Antitrust Client Advisory - The Supreme Court's Linkline Decision: Further Limits On Section 2 Of The Sherman Act

On February 27, 2009, in Pacific Bell Telephone v. Linkline Communications,¹ the US Supreme Court took a decisive step in restricting the reach of Section 2 of the Sherman Act for future monopolization cases.  What is left of § 2 as a viable antitrust enforcement tool for the Obama Justice Department—as well as the private bar—remains to be seen.  Linkline can be read as a “shot across the bow” in response to the Obama administration’s avowed commitment to “reinvigorate antitrust enforcement” with a specific reference to monopolization cases, as well as mergers.²  The bent of this decision is far more consistent with the constrained view of § 2 enforcement encapsulated in the Bush administration’s late 2008 report on Section 2 enforcement policy than with an expansive attack on dominant firm exclusionary or abusive conduct.³

Chief Justice Roberts, writing for the 5-member majority, addresses the § 2 claim of Linkline Communications, an independent service provider in the retail DSL internet service market, alleging that Pacific Bell Telephone (doing business as AT&T), a vertically integrated competitor, unlawfully monopolized the DSL retail service market by imposing an exclusionary “price squeeze” on Linkline.  AT&T controls the “last mile,” linking customer premises to the telephone lines generally necessary for provision of retail DSL service, and is under an FCC order to provide wholesale interconnect services to independent retailers such as Linkline.  The Court describes plaintiffs’ “price squeeze” theory as follows:

. . . such a claim can arise when a vertically integrated firm sells inputs at wholesale and also sells finished goods or services at retail.  If that firm has power in the wholesale market, it can simultaneously raise the wholesale price of inputs and cut the retail price of the finished good. This will have the effect of ‘squeezing’ the profit margins of any competitors in the retail market.  Those firms will have to pay more for the inputs they need; at the same time, they will have to cut their retail prices to match the other firm’s prices.⁴

In essence, plaintiffs claim that “. . . defendants must leave them a ‘fair’ or ‘adequate’ margin between the wholesale price and the retail price.”⁵

The Court opens its discussion with a sweeping restatement of the aged Colgate doctrine that except in “rare instances . . . . businesses are free to choose the parties with whom they will deal, as well as the prices, terms and conditions of that dealing.”⁶  It refers to two possible exceptions but quickly notes that neither is present in this case:  (i) “predatory pricing,” defined in Brooke Group as “below cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses” and (ii) the possibility, citing Aspen Skiing, that in unspecified “limited circumstances” a monopolist may have a “duty to deal” with its competitors.⁷  Relying centrally on its prior decisions in Brooke Group⁸ and Trinko,⁹ the Court frames the issue as “whether such a price-squeeze claim may be brought under § 2 of the Sherman Act when the defendant is under no antitrust obligation to sell the inputs to the plaintiff in the first place.”¹⁰  The Court holds that such a claim may not be brought, reasoning that a “price squeeze” involves unilateral pricing decisions at two levels, wholesale and retail, and that each of these markets must be analyzed separately. 

First, with respect to the wholesale level, the Court points out the District Court had held AT&T had no “antitrust duty to deal,” the Court of Appeals had “assumed that any duty to deal arose only from FCC regulations,” and the question on which the Court granted certiorari “made the same assumption.”  Thus, given the absence of any antitrust duty to deal at the wholesale level, there can be no violation based on unilateral pricing decisions at wholesale, for “Trinko . . . makes clear that if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous.”¹¹ 

Second with respect to the retail component of the “price squeeze” allegation (i.e., that defendants’ prices were too low), the Court starts by expressing continued skepticism about any antitrust theory of liability that would challenge prices as being too low, and concludes that absent a Brooke Group “predatory pricing” allegation, there can be no antitrust violation for defendants’ unilateral pricing in the retail market.¹²

The Court thus quickly concludes that  “plaintiffs’ price-squeeze claim, looking to the relation between retail and wholesale prices, is thus nothing more than an amalgamation of a merit-less claim at the retail level, and a merit-less claim at the wholesale level.  If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ profit margins.”¹³ 

Despite the apparent ease with which the Court dispatched the case under its recent cases,¹⁴ the majority bolsters its conclusion by also expressing “institutional concerns” against plaintiffs’ price-squeeze claim.  Imposing a “duty to deal” would involve courts acting as “central planners,” dealing day-to-day with the questions of proper price, quantity and other terms.”  The task would be even more difficult in this instance as “courts would be aiming at a moving target, since it is the interaction between these two prices that may result in a squeeze.”¹⁵  Finally, the absence of a clear rule or objective standard offers no “safe harbor” for a firm’s pricing decisions.¹⁶  Determining what may be a “fair” or “adequate” price is a burden the Court is reluctant to place on market incumbents.  In passing, the Court quotes liberally from an appellate court decision by concurring Justice Breyer and characterizes price-squeeze claims as an unnecessary “new theory of liability,” consigning Judge Learned Hand’s opinion in Alcoa¹⁷ to the dustbin of history, at least with respect to its holdings on price-squeezes.¹⁸

Justice Breyer’s concurrence, joined by Justices Stevens, Souter and Ginsburg, takes a different approach.  Citing both Alcoa and Grinnell,¹⁹ he observes:  “A ‘price squeeze’ claim finds its natural home in a Sherman Act § 2 monopolization case where the Government as plaintiff seeks to show that a defendant’s monopoly power rests, not upon ‘skill, foresight and industry,’ but upon exclusionary conduct.”²⁰  Pointing out that exclusionary conduct may take “myriad” forms Justice Breyer would leave for another day—and, presumably a Government case—the task of addressing the relationship of a “price squeeze” to a “refusal to deal” by a monopolist, and the question whether either can be sufficiently exclusionary in a given case to provide a basis for § 2 liability.  This case, he believes, should be consigned to the regulators, who have already imposed a “duty to deal” on defendants.

Beyond its narrowest holding, what has the Court done in Linkline?  First, Aspen Skiing is probably now either bad law or limited to its specific facts.  It is doubtful whether, in this Court’s view, a monopolist ever has an “antitrust” duty to deal.  And, it is also doubtful whether there is any practical remnant of the “essential facilities doctrine” after Linkline?  In this respect, the Bush Administration’s Section 2 Report might be considered prescient, having squarely rejected enforcement against unilateral refusals to deal.²¹  Second, if the majority view of actionable § 2 exclusionary conduct continues to prevail, then oft-cited monopolization cases such as Alcoa and Grinnell—from a judicial era far less sophisticated in terms of economic analysis—will be of little more than antiquarian interest, even if the Court respectfully declines to overrule them explicitly.  Finally, and of perhaps greatest significance, much of the majority’s reasoning here can be applied in varying degrees to all other unilateral pricing actions, such as loyalty rebates and bundled discounts, as well as exclusive dealing and tying.  Is Linkline heading in the direction of a Section 2 limited only to predatory pricing?

We may receive an answer to this question if the government chooses to accept Justice Breyer’s thinly-veiled invitation to bring another monopolization case.  Such a case might come from the Federal Trade Commission, several of whose members, including its new Chair Jonathan Leibowitz, have already indicated strenuous concerns about reduced § 2 enforcement in light of DOJ’s Section 2 Report.²²  It might even come from DOJ itself, whose recently nominated leader, Christine Varney, may wish to find a mechanism to distance herself from her predecessor’s policy positions and thereby follow through on President Obama’s campaign statement calling for more antitrust enforcement generally, including against monopolies.

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[1] 555 US ___ (2009) (“Linkline”).

[2] Barack Obama, Statement for American Antitrust Institute 1 (Feb. 20, 2008), available at http://www.antitrustinstitute.org/Archives/obama2.ashx.

[3] US Department of Justice, Competition and Monopoly:  Single-firm conduct under Section 2 of the Sherman Act (Sept. 2008) (“Section 2 Report”).   [4] Linkline, slip Op. at 1.   [5] Id. at 9.

[6] Id. at 7 (citing United States v. Colgate & Co., 250 U.S. 300, 307 (1919)).

[7] Id. at 8 (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 US 585, 608-611 (1985).  The Court makes no effort to elucidate what may be left of an Aspen Skiing duty to deal, beyond implying that a monopoly position in an upstream market would be a necessary, but by no means, sufficient condition.  Id. & n.2.

[8] Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., 509 US 209 (1993).

[9] Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, U.S. 398 (2004).

[10] Linkline, slip op. at 9.

[11] Id. at 9.

[12] Id. at 11.

[13] Id. at 12 (citation omitted).

[14] See e.g., id. at 9 (“straightforward application or our recent decision in Trinko”).

[15] Id. at 13.

[16] Id.

[17] United States v. Aluminum Co. of America, 148 F.2d 416, 430 (2d Cir. 1945) (“Alcoa”).

[18] See id. at 15 (“We do not need to endorse a new theory of liability . . . .”) and 12 n.3 (“Given developments in economic theory and antitrust jurisprudence since Alcoa, we find our recent decisions in Trinko and Brooke Group more pertinent to the question before us.”).   [19] United States v. Grinnell Corp., 384 U.S. 563, 576 (1966).

[20] Linkline (Breyer, J., concurring), at 1.

[21] See Section 2 Report at 129 (“The Department believes that there is a significant risk of long-run harm to consumers from antitrust intervention against unilateral, unconditional refusals to deal with rivals, particularly considering the effects of economy-wide disincentives and remedial difficulties.  The Department thus concludes that antitrust liability for unilateral, unconditional refusals to deal with rivals should not play a meaningful part in Section 2 enforcement.”).  Interestingly, the Linkline majority’s “institutional concerns” about the courts’ inability to distinguish lawful from unlawful pricing and their inability to administer remedies, as well as the concern that firms would have no “safe harbor” for their pricing practices seem to echo the Department of Justice’s similar, recurring themes in its Section 2 Report.

[22] Statement of Commissioners Harbour, Leibowitz and Rosch on the Issuance of the Section 2 Report by the Department of Justice (Sept. 8, 2008), available at http://www.ftc.gov/os/2008/09/080908section2stmt.pdf.