Source: http://supreme.justia.com/cases/federal/us/555/07-512/opinion.html
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Pacific Bell Telephone Co. v. linkLine Communications, Inc. :: 555 U.S. ___ (2009) :: Justia US Supreme Court Center Justia.comFind a LawyerLegal AnswersLawMore ▾Justia BlogVerdictLaw Blog DirectoryLegal FormsUS Law US Supreme Court Cases Federal Cases US Constitution US Code Federal RegulationsFederal DocketsState CasesState Codes & StatutesTrademarksPatentsCompany Legal ProfilesMarketing ServicesSign InSearchJustia › US Law › US Case Law › US Supreme Court › Volume 555 › Pacific Bell Telephone Co. v. linkLine Communications, Inc. › Opinion
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COMMUNICATIONS, INC., et al.on writ of certiorari to the united states court of
Appeals for the ninth circuit[February 25, 2009] Chief Justice Roberts delivered the opinion of the Court.
The plaintiffs in this case, respondents here, allege that a competitor subjected them to a “price squeeze” in violation of §2 of the Sherman Act. They assert that 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. The question before us is 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. We hold that no such claim may be brought.I
This case involves the market for digital subscriber line (DSL) service, which is a method of connecting to the Internet at high speeds over telephone lines. AT&T[Footnote 1] owns much of the infrastructure and facilities needed to provide DSL service in California. In particular, AT&T controls most of what is known as the “last mile”—the lines that connect homes and businesses to the telephone network. Competing DSL providers must generally obtain access to AT&T’s facilities in order to serve their customers. Until recently, the Federal Communications Commission (FCC) required incumbent phone companies such as AT&T to sell transmission service to independent DSL providers, under the theory that this would spur competition. See In re Appropriate Framework for Broadband Access to Internet over Wireline Facilities, 20 FCC Rcd. 14853, 14868 (2005). In 2005, the Commission largely abandoned this forced-sharing requirement in light of the emergence of a competitive market beyond DSL for high-speed Internet service; DSL now faces robust competition from cable companies and wireless and satellite services. Id., at 14879–14887. As a condition for a recent merger, however, AT&T remains bound by the mandatory interconnection requirements, and is obligated to provide wholesale “DSL transport” service to independent firms at a price no greater than the retail price of AT&T’s DSL service. In re AT&T Inc. and BellSouth Corp., 22 FCC Rcd. 5662, 5814 (2007).
In July 2003, the plaintiffs brought suit in District Court, alleging that AT&T violated §2 of the Sherman Act, 15 U. S. C. §2, by monopolizing the DSL market in California. The complaint alleges that AT&T refused to deal with the plaintiffs, denied the plaintiffs access to essential facilities, and engaged in a “price squeeze.” App. 18–19. Specifically, plaintiffs contend that AT&T squeezed their profit margins by setting a high wholesale price for DSL transport and a low retail price for DSL Internet service. This maneuver allegedly “exclude[d] and unreasonably impede[d] competition,” thus allowing AT&T to “preserve and maintain its monopoly control of DSL access to the Internet.” Ibid. In Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U. S. 398, 410 (2004), we held that a firm with no antitrust duty to deal with its rivals at all is under no obligation to provide those rivals with a “sufficient” level of service. Shortly after we issued that decision, AT&T moved for judgment on the pleadings, arguing that the plaintiffs’ claims in this case were foreclosed by Trinko. The District Court held that AT&T had no antitrust duty to deal with the plaintiffs, App. to Pet. for Cert. 77a–85a, but it denied the motion to dismiss with respect to the price-squeeze claims, id., at 86a–90a.The court acknowledged that AT&T’s argument “has a certain logic to it,” but held that Trinko “simply does not involve price-squeeze claims.” Id., at 86a. The District Court also noted that price-squeeze claims have been recognized by several Circuits and “are cognizable under existing antitrust standards.” Id., at 89a, and n. 27.
At the District Court’s request, plaintiffs then filed an amended complaint providing greater detail about their price-squeeze claims. AT&T again moved to dismiss, arguing that price-squeeze claims could only proceed if they met the two established requirements for predatory pricing: below-cost retail pricing and a “ ‘dangerous probability’ ” that the defendant will recoup any lost profits. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U. S. 209, 222–224 (1993). The District Court did not reach the issue whether all price-squeeze claims must meet the Brooke Group requirements, because it concluded that the amended complaint, “generously construed,” satisfied those criteria. App. to Pet. for Cert. 46a–49a, 56a. The court also certified its earlier order for interlocutory appeal on the question whether “Trinko bars price squeeze claims where the parties are compelled to deal under the federal communications laws.” Id., at 56a–57a.
We granted certiorari, 554 U. S. ___ (2008), to resolve a conflict over whether a plaintiff can bring price-squeeze claims under §2 of the Sherman Act when the defendant has no antitrust duty to deal with the plaintiff. See Covad Communications Co. v. Bell Atlantic Co., 398 F. 3d 666, 673–674 (CADC 2005) (holding that Trinko bars such claims). We reverse.II
This case has assumed an unusual posture. The plaintiffs now assert that they agree with Judge Gould’s dissenting position that price-squeeze claims must meet the Brooke Group requirements for predatory pricing. They ask us to vacate the decision below in their favor and remand with instructions that they be given leave to amend their complaint to allege a Brooke Group claim. In other words, plaintiffs are no longer pleased with their initial theory of the case, and ask for a mulligan to try again under a different theory. Some amici argue that the case is moot in light of this confession of error. They contend that “[w]ith both petitioners and respondents now aligned on [the same] side of the question presented, no party with a concrete stake in this case’s outcome is advocating for the contrary position.” Brief for COMPTEL 6. We do not think this case is moot. First, the parties continue to seek different relief. AT&T asks us to reverse the judgment of the Court of Appeals and remand with instructions to dismiss the complaint at issue. The plaintiffs ask that we vacate the judgment and remand with instructions that they be given leave to amend their complaint. The parties thus continue to be adverse not only in the litigation as a whole, but in the specific proceedings before this Court.
Amicialso argue that we should dismiss the writ of certiorari because of the “lack of adversarial presentation” by an interested party. Brief for COMPTEL 7. To the contrary, prudential concerns favor our answering the question presented. Plaintiffs defended the Court of Appeals’ decision at the certiorari stage, and the parties have invested a substantial amount of time, effort, and resources in briefing and arguing the merits of this case. In the absence of a decision from this Court on the merits, the Court of Appeals’ decision would presumably remain binding precedent in the Ninth Circuit, and the Circuit conflict we granted certiorari to resolve would persist. Two amicihave submitted briefs defending the Court of Appeals’ decision on the merits, and we granted the motion of one of those amici to participate in oral argument. 555 U. S. ___ (2008). We think it appropriate to proceed to address the question presented.IIIA
Section 2 of the Sherman Act makes it unlawful to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.” 15 U. S. C. §2. Simply possessing monopoly power and charging monopoly prices does not violate §2; rather, the statute targets “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell Corp., 384 U. S. 563, 570–571 (1966). As a general rule, businesses are free to choose the parties with whom they will deal, as well as the prices, terms, and conditions of that dealing. See United States v. Colgate & Co., 250 U. S. 300, 307 (1919). But there are rare instances in which a dominant firm may incur antitrust liability for purely unilateral conduct. For example, we have ruled that firms may not charge “predatory” prices—below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses. Brooke Group, 509 U. S., at 222–224. Here, however, the complaint at issue does not contain allegations meeting those requirements. App. 10–24.
There are also limited circumstances in which a firm’s unilateral refusal to deal with its rivals can give rise to antitrust liability. See Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U. S. 585, 608–611 (1985). Here, however, the District Court held that AT&T had no such antitrust duty to deal with its competitors, App. to Pet. for Cert. 84a–85a, and this holding was not challenged on appeal.[Footnote 2]
The challenge here focuses on retail prices—where there is no predatory pricing—and the terms of dealing—where there is no duty to deal. Plaintiffs’ price-squeeze claims challenge a different type of unilateral conduct in which a firm “squeezes” the profit margins of its competitors. This requires the defendant to be operating in two markets, a wholesale (“upstream”) market and a retail (“downstream”) market. A firm with market power in the upstream market can squeeze its downstream competitors by raising the wholesale price of inputs while cutting its own retail prices. This will raise competitors’ costs (because they will have to pay more for their inputs) and lower their revenues (because they will have to match the dominant firm’s low retail price). Price-squeeze plaintiffs assert that defendants must leave them a “fair” or “adequate” margin between the wholesale price and the retail price. In this case, we consider whether a plaintiff can state a price-squeeze claim when the defendant has no obligation under the antitrust laws to deal with the plaintiff at wholesale.B
1. A straightforward application of our recent decision in Trinko forecloses any challenge to AT&T’s wholesale prices. In Trinko, Verizon was required by statute to lease its network elements to competing firms at wholesale rates. 540 U. S., at 402–403. The plaintiff—a customer of one of Verizon’s rivals—asserted that Verizon denied its competitors access to interconnection support services, making it difficult for those competitors to fill their customers’ orders. Id., at 404–405. The complaint alleged that this conduct in the upstream market violated §2 of the Sherman Act by impeding the ability of independent carriers to compete in the downstream market for local telephone service. Ibid. We held that the plaintiff’s claims were not actionable under §2. Given that Verizon had no antitrust duty to deal with its rivals at all, we concluded that “Verizon’s alleged insufficient assistance in the provision of service to rivals” did not violate the Sherman Act. Id., at 410. Trinko thus 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.
“[C]utting prices in order to increase business often is the very essence of competition.” Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U. S. 574, 594 (1986). In cases seeking to impose antitrust liability for prices that are too low, mistaken inferences are “especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Ibid.; see also Brooke Group, 509 U. S., at 226; Cargill, Inc. v. Monfort of Colo., Inc., 479 U. S. 104, 121–122, n. 17 (1986). To avoid chilling aggressive price competition, we have carefully limited the circumstances under which plaintiffs can state a Sherman Act claim by alleging that prices are too low. Specifically, to prevail on a predatory pricing claim, a plaintiff must demonstrate that: (1) “the prices complained of are below an appropriate measure of its rival’s costs”; and (2) there is a “dangerous probability” that the defendant will be able to recoup its “investment” in below-cost prices. Brooke Group, supra, at 222–224. “Low prices benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition.” Atlantic Richfield Co. v. USA Petroleum Co., 495 U. S. 328, 340 (1990).
3. Plaintiffs’ price-squeeze claim, looking to the relation between retail and wholesale prices, is thus nothing more than an amalgamation of a meritless claim at the retail level and a meritless 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.[Footnote 3]C
1. Institutional concerns also counsel against recognition of such claims. We have repeatedly emphasized the importance of clear rules in antitrust law. Courts are ill suited “to act as central planners, identifying the proper price, quantity, and other terms of dealing.” Trinko, 540 U. S., at 408. “ ‘No court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. The problem should be deemed irremedia[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.’ ” Id., at 415 (quoting Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L. J. 841, 853 (1989)); see also Town of Concord v. Boston Edison Co., 915 F. 2d 17, 25 (CA1 1990) (Breyer, C. J.) (“[A]ntitrust courts normally avoid direct price administration, relying on rules and remedies . . . that are easier to administer”). It is difficult enough for courts to identify and remedy an alleged anticompetitive practice at one level, such as predatory pricing in retail markets or a violation of the duty-to-deal doctrine at the wholesale level. See Brooke Group, supra, at 225 (predation claims “requir[e] an understanding of the extent and duration of the alleged predation, the relative financial strength of the predator and its intended victim, and their respective incentives and will”); Trinko, supra, at 408. Recognizing price-squeeze claims would require courts simultaneously to police both the wholesale andretail prices to ensure that rival firms are not being squeezed. And courts would be aiming at a moving target, since it is the interaction between these two prices that may result in a squeeze.
The most commonly articulated standard for price squeezes is that the defendant must leave its rivals a “fair” or “adequate” margin between the wholesale price and the retail price. See Town of Concord, supra, at 23–25; Alcoa, 148 F. 2d 416, 437–438 (CA2 1945). One of our colleagues has highlighted the flaws of this test in Socratic fashion:“[H]ow is a judge or jury to determine a ‘fair price?’ Is it the price charged by other suppliers of the primary product? None exist. Is it the price that competition ‘would have set’ were the primary level not monopolized? How can the court determine this price without examining costs and demands, indeed without acting like a rate-setting regulatory agency, the rate-setting proceedings of which often last for several years? Further, how is the court to decide the proper size of the price ‘gap?’ Must it be large enough for all independent competing firms to make a ‘living profit,’ no matter how inefficient they may be? . . . And how should the court respond when costs or demands change over time, as they inevitably will?” Town of Concord, supra, at 25.
Some amici respond to these concerns by proposing a “transfer price test” for identifying an unlawful price squeeze: A price squeeze should be presumed if the upstream monopolist could not have made a profit by selling at its retail rates if it purchased inputs at its own wholesale rates. Brief for American Antitrust Institute (AAI) 30; Brief for COMPTEL 16–19; see Ray v. Indiana & Mich. Elec. Co., 606 F. Supp. 757, 776–777 (ND Ill. 1984). Whether or not that test is administrable, it lacks any grounding in our antitrust jurisprudence. An upstream monopolist with no duty to deal is free to charge whatever wholesale price it would like; antitrust law does not forbid lawfully obtained monopolies from charging monopoly prices. Trinko, supra, at 407 (“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system”). Similarly, the Sherman Act does not forbid—indeed, it encourages—aggressive price competition at the retail level, as long as the prices being charged are not predatory. Brooke Group, 509 U. S., at 223–224. If both the wholesale price and the retail price are independently lawful, there is no basis for imposing antitrust liability simply because a vertically integrated firm’s wholesale price happens to be greater than or equal to its retail price. 2. Amici assert that there are circumstances in which price squeezes may harm competition. For example, they assert that price squeezes may raise entry barriers that fortify the upstream monopolist’s position; they also contend that price squeezes may impair nonprice competition and innovation in the downstream market by driving independent firms out of business. See Brief for AAI 11–15; Town of Concord, supra, at 23–24.
The problem, however, is that amicihave not identified any independentcompetitive harm caused by price squeezes above and beyond the harm that would result from a duty-to-deal violation at the wholesale level or predatory pricing at the retail level. See 3A P. Areeda & H. Hovenkamp, Antitrust Law¶767c, p. 126 (2d ed. 2002) (“[I]t is difficult to see any competitive significance [of a price squeeze] apart from the consequences of vertical integration itself”). To the extent a monopolist violates one of these doctrines, the plaintiffs have a remedy under existing law. We do not need to endorse a new theory of liability to prevent such harm.IV
Lastly, as mentioned above, plaintiffs have asked us for leave to amend their complaint to bring a Brooke Group predatory pricing claim. We need not decide whether leave to amend should be granted. Our grant of certiorari was limited to the question whether price-squeeze claims are cognizable in the absence of an antitrust duty to deal. The Court of Appeals addressed only AT&T’s motion for judgment on the pleadings on the plaintiffs’ original complaint.[Footnote 4] For the reasons stated, we hold that the price-squeeze claims set forth in that complaint are not cognizable under the Sherman Act. Plaintiffs have also filed an amended complaint, and the District Court concluded that this complaint, generously construed, could be read as alleging conduct that met the Brooke Group requirements for predatory pricing. App. to Pet. for Cert. 47a–52a, 56a. That order, however, applied the “no set of facts” pleading standard that we have since rejected as too lenient. See Bell Atlantic Corp. v. Twombly, 550 U. S. 544, 561–563 (2007). It is for the District Court on remand to consider whether the amended complaint states a claim upon which relief may be granted in light of the new pleading standard we articulated in Twombly, whether plaintiffs should be given leave to amend their complaint to bring a claim under Brooke Group, and such other matters properly before it. Even if the amended complaint is further amended to add a Brooke Group claim, it may not survive a motion to dismiss. For if AT&T can bankrupt the plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market. Nevertheless, such questions are for the District Court to decide in the first instance. We do not address these issues here, as they are outside the scope of the question presented and were not addressed by the Court of Appeals in the decision below. See Cutter v. Wilkinson, 544 U. S. 709, 718, n. 7 (2005) (“[W]e are a court of review, not of first view”).* * *
Trinko holds that a defendant with no antitrust duty to deal with its rivals has no duty to deal under the terms and conditions preferred by those rivals. 540 U. S., at 409–410. Brooke Group holds that low prices are only actionable under the Sherman Act when the prices are below cost and there is a dangerous probability that the predator will be able to recoup the profits it loses from the low prices. 509 U. S., at 222–224. In this case, plaintiffs have not stated a duty-to-deal claim under Trinko and have not stated a predatory pricing claim under Brooke Group. They have nonetheless tried to join a wholesale claim that cannot succeed with a retail claim that cannot succeed, and alchemize them into a new form of antitrust liability never before recognized by this Court. We decline the invitation to recognize such claims. Two wrong claims do not make one that is right. The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.It is so ordered.Footnote 1 Petitioners consist of several corporate entities and subsidiaries, and their names and corporate structures have changed frequently over the course of this litigation. For simplicity, we will refer to all the petitioners as “AT&T.”Footnote 2 The Court of Appeals assumed that any duty to deal arose only from FCC regulations, 503 F. 3d, at 878–879, n. 6, and the question on which we granted certiorari made the same assumption. Even aside from the District Court’s reasoning, App. to Pet. for Cert. 77a–85a, it seems quite unlikely that AT&T would have an antitrust duty to deal with the plaintiffs. Such a duty requires a showing of monopoly power, but—as the FCC has recognized, 20 FCC Rcd., at 14879–14887—the market for high-speed Internet service is now quite competitive; DSL providers face stiff competition from cable companies and wireless and satellite providers.Footnote 3 Like the Court of Appeals, 503 F. 3d, at 880, amiciargue that price-squeeze claims have been recognized by Circuit Courts for many years, beginning with Judge Hand’s opinion in United States v. Aluminum Co. of America, 148 F. 2d 416 (CA2 1945) (Alcoa). In that case, the Government alleged that Alcoa was using its monopoly power in the upstream aluminum ingot market to squeeze the profits of downstream aluminum sheet fabricators. The court concluded: “That it was unlawful to set the price of ‘sheet’ so low and hold the price of ingot so high, seems to us unquestionable, provided, as we have held, that on this record the price of ingot must be regarded as higher than a ‘fair price.’ ” Id., at 438. 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.Footnote 4 We note a procedural irregularity with this case: Normally, an amended complaint supersedes the original complaint. See 6 C. Wright & A. Miller, Federal Practice & Procedure §1476, pp. 556–557 (2d ed. 1990). Here, the District Court addressed the amended complaint in its 2005 order, App. to Pet. for Cert. 36a–52a, but the court only certified its 2004 order—addressing the original complaint—for interlocutory appeal, id., at 56a–57a. Both parties, as well as the Solicitor General, have expressed confusion about whether the amended complaint and the 2005 order are properly before this Court. See Brief for Petitioners 9, n. 6 (noting “some ambiguity” about which order was certified); Brief for United States 17 (“[I]t is unclear whether the 2005 Order and the amended complaint are properly at issue in this interlocutory appeal”); Brief for Respondents 8–10. The Court of Appeals majority did not address any of the District Court’s holdings from the 2005 order, so we decline to consider those issues at this time.