Opinion ID: 186414
Heading Depth: 2
Heading Rank: 2

Heading: Has Covad Stated a Claim under the Sherman Act?

Text: 18 Covad alleges Bell Atlantic engaged in five types of conduct in violation of the Sherman Act. They are that Bell Atlantic: (1) unlawfully refused to cooperate with Covad (¶¶ 91-177, 196-201); (2) engaged in an unlawful price squeeze (¶¶ 178-85); (3) falsely advertised that its own DSL service was available at times and in places where Covad's service was available (¶¶ 186-92); (4) refused to sell its DSL service, in places where it was actually available, to would-be customers who had orders pending for Covad's DSL service (¶¶ 193-95); and (5) brought a baseless and bad faith patent suit against Covad (¶¶ 202-12).
19 Although the Court in Trinko recognized that [u]nder certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct, 540 U.S. at 408, 124 S.Ct. 872, it concluded that insufficient assistance in the provision of service to rivals is not a recognized antitrust claim under [its] existing refusal-to-deal precedents, id. at 410, 124 S.Ct. 872. An antitrust claim based upon the defendant's refusal to cooperate with its competitor can withstand a motion to dismiss only when it is alleged either that the defendant had previously engaged in a course of dealing with its rivals, or [that it] would ever have done so absent statutory compulsion, id. at 409, 124 S.Ct. 872. Here, Covad alleges neither that Bell Atlantic had at one time voluntarily dealt with Covad nor that it would ever have been in Bell Atlantic's interest to have done so. Therefore, as in Trinko, the defendant's reluctance to interconnect ... tells us nothing about dreams of monopoly. Id. 20 In the light shed by Trinko, we agree with the district court that the following allegations do not state a claim upon which relief can be granted under § 2 of the Sherman Act: The Battle to Collocate (¶¶ 91-124), in which Covad alleges Bell Atlantic did not offer it the opportunity to co-locate its equipment on Bell Atlantic's premises upon just, reasonable, and nondiscriminatory terms (as required by § 101 of the 1996 Act, 47 U.S.C. § 251(c)(6)); The Odyssey of Obtaining Loops and Dealing with OSS (¶¶ 125-174), in which Covad alleges Bell Atlantic violated its obligation under the same provision to share loops and OSS; The Effort to Obtain Transport (¶¶ 175-77), which similarly pertains to Bell Atlantic's duties under the 1996 Act; and Bell Atlantic's Sham, `Feel Good' Negotiation Strategy (¶¶ 196-201), in which Covad alleges Bell Atlantic failed to bargain in good faith over terms of interconnection (as required by § 101 of the 1996 Act, 47 U.S.C. § 251(c)(1)).
21 Covad next alleges Bell Atlantic attempted to monopolize the market for DSL in violation § 2 of the Sherman Act by pricing its services as follows: 22 Bell Atlantic ... offered and re-sold its DSL services to [Internet Service Providers] at a monthly price ... very close to, and in some cases less than, the monthly cost Bell Atlantic charge[d] Covad and other wholesale customers for unbundled loops.... [Bell Atlantic] achieve[d] this discriminatory pricing by allocating a negligible or zero cost to the loops over which it provides its DSL services and recovering virtually all ... of the cost of the loops from its local analog voice services. 23 Covad claims this conduct constitutes a price squeeze that violates the Sherman Act, for which proposition it relies upon United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir.1945). 24 Covad's allegation is in essence that Bell Atlantic charged Covad a prohibitively high and discriminatory price for access to its loops. Bell Atlantic's duty to make those loops available at all, however, is purely a creature of the 1996 Act. See 47 U.S.C. 251(c)(3). The Sherman Act does not impose such a duty — recall Trinko, 540 U.S. at 410, 124 S.Ct. 872 (insufficient assistance in the provision of service to rivals is not a recognized antitrust claim) — at least when there is no allegation it would have been profitable for the defendant to have made its facilities available to a competitor absent statutory compulsion. And, as observed in a leading treatise, it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal, 3A AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 767c3, at 129-30 (2d ed.2002). We therefore affirm the district court's dismissal of Covad's § 2 claim based upon a price squeeze.
25 Covad also maintains its complaint states an antitrust claim based upon Bell Atlantic's pre-announcement of its DSL service: Knowing the limited reach and scope of its planned service Bell Atlantic nonetheless advertised its DSL services aggressively. The effect of that advertising was allegedly to leave the impression that Bell Atlantic was ready, willing and capable of providing DSL services. In response, Bell Atlantic contends, among other things, Covad's complaint does not state an antitrust claim because it does not allege a plausible harm to competition. We agree and hence do not reach Bell Atlantic's other arguments.  26 The gist of Covad's allegation is that Bell Atlantic aggressively advertised its DSL service in certain areas when that service was not yet available there. According to the complaint, that advertising could stifle competition either by capturing customers through a bait and switch, or (in any event) by delaying customers who otherwise would have gone to Covad for services Bell Atlantic was advertising and by increasing the costs Covad would have to bear in order to advertise. 27 Concerning the bait and switch, Covad alleges that when a would-be customer called Bell Atlantic to order DSL service at a location where it was not yet available from Bell Atlantic, the defendant attempted to sell that customer its slower and more expensive `ISDN Anywhere' service. As for delaying customers who otherwise would have gone to Covad for services Bell Atlantic was advertising, although Covad does not elaborate, we believe its point is that some potential customers, after attempting to order DSL service from Bell Atlantic only to discover it was unavailable, decided to wait for Bell Atlantic's service to become available rather than immediately patronizing Covad. 28 None of these allegations suggests a plausible harm to competition, let alone a case of attempted monopolization. On the contrary, the practices alleged could only have enhanced competition by subjecting Covad's DSL service to market rivalry both from Bell Atlantic's present ISDN and from its future DSL service. That Covad might have lost customers in this way does not state an antitrust claim, for [i]t is axiomatic that the antitrust laws were passed for the protection of competition, not competitors.  Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993). Similarly, to the extent Bell Atlantic's advertising obligated Covad to increase its own advertising, competition was only enhanced. See ROBERT H. BORK, THE ANTITRUST PARADOX 314 (2d ed.1993) (advertising and promotion [are] essential to vigorous market rivalry). 29 The cases upon which Covad relies do not suggest otherwise. They each involved either a defendant that was alleged to have untruthfully but effectively disparaged its competitor's product, see, e.g., Nat'l Ass'n of Pharm. Mfrs. v. Ayerst Lab., 850 F.2d 904, 916-17 (2d Cir.1988) (generic drug manufacturer alleging brand name manufacturer spread materially false information about safety of its product states claim under § 2 of Sherman Act where falsehood was likely to induce reasonable reliance and was not readily susceptible of neutralization or other offset), or in one instance a monopolist that by making false representations had frustrated potential rivals' efforts to develop a competitive product, see Microsoft Corp., 253 F.3d at 76-77. In no case could the consumer readily discover the defendant's falsity. Here, the alleged falsehood pertains only to whether Bell Atlantic's DSL service was then available. When a company falsely claims or implies its own service is available and the falsity of that claim is necessarily dispelled whenever a consumer tries to obtain the service, there can be no plausible harm to competition; upon discovering the service is not available, the consumer may choose freely whether to purchase the service from another source or to wait for the offeror to make good on its offer. Although the consumer will have incurred an unnecessary transaction cost — which may generate bad will toward the firm by which it was misled — that is not a harm to the competitive process. 30 MCI Communications Corp. v. AT & T Co., 462 F.Supp. 1072 (N.D.Ill.1978), cited by Covad, is not necessarily to the contrary. There, AT & T's pre-announcement campaign was allegedly accompanied by extensive publicity to the business and financial community and was intended not only to discourage MCI's potential customers but also to deprecate MCI's credit in the financial community. Id. at 1096-97. In this case, Covad does not allege that Bell Atlantic's preannouncement was aimed at anyone but potential customers and, as we have seen, upon inquiring they had to be undeceived.
31 Covad next argues that Bell Atlantic unlawfully refused to sell its DSL service to would-be customers who had orders for DSL service pending with Covad. According to Covad, Bell Atlantic's refusal to deal was designed to prevent Covad from getting to the market ahead of Bell Atlantic. Bell Atlantic counters that Covad failed to plead that this practice resulted in a short-term economic loss to Bell Atlantic, as is required. See AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 773, at 199 (Supp.2004) (to be unlawful, refusal to deal must be `irrational' in the sense that the defendant sacrificed the opportunity to make a profitable sale only because of the adverse impact the refusal would have on a rival). In any event, Bell Atlantic asserts, it had a legitimate economic justification for refusing to deal, namely, that it was unprofitable to sell its DSL service to a consumer who would soon switch his custom to Covad. Neither of Bell Atlantic's arguments is persuasive as a justification for dismissing Covad's complaint. 32 As to Bell Atlantic's first point, the defendant is correct that in order to prevail upon this claim Covad will have to prove Bell Atlantic's refusal to deal caused Bell Atlantic short-term economic loss. See generally United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct. 465, 63 L.Ed. 992 (1919) (absent purpose to create or maintain monopoly, [the Sherman Act] does not restrict the long recognized right of trader ... freely to exercise his own independent discretion as to parties with whom he will deal). But Covad has alleged that Bell Atlantic's refusal to deal was predatory, which suffices to withstand a motion to dismiss because, in the vernacular of antitrust law, a predatory practice is one in which a firm sacrifices short-term profits in order to drive out of the market or otherwise discipline a competitor. See Brooke Group Ltd., 509 U.S. at 222-23, 113 S.Ct. 2578 (claim of predatory pricing demands proof of below-cost pricing). 33 Bell Atlantic's second defense — that its refusal to deal was economically justified — depends upon a question of fact and therefore is not cognizable in support of a motion to dismiss. It is, of course, entirely possible Bell Atlantic will be able to prove the cost of connecting a customer to its DSL service is not recovered in the short-term, thereby showing its refusal to deal was a reasonable business decision. On the other hand, it is also possible Bell Atlantic's refusal to deal reflected its willingness to sacrifice immediate profits from the sale of its DSL service in the hope of driving Covad out of the market and recovering monopoly profits in the long-run. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588-89, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (because predatory pricing requires practitioner to forgo profits that free competition would offer, it must have a reasonable expectation of recovering, in the form of later monopoly profits, more than the losses suffered). The district court cannot choose between these competing explanations without first resolving questions of fact not before it upon a motion to dismiss.
34 Finally, Covad argues its allegation that Bell Atlantic brought a spurious patent case against it states a claim under § 2 of the Sherman Act. See generally Bell Atlantic Network Services, Inc. v. Covad Communications Group, 92 F.Supp.2d 483 (E.D.Va.2000). Specifically, Covad contends that Bell Atlantic's suit was baseless, brought in bad faith, and had an anticompetitive effect. Bell Atlantic counters first, as the district court held, that Covad failed to allege the suit had an anticompetitive effect, see Covad Communications, 201 F.Supp.2d at 135 (quoting Microsoft, 253 F.3d at 58-59), and second, that the suit was not objectively baseless. 35 Regarding anticompetitive effect, Bell Atlantic is mistaken. Covad alleges Bell Atlantic brought the patent suit in order to interfere with competition in the relevant markets. That is sufficient to allege an anticompetitive effect. 36 Alternatively, Bell Atlantic urges us to hold, as a matter of law, that its bringing the patent suit could not have harmed competition. In so doing, Bell Atlantic confuses the function of a motion to dismiss pursuant to Rule 12(b)(6), which tests the sufficiency of the plaintiff's allegations, with a motion for summary judgment pursuant to Rule 56, which tests the sufficiency of the non-moving party's evidence in light of the legal theory it has advanced. See Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) (simplified notice pleading standard [of the Federal Rules of Civil Procedure] relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims). Bell Atlantic's protestation notwithstanding, we have it on good authority that even a single patent suit brought in bad faith against a nascent rival might unlawfully harm competition. See 3A AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 782k, at 281 (an unjustified patent infringement suit ... might be abused by a monopolist to the detriment of actual or potential rivals). Whether Bell Atlantic's suit had such an effect is, again, a question not properly decided upon a motion to dismiss. 37 Bell Atlantic next disputes Covad's characterization of the patent suit as baseless. Resolving this matter requires us to consider the Noerr-Pennington doctrine, under which petitioning the Government for redress of grievances, whether by efforts to influence legislative or executive action or by seeking redress in court, is immune from liability under the antitrust laws. See E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 136, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961); Cal. Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 510, 92 S.Ct. 609, 30 L.Ed.2d 642 (1972) ( Noerr-Pennington doctrine encompasses the approach of citizens ... to courts). 38 Noerr-Pennington immunity, however, does not extend to sham litigation. The presumption of antitrust immunity for litigating is dispelled if the plaintiff can show that two conditions are met: 39 First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits.... Only if challenged litigation is objectively meritless may a court examine the litigant's subjective motivation.... This two-tiered process requires the plaintiff to disprove the challenged lawsuit's legal viability before the court will entertain evidence of the suit's economic viability. 40 Prof'l Real Estate Investors, Inc. v. Columbia Pictures Indus. , 508 U.S. 49, 60-61, 113 S.Ct. 1920, 123 L.Ed.2d 611 (1993). Bell Atlantic urges us to decide as a matter of law that its patent suit against Covad was not objectively baseless. Covad interposes no issue of fact and joins issue on the question of law. With the opinions of the patent courts before us, we see no barrier to our determining now whether Bell Atlantic's suit was a sham and hence without Noerr-Pennington immunity from antitrust liability. 41 Bell Atlantic sued Covad for patent infringement. The district court, in a lengthy and detailed opinion, granted summary judgment in favor of Covad. Bell Atlantic Network Services, 92 F.Supp.2d at 499-500. Bell Atlantic appealed, and the Court of Appeals for the Federal Circuit, in another lengthy and detailed opinion, see 262 F.3d 1258 (2001), affirmed the judgment of the district court. That Covad ultimately prevailed, of course, tells us little about whether Bell Atlantic's patent suit lacked objective merit. See Prof'l Real Estate Investors, 508 U.S. at 60 n. 5, 113 S.Ct. 1920 (court must resist the understandable temptation to engage in post hoc reasoning by concluding that an ultimately unsuccessful action must have been unreasonable or without foundation). 42 Our review of the patent courts' opinions convinces us that Bell Atlantic's case against Covad was not objectively baseless. Bell Atlantic advanced reasonable arguments that each court went to some lengths to reject. Nothing in their opinions suggests that no reasonable litigant could [have] realistically expect[ed] success on the merits. Id. at 60, 113 S.Ct. 1920. 43 Covad also alleges Bell Atlantic singled Covad out for suit and used the patent action as the vehicle for serving discovery requests on Covad seeking confidential information about a competitor. Those allegations, however, speak to Bell Atlantic's subjective motivation for suing Covad, which may be evaluated [o]nly if [the] challenged litigation is objectively meritless. Id. We therefore conclude that Covad's allegation that Bell Atlantic brought a baseless and bad faith patent suit against it fails to state a claim under § 2 of the Sherman Act.