Ninth Circuit Holds Price Squeeze Claims Survive Trinko

A price squeeze occurs when a vertically integrated company with a monopoly in the upstream market sets its wholesale prices to its customers so high that they cannot compete effectively with it at the downstream level.In some circumstances, price squeezes may constitute exclusionary conduct under Section 2 of the Sherman Act.For example, in City of Mishikawa v. American Electric Power, 616 F. 2d 976 (7th Cir. 1980) the defendant utility company sold power both at wholesale and directly to consumers.By setting its wholesale price higher than its retail price, it effectively prevented its wholesale customers from competing with it at the consumer level.Other courts, however, have criticized price squeeze claims pointing out that they can be pro-consumer when the upstream monopolist can carry out the downstream activities more efficiently than its independent competitors, and such claims also impose administrative burdens on the courts with respect to price setting for which they are ill-suited.Town of Concord v. Boston Edison Co., 915 F. 2d 17 (1st Cir. 1990).

In Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), the Supreme Court held that the refusal of a monopolist to deal with a competitor usually does not constitute exclusionary conduct sufficient to violate Section 2 of the Sherman Act.In Trinko, the defendant had a lawful monopoly over the lines necessary for delivery of telephone and internet communications.The 1996 Telecommunications Act required it to give competitors access to these lines on fair and nondiscriminatory terms.Defendant allegedly failed to do so, and engaged in other obstructionist conduct vis-à-vis its competitors.This conduct gave rise to the Section 2 claim.In reaching its holding, the Supreme Court emphasized that unilateral refusals to deal seldom violate the antitrust laws, particularly where such conduct is subject to regulation by another set of laws and agencies.

Since Trinko was decided, one issue that has split the courts is whether it also bars price squeeze claims, i.e., where the monopolist is willing to supply its competitors, but only on terms regarded as unfair or unduly burdensome by the competitor.Compare Covad Communications Co. v. Bellsouth Corp., 374 F. 3d 1044, 1050 (11th Cir. 2004) (holding that price squeeze claims survive Trinko) with Covad Communication Co. v. Bell Atlantic, 398 F. 3d 666, 673 (D.C. Cir. 2005) (holding they do not).Logic suggests that since under Trinko the integrated monopolist is free to refuse to deal entirely, it should be free to set the terms – including a price squeeze – on which it will deal with rivals.

In Linkline Communications v. Pacific Bell, 2007 U.S. App. LEXIS 21719, the Ninth Circuit dealt with a price squeeze claim in the telecommunications industry.Plaintiffs were Internet Service Providers ("ISPs") who sell digital subscriber lines ("DSL") on the internet to retail customers.They leased those facilities from defendants, which had regional monopolies over the telephone lines used for DSL access.In addition to providing access to those lines at wholesale to ISPs, defendants themselves provided DSL access at retail to individual consumers.Plaintiffs alleged, inter alia, that defendants engaged in a price squeeze by charging ISPs a high wholesale price in relation to the price at which defendants provided retail service.The District Court denied the motion to dismiss the price squeeze claim but certified its order for interlocutory appeal.Defendant’s main argument on appeal was that such price squeeze claims in the telecommunications industry were barred by the Supreme Court’s Trinko decision.

In a 2-1 decision, however, the Ninth Circuit rejected this argument.It stated that, in City of Anaheim v. Southern California Edison Co., 955 F. 2d 1373 (1992) it had joined its sister circuits in holding that claims of price squeezing under Section 2 are viable against monopolists in regulated industries.By contrast, in Trinko, the Supreme Court held that Verizon’s insufficient assistance in the provision of service to rivals is not a recognized claim under the Court’s refusal to deal precedents.While the Trinko court did recognize that the regulatory structure governing telecommunications was an important factor in concluding that it was not justified in extending antitrust liability to include Trinko‘s case, it was only one factor and not a per se bar to judicial enforcement of the antitrust laws.

Thus, according to the Ninth Circuit, the issue was whether Anaheim remains viable after Trinko.It found that the reasoning and theory of Anaheim is not "clearly irreconcilable" with that of Trinko.Trinko did not involve a price squeeze theory and the Trinko court took "great care" to say that "claims that satisfy established antitrust standards" are preserved.Moreover, Anaheim did not embrace an unlimited view of Section 2 price squeeze claims in regulated industries, but cautioned that courts should tread carefully in regulated industries and require a showing of specific intent by the monopolist to serve its monopolistic purposes at the expense of retail competitors.Since Trinko stated that the existence of a regulatory structure was only one factor to consider, and Anaheim rejected the wholesale importation of antitrust theory into regulated industries, the Ninth Circuit found that the two decisions are consistent.The court concluded its decision by noting that, unlike both Anaheim and Trinko, the industry here was only partially regulated, and that regulation is limited to the wholesale level and there is no regulation at the retail level.Since much of the conduct at issue relates to the unregulated retail prices, this provides a further basis for concluding that Trinko should not bar the claim.

Judge Gould dissented from the majority decision and opinion.In his view, Trinko takes the issue of wholesale pricing out of the case since "it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal.Covad Communications v. Bell Atl. Corp., 398 F. 3d. 666, 673 (D.C. Cir. 2005) (quoting 3A Areeda & Hovenkamp, Antitrust Law, 129-30 (2d. Ed. 2002).Once the wholesale pricing issue is removed, then plaintiff does not have an antitrust claim unless it can show that the retail prices are predatory within the meaning of Brooke Group v. Brown & Williamson Corp., 509 U.S. 209 (1993).Since plaintiffs did not allege that defendant had market power in the retail DSL market, that its retail prices were below cost, or that defendant could recoup its losses after a period of predation, it could not satisfy the Brooke Group standards and the Complaint should be dismissed.

The defendants did file a petition for certorari with the Supreme Court on October 17, 2007.Shortly thereafter, a star studded group of economists (William Baumol, Kenneth Elzinga, Franklin Fisher and Thomas Jorde among others), represented by Robert Bork and J. Gregory Sidak, filed an amicus brief in support of the petition.The amicus brief argues, inter alia, that the Ninth Circuit opinion is "incompatible" with the reasoning of the Trinko court, specifically noting that Trinko recognized that, in regulated industries, "[e]nforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing – a role for which they are ill-suited."Trinko, 504 U.S. at 408.Thus, the last chapter has not been written and, given the split in the circuits as well as the amicus brief submitted by numerous influential economists, the Supreme Court may choose to take up this issue itself.

Authored by:

Carlton A. Varner

(213) 617-4146

cvarner@sheppardmullin.com