AT&T ‘Price Squeeze’ Didn’t Violate Sherman Act, Supreme Court Told

A group of Internet access providers sued the Pacific Bell unit of SBC, now AT&T, alleging that it tried to use the tactic to interfere with DSL market competition. Two federal courts said the price-squeeze allegations made a claim under Section 2 of the Sherman Act -- despite a 2004 Supreme Court ruling in Verizon v. Trinko that Telecom Act network-sharing requirements can’t be enforced through antitrust law.

The case is “procedurally complicated,” but the court has an easy way out, said Rebecca Arbogast, a Stifel Nicolaus analyst who watched the argument. In its brief, plaintiff LinkLine abandoned its original position and asked the court to throw out the lower court’s decision so the company could argue its case differently. That request greatly increased the chances of an AT&T win, Arbogast said. Chief Justice John Roberts appeared to agree, joking to the AT&T attorney, “You are probably feeling pretty good about your chances since your opponent has given up, right?” The question is how broad the victory will be, Arbogast said. The court could just send the case back to the district judge. But a ruling that companies like AT&T can price-squeeze without violating the Sherman Act would be significant, she said.

A Supreme Court ruling that a price squeeze violates antitrust law would discourage AT&T and other big companies from investing and innovating, said AT&T attorney Aaron Panner. Failure to adopt a clear rule could also deter investment, because it would prompt concern about possible lawsuits, he said. To promote innovation, the court should rule that alleging a price squeeze doesn’t state a legal claim when there’s no duty to deal, he said.

If the Supreme Court permits a competitor to claim an antitrust violation for a price squeeze, the larger company will be forced to raise retail prices to consumers or “share the benefits of its lawful monopoly” with rivals by lowering wholesale prices, said Deanne Maynard, an assistant to the solicitor general. Neither outcome would be consistent with the Supreme Court’s previous antitrust decisions, she said.

Justice David Souter asked if there’s a consensus in support of AT&T’s argument that, without a clear rule, companies’ investment would be discouraged. Panner said scholars cited in the brief of the American Antitrust Institute agreed that a price squeeze shouldn’t be a claim under antitrust law. Panner acknowledged that some could be trying to find “counterexamples,” but he said “search for the rare case” can cause harm. Souter appeared unconvinced. Until economic literature makes the argument a “slam dunk,” the court should leave it “for reasoning and analysis,” he said.

AT&T believes the Supreme Court should dismiss LinkLine’s lawsuit because it conflicts with the court’s decision in Trinko, Panner said. As in Verizon’s case, AT&T had no duty to deal with LinkLine, he said. Maynard, from the solicitor general’s office, agreed. Under Trinko, lawful monopolists may charge monopolistic prices, she said. Punishing AT&T for a price squeeze could result in “chilling legitimate price cutting,” and it would put the courts in the role of regulator, she said.

Trinko, which didn’t specifically involve a price- squeezing claim, doesn’t justify dismissing LinkLine’s lawsuit, said Maxwell Blecher, attorney for LinkLine. Rather, LinkLine’s complaint only needed to satisfy the 1993 Supreme Court case Brooke Group v. Brown & Williamson Tobacco, he said. Under that precedent, LinkLine was required to allege that the retail prices charged were predatory in a way that antitrust laws forbid.

So that LinkLine can amend its complaint and pursue its Brooke Group argument back in district court, the company wants the Supreme Court to vacate the ruling of the U.S. Court of Appeals for the 9th Circuit, Blecher said. The 9th Circuit ruled in LinkLine’s favor, but LinkLine believes the decision was incomplete because it answered only whether a price squeeze was covered by Trinko. The decision said nothing about the implications of Brooke, he said.

If LinkLine had a complaint, it could have sought relief from the FCC, Panner said. Justices Stephen Breyer, Anthony Kennedy and Souter appeared interested in the argument. If the FCC can already deal with complaints like this, it might not be wise for the courts to clarify or make new antitrust rules, Souter said. It’s a different battle if the injured party has a forum to complain, Breyer said. Richard Brunell, an attorney representing the American Antitrust Institute, disagreed. “The mere existence of a regulatory remedy is insufficient,” he said.