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A Shadow Over More Aggressive Antitrust Enforcement? Supreme Court Holds Firm on Higher Hurdles for Monopolization Claims

February 27, 2009

The Supreme Court addressed the U.S. antitrust laws - and Section 2 of the Sherman Act in particular – twice this week. On Wednesday, the Supreme Court issued a decision in Pacific Bell Telephone Co. dba AT&T  v. linkLine Communications (“linkLine”) which barred price squeeze claims under Section 2 of the Sherman Act where a company has no antitrust duty to deal with its competitors. On Monday, the Court declined to hear the FTC’s appeal in Rambus Inc. v. FTC (“Rambus”), thus allowing the D.C. Circuit’s rejection of the government’s case against Rambus to stand. Both developments show that although the new Administration may seek a more proactive enforcement approach to monopolization and single conduct cases, the courts may not necessarily follow the Administration’s lead. 

The Supreme Court’s Decision in linkLine

By holding that price squeeze claims are barred under Section 2 of the Sherman Act, the Supreme Court decisively settled a question which has been the subject of some controversy between the DOJ and FTC in the past year. The FTC opposed AT&T’s petition for certiorari, arguing that price squeeze claims should be enforced under the federal antitrust laws. In contrast, the DOJ supported AT&T’s petition, arguing that the federal antitrust laws should not recognize such claims. Some commentators have speculated that the Supreme Court’s linkLine decision indicates that even if the Agencies aggressively pursue antitrust claims as the new Administration has promised, they may find their efforts thwarted in the courts.

This case was brought by a number of independent internet providers which compete with AT&T to provide access to the internet through retail digital subscriber line (“DSL”) service in California. Since the independent providers (including linkLine) do not own the infrastructure and facilities needed to provide DSL transport service, they lease it from AT&T. The plaintiffs claimed that AT&T attempted to maintain a monopoly in the retail DSL market by engaging in an unlawful “price squeeze” in violation of Section 2 of the Sherman Act. According to plaintiffs, AT&T leased its wholesale DSL transport service at a high price and sold its retail DSL service at a low price, effectively foreclosing competition in the California retail DSL market.

Reversing the Ninth Circuit, the Court held that under its 2004 decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko (“Trinko”), Section 2 price squeeze claims require a duty to deal.  Because the District Court had already determined that AT&T had no antitrust duty to deal with its competitors, plaintiffs’ price squeeze claim was doomed. In a footnote to the linkLine opinion, the Court noted that even if the District Court had not already decided the issue it seemed “quite unlikely that AT&T would have an antitrust duty to deal with plaintiffs” and suggested that such a duty could only arise from FCC regulations and not from the Sherman Act.

The Court also rejected the narrow reading of Trinko applied by the Ninth Circuit and the District Court; both courts had emphasized the fact that plaintiffs in Trinko were denied access to vital infrastructure while the plaintiffs in linkLine alleged only an unlawful pricing scheme. The Court emphasized that whether a claim is price or non-price, Trinko stands for the proposition that a company cannot incur antitrust liability in the absence of an antitrust duty to deal. Put another way, AT&T had no duty to deal with plaintiffs at all, much less on favorable wholesale pricing terms.

The Court also confirmed that price squeeze claims must follow the two prong predatory pricing test set out under Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (“Brooke Group”), thereby further limiting the circumstances in which such claims can be brought. Brooke Group imposes antitrust liability only where a company elects to incur a short-term loss by setting its prices below its competitors’ costs and then, once it has driven its competitors out of the market, raises its prices to supra-competitive levels. Since plaintiffs failed to allege that AT&T’s conduct satisfied the Brooke Group test and since AT&T’s retail prices remained above cost, the Court rejected plaintiffs’ price squeeze claim.

Although the Court’s decision in linkLine does provide a clear rule that will allow companies and their counsel to more effectively navigate the contours of antitrust price squeeze liability, it does not do away with Section 2 liability altogether. It simply makes a previously difficult claim even tougher to bring. Of course, linkLine also leaves intact independent Section 2 claims based on either a refusal to deal or predatory pricing. Thus, companies that possess unique infrastructure or scarce resources, particularly those with market power, should still proceed with caution when dealing with rivals. Finally, regardless of the reach of the Sherman Act, at least in some industries other regulatory tools exist to accomplish the same goals. As a condition of a recent merger, the FCC required AT&T to provide wholesale DSL transport services to independent providers at a price no greater than the retail price of AT&T’s retail DSL service.

The Supreme Court’s Denial of Certiorari in Rambus

The Supreme Court’s refusal on Monday to review the D.C. Circuit’s opinion in Rambus appeared to deal the final crippling blow to the FTC’s seven year antitrust case against memory chip maker Rambus Inc. That case was based on the FTC’s claim that while Rambus was a member of a standard-setting organization it deliberately withheld information about patent interests it held in certain dynamic random access memory technology (“DRAM”) in order to ensure that the technology would be incorporated into industry standards and allow Rambus to acquire monopoly power in certain DRAM markets. The FTC’s administrative decision (issued in 2006) found that Rambus’s conduct amounted to exclusionary conduct in violation of Section 2 of the Sherman Act and deceptive conduct in violation of Section 5 of the FTC Act.
Rambus appealed the FTC’s decision to the D.C. Circuit, which ruled that the FTC had failed to show that Rambus’s allegedly exclusionary conduct had allowed it to acquire a monopoly in the DRAM market. The D.C. Circuit held that in order to prove monopolization, the FTC was required to show that “but for” Rambus’s actions the organization would have excluded Rambus’s technology from the DRAM standards. In finding that the FTC did not meet this burden, the D.C. Circuit pointed to the Commission’s own remedial opinion, which made clear that there was insufficient evidence from the administrative proceedings that the organization would have incorporated other technology in the standards had it been aware of Rambus’s DRAM interests. 
Although the Supreme Court’s refusal to review the D.C. Circuit’s ruling decisively ends the Sherman Act monopolization conflict between the FTC and Rambus in the U.S. federal court system, the FTC may have weapons left in its arsenal. Presumably concerned that the FTC may reconsider its Section 5 claims against Rambus on remand, the D.C. Circuit’s decision went out of its way to suggest that the Agency’s evidence of Rambus’s allegedly deceptive conduct is weak. Nonetheless, given the pro-enforcement antitrust stance of the Obama Administration and the FTC’s seemingly renewed vigor for administratively pursuing cases under Section 5 of the FTC Act, Rambus may soon find itself facing a stand-alone Section 5 action. In fact, responding to the Supreme Court’s denial of certiorari, David Wales, acting director of the FTC’s Bureau of Competition, said, “[t]his is not the decision we were hoping for, and we are reviewing our options.”

A company that is a member of a standard-setting organization and that seeks to have its patented technology adopted as an industry standard should not view the Supreme Court’s decision to deny review in Rambus as a green-light to intentionally withhold patent interests from that organization.  Other circuit courts may disagree with the D.C. Circuit’s decision and be inclined to find such behavior anticompetitive. Indeed, if there is enough inconsistency between the circuits, the Supreme Court may find itself faced with a future request for certiorari on this same question. The FTC has already indicated that standard-setting and monopolization cases will remain an agency priority. Finally, even if the FTC declines to pursue its Section 5 claims against Rambus, regulators in the European Union (“EU”) have charged Rambus with abuse of a dominant market position, alleging that the company claimed unreasonable royalties for the use of its patents, which the EU maintains were fraudulently set as industry standards. Thus, a company that obtains patent protection for its technology outside of the U.S. may also face antitrust scrutiny abroad.