United States: Supreme Court to Consider the Interface Between the Antitrust Laws and the Telecommunications Act of 1996

On March 10, 2003, The United States Supreme Court granted certiorari in Verizon Communications v. Law Offices of Curtis Trinko, to decide whether the customer of a local telephone company’s competitor should be allowed to proceed with an antitrust claim against the local telephone service provider. The antitrust claim, dismissed in the District Court, was held valid by the Second Circuit Court of Appeals despite the pervasive regulatory regime created by the Telecommunications Act of 1996.

The Telecommunications Act of 1996 ("the 1996 Act") sought to encourage competition in local telephone competition by requiring incumbent local exchange companies ("ILECs"), such as Verizon, to share their facilities at extremely attractive prices with new entrants into local telephone service, called competitive local exchange carriers ("CLECs"). CLECs claimed that Verizon filled its own customers’ orders before those of the CLECs, failed at other times to fill CLEC orders at all, and failed to inform CLECs of the status of CLEC customer orders. In March 2000, Verizon paid a $3 million fine to end an FCC investigation into these allegations. Verizon also agreed to pay $10 million to CLECs injured by Verizon’s conduct.

Trinko then filed a class action suit claiming that Trinko and other members of a class, defined as customers of CLECs, had been injured by Verizon’s conduct and, among other things, sought damages under Section 2 of the Sherman Act for Verizon’s alleged monopolization of local telephone service.

The District Court held Trinko had standing to assert an antitrust claim. Verizon claimed the plaintiff was merely an "indirect purchaser" of Verizon services and therefore could not maintain the suit under the Sherman Act. See Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The District Court, however, held Trinko to be a CLEC customer directly injured by Verizon’s treatment of CLECs. However, the District Court dismissed the antitrust claim, holding that, although the 1996 Act required Verizon to assist CLECs, the antitrust laws do not require any company, even a monopolist, to cooperate with its competitors. The plaintiff did not allege any facts to show a willful acquisition or maintenance of monopoly power, so the antitrust claim failed. The District Court did not believe that a violation of the 1996 Act, without more, could support an antitrust claim. It never reached the question of whether the 1996 Act could confer antitrust immunity.

The Second Circuit agreed with the District Court that the plaintiff had standing to assert an antitrust claim, but it disagreed with the District Court’s dismissal of the suit at the pleading stage. The Second Circuit held that the 1996 Act did not immunize ILECs from the antitrust laws and refused to assume such immunity absent a "plain repugnancy" between the 1996 Act and the antitrust laws. The Court strongly hinted, however, that injunctive relief, as opposed to a monetary award, might be inappropriate in the event the suit was successful because of its potential to disrupt the 1996 Act regulatory scheme.

The appellate court believed a monopolist did not have an unqualified right to refuse to deal with other firms. Plaintiff had alleged several bases to support an antitrust claim. For example, the Court found that the plaintiff might be able to make out an "essential facilities" claim. Trinko claimed the local loop was an essential facility, and the Second Circuit said that theory needed to be considered by the District Court. The plaintiff might also have a claim for monopoly leveraging – the use of monopoly power in one market to gain a competitive advantage in a separate market. The Second Circuit emphasized that it was not commenting upon the ultimate success of such an argument; it was simply too early in the litigation for the argument to be rejected.

The Second Circuit rejected the reasoning of Goldwasser v. Ameritech Corp., 222 F.3d 390 (7th Cir. 2000), thereby creating a split among the Circuits. As discussed in the Kilpatrick Stockton LLP Antitrust Legal Alert of August 7, 2002, "Circuit Split Exists on Antitrust Immunity Issue," the Seventh Circuit held that the 1996 Act took precedence over general antitrust laws because of the specific affirmative obligations imposed upon the incumbent carriers by the Act. Goldwasser also rejected a claim based upon the "essential facilities" doctrine because it found the claim "inextricably linked" to claims under the 1996 Act. Although Goldwasser rejected the idea that the 1996 Act conferred general implied immunity for conduct that would violate the antitrust laws, it found that application of the antitrust laws to the detailed regulatory regime concerning local markets would be inappropriate.

The Supreme Court’s grant of certiorari framed the question broadly: "Did the Court of Appeals err in reversing the District Court’s dismissal of respondents’ antitrust claims?" The issues posed by Trinko are important to both the antitrust laws and the 1996 Act. The FTC and the Antitrust Division voluntarily filed a joint amici curiae brief, without invitation of the Court, urging the Court to take the case because of the Second Circuit’s failure to recognize that conduct which harms one’s competitors is only actionable if it is exclusionary or predatory conduct, i.e., that which makes no economic sense except as an effort to diminish competition.1 That defect poisons both potential bases for liability – essential facilities and monopoly leveraging. The brief claims the Second Circuit also got the elements needed for a monopoly leveraging claim wrong because it failed to require "a dangerous probability" of successfully acquiring or maintaining a monopoly in the second market, which the plaintiff did not allege.

The 1996 Act in a sense set up a system of "regulatory" rather than market place competition. It did this by requiring ILECs to provide facilities – whether essential or not – to CLECs at extremely attractive prices. Thus, the competitive regime created was artificial and induced by an ILEC subsidy of CLEC entry. The 1996 Act set up complex requirements to achieve that result, a result inconsistent with an antitrust regime. The Supreme Court will necessarily focus on this global question.

It may also address – whether it will choose to do so is unclear – the question of whether standing found here was appropriate. The CLECs bought and resold service to Trinko. The Second Circuit, relying on the Supreme Court’s decision in Blue Shield of Virginia v. McCready, 457 U.S. 465 (1984), which held that a customer or competitor can suffer direct injury from an anticompetitive scheme aimed at the competitors, found Trinko’s injury to be distinct – i.e., staying with the CLEC and receiving inferior service directly injured Trinko. Illinois Brick, according to the Second Circuit, was limited only to injury in the form of higher prices that is passed on to the consumer. This analysis seems quite shallow and broadens antitrust standing markedly.

© Kilpatrick Stockton LLP.