United States: Supreme Court Decides Major Monopolization Case

On January 13, 2004, the Supreme Court issued its decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, No. 02-682. The Court’s ruling represents a major decision in the area of monopolization under Section 2 of the Sherman Act and resolves perhaps the most important business case of the Term. The opinion addresses several significant antitrust theories applicable to monopolization cases and will effectively limit certain controversial antitrust doctrines. It could also make it substantially more difficult to bring a monopolization or attempted monopolization claim against a dominant firm, particularly in a regulated industry. This case was the subject of a Kilpatrick Stockton Antitrust Legal Alert on March 31, 2003.

This lawsuit arose at the intersection of the Sherman Act and the Telecommunications Act of 1996. The Telecommunications Act sought to encourage competition and facilitate new entry in local telephone markets 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, a customer who bought local phone service from a CLEC, then filed an antitrust class-action suit. The suit alleged that Verizon failed to comply with the access requirements of the Telecommunications Act and that this conduct violated the monopolization provisions of Section 2 of the Sherman Act by restraining competition in the market for local telephone service and thereby injuring the class members as customers of the CLEC. The district court held that Trinko had antitrust standing, but it dismissed the suit on the ground that the complaint failed to state a cause of action under Section 2. The Second Circuit reversed, agreeing that Trinko had standing but concluding that the complaint set forth a monopolization claim.

In an opinion written by Justice Scalia for a six-Justice majority, the Court held that Verizon’s alleged failure to provide competitors with adequate access to its local network was not exclusionary conduct violative of Section 2. Justice Stevens, joined by Justices Souter and Thomas, concurred in the judgment on the ground that Trinko lacked antitrust standing.

The majority began by explaining that the Telecommunications Act specifically forecloses any argument that an ILEC can face increase exposure to antitrust liability merely by failing to comply with its obligations under the Act to assist competitors. To prevail, therefore, Trinko would have to establish that Verizon’s conduct offends antitrust principles that pre-dated the Telecommunications Act. Against this backdrop, the majority opinion reaffirmed that, in general, the Sherman Act neither limits even a monopolist’s right to choose the parties with which it deals nor requires a monopolist to assist rival firms. While those principles are not unqualified, the Court stressed that it has been "very cautious in recognizing . . . exceptions." In particular, the Court held that the exception recognized in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) – a much-criticized decision that condemned a monopolist’s refusal to assist a competitor – was inapplicable here. Noting that Aspen Skiing is a "limited exception" that "is at or near the outer boundary of § 2 liability," the Court fundamentally distinguished that decision on the ground that the refusal to assist or cooperate with rivals there gave rise to concerns that the conduct was anticompetitive. As the Court explained, (1) the defendant in Aspen Skiing had unilaterally terminated an existing, "voluntary (and thus presumably profitable) course of dealing," which "suggested a willingness to forsake short-term profits to achieve an anticompetitive end"; (2) "the defendant’s unwillingness . . . [to continue the existing arrangement] even if compensated at retail price revealed a distinctively anticompetitive bent" and suggested "a calculation that its future monopoly retail price would be higher"; and (3) the defendant "refused to provide to its competitor . . . a product that it already sold at retail" in the marketplace, not one that it was required by statute to offer at considerable expense and effort. In Verizon, by contrast, none of these factors was present, and therefore the failure to provide the access required by the Telecommunications Act "sheds no light upon the [defendant’s] motivation" and "tells us nothing about dreams of monopoly." Accordingly, "Verizon’s alleged insufficient assistance in the provision of service to rivals is not a recognized antitrust claim under this Court’s existing refusal-to-deal precedents." This conclusion applies, the Court stated, whether the case is analyzed under the doctrine of Aspen Skiing, essential facilities, or monopoly leveraging.

In addition, the majority declined to create a new principle requiring monopolists to aid their competitors beyond the circumstances of Aspen Skiing. First, the Court recognized that it can be "difficult" for an antitrust court to determine whether challenged conduct constitutes "illicit exclusion . . . [or] legitimate competition" and that "[m]istaken inferences and the resulting false condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’" Indeed, such erroneous conclusions would "distort investment and lead to a new layer of interminable litigation." Second, in a regulated industry, the Court observed that the regulatory system itself often serves "to deter and remedy anticompetitive harm." Finally, as the Court emphasized, "a generalist antitrust court" is not well suited to assessing the anticompetitive nature of regulatory violations and continually supervising day-to-day compliance with detailed regulatory requirements. Weighing the "slight benefits of antitrust intervention here" against "a realistic assessment of its costs," the Court held that Verizon did not violate Section 2 by failing to provide assistance to other local telephone companies.

In sum, the Court concluded that the antitrust laws imposed on defendant "no duty to aid competitors." As the Court admonished, the Sherman Act "does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition." In light of this ruling, the majority did not reach the issue of antitrust standing.

Justice Stevens’ concurring opinion did address the standing question and found that Trinko, as a customer of the CLEC that allegedly was denied adequate access to Verizon’s telephone network, did not have antitrust standing under Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519 (1983). Because Trinko’s asserted injury was derivative of the alleged anticompetitive effect on the CLEC, Justice Stevens concluded that standing was not established under Blue Shield of Va. v. McCready, 457 U.S. 465 (1982).

The Court’s decision stands as a very important development with respect to monopolization claims under Section 2 of the Sherman Act. The opinion identifies its earlier decision regarding a monopolist’s unilateral refusal to deal in Aspen Skiing as an outlier and essentially limits that decision to the peculiar facts at issue there. In addition, while not rejecting the doctrine outright, the Court declined the opportunity to recognize the "essential facility" doctrine (which dictates that in certain circumstances, dominant firms are required to share their facilities with competitors) as a viable antitrust theory. Furthermore, dispensing of the issue in a footnote, the majority made clear that Section 2 does not reach the use of monopoly power in one market to gain a competitive advantage in a related market – a practice commonly known as monopoly leveraging – unless the conduct results in the monopolist obtaining monopoly power or something dangerously close in the second, related market. Beyond the majority’s holdings, the opinion contains language that may give dominant firms in regulated industries greater hope of fending off monopolization claims by invoking implied immunity arguments. These points all will have significance in shaping the contours of Section 2 and many of these issues have been the subject of heated debates in the antitrust bar over the past two or three decades. Finally, given the facts of this case, the concurrence’s position regarding Trinko’s lack of standing finds solid support in the law. Both the majority and the concurring opinions appear to reflect the Court’s concern that private Sherman Act cases like this one have exceeded proper legal bounds.