Did Trinko really kill antitrust price squeeze claims? A critical approach to the Linkline decision through a comparison of E.U. and U.S. case law.

• Author: Rudaz, Caroline Cavaleri

ABSTRACT

This Article presents a critical analysis of the Linkline case that refuses to recognize price squeeze claims as antitrust claims under [section] 2 of the Sherman Act. It argues that Linkline gives a distorted reading of Trinko without giving proper attention to the application of [section] 2 of the Sherman Act. The Linkline decision takes a dogmatic position and thus, while refuting the Alcoa decision, appears to be a missed opportunity to more precisely define price squeezing.

This Article offers a comparison between the U.S. Supreme Court's decision and the recent European decisions delivered in broadband access cases that are pointing in a completely different direction. As U.S. antitrust law and E.U. competition law converge by seeking to protect consumer welfare through the application of law based on sound economic analysis, price squeezing illustrates the most acute difference between the U.S and E.U.: the fear of introducing regulatory principles through antitrust law in the U.S. as opposed to a more tolerant perception of state intervention in the E. U.

TABLE OF CONTENTS I. INTRODUCTION II. RECENT DECISIONS A. Linkline B. Deutsche Telekom AG C. Telefonica III. PRICE SQUEEZE DEFINITION A. Price Squeeze Foundations in the United States and European Union 1. United States 2. European Union B. Market Definition and Market Power 1. Market Definition 2. Market Power C. Values and References D. Possible Justifications IV. PRICE SQUEEZE AND DUTY TO DEAL A. Link Between Price Squeeze and Duty to Deal B. Price Squeeze Claim Under [section] 2 1. Monopoly Power 2. Intent C. Protection of Investments V. RELATIONSHIP AND COORDINATION BETWEEN ANTITRUST AND REGULATION VI. COMPETITION GOALS VII. CONCLUSION I. INTRODUCTION

In AT&T California v. Linkline Communications, Inc., a February 2009 case related to broadband access in the telecommunications sector, the U.S. Supreme Court curbed the development of price squeeze (1) claims under [section] 2 of the Sherman Act by refusing to recognize them as antitrust claims. (2) Shortly before Linkline, the European Commission (3) and the European Union's Court of First Instance (4) also each delivered a decision in a broadband access case. Their decisions pointed in a totally different direction than Linkline: the European decisions condemned price squeezing as an abuse of a dominant market position. (5)

Linkline reaffirms the Supreme Court's concerns--previously expressed in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko (6)--over protecting the incentive to invest and innovate, saving antitrust courts from acting as central planners, (7) and, ultimately, avoiding error costs. (8) Although Linkline relies heavily on Trinko, it distorts this precedent and fails to properly consider the application of [section] 2 of the Sherman Act. Rather than truly examining the issue of monopolization, the decision takes a dogmatic position. Linkline refutes Alcoa but misses an opportunity to more precisely define price squeezing; leaves certain questions unresolved; and draws a confusing connection between a price squeeze and the duty to deal, subordinating the first to the second.

This Article compares Linkline with recent European decisions, specifically Commissioner v. Deutsche Telekom AG and Wanadoo Espana v. Telefonica. It examines how courts on both sides of the Atlantic resolve questions surrounding price squeezing in antitrust cases. The cases analyzed in this Article are emblematic of the current development of antitrust law in the United States and in the European Union, and the outcomes of these cases show the differences in the treatment of similar claims within the same sector. Ultimately, this Article refutes the notion that diverging competition goals, an explanation for the divergence commonly propounded in the United States, can fully explain the differences between the U.S. and E.U. cases, because both U.S. and E.U. competition laws aim to protect consumer welfare.

The observations set forth in this Article address the telecommunications sector. All of the cases involve a vertically integrated, formerly monopolistic firm that still holds a dominant position on an input characterized by significant sunk costs in a telephone network extending to a local loop. This asset is uneconomical to duplicate. As a result, in each case, access to the integrated firm's network was opened to competitors through regulation to develop a competitive downstream market of DSL services. Each vertically integrated firm sells wholesale inputs and finished goods or services at the retail level, and new entrants are both customers (at the wholesale level) and competitors (at the retail level) of these integrated firms.

Part II of the Article briefly outlines three decisions: Linkline, Deutsche Telekom AG, and Telefonica. Part III defines a price squeeze claim by first looking at its historical development in the United States and European Union and then discussing several controversial aspects: the delineation of the market definition and the market power of a price squeeze; the values and economical references to consider when defining its abuse; and the legitimate business reasons that can justify the dominant firm's behavior. The Article then shifts to three questions intrinsically linked to price squeeze claims. Part IV examines whether a price squeeze implies a duty to deal. Part V examines the relationship between regulation and antitrust in the framework of a price squeeze. Finally, Part VI examines what antitrust goals are targeted from the perspective of a price squeeze claim. This Article concludes with the assertion that U.S. and E.U. laws both theoretically aspire to protect consumer welfare, but differing approaches to competition law bring about opposing results in price squeeze cases.

2. RECENT DECISIONS

   1. Linkline

      As a former monopolist, AT&T (9) controls most of the local telephone network and, in particular, the last mile, which connects the subscriber, private homes or businesses, and the local network exchange. (10) As a vertically integrated firm, AT&T sells both wholesale DSL access to Internet service providers (ISPs) and--in competition with these same ISPs--finished goods and services to individual consumers at the retail level. (11) Until 2005, AT&T was required by the regulatory authority to open its local loop to competitors in order to develop a competitive market for Internet services. (12) This forced-sharing requirement was then abandoned because of competition beyond DSL for high-speed Internet services, but AT&T remains bound "to provide wholesale 'DSL transport' service to independent firms at a price no greater than the retail price of AT&T's DSL service" as a condition of a recent merger. (13)

      The plaintiffs in Linkline were four independent ISPs (hereinafter Linkline) that offer high-speed digital data transmission via telephone cable. (14) To provide their services to consumers, they needed access to the network elements provided by AT&T. (15) In their claims against AT&T, the plaintiffs alleged that their profit margins were being illegally squeezed because AT&T had sufficient market power to simultaneously raise prices in the wholesale market and cut the retail price of the finished goods, thus monopolizing or attempting to monopolize regional digital subscriber-line markets. (16)

      While the case was pending at the district court, the Supreme Court issued the Trinko decision, holding that "a firm with no antitrust duty to deal with its rivals at all is under no obligation to provide those rivals with a 'sufficient' level of service." (17) AT&T then argued that Trinko foreclosed the plaintiffs' claim. (18) The district court denied both parties' motions for judgment on the pleadings. (19) On appeal, the Ninth Circuit held that Linkline stated a claim under price squeeze theory and granted certiorari. First, the court observed that price squeeze allegations had long been recognized as valid claims under [section] 2 of the Sherman Act, and a price squeeze could occur even if prices were regulated at both wholesale and retail levels. (20) Next, the court concluded that the Supreme Court's decision in Trinko (21) did not call for a reconsideration of this view. (22) Trinko explains that "claims that satisfy established antitrust standards" are preserved in particular regulatory contexts. (23) Trinko did not involve a price squeeze theory, and the Ninth Circuit concluded that a price squeeze claim remained a potentially viable antitrust claim. (24) Furthermore, the court concluded that Trinko did not bar the application of antitrust law in regulated industries, but a regulatory regime is "one factor" for a court to consider when determining antitrust liability. (25) In the case at hand, only wholesale prices were regulated and retail prices were constrained by antitrust law. (26) The court thus held that, if Linkline could prove that its allegation involved only unregulated prices, it could bring a valid antitrust claim. (27)

      AT&T appealed to the Supreme Court. (28) The Supreme Court heard the case and disagreed with the Ninth Circuit. It concluded that the Sherman Act did not recognize a price squeeze claim. (29)

      The Court's argument is seductive in its simplicity: following Trinko, if an undertaking "has no antitrust duty to deal with competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous." (30) Thus, the Supreme Court found no reason to distinguish between price and nonprice components of a transaction for antitrust purposes, and it held that AT&T was not required to propose wholesale prices at the level its rivals would have preferred. (31)

      With this argument, Linkline rules out all antitrust claims regarding price in the upstream market, (32) and leaves valid only claims concerning overly low prices in the downstream market. (33) To prevail...