Celebrating Freedom: Trinko Reaffirms Freedom to Deal Absent Anticompetitive Intent; Raises the Bar for Refusal to Deal Plaintiffs
By: RICHARD J. WEGENER
February 2004
Background
On January 13, the U.S. Supreme Court issued its much-anticipated decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 125 S.Ct. 872, 86 ATRR 33 (U.S. 2004). The case, on appeal from the Second Circuit’s reinstatement of previously dismissed essential facilities and monopoly leveraging claims, teed up an opportunity for the Court to clarify the increasingly hazy role of Section 2 of the Sherman Act in today’s marketplace.
Verizon, a dominant firm, was accused of breaching its duty under the 1996 Telecommunications Act to share its network with competitor AT&T. A six-Justice majority, reaching the merits, held that Section 2 does not give courts carte blanche to require firms, including monopolists, to “alter [their] way of doing business whenever some other approach might yield greater competition.” Three concurring Justices would have ruled that the plaintiff, a customer of AT&T, lacked standing because its injury “was purely derivative” of AT&T’s injury.
Colgate Still Means “Freedom to Deal”
The Court’s analysis – which is easy to read – begins with the obvious – that “the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct” [emphasis in the original]. Accordingly, the issue presented was the extent to which a refusal-to-deal may constitute the requisite anticompetitive conduct. The Court noted that forcing a monopolist to share an otherwise lawfully acquired monopoly distorts the competitive incentive that the antitrust laws were intended to promote and converts the judiciary into an unlikely “central planner” with the responsibility to decide price, quantity, and the other terms of dealing. Such a result is not consistent with the general rule of United States v. Colgate & Co., 250 U.S. 300 (1919), that the antitrust laws do not restrict the right of an entirely private business, freely to exercise its own independent discretion as to parties with whom it will deal. The Court’s holding, therefore, turned on whether the complaint had alleged sufficient facts to establish an exception to the ordinary “freedom to deal.”
Sacrificing Short-Term Profits Can Be “Anticompetitive Intent”
In Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), the Court differentiated between lawful price-cutting and unlawful predatory pricing by requiring a predatory pricing plaintiff to demonstrate that the defendant incurred some measure of short-term profit loss in a rational hope (accompanied by a demonstrable possibility) of earning long-term monopoly rents. The Trinko Court applied the same reasoning to gauge whether Verizon’s alleged refusal-to-deal with AT&T was anticompetitive. Because any refusal by Verizon would have been to deal on wholesale terms, a business arrangement which, but for the interconnection mandate in the 1996 Act, Verizon would never have offered to any of its customers (particularly to retail customers or competitors), the Court concluded that the complaint in Trinko could not have alleged a sacrifice of short-term profits, and so did not state a Section 2 cause of action.
What is left of Aspen Skiing?
After Trinko, there is little doubt that exceptions to the freedom to deal are narrow. Aspen Skiing is left standing, but shivering at the edge of Section 2 law. The Court took great pains to emphasize the short-term losses incurred by the defendant in Aspen – refusing even to sell at retail, and terminating a presumably profitable prior arrangement – and the similar termination of presumably profitable business activities in Otter Tail were both horses of a different color. The loss of short-term profits in both cases revealed a “distinctly anticompetitive bent,” which the Court found lacking under the facts alleged in Trinko.
Implications for Refusal to Deal Cases
Recent history has been marked by a proliferation of Section 2 cases claiming a variety of wrongs ranging from refusals to share innovations that might aid competitors to strategies that have the effect of excluding competitors from the market or adversely affecting access to “bottleneck” facilities.
Trinko raises the bar for future refusal to deal plaintiffs. Refusals to deal are presumed lawful, even by a monopolist. In order to counter that presumption, one must prove that the refusal involves “anticompetitive conduct,” such as a decision to sacrifice short-term profits. Conversely, unless the defendant is refusing to deal on terms which cannot be demonstrated to be commercially advantageous, the plaintiffs will be unable to state an antitrust claim. We expect few plaintiffs will be able to do so.