At oral argument yesterday in Hawaii v. Office of Hawaiian Affairs, the petitioner’s counsel was in the enviable position of spending most of his argument debating just how big his victory in the case should be.  Respondent’s counsel, in turn, conceded that to the extent the lower court decided the case on the basis that petitioner claimed it did, then the decision was wrong and should be vacated.

Every now and again, by the time a case has gone through the crucible of Supreme Court merits briefing, it becomes obvious to counsel for the respondent that there is no reasonable chance of successfully defending the decision below, at least on the grounds upon which it was decided (or appeared to be decided).  The Hawaii case was one such instance.  Coincidentally, just before that argument began, the Court issued its decision in another such case, AT&T v. linkLine, No. 07-512.

In linkLine, the court of appeals held that the plaintiff (an independent internet service provider (ISP)) had stated an antitrust claim against AT&T (both a provider of wholesale DSL services to ISP’s like linkLine, and a retail seller of DSL services itself) under a so-called “price squeeze” theory.  The basic idea was that AT&T was driving its competitors in the retail DSL market out of business by charging  too high a wholesale price (raising the plaintiff’s costs) and charging too low a price at retail (effectively reducing the plaintiff’s revenue).  The price squeeze theory has been around for a while, famously recognized by Judge Learned Hand in a case from the 1940s.  But its underpinnings had been substantially eroded by a recent decision from the Supreme Court, Verizon v. Trinko, 540 U.S. 398 (2004), which held that a company that does not have any antitrust duty to deal with its competitors cannot be subject to antitrust liability based on the way it conducts itself during voluntary transactions with its competitors.  In Trinko, the challenged conduct was providing the competitor lousy service.  The court of appeals in linkLine thought, however, that there was a difference when the conduct was engaging in a price squeeze, in part because the price squeeze theory had been around in the lower courts for quite some time.

However, by the time of the briefing on the merits, linkLine‘s lawyers apparently decided that this was a distinction that the Court was not going to accept, and they promptly abandoned their price squeeze claim in the Supreme Court, asking instead for a remand to allow them to amend their complaint to pursue a more traditional predatory pricing claim against AT&T.

They got their wish, mostly.  Yesterday, the Court handed down its decision, putting a stake in the heart of the price squeeze theory of antitrust liability.  Writing for five justices, Chief Justice Roberts rejected, as an initial matter, any suggestion that the plaintiff’s change in position mooted the case or otherwise counseled against deciding the question presented.  The parties were still adverse in the general litigation, he explained, and with respect to what the Court should do about the judgment (plaintiffs wanting it vacated, and AT&T wanting it outright reversed).

The Chief then explained that in light of Trinko, and the plaintiffs’ concession that AT&T had no antitrust duty to deal with them, AT&T accordingly had no antitrust duty to sell wholesale DSL services to them at any particular price.  And, the Court explained, the only duty AT&T has with respect to its retail pricing is the ordinary antitrust duty not engage in predatory pricing (defined as selling below cost with a dangerous probability of being able to recover the losses after driving their competitors out of business).

The price squeeze theory, the Court said, was undesirable because it threatened to chill the very thing antitrust law is designed to encourage – low prices for consumers.  “Firms might raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability,” the Chief explained.  At the same time, the majority doubted the courts’ institutional capacity to reasonably administer a price squeeze regime, which could ultimately require courts to decide what constitutes reasonable wholesale and retail prices in particular markets.

The Court accordingly vacated the Ninth Circuit’s decision and remanded.  It noted that plaintiffs had already been allowed to file an amended complaint, alleging an ordinary predatory pricing claim.  But it concluded that in finding the second complaint adequate, the district court had applied a too lenient pleading standard (i.e., the “no set of facts” standard the Court rejected in Twombly).  The district court would therefore having to revisit the question on remand.

The Court also stated, somewhat cryptically, that even if allowed to replead, the plaintiff’s complaint “may not survive a motion to dismiss” because “if AT&T can bankrupt plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market.”  This could be read to suggest not simply that plaintiffs would have to satisfy the ordinary Brook Group standard for making out a predatory pricing claim, but that in the circumstances of this case, even that theory is somehow unavailable in light of how dependant the plaintiffs are on AT&T as a wholesale supplier.

Four justices concurred in the judgment, preferring that the Court have decided the case on the narrower ground that at least when there is a government regulator (here, the FCC) that could provide relief for the alleged harm (here, too high wholesale prices) without the need to invoke antitrust law.  Justice Breyer’s opinion would have kept open the possibility, however, that a price squeeze theory could be valid in other circumstances.

Posted in Hawaii v. Office of Hawaiian Affairs, Pacific Bell Telephone Co., dba AT&T California v. linkLine Communications, Everything Else