Price Squeezes after Trinko

1. Price Squeezes after Trinko Aryeh Friedman

2. United States v. Aluminum Co. of America (1945) • Judge Hand held that Alcoa, a vertically integrated company manufacturing aluminum ingot and sheet aluminum, set its ingot prices at the first (or upstream) level so high (“higher than a ‘fair price’”) that its sheet aluminum fabricator customers could not compete with it at this second (or downstream) market and still make a “living profit.”

3. Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko. • The Supreme Court held that while the 1996 Act expressly provided that the regulatory regime did not displace the antitrust laws, it also did not expand the far narrower duty to deal imposed by the antitrust laws, the outer limits of which were defined by Aspen Skiing Co. v. Aspen Highlands Skiing Corp.

4. Trinko and price squeeze claims;Upstream market • Focusing first on the “higher than fair price” in the upstream market – is a “price squeeze” nothing more than a constructive refusal to deal (by raising the price so high that it is no longer affordable to competitors) or denial of reasonable access to an essential facility? If so, does Trinko preclude the assertion of a price squeeze claim where the upstream supplier has not previously made the essential input available to competitors at all or at competitive level prices? • The Court in Trinko held: • Evidence of monopoly pricing in the upstream market is not, at least in the short-term and absent evidence of other anticompetitive conduct, a violation of section 2 of the Sherman Act • A refusal to deal is not a violation of the antitrust laws if the defendant has never offered the upstream product or service at all or at other than the monopoly price. • Regulatory Overlay: • Where access to the monopolized service or product is mandated by regulation there can be no “essential facilities” claim because unavailability of access is an “indispensable requirement” for invoking that doctrine. • Courts should be reluctant to find a refusal to deal where the regulatory structure is designed to deter and remedy anticompetitive harm

5. Trinko and price squeeze claims;Downstream market • Focusing on the lower than “living profit” requirement in the downstream market, does Trinko require that the pricing there be below cost, i.e., “predatory pricing?” • In Trinko the Court bolstered its reluctance to extend the refusal to deal doctrine to the facts alleged because “as we have concluded with respect to above-cost predatory pricing schemes” applying the antitrust laws to conduct condemned by the 1996 Act would be “’beyond the practical ability of a judicial tribunal to control.’”

6. Cavalier Telephone v. Verizon, 4th Cir. 2003, cert. den. U.S. S. Ct. 2004 • The Fourth Circuit summarily held that any antitrust claim based on access to facilities that the ILEC would not have made available absent the 1996 Act, including a price squeeze claim, could not survive Trinko. • Oral argument in Covad v. Bell Atlantic (DC Cir. 2004) (appeal from grant of motion to dismiss, inter alia, a price squeeze claim): Tatel, J.: price squeeze dependent on 1996 Act obligation to make loops available. Ginsburg, J.: “to say … they are not giving us access or alternatively … they’re pricing access in such a way as to make it unattractive … are essentially indistinguishable.”

7. Covad Communications v. BellSouth, 11th Cir. 2004 • Price squeeze claim survived “because it is based on traditional antitrust doctrine.” Relying on Brooke Group, the Eleventh Circuit articulated the required allegations of a traditional price squeeze claim as first, “that ‘prices complained of are below an appropriate measure of cost’” and second that “BellSouth had ‘a dangerous probability [] of recouping its investment in below-cost prices.” • With respect to the “below-cost” element, Covad alleged that the prices that BellSouth’s downstream prices were set so low relative to its upstream unbundled loop prices, that Covad could not meet BellSouth’s downstream prices “and still make a reasonable return on its investment.” • With respect to the second “recoupment” element, Covad alleged that BellSouth allocated a de minimis amount for its own loop costs, giving it “a significantly higher profit margin on its wholesale sales (for which it faces no competition) than it does on the corresponding retail sales (for which Covad is attempting to compete).”

8. Deutsche Telekom AG (2003) • Under the Commission’s Napier Brown-British Sugar decision “there is an abuse of a dominant position where the wholesale prices that an integrated dominant undertaking charges for services provided to its competitors on an upstream market and the prices it itself charges end-users on a downstream market are in a proportion such that competition on the wholesale or retail market is restricted.” • First, the defendant had to be “an integrated dominant undertaking” with a dominant position in the upstream market. The Commission found that DT enjoyed a dominant position on the German markets in access to local fixed networks, both wholesale and retail (in the latter in both narrowband and broadband).

9. Deutsche Telekom AG (cont’d) • Second, there had to be a “proportion” that constituted a “margin squeeze.” In the German telecommunications market, wholesale rates were regulated. Thus the margin squeeze analysis focused on the retail rates, which were either subject to price cap regulation, or post-tariff review, so that DT had sufficient pricing discretion in the first instance. DT argued that retail prices could only be the basis for a margin squeeze claim if they were “abusive below-cost selling or predation.” The Commission rejected the predation argument, asserting that it is sufficient to establish a margin squeeze if there is “a disproportion between the two charges such that competition is restricted.” The relevant question was whether the difference between the retail prices charged by the dominant undertaking and the wholesale prices it charged its competitors for comparable services was “negative or insufficient to cover the product specific costs to the dominant operator of providing its own retail services on the downstream market.”

10. Deutsche Telekom AG (cont’d) • The third requirement is that “competition on the wholesale or retail market is restricted.” DT argued that this required a showing that the margin squeeze created or raised barriers to entry in the downstream market. But the Commission held that under Court of Justice precedent there is an abuse of dominant power where the dominant undertaking uses its pricing policy to eliminate its competitors, and this includes margin squeezes.