Adam H. Morse (adamhmorse) wrote,
Adam H. Morse

Verizon Communications, Inc., v. Law Offices of Curtis V. Trinko, LLP

Verizon Communications, Inc., v. Law Offices of Curtis V. Trinko, LLP, 02-682. Majority opinion by Justice Scalia, in which Chief Justice Rehnquist and Justices O'Connor, Kennedy, Ginsburg, and Breyer joined. Justice Stevens wrote an opinion concurring in the judgment, in which Justices Souter and Thomas joined.

The Telecommunications Act of 1996 ended the pattern of monopolistic control of local phone service. This case deals with whether a telephone customer can bring an antitrust action against the incumbent service provider for failing to allow other phone companies to compete on a fair basis. The District Court for the Southern District of New York dismissed the claim, but the Second Circuit reinstated the claim and remanded for trial. The Supreme Court granted cert and reversed the Second Circuit.

The Majority Opinion
Justice Scalia wrote the majority opinion. He began by laying out the factual background to the case. Prior to 1996, Verizon and its predecessors had the exclusive franchise to provide local phone service within New York State. The 1996 Telecommunications Act sought to end the local phone service monopolies and to encourage competition. To achieve this goal, the Act required local phone companies to provide their competitors with access to network facilities, including access to individual elements "unbundled" from the rest of the network.

Verizon entered into an interconnection agreement with AT&T subsequent to binding arbitration. New York's state regulatory agency approved the agreement in 1997. Verizon also took advantage of the 1996 act's permission for local phone companies to compete in the long-distance market. The act requires local phone services to meet a checklist of requirements to engage in long-distance services, including meeting certain obligations to provide competitive access to network facilities. The Federal Communications Commission approved Verizon's efforts to expand into long-distance services in 1999.

Part of Verizon's obligations under its agreements was to provide competitors with access to its electronic service system for maintenance and quality control. The competitors were supposed to be able to order service support through the electronic system, with Verizon sending notifications when the services had been provided. Unfortunately, Verizon's competitors complained to the state and federal regulators that their orders were not being filled, impairing their ability to compete.

The FCC entered a consent decree resolving the complaints, while New York's state regulatory agency issued a series of orders resolving its side of the complaints. The consent decree required Verizon to make a $3 million "voluntary contribution" to the U.S. Treasury. The scare quotes come from Justice Scalia's opinion; after all, it's really quite obviously a fine that Verizon consented to pay. The state, in turn, required Verizon to pay $10 million in damages to its competitors. Both regulatory agencies also applied heightened requirements to ensure future compliance. About six months later, both agencies terminated their consent decrees and orders, concluding that the problem had been solved.

The respondent in this case, a law firm in New York, filed an action shortly after the regulatory judgments that alleged antitrust violations by Verizon and sought compensation for itself and a class of similarly situated plaintiffs. The complaint claimed that the anticompetitive conduct of Verizon hurt potential and actual customers of its rivals by deterring the customers from switching to the rival phone companies. The complaint also alleged violations of the Communications Act of 1934 and of state law. The district court dismissed all of respondent's claims. The court of appeals reinstated the antitrust claims and the Supreme Court granted cert.

Justice Scalia began his analysis of the legal issues by laying out the requirements imposed by the Telecommunications Act in more detail. Incumbent phone companies are required to offer access to unbundled elements of the network on fair terms, which the FCC has interpreted to mean at a price equivalent to the long-term incremental cost. The start-up phone company can either interconnect its own network or simply lease components of the network at wholesale prices and use those components to offer retail service. The incumbents are also required to allow rivals to instal equipment on the incumbents property, to make network interconnection feasible.

Justice Scalia then discussed preemption of antitrust laws by other regulatory systems. Ordinarily, a detailed regulatory system supersedes the more general duties under the antitrust law. However, the 1996 Act specifically states that antitrust claims and remedies remain available, so there can be no claim of an implied exemption to the antitrust laws. The majority opinion thus went on to consider whether respondent stated a claim under the ordinary standards of antitrust law.

Justice Scalia stated that any claim of antitrust violations in this case would depend on Sec. 2 of the Sherman Act, which prohibits "monopolizing." He noted that simply having monopoly power is not a violation of the Sherman Act; the ability to charge monopoly prices because of a monopoly generated by superior business ability, such as offering a better product, is part of the free-market system because it incentivizes diligent work and innovative developments. Monopolizing requires anticompetitive conduct designed to improperly maintain or create a monopoly in order to be actionable.

Justice Scalia then discussed the tension between the ordinary competitive system and requiring firms to offer rivals use of their facilities. The ability to use a rival's network reduces the incentives to develop a separate, economically beneficial system, and Justice Scalia raises the specter that mandatory negotiations between rivals could lead to collusion and price-fixing. As a result, antitrust law generally permits firms to refuse to deal with their rivals.

However, under certain exceptional circumstances, antitrust law does require firms to deal with their competitors. Justice Scalia noted the general hesitancy to impose such duties and then discussed the leading case.

Aspen Skiing Co. v. Aspen Highlands Skiing Co. addressed whether ski resorts violated the Sherman Act by discontinuing a multiple resort ticket plan, apparently to pressure the smallest resort out of business. The defendant owned three of the four ski resorts in Aspen; unsurprisingly, the plaintiff owned the fourth. For many years, they had issued multiple day passes that allowed skiers to ski whichever mountain they wanted to. The defendant demanded an increased share of the revenues of the all-area passes and then canceled the arrangement. The plaintiff offered a series of increasingly desperate possibilities to recreate the all-area ticket, up to and including an offer to purchase tickets to the defendant's resorts at retail price. The defendant declined even that offer. The Supreme Court upheld a jury verdict against the defendant, noting that the defendant appeared to be foregoing even large short-term gains in the hopes that it would reap monopoly prices in the long run by reducing competition.

Justice Scalia stated that Aspen is "at or near" the outer boundary for such claims. The Court relied on the defendant's decision to terminate a voluntary, presumably profitable joint venture as evidence that there was anti-competitive intent. Furthermore, the fact that the defendant was offered retail price shows that it was seeking to harm its competition.

In contrast, Verizon had no voluntary dealings with its rivals. Consequently, Justice Scalia found it difficult to determine whether Verizon's "regulatory lapses were prompted not by competitive zeal but by anticompetitive malice." Furthermore, the Telecommunications Act requires cost-based pricing, not the retail price that was offered in Aspen. Justice Scalia also observed that in Aspen and similar cases, the defendant refused to sell a service to the plaintiff that it already sold to other customers. In this case, Verizon only sells phone service to retail customers as a complete package; the piecemeal sales to rivals required by the Telecommunications Act are a whole new offering and cost meaningful money.

Justice Scalia went on to state that this conclusion would be true even if the Supreme Court adopted the "essential facilities" doctrine that the court of appeals relied on in reversing. He noted that the Supreme Court has never adopted that doctrine, but stated that the doctrine requires the unavailability of access to the essential facilities, and that Verizon's competitors had access because the regulatory agencies could compel access. He concluded that the 1996 Act eliminated any need for a judicially created remedy of compelled access.

Finally, Justice Scalia justified his conclusions on antitrust policy grounds. Antitrust doctrines need to be sensitive to the economic realities of the industry in question, which includes the regulatory background of the industry. Where there is a regulatory structure designed to prevent anticompetitive behavior, the courts should be hesitant to expand antitrust doctrine, because it will likely do little good and may do some harm. In other words, "[j]ust as regulatory context may in other cases serve as a basis for implied immunity,,it may also be a consideration in deciding whether to recognize an expansion of the contours of §2." (citation omitted). In this case, Verizon had to provide access in order to gain the ability to offer competitive long-distance services and the FCC and New York's agency can enforce those requirements. The regulatory response in this case actually solved the lack of access that had existed.

Furthermore, false positives in the antitrust context have large costs, because they deter the very sorts of competitive behavior that antitrust law is designed to protect. In essence, Justice Scalia threw up his hands at the possibility of determining whether an incumbent phone service was denying access, especially because of the numerous different ways in which challenger phone services can be harmed. Furthermore, the injunctive relief that respondent requested would be difficult for a court to enforce, and courts ought not to issue injunctions that they cannot adequately enforce.

Justice Scalia concluded by noting that the Telecommunications Act is more ambitious, in some ways, than the antitrust acts, because it broke up monopolies instead of merely trying to prevent monopolization prospectively. While the Sherman Act is the "Magna Carta" of free trade, it does not authorize unlimited judicial decisions to facilitate competition.

Justice Scalia did not reach the issue of whether the respondent had standing, on the grounds that it was unnecessary to decide in light of the decision against the respondent on a substantive ground.

The Concurrence in the Judgment
Justice Stevens wrote a short opinion concurring in the judgment, in which Justices Souter and Thomas joined. Justice Stevens's opinion did not reach any of the same issues as the majority opinion, because he would have decided the case purely on the basis of standing.

Standing goes to the question of whether the plaintiff in a case is entitled to relief under the law, as distinct from the question of whether the defendant has, in fact, violated the law. Standing issues have two components. First, the Supreme Court has recognized a set of constitutional standing requirements. Second, even if a plaintiff has constitutional standing, the statute they seek to use in their lawsuit must provide them with statutory standing. In this case, the only question is whether the respondent had statutory standing.

Justice Stevens began with the standing analysis on the grounds that complicated legal claims should deal with standing first. Respondent seeks treble damages, a traditional antitrust remedy made available under the Clayton Act to "any person who has been injured in his business or property." Although a literal reading would treat the law firm as a person in the meaning of the statute, the Supreme Court has not adopted that literal reading. The Supreme Court has instead limited standing in antitrust cases to avoid either double recovery for the same offense or complex litigation over how to apportion damages among various claimants. Antitrust law follows the general rule of not going beyond the first step in analyzing damages.

Justice Stevens reasoned that any harm that respondent suffered flowed purely from the harm that AT&T suffered at Verizon's hands. While the question of whether AT&T suffered an antitrust harm, and if so what its damages are, is daunting, AT&T is far better positioned to enforce the public interest underlying the antitrust law. Denying AT&T's customers an antitrust remedy greatly simplifies the litigation, while not leaving the antitrust law unenforced.

Because the standing question would resolve the case, Justice Stevens would not have reached the issue decided by the majority.

In general, I'm not a fan of overemphasis on standing issues. Constitutional standing issues are often used to allow violations of federal law go unremedied. Where Congress framed the right to a cause of action in sweeping terms, the Court should not limit standing without a compelling reason. Furthermore, the Supreme Court, in particular, generally grants cert to resolve an important legal issue. Resolving a standing issue first sometimes results in unnecessarily dodging an underlying legal issue that ought to be resolved quickly. However, in this case, Justice Stevens was right to resolve the standing issue first, because the standing issue is relatively easy and the complicated substantive issue would be best litigated by a party with a clear claim to recovery.

The plaintiff is particularly unsympathetic. While most New Yorkers are familiar with the incompetence and malfeasance of Verizon's phone service, the real anticompetitive harm alleged hurt AT&T. While AT&T may have unintentionally passed on some of the harm to its customers, by being unable to handle their service requests promptly or providing poor service, this is fundamentally different from a wrong like price fixing that really hurts the ultimate consumers directly. The plaintiff looks to be deriving a quick buck, not so much by recovering from a real harm, but by bringing to bear the heavy artillery of a class action and treble damages to create substantial legal fees. Perhaps there is some real harm that the plaintiff suffered. But even then, that harm looks more like a contractual failing on AT&T's part. It makes sense to not let respondent press this claim, while leaving open the antitrust question for when a phone company that has actually been denied the ability to compete brings a case.

If the antitrust question were easy, the majority might be right to resolve it directly. But Justice Scalia's analysis hardly reassures me. First, by stressing the regulatory background, Justice Scalia lets in through the backdoor the sort of implied immunity that the Telecommunications Act specifically disclaims. The Telecommunications Act explicitly leaves open the possibility of antitrust remedies; to turn around and say that antitrust remedies are not necessary because of the procompetitive regulation of the FCC is in effect to allow the Telecommunications Act to supersede the Sherman and Clayton Antitrust Acts, despite the 1996 Act's explicit statement that it is not intended to do so. Justice Scalia's explicit invocation by analogy of the doctrine of implied immunity to justify the majority's conclusion, after acknowledging that a direct claim of implied immunity could not stand, demonstrates the error of the analysis. Where Congress has rejected implied immunity, the Court has no business using the same style of analysis that produces implied immunity to deny a claim under the different name of determining the contours of the antitrust laws.

Furthermore, the Court never considers the unique economic circumstances related to a natural monopoly. Local phone services is a natural monopoly; it generally only makes economic sense for a single network of phone lines to serve an area. That means that any competition will require either building a redundant network of phone cables, with little societal benefit, or for different firms to share the same phone network. That raises serious questions for how to apply the antitrust law. I'm not at all expert in antitrust law, but the analysis here was much more difficult than the majority gave it credit for. That's particularly true because the efforts to create competitive local phone services have faced serious problems from all of the barriers that the incumbent phone services, and in some cases local municipalities and states, have erected. Antitrust law, with its heavy deterrence of treble damages, may be precisely what is needed to enforce the policies of the Telecommunications Act. By reaching this case without the benefit of an appropriate plaintiff that is well-situated to present the strongest arguments, the Court may have made an important mistake. Justice Stevens's approach would have been better.
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