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U.S. Supreme Court Insulates ILECs from Antitrust Liability for Alleged Violations of the Telecommunications Act of 1996

January 2004
By James Serota and Judith O’Neill, Greenberg Traurig, New York Office

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The Telecommunications Act of 1996 (the “Act”) imposed rigorous and precise duties upon incumbent local exchange carriers (“ILECs”) in order to facilitate market entry by competitive local exchange carriers (“CLECs”), which did not exist in the Communications Act of 1934, which the Act amended. In this regard, the Act established a complex regime to mandate, monitor and enforce competition. In Verizon v. Trinko the U.S. Supreme Court rejected an antitrust claim based upon breach of the ILEC’s statutory duty under the 1996 Act to share its network with its competitors.

James Serota
"It is a statutory obligation of the ILECs to provide unbundled access to individual elements of their networks to its competitors at statutorily mandated rates which the ILECs claim are below their costs."

Verizon Communications is the combination of two former Regional Bell Operating Companies (“RBOCs”) divested from AT&T in the 1984 antitrust Modified Final Judgment as well as the former independent carrier, GTE. It is the ILEC serving the MidAtlantic States from Virginia through and including New York State and inland to Pennsylvania.

Central to the purpose of the 1996 Act is the introduction of competition to the local market. It is a statutory obligation of the ILECs to provide unbundled access to individual elements of their networks to its competitors at statutorily mandated rates which the ILECs claim are below their costs. This is done through interconnection or access agreements. Following the passage of the Act, pursuant to compulsory arbitration, Verizon signed an interconnection agreement with AT&T approved by the New York Public Service Commission (PSC). When various CLECs, including AT&T, complained to regulators that many service orders were being unfulfilled or delayed in violation of Verizon’s obligation to provide access to its operations support systems, the New York PSC and the FCC opened investigations which led to a series of orders and an FCC consent decree. This, in turn resulted in new performance measurements and new reporting requirements to the FCC and the PSC.

Immediately following the entry of the consent decree with the FCC, a New York City law firm that was a local telephone service customer of AT&T filed suit on behalf of itself and a class of similarly situated customers whose service orders, they alleged, had not been filled timely or at all. The complaint was in large part based on conduct that formed the basis of the PSC and FCC investigations and consent decrees. Because the petitioner was not a direct purchaser of the Verizon services, but a customer of one of Verizon’s competitors, the Court could have dismissed the complaint as suggested by the concurring opinion, in accordance with previously established standards under Illinois Brick doctrine which bars claims by indirect purchasers. Instead, the Supreme Court chose to offer broader pronouncements on the breadth and interpretation of Sherman Act Section 2 claims for monopolization under the antitrust laws. The Court noted that but for a savings clause in the 1996 Act preserving claims that satisfy existing antitrust standards, the 1996 Act would have been a good candidate for implied antitrust immunity. Immunity from the antitrust laws may be implied where there is a detailed regulatory scheme with detailed statutory duties necessary to make the statute work and a mechanism for addressing and monitoring on an ongoing basis market access that previously had been addressed by the antitrust laws. Because the 1996 Act specifically preserved those claims, the Court directly turned to whether the activities of the complaint violated pre-existing antitrust standards.

For 85 years it has been an essential tenet of antitrust policy that individual suppliers have complete discretion to determine with whom they may deal. Limited exceptions to that doctrine have been created for example where a single monopolist or a group of competitors created an essential facility which is feasible to provide to competitors to gain access to compete, but which the monopolist or competitors have arbitrarily chosen to deny to new entrants in order to further their own anti-competitive monopoly position. This “Essential Facilities” doctrine formed the basis for many of the antitrust claims filed prior to and in connection with the U.S. Department of Justice case against AT&T which ultimately led to the break-up of AT&T. In the case of a single monopolist, this theory was best exemplified by a Supreme Court case Aspen Skiing Company v. Aspen Highlands Company, where one provider of ski lift tickets to three mountains had previously co-operated with another rival who owned access to a fourth to provide an all areas ski ticket. When the operator that controlled three areas thereafter refused to cooperate with its smaller rival after a long history of dealing, and even when offered retail lift ticket payments from its rival eliminating any claim of economic loss, the court upheld liability, concluding the defendant had elected to forgo short run benefits in the interest of reducing competition by harming its competitor.

In Trinko, the Court chose to recast Aspen Highlands as a doctrine near the outer boundary of Section 2 liability. The Verizon services in question were not previously voluntarily marketed or made available to competitors under the terms and conditions of the Act, thus there was no pre-existing history of available unbundled services necessary for competition. The Court further noted that one of the indispensable requirements for invoking the doctrine of essential facilities is the unavailability of access to the essential facilities. Where a state and federal agency has effective power to compel sharing and to regulate its scope, it is unnecessary to impose a judicial doctrine of forced access. The Court considered the existence of a regulatory structure designed to deter and remedy antitrust competitive harm of particular importance. In recognition of that structure, the additional benefit to competition provided by antitrust enforcement, in the Supreme Court’s view, would tend to be small. The Court was particularly concerned with the difficulty of determining illegal exclusion, based upon violation of statutory duties, which, in its view, would be difficult for antitrust courts to evaluate because they are highly technical, extremely numerous and given to incessant complex and constantly changing interaction, sharing and interconnection obligations and thus “beyond the practical ability of a traditional tribunal to control.” It echoed the view of Professor Areeda that “no court should impose a duty to deal that it cannot explain or adequately and reasonably supervise.”

The Court considered the problem judicially irremediable by antitrust law when “compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.” The Court denied that judges have the right to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition and thus concluded that the respondents complaint failed to state a claim under the antitrust law.

The Court, in a footnote, also killed the doctrine of “monopoly leveraging.” In Spectrum Sports v. McQuillen the Court held that a claim for attempted monopolization could not survive if a relevant market was not defined. Thus, the prior theory of “monopoly leveraging,” under which a monopolist attempts to extend its monopoly in one market by “leveraging” its advantage into a second market no longer has viability, absent proof of a dangerous probability of success in a clearly defined, relevant second market. While the Court preserved the doctrine of essential facilities for denial of competitive access based upon concerted action, it remains to be seen what is left of the doctrine when employed by a single entity. Ironically, it is that doctrine that led to the demise of the Bell empire which once provided bundled end-to-end local and long distance telephone service and equipment.

This case has serious implications for the additional antitrust claims pending and threatened against any ILEC. For example, Covad, a high-speed Internet service provider that has always relied on ILEC access to deliver its services, has claimed consistently that Verizon’s (or previously BellAtlantic’s) and other ILECs’ inability to timely fill its access orders, was a violation of the antitrust laws. While theoretically, the Court left open the possibility of an antitrust claim independent of violations of the Act, given the ubiquitous coverage of the Act, and the difficulty of finding anticompetitive behavior that would not violate the Act, Covad’s claims are facing a new, formidable challenge. Appreciating this, other CLECs are now suggesting Congressional action to legislatively link the coveted treble damages deterrent of the antitrust laws to violations of the Act.

Internet services, and increasingly international and local exchange “voice telephony” services or the functional equivalent thereof, travel on high- speed, packet or soft-switched asynchronous networks using Internet protocol instead of the traditional circuit-switched synchronous networks of the ILECs. This includes Internet-based telephony run over Internet protocol networks, or Voice Over Internet Protocol (“VOIP”). VOIP is a very competitive and growing field and is not as yet regulated by the FCC, though the Commission currently is contemplating what might be appropriate regulation. Thus, implications for VOIP of the Trinko case are not yet clear and likely will not be until the FCC adopts a regulatory policy.

Finally, outside of the telecommunications sector, the impact could be substantial in other regulated industries, particularly where there is a regulatory scheme which either addresses competition or provides alternative means of addressing competition issues, such as those found in the federal antitrust laws.


© 2004 Greenberg Traurig

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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.