Amicus Curiae Brief — Verizon Communications Inc. v. Law Offices of Curtis v. Trinko, LLP

) \ Supreme Court, US

RED

No. 02-682

In The

VERIZON COMMUNICATIONS, INC.,

Petitioner,

LAW OFFICES OF CURTIS V. TRINKO, LLP,

Respondent.

On Writ Of Certiorari To The United States

Court Of Appeals For The Second Circuit

BRIEF OF UNITED PARCEL SERVICE, INC.,

HONEYWELL INTERNATIONAL INC., VISA U.S.A.

INC., AND EASTMAN KODAK COMPANY AS

AMICI CURIAE IN SUPPORT OF PETITIONER

PETER M. KREINDLER

HONEYWELL INTERNATIONAL INC.

101 Columbia Road

Morristown, NJ 07962

(973) 455-5513

Attorney for Amicus Curiae

Honeywell International Inc.

STEPHEN THEOHARIS

Visa U.S.A. INC.

123 Mission Street

San Francisco, CA 94105

(415) 932-2100

Attorney for Amicus Curiae

Visa U.S.A. Inc.

PATRICK M. SHELLER

EASTMAN KODAK COMPANY

P.O. Box 92988

Rochester, NY 14692

Attorney for Amicus Curiae

Eastman Kodak Company

May 23, 2003

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

Drew S. Days, III

Counsel of Record

W. STEPHEN SMITH

BETH S. BRINKMANN

MORRISON & FOERSTER LLP

2000 Pennsylvania Ave.,

N.W.

Washington, D.C. 20006

(202) 887-1500

PAUL T. FRIEDMAN

MORRISON & FOERSTER LLP

425 Market Street

San Francisco, CA 94105

(415) 268-7000

Attorneys for Amicus Curiae

United Parcel Service, Inc.

OR CALL COLLECT (402) 342-2831

MAL 2D oF!

Supreme Court of the Anited: States

TABLE OF CONTENTS

INTEREST OF AMICI CURIAE............ccccccccessesssseees

INTRODUCTION AND SUMMARY OF ARGU-

I. THE COURT OF APPEALS’ MONOPOLY

LEVERAGING THEORY EXCEEDS THE

SCOPE OF SECTION 2 OF THE SHERMAN

A.

B.

C.

Section 2 Is Not Violated When A Firm

Uses Its Lawfully Acquired Monopoly

Power In One Market To “Gain A Com-

petitive Advantage” In Another Market...

The Monopoly Leveraging Theory Is Not

An Appropriate Means Of Analyzing Sec-

a ee ccnercnncesninccencinindiiinininisanidiacns

The Monopoly Leveraging Theory Un-

dermines The Purposes Of The Sherman

THE ESSENTIAL FACILITIES DOCTRINE

IS NOT AN INDEPENDENT BASIS FOR

LIABILITY UNDER SECTION 2 OF THE

A.

The Essential Facilities Doctrine Ex-

tends To Conduct Beyond The Reach Of

ER EEC ey ween

Ample Legal Means Already Exist To

Redress Any Unlawful Anticompetitive

Conduct That Results From Control Of A

EE

li

TABLE OF CONTENTS - Continued

Page

C. The Essential Facilities Doctrine Runs

Contrary To The Aims Of The Sherman

Act By Requiring Competitors To Share

ITT ciitiialeriidieiacinainiscitnaiaanmebinmenmenenes 26

SITET crminninreenensscosncossscsnetnseneceeresesersesenseess 30

TABLE OF AUTHORITIES

Page

CASES

AD/SAT v. Associated Press, 181 F.3d 216 (2d Cir.

aati iatesib aiariatinibapaatenpinnempeinnnenmnsmenennene 13

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999)...18, 27

Alaska Airlines, Inc. v. United Airlines, Inc., 948

F.2d 536 (9th Cir. 1991), cert. denied, 503 U.S.

Tee 7, 10, 14, 20, 25

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

Sk 18, 21, 22, 23, 24

Association for Intercollegiate Athletics for Women

v. NCAA, 735 F.2d 577 (D.C. Cir. 1984) ..........::ccccceeeeees 10

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d

263 (2d Cir. 1979), cert. denied, 444 U.S. 1093

Blue Cross & Blue Shield United of Wisc. v. Marsh-

field Clinic, 65 F.3d 1406 (7th Cir. 1995), cert.

denied, 516 U.S. 1184 (1996) ............cccccccceeeeeeeeeseeees 19, 20

Brooke Group Ltd. v. Brown & Williamson Tobacco

Corp., 509 U.S. 209 (19938) ..............cccessscccrrrossessssseevoenees 10

Brown Shoe Co. v. United States, 370 U.S. 294

IE cilia taiiatitarin a aianeaternsineneteneugnanenasmmmmmumeeneseneneneetn 7

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

Eee 7

Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104

IT sotioesitinti tiated ten rtm taadmtamupmtanngnreedanenepmnenesnemetts 8

Cavalier Tel., LLC v. Verizon Va., Inc., No. 02-1337,

slip op. (4th Cir. May 20, 20038)............cccccccerereeseeees 18, 21

iv

TABLE OF AUTHORITIES -— Continued

City of Chanute v. Williams Natural Gas Co., 955

F.2d 641 (10th Cir.), cert. denied, 506 U.S. 831

(1992), overruled in part on other grounds by

Systemcare, Inc. v. Wang Lab. Corp., 117 F.3d

1137 (10th Cir. 1997) (em banc).................cccccccccssseesersees 20

Copperweld Corp. v. Independence Tube Corp., 467

ee ee erncacnnnniseninmiuetenitutmimnnlinneeiass 3, 5, 8, 10, 26

Covad Communications Co. v. BellSouth Corp., 299

F.3d 1272 (11th Cir. 2002), petition for cert. filed,

71 U.S.L.W. 3640 (U.S. March 20, 2003) (No. 02-

Eastman Kodak Co. v. Image Tech. Servs., Inc., 504

ee ressticncicitchiitinsiesentniaiinaataiiianiinainintattniaaatasasiel 7,9

Eleven Line, Inc. v. North Tex. State Soccer Ass'n,

213 F.3d 198 (5th Cir. 2000)..cccccecccccoccsescsesseesseeseesses 10, 14

Fineman v. Armstrong World Indus., 980 F.2d 171

(3d Cir. 1992), cert. denied, 507 U.S. 921 (1993) .....10, 14

Foremost Pro Color v. Eastman Kodak Co., 703 F.2d

534 (9th Cir. 1983), cert. denied, 465 U.S. 1038

Ee Si cescncssanccnnssemanniansesnsnnsmascsssammanssennanstinetensenseentis 21

Illinois ex rel. Burris v. Panhandle E. Pipe Line Co.,

935 F.2d 1464 (7th Cir. 1991), cert. denied, 502

ee GREET cittcnsnetivensnnstnteasicmenicesninineiesentenensiiesmcesssial 21

In re EVIC Class Action Litig., No. 02-Civ-2703,

2002 WL 1766554 (S.D.N.Y. July 30, 2002)................... 29

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S.

PIP a el vunecsnecnennsensrtannanenieitnntinnniniiedngiinmimemsiieinaneniess 15

Vv

TABLE OF AUTHORITIES — Continued

Page

Laurel Sand & Gravel, Inc. v. CSX Transp., Inc.,

MCI Communications Corp. v. AT&T, 708 F.2d

1081 (7th Cir.), cert. denied, 464 U.S. 891

ee 19, 20, 21, 22, 24

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

GUE WEB. G06 (IGG GD .nccccccceccccosceccssccsccsscesccscsessssessscseces 5, 29

Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S.

ETT sc sceicrtientinsiccninsanneninencnnniitatmniignsiienuitninenmnnennnte 16

Olympia Equip. Leasing Co. v. Western Union Tel.

Co., 797 F.2d 370 (7th Cir. 1986), cert. denied,

ee Se ancntciinsudccnncitcnienmmninstdnendnsnaimeniebenentanmnes 8

Otter Tail Power Co. v. United States, 410 U.S. 366

UT iscisititnedaendiatiniatniniatenienbuniniadiiniteningniisianoennel 22, 23, 24, 25

Southern Pac. Communications Co. v. AT&T, 740

F.2d 980 (D.C. Cir. 1984), cert. denied, 470 U.S.

Be et ocsnrnsnsnnentenstranineniinennenmianemnenatiommesmneneseen 18

Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447

Gi rcsenccnssessenessnipsnsssenssssnssensetensnmnsmenenensmmmmassineenan passim

Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83

Gi censcrnecstsascunndensnanannenavapsnapemniecsmenceniesnmentnnemnensennens 6

Town of Concord v. Boston Edison Co., 915 F.2d 17

(Ist Cir. 1990), cert. denied, 4992 U.S. 931

TI cssenercnnsntitatennesneiadintinmeinemanbiptibbeemeneusnnees 7, 14, 15, 26

Twin Labs., Inc. v. Weider Health & Fitness, 900

LG 13, 20, 21

United States v. Aluminum Co. of Am., 148 F.2d

ee 4

vi

TABLE OF AUTHORITIES — Continued

Page

United States v. Citizens & Southern Nat'l Bank,

a al iencccrtcinsincsipeiienicdiiniibitiemarigmastiiiiaiaaiameanaaasiits 19

United States v. Colgate & Co., 250 U.S. 300 (1919).....4, 16

United States v. EI. du Pont de Nemours & Co.,

eS Ce icniriisiliteinitendientenincnatiadiicemtaniieinniataiataiaal 6, 7

United States v. Griffith, 334 U.S. 100 (1948)......... 9, 10, 11

United States v. Grinnell Corp., 384 U.S. 563 (1966)......... 7

United States v. Otter Tail Power Co., 331 F. Supp.

54 (D. Minn. 1971), aff'd in part, vacated in part,

ey SI ccacctiiitsnincetinanesnieneninminninmanmeneee’ 24

United States v. Terminal R.R. Ass’n, 224 U.S. 383

SST hcsieistsiaseeiiili iene iethehinsiietmaainatariaasinalncmnas 18

United States v. Trenton Potteries Co., 273 U.S. 392

I shcaditcisiaaeiiciiatadidaiaalitas tial iasibiiitetiianaia tinea 26

Virgin Atl. Airways v. British Airways, 257 F.3d 256

EP CEE AE inectinttiininattenccinmrmnaiatiiiiabbeninneienitetediianmiainedl 9,13

Yankees Ent’mt & Sports Network, LLC v. Cablevi-

sion Sys. Corp., 224 F.Supp. 2d 657 (S.D.N_Y.

iit ccnncunentesnstsussinennantiiatabateppimmnenmeneiiearmmmenetenia 28, 29

: STATUTES

Sherman Act, 15 U.S.C. § 11 ....................0.cc0000 5, 8, 9, 18, 26

Sk Eee passim

Fe I ciearniinisarrrriatnncsendintinnmetimarentiteniaaieiabiminsidiameaiins 17

re ccrtcrsitcnnecitaticrieianeninipernininsinnpsaaniniel 17

GF ee Wei iaenrentinreneninntcndnptennansanitemiaminitemininiag 17

geese ene 17

— a

Vii

TABLE OF AUTHORITIES — Continued

Page

Telecommunications Act of 1996, Pub. L. No. 104-

is IIIs Ul iccteninsrinsioneaninanenienpitnnedenbianminnemmepenpepsienmnes 17

OTHER AUTHORITIES

Phillip Areeda, Antitrust Analysis (3d ed. 1984)............... 15

3 Phillip E. Areeda & Herbert Hovenkamp, Anti-

I Se ccccrcretenimcmnininmmnnnnel 25

3A Phillip E. Areeda & Herbert Hovenkamp,

Antitrust Law (2d ed. 2002).............ccssssssesereeeeeeeees passim

Phillip E. Areeda & Herbert Hovenkamp, Antitrust

I GD cncrcimmne 21

3 Phillip Areeda & Donald F. Turner, Antitrust Law

Ita sicennnennnntecsutesnanenenmmmanennnnagnememmenmemene 14, 25

Phillip Areeda, Essential Facilities: An Epithet In

Need Of Limiting Principles, 58 Antitrust L.J.

Be el cteonntinanninenmennemnenessemeniammennmes 20

Robert Bork, The Antitrust Paradox (1978).......... 11, 14, 15

Herbert Hovenkamp, Federal Antitrust Policy: The

Law of Competition And Its Practice (1994)...............++ 20

William K. Jones, Government Price Controls and

Inflation: A Prognosis Based on the Impact of

Controls in the Regulated Industries, 65 Cornell

a Te a ee errercsenemnscenennssnnemmnenes 25

Scott D. Makar, The Essential Facility Doctrine and

the Health Care Industry, 21 Fila. St. U. L. Rev.

TTR nee TEEN 20

Richard A. Posner & Frank H. Easterbrook, Anti-

I, I conn ininricrnticiaitiiateineaintiiiapemnrees 11, 14, 15

Richard A. Posner, Antitrust Law (2d ed. 2001)................ 15

1

INTEREST OF AMICI CURIAE’

This case involves important issues in antitrust law —

the validity of two theories known as “monopoly leverag-

ing” and the “essential facilities doctrine.” The court of

appeals erroneously held that respondent's allegations

state a claim for relief under Section 2 of the Sherman Act,

15 U.S.C. § 2, based on both theories.

United Parcel Service, Inc. (UPS) provides parcel

transportation services throughout the United States and

worldwide. UPS competes with a wide array of other

carriers, including nationwide carriers, a host of trucking

companies, logistics providers, numerous regional and

local companies across the country, the United States

Postal Service and other postal services around the world.

Honeywell International Inc. (Honeywell) is a diversi-

fied technology and manufacturing company that provides

customers throughout the United States and worldwide

with aerospace products and services, control technologies

for buildings, homes and industry, specialty chemicals,

fibers, plastics and electronic and advanced materials.

Honeywell competes with local, regional, national, and

global companies in the many industries that it serves.

Visa U.S.A. Inc. (Visa) is a membership corporation

owned by approximately 14,000 banks and other financial

institutions located throughout the United States and world-

wide. Visa acts as an umbrella organization for its mem-

bers, providing advertising services to support the Visa

brand and technology services to facilitate Visa payment

transactions. Visa also regulates and coordinates certain

' Letters from all parties consenting to the filing of this brief have

been filed with the Clerk as required under Rule 37.3(a). Pursuant to

Rule 37.6, amici state that counsel for the parties did not author this

brief in whole or in part, and no one other than the amici, their

members, or their counsel, made a monetary contribution to the

preparation or submission of this brief.

2

aspects of its members’ individual programs through rules

and by-laws adopted by its board of directors. Under this

umbrella structure, Visa’s members issue payment cards

to consumers and sign up merchants to accept Visa pay-

ment products.

Eastman Kodak Company (Kodak) is a global devel-

oper, manufacturer and supplier of imaging products and

technologies used by consumers, medical professionals,

professional photographers, movie and television produc-

ers, government customers and commercial businesses.

Kodak operates manufacturing plants, research facilities,

distribution centers and business offices throughout the

United States.

Amici have a strong interest in ensuring that the

antitrust laws are applied by the lower courts to promote

aggressive competition, not to shield inefficient competi-

tors from the forces of such competition. Because of their

nationwide operations, amici also have a strong interest in

ensuring the uniform application of the antitrust laws

throughout the country, so that their operations and

business decisions are not subject to different standards in

different jurisdictions.

INTRODUCTION AND

SUMMARY OF ARGUMENT

A claim for violation of Section 2 of the Sherman Act

cannot be stated under the court of appeals’ theories of

“monopoly leveraging” or denial of access to an “essential

facility.” Neither of those labels provides an independent

basis for a Section 2 claim because neither requires courts

to determine whether monopolization through predatory

conduct, which is at the heart of Section 2, is alleged in a

particular case. The Court should reject the use of those

labels and provide clear guidance to the lower courts by

reaffirming that Section 2 “makes the conduct of a single

firm unlawful only when it actually monopolizes or danger-

ously threatens to do so” through anticompetitive means.

'

)

3

Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459

(1993).

I. Under the court of appeals’ “monopoly leveraging”

theory, a firm violates Section 2 if it uses monopoly power

in one market to “gain a competitive advantage” in a

second market, even if there has been no attempt to

monopolize the second market. This holding is inconsis-

tent with the text and purpose of Section 2, as well as this

Court’s teachings. Section 2 prohibits monopolization and

attempted monopolization. Recognizing that the statute

“directs itself not against conduct which is competitive,

even severely so, but against conduct which unfairly tends

to destroy competition itself,” the Court has long held that

that statutory prohibition reaches only “predatory or

anticompetitive” conduct that creates or enhances monop-

oly power. Spectrum Sports, 506 U.S. at 456-458. Section 2

“leaves untouched a single firm’s anti-competitive conduct

(short of threatened monopolization).” Copperweld Corp. v.

Independence Tube Corp., 467 U.S. 752, 774 (1984).

Consistent with these teachings, the court of appeals’

monopoly leveraging theory has been rejected by most

other circuits, and criticized by antitrust scholars, as an

improper and dangerous extension of Section 2. These

courts and commentators correctly recognize that any use

of monopoly power to engage in predatory conduct that

monopolizes or attempts to monopolize a second market

can be reached under traditional Section 2 standards. By

creating potential antitrust liability and treble damage

exposure for conduct that, far from lessening competition,

often benefits consumers by enabling large firms to lower

costs and offer new products through vertical integration,

the court of appeals’ monopoly leveraging theory under-

mines the purposes of the antitrust laws.

II. The court of appeals’ reliance on the “essential

facilities doctrine” as an independent basis for Section 2

liability is equally erroneous. Under the lower court’s

ruling, a firm that controls any business asset that com-

petitors deem “essential” to their success may find itself

4

subject to a Section 2 action demanding that the firm ~

surrender exclusive control over that asset and pérmit a

rival to use it regardless of whether the firm’s refusal to

assist its rival is predatory and gives rise to a dangerous

threat of monopoly power. This holding, too, is inconsistent

with the text and purpose of Section 2 and this Court’s

teachings: absent predatory conduct that monopolizes or

genuinely threatens to monopolize, the Sherman Act “does

not restrict the right of a trader or manufacturer * * *

freely to exercise his own independent discretion as to

parties with whom he will deal.” United States v. Colgate

& Co., 250 U.S. 300, 307 (1919).

Although some lower courts have used the essential

facilities doctrine to analyze allegations that a monopolist in

one market denied competitors access to an “essential

facility” in order to obtain a monopoly in a second market,

the court below went far beyond such cases. It held that

Section 2 imposes on a lawful monopolist a duty to create a

wholesale market in the monopoly product so that other

firms may buy that product at a reduced price, and then

resell it in competition with the monopolist. That extraordi-

nary rule is flatly inconsistent with long-settled Section 2

jurisprudence, which has never required a lawful monopolist

to alter its business in order to create competition in its own

market, and would threaten to defeat the Sherman Act’s

objectives of promoting aggressive competition on the merits.

“The successful competitor, having been urged to compete,

must not be turned upon when he wins.” United States v.

Aluminum Co. of Am., 148 F.2d 416, 430 (2d Cir. 1945).

Even in its narrower form, the essential facilities

doctrine has been widely criticized by other courts and

commentators as being antithetical to the purposes of the

antitrust laws. The central message of the Sherman Act is

that competition, not cooperation, is the antidote for

monopoly. The essential facilities doctrine, however,

mandates cooperation among rivals, and thereby dimin-

ishes incentives for firms to compete on the merits. The

doctrine also requires courts to become regulators —

5

designing, implementing, and monitoring the terms upon

which forced access to a competitor’s assets is granted. For

these reasons, the competitive problems presented by

natural monopolies — the only kinds of assets that might

be deemed “essential facilities” — have generally been

addressed through statute and administrative action.

This Court has never adopted the essential facilities

doctrine. In those few cases in which the Court has found

that a monopolist’s unilateral refusal to deal with its rivals

constitutes predatory conduct that monopolizes or danger-

ously threatens to monopolize a relevant market, it has

employed the traditional Section 2 standards and found

them to be adequate to the task. The essential facilities

doctrine, like the monopoly leveraging theory, serves only

to undermine the purposes of Section 2 and should not be

adopted by this Court.

The Court should be particularly skeptical of judi-

cially crafted antitrust rules, like monopoly leveraging or

the essential facilities doctrine, that ban a particular type

of conduct without determining whether conduct in a

particular case is anticompetitive. That is because, as this

Court has recognized, “[i]t is sometimes difficult to distin-

guish robust competition from conduct with long-term

anticompetitive effects,” Spectrum Sports, 506 U.S. at 458-

- 459, and “mistaken inferences” about competitive conduct

“are especially costly, because they chill the very conduct

the antitrust laws are designed to protect.” Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986).

Moreover, “single firm activity,” which is addressed by

Section 2, “is unlike concerted activity covered by § 1 [of the

Sherman Act], which ‘inherently is fraught with anticompeti-

tive risk.” Spectrum Sports, 506 U.S. at 458 (quoting Cop-

perweld, 467 U.S. at 767-769). It is “for these reasons,” that

Section 2 “makes conduct of a single firm unlawful only

6

when it actually monopolizes or dangerously threatens to

do so.” Spectrum Sports, 506 U.S. at 458.’

I. THE COURT OF APPEALS’ MONOPOLY LEV-

ERAGING THEORY EXCEEDS THE SCOPE OF

SECTION 2 OF THE SHERMAN ACT

A. Section 2 Is Not Violated When A Firm

Uses Its Lawfully Acquired Monopoly

Power In One Market To “Gain A Competi-

tive Advantage” In Another Market

1. Section 2 of the Sherman Act makes it unlawful

for a person to “monopolize, or attempt to monopolize, or

combine or conspire with any other person or persons to

monopolize any part of the trade or commerce among the

several States, or with foreign nations.” 15 U.S.C. § 2. In

Spectrum Sports v. McQuillan, 506 U.S. 447 (1993), the

Court confirmed that monopolization is at the core of a

Section 2 violation. Section 2 “makes the conduct of a

single firm unlawful only when it actually monopolizes or

dangerously threatens to do so.” Id. at 459.’

* Amici address only the merits of the monopoly leveraging and

essential facilities rulings in this brief and do not discuss the statutory

standing ruling challenged by petitioner, although we agree that that

ruling also is erroneous. See Pet. 23-26. The questions on the merits can

be addressed by the Court without reaching the statutory standing

issue. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 97 n.2

(1998). We urge the Court to address these merits questions as a

threshold matter, in light of the serious adverse consequences for the

nation’s economy that flow from the court of appeals’ erroneous rulings

on monopoly leveraging and essential facilities and the fact that lower

courts are in need of guidance on these issues.

* The Court has defined monopoly power as “the power. to control

prices or exclude competition.” United States v. E.I. du Pont de Nemours

& Co., 351 U.S. 377, 391 (1956). Although the issue of whether a firm

possesses such power must be evaluated in the context of a specific

market, the Court has found that market shares of 75 percent or more

generally give rise to a presumption of monopoly power. See, e.g.,

(Continued on following page)

’

}

'

7

This Court also has held that Section 2 prohibits

monopolization only through conduct that is “predatory or

anti-competitive” - i.e., conduct that makes economic

sense only insofar as it would eliminate competition. Jd. at

456. And it is clear that “a practice is not ‘anticompetitive’

simply because it harms competitors. After all, almost all

business activity, desirable and undesirable alike, seeks to

advance a firm’s fortunes at the expense of its competitors.

Rather, a practice is ‘anticompetitive’ only if it harms the

competitive process. * * * It harms that process when it

obstructs the achievement of competition’s basic goals —

lower prices, better products, and more efficient produc-

tion methods.” Town of Concord v. Boston Edison Co., 915

F.2d 17, 21-22 (1st Cir. 1990), cert. denied, 499 U.S.-931

(1991) (citing, inter alia, Brunswick Corp. v. Pueblo Bowl-

O-Mat, Inc., 429 U.S. 477, 488-489 (1977); Brown Shoe Co.

v. United States, 370 U.S. 294, 320 (1962)).

This Court has explained, for example, that monopoly

power that is acquired through “growth or development as

a consequence of a superior product, business acumen, or

historic accident,” is not proscribed by the antitrust laws

and is lawful. United States v. Grinnell Corp., 384 U.S.

563, 571 (1966). Such a lawful monopoly, “absent ‘preda-

tory’ practices to maintain it, will continue only so long as

the monopolist sustains a level of efficiency or innovation

such that its rivals cannot effectively compete. Because

this type of monopolist behaves in an economically effi-

cient manner, the antitrust laws do not stand as an obsta-

cle to its existence.” Alaska Airlines, Inc. v. United

Airlines, Inc., 948 F.2d 536, 547 (9th Cir. 1991), cert.

denied, 503 U.S. 977 (1992). That is because the purpose of

Section 2 “is not to protect businesses from the working of

Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 481 (1992)

(80 percent share); United States v. Grinnell Corp., 384 U.S. 563, 571

(1966) (87 percent share); E.J. du Pont, 351 U.S. at 391 (75 percent

share).

8

the market; it is to protect the public from the failure of

the market. The law directs itself not against conduct

which is competitive, even severely so, but against conduct

which unfairly tends to destroy competition itself.” Spec-

trum Sports, 506 U.S. at 458.

2. The Court’s precedents make clear that gaining a

competitive advantage in a second market is not sufficient

to subject a monopolist to liability under Section 2. In

particular, in Copperweld Corp. v. Independence Tube

Corp., 467 U.S. 752 (1984), the Court emphasized that

Section 2 applies only to unilateral conduct and “leaves

untouched a single firm’s anti-competitive conduct (short of

threatened monopolization) that may be indistinguishable

in economic effect from the conduct of two firms subject to

§ 1 liability.” Jd. at 774 (emphasis added). The Court ex-

plained that “Congress authorized Sherman Act scrutiny of

single firms only when they pose a danger of monopoliza-

tion. Judging unilateral conduct in this manner reduces

the risk that the antitrust laws will dampen the competi-

tive zeal of a single aggressive entrepreneur.” Jd. at 768.

Indeed, the zealous pursuit of competitive advantage

— by firms large and small — is precisely what the

Sherman Act is intended to foster. As this Court has

recognized, “[it] is in the interest of competition to permit

dominant firms to engage in vigorous competition, includ-

ing price competition.” Cargill, Inc. v. Monfort of Colo.,

Inc., 479 U.S. 104, 116 (1986) (citation omitted). Put

simply, “[tJhe lawful monopolist should be free to compete

like everyone else; otherwise the antitrust laws would be

holding an umbrella over inefficient competitors.” Olympia

Equip. Leasing Co. v. Western Union Tel. Co., 797 F.2d 370,

375-376 (7th Cir. 1986) (Posner, J.), cert. denied, 480 U.S.

934 (1987); see also Foremost Pro Color v. Eastman Kodak

Co., 703 F.2d 534, 543-544 (9th Cir. 1983) (“A monopolist,

no less than any other competitor, is permitted and indeed

encouraged to compete aggressively on the merits.”), cert.

denied, 465 U.S. 1038 (1984).

9

3. The court of appeals reached its contrary ruling —

that a monopolist violates Section 2 if it “gains a competi-

tive advantage” in a second market — by extending Section

2 under the guise of the “monopoly leveraging” theory.

That theory is rooted in that court’s earlier opinion in

Berkey Photo, Inc. v. Eastman Kodak Company, 603 F.2d

263, 276 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980),

where it had declared that “the use of monopoly power

attained in one market to gain a competitive advantage in ©

another is a violation of § 2, even if there has not been an

attempt to monopolize the second market.” Pet. App. 30a

(quoting Virgin Atl. Airways v. British Airways, 257 F.3d

256, 272 (2d Cir. 2001), which relied on Berkey Photo).

That decision, in turn, had quoted dicta in United States v.

Griffith, 334 U.S. 100, 107 (1948), suggesting that a

monopolist was prohibited not only from using its monop-

oly power to create another monopoly, but also from using

it to “gain a competitive advantage.” Berkey Photo, 603

F.2d at 275 (quoting Griffith, 334 U.S. at 107).

The holding of the Court in Griffith made clear,

however, that liability under Section 1 and Section 2 of the

Sherman Act requires a finding that a “restraint of trade

or monopoly results as the consequence of a defendant’s

conduct or business arrangement.” Griffith, 334 U.S. at

105; id. at 106 (noting that the question for the Court to

resolve was whether the agreements resulted in “restrain-

ing or monopolizing of trade within the meaning of the

Sherman Act”). Moreover, the Court’s subsequent decision

in Eastman Kodak Company v. Image Technical Services,

Inc., 504 U.S. 451, 482-483 (1992), confirmed that reading

when it quoted the Griffith language in describing the

elements of a Section 2 claim, but immediately followed the

quote with the explanation that, if the defendant there

adopted the challenged policies “as part of a scheme of willful

acquisition or mainterance of monopoly power, it will have

violated § 2.” Ibid. The Court thereby demonstrated that

Griffith does not eliminate the need to establish monopoliza-

tion or attempted monopolization through anticompetitive

10

means before a firm can be subject to liability under

Section 2. The Court’s teachings in Spectrum Sports and

Copperweld. confirm that fact as well. See also Brooke

Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S.

209 (1993).

The Griffith dicta referring to “gain{ing] a competitive

advantage” cannot be read to override those precedents.

Indeed, that dicta was only one reference in a list of

examples of what monopoly power could not be used to do

and other examples included “foreclos[ing] competition”

and “destroy[ing] a competitor,” 334 U.S. at 107, which

would be rendered superfluous under respondent’s read-

ing. See also 3A Phillip E. Areeda & Herbert Hovenkamp,

Antitrust Law 4 772b3, at 180 (2d ed. 2002) (“Areeda &

Hovenkamp”) (observing that “[iJt would be strange to

invest” the Griffith dicta about gaining a competitive

advantage with great weight because the case “had noth-

ing to do with vertical integration” and “certainly did not

discuss either such integration or absolute refusals to

deal”).

4. Not surprisingly, most lower courts have under-

stood that the Berkey Photo monopoly leveraging theory

exceeds the scope of Section 2 and have flatly rejected the

theory, correctly finding that it is inconsistent with the

letter and purpose of the statute. See Alaska Airlines, 948

F.2d at 547; Fineman v. Armstrong World Indus., 980 F.2d

171, 203 (3d Cir. 1992), cert. denied, 507 U.S. 921 (1993);

Eleven Line, Inc. v. North Tex. State Soccer Ass’n, 213 F.3d

198, 206 n.16 (5th Cir. 2000). Indeed, the Second Circuit

itself had effectively interred the monopoly leveraging

theory until the court of appeals’ opinion in this case

breathed new life into it. See pages 11-13, infra.

Prominent scholars also have rejected the monopoly

leveraging theory. See, e.g., 3A Areeda & Hovenkamp,

4 771c, at 173; see also Association for Intercollegiate

Athletics for Women v. NCAA, 735 F.2d 577, 586 n.14 (D.C.

Cir. 1984) (per curiam) (reserving judgment on question in

light of “substantial academic criticism cast upon the

11

leveraging concept”) (citing, eg., Richard A. Posner &

Frank H. Easterbrook, Antitrust 802-810, 870-871 (2d ed.

1981); Robert Bork, The Antitrust Paradox 365-366, 372-

375 (1978)). This Court should do likewise and make clear

that a mere allegation that a monopolist in one market

gained a competitive advantage in a second market cannot

state a claim under Section 2. The Court also should

clarify that lower courts should not rely on the language in

Griffith that has been read to suggest the contrary.‘

B. The Monopoly Leveraging Theory Is Not

An Appropriate Means Of Analyzing Sec-

tion 2 Claims

The history of Berkey Photo and its progeny in the

Second Circuit demonstrates that the monopoly leveraging

theory had not been found, even by that court, to be an

appropriate means for analyzing Section 2 claims prior to

the instant case. From the very outset, the Second Circuit

began to limit its monopoly leveraging theory, apparently

realizing that it could not be applied as broadly as initially

stated without improperly expanding the boundaries of

Section 2.

1. In Berkey Photo, the Second Circuit set forth its

broad description of the monopoly leveraging theory in an

expansive introductory section of the opinion discussing

* The confusion in the lower courts is most recently exemplified by

Covad Communications Co. v. BellSouth Corp., 299 F.3d 1272 (11th Cir.

2002), petition for cert. filed, 71 U.S.L.W. 3640 (U.S. March 20, 2003)

(No. 02-1423), where the court of appeals relied on the “competitive

advantage” language in Griffith and Berkey Photo, but adopted an even

broader view, suggesting that three different theories of alleged anti-

competitive behavior — the essential facilities doctrine, refusal to deal,

and price squeeze — all constitute monopoly leveraging. See id. at 1284-

1285, 1288. The Eleventh Circuit thereby viewed the essential facilities

doctrine as a form of monopoly leveraging, whereas the court below

treated the labels as identifying two independent bases for Section 2

liability.

12

the court’s general conception of Section 2 doctrines. See

603 F.2d at 275-276. When it came to applying the monop-

oly leveraging theory to the facts before it, however, the

court found the task to be quite difficult. First, the court

had to clarify that Section 2 would be violated by a firm

gaining a competitive advantage only if the firm did so by

“use of the monopoly power it possessed in other segments

of the industry,” and not if that advantage was gained

merely “by virtue of membership in an integrated [monop-

oly] firm.” Id. at 291. The court described such prohibited

“use of monopoly power” as “an action that a firm would

have found substantially less effective, or even counter-

productive, if it lacked market control.” Jbid. In a second

attempt to describe its test, the court of appeals explained

that its analysis rested on “a simple proposition: if an

action that gains a firm a competitive advantage is effec-

tive because of the company’s efficiency, prestige, and

innovativeness, and not because of its control over the

market, the action is not a use of power.” Jd. at 292.

But the Berkey Photo court could not resolve that

“simple” issue on the record before it, ibid., notwithstand-

ing that there had been four years of litigation, thousands

of exhibits, and a trial that had lasted more than six

months, id. at 268. The court acknowledged that, even on

the facts of that case — where it found that the defendant

had a monopoly in more than one market and where the

defendant had gained a competitive advantage through

the challenged conduct — the advantage “may have been

attributable to its innovation of a new system of photogra-

phy, and not to its monopoly power,” and thus would not

give rise to Section 2 liability. Jd. at 292. At the same time,

the court was unwilling to “dismiss the possibility” that

the defendant’s monopoly power was not “at least a partial

root of its ability to gain an advantage.” Ibid. Because the

court could not “say with certainty on which side of this

demarcation the facts fleJll,” the court reversed and

remanded for a new trial. Ibid.

13

2. Subsequent panels of the Second Circuit failed to

provide a fuller explication of how courts are to distinguish

between use of a firm’s monopoly power and use of its

efficiencies and innovativeness to achieve a “competitive

advantage.” Indeed, several subsequent opinions of that

circuit read the monopoly leveraging theory even more

narrowly and expressed doubt about its validity. For

example, in Twin Laboratories, Inc. v. Weider Health &

Fitness, 900 F.2d 566 (2d Cir. 1990), the court dismissed

Berkey Photo’s “competitive advantage” language as dicta;

characterized that case as involving a tying claim; de-

clared that the quoted language “requires tangible harm to

competition” — not just competitors; and found no such

evidence in the case before it. Jd. at 570-571. In AD/SAT

v. Associated Press, 181 F.3d 216 (2d Cir. 1999), the court

directly questioned the “continued scope of monopoly

leveraging claims as independent causes of action,” in

light of Spectrum Sports, 506 U.S. at 459; repeated Twin

Laboratories’ analysis of Berkey Photo; and found there

was inadequate evidence of monopolizing conduct. Id. at

230-231.

Even more recently, in Virgin Atlantic Airways Ltd. v.

British Airways, 257 F.3d 256 (2d Cir. 2001), the Second

Circuit observed that it already had questioned the “com-

petitive advantage” theory of monopoly leveraging, id. at

272, and explained that the requirement of Spectrum

Sports for conduct that actually monopolizes or danger-

ously threatens to do so, “goes beyond ‘gaining a competi-

tive advantage’ as set out in Berkey Photo.” Ibid. The court

determined that it was “unnecessary for [it] to decide, as a

matter of law, the viability of a claim for monopoly lever-

aging as described in Berkey Photo,” however, because the

plaintiff lacked the requisite proof in that case. Ibid.

Accordingly, the experience of the Second Circuit in

dealing with its Berkey Photo precedent does not commend

adoption of that theory as an appropriate means of analyz-

ing Section 2 claims. The court’s attempts to narrow the

theory by requiring tangible harm to competition and -its

14

suggestion that a requirement of monopolization or dan-

gerous threat thereof may be required amply demonstrate

that the flaw in the theory is that it exceeds the scope of

Section 2. Thus, as the Ninth Circuit observed when it,

like the Third and Fifth Circuits, rejected the monopoly

leveraging doctrine as an independent theory of liability:

“If there is a dangerous probability that a monopoly will be

created by leveraging conduct, then the conduct will be

reached under the [traditional] doctrine of attempted

monopoly” pursuant to Section 2. Alaska Airlines, 948 F.2d

at 549; see also Fineman, 980 F.2d at 203; Eleven Line,

Inc., 213 F.3d at 206 n.16.

C. The Monopoly Leveraging Theory Under-

mines The Purposes Of The Sherman Act

1. The court of appeals’ monopoly leveraging theory

discourages monopolists and other large firms from

entering new markets and engaging in conduct that would

result in lower prices, better products, and more efficient

production. For example, firms often vertically integrate

from one market into a second market in order to lower

their costs, and therefore their prices, and to provide

integrated products that are more valuable to the con-

sumer. See, e.g., Posner & Easterbrook, supra, at 869

(“vertical integration is a potential source of substantial

cost savings”). Courts and commentators have recognized

that vertical integration by a monopolist, even if it drives

competitors out of business, may be perfectly lawful

because it “could (by lowering costs) lower prices, or, in

any event, save economic resources.” Town of Concord, 915

F.2d at 24 (citing 3 Phillip Areeda & Donald F. Turner,

Antitrust Law 4 725d, at 201 (1978), and Bork, supra, at

243); see also 3A Areeda & Hovenkamp {{ 757a-757c, at

23-27.

Under the court of appeals’ monopoly leveraging

theory, however, any such effort at vertical integration can

become the basis for an antitrust claim on the ground that

it harms competitors by giving the integrated firm a

15

“competitive advantage” (regardless of whether it results

in the acquisition or enhancement of monopoly power in

the second market through predatory conduct). Firms that

are potentially subject to such claims will be deterred from

seeking the efficiencies of vertical integration, knowing

that the reward for such conduct may be lengthy and

costly antitrust litigation and, potentially, treble damages

and a court order prohibiting them from making use of

those efficiencies to compete in the second market. See

Richard A. Posner, Antitrust Law 224 (2d ed. 2001) (“Were

vertical integration deemed a suspect practice under the

antitrust laws because of its potential exclusionary effect,

all commercial activity would be placed under a cloud as

the courts busied themselves redrawing the boundaries of

firms, even though the normal motivation for and conse-

quence of vertical integration are merely to reduce the

transaction costs involved in coordinating production by

means of contracts with other firms.”) (footnote omitted).

2. The court of appeals’ monopoly leveraging theory

does nothing to benefit consumers. As courts and commenta-

tors have pointed out, “the extension of monopoly power from

one to two levels does not necessarily, nor in an obvious way,

give a firm added power to raise prices.” Town of Concord,

915 F.2d at 23. That is because “there is but one optimal

monopoly profit to be gained from the sale of an end-

product.” 3A Areeda & Hovenkamp { 756b2, at 13; see

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 36

(1984) (O’Connor, J., concurring in the judgment) (noting

that that economic theory is “widely accepted” and “easily

demonstrated”) (citing Phillip Areeda, Antitrust Analysis 735

(38d ed. 1981), and Bork, supra, at 372-374). See also Bork,

supra, at 229 (“vertically related monopolies can take only

one monopoly profit”); Posner & Easterbrook, supra, at 870

(“There is only one monopoly profit to be made in a chain of

production”); Town of Concord, 915 F.2d at 21, 32-33 (App. A)

(explaining this “counterintuitive” result). And to the extent

that conduct expanding a monopoly from one market to a

second market does harm consumers by expanding the

16

firm’s monopoly power, such conduct is actionable under

the traditional rubric of Section 2.

Il. THE ESSENTIAL FACILITIES DOCTRINE IS

NOT AN INDEPENDENT BASIS FOR LIABIL-

ITY UNDER SECTION 2 OF THE SHERMAN

ACT

A. The Essential Facilities Doctrine Extends

To Conduct Beyond The Reach Of Section 2

1. The court of appeals purported to recognize that a

monopolist does not have a duty to cooperate with its

competitors, Pet. App. 28a, but then concluded that “a

monopolist has a duty to provide competitors with reason-

able-access to ‘essential facilities,’ facilities under the

monopolist’s control and without which one cannot effec-

tively compete in a given market.” Jd. at 29a. The court

went on to hold that respondent stated a Section 2 claim

under that “essential facilities doctrine” by alleging that

petitioner failed to provide its competitor (the company

that provided respondent local telephone service) reason-

able access to its “local loop” which, according to respon-

dent, was essential to competing in the market for local

telephone service and would be prohibitively expensive for

others to create independently. [bid.

This Court has indicated, however, that, “[iJn the

absence of any purpose to create or maintain a monopoly,

the [Sherman Act] does not restrict the long recognized

right of a trader or manufacturer * * * freely to exercise

his own independent discretion as to parties with whom he

will deal.” United States v. Colgate & Co., 250 U.S. 300,

307 (1919); see also Monsanto Co. v. Spray-Rite Serv.

Corp., 465 U.S. 752, 761 (1984). The court of appeals’ use

of an imprecise label therefore led it to erroneously hold

that any allegations that satisfy its “essential facilities”

doctrine provide an independent basis for a Section 2

claim.

herr

17

2. One of the reasons the court of appeals may have

been led to apply its essential facilities doctrine in this

case is because of the duties that the Telecommunications

Act of 1996 (Telecommunications Act), Pub. L. No. 104-

104, 110 Stat. 56, places on petitioner and other local

exchange carriers. For example, that law requires local

exchange carriers to provide any requesting telecommuni-

cations carrier “nondiscriminatory access to network

elements on an unbundled basis * * * on rates, terms and

conditions that are just, reasonable, and nondiscrimina-

tory in accordance with the terms and conditions of the

[parties’ interconnection] agreement and the requirements

of” 47 U.S.C. §§ 251, 252. 47 U.S.C. § 251(c\(3). The Tele-

communications Act contains its own comprehensive

remedial scheme. The governing interconnection agree-

ment in this case provided for an exclusive dispute resolu-

tion procedure to govern any disputes be ween petitioner

and respondent’s local telephone service provider that

arose out of the agreement. Pet. App. 5a. Moreover, the

FCC maintains regulatory authority over certain local

exchange carriers, such as petitioner. See 47 U.S.C. § 257(dX6).

Indeed, the very conduct challenged by respondent in this

case led to an FCC consent decree under which petitioner

agreed to pay $3 million to the United States and $10

million to respondent’s local telephone service provider

and other similarly situated carriers. Pet. App. 5a.

But such an obligation imposed by a regulatory

scheme cannot support a claim for violation of Section 2 of

the Sherman Act. Before enactment of the Telecommunica-

tions Act, petitioner had no duty under the antitrust laws

to enable firms to compete against it in the provision of

local telephone service by granting them access to its

wiring and telecommunications network. And Congress

expressly declined to expand the scope of the antitrust

laws by virtue of the Telecommunications Act. See Pub. L.

No. 104-104, § 601(b\(1), 110 Stat. 56, 143 (providing that

nothing in the Act “shall be construed to modify, impair or

supersede the applicability of any of the antitrust laws”);

18

Cavalier Telephone, LLC v. Verizon Va., Inc., No. 02-1337,

slip op. at 19 (4th Cir. May 20, 2003). The court of appeals

apparently recognized the inappropriateness of relying on

a duty from a regulatory scheme to create a novel duty

under the antitrust laws and found, instead, that peti-

tioner’s duty to provide its competitor access to its facili-

ties arose from Section 2 of the Sherman Act. Cf. Pet. App.

29a (acknowledging that alleged conduct might also violate

the Telecommunications Act).

The court of appeals failed, however, to articulate the

elements of the Section 2 essential facilities claim it

recognized. It simply cited a decision from another circuit,

see Pet. App. 29a (citing Southern Pac. Communications

Co. v. AT&T, 740 F.2d 980, 1009 (D.C. Cir. 1984), cert.

denied, 470 U.S. 1005 (1985)), and quoted it as describing

United States v. Terminal Railroad Ass’n, 224 U.S. 383,

411 (1912), to require a monopolist “to provide conipetitors

with reasonable access to ‘essential facilities,’” upon “just

and reasonable terms.” But Terminal Railroad did not use

the “essential facilities” terminology and did not adopt the

doctrine. Indeed, that case did not even involve single-firm

conduct. Rather, it involved the very different situation of

joint action by multiple rivals and the question the Court -

addressed was whether their conduct “resulted in a combina-

tion which is in restraint of trade” in violation of Sections 1

and 2 of the Sherman Act. See Terminal R.R., 224 U.S. at

394. The admission of another rival to the joint venture was

imposed as a remedy. Cf. id. at 409-410 (discussing a finding

of attempted monopolization in course of remedy analysis).

3. This Court “has never adopted” the essential

facilities doctrine. AT&T Corp. v. Iowa Utils. Bd., 525 U.S.

366, 428 (1999) (Breyer, J., concurring in part and dissenting

in part). The Court has declined to address the possible

applicability of the doctrine even when the court below

relied on it. See Aspen Skiing Co. v. Aspen Highlands

Skiing Corp., 472 U.S. 585, 611 n.44 (1985).

Various lower courts, however, have described the

doctrine as requiring a firm with monopoly power in one

OG A EA pth ta

19

market to share its assets with competitors in a related

non-monopoly market in certain circumstances. The

Seventh Circuit in MCI Communications Corp. v. AT&T, 708

F.2d 1081 (1983), cert. denied, 464 U.S. 891 (1983), articu-

lated a four-part test for determining when the doctrine

should be applied and other courts have purported to adopt

the test.° Those decisions should be rejected.

The antitrust laws rest upon the well-established

economic principle that aggressive competition among

rivals, not the forced sharing of competitive assets, will

maximize consumer welfare. See United States v. Citizens

& Southern Natl Bank, 422 U.S. 86, 116 (1975). Because

the essential facilities doctrine suggests that the antidote

to monopoly is cooperation, not competition, it is inher-

ently dangerous and should not be adopted by this Court.

The essential facilities doctrine has been widely criti-

cized by both courts and commentators, including by subse-

quent decisions of the Seventh Circuit. Judge Posner has

emphasized, for example, that “[clonsumers are not better off

if the natural monopolist is forced to share some of his profits

with potential competitors.” Blue Cross & Blue Shield

United of Wisc. v. Marshfield Clinic, 65 F.3d 1406, 1413

(7th Cir. 1995), cert. denied, 516 U.S. 1184 (1996). Rather,

it is in the interest of consumers to permit a lawful m»-

nopolist to reap the full economic benefit of its position,

because those supra-competitive rewards will encourage

potential competitors to compete aggressively to dislodge

the monopolist. See ibid. Judge Posner also has pointed out

that other noted antitrust scholars have criticized “the

decisions in the essential-facilities line” as “having nothing to

do with the purposes of the antitrust law.” See id. at 1412

* The MCI test requires the following elements: “(1) control of the

essential facility by a monopolist; (2) a competitor’s inability practically

or reasonably to duplicate the essential facility; (3) the denial of the use

of the facility to a competitor; and (4) the feasibility of providing the

facility.” MCI, 708 F.2d at 1132-1133.

20

(citing Herbert Hovenkamp, Federal Antitrust Policy: The

Law of Competition And Its Practice § 7.7 (1994); Phillip

Areeda, Essential Facilities: An Epithet In Need Of Limiting

Principles, 58 Antitrust L.J. 841 (1990); Scott D. Makar, The

Essential Facility Doctrine and the Health Care Industry, 21

Fla. St. U. L. Rev. 913 (1994)).

Some lower courts have attempted to limit the essen-

tial facilities doctrine, apparently in an effort to bring it

closer to the text and purpose of Section 2. For example,

some courts have applied the doctrine to instances where,

absent access to the monopolist’s facilities, a competitor

cannot compete at all in a secondary market, but have not

allowed an essential facilities claim to be based on a mere

difficulty in competing on terms that are less favorable than

the monopolist’s own access to its facilities. See Alaska

Airlines, 948 F.2d at 545-546; City of Chanute v. Williams

Natural Gas Co., 955 F.2d 641, 648-649 (10th Cir.), cert.

denied, 506 U.S. 831 (1992), overruled in part on other

grounds by Systemcare, Inc. v. Wang Lab. Corp., 117 F.3d

1137 (10th Cir. 1997) (en banc); Laurel Sand & Gravel, Inc. v.

CSX Transp., Inc., 924 F.2d 539, 544-545 (4th Cir.), cert.

denied, 502 U.S. 814 (1991). Other courts, including the

Seventh Circuit, appear to view a facility as “essential” only

if it cannot be duplicated because the monopoly is a natural

monopoly, is legally protected from competition, or is publicly

subsidized. See, e.g., MCI, 708 F.2d at 1133; Marshfield

Clinic, 65 F.3d at 1412; 3A Areeda & Hovenkamp { 773b, at

202. Those attempts to cabin the doctrine have not, however,

succeeded in creating a manageable legal standard justified

by a coherent economic theory so as to warrant adoption

by this Court.*

* Some commentators similarly have suggested that the essential

facilities doctrine, if it were to be recognized at all, should be limited to

“facilities that are a natural monopoly, facilities whose duplication is

forbidden by law, and perhaps those that are publicly subsidized and

thus could not practicably be built privately.” Twin Labs., 900 F.2d at

(Continued on following page)

21

The application of the doctrine by the court below

compounded the problem by striking out in the other

direction and broadening the essential facilities doctrine

beyond what any other court had done. In holding that

petitioner is obligated, not merely under the Telecommu-

nications Act, but also under Section 2, to provide competi-

tors with access to its local loop, the court of appeals’

ruling would require a firm to create a wholesale market

to sell its product or service to a rival at a discount so that

that rival can then turn around and resell the product or

service at retail in direct competition with the firm. No

other court has held that a lawful monopolist must provide

a competitor access to its facilities in order to create

competition in the monopoly market. See, e.g., Illinois ex

rel. Burris v. Panhandle E. Pipe Line Co., 935 F.2d 1464,

1484 (7th Cir. 1991), cert. denied, 502 U.S. 1094 (1992)

(“penaliz{ing] the monopolist for refusing to surrender a

lawfully obtained monopoly” is “a result courts have long

foresworn”).

That is what the Seventh and Fourth Circuits have

correctly recognized is not required by the antitrust laws.

See Goldwasser v. Ameritech Corp., 222 F.3d 390, 398 (7th

Cir. 2000) (“even a firm with monopoly power has no

general duty to engage in a joint marketing program with

a competitor”) (quoting Aspen Skiing, 472 U.S. at 600);

Cavalier Tel., LLC v. Verizon Va., Inc., No. 02-1337, slip op.

at 18 (4th Cir. May 20, 2003); see also MCI, 708 F.2d at

1133, 1148-1149 (requiring AT&T to provide MCI access to

its local telephone network so as to enable MCI to compete

569 (quoting Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law

{ 736.2, at 680-681 (1988 Supp.)); see also 3A Areeda & Hovenkamp

4 771c, at 173 (“only three situations in which an essential facilities

doctrine is even arguably appropriate”). These commentators also,

however, recognize the heavy costs that the doctrine would impose and

the minimal benefits it would yield and ultimately conclude that the

doctrine should be rejected. See ibid.

22

in the long-distance market (not in the local telephone

market), but denying MCI’s claim for access to AT&T's

long-distance network even though such access also would

have improved MCI’s ability to compete in long-distance

market).

Moreover, the required creation of a wholesale market

would mean, in essence, that a firm would be made to

alter the inherent nature of its business. Such a require-

ment has been correctly rejected by other courts as not

mandated by Section 2. See Laurel Sand & Gravel, 924

F.2d at 545 (finding no liability under essential facilities

doctrine because whether it is feasible for monopolist to

provide access “must be analyzed not in terms of all the

possibilities” of the firm, but in the context of its normal

course of business).

Prominent scholars have declared that “the essential

facility doctrine is both harmful and unnecessary and

should be abandoned.” 3A Areeda & Hovenkamp { 771c, at

173. This Court should conclude likewise and decline to

adopt the doctrine.

B. Ample Legal Means Already Exist To Redress

Any Unlawful Anticompetitive Conduct That

Results From Control Of A Particular Facil-

ity

There is no cause for the Court to adopt the essential

facilities doctrine in any form because allegations of truly

anticompetitive conduct, including conduct that involves the

control of a particular facility, can be adequately redressed

under traditional Section 2 standards or through regulation.

1. This Court’s decisions in Aspen Skiing Co. v.

Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), and

Otter Tail Power Co. v. United States, 410 U.S. 366 (1973),

illustrate well the use of traditional Section 2 analysis in

the context of a unilateral refusal to deal.

As noted above, the Aspen Skiing Court explicitly

withheld judgment on the applicability of the essentiai

23

facilities doctrine, notwithstanding the court of appeals’

reliance on it in that case. See 472 U.S. at 599, 611 n.44.

Instead, the Court addressed whether the record evidence

supported the jury finding that the defendant’s refusal to

deal constituted predatory conduct to maintain monopoly

power under the traditional Section 2 standards.

Aspen Skiing met that criterion because it involved a

company that not only discontinued a longstanding prac-

tice of joint-ticket packages (notwithstanding that the

practice had benefited it economically in the past), but the

company also then refused to sell its own tickets to the

competitor “at the tour operator’s discount or at retail,” id.

at 593, and refused to accept full-price coupons from the

competitor’s customers (guaranteed by funds on deposit at

a local bank) in exchange for its daily tickets, id. at 594.

That combination of actions made it impossible for the

competitor to market its own joint-ticket. Jd. at 607-608.

The company’s conduct thereby eliminated from the

market a product that was preferred by consumers and

“consumers were adversely affected by the elimination” of

the product. Jd. at 606. Also, the company engaged in a

national advertising campaign that “strongly implied” a

falsehood that its mountains were the only ski mountains

in the area. Jd. at 593. The company thus attempted to

expand its monopoly power through predatory conduct by

excluding competition “on some basis other than effi-

ciency.” Id. at 605.

Similarly, the Court in Otter Tail did not invoke an

“essential facilities” doctrine, but rather affirmed the

district court’s straightforward application of Section 2 to

find that the defendant, an electric utility company, had

“attempted to monopolize and had monopolized the retail

distribution of electric power in its service area in viola-

tion of § 2 of the Sherman Act.” 410 U.S. at 368. The Court

did not rely solely on the fact that the defendant refused to

sell its energy at wholesale to potential rivals (municipal

power systems that were former retail customers). The

Court also relied on the fact that the defendant refused to

24

wheel (carry) power from other suppliers of wholesale

energy who were willing to supply it to the potential rivals

but needed such wheeling by the defendant to reach the

rivals. Jd. at 377. The Court confirmed the district court’s

determination that the defendant thereby used its “strate-

gic dominance * * * to foreclose potential entrants into the

retail area from obtaining electric power from outside

sources of supply.” Jd. at 377 (quoting United States v.

Otter Tail Power Co., 331 F. Supp. 54, 60 (D. Minn. 1971)).

The Otter Tail Court emphasized that such use of

monopoly power “to destroy threatened competition”

constitutes attempted monopolization in violation of

Section 2. 410 U.S. at 377 (citation omitted). The Court

expressly found that the record supported the district

court’s finding that the defendant’s “refusals to sell at

wholesale or to wheel were solely to prevent municipal

power systems from eroding its monopolistic position.” Id.

at 378.

Both Aspen Skiing and Otter Tail therefore teach that

traditional Section 2 standards are adequate to impose

liability to the extent unilateral denial of access maintains

or enlarges monopoly power through predatory or exclu-

sionary means (i.e., if the conduct makes economic sense

only insofar as it would eliminate competition). See also

Br. U.S. & FTC Supporting Pet. Cert. at 12, 13.’

" Although the Seventh Circuit applied the essential facilities

doctrine in MCI, see page 19 & note 5, supra, that court also relied

heavily on Otter Tail as “an analogy” and described that case not as

applying an “essential facilities” label, but as focusing on the traditional

Section 2 concern that a defendant had used its monopoly power “to

further a monopoly in another market.” 708 F.2d at 1133. Such tradi-

tional Section 2 analysis also would have been adequate to resolve the

problem before the court in MCI. See 3A Areeda & Hovenkamp { 771c,

at 173 (“In virtually every instance where competitive problems can be

effectively addressed by forcing the monopolist to deal, traditional

doctrine of refusal to deal is sufficient to the task.”).

a

25

2. Regulation is an even more typical means of

addressing concerns about access to a lawful monopolist’s

facilities. In fact, it is generally the case that unilateral

refusals to deal by lawful monopolists are thought to be

best addressed through “[glovernment regulation, as

opposed to treble damages and criminal liability under the

Sherman Act.” Alaska Airlines, 948 F.2d at 548 (citing

William K. Jones, Government Price Controls and Infla-

tion: A Prognosis Based on the Impact of Controls in the

Regulated Industries, 65 Cornell L. Rev. 303, 304 (1980)).

That is because a true essential facility is, by definition, a

natural monopoly,’ and the competitive problems posed by

a natural monopoly cannot be remedied by market forces

(except, perhaps, in the very long run). Regulation, there-

fore, is the only practical means of forcing a natural monopo-

list to expand market output and reduce market price. In

these circumstances, application of traditional Section 2

unilateral refusal to deal analysis is necessary only as a

means to capture conduct that cannot be redressed through

regulatory remedies. Commentators have explained that

that was the case in Otter Tail, where the federal regulatory

agency “lacked the authority to order wheeling of wholesale

power, and the Court used antitrust to fill this regulatory

vacuum.” 3A Areeda & Hovenkamp 4 772b3, at 181 (footnote

omitted).

Regulation also is a better means for resolving prob-

lems of access to natural monopolies because, otherwise,

courts (instead of regulators) will be called upon to make

judgments about exactly which assets a firm must be

* A natural monopoly arises in a market in which consumer

demand will support only one efficiently-scaled firm. In such a market,

the costs of production are significantly lower with a single producer,

and that producer can earn larger profits by charging less than would

be charged by several less efficient firms. See Alaska Airlines, 948 F.2d

at 548 (citing 3 Areeda & Turner 4 621a, at 47-48 (1978)); see also 3

Areeda & Hovenka nop { 658b, at 121.

2€

forced to share with a competitor and the terms, including

price, on which such sharing must take place. One of the

principal problems with courts setting prices is that “[tJhe

reasonable price fixed today may through economic and

business changes become the unreasonable price of tomor-

row.” Town of Concord, 915 F.2d at 25 (quoting United States

v. Trenton Potteries Co., 273 U.S. 392, 397 (1927)). There-

fore, lower courts would be required to continue to monitor

and enforce such orders. “Such a solution is nothing less

than price regulation of the kind undertaken by regulatory

agencies — something for which both the federal courts and

the antitrust litigation process are extremely ill-suited.”

3A Areeda & Hovenkamp { 771b, at 172.

In short, it is not for the courts to serve the role of

legislature or regulatory commission. If economic interests

or public demand calls for particular facilities to be

shared, the legislature can mandate such sharing either

directly or through the adoption of a regulatory scheme to

be overseen by an agency equipped to determine the

appropriate prices to be charged and the terms of access to

the facility. Congress and state and local legislatures can

and have enacted legislation to address such issues,

including the Telecommunications Act which imposes

particular duties on petitioner and required petitioner to

remedy an alleged violation of the statute.

C. The Essential Facilities Doctrine Runs Con-

trary To The Aims Of The Sherman Act By

Requiring Competitors To Share Resources

1. The essential facilities doctrine discourages

competition by all firms — large and small — by creating

the prospect of forced sharing of business assets. Indeed,

by requiring firms to cooperate with one another through

the sharing of resources and common costs, the doctrine

promotes precisely the kind of coordination between firms

that is the concern of Section 1 of the Sherman Act. See,

e.g., Copperweld, 467 U.S. at 767-768.

27

The essential facilities doctrine serves to deter large

firms from engaging in procompetitive conduct that

benefits consumers. First, companies will not compete

aggressively to build efficiently-scaled businesses if the

cost of success is that they must share the fruits of their

labors with rivals. 3A Areeda & Hovenkamp { 773e, at 212

(“the [essential] facility, which is admittedly desirable,

might not have come into existence had a sharing re-

quirement existed when the investment was made”). In

addition, firms potentially subject to an “essential facili-

ties” claim will be reluctant to “undertake the investment

necessary to produce complex technological innovations

knowing that any competitive advantage deriving from

those innovations will be dissipated by the sharing re-

quirement.” AT&T Corp., 525 U.S. at 429 (Breyer, J.,

concurring in part and dissenting in part). Under the court

of appeals’ rule, rivals who do not bear any of the costs or

risks of developing innovative ideas, products or busi-

nesses will be able to share in those investments.

Second, the essential facilities doctrine will discourage

firms that control an arguably “essential” facility from

vertically integrating into a related market — even if such

integration would result in lower costs and prices to

consumers. A firm that does so would immediately subject

itself to attack by competitors in the related market, who

would demand access to the firm’s “essential” assets and

resources. These effects will be magnified if the Court

endorses the court of appeals’ unprecedented conclusion

that Section 2 may be invoked to force a firm that com-

petes in only one market to create a separate wholesale

market for its product or service so that would-be rivals

may compete with it on equal terms. Under that rule, any

company that develops an innovative or successful product

or service would be subject to an essential facilities claim.

Competitive conduct by smaller firms also is discour-

aged by the essential facilities doctrine because smaller

rivals will have little incentive to compete aggressively to

28

develop products and services that may displace an in-

cumbent monopolist if they can invoke the Sherman Act to

gain access to the monopolist’s assets. 3A Areeda & Ho-

venkamp 4 771b, at 172 (“the right to share a monopoly

discourages firms from developing their own alternative

inputs”).”

2. If this Court were to adopt the essential facilities

doctrine as an independent Section 2 standard and author-

ize lower courts to force competitors to share resources,

the adverse effects on economic efficiency would permeate

every sector of the economy. As the courts of appeals have

demonstrated, it is difficult to define and implement

uniform standards for the essentia! facilities doctrine.

Such uncertainty regarding the scope of the doctrine

already has led to a proliferation of cases with varying and

conflicting constructions of the doctrine. That would

undoubtedly continue, especially if, as the court of appeals

here held, those cases can be brought by class action

plaintiffs seeking treble damages.

Since this decision, more than two dozen additional

cases have been filed against incumbent local telephone

companies. See Pet. 28 n.22. Plaintiff class actions are now

being pursued based on similar theories against firms in

other industries as well. See, e.g., Yankees Ent’mt & Sports

Network, LLC v. Cablevision Sys. Corp., 224 F. Supp. 2d

© The essential facilities doctrine does not benefit consumers by

reducing price. See p. 19, supra. Commentators explain that, for a

variety of reasons, “when [an essential facility) is shared; ordinarily,

price and output are the same as they were when one monopolist used

the input alone.” 3A Areeda & Hovenkamp 4 771b, at 171-172. For

example, so long as a monopolist is able to charge a monopoly price fur

access to its facilities, it will prevent rivals from achieving cost savings,

expanding output, or lowering price. Even if a court acts as a regulator

and requires the monopolist to charge a lower price for access, there is

no assurance that this will result in lower prices to the consumer

because the firms sharing the monopoly asset may simply maintain the

monopoly price and share the monopoly profits. [bid.

29

657, 671-673 & n.12, 674-675 (S.D.N.Y. 2002) (expressly

relying on decision by court of appeals in the instant case

to deny motion to dismiss a Section 2 claim under monop-

oly leveraging theory and essential facilities doctrine,

based on allegations that a cable operator refused to grant

a regional sports programmer “carriage on its system on

nondiscriminatory terms such as those terms and condi-

tions available to its affiliates,” id. at 664, which caused

the latter to have fewer viewers and less revenue); Jn re

EVIC Class Action Litig., No. 02-Civ-2703, 2002 WL

1766554, at *12-14 (S.D.N.Y. July 30, 2002’ (expressly

relying on decision by court of appeals in the instant case

to deny motion to dismiss a Section 2 claim under monop-

oly leveraging theory and essential facilities doctrine,

based on allegations that UPS offered package insurance

to its customers, but denied other potential package

insurers access to the shipping forms and software that

UPS provides to its customers).

The court of appeals’ construction of Section 2 will

“chill the very conduct the antitrust laws are designed to

protect.” Matsushita Elec. Indus. Co., 475 U.S. at 594. The

Court should reject that construction and confirm, instead,

that Section 2 is meant to foster aggressive competition on

the merits by prohibiting only predatory or exclusionary

conduct that monopolizes or attempts to monopolize a

relevant market. See Spectrum Sports, 506 U.S. at 458-

459.

30

CONCLUSION

For the foregoing reasons, the amen of the court of

appeals should be reversed.

Respectfully submitted,

PETER M. KREINDLER Drew S. Days, III

HONEYWELL INTERNATIONALINC. Counsel of Record

101 Columbia Road W. STEPHEN SMITH

Morristown, NJ 07962 BETH S. BRINKMANN

(973) 455-5513 MORRISON & FOERSTER LLP

Attorney for Amicus Curiae ee ivania Ave.,

Honeywell International Inc. Washington, D.C. 20006

STEPHEN THEOHARIS (202) 887-1500

Visa U.S.A. INC. PAUL T. FRIEDMAN

123 Mission Street MORRISON & FOERSTER LLP

San Francisco, CA 94105 425 Market Street

(415) 932-2100 San Francisco, CA 94105

Attorney for Amicus Curiae (415) 268-7000

Visa U.S.A. Inc. Attorneys for Amicus Curiae

United Parcel Service, Inc.

PATRICK M. SHELLER

EASTMAN KODAK COMPANY

P.O. Box 92988

Rochester, NY 14692

Attorney for Amicus Curiae

Eastman Kodak Company

May 23, 2003

sev