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

In The MAY 2 3 2003

Supreme Court of the Anited ates

¢

FICE OF TME ORERK

VERIZON COMMUNICATIONS INC.,

Petitioner,

v.

LAW OFFICES OF CURTIS V. TRINKO, LLP,

Respondent.

Sd

On Writ Of Certiorari To The United States Court

Of Appeals For The Second Circuit

¢

BRIEF AMICUS CURIAE OF THE

COMMONWEALTH OF VIRGINIA, THE STATES OF

ALABAMA, DELAWARE, INDIANA, NEBRASKA,

NEW HAMPSHIRE, OKLAHOMA AND UTAH

IN SUPPORT OF PETITIONER

o

JERRY W. KILGORE

Attorney General of Virginia

WILLIAM H. HurRD

State Solicitor

MAUREEN RILEY MATSEN

WILLIAM E. THRO

Deputy State Solicitors

JUDITH WILLIAMS JAGDMANN

Deputy Attorney General

Counsel of Record

C. MEADE BROWDER, JR.

Senior Assistant Attorney General

SARAH OXENHAM ALLEN

RAYMOND L. DOGGETT, JR.

Assistant Attorneys General

900 East Main Street

Richmond, Virginia 23219

(804) 786-2436

[Additional Counsel Listed On Inside Cover]

OOOO

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

OR CALL COLLECT (402) 342-2831

WILLIAM H. Pryor, JR.

Attorney General of

Alabama

Office of the Attorney

General

11 South Union Street

Montgomery, Alabama

36130

(334) 353-3915

M. JANE BRADY

Attorney General

State of Delaware

820 North French Street

Wilmington, Delaware

19801

(302) 577-8400

STEVE CARTER

Attorney General of

Indiana

Indiana Government

Center South

Fifth Floor

302 West Washington

Street

Indianapolis, Indiana 46204

(317) 232-6201

JON BRUNING

Attorney General of

Nebraska

Office of the Attorney

General

2115 State Capitol Building

Lincoln, Nebraska 68509

(402) 471-2683

PETER W. HEED

Attorney General of

New Hampshire

Office of the Attorney

General

33 Capitol Street

Concord, New Hampshire

03301

(603) 271-3655

W.A. DREW EDMONDSON

Attorney General of

Oklahoma

2300 North Lincoln

Boulevard

Suite 112

Oklahoma City, Oklahoma

73105-4894

(405) 521-3921

MARK L. SHURTLEFF

Attorney General of Utah

Office of the Attorney

General

236 State Capitol

Salt Lake City, Utah 84114

(801) 538-1191

I.

Il.

TABLE OF CONTENTS

Under Antitrust Principles Recognized by This

Court, Respondent Fails to State a Claim ..........

B. The Theories Relied Upon by the Second

Circuit, Without More, Do Not Establish

an Antitrust Violation. ..........................+.

1. Zven if the Essential Facilities Doc-

trine Can Serve as the Basis for a

Section 2 Monopolization Claim, the

Traditional Elements of the Section 2

Claim Must Be Pled. ..........................

2. Allegations of a Dangerous Probabil-

ity of Monopolizing a Second Market

are Necessary to State a Monopoly

Leveraging Claim. .........................s0++

IN PASSING THE TELECOMMUNICATIONS

ACT OF 1996, CONGRESS INTENDED NEI-

THER TO EXPAND NOR TO CONTRACT THE

AVAILABILITY OF AN ANTITRUST CLAIM ....

A. State and Federal Regulation is a Proper

Consideration in Antitrust Analysis........

B. By Enacting the Telecommunications Act

of 1996, Congress Built on the Tradi-

tional Authority of States to Regulate

Providers of Local Telephone Service ......

8

11

11

TABLE OF CONTENTS - Continued TABLE OF AUTHORITIES

Page Page

C. The Decision of the Second Circuit is Unrea- em

tory Oversight Established by Congress and Abcor Corp. v. AM Int'l, Inc.,

Could Hamper the States’ Ability to Fa- FD ee ee Se I Bie rcrccscsccecesesccnssssssccscssasssessssenes 4

Se a a ee Advanced Health-Care Servs. v. Radford

: ORL, .cccccccccccccccccccccccccccccccccccccsoccossoccscossooes Community Hosp.,

CORSO AMIN ccceccccccccccncccescccccccscsccsscsssescssccsccssssseees 16 910 F.2d 139 (4th Cir. 1900)...................cccccsresssesssseesseees 4

Alaska Airlines v. United Airlines,

948 F.2d 536 (9th Cir. 1991)....................c cece 2,9, 10

Aspen Skiing Co. v. Highlands Skiing Corp.,

8 ee 2, 4,5

Association for Intercollegiate Athletics for Women

v. NCAA,

| 735 F.2d 577 (D.C. Cir. 1964)............c.cscesssesssseseseseseeseees 9

AT&T v. Iowa Utils. Bd.,

Ee 5

Bell Atlantic-Maryland Inc. v. MCI,

240 F.3d 279 (4th Cir. 2001), vacated and

remanded on other grounds, 535 U.S. 635 (2002) ......... 13

Blue Cross & Blue Shield United of Wisconsin v.

Marshfield Clinic,

en 3

City of Anaheim v. Southern California Edison Co.,

OU 7

Concord v. Boston Edison Co.,

eee 11

Eastman Kodak Co. v. Image Technical Servs., Inc.,

Se ey Ge ett icnetahiccintinennnnsicresntteinetanimnsgepianmeuneneaes 5

Fineman v. Armstrong World Industries,

ee Pe Ce Ce rnreiemencnnsnnmmmen 9

iv

TABLE OF AUTHORITIES — Continued

Page

In re: Bell Atlantic-New York Authorization Under

Section 271 of the Communications Act to Provide

In-Region, Interlata Service in the State of New York,

15 F-C.C.R. 5413 (Mar. 9, 2000) ...00.0......ccccceceesescereeseneeneneenees 14

M & M Med. Supplies & Serv. v. Pleasant Valley Hosp.,

981 F.2d 160 (4th Cir. 1992) (en banc) ...............ccccceeeeeees 8

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

Sn TT ssccniacaieaicendesiesesiieeiia cia icincenaetaralamanianinnrmaeinn 4

MCI Communications Corp. v. AT&T,

of e 6, 11

MCI WorldCom Inc. v. Bell Atlantic-New York,

2000 WL 363378 (N.Y.PS.C. Feb. 11, 2000).................. 14

MCI WorldCom Inc. v. Bell Atlantic-New York,

~ 2000 WL 1531916 (N.Y.PS.C. Jul. 27, 2000)................. 14

Oiympia Equip. Leasing Co. v. Western Union Tel. Co.,

| 2

Papasan v. Allain,

ns I anirniisisairesantnintaciietasiiesiiciniaeianiaatainniataiinintl 8

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

740 F.2d 960 (D.C. Cir. 19B4).......cccccccccccccccsssscscsseeserseees 7

Spectrum Sports, Inc. v. McQuillan,

inserts iieirneteniennninienlinninnininriitininniisinimiitinanael 3,8

United States v. E. I. DuPont de Nemours & Co.,

Se IE UTI csicincin inst ieiesineieieeatiaharericnmanaitatiiienitiamceanas 3

United States v. Grinnell Corp.,

a atid acnciataiiaitneteniintasesnieaiisihddtadiliiastaatiatiniia 3

ile SS Sb

———— NT eR re

v

TABLE OF AUTHORITIES - Continued

Page

Verizon Communications, Inc. v. FCC,

CE 2

Willman v. Heartland Hosp. E.,

eee 8

STATUTES

Se is UII insncnseninninrsininnnnesnsmatianninpinimesieeees 1, 13

Sy Se SIT cic ceersiniercnieenstcmnnteinniataniaieanaiainaiendastmamamenaets 2

en ictininrricinssinnndeinnnaemeiaiemneinnemenanesl 13

a es ST inecininrcsipenensinicnmemeniuceniesdeenininiieunadin 13

ye ee cicerennntetncnnnetnisiimnecnnsnnsnensninneniniamseasil 13

a ey ee carceneniintnictunanseniarmnanimnniniiiitatiennnsimeniel 13

Br le Se trcinisnstsrrennnredeenmensnmmsensansniinemmenaasimem 13

Pub. L. No. 104-104, 110 Stat. 56 (47 U.S.C. 151 et

I iiticintintinrndiiianncanmspeniatscimnnniasiiiaeeninsniniiinemeasinta 12

OTHER AUTHORITIES

3 Phillip Areeda & Herbert Hovenkamp, Antitrust

Bey STE inesnccstrncaiensiineniinimensasinnnebnestenietenesel 4, 6,8

3A Phillip Areeda & Herbert Hovenkamp, Antitrust

ee eee cccrtincnienstesscennintecnemenennimiinmenel 6, 12

Robert Bork, The Antitrust Paradox (1978) ..............---+-+»: 4

Robert Pitofsky, Donna Patterson & Jonathan Hooks,

The Essential Facilities Doctrine Under U.S.

Antitrust Law, 70 Antitrust L.J. 443 (2002)................... 6

1

INTERESTS OF THE AMICI

The States have significant responsibilities in both

antitrust enforcement and enforcement of the regulatory

scheme developed by the Telecommunications Act of 1996.

The States, therefore, have a strong interest in promoting

sound judicial decision-making in the application of

antitrust law to activities undertaken pursuant to the

Telecommunications Act of 1996 and in promoting the

rational development of case law in this area. There are

difficult legal issues inherent in subjecting incumbent

providers of local telephone services to new duties to assist

their competitors, while continuing their obligations under

antitrust law. These difficulties counsel a cautious ap-

proach which has been utterly forsaken by the decision of

the Second Circuit.

¢

ARGUMENT

I. UNDER ANTITRUST PRINCIPLES RECOGNIZED

BY THIS COURT, RESPONDENT FAILS TO

STATE A CLAIM.

The Second Circuit’s opinion expands the duty of

incumbent providers of local telephone service to assist

competitors beyond the antitrust duties imposed on

monopolists under Section 2 of the Sherman Act. Although

the Telecommunications Act of 1996 (“the Act”) imposes

new obligations on incumbent providers to open their

markets to competition, it does not alter the applicability

of the Sherman Act. Instead, Congress expressly provided

that “nothing in this Act ... shall be construed to modify,

impair, or supersede the applicability of any of the anti-

trust laws.” 47 U.S.C. § 152 note. Thus, the elements of an

2

antitrust action remain the same. ihe Second Circuit’s

opinion is problematic because it permits an antitrust

claim to go forward absent factual allegations supporting

all elements required under Section 2 of the Sherman Act.

The Act provides that incumbent local exchange

carriers must allow entering competitors to interconnect

with incumbents’ telephone networks on terms to be

worked out between the incumbents and the new entrants.

State public utility commissions (“State Commissions”) are

to arbitrate the agreements between the incumbents and

their competitors, and the State Commissions have au-

thority to set rates “that would subject both incumbents

and entrants to the risks and incentives that a competitive

market would produce.” Verizon Communications, Inc. v.

FCC, 535 U.S. 467, 476 (2002). See also 47 U.S.C. 251(c).

The duties imposed on a monopolist under the anti-

trust laws, however, are different from the duties imposed

on the incumbents under the Act. Under antitrust law,

even a firm with monopoly power has no general duty to

assist its rivals. Aspen Skiing Co. v. Highlands Skiing

Corp., 472 U.S. 585, 600-01 (1985). See also Olympia

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

375-76 (7th Cir. 1986) (Posner, J.). In addition, a monopo-

list that has obtained its position lawfully can reap the

benefits of its success by dernanding whatever rates it can

receive from the marketplace. Such conduct, standing

alone, is not an antitrust violation. Alaska Airlines v.

3

United Airlines, 948 F.2d 536, 548-49 (9th Cir. 1991).’ As

this Court has acknowledged:

The law directs itself not against conduct which

is competitive, even severely so, but against con-

duct which unfairly tends to destroy competition

itself. It does so not out of solicitude for private

concerns but out of concern for the public inter-

est.

Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458

(1993).

A. The Traditional Elements of a Section 2

Claim

In order for “monopolization” to be a violation of Section

2 of the Sherman Act, two elements must be shown: (1) the

possession of monopoly power, defined as the power to

control prices or exclude competition, United States v. E. I.

DuPont de Nemours & Co., 351 U.S. 377, 391 (1956); and

(2) deliberateness. United States v. Grinnell Corp., 384

U.S. 563, 570-71 (1966). The “deliberateness” element has

been defined as “the willful acquisition or maintenance of

[monopoly] power as distinguished from growth or devel-

opment as a consequence of a superior product, business

acumen, or historic accident.” Jd. (emphasis added). Deliber-

ateness has also been described as “anticompetitive,”

' In stark contrast to the regulation of telephone rates by State

Commissions, the antitrust laws specifically decline the responsibility

of setting the rates that monopolists can charge. See Blue Cross & Blue

Shield United of Wisconsin v. Marshfield Clinic, 65 F.3d 1406, 1413 (7th

Cir. 1995) (“the antitrust laws are not a price-control statute or a

public-utility or common-carrier rate-regulation statute”).

4

“predatory,” or “exclusionary.” 3 Phillip Areeda & Herbert

Hovenkamp, Antitrust Law, 650c, at 69 (2d ed. 2002);

Aspen Skiing, 472 U.S. at 602.

The deliberateness element is absent when a monopo-

list engages in conduct that disadvantages a competitor,

but does so in pursuit of legitimate business objectives or

to enhance efficiency. See, e.g., Aspen Skiing, 472 U.S. at

604-05; Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924, 927

(4th Cir. 1990) (“A desire to increase market share or even

to drive a competitor out of business through vigorous

competition on the merits is not sufficient.”). The monopo-

list who violates Section 2 is the one who adversely affects

competition by engaging in economically irrational behav-

ior. See, e.g., Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 589 (1986) (the sacrifice of short-term

profits may be viewed by the predator as “an investment

in future monopoly profits (where rivals are to be killed),”

quoting Robert Bork, The Antitrust Paradox 145 (1978));

Advanced Health-Care Servs. v. Radford Community

Hosp., 910 F.2d 139, 148 (4th Cir. 1990) (“If a plaintiff

shows that a defendant has harmed consumers and

competition by making a short-term sacrifice in order to

further its exclusive, anti-competitive objectives, it has

shown predation by that defendant.”).

This Court’s opinion in Aspen Skiing further ex-

plained that, in order for conduct to be “exclusionary,” it

must do more than merely harm a smaller rival. It must

impair competition in an “unnecessarily restrictive way.”

472 U.S. at 605. “If a firm has been ‘attempting to exclude

rivals on some basis other than efficiency,’ it is fair to

characterize its behavior as predatory.” Id. (quoting Bork,

supra, at 138 (1978)).

aa ~

PP ———— ee ee ee 7

— a

5

A monopolist does not have to cooperate with its rivals

under the antitrust laws, unless the refusal to deal consti-

tutes purposeful and anticompetitive conduct. Aspen

Skiing, 472 U.S. at 600-01. In order for failure to cooperate

with a rival to be “exclusionary” under Section 2, at a

minimum it must occur without a legitimate business or

efficiency reason and make no economic sense other than

as an intentional effort to injure competition by preserving

or acquiring higher monopoly profits. Jd. at 608, 610-11.

See also Eastman Kodak Co. v. Image Technical Servs.,

Inc., 504 U.S. 451, 482-83 (1992).

Respondent failed to allege exclusionary conduct in

this case. The Second Circuit, however, decided that the

amended complaint was sufficient to state a claim under

either the essential facilities doctrine or a monopoly

leveraging theory. Pet. App. 29a. Its decision, if upheld,

would unreasonably expand the scope of antitrust law in

the telecommunications context beyond any theory ap-

proved by this Court, a result not contemplated by the Act

and not necessary to enforce either the Act or antitrust

law.

B. The Theories Relied Upon by the Second

Circuit, Without More, Do Not Establish

an Antitrust Violation.

1. Even if the Essential Facilities Doctrine

Can Serve as the Basis for a Section 2 Mo-

nopolization Claim, the Traditional Ele-

ments of the Section 2 Claim Must Be Pled.

First, this Court has “never adopted” the essential

facilities doctrine as a basis for liability in a Section 2 case.

AT&T v. Iowa Utils. Bd., 525 U.S. 366, 428 (1999) (Breyer,

6

J., concurring in part and dissenting in part). In addition,

the doctrine has been widely criticized by leading antitrust

commentators. See, e.g., 3A Phillip Areeda & Herbert Ho-

venkamp, Antitrust Law, 4 771c, at 173 (2d ed. 2002) (“the

essential facility doctrine is both harmful and unnecessary

and should be abandoned”); Robert Pitofsky, Donna Patterson

& Jonathan Hooks, The Essential Facilities Doctrine Under

U.S. Antitrust Law, 70 Antitrust L.J. 443, 443 (2002) (“If U. S.

scholarship were the last word on the subject, one would be led

to conclude that the essential facilities doctrine should be

described narrowly or fully abandoned.”).’

Second, although respondent may have adequately

pled the elements peculiar to an essential facilities claim,’

it still must allege all other elements of a Section 2

monopolization violation. As discussed above, a Section 2

violation requires “exclusionary” or “predatory” conduct by

the monopolist. The essential facilities doctrine does not and

should not be permitted to eliminate the need to allege

deliberateness in order to state a Section 2 violation. See, e.g.,

3 Areeda & Hovenkamp, supra, | 650c at 69. In addition,

* There are four elements that are said to establish liability under

the essential facilities doctrine:

(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 Communications Corp. v. AT&T, 708 F.2d 1081, 1132-33 (7th Cir.

1983).

* The Second Circuit found that respondent did allege that AT&T's

access to petitioner’s local loop was essential to AT&T's ability to

compete in the local telephone service market and that it would be

prohibitively expensive for it to create independent facilities. Pet. App. -

29a.

— <r eee

7

several lower courts have rejected essential facilities claims

in regulated industries because the defendants were found

to have legitimate business reasons for denying access

to the essential facility. See, eg., Southern Pac.

Communications Co. v. AT&T, 740 F.2d 980, 1009 (D.C.

Cir. 1984) (holding that AT&T’s regulatory justification

defense for denial of access to its telephone network, based

on its status as an entity regulated under a “public

interest” standard, was reasonable and made in good faith,

rather than because of competitive considerations); City of

Anaheim v. Southern California Edison Co., 955 F.2d

1373, 1381 (9th Cir. 1992) (holding that defendant had a

legitimate business reason for denying access to its low-

cost power source, so that its entire customer base could

benefit from its low-cost power, rather than having it

siphoned off by only a few customers).

Even under an essential facilities theory, respondent

must show that petitioner has an antitrust duty, not just a

duty under the Act, to provide access to the local exchange

network. In order to establish this antitrust duty, respon-

dent must allege that petitioner’s failure to provide such

access would not make economic sense unless it intended

to harm competition in the local telephone service market.‘

Respondent has not done so.

* In their amicus brief supporting petitioner’s request for review by

this Court, the United States and the Federal Trade Commission noted

that respondent did allege that petitioner “had no valid business

reason” for its behavior. Brief for the United States and the Federal

Trade Commission as Amici Curiae, Verizon Communications, Inc. v.

Law Offices of Curtis V. Trinko, on petition for a writ of certiorari, Dec.

17, 2002, at 13. As the United States pointed out, however, a conclusory

legal assertion couched as a factual allegation is not a sufficient

(Continued on following page)

8

2. Allegations of a Dangerous Probability

of Monopolizing a Second Market are

Necessary to State a Monopoly Lever-

aging Claim.

As with the essential facilities doctrine, the Second

Circuit treats monopoly leveraging as if it constitutes a

stand-alone violation of Section 2, absolving respondent of

the need to plead all necessary elements of such a viola-

tion. This Court has never accepted such a view of monop-

oly leveraging. The Second Circuit found that a monopoly

leveraging claim can be made by alleging that a monopo-

list in one market is using that power to gain a “competi-

tive advantage” in a second market. Pet. App. 30a. But

this sets the bar too low. As this Court has explained, a

firm does not violate Section 2 unless it actually monopo-

lizes or dangerously threatens to monopolize the second

market. Spectrum Sports, 506 U.S. at 459. No antitrust

claim is made under the Court’s existing antitrust juris-

prudence when the firm is alleged merely to use its domi-

nant position in one market to gain a competitive

advantage in another. See 3 Areeda & Hovenkamp, supra,

4 652a, at 89-90.

Some circuits have reserved judgment on whether a

monopoly leveraging claim requires showing a dangerous

probability of monopolizing a second market instead of

showing merely that the monopolist gained a competitive

advantage in that market. See, e.g., M & M Med. Supplies &

allegation of exclusionary conduct that makes no economic sense except

to harm competition. Id. at 14 (citing Papasan v. Allain, 478 U.S. 265,

286 (1986)).

9

Serv. v. Pleasant Valley Hosp., 981 F.2d 160, 169 (4th Cir.

1992) (en banc); Association for Intercollegiate Athletics for

Women v. NCAA, 735 F.2d 577, 586 n.14 (D.C. Cir. 1984);

Willman v. Heartland Hosp. E., 34 F.3d 605, 613 (8th Cir.

1994). However, two other circuits have decided the issue.

They require proof of a dangerous probability of success in

monopolizing the second market, noting that the antitrust

laws allow monopolies that have arisen from efficiency and

natural market forces, and therefore, attaching antitrust

liability when a firm merely gains a competitive advantage

in another market does violence to traditional Section 2

analysis. Fineman v. Armstrong World Industries, 980 F.2d

171 (3d Cir. 1992); Alaska Airlines, 948 F.2d at 536.

Respondent's amended complaint alleges that peti-

tioner has monopoly power over a wholesale market in

which it provides access to the local network exchange to

competitive carriers. J.A. 29. Respondent further alleges

that petitioner uses its power in the wholesale market to

gain a competitive advantage in a retail market in which

both petitioner and its competitors sell local telephone

service to consumers. Jd. A claim under the Sherman Act,

however, is not implicated by the conduct pled unless

reopondent also alleges that petitioner was using anticom-

petitive behavior to create a second monopoly in the retail

local telephone service market:

... the elements of the established actions for

“monopolization” and “attempted monopoliza-

tion” are vital to differentiate between efficient

and natural monopolies on the one hand, and

unlawful monopolies on the other. ... The anti-

competitive dangers that implicate the Sherman

Act are not present when a monopolist has a law-

ful monopoly in one market and uses its power to

10

gain a competitive advantage in the second mar-

ket. By definition, the monopolist has failed to

gain, or attempt to gain, a monopoly in the second

market. Thus, such activity fails to meet the sec-

ond element necessary to establish a violation of

Section 2. Unles *“e monopolist uses its power in

the first marke! *< acquire and maintain a mo-

nopoly in the second market, or to attempt to do

so, there is no Section 2 violation.

Alaska Airlines, 948 F.2d at 548 (emphasis added). This

element is missing from respondent's allegations.

- In sum, just as the allegation of a monopoly position

in a market, by itself, does not state a Section 2 monopoli-

zation claim, so, too, the allegation of the use of monopoly

power, without more, does not state « claim for the delib-

erate acquisition or maintenance of monopoly power in

violation of Section 2. A necessary element of the claim is

that the challenged conduct lacks any business justifica-

tion other than an intent to harm competition. This

element is absent from the Second Circuit’s two antitrust

theories of liability and was not alleged in respondent's

amended complaint. Thus, the Second Circuit’s decision

transforms duties that the incumbent local exchange

carriers must perform under the Act (including duties

under incumbent-competitor contracts arbitrated by State

Commissions) into antitrust duties. Such an expansion of

potential antitrust liability eliminates one of the tradi-

tional elements of a Section 2 Sherman Act claim. It has

no precedent in this Court’s jurisprudence and is unwar-

ranted.

ee

11

Il. IN PASSING THE TELECOMMUNICATIONS

ACT OF 1996, CONGRESS INTENDED NEI-

THER TO EXPAND NOR TO CONTRACT THE

AVAILABILITY OF AN ANTITRUST CLAIM.

A. State and Federal Regulation is a Proper

Consideration in Antitrust Analysis.

“(W]here regulatory and antitrust regimes coexist,

antitrust analysis must sensitively ‘recognize and reflect

the distinctive economic and legal setting’ of the regulated

industry to which it applies.” Concord v. Bosion Edison

Co., 915 F.2d 17, 22 (1st Cir. 1990) (citations omitted)

(Breyer, C.J.). This is not to say that a regulated entity has

immunity from antitrust laws or that antitrust laws are

unenforced in a regulated environment. Jd. at 21-22.

Rather, as the First Circuit recognized in Concord, “anti-

trust courts can and do consider the particular circum-

stances of an industry” and adjust the rules to the

existence, extent and nature of regulation. Jd. at 22-23

(citation omitted). In Concord, the First Circuit noted the

difficulty in addressing the antitrust allegation without

acting like a regulatory agency. Id. at 25-26. When a

function is already served by regulators, courts are right-

fully reluctant to perform such an undertaking. Similarly,

the Seventh Circuit has explained that “[aJn industry's

regulated status is an important ‘fact of market life,’ the

impact of which on . . . competitive decisions is too obvious

to be ignored.” MCI Communications Corp., 708 F.2d at

1105 (citation omitted).

Respondent attempted to allege an antitrust action

arising out of conduct that is the subject of extensive state

ont Gent lati The S 1 Circuit aband ;

traditional antitrust analysis to permit respondent’s claim

to go forward. In so doing, it has written substantial new

12

antitrust law without adequate consideration of the

regulated nature of the relevant market. Although this

Court has not addressed the question whether or how a

regulatory scheme should impact antitrust analysis, the

opinions of the First and Seventh Circuits provide useful

guidance.’ At a minimum, they support a finding: that the

Act was not intended to create new and lower standards

for pleading an antitrust cause of action in the telecom-

munications industry. But that is precisely what the

Second Circuit did.

B. By Enacting the Telecommunications Act

of 1996, Congress Built on the Traditional

Authority of States to Regulate Providers

of Local Telephone Service.

The express purpose of the Act is “[t]o promote compe-

tition and reduce regulation in order to secure lower prices

and higher quality services for American telecommunica-

tions consumers and encourage the rapid deployment of

new telecommunications technologies.” Pub. L. No. 104-

104, 110 Stat. 56 (1996). To that end, the Act calls upon

the States to perform an important role in facilitating

transition to a competitive market. The provisions of the

Act recognize and rely upon “the benefit of employing the

vast resources and expertise of State public service com-

missions to resolve ongoing disputes arising from the

* A leading antitrust scholar claims that the antitrust savings

clause in the Act “preserves not merely the basic application of the

antitrust laws, but also the system of regulatory deference and express

or implied immunity in favor of federal and state agencies that has

always governed antitrust disputes in regulated or partially deregu-

lated industries.” 3A Areeda & Hovenkamp, supra, 4 785b2 at 292.

13

administration and interpretation of interconnection

agreements.” Bell Atlantic-Maryland Inc. v. MCI World-

Com, Inc., 240 F.3d 279, 305 (4th Cir. 2001), vacated and

remanded on other grounds, 535 U.S. 635 (2002). The Act

employs the State Commissions in a variety of roles to

carry out its purposes.

Under the Act, State Commissions may be called upon

to mediate differences between incumbents and competi-

tors engaged in negotiating the terms of interconnection

agreements. 47 U.S.C. § 252(a)(2). They serve as arbitra-

tors of open issues that cannot be resolved through the

parties’ good faith negotiations. 47 U.S.C. § 252(b). In the

context of these arbitrations, State Commissions may

establish rates for interconnection, services, or network

elements, and may impose conditions upon the parties that

they deem necessary to ensure that the interconnection

obligations created by the Act are met. 47 U.S.C. §§ 252(c),

(d). Ultimately, the State Commissions must approve all

interconnection agreements, whether developed through

negotiation or arbitration. 47 U.S.C. § 252(e).

By including in the Act a statutory role for State

Commissions, Congress utilized the infrastructure and

expertise closest to the local exchange service markets —

State Commissions - to facilitate the transition to a competi-

tive market. Congress’ reliance on that regulatory role for the

States argues against the Second Circuit's expansion of

antitrust claims to include claims based solely on the duties

imposed by the Act. As shown by the savings clause, found at

47 U.S.C. § 152 note, the Act was not intended to limit

antitrust claims, but neither was it intended to alter the

elements or lower the bar for successfully pleading them.

14

C. The Decision of the Second Circuit is Unrea-

sonably Expansive in Light of the Regulatory

Oversight Established by Congress and

Could Hamper the States’ Ability to Facili-

tate Transition to Market Competition.

There is currently a combined state and federal

regulatory system in place pursuant to the Act to facilitate

the transition of the local telephone market to competition.

In fact, the conduct that respondent complains of was the

subject of a regulatory proceeding before the FCC and the

New York Public Service Commission.* Any antitrust claim

based on the same conduct must conform to traditional

antitrust law. As explained above, respondent's pleading

omits allegations that, if true, would establish a necessary

element of an antitrust cause of action. Omitting these

allegations expands the reach of antitrust jurisprudence.

Such an expansion could be counterproductive in the

context of the regulatory framework established by Con-

gress. Where such an expansion was not clearly intended

by Congress, it is important that it not be undertaken

without recognition of the impact that such an expansion

of antitrust law in the telecommunications area might

have, given the regulatory structures in place for enforce-

ment of the Act.

* Order, In re: Bell Atlantic-New York Authorization Under Section

271 of the Communications Act to Provide In-Region, Interlata Service

in the State of New York, 15 F.C.C.R. 5413 (Mar. 9, 2000); Order

Directing Improvements to Wholesale Service Performance, MCI

WorldCom Inc. v. Bell Atlantic-New York, 2000 WL 363378 (N.Y.PS.C.

Feb. 11, 2000); Order Addressing OSS Issues, MCI WorldCom Inc. v.

Bell Atlantic-New York, 2000 WL 1531916 (N.Y.P.S.C. Jul. 27, 2000).

15

There is inherent tension between the operation of a

congressionally prescribed state and federal regulatory

structure, like that provided by the Act, and the use of

antitrust laws to enforce the provisions of the same Act.

This tension arises on at least three fronts:

¢ the unique regulatory expertise in highly

technical subject matter that resides in the

State Commissions and the FCC, and which

is not typically found in courts hearing pri-

vate antitrust enforcement actions;

¢ the potential for conflicting adjudications re-

garding incumbent obligations arising under

the Act in regulatory proceedings as com-

pared to federal antitrust actions and the ef-

fect such uncertainty might have on the

anticipated transition of the market to com-

petition; and

¢ the absence, in private antitrust actions, of

the unique representation of the public in-

terest provided by the state regulatory body.

The existence of these tensions does not mean that the

regulatory mechanisms set forth by Congress preclude the

continued operation of traditional antitrust principles in

the telecommunications industry. The tensions do under-

score, however, the complexity implicit in the coexistence

of the two enforcement schemes and the resulting need for

caution in using the Act as an occasion for reducing the

elements necessary to make out a claim under Section 2 of

the Sherman Act. The consequences of unnecessary and

unanticipated changes in the reach of antitrust law as

applied to activity under the Act are difficult to predict,

and the careful balance of competing concerns demanded

by the nature of the telecommunications market, counsel

16

against adoption of the ill-advised decision of the Second

Circuit in this case.

¢

CONCLUSION

For the reasons stated above, the judgment of the

United States Court of Appeals for the Second Circuit

should be REVERSED.

Respectfully submitted,

JERRY W. KILGORE

Attorney General of Virginia

WILLIAM H. HURD

State Solicitor

MAUREEN RILEY MATSEN

WILLIAM E. THRO

Deputy State Solicitors

JUDITH WILLIAMS JAGDMANN

Deputy Attorney General

Counsel of Record

C. MEADE BROWDER, JR.

Senior Assistant Attorney General

SARAH OXENHAM ALLEN

RAYMOND L. DOGGETT, JR.

Assistant Attorneys General

900 East Main Street

Richmond, Virginia 23219

(804) 786-2436 (voice)

(804) 371-0200 (facsimile)

Counsel for the Commonwealth

of Virginia

May 23, 2003