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

No. 02-682

Supreme Court of the Anite States ‘

VERIZON COMMUNICATIONS INC.,

Petitioner,

V.

LAW OFFICES OF CURTIS V. TRINKO, LLP,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF FOR ALLEGIANCE TELECOM, INC.,

ATX COMMUNICATIONS, INC.,

FOCAL COMMUNICATIONS CORP.,

ICG COMMUNICATIONS, INC., PAC-WEST

TELECOMM, INC., AND US LEC CORP. AS

AMICI CURIAE IN SUPPORT OF RESPONDENT

RICHARD M. RINDLER

Counsel of Record

ERIC J. BRANFMAN

REBECCA P. DICK

SWIDLER BERLIN

SHEREFF FRIEDMAN, LLP

3000 K STREET, N.W., SUITE 300

WASHINGTON, DC 20007

(202) 424-7500

Attorneys for Amici Curiae

Allegiance Telecom, Inc., ATX

Communications, Inc., Focal

Communications Corp., ICG

Communications, Inc., Pac-

West Telecom, Inc., and US

LEC Corp.

ee

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20001 nv,

KEVIN JOSEPH

Senior Vice President

Government & External

Affairs

ALLEGIANCE TELECOM, INC.

1919 M Street, N.W.

Washington, D.C. 20036

(202) 464-1789

Counsel for Amicus Curiae

Allegiance Telecom, Inc.

CHRISTOPHER A. HOLT

Senior Vice President, Chief

Counsel for Law & External

Affairs & Secretary

ATX COMMUNICATIONS, INC.

75 Broad Street

| Ith Floor

New York, NY 10004

(212) 509-4135

Counsel for Amicus Curiae ATX

Communications, Inc.

RICHARD METZGER

Senior Vice President & General

Counsel

FOCAL COMMUNICATIONS CORP.

7799 Leesburg Pike

210 North

Falls Church, VA 22043

Counsel for Amicus Curiae

Focal Communications Corp.

BERNIE ZUROFF

General Counsel & Secretary

ICG COMMUNICATIONS, INC.

161 Inverness Drive West

Englewood, CO 80112

(888) 424-1144

Counsel for Amicus Curiae ICG

Communications, Inc.

JOHN SUMPTER

Vice President, Regulatory

PAC-WEST TELECOMM, INC.

1776 W. March Lane

Suite 250

Stockton, CA 95207

(209) 926-3136

Counsel for Amicus Curiae Pac-

West Telecomm, Inc.

MICHAEL L. SHOR

General Counsel

US LEC Corp.

Three Morrocroft Centre

6801 Morrison Boulevard

Charlotte, NC 28211

(703) 584-6828

Counsel for Amicus Curiae US

LEC Corp.

QUESTIONS PRESENTED

Amici will address: (1) whether persistent disruptions by a

monopolist of the wholesale service it sells to competitors,

where the disruptions impair the retail service the competitors

provide to their customers, and where the customers can be

expected to—and do—blame the competitors for the retail

service problems, are fairly characterized as simply a passive

refusal to deal by the monopolist;

(2) whether, if the allegations in this case are analyzed as a

refusal to deal, long-standing antitrust precedent should be

overturned, and a monopolist should be permitted unrea-

sonably to refuse to do business with a competitor even if the

refusal prevents competition and is not demonstrated to be

part of any procompetitive business strategy;

(3) whether, despite the express antitrust savings clause in

the Telecommunications Act of 1996, 47 U.S.C. § 152 note

(§ 601(b), 110 Stat. 143) and the absence of “plain repug-

nancy” between that statute and the antitrust laws, incumbent

telephone monopolists should be excused from compliance

with Section Two of the Sherman Act, 15 U.S.C. § 2.

TABLE OF CONTENTS

Page

QUES TIONG PRESENT BD ecccccccccsccccesccccsccsescsssscososses i

ee ae Ce cccterenscscsnnnnnennsemennemenes Vv

BU Peete OF ARTIC CUTIAL. ..ccccccccccccssecssccsessnseseoecs l

SUMMARY OF ARGUMENT ......00........:cccsscessesenenees 3

GENUS cavensenseapasnsesesssmsmesssenmeninnstnnnemmneienaete 5

I. VERIZON’S ARGUMENT IS BASED ON A

FACTUAL CLAIM THAT CANNOT BE

DECIDED ON A MOTION TO DISMISG....... 5

A. Incumbent Telephone Companies,

Incluu.ng Verizon, Retain Monopoly

Power In Local Markets Everywhere,

While Facing A Chorus Of Charges Of

Anticompetitive Conduct..................:00008 5

B. Verizon’s Claim That Its Conduct Makes

Procompetitive Business Sense Raises A

Question Of Fact That Cannot Be

Resolved On This Motion To Dismiss...... 7

ll. THE ALLEGED CONDUCT GOES

BEHOND REFUSALS TO DEAL, AND

AMOUNTS TO AFFIRMATIVE DISRUP-

TION OF COMPETITION .............cccccsceseeeseeees 7

lil. UNDER WELL-ESTABLISHED ANTI-

TRUST STANDARDS, WHERE A

MONOPOLIST’S UNREASONABLE CON-

DUCT PRESERVES ITS MONOPOLY

POWER, THE CONDUCT VIOLATES § 2

UNLESS IT MAKES PROCOMPETITIVE

BUSINESS SENSE INDEPENDENTLY OF

ITS EXCLUSIONARY EFFECTS ................... 8

(iii)

iV

TABLE OF CONTENTS—Continued

A. Even If Proved, Verizon’s Assertions Are

Legally Insufficient .............:ccseeseeeeereees

1. Unreasonable Refusals To Deal Are

Judged By The Same

“Procompetitive Business Sense”

Standard As Other Exclusionary

Conduct That Preserves Monopoly

2. Essential Facilities Analysis

Proceeds Under The Same

“Procompetitive Business Sense”

IV. CONGRESS HAS MANDATED THAT THE

ANTITRUST LAWS CONTINUE TO AP-

PLY TO TELEPHONY, AND EVEN IF IT

HAD NOT, THOSE LAWS WOULD APPLY

BECAUSE THERE IS NO “PLAIN REPUG-

NANCY” BETWEEN THE ANTI-TRUST

LAWS AND THE REGULATORY SCHEME

ESTABLISHED BY THE ‘96 ACT..................

A. The Antitrust Laws Govern Local

B. Application Of The Antitrust Laws

Promotes InvestMent .............ccccccceeeeeeeeeeeee

C. The Courts Provide An Appropriate

Forum For Resolving Antitrust Claims .....

D. De Facto Immunity Would Conflict With

Page

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17

19

19

21

22

24

25

Vv

TABLE OF AUTHORITIES

CASES

Advanced Health Care Servs. v. Radford

Community Hosp., 910 F.2d 139 (4th Cir.

Fea cviassieicateentnssnbtnmienieninnicaivetnienielinienitienesiatintateatiatimdniion

Aloha Airlines, Inc. v. Hawaiian Airlines Inc.,

349 F. Supp. 1064 (D. Haw. 1972)...........0.000..

Aspen Skiing Co. v. A&Spen Highlands Skiing

Corp., 472 U.S. 585 (1985)........cccscccceeseeee 4, 11,

Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 738 F.2d 1509 (10th Cir. 1984), aff'd

on other grounds, 472 U.S. 585 (1985) .............

Caribbean Broadcasting Sys., Ltd. v. Cable &

Wireless PLC, 148 F. 3d 1080 (D.C. Cir.

Carnation Co. v. Pacific Westbound Conf., 383

Sele Sey EU TEEisnnnnsininnineinieiaiutiaiaiiipeniisiaienineis

Cavalier Tel., LLC v. Verizon Virginia, Inc., 330

F.3d 176 (4th Cir. 2003) ............0000. meusuenntsinients

City of Anaheim v. Southern California Edison

Co., 955 F.2d 1373 (9th Cir. 1992)... eee

City of Malden v. Union Elec. Co., 887 F.2d 157

Se: SUIT citncineitsinsedisieinisipnetasinsitinimeniniemipainauss

Complaint, Covad Communications Co. v. Bell

Atlantic Corp., No. 1:99-CV-01046 (D.D.C.

Ne a citanaatiiai carina

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. Mar. 20,

ee STI initinininsistcinsiieinimncnmanennaeien

Data Gen. Corp. v. Grumman Sys. Support

Corp., 36 F.3d 1147 (Ist Cir. 1994)...

Delaware & Hudson Ry. Co. v. Consolidated

Rail Corp., 902 F.2d 174 (2d Cir. 1990)...........

Page

13,14

18

18

24

16

18

18

18

10

17-18

vi

TABLE OF AUTHORITIES—Continued

Page

Directory Sales Mgmt. Corp. v. Ohio Bell Tel.

Co., 833 F.2d 606 (6th Cir. 1987).......ccccceeeeeees 18

Eastman Kodak Co. v. Image Technical Servs.,

Inc., 504 U.S. 451 (1992)........ccsscersseserseeseeees 5

Hishon v. King & Spaulding, 467 U.S. 69 (1984). 3,7

Homefinders of America, Inc. v. Providence

Journal Co., 621 F.2d 441 (1st Cir. 1980)......... 13

Ideal Dairy Farms, Inc. v. John Labatt, Lid., 90

F.3d 737 (31rd Cir. 1996) ...........cscssserrssesrreeeeeeees 18

Interface Group, Inc. v. Massachusetts Port

Authority, 816 F.2d 9 (1st Cir, 1987)... 17

Intergraph Corp. v. Intel Corp., 195 F.3d 1346

(Ped. Cle. 1999) ..cccccccrceccsecccseccscesosovesscnscscsssescsecs 418

LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir.

2003), petition for cert. filed, 72 U.S.L.W.

3007 (U.S. June 20, 2003) (No. 02-1865).......... 11

Lorain Journal Co. v. United States, 342 U.S.

SO |) 4, 14-15

MCI Communications Corp. v. American Tel. &

Tel. Co., 708 F.2d 1081 (7th Cir. 1983)............. 18, 19

Mid-Texas Communications Sys., Inc., Vv.

American Tel. & Tel. Co., 615 F.2d 1372 (Sth

Cie, GERD ccncencecccosesccessensnensscesens sepaeenenmptnmnnasins 18

Northern Pac. Ry. Co. v. United States, 356 U.S.

D CIBER cececcnscncsvascccccccossensesteccsesssnosenesessenssssonones 4

Northwest Wholesale Stationers v. Pacific

Stationery & Printing Co., 472 U.S. 284

BD) ncccovecvescccccscocccccssscnsscssononseveseseseqnenessososensees 17

Olympia Equip. Leasing Co. v. Western Union

Tel. Co., 797 F.2d 370 (7th Cir. 1986)..........0006 12-13

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

«ee 4, 10, 15, 24

— ————————————

Vii

TABLE OF AUTHORITIES—Continued

Page

Phoenix Consulting Inc. v. Republic of Angola,

216 F.3d 36 (D.C. Cir. 2000) .....cccccccccececeeeeee 7

Scheuer v. Rhodes, 416 U.S. 232 (1974) oo... 3,7

Silver v. New York Stock Exch., 373 U.S. 341

EER ee 4,21,24

Southern Pac. Communications Co. v. American

Tel. & Tel., 740 F.2d 980 (D.C. Cir. 1984)........ 4,19

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

I Si iirenssiesnsicenatriecteceriniiertecieresiiadmtaninaiiits 23

Turbe v. Gov't of the Virgin Islands, 938 F.2d

REESE ee eee 7

United States v. American Tel. & Tel. Co., 552 F.

Supp. 131 (D.D.C. 1982), aff'd, Maryland vy.

United States, 460 U.S. 1001 (1983) wo... 6, 19

United States v. American Tel. & Tel., 524 F.

Supp. 1336 (D.D.C. 1981)... eee 4, 19, 20-21

United States v. Borden Co., 308 U.S. 188 (1939) 24

United States v. Griffith, 334 U.S. 100 (1948)....... 5

United States v. Microsoft Corp., 253 F.3d 34

en 4,8,9, 10, 11,17

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

Supp. 54 (D. Minn. 1971), aff'd, 410 U.S. 366

ec a 15

Amended Judgment, United States v. Otter Tail

Power Co., 1971 U.S. Dist. LEXIS 10845 (D.

Minn. 1971), aff'd, 410 U.S. 366 (1973)........... 15

United States v. Philadelphia Nat'l Bank, 374

a A Ce icccienanenticinriatninnteditniebiiiinibiaieaiiteiteniacaiees 4

United States v. Radio Corp. of America, 358

a Sa aT cieahtiesenienbinnemendenensianiasunipeaeemmess 24

First Amended Counterclaim, Verizon Communi-

cations Inc. v. ATX Communications, Inc., No.

02-1374 (SLR) (D. Del. filed May 12, 2003).... 6

Vili

TABLE OF AUTHORITIES—Continued

Page

Verizon Communications Inc. v. FCC, 535 U.S.

RF Ce censcseremnscenasesemeemnimnavnasinnsintennsenan 13, 21

Verizon New Jersey, Inc. v. Ntegrity Telecontent

Servs., Inc., 219 F. Supp. 2d 616 (D.N.J. 2002) 6

STATUTES

LE Tot > 3,8

Telecommunications Act of 1996, 47 U.S.C.

BD ODE 0 BOI ccoscesncccccseessssecessnsseesenecessnnsnsesennseccenee 2

47 U.S.C. § 152 note (§ 601(b), 110 Stat. 143)..... 4,19

Ge aE, © ee cccinernticrenateninienennnionnn 4

BF I, B Beccencsnenessenenstanseninammninmanenenannninnn 4

Fe Be FO cenreciennmnnmnicnnnanneninnnaen 4

AGENCY AND OTHER GOVERNMENT MATERIALS

Federal Communications Commission, Local

Telephone Competition: Status as of

December 31, 2002, Table 6 (June 12, 2003),

at http://ftp.fec.gov/Bureaus/Common_Carrier/

Reports/FCC-State_Link/IAD/lcom0603.pdf. ... 5

In the Matter of Implementation of the Local

Competition Provisions in the Telecommu-

nications Act of 1996, CC Docket 96-98, First

Report and Order, \\1 FCC Red. 15499 (Aug.

FE ei cnencecnsenstcecticenictnnmnatsentenssnemnentnmannnses 20

Remarks on Signing the Telecommunications

Act of 1996, 1996 Pub. Papers, vol. | (Feb. 8,

MISCELLANEOUS

Phillip Areeda, Essential Facilities: An Epithet in

Need of Limiting Principles, 58 Antitrust L.J.

BD Ce ciiccecisnncniniintiiensicnhinnnnaniiiniemiianiianiminnaeen 23

~~ v

ix

TABLE OF AUTHORITIES—Continued

Association for Local Telecommunications

Services, The State of Local Competition 2003

RTE I vee a

Robert Bork, The Antitrust Paradox (1978)..........

Jeffrey A. Eisenach, The Real Telecom Scandal,

Wall Street Journal (September 30, 2002).........

Robert E. Litan, Antitrust Enforcement, in

Revolution in the U.S. Information Infrastruc-

ture (Nat’l Academy of Engineering, 1995)......

Robert Pitofsky, Donna Patterson, and Jonathan

Hooks, The Essential Facilities Doctrine

Under U.S. Antitrust Law, 70 Antitrust L. J.

443 (2002)

Page

22

18

IN THE

Supreme Court of the Gnited States

No. 02-682

VERIZON COMMUNICATIONS INC.,

Petitioner,

Vv.

LAW OFFICES OF CURTIS V. TRINKO, LLP,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF FOR ALLEGIANCE TELECOM, INC.,

ATX COMMUNICATIONS, INC.,

FOCAL COMMUNICATIONS CORP.,

ICG COMMUNICATIONS, INC., PAC-WEST

TELECOMM, INC., AND US LEC CORP. AS

AMICI CURIAE IN SUPPORT OF RESPONDENT

INTEREST OF AMICI CURIAE '

Amici curiae Allegiance Telecom, Inc., ATX Communica-

tions, Inc., Focal Communications Corp., ICG Communica-

tions, Inc., Pac-West Telecomm, Inc., and US LEC Corp. are

competitive telephone companies known as competitive local

exchange carriers, or “CLECs,” that seek to compete with

No one other than the named amici wrote this brief in whole or in

part, or made any monetary contribution to its preparation. Both parties

have filed blanket consents to the filing of amicus briefs.

2

incumbent monopoly telephone companies, or “ILECs,” in

markets for local telephone service throughout the United

States. Although no CLEC is a party to this case, amici and

other CLECs may be profoundly affected by its outcome.

Some amici are currently litigating monopolization claims

against ILECs, including Verizon Communications Inc.

(“Verizon”). All amici, including those not currently in-

volved in antitrust litigation, have a strong interest in ensuring

that the antitrust laws continue to govern business conduct in

local telephone markets. Amici will provide the Court with

the CLECs’ perspective on the hostile environment for

competition in local telephone markets today, the ineffec-

tiveness of regulation alone in preserving competitive

conditions, and the antitrust standards that should constrain

anticompetitive conduct by the incumbent monopolists.

As six of the most experienced CLECs in the nation, amici

compete with and purchase services from ILECs, including

Verizon. All amici serve retail customers. ATX, ICG, and

Pac-West trace their origins to the mid-1980s and the

telecommunications revolution sparked by the divestiture of

AT&T’s long-distance and equipment affiliates from its local

service operations. Allegiance, Focal, and US LEC were

founded shortly after passage of the Telecommunications Act

of 1996, 47 U.S.C. § 151 et seg. (96 Act”). Today

Allegiance, Focal, and ICG operate in markets around the

country. US LEC concentrates its operations in the southeast

and the mid-Atlantic regions, ATX operates in the midwest

and on the East Coast, and Pac-West operates on the

West Coast.

Although each amicus has a different business model, all

are in part facilities-based, meaning that they utilize some of

their own equipment and facilities in serving customers,

while at the same time seeking to use some equipment and

facilities (particularly last-mile facilities) of the incumbent

monopolist. The competition they seek to bring to the

3

marketplace can only survive where unreasonable conduct

that preserves monopoly power, and that lacks a legitimate

business justification, is prohibited.

SUMMARY OF ARGUMENT

1. The conduct alleged in this case is not simply a

passive refusal to deal, but affirmative activity by a monopo-

list creating a public misperception that its competitors’

service is technically deficient. The complaint alleges that

Verizon has repeatedly mishandled various aspects of

wholesale service to CLECs, with the result that CLEC retail

customers, including the plaintiff, receive inadequate service.

Verizon/Trinko Joint Appendix (“J.A.”) at 19, 29. In the

experience of amici, ILEC disruptions of wholesale service

are common and frequently in turn disrupt telephone service

to CLEC retail customers. When this occurs, CLEC custom-

ers conclude that the fault lies with their CLEC provider; they

do not blame the ILEC. All amici have lost customers as a

result of ILEC wholesale service interruptions that their

customers attributed to amici. Framing the issue in this case

as no more than a passive refusal to deal ignores the

allegations of affirmative mishandling of wholesale business

by Verizon, mishandling that impairs the ability of Verizon’s

competitors to compete effectively and preserves Verizon’s

monopoly power.

2. The complaint alleges that Verizon lacks a legitimate

business justification for its conduct, J.A. at 29, an allegation

that must be accepted as true for the purposes of Verizon’s

motion to dismiss. Hishon v. King & Spaulding, 467 U.S. 69,

73 (1984); Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). The

justification Verizon has advanced, even if proved, would not

satisfy the legal standard under Section 2 of the Sherman Act,

15 U.S.C. § 2. Section 2 condemns unreasonable unilateral

conduct by a monopolist that: (1) preserves monopoly power,

and (2) does not make business sense for the monopolist but

for its exclusionary effects, i.e, does not improve the

4

monopolist’s efficiency or the price or quality of its products.

United States v. Microsoft Corp., 253 F.3d 34, 59 (D.C. Cir.

2001) (en banc). Verizon suggests that the course it pursued

was more profitable than less exclusionary conduct would

have been, Brief for Petitioner (“Verizon Br.”) at 26, but

without more this does not qualify as a procompetitive

justification and thus fails the test. Aspen Skiing Co. v. Aspen

Highlands Skiing Corp., 472 U.S. 585, 601-05 (1985); Otter

Tail Power Co. v. United States, 410 U.S. 366, 378 (1973);

Lorain Journal Co. v. United States, 342 U.S. 143, 155

(1951); Microsoft, 253 F.3d at 59. Monopoly is inherently

more profitable than competition, and increased profits alone

cannot be a defense to a charge of illegal monopolization.

This principal applies to all § 2 cases, including those in

which the specific conduct alleged is an unreasonable refusal

to deal or denial of access to essential facilities. United States

v. American Tel. & Tel., 524 F. Supp. 1336, 1360-61

(D.D.C. 1981).

3. Congress expressly directed that the antitrust laws

continue to govern local telephone markets by including an

antitrust savings clause in the 96 Act. 47 U.S.C. § 152 note

(§ 610(b), 110 Stat. 143). Moreover, the ’96 Act and its

associated regulations are intended to encourage competition,

and thus are parallel in purpose to the Sherman Act. 47

U.S.C. §§ 251(c), 252, 271; Northern Pac. Ry. Co. ¥.

United States, 356 U.S. 1, 4 (1958) (Sherman Act is a

“comprehensive charter of economic liberty”). Where there

is no “plain repugnancy” between a regulatory scheme and

the antitrust laws, the antitrust laws are presumed to apply,

even in the absence of an express savings clause. F.g.,

United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 351

(1963); Silver v. New York Stock Exch., 373 U.S. 341, 357

(1963); Southern Pac. Communications Co. v. American Tel.

& Tel., 740 F.2d 980, 999 (D.C. Cir. 1984). To nevertheless

excuse Verizon from compliance with the Sherman Act

would depart from long-standing United States practice

5

regarding the treatment of regulated industries in general and

the telecommunications industry in particular, and would

flout Congressional intent.

ARGUMENT

I. VERIZON’S ARGUMENT IS BASED ON A

FACTUAL CLAIM THAT CANNOT BE

DECIDED ON A MOTION TO DISMISS

A. Incumbent Telephone Companies, Including

Verizon, Retain Monopoly Power In Local

Markets Everywhere, While Facing A Chorus

Of Charges Of Anticompetitive Conduct

Seven years after passage of the "96 Act, monopoly

remains ubiquitous in markets for local telephone service

throughout the United States. With the exception of a

handful of. urban centers, in no area do the incumbent's

customers purchase less than 70% of local lines, while the

uniform experience of CLECs, including amici, is that

successful, effective entry is extremely difficult. See Federal

Communications Commission, Local Telephone Competition:

Status as of December 31, 2002, Table 6 (June 12, 2003),

at http://ftp.fec.gov/Bureaus/Common_Carrier/Reports/FCC-

State_Link/IAD/lcom0603.pdf. Numerous CLECs entered

local markets in the wave of optimism created by the °96 Act,

but more than 50 have now declared bankruptcy, and of over

300 facilities-based CLECs in business in 1999, only about

100 remain. Jeffrey A. Eisenach, The Real Telecom Scandal,

Wall Street Journal (September 30, 2002); Association for

Local Telecommunications Services, The State of Local

Competition 2003 (April 2003). |

Of course, possession of monopoly power is not illegal

unless the power was created or preserved by anticompetitive

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

504 U.S. 451, 482-483 (1992): United States v. Griffith, 334

U.S. 100, 107 (1948). However, many ILECs, including

6

Verizon, face serious allegations that they owe their

continuing monopolies to anticompetitive behavior. For

example, CLECs have formally alleged that Verizon has:

(1) advised a CLEC and regulators that its conversion

processes were reliable, then disrupted service to hundreds of

CLEC customers when converting their service from resale to

the CLEC’s switch, First Amended Counterclaim, Verizon

Communications Inc. v. ATX Communications, Inc., No. 02-

1374 (SLR) (D. Del. filed May 12, 2003) (pending); (2) with-

out warning, terminated long distance access for numerous

former Verizon customers that had decided to switch to a

CLEC, Verizon New Jersey, Inc. v. Ntegrity Telecontent

Servs., Inc., 219 F. Supp. 2d 616, 630 (D.NJ. 2002)

(complaint dismissed); and (3) repeatedly and without

warning, failed to make wholesale service available on the

dates promised, forcing a CLEC to notify its customers that

installation of their retail service would be delayed, thereby

causing the CLEC to lose business and damaging its

reputation. Compl. 4] 141-45, Covad Communications Co. v.

Bell Atlantic Corp., No. 1:99-CV-01046 (D.D.C. filed July 5,

2001) (stayed D.C. Ct. App.). Many CLEC antitrust claims

have been interpreted, like the plaintiff's claims in this case,

as an allegation that the ILEC’s conduct is tantamount to an

unreasonable refusal to deal with CLECs. As in this case,

however, often the conduct alleged was not mere passive

refusals, but affirmative actions that damaged CLEC reputa-

tions and thereby preserved ILEC monopolies.

In the past, markets for telephone equipment and long-

distance service have been well-served by effective antitrust

enforcement, to the great benefit of American commerce.

United States v. American Tel. & Tel. Co., 552 F. Supp. 131

(D.D.C. 1982), aff'd, Maryland v. United States, 460 U.S.

1001 (1983). Today, a number of companies seek to bring

competition to local service markets, but they can do so if

only antitrust law prohibits incumbents from blocking

effective entry.

7

B. Verizon’s Claim That Its Conduct Makes

Procompetitive Business Sense Raises A

Question Of Fact That Cannot Be Resolved On

This Motion To Dismiss

The plaintiff alleges that Verizon has dealt with

competitors in unreasonable ways that disrupt their opera-

tions, thereby impeding their ability to compete effectively.

J.A. at 29-30. Verizon says that its conduct makes business

sense independently of its exclusionary effects. Verizon Br.

at 26. This is a factual claim that cannot be resolved on a

motion to dismiss. The complaint alleges that Verizon has

“no legitimate business purpose” or “valid business reason”

for its conduct, J.A. at 29, that it has attempted to exclude

rivals “on a basis other than efficiency,” id., and that its

conduct is “unnecessarily restrictive.” /d. There is no record

evidence and not even a formal pleading to the contrary. For

purposes of this motion, the plaintiffs allegations must be

accepted as true. Hishon v. King & Spaulding, 467 U.S. at

73; Scheuer v. Rhodes, 416 U.S. at 236; Phoenix Consulting

Inc. v. Republic of Angola, 216 F.3d 36, 38 (D.C. Cir. 2000);

Turbe v. Gov't of the Virgin Islands, 938 F.2d 427, 428 (3rd

Cir. 1991).

il. THE ALLEGED CONDUCT GOES BEYOND

REFUSALS TO DEAL, AND AMOUNTS

TO AFFIRMATIVE DISRUPTION OF

COMPETITION

The allegations in the complaint in this case, as with many

other pending antitrust complaints against ILECs, assert much

more than passive refusals to do business. The issue is

whether Verizon disrupted wholesale service to its competi-

tors, impairing aspects of their retail service to their custom-

ers in the process. See, e.g.,J.A. at 19. Verizon’s misconduct

allegedly occurred often enough and in so many forms that it

made it difficult for competitors to compete effectively, J.A.

at 29, thereby preserving Verizon’s monopoly power.

8

In amici’s experience, when customers encounter

unfamiliar service problems upon switching to CLEC service,

they conclude that the fault lies with the CLEC. After all,

most faced no similar service problems when they obtained

service from an ILEC. When the service interruptions are

serious, CLEC competition is weakened. Some customers

remain with their CLEC but tell others of the technical

problems they have encountered, discouraging potential

customers from purchasing CLEC service. Some require

CLECs to grant them credits or provide expensive work-

arounds, such as free cellular telephones and air time until

their CLEC landline service is finally in place. CLECs

usually must absorb these costs and the accompanying

administrative burdens, which distract them from their efforts

to build their businesses. Some customers promptly switch

back to ILEC service, again telling others of their unhappy

experiences with a CLEC. Thus, by repeatedly and

significantly disrupting the wholesale service it provides to

CLECs and thereby impairing the retail service they can

provide, an ILEC can preserve its monopoly power.

lll. UNDER WELL-ESTABLISHED ANTITRUST

STANDARDS, WHERE A MONOPOLIST’S UN-

REASONABLE CONDUCT PRESERVES ITS

MONOPOLY POWER, THE CONDUCT VIO-

LATES § 2 UNLESS IT MAKES PROCOMPETI-

TIVE BUSINESS SENSE INDEPENDENTLY OF

ITS EXCLUSIONARY EFFECTS

A. Even If Proved, Verizon’s Assertions Are

Legally Insufficient

Unreasonable conduct by a monopolist that preserves its

monopoly power violates § 2 of the Sherman Act unless it

makes business sense for the monopolist independently of its

exclusionary effects. See Microsoft, 253 F.3d at 59. On this

motion to dismiss, Verizon implicitly concedes the first

ae

9

element of this standard, that it preserves its monopoly power

by dealing with CLECs in disruptive ways that prevent them

from competing effectively, or by refusing to deal with them

at regulated, compensatory rates. Verizon points out that its

choice is between selling functional wholesale access that a

CLEC can utilize in serving a retail customer, and selling

retail service to the same customer itself. Verizon Br. at 26

n.23. In other words, if Verizon refuses to sell functional

wholesale access to CLECs, retail customers—even if they

prefer to obtain service from a CLEC—will be forced to turn

to Verizon instead. Unless Verizon leases CLECs functional

access to its network, especially the last mile,’ there can

be no effective competition in the provision of local

telephone service.

The antitrust inquiry then turns to whether the challenged

conduct makes legitimate business sense apart from _ its

exclusionary effects. Verizon suggests that it earns higher

profits by excluding CLECs. Verizon Br. at 26 n.23. But the

relevant antitrust question is not whether the monopolist will

earn more through the exclusionary conduct, since monopoly

power generally increases profits. The question is how it will

earn more: does the conduct enhance the monopolist’s returns

by enabling it to improve the price or quality of its service, or

to improve the efficiency of its internal operations?

Microsoft, 253 F.3d at 59. If so, the conduct will produce

higher profits for the monopolist even apart from its effects in

preserving monopoly power, and the monopolist will have

preserved its market position through competition on the

merits. But if the conduct provides no such procompetitive

* While amici and some other Ci.ECs are in part facilities-based,

it is not now and will not in the foreseeable future be feasible for CLECs

to build out their networks to cover the “last mile” between most

customers and the nearest call distribution point, called an “end office” or

“central office.”

10

benefit, it does not make business sense except by depriving

customers of choice.

As expressed by the unanimous en banc D.C. Circuit:

. if a plaintiff successfully . . . demonstrates]

anticompetitive effect, then the monopolist may proffer a

‘procompetitive justification’ for its conduct. If the

monopolist asserts a procompetitive justification—a

nonpretextual claim that its conduct is indeed a form of

competition on the merits because it involves, for

example, greater efficiency or enhanced consumer

appeal—then the burden shifts back to the plaintiff to

rebut that claim.

Microsoft, 253 F.3d at 59 (citations omitted). And the First

Circuit has held:

.. . a business justification is valid if it relates directly or

indirectly to the enhancement of consumer welfare.

Thus, pursuit of efficiency and quality control might be

legitimate competitive reasons for an otherwise

exclistonary-tefusal to deal, while the desire to maintain

a monopoly market share or thwart the entry of

competitors would not.

Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d

1147, 1183 (1st Cir. 1994).

The notion that self-interest is a sufficient justification has

been expressly rejected by this Court:

‘The promotion of self-interest alone does not invoke the

rule of reason to immunize otherwise illegal conduct.’

[The Sherman] Act assumes that an enterprise will

protect itself against loss by operating with superior

service, lower costs, and improved efficiency. Otter Tail

... Sought to substitute for competition anticompetitive

uses of its dominant economic power.

Otter Tail, 410 U.S. at 380 (citations omitted). Similarly, the

Third Circuit has recently held that:

—- — ©

=z.

... a defendant’s assertion that it acted in furtherance of

its economic interests does not constitute the type of

business justification that is an acceptable defense to § 2

monopolization. Paraphrasing one corporate executive’s

well-publicized statement, whatever is good for [the

company]. . . is not necessarily permissible under § 2 of

the Sherman Act.

LePage’s Inc. v. 3M, 324 F.3d 141, 163 (3d Cir. 2003),

petition for cert. filed, 72 U.S.L.W. 3007 (U.S. June 20,

2003) (No. 02-1865).

Verizon has not explained how its conduct has increased its

profits other than by forcing retail customers that would have

preferred to purchase telephone service from a CLEC to

purchase service from Verizon instead. Verizon has not

described any way in which its conduct makes its products

and services better or less expensive, or makes its internal

processes more efficient. Thus, it has utterly failed to address

the standard for evaluating unreasonable monopoly conduct

that excludes competition.

The “makes business sense apart from exclusion” test is

designed to ensure that a monopolist is able to compete

aggressively, on the merits, to preserve its market position.

Microsoft, 253 F.3d at 58-59. The test allows a monopolist to

conduct its business in any way that is both rational and

procompetitive, even if its success in that course of action

protects and preserves its monopoly power. Consumers

benefit if the monopolist is permitted to compete in

procompetitive ways along with its smaller competitors, who

by dint of their lack of market power usually cannot compete

in any other manner. The standard only prohibits a

monopolist from unreasonably excluding rivals “on some

basis other than efficiency.” Aspen Skiing, 472 U.S. at 605,

quoting Robert Bork, The Antitrust Paradox 138 (1978).

The standard does not, however, insulate conduct for which

any business justification, no matter how negligible, can be

12

constructed, despite extreme language proposed by Verizon

and some amici writing on its behalf. The fact that

exclusionary conduct results in a minor savings for the

monopolist would not protect the conduct if costs greater than

those savings also result, that is, the conduct would not would

be profitable overal/ absent its monopoly-preserving effects.

Since it is possible to imagine some minor savings arising

from virtually any type of business conduct, a standard that

would permit any such savings, no matter how insignificant,

to excuse exclusionary conduct would in practice free a

monopolist from any’ antitrust constraint. Moreover, reliance

on even insignificant savings would depart from the principle

of protecting rational business behavior, since rational

business people do not pursue an expensive course of action

simply because of a minor associated benefit. The

appropriate legal standard is whether the conduct is

procompetitive and profit-maximizing overall. Thus, a rule

that only conduct that makes no business sense apart from its

competition-restricting effects can be challenged under § 2, if

applied literally, would deny consumers antitrust protection

from much monopolistic behavior and would reach well

beyond the goal of protecting monopolists’ ability to compete

in rational, procompetitive ways.

1. Unreasonable Refusals To Deal Are Judged

By The Same “Procompetitive Business

Sense” Standard As Other Exclusionary

Conduct That Preserves Monopoly Power

Verizon treats this case as one involving refusals to deal.

Verizon Br. at 17-20. Refusal-to-deal precedent applies the

same “procompetitive business sense” standard as other §2

cases described above. Where the refusals are unreasonable

and preserve monopoly power, they are suspect, since in the

absence of restraints on competition, companies generally

want to maximize their sales in order to maximize their

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

13

Co., 797 F.2d 370, 376 (7th Cir. 1986) (Posner, J.).° Thus,

the examination of a proffered procompetitive justification

must be a careful one.

In Aspen Skiing, the absence of a _procompetitive,

efficiency-based justification was decisive. A ski resort

monopolist owning three slopes in Aspen ceased selling a six-

day lift ticket in conjunction with its rival, which owned the

remaining slope in Aspen. The joint ticket had enabled the

holder to ski on any of the four Aspen slopes on each of six

days. While the Court examined the monopolist’s prior

participation in the joint ticket, this history was important

solely because the prior course of conduct was evidence of

where the monopolist’s legitimate business interests lay. The

Court also emphasized the fact that in competitive ski

markets, joint tickets are common. The Court looked to

whether there was an efficiency-based justification for the

defendant’s refusal to participate in the joint ticket, and found

the jury’s negative answer to be supported by the evidence.

The Court’s articulation of the governing standard

emphasized that the efficiency of the challenged conduct is

determinative, and liability attaches wh..e the defendant is

not driven by “efficiency concerns and. . . [is] willing to

sacrifice short-run benefits and consumer goodwill in

exchange for a perceived long-run impact on its smaller

rival.” 472 U.S. at 610-11.

* Refusals to deal that are not unreasonable—such as refusals to sell

below cost or to sell in furtherance of a scheme to defraud—cannot form

the basis of § 2 liability. See, e.g, Homefinders of America, Inc. v.

Providence Journal Co., 621 F.2d 441 (Ist Cir. 1980) (deceptive character

of plaintiff's real estate listings a valid reason for refusal to publish

advertisements). The sales involved in this case, however, were at

regulated rates, already held by the FCC (and in the case of TELRIC rates,

by this Court) to be reasonably compensatory. See Verizon Communica-

tions Inc. v. FCC, 535 U.S. 467 (2002).

14

The monopolist Aspen Skiing was in a position similar to

that of Verizon here: by refusing to sell joint tickets, Aspen

Skiing could force most of the customers who would have

purchased joint tickets to purchase Aspen-Skiing-only tickets

instead. By refusing to do business on reasonable terms with

its competitor, Aspen Skiing increased the sales of its own

tickets and earned higher profits in the long run. It gave up

its share of revenue from the joint tickets but gained revenue

from increased sales of Aspen-Skiing-only tickets and

increased usage of its associated services, such as its ski

school, ski rentals, racing events, and restaurants.’ Aspen

Skiing’s refusal to deal on reasonable terms was nevertheless

condemned by the Court because it preserved monopoly

power and did not improve the quality or price of Aspen

Skiing’s products or operations. 472 U.S. at 608-09.

In Lorain Journal, a monopoly newspaper refused to

accept advertising from customers that also purchased

advertising time on a new local radio station. It offered no

explanation of why the refusal made business sense apart

from its exclusionary effects, but instead relied on the right of

every business to “select its customers.” Lorain Journal, 342

U.S. at 155. The Court wrote:

‘(T]he word “right” is one of the most deceptive of

pitfalls; it is so easy to slip from a qualified meaning in

the premise to an unqualified one in the conclusion.

Most rights are qualified.’ The right claimed by the

[Lorain Journal] . . . is neither absolute nor exempt from

regulation. Its exercise as a purposeful means of

‘The Court's opinion does not provide figures for Aspen Skiing’s

revenues, but upon termination of the joint ticket, its competitor's market

share fell from 20.5% to 11% in four years and the latter’s revenues from

associated services “declined sharply as well.” 472 U.S. at 594-95.

Likely a significant amount, if not all, of this lost revenue was shifted to

Aspen Skiing.

<->

15

monopolizing interstate commerce is prohibited by the

Sherman Act.

Id. (citations omitted).

In lieu of advancing any explanation of how its conduct is

procompetitive and therefore makes business sense apart

from its exclusionary effects, Verizon raises a variety of

arguments that, if accepted by the Court, would excuse it

from having to demonstrate such a justification. These

arguments are based on its characterization of the plaintiff's

claim as one for refusals to deal, a description that, as

explained above, ignores the thrust of the allegations. The

arguments also conflict with established antitrust precedent

about refusals to deal.

First, Verizon suggests that the antitrust laws do not require

it to sell services at wholesale if it has never done so before.

Verizon Br. at 18. This argument cannot be squared with

Otter Tail. 410 U.S. 366. There the monopolist refused

either to wheel wholesale electric power from other sellers or

to itself sell power at wholesale to would-be municipal power

authorities, thereby forcing those towns to accept it as their

retail power distributor. While Otter Tail was regularly in the

business of wheeling power for itself and others, it sold little

power at wholesale: Otter Tail’s “business . . . [was] almost

exclusively retail.” United States v. Otter Tail Power Co.,

331 F. Supp. 54, 56 (D. Minn. 1971). Yet its refusal to sell

power at wholesale to potential retail competitors was

condemned by the courts along with its refusal to wheel

power to those entities. The provision in the district court’s

injunction barring Otter Tail from refusing to sell wholesale

power, Sec. IVA, Amended Judgment, 1971 U.S. Dist.

LEXIS 10845 (D. Minn. 1971), was upheld by the Supreme

Court. 410 U.S. at 382. Otter Tail’s refusal to sell power at

16

wholesale to competitors parallels the conduct alleged in

this case.”

Moreover, Verizon’s suggestion that it never sold services

at wholesale until required to do so by the °96 Act, Verizon

Br. at 19-20, raises an additional issue of fact not established

in the record and inappropriately raised on a Rule 12(b)(6)

motion to dismiss. Competitive access providers existed in

some Verizon states prior to 1996. Some incumbents, includ-

ing Verizon’s predecessor, NYNEX Corporation, did

business with them. Moreover, on occasion NYNEX

engaged in a variety of arrangements with long-distance

companies. Verizon’s argument cannot be evaluated in the

absence of evidence about the nature and scope of the

wholesale services provided by its predecessors prior to

passage of the °96 Act.

Verizon emphasizes that the CLEC involved in this case is

a reseller, contending that the antitrust laws are less

concerned about anticompetitive behavior that drives resellers

out of a market than about similar behavior directed at

competitors that operate their own facilities. Verizon Br. at

30. This claim is unfounded as a legal matter, but more

importantly, the arguments Verizon advances contain no such

limitation—they would apply with equal force to all

competitors. Even a firm that utilized only its own facilities

throughout, including over the last mile, would have to

interconnect with Verizon in order for its customers to

receive calls from Verizon customers and complete calls to

them. If Verizon had no antitrust obligation to deal on

* The Fourth Circuit recently wrote that Otter Tail “was in the business

of . . . selling electricity at wholesale,” Cavalier Tel., LLC v. Verizon

Virginia, Inc., 330 F.3d 176, 187 (4th Cir. 2003) (emphasis in original),

but the pages of the Supreme Court's opinion that it cites mention only

Otter Tail’s existing wheeling and retail sales businesses, not any ongoing

sales of power at wholesale.

enema

17

reasonable terms with a competitor, as it contends, then it

would not have to interconnect even with a wholly facilities-

based competitor unless regulation effectively compelled it

to. There would be no antitrust backstop in the event the

regulatory scheme proved unable to protect competition, as

has occurred all too frequently in the past.

Verizon further contends that refusals of the sort it reads

into the complaint are a different “class” of conduct than

anything previously condemned under § 2 of the Sherman

Act. Verizon Br. at 16. But the categories of antitrust

misconduct are not narrowly circumscribed; “the means of

illicit exclusion, like the means of legitimate competition, are

myriad.” Microsoft, 253 F.3d at 58. Defining categories and

then assigning conduct to one or another of them would divert

attention from the main antitrust issue, whether a monopo-

list’s conduct unreasonably preserved its market power. One

of the strengths of the United States antitrust laws has been

their consistent focus on whether challenged conduct is

actually anticompetitive, without undue reliance on pre-

defined categories. See, e.g., Northwest Wholesale Stationers

v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).

This analysis maximizes the strategic flexibility of all

businesses, regardless of market share, while ensuring that

anticompetitive conduct does not escape condemnation.

2. Essential facilities analysis proceeds under

the same “procompetitive business sense”

standard

The essential facilities doctrine is an older variant of

refusal-to-deal principles and is analytically consistent with

them. It has been adopted in every circuit and is well-

established in antitrust jurisprudence.° The fourth element of

* See, e.g., Interface Group, Inc. v. Massachusetts Port Authority, 8\6

F.2d 9, 12 (Ist Cir. 1987); Delaware & Hudson Ry. Co. v. Consolidated

18

an essential facilities claim, that it would be feasible for the

monopolist to permit access, is, as applied by the courts, the

equivalent of the legitimate business justification standard

applicable in refusal-to-deal cases. MCI Communications

Corp. v. American Tel. & Tel. Co., 708 F.2d 1081, 1132-33

(7th Cir. 1983). The analysis was succinctly expressed in the

AT&T case:

{P]roblems of feasibility and practicability may be taken

into account by the Court in determining the sufficiency

under the law of the access to essential facilities granted

by defendants to non-Bell carriers. To put it another

way, parity is not necessarily required. But... AT&T

and its subsidiaries now discriminate between Long

Lines and non-Bell carriers with regard to access to Bell

System facilities. . . . this discrimination [is]

anticompetitive in its effect. . .. The burden is

now upon defendants to show why, despite that

Rail Corp., 902 F.2d 174, 179 (2d Cir. 1990); /deal Dairy Farms, Ine. v.

John Labatt, Lid, 90 F.3d 737, 748 (3rd Cir. 1996); Advanced Health

Care Servs. v. Radford Community Hosp., 910 F.2d 139, 150 (4th Cir.

1990); Mid-Texas Communications Sys., Inc., v. American Tel. & Tel. Co.,

615 F.2d 1372, 1387 n.12 (Sth Cir. 1980); Directory Sales Mgmt. Corp. v.

Ohio Bell Tel. Co., 833 F.2d 606, 612 (6th Cir. 1987), MC/

Communications Corp. v. American Tel. & Tel. Co., 708 F.2d 1081, 1132-

33 (7th Cir. 1983); City of Malden v. Union Elec. Co., 887 F.2d 157, 160

(8th Cir. 1989); City of Anaheim v. Southern California Edison Co., 955

F.2d 1373, 1380 (9th Cir. 1992); Aspen Skiing Co. v. Aspen Highlands

Skiing Corp., 738 F.2d 1509, 1520 (10th Cir. 1984), aff'd on other

grounds, 472 U.S. 585 (1985); Covad Communications Co. v. BellSouth

Corp., 299 F.3d 1272, 1285 (11th Cir. 2002), petition for cert. filed, 7\

U.S.L.W. 3640 (U.S. Mar. 20, 2003) (No. 02-1423); Caribbean

Broadcasting Sys., Lid. v. Cable & Wireless PLC, 148 F. 3d 1080, 1088

(D.C. Cir. 1998); Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1356-58

(Fed. Cir. 1999). See also Robert Pitofsky, Donna Patterson, and

Jonathan Hooks, 7he Essential Facilities Doctrine Under U.S. Antitrust

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

19

anticompetitive impact, such unequal treatment is

reasonable . .. .

U.S. v. AT&T, 524 F. Supp. at 1361.

The essential facilities doctrine has been applied repeatedly

to local telephone networks. Such a network remains the

paradigm of an essential facility: it cannot be feasibly

duplicated, yet access to it is essential for competition in

related service markets. Application of the doctrine has

produced significant competitive benefits, greatly enhancing

the reliability, capacity, and efficiency of this nation’s long-

distance telephone communications and its telephone equip-

ment markets. Southern Pac. Communications, 740 F.2d

980; MCI v. AT&T, 708 F.2d 1081; U.S. v. AT&T, 552 F.

Supp. 131.

IV. CONGRESS HAS MANDATED THAT THE

ANTITRUST LAWS CONTINUE TO APPLY TO

TELEPHONY, AND EVEN IF IT HAD NOT,

THOSE LAWS WOULD APPLY BECAUSE

THERE IS NO “PLAIN REPUGNANCY”

BETWEEN THE ANTITRUST LAWS AND THE

REGULATORY SCHEME ESTABLISHED BY

THE °96 ACT

A. The Antitrust Laws Govern Local Telephony

The antitrust laws apply to telephony, as they do to most

regulated industries. The regulatory and antitrust regimes

work together, each in its own way, to foster competition.

The °96 Act expressly provides that nothing therein:

shall be construed to modify, impair or supersede the

applicability of any of the antitrust laws.

47 U.S.C. § 152 note. This was recognized by then-President

Clinton when he signed the °96 Act into law:

The Act’s . . . antitrust savings clause . . . ensures that

even for activities allowed under or required by the

20

legislation, or activities resulting from FCC rulemakings

or orders, the antitrust laws continue to apply fully.

Remarks on Signing the Telecommunications Act of 1996,

1996 Pub. Papers, vol. | at 189 (Feb. 8, 1996). In its initial

order regarding the °96 Act, the FCC stated its view that the

antitrust laws remain in force:

Finally, we clarify, as one commenter requested, that

nothing in sections 251 and 252 or our implementing

regulations is intended to limit the ability of persons to

seek relief under the antitrust laws, other statutes, or

common law.

In the Matter of Implementation of the Local Competition

Provisions in the Telecommunications Act of 1996, CC

Docket 96-98, First Report and Order, \| FCC Red. 15499,

15565 (Aug. 8, 1996). This remains the FCC’s position

today. It has urged the courts to recognize the continuing

applicability of the antitrust laws:

. . . a violation of the 1996 Act is not necessarily a

violation of the antitrust laws . . . [bjut . . . neither does

the 1996 Act bar claims that satisfy established antitrust

standards .... Even if Congress had not clearly ex-

pressed its intent, well-established law would preclude

construing the 1996 Act to effect an implied repeal of

the Sherman Act absent a ‘convincing showing of clear

repugnancy between the antitrust laws and the regulatory

system’ .... [NJothing in the 1996 Act suggests a

‘plain repugnancy’ . . . between that Act and the antitrust

laws, both of which are ‘competition-friendly.”

Amicus Brief of the United States and the Federal

Communications Commission, Covad Communications Co. v.

Bell Atlantic Corp., No. 02-7057, Dec. 17, 2002 (D.C. Cir.),

available at http://www.usdoj.gov/atr/cases/f200500/200567.

htm (citations omitted).

Regulation alone often cannot prevent anticompetitive

abuses by a monopolist. See U.S. v. AT&T, 524 F. Supp. at

—<o oe oe ae ow eC -

21

1347. In other long-monopolized telephony markets,

effective entry was accomplished only following firm

application of the antitrust laws. It is commonplace for the

antitrust laws to remain in place in other industries as well,

even in the face of a pervasive regulatory scheme. See e.g.,

Silver v. New York Stock Exch., 373 U.S. at 357 (securities).

In drafting the "96 Act, Congress could not have made more

clear its determination that the antitrust laws should continue

to apply to local telephony, as they have for decades. The

Court should reject any invitation to reverse this clear

congressional choice.

B. Application Of The Antitrust Laws Promotes

Investment

Verizon asserts that requiring it to permit CLECs to lease

its facilities discourages CLECs from investing in telephone

infrastructure of their own. Verizon Br. at 27-28. This

argument has already been rejected by this Court, which

noted that it “founders on fact.” Verizon v. FCC, 535 U.S.

at 516.

Between 1996 and 2000, CLECs invested some $55 billion

in telecommunications facilities. As the Court observed, “a

regulatory scheme that can boast such substantial capital

spending over a 4-year period is not easily described as an

unreasonable way to promote competitive investment in

facilities.” Jd. at 1676. Similarly, antitrust principles that

promote the same practices as the regulatory scheme cannot

fairly be described as unreasonably deterring investment.

Moreover, not requiring Verizon to lease its last-mile

facilities would bring CLEC investment in facilities to a

standstill. There is no prospect that it will ever be cost-

effective for a CLEC to duplicate the last mile between a

local telephone end office and the customer’s premises.

Without the ability to lease access to the last mile, CLECs

cannot feasibly reach most customers. CLEC investment in

22

infrastructure at the center of the network, behind the last

mile, would be foolhardy unless CLECs’ ability to lease

functional access to customers over the last mile was assured.

Verizon also contends that the requirement that it lease its

facilities unless it has a legitimate reason not to dilutes its

incentives to make investments in infrastructure of its own.

Verizon Br. at 27. Historical experience demonstrates, how-

ever, that competitive pressure is the greatest spur to

investment, while the prospect of unchallenged market

dominance invites complacency. Fiber-optic technology was

developed in the early 1970s. While the market for long-

distance telephone service remained solely in AT&T’s hands,

however, there was no competitive urgency for it to undertake

expensive improvements in its long-distance network and it

did not do so. New competitors, entering long-distance after

AT&T divested its equipment and local service affiliates,

installed the first fiber-optic cable networks for long-distance

telephone service in the United States. Robert E. Litan,

Antitrust Enforcement, in Revolution in the U.S. Information

Infrastructure (Nat’l Academy of Engineering, 1995). Only

then did AT&T begin to upgrade its own network with

fiber. /d.

C. The Courts Provide An Appropriate Forum

For Resolving Antitrust Claims

In determining liability in this case, the focus of the court’s

inquiry will be whether the conduct alleged is of the nature

and scope of an antitrust violation. This is inherently not a

regulatory inquiry, and regulatory processes are not

particularly suited to evaluating it. Courts have for decades

assessed claims of antitrust violations in regulated industries,

and in the process have repeatedly cured significant

anticompetitive conduct that regulators were not equipped

to address.

23

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

Cir. 1990) (Breyer, J.), is not to the contrary. That decision

involved a price squeeze, a claim that presents unique

difficulties—including the possibility that imposing liability

could cause consumer prices to rise. There is no price

squeeze claim in this case and no risk that the outcome will

result in increased consumer prices. Moreover, Town of

Concord concerned prices that had been expressly approved

by regulators and upheld by a federal court of appeals in a

proceeding in which the plaintiffs had actively participated.

Here, in contrast, the challenged conduct has been

condemned by regulators and the plaintiff has no opportunity

to seek relief in a regulatory forum.

In designing injunctive relief, the existence of a regulatory

scheme makes application of refusal-to-deal principles more

feasible, not less. Phillip Areeda, Essential Facilities: An

Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841,

853 (1989). Existing regulations can be used as guidance,

and unresolved issues requiring regulatory processes and

expertise can be referred by the court to the appropriate

agency. Or a court can confine itseif to general injunctive

relief, setting outside limits but avoiding excessively regula-

tory detail.

In determining damages, the court will have no cause and

no opportunity to design a regulatory scheme. It will be

confined to determining the extent of the plaintiff's damages,

attributable here to the difference in quality between the

service the plaintiff would have enjoyed in the absence of the

alleged misconduct, and the service it in fact received. This

is an inquiry that courts and juries are well qualified

to resolve.

Verizon also argues that judicial intervention is unneces-

Sary to preserve competition in local telephone markets

because of the pervasiveness of the regulatory scheme. The

plaintiff's claim, however, is to the contrary—that antitrust

24

violations have occurred despite regulatory oversight.

Verizon’s argument presumes the outcome of the plaintiff's

case without the benefit of evidence. If the plaintiff ulti-

mately proves its case, it would not be the first time that

regulation has failed to prevent antitrust violations in

telephone markets.

Verizon’s dire predictions about the consequences of

litigating this case are unduly alarmist. Courts have long

handled both the liability and relief stages of antitrust claims

in regulated industries without venturing into territory more

appropriately the province of regulators. See e.g., Otter Tail,

410 U.S. at 372 (electricity); Carnation Co. v. Pacific

Westbound Conf., 383 U.S. 213, 217-18 (1966) (shipping);

Silver v. New York Stock Exch., 373 U.S. at 357 (securities);

United States v. Radio Corp. of America, 358 U.S. 334 (1959)

(broadcasting); United States v. Borden Co., 308 U.S. 188,

198 (1939) (agriculture); Aloha Airlines, Inc. v. Hawaiian

Airlines Inc., 349 F. Supp. 1064, 1068 (D. Haw. 1972) (air

travel). There is no sound reason to doubt the courts’ ability

to handle this case appropriately.

D. De Facto Immunity Would Conflict With

Congressional Intent And Constitute Bad

Policy

While Verizon disclaims any intention to seek immunity

from the antitrust laws, the standard it urges on the Court

would insulate it from antitrust challenge as completely as

would immunity. A conclusion that courts are ill-equipped to

assess antitrust violations in regulated industries, and that

regulatory bodies offer the only appropriate forum for

competitive issues in these industries, would preclude the

bringing of any antitrust claims.

Those unable to bring a regulatory claim, such as the

plaintiff in this case, would be entirely without remedy. And

conduct that is outside the jurisdiction of the regulators but

—

25

affects competition in local telephony, such as is raised in a

number of CLEC antitrust claims against ILECs, might be

protected from antitrust challenge as well.

Moreover, regulatory processes are designed to produce

narrow solutions to individual problems, not to address broad

patterns of conduct. Regulatory processes can neither

effectively assess such patterns nor provide effective relief

where appropriate.

What Verizon seeks is immunity in everything but name.

Adoption of the analysis it advocates would conflict with the

clearly expressed will of Congress, which was based on

decades of experience with the benefits to be gained from

effective antitrust enforcement in telephone markets.

CONCLUSION

Established precedent, sound antitrust principles, and clear

statutory directives warrant affirmance of the appellate

court’s decision in directing the denial of Verizon’s motion to

dismiss. Verizon urges this Court to sweep aside long-

standing and well-reasoned antitrust authority on exclusion-

ary conduct that maintains monopoly power, significantly

loosening constraints on anticompetitive conduct by

monopolists across the entire spectrum of the economy. Its

alternative argument, that courts are not well-suited to

evaluate antitrust claims in regulated industries and especially

in local telephony, conflicts with the will of Congress and

would mark a sharp break with a long and successful history

of antitrust enforcement in other telephone markets.

These far-reaching arguments arise in the context of a

skeletal complaint that is before the Court on a motion to

dismiss.- There is only a general description of most of the

misconduct alleged, no evidentiary support for the factual

assertions on which Verizon relies, and indeed no evidentiary

record whatsoever. Thus, there is little by which to assess the

26

scope, nature, and effects of the conduct Verizon has

allegedly undertaken.

Moreover, there is nothing by which to assess the existence

of a legitimate business justification for Verizon’s alleged

actions. A monopolist may not engage in unreasonable

conduct that prevents competition unless the conduct is

procompetitive or efficiency-enhancing—it improves the cost

or quality of its products or services or improves the internal

efficiency of its operations. Verizon has not asserted, much

less established, that it meets this standard, and therefore the

decision of the Second Circuit should be affirmed.

Respectfully submitted,

RICHARD M. RINDLER

Counsel of Record

ERIC J. BRANFMAN

REBECCA P. DICK

SWIDLER BERLIN

SHEREFF FRIEDMAN, LLP

3000 K STREET, N.W., SUITE 300

WASHINGTON, DC 20007

(202) 424-7500

Attorneys for Amici Curiae

Allegiance Telecom, Inc., ATX

Communications, Inc., Focal

Communications Corp., ICG

Communications, Inc., Pac-West

Telecom, Inc., and US LEC Corp.

27

KEVIN JOSEPH JOHN SUMPTER

Senior Vice President Vice President, Regulatory

Government & External PAC-WEST TELECOMM, INC.

Affairs 1776 W. March Lane

ALLEGIANCE TELECOM, INC. Suite 250

1919 M Street, N.W. Stockton, CA 95207

Washington, D.C. 20036 (209) 926-3 136

(202) 464-1789 Counsel for Amicus Curiae Pac-

Counsel for Amicus Curiae West Telecomm, Inc.

Allegiance Telecom, Inc. MICHAEL L. SHOR

CHRISTOPHER A. HOLT General Counsel

Senior Vice President, Chief US LEC Corp.

Counsel for Law & External Three Morrocroft Centre

Affairs & Secretary 6801 Morrison Boulevard

ATX COMMUNICATIONS, INC. — Charlotte, NC 28211

75 Broad Street (703) 584-6828

11th Floor Counsel for Amicus Curiae US

New York, NY 10004 LEC Corp.

(212) 509-4135

Counsel for Amicus Curiae ATX

Communications, Inc.

RICHARD METZGER

Senior Vice President & General

Counsel

FOCAL COMMUNICATIONS CORP.

7799 Leesburg Pike

210 North

Falls Church, VA 22043

Counsel for Amicus Curiae

Focal Communications Corp.

BERNIE ZUROFF

General Counsel & Secretary

ICG COMMUNICATIONS, INC.

161 Inverness Drive West

Englewood, CO 80112

(888) 424-1144

Counsel for Amicus Curiae ICG

Communications, Inc.