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

| Supreme Court. US

FILED

JUL 25 2003

No. 02-682 | OPEC Oe bb illabek

IN THE

Supreme Court of the United States

VERIZON COMMUNICATIONS INC.,

Petitioner,

v.

LAW OFFICES OF CURTIS V. TRINKO, LLP,

Respondent.

On Wait oF CERTIORARI TO THE

UNitTep STATES CouRT OF APPEALS FOR THE SECOND CIRCUIT

$$ ——— ————

—

BRIEF FOR COVAD COMMUNICATIONS COMPANY, INC.

AS AMICUS CURIAE IN SUPPORT OF RESPONDENT

MAarGareT A. ROBBINS ALFRED C. PFEIFFER, JR.

Associate General Counsel Counsel of Record

Covap COMMUNICATIONS COMPANY — FRANK M. HINMAN

3420 Central Expressway Marta E. Miyar

Santa Clara, CA 95051 BINGHAM McCutTcHen LLP

(408) 616-6616 Three Embarcadero Center

San Francisco, CA 94111

(415) 393-2000

Attorneys for Amicus Curiae

Covad Communications Company, Inc.

182027 ce

COUNSEL PRESS

(800) 274-3321 + (800) 359-6859

i

TABLE OF CONTENTS

TABLE OF CITED AUTHORITIES ...............

INTEREST OF AMICUS ........cscccccccesevces

SUMMARY OF THE ARGUMENT ...............

P|, PPPPereTerrTTrTTTryrrresrrre eerie

I.

The ILECs Routinely Engage In Exclusionary

Conduct That Harms Competition ........

A.

ILEC Misconduct Affects Far More

Than Local Phone Service Resellers ...

Covad And The Deployment Of DSL

TOCRONORY occ ccccccccccsscecccccens

1. ILECs Suppressed DSL Tech-

CONDE cc ccccccccccccccscseseses

2. The Response to the Threat Posed

Dy COVES occ ccccccccccccecccces

The ILECs’ Campaign To Exclude

CRMPOUIGR 2 oc cccccccccvcceccsecens

1. Outright Denials of Collocation

2. Constructive Denials through

Unreasonable Conditions ........

a. Unreasonable delay ..........

b. Anticompetitive build-out

requirements ..............-.

Page

il

Contents

c. Arbitrary loop policies .......

3. Discrimination Against Rivals ....

D. ILECs All But Destroyed Competition

And Increased Their Monopolies .....

I]. Antitrust Remedies Are Necessary, Proper

And Traditional Means To Combat ILECs’

Anticompetitive Conduct .............+..

A. Traditional Sherman Act Section 2

Doctrines Forbid The ILECs’ Exclusionary

PURSIIOGD .ucccccesveceeneseul

1.

The Unique History of the Regulated

Telecommunications Industry

Demonstrates the Importance of

Antitrust Enforcement ...........

Monopoly-to-Monopoly

Leveraging is Unlawful ...........

The Essential Facilities Doctrine

Properly Applies to the ILECs’

Attempts to Use Their Local

Network Monopolies to Control

Secondary Markets ...............

a. Essential facilities claims involve

extension of a monopoly into a

second market ..............

ili

Contents

b. Essential facilities claims

are especially important in

“natural” monopoly markets ..

B. Even Under The ILECs’ Unfounded

View Of Exclusionary Conduct, Their

Conduct Is Still Exclusionary .........

Conclusion

1.

Verizon and Its Amici Try to Create a

False Predatory Pricing Requirement

for Section 2 Liability ............

Raising Rivals’ Costs Is Exclusionary

ILECs Routinely Forego Profits to

Harm Competition ..............

Page

iv

TABLE OF CITED AUTHORITIES

Page

Cases

Advanced Health-Care Serv., Inc. v. Radford Cmty.

Hosp., 910 F.2d 139 (4th Cir. 1990) ...........-- 23

American Ad Mgmt., Inc. v. General Tel. Co. of Cal.,

190 F.3d 1051 (9th Cir. 1999) ...... 0.0... . ee eees 5

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

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

grounds, 472 U.S. 585 (1985) ..... 22.6.0 eee eeees 17

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

472 U.S. 585 (1985) ..... 2... cece ee eee eee 23, 27, 28, 30

AT&T Corp. v. lowa Utils. Bd., 525 U.S. 366 (1999) .... 25

Ball Mem’! Hosp., Inc. v. Mutual Hosp. Ins., Inc.,

784 F.2d 1325 (7th Cir. 1986) ...........---+55- 28-29

Bell Tel. Co. of Pa. v. F.C.C., 503 F.2d 1250 (3d Cir.

GID ccccccccccescccosncescccccsscesssoceses 18-19

California v. F.C.C., 39 F.3d 919 (9th Cir. 1994) ..... 19

California v. F.C.C., 905 F.2d 1217 (9th Cir.1990) .. 19

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

ths Cle. 19GD) 2... cc cccccccccccccccccccccscces 23

City of Vernon v. S. Cal. Edison Co., 955 F.2d 1361

(9th Cir. 1992), cert. denied, 506 U.S. 908 (1992) .... 23

Copperweld Corp. v. Independence Tube Corp., 467 U.S.

FEED cc ccvcvcccccscescscccesesvceseseses 14

Vv

Cited Authorities

Page

Covad Comm. Co. v. BellSouth Corp., 299 F.3d 1272

(11th Cir. 2002), reh’g denied, 314 F.3d 1282 ..... 1, 23

Delaware & Hudson Ry. Co. v. Consol. Rail Corp., 902

F.2d 174 (2d Cir. 1990), cert. denied, 500 U.S. 928

GEUDED ebecdecccscédvecsesedssddndsecesessiess 23

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

833 F.2d 606 (6th Cir. 1987) ..............604.. 23

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

306 US. 451 (1992) ..... 2.2 ccceees 4,17, 21, 26, 28, 30

Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 1997),

GG, THB UD. FIO (IDI)... wccccccccccccccccces 29

H&W Indus., Inc. v. Formosa Plastics Corp., U.S.A.,

687 F. Supp. 271 (N.D. Miss. 1988), rev'd on other

grounds, 860 F.2d 172 (5th Cir. 1988) ........... 14

Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir.

1977), cert. denied, 436 U.S. 956 (1978) .......... 22

Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d

Fae GG GEEED cecccecesccecesesscocscesess 23

Indeck Energy Services, Inc. v. Consumers Energy Co.,

250 F.3d 972 (6th Cir. 2000) .............000ee 5

Int'l Bhd. of Teamsters v. Phillip Morris, Inc.,

34 F. Supp. 2d 656 (N.D. Ill. 1998), aff'd, 196 F.3d

SEP PENG GUUED ccccccecccccccccctstecesces 6

Interface Group, Inc. v. Mass. Port Auth., 816 F.2d

PE SEED cccunvecesccaseacesedeusscecss 22-23

vi

Cited Authorities

Page

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

PO. GER, BERSD cccccccccccscccceccsesccccesee 23

Law Offices of Curtis V. Trinko v. Bell Atlantic Corp.,

305 F.3d 89 (2d Cir. 2002) ...... 2.60. eee eee eees 3, 23

Leitch Mfg. Co. v Barber Co., 302 U.S. 458 (1938) .... 22

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

Hosp., Inc., 981 F.2d 160 (4th Cir. 1992) ......... 14

MCI Comm. Corp. v. AT&T Co., 708 F.2d 1081

BUDGE, TEED cccccccccccccccccccens 19, 20, 23, 24, 25

Mid-Texas Communications Sys., Inc. v. AT&T Co.,

615 F.2d 1372 (5th Cir. 1980) .............2045. 23

Multistate Legal Studies, Inc. v. Harcourt Brace

Jovanovich Legal and Prof'l Publications, Inc.,

63 F.3d 1540 (10th Cir. 1995) ............20005. 29

Nat'l Ass’n of Regulatory Util. Comm'rs v. F.C.C.,

737 F.2d 1095 (D.C. Cir. 1984) ...........-..4.- 18

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

797 F.2d 370 (7th Cir.), reh’g denied, 802 F.2d 217

(1986), cert. denied, 480 U.S. 934 (1987) ......... 28

Southern Pacific Comm. Co. v. AT&T Co., 740 F.2d 980

GEE. GER, BED ccccccccccccccccsvceccccescoce 20, 25

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

CGH DEUED ccccscccccosecessécesesseccesees 27

vii

Cited Authorities

Page

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

SP NEED Sccaccceectsnccasnccceesesss 28

United States v. AT&T Co., 524 F. Supp. 1336 (D.D.C.

SE ceuneneschencucneenccentéustsiseucoeese 19

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

on other grounds sub nom. Copperweld Corp. v.

Independence Tube Corp., 467 U.S. 752 (1984) .... 22

United States v. Grinnell Corp., 384 U.S. 563 (1966) ... 26

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

(en banc), cert. denied, 534 U.S. 952 (2001) ...... 6, 27

United States v. Paramount Pictures, 334 U.S. 131

DEED Saveuddededendanbdscddandbansedesencee 22

United States v. Terminal R.R. Ass’n of St. Louis,

PPD whncecsccccccaseseséicceses 19

United States Telecom Ass‘n v. F.C.C., 290 F.3d 415

PERUSE cboccccedesccccceséeceesecécne 20

Verizon Communications, Inc. v. F.C.C., 535 U.S. 467

ME osdecusesciedecusséessucdeusssescces 20, 25, 30

Statutes

Telecommunications Act of 1996,

47 USC. $6 151, ef 90g. 0... .cccccccceccccess passim

vill

Cited Authorities

Page

Agency Materials

In the Matters of Amendment of Sections 64.702 of the

Commission's Rules and Regulations, 2 F.C.C.R.

3072 (May 22, 1987) .......-0cee cece cece eeeees 19

In the Matter of Establishment of Policies and Procedures

for Consideration of Application to Provide

Specialized Common Carrier Services in the Domestic

Public Point-to-Point Microwave Radio Service and

Proposed Amendments to Parts 21, 43, and 61 of the

Commission's Rules, 29 F.C.C.2d 870 (1971) ..... 18, 19

Second Report and Order, In the Matter of

Implementation of the Telecommunications Act of

1996, 13 F.C.C.R. 17,018 (July 14, 1998) ......... 8, 21

Other Authorities

Big is Better, The Investment Dealer's Digest,

November 19, 2001... 0.0... cc cece cece ee eeeees 10, 16

Brief for the United States and Federal

Communications Commission as Amici Curiae

in Support of Appellants, Intermedia Comm., Inc.

v. BellSouth Telecomm., Inc., No. 01-10224-JJ

(11th Cir. filed Mar. 28, 2001) .............555- 30

Brief for the United States and the Federal Trade

Commission as Amici Curiae, Verizon Comm., Inc.

v. Law Offices of Curtis V. Trinko, On Petition for

a Writ of Certiorari, No. 02-682 (filed Dec. 2002)

ix

Cited Authorities

Complaint, Covad Comm. Co. v. BellSouth Corp.,

No. 1:00-CV-3414 (N.D. Ga. Dec. 22, 2000) ..... 7

David Rohde, Bells Are Failing to Compete As They

Promised, Network World, Inc., Mar. 5, 2001

available at http:// www.nwfusion.com/news/

2001/0305bellcomp.html ............6.00 eens 16

F. Scherer & D. Ross, Industrial Market Structure and

Economic Performance (3d Ed. 1990) ............ 21

DSL FAQ: Why is a line sharing install easier?,

BroadbandReports.com, available at http:/ /

www.dslreports.com/faq/402 .............65. 14

Herbert Hovenkamp, Federal Antitrust Policy:

The Law of Competition and Its Practice § 7.7a

PGE DEED escoccccccscccvccesocesccecsess 25

Herbert Hovenkamp, Post-Chicago Antitrust:

A Review and Critique, 2001 Colum. Bus. L. Rev.

BOP GEENED cc cvccccccesccesccenseeeeoccovesess 28

Jason Krause, Dawn of the Big Bells, The Industry

Standard, April 20, 2001, available at http:/ /

www.thestandard.com/ article

©1902, 25671 OO. Dtml 2.0... eee cccccceccccccees 15, 16

Letter from Chairman Powell to House and Senate

Appropriations Committees of 5/4/01 ........ 21

P. Areeda & D. Turner, Antitrust Law (1978) .... 27

Phillip E. Areeda, Essential Facilities: An Epithet in

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

GREUED ccccccccvccvcccccccceveccovevescosecees 25

x

Cited Authorities

Phillip E. Areeda & Herbert Hovexkamp,

Antitrust Law 2d (2002) .........0e eee ec neeee

Plaintiff's Memorandum in Opposition to

Defendant's Motion for Involuntary Dismissal

Under Rule 41(b), United States v. AT&T Co.,

No. 74-1698 (D.D.C., filed Aug. 16, 1981) .......

R. Bork, The Antitrust Paradox, 138 (1960) .........

Second Amended Complaint, Covad Comm. Co. v.

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

RM, TE, BESGD cesssccnccsvoescesscct Resaceses

Stephen P. Pizzo, Why is Broadband So Narrow?,

Forbes, Inc., Sept. 10, 2001 ............- eee eee

Steven C. Salop, Economic Concepts and Antitrust

Analysis, 56 Antitrust L.J. 57 (1987) ............

Thomas G. Krattenmaker & Steven C. Salop,

Anticompetitive Exclusion: Raising Rivals’ Cost to

Achieve Power Over Price, 96 Yale L.J. 209 (1986)

eeeeveeveeoeeeeeveeeeeeeeeeeeeeeeeeeeeeeeeeeee eee eo @

Todd Wallack, Covad Knows How To Saree.

ey EE EE oo cn cccdctéectencesedee

Todd Wallack, Covad Makes A Comeback From

Bankruptcy, S.F. Chron., Sept. 6, 2002 ..........

1

INTEREST OF AMICUS

Amicus Covad Communications Company (“Covad”) is

a competitive local exchange carrier (“CLEC”). Covad is the

largest independent provider of digital subscriber line (“DSL”)

service, a low-cost means of providing high-bandwidth

internet access to businesses and consumers. Covad provides

DSL service to the public through a combination of its own

extensive network facilities and discreet, nonduplicable

elements of the monopoly local telephone networks of

incumbent local exchange carriers (“ILECs”) such as Verizon."

Covad has experienced first hand ILEC anticompetitive

conduct of the type that is the subject of this action. Covad

has been and continues to be severely harmed by that conduct

while other DSL providers, and numerous other CLECs, have

been driven out of business altogether.

Covad has two pending antitrust actions against ILECs

for this very conduct now before the Courts of Appeals for the

Eleventh Circuit (against BellSouth) and the District of

Columbia Circuit (against Verizon). In both actions, the ILECs

moved to dismiss at the pleading stage and Covad appealed.

The District of Columbia Circuit has stayed Covad’s appeal

pending a decision in this case. Covad Communications Co. v.

Bell Atlantic Corp., No. 02-7057. The Eleventh Circuit reinstated

Covad's claims against BellSouth. Covad Communications Co.

v. BellSouth Corp., 299 F.3d 1272, reh’g denied 314 F.3d 1282 (11th

Cir. 2002). The case is stayed while BellSouth’s Petition for a

writ of certiorari to the Eleventh Circuit is pending before this

Court. BellSouth Corp. v. Covad Communications Co.,

No. 02-1423 (petition filed Mar. 20, 2003).

1. Pursuant to Supreme Court Rule 37.6, Covad states that no counsel

for any party authored this brief in whole or in part, and that no person or

entity, other than Covad and its counsel, contributed monetarily to the

preparation or submission of this brief.

The parties have consented to the filing of all amicus briefs. Pursuant

to Supreme Court Rule 37.3, letters evidencing these consents have been

filed with the Clerk.

2

SUMMARY OF THE ARGUMENT

More than seven years have passed since Congress enacted

the Telecommunications Act of 1996, 47 U.S.C. §§ 151, et seq.

(the “1996 Act”), which was designed to bring true competition

to local telecommunications markets. But as the United States

observes, “[s]ince then, the incumbent local exchange carriers

(ILECs), such as the Bell Companies that inherited AT&T's

local telephone franchises, have remained dominant.” Brief

for the United States and the Federal Trade Commission as

Amici Curiae Supporting Petitioner (“US/FTC Br.”), 2.

Competition has not materialized because the ILECs have

manipulated the competitive and regulatory landscapes to

extend their long-sanctioned, rate-payer funded local

telephone monopolies into monopolies over other, emerging

markets, including the markets for Internet access, in which

Covad competes. The ILECs’ persistent misconduct has

devastated the competitive landscape. Many competitors have

been forced out of business altogether and others, such

as Covad, have been grievously injured. The ILECs’

determination to exclude competition, and their success in

doing so, despite the provisions of the 1996 Act, make clear

the need for antitrust enforcement to bring an end to their

exclusionary practices. Without such enforcement, competition

will never develop.

1. The ILECs are engaged in a pattern of conduct

that has been designed to and does devastate competition.

They routinely proffer outright denials of access to their

networks, engage in effective denials through the mechanism

of conscious, unreasonable delays even when ostensibly

deigning to provide access, and take countless steps to raise

their rivals’ costs so as to drive out competition (including by

implementation of an anticompetitive price squeeze with

regard to DSL). Through this course of conduct they have

succeeded both in destroying most market entrants, and also

in consolidating and expanding their own monopoly power.

2. The ILEC conduct about which Respondent and Covad

complain is not novel territory unrecognized by the antitrust

laws. Rather, traditional antitrust doctrines developed over

3

many decades preclude the precise type of misconduct in

which the ILECs are engaged, precisely because it harms

competition.

One need venture no further than the history of the

telecommunications industry itself to reject the ILECs’ notion

that their conduct is beyond the reach of the antitrust laws.

Their duty to provide reasonable access to their monopoly

networks was expressly codified by the 1996 Act, but long

predated it under the antitrust laws. AT&T’s divestiture

resulted directly from anticompetitive tactics virtually

indistinguishable from those now perpetrated by its corporate

progeny. Those practices have been recognized as unlawful

under a number of traditional antitrust doctrines, long before

the 1996 Act. The ILECs’ attacks on antitrust doctrines such as

essential facilities and monopoly leveraging simply ignore this

Court's teachings in a misguided focus on labels. Whatever

label is applied, this Court has long and consistently held that

a monopolist violates Section 2 of the Sherman Act when it

extends its monopoly over one market into monopoly power

over another market. That is precisely what the ILECs stand

accused of doing.

3. Verizon and its amici propose a new and unfounded

test for Section 2 liability involving refusals to deal among

competitors. They propose importing a quasi-predatory

pricing standard, by which conduct is only unlawful if a

monopolist has forsaken otherwise profitable sales to drive

away competition. The Court has never adopted such a

standard, and should not do so. Conduct need not involve a

sacrifice of profits to be exclusionary. Rather, any conduct that

excludes competition on a basis other than efficiency is

exclusionary when engaged in by a monopolist. For example,

monopolists in control of a nonduplicable network are

uniquely positioned to exclude competition without ever

sacrificing profits, merely by raising their rivals’ costs.

Even if Section 2 liability depended on a showing that a

monopolist has forsaken profits, the ILECs would be liable

here and in the cases Covad has brought. Covad, like the CLEC

in this case, does not seek to take any element of the ILECs’

4

networks for free. Rather, the 1996 Act incorporates a pricing

structure that is, by law, profitable. Thus, each time the ILECs

refuse to deal with CLECs such as Covad, they fail to utilize

unused capacity on their networks. They thereby turn away

profits and fail even the ILECs’ imagined test for Section 2

liability.

ARGUMENT

I. The ILECs Routinely Engage In Exclusionary Conduct

That Harms Competition

The antitrust laws and the 1996 Act have the same express

goal - promoting competition. Section 2 prohibits exclusionary

conduct that harms competition: the use of monopoly power

“to foreclose competition, gain a competitive advantage, or

destroy a competitor.” Eastman Kodak Co. v. Image Technical

Services, Inc., 504 U.S. 451, 482-83 (1992) (quoting United States

v. Griffith, 334 U.S. 100, 107 (1948)). Verizon turns the law and

the facts upside down, claiming Section 2 should ignore

whether “competitors remain viable” because competition

itself “harms all rivals” and can “lead to a monopoly market.”

Brief for Petitioner (“Verizon Br.”), 25. Section 2, however,

evaluates both the means employed and the effects on

competition. What a firm may acquire by means of fair

competition is quite distinct from what a firm may do while

wielding pre-existing monopoly power.

Verizon and its fellow ILECs have not engaged in fair

competition. Their success is not due to “innovation or

economies of scale or scope” as Verizon contends, Verizon Br.

25, but to their misuse of their historical monopoly of the local

telephone network - which competitors must access to

compete. They use their control over the local network to starve

out their rivals and gain long-term competitive advantages.

Verizon and its ILEC amici attempt to dismiss protests about

their misconduct as mere quibbles about the particulars of

contract performance. See, e.g., Brief Amicus Curiae of

BellSouth Corporation, SBC Communications, Inc., and Qwest

Communications International, Inc. in Support of Petitioner

(“BellSouth Br.”), 2 (claim “based on routine performance

disputes between contracting parties”). Their misconduct goes

5

far beyond mere technical breaches of contracts. It was and is

intentional, so pervasive as to become institutionalized, and,

unfortunately, highly successful. The ILECs have not only

harmed competition, they have crippled it and, if left

unchecked, fully intend to eliminate it.

A. ILEC Misconduct Affects Far More Than Local

Phone Service Resellers

Respondent presents a compelling case that Verizon's

exclusionary practices have harmed competition for the

provision of basic local telephone service. But Covad addresses

an even more serious problem. The ILECs have used, and

continue to use, their control over the local telephone network

facilities not merely to dominate the local telephone service

market, but to gain and maintain monopoly power over

entirely distinct markets. Covad participates in such markets,

for local Internet access, and has experienced firsthand the

ILECs’ unlawful practices.” Verizon and the other ILECs are

engaged in a pattern of conduct designed to exclude Covad

and other competitors from competing with the ILECs for

customers who want to connect to the Internet.

2. The Second Circuit chose not to address the potential antitrust

claims of CLECs in the context of the 1996 Act. See Law Offices of Curtis V.

Trinko v. Bell Atlantic Corp., 305 F.3d 89, 113 n.19 (2d Cir. 2002). However, to

the extent the Court reaches the issue in this case, it is clear Covad, itself

injured and participating in a market where the ILECs have successfully

driven out all other non-ILEC competitors (see pp. 15-16 post), if anything

has a substantially stronger claim of antitrust injury than even Respondent.

See, e.g., American Ad Mgmt., Inc. v. General Tel. Co. of Cal., 190 F.3d 1051,

1058 (9th Cir. 1999) (“[I]t is not the status as a consumer or competitor that

confers antitrust standing, but the relationship between the defendant's

alleged unlawful conduct and the resulting harm to the plaintiff.”);

Indeck Energy Services, Inc. v. Consumers Energy Co., 250 F.3d 972, 977

(6th Cir. 2000) (” Although antitrust actions may, of course, be initiated by

marketplace competitors, those actors in the economic forum must at least

allege that exclusion of the competitor from the marketplace results in the

elimination of a superior product or a lower-cost alternative”). Here, Covad

has a direct relationship with the ILECs and its alleged injury results directly

from the ILECs’ exclusionary conduct. Whatever derivative injury

consumers incur by reason of the harm to Covad may be worthy of redress,

but certainly no more so than Covad’s direct injuries.

6

Covad is a facilities-based CLEC. It independently owns,

operates and maintains its own telecommunications

transmission and related facilities instead of simply reselling

the ILECs’ telecommunications services. Verizon relies heavily

on the inaccurate notion that its competitors simply resell its

services. See, e.g., Verizon Br. 3 (rivals “resell [ILECs’] services

as mere marketers and middlemen’ ), 26 (disputing obligation

to sell to “mere resellers”), 30 (“the rival simply resells the

incumbent's service”); Brief of United Parcel Service, Inc.,

Honeywell International Inc., Visa U.S.A., Inc., and Eastman

Kodak Company as Amici Curiae in Support of Petitioner

(“UPS/ Kodak Br.”), 21 (rivals “resell the product or service at

retail in direct competition with the firm”). Verizon is wrong.

Facilities-based CLECs like Covad are not “mere resellers” of

ILEC services. Covad undertook the massive investment to

develop, build and support its own network. Thus, when

Verizon and other ILECs refused to deal with Covad, they were

not merely maintaining their existing monopoly but

attempting to extend it into markets where access to the local

telephone network was essential to competition. That conduct

violates the antitrust laws, and always has.

B. Covad And The Deployment Of DSL Technology

The story of the ILECs’ anticompetitive campaign against

Covad and other DSL providers begins with the classic

symptom of monopolistic complacency: suppression of

innovation. Actions that “suppress alternative technology

undeniably quash market competition which hurts consumers

in a manner prohibited by the antitrust laws.” Int’l Bhd. of

Teamsters v. Phillip Morris, Inc., 34 F. Supp. 2d 656, 663 (N.D.

Ill. 1998), aff'd, 196 F.3d 818 (7th Cir. 1999); see also United States

v. Microsoft, 253 F.3d 34, 76-78 (D.C. Cir.) (en banc), cert. denied,

534 U.S. 952 (2001) (Microsoft violated the Sherman Act

by, among other things, suppressing Java technology

development by competitors).

1. ILECs Suppressed DSL Technology

ILECs had DSL technology and the capability to deploy it

for years before the 1996 Act but suppressed its development

and deployment and withheld it altogether from the

7

consuming public to gain further monopoly profits from more

expensive, less efficient, internet access services.’

At the time, due to the rapid acceleration of Internet use,

the Internet access market was ripe for an affordable high-

speed alternative technology. To fill that void, Covad

introduced DSL, a “dedicated” local communications service

that does not travel on the public, switched telephone network.

Unlike switched offerings, dedicated services operate directly

between two set points, provide high speed digital connections

(as much as 50 times faster than the standard 28.8k modem

used for dial-up internet access), and are continually

connected. Thus, DSL customers get fast service, do not need

to dial up every time they want to utilize the service, and they

pay a flat, monthly fee, regardless of the amount of time they

actually spend using the service. DSL technology is also

affordable, because it operates over existing copper phone lines

~ the same ones ILECs use to provide voice telephone service

and much slower or less cost-effective internet access services

- obviating special trenching or cable installation that, until

then, was necessary to get high-speed dedicated connectivity.‘

DSL technology had been available for a number

of years, Verizon and other ILECs suppressed it because they

did not want to reduce their revenues from more profitable

services. Specifically, ILECs offered: 1) POTS (“plain old

telephone service” ), the basic analog local telecommunications

service used for voice calls and for dial-up connections to the

Internet via modems, 2) ISDN (“Integrated Services Digital

Network”), a digital dial-up telecommunications service that

Sena See came telephone Rinse and infeestructare that ts

3. Complaint, Covad Comm. Co. v. BellSouth Corp., No. 1:00-CV-3414,

{15 (N.D. Ga. Dec. 22, 2000) (“BellSouth Compl.”); Second Amended

Covad Comm. Company v. Bell Atlantic Corp., No. 1:99-CV-01046,

q 45 (D.D.C. Aug. 10, 2000) (“Verizon Compl.”). We expect the ILECs may

dispute some of the facts asserted here. But because Covad’s cases against

ILECs such as Verizon and BellSouth are challenged, like Respondent's

claims, at the pleading stage, it is the complaints’ allegations, and not the

ILECs’ denials, that matter.

4. See BellSouth Compl., ¢{ 7, 14, 18-21; Verizon Compl., ¢€ 46-48.

used to provide POTS, and for which customers pay per

minute charges; and 3) T-1 and Frame Relay, dedicated high-

speed services run on (expensive) lines specially-installed for

the individual user, usually a large business.°

2. The Response to the Threat Posed by Covad

Covad and other CLECs formed to take advantage of the

DSL technology the ILEC » iad suppressed.* When that

competitive threat emergea, '».wever, the ILECs immediately

raised significant barriers to impede competitive entry. In so

doing, the ILECs delayed the initial commercial offering of

DSL to the public (and competitive entry into the market)

by more than a year, made impossible the widespread

dissemination of DSL by CLECs, and guaranteed for

themselves continued monopoly profits from other services.’

More importantly, the delay gave the ILECs the time necessary

to develop and deploy their own DSL offerings without fear

of losing any competitive advantage to earlier entrants.*

In the process, ILECs enacted arbitrary policies +. rem | only

to CLECs that further raised CLEC costs for

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component to DSL delivery that competitors could not

duplicate: the ubiquitous local telephone network.

Covad and other DSL CLECs need access to the local

telephone network to provide DSL service. In particular, Covad

must “collocate” - physically place equipment in ILEC facilities

5. See BellSouth Compl., {4 15, 17-22; Verizon Compl., ¢{ 55-59.

6. See Verizon Compl., {{ 45, 69; BellSouth Compl., { 14.

7. See Verizon Compl., ¢¢ 69-70, 97; BellSouth Compl., {{ 1,

45-46, 57.

8. All technology-focused industries place a great premium on being

first to market. See Verizon Compl., ¢ 67. Once a system is up and running,

it is more difficult for a competitor to get a potential customer to undergo

the trouble and inconvenience of switching to another provider. See 1d.

Therefore, “even minor delays” in interconnecting with an ILEC “can

represent a serious and damaging business impediment to competitive

market entrants.” Second Report and Order, In the Matter of Implementation

of the Telecommunications Act of 1996, 13 F.C.C.R. 17,018, { 3 July 14, 1998).

9

such as “central offices”* (“COs”) - to connect to the existing

telephone network.” It must also have access to the copper

telephone wires (called “local loops”) that connect

businesses and residents to COs, and “transport” facilities,

which are broadband transmission pipes that connect

various COs to one another.”

C. The ILECs’ Campaign To Exclude Competition

At every turn, ILECs have taken advantage of their

control over the local telephone network to exclude Covad

and other Internet access competitors - at first, by outright

denials and subsequently, by imposition of unreasonable

and expensive requirements and conditions, thereby raising

CLEC costs. The ILECs, however, do not impose similar

requirements, expenses, or delays on their own retail DSL

operations. Instead, they allocate costs in such a way as to

price their DSL offerings too low for rivals to match and

still cover the high start-up costs the ILECs impose on rival

operations.

1. Outright Denials of Collocation

The ILECs begin their exclusion of facilities-based

CLECs such as Covad by simply shutting the gates. They

routinely deny Covad and other CLECs collocation in

numerous COs within their local service territories,

unilaterally - and falsely - declaring that no space is

available.”* Because each collocation denial effectively

prohibits Covad and other CLECs from serving that CO’s

9. Central offices are the facilities where all of the residential and

business telephone lines for a given geographic area come together and

where the ILECs’ telecommunications equipment (such as switches) is

located. See Verizon Compl, {{ 61-62; BellSouth Compl., ¢ 24. Each state

has several hundred COs and none overlap in geography or customers.

See id. California, for example, has more than 600. See id.

10. See Verizon Compl., ¢{ 71, 91-92; BellSouth Compl., ¢ 31.

Tl. See Verizon Compl, {{ 5, 63-64; BellSouth Compl., ¢¢ 25-44.

12. Physical collocation makes little demand on space. Covad’s

equipment, for example, typically occupies between two and four bays in

the CO. Each bay of equipment is approximately seven feet high and two

feet wide. See Verizon Compl., { 93.

10

market, the ILECs have controlled whether, when and in

which markets CLECs can enter and deploy DSL in

competition with the slower or more expensive ILEC

services and, later, the ILECs’ own DSL offering.”

For example, Covad requested collocation in a CO in

the District of Columbia metropolitan area. Bell Atlantic

(“Verizon”)'* denied collocation, representing to both

Covad and the state commission that the CO was a two-

story building with very little unused, conditioned space.

In fact, the CO has four floors and plenty of unused space

suitable for collocation. In this false manner, Verizon has

denied Covad collocation in many critical market COs

within its territory, including Arlington, Crystal City,

Tyson’s Corner, and the Dulles Corridor, in Washington

D.C., and Wayne, Conshohocken, Bryn Mawr, King of

Prussia, and Landsdale in Pennsylvania. All of these are

business centers with large communities of potential Covad

small business customers." The experience was the same

around the country, no matter the ILEC."*

During that one year plus delay when the ILECs

claimed there was “no space” for Covad, the ILECs found

sufficient space in those COs to install the collocation

equipment of their own retail DSL subsidiaries.” Indeed,

despite the fact that Covad was by far first to market, the

ILECs often ended up rolling out their own DSL offering in

those disputed CO markets before Covad or any other

CLEC.

13. See BellSouth Compl, ¢ 24.

14. Verizon was formed from the merger of GTE Corp. and Bell

Atlantic Corp. See Big is Better, The Investment Dealer's Digest, November

19, 2001, at 30-35.

15. See Verizon Compl., ¢¢ 99-103.

16. For example, Covad’s experience in BellSouth's territory was no

different. See BellSouth Compl, ¢¢ 47-49.

17. See Verizon Compl., ¢ 104.

11

2. Constructive Denials through Unreasonable

Conditions

The ILECs’ denials of access through control of

collocation space have come at a high price for Covad and

other CLECs in terms of time, resources, and delayed market

entry. But even when ILECs have nominally granted access

for collocation, they have taken advantage of every step of

the process to create delay and impose additional

unreasonable and unwarranted expenses on their rivals,

creating an artificial and competitive advantage for their

own unburdened DSL products.

a. Unreasonable delay

When ordering collocation, Covad has experienced

unreasonable delay at every stage of the collocation request

and provisioning process. Covad has often waited upwards

of 120 days just to get a price quote for collocation.” Once

Covad receives the price quote, places the firm order, and

pays the required deposit, all that remains is for the ILEC

to provision the collocation space. But at that point, the

ILECs have again resorted to systematic delay tactics. For

example, Covad waited 221 days for space in the Newman,

Ga. CO, 228 days for space in Fort Lauderdale, Fla., 247 days

in Hollywood, Fla., and in Atlanta, Covad waited more than

120 days for space in 17 of the first 35 COs in which it

ordered space.'* The process, from application to

provisioning, took as much as 375 days in Georgia, 244 days

in North Carolina, and 323 days in Florida.”

b. Anticompetitive build-out requirements

Even where the ILECs agreed to provide Covad with

physical collocation, they have hindered Covad’s ability to

provide competing services by insisting that Covad

18. See BellSouth Compl., ¢¢ 50-53.

19. See id., ¥ 54-57.

20. See id., ¢ 57. Other ILECs implemented similar delay tactics in the

collocation application and provisioning process. See Verizon Compl, ¢ 124.

12

purchase what is known as a collocation “cage”” and

inflating the costs of collocation. Since the ILECs actually built

the cages, they also set the (often exorbitant) fees for that build.

Verizon, for example, required much more than expensive

cages; it required CLECs including Covad to build separate

corridors, entrances, staircases, and even a bathroom before

providing collocation.” Indeed, to build out in a single CO,

Verizon quoted Covad physical collocation prices as high as

$412,226 in Virginia, $368,141 and $252,300 in New Jersey,

$115,900 in Pennsylvania, $115,543 in Delaware, and $154,711

in Maryland.”

For Covad and other CLECs, the “ price-discounted” access

Verizon complains of, Verizon Br. 10, 11, has yet to materialize.

Verizon not only passed all its costs on to the CLECs attempting

to collocate, it charged CLECs as much as five times Verizon's

costs. In Bethesda, Maryland, for example, Verizon incurred

$62,389 in collocation costs for the CO, however, it billed Covad

and the other collocating CLECs more than $320,000 in deposits

(i.e. 50% of the collocation price).

c. Arbitrary loop policies

Once Covad has surmounted the first hurdle and

collocated in a central office, it then encounters the ILECs’

attempts to prevent it from buying and installing local loops.

The ILECs have implemented arbitrary loop policies and

procedures to limit the type of service CLECs could offer,

21. The collocation cage is a metal cage-like barrier that separates the

physical space allotted to the CLECs equipment from the remainder of the

CO. See Verizon Compl, ¢§ 73, 105.

22. See Verizon Compl., ¢{ 105-10, 257-59.

23. See Verizon Compl., 44 105-10. In other states, such as

Massachusetts and New York, commissions supervised collocation practices

more closely, and the average cost for collocation was much lower ($35,000

in Massachusetts and $43,814 in New York). See id., ¢ 111.

24. See id., 4 250. Verizon's over-pricing practice was not unique to

Bethesda. Verizon demanded, and received, more than $200,000 (for $67,531

in costs) for its Moorestown, N.J. CO, more than $270,000 (for $61,000 in

costs) for its Hackensack, N.J. CO, more than $140,000 (for $43,663 in costs)

for its Columbia, Md. CO, more than $378,000 (for $154,904 in costs) for its

Laurel, Md. CO, and more than $153,000 (for $66,125 in costs) for its Marlton,

NJ. CO. See id., ¥§ 251-56.

13

hamper CLECs’ ability to determine the availability of service

to customers at the ordering stage, and add significant delay

to the loop (and, thus, overall DSL service) delivery process.

Because the ILECs’ own retail DSL operations are not subject

to these policies, the ILECs created an artificial competitive

advantage over CLECs.

BellSouth, for example, implemented a manual loop

ordering process for CLECs that is, by design, inept and

calculated to produce delay, human error and uncertainty at

every turn. The ILEC requires, for example, that each order be

typed on a (complicated and confusing) request form and

submitted manually via facsimile to BellSouth where an

employee manually retypes the information into BellSouth’s

system. BellSouth often rejects (without notice to the CLEC)

thousands of orders because the facsimile renders the

transmission illegible or it claims the form is improperly filled

out.” For its own DSL products, by contrast, BellSouth uses

an electronic pre-ordering and ordering system which it does

not make accessible to CLECs.”

Verizon similarly uses loop pre-qualification to impede

competition. Verizon initially tied its willingness to provide

loop information to its own ability to provide DSL services;

when it was not offering DSI. service, it simply refused to

provide Covad or other CLECs with any loop information.

Once Verizon deployed its own DSL service, it would only

provide loop information for those locations where it provided

DSL. In those locations, Verizon would only tell Covad the

loop length, omitting other conditions such as load coils or

bridged taps that could affect DSL transmission over that loop.

In locations where Verizon was not providing DSL, Verizon

subsequently claimed that it would only look up the pertinent

information manually (even though Verizon had an automated

loop information system) and provide it to Covad on a loop-

by-loop basis, a time-consuming and ineffective method for

25. See BellSouth Compl., ¢{ 67-68. BellSouth has at times turned off

its facsimile machines without notice, and has changed facsimile numbers

without notice, later contending that large numbers of orders were never

received. See id.

26. See id., ¥§ 70-71.

14

handling the volume of loop orders Covad placed with

Verizon. Under Verizon's system, therefore, Covad - unlike

Verizon - could not guarantee its customers in advance what

speed service they would get or when.”

3. Discrimination Against Rivals

The ILECs also discriminate against CLECs, and in favor

of the ILECs’ own retail DSL operations by dictating the very

technology CLECs can use to provide DSL services. ILECs do

this for no technologically sound reason, but rather to gain

competitive advantages in, and therefore dominate, the

Internet access markets.” “[A] parent corporation may favor

its subsidiary so long as it does not lead to control of the

relevant market.” H&W Indus., Inc. v. Formosa Plastics Corp.,

U.S.A., 687 F. Supp. 271, 276 (N.D. Miss. 1988), rev'd on other

grounds, 860 F.2d 172 (5th Cir. 1988); see also M&M Med. Supplies

& Serv., Inc. v. Pleasant Valley Hosp., Inc., 981 F.2d 160, 166-68

(4th Cir. 1992) (vacating summary judgment in Section 2 action

alleging hospital monopolized medical equipment market by

marketing only its medical equipment subsidiary’s products).

The ILECs have blatantly engaged in discrimination

regarding a particularly promising technology for delivering

DSL service, known as “line sharing.” Line sharing permits a

single local loop to carry both basic voice telephone service

and DSL service to a customer, simultaneously.” A customer

receiving DSL service via line sharing, therefore, does not need

a second local loop.” But instead of permitting Covad and

27. See Verizon Compl., ¥4 125-130.

28. Relying ona Robinson-Patman Act discussion in a treatise, Verizon

suggests a Section 2 action cannot be sustained when the allegation is that

a parent company discriminated between its subsidiary and unrelated

companies. Verizon Brief 18-19 & n.15. Unlike the Robinson-Patman Act

(and Section 1 of the Sherman Act), Section 2 combats both unilateral and

concerted actions that cause monopolization. See Copperweld Corp. v.

Independence Tube Corp., 467 U.S. 752, 776-77 (1984) (“ Any anticompetitive

activities of corporations and their wholly owned subsidiaries meriting

antitrust remedies may be policed” by Section 2).

29. See BellSouth Compl., § 84; Verizon Compl., {{ 180-81.

30. See, e.g., DSL FAQ: Why is a line sharing install easier?, Broadband

Reports.com, available at http:/ / www.dslreports.com/faq/402.

15

other CLECs to use existing voice lines to provide digital

service, Verizon and BellSouth have required Covad to procure

a second line - that is, a new loop - to offer DSL service. At the

same time, their own DSL operations utilize line-sharing.”!

By forcing CLECs to purchase a second loop to service

their customers and manipulating the process of allocating

the cost of those local loops, the ILECs achieve an anticompetitive

price squeeze. To price their retail DSL service, the ILECs attribute

only a negligible portion of the cost of the local loop to DSL

and other data services, attributing the overwhelming

majority of the cost to the analog voice service they provide

on the same line. The ILECs then set the retail prices for their

DSL services at or below the price they charge CLECs for

the wholesale unbundled loop ILECs require CLECs to

purchase to offer DSL. Unable to match the ILEC DSL retail

price and make a reasonable return on their investment,

CLECs are trapped between the price they must pay as ILEC

customers for the loop and the DSL retail price set by ILECs as

competitive DSL providers. The ILECs thus extend their

monopoly over local loops into control over DSL service as well.

D. ILECs All But Destroyed Competition And

Increased Their Monopolies

By means of this intentional pattern of conduct, ILECs

successfully eliminated or seriously injured their rival CLECs

and expanded the scope and reach of their monopolies. As

one commentator aptly described the current situation:

What's left of Ma Bell’s progeny - BellSouth, Qwest,

SBC, and Verizon - have maintained their lock on

local phone service and driven most of their

newfangled rivals to the hills. They’ve moved

successfully into new markets like wireless and

broadband Net access.

Jason Krause, Dawn of the Big Bells, The Industry Standard,

April 20, 2001, available at http://www.thestandard.

com/article/0,1902,23871,00.html. Indeed, the ILECs’

31. See BellSouth Compl., ¥ 85; Verizon Compl., { 181.

32. See BellSouth Compl., ¥ 84-86; Verizon Compl., ¥ 179-84.

16

anticompetitive conduct “effectively dr[ove] every major [DSL]

competitor except Covad out” of business. Id. All three of the

prominent CLECs offering DSL service in direct competition

with ILEC internet access offerings - Covad, Rhythms, and

Northpoint - were forced into bankruptcy; all but Covad

ceased doing business altogether. See Todd Wallack, Covad

Knows How To Survive, S.F. Chron., Feb. 10, 2003, at E1; Todd

Wallack, Covad Makes A Comeback From Bankruptcy, S.F. Chren.,

Sept. 6, 2002, at B1; see also Stephen P. Pizzo, Why is Breadband

So Narrow?, Forbes, Inc., Sept. 10, 2001, at 50.

The ILECs reduced not only the ranks of their competitors,

but their own ranks, via merger, thereby enhancing their

already enormous monopoly power. The 1984 break-up of AT&T

resulted in seven Regional Bell Operating Companies

(“RBOCs,” i.e. ILECs); now, as a result of several recent mergers,

there are only four: Verizon (the largest), SBC, Ameritech, and

Qwest. See Big is Better, ante. These four mega-ILECs dominate

local telephone network facilities in enormous multi-state

regions, and provide DSL and other Internet access services to

an overwhelming percentage of the population in those states.

That intense consolidation was permitted only on the

premise of the ILECs’ ongoing obligations to open their

networks to competition under the 1996 Act and further

obligations assumed by the merging ILECs to compete with

one another. See David Rohde, Bells Are Failing to Compete As

They Promised, Network World, Inc., Mar. 5, 2001, at 1, available

at http:/ / www.nwfusion.com/news/2001/0305bellcomp.

html. None of this promised competition has materialized.

See id.; see also Krause, Dawn of the Big Bells, ante. As a result,

the ILECs have taken the benefits of the 1996 Act with none of

its burdens. The Act guards against this by means of antitrust

enforcement.

Il. Antitrust Remedies Are Necessary, Proper And

Traditional Means To Combat ILECs’ Anticompetitive

Conduct

Verizon and its amici have mythologized the antitrust laws

to create the appearance that access to their state-created,

ratepayer-funded local monopoly networks would never be

appropriate under the “unadorned antitrust laws.” In reality,

17

many decades of antitrust law, in both regulated and

unregulated industries, make clear that no monopolist may

engage in the type of exclusionary conduct the ILECs have

practiced so relentlessly for the past seven years. The claims

against Verizon in this case are nothing new. Rather, they arise

from the same conduct - abuse of the unique monopoly power

inherent in the local telephone network - that led to the

breakup of the old AT&T Bell System twenty years ago.

A. Traditional Sherman Act Section 2 Doctrines Forbid

The ILECs’ Exclusionary Practices

This Court has long held that there are defined limits ona

monopolist’s privilege not to deal with its rivals:

It is true that as a general matter a firm can refuse

to deal with its competitors. But such a right is not

absolute; it exists only if there are legitimate

competitive reasons for the refusal.

Kodak, 504 U.S. at 483 n.32 (1992); Aspen Skiing Co. v.

Aspen Highlands Skiing Corp., 472 U.S. 585, 601 (1985) (“right

to refuse to deal with other firms does not mean that the right

is unqualified”). As in Kodak, the conduct alleged here, which

involves “market foreclosure,” is “facially anticompetitive and

— the harm that antitrust laws aim to prevent.” 504 U.S.

at :

Verizon and its amici rely heavily on critiques from various

commentators to mask the lack of legal precedent for what

their position truly represents: a dramatic change in how the

antitrust laws treat exclusionary conduct by vertically

integrated monopolists. But the Court has long recognized that

the value of such theoretical economic constructs is limited,

particularly where, as here, the Court is reviewing the case

_ without benefit of a developed factual record. See, e.g., Kodak.,

504 U.S. at 486 (“In the end, of course, Kodak’s arguments

[about interbrand competition logically disciplining

intrabrand market power] may prove to be correct. . . . But we

cannot reach these conclusions as a matter of law on a record

this sparse”). Covad’s claims, like Respondent's, are challenged

on the pleadings, not after development of facts through

18

discovery. At the pleading stage, the claims asserted by

Respondent (and.those asserted against the ILECs by Covad)

state well recognized violations of Section 2 of the Sherman Act.

1. The Unique History of the Regulated

Telecommunications Industry Demonstrates

the Importance of Antitrust Enforcement

The 1996 Act may indeed have been “something brand new”

when it was enacted seven years ago. Verizon Br. 2. But the need

to restrain exclusionary abuses by those who control the local

telephone network is nothing new. Local telephone monopolists

have long been using their control over the nonduplicable local

network - a network that literally connects by wire all end users

in a given geographic region - to exclude competition in other

markets that depend on access to that monopolized local network.

Verizon’ s amici assert that an “ILEC’s affirmative duties to share

its resources with rivals derive not from antitrust law but from

the 1996 Act.” BellSouth Br. 8. They ask the Court to ignore the

history of the antitrust laws, and in particular the painful history

of anticompetitive conduct by local monopolists in the

telecommunications industry.

The requirement to provide reasonable access to elements

of the local telephone network did not originate with the 1996

Act but existed decades before it. Local telephone monupolists

have long been required to provide competitors full access to

their local networks, through a process called interconnection.

See In the Matter of Establishment of Policies and Procedures for

Consideration of Application to Provide Specialized Common Carrier

Services in the Domestic Public Point-to-Point Microwave Radio

Service and Proposed Amendments to Parts 21, 43, and 61 of the

Commission's Rules, 29 F.C.C.2d 870, 940, 4 157 (1971)

(“Specialized Common Carrier”). The FCC regulated that

interconnection duty and AT&T was famously found to have _

violated the antitrust laws for failing to comply with it.

Interconnection is not one duty, but a set of duties. It has

long included the obligation to lease local loops to competitors,

who are entitled to full use of them. See, e.g., Nat'l Ass’n of

Regulatory Util. Comm'rs v. F.C.C., 737 F.2d 1095, 1106 (D.C.

Cir. 1984); Bell Tel. Co. of Pa. v. F.C.C., 503 F.2d 1250, 1259

rr ee -

19

(3d Cir. 1974); MCI Comm. Corp. v. AT&T Co., 708 F.2d 1081,

1140 & n.88 (7th Cir. 1983); Specialized Common Carrier, 29

F.C.C.2d at 938, 940, |] 151, 157; see also MCI, 708 F.2d at 1133

(finding MCI’s request to lease local loops was not a request

to abandon facilities). Interconnection also obliged local

monopolists to provide physical connection between the local

network and competing networks - the same duty embraced

under the 1996 Act by collocation. See United States v. AT&T

Co.,524 F. Supp. 1336, 1352-53 (D.D.C. 1981) (“AT&T”) (“Long

distance and other intercity lines are essentially useless unless

they can be connected to the local switches.”). Those duties

expressly applied to ensure reasonable access for competitors

providing advanced services, such as the DSL service Covad

provides. See California v. F.C.C.,39 F.3d 919, 929 (9th Cir. 1994)

(recognizing pre-1996 FCC order that “BOCs must provide

other enhanced service providers the same interconnections

the BOCs use in providing their own services”); see also In the

Matters of Amendment of Sections 64.702 of the Commission's Rules

and Regulations, 2 F.C.C.R. 3072, 3080, § 61 (May 22, 1987)

(“carriers must provide efficient nondiscriminatory access to

the basic service facilities necessary to support their

competitors’ enhanced services”).

The ILECs’ pre-1996 obligations included not just the duty

to provide access, but to do so on “just and reasonable terms”

that would place competitors on “as nearly as equal plane as

may be.” AT&T, 524 F. Supp. at 1353 (quoting United States v.

Terminal R.R. Ass’n of St. Louis, 224 U.S. 383, 411 (1912));

California v. F.C.C., 905 F.2d 1217, 1229 (9th Cir. 1990) (noting

FCC's pre-1996 “open-network policy of requiring the BOCs

to make the telephone networks as accessible to competitors

as they are to the BOCs themselves”). Indeed, AT&T was found

liable under the Sherman Act some twenty years ago for forcing

interconnections to take place by means of “inappropriate or

inefficient equipment or procedures.” MCI, 708 F.2d at 1150.

Beyond its straight refusals to provide reasonable access

to its monopoly local network, AT&T also took advantage of

the regulated nature of the industry to impede competition:

Finally, and most importantly, the filings with the

state commissions (as a culmination of the

20

negotiations) added additional months of delay

before MCI could enter the market. The combined

effect of the bad faith negotiations and the filing of

the state tariffs may have cost MCI one and a half

years of time and revenue while it fought for

interconnections, first with AT&T at the bargaining

table and later in the FCC and the courts.

MCI, 708 F.2d at 1158.

The same pattern of obstruction and delay has continued

under the 1996 Act, as described in detail above. See pp. 6-16,

ante. As this Court has recognized, ILECs have caused

competitively meaningful delays through refusals to comply

with the 1996 Act:

A separate rate for an unbundled element is not

much good if ... the incumbents refuse to allow

the leased elements to be combined with a

competitor’s own equipment. And this is just what

was happening before the FCC devised its

combination rules. Incumbents, according to the

FCC’s findings, were refusing to give competitors’

technicians access to their physical plants to make

necessary connections.

Verizon Comm., Inc. v. F.C.C., 535 U.S. 467, 532 (2002). Indeed,

just as the old AT&T did, the ILECs are actively using the

litigation process to delay whatever administrative

enforcement might otherwise apply. Fully seven years after

the 1996 Act was enacted, the basic rules under which it will

be administered are still yet to be finally resolved. See, e.g.,

United States Telecom Ass’n v. F.C.C., 290 F.3d 415 (D.C. Cir.

2002) (remanding implementation order to FCC for a third

round of reconsideration, six years after 1996 Act enacted).

That conduct frustrates competition. See, e.g., Southern Pac.

Comm. Co. v. AT&T Co., 740 F.2d 980, 1001-02 (D.C. Cir. 1984)

(cost and delay inherent in regulatory process “clearly

constitute barriers to entry”).

The FCC has observed that even minor delays in providing

interconnection to local telephone networks “can represent a

serious and damaging business impediment to competitive

market entrants” such as Covad and AT&T, the CLEC serving

21

Respondent. Second Report and Order, In the Matter of

Implementation of the Telecommunications Act of 1996, 13 F.C.C.R.

17,018, { 3 (July 14, 1998). FCC and state administrative

agencies simply do not have the power to deter such conduct,

nor to compensate its victims. The FCC acknowledges this.

FCC Chairman Michael Powell has told Congress that “[g]iven

the vast resources of many of the nation’s ILECs,” the FCC’s

current fining authority of $1.2 million per offense

“is insufficient to punish and deter violations in many

instances.” Letter from Chairman Powell to House and Senate

Appropriations Committees of 5/4/01. Antitrust remedies,

including treble damages and attorneys’ fees, are necessary to

make the ILECs, with their vast resources, obey the law.

2. Monopoly-to-Monopoly Leveraging is

Unlawful

Verizon and its amici attempt to present the concept of

monopoly leveraging as somehow beyond the realm of the

“real” antitrust laws. See, e.g., Verizon Br. 43 (monopoly.

leveraging theory is “largely discredited”); BellSouth Br. 20

(monopoly leveraging theory “conflicts with established limits

on antitrust law”). That argument is impossible. Decades of

this Court’s decisions have expressly upheld liability for

monopoly leveraging. As the Court observed in Kodak, it

“has held many times that power gained through some natural

and legal advantage such as a patent, copyright, or business

acumen can give rise to liability if ‘a seller exploits his

dominant position in one market to expand his empire into

the next.” Kodak, 504 U.S. at 479-80 n.29 (citing cases). That is a

point on which the Kodak majority and dissent agreed. 504

U.S. at 498 (“The Court correctly observes that the antitrust

laws do not permit even a natural monopolist to project its

monopoly power into another market”) (Scalia, J., dissenting)

(emphasis in original).*

There can be no question, at this point, that monopoly

leveraging is a well-established Section 2 violation. See, e.g,

33. See also 504 US. at 476 n.23 (“A firm can exact leverage whenever

other equipment is not a ready substitute. F. Scherer & D. Ross, Industrial

Market Structure and Economic Performance 16-17 (3d ed. 1990)”). There is no

substitute, ready or otherwise, for critical elements of the ILECs’ local

telephone network, such as local loops.

-_

22

United States v. Griffith, 334 U.S. 100, 108 (1948) (monopoly

power cannot be used “to beget monopoly”), overruled on other

grounds sub nom. Copperweld, 467 U.S. at 764 n.8; United States

v. Paramount Pictures, 334 U.S. 131, 174 (1948). And the

attempted extension of even a lawful monopoly is improper

“whatever the nature of the device by which” the monopolist

attempts to extend its monopoly. Leitch Mfg. Co. v Barber Co.,

302 U.S. 458, 463 (1938). Even those ingenious enough to

develop a lawfully patented product cannot seek to leverage

or extend their monopolies. Id. As an historically state-

supported and ratepayer-funded monopoly, Verizon has, if

possible, even less justification for extending its monopoly

power into other markets.

In reality, the ILECs are merely using perceived infirmities

in the Second Circuit Court of Appeals’ particular formulation

of the monopoly leveraging test to eliminate-leveraging

liability altogether. There is no basis to do so. Whether the

Court adopts the Second Circuit’s view that gaining a

“competitive advantage” in the secondary market suffices, or

the more stringent view requiring at least a dangerous

probability of obtaining a monopoly in the secondary market,

the ILECs fail the test. They have “exploited [their] dominant

position” over the local telephone network to gain monopolies,

not merely competitive advantage, in a number of additional

markets - including, in the case of Covad, the market for

Internet access. See pp. 15-16, ante. Whatever leveraging

standard the Court applies, the ILECs’ conduct violates the

antitrust boundaries this Court long ago established.

3. The Essential Facilities Doctrine Properly

Applies to the ILECs’ Attempts to Use Their

Local Network Monopolies to Control

Secondary Markets

Verizon and its amici criticize the essential facilities

doctrine at length, pointing out that this Court has never

“recognized” the doctrine. See, e.g., Verizon Br. 40; US/FTC

Br. 21. But they cannot dispute that all thirteen Courts of

Appeal recognize the doctrine, and agree as to its elements.

34. See, e.g., Hecht v. Pro-Football, Inc., 570 F.2d 982, 992-93 (D.C. Cir.

1977), cert. denied, 436 U.S. 956 (1978); Interface Group, Inc. v. Mass. Pont d)

23

And so did the United States in its brief in support of Verizon's

petition for a writ of certiorari in this matter. The United States

described the principle behind “the leading case,” the Seventh

Circuit's decision in MCI, 708 F.2d at 1132-33 as follows:

“a monopolist may be required to assist rivals by sharing a

facility if the monopolist can ‘extend monopoly power from

one stage of production to another.” Brief For The United

States And The Federal Trade Commission As Amici Curiae,

Verizon Comm., Inc. v. Law Offices of Curtis V. Trinko, On Petition

for a Writ of Certiorari, No. 02-682 (filed Dec. 2002) at 12

(quoting MCI, 708 F.2d at 1132-33).° In other words, the

essential facilities doctrine as exemplified by

addresses one situation where an unchecked monopolist ==

would otherwise extend its monopoly into a secondary market

- conduct the “Court has held many times” is unlawful. Kodak,

504 U.S. at 479-80 n.29.

a. Essential facilities claims involve extension

of a monopoly into a second market

The essential facilities claim asserted against ILECs by

Covad, even more so than the claim asserted by Trinko, fits

(Cont'd)

816 F.2d 9, 12 (1st Cir. 1987); Delaware & Hudson Ry. Co. v. Consol. Rail Corp.,

902 F.2d 174, 179-80 (2d Cir. 1990), cert. denied, 500 U.S. 928 (1991); Ideal

Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 748 (3d Cir. 1996); Advanced

Health-Care Serv., Inc. v. Radford Cmty. Hosp., 910 F.2d 139, 150 (4th Cir. 1990);

Mid-Texas Comm. Sys., Inc. v. AT&T Co., 615 F.2d 1372, 1387 n.12 (5th Cir.

1980); Directory Sales Mgmt. Corp. v. Ohio Bell Tel. Co., 833 F.2d 606, 612 (6th

Cir. 1987); MCI Comm. Corp. v. AT&T 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 Vernon v. S. Cal. Edison Co., 955 F.2d 1361, 1366-67 (9th Cir. 1992),

cert. denied, 506 U.S. 908 (1992); Aspen Highlands Skiing Corp. v. Aspen Skiing

Co., 738 F.2d 1509, 1520 (10th Cir. 1984), aff'd on other grounds, 472 U.S. 585

(1985); Covad Comm. Co. v. BellSouth Corp., 299 F.3d 1272, 1285-88 (11th Cir.

2002), reh’g denied, 314 F.3d 1282; Intergraph Corp. v. Intel Corp., 195 F.3d

1346, 1356-57 (Fed. Cir. 1999).

35. Verizon mistakenly asserts that all CLEC claims seek affirmative

“assistance” and to force ILECs to “share” their resources. See, e.g., Verizon

Br. 11, 27. That is not what Covad seeks. Rather, the ILECs are refusing to

lease to Covad elements of their networks that by definition they are not

otherwise using, and from which they are not otherwise deriving the income

Covad would provide. See pp. 26-30, post.

24

perfectly the MCI essential facilities test. MCI distinguished

between two sets of demands for network access by MCI.

The Seventh Circuit found MCI stated an essential facilities

claim when it sought access to elements of AT&T’s monopoly

local telephone neiwork that could not reasonably be

duplicated, to use those elements to provide a separate and

distinct product, long distance service. MCI, 708 F.2d at 1132-

33. By contrast, the Seventh Circuit found MCI had not proved

an essential facilities claim when it sought access to elements

of AT&T's long distance network, in part because MCI had

not proved the elements it sought to lease were essential

(MCI having shown the ability to duplicate them), id. at 1147-

48, and, given the elements were not essential, MCI could not

claim a right to unfettered access to AT&T's entire network

merely to provide the same service AT&T was providing. Id.

at 1149. Verizon has focused on the latter component of the

Seventh Circuit's analysis in isolation, to argue that there can

be no essential facilities claim when the competitor merely

provides the same service as the incumbent whose facilities it

seeks to share. Verizon Br. 42. But that is not what MCI held,

nor would it be a coherent result; if a plaintiff meets the four

well-established elements of the essential facilities doctrine,

there is no reason to import a new unspoken element that the

competitor must participate at a different level of the market

than the monopolist.

In any event, even if the essential facilities doctrine were

somehow inapplicable to those who resell a monopolist’s

products in the same market, that would not justify the ILECs’

plea to do away with the essential facilities doctrine altogether.

It is true that some CLECs merely resell local service they buy

from ILECs at wholesale. But many other CLECs, including

Covad, use interconnection with and elements of the

monopoly local telephone networks to provide competition

to the ILECs in markets other than the market for local

telephone service. This Court's long-standing Section 2

precedents - whether labeled under the essential facilities

doctrine or not - confirm that it is unlawful to wield monopoly

power where doing so extends that monopoly power into other

markets. See pp. 26-30, post.

25

b. Essential facilities claims are especially

important in “natural” monopoly markets

Even Verizon’s amici concede that an essential facilities

approach to refusals to deal is most necessary where the

monopolist controls a “natural monopoly.” See UPS/ Kodak

Brief 25. Academic commentators have agreed. See, e.g., Phillip

E. Areeda, Essential Facilities: An Epithet in Need of Limiting

Principles, 58 Antitrust L.J. 841, 853 n.21 (1990) (MCI “is

probably correct [in holding] a monopolist must, when

feasible, make its essential facility available to a competitor

who is unable to duplicate it.”); Herbert Hovenkamp, Federal

Antitrust Policy: The Law of Competition and Its Practice § 7.7a,

274 (2d ed. 1994) (courts have regularly found to be essential

“structures, plants or other valuable productive assets that

were created as part of a regulatory regime, whether or not

they are properly natural monopolies” ).

The local telephone network has long been recognized as

a paradigm of a “natural” monopoly. See AT&T Corp. v. lowa

Utils. Bd., 525 U.S. 366, 371 (1999) (“States typically granted

[the ILECs] an exclusive franchise in each local service area”).

As this Court has found, because each local telephone network

involves a set of literally many millions of telephone wires

connecting each home and business in the region, duplication

of that network is impracticable in the extreme. See Verizon,

535 U.S. at 490 (“It is easy to see why a company that owns a

local exchange ... would have an almost insurmountable

competitive advantage not only in routing calls within the

exchange, but, through its control of this local market, in the

markets for terminal equipment and long-distance calling as

well.”).

The courts have consistently found - long before the 1996

Act - that this “natural” monopoly power carries with it an

obligation that the local telephone monopolists provide

reasonable access to those local network facilities. MCI, 708

F.2d at 1133, 1138, 1140-41; AT&T, 524 F. Supp. at 1353 (“clear

that the local facilities controlled by Bell are ‘essential facilities’

within the meaning of these decisions”); Southern Pac. Comm.,

740 F.2d at 1008 (finding “the Bell operating companies’ local

distribution facilities are ‘essential facilities’” and that the

26

antitrust laws “prohibit AT&T from unreasonably and

discriminatorily restricting access to these essential facilities”);

see also Phillip E. Areeda & Herbert Hovenkamp, 3A Antitrust

Law 2d 4 772, 175 (2002) (“whether or not local ‘hard-wired’

telephone service is best delivered by a monopoly, it would

be unwise to allow that monopoly to obstruct free competition

in long distance services or telephone instruments, where

competition is clearly possible”).

B. Even Under The ILECs’ Unfounded View Of

Exclusionary Conduct, Their Conduct Is Still

Exclusionary

Verizon and its amici argue for a special, heightened

pleading standard for Section 2 refusal to deal claims against

vertically integrated monopolists. That position is at odds with

their repeated assertions that there are no subcategories of

Section 2 offenses - i.e., essential facilities does not exist as an

independent claim; monopoly leveraging does not exist, and

so on. All Section 2 claims, however labeled, have just two

necessary elements: “(1) the possession of monopoly power

in the relevant market and (2) the willful acquisition or

maintenance of that power.” Kodak, 504 U.S. at 481 (quoting

United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966)). The

conduct the ILECs are alleged to have engaged in more than

satisfies that pleading test, the only one this Court has ever

said applies to refusal to deal claims. Verizon's proposed test

would immunize conduct recognized by established antitrust

principles as anticompetitive. In any event, even if the Court

adopted the new “predatory pricing” standard Verizon urges,

Verizon would still fail the test because it routinely foregoes

profits when it refuses to deal with CLECs such as Covad.

1. Verizon and Its Amici Try to Create a False

Predatory Pricing Requirement for Section 2

Liability

As the Court put it in Kodak, what Verizon and its amici

seek here would be “a radical departure in this Court's antitrust

law.” 504 U.S. at 479-80 n.29. They seek the creation of a new

pleading rule, one that essentially imposes a predatory pricing

requirement before a monopolist may be found to have

engaged in an actionable refusal to deal. That proposed

ow een

27

amendment to the Sherman Act is both unfounded and ill-

advised.

The United States argues that the Court should analyze

claims against ILECs using the same “sort of analysis

[it employs] with respect to predatory pricing.” US/FTC

Br. 16. That would be a massive change to, not an application

of, the antitrust laws. It is true the courts “have recognized

that conduct is exclusionary where it involves a sacrifice of

short-term profits or goodwill that-makes sense only insofar

as it helps the defendant maintain or obtain monopoly power.”

Id. But that is not the only form of conduct that qualifies as

exclusionary. Rather, the Section 2 jurisprudence of this Court

and the lower courts recognizes that “the means of illicit

exclusion, like the means of legitimate competition, are

myriad.” Id., 14 (quoting Microsoft, 253 F.3d at 58).

That is why courts analyzing claims of exclusionary

conduct have focused not on attempts to establish a list of

practices that are (or are not) exclusionary, but have analyzed

instead the “anticompetitive effect” of the challenged conduct.

Microsoft, 253 F.3d at 58. Thus, conduct is exclusionary if it

“harms the competitive process.” Town of Concord v. Boston

Edison Co., 915 F.2d 17, 21 (1st Cir. 1990) (Breyer, J.). Contrary

to Verizon's suggestion, Aspen Skiing Co. v. Aspen Highlands

Skiing Corp., 472 U.S. 585 (1985), did not require, to state a

refusal to deal claim, that a monopolist forego profits or change

a prior policy of dealing with competitors. To the contrary,

Aspen recognized the broad and flexible nature of exclusionary

conduct: “If a firm has been ‘attempting to exclude rivals on

some basis other than efficiency,’ it is fair to characterize

its behavior as predatory.” 472 U.S. at 605 (quoting R. Bork,

The Antitrust Paradox, 138 (1960)). Aspen went on to quote

the Areeda and Turner definition of exclusionary conduct:

“behavior that not only (1) tends to impair the opportunities

of rivals, but also (2) either does not further competition on

the merits or does so in an unnecessarily restrictive way.”

Id. at 605 n.32, (quoting P. Areeda & D. Turner, 3 Antitrust Law

{| 626b, 78 (1978)). While the fact pattern in Aspen certainly

28

met that test, the Court has never - in Aspen, Kodak or elsewhere

- pronounced that only forsaking profits would do so.*

2. Raising Rivals’ Costs Is Exclusionary

Verizon's proposed test is obviously flawed because it

exempts from liability any anticompetitive conduct that does

not involve the sacrifice of profits. Among other things, it thus

immunizes the well-recognized propensity of monopolists to

destroy competition without ever foregoing a cent of profit,

by raising their rivals’ costs. See generally Thomas G.

Krattenmaker & Steven C. Salop, Anticompetitive Exclusion:

Raising Rivals’ Cost to Achieve Power Over Price, 96 Yale L.J. 209,

224 (1986) (“Raising rivals’ costs can be a particularly effective

method of anticompetitive exclusion. This strategy need not

entail sacrificing one’s own profits in the short run... .”);

see also Herbert Hovenkamp, Post-Chicago Antitrust: A Review

and Critique, 2001 Colum. Bus. L. Rev. 257, 318-23 (2001)

(discussing economic logic behind raising rivals’ cost theory).

Raising rivals’ costs has been a primary mechanism by which

ILECs have destroyed competition.

Where, as here, a monopolist controls inputs that are

necessary to competition, it can thwart that competition by

raising its rivals’ costs of obtaining them. That may happen

directly, as with the type of price squeeze condemned in the

landmark Alcoa case, United States v. Aluminum Co. of America.

148 F.2d 416, 437-38 (2d Cir. 1945); see also Steven C. Salop,

Economic Concepts and Antitrust Analysis, 56 Antitrust L.J. 57,

58-59 (1987) (evil of price squeeze is not predatory pricing;

“rather, it is a claim that firms exclude rivals and gain power

over price by raising their rivals’ costs”). Monopolists have

also found more subtle means to inflate their competitors’

costs. See, e.g., Ball Mem’! Hosp., Inc. v. Mutual Hosp. Ins., Inc.,

36. Indeed, the Seventh Circuit has interpretéd Aspen to mean

“a monopolist may be guilty of monopolization if it refuses to cooperate

with a competitor in circumstances where some cooperation is indispensable

to effective competition.” Olympia Equip. Leasing Co. v. Western Union

Tel. Co., 797 F.2d 370, 379 (7th Cir.) (Posner, J.) reh’g denied, 802 F.2d 217

(1986), cert. denied, 480 U.S. 934 (1987). That is precisely what Respondent,

and CLECs such as Covad, have alleged. The ILECs refuse to deal with

CLECs with the specific knowledge that their refusal makes it impossible

to compete.

29

784 F.2d 1325, 1339-40 (7th Cir. 1986) (“When a firm finds a

way to confront its rivals with higher costs, it may raise its

own prices to consumers without drawing increased output

from them.”); Forsyth v. Humana, Inc., 114 F.3d 1467, 1478

(9th Cir. 1997), aff'd, 525 U.S. 299 (1999) (reversed summary

judgment; policy raised factual question of whether conduct

raised competitor’s costs); Multistate Legal Studies, Inc. v.

Harcourt Brace Jovanovich Legal and Prof! Publications, Inc., 63

F.3d 1540, 1553 n.12 (10th Cir. 1995) (raising rival's costs “would

qualify as anticompetitive conduct unless [defendants] could

demonstrate a legitimate business justification for it”).

Verizon and its fellow ILECs have perpetrated both types

of raising-rivals’-costs schemes - especially against facilities-

based CLECs such as Covad. The ILECs have engaged in direct

price squeezes, see p. 15, ante, and routinely employ countless

mechanisms to make the interconnection process as time-

consuming and costly as possible, see pp. 12-14, ante, all with

no purpose but to extend their monopoly over the local

telephone network into monopoly power over downstream

markets such as the market for Internet access. The United

States emphasized the exclusionary effects of just such a

strategy, when used by AT&T:

Even with respect to those limited facilities AT&T

agreed to provide, it imposed a number of

cumbersome and unnecessary technical and

operational practices on its competitors which

increased their costs and lowered the quality of

their service, in marked contrast to the efficient

interconnection arrangements made available to

AT&T's own intercity private line connections.

Plaintiff's Memorandum in Opposition to Defendant's Motion

for Involuntary Dismissal Under Rule 41(b), at 79, United States

v. AT&T Co., No. 74-1698 (D.D.C., filed Aug. 16, 1981). Yet the

approach suggested by Verizon and the United States, which

would require predatory pricing to state a refusal to deal claim,

would place all that plainly anticompetitive conduct beyond

the reach of the antitrust laws. That would indeed be a “radical

departure” in the law.

30

The United States’ position also appears to be a radical and

unexplained departure from its prior position concerning CLEC

antitrust claims against ILECs. The United States (together with

the Federal Communications Commission) opined to the Court

of Appeals for the Eleventh Circuit in 2001 that a CLEC’s

allegations of an ILEC’s “failure to provide reasonable

interconnection” under the 1996 Act - remarkably similar to the

allegations asserted by Respondent here and by Covad in its

lawsuits against ILECs - sufficiently “allege[d] exclusionary

conduct by a firm with monopoly power that lacks business

justification and that harms competition.” See Brief for the United

States and Federal Communications Commission as Amici

Curiae in Support of Appellants, Intermedia Comm., Inc. v. BellSouth

Telecomm., Inc., No. 01-10224-J] (11th Cir. filed Mar. 28, 2001)

25-26. Verizon and its amici offer no explanation how the antitrust

laws have changed since then, so that such conduct is no longer

exclusionary, as a matter of law.

3. ILECs Routinely Forego Profits to Harm

Competition

Even if the Court adopted the new “predatory pricing”

test proposed by Verizon and the United States, Verizon and

its fellow ILECs would still be liable under it. Just as in Aspen

and Kodak, to exclude their CLEC competitors, the ILECs are

foregoing profits, by refusing to engage in what would

otherwise be profitable sales. CLECs, after all, do not buy

unbundled network elements from ILECs for free or even, as

Verizon falsely suggests, at cost. Rather, the FCC has mandated

that states price unbundled network elements using the Total

Element Long Run Incremental Cost (“TELRIC”) methodology,

which expressly covers both the ILECs’ costs and a reasonable

profit. Verizon, 535 U.S. at 493, 500 n.19. Indeed, given that

most elements of the local telephone network (including,

notably, the many millions of essential local loops controlled

by the ILECs) have been in place and funded by ratepayers

for many decades, it is hard to imagine how the ILECs could

claim the transactions are unprofitable.

CONCLUSION

For the foregoing reasons, the Court should affirm the

judgment of court of appeals.

Respectfully submitted,

MarGareT A. RosBINs ALFRED C. PFEIFFER, JR.

Associate General Counsel Counsel of Record

Covap COMMUNICATIONS FRANK M. HINMAN

COMPANY Marta E. Miyar

3420 Central Expressway BINGHAM McCutTcHen LLP

Santa Clara, CA 95051 Three Embarcadero Center

(408) 616-6616 San Francisco, CA 94111

(415) 393-2000

Attorneys for Amicus Curiae

Covad Communications Company, Inc.