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

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No. 02-682 ~~

IN THE

Supreme Court of the Anite

VERIZON COMMUNICATIONS INC..

Petitioner.

LAW OFFICES OF CURTIS V. TRINKO, LLP,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF OF Z-TEL TECHNOLOGIES, INC. AS

AMICUS CURIAE SUPPORTING RESPONDENT

CHRISTOPHER J. WRIGHT *

TIMOTHY J. SIMBONE

HARRIS, WILTSHIRE &

GRANNIS LLP

1200 Eighteenth Street, N.W.

Washington. DC 20036

(202) 730-1300

CHRISTOPHER V. GOODPASTOR

Z-TEL TECHNOLOGIES, INC.

601 S. Harbour Island Blvd.

Suite 220

? Tampa, Florida 33602

* Counsel of Record (813) 233-4982

July 25, 2003

SIE SPE a a a EE aD

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

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ......ccccssssccsssssssscesssssssseeseen iii

INTEREST OF AMICUS CURIAE .cccsssssssssssssssesssssevee ; |

BACKGROUND ......ccecsss0000e INT a oc

SUMMARY OF ARGUMENT ..0ccccccssessesssssssssessssssessees 6

LLL ATTA 10

I. VERIZON AND THE GOVERNMENT

RELY ON DISPUTED ISSUES OF FACT,

WHICH CANNOT BE RESOLVED AT

THE PLEADING STAGE, TO CHARAC-

TERIZE POTENTIAL COMPETITORS

INCORRECTLY AS MERE “RESELLERS” .. 10

Il. SECTION 2 AND THIS COURT’S PRECE-

DENTS IMPOSE AN _ AFFIRMATIVE

DUTY TO DEAL ON THE OWNER OF

ESSENTIAL FACILITIES THAT CANNOT

REASONABLY OR PRACTICALLY BE

eT Ena O Oe TEE cosccncscesecenmennesennsesssnsveesesencsoonesses 12

A. Retail Competition Will Not Arise

Without Antitrust Intervention When A

Monopolist Owns Essential Facilities

That Competitors Need To Provide Retail

BI asisiepeccesianandieanienseanicecsentensncsnsenessesees 12

B. This Court Has Recognized That A

Monopolist’s Refusal To Provide Rea-

sonable Access To Essential Facilities

NE CIID Bececsccccnnsansnacssosssszenenensense 15

TABLE OF CONTENTS—Continued

C. Otter Tail Squarely Applies To The

Essential Transmission Facilities That

Competitive Companies Need To Provide

Local and Vertical Telecommunications

BOT VEB EB rccccccscovccssessesstentemmtene

D. The Essential Facilities Doctrine

Provides A Sound Basis For Identify-

ing When Monopolists Must Deal

With Comapetttet .cccccccscossssescssecssccsnensaniiins

E. Adopting The Government’s Test For

“Exclusionary” or “Predatory” Conduct

Would Eliminate The Essential Facilities

DOCUTTNG ..ccccccccccnssncscoonsscnssansiennnnsesninianlia

F. This Court Already Has Rejected The

Government’s Argument That A Desire

To Maintain Retail Profits Justifies A

Monopolist’s Refusal To Deal In

Connection With Essential Facilities.........

G. Verizon’s Argument That The Essential

Facilities Doctrine Applies Only To

Monopolists That Have Voluntarily Dealt

With Competitors In The Past Is

Ill. THE GOVERNMENT’S ARGUMENTS

AGAINST APPLYING A “MONOPOLY

LEVERAGING” THEORY IN THIS CASE

ARE MISPLACED .............ccccccossssssecsssesssssessoese

IV. LIABILITY UNDER SECTION 2 IS FULLY

CONSISTENT WITH THE TELECOM-

MUNICATIONS ACT OF 1996 ........cccccccsseeseees

CONCLUSION ....cccoccosccccccssosssoossssonssssnssssnssenseasssennnnnan

Page

iil

TABLE OF AUTHORITIES

SUPREME COURT CASES Page

Aspen Skiing Co. v. Aspen Highlands Skiing

Carp, S72 U.S. SBS (1DBS)......cceccrcccsceccssesecessees 23

AT&T Corp. v. lowa Utilities Board, 525 U.S.

Te 5,6

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

rR 12

Eastman Kodak Co. v. Image Technical Servs.,

I passim

General Motors Corp. v. Tracy, 519 U.S. 278

ELT 14

International Salt Co. v. United States, 332 U.S.

i eracierreertereineeneenenenssensensensseees 13

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

CC EE 26

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

ei deccereariesicannnmemenennneensscneueneenesee passim

Standard Oil Co. v. United States, 221 U.S. |

i taeenetcmetncennnennnnnnensenscnseeees 12

United States v. Griffith, 334 U.S. 100 (1948)....... 13

United States v. Grinnell Corp., 384 U.S. 563

ES 12

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

EE 29

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

LT passim

LOWER COURT CASES

Delaware & Hudson Railway Co. ¥.

Consolidated Rail Corp., 902 F.2d 174 (2d

Ee 20

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

Tc 3, 14, 15, 18

TABLE OF AUTHORITIES—Continued

Southern Pacific Communications v. AT&T, 740

Virgin Atlantic Airways » %ritish Airways, 257

ADMINISTRATIVE MATERIALS

In re Amendment of Section 64.702 of the

Commission's Rules and Regulations, Final

Decision, 77 F.C.C.2d 384 (1980)...

In re Application by Bell Atlantic New York for

Authorization Under Section 271 of the

Communications Act To Provide In-Region,

InterLATA Service in the State of New York,

Memorandum Opinion and Order, 15 FCC

PRRs SE ISSO cms

In re AT&T Corp. v. Ameritech Corp.,

Memorandum Opinion and Order, 13 FCC

PR OG GRO SED ence

In re Computer Il Further Remand Proceedings,

In re Implementation of the Local Competition

Provisions in the Telecommunications Act of

1996, First Report and Order, 11 FCC Red

Local Telephone Competition: Status as of

December 31, 2002 (June 12, 2003)..................

Press Release, FCC Adopts New Rules for

Network Unbundling Obligations of Incumbent

Local Phone Carriers (Feb. 20, 2003)...............

Review of the Section 251 Unbundling

Obligations of Incumbent Carriers, Notice of

Proposed Rulemaking, 16 FCC Rcd 22781

TABLE OF AUTHORITIES—Continued

STATUTES Page

Ba Wise 00 Sircnssnsnesneunnesennenensnnmnensnanieseecemmemmmenamens passim

Communications Act of 1934, 47 U.S.C. § I5I

et seq.

Be GE ON cestssenennnnspesenmeneenenensemmeneenmemntins 9,27

Ir ei il ccsentenientienanteiatpittetiianidpeneapanniepnsamtintssinaiittiniies 26

Telecommunications Act of 1996, Pub. L. No.

Sey, SEC, Se ccsenmmensnsnssevemmscssnseressenensens passim

MISCELLANEOUS MATERIALS

ABA Section on Antitrust, Antitrust Law

Developments (Sth ed. 2002) ..............cccccceeeeeeeee 28

P. Areeda and H. Hovenkamp, Antitrust Law

ene 8, 19,24

R. Bork, The Antitrust Paradox (1978) ................. 23

J. Soma, D. Forkner, and B. Jumps, The Essential

Facilities Doctrine in the Deregulated

Telecommunications Industry, 13 Berkeley

es Chats GUE crcenmancnnnenmsensnsesen

J. Speta, Tying, Essential Facilities, and Network

Externalities: A Comment on Piraino, 93 NW

_— — ——~—e- -

a em

INTEREST OF AMICUS CURIAE

Z-Tel Technologies, Inc. (“Z-Tel”) provides telephone

service, through its subsidiaries, to more than 250,000

customers in 47 states. Z-Tel’s substantial interest in this

litigation arises from the company’s unavoidable dependence

on access to the local telephone networks acquired by the

incumbent local exchange carriers (“incumbents”), including

petitioner Verizon Communications, Inc. (“Verizon”), during

decades of their existence as state-franchised monopolists.

~ Adopting the position advanced in this case by Verizon and

by the Department of Justice and the Federal Trade

Commission (collectively, the “government”) would have

substantial, negative consequences for competitors and

consumers. Z-Tel therefore respectfully submits this brief to

assist the Court in resolving this litigation.

BACKGROUND

1. Z-Tel competes against incumbent local telephone

companies by providing telephone service to residential and

small-to-medium-sized business customers. Although

Verizon erroneously describes competitors like Z-Tel as

companies that merely seek to resell incumbent services, Z-

Tel is no more a reseller of telephone service than General

Motors is a reseller of steel. Z-Tel has invested more than

$100 million in “vertical service” capabilities alone.’ Z-Tel

originally was conceived as a software company devoted to

developing unique vertical services for the telephone. Today,

' As incumbent SBC Communications, Inc. (“SBC”) explained in a

recent filing with the Securities and Exchange Commission, “vertical

services” are “enhanced telephone services available to retail customers

such as Caller ID, Call Waiting, and voice mail. . . . These services are not

regulated by the FCC and are generally more profitable than basic

local phone service.” SBC Form 10-K Report (for fiscal year ending

December 31, 2002), at 3-4 (available at http://www.shareholder.com/sbe/

downloads/!0-K_2002.doc).

t a

its innovative offerings include voice-mail that may be

accessed over the Internet; “find me” call-forwarding, which

directs calls to multiple numbers when the first number dialed

is not answered; and Z-Tel’s newest innovation, “Personal

Voice Assistant,” a unified, voice-recognition messaging

service that allows subscribers, simply by using their voice,

(1) to make calls or retrieve contact information from their

“Outlook” or other address book, and (2) to send voice

messages by e-mail from any phone without using a

computer.

As a consequence of decades of franchised monopoly and

the incumbents’ continuing dominance of the Advanced

Intelligent Network platform,’ the overwhelming majority of

consumers purchase their vertical services from their local

telephone service provider. To maximize Z-Tel’s ability to

compete for customers, the company expanded its original

business plan to serve customers directly as a competitive

local exchange carrier.’

To provide competitive telephone service, Z-Tel needs to

lease “costly bottleneck elements” from the incumbents,

“duplication of which is neither likely nor desired.” Verizon

Communications, Inc. v. FCC, 535 U.S. 467, 515 (2002).

Competitors cannot economically duplicate the entire local

network of “loops,” the actual lines running into homes and

businesses. Competitors also need access to incumbents’

switches because loops are typically “hard-wired” to those

switches; it is economically infeasible to bypass that

bottleneck using a high-capacity line unless a customer has at

2 The Advanced Intelligence Network platform allows external

computers to control call processing and to manage network information,

enabling the provision of sophisticated vertical services.

> Z-Tel’s most popular product is a “bundled” product that includes its

innovative vertical services. See www.z-felcom (describing “Z-

LineHOME”).

least 18 phone lines in a particular location.’ Moreover, for

technical and economic reasons, competitors that need access

to an incumbent’s switches also need access to its local

transport and signaling.

The incumbents’ control of these facilities gives them “an

almost insurmountable competitive advantage,” so that a

“newcomer could not compete with the incumbent carrier to

provide local service without coming close to replicating the

incumbent’s entire existing network.” Verizon, 535 U.S. at

490. In that regard, little has changed since 1983, when the

Seventh Circuit concluded that “MCI could not duplicate

Bell’s local facilities” because it would not be “economically

feasible.” MCI Communica-tions Corp. v. AT&T, 708 F.2d

1081, 1133 (7th Cir. 1983).

2. The finished products Z-Tel sells are completely

different from the inputs it buys from incumbents. Z-Tel’s

innovative vertical services are obviously different from the

inputs (loops, switches, transport, and signaling).° But the

inputs also differ from basic local voice services. Standing

alone, the inputs represent only raw capacity, rather than a

finished service. To provide local voice services, Z-Tel must

combine the leased capacity with customer service, account

* Z-Tel discussed these issues in detail in publicly available comments

filed at the Federal Communications Commission. See Comments of

Z-Tel Communications, Inc., FCC CC Docket 01-338 (Apr. 5, 2002),

at 28-56.

* The FCC recently rejected the incumbents’ argument that competitors

do not need access to incumbents’ switches, transport, and signaling to

provide service to residential and small business customers. See FCC

Press Release, FCC Adopts New Rules for Network Unbundling

Obligations of Incumbent Local Phone Carriers (Feb. 20, 2003) (“FCC

Press Release”).

° Moreover, those vertical services are provided primarily by means of

equipment based in Tampa, Florida, that Z-Tel does not lease from

the incumbents.

_management, and billing and collection. It must also under-

take the complicated work of charging (and paying) other

carriers for sending and receiving calls.’ These activities may

add as much to the cost of providing retail local voice

services as do the inputs controlled by the incumbent.*

For most of the history of telephone service in the United

States, local services were dominated by a single company,

AT&T. In the 1980s, the break-up of AT&T permitted

the long-distance market and the telephone equipment

manufacturing market to become competitive. Local voice

services, however, remained dominated by the Regional Bell

Operating Companies that spun off from AT&T; these

companies continued to provide local voice services as

franchised monopolists.’

In adopting the Telecommunications Act of 1996, Pub. L.

No. 104-104, 110 Stat. 56 (“1996 Act”), Congress sought to

open local voice services to competition. Although incum-

” For example, when an AT&T customer or a Verizon Wireless

customer calls a Z-Tel customer, Z-Tel may be entitled to collect a

“terminating access” charge. Similarly, Z-Tel may owe another carrier

when one of its customers calls a customer served by another carrier. Z-

Tel operates a large call center and its account management staff

constitutes a significant portion of Z-Tel’s 1,200 employees.

* Z-Tel also provides these services at wholesale to other carriers

seeking to provide competitive local service, including Sprint and, before

its bankruptcy, MCI.

*® Both before and after the break-up of AT&T, the FCC attempted to

foster competition in “enhanced services” (including vertical calling

services), recognizing that the “importance of the control of local facilities

. . cannot be overstated.” /n re Amendment of Section 64.702 of the

Commission's Rules and Regulations, Final Decision, 77 F.C.C.2d 384,

468 (1980); see generally In re Computer Il Further Remand

Proceedings, 14 FCC Red 4289 (1999) (describing the relevant FCC

decisions). For vertical services, however, no significant competitive

industry emerged to challenge incumbent monopolies until competitors

like Z-Tel were allowed to provide competitive voice service.

bent resistance has greatly slowed the development of

competition, approximately 14 million residential and small

business customers have chosen to obtain service from a

competitive local exchange carrier rather than = an

incumbent.'” These customers apparently believe that

competitive carriers offer differentiated services that are

superior to those provided by the incumbent.

3. This case presents the question of whether federal

antitrust claims may be stated against incumbents for refusing

to deal with competitors that need access to incumbents’

essential facilities to provide local voice services. The

plaintiff in this case alleges a problem commonly encountered

by Z-Tel and other competitive carriers—that Verizon,

instead of flatly denying access to its facilities, effectively

denied access by filling competitors’ orders more slowly than

its own.

By undermining competitive access to their essential

facilities, the incumbents seek to maintain their dominance

over both local voice services and vertical services. Vertical

services are particularly important to incumbents because

such services are unregulated, and therefore offer incumbents

“a higher profit margin than basic local service.” See, e.g., In

re AT&T Corp. v. Ameritech Corp., 13 FCC Red 21438,

21468 (1998) (quoting the brief of Ameritech—now part

of SBC—in that proceeding). Vertical services allow

new entrants to distinguish themselves with new and better

services, permitting competitors the opportunity to add

customers for both vertical and local voice services.'? The

'° Federal Communications Commission, Local Telephone Competi-

tion: Status as of December 31, 2002 (June 12, 2003), Table 2.

'' Pet. App. 6a. The case below was dismissed pursuant to Fed. R. Civ.

P. 12(b)(6). Pet. App. Sla. Accordingly, respondent's allegations must

be taken as true at this stage.

'2 7-Tel leases network elements—one of the three means of market

entry noted by this Court in AT&T Corp. v. lowa Utilities Board, 525 U.S.

incumbents’ efforts to foreclose competition in local voice

services not only preserve their dominance (and the

associated revenues) in that realm, but also eliminate

competition (on both price and quality) in vertical services.

In this case, the Second Circuit concluded that the plaintiff

had stated claims under Section 2 of the Sherman Act. First,

by alleging that Verizon had denied reasonable access to its

bottleneck facilities, the court concluded that the plaintiff had

stated a claim under the essential facilities doctrine. Pet.

App. 30a. Second, by alleging that Verizon was using its

“monopoly power over a wholesale market . . . to gain a

competitive advantage in a retail market in which

telecommunications carriers sell local phone service to

consumers,” the court found that the plaintiff had stated a

“monopoly leveraging” claim as well. Pet. App. 30a.

SUMMARY OF ARGUMENT

1. To provide its local voice and vertical services to

customers, Z-Tel needs access to local telephone transmission

facilities owned by incumbents. Although decades of state-

sanctioned monopoly over local voice services ended with the

passage of the Telecommunications Act of 1996, the

incumbents intentionally seek to maintain their dominance in

local voice services and vertical services by denying

reasonable access to their essential facilities.

The incumbents’ conduct violates Section 2. Of course,

Section 2 does not broadly prohibit monopoly as such: the

underlying premise of the law is that a general governmental

proscription of monopoly is unnecessary because, in markets

free from exclusionary and predatory conduct, competition

will develop without intervention. Competition itself breeds

competition and destroys monopolies.

366, 372 (1999)—rather than reselling the incumbents’ services because it

best permits Z-Tel to distinguish itself by offering both innovative vertical

services and better customer service.

As this Court recognized in Otter Tail Power Co. v. United

States, 410 U.S. 366 (1973), however, in certain circum-

stances the competition necessary to break down monopoly

power cannot develop without intervention. Specifically,

where essential facilities of the sort owned by the incumbents

are involved, a monopoly may be preserved unlawfully and

competition eliminated absent an affirmative requirement that

the owner of essential facilities deal with competitors. In

those narrow circumstances, Section 2’s fundamental concern

of protecting the competitive process requires the imposition

of a duty to deal.

The essential facilities doctrine provides a sound basis for

identifying the circumstances under which monopolists are

required to deal with competitors. Properly construed, the

doctrine requires owners of essential facilities that cannot

reasonably or practically be duplicated—facilities the

“duplication of which is neither likely nor desired,” Verizon,

535 U.S. at 515—to deal with competitors on reasonable

terms to allow the use of those facilities.

Unlike Verizon, which seeks a broad disavowal of the

essential facilities doctrine, the government concedes that the

doctrine may help to identify Section 2 violations. Brief for

the United States and the Federal Trade Commission as

Amici Curiae Supporting Petitioner (“SG Br.”) 22 n.6.

Nevertheless, the government’s “exclusionary or predatory

conduct” standard would eviscerate the doctrine by

permitting liability to be found only when a monopolist’s

“refusal to sell his goods or services below the monopoly

price” makes no business sense. SG Br. 22-23. That novel

standard incorrectly implies that competitors such as Z-Tel

are merely “resellers” by ignoring the difference between

finished local voice services and the essential facilities (i.e.,

loops, transport, switching and signaling) used as inputs into

the finished services. Although the antitrust laws might not

always prohibit a monopolist from selling a finished retail

service at a monopoly price, that conclusion does not apply to

the price of essential facility inputs needed by competitors to

create retail services to compete with those offered by the

owner of the essential facility. Indeed, there is no

competitive price at which it would make “business sense”

for the owner of an essential facility to sell access to that

facility—hence the need for the essential facilities doctrine.

In any event, the government’s standard should be rejected

because it relies on a disputed factual issue of market

definition that cannot be resolved at the pleading stage.

The government also suggests that a monopolist’s desire to

protect revenues in its retail market justifies a refusal to

provide reasonable access to essential facilities at wholesale.

That argument fails under this Court’s precedents. In Otter

Tail, this Court squarely rejected the defendant’s claim that

its desire to protect its retail revenues justified its refusal

either to sell power to the plaintiffs at wholesale or to allow

its essential transmission facilities to be used to “wheel”

wholesale power to the plaintiffs from other sources.

Similarly, in Eastman Kodak Co. v. Image Technical Servs.,

Inc., 504 U.S. 451 (1992), this Court rejected the defendant’s

efforts to preserve its retail service revenues by refusing to

sell parts to competitive service providers at wholesale.

2. Plaintiff's monopoly leveraging claim falls squarely

within the traditional scope of Section 2. It “requires no

extension of Sherman Act §2’s basic coverage” to find

liability when a company “forces customers of its A

monopoly to purchase its B good rather than the good of any

rival.” P. Areeda and H. Hovenkamp, 3 Antitrust Law 95-96

(2d ed. 2002) (“Areeda & Hovenkamp”). That is precisely

what the incumbents seek to do: they wish to use their

monopoly over local voice services to force customers to buy

profitable vertical services from them, rather than from

competitive entrants.

This Court’s decision in Kodak confirms that efforts by a

company with a lawful monopoly to leverage its monopoly

into dominance in another market are subject to scrutiny

under Section 2. Further, even critics of monopoly leverag-

ing acknowledge that a rate-regulated monopolist’s efforts to

expand its dominance in a regulated market into a related,

unregulated market warrants concern. This case presents

more compelling circumstances for stringent review of

leveraging efforts than Kodak because the incumbents seek to

extend their dominance in regulated local voice services into

dominance over unregulated vertical services.

3. Section 2 applies even though the incumbents’ efforts

to undermine access to their essential facilities also may

violate provisions of the 1996 Act. The antitrust savings

clause in the 1996 Act expressly provides that the

requirements of the Act do not “modify, impair, or supersede

the applicability of the antitrust laws.” 47 U.S.C. § 152 note.

Both Verizon and the government nonetheless suggest that

the existence of the 1996 Act and the unbundling obligations

that it imposes on incumbents shields incumbents from

antitrust liability. That suggestion is simply wrong.

Although a violation of the 1996 Act does not automatically

create liability under the antitrust laws, violations of

“extrinsic statutory or legal duties” may support a claim of

monopolization or attempted monopolization under Section 2.

Moreover, contrary to Verizon’s claims, the 1996 Act’s

creation of a regulatory regime to establish wholesale prices

for bottleneck telecommunications facilities actually removes

an alleged obstacle to application of the essential facilities

doctrine. Under the Act, expert regulators already have

determined wholesale prices—including a fair profit for

incumbents—and courts adjudicating antitrust claims easily

could rely on their determinations.

ARGUMENT

The antitrust causes of action pleaded in this case enjoy

solid support in the precedents of this Court and the courts of

appeals. The novel contentions of Verizon and the

government lack merit because they would transform the

market-opening provisions of the 1996 Act into a de facto

exemption from antitrust scrutiny. This Court should affirm

the decision of the Second Circuit and remand this case to the

trial court so that the plaintiff may attempt to develop the

evidence to support its well-pleaded allegations.

I. VERIZON AND THE GOVERNMENT RELY ON

DISPUTED ISSUES OF FACT, WHICH

CANNOT BE RESOLVED AT THE PLEADING

STAGE, TO CHARACTERIZE POTENTIAL

COMPETITORS INCORRECTLY AS MERE

“RESELLERS.”

Verizon’s and the government’s arguments rely on a

fundamental misunderstanding of fact.'? Contrary to those

litigants’ claims, new entrants like Z-Tel do not seek access

to the incumbents’ essential facilities so that they may “resell

those services as mere marketers and middlemen.” Brief for

Petitioner (“Verizon Br.”) 3. The essential elements of loops,

local transport, switching, and signaling are basic

transmission facilities that competitors need to deliver their

finished services to consumers, but they are not themselves

the finished services that consumers purchase. As the FCC

stated, competitive carriers need access to the incumbents’

'? See, e.g., Verizon Br. 26 (incumbent monopolists cannot be forced to

“provide . . . assistance at forced discounts to rivals, even mere resellers,

to help them sever Verizon’s relationship with its retail customers); SG

Br. 20-25 (incumbent monopolists are entitled to insist on monopoly

prices for their “goods or services”). As further discussed infra at 19-20,

these claims improperly assume that competitors like Z-Tel are merely

reselling incumbents’ services.

facilities “to connect end user customers to the [competitive]

carriers’ equipment.” Review of the Section 251 Unbundling

Obligations of Incumbent Carriers, Notice of Proposed

Rulemaking, 16 FCC Red 22781, 22804 n.111 (2001). Once

“connected” to customers, competitors provide innovative

new vertical and bundled telecommunications offerings, and

also offer better customer service and more convenient

billing.

Z-Tel perfectly illustrates this point. As noted above, Z-

Tel began as a software company, dedicated to developing

new vertical services for the telephone; its services now

include a unique “Personal Voice Assistant,” as well as

sophisticated voice-mail and call-forwarding features. These

innovative services reside on Z-Tel’s computers in Tampa,

Florida. Although Z-Tel requires access to incumbents’

essential transmission facilities “to connect end _ user

customers to . . . [that] equipment,” Z-Tel clearly does not

merely “resell” the vertical services described above; rather,

Z-Tel provides customers its own vertical services.

Nor does Z-Tel merely resell incumbents’ local voice

service. As discussed supra at 3-4, the unbundled elements

of the local network that competitors buy from incumbents

are not finished “services,” but are simply raw capacity on

wires and equipment. To provide local voice services, Z-Tel

and other competitive carriers must take that capacity and add

all of the “service” components, including account

management, billing and collections, and coordination of

interconnection with other carriers. By performing these

functions more effectively and efficiently than the

incumbents, and by combining them with incumbents’

essential facilities, competitors can offer improved retail local

services that benefit consumers by driving down prices and

improving the end-user experience.

In any event, whether competitors such as Z-Tel can be

categorized as “resellers,” as Verizon contends and the

government implies, depends on the definition of the relevant

input and retail product markets. Questions of market

definition, however, are intensely factual and ill-suited for

resolution at the pleading stage. See Kodak, 504 U.S. at 482

(reversing summary judgment and noting that “[t}he proper

market definition in this case can be determined only after a

factual inquiry into the ‘commercial realities’ faced by

consumers”) (quoting United States v. Grinnell Corp., 384

U.S. 563, 572 (1966)).'* Accordingly, even if Verizon’s and

the government’s assumption that competitors are merely

resellers were accurate (which it is not), those litigants’

arguments fail because they rely on a disputed factual issue

that cannot be resolved at this stage of the litigation.

Il. SECTION 2 AND THIS - COURT'S

PRECEDENTS IMPOSE AN AFFIRMATIVE

DUTY TO DEAL ON THE OWNER OF

ESSENTIAL FACILITIES THAT CANNOT

REASONABLY OR PRACTICALLY BE

DUPLICATED.

A. Retail Competition Will Not Arise Without

Antitrust Intervention When A Monopolist

Owns Essential Facilities That Competitors

Need To Provide Retail Services.

Section 2 of the Sherman Act was “enacted for the

protection of competition, not competitors,” Brunswick Corp.

v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977). The

Sherman Act does not broadly “prohibit or condemn

‘monopoly in the concrete,”” SG Br. 10 (quoting Standard

Oil Co. v. United States, 221 U.S. 1, 62 (1911)); a general

governmental prescription of monopoly is unnecessary

'* Moreover, even if competitors ultimately were proved to be mere

resellers, they would still be entitled to rely on an incumbent's evasions of

its regulatory obligation for the purpose of maintaining its monopoly to

show a violation of Section 2. See infra at 28-29.

because, in markets free from exclusionary and predatory

conduct, competition usually will develop without intervene-

tion. That competition will, in turn, tend to break down

. 5

monopolies.

In circumstances involving a monopolist’s control of

essential facilities, however, antitrust law intervenes to

protect the competitive process because competition will not

otherwise arise. As this Court has held, it is “unreasonable,

per se, to foreclose competitors from any substantial market.”

mternational Salt Co. v. United States, 332 U.S. 392, 396

(1947). “The antitrust laws are as much violated by the

prevention of competition as by its destruction.” See United

States v. Griffith, 334 U.S. 100, 107 (1948); see also Kodak,

504 U.S. at 482-83 (Section 2 forbids the use of monopoly

power “to foreclose competition, to gain a competitive

advantage, or to destroy a competitor.”) (quoting Griffith, 334

U.S. at 107). Section 2 is thus intended not to eliminate

isolated bad acts, but to protect the competitive process so

that competition may emerge.

This Court already has acknowledged—in the context of

the gas and electric industries—that competition will not

develop naturally when a monopolist owns an essential

facility that cannot reasonably or practically be duplicated

by competitors: :

Companies supplying manufactured gas proliferated in

the latter half of the 19th century and, after initial efforts

at regulation by statute at the state level proved

unwieldy, the States generally left any regulation of the

industry to local governments. Many of those

municipalities honored the tenets of laissez-faire to the

'® See, e.g., J. Soma, D. Forkner, and B. Jumps, The Essential Facilities

Doctrine in the Deregulated Telecommunications Industry, 13 Berkeley

Tech. L.J. 565, 581 (1998) (“Congress enacted the antitrust laws to

promote economic efficiency via the protection of the competitive

process.”).

point of permitting multiple gas franchisees to serve a

single area and relying on competition to protect the

public interest. The results were both predictable and

disastrous, including an initial period of “wasteful

competition,” followed by massive consolidation and the

threat of monopolistic pricing.

General Motors Corp. v. Tracy, 519 U.S. 278, 288-89 (1997)

(internal citations omitted). The evolution of the electrical

industry followed a similar course:

Again, after an initial period of unsuccessful regulation

by state statute, States mostly left regulation of the

electric industry to municipal or local government.

Multiple franchises were handed out, and duplicative

utility systems came into being. The results were

ruinous and short-lived. For example, 45 mostly over-

lapping franchises were granted for electric utility

operation in Chicago between 1882 and 1905. By

1905, however, a single monopoly entity had emerged

from the chaos, and customers ended up paying

monopoly prices.

Id. at 290 n.7 (internal citations omitted). The GMC Court

concluded that, where bottleneck distribution facilities exist,

the states had learned “from chastening experience” that

competition could not be relied upon to eliminate

monopolies, but would “simply give over to monopoly in due

course.” /d. at 290.

The same is true in the context of the local telephone

network, where the local transmission bottleneck closely

resembles those of the gas and electric industries. As the

Seventh Circuit wrote in MC/ v. AT&T, it simply “would not

be economically feasible for [a competitor] to duplicate [the

incumbents’] local distribution facilities (involving millions

of miles of cable and line to individual homes and

businesses).”. 708 F.2d 1081, 1133 (7th Cir. 1983). In such

circumstances, competition will not develop to break up the

monopoly and the antitrust laws should “impose[] on firms

controlling [the essential transmis-sion facilities] the

obligation to make the facilit{ies} available on non-

discriminatory terms.” /d. at 1132.

In all of these industries—gas, electric, and telecommuni-

cations—competition is entirely possible in the retail

products'®: it is the bottleneck nature of the transmission

facilities that prevents the development of competition in the

retail markets. As this Court has recognized, imposing a duty

to deal under Section 2 to provide access to those

transmission facilities is necessary to enable retail

competition to develop. Consequently, the government’s

argument that Section 2 never imposes an affirmative duty to

deal on a monopolist whose actions “make business or

economic sense” is simply incorrect. SG Br. 7.

B. This Court Has Recognized That A Mono-

polist’s Refusal To Provide Reasonable Access

To Essential Facilities Violates Section 2.

This Court’s decision in Otter Tail, which involved

transmission facilities for electric power, recognized that

antitrust intervention is necessary to enable competition to

arise when a transmission bottleneck exists. Otter Tail

addressed the refusal of an electric utility either (1) to allow

municipalities seeking to sell electricity at retail to use the

utility’s regional transmission facilities to transmit power

purchased from another provider, or (2) to sell its own power

at wholesale to such municipalities. The Court focused on

* See, e.g., http://www platts.com/features/usgasguide/retail. shiml (\3

states have retail competition in the gas _ industry); -//www.

cia. doe. gov/cneaf electricity/chg_str/booklevprogress.himl (as of 1999,

24 states had passed statutes to enable retail competition in the electric

industry). The Telecommunications Act of 1996 was motivated in

substantial part by the realization that retail competition for

telecommunications services, including local and vertical services, is

entirely possible if access to essential transmission facilities is available

on reasonable terms.

the bottleneck nature of Otter Tail’s transmission facilities; it

noted the district court’s determination that Otter Tail “ha[d]

‘a strategic dominance in the transmission of power in most

of its service area,’ and that it used this dominance to

foreclose potential entrants into the retail area from obtaining

electric power from outside sources of supply.” 410 U.S. at

377. The Court concluded that Otter Tail’s refusal to deal

with the towns to supply access to its transmission facilities

“sought to substitute for competition anticompetitive uses of

its domin-ant economic power.” /d. at 380. The Court

therefore upheld the district court’s order enjoining Otter Tail

from refusing to deal. Otter Tail thus recognized that Section

2’s protection of the competitive process requires an

affirmative duty to deal in connection with essential facilities.

Although the dissent in Otter Tail questioned the need for

applying Section 2 in that context,'’ its analysis makes clear

~that this case is far easier. Justice Stewart argued that

monopoly was inevitable in retail distribution of electricity,

and that “the inevitability of a monopoly . . . requires price

control to take the place of competition.” 410 at 389. Asa

result, he believed, “antitrust principles applicable to other

industries cannot be blindly applied” to the electric industry.

Id. In other words, in Otter Tail the utility tried to use its

dominance over transmission to foreclose entrants into the

retail market—but the dissenters believed that the retail

product was inevitably a price-regulated monopoly, so there

was nothing to be gained by traditional application of the

antitrust laws. As noted above, however, it is now widely

accepted that retail competition is entirely possible in the

context of bottleneck transmission facilities if reasonable

access to essential facility inputs into the finished retail

services is assured. See supra at 15 & n.16. Thus, Otter

'” Justice Stewart's opinion, joined by Chief Justice Burger and then-

Justice Rehnquist, actually concurred in a part of the majority opinion not

relevant here, but otherwise dissented.

Tail’s holding—preventing the utility from withholding the

essential transmissior input into retail electrical service—is

particularly relevant to modern retail competition.

C. Otter Tail Squarely Applies To The Essential

Transmission Facilities That Competitive

Companies Need To Provide Local and

Vertical Telecommunications Services.

Otter Tail’s recognition that Section 2 imposes an

affirmative duty to deal on owners of essential transmission

facilities applies to this case. The parallel is obvious in

connection with competitors’ provision of vertical services.

In Otter Tail, towns wished to use the utility’s essential

transmission facilities to transmit electricity from outside

sources to retail end-users. Similarly, competitors like Z-Tel

wish to use the incumbents’ essential transmission facilities to

transmit vertical services from outside sources (such as Z-

Tel’s computers in Tampa) to retail end users.

The same parallel applies to competitors’ provision of local

voice services. Contrary to the arguments of the government

and Verizon, the incumbents’ local transmission facilities are

not identical to the retail local voice services provided to end

users any more than the utility’s transmission facilities were

identical to the retail electric service in Otter Tail. In both

cases, the essential network facilities to which competitors

seek access represent merely raw transmission capacity. To

provide a retail service, competitors like Z-Tel add customer

service, account management, billing and _ collections

(including the complex yet vital activities of charging other

carriers for sending and receiving calls and paying still other

carriers to send or receive calls), and other components.

Competitors need the incumbents’ essential transmission

facilities merely as an input into finished local voice services

provided to end users.

D. The Essential Facilities Doctrine Provides

A Sound Basis For Identifying When

Monopolists Must Deal With Competitors.

The essential facilities doctrine, recognized by every

federal court of appeals,'* reflects the fundamental principle

of Otter Tail: when a company controls essential facilities

that competitors need to deliver their retail services to

consumers, the Sherman Act imposes an affirmative duty to

provide access to the facilities on reasonable terms. Properly

applied, the doctrine provides a sound basis for identifying

when monopolists should be required to share their facilities.

Specifically, the doctrine imposes a duty to deal only when

four elements are present: “(1) control of the essential facility

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

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

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

of providing the facility.” MC/, 708 F.2d at 1132-33.

The second prong is critical: the doctrine requires only

owners of bottleneck facilities that cannot reasonably or

practically be duplicated—in the Verizon Court’s terms,

facilities the “duplication of which is neither likely nor

desired,” 535 U.S. at 515—to deal with competitors on

reasonable terms to allow the use of those facilities.

Significantly, even critics of the essential facilities doctrine

acknowledge that local telephone transmission networks

satisfy this narrow notion of “essentiality.” Areeda and

Hovenkamp’s antitrust treatise, for example, cites the “natural

monopolies of the local telephone exchanges in the MC/ and

Southern Pacific cases” as the clearest example of truly

“essential” facilities, noting that “[o]ne could not sell

residential and most business long distance service without

access to the hardwired local statutory monopolies controlled

'® For a list of relevant cases, see Brief in Opposition to Petition for

Certiorari of the Law Offices of Curtis Trinko, L.L.P., at 22.

by the defendant.” Areeda & Hovenkamp, 3A Antitrust Law

199 (citing MCI, 708 F.2d at 1132, and Southern Pacific

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

As discussed above, the same is true of local voice and

vertical services.

E. Adopting The Government’s Test For

“Exclusionary” or “Predatory” Conduct

Would Eliminate The Essential Facilities

Doctrine.

The government correctly concedes that the essential

facilities doctrine fits within the framework of the Sherman

Act. At the same time, however, the government argues that

liability should be found only when a monopolist’s “refusal to

sell his goods or services below the monopoly price” is

“exclusionary” or “predatory”—i.e., when the refusal to sell

makes no business sense. See SG Brief at 21-22. The

government’s concession is illusory; its proposed standard

would eviscerate the essential facilities doctrine.

The government incorrectly implies that Z-Tel and other

competitive carriers are mere resellers by confusing the

market for a finished retail service (local voice and vertical

services) with the market for the essential transmission

facilities (loops, local transport, switching, and signaling)

used as inputs in the provision of the retail service. In

arguing that the incumbents should be allowed to “refus[e] to

sell [their] goods or services below the monopoly price,” SG

Br. at 23, the government fails to recognize that the “goods”

at issue here are merely inputs into the finished service. As a

business matter, there is no price at which a monopolist will

sell essential inputs to rivals such that it will suffer a

reduction of its market power; indeed, the theoretical

economic price of an input that cannot reasonably or

practically be duplicated is infinitely high. The monopolist

will simply refuse to deal or, equivalently, deal only on terms

that make potential competitors unprofitable.'? Under this

Court’s ruling in Otter Tail—and the essential facilities

doctrine reflecting that ruling—a monopolist cannot be

allowed to refuse to deal in connection with essential

transmission facilities, because that would eliminate the

possibility of competition in the retail market for the finished

product. In short, although the government pays lip service to

the essential facilities doctrine in some circumstances, the

logic of its argument leaves no room for the doctrine’s

application.

F. This Court Already Has Rejected The

Government’s Argument That A Desire To

Maintain Retail Profits Justifies A

Monopolist’s Refusal To Deal In Connection

With Essential Facilities.

The government also suggests that a monopolist’s desire to

sell at retail rather than at wholesale justifies a refusal to

provide reasonable wholesale access to essential facilities.

See, e.g., SG Br. 29 (stating that the complaint should be

dismissed because incumbents cannot be obliged by Section 2

to “act{] as wholesalers”). This Court has rejected that

argument repeatedly. First, in Otter Tail, the utility urged

that it had a “business justification” for refusing to wheel

power or to sell at wholesale. Otter Tail claimed that if it

were to do so, “more and more municipalities” would go into

the distribution business, and Otter Tail would lose retail

customers and “go downhill.” 410 U.S. at 380.” The Court

'° An offer to deal at an unreasonable price is, of course, tantamount to

a refusal to deal. See, eg. Delaware & Hudson Railway Co. v.

Consolidated Rail Corp., 902 F.2d 174, 179 (2d Cir. 1990) (“[T]here need

not be an outright refusal to deal in order to find the denial of an essential

facility occurred. It is sufficient if the terms of the offer to deal are

unreasonable.”).

” The dissent regretted that the Court “scofffed]” at this “business

justification” defense. Justice Stewart argued that “where the health of

responded brusquely, stating that “(t]he promotion of self-

interest alone” does not insulate efforts to preserve a

monopoly from liability under Section 2: “Th{e] Act assumes

that an enterprise will protect itself against loss [of retail

customers] by operating with superior service, lower costs,

and improved efficiency,” not by “substitut{ing] for

competition anticompetitive uses of its dominant economic

power.” /d. Accordingly, the incumbents have the option of

maintaining retail customers by out-competing new entrants

through the development of better and cheaper retail services;

but Section 2 does not permit the incumbents to substitute the

use of their dominance over local transmission facilities for

competition in retail services.

Second, Eastman Kodak v. Image Technical Services also

directly rebuts the government’s suggestion that efforts to

maintain retail customers by unreasonably refusing to sell at

wholesale are exempt from Section 2’s prohibitions.”' The

Kodak plaintiffs (“independent service organizations” or

“ISOs”) alleged that the company’s refusal to sell them

parts used in the repair of Kodak copiers represented

power companies and the abundance of our energy supply were

considerations central to the congressional purpose in devising the

regulatory scheme,” protecting Otter Tail’s economic health was an

appropriate consideration. /d at 389. In the present context, however,

there can be no claim that Congress has sought to protect the economic

health of the incumbents at the expense of competition; to the contrary,

this Court’s recent decision in Verizon emphasized that Congress wished

to “give aspiring competitors every possible incentive to enter local retail

telephone markets, short of confiscating the incumbents’ property.” 535

U.S. at 489.

*! Kodak involved “monopoly leveraging,” although the Court

employed traditional Section 2 analysis. See 504 U.S. at 479 n.29

(rejecting the dissent’s view that the antitrust laws “do not apply” to

efforts to extend an “inherent” monopoly into other markets). Kodak's

“monopoly leveraging” holding is discussed below in the portion of our

brief addressing that issue. See infra at 23-26.

monopolization or attempted monopolization of the copier

‘service market (because repairs could not be made without

parts). Kodak’s policy was motivated by a desire to retain the

lucrative service component of its copier clients’ retail

business, rather than selling its parts at wholesale and risking

the deterioration of its retail business. This Court found that

the plaintiffs’ had presented evidence of a Section 2 violation

because Kodak had “used its control over parts to strengthen

its monopoly share of the Kodak service market,” so

“ljiability turn[ed] . . . on whether ‘valid business reasons’

can explain Kodak’s actions.” /d. at 483.

Kodak declined to make the brazen argument presented by

the government in this case—that the company’s desire to

maintain its retail (service) monopoly rather than selling parts

at wholesale constituted a “valid business reason.” Realizing

that a company’s bare desire to maintain supra-competitive

profits cannot be a valid business justification under Section

2, Kodak instead made the similar argument that its refusal to

sell parts to ISOs was justified to prevent them from “free-

riding on Kodak’s capital investment.” /d. According to

Kodak, the ISOs were “free-riding” because “they ha[d]

failed to enter the equipment and parts markets.” /d. at 485.

This Court rejected that claim, however, because “([t]his

understanding of free-riding has no support in our case law.”

Id. Rather, “one of the evils proscribed by the antitrust laws

is the creation of entry barriers to potential competitors by

requiring them to enter two markets simultaneously.” /d.

G. Verizon’s Argument That The Essential

Facilities Doctrine Applies Only To

Monopolists That Have Voluntarily Dealt

With Competitors In The Past Is Incorrect.

Verizon argues that there is “no prima facie reason to

question a refusal of never-before-offered terms” and that

doing so here would require every monopolist to “dismantle

its retail monopoly.” Verizon Br. 19. Clearly, however, the

essential facilities doctrine would not require the

“dismantling” of retail monopolies maintained due to

legitimate efficiencies—the doctrine would apply only to

monopolies resulting purely from ownership of essential

facilities.”* Moreover, a monopolist should not be permitted

to refuse to deal simply because it consistently refused to deal

with competitors in the past, as opposed to terminating

existing deals. Although making an “important change” such

as terminating existing relations may have evidentiary

significance in some contexts, this Court has held that “[i]f a

firm has been ‘attempting to exclude rivals on some basis

other than efficiency,” it is fair to characterize its behavior as

predatory.” Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585, 605 (1985) (quoting R. Bork, The

Antitrust Paradox 138 (1978)). Excluding rivals by

consistently refusing to lease bottleneck facilities in all

circumstances is certainly no less predatory than refusing to

deal only some circumstances.

lil. THE GOVERNMENT’S ARGUMENTS

AGAINST APPLYING A “MONOPOLY

LEVERAGING” THEORY IN THIS CASE

ARE MISPLACED.

The circuit court found that petitioner may be able to prove

a “monopoly leveraging” claim, which, under Second Circuit

law, would require showing that respondent “(1) possessed

monopoly power in one market; (2) used that power to gain a

competitive advantage . . . in another distinct market; and (3)

caused injury by such anticompetitive conduct.” Pet. App.

30a (quoting Virgin Atlantic Airways v. British Airways, 257

F.3d 256, 272 (2d Cir. 2001)). The government rejects this

“gain-a-competitive-advantage” formulation of the monopoly

2 In this case, the incumbents’ monopoly not only derives from control

of essential facilities, but from essential facilities 1) that they own as the

result of a state-granted monopoly over local services; and 2) that were

entirely funded (including a profit for the monopolist) by the ratepayers.

leveraging theory, claiming that the Sherman Act “proscribes

fonly] monopolization or attempted monopolization, rather

than [mere] ‘misuse’ of market power.” SG Br. 26. The

government also maintains that “[s]uch a theory is incompati-

ble with the antitrust laws” because it potentially could

extend antitrust liability to “monopolists that gain any

competitive advantage,” including from “economies of scope

or scale, or the ability to sustain expensive research and

development efforts.” SG Br. 27 (emphasis added). Both of

those concerns are misplaced in the present context.

First, although the government cites Areeda and

Hovenkamp in rejecting the Second Circuit’s application of

the monopoly leveraging theory, it fails to acknowledge these

scholars’ view that it “requires no extension of Sherman Act

§2’s basic coverage” to find liability where “the defendant

has used or is using its monopoly power in one market to

create a monopoly in a second market—for example, when it

forces customers of its A monopoly to purchase its B good

rather than the good of any rival.” Areeda & Hovenkamp, 3

Antitrust Law 95. Z-Tel and other competitors face this

problem: the incumbents seek to expand their dominance in

local voice services (A) into vertical services (B). As a

consequence of decades of franchised monopoly and the

incumbents’ control of access to the AIN platform, see supra

at 2 and n.2, vertical services are nearly always supplied by a

customer’s local service provider. Incumbents clearly retain

dominance in local voice services, and therefore have (at the

very least) a “dangerous probability” of attaining a monopoly

in vertical services. Accordingly, the Court does not need to

address the government’s quibble with the Second Circuit’s

formulation of the “monopoly leveraging” theory in the

context of leveraging claims against incumbent telephone

companies. Such claims fall within the traditional scope of

Section 2.

This Court’s decision in Kodak confirms that conclusion.

Kodak was a traditional Section 2 case involving allegations

that Kodak had monopolized or attempted to monopolize the

service market by refusing to sell parts to [SOs—in other

words, Kodak was attempting to leverage its A market in

parts into the B market for service. After finding that Kodak

had monopoly power in the relevant market, thus satisfying

the first element of a Section 2 claim, this Court held that the

second element of a § 2 claim is met when a monopolist uses

its “monopoly power ‘to foreclose competition, to gain a

competitive advantage, or to destroy a competitor.’"” 504

U.S. at 482. At the summary judgment stage, the Court found

that respondents’ evidence that Kodak had “used its control

over parts to strengthen its monopoly share of the Kodak

service market” satisfied that requirement. /d. at 483.7? In

short, Kodak represents a finding by this Court that efforts by

a company with a lawful monopoly to leverage that

monopoly into dominance in another market are subject to

scrutiny under Section 2.

The government’s second concern—that a broad doctrine

of “monopoly leveraging” might improperly extend antitrust

liability to monopolists attempting to leverage “any

competitive advantage,” SG Br. 27, however benign—is

simply inapposite here. Even critics of monopoly leveraging

in other contexts acknowledge that “monopoly leveraging has

rightly been a concern where natural monopoly prevails,

principally because the monopolists have been rate-

regulated.” ** Because the purpose of such rate regulation is

to prevent the monopolist from collecting monopoly rents in

* As set forth supra at 21-22, the Court also rejected Kodak’s

argument that its refusal to deal with ISOs was justified by its desire to

maintain the retail services component of its customers’ business.

* See, ¢. g., J. Speta, Tying, Essential Facilities, and Network

Externalities: A Comment on Piraino, 93 NW U. L. Rev. 1277, 1280

(1999).

the regulated market, such entities have a strong incentive to

attempt to extend their dominance in the regulated industry

into related, unregulated markets where they will be able to

charge supra-competitive prices.””

Z-Tel and other competitors face precisely this problem in

the telecommunications context. Because the incumbents’

local voice services are rate-regulated, they wish to leverage

their local dominance into unregulated vertical services.

Consistent with Kodak (and the views of Areeda and

Hovenkamp)—and contrary to the positions taken by the

government and respondent—such leveraging represents a

garden-variety violation of Section 2.

IV. LIABILITY UNDER SECTION 2 IS FULLY

CONSISTENT WITH THE TELECOMMUNI-

CATIONS ACT OF 1996.

In addition to arguing that the conduct alleged in this case

does not implicate Section 2, Verizon also makes the curious

claim—not joined by the government—that the 1996 Act

renders enforcement of the antitrust laws “inadvisable” here,

even if they are applicable. Verizon Br. 34-40. The 1996 Act

imposes certain obligations on incumbent local exchange

carriers to lease elements of their local bottleneck facilities to

competitors, independent of (but consistent with) their

obligations under the antitrust laws. See, e.g., 47 U.S.C.

§ 251(c). But, as the government acknowledges

> As Justice O'Connor explained in the similar context of tying

allegations:

In a regulated industry a firm with market power may be unable to

extract a monopoly profit because it lacks control over the prices it

charges for regulated products or services. Tying may then be used

to extract that profit from sale of the unregulated, tied products or

services.

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 36 n.4 (1984).

the 1996 Act does not by its terms bar application of the

Sherman Act to the same sphere of conduct or provide

immunity from Section 2 prosecutions. To the contrary,

the 1996 Act includes a savings clause that recognizes

that the antitrust laws impose distinct obligations and

that neither set of laws displaces the other. Specifically,

the 1996 Act provides . . . that it should not “be

construed to modify, impair, or supersede the

applicability of any of the antitrust laws.”

SG Br. 10-11 (citing 47 U.S.C. § 152 note).

In light of the 1996 Act’s savings clause, Verizon is left to

argue vaguely that applying the antitrust laws in the presence

of the 1996 Act would somehow threaten the functioning of

the regulatory regime. But that is not the case—Congress

presumably went to the trouble of expressly preserving

antitrust law in the 1996 Act precisely because it reinforces

the pro-competitive purposes of the Act.”°

Although the government does not join in Verizon’s

Strained immunity argument, it advances an unmeritorious

argument premised on the 1996 Act that would have the same

effect. The government criticizes the lower court for

“appear[ing] to have assumed” that “reasonable access”

*° Moreover, as the court below noted, there is nothing novel about

applying the antitrust laws in the context of a pro-competitive regula-

tory statute:

In [Otter Tail], the Supreme Court held that the antitrust laws apply

to at least one other industry regulated by a statute that was intended

to encourage competition in the industry .... The Court noted that

the Act embodied “an overriding policy of maintaining competition

to the maximum extent possible consistent with the public interest” .

... And despite a specific regulatory structure that was [like the

1996 Act] meant io encourage competition through interconnection,

the Court found that the Federal Power Act did not preclude an

antitrust suit against the regulated utility.

Pet. App. 34a-3Sa.

means “on the terms provided under the 1996 Telecommunic-

ations Act rather than on such terms as would make business

sense” for the monopolist. According to the government, that

“inappropriately imports Telecommunications Act duties and

standards into the antitrust laws.” SG Br. 24. By claiming

that incumbents are always justified in refusing to sell

essential inputs for less than the monopoly price of a finished

retail service, however, the government erroneously

“assumes” that violations of the 1996 Act can never create

liability under the antitrust laws. That assumption appears to

render the antitrust savings clause surplusage; in any event, it

is plainly contrary to the clause’s terms.”’

The government also fails meaningfully to address the

established principle that a breach of an “extrinsic statutory or

legal duty” may support a monopolization claim.” The

2” it is also contrary to the legislative history of the statute. See. e.g.,

President's Statement upon Signing, S. 652, 32 Weekly Comp. Pres. Doc.

218 (Feb. 8, 1996) (“This clause ensures that even for activities allowed

under or required by the legislation, or activities resulting from FCC

rulemaking or orders, the antitrust laws continue to apply fully.”)

Notably. the FCC does not appear to read the antitrust savings clause like

the government. In granting Verizon's petition for authorization to

provide long-distance service in New York, the FCC stated:

“Furthermore, Bell Atlantic [Verizon's predecessor] risks liability through

antitrust and other private causes of action if it performs in an unlawfully

discriminatory manner.” /n re Application by Bell Atlantic New York for

Authorization Under Section 271 of the Communications Act To Provide

In-Region, InterLATA Service in the State of New York, Memorandum

Opinion and Order, 15 FCC Red 3953, 4165 (1999). The FCC was right:

by providing discriminatory access to their facilities, incumbents may be

liable under the antitrust laws as well as other laws, including the

1996 Act.

>8 See ABA Section on Antitrust, Antitrust Law Developments 249 (Sth

ed. 2002) (“Where conduct contributes to establishing or maintaining

monopoly power, a court will be especially likely to find such conduct

predatory or anticompetitive if it is also improper for reasons extrinsic to

the antitrust laws.”).

government expressly acknowledges the line of cases so

holding, and concedes that evidence of “fraud and deception,”

“enforcement of a fraudulently obtained patent,” or “sham

litigation or bad-faith contact with administrative agencies”

may all form the basis of a monopolization claim. See SG Br.

12 n.3; 14.n.4; 25 n.10. Nevertheless, it simply announces its

view that violations of the 1996 Act are different.

The government’s bald assertion is wrong. Once again,

Otter Tail provides a close analogy to this case. This Court

repeatedly noted that Otter Tail had refused to interconnect

with requesting municipalities for the purpose of wheeling

power, notwithstanding the Federal Power Commission’s

requirement that it do so. Otter Tail, 410 U.S. at 371-72,

376-77, 380 n.10. That violation of an extrinsic duty, far

from insulating Otter Tail from antitrust liability, clearly

contributed to this Court’s holding that Otter Tail had

violated Section 2.”°

In its brief, the government also confuses the issue of

liability with remedy. As to remedy, as the government

acknowledges, this Court’s decision in Terminal Railroad

calls for “equal access on reasonable terms.” SG Br. 24 n.9

(quoting United States v. Terminal R.R. Ass'n, 224 U.S. 383,

411 (1912)).- That is precisely what cost-based rates

established by regulators under the 1996 Act accomplish—as

the Antitrust Division advised the FCC when it urged the

FCC to adopt the pricing rules upheld by this Court in

Verizon”” That acknowledgement makes the government’s

*? Moreover, by suggesting that incumbents may decide whether

allowing access “would make business sense,” SG Brief at 24, without

regard to the legal regime under which the business operates, the

government implicitly endorses the view that it may make “business

sense” to violate the law, thereby securing immunity from antitrust

scrutiny.

Docket 96-98 (May 16, 1996), at 31. The FCC followed the Division's

apparent belief that a monopolist cannot be /iab/e under the

antitrust laws if the remedy would require the monopolist to

charge less than monopoly rates all the more inexplicable.

Finally, the existence of a regulatory scheme to establish

wholesale prices for bottleneck telecommunications facilities

actually removes a practical issue flowing from the

application of the essential facilities and monopoly leveraging

theories. On account of that regulatory regime, courts finding

liability will not have to wrestle at the remedial phase of an

antitrust case involving bottleneck local telephone facilities

with the vexatious issue of determining “reasonable terms.”

That has already been done by expert regulators. Thus, the

existence of a regulatory scheme that explicitly does not

modify, impair, or supersede the antitrust laws not only

presents no barrier to the application of Section 2, but

actually renders application of Section 2 more straightforward

as a practical matter.

CONCLUSION

The judgment of the court of appeals should be affirmed.

advice. /n the Matter of Implementation of the Local Competition

Provisions in the Telecommunications Act of 1996, First Report and

Order, 11 FCC Red 15499 (1996) (“First Report and Order’), 15821

(summarizing the Antitrust Division’s views), 15846-47 (adopting a

methodology designed to establish prices for network elements “based on

costs similar to those incurred by the incumbents”).

=—

* Counsel of Record

July 25, 2003

Respectfully submitted,

CHRISTOPHER J. WRIGHT *

TIMOTHY J. SIMEONE

HARRIS, WILTSHIRE &

GRANNIS LLP

1200 Eighteenth Street, N.W.

Washington, DC 20036

(202) 730-1300

CHRISTOPHER V. GOODPASTOR

Z-TEL TECHNOLOGIES, INC.

601 S. Harbour Island Blvd.

Suite 220

Tampa, Florida 33602

(813) 233-4982

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.