Opinion
No. 03 CV 718 (KMW).
March 17, 2005
OPINION AND ORDER
Plaintiff complains that Defendants (referred to collectively as "Verizon") sell Verizon's high speed Internet access service (termed Digital Subscriber Line ["DSL"] service) only to customers who also purchase its local telephone service, which Plaintiff claims constitutes unlawful "tying" of services in violation of Section 1 of the Sherman Act, and which Plaintiff claims assists Verizon in monopolizing local telephone service in violation of Section 2 of the Sherman Act. Plaintiff also claims that this same conduct violates Section 202(a) of the Communications Act of 1984, 47 U.S.C. § 202(a) ("§ 202(a)"), in that it "unjustly and unreasonably discriminates" against those who buy local telephone service from Verizon's competitors. Plaintiff seeks, on behalf of a purported class of Verizon customers, damages and an injunction requiring Verizon to sell DSL service to customers who elect to purchase telephone service from another provider.
15 U.S.C. §§ 1 and 2.
Verizon has moved to dismiss the Complaint, claiming (1) that Plaintiff lacks standing; (2) that Plaintiff has failed to state a claim pursuant to the Sherman Act; and (3) that Plaintiff has failed to state a claim pursuant to § 202(a) of the Communications Act; and that, alternatively, in construing "discrimination" pursuant to § 202(a), the Court should defer to the Federal Communications Commission (the "FCC") pursuant to the doctrine of primary jurisdiction.
I. Background
Over ten years ago, it was discovered that by using the high frequency band of a copper loop, a carrier can deliver DSL service to customers using the same copper loop used to deliver telephone service (which uses a lower frequency). When Verizon began providing DSL service, it sold DSL service to its telephone customers as part of one package. Plaintiff alleges that Verizon currently refuses to sell him Verizon's DSL service unless he also purchases Verizon's local telephone service. Plaintiff contends that Verizon should sell these two types of service separately, and contends that if Verizon were to do so, customers would pay a lower price for the two services, because competitors would sell telephone service at a lower price than Verizon. Am. Compl., ¶ 19.
Plaintiff's antitrust claim is premised on his contentions that (1) by unlawfully "tying" its telephone service to its DSL service, Verizon forces those customers who want Verizon's DSL service to pay a higher price for their local Verizon telephone service than is charged by competing providers of telephone service, and (2) Verizon thereby disadvantages those competitors, and monopolizes local telephone service.
Plaintiff's Communications Act claim is premised on his contention that Verizon's practice discriminates against customers who want to purchase only Verizon's DSL service.
Plaintiff's claims are brought in a market in which competition has been heavily regulated since 1996. That year, Congress passed the "Telecommunications Act of 1996," 47 U.S.C. § 151 et seq. (the "1996 Act") which was intended to foster competition in the telecommunications market. To achieve that goal, the 1996 Act gave the FCC broad power to decide, inter alia, whether to compel incumbents (generally referred to as Incumbent Local Exchange Carriers ["ILECs"]) to make particular "network elements" available to other telecommunications carriers, including competitors who sold local telephone service (generally referred to as Competitive Local Exchange Carriers ["CLECs"]). The 1996 Act directed the FCC, when making the latter decisions, to decide whether failure to provide access to particular network elements would impair competitors' ability to provide services. Id. § 251 (d) (2). It also provided for the FCC to decide what "rates, terms, and conditions" for access to network elements are "just, reasonable, and nondiscriminatory." 47 U.S.C. § 251 (c) (3). Among the ILECs' "network elements" are the copper wire loops that connect each customer to the carrier's network.
In carrying out its mandate, the FCC (and State public utility commissions) have devoted enormous resources and countless hours to analyzing the extent to which competition among communications carriers would be furthered or hindered by the Commission's ordering carriers to sell particular network elements "unbundled," and, if so, on what terms and conditions. For example, it has thoroughly analyzed, over years, whether those with existing copper lines, and those with the newer fiber optic cable, must share part or all of those facilities with competitors, and, if so, on what terms and conditions. Among the issues the FCC has analyzed in that connection are: if line sharing is required, and a competitor leases only the low spectrum of a line — or only the high spectrum of a line — how should the costs of installing and maintaining the line be allocated; how should different loop "architectures" be taken into account; whether forced sharing by carriers, and/or the allocation of costs between them, would disincentivize carriers from installing new lines or developing new means for providing the services; and what effect new technology has on competition (the FCC has found that cable and satellite service are new technologies that compete to some degree with DSL). In re Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, 18 F.C.C.R. 16,978, 17,110-17,136 (F.C.C. Aug. 21, 2003) (Aug. 21, 2003), ¶¶ 211-263 ("Aug. 21, 2003 Report and Order"). II. Motion to Dismiss
In considering a motion to dismiss for failure to state a claim upon which relief can be granted, the Court merely "determine[s] whether the complaint itself is legally sufficient," Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985), accepting as true its factual allegations. See Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999), cert. denied, 528 U.S. 1188 (2000). All inferences are drawn in favor of the non-moving party. See Moore v. PaineWebber, Inc., 189 F.3d 165 (2d Cir. 1999). The complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Cruz v. Gomez, 202 F.3d 593, 597 (2d Cir. 2000) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). In making this assessment, the Court "must limit itself to the facts stated in the complaint, documents attached to the complaint as exhibits and documents incorporated by reference in the complaint." Hayden v. County of Nassau, 180 F.3d 42, 54 (2d Cir. 1999).
A. Sherman Act Claims 1. Effect of 1996 Act
A market in which competition is as closely regulated as is the telecommunications market would usually be viewed as a "good candidate" for implication of antitrust immunity, "to avoid the real possibility of [antitrust] judgments conflicting with the agency's regulatory scheme. . . ." Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 406 (2004) ("Trinko"). Congress, however, precluded this interpretation by enacting an antitrust-specific saving clause in Section 601(b) (1) of the 1996 Act, which provides: "nothing in this Act . . . shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws." 110 Stat. 143, 47 U.S.C. § 152, note. See Trinko at 406.
Until the United States Supreme Court's Trinko decision in January 2004, lower courts struggled with the question whether FCC regulation could be taken into account in deciding whether a carrier's conduct violated the antitrust laws. Trinko gave substantial guidance in answering the question, in the context of deciding whether the Court should expand the reach of the antitrust laws to force a telecommunications monopolist to sell particular services to its competitors. The Court held that although the 1996 Act does not supercede the applicability of antitrust laws, when a court is considering whether to expand the reach of the antitrust laws, FCC regulation is one factor among several to be taken into account, because where Congress has created a regulatory structure "designed to deter and remedy anti-competitive harm," "the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny." Id. at 412.
2. Reach of Sherman Act a. Sherman Act Section 2
In Trinko, the Court was asked to decide whether a court should find a violation of Section 2 of the Sherman Act where an ILEC had allegedly discouraged customers from dealing with its rivals by denying its rivals interconnection services and by failing to give rivals' orders the same priority as it gave its own orders. The Court viewed the question as whether it should expand the narrow category of cases that require a monopolist to sell to competitors. The Court declined to apply Section 2 to such a case, "because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm." Trinko at 408 (emphasis added). In reaching its decision, the Court considered the following four factors:
The Trinko court noted that the Court, in the past, had been "very cautious" in recognizing exceptions to the general rule that monopolists have the right to refuse to deal with other firms. To underscore the narrow scope of the exception, the Court described its Aspen Skiing decision as ". . . at or near the outer boundary of § 2 liability." Trinko at 408, citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). In Aspen Skiing, the Court compelled a ski-lift monopolist to sell its services to a competitor, where the monopolist had previously sold to the competitor (presumably profitably) and where the monopolist had then changed course, and refused to sell to its competitor even at the monopolist's retail price.
Plaintiff claims that Trinko held merely that violations of duties imposed by the 1996 Act do not constitute Sherman Act claims. What Trinko held is quite different: it held that to the extent that the 1996 Act imposed particular duties on carriers, violation of those duties does not, ipso facto, violate the Sherman Act; the Trinko court then proceeded to its principal analysis: whether the monopolist's conduct violated antitrust standards. 540 U.S. at 407.
(1) whether the costs of antitrust intervention outweigh the benefits; for example, whether judicial intervention would risk distorting investment, in light of the constantly changing competitive landscape in the telecommunications market; Trinko at 414;
(2) whether the requested relief would require a court to assume a role for which it is "ill-suited": to "identif[y] the proper price, quantity, and other terms of dealing," which the Supreme Court referred to as thrusting courts into the role of "central planners." Trinko at 408;
(3) whether remediation would require "continuing supervision of a highly detailed decree," Trinko at 415;
(4) whether there exists a "regulatory structure designed to deter and remedy anticompetitive harm" — a factor that cannot, under the 1996 Act, limit the scope of the antitrust laws, but that can weigh against extending their reach. Trinko at 412.
Plaintiff contends that because the conduct challenged in Trinko was refusal to sell certain services to acompetitor, the Trinko reasoning applies only to refusals to deal with competitors, not refusals to deal with consumers. Here, Plaintiff complains of both: (1) Verizon's refusal to provide its DSL service over competitors' lines, and (2) Verizon's refusal to sell its DSL service to consumers who do not purchase its telephone service. Because the inquiry the Trinko Court deemed essential is whether a court is suited to provide a remedy for allegedly anticompetitive conduct by a single firm, its reasoning applies to both a single firm's refusal to provide services over competitors' lines, and a single firm's refusal to deal with certain consumers.
In deciding the amount of any damages for alleged past misconduct in the instant case, the Court would have to determine the prices that Verizon would have charged, absent antitrust violations, for services not offered by Verizon for most of the relevant time period: (1) voice service provided without DSL service, (2) DSL service provided to consumers over a line shared with a competitor, and (3) stand-alone DSL service, provided over Verizon's loop. As the Court emphasized in Trinko, courts are not equipped to determine the appropriate price for one component of a bundled product, where market forces have not determined the appropriate price for that component. Without the benefit of the latter information, courts are ill-suited to identify the prices for the unbundled component that would have been charged, over time, absent the alleged misconduct.
Plaintiff contends that Verizon has, in the past, provided stand-alone DSL service. Although Verizon disputes Plaintiff's contention, it appears that Verizon sold stand-alone DSL service as part of a "technical trial" for a limited category of customers in a limited number of states, which trial lasted only eight months (December 2003 to July 30, 2004). Decl. of Michael D. Poling (Aug. 16, 2004). This provision of services lasted for only a small fraction of the time period for which Plaintiff seeks damages (the complaint does not state the time period for which damages are sought; the court infers from Plaintiff's allegations that the relevant time period is at least five years). Verizon's pricing during an eight month trial to a limited class of customers in a limited number of states does not provide a sufficient basis for judicial estimation of the price that would result from the play of free-market forces, during a much longer time period in many more states.
To identify the price for unbundled DSL service that would have been charged, absent the alleged misconduct, this Court would have to answer the same cost-related and market-force questions that the Trinko court held are not suitable for courts to answer. That is, if the Court were to, inter alia, order Verizon to pay damages for the alleged injuries caused by Verizon's practices, the Court would inevitably be required to determine what prices would have been charged, absent the alleged misconduct, at many different points in time for telephone voice service and for DSL service. Those prices could be determined only after analysis of facts of the type the FCC considered relevant to whether it should require ILECs to sell certain unbundled services to competitors. That analysis would have to include such considerations as: where the ILEC has invested substantial amounts of money in bringing a wire to a customer's home (including securing rights of way, digging trenches or placing poles, and running wire underground or along poles), how would and/or should these costs have been allocated among unbundled services? See Aug. 21, 2003 Report and Order, at 17,105-17, 117.
The Court is also likely to be asked to set the fair price for providing unbundled DSL service post-decree. The Amended Complaint asks the Court, inter alia, to enjoin Verizon from tying the sale of local telephone service to the sale of DSL service. Am. Compl. ¶ 48 (ii). One solution offered by Plaintiff tying the sale of local telephone service to the sale of DSL service. Am. Compl. ¶ 48 (ii). One solution offered by Plaintiff is for Verizon to provide DSL service over a competitor's line at "cost-based rates." Pl.'s Resp. to Verizon's Supplemental Mem. Supp. Def.'s Mot. to Dismiss at 5. The proper allocation of costs is a highly complex and hotly contested issue in the telecommunications market.
The inappropriateness of a court making such decisions is underscored when the decisions are considered in light of the first three Trinko factors:
(1) the costs of antitrust intervention here would outweigh the benefits, because intervention runs a substantial risk of skewing investment incentives: the constantly changing competitive landscape makes it very difficult for a court to set a reasonable price for services, which requires consideration of, inter alia, what return on investment will maximize beneficial investment in new technologies;
(2) identifying and remedying the alleged wrongs here would require this Court to act as a "central planner." In deciding whether Defendants are making DSL service available to consumers on reasonable terms and in time, what is the optimal configuration of services and prices to promote competition, while incentivizing all carriers to innovate;
(3) remediation here would require "continuing supervision of a highly detailed decree." Trinko at 415. Continuing supervision would be needed for the Court to decide, on an ongoing basis, whether any change(s) in the competitive landscape change the reasonableness of the terms and conditions of sale the Court approved. The decree's high level of detail would result, in part, from complexity of the accounting and other pricing factors the Court would be required to consider.
In Trinko, plaintiff sought a decree pursuant to which the Court would have had to decide, inter alia, whether Verizon had provided rivals with access to the local loop market only on "terms and conditions that are not as favorable" as those enjoyed by Verizon. Trinko at 883.
In the instant case, Plaintiff seeks a decree pursuant to which the Court would have to decide, inter alia, "the price that would obtain in a competitive market free of the pernicious effects of the anticompetitive practices identified [in the Complaint]. . . ." Am. Compl., ¶ 48.
Because of the persuasiveness of the first three Trinko considerations in counselling against antitrust intervention here, the Court need not consider the fourth factor considered inTrinko: whether the extent of FCC regulation of the challenged conduct counsels against extending the reach of the antitrust laws. The Court notes, however, that there is pervasive FCC oversight and regulation of the facilities that carriers use to deliver DSL services.
For the foregoing reasons, the Court concludes that Plaintiff has not stated an antitrust claim pursuant to Sherman Act Section 2.
The Court also concludes that for the foregoing reasons Plaintiff lacks standing to assert a claim pursuant to Sherman Act Section 2. Plaintiff must meet three requirements in order to have standing: there must be "an injury in fact," "causation," and "redressability — a likelihood that the requested relief will redress the alleged injury." Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 102-103 (1998). In this case, as described above, the Court is ill-suited to redress the alleged injuries.
b. Sherman Act Section 1
Plaintiff claims that Verizon's sales practices described above constitute unlawful tying that violates Sherman Act Section 1, under preexisting antitrust standards. A Court is ill-suited to redress the alleged injuries underlying Plaintiff's Sherman Act Section 1 claim, and Plaintiff thus lacks standing to assert this claim, for the same reasons that Plaintiff lacks standing to assert a Sherman Act Section 2 claim.
The Court need not reach other antitrust issues briefed by Verizon, which address alternative arguments for dismissing Plaintiff's claims, including the argument that Plaintiff's definition of the product market is under-inclusive. The Court has considered all of the antitrust arguments made by Plaintiff, and the Court has concluded that they are without merit.
B. Communications Act Claim
Plaintiff claims that Verizon, by refusing to sell DSL service to customers, unbundled from its local telephone service, discriminates against customers who buy local telephone service from Verizon's competitors, in violation of 47 U.S.C. § 202(a) ("§ 202(a)"). Verizon's actions, however, are not "discrimination" within the meaning of § 202(a) — § 202(a) "discrimination" is limited to situations where "the carrier is offering the service to other customers at a different price or under different conditions than those offered to [the plaintiff]." Telecom Int'l Am., Ltd. v. ATT Corp., 280 F.3d 175, 199 (2d Cir. 2001) (internal quotation marks omitted).
Alternatively, the Court holds that primary jurisdiction over this claim lies with the FCC. The determination of whether a carrier discriminates within the meaning of § 202(a) when it refuses to provide DSL service to those who choose another voice provider, is within the FCC's mandate; that determination is best made, in the first instance, by a body with the FCC's technical expertise and policy-making functions. See, e.g., In re Deployment of Wireline Services Offering Advanced Telecommunications Capability, 16 F.C.C.R. 2101, 2114 (F.C.C. Jan. 19, 2001).
The Court has considered all of the § 202 arguments made by Plaintiff, and the Court has concluded they are without merit.
Conclusion
For the foregoing reasons, the Court grants Verizon's Motion to Dismiss for failure to state a claim upon which relief may be granted.The Clerk of the Court is directed to close this case. Any pending motions are moot.