Covad Communications Co. v. BellSouth Corp.
Opinion
[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS FILED FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS ELEVENTH CIRCUIT ________________________ AUGUST 2, 2002 THOMAS K. KAHN CLERK No. 01-16064 ________________________ D. C. Docket No. 00-03414-CV-BBM-1
COVAD COMMUNICATIONS COMPANY, DIECA COMMUNICATIONS, INC., d.b.a. Covad Communications Company,
Plaintiffs-Appellants,
versus
BELLSOUTH CORPORATION, BELLSOUTH TELECOMMUNICATIONS, INC.,
Defendants-Appellees.
________________________
Appeal from the United States District Court for the Northern District of Georgia ________________________ (August 2, 2002)
Before BARKETT and MARCUS, Circuit Judges, and HIGHSMITH*, District Judge. ____________________________
*Honorable Shelby Highsmith, U.S. District Judge for the Southern District of Florida, sitting by designation. BARKETT, Circuit Judge:
Covad Communications Company and Dieca Communications, Inc.
(collectively “Covad”)1 appeal the district court’s dismissal, pursuant to Federal
Rule of Civil Procedure 12(b)(6), of their action against BellSouth Corporation and
BellSouth Telecommunications Corporation (collectively “BellSouth”). Covad is a
seller of high-speed Digital Subscriber Line (“DSL”) internet service. BellSouth is
a regional telephone service and telecommunications provider, which also sells
DSL service. Covad and BellSouth have entered into an “interconnection
agreement” to allow Covad to provide DSL service to consumers over BellSouth’s
existing telephone lines. However, Covad alleges that BellSouth has attempted to
stifle competition both by failing to live up to its contractual obligations and
through broad exclusionary behavior, including the use of price squeezes,
misleading advertising, and the misuse of Covad’s confidential customer
information. Covad’s 24-count complaint asserts that BellSouth’s actions violated
the Sherman Antitrust Act, the Telecommunications Act of 1996, state anti-
monopoly statutes and unfair competition laws, and state law of breach of contract.
On appeal, Covad argues that the trial court erred in dismissing Covad’s complaint.
We agree and REVERSE.
1 Dieca is a wholly-owned subsidiary of Covad.
2 BACKGROUND
BellSouth is the incumbent local exchange carrier (“ILEC”) that inherited
monopoly control over the local telephone network in a nine-state region after the
breakup of AT&T in 1983. Covad, formed in 1996, sells high speed DSL service,
a technology that allows consumers and businesses to transmit and receive data
over existing copper phone lines. Covad’s DSL service competes directly with
BellSouth’s own DSL and other retail data services, such as dial-up internet access,
Internet Services Digital Network (“ISDN”) and dedicated line services such as
“Frame Relay” and “T-1.”
As Covad explains it,2 to bring its services to consumers in BellSouth’s
region, Covad must have dependable, timely, and affordable access to the local
telephone network controlled by BellSouth. Because of the ubiquitous nature of
the local telephone network, the facilities controlled by BellSouth cannot
practicably be duplicated. Thus, to operate feasibly, Covad must be able to
“interconnect” its DSL network with BellSouth’s local telephone network, which
means, at its most basic, that Covad needs to be able to connect its wires to the
BellSouth wires that make up the local telephone network.
2 Because in this appeal we review de novo the district court’s grant of a motion to dismiss Covad’s complaint, we take the facts as they are alleged in Covad’s complaint. See Quality Foods de Centro Am., S.A. v. Latin Am. Agribusiness Dev. Corp., S.A., 711 F.2d 989, 994-95 (11th Cir. 1983).
3 Congress recognized that new companies seeking entry into the market
could not compete if they had to duplicate existing telephone networks, and
addressed this concern by passing the Telecommunications Act of 1996 (the “1996
Act”), which requires, among other things, that ILECs allow competitors to
interconnect with their networks. The centerpieces of the 1996
Telecommunications Act are sections 2513 and 252,4 codified at 47 U.S.C. §§ 251
and 252, which together impose a series of affirmative duties on ILECs like
BellSouth, for the benefit of competitive local exchange carriers (“CLECs”) like
Covad. Sections 251 and 252 also establish the standards for the arbitration and
approval of interconnection agreements between ILECs and CLECs.
Pursuant to the 1996 Act, Covad entered into a contract in 1998 with
3 Section 251 imposes various duties on all local exchange carriers (“LECs”): to permit the resale of their telecommunication services; to provide number portability; to provide dialing parity to other LECs; to afford other LECs access to poles, ducts, conduits, and rights-of-way; and, most significantly here, to establish reciprocal compensation arrangements for the transport and termination of telecommunications. 47 U.S.C. § 251(b). Section 251 also imposes additional obligation on ILECs, including the duty to interconnect their networks with that of any requesting telecommunications carriers “on rates, terms, and conditions that are just, reasonable, and nondiscriminatory,” and to negotiate in good faith the agreements establishing the rates, terms, and conditions of these interconnections. 47 U.S.C. § 251(c)(1) and (2). 4 Section 252 provides for the negotiation, arbitration, and approval of interconnection agreements and requires all parties to participate in any arbitration. 47 U.S.C. § 252(b)(1) and (5). All interconnection agreements adopted by negotiation or arbitration must be submitted for approval to the respective state public service commission (“PSC”). 47 U.S.C. § 252(e).
4 BellSouth (the “Interconnection Agreement”) in which BellSouth agreed, among
other things: (1) to allow Covad to “collocate” (place Covad’s equipment) in
BellSouth central offices throughout its region, providing interconnection between
the network controlled by BellSouth and Covad’s network; (2) to provide
interoffice transport facilities (high capacity connections necessary to connect
Covad’s equipment in various central offices); (3) to provide nondiscriminatory
access to operational support systems (“OSS”) to allow Covad to place orders for
facilities; and (4) to provide loops (the actual copper wires used for DSL
transmission).
In this suit, Covad alleges that Bell South aimed to stifle competition and
protect and extend its local telephone monopoly, in violation of the Interconnection
Agreement and the antitrust laws, by embarking on a series of dilatory, anti-
competitive acts designed to prevent or delay Covad’s entry into the DSL market,
impede its ability to deliver service to consumers, and drive Covad from the
marketplace. In particular, Covad alleges that BellSouth regularly misrepresented
the availability of space in BellSouth’s central offices so as initially to effectively
deny collocation altogether. When it did permit collocation, BellSouth allegedly
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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS FILED FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS ELEVENTH CIRCUIT ________________________ AUGUST 2, 2002 THOMAS K. KAHN CLERK No. 01-16064 ________________________ D. C. Docket No. 00-03414-CV-BBM-1
COVAD COMMUNICATIONS COMPANY, DIECA COMMUNICATIONS, INC., d.b.a. Covad Communications Company,
Plaintiffs-Appellants,
versus
BELLSOUTH CORPORATION, BELLSOUTH TELECOMMUNICATIONS, INC.,
Defendants-Appellees.
________________________
Appeal from the United States District Court for the Northern District of Georgia ________________________ (August 2, 2002)
Before BARKETT and MARCUS, Circuit Judges, and HIGHSMITH*, District Judge. ____________________________
*Honorable Shelby Highsmith, U.S. District Judge for the Southern District of Florida, sitting by designation. BARKETT, Circuit Judge:
Covad Communications Company and Dieca Communications, Inc.
(collectively “Covad”)1 appeal the district court’s dismissal, pursuant to Federal
Rule of Civil Procedure 12(b)(6), of their action against BellSouth Corporation and
BellSouth Telecommunications Corporation (collectively “BellSouth”). Covad is a
seller of high-speed Digital Subscriber Line (“DSL”) internet service. BellSouth is
a regional telephone service and telecommunications provider, which also sells
DSL service. Covad and BellSouth have entered into an “interconnection
agreement” to allow Covad to provide DSL service to consumers over BellSouth’s
existing telephone lines. However, Covad alleges that BellSouth has attempted to
stifle competition both by failing to live up to its contractual obligations and
through broad exclusionary behavior, including the use of price squeezes,
misleading advertising, and the misuse of Covad’s confidential customer
information. Covad’s 24-count complaint asserts that BellSouth’s actions violated
the Sherman Antitrust Act, the Telecommunications Act of 1996, state anti-
monopoly statutes and unfair competition laws, and state law of breach of contract.
On appeal, Covad argues that the trial court erred in dismissing Covad’s complaint.
We agree and REVERSE.
1 Dieca is a wholly-owned subsidiary of Covad.
2 BACKGROUND
BellSouth is the incumbent local exchange carrier (“ILEC”) that inherited
monopoly control over the local telephone network in a nine-state region after the
breakup of AT&T in 1983. Covad, formed in 1996, sells high speed DSL service,
a technology that allows consumers and businesses to transmit and receive data
over existing copper phone lines. Covad’s DSL service competes directly with
BellSouth’s own DSL and other retail data services, such as dial-up internet access,
Internet Services Digital Network (“ISDN”) and dedicated line services such as
“Frame Relay” and “T-1.”
As Covad explains it,2 to bring its services to consumers in BellSouth’s
region, Covad must have dependable, timely, and affordable access to the local
telephone network controlled by BellSouth. Because of the ubiquitous nature of
the local telephone network, the facilities controlled by BellSouth cannot
practicably be duplicated. Thus, to operate feasibly, Covad must be able to
“interconnect” its DSL network with BellSouth’s local telephone network, which
means, at its most basic, that Covad needs to be able to connect its wires to the
BellSouth wires that make up the local telephone network.
2 Because in this appeal we review de novo the district court’s grant of a motion to dismiss Covad’s complaint, we take the facts as they are alleged in Covad’s complaint. See Quality Foods de Centro Am., S.A. v. Latin Am. Agribusiness Dev. Corp., S.A., 711 F.2d 989, 994-95 (11th Cir. 1983).
3 Congress recognized that new companies seeking entry into the market
could not compete if they had to duplicate existing telephone networks, and
addressed this concern by passing the Telecommunications Act of 1996 (the “1996
Act”), which requires, among other things, that ILECs allow competitors to
interconnect with their networks. The centerpieces of the 1996
Telecommunications Act are sections 2513 and 252,4 codified at 47 U.S.C. §§ 251
and 252, which together impose a series of affirmative duties on ILECs like
BellSouth, for the benefit of competitive local exchange carriers (“CLECs”) like
Covad. Sections 251 and 252 also establish the standards for the arbitration and
approval of interconnection agreements between ILECs and CLECs.
Pursuant to the 1996 Act, Covad entered into a contract in 1998 with
3 Section 251 imposes various duties on all local exchange carriers (“LECs”): to permit the resale of their telecommunication services; to provide number portability; to provide dialing parity to other LECs; to afford other LECs access to poles, ducts, conduits, and rights-of-way; and, most significantly here, to establish reciprocal compensation arrangements for the transport and termination of telecommunications. 47 U.S.C. § 251(b). Section 251 also imposes additional obligation on ILECs, including the duty to interconnect their networks with that of any requesting telecommunications carriers “on rates, terms, and conditions that are just, reasonable, and nondiscriminatory,” and to negotiate in good faith the agreements establishing the rates, terms, and conditions of these interconnections. 47 U.S.C. § 251(c)(1) and (2). 4 Section 252 provides for the negotiation, arbitration, and approval of interconnection agreements and requires all parties to participate in any arbitration. 47 U.S.C. § 252(b)(1) and (5). All interconnection agreements adopted by negotiation or arbitration must be submitted for approval to the respective state public service commission (“PSC”). 47 U.S.C. § 252(e).
4 BellSouth (the “Interconnection Agreement”) in which BellSouth agreed, among
other things: (1) to allow Covad to “collocate” (place Covad’s equipment) in
BellSouth central offices throughout its region, providing interconnection between
the network controlled by BellSouth and Covad’s network; (2) to provide
interoffice transport facilities (high capacity connections necessary to connect
Covad’s equipment in various central offices); (3) to provide nondiscriminatory
access to operational support systems (“OSS”) to allow Covad to place orders for
facilities; and (4) to provide loops (the actual copper wires used for DSL
transmission).
In this suit, Covad alleges that Bell South aimed to stifle competition and
protect and extend its local telephone monopoly, in violation of the Interconnection
Agreement and the antitrust laws, by embarking on a series of dilatory, anti-
competitive acts designed to prevent or delay Covad’s entry into the DSL market,
impede its ability to deliver service to consumers, and drive Covad from the
marketplace. In particular, Covad alleges that BellSouth regularly misrepresented
the availability of space in BellSouth’s central offices so as initially to effectively
deny collocation altogether. When it did permit collocation, BellSouth allegedly
raised Covad’s costs unnecessarily and systematically and in bad faith denied and
delayed facilities essential to Covad’s success, including interoffice transport, OSS,
5 and local loops, resulting in delays and lost customers. Covad also asserts that
BellSouth manipulated its dual role as both Covad’s wholesale supplier (of local
exchange elements) and its retail competitor (for DSL) by engaging in a “price
squeeze”—an intentional pattern of pricing wholesale inputs at such a high level
that Covad (or indeed BellSouth itself) cannot absorb those costs and still compete
profitably in the downstream retail markets. By assigning inordinately high costs
to its wholesale offerings, and inordinately low costs to its retail offerings,
BellSouth allegedly squeezed out competitors such as Covad, clearing the field for
its own retail services.
Furthermore, Covad alleges that BellSouth strategically understaffed its
wholesale division, which BellSouth created to serve customer-competitors like
Covad. This strategy slowed down order processing and created backlogs that, at
times, included over 5,000 Covad orders. By refusing to develop adequate systems
for placing wholesale orders, BellSouth thwarted Covad’s aggressive
first-to-market strategy, caused Covad to lose customers, impeded Covad’s ability
to deliver high quality service, and protected BellSouth’s monopoly.
Finally, Covad alleges that BellSouth acted with clear motive and intent to
destroy DSL competition and competitors like Covad. Covad asserts that
BellSouth possessed DSL technology, but did not offer it to the public as a means
6 of internet access until forced to do so in competition with Covad; BellSouth
preferred to offer more profitable alternatives such as ISDN or T-1 service, at the
expense of consumer choice. When Covad threatened to compete for internet
access customers with DSL, a cheaper and more convenient service, BellSouth
itself began an aggressive campaign to offer DSL. BellSouth confirmed its
anticompetitive intent, Covad says, by falsely disparaging Covad’s services and
using confidential Covad information to solicit its customers. Covad states that
BellSouth’s scheme has had the intended effect of denying Covad access to the
local internet access markets, substantially lessening competition and consumer
choice in those markets, creating higher prices, and stifling innovation.
These actions, according to Covad, violate the 1996 Act, the Sherman Act,
and various state laws. The district court, relying on the Seventh Circuit’s opinion
in Goldwasser v. Ameritech Corp., 222 F.3d 390 (7th Cir. 2000), dismissed
Covad’s Sherman Act claims, holding that allegations that are based on duties
established by the 1996 Act cannot form the basis of a violation of the Sherman
Act because (1) “‘affirmative duties to help one’s competitors . . . do not exist
under the unadorned antitrust laws,’” D.C. Opinion at 15 n.8 (quoting Goldwasser,
222 F.3d at 400); (2) “the ‘elaborate enforcement structure’ of the 1996 Act
precludes suits under the Sherman Act for ILEC duties because ‘antitrust laws
7 would add nothing to the oversight already available under the 1996 law,’” id. at
15 (quoting Goldwasser, 222 F.3d at 400-01); and (3) even if such allegations
could be entirely divorced from the 1996 Act context, such claims nonetheless
would not constitute “allegations of a freestanding antitrust claim” because “‘[t]he
elaborate system of negotiated agreements and enforcement established by the
1996 Act’” should not be “‘brushed aside by any unsatisfied party with the simple
act of filing an antitrust action.’” Id. at 16-17 (quoting Goldwasser, 222 F.3d at
401).5
Turning to Covad’s claims under Section 222 of the 1996 Act and for breach
of contract, the district court found that, because state commissions have the power
not only to approve interconnection agreements “but to later interpret and enforce
them as well,” “sections 206 and 207 do not grant federal courts jurisdiction . . .
when claims directly implicate the regulatory scheme of the 1996 Act,” except for
the power to review “a determination by a [state commission].” Id. at 37-38.
Because Covad’s claims “relate directly to duties under the 1996 Act or the
5 The district court, however, did not dismiss Covad’s antitrust claims in their entirety; it found that allegations that “BellSouth engaged in predatory advertising and promotion” could support an antitrust violation and dismissed these claims only to the extent that they alleged misuse of proprietary information, a subject that is “covered by paragraph 9 of the Interconnection Agreement.” D.C. Opinion at 29-31. The court also declined to dismiss Covad’s “monopoly leveraging” claim to the extent it was based on conduct “not implicated by the 1996 Act.” Id. at 33.
8 interconnection agreement, which are to be first reviewed and enforced by the
respective [state commissions],” the court dismissed those claims. Id. at 38.
Finally, the court dismissed Covad’s tort claims for interference and unfair
competition to the extent they involved any allegation other than “improperly
soliciting customers not to enter into contracts with Covad or to breach existing
contracts, [and] disparaging Covad’s products and services.” Id. at 40.6 The trial
court rejected the bulk of Covad’s tort claims because they “are merely a restated
breach of contract claim which the court has already dismissed for the reasons
noted above.” Id.
We review a district court’s dismissal of a complaint de novo. In particular,
“[w]hether specific conduct is anti-competitive is a question of law reviewed de
novo.” SmileCare Dental Group v. Delta Dental Plan of Cal., Inc., 88 F.3d 780,
783 (9th Cir. 1996). “‘[A] complaint should not be dismissed for failure to state a
claim 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.’” St. Joseph’s Hosp., Inc. v.
Hosp. Corp. of Am., 795 F.2d 948, 953 (11th Cir. 1986) (quoting Conley v.
Gibson, 355 U.S. 41, 45-46 (1957)). This Court “must accept the facts pleaded as
6 The tort claims not dismissed by the district court were subsequently dismissed by stipulation and are not part of this appeal.
9 true and construe them in a light favorable to plaintiffs.” Quality Foods de Centro
Am., S.A. v. Latin Am. Agribusiness Dev. Corp., S.A., 711 F.2d 989, 994-95 (11th
Cir. 1983). Rule 12(b)(6) dismissals are particularly disfavored in fact-intensive
antitrust cases. In Quality Foods, which involved claims under sections 1 and 2 of
the Sherman Act, this Court stated that “the threshold of sufficiency that a
complaint must meet to survive a motion to dismiss for failure to state a claim is
exceedingly low.” 711 F.2d at 994. “Although authorized by the Federal Rules of
Civil Procedure, the liberal rules as to the sufficiency of a complaint make it a rare
case in which a motion [to dismiss] should be granted.” St. Joseph’s Hosp., 795
F.2d at 953 (footnote omitted).
DISCUSSION
I. Sherman Act Claims
We turn first to the question of whether the litany of facts pleaded in
Covad’s complaint, if taken as true, state a cause of action for the violation of the
Sherman Act. Answering this question requires a two-tiered inquiry. First, we
must determine whether the 1996 Act’s regulation of local telecommunications
markets precludes application of the Sherman Act so that a claim based on facts
“inextricably linked” to an alleged violation of the 1996 Act can never, as a matter
of law, form the basis of an independent Sherman Act claim. If we conclude that
10 the 1996 Act precludes “inextricably linked” antitrust claims, then our inquiry is at
an end. However, if such a claim can stand as an independent Sherman Act claim,
then we must determine whether the allegations in Covad’s complaint adequately
allege a violation of the Sherman Act.
A. Does the 1996 Act Preempt All Sherman Act Claims?
As a general principle, a statute does not automatically limit causes of action
under another statute, and conduct that is alleged to violate one statute can also
violate another, subjecting the perpetrator to liability for the violation of each.
Moreover, the same conduct may support various theories of liability and expose
the perpetrator to different types of damages. At the same time, Congress can
determine the contours and extent of the remedy for specific conduct it determines
to be unlawful and accordingly limit the causes of action for such conduct. While
such congressional limitations can be established explicitly, courts have also
determined that if two statutes are deemed to be plainly repugnant to each other,
then Congress has implicitly limited one or the other. However, we must be
mindful that courts should be reluctant to imply a limitation resulting in antitrust
immunity. See Cantor v. Detroit Edison Co., 428 U.S. 579, 597 (1976). “Repeals
of the antitrust laws by implication from a regulatory statute are strongly
disfavored, and have only been found in cases of plain repugnancy between the
11 antitrust and regulatory provisions.” United States v. Philadelphia Nat’l Bank, 374
U.S. 321, 350-51 (1963) (footnotes omitted).
The initial question before us in this case is whether Congress intended in
the 1996 Act to provide immunity from antitrust violation claims for conduct
covered in that Act. We begin by examining the plain language of the 1996 Act to
determine whether it expresses any intention to preempt Sherman Act antitrust
claims for conduct that is inextricably linked to the 1996 Act. Our examination
reveals that, rather than pre-emptive language, Congress specifically and directly
stated that the two Acts were intended to be used in tandem to accomplish the
congressional goals served by both acts—namely, the stimulation of competition.7
Congress explicitly stated—both through a savings clause directed specifically at
antitrust enforcement and through an additional general savings clause—that the
1996 Act does not supplant or change the antitrust laws. The 1996 Act provides:
SAVINGS CLAUSE . . . nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws.
NO IMPLIED EFFECT . . . This Act and the amendments made by this Act shall not be construed to modify, impair, or supersede
7 The purpose of the 1996 Act is to “provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition.” H.R. Conf. Rep. 104-458, 1996 WL 46795, at *1 (1996).
12 Federal, State or local laws unless expressly so provided in such Act or amendments.
Telecommunications Act of 1996, sec. 601(b)(1), (c)(1), § 152 note, 110 Stat. 56,
143 (1996) (emphasis added). Thus, in enacting the 1996 Act, Congress did not
explicitly supersede the salience of the antitrust laws in the telecommunications
industry.
It is clear that plain repugnancy cannot be found between the 1996 Act and
the antitrust laws in view of the 1996 Act’s express language reserving the
applicability of the antitrust laws. An act that expressly preserves the antitrust
laws’ applicability and fully subjects anticompetitive activities to them cannot be
read to impliedly repeal those laws. We agree with the Second Circuit that the
“savings clause unambiguously establishes that there is no ‘plain repugnancy’
between the Telecommunications Act and the antitrust statutes [and thus] that the
Telecommunications Act does not provide an ‘implicit immunity’ from the
antitrust laws.’” Law Offices of Curtis V. Trinko v. Bell Atl. Corp., ___ F.3d ___,
___ (2d Cir. 2002). We conclude that the plain statutory language is sufficient to
end our inquiry on this matter. CBS Inc. v. Primetime 24 Joint Venture, 245 F.3d
1217, 1222 (11th Cir. 2001) (“[W]hen the words of a statute are unambiguous,
then, this first canon [of statutory construction] is also the last: judicial inquiry is
complete.”) (brackets in original) (citations omitted).
13 However, should there be any doubt that the plain language of the savings
clause resolves the issue, we find support for our conclusion in the legislative
history surrounding the 1996 Act, reflecting that the President, the Congress, the
Department of Justice, and the FCC have emphasized the critical need for the
antitrust laws to work in conjunction with the 1996 Act in order to spur
competition in the telecommunications industry. For example, the Senate Report
analyzing the bill specifically provided: “[T]he provisions of this bill shall not be
construed to grant immunity from any future antitrust action against any entity
referred to in the bill.” S. Rep. No. 104-23, at 17 (1995) (R2-7-A18). Thus, the
savings clause “prevents affected parties from asserting that the bill impliedly
preempts other laws.” Joint Explanatory Statement of the Committee of
Conference, H.R. Conf. Rep. No. 104-458, S. Rep. No. 104-230, at 201 (1996)
(“Conference Report”). Throughout the legislative record, Congress repeatedly
emphasized that ILECs like BellSouth remain subject to antitrust enforcement:
Antitrust law is synonymous with low prices and consumer protection – and that is exactly what we need in our telecommunications industry . . . . [T]he bill contains an all-important antitrust savings clause which ensures that any and all telecommunications merger and anticompetitive activities are fully subject to the antitrust laws. . . . And by maintaining the role of the antitrust laws, the bill helps to ensure that the Bells cannot use their market power to impede competition and harm consumers.
142 Cong. Rec. H1145-06 (daily ed. February 1, 1996) (statement of Rep.
14 Conyers).
The second important antitrust issue in this legislation is the unequivocal antitrust savings clause that explicitly maintains the full force of the antitrust laws in this vital industry. Today we take for granted that the antitrust laws apply to the communications sector. . . . Application of the antitrust laws is the most reliable, time-tested means of ensuring that competition, and the innovation that it fosters, can flourish to benefit consumers and the economy.
142 Cong. Rec. S687-01 (daily ed. February 1, 1996) (statement of Sen. Thurmond).
I firmly believe that we must rely on the bipartisan principles of antitrust law in order to move as quickly as possible toward competition in all segments of the telecommunications industry, and away from regulation. Relying on antitrust principles is vital to ensure that the free market will work to spur competition and reduce government involvement in the industry.
141 Cong. Rec. S18586-01 (daily ed. December 14, 1995) (statement of Sen. Leahy).
Former President Clinton again emphasized the importance of antitrust
enforcement when he signed the 1996 Act into law:
The Act’s emphasis on competition is also reflected in its antitrust savings clause. 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.
Statement by President William J. Clinton upon Signing S. 652, 32 Weekly Comp.
Pres. Doc. 218 (February 8, 1996), reprinted in 1996 U.S.C.C.A.N. 228-1, 228-3.
Thus, both the legislative and executive branches recognized that the antitrust laws
15 would coexist alongside the Act.
Finally, in implementing sections 251 and 252 of the 1996 Act (governing
the arbitration for and approval of interconnection agreements between ILECs like
BellSouth and CLECs like Covad), the FCC formally acknowledged that its
regulations did not provide the “exclusive remedy” for anticompetitive conduct.
First Report and Order, In re Implementation of the Local Competition Provisions
in the Telecommunications Act of 1996, 11 F.C.C.R. 15499, ¶ 124 (Aug. 8, 1996)
(R2-7-A174). The FCC emphasized that, in addition to judicial review of
arbitrations setting the terms of interconnection agreements, “parties have several
options for seeking relief if they believe that a carrier has violated the standards
under section 251 or 252,” id., expressly including private antitrust enforcement:
“[W]e clarify . . . that nothing in sections 251 and 252 or our implementing
regulations is intended to limit the ability of persons to seek relief under the
antitrust laws.” Id. at ¶ 129 (R2-7-A175) (footnote omitted).
Thus, in view of the plain statutory language and the legislative
pronouncements of the intended coexistence of the antitrust laws and the 1996 Act,
we cannot agree with Goldwasser to the extent that it is read to say that a Sherman
Act antitrust claim cannot be brought as a matter of law on the basis of an
allegation of anti-competitive conduct that happens to be “intertwined” with
16 obligations established by the 1996 Act.8
At the same time, we agree with Goldwasser that merely pleading violations
of the 1996 Act alone will not suffice to plead Sherman Act violations. Thus, a
claim that a defendant failed to live up to its contractual obligations under an
8 The Goldwasser court stated:
Nevertheless, when one reads the complaint as a whole these allegations appear to be inextricably linked to the claims under the 1996 Act. Even if they were not, such a conclusion would then force us to confront the question whether the procedures established under the 1996 Act for achieving competitive markets are compatible with the procedures that would be used to accomplish the same result under the antitrust laws. In our view, they are not. The elaborate system of negotiated agreements and enforcement established by the 1996 Act could be brushed aside by any unsatisfied party with the simple act of filing an antitrust action. Court orders in those cases could easily conflict with the obligations the state commissions or the FCC imposes under the § 252 agreements. The 1996 Act is, in short, more specific legislation that must take precedence over the general antitrust laws, where the two are covering precisely the same field.
Goldwasser, 222 F.3d at 401.
The district court interpreted this language to mean that a Sherman Act antitrust claim cannot ever be brought if it alleges conduct also covered by the 1996 Act. We disagree that Goldwasser stands for such a broad proposition, and note that Goldwasser tied its conclusion to the specific allegations of the complaint in that case. We do agree, however, with the Second Circuit in Trinko, when it concluded that “controlling case law does not support the theory that specific legislation meant to encourage competition necessarily takes precedence over the general antitrust laws,” Trinko, ____F.3d at ____ (citing Otter Tail Power Co. v. United States, 410 U.S. 366 (1973)). The Second Circuit also noted that “[i]t is unlikely that allowing antitrust suits would substantially disrupt the regulatory proceedings mandated by the Telecommunications Act.” Id. While acknowledging that injunctive relief in such suits may require judicial restraint, the Trinko court stated that “[a]warding damages for the willful maintenance of monopoly power would not substantially interfere with the regulatory scheme envisioned by the Telecommunications Act,” noting that in some instances, “it is possible that the antitrust laws will be needed to supplement the regulatory scheme” to bring competition to the local phone service markets. Id. at ___ (footnote omitted).
17 agreement made pursuant to the 1996 Act in and of itself will be insufficient to
establish an antitrust violation. However, if a plaintiff also pleads facts that, if true,
tend to show an anticompetitive purpose to create or maintain a monopoly, then
that plaintiff has pleaded an antitrust violation.9 Because we believe that the 1996
Act does not preempt claims under the Sherman Act as a matter of law, we turn to
the question of whether Covad has pleaded a valid antitrust claim.
B. Does Covad’s Complaint Sufficiently Allege a Violation of the
Sherman Act?
Establishing a Section 2 monopolization violation requires proof of two
elements: “(1) the possession of monopoly power in the relevant market and (2)
“the willful acquisition or maintenance of that power as distinguished from growth
or development as a consequence of a superior product, business acumen, or
9 In Goldwasser, the plaintiff pleaded 20 counts, seventeen of which explicitly cited violations of the 1996 Act. Goldwasser then alleged that “[a]ll of these practices . . . violate both § 2 of the Sherman Act, 15 U.S.C. § 2, and the 1996 Act itself.” Goldwasser, 222 F.3d at 395. None of the charges involved any allegations of anticompetitive intent; rather, the complaint merely asserted that the defendant was a monopolist, and that it had violated the 1996 Act. The Seventh Circuit observed, consistent with what we have said above, that such allegations of mere failure to fulfill obligations under the 1996 Act are insufficient to state a claim under the Sherman Act: “The fundamental fallacy in the plaintiffs’ theory is that the duties the 1996 Act imposes on ILECs are coterminous with the duty of a monopolist to refrain from exclusionary practices. They are not.” Id. at 399. The Goldwasser court further observed that there exists no independent duty to help competitors under the antitrust laws. Therefore, “[a] complaint like this one, which takes the form ‘X is a monopolist; X didn’t help its competitors enter the market so that they could challenge its monopoly; the prices I must pay X are therefore still too high’ does not state a claim under Section 2.” Id. at 400.
18 historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966);
accord Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 481-83
(1992). Monopoly power is defined as “the power to control prices or exclude
competition.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391
(1956). A firm that does not achieve monopoly power may nonetheless violate
Section 2 through “attempted monopolization.” Proving attempted monopolization
requires a showing of: (1) anticompetitive or exclusionary conduct; (2) with
specific intent to monopolize; and (3) a dangerous probability of achieving
monopoly power. See Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456
(1993). Anticompetitive conduct is “the use of monopoly power, however lawfully
acquired, to foreclose competition, to gain a competitive advantage, or to destroy a
competitor.” United States v. Griffith, 334 U.S. 100, 107 (1948), disapproved of
on other grounds by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752
(1984). An assessment of intent is critical in determining whether an accused
monopolist’s actions qualify as anti-competitive conduct. Id. at 106-07; accord
United States v. Colgate & Co., 250 U.S. 300, 307 (1919) (stating that “[i]n the
absence of any purpose to create or maintain a monopoly, the [Sherman Act] does
not restrict the long recognized right of [a] trader or manufacturer engaged in an
entirely private business, freely to exercise his own independent discretion as to
19 parties with whom he will deal”).
Covad’s Sherman Act claims fall under three different categories of alleged
anti-competitive behavior. First, Covad complains that BellSouth denied Covad
the use of an “essential facility,” namely its network of telephone lines. Although,
as Covad recognizes, the antitrust laws in general do not require that firms
(including monopolies) affirmatively help their competitors to succeed, there is a
narrow exception to this general rule when a monopolist improperly withholds
access to an “essential facility” without which a competitor cannot enter or
compete in a market. See, e.g., Consolidated Gas Co. of Fla., Inc. v. City Gas Co.
of Fla., 880 F.2d 297, 301 (11th Cir. 1989) (hereinafter, “Consolidated Gas I”).10
Second, Covad complains about BellSouth’s “refusal to deal.” Although a party
may ordinarily choose freely the companies with which it will conduct business,
when a monopolist’s refusal to deal is accompanied by the intent to monopolize
and the requisite degree of market power, that refusal to deal may violate Section
2. See, e.g., Mr. Furniture Warehouse, Inc. v. Barclays Am./Commercial, Inc. 919
F.2d 1517, 1522 (11th Cir. 1990). Third, Covad alleges that BellSouth illegally
manipulated its dual role as both Covad’s wholesale supplier (of local exchange
10 Consolidated Gas I was reinstated, en banc, by 912 F.2d 1262 (11th Cir. 1990) (“Consolidated Gas II”), which was then vacated and remanded in 499 U.S. 915 (1991), because the parties reached a settlement and the case therefore became moot.”
20 elements) and its retail competitor (for DSL) by engaging in a “price squeeze.” A
price squeeze is an intentional pattern of pricing wholesale inputs at such a high
level that Covad cannot absorb those costs and still compete profitably in the
downstream retail markets. See, e.g., Cities of Anaheim, Riverside, Banning,
Colton & Azusa, Cal. v. Fed. Energy Regulatory Comm’n, 941 F.2d 1234, 1238
(D.C. Cir. 1991). Covad alleges that by assigning inordinately high costs to its
wholesale offerings, and inordinately low costs to its retail offerings, BellSouth
squeezes out competitors such as Covad, clearing the field for its own retail
services.
It is important to recognize that each of these three theories is related to
Covad’s allegation that BellSouth engages in what is known as “monopoly
leveraging.” Monopoly leveraging occurs when a firm uses its market power in
one market to gain market share in another market other than by competitive
means. See Aquatherm Indus., Inc. v. Fla. Power & Light Co., 145 F.3d 1258,
1262 (11th Cir. 1998) (citing Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d
263, 276 (2d Cir. 1979) (“[T]he use of monopoly power attained in one market to
gain a competitive advantage in another is a violation of § 2, even if there has not
been an attempt to monopolize the second market.”)). For example, in this case,
while BellSouth may not at present have a monopoly in the high-speed internet
21 market, it can attempt to leverage its clear monopoly in the telecommunications
market by refusing to deal with or provide essential facilities to competitors in the
high-speed internet market. We have previously held that monopoly leveraging
can violate Section 2: “[W]hen a party with monopoly power abuses its monopoly
power in one market as a means of gaining an unlawful competitive advantage in
and monopolizing another market, we have no hesitation to conclude that the
Sherman Act prohibits such conduct.” Key Enters. of Del., Inc. v. Venice Hosp.,
919 F.2d 1550, 1568 (11th Cir. 1990), vacated as moot by 9 F.3d 893 (11th Cir.
1993). The Supreme Court has also found that a triable question of fact exists on a
Section 2 claim where a defendant used its control over one market to gain
dominance in another market. See Eastman Kodak, 504 U.S. at 482-83; see also
Poster Exch., Inc. v. Nat’l Screen Serv. Corp., 431 F.2d 334, 339 (5th Cir. 1970).11
Guided by these basic principles of antitrust law, we consider Covad’s three claims
sequentially.12
11 In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Eleventh Circuit adopted as binding precedent all Fifth Circuit decisions handed down prior to the close of business on September 30, 1981. 12 We stress here that our inquiry is limited by the standard of review appropriate to BellSouth’s Rule 12(b)(6) motion. Covad need only have alleged necessary elements of the relevant claims. We are not presented here with deciding, for example, whether telephone lines are in fact essential facilities for providing high-speed internet service, or whether BellSouth in fact had monopolistic intent in performing the alleged anticompetitive conduct. The standard of review at this stage is, of course, different than those at summary judgment or at trial.
22 1. Essential Facilities
The withholding of access to an essential facility without which a
competitor cannot enter or compete in a market is a violation of the antitrust laws.
See Consolidated Gas I, 880 F.2d at 301. Under the well-established “essential
facilities” doctrine, an inference of anticompetitive intent in violation of Section 2
arises upon a showing of four elements: (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. See MCI Communications Corp. v. AT&T,
708 F.2d 1081, 1132-33 (7th Cir. 1983). By exercising its control over an essential
facility (sometimes called a “bottleneck”) to withhold access to that facility, a
monopolist can exclude competition. For example, in Consolidated Gas I, we
found that a massive system of natural gas pipes controlled by the defendant was
an essential facility. Control over that bottleneck, the gas pipelines, enabled the
defendant to exercise its power in the market to exclude competition. See
Consolidated Gas I, 880 F.2d at 301. “Thus, the antitrust laws have imposed on
firms controlling an essential facility the obligation to make the facility available
on non-discriminatory terms.” MCI, 708 F.2d at 1132.
In MCI, 708 F.2d at 1133, the Seventh Circuit held that the local telephone
23 network was an essential facility and that AT&T could not deny MCI reasonable
access to it. Covad argues that MCI is essentially indistinguishable from the
present case, and uses it as a template in stating the elements of its essential
facilities claim. First, Covad alleges that BellSouth controls an essential facility,
indeed, the same essential facility (local telephone exchange) at issue in MCI. See
id. Second, Covad alleges that it would not be economically feasible “to duplicate
Bell’s local distribution facilities (involving millions of miles of cable and line to
individual homes and businesses), and regulatory authorization could not be
obtained for such an uneconomical duplication.” Id. Third, Covad contends that
BellSouth denied interconnections to the essential facilities, and fourth, did so even
though the interconnections could have been feasibly provided. See id. Finally,
Covad maintains that BellSouth’s conduct was intended to, and did, leverage
BellSouth’s local exchange monopoly into the local internet access markets to
exclude Covad and to create or preserve BellSouth’s monopoly power in the local
internet access markets. See id.
BellSouth’s response to this claim begins with a critique of the essential
facilities doctrine itself, explaining that “[e]ssential facilities claims—along with
other doctrines that Covad invokes in passing—exist at the fringes of antitrust
law.” Br. of Appellee at 34 (citing Blue Cross & Blue Shield United of Wisc. v.
24 Marshfield Clinic, 65 F.3d 1406, 1412 (7th Cir. 1995) (“[T]he essential-facilities
line[] has been criticized as having nothing to do with the purposes of antitrust
law.”). Whatever the merits of this critique, as the Seventh Circuit observed in
Blue Cross, “[w]e are not authorized to abrogate doctrines that have been endorsed
and not yet rejected by the Supreme Court.” Blue Cross, 65 F.3d at 1413 (citing
Olympia Equip. Leasing Co. v. W. Union Tel. Co., 797 F.2d 370, 376 (7th Cir.
1986)).
With regard to the substance of Covad’s essential facilities claim, BellSouth
responds with three points. First, BellSouth argues that Covad cannot allege the
most basic element of an essential facilities claim: the actual denial of access to an
essential facility. BellSouth states that Covad conceded that BellSouth has
participated in the interconnection and negotiation/arbitration process, and that
BellSouth has provided all of the types of facilities that Covad has sought.
According to BellSouth, the dispute is thus restricted to the following matters: the
specific terms, timing, and implementation of the interconnection agreement; the
alleged “delays” in obtaining collocation space and transport; and the “obstacles”
in obtaining loops. BellSouth maintains that these complaints are properly
characterized as claims regarding the terms or quality of access under the
interconnection agreement, and that none of these claims can amount to an antitrust
25 claim.
Second, BellSouth argues that Covad’s claim fails because the essential
facilities doctrine never applies where a competitor seeks “preferential access” or
asks the owner to “abandon its facilities.” Br. of Appellee at 39 (citing MCI, 708
F.2d at 1133). BellSouth explains that when Covad purchases an unbundled loop,
it gains exclusive use of that loop, and that antitrust laws have never required a
monopolist to “cease using its own facility so that [a competitor] can begin using
it.” Id. (quoting City of Vernon v. S. Cal. Edison Co., 955 F.2d 1361, 1366 (9th
Cir. 1992)).
Third, BellSouth argues that Covad is attempting to use antitrust law not
merely to gain access to facilities, but also to force BellSouth to construct new
facilities or to alter the nature of its business and become a renter of facilities for
competitors to use. BellSouth observes that “[n]o case has suggested that the
monopolist must build new capacity to satisfy a would-be sharer.” Id. at 40
(quoting 3A Areeda & Hovenkamp, Antitrust Law ¶ 773e, at 214). BellSouth
characterizes Covad’s claim as an attempt to harness the antitrust law to force
BellSouth to build new facilities, to develop new software, or to modify existing
facilities quickly enough to meet Covad’s alleged business needs.
For the most part, these are arguments that must be addressed at a later stage
26 of the proceedings, such as summary judgment or trial. We note that with regard
to BellSouth’s first point, Section 2 prohibits denial of access to essential facilities
on reasonable terms. See Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d
536, 542 (9th Cir. 1991); City of Vernon, 955 F.2d at 1367; Laurel Sand & Gravel,
Inc. v. CSX Transp., Inc., 924 F.2d 539, 545 (4th Cir. 1991); accord Del. &
Hudson Ry. v. Consol. Rail Corp., 902 F.2d 174, 179-80 (2d Cir. 1990) (“[i]t is
sufficient if the terms of the offer to deal are unreasonable”). The “applicable legal
standard” is that “[a]ny company which controls an ‘essential facility’ or a
‘strategic bottleneck’ in the market violates the antitrust laws if it fails to make
access to that facility available to its competitors on fair and reasonable terms that
do not disadvantage them.” United States v. AT&T, 524 F. Supp. 1336, 1352-53
(D.D.C. 1981) (emphasis added) (citing United States v. Terminal R.R. Ass’n of
St. Louis, 224 U.S. 383, 411 (1912), and Otter Tail Power Co. v. United States,
410 U.S. 366 (1973), among other cases). As the Supreme Court explained in
Terminal R.R., a monopolist must provide access to essential facilities “upon such
just and reasonable terms and regulations as will, in respect of use, character, and
cost of service, place every such company upon as nearly an equal plane as may be
with respect to expenses and charges as that occupied by the proprietary
27 companies.”13 224 U.S. at 411. Whether or not Covad can ultimately prove a
violation, its complaint does allege that Bell South sometimes denied access to its
facilities outright and other times denied access on reasonable terms.14
As to BellSouth’s second argument, we likewise note that the case upon
which BellSouth relies, City of Vernon, 955 F.2d at 1361, affirmed a summary
judgment, not a Rule 12 dismissal. Moreover, City of Vernon sought exclusive use
of a relative share of defendants’ entire electrical transmission facilities. See id. at
1364 & nn. 3 & 4. As we understand the claim here, Covad seeks temporary use of
an element of the ratepayer-funded local telephone network only for so long as
Covad has a customer, after which BellSouth regains full use of the facility (which
at all times remains its property). That temporary use seems quite similar to the
use of a pipeline in Consolidated Gas I and is nothing more than MCI found
13 BellSouth cites to a number of cases denying essential facilities claims, but those cases are distinguishable from the present case. For example, Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 748 (3d Cir. 1996), affirming summary judgment, involved alleged overcharges under the parties’ contract, not denial of access to essential facilities. Anserphone, Inc. v. Bell Atl. Corp., 955 F. Supp. 418, 428-29 (W.D. Pa. 1996), found plaintiff’s evidence of poor service an insufficient “constructive denial” of access to withstand summary judgment. Twin Labs., Inc. v. Weider Health & Fitness, 900 F.2d 566, 569 (2d Cir. 1990) and Valet Apt. Servs. Inc. v. Atlanta Journal & Constitution, 865 F. Supp. 828, 830-31 (N.D. Ga. 1994), involved fact-bound disputes about whether and where to place print advertisements. 14 BellSouth’s argument that the essential facilities claim is really an ordinary breach of contract claim does not support its motion to dismiss. Covad’s allegations of anticompetitive conduct can and do “support antitrust liability” at the pleading stage. Mr. Furniture Warehouse, 919 F.2d at 1522-23 (monopolist’s refusal to deal supports Section 2 claim where it is “designed to have an anticompetitive effect”). Breach of contract and antitrust are not mutually exclusive. See City of Vernon, 955 F.2d at 1368.
28 proper. See MCI, 708 F.2d at 1132-33. In any case, these are primarily fact issues
that reflect upon the feasibility of the requested relief. It would thus be
inappropriate to grant dismissal on this basis. Similarly, whether the relief sought
would unreasonably require BellSouth to construct new facilities as opposed to
granting nondiscriminatory access to existing ones is primarily a question of fact
inappropriate for disposition on a motion to dismiss.
Without venturing any opinion on the merits of its specific allegations, we
conclude that Covad’s complaint satisfies the “exceedingly low” threshold of
sufficiency that a complaint must meet to survive a motion to dismiss for failure to
state a claim, Quality Foods, 711 F.2d at 995, namely, that it must adequately
allege that as an integrated telecommunications company with monopoly control,
BellSouth attempted to leverage its monopoly power in the high-speed internet
market by giving itself preferential access to its essential facilities.
2. Refusal to deal
Covad also claims anticompetitive conduct based on BellSouth’s refusal to
deal with a competitor or potential competitor. Although a party may ordinarily
choose the companies with whom it will conduct business, the existence of a “right
to refuse to deal with other firms does not mean that the right is unqualified.”
Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 601 (1985).
29 When a monopolist’s refusal to deal is accompanied by the intent to monopolize
and the requisite degree of market power, that refusal to deal may violate Section
2. See Mr. Furniture, 919 F.2d at 1522 (citing National Indep. Theatre Exhibitors,
Inc. v. Charter Fin. Group, Inc. 747 F.2d 1396, 1402 (11th Cir. 1984), and Otter
Tail, 410 U.S. at 377-78); accord Lorain Journal Co. v. United States, 342 U.S.
143, 154 (1951); Mid-Texas Communications Sys., Inc. v. AT&T Co., 615 F.2d
1372, 1387 (5th Cir. 1980) (right to refuse to deal is “limited when the company
possesses a monopoly because the danger exists that it may use its monopoly
position to decrease competition in other markets”). As the Supreme Court has
explained, “[i]t 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.” Eastman Kodak, 504 U.S. at 483 n.32; accord
Aspen, 472 U.S. at 600-05 (affirming jury’s monopolization finding where
monopolist ski resort ended joint marketing program with competitor).
The Seventh Circuit has summarized the Supreme Court’s holding in Aspen
in terms useful to our consideration of the present case:
Aspen Skiing Co. v. Aspen Highlands Skiing Corp. . . . goes the furthest of any case we know toward imposing (more precisely, allowing a jury to impose) a duty under antitrust law to help a competitor; and as a recent decision by the Supreme Court it requires our most careful and respectful consideration. The Aspen Skiing Company owned three of the four mountains that make up the Aspen
30 skiing complex. Aspen Highlands Skiing Corporation owned the fourth. The two companies had offered their customers a joint ticket, usable on all four mountains, and the suit arose because Aspen Skiing Company terminated this cooperative arrangement. The Supreme Court found that for the convenience of customers an owner of a ski mountain in a multi-mountain skiing area normally would want to offer a ski ticket usable on any of the mountains. The joint ticket had originated at a time when there was competition among the different ski mountains at Aspen, and similar tickets were offered at other multi-mountain ski areas. 105 S. Ct. at 2858. In other words, competition required some cooperation among competitors. Aspen Highlands is not a conventional monopoly refusal-to-deal case like Otter Tail because Aspen Highlands was never a customer of Aspen Skiing Company; the skiers are the customers. But it is like the essential-facility cases in that the plaintiff could not compete with the defendant without being able to offer its customers access to the defendant’s larger facilities.
Olympia, 797 F.2d at 377.
As we understand it, Covad’s refusal-to-deal claim is based on alleged facts
that are virtually identical to those supporting its essential facilities claim; that is,
Covad simply alleges that BellSouth has refused to deal with Covad with respect to
an essential facility, and that this refusal was motivated by monopolistic intent.15
15 BellSouth argues that Covad’s complaint contains no specific allegation that BellSouth has forgone any economic advantage by failing to provide Covad with the accommodations it desires. Although it may be true that there is no specific allegation of this sort, the entire complaint alleges that BellSouth’s failure to live up to its contractual duties was motivated by its will to monopolize, and showing that BellSouth has forgone an economic advantage is simply a fact that, if true, would tend to support the contention of monopolistic intent in the fact of a proffered legitimate business justification. Here, on motion to dismiss, there is no proffered legitimate business justification for Covad to refute, so the absence of specific factual allegation is irrelevant. See, e.g., Eastman Kodak, 504 U.S. at 483-84 (ruling on a summary judgment motion and noting that after plaintiff’s presentation of evidence of Kodak’s exclusionary action with monopolistic intent, Kodak bore the initial burden of presenting evidence of “valid
31 The claim is thus an amalgam of Aspen and Otter Tail, in that Covad is a customer
of BellSouth that would like to purchase from BellSouth the right to interconnect
with BellSouth’s essential facility.
In response, BellSouth argues that Aspen is inapposite, because in that case
the Court held that the defendant had a duty to continue to deal where termination
of the relationship would involve a “sacrifice [of] short-run benefits and consumer
goodwill” in the interest of excluding a rival and reducing competition. 472 U.S.
at 610-11. BellSouth argues that Covad has never alleged that BellSouth has
refused to deal (much less terminated a relationship); rather, BellSouth says, Covad
alleged that Covad and BellSouth established a new relationship. We do not find
this argument persuasive. In Aspen, which involved competitors only (not a
competitor-customer relationship), defendant’s termination of an existing joint-
marketing relationship and accompanying sacrifice of short-term benefits
supported the jury’s inference of the defendant’s anticompetitive intent. See
Aspen, 472 U.S. at 610-11. However, those are not prerequisites for a refusal-to-
deal claim, and Aspen does not say or suggest that they are. Other cases, such as
Otter Tail, involve a refusal to deal where there has been no prior arrangement, and
a vertically integrated monopolist that refuses to deal with a customer to foreclose
business reasons” to justify its actions).
32 competition in a second market may violate Section 2. See Olympia, 797 F.2d at
376-77. In other words, in Aspen, the fact that the defendant had terminated a
long-standing and mutually economically beneficial agreement was significant
only because it supported the jury’s conclusion that the defendant’s refusal to deal
had been motivated by monopolistic intent rather than legitimate business purpose.
We note that in Stein v. Pac. Bell Tel. Co., 173 F. Supp. 2d 975, 983 (N.D.
Cal. 2001), the district court held that plaintiff had stated a valid antitrust claim on
refusal-to-deal facts similar to those in the present case. In Stein, according to the
plaintiff, Pacific Bell “entered into these optional and voluntary [1996 Act]
agreements and then breached them or proceeded to engage in bad faith conduct in
carrying them out, without any business justification and with the intent to destroy
its competitors . . . so as to unlawfully maintain its monopoly.” Id. Citing Aspen,
the plaintiff claimed that such conduct violated Section 2 of the Sherman Act
because Pacific Bell was “attempting to exclude rivals on some basis other than
efficiency,” thus making its conduct “predatory.” Id. The Stein court held that
even accepting Goldwasser in its entirety, the plaintiff had stated a valid claim. Id.
at 983-84 (“Goldwasser did not consider whether violations of the 1996 Act, if
done in a ‘predatory’ manner as defined in Aspen Skiing, can make up an
independent basis for liability under the Sherman Act. The plaintiffs in
33 Goldwasser did not allege, as Stein alleges here, that the defendant breached
interconnection agreements in bad faith and engaged in other exclusionary
practices.”).
In essence, BellSouth asks this Court to conclude that it is impossible to find
a refusal to deal where the defendant has formed an agreement with the plaintiff, in
this case an agreement pursuant to the strictures of the 1996 Act. For the reasons
stated above, we conclude that allegations that allege a failure to perform under an
agreement that amount to a refusal to deal are sufficient to state a claim under the
antitrust laws.16
3. Price Squeeze
Covad also alleges that BellSouth manipulated its dual role as both Covad’s
wholesale supplier (of local exchange elements) and its retail competitor (for DSL)
by engaging in a “price squeeze.” BellSouth argues that Covad’s allegations must
fail because, as the district court stated, “there is no allegation that [BellSouth] set
accompanying low retail prices for its own DSL services.” BellSouth argues that
in light of the 1996 Act’s regulatory scheme, Covad’s failure to allege
accompanying low retail prices is fatal because BellSouth has no discretion over
16 Again, this case is presented to us on a motion to dismiss. BellSouth’s response that it has not in fact refused to deal, while an appropriate issue for consideration on motion for summary judgment or at trial, is not open to consideration here.
34 the prices it charges Covad for unbundled loops and other “inputs” that Covad
uses; those charges are set by state commissions after extensive proceedings in
accordance with the Act’s standards. BellSouth maintains that these rates are not
“mere[ly] tariff[ed]” and BellSouth is not free to lower those rates unilaterally.
Compare Br. of Amici Curiae Competitive Telecommunications Ass’n at 29 n.11.
In addition, BellSouth argues that section 252 provides that all network element
rates must be “based on cost,” 47 U.S.C. §252(d)(1); accordingly, Covad’s failure
to allege that the rates BellSouth charges for its retail DSL service are below cost
forecloses Covad’s claim. BellSouth argues that antitrust law cannot possibly
force a company to raise above-cost retail prices to give competitors a greater
margin, because such a rule would hurt, rather than help, consumers. In essence,
BellSouth contends that Covad’s claim boils down to a complaint that the network
element rates set by state commissions are too high. BellSouth further asserts that
the appropriate remedy for this complaint is not a collateral antitrust action, but
judicial review under Section 252(e)(6).
Covad responds by stating that its complaint in fact did allege that
BellSouth’s retail prices “are set so low related to its unbundled wholesale loop
prices that Covad cannot meet BellSouth’s wholesale or retail prices and still make
a reasonable return on its investment.” More important, Covad maintains, this
35 issue is irrelevant because whether or not there is a price squeeze should not
depend on whether retail prices are “too low,” but rather on the “squeeze” created
by the disparity between the wholesale prices Covad must pay BellSouth upstream
and the prices Covad must charge downstream to remain competitive with
BellSouth. See, e.g., City of Kirkwood v. Union Elec. Co., 671 F.2d 1173, 1176
n.4 (8th Cir. 1982). The presence of an illegal differential, Covad states, is
precisely what Covad alleged. Covad also states that commission or other
regulation at the wholesale end (or even both ends) of the price squeeze is no
defense.
Both sides cite a number of cases in support of these positions,17 but
BellSouth’s response to the claim is essentially factual in nature, and therefore it is
inappropriate to grant BellSouth’s motion to dismiss under Rule 12. Whether or
not BellSouth has any control over the wholesale prices it charges, or whether the
17 BellSouth cites Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993) (rejecting “the notion that above-cost prices that are below . . . the costs of a firm’s competitors inflict injury to competition cognizable under the antitrust laws”); Indeck Energy Servs., Inc. v. Consumers Energy Co., 250 F.3d 972, 978-79 (6th Cir. 2000) (plaintiff “ha[s] no statutory right to compete in the economic marketplace on [its] own terms and in such a manner as to accumulate expected profits”). Compare Br. of Amici Curiae Competitve Telecomm. Ass’n at 29 n.11 (arguing that BellSouth should have raised retail prices to protect competitors). Covad responds with City of Kirkwood, 671 F.2d at 1179, and Fed. Power Comm’n v. Conway Corp., 426 U.S. 270, 279 (1976) (“When costs are fully allocated, both the retail rate and the proposed wholesale rate may fall within a zone of reasonableness, yet create a price squeeze between themselves.”) (citation omitted).
36 differential between the wholesale and retail prices is such that Covad and other
would-be DSL competitors are squeezed out—these are questions of fact.
BellSouth may very well prevail on summary judgment, but for the purposes of the
pleading stage, Covad’s complaint states a claim under antitrust law.
II. Breach of Contract Claims
The district court dismissed Covad’s breach of contract claims for lack of
jurisdiction, finding that they must first be presented to PSCs. This Court,
however, recently held that “state commissions . . . are not authorized under
section 252 to interpret interconnection agreements” at all. Bellsouth Telecomm.,
Inc. v. MCImetro Access Transmission Servs. Inc., 278 F.3d 1223, 1237 (11th Cir.
2002). BellSouth concedes that the trial court’s reasoning is “inconsistent with
Bellsouth v. MCImetro.” In light of MCImetro, the trial court’s dismissal for lack
of jurisdiction must be reversed.
III. The 1996 Act Claim
The trial court dismissed Covad’s 1996 Act claim because it found any
claims “relate[d] directly to duties under the 1996 Act” must be submitted to PSCs.
R3-25-38. For the same reasons that apply to Covad’s breach of contract claims,
this ruling is inconsistent with MCIMetro and must be reversed.
IV. State Law Claims
37 The trial court concluded that Covad’s state tort law claims were “preempted
by the 1996 Act.” This holding is irreconcilable with the Act’s express “No
Implied Effect” clause, which set forth Congress’ intent not to “modify, impair, or
supercede Federal, State or local laws.” Telecommunications Act of 1996, sec.
601(c)(1), § 152 note, 110 Stat. 56, 143 (1996).
BellSouth does not attempt to defend the trial court’s ruling, but argues
instead that Covad has failed to plead any tort claims, asserting that conduct that
constitutes a breach of contract can never support an interference claim. The cases
BellSouth cites, St. Mary’s Hosp. of Athens, Inc. v. Radiology Prof’l Corp., 421
S.E.2d 731, 735 (Ga. Ct. App. 1992), and International Telecomm. Exch. Corp. v.
MCI Telecomms. Corp., 892 F. Supp. 1520, 1543 n.19 (N.D. Ga. 1995), do not
support that broad proposition. Rather, they were summary judgment cases where
plaintiffs had failed to produce evidence that the defendant had actually induced
any third party not to contract with the plaintiff. At the Rule 12 stage, the only
proper inquiry is whether Covad has alleged such direct interference. It has, in
claiming that BellSouth “interfered with Covad’s existing and prospective business
relations with customers.” Therefore, the dismissal of Covad’s tort claims must
also be reversed.
CONCLUSION
38 For the reasons stated above, the decision of the district court granting
BellSouth’s motion to dismiss is REVERSED, and the case is REMANDED for
further proceedings in light of this opinion.
374 F.3d 1044 (Covad Communications Co. v. BellSouth Corp.) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.