The Supreme Court and Local Governments A 2004 Review

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1 November/December 2004 INTERNATIONAL MUNICIPAL LAWYERS ASSOCIATION In this issue: Prompt Judicial Review and SOBs The Hiibel Decision Canada s Top Court and the United Taxi Drivers Case Verizon Communications v. Trinko Implications for Cities San Antonio 2004: The Annual Conference The Supreme Court and Local Governments A 2004 Review

2 Verizon Communications v. Trinko The Message for Cities is Caution by Robert A. Jablon, Mark S. Hegedus, and Sean M. Flynn The United States Supreme Court s antitrust decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP 1 may make it more difficult, but certainly not impossible, for cities to use antitrust laws to check the economic power of regulated entities. Trinko s holding that a duty to deal with competitors imposed by regulation or statute does not, by default, create an antitrust duty to deal represents no remarkable change in antitrust law. Trinko is remarkable, however, in its hostility towards antitrust enforcement in the context of regulated industries, such as portions of the electricity, telecommunications, and water industries, which often provide vital public services. These industries are regulated because they are prone to have and exercise monopoly power; thus, these are the last companies to which one would want to give a pass on antitrust laws. Especially after Trinko, it is important that municipal lawyers shape antitrust cases to meet Supreme Court concerns. To protect their clients, municipal lawyers may want to consider greater participation in agency cases. They may also want to consider municipal ownership of key, essential facilities and the municipal provision of services. The Holding in Trinko The Trinko result is within the mainstream of antitrust law. The plaintiff, a law firm, brought suit against Verizon Communications for violation of Section 2 of the Sherman Antitrust Act. 2 Section 2 makes it illegal for companies to monopolize, or attempt to monopolize trade, and limits the ability of companies that have monopoly power to refuse to deal with competitors to maintain or expand their monopolies Municipal Lawyer Trinko alleged that Verizon had blocked it and others from receiving adequate telephone service from a competitor, AT&T, because Verizon had provided competitors with deficient operations support systems services that were deemed essential to the sale of local telephone service. Especially after Trinko, it is important that municipal lawyers shape antitrust cases to meet Supreme Court concerns. To protect their clients, municipal lawyers may want to consider greater participation in agency cases. Verizon was the incumbent, New York City-franchised telephone company. The Telecommunications Act of required Verizon to open telephone service to competition, including, among other things, by unbundling components of telephone service for separate sale. Just before Trinko brought suit, Verizon had settled cases with the Federal Communications Commission (FCC) and the New York Public Service Commission involving allegations of past inadequacies in network access. Verizon paid a fine (a voluntary contribution ) and was made subject to new performance measurements and reporting requirements. 5 Justice Scalia, writing for the Supreme Court, described the Act as impos[ing] certain duties upon incumbent local telephone companies in order to facilitate market entry by competitors, and establish[ing] a complex regime for monitoring and enforcement. 6 He characterized the case as requiring the Court to consider whether a complaint alleging breach of the incumbent s duty under the 1996 Act to share its network with competitors states a claim under 2 of the Sherman Act. 7 Citing the Act and FCC regulations as the source of Verizon s duty to deal, the Court ruled that this new regulatory right of access did not create an obligation under Section 2 for Verizon to give its competitors access. It found that, in any event, AT&T did receive access to Verizon facilities, thus defeating Trinko s claim based upon denial of such access. The Court noted that AT&T had not complained, and that Trinko s own complaint set forth a single example of the alleged failure to provide adequate access, a failure that resulted in the FCC consent decree and PSC orders. 8 While not claiming to exempt regulated industries from antitrust law, 9 the Court expressed the view that regulatory bodies were better able than courts to deal with competitive problems in regulated industries, especially where there was heavy regulation of access to networks and where agencies had provided for access. Accordingly, it concluded that, in view of the Act s extensive provision for access, it need not consider impos[ing] a judicial doctrine of forced access. 10 Trinko Reinforces Burdens for Plaintiffs It is well-established that the mere fact of a company being a monopoly is not illegal, as monopolies are often obtained legally for example, as a result of franchises, patents, or as a consequence of

3 a superior product, business acumen or historic accident. 11 Illegality comes from the abuse of a monopoly, as the Supreme Court s famed quote from United States v. Griffith made clear: [T]he use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor is unlawful If monopoly power can be used to beget monopoly, the Act becomes a feeble instrument indeed. 12 Where a monopolist acts willfully to acquire or maintain monopoly power through leveraging existing monopoly power for example, through anticompetitive refusals to deal with competitors that exercise of power will be condemned. It is easy enough to say that a company cannot abuse its monopoly, but what amounts to abuse? In United States v. Microsoft Corp., the court concluded that Microsoft abused its lawful monopoly over the Windows operating system when it placed restrictions on operating system licensing arrangements targeted at preventing Netscape (Microsoft s chief rival in the Internet browser market) from developing webbased products to compete with Windows. 13 Likewise, in Otter Tail Power Co. v. United States, the Supreme Court found that an electric company s refusal to provide access to its monopoly transmission network became abusive in light of its refusal to also sell power at wholesale prices, its engaging in litigation, and other tactics aimed at blocking cities that wanted to replace it as a monopoly seller of electricity in their local communities. 14 In another case, Aspen Skiing Co. v. Aspen Highlands Skiing Corp., the defendant had, over time, acquired three of the four Aspen, Colorado ski mountains. It terminated its joint mountain area ski ticket with the owner of the fourth, despite the ticket s apparent profitability, and refused to sell lift tickets to its competitor at full retail price. 15 The Supreme Court found this refusal to deal to be an act of illegal monopolization. In Trinko, however, the Court appeared to tolerate a greater degree of Where a monopolist acts willfully to acquire or maintain monopoly power through leveraging existing monopoly power for example, through anti-competitive refusals to deal with competitors that exercise of power will be condemned. monopoly abuse. Emphasizing the antitrust principle that companies (including monopolies) may deal with those with whom they please and charge what the market may bear, the Court would allow monopoly profits under the belief that the allure of such profits could encourage both monopolists and competitors to invest in economically beneficial facilities. 16 Under the Court s framework, excessive antitrust enforcement could lead to false positives, distort[ing] investment, and adding a new layer of interminable litigation. 17 Thus, although Trinko recognized the existence of monopoly abuse, it deems abuses to be potentially self-correcting. In addition to its rather laissez-faire attitude towards monopoly power and Robert A. Jablon Sean M. Flynn its abuse, the Court took a constrained view of an antitrust court s ability to address and deal with such abuse, especially where the remedy involved access to monopolized facilities. It feared that if courts were to enter the fray, they might not be able to provide sensible remedies. Enforced sharing could involve courts in setting the terms of access, such as proper price, quantity, and other terms of dealing a role for which they are ill-suited and that compelling negotiations among competitors may facilitate the supreme evil of antitrust: collusion. 18 The Court admonished that [n]o court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. 19 It also viewed courts as ill-equipped to analyze the highly technical and complex types of claims at issue, compared with the availability of regulatory supervision as an effective steward of the antitrust function. 20 Further, deterred by the day-to-day controls deemed necessary to administer sharing obligations, it suggested that there was an either/or standard, namely: in regulated industries under which regulatory agencies consider antitrust matters, courts should not enter the field. 21 Finally, the Court focused on the essential facilities doctrine, with continued on page 20 Robert A. Jablon, a partner at Spiegel & McDiarmid, has been working with municipalities since He has represented cities in antitrust; utility, including electric restructuring and transmission; natural gas; nuclear; rate; contract; fraud, and other administrative and litigation matters. Mark S. Hegedus, a former trial attorney in the Transportation, Energy and Agriculture Section of the Antitrust Division of the U.S. Department of Justice, is of counsel at the firm, and Sean M. Flynn is an associate focusing on antitrust, energy and telecommunications law for U.S. and international clients. Sean served as a consultant to the South African Competition Commission in a recent case involving a refusal to license an essential AIDS medicine patent. Spiegel & McDiarmid is a mid-sized, national law firm that represents state and local Mark S. Hegedus governments and consumers in infrastructure issues, and in particular, in energy, telecommunications, environmental, and transportation matters, government affairs, and litigation. The opinions expressed are those of the authors and not necessarily those of the firm or its clients. November/December 2004 Vol. 45, No. 6 19

4 VERIZON COMMUNICATIONS V. TRINKO which Otter Tail and a number of other cases are associated. The conventional understanding of the doctrine provides that where a company owns an essential monopoly facility, the owner of that facility may not unreasonably block competitors from access, if providing access is feasible. 22 Facilities found to be essential in prior cases include railway stations, electric power lines, fruit warehouse buildings, and sports stadiums. 23 Interestingly, the Trinko Court never outlined its understanding of the essential facilities doctrine, claiming that the Supreme Court has never recognized such a doctrine, crafted by some lower courts, and that it had no need either to recognize it or to repudiate it. 24 It found, in any event, that the doctrine was inapplicable: an indispensable requirement for invoking the doctrine was the unavailability of access to the essential facility; where access existed (where a state or federal agency had effective power to compel sharing and to regulate its scope and terms ), the claim failed. Because of the Telecommunication Act s extensive provision for access, the Court found it unnecessary to impose a judicial doctrine of forced access in Trinko. 25 Given the Court s conclusion that Verizon had not denied access to its facilities, it need not have addressed the essential facilities question. Nonetheless, some lower courts since the Trinko decision have acted on the Court s smoke signals and rejected or restricted essential facilities-based antitrust claims against regulated monopolies. 26 Courts and Regulatory Agencies: Complementary Roles in Securing Fair Competition The Court s either/or approach to antitrust enforcement in regulated industries, if left unchallenged, amounts to a curtailment of antitrust enforcement by courts in regulated industries. It is thus contrary to the oft-stated principle that repeals of antitrust laws by implication are strongly disfavored. 27 It is also contrary to antitrust savings clauses in continued from page 19 regulatory statues, such as the Telecommunications Act 28 and the Federal Power Act, 29 that specifically preserve a role for antitrust enforcement alongside the statutory regulatory regime. The statutory scheme providing for both regulation and antitrust clearly requires that they be understood as complementary, not opposing, forces in preserving competition and protecting consumers. 30 For example, the Court s expressed concern about an antitrust FERC may deem it more important to get a natural gas pipeline or a liquefied natural gas (LNG) delivery system built, or a regional transmission organization established, than to limit accretions of market power that result from approvals of such applications. Although an agency may impose conditions that address competitor concerns, those conditions may effectively represent bargains among key players the strength of such conditions may depend upon the agency s perceptions of the ability of those whose conduct The Court s either/or approach to antitrust enforcement in regulated industries, if left unchallenged, amounts to a curtailment of antitrust enforcement by courts in regulated industries. It is thus contrary to the oft-stated principle that repeals of antitrust laws by implication are strongly disfavored. court s being unable to be a dayto-day enforcer of sharing agreements ignores the ability of the court to order relief, and that of the agency to administer or implement it. In Otter Tail, the court ordered transmission access with the terms and conditions being determined by the regulatory agency. In the case of Florida Municipal Power Agency v. Florida Power & Light Company, the Federal Energy Regulatory Commission (FERC) ordered the Florida Power & Light Company (FPL) to sell network transmission service. 31 The court held that FPL could be subject to damages for its past refusals to sell network service and FPL settled the case, thus supplementing FERC relief. 32 Moreover, the either/or view deprives plaintiffs of important remedies that only a court can order. Although federal (but not necessarily state) agencies often take account of antitrust principles, 33 they do not have the authority to enforce the antitrust laws. Limiting the judicial role generally would limit the powerful and statutorily enacted remedies of treble damages for violations, and injunctive relief. Moreover, regulatory agencies may have primary statutory missions that de-emphasize antitrust considerations. For example, the conditions are meant to limit to thwart the agency s primary goals. Again, because of their importance and tendencies towards monopoly power, regulated industries are not where one would want to weaken judicial antitrust enforcement. Finally, the either/or approach may unduly protect powerful interests from independent oversight. Regulatory decisions are often policy ones. Appointments are expressly political (they must meet approval of both the President and the Senate) and are often urged by the very industries that are subject to regulation. Regulators frequently come from, or find employment in, the industries they regulate. Interested parties not only lobby as to legislation, budget, and appointments but, under agency rules, they can also meet with the regulators themselves on policy matters. Moreover, regulatory agencies are often captured by important interests whose activities they oversee. 34 Even where agencies have a strong, independent agenda, this agenda sometimes appropriately may be supportive of the interests that they regulate. Adopting an either/or approach may thus deny access to a neutral forum precisely in cases where it is most needed. 20 Municipal Lawyer

5 The Rules for Municipal Lawyers Still Apply, Only More So Certainly in light of Trinko, municipal lawyers need not abandon judicial fora where cities have legitimate antitrust concerns. However, they should draw lessons from the decision. First, lawyers should pay heed to the factual shortcomings in the Trinko claim. Trinko apparently alleged only one failure to provide access, and that failure was addressed by regulatory agencies. Plaintiffs are likely to be on stronger footing if their allegations involve substantial harms to competition, and seek antitrust relief that is presumably not available from a regulatory agency. To use an example from the electricity industry, plaintiffs who can show that excluding certain entities, such as municipal utilities, from joint transmission ownership arrangements will reduce transmission investment and harm municipal competitors (especially given that it is generally both economically and environmentally infeasible to build competing transmission networks) will be in a better position to argue their claim. Indeed, such a case would clearly suggest collusion, which Trinkocalls the supreme antitrust evil. 35 Second, municipal lawyers may want to recommend that cities take more active roles before regulatory agencies that administer access regimes, as Trinko suggests an enhanced role for regulatory agencies in assessing claims regarding harms to competition. Municipalities concerned about the competitive effects of regulated companies activities should make themselves heard before relevant agencies, whether the municipality is acting as a market participant itself, or as a representative of municipal residents who consume the output of such companies. Also, depending upon the matters involved, cities may be able to file before both agencies and courts, seeking to defer court action pending an agency ruling, seeking agency advice, seeking preliminary relief that only a court can give, or seeking to preserve damage claims. Finally, the trends and concerns highlighted by Trinkoindicate that municipalities should consider acquiring ownership or greater levels of control over facilities essential to providing public services such as electricity, natural gas, water, and telecommunications. In some sectors of these industries, the tendency towards the accumulation and exercise of monopoly power is clear. If antitrust court remedies are limited and administrative agencies lack the will or the capability to provide adequate remedies, municipalities may be best able to protect their residents interest in having access to such facilities through direct participation, be it ownership or through other contractual arrangements. 36 Notes U.S. 398, 124 S. Ct. 872 (2004) U.S.C. 2 (West 2004). 3. See, e.g., U.S. v. Griffith, 334 U.S. 100 (1948); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973); U.S. v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001) U.S.C (West 2004) S. Ct. 872, (2004). 6. Id. at Id. 8. Id. at Courts have continued to subject regulated monopolies to the traditional refusal to deal doctrine. SeeZ-TEL Communications, Inc. v. SBC Communications, Inc., 331 F. Supp.2d 513 (D. Tex. 2004); Am. Cent. E. Tex. Gas Co. v. Union Pac. Res. Group, Inc., 93 Fed. Appx. 1, 9-10 (5th Cir. 2004) S. Ct. at U.S. v. Grinnell Corp., 384 U.S. 563, 571 (1966). 12. Griffith, 334 U.S. 100, (1948). 13. U.S. v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001). 14. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). 15. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) S. Ct. 872, 879 (2004). 17. Id. at Id. at Id. at 883 (quoting Phillip Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 A NTITRUST L. J. 841, 853 (1989)). 20. Id. at Id. at SeeMCI Communications Corp. v. AT&T, 708 F.2d 1081 (7th Cir. 1982). 23. United States v. Terminal R.R. Ass n of St. Louis, 224 U.S. 383 (1912); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973); Gamco, Inc. v. Providence Fruit & Produce Bldg., 194 F.2d 484, 488 (1st Cir. 1952); Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977) S. Ct. 872, (2004). 25. Id. at Covad Communications Co. v. BellSouth Corp., 374 F.3d 1044 (11th Cir. 2004); Z-TEL Communications, Inc. v. SBC Communications, Inc., 331 F. Supp.2d 513 (D. Tex. 2004); Levine v. BellSouth Corp., 302 F. Supp. 2d 1358 (S.D. Fla. 2004); N.Y. Mercantile Exch., Inc. v. Intercontinental Exch., Inc., 323 F. Supp. 2d 559 (S.D.N.Y. 2004). 27. United States v. Philadelphia Nat l Bank, 374 U.S. 321, (1963); accordconsumers Power Co. (Midland Plant, Units 1 and 2), 6 N.R.C. 892, (1977) U.S.C. 152 (West 2004) U.S.C. 824k (West 2004). 30. Philadelphia Nat l Bank, 374 U.S. at ; Northern Natural Gas Co. v. Federal Power Commission, 399 F.2d 953, (D.C. Cir. 1968) (Wright, J.); Gulf States Utils. Co. v. Federal Power Commission, 411 U.S. 747 (1973). 31. Florida Mun. Power Agency v. Florida Power & Light Co., 64 F.3d 614 (11th Cir. 1995), enforced, 81 F. Supp.2d 1313 (M.D. Fla. 1999). 32. Id. 33. See, e.g., Gulf States Utils. Co., 411 U.S. 747 (1973). 34. John Shepard Wiley, Jr., A Capture Theory of Antitrust Federalism, 99 H ARV. L. R EV. 713 (1986) S. Ct. 872, 879 (2004). 36. In addition, municipal ownership often provides cities with added revenue benefitsṁl The Canadian Institute s 11th Annual This material was first published by the International Municipal Lawyers Association (IMLA), 1110 Vermont Avenue N.W., Suite 200, Washington, D.C , Provincial/Municipal and is reproduced with the Government permission of IMLA. Liability IMLA is Conference a non-profit, professional organization Feb , that has 2005 been an Toronto, advocate and Canada resource for local government attorneys since IMLA serves more than 1,400 member municipalities This Conference and local delivers government the information entities you in the need United to stay States up-to-date and Canada, on the and is most the only critical international issues for organization As IMLA devoted member, exclusively receive 10% to addressing off your the needs registration of local price! government Visit lawyers. 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