Theodore F. Kommers
GR Review

 The U.S. Supreme Court’s recent decision in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (May 21, 2007), addressed consumer complaints that incumbent local exchange carriers engaged in noncompetitive conduct in violation of the antitrust laws established under the Sherman Act.  The opinion was written by Justice Souter, joined by Chief Justice Roberts, and Justices Scalia, Kennedy, Thomas, Breyer, and Alito.¹  The Supreme Court affirmed the District Court and reversed the Second Circuit Court of Appeals in finding that the plaintiffs failed to allege collusion or agreement on the part of the phone companies sufficient to state a claim under the anti-trust laws.  Plaintiffs purported to represent a class of subscribers to local telephone and/or high speed internet access services.  The primary basis for the claim was the allegation that prices charged for phone and internet service were artificially inflated by a lack of competition due to the ILECs’ failure to compete in each other’s territory.  

Factual Background

In 1984, the American Telephone & Telegraph Company (AT&T) was divested of its monopolistic hold on nationwide telephone service.  The split resulted in seven Regional Bell Operating Companies known as incumbent local exchange carriers (ILECs), then commonly known as the Baby Bells.  These ILECs, in turn, had monopolistic authority over landline telephone service in their respective geographic regions and were not permitted to participate in the long-distance market.  Twelve years later, the Telecommunications Act of 1996 restructured the market by divesting the ILECs of their regional monopolies, allowing the ILEC’s to enter the long distance market, and requiring the ILEC’s to open and facilitate entry into their own markets by competitors (i.e., competitive local exchange carriers (“CLECs”)).  “A CLEC could make use of an ILEC’s network in any of three ways:  by (1) ‘purchas[ing] local telephone services at wholesale rates for resale to end users,’ (2) ‘leas[ing] elements of the [ILEC’s] network “on an unbundled basis,”’ or (3) ‘interconnect[ing] its own facilities with the [ILEC’s] network.’”  Id. at 1962.  As the markets developed following the 1996 Act, “[t]hrough a series of mergers and acquisitions, those seven companies were consolidated into [ ] four ILECs named in the suit:  BellSouth Corporation, Qwest Communications International, Inc., SBC Communications, Inc., and Verizon Communications, Inc.”  FN1, Id.  The four defendants comprise approximately 90% of the market for local telephone service.  

Plaintiffs brought suit based primarily on the fact that, despite ILECs being required to open their markets to CLECs (i.e., outsider ILECs), in the ten years since passage of the Telecommunications Act, ILECs were not seeking entry into each other’s landline territory.  Plaintiffs asserted that the lack of competition within each ILEC’s geographic landline region allowed each of the ILECs to maintain higher prices for telephone and internet service than they otherwise could in the presence of competition.  

Turning to the specific allegations, Plaintiffs alleged that the ILECs conspired to restrain trade in two ways each of which “supposedly inflate[ed] charges for local telephone and high-speed internet services.”  Id. at 1962.  The first was “that the ILECs ‘engaged in parallel conduct’ in their respective service areas to inhibit the growth of upstart CLECs.”  Id.  They allegedly did so by making unfair contracts with the CLECs for access to ILEC networks, providing inferior connections to the networks, and overcharging.  Plaintiffs alleged that the ILECs “’compelling common motivatio[n]’ to thwart the CLECs competitive effort naturally led them to form a conspiracy.”  Id.  Second, Plaintiffs alleged that the ILECs made agreements “to refrain from competing against one another” which can be “inferred from the ILECs’ common failure ‘meaningfully [to] pursu[e]’ ‘attractive business opportunit[ies]’ in contiguous markets where they possessed ‘substantial competitive advantages.'”  Id.  Plaintiffs also cited to a statement by Richard Notebaert, chief executive officer of the IEC Quest, “that competing in the territory of another ILEC ‘might be a good way to turn a quick dollar but that doesn’t make it right. . . .’”  Id.

Based on this behavior, Plaintiffs brought suit asserting a class action against the ILECs for violation of the anti-trust laws of the Sherman Act.  Under the Sherman Act, liability is triggered by a “contract, combination . . . , or conspiracy, in restraint of trade or commerce.”  15 U.S.C. § 1.  The specific issue in the case was whether the Plaintiffs had stated a cause of action – whether they had sufficiently alleged facts to show that the ILECs’ behavior was unlawful.  Under the Sherman Act, parallel conduct by similarly situated market participants, alone, is not sufficient to trigger liability under the Act, even if that parallel conduct results in restraint of trade.  The question before the Court, then, was whether Plaintiffs had adequately alleged a contract or conspiracy behind that parallel conduct.  

At root, Plaintiffs' allegations were based on inferences they took from observed common behavior – and not based on actual collusion.  Since Section 1 of the Sherman Act only prohibits behavior based on contract, combination, or conspiracy, the Court had to determine whether the ILECs’ alleged parallel conduct was undertaken independently or pursuant to agreement – which the Court answered in the negative.  The Court pointed out that, while parallel business behavior could be admitted as circumstantial evidence of an underlying agreement in the trial of the case, such allegations, alone, do not rise to the level of establishing agreement or a Sherman Act offense.  The Court stated that parallel conduct is “just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market”  as collusive behavior.  Id. at 1964.  Accordingly, if the conduct is “parallel” and results in an uncompetitive market, it is not illegal unless agreement or conspiracy can be established.

Ted Kommers is a Partner in Gould & Ratner's Litigation Group.  He may be reached at 312.899.1678 or via email at tkommers@gouldratner.com.  


¹Justice Stevens filed a dissenting opinion, in which Justice Ginsburg joined, except as to Part IV.