Covad Communications Co. v. Bellsouth Corp.

• Decision Date: 02 August 2002
• Docket Number: No. 01-16064.,01-16064.
• Citation: 299 F.3d 1272
• Parties: COVAD COMMUNICATIONS COMPANY, Dieca Communications, Inc., d.b.a. Covad Communications Company, Plaintiffs-Appellants, v. BELLSOUTH CORPORATION, BellSouth Telecommunications, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

299 F.3d 1272

COVAD COMMUNICATIONS COMPANY, Dieca Communications, Inc., d.b.a. Covad Communications Company, Plaintiffs-Appellants, v. BELLSOUTH CORPORATION, BellSouth Telecommunications, Inc., Defendants-Appellees.

No. 01-16064.

United States Court of Appeals, Eleventh Circuit.

August 2, 2002.

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Michael J. Guzman, Washington, DC, Tony G. Powers, Kimberly L. Myers, Rogers

& Hardin, Atlanta, GA, Alfred C. Pfeiffer, Jr., Frank M. Hinman, Jason A. Yurasek, Bingham McCutchen, LLP, San Francisco, CA, for Plaintiffs-Appellants.

A. Stephens Clay, James F. Bogan, III, Kilpatrick & Cody, J. Henry Walker, Ashley B. Watson, Marc William Franklin Galonsky, Marc Gary, BellSouth Corp., Atlanta, GA, Jeffrey W. Sarles, Stephen Michael Shapiro, Mayer, Brown, Rowe & Maw, Chicago, IL, Michael K. Kellogg, Aaron M. Panner, Mark C. Hansen, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, DC, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before BARKETT and MARCUS, Circuit Judges, and HIGHSMITH^*, District Judge.

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.

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.

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 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 non-discriminatory 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, 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 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 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 free-standing 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 interconnection agreement,...