Linkline Communications, Inc. v. Sbc California

• Decision Date: 11 September 2007
• Docket Number: No. 05-56023.,05-56023.
• Citation: 503 F.3d 876
• Parties: LINKLINE COMMUNICATIONS, INC.; Inreach Internet LLC; Om Networks, dba Omsoft Technologies, Inc.; Nitelog, Inc., dba Red Shift Internet Services, Plaintiffs-Appellees, v. SBC CALIFORNIA, INC., fka Pacific Bell Telephone Company; Pacific Bell Internet Services; SBC Advanced Solutions, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

503 F.3d 876

LINKLINE COMMUNICATIONS, INC.; Inreach Internet LLC; Om Networks, dba Omsoft Technologies, Inc.; Nitelog, Inc., dba Red Shift Internet Services, Plaintiffs-Appellees, v. SBC CALIFORNIA, INC., fka Pacific Bell Telephone Company; Pacific Bell Internet Services; SBC Advanced Solutions, Inc., Defendants-Appellants.

No. 05-56023.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 5, 2007.

Filed September 11, 2007.

Robert A. Mittelstaedt and Craig E. Stewart, Jones Day, San Francisco, CA, for appellants SBC California, Inc., Pacific Bell Internet Services, and SBC Advanced Solutions, Inc.

Maxwell M. Blecher and Gary M. Joye, Blecher & Collins, P.C., Los Angeles, CA, for appellees linkLine Communications, Inc., In-Reach Internet LLC, Om Networks, dba Omsoft Technologies, Nitelog, Inc., dba Red Shift Internet Services.

John Thorne and Paul J. Larkin, Jr., Verizon Communications Inc., Arlington, VA; Aaron M. Panner, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC; and Richard G. Taranto, Farr & Taranto, Washington, DC, for amicus curiae Verizon Communications, Inc.

Appeal from the United States District Court for the Central District of California; Stephen V. Wilson, District Judge, Presiding. D.C. No. CV-03-05265-SVW.

Before: SIDNEY R. THOMAS, KIM McLANE WARDLAW, and RONALD M. GOULD, Circuit Judges.

Opinion by Judge THOMAS; Dissent by Judge GOULD.

THOMAS, Circuit Judge:

This appeal presents the question of whether the Supreme Court's decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 124 S.Ct. 872, 157 L.Ed.2d 823 (2004) ("Trinko"), bars a plaintiff from claiming a violation of § 2 of the Sherman Antitrust Act by virtue of an alleged price squeeze perpetrated by a competitor who also serves as the plaintiff's supplier at the wholesale level, but who has no duty to deal with the plaintiff absent statutory compulsion. We conclude that it does not, and affirm the order of the district court denying judgment on the pleadings.

I

This action was filed by linkLine Communications, Inc., In-Reach Internet LLC, Om Networks, and Nitelog, Inc. (collectively "linkLine"), who are Internet Service Providers ("ISPs") who sell DSL¹ access to the internet to retail customers.² While some ISPs affiliated with local telephone companies own their own infrastructure and facilities for transmitting data between the internet and consumers, these four lease those facilities variously from SBC California, Inc., Pacific Bell Internet Services, and SBC Advanced Solutions, Inc. (collectively "SBC Entities").

As is true in many regions, because of the development of the telecommunications industry and the costs of building the necessary infrastructure, regional monopolies have developed that own and control the lines necessary for the delivery of telecommunication services.³ These regional telephone companies are known as incumbent local exchange carriers ("ILECs"). ILECs tend to own the local telephone network as well as the telephone lines— known as the "last-mile"—that connect each individual consumer to the network. Because any company seeking to connect with users at the end of these last mile connections must interconnect with the ILEC, the ILEC's facilities are commonly referred to as "bottleneck" facilities.

At the time of the filing of linkLine's amended complaint, the relevant ILEC in this case was SBC California, Inc. ("SBC"), then a subsidiary of SBC Communications.⁴ At the time of the filing of the amended complaint Pacific Bell Internet Services ("PBIS") was a subsidiary of SBC which sold DSL internet access to retail consumers using SBC's telephone lines. In June 2000, SBC transferred responsibility for the provisioning and billing of DSL facilities to SBC Advanced Solutions, Inc. ("SBC-ASI"), an affiliate of SBC's and a subsidiary of SBC Communications. The SBC Entities were thus organized so that they sold both wholesale DSL access ("DSL transport services") to independent ISPs as well as retail DSL access (through PBIS and then SBC-ASI) to individual consumers. At the time the amended complaint was filed, the SBC Entities were both a supplier to the Plaintiffs at the wholesale level, and a competitor at the retail level.

Linkline filed its original complaint on July 24, 2003, alleging that the SBC Entities, acting as a single entity, have monopolized and attempted to monopolize the regional DSL market in violation of § 2 of the Sherman Act.⁵ In support of the § 2 claim, the complaint alleged that SBC Entities:

(a) created a price squeeze by charging ISP a high wholesale price in relation to the price at which defendants were providing retail services;

(b) intentionally adopted anticompetitive procedures and processes for handling customer ordering and installation to ISPs that are calculated to (i) cause ISP customer disruption and interruption in service, and (ii) create extraordinary and serious delays and a substantial backlog of orders, in the hope that the ISP customers will revert back to defendants;

(c) purposefully created and imposed procedures that impeded, and/or caused significant delays and costs for, end user customers of defendant switching to the services of independent ISPs, including plaintiffs;

(d) misled, harassed and exhibited hostility toward customers of ISPs, including plaintiffs;

(e) disparaged and created doubts about the efficacy and legality of ISPs, including plaintiffs; and

(f) purposefully failed to bill properly for DSL services.

In short, defendants adopted procedures carefully calculated to deny ISPs access to an essential facility and to preserve and maintain its monopoly control of DSL access to the Internet.

On July 6, 2004, the SBC Entities filed a motion for judgment on the pleadings. The district court read linkLine's complaint as alleging three different categories of anticompetitive conduct: refusal to deal, denial of access to an essential facility, and price squeezing. In an order dated October 20, 2004, the district court dismissed the first two as barred by the Supreme Court's decision in Trinko.⁶ With respect to the price squeezing claim, it ordered the Plaintiffs to file an amended complaint "limited to the price squeeze claim that details beyond the normal requirements of Rule 8 specific facts supporting Plaintiffs' price-squeeze claim." The first amended complaint described the allegation as follows:

(1) As set forth above defendants unlawfully manipulated their dual role as vertically integrated monopolists as both a wholesale-monopoly supplier and retail competitor of plaintiffs for DSL by engaging in an unlawful price squeeze by intentionally charging independent ISPs wholesale prices that were too high in relation to prices at which defendants were providing retail DSL services and necessary equipment to end-user customers — and for a period by charging wholesale DSL prices to competing ISPs (such as plaintiffs) that actually exceeded the prices at which defendants retail affiliate (PBI) was charging retail end-user customers for DSL services and necessary equipment — thereby making it impossible for independent ISP competitors such as plaintiffs to compete at the low retail prices set by defendants for combined DSL-Internet Service and necessary equipment provided to end-user customers.

(2) If plaintiffs charged retail DSL-Internet access customers the same retail price as defendants' retail affiliate charged, plaintiffs could not cover the cost of providing DSL service, which costs necessarily includes the wholesale transport costs charged by defendants.

(3) By the same token, if defendants themselves charged their retail affiliates the same wholesale costs for DSL transport that they charged their wholesale ISP customers (such as plaintiffs), defendants could not cover their wholesale costs and make a profit from DSL service at their low retail prices for their bundled offering of DSL, Internet Service and necessary equipment (e.g., free modem and installation), that were in some cases, and for some period, even below the wholesale DSL transport cost. Given the price margin relationship between retail and wholesale prices, defendants are clearly attempting to compensate for deliberately sacrificing profits on the retail end of their operations (with offsetting margins on the wholesale side) in order to stifle, impede and exclude competition from independent ISPs such as plaintiffs that are both wholesale customers and retail rivals.

In addition, the amended complaint also alleged that the Defendants

(1) intentionally adopted anticompetitive procedures and processes for handling customer ordering and installation to ISPs that are calculated to (i) cause ISP customer disruption and interruption in service, and (ii) create extraordinary and serious delays and a substantial backlog of orders, in the hope that the ISP customers will revert back to defendants;

(2) purposefully created and imposed procedures that impeded, and/or caused significant delays and costs for, end user customers of defendant switching to the services of independent ISPs, including plaintiffs, and imposed unreasonable and anticompetitive costs of DSL aggregation-backhaul circuits necessary for providing DSL service and particularly given the delays in processing orders, unfairly raised the per-customer costs of independent ISPs trying to compete with defendants.

(3) misled, harassed and exhibited hostility toward customers of ISPs, including plaintiffs;

(4) disparaged and created doubts about the efficacy and legality of ISPs, including plaintiffs; and

(5) purposefully failed to bill properly for DSL services.

In response, the SBC Entities filed various motions challenging the price squeeze allegations and other portions of the amended complaint.

The district court granted in part the relief requested, but denied the motion to dismiss for failure to state a claim....