Nynex Corp. v. Discon Inc.

• Decision Date: 14 December 1998
• Docket Number: 961570
• Citation: 119 S.Ct. 493,142 L.Ed.2d 510,525 U.S. 128
• Parties: (96-1570) 93 F.3d 1055, vacated and remanded. SUPREME COURT OF THE UNITED STATES NYNEX CORPORATION, et al., PETITIONERS v. DISCON, INCORPORATED1570 [
• Court: U.S. Supreme Court

525 U.S. 128

119 S.Ct. 493

142 L.Ed.2d 510

(96-1570)

93 F.3d 1055, vacated and remanded

SUPREME COURT OF THE UNITED STATES

NYNEX CORPORATION, et al., PETITIONERS v DISCON, INCORPORATED

No. 96 1570

[December 14, 1998]

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

Justice Breyer delivered the opinion of the Court.

In this case we ask whether the antitrust rule that group boycotts are illegal per se as set forth in Klor's, Inc. v. Broadway&nbhyphHale Stores, Inc., 359 U.S. 207, 212 (1959), applies to a buyer's decision to buy from one seller rather than another, when that decision cannot be justified in terms of ordinary competitive objectives. We hold that the per se group boycott rule does not apply.

I

Before 1984 American Telephone and Telegraph Company (AT&T) supplied most of the Nation's telephone service and, through wholly owned subsidiaries such as Western Electric, it also supplied much of the Nation's telephone equipment. In 1984 an antitrust consent decree took AT&T out of the local telephone service business and left AT&T a long-distance telephone service provider, competing with such firms as MCI and Sprint. See M. Kellogg, J. Thorne, & P. Huber, Federal Telecommunications Law §4.6, p. 221 (1992). The decree transformed AT&T's formerly owned local telephone companies into independent firms. At the same time, the decree insisted that those local firms help assure competitive long-distance service by guaranteeing long-distance companies physical access to their systems and to their local customers. See United States v. American Telephone & Telegraph Co., 552 F. Supp. 131, 225, 227 (DC 1982), aff'd sub nom. Maryland v. United States, 460 U. S 1001 (1983). To guarantee that physical access, some local telephone firms had to install new call-switching equipment; and to install new call-switching equipment, they often had to remove old call-switching equipment. This case involves the business of removing that old switching equipment (and other obsolete telephone equipment) a business called "removal services."

Discon, Inc., the respondent, sold removal services used by New York Telephone Company, a firm supplying local telephone service in much of New York State and parts of Connecticut. New York Telephone is a subsidiary of NYNEX Corporation. NYNEX also owns Materiel Enterprises Company, a purchasing entity that bought removal services for New York Telephone. Discon, in a lengthy detailed complaint, alleged that the NYNEX defendants (namely, NYNEX, New York Telephone, Materiel Enterprises, and several NYNEX related individuals) engaged in unfair, improper, and anticompetitive activities in order to hurt Discon and to benefit Discon's removal services competitor, AT&T Technologies, a lineal descendant of Western Electric. The Federal District Court dismissed Discon's complaint for failure to state a claim. The Court of Appeals for the Second Circuit affirmed that dismissal with an exception, and that exception is before us for consideration.

The Second Circuit focused on one of Discon's specific claims, a claim that Materiel Enterprises had switched its purchases from Discon to Discon's competitor, AT&T Technologies, as part of an attempt to defraud local telephone service customers by hoodwinking regulators. According to Discon, Materiel Enterprises would pay AT&T Technologies more than Discon would have charged for similar removal services. It did so because it could pass the higher prices on to New York Telephone, which in turn could pass those prices on to telephone consumers in the form of higher regulatory-agency-approved telephone service charges. At the end of the year, Materiel Enterprises would receive a special rebate from AT&T Technologies, which Materiel Enterprises would share with its parent, NYNEX. Discon added that it refused to participate in this fraudulent scheme, with the result that Materiel Enterprises would not buy from Discon, and Discon went out of business.

These allegations, the Second Circuit said, state a cause of action under §1 of the Sherman Act, though under a "different legal theory" from the one articulated by Discon. 93 F.3d 1055, 1060 (1996). The Second Circuit conceded that ordinarily "the decision to discriminate in favor of one supplier over another will have a pro-competitive intent and effect." Id., at 1061. But, it added, in this case, "no such pro-competitive rationale appears on the face of the complaint." Ibid. Rather, the complaint alleges Materiel Enterprises' decision to buy from AT&T Technologies, rather than from Discon, was intended to be, and was, "anti-competitive." Ibid. Hence, "Discon has alleged a cause of action under, at least, the rule of reason, and possibly under the per se rule applied to group boycotts in Klor's, if the restraint of trade ' "has no purpose except stifling competition." ' " Ibid. (quoting Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 131 (CA2) (en banc) (in turn quoting White Motor Co. v. United States, 372 U.S. 253, 263 (1963)), cert. denied, 439 U.S. 946 (1978)). For somewhat similar reasons the Second Circuit believed the complaint stated a valid claim of conspiracy to monopolize under §2 of the Sherman Act. See 93 F.3d, at 1061 1062.

The Second Circuit noted that the Courts of Appeals are uncertain as to whether, or when, the per se group boycott rule applies to a decision by a purchaser to favor one supplier over another (which the Second Circuit called a "two-firm group boycott"). Compare Com-Tel, Inc. v. DuKane Corp., 669 F.2d 404, 411 413, and nn. 13, 16 (CA6 1982); Cascade Cabinet Co. v. Western Cabinet & Millwork Inc., 710 F.2d 1366, 1370 1371 (CA9 1983), with Construction Aggregate Transport, Inc. v. Florida Rock Industries, Inc., 710 F.2d 752, 776 778 (CA11 1983). We granted certiorari in order to consider the applicability of the per se group boycott rule where a single buyer favors one seller over another, albeit for an improper reason.

II

As this Court has made clear, the Sherman Act's prohibition of "[e]very" agreement in "restraint of trade," 26 Stat. 209, as amended, 15 U.S.C. § 1 prohibits only agreements that unreasonably restrain trade. See Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988) (citing National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U.S. 85, 98 (1984)); Standard Oil Co. of N. J. v. United States, 221 U.S. 1, 59 62 (1911); 2 P. Areeda & H. Hovenkamp, Antitrust Law ¶320b, p. 49 (1995). Yet certain kinds of agreements will so often prove so harmful to competition and so rarely prove justified that the antitrust laws do not require proof that an agreement of that kind is, in fact, anticompetitive in the particular circumstances. See State Oil Co. v. Khan, 522 U.S. 3, 10 (1997); Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 289 290 (1985); 2 Areeda & Hovenkamp, supra, ¶320b, at 49 52. An agreement of such a kind is unlawful per se. See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940) (finding horizontal price-fixing agreement per se illegal); Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408 (1911) (finding vertical price-fixing agreement per se illegal); Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49 50 (1990) (per curiam) (finding horizontal market division per se illegal).

The Court has found the per se rule applicable in certain group boycott cases. Thus, in Fashion Originators' Guild of America, Inc. v. FTC, 312 U.S. 457 (1941), this Court considered a group boycott created by an agreement among a group of clothing designers, manufacturers, suppliers, and retailers. The defendant designers, manufacturers, and suppliers had promised not to sell their clothes to retailers who bought clothes from competing manufacturers and suppliers. The defendants wanted to present evidence that would show their agreement was justified because the boycotted competitors used "pira[ted]" fashion designs. Id., at 467. But the Court wrote that "it was not error to refuse to hear the evidence offered" evidence that the agreement was reasonable and necessary to "protect against the devastating evils" of design pirating for that evidence "is no more material than would be the reasonableness of the prices fixed" by a price-fixing agreement. Id., at 467 468.

In Klor's the Court also applied the per se rule. The Court considered a boycott created when a retail store, Broadway-Hale, and 10 household appliance manufacturers and their distributors agreed that the distributors would not sell, or would sell only at discriminatory prices, household appliances to Broadway-Hale's small, nearby competitor, namely, Klor's. 359 U.S., at 208 209. The defendants had submitted undisputed evidence that their agreement hurt only one competitor (Klor's) and that so many other nearby appliance-selling competitors remained that competition in the marketplace continued to thrive. Id., at 209 210. The Court held that this evidence was beside the point. The conspiracy was "not to be tolerated merely because the victim is just one merchant." Id., at 213. The Court thereby inferred injury to the competitive process itself from the nature of the boycott agreement. And it forbade, as a matter of law, a defense based upon a claim that only one small firm, not competition itself, had suffered injury.

The case before us involves Klor's. The Second Circuit did not forbid the defendants to introduce evidence of "justification." To the contrary, it invited the defendants to do so, for it said that the "per se rule" would apply only if no "pro-competitive justification" were to be found. 93 F.3d, at 1061; cf. 7 P. Areeda & H. Hovenkamp, Antitrust Law ¶1510, p. 416 (1986) ("Boycotts are said to be unlawful per se but justifications are routinely considered in defining the forbidden category"). Thus, the specific legal question before us is whether an...