Nynex Corp. v. Discon

• Decision Date: 05 October 1998
• Docket Number: No. 96-1570,96-1570
• Citation: 525 U.S. 128,119 S. Ct. 493,142 L. Ed.2d 510
• Parties: NYNEX CORPORATION, ET AL. v. DISCON, INCORPORATED
• Court: U.S. Supreme Court

525 U.S. 128

119 S. Ct. 493

142 L. Ed.2d 510

NYNEX CORPORATION, ET AL.

v.DISCON, INCORPORATED

No. 96-1570

supreme Court Of The United STATES

Argued October 5, 1998

Decided December 14, 1998

James R. Young argued the cause for petitioners.

Lawrence C. Brown argued the cause for respondent.

SYLLABUS.

Respondent Discon, Inc., sold "removal services"--i.e., the removal of obsolete telephone equipment--through petitioner Materiel Enterprises Company, a subsidiary of petitioner NYNEX Corporation, for the use of petitioner New York Telephone Company, another NYNEX subsidiary. After Materiel Enterprises began buying such services from AT&T Technologies, rather than from Discon, Discon filed this suit, alleging that petitioners and others had engaged in unfair, improper, and anticompetitive activities. The District Court dismissed the complaint for failure to state a claim. The Second Circuit affirmed with an exception, holding that certain of Discon's allegations--that Materiel Enterprises paid AT&T Technologies more than Discon would have charged because it could pass the higher prices on to New York Telephone, which could then pass them on to telephone consumers through higher regulatory-agency-approved service charges; that Materiel Enterprises would receive a year-end rebate from AT&T Technologies and share it with NYNEX; that Materiel Enterprises would not buy from Discon because it refused to participate in this fraudulent scheme; and that Discon therefore went out of business--stated a claim under § 1 of the Sherman Act. Noting that the ordinary procompetitive rationale for discriminating in favor of one supplier over another was lacking in this case, and that, in fact, the complaint alleged that Materiel Enterprises' buying decision was anticompetitive, the court held that Discon may have alleged a cause of action under, inter alia, the antitrust rule set forth in Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212, 3 L. Ed. 2d 741, 79 S. Ct. 705, that group boycotts are illegal per se. For somewhat similar reasons the court believed the complaint stated a valid conspiracy to monopolize claim under § 2 of the Act.

Held: The per se group boycott rule does not apply to a single buyer's decision to buy from one seller rather than another. Pp. 4-11.

(a) Precedent limits the per se rule in the boycott context to cases involving horizontal agreements among direct competitors. See, e.g., Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 734, 99 L. Ed. 2d 808, 108 S. Ct. 1515. The per se rule is inapplicable here because this case concerns only a vertical agreement and a vertical restraint, in the form of depriving a supplier of a potential customer. Nor is there a special feature that could distinguish this case from such precedent. Although petitioners' behavior hurt consumers by raising telephone service rates, that consumer injury naturally flowed not so much from a less competitive market for removal services, as from the exercise of market power lawfully in the hands of a monopolist, New York Telephone, combined with a deception worked upon the regulatory agency that prevented the agency from controlling the exercise of monopoly power. Applying the per se rule here would transform cases involving business behavior that is improper for various reasons into treble-damages antitrust cases and would discourage firms from changing suppliers--even where the competitive process itself does not suffer harm. Moreover, special anticompetitive motive cannot be found in Discon's claim that Materiel Enterprises hoped to drive Discon from the market lest Discon reveal its behavior to New York Telephone or to the relevant regulatory agency. That motive does not turn Materiel Enterprises' actions into a "boycott" under this Court's precedents, and Discon's reasons why the motive's presence should lead to the application of the per se rule are unconvincing. Finally, Discon's allegations that New York Telephone (through Materiel Enterprises) was the largest buyer of removal services in the State, and that only AT&T Technologies competed for New York Telephone's business, are not sufficient to warrant application of a per se presumption of consequent harm to the competitive process itself, absent a horizontal agreement. Discon's complaint suggests that other actual or potential competitors might have provided roughly similar checks upon "equipment removal" prices and services with or without Discon, which argues against the likelihood of anticompetitive harm. Pp. 4-10.

(b) Unless petitioners' purchasing practices harmed the competitive process, they did not amount to a conspiracy to monopolize in violation of § 2, and Discon cannot succeed on this claim without prevailing on its § 1 claim. Pp. 10-11.

(c) Petitioners' argument that Discon's complaint should be dismissed because it fails to allege that petitioners' purchasing decisions harmed the competitive process itself lies outside the questions presented for certiorari, which were limited to the application of the per se rule, and cannot be raised in this Court. P. 11. 93 F.3d 1055, vacated and remanded.

Lawrence G. Wallace argued the cause for the United States, as amicus curiae, by special leave of court.

BREYER, J., delivered the opinion for a unanimous Court.

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-Hale Stores, Inc., 359 U.S. 207, 212, 3 L. Ed. 2d 741, 79 S. Ct. 705 (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 along-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. SeeUnited 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, 75 L. Ed. 2d 472, 103 S. Ct. 1240 (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....