NYNEX CORP. v. DISCON, INC.
Discon Incorporated sold services to remove obsolete telephone equipment to Material Enterprises Company, a subsidiary of NYNEX Corporation. When Material Enterprises started to buy removal services from AT&T; Technologies instead, Discon filed suit alleging NYNEX had engaged in unfair and anticompetitive practices. Discon claimed that Material Enterprises paid AT&T; more than Discon would have received. Material Enterprises passed on the extra cost to the customers of NYNEX. Material Enterprises then received a rebate from AT&T; and shared it with NYNEX. Discon alleged these practices were intended to them and to benefit their competitor, AT&T;, because Discon refused to participate in the scheme. The District Court dismissed the suit for failure to state a claim. The Court of Appeals affirmed the dismissal, but held Discon's claims were founded under the Sherman Act. Discon had a valid claim in antitrust rules that prohibit group boycotts because the practices were anticompetitive. Moreover, the complaint stated a valid conspiracy to monopolize. NYNEX argued that this case did not constitute a group boycott and therefore it could not proceed.
Does the antitrust rule outlawing group boycotts apply to a single buyer's decision to buy from one company over another?
Legal provision: Sherman
No. In a unanimous decision, announced by Justice Stephen G. Breyer, the Court ruled the group boycott rule does not apply to claims with a single buyer and a single supplier. In the competitive environment antitrust laws seek to encourage, NYNEX had the freedom to switch its vendor. As for the conspiracy to monopolize claim, the Court remanded the case to provide Discon a chance to show that NYNEX agreements possibly harmed the competitive process.
Argument of James R. Young
Chief Justice Rehnquist: We'll hear argument now in Number 96-1570, NYNEX Corporation v. Discon, Inc....
Mr. Young: Mr. Chief Justice, and may it please the Court:
In explaining why the Second Circuit was wrong, I'd like to focus on two legal principles.
The first is that an antitrust case brought by a disappointed supplier must contain adequate allegations of harm to competition and not just harm to the competitor, and the second is that that harm-to-competition requirement is not met simply by an allegation that the supplier was terminated for a bad reason, even if that reason is in violation of laws other than the antitrust laws.
The lower courts have repeatedly used these principles to deal efficiently and appropriately with meritless but tempting treble damage antitrust suits brought by suppliers and distributors in the lower courts and, in doing so, they have been consistent with the principles of GTE Sylvania and Sharp, because the very cost of this litigation alone... these cases go on for years.
The expenses are tremendous.
These costs are a tremendous chill on the right to, a purchaser's right to change suppliers freely, which is the essence of the competitive process.
The Second Circuit made a substantive error.
It extended group boycott law to cover a vertical nonprice agreement despite the clear requirement that a group boycott requires a horizontal agreement.
Now, the second circuit made this error apparently because it confused an alleged regulatory fraud in the telephone services market, the aim of which was to raise local telephone rates, for a competitive problem, but this case has nothing to do with rivalry among providers of local telephone service.
Discon in its brief acknowledges that.
Now, apparently, because of this confusion the Second Circuit did not even examine whether there were concrete allegations of market-wide harm to competition in the removal services market, which is the only relevant market here.
Justice Kennedy: So if costs were passed on to the consumer, that's just irrelevant?
Mr. Young: It's very relevant for regulatory purposes, but the question in a rule of reason analysis in the removal services market is whether or not a price now put in the conditions of competition in that market were changed, where...
Justice Kennedy: It seems to me if you have a monopolist that's the buyer and the agreement is to eliminate all but one supplier, and if you assume that those costs are going to be passed on to the consumer, I don't know why that isn't part of the competitive analysis, at least under the rule of reason.
Mr. Young: The... I think the important portion that is relevant under the rule of reason, as I say, it's not whether local telephone rates were raised.
There are regulatory commissions to examine those issues.
The question is, what were the terms of rivalry in the removal services market, and that's really where the Second Circuit I think missed the boat.
It did not even examine whether or not there was harm to competition in that market.
Now, one of the most...
Justice Ginsburg: On that question...
Justice Kennedy: Suppose we could show the costs were passed on to the consumers, and that that was the necessary effect of this, and it's a rule of reason analysis.
In a rule of reason case, the court would not admit the testimony if the costs were passed on to the consumers, unnecessarily?
Mr. Young: In a rule of reason case, Justice Kennedy, I think that fact, the fact that costs were passed on, is irrelevant to the rule of reason antitrust analysis.
Justice Stevens: But may I just interrupt with, what about the costs of removal services?
What if the alleged conspiracy, which may or may not have existed, result in higher costs of removal services?
Mr. Young: That's the core of the case, Your Honor.
Justice Stevens: And don't they allege that they did, that Technologies bid $998,000, and the plaintiff was bidding about half that amount any they mark it up to amounts still less than...
Mr. Young: Just...
Justice Stevens: Haven't they alleged that the costs of removal services were artificially enhanced?
Mr. Young: No, I don't believe they have, and I'd like to explain why.
Justice Ginsburg: May I ask just preliminarily before you make that explanation, who was in the removal business, other than ATT Technology and Discon?
One picture that I have is an agreement that would leave only one supplier standing, and in that case, if there were only the two in the business, it would be quite a different situation than if it were just a single supplier eliminated and many still standing, so what was it?
Mr. Young: The complaint alleges at least four people, four companies in the business.
There was Discon, there was AT&T, there was a company called LISN, which I believe is pronounced LISN, and there was an individual named McGee.
All are alleged in the complaint as being in the business.
Actually, the New York Public Service Commission, which conducted a detailed inquiry into this, in the public record of that proceeding is the fact that there were, in fact, a very large number of people competing in this business.
To the question about price and output, though, price and output, that is, in the removal services market, that is the critical factor, but the allegation here is that New York Telephone voluntarily paid more than the market price.
It's the same sort of situation as if the procurement officer at NYNEX had decided to give the money to his... to give the business to his brother-in-law and pay his brother-in-law an extra 20 percent.
That doesn't change the market price.
Justice Stevens: Oh, but why doesn't it, if that's a main purchaser in the market, and if the people who made the agreement... the whole thing is kind of strange, but anyway, if the people who made the agreement had for its purpose higher prices for removal services, why does it matter that they were willing to pay the higher prices?
Mr. Young: I think...
Justice Stevens: Because those prices then, as Justice Kennedy pointed out, are passed on to the ultimate consumer of telephone services.
Mr. Young: I think what matters about it is that if there is no change in the terms of rivalry in the removal services market, and I'd like to get to that in a minute, why I think that's true, then the fact that a buyer voluntarily pays more doesn't change the market price, doesn't change the market output.
That is unchanged.
The question is, if New York Telephone decided at one point that it didn't want to be a part of this alleged scheme any more, could it go into the market and get the competitive price for removal services, and it could, for I think a very fundamental reason.
This Court in Mitsushita, in talking about what market power means and the elements of market power, has indicated that barriers to entry are critical, that you can't maintain supracompetitive prices without market power without barriers to entry.
Justice Souter: But isn't there going to be, even as you describe it, a tendency to inflate price even in the event that NYNEX tomorrow morning, or tomorrow morning after the complaint was filed, decided that it didn't want to pay that much, because it had already demonstrated that in fact it would pay an inflated price, the competitors... I will assume for the sake of argument there were three... knew that it would pay the inflated price, and therefore I assume there would be a tendency on their part to say, let's hold them to their inflated price, or something like it.
So the very fact that NYNEX may change its mind tomorrow morning doesn't necessarily suggest that it will return to the competitive market that it had before it showed its willingness to pay the inflated price.
Mr. Young: I think the reason that it would return to the competitive price is the fact in this industry, where there are no barriers to entry, the complaint alleges not just that these people were in the market, but that this business can and was performed by telephone companies for themselves.
Justice Souter: Well, you may... and I realize that, so in fact there's a fifth player here...
Mr. Young: Right.
Justice Souter: I know, but isn't the point at this stage that that is a matter for litigation under a rule of reason analysis?
In other words, the only point that I think I'm making is that it does not seem to be implausible as a matter of law, on the allegations of the complaint, that if NYNEX changed its mind tomorrow morning, the price would necessarily return to the pre-inflation competitive price.
It seems to me a matter for... at least for litigation, isn't that so?
Mr. Young: No, I don't agree, and the reason I don't agree is the point I'm coming back to with barriers to entry.
The original complaint, and this is the joint appendix at page 15 to 17, indicates how easy and quick it was for somebody to get into this business, which is really just the first cousin of the salvage business.
Discon got into business in June of 1984.
Within 30 days it had $500,000 worth of business.
It had plans to ramp up its operation here fairly dramatically.
So I think the important point is that if there are no barriers to entry, then there is absolutely no reason to suspect, and a district court faced with this kind of complaint can reasonably conclude that there is no adequate allegation here of harm to competition.
There is only an allegation that a purchaser voluntarily agreed to pay more than the market price.
Justice Breyer: Sorry, I thought he didn't.
I thought... I'm mixed up, perhaps, but I thought that if we call... let's call NYTel that whole series of buyers, and we'll call AT&T Tech the seller.
I thought they did pay a competitive price.
They paid a low price disguised as a high price, so they not only got the low price, they got an extra term, the extra term was called, the term to help you chisel.
So they paid some money, which was cheap, and that money, plus the extra benefit, the help you chisel term.
There's no reason to think that's any lower, or higher, no higher than Discon's price, is it... is it?
They paid a competitive price.
It just happened they paid about the same amount of money, and they also got a little kick in there.
Mr. Young: Well, it is true...
Justice Breyer: So there's no doubt about that, is there?
Justice Scalia: It's a different product they were selling.
They were making an extraordinary offer.
Mr. Young: I'm sorry, Justice Scalia.
Justice Scalia: They're selling a different product, so the price could be higher.
Justice Breyer: Yes, right, a little higher...
Justice Scalia: They're selling removal services plus a kickback, so the price for the removal service is quite low.
Mr. Young: You could certainly analyze it...
Justice Scalia: It might have been the best price in the market, actually.
Justice Breyer: So there's no doubt about that, but there's also no doubt, I take it, that the consumer paid more.
I mean, they went and chiseled, according to the complaint, all right, so... and were they exercising monopoly power?
So I mean I don't see there's any... your... NYTel, certainly exercising monopoly power.
That's how it was able to charge a higher price to the consumer, because it's a monopoly, all right, so...
Mr. Young: But it was...
Justice Breyer: Yes.
Mr. Young: Excuse me, Your Honor.
Justice Breyer: Go ahead.
Mr. Young: I agree that the allegation is that they were exercising monopoly power in the telephone services market, but the important point is, that's not the relevant market for the analysis here.
The relevant market is the removal services market.
There's understandably some confusion because the... of course, the theory of the harm in this case has been very much a moving target throughout the history of this litigation, but stripped to its essentials you can put the monopoly, the allegation about telephone services aside, because that's not the relevant market for this case.
What is critical is the removal services market, where there were no barriers to entry, where entry was easy, and so there was no reason to think that the terms of competition were altered at all.
Justice Scalia: What about the purchase of removal services, as opposed to the sale of removal services?
Does... was there monopoly power there?
Mr. Young: In the purchase of removal services?
Justice Scalia: Right.
Mr. Young: Well, certainly I think you have to say the complaint fairly alleges that there were two principal buyers of removal services, but the allegations of the complaint are focused on the provider's side of the equation and, of course, here, since this is... we're considering a motion to dismiss, we have to take the allegations in the complaint.
Justice Scalia: It's alleging a conspiracy between the provider and the purchaser, right, and...
Mr. Young: That's correct.
Justice Scalia: When such a conspiracy is alleged, wouldn't the monopoly power on the part of the purchaser be relevant?
Mr. Young: Only if there were adequate allegations that the terms of market-wide competition in the removal services market had changed, and here... here I come back to what I tried to explain before.
Because of the barriers to entry point, then there shouldn't be any concern.
Justice Stevens: Actually, as I understand it there's... there were two purchasers, the exchange sub of AT&T as well as the NYNEX sub, and the allegation is, they agreed to create a monopoly in the purchase of removal services.
Mr. Young: That was one of the allegations pressed below, that you could say that, if I understand the question correctly, that there was a conspiracy between two separate subsidiaries of NYNEX.
Justice Stevens: Well, no, between the NYNEX MECo, or whatever it is...
Mr. Young: Right.
Justice Stevens: and the AT&T subsidiary that consumed removal services in its exchange business, in the...
Mr. Young: Yes.
Yes, there was an allegation that there was a conspiracy between those two.
The allegation in the trial court... I think this is clear from the complaint, the amended complaint, paragraphs 100 and 104.
Let me get directly to the point.
The point is that the allegation below was that there was a conspiracy to make NYNEX the monopolist in that market.
Now, the reason that is faulty, the reason that doesn't even meet the conspiracy test, is that NYNEX was not in the removal services market and had no intent to be.
Justice Stevens: Isn't the complaint fairly read as indicated, they wanted AT&T Technologies to have all the removal business?
Mr. Young: I think the complaint is fairly read, and now I refer to paragraphs 100 and 104 of the amended complaint, where the allegation is that the power over price was to be in NYNEX's hands, and also if you look at the briefs they're filed in the court of appeals.
I think it's clear that what they were alleging below... it's not the theory that the Second Circuit went off on, but their theory below was that it was NYNEX to be the monopolist, and that's why there's a fundamental problem in that theory, because NYNEX wasn't even in the business.
That's what I meant... this is one of the things I meant when I was referring to sort of the moving target that this case has been as it moved through the... moved through the...
Justice Stevens: What paragraph again is that, just so I know?
Mr. Young: That's paragraph 100 and 104.
Justice Stevens: Okay, thank you.
Justice Ginsburg: Mr. Young, you're not treating this as a pleading...
Chief Justice Rehnquist: The cases that come up on a motion to dismiss are more apt to be moving targets than if you'd gone through and litigated the thing and there was some sort of a factual record, I think.
That may not be your fault.
Mr. Young: Well, the... one thing, though, I think is clear, and that is, we have the final theory before us.
We have the allegations of the complaint before us, the allegations have the problem that I think I've described, so this is a case that is very appropriate for dismissal, just as so many of the lower courts have dealt with antitrust claims that really don't allege harm to market-wide...
Justice Ginsburg: Mr. Young, that's the part that I don't understand, because it's not clear to me whether your position is, there is no claim to state, or no claim was adequately stated, the insufficient statement versus, given this situation, there is no possible claim to be stated.
Mr. Young: I guess I'd answer that question this way.
It is certainly true that harm to market-wide competition is not adequately alleged.
It is very difficult for me to see how it could have been adequately alleged in this kind of a business precisely because there are no barriers to entry.
That's not to say that there... a plaintiff with a well-pleaded complaint might not have another cause of action.
There might have been a breach of contract action, or a fraud, or a tortious interference.
There could be other legal remedies for someone in Discon's position, but antitrust law is really the wrong legal lens to look at this problem through.
Justice Ginsburg: On that, you gave us a precise question about the Second Circuit's theory about group boycott.
The Second Circuit didn't give any alternate ruling in case that was wrong, and yet you're asking us to dispose of the entire case, and that I don't understand either.
If we answer your question yes, the Second Circuit was wrong, shouldn't we then say, and now let it go back there?
Mr. Young: No, I don't believe so, because the question presented did not use the words per se, it said, group boycott.
The Second Circuit, when it used that phrase, encompassed both... included both alternatives, either a rule of reason or a per se analysis, so I think the rule of reason analysis is fairly included in the question presented and, as I said before, I think this Court has everything before it that it needs to resolve the case.
The principles here I think are relatively straightforward.
There is no further need, I would respectfully suggest, for further...
Justice Stevens: May I ask this question, Mr. Young.
You place great emphasis on the fact there are no barriers to entry...
Mr. Young: Yes.
Justice Stevens: in the market and, assuming that's correct, is it your position that even if the people in the business do engage in a conspiracy to exclude somebody entirely and drive them out of business for all sorts of improper purposes, that could never be an antitrust violation as long as there are no barriers to entry, because always somebody will come back later because they can't succeed?
Mr. Young: The... Justice Stevens, I think the right answer to that question is, as long as what we're talking about is a vertical nonprice agreement, then the appropriate analysis is the rule of reason analysis, and it is... as long as there genuinely are no barriers to entry, it may well be that the allegation is that people have acted for a bad reason in terminating the supplier, but that's not...
Justice Stevens: And the bad reason in this case is, to exclude this company from the market permanently and entirely no matter what it takes, that's perfectly all right, because other people can always get back in and replace them?
Mr. Young: Because...
Justice Stevens: That would never be an antitrust violation.
Mr. Young: Because the relevant question is, what is the state of rivalry in the market, not whether a particular supplier goes out of business.
Justice Kennedy: Just getting back to the relevant market one more time, let's assume a universe in which, because of the regulatory scheme... let's assume this.
100 percent of the removal costs are passed on to the consumer, and then you have an allegation of a conspiracy to raise those costs at the level that we're discussing here of the suppliers of the removal services.
What authority do I cite for your proposition that the consumer price is not part of the relevant market?
When I write that down, what do I cite for that, just what I know about economics?
Mr. Young: The best authorities that I would point to... I could not point to any authority of this Court.
There are several lower court opinions.
There's a Judge Posner decision that's cited in the briefs.
There's the Blue Cross Marshfield decision, and there's a First Circuit decision that Justice Breyer wrote when he was on the First Circuit that explains the same point.
I think that's the case with the unlikely plaintiff's name of Kartell.
Justice Kennedy: Thank you.
Mr. Young: But those two cases... I'm sure that there are others, but those two cases have a particularly good explanation of why it is that a monopolist who raises his rates is, that is not an antitrust problem.
It is, in fact, as Judge Posner explains...
Justice Souter: A regulated monopolist.
Mr. Young: Regulated monopolist, excuse me, yes, why that is not an antitrust problem.
Let me just talk...
Justice Scalia: Could I ask... I frankly tend to agree with you about what result you get when you apply the rule of reason, but I'm not sure that... I certainly didn't understand when I voted to grant the petition that we were talking about anything except a group boycott in violation of section 1, and that's a term of art, and the term of art means the kind of thing that is a per se violation.
Have you ever heard of a group boycott that... would you have to call it a group boycott in order to use the rule of reason?
Mr. Young: Well, I think this Court in Northwest Stationers certainly suggested that there could be group boycotts that are not analyzed under a per se approach, but in terms of the question presented, plainly the Second Circuit indicated meant group boycott to subsume both per se and rule of reason.
Justice Souter: But even on that reading, and you're probably right on that, why still don't we send it back and see... let them have a crack at whether there is a different rule of reason and conceptualization that might apply?
Mr. Young: Because... two reasons.
First, the Court has everything in front of it it needs to dispose of the case.
It has the theory...
Justice Souter: Well, but we'll be disposing it if we do what you invite us to do and, in fact, in the first instance we won't be acting as a reviewing court.
Mr. Young: The second reason, which I think is probably the most...
Justice Souter: The better reason.
Mr. Young: important is...
It inevitably is.
The second reason is that if this Court sends this back it is implicitly saying, I think, that this complaint was good enough, as we've indicated in the briefs.
The lower courts have developed quite a practice in dealing with these disappointed supplier cases.
The 12(b)(6) motion is used, and one difficulty about remanding this case is, I think it would tend to undercut that, and...
Justice Scalia: Well, we wouldn't be saying the complaint is good enough.
We would be saying the issue of whether the complaint is good enough on this other theory was not before us.
Mr. Young: If I might...
Justice Scalia: I mean, that's what we would be saying if we sent it back.
Now, maybe we shouldn't say that, but...
Mr. Young: One more... if I could say one more thing before I close, I haven't really talked about the section 2 conspiracy claim at any great length.
I think this is covered in the briefs.
The basic point is, if there's no rule of reason claim there can be no conspiracy claim.
I'd like to reserve the balance of my time.
Argument of Lawrence G. Wallace
Chief Justice Rehnquist: Very well, Mr. Young.
Mr. Wallace, we'll hear from you.
Mr. Wallace: Thank you, Mr. Chief Justice, and may it please the Court:
The courts have not had experience with the kind of antitrust claim alleged in this case.
It involves a regulatory evasion scheme to harm consumers by recovering inflated costs under a rate regulation system allowing recovery of costs by the regulated utility, the kind of system of rate regulation now rapidly being superseded by competitive deregulation or by systems of rate regulation such as price caps that are designed to provide greater incentives for efficiency on the part of the regulated utility.
And the allegation is of a conspiracy not just, for example, with an accountant to cook the books of the regulated utility, but with a supplier in an unregulated, what the antitrust lawyers call upstream market, the market for these removal services, and the conspiracy alleged is to monopolize that market and to exclude a competitor of that supplier of removal services from that unregulated market because competition in that market would threaten the success of the scheme that allegedly involves inflated payments to that supplier, followed by secret rebates.
Now, we agree with petitioners that this is not properly regarded as a per se... an allegation of a per se violation of the antitrust laws, for reasons explained in our brief.
Basically, we think the court of appeals got off track on that particular point by not recognizing that it has to be a type of restraint that almost always tends to restrict competition and reduce output, rather than that on the facts of a particular case it might be shown that the restraint has only anticompetitive effects.
So we agree that it's a case for rule of reason analysis under section 1, but we do think that petitioner's argument in, particularly in their brief, is too facile in trying to make almost a virtue for purposes of this case out of the regulatory evasion allegations.
They say that these allegations sufficiently show the motive, a motive for the conduct that's alleged, but that the effects on consumers in the utility's own market for telephone services have to be ignored entirely because the restraint alleged is in this upstream market for removal services.
But the very authority they cite, correctly, describing the rule of reason, this Court's decision in Business Electronics v. Sharp Electronics, quoting its decision in GTE Sylvania, says that under the rule of reason... and this is the quote from both cases... the factfinder weighs all the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.
Justice Scalia: Well, that's true when you have identified a restraint on competition.
You ask yourself, you know, is it worth the benefits on the other side.
But what is the restraint on competition here?
The argument being made is that there is no restraint on competition, period, that any time NYNEX itself wanted to terminate this sweetheart deal it could, and it would have in front of it a totally competitive industry, because it takes nothing to get into it.
It's like demolition.
As I understand it, some telephone companies don't even use outside people to do it.
They use their employees.
They say, come on, rip out this switchboard.
We don't need it any more.
Mr. Wallace: This argument may turn out to be one that could be substantiated even in summary judgment proceedings factually, but it seems to me to rest on drawing too much out of some passing references in some of the allegations of the complaint...
Justice Souter: Well, I think he's making a further argument...
Mr. Wallace: at this stage of the case.
Justice Souter: Mr. Wallace.
I think he's making the argument that the allegations in the complaint are simply insufficient, that they have not, in fact, alleged sufficiently barriers to entry.
What's the Government's response to that?
Mr. Wallace: Well, we certainly would file a complaint, I hope, that would be clearer in its theories of what the violation is.
The Second Circuit has read the complaint generously, although we think that is not improper at the motion to dismiss stage, the logic of the complaint, putting the regulatory evasion scheme together with the allegations of an attempt to achieve monopoly power logically from the complaint to mask those regulatory evasions, because the existence of competition by a participant such as Discon would threaten to unmask it.
It... I mean, the petitioners like to say that this is just an allegation of harm to a competitor, but it was the fact of the competition in that market that was the threat to the scheme.
Justice Breyer: Well, all right, assume... I'm having trouble understanding, and the part I don't understand is, I'll assume any facts you want.
Now, how could it be a violation of the antitrust law?
That is to say, I'm not saying it is or isn't.
I am a buyer.
I buy from A.
When I buy from A, I haven't bought from B.
I'll assume there are only two firms, A and B, so if I buy everything from A, I've bought nothing from B.
Now, suppose that I have a terrible motive, like trying to chisel consumers.
That's what they're saying here.
Now, either they win on that terrible motive, or they lose.
Suppose they lose, because that's a regulatory problem, not an antitrust problem.
At that point, what facts could make out a rule of reason antitrust case?
Mr. Wallace: Well, in... I think under these allegations the facts that could make it out would be that they could substantiate that this was a conspiracy to monopolize that market...
Justice Breyer: No, no, those are conclusions.
Mr. Wallace: and show some...
Justice Breyer: I'm asking you about facts.
Mr. Wallace: Mm-hmm.
Justice Breyer: That's a conclusion, a legal conclusion.
Mr. Wallace: Yes.
Justice Breyer: I want to know what facts there are that, if we assume this motive, is a regulatory problem and not an antitrust problem, and if we assume giant entry barriers, only two firms... as tall as the Empire State Building those entry barriers.
Now, assume all that, and tell me what are the facts that would then make out a violation of either section 1 or section 2.
Facts, not legal conclusions.
Mr. Wallace: Well, the facts are that, as alleged, that they discriminated against this participant in the market in order to exclude him from the market even when he was offering fully adequate competitive services at a more favorable price, and that there were no legitimate business reasons for the decision, but it was designed to mask the regulatory violation.
Justice Breyer: Does that mean something other than what I said I would assume...
Mr. Wallace: Other than just...
Justice Breyer: that what they did... I assume they bought from A for this bad reason.
Now, have you added anything to that, my assumption, in what you just said?
I'm willing to assume that they bought from A, never bought from B...
Mr. Wallace: But...
Justice Breyer: and they did it for this bad reason, to chisel the consumer.
Now, once I've assumed that, have you added a fact to that?
Mr. Wallace: That...
Justice Breyer: And if so, what?
Mr. Wallace: That they... it's also alleged that they conspired together to take steps to see to it that the plaintiff here, the respondent, was excluded from that market because of the threat that his competitive offers would unmask the conspiracy, the regulatory evasion conspiracy.
The point I want to make is that once the domain of the antitrust laws has been entered because a restraint has been alleged in the unregulated, upstream market, it seems to us that the purpose and effect of the alleged restraint should be looked at in total, just as the purpose and effect occurs in the real world, and that includes the effect on consumers in the utilities market.
Argument of Lawrence C. Brown
Chief Justice Rehnquist: Thank you, Mr. Wallace.
Mr. Brown, we'll hear from you.
Mr. Brown: Mr. Chief Justice, and may it please the Court:
We're here in a situation that is like the Klor's case.
This is a 12(b)(6) motion.
In Klor's there was an application for summary judgment.
In Klor's, absolutely no procompetitive justification was given in a group boycott context by the defendants.
Rather, they said they had the right to contract with whoever they pleased...
Chief Justice Rehnquist: That was quite a different fact situation, was it not, Mr. Brown?
Mr. Brown: Well, Mr. Chief Justice, as I understand Klor's...
Chief Justice Rehnquist: I mean, could you answer the question?
Mr. Brown: Yes.
Chief Justice Rehnquist: Don't you think that was quite different, with a number of different parties involved?
Mr. Brown: I think that is true, Your Honor, in terms of the number of parties involved, but in terms of the structure, the violation that was being addressed, I don't believe it differs.
Chief Justice Rehnquist: Well, you need a group to make a group boycott, don't you?
Mr. Brown: Well, Your Honor, as I read Northwest Stationers, in terms of its description of what a per se approach generally involving, a joint effort by a firm or firms to disadvantage a competitor of one of the participants in the boycott to keep them from access to a market, or from certain critical components that they need to compete.
In the present case, Your Honor, we have a situation where, at the time of the AT&T breakup, MECo is created.
MECo is a gatekeeper, Your Honor.
We've heard about entry barriers here this morning.
The only way that you could sell NYNEX, and I will use that in the plural, is if MECo approved you as a vendor.
Chief Justice Rehnquist: MECo is really an agent for NYNEX, was it not?
Mr. Brown: I don't disagree with that, Your Honor, but to sell to New York Telephone, who was actually the ultimate purchaser... MECo was just a reseller... MECo had to approve every vendor and qualify it.
Chief Justice Rehnquist: Why is that any different from saying that NYNEX's purchasing agent had to approve every vendor?
Mr. Brown: Well, Your Honor, I don't think it is different.
I don't think it is different, but it has to... I'm addressing myself to barriers to entry.
In terms of barriers to entry, Your Honor, we're dealing with a situation that you could not sell to NYNEX, read NYTel...
Justice Scalia: Without selling to NYNEX.
I mean, you could not sell to NYNEX without getting the approval of NYNEX's purchasing agent.
Mr. Brown: That's true, Your Honor.
Justice Scalia: Which is NYNEX.
Mr. Brown: And in this case we did...
Justice Scalia: Why is this case any different... let me put it another way.
Is it your position that you can avoid a motion for summary judgment whenever you allege a sole purchaser... I'm the only purchaser in the industry of widgets.
Nobody else uses widgets, and I enter into a requirements contract with one seller.
I totally eliminate all other competitors selling widgets.
Now, is that enough for you to allege?
Mr. Brown: No, Your Honor, and I think we've gone beyond that.
Justice Scalia: Why have you gone beyond that?
Mr. Brown: First of all, Your Honor, Discon, my client, and AT&T Communications, in addition to some minor vendors who I will deal with if Your Honor would want me to, were approved by MECo to sell to NYTel.
We were both selling to NYTel.
The analogy to an exclusive...
Justice Scalia: I'll change my hypothetical, then.
There used to be three people selling to this sole purchaser of widgets.
I'm the only company in the country that purchases widgets.
I used to buy it from three people.
I decide I am going to enter into a requirements contract with one of these three, which means that I won't be buying from the other two.
Is that... does that allege an antitrust violation?
Mr. Brown: As you put it, Your Honor, no, I don't think it does.
Justice Scalia: Now, what have you added to that?
Mr. Brown: All right, Your Honor, these things.
My client, Discon, and AT&T Communications were supplying services, and these services were often bid.
My client was often winning these bids.
AT&T Communications, not the parent, would speak with AT&T the parent, and NYNEX and NYTel, draw those awarded contracts back.
That's one example.
A second example... and that, Your Honor, would be ignoring your bidding practices and taking a higher price with absolutely no procompetitive or economic justification.
There has never been an issue raised as the quality of my client's services or its ability to perform and deliver for the price bid.
Justice Scalia: Right.
I'll add to my hypothetical that the reason we entered into the requirements contract with this one supplier is that that supplier is owned by my son-in-law, okay.
I don't consider that a terribly good competitive justification, right?
Would that make it an antitrust violation?
Mr. Brown: I don't think that would make it an antitrust violation if that was the sole, unilateral act, Your Honor, but if we're dealing in a Colgate context, and we're going to say...
Justice Scalia: No, it's not unilateral.
I mean, you can't make a requirement... it takes two to make a contract.
I mean, I enter the requirements contract with the supplier.
I conspired with the supplier to make a requirements contract.
You know, I said, what if I bought all my requirements from you, and he said, yes, that's a good idea.
Mr. Brown: You haven't stated a conspiracy to do anything to any third party as to that point in time, Your Honor.
Justice Scalia: Yes, I have.
I'm eliminating everybody else from the widget-selling industry.
Mr. Brown: No, you're not, Your Honor, not within the context of the antitrust laws, and why I say what I say is, and why I use the term unilateral, if you're to go forward without any intent to damage a competitor of the person with whom you're dealing, with whom you, as the widget purchaser, is dealing, that's one thing.
But if you enter into that agreement, Your Honor, with the intent to make sure that that competitor or the person you deal with is excluded from that market never to return, and by that you have effected a harm on competition because you have restriction on output, you have restriction on price...
Justice Scalia: Well, how have I effected a... I mean, I haven't harmed... that may give you a cause of action against me, where you add to my hypothetical not just that I want to help my son-in-law, but I... these other two companies that I'm driving out are owned by enemies of mine, and I really want to hurt them.
I guess there's a cause of action for, I don't know, malicious interference with business relationships or something like that, but in order for it to be an antitrust cause of action you have to show that there has been harm to competitiveness within that industry.
How is there any harm to competitiveness?
Mr. Brown: All right, Your Honor...
Justice Scalia: As soon as my son-in-law leaves that company, I can immediately open it up for bids and people will come in and, since there are no entry barriers to this particular industry, I can ask for as low a price as I want.
Mr. Brown: Your Honor, my response to that would be twofold.
First, the conduct in this particular case concerned the manner in which a regulatory evasion was effected.
That's where the anticompetitive harm came.
In the supplier market, the supplier market had to be fixed and supercompetitive prices had to be enabled by the elimination of competition in the supplier market, which is unregulated, and what occurred here, Your Honor, was a series of events which, when put into operation, eliminated my client from that market, and I will go further and say this.
Justice Stevens: Mr. Brown, may I ask a rather fundamental question that cuts across the whole case?
You say, from that market.
Mr. Brown: Yes.
Justice Stevens: Now, it seems to me there are at least two different ways one might describe that market, and I want to know which one you say.
As your opponent said, at 104 you say the market is purchases by NYNEX.
That's one way to define it.
There also, however, are two other purchasers of removal services in New York.
There's AT&TC, which you describe in paragraph 26, and there's also the Buffalo, or Rochester Telephone Company.
Now, are Rochester and AT&TC in or out of the market you say was monopolized?
Mr. Brown: The answer to that, Your Honor, is very simply, is that Rochester Telephone is not characterizable as being in the same market if we deal with sales to NYNEX.
Justice Stevens: So you do not contend that the... that the market which included Rochester Telephone was monopolized or restrained?
You're not saying that?
Mr. Brown: I am saying it can be read, Your Honor, at both levels.
Justice Stevens: Well, how do you read it?
You're the author of the complaint.
Mr. Brown: How I read it, Your Honor, is that this is an attempt to monopolize a market for the provision of removal services...
Justice Stevens: I understand that, and I'm asking you how do you define the market?
What is the market?
Does it include or does it not include Rochester Telephone?
Mr. Brown: It would not include Rochester Telephone.
Justice Stevens: Does it include or not include AT&TC?
Mr. Brown: AT&TC is ATC Communications, Your Honor, is the...
Justice Stevens: It's the interexchange network in the State for AT&T.
Mr. Brown: Yes.
Yes, Your Honor.
Justice Stevens: And they use removal services, too.
Mr. Brown: That's right.
We treated that as a separate market as well.
Justice Stevens: So it does not include that entity, either.
Mr. Brown: That's correct.
They're separately regulated, Your Honor.
Justice Stevens: So the market we're talking about is the single purchaser of NYNEX.
Mr. Brown: Yes.
Justice Stevens: Okay.
Mr. Brown: Yes.
Justice Kennedy: In responding to Justice Scalia's hypothetical, the exclusive requirements contract and the son-in-law, is your answer that there is no actionable antitrust violation even if the supplier is a monopolist?
Mr. Brown: Your Honor, if the...
Justice Kennedy: The purchaser is a monopolist?
Mr. Brown: If the purchaser's a monopsonist, has control... Your Honor, I think that that's a more difficult question.
The market power...
Justice Kennedy: That's not what...
Justice Scalia: That was my question.
Mr. Brown: I misunderstood you, then, Justice Scalia.
Justice Kennedy: I think to make your hypothetical work you have to assume that Justice Scalia's purchaser of the services is a monopolist who then passes on the cost to the consumer.
Mr. Brown: Yes.
Well, I think we did assume, and I assumed in my brief in this Court we were dealing with a monopsonist for the purchase of services in that market, which is why I was saying, in response to Justice Stevens when he asked, that I was eliminating purchases by NYNEX for that purpose, because it would be the monopsonist in that market.
Justice Stevens: It seems to me it's a strange...
Justice Kennedy: So part of the agreement with the son-in-law and the purchaser is, and we'll pass this cost on to the consumer?
Mr. Brown: That's absolutely correct, Your Honor.
Justice Kennedy: Then is there an antitrust violation?
Mr. Brown: I believe so, Your Honor, because the purpose there, even though the effect may be on ratepayers, you can only affect that purpose by eliminating competition in the supplier services market.
That is the only way you can make that work under the facts of this case as we pled them.
Justice Scalia: The reason... but the reason the consumers are subject to the whims of a monopolist is not anything that's been done in this contract.
They're subject to monopoly power because the State has made them subject to monopoly power by awarding monopoly to the provider of telephone services.
How can you blame the fact that they're harmed by monopoly power upon this deal?
This deal hasn't created that monopoly power.
It's a creation of the State.
Mr. Brown: Well, Your Honor, that brings about who really has the authority as between the antitrust laws...
Justice Scalia: But I thought the purpose of the antitrust laws was to stop individuals from creating monopoly power, and the monopoly power that is hurting these consumers is not a creation of this deal, it's a creation of the State.
Mr. Brown: That monopoly power, my response would be, Your Honor, cannot be abused in this case unless they fix the supplier markets in a manner violative of the antitrust laws.
Justice Scalia: Well, there are regulatory... I mean, in awarding monopoly the State also supervises it, so there are punishments that can be meted out by the appropriate regulatory authority, but I find it hard to see how you can blame that monopoly power upon this transaction.
Mr. Brown: We're not attacking... we're not attacking the purchaser for being a monopsonist.
We're attacking the purchaser for being engaged in activity upstream beyond those areas in which he can operate as a natural monopolist to fix and destroy competition in supplier markets.
Justice Breyer: Can I ask you the same question that I asked the Solicitor General?
If through some miracle you remember it, I won't repeat it.
Mr. Brown: No, if you would, please.
Justice Breyer: Right.
I'm not doubting for present purposes your client should have a remedy.
I mean, the only issue, I think, is whether it's an antitrust remedy or a regulatory remedy, so assume that.
Also, I'm not going to doubt for present purposes that you have a big buyer... you know, put them all together all three of them.
I'm counting them as one buyer, and we have two sellers, A and B.
A is AT&T, all right.
And I'm also not doubting that what happened is, the buyer went to the seller, your competitor, and said, I'm going to buy at a low price disguised as a high price, for terrible reasons, to hurt the consumer.
I'm assuming all that.
As a result, your client lost the business, all right.
I've got those facts.
I'm assuming all that in your favor.
I'm assuming that your client's never going to get the business unless you can complain to the regulator and get this set aside.
Now, is there... I can understand the legal issue.
We have to characterize this bad reason as, is it a regulatory problem or an antitrust problem?
Any additional fact, is there any additional fact that you want to show, other than what I just summarized, because if not, I guess we could decide, yes or no, but if so, what are they?
Mr. Brown: All right.
Justice Breyer: What additional facts, and as far as entry barriers are concerned, I'll assume whatever entry barriers you want, whatever you think you plausibly can prove as to lack thereof, or not lack thereof.
Is there any additional fact?
Mr. Brown: I think, Your Honor, in response, there are probably a couple.
First of all, there was just not a change of suppliers for economic purposes at all.
You've assumed evil motives, but I don't know if you're assuming the evil motive that creates an antitrust injury.
Justice Breyer: What evil motive... now... in other words, there is a human being called a manager, and we're looking into his mind, and I can see that that manager might want to cheat the consumer, on your theory, I've got that one, by raising the price above what he really paid when he tells the regulator.
Now, is there some additional factual set of things floating around in that person's brain?
Mr. Brown: Right.
Your Honor, there was a two-step approach in this case which is specifically pled in the amended complaint.
The first was that prices would be charged by the competitors and they would be marked up by the manager, as you've called the manager.
Justice Breyer: Mm-hmm.
Mr. Brown: However, in 1985, New York Telephone said, we can't tolerate these markups any more.
You better find another way to go about this.
So instead... instead, MECo, Materials Enterprises, the manager, if you will, starts to mandate that the competitors come in with supracompetitive prices.
My client would not do that.
Justice Breyer: No, I've got that.
Haven't I assumed that?
I've assumed that what happened was that the buyers went to your competitor and said, charge us a high price, heh, heh, give us a rebate, heh, heh, that way we will, in fact, cheat the consumer.
I'm assuming all that in your favor, and what I'm looking for is some additional fact.
Is there some additional fact in this case that you would like to try to prove, because I can deal with the legal issue as the facts as I assume them.
I decide one way or the other.
But what I'm looking for is, are there some additional facts that you might prove which, I don't know what they are.
That's why I'm asking the question.
Mr. Brown: Right.
I think, Your Honor, the one thing... the things I would like to prove is, first of all, to compete in this market I will not have to exercise those efficiencies that would ordinarily be exercised for me to compete in this market and to bid.
In other words, competition is being suppressed.
Price is being increased, output is being reduced, you cannot enter this market unless you enter into the scheme.
Now, if the issue we're talking about, Your Honor, is the regulatory, as Professor Areeda calls it, the regulatory remedy as opposed to an antitrust remedy, I only suggest this, that when the Public Service Commission of the State of New York and the Federal regulators kept pressing the utilities in this case they told them... they told them to take the procurement inside the regulated businesses, and I say that because the regulators were acknowledging that they could not regulate the supplier market, that that's within the realm of antitrust.
If we're talking about the remedy for my client as a competitor, the public service commission, Your Honor, and the FCC cannot give my client, Discon, Incorporated, any remedy for anticompetitive injury at all.
Chief Justice Rehnquist: But your client can certainly... but NYNEX can certainly be punished by the regulatory authority, can it not?
Mr. Brown: Yes, but not for antitrust violations.
Not for suppression of competition in the supplier market, Your Honor.
Chief Justice Rehnquist: No, but for passing on these phony prices to consumers, certainly the New York regulatory authority could get after it.
Mr. Brown: I think that's accurate, Your Honor, and I think they did adjust the rate basis, and they fined them, and so did the Federal Communications Commission, but that again doesn't address the antitrust issues and, in fact, in this industry the FCC has acknowledged that this industry in terms of antitrust, from the times of the AT&T breakup case forward.
And there are a number of circuit court of appeals cases on this acknowledging that the existence of regulation in and of itself is not an excuse for not applying the antitrust laws, because the regulation does not address antitrust violations.
They're dealing with natural monopolists, as I think I had said in my brief, and acknowledged that point.
Justice Scalia: Mr. Brown, may I suggest something that maybe you are adding to the hypothetical that Justice Stevens... that Justice Breyer proposes?
It seems to me it is a part of your case that not only was there this scam in which I was going to give all of my business to you and get a kick-back, but you allege it was an essential part of the scam that everybody else be driven out of the industry.
Mr. Brown: Ultimately, every...
Justice Scalia: If you are unsuccessful in driving everybody else out, the scam would be disclosed.
It would be apparent that you're paying much more to the person that's giving you the kick-back than you have to pay for these services.
I guess that's an additional allegation that you make here.
Mr. Brown: Yes.
Yes, it is, Your Honor.
Justice Stevens: Could you explain one allegation?
A couple of places in the complaint you say they had threatened to discredit Discon with the regulatory agencies.
I don't quite understand that, because I didn't understand that you were subject to regulation.
Mr. Brown: No, Your Honor, what... where this was occurring is, my client was an intervenor in hearings before the New York State Public Service Commission, and New York tells internal security... and there's a mention of it, to try to establish that my client was involved in payment of certain personnel within the NYNEX group to ensure it would get business.
How that ties in in terms of the allegation is, there is a later allegation in the complaint, Your Honor, that later MECo personnel came to the principal of my client and said, if you will return all evidence of discrimination, and you will agree to cooperate with this scam, we'll let you provide services again to NYNEX.
I realize they're located in separate parts of the complaint, but that is more a function of chronology in time than it is a lack of a tie.
Justice Breyer: What are you going... what do you intend to show, any, again, facts... I'm back to facts.
What do you intend to show, if you want to... you're going to show that the buyer bought only from the seller, who had imposed this unfair condition.
I understand you're going to show that.
Once you've shown that, what do you intend to show extra to demonstrate what Justice Scalia just said?
I mean, does your claim that, well, really what the buyer was doing here is, it wanted to exclude all the other competitors of the sellers.
Does that come down to a claim that, yes, he just bought from A all the time?
Is there something extra?
Mr. Brown: Yes.
Justice Breyer: What?
Mr. Brown: The purpose is to buy from A only to discipline B.
Justice Breyer: And what do... I mean, do you have any fact at all that's going to show that, other than the fact that what the buyer did was always buy from A?
Mr. Brown: Oh, yes, Your Honor.
Justice Breyer: What, for example?
Mr. Brown: They're pled in the complaint?
Justice Breyer: Like what?
Mr. Brown: Winning on bids which then, when AT&T Communications went in with a higher bid, it would... the bid would be retracted and awarded to AT Communications without any further notice to my client.
That's only one example.
Justice Souter: Well, is the fact that they disqualified your client from bidding, perhaps, an answer to the question?
Mr. Brown: They...
Justice Souter: In other words, they didn't just say, I'm going to buy from A.
They said, B, you cannot even bid any more.
We are excluding you from that possibility.
Is that enough as an additional fact?
Mr. Brown: Your Honor, I believe that's another additional fact.
I believe it would show that they did not intend to comply with their own bidding procedures, that they in fact were acting against their own best interest.
Chief Justice Rehnquist: How is that any different from the hypothesis of a requirements contract?
It has the same effect on your client, whether we say... whether NYNEX says, I'm going to have a requirements contract and buy my stuff from X, or if they say, I won't have you bidding any more.
The result in each case is, you get nothing.
Mr. Brown: Well, Your Honor, I think... I think I can answer that two ways.
First of all, the reason they entered into the agreements with AT Communications was because AT Communications would assist them in the regulatory evasion scheme in the administratively controlled area, the natural monopoly.
They could pass through the cost and damage consumers by controlling the unregulated supplier market.
That was the motive for entering into that exclusive requirements contract, if we call it that, at that point in time.
Chief Justice Rehnquist: But I asked you, what's the difference between a requirements contract and the statement to your client, we won't even have you bid?
Mr. Brown: All right.
Your Honor, the reason my client was forbidden... assuming I'm not limited by the hypothetical precisely, the reason my client was forbidden to bid further was because it would not charge supracompetitive prices and wanted to compete, and was in direct communication with NYTel, which was found out, it was forbidden, and then they decertified my client from bidding.
Chief Justice Rehnquist: Thank you, Mr. Brown.
Mr. Brown: Thank you, Your Honor.
Rebuttal of James R. Young
Chief Justice Rehnquist: Mr. Young, you have 2 minutes remaining.
Mr. Young: Mr. Chief Justice, I don't want to impose on the Court.
I think I've made the points I...
Justice Stevens: Well, it wouldn't impose on the Court if you answered one question for me.
Mr. Young: Certainly.
Justice Stevens: When your opponent kept referring to AT&T Communications, was he really referring to AT&T Technologies?
I get a little mixed up with the subsidiaries here.
Mr. Young: AT...
Justice Stevens: AT&T Technologies is the one, the AT&T sub, that was the... that actually provided the removal services, was it not?
Mr. Young: I believe that's correct.
Justice Stevens: And so when he said Communications he meant Technologies.
Mr. Young: At one point I think when he was talking about purchasers he referred to AT&T Communications as a purchaser...
Justice Stevens: That would have been this AT&TC that I was referring to earlier.
Mr. Young: That's correct.
Justice Stevens: Right.
Do you also read the complaint the way he does, just... I guess you do, because you pointed out that paragraph of the complaint.
The only market we're concerned about is the market, purchases by New York Telephone.
Mr. Young: There are actually, I think, two markets alleged.
One is a New York State-wide market, and one is New York Telephone market, but again, as I said, I think the barriers to entry point is dispositive.
Justice Stevens: Right.
Chief Justice Rehnquist: Thank you, Mr. Young.
The case is submitted.