Supreme Court Case Looms Large For Bells

Telecom Policy Report, Oct 15, 2003

Outcome In Verizon v. Trinko Could Stunt RBOCs' Markets

The U.S. Supreme Court, at press time, was poised to begin hearing oral arguments in Verizon v. Trinko, a case that has the potential to radically alter the course of local telephone competition in America. In the words of one analyst who spoke with Telecom Policy Report, the Trinko case "addresses whether the existence of the Telecom Act of 1996 means the Bell companies enjoy antitrust immunity." The breakup of AT&T came soon after the Supreme Court decided against the Bell System claims of antitrust immunity in 1978 in a case very similar to the Trinko case.

The Bell companies have revived many of the techniques that AT&T used during the 1970s and 1980s when it was trying to defend and expand its monopoly, telecom policy analyst and author Daniel Berninger said. "In particular, the Bell companies claim, as AT&T did, that pervasive regulation and pricing established through the tariff process makes them immune to antitrust complaints. The current business landscape parallels nearly exactly the same business conditions that gave rise to antitrust complaints and the breakup of AT&T in the '70s and '80s," Berninger said. Berninger is the author of Broken Trust: Rise & Fall of the Bell System.

If the Bell companies are to survive as lucrative telco monopolies, they need to win the Trinko case and a number of other similar lawsuits. If the Trinko case goes badly for Verizon, the decision could open a floodgate of litigation brought against the three other Bells by ordinary citizens alleging antitrust violations. Despite what many of their critics say, the Bells do not need, nor want, more litigation. They already have their hands full trying to stave off the effects posed by competitors who are steadily chipping away at their respective markets. More costly litigation could exacerbate what is already a downward financial trend for the Bells, turning it into an outright tailspin. This is especially true for Verizon, the best performer of the four Bells.

The Trinko case has its roots in a complaint originally filed in late 2000 by a New York law firm against what was then Bell Atlantic - now known as Verizon Communications. In a nutshell, the law firm, Curtis V. Trinko LLP, alleges that Verizon engaged in anti-competitive conduct that resulted in the Trinko law firm receiving poor telephone service.

Since its beginning, the Trinko case has undergone some interesting twists and turns. In May 2001, the U.S. Court of Appeals for the 2nd Circuit reversed part of a lower court's ruling that had dismissed the case on grounds that Trinko, as a "customer of a customer," did not have the right to bring an antitrust action against Bell Atlantic, the incumbent telco. Trinko's local service provider was AT&T. It was AT&T who was Verizon's customer, the lower court said. The appeals court disagreed, saying that Sections 206 and 207 of the Communications Act "makes parties who violate [the Act] liable to parties they injure through such violations" regardless of whether they are direct customers of Verizon or customers of Verizon's network resellers - in this case, AT&T. Verizon eventually settled the claim that AT&T brought against the Baby Bell. But Trinko - the firm purportedly was without telephone service for some weeks while AT&T and Verizon worked out their differences - decided to bring its own action against Verizon.

In many ways, the Trinko case parallels what was happening in the marketplace shortly before AT&T's divestiture of the Bell System.

"AT&T spent $360 million to protect its monopoly, and the Bell companies could afford to do the same," Berninger said. "But, ultimately, the courts forced a settlement that broke up AT&T and unleashed dramatic growth in telecommunications ... and made the birth of the commercial Internet possible."

Roy Katriel, an antitrust lawyer based in Washington, D.C., who represents consumers, told TPR that a particular focus of the case - and what is being brought before the High Court - is the overlap of two separate pieces of legislation - the Sherman Act and the 1996 Telecommunications Act. "A question that arises in the Trinko case is whether there was a violation of the 1996 Telecom Act - that is whether Verizon made a good faith effort to open its network to competition. And if there was a violation of the Act, might it also have been a violation of the Sherman Act, the federal antitrust law?" Katriel asked rhetorically.

In essence, the Telecom Act established the ground rules for some new markets, in particular the market for wholesale provision of telecommunications services, offered Chris Savage, a telecom lawyer with Cole, Raywid, & Braverman. "The question is whether given the existence of new markets, if a company like Verizon violates the Telecom Act's ground rules in order to maintain its monopoly, is that also an antitrust violation? The Trinko folks say yes, because they view that sort of market behavior as flawed and anti-competitive. The defendants say this new market in wholesale telecommunications is entirely a creature of regulation. Therefore, misbehavior in that market might amount to a violation of the regulation, but it can't amount to an independent antitrust violation."