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August 5, 2015

Solar Panel Antitrust Complaint May Test Limits of Monopolization Doctrine

On March 3, 2015, SolarCity, a marketer of rooftop solar panels, filed a complaint in federal District Court in Arizona alleging that the Salt River Project Agricultural and Power District (SRP) is monopolizing or attempting to monopolize the market for retail electricity by eliminating subsidies for solar power and replacing them with an electric rate structure that makes rooftop solar prohibitively expensive to operate.[1] In late June, SRP moved to dismiss the Complaint on numerous grounds, including the failure of SolarCity to state a cognizable claim of monopolization, and Solar City has since responded to SRP’s motion.  SRP’s motion and SolarCity’s response raise significant issues as to the reach of Section 2 of the Sherman Act, especially in light of recent Supreme Court decisions.

Section 2 of the Sherman Act prohibits monopolization and attempts to monopolize of “any part of the trade or commerce among the several States, or with foreign nations…”[2]   While long considered a potent weapon of antitrust enforcement, Supreme Court decisions over the past decade or so have narrowed its reach. The Court has strictly limited the duty of a monopolist to deal with its rivals;[3] eliminated Section 2 liability where application of the antitrust laws is incompatible with securities regulation;[4] eliminated price squeezes as a cognizable theory of liability;[5]restricted antitrust liability for predatory bidding;[6] called into question the continued viability of the “essential facilities” doctrine;[7] and limited the application of earlier decisions finding in favor of liability.[8] Making matters worse (from an antitrust plaintiff’s perspective), the Court has heightened the standard an antitrust complaint must meet to withstand a motion to dismiss.[9]

Turning prior Section 2 doctrine on its head, some lower courts interpreting those decisions now treat the pursuit of monopoly profits as a valid business justification for exclusionary conduct by monopolists, while others “seem to suggest that courts can completely eradicate the need for any business justification at all.”[10]

Prior to this recent trend, the leading Section 2 case was Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)(Aspen). Aspen Skiing Co. and Aspen Highlands Skiing Corp. were owners of nearby resorts that for many years had jointly offered ski tickets to their facilities. When Aspen Skiing Co. terminated the joint arrangement, Aspen Highlands found it much more difficult to market its ski resort, and filed suit against Aspen Skiing Co. alleging unlawful monopolization under Section 2 of the Sherman Act. On appeal from a verdict in favor of Aspen Highlands, the Supreme Court affirmed, holding that while monopolists generally have a right to choose with whom they will do business, the decision to refuse to deal with a particular customer may form the basis for antitrust liability where doing so inflicts competitive harm and the monopolist lacks a “normal business purpose” for its actions.  The Court concluded that Aspen Skiing Co. could properly be held liable in light of evidence that its refusal to continue the joint marketing was not justified by pursuit of any efficiency.

The Supreme Court revisited Aspen in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004)(Trinko). The plaintiff in Trinko, a customer of a competitive local telephone service provider, alleged that Verizon committed unlawful monopolization by providing its own retail telephone customers access to its monopoly local network more readily than to customers of competing local telephone service providers.

A threshold issue in the case was the effect of an antitrust savings provision in the 1996 federal Telecommunications Act. That Act required local monopoly telephone companies such as Verizon to allow competing service providers access to their local networks on a non-discriminatory basis, with regulatory supervision by the FCC and state regulators.  Barring an antitrust savings clause, the Supreme Court noted, the existence of that regulatory oversight might have immunized Verizon from liability under the Sherman Act.  While the Act’s antitrust savings clause precluded a finding of implied immunity, it did not “create new claims that go beyond existing antitrust standards.” 540 U.S. at 407.

In defending against a motion to dismiss for failure to state a cognizable claim under Section 2, the Trinko plaintiff relied primarily on the Supreme Court’s upholding the Section 2 claim in Aspen. The Supreme Court held that the Trinko complaint was properly dismissed, however, finding that Aspen is “at or near the outer boundary of §2 liability.”  In order to fit within the “limited exception” of Aspento the rule that monopolists are free to choose with whom they will deal, the Court held that a plaintiff must demonstrate that the monopolist voluntarily engaged in a course of dealing with its rivals, or would have done so absent regulatory compulsion. In the absence of a voluntary course of dealing, the Court held, it was impossible to tell whether the refusal to deal was motivated by anticompetitive malice. In addition, the Court found it significant that what the defendant in Aspen refused to provide to its competitor was a product it already sold at retail, i.e., bundled lift tickets, whereas the defendant in Trinko was denying access to something entirely new that was created by the 1996 Telecommunications Act, i.e., unbundled elements of its local network. 540 U.S. at 410.

The Court also stressed that antitrust exposure would confer little benefit given the extensive regulatory oversight over access to the local network, and that that benefit was outweighed by a realistic assessment of its costs. Those costs include the risk that the antitrust laws might mistakenly condemn conduct that is pro-competitive, and that the conduct may be beyond the practical ability of a court to control. 540 U.S. at 411-13.

The Court went even further in limiting cognizable Section 2 claims in Pacific Bell Tel. Co. v. Linkline Communications, Inc. , 555 U.S. 438 (2009)(Linkline). Plaintiffs in Linkline marketed DSL internet service in competition with AT&T, but also required access to AT&T’s wholesale DSL transport service in order to serve their customers. They sued AT&T under Section 2 of the Sherman Act, claiming that AT&T was monopolizing the market for retail DSL service by engaging in a “price squeeze,” i.e., combining high prices to competitors for access to its wholesale DSL transport service with low prices for retail DSL internet service. AT&T moved to dismiss the complaint on the strength of the Trinko decision, but the lower court ruled that Trinko did not apply to price squeeze claims, and the court of appeals affirmed.

On certiorari, the Supreme Court reversed the denial of AT&T’s motion to dismiss, holding that any challenge to AT&T’s wholesale prices was foreclosed by a “straightforward application” of Trinko. In Trinko, the Court said, it had established that a party with no antitrust duty to deal with competitors could have no antitrust liability for failing to provide adequate assistance (in the form of access to its network) to competitors. “Trinko thus makes clear that if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous.” 555 U.S. at 450.

The Court added that while Trinko involved discriminatory access to wholesale service, whereas Linkline involved a challenge to AT&T’s pricing structure, “there is no reason to distinguish between price and nonprice components of a transaction.” 555 U.S. at 450 (citations omitted). Because AT&T could just as easily have squeezed its competitors by providing poor quality interconnection service as it was alleged to have done through a price squeeze, there was no rational basis to distinguish Trinko.

The Court next turned to the retail aspect of the alleged price squeeze, i.e., the claim that AT&T’s retail DSL service prices were too low. The Court rejected that claim on the ground that plaintiffs failed to allege the essential elements of predatorily low prices under Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 502 U.S. 209 (1993)(Brooke). In Brooke, the Court held that to establish antitrust liability for predatory pricing, a plaintiff must show that the prices are below an appropriate measure of its rival’s costs, and that there is a dangerous probability that the defendant will be able to recoup its losses in below cost pricing once the competitor is driven out.

Having rejected price squeezes as “an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level” (555 U.S. at 452), the Court proceeded to “institutional concerns” that counsel against recognition of price squeeze claims. Among these are the fact that price squeeze behavior is difficult to identify and supervise; that exposure to such claims leaves firms no safe harbor for their pricing practices;  and there is no measurable standard to judge what constitutes a fair margin between of wholesale and retail prices. 555 U.S. at 452-54.

Finally, the Court rejected amici claims that there are circumstances in which price squeezes harm competition, stating that “The problem …is that amici have not identified any independent competitive harm cause by price squeezes above and beyond the harm that would result from a duty-to-deal violation at the wholesale level or predatory pricing at the retail level,” neither of which were established in Linkline. 555 U.S. at 455.

While Trinko, Linkline and related cases pose ever increasing barriers to Section 2 lawsuits, some remain undeterred. Among those is SolarCity which, as already noted, has filed a complaint alleging that SRP’s conduct in making it prohibitive to operate rooftop solar panels as a substitute for SRP’s electricity constitutes an unlawful attempt to monopolize the market for retail electricity service. Not surprisingly, Trinko and Linkline figure prominently in SRP’s motion to dismiss the complaint and SolarCity’s response.[11]

SRP asserts that merely possessing monopoly power and charging monopoly prices is not illegal (citing Linkline), and that the possession of monopoly power will not be found unlawful unless it is accompanied by anticompetitive conduct (citing Trinko). Motion at 25.  Linkline, SRP states, establishes the narrow circumstances under which a dominant firm may be held liable for unilateral conduct.  Those are that if the plaintiff claims that the dominant firm’s prices are too low, the plaintiff must  allege that they are below an appropriate measure of the firm’s costs (the so-called “below-cost pricing test”); and if the plaintiff contends that the prices are too high, it must allege that the defendant has an antitrust duty to deal with the plaintiff. SRP argues that SolarCity has done neither in its Complaint.

SRP further claims that the only two circuits to address the issue have extended the below-cost pricing test to “the kind of claims alleged by SolarCity: exclusive dealing claims in which price is the primary method of exclusion.” Motion at 26, citing ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3rdCir. 2012)(ZF Meritor) and NicSand Inc. v. 3M Co., 507 F.3rd 442 (6th Cir. 2007).

Finally, SRP asserts that, while not labeled in the Complaint as such, in essence SolarCity is claiming that SRP is engaging in a price squeeze through the combination of retail electricity prices that are relatively low and prices for generating power with solar panels that are high. As such, SRP claims, SolarCity’s Section 2 claim runs afoul of the Supreme Court’s rejection of price squeezes as a basis for antitrust liability.[12]

In its response to SRP’s motion to dismiss, SolarCity accuses SRP of mischaracterizing both the law and the Complaint on the issue of exclusive dealing.  According to SolarCity, SRP incorrectly characterizes the Section 2 claim as being about pricing, whereas “Instead, [SRP] imposed exclusionary, discriminatory terms that lock customers into satisfying all their electric requirements from [SRP]. This excludes efficient competitors, without sufficient justification or purpose…[and] constitutes a well pleaded and traditional antitrust violation.” Response at 21-22 (citation omitted). And, says SolarCity, the cases cited by SRP are distinguishable since, “to the extent they discuss ‘pricing’ conduct, they relate to allegations of discounting, rebates, or unbounded duties to deal with competitors, none of which is at issue here.” Response at 27 (footnote omitted).[13]

SolarCity offers additional reasons why its Complaint is distinguishable from the complaints deemed insufficient to withstand a motion to dismiss in Trinko and Linkline. First, it claims that the prices charged by SRP to customers that self-generate with solar panels are so extreme that they are not prices at all: “Instead, they are terms that require exclusive dealing with [SRP] by imposing penalties so severe that no customer will stray.” Response at 27.

Second, it contends that it is not seeking to impose on SRP a duty to deal, which Trinko and Linkline generally do not permit. “[SRP] mischaracterizes SolarCity’s Complaint as a request for assistance from its competitor, but it is SolarCity’s customers, not SolarCity, that do business with [SRP], and [SRP]’s conduct is directed at those customers. By [SRP]’s reasoning, no competitor could sue for monopolization because any challenge can be re-framed as a request to “assist” a competitor by refraining from anticompetitive conduct. That is wrong….” Response at 28.

As matters stand, assuming the Court does not dismiss the Complaint on other grounds, it will have to decide if SolarCity has succeeded in navigating through the obstacles to monopolization cases erected in Trinko and Linkline. As discussed above, those cases establish that a firm with no antitrust duty to deal with its competitors at wholesale has no duty to deal under terms and conditions that the rivals find commercially advantageous. The gravamen of SolarCity’s monopolization theory appears to be that SRP should be prevented from imposing commercially disadvantageous terms on customers who install solar panels. On the other hand, SolarCity contends that SRP’s competitive rival is SolarCity itself, not SRP’s customers who use SolarCity’s products. In addition, SolarCity seeks to bring itself within the ambit of cases that suggest that Trinko and Linkline do not apply where the predominant element of the alleged exclusionary conduct is not pricing behavior.

Assuming the Court agrees with SolarCity that Trinko and Linkline are factually distinguishable, it would still have to find that those cases should not apply by analogy. Demonstrating that some courts, such as the Third Circuit in ZF Meritor, have sustained monopolization cases notwithstanding Trinko and Linkline, may not be enough to survive SRP’s motion to dismiss, if their reasoning is not readily transferable to SolarCity’s facts.

Given the questions over what remains of monopolization doctrine in the post Trinko and Linkline era , the outcome of this dispute should be of interest to the antitrust bar. But it could also have repercussions for the electric utility industry, given the pervasive disputes over what constitutes just and reasonable rates for retail customers who satisfy a portion of their electricity needs through solar panels and other forms of self-generation.

[1] SolarCity Co. v. Salt River Project et al., Case No. 2:15-CV-00374-DLR (D. Ariz). The Complaint also alleges other antitrust violations, which are beyond the scope of this article.

[2] 15 U.S.C. § 2.

[3] Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004)(Trinko).

[4] Credit Suisse Secs. (USA) LLC v. Billing, 551 U.S. 264 (2007).

[5] Pacific Bell Tel. Co. v. Linkline Communications, Inc. , 555 U.S. 438 (2009)(Linkline).

[6] Weyerhaeuser Co. v. Ross-Simmons Hardware Lumber Co., 549 U.S. 312 (2007).

[7] Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, supra, 540 U.S. at 411.

[8] See., e.g., Trinko, 540 U.S. at 409,  holding that Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) represented a “limited exception” to the doctrine that monopolists have no duty to deal with their rivals.

[9] Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)(Towmbly)(overruling principle that motions to dismiss antitrust complaints must be denied unless there is “no set of facts” under which plaintiff could prevail; factual allegations in complaint must be enough to raise the right to relief above the speculative level). While  Twombly involved a complaint under Section 1 of the Sherman Act, the Court has since made clear that it applies to complaints involving violations of Section 2 as well. Linkline, 555 U.S. at 456.

[10] Diana DeLeon, The Judicial Contraction of Section 2 Doctrine, 45 Loy. L.A.L. Rev. 1105, 1137 (2012).

[11] SRP also seeks dismissal on the grounds that it is immune from liability as a public, political subdivision of the state and that its conduct is legally protected under the “state action,” “filed rate,” and Noerr-Pennington doctrines. If SRP is successful on any of these grounds, the Court may not reach the issue of whether SolarCity has alleged cognizable antitrust claims.

[12] As a separate basis for dismissing all of SolarCity’s antitrust claims, SRP alleges that SolarCity has failed to properly allege a relevant market in which the challenged conduct occurred. According to SRP, SolarCity is complaining about competition in the market for retail electric service, whereas solar panels are a form of generating equipment that is not interchangeable with electric service. Motion at 21.

[13] SolarCity quotes at length from ZF Meritor, in which the Third Circuit upheld a Section 2 monopolization claim against Eaton Corp., the dominant manufacturer of heavy-duty truck transmissions, where Eaton offered rebates to truck manufacturers who purchased a high percentage of their transmissions from Eaton; required the truck manufacturers not to offer transmissions from other suppliers in certain marketing materials; required the truck manufacturers to offer more attractive prices on the transmissions to their customers; and required the truck manufacturers to allow Eaton to match any prices offered by competing transmission manufacturers.  Finding that pricing was not the predominant method of Eaton’s exclusionary conduct, the Court distinguished Linkline and other cases in which courts dismissed monopolization claims because the defendant’s allegedly harmful prices exceeded its costs.


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