OCTOBER TERM, 1998
Syllabus
NYNEX CORP. ET AL.
v. DISCON, INC.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND
CIRCUIT
No. 96-1570. Argued October 5, 1998-Decided December 14,
1998
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 anti competitive, 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, 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. 133-140.
(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. 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 fea-
129
ture 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 anti
competitive 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.133-139.
(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. 139-140.
(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. 140.
93 F.3d
1055, vacated and remanded.
BREYER, J., delivered the opinion for a unanimous Court.
James R. Young argued the cause for petitioners. With him on the
briefs were John Thorne, Richard G. Taranto, Guy Miller Struve,
James D. Liss, and Vincent T. Chang.
130
Deputy Solicitor General Wallace argued the cause for the United
States as amicus curiae. With him on the brief were Solicitor
General Waxman, Assistant Attorney General Klein, Deputy Assistant
Attorney General Melamed, Barbara McDowell, Catherine G.
O'Sullivan, Mark S. Popofsky, and Debra A. Valentine.
Lawrence C.
Brown argued the cause for
respondent.
With him on the brief was
John H. Ring III. *
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
(1959), applies to a buyer's decision to buy from one seller rather
than another, when that decision cannot be justified in terms of
ordinary competitive objectives. We hold that the
per se
group boycott rule does not apply.
I
Before 1984 American Telephone and Telegraph Company (AT&T)
supplied most of the Nation's telephone service and, through wholly
owned subsidiaries such as Western Electric, it also supplied much
of the Nation's telephone equipment. In 1984 an antitrust consent
decree took AT&T out of the
local telephone service
business and left AT&T a
long-distance telephone service
provider, competing with such firms as MCI and Sprint. See M.
Kellogg, J. Thorne, & P. Huber, Federal Telecommunications Law
§ 4.6, p. 221
*Briefs of
amici curiae urging reversal were filed for
the American Automobile Manufacturers Association by
Stephen M.
Shapiro, Roy T. Englert, Jr., Donald M. Falk, and
Mark
Slywynsky; for the Business Roundtable by
Thomas B.
Leary and
Robert C.
Weinbaum; for GTE Corporation
by
Christopher Landau, Paul T. Cappuccio, William P. Barr,
and
M. Edward Whelan III; and for the Association of the Bar
of the City of New York by
Richard M. Steuer.
Mark R. Patterson and
Stephen F.
Ross filed
a brief for Law Professors as
amici curiae urging
affirmance.
131
(1992). The decree transformed AT&T's formerly owned local
telephone companies into independent firms. At the same time, the
decree insisted that those local firms help assure competitive
long-distance service by guaranteeing long-distance companies
physical access to their systems and to their local customers. See
United States v.
American Telephone &
Telegraph Co., 552 F. Supp. 131, 225, 227
(DC 1982),
aff'd
sub nom. Maryland v.
United States, 460 U. S. 1001 (1983).
To guarantee that physical access, some local telephone firms had
to install new call-switching equipment; and to install new
call-switching equipment, they often had to remove old
call-switching equipment. This case involves the business of
removing that old switching equipment (and other obsolete telephone
equipment)-a business called
"removal services."
Discon, Inc., the respondent, sold removal services used by New
York Telephone Company, a firm supplying local telephone service in
much of New York State and parts of Connecticut. New York Telephone
is a subsidiary of NYNEX Corporation. NYNEX also owns Materiel
Enterprises Company, a purchasing entity that bought removal
services for N ew 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 Tech-
132
nologies, 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 N ew 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, "anticompetitive."
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
Oreek Corp.
v.
Whirlpool Corp., 579 F.2d
126, 131
(CA2) (en banc) (in turn quoting
White Motor
Co. v.
United States, 372 U. S. 253, 263
(1963)), cert. denied, 439 U. S. 946 (1978)). For somewhat similar
reasons the Second Circuit believed the complaint stated a valid
claim of conspiracy to monopolize under § 2 of the Sherman Act. See
93 F. 3d, at 1061-1062.
133
The Second Circuit noted that the Courts of Appeals are
uncertain as to whether, or when, the
per se group boycott
rule applies to a decision by a purchaser to favor one supplier
over another (which the Second Circuit called a "two-firm group
boycott"). Compare
Com-Tel, Inc. v.
DuKane Corp.,
669 F.2d
404, 411-413, and nn. 13, 16
(CA6 1982);
Cascade
Cabinet Co. v.
Western Cabinet &
Millwork
Inc., 710 F.2d
1366, 1370-1371
(CA9 1983), with
Construction
Aggregate Transport, Inc. v.
Florida Rock Industries,
Inc., 710 F.2d
752, 776-778 (CAll 1983). We granted certiorari in order to
consider the applicability of the
per se group boycott rule
where a single buyer favors one seller over another, albeit for an
improper reason.
II
As this Court has made clear, the Sherman Act's prohibition of
"[e]very" agreement in "restraint of trade," 26 Stat. 209, as
amended, 15 U. S. C. § 1, prohibits only agreements that
unreasonably restrain trade. See
Business Electronics
Corp. v.
Sharp Electronics Corp., 485 U. S. 717, 723 (1988)
(citing
National Collegiate Athletic Assn. v.
Board of
Regents of Univ. of Okla., 468 U. S. 85, 98 (1984));
Standard Oil Co. of N. J. v.
United States, 221 U. S. 1, 59-62 (1911);
2 P. Areeda & H. Hovenkamp, Antitrust Law ~ 320b, p. 49 (1995).
Yet certain kinds of agreements will so often prove so harmful to
competition and so rarely prove justified that the antitrust laws
do not require proof that an agreement of that kind is, in fact,
anticompetitive in the particular circumstances. See
State Oil
Co. v.
Khan, 522 U. S. 3, 10 (1997);
Northwest Wholesale Stationers, Inc. v.
Pacific
Stationery & Printing Co.,
472 U. S. 284, 289-290
(1985); 2 Areeda & Hovenkamp,
supra, ~ 320b, at 49-52.
An agreement of such a kind is unlawful
per se. See,
e.
g., United States v.
Socony- Vacuum Oil Co., 310 U. S. 150, 218 (1940)
(finding horizontal price-fixing agreement
per se illegal);
Dr. Miles Medical Co. v.
John D. Park &
Sons
Co., 220 U. S.
373, 408 (1911) (finding vertical price-fixing agreement
per
se illegal);
134
Palmer v.
BRG of Ga., Inc., 498 U. S. 46, 49-50 (1990)
(per curiam) (finding horizontal market division
per
se illegal).
The Court has found the
per se rule applicable in certain
group boycott cases. Thus, in
Fashion Originators' Guild of
America, Inc. v.
FTC, 312 U. S. 457 (1941),
this Court considered a group boycott created by an agreement among
a group of clothing designers, manufacturers, suppliers, and
retailers. The defendant designers, manufacturers, and suppliers
had promised not to sell their clothes to retailers who bought
clothes from competing manufacturers and suppliers. The defendants
wanted to present evidence that would show their agreement was
justified because the boycotted competitors used "pira[ted]"
fashion designs.
Id., at 467. But the Court wrote that "it
was not error to refuse to hear the evidence offered" -evidence
that the agreement was reasonable and necessary to "protect ...
against the devastating evils" of design pirating-for that evidence
"is no more material than would be the reasonableness of the prices
fixed" by a price-fixing agreement.
I d., at 467-468.
In
Klor's the Court also applied the
per se rule.
The Court considered a boycott created when a retail store,
Broadway-Hale, and 10 household appliance manufacturers and their
distributors agreed that the distributors would not sell, or would
sell only at discriminatory prices, household appliances to
Broadway-Hale's small, nearby competitor, namely, Klor's. 359 U.
S., at 208-209. The defendants had submitted undisputed evidence
that their agreement hurt only one competitor (Klor's) and that so
many other nearby appliance-selling competitors remained that
competition in the marketplace continued to thrive.
Id., at
209-210. The Court held that this evidence was beside the point.
The conspiracy was "not to be tolerated merely because the victim
is just one merchant."
Id., at 213. The Court thereby
inferred injury to the competitive process itself from the nature
of the boycott agreement. And it forbade, as a matter
135
of law, a defense based upon a claim that only one small firm,
not competition itself, had suffered injury.
The case before us involves
Klor's. The Second Circuit
did not forbid the defendants to introduce evidence of
"justification." To the contrary, it invited the defendants to do
so, for it said that the
"per se rule" would apply only if
no "pro-competitive justification" were to be found. 93 F. 3d, at
1061; cf. 7 P. Areeda & H. Hovenkamp, Antitrust Law ~ 1510, p.
416 (1986) ("Boycotts are said to be unlawful per se but
justifications are routinely considered in defining the forbidden
category"). Thus, the specific legal question before us is whether
an antitrust court considering an agreement by a buyer to purchase
goods or services from one supplier rather than another should
(after examining the buyer's reasons or justifications) apply the
per se rule if it finds no legitimate business reason for
that purchasing decision. We conclude no boycott-related
per
se rule applies and that the plaintiff here must allege and
prove harm, not just to a single competitor, but to the competitive
process, i.
e., to competition itself.
Our conclusion rests in large part upon precedent, for precedent
limits the
per se rule in the boycott context to cases
involving horizontal agreements among direct competitors. The
agreement in
Fashion Originators' Guild involved what may be
called a group boycott in the strongest sense: A group of
competitors threatened to withhold business from third parties
unless those third parties would help them injure their directly
competing rivals. Although
Klor's involved a threat made by
a
single powerful firm, it also involved a horizontal
agreement among those threatened, namely, the appliance suppliers,
to hurt a competitor of the retailer who made the threat. See 359
U. S., at 208209; see also P. Areeda & L. Kaplow, Antitrust
Analysis:
Problems, Text, and Cases 333 (5th ed. 1997) (defining
paradigmatic boycott as "collective action among a group of
com-
136
petitors that may inhibit the competitive vitality of rivals");
11 H. Hovenkamp, Antitrust Law' 1901e, pp. 189-190 (1998). This
Court emphasized in
Klor's that the agreement at issue
was
"not a case of a single trader refusing to deal with another,
nor even of a manufacturer and a dealer agreeing to an exclusive
distributorship. Alleged in this complaint is a wide combination
consisting of manufacturers, distributors and a retailer." 359 U.
S., at 212-213 (footnote omitted).
This Court subsequently pointed out specifically that
Klor's was a case involving not simply a "vertical"
agreement between supplier and customer, but a case that also
involved a "horizontal" agreement among competitors. See
Business Electronics, 485 U. S., at 734. And in doing so,
the Court held that a "vertical restraint is not illegal
per
se unless it includes some agreement on price or price levels."
Id., at 735-736. This precedent makes the
per se rule
inapplicable, for the case before us concerns only a vertical
agreement and a vertical restraint, a restraint that takes the form
of depriving a supplier of a potential customer. See 11 Hovenkamp,
supra, , 1902d, at 198.
We have not found any special feature of this case that could
distinguish it from the precedent we have just discussed. We
concede Discon's claim that the petitioners' behavior hurt
consumers by raising telephone service rates. But that consumer
injury naturally flowed not so much from a less competitive market
for removal services, as from the exercise of market power that is
lawfully in the hands of a monopolist, namely, New York
Telephone, combined with a deception worked upon the regulatory
agency that prevented the agency from controlling New York
Telephone's exercise of its monopoly power.
To apply the
per se rule here-where the buyer's decision,
though not made for competitive reasons, composes
137
part of a regulatory fraud-would transform cases involving
business behavior that is improper for various reasons, say, cases
involving nepotism or personal pique, into trebledamages antitrust
cases. And that
per se rule would discourage firms from
changing suppliers-even where the competitive process itself does
not suffer harm. Cf.
Poller v.
Columbia Broadcasting
System, Inc., 368
U. S. 464, 484 (1962) (Harlan, J., dissenting) (citing
Packard Motor Car Co.
The freedom to switch suppliers lies close to the heart of the
competitive process that the antitrust laws seek to encourage. Cf.
Standard Oil, 221 U. S., at 62 (noting "the freedom of the
individual right to contract when not unduly or improperly
exercised [is] the most efficient means for the prevention of
monopoly"). At the same time, other laws, for example, "unfair
competition" laws, business tort laws, or regulatory laws, provide
remedies for various "competitive practices thought to be offensive
to proper standards of business morality." 3 P. Areeda & H.
Hovenkamp, Antitrust Law ~ 651d, p. 78 (1996). Thus, this Court has
refused to apply
per se reasoning in cases involving that
kind of activity. See
Brooke Group Ltd. v.
Brown
&
Williamson Tobacco Corp., 509 U. S. 209, 225 (1993)
("Even an act of pure malice by one business competitor against
another does not, without more, state a claim under the federal
antitrust laws"); 3 Areeda & Hovenkamp,
supra, ~ 651d,
at 80 ("[I]n the presence of substantial market power, some kinds
of tortious behavior could anticompetitively create or sustain a
monopoly, [but] it is wrong categorically to condemn such practices
... or categorically to excuse them").
Discon points to another special feature of its complaint,
namely, its 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 hope, says
Discon, amounts to a special anticompetitive motive.
138
We do not see how the presence of this special motive, however,
could make a significant difference. That motive does not turn
Materiel Enterprises' actions into a "boycott" within the meaning
of this Court's precedents. See
supra, at 135-136. Nor, for
that matter, do we understand how Discon believes the motive
affected Materiel Enterprises' behavior. Why would Discon's demise
have made Discon's employees less likely, rather than more likely,
to report the overcharge/rebate scheme to telephone regulators?
Regardless, a
per se rule that would turn upon a showing
that a defendant not only knew about but also hoped for a firm's
demise would create a legal distinction-between corporate knowledge
and corporate motive-that does not necessarily correspond to
behavioral differences and which would be difficult to prove,
making the resolution of already complex antitrust cases yet more
difficult. We cannot find a convincing reason why the presence of
this special motive should lead to the application of the
per
se rule.
Finally, we shall consider an argument that is related
tangentially to Discon's
per se claims. The complaint
alleges that New York Telephone (through Materiel Enterprises) was
the largest buyer of removal services in New York State, see
Amended Complaint ~~ 2, 29, 99, App. 75, 83, 110, and that only
AT&T Technologies competed for New York Telephone's business,
see ~~ 2, 26, 29, id., at 75, 82-83. One might ask whether these
accompanying allegations are sufficient to warrant application of a
Klor's-type presumption of consequent harm to the
competitive process itself.
We believe that these allegations do not do so, for, as we have
said, see
supra, at 135-136, antitrust law does not permit
the application of the
per se rule in the boycott context in
the absence of a horizontal agreement, though in other contexts,
say, vertical price fixing, conduct may fall within the scope of a
per se rule not at issue here, see,
e. g., Dr. Miles
Medical Co., 220 U. S., at 408. The complaint
139
itself explains why any such presumption would be particularly
inappropriate here, for it suggests the presence of other potential
or actual competitors, which fact, in the circumstances, could
argue against the likelihood of anticompetitive harm. The complaint
says, for example, that New York Telephone itself was a potential
competitor in that New York Telephone considered removing its
equipment by itself, and in fact did perform a few jobs itself. See
~ 27, App. 83. The complaint also suggests that other nearby small
local telephone companies needing removal services must have worked
out some way to supply them. See ~ 53, id., at 91. The complaint's
description of the removal business suggests that entry was easy,
perhaps to the point where other firms, employing workers who knew
how to remove a switch and sell it for scrap, might have entered
that business almost at will. Cf. ~ 27, id., at 83. To that extent,
the complaint suggests other actual or potential competitors might
have provided roughly similar checks upon "equipment removal"
prices and services with or without Discon. At the least, the
complaint provides no sound basis for assuming the contrary. Its
simple allegation of harm to Discon does not automatically show
injury to competition.
III
The Court of Appeals also upheld the complaint's charge of a
conspiracy to monopolize in violation of § 2 of the Sherman Act. It
did so, however, on the understanding that the conspiracy in
question consisted of the very same purchasing practices that we
have previously discussed. Unless those agreements harmed the
competitive process, they did not amount to a conspiracy to
monopolize. We do not see, on the basis of the facts alleged, how
Discon could succeed on this claim without prevailing on its § 1
claim. See 3 Areeda & Hovenkamp,
supra, ~ 651e, at
81-82. Given our conclusion that Discon has not alleged a § 1
per se violation, we think it prudent to vacate this portion
of the Court
140
of Appeals' decision and allow the court to reconsider its
finding of a § 2 claim.
IV
Petitioners ask us to reach beyond the
"per se" issues
and to hold that Discon's complaint does not allege anywhere that
their purchasing decisions harmed the competitive process itself
and, for this reason, it should be dismissed. They note that Discon
has not pointed to any paragraph of the complaint that alleges harm
to the competitive process. This matter, however, lies outside the
questions presented for certiorari. Those questions were limited to
the application of the
per se rule. For that reason, we
believe petitioners cannot raise that argument in this Court.
V
For these reasons, the judgment of the Court of Appeals is
vacated, and the case is remanded for further proceedings
consistent with this opinion.
It is so ordered.
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