ELLEN SEGAL HUVELLE, District Judge.
These are antitrust cases between competing mobile wireless carriers. Before the Court are motions to dismiss lawsuits which Sprint and Cellular South brought to enjoin AT & T's proposed acquisition of T-Mobile. AT & T and T-Mobile move for dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Sprint's and Cellular South's complaints fail to adequately allege that the merger would cause them "antitrust injury," and therefore that they lack the "antitrust standing" required to seek injunctive relief under § 16 of the Clayton Act, 15 U.S.C. § 26.
Plaintiff Sprint Nextel Corporation ("Sprint") is the third largest national provider of mobile wireless services, with 50 million wireless customers. (Sprint Compl. ¶ 96.) In 2010, Sprint "accounted for 15 percent of all mobile wireless services revenues." (Id.) Plaintiffs Cellular South, Inc., and its wholly owned subsidiary Corr Wireless Communications, L.L.C. (collectively, "Cellular South" unless otherwise stated), are regional carriers operating a wireless network that "serves more than 887,000 customers located in Mississippi, Tennessee, Alabama Florida, and other surrounding states." (Cellular South Compl. ¶¶ 1, 21.)
Defendant AT & T Mobility, L.L.C. ("AT & T"), the wholly owned subsidiary of defendant AT & T, Inc., is the second largest national carrier,
On March 20, 2011, AT & T entered into a stock purchase agreement to acquire T-Mobile and to merge the two companies' mobile wireless services businesses. Five months later, the United States brought suit to enjoin the acquisition, alleging that its effect would "be substantially to lessen competition, or to tend to create a monopoly" in violation of § 7 of the Clayton Act. 15 U.S.C. § 18.
The Court heard argument on defendants' motions on October 24, 2011. Having considered the parties' positions and the relevant legal principles, the Court will grant the motions except as to plaintiffs' claims regarding mobile wireless devices, and Cellular South's roaming claim insofar as it relates to Corr Wireless.
Section 16 of the Clayton Act authorizes private parties to seek injunctive relief to protect "against threatened loss or damage by a violation of the antitrust laws." 15 U.S.C. § 26. While the statute's text is broad, providing for suits by "[a]ny person, firm, corporation, or association," id., courts have limited its reach to those plaintiffs that allege a threat of "antitrust injury." Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 113, 107 S.Ct. 484, 93 L.Ed.2d 427 (1986).
Antitrust injury is injury "of the type the antitrust laws were designed to prevent and that flows from that which makes the defendants' acts unlawful." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977). Accordingly, a private antitrust plaintiff must allege more than threatened loss or damage that is merely "causally linked" to the defendant's anticompetitive behavior. Id. The plaintiff must additionally allege that its threatened injury "reflect[s] the anticompetitive effect either of the [antitrust] violation or of anticompetitive acts made possible by the violation." Id. Thus, even if a threatened injury is "causally related to an antitrust violation," it "will not qualify as `antitrust injury' unless it is attributable to an anti-competitive aspect of the practice under scrutiny." Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334, 110 S.Ct. 1884, 109 L.Ed.2d 333 (1990).
The antitrust injury requirement aligns antitrust suits brought by private parties "`with the purposes of the antitrust laws,
When the Supreme Court first articulated the requirement in Brunswick, for example, it held that plaintiffs seeking treble damages for alleged antitrust violations under § 4 of the Clayton Act, 15 U.S.C. § 15, had not established antitrust injury where they sought to recover for "profits they would have realized had competition been reduced" but for the defendant's pro-competitive activities. 429 U.S. at 488, 97 S.Ct. 690. The Court did not dispute that plaintiffs had suffered injury-in-fact. Emphasizing that the antitrust laws "were enacted for `the protection of competition not competitors,'" however, the Court held that it would be "inimical to the purposes of [those] laws to award damages" for injuries a competitor suffered from increased competition. Id. (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962)).
In Cargill, the Court applied the same principle in extending the antitrust injury requirement to suits for injunctive relief under § 16. See 479 U.S. at 109-13, 107 S.Ct. 484. Monfort of Colorado, then the country's fifth-largest beef packer, sued to enjoin the acquisition of Spencer Beef, the number three beef packer, by Excel Corporation, the number two beef packer. Id. at 106, 107 S.Ct. 484. In its complaint, Monfort "alleged that the acquisition would `violat[e] [§]7 of the Clayton Act because the effect of the proposed acquisition may be substantially to lessen competition or tend to create a monopoly.'" Id. at 107, 107 S.Ct. 484 (first alteration in the original). Monfort further alleged that the acquisition would "result in a concentration of economic power in the relevant markets" that would allow the merged entity to bid up the cost of inputs and cause a drop in market prices, such that Monfort was threatened with a profit loss. Id. at 107, 107 S.Ct. 484 (internal quotation marks omitted).
Finding Monfort's complaint "of little assistance" in "determining what Monfort alleged the source of its injury to be," id. at 113, 107 S.Ct. 484, the Court nonetheless was able to discern two distinct theories of injury that Monfort alleged: first, conventional price competition, and second, predatory pricing.
As to the first theory, the Court reasoned:
Id. at 116, 107 S.Ct. 484 (alteration in the original) (quoting Arthur S. Langenderfer, Inc. v. S.E. Johnson Co., 729 F.2d 1050, 1057 (6th Cir.1984)). As in Brunswick, where the Court did not question that plaintiff suffered lost profits, the Cargill Court accepted plaintiff's allegations of threatened injury-in-fact as sufficient. Nonetheless, the Court concluded that "the threat of loss of profits due to possible price competition following a merger does not constitute a threat of antitrust injury." Id. at 116-17, 107 S.Ct. 484.
The Court then turned to Monfort's second claim of antitrust injury: the threat that Excel would engage in predatory pricing. Id. at 117, 107 S.Ct. 484. The Court stated that predatory pricing "is a practice that harms both competitors and competition" and recognized that, in theory at least, losses threatened by predatory pricing constitute an injury of the type the antitrust laws were designed to prevent. Id. at 117-18, 107 S.Ct. 484 ("Predatory pricing is thus a practice `inimical to the purposes of [the antitrust] laws,' Brunswick, [429 U.S. at 488, 97 S.Ct. 690], and one capable of inflicting antitrust injury.") (first alteration in the original). However, the Court concluded that Monfort had failed to properly press this claim before the district court, and that even if it had, it likely would not have succeeded given characteristics specific to the market it faced. Id. at 118-19 & n. 15, 107 S.Ct. 484.
The Supreme Court's analysis in Cargill is instructive as to both the principles underlying the concept of antitrust injury and the method of inquiry it demands. Determining whether a private party has standing to sue under § 16 of the Clayton Act requires a careful assessment of the connection between the threatened loss or damage, on the one hand, and the reason defendants' proposed conduct is allegedly illegal on the other. As the Court clarified in Atlantic Richfield:
495 U.S. at 343-44, 110 S.Ct. 1884.
Methodologically, then, assessing antitrust injury at the pleadings stage of a § 16 suit requires two distinct inquiries. First, does plaintiff's complaint allege a threatened injury-in-fact? Second, does the threatened injury result from an anticompetitive aspect of defendant's proposed conduct, i.e., that which would make the transaction illegal under the antitrust laws? A plaintiff has sufficiently pleaded a claim to antitrust injury only if its complaint satisfies both inquiries
The Court's analysis, however, is not confined to the discrete question of whether Sprint and Cellular South have sufficiently alleged antitrust injuries. Antitrust injury is but one factor to be considered in assessing whether private plaintiffs have standing to sue under the antitrust laws. In Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983), the Supreme Court described other factors relevant to determining whether a plaintiff seeking treble damages pursuant to § 4 of the Clayton Act has antitrust standing: "the directness of the injury, whether the claim for damages is `speculative,' the existence of more direct victims, the potential for duplicative recovery and the complexity of apportioning damages." Andrx Pharm., 256 F.3d at 806 (citing Associated Gen. Contractors, 459 U.S. at 542-45, 103 S.Ct. 897); accord Daniel v. Am. Bd. of Emergency Med., 428 F.3d 408, 443 (2d Cir.2005).
To be sure, "many of these other factors are not relevant to the standing inquiry under § 16," Cargill, 479 U.S. at 110 n. 5, 107 S.Ct. 484, and therefore have no application here. The antitrust standing inquiry under § 16 is "less demanding" than that under § 4 because § 16 "provides for injunctive relief, not treble damages," and therefore "the risk of duplicative recovery or the danger of complex apportionment that pervades the analysis of standing under [§]4 is not relevant to the issue of standing under [§]16." Palmyra Park Hosp., 604 F.3d at 1299-1300 (internal quotation marks omitted); accord Adams v. Pan Am. World Airways, Inc., 828 F.2d 24, 26 (D.C.Cir.1987).
Ultimately, "[t]he extent to which [factors other than antitrust injury] apply when plaintiffs sue for injunctive relief depends on the circumstances of the case," and "the weight to be given the various factors will [also] necessarily vary" depending on the context. Daniel, 428 F.3d at 443. Of particular relevance here is the fact that courts assessing the viability of a § 16 plaintiff's claim to antitrust injury on the pleadings have considered whether the plaintiff's allegations are too speculative to be allowed to proceed.
With these principles in mind, the Court turns to Sprint's and Cellular South's claims to antitrust standing and, in particular, antitrust injury. For purposes of this inquiry only, the Court assumes that AT & T's proposed acquisition of T-Mobile would violate § 7 of the Clayton Act, and focuses instead on whether plaintiffs have sufficiently alleged a threatened loss or damage stemming from an aspect or effect of the proposed acquisition that would make it illegal.
Sprint and Cellular South allege threatened injuries that stem from both horizontal and vertical aspects of AT & T's proposed acquisition of T-Mobile. That is to say: as participants in a number of different markets, wireless carriers are related both horizontally and vertically. In certain markets, the carriers compete with each other to sell outputs, and in other markets, they compete to purchase inputs. Such relationships are deemed horizontal in that they pit carriers against carriers, acting in parallel as either sellers or buyers.
Assuming the truth of the facts that the plaintiffs allege, the Court describes each relevant market and assesses the plaintiffs' claims of antitrust injury in it. "To survive a motion to dismiss, the pleadings must suggest a plausible scenario that shows that the pleader is entitled to relief." Jones v. Horne, 634 F.3d 588, 595 (D.C.Cir.2011) (alterations and internal quotation marks omitted). Plaintiffs' complaints must therefore "contain sufficient factual matter, accepted as true, to state a claim" to antitrust standing "that is plausible on its face." Iqbal, 129 S.Ct. at 1949 (internal quotation marks omitted). In particular, "[a] `naked assertion' of antitrust injury, the Supreme Court has made clear, is not enough; an antitrust claimant must put forth factual `allegations plausibly suggesting (not merely consistent with)' antitrust injury." NicSand, 507 F.3d at 451 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955).
AT & T, T-Mobile, Sprint, and Cellular South are primarily competing wireless carriers: they compete horizontally to sell wireless services and a broad array of wireless devices, including basic mobile phones, smartphones (e.g., Android phones, BlackBerry phones, the Apple iPhone), tablets (e.g., the Samsung Galaxy Tab, the BlackBerry PlayBook, the Apple iPad), and other products that access their voice and data networks.
Sprint and Cellular South compete with AT & T, T-Mobile, and other wireless carriers — most prominently, Verizon — to sell wireless services. In the market that is of primary concern here, that for postpaid wireless services,
Sprint and Cellular South allege that AT & T's acquisition of T-Mobile would affect an illegal concentration of market power and lead to higher retail wireless rates. Sprint opens its complaint by declaring that, "[i]n one fell swoop," the proposed transaction "would eliminate one of four national competitors" in the mobile wireless market "and marginalize a second (Sprint), pushing the market back toward a 1980s-style cell phone duopoly that would force consumers to endure higher prices and be denied the fruits of vigorous innovation." (Id. ¶ 1; see also id. ¶ 2 ("On its face, the horizontal combination of AT & T and T-Mobile is a classic violation of antitrust merger law, resulting in market concentration far in excess of the thresholds established by" law.); Cellular South Compl. ¶¶ 10-14.)
Standing alone, however, such allegations do not help to resolve the question of whether these competitor plaintiffs have pleaded antitrust injury. At issue here are Sprint's and Cellular South's allegations regarding the injuries that they will suffer if the merger is consummated. Alleging harm to consumers, while relevant to showing an antitrust violation, is not sufficient to demonstrate antitrust injury; harm to consumers by way of increased prices is the type of injury the antitrust laws were designed to prevent, but it is not an injury-in-fact that competitors suffer.
That remains the case even if, as Sprint and Cellular South allege, the proposed acquisition will incentivize Verizon, "AT & T's most significant competitor post-merger, ... to coordinate with AT & T rather than compete." (Sprint Compl. ¶ 3; see id. ¶¶ 195-98; Cellular South Compl. ¶¶ 73-76.) In Matsushita Electrical Industrial Co., the Supreme Court addressed allegations by American television manufacturers that their Japanese rivals "had illegally conspired to drive American firms from the ... market." 475 U.S. at 577-78, 106 S.Ct. 1348. The Court began its analysis "by emphasizing what [plaintiffs'] claim is not:"
Id. at 582-83, 106 S.Ct. 1348 (citations omitted). The Court's logic is directly applicable here. Whether the result of an increase in market concentration by itself, or "the oligopolistic price coordination" that "excessive concentration ... portends," Brooke Group Ltd., 509 U.S. at 229-30, 113 S.Ct. 2578, an increase in market prices alone does not harm competitors. To the contrary, "You want your competitors to charge high prices." JTC Petroleum Co. v. Piasa Motor Fuels, Inc., 190 F.3d 775, 778 (7th Cir.1999) (Posner, J.). The possibility that a post-merger AT & T could raise market prices does not, without more, threaten injury-in-fact to Sprint and Cellular South. It therefore does not confer antitrust standing on them.
Plaintiffs claim that wireless devices "are becoming the primary driver in selection of wireless service." (Cellular South Compl. ¶ 54.) "Device preference increasingly drives customer choice of wireless carriers." (Id.; see Sprint Compl. ¶ 79.) As such, wireless carriers compete with each other to secure the most desirable devices for their own networks, sometimes leveraging exclusivity deals with device manufacturers to aid their efforts.
Where a defendant, by means of anticompetitive conduct, restricts or forecloses a competitor plaintiff's access to a necessary input, courts have found that the resulting loss is injury of the type that the antitrust laws were designed to prevent. See Eastman Kodak Co. v. Image Technical
In Eastman Kodak, firms that serviced Kodak photocopiers (independent service organizations or "ISOs") alleged that Kodak acted anticompetitively when it "adopted policies to limit the availability of parts to [those firms] and to make it more difficult for [them] to compete with Kodak in servicing Kodak equipment." 504 U.S. at 455, 112 S.Ct. 2072. Kodak machines required Kodak parts, and Kodak parts were only available from Kodak directly or by way of original-equipment manufacturers ("OEMs") that contracted with Kodak. Id. at 456-57. When Kodak limited direct sales of parts to "buyers of Kodak equipment who use[d] Kodak service or [who] repair[ed] their own machines," and additionally struck agreements with the OEMs preventing them from selling parts to anyone but Kodak, the ISOs "were unable to obtain parts from reliable sources ... and many were forced out of business, while others lost substantial revenue." Id. at 458, 112 S.Ct. 2072. The ISOs sued, alleging "that Kodak had unlawfully tied the sale of service for Kodak machines to the sale of parts, in violation of § 1 of the Sherman Act, and had unlawfully monopolized and attempted to monopolize the sale of service for Kodak machines, in violation of § 2 of that Act." Id. at 459, 112 S.Ct. 2072 (citing 15 U.S.C. §§ 1, 2).
Neither the Supreme Court nor the lower courts questioned whether the ISOs had established antitrust injury,
What distinguishes the present case from Eastman Kodak, however, is the alleged source of the defendants' power to impair plaintiffs' ability to compete in the input market. In Eastman Kodak, the defendant was both the plaintiffs' competitor and their supplier. Here, the wireless carriers — plaintiffs, defendants, Verizon, and all the rest, national and regional alike — compete against each other as fellow purchasers of wireless devices, which they procure from manufacturers in order to sell to consumers.
Yet, other plaintiffs have succeeded on similar theories in the past. In Six West, an independent theater operator challenged the merger of its two major competitors, theater chains that were owned by vertically integrated movie distributors. 2000 WL 264295, at *1-2, *21. The plaintiff alleged that, because the transaction would "effectuate[] intimate affiliations between exhibitors ... and distributors," it would "`impede plaintiff's ability to obtain quality motion pictures.'" Id. at *21 (quoting plaintiff's amended complaint). The Court concluded that plaintiff had alleged an antitrust injury because the merger would "effectively[ ] depriv[e] [p]laintiff of its ability to compete for first-run films." Id. at *22.
In Bon-Ton Stores, the Bon-Ton department store chain sought to enjoin the acquisition of McCurdy's, one of its local competitors, by May, one of its large national competitors. 881 F.Supp. at 862-63. With the acquisition, May would have acquired all of the available retail space for a department store in all of the main malls in Rochester, New York. Id. at 865. Bon-Ton argued that the merger would hinder its ability to enter the Rochester market because store space in malls was critical to the department store business. Id. at 876-77. The Court issued a preliminary injunction and denied defendants' motions to dismiss, concluding that Bon-Ton's threat of "effective exclusion from the Rochester market" constituted antitrust injury. Id. at 878 ("Courts have held in many cases that a business which has been prevented from entering (and thus competing in) a market have standing to sue under the antitrust laws." (collecting cases)).
Finally, in Tasty Baking, the manufacturer of Tastykake snack cakes sued to unravel the merger of the manufacturers of the Hostess and Drake snack cake brands. 653 F.Supp. at 1254. The plaintiff alleged that the transaction would "impair [its] ability to enter new markets and develop business, by facilitating [defendants'] negotiations with retailers for better
Mobile wireless devices, and smartphones in particular, are Sprint's and Cellular South's first-run movies, mall locations suitable for department stores, and shelf space and promotional time, for they are necessary inputs for plaintiffs' businesses. (Cellular South Compl. ¶ 54; Sprint Compl. ¶ 79.) Like the plaintiffs in Six West, Bon-Ton Stores, and Tasty Baking, Sprint and Cellular South have alleged that the transaction in question threatens their continued access to these inputs.
Nonetheless, the Court must still determine the sufficiency of plaintiffs' pleadings, and in particular the plausibility of their threat to injury-in-fact arising from the monopsony power AT & T would gain in the market for mobile wireless devices with the acquisition of T-Mobile.
Sprint's and Cellular South's complaints provide factual support for the allegation that AT & T already possesses significant market power as a purchaser of mobile wireless devices, and that the acquisition of T-Mobile threatens them with harm. Sprint alleges that the proposed transaction would add T-Mobile's 34 million customers to AT & T's 95 million customers, leaving the merged entity with 129 million customers (a 37 percent increase) (Sprint Compl. ¶¶ 94, 97) and controlling "in excess of 40 percent of the national markets." (Id. ¶ 2; see id. ¶ 138; Cellular South Compl. ¶ 9 (alleging United States customer numbers for the national and regional carriers in the second quarter of 2011).).
Crucially, Sprint then alleges two links between a carrier's power as a seller in the output market and a carrier's power as a buyer in the input market. The first regards volume commitments:
(Sprint Compl. ¶ 84.)
Sprint's second alleged connection between concentration in the selling and buying markets relates to "exclusivity arrangements or `time-to-market' advantages" through which larger carriers secure exclusive access to certain devices — typically "cutting-edge smartphones" — for a specific period of time. (Id. ¶ 85; see Cellular South Compl. ¶¶ 58-59.) Sprint alleges that the Federal Communications Commission ("FCC") has found that while larger carriers can negotiate handset exclusivity agreements, smaller carriers such as Sprint cannot. (Sprint Compl. ¶ 85.) Sprint cites Apple's iPhone as an example. AT & T was the exclusive provider of the "iconic" iPhone from 2007 until early 2011, when Apple "gave Verizon a time-to-market advantage ... most likely because Verizon had the largest subscriber base in the United States." (Id. ¶ 86.) Accordingly, Sprint "had to compete without access to the iPhone for nearly five years." (Id.)
(Id. ¶ 160; see id. ¶ 162 (alleging that, in addition to endowing AT & T with the ability to secure more exclusive handset arrangements, the merger would allow AT & T to extract longer exclusivity periods).)
Cellular South's claims to antitrust injury from the proposed transaction's effect on the market for wireless devices are, if anything, even more plausible. Cellular South adds narrative to the numbers and market logic alleged by Sprint:
(Cellular South Compl. ¶ 53; see id. ¶¶ 60, 63, 87.)
Cellular South also focuses on the proposed acquisition's elimination of "T-Mobile as an independent source of demand for wireless devices," thus squarely stating a monopsony concern. (Cellular South Compl. ¶ 12; see id. ¶ 26 ("AT & T's acquisition of T-Mobile would further consolidate an already concentrated wireless industry and remove one independent customer (T-Mobile) with millions of device customers from the already short list of those wireless carriers ordering devices from device manufacturers.").)
But Cellular South worries about more than the mere fact of the post-merger AT & T's enhanced buying power in the market for devices. It alleges that the proposed transaction would exacerbate its network interoperability woes. As will be discussed in more detail below, not all carriers' networks are compatible with each other: phones designed for one network cannot be used on many others. (See Section II(B)(1), infra.) Cellular South claims that AT & T and Verizon have exercised their purchasing power in the markets for devices and network equipment to propagate "their own separate `ecosystems' of compatible infrastructure... that cannot be utilized by other competitors," and that the proposed acquisition would increase the big carriers' "incentive and power to exclude competitors from those ecosystems." (Cellular South Compl. ¶ 50.) Accordingly, "Without T-Mobile's independent demand for devices, device manufacturers will be even less willing to design or build devices for any carrier, like Cellular South, which is operating outside of the ecosystem of one or the other of [Verizon and AT & T]." (Id. ¶ 52.) In other words, Cellular South alleges that the proposed acquisition threatens its access not only to handsets that are particularly desirable, but also, more fundamentally, to whole "ecosystems" of devices and network infrastructure — and customers. Based on these allegations, the Court concludes that Cellular South's complaint also satisfies Twombly as regards its claim of threatened injury-in-fact from an anticompetitive aspect of the proposed merger — AT & T's acquisition of monopsony power in the market for mobile wireless devices.
By contrast, certain of the plaintiffs' seemingly device-related claims do not plausibly allege threatened injury-in-fact. Sprint states that the post-merger AT & T would, with Verizon, compose a "Twin Bell duopoly" gatekeeper, controlling "access to the wireless bridge between upstream developers and the consumers they seek to connect with via wireless communications." (Sprint Compl. ¶ 9; see id. ¶¶ 187-88.) This may be a plausible allegation, but it does not describe a threatened loss or damage to Sprint, as opposed to one faced by the upstream producers: merely claiming that "independent wireless carriers ... would not have the features and content required to compete," (id. ¶ 188), does not suffice in the absence of facts about the market relationship between the carriers and those producers.
Sprint's claim to threatened injury arising from the potential loss of T-Mobile as a partner in ventures "to create substantial scale for the creation of new handsets and to compete with [AT & T and Verizon] for such handsets" also fails. (Id. ¶ 161.) Sprint frames this allegation in terms of "innovation in handsets," (id. ¶ 169; see, e.g., id. ¶¶ 4, 91; Joint Opp'n at 29), but in order to state a claim to antitrust injury it must do more — again, it must allege its own injury-in-fact stemming from defendants' allegedly anticompetitive behavior.
Community Publishers, Inc. v. Donrey Corp., 892 F.Supp. 1146 (W.D.Ark.1995), is of no help to Sprint here. There, in determining that the plaintiff newspaper, the Daily Record, had antitrust standing to challenge the acquisition of one of its local competitors (the Times) by another of its local competitors (the Morning News), the Court found it significant that the challenged acquisition would spell the likely end "of a news and advertising sharing agreement" that was then in effect between the Daily Record and the Times. Cmty. Publishers, Inc., 892 F.Supp. at 1166. Because of the dynamics of the local newspaper market and the fact that the agreement was only between the Daily Record and the Times, the Court assumed that the "anticompetitive incentive to terminate" the agreement would inevitably lead to the agreement's end. Id. at 1167. Here, by contrast, Sprint acknowledges that the OHA consists of many players, from many different industries. (Sprint Compl. ¶ 89.) Even if T-Mobile was a "critical, pioneering member[]" of the OHA, (id.), Sprint's complaint fails to allege facts in support of the claim that the proposed acquisition would cause the OHA to fall apart or leave Sprint without alternative partners in its quest to develop new wireless devices.
As discussed, however, the plaintiffs' complaints do state plausible claims that the proposed acquisition threatens them with loss and damage in the market for handsets generally. Because their threatened injuries "flow[] from that which makes defendants' acts unlawful" in that they would result from the post-merger AT & T's increased monopsony power in a market for inputs that are necessary to their ability to compete, Sprint and Cellular South have adequately alleged a threatened antitrust injury with regard to the proposed acquisition's effects on their access to mobile wireless devices. Brunswick Corp., 429 U.S. at 489, 97 S.Ct. 690.
To assess Sprint's claims of potential injury in the market for wireless spectrum, it is first necessary to provide a brief explanation of contemporary mobile wireless technology and the government's role in regulating certain aspects of it.
Mobile wireless devices "convert voice, text, and data into radio signals, which are then transmitted to a cell site," consisting of an antenna or an array of antennas and "typically located on a tower or building."
One factor affecting a band's value is the "propagation characteristics of the spectrum." (Id.) For example, "Lower frequency signals travel greater distances and penetrate buildings and other obstructions more effectively." (Cellular South Compl. ¶ 48; see Sprint Compl. ¶ 35.) "The FCC has licensed radio spectrum for commercial mobile wireless use primarily in bands between 700 MHz and 2500 MHz." (Id. ¶ 35.) Because the 700 MHz band (so-called "beachfront spectrum") is the "lowest frequency spectrum that the FCC has licensed for commercial mobile wireless communications," and therefore has "excellent propagation characteristics" such that "it can be built out with fewer cell sites and therefore less expensively than high frequency spectrum," (id. ¶ 37), licenses for it are highly desirable from the perspective of wireless carriers. (Cellular South Compl. ¶ 48).
Another factor affecting a spectrum band's value is "the extent to which an ecosystem of compatible infrastructure, equipment, and handsets exists for the bands" (Sprint Compl. ¶ 34) because, for example, the antenna on a mobile device and that at a cell site must be tuned to the same band in order for them to connect.
To the extent that Cellular South's claims regarding wireless spectrum relate to cutting-edge wireless devices, these allegations have been addressed above. (See Section II(A)(2), supra.) Sprint, on the other hand, focuses on the fact that the merger "would add T-Mobile's spectrum to AT & T's already substantial spectrum holdings." (Id. ¶ 170.) Sprint also claims that, "[a]bsent the acquisition of T-Mobile, all of the national wireless carriers, with the possible exception of Verizon, likely would seek spectrum in `new' bands for which the research and development costs for new equipment have not yet been incurred." (Id. ¶ 171.) Thus, "[b]y acquiring developed spectrum through the T-Mobile acquisition, AT & T would effectively and improperly shift the costs of spectrum development to Sprint and other carriers" and "further weaken their ability to compete on the merits by increasing
What differentiates this claim from plaintiffs' devices claims is that here, Sprint has not alleged that the proposed transaction would be a merger-to-monopsony. Sprint does not claim that the acquisition would enable AT & T to muscle other carriers out of FCC auctions for wireless spectrum, but rather, that the transaction would add to AT & T's inventory of spectrum and reduce its network development costs. To the extent Sprint challenges the mere fact that, if AT & T acquires T-Mobile, it will also acquire some additional amount of spectrum, Sprint does not allege injury-in-fact. Without additional guidance as to this claim, the Court is left to assume that AT & T's acquisition of T-Mobile's spectrum would threaten Sprint with injury-in-fact only if the acquisition would curtail Sprint's access to a supply of spectrum that it demonstrably needed. The parties differ significantly as to the sufficiency of AT & T's spectrum holdings,
Sprint also claims antitrust injury on the theory that "[b]y acquiring developed spectrum through the T-Mobile acquisition, AT & T would effectively and improperly shift the costs of spectrum development to Sprint and other carriers[,] ... further weak[ening] their ability to compete on the merits by increasing their costs and delaying their access to new equipment." (Id.; see id. ¶ 174.) In that it describes the carriers as collaborating successfully on market development,
For these reasons, defendants' Motion to Dismiss Sprint is granted as to Sprint's claims regarding spectrum and network development costs.
AT & T, T-Mobile, Sprint, and Cellular South also buy and sell services and products among themselves, such that Sprint and Cellular South challenge two vertical effects of the proposed acquisition — effects that alter the dynamics of their relationship with AT & T as purchasers of services that AT & T sells or that are allegedly related to services that AT & T sells.
Plaintiffs' first allegation of a vertical effect regards the market for roaming. "Roaming agreements between carriers
Sprint alone raises a second claim regarding the proposed acquisition's vertical effects, this with regard to the market for "backhaul." Backhaul is also a necessary input in the market for mobile wireless services in that it connects cell sites to the traditional wireline networks where calls are routed. In addition to acting as wireless carriers themselves, AT & T and Verizon also supply the lion's share of backhaul to other wireless carriers, including Sprint and, at the present, T-Mobile. (Sprint Compl. ¶ 149.) Sprint alleges that by eliminating T-Mobile as an independent purchaser of backhaul, the proposed acquisition will enable AT & T and Verizon to charge Sprint and other carriers higher prices for the service. (Id. ¶¶ 7, 182.)
What plaintiffs' claims regarding roaming and backhaul share in common is the general allegation that AT & T's purchase of T-Mobile will result in plaintiffs paying more to procure necessary inputs. Accordingly, as it did with regard to plaintiffs' allegations about the proposed acquisition's effect on the market for wireless devices, the Court concludes that plaintiffs' alleged injuries are of the type that the antitrust laws were designed to prevent. See (Section II(A)(2), supra); Eastman Kodak Co., 504 U.S. at 478, 112 S.Ct. 2072; Tasty Baking Co., 653 F.Supp. at 1273-76. The inquiry focuses instead on the other component of antitrust injury: have plaintiffs alleged, with the requisite specificity, a threatened injury-in-fact?
At the outset, it is important to note one critical difference between plaintiffs' devices allegations addressed above, on the one hand, and their roaming and backhaul allegations on the other. In the market for devices, plaintiffs allege that AT & T's acquisition of T-Mobile would be a merger-to-monopsony. Their allegations of loss or damage stem from the post-merger AT & T's purchasing power in the market for devices — an input market for all carriers. Because plaintiffs have alleged facts about the proposed transaction's effects on the output market (the market for mobile wireless services), and because they posited links between AT & T's increased selling power in the output market and its increased purchasing power in the input market, they have stated a plausible claim to antitrust injury in the market for wireless devices.
In the markets for roaming and backhaul, however, plaintiffs do not raise monopsony claims. Rather, plaintiffs allege that they, along with T-Mobile, purchase roaming and backhaul from AT & T and Verizon in various configurations. Plaintiffs' roaming and backhaul claims relate not to the merged entity's purchasing power, but rather to its selling power, for they allege the proposed acquisition will increase concentration among sellers of roaming and backhaul (and that they will
Roaming allows one carrier's subscribers to access another carrier's network when they are outside of their own network's range, as long as the two carriers' networks are compatible and as long as the carriers have a roaming agreement. (Sprint Compl. ¶¶ 55, 57; Cellular South Compl. ¶ 27.)
While a number of factors determine whether two networks are compatible, the parties emphasize transmission technology.
Carriers have used various transmission technologies over time, but this basic divide between GSM and CDMA has persisted to the current, "third generation" networks ("3G").
Thus, carriers sign roaming agreements to supplement their networks' capacities and so their customers do not lose service when traveling outside their service areas. (Sprint Compl. ¶¶ 33, 55.) "Verizon and AT & T have large wireless network footprints in the United States," and "therefore have a higher percentage of on-network calls than other carriers" so "their subscribers have less need for roaming. AT & T and Verizon realize revenue from carriers who contract for roaming services over their networks." (Id. ¶ 56.) Implicit in the fact that Verizon and AT & T have "less need" is the fact that they both buy and sell roaming, but Sprint's complaint says nothing more about their purchasing activities.
Rather, Sprint merely alleges that "[t]he merger would raise [its] input costs for roaming." (Id. ¶ 183.) Because Sprint is a CDMA carrier and AT & T and T-Mobile are GSM carriers, however, Sprint cannot purchase roaming from defendants. In order to justify its allegation of threatened harm, Sprint posits the following sequence: After the merger, AT & T will increase its retail wireless rates.
(Sprint Compl. ¶ 185.) Even accepting for the moment that the acquisition will prompt AT & T to raise its retail rates, there remain three assumptions that underlie this scenario for which Sprint alleges no factual basis: First, that AT & T's increased retail wireless rates would give it "an incentive to increase" the rates it charges its competitors for roaming; second, that Verizon would match AT & T's increase in retail rates rather than keep its prices low to attract new customers; and third, similar to the first, that Verizon's increased retail wireless rates would prompt it to raise its roaming fees to Sprint.
When counsel for Sprint was asked at oral argument to explain where the complaint alleged facts to support these assumptions, counsel did not cite facts and instead referenced a "basic economic principle" and an Antitrust Law Journal article upon which Sprint relied for its discussion of customer foreclosure. (10/24 Tr. 76 ("[T]his is a basic economic principle. It's cited in the leading economics article, ... Riordan and Salop.... We cited it."); see Joint Opp'n at 39-40 (discussing the market for backhaul, where Sprint is a customer of AT & T's (citing Michael H. Riordan & Steven C. Salop, Evaluating Vertical Merger: A Post-Chicago Approach, 63 Antitrust L.J. 513, 557 (1995) (addressing customer foreclosure))).) But the referenced "principle" is nowhere to be found in the materials cited, since they relate to customer foreclosure and Sprint is not a customer of either AT & T or T-Mobile in
Cellular South, on the other hand, presents more concrete claims to antitrust injury in the market for roaming when it alleges that, "[b]y reducing the number of potential roaming partners, the merger threatens" it with "pay[ing] higher roaming prices." (Cellular South Compl. ¶ 27.) The crucial difference is that Cellular South's Corr Wireless subsidiary, which uses the GSM transmission technology, has been a roaming customer of T-Mobile and is currently a roaming customer of AT & T. (Id. ¶ 67.) As such, given that roaming is a necessary input for Cellular South, the fact that "the removal of T-Mobile from the marketplace would leave only AT & T as a potential GSM roaming partner," (id. ¶ 68), might be enough to demonstrate Cellular South's antitrust standing.
Defendants protest that only "a small fraction of Cellular South's customer base relies on roaming technology compatible with AT & T's and T-Mobile's networks." (Motion to Dismiss Cellular South at 8.) This is certainly true, and defendants are correct that "Cellular South's assertion that AT & T and T-Mobile's merger will nevertheless somehow result in Cellular South paying higher roaming rates for its CDMA technology to Verizon has no greater factual support than the parallel allegation in Sprint's complaint." (Id. at 9 (emphasis deleted).) Cellular South has not alleged facts that would plausibly suggest that any cost increase by the post-merger AT & T for GSM roaming would hop the technological divide to CDMA roaming. Accordingly, defendants' Motion to Dismiss Cellular South is granted as to Cellular South's CDMA roaming claims.
Defendants' Motion is denied, however, as to Cellular South's GSM roaming claims. Defendants have cited no case establishing a de minimis exception to antitrust injury. Even if Corr Wireless represents only a small part of Cellular South's business, Cellular South's allegations suggest that its threatened loss from the merger is plausible.
First, Cellular South alleges that regional carriers' ability to procure roaming at reasonable rates is crucial to their business model: "Reasonable and affordable roaming access has always been, and continues to be, a prerequisite for any wireless operator that does not own a nationwide network.... No wireless carrier can survive without access to a nationwide network for voice and data transmissions when the carrier's customers are outside the carrier's service area." (Cellular South Compl. ¶¶ 64-65.) Second, Cellular South alleges that Corr Wireless had significant difficulties securing roaming agreements in the past. (Id. ¶ 67 ("AT & T unreasonably and wrongfully refused a 3G roaming agreement with Corr Wireless until very recently, and even then, offered only unreasonable terms that amount to a constructive refusal to permit 3G roaming.").) Third, Cellular South claims that Corr Wireless's experience was not unique, and that AT & T has a history of engaging in "exclusionary practices." (Id. ¶ 71.) For example, "Cellular South alleges, on information and believe, that AT & T has engaged in a pattern and practice of denying roaming agreements to smaller carriers, as part of its efforts to monopolize local markets and to injure competition." (Id.) Looking to the future, Cellular South worries in particular about whether it will be able to negotiate 4G-LTE roaming agreements with the national carriers. (Id. ¶¶ 66, 69-71.).
Defendants' appeal to the fact of FCC regulation of roaming does not, at this stage, defeat Cellular South's showing. Defendants argue that FCC regulations require "all mobile wireless carriers to provide roaming for common carrier services to other carriers on a just, reasonable, and non-discriminatory basis." (Motion to Dismiss Cellular South at 9.
Backhaul comprises the physical infrastructure — dedicated copper, microwave, or fiber optic circuits — that connects cell sites to the wireline network to which wireless calls are routed.
Imagine a call placed from a cellphone to a landline phone. Voice data travels wirelessly from the device to a cell site (on a given band of spectrum and via a particular transmission technology, as discussed).
The contemporary market for backhaul reflects the recent history of the telecommunications industry. "For decades" prior to its breakup in 1984, "the Bell System controlled wireline monopolies across the country." (Id. ¶ 5.) Since then, Sprint alleges that "the `Ma Bell' descendants, AT & T and Verizon, have largely reassembled the Bell monopolies under their joint control." (Id.) Therefore, AT & T and Verizon own wires — both the wireline networks, which they control as "[t]he two remaining [incumbent local exchange carriers ("ILECs")] of the old Bell System," and the backhaul that connects cell sites to those networks. (Id. ¶ 59.) Indeed, Sprint claims that AT & T and Verizon "are the predominant providers of [backhaul]," although, crucially, they compete with "some independent telecommunications firms" that also provide backhaul. (Id.) Specifically, Sprint alleges that "[o]ver 90 percent of all special access services in the United States, including backhaul, are provided by the ILECs, primarily AT & T and Verizon." (Id. ¶ 149.)
Because it reflects the initial inheritances from the Bell System and the subsequent mergers among the Baby Bells, the market for backhaul is geographically bifurcated. AT & T and Verizon have distinct traditional service territories, such that they rarely compete with each other as backhaul providers. (Id. ¶¶ 134, 177; see also 10/24/11 Tr. 66 (Counsel for Sprint representing that "AT & T has [a historical legacy incumbent monopoly] in [its] half of the country.").) AT & T's ILEC territory comprises twenty-two states. (Sprint Compl. ¶ 181.) Sprint alleges that "AT & T has market or monopoly power for backhaul in a number of relevant geographic markets ... in its traditional service territor[y]." (Id. ¶ 151.)
Like Sprint's claims to antitrust injury in the markets for mobile wireless devices and roaming, Sprint's claim to antitrust injury in the market for backhaul alleges that the proposed acquisition would increase Sprint's costs for a necessary input. (Id. ¶ 175.) Sprint purchases backhaul from AT & T. (Id. ¶ 176 ("Sprint pays about $1 billion per year for ... backhaul, mostly to AT & T and Verizon.").) Where these claims differ, however, is with regard to T-Mobile's current role in the market. T-Mobile, while not a potential roaming partner for Sprint due to the incompatibility of their networks, both buys and sells roaming. With regard to backhaul, by contrast, T-Mobile is only a fellow purchaser.
Sprint cannot allege, therefore, that the proposed transaction would be a merger-to-monopoly. By acquiring T-Mobile, AT & T will not gain any backhaul infrastructure, and the merger would not lead immediately to increased concentration among backhaul suppliers. Sprint gets there in a roundabout way, though, by alleging first that the acquisition will decrease the number of backhaul purchasers. Sprint quotes an industry association filing before the FCC stating that "`AT & T has indicated that it will move T-Mobile's backhaul traffic on to its own transport network wherever possible.'" (Id. ¶ 181.) The same filing states that T-Mobile currently sources backhaul "`for approximately 20 percent of its cell sites'" from independent providers, i.e., not AT & T and not Verizon. (Id. ¶ 181; see id. ¶ 178-79 (describing T-Mobile "as a purchaser of backhaul with a strong interest in obtaining services
It bears repeating that, as has been established and as defendants concede (see Reply at 2), such an injury would be of the type that the antitrust laws are designed to prevent.
As it stands, Sprint's claims fail. Sprint alleges no facts to support its theory that the elimination of T-Mobile as a purchaser of backhaul will increase concentration among backhaul sellers by putting the independent providers out of business. Sprint might have described the independent providers (by more than just name (see Sprint Compl. ¶ 149)) and the local markets where T-Mobile's presence as an independent purchaser ensures their survival. Crucially, Sprint might have provided even rough estimates of the percentage of the independent purchasers' business that T-Mobile represents.
Time and again, the Supreme Court has emphasized that "`a district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed.'" Id. at 558, 127 S.Ct. 1955 (quoting Associated Gen. Contractors, 459 U.S. at 528 n. 17, 103 S.Ct. 897). It is no accident
While perhaps "elusive,"
Defendants' Motion to Dismiss Sprint and Motion to Dismiss Cellular South are both denied insofar as they challenge plaintiffs' claims to antitrust injury with regard to the proposed acquisition's effects on the market for mobile wireless devices. (See Section II(A)(2), supra.) Defendants' Motion to Dismiss Cellular South is denied insofar as it attacks Cellular South's antitrust standing to pursue claims regarding the role of Corr Wireless as a purchaser of GSM roaming. (See Section II(B)(1), supra.) Defendants' motions are granted as to plaintiffs' remaining claims.
