NYNEX CORP. v. DISCON, INC.

525 U.S. 128 (1998)

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 (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

   …This case involves the business of removing…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 Co.,…a subsidiary of NYNEX. NYNEX also owns Materiel Enterprises Co., a purchasing entity that bought removal services for New York Telephone. Discon…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. 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 Technologies, 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 New 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. 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.” But, it added, in this case, “no such pro-competitive rationale appears on the face of the complaint.” Rather, the complaint alleges Materiel Enterprises’ decision to buy from AT&T Technologies, rather than from Discon, was intended to be, and was, “anti-competitive.” 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.’” (quoting White Motor Co. v. United States, 372 U.S. 253, 263 (1963))

   For somewhat similar reasons the Second Circuit believed the complaint stated a valid claim of conspiracy to monopolize under §2 of the Sherman Act. 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”). [Citations.] 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

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   …The Court has found the per se rule applicable in certain group boycott cases….    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. 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. 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.” 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.

   Nor have we 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 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 treble-damages antitrust cases. And that per se rule would discourage firms from changing suppliers—even where the competitive process itself does not suffer harm. [Citations.].

   The freedom to switch suppliers lies close to the heart of the competitive pro­cess that the antitrust laws seek to encourage. 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.

   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. 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, and that only AT&T Technologies competed for New York Telephone’s business. 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 supra, 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.) The complaint 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….

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. Given our conclusion that Discon has not alleged a §1 per se violation, we think it pru­dent to vacate this portion of the Court 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.

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NOTES and QUESTIONS

   1.    Do the allegations in this case satisfy the per se test  of Pacific Stationery? How do you think Justice Breyer would respond to that question?

   2.    How useful is the distinction between Type I and Type II error in understanding the Court’s decision here?

   3.    Part IV of the opinion relates to what will happen on remand.  If the complaint is truly defective in this regard, what result?  Would the defect go to the required elements of the offense, to civil standing, or what?

   4.    Where, if at all, can one elsewhere find evidence of the Court’s reluctance to convert business torts into antitrust offenses?

   5.    You might wish to revisit the preceding three questions in the light of additional evidence that you will accumulate as the course progresses.