United States District Court, District of Columbia
May 3, 2002
COVAD COMMUNICATIONS COMPANY, ET AL., PLAINTIFFS,
BELL ATLANTIC CORP., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Gladys Kessler, United States District Judge.
Plaintiffs, Covad Communications Company and Dieca Communications,
Inc. (collectively "Covad"), bring this antitrust action for damages and
injunctive relief against Defendants, Bell Atlantic Corporation and its
subsidiaries (collectively, "Bell Atlantic").
The matter is now before the Court on Defendants' Motion to Dismiss the
Second Amended Complaint. Upon consideration of the Motion, Opposition,
Reply, Sur-reply, the numerous submissions of supplemental authority
submitted by parties, the Motions Hearing held on March 11, 2002, and the
entire record herein, for the reasons stated below, the Court grants
Defendants' Motion to Dismiss.
Covad is a California-based start-up company founded in 1996 that uses
a technology called Digital Subscriber Line ("DSL") to provide high-speed
Internet services, as well as other network and data services.*fn2
Defendants are collectively the Bell Atlantic Corporation and its
twelve subsidiaries.*fn3 Bell Atlantic provides telecommunications and
local exchange services in thirteen states along the North Eastern
Seaboard as well as in the District of Columbia.*fn4
Covad alleges that Bell Atlantic has unlawfully maintained monopoly
power in various telecommunications markets, including the DSL market, and
has engaged in anticompetitive and exclusionary conduct in violation of
Section 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. § 1, 2
("Sherman Act"), Sections 4 and 16 of the Clayton Antitrust Act,
15 U.S.C. § 15 and 26 ("Clayton Act"), the District of Columbia
Antitrust Act of 1980, D.C. Code §§ 28-4503, 4508 and common law.
Before turning to the particulars of Covad's Complaint, some general
explanation about the regulatory framework within which the parties
operate is warranted.
A. Telecommunications Act of 1996
The relationships between the parties are governed in large part by the
Telecommunications Act of 1996, Pub.L. 104-104, 110 Stat. 56 (1996),
codified at 47 U.S.C. § 151 et seq. ("1996 Act" or the "Act"), which
sought to jump-start competition in the communications industry after a
lengthy period of state and FCC regulated monopolies. The goal of the
1996 Act was to transform the telecommunications industry from a
monopolistic setting to a competitive one.*fn5
To encourage competition, the Act requires that those companies that
have historically provided telephone services, referred to as "incumbent
local exchange carriers" or "ILECs," provide certain services to new
entrants in the telecommunications market, referred to as "competitive
local exchange carriers" or "CLECs."
Among other things, the 1996 Act requires that ILECs permit
"interconnection" with their local telecommunications network.*fn6
Specifically, ILECs must give new entrants access to their local network
on terms that are "just, reasonable and non-discriminatory" so that these
new entrants or CLECs can compete with ILECs in existing and emerging
telecommunications markets. 47 U.S.C. § 251. Furthermore, the 1996
Act establishes a set of procedures for making and enforcing
"interconnection agreements" between ILECs and CLECs for access to local
networks. 47 U.S.C. § 252.
Since December of 1997, Covad (a CLEC) and Bell Atlantic (an ILEC),
have entered into numerous interconnection agreements concerning access
to Bell Atlantic's local network. All of these agreements have been, or
currently are, the subject of dozens of enforcement proceedings before
numerous state regulatory bodies and the FCC.
B. Covad's Complaint
In this action, Covad alleges that Defendants have unlawfully
maintained their monopoly power in various telecommunications markets by
engaging in a pattern of "unlawful, anticompetitive and fraudulent
practices" in order to prevent Covad's entry into those markets. Compl.
In particular, Covad alleges that its DSL services threaten Bell
Atlantic's monopoly power in three different product markets, namely the
"Local Internet Access Market," the "Local Telecommuting Market," and the
"Local Voice Services Market."*fn7
See Compl. ¶ 53.
asserts the existence of hundreds of different geographic
markets in the states Bell Atlantic serves.*fn8
Virtually all the
conduct of which Plaintiffs complain concerns Bell Atlantic's failure to
perform duties required under the 1996 Act. Chief among these allegations
is that Bell Atlantic has denied Covad access to its local telephone
network in the following four ways: (1) refusing to "collocate" or
provide physical space and facilities for the placement of Covad's
equipment within Bell Atlantic's central offices, Compl. ¶¶ 91-124;
(2) denying access to "local loops," which are the wires running between
Bell Atlantic's central offices and customers' premises, Compl. ¶¶
125-177; (3) refusing to maintain adequate operations support systems
("OSS"), the computer systems that Covad along with numerous other new
entrants in the local telecommunications markets must use to order loops
from Bell Atlantic, Compl. ¶¶ 131-135; and (4) denying access to the
"transport" facilities that connect Covad's central office equipment with
other points in Covad's network, Compl. ¶¶ 175-177.
Covad argues that Bell Atlantic has repeatedly denied or delayed access
to these four dimensions of the local telephone network. Plaintiffs
further allege that timely access to Bell Atlantic's local network is
essential to their provision of DSL services and to competition in the
relevant telecommunications markets. See Compl. ¶¶ 89-177.
Plaintiffs' other allegations of anticompetitive conduct include price
squeezing and refusal to line share, see Compl. ¶¶ 178-185;
misleading and fraudulent advertising, see Compl. ¶¶ 186-192; bad
faith negotiations, see Compl. ¶¶ 196-201; and patent misuse, see
Compl. ¶¶ 202-212.
Plaintiffs filed this action on April 28, 1999, amending their
Complaint twice, once on July 8, 1999, and again on August 10, 2000.
The Court has issued two Memorandum Opinions since then, both of which
denied Non-resident Defendants' Motions to Dismiss for Lack of Personal
Jurisdiction.*fn9 Defendants now move to dismiss the entire case for
failure to state a claim. Fed.R.Civ.P. 12(b)(1) and (b)(6). The Court
heard oral argument on this Motion on March 11, 2002.
II. STANDARD OF REVIEW
"[A] complaint should not be dismissed for failure to state a claim
unless it appears beyond doubt that the plaintiff can prove no set of
facts in support of his claim which would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); Davis v. Monroe County Bd. of
Educ., 119 S.Ct. 1661, 1676 (1999).
A. All Antitrust Claims Related to 1996 Act Duties Must Be Dismissed
The heart of Plaintiffs' Complaint is that Bell Atlantic has violated
Section 2 of the Sherman Act, which prohibits (1) the willful acquisition
or maintenance of monopoly power in the relevant market (2) by the use of
exclusionary or predatory conduct "to foreclose competition, to gain a
competitive advantage, or to destroy a competitor." United States v.
Griffith, 334 U.S. 100, 108 (1948). A showing of "exclusionary" conduct
is an absolute pre-requisite to stating a claim under Section 2.
A careful review of the Complaint reveals that virtually all
allegations of exclusionary conduct, with the exception of the
retaliatory patent law suit, relate to Bell Atlantic's failure to comply
with the myriad duties contained in sections 251 and 252 of the 1996
Specifically, Covad alleges that Bell Atlantic engaged in
"exclusionary" conduct through denial or delay of access to its local
network in the areas of collocation,*fn10 access to loops,*fn11
adequate operations support systems,*fn12 transport services,*fn13 and
line sharing,*fn14 all of which are expressly governed by §§
251(c)(1), (2), (3) and (6) of the 1996 Act as well as by particular
provisions in the interconnection agreements entered into between the
parties. Plaintiffs also allege that Defendants engaged in exclusionary
conduct through price squeezing,*fn15 misleading advertising about its
own DSL services,*fn16 sham negotiations,*fn17 and a retaliatory patent
conduct which, with the exception of the patent suit, is
also governed by the 1996 Act and the interconnection agreements between
For the reasons discussed below, the Court concludes that none of these
allegations, if proven, can be "exclusionary" conduct within the meaning
of antitrust law and that therefore, Covad's claims related to the 1996
Act must be dismissed.
1. The 1996 Act Contains Affirmative Duties That Extend Beyond the
Requirements of Anti-Trust Law
First, Covad's allegations, which essentially relate to Bell Atlantic's
failure to comply with 1996 Act duties, fall squarely outside the
parameters of antitrust law. As recognized by the Seventh Circuit in
Goldwasser v. Ameritech Corporation, 222 F.3d 390 (7th Cir. 2000), the
1996 Act contains duties and obligations of affirmative assistance that
"go well beyond anything the antitrust laws would mandate on their own."
222 F.3d at 400. Almost every court since Goldwasser has recognized this
to be true.*fn19
The reason for this nearly unanimous consensus is that the 1996 Act was
designed by Congress to spur competition in local telephone markets in
ways that the antitrust laws did not require. As the Seventh Circuit
explained in Goldwasser, "Congress could have chosen a simple antitrust
solution to the problem of restricted competition in local telephone
markets. It did not." Goldwasser, 222 F.3d at 399. Instead, Congress
created a new statutory system of "more specific and far-reaching
obligations [than imposed by the antitrust laws] that [it] believed would
accelerate the development of competitive markets." Id. at 401.
Specifically, Congress imposed on ILECs a "host of special duties" or
"affirmative duties to help one's competitors" that "do not exist under
the unadorned antitrust laws." Id. at 399.
Consequently, the duties of affirmative assistance set forth in the
1996 Act exist outside the parameters of pre-existing antitrust law.
Bell Atlantic's alleged failure to comply with those duties, which is the
lion's share of Plaintiffs' Complaint, does not constitute "exclusionary"
conduct as a matter of law, which is the sine qua non of any antitrust
2. The Plain Language of the 1996 Act Precludes Creation of Antitrust
Claims for 1996 Act Duties
Second, the savings clauses of the 1996 Act preclude expansion of
law to incorporate 1996 Act duties. The 1996 Act contains two
savings clauses. Section 601(c)(1), the general savings clause, provides
that "[t]his Act . . . shall not be construed to modify, impair or
supersede federal, State, or local law unless expressly so provided."
The Act also provides a savings clause that specifically refers to
antitrust remedies: "nothing in this Act . . . shall be construed to
modify, impair, or supersede the applicability of the antitrust laws."
47 U.S.C. § 152, Historical and Statutory Notes. Pub.L. No. 104-104,
110 Stat. 56, § 601(b)(1).
In adopting these two separate savings clauses, Congress made explicit
its intention that the 1996 Act should not in any way alter the
application or scope of existing antitrust law. Thus, conduct that was
proscribed prior to the 1996 Act remains proscribed after its enactment.
Similarly, conduct that did not violate antitrust law prior to the 1996
Act does not now violate antitrust law after the Act. As explained
above, there is nearly unanimous consensus that the 1996 Act imposes
affirmative duties of assistance that require far more than the existing
antitrust laws now require. If Congress intended antitrust liability and
remedies to attach to violations of the specific and affirmative duties
set forth in the 1996 Act, it certainly knew how to make its intention
known by including provisions to that effect in the 1996 Act.
3. Plaintiffs Do Not State an Essential Facility Claim
Third, Plaintiffs fail to state an essential facility claim.
Plaintiffs' primary argument is that Bell Atlantic's denial and delay of
access to its local network amounts to denial of an "essential facility"
in violation of antitrust law.
An essential facility claim requires that a monopolist who competes
with the plaintiff in the monopolized market controls an essential
facility, and refuses the plaintiff's request for access to that
facility. Caribbean Broadcasting Sys., Ltd. v. Cable & Wireless PLC,
148 F.3d 1080, 1088 (D.C. Cir. 1998); see also MCI Communications Corp.
v. AT & T, 708 F.2d 1081, 1132-33 (7th Cir. 1983). The animating concern
of this doctrine is to prevent a monopolist from extending monopoly power
from one stage of production to another, and from one market to another.
The essential facility doctrine, however, is a narrow and limited
qualification of a firm's right to refuse to deal with its competitors.
Olympia Equipment Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370,
376 (7th Cir. 1986). Because the purpose of antitrust law is to protect
competition, not competitors, a firm — even one with lawful
monopoly power — ordinarily has no duty under antitrust law to help
its competitors. Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,
472 U.S. 585, 600 (1985). Indeed, compulsory access to a firm's
facilities, if it exists at all, is exceptional, particularly in a
regulated industry. 3A Phillip Areeda & Herbert Hovenkamp, Antitrust
Law, ¶¶ 771b, 771c, 773a (1996).
Furthermore, in order to prevail under an essential facility theory,
Plaintiffs must still demonstrate an "anticompetitive effect." See
United States v. Microsoft, 253 F.3d 34, 58 (D.C. Cir. 2001).
Specifically, the conduct must make a significant contribution to
maintenance of its monopoly power, pose significant harm to competition,
or otherwise "impair competition in an unnecessarily restrictive way."
Aspen Skiing, 472 U.S. at 605-606; 3 P. Areeda & H. Hovenkamp, supra,
¶ 651c at 78 (1996). Defendant's conduct
must also lack a legitimate
business justification in order to be unlawful or exclusionary. Aspen
Skiing, 472 U.S. at 605-606.
Finally, consideration of existing regulatory mechanisms and the degree
to which they already address the alleged threat to competition is
necessary. see MCI v. AT & T, 708 F.2d at 1106 ("the presence of a
substantial degree of regulation, although not sufficient to confer
antitrust immunity, may affect . . . the precise dimensions of the
`willful acquisition or maintenance' of [monopoly] power") (internal
citations omitted); Town of Concord v. Boston Edison Co., 915 F.2d 17, 25
(1st Cir. 1990) (regulation "dramatically alters the calculus of
antitrust harms and benefits"; finding that price squeeze did not violate
Sherman Act because prices were fully regulated); see also 1A P. Areeda &
H. Hovenkamp, supra, ¶ 240(d) at 15, 17 (2000) ("Even when conduct
is not exempt from antitrust laws, regulation of a market can bear
heavily on the application of antitrust principles . . . The presence of
regulation in some instances limits the antitrust role, and in some
instances simply changes it . . . The impact depends on the nature of the
regulatory regime, the nature of the antitrust claim, and the degree of
supervision given by the agency to the challenged conduct.").
Viewed in light of these principles, Covad's allegations fail to state
an essential facility claim. Those allegations focus on disputes over
the terms for obtaining access to Bell Atlantic's local exchange network
— an entitlement that was first created by the 1996 Act (not by the
antitrust laws). The particular terms of that statutorily mandated
access are now fully regulated by the FCC and state commissions through
their oversight and approval of detailed interconnection agreements. In
this setting, there can be no significant harm to competition or
anti-competitive effect as a matter of antitrust law, as every relevant
facet of Bell Atlantic's relationship with Covad is subject to regulation
under the 1996 Act, the rulings of the FCC, and the affirmative and
active supervision of state public utility commissions charged with the
1996 Act's enforcement. See Goldwasser, 222 F.3d at 401 ("antitrust laws
would add nothing to the oversight already available under the 1996
[Act]"); cf. Town of Concord, 915 F.2d 17 (price squeeze claims are not
exclusionary conduct under Section 2 because no durable harm to
competition in fully regulated markets).
The case at bar is simply unlike the paradigmatic denial of an
essential facility that the Supreme Court analyzed in Aspen Skiing Co.,
472 U.S. 585 (1985), where an unregulated firm with monopoly power chose
to "forgo cash revenues and efficient methods of doing business for the
sole purpose of driving its rivals out of the market." Goldwasser, 222
F.3d at 398.
Nor is this the case of Otter Tail Power Co. v. United States,
410 U.S. 366
where the Supreme Court upheld a finding of
Section 2 liability against a public utility company
that refused to
supply or "wheel" to retail competitors essential wholesale power that
the governing regulatory scheme was without authority to compel. See
Otter Tail Power, 410 U.S. at 375 ("So far as wheeling is concerned,
there is no authority granted the Commission under . . . the Federal
Power Act to order it . . . the power to direct wheeling was left to
the `voluntary coordination of electric facilities'") (citations
This case, by contrast, involves disputes over access to Bell
Atlantic's local network where the access is mandated by the 1996 Act,
fully regulated by the FCC and state commissions, and clearly spelled out
in detailed interconnection agreements approved by the FCC and state
commissions. Bell Atlantic has no freedom to take any unilateral action
relating to access to interconnection with the local networks.*fn22 In
light of this regulatory scheme, application of the essential facility
doctrine and its underlying compulsory dealing rationale "would add
nothing to the oversight already available under the 1996 law."
Goldwasser, 222 F.3d at 401.
Accordingly, in view of established essential facility doctrine
principles as well as the regulatory context of this case, the Court
concludes that Plaintiffs fail to state an essential facility claim.
4. The Enforcement Schemes of the 1996 Act and Anti-Trust Law Are
Finally, while not dispositive of the issue, the Court cannot help but
note the fundamental incompatibility between the remedial schemes
established by the antitrust laws and the 1996 Act. As explained above,
most of the Complaint concerns conduct that is committed to the
of the FCC and to state public utility commissions.
Permitting judicial consideration of these same issues may interfere with
the ability of state regulatory agencies and the FCC to carry out their
regulatory missions, and could subject ILECs to inconsistent standards of
conduct. See Phonetele, Inc. v. AT & T Co., 664 F.2d 716, 732 (9th Cir.
1981) ("the agency must have sufficient freedom of action to carry out
its regulatory mission, and the regulated entity should not be required
to act with reference to inconsistent standards of conduct.").
For example, a CLEC could use antitrust law as a vehicle to
collaterally challenge adverse determinations of regulators, or bypass
regulatory determinations concerning alleged violations of
interconnection agreements altogether. In this case, for example, the
gravamen of Covad's Complaint is essentially that Bell Atlantic has
failed to comply with numerous negotiated interconnection agreements
entered into pursuant to the 1996 Act. See March 11, 2002, Motions
Hearing, Defs.' Handout at 3-4. These very same issues are already
before or have already been decided by dozens of state commissions as
well as the FCC. Whether an interconnection agreement has been violated
is a determination that, as an initial matter at least, must be decided
by regulators, and not this Court.
Indeed, the Seventh Circuit in Goldwasser emphasized the nature of this
incompatibility when dismissing a substantially similar Complaint:
[T]he procedures established under the 1996 Act for
achieving competitive markets [are not] compatible
with the procedures that would be used to accomplish
the same result under the antitrust laws . . . The
elaborate system of negotiated agreements and
enforcement established by the 1996 Act could be
brushed aside by any unsatisfied party with the simple
act of filing an antitrust action. Court orders in
those cases could easily conflict with the obligations
the state commissions or the FCC imposes.
Goldwasser, 222 F.3d at 401. See also Essential Communications Sys.
Inc. v. AT & T, 610 F.2d 1114, 1120-21 (3rd Cir. 1979) (although
Communications Act does not confer blanket antitrust immunity, "[w]e
recognize . . . that a given antitrust remedy might in specific instances
present an actual or potential conflict with a duty imposed by the
FCC."). Consequently, there is a basic incompatibility between the
remedial schemes of the 1996 Act and antitrust law.
In view of all the foregoing, the Court finds that Covad's allegations
pertaining to 1996 Act duties do not constitute exclusionary conduct as a
matter of antitrust law. Plaintiffs' claims are therefore dismissed, and
Bell Atlantic's Motion is granted as to these claims.
B. Covad's Retaliatory Patent Claim Must Be Dismissed
Covad also alleges that Bell Atlantic's suit against it for patent
infringement constitutes a violation of Section 2.*fn23
202-212. Specifically, Covad states that Bell Atlantic's "bad-faith
filing of the patent action was a pretext. Bell Atlantic did not bring
the patent action out of any desire to protect its purported intellectual
property . . . [but rather] to interfere with competition in the relevant
markets and to retaliate against [it] for asserting
its rights in this lawsuit." Compl. ¶ 212.
However, Covad has failed to allege that this suit had any
"anticompetitive effect." Microsoft, 253 F.3d at 58-59 (prima facie case
under Section 2 requires demonstration of "anticompetitive effect").
Therefore, any claim based on the patent suit is dismissed, and
Defendants' Motion is granted as to this claim.
C. Covad's State Law Claims Must Be Dismissed
Because the Court has dismissed Plaintiffs' federal claims, it declines
to exercise supplemental jurisdiction over the state law claims.
Defendants' motion is therefore granted as to Covad's state law claims,
and these claims are dismissed.
For all the foregoing reasons, Defendants' Motion to Dismiss the
Complaint is granted. Covad's claims are dismissed. An appropriate
Order will issue with this Opinion.
O R D E R
The matter is now before the Court on Defendants' Motion to Dismiss the
Second Amended Complaint. Upon consideration of the Motion, Opposition,
Reply, Sur-reply, the numerous submissions of supplemental authority
submitted by parties, the Motions Hearing held in this matter on March
11, 2002, and the entire record herein, for the reasons stated in the
accompanying Memorandum Opinion, it is hereby
ORDERED, that the Court grants Defendants' Motion to Dismiss the Second
Amended Complaint; it is further
ORDERED, that this case is dismissed.