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INTERNATIONAL AUDIOTEXT NETWORK v. AT&T

December 14, 1994

INTERNATIONAL AUDIOTEXT NETWORK, INC., Plaintiff,
v.
AMERICAN TELEPHONE AND TELEGRAPH COMPANY, Defendant.


LAWRENCE M. McKENNA, U.S.D.J.


The opinion of the court was delivered by: LAWRENCE M. MCKENNA

McKENNA, D.J.

 1: The Amended Complaint and the Agreement.

 Defendant American Telephone and Telegraph Company ("AT&T") moves, pursuant to Fed. R. Civ. P. 12(b)(6), for an order dismissing the Amended Complaint of plaintiff International Audiotext Network, Inc. ("IAN"). For the reasons set forth below, the motion is granted.

 IAN asserts five claims against AT&T: (1) and (2), monopolization and an attempt to monopolize in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2; (3) agreement in restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; and (4) and (5), violations of Sections 201(b) and 202(a) of the Communications Act, 47 U.S.C. §§ 201(b) and 202(a).

 IAN's claims all relate to a Cooperative Marketing Agreement between AT&T and Malhotra & Associates, Inc. ("Malhotra") entered into on May 6, 1991 (the "Agreement"). *fn1" IAN and Malhotra are identified in the Amended Complaint (PP 4, 5) as Information Providers, or "IPs," that is, firms that "provide various kinds of information and/or services via telephone to callers, such as stock quotes, time and temperature and horoscopes." (Am. Cplt. P 4.) The parties at times refer to the services rendered by IPs as "audiotext" services.

 As described by IAN, in the Agreement "AT&T agreed to pay Malhotra compensation based on the number of monthly minutes called from overseas to Malhotra's various telephone numbers." (Id. P 13.)

 
The per minute compensation to Malhotra from AT&T represents a share of the revenue derived by AT&T from international calls originating outside the United States and terminating inside the United States. The fees that AT&T charges to foreign telephone companies to provide connections to the United States are known as accounting rates and are agreed upon in international negotiations. As the accounting rate of payments are based upon minutes of connect time, the stimulation of traffic to the United States from overseas increases defendant's revenue. The Agreement between Malhotra and AT&T provides Malhotra a fixed per minute share of the accounting rate receipts of AT&T for international calls terminating at Malhotra's audiotext service center.

 (Id. P 14.) The agreement was exclusive to Malhotra (id. P 16) through July 8, 1993 (Pl. Mem. at 7.). *fn2"

 IAN has sought to enter into an agreement with AT&T "on the same terms and conditions" as the Agreement, but AT&T has refused to do so. (Id. PP 20, 22.)

 The alleged economic impact on IAN of AT&T's refusal to enter into an agreement with IAN similar to the Agreement is summarized by IAN thus:

 
Defendant controls an essential facility to the completion of international audiotext services. Duplication of defendant's international transport and billing services and arrangements by plaintiff would be economically infeasible and denial of its use inflicts a severe handicap on plaintiff and other potential market entrants. Without access to both the toll settlement arrangements and switching facilities of defendant, plaintiff cannot duplicate the call completing capability provided by defendant to Malhotra or collect the charges associated with the call.

 (Id. P 30.)

 IAN also alleges that "the Agreement entails a joint venture between [AT&T] and Malhotra in which . . . AT&T provides transport and billing facilities and services to Malhotra for international inbound sent-paid calls to Malhotra's audiotext services." (Id. P 7). Thus, IAN alleges, after referring to certain of the provisions of the Agreement, "AT&T is, in fact, a competitor of [IAN] because by engaging in such intense overview and involvement AT&T is engaging in the same business as [IAN]." (Id. P 12.)

 2. Rule 12(b)(6) Standards in Antitrust Cases.

 "[A] short plain statement of a claim for relief which gives notice to the opposing party is all that is necessary in antitrust cases, as in other cases under the Federal Rules." George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 554 (2d Cir. 1977) (citing Nagler v. Admiral Corp., 248 F.2d 319 (2d Cir. 1957), and 5 Charles Alan Wright & Arthur Miller, Federal Practice & Procedure, § 1228 (1969)). That does not mean that "conclusory allegations which merely recite the litany of antitrust will...suffice." John's Insulation, Inc. v. Siska Constr. Co., 774 F. Supp. 156, 163 (S.D.N.Y. 1991). An antitrust complaint must "adequately...define the relevant product market, ...allege antitrust injury, [and]...allege conduct in violation of the antitrust laws." Re-Alco Indus., Inc. v. National Ctr. for Health Educ., Inc., 812 F. Supp. 387, 391 (S.D.N.Y. 1993). In considering the complaint on a motion under Fed. R. Civ. P. 12(b)(6), "the Court must accept the pleader's allegations of facts as true together with such reasonable inferences as may be drawn in [the pleader's] favor." Deep South Pepsi-Cola Bottling Co. v. Pepsico, Inc., 1989 U.S. Dist. LEXIS 4639, 1989 WL 48400, at * 5 (S.D.N.Y. May 2, 1989). In determining the present motion, the Court may, of course, consider the Agreement, which is "incorporated in the [Amended Complaint] by reference." Kramer v. Time Warner,Inc., 937 F.2d 767, 773 (2d Cir. 1991). Materials publicly filed by or with the Federal Communication Commission ("FCC"), of which the Court may take judicial notice, may also be considered on the motion, at least as giving an indication of the nature of relevant practices in and policies affecting the telecommunications business. Id. at 774.

 It has been very persuasively argued that an antitrust plaintiff whose complaint is challenged must articulate "a careful statement of his legal theory." Phillip Areeda & Donald F. Turner, Antitrust Law, P 317e (1978). It is not clear however, in the Second Circuit, that the theory -- as distinguished from the facts supporting it -- must be set forth in the complaint itself, see George C. Frey, 554 F.2d at 554, but it is nevertheless not too much to ask that the theory -- or "alternative or multiple legal theories," Areeda & Turner, P 317e -- at least be fully argued in response to a dispositive motion. Not only will such argument enable a court to see how the facts alleged, if proved, would constitute a violation of the Sherman Act, but "the recommended specificity focuses discovery and thereby saves both parties' energies and costs." Id. "The heavy costs of modern federal litigation, especially antitrust litigation, and the mounting caseload pressures on the federal courts, counsel against launching the parties into pretrial discovery if there is no reasonable prospect that the plaintiff can make out a cause of action from the events narrated in the complaint." Sutliff, Inc. v. Donovan Cos., Inc., 727 F.2d 648, 654 (7th Cir. 1984) (Posner, J.).

 3: Section 2 of the Sherman Act.

 Judge Sand has concisely summarized the requirements of a Section 2 claim:

 
Each of the activities which Section 2 seeks to proscribe has its own elements. Unlawful monopolization has two elements: "(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." Attempted monopolization has three elements: "(1) that the defendant has engaged in predatory or anti-competitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power."

 Ortho Diagnostic Sys., Inc. v. Abbott Labs., Inc., 822 F. Supp. 145, 153 (S.D.N.Y. 1993) (quoting United States v. Grinnell Corp., 384 U.S. 563, 570-571, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966), and Spectrum Sports, Inc. v. McQuillan, 122 L. Ed. 2d 247, 113 S. Ct. 884, 890-891 (1993)). In addition:

 
It appears clear that a claim under the Sherman Act is stated both where a company leverages power in one market to create monopoly in another, and where a company uses monopoly power in one market to impede competition in another, whether or not it attempts to monopolize the second market, with resulting "tangible harm to competition."

 Viacom Int'l, Inc. v. Time Inc., 785 F. Supp. 371, 378 (S.D.N.Y. 1992) (quoting Twin Labs., Inc. v. Weider Health & Fitness, 900 F.2d 566, 571 (2d Cir. 1990), and citing United States v. Griffith, 334 U.S. 100, 92 L. Ed. 1236, 68 S. Ct. 941 (1948), and Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 275 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 100 S. Ct. 1061, 62 L. Ed. 2d 783 (1980)). *fn4"

  IAN relies very substantially -- indeed, it is fair to say, its Section 2 case turns -- on the "essential facility" doctrine. See Am. Cplt. PP 24, 29, 30; Pl. Mem. at 6-7, 19-22. The essential facility doctrine is "a label that may aid in the analysis of a monopoly claim, not a statement of a separate violation of law." Viacom, 785 F. Supp. at 376 n.12 (citing Phillip A. Areeda & Herbert Hovenkamp, Antitrust Law, P 736.1a (Supp. 1990)). In an early formulation, "the essential facility doctrine, also called the 'bottleneck principle,' states that where facilities cannot practicably be duplicated by would-be competitors, those in possession of them must allow them to be shared on fair terms. It is illegal restraint of trade to foreclose the scarce facility.'" Hecht v. Pro-Football, Inc., 187 U.S. App. D.C. 73, 570 F.2d 982, 992 (D.C. Cir. 1977) (quoting A. O. Neale, The Antitrust Laws of the United States, at 67 (2d ed. 1970)) (footnote omitted), cert. denied, 436 U.S. 956, 57 L. Ed. 2d 1121, 98 S. Ct. 3069 (1978). The Second Circuit has adopted the Seventh's formulation of the elements of an "essential facility" claim: "(1) control of the essential facility by a monopolist; (2) a competitor's inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility." MCI Communications Corp. v. American Tel. & Telegraph Co., 708 F.2d 1081, 1132-33 (7th Cir.) (citations omitted), cert. denied, 464 U.S. 891, 78 L. Ed. 2d 226, 104 S. Ct. 234 (1983). See Twin Labs., 900 F.2d at 569; Delaware & Hudson Ry. Co. v. Consolidated Rail Corp., 902 F.2d 174, 179 (2d Cir. 1990). The "essential facility" doctrine, however, is in tension with another: "Antitrust law . . . does not require one competitor to give another a break just because failing to do so offends notions of fair play." Twin Labs., 900 F.2d at 568.

 Both judicial and academic commentary makes it clear that each case in which an essential facility claim is put forward must be carefully examined, particularly as to the issues of whether the facility in question is truly "essential," the effect on competition of withholding the facility, and the situations in which the facility must be shared. See generally Twin Labs., 900 F.2d at 569; Olympia Equip. Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370, 376-77 (7th Cir. 1986) (Posner, J.), rehearing & rehearing en banc denied, 802 F.2d 217 (7th Cir. 1986), cert. denied, 480 U.S. 934 (1987); Fishman v. Estate of Wirtz, 807 F.2d 520, 570-75 (7th-Cir. 1986) (Easterbrook, J., dissenting in part); Phillip A. Areeda & Herbert Hovenkamp, Antitrust Law, PP 736.1, 736.2 (Supp. 1993).

 4: The Relevant Markets.

 Analysis of IAN's Section 2 claims must begin with identification of the market it claims that AT&T has monopolized (or attempted to monopolize), and of the market in which the Agreement, under a monopoly leveraging theory, will allegedly work tangible harm to competition, as well as with some understanding of how those markets work. "It is, of course, a basic principle in the law of monopolization that the first step in a court's analysis must be a definition of the relevant markets." Berkey Photo, 603 F.2d at 268. "A complaint must allege a relevant product market in which the anticompetitive effects of the challenged activity can be assessed." Re-Alco Indus., 812 F. Supp. at 391. It has been said that the courts will "reject market allegations that make no economic sense under any set of facts," that, in other words, an antitrust plaintiff must "set out a theoretically rational explanation to support its proposed relevant product market." Theatre Party Assocs., Inc. v. The Shubert Org., Inc., 695 F. Supp. 150, 154 (S.D.N.Y. 1988).

 IAN alleges two markets. (Am. Cplt. PP 24, 25.) The first is "the market for providing audiotext services within the United States to callers from overseas." (Id. P 24.) AT&T challenges this definition on the ground that "it fails to offer any 'theoretically rational explanation' why callers from overseas . . . would not regard audiotext services accessed through terminating telephones located outside the United States as substitutes for audiotext services accessed through terminating telephones located within the United States." (Def. Mem. at 17.) It is a good question, to which IAN does not really give an answer. Market definition, however, is generally ultimately a question of fact which "can be determined only after a factual inquiry into the 'commercial realities' faced by consumers," Eastman Kodak, 112 S. Ct. at 2090 (quoting Grinnell, 384 U.S. at 572), and the Court will not determine it on the present motion. See Michael Anthony Jewelers, Inc. v. Peacock Jewelry, Inc., 795 F. Supp. 639, 647 (S.D.N.Y. 1992).

 IAN immediately follows the market definition of paragraph 24 of the Amended Complaint, however, with a theory that, in any apparent real context, is not "plausible." Theatre Party, 695 F. Supp. at 154. IAN explains:

 
AT&T has effective control over the manner in which calls are received in the United States from abroad. IAN, or any other IP, cannot receive calls directly from callers abroad, but must rely on AT&T to transport the call to the termination point (the IP's audiotext program). As a result of this "bottleneck" all calls coming from abroad must go through AT&T's network.

 (Am. Cplt. P 24) "Thus," IAN alleges, "individual callers in the relevant market cannot as a practical matter choose for themselves between Malhotra, IAN, or any other IP based on price and non-price competitive factors. Instead, as a practical matter, defendant makes the choice for them." (Id.)

 IAN thus argues that AT&T's "network" is an "essential facility," and that AT&T's refusal to enter into an agreement with IAN similar to the Agreement effectively denies IAN access to that "essential facility." The flaw in this explanation of IAN's Section 2 claim is that there is no allegation of facts from which it can be inferred that AT&T has denied (or will deny) IAN access to the alleged "essential facility," AT&T's "network." Even if one concedes AT&T's "overwhelming control of international traffic to the United States" (Pl. Mem. at 22), IAN has not alleged facts from which it can be inferred that AT&T has refused to transport or will not transport calls from overseas callers to IAN's United States telephone numbers just as it does calls from overseas callers to Malhotra's United States telephone numbers. Rather, the Amended Complaint itself alleges that it is pursuant to its common carrier obligations, [that] AT&T provides telecommunication facilities and services to terminate calls to Malhotra's audiotext services from overseas." (Am. Cplt. 8.) (Emphasis added.) There is no basis for the inference that AT&T will not, pursuant to those same common carrier obligations, transport and terminate any call from overseas to any IAN telephone number in the United States. Indeed, AT&T concedes that it "must terminate calls to IAN's telephone numbers." (Def. Mem. at 22.) Thus, there is no fact alleged (nor has IAN suggested it could allege facts) from which the truth can be inferred of IAN's conclusion: that AT&T, simply by its control of facilities for transporting calls from overseas to the United ...


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