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DISCON INC. v. NYNEX CORP.

February 2, 2000

DISCON INCORPORATED, PLAINTIFF,
V.
NYNEX CORPORATION, NYNEX MATERIAL ENTERPRISES, NEW YORK TELEPHONE, DEFENDANTS.



The opinion of the court was delivered by: Arcara, District Judge.

DECISION AND ORDER

INTRODUCTION

Currently before the Court is the motion of defendants NYNEX Corporation, NYNEX Material Enterprises ("MECo"), and New York Telephone ("NYT"), (referred to collectively herein as "NYNEX"), pursuant to Rules 12(b)(6) and 56 of the Federal Rules of Civil Procedure, for summary judgment dismissing the complaint. Oral argument on the motion was held on January 21, 2000. After reviewing the submissions of the parties and hearing oral argument from counsel, the Court grants defendants' motion for summary judgment.

BACKGROUND

This case involves the sale to telephone companies of "removal services" — i.e., the dismantling and hauling away of telephone switching equipment from telephone company central offices. Plaintiff Discon, Incorporated ("Discon"), a company formed in 1984, see Second Amended Complaint at ¶ 36, sold such services to NYNEX beginning in 1984, when NYNEX became independent of American Telephone and Telegraph Company ("AT & T") in the Bell System breakup. See United States v. American Tel. & Tel. Co., 552 F. Supp. 131 (D.D.C. 1982), aff'd sub nom., Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983).*fn1 In 1986, NYNEX decided to use AT & T Technologies, rather than Discon, as a supplier of removal services.*fn2

Discon brought this action against NYNEX in 1990, asserting, inter alia, several antitrust claims based on the 1986 termination of Discon as a supplier to NYNEX. The gist of Discon's challenge is that this choice, alleged to have been made pursuant to an agreement with AT & T Technologies, was designed improperly to raise the rates that regulators would allow NYNEX to charge its customers for telephone service. This Court dismissed Discon's initial complaint, with leave to refile. Discon, Inc. v. NYNEX Corp., 1992 WL 193683 (W.D.N.Y. June 23, 1992). Discon then filed an amended complaint, which the Court subsequently dismissed with prejudice. Discon, Inc. v. NYNEX Corp., Decision and Order, 90-CV-546A (W.D.N.Y. June 7, 1995).*fn3

On appeal, the Second Circuit affirmed the dismissal of all but two of Discon's antitrust claims, as to which it reversed. Discon, 93 F.3d at 1058-62. With respect to § 1 of the Sherman Act, 15 U.S.C. § 1, the Second Circuit agreed with this Court in rejecting Discon's theories alleging a horizontal agreement and vertical price-fixing, thereby recognizing that the case involves only an alleged non-price, vertical (supplier-purchaser) agreement between NYNEX and AT & T Technologies. See id. at 1060 n. 5. The Second Circuit, however, revived the § 1 claim under a different legal theory from that argued by Discon, holding that "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 . . ., if the restraint of trade has no purpose except stifling competition." Id. at 1061 (internal quotations omitted). In distinguishing this case from the "vast majority of cases" involving a buyer's "decision to discriminate in favor of one supplier over another," the Second Circuit focused only on the alleged ratepayer exploitation, concluding that NYNEX's alleged decision to choose "a more costly supplier in order to overcharge rate-paying customers" could itself constitute "entirely anticompetitive" conduct. Id. The Second Circuit did not examine the removal services market or discuss any grounds for inferring a market-wide anticompetitive effect from the challenged conduct.

As to Discon's claims under § 2 of the Sherman Act, 15 U.S.C. § 2, that NYNEX had monopolized and attempted to monopolize the alleged market for removal services, the Second Circuit affirmed the dismissal, explaining that NYNEX was not even a competitor, let alone an actual or threatened monopolist, in that market. Discon, Inc., 93 F.3d at 1062. But, the Second Circuit revived the third of Discon's § 2 claims, specifically, that NYNEX had engaged with AT & T Technologies in a "conspiracy to monopolize." Id. Although Discon asserted that the conspiracy was intended to make a monopolist out of NYNEX, the Second Circuit disagreed and revived the claim on the ground that Discon had sufficiently alleged that NYNEX had instead conspired to make a removal services monopolist out of AT & T Technologies, which was allegedly Discon's principal rival in the provision of removal services. Id.

The Supreme Court vacated the Second Circuit's judgment and remanded for further proceedings. NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 119 S.Ct. 493, 142 L.Ed.2d 510 (1998). With respect to the § 1 claim, the Supreme Court held that "the per se group boycott rule does not apply" to "a buyer's decision to buy from one seller rather than another," even "when that decision cannot be justified in terms of ordinary competitive objectives." Id. at 130, 119 S.Ct. 493. The Court stated:

[T]he 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 [Discon] must allege and prove harm, not just to a single competitor, but to the competitive process, i.e., to competition itself.

Id. at 135, 119 S.Ct. 493. Thus, in sum, the Supreme Court held that, even assuming NYNEX's decision to deal exclusively with AT & T Technologies emanated from some corrupt or improper motive, Discon cannot succeed on its § 1 claim unless it alleges and proves that NYNEX's action caused harm, not just to Discon itself, but to competition as a whole in the relevant market. The Court held that this requirement to allege and prove market-wide anticompetitive effects applied to both the § 1 and § 2 conspiracy claims. Id. at 139, 119 S.Ct. 493.

Further parting company with the Second Circuit, the Supreme Court found that any harm to telephone ratepayers resulting from NYNEX's behavior was not sufficient to prove harm to competition, because any such consumer injury naturally flowed from the exercise of market power that is lawfully in the hands of a monopolist, namely NYNEX. Id. at 136, 119 S.Ct. 493. The Court also rejected Discon's reliance on what Discon alleged to be a "special anticompetitive motive" to "drive Discon from the market lest Discon reveal [MECo's] behavior to [NYT] or to the relevant regulatory agency," noting that, as a logical matter, terminating Discon was at least as likely to provoke exposure of the regulatory misconduct, as it was to promote a cover-up. Id. at 137-38, 119 S.Ct. 493. Finally, the Supreme Court pointed out that Discon's own First Amended Complaint "suggests the presence of other potential or actual competitors, which fact, in the circumstances, could argue against the likelihood of anticompetitive harm." Id. at 138-39, 119 S.Ct. 493. In this regard, the Court made specific reference to allegations: (1) that NYNEX itself was a potential competitor able to perform its own removals; (2) that "other nearby small local telephone companies needing removal services must have worked out some way to supply them;" and (3) that "entry [into the removal business] was easy, perhaps to the point where other firms, employing workers who knew how to remove a switch and sell it for scrap, might have entered that business almost at will." Id. at 139, 119 S.Ct. 493. The existence of these other actual or potential competitors "might have provided roughly similar checks upon `equipment removal' prices and services with or without Discon," and argued against any harm to competition arising from Discon's demise. Id.

Despite NYNEX's request that it do so, the Supreme Court declined to rule on the adequacy of Discon's allegations of market-wide anticompetitive effects because, in the Court's view, such a ruling was beyond the scope of the questions presented in NYNEX's certiorari petition. Id. at 140, 119 S.Ct. 493. Accordingly, the Supreme Court remanded the case to the Second Circuit for further proceedings consistent with its opinion.

On remand, the Second Circuit decided, in turn, to remand the case to this Court for further proceedings. Discon, Inc. v. NYNEX Corp., 184 F.3d 111, 114 (2d Cir. 1999). The Second Circuit emphasized the Supreme Court's requirement that Discon "`must allege and prove harm, not just to a single competitor, but to the competitive process, i.e., to competition itself.'" Id. (quoting NYNEX, 525 U.S. at 135, 119 S.Ct. 493). The Second Circuit instructed this Court to afford Discon the opportunity to amend its complaint to refine its allegations in light of the Supreme Court's decision, while leaving NYNEX "free to challenge whatever showing Discon can make." Id. The Second Circuit noted that "[i]t may well be difficult for Discon to resist a motion by NYNEX for summary judgment on the issue of lack of an adequate showing of injury to competition . . ." Id.

On October 18, 1999, Discon filed its Second Amended Complaint. The Second Amended Complaint asserts claims under §§ 1 and 2 of the Sherman Act and various state law claims. On November 18, 1999, NYNEX moved for summary judgment.

DISCUSSION

A. Summary Judgment Standard

"By avoiding wasteful trials and preventing lengthy litigation that may have a chilling effect on pro-competitive market forces, summary judgment serves a vital function in the area of antitrust law." Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90, 95 (2d Cir. 1998) (citations omitted). "The standard for summary judgment applies equally to antitrust cases as to any other case." United Air Lines, Inc. v. Austin Travel Corp., 867 F.2d 737, 742 (2d Cir. 1989) ...


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