Case No. 14-1654
UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT
PATRIOT WIRELESS CORP.,
Plaintiff-Appellee
v.
DOMINION TELECOMMUNICATIONS, INC.,
Defendant-Appellant
APPEAL FROM UNITED STATES DISTRICT COURT DISTRICT OF MADISON
No. 13-1684 _____________________________________________________________
BRIEF OF PLAINTIFF-APPELLEE
Team B
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CORPORATE DISCLOSURE STATEMENT
Pursuant to Federal Rule of Appellate Procedure 26.1, Plaintiff-Appellee Patriot Wireless
Corporation makes the following disclosure: Patriot Wireless Corporation is a Madison State
corporation that does not have a parent corporation. No publicly owned company has any
ownership interest in Patriot Wireless Corporation.
DATED this 20th day of January, 2015.
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TABLE OF CONTENTS
CORPORATE DISCLOSURE STATEMENT .................................................................. ii
TABLE OF AUTHORITIES ............................................................................................... v
JURISDICTIONAL STATEMENT .................................................................................... 1
STATEMENT OF ISSUES ................................................................................................. 2
STATEMENT OF THE CASE ........................................................................................... 3
STATEMENT OF FACTS .................................................................................................. 4
SUMMARY OF ARGUMENT ........................................................................................... 7
STANDARD OF REVIEW ................................................................................................. 9
ARGUMENT .................................................................................................................... 10
I. Dominion Possessed Monopoly Power in the Television Service and Cellular Service Markets ........................................................................................ 10
"II. The Bundled Discount Offered by Dominion was Anticompetitive ...................... 12
"a. The LePage’s standard offers guidance to firms while protecting consumer welfare .................................................................................................................... 12
b. The bundle offered by Dominion aims to exclude competition from the cellular service market ............................................................................................ 16
c. The bundle offered by Dominion creates an anticompetitive effect in the cellular service market ...................................................................................... 16
III. Dominion's Refusal to Deal was Anticompetitive .................................................. 18
a. Courts look to the totality of the circumstances when determining the lawfulness of a refusal to deal ................................................................................ 19
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b. Dominion terminated a prior profitable course of dealing ..................................... 20
c. Dominion lacked a valid business justification for terminating the prior course of dealing ............................................................................................ 21
"d. Dominion intended to exclude Patriot from the cellular services market .............. 23
e. Dominion's refusal to deal had anticompetitive effects in the cellular services market ....................................................................................................... 25
CONCLUSION ................................................................................................................. 29
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TABLE OF AUTHORITIES
Cases
Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) ................................................................................................... passim Broadway Delivery Corp. v. United Parcel Serv. of Am., 651 F.2d 122 (2d Cir. 1981) .............................................................................................. 11 Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) .......................................................................................................... 25 Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2007) ...................................................................................... passim Chi. Bd. of Trade v. United States, 246 U.S. 231 (1918) .......................................................................................................... 26 Domed Stadium Hotel, Inc. v. Holiday Inns, Inc., 732 F.2d 480 (5th Cir. 1984) ............................................................................................. 11 Eastman Kodak Co. v. Image Technical Servs, Inc., 504 U.S. 451 (1992) .................................................................................................... 25, 26 Hayden Pub. Co., Inc. v. Cox Broad. Corp.,
730 F.2d 64 (2d Cir. 1984) ................................................................................................ 11
Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919 (9th Cir. 1980) ............................................................................................. 11 In re Nw. Airlines Corp. Antitrust Litig., 197 F. Supp. 2d 908 (E.D. Mich. 2002) ...................................................................... 11, 12 J.B.D.L. Corp. v. Wyeth-Ayerst Labs., Inc., 485 F.3d 880 (6th Cir. 2007) ............................................................................................... 9 LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) ....................................................................................... passim Lorain Journal Co. v. United States, 342 U.S. 143 (1951) .................................................................................................... 22, 26 Meijer, Inc. v. Abbott Labs., 544 F. Supp. 2d 995 (N.D. Cal. 2008) ......................................................................... 14, 15
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Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438 (2009) .......................................................................................................... 18 Standard Oil Co. v. United States, 221 U.S. 1 (1911) ............................................................................................................. 26 United States v. Colgate & Co., 250 U.S. 300 (1919) .......................................................................................................... 18
United States v. Grinnell Corp.,
384 U.S. 563 (1966) .......................................................................................................... 11 United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) ....................................................................................... 25, 26 Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) ................................................................................................... passim
Statutes
15 U.S.C. § 2 .......................................................................................................................... passim 15 U.S.C. § 15(a) ......................................................................................................................... 1, 2 15 U.S.C. § 26 ................................................................................................................................. 3 28 U.S.C. § 1291 ............................................................................................................................. 1 28 U.S.C. § 1331 ............................................................................................................................. 1
Other Authorities
3A Areeda & Hovenkamp, Antitrust Law (2008) .................................................................. passim 3B Areeda & Hovenkamp, Antitrust Law (2008) ......................................................................... 11
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JURISDICTIONAL STATEMENT
Patriot alleged that Dominion violated the Sherman Act. 15 U.S.C. §§ 2. The District
Court had jurisdiction pursuant to 15 U.S.C. §15(a) and 28 U.S.C. § 1331. Dominion timely filed
their notice of appeal on January 13, 2014. This Court has jurisdiction pursuant to 28 U.S.C. §
1291. This brief is timely filed.
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STATEMENT OF ISSUES
I. Whether Dominion’s introduction of a bundled discount following Patriot’s entry into the
market was anticompetitive in violation of Section 2 of the Sherman Act.
II. Whether Dominion’s termination of a prior course of dealing with Patriot was an
anticompetitive refusal to deal in violation of Section 2 of the Sherman Act.
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STATEMENT OF THE CASE
On February 22, 2013, Plaintiff Patriot Wireless Corporation (“Patriot”) originally filed a
complaint alleging that Defendants Ariel Wireless Company, Noble Communications
Corporation, and Dominion Telecommunications, Incorporated (“Dominion”) violated Section 2
of the Sherman Act. The suit, brought under the Clayton Act, 15 U.S.C. §§ 15 and 26, sought
treble damages and injunctive relief. The United States District Court for the District of Madison
granted a preliminary injunction ordering Dominion to continue providing cellular transmission
capacity to Patriot. On July 18, 2013, the District Court granted a motion to dismiss by co-
Defendants Ariel Wireless and Noble Communications. Subsequently, the remaining parties,
Patriot and Dominion, performed discovery and filed cross-motions for summary judgment.
On December 16, 2013, the District Court found Dominion’s conduct to be in violation of
the Sherman Act in two ways. First, by using the standard of review as set forth in LePage’s Inc.
v. 3M – where a bundled discount is deemed anticompetitive even if it is priced above cost – the
District Court found Dominion’s bundled discount anticompetitive. Second, the District Court
found that Dominion engaged in anticompetitive behavior by its refusal to lease capacity to
Patriot. Thus, Patriot prevailed on both counts and the court ordered Dominion to pay $100
million in damages, trebled per statute, as well as attorneys’ fees and costs of $1 million. The
District Court enjoined Dominion from terminating the lease agreement with Patriot until June
16, 2016.
Dominion filed a timely appeal on January 13, 2014, bringing the matter before this
Court.
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STATEMENT OF FACTS
Defendant-Appellant Dominion Telecommunications, Incorporated (“Dominion”)
possessed significant market share in the cellular service and television service markets for the
city of Mason for all parts relevant to this action. R. at ¶ 2-3. Plaintiff-Appellee Patriot Wireless
Corporation (“Patriot”) attempted to offer consumers a cheaper option in the cellular services
market, and was successful following entry into the market in July 2012. R. at ¶ 4. Patriot’s
business model was drastically different than Dominion’s, offering consumers a low-cost option;
Patriot’s price of $75 for cellular service was lower than Dominion’s $100 price. R. at ¶ 4.
Due to the high costs of constructing a cellular network, Patriot opted to lease network
capacity from Dominion prior to entering the market. R. at ¶ 4. Patriot planned to increase its
market share over time and use the profits to eventually construct its own cellular network. R. at
¶ 4. In July 2012, Patriot and Dominion entered into a four-year lease agreement allowing
Patriot the ability to lease excess capacity from Dominion. R. at ¶ 4. The lease agreement
included a clause allowing Dominion the power to terminate the contract for any reason with
thirty days notice. R. at ¶ 4.
After Patriot’s entry into the cellular services market, consumers responded favorably. R.
at ¶ 5. Patriot was able to capture 5% of the market within six months. R. at ¶ 5. Over half of
this growth was a result of consumers leaving Dominion and choosing the low-cost option
Patriot offered. R. at ¶ 5.
Dominion responded with a bundle that packaged its cellular service with cable television
service for $105 in December 2012. R. at ¶ 9. Previously, consumers wishing to purchase both
options from Dominion were required to pay $200, or $100 for each service. R. at ¶ 2–3.
Dominion’s market share increased by 7% in the three months following the introduction of the
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bundle. R. at ¶ 9. During this time period, Patriot’s market share stopped increasing. R. at ¶ 10.
Patriot had still outpaced its expected growth and began planning the construction of its
own cellular network. R. at ¶ 11. Under Patriot’s plan, over half of the financing would come
from the profit in existing operations while the remaining cost would be borrowed from a group
of banks. R. at ¶ 11. The $100 million loan from the banks was contingent upon Patriot
continuing to earn profits of at least $5 million per month. R. at ¶ 11. Following the completion
of its cellular network, Patriot would no longer need to lease capacity from Dominion. R. at ¶
11. During the two year construction period of its network, Patriot would still need to lease
cellular capacity from Dominion. R. at ¶ 11. On January 2, 2013, Patriot announced that it
would be building its own cellular network. R. at ¶ 11.
Dominion responded by terminating the lease agreement with Patriot. R. at ¶ 12. As
justification, Dominion claimed that shortly after the lease agreement was signed, an internal
report found that there was a 50% chance of network failure if Dominion did not act to upgrade
its cellular network. R. at ¶ 12. Dominion wanted to delay the upgrade until July 2013 when it
believed it would have greater cash flow and, based on Dominion’s increasing market share, did
not believe that the network could support both parties. R. at ¶ 10. Dominion’s internal report
ended up being incorrect, as the cellular network was able to support both parties through
technical advances and lower-than-anticipated utilization by cellular service subscribers. R. at ¶
13.
Following the termination of the lease agreement, Patriot was unable to make an
agreement to lease cellular capacity from any other competitor in the market. R. at ¶ 12.
Additionally, the banks that had agreed to finance Patriot’s construction of its cellular network
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backed out of the financing agreement. R. at ¶ 12. Without the ability to lease cellular network
capacity, Patriot will be unable to serve its customers and will be forced to exit the market.
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SUMMARY OF ARGUMENT
Dominion used monopoly power in the television and cellular service markets to exclude
Patriot and other low-cost rivals from competing. In both markets, Dominion possessed
sufficient market share to qualify as a monopolist. Additionally, Dominion satisfied the conduct
element of Section 2 of the Sherman Act by offering an anticompetitive bundle and by
unlawfully refusing to deal with Patriot following a pre-existing course of dealing.
1. Dominion’s introduction of a bundled discount following Patriot’s entry into the cellular
services market is anticompetitive and aimed at excluding competition. The standard articulated
by the Third Circuit in LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003), is most appropriate for
analyzing bundled discounts because it provides guidance to firms while protecting consumer
welfare. Even if this Court were to adopt the Ninth Circuit’s approach in Cascade Health
Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2007), this case would qualify as an exception
because the cellular services market does not fall within the scope of the “normal case[s]” that
the discount attribution test was intended to cover. Id. at 901. The high fixed costs in the
cellular service market, relative to variable costs, distinguish the instant case from the healthcare
services market at issue in PeaceHealth.
The behavior by Dominion is exclusionary and aimed at foreclosing the market to Patriot
and other low-cost providers. The discount offered to consumers was substantial and would not
have occurred, but for the perceived threat that Patriot and other low-cost cellular service
providers posed to Dominion. The bundled discount was offered for the purpose of regaining
market share to allow for higher prices by Dominion following Patriot’s exclusion from the
market.
The bundled discount creates an anticompetitive effect on the cellular services market.
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The exclusion of Patriot and other low-cost providers will allow for Dominion to return to its
previous pricing, which was the highest in the market. The benefits that consumers enjoy from
the bundled discount will be short-lived and disappear following the absence of Patriot and other
low-cost cellular service providers from the market. Examining the period before Patriot’s entry
into the market allows one to predict the price that Dominion will charge following Patriot’s
exclusion from the market. Lacking competition from low-cost cellular service providers,
Dominion will return to charging the highest price on the market, harming consumer welfare.
2. The termination of the lease agreement is an anticompetitive refusal to deal in violation
of Section 2. Analyzing the circumstances surrounding the formation and subsequent
termination of the lease agreement suggests questionable behavior by Dominion. Only three
months after entering into a four-year agreement, Dominion terminated a profitable agreement
with Patriot. The compensation offered by Patriot was equal to the amount Dominion received
from consumers purchasing cellular service as part of the bundled discount. Dominion claims
that an internal report suggested that their cellular network was unfit for both parties to share. A
responsible company would not have undertaken a lease agreement while such a study was
underway. Instead, the purpose of Dominion’s refusal to deal is to exclude Patriot from
competing in the cellular services market. Following Patriot’s growth in the market and
announcement that they would construct their own cellular network to cement their place as a
viable competitor, Dominion determined that they had to act to protect their market share. The
goal of terminating the lease agreement is to prevent competition, not to satisfy any valid
business justification. Additionally, the exclusion of Patriot from the cellular services market
has an anticompetitive effect that outweighs any concerns about chilling innovation or forcing
rivals to deal with one another.
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STANDARD OF REVIEW
A grant of summary judgment is subject to de novo review. J.B.D.L. Corp. v. Wyeth-Ayerst
Labs., Inc., 485 F.3d 880, 886 (6th Cir. 2007).
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ARGUMENT
I. Dominion Possessed Monopoly Power in the Television Service and Cellular Service Markets
"A monopolist may not maintain monopoly power by engaging in conduct that unfairly
excludes competitors from the market. The issues before this Court are (1) whether Dominion
Telecommunication, Incorporated’s (“Dominion”) introduction of a bundled discount following
Patriot Wireless Corporation’s (“Patriot”) entry into the market was anticompetitive in violation
of Section 2 of the Sherman Act, and (2) whether Dominion’s termination of a prior course of
dealing with Patriot was an anticompetitive refusal to deal in violation of Section 2 of the
Sherman Act. Section 2 of the Sherman Act states:
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…”
Patriot is a new competitor in the suburban Mason cellular telephone market, having
entered the market in July of 2012. R. at ¶ 4. Dominion has been a major competitor in the
Mason cellular service market since 1993, when it constructed the first cellular network in the
Mason metropolitan area. R. at ¶ 3. Dominion also has had a local monopoly in cable service
since 1984. R. at ¶ 2. In July 2012, Dominion and Patriot entered into a four-year lease
agreement where Patriot was able to lease unused cellular capacity from Dominion. R. at ¶ 4.
Patriot’s unique business approach as a low-cost provider allowed them to provide cellular
services for $75, which was significantly cheaper than Dominion’s $100 service. R. at ¶ 4. In
response to Patriot’s explosive growth in the first six months, Dominion began to offer
customers an anticompetitive bundle with cable and cellular services. R. at ¶ 9. Additionally,
Dominion gave Patriot thirty days notice of termination of the lease agreement based upon an
internal projection regarding network capacity. R. at ¶ 12.
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Dominion’s conduct has violated both elements of a Section 2 offense. The two elements
of a Section 2 offense are “(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 incident.”
U.S. v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
Dominion has monopoly power in the television services market. Monopoly power can
be established from the relative market share a company possesses in a particular market. 3B
Areeda & Hovenkamp, Antitrust Law ¶ 801a, at 383 (2008). Market shares between 50% and
70% can demonstrate monopoly power. Broadway Delivery Corp. v. United Parcel Serv. of Am.,
651 F.2d 122, 129 (2d Cir. 1981), cert. denied, 454 U.S. 968 (1981); see also Hunt-Wesson
Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919 (9th Cir. 1980), cert. denied, 450 U.S. 921 (1981)
(65% market share sufficiently pleads monopoly power). Dominion’s cable service accounts for
60% of the television services market. R. at ¶ 2. Thus, Dominion has sufficient market power to
be deemed a monopolist in the television services market.
Additionally, Dominion has monopoly power in the cellular services market. Courts have
not foreclosed a categorical rule that shares less than 50% preclude finding monopoly power. 3B
Areeda & Hovenkamp, Antitrust Law, ¶ 807d1, at 441-44 (2008). In fact, it has been held that
monopoly power can be found where a party’s market share is less than 50%. Hayden Pub. Co.,
Inc. v. Cox Broad. Corp., 730 F.2d 64 (2d Cir. 1984); see also Domed Stadium Hotel, Inc. v.
Holiday Inns, Inc., 732 F.2d 480, 490 (5th Cir. 1984) (noting that a share of less than the 50%
generally required for actual monopolization may support a claim for attempted monopolization
if other factors are present); In re Nw. Airlines Corp. Antitrust Litig., 197 F. Supp. 2d 908, 919
(E.D. Mich. 2002) (stating that a defendant still might possess monopoly power where its market
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share is below 50%). At the time the complaint was filed, Dominion possessed 46% market
share of the cellular services market.1 R. at ¶ 3, 9. Together, Dominion’s local monopoly in
television services and its established presence in the cellular services market allowed Dominion
to offer a bundled discount at a significantly lower rate than its competitors. As a result,
Dominion exercised its monopoly power to control prices and exclude competitors in the cellular
services market.
Dominion’s conduct was anticompetitive and satisfies the second element of a Section 2
claim. The second element involves the willful acquisition or maintenance of monopoly power as
distinguished from growth or development as a consequence of a superior product, business
acumen, or historic incident. Anticompetitive conduct that violates Section 2 of the Sherman Act
can come in a variety of forms, including bundled discounts, LePage’s Inc. v. 3M, 324 F.3d 141
(3d Cir. 2003), and refusals to deal. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S.
585 (1985).
II. The Bundled Discount Offered by Dominion was Anticompetitive
a. The LePage’s standard offers guidance to firms while protecting consumer welfare.
" The LePage’s standard is most consistent with the principles of antitrust law. In
LePage’s, the Third Circuit applied the rule of reason to find large rebates by the Defendant
anticompetitive. 324 F.3d at 157. Despite the benefits to consumer welfare in the short-term, the
Third Circuit held that the long-term effects would be detrimental to consumers and competition.
Id. The court’s standard for analyzing the bundle was based on their assertion that “[t]he
principal anticompetitive effect of bundled rebates as offered by 3M is that when offered by a
""""""""""""""""""""""""""""""""""""""""""""""""""""""""1"This calculation is based upon Dominion’s 40% market share at the beginning of December 2012, plus the increase in market share of 5% in December 2012 and 1% in January 2013. R. at ¶ 3, 9. The Complaint was filed on February on February 22, 2013.
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monopolist they may foreclose portions of the market to a potential competitor who does not
manufacture an equally diverse group of products and who therefore cannot make a comparable
offer.” Id. at 155. The court reasoned that “[i]f 3M were successful in eliminating competition
from LePage’s . . . 3M could exercise its monopoly power unchallenged.” Id. at 160. Thus, the
Third Circuit’s approach looked to both the short-term and long-term consequences of the bundle
to determine the competitive effects.
The PeaceHealth approach incorrectly equates predatory pricing with bundled discounts.
The Ninth Circuit correctly stated that “[a] competitor who produces fewer products than the
defendant but produces the competitive product at or below the defendant’s cost to produce that
product may nevertheless be excluded from the market because the competitor cannot match the
discount the defendant offers over its numerous product lines.” PeaceHealth, 515 F.3d 883, 904
(9th Cir. 2007). However, the court adopted the discount attribution test, which implements a
similar analysis as that required for predatory pricing. Id. The two instances are distinct,
however, as “a single-product rival could compete with an aggregated multiproduct discount by
the monopolist only by offering a significantly larger discount on its own single product. It
would have to match not only the rival’s price on the single product, but also compensate the
buyer for loss of discounts on the other bundled products that the rival did not sell.” 3A Areeda
& Hovenkamp, Antitrust Law, ¶ 749d, at 318 (2008). Bundled discounts allow the Defendant to
spread costs over products not offered by competitors, thus increasing the risk of anticompetitive
exclusionary conduct. The Ninth Circuit’s approach is flawed because it incorrectly treats
bundled discounts and predatory pricing claims as similar.
Additionally, the Ninth Circuit’s approach is a bright-line rule that is too inflexible to
work in all circumstances. The PeaceHealth standard requires courts to look no further than the
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Defendant’s incremental costs of production and the price at which the good or service is
offered. PeaceHealth, 515 F.3d at 910. It is unwise to think that this approach will encompass
all of the bundled discounts that could conceivably be challenged. Professors Areeda and
Hovenkamp would not adopt such a rigid approach either, instead stating that “[a] requirement
that the bundling practice be sufficiently severe so as to exclude an equally efficient single-
product rival, and without an adequate business justification, seems to strike about the right
balance between permitting aggressive pricing while prohibiting conduct that can only be
characterized as anticompetitive.” 3A Areeda & Hovenkamp, Antitrust Law, ¶ 749d1, at 323
(2008). Therefore, the proper analysis is to examine the entirety of the circumstances
surrounding a bundled discount, rather than merely focusing on the Defendant’s cost and pricing.
Even under the PeaceHealth approach, there are exceptions for markets that have high
fixed costs relative to variable costs. The Ninth Circuit recognized they were not requiring “that
in every case in which a plaintiff challenges low prices as exclusionary conduct the plaintiff must
prove that those prices were below cost.” PeaceHealth, 515 F.3d at 901. Instead, the Ninth
Circuit held that the discount attribution test would be applied only “in the normal case.” Id. at
901. Markets that have high fixed costs which “dwarf variable costs” would not have the
discount attribution test applied. Meijer, Inc. v. Abbott Labs., 544 F. Supp. 2d 995, 1004 (N.D.
Cal. 2008). In Abbott, the court held that the discount attribution test would not be appropriate in
the pharmaceutical market. Id. Applying the PeaceHealth standard in that context would “not
achieve its stated goal of prohibiting pricing that results in the exclusion of equally efficient
competitors.” Id. at 1004. Therefore, the Ninth Circuit did not intend for the discount attribution
test to be applied to all markets.
The market for cellular service in Mason differs significantly from the market at issue in
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PeaceHealth. Dominion’s fixed costs of providing cellular service are $72.38 million per month,
while Dominion’s variable costs are $3 per customer, or only $2.4 million for December 2012.2
The ratio of fixed to variable costs is over thirty, making it inappropriate to apply the discount
attribution test adopted in PeaceHealth to this case. In contrast, the parties in PeaceHealth were
competing in a health services market where fixed costs were not substantially greater than
variable costs. PeaceHealth, 515 F.3d at 883. Examining only Dominion’s incremental cost of
providing cellular service is an inaccurate measure in this market, given the substantial fixed
costs. Given the circumstances in the cellular services market, this case falls within the
exception contemplated by the Ninth Circuit in PeaceHealth.
Further, the LePage’s standard offers firms guidance for how to price bundles without
negatively affecting consumer welfare. The factors present in LePage’s are clear for
interpretation. A monopolist may not offer a bundle that is aimed at excluding a competitor and
which makes it impossible for an equally efficient rival to compete. LePage’s, 324 F.3d at 162
(“The effect of 3M’s conduct in strengthening its monopoly position by destroying competition .
. . is most apparent when 3M’s various activities are considered as a whole.”). This standard will
only be met in the most extreme of circumstances and will preserve the countless bundles that
are present in everyday life. See 3A Areeda & Hovenkamp, Antitrust Law, ¶ 749a, at 307
(2008). The Ninth Circuit overreached in PeaceHealth and attempted to give firms guidance
while sacrificing consumer welfare. 515 F.3d at 907 (“The discount attribution standard
provides clear guidance for sellers that engage in bundled discounting practices.”). The
LePage’s standard satisfies both of these goals by giving firms guidance about the lawfulness of
bundles while protecting consumer welfare.
""""""""""""""""""""""""""""""""""""""""""""""""""""""""2 At the beginning of December 2012, Dominion provided service to 40% of the 2 million cellular subscribers in Mason for a total of 800,000 customers. R. at ¶ 3.
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b. The bundle offered by Dominion aims to exclude competition from the cellular service market. A bundle that provides significant discounts to consumers can be deemed exclusionary.
In LePage’s, the Third Circuit determined that the size of the rebates offered to customers
“created a substantial incentive for each customer” to purchase from the Defendant rather than
the Plaintiff. 324 F.3d at 154. In particular, the Court was persuaded by the fact that “[i]n some
cases, these magnified rebates to a particular customer were as much as half of LePage’s entire
prior tape sales to that customer.” Id. at 157. The discounts were “substantial” according to the
Court and could be reasonably interpreted as a monopolist attempting to exclude competition.
Id. at 154, 157. Thus, the size of the discount is an important factor in determining the
exclusionary intent of a monopolist, because it can create strong incentives for consumers to
forego dealing with a competitor.
The bundle offered by Dominion provides an unprecedented discount to consumers based
on the period prior to Patriot’s entry into the market. Dominion’s bundle offers consumers a $95
discount on cellular service and cable television based on the individual prices of those services.
R. at ¶ 2, 3. The discount consumers receive from purchasing the bundle is greater than the price
Patriot charges for cellular service. R. at ¶ 4. Additionally, as in LePage’s, the timing of the
bundle is suspicious. 324 F.3d at 160. It is unlikely that the bundle would have been introduced
without Patriot’s entry into the market, and it is unlikely that the bundle will continue to exist if
Patriot is excluded from the market. Dominion introduced the bundle to regain market share and
eliminate competition from low-cost cellular providers.
c. The bundle offered by Dominion creates an anticompetitive effect in the cellular service market.
"" A bundled discount that forecloses competition has an anticompetitive effect on the
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market. In LePage’s, the Third Circuit identified the anticompetitive effect of 3M’s rebates by
stating that “[i]t was only after LePage’s entry into the market that 3M introduced the bundled
rebate programs. If 3M were successful in eliminating competition from LePage’s . . . 3M could
exercise its monopoly power unchallenged.” Id. at 160. Thus, the court determined that the
benefits to consumer welfare in the short-term from the rebate program were outweighed by the
anticompetitive effect of having a monopolist. Following the short-term discounts, prices would
rise to uncompetitive levels after the absence of a competitor in the market.
If competitors are unable to offer a comparable package, then a bundle may coerce
consumers into purchasing from the Defendant. “[P]ackage discounting can also coerce buyers .
. . when no rival can readily assemble a comparable package. In this case a package that is
nominally ‘above cost’ can coerce when the only way the rival can match the discount is to give
an even larger per-item discount.” 3A Areeda & Hovenkamp, Antitrust Law, ¶ 749d3, at 327
(2008). Because a competitor cannot offer consumers the same bundle, they are forced to
increase the discount on their product. Thus, a bundle that cannot be matched by a competitor
has the ability to be anticompetitive by its very nature. It may be impossible for any competitor,
even one that is equally or more efficient, to offer consumers the same discount.
No competitor in the cellular service market can offer a bundle comparable to Dominion.
Dominion’s monopoly in cable service forecloses the ability of any rival to offer a similar
package to consumers. Low-cost providers like Patriot are only able to offer cellular service to
consumers, and do so at a price lower than Dominion. Patriot is unable to spread costs over
multiple product lines and therefore cannot match the steep discount that Dominion currently
offers consumers. The business model of Patriot and other low-cost providers is severely
threatened by the existence of Dominion’s bundle.
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The Court need only examine the market prior to Patriot’s entry to find the
anticompetitive effect that will occur in the cellular service market. Before Patriot began offering
consumers cellular service for $75, consumers purchasing from Dominion were paying $100 for
cellular services. R. at ¶ 3. Consumers responded quickly to Patriot’s entry into the market as
five percent of the market shifted to Patriot, with three percent switching from Dominion. R. at ¶
5. The coercive effect of the bundle has terminated Patriot’s growth and threatens to foreclose
them from the cellular service market. R. at ¶ 13. If the bundle is successful in driving Patriot
and other low-cost providers from the market, consumers will then be forced to pay $100 for
cellular service. Once a monopoly in the market is established again, prices will rise to levels
consistent to the period prior to Patriot’s presence in the market. The bundle is a temporary
measure offered by Dominion aimed at helping it monopolize the cellular services market.
III. Dominion’s refusal to deal was anticompetitive.
Dominion’s unlawful refusal to deal with Patriot violates Section 2 of the Sherman Act.
As a general rule, firms, even those with monopoly power, have a right to deal, or refuse to deal,
with whomever they choose without violating the antitrust laws. United States v. Colgate & Co.,
250 U.S. 300, 307 (1919); see also Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438,
444 (2009); Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 410
(2004) (a business, even a monopolist, has “no antitrust duty to deal with its rivals at all”).
However, the right to refuse to deal is not unqualified. See Trinko, 540 U.S. at 408 (quoting
Aspen, 472 U.S. at 601). “Under certain circumstances, a refusal to cooperate with rivals can
constitute anticompetitive conduct and violate [Section] 2.” Trinko, 540 U.S. at 408 (quoting
Aspen, 472 U.S. at 601. The Supreme Court has “been very cautious in recognizing such
exceptions,” but it has done so, most significantly in Aspen. Trinko, 540 U.S. at 408.
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Dominion’s refusal to continue dealing with Patriot falls within the Aspen exception.
Similar to the anticompetitive conduct of Ski Co. in the Aspen case, Dominion was willing to
forgo short-term profits because “it was more interested in reducing competition . . . over the
long run by harming its smaller competitor.” 472 U.S. at 608. Dominion terminated a profitable
lease agreement they had just begun without citing any valid business justification.
a. Courts should look to the totality of the circumstances when determining the lawfulness of a refusal to deal.
Aspen is the “leading case for [Section] 2 liability based on refusal to cooperate with a
rival.” Trinko, 540 U.S. at 408. In Aspen, the defendant-monopolist Ski Co. owned three of four
mountains in a ski area, and after selling joint ski lift tickets with its rival for several years, Ski
Co. cancelled the arrangement and refused to further sell ski lift tickets to its rival, even at full
retail price. 472 U.S. at 592–94. The Court found Ski Co.’s refusal to deal with its rival was
motivated entirely by a decision to avoid providing any benefit to its rival. Id. Additionally, Ski
Co. would have incurred no additional cost, it would have been provided with immediate
benefits, and the arrangement would have satisfied potential customers. Id. at 610. Together,
these factors supported the inference that Ski Co. was driven by the desire to establish and
exploit its monopoly power on the market because it was willing to sacrifice short-term profits
and consumer goodwill in exchange for a perceived long-run impact on its smaller rival. Id. at
610-11.
Courts should analyze all relevant facts and circumstances in determining whether to
force dealing between competitors. The Court in Aspen looked at the behavior of the monopolist
and rival, as well as circumstances surrounding their past dealing and the effects of the
arrangement on consumers. See id. at 604 (“It is, accordingly, appropriate to examine the effect
of the challenged pattern of conduct on consumers, on Ski Co.’s smaller rival, and on Ski Co.
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itself.”). The complex and sensitive nature of dealing between competitors, and their
implications to consumers require a fact intensive inquiry in order to protect consumers and
prevent anticompetitive effects. Thus, because the instant case, just like Aspen, involves a
monopolist dealing with a rival, this Court must examine the totality of the circumstances in
determining the legality of Dominion’s refusal to deal.
b. Dominion terminated a prior profitable course of dealing and sacrificed profits for the purpose of excluding a competitor.
"Dominion unilaterally terminated a profitable arrangement with Patriot and sacrificed this
efficient arrangement for the purpose of excluding Patriot from the cellular services market. In
Trinko, the Supreme Court found that when a single firm with market power unilaterally ceases
participation in a cooperative venture, “[t]he unilateral termination of a voluntary (and thus
presumably profitable) course of dealing suggest[s] a willingness to forsake short-term profits to
achieve an anticompetitive end.” 540 U.S. at 409 (citing Aspen, at 608, 610-611) (analyzing
Section 2 liability under Aspen). The arrangement between Patriot and Dominion provided that
Patriot would pay Dominion $5 per household per month to lease network capacity. R. at ¶ 8.
With the introduction of the bundled discount, Dominion’s customers would also pay $5 for their
cellular service. R. at ¶ 9. The average variable cost to Dominion of the network capacity is $3
per household per month. R. at ¶ 7. Thus, the margin on Dominion’s network capacity leased to
Patriot is equal to the margin on the network capacity used by Dominion customers. In Aspen,
the competitor was willing to pay the full face value of a ski ticket in order to continue selling
tickets for access to the monopolist’s mountains as well as its own. 472 U.S. at 594. Here,
Dominion terminated an arrangement in which Patriot offered the same $5 amount that
customers paid in the retail capacity. R. at ¶ 8. Additionally, Dominion will incur further costs
in marketing and selling its capacity to other retail consumers. Leasing to Patriot requires no
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additional cost and bears no risk, as the terms of the lease are already established and the
arrangement is ongoing. Most importantly, per Dominion’s internal report, there is a 50%
chance of network failure with the current Patriot arrangement; however, the same 50%
probability of market failure applies if Dominion achieves its goal of attaining more market
share. R. at ¶ 10. Dominion’s actions indicate a goal of achieving more market share. While
there is nothing facially inappropriate or anticompetitive with this goal, if Dominion
accomplishes this feat, the same 50% probability of network failure will apply. See R. at ¶ 10.
Thus, if Dominion is successful in garnering more control of the market, and reaches 50%
market share, then the same network capacity issues will exist in the same manner as currently
projected as a result of the current arrangement with Patriot.
c. Dominion lacked a valid business justification for terminating the course of dealing.
Dominion failed to provide a valid business justification for terminating its agreement
with Patriot. Dominion produced an internal report predicting a 50% chance of system failure
given the continued support of Patriot’s network. R. at ¶ 10. Accepting this report as a
legitimate business reason for discontinuing the arrangement with its rival fails to consider
Dominion’s goals and its own market projections. As of December 2012, Patriot controlled 5%
of the market share. R. at ¶ 5. Consequently, if Dominion ceases its agreement with Patriot and
Patriot is unable to find another provider of network capacity, 5% of the market will be forced to
look for a new provider. Three percent of Patriot’s market share was previously under
Dominion’s domain. R. at ¶ 5. Thus, in reality, assuming those customers will return to
Dominion, by excluding Patriot, Dominion presumably will add approximately 3% from Patriot
to its previously supported share of the market. Furthermore, Dominion’s goal was to gain more
market share, and it hoped to gain more by utilizing its bundled pricing scheme. Assuming
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Dominion would regain the 3% of the market it controlled prior to Patriot’s rise, Dominion
would return to the allegedly critical situation it was in while supporting Patriot’s system and
would likely need to move the timeline for system upgrades forward even in the absence of
Patriot’s presence on the market. Accordingly, it appears Dominion’s system upgrades were
inevitable, and the timeline of those upgrades would not necessarily be forced forward if this
Court were to find an improper and anticompetitive refusal to deal in the instant case.
Dominion terminated an existing profitable arrangement with a rival to pursue a path of
business that required greater costs and uncertainty. Dominion’s conduct of sacrificing profits in
favor of excluding a competitor is similar to the conduct of the monopolists found in violation of
Section 2 in Aspen and Lorain Journal Co. v. United States, 342 U.S. 143 (1951). Dominion also
failed to demonstrate any procompetitive effects relating to its actions that would outweigh the
anticompetitive effects harming consumer welfare. Forced dealing in this case preserves the
competitive market and protects consumer welfare, especially for those consumers who prefer
low-cost providers, such as Patriot. Furthermore, forced leasing of the network capacity to
Patriot does not present an undue burden for Dominion should it require a network upgrade. If
Dominion is successful in attaining greater market share, then an upgrade to its cellular network
is inevitable. Additionally, Dominion already possesses the resources to allow it to upgrade its
network.
The timing of Dominion’s refusal to deal with Patriot is problematic for its defense. In
Aspen, the Court was persuaded in part because of the several years of dealing between the
parties prior to the termination of their agreement. 472 U.S. at 608–11. The history of the course
of dealing was a factor in finding that the refusal to deal was unlawful. Id. Here, Dominion
terminated a lease agreement only several months after its formation. R. at 5. It seems unlikely
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that a business would finalize a four-year agreement prior to determining the soundness of the
leased product. In this case, Dominion did just that. Only three months after entering into the
lease agreement, Dominion claims that an internal report showed that the network would be
unable to support both parties. R. at ¶ 12. This justification suggests either reckless corporate
governance or dishonesty on the part of Dominion. This Court is not being asked to intervene in
the normal business affairs of Dominion by granting Patriot the opportunity to continue leasing
cellular network capacity. Instead this Court must only determine that the timing of this course
of dealing is highly suspicious, given that the internal report from Dominion occurred shortly
after a major lease agreement with Patriot and coincided with Patriot’s rapid growth in the
market.
d. Dominion intended to exclude Patriot from the cellular services market.
By unilaterally terminating the lease agreement, Dominion improperly excluded Patriot
from the cellular services market. “Improper exclusion is always deliberately intended.” Aspen,
472 U.S. at 602–03 (citing R. Bork, The Antitrust Paradox 160 (1978) (noting improper
exclusion does not include exclusion resulting from a superior efficiency)). A monopolist who
has done business with a competitor must possess a legitimate business reason for discontinuing
that business relationship to avoid a violation under Section 2 of the Sherman Act. Aspen, 472
U.S. at 608–11. A legitimate business justification demonstrates a lack of intent to exclude a
competitor. In the instant case, Dominion fails to provide a legitimate business justification for
its conduct. Dominion presents the projected 50% chance of significant, regular outages as
evidence of the need to terminate the leasing agreement with Patriot. R. at ¶ 10. Notably, this
report projected the outages would occur over six months in the future. R. at ¶ 10. Moreover, an
upgrade to avoid the projected outages could be completed within three months and Dominion
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had the required $2 million available to complete the improvement. R. at ¶ 10. Thus, the
upgrade was feasible and seemingly inevitable if Dominion believed the projections it presented
as justification for its inability to continue to service Patriot. Finally, after the complaint was
filed, Dominion’s market share grew 7%, yet Dominion’s network was able to continue
supporting Patriot’s customers without incident, R. at ¶ 13, further bolstering the argument that
Dominion did not present a valid business justification for refusing to deal with its competitor.
In the absence of a legitimate business reason for terminating the agreement with Patriot,
Dominion has improperly excluded Patriot, and therefore the Court should find this exclusion
was effected with deliberate intent.
The instant case is similar to Aspen in that the monopolist appears to have actively made
decisions which were meant to exclude a competitor from the market. Moreover, this decision to
exclude a competitor from the market came at the cost of foregoing an efficient, profitable
arrangement. In Aspen, the monopolist did not merely reject an offer to participate in a
cooperative venture with a competitor, but instead elected to change its distribution pattern from
the pattern which had existed in a competitive market for years. 472 U.S. at 603. In the instant
case, Dominion bases its decision to refuse to continue to deal with Patriot on a report that
simply states a chance of network failure. R. at ¶ 10, 12. That failure could be easily avoided by
implementing planned upgrades using resources readily available to Dominion at the time. R. at
¶ 10. Moreover, similar to the willful election by the monopolist in Aspen to alter the
distribution pattern and exploit its monopoly, Dominion chose to terminate its agreement with
Patriot at the very time when Patriot was presenting a challenge to Dominion’s monopoly by
gaining some of Dominion’s market share. R. at ¶ 5. Notably, Dominion notified Patriot of its
intent to terminate shortly after Patriot announced its intention to build its own network. R. at ¶
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12. The timing of this termination is suspect given it occurred just six months after the rivals
established their leasing relationship. R. at ¶ 12. This timing supports the inference that
Dominion was attempting to exclude its rival from the market. As the lower court noted, these
factors combine to present evidence of intent to exclude Patriot from the market. R. at ¶ 20.
Further, Dominion understood that by terminating its agreement with Patriot at this time, it could
cause Patriot to fail as a company due to its lack of network capacity. In the absence of
continued cooperation from Dominion, Patriot could not obtain network capacity to service its
customers, and would therefore be unable to satisfy obligations to banks necessary to the
financing of the building of Patriot’s own network. R. at ¶ 11. Thus, Patriot would likely cease
to exist in the market if Dominion is not forced to deal with Patriot.
e. The exclusion of Patriot and other low-cost providers from the cellular service market has anticompetitive effects.
"The antitrust courts must distinguish exclusionary acts, which reduce social welfare, and
competitive acts, which the antitrust laws encourage. United States v. Microsoft, 253 F.3d 34, 58
(D.C. Cir. 2001). In determining whether a monopolist’s act is exclusionary, this Court must
look to whether the monopolist’s act has an anticompetitive effect. Id. The plaintiff has the
initial burden of demonstrating harm to the competitive process. Id. at 58–59 (noting harm to a
competitor will not suffice); see also Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp.,
509 U.S. 209, 225-26 (1993). Once the plaintiff demonstrates an anticompetitive effect, the
burden then shifts to the monopolist defendant to present a procompetitive justification for the
act. Microsoft, 253 F.3d at 59; see also Eastman Kodak Co. v. Image Technical Services, Inc.,
504 U.S. 451, 483 (1992). Upon successful demonstration of procompetitive effects, the court
must then balance whether the anticompetitive harm outweighs the procompetitive benefits of
the monopolist’s acts. See Microsoft, 253 F.3d at 59. Courts generally apply the rule of reason
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in balancing the benefits and harms to competition of a monopolist’s act. Id. at 59; see also
Standard Oil Co. v. United States, 221 U.S. 1, 31 (1911). This balancing test focuses on the
conduct of the monopolist, rather than the intent of the monopolist. See Microsoft, 253 F.3d at
59. However, this Court may examine evidence of intent to understand better the likely effect of
the conduct. See id. (citing Aspen, 472 U.S. at 603; Chi. Bd. of Trade v. United States, 246 U.S.
231, 238 (1918)).
Courts should force monopolists to deal when refusals to do so are anticompetitive. “The
high value [the Court has] placed on the right to refuse to deal with other firms does not mean
that the right is unqualified." Aspen, 372 U.S. at 601. For example, the Supreme Court has held
that a monopolist may not refuse to sell advertising to persons that patronize a competitor.
Lorain Journal, 342 U.S. at 152. In Lorain Journal, the monopolist, a journal company that was
the only local business disseminating news and advertising material in the town, refused to sell
advertising to persons that patronized a radio station in a nearby town. Id. at 148. The journal
company sought to maintain its monopoly position in the market of news dissemination by
excluding from advertising those who supported the competitor. Id. at 149. The Court held this
refusal to deal was anticompetitive and therefore unlawful. Id. Thus, while the fact pattern in
Lorain Journal involved the refusal to deal with patrons of a competitor rather than the refusal to
deal with a competitor, it demonstrates the willingness of courts to rule for plaintiffs to curtail
anticompetitive effects resulting from refusals to deal that lack a valid business purpose or
procompetitive balancing effect.
Dominion willfully excluded its rival from competing in the market. Patriot had no
reasonable alternative to support its network, as the other two players in the market refused to
lease any capacity to Patriot. R. at ¶ 12. Additionally, Patriot lacked the resources to complete
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the development of its own network in time to remain competitive in the market. R. at ¶ 12.
Furthermore, because Patriot could not continue to earn positive cash flows without the use of
Dominion’s network capacity, Patriot was unable to support its commitment of $5 million to the
banks responsible for funding the development of Patriot’s new network. R. at ¶ 12. Therefore,
because Patriot was unable to obtain network capacity from other competitors or build its own
network in the necessary time frame, it could not compete effectively in the market without
Dominion’s network capacity. As a result, Dominion was able to exclude Patriot from the
market by refusing to deal.
Patriot is essential to the maintenance of a competitive marketplace in Mason and the
company’s exclusion has a negative effect on consumers. By January 2013, Patriot had obtained
5% of the suburban Mason market share. R. at ¶ 5. Further, Dominion’s actions taken with the
motivation to exclude Patriot from the market and regain some of the market share lost to Patriot
are evidence of the important role of Patriot as a player in the cellular services market.. Because
Dominion’s network capacity is essential to Patriot’s competitive vitality, and Patriot is essential
to maintaining a competitive marketplace in suburban Mason, the ongoing provision of network
capacity to Patriot by Dominion is imperative to avoid anticompetitive effects and promote
consumer welfare. Thus, Dominion should not be permitted to refuse to provide the network
capacity to Patriot, particularly given the economics of the existing arrangement, which
demonstrate the feasibility and procompetitive benefits of such collusion in the market.
Moreover, the preexisting agreement establishes precedent for a baseline of terms presumably
favorable to the monopolist and limits any issues related to terms
of the forced dealing.
Requiring Dominion to provide Patriot with network capacity pursuant to their agreement
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improves the market for consumers and will not chill innovation. Dominion is incentivized to
innovate further and the network capacity is not at risk of providing Patriot with a windfall of
benefits. In other words, any concerns regarding a diminished incentive for the monopolist to
innovate given any innovation’s predicted benefit to the competitor is inapplicable because of the
nature of the leased network capacity. In this case, the network capacity is the equivalent of
warehouse space for storage of perfectly durable goods, such as bricks. Assuming away factors
such as location, all warehouse space is equal, and innovations to improve the warehouse space
(e.g., air-conditioning) do not materially improve the storage of the perfectly durable goods.
Similarly, any enhancement of Dominion’s network capacity will not materially benefit Patriot,
as Patriot simply needs the space. Further, concerns such as the pricing and terms of the forced
sharing of resources do not create an issue given that Dominion previously contracted to provide
Patriot with such services. Therefore, the procompetitive effects of requiring Dominion to
provide Patriot with network capacity outweigh the minimal concerns of disincentivizing
innovation, as such concerns are inapplicable to these facts.
This case clearly falls within the framework of the exception established in Aspen. Only a
few months after entering into a profitable lease agreement with Patriot, Dominion terminated
the deal based on Patriot’s growth in the cellular service market. R. at ¶ 12. None of
Dominion’s business justifications fit with their actions to expand market share and potentially
threaten the viability of their cellular network. Additionally, the timing of the report is suspect
and falls outside of usual business practices. If Patriot and other low-cost cellular service
providers are excluded from competing in the market, consumers can expect fewer choices and
higher prices.
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CONCLUSION
For the foregoing reasons Plaintiff-Appellee Patriot Wireless Corporation requests that
this Court affirm the District Court’s December 16, 2013 judgment.
Dated: January 20, 2015
By Team B
Attorneys for Plaintiff-Appellee Patriot Wireless Corporation