United States Court of Appeals for the

Thirteenth Circuit

_____________

Case No. 14-1654 _____________

PATRIOT WIRELESS CORPORATION,

Plaintiff-Appellee, v.

DOMINION TELECOMMUNICATIONS, INCORPORATED,

Defendant-Appellant.

_________________

On Appeal from an Order Entered in the United States District Court for the District of Madison No. 13-1684

OPENING BRIEF ON BEHALF OF APPELLANT DOMINION TELECOMMUNICATIONS, INC.

Team F Attorneys for Appellant Dominion Telecommunications, Inc.

i

CORPORATE DISCLOSURE STATEMENT

Pursuant to Federal Rule of Appellate Procedure 26.1, the undersigned counsel certifies

that Defendant–Appellant Dominion Telecommunications, Inc. has no parent corporation, and no

publicly traded corporation owns 10% or more of its stock.

____________________ Team F

Attorneys for Dominion Telecommunications, Inc.

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TABLE OF CONTENTS

STATEMENT OF JURISDICTION .............................................................................................. 1 STATEMENT OF ISSUES ............................................................................................................ 2 STATEMENT OF THE CASE....................................................................................................... 3 STATEMENT OF FACTS ............................................................................................................. 3 SUMMARY OF ARGUMENT ...................................................................................................... 5 STANDARD OF REVIEW ............................................................................................................ 7 ARGUMENT .................................................................................................................................. 7

I. DOMINION LACKS THE MONOPOLY POWER REQUIRED FOR A § 2 VIOLATION ... 8

A. The District Court Erred by Making No Finding of Monopoly Power ................................. 8 B. Refusal to Deal: Dominion’s Market Share Is Too Small and the Cellular Market Is Too Competitive to Infer Monopoly Power ....................................................................................... 9 C. Bundled Discount: Dominion’s Market Share Is Too Small and the Cable Market Is Too Competitive to Infer Monopoly Power ..................................................................................... 11

II. DOMINION’S BUNDLED DISCOUNT IS NOT ANTICOMPETITIVE ............................. 12

A. Dominion’s Bundled Discount Is Procompetitive Because It Prices Cellular Services Above Dominion’s Average Variable Costs ............................................................................. 14

1. The Discount Attribution Standard Identifies Anticompetitive Bundled Discounts........ 16 2. Supreme Court Precedent Supports an Above-Cost Safe Harbor for Bundled Discounts 18 3. Antitrust Policy Supports an Above-Cost Safe Harbor for Bundled Discounts .............. 19 4. Under the Discount Attribution Standard, Dominion’s Bundled Discount Is Not Anticompetitive..................................................................................................................... 22

B. Even Under the LePage’s Standard, Dominion’s Discount is Not Anticompetitive........... 24

III. DOMINION’S DECISION TO TERMINATE THE LEASE AGREEMENT WAS NOT ANTICOMPETITIVE .................................................................................................................. 26

A. The Record Demonstrates Dominion’s Valid Business Justification ................................. 27 B. Dominion’s Decision to Terminate the Contract Was Profitable in the Short Term .......... 30 C. Patriot Was on Notice that Its Dealings with Dominion Were Subject to Change ............. 31 D. Prudence Dictates that this Court Not Expand the Aspen Skiing Exception ........................ 32

CONCLUSION ............................................................................................................................. 34

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TABLE OF AUTHORITIES Cases

Advo, Inc. v. Phila. Newspapers, Inc., 51 F.3d 1191 (3d Cir. 1995).............................................................................................. 23 Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., 4 F. Supp. 3d 1123 (D. Ariz. 2014) .................................................................................. 17 Am. Tobacco Co. v. United States, 328 U.S. 781 (1946) .................................................................................................... 10, 11 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ............................................................................................................ 7 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) .............................................................................................. 27, 31, 32 Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007)................................................................................................ 9 Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) ........................................................................................ 13, 18, 19, 20 Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2007) ..................................................................................... passim Christy Sports, LLC v. Deer Valley Resort Co., 555 F.3d 1188 (10th Cir. 2009) .................................................................................. 26, 33 Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) ........................................................................................................ 8 Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir. 2000) .......................................................................................... 10 D.E. Rogers Assocs. v. Gardner-Denver Co., 718 F.2d 1431 (6th Cir. 1983) .......................................................................................... 23 Del. Valley Surgical Supply Inc. v. Johnson & Johnson, 523 F.3d 1116 (9th Cir. 2008) ............................................................................................ 7 Dimmitt Agri Indus., Inc. v. CPC Int’l Inc., 679 F.2d 516 (5th Cir. 1982) .............................................................................................. 9

iv

Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992) .......................................................................................................... 10 Fla. Fuels, Inc. v. Belcher Oil Co., 717 F. Supp. 1528 (S.D. Fla. 1989) .................................................................................. 28 Gamco, Inc. v. Providence Fruit & Produce Bldg., 194 F.2d 484 (1st Cir. 1952) ............................................................................................. 28 In re Adderall XR Antitrust Litig., 754 F.3d 128 (2d Cir. 2014).............................................................................................. 27 Int’l Boxing Club of N.Y. v. United States, 358 U.S. 242 (1959) .......................................................................................................... 10 Irvin Indus. v. Goodyear Aerospace Corp., 974 F.2d 241 (2d Cir. 1992).............................................................................................. 23 J.B.D.L. Corp. v. Wyeth-Ayerst Labs., Inc., No. 1:01-CV-704, 2005 WL 1396940 (S.D. Ohio June 13, 2005) ................................... 21 Jefferson Parish Hosp. Dist. No. 2. v. Hyde, 466 U.S. 2 (1984) .............................................................................................................. 13 Kolon Indus. Inc. v. E.I. DuPont de Nemours & Co., 748 F.3d 160 (4th Cir. 2014) ............................................................................................ 10 Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 762 F.3d 1114 (10th Cir. 2014) ........................................................................................ 11 LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003)....................................................................................... passim McGahee v. N. Propane Gas Co., 858 F.2d 1487 (11th Cir. 1988) ........................................................................................ 23 Morgan v. Ponder, 892 F.2d 1355 (8th Cir. 1999) .......................................................................................... 23 Ne. Tel. Co. v. Am. Tel. & Tel. Co., 651 F.2d 76 (2d Cir. 1981)................................................................................................ 24 Novell, Inc. v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013) ........................................................................ 9, 27, 30, 33

v

Oahu Gas Serv., Inc. v. Pac. Res., Inc., 838 F.2d 360 (9th Cir. 1988) ........................................................................................ 7, 29 Ortho Diagnostic Sys., Inc. v. Abbott Labs., Inc., 920 F. Supp. 455 (S.D.N.Y. 1996) ................................................................................... 15 Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) .......................................................................................................... 10 Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438 (2009) .......................................................................................................... 29 Peoria Day Surgery Ctr. v. OSF Healthcare Sys., No. 06-1236, 2009 WL 5217344 (C.D. Ill. Dec. 30, 2009) .............................................. 17 Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421 (9th Cir. 1995) ............................................................................................ 10 Ryfko Mfg. Co. v. Eden Servs., 823 F.2d 1215 (8th Cir. 1987) .................................................................................... 10, 11 Se. Mo. Hosp. v. C.R. Bard, Inc., 642 F.3d 608 (8th Cir. 2011) .............................................................................................. 8 Sheridan v. Marathon Petroleum Co., 530 F.3d 590 (7th Cir. 2008) .............................................................................................. 8 Stearns Airport Equip. Co. v. FMC Corp., 170 F.3d 518 (5th Cir. 1999) ............................................................................................ 23 Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57 (1st Cir. 2004) ............................................................................................... 25 Theme Promotions, Inc. v. News Am. Mktg. Fsi, 539 F.3d 1046 (9th Cir. 2008) .......................................................................................... 25 Tri-State Rubbish v. Waste Mgmt., Inc., 998 F.2d 1073 (1st Cir. 1993) ........................................................................................... 23 United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945).............................................................................................. 12 United States v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003) ........................................................................................ 23

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United States v. Grinnell Corp., 384 U.S. 563 (1966) ...................................................................................................... 9, 10 Valassis Commc’ns, Inc. v. News Am. Inc., No. 2:06-cv-10240, 2011 WL 2420048 (E.D. Mich. Jan. 24, 2011) ................................ 17 Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) ........................................................................................ 13, 20, 26, 33 Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312 (2007) .................................................................................................... 18, 19 William Inglis & Sons Baking Co. v. ITT Cont’l Baking Co., 668 F.2d 1014 (9th Cir. 1981) .......................................................................................... 23 Wojcik v. City of Romulus, 257 F.3d 600 (6th Cir. 2001) .............................................................................................. 7 ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012)........................................................................................ 19, 25

Statutes

15 U.S.C. § 2 ............................................................................................................................. 1, 17

15 U.S.C. § 15 ................................................................................................................................ 1

15 U.S.C. § 26 ................................................................................................................................. 1

28 U.S.C. § 1291 ............................................................................................................................. 1

28 U.S.C. § 1331 ............................................................................................................................. 1

28 U.S.C. § 1337(a) ........................................................................................................................ 1

Treatises

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law (3d ed. 2008) .................................................................................. 13, 16, 17

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Other Authorities

Antitrust Modernization Comm’n, Report and Recommendation (Apr. 2, 2007) .................. 20, 21 Brief for the United States as Amicus Curiae, 3M v. LePage’s Inc., 524 U.S. 953 (2004) (No. 02-1865), 2004 WL 1205191 ............... 21 Hannibal Travis, Wi-Fi Everywhere: Universal Broadband Access As Antitrust and Telecommunications Policy, 55 Am. U. L. Rev. 1697 (2006) ........................................................................................ 12 Phillip Areeda & Donald F. Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 99 Harv. L. Rev. 697 (1975) ............................................................................................. 23 Thomas A. Lambert, Appropriate Liability Rules for Tying and Bundled Discounts, 72 Ohio St. L.J. 909 (2011)............................................................................................... 17 William B. Tye, Competitive Access: A Comparative Industry Approach to the Essential Facility Doctrine, 8 Energy L.J. 337 (1987)................................................................................................... 28 With New Entrants, Streaming TV Sees Watershed Moment,

MSN Money (Oct. 19, 2014), http://www.msn.com/en-ca/money/topstories/with-new-entrants-streaming-tv-sees-watershed-moment/ar-BB9VXHE ........................................ 12

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STATEMENT OF JURISDICTION

The Basis for the District Court’s Jurisdiction

The district court had subject matter jurisdiction under 28 U.S.C. §§ 1331 and 1337(a),

because the plaintiff brought claims under the Clayton Act, 15 U.S.C. §§ 15, 26, and Sherman

Act, 15 U.S.C. § 2.

The Basis for this Court’s Jurisdiction

This Court has jurisdiction under 28 U.S.C. § 1291, because Dominion appeals from the

final order of a United States District Court that disposed of all parties’ claims.

Timeliness

Dominion’s appeal was timely filed under Federal Rule of Appellate Procedure 4(a). The

district court entered final judgment on December 16, 2013. Dominion filed its notice of appeal

on January 13, 2014.

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STATEMENT OF ISSUES

1. Single-product discounts and bundled discounts pose similar anticompetitive

risks. A single-product discount is not anticompetitive under Sherman § 2 if the discount does

not result in a price below an appropriate measure of the discounter’s cost. Dominion sold a

bundle of two products for a discounted price above its incremental cost. Was Dominion’s

bundled discount anticompetitive in violation of Sherman § 2?

2. A monopolist’s refusal to deal with a competitor is only unlawful if the

monopolist had no legitimate business justification or economic rationale for terminating a

previously profitable relationship. Dominion cancelled Patriot’s lease after learning that

Dominion’s cellular facilities could not support both companies’ customers and that terminating

the lease would be profitable in the short term. Does Dominion’s decision to terminate the lease

amount to an anticompetitive refusal to deal in violation of Sherman § 2?

3

STATEMENT OF THE CASE

Patriot Wireless Corporation (“Patriot”) filed suit in 2013 against three cellular services

companies, seeking treble damages and injunctive relief for alleged violations of Sherman § 2.

The district court granted a preliminary injunction ordering Dominion Telecommunications, Inc.

(“Dominion”) to continue providing cellular transmission services to Patriot. The court then

dismissed Patriot’s complaints against two defendants—Ariel Wireless Co. and Noble

Communications Corp.—leaving Dominion as the only defendant. Dominion and Patriot

engaged in discovery and filed cross-motions for summary judgment. After making findings of

undisputed facts, the district court granted Patriot’s motion and entered judgment against

Dominion in the amount of $100 million, trebled by statute, plus fees and costs, and continued

the injunction until June 16, 2016. See Patriot Wireless Corp. v. Dominion Telecomm., Inc., No.

13-1684 (D. Mad. Dec. 16, 2013). Dominion timely filed this appeal.

STATEMENT OF FACTS

Dominion is a cable television and cellular services provider that began operating in the

City of Mason, Madison, thirty years ago. R. at 2.1 Mason is a large, suburban area with 2.5

million households. R. at 1. Two million of those households purchase television and cellular

services, which are sold on a per-household basis. R. at 1–2. Of the television-viewing

households, 60% purchase cable from Dominion. The remaining 40% buy satellite subscriptions

or watch only over-the-air broadcasts. R. at 2.

Over twenty years ago, Dominion became the first cellular services provider in Mason.

R. at 2. Dominion constructed a cellular network that, even today, provides the best cellular

1 This abbreviation refers to the record in this case, which consists of the district court’s summary judgment opinion and order in Patriot Wireless Corp. v. Dominion Telecommunications, Inc., No. 13-1684 (D. Mad. Dec. 16, 2013).

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coverage in the area. R. at 2. By 2011, Dominion’s superior coverage and handset offerings

earned it the patronage of 50% of Mason’s cellular service subscribers, each of whom paid $100

a month per household. R. at 2. But low-cost providers entered the market and began to cut into

Dominion’s market share. R. at 2. By December 2012, Dominion’s share dropped to 40%.

R. at 2. Two major companies gained 20% and 30% of the market by charging between $80 and

$95 per month. R. at 3. Other small carriers captured 5% of the market. R. at 3. A new entrant,

Patriot, serviced the remaining 5% of households and maintains that market share to this day.

R. at 3, 5.

Patriot began selling cellular services to Mason subscribers in July 2012. R. at 2. Instead

of building a cellular network of its own, Patriot leased excess capacity from Dominion for $5 a

household per month. R. at 3. The two companies entered a four-year agreement, but Dominion

retained the right to terminate the agreement at any time with 30-days’ notice. R. at 3. Patriot

hoped to gain market share by offering a low-price service for $75 per month and to eventually

build its own low-cost network after obtaining 5% of the market. R. at 3. Both companies

expected it would take years for Patriot to reach this threshold. R. at 3, 4.

In October 2012, Dominion conducted market research to determine the likely demand

for a cable and cellular package, discounted at $105 per month. R. at 4. Customers would receive

a $95 discount over paying $100 for each product individually. R. at 2. The researchers projected

that 10% of the market would purchase this package. R. at 4. But Dominion’s researchers also

feared that its cellular network could not support the 10% growth anticipated from this bundle.

R. at 4. The researchers advised that Dominion’s network faced a 50% risk of suffering regular

service outages if it had to support 50% of the market for six months or more. R. at 4. The 10%

increase from the discount could push the network over the 50% threshold because Dominion

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already serviced 40% of the market, not including Patriot’s customers. R. at 4. To avoid the risk

of outages, Dominion could perform upgrades costing $2 million. R. at 4. Dominion had the

resources to upgrade, but in November 2012, it elected to perform the upgrade in July 2013,

when it would have greater cash flow. R. at 4. In December 2012, Dominion announced that it

was offering the $105 per month cellular–cable services bundle. R. at 4.

Customers responded quickly to the considerably lower prices, with 5% of the market

signing up within the first month. R. at 4. At the same time, Patriot’s low-cost product was

receiving better-than-expected results in the market. Seeing the growth of both products and

knowing its network limitations, Dominion decided at the end of December 2012 to terminate

Patriot’s lease. R. at 4. But on January 2, 2013, before Dominion announced its decision, Patriot

publicized that it planned to immediately begin constructing its own network. R. at 4. Shortly

thereafter, Dominion notified Patriot that its lease was terminated. R. at 5.

Neither of the two other large companies in the area was willing to lease Patriot its excess

capacity. R. at 5. The district court entered an injunction, which permitted Patriot to continue

leasing space from Dominion. R. at 5. This allowed Patriot to retain 5% of Mason’s cellular

services customers throughout the course of these proceedings. R. at 5. Dominion’s market share

grew to 47% before growth attributable to its bundled discount ceased. R. at 4.

SUMMARY OF ARGUMENT

Dominion submits:

A. The district court failed to hold Patriot to its burden of defining the relevant

market and proving Dominion’s ability to successfully restrict output and raise prices within that

market. Because Dominion has relatively low market share in both the cellular and cable services

markets, and there is direct evidence of new entrants and active price competition, no reasonable

6

jury could find Dominion has monopoly power in either market. Thus, the Court should reverse

the district court’s ruling and enter judgment in favor of Dominion.

B. Discounts generally benefit consumers by offering low prices. Bundled discounts

can be anticompetitive, however, if they have the capacity to exclude an equally efficient rival. A

court can only identify this potential harm by considering whether the bundled discount results in

a price below the defendant’s incremental cost. The “discount attribution standard” is the best

method for identifying such anticompetitive pricing of bundled discounts. Under this standard,

Dominion’s bundled discount is priced above its relevant cost, and is thus not anticompetitive

under Sherman § 2. To the extent that LePage’s permits a court to identify anticompetitive

bundled discounts without considering cost, it should not be followed. Even if the Court looks

for evidence of anticompetitive effect in non-cost factors like substantial foreclosure, Patriot’s

foreclosure does not indicate any harm cognizable under Sherman § 2.

C. A monopolist cannot be liable for its unilateral refusal to deal when, as here, the

monopolist has valid business justifications and economic rationale for that refusal. Dominion

terminated its prior lease agreement with Patriot out of the well-supported fear that its network

could not support both companies’ customers. Furthermore, by terminating the lease, Dominion

was able to expand its sales, resulting in a short-term profit for the company. Condemning

Dominion’s contract decision would extend the outer boundaries of Sherman § 2 and invoke

harmful policy implications, including protecting inefficient competitors, discouraging

businesses’ infrastructure investments, producing administrative difficulties for antitrust

tribunals, and thwarting procompetitive joint ventures.

7

STANDARD OF REVIEW

Appellate courts exercise plenary review over a district court’s summary judgment ruling.

Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 912 (9th Cir. 2007). Thus, courts apply

the summary judgment standard de novo to determine whether the moving party shows that there

is no genuine issue as to any material fact and that the moving party is entitled to judgment as a

matter of law. Id.; see also Fed. R. Civ. P. 56(a). A dispute about a material fact is genuine “if

the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

When reviewing cross-motions for summary judgment, courts “evaluate each motion on

its own merits and view all facts and inferences in the light most favorable to the nonmoving

party.” Wojcik v. City of Romulus, 257 F.3d 600, 608 (6th Cir. 2001) (citing Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).

Whether the district court applied the correct legal standard is reviewed de novo. Del.

Valley Surgical Supply Inc. v. Johnson & Johnson, 523 F.3d 1116, 1119 (9th Cir. 2008)

Determinations that “specific conduct was anticompetitive in violation of the Sherman Act are

questions of law reviewed de novo.” Oahu Gas Serv., Inc. v. Pac. Res., Inc., 838 F.2d 360, 368

(9th Cir. 1988).

ARGUMENT

Section 2 of the Sherman Act, 15 U.S.C. § 2 (2012),2 prohibits monopolization, which

courts interpret as requiring two elements. The plaintiff must prove (1) the defendant had

monopoly power in the relevant market; and (2) the defendant engaged in anticompetitive or

2 “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 . . . shall be deemed guilty of a felony . . . .” 15 U.S.C. § 2.

8

exclusionary conduct through “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.” Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1438 (2013) (quoting

United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966)).

Dominion’s conduct did not satisfy either of the two elements of monopolization

under Sherman § 2. Thus, the district court erred by denying Dominion’s motion for summary

judgment. The district court further compounded that error by granting Patriot’s motion for

summary judgment.

I. DOMINION LACKS THE MONOPOLY POWER REQUIRED FOR A § 2

VIOLATION

In this case, Patriot bore the burden of proving monopoly power by showing Dominion’s

“ability to charge a price above the competitive level . . . without losing so many sales to existing

competitors or new entrants as to make the price increase unprofitable.” Sheridan v. Marathon

Petroleum Co., 530 F.3d 590, 594 (7th Cir. 2008). The district court did not hold Patriot to its

burden and thus employed the wrong legal standard when granting summary judgment for

Patriot. Furthermore, Dominion’s relatively small market share of the highly competitive cable

and cellular services markets proves a reasonable jury could not find monopoly power in this

case.

A. The District Court Erred by Making No Finding of Monopoly Power

The district court committed reversible error by failing to hold Patriot to its high burden

of proving Dominion’s monopoly power. See Se. Mo. Hosp. v. C.R. Bard, Inc., 642 F.3d 608,

617 (8th Cir. 2011) (affirming summary judgment for defendant because plaintiff failed to prove

monopoly power in the relevant market). The district court did not conduct either of the steps

9

necessary to find monopoly power through circumstantial evidence; 3 it did not define a relevant

product and geographic market, and it did not show Dominion’s power within that market. As

the plaintiff, Patriot bore the burden of proof on these issues. See United States v. Grinnell Corp.,

384 U.S. 563, 571 (1966). By skipping these steps, the district court permitted Patriot to avoid

proving “the most heavily contested issues in monopoly cases.” Dimmitt Agri Indus., Inc. v. CPC

Int’l Inc., 679 F.2d 516, 526 (5th Cir. 1982). There is ample precedential support for this Court

to reverse the district court for this failure, as “[n]ot infrequently, the initial question of market

power proves decisive.” Novell, Inc. v. Microsoft Corp., 731 F.3d 1064, 1071 (10th Cir. 2013).

B. Refusal to Deal: Dominion’s Market Share Is Too Small and the

Cellular Market Is Too Competitive to Infer Monopoly Power

If a plaintiff proves a relevant product and geographic market, courts may infer monopoly

power if the defendant possesses a substantial share of that market and the market itself lacks

other indicia of competition. See Novell, 731 F.3d at 1071 (discussing monopoly power). Even if

the Court finds Patriot proved the relevant market for its refusal-to-deal claim, no reasonable jury

could conclude that Dominion had monopoly power. Dominion possesses only a harmless share

of the cellular services market, which has strong competitors and active price competition.

Dominion’s share of the Mason cellular services market falls well below the level

required to infer monopoly power. At most, Dominion possessed a 47% share of that market at

the time Patriot filed suit. R. at 2, 4. The Supreme Court, however, has relied upon much higher

market share in the cases in which it inferred monopoly power. See, e.g., Eastman Kodak Co. v.

3 Some courts have found monopoly power through direct evidence of supracompetitive prices and reduced output. See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 307 (3d Cir. 2007) (“The existence of monopoly power may be proven through direct evidence of supracompetitive prices and restricted output.”). Patriot has not alleged supracompetitive prices or reduced output. Thus, this theory of monopoly power is not before the Court.

10

Image Technical Servs., Inc., 504 U.S. 451, 481 (1992) (inferring monopoly power from between

80% and 95% market share); Otter Tail Power Co. v. United States, 410 U.S. 366, 369–70 n.1

(1973) (91% market share), Grinnell Corp., 384 U.S. at 571 (87% market share); Int’l Boxing

Club of N.Y. v. United States, 358 U.S. 242, 249 (1959) (93% market share); Am. Tobacco Co. v.

United States, 328 U.S. 781, 795 (1946) (68% spiking to 74%); see also Kolon Indus. Inc. v. E.I.

DuPont de Nemours & Co., 748 F.3d 160, 174 (4th Cir. 2014) (stating that “the Supreme Court

has never found a party with less than 75% market share to have monopoly power”).

Furthermore, courts have found that defendants did not possess monopoly power when

they controlled even more of the market than Dominion has here. See, e.g., Kolon Indus. Inc. v.

E.I. DuPont de Nemours & Co., 748 F.3d 160, 174 (4th Cir. 2014) (affirming summary judgment

because defendant “clearly lacks” monopoly power with 59% of market and high barriers to

entry); Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1063 (8th Cir. 2000) (granting

judgment as a matter of law to defendant with 75% market share).

Even if the Court concluded that Dominion’s 47% market share created a possible

inference of monopoly power, the market structure indicates that Dominion does not possess the

power to maintain supracompetitive prices or exclude competition. See Rebel Oil Co., Inc. v. Atl.

Richfield Co., 51 F.3d 1421, 1439 (9th Cir. 1995) (“A mere showing of substantial or even

dominant market share alone cannot establish market power sufficient to carry out a predatory

scheme.”). One market characteristic that demonstrates a lack of monopoly power is the presence

of significant competitors. See Ryfko Mfg. Co. v. Eden Servs., 823 F.2d 1215, 1232 (8th Cir.

1987) (“[D]irect evidence of competitive pressure—demonstrated by a significant number of

viable competitors . . . indicates a lack of market power.”). Dominion faces competition from

two large companies, not including Patriot, who collectively possess half of the market. R. at 3.

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We know that these competitors possess some excess capacity and they captured 10% of

Dominion’s market share in 2012 alone. R. at 2, 5. Thus, these competitors could constrain any

efforts by Dominion to lower its output and increase price. The competitors could use their

excess capacity to capture more of the market, as they have done in the past two years.

In addition to the presence of strong competitors, Dominion’s fluctuations in market

share demonstrate competitors’ ability to constrain any price increase by Dominion. See Am.

Tobacco, 328 U.S. at 794–95 (listing and considering market shares over nine years); see also

Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 762 F.3d 1114, 1125 (10th Cir. 2014)

(requiring high market share to be “durable”). Fluctuating market share proves a lack of

coordinated pricing in the market and evidences a market leader’s inability to charge prices

above a competitive level. See Ryfko Mfg. Co., 823 F.2d at 1232 (stating that price sensitivity

“indicates a lack of market power”). Over the last few years, Dominion’s share of the cellular

services market has fluctuated from 50% in 2011, to 40% in 2012, and up again to its current

47% share. R. at 2, 4. These changes are direct evidence of a competitive marketplace, consumer

price sensitivity, and a lack of monopoly power influence.

C. Bundled Discount: Dominion’s Market Share Is Too Small and the

Cable Market Is Too Competitive to Infer Monopoly Power

For a bundled discount to constitute a violation of Sherman § 2, the discounter must at

least have monopoly power in the non-competitive product market, in this case the market for

television services. See, e.g., LePage’s Inc. v. 3M, 324 F.3d 141, 146 (3d Cir. 2003) (noting

3M’s concession of monopoly power in non-competitive product market for branded tape).

The Court may apply the same analysis described above to find that Dominion did not

have monopoly power in the market for television services. When looking to market share, the

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famous Learned Hand formula states that “it is doubtful whether sixty or sixty-four percent

would be enough; and certainly thirty-three percent is not.” United States v. Aluminum Co. of

Am., 148 F.2d 416, 424 (2d Cir. 1945). Even if the Court assumes the Mason television viewers

to be the relevant market, Dominion possesses only 60% of that market.4 R. at 2. This low

market share creates doubt about Dominion’s monopoly power.

The recent entry of new competitors further shows Dominion’s lack of power.

Technological advancements have made it easier for entertainment-content providers to enter the

market, demonstrating active competition. See Hannibal Travis, Wi-Fi Everywhere: Universal

Broadband Access As Antitrust and Telecommunications Policy, 55 Am. U. L. Rev. 1697, 1724–

25 (2006) (“Robust competition from the Internet threatens to destroy the cable and telephone

companies’ revenue base as . . . webcasting and digital delivery of entertainment could render

cable television less necessary.”). In recent years, “online services like Netflix, Hulu and

Amazon have been gaining viewers at the expense of cable and satellite services.” With New

Entrants, Streaming TV Sees Watershed Moment, MSN Money (Oct. 19, 2014),

http://www.msn.com/en-ca/money/topstories/with-new-entrants-streaming-tv-sees-watershed-

moment/ar-BB9VXHE. These new entrants would constrain any attempt by Dominion to charge

prices above a competitive level, thus further demonstrating Dominion’s lack of monopoly

power.

II. DOMINION’S BUNDLED DISCOUNT IS NOT ANTICOMPETITIVE

Sherman § 2 does not condemn the mere possession of monopoly power. Instead, it

prohibits “the willful acquisition or maintenance of that power as distinguished from growth or

4 Dominion does not concede that Patriot has proven this to be the relevant market.

13

development as a consequence of a superior product, business acumen, or historic accident.”

Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004)

(quoting Grinnell, 384 U.S. at 570–71). Here, Dominion increased its market share by offering a

superior product at a lower price. Generally, bundled discounts are a form of desirable

competition on the merits and the “great majority of discounting practices are procompetitive.”

Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 749 (3d ed. 2008). Customers prefer

the low prices of bundled discounts and businesses favor these discounts because they help

achieve economies of scale and consolidate the administrative expense of servicing clients. See

Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 895–96 (9th Cir. 2007) (discussing the

benefits of bundled discounts). For these reasons, the Supreme Court has recognized that

packaged sales “can merely be an attempt to compete effectively—conduct that is entirely

consistent with the Sherman Act.” Jefferson Parish Hosp. Dist. No. 2. v. Hyde, 466 U.S. 2, 12

(1984) (discussing tying cases), abrogated by Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S.

28, 33 (2006).

Even competition on the merits of price or quality, however, can force less efficient rivals

or inferior products to exit the market. Such exclusion on the merits is “of no moment to the

antitrust laws if competition is not injured.” Brooke Group Ltd. v. Brown & Williamson Tobacco

Corp., 509 U.S. 209, 224 (1993). Despite their ubiquity and procompetitive benefits, bundled

discounts can cause injury to competition. This can occur when an equally efficient rival cannot

match the discount. The Court can best identify and regulate such anticompetitive bundled

discounts by adopting the discount attribution standard employed by the Ninth Circuit in

Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2007), which has the near

consensus support of antitrust scholars, and is strongly urged by antitrust jurisprudence and

14

policy. Under that standard, Dominion’s bundled discount is not below incremental cost and thus

could not support a finding of anticompetitive conduct under Sherman § 2.

A. Dominion’s Bundled Discount Is Procompetitive Because It Prices

Cellular Services Above Dominion’s Average Variable Costs

Bundled discounts can be exclusionary, and thus actionable under § 2, if an equally

efficient competitor could not match the offer. See Cascade, 515 F.3d at 909 (“[T]he primary

anticompetitive danger posed by a multi-product bundled discount is that such a discount can

exclude a rival is [sic] who is equally efficient at producing the competitive product simply

because the rival does not sell as many products as the bundled discounter.”); LePage’s Inc. v.

3M, 324 F.3d 141, 155 (3d Cir. 2003) (“[E]ven an equally efficient rival may find it impossible

to compensate for lost discounts on products that it does not produce.”). An example can

illustrate this potential harm. A monopolist may offer customers a discount if they purchase two

products in a bundle. A rival may produce one of those products at a lower cost than the

monopolist, but the rival cannot offer a comparable bundle if it lacks access to the second

product. The rival’s only hope of competing is to drop its price enough to entice consumers to

forgo the benefits of the bundle and purchase the two products separately; the competitive

product from the rival and the non-competitive product from the monopolist. With fewer

products, however, the rival must cut its price more drastically than the monopolist, who can

spread its discount over the two products. The risk is that the monopolist could force the equally

efficient rival to price below its incremental costs, while the monopolist is able to keep its price

15

above incremental cost.5 Thus, the monopolist remains profitable in the short term, but the rival

must sacrifice short-term profits.

Although the Ninth and Third Circuits recognized the potential for bundled discounts to

cause this anticompetitive harm, the courts disagreed about how to identify the harm in practice.

The Ninth Circuit, in Cascade Health, correctly concluded that a court should identify

anticompetitive discounts by comparing the price of the bundle to the defendant’s average

variable cost. 515 F.3d at 910. By contrast, the Third Circuit shunned a cost-based test. See

LePage’s, 324 F.3d at 155. Instead, the Third Circuit allowed a finding of anticompetitive

conduct whenever a monopolist offers a bundle of products that the plaintiff cannot match and

the effect of the bundle is to foreclose substantial portions of the market. Id. at 159–60.

As the following discussion demonstrates, the Ninth Circuit’s cost-based standard allows

the Court to identify the harm posed by anticompetitive bundled discounts. Furthermore, that

5 The often-cited example of this possibility comes from Ortho Diagnostic Systems, Inc. v. Abbott Laboratories, Inc., 920 F. Supp. 455, 467 (S.D.N.Y. 1996):

Assume for the sake of simplicity that the case involved the sale of two hair products, shampoo and conditioner, the latter made only by A and the former by both A and B. Assume as well that both must be used to wash one's hair. Assume further that A's average variable cost for conditioner is $2.50, that its average variable cost for shampoo is $1.50, and that B's average variable cost for shampoo is $1.25. B therefore is the more efficient producer of shampoo. Finally, assume that A prices conditioner and shampoo at $5 and $3, respectively, if bought separately but at $3 and $2.25 if bought as part of a package. Absent the package pricing, A's price for both products is $8. B therefore must price its shampoo at or below $3 in order to compete effectively with A, given that the customer will be paying A $5 for conditioner irrespective of which shampoo supplier it chooses. With the package pricing, the customer can purchase both products from A for $5.25, a price above the sum of A's average variable cost for both products. In order for B to compete, however, it must persuade the customer to buy B's shampoo while purchasing its conditioner from A for $5. In order to do that, B cannot charge more than $0.25 for shampoo, as the customer otherwise will find A's package cheaper than buying conditioner from A and shampoo from B.

16

cost-based standard is more aligned with antitrust jurisprudence and policy than the ambiguous

substantial foreclosure standard.

1. The Discount Attribution Standard Identifies Potentially

Anticompetitive Bundled Discounts

In Cascade Health, the Ninth Circuit adopted a cost-based test for identifying

anticompetitive bundles called the discount attribution standard. 515 F.3d at 906–10. This

standard accounts for the unique risks posed by anticompetitive bundles; the bundle’s price could

exclude an equally efficient competitor even if the monopolist prices each of the individual

products above its average variable cost. The discount attribution standard accounts for that

potential harm by “simply attribut[ing] the entire discount on all products in the package to the

product for which exclusion is claimed.” Areeda & Hovenkamp, supra, ¶ 749. In other words, a

court employing this standard first identifies how much customers save by purchasing the bundle

compared to purchasing the products separately. The court then subtracts these savings from the

monopolist’s price for the product that the rival produces, the competitive product. If the

resulting price of this competitive product is greater than the monopolist’s average variable cost

of manufacturing that product, then the equally efficient rival can compete with the bundle.

Thus, there is no cognizable anticompetitive harm from the bundled discount. See Cascade, 515

F.3d at 906 (“This standard makes the defendant’s bundled discount legal unless the discounts

have the potential to exclude a hypothetical equally efficient producer of the competitive

product.”).

The discount attribution standard has gained a “near consensus” among antitrust scholars,

in part, because it focuses on the discount’s effect on competition, rather than its effect on a

single competitor. See Thomas A. Lambert, Appropriate Liability Rules for Tying and Bundled

17

Discounts, 72 Ohio St. L.J. 909, 962 (2011) (surveying the academic literature). For this reason,

a leading antitrust treatise calls the standard “essential to analyzing claims of package discounts.”

Areeda & Hovenkmap, supra, ¶ 749. Agreeing with this reasoning, district courts have found the

standard to be “the starting point for sound antitrust analysis of discounts for product bundles.”

Valassis Commc’ns, Inc. v. News Am. Inc., No. 2:06-cv-10240, 2011 WL 2420048, at *4 (E.D.

Mich. Jan. 24, 2011).6

By contrast, the Third Circuit’s LePage’s standard that the district court employed here

does not consider cost, and thus fails to determine whether the bundled discount would exclude

an equally efficient competitor. See Areeda & Hovenkamp, supra, ¶ 749 (“[O]nly an effective

price that is ‘below cost’ can exclude an equally efficient rival.”). Under LePage’s, a plaintiff

only needs to prove that it could not match the discount. The standard does not consider whether

the plaintiff is as efficient as the monopolist. Because it does not consider cost, LePage’s allows

for the antitrust laws to condemn procompetitive discounting simply because any competitor, no

matter how inefficient, cannot match the monopolist’s discount. This singular focus on the

plaintiff’s alleged injury, without considering cost, directly conflicts with the “axiomatic”

principle “that the antitrust laws were passed for the protection of competition, not competitors.”

Brooke Group, 509 U.S. at 224.

By identifying those bundled discounts that would exclude an equally efficient

competitor, the discount attribution standard is best suited to advance antitrust principles.

6 For more support of the discount attribution standard, see Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., 4 F. Supp. 3d 1123, 1140 (D. Ariz. 2014) (finding bundled discount not anticompetitive because plaintiff “has not provided any other evidence that Honeywell prices its MRO services below cost”); Peoria Day Surgery Ctr. v. OSF Healthcare Sys., No. 06-1236, 2009 WL 5217344, at *5–6 (C.D. Ill. Dec. 30, 2009) (allowing § 1 bundled discount claim to survive summary judgment because defendant arguably violated the discount attribution standard used in Cascade).

18

Additionally, this standard complies with antitrust jurisprudence and policies that the LePage’s

standard neglects.

2. Supreme Court Precedent Supports an Above-Cost Safe

Harbor for Bundled Discounts

The Supreme Court has not directly considered how to identify anticompetitive bundled

discounts, but it has provided substantial guidance on that issue through its predatory pricing

jurisprudence. As with bundled discounts, predatory pricing schemes pose the risk that an

equally efficient competitor could not match a monopolist’s low prices without suffering short-

term losses. See Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 318

(2007) (describing harms of predatory pricing). With that potential anticompetitive harm in

mind, the Supreme Court created a safe harbor from antitrust liability for monopolists selling a

single product at a price above cost. The Supreme Court created this safe harbor in Brooke

Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993), when it considered

whether a cigarette manufacturer engaged in anticompetitive price discrimination by heavily

discounting its generic cigarettes. The Court declined to find antitrust liability in above-cost

prices because such prices do not “inflict injury to competition cognizable under the antitrust

laws.” Id. at 223. Insisting that this above-cost safe harbor applies “regardless of the type of

antitrust claim involved,” the Court explained that “the exclusionary effect of prices above a

relevant measure of cost either reflects the lower cost structure of the alleged predator, and so

represents competition on the merits, or is beyond the practical ability of a judicial tribunal to

control without courting intolerable risks of chilling legitimate price-cutting.” Id. The Court

recently demonstrated the broad applicability of this safe harbor by applying it to a predatory

bidding case. See Weyerhaeuser, 549 U.S. at 319. Although the Supreme Court has never applied

19

this above-cost safe harbor to a bundled discount, the Court’s language and rationale “poses a

strong caution against condemning bundled discounts that result in prices above a relevant

measure of cost.” Cascade, 515 F.3d at 902.

In LePage’s, the Third Circuit attempted to distinguish the Supreme Court’s above-cost

safe harbor by noting that Brooke Group was a Robinson-Patman Act claim against an

oligopolist for a single-product discount, whereas LePage’s involved a Sherman § 2 claim

against a monopolist for a bundled discount. The court also believed that the Supreme Court

disfavored the Brooke Group safe harbor. But as the Third Circuit soon recognized, it was

mistaken. Less than a decade after deciding LePage’s, the court admitted its error, stating that

“several of the bases on which we distinguished Brooke Group have been undermined by

intervening Supreme Court precedent, which counsels caution in extending LePage’s.” ZF

Meritor, LLC v. Eaton Corp., 696 F.3d 254, 274 n.11 (3d Cir. 2012). The only distinguishing

feature that survived the Third Circuit’s change of course was that Brooke Group involved only

one product, but bundled discounts involve several products. This simple difference should not

cause the Court to ignore the Supreme Court’s strong language that “only below-cost prices

should suffice, and we have rejected elsewhere the notion that above-cost prices . . . inflict injury

to competition cognizable under the antitrust laws.” Brooke Group, 509 U.S. at 223. The policies

underlying the safe harbor for single products apply with equal vigor to bundled discounts and

LePage’s conflicts with those policies.

3. Antitrust Policy Supports an Above-Cost Safe Harbor for

Bundled Discounts

The Supreme Court created the above-cost pricing safe harbor, in part, because this cost

measure encourages procompetitive low pricing while prohibiting the most anticompetitive

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discounting practices. As the Court emphasized in Brooke Group, “[i]t would be ironic indeed if

the standards for predatory pricing liability were so low that antitrust suits themselves became a

tool for keeping prices high.” 509 U.S. at 226–27. The Supreme Court has repeatedly raised this

cautionary language, especially when courts attempt to extend the reach of Sherman § 2 beyond

its recognized boundaries. See, e.g., Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko,

LLP, 540 U.S. 398, 414 (2004) (“The cost of false positives counsels against an undue expansion

of § 2 liability.”). The Supreme Court stated that “[m]istaken inferences and the resulting false

condemnations are especially costly, because they chill the very conduct the antitrust laws are

designed to protect.” Id.

The discount attribution standard encourages procompetitive price-cutting by providing

“clear guidance for sellers that engage in bundled discounting practices.” Cascade, 515 F.3d at

907. Under the discount attribution standard, a business can determine whether its discounts are

harming competition simply by comparing its own prices and costs. Thus, businesses could offer

the maximum discount to consumers, while also promoting competition on the merits of price.

The LePage’s standard, by contrast, conflicts with antitrust policy. LePage’s discourages

businesses from discounting because it “offers no clear standards by which firms can assess

whether their bundled discounts are likely to pass antitrust muster.” Antitrust Modernization

Comm’n, Report and Recommendation 94 (Apr. 2, 2007) (hereinafter AMC Report). Under the

LePage’s standard, antitrust liability depends on whether any substantial competitor cannot meet

the bundled discount. But if a monopolist does not know its competitors’ costs, it cannot

determine how to price its discounts without incurring liability. See Cascade, 515 F.3d at 905

(“A potential defendant who is considering offering a bundled discount will likely not have

access to information about its competitors’ costs, thus making it hard for that potential

21

discounter . . . to determine whether the discount it wishes to offer complies with the antitrust

laws.”). This lack of guidance will cause businesses to offer fewer discounts, thus harming

consumers. See AMC Report, supra, at 94 (“[T]he Third Circuit’s decision is likely to

discourage firms from offering procompetitive bundling discounts and rebates to consumers.”).

Furthermore, the LePage’s standard does not provide adequate guidance to courts, which

will further cause businesses to charge higher prices out of fear of incurring antitrust liability.

Given the economic complexities of antitrust law and the strong deterrent of treble damages, the

Supreme Court has cautioned that some anticompetitive conduct may be “beyond the practical

ability of a judicial tribunal to control.” Trinko, 540 U.S. at 414 (quoting Brooke Group, 509

U.S. at 223). District courts considering the LePage’s standard have already noted this difficulty.

As one court stated, “[t]he Third Circuit decision also leaves unclear (at least to this Court) the

precise nature of 3M’s violation of § 2. The verdict imposed a heavy penalty on 3M without

producing consistent guidance for what is permissible price competition.” J.B.D.L. Corp. v.

Wyeth-Ayerst Labs., Inc., No. 1:01-CV-704, 2005 WL 1396940, at *13 (S.D. Ohio June 13,

2005).

These negative policy implications strongly caution against adopting the LePage’s

standard. The Third Circuit adopted that standard without the benefit of the economic literature

and experience that is presently before this Court. See Brief for the United States as Amicus

Curiae, 3M v. LePage’s Inc., 524 U.S. 953 (2004) (No. 02-1865), 2004 WL 1205191, at *15–16

(recommending that the Supreme Court deny certiorari of LePage’s to await further development

of the case law, and further insights from academic commentary” before attempting to create a

standard to regulate the “important business practice” of bundled discounts). The Court should

heed the wisdom of that academic commentary and subsequent courts’ analysis to adopt the

22

discount attribution standard. That standard appropriately regulates anticompetitive discounting,

is consistent with Supreme Court jurisprudence, and advances antitrust policies. Upon adopting

that standard, no reasonable jury could find that Dominion’s bundled discount was

anticompetitive. Thus, the Court should reverse the district court and grant summary judgment

for Dominion.

4. Under the Discount Attribution Standard, Dominion’s Bundle

Discount Is Not Anticompetitive

Dominion sought to compete on the merit of price by offering consumers a discount if

they purchased cable and cellular services together. The bundled price was $105 a month.

R. at 4. If consumers purchased the products separately, they would pay $100 a month for each

product. R. at 2. The difference between the bundled price and the individual prices is $95.7 If

$95 is subtracted from the price of cellular services, the result is an effective discounted price for

cellular services of $5 per month, per household.8 Dominion’s average variable cost to produce

cell phone services is $3. R. at 3. Thus, Dominion is not selling below cost, because its cost of

servicing that extra subscription—its average variable cost—is less than the discount attribution

price. An equally efficient competitor could match Dominion’s price and thereby compete with

the bundled discount.

The district court expressed concern that Dominion’s high fixed costs should factor into

the anticompetitive analysis. R. at 6. Although the Supreme Court has declined to define the

appropriate measure of cost in its predatory pricing cases, see Brooke Group, 509 U.S. at 223

n.1, courts of appeal for the First, Second, Fifth, Eighth, and Tenth Circuits have identified

7 ($100 + $100) – $105 = $95. 8 $100 – $95 = $5.

23

average variable cost as the appropriate measure.9 And the Ninth Circuit adopted average

variable cost as the best measure specifically for evaluating bundled discounts. Cascade, 515

F.3d at 909–10. Using average variable cost makes economic sense, because this cost closely

approximates a business’s marginal cost. And marginal cost is what a business uses to determine

if making one additional sale is profitable. See Phillip Areeda & Donald F. Turner, Predatory

Pricing and Related Practices Under Section 2 of the Sherman Act, 99 Harv. L. Rev. 697, 716–

18 (1975) (proposing the use of average variable cost as a proxy measure for marginal cost). A

profit-maximizing business knows that as long as its “prices exceed its marginal cost, each

additional sale decreases losses or increases profits.” Advo, Inc. v. Phila. Newspapers, Inc., 51

F.3d 1191, 1198 (3d Cir. 1995). Each time Dominion made a sale for above its average variable

cost, it increased its profitability or reduced its losses.

Considering fixed cost would not only buck the trend of these well-reasoned cases, but it

would also create a needlessly complex standard for assessing liability and make Patriot’s claim

internally inconsistent. First, Dominion’s average fixed costs decreased greatly as its subscriber

base expanded. Dominion’s market share grew from 800,000 cellular subscribers to 940,000

9 See United States v. AMR Corp., 335 F.3d 1109, 1120 (10th Cir. 2003) (“Because it is uncontested that American did not price below AVC for any route as a whole, . . . the government has not succeeded in establishing the first element of Brooke Group, pricing below an appropriate measure of cost.”); Stearns Airport Equip. Co. v. FMC Corp., 170 F.3d 518, 532 (5th Cir. 1999); Morgan v. Ponder, 892 F.2d 1355, 1360 (8th Cir. 1999); Tri-State Rubbish v. Waste Mgmt., Inc., 998 F.2d 1073, 1080 (1st Cir. 1993); Irvin Indus. v. Goodyear Aerospace Corp., 974 F.2d 241, 245 (2d Cir. 1992). But see McGahee v. N. Propane Gas Co., 858 F.2d 1487, 1496 (11th Cir. 1988) (prices above average variable cost yet below average total cost could create circumstantial evidence of predatory intent); William Inglis & Sons Baking Co. v. ITT Cont’l Baking Co., 668 F.2d 1014, 1035 (9th Cir. 1981) (pricing above average variable cost but below average total cost “is not inherently predatory, it does not follow, however, that such prices are never predatory”); accord D.E. Rogers Assocs. v. Gardner-Denver Co., 718 F.2d 1431, 1437 (6th Cir. 1983) (same).

24

subscribers in only four months. R. at 2, 4. The record, however, provides no indication that

Dominion’s average variable cost has moved from $3, regardless of the number of subscribers.

R. at 3. Thus, by considering average fixed cost, a court may find a price to be below cost one

month, but above cost only a few months later. Such complexities have caused some courts to

reject fixed-cost measures and instead conclude that “when the costs of misjudgment are high

and the prevalence of the conduct the law seeks to deter is low, simpler rules are preferable.” Ne.

Tel. Co. v. Am. Tel. & Tel. Co., 651 F.2d 76, 88 (2d Cir. 1981). Second, Patriot’s insistence that

the Court consider fixed cost conflicts with its own refusal-to-deal claim. For Patriot to succeed

on its refusal-to-deal claim, it must show that its lease agreement was profitable for Dominion.

But Dominion charged Patriot the same $5 rate that it effectively charged customers that

purchased the bundled discount. From Dominion’s perspective, charging $5 made economic

sense in both cases because each $5 sale covered the variable cost of servicing that subscription

and contributed to profit. But Patriot asks the Court to find that this $5 rate is profitable to

Dominion in the refusal-to-deal assessment, but unprofitable to Dominion in the bundled

discount assessment. Considering fixed cost would only promote Patriot’s contradictory

argument. Instead of endorsing that inconsistency, the Court could evaluate Dominion’s bundled

discount like the majority of circuit courts do and like any profit-maximizing business would, by

using average variable cost as the measure of anticompetitive discounts.

B. Even Under the LePage’s Standard, Dominion’s Discount is Not

Anticompetitive

Even if the court does adopt the LePage’s standard, Dominion’s bundled discount is not

anticompetitive because it did not foreclose substantial portions of the market to competition.

Instead of appropriately evaluating the effect that Dominion’s bundled discount would have had

25

on an equally efficient competitor, the district court found injury to competition because one

competitor—Patriot—could not compete with the discount. Patriot’s loss of market share,

however, was legally insubstantial.

Only “substantial” foreclosure evidences a potential harm to competition. Substantial

foreclosure typically requires the exclusion of far more market share than occurred in this case.

See ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 287 (3d Cir. 2012) (finding 85% foreclosure

sufficient for a jury to conclude that exclusive dealings were anticompetitive); Theme

Promotions, Inc. v. News Am. Mktg. Fsi, 539 F.3d 1046, 1054 (9th Cir. 2008) (suggesting that

40–60% foreclosure may be sufficient). One court has said that foreclosures of less than 30 or

40% “make dismissal easy.” Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I.,

373 F.3d 57, 68 (1st Cir. 2004) (citing Jefferson Parish Hosp., 466 U.S. at 45–46 (O’Connor, J.,

concurring)). Even LePage’s involved foreclosure of at least 40 to 50% of the market. See ZF

Meritor, 696 F.3d at 286 (interpreting LePage’s). By contrast, Dominion’s discount in this case

foreclosed only 7% of the market. That is the percentage of the market that Dominion gained

with the discount. R. at 4. This minimal percentage does not even approach the foreclosure that

courts typically call “substantial,” but instead falls in the range of foreclosure that makes

“dismissal easy.”

With such minimal foreclosure, Dominion’s rebate program does not present the

anticompetitive dangers found in LePage’s. In that case, there was clear evidence that 3M

intended to, and did, raise prices after LePage’s was excluded. See LePage’s, 324 F.3d at 163

(discussing evidence demonstrating that “3M’s rebate programs did not benefit the ultimate

consumer”). In this case, Dominion won only a small percentage of the market and there is no

evidence that it intends to, or even could, raise prices in the future. Without proving any intent or

26

ability to raise prices, Patriot’s § 2 claim is nothing more than the complaint of a single, less-

efficient competitor.

III. DOMINION’S DECISION TO TERMINATE THE LEASE AGREEMENT

WAS NOT ANTICOMPETITIVE

Patriot alleges that Dominion committed a second antitrust violation by terminating a

lease agreement that existed between the two companies. Even though both parties agree that

Dominion had the contractual right to terminate the agreement with notice, Patriot argues

Dominion’s decision to ultimately do so amounts to an anticompetitive refusal to deal. For nearly

a century, however, the Supreme Court has adhered to the antitrust principle that a business is

free “to exercise [its] own independent discretion as to parties with whom [it] will deal.” Verizon

Commc’ns v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004) (quoting United

States v. Colgate & Co., 250 U.S. 300, 307 (1919)). Also, the antitrust laws do not require

Dominion to invite competitors to use its infrastructure or to adhere to that business model

indefinitely if it does decide to allow access to competitors. See, e.g., Christy Sports, LLC v.

Deer Valley Resort Co., 555 F.3d 1188, 1194 (10th Cir. 2009) (describing refusal-to-deal

antitrust principles).

Refusing to deal with a competitor is only anticompetitive when a “monopolist seeks to

terminate a prior (voluntary) course of dealing with a competitor.” In re Adderall XR Antitrust

Litig., 754 F.3d 128, 134 (2d Cir. 2014). This exception finds its roots in Aspen Skiing Co. v.

Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). In that case, a monopolist acted with the

sole purpose of excluding its rival by refusing to continue a prior joint marketing program

without any business justification for doing so. Id. at 592–93. The Supreme Court has refused to

extend the exception beyond the facts of Aspen Skiing, calling that case “at or near the outer

27

boundary of § 2 liability.” Trinko, 540 U.S. at 399. Thus, Dominion’s decision to terminate the

lease cannot create antitrust liability, unless Patriot proves two elements. First, Patriot must show

that there was “a preexisting voluntary and presumably profitable course of dealing between”

itself and Dominion. Novell, Inc. v. Microsoft Corp., 731 F.3d 1064, 1074 (10th Cir. 2013).

Second, Patriot must prove that Dominion terminated this relationship without any economic

rationale or valid business justification. Id. at 1075.

Although the lease was profitable and voluntary, Dominion had a valid business

justification for terminating that lease and its decision generated profit in the short term. Thus,

this case is clearly distinguishable from Aspen Skiing, and Dominion’s decision was not an

anticompetitive refusal to deal.

A. The Record Demonstrates Dominion’s Valid Business Justification

The Aspen Skiing decision made clear that a monopolist’s refusal to deal with a

competitor “does not violate § 2 if valid business reasons exist for that refusal.” Aspen Skiing,

472 U.S. at 597. Monopolists have asserted many business justifications for refusing to deal with

a competitor, and courts have accepted a monopolist’s lack of excess capacity as a valid business

justification. See e.g., Gamco, Inc. v. Providence Fruit & Produce Bldg., 194 F.2d 484, 487 (1st

Cir. 1952) (stating that lack of available space in building would justify defendant's refusal to

rent to plaintiff); Fla. Fuels, Inc. v. Belcher Oil Co., 717 F. Supp. 1528, 1535 (S.D. Fla. 1989)

(stating that lack of available storage capacity would be a valid defense for monopolist’s refusal

to share petroleum storage tanks with plaintiff); see also William B. Tye, Competitive Access: A

Comparative Industry Approach to the Essential Facility Doctrine, 8 Energy L.J. 337, 360

(1987) (stating that “congestion of the facility” is a valid efficiency justification and defense).

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The record contains undisputed facts that Dominion terminated the lease agreement

because it legitimately feared that its network would collapse under the increased burden of

Patriot’s customers. The threat to Dominion’s cellular network forced it to ultimately consider

two options: begin upgrades on its network immediately to expand capacity; or terminate the

lease agreement with Patriot and begin upgrades in July of 2013. R. at 4, 8. After considering its

financial health, including its cash flow, high fixed costs, and amortization of its billion-dollar

cellular network, Dominion made the business decision that it was imprudent to begin upgrades

immediately. R. at 4. Instead, Dominion decided to delay construction for several months.

R. at 4. As a result of this business decision, Dominion was forced to terminate the supply

agreement and gave Patriot the required 30-day-notice that it was doing so. R. at 5.

The district court recognized the threat to Dominion’s network and its limited options, yet

concluded that Dominion had no business justification for refusing to deal with Patriot. R. at 8.

When reaching this conclusion, the district court doubted Dominion’s legitimate business

justification for two reasons: (1) Dominion could have “averted” the danger of a network

collapse by upgrading earlier or curtailing its intake of Dominion customers; and (2) the timing

of Dominion’s termination appeared exclusionary. R. at 8. The district court erred by allowing

these two doubts to overshadow Dominion’s well-documented business justification.

As to the district court’s first doubt, it is not relevant that Dominion had the option to

perform the upgrades earlier or to make more capacity for Patriot by declining to accept new

Dominion customers. No firm, including a monopolist, is required to take into account the

wellbeing of a competitor when making a business decision. In the factually similar case of Oahu

Gas Service, Inc. v. Pacific Resources, Inc., 838 F.2d 360 (9th Cir. 1988), the Ninth Circuit

reversed a jury verdict that a propane distributor illegally refused to deal with a rival by delaying

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the construction of a propane-production facility. If the monopolist had built the facility, its rival

would have had more access to propane and could have expanded. The monopolist presented

evidence that it did not construct the facility earlier because that decision would not have been

“economically efficient.” Id. at 368. However, there was clear evidence that the monopolist also

acted “on a desire to restrict the supply of propane potentially available to [its rival].” Id. at 369.

For these two reasons, the monopolist elected to delay its construction a few years. The court

found this refusal to expand to be completely legal under the antitrust laws, because it was

supported by the monopolist’s valid concern for economic efficiency. The Ninth Circuit’s

conclusion in Oahu Gas is an excellent example of the recognized antitrust policy that should

also apply in Dominion’s case: a firm “certainly has no duty to deal under terms and conditions

that the rivals find commercially advantageous.” Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc.,

555 U.S. 438, 450 (2009).

The district court also found the timing of Dominion’s decision evidenced an intent to

exclude because Dominion gave Patriot notice of termination shortly after Patriot announced

plans to build its own cellular facility. R. at 5. The timing of Dominion’s announcement was

both legally and factually immaterial. Just as there is no legal duty to act in the way that most

benefits a competitor, a business has no legal duty to accommodate a rival’s timeframe when

exercising its contractual rights. The district court cited no precedent for the proposition that the

timing of a contractual announcement can refute a valid business justification and we are not

aware of any.

Even if timing was probative of Dominion’s intent, the relevant inquiry is when

Dominion made its decision to terminate, not when it made the announcement. On this factual

issue, it is clear that Patriot’s plans to develop its own facility could not have influenced

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Dominion’s decision to terminate the lease. It is undisputed that Dominion decided to terminate

Patriot’s lease in December 2012. R. at 4. Patriot did not announce its plans to build until

January 2, 2013. R. at 4. Thus, the record plainly disputes that Patriot’s announcement motivated

Dominion’s decision.

The district court made two errors at this stage in Patriot’s refusal-to-deal claim. First, the

district court determined that Dominion’s fear of a network collapse and subsequent loss of

customers was not a legitimate business justification for ending its relationship with Patriot.

Then, the court compounded this error by inappropriately imposing its own post hoc business

assessment onto Dominion’s conduct. Contrary to the district court’s finding, Dominion’s

decision was appropriately motivated by a desire to protect the integrity of its business, not to

exclude a relatively innocuous competitor.

B. Dominion’s Decision to Terminate the Contract Was Profitable in the

Short Term

The Aspen Skiing decision and subsequent refusal-to-deal cases also require that the

monopolist sacrifice short-term profit by refusing to deal before a court can find an antitrust

violation. See Novell, Inc. v. Microsoft Corp., 731 F.3d 1064, 1074 (10th Cir. 2013) (quoting

Trinko, 540 U.S. at 407). In Novell, Inc. v. Microsoft Corp., the Tenth Circuit held that Microsoft

did not violate the antitrust laws by refusing to deal with Novell, an applications developer.

Microsoft’s refusal to deal was not anticompetitive because its share of the relevant market

actually increased shortly after the decision was made. Id. at 1076–77. Thus, the refusal to deal

increased Microsoft’s profits in the short term. Id. at 1077. Similarly, here, Dominion’s decision

to terminate the lease opened excess network capacity that Dominion profitably sold to new

subscribers. The prospect of extra capacity allowed Dominion to pursue new subscribers without

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fear that its network would experience outages. Dominion pursued this opportunity by growing

its market share by 7%. Even though Dominion’s new customers received a discounted price,

their subscriptions were still profitable for Dominion because Dominion was selling

subscriptions above average variable cost. Thus, Dominion made a business decision to protect

the integrity of its network, which profitably freed capacity for sales to more customers.

C. Patriot Was on Notice that Its Dealings with Dominion Were Subject

to Change

In addition to the existence of a legitimate business justification and short-term

profitability, the agreement between Dominion and Patriot is not the type of business relationship

that falls within the Aspen Skiing exception because the agreement explicitly “allowed Dominion

to terminate [the lease] for any reason.” R. at 6. Unlike Aspen Skiing, where there existed a

profitable agreement between rivals for over two decades, Patriot’s lease was a contract that put

both parties on notice that their relationship was temporary and terminable. Unfortunately,

Patriot relied entirely on this terminable lease when it secured financing for its new cellular

network. Dominion should not be liable for Patriot’s poor business decision.

At least one court found that the freely terminable nature of a contract supports a finding

that a refusal to deal is not illegal under § 2. In Christy Sports, LLC v. Deer Valley Resort Co.,

555 F.3d. 1188 (10th Cir. 2009), Deer Valley developed its ski resort by selling parcels of

mountain land to third-party businesses. Id. at 1190. The sales contracts expressly reserved Deer

Valley the right to approve the type of businesses that could operate on its land. Id. For ten years,

plaintiff Christy Sports ran a ski rental shop on the mountain with Deer Valley’s written consent.

Id. at 1191. In 2005, however, Deer Valley opened its own ski rental shop on the mountain and

told Christy Sports that it could no longer rent ski equipment. Id. The court found Deer Valley’s

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revocation was not an anticompetitive refusal to deal under the Aspen Skiing exception, in part,

because Christy Sports “should have been aware that the relationship was temporary and subject

to Deer Valley’s business judgment.” Id. at 1197. The restrictive covenant lent support to the

court’s determination that Deer Valley was merely terminating a temporary contract, rather than

forsaking any short-term profits.

As in Christy Sports, the temporary nature of Patriot’s lease distinguishes this case from

Aspen Skiing and further evidences that Dominion was acting according to its legitimate business

purpose of protecting its network from collapse, a risk that both parties likely contemplated when

they entered this freely terminable agreement.

D. Prudence Dictates that this Court Not Expand the Aspen Skiing

Exception

As the forgoing explains, applying the Aspen Skiing exception to this case would extend

the outer boundaries of liability under § 2 for refusals to deal because in this case, unlike in

Aspen Skiing, Dominion had a legitimate business justification for terminating a temporary

contract and did not sacrifice short-term profits to do so. There are at least four strong policy

reasons why the Court should not extend Aspen Skiing.

First, the focus of § 2 is on protecting competition, not competitors. Extending the reach

of an exception that forces businesses to support weaker competitors runs contrary to this

established antitrust principle. See Novell, Inc., 731 F.3d at 1072 (“Forcing monopolists to hold[]

an umbrella over inefficient competitors might make rivals happy but it usually leaves

consumers paying more for less.”(internal quotation marks omitted)). Second, compulsory

cooperation between competitors “may lessen the incentive for the monopolist, the rival, or both

to invest in those economically beneficial facilities,” Trinko, 540 U.S. at 408, and thus stifles

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development and innovation, Novell, 731 F.3d at 1073. Third, a court order forcing businesses to

deal with one another creates administrative difficulties. Such an order requires courts to act as

regulatory bodies tasked with monitoring and enforcing a relationship between two competitors.

See Trinko, 540 U.S. at 408 (“Enforced sharing . . . requires antitrust courts to act as central

planners, identifying the proper price, quantity, and other terms of dealing—a role for which they

are ill suited.”). Fourth, finding Dominion’s conduct anticompetitive would chill all businesses’

willingness to enter into procompetitive agreements with rivals. Cf. Christy Sports, 555 F.3d at

1195 (explaining that agreements between rivals that give the incumbent the right to limit

immediate competition are actually procompetitive because they facilitate the entry of new

market participants). Dominion was under no obligation to allow Patriot to use its cellular

network. Dominion’s decision to enter into a freely terminable agreement facilitated the entry of

a new competitor—a procompetitive outcome. Had Dominion feared that its relationship with a

rival would create potential antitrust liability, Patriot likely would never have had the chance to

enter the market and consumers would have lost the option of an additional cellular service

provider.

For these reasons, Dominion’s conduct properly rests with the plethora of cases that

found the Aspen Skiing exception inapplicable. Dominion had legitimate business justifications

for its conduct, it did not sacrifice short-term profit by doing so, and the relationship with Patriot

was temporary and terminable. Therefore, at the very least, the district court erred in finding

there was no genuine issue of material fact with regard to the refusal-to-deal claim.

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CONCLUSION

For the reasons stated above, Dominion requests this Court reverse the judgment below

and grant entry of summary judgment for Dominion. Or, in the alternative, vacate the district

court opinion and remand the case for trial.

DATED: January 20, 2014. Respectfully submitted, Team F.

By ___________________

Team F Attorneys for Appellant Dominion Telecommunications, Inc.