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Supreme Court Case on Baby Bells May Affect Antitrust Enforcement
By Jess Bravin
The Wall Street Journal
Tuesday, November 28, 2006

WASHINGTON -- In a case with implications for antitrust enforcement, the Supreme Court heard arguments on how specific a plaintiff's allegations must be to claim anticompetitive behavior.

The case springs from the decades-old legal saga that ended the Bell system telephone-service monopoly and created today's marketplace.

The 1996 Telecommunications Act gave the Bell system's regional successors, the Baby Bells, the right to sell long-distance service in return for opening their local networks to competitors.  Despite Congress's expectation the law would create a competitive market, the Baby Bells have remained dominant in their respective regions.

The plaintiffs, a group of individuals who bought local telephone and Internet service since the law was enacted and represented by the class-action firm Milberg Weiss Bershad & Schulman LLP, filed suit in 2003, alleging the Baby Bells conspired to restrict entry into their territories of competitors in local telephone and Internet service.  They claimed the Baby Bells, which after several mergers and name changes now include AT&T Inc., BellSouth Corp., Qwest Communications International Inc. and Verizon Communications Inc., violated the Sherman Antitrust Act, which prohibits "every contract, combination ... or conspiracy, in restraint of trade or commerce."

The plaintiffs had no direct evidence of such a conspiracy, however, and instead based their claim on circumstantial indicators of anticompetitive behavior, such as the parallel conduct of the Baby Bells in declining to compete in each other's territory and allegedly impeding other carriers from connecting to their networks.  The Baby Bells argued that without more -- such as an allegation of a specific meeting in which a deal was made to restrain trade -- the case should be dismissed without allowing the plaintiffs discovery of internal documents.

The Federal Rules of Civil Procedure impose minimal requirements to file a lawsuit, specifying little more than that plaintiffs file "a short and plain statement of the claim showing that [they are] entitled to relief."  Court rulings have interpreted the rule to require that the claim provide defendants "fair notice" of the accusation so they can respond and prepare for trial.

A federal judge in New York dismissed the suit, ruling the plaintiffs' allegations fell short of this standard.  The Second U.S. Circuit Court of Appeals, also in New York, reinstated the lawsuit, saying the evidentiary test applied by the trial court was better suited at a later stage of proceedings -- summary judgment, which a party can seek after discovery and presentation of evidence -- on the grounds no reasonable jury could agree with its opponent.

The appeals court acknowledged that the ease of filing lawsuits imposed on defendants the "sometimes colossal expense of undergoing discovery" and could thereby encourage unjustified settlements to avoid trial.  But the Second Circuit said "if that balance is to be recalibrated ... it is Congress or the Supreme Court that must do so."

Yesterday, a lawyer for the Baby Bells, Michael Kellogg, told the Supreme Court that no recalibration was needed because existing law already required dismissal of the suit.

Several justices, however, seemed unpersuaded.  Justice Ruth Bader Ginsburg suggested the Baby Bells were trying to rewrite a 68-year-old rule by adding evidentiary requirements to the initial claim, and Justice John Paul Stevens said "dozens" of antitrust claims were no more specific than that alleged in the Baby Bells case.

The Bush administration, siding with the Baby Bells, argued that parallel conduct was common in the U.S. economy, and that allowing antitrust suits based only on it would be too burdensome for business.  Pressed by Justice Antonin Scalia, however, Assistant Attorney General Thomas Barnett agreed that some parallel conduct could be so suspicious as to be sufficient to support a claim.

But the plaintiffs' attorney, J. Douglas Richards, fared no better.  Under the standard the plaintiffs favored, Justice Stephen Breyer said, half the companies in the U.S. could be sued.  Adopting that position would have the Supreme Court "restructuring the economy," he said.

A decision is expected by the end of the court's term, in June.

(Bell Atlantic Co. v. Twombly)

--Mark Anderson contributed to this article.

Write to Jess Bravin at jess.bravin@wsj.com


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