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From Antitrust Law Daily, April 9, 2015

Text messaging case a lesson in distinguishing between express and tacit collusion

By Jeffrey May, J.D.

Four wireless network providers—AT&T, Verizon, Sprint, and T-Mobile—were not shown by complaining customers to have conspired to fix the price of pay-per-use (PPU) text messages, the U.S. Court of Appeals in Chicago ruled today. Dismissal of a class action antitrust suit against the providers and their trade association was affirmed (In re: Text Messaging Antitrust Litigation, April 9, 2015, Posner, R.).

The complaining customers of PPU text messaging services, as opposed to the now ubiquitous bundled text messaging plans, had presented circumstantial evidence consistent with an inference of collusion for the period from 2005 to 2008. In 2010, the appellate court upheld the district court's denial of the defendants' motion to dismiss the complaint for failure to state a claim. However, the evidence presented on the defendants' motion for summary judgment, following three years of discovery, was equally consistent with independent parallel behavior, the court explained. The plaintiffs failed to find sufficient evidence of express collusion to make a prima facie case. Consequently, “the district court had no alternative to granting summary judgment in favor of the defendants.”

The plaintiffs failed to find evidence that the defendants colluded expressly or explicitly agreed to raise prices. It was not enough that they tacitly raised prices in a “follow the leader” strategy, according to the court. Rejected was the plaintiffs' supposed “smoking gun”—a pair of emails discussing price increases for PPU services from one T-Mobile employee to another. The court called the plaintiffs’ emphasis on the e-mails “a mystery” and suggested that it “wast[ed] space in their briefs that might have been better used.”

Treating tacit collusion as a Sherman Act violation. The court cautioned against treating tacit collusion as if it were express collusion. It was suggested that imposing liability for tacit collusion would harm competition. The court pointed to the writings of Harvard Law School Professor Louis Kaplow, who has argued that tacit collusion should be deemed a violation of the Sherman Act. In response, the court said: “That of course is not the law, and probably shouldn’t be.”

Evidence of agreement. The plaintiffs unsuccessfully argued that an agreement between the carriers explained their daring to raise PPU prices. The argument was based on the suggestion that had any one of the four carriers not raised its price, the others would have experienced costly consumer “churn,” or loss of customers to a competitor. The court offered six reasons why this did not amount to evidence of express collusion:

  1. a rational profit-maximizing seller does not care about the number of customers it has but about its total revenues relative to its total costs;

  2. despite the risk of churn, tacit collusion occurs because of the advantages of hanging together rather than hanging separately;

  3. to eliminate all risk of churn the defendants would have had to agree to raise their prices simultaneously, but the defendants' prices did not move in lockstep;

  4. there was no evidence that PPU pricing was a major determinant of a consumer’s choice of carrier, since the price increases involved a small absolute amount of money for most consumers and consumers faced with price increases might sign on to the company’s text messaging bundle plan;

  5. the PPU price increases occurred as text messaging caught on with the consuming public and surged in volume, and the carriers wanted their PPU customers to switch to bundles; and

  6. gains from fixing prices in the PPU market, which was generating a slight—and shrinking—part of the carriers’ overall revenues would be more than offset by the inevitable legal risks and could be negated by increased competition in the carriers’ other markets.

Trade association role. The court also was not persuaded that the trade association facilitated a price fixing agreement. While opportunities for senior leaders of the defendants to meet privately at trade association meetings “abounded,” there was no basis for an inference that they were using the meetings to plot prices increases. “This evidence would be more compelling if the immediate sequel to any of these meetings had been a simultaneous or near-simultaneous price increase by the defendants. Instead there were substantial lags,” the court noted.

“We hope this opinion will help lawyers understand the risks of invoking 'collusion' without being precise about what they mean,” the court said. “Tacit collusion, also known as conscious parallelism, does not violate section 1 of the Sherman Act. Collusion is illegal only when based on agreement.”

The case is No. 14-2301.

Attorneys: Patrick J. Coughlin (Coughlin Stoia Geller Rudman & Robbins LLP) for Aircraft Check Services Co. Aaron Martin Panner (Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC) for Verizon Wireless. Micah Block (Davis, Polk & Wardwell LLP) and Charles H.R. Peters (Schiff Hardin LLP) for T-Mobile USA, Inc., and Sprint Nextel Corp. Brian A. McAleenan (Sidley Austin LLP) for AT&T Mobility, LLC. Ruth A. Bahe-Jachna (Greenberg Traurig, LLP) for CTIA - The Wireless Assn. Dane H. Butswinkas (Williams & Connolly LLP) and Frederic R. Klein (Goldberg Kohn Ltd.) for Sprint Communications, Inc.

Companies: Aircraft Check Services Co.; Verizon Wireless; T-Mobile USA, Inc.; Sprint Nextel Corp.; AT&T Mobility, LLC; CTIA - The Wireless Assn.; Sprint Communications, Inc.

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