Verizon v. Trinko: what's it mean to you and me?

Monday's Wall Street Journal included a tremendous article by David S. Evans--available to subscribers only, alas--on the Supreme Court's decision in Verizon v. Trinko, No. 02-682 (Jan. 13, 2003). I agree with Evans that the case is one of the most important decisions of the decade--indeed, a critical boost for constitutional rights. Let me explain why anyone should care about a complicated ruling on telecommunications law. The explanation is long, but stick with me.

First some background. The Telecommunications Act of 1996 introduced a plethora of new laws, and required a plethora (squared) of new regulations, designed to "open local phone service to competition." Remember that the 1984 breakup of AT&T (following a decade of court and Federal Communications Commission (FCC) rulings) created viable competition in the "long lines" market. Suddenly you could choose your own long distance carrier, change your mind, or use a "1010" dial-around to select your carrier on the fly. It was confusing for a while, but prices fell for quite some time (they've starting inching up in the late 1990s but are either stabilized or falling again). The 1996 Act was supposed to replicate those lower prices, and more choices, for your local phone service. In other words, the 1996 Act focused squarely on reducing the market share of the Bell Operating Companies, such as SBC, Verizon, Bell South, etc.

A whole bunch of FCC and Supreme Court decisions later (see here for further background), and a bigger bunch of investor dollars later, little such competition emerged. It just wasn't profitable for new entrants to lay new cable on each street to each business or home. But, the FCC and competitors reasoned, why not use the existing cables and lines. Sure, those cables were owned by the incumbent providers (again, for the most part, the Bells). Nonetheless, the law compelled the Bells to lease use of their network to their competitors. And the FCC and Supreme Court set lease rates substantially lower than the Bells' costs to build their network. Presto, chango: watch me pull some competition out of my hat.

Well, this worked marginally (pun intended) better. (Though many competitors still failed, and many shareholders lost.) And it's still the practice, although some states have permitted the Bells to increase competitor lease somewhat recently. But, it's a bit unfair, don't you think? It's one thing to promote competition; it's another to expect a competitor to subsidize competition. Further, this approach requires constant oversight by the FCC and state utility commissions over the business relations between regulated carriers. That's inefficient.

Adding insult to injury, lawyers sniffed money and started filing clever law suits, claiming that customers of the Bell competitors were injured while the FCC or state commissions adjudicated the various claims. Some experts said that the 1996 Act implicitly immunized the Bells, some said not. The circuit courts split on the issue: the Seventh Circuit (the Goldwasser case in 2000) found that the Act precluded private antitrust actions, while the Second Circuit (the Trinko case in 2002) permitted such claims. Such a "split in the circuits" often prompts Supreme Court review. But I was surprised when the Supremes agreed to hear the case; I thought the Second Circuit was clearly right and the Seventh Circuit clearly wrong. After all, the 1996 Act itself says: "nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws." What could be clearer?

Apparently nothing. The Supreme Court had no trouble agreeing with the Second Circuit (analysis--one paragraph) that the law didn't preclude separate antitrust suits. The rest of the decision is the good stuff, and explains why the Court grabbed the case.

Moving from telecom to antitrust law, the Supremes considered whether the Bell's refusal to deal (or delay in dealing) with competitors was unlawful. As Evans wrote:

The six judges decided that compelling firms -- even monopolies -- to share their property risked reducing innovation and economic growth. A firm would have little incentive to invest if it had to share the results with its competitors, and the competitors would have little incentive if they could piggyback on their more successful rival. They also expressed doubt that courts could identify the exceptions when forced sharing might make sense. And they worried that courts would turn into "central planners" that would have to dictate price, quantity, and the other terms of deals between rivals. This position garnered the support of justices across a wide ideological spectrum, from Antonin Scalia to Ruth Bader Ginsburg.

Finally, we get to the point. Private property is private, damn it. The government may not pilfer (or significantly impair) it without paying value. U.S. Constitution, Amend V. This extends to property of utilities, including a telephone network. And it covers property, like a phone network, that require prior governmental authorization. Those networks, though regulated, are owned by the Bells, used as they choose.

This is an enormously helpful line of reasoning for us "constitutionalists" (you know, the ones the media call "strict constructionists," the ones who think the Constitution says what it means, not what someone wishes it said). So, in the face of a wealth of recent and contrary precedent, Trinko is a welcome case that emphasizes the narrowness of government power over persons, whether natural person or legal persons (i.e., corporations). For antitrust lawyers, Trinko means that the long-standing doctrine permitting courts to give competitors access to a rival's "essential facilities" is essentially dead.

And there's another lesson as well, a very practical one. Twenty-five years in the industry make me a believer in competition: Cheaper and faster than administrative regulation, competition ensures lower prices, better service and more choices. Whenever possible, rely on the market--not a bureaucracy or a court--to oversee providers of essential services. As the Supreme Court said in Trinko (Slip Op. at 15):

Judicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation, atop the variety of litigation routes already available to and actively pursued by competitive LECs. [And such oversight] may be. . . "beyond the practical ability of a judicial tribunal to control."

The United States is large enough so that most utility services can be provided by more than a single firm. In such cases, competition is vastly better than government.

But it is not always so. Competition may be infeasible in local telephony, in energy distribution or other areas. Moreover, I've consulted on telecommunications laws in other countries, in the developing world--nations significantly smaller than the U.S. Although one would like to rely on competition (rather than regulators required rapidly to become experts in the relevant industry), it may not always be possible. (This is the so-called "natural monopoly," where prices decline over the relevant range of demand.) In such circumstances, a regulated monopoly may the most efficient provider.

So the Trinko ruling sets some real-world limits to government. Yes, the government should regulate natural monopoly utilities. But, it shouldn't be self defeating: over-burdening such companies freezes technological progress, chokes choice and perpetuates high prices. It's not logical to force a company to subsidize it's competitors; it also won't serve the interests of the public.

This long-winded explanation provides both a glimpse into my work-day world and practical advice. There's no difference between the property of a Fortune 500 company and the family farm. One thing a farmer knows is that beating a cow won't produce more milk. Next time Congress considers a huge law covering a complex industry, I hope they ask: "would this be fair if applied to my house?"

How many statutes do you think would remain?