People’s Choice Wireless, Inc. v. Verizon Wireless, B175179.

In a case building upon the definition of “unfair” as defined in the California Unfair Practices Act1, plaintiffs, independent dealers of cellular phones (“Independent Dealers”) alleged that defendant Verizon Wireless (“Verizon”) engaged in unfair competition within the meaning of Business and Professions Code Section 17200 by (1) refusing to sell popular, new cellular telephone models to the Independent Dealers during an extended “holdback” period, and (2) selling cellular telephones to customers below cost in certain circumstances, where because of a change in Verizon’s sales policies, the Independent Dealers could not afford to compete. The Independent Dealers brought an action for injunctive relief pursuant to California Business and Professions Code Section 17203.

The trial court sustained a demurrer to an amended complaint without leave to amend, and the Court of Appeals, 2d Appellate District affirmed. The court held that while the practices alleged to be “unfair” may have injured the Independent Dealers as competitors, the practices were lawful unilateral refusals to deal, and thus protected by the Colgate doctrine.2 The court cited Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP3 as having “revisited” Colgate, and having extended broad approval to the “long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise its own independent discretion as to parties with whom he will deal.”4 In Trinko, the Supreme Court explained that the “opportunity to charge monopoly prices – at least for a short period – is what attracts business acumen in the first place; it induces risk taking that produces innovation and economic growth.”5 In effect, the Court of Appeals considered the Independent Dealers to be “free riders” on the unilateral business endeavors of Verizon and its wholly-owned and operated stores. Thus, while Verizon’s trade policies, and its changes of position, may have injured the Independent Dealers, as competitors, Verizon had an almost unfettered right to do so, and accordingly, may have injured competitors, but did not injure competition. Through its analysis of Trinko, Colgate has been elevated to a new level, as a limitation on the duty of an alleged monopolist to deal with competitors.

Verizon sells cellular telephones through wholly-owned and operated stores to consumers below cost, if the consumer agrees to purchase telephone service for a set period of time, usually one to three years. Verizon also subsidizes the cost of the purchase of cellular telephones, if the customer wishes to upgrade to a new phone. At Verizon’s request, the providers of the cellular telephones, including Motorola, Nokia and Sony, manufactured phones exclusively for Verizon, to be solely compatible with its telephone network. The manufacturers agree to sell new models to Verizon on an exclusive basis for a specified period of time, normally three to six months. During this period, the Independent Dealers could not purchase new models from the manufacturers. However, they could purchase the same phones directly from Verizon. Most consumer purchases occur within the exclusivity period.

The Independent Dealers can only match the prices being charged for cellular telephones in the Verizon stores by giving away accessories, including headsets and carrying cases, at no charge to the consumer.

However, even during the exclusivity period, Verizon imposed a two-week “holdback” period, whereby it would refuse to make its most popular new models available to the Independent Dealers. During the “holdback” period, Verizon released these models to its wholly-owned and operated retail stores, but not to the Independent Dealers.

When the Motorola T720 and the Blackberry 6750 came to market, however, Verizon extended the “holdback” period from two months to in excess of four months. Plaintiffs alleged that the “holdback” period was intended to and had the effect of preventing price competition. Therefore, they alleged, it was “unfair” under Cel-Tech.

Verizon had a commission structure which treated the Independent Dealers relatively equally within its wholly-owned stores. Verizon subsidized the cost of new cellular telephones only for customers who have fulfilled at least one year of the service contract. On a parallel basis, Verizon paid a commission to the Independent Dealers whenever they obtained a service contract renewal from customers who had fulfilled at least one year of their existing service contract.

In December 2002, however, Verizon began to subsidize all new cellular phones sales, notwithstanding that the customer had not fulfilled at least one year of his or her service contract. However, it did not change the commission schedule applicable to the Independent Dealers. Thus, the Independent Dealers were at a disadvantage, and were unable to engage in price competition with the Verizon operated stores. The Independent Dealers urged that the changes in business practices were tantamount to the “lock-in” feature of Eastman Kodak Co. v. Image Technical Services, Inc.6 It also analogized the practices to the changes in position in Aspen Skiing Co. v. Aspen Highlands Skiing Corp.7

In People’s Choice Wireless, Inc. v. Verizon Wireless, California Court of Appeals (2d Dist.), No. B175179, issued on July 28, 2005, the court rejected the Eastman Kodakand Aspen Skiing analogies. It noted that in Trinko, Justice Scalia identified Aspen Skiing as being “at or near” the outer boundary of [Section 2] liability.8 The Court of Appeal noted further that in Eastman Kodak, the original equipment purchasers of Kodak equipment were “locked-in”, as there were no substitutes for Kodak parts used in Kodak equipment. Thus, Kodak controlled nearly 100% of the parts market and 80% – 95% of the service market of its own “installed base”. There were no readily available substitutes, and this was sufficient to suggest that Kodak was able to exercise market power over the purchase of parts and service for its own line of xerographic equipment.

Here, however, the Court of Appeals found no corresponding market power that could have been enjoyed by Verizon to foreclose competition, gain a competitive advantage, or to destroy a competitor. In contrast, the relevant market was comprised of all cellular telephones, and there was no allegation that Verizon had monopolized that market or any related market. There were service providers other than Verizon, including T-Mobile and Cingular, and phone manufactures such as Motorola, Nokia and Sony. The only meaningful allegation in the complaint was that the Independent Dealers were denied the ability to sell the most popular new Verizon models for a limited period of time.

Thus, the Court of Appeals inferred from the complaint that plaintiffs’ ability to sell other brands was unfettered, and that consumers still had a wide variety of choices on what and where to buy. On this basis, the Court of Appeal held that the only complaint that the Independent Dealers had was on “intrabrand” and not “interbrand” price competition. The court concluded that it was a “logical deduction” from the complaint that while the Independent Dealers could not undercut Verizon’s prices on popular new Verizon cellular telephone models during the limited “holdback” period, they could still undercut Verizon’s prices with respect to the competing brand models acquired from other manufacture and service providers.

However, the lynch-pin of the court’s decision is that in the absence of an abuse of monopoly power in a relevant market, the case involved nothing more than a permissible unilateral refusal to deal with the Independent Dealers, protected by Colgate. The court held that “boiled down,” the Independent Dealers position was that the trial court failed to limit the application of Colgate, as against other antitrust policies. Again, borrowing from Justice Scalia’s opinion in Trinko, the court held that the Independent Dealers had failed to appreciate that antitrust policy attempts to balance the benefits of protecting and fostering economic incentives for entrepreneurs to pursue innovative business practices, with the benefits procured for consumers. The court held that the trial court had found the “right balance”, and held further that based upon the “special heed” of Trinko, “we should be cautious before creating exceptions to the conduct allowed by Colgate.9

The court agreed with the Independent Dealers that Cel-Tech does not require that there be an antitrust violation in order to state a cause of action for injunctive relief pursuant to Business and Professions Code Section 17203. Nevertheless, the court held that it was constrained to look at the alleged impact of the conduct on competition, and to consider any “counter vailing policies”.10

Even assuming that the Independent Dealers were correct that Verizon’s conduct reduced both consumer choice and price competition, there was no perceived threat or harm to the competitive process. The court stated:

“[T]here may be a reduction in intrabrand competition regarding some Verizon cellular telephones for short periods of time, but there is no reduction in interbrand competition.… What shines through more clearly … is that Verizon’s conduct has injured the independent dealers. But as Cel-Tech teaches, injury to competitors is not the same thing as injury to competition, and we may only consider the latter.”11

As a final death-knell to the Independent Dealers amended complaint, the court noted that:

“The bottom line is, the Independent Dealers want to prevent Verizon from discounting in situations where they themselves could not discount. This means that if the Independent Dealers cannot share the wealth, they want a court to force certain Verizon customers to pay higher prices. What antitrust policy would be in play here?”12

Finally, the court noted that Section 1 of the Sherman Act was not implicated in the decision. This is because the conduct involving Verizon and its wholly-owned and operated cellular telephone stores was “wholly unilateral”, and thus governed by the single entity standard of Copperweld.13 The court thus distinguishes Eiberger v. Sony Corp.,14 and cases involving discrimination between competing downstream distributors. As independent downstream distributors are lacking, Eiberger is inapplicable, and the case is governed by Copperweld. The court notes that a single firm must pose a danger of actual monopolization in a properly defined relevant market. Here, there is no such danger, and accordingly, there is nothing that would trigger the application of Cel-Tech.15 In the last analysis, the court finds that Justice Scalia’s elevation of Colgate, in Trinko, and its limitation of the duty of even an alleged monopolist to deal with its rivals, drives the analysis, and accordingly, the amended complaint failed to state a cause of action under the California Unfair Competition Act.

  1. See, Cel-Tech Communications v. L.A. Cellular, 20 Cal. 4th 163, 187 N. 12 (1999) (standard for “unfair” conduct is limited to actions by competitors alleging anticompetitive conduct.) In Cel-Tech, the California Supreme Court held that even where not “unlawful” a practice could be “unfair” where the conduct “threatens an incipient violation of an antitrust law, or violates the policy or spirit of such laws, because its competitive effects are comparable to, or the same as a violation of the antitrust laws, or otherwise significantly threatens or harms competition.” See, 20 Cal. 4th at 186.
  2. United States v. Colgate & Co., 250 U.S. 300 (1919) (“Colgate“).
  3. 540 U.S. 398, 408 (2004) (“Trinko“).
  4. Colgate at 307.
  5. Trinko at 407.
  6. 504 U.S. 451 (1992) (“Eastman Kodak“).
  7. 472 U.S. 585 (1985) (“Aspen Skiing“).
  8. 540 U.S. at 409.
  9. Slip Opinion at 12.
  10. Slip Opinion at 12.
  11. Slip Opinion at 12.
  12. Slip Opinion at 13-14.
  13. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (parent and its wholly-owned subsidiaries considered single economic unit for purposes of Sherman Act).
  14. 622 F.2d 1068 (2d Cir. 1980).
  15. Cel-Tech Communication, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163 (1999).

Authored by:
Don T. Hibner, Jr.