A maker of concrete vaults that house telephone cables cannot add an exclusive dealing claim to the host of antitrust allegations it has leveled against SBC Services Inc., a California District Court judge has ruled.

Plaintiff Jensen Enterprises, Inc. sought to amend its complaint against SBC to add an exclusive dealing claim under Clayton Act Section 3, but U.S. District Court Judge Susan Illston denied the motion, saying that 9th Circuit case law only allows such claims to be alleged against sellers, and SBC is in no sense a seller of the vaults.  Jensen Enterprises, Inc. v. Oldcastle, Inc., C-06-247 SI (N.D. Cal. Feb. 5, 2007).

Jensen makes and sells telephone utility vaults, concrete structures that are used to connect telephone cables from properties to telephone land lines.  According to the complaint, the companies that make these vaults usually sell directly to a developer, who then installs them and the accompanying telephone cable.  After installation is complete, according to the complaint, the property developer usually must resell the vaults and cable to an AT&T affiliate, and only then will the affiliate provide phone service.

Jensen alleges that defendants, three affiliates of AT&T, Inc.[1], conspired with another maker of the vaults, defendant Oldcastle, Inc., to eliminate competition and artificially inflate prices.

According to Jensen, the AT&T affiliates have named Oldcastle as the sole source of concrete vaults for connecting properties in California and Nevada to the AT&T networks in those states.  Jensen claims that Oldcastle, as the only authorized seller, charges property developers excessively high prices for its vaults — prices that it could never charge if it had to face competition.  The developers must then resell the vaults to an AT&T affiliate at a very low price which, according to the complaint, the affiliate justifies by referring to prices in a sales contract between SBC and Oldcastle.

Thus, Jensen claims, Oldcastle enjoys windfall profits and AT&T affiliates effectively force property developers to subsidize their telephone network in California and Nevada — all at the expense of excluded competitors and captive customers.  “These property developers are in the first instance captive purchasers who must buy dear from Oldcastle, and then they become captive resellers who must sell cheap to the local AT&T affiliate,” the complaint alleges. 

Jensen claims the arrangement violates Sherman Act sections 1 and 2, California’s Cartwright Act and the Nevada Fair Trade Practice Act and that it constitutes tortious interference with contracts and tortious interference with prospective economic advantage.  To this list, Jensen sought to add an exclusive dealing claim under Clayton Act section 3, which provides that “It shall be unlawful … to … make a sale … of goods … on the condition … that the … purchaser … shall not use or deal in the goods … of a competitor … where the effect … may be to substantially lessen competition or tend to create a monopoly ….”

SBC opposed the amendment, citing McGuire v. Columbia Broadcasting System, 399 F.2d 902 (9th Cir. 1968) for the proposition that a Section 3 claim cannot lie against a buyer in an alleged exclusive dealing arrangement.  “The language of the statute defines liability in terms of a person who makes a sale or contracts for sale and nowhere provides for liability of the buyer.”  Id. at 906.  Another district court has observed that such a limitation is consistent with the “fundamental antitrust concept that the alleged sins of sellers should not be visited on buyers because of the risk of chilling competition.”  Genetic Systems Corp. v. Abbott Laboratories, 691 F. Supp. 407, 415 (D.D.C. 1988).

Jensen argued that McGuire was inapplicable because buyers in the instant case are the property developers and contractors.  The District Court noted, however, that SBC was also a buyer of the concrete vaults, and that nowhere in the transaction is SBC a seller.  The court therefore denied plaintiff’s motion to amend the complaint to add to the section 3 claim against SBC. (The court granted plaintiff’s motion to add a section 3 claim against Oldcastle, which did not oppose the amendment).

[1] The AT&T defendants are SBC Services, Inc., Pacific Bell Telephone Company and Nevada Bell Telephone Company.