Covad Communications Co. v. Bell Atlantic Corp.

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 18, 2004 Decided March 1, 2005
Reissued March 2, 2005

No. 02-7057

COVAD COMMUNICATIONS COMPANY AND
DIECA COMMUNICATIONS, INC., D/B/A COVAD
COMMUNICATIONS COMPANY,
APPELLANTS

v.

BELL ATLANTIC CORPORATION, ET AL.,
APPELLEES

Appeal from the United States District Court
for the District of Columbia
(No. 99cv01046)

Bruce D. Sokler argued the cause for appellants. With
him on the briefs were Fernando R. Laguarda, John R. Gerstein,
Merril J. Hirsh, Gabriela Richeimer, and James A. Kirkland.
Antony R. Petrilla and Donald B. Verrilli, Jr. entered
appearances.

David W. Carpenter, David L. Lawson, C. Frederick
Beckner, III, Ryan D. Nelson, Jason D. Oxman, Eric J.
Branfman, Rebecca P. Dick, Jonathan D. Lee, and Stephen T.
Perkins were on the brief of amici curiae AT&T Corporation, et
 2

al. in support of appellants.

Eliot Spitzer, Attorney General, Attorney General’s
Office of the State of New York, Michelle Aronowitz, Deputy
Solicitor General, Jay L. Himes and Richard L. Schwartz,
Assistant Attorney Generals, Richard Blumenthal, Attorney
General, Attorney General’s Office of the State of Connecticut,
Steven M. Rutstein, Assistant Attorney General, Carla Stovall,
Attorney General, Attorney General’s Office of the State of
Kansas, G. Steven Rowe, Attorney General, Attorney General’s
Office of the State of Maine, J. Joseph Curran, Jr., Attorney
General, Attorney General’s Office of the State of Maryland,
Mike Hatch, Attorney General, Attorney General’s Office of the
State of Minnesota, Frankie Sue Del Papa, Attorney General,
Attorney General’s Office of the State of Nevada, and Mark L.
Shurtleff, Attorney General, Attorney General’s Office of the
State of Utah, were on the brief of amici curiae States of New
York, et al. in support of reversal of the order appealed from.

Mark C. Hansen argued the cause for appellees. With
him on the brief were Michael K. Kellogg, Aaron M. Panner,
John Thorne, and Richard G. Taranto. Dan K. Webb and Steven
F. Benz entered appearances.

Jerry W. Kilgore, Attorney General, Attorney General’s
Office of the Commonwealth of Virginia, William E. Thro, State
Solicitor General, and Maureen Riley Matsen, Deputy State
Solicitor General, were on the brief for amicus curiae
Commonwealth of Virginia, in support of appellees.

R. Hewitt Pate, Assistant Attorney General, U.S.
Department of Justice, Catherine G. O'Sullivan, Nancy C.
Garrison, and David Seidman, Attorneys, John C. Rogovin,
General Counsel, Federal Communications Commission, John
E. Ingle and Susan L. Launer, Deputy Associate General
 3

Counsels, were on the brief of amici curiae The United States
and Federal Communications Commission supporting neither
party.

Andrew D. Roth and Laurence Gold were on the brief of
amicus curiae Communications Workers of America in support
of appellees.

Lawrence E. Sarjeant, Marc Gary, Stephen M. Shapiro,
John E. Muench, Jeffrey W. Sarles, and James D. Ellis were on
the brief of amici curiae BellSouth Corporation, et al. in support
of appellees. James F. Rill entered an appearance.

Before: GINSBURG, Chief Judge, and ROGERS and
TATEL, Circuit Judges.

Opinion for the Court filed by Chief Judge GINSBURG.

GINSBURG, Chief Judge: This appeal comes to us in the
wake of Verizon Communications Inc. v. Curtis V. Trinko, LLP,
540 U.S. 398 (2004), in which the Supreme Court held that a
complaint alleging an incumbent local exchange carrier (ILEC)
refused to share elements of its network with a competitor, as
required by the Telecommunications Act of 1996, 110 Stat. 56,
codified at 47 U.S.C. § 151 et seq., did not state a claim for
monopolization or attempted monopolization under § 2 of the
Sherman Act, 15 U.S.C. § 2. In the present case, Covad
Communications Company sued Bell Atlantic Corporation, also
an ILEC, similarly alleging Bell Atlantic had violated § 2 of the
Sherman Act by virtue of having breached various duties
imposed upon it by the 1996 Act and by engaging in other
anticompetitive conduct.

The district court, prior to the Supreme Court’s decision
 4

in Trinko, granted Bell Atlantic’s motion to dismiss Covad’s
complaint for failure to state a claim upon which relief can be
granted. Covad Communications Co. v. Bell Atlantic Corp., 201
F. Supp. 2d 123, 127 (D.D.C. 2002). Covad appeals, arguing:
(1) the allegations in its complaint relative to the 1996 Act are
materially different from the allegations held deficient in
Trinko; and (2) at least some of its allegations are of conduct
independently proscribed by the Sherman Act.*

We conclude that most of the allegations in Covad’s
complaint do not state an antitrust claim; they describe at most
a violation of the 1996 Act. Of the three allegations unrelated
to duties imposed upon Bell Atlantic by the 1996 Act – the false
pre-announcement campaign, the refusal to deal, and the
baseless and bad faith patent suit – only the alleged refusal to
deal states an antitrust claim and therefore should not have been
dismissed.

I. Background

Covad provides a Digital Subscriber Line (DSL) service
over local telephone lines, which not only gives its customers
high-speed Internet access but also permits Covad to offer voice
and data service, in competition with Bell Atlantic, which
provides local exchange and telecommunications services,
including DSL. Covad contends that Bell Atlantic used its
monopoly power to undermine competition in various markets

*
The district court declined to exercise supplemental
jurisdiction over the three state common law claims and the claim that,
in addition to violating the Sherman Act, Bell Atlantic violated the
District of Columbia Antitrust Act. 201 F. Supp. 2d at 135. Covad
does not challenge that ruling on appeal.
 5

for telecommunications services. In April 1999 Covad sued Bell
Atlantic and twelve subsidiaries asserting, in its second amended
complaint, seven causes of action, including the four Sherman
Act claims that are the subject of this appeal. The thrust of the
four antitrust claims – monopolization, attempted
monopolization, denial of essential facilities and refusal to deal,
and monopoly leveraging – is that Bell Atlantic violated the
Sherman Act by exercising its monopoly power in violation of
its obligations under the 1996 Act.

Several allegations clearly concern Bell Atlantic’s failure
to make various of its facilities and elements of its network
available to Covad, as required by the 1996 Act. See 47 U.S.C.
§ 251(c) (requiring ILECs to share unbundled network elements
with competitors). See generally Trinko, 540 U.S. at 402-05
(discussing duties imposed upon ILECs by 1996 Act); Covad
Communications, 201 F. Supp. 2d at 127 (same). Specifically,
Covad alleges Bell Atlantic failed to provide it with adequate
co-located space and facilities; did not make its local loops – the
wires between Bell Atlantic’s central offices and its customers’
premises – sufficiently available to Covad; did not maintain
adequate operations support systems (OSS) for Covad’s use; and
denied Covad access to the “transport facilities” it needed to
connect its central office equipment with other points in its
network.

Covad also alleges Bell Atlantic engaged in
anticompetitive conduct arguably untethered to the 1996 Act.
Specifically, the complaint states Bell Atlantic pursued an
unlawful “price squeeze”; created the false impression Bell
Atlantic’s own DSL service was already available to consumers;
refused to sell its DSL service to would-be customers who had
orders for DSL service pending with Covad; and brought a
baseless and bad faith patent suit against Covad.
 6

Bell Atlantic moved to dismiss Covad’s complaint on the
ground it did not state a claim upon which relief can be granted.
The district court granted that motion, explaining that “virtually
all allegations of exclusionary conduct, with the exception of the
retaliatory patent law suit, relate to Bell Atlantic’s failure to
comply with the myriad duties contained in ... the 1996 Act,”
201 F. Supp. 2d at 129, and more important, “fall squarely
outside the parameters of antitrust law,” id. at 130. Thus, the
district court held the allegations concerning Bell Atlantic’s
failure to share its facilities and certain network elements with
Covad did not state a claim under the so-called “essential
facilities” doctrine – which the Supreme Court in Trinko later
described as having been “crafted by some lower courts”
applying the Sherman Act, 540 U.S. at 410 – and held the
allegations concerning the baseless and bad faith patent suit
were inadequate because Covad “failed to allege [it] had any
‘anticompetitive effect.’” Id. at 135 (citing United States v.
Microsoft Corp., 253 F.3d 34, 58-59 (D.C. Cir. 2001)).

II. Analysis

We review de novo the district court’s dismissal of a
complaint for failure to state a claim upon which relief can be
granted. See Caribbean Broad. Sys. Ltd. v. Cable & Wireless
PLC, 148 F.3d 1080, 1085 (D.C. Cir. 1998). Confronted with a
motion to dismiss, “a plaintiff is not required to plead facts
sufficient to prove its allegations”; rather, the complaint need
only contain “a short and plain statement of the claim showing
that the pleader is entitled to relief.” FED. R. CIV. P. 8(a). The
court must accept all facts and reasonable inferences as true and
may dismiss the complaint only if it “it appears beyond doubt
that the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief.” Caribbean Broad. Sys., 148
F.3d at 1086. Why? Because the “the issue presented by a
 7

motion to dismiss is not whether a plaintiff will ultimately
prevail but whether the claimant is entitled to offer evidence to
support the claims.” Id.

In this case, therefore, the issue on appeal is broadly
whether Covad’s complaint alleges Bell Atlantic engaged in any
“anticompetitive conduct” in violation of § 2 of the Sherman
Act. See Trinko, 540 U.S. at 407 (“possession of monopoly
power will not be found unlawful unless it is accompanied by an
element of anticompetitive conduct”). Covad argues that all the
claims in its complaint should be reinstated because its
allegations of anticompetitive conduct, taken together, dwarf the
single allegation at issue in Trinko and that, in any event, at least
some of its allegations, viewed individually, do state a claim
upon which relief can be granted under the Sherman Act. Bell
Atlantic contends the district court properly dismissed the
complaint in its entirety because each allegedly anticompetitive
act either pertains only to a duty imposed by the 1996 Act or
otherwise fails to state a claim under the Sherman Act.

In determining whether Covad has stated a valid claim,
our starting point is the teaching of the Supreme Court in Trinko
about the relationship between the 1996 Act and established
antitrust principles. In holding a complaint alleging breach of an
ILEC’s duty under the 1996 Act to share its network with
competitors did not state a claim under § 2 of the Sherman Act,
the Court explained that, “just as the 1996 Act preserves claims
that satisfy existing antitrust standards, it does not create new
claims that go beyond existing antitrust standards.” Id. at 407.
Having determined that a violation of the 1996 Act is not itself
actionable under the Sherman Act, the Court went on to
determine “whether the activity of which [the plaintiff]
complains violate[d] pre-existing antitrust standards.” Id. We
address the same question but only after first disposing of
 8

Covad’s preliminary arguments for distinguishing Trinko.

A. Has Covad Distinguished Trinko?

At the outset Covad contends its complaint is materially
different from the complaint in Trinko, and should be reinstated
in its entirety, because the complaint in Trinko stated only “the
narrowest of claims,” whereas its complaint alleged the
defendant ILEC: (1) engaged in “a vast array of anticompetitive
conduct”; and (2) sought to “export” its monopoly power to a
downstream market. Covad also maintains (3) the district court
erroneously held the 1996 Act implicitly granted antitrust
immunity for a carrier regulated by the 1996 Act – an
interpretation specifically rejected by the Supreme Court in
Trinko, 540 U.S. at 406.

Covad’s first distinction is legally irrelevant. A violation
of § 2 of the Sherman Act “requires, in addition to the
possession of monopoly power in the relevant market, the
willful acquisition or maintenance of that power as distinguished
from growth or development as a consequence of a superior
product, business acumen, or historic accident.” Id. at 407.
Accordingly, a “would-be monopolist ... comes within the
condemnation of the Sherman Act [only] when it engages in
‘anticompetitive conduct.’” Caribbean Broad. Sys., 148 F.3d at
1087; see Trink o, 540 U.S. at 407. Therefore, as Bell Atlantic
argues, whether a particular allegation states a claim under the
Sherman Act depends entirely upon the competitive significance
of the conduct alleged, and not at all upon the number or detail
of the allegations recited in the complaint.

Covad’s second distinction of Trinko, that Bell Atlantic
attempted to leverage monopoly power from one market into
another, is equally unavailing. As Bell Atlantic is quick to point
 9

out, the Court in Trinko rejected a similar argument, see 540
U.S. at 415 n.4 (holding theory of second-market “leveraging
presupposes anticompetitive conduct, which in this case could
only be the refusal-to-deal claim we have rejected”). If Covad
does not allege any anticompetitive conduct in Bell Atlantic’s
“acquisition or maintenance” of monopoly power, then it is of
no moment whether Bell Atlantic allegedly exercised monopoly
power in two markets rather than in one.

Covad’s final point, namely, that the district court
erroneously granted Bell Atlantic implied antitrust immunity
insofar as it is regulated by the 1996 Act, simply misstates the
holding of the district court. Although that court “[could] not
help but note” in a dictum the “fundamental incompatibility”
between the remedial scheme of the 1996 Act and the remedies
available under the Sherman Act – as would the Supreme Court
in Trinko, see 540 U.S. at 406 (“1996 Act is a good candidate
for implication of antitrust immunity, to avoid the real
possibility of judgments conflicting with the agency’s regulatory
scheme”) – that was not in the district court’s view “dispositive”
of Covad’s antitrust claims. 201 F. Supp. 2d at 133. Indeed, as
Bell Atlantic notes, the district court did not need to consider
whether the 1996 Act granted Bell Atlantic, as an ILEC, implicit
antitrust immunity because it had already held Covad’s
allegations that Bell Atlantic had violated the 1996 Act did not
give rise to an antitrust claim. See id. at 130-33.

Because Covad fails either to distinguish Trinko or to
show the district court’s analysis is inconsistent with that
decision, we review Covad’s complaint in light of the Supreme
Court’s holding that the 1996 Act did not alter preexisting
antitrust standards. 540 U.S. at 406-07. That Bell Atlantic’s
alleged conduct may violate the 1996 Act does not, of course,
mean that same conduct cannot violate the Sherman Act. The
 10

question to which we now turn, therefore, is whether any of the
conduct alleged in Covad’s complaint, regardless whether it
violated the 1996 Act, violated § 2 of the Sherman Act.

B. Has Covad Stated a Claim under the Sherman Act?

Covad alleges Bell Atlantic engaged in five types of
conduct in violation of the Sherman Act. They are that Bell
Atlantic: (1) unlawfully refused to cooperate with Covad (¶¶
91-177, 196-201); (2) engaged in an unlawful price squeeze (¶¶
178-85); (3) falsely advertised that its own DSL service was
available at times and in places where Covad’s service was
available (¶¶ 186-92); (4) refused to sell its DSL service, in
places where it was actually available, to would-be customers
who had orders pending for Covad’s DSL service (¶¶ 193-95);
and (5) brought a baseless and bad faith patent suit against
Covad (¶¶ 202-12).

1. Refusal to cooperate

Although the Court in Trinko recognized that “[u]nder
certain circumstances, a refusal to cooperate with rivals can
constitute anticompetitive conduct,” 540 U.S. at 408, it
concluded that “insufficient assistance in the provision of
service to rivals is not a recognized antitrust claim under [its]
existing refusal-to-deal precedents,” id. at 410. An antitrust
claim based upon the defendant’s refusal to cooperate with its
competitor can withstand a motion to dismiss only when it is
alleged either that the defendant had previously “engaged in a
course of dealing with its rivals, or [that it] would ever have
done so absent statutory compulsion,” id. at 409. Here, Covad
alleges neither that Bell Atlantic had at one time voluntarily
dealt with Covad nor that it would ever have been in Bell
Atlantic’s interest to have done so. Therefore, as in Trinko, the
 11

defendant’s “reluctance to interconnect ... tells us nothing about
dreams of monopoly.” Id.

In the light shed by Trinko, we agree with the district
court that the following allegations do not state a claim upon
which relief can be granted under § 2 of the Sherman Act: “The
Battle to Collocate” (¶¶ 91-124), in which Covad alleges Bell
Atlantic did not offer it the opportunity to co-locate its
equipment on Bell Atlantic’s premises upon “just, reasonable,
and nondiscriminatory terms” (as required by § 101 of the 1996
Act, 47 U.S.C. § 251(c)(6)); “The Odyssey of Obtaining Loops
and Dealing with OSS” (¶¶ 125-174), in which Covad alleges
Bell Atlantic violated its obligation under the same provision to
share loops and OSS; “The Effort to Obtain Transport” (¶¶ 175-
77), which similarly pertains to Bell Atlantic’s duties under the
1996 Act; and “Bell Atlantic’s Sham, ‘Feel Good’ Negotiation
Strategy” (¶¶ 196-201), in which Covad alleges Bell Atlantic
failed to bargain in good faith over terms of interconnection (as
required by § 101 of the 1996 Act, 47 U.S.C. § 251(c)(1)).

2. Price squeeze

Covad next alleges Bell Atlantic attempted to
monopolize the market for DSL in violation § 2 of the Sherman
Act by pricing its services as follows:

Bell Atlantic ... offered and re-sold its DSL services to
[Internet Service Providers] at a monthly price ... very
close to, and in some cases less than, the monthly cost
Bell Atlantic charge[d] Covad and other wholesale
customers for unbundled loops. ... [Bell Atlantic]
achieve[d] this discriminatory pricing by allocating a
negligible or zero cost to the loops over which it
provides its DSL services and recovering virtually all ...
 12

of the cost of the loops from its local analog voice
services.

Covad claims this conduct constitutes a “price squeeze” that
violates the Sherman Act, for which proposition it relies upon
United States v. Aluminum Co. of America, 148 F.2d 416 (2d
Cir. 1945).

Covad’s allegation is in essence that Bell Atlantic
charged Covad a prohibitively high and discriminatory price for
access to its loops. Bell Atlantic’s duty to make those loops
available at all, however, is purely a creature of the 1996 Act.
See 47 U.S.C. 251(c)(3). The Sherman Act does not impose
such a duty – recall Trinko, 540 U.S. at 410 (“insufficient
assistance in the provision of service to rivals is not a recognized
antitrust claim”) – at least when there is no allegation it would
have been profitable for the defendant to have made its facilities
available to a competitor absent statutory compulsion. And, as
observed in a leading treatise, “it makes no sense to prohibit a
predatory price squeeze in circumstances where the integrated
monopolist is free to refuse to deal,” 3A AREEDA &
HOVENKAMP, ANTITRUST LAW ¶ 767c3, at 129-30 (2d ed. 2002).
We therefore affirm the district court’s dismissal of Covad’s §
2 claim based upon a price squeeze.

3. False pre-announcement campaign

Covad also maintains its complaint states an antitrust
claim based upon Bell Atlantic’s pre-announcement of its DSL
service: “Knowing the limited reach and scope of its planned
service Bell Atlantic nonetheless advertised its DSL services
aggressively.” The effect of that advertising was allegedly “to
leave the impression that Bell Atlantic was ready, willing and
capable of providing DSL services.” In response, Bell Atlantic
 13

contends, among other things, Covad’s complaint does not state
an antitrust claim because it does not allege a plausible harm to
competition. We agree and hence do not reach Bell Atlantic’s
other arguments.*

The gist of Covad’s allegation is that Bell Atlantic
aggressively advertised its DSL service in certain areas when
that service was not yet available there. According to the
complaint, that advertising “could stifle competition either by
capturing customers through a bait and switch, or (in any event)
by delaying customers who otherwise would have gone to
Covad for services Bell Atlantic was advertising and by
increasing the costs Covad would have to bear in order to
advertise.”

Concerning the “bait and switch,” Covad alleges that
when a would-be customer called Bell Atlantic to order DSL
service at a location where it was not yet available from Bell
Atlantic, the defendant attempted to sell that customer its
“slower and more expensive ‘ISDN Anywhere’ service.” As for
“delaying customers who otherwise would have gone to Covad
for services Bell Atlantic was advertising,” although Covad does
not elaborate, we believe its point is that some potential
customers, after attempting to order DSL service from Bell
Atlantic only to discover it was unavailable, decided to wait for
Bell Atlantic’s service to become available rather than
immediately patronizing Covad.

None of these allegations suggests a plausible harm to

*
Specifically, we do not address Bell Atlantic’s arguments
that the court should presume any harm to competition from false
advertising is de minimis and that a plaintiff must plead actual falsity
in order to state an antitrust claim.
 14

competition, let alone a case of attempted monopolization. On
the contrary, the practices alleged could only have enhanced
competition by subjecting Covad’s DSL service to market
rivalry both from Bell Atlantic’s present ISDN and from its
future DSL service. That Covad might have lost customers in
this way does not state an antitrust claim, for “[i]t is axiomatic
that the antitrust laws were passed for the protection of
competition, not competitors.” Brooke Group Ltd. v. Brown &
Williamson Tobacco Corp., 509 U.S. 209, 224 (1993).
Similarly, to the extent Bell Atlantic’s advertising obligated
Covad to increase its own advertising, competition was only
enhanced. See ROBERT H. BORK, THE ANTITRUST PARADOX 314
(2d ed. 1993) (“advertising and promotion [are] essential to
vigorous market rivalry”).

The cases upon which Covad relies do not suggest
otherwise. They each involved either a defendant that was
alleged to have untruthfully but effectively disparaged its
competitor’s product, see, e.g., Nat’l Ass’n of Pharm. Mfrs. v.
Ayerst Lab., 850 F.2d 904, 916-17 (2d Cir. 1988) (generic drug
manufacturer alleging brand name manufacturer spread
materially false information about safety of its product states
claim under § 2 of Sherman Act where falsehood was “likely to
induce reasonable reliance” and was “not readily susceptible of
neutralization or other offset”), or in one instance a monopolist
that by making false representations had frustrated potential
rivals’ efforts to develop a competitive product, see Microsoft
Corp., 253 F.3d at 76-77. In no case could the consumer readily
discover the defendant’s falsity. Here, the alleged falsehood
pertains only to whether Bell Atlantic’s DSL service was then
available. When a company falsely claims or implies its own
service is available and the falsity of that claim is necessarily
dispelled whenever a consumer tries to obtain the service, there
can be no plausible harm to competition; upon discovering the
 15

service is not available, the consumer may choose freely
whether to purchase the service from another source or to wait
for the offeror to make good on its offer. Although the
consumer will have incurred an unnecessary transaction cost –
which may generate bad will toward the firm by which it was
misled – that is not a harm to the competitive process.

MCI Communications Corp. v. AT&T Co., 462 F. Supp.
1072 (N.D. Ill. 1978), cited by Covad, is not necessarily to the
contrary. There, AT&T’s pre-announcement campaign was
allegedly “accompanied by extensive publicity to the business
and financial community” and was intended not only “to
discourage MCI’s potential customers” but also “to deprecate
MCI’s credit in the financial community.” Id. at 1096-97. In
this case, Covad does not allege that Bell Atlantic’s
preannouncement was aimed at anyone but potential customers
and, as we have seen, upon inquiring they had to be undeceived.*

4. Refusal to deal

Covad next argues that Bell Atlantic unlawfully refused
to sell its DSL service to would-be customers who had orders
for DSL service pending with Covad. According to Covad, Bell

*
Covad also relies upon United States v. Microsoft Corp.,
159 F.R.D. 318 (D.D.C. 1995), for the proposition that a
preannouncement campaign directed at consumers may violate the
Sherman Act. Although the district court, in rejecting a proposed
consent decree did suggest that a preannouncement campaign might
unlawfully “contribute to the acquisition, maintenance, or exercise of
market share,” id. at 336, because the Government had made no
allegation concerning a preannouncement campaign, id. at 335, this
court expressly disapproved the district court’s consideration of that
subject. 56 F.3d 1448, 1459 (1995).
 16

Atlantic’s refusal to deal was designed “to prevent Covad from
getting to the market ahead of Bell Atlantic.” Bell Atlantic
counters that Covad failed to plead that this practice resulted in
a short-term economic loss to Bell Atlantic, as is required. See
AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 773, at 199 (Supp.
2004) (to be unlawful, refusal to deal must be “‘irrational’ in the
sense that the defendant sacrificed the opportunity to make a
profitable sale only because of the adverse impact the refusal
would have on a rival”). In any event, Bell Atlantic asserts, it
had a legitimate economic justification for refusing to deal,
namely, that it was unprofitable to sell its DSL service to a
consumer who would soon switch his custom to Covad. Neither
of Bell Atlantic’s arguments is persuasive as a justification for
dismissing Covad’s complaint.

As to Bell Atlantic’s first point, the defendant is correct
that in order to prevail upon this claim Covad will have to prove
Bell Atlantic’s refusal to deal caused Bell Atlantic short-term
economic loss. See generally United States v. Colgate & Co.,
250 U.S. 300, 307 (1919) (absent “purpose to create or maintain
monopoly, [the Sherman Act] does not restrict the long
recognized right of trader ... freely to exercise his own
independent discretion as to parties with whom he will deal”).
But Covad has alleged that Bell Atlantic’s refusal to deal was
“predatory,” which suffices to withstand a motion to dismiss
because, in the vernacular of antitrust law, a “predatory”
practice is one in which a firm sacrifices short-term profits in
order to drive out of the market or otherwise discipline a
competitor. See Brooke Group Ltd., 509 U.S. at 222-23 (claim
of predatory pricing demands proof of below-cost pricing).

Bell Atlantic’s second defense – that its refusal to deal
was economically justified – depends upon a question of fact
and therefore is not cognizable in support of a motion to dismiss.
 17

It is, of course, entirely possible Bell Atlantic will be able to
prove the cost of connecting a customer to its DSL service is not
recovered in the short-term, thereby showing its refusal to deal
was a reasonable business decision. On the other hand, it is also
possible Bell Atlantic’s refusal to deal reflected its willingness
to sacrifice immediate profits from the sale of its DSL service in
the hope of driving Covad out of the market and recovering
monopoly profits in the long-run. See Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475 U.S. 574, 588-89 (1986)
(because predatory pricing requires practitioner to “forgo profits
that free competition would offer,” it “must have a reasonable
expectation of recovering, in the form of later monopoly profits,
more than the losses suffered”). The district court cannot
choose between these competing explanations without first
resolving questions of fact not before it upon a motion to
dismiss.

5. Baseless and bad faith patent suit

Finally, Covad argues its allegation that Bell Atlantic
brought a spurious patent case against it states a claim under §
2 of the Sherman Act. See generally Bell Atlantic Network
Services, Inc. v. Covad Communications Group, 92 F. Supp. 2d
483 (E.D. Va. 2000). Specifically, Covad contends that Bell
Atlantic’s suit was baseless, brought in bad faith, and had an
anticompetitive effect. Bell Atlantic counters first, as the district
court held, that Covad failed to allege the suit had an
anticompetitive effect, see Covad Communications, 201 F. Supp.
2d at 135 (quoting Microsoft, 253 F.3d at 58-59), and second,
that the suit was not objectively baseless.

Regarding anticompetitive effect, Bell Atlantic is
mistaken. Covad alleges Bell Atlantic brought the patent suit in
order “to interfere with competition in the relevant markets.”
 18

That is sufficient to allege an anticompetitive effect.

Alternatively, Bell Atlantic urges us to hold, as a matter
of law, that its bringing the patent suit could not have harmed
competition. In so doing, Bell Atlantic confuses the function of
a motion to dismiss pursuant to Rule 12(b)(6), which tests the
sufficiency of the plaintiff’s allegations, with a motion for
summary judgment pursuant to Rule 56, which tests the
sufficiency of the non-moving party’s evidence in light of the
legal theory it has advanced. See Swierkiewicz v. Sorema N.A.,
534 U.S. 506, 512 (2002) (“simplified notice pleading standard
[of the Federal Rules of Civil Procedure] relies on liberal
discovery rules and summary judgment motions to define
disputed facts and issues and to dispose of unmeritorious
claims”). Bell Atlantic’s protestation notwithstanding, we have
it on good authority that even a single patent suit brought in bad
faith against a nascent rival might unlawfully harm competition.
See 3A AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 782k, at 281
(“an unjustified patent infringement suit ... might be abused by
a monopolist to the detriment of actual or potential rivals”).
Whether Bell Atlantic’s suit had such an effect is, again, a
question not properly decided upon a motion to dismiss.

Bell Atlantic next disputes Covad’s characterization of
the patent suit as baseless. Resolving this matter requires us to
consider the Noerr-Pennington doctrine, under which
petitioning the Government for redress of grievances, whether
by efforts to influence legislative or executive action or by
seeking redress in court, is immune from liability under the
antitrust laws. See E. R.R. Presidents Conference v. Noerr
Motor Freight, Inc., 365 U.S. 127, 136 (1961); Cal. Motor
Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 510 (1972)
(Noerr-Pennington doctrine encompasses “the approach of
citizens ... to courts”).
 19

Noerr-Pennington immunity, however, does not extend
to “sham” litigation. The presumption of antitrust immunity for
litigating is dispelled if the plaintiff can show that two
conditions are met:

First, the lawsuit must be objectively baseless in the
sense that no reasonable litigant could realistically
expect success on the merits. ... Only if challenged
litigation is objectively meritless may a court examine
the litigant’s subjective motivation. ... This two-tiered
process requires the plaintiff to disprove the challenged
lawsuit’s legal viability before the court will entertain
evidence of the suit’s economic viability.

Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus.
508 U.S. 49, 60-61 (1993). Bell Atlantic urges us to decide as
a matter of law that its patent suit against Covad was not
“objectively baseless.” Covad interposes no issue of fact and
joins issue on the question of law. With the opinions of the
patent courts before us, we see no barrier to our determining
now whether Bell Atlantic’s suit was a sham and hence without
Noerr-Pennington immunity from antitrust liability.

Bell Atlantic sued Covad for patent infringement. The
district court, in a lengthy and detailed opinion, granted
summary judgment in favor of Covad. Bell Atlantic Network
Services, 92 F. Supp. 2d at 499-500. Bell Atlantic appealed, and
the Court of Appeals for the Federal Circuit, in another lengthy
and detailed opinion, see 262 F.3d 1258 (2001), affirmed the
judgment of the district court. That Covad ultimately prevailed,
of course, tells us little about whether Bell Atlantic’s patent suit
lacked objective merit. See Prof’l Real Estate Investors, 508
U.S. at 60 n.5 (“court must resist the understandable temptation
to engage in post hoc reasoning by concluding that an ultimately
 20

unsuccessful action must have been unreasonable or without
foundation”).

Our review of the patent courts’ opinions convinces us
that Bell Atlantic’s case against Covad was not objectively
baseless. Bell Atlantic advanced reasonable arguments that each
court went to some lengths to reject. Nothing in their opinions
suggests that “no reasonable litigant could [have] realistically
expect[ed] success on the merits.” Id. at 60.

Covad also alleges Bell Atlantic “singled Covad out” for
suit and “used the patent action as the vehicle for serving
discovery requests on Covad” seeking “confidential information
about a competitor.” Those allegations, however, speak to Bell
Atlantic’s subjective motivation for suing Covad, which may be
evaluated “[o]nly if [the] challenged litigation is objectively
meritless.” Id. We therefore conclude that Covad’s allegation
that Bell Atlantic brought a baseless and bad faith patent suit
against it fails to state a claim under § 2 of the Sherman Act.

III. Conclusion

For the foregoing reasons, the judgment of the district
court dismissing Covad’s claims of monopolization and
attempted monopolization is reversed with respect to Covad’s
claim that Bell Atlantic unlawfully refused to deal with would-
be customers who had orders for DSL service pending with
Covad. The judgment is affirmed in all other respects and this
matter is remanded to the district court for further proceedings
consistent herewith.

So ordered.