Conspiracy charge moves phone-locking case forward

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RCR Wireless News

WASHINGTON, D.C. — The federal judge who a month ago dismissed a class-action lawsuit claiming the nation’s top mobile-phone operators violated antitrust laws by tying handset sales to the purchase of wireless service from carriers has agreed to allow a similar lawsuit explicitly alleging industrywide conspiracy to go forward.

The current lawsuit pending before U.S. District Judge Denise Cote in U.S. District Court for the Southern District of New York, like the one before it and additional lawsuits also taking aim at the bedrock industry marketing practice, could prove more difficult for industry to defend.

Plaintiffs’ lawyers said Cote discarded critical evidence in the first case (Brook) because of her determination that a direct conspiracy claim had not been made, a finding with key legal implications for the calculation of market power.

Indeed, Cote ruled in Brook that plaintiffs failed to present sufficient evidence to prove “any one defendant has the degree of market power necessary to sustain a tying claim or to show that any of the defendants’ alleged tying arrangements has an actual adverse effect on competition in the U.S. market for wireless handsets.”

However, under a conspiracy claim accepted by the court, the plaintiffs said aggregate market power can be considered by the judge.

Plaintiffs’ lawyers insist they alleged conspiracy in the Brook case tossed out by Cote and plan to challenge the ruling in the 2nd U.S. Circuit Court of Appeals in New York. The attorneys point to last week’s 2nd Circuit decision remanding to district court a class-action antitrust lawsuit against Verizon Communications Inc., BellSouth Corp., Qwest Communications and SBC Communications Inc. The 2nd Circuit said a direct allegation of conspiracy is not necessarily required for a court to keep a lawsuit alive if arguments are presented that defendants acted in parallel.

“The court’s ruling in Brook really just postponed the day of reckoning on the stronger antitrust claims, which are the conspiracy claims,” said Scott Bursor, a member of the plaintiffs’ legal team.

The plaintiffs plan to file an amended complaint in Freeland later this week and move for class certification on Oct. 21. The Freeland case could go to trial in March 2007 if it is not rejected by fall of next year.

Similar lawsuits in Tennessee and South Carolina may end up in Cote’s court. A court in Alameda County, Calif., is considering phone lock lawsuits filed by the Foundation for Taxpayer and Consumer Rights.

The Freeland lawsuit contends CTIA, the cellular phone association; the Telecommunications Industry Association, which represents manufacturers and crafts technical standards; and CDMA, TDMA and GSM groups worked together to effectively make phone locking an industry standard. The lawsuit asserts that as the phone-lock practice was embraced throughout industry, the number of handset manufacturers decreased and prices-beginning in 1998-began to inch upward.

The cellular industry said phone locking is not an industrywide practice and that practices vary among national mobile-phone carriers.

“Wireless customers overwhelmingly prefer discounted handsets and the lower rates that carriers offer customers who commit to a one- or two-year contract term-‘locking’ a handset can be a way to encourage customers to honor their agreement-just like airlines make their lowest fares nonrefundable,” said John Walls, vice president for public affairs at CTIA. “If the freedom to switch carriers is important to a consumer, the customer can chose a carrier who doesn’t lock its handsets (or offers unlocked handsets as well as locked handsets) or a carrier whose unlocking policies meet their needs.”

Walls added that handset locks in dual band `world phones’ are intended to prevent consumers from buying phones in the United States via contract and selling it at a steep discount overseas, where carriers do not subsidize cell phones. Walls said “handset arbitrage” raises carriers’ costs, which are subsequently passed on to subscribers.

“It [phone locking] is a feature that, if implemented, enables carriers who subsidize the cost of the phone to ensure the phone is initialized on its network, not a competitor’s network,” said Dan Bart, TIA senior vice president, standards and special projects.

Plaintiffs’ lawyers argue the wireless industry is trying to confuse the issues in the Brook and Freeland lawsuits by arguing the price of the tied good is reduced by carrier subsidies.

“[D]efendants acknowledge that they recover these ‘subsidies’ through monthly charges. … Indeed, defendants over-recoup these subsidies by refusing to offer an untied service-only price even after the subsidy has been fully recovered,” plaintiffs told the court in May 13 filing. “Defendants’ purported subsidies thus actually raise prices rather than lowering them.”

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