Antitrust Law Daily Wrap Up, ANTITRUST—DKan: Cell Phone Distributor Did Not State Antitrust Claims Over Sprint’s Policies Restricting Its Phones to Its Network, (Mar 26, 2013)

By Tobias J. Gillett, J.D., LLM.

A cell phone distributor did not sufficiently allege an injury sustained as a result of Sprint’s conduct to state a claim under Kansas antitrust law, and the distributor did not state a claim that Sprint had unlawfully tied its cell phones to its network for purposes of a Sherman Act tying claim, the federal district court in Wichita, Kansas has ruled (Sprint Nextel Corp. v. The Middle Man, Inc., March 25, 2013, Marten, J.).

Sprint Nextel Corporation sued The Middle Man, Inc., claiming that The Middle Man was engaged in a business practice of acquiring large quantities of Sprint cell phones directly from Sprint or its dealers or from co-conspirators. The process required the original purchaser of the cell phones to break their service contracts with Sprint. After The Middle Man acquired the phones, it would allegedly disable the software confining the phone to Sprint’s network, permitting it to be used on any network. Sprint alleged that this practice prevented Sprint from recouping the subsidy it paid to manufacturers for the phones to induce consumers to sign contracts with Sprint.

The Middle Man asserted a variety of counterclaims against Sprint, including antitrust claims for violation of Section 1 of the Sherman Act and Kansas antitrust law. The Middle Man alleged that Sprint unlawfully restrained trade “by engaging in an agreement with its authorized dealers that restrains trade or fixed prices by restricting customers’ rights to activate phones on other networks and resell the phones to third parties.” Sprint moved to dismiss the counterclaims.

The court concluded that The Middle Man had not stated a claim under either antitrust law. The court explained that the Kansas antitrust law permitted “any person injured or damaged by such an arrangement” to have standing to bring a suit. However, The Middle Man had only alleged that it “ha[d] been injured as a direct and proximate result” of Sprint’s conduct, “due to Sprint retaining control over the pricing of phones for use on its network,” and that such policies “may make it more difficult and expensive to procure pre-owned wireless phones programmed to be operated on the Sprint network.” The Middle Man had not supported these assertions with “well-pleaded factual contentions,” in the court’s view. Without well-pled facts demonstrating that it had suffered an injury, The Middle Man did not have standing for its Kansas antitrust claim.

The Middle Man asserted a claim under Section 1 of the Sherman Act that Sprint had tied its network and its phones together in a manner that violated the antitrust laws, and that the arrangement should be analyzed as a per se violation. However, the court concluded “that the products are not tied at all.” Customers could purchase new phones from Sprint at full price without signing a contract to use the phone on Sprint’s network, or they could purchase a phone from a third-party distributor and enter into a contract with Sprint to use it on Sprint’s network. Consumers were not forced to purchase either product in order to obtain the other one; they merely bought a phone with a contract through Sprint to obtain the phone discount subsidized by Sprint. Therefore, the court dismissed the tying claim.

The case is No. 12-2159-JTM.

Attorneys: Catherine C. Whittaker (Shook, Hardy & Bacon LLP) for Sprint Nextel Corporation. David L. Marcus (Graves Bartle Marcus & Garrett, LLC) for The Middle Man, Inc.

Companies: The Middle Man, Inc.; Sprint Nextel Corporation

Cases: Antitrust KansasNews