Steve Labaton

June 27, 2006

WASHINGTON, June 26 The Supreme Court announced Monday that it would consider a lawsuit that accuses the nation's largest telephone companies of violating federal antitrust law by conspiring to carve up local markets to preserve their monopolies.

AT&T, Verizon and Qwest asked the court to rule after they failed to persuade an appeals court that the large consumer action should be dismissed for lack of evidence. The complaint by the consumers did not offer direct evidence of a conspiracy. Instead, it relied on the fact that the companies had engaged in "parallel conduct" of not moving into each other's service areas.

The phone companies said the standard set by the appeals court was so low that it would inevitably encourage baseless lawsuits.

The case has gained attention because it could set the standard for motions to dismiss antitrust claims filed under Section 1 of the Sherman Act. A collection of influential business interests, some of whom have been defendants in antitrust cases, has filed briefs supporting the phone companies. They include the United States Chamber of Commerce, the Alliance of Automobile Manufacturers, the National Association of Manufacturers and companies in the airline, commodities, credit card and chemical industries. The appeals court told the telephone companies that there would be ample opportunity for them to make the case at trial that there was not enough evidence to prove a conspiracy.

The telephone appeal, Bell Atlantic v. Twombly, No. 05-1126, will be heard in the Supreme Court's next term, which begins in October, along with a second antitrust appeal that the court decided Monday that it would hear. That case, which also poses issues of importance to both businesses and consumers, raises the question of whether Weyerhaeuser, the large forest products company, unlawfully injured a tiny rival by paying too much for saw logs. In the late 1990's and early 2000's, the price of some types of saw logs used to make lumber increased while the price of hardwood lumber decreased, narrowing margins and forcing more than two dozen unprofitable saw mills to close. A federal jury found that Weyerhaeuser monopolized the market through its large purchases of red alder logs in the Pacific Northwest at high prices, in violation of Section 2 of the Sherman Act.

The jury awarded Ross-Simmons Hardwood Lumber Company, a small rival saw mill, damages of $26.3 million, which a judge then tripled to $78.8 million.

The Bush administration has filed a brief asking the Supreme Court to reverse the decision. It argues that the decision of the lower court "threatens to chill pro-competitive conduct by companies that bid aggressively in order to ensure access to inputs or to increase their output." The case is Weyerhaeuser v. Ross-Simmons Hardwood Lumber, No. 05-381.

The justices, as they near the end of their current term, rejected a third antitrust appeal, filed by the Federal Trade Commission, which sought to punish a major drug maker for reaching a settlement with a generic maker. The effect of the settlement was that it kept the generic drug off the market.

In that case, the commission found itself in the unusual position of being at odds with the Bush administration. Representing the administration, the solicitor general sided with the pharmaceutical industry in support of a decision by a federal appeals court that approved a settlement between Schering-Plough and a generic drug company, Upsher-Smith Laboratories. The administration asked the Supreme Court to reject the commission's appeal. The trade commission had challenged the settlement between the drug makers because it delayed the generic company from bringing a rival drug to the market. As such, the commission said it violated Section 1 of the Sherman Act and the Hatch-Waxman Act, which Congress passed in 1984 to accelerate the development of lower-cost generic drugs. But the United States Court of Appeals for the 11th Circuit, in Atlanta, disagreed. It found that the settlement did not violate antitrust law but simply resolved costly and vexatious litigation. A recent study by the trade commission has found a sharp increase in deals between brand and generic drug makers, which some officials say are having the effect of reducing competition for high-cost drugs.

In response to the Supreme Court's decision, Senator Charles E. Schumer, Democrat of New York, and Senator Charles E. Grassley, Republican of Iowa, said Monday that they would introduce a bill to restrict agreements that block generic drugs from coming to market. The legislation, which is also sponsored by two other Democrats, Senator Patrick J. Leahy of Vermont and Senator Herb Kohl of Wisconsin, faces an uphill battle.

The Supreme Court also agreed to hear an appeal of a case that has profound implications for patents. The case goes to the heart of patent law. The Patent Act says that a patent may not be granted if the differences between the invention seeking protection and prior patented inventions "would have been obvious at the time the invention was made."

The question the court agreed to consider is the standard of non-obviousness, an important issue to many patents. The case, KSR International v. Teleflex, No. 04-1350, is a dispute over a patent for gas pedals in cars and light trucks. Teleflex accused KSR International of infringing on its patent for gas pedals. KSR replied in its defense that Teleflex's patent was invalid because it failed to satisfy the standard for obviousness.

A district court invalidated Teleflex's patent, finding that it combined elements of the prior art. But the decision was reversed by the United States Court of Appeals for the Federal Circuit. It said the lower court could not find the patent invalid without a specific finding as to a "suggestion or motivation" of combining the elements of prior inventions.

Both KSR and the Bush administration have asked the Supreme Court to revise the standard applied by the appeals court.