United States v. Western Elec. Co., Inc.

OPINION

HAROLD H. GREENE, District Judge.

Section 1(A) of the decree entered on August 24, 1982, provides that “[n]ot later than six months after the effective date of [the decree], defendant AT & T shall submit to the Department of Justice for its approval, and thereafter implement, a plan of reorganization,” and section VIII(J) specifies that the plan of reorganization “shall not be implemented until approved by the Court as being consistent with the provisions and principles of the decree.” In accordance with these provisions, AT & T has submitted its plan to the Court following approval by the Department of Justice.

1

The intervenors were thereafter given the opportunity to raise objections; a considerable number of such objections were, in fact, filed with the Court; and AT & T and the Department of Justice,'in turn, filed their own responses.

Following receipt of these papers, the Court designated certain issues for more intensive briefing and for oral argument.

2

Voluminous briefs were received on these issues, and argument was had thereon on June 2, 1983.

3

At that hearing, the Court

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also heard testimony from three of the designated chief executives

4

of the seven newly-established Regional'Companies.

5

Additional documents were submitted after the hearing, including one — a letter with attachments from AT & T (see p. 1067

infra

) — as late as June 29, 1983.

The Court has considered all issues raised with respect to the plan of reorganization on the basis of the written materials, the oral hearing, the testimony, and the entire record herein, and it has concluded that the plan of reorganization will be approved

6

provided that certain inconsistencies with the provisions and principles of the decree are corrected.

7

I

Equal Access

The decree requires the Operating Companies to “provide to all interexchange carriers and information service providers exchange access, information access, and exchange services for such access ... that is equal in type, quality, and price to that provided to AT & T and its affiliates.” Section 11(A).

8

As the stepping stone to increased competition in the field of intercity telecommunications, the decree’s equal access requirements and the implementing provisions of the plan of reorganization have generated substantial controversy. Comments filed by Operating Company executives, interexchange carriers, regulatory

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commissions, consumer groups, and telecommunications associations indicate that at this stage of the proceedings

9

there is a need to resolve three primary questions relating to equal access:

10

what is it, how is it to be achieved, and who will pay for it?

A.

What Does “Equal” Mean?

A number of the Operating Companies propose to connect AT & T’s interexchange competitors to the homes or businesses of local telephone subscribers by using facilities built or upgraded specially for that purpose; AT & T, on the other hand, will in numerous LATAs gain access to subscriber lines through different facilities, many of which are already extant.

11

For that reason, the access provided AT & T’s competitors will not be identical to that given AT & T in all places; rather, it will be technically different in certain areas and at certain times.

The Operating Companies assert that any such technical deviations will be so slight as to be imperceptible to all customers, whether of voice or of data.

12

Accordingly, they urge the Court to accept a definition of “equal access” as access whose “overall quality in a particular area is equal within a reasonable range which is applicable to all carriers,”

13

and to reject a more stringent definition which would demand access that yields identical technical quality (i.e., identical values for loss, noise, and echo, and identical possibility of blocking).

14

The Court accepts the Operating Companies’ definition and will not insist on absolute technical equality. To do otherwise would necessitate substantial dismantling and reconstruction of local telephone networks without any real benefits either to the consuming public or to AT & T’s intercity competitors. This ruling, however, is based squarely upon the Operating Companies’ representations that both voice and data customers will perceive no qualitative differences between AT & T transmissions and those of its competitors — at least with respect to those portions of the transmissions carried by an Operating Company.

15

The Operating Companies are well aware, however, that the Department of Justice will be monitoring the quality of the access they will provide and that the price of falling short of their assurance of equal quality will be enforcement proceedings brought by the Department.

16

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The interexchange competitors, as noted, would not be disadvantaged if the Operating Companies meet the standard they have proposed. Their real complaint is that the Operating Companies will be unable to meet that standard in many of the LATAs by the means they propose

17

— a subject to which the Court now turns.

B.

Which Switches Should Be Used for Access Arrangements?

First. Since the initial comments were filed regarding the first, or LATA, phase of the plan of reorganization, a number of intervenors have expressed concern over the kinds of switches the Operating Companies will use to route traffic from an interexchange carrier’s point of presence in a LATA to a local Class 5 end office.

18

The Court initially shared this concern, primarily because so little information about equal access planning for individual LATAs had been made available. In May of 1983, it therefore requested the Regional Companies to report in detail regarding their plans for equal access and their need in this respect for the efficient, state-of-the-art No. 4ESS switches.

19

The Court asked to be apprised of any instances where an Operating Company believed that a particular switch should be assigned to it for equal access purposes even though that switch would belong to AT & T under the predominant use test.

20

The responses were extremely helpful. Their detail and the varied recommendations made with respect to each region revealed that, contrary to some speculation, the Operating Companies had carefully studied the alternatives for the provision of access within their respective territories, and that they had concluded, independent of pressure from AT & T, which arrangements would be most economical and efficient for them.

Most of the LATAs will be served by four-wire digital tandems,

21

if not in 1984,

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then within two years.

22

The Operating Companies are not planning to make as much use of the existing No. 4ESS switches, however, as might have been anticipated. The basis of that choice appears reasonable.

Because of the large capacity of the No. 4ESS switch, the cost to an Operating Company of leasing part of it would be, in most cases, greater than would be that of constructing a smaller-scale switch directly for that company. The other alternative— vesting ownership of the No. 4ESS switch in the Operating Company, in the expectation that it will be able to lease substantial capacity to AT & T — is problematic in many cases because AT & T may choose instead to build a new switch (and even if it did not, it would be required in any event under the plan to terminate the lease after eight years). In either event, the Operating Company would thus be left with the expense of stranded capacity.

For these reasons, the Operating Companies will instead engage in a substantial amount of new construction, and they have persuaded the Court that this is an appropriate decision. In some instances they will thereby be merely accelerating construction which would have occurred in any event, and new construction, as opposed to leasing, will have the advantage of facilitating network separation between AT & T and the Operating Companies.

Given the care which went into the Operating Companies’ studies, the Court will not second-guess them by imposing upon them an assignment of switches which they do not endorse. The Court therefore rejects the position of some

23

that all No. 4ESS switches should be divested from AT & T and assigned instead to the Operating Companies.

Second. The New England Telephone Co. (NET) has suggested that it could provide access more economically if the Court were to override the predominant use test in its territory with respect to three advanced switching systems. NET wishes to make extensive use of No. 4ESS switches— which apparently would be more appropriate in its region than elsewhere because of existing population densities — and it states that it could benefit from the allocation of three existing No. 4ESS switches (in Manchester, New Hampshire; Springfield, Massachusetts; and Cambridge, Massachusetts).

24

NET has further informed the Court that if it were to receive the existing switches in these locations, the net present value advantage to it would range from $20 to $25 million with respect to the Cambridge switch and from zero to $8 million

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per switch with respect to the Manchester and Springfield facilities.

25

Although it accepted the predominant use test, the Court has stated that this test would be waived where particular equipment was needed by an Operating Company for the provision of equal access. See note 20

supra.

Clearly that need is present with respect to the Cambridge switch,

26

and the Court will therefore require that AT & T assign that switch to NET. The matter is not as clear with regard to the Manchester and Springfield switches. If NET wishes to make a formal proposal for the transfer of these switches, it should submit a motion explaining under what circumstances the savings would amount to zero and under what circumstances they would amount to $8 million,

27

and AT & T and the Department of Justice may respond to the motion. The Court will order no other changes in the assignment of switches.

28

C.

How Should the Operating Companies Recover the Costs of Becoming

Equal Access Providers and of Reconfiguring Local Networks to Conform to LATA Boundaries?

AT & T estimates that it will cost the Operating Companies $73 million to reconfigure their networks

29

and $2.47 billion to provide equal access.

30

The plan of reorganization does not directly address the issue of who should pay these costs but seems to proceed on the premise that equal access is exclusively an Operating Company responsibility with which the plan, and AT & T, need not be concerned. That approach is improperly simplistic.

Section 1(A)(1) of the decree states that AT & T shall

transfer from AT & T and its affiliates to the BOCs .. . sufficient facilities [and] systems ... to permit the BOCs to perform, independently of AT & T, exchange telecommunications and exchange access functions ... and [which are]

sufficient to enable the BOCs to meet the equal exchange access requirements

of Appendix B (emphasis added).

There can be no doubt, then, that AT & T has a significant responsibility

31

to see to it

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that the Operating Companies are left in a position, as of divestiture, that will enable them to offer equal access to AT & T’s competitors.

32

The only question is what obligations attach to this responsibility.

The intervenors have proposed various ways to assign the costs of network configuration and equal access directly to AT & T, from requiring AT & T to give the Operating Companies more switches to requiring it to finance all equal access projects. The former has the disadvantage of imposing switch assignments on the Operating Companies which they do not want; the latter is problematic in that it will perpetuate a liaison between AT & T and the Operating Companies where none should exist. AT & T, for its part, while it rejects any suggestion that it should have to pay these costs, in effect concedes that it bears some share of the responsibility since it asserts that the access charges paid by interexchange carriers will reimburse the' Operating Companies, and that it, as the dominant interexchange carrier, will pay the lion’s share of such charges.

All the parties have agreed that these costs are properly to be recovered from the interexchange carriers, rather than through access charges levied on local ratepayers, because the expenditures represent improvements to the long distance network. AT & T’s assurances to the contrary notwithstanding, it is unsettled at present by what methodology the interexchange carriers could be made to bear the costs of equal access and network reconfiguration through interstate access charges. Under existing procedures for allocating property costs, revenues, expenses, and reserves between intrastate and interstate jurisdictions for rate making purposes (see 47 C.F.R. § 67.1 ), a disproportionately small amount of equal access and network reconfiguration costs would be designated for recoupment through interstate tariffs; most of these costs would be designated for recovery through intrastate tariffs even though, at least initially, most of the benefits of equal access connections will flow to users of interstate, not intrastate, telecommunications services. See Correspondence between Howard J. Trienens and A. Gary Collins, filed June 29,1983; Response of Mid-Atlantic Bell Telephone Companies, May 31,1983, at 8-10.

33

In fact, only after it was pointed out by others did AT & T acknowledge that all equal access and network configuration costs would not be recovered through interexchange carrier charges under the current jurisdictional separations procedures.

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Another, equally serious problem is created by the ability of AT & T to make use of the so-called bypass technology (552 F.Supp. at 175-76) which would allow that company, at its choice, and given the availability of the necessary technology, to bypass the Operating Company circuits altogether and to reach ultimate telephone subscribers directly. To the extent that bypass is a serious threat to the Operating Companies,

34

AT & T, because of its size and its well-developed telecommunications technology, is by far the most likely origin of that threat. Use of that bypass technology by AT & T would, of course, permit it to escape the payment of access charges to the Operating Companies, and this, in turn, would jeopardize the recovery of the funds which will be expended by the Operating Companies for the equal access and reconfiguration construction program.

It is thus not certain that the Operating Companies will be fully reimbursed through carrier access charges for their equal access and network reconfiguration expenditures. Yet because the decree anticipated that AT & T would transfer sufficient facilities to the Operating Companies to ensure equal access; because it now appears that the Operating Companies will instead have to undertake substantial new construction of their own; and because AT & T has throughout this proceeding assured the Court that access charges paid by interexchange carriers would be the instrument which would prevent divestiture from causing increases in local rates, it is appropriate that AT & T should bear the ultimate risk if it turns out that its assurances are overly optimistic.

35

That risk will accordingly be assigned to AT & T in the following manner.

According to the plan of reorganization, the equal access construction program will be completed in five years. Within five years thereafter, that is by January 1,1994, if the Operating Companies have not recovered the costs of equal access and network reconfiguration, inclusive of financing costs, through their collection of access charges from the interexchange carriers,

36

AT & T will be responsible for reimbursing the Operating Companies in the amount of any remaining deficit.

37

A preliminary accounting will take place at the close of the construction program on by January 1, 1989, whichever is earlier.

If the Operating Companies and AT & T are able to report to the Court on or before January 1,1994, of their agreement that all costs have been recovered, AT & T will be discharged from any further obligation with respect to the cost of equal access and network reconfiguration. If there is a dispute, the Court will decide, if necessary with the assistance of the Department of Justice and the Federal Communications Commission, whether all costs have been recovered.

38

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II

Contingent Liabilities

Under the plan of reorganization, the contingent liabilities of the Bell System are apportioned among AT & T and the Operating Companies on the basis of their relative net investment

39

as of the date of divestiture.

40

Section VIII(H) of the decree allocates to each Operating Company a proportionate share of the System’s consolidated debt and equity; and the plan of reorganization provides that the post-divestiture entities will share in the contingent liabilities on the same basis.

41

The intervenors acquiesce in most aspects of the plan’s allocation of contingent liabilities,

42

and they limit their objections in the main to the allocation of contingent antitrust liabilities. Several intervenors assert broadly that because the Operating Companies were not responsible for AT & T’s alleged conduct in violation of the antitrust laws and reaped no benefits from such violations, they should not have to share in the liabilities resulting from any antitrust claims. Others make similar arguments more narrowly with respect only to certain types of antitrust violations, such as those relating to the provision of interexchange services or of customer premises equipment (CPE).

43

The contingent liability provisions of the plan assume (1) that prior to divestiture the Bell System operated as a single unit, and (2) that the residual risks of the System’s predivestiture operations should be shared by all entities which receive a part of the System’s assets. Several intervenors challenge these assumptions.

A.

Principle of the Division of the Contingent Liabilities

It is argued by a number of opponents of the plan that for many purposes the Bell System did not operate as a single enterprise. Thus, it is claimed that various Operating Companies charged different rates, operated under different tariffs, were directed by different personnel, and engaged in other practices which differed from company to company. One consequence of this diverse pattern, according to the plan’s opponents, is that some Operating Companies were charged with violations of the antitrust laws along with AT & T while others were not. Further, since under the law a corporation is not automatically liable for the antitrust violations of its affiliates,

44

there is no basis, it is said, for imposing liability upon entities

(i.e.,

the Operating Companies) which have not been or may not be found to have been at fault. Finally, citing

Texas Industries, Inc. v. Radcliff Materials, Inc.,

451 U.S. 630 , 101 S.Ct. 2061 , 68 L.Ed.2d 500 (1981), several intervenors argue that the plan violates the “rule”

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against contribution for antitrust damages.

45

All of these arguments miss the mark. Until the time the reorganization takes effect, the Bell System is legally a single enterprise, with a single claim to the System’s assets and a single responsibility for the System’s liabilities. It is erroneous, therefore, to pose the problem in terms of imposing liability upon parts of the enterprise based upon fault or lack of fault; at the time the acts complained of occurred there was only one entity (the Bell System), and should there be a judgment in any particular case, that entity will have been found to be at fault.

The evidence at the trial of this case did not isolate specifically whether the fault for particular activities which allegedly violated the antitrust laws lay with personnel assigned to AT & T headquarters or with personnel working for an Operating Company; and, of course, there was no adjudicated final judgment by which such fault could have been parceled out. In view of the commingling and transfers of personnel between AT & T’s central divisions

(e.g.,

Western Electric) and the Operating Companies, it may be that no such decision could ever have been made.

46

This basic problem with the theory advanced by the intervenors is not cured by the circumstance that some Operating Companies are defendants in some of the pending private antitrust lawsuits while others are not. The decisions of antitrust plaintiffs as to which Operating Companies, if any, should be named as defendants in the private suits appear to have most often been dictated by such non-substantive matters as jurisdiction, venue, and ease of discovery.

47

Such choices were available to the plaintiffs in the various actions because they knew that the cost of any judgment would be shared by AT & T and all Operating Companies

48

regardless whether or not a particular Operating Company was a party to the proceeding in which liability was determined. In short, the identity of the particular Bell defendants played no real substantive part in pre-divestiture lawsuits or judgments, and it would make no sense to regard it as the determinative factor with respect to the payment of judgments based on pre-divestiture conduct which are entered or become final after divestiture actually occurs.

More broadly, it is incorrect to view the plan’s allocation of contingent liabilities as an attempt to impose upon this Court the responsibility for making findings concerning fault or for imposing liability with respect to lawsuits pending in other forums.

49

The plan of reorganization does not purport to assign fault; all that is involved here is that, as part of its review of the decree and of the plan of reorganization of the Bell System, the Court has been presented with a proposed contractual arrangement

50

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whereby the Operating Companies and AT & T will share in the payment of liabilities arising from pre-divestiture operations regardless of fault — in effect a form of self-insurance. See p. 1073

infra.

The intervenors’ reliance upon

Texas Industries, Inc. v. Radcliff Materials, Inc., supra,

as an obstacle to this procedure is misplaced. In that case the Supreme Court held merely that there is no

right

to contribution in antitrust cases;

51

it did not decide, nor was its decision based on the premise, that contribution is contrary to the policies underlying the antitrust laws.

52

Texas Instruments

thus does not invalidate either the liability sharing arrangement which presently exists (and has long existed) among the Bell System’s components for that System’s liabilities or the contractual arrangement proposed for the future by the plan of reorganization.

53

B.

Method of Apportionment

The plan of reorganization proceeds on the basis that the residual risks of the Bell System’s pre-divestiture operations should be shared by the entities of the System on the same basis as their receipt of the System’s assets and equity.

54

This method of apportionment is challenged by several intervenors who suggest a division of contingent liabilities based on a “benefit” or “line of business” approach rather than the “relative net investment” approach provided for by the plan.

55

While this suggestion appears abstractly to have some merit, it is faulty if only because it suffers from serious, indeed insuperable, difficulties in administration.

It may well be doubtful that the Operating Companies benefitted quite as much from the activities challenged in the various pending antitrust suits as AT & T now claims; but it would also surely be incorrect to say that the Operating Companies’ past and future lines of business received no benefits. For example, activities which adversely affected competitors of AT & T in the CPE business probably benefitted not only AT & T “headquarters” but also the Operating Companies’ own CPE business, and the effects of these activities may even

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linger so as to continue to provide the local companies with a benefit after divestiture. Further, evidence at the trial of this case indicated significant involvement of the Operating Company personnel in the so-called “procurement” portion of the case, i.e., that dealing, among other things, with CPE.

Likewise, because the Operating Companies received a substantial portion of revenues from interexchange services through the division of revenues process, and because it appears that they stood to lose revenues to the extent that long distance traffic was handled by one of AT

& T’s

competitors, it is difficult to say that they did not benefit from Bell System activities claimed to be unlawful which affected the interexchange market.

For these reasons, several intervenors candidly acknowledge that it is not possible, at least not without lengthy proceedings, to conclude that the Operating Companies received no benefit from the conduct challenged in pending antitrust actions

56

or precisely how such benefits might be allocated between them and AT & T.

57

The Court will go further. In its view, to attempt to trace benefits from conduct challenged in lawsuits not yet decided to lines of business

58

which will be engaged in at a later time by entities which do not yet exist would involve the Court in an impossible, almost metaphysical task, and it is one which, for that reason, it will not undertake.

More affirmatively, the assumption underlying the plan’s allocation of contingent liabilities that, as a matter of equity, the contingent liabilities should be shared proportionately by all entities which “succeed” to the assets of the Bell System, is not unreasonable. Under the current division of revenues and costs within the Bell System, antitrust liabilities are liabilities of the entire System. Contingent antitrust liabilities — just as the other contingent liabilities not challenged by the intervenors — do not encumber particular assets or particular lines of business; they encumber all of the System’s assets and equity. Because the decree provides that the Operating Companies and AT & T will each receive a portion of the consolidated debt and equity of the Bell System,

59

it is reasonable for each of the post-divestiture entities also to receive a corresponding portion of the System’s predivestiture business risks which encumber the equity.

60

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The proof of that proposition lies in an examination of the alternatives. If AT & T had decided to settle, insure, or self-insure all contingent liabilities prior to divestiture, the costs of these liabilities would have been reflected now in the Bell System’s debt and equity accounts,

61

and there would have been no need for making provision in the plan of reorganization for the allocation of contingent liabilities. These other options were apparently considered by AT & T and the Operating Companies,

62

and the choice was made that each Operating Company would take on a portion of the Systern’s consolidated equity as well as all assodated business risks. In furtherance of that decision, all Bell System Companies are, in essence, insuring one another against the possibility that the contingent liabilities will become certain after divestiture. The chief executives of the Regional Companies have informed the Court that, with but one exception, they agree with the choice made in the plan for allocating the contingent liabilities.

63

For these reasons, the Court rejects the objections to the treatment accorded in

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the plan of reorganization to the contingent liabilities,

64

and it will approve that portion of the plan as part of its overall disposition of the parties’ motions.

*1073

The Court notes that it is entirely unlikely that the contingent liabilities could realistically threaten the viability of the Operating Companies. AT & T has suggested that $25 billion in additional liabilities might become certain after divestiture, but it has since hastened to concede that this possibility is extremely remote. Even if this outside contingency came to pass, the Operating Companies could finance their shares with debt, and their debt ratios would then increase from 45 percent to the 50 percent range — still the typical debt ratio of independent telephone companies and electrical utilities.

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Ill

Bell Name and Logo

[6] The plan of reorganization originally submitted by AT & T provided that upon the divestiture both AT & T and the Operating Companies could continue to use the “Bell” name.

65

Complex provisions were made with respect to the Bell trademarks,

66

and the plan further provided that if, in light of the Justice Department’s opposition to the AT & T approach, the Court were to disapprove it, AT & T

“will adopt

the alternative ... [to] retain all uses of the Bell name, including all Bell trademarks, the Bell logo or seal, the blue and ochre stripes, and other graphics and all uses of Bell in corporate names” (emphasis added)

67

The Department of Justice did not oppose the second alternative,

68

but with respect to the first it proposed an amendment which AT & T accepted. It is this Department of Justice version (Amendment No. 15), described in more detail below, which is now before the Court.

Under Amendment No. 15, although the Operating Companies would have exclusive rights to the Bell logo in the United States,

69

they could use it only in connection with the provision of exchange telecommunications services, exchange access services, and printed directory advertising. The Operating Companies would be prohibited from using the Bell logo in connection with the marketing of any customer premises equipment (even that supplied by AT & T and its affiliates). As concerns the “Bell” name, the Operating Companies would be permitted to use it only in connection with

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services other than the sale of equipment and only when explicitly modified by a geographic designation of an area less than national in scope

(e.g.,

Southwestern Bell); AT & T, on the other hand, could use the name “Bell” on a national basis for all these purposes if preceded by the word “American.”

70

A.

Use of the “Bell” Name by both AT & T and the Operating Companies Would Be Confusing

The Department of Justice apparently considered that the original AT & T plan was unacceptable because it could lead to consumer confusion and mutual promotion

(i.e.,

cross subsidization). The proposal presently before the Court is as flawed in those respects as the first plan — if not more so — and it therefore cannot be approved.

There is no question but that the proposal, if implemented, would be confusing as to the relationship between AT & T and the Operating Companies: contrary to fact, it would lead consumers to believe that there is a continuing close connection between these entities or, worse, that they are all still components of the same company. The proposed system — AT & T’s use of the “Bell” name preceded by the word “American” and the Operating Companies’ use of the “Bell” name preceded by the designation of some smaller geographic area — inevitably suggests that each of the Operating Companies provides service in a particular region of the country while AT & T provides the national service which ties all of the components together into one integrated Bell System. As one of the intervenors correctly points out,

for AT & T to suggest that consumers will not likely think that “Illinois Bell” is part of “American Bell” is as preposterous as it is that consumers would not think Illinois to be part of America.

71

This implication, that there is a continuing link between AT & T and the Operating Companies, would have several significant anticompetitive effects: in the market for intercity telecommunications services it would imply that AT & T is the natural or “official” long distance company to be used in conjunction with the local services provided by the several Bell Operating Companies; in the market for consumer premises equipment it would lead consumers to believe that the local system maintained by a “Bell” Operating Company calls for “American Bell”

(i.e., AT & T)

equipment, or at a minimum, that American Bell equipment is made for and works better than the equipment of other manufacturers when hooked up to the local Bell network;

72

and it would suggest that the local Bell Operating Companies will warrant, service, and repair the equipment of the national Bell company

(i.e.,

AT & T).

It is only to belabor the obvious to record that with respect to each of these areas, AT & T’s competitors would, in terms of consumer perception, come off distinctly second best. None of them could claim a similarly close relationship with the local Operating Companies. Sprint and MCI would inevitably be regarded as not as well suited as AT & T to render long distance service in. partnership with the local circuits of the Bell Operating Companies; and Tandy and ITT would constantly have to strive to overcome the perception that, even if their equipment could be connected at all to the local Bell Operating Company loops, it

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would not operate as smoothly and naturally with them as would AT & T’s, and that, again unlike AT & T’s equipment, it would not be locally serviced.

The implication of a continuing relationship between AT & T and the Operating Companies is thus inconsistent with the bedrock principles underlying the decree. The principal purpose of the decree was to introduce fair and equitable competition in the telecommunications markets. This was to be achieved by separating the Operating Companies from AT & T so as to ensure that purchasing decisions regarding AT & T’s competitive services and equipment would be unaffected by the position of the Operating Companies as the providers of local monopoly exchange and exchange access services.

73

It was, in brief, the decree’s purpose to give AT & T’s competitors the opportunity to compete with AT & T on equal terms without artificial impediments. The proposal for joint use of the “Bell” name substantially, if not fatally, undercuts these objectives.

74

Moreover, as long as AT & T and the Operating Companies both used the “Bell” name, there would also be subsidization between them to the detriment of the other existing and potential competitors. Any promotional efforts by either AT & T or an individual Operating Company would accrue to the benefit of the other, transmitting overtly or subliminally the message that Bell is a single, dominant supplier of telecommunications services and equipment. When an Operating Company advertised under the “Bell” name, it would necessarily also promote the products and services of AT & T marketed under the “American Bell” label, and vice versa. The long-standing consumer association of the “Bell” name with all aspects of the Bell System’s local, long distance, and equipment operations would not only persist; it would actually be reinforced.

75

The decree is designed to effect a radical separation of the Operating Companies from AT & T;

76

it will hardly do to contin

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ue to have the various divested entities of the Bell System

77

hold themselves out as if they were all still part of the same complex.

78

The plan proposed by AT & T would create the impression to the consuming public that the divestiture had never taken place. The Court did not approve a decree breaking up the Bell System to have that system rise again, phoenix-like, in the plan of reorganization.

For these reasons, the “Bell” name and the Bell logo must belong either to AT & T or to the Operating Companies — but not to both.

B.

AT & T Is Not Entitled to the “Bell” Name and Logo as a Matter of Right

Since the concurrent use by AT & T and the Operating Companies of the name “Bell” cannot be approved, it remains to be decided which entity or entities should inherit that name — and along with it the logo — as part of the divestiture. Before proceeding to determine whether AT & T or the Operating Companies should, consistently with the decree’s principles, be assigned the Bell tradename and trademark, consideration must be given to several preliminary arguments made by AT & T.

First. AT & T contends that it owns the “Bell” name,

79

from which it would presumably follow that it cannot be deprived thereof without its acquiescence. That argument is not well taken.

All of the assets of the combined Bell System are the property of AT & T

80

yet some — indeed the majority — of these assets are being assigned by the decree to the Operating Companies. If AT & T had a veto power stemming from general principles of property law with respect to the “Bell” name, it would have the same kind of power with regard to all other Bell System assets. Obviously that is not so, in the context of a distribution of assets and liabilities stemming from a break-up of the corporation under a court-approved decree.

81

The question actually is a much more simple and direct one: how should the assets represented by the “Bell” name and logo be distributed in order to effectuate the provisions and principles of the decree — an issue which is considered in Part C below.

Second. AT & T next claims that the “Bell” name is part of the heritage of AT & T,

82

and that customers who have purchased Bell telephones and services and who may want to patronize Bell System companies in

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the future are entitled to know, post-divestiture, which companies “are historically related to those products and services they have enjoyed for a hundred years.”

But not only is that name as much a part of the heritage of the Bell Operating Companies as that of AT & T, but, in the public mind, “Bell” may well be said to stand primarily for the local companies, for that is where the public has traditionally obtained its telephones and its service.

83

It was the Operating Company to which one turned with a malfunction, a complaint, a request for new or altered service, a billing inquiry, and the like. The function of a trademark or tradename is to indicate the party which “puts the goods on the market and accepts the responsibility or plaudits for their acceptability or quality.” E. Vandenburgh, Trademark Law and Procedure at 34 (2d ed. & 1979 Supplement).

84

In this instance, that means, more than any other entity, the Operating Companies.

Third. AT & T contends that the name “Bell” is assigned to it by the plan of reorganization and that this assignment should not be disturbed because it allegedly is not inconsistent with the provisions of the decree. It is true that the Department of Justice has capitulated to this argument, stating that it could find no basis for overturning the AT & T decision. But the provisions of the plan drawn by AT & T are entitled to much less weight here than in other circumstances, since it is clear from the submissions of the designated chief executives of the Regional Companies that a number of them oppose the proposed disposition of the Bell name and logo.

85

Beyond that, as the Court has had occasion to explain a number of times, the plan of reorganization, to be approved, must be consistent not only with the provisions of the decree but also with the underlying principles. For the substantive reasons discussed below, an assignment of the “Bell” name and logo, or either, to AT & T would not be consistent with these principles.

C.

Use of the Bell Name and Logo Are More Appropriately Assigned to the Operating Companies than to AT & T

Both the original plan and the proposed Department of Justice amendment would

*1079

deny to the Operating Companies the use of the Bell name and logo in marketing customer premises equipment (CPE).

86

The former would have severely limited this use; the latter would preclude it altogether. It is this aspect which has drawn the widest criticism — from the States, the interexchange carriers, the manufacturers of CPE, and the Operating Companies themselves. In the view of the Court, the critics are entirely correct.

The decree as ultimately entered expressly authorized the Operating Companies to market customer premises equipment. The Court fully explained why it required this modification as a condition of its approval of the decree:

As against [the] relatively slight risks to competition from Operating Company involvement in the marketing of CPE must be weighed the very substantial contribution these companies could make to vigorous competition in the customer premises equipment market.... The Operating Companies, with their existing relationship to telephone users, are more likely than any other competitive entity to provide an effective counter-balance to AT & T’s market strength and thereby to promote a genuinely competitive market.

552 F.Supp. at 192 (footnotes omitted).

87

To deprive the Operating Companies of the use of the Bell logo and the Bell name in the CPE area would effectively cripple their efforts to become viable competitors in this market. The Court approved the decree in the expectation that the Operating Companies would be able to use their “existing relationship to telephone subscribers” in marketing equipment as a counter to AT & T’s market strength.

88

The various Operating Company officials who provided comments to the Court

89

on this aspect of the plan of reorganization attested to the fact that their

principal strength in the marketplace for customer premises equipment (and other potential services which may be approved by the Court) [is their] long and solid reputation for quality products and excellent service. Our ability to trade on that hard earned reputation is important and should not be compromised by denying us the ability to use the Bell logo and marks as legitimate reminders of who we are.

90

Several executives of the' new Regional Companies have stated that they might have to stay out of the equipment market entirely (or limit themselves to the sale of large-scale equipment) if they were prevented from using the Bell name and logo in connection with equipment marketing. See testimony of Thomas Bolger, June 2, 1983, transcript at 25601-02; see also, Wall Street Journal,

Some Bell Companies May Stop Supplying Residential Phones as Competition Grows,

June 17, 1983.

It would not be similarly inimical to the purposes and principles of the decree to preclude AT & T from the use of the Bell name and logo. One principle underlying the decree is that both AT & T and the

*1080

Operating Companies shall be in a position to be vigorous competitors with each other and with others in the marketing of customer premises equipment. To that end, the decree sets up a carefully balanced structure, as follows. AT & T will retain all embedded CPE; it will retain the Bell System retail outlets; and it will retain the ability both to manufacture and to market CPE. The decree further takes into account in this regard that, by comparison with the individual Operating Companies, AT & T will be a giant, with financial and other resources far overshadowing those of the local entities.

The Operating Companies, on the other hand, will come out of the divestiture with relatively limited. CPE-related resources and functions. They will be prohibited from manufacturing CPE; they will be deprived in part of their existing customer base by the assignment of existing CPE to AT & T; they will lack the ready-made outlet .of existing retail stores; and they will not have the benefit of Bell personnel experienced in the marketing of CPE. Insofar as such marketing is concerned, these companies will essentially be limited to their proximity to the local customer base in addition to the goodwill inherent in the “Bell” name and logo (if these are assigned to them). In short, in competitive terms, the assignment of the Bell name and logo to the Operating Companies rather than to AT & T can hardly be characterized as unfair to the latter.

91

The true situation is that, without the name and logo the local companies’ right, under the decree, to market CPE would be defeated, while AT & T’s right to do so would only be minimally affected.

92

It is appropriate, finally, to quote from the representations which were made to the Court by AT & T’s counsel at last year’s public interest hearing. On June 29, 1982, counsel stated in response to comments made by an attorney representing a competitor that

... The problem is not the logo, the yellow and blue stripes and that sort of thing .... We do not want to get into that fight and we have already agreed ... that the Bell that you know, the stripes that you have come to know they will go to the BOCs. Trucks that get repainted will be the Long Lines trucks, [not?] the BOC trucks.

The only thing left then is the names. I think Tandy’s counsel was very appropriate in saying that after all, you’re breaking up the Bell System... . What he objected to was concurrent use of the same corporate names. I stand before you and say there will be no such concurrent use of the same corporate name after the split.

When the Court suggested that this understanding had best be incorporated in the decree, AT & T’s counsel replied that this was not necessary because

[t]he question has been raised about these common names, the Court Reporter is recording this and there is a record of this hearing that should well outlast all of us, I suppose.

Transcript at 25214-15.

To be sure, it could be argued that these statements are not without some ambiguity.

93

Yet the overwhelming sense of the

*1081

representation, particularly when juxtaposed against the arguments made by counsel for one of AT & T’s competitors and that of the Department of Justice, was that AT & T was content to have the Operating Companies inherit the Bell logo and name.

94

For the reasons stated, the Court will refuse to approve the plan of reorganization unless it is amended to provide for use of the “Bell” name and logo by the Operating Companies (except as provided in Part D

infra)

and for a prohibition on AT & T’s use after January 1, 1984,

95

of the “Bell” name or the word “Bell” in any existing or new corporate name or in connection with the manufacture or marketing of any product or service, or for any other purpose.

96

D.

Limitations on the Operating Companies

The use which the Operating Companies may make of the Bell name and logo requires additional discussion.

First. Under the current version of the plan of reorganization, the “Bell” trademarks are to be assigned to the Central Staff Organization.

97

However, if the CSO were to receive the assignment of the name and logo, it might also have to administer centrally a program of quality control, for-lack of reasonable “quality control” could be regarded as working an abandonment of the licensor’s registration of its trademark. See Lanham Act, 15 U.S.C. § 1051

et seq.; Dawn Donut Co. v. Hart’s Food Stores, Inc.,

267 F.2d 358, 367 (2d Cir.1959). Such monitoring of the Operating Companies by the CSO would run counter to the notion that it is the Operating Companies which control the CSO, not vice versa. Moreover, each Regional Company must have individual responsibility for giving meaning to the products or services it offers under the name Bell, consistent with trademark and antitrust law. Accordingly, the Court will require that the tradename and trademarks shall pass directly to the Regional Companies, without intervention of the CSO.

Second. With respect to exchange telecommunications, exchange access, and directory advertising, the Operating Companies and the Regional Companies will, by definition, be limited to clearly defined geographic areas, and they will therefore use the name “Bell” only in conjunction with a geographic designation indicating the relevant territory. Likewise, in their corporate names, the Operating and Regional Companies will use “Bell” only in conjunction with a geographic prefix. In the marketing of equipment, however, these companies may wish to compete in places beyond their service territories, particularly with respect to the sale of large-scale telecommunications equipment to business customers. There is no reason why such competition should be

*1082

precluded by the imposition of territorial restrictions.

98

To the extent that an Operating Company sold CPE within its own geographic area, there might be no problem. Confusion would result, however, if hypothetically, Southern Bell, Northwestern Bell, and Pennsylvania Bell all marketed equipment in, say, Chicago, simply as “Bell” products, or if they stamped only the Bell logo on the equipment they sold there. The name “Bell” would in that case have little meaning; both it and the logo might be of dubious legitimacy under trademark law; and each company would run the risk of being sued by Illinois Bell for unfair competition. Accordingly, an Operating Company wishing to trade in another’s territory shall not use the name “Bell” without a trade modifier, nor may it use the logo standing alone. See,

e.g., Standard Oil Company v. Standard Oil Company,

252 F.2d 65 (10th Cir. 1958);

Mister Donut of America, Inc. v. Mr. Donut, Inc.,

418 F.2d 838 (9th Cir.1969).

99

IV

Patents

The issue before the Court is not, as it is with regard to the Bell name and logo, whether the Bell system patents should be assigned to AT & T or to the Operating Companies. AT & T will, in any event, retain ownership of all the patents. The question to be decided is the extent to which the Operating Companies will share in the patents by being granted licenses thereto, and what right these companies should have to grant sublicenses to others.

A.

Meaning of the Decree

The plan of reorganization provides that the Operating Companies will be granted royalty-free licenses to use patents

100

now owned by AT & T or to be issued to AT & T within five years after divestiture, to the extent that they relate to exchange, exchange access, and printed directory advertising services.

101

Under the plan, the Operating Companies will not, however, be granted licenses to patents relating (1) to any services which the decree prohibits them from offering (such as inter-LATA service) and (2) to the provision of customer premises equipment. To justify these limitations, AT & T and the Department of Justice rely upon section 1(A)(1) of the decree, which provides,

inter alia,

for the

transfer from AT & T ... to the BOCs ... of sufficient ... rights to technical information to permit the BOCs to perform, independently of AT & T, exchange telecommunications and exchange access functions

and on section VIII(B) which provides that

all facilities, personnel, systems, and rights to technical information owned by

*1083

AT & T ... which are necessary for the production, publication, and distribution of printed advertising directories shall be transferred to the separated BOCs.

In the view of these parties, no patent rights need to be granted to the Operating Companies on any basis other than these explicit provisions contained within the “four corners” of the decree. This is erroneous.

When the Court approved the proposed decree on August 11, 1982, it made the approval contingent upon the adoption by the parties of a number of modifications. These modifications, it was made clear at the time, were required only for the most substantial changes or clarifications; with respect to other subjects, the Court stated that it was content to rely upon the parties’ representations and promises and its own authority to give them effect during the implementation proceedings, including by its authority to approve or disapprove of the plan of reorganization. Thus, the August 11, 1982 Opinion explained

With respect to a number of subjects, the proposed decree establishes merely general principles and objectives, leaving the specific implementing details for subsequent action, principally by the plan of reorganization....

The parties have also made informal promises,

either to each other or to the Court,

as to how they intend to interpret or implement various provisions.

The Court has decided that its public interest responsibilities require that it establish a process for determining

whether the plan of reorganization and other, subsequent actions by AT & T actually implement these principles and promises

in keeping with the objectives of the judgment....

For that reason, the Court is requiring that the judgment be modified ... to provide for a proceeding ... in which

the Court will determine whether the plan of reorganization is consistent with the decree’s general principles and promises

(emphasis added).

552 F.Supp. at 224-25.

One of these promises concerned patents. In its August 11, 1982 Opinion, the Court took note of the fact that

AT & T has proposed granting to the Operating Companies, on a royalty-free basis,

all

existing patents and all patents issued for a period of five years following approval of the proposed decree.

552 F.Supp. at 177 (emphasis added).

102

This statement was not conjured up by the Court; it reflects repeated representations made to it both by AT & T and by the Department of Justice. For example, the Department stated in its Response to Public Comments of May 20, 1982 at 132 that

the reorganization plan will require AT & T to grant royalty-free licenses to the BOCs for

all

of its existing patents, and for

all

patents issued for a period of five years following entry of the proposed modification (emphasis added).

See also Department of Justice Response to Public Comments, May 20, 1982, at 38; AT & T Reply to Comments, May 21, 1982, at 123; and see note 105

infra.

These various representations, said the Court in its August 11, 1982 Opinion,

are adequate to support the conclusion that the Operating Companies will possess the necessary patent and technical information resources.

103

The arguments now made by AT & T and the Department of Justice in support of their claim that the word “all” in their several representations to the Court did not really mean “all,” and that in context they meant something else, are disingenuous to say the least.

104

Both parties base their narrow interpretations on the circumstance that the representations were made at a time when the

*1084

proposed decree would have limited the Operating Companies to exchange telecommunications and exchange access services.

105

While this is an accurate depiction of their timing, it does not in the least support the conclusion that the promises were or reasonably should have been regarded as limited to patents which related to these lines of business.

These promises, whatever their timing, were relevant not only to the question of what resources were required to be transferred to the Operating Companies to implement the exchange telecommunications and access service provisions of section 1(A)(1), but also to two other issues— whether the Operating Companies should receive licenses to patents which they had in substantial part financed, and whether AT & T should be relieved of the obligation, imposed by the 1956 decree, to license its patents to all applicants on a nondiscriminatory basis.

First. There were numerous references throughout the Tunney Act proceedings to the fact that the Operating Companies, by means of the licensing contracts, had contributed substantial amounts to the cost of the research which led to the patents, and this was always regarded by all as at least a possible basis for awarding licenses to the patents to these companies. See,

e.g.,

Department of Justice Response to Public Comments, May 20, 1982, at 38.

Second. The Department of Justice took the position during the Tunney Act proceedings that it was reasonable and in the public interest to relieve AT & T of the patent provisions of the 1956 decree which required it to grant licenses to all comers, foreign and domestic. One basic argument made to buttress the claim of reasonableness was that the fruits of the Bell system research would not simply be lost to the world because the reorganization plan would still require AT & T to grant royalty-free licenses to the Operating Companies for all of its existing patents and for all patents issued for a period of five years following entry of the decree.

106

The Department explained that the effect of such a grant would be that

the BOCs will have the right to sublicense these patents for their own use, including the manufacture of equipment for the BOCs’ purchase. Thus, as a practical matter, many AT & T patents issued within the next several years must also be licensed to AT & T’s competitors notwithstanding entry of the proposed modification.

Because of the existence of requirements that AT & T license patents heretofore

*1085

issued or issued during the next five years, and in view of the BOCs’ sublicensing rights, it is apparent that a significant portion, if not all, of such ‘work in progress’ patents will be licensed.... [T]here is no reason to believe that entry of the proposed modification will result in the removal of ‘work in progress’ patents from the pool of AT & T patents generally available to industry.

107

This expansive description of the proposed distribution of patent rights was not in any way limited, explicitly or implicitly, to section 1(A)(1) of the decree or to intraLATA services. The Justice Department’s reference was to the effect of the proposed decree on the mandatory licensing provisions of the 1956 decree — and these provisions clearly applied to all Bell System patents (including, of course, the CPE patents).

There is, in view of that history, no reasonable basis for the conclusion that the various references by AT & T and the Department of Justice to “all” patents did not mean just that, or that CPE patents in particular were meant to be withheld from the Operating Companies. Thus, when the decree was modified to authorize the Operating Companies to provide CPE, there was no need again to specify the patent rights incidental to this modification

108

— rights which were already guaranteed to the Operating Companies by the parties’ representations and by the Court’s retention of jurisdiction to give effect thereto. As the Court said with reference to patents and technical information,

When [the plan of reorganization] is submitted . .. the Court will evaluate [that plan] to make certain that [the appropriate details] conform to the general principles implied by these assurances.

552 F.Supp. at 177.

AT & T next contends that, if it were required to license all the Bell System patents to the Operating Companies which would then have the right to sublicense these patents to others, it would be required to “give away

its

technology” (emphasis added).

109

That formulation misstates the issue. Because of their financing of much Bell System research through the licensing contracts, what the Operating Companies will be receiving cannot fairly be described as AT & T’s technology;

110

that technology is as much theirs as it is AT & T’s. See 552 F.Supp. at 177.

111

Also, as the Court has already noted (see Part II above) all of the assets and all of the liabilities of the Bell System are being distributed between AT & T and the Operating Companies. AT & T cannot assert that, in the context of that distribution, the patents are “its” technology unless it is also prepared to live with the proposition that the liabilities of the Bell System are “its” liabilities. In short, it is entirely appropriate under the decree for

*1086

the Operating Companies to receive licenses to the existing patents and to those which will be issued within the next five years.

112

AT & T and the Department of Justice finally argue that under this rule, the Operating Companies would receive licenses to patents for services which the decree currently prohibits them from offering,

113

and that there could be no justification for such an action. It is not true, however, that even with respect to such subjects as interLATA services, the Operating Companies will be entirely barred from entry; they will be in these lines of business as of the very date of divestiture, albeit on a limited scale,

114

and they will therefore be able legitimately to make use of the pertinent patents

115

and the technology they represent.

116

Additionally, the line of business restrictions which will initially apply might in the future be lifted by the Court pursuant to section VIII(C) of the decree, and the patents would be useful to the Operating Companies at that time.

117

B.

Sublicensing by the Operating Companies

It is thus clear that, in view of the representations made by the parties and accepted by the Court as part of the decree, as well as in view of the various supporting considerations

(e.g.,

that the Operating Companies in significant part financed the research which produced the patents), the local companies are entitled to licenses to all the patents secured during the course of their association with AT & T and for five years after the association is dissolved.

118

This does not mean, however, as AT & T assumes and as some of the intervenors strenuously urge, that the Operating Companies may make direct use of the patents with respect to services which are otherwise forbidden to them by the decree. What must be firmly kept in mind is that, since the Operating Companies will not be allowed to enter manufacturing, they will be able to make effective use of the patent licenses only to the extent that they will have the power to grant sublicenses to manufacturers. As explained below, that power will exist with respect to some subjects immediately upon divestiture; with respect to others it is inchoate and its actual exercise will depend upon the removal of the line of business restrictions under section VIII(C).

*1087

The Operating Companies may grant sub-licenses consistently with the decree to the extent that they will use the technology covered by the particular patents in their provision of products and services which they are authorized to sell or render.

119

They may not, however, grant sublicenses with respect to any other patents, for two reasons: first, because they may not, absent special permission, engage in new lines of business (sections 11(D), VIII(C)),

e.g.,

the sale of patent rights simply as a business venture unrelated to their own use of the technology; and second, because AT & T’s manufacturing competitors are not entitled, as such, to the fruits of the Bell System research (552 F.Supp. at 176-77).

120

On the basis of these principles, it is convenient to consider the sublicensing issue with respect to two distinct categories of products or services — those which the Operating Companies will be allowed to market immediately upon divestiture, and those which they will not be permitted to market at that time.

The first of these categories includes, of course, customer premises equipment.

121

In an effort, accordingly, to resolve whether the grant of sublicenses to CPE patents by the Operating Companies to manufacturers of CPE would be used by the local companies in their provision of CPE — and whether therefore these companies may sublicense Bell System patents to such manufacturers — the Court has received and considered evidence (in both oral and affidavit form) from the chief executives of the Regional Companies. This evidence indicates that the Operating Companies will use the end products of the sublicenses in several respects.

First. The Operating Companies must have the right to sublicense CPE patents to manufacturers of their choice if they are to develop a CPE product line distinct from that of AT & T. As Thomas Bolger, designated chief executive officer of the Mid-Atlantic Region, has pointed out, if the Operating Companies were not granted rights to CPE patents, “the selection of the vendor to use Bell technology to supply a BOC would be taken from the BOCs and left to AT & T [which] might, or might not, cross-license the vendor with whom BOCs wish to deal.”

122

Under such circumstances, the re

*1088

liance of the Operating Companies upon Western Electric equipment would be perpetuated, thus impeding competition in the telecommunications equipment markets. It follows, of course, that without CPE patent rights and the ability to market a distinctive product line, the Operating Companies would not be able to provide the “effective counterbalance to AT & T’s market strength” in CPE marketing, which the Court sought to establish in modifying the decree. 552 F.Supp. at 192.

123

Second. If the Operating Companies are able to sublicense CPE patents, they will probably be able to negotiate lower equipment purchase prices and thus to share in the benefits from the Bell System research which they supported for so long.

124

This, in turn, will facilitate greater CPE sales and higher Operating Company revenues, and contribute in the long run to the financial viability of the Operating Companies (and indirectly to stable local telephone rates).

125

Third. The sublicensing of patents will permit the Operating Companies to benefit from increased competition among their suppliers — another development which would tend to reduce the price of CPE purchased by the Operating Companies for resale. To the extent that greater eompetition among CPE manufacturers

126

and lower wholesale prices paid by the Operating Companies will result in lower retail prices for consumers, the public will benefit as well.

For these reasons, the Court concludes that the sublicensing of CPE patents to manufacturers of CPE would be a legitimate part of the Operating Companies’ CPE marketing business.

In contrast to the substantive benefits which would inure to the Operating Companies from the ability to license CPE patents, only one possible adverse effect has been suggested.

127

The Department of Justice contends that Operating Company sublicensing of such patents would be a “step into the manufacturing area,” contrary to section VIII(A) of the decree. Such sublicensing, according to the Department, would give the Operating Companies an interest in the success of their manufacturer-sublicensees, and this, coupled with the proprietary interest in the particular technology covered by the sublicense, would create an incentive for anticompetitive acts.

128

In substance, this argument is but a variation of the claims made by the Department when it opposed the Court’s decision

*1089

to permit the Operating Companies to enter the CPE market. The Court then rejected the Department’s assertion

129

that Operating Company marketing of CPE would result in anticompetitive conduct,

130

because it concluded that the subsidization by the Operating Companies of their retail CPE operations with monopoly-derived revenues was entirely improbable.

There is no good reason — and the Department has offered none

131

— why the Operating Companies would have a greater incentive or opportunity to engage in such subsidization merely because they will be able to sublicense CPE patents to independent manufacturers.

132

Such an ability would no more facilitate coordination between separate corporations likely to lead to cross-subsidization than the purchasing contracts themselves, nor would the sublicensing of patents make anti-competitive activities any less detectable.

133

See 552 F.Supp. at 191-92.

134

Finally, it is surely not without significance that the manufacturers of CPE—

*1090

whom the Department of Justice is ostensibly attempting to protect — uniformly support the grant of sublicensing rights to the Operating Companies.

The Court concludes that the Operating Companies may sublicense their Bell System patent rights to manufacturers of CPE where the equipment produced under the sublicenses will be sold to the Operating Companies.

The same rule applies to the services which the Operating Companies will be authorized to perform. Clearly, they may sublicense patents for the manufacture of products which will assist them in providing intra-LATA service. Further, although prohibited from providing inter-LATA service generally, they will be in two relatively small areas of that market: corridor services

135

and Official Services.

136

Under the rationale applied to CPE, sublicenses may therefore be granted to manufacturers for the provision of equipment for the Operating Companies’ own use in these two authorized inter-LATA services.

137

Finally, section VIII(C) of the decree provides that the Court may, in the future, allow the Operating Companies to enter lines of business presently prohibited to them.

138

While, of course, the Operating Companies could not, immediately upon divestiture, sublicense patents useful with respect to such lines of business (see note 120 supra), the patent licenses assigned to them at the time of divestiture will become valuable through the automatic availability of the right to sublicense to the extent that section VIII(C) is successfully invoked in the future.

139

C.

General Considerations

Two additional considerations applicable both to the patent issue and the “Bell” name and logo questions deserve brief mention.

First. The Department of Justice

140

has been opposed to the marketing of CPE by the Operating Companies from the very outset. It was the Department which insisted on a provision in the proposed decree prohibiting such marketing. See,

e.g.,

Brief of the United States, June 14, 1982, at 30. When the Court on August 11, 1982, informed the parties that it would not approve the proposed decree unless that prohibition was eliminated, the Department sought reconsideration — the only issue with respect to which it made such an effort. See Memorandum, August 23, 1982. Finally, when the Court denied reconsideration, the Department, on the very date of filing the modified decree, submitted a memorandum in which it expressed “substantial doubts” that the modification allowing the Operating Companies to market CPE was “properly within the Court’s authority under the public interest standard or [was] supported by the antitrust theory and the record in these cases.”

The decree entered in this case allows the Operating Companies to market CPE. That decree was signed by the two parties, and it was entered as a judgment of this

*1091

Court. Whatever may be the views of the Department of Justice or some of its officials regarding the wisdom of the CPE provision, it will be enforced. And the Court will not allow this provision to be stripped of its vitality by artificial restraints which would undermine the competitive position of the Operating Companies in the CPE business vis-a-vis AT & T.

141

Second. The Court has previously taken note of the recent decision of the Federal Communications Commission concerning access charges. See 1983-1 Trade Cas. ¶ 65 ,-333 at 66,973-75 (April 20, 1983). Briefly, the Court was advised prior to the entry of the decree that whatever subsidy from long distance rates might in the past have been inherent in the local rate structure could and would be preserved by means of access charges levied on interexchange carriers.

142

However, in December of last year, the FCC decided to levy such charges also on individual subscribers.

143

This access charge decision undermines one of the assumptions underlying the Court’s approval of the decree

144

— that there would be no impairment of the principle of universal service

145

— that is, that everyone, regardless of income, would have access at least to a minimum of telephone service, in recognition of the fact that this service is a necessity rather than a luxury.

146

The FCC’s decision unnecessarily

147

jeopardizes this objective.

Whatever its authority or lack of it with regard to this development,

148

the Court may certainly take it into account, as further support for conclusions which are sound for other reasons. In passing upon the tradename, trademark, and patent issues, as well as on various other questions, the Court has done just that (see p. 1121 infra). In each instance, the Court’s decision is fully justified by other, specific considerations cited in the text, but in each such instance the Court also found that its decision was buttressed by the need to cope with the threat posed to universal, low-cost, local telephone service.

V

Employees

A.

Pension Plan

Two challenges are made to the employee pension provisions of the plan of reorganization.

*1092

1.

Union Challenge

The Communications Workers of America (Union)

149

claims that the plan’s proposal to divide the Bell System Pension Plan (BSPP) into nine separate plans will materially alter the terms and conditions of employment within the Bell System, and that the plan therefore impermissibly interferes with the Union’s right to bargain over pension benefits.

The two current pension plans, the BSPP covering nonmanagement employees and the Bell System Management Pension Plan (BSMPP) covering management employees, have existed in their present form only since 1980. Prior to that time, the many separate companies which constitute the Bell System administered separate pension plans. In October 1980 the plans were aggregated,

150

and even though a formal separation between management and non-management personnel was maintained, the assets of both the BSPP and BSMPP have since 1980 been pooled for investment purposes into one Bell System Trust. The plan of reorganization would divide each integrated plan into nine plans to correspond to the nine entities which inherit AT & T’s assets and functions after January 1, 1984.

151

The Union, which is concerned specifically with the BSPP, offers eight changes it believes this division would cause, but upon examination they reduce to three general categories. First, the Union complains that the plan would phase out the “interchange” provisions in the BSPP governing the portability of service credit from one Bell Systern company to another. Second, it speculates that each of the nine plans will be financially more risky than the existing central plan,

152

with the result that an employee’s benefits may be reduced. Third, the Union maintains that the post-divestiture plans — as described in the plan of reorganization — would treat former employees who are rehired differently from the way they now are treated for pension purposes.

153

In approving the divestiture and rejecting the Union’s request that the decree be modified to provide that it would not preclude continued national bargaining in telecommunications, the Court stated last August:

[TJhere is no need for such a modification. There is nothing in the proposed decree or in general principles of law which would preclude or interfere with such bargaining, and there accordingly is no reason whatever why, following the entry of the decree and the reorganization, such bargaining cannot continue as in the past.

[T]he settlement of the lawsuits .. . do[es] not involve AT & T’s labor relations and, more particularly, [it has] nothing to do with the Communications Workers of America or its relationship with the Bell System, [citations omitted]. It follows that the union, on the one hand, and AT & T, and the divested Operating Companies, on the other, will be entirely free to arrange their mutual labor relationships as the Bell System and the union did in the past, irrespective of the struc

*1093

tural changes that may be brought about by the decree

552 F.Supp. at 210.

The Union cites this language, the labor exception to the Sherman Act, federal labor policy, and the lack of relation between the Bell System Pension Plan and AT & T’s alleged anticompetitive conduct as reasons why the Court should not approve the plan’s proposed treatment of the BSPP but should commit the future of the BSPP to the results of collective bargaining.

First. The Court observes that the plan of reorganization does acknowledge the role of collective bargaining over pension benefits. AT & T states that

[t]he provisions of this section [regarding pensions] are based on the Bell System’s plans and trusts as they currently exist. These plans- and trusts may be modified during 1983 or thereafter as a result of collective bargaining or other requirements.

154

Thus, it does not appear that AT & T is attempting to ride roughshod over the bargaining rights of its employees.

Second. Although AT & T could not materially alter pension benefits unilaterally (see

NLRB v. Katz,

369 U.S. 736 , 82 S.Ct. 1107 , 8 L.Ed.2d 230 (1962),

Bastian-Blessing, Division of Golconda Corp. v. NLRB,

474 F.2d 49 (6th Cir.1973)), this principle and the cases which support it are inapplicable here.

155

We are not dealing here with unilateral employer action in the sense in which it is condemned by the labor laws, but with a break-up of the employer company as part of a comprehensive settlement of a complex antitrust action. See

Newspaper Guild of Greater Philadelphia, Local 10 v. NLRB,

636 F.2d 550 , 560 (D.C.Cir.1980).

Furthermore, contrary to the Union’s assumption, the decree in this case requires far more than a separation of AT & T’s telecommunications functions; it requires the complete economic separation of the various components of the Bell System. See,

e.g.,

sections 1(A)(1); 1(A)(3). It would be entirely inconsistent with the decree to perpetuate a unified pension plan, with the result that employees of the independently owned and functioning Operating Companies would continue to look to AT & T for their pension benefits. As it is, equipment manufacturers are concerned that they may not receive equitable treatment from Central Staff Organization employees due to their alleged emotional ties to their former parent, company. Such claims would acquire considerable plausibility if CSO and Operating Company employees believed that they had a continued economic stake in AT & T in the form of their retirement benefits.

At a minimum, the decree requires that the pension assets of employees follow them to their new assignments, and that the Regional Companies develop, as soon as possible, self-sufficient pension plans.

156

Union-

*1094

employer bargaining for a continued, unified pension plan is thus not a viable option. This is a structural matter covered by the decree that is not inconsistent with federal labor policy, for there will be no “changes in coverage, levels, or administration of the plan.”

Connecticut Light & Power Co. v.

NLRB, 476 F.2d 1079, 1082 (2d Cir.1973).

157

The phasing out of unlimited portability

158

is likewise a natural consequence of divestiture, for it would surely be inconsistent with the independence of the Operating Companies from AT & T and from one another to allow employees to rotate among them as freely as if these companies were related entities.

159

The Court therefore approves AT & T’s proposals which would divide the two existing plans into nine separate plans, and the provisions governing the division of pension assets through actuarial studies — both before and after divestiture — to ensure that the assets will be equitably distributed.

Third. There is merit in the Union’s position that the Court need not and should not involve itself in the specific terms of the post-divestiture pension plans beyond their structure. Unlike the threshold issues of the pension plans’ division and the elimination of unlimited portability, the precise terms of the pension plans admit of several resolutions each of which would be consistent with the decree.

160

However such nonstructural aspects of the pension plans may have been resolved in the past, their resolution is not cast in concrete. Accordingly, they are open for further decision, whether by collective bargaining when the contract governing the current pension plan expires in August 1983, or otherwise as AT & T and the Union see fit. The Court’s approval of the plan of reorganization is therefore not to be regarded as an endorsement of whatever AT & T may be planning with respect to post-divestiture pension benefits. To put it another way, there is nothing in the Court’s approval of the plan of reorganization (other than the structural and portability matters discussed above) which would in any way impair the obligation of AT & T to bargain in good faith with the Union.

*1095

2.

State Objections

The State of Maine and the Maine Public Utilities Commission argue that the plan of reorganization improperly allocates certain pension assets to AT & T. Under the plan, the assets of BSPP and BSMPP would be divided and allocated among the nine post-divestiture entities so that the accrual rates

161

for each of the new plans after divestiture would be approximately the same as will be the rates under the AT & T plans immediately prior to divestiture.

The allocation would be accomplished in two steps: first, there would be coverage of an amount equal to the present value of accrued benefits for each participant; second, all remaining assets — the difference between the present value of assets and liabilities — would be allocated so that the accrual rates for the post-divestiture pension plans would be approximately the same as the accrual rates in effect for the AT & T plans immediately prior to divestiture. Maine does not quarrel with the first step which, in any event, is required by the Employee Retirement Income Security Act (ERISA) and section 414(a) of the Internal Revenue Code. However, in its view, the assets in excess of those needed to cover accrued benefits

162

should be allocated in proportion to the contributions which produced the excess rather than on the basis proposed by AT

&

T.

Maine claims that because some 10 to 20 percent of present Operating Company employees will be transferred to AT & T,

163

it is likely that excess assets originally contributed to the pension plans by the Operating Companies will improperly be transferred to the AT & T plan (thus reducing proportionately its pension liabilities).

164

It may well be true, as Maine contends

165

that the law does not affirmatively require that excess assets must follow the transferred employees from the Operating Companies to AT & T since there is no requirement that employees receive the benefit of excess assets.

166

What is flawed, however, is the State’s argument that it is improper for the plan of reorganization to allocate the excess funds in accordance with future payment obligations and contribution levels, and that these funds must be allocated instead in accordance with the contributions made in the past. What this argument overlooks is that while the Operating Companies would be losing excess assets associated with the transferred employees, they would also be losing liabilities, i.e., the benefits the employee will accrue in the future. Under Maine’s proposal, entities with higher liabilities after divestiture than before would have fewer pension fund assets to meet their future obligations, requiring' a higher funding rate. Conversely, those companies which will have lower pension liabilities after divestiture than before would enjoy a windfall. The most important consideration is the interest of the participants and beneficiaries,

167

and they are best served by the proposed plan.

168

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B.

Employee Transfers

In addition to the one-year true-up period

169

immediately following divestiture during which any employee may be transferred between AT & T and an Operating Company

170

without loss of seniority rights or other benefits,

171

the plan further provides that employees in four specific job categories

172

may be transferred without loss of benefits after the one-year period.

173

Section 1(A)(2) of the decree provides that AT & T and the Operating Companies may continue to share certain facilities, and the plan implements that provision by specifying that the entities “intend to cease sharing network facilities as promptly as is reasonably feasible.” Plan of Reorganization at 56. The plan’s employee transfer provisions are justified by AT & T on the basis that the job functions of these employees will begin with one entity but will need to be transferred to another as transitory arrangements for the sharing of multifunction facilities are phased out. Response to Objections at 382-83.

The principal objections raised to the plan’s grant of transfer rights to the employees are that this may result in fraternization between AT & T and Operating Company personnel, the disclosure of equal access network information to AT & T employees, the perpetuation of loyalty to the Bell System, and the provision by Operating Company personnel of certain inter-exchange services to AT & T but not to other interexchange carriers. See,

e.g.,

Comments of Satellite Business Systems, February 15, 1983, at 65-66, 91.

The intervenors’ concerns are not frivolous; however, given the necessity for some sharing of multifunction facilities, the solution adopted in the plan is, in general, a reasonable one. The basic alternative to the provisions for transfers without loss of benefits is a lay-off of the affected employees by one entity to be followed by a (possible) rehire by the other. The Court has no intention whatever of unnecessarily imposing such a hardship on these employees.

*1097

Moreover, the entire matter must be kept in perspective: the individuals involved will not be managers or other policy makers but relatively low level employees. It is thus unlikely that manipulation or the disclosure of sensitive information to AT & T will occur. The loss of employment security and the unusual and unnecessary inefficiencies which would be the consequence of a rejection of most of the transfer provisions can therefore not be justified.

There is, however, one exception to this principle. AT & T has not demonstrated why Operating Company personnel should write inter-LATA orders for AT & T for up to 5V2 years after divestiture. Such order-writing is purely an interexchange function; it is performed by persons, not “facilities” as that word is used in section 1(A)(2); and this service would not be available to any interexchange carrier other than AT & T. Indeed, such order-writing by Operating Company personnel for AT & T could provide the latter with a significant competitive advantage. The Court will not permit sharing of this function, and it will require the deletion of references to such sharing from the plan of reorganization (at pp. 253, 254, 279-80, and 287), unless the benefits are made available to all interexchange carriers.

The Union, unlike the other intervenors,

174

suggests that the Court require modification of the plan to permit unlimited transfers of employees among the post-divestiture Bell System entities. As noted

supra,

such a provision would be flatly inconsistent with section 1(A) of the decree and with the underlying rationale of the judgment — that the economic integration among the various Bell System entities must cease. That proposal, too, will therefore be rejected.

VI

Official Services and Other Facilities

With one major exception, the division of network facilities and other assets is reasonable and fully consistent with the decree.

A.

Official Services

The Court will not approve the decision made in the plan of reorganization with regard to so-called Official Services. These services represent communications between personnel or equipment of an Operating company located in various areas and communications between Operating Companies and their customers.

175

The plan of reorganization provides that Bell System facilities used in whole or in part for Official Services will be assigned according to the same rules applicable to other transmission facilities; meaning that, if facilities are used solely or predominantly to perform interLATA functions, they will be assigned to

*1098

AT & T even if the functions constitute Official Services.

176

Additionally, the Department of Justice has indicated to one or more Operating Companies

177

that it would object if they constructed and operated their own inter-LATA facilities to administer Official Services.

178

In the view of the Court, neither the plan’s treatment of Official Service facilities nor the position of the Department of Justice is consistent with the principles underlying the decree.

Each Operating Company conducts its authorized operations in several LATAs. In order to achieve operational efficiencies, the four basic categories of Official Service systems

179

have been designed to serve geographical areas which are usually larger than individual LATAs. For example, the so-called “Operational Support System Networks” (see note 179 supra) typically cover an entire state or major portion of a state, permitting the monitoring and controlling of trunks and switches and the routing of traffic from a centralized location. Directory assistance, repair service offices, and business offices likewise serve geographical areas which are larger than individual LATAs.

180

For the reasons stated below, it makes no sense to prohibit the Operating Companies from using, constructing, and operating on their own the facilities they need to conduct Official Services, whether they be intraLATA or inter-LATA in character, and to require them instead to lease such facilities from AT & T.

181

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The Department of Justice recognizes “that the BOCs may have constructed their internal data processing and operational support systems on the assumption that communications links between their facilities would be over BOC-owned facilities,”

182

and further that to require such communications to be “placed on commercial facilities might abruptly increase the BOCs’ cost of providing service.”

183

Yet, relying solely on the curt rationale that such traffic is correctly classified as inter-LATA, the Department supports the assignment of all existing inter-LATA Official Service facilities to AT & T. This solution is both unwise and unnecessary.

Only two alternatives would be available to the Operating Companies under the current plan, both of them undesirable. One option would be for the companies to redesign their Official Service systems so that none of their internal communications crosses LATA boundaries. This would result in a loss of the operational and cost efficiencies produced by the centralization which currently exists in the local phone system.

184

In effect, a separate, self-contained Operating Company would be created for each LATA — a result clearly not contemplated by the decree.

The other option would be to have the Operating Companies’ Official Service communications carried by AT & T or another interexchange carrier. See note 181

supra.

This alternative would not only be very costly

185

but it suffers from a number of other infirmities. As William Weiss, chief executive-designate of the Midwest Region, points out:

Speed and reliability are critically important with respect to the BOCs’ monitoring and controlling of their switches and trunks. BOC operating personnel and computers must have continuous, instantaneous information regarding traffic loads and the operating status of equipment. When traffic overloads or equipment malfunctions occur, they must have the capability to immediately control equipment and reroute traffic. Forcing the BOCs to rely on third parties for official service communications ... could seriously jeopardize the BOCs’ fulfillment of their responsibilities to provide intraLATA communications and exchange access ....

Moreover ... [i]n many instances, the BOCs could more efficiently conduct these communications over inter-LATA facilities constructed and owned by the BOCs. The BOCs’ ability to deploy new transmission technologies is at least as good and probably better than that of third parties who might provide us with inter-LATA services. The cost of building facilities utilizing those new technologies might be far less than the cost of leasing facilities employing older, and thus higher-priced technologies.

... The critical point is that the BOCs should be free to conduct their official services communications in the optimal

*1100

manner, selecting whichever option is the most reliable and cost-efficient.

186

Such significant burdens should not be imposed on the Operating Companies unless this is clearly required by the decree. An examination of the decree’s provisions shows, however, that a prohibition on the maintenance of inter-LATA Official Service facilities by the Operating Companies is required neither by its spirit nor by its letter.

The Operating Companies are prohibited from engaging in intercity, inter-LATA services in order to prevent a recurrence of the alleged anticompetitive practices of AT & T, which was claimed by the government to have used its local monopolies to disadvantage its intercity competitors in a variety of ways. That rationale is wholly inapplicable to the provision of inter-LATA service by each Operating Company for its own internal, official purposes.

187

Only by a highly abstract distinction between services that are once and for all labelled “competitive” or “monopolistic” could that prohibition be applied to the Operating Companies’ Official Services. Moreover, it is ironic that a prohibition which grew out of AT & T’s dominant competitive position and its alleged misuse of that position is now sought to be applied in such a way as to afford AT & T a substantial financial benefit by giving it the opportunity to carry, for a profit, the Operating Companies’ own internal, official communications which these companies are perfectly able to carry themselves and have, indeed, carried themselves in the past.

188

Nor is so illogical a result required by the strict terms of the decree. While the Operating Companies are prohibited by section 11(D)(1) from providing “interexchange telecommunications services,” section IV(P) defines “telecommunications services” as “offering

for hire

of telecommunications facilities” (emphasis added). Obviously, the Official Services are not “for hire.” Similarly, the decree prohibits the Operating Companies from engaging in “information services,” but it expressly permits them to engage in such services “for the management, control, or operation of a telecommunications system or the management of a telecommunications service.” Section IV(J). Further, section 1(A)(1) mandates

[t]he transfer from AT & T and its affiliates to the BOCs ... of sufficient facilities [to permit them] to perform, independently of AT & T, exchange telecommunications and exchange access functions, including the procurement for, and engi

*1101

neering, marketing and

management

of, those functions, (emphasis added).

189

In light of these provisions, it is thus not surprising that, contrary to its present position, the Department of Justice stated in its competitive impact statement filed with the Court on February 10, 1982, that the Operating Companies will continue to perform those functions which are “inherent” in exchange communications and exchange access, such as “the ability to engage in the ... management of retained functions.” Competitive Impact Statement at 29. Because each Operating Company will perform its authorized services in several LATAs, an inherent part of the management of those services includes official communications which cross LATA boundaries.

For these reasons, the. Court rules that an Operating Company shall receive interLATA facilities which are used solely or predominantly for the performance of its own Official Service functions. If the use made by an Operating Company of a multifunction facility for the provision of exchange telecommunications, exchange access, and Official Services, predominates in the aggregate (including all such functions) over that made of such facility by AT & T, the multifunction facility is required under section VIII(G) of the decree to be assigned to the Operating Company.

190

The Court further confirms that the decree does not prohibit the Operating Companies from providing their own Official Services, including, if necessary, by the construction of the appropriate inter-LATA facilities.

191

B.

Other

The network assets are being assigned on the basis of whether they provide an exchange function (in which event they are assigned to the Operating Company) or an interexchange function (in which event they go to AT & T); where an asset performs both functions, the assignment depends essentially upon predominant use. Sections 1(A)(2), VIII(G); see note 20

supra.

A number of intervenors have objected to one aspect or another of the division of assets provided for under the plan (or to the failure to complete such division in advance of the approval of the plan of reorganization) but the Court finds all such objections (other than those related to Official Services allocations discussed supra)

to

lack merit.

1. Several intervenors claim that the plan improperly disregards the predominant use test required by the decree. To be sure, the decisive role of that test can most clearly be discerned in the assignment of switching systems, and its role is not as apparent where less complex equipment is involved. That result, however, is not surprising: it would be technically and administratively impossible to assign ownership of each of the thousands of relatively small items in the central offices on the basis of predominant use. What AT & T has proposed instead is to assign equipment bays containing related items of equipment to work areas which, in turn, are assigned to AT & T or the Operating Companies on the basis of predominant use. In the absence of a showing that the assignment of the general work areas as such is not being made on this basis — which has not been forthcom

*1102

ing — the Court will accept these provisions of the AT & T plan.

192

2. The assignment of the private line facilities and other specialized functions

{e.g.,

call completion and local directory assistance) proposed in the plan is likewise consistent with the decree and otherwise appropriate, and it will therefore also be approved.

193

3. One type of facility about which there has been particular controversy is 800 Service Directory Assistance which several of AT & T’s competitors claim properly to belong to the Operating Companies. It is abundantly clear, however, that this particular directory assistance is an interexchange, inter-LATA service which is appropriately assigned to AT & T. If this enhanced service were assigned to the Operating Companies in spite of the fact that it performs interexchange functions, it could be done only on the basis that AT & T’s competitors should be afforded the ability, through the medium of the Operating Companies, to offer this service without having to pay for it.

194

If the other interexchange carriers wish to offer long distance directory assistance, they will have to construct the necessary facilities. It is not the purpose of the Court’s review of the plan of reorganization to “punish” AT & T or to provide advantages to its interexchange competitors to which they are not legitimately entitled.

195

The assignment of the network facilities and other assets provided for in the plan of reorganization will accordingly be approved.

VII

LATA Issues

In its April 20, 1983 Opinion on the proposed LATAs (see note 6 supra) the Court requested further information with regard to certain specified LATAs as well as assurances with regard to intra-LATA equal access. Also to be resolved at this time are issues which have been separately briefed respecting traffic between the LATAs and areas served by non-Bell, or independent telephone companies.

*1103

A.

Individual LATAs

1.

Vermont, Maine, New Hampshire

The Court in its April 20, 1983, Opinion declined to approve New England Telephone’s proposed departure of the Maine, Vermont, and New Hampshire LATAs from state boundaries because some 26 border communities would otherwise have been placed in “out-of-state” LATAs.

196

The regulators in these states had expressed concern that these stateline crossings could result in discriminatory treatment of telephone users in these communities, and they requested that these areas be redrawn so that each LATA would correspond precisely to the borders of the particular state. NET has since informed the Court that it withdraws its request for stateline crossings and proposes instead LATA boundaries which conform to state borders. These new LATAs are approved.

197

NET requests additionally that it be allowed to phase in the new LATA boundaries, so that, in order to minimize costs, the necessary network modifications may be undertaken in conjunction with other system improvements.

198

That request is likewise approved.

199

2.

Worcester

NET has drawn a separate Central Massachusetts LATA in conformity with the Courts April 20, 1983, Opinion, separating Worcester and its surrounding communities from the Boston area and creating a total of three LATAs in Massachusetts, but at the same time it has asked the Court to reconsider whether this third Massachusetts LATA is in the public interest. NET contends that the establishment of a third LATA will prove costly to local ratepayers; will disrupt service in nine towns divided by the new LATA boundary;

200

will decrease the viability of various optional intrastate billing plans which depend upon volume and distance;

201

and may preclude use of a No. 4ESS switch as an access tandem to the possible detriment of AT & T’s interexchange competitors. The Massachusetts Department of Public Utilities also urges the Court to reconsider the division of the Eastern Massachusetts LATA into an Eastern and a Central LATA, arguing additionally that the growth of the high technology industry beyond suburban Boston westward toward Worcester has created a single community of interest in central and eastern Massachusetts. The Department of Justice, on the other hand, continues to maintain that the contribution three LATAs would make to a competitive telecommunications environment in Massachusetts outweighs the inconvenience and cost involved in the creation of a third LATA.

The Court has carefully reviewed the filings addressed to eastern Massachu

*1104

setts, and it has decided to grant the request of NET for a single LATA for that area. Although NET continues to overestimate the cost to ratepayers of separating the LATA,

202

the other grounds it advances are persuasive. In its most recent filing, NET describes in considerable detail the impact on subscribers whose towns would be split by the new border between the Eastern and Central LATAs. The Court has also been persuaded by the NET and the PUC submissions that the population of this area is sufficiently concentrated and the local telephone network sufficiently integrated that the expense, effort, and customer inconvenience associated with dividing the network would be very substantial, even if NET’s estimate of the expense is somewhat exaggerated.

203

The detail provided by New England Telephone in its May 5 and May 23, 1983, submissions stands in stark contrast to the paucity of supporting documentation in the Department of Justice’s filing. The Department offers only its bare conclusion that “the competitive benefits of separating Worcester from Boston outweigh the costs of separation.” The Department does indicate that it would consider exceptions to the new boundary to allow NET to continue to serve the divided communities, but NET persuasively counters that since calls within these municipalities are carried by the toll network — but billed as if the calls were local — “it is not clear what exemption could solve [the] problem.”

The Court concludes that the palpable expense and inconvenience of separating the LATA outweigh the Department’s speculation about benefits to competition,

204

and it will therefore approve the consolidation of Boston and Worcester in a single LATA.

3.

New York

The Court accepts the Operating Company’s proposal to consolidate Glens Falls and Albany into a single LATA and also to consolidate Utica and Syracuse into a single LATA.

205

To be sure, New York Telephone Co. failed to provide the Court with new information except the revised, lower count of telephones in Glens Falls,

206

but the Department of Justice has advised the Court that it does not believe that the competitive purposes of the decree would be significantly advanced by creating four LATAs rather than two. In view of the Department’s general tendency to err on the side of separation in close cases — as evidenced, for example, by its position on the proposed Eastern Massachusetts LATA — its

*1105

failure to advocate such separation here, and the relatively small size of Utica

207

and Glens Falls, the Court is reluctant to impose on New York Telephone Co. total estimated costs of $8.6 million in network reconfiguration.

208

4.

Pennsylvania

Pennsylvania Bell pledges (1) to build a No. 4ESS switch in the Philadelphia LATA and lease access capacity from AT & T in the meantime, (2) to offer access in the Pittsburgh LATA through a DMS-200 switch,

209

and (3) to construct a DMS-200 switch in Harrisburg. Based upon these assurances, the Court will approve the Pennsylvania LATAs.

5.

Baltimore

Chesapeake & Potomac Telephone Co. and the Department of Justice ask the Court to make explicit its approval of exceptions requested by C & P to allow eight exchanges in the Baltimore LATA to continue using “Metro FX” service. This service allows telephone subscribers in these exchanges to pay rates for calls to and from Washington, D.C. as if the exchanges were located in the Washington LATA. The exceptions are approved.

Some of the affected exchanges are located in Calvert County, Maryland, whose Chamber of Commerce wrote the Court in late April 1983, concerned that the County’s inclusion in the Baltimore LATA would mean disruption of economically necessary discount calling into Washington. The express approval of all FX exceptions requested by C & P should alleviate the County’s concerns, for in view of that approval the placement of Calvert County in the Baltimore LATA will not affect its subscribers’ rates.

The Court finds, however, that the County’s placement in the Baltimore LATA, as initially proposed by C & P and accepted by the Court on April 20,1983, is reasonable in light of C & P’s representation that it would cost over $3 million to reconfigure the County’s local network to render it suitable for inclusion in the Washington LATA. According to C & P, this also would “leave idle about $500,000 in facility capacity between these exchanges and Annapolis,” Annapolis being the location of the toll center which connects Calvert County exchanges to the long distance network.

6.

Winchester

For the reasons stated in the Department of Justice’s filing,

210

, the Court reconsiders the consolidation of the proposed Winchester and Louisville LATAs; approves the Louisville LATA as originally proposed; and approves the association of the Winchester LATA with the independent area around Lexington served by GTE.

7.

Birmingham/Huntsville

South Central Bell’s division of the Birmingham LATA into two separate LATAs, as required by the Court’s April 20, 1983, Opinion, is approved.

*1106

8.

Midwest

The Court approves the inclusion of Kankakee in the Chicago LATA;

211

the Detroit LATA as proposed;

212

the Grand Rapids LATA;

213

the inclusion of Sikestown and Cape Girardeau in the St. Louis LATA;

214

the borders between the Cleveland and Akron-Canton LATAs;

215

the Southeast, Wisconsin LATA as proposed;

216

and the division of the Davenport LATA.

217

9.

Minnesota

Northwestern Bell and the Minnesota Public Utilities Commission request the Court to consolidate the Fargo (North Dakota) and Brainerd (Minnesota) LATAs. The LATAs are now separated by the North Dakota/Minnesota border. Previously the Commission and the Operating Company had been at odds over five communities on the Minnesota side of the border which Northwestern Bell desired to place in the Fargo LATA rather than the Brainerd LATA.

The requested consolidation will be approved. Although it requires an exception to the decree’s presumption against LATAs that cross state lines, it will accomplish the Minnesota Public Utilities Commission’s objective of ensuring a LATA of adequate population to be attractive to interexchange carriers without requiring Northwestern Bell to incur $9 million in network reconfiguration costs, as would the previous proposal of the Minnesota regulators.

218

The resulting LATA would be of moderate size — 216,000 subscribers not including those of Independent companies— and it would be consistent with the community of interest that spans the Minnesota/North Dakota border.

10.

Seattle

The Court approves the inclusion of Bellingham in the Seattle LATA for the reasons stated in the May 5, 1983, filing of Pacific Northwest Bell,

219

and since leasing space on AT & T’s No. 4ESS switch would cost the Operating Company approximately $1.2 million more than installing a switch of its own, the Court approves Pacific Northwest Bell’s request to provide access in the Seattle LATA through a new 4-wire digital switch.

11.

Oregon

Pacific Northwest Bell requests the Court to reconsider its decision to require the establishment of the two LATAs initially proposed for Oregon, and to allow instead a single LATA for the entire state. The State, through its Governor, endorses the request, as does the Oregon Public Utility Commission. Pacific Northwest Bell ex

*1107

plains its change of position as having resulted from a realization that it had proposed two LATAs based on a “conservative” reading of the decree’s requirements. The Department of Justice maintains that a single LATA in Oregon would be unreasonable, and the Court agrees. Because of the distance between Eugene and Portland, the two major cities in Oregon, two LATAs configured around these cities are clearly warranted under the general standards applicable to the entire country, and the Court will not reverse its earlier determination.

12.

California

The Court approves a tenth LATA in California composed of San Luis Obispo County as a reasonable response to its order of April 20, 1983 that the County’s exchanges not be included in the Los Angeles LATA.

13.

Pennsylvania-New York-New Jersey Corridors

The Court gave tentative approval to two unique serving arrangements for metropolitan regions which cross state lines — the “limited corridors” running from New York City into five northern New Jersey counties and from Philadelphia into three southern New Jersey counties.

In response to questions posed by the Court, the Operating Companies and the Department of Justice provided additional information about the setting of access charges and customer rates with respect to corridor traffic. Some of the potential competitors of the Operating Companies object to the local companies’ plans not to pass on to their end user customers the costs of facilities they do not use in serving them, that is, the costs of the circuits used to connect competitors’ points of presence to the local loops. In the case of the corridors, which were sanctioned specifically to preserve for interstate callers in these areas the advantages of the existing local networks, the Operating Companies’ policy is reasonable. As New Jersey and Pennsylvania Bell observed, “[t]o do otherwise would require the Operating Companies to compete on the basis of their competitors’ costs rather than their own.”

The International Communications Association registers a different complaint about the corridors. Rather than to ask for more competition within the corridors, it wants to ensure that the Operating Companies’ efficiencies will be passed on to consumers in the lowest rates possible, and it argues that this would more assuredly be accomplished if the corridor areas became LATAs (so that all traffic within a corridor would be intra-LATA). It is difficult to understand what difference this would make since the area would still be interstate and the rates would therefore still be subject to the jurisdiction of the Federal Communications Commission.

220

Furthermore, if the corridor areas were configured into separate LATAs, this would force a reassessment of a number of other LATA boundaries, such as those between Long Island and New York City and New York City and Westchester, or else huge New York-New Jersey and Philadelphia-New Jersey-Delaware LATAs would have to be established — both undesirable developments.

For these reasons, the Court approves the two proposed corridors subject to the equal access provisions discussed

infra.

B.

Intra-LATA Equal Access

With the exception of the New York and Pennsylvania corridors, the Court accepts as reasonable the commitments made by all of the Operating Companies as required by the April 20, 1983, Opinion ( 1983-1 Trade Cas. ¶ 65,333 at 69,980) to provide equal access for intra-LATA service.

First. Pursuant to the Operating Company commitments, the access offered to interexchange carriers for intra-LATA toll

*1108

calls

221

will be equal in technical quality to the access provided to these carriers for inter-LATA calls, meaning that both types of access connections will be performed by the same exchange access facilities (be they access tandems or direct trunks between end offices and interexchange carrier points of presence). The access will be equal also in another respect: subscribers of AT & T and its interexchange competitors alike will not be able to select in advance either AT & T or one of its competitors as a transporter of intra-LATA toll calls — -the so-called “presubscription” or “preselection” option. Rather, if a subscriber wishes to place an intra-LATA call through AT & T, MCI, Sprint, Microtek or one of the other competitive services, he will have to add four digits at the time of dialing

(i.e.,

an access code of “10XX”). If an access code is not dialed, the intra-LATA call will automatically be carried by the Operating Company.

What that means, of course, is that, with respect to intra-LATA traffic, there will be inequalities between all interexchange carriers, on the one hand, and the Operating Companies, on the other. Telephone users will be able to access an Operating Company as they do now, simply by dialing a seven or ten-digit number (depending upon whether an area code is used).

222

To access an interexchange carrier, on the other hand, a telephone user would consciously have to select that carrier and dial the appropriate four-digit access code. Additionally, the Operating Companies (with their proliferation of direct trunks between Class 5 end offices and the concomitant ability to transport calls without the need for switching) may be able to carry their intra-LATA toll calls with higher quality and at less cost than can the competitors carry theirs.

A number of interexchange carriers attack this scheme both on account of the absence, to them, of the presubscription option, and because of the inequalities in facilities between the Operating Companies and their potential intra-LATA toll competitors.

The Court has concluded that, in light of all the circumstances and competing considerations, the position of the Operating Companies is not unreasonable. In approving the consent decree as in the public interest, and in directing the Operating Companies to provide intra-LATA access, it was not the Court’s intention to require the decimation of the local telephone networks or to deprive customers of the conveniences and cost benefits which the Operating Companies have succeeded in making available to them.

It would cost approximately $1 billion and take several years to modify the 3,000 Bell end offices so as to permit a telephone' user to presubscribe for one carrier for intra-LATA toll calls and another carrier for inter-LATA calls.

223

In the absence of such an expenditure — which the Court will not require — what will be available to the customer in the near future is the option to preselect one telephone company, and one only. If such a customer could select in advance either an interexchange carrier or an Operating Company for intra-LATA calls, many, if not most, telephone users would preselect the former rather than the latter. This is so because of the overriding fact that, under the decree and the plan of reorganization, the interexchange carriers are allowed to carry all toll calls (both interLATA and intra-LATA) while the Operating Companies may carry only intra-LATA calls — a significant drawback with respect to convenience. Thus, to require the Operating Companies to provide the presubscription option to the interexchange carriers would place the local companies at an almost insuperable disadvantage. This the Court will not do.

*1109

Even if a subscriber cannot or does not presubscribe, he may still designate a particular carrier at the time he makes the actual call (by dialing a specified access code). What if a customer does not do so — which carrier will get that business? Some suggest that all intra-LATA toll calls should be required to be designated.

224

That, too, will not be required.

To require all callers to use a four-digit access code, in addition to the number to be called, for all intra-LATA toll calls — including those carried by the local Operating Company — would have the perverse consequence of making intra-LATA, or local toll calls more cumbersome to dial than interLATA, or long distance toll calls.

225

This is totally inappropriate. The alternative— which the Court will allow- — is to route all -undesignated intra-LATA toll calls to the Operating Company.

This conclusion is buttressed by the consideration that affirmatively to forbid such an arrangement would inappropriately override state regulators’ authority to decide what intrastate calling arrangements are best suited to the public interest within their states. In a state such as Florida, where the Public Utilities Commission has sanctioned intrastate competition by granting Microtel a license,

226

the Commission might well decide that intra-LATA competition should be further encouraged by requiring access codes alike for the Operating Company and its competitors, but the Court should not force this outcome. With respect to a state where the future of intraLATA competition is more uncertain than in Florida, the Court would be even less justified in ordering the Operating Company to make intra-LATA telephone calling inconvenient for everyone — by adding four more digits to every intra-LATA toll call— for only speculative offsetting gains. Such a decision ought to be reserved for the state regulators, as several of them have urged.

227

The unevenness resulting from the Court’s decision between the Operating Companies and their competitors does not offend the competitive principles of the decree. The decree mandates that the Operating Companies have primary responsibility for exchange services, and it is appropri

*1110

ate therefore that they should enjoy the non-access code arrangements with their exchange customers. The competitors are merely secondary suppliers of intra-LATA service, and while they may operate in that market on that basis, they should hardly be given what, in view of the considerations discussed above, would amount to a preferred position. However, if they should truly offer a better price or a better service than the Operating Companies, they should be able to educate their potential customers that it is worth the extra four numbers to take advantage of their offering.

Second. The reverse is true with respect to the so-called corridors.

228

These corridors traverse not only LATA boundaries but also state boundaries, and they thus represent dual exceptions to the decree. They were permitted by the Court in heavily populated metropolitan areas not out of a desire to “[maintain] the position of the Operating Companies in the corridor,” as New Jersey Bell and the Bell Telephone Company of Pennsylvania assert, but to maintain for consumers the benefits of what were represented to the Court to be particularly efficient network arrangements.

The decree presumes that the interexchange carriers — not the Operating Companies — will be the primary transporters of interstate, inter-LATA telecommunications. One of the reasons underlying the Court’s tentative approval of the corridors — which would allow the Operating Companies, too, to operate in the markets the corridors represent — was that these routes would be fully open to competition. To implement that purpose, the Operating Companies will have to offer complete inter-LATA access to competitors which carry inter-LATA traffic within the corridors,

229

with all that this implies, including the option of presubscription

230

and the requirement that all calls be designated. The Operating Companies may choose whether they will develop the software that will allow presubscription of more than one carrier, or whether they will offer presubscription of one carrier only.

C.

Bell-Independent Traffic

On February 17, 1983, the Operating Companies

231

submitted their proposed classifications of traffic between areas they serve and those served by independent telephone companies (Independents)

232

as either inter-LATA or intra-LATA.

The need for such a process came about because of the proximity of many Bell and Independent areas, and the consequent joint Operating Company/Independent service arrangements which are currently in effect around the country (that is, the Operating Company typically switches traffic

*1111

between its end offices and the offices of the Independent, which then routes that traffic to its final destination). If all that traffic were considered to be inter-LATA under the decree, the Operating Companies would be prohibited from participating in such arrangements, and significant, costly network rearrangement would have to be undertaken in order to have all Bell-Independent traffic carried by an interexchange carrier.

233

To avoid such disruptive effects, the Operating Companies were asked to identify those areas where, consistént with the decree’s purpose of limiting Operating Company participation in the long distance competitive markets, they should nevertheless be permitted to continue to provide joint service offerings with adjacent independent companies.

234

In addition to determining whether the particular Operating Company may carry such traffic or whether it should be precluded from doing so, the classifications will also be the basis for deciding whether Bell System facilities and assets connecting Bell and Independent territory should be assigned to AT & T or to an Operating Company.

On February 23,1983, the Court issued an order establishing procedures for the review of the classifications prepared by the Operating Companies. Subsequently, a number of interested parties submitted comments, and AT & T and the Department of Justice filed their own responses.

The classifications, although made by the Operating Companies, are based upon principles and criteria furnished to these companies by the Department of Justice. The fundamental governing principle used by the Department and hence by the Operating Companies was that, for the purpose of determining whether the traffic between an Operating Company and adjacent Independent territory is to be regarded as interLATA or intra-LATA, Independent territory was treated as if it were Bell territory. Traffic is thus classified as intra-LATA if it would have been included within a LATA had it been exclusively Bell territory; it is classified as inter-LATA if it would have required the establishment of a separate LATA.

On November 17, 1982, the Department of Justice set forth the criteria by which it would judge the Operating Company determinations.

235

The following types of Bell-Independent traffic were designated as clearly intra-LATA:

(1) traffic within local calling areas and non-optional extended area service (EAS) areas;

(2) intrastate traffic for states with a single LATA;

(3) traffic within a single statistical area; and

(4) traffic between a LATA and Independent exchanges serving non-statistical areas.

The following types of Bell-Independent traffic were designated by the Department as “possibly” intra-LATA:

(1) traffic between a LATA and Independent territory in an adjacent SMSA which includes fewer than 100,000 main or equivalent main stations, or the distance between the core cities of the two areas is less than 25 miles;

(2) traffic between a LATA and Independent territory without a Class 4 switch (or other network considerations); and

(3) traffic between isolated Bell exchanges and an Independent dominated SMSA, provided that the Indepen

*1112

dent makes a commitment to provide equal access.

The remaining traffic is regarded under the criteria as inter-LATA.

Reliance upon these criteria by the Department, and hence the Operating Companies, would have the following impact in the two factual circumstances which are predominant with respect to Bell-Independent traffic: (1) an Operating Company LATA may not be associated with an Independent area if the latter constitutes a market of sufficient size and distance from other markets to attract multiple interexchange carrier entry; (2) if, to the contrary, the Independent area has relatively few access lines or if the distance between the Bell and Independent core communities is insubstantial, an association between the Operating Company LATA and the Independent area will be permitted. In a few instances, particularly in Oregon and Washington, traffic was classified as inter-LATA by the particular Operating Company because it elected not to serve the relatively small Independent area in question.

236

In a number of other instances, where the Operating Companies and the Independents agreed that there will be no Operating Company service despite an absence of a prohibition in the decree, the traffic was also classified as inter-LATA for purposes of the division of Bell System facilities.

237

The two principal objections

238

which have been advanced with respect to the Bell-Independent traffic classifications are first, that in certain instances either too many or too few Independent areas have been associated with Operating Company LATAs; and second, that the classifications unduly curtail the business freedom of the Independents.

First. The Court has considered the various Bell-Independent traffic classifications on the same basis as its earlier consideration of the LATAs.

239

Although it is possible to disagree with particular decisions that were made by AT & T and the Department of Justice in this process, the Court has concluded that in no instance have the

*1113

intervenors made a case sufficiently compelling that it calls for a rejection of the classification.

240

The Department’s guidelines are reasonable and consistent with the principles of the decree, and these guidelines were properly applied by the Operating Companies

241

Second. The “business freedom” claim is largely based upon a misunderstanding concerning the substantive scope of the classification decisions. Contrary to the assumption of some intervenors, the classification of particular traffic as intra-LATA does not have as its consequence that interexchange carriers may not offer service with respect thereto or that the Independents may not directly provide access arrangements to these carriers.

242

The intra-LATA or interLATA classifications — in this context as in the context of service within the Bell territories — bind only the Operating Companies and affect only their ability to provide service; they do not bind the interexchange carriers or the Independents and they will not in any way affect their ability to provide service.

To be sure, where traffic has been class! fied as inter-LATA, an Operating Company may not be “associated” with the adjacent Independent territory, and to that extent it may be said that the business freedom of the Independents is being restricted.

243

That, however, is an inevitable consequence of the decree which limits the Bell Operating Companies to intra-LATA service; it cannot be regarded as a defect in the classifications made by the Operating Companies and approved by the Department of Justice. The objections to these classifications, as well as to the classification process, will accordingly be rejected.

244

The proposed Bell-Independent classifications will be approved.

VIII

Central Staff Organization

Section 1(B) of the decree requires the creation of a central organization jointly funded and utilized by the Regional Companies (1) for the purpose of meeting national security and emergency preparedness requirements and (2) for administering such

*1114

functions and services as can most efficiently be performed on a centralized basis.

245

Pursuant to these provisions, AT & T has proposed, and the Department of Justice has approved, the creation of an 8,800-per-son Central Staff Organization (CSO) which would engage in a number of technical and nontechnical functions

246

to replace support which the Operating Companies have until now received from the AT & T General Departments, Bell Laboratories, and Western Electric.

247

A.

CSO Responsibilities

Under the plan of reorganization, the CSO will perform technical services to support the Operating Companies in the “construction, operation, and maintenance of their local exchange networks.”

248

AT & T has listed five such technical functions: (1) network planning, which is described as “a long-range function concerned with recommending to the BOCs the optimal direction in which the local networks should evolve";

249

(2) systems engineering, that is, the development of “generic requirements for new systems” which will enable the Operating Companies to “inform vendors of the features and functions that the BOCs want or need in the equipment they purchase”; (3) applied engineering, that is, the testing and evaluation of the products of potential suppliers to determine whether they meet the generic requirements developed by the systems engineers; (4) applied research, involving “state-of-the-art research in switching, signaling, materials and other elements which provide the underpinning for exchange telecommunications”; and (5) information systems support, which will involve “maintaining and enhancing a number of computerbased operations and administrative systems integral to the exchange business.”

250

Among the non-technical functions will be the provision to the Operating Companies of procurement support services,

251

and such other assistance as legal services,

252

regulatory support services, marketing (including billing and sales support) services, financial services, human resources development, and employee relations.

The criticisms leveled at the CSO proposal fall essentially into two categories.

253

First, intervenors representing regulatory and consumer interests contend that AT & T has presented inadequate justification for what is contended to be an overly large and costly organization. Second, po

*1115

tential equipment suppliers of the Operating Companies claim that the CSO may, in effect, exercise control over many procurement decisions, discriminate in favor of Western Electric products, and, over time, become a second-generation AT & T. After careful consideration, the Court has concluded that these objections are not sufficiently weighty to warrant either the rejection or the modification of the CSO provisions of the plan of reorganization.

B.

CSO Size

There is substantial evidence that the CSO is neither too large nor too costly a burden on the Operating Companies. Since these companies will be controlling the CSO — not the other way around — and since most of the costs of the CSO will not be capable of capitalization, the local companies will have strong incentives to avoid wastefulness in the CSO’s operation.

254

In fact, it appears that the total cost of the CSO to the Operating Companies will be considerably less than what they now pay to AT & T for centralized support.

255

Moreover, and significantly, the chief executives of the Regional Companies, who played an active part in molding the CSO,

256

have given an exceptionally strong endorsement to the size of the organization, its cost, and the responsibilities vested in it by the plan of reorganization.

257

In short, the concern of some of the intervenors that the CSO is an AT & T tool designed to hamper Operating Company progress rather than to assist these companies is not shared by those most directly involved.

258

On this issue, at least, the opinions of the Regional Company managers are entitled to more weight than those of regulators

259

and consumer groups.

Some of the intervenors also question the assignment to the CSO of functions other than those strictly related to national security and emergency preparedness. The decree permits the CSO to perform such functions as “can most efficiently be provided on a centralized basis.” Section 1(B). It appears obvious that, with respect to the responsibilities which are vested in the CSO

*1116

by the plan of reorganization, substantial economies will be realized from centralization. To be sure, AT & T has not provided a quantification of efficiencies and economies, but that is not especially surprising since it is unlikely that detailed cost-benefit comparisons could now be made: the seven Regional Companies are at present only planning to operate in this respect, and the territory is somewhat unchartered. It does not require an army of efficiency experts, however, to conclude that it will be more economical for certain support functions to be performed once rather than seven times over. As the Department of Justice has aptly observed, “it is neither necessary nor useful to engage in extensive second-guessing of the [Operating Companies’] decisions as to what activities can efficiently be centralized.”

260

The Court concludes that the objections regarding size, scope, and cost of the CSO do not warrant disturbing the CSO proposal.

C.

Procurement Functions

The objections relating to the CSO’s possible involvement in procurement activities have somewhat more substance. The intervenors complain in this respect primarily that standards may be set by the CSO which will favor Western Electric products over those of competitors, and that the testing of products may be biased against Western’s competitors.

It seems beyond debate that uniform standards are necessary to ensure high quality in the telephone system, indeed its very survival as a nationwide network.

261

Nor are such standards incompatible with competition. Not all characteristics of products to be purchased by the Operating Companies will be specified in advance; there will be ample room for competitors to meet the generic requirements established by the CSO and still produce products drawing upon their special skills, distinctive styles, and other competitive advantages.

Similar conclusions apply to the testing function to be performed by CSO personnel. AT & T has advised the Court that such personnel will not make product recommendations to individual Operating Companies but will limit themselves to “a scientific and objective testing function.” Test results will be made available to both the Operating Companies and the manufacturers, and the latter will be allowed an opportunity to demonstrate the incorrectness of any adverse findings. And it will be up to the Operating Companies, not the CSO, to determine the weight and significance to be accorded to the test results in the making of final procurement decisions.

262

The Court believes that these assurances adequately protect potential vendors.

263

Some intervenors question more broadly whether objective conclusions are at all possible with respect to such activities as standard-setting, testing, and the like,

264

and that in practice it may not be possible to distinguish sharply between these functions and procurement decision-making. Another intervenor asks who at the Operating Company level would “undertake an independent and intelligent analysis of the technical and other evaluations sent to [these companies] by the CSO” if, as AT & T asserts, there are not enough qualified technical personnel in the Bell System to staff both the Operating Companies and the CSO.

265

Although these objections are not without some force — particularly those related

*1117

to the somewhat shadowy line between standard-setting and procurement — the Court has decided that, on balance, the advantages to be achieved from the centralization of these various responsibilities outweigh the dangers visualized by the opponents of such a step. The issue redjices itself to an inquiry whether the desirable ends of economy and uniform quality can be achieved without serious risk that the CSO will become an instrument of anticompetitive conduct. In the Court’s view, that risk,

i.e.,

the risk of bad faith, is relatively small,

266

for a very basic reason.

There will be no continuing relationship between AT & T and the CSO,

267

and therefore no economic incentive for CSO personnel to favor Western Electric products over those of any other supplier. CSO personnel will, at least indirectly, be working for the Operating Companies; their success in their new employment will be bound up with the success of the local companies;

268

and the Operating Companies are far more likely to flourish by purchasing the best equipment at the best price than by favoring Western Electric products regardless of quality or price. The employees’ economic incentives therefore all run in favor of the Operating Companies and against improper favoritism toward Western Electric. Moreover, the testimony of the regional chief executives and their various filings with the Court establish that they intend to make their own procurement decisions, and that they are acutely aware of the spectre of an enforcement action brought by the United States should the CSO act anticompetitiveIy.

269

In the absence of an economic incentive, much is made of the emotional attachment of CSO personnel to AT & T — the former employer of many of them. Such an attachment cannot be entirely discounted, at least with respect to some employees and at least in the- short run. But it defies all experience with a mobile work force in the United States to assume that, for any length of time, former AT & T personnel will make decisions which will assist their former employer, but now sometime competitor, simply because they used to work there.

270

Certainly the Court would not be justified in vetoing an arrangement agreed to by AT & T, the Operating Companies, and the Department of Justice which is otherwise perfectly sensible and reasonable upon the basis of so speculative an objection.

271

*1118

The Central Staff Organization is designed to carry out extremely important responsibilities. Not only will it perform the coordination for national defense and other emergency purposes that is vital to the nation’s security, but it will also set the standards which will permit telecommunications to continue to operate in an engineering sense as one national network.

272

These responsibilities were in the past performed exceedingly well by AT & T. In the Court’s view, it is essential that the break-up of the Bell System and the economic competition which will result from that break-up will not lead to a departure from that high standard or to the development of balkanized regional networks which poorly interconnect with each other to the detriment of all users. The Central Staff Organization will be an important check against deterioration and fragmentation of the existing telephone system.

For these reasons, the Court is strongly committed to the success of the CSO, and it will not weaken that organization, whether in size or in authorized responsibilities, without good cause. The arguments proffered by the intervenors, while they do not, here and there, lack some plausibility, are far from being sufficiently persuasive to provide such a cause. The Court accordingly will approve the Central Staff Organization as it is proposed in the plan of reorganization.

IX

Further Court Proceedings

Several intervenors suggest additional judicial or other proceedings of various kinds beyond those that are expressly provided for in the decree. For example, the State of New Mexico asks that the intervention status of all third parties be continued to permit them to participate in the true-up process following divestiture.

273

The State of California asserts

274

more specifically that a true-up procedure is necessary to ensure the achievement of target debt ratios, pointing out that the plan already contemplates such a procedure with respect to a number of other subjects.

275

American Satellite Company asks for the submission to the Court of detailed information concerning the day-to-day progress in the implementation of the plan of reorganization and requests public disclosure as well as judicial review of all divestiture-related contracts.

276

And the State of Maine urges that the state and local public utilities commissions be allowed to participate in the division of assets between AT & T and the Operating Companies by a court-imposed requirement of the distribution to them of the same kinds of information and monitoring rights possessed by the Department of Justice. The Court will deny all of these and similar requests.

277

There now is some provision in the decree, albeit on a carefully limited basis, for the retention of jurisdiction by the Court.

Section VII specifies that, upon application of a party or an Operating Company, the Court may issue orders to construe the decree, carry it out, modify it, or enforce it, or to punish violations.

278

At the request of

*1119

a number of intervenors, the Court announced the adoption of a procedure which would permit an interested nonparty to initiate enforcement proceedings on its own. But that opportunity was deliberately kept very narrow

279

because, as the Court stated on August 11,1982, so restricted it strikes a proper balance between the need for some enforcement mechanism not under the direct control of the parties and the necessity of avoiding “constant, unnecessary interference by AT & T’s competitors and others with implementation of the reorganization and with the normal operations of AT & T and the divested Operating Companies ... [as well as the necessity not to burden the Court] with innumerable requests for clarification or modification, and with charges of violations.” 552 F.Supp. at 219-20.

The Court will not expand these provisions. The difference between the procedures described above and those presently suggested by the intervenors is that the former are designed to be invoked only sporadically, upon the occurrence of some specific incident regarding the decree, while the latter would involve the Court, the intervenors, or both, on a more or less continuing basis in the divestiture process. The Court has no wish to be engaged on a long-range basis in oversight either of the divestiture or of the operations of the various components of the Bell System; such an oversight role would not be consistent with the principle of proper judicial restraint; and the kind of interference which it implies would not be fair to those who will manage AT & T and the Operating Companies.

The Tunney Act requires a court to determine whether certain consent decrees are in the public interest and, in view of the unusual circumstances of this case,

280

this responsibility also required the Court to pass upon the validity of the plan of reorganization under the decree and to allow third party intervenors to participate extensively in the review process. But for the reasons outlined above, this direct oversight should end with the approval of the plan of reorganization.

To be sure, the reorganization process is not complete: the division of assets, the transfer of employees and stock, and the upgrading of the Operating Companies to the status of truly equal access providers have yet to occur. Also, as several intervenors point out, it is possible that those within the Bell complex who will actually implement the reorganization will attempt to depart from the spirit if not the letter of the decree. However, notwithstanding some failures,

281

the parties have not given evidence of bad faith sufficient to impose upon them the rather draconian requirements requested by the intervenors.

282

*1120

There comes a time, once the basic documents have been approved, when the Court, rather than to superintend on an intensive basis the actual implementation of the reorganization, should, in the interest of keeping judicial involvement to a necessary minimum, leave compliance to the managers of the business interests directly involved, with such oversight as is vested in the Department of Justice by the decree. See,

e.g.,

section VI.

283

Should the Court’s expectations with respect to the good faith and the fidelity of the parties to the letter and the spirit of the decree be disappointed with regard to any particular matter, there will be time enough under section VII, section VIII(I), and the Court’s general equity powers, to take appropriate action. Except for such an eventuality, however, the Court’s direct oversight role will come to an end with its approval of the plan of reorganization.

X

Conclusion

A. Summary

The Tunney Act imposed upon the Court the responsibility for determining whether the consent decree submitted to it by the parties was “in the public interest.” In August of 1982, the Court approved the heart of the decree — divestiture—as satisfying that standard. At the same time, it determined that its public interest responsibilities required it to pass also on the plan of reorganization, since that plan was to fill in the decree’s many interstices and to describe the precise method by which divestiture was to be accomplished.

284

The plan was submitted by the parties, and the Court has since subjected it to thorough scrutiny, on its own and with the assistance of the parties and over one hundred intervenors.

285

To the extent that it has been free to do so,

286

the Court, in exercising its Tunney Act responsibilities, has sought to achieve three principal objectives: (1) promotion of true and fair competition in the telecommunications long distance and equipment markets, (2) preservation of AT & T as a dynamic force, capable of research, manufacturing, and marketing in technologically advanced fields, and (3) protection of the principle of universal telephone service, accessible to all segments of the population regardless of income.

*1121

In its consideration of the decree, the Court was able to advance all of these objectives — in part by approving various provisions of the proposal submitted by the parties over vigorous objection from others, and in part by requiring the substantial modification of a number of other provisions.

287

When it considered the plan of reorganization, the Court again had all three objectives in mind. However, it became apparent in the course of that consideration that the bulk of the actions which the Court had to take to achieve consistency of the plan with the decree tended primarily to promote the vitality of the Operating Companies

288

and the principle of universal service.

289

These actions, which are described in detail in the body of the Opinion, include the assignment of the “Bell” name and logo to the Operating Companies (Part III(C) of the Opinion); imposition of the requirement that the Operating Companies be granted licenses to all patents acquired by the Bell System (Part IV(A)), along with appropriate sublicensing rights (Part IV(B)); the grant of authority to the Operating Companies to perform their own Official Services functions rather than to have to lease the necessary facilities from AT & T or other interexchange carriers (Part VI(A)); approval of the establishment of a Central Staff Organization which will give effective logistical support to the Operating Companies (Part VIII); imposition of the requirement that AT & T stand as the ultimate guarantor of the costs of equal access and network reconfiguration (Part I); and the approval of local access and transport areas (LATAs) which avoid substantial, costly network rearrangements (Part VII(A)).

The fundamental purpose of the decree under the antitrust laws is to create conditions which will reduce the cost of telecommunications service t • the public — individual consumers, busir • s, and government.

290

*1122

Competition in the long distance and telephone equipment markets is already bearing fruit in the form of lower prices and wider choices.

291

In the view of this Court, it is not necessary that these favorable developments be accompanied by the imposition of higher rates for local service.

One of the Court’s principal aims throughout the public interest process has been to ensure that divestiture would not bring about or contribute to local telephone rate increases. While the parties to this proceeding have acknowledged that this effort was successful and that neither the decree nor the divestiture has caused or will cause local rates to rise,

292

these rates will nevertheless be going up, albeit for reasons unrelated to the reorganization of the Bell System.

As the Court has previously noted, and as it elaborates at p. 1091

supra,

decisions taken by federal regulators regarding access charges will have the effect of increasing the cost of local service to residential subscribers. The Court has no authority to countermand those decisions.

293

It does, however, have the authority to take them into account — not conclusively, certainly, but as support for determinations which are indicated in any event. That is what it has done here. The modifications it is requiring to be made in the proposed plan of reorganization should assist in moderating the pressure for local rate increases, whatever their source.

294

The telecommunications industry as a whole has a bright future for, as the Court previously observed,

295

we live in an age in which information and its transmission are central to the commonwealth and a flourishing economy. No one can predict which company or group of companies will be able best to take advantage of the opportunities which lie ahead. To a large extent this will depend upon their own efforts and performance,

296

and to a lesser degree upon the wisdom of those who will exercise regulatory authority over various segments of the industry at the federal and local levels. As indicated above (Part IX), the Court’s own oversight over the Bell System divestiture process will end with the approval of the plan of reorganization.

297

AT & T (including Western Electric and Bell Laboratories) as well as the Operating Companies appear to be led by talented managers, scientists, and engineers; moreover, these entities will continue to command immense personal and material resources. There is no reason to believe that the separate parts of the reorganized Bell System will not prosper in the new environ

*1123

ment or that they will fail to contribute significantly to the American economy.

B.

Action on the Motions

Motions of AT & T and of the Department of Justice seeking approval of the plan of reorganization are pending.

298

These motions will favorably be acted upon after the Court is advised that the following modifications

299

are agreed to by the parties:

300

1. If by January 1, 1994, the Operating Companies in the aggregate have not recovered the costs of providing equal access and network reconfiguration (as defined in AT & T’s Consolidated Application filed with the Federal Communications Commission on March 1, 1983), plus financing expenses, through their collection of access charges from the interexchange carriers, AT & T will reimburse the Operating Companies in the amount of any remaining deficit. For purposes of this provision, “costs” shall mean the actual costs incurred by the Operating Companies, as distinguished from the estimates in the Consolidated Application. A preliminary accounting will be provided to the Court at the close of the Operating Companies’ equal access and network reconfiguration program or by January 1, 1989, whichever is earlier, and a final accounting not later than January 1, 1994.

2. Beginning on the date of divestiture, AT & T will cease to use the word “Bell” in its corporate name and in the names of its subsidiaries or affiliates, other than Bell Laboratories and AT & T’s foreign subsidiaries or affiliates; and beginning on the same date, AT & T will cease to use the “Bell” name and the Bell trademarks, or either, on any equipment sold by it in the United States after that date, except for equipment manufactured or purchased by AT & T prior to that date. In the event that substantial efforts have been made by AT & T by November 1, 1983, to acquaint the public with a new name to replace the name “American Bell,” and for good cause shown, the Court will extend the use of that name by AT & T for an additional six months following divestiture in connection with the sale, but not the manufacture or purchase, of equipment.

The divested Operating Companies, the Regional Companies, or either, may use the “Bell” name and the Bell trademarks in connection with the services they perform and on equipment they use or sell, and they may use the word “Bell” in their corporate names, provided that the “Bell” name is modified so as to identify the particular company, and provided further that on equipment sold any Bell trademark is accompanied by the corporate name of the respective Operating Company or Regional Company.

3. AT & T will grant to each Operating Company nonexclusive and personal royalty-free licenses to use telecommunications equipment and operational methods covered by all existing patents owned or controlled by AT & T and all other patents issued to AT & T on or before five years after the date of divestiture.

AT & T will grant to each Operating Company the right to sublicense all AT & T patents to manufacturers for use only in providing the Operating Companies with goods and services embodying the inventions of the patents.

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4. In determining whether the use made by an Operating Company of facilities or other assets predominates over that made by AT & T within the meaning of section VIII(G) of the decree, the capacity of a facility or other asset devoted to Operating Company Official Service functions will be included as part of the Operating Company’s use. Nothing in the decree precludes an Operating Company from constructing or maintaining facilities or other assets devoted to Operating Company Official Service functions.

5. The Operating Companies will not provide inter-LATA order writing, order typing, or other provisioning exclusively for AT & T.

6. The decree does not relieve AT & T and the Operating Companies from bargaining in good faith with any labor union, except with respect to the division of the Bell System Pension Plan into nine separate plans; the actuarial methodology specified in the plan of reorganization; and the elimination, one year following the date of divestiture, of unlimited portability of service credit.

ON MOTION FOR PARTIAL RECONSIDERATION

I

AT & T has asked for partial reconsideration of the Court’s ruling of July 8, 1983, requesting that the Court delete Modification 1

1

which requires that AT & T guarantee the costs of providing equal access and of reconfiguring the network to conform to the LATAs (hereinafter generally referred to collectively as access costs or access expenses). The principal contention supporting the request for an outright elimination of the guarantee provision

2

is that this provision would improperly add to AT & T’s obligations under the decree.

3

As the Court previously pointed out (Opinion of July 8, 1983, 569 F.Supp. 1057 at 1066-68), there are two bases under the decree for requiring AT & T to bear at least part of the cost of access, whether in the form of a guarantee or otherwise. First, although section requires AT & T to transfer to the Operating Companies adequate facilities to enable the local companies to meet the equal access requirements, the transfers of equipment provided for under the plan of reorganization will clearly not be sufficient to achieve that purpose. Second, AT & T consistently represented to the Court that, even though the company would not pay the access expenses directly, it would do so indirectly through the carrier access charges.

4

It now appears, however, that for several reasons discussed in the July 8, 1983 Opinion, the carrier access charges may not be adequate to reimburse

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the Operating Companies for these costs. Hence the guarantee required as a prerequisite to the Court’s approval of the plan of reorganization.

The argument made by AT & T, and supported by the Department of Justice, that the guarantee would impose an obligation on the company that would be inconsistent with what the parties call the decree’s “basic premise” — that the access costs be recovered through access charges paid by all interexchange carriers, not merely AT & T

5

— thus misses the point, for it fails to consider those features which embody a special AT & T obligation not shared by other carriers: the provisions of section 1(A)(1) and the representations made to the Court by AT & T.

6

All of these subjects were fully explored by the parties and considered by the Court prior to the issuance of the July 8, 1983 Opinion; AT & T’s motion adds nothing new on any of the underlying issues; and the Court will therefore deny that motion to the extent that it requests the deletion of Modification 1.

II

The essence of AT & T’s argument in support of the attachment of a proviso to the Modification lies in the claim that the Operating Companies and the local regulators would have and might exercise the opportunity to establish access charges that would be insufficient for full cost recovery. The result of such actions would be that the costs would ultimately be recovered from AT & T pursuant to the guarantee. This, according to AT & T, is not the purpose for which the Modification was designed. That understanding is correct.

The Operating Companies, assured under the guarantee provision of reimbursement from AT & T at the end of the ten-year period specified in the Modification, would have a significant incentive consistently to under-recover access costs prior to that time;

7

the regulators would have a similar incentive to deny full recovery of such costs;

8

and AT & T’s competitors would have an incentive to encourage these trends.

9

In the judgment of the Court it is quite likely that, absent some countervailing mechanism, these entities will act on these incentives.

The Court was not unmindful of this contingency when it issued the July 8, 1983 Opinion. Indeed, it was for that reason that it required AT & T and the Operating Companies to file prior to divestiture a description of the accounting methods which would be used for identifying the access costs and for determining whether and when they had been recovered. Opinion at 1068 note 37. The Court had in mind that, if AT & T and the Operating Companies agreed on the procedure and substance with respect to such recovery, there would be no need for further judicial intervention; if these parties did not agree (essentially because of a dispute similar to that generated

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by AT & T’s present motion) the Court could take steps before divestiture to guard against the contingencies feared by AT & T. By its motion AT & T has brought the issue to a head now, and there is no reason for delaying consideration of this subject.

The July 8, 1983 ruling represents the Court’s determination that the somewhat conflicting requirements of the decree

10

can best be harmonized by requiring the Operating Companies to incur the access ex

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