United States v. American Telephone & Telegraph Co.

*135

OPINION

HAROLD H. GREENE, District Judge.

These actions are before the Court

1

for a determination whether a consent decree proposed by the parties is in the “public interest”

2

and should therefore be entered as the Court’s judgment. Over six hundred comments from interested persons, many of them objecting to various aspects of the proposal, have been received, and the Court has considered briefs submitted by the parties and others, and it has heard extensive oral argument. This opinion discusses the principal questions raised by these interested persons, and it embodies the Court’s decision on the appropriateness of the proposed decree under the Tunney Act’s public interest standard.

The opinion is divided into twelve parts. Part I relates the history of the litigation and the terms of the proposed decree. The next two sections contain analyses of two underlying legal issues — the standard of review to be applied by the Court under the Tunney Act (Part II) and the relationship between the decree and state regulation (Part III). The following section (Part IV) considers the question whether the divestiture of the local Operating Companies is in the public interest. Two sections discuss the removal of restrictions from AT & T— Section V as a general matter, and Section VI in the context of the provision of information and of electronic publishing services. The next two sections directly relate to the Operating Companies: Section VII considers whether the proposed limitations on Operating Company activities are in the public interest and Section VIII whether the decree makes adequate provision for access by intercity carriers to Operating Company networks. Part IX discusses the issues arising from the division of assets between AT & T and the Operating Companies; Part X considers special issues and provisions; and Part XI deals with problems of implementation and enforcement. Part XII contains the Court’s summary and conclusion.

I

Preliminary Considerations

A.

History of the Litigation

On January 14, 1949, the government filed an action in the District Court for the District of New Jersey against the Western Electric Company, Inc.

3

and the American Telephone and Telegraph Company, Inc. (Civil Action No. 17-49).

4

The complaint alleged that the defendants had monopolized and conspired to restrain trade in the manufacture, distribution, sale, and installation of telephones, telephone apparatus, equipment, materials, and supplies, in viola

*136

tion of sections 1, 2, and 3 of the Sherman Act, 15 U.S.C. §§ 1 , 2, and 3.

5

The relief sought included the divestiture by AT & T of its stock ownership in Western Electric; termination of exclusive relationships between AT & T and Western Electric; divestiture by Western Electric of its fifty percent interest in Bell Telephone Laboratories;

6

separation of telephone manufacturing from the provision of telephone service; and the compulsory licensing of patents owned by AT & T on a non-discriminatory basis.

The court record reveals little activity in the case between the date of the filing of the complaint in 1949 and the entry of a consent decree in 1956. Except for the notation that an answer was filed in April, 1949, there are no record entries until the Fall of 1951 when the government filed and the court ordered compliance with several discovery requests. Following the discovery order, there is another two-year gap, and it is not until April 27,1953, that another record entry is found. This entry indicates that defendants were given two additional months to complete their compliance with the government’s 1951 discovery requests. The next reference is to the transcript of a hearing held on January 24,1956, during which the consent decree was approved as being in the public interest. See pp. 137-138

infra.

The gaps in the court record are partly filled by a report of a committee of the United States House of Representatives

7

which conducted an intensive investigation of the circumstances surrounding the entry of the consent decree. Report of the Antitrust Subcommittee of the House Committee on the Judiciary on the Consent Decree Program of the Department of Justice, 86th Cong., 1st Sess., January 30, 1959 (Committee Print) [hereinafter Subcommittee Report]. That report reveals that the parties were quite active between the time of the filing of the government’s discovery requests in 1951 and the signing of the consent decree in 1956.

As early as February 28, 1952, the president of Bell Laboratories, Dr. M.J. Kelly, met with Secretary of Defense Robert A. Lovett and other members of the Department of Defense to enlist their help in persuading the Justice Department to suspend prosecution of the action

8

until the end of the Korean War,

9

a suspension the Attorney General refused to grant.

10

AT & T continued its attempts to end the litigation as soon as the Eisenhower Administration took office. Its executives and lawyers met with officials of the Departments of Defense and Justice throughout the first six months of 1953. Subcommittee Report at 51-52. These efforts culminated in a meeting on June 27, 1953, during a judicial conference held at White Sulphur

*137

Springs, West Virginia, between T.B. Price, AT & T’s general counsel, and Attorney General Herbert Brownell. According to a memorandum prepared by Price following this meeting, Attorney General Brownell said that he believed that “a way ought to be found to get rid of the case,” and that AT & T “could readily find practices that [they] might agree to have enjoined with no real injury to [their] business.” Memorandum of T.B. Price (March 3,1954)

reprinted in

Subcommittee Report at 53-54.

11

Shortly after this meeting, AT & T again urged the Defense Department “to intercede with the Justice Department to have the case settled on a basis that would not require divorcement of Western.” Subcommittee Report at 55. To that end, Secretary of Defense Charles E. Wilson had a letter hand-carried to Attorney General Brownell urging him to end the litigation without divesting Western Electric. The rationale stated for this position was that the severance of Western Electric would “effectively disintegrate the coordinated organization which is fundamental to the successful carrying forward of these critical defense projects,” and would “be contrary to the vital interests of the Nation.” Subcommittee Report at 56. The Wilson letter was actually prepared by AT & T.

12

Periodic negotiations between AT & T and the government continued through 1954 and 1955, and by early December, 1955, the government and AT & T had reached an agreement.

13

The consent decree which was the product of this process included neither the divestiture of Western Electric

14

nor any of

*138

the other structural relief originally requested by the government. Instead, an injunction was issued which precluded AT & T from engaging in any business other than the provision of common carrier communications services; precluded Western Electric from manufacturing equipment other than that used by the Bell System; and required the defendants to license their patents to all applicants upon the payment of appropriate royalties.

Despite the substantial differences between the structural relief requested in the government’s 1949 complaint and the relief actually provided by the proposed decree, the District Court for the District of New Jersey accepted the proposal on January 24, 1956, after a brief hearing, stating:

15

I feel that I can unhesitatingly accept the recommendation of the Attorney General, that this judgment is in the public interest, and that it is a satisfactory adjustment of this very, very vexatious problem; and I am therefore happy to go along with the recommendation made by the Attorney General and shall forthwith sign this judgment.

After the decree was approved, no major developments occurred in the case for the next several years. Until 1981, the entries in the court record

16

concern primarily the patent licensing provisions.

17

*139

This was the status of the

Western Electric

suit when the government filed a separate antitrust action on November 20, 1974, in this Court against AT & T, Western Electric, and Bell Telephone Laboratories, Inc. (Civil Action No. 74-1698).

18

The complaint in the new action alleged monopolization by the defendants with respect to a broad variety of telecommunications services and equipment in violation of section 2 of the Sherman Act. In this lawsuit, the government initially sought the divestiture from AT & T of the Bell Operating Companies (hereinafter generally referred to as Operating Companies or BOCs)

19

as well as the divestiture and dissolution of Western Electric. While the action was pending, the government changed its relief requests several times asking, at various times or in various alternatives, for the divestiture from AT & T of Western Electric and portions of the Bell Laboratories.

20

Pretrial discovery began shortly after the defendants filed their answer in February 1975, but during the next three-and-one-half years, that discovery was effectively halted for over thirty months.

21

On February 7, 1978, the Court referred the case to the United States Magistrate for preparation of a discovery schedule. Pursuant to that authority, the Magistrate issued two orders on April 27, 1978, but attempts at discovery led to various disagreements, and by the Summer of 1978, very little progress had been made.

On September 11, 1978, the Court issued an opinion which disposed of all then outstanding legal issues

22

and laid out the future course of the pretrial proceedings. See

United States v. AT & T, supra,

461 F.Supp. 1314 . In brief, the proceedings were designed to coordinate discovery and the definition of issues and move both forward simultaneously and with expedition. To these ends, the parties were directed to file over the following eighteen months four

23

successive Statements of Contentions and Proof which precisely and in detail defined their legal and factual conten

*140

tions.

24

Each Statement was to be more specific and more focused than the last, and discovery at each stage was to be limited to the issues raised in the most recent Statements.

25

Upon the completion of this process, and pursuant to a further pretrial order, the parties began a structured stipulation process. This process was designed to produce, and it did produce, stipulations of all uncontested facts and contentions, a catalogue of all contentions that remained in dispute, and the proof (both testimonial and documentary) that would be used to support each contention. As a result of this process, the case was essentially divided into 82 segments or episodes,

26

many of which constituted major antitrust disputes in their own right. These episodes provided the structure for the presentation of evidence at trial.

27

The trial itself began on January 15, 1981. At the request of the parties, the trial was recessed immediately after the opening statements

28

for a period of six weeks in order to afford an opportunity for a negotiated settlement.

29

When the settlement discussions proved fruitless, the trial resumed on March 4, 1981. The government presented close to one hundred witnesses, many thousands of documents, and additional thousands of stipulations. After the conclusion of the government’s case, defendants moved to dismiss the action on a variety of grounds. That motion was denied on September 11, 1981.

United States v. AT & T, supra,

524 F.Supp. 1336 . Defendants commenced their case-in-chief on August 3, 1981, and during the next five months they presented approximately 250 witnesses

30

and tens of thousands of pages of documents.

Defendants were scheduled to complete the presentation of their evidence on about January 20, 1982, and it was expected that the government’s rebuttal evidence would be presented between that date and February 10, 1982, when the trial would have ended. However, early in January, 1982, the Court was advised of the proposed decree described below.

B.

The Proposed Decree

On January 8, 1982, the parties to these two actions filed with the District Court for

*141

the District of New Jersey a stipulation consenting to the entry by the Court of the “Modification of Final Judgment”

31

filed therewith.

32

On the same day, they attempted to file in this Court a dismissal of the

AT & T

action pursuant to Rule 41(a)(1)(h), Federal Rules of Civil Procedure. This Court ordered that the dismissal be lodged, not filed,

33

and, in accordance with that order and the provisions of the Tunney Act, the dismissal has not yet been effected. See note 52

infra.

In their settlement proposal, the parties proposed that the Court enter the following judgment with respect to both lawsuits.

34

Section I of the proposed decree would provide for significant structural changes in AT & T. In essence, it would remove from the Bell System the function of supplying local telephone service by requiring AT & T to divest itself of the portions of its twenty-two Operating Companies which perform that function.

The geographic area for which these Operating Companies would provide local telephone service is defined in the proposed decree by a new unit, the “exchange area.” According to the Justice Department, an exchange area “will be large enough to comprehend contiguous areas having common social and economic characteristics but not so large as to defeat the intent of the decree to separate the provision of intercity services from the provision of local exchange service.”

35

Court approval would be required for the inclusion in an exchange area of more than one standard metropolitan area or the territory of more than one State.

36

The Operating Companies would provide telephone service from one point in an exchange area to other points in the same exchange area — “exchange telecommunications”

37

— and they would originate and terminate calls from one exchange area to another exchange area — “exchange access.”

38

The interexchange portion of calls from one exchange area to another exchange area

39

would, however, be carried by AT & T and the other interexchange carriers, such as MCI and Southern Pacific Co.

40

The proposed decree sets forth general principles governing the configuration of

*142

the Operating Companies

41

which AT & T would be required to divest.

42

Under the proposal, AT & T would be required to endow the companies with sufficient personnel, facilities, systems, and rights to technical information to enable them to provide exchange telecommunications and exchange access services

43

These personnel, systems, facilities, and rights would be drawn from the Operating Companies and from AT & T and its other affiliates. AT & T would be permitted to choose to transfer some of these elements directly to the new Operating Companies and to place others in a central entity jointly owned by them.

AT & T would be required by the proposed decree to formulate a plan of reorganization which complied with these principles, and to submit the plan to the Department of Justice within six months after the Court approved the decree. The plan would not be effective without the Department’s approval.

After divestiture, the new Operating Companies would be required to provide, through a centralized body, a single point of contact for national security and emergency preparedness. They would be permitted to use this or a similar central body to provide those services, such as administration and engineering, which “can most efficiently be provided on a centralized basis.” In addition, until September 1987, AT & T, Western Electric, and Bell Laboratories would have to provide on a priority basis, all research, development, manufacturing, and other support services necessary to enable the Operating Companies to fulfill the requirements of the proposed decree.

44

Section II of the proposed decree would complement these structural changes by various restrictions which are said to be designed (1) to prevent the divested Operating Companies from discriminating against AT & T’s competitors, and (2) to avoid a recurrence of the type of discrimination and cross-subsidization that were the basis of the

AT & T

lawsuit.

The first group of these provisions would require the divested Operating Companies to provide services to interexchange carriers

45

equal in type, quality, and price to the services provided to AT & T and its affiliates.

46

In addition, they would be prohibited from discriminating between AT & T and other companies in their procurement activities, the establishment of technical standards, the dissemination of technical information, their use of Operating Company facilities and charges for such use, and their network planning. The Justice Department has indicated that it intends these provisions to be “construed broadly to encompass all potential areas of favoritism, subtle as well as overt, that may arise in relationship

*143

between the divested BOCs and AT & T and its competitors.” Competitive Impact Statement at 26-27.

The second type of restriction imposed upon the Operating Companies is said to be intended to prevent them from engaging in any non-monopoly business so as to eliminate the possibility that they might use their control over exchange services to gain an improper advantage over competitors in such businesses. Thus, the Operating Companies would not be permitted (1) to manufacture or market telecommunications products and customer premises equipment; (2) to provide interexchange services, (3) to provide directory advertising such as the Yellow Pages; (4) to provide information services; and (5) to provide any other product or service is not a “natural monopoly service actually regulated by tariff.” The Operating Companies would have the authority, however, to engage in what are called the "inherent” functions of procurement, engineering, marketing, and management.

Section III of the agreement provides that the decree would be binding on AT&T and the Operating Companies and their successors and that it would not constitute any evidence against, an admission by, or an estoppel against AT&T or the Operating Companies.

47

The proposed decree contains a number of enforcement provisions. Section V would impose a requirement upon AT & T and the Operating Companies to inform their employees of their obligations under the decree. Section VI would grant to the Department of Justice the right of access to AT & T and the Operating Companies to inspect books, interview and depose employees, and demand reports.

48

Section VII provides that the Court would retain jurisdiction for the purpose of issuing orders to construe or carry out the decree, to modify it, to enforce compliance, and to punish violations, upon application of the parties and, after the reorganization, upon the application of an Operating Company.

Finally, the proposed decree would vacate the final judgment entered on January 24, 1956 in the

Western Electric

case, eliminating the restrictions imposed upon AT & T by that decree.

On January 11, 1982, Judge Vincent Biunno of the District Court for the District of New Jersey, following a brief hearing, approved the proposed decree, interpreting it solely, as a modification of the 1956 consent judgment, but he did not, initially, agree to the parties’ request for a transfer of the

Western Electric

action to this Court.

The following day, this Court held a hearing and continued in effect its order that the stipulation of dismissal which the parties had attempted to file in the

AT & T

action here be simply lodged pending completion of the appropriate public interest proceedings. Judge Biunno thereafter granted the parties’ motion for a transfer of the

Western Electric

action, that action was docketed here under Civil Action No. 82-0192 and, by order of this Court, it was consolidated with the

AT & T

action. At the same time, this Court vacated the order of January 11, 1982, which had approved the proposed decree, and it ordered that procedures equivalent to those required by the Tunney Act be applied to the consolidated actions.

49

C.

Procedures in Connection with the Settlement Proposal

The Tunney Act provides that a proposal for a consent judgment submitted by the United States in an action brought under the antitrust laws may not be entered by

*144

the Court without prior compliance with certain procedures. These procedures include a sixty-day comment period, publication of a competitive impact statement by the Department of Justice, a sixty-day period for the receipt of public comments, and a determination by the Court that “the entry of such judgment is in the public interest.”

50

For the purpose of this public interest determination the Court may consider

(1) the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration or relief sought, anticipated effects of alternative remedies actually considered, and any other considerations bearing upon the adequacy of such judgment;

(2) the impact of entry of such judgment upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of public benefit, if any, to be derived from a determination of the issues at trial.

Procedurally the Court may

(1) take testimony of Government officials or experts or such other expert witnesses, upon motion of any party or participant or upon its own motion, as the court may deem appropriate;

(2) appoint a special master and such outside consultants or expert witnesses as the court may deem appropriate; and request and obtain the views, evaluations, or advice of any individual, group or agency of government with respect to any aspects of the proposed judgment or the effect of such judgment, in such manner as the court deems appropriate;

(3) authorize full or limited participation in proceedings before the court by interested persons or agencies, including appearance amicus curiae, intervention as a party pursuant to the Federal Rules of Civil Procedure, examination of witnesses or documentary materials, or participation in any other manner and extent which serves the public interest as the court may deem appropriate;

(4) review any comments including any objections filed with the United States under subsection (d) of this section concerning the proposed judgment and the responses of the United States to such comments and objections; and

(5) take such other action in the public interest as the court may deem appropriate.

15 U.S.C. § 16 (e), (f).

When they filed the present proposed decree, the government and AT & T took the position that the Tunney Act did not apply because (1) their submission in the District Court for the District of New Jersey was merely a “modification” of an existing consent judgment, as distinguished from the entry of a judgment,

51

and (2) no consent judgment at all was filed in this Court, but only a dismissal of the pending action.

52

*145

In the opinion of this Court, that reasoning may most charitably be described as disingenuous. If that reasoning were deemed acceptable, the parties here — and in similar antitrust actions — could subvert the clearly expressed will of Congress by a mere act of labelling. The Tunney Act was designed to expose to public scrutiny and to a judicial public interest determination the settlements negotiated between the Department of Justice and the various antitrust defendants. The instant agreement, whatever the label the parties chose to affix, settled two such lawsuits. That settlement, moreover, not only disposed of what is the largest and most complex antitrust action brought since the enactment of the Tunney Act but the settlement itself raises what may well be an unprecedented number of public interest questions of concern to a very large number of interested persons and organizations. See note 60

infra.

As the Court made clear from the very day the settlement was announced, it was not and is not prepared to allow this circumvention of the congressional purpose.

53

In any event, the parties have now stated in various ways and before various forums (including before this Court) that, irrespective of their opinion of the technical applicability of the Tunney Act, they are willing

54

to have the Tunney Act procedures applied by this Court.

55

In view of those representations, it became unnecessary for the Court to pass specifically upon the technical applicability of the Act. Instead, the Court on January 21,1982, entered an order which, pursuant to the parties’ consent and the Court’s general equitable powers,

56

applied the substantive Tunney Act procedures to the instant settlement.

Following the entry of that order, and in compliance therewith,

57

the parties filed the appropriate pleadings and reports.

58

After

*146

the Court issued its January 21 order — and even prior to that time

59

— a considerable number of individuals and entities sought to intervene in these proceedings for various purposes.

60

On February 5, 1982, the Court issued an order denying all such requests.

61

*147

The Court also received a considerable number of comments from individual citizens. All such comments were filed in the Public Interest Docket,

62

and duplicates were turned over to the Department of Justice for its response in accordance with paragraph 8 of the January 21, 1982 order.

63

During the months of April and May, 1982, the Department of Justice filed with the Court the comments it had received during the preceding sixty days, and on May 20, 1982, it filed its response to those comments.

64

On May 25, 1982, the Court issued a Memorandum governing further proceedings. The Memorandum identified a number of key issues that were raised by the comments and the responses, and it invited the parties and the various interested persons to brief these issues in a form more suitable to judicial adjudication than the necessarily somewhat diffuse comments. A hearing was held on June 29 and 30, 1982, at which time the issues were further elucidated and refined.

65

The Court’s substantive conclusions based upon the comments, responses, briefs, oral arguments, and the entire record herein, are discussed below.

II

Power of the Court in this Public Interest Proceeding

Under the Tunney Act, the Court may approve the decree proposed by the parties only if it first determines that such approval is “in the public interest.”

66

Before discussing the substantive provisions of the proposed decree, it is appropriate to set out the standards which will guide the Court’s public interest review.

67

*148

A.

Purpose of the Tunney Act

In enacting the Tunney Act, Congress sought to ensure that the Justice Department’s use of consent decrees in antitrust cases would fully promote the goals of the antitrust laws and foster public confidence in their fair enforcement.

68

The legislators found that prior practice, which gave the Department almost total control of the consent decree process, with only minimal judicial oversight, failed to accomplish these ends.

The legislative history shows that Congress was particularly concerned that the “excessive secrecy” of the consent decree process deprived the public of the opportunity to scrutinize and comment upon proposed decrees, thereby undermining confidence in the legal system.

69

In addition, the legislators found that consent decrees often failed to provide appropriate relief, either because of miscalculations by the Justice Department

70

or because of the “great influence and economic power” wielded by antitrust violators.

71

The history, indeed, contains references to a number of antitrust settlements deemed “blatantly inequitable and improper” on these bases.

72

To remedy these problems, Congress imposed two major changes in the consent decree process. First, it reduced secrecy by ordering disclosure by the Justice Department of the rationale and the terms of proposed consent decrees and by mandating

*149

an opportunity for public comment.

73

Second, it sought to eliminate “ ‘judicial rubber stamping’ of proposals submitted to the courts by the Department,” by requiring an explicit judicial determination in every case that the proposed decree was in the public interest.

74

It is clear that Congress wanted the courts to act as an independent check upon the terms of decrees negotiated by the Department of Justice,

75

and this Court will review the instant settlement in that spirit.

76

B.

Factors to be Considered

Although the statute is explicit as to the Court’s obligation to make a public interest determination, it provides relatively little guidance regarding the meaning of “public interest” in this context.

77

What is clear is that, whatever other factors a court may take into account, it must begin by defining the public interest in accordance with the antitrust laws. S.Rep. No. 93-298,

supra,

at 3; H.R.Rep. No. 93-1463,

supra,

at 11-12. It is therefore to the basic purposes of the antitrust laws that we must first turn.

The Supreme Court has repeatedly held that, in enacting the Sherman Act, Congress sought to “preserv[e] free and unfettered competition as the rule of trade.”

Northern Pacific Railway Co. v. United States,

356 U.S. 1, 4 , 78 S.Ct. 514, 517 , 2 L.Ed.2d 545 (1958). See also

National Society of Professional Engineers v. United States,

435 U.S. 679, 692 , 98 S.Ct. 1355, 1365 , 55 L.Ed.2d 637 (1978);

United States v. Crescent Amusement Co.,

323 U.S. 173, 187 , 65 S.Ct. 254, 261 , 89 L.Ed. 160 (1944). Competition has not been endorsed by the Congress and the courts as a purely academic matter. The need to safeguard free competition is a direct result of the fundamental premise of our economic system that

unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time provid

*150

ing an environment conducive to the preservation of our democratic political and social institutions.

Northern Pacific Railway Co. v. United States, supra,

356 U.S. at 4 , 78 S.Ct. at 517 . See also

National Society of Professional Engineers v. United States, supra,

435 U.S. at 695 , 98 S.Ct. at 1367 .

78

This policy is embodied in two types of legal standards — those applied to the liability phase of antitrust cases and those which govern the relief phase. Since the Court’s determination here is concerned solely with remedies, the decisions granting relief after a finding of liability form the most relevant yardstick for determining whether the proposed consent decree will further antitrust policies, and the Court will therefore use these decisions as its basic standard.

Antitrust remedies, it is usually said, must “effectively pry open to competition a market that has been closed by defendants’ illegal restraints.”

International Salt Co.

v.

United States,

332 U.S. 392, 401 , 68 S.Ct. 12, 17 , 92 L.Ed. 20 (1947). See also 2 P. Areeda & D. Turner,

Antitrust Laws

§ 327 (1978). A decree must “break up or render impotent the monopoly power found to be in violation of the Act,”

79

that is, it must leave the defendant without the ability to resume the actions which constituted the antitrust violation in the first place. For these reasons, the decree should not be limited to past violations; it must also effectively foreclose the possibility that antitrust violations will occur or recur. As the Court noted in

International Salt Co. v. United States, supra,

332 U.S. at 400 , 68 S.Ct. at 17 ,

it is not necessary that all of the untraveled roads to [anticompetitive conduct] be left open and that only the worn one be closed. The usual ways to the prohibited goals may be blocked against the proven transgressor.

See also

National Society of Professional Engineers v. United States, supra,

435 U.S. at 697-98 , 98 S.Ct. at 1368 ;

United States v. United States Gypsum Co.,

340 U.S. 76, 88 , 71 S.Ct. 160, 169 , 95 L.Ed. 89 (1950);

Associated Press

v.

United States,

326 U.S. 1, 22 , 65 S.Ct. 1416, 1425 , 89 L.Ed. 2013 (1945);

United States v. Crescent Amusement Co., supra,

323 U.S. at 188 , 65 S.Ct. at 261 ;

United States v. United Shoe Machinery Corp.,

110 F.Supp. 295, 346-47 (D.Mass.1953),

aff’d,

347 U.S. 521 , 74 S.Ct. 699 , 98 L.Ed. 910 (1954).

80

While the issue of competition and the effects on competition which are at the heart of the antitrust laws should thus be deemed matters of paramount concern, it is clear from the cases that other factors are not irrelevant.

81

As the Supreme Court has put it, antitrust violations should be remedied “with as little injury as possible to the interest of the general public” and to relevant private interests.

United States v. American Tobacco Co.,

221 U.S. 106, 185 , 31 S.Ct. 632, 650 , 55 L.Ed. 663 (1911). See also,

United States v. E.I. duPont de Nemours,

366 U.S. 316, 327-28 , 81 S.Ct. 1243, 1250-51 , 6 L.Ed.2d 318 (1961). When choosing between effective remedies, a court

*151

should impose the relief which impinges least upon other public policies.

United States v. American Tobacco Co., supra; United States v. E.I. duPont de Nemours, supra; United States v. Terminal Railroad Ass’n,

224 U.S. 383, 410 , 32 S.Ct. 507, 515 , 56 L.Ed. 810 (1912).

82

Thus, the Court would be justified in rejecting the proposed decree or requiring its modification

83

if it concluded that the decree unnecessarily conflicts with important public policies other than the policy embodied in the Sherman Act.

C.

Degree of Deference to the Proposal Submitted by the Parties

Where, as here, a court is evaluating a settlement, it is not as free to exercise its discretion in fashioning a remedy as it would be upon a finding of liability. For when parties enter into a consent decree, they

waive their right to litigate the issues involved in the case and thus save themselves the time, expense, and inevitable risk of litigation. Naturally, the agreement reached normally embodies a compromise; in exchange for the saving of cost and the elimination of risk, the parties each give up something they might have won had they proceeded with the litigation.

United States

v.

Armour & Co.,

402 U.S. 673, 681 , 91 S.Ct. 1752, 1757 , 29 L.Ed.2d 256 (1971). If courts acting under the Tunney Act disapproved proposed consent decrees merely because they did not contain the exact relief which the court would have imposed after a finding of liability, defendants would have no incentive to consent to judgment and this element of compromise would be destroyed. The consent decree would thus as a practical matter be eliminated as an antitrust enforcement tool, despite Congress’ directive that it be preserved. See S.Rep. No. 93-298,

supra,

at 6; H.R.Rep. No. 93-1463,

supra,

at 6.

It follows that a lower standard of review must be applied in assessing proposed consent decrees than would be appropriate in other circumstances. H.R.Rep. No. 93-1463,

supra,

at 12. For these reasons, it has been said by some courts that a proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as.it falls within the range of acceptability or is “within the reaches of public interest.”

United States v. Gillette Co.,

406 F.Supp. 713, 716 (D.Mass.1975). See also

United States v. Bechtel Corp.,

648 F.2d 660, 666 (9th Cir.1981);

United States v. Carrols Development Corp.,

454 F.Supp. 1215, 1222 (N.D.N.Y.1978);

United States v. National Broadcasting Co.,

449 F.Supp. 1127, 1143 (C.D.Cal.1978). Although these decisions are not necessarily binding,

84

this Court will follow a similar approach.

It does not follow from these principles, however, that courts must unquestioningly accept a proffered decree ■ as long as it somehow, and however inadequately, deals with the antitrust and other public policy problems implicated in the lawsuit. To do' so would be to revert to the “rubber stamp” role which was at the crux of the congressional concerns when the Tunney Act became law. This consideration is especially potent in these cases, for several reasons.

First. This is not an ordinary antitrust case. The American Telephone and Telegraph Company, with its various components and affiliates, is the largest eorpora

*152

tion in the world by any reckoning,

85

and the proposed decree, if approved, would have significant consequences for an unusually large number of ratepayers, shareholders, bondholders, creditors, employees, and competitors. Beyond that, it is clear that the divestiture of the Operating Companies, combined with the entry of AT & T into new competitive markets, will be an enormous undertaking, fraught not only with many problems and difficulties, but also with a potential for substantial private advantage at the expense of the public interest. In view of these considerations, and of the potential impact of the proposed decree on a vast and crucial sector of the economy and on such general public interests as the cost and availability of local telephone service, the technological development of a vital part of the national economy, national defense, and foreign trade, the Court would be derelict in its duty if it adopted a narrow approach to its public interest review responsibilities.

86

Second. Some of those who during the legislative hearings took a narrow view of the judicial responsibilities under the Act suggested that the courts would generally not be able to render sound judgments on settlements because they would not be aware of all the relevant facts.

87

But that factor is of relatively little relevance here, for this Court has already heard what probably amounts to well over ninety percent of the parties’ evidence both quantitatively and qualitatively, as well as all of their legal arguments.

88

It is thus in a far better position than are the courts in the usual consent decree cas.es

89

to evaluate the specific details of the settlement.

90

Third. These actions, and this settlement, have an unfortunate history. The 1956

Western Electric

consent decree was evidently the product of the very kind of influence and pressure that Congress subsequently sought to prevent through the Tunney Act procedures. See pp. 135-138

supra.

That identical settlement, and the identical parties, are now before the Court. Nor can those events simply be dismissed as ancient history, irrelevant to the events of 1981-82. One needs only to recall the peculiar circumstances under which the instant settlement proposal was sought to be filed in the courts

91

and the recurrence of an

*153

inappropriate collaboration in the course of the litigation between the Department of Defense and AT & T similar to that which occurred in 1952-54. See

United States v. AT & T,

524 F.Supp. 1331 (D.D.C.1981).

92

These circumstances do not foster a sense of confidence that the assessment of the settlement and its implications may be left entirely to AT & T and the Department of Justice.

None of this means, of course, that the Court would be justified in simply substituting its views for those of the parties. But it does mean that the decree will receive closer scrutiny than that which might be appropriate to a decree proposed in a more routine antitrust case.

The Court concludes that, taking into account the various legislative and decisional mandates discussed above, it will apply the following standard to its evaluation of the proposed decree. After giving due weight to the decisions of the parties as expressed in the proposed decree, the Court will attempt to harmonize competitive values with other legitimate public interest factors. If the decree meets the requirements for an antitrust remedy — that is, if it effectively opens the relevant markets to competition and prevents the recurrence of anticompetitive activity, all without imposing undue and unnecessary burdens upon other aspects of the public interest — it will be approved.

93

If the proposed decree does not meet this standard, the Court will follow the practice applied in other Tunney Act cases

94

and, as a prerequisite to its approval, it will require modifications which would bring the decree within the public interest standard as herein defined.

95

Ill

Conflict Between the Proposed Decree and State Regulation

A number of interested persons, principally States and state regulatory commissions,

96

contend that this Court lacks the power to enter the decree proposed by the parties without the approval of the regulatory commissions acting under state law. The decree would require AT & T to take various actions for which regulatory approval is required under state law,

97

and it would restrict the Operating Companies

*154

with respect to activities which they are authorized to engage in under state regulation.

98

Because of this conflict, say the States, the decree may not be entered until the requisite permission from the various state agencies has been secured. The Department of Justice and AT & T assert in response that state law

99

is preempted to the extent that it bars execution of the decree.

100

A.

General

This is not the first case in which States have argued that a federal court decree based upon federal law may not validly require actions prohibited by state law. These claims are almost as old as the Republic. One needs to recall only the great school desegregation disputes of the last thirty years, in the course of which a number of States justified their failure to comply with federal court injunctions by asserting that compliance was impossible because of the conflicting requirements of state law. The Supreme Court repeatedly and consistently held that the Supremacy Clause of the Constitution

101

rendered invalid any state authority that conflicted with the federal court order.

North Carolina State Board of Education v. Swann,

402 U.S. 43, 46 , 91 S.Ct. 1284, 1286 , 28 L.Ed.2d 586 (1971);

Griffin v. County School Board,

377 U.S. 218, 231-34 , 84 S.Ct. 1226, 1233-34 , 12 L.Ed.2d 256 (1964);

Cooper v. Aaron,

358 U.S. 1 , 78 S.Ct. 1401 , 3 L.Ed.2d 5 (1958); see also

Morgan v. McDonough,

540 F.2d 527 (1st Cir.1976);

United States v. Indianola Municipal Separate School District,

410 F.2d 626, 630-31 (5th Cir.1969). More recently, in

Washington v. Washington

*155

State Commercial Passenger Fishing Vessel Ass’n,

443 U.S. 658, 695 , 99 S.Ct. 3055, 3079 , 61 L.Ed.2d 823 (1979), the Court once again rejected the argument that state law restrictions could prevent a state regulatory agency from complying with a federal court’s decree, reiterating that “[s]tate-law prohibition against compliance with the District Court’s decree cannot survive the command of the Supremacy Clause of the United States Constitution.”

While the basis for preemption is the Constitution, a preemptive effect in an individual case may be based on that document, on treaties, or on federal statutes such as the Sherman Act, which constitute valid exercises of federal power. See

California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc.,

445 U.S. 97 , 100 S.Ct. 937 , 63 L.Ed.2d 233 (1980). In other words, if this Court has the authority under the Sherman Act to issue the proposed decree, state regulatory statutes are unenforceable to the extent that they prevent compliance with its terms.

102

The States cannot and most of them do not dispute that the conditions sought to be remedied by the decree fall within the broad sweep of the Sherman Act. Like the Commerce Clause of the Constitution,

103

the Sherman Act “extend[s] beyond activities actually

in

interstate commerce to reach other activities that, while wholly local in nature, nevertheless substantially

affect

interstate commerce.”

McLain v. Real Estate Board of New Orleans, Inc.,

444 U.S. 232, 241 , 100 S.Ct. 502, 508 , 62 L.Ed.2d 441 (1980). See also

Hospital Building Co. v. Trustees of Rex Hospital,

425 U.S. 738, 743 , 96 S.Ct. 1848, 1851 , 48 L.Ed.2d 338 (1976). Similarly, the States do not dispute that the power of the Court under Section 4 of the Sherman Act, 15 U.S.C. § 4 , to “prevent and restrain” violations of the statute is broad enough to encompass the decree proposed by the parties in this case. Their argument bypasses these general constitutional and antitrust principles to rely instead on certain specific aspects of the exercise of federal antitrust power, as follows.

1.

Tenth Amendment

Several States assert—citing Nat

ional League of Cities v. Usery,

426 U.S. 833 , 96 S.Ct. 2465 , 49 L.Ed.2d 245 (1976)—that the proposed decree would unconstitutionally invade powers reserved to them under the Tenth Amendment. In that case, the Supreme Court held that Congress was foreclosed from extending minimum wage and maximum hour employment standards to persons employed by the States themselves, ruling ( 426 U.S. at 851-52 , 96 S.Ct. at 2474) that activities in areas such as

fire prevention, police protection, sanitation, public health, and parks and recreation .... are typical of those performed by state and local governments in discharging their dual functions of administering the public law and furnishing public services. Indeed, it is functions such as these which governments are created to provide, services such as these which the States have traditionally afforded their citizens. If Congress may withdraw from the States the authority to make those fundamental employment decisions upon which their systems for performance of these functions must rest, we think there would be little left of the States’ ‘separate and independent existence.’ . .. [T]he dispositive factor is that Congress has attempted to exercise its Commerce Clause authority to prescribe minimum wages and maximum hours to

*156

be paid by the States in their capacities as sovereign governments.... We hold that insofar as the challenged amendments operate to directly displace the States’ freedom to structure integral operations in areas of traditional governmental functions, they are not within the authority granted Congress by Art. I, § 8, cl. 3. (footnotes omitted).

The Court made it abundantly clear that its decision was not to be regarded as a wholesale retreat from the principle of federal supremacy in the event of federal-state conflict; rather, the decision was strictly limited to the proposition that the Tenth Amendment imposes limitations on the “exercise of congressional authority directed ... to the States as States.”

Id.

426 U.S. at 845 , 96 S.Ct. at 2471.

The progeny of

National League of Cities

has continued to distinguish sharply between federal regulation of States and such regulation of “private persons and businesses ‘necessarily subject to the dual sovereignty of the government of the Nation and of the State in which they reside.’ ”

Hodel v. Virginia Surface Mining & Reclamation Ass’n,

452 U.S. 264, 286 , 101 S.Ct. 2352, 2365 , 69 L.Ed.2d 1 (1981),

quoting National League of Cities v. Usery, supra,

426 U.S. at 845 , 96 S.Ct. at 2471 . See also,

Federal Energy Regulatory Commission v. Mississippi,

- U.S. -, 102 S.Ct. 2126 , 72 L.Ed.2d 532 (1982). As to the latter category of regulation, said the Court, there is “no Tenth Amendment impediment to congressional action.”

Hodel v. Virginia Surface Mining & Reclamation Ass’n, supra,

452 U.S. at 286 , 101 S.Ct. at 2365 .

The proposed decree imposes obligations only on private business. By its terms, it does not apply to the States at all; pursuant to the congressional power over interstate commerce it simply regulates private activities which are without any doubt subject to that power. To be sure, some of these activities may also be subject to state regulation; but such confluence is not, and has never been held to be, regulation of “States as States.”

The Supreme Court recently considered an analogous problem in

Federal Energy Regulatory Comm’n v. Mississippi, supra.

One of the statutory provisions at issue in that case permitted the Federal Energy Regulatory Commission to exempt certain private facilities from state laws. While the Court divided as to the application of the Tenth Amendment to other sections of the statute, it was unanimous in upholding this particular provision because, as the majority noted, “the Federal Government may displace state regulation even though this serves to ‘curtail or prohibit the States’ prerogatives to make legislative choices respecting subjects the States may consider important.’ ” - U.S. at -, 102 S.Ct. at 2129 , quoting

Hodel v. Virginia Surface Mining & Reclamation Ass’n, supra,

452 U.S. at 290 , 101 S.Ct. at 2367 . See also, - U.S. at - n. 1, 102 S.Ct. at 2130 n. 1 (O’Connor, J., dissenting).

2.

Communications Act

Some States argue next that in enacting the Communications Act, Congress intended to prevent federal preemption of the state regulation of telecommunications permitted by that statute. There is no evidence whatever to support this proposition. Absent specific indication of congressional intent, the Court declines to read the Communications Act so as to immunize these state laws from preemption by other federal statutes.

Furthermore, the States’ authority under the Communications Act is limited to “local services .. . that in their nature and effect are separable from and do not substantially affect the conduct or development of interstate communications.”

North Carolina Utility Commission v. FCC,

537 F.2d 787 , 793 (4th Cir.1976). The decree, of course, concerns matters which are beyond this limited grant of jurisdiction.

Finally, even if the Communications Act did support certain kinds of state regulation, it would not help the States here. This Court has heard a variation of the argument they make when it was raised, again and again, by AT & T and has reject-

*157

ed it every time.

United States v. AT & T, supra,

524 F.Supp. at 1345;

United States v. AT & T, supra,

461 F.Supp. at 1320-30 . As the Court previously stated, regulation under the Communications Act is neither sufficiently explicit nor sufficiently pervasive

104

to allow it to stand in the way of the enforcement of the antitrust laws.

105

All other courts which have had occasion in recent years to consider the subject of telecommunications antitrust immunity on account of regulation under the Communications Act have reached the same conclusion.

Phonetele, Inc. v. AT & T,

664 F.2d 716 (9th Cir.1981);

Sound, Inc. v. AT & T,

631 F.2d 1324 , 1327-31 (8th Cir.1980);

Mid-Texas Communications Systems, Inc. v. AT & T,

615 F.2d 1372, 1377-82 (5th Cir.1980);

Essential Communications Systems, Inc. v. AT & T,

610 F.2d 1114 (3rd Cir.1979). See also,

National Gerimedical Hospital and Gerontology Center v. Blue Cross,

452 U.S. 378 , 101 S.Ct. 2415 , 69 L.Ed.2d 89 (1981). If the Communications Act itself and direct regulation by the FCC pursuant to that Act do not impair antitrust liability,

a fortiori

mere implied recognition in the Act of state regulation — assuming that there is such recognition — cannot stand in the way either of a finding of such liability or of the taking of necessary remedial action in implementation of the mandate of the Sherman Act.

B.

Parker v. Brown

The States’ primary contention is that the decree is barred by the state action exemption from the antitrust laws first announced in

Parker v. Brown,

317 U.S. 341 , 63 S.Ct. 307 , 87 L.Ed.2d 315 (1943). In that case, the Supreme Court upheld a regulatory program which restricted competition among raisin growers by setting prices and limiting production. Finding no suggestion in the legislative history of the Sherman Act that such state action was to be restrained, the Court declined to find that the Sherman Act preempted the state law.

The

Parker

doctrine, which has been restated and applied a number of times since then,

106

“reflects Congress’ intention to embody in the Sherman Act the federalism principle that the States possess a significant measure of sovereignty under our Constitution.”

Community Communications Co. v. City of Boulder,

455 U.S. 40, 53 , 102 S.Ct. 835, 842 , 70 L.Ed.2d 810 (1982). See also Areeda,

“Antitrust Immunity for ‘State Action’ After Lafayette,”

95 Harv.L. Rev. 435, 436 (1981). At the root of the rule is the principle that federalism permits the States to impose a regime of economic regulation which is different from and inconsistent with the free competition principle mandated by the antitrust laws.

There are several reasons why the States’ reliance on the

Parker

doctrine is misplaced.

In the first place, since the doctrine is rooted in the desirability of state experimentation and regulation, it is not at all self-evident that it is applicable to the type of activity involved in these eases. The telecommunications network is, technologically and economically, a national network with interdependent components.

107

Con

*158

gress has recognized this interstate characteristic, with its impacts on the national economy and national defense, by exercising its power under the Commerce Clause to reserve federal control over interstate communications.

North Carolina Utility Commission v. FCC, supra.

It may be doubted that the

Parker

doctrine may reasonably be extended to this kind of an activity which is national par excellence.

In any event, the

Parker v. Brown

line of cases does not establish that all state regulation

per se

serves to immunize activities from the federal antitrust laws. Such an immunity exists only if (1) the restraint is clearly articulated and affirmatively expressed as state policy, and (2) the policy is actively supervised by the State.

California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., supra,

445 U.S. at 105 , 100 S.Ct. at 943. Moreover, preemption is precluded only under special circumstances and to achieve a specific goal: to allow the states to implement alternatives to the Sherman Act system of free competition. It is against these standards that the States’ contention here must be tested.

The conduct that is the subject of these antitrust actions is clearly not beyond the reach of the federal antitrust laws

108

— a conclusion with which the States are in agreement.

109

That is so because some of that conduct

(i.e.,

the allegedly anticompeti-five activity of AT & T in the intercity services market) is not under state regulation at all; and because the remainder

(i.e.,

AT & T’s activity in the local services and equipment markets) is regulated by the States only in the sense that the local Operating Companies are required to file tariffs with respect thereto — actions which the courts have consistently held to be insufficient to qualify under the

Parker-Midcal

“active supervision” standard.

110

To put it another way, it is clear that state regulation would not be a defense during the liability phase of this or any other antitrust action based on similar conduct.

Since the conduct which is the subject of these lawsuits is thus well within the jurisdiction of the federal antitrust laws — as distinguished from the regulatory jurisdiction of the States — it would make no sense to hold that, in providing a remedy for the anticompetitive conduct,

111

the Court must refrain from interfering with state regulation.

112

Such a holding would in effect place this conduct in a no-man’s land — not regulated by the states sufficiently to meet the

Parker-Midcal

test, yet immunized from effective federal antitrust jurisdiction because the antitrust remedy is barred by state regulations unrelated to this conduct.

113

The practical consequences of such a rule to antitrust enforcement could be devastating.

*159

No effective, unconditional antitrust judgment could be entered and enforced with respect to any subject matter area in which the states had established a system of regulation. The federal antitrust court would have to await the outcome, the benevolent agreement, of the local regulatory authorities before it could implement its decree. Should one or more States or their regulatory bodies object, the decree could not be enforced, irrespective of the necessity for such enforcement in the vindication of federal antitrust policy.

114

It is inconceivable that Congress could have intended to defer to state laws in such a way as to preclude a court from effectively remedying an antitrust violation. Without effective relief, “the Government has won a lawsuit and lost a cause.”

International Salt Co. v. United States, supra,

332 U.S. at 401 , 68 S.Ct. at 17 .

115

Deference to state law in this type of situation would leave the Sherman Act powerless to eliminate anticompetitive activity,

116

even though the activity was not subject to state regulation sufficient to preclude application of the antitrust laws. This result is directly contrary to the thesis of the state action doctrine: that “[t]he national policy in favor of competition” is supplanted only when state regulation will take its place.

117

California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., supra,

445 U.S. at 106 , 100 S.Ct. at 943.

In these particular cases, the rule proposed by the States would reduce the Court’s judgment to little more than an advisory opinion: AT & T would have to obtain the approval of the public utilities commission of every State before that judgment would actually be implemented. As the States themselves have said, if their claim were accepted, they would have the “unassailable authority to veto” the divestiture and to cause a “balkanized scheme of telecommunications service” should they so choose.

118

The Court concludes that the state action doctrine does not restrict the judicial power to impose an appropriate remedy under the Sherman Act.

C.

Avoidance of Unnecessary Conflict with State Law

The absence of absolute limitations upon a court’s remedial powers under the

*160

Sherman Act does not mean that the Court is free to ignore the States’ legitimate interests.

It is well established that interference with state interests is not a favored approach; it is a measure to be employed only when necessary to vindicate federal law. Thus, a judicial remedy may infringe upon state law only to the extent necessary effectively to protect the federal interest. See

Milliken v. Bradley,

433 U.S. 267, 280-81 , 97 S.Ct. 2749, 2757 , 53 L.Ed.2d 745 (1977);

Morgan

v.

McDonough, supra,

540 F.2d at 534 .

119

Moreover, in exercising their discretion in fashioning antitrust remedies,

120

courts are obligated to minimize the impact of their decrees upon other public policies (see Part II supra), including, of course, the policy against unnecessary interference with state interests.

Were the Court to fashion its own remedy following a finding of liability, it would accordingly be obligated to minimize interference with state law to the extent that this may be done without vitiating or weakening the remedial measures required as a result of the findings made in the litigation. It is difficult to believe that when the parties arrive at a consent decree they have greater powers to override these principles than would the Court in drafting its own decree. In any event, whatever the parties may do, the Court would certainly be justified in taking the policy against unnecessary interference with state law and state policy into account when it passes upon the proposed judgment in a public interest proceeding.

It follows from what has been said that those provisions in the proposed decree which are necessary to vindicate the federal interest in the enforcement of the antitrust laws will be approved notwithstanding the fact that they may conflict with the state laws or interests. However, in its overall consideration of the public interest, the Court will also take into account that a particular provision may be merely peripheral to the federal interest but have a substantial adverse impact on state laws.

121

IV

The Divestiture

A key feature of the proposed decree is the divestiture of the Operating Companies from the remainder of AT & T. In order to determine whether that divestiture is in the public interest, the Court must decide first whether it is a remedy that is likely to eliminate anticompetitive conditions within the telecommunications industry. In addition, the Court must assess the efficacy of alternative remedies and it must weigh the effect of the divestiture on the public interest generally, particularly on the level of charges for local telephone service.

A.

Conditions Necessitating Antitrust Relief

1.

Evidence of Anticompetitive Actions by AT&T

In its complaint and in documents filed thereafter

(i.e.,

the several Statements of Contentions and Proof), the government asserted that AT & T monopolized the intercity telecommunications market and the telecommunications product market in a variety of ways in violation of the Sherman Act.

The evidence that was produced during the

AT & T

trial indicates that, at least with respect to several of the government’s claims, this charge may be well tak

*161

en. It would be inappropriate for the Court at this juncture to draw definitive conclusions with regard either to the sufficiency of the evidence to sustain a finding of liability or to the validity of AT & T’s various legal and factual defenses. The Court is not called upon, in this public interest proceeding, to render a final judgment on this case; indeed, not all the evidence that may bear on the issues has yet been adduced.

122

It is not improper, however, for the Court to consider whether the state of proof at trial was such as to sustain this divestiture as being in the public interest. See 15 U.S.C. §§ 16 (b)(2), (e).

In its intercity case, the government alleged that AT & T used its control over its local monopoly to preclude competition in the intercity market. The government proved

inter alia

that after 1968 AT & T included a “customer premises” provision in its interconnection tariff which deterred potential competitors from entering that market;

123

that it refused to provide FX and CCSA services to specialized common carriers and domestic satellite carriers until 1974 when the FCC specifically ordered it to do so;

124

and that it attempted to prevent competitors from offering metered long distance service that would compete with AT & T’s own regular long distance service.

125

AT & T’s basic rationale for these policies was that it was attempting to prevent competitors from “creamskimming.”

126

As viewed by AT & T, it would have been able successfully to combat creamskimming if it had priced each of its routes on the basis of the costs for operating that route. However, it concluded that the FCC had rejected this approach when it endorsed national rate averaging in the interest of promoting the goal of universal service. Accordingly, AT & T argued that, since rate averaging is inconsistent with competition, and since the basic rate averaging policy had been required by the FCC as being in the public interest, it was acting reasonably under the Communications Act in preventing competition as best and as long as it could.

127

What this line of reasoning fails to consider is that, at least by the mid-1970s, the FCC had clearly begun to promote competi

*162

tion in telecommunications. The government contended during the trial — correctly, in the Court’s view — that AT & T had an obligation to follow the more recent FCC policy rather than the Commission’s previous policies which may have suited it better,

128

particularly since there was never a direct FCC rule against de-averaging. Moreover, even if, because of the lack of definite guidance from the FCC, AT & T’s actions were to be regarded as reasonable under the Communications Act standards, it does not at all follow that these same actions were immunized under the standards of the Sherman Act.

129

What is significant about these events is that AT & T was able to adopt the policies described above in large part because of its control over the local exchange facilities. For example, it was because of its ownership and control of the local Operating Companies — whose facilities were and are needed for interconnection purposes by AT & T’s competitors — that AT & T was able to prevent these competitors from offering FX and CCSA services. Similarly, AT & T was able to deter competition by manipulating prices for access to the Operating Company networks.

130

AT & T’s control over the local Operating Companies was central also to the anticom-petitive behavior alleged with respect to the second facet of the government’s case, that involving customer-provided terminal equipment.

The government proved that AT & T prohibited the attachment of competitors’ equipment to the network except through a protective connecting arrangement (PCA). There was evidence that some experts (including a panel of the National Academy of Sciences)

131

believed that such a PCA was necessary

132

if the nationwide telephone network was to be protected from a variety of harms.

133

On the other hand, the government’s evidence indicated that AT & T required PCAs for equipment that in all probability could not harm the network; that there were delays in providing PCAs; that the PCAs were over-designed and over-engineered, and, thus, over-priced; that PCAs were required for competitive

*163

equipment while identical equipment sold by AT & T did not require their use; and that PCAs could not guard against all four potential harms to the network.

134

Additionally, the alternative option of certification

135

was available but never seriously pursued by Bell.

136

Moreover, when ultimately certification was directly mandated by the FCC as a substitute for the protective connecting arrangement, the telephone network — AT & T’s predictions to the contrary notwithstanding — did not cease to function in its customary fashion. Indeed, AT & T was unable during the trial to prove

any

actual harm to the network from the elimination of the PCAs.

In its procurement part of the case, the government alleged, and there was proof, that AT & T used its control over the local Operating Companies to force them to buy products from Western Electric even though other equipment manufacturers produced better products or products of identical quality at lower prices. Here, too, AT & T’s control of the Operating Companies was central to the allegedly anticompetitive behavior.

137

Without making definitive findings on any or all of the issues, it is certainly clear that — to the extent that the proposed decree is offered by the government on the premise that it will destroy the basis of past anticompetitive behavior — the Court would not be justified in rejecting it as constituting a remedy for non-existent anticompeti-tive acts.

2.

Concentration of Power in the Telecommunications Industry

There is an additional reason, largely independent of the factors discussed above, which supports some type of antitrust relief in this case: AT & T’s substantial domination of the telecommunications industry in general.

The antitrust laws are most often viewed as only a means for ensuring free competition in order to achieve the most efficient allocation of society’s resources. See pp. 149-150

supra.

However, Congress and the courts have repeatedly declared that these laws also embody “a desire to put an end to great aggregations of capital because of the helplessness of the individual before them.”

United States v. Aluminum

*164

Company of America,

148 F.2d 416, 428 (2d Cir.1945) (footnote omitted). See also

Standard Oil Co. v. United States,

221 U.S. 1, 50 , 31 S.Ct. 502, 511 , 55 L.Ed. 619 (1911);

United States v. Trans-Missouri Freight Ass’n,

166 U.S. 290, 323-24 , 17 S.Ct. 540, 552 , 41 L.Ed. 1007 (1897).

The legislators who enacted the Sherman Act voiced concerns beyond the effects of anticompetitive activities on the economy: they also greatly feared the impact of the large trusts, which then dominated the business world, on the nation’s political system, and they regarded the power of these trusts as an evil to be eradicated. Thus, Senator Sherman stated:

If the concentrated powers of [a] combination are intrusted to a single man, it is a kingly prerogative, inconsistent with our form of government, and should be subject to the strong resistance of the State and national authorities. If anything is wrong, this is wrong. If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life.

21 Cong.Rec. 2457 (1890).

138

These views have been repeatedly echoed since that time, as, for example, during the congressional debates at the time of the enactment of the 1950 amendments to the Clayton Act. See 96 Cong.Rec. 16450 (1950) (Remarks of Sen. Kefauver); 95 Cong.Rec. 11494 (1950) (Remarks of Rep. Bryson); 95 Cong.Rec. 11486 (1949) (Remarks of Rep. Celler). See also

Brown Shoe Co. v. United States,

370 U.S. 294, 344 , 82 S.Ct. 1502, 1534 , 8 L.Ed.2d 510 (1962). As Justice Douglas stated in his dissenting opinion in

United States v. Columbia Steel Co.,

334 U.S. 495, 536 , 68 S.Ct. 1107, 1128 , 92 L.Ed. 1533 (1948):

Power that controls the economy should be in the hands of elected representatives of the people, not in the hands of an industrial oligarchy. Industrial power should be decentralized. It should be scattered into many hands so that the fortunes of the people will not be dependent on the whim or caprice, the political prejudices, the emotional stability of a few self-appointed men. The fact that they are not vicious men but respectable and social-minded is irrelevant. That is the philosophy and the command of the Sherman Act. It is founded on a theory of hostility to the concentration in private hands of power so great that only a government of the people should have it.

139

Our political system is designed so that the power of one group may be checked by the power of another. The antitrust laws require this same approach in the economic sphere. Obviously, if one company controlled an essential part of the economy, it would be in a position to gain an undue influence over economic decisions and, as a result, most likely over political decisions. Thus, the antitrust laws seek to diffuse economic power in order to promote the proper functioning of both our economic and our political systems. See generally, A.D. Neale,

The Antitrust Laws of the United States of America,

422-23 (1962); Blake & Jones,

Antitrust Dialogue: Defense,

65 Colum.L.Rev. 337, 384 (1965).

The significance of these concepts is accentuated by the context in which the Court must consider the public interest in these cases. The telecommunications industry plays a key role in modern economic,

*165

social, and political life. Indeed, many commentators have asserted that we are entering an age in which information will be the keystone of the economy

140

as steel was when Justice Douglas wrote in the

Columbia Steel Co.

case.

141

The only pervasive two-way communications system is the telephone network. It is crucial in business affairs, in providing information to the citizenry, and in the simple conduct of daily life. In its present form, AT & T has a commanding position in that industry. The men and women who have guided the Bell System appear by and large to have been careful not to take advantage of its central position in America’s economic life. There is no guarantee, however, that future managers will be equally careful.

142

In any event, it is antithetical to our political and economic system for this key industry to be within the control of one company.

For these reasons, the Court concludes that the loosening of AT & T’s control over telecommunications through the divestiture of the Operating Companies will entail benefits which transcend those which flow from the narrowest reading of the purpose of the antitrust laws.

B.

Effect of the Divestiture

The remedy in an antitrust action — whether imposed by a court or agreed upon between the parties — is measured both by how well it halts the objectionable practices and by its prospects for minimizing the likelihood that such practices will occur in the future. See Part II

supra.

Where, as here, the Court has heard substantially all of the evidence, it is appropriate that it weigh the proposed remedy against the evidence in that context.

As indicated in Part IV(A)

supra,

the ability of AT & T to engage in anticompeti-tive conduct stems largely from its control of the local Operating Companies. Absent such control, AT & T will not have the ability to disadvantage competitors in the interexchange and equipment markets.

For example, with the divestiture of the Operating Companies AT & T will not be able to discriminate against intercity competitors, either by subsidizing its own intercity services with revenues from the monopoly local exchange services, or by obstructing its competitors’ access to the local exchange network. The local Operating Companies will not be providing interex-change services, and they will therefore have no incentive to discriminate. Moreover, AT & T’s competitors will be guaranteed access that is equal to that provided to AT & T, and intercity carriers therefore will no longer be presented with the problems that confronted them in that area. See Part VIII,

infra.

Abuses will also be unlikely in the equipment interconnection area, for the simple reason that the Operating Companies will not manufacture equipment and will therefore lack AT & T’s incentive to favor the connection of one manufacturer’s equipment over that of another. Even as to the part of the government’s case dealing with procurement, the divestiture of the Operating Companies will go a long way toward eliminating the potential for anticompeti-tive behavior. Any pro-Western Electric

*166

bias on the part of these companies will be eliminated once the intra-enterprise relationship between the Operating Companies and Western Electric is broken.

143

To the extent, then, that the proposed decree proceeds on the assumption that the structural reorganization will make it impossible, or at least unprofitable, for AT & T to engage in anticompetitive practices, it is fully consistent with the public interest in the enforcement of the antitrust laws. The soundness of this remedy becomes even more apparent when it is compared with other relief alternatives.

C.

Alternative Remedies

In order to determine whether the divestiture proposed by the parties is the remedy which will most effectively fulfill the goals of the antitrust laws, it is appropriate for the Court to evaluate the various alternative remedies that may have been considered or proposed. See 15 U.S.C. § 16 (e)(1).

Three alternatives to the divestiture of the Operating Companies emerged in the course of the

AT & T

litigation. The first would have required the divestiture of Western Electric and Bell Laboratories from AT & T.

144

The second, similar in concept if not in detail, would have had as its most salient feature the divestiture from AT & T of portions of Western Electric and Bell Laboratories and of several Bell Operating Companies.

145

The third was a strictly injunctive, non-structural remedy, which would have imposed detailed constraints upon AT & T’s activities.

146

None of these alternatives would be as efficacious as the divestiture of the Operating Companies embodied in the proposed decree.

147

1.

Divestiture of Western Electric and Bell Laboratories

The divestiture of all or part of Western Electric and Bell Laboratories from AT & T, with or without the divestiture of some, but not all, of the Bell Operating Companies,

148

suffers from several defects in comparison with the parties’ present proposal: (1) it would not be as effective in eliminating anticompetitive conduct, and (2) it would have a greater adverse impact on future contributions of the Bell System to the national economy.

*167

The inadequacy of the divestiture from the Bell System of its research and manufacturing arms as an antitrust remedy is obvious: it would not eliminate AT & T’s ability and incentive to take anticompeti-tive actions against its competitors in the intercity market. The remedy would thus be ineffective in the very area in which the government’s proof in the

AT & T

action was strongest.

149

In addition, this remedy would not eliminate AT & T’s de facto control of the national telecommunications system. Although the company would no longer dominate the manufacturing and research markets, it would still control the essentials of American telecommunications — virtually all intercity and local services. The divestiture would thus not fulfill the goal of deconcentrating AT & T’s vast economic power.

The divestiture of Western Electric and Bell Laboratories would suffer from an additional defect. Considerable evidence was adduced during the

AT & T

trial concerning the central role of Bell Laboratories — and to a lesser degree of Western Electric — in innovation in the telecommunications industry and, more broadly, in industrial research.

150

AT & T argued vigorously that the present structure of the Bell System was in significant part responsible for this admirable record because the researchers were linked with a manufacturer — Western Electric — and with two service organizations — the Operating Companies and the Long Lines Department.

151

The Court is of the opinion that there is considerable merit to these contentions. Bell Laboratories has been a positive force both in basic and in applied research, and this research has had a beneficial effect on the nation’s economic position in all of its varied aspects.

152

It also seems to be true that the links between Bell Laboratories and the manufacturing and service arms of the Bell System have been of assistance in the achievement of these technological successes.

On this basis, then, the separation of Bell Laboratories from all of these functions could have an adverse effect upon future research and development,

153

and it may for that reason be regarded as less desirable than the present proposal which would leave Bell Laboratories associated with a manufacturer and two service organizations — Long Lines and AT & T’s new information services — which would supply the practical experience that would be useful in stimulating the research operations.

2.

Injunction

The second major alternative to the proposed decree is an injunction which would be enforced by special masters appointed by and responsible to the Court. This alternative, too, suffers from a number of defects.

It would be difficult to formulate an order that would effectively deal with all of the different kinds of anticompetitive behavior that are claimed to have occurred over a considerable period of time, in various geographical areas, and with respect to many different subjects. There is evidence which suggests that AT & T’s pattern during the last thirty years has been to shift from one anticompetitive activity to another, as various alternatives were foreclosed

*168

through the action of regulators or the courts or as a result of technological development.

154

In view of this background, it is unlikely that, realistically, an injunction could be drafted that would be both sufficiently detailed to bar specific anticompeti-tive conduct yet sufficiently broad to prevent the various conceivable kinds of behavior that AT & T might employ in the future.

155

An even more formidable obstacle is presented by the question of enforcement. Two former chiefs of the FCC’s Common Carrier Bureau, the agency charged with regulating AT & T, testified that the Commission is not and never has been capable of effective enforcement of the laws governing AT & T’s behavior.

156

In their view, this inability was due to structural, budgetary, and financial deficiencies within the FCC as well as to the difficulty in obtaining information from AT & T. Whatever the true cause, it seems clear that the problems of supervision by a relatively poorly-financed, poorly-staffed government agency over a gigantic corporation with almost unlimited resources in funds and gifted personnel are no more likely to be overcome in the future than they were in the past.

157

These difficulties would be exacerbated if enforcement of a broad injunction were vested in court-appointed special masters. To be sure, such officials have proved in the past to be capable of performing relatively narrow, short-term responsibilities, and to perform them well. But the type of broad injunctive relief that would be needed in these cases would require quasi-permanent supervision of all of AT

&

T’s activities by not one or two special masters but by a vast staff. In short, what would be required would be a re-creation of the FCC’s Common Carrier Bureau in the guise of an arm of the Judiciary. Such a development would be undesirable for many different reasons.

158

Furthermore, there is no reason to believe that, in the end, a judicially-created bureaucracy would be any more capable than the FCC itself of performing the unending task of vigilance and oversight that would be required to ensure that an integrated Bell System did. not engage in anticompetitive conduct.

D.

Effect of the Divestiture Upon Other Interests

A number of individuals have written to the Court and to the Department of Justice urging the rejection of the proposed decree. They contend that AT & T in its present, integrated form has rendered excellent and affordable telephone service to the citizens of this nation, including those with modest

*169

incomes and those who live in sparsely populated areas. Many note that AT & T’s securities have been a mainstay of the small investor, with a long history of stable prices and dividend payments. Given that record, the argument goes, the break-up of AT & T could not possibly be in the public interest. While the Court has very carefully considered these concerns,

159

it has concluded that they are not sufficient to overcome the considerations supporting divestiture.

The divestiture of the Operating Companies will not necessarily have an adverse effect upon the cost of local telephone service.

160

The decree would leave state and federal regulators with a mechanism — access charges — by which to require a subsidy from intercity service to local service. By means of these access charges, the regulators would be free to maintain local rates at current levels or they could so set the charges as to increase or decrease local rates.

161

As to the second claim, there is simply no evidence or reason to believe that, funding aside, the quality of service will decline as a result of divestiture. The divested Operat-mg Companies will not be technical backwaters: they will have substantial incentives to upgrade their networks and to provide high-quality interconnections for other carriers in order to maximize revenues from access charges and from local rates.

As noted above, it is unlikely that the divestiture will impair the research capabilities of Bell Laboratories. See pp. 147-149

supra.

The scientists and engineers working in that organization will retain their incentive to improve the equipment and technology used to provide local telephone service, if only because the largest potential customers of Western Electric— Bell Laboratories companion in the “new” AT & T complex — will be the divested Operating Companies.

162

In addition, AT & T’s information services and interexchange services can be provided to customers only over the Operating Companies facilities, again creating large incentives for continued improvement and upgrading of these facilities.

163

In the final analysis, it is apparent that, as with so many public issues, a choice must be made.

*170

There has long been a debate over the relative merits of regulation and competition. The evidence adduced during the

AT &■ T

trial indicates that the Bell System has been neither effectively regulated nor fully subjected to true competition. The FCC officials themselves acknowledge that their regulation has been woefully inadequate to cope with a company of AT & T’s scope, wealth, and power. The efforts of various arms of government to introduce true competition into the telecommunications industry have been similarly feeble. The antitrust suit brought by the Department of Justice in 1949 ended in 1956 with a consent decree which imposed injunctive relief that was patently inadequate. It took from 1968 when the

Carterfone

decision

164

was handed down by the FCC to 1978 when the United States Court of Appeals decided

Ex-ecunet

II

165

to establish even the very principle of competition so that it was beyond dispute by AT & T. Future regulatory and injunctive remedies are unlikely to be more successful than were similar efforts in the past. In short, the choice is between a Bell System restrained by neither regulation nor true competition and a Bell System reorganized in such a way as to diminish greatly the possibility of future anticompetitive behavior.

The history of the American economic system teaches that fair competition is more likely to benefit all, especially consumers, than an industry dominated by a single-company monopolist. There is no reason to believe that the experience of- the telecommunications industry will be contrary to that rule.

For all of these reasons, the Court concludes that the divestiture from AT & T of companies providing local telephone service is in the public interest.

V

Absence of Restrictions on AT & T

Under the terms of the proposed decree, the line of business restrictions and the licensing requirements imposed by the 1956 consent decree in the

Western Electric

case would be removed and AT & T would be free to compete in all facets of the marketplace.

166

Some of the opponents of the proposed decree argue that several of the restrictions contained in the 1956 decree should not be eliminated, and others contend that the Court should also impose additional restrictions, not present in the 1956 decree. For the reasons explained in this part of the opinion and Part VI below,

167

the Court finds that, with one exception (see Part VI(B)

infra),

the imposition of restrictions on AT & T would not be in the public interest.

The antitrust laws do not require that a company be prohibited from competing in a market unless it can be demonstrated that its participation in that market will have anticompetitive effects. Past restrictions on AT & T were justified primarily because of its control over the local Operating Companies. With the divestiture of these local exchange monopolies, continued restrictions are not required unless justified by some other rationale.

A.

AT & T Power in the Interexchange Market

Virtually all those who suggest that restrictions beyond those in the proposed decree be imposed on AT & T make the same general arguments. Their basic claim is that AT & T still possesses monopoly power in the interexchange market

168

and that it will leverage this power by cross subsidizing its competitive services with monopoly reve

*171

nues.

169

These interexchange monopoly revenues, it is said, will subsidize a variety of business activities, ranging from competitive interexchange routes to equipment manufacturing to alternative local distribution facilities.

The validity of these arguments depends, of course, upon the soundness of the claim that after the divestiture AT & T will still possess monopoly power in the interex-change market. If AT & T lacks such power, it would be unable to reap supra-competitive profits with which to support its other activities; it would only recover a profit commensurate with its interexchange operations.

There can be no doubt that AT & T’s market share in the interexchange market is high. Although it is not possible to focus on a precise figure inasmuch as the number of market share estimates is almost as varied as the number of persons submitting comments, even AT & T concedes that as late as 1981 its share of interexchange revenue was around 77 percent.

170

But the inquiry of whether AT & T possesses monopoly power in the interexchange areas does not end with a description of AT & T’s size or its market share.

As defined by the Supreme Court, monopoly power is “the power to control prices or exclude competition.”

United States v. Grinnell Corp., supra,

384 U.S. at 571, 86 S.Ct. at 1704 (1966);

United States v. duPont & Co.,

351 U.S. 377, 391 , 76 S.Ct. 994, 1004 , 100 L.Ed. 1264 (1956). Although monopoly power may be inferred from a firm’s predominant share of the market, size alone is not synonymous with market power, particularly where entry barriers are not substantial.

United States v. Grinnell, supra,

384 U.S. at 571, 86 S.Ct. at 1704;

United States v. AT & T, supra,

524 F.Supp. at 1347; Posner,

Market Power in Antitrust Cases,

94 Harv.L.Rev. 937, 947-51 (1981).

Both the Department of Justice and AT & T contend that competition in the inte-rexchange market is growing and that this increase in competition demonstrates an absence of monopoly power.

171

There is some validity to this claim. The interexchange market is now being served not only by relatively young businesses but also by subsidiaries of such well established firms as ITT, Southern Pacific, and IBM.

That is not to say, however, that competition has flourished without impediment or that it would soar if the Bell System were not broken up. There is substantial merit to the suggestion that, absent divestiture, AT & T would still possess significant monopoly power, and that whatever competition developed in the past did so despite anticompetitive conditions. See Part IV

supra.

But the overriding fact is that the principal means by which AT & T has maintained monopoly power in telecommunications has been its control of the Operating Companies with their strategic bottleneck position. The divestiture required by the proposed decree will thus remove the two main barriers that previously deterred firms from entering or competing effectively in the interexchange market.

First. AT & T will no longer have the opportunity to provide discriminatory interconnection to competitors. The Operating Companies will own the local exchange facilities. Since these companies will not be providing interexchange services, they will lack AT & T’s incentive to discriminate. Moreover, they will be required to provide all interexchange carriers with exchange access that is “equal in type, quality, and price to that provided to AT & T and its

*172

affiliates.” Proposed Decree, Section II. See Part VIII

infra.

Second. Once AT & T is divested of the local Operating Companies, it will be unable either to subsidize the prices of its interex-change service with revenues from local exchange services or to shift costs from competitive interexchange services.

With the removal by the decree of all these burdens on competition, the number of firms entering the interexchange market is thus, likely to increase.

172

This development should be further assisted by the reduction of other barriers to entry. For example, although the cost of entering the telecommunications business is still substantial, the size of the required capital investment is not as great as it once was.

173

In addition, as more competitors begin to offer more services that are comparable to those offered by AT & T,

174

entrenched customer preferences in favor of AT & T will decrease.

With the removal of these barriers to competition, AT & T should be unable to

engage

in monopoly pricing in any market. To be sure, there are a number of routes for which AT & T is the sole interexchange carrier. However, several of these routes serve sparsely populated areas and appear to be only marginally profitable. On the other hand, should it turn out that these routes are in fact lucrative and that AT & T is nevertheless charging monopoly prices, then, following divestiture, market forces should fairly rapidly remedy the situation: because of the elimination of entry barriers, new entrants will be attracted to these markets, and prices, in turn, will fall to their competitive levels.

For these reasons, it appears that after divestiture, AT & T will largely lack the monopoly power that the opponents of the decree suggest,

175

and the trend of increasing competition may therefore be expected to continue.

176

Thus, unless proposed restrictions on AT & T are premised on more than the claim that AT & T has monopoly power in the

*173

interexchange area, they will have to be rejected.

B.

Interexchange Restrictions

Some of those who have commented on the proposed decree

177

urge that the Court require a modification which would add a clause guaranteeing access to AT & T’s interexchange network for its competitors, and another which would require AT & T’s Long Lines Department to be placed in a fully separated subsidiary. The imposition of such modifications is not warranted.

Those who argue for these restrictions essentially cite no reason other than AT & T’s share in the interexchange market to support their demands and, as discussed

su

pra, that alone is insufficient.

Additionally, the proposed restrictions are substantively deficient. As the proponents of a clause which would guarantee access to AT & T’s interexchange competitors concede,

178

such access is already required by existing FCC decisions and regulations. These regulations make it possible for competing carriers to interconnect freely and to expand their facilities by “piecing out” AT & T’s network, that is, by using AT & T’s facilities to complete portions of routes that must traverse low density, sparsely populated, and hence presumably not very profitable territory. See note 172

supra.

There is no basis for simply repeating in the decree

179

precisely that which is already contained in the FCC regulations.

The second proposed restriction — that Long Lines be placed in a separate subsidiary — is likewise unsupported either by necessity or by adequate reasoning. This restriction is required, it is said, to prevent AT & T from using its interexchange revenues to subsidize its competitive services. But as the Court has stated elsewhere (see Part VII

infra),

if cross subsidization is a problem, a separate subsidiary will not resolve it. Moreover, AT & T’s opportunity for any cross subsidization will become increasingly curtailed as interexchange competition increases; excessive profits from that service with which to subsidize other activities would quickly attract lower-priced competitors into the interexchange field or stimulate existing competitors into expanding their networks to displace AT & T.

For these reasons, the proposed interex-change restrictions must be rejected.

C.

Equipment Restrictions

The restrictions that are suggested in the area of equipment manufacturing are of three basic types: that AT & T’s equipment manufacturing and marketing operations be placed in a separate subsidiary or even, in the view of some of those who submitted comments, divested;

180

that AT & T be required to disseminate its network standards and technical information; and that procurement quotas be imposed on the Operating Companies and on AT & T’s Long Lines Department.

In addition to justifying these restrictions on the basis discussed above — that is, on AT & T’s interexchange market share — their proponents support their position on two other grounds: that AT & T possesses monopoly power in the equipment market, and that the association with Bell Laboratories

*174

and Long Lines provides Western Electric with anticompetitive advantages in the manufacturing of equipment. The Court will examine each of the arguments in turn.

There is no merit to the claim that after divestiture AT & T will possess monopoly power in the area of equipment manufacturing. In reviewing the proof on anticom-petitive behavior in the equipment market — even before divestiture — the Court found that the government’s evidence on that aspect of the case was less convincing than, for example, on that involving intercity services. As explained in Part IV

supra,

where the government was able to show that AT & T’s market share was high, it was generally unable to demonstrate significant anticompetitive behavior; where evidence of behavior was more damning, it had difficulty establishing market power. Thus, at a minimum the factual predicate for drastic restrictions in the equipment area is not as apparent as it might be with respect to other subjects.

After divestiture, AT & T’s position in the equipment market will be further diminished, and that market is certain to become more competitive.

181

To the extent that prior to divestiture AT & T was able to engage in anticompetitive conduct in the equipment market, that ability stemmed basically from its control of the Operating Companies. Once these local companies are divested, Western Electric will lose its captive customers. Not only does the proposed decree eliminate the Operating Companies' intra-enterprise incentive to purchase Western Electric equipment, but it also includes specific provisions that prohibit these companies from discriminating in the procurement of equipment. One of these provisions requires that within six months after the reorganization of AT & T, each Operating Company must submit to the Department of Justice compliance procedures explaining how that company plans to carry out its equipment procurement obligations. Proposed Decree, Sections 11(B) and (C). If an Operating Company discriminates in procuring equipment, that act will constitute a violation of the decree, and an enforcement action may be brought against it.

There is likewise no merit to the argument that Western Electric will have an anticompetitive edge in the production of new equipment because its affiliation with Bell Laboratories and Long Lines will give it early access to technical information and network standards. This claim ignores the fact that after divestiture, the Operating Companies, not AT & T, will control the information necessary for local exchange and exchange access services. Thus, if equipment manufacturers need information about interconnecting their equipment to the local exchange network, it will be provided by companies that are not engaged in the manufacturing of equipment.

182

There is no competitive basis, therefore, for imposing any of the proposed restrictions on AT & T in the area of equipment manufacturing and marketing.

183

*175

D.

Bypass

A considerable number of persons

184

have suggested that the Court prohibit AT & T from using new local distribution technologies that would allow it to “bypass” the networks of the Operating Companies to reach its looal subscribers directly.

185

The fear is that, early on, use of this technology will tend to exert pressure on Operating Companies rates and their ability to levy access charges on interexchange carriers, and that, in time, the new technology will render the Operating Companies and their plant obsolete.

The suggestions for a modification to prohibit bypass would be worthy of implementation only if two premises were accepted: (1) that if AT & T does not develop the technology required for bypass, it will not be developed by anyone, and (2) that it is desirable as a matter of public policy to curtail this technological development. Neither premise is well taken.

AT & T is not the only carrier to possess the technical know-how necessary for bypassing the Operating Companies’ local networks. Imposition of this restriction on AT & T is thus unlikely to be effective.

186

Furthermore, because other interexchange carriers possess this technology, to prohibit only AT & T from developing and using it would artificially and unfairly restrict competition — an action antithetical to the purposes of the antitrust laws.

187

Even if the Court, by a simple modification of the decree, could stop bypass technology from developing, it would not be justified in doing so. This technology is a threat to the Operating Companies presumably because, when it is developed, it will be more advanced and less expensive than the present method of transmission which depends upon a cumbersome system of poles and wires. Bypass would provide telecommunications service directly to the subscriber by means of satellites, microwave towers, or other advanced technological innovations at a lower cost than such service is available now. If indeed this should prove to be the case — there is general agreement that truly large-scale use of bypass technology is still some time into the future — the answer is not to call a halt to these developments but to make certain that the- benefits will not be distributed in such a way as to undermine the goal of universal service.

Neither the Court nor those who object to the decree can halt the electronic revolution any more than the Luddites could stop the industrial revolution at the beginning of the last century. If and when bypass technology becomes technically and economically feasible for widespread use, it should have the effect of reducing telephone costs and charges across the board, to the benefit of consumers, the economy, and the nation. Should it turn out instead that, as some fear, this technology will be used to reduce charges unevenly so as to threaten the goal of universal service, then those with legislative authority may at that time wish to take steps, through a program of subsidies, special charges, or other regulatory means, to make the benefits of the new technology available to all, including those who are relatively low-volume users of telephone

*176

service. But there is no warrant for preventing the development of this technology through a ban on its use by AT & T or otherwise.

E.

Patent Licensing Requirements

Under the terms of the 1956 consent decree, AT & T is required to grant to all applicants non-exclusive licenses for all existing and future Bell System patents. 1956 Consent Decree, Section X. In addition, the decree requires that, upon the payment of reasonable charges, AT & T must furnish to those with licenses for AT & T patents the technical information necessary to manufacture the equipment for which the applicant obtained the patent license. Section XIV. These licensing requirements

188

would be eliminated by the proposed decree, and the Court must determine whether such elimination is in the public interest.

A prime reason for the imposition of the mandatory licensing requirement in 1956 was AT & T’s anticompetitive hold on telecommunications and electronics technology.

189

But this technology has advanced rapidly since then, and has become much more widely dispersed, so that AT

&

T now faces significant challenges in research and development both from established domestic firms and from powerful foreign competitors. The need for continued compulsory licensing of patents, therefore, is diminished on this basis alone.

Divestiture of the Operating Companies may be expected vastly to accelerate this trend. Until now, AT & T’s research and development have been financed primarily through the licensing contracts with the local Operating Companies. As long as rate-payer-financed local exchange revenues were supporting this research and development, it made sense to require AT & T to share the fruits of its monopoly financing with others. But under the proposed decree, the licensing contracts will be terminated, and this rationale for exclusive licensing thus falls.

Moreover, AT & T would be forced after divestiture to fund its research and development just like other competitive enterprises — without an artificial subsidy from captive ratepayers. That being so, unless compulsory licensing is eliminated, AT & T would be placed at a significant disadvantage vis-a-vis its competitors: of all those who would be active in the development of new technology, it alone would be compelled to furnish its patents to those who might be interested,

190

including all of its domestic and foreign competitors.

191

Some of AT & T’s competitors contend next that compulsory licensing is necessary to ensure that equipment manufacturers and interexchange carriers receive the interface information necessary to interconnect with the local exchange network. There is no basis for such claims. As stated in Subpart C

supra,

after the divestiture, the local Operating Companies, not AT & T, will possess and generate the information necessary for interconnection. The proposed decree requires AT & T to provide

*177

these Operating Companies with,

inter alia,

sufficient technical information to permit them to perform their exchange telecommunications and exchange access functions. Proposed Decree, Section 1(A)(1). The Operating Companies, in turn, are prohibited from discriminating in the “establishment and dissemination of technical information and procurement and interconnection standards.” Section 11(B)(2).

192

And since the Operating Companies will neither manufacture equipment nor provide interexchange services, they will have no incentive to favor Western Electric or Long Lines to the detriment of other intercity service providers and equipment manufacturers.

For these reasons, the Court concludes that the provisions in the proposed decree which would eliminate the patent licensing provisions imposed in 1956 are not inconsistent with the public interest.

193

Somewhat different considerations apply to licensing relationships between AT & T and the local Operating Companies. These companies have not only relied on the research of Bell Laboratories; through the licensing contracts they have provided direct financial support for that research. In addition, access to the patents and technical information owned by AT & T is necessary if the Operating Companies are to perform properly their exchange telecommunications and access functions. For these reasons, the Court would be reluctant to approve the proposed decree were the Operating Companies to be spun off without patent and research resources. That, however, is not the case.

Under the terms of the proposed decree, the Operating Companies must be given the technical information needed to perform their functions. Proposed Decree, Section 1(A)(1).

194

As part of its compliance with this requirement, 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. See,

e.g.,

AT & T Reply Comments at 123. AT & T has also agreed to provide the Operating Companies with non-patentable technical information that has been funded by the license contracts. Specifically, it has stated (AT & T Reply Comments at 123-34, n. **):

To the extent License Contract work in progress upon the date of divestiture yields useful technical information thereafter, such information shall also be made available to the BOCs for an appropriate period after divestiture. In addition, technical information concerning Western Electric products and systems will be made available to the extent necessary for the BOCs to procure, or otherwise contract for, compatible equipment and systems from other manufacturers.

Finally, the parties have assured the Court that the Operating Companies will have the right to sublicense the AT & T patents and technical information to those providing them with goods and services. See,

e.g.,

Department of Justice Response to Comments at 38-39.

These representations are adequate to support the conclusion that the Operating Companies will possess the necessary patent and technical information resources. The assurances must, of course, be implemented by means of appropriate details in the reorganization plan, and when that plan is submitted pursuant to the procedures set forth in Part XI

infra,

the Court will evaluate these details to make certain that they conform to the general principles implied by these assurances.

*178

VI

The 1956 Decree and Line of Business Restrictions

The basic agreement embodied in the 1956 consent decree in the

Western Electric

case

195

was that AT & T would not be required to divest itself of Western Electric, provided that AT & T would restrict its operations to the provision of common carrier communications services

196

and that Western Electric would manufacture only the types of equipment used by the Bell System.

197

The decree which has now been submitted by the parties would eliminate all of the restrictions of the 1956 consent judgment. If that decree is entered by the Court, AT & T would be free to enter the computer market as well as to provide the full range of so-called information services.

198

There has been no serious opposition to the entry of AT & T into manufacturing and marketing of computers and other electronic equipment, and there is no question that this development would be in the public interest.

199

It will accordingly be ap

*179

proved. By contrast, others who have submitted comments object to AT & T’s entry into the information services market.

“Information services” are defined in the proposed decree at Section IV(J) as:

the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information which may be conveyed via telecommunications ....

Two distinctly different types of information services fall within this general category: services which would involve no control by AT & T over the content of the information other than for transmission purposes (such as the traditional data processing services), and services in which AT & T would control both the transmission of the information and its content (such as news or entertainment). Because these two types of services raise different concerns, they will be addressed separately.

A.

Data Processing and Other Computer-Related Services

As technology has advanced, the line between communications and data processing has become blurred. Advances in communications technology, for example, now allow otherwise incompatible computers to converse with each other. New sophisticated telephone equipment located on a customer’s premises not only performs switching and call routing functions but it also retrieves information much as does a traditional computer. Even ordinary telephones may be capable of performing functions that formerly required the support of a separate computer.

200

Providers of data processing services— like others who have commented on the decree in other contexts — contend that AT & T should be prohibited from entering these fields because of its market power in the area of interexchange services. Shaping the argument to support their particular interests, these persons contend that AT & T will use the monopoly profits from its interexchange services to subsidize its computer-related services, and that it will use its control over the interexchange network to discriminate against other data processing competitors in providing access to that network.

As explained in Part V

supra,

there is little possibility that AT & T will be able to use its revenues from the interexchange market to subsidize its prices for computer services. That being true, AT & T would not possess any anticompetitive advantages over competitors on this basis, and the possibility of cross subsidization as a basis for rejecting this portion of the proposed decree may therefore be completely discounted.

The discrimination argument is slightly more serious. Since AT & T will be offering its own computer-related services, it may well have an incentive to discriminate in transmitting competitors’ services. But what defeats the objections is that AT & T’s actual ability to discriminate is quite remote. This segment of the information services industry is already well established, comprised of some of the nation’s leading corporate giants, as well as of many smaller concerns. The FCC has found that “[tjhere are literally thousands of unregulated computer service vendors offering competing services connected to the interstate telecommunications network.”

Computer II, supra,

77 F.C.C.2d at 426. These strongly competitive conditions will limit AT & T’s ability to practice discrimination in two ways. First, AT & T’s competitors will have the economic resources necessary to combat any attempt at discrimination. Second, the growing demand for informa

*180

tion services will necessarily increase the demand for transmission facilities for these services. Such an increase in demand is likely to stimulate AT & T’s interexchange competitors to offer satisfactory alternatives to the AT & T network,

201

and any attempt by AT & T to discriminate would only further enhance this eventuality.

This fairly limited possibility of discrimination clearly does not outweigh the substantial advantages to the public that would be gained by allowing AT & T to develop this new technology. AT & T’s entry into these technologically sophisticated fields will stimulate competition, and it is therefore likely to produce further technological advances, new products, and better services — all of which are likely to benefit the American consumer, American foreign trade, and national defense.

Since AT & T’s participation in these areas will foster the traditional objectives of the Sherman Act and is not likely to lead to anticompetitive practices,

202

the Court will not sustain the objections to this aspect of the proposed decree.

203

B.

Electronic Publishing

Services

204

The second type of information service which AT & T would be permitted to provide under the proposed decree are those services in which it would control, or have a financial interest in, the content of the information being transmitted. Those services are generally referred to as electronic publishing or information publishing services.

205

A number of organizations have objected to entry of the proposed decree unless it is modified to include a ban on electronic publishing. However, the decree itself does not specifically refer to the concept of electronic publishing, let alone provide a suitable definition. In order to conduct a meaningful discussion of the relevant issues, therefore, electronic publishing must first be defined. After drawing on various sources,

206

the Court has concluded that, for

*181

purposes of this opinion, electronic publishing

207

will be regarded as:

the provision of any information which a provider or publisher has, or has caused to be originated, authored, compiled, collected, or edited, or in which he has a direct or indirect financial or proprietary interest, and which is disseminated to an unaffiliated person through some electronic means.

208

A number of persons have argued that because of potential dangers to competition and to First Amendment values, AT & T should be prohibited from engaging in such activities. For the reasons stated below, the Court agrees.

The threat to competition that is claimed to be posed by AT & T in this industry is that, through the use of cross-subsidization and customer discrimination, it will use its power in the interexchange market to disadvantage competing electronic publishers.

209

While the possibility of cross-subsidization is as remote here as it is with respect to other subjects considered herein,

210

there is a real danger that AT & T will use its control of the interexchange network to undermine competing publishing ventures.

AT & T could discriminate against competing electronic publishers in a variety of ways. It could, for example, use its control over the network to give priority to traffic from its own publishing operations over that of competitors. A second concern is that, inasmuch as AT & T has access to signalling and traffic data, it might gain proprietary information about its competitors’ publishing services. Furthermore, it appears that AT & T would have both the incentive and the opportunity to develop technology, facilities, and services that favor its own publishing operations and the areas served by these operations rather than the operations of the publishing industry at large. Similarly, AT & T could discriminate in interconnecting competitors to the network and in providing needed maintenance on competitors’ lines. Finally, AT & T might submit tariffs that would have the effect of favoring AT & T’s publishing operations to the disadvantage of competing concerns.

AT & T and the Department of Justice provide the same response to these arguments that they make in other contexts: that market forces will curtail AT & T’s ability effectively to engage in these practices. In the absence of special problems

*182

and concerns relating only to the electronic publishing industry, the Court probably would, as it has in other instances, accept that response. However, in the view of the Court a different conclusion is appropriate here, for the peculiar characteristics of the electronic publishing market would both render anticompetitive acts more damaging to AT & T’s competitors in that market and insulate such acts from correction by market forces.

The electronic publishing industry is still in its infancy. Although this business may some day be a very significant part of the American communications system, at present, and most likely for the next several years, a small number of relatively small firms will be experimenting with new technology to provide services to an American public that is, for the most part, still almost totally unfamiliar with them. There can be no doubt that, if AT & T entered this market, the combination of its financial, technological, manufacturing, and marketing resources would dwarf any efforts of its competitors.

211

In fact, AT & T’s mere presence in the electronic publishing area would be likely to deter other potential competitors from even entering the market.

It is also readily apparent that competitors in the electronic publishing industry— far more so than competitors in any other industry — could easily be crushed were AT & T to engage in the types of anticompeti-tive behavior described above. Unlike most products and services, information in general and news in particular are by definition especially sensitive to even small impediments or delays. Information is only valuable if it is timely; by and large it is virtually worthless if its dissemination is delayed. This quality is especially important in electronic publishing because up-to-date information and constant availability are the features likely to be sought by subscribers.

The trial record in the

AT & T

case reveals many instances when AT & T was slow to respond to the needs of competitors, both in providing essential products or parts and in servicing these products and parts.

212

Any delays of that kind, were they to occur in the context of the transmission of electronic publishing information, would quickly cause subscribers to desert their unreliable publishers and thus cripple AT & T’s competitors in that business.

Finally, electronic publishers remain more dependent upon the AT & T network than others in the telecommunications business. In some areas, AT & T is the sole provider of intercity services. Elsewhere, where competition does exist, the other common carriers — although capable of handling voice transmissions — frequently lack the sophisticated facilities necessary to meet the needs of the electronic publishers.

213

Systems that are specifically designed to transmit data do not provide a satisfactory solution; most of these systems lease part, if not all, their facilities from AT & T. Nor are satellites the answer, for at least for the present they do not appear to present a realistic alternative, given their restricted availability, potential transmission problems, and high costs.

Thus, even if AT & T should engage in anticompetitive activity, publishers would

*183

have no realistic alternative transmission system by which to reach their subscribers. The low level of demand for these services that exists at present makes it unlikely that competing interexchange carriers would construct transmission systems to be used solely for the delivery of electronic publishing services, and publishers would therefore be forced to accept the inferior services provided by AT & T.

Based on competitive considerations alone, therefore, the Court might well be justified in barring AT & T from electronic publishing industry. Beyond that, AT & T’s entry into the electronic publishing market poses a substantial danger to First Amendment values.

The goal of the First Amendment is to achieve “the widest possible dissemination of information from diverse and antagonistic sources.”

Associated Press v. United States,

326 U.S. 1, 20 , 65 S.Ct. 1416, 1424 , 89 L.Ed. 2013 (1945). See also

FCC

v.

National Citizens Committee for Broadcasting,

436 U.S. 775, 795 , 98 S.Ct. 2096, 2112 , 56 L.Ed.2d 697 (1978). This interest in diversity has been recognized time and again by various courts. In

Red Lion Broadcasting v. FCC,

395 U.S. 367, 390 , 89 S.Ct. 1794, 1806 , 23 L.Ed.2d 371 (1969), for example, the Supreme Court observed that

[i]t is the purpose of the First Amendment to preserve an uninhibited marketplace of ideas in which truth will ultimately prevail, rather than to countenance monopolization of that market.

See also

New York Times Co. v. Sullivan,

376 U.S. 254, 270 , 84 S.Ct. 710, 720 , 11 L.Ed.2d 686 (1964). Judge Learned Hand, speaking for the Court of Appeals for the Second Circuit, similarly noted that the media serve “one of the most vital of all general interests: the dissemination of news from as many different sources, and with as many different facets and colors as possible.”

214

United States v. Associated Press,

52 F.Supp. 362, 372 (S.D.N.Y.1943),

aff’d,

321 U.S. 1 , 64 S.Ct. 397 , 88 L.Ed. 497 (1945).

215

The striving for diversity in sources of information has found expression not merely in the traditional and constitutional prohibition on control of news by government but also in some private contexts, notably in regard to the broadcast media. The Federal Communications Commission is charged by the Communications Act with granting broadcast licenses in the “public interest, convenience and necessity.” 47 U.S.C. §§ 301 , 303, 307, 309. Pursuant to that public interest standard, the Commission has time and again adopted rules designed to promote diversity among the broadcast media.

216

These rules, and the policies underlying them, have repeatedly been sustained by the Supreme Court and the Court of Appeals for this Circuit.

For example, in

United States v. Storer Broadcasting Co.,

351 U.S. 192, 201-04 , 76 S.Ct. 763, 769-771 , 100 L.Ed. 1081 (1956), the Supreme Court, recognizing the impor

*184

tance of diversity and the authority of the FCC to determine the public interest, upheld rules placing limitations on the total number of broadcast stations a person may own or control. See also,

National Broadcasting Co. v. United States,

319 U.S. 190 , 63 S.Ct. 997 , 87 L.Ed. 1344 (1943). Likewise, in

FCC v. National Citizens Committee for Broadcasting,

436 U.S. 775 , 98 S.Ct. 2096 , 56 L.Ed.2d 697 (1978), the Court sustained regulations which banned the award or transfer of a broadcast license where there was a common ownership of a broadcast station and a daily newspaper located in the same locality, stating ( 436 U.S. at 801-02 , 98 S.Ct. at 2115),

... the Commission has acted ‘to enhance the diversity of information heard by the public .... ’ The regulations are a reasonable means of promoting the public interest in diversified mass communications.

217

Certainly, the Court does not here sit to decide on the allocation of broadcast licenses. Yet, like the FCC, it is called upon to make a judgment with respect to the public interest and, like the FCC, it must make that decision with respect to a regulated industry and a regulated company.

In determining whether the proposed decree is in the public interest, the Court must take into account the decree’s effects on other public policies, such as the First Amendment principle of diversity in dissemination of information to the American public. See Part II

supra.

Consideration of this policy is especially appropriate because, as the Supreme Court has recognized, in promoting diversity in sources of information, the values underlying the First Amendment coincide with the policy of the antitrust laws.

FCC v. National Citizens Committee for Broadcasting, supra,

436 U.S. at 800, n. 18 , 98 S.Ct. at 2114, n. 18.

Applying this diversity principle to the issue here under discussion, it is clear that permitting AT & T to become an electronic publisher will not further the public interest.

During the last thirty years, there has been an unremitting trend toward concentration in the ownership and control of the media. Diversity has disappeared in many areas; newspapers have gone out of business; others have merged; and much of the flow of news and editorial opinion appears more and more to be controlled and shaped by the three television networks and a handful of news magazines and metropolitan newspapers.

This concentration presents obvious dangers even today. Unless care is taken, both the concentration and the attendant dangers will be significantly increased by the new technologies. Indeed, it is not at all inconceivable that electronic publishing, with its speed and convenience will eventually overshadow the more traditional news media, and that a single electronic publisher would acquire substantial control over the provision of news in large parts of the United States. See also Part IV(A)

supra.

218

*185

The concentration that now exists in the media has presumably been brought about by impersonal economic and technological forces, and it is obviously beyond the concern of this or any other court. But the particular concentration that may emerge from the proposed decree is subject to the Court’s jurisdiction in this antitrust case as part of the instant proceeding. Not only is AT & T a regulated company, and not only does the proceeding stem directly from serious charges of anticompetitive conduct, but the Court has been mandated not to approve the proposed decree unless it finds it to be in the public interest. AT & T’s ability, described above, to use its control of the interexchange network to reduce or eliminate competition in the electronic publishing industry is the source of this threat to the First Amendment principle of diversity.

In sum, for a variety of reasons, the entry of AT & T into electronic publishing involves risks to the public interest that are greater than those which would be involved by that company’s entry into other markets. Since under the Sherman Act, it is appropriate to bar a company from a market if the restriction is necessary to permit the development of competition in that market

(Ford Motor Co. v. United States, supra,

405 U.S. at 577-78, 92 S.Ct. at 1151-52),

219

and since First Amendment values, too, support a ban on electronic publishing by AT & T, the Court will require that the company be prohibited from entering that market.

220

At the same time, a prohibition on electronic publishing does not impose an undue burden on AT & T.

221

The company is free to enter all the other computer, computer-related, and information services markets; and it will simply be barred from the creation or control of the information to be transmitted.

222

AT & T may thus fulfill its traditional function of providing a delivery system for information which others wish to transmit, and it may also manufacture and market equipment for the electronic publishing industry and provide transmission services for other electronic publishers.

223

*186

The restriction on electronic publishing— like any limitation on competition — should only remain in effect for the period necessary to establish conditions conducive to free and fair competition. Since it is not likely that the factors enumerated above which militate against AT & T’s immediate entry into the electronic publishing market will continue to exist indefinitely, the Court will place a time limit on its prohibition. See

Ford Motor Co. v. United States, supra,

405 U.S. at pp. 562, 575 n. 10, 92 S.Ct. at pp. 1142, 1150 n. 10, where the Court upheld an antitrust decree that prohibited Ford from entering the spark plug manufacturing business but limited that prohibition to a period of ten years.

Section VII of the proposed decree allows modifications to be made in its provisions upon the application of a party or an Operating Company. It is the intention of the Court to remove the prohibition on electronic publishing at the end of seven years from the entry of the decree should application for such removal be made pursuant to Section VII. That seven-year period should be sufficient for the development of electronic publishing as a viable industry, for the acquisition of sufficient strength by individual publishers adequate to permit them to compete, and for the development of means other than the AT & T network for the transmission of the messages of electronic publishers. During that same period, the new AT & T will also have acquired a track record with respect to behavior toward its competitors in other areas of the telecommunications business.

224

VII

Restrictions on the Divested Operating Companies

The proposed decree limits the Operating Companies, upon their divestiture, to the business of supplying local telephone service. In addition to a general prohibition against the provision of “any product or service that is not a natural monopoly service actually regulated by tariff,” there are more specific restrictions in Section 11(D) which deny the Operating Companies the opportunity to engage in the following activities: (1) the provision of interexchange services; (2) the provision of information services; (3) the manufacture of telecommunications products and customer premises equipment; (4) the marketing of such equipment and (5) directory advertising, including the production of the “Yellow Pages”

225

directories.

226

Restrictions of this type may validly be imposed if they are necessary to prevent the occurrence or recurrence of anticompet-itive conduct.

Ford Motor Co. v. United States, supra,

405 U.S. at 577-78, 92 S.Ct. at 1151-52. See Part II

supra.

However, as the Department of Justice

227

concedes, such restrictions deserve “the most careful scrutiny” to ensure both that they will have the desired effect and that they will not actually limit competition by unnecessarily barring a competitor from a market. Department of Justice Response to Comments at 56.

*187

These restrictions are justified, according to the Department, because the Operating Companies will have “both the ability and the incentive” to thwart competition in these markets by leveraging their monopoly power in the intraexchange telecommunications market.

228

In the absence of the restrictions, it is reasoned, the Operating Companies will be able (1) to subsidize their prices in competitive markets with supra-competitive profits earned in the monopoly market, and (2) to hinder competitors by restricting their access to the intraexchange network. In short, it is the Department’s view that the divested Operating Companies may appropriately be equated with the present Bell System complex in that, if permitted to enter competitive markets, they may be expected to engage in the same type of anticompetitive behavior that was the crux of the

AT & T

lawsuit.

The government’s approach, while not without conceptual neatness, fails to take account of circumstances far more complex than these undifferentiated rules acknowledge. The Bell System is a vast, vertically integrated company which dominates local telecommunications, intercity telecommunications, telecommunications research, and the production and marketing of equipment. Each of the divested Operating Companies will have a monopoly in only one geographic portion of one of these markets — local telecommunications. . In addition, the Bell System as presently constituted has few powerful competitors in any of the activities in which it is engaged. The Operating Companies, by contrast, will, if permitted to enter competitive markets, be faced with the most potent conceivable competitor: AT & T itself. Thus, the only similarity between the divested Operating Companies and the present Bell System is that both possess a monopoly in local telecommunications.

That single circumstance — important though it may be — is not a sufficient basis upon which to restrict competition generally in the name of the antitrust laws. If this were the case, all monopolies might have to be barred from competitive industries, and even the Department of Justice acknowledges that this drastic remedy is not required. See Response to Comments at 55. The Tunney Act’s public interest standard permits the Operating Companies to be barred from a competitive market only if there is a substantial possibility that they will use monopoly power to impede competition in that market. Two basic factors are relevant to this determination.

The restrictions are based upon the assumption that the Operating Companies, were they allowed to enter the forbidden markets, would use their monopoly power in an anticompetitive manner. It is accordingly necessary for the Court first to determine whether these companies will actually have the incentive and opportunity to act anticompetitively.

229

Second, the restrictions are, at least in one sense, directly anticompetitive because they prevent a potential competitor from entering the market. The Court must accordingly also consider the extent to which the participation of the Operating Companies would contribute to the creation of a competitive market.

230

In addition, the Court must assess the effect of the restrictions upon other important public policies. Many persons,

231

including particularly the States, claim that

*188

these restrictions would have adverse consequences in that they would either undermine the financial viability of the divested Operating Companies, or produce substantial increases in the rates for local telephone service, thus eroding the statutory goal of universal telephone service for all Americans. See 47 U.S.C. § 151 .

232

This factor, to be sure, cannot preclude the imposition of a restriction necessary to preclude the anticompetitive activity; but to the extent that a restriction does not have a procom-petitive effect, it may not be imposed if it infringes upon other important public policies. See generally Part II

supra.

The Court will examine the various substantive provisions in light of these general principles.

233

A.

Interexchange Services

The proposed decree prohibits the divested Operating Companies from providing in-terexchange services. This restriction is clearly necessary to preserve free competition in the interexchange market.

Access to the local exchange is essential for all interexchange carriers and, as the evidence in the

AT & T

action has suggested, there are many ways in which the company controlling the local exchange monopoly could discriminate against competitors in the interexchange market. See Part IV

supra.

After divestiture, the incentive of those who control the local networks to engage in such activity will remain unchanged: they would stand to gain business if other carriers were disadvantaged by poor access arrangements and high tariffs.

To permit the Operating Companies to compete in this market would be to undermine the very purpose of the proposed decree — to create a truly competitive environment in the telecommunications industry. The key to interexchange competition is the full implementation of the decree’s equal exchange access provisions. See Part VIII

infra.

If the Operating Companies were free to provide interexchange service in competition with the other carriers, they would have substantial incentives to subvert these equal access requirements. The complexity of the telecommunications network would make it possible for them to establish and maintain an access plan that would provide to their own interexchange service more favorable treatment than that granted to the other carriers. Such a result would perpetuate the very inequalities that the proposed decree is designed to eliminate. Finally, the Operating Companies would also have the ability to subsidize their interexchange prices with profits earned from their monopoly services.

Those who object to this restriction suggest (1) that the Operating Companies would provide additional competition in the interexchange market and (2) that revenues from interexchange operations would increase that viability and reduce the need for local rate increases. These objections

*189

have little merit in this context. If the Operating Companies entered the interex-change market and competed fairly, without exploiting their local monopoly positions, the resulting increase in competition would not be substantial.

234

Moreover, the Operating Companies could realistically recoup substantial profits from their interex-change operations only by using their monopoly power to disadvantage competitors.

235

But that, of course, would be precisely the behavior which brought about the 1974 lawsuit against AT & T and the current proposal for a decree. In short, there are clear, and indeed overwhelming, pro-competitive justifications for this restriction.

236

B.

Information Services

The proposed decree prohibits the Operating Companies from providing information services, an umbrella description of a variety of services including electronic publishing and other enhanced uses of telecommunications.

237

This prohibition is necessary for reasons similar to those justifying the restriction on interexchange services, as well as for additional reasons not relevant to the interexchange problem.

All information services are provided directly via the telecommunications network. The Operating Companies would therefore have the same incentives and the same ability to discriminate against competing information service providers that they would have with respect to competing interex-change carriers. Here, too, the Operating Companies could discriminate by providing more favorable access to the local network for their own information services than to the information services provided by competitors, and here, too, they would be able to subsidize the prices of their services with revenues from the local exchange monopoly.

238

There is also the effect on the configuration of the local networks to consider. Many of the competitive problems in the interexchange market resulted from the fact that competition was introduced after AT & T had designed the local networks to service only its own Long Lines department. If the Operating Companies are excluded from the information services market, they will have an incentive, as time goes on, to design their local networks to accommodate the maximum number of information service providers, since the greater the number of carriers the greater will be the Operating Companies’ earnings from access fees. Thus, competition will be encouraged from the outset. If, however, the Operating Companies were permitted to provide their own information services, their incentive would be the precise opposite: it would be to design their local net

*190

works to discourage competitors, and thus to thwart the development of a healthy, competitive market.

239

The restriction on the provision of information services by the Operating Companies has been attacked on the ground that it will remove their incentive to upgrade the local networks and will cause them, to become technological backwaters.

240

This claim underrates the role of the Operating Companies under the proposed decree. These companies will carry traffic between the information service providers and their subscribers; their networks will therefore have to be capable of carrying these technologically advanced services; and they will have a' financial incentive to create this capability because they will earn access charges for providing this service.

241

For all of these reasons, the imposition of this restriction is fully consistent with the antitrust laws.

C.

Manufacture of Equipment

The provision in the proposed decree which prohibits the Operating Companies from manufacturing telecommunications equipment and customer premises equipment (CPE)

242

is also an outgrowth of the government’s case in the

AT & T

action. The basic rationale of the procurement portion of that case was that

a combination of vertical integration and rate-of-return regulation . .. tended to generate decisions by the Operating Companies to purchase equipment produced by Western [Electric] that is more expensive or of less quality than that manufactured by the general trade.

United States v. AT & T, supra,

524 F.Supp. at 1373. The government presented evidence to support this theory, which tended to show that AT & T headquarters and the service components of the Bell System — the Bell Operating Companies and the Long Lines Department — engaged in systematic efforts to disadvantage outside suppliers.

Id.

at 1371-74. See also Part IV

supra.

That theory and that evidence directly support the proposed prohibition on the manufacture of equipment by the Operating Companies.

There is a substantial likelihood that, should the Operating Companies be permitted to manufacture telecommunications equipment, nonaffiliated manufacturers would be disadvantaged in the sale of such equipment and the development of a competitive market would be frustrated. The Operating Companies would have an incentive to subsidize the prices of their equipment with the revenues from their monopoly services as well as to purchase their own equipment, even though it was more expensive and not of the highest quality. In that respect, the Operating Companies lack the competitive restraints that ordinarily prevent the typical vertically-integrated company from engaging in such practices: the absence of competition in the end product market — exchange telecommunications— immunizes these purchasing decisions from competitive pressures. The Operating Companies therefore would be able to pay inflated prices for poor quality equipment and to reflect these costs in their rates without suffering a diminution in revenues.

*191

See

United States v. AT & T, supra,

524 F.Supp. at 1373.

243

Moreover, if they were permitted to manufacture CPE, the Operating Companies would have substantial incentives to favor their own manufacturing arms by providing to them information regarding changes in network standards, thus permitting them to gain an advantage over non-affiliated manufacturers.

244

In addition, they could subsidize the price of this equipment with revenues from the exchange monopoly.

The risks of anticompetitive behavior are not quite as severe as those which exist in connection with the' provision of interex-change and information services. However, they are sufficient to support the imposition of the restriction, especially because the entry of the Operating Companies into this market would not provide any substantial impetus to competition or make any significant contribution to the reduction of local rates. The CPE manufacturing industry already contains numerous competitors, including large domestic and foreign firms, and it is wholly unlikely that the Operating Companies could earn supracompetitive profits in this market that would enable them to subsidize local telephone service. The minimal additional competition which they could provide does not outweigh the substantial possibility that they will engage in anticompetitive conduct.

D.

Marketing of Customer Premises Equipment

The proposed decree would also prohibit the Operating Companies from selling or leasing customer premises equipment.

245

While the Department of Justice’s comments and briefs tend to blur the distinction between manufacturing and marketing, in fact the restrictions on the two activities present wholly different considerations. Based upon a realistic assessment, marketing of CPE presents little potential for anti-competitive behavior by the Operating Companies. While the Operating Companies would have the theoretical ability to engage in the types of anticompetitive activities which support the prohibition on manufacturing of CPE, their incentives and their practical ability to do so would be minimal.

Anticompetitive activities undertaken by two separate corporations rather than by two components of the same corporation are likely to be far more difficult to accomplish because of increased problems of coordination and the greater possibility of detection. For example, it would be quite difficult for an Operating Company to conspire successfully with a manufacturer to provide advance information about revised network standards or to impose interconnection restrictions which favored that manufacturer’s products and no one else’s.

246

*192

The possibility of successful subsidization of CPE prices with local exchange revenues appears remote for several reasons. First, since the two businesses are so completely different, the Operating Companies would have little ability to engage in cross subsidization by the sharing of common costs. Second, the participation of a second company would probably make cross subsidization far easier to detect.

247

Third, the second company’s participation in most of the schemes would most likely reduce the profits which the Operating Companies could reap. When these increased risks of detection are combined with the decreased financial gain, it is clear that the incentives for participation of the Operating Companies in cross subsidization schemes are substantially reduced.

As against these 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. Under the proposed decree, AT & T will retain both the embedded customer premises equipment and the existing network of retail outlets.

248

These factors, combined with Western Electric’s large market share, will, at a minimum, ensure its continuation as a formidable provider of CPE for a considerable period of time. The Operating Companies, with their .existing relationship to telephone users, are more likely than any other competitive entity to provide an effective counterbalance to AT & T’s market strength and thereby to promote a genuinely competitive market.

249

The Court concludes that, for the reasons stated,

250

the prohibition on marketing by the Operating Companies of customer premises equipment is not in the public interest, and it will therefore require that

*193

the proposed decree be modified to eliminate this prohibition.

251

E.

Directory Advertising

Each Bell Operating Company presently publishes Yellow Pages directories for its service area.

252

The proposed decree would bar the divested Operating Companies from all activities related to directory advertising, including the production of the so-called Yellow Pages.

253

This restriction lacks an appropriate basis and is not in the public interest.

Neither of the reasons underlying the other restrictions on the Operating Companies — the need to prevent cross subsidization and the importance of preventing competitor discrimination — has any relevance to the printed directory market.

254

All parties concede that the Yellow Pages currently earn supra-competitive profits. See,

e.g.,

the Department of Justice Response to Comments at 71. There is no warrant therefore for proceeding on the premise that the advertising prices charged by the Operating Companies are artificially low as the result of a subsidy from local exchange service. Similarly,' there is no possibility of improper discrimination by the Operating Companies against competing directory manufacturers since access to the local exchange network is not required for production of a printed directory.

255

In short, the Operating Companies would have little or no ability to discriminate against competitors in the printed directory market, and this restriction thus has no procompeti-tive justification whatever.

256

To the contrary, the prohibition on directory production by the Operating Companies is distinctly anticompetitive in its effects, for at least two reasons. In the first place, the production of the Yellow Pages will be transferred from a number of smaller entities to one nationwide company — AT & T.

257

This type of concentration is itself

*194

anathema to the antitrust laws. Furthermore, possession of the franchise for the printed directories will give AT & T a substantial advantage over its competitors in providing electronic directory advertising

258

—a market in which the Operating Companies will not be engaged.

In addition to these factors directly related to competition, there are other reasons why the prohibition on publication of the Yellow Pages by the Operating Companies is not in the public interest. All those who have commented on or have studied the issue agree that the Yellow Pages provide a significant subsidy to local telephone rates. This subsidy would most likely continue if the Operating Companies were permitted to continue to publish the Yellow Pages.

The loss of this large subsidy would have important consequences for the rates for local telephone service. For example, the State of California claims that a two dollar increase in the rates for monthly telephone service would be necessary to offset the loss of revenues from directory advertising.

259

Other states assert that increases of a similar magnitude would be required.

260

Evidence submitted during the

AT & T

trial indicates that large rate increases of this type will reduce the number of households with telephones and increase the disparity, in terms of the availability of telephone service, between low income and well-off citizens.

261

This result is clearly contrary to the goal of providing affordable telephone service for all Americans.

262

In addition, as noted in Part III(C)

supra,

the Court must take care to intrude upon state regulation only to the extent necessary to vindicate the federal interest embodied in the antitrust laws. Where, as here, that interest is not furthered, intrusion constitutes an impermissible imposition upon the States.

For these various interrelated reasons, the Court concludes that the prohibition, express or implied, on publication by the Operating Companies of the Yellow Pages directories is not in the public interest. It will therefore require that the proposed judgment be modified to specify that there will be no such prohibition.

263

F.

Removal of the Restrictions

It is probable that, over time, the Operating Companies will lose the ability to leverage their monopoly power into the competitive markets from which they must now be barred. This change could occur as a result of technological developments which eliminate the Operating Companies’ local exchange monopoly or from changes in the structures of the competitive markets. In either event, the need for the restrictions upheld in Subparts A through C will disap

*195

pear, and the decree should therefore contain a mechanism by which they may be removed.

264

Recognizing this fact, the Department of Justice has undertaken to report to the Court every three years concerning the continuing need for the restrictions imposed by the decree. Response to Comments at 62. In addition, both parties have agreed that the restrictions may be removed over the opposition of a party to the decree when the Court finds that “the rationale for [the restriction] is outmoded by technical developments.” Department of Justice Brief at 32-33; AT & T Brief at 18.

The standard for removal of restrictions proposed by the parties incorporates the Department of Justice’s view that the restrictions are justified by the mere existence of monopoly power. However, in the opinion of the Court, the removal of the restrictions should be governed by the same standard which the Court has applied in determining whether they are required in the first instance. Thus, a restriction will be removed upon a showing that there is no substantial possibility that an Operating Company could use its monopoly power to impede competition in the relevant market.

265

See pp. 187-188

supra.

To avoid any question about the appropriate test

266

the standard for removal of the restrictions should be explicitly incorporated into the decree.

267

VIII

Equal Exchange Access

One of the government’s principal contentions in the

AT & T

case was that the Operating Companies provided interconnections to AT & T’s intercity competitors which were inferior in many respects to those granted to AT & T’s own Long Lines Department. There was ample evidence to sustain these contentions. See Part IV

supra.

Although after divestiture the Operating Companies will no longer have the same incentive to favor AT & T, a substantial AT & T bias has been designed into the integrated telecommunications network, and the network, of course, remains in that condition. It is imperative that any disparities in interconnection be eliminated so that all interexchange and information service providers will be able to compete on an equal basis.

*196

The Court has examined the equal access provisions of the decree and it is satisfied that, with limited exceptions, they meet the public interest standard.

A.

General Principles

The governing principle established by the proposed decree is that by September 1, 1986, the Operating Companies must provide access services

268

to interexchange carriers and information service providers which are “equal in type, quality, and price” to the access services provided to AT & T and its affiliates. Section 11(A). This broad guarantee of equal treatment, when implemented, will effectively remove any interconnection-type obstacles to free competition between AT & T and the other carriers;

269

it therefore comports with the public interest and will be endorsed and enforced by the Court.

270

As indicated, the equal access requirement does not become effective immediately. There is a phase-in period: the Operating Companies must begin offering equal access by 1984; carriers must be able to obtain equal access for one-third of their subscribers by 1985; and such access must be furnished to all subscribers “upon bona fide request” by 1986. The decree also fails to specify the manner in which equal access will be provided; rather, it permits each Operating Company to devise an appropriate plan to fulfill this requirement.

271

The Court finds these provisions to be reasonable and not inconsistent with public interest. Major changes in switching equipment — such as those that will be necessary to provide equal access to all interex-change and information providers — realistically take months or in some instances

*197

years to accomplish.

272

For that reason, the Court could not expect equal access to be achieved immediately or to be phased-in on a more expedited basis than is contemplated in the proposed decree.

273

Similarly, since the Bell System network is both vast and complex, a variety of approaches will in all probability be necessary to achieve equal access. Imposition by the Court of a single procedure applicable to all areas and all interconnection requirements is likely to create inefficiencies and impose added costs on the Operating Companies without achieving superior results.

The Court therefore finds that, generally speaking,

274

the means provided in the proposed decree to achieve equal access are adequate to protect the public interest.

B.

Exceptions to Equality

The proposed decree contains some exceptions to the broad mandate of equality. These exceptions must be closely scrutinized to determine whether they will give AT & T an unjustified advantage over other carriers and thus obstruct the development of free competition.

275

First. Long distance calls may presently be placed over the AT & T network by dialing ten or eleven digits while twenty-two or twenty-three digits are necessary to use the facilities of the other interexchange carriers. This substantial disparity in dialing convenience has had a significant negative impact on competition.

276

Under the proposed decree, this disparity will be drastically reduced, but some difference in the number of digits will remain: fourteen digits'will be needed for the use of the facilities of a competing carrier while ten or eleven will be required for calls placed over the AT & T network.

277

,

The reason given by the parties for this continued distinction is that full dialing parity is impossible without a change in the national area numbering plan. It appears, furthermore, that a change in that plan for all the telephone instruments in the United States would be both difficult and costly. When the FCC orders a revision in that plan — which it apparently has the authority to do at any time — the dialing parity which is in keeping with the equality principles of the proposed decree will in fact be achieved.

It is inappropriate for the Court to order such a change in advance of the FCC-required change-over; the difference in the required number of digits simply does not present an obstacle to competition sufficient to require the expense and effort involved in an early change in the plan.

278

*198

This conclusion is buttressed by the requirement in the proposed decree that the divested Operating Companies provide a service which will permit a subscriber to route his calls automatically to a single interex-change carrier other than AT & T. Appendix B(A)(2)(ii).

279

By means of this service, the subscriber will be able to use that carrier’s network by dialing only the same ten or eleven digits that are required of an AT & T subscriber. „

Second. Another exception to full equality is a provision which will permit the Operating Companies to provide billing services for only one interexchange carrier

280

which presumably will be AT & T.

281

Unquestionably, it would impose a considerable expense and any administrative burden upon the Operating Companies to require them to provide billing services for all intercity carriers, and in the view of the Court this would not be in the public interest. Another alternative for the achievement of complete equality would be to prohibit the Operating Companies from providing billing services to any carrier (including AT & T). If this were done, AT & T would, of course, have to do its own billing.

The parties claim, and the Court agrees, that if AT & T had to establish its own billing system, it could do so only on the basis of a surcharge to its monthly telephone bills similar to the charges now imposed by interexchange carriers other than AT & T. Such a charge would be quite substantial,

282

and it would impose a significant burden upon telephone subscribers, particularly those — -who are the majority of the users — whose monthly long distance bills are relatively small. It has been estimated that an additional charge of this type could double the long distance bills of many of these citizens.

283

As indicated, the proposed decree resolves this problem by allowing the Operating Companies to engage in joint billing with AT & T. This solution would provide AT & T with an advantage over its competitors in two ways: (1) AT & T would have lower billing costs than its competitors;

284

(2) as the intercity carrier with access to Operating Company billing, AT & T might be perceived by the public as the “official” or approved intercity carrier.

As concerns the cost probl

This text is long and has been trimmed here. Open the source document for the complete record.