Petition — Woodlands Telecommunications Corp. v. Southwestern Bell Telephone Co.

Supreme Court, U. S$.

e E-E e iyi

vo. 0 0°175) auc 6 1980

mWUAK, JR., CLERK

1

In THE

Supreme Court

of the United States

Ooctoser TERM 1979

Wooptanps TELECOMMUNICATIONS CoRPORATION,

Petitioner,

Vv.

SouTHWESTERN Bett TELEPHONE Company,

Respondent.

On Wait or CERTIORARI

To Tue Unrtep States Court Or APPEALS

For Tue Firts Cirrovitr

PETITION FOR WRIT OF CERTIORARI

Louis Parne Davin L. Orr

RicHarp A. SHEEHY McGinnis, Locorince &

Butter, Bryon, Rice, KILGORE

Cook & Knapp 900 Congress Avenue

1100 Esperson Building Austin, Texas 78701

Houston, Texas 77002 (512) 476-6982

(713) 237-3187

Counsel For Petitioner

Bowne of Houston, inc. acces hi Printed in U.S.A.

i

QUESTIONS PRESENTED

1. Must a jury decide the effect of the Federal Communi-

cations Commission’s authority to compel interconnection on

Bell’s monopoly power?

2. Must a jury decide whether Bell’s refusal to intercon-

nect complied with regulatory policy in determining whether

Bell violated section 2 of the Sherman Act?

3. Must a jury deduct federal income taxes from lost

profits in arriving at a damages verdict in an antitrust case?

PARTIES

Woodlands Telecommunications Corporation, Mid-Texas

Communications Systems, Inc., Mitchell Energy & Develop-

ment Corp., and The Woodlands Development Corporation

were appelles below. Southwestern Bell Telephone Company

was appellant below.

ne,

li

TABLE OF CONTENTS

Page

GPRM UNMET EEED ck ccc cece ceccenns. i

GE Ee an i

ak eg Va Vk on wd ss vv ea nik 1

re iia sia Gen dg dialed sedi co vcewees 1

ES 1

STATEMENT OF THE CASE ....................0c000 4

REASONS FOR GRANTING THE WRIT ................ 6

I. The Importance of the Monopoly Power Question... 8

II. The Importance of and Conflicting Decisions on the

Monopolization Question......................... 12

a 13

B. Consideration of Regulatory Policy ............ 15

1. The Appropriate Context for Consideration of

Ge gd Uy hig ss oxo vss 0 16

2. Application of the Rule of Reason .. )

III. The Conflict on the Tax Question ................ 21

ES sca de ds evasdccade 22

I i gc cic rv ee vsvenceees 24

SN 25

CERTIFICATE OF SERVICE .....................0005: 26

TABLE OF AUTHORITIES

Cases

American Fed. of Tobacco Growers v. Neal, 183 F.2d 869

ED er 12

Associated Press v. United States, 326 U.S.1(1945) ...... 12,14

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2nd

Cir. 1979), cert. denied, 100 S.Ct. 1061 (1980) .......... 8,15

Byars v. Bluff City News Co., 609 F.2d 843 (6th Cir.

EET SS nan 13, 14

California Computer Products, Inc. v. IBM Corp., 1979-1

Trade Cas. {[ 62, 713 (9th Cir. 1979) ................. 14

California v. Federal Power Commission, 369 U.S. 482 (1962) 17

ill

Cases — (Continued)

Page

Chastain v. AT&T, 401 F. Supp. 151 (D.D.C. 1975) ........ 7

Commissioner of Internal Revenue v. Glenshaw Glass Co.,

ee Ws I kas ote ema eels Ae aK dee es 21

Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S.

oe ri5.5 Lew crate nk ow cde balay bas Geis baa 14

Essential Communications Systems, Inc. v. AT&T, 610 F.2d

Sn I INE sia ek ok 2 eae Rd Aa 7

Gamco, Inc. v. Providence Fruit and Produce Bldg., 194 F.2d

Pe ns ee RGE SAY nes Dd Seda belo beens 12

Fox & Jacobs, Inc. v. AT&T, No. S-77-77-CA (E.D. Tex. 1979) 7

Gordon v. New York Stock Exchange, 422 U.S. 659 (1975) .. 16

Hanover Shoe, Inc. v. United Shoe Machinery Corporation,

ee We EE Gk. vr eis kd ot beatae. 21, 22, 24, 25

Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977),

cert. denied, 436 U.S. 956 (1978) ............ ccc cece 15

ILC Peripherals Leasing Corp. v. IBM Corp., 458 F. Supp.

I od lads ket ce ba hick a bes vee KS 8

Interconnect Planning Corp. v. AT&T, 1979-1 Trade Cas. { 62,

Se a RE Nei ale kl Sado sca venohaccas 7

ITT Corp. v. GTE Corp., 518 F.2d 913 (9th Cir. 1975) ...... 19

Jarvis, Inc. v. AT&T, 1978-2 Trade Cas. { 62, 197 (D.D.C.

EY pha et ialeins Vou Me wher d vate ew anaes s Semele. 7

Litton Systems, Inc. v. AT&T, 1980-1 Trade Cas. J 63, 246

CE ME I oh Ck a ARAN Neo ae ed taal ees Gem aan 7

Macom Products Corp. v. AT&T, 359 F. Supp. 973 (C.D.

SE IC Se ce ee rans hee ad upaaeNa ee vee ts 7

MCI Communications Corp. v. AT&T, 462 F. Supp. 1072

SO See EE S's 20 a Dick sin Wee web UGTA dia Gbpions 7,8

McLain v. Real Estate Board of New Orleans, Inc., 100 S.Ct.

SNE fassovsas oia-c'y 0 Sole bie Ly Whad wadaeaiae Uelwean es eee 14

Mt. Hood Stages, Inc. v. Greyhound Corp., 555 F.2d 687 (9th

Cir. 1977), rev'd on another ground, 437 U.S. 322 (1978) .. 11

iv

Cases — (Continued)

Page

National Society of Professional manage v. United States,

SP TRIN ets oon ae ks hed es . 18,19

Norfolk & Western Railway ( Co. v. - Lip 100 S.Ct. 755

Chie | Tawa § FC

Northeastern Telephone Co. v. AT&T, 1979-1 Trade Cas. 62,

ee Gey I hn SNL ah eee 7

Other Tail Power Co. v. United States, 410 U.S. 366

A: RETA ah ae aN a nee ea 11, 12, 13, 14, 17

Sargent-Welch Scientific Co. v. Ventron Corp., 567 F.2d 701

(7th Cir. 1977), cert. denied, 439 U.S. 822 (1978) ........ 15

SCM Corp. v. Xerox Corp., 463 F. Supp. 983 (D. Conn. 1978) 8

Smithkline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3rd Cir.

1978), cert. denied, 439 U.S. 838 (1978) ................ 15

Sound, Inc. v. AT&T, 1979-2 Trade Cas. ] 62, 974 (S.D. Iowa

EE ee Tak ee OR EE oe a ce 7

Southern Pacific Communications Co. v. AT&T, No. 78-0545

CERN MAOEM ME aS cts Cade, etka osu 7

Telex Corp. v. IBM Corp., 510 F.2d 894 (10th Cir. 1975),

cert. dismissed, 423 U.S. 802 (1975) .................. ee

United States v. AT&T, 427 F. Supp. 57 (D.D.C. 1976), cert.

denied, 429 U.S. 1071 (1977), cert. denied, No. 77-1009

(D.C. Cir. 1977), cert. denied, 434 U.S. 966 (1977), on

reconsideration, 461 F. Supp. 1314 (D.C.C. 1978) ........ 7

United States v. Griffith, 334 U.S. 100 (1948) ........... 13, 14

United States v. Grinnell Corp., 384 U.S. 563 (1966) .... 13,14

United States v. IBM, No. 69-200 (S.D. N.Y. 1969)

United States v. Marine Bancorporation, 418 U.S. 602 (1974) 20

United States v. National Ass’n of Sec. Dealers, Inc., 422 U.S.

De ER POE Cok a bia eto COMO RL a Sw OR te 16

United States v. Pacific & A.R. & N. Co., 228 U.S. 87 (1913) . 12

United States v. Radio Corp. of America, 358 U.S. 334 (1959) 17

Vv

Cases — (Continued)

Page

United States v. Terminal Railroad Ass'n, 224 U.S. 383 (1912) 12

Woods Exploration & Production Co. v. Aluminum Co. of

America, 438 F.2d 1286 (5th Cir. 1971), cert. denied, 404

SR I i vin s ide NiShueedacdes cade ee ees 15

Statutes

EEO os vais di bie CN Bae dS OF nob 8s eae 1

oto. ere nas oot peas apo a Oak bed bale 4

EE oe... ees cccunew et Wpame teem eetae 11

I ou, ows Cab aah sae eeae hee dommes mee 1

ee css saws ch ee ode enc Paaeae 5

Ss cain dg Gain awe ae mae aaeneae 9

gee 1, 9, 10, 11, 15, 16, 17, 18

Internal Revenue Code §63 ....... 0... ccc ees 23

Internal Revenue Code § 104(a)(2) ...................... 24

Internal Revenue Code §172 ........................005. 23

Internal Revenue Code $§172(c) ..................2.0005. 22

Internal Revenue Code § 186 ....................... 22, 23, 24

Internal Revenue Code § 186(a)(1) ...............2..0.00. 22

Internal Revenue Code § 186(a)(2) .................00005 23

Internal Revenue Code § 186(c) ......................... 22

Internal Revenue Code §186(d)(1), (3) .................. 23

ee ED 55 os is 0.0 cas vc Su nwe v ueeunepece 22

ee. iin owe vcednk cme nwain Kwope 22

pe GR | rere err re 23

Congressional Matters

S. Rep. No. 552, 91st Cong., Ist Sess., reprinted in [1969]

U.S. Code Cong. & Ad. News 2027, 2315 ................ 23

vi

Miscellaneous Materials

3 P. AREEDA & D. TURNER, ANTITRUST LAW {315c

| IRN Bea bah cr Sa re

Comment, The Right to an Incompetant Jury: Protracted

Commercial Litigation and the Seventh Amendment, 10

RR OF I, ee eerie eee

Comment, The Role of Income Taxes in Determining Anti-

trust Treble Damages Awards, 56 TEXAS L. REV. 293

As Sate ss chide Jhels oak ode eR aew ty ba Cal ew cai

Complex Litigation Materials: Proposed Procedural Revisions

to Expedite the Resolution of Complex Antitrust Cases, 48

ADUTTTIUGL Tad. GES (IBRD) «anos ccs ican.

Harris & Liberman, Can the Jury Survive the Complex Anti-

trust CaseP 24 N.Y.L. SCH. L. REV. 611 (1979) ........

Lynch, The Case for Striking Jury Demands in Complex Anti-

trust Litigation, 1 REV. OF LITIGATION 3 (1980) ......

Note, Antitrust and Regulated Industries: A Critique and Pro-

posal for Reform of the Implied Immunity Doctrine, 57

Sy a a EL COD if hrc hacis A oo ces vie ccecie's

Note, The Right to a Jury Trial in Complex Civil Litigation,

OS ARV. bs Be. Oe CIE) | «ow. eb etic,

REPORT TO THE PRESIDENT AND THE ATTORNEY

GENERAL OF THE NATIONAL COMMISSION FOR

THE REVIEW OF ANTITRUST LAWS AND PROCE-

I 2 rer ee ort es genre

Shaffer, Those Complex Antitrust Cases, Wall St. J., Aug.

RR ERA Reto ean keen fe Oak ee cea

L. SUT "IVAN, ANTITRUST LAW §§ 25 and 43 (1977) ...

8

ll

10

10

18

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Fifth Circuit is reported at 615 F.2d 1372. The opinion of

the United States District Court for the Southern District of

Texas denying motion to dismiss is reported at 447 F. Supp.

1261.

JURISDICTION

The judgment of the United States Court of Appeals for

the Fifth Circuit was entered on May 1, 1980. The petition

for rehearing en banc was denied on May 27, 1980. This

Court has jurisdiction to review the judgment by writ of

certiorari under 28 U.S.C. § 1254(1).

STATUTES

Section 2 of the Sherman Act, 15 U.S.C. §2, provides:

Every person who shall monopolize, or attempt to

monopolize, or combine or conspire with any other per-

son or persons, to monopolize any part of the trade or

commerce among the several States, or with foreign

nations, shall be deemed guilty of a felony, and, on con-

viction thereof, shall be punished by fine not exceeding

one million dollars if a corporation, or, if any other per-

son, one hundred thousand dollars, or by imprisonment

not exceeding three years, or by both said punishments,

in the discretion of the Court.

Section 201(a) of the Federal Communcations Act, 47

U.S.C. §201(a), provides:

It shall be the duty of every common carrier engaged

in interstate or foreign communication by wire or radio

to furnish such communication service upon reasonable

request therfor; and, in acordance with the orders of the

Commission, in cases where the Commission, after op-

portunity for hearing, finds such action necessary or

desirable in the public interest, to establish physical

2

connections with other carriers, to establish through

routes and charges applicable thereto and the divisions

of such charges, and to establish and provide facilities

and regulations for operating such through routes.

Section 186 of the Internal Revenue Code provides:

(a) Allowance of deduction.—If a compensatory

amount which is included in gross income is received or

accrued during the taxable year for a compensable in-

jury, there shall be allowed as a deduction for the tax-

able year an amount equal to the lesser of —

(1) the amount of such compensatory amount, or

(2) the amount of the unrecovered losses sus-

tained as a result of such compensable injury.

(b) Compensable injury. — For purposes of this see-

tion, the term “compensable injury” means —

(1) injuries sustained as a result of an infringe-

ment of a patent issued by the United States,

(2) injuries sustained as a result of a breach of

contract or a breach of fiduciary duty or relation-

ship, or

(3) injuries sustained in business, or to property,

by reason of any conduct forbidden in the antitrust

laws for which a civil action may be brought under

section 4 of the Act entitled “An Act to supplement

existing laws against unlawful restraints and mo-

nopolies, and for other purposes”, approved Octo-

ber 15, 1914 (commonly know as the Clayton Act).

(c) Compensatory amount.— For purposes of this

section, the term “compensatory amount” means the

amount received or accrued during the taxable year as

damages as a result of an award in, or in settlement of,

a civil action for recovery for a compensable injury, re-

duced by any amounts paid or incurred in the taxable

year in securing such award or settlement.

3

(d) Unrecovered losses. —

(1) In general.— For purposes of this section,

the amount of any unrecovered loss sustained as a

result of any compensable injury is —

(A) the sum of the amount of the net operat-

ing losses (as determined under section 172)

for taxable year in whole or in part within the

injury period, to the extent that such net oper-

ating losses are attributable to such compen-

sable injury, reduced by

(B) the sum of —

(i) the amount of the net operating

losses described in subparagraph (A)

which were allowec for any prior taxable

year as a deduction under sectior 172 as a

net operating loss carryback or carryover

to such taxable year, and

(ii) the amounts allowed as a deduction

under subsection (a) for any prior taxable

year for prior recoveries of compensatory

amounts for such compensable injury.

(2) Injury period. — For purposes of paragraph

(1), the injury period is —

(A) with respect to any infringement of a

patent, the period in which such infringement

occurred,

(B) with respect to a breach of contract or

breach of fiduciary duty or relationship, the

period during which amounts would have been

received or accrued but for the breach of con-

tract or breach of fiduciary duty or relation-

ship, and

(C) with respect to injuries sustained by

reason of any conduct forbidden in the anti-

trust laws, the period in which such injuries

were sustained.

4

(3) Net operating losses attributable to compen-

sable injuries. — For purposes of paragraph (1) —

(A) anet operating loss for any taxable year

shall be treated as attributable to a compensa-

ble injury to the extent of the compensable

injury sustained during such taxable year, and

(B) if only a portion of a net operating loss

for any taxable year is attributable to a com-

pensable injury, such portion shall (in apply-

ing section 172 for purposes of this section) be

considered to be a separate net operating loss

for such year to be applied after the other por-

tion of such net operating loss.

(e) Effect on net operating loss carryovers. —If for

the taxable year in which a compensatory amount is re-

ceived or acrued any portion of a net operating loss

carryover to such year is attributable to the compensa-

ble injury for which such amount is received or accrued,

such portion of such net operating loss carryover shall

be reduced by an amount equal to —

(1) the deduction allowed under subsection (a)

with respect to such compensatory amount, reduced

by

(2) any portion of the unrecovered losses sus-

tained as a result of the compensable injury with

respect to which the period for carryover under

section 172 has expired.

STATEMENT OF THE CASE

At the conclusion of a six-weeks trial, a jury found that

Southwestern Bell Telephone Company (“Bell”) willfully

used its monopoly power to exclude Woodlands Telecom-

munications Corporation (“WTC”) from the telephone

business at The Woodlands, Texas, and that WTC had

suffered damages of $18,369,827. (R. 648). Pursuant to its

jurisdiction under section 4 of the Clayton Act, 15 U.S.C.

5

§ 15, the trial court trebled damaged to $55,109,481 and

entered judgment for WTC. (R. 695).

The Woodlands is a new town being developed on

approximately 20,000 acres of previously uninhabited

timberland near Houston, Texas (Tr. 1122), pursuant to the

Urban Growth and New Community Development Act of

1970, 42 U.S.C. § 4501 et. seq. When completed, The Wood-

lands will have a population of 150,000 with extensive com-

mercial, industrial, educational, and recreational facilities.

Since there was no existing telephone service to this pre-

viously uninhabited area, the developer was required by

the Department of Housing and Urban Development

(“HUD”) to arrange for telephone service to be provided.

(PX 227). No state agency assigned service areas in Texas

at this time so any telephone company was free to offer ser-

vice. A number of companies, including Bell, made com-

petitive proposals to the developer. (PX 63). The pro-

posal of Mid-Texas Communications Systems, Inc. (“Mid-

Texas”) to form WTC to provide innovative services util-

izing the latest technological advances proved to be the

most attractive. A joint venture agreement was signed on

August 30, 1972, between Mid-Texas and Mitchell Energy

& Development Corp. (PX 83), and WTC was organized

and began preparations to serve. (Tr. 1499-1507).

A new company unaffiliated with the Bell System must

gain access to the interstate telephone network through

interconnection with the nearest Bell System company.

Keeping with its policy that “[e]ach system which is pur-

chased and installed by one of our competitors means lost

revenue to {our] company” (PX 59), and because it would

set an example that it expected to be repeated in other

new towns throughout the state of Texas (PX 93), Bell

refused to interconnect with WTC. WTC filed a complaint

requesting the Federal Communications Commission

6

(“FCC”) to compel the interconnection (PX 123) and tried

other means to provide interim service until the FCC could

act on the complaint. (Tr. 1532-78). Bell employed various

tactics to prevent timely FCC action and thwarted each of

the means WTC tried to provide interim service.

Finally, Bell resorted to economic coercion of Mid-Texas

to force it to cause the FCC complaint to be withdrawn.

Bell unilaterally changed the basis upon which it divided

long-distance revenues with Mid-Texas in other areas of

the state where Mid-Texas operated telephone companies

and applied the change retroactively so as to backbill Mid-

Texas for $160,000. (Tr. 1530-59). A Bell vice-president

pressured the man who was president of both Mid-Texas

and WTC to withdraw the FCC complaint, telling him that

“The Woodlands case was a dangerous precedent-setting

matter” (Tr. 1018) ; “Southwestern Bell would use all legal

means to oppose such a dangerous precedent-setting filing”

(Tr. 1018); even if he got an order compelling Bell to

interconnect, he would still have problems getting Houston

metro and intrastate connections (Tr. 1021-22); and that

“it was going to be a long, hard battle.” (Tr. 1022). Faced

with this pressure and Bell’s barricade of access to the

interstate telephone network, WTC was forced to withdraw

its FCC complaint so that Bell would provide service when

The Woodland: was opened for public occupancy. (Tr.

1851).

REASONS FOR GRANTING THE WRIT

A writ should be granted in this case because: (1) it

presents three important questions of antitrust law which

should be settled by this Court; and (2) the Fifth Cireuit

has decided these questions in a way in conflict with applie-

able decisions of this Court and other cireuits. Those

questions involve the standards to be applied and the role

7

of the jury in determining the existence of monopoly power,

the misuse of monopoly power, and the effect of federal

income taxes on antitrust damages. A large number of

cases involving the same issues are pending in the lower

courts. In its Motion to Expedite Oral Argument in the

Fifth Circuit, Bell advised the court that there are more

than forty antitrust cases pending against Bell System

companies and that “[t]he prompt resolution of the issues

involved in this appeal could be invaluable, both to the

parties and to the courts, in all of the antitrust cases

pending against the Bell System, and possibly in a number

of other such cases pending against regulated common

carriers and public utilities.”! The impractical and con-

flicting nature of the Fifth Circuit’s decisions on these

important questions makes it all the more imperative that

this Court grant certiorari in this case. Experience has

shown that trials of these cases impose heavy strains on the

1 Several courts have rejected the tyr pasa companies’ attempts

to dismiss plaintiffs’ claims prior to trial on the basis of regulatory

immunity; therefore, the same questions presented here must be

faced in the trial of those cases. See United States v. AT&T, 427

F. Supp. 57 (D.D.C. 1976), cert. denied, 429 U.S. 1071 roe

cert. denied, No. 77-1009 (D.C. Cir. 1977), cert. denied, 434 U.S.

966 (1977), on reconsideration, 461 F. Supp. 1314 (D.D.C. 1978);

MCI Communications Corp. v. ATUT, 462 F. Supp. 1072 (N.D.

Ill. 1978); Litton Systems, Inc. v. AT&T, 1 1 Trade Cas.

{ 63,246 (S.D.N.Y. 1980); Southern Pacific Communications Co.

v. AT&T, No. 78-0545 (D.D.C. July 2, 1979); Sound, Ine. v.

AT&T, 1979-2 Trade Cas. { 62,974 (S.D. Iowa 1979); Fox &

Jacobs, Inc. v. AT&T, No. S-77-77-CA (E.D. Tex. 1979); North-

eastern Telephone Co. v. AT&T, 1979-1 Trade Cas. { 62,548 (D.

Conn. 1978); Interconnect Planning Corp. v. AT&T. 1979-1 Trade

Cas. J 62,655 (S.D.N.Y. 1978); Jarvis, Inc. v. AT&T, 1978-2 Trade

Cas. {62,197 (D.D.C. 1978); Chastain v. ATST, 401 F. Supp.

151 (D.D.C. 1975); Macom Products Corp. v. AT&T, 359 F. Supp.

973 (C.D. Calif. 1973); Essential Communications Systems, Inc.

v. AT&T, 610 F.2d 1114 (3rd Cir. 1979).

8

time and resources of the courts, juries, and parties.2, An

authoritative resolution of these questions would reduce

substantially the possibility of trial error and the risk of

re-trials in all these cases, thereby providing a significant

public benefit. This case is ideal for the resolution of these

questions because it involves only discrete questions of the

proper standards to be applied, questions that may be

decided by this Court without any necessity of becoming

enmeshed in a detailed consideration of the evidence. Con-

sequently, answers to these questions here would provide

guidelines applicable in all the other pending cases.

Furthermore, the answer to the question regarding the

effect of income taxes on damages will be applicable to all

private antitrust suits.

I. THE IMPORTANCE OF THE

MONOPOLY POWER QUESTION

The first question — Must a jury decide the effect of the

FCC’s authority to compel interconnection on Bell’s mono-

poly power? — is important because it presents a funda-

mental question of the effect of regulatory authority on

the existence of monopoly power and the role to be assigned

to juries, if any, in resolving that question. The same

fundamental question will be present in every section 2

ease involving a regulated industry when an agency has

2 The trial of this case lasted six weeks and required five years to

prepare. The recently completed trial of MCI Communications

Corp. v. AT&T, 462 F. Supp. 1072 (N.D. Ill. 1978), covered a

period of three and one-half months. Other recent trials of mon-

opolization cases similarly have required protracted trials: ILC

Peripherals Leasing Corp. v. IBM Corp., 458 F. Supp. 423 (N.D.

Calif. 1978) (six months); SCM Corp. v. Xerox Corp., 463 F.

Supp. 983 (D. Conn. 1978) (fourteen months); United States v.

IBM, No. 69-200 (S.D.N.Y. 1969) (continuing into its seventh

year); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263

(2n An 1979), cert. denied, 100 S. Ct. 1061 (1980) (seven

months),

#9

authority to compel action by a recalcitrant monopolist.

Since the Fifth Circuit’s decision of that question confuses

the nature of the pertinent inquiry and imposes an undue

burden on the jury to decide a question it should not be

asked to decide, review of the Fifth Circuit’s decision is

particularly justified.

One of the goals of the Federal Communications Act of

1934 was to make available a nation-wide communication

service. 47 U.S.C. $151. To achieve that goal, Congress

allowed telephone companies to work out agreements for

interconnection of their lines withou. regulatory licensing

or supervision. When one company refused to interconnect

voluntarily, however, Congress, in section 201(a) of the

Act, 47 U.S.C. § 201(a), empowered the FCC to compel

interconnection in the public interest. Bell argued that the

mere existence of section 201(a) immunized it from appli-

cation of the antitrust laws or, alternatively, prevented it

from possessing monopoly power as a matter of law. The

trial court rejected Bell’s legal arguments, App. at A-37,

and concluded that since Bell did not otherwise dispute that

it controlled access to the facilities WTC needed to enter

business, there was no issue of fact on the existence of

monopoly power. Consequently, he instructed the jury that

“Southwestern Bell has ‘monopoly power’ in the relevant

market in this case in that Southwestern Bell controlled the

essential facilities of long-distance lines and NNX codes to

which competitors must have access to do business.” (R.

624).

The Fifth Circuit agreed that Bell was not immune from

the antitrust laws but held that the jury, not the trial court,

should decide the question of the effect of section 201(a) on

the monopoly power issue: “Whether Bell possessed suffi-

cient power to exclude competition in light of section

201(a) is a question for the jury’s consideration.” App. at

10

A-26. The effect of the Fifth Circuit’s decision will be to

lend perverse justification to the criticism of juries’ ability

to decide antitrust cases*® and is contrary to the current

efforts to simplify and shorten jury trials of antitrust

cases.* The difficulty the jury will experience in dealing with

this question on remand and the similar questions to be

faced by juries in the other pending cases stems not from

any inherent shortcomings on their part, but rather from

the fact that they are being forced to decide an abstract

legal question instead of resolving a factual dispute.®

Stated simply, it makes no sense to ask a jury what the

legal effect is of section 201(a) on Bell’s power to control

access to the interstate telephone network. That is a ques-

3 See Lynch, The Case for my, Jury Demands in Complex Anti-

trust Litigation, 1 REV. OF LITIGATION 3 (1980); Harris &

Liberman, Can the Jury Survive the Complex Antitrust Case? 24

4.Y.L. SCH. L. REV. 611 (1979); Comment, The Right to an

Incompetent Jury: Protracted Commercial Litigation and the

Seventh Amendment, 10 CONN. L. REV. 775 (1978); Note, The

ht to a Jury Trial in Complex Civil Litigation, 92 HARV. L.

V. 898 (1979).

4 REPORT TO THE PRESIDENT AND THE ATTORNEY GEN-

ERAL OF THE NATIONAL COMMISSION FOR THE RE-

VIEW OF ANTITRUST LAWS AND PROCEDURES (1979);

Complex Litigation Materials: he sages Procedural Revisions to

Expedite the Resolution of Complex Antitrust Cases, 48 ANTI-

TRUST L. J. 663 (1980).

5 It has been aptly noted that:

All this [criticism] may say less about the jury system than

about the laws juries are being asked to consider. If antitrust

and securities cases are so difficult to comprehend it may be

a sign that in those areas the law itself needs to be recon-

sidered, Might it also mean that juries are being forced to

render legal judgments on the basis of legal theories that are

losing touch with reality?

Shaffer, Those Complex Antitrust Cases, Wall St. J., Aug. 29,

1978, at 16, col. 4.

11

tion of law which should be decided by the court. The same

point was made in another monopolization case involving

a regulated industry when the defendant complained of the

trial court’s refusal to instruct the jury to consider the

effect of a regulatory statute:

Greyhound complains of the district court’s ‘failure

to instruct on section 5(11).’ It is not clear precisely

what Greyhound has in mind. The extent to which

Greyhound’s conduct was exempt from the antitrust

laws by the Interstate Commerce Act was a legal ques-

tion, not an issue of fact for the jury.

Mt. Hood Stages, Inc. v. Greyhound Corp., 555 F.2d 687,

695 (9th Cir. 1977), rev’d on another ground, 437 U.S. 322

(1978).

Moreover, the Fifth Cireuit’s holding, that the existence

of a remedial, regulatory statute may have the effect of

preventing one from possessing monopoly power, conflicts

with this Court’s decision in an almost identical case, Otter

Tail Power Co. v. United States, 410 U.S. 366 (1973). Otter

Tail generated and transmitted electric power to a number

of towns. When four of those towns decided to replace

Otter Tail with independently-owned systems, they had to

obtain wholesale power from Otter Tail or purchase it else-

where and have Otter Tail “wheel” the power over its trans-

mission network. Otter Tail refused to do either. Two

towns filed complaints with the Federal Power Commission

(“FPC”) to compel interconnection under a statute, 16

U.S.C. §824a(b), which is nearly identical to section 201(a).

One town was successful in obtaining such an order; an-

6 Professors Areeda and Turner have criticized the practice of some

trial courts of leaving ultimate legal questions to be decided by

juries, “[T]here is no excuse for leaving the jury to flounder on

matters where it is ignorant or, at best, ill-informed.” 3 P.

eB & D. TURNER, ANTITRUST LAW {315c at 54

12

other town withdrew its complaint because it could not

stand the delay and financial burden imposed; and two

other towns were able to obtain power elsewhere. In affirm-

ing that Otter Tail’s refusal to deal violated section 2 of the

Sherman Act, this Court held: “The fact that three munici-

palities which Otter Tail opposed finally got their munici-

pal systems does not excuse Otter Tail’s conduct. That

fact does not condone the antitrust tactics which Otter

Tail sought to impose.” 410 U.S. at 380-81. Since the fact

that the FPC actually used its statutory authority to com-

pel interconnection did not prevent Otter Tail from being

held to possess monopoly power, the mere existence of sub-

stantially the same authority unexercised by the FCC cer-

tainly cannot prevent Bell from being held to possess

monopoly power.’

Il. THE IMPORTANCE OF AND CONFLICTING

DECISIONS ON THE MONOPOLIZATION QUESTION

The second question — Must a jury decide whether Bell’s

refusal to interconnect complied with regulatory policy in

determining whether Bell violated section 2 of the Sherman

Act? — is important because it raises significant questions

7 Likewise, the authority of the Interstate Commerce Commission

to order through-routing did not alter the unlawful nature of the

refusals to deal in United States v. Terminal Railroad Ass'n, 294

U.S, 383 (1912), or in United States v. Pacific & A.R.&N. Co.,

228 U.S. 87 ong . Similarly, the fact that other news agencies

were available did not deter this Court from holding the Asso-

ciated Press’ refusal to deal unlawful in Associated Press v. United

States, 326 U.S. 1 (1945). Other circuits also are in agreement on

this point: “defendants may not be heard to say that they have

not established a monopoly merely because they do not interfere

with an outside warehouse if it can shift for itself”; American Fed.

of Tobacco Growers v. Neal, 183 F.2d 869, 872 (1950); “The short

answer to this [defendants’ contention that they lacked monopoly

power because other sites were available] is that a monopolized

resource seldom lacks substitutes; alternatives will not excuse

monopolization”; Gamco, Inc. v. Providence Fruit ¢> Produce

Bldg., 194 F.2d 484, 487 (1952).

13

of the proper standard to be applied in assessing misuse of

monopoly power and the proper context in which regulatory

policy should be considered in antitrust cases. The Fifth

Circuit’s decision applies a standard in conflict with the

standard applied by this Court and misplaces a duty on

the jury to consider regulatory policy in determining

whether a refusal to deal violates antitrust law.

The trial court followed the opinions of this Court in

instructing the jury on the standards it was to apply in

determining whether Bell misused its monoply power. He

instructed the jury that the pertinent inquiry was whether

Bell willfully maintained its monopoly power (R. 624), as

stated by this Court in United States v. Grinnell Corp., 384

U.S. 563, 570-71 (1966). In deciding that question, he in-

structed the jury that the use of monopoly power to fore-

close competition or to gain a competitive advantage, or to

destroy a competitor, is unlawful (R. 625), in accordance

with Otter Tail Power Co. v. United States, 410 U.S. 366,

377 (1973), and United States v. Griffith, 334 U.S. 100, 107

(1948).

Although it discussed anticompetitive purpose or intent,

the Fifth Cireuit applied a different standard: “section 2

prohibits only those refusals to deal which under the par-

ticular circumstances of a case are unreasonably anticom-

petitive,” App. at A-30, and held that the jury must resolve_

“the reasonableness of Bell’s actions” under instructions

from the trial judgg“as to the relevant regulatory frame-

work.” App. at A-33.

A. THE MISUSE STANDARD

The Fifth Circuit thus abandoned the anticompetitive

purpose or intent standard applied by this Court and

adopted the “unreasonableness” standard advocated by the

Sixth Circuit in Byars v. Bluff City News Co., 609 F.2d 843,

14

853 (6th Cir. 1979). The Sixth Circuit in Byars expressed

its dissatisfaction with this Court’s standard and declared

that “what should matter is not the monopolist’s state of

mind, but the overall impact of the monopolist’s practices.”

609 F.2d at 860. It decided, therefore, to apply a standard

similar to the Rule of Reason applied in Sherman Act sec-

tion 1 cases requiring determination “whether the mono-

polist’s conduct is unreasonably anti-competitive and thus

unlawful.” Id.

This standard is not only in square conflict with the

standard applied in Otter Tail® and this Court’s other sec-

tion 2 decisions® but also rejects the emphasis this Court has

given to the overall importance of anticompetitive purpose.

As recently as McLain v. Real Estate Board of New

Orleans, Inc., 100 S.Ct. 502, 509 (1980), this Court empha-

sized that “in a civil action under the Sherman Act,

liability may be established by proof of either an unlawful

purpose or an anticompetitive effect.” [Court’s emphasis. ]

This conflict on so fundamental a point should not go

unresolved. It will cause confusion in the lower courts and

the application of different standards among the circuits ;!?

8 The Fifth Circuit said that Otter Tail did not determine this issue

because, “Otter Tail did not present a case like the present one

where the utility is gy that its actions were justified by

articulable public interest factors.” App. at A-30 n.14. This

attempted distinction is erroneous. The majority opinion reveals

that Otter Tail did make such an argument: Otter Tail “assert[ed]

that compulsory interconnection or wheeling will erode its inte-

ted system and threaten its capacity to serve adequately the

public.” 410 U.S. 381. Justice Stewart’s dissent deals with the

argument in greater detail. 410 U.S. 389.

9 United States v. Grinnell Corp., 384 U.S. 563 (1966); United

States v. Griffith, 334 U.S. 100 (1948); Associated Press v. United

States, 326 U.S. 1 (1945); Eastman Kodak Co. v. Southern Photo

Materials Co., 273 U.S. 359 (1927).

10 The Ninth Circuit also employed an “unreasonableness” standard

in California Computer Products, Inc. v. IBM Corp., 1971-1 Trade

Cas. § 62,713 (9th Cir. 1979). Other circuits have applied this

15

moreover, it disregard the reasons and necessity for polic-

ing the conduct of monopolists more closely under section 2

than the conduct of non-monopolists under section 1.1

B. CONSIDERATION OF REGULATORY POLICY

The Fifth Cireuit’s rejection of the established standard

became all the more significant when it decided that the

“unreasonableness” standard it had created required the

jury to apply the public interest test of section 201(a) in

determining whether Bell’s actions were unreasonable.

App. at A-30. That decision conflicts with applicable prin-

ciples adopted by this Court on two related points: first,

it misplaces consideration of regulatory policy by making

it the standard for determining monopolization rather than

limiting consideration to whether it conflicts with antitrust

policy under the implied immunity doctrine; and, second,

even if a Rule of Reason standard wer applicable, it

assesses reasonableness from the regulatcry perspective

rather than the antitrust perspective.

Court’s anticompetitive purpose or intent standard. Berkey Photo,

Inc. vy. Eastman Kodak Co., 603 F.2d 263 (2nd Cir. 1979), cert.

denied, 100 S. Ct. 1061 (1980); Smithkline Corp. v. Eli Lilly &

Co., 575 F.2d 1056 (3rd Cir. 1978); cert. denied, 439 U.S. 838

(1978); Sargent-Welch Scientific Co. v. Ventron Corp., 567 F.2d

701 (7th Cir. 1977), cert. denied, 439 U.S. 822 (1978); Telex Corp.

v. IBM Corp., 510 F.2d 894 (10th Cir. 1975), cert. dismissed, 423

U.S. 802 (1975); Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C.

Cir. 1977), cert. denied, 436 U.S. 956 (1978). Prior to its decision

in this case, the Fifth Circuit also had applied the anticompetitve

purpose or intent standard. See Woods Exploration & Producing

Co. v. Aluminum Co. of America, 438 F.2d 1286 (5th Cir. 1971),

cert. denied, 404 U.S. 1047 (1972).

11 “There are kinds of acts which would be lawful in the absence of

monopoly but, because of their tendency to foreclose competitors

from access to markets or customers or some other inherently

a. a tendency, are unlawful under § 2 if done by a

monopolist.” vee co tor Scientific Co. v. Ventron Corp., 567

F.2d 701, 711 (7th Cir. 1977), cert. denied, 439 U.S. 822 (1978).

16

1. The Appropriate Context for Consideration of Regulation

On the first point, the purpose of the implied immunity

doctrine is to determine which standard — regulatory or

antitrust — Congress intended to apply to particular con-

duct.!2 It must be one or the other for plainly Congress

did not intend that juries be required to make regulatory

judgments in the context of deciding violations of the

antitrust laws. Yet that is precisely what the Fifth Cir-

cuit’s decision requires. In a prime example of circular

reasoning, the Fifth Circuit holds that the antitrust laws

are applicable to Bell’s conduct but that the lawfulness of

that conduct under the antitrust laws is to be judged under

the regulatory standard.

The justification given for such curious reasoning is

“public policy” :

This holding is based on the structure and effect of

section 201(a) under which the FCC, upon appropriate

demand, is empowered to determine whether a par-

ticular interconnection is in the public interest. The

FCC’s inquiry is controlled by its consideration of the

public interest as informed by the general concerns of

the Communiceuons Act and prior adjudicatory deci-

sions under section 201(a). As previously noted, it is

possible that in certain situations, interconnection will

not be in the public interest. ... In those instances,

public policy will be vindicated only if interconnection

is denied. Prevention can occur only if the private

utility denies interconnection in the first instance.

Where the private concern properly denies an inter-

connection, it would be contrary to public policy to

permit antitrust liability against it.

12 See Gordon v. New York Stock Exchange, 422 U.S. 659, 691

(1975); United States v. National Ass'n of Sec. Dealers, Inc., 422

U.S. 694, 720 (1975); Note, Antitrust and Regulated Industries:

A Critique and Proposal for Reform of the Implied Immunity

Doctrine, 57 TEXAS L. REV. 751, 760-61 (1979).

17

App. at A-31. Consideration of public policy “based on

the structure and effect of section 201(a)” is an appro-

priate inquiry, but solely in the context of determining

whether Congress intended antitrust immunity for refusals

to interconnect. It is that very structure and effect that

compelled the conclusion that Congress did not intend to

create such an exemption because it left the decision .

whether to interconnect, in the first instance, to the busi-

ness judgment of the parties. If Congress had considered

that prevention of undesirable interconnections was a para-

mount public interest, it would have made section 201(a)

a licensing statute and prohibited all interconnections

unless and until the FCC found them to be in the public

interest. Having chosen instead to leave the matter to the

business judgment of the parties, the logical corollary is

that Congress also intended that if that business judgment

was based on anticompetitive purpose or intent, its exer-

cise should be penalized under the antitrust laws as well

as being subject to compulsory order of the FCC.

Most importantly, the rationale for the Fifth Circuit’s

holding, that “it would be contrary to public policy to per-

mit antitrust liability against [Bell if the interconnection

would not have been in the public interest],” is contrary

to this Court’s holding in United States v. Radio Corp. of

America, 358 U.S. 334 (1959), that antitrust liability may

be imposed even when the FCC has approved expressly

defendant’s action as being in the public interest. Accord

California v. Federal Power Commission, 369 U.S. 482, 489

(1962) (“approval of the transaction by the Commission

would be no bar to the antitrust suit”); see Otter Tail

Power Co. v. United States, 410 U.S. 366, 373 (1978).

Moreover, this supposed accommodation to public policy

hy incorporating the regulatory standard into the antitrust

standard is unworkable. Neither trial judges nor juries are

18

equipped to assess the regulatory factors relevant to decid-

ing whether the proposed interconnection would h: ve been

in the public interest.

2. Application of the Rule of Reason

On the second point, the Fifth Circuit’s holding that the

reasonableness of Bell’s refusal to interconnect must be

judged under the public interest standard of section 201(a)

conflicts with the principles regarding proper application

of the Rule of Reason set out in National Society of Profes-

sional Engineers v. United States, 435 U.S. 679 (1978). This

Court carefully explained the limited context within which

the Rule of Reason is applied: “Contrary to its name, the

Rule does not open the field of antitrust inquiry to any

argument in favor of a challenged restraint that may fall

within the realm of reason. Instead, it focuses directly on

the challenged restraint’s impact on competitive condi-

tions.” 435 U.S. at 688. In a passage that is particularly

applicable to the case at hand, this Court said:

The early cases also foreclose the argument that

because of the special characteristics of a particular

industry, monopolistic arrangements will better pro-

mote trade and commerce than competition. ... That

13 In his analysis of the standards — in monopolization cases,

Professor Sullivan observes that “the judicial system, particularly

the jury system, which can handle issues of conduct and even

motive with some degree of comfort, is Fy ped to deal skill-

fully with structural analysis.” L. SULL N, ANTITRUST

LAW § 25 at 81 (1977). Further he says:

If there is one task that judges and juries informed through

the adversary system, may really be good at, it is identifying

the pernicious in human affairs. To contend that the con-

ventional formulation, which looks, in a sense, for evil, ought

to be amended to one which looks solely to an effect vali-

dated by economic studies is to assume too much about the

precision of applied economics and to assume too little about

the value of more humanistic modes of inquiry.

Id. § 43 at 110.

19

kind of argument is properly addressed to Congress

and may justify an exemption from the statute for

specific industries, but it is not permitted by the Rule

of Reason.

435 U.S. at 689-90. The Court concluded its explication of

the Rule by stating:

[T]he purpose of the analysis is to form a judgment

about the competitive significance of the restraint; it

is not to decide whether a policy favoring competition

is in the public interest of the members of an industry.

Subject to exceptions defined by statute, that policy

decision has been made by the Congress. [Emphasis

added. }.

435 U.S. at 692. Thus, the Fifth Circuit has held that the

Rule of Reason must be applied in a manner and for a

purpose directly contrary to what this Court has held is its

true role and purpose.

The Ninth Circuit has made the point in a case involving

the telephone industry. In ITT Corp. v. GTE Corp., 518

F.2d 913 (9th Cir. 1975), the court explained that:

If an activity is nonexempt, the antitrust laws apply

with undiminished force, whether or not the activity

is regulated. Put another way, if a claim of exemption

is rejected in an antitrust suit, the only pertinent frame

of reference is the antitrust law. The ‘advantages’

flowing from the challenged activity and purportedly

fostered by the regulatory scheme become as irreievant

as they would be in the absence of any regulation what-

soever. [Emphasis added. ]

518 F.2d at 935. The Fifth Circuit misunderstood the Ninth

Circuit’s further observation that regulation is not irrele-

vant from a factual perspective. The Ninth Cireuit said

that although regulation is to be assessed as another fact

of market life, “[i]n the absence of an exemption claim, the

20

fact of regulation is significant, but not because it embodies

a doctrinal scheme different from the antitrust law; the

sole legal perspective is that afforded by the antitrust law.”

Id.

The Ninth Circuit illustrated what it meant by saying:

“This was the approach taken in United States v. Marine

Bancorporation, 418 U.S. 602 (1974).” 518 F.2d 93€ n.85.

The government there brought an action under section 7 of

the Clayton Act challenging a proposed merger between

two commercial banks. The government relied on the

theory of potential competition, arguing that the merger

would eliminate the possibility that the acquiring bank

would enter the market de novo. State law prohibited the

kind of branching that would have been necessary for the

acquiring bank to enter the market de novo. The regulatory

framework discussed there had nothing to do with the legal

standard by which defendants’ conduct was to be judged

under the Clayton Act. That standard, the potential com-

petition doctrine, was purely the creature of antitrust law.

Defendants would have violated the Clayton Act under that

doctrine if their merger would have reduced the possibility

of increased competition in the market. State regulatory

law was relevant only on the facts to which the doctrine

was to be applied; that is, it was relevant, as a factual

matter, to the possibilities that the acquiring bank could

have entered the market de novo. It was not an alternative,

potentially incompatible, test for judging the legality of

the merger, nor were the state regulations on branching in

any way introduced into the legal test for determining the

legality of a merger under the potential competition doe-

trine. The regulations were relevant only on the facts. It

was in this sense, and in this sense only, that the Court

stated: “We further hold . . . that the application of the

[potential competition] doctrine to commercial banking

must take into account the unique federal and state regula-

21

tory restraints on entry into that line of commerce. Failure

to do so would produce misconceptions that go to the heart

of the doctrine itself.” 7d. at 627. The Fifth Cireuit’s quota-

tion of this language, App. at A-33, is thus inapposite and

it offers no support to the Fifth Cireuit’s decision here.

The conflict is clear: under the principles applied by this

Court and the Ninth Circuit, once it is determined that

Bell’s actions are nonexempt, the lawfulness of Bell’s action

must be judged solely from the perspective of the antitrust

laws; but the Fifth Circuit says that even though Bell’s

actions are nonexempt, their lawfulness is to be judged

from the perspective of the regulatory standard. The need

for uniformity and efficient utilization of judicial resources

requires that this conflict be resolved so that the more than

forty lower courts faced with this dilemma in the other

cases pending against Bell System companies will know

which standard is to be applied.

Il. THE CONFLICT ON THE TAX QUESTION

The Fifth Circuit held that damages in an antitrust suit

must be reduced by federal income taxes. App. at A-36.

This holding is an unwarranted departure from this Court’s

precedent in Hanover Shoe, Inc. v. United Shoe Machinery

Corporation, 392 U.S. 481 (1968). In Hanover Shoe, this

Court addressed the issue of whether actual damages should

be reduced by federal income taxes in an antitrust case.

The Court acknowledged that an antitrust plaintiff is dam-

aged only to the extent of after-tax profits, but pointed out

that both actual and treble antitrust damages are taxed at

the time of recovery under the rule of Commissioner of

Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426

(1955). The Court held, therefore, that reduction of anti-

trust damages by federal income taxes is improper because

it constitutes double taxation. The decision of the Fifth

_

22

Circuit is in direct conflict with that holding. Bell did not

make this argument either in the trial court or on appeal

and the Fifth Cirenit’s sua sponte holding fails to consider

Hanover Shoe or the pertinent provision of the Internal

Revenue Code (“IRC”); indeed, the only authority men-

tioned is this Court’s recent decision in Norfolk & Western

Railway Co. v. Inepelt, 100 S.Ct. 755 (1980). Consideration

of these authorities will reveal that there is no basis for the

Fifth Circuit’s failure to follow Hanover Shoe.

A. EFFECT OF IRC § 186

In 1969, Congress enacted section 186 of the Internal

Revenue Code, a very complex provision allowing a narrow

and limited income tax deduction for cetain amounts recov-

ered in connection with an antitrust injury. Although a

cursory reading of secticn 186 might suggest that it affects

the rationale supporting Hanover Shoe, a critical analysis

of section 186 in light of its legislative history and the prin-

ciples underlying income taxation reveals that section 186

has no impact whatsoever on the holding in Hanover Shoe

or its underlying rationale.

An antitrust plaintiff still must include the entire amount

of antitrust damages in gross income. Section 186 allows a

deduction with respect to that amount only to the extent of

the lesser of (1) the compensatory amount,'* i.e., the amount

of actual damages (excluding punitive damages)! reduced

by costs of recovery (e.g., attorneys’ fees, court costs)!® or

(2) the amount of net uperating losses!” sustained in prior

taxable years, but only to the extent that losses attributable

M4 TRC § 186(a)(1).

15 Treas, Reg. § 1.186-1(c)(1).

16 TRC § 186(c); Treas. Reg. § 1.186-1(c)(4).

17 A net operating loss is an excess of allowable deductions over

gross income. IRC § 172(c).

23

to the antitrust injury were sustained in those same years

and only to the extent that those net operating losses were

not previously deducted under IRC § 172.18

A close analysis of section 186 reveals that it allows a

deduction with respect to antitrust damages only to the

extent that the antitrust plaintiff was denied the tax benefit

of income tax deductions customarily allowed in computing

taxable income. Thus, the purpose and effect of section 186

is not to exempt any portion of antitrust damages from

taxation, but rather to insure that the amount actually taxed

upon recovery represents only taxable income!® and does

not include any amounts that would have been allowed as

deductions but for the antitrust injury. This reading of

section 186 is in accord with its legislative history.2° At

least one commentator has reached a contrary conclusion.

See Comment, The Role of Income Taxes in Determining

Antitrust Treble Damages Awards, 56 TEXAS L. REV.

293 (1978). That conclusion, however, is based on an en-

tirely erroneous reading of section 186,21 thus demonstrat-

ing the complexity of the section and its susceptibility to

misinterpretation.

Since the entire amount of an antitrust recovery is still

subject to taxation at the time of recovery to the extent

18 (Hy, (gy neds IRC § 186(d)(1), (3); Treas. Reg. § 1,186-1(d)

8 Taxable income is the amount by which gross income exceeds

allowable deductions. IRC § 63.

*° See S. Rep. No. 552, 91st Cong., Ist Sess., reprinted in [1969] U.S.

Code Cong. & Ad. News 2027, 2315.

*1 See, e.g., the statement at page 296 that a plaintiff with no net

operating losses could deduct the entire amount of actual dam-

ages. Obviously, a plaintiff with no net operating losses can

deduct no portion of the antitrust award, since the deduction is

limited to the lesser of the compensatory amount or prior net

operating losses.

24

that it represents taxable income,” the holding in Hanover

Shoe, that reduction of antitrust Jamages by federal income

taxes is improper because it constitutes double taxation,

remains viable.

B. EFFECT OF NORFOLK

In Norfolk & Western Railway Co. v. Liepelt, 100 8.Ct.

755 (1980), this Court held that damages must be reduced

by federal income taxes in a case brought under the Federal

Employers’ Liability Act. Although the Fifth Circuit cited

Norfolk in connection with its holding that antitrust dam-

ages must be reduced by federal income taxes, Norfolk is

easily distinguishable. Personal injury damages are totally

exempt from federal income taxation under IRC $104

(a)(2); therefore, the danger of double taxation that con-

cerned the Court in Hanover Shoe was not present in Nor-

folk. Nowhere in Norfolk did the Court purport to over-

rule Hanover Shoe, and Hanover Shoe is not inconsistent

with Norfolk either in holding or in rationale.

A grant of certiorari is justified in this case by the Fifth

Circuit’s unwarranted departure from the precedent set in

Hanover Shoe. This case provides an excellent opportunity

for the Court to re-examine Hanover Shoe in light of the

enactment of section 186 and the decision in Norfolk and

to reaffirm its continued vitality. Guidance from this Court

is extremely desirable because of the complexity of section

186, its demonstrated susceptibility to misinterpretation,

and the needless complexity that will be injected into

already complex antitrust cases if misguided courts con-

tinue to disregard Hanover Shoe. Before Norfolk, most

courts refused to countenance the consideration of income

taxes in any type of damages suit because of the concomi-

22 Or, more specifically, to the extent that it would have represented

taxable income but for the antitrust injury.

25

tant speculation and complexity that overshadow the real

issues in the case.”> Although speculation and complexity

may not justify the exclusion of income taxes from consid-

eration in cases in which they are legally relevant, cer-

tainly the Court should take every opportunity to prevent

such speculation and complexity in cases in which income

taxes are legally irrelevant.

Review by this Court is particularly justified in view of

the universal application of the Fifth Circuit’s holding that

antitrust damages must be reduced by federal income taxes.

The implications of the holding could: affect not only the

forty pending Bell cases, and not only other section 2 cases

involving a regulated industry, but all private antitrust

eases. Unless this Court checks such unwarranted depar-

tures from Hanover Shoe, antitrust trials, which already

impose strains upon judicial and individual resources, could

become needlessly mired in: the complexities of federal

income tax law. The prompt resolution of this issue would

benefit courts and litigants alike.

CONCLUSION

For these reasons, a writ of certiorari should issue to

review the judgment and opinion of the Fifth Circuit.

Respectfully submitted,

Davin L. Orr

900 Congress Avenue

Austin, Texas 78701

Louis Pang

Riowarp A, SHEEHY

1100 Esperson Building

Houston, Texas 77002

Counsel For Petitioner

23 Nodoy & Western Railway Co. v. Liepelt, 100 S.. Ct. 755, 757-58

1 ;

26

CERTIFICATE OF SERVICE

I certify that true and correct copies of this Petition for

a Writ of Certiori were delivered to counsel for Respondent

by placing same in the United States Mail, postage prepaid,

addressed as follows:

Mr. Waurer EK. WorkKMAN

Baker & Borts

One Shell Plaza

Houston, Texas 77002

Mr. James M. Sarto

P. O. Box 1530

Houston, Texas 77002

Mr. Grorce L. SaunpERs, JR.

Siwwiey & Austin

One First National Plaza

Chicago, Illinois 60603

On thes th day of August, 1980. cs

a