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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1980
- **Citation:** 449 U.S. 912

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_0197%3A1. Public record. Not legal advice.