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

Supreme

-——]

Court, U. S.

FILED

8.02175 FF aus 61080

" | sue

AK, JR., CLERK

In Tue

Supreme Court

of the United States

Ooroser Trm 1979

Woopianns TELECOMMUNICATIONS CORPORATION,

Petitioner,

v.

SouTHWESTEEN Beit TeLePHONE Company,

Respondent.

On Wart Or Certiorari To THE

Unrrep States Court Or APPEALS

For Tue Firtx Crrovir

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

Louis Parner Davin L. Orr

Ricuarp A. SHEEHY McoGrwnis, LocormcE

Burtuer, Brinton, Ricz, & Kiicore

Coox & Knapp 900 Congress Avenue

1100 Esperson Building Austin, Texas 78701

Houston, Texas 77002 (512) 476-6982

(713) 237-3187

Counsel for Petitioner

a a ee nnernrnramnnnemneinensnanenme eee ea

Bowne of Houston, Inc. Printed In U.8.A,

TABLE OF CONTENTS

Opinion of the United States Court of Appeals for

the Fifth Circuit, May 1, 1980 .................. A-1

Opinion of the United States District Court for the

Southern District of Texas, March 9,1978 ....... A-37

Judgment of the United States Court of Appeals for

the Fifth Cireuit, May 1,1980 .................. A-48

Notice of Order Denying Petition for Rehearing and

Rehearing en banc, May 27,1980 ................. A-49

Mip-Texas Communications Systems, INC., ET AL.,

Plaintiff s-A ppellees,

Vv.

AMERICAN TELEPHONE AND TELEGRAPH CoMPANY, ET AL.,

Defendants,

SouTHWESTERN Bett TeLePpHone Company,

Defendant-Appellant.

No. 79-1221

Unttep States Court or Appgats, Firtx Circurr.

May 1, 1980.

APPEAL FROM THE UNITED STATES

DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF TEXAS.

Before AINSWORTH, INGRAHAM and GARZA, Cir-

cuit Judges.

AINSWORTH, Circuit Judge:

This is an antitrust action by Woodlands Telecommuni-

cations Corporation (WTC) for damages against South-

western Bell Telephone Company (Bell) based on alleged

violations of Sections 1 and 2 of the Sherman Anti-trust

Act, 15 U.S.C. §§1 & 2. WTC, a new corporation formed

for the purpose of providing telephone service within a new

residential development outside of Houston, Texas, known

as the Woodlands, based its suit principally on the refusal

of the defendant to provide toll interconnection of the pro-

posed telephone facility with the Beli System. The case

was submitted to a jury on special interrogatories resulting

in a verdict in favor of WTC against Bell for $18,369,827

A-2

damages which was trebled by the court in a final judgment

for $55,109,481. Defendant’s motion for judgment n.0o.v. or,

in the alternative, for a new trial was denied. Bell has

appealed from the judgment and asserted several grounds

for error in the trial which raise novel questions of the

proper accommodation of the antitrust laws with the regu-

lation of the telecommunications industry. We reverse and

remand for a new trial for reasons we shall detail.

I. LVYTRODUCTION

A. THE PERTINENT FACTS

We set forth an outline of those facts necessary to our

decision. During the early 1970’s Mitchell Energy & Devel-

opment Corporation (Mitchell) began the planning of a

new community to be located about 28 miles north of Hous-

ton. Eighteen thousand acres of vacant land was acqiired

by it for the building of a proposed city of an ultimate

population of 150,000 persons by the 1990’s. This commu-

nity, to be known as The Woodlands, was to be developed

by Mitchell’s wholly owned subsidiary, The Woodlands

Development Corporation. It qualified under the Urban

Growth and New Community Development Act of 1970, 42

U.S.C. § 4501 et seq., which provides for government guar-

antees of the bonds of private new community developers

up to a maximum of $50,000,000, and the Secretary of

Housing and Urban Development granted the developers

a bond guarantee for the maximum amount. 42 U.S.C.

§ 4514.

In early 1971 Mitchell’s representatives met with those

of various utility companies to investigate possible means

of providing basic services to The Woodlands. Mitchell

1 Treble damages are provided for in section 4 of the Clayton Act,

15 U.S.C. § 15.

A-3

attempted to obtain financial assistance in the form of pay-

ments or percentage of revenues from these companies

in return for the right to serve The Woodlands. Subse-

quently, representatives of Mitchell and Beli met to discuss

the providing of telephone services in the proposed devel-

opment. Bell expressed its willingness to furnish the tele-

phone services required, but objected to giving financial

assistance because it would be inconsistent with Bell’s obli-

gations as a regulated common carrier, and with general

company policy. Mitchell then began investigating the pos-

sibility of establishing a new independent telephone com-

pany to serve The Woodlands.

In order for an independent telephone company to do

business it was essential that its local lines interconnect

with the existing Bell System interstate network so that its

customers would have long-distance service. It was also

necessary that an independent company have central office

three-digit numbers known as NNX codes which are as-

signed and coordinated by the Bell System operating

companies.

Bell claimed that in accordance with its published tariffs

The Woodlands was located primarily in areas which were

part of its Spring and Pinehurst exchanges. Twenty per

cent of the site was in an exchange operated by Conroe

Telephone Company, an independent. Mitchell negotiated

with Mid-Texas Communications Systems, Inc. (Mid-

Texas), an independent telephone company, which led to

the formation of a new jointly owned independent to be

known as Woodlands Telecommunications Corporation,

plaintiff in this case. WTC then requested that Bell pro-

vide NNX codes and interconnection with the proposed

new telephone system. Bell refused to interconnect volun-

tarily. It planned to serve the area itself. Bell contended

that establishment of a new independent telephone com-

pany was contrary to the public interest and would be a

A-4

wasteful duplication of facilities with those of Bell. Bell

stated that it would interconnect with WTC only if ordered

to do so by state or federal regulatory authorities.

Accordingly, on November 9, 1972, WTC filed an

informal complaint with the Federal Communications

Commission (FCC) seeking an order under authority of

section 201(a) of the Communications Act of 1934, 47

U.S.C. § 201(a), to require Bell to interconnect with its

proposed facilities. Bell responded on December 13,

objected to interconnection, and stated its own intention to

serve The Woodlands. On March 20, 1973, the parties

attended a conference with FCC staff members about the

pending complaint of WTC. Bell’s attorney stated at the

meeting that if interconnection was ordered by FCC in

connection with the proposed interstate service it would

appeal the order to the courts. Intrastate connection would

still require compliance with the Texas statutory pro-

cedure. Bell insisted upon a full evidentiary hearing on

the record before the FCC but the Commission decided

that such a hearing was not required in light of the need

for expedited decision and thus the matter was to be deter-

mined by FCC on written submission of the parties. After

further discussion between WTC and Bell representatives,

WTC concluded on July 11 to discontinue its efforts to

serve The Woodlands, thereby clearing the way for Bell

to do so, and on August 2, a majority of WTC directors

voted to withdraw the FCC complaint. The parties dispute

the circumstances of the withdrawal of the complaint,

WTC contends it was economically coerced by defendant

Bell, which responds that the withdrawal was voluntarily

made.

B. THE PROCEEDINGS IN THE DISTRICT COURT

WTC filed this suit on November 19, 1973 against Bell

and American Telephone & Telegraph Company (AT&T)

A-5

alleging a conspiracy to monopolize and restrain trade in

the furnishing of telecommunications services in The

Woodlands in violation of the Sherman Antitrust Act.

Bell counterclaimed against WTC and cross-claimed

against Mid-Texas, Mitchell and Woodlands Development

Corporation, also on Sherman Act grounds. Defendants’

motion to dismiss the complaint on the basis that it was

immune from antitrust action because of the provisions of

the Communications Act of 1934 (47 U.S.C. § 151 et seq.)

was denied by the district court. See Woodlands Telecom-

munications Corp. v. AT&T, 447 F.Supp. 1261 (S.D.Tex.

1978). Thereafter, during the course of the trial AT&T

was dismissed as a defendant. As previously indicated,

the jury’s verdict was in favor of WTC and Bell brought

this appeal.

On appeal, Bell raises four principal issues. First, that

the district court erred in applying the antitrust laws to

an interconnection dispute which was subject to state and

federal regulations, under a standard inconsistent with the

antitrust standard of competition. Second, Bell contends

that under the circumstances it is immune from antitrust

liability because it is entitled to the protection provided

by the doctrine enunciated in Eastern Railroad Presidents

Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81

S.Ct. 523, 5 L.Ed.2d 464 (1961) and United Mine Workers

v. Pennington, 381 U.S. 657, 85 S.Ct. 1585, 14 L.Ed.2d 626

(1965), the so-called Noerr-Pennington doctrine, which

protects the rights of freedom of expression and resort to

governmental processes. Bell’s third issue is that the trial

judge erroneously limited Bell’s defense on the impact of

regulation by refusing to give any instructions to the jury

on the nature and effect of federal and state regulation

of the telecommunications industry in connection with the

issues before it. Bell also contends that the damages

A-6

assessed were based upon a damage model improper as a

matter of law. We discuss these issues in order.”

Il. IMPLIED IMMUNITY

Bell’s primary contention is that the district court erred

in applying the antitrust laws to an interconnection dispute

which was subject to regulation both by state and federal

authorities. Thus Bell asserts that antitrust liability can-

not be imposed upon it for failure voluntarily to inter-

connect with WTC. The federal regulatory authority is

found in section 201(a) of the Communications Act, 47

U.S.C. § 201(a), which reads as follows:

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 reason-

able request therefor; and, in accordance with the

orders of the Commission, in cases where the Commis-

sion, after opportunity for hearing, finds such action

necessary or desirable in th@mblic interest, to estab-

lish physical connections witlfMpther carriers, to estab-

lish through routes and charges applicable thereto and

the divisions of such charges, and to establish and pro-

vide facilities and regulations for operating such

through routes.

Section 201(a) does not expressly exempt a carrier from

antitrust liability for refusing a request to interconnect,®

2 In light of our resolution of the main issues in this case, we need

not discuss Bell’s other contentions.

3 The Communications Act does provide explicit exemptions for

telephone company consolidations and acquisitions. 47 U.S.C,

§§ 991(a), 999(c) )(1). The existence of an explicit exemption in

one part of the Act does not provide authority for the proposition

that other actions not directly covered are impliedly exempt.

Industrial Communications Systems, Inc. v. Pacific Tel. & Tel.

Co., 505 F.2d 152, 156 (9th Cir 1974). The existence of explicit

immunities may indicate that Congress did not intend for courts

to imply exemptions in other parts of the statute. See California

A-7

but Bell argues that it would be unfair to subject it to

antitrust liability in light of the FCC’s ultimate statutory

control over interconnection. Under this construction by

Bell, the public interest standard controlling interconnec-

tion under section 201(a) is inherently inconsistent with

the anticompetitive standard for assessing liability under

the antitrust laws. Bell asserts a right—and indeed an

obligation—to oppose interconnection in those cases

where it believes that the public interest would not thereby

be served, subject only to review of its action by the FCC

pursuant to section 201(a). To allow both antitrust and

regulatory standards to operate independently would, it is

contended, place Bell in a dilemma. Hither Bell would be

forced to approve all interconnection requests regardless

of the public interest involved, or it could continue to

refuse those requests it deems not in the public interest

only at risk of substantial antitrust liability. Bell asserts

that the only fair method of resolving the matter is for the

court to hold that section 201(a) creates an implied

immunity from the antitrust laws.*

v. FPC, 369 U.S. 482, 485, 82 S.Ct. 901, 904, 8 L.Ed.2d 54 (1962);

United States v. Borden Co., 308 U.S. 188, 200-01, 60 S.Ct. 182,

189-90, 84 L.Ed. 181 (1939); Cain v. Air Cargo, Inc., 599 F.2d 316,

320 (9th Cir. 1979). In order to assure the proper relationship

between regulatory provisions and antitrust safeguards, courts

must inquire if “application of the antitrust laws would seriously

undermine a comprehensive regulatory scheme,” even in the

absence of explicit exemption. See Note, ATT and the Antitrust

Laws: A Strict Test for Implied Immunity, 85 Yale L.J. 254, 269-70

n.76 (1975). Cf. Pan Amer. World Airways, Inc. v. United States,

371 U.S. 296, 320-21, 83 S.Ct. 476, 490, 9 L.Ed.2d 325 (1963)

(Brennan, J., dissenting ).

4 Bell also argues that federal and state regulation of the telecom-

munications industry is so pervasive as to warrant blanket

immunity for its actions in this case. See United States v. National

Ass'n Sec. Dealers, Inc., 422 U.S. 694, 730, 95 S.Ct. 2427, 2448, 45

L.Ed.2d 486 (1975); Hughes Tool Co. v. Trans World Airlines,

Inc., 409 U.S. 363, 387-89, 93 S.Ct. 647, 661-62, 34 L.Ed.2d 577

(1973); Pan Amer. World Airways, Inc. v. United States, 371 U.S.

A-8

The Supreme Court has repeatedly held that “[r]epeals

of the antitrust laws by implication from a regulatory

statute are strongly disfavored, and have only been found

in cases of plain repugnancy between the antitrust and

regulatory provisions.” United States v. Philadelphia

National Bank, 374 U.S. 321, 350-51, 83 S.Ct. 1715, 1734-35,

10 L.Ed.2d 915 (1963) (footnotes omitted). See Gordon v.

New York Stock Exchange, Inc., 422 U.S. 659, 682, 95 S.Ct.

2598, 2611, 45 L.Ed.2d 463 (1975). The unwillingness of

the courts to imply antitrust immunity is based on recog-

nition that the “antitrust laws represent a fundamental

national economic policy” which should not be lightly dis-

turbed. Carnation Co. v. Pacific Westbound Conference,

383 U.S. 2138, 218, 86 S.Ct. 781, 784, 15 L.Ed.2d 709 (1966).

Therefore, immunity will be implied only if necessary to

permit the regulatory scheme to function, and then only

to the “minimum extent necessary.” Silver v. New York

Stock Exchange, 373 U.S. 341, 357, 83 S.Ct. 1246, 1257, 10

L.Ed.2d 389 (1963).

296, 300-01, 83 S.Ct. 476, 480, 9 L.Ed.2d 325 (1963). Bell con-

tends that immunity is justified because “scarcely a single busi-

ness act is free from continuous regulation or at least [some]

administrative governmental review.” Carter v. ATUT, 365 F.2d

486, 495 (5th Cir.), cert. denied, 385 U.S. 1008, 87 S.Ct. 714, 17

L.Ed.2d 546 (1967). See Western Electric Co. v. Milgo Elec-

tronic Corp., 568 F.2d 1203 (5th Cir.), cert. denied, 439 U.S. 895,

99 S.Ct. 255, 58 L.Ed.2d 241 (1978). Neither Carter nor Western

Electric considered the ge ge question directly. Carter con-

cerned the application of the doctrine of primary jurisdiction,

whereas Western Electric involved the appealability of an FCC

order. Indeed, courts have often rejected the argument that anti-

trust immunity should be implied because of the pervasiveness

of federal and state regulation. See, e. g., Essential Communica-

tions Systems, Inc. v. ATT, 610 F.2d 1114 (3d Cir. 1979); MC]

Communications Corp. v. AT&T, 462 F.Supp. 1072, 1080-82

N.D.II1.1978); United States v. AT&T, 427 F.Supp. 57, 60-61

D.D.C, se Ci cert. denied, 434 U.S. 966, 98 S.Ct. 507, 54

L.Ed.2d 452 (1977); Macom Products Corp. v. AT&T, 359 F.

Supp. 973, 976 (C.D.Cal.1973). Federal and state regulation of

the telecommunications industry is not so pervasive as to justify a

blanket immunity.

A-9

In the FCC’s determination of the “public interest”

question under the Act there is no doubt that competition

is a relevant factor. FCC v. RCA Communications, Inc.,

346 U.S. 86, 94, 73 S.Ct. 998, 1004, 97 L.Ed. 1470 (1953).

Competition per se, however, is not the sole touchstone for

decision since competition is not the only consideration.

RCA, supra, 346 U.S. at 93, 73 S.Ct. at 1003; Hawaiian

Telephone Co. v. FCC, 498 F.2d 771, 775-77 (D.C.Cir.1974).

Rather, the FCC must consider all factors relating to the

“public convenience and necessity.” Hawaiian Telephone,

498 F.2d at 776. In general, the public interest is to be

considered in light of the overall purpose of the Communi-

cations Act “to make available, so far as possible, to all

the people of the United States a rapid, efficient, Nation-

wide, and world-wide wire and radio communication ser-

vice with adequate facilities at reasonable charges... .”

47 U.S.C. § 151. As decisions under section 201(a) reveal,

the FCC considers a number of specific non-competition-

related factors in determining the public interest in inter-

connection cases. See, e. g., Oklahoma-Arkansas Tele-

phone Co. v. Southwestern Bell Telephone Co., 6 F.C.C.

809 (1939) (adequacy of existing service); Jn the Matter

of Western Union Telegraph Co., 17 F.C.C. 152, 171-75

(1952) (lack of evidence of public necessity resulting in

a “blank check” for competitor to serve most profitable

routes if interconnection were ordered). Since an analysis

of competitive effects is not decisive, the FCC may not

adequately safeguard antitrust interests. Thus, in the

absence of clear conflict, the antitrust laws must be per-

mitted to operate.

WTC argues that the Supreme Court’s decision in the

antitrust case of Otter Tail Power Co. v. United States,

410 U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d 359 (1973), controls

the question of Bell’s implied immunity here. In that case,

A-10

Otter Tail Power Company, an electric utility that gener-

ated and transmitted electric power to hundreds of com-

munities in Minnesota, North Dakota, and South Dakota,

allegedly violated the antitrust laws by a number of preda-

tory actions. Within each town, Otter Tail operated pur-

suant to a 10-20-year franchise granting monopoly status

in the locality. In four communities, the citizens voted to

establish independently owned systems at the expiration

of the Otter Tail franchise. Localities wishing to establish

independent systems either had to obtain wholesale power

directly from Otter Tail itself or purchase it elsewhere

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

sion lines. When asked to provide or wheel power, Otter

Tail refused. Two localities filed complaints before the

Federal Power Commission (I°PC) to compel Otter Tail

to interconnect. One town successfully pursued its claim,

but the other withdrew its complaint and restored Otter

Tail’s franchise. Two other towns were able to contract

for power elsewhere only to have Otter Tail refuse to

wheel it. In addition, Otter Tail had either initiated or

sponsored litigation unrelated to the FPC proceedings

which had the effect of frustrating the towns’ plans by

interfering with their ability to float revenue bonds needed

to finance the independent systems.

Otter Tail contended that it was insulated from antitrust

liability because of existing federal regulation, relying

specifically on section 202(b) of the Federal Power Act,

which grants FPC authority to compel interconnection if

found to be “necessary or appropriate in the public inter-

est.” 16 U.S.C. §824a(b). The Supreme Court rejected

the argument on the ground that the statutory provision

was designed to foster voluntary interconnection. After

reviewing the relevant legislative history the Supreme

Court held that Congress rejected a pervasive regulatory

A-1l

scheme “in favor of voluntary commercial relationships.

When these relationships are governed in the first instance

by business judgment and not regulatory coercion, courts

must be hesitant to conclude that Congress intended to

override the fundamental national policies embodied in the

antitrust laws.” Otter Tail, supra, 410 U.S. at 374, 93 S.Ct.

at 1028. Thus, there was no basis for concluding that Con-

gress intended to displace the antitrust laws in that case.

Relying on Otter Tail, the district court in the present

case held that Bell was not entitled to antitrust immunity

because its initial decision whether to interconnect was a

matter of business judgment and was not the product of

“regulatory supervision.” Woodlands Telecommunications

Corp. v. AT&T, 447 F.Supp. 1261, 1265-66 (S.D.Tex.1978).

The district court noted that “[i]f the refusal to intercon-

nect is for the express purpose of excluding competition,

as is alleged in this case, the antitrust laws may provide

another remedy in addition to section 201(a).” Woodlands

Telecommunications, swpra, 447 F.Supp. at 1266.

However, to categorize Bell’s decision as purely volun-

tary or only a matter of business judgment is somewhat

misleading. As Bell argues, its decision is not voluntary

in the full sense of the word because Bell conforms its

policies to the regulatory provision by considering factors

related to the public interest when deciding whether to

interconnect. Thus, Bell asserts that it would be inherently

unfair to subject it to antitrust liability for decisions which

it considers are taken in the public interest.

Bell’s position is not without merit. Undoubtedly there

may be situations where interconnection should not be

permitted since it would not be in the public interest. To

argue otherwise would be to ignore the effect of the statu-

tory inquiry; the statute envisions interconnection requests

A-12

that are both in the public interest and those that are not.

When an interconnection is not in the public interest, Bell’s

refusal is obviously supportable, for without the refusal, an

undesirable interconnection would occur. In those instances

where interconnection is not in the public interest, the

statutory framework places the initial onus of refusal on

Bell. To create the potential for antitrust liability where

Bell is acting to safeguard the public interest would be con-

trary to public policy. Fairness to the regulated industry

is an important factor, therefore, in determining whether

antitrust immunity exists. See Note, Antitrust and Regu-

lated Industries: A Critique and Proposal for Reform of

the Implied Immunity Doctrine, 57 Tex.L.Rev. 751, 757,

787-88 (1979).

Nevertheless, it would be improper to imply that all

decisions refusing interconnection are immune. Though

the refusal may be based upon articulable concerns of

public policy, it may also be possible to rationalize a

decision whose purpose is anticompetitive. While section

201(a) provides a mechanism to compel interconnection,

the FCC cannot always provide complete relief to an

injured competitor. The FCC’s mandate is not explicitly

centered upon competitive effects so that its inquiry into

antitrust concerns may be obscured. Nor is the FCC

empowered to award damages in favor of the injured

competitor. Thus, an antitrust court has an important

role in preventing misuse of the public interest standard.

Accordingly, section 201(a) of the Communications Act

does not as matter of law automatically grant Bell immu-

nity from the effects of the antitrust laws.®

5 See generally United States vy. ATUT, 46i F.Supp. 1314, 1328

n. 43 (D.D.C.1978). See also Nader v. FCC, 520 F.2d 182, 206

(D.C.Cir.1975).

8 See generally MCI Communications Corp. v. ATOT, 462 F.Supp.

1072, 1089-96 (N.D.I11.1978) (no immunity for refusing to inter-

A-13

Nevertheless, to the extent that Bell based its decision

here on articulable concerns relating to the public interest

as defined in section 201(a), it is entitled to a measure of

protection from the effects of the antitrust laws. As we

discuss later in Section III of this opinion, Bell’s claimed

reliance on public interest concerns in denying an intercon-

nection request are relevant to an assessment of Bell’s

alleged monopolistic purpose or intent. Thus, while we

affirm the district court’s ultimate holding that Bell’s

actions are not immune as a matter of law, we disagree

with the district court’s analysis that section 201(a) is

unrelated to Bell’s initial decision whether to interconnect.

Throughout the course of proceedings, Bell has argued that

its decision was atfected by concerns related to the public

interest as provided in section 201(a). Bell’s action may

have been so constrained, and its actions must be con-

sidered in a different light than if no regulatory provision

which could mandate interconnection existed, for it is

connect with specialized communications carrier); United States

v. ATUT, 461 F.Supp. 1314, 1320-30 (D.D.C.1978) (no immunity

for alleged predatory practices including refusals to interconnect

with long-distance telephone facilities). See also Essential Com-

munications Systems, Inc. v. ATUT, 610 F.2d 1114 (3d Cir. 1979);

Jarvis, Inc. v. ATOT, 481 F.Supp. 120, 123 (D.D.C.1978).

In its brief plaintiff also calls to our attention the position enunci-

ated in the amicus brief of FCC filed in United States v. ATUT,

427 F Supp. 57, 58 (D.D.C.1976), cert. denied, 429 U.S. 1071, 98

S.Ct. 507, 54 L.Ed.2d 452 (1977). There it was alleged that AT&T

had refused interconnection with new independent telephone

aro, gona organized to serve new communities. Memorandum of

FCC as Amicus Curiae, reprinted at 62 F.C.C. 1102, 1130. The

FCC’s brief stated in part that:

[f]or purposes of communications policy, interconnection in

that circumstance would appear to be a neutral act; if it were

required for reasons of competition, and if there were no

affirmative communications policy reasons to forbid intercon-

nection, maintenance of an antitrust action would not neces-

sarily interfere with Commission regulation.

62 F.C.C.2d at 1112-13 (emphasis in original).

A-14

entirely plausible that its initial decision whether to inter-

connect was closely tied to the public interest inquiry under

section 201(a).

Bell also contends that its actions in this case were

immune from antitrust liability by virtue of state regula-

tion. Under Texas law applicable at the time of this suit,’

telephone companies were under an obligation to inter-

connect with other companies upon request, Tex.Rev.Civ.

Stat. Ann. art. 1427, except that no telephone company

could be compelled to interconnect for “any message origi-

nating at any point on its own lines.” Tex.Rev.Civ.Stat.

Ann. art. 1429. There was no statewide commission to

resolve disputes concerning interconnection, but they were

submitted to the local city councils or county commis-

sioner’s court which could order interconnection if found

to be “necessary for public convenience.” Tex.Rev.Civ.Stat.

Ann. art. 1430. Failure to comply with an order from the

appropriate local authority could result in a maximum

penalty of ten dollars per day. Tex.Rev.Civ.Stat.Ann. art.

1431. Bell contends that local authorities were required to

deny an interconnection request if an existing telephone

company was already serving the area, citing in support of

its contention Ohmes v. General Telephone Co., 384 S.W.2d

796, 799 (Tex.Civ.App.— Amarillo 1964, writ ref’d).

As with federal regulatory provisions, there exists a

strong presumption against finding antitrust immunity on

the basis of state regulation. Cantor v. Detroit Edison Co.,

428 U.S. 579, 595-98 & nn. 36, 37, 96 S.Ct. 3110, 3120 & nn.

7In 1976, Texas enacted a new statute creating a state-wide reg-

ulatory commission with jurisdiction over the telecommunications

industry. Tex.Rev.Civ.Stat.Ann. art. 1446c (Vernon Supp.1979),.

The new law treats interconnections in a manner similar to sec-

tion 201(a) in that interconnection refusals are subject to review

by a centralized commission under a public interest standard.

Tex.Rev.Civ.Stat.Ann. art. 1446c § 61(2) (Vernon Supp.1979).

A-15

36, 37, 49 L.Ed.2d 1141 (1976). Thus, the mere possibility

of a conflict between state regulation and federal antitrust

standards is insufficient to support a finding of immunity.

Cantor, supra, 428 U.S. at 596, 96 S.Ct. at 3120.8

A review of applicable Texas law demonstrates that

immunity from federal antitrust law is not “imperative in

the continued effective functioning” of the state regulatory

scheme. Cantor, supra, 428 U.S. at 595-96 n. 36, 96 S.Ct. at

3120-21 n. 36. Like its federal counterpart, Texas law relies,

in the first instance, on the decision of each individual

telephone company whether to interconnect. Indeed, Texas

law is substantially less potent in that no statewide regula-

tory commission was available to force interconnection, but

control, to the extent that it existed at all, was exercised

by decentralized local authorities. See Fulda, Telephone

Regulation in Texas: Should Regulation by Cities Be

Replaced by a State Commission? 45 Tex.L.Rev. 611, 618-20

(1967). Accordingly, since Bell’s actions were not com-

pelled by state regulatory actions they were not immune by

virtue of state regulation. See Interconnect Planning Corp.

v. AT&T, 465 F.Supp. 811 (S.D.N.Y. 1978).

Il. NOERR-PENNINGTON

Bell’s second major contention is that its actions are

immune from antitrust liability under the so-called Noerr-

Pennington doctrine. The guiding principle behind the

Noerr-Pennington immunity is to insure “uninhibited

access to government policy makers.” George R. Whitten,

Jr., Inc. v. Paddock Pool Builders, Inc., 424 F.2d 25, 32

8 See generally Goldfarb v. Virginia State Bar, 421 U.S. 773, 79i,

95 S.Ct. 2004, 2015, 44 L.Ed.2d 572 (1975) (antitrust immunity

should be recognized only where state law compels action taken

by regulated company ). See also Jackson v. Metropolitan Edison

(ier “ U.S. 345, 357, 95 S.Ct. 449, 456-57, 42 L.Ed.2d 477

A-16

(1st Cir.), cert. denied, 400 U.S. 850, 91 S.Ct. 54, 27 L.Hd.2d

88 (1970). Initially the doctrine was applied to efforts to

influence legislative and executive action. Eastern Rail-

road Presidents Conference v. Noerr Motor Freight, Inc.,

365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961) (publicity

campaign by railroad companies designed to obtain legisla-

tion adverse to trucking industry); United Mine Workers

v. Pennington, 381 U.S. 657, 85 S.Ct. 1585, 14 L.Ed.2d 626

(1965) (joint effort by employers and union to influence

public offcials even though intended to eliminate competi-

tion). It is now clear, however, that Noerr-Pennington

immunity extends to attempts to influence judicial and

administrative actions since the “right to petition extends

to all departments of the Government.” California Motor

Transport Co. v. Trucking Unlimited, 404 U.S. 508, 510,

92 S.Ct. 609, 611-12, 30 L.Ed.2d 642 (1972). See generally

Fishel, Antitrust Inability for Attempts to Influence Gov-

ernment Action: The Basis and Limits of the Noerr-Pen-

nington Doctrine, 45 U.Chi.L.Rev. 80, 96-104 (1977).

Bell contends that under Noerr-Pennington antitrust

liability cannot be imposed for actions taken to bring

important questions before governmental authorities for

resolution. Thus Bell asserts that its refusal to inter-

connect is protected since refusal was a necessary first step

in bringing the dispute before the FCC.

The erux of the Noerr-Pennington immunity is the need

to protect efforts directed to governmental officials for the

purpose of seeking redress. The doctrine has been applied

only to situations involving direct actions made to influence

governmental decisionmaking. See, e. g., Noerr, supra

(publicity campaign designed to influence passage of state

laws) ; California Motor, supra (instituting state and fed-

eral proceedings to defeat award of operating rights) ;

Franchise Realty Interstate Corp. v. San Francisco Local

A-17

Joint Executive Board, 542 F.2d 1076 (9th Cir. 1976)

(direct lobbying efforts opposing building permit grants

before zoning board), cert. denied, 430 U.S. 940, 97 S.Ct.

1571, 51 L.Ed.2d 787 (1977); Metro Cable Co. v. CATV of

Rockford, Inc., 516 F.2d 220 (7th Cir. 1975) (making repre-

sentations to local city council concerning cable television

franchise). Bell’s initial decision to refuse interconnection

was not directed toward any governmental agency or offi-

cial. Bell was not required to consult with the FCC or

obtain approval of its decision to refuse interconnection.

Therefore, refusal was a necessary first step if FCC action

was to occur. Until the governmental process is initiated

however, Noerr-Pennington immunity should not extend

to actions occurring in an essentially private context.

Bell’s initial refusal to interconnect, therefore, was not an

attempt to influence governmental action so as to warrant

protection under Noerr-Pennington.

Bell contends that this court’s decision in International

Telephone & Telegraph Corp. v. Umted Telephone Co. of

Florida, 550 F.2d 287 (5th Cir. 1977), controls this case.

In United Telephone, plaintiff ITT entered into an agree-

ment with the developers of an extensive real estate

project, whereby ITT would provide the equipment for a

central telephone terminal system. In order to provide

service to areas outside the development, the developers

requested interconnection with United’s facilities. The

developers did not have an operating certificate from the

state regulatory commission, which was a prerequisite to

operation. Accordingly, United filed a complaint with the

Florida Public Service Commission questioning the legality

of the proposed interconnection under state law, but stat-

ing its willingness to interconnect to the extent that the

operation was legal. The developers, joined by intervenor

ITT, moved to dismiss the complaint, which was denied by

A-18

the Commission, and neither party appealed from the

adverse decision. The Commission later terminated the

proceedings as moot when the developers abandoned their

effort to install the telephone system. The Commission

said in its order that the proposal in fact violated state

law since the developers did not have a certificate of public

convenience and necessity. ITT then brought suit for

damages against United under the antitrust laws, alleging

that United had filed a “sham” complaint with the Com-

mission. This court held that the antitrust suit was barred

by operation of the Noerr-Pennington doctrine since

United properly brought the dispute before the Commis-

sion which was “the authority to determine whether the

actions herein would be unlawful under Florida law.”

United Telephone, supra, 550 F.2d at 289.

Bell asserts that it did nothing more than bring this

matter before the FCC which had the authority to deter-

mine the validity of the refusal under federal law to inter-

connect. The cited case is distinguishable, however, from

the present case. First, in United Telephone, the regulatory

scheme permitted United itself to commence administrative

review by the filing of a complaint, unlike the situation in

the present case where Bell did not initiate the FCC pro-

ceeding. The complaint in United Telephone did not allege

a series of wrongful acts, but contended that the filing of

the complaint itself before the state regulatory agency was

sufficient to subject United to antitrust liability. In the

present case, WTC alleges anticompetitive actions beyond

the scope of the FCC action. The regulatory agency in

United Telephone actually decided the merits of the dis-

pute in favor of United, and it would be difficult to conclude

that the filing of a complaint constitutes a sham where the

party seeking relief actually prevails. See, e. g., Taylor

Drug Stores, Inc. v. Associated Dry Goods Corp., 560 F.2d

A-19

211, 213 (6th Cir. 1977) ; Franchise Realty, supra, 542 F.2d

at 1079; Central Bank of Clayton v. Clayton Bank, 424

F.Supp. 163, 167 (E.D.Mo.1976), aff'd mem., 553 F.2d 102

(8th Cir.), cert. denied, 433 U.S. 910, 97 S.Ct. 2978, 53

L.Ed.2d 1095 (1977). See generally 1 P. Areeda & D.

Turner, Antitrust Law § 203 (1978). In the present case,

the complaint was withdrawn prior to final FCC determina-

tion. The instant case is clearly different under the cir-

cumstances. Accordingly, we hold that Bell’s initial deci-

sion refusing interconnection does not fall within the

protection afforded by the Noerr-Pennington doctrine.

WTC also categorized Bell’s procedural moves opposing

its complaint before the FCC as “delaying tactics” which

constituted anticompetitive conduct. For example, WTC

argued that Bell’s insistence upon a full hearing on the

record rather than agreeing to follow the written submis-

sion procedure suggested by the FCC staff was evidence

of improper tactics. It is clear, however, that under

California Motor Bell had a right to contest the FCC com-

plaint regardless of any anticompetitive intent. California

Motor, supra, 404 U.S. at 511, 92 S.Ct. at 612. WTC argues

that Bell’s actions before the FCC are not immune because

they fall within the so-called “sham exemption” to Noerr-

Pennington immunity which prevents a party from misus-

ing governmental processes by employing means that

achieve “substantive evils.” California Motor, supra 404

USS. at 513-16, 92 S.Ct. at 613-14. See Woods Exploration

& Producing Co. v. Aluminum Company of America, 438

F.2d 1286, 1296-98 (5th Cir. 1971), cert. denied, 404 U.S.

1047, 92 S.Ct. 701, 30 L.Ed.2d 736 (1975).

In assessing the applicability of the “sham exemption”

to Bell’s direct representations before the FCC, it is

important to note that it should be read narrowly in order

to protect the first amendment right of access to adminis-

A-20

trative proceedings. Franchise Realty, supra, 542 F.2d at

1082. We must be particularly careful in considering

allegations of sham in situations like the present one where

the applicant withdrew its claim prior to final agency reso-

lution since the administrative determination may benefit

the factfinder in characterizing the challenged action. See

1 P. Areeda & D. Turner, Antitrust Law § 203b (1978).

Cf. Israel v. Baxter Laboratories, Inc., 466 F.2d 272, 279-80

(D.C.Cir.1972) (case alleging improper conduct before

administrative agency deferred pending remand to the

agency to determine issues relating to the supposed sham

conduct).

In the present case, if is difficult to understand how

Bell’s direct dealings before the FCC can fairly be

categorized as a sham. As the Supreme Court noted in

California Motor, “[O'p ponents before agencies or courts

often think poorly of the other’s tactics, motions, or

defenses and may readily call them baseless. One claim,

which a court or agency may think baseless, may go

unnoticed; but a pattern of baseless, repetitive claims may

emerge which leads the factfinder to conclude that the

administrative and judicial processes have been abused.”

California Motor, supra, 404 U.S. at 513, 92 S.Ct. at 613.

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

1072, 1102-04 (N.D.I1.1978).°

9 Indeed, WTC has not alleged a consistent pattern whereby Bell

refused interconnection requests in all cases and then raised

a of procedure for the purposes of delay before the FCC.

n fact, Béll has voluntarily interconnected with other inde-

pendent oe companies in the past. Thus, the situation is

unlike California Motor where it was contended that the various

conspirators opposed every effort by a new competitor to enter

the market by initiating administrative proceedings “without

— cause and regardless of the merits.” California Motor

ransport Co. v. Trucking Unlimited, 404 U.S. 508, 512, 92 S.Ct.

609, 612, 30 L.Ed.2d 642 (1972). Cf. Otter Tail Power Co. v.

United States, 410 U.S. 366, 372, 93 S.Ct. 1022, 1027, 35 L.Ed.2d

A-21

In summary, we hold that Bell is not entitled to immunity

under the Noerr-Pennington doctrine since its refusal to

interconnect was not directed toward influencing govern-

mental action. Its direct dealings with the FCC, however.

are entitled to that protection.’®

359 (1973) (power company instituted litigation against four

municipalities that were attempting to create independent sys-

tems). See generally Note, Limiting the Antitrust Immunity for

Concerted Attempts to Influence Courts and Adjudicatory Agen-

cies: Analogies to Malicious Prosecution and Abuse of Process, 86

Harv.L.Rev. 715 (1974).

10In this regard, Bell requested and was denied an instruction

specifically setting forth the application of the Noerr-Pennington

octrine with respect to its gown to WTC’s complaint before

- FCC. In particular Bell requested an instruction to the

eirect:

WTC claims that Southwestern Bell acted unlawfully in

opposing WTC’s informal complaint before the FCC to compel

Southwestern Bell to interconnect, and in insisting that the

FCC hold a formal evidentiary hearing to decide the matter.

You are instructed that to demand a hearing before a court or

an administrative agency does not violate the Sherman Act,

even if such demand is made as a joint and concerted action,

and even if the intent or purpose of the demand is to eliminate

competition, unless that demand is purely and simply a sham.

Therefore, you are instructed that, even if you believe that

Southwestern Bell and AT&T combined or conspired to restrain

trade as I have defined those terms to you, you may not

find that Defendants violated the Sherman Act unless WTC

specifically proves by a preponderance of the evidence that

Southwestern Bell opposed WTC’s informal complaint before

the FCC and demanded a hearing without any probable cause

and totally regardless of the merits of Southwestern Bell’s or

AT&T's position under the Communications Act.

You are instructed that petitioning an administrative agency

such as the FCC can result in certain delays because admin-

istrative procedures are often time consuming. Such delays are

a price which businesses have to pay in our complex, highly

a gre economy. Southwestern Bell and AT&T cannot be

held responsible for the delays occasioned solely by adherence

to the statutory provisions and procedural requirements of the

FCC. Such delays cannot, as a matter of law, form a basis for

the finding of an antitrust violation.

Bell’s Requested Instruction #8 (footnotes omitted). While the

district court instructed the jury on the import of Noerr-

Pennington in general, we believe that in substance Bell’s re-

quested specific instruction was proper.

A-22

IV. INSTRUCTIONS TO THE JURY

Bell contends that the district court erred by failing to

instruct the jury concerning the effect of regulation as it

related to Bell’s actions in refusing interconnection with

WTC. The Supreme Court has recognized that consideration

of federal and state regulation is proper in certain instances

even after the issue of antitrust immunity has been resolved.

United States v. Marine Bancorporation, Inc., 418 U.S. 602,

627, 94 S.Ct. 2856, 2872-73, 41 L.Ed.2d 978 (1975) (applica-

tion of the antitrust laws to bank mergers “must take into

account the unique federal and state regulatory restraints”

on defendant’s conduct). See Silver v. New York Stock Ex-

change, 373 U.S. 341, 360-61, 83 S.Ct. 1246, 1258-59, 10 L.Ed.

2d 389 (1963). The Ninth Circuit also has noted the continu-

ing significance of regulation:

This is not to say that the nature and extent of regu-

lation is, in the absence of an exemption, irrelevant

from a factual perspective. The impact of regulation

on pricing and other competitive factors is too obvious

to be ignored. In the absence of an exemption claim,

the fact of regulation is significant, but not because it

embodies a doctrinal scheme different from the anti-

trust law; the sole legal perspective is that afforded by

the antitrust law. Rather, the impact of regulation

must be assessed simply as another fact of market life.

International Telephone & Telegraph Corp. v. General

Telephone and Electronics Corp., 518 F.2d 913, 935-36 (9th

Cir. 1975) (footnote omitted). Thus, the anti-trust laws are

not so inflexible as to deny consideration of governmental

regulation. “[AJntitrust courts can and do consider the

particular circumstances of an industry and therefore

adjust their usual rules to the existence, extent, and nature

of regulation. Just as the administrative agency must con-

sider the competitive premises of the antitrust laws, the

antitrust court must consider the peculiarities of an indus-

A-23

try as recognized in a regulatory statute.” 1 P. Areeda &

D. Turner, Antitrust Law § 223d (1978). See Jacobi v.

Bache € Co., 520 F.2d 1231, 1237-39 (2d Cir. 1975) (reject-

ing application of per se rule in light of regulation of stock

exchange), cert. denied, 423 U.S. 1053, 96 S.Ct. 784, 46 L.Ed.

2d 642 (1976). See also Almeda Mall, Inc. v. Houston

Iighting & Power Co.,... F.2d... . (5th Cir. 1980)

(No. 78-1586, April 11) (slip op. at 4834-35). The fact of

regulation may therefore operate within the confines of the

applicable antitrust laws.

The gravamen of WTC’s theory of liability is that Bell

violated section 2 of the Sherman Act by using monopoly

power in the long-distance telephone market to hinder com-

petition in the local Woodlands market.!! WTC claims that

Bell’s refusal to deal with WTC in the long-distance market

constituted a willful misuse of its monopoly power in vio-

lation of the antitrust laws. Illegal monopolization under

section 2 has two distinct elements: (1) possession of

monopoly power in the relevant market, and (2) “the willfu!

acquisition or maintenance of that power as distinguished

from growth or development as a consequence of a superior

product, business acumen, or historic accident.” United

States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698,

1704, 16 L.Ed.2d 778 (1966). See generally Berkey Photo,

Inc. v. Eastman Kodak Co., 603 F.2d 263, 271-76 (2d Cir.

1979), cert. denied, ..US.....,1008.Ct. 1061, 62 L.Ed.2d

783 (1980). A monopolist may not arbitrarily or invidiously

use its monopoly power in one market, even if lawfully

obtained, to harm competition in another market. See, e.g.,

United States v. Griffith, 334 U.S. 100, 107-08, 68 S.Ct. 941,

11 WTC originally alleged violations of both section 1 and section 2

of the Sherman Act. The subsequent dismissal of defendant

AT&T, however, removed the section 1 conspiracy claims.

eeey. WTC’s claim against Bell was premised solely on

section 2.

A-24

945-46, 92 L.Ed. 1236 (1948) ; Smith-Kline Corp. v. Eli Lily

& Co., 575 F.2d 1056 (3d Cir.), cert. denied, 439 U.S. 838, 99

S.Ct. 123, 58 L.Ed.2d 134 (1978) ; Pacific Coast Agricultural

Export Association v. Sunkist Growers, Inc., 526 F.2d 1196

(9th Cir. 1975), cert. denied, 425 U.S. 959, 96 S.Ct. 1741, 48

L.Ed.2d 204 (1976). Bell contends that the effect of regu-

lation is relevant to the issue of the existince of monopoly

power and misuse of that power.

A. REGULATION AND MONOPOLY POWER

Monopoly power exists if a firm has “the power to control

prices or exclude competition.” Grinnell, supra, 384 U.S. at

571, 86 S.Ct. at 1704. In the present case, the district court

instructed the jury that:

Southwestern Bell has “monopoly power” in the rele-

vant 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. You are further instructed that the

relevant market is the providing of telephone services

to The Woodlands. Because the court has determined

that Southwestern Bell possessed monopoly power in

the relevant market, you need not deliberate on this

element, but rather you are to regard it as proven by

by WTC by a preponderance of the evidence.

R. at 624. Thus, the district court withdrew this critical

issue from the jury’s consideration. Bell argues that this

instruction was erroneous since it could not exclude com-

petition from The Woodlands market given the existence

of section 201(a) by which a competitor may petition

the FCC for an order to interconnect. Specifically, Bell

requested and was refused an instruction to the effect that:

You are instructed that the mere fact that South-

western Bell may have had a monopoly in the provision

of telephone service in certain markets or areas in the

A-25

sense that it had a large share or the e1 tire share of

those markets would not be sufficient to establish that

Southwestern Bell possessed monopoly power. As I

instructed you earlier, Southwestern Bell as a regu-

lated public utility under both state and federal law

was under a common carrier duty to serve all would-be

subscribers in its service areas upon demand.

In determining whether Southwestern Bell had mon-

opoly power in the sense that it had the power to

exclude competition, you are instructed that both Texas

and federal law provided procedures to compel South-

wesiern Bell to connect with other telephone companies

where certain conditions were met. To establish that

Southwestern Bell had monopoly power, therefore,

WTC must prove by a proponderance of the evidence

that despite the authority of the FCC to order inter-

connection, Southwestern Bell nonetheless had the

power to exclude competition. In this connection, I

must remind you that my earlier instructions con-

cerning Southwestern Bell’s right to oppose WTC’s

informal complaint to the FCC and to insist upon a

formal evidentiary hearing applies equally to the

alleged offense of monopolization.

Bell’s Requested Instruction # 13 (footnote omitted).

In determining the proper instruction to the jury in this

regard, the court should have been aware that in specific

circumstances regulatory control is relevant to the exist-

ence of monopoly power and may even prohibit a finding

of such power as a matter of law. See, e.g., Travelers Insur-

ance Co. v Blue Cross of Western Pennsylvania, 361 F.

Supp. 774, 780 (W.D.Pa.1972) (company was not a mono-

polist since it lacked control over rate-making mechanism),

aff’d, 481 F.2d 80 (3d Cir.), cert. denied, 414 U.S. 1093, 94

S.Ct. 724, 38 L.Ed.2d 550 (1973) ; Redwing Carriers, Inc. v.

McKenzie Tank Lines, 443 F.Supp. 639, 641 (N.D.Fla.1977)

(price for transportation of item set by regulatory agency

A-26

so fact that one shipper may obtain a monopoly is irrele-

vant since price will be unaffected) aff’d, 594 F.2d 114 (5th

Cir. 1979); Nankin Hospital v. Michigan Hospital Ser-

vice 361 F.Supp. 1199, 1209-10 & n. 33 (E.D.Mich.1973)

(company does not possess monopoly power since rates

controlled and actively reviewed by state insurance com-

mission). Cf. International Railways of Central America V.

United Brands Co. 532 F.2d 231, 240 (2d Cir. 1976) (consent

decree which fixed freight rates removed ability of banana

grower to coerce lower freight rates from railroad and thus

negated finding of monopoly power), cert. denied, 429 U.S.

835, 97 S.Ct. 101, 50 L.Ed.2d 100 (1976).

We hold that the district court erred in directing the jury

to assume the existence of monopoly power while at the

same time refusing to instruct the jury that there existed

a regulatory mechanism to compel interconnection. The

regulatory procedure was directly relevant to Bell’s power

to exclude competition. Undoubtedly, section 201(a) must

be taken into account‘n any consideration of Bell’s decision

on interconnection. See Watson & Brunner, Monopolization

by Regulated “Monopolies”: The Search for Substantive

Standards, 22 Antitrust Bull. 559, 573-74 (1977). Whether

Bell possessed sufficient power to exclude competition in

light of section 201{a) is a question for the jury’s consider-

ation. Accordingly, the district court should have instructed

the jury on the applicable regulatory provision pertaining

to interconnection and on the jury’s duty “to take into

account the unique federal and state regulatory restraints.”

Thus the jury should have been permitted fairly to resolve

the issue of Bell’s alleged monopoly power. The court’s

failure to do so constituted reversible error.

B. REGULATION AND MISUSE OF MONOPOLY POWER

Mere possession of monopoly power does not violate the

antitrust laws. Grinnell, supra, 384 U.S. at 571, 86 S.Ct. at

A-27

1704; Berkey supra, 603 F.2d at 273. Thus, even if the jury

should find that Bell possessed monopoly power, liability

under Sherman Act section 2 exists only if the jury finds

that Bell abused its monopoly power by acting “in an

unreasonably exclusionary manner” relative to its com-

petitors. Byars v. Bluff City News Co., 609 F.2d 843, 853

(6th Cir. 1979). WTC’s position is that Bell’s refusal to

interconnect constituted such an abuse. Bell responds that

the fact of regulation is relevant to the jury’s decision

whether the refusal was reasonable. Accordingly, Bell also

argues that the district court erred in failing to instruct the

jury to consider the impact of regulation in assessing

whether Bell’s conduct constituted a misuse of monopoly

power.

As a general rule, a company has the right to deal with

whomever it chooses. Associated Press v. Umted States,

326 U.S. 1, 14-15, 65 S.Ct. 1416, 1422, 89 L.Ed. 2013 (1945).

This right is limited when the company possesses a mono-

poly because the danger exists that it may use its monopoly

position to decrease competition in other markets by refus-

ing to deal with competitors. Accordingly, courts have held

that in certain instances a monopolist’s refusal to deal

violates the antitrust laws. See, e.g., Eastman Kodak Co. v.

Southern Photo Materials Co., 273 U.S. 359, 47 S.Ct. 400,

71 L.Ed. 684 (1927); United States v. Terminal Railroad

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

Gamco, Inc. v. Providence Fruit & Produce Building, Inc.,

194 F.2d 484 (1st Cir.), cert. denied, 344 U.S. 817, 73 S.Ct.

11, 97 L.Ed. 636 (1952).!2

12 Refusals to deal by a monopolist have been analyzed under two

somewhat different approaches. Note, Refusals to Deal by Ver-

tically Integrated Monopolists, 87 Harv.L.Rev. 1720, 1732-51

(1974). The first approach focuses on the monopolists intent in

refusing to deal. See Eastman Kodak Co. v. Southern Photo

Materials Co., 273 U.S. 359, 47 S.Ct. 400, 71 L.Ed. 684 (1927).

See also United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct.

A-28

This court has considered competitor’s claims challenging

a monopolist’s refusal to deal. In Poster Exchange, Inc, Vv.

National Screen Service Corp., 431 F.2d 334 (5th Cir. 1970),

cert. demed, 401 U.S. 912, 91 St. 880, 27 L.Ed.2d 811

(1971), a vertically integrated producer-distributor of

motion picture advertising accessories allegedly used its

monopoly position in the production market to obtain a

monopoly in the Atlanta distribution market by refusing

to deal with local distributors. We affirmed the judgment

against the monopolist since it was clear that it had “inten-

tionally used” its monopoly power and that its refusal could

not be “defended on the ground that it was only the exercise

of legitimate business judgment.” Poster Exchange, supra,

431 F.2d at 339. Similarly, in Sia Twenty-Nine Produc-

tions, Inc. v. Rollins Telecasting, Inc., 365 F.2d 478 (5th Cir.

1966), an advertising agency claimed that the only tele-

vision station in town improperly refused to accept ads

from the agency. The station defended its actions on the

ground that the refusal to deal was based upon certain

advertising standards created by the station for legitimate

business reasons. The court reversed a grant of summary

judgment in favor of the station and stated that “[iJt is

465, 468, 63 L.Ed. 992 (1919). The second approach to the prob-

lem of a monopolist’s refusal to deal is the so-called “bottleneck”

theory. Under this approach, a monopolist who controls a “facility

or resource that is essential to competitive viability in the market-

place must i access to it on reasonable terms to [its] com-

petitors.” atson & Brunner, Monopolization by Regulated

Monopolies”: The Search for Substantive Standards, 22 Antitrust

Bull. 359, 571 (1977). See e.g., United States v. Terminal Rail-

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

(group of railroad companies acquiring essential a

acility and denying access to yor sow Associated Press v.

United States, 3 S. 1, 14-15, 65 S.Ct. 1416, 1422, 89 L.Ed. 2013

(1945) (news agency’s rules ap membership to competitors

of existing members). While in theory there exist differences

between the two approaches, in practice the theories are similar.

Byars v. Bluff City News Co., 609 F.2d 843, 856 (6th Cir. 1979).

A-29

clear that the complaint is sufficient if the refusal of defend-

ant to accept advertising from plaintiff by setting up

unreasonable standards or by adopting an arbitrary course

of action is for the purpose of destroying plaintiff as an

agency and thereby furthering a course toward monopoliza-

tion.” Six Twenty-Nine, supra, 365 F.2d at 483. The court

recognized that the issue of the station’s intent was the

most important fact inquiry, and further acknowledged that

the reasonableness of the advertising standards was “a key

factor in determining whether the Station had the intention

of eliminating the competition of the plaintiff agency.” Six

Twenty-Nine supra, 365 F.2d at 486.

As both Poster Exchange and Six Twenty-Nine make

clear, a monopolist is not liable simply by refusing to deal,

but may in appropriate situations present valid justifica-

tions for its actions. See, e. g., United Brands, supra, 532

F.2d at 239-40 (monopolist could not be held liable for

closing its plant, and thereby refusing to deal with local

railroad, since closing was justified by the fact that the

plant was losing money); Packaged Programs, Ine. v.

Westinghouse Broadcasting Co., 255 F.2d 708 (3d Cir.

1958) (factual issue existed whether monopolist television

station’s refusal to accept competitor’s film was based on

valid business judgment) ; Gamco, supra, 194 F.2d at 487-

88 (denial of access to commercial building would have

been justified in certain situations). See also E. A.

McQuade Tours, Inc. v. Consolidated Air Tour Manual

Committee, 467 F.2d 178 (5th Cir. 1972) (existence of

objective business reasons justified concerted refusal to

deal), cert. denied, 409 U.S. 1109, 93 S.Ct. 912, 34 L.Ed.2d

690 (1973); Union Leader Corp. v. Newspapers of New

England, Inc., 180 F.Supp. 125 (D.Mass.1959), modified,

284 F.2d 582 (1st Cir. 1960) (monopolist’s conduct tested

under “fairness” approach which includes consideration of

industry practices), cert. denied, 365 U.S. 833, 81 S.Ct. 747,

A-30

6 L.Ed.2d 201 (1961). Thus, as a general principle, section

2 prohibits only those refusals to deal which under the

particular circumstances of a case are unreasonably anti-

competitive. Byars, supra, 609 F.2d at 860.'*

Therefore, the question is whether this principle of anti-

trust law permits consideration of regulation in assessing

the reasonableness of Bell’s actions.'* It is undisputed that

the district court instructed the jury that it may consider

“legitimate telephone business reasons” for Bell’s actions.

Bell contends, however, that the failure to instruct the

jury to consider regulatory reasons for its actions was

error. Indeed, throughout the proceedings in this case Bell

13 Analysis of the factual context in which an action allegedly in

violation of the antitrust laws occurred is also important under the

“rule of reason” under section 1. See, e.g., Board of Trade v.

United States, 246 U.S. 231, 238, 38 S.Ct. 242, 243, 62 L.Ed. 683

1918); Neeld v. National Hockey League, 594 F.2d 1297 (9th

ir. 1979); E. A. McQuade Tours, Inc. v. Consolidated Air Tour

Manual Commission, 467 F.2d 178 (5th Cir. 1972), cert. denied,

409 U.S. 1109, 93 S.Ct. 912, 34 L.Ed.2d 690 (1973). Both Bell and

WTC have expended considerable energies debating whether the

“rule of reason” concept applies in section 2 cases. It is clear,

however, that the analysis under section 2 is similar to that under

section 1 regardless whether the rule of reason label is applied

o10): Byars v. Bluff City News Co., 609 F.2d 843, 860 (6th Cir.

14 Unlike other parts of this opinion, this issue is not determined b

Otter Tail Power Co. v. United States, 410 U.S. 366, 93 S.Ct. 1022,

35 L.Ed.2d 359 (1973). In Otter Tail, there existed no positive

justification for the monopolist’s actions, and indeed, the com-

pany did not dispute that “its purpose in refusing to deal with

municipalities desiring to establish municipally owned systems is

to protect itself in the position it now enjoys in the area.” United

States v. Otter Tail Power Co., 331 F.Supp. 54, 61 (D.Minn.1971).

The company engaged in other predatory practices that went far

beyond a mere refusal to deal including refusals to wheel power,

use of restrictive clause in various contracts, and instigating a

ttern of litigation to harass municipalities. Thus, Otter Tail

d not present a case like the present one where the utility is

es that its actions were justified by articulable public inter-

est factors.

A-31..

states that its primary justification for refusing intercon-

nection with WTC was its belief that interconnection was

contrary to the public interest as defined in section 201(a)

because it would result in duplication of facilities in The

Woodlands area. Bell contends that many of its state-

ments and actions concerning its refusal to interconnect

cannot be understood properly without consideration of

the regulatory scheme.

We hold that the district court also erred in failing to

instruct the jury that it could consider the effect of regula-

tion in ascertaining whether Bell willfully misused its

monopoly power. 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 particular 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

Communications Act and prior adjudicatory decisions

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

that in certain situations, interconnection will not be in the

public interest. Thus the FCC has refused interconnection

in several cases, e.g., Oklahoma-Arkansas Telephone Co. v.

Southwestern Bell Telephone Co., 6 FCC 809 (1939);

Western Union Telegraph Co., 17 FCC 152, 174-75 (1952).

See also In the Matter of AT&T, 67 FCC 2d 1455, 1472-80

(1978), rev’d on other grounds sub nom. MCI Telecommu-

nications Corp. v. FCC, 580 F.2d 590 (D.C.Cir.), cert.

denied, 439 U.S. 980, 99 S.Ct. 566, 58 L.Ed.2d 651 (1978).

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 interconnec-

tion, it would be contrary to public policy to permit anti-

trust liability against it.

A-32

In the present case, we do not know if the interconnec-

tion was, in fact, in the public interest since the oppor-

tunity for FCC determination of that question was

foreclosed by the withdrawal of WTC’s complaint. Never-

theless, it is the antitrust court’s responsibility to judge

the reasonableness of Bell’s refusal in light of the relevant

factual context of the decision which necessarily includes

consideration of the effect of regulation. Bell’s position is

that the refusal was not arbitrary or motivated by anti-

competitive intent, but instead was proper because Bell

believed that WTC’s request was contrary to the public

interest.!5 If Bell was correct in its assessment, and if its

purpose in refusing interconnection was to vindicate the

public interest, then the refusal, despite its obvious anti-

competitive effect, would have been proper and entitled to

protection from antitrust scrutiny. In this case, where the

public interest has not been officially determined, it is no

less important for the vindication of the statutory pro-

cedure that under proper instruction the jury be allowed

to consider why Bell’s refusal to interconnect was reason-

able under the antitrust laws because it was based on

articulable concerns of regulatory policy. The important

issue in this case is whether Bell’s action was reasonable

under antitrust law in light of the relevant factors concern-

ing the public interest standard.

It is clear from the facts of this case that Bell’s refusal

may plausibly have been based on legitimate regulatory

factors relevant to section 201(a). The difficulties pre-

sented by the construction of city-sized developments are

many; indeed, commentators have speculated on a variety

of constitutional problems presented by new communities.

15 In this regard we note the statement in plaintiff-appellee WTC’s

brief that “The issue of regulation was relevant for the jury only

insofar as it reflected Bell’s intent or motive in denying the inter-

connection.” (WTC’s brief pp. 51-52.)

A-33

See, e. g., Comment, Democracy in the New Towns: The

Limits of Private Government, 36 U.Chi.L.Rev. 379 (1969).

The problems raised in this case, while less theoretical, are

no less significant. The Woodlands was planned as a fully

integrated city developed in the midst of an existing,

albeit undeveloped, portion of the metropolitan area. Prior

to the emergence of The Woodlands plan, other entities

had been planning for the area along more traditional

lines. One such entity was Bell which had been serving

developed areas within its Spring and Pinehurst exchanges

for several decades, and planning for the undeveloped

areas which included most of The Woodlands site. Thus,

The Woodlands concept, while innovative, did not occur on

land unaffected by previous planning. Both Bell and WTC

had legitimate expectations regarding the area. Bell’s

argument that it was seeking to determine the public inter-

est is therefore not facially implausible. Concern with

duplication of service and facilities resulting in inefficient

service presents a possible ground for a legitimate refusal

to interconnect. We do not determine here that Bell’s

refusal was, in fact, reasonable, but we hold that factual

issues concerning the reasonableness of Bell’s actions are

presented which require resolution by a jury properly

instructed by the trial judge as to the relevant regulatory

framework. “Failure to do so would produce misconcep-

tions that go to the heart of the doctrine itself.” Marine

Bancorporation, supra, 418 U.S. at 627, 94 S.Ct. at 2873.6

16 Even granting that the district court erred in failing to instruct

on the nature of regulation, WTC contends that the omission was

harmless error. We reject that argument. The question on appeal

is not whether an instruction was faultless in every respect, but

whether the jury, considering the instruction as a whole, was mis-

led. Coughlin v. Capitol Cement Co., 571 F.2d 290, 300 (5th Cir.

1978); International Air Industries, Inc. v. American Exce Co.,

517 F.2d 714, 728 (5th Cir. 1975), cert. denied, 424 U.S. 943, 96

S.Ct. 1411, 47 L.Ed.2d 349 (1976). Thus, only in those cases

where the reviewing court has a substantial doubt whether the

A-34.

Vv. DAMAGES

Since this case is being remanded for a new trial we

need not consider all the parties’ contentions with respect

to the damage phase of the lawsuit, but we discuss certain

poin ‘ which should be considered on retrial.

In response to the special interrogatories, the jury found

that the amount which would fairly and reasonably com-

pensate WTC for injury to its business or property caused

by Bell was the sum of $18,369,827. This was the exact

amount which plaintiff WTC sought in the case and which

its expert Pat Loconto, of Touche Ross & Company testi-

fied were its lost profits. (PX 261.) Examination of exhibit

261 discloses that WTC’s total net profit before deduction

for federe! income taxes for the 27-year period selected

by it amounted to $70,308,996. This sum discounted to

present value totaled $18,369,827.

The ultimate treble damage award of $55,109,481 is

striking in view of the circumstances. WTC was a newly

founded company with no record of sales or profits, and

was organized to provide independent telephone services

ea was fairly guided in its deliberations should the judgment

disturbed. McCullough v. Beech Aircraft Corp., 587 F.2d 754,

759 (5th Cir. 1979). WTC argues that the failure to instruct on

the nature of regulation was harmless because Bell presented

evidence on regulation during trial and discussed the effect of

regulation during its closing argument. Moreover, WTC asserts

that the district court’s instruction that liability could not be

found if the jury believed that Bell “refused to interconnect for

legitimate telephone business reasons,” was sufficiently broad to

include consideration of regulation. We disagree.

The failure to instruct on the impact of regulation is too central

to be harmless error. Bell’s presentation of evidence on regula-

tion and discussion during closing argument cannot in and of

itself justify the district court’s failure to provide guidance on the

issue for without specific instruction the jury has no indication

how such evidence was to be used in its deliberations. To hold

otherwise would be to abrogate the district court’s duty to instruct

the jury accurately.

A-35

in an area not yet built. It was formed with an initial

capital of $251,000. Mitchell and Mid-Texas each put up

$500, a total of $1,000, to purchase the capital stock of the

newly formed WTC. Mid-Texas then purchased $250,000

of preferred stock. Of the total initial capital only $120,000

in unrecoverable funds was spent by WTC. However,

Mitchell would be entitled to one half of the $55 million

judgment for damages in this case on an investment of

$500.

It was error for the district judge to instruct the jury

that in considering plaintiff’s damage model, “you may

assume” that WTC had proved it would enjoy a monopoly

and be the only telephone company in The Woodlands for

the 27-year period, of time selected in assessing future

damages. The district court’s instruction to the jury in

that regard reads as follows:

In determining WTC’s lost profits, you may assume

that WTC’s and Southwestern Bell’s roles would have

been reversed, so that WTC, instead of Southwestern

Bell, would have been and would continue to be the only

company providing telephone service to that portion of

The Woodlands that has been and will be in the future

served by Southwestern Bell.

R. at 631. Whether it might be “assumed” that WTC would

be the only company serving The Woodlands was a strong-

ly disputed fact according to the evidence presented by

the parties. Bell maintained throughout the most of The

Woodlands area was situated in its Spring and Pinehurst

exchanges, that its published tariffs to that effect were dis-

closed before the concept of The Woodlands was

announced. Further, Bell showed that it intended to serve

The Woodlands area and already was providing service to

2,000 subscribers immediately around The Woodlands site

when the interconnection controversy developed. While it

A-36

is true that WTC sought a monopoly in The Woodlands

without competition, it is far from certain that its proof

showed that it could have accomplished this objective. In

instructing the jury that “you may assume” that WTC

would be the only telephone company in The Woodlands

the district court did not give due consideration to the

evidence of record and its instruction was erroneous.!”

In addition, WTC’s damage model arbitrarily selected a

27-year period to develop future profits.’* It was based on

an erroneous concept of future damages. The total net

profits reflected in the model showed no deduction for fed-

eral income taxes.!® Significantly, at least 25% of the

conjectured future profits of WTC are shown to have

occurred in the last four years of the 27-year period. (See

PX 261.) On retrial, these errors can be avoided by proper

instruction to the jury on the issue of the respective, com-

petitive rights of WTC and Bell to serve The Woodlands

and on the propriety of the submission of a credible dam-

age model.

REVERSED AND REMANDED FOR A NEW TRIAL.

17 The charge was obviously ambiguous and confusing as the cham-

bers conference colloquy between the court and counsel reveals.

Though requested by Bell’s counsel to do so, the district judge

declined to delete the charge in what was a critically important

portion of his instructions. It is even possible under the language

of the charge that the jury may have believed that it was being

told to assume the WTC monopoly. (See Tr. 3484-3488. )

18 The transcript discloses that the expert witness chose the cutoff

year of 1999—a 27-year period —at the direction of plaintiffs

counsel, Tr. 2325-2327.

19 Though plaintiffs exhibit 261 shows net profits before federal

income taxes and is the predicate for the jury’s $18 million ver-

dict, plaintiffs exhibit 265 discloses by years on the bottom line

Net Income (Loss) after deduction for federal income taxes.

Obviously a net profits total after income taxes would be substan-

tially lower than that shown in exhibit 261. Cf. Norfolk & West-

ern Ry. Co. v. Liepelt, .. U.S. _., 100 S.Ct. 755, 62 L.Ed.2d 689

a for the Supreme Court’s most recent pronouncement on

e propriety of considering income taxes in damage awards.

A-37

WoopLanps TELECOMMUNICATIONS CORPORATION,

Plaintiff,

v.

AMERICAN TELEPHONE AND T'ELEGRAPH COMPANY AND

SoUTHWESTERN BELL TELEPHONE COMPANY,

Defendants.

Civ. A. No. 73-H-1577.

Untrep States District Court,

S. D. Texas,

Houston Drviston.

Marcu 9, 1978.

George D. Byfield, McGinnis, Lochridge & Kilgore, Aus-

tin, Tex., for plaintiff.

Walter E. Workman, Baker & Botts, Houston, Tex., for

S.W. Bell.

Louis B. Paine, Jr., Butler, Binion, Rice, Cook & Knapp,

Houston, Tex., for Energy & Dev. & Woodlands Dev.

James M. Shatto, Houston, Tex., of counsel, for defend-

ants.

MEMORANDUM OPINION AND ORDER

SINGLETON, District Judge.

Woodlands Telecommunications Corporation (WTC)

filed this suit charging that defendants Southwestern Bell

Telephone Company (Southwestern Bell) and American

Telephone and Telegraph Company (AT&T) combined and

conspired to monopolize the telephone business at a new

community development north of Houston, Texas, known as

the Woodlands, in violation of sections 1 and 2 of the Sher-

A-38

man Act, 15 U.S.C. §§ 1, 2. Defendants have filed a motion

to dismiss for failure to state a claim upon which relief can

be granted. Defendants contend that this case should be

dismissed for two reasons: (1) their conduct is immune

from the antitrust laws because of regulation by the Federal

Communications Commission (FCC) under the authority

granted by the Communications Act of 1934, 47 U.S.C. § 151,

et seq.; and (2) under the doctrine of primary jurisdiction,

the FCC is the proper forum to decide the issues involved.

The court concludes that under the facts as alleged in the

first amended complaint, defendants are not immune from

the antitrust laws and the doctrine of primary jurisdiction

is not applicable. Accordingly, the motion to dismiss is

denied.

In considering a motion to dismiss for failure to state a

claim, the allegations of the complaint are accepted as true.

Mann v. Adams Realty Company, Inc., 556 F.2d 288 (5th

Cir. 1977). For the purposes of this motion, the facts which

are recited and accepted as true are those alleged in plain-

tiff’s first amended complaint.

FACTS ALLEGED

In 1971-72, Mitchell Energy and Development Corpora-

tion (Mitchell) planned a new community development to be

located north of Houston, which was to be known as Wood-

lands. Mitchell acquired 18,000 acres of previously uninhab-

ited land for this community. The project was to be

developed by a Mitchell subsidiary, Woodlands Develop-

ment Corporation (Woodlands Development). It was envi-

sioned this new community to reach a population of 150,000

over a twenty-year period.

There was no existing telephone service for this area;

however, Southwestern Bell had announced that it would

provide service to this area. Mitchell and Woodland Devel-

opment met with representatives of several companies,

A-39

including Southwestern Bell, which had expressed an inter-

est in providing telephone service to the new development.

The developers eventually chose the proposal made by Mid-

Texas Communications Systems, Inc. (Mid-Texas) for tele-

phone service for the Woodlands. Mid-Texas operates

telephone companies in several towns in Central Texas and

around Houston, Dallas, and San Antonio. Mid-Texas

proposed that Mitchell and Mid-Texas form a new corpora-

tion, WTC, which, with Mid-Texas’ funding and operational

expertise, would provide telephone service to the Wood-

lands. Mid-Texas and Mitchell each owned 50 percent of

the stock of WTC.

AT&T, along with Southwestern Bell and other AT&T

subsidiaries, are frequently referred to as the Bell System.

Each of the operating companies is an independently organ-

ized corporation providing local telephone service in one or

more states. AT&T itself does not provide local telephone

service, but, through its Long Lines Department, furnishes

interstate telephone service to its operating companies.

Each operating company connects with the facilities of

other telephone companies, including non-Bell System com-

panies and the Long Lines Department of AT&T to provide

long-distance telephone service.

The Bell System assigns NNX codes for each area of the

United States. The NNX code is the first three digits of all

telephone numbers. In order for any telephone company

to begin service, there must be an NNX code assignment

for its service area and its facilities must be interconnected

to those of the Bell System.

The first amended complaint alleges that AT&T and

Southwestern Bell wanted the telephone business at the

Woodlands and wanted to prevent a competitor, namely

WTC and Mid-Texas, frori having that business. After

A-40

learning that the developers had chosen the Mid-Texas

proposal, AT&T and Southwestern Bell engaged in a course

of conduct designed to prevent WTC and Mid-Texas from

providing telephone service to the Woodlands. Southwest-

ern Bell, therefore, refused to assign an NNX code for the

Woodlands area and refused to interconnect with WTC.

There was no state agency in the state of Texas at this

time which regulated telephone operations so by refusing

to assign NNX codes and by refusing to interconnect,

Southwestern Bell could exclude any other telephone com-

panies it chose from competing with it. However, a tele-

phone company could file a complaint with the FCC under

47 U.S.C. § 201(a)? and the FCC could compel interconnec-

tion by Southwestern Bell. Such interconnection would be

with respect to interstate lines only. With respect to intra-

state interconnection, a telephone company would have to

bring an action in the Texas state courts to require inter-

connection.

To thwart these efforts by WTC, the complaint alleges

that AT&T and Southwestern Bell determined that delaying

any interconnection orders could effectively prevent WTC

from providing the necessary telephone service for the

Woodlands. Because of its loan commitments, the developer

of the Woodlands could not allow for a delay in telephone

service. If WTC was delayed in providing telephone serv-

1§201. Service and charges

(a) 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 therefor;

and, in accordance with the orders of the Commission, in cases

where the Commission, after opportunity for hearing, finds such

action necessary or desirable in the public interest, to establish

physical 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.

A-41

ice, the Woodlands would have no alternative but to turn

to Southwestern Bell for service. It is alleged that South-

western Bell was successful in delaying action by the FCC

by using bad faith procedural maneuvers.

Southwestern Bell also prevented attempts by WTC to

provide temporary interconnection. WTC attempted to

provide temporary telephone service through interconnec-

tion with telephone companies other than Southwestern

Bell. Southwestern Bell prevented such interconnection,

through economic coercion exerted on the other telephone

companies.

After all efforts for temporary service were exhausted

and action by the FCC had been delayed so that any WTC

telephone service could not keep pace with the Woodlands’

development schedule, WTC and Mitchell conceded that

Southwestern Bell had been successful in preventing anyone

other than a Bell System company from providing telephone

service to the Woodlands. Accordingly, Mitchell contacted

Southwestern Bell to see if it would provide the necessary

telephone service. Southwestern..Bali-agreed to provide

such service on the condition that the complaint that had

been filed by WTC with the FCC be withdrawn. Because of

this ultimatum, the complaint was withdrawn. Southwestern

Bell is now providing telephone service to the Woodlands.

ANTITRUST IMMUNITY

The first question which must be addressed is whether the

FCC’s jurisdiction over the telephone companies under the

Communications Act has preempted this court’s jurisdiction

under the antitrust Jaws to decide the instant case. The

Communications Act does not expressly exempt the tele-

phone companies from the antitrust laws so the issue is

whether the Act provides implied immunity. Whether a

regulatory scheme implicitly immunizes regulated activities

and organizations from the anti-trust laws depends upon

A-42

the nature of the particular agency and statutes in question.

Cases dealing with other agencies and statutes cannot be

controlling in this case, but are helpful in determining what

questions are relevant. It is necessary to analyze the scope

and history of the regulatory scheme to determine whether

the particular anti-trust challenge alleged here can be recon-

ciled with the regulatory scheme.

This analysis involves two distinct inquiries. First, it

may be asked whether, by enacting a particular statute

governing specific conduct, Congress intended that conduct

to be controlled solely by the regulatory agency. This was

the inquiry in Gordon v. New York Stock Exchange, Inc.,

422 U.S. 659, 95 S.Ct. 2598, 45 L.Ed.2d 463 (1975), where

the Supreme Court found that under section 19(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78s(b), Con-

gress intended to leave the supervision of the fixing of

reasonable rates of commission to the Securities and Ex-

change Commission. The court held that the antitrust laws

were inapplicable since they would bar fixed commission

rates which would preclude and prevent the operation of

the Securities Exchange Act as intended by Congress.

If Congress intends conduct to be controlled solely by a

regulatory agency, there is an irreconcilable conflict be-

tween the regulatory statute and the antitrust laws.

Defendants argue that such a confiict exists by reason of

section 201(a) of the Communications Act, 47 U.S.C.

§ 201(a). Under section 201(a), the FCC has the authority

to order a carrier to interconnect only after the FCC has

determined that the interconnection is necessary or desir-

able in the public interest. Defendants contend that the

antitrust laws cannot apply in this instance because it would

usurp the FCC’s jurisdiction to determine whether inter-

connection is in the public interest.

A-43

Defendants misinterpret section 201(a). A determination

of public interest by the FCC is not necessary before car-

riers interconnect their facilities. As opposed to a licensing

statute, section 201(a) leaves the question of whether to

interconnect to be decided in the normal course of business

by the parties; carriers may interconnect their facilities

without FCC permission or order. A public interest deter-

mination by the FCC is required only if a carrier has

refused to interconnect and such refusal is challenged

before the FCC.

A earrier’s decision whether to interconnect or refuse

to interconnect is a matter of business judgment which is

not subject to section 201(a) unless, after a refusal, the

FCC directs such interconnection. Therefore, the decision

whether to voluntarily interconnect is itself not subject to

regulatory supervision. When relationships in business

are not governed by regulatory supervision, but are rather

the product of the business judgments of the parties, the

courts should be hesitant to conclude that the antitrust

laws are inapplicable. Otter Tail Power Co. v. Umited

States, 410 U.S. 366, 374, 93 S.Ct. 1022, 35 L.Ed.2d 359

(1973) ; Silver v. New York Stock Exchange, 373 U.S. 341,

83 S.Ct. 1246, 10 L.Ed.2d 389 (1963) ; United States v. Radio

Corp. of America, 358 U.S. 334, 351, 79 S.Ct. 457, 3 L.Ed.2d

354 (1959). Where a carrier refuses to interconnect and

there has been no FCC action on the matter, the mainte-

nance of an antitrust action does not interfere with FCC

regulation. Where the FCC has acted, however, and

directed a carrier to interconnect, the antitrust laws should

not be used to interfere with the FCC’s determination.

At common law, there was no duty to interconnect

facilities between carriers. Section 201(a) was enacted in

recognition of this fact. Oklahoma-Arkansas Telephone Co.

v. Southwestern Bell Telephone Co., 45 F.2d 995 (8th Cir.

A-44

1930), cert. denied, 283 U.S. 822, 51 S.Ct. 346, 75 L.Ed.

1437 (1931). If the refusal to interconnect is for the express

purpose of excluding competition, as is alleged in this case,

the antitrust laws may provide another remedy in addition

to section 201(a). Whether the court is asked to order

interconnection or to award treble damages, the practical

effect is that the court must determine whether there should

be or should have been an interconnection between the

carriers. Under most circumstances, a court may consider

certifying the question of whether the interconnection is in

the public interest to the FCC under the doctrine of

primary jurisdiction. However, under the doctrine of

primary jurisdiction, as will be discussed below, the court

would not lose jurisdiction and the case would not be

dismissed. Rather, the final determination of the antitrust

question would merely be postponed.

A second distinct inquiry is whether the regulatory

scheme in its entirety is so pervasive that it necessarily

displaces the antitrust laws. In United States v. National

Association of Securities Dealers, 422 U.S. 694, 95 S.Ct.

2427, 45 L.Ed.2d 486 (1975), the Supreme Court, using this

analysis, held that the Securities and Exchange Commis-

sion’s exercise of regulatory authority under the Invest-

ment Company Act of 1940, 15 U.S.C. § 80a-1, et seq., and

the Maloney Act, 15 U.S.C. § 780-3, was sufficiently perva-

sive to confer implied immunity from the antitrust law.

Repeals of the antitrust laws by implication “are strong-

ly disfavored, and have only been found in cases of plain

repugnancy between the antitrust and regulatory provi-

sions.” Gordon v. New York Stock Exchange, 422 U.S. at

682, 95 S.Ct. 2598; United States v. Philadelphia National

Bank, 374 U.S. 321, 350-351, 83 S.Ct. 1715, 1734, 10 L.Ed.2d

915 (1963). Immunity will be implied only if necessary to

make the regulatory statutes work, and “only to the mini-

A-45

mum extent necessary.” Gordon v. New York Stock

Exchange, 422 U.S. at 683, 95 S.Ct. at 2612.

The argument that the Communications Act is so perva-

sive with respect to the telephone industry that it impliedly

repealed or displaced the antitrust laws was rejected in

United States v. American Telephone & Telegraph Co., 427

F.Supp. 57 (1976), cert. denied, No. 77-1009 (D.C.Cir.

May 26, 1977), cert. denied, 434 U.S. 966, 98 S.Ct. 507, 54

L.Ed.2d 452 (1977). This court agrees with the conclusion

of Judge Waddy that “[nJeither the language, nor the

legislative history of the Communications Act supports the

conclusion that Congress intended by the Act to grant a

total, blanket immunity to defendants from application of

antitrust laws, and to place exclusive jurisdiction over all

their conduct in the Federal Communication Commission.”

United States v. American Telephone & Telegraph Co., 427

F.Supp. at 61.

PRIMARY JURISDICTION

The doctrine of primary jurisdiction applies when a

court and a regulatory agency have concurrent jurisdiction

over all or part of a controversy and determines whether

the court or the agency should make the initial decision.

The doctrine does not allocate power between courts and

agencies, but governs only whether the court or agency

will initially decide the particular issue. A determination

that an agency has primary jurisdiction does not neces-

sarily mean that the court will refrain from deciding the

case; the court’s jurisdiction is not ousted by primary

jurisdiction, but is only postponed. United States v. Phila-

delphia National Bank, 374 U.S. at 353, 83 S.Ct. 1715, 10

L.Ed.2d 915; 3 K. Davis, Administrative Law Treatise

§ 19.01 at 3 (1958). Accordingly, a determination to invoke

the doctrine of primary jurisdiction will not result in

A-46

dismissal of a case but will only involve a staying of further

action until the questions certified to the administrative

agency have been resolved.

A case involving interconnection between carriers will

frequently give rise to the question of whether such inter-

connection will be in the public interest. Congress, through

section 201(a), has indicated that the FCC should deter-

mine this question. Therefore, in most antitrust cases

based on one carrier’s refusal to interconnect with another,

the question of whether such interconnection would be in

the public interest should be referred to the FCC for initial

determination. Following resolution of this question, the

court would then determine the antitrust issues.

If plaintiff was seeking an order from this court com-

pelling defendants to interconnect, the case would definitely

call for referral to the FCC. In most instances, the seeking

of treble damages rather than injunctive relief would not

alter the referral to the FCC since the threat of treble

damages as a practical matter may achieve the same result

as injunctive relief. However, for two reasons, referral of

this case to the FCC under the doctrine of primary jurisdic-

tion would be improper.

First, when Southwestern Bell was contacted by Mitchell

to provide telephone service to the Woodlands and began

providing such service, the question of whether intercon-

nection was in the public interest became moot. Once

Southwestern Bell began providing telephone service to

this area, there was no other carrier with which defendants

could interconnect. The question of whether interconnec-

tion was in the public interest was moot before this anti-

trust suit was filed. Further, there could be no regulatory

policy which could be served by this court requesting the

FCC to attempt to decide issue where no current con-

troversy exists.

A-47

Secondly, the question of whether defendants should be

ordered to interconnect with plaintiff’s facilities was before

the FCC, and therefore the question of whether intercon-

nection was in the public interest was also before the FCC.

The complaint alleges, and for the purposes of this motion

such allegation is accepted as true, that the defendants,

acting in bad faith, prevented the FCC from determining

these issues. The conduct which is alleged to have violated

the antitrust laws includes defendants’ actions in prevent-

ing plaintiff’s access to the administrative remedies of the

FCC. Because the refusal to interconnect forms only a

portion of the antitrust violations complained of herein,

referral of the interconnection issue to the FCC is not

required.

Defendants, citing Noerr,2 Pennington,’ and California

Motor Transport,’ assert that their resort to the FCC in

opposing plaintiff’s complaint under section 201(a) cannot

violate the antitrust laws even if their motive for so doing

was anticompetitive. While resort to governmental proc-

esses does not violate the antitrust laws, attempts to bar

one’s competitor’s meaningful access to administrative

agencies or the courts is not immune from antitrust legis-

lation. California Motor Transport Co. v. Trucking Unlim-

ited, 404 U.S. 508, 511-12, 92 S.Ct. 609, 30 L.Ed.2d 642

(1972). The complaint here alleges bad faith abuse of the

administrative process so defendants do not have protec-

tion under the Noerr-Pennington doctrines.

Therefore, premises considered, it is ORDERED that

defendants’ motion to dismiss be, and the same is hereby,

DENIED.

2 Eastern R. R. Presidents Conf. v. Noerr Motor Freight, Inc., 365

U.S, 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961).

3 United Mine Workers v. Pennington, 381 U.S. 657, 85 S.Ct. 1585,

14 L.Ed.2d 626 (1965).

4 California Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508,

92 S.Ct. 609, 30 L.Ed.2d 642 (1972).

United States Court of Appeals

For THE FirtH Crmcuitr

No. 79-1221

D. C. Dooxer No. CA 73-H-1577

Mip-Texas Communication Systems, INc., ET AL,

Plaintiff s-Appellees,

v.

AMERICAN TELEPHONE AND TELEGRAPH Co., ET AL,

Defendants,

SouTHWESTERN Be. TELEPHONE CoMPANY

Defendant-A ppellant.

APPEAL FROM THE

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF TEXAS |

Before AINSWORTH, INGRAHAM and GARZA, Cir-

cuit Judges.

JUDGMENT

This cause came on to be heard on the transcript of

the record from the United States District Court for the

Southern District of Texas, and was argued by counsel;

On ConsmperAtTION WHEREOF, It is now here ordered and

adjudged by this Court that the judgment of the said

District Court in this cause be, and the same is hereby,

reversed; and that this cause be, and the same is hereby

remanded for a new trial to the said District Court in

accordance with the opinion of this Court;

It is further ordered that plaintiffs-appellees pay to the

defendant-appellant the costs on appeal, to be taxed by the

Clerk of this Court.

May 1, 1980

Issued as Mandate: June 9, 1980

United States Court of Appeals

Firts Circuit

OFFICE OF THE CLERK

May 27, 1980

Giuupert Ff’. GanucHeau

Clerk

Tei. 504-589-6514

600 Camp StREET

New Orueans, La. 70130

TO ALL PARTIES LISTED BELOW:

No. 79-1221

Mw-Texas Communication Systems, INc., ET AL

vs—

AMERICAN TELEPHONE AND TELEGRAPH Co., ET AL

SouTHWESTERN BELL TELEPHONE CoMPANY

Dear Counsel:

This is to advise that an order has this day been entered

denying the petition( ) for rehearing, and no member of

the panel nor Judge in regular active service on the Court

having requested that the Court be polled on rehearing en

banc (Rule 35, Federal Rules of Appelate Procedure; Local

Fifth Circuit Rule 16) the petition( ) for rehearing en

banc has also been denied.

See Rule 41, Federal Rules of Appelate Procedure for

issuance and stay of the mandate.

Very truly yours,

Grupert F'. Ganucneav, Clerk

By R. Apetine Barnes

Deputy Clerk

Mr. Walter E. Workman

Mr. George L. Saunders, Jr.

Mr. George D. Byfield