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

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## Record

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

## Text

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.)

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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.

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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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_0197%3A2. Public record. Not legal advice.