Appendix — American Telephone & Telegraph Co. v. Phonetele, Inc.

FILED —

>. °2359 JUN 25 1982

eT STEVAS,

K

IN THE

Supreme Court of the United States

October Term, 1981

AMERICAN TELEPHONE AND TELEGRAPH COMPANY,

WESTERN ELectric COMPANY, INc., and BELL TELEPHONE

LABORATORIES, INC.,

Petitioners,

against

PHONETELE, INC.

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

HOWARD J. TRIENENS

Counsel of Record for Petitioners

195 Broadwa

New York, York 10007

(212) 393-5111

Of Counsel:

Jim G. KILPaATRIC

WILLIAM J. JONES

ANDREW M. WHITE

WYMAN, BAUTZER, ROTHMAN,

KucnHet & SILBERT

JUNE 25, 1982

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendia F

i

TABLE OF CONTENTS

Opinion of the panel majority and dis-

senting opinion, Phonetele, Inc. v.

American Tel. & Tel. Co., 664 F.2d

Fe Ga Ga. GEN) cence

Order in Phonetele, Inc. v. American Tel.

& Tel. Co., et al., No. 77-3877 (9th

- SS 5 ll eee

Memorandum of Decision, Paroneiele,

Inc. v. American Tel. & Tel. Co., 435

F.Supp. 207 (C.D. Cal. 1977) ..........

Order in Phonetele, Inc. v. American Tel.

& Tel. Co., et al., No. 77-3877 (9th

Re § _S

Statutory Provisions Involved ................

Compiaint in Phonetele, Inc. v. American

Tel. & Tel. Co., et al., Civil Action No.

74-3566 FW (C.D. Cal., filed Decem-

ff Pee

A-1

A-68

A-69

A-79

A-80

Appendix A

A-1

(Filed Dec. 3, 1981)

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 77-3877

D.C. No. CV 74-3566-WPG

No. 77-2936

D.C. No. CV 73-2511-LTL

PHONETELE, INC.,

Plaintiff-Appellant,

vs.

AMERICAN TELEPHONE AND TELEGRAPH COMPANY;

WESTERN ELectTric COMPANY, INCORPORATED;

Be_t TELEPHONE LABORATORIES, INCORPORATED

Defendants- Appellees.

DASA CORPORATION, ETC.,

Appellant,

vs.

GENERAL TELEPHONE COMPANY OF

CALIFORNIA, ET AL.,

Appellees.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF CALIFORNIA

OPINION

William P. Gray, U.S. District Judge, Presiding

(No. 77-3877)

Lawrence T. Lydick, U.S. District Judge, Presiding

(No. 77-2936)

Argued and submitted before a panel consisting of

Hufstedler and Kennedy, Circuit Judges,

and Claiborne, District Judge, May 7, 1979

Submission ordered vacated November 20, 1979

Reargued and resubmitted before a panel consisting of

Kennedy and Fletcher, Circuit Judges, and

Claiborne, District Judge, February 6, 1980

A-2

Before: KENNEDY and FLETCHER, Circuit Judges and

CLAIBORNE,* District Judge.

KENNEDY, Circuit Judge:

These consolidated appeals present to this circuit the question

whether a telephone company may be sued for damages and

injunctive relief for attempting to monopolize and restrain trade

in the distribution and sale of telephone terminal equipment.’

The case requires us to reconcile the antitrust laws with the

regulatory regime established by the Communications Act of

1934, 47 U.S.C. §§ 151-609 (1976 & Supp. III 1979) [FCA or

Act}.

Plaintiff Phonetele, Inc., manufactures and sells the

“Phonemaster,” equipment connected to a telephone to prevent

the user from placing calls beyond a predetermined area. Pilain-

tiff DASA Corp. manufactures equipment known as “Divert-A-

Call” which is connected to a telephone and effects automatic

transfer of an incoming call to another telephone number. Both

devices are attached by electric connections.

The complaints in these actions arose from the tariffs filed by

the defendants with the Federal Communications Commission

[FCC] and the California Public Utilities Commission [CPUC],

tariffs which prohibited the direct electrical connection of cus-

tomer-provided equipment to the telephone without the use of a

plate-like connecting device, called a “protective connecting

arrangement” or “PCA,” supplied by the telephone company.

Plaintiffs allege that the filing and implementation of these tariffs

violated the antitrust laws.

DASA filed its complaint in 1973, alleging violations of sec-

tions | and 2 of the Sherman Act by General Telephone of Cali-

fornia [General Telephone or General], by Ford Industries as

manufacturer of an automatic call diverter, and by others

unnamed. Damages and injunctive relief were sought.’ As for

the section | violations, the complaint generally alleges that since

1966 the defendants combined to unreasonably restrain trade in

* Honorable E. Claiborne, Chief United States District

Judge for the d Ad District of Nevada, si detent tadgpaien

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the call diverter market in those areas of California in which

General has a state-granted monopoly in telephone system opera-

tion. The alleged goal of the concert and agreement was to

suppress competition.’ DASA’s section 2 monopolization claim

is that General and its co-conspirators have controlled at least 90

percent of the automatic call diverter market in those areas of

California in which General operates and that defendants have

monopolized the market and have undertaken to destroy actual

and potential competitors.‘

Phonetele’s 1974 complaint charges that American Telephone

& Telegraph Company (AT&T), the 23 operating companies in

which it has major interests, and AT&T subsidiaries Western

Electric and Bell Telephone Laboratories,’ have combined and

agreed to restrain commerce in the marketing, sales, and distribu-

tion of the Phonemaster, conspired to monopolize the terminal

equipment market, and have effected tying arrangements, all in

violation of sections | and 2 of the Sherman Act, and section 3 of

the Clayton Act. Phonetele claims that AT &T and its operating

companies control approximately 80 percent of the nation’s tele-

phone lines, and that this gives AT&T complete power over all

1,700 independent telephone companies which must use these

interstate lines. Misconduct in the establishment and enforce-

ment of an AT&T tariff requiring a coupling device for equip-

ment like Phonetele’s is also charged. Finally, Phonetele alleges

AT&T was wrongfully responsible for conforming state tariffs

and enforcement efforts. Phonetele alleged damages in excess of

$30 million. It sought trebling of those damages and injunctive

relief. Phonetele has since stated that it will no longer seek

injunctive relief.

The district courts below dismissed the actions on the grounds

that the FCC (and state utilities commissions where appropriate)

had “exclusive jurisdiction” over the subject of interconnection of

terminal equipment with the telephone system and that the FCA

conferred an implied antitrust immunity for the activities of the

defendants.’

A-4

The immunity issue in Phonetele’s appeal concerns the nature

and extent of the FCC’s regulation pursuant to the scheme cre-

ated by the Act; DASA’s case involves additional and similar

issues concerning the CPUC.

|

REGULATORY SCHEME

The FCA provides for the regulation of telecommunications

common carriers by the FCC and requires carriers to file tariffs

with the FCC covering “practices” as well as charges." Before

changing any of its practices by filing a new tariff, the carrier

must give ninety days notice to the FCC and the public.’ The

requirement that carriers file tariffs is the primary mechanism of

regulation. Once a tariff becomes effective, the carrier is

required to adhere to its provisions.

Section 201 (b) requires that “[a]ll charges, practices, classifi-

cations, and regulations” be “just and reasonable.” The section

further states that “any such charge, practice, classification, or

regulation that is unjust or unreasonable is declared to be unlaw-

ful.” Any unjust or unreasonable discrimination in carrier con-

duct is unlawful. 47 U.S.C. § 202 (1976). Section 201(b)

authorizes the FCC to prescribe “such rules and regulations as

may be necessary in the public interest” to implement the Act's

mandates.

Free competition is not irrelevant to the objectives of utility

regulation, but determinations of whether a company’s practices

are in the public interest as defined by the Act require FCC

consideration of factors otner than competition. Such factors

include network safety and efficiency, the need of the public for

reliable service at reasonable rates, the proper allocation of the

‘rate burden, the financial integrity of the carriers, and the future

needs of both users and carriers."

Whenever a new tariff is proposed, the FCC may, upon its own

initiative or upon the complaint of an interested party, hold hear-

ings concerning the lawfulness of the practice, and may suspend

the tariff." Section 205 authorizes the FCC, after hearings and

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upon a finding that a tariff does or will violate the Act, to issue a

cease and desist order and to prescribe conduct to satisfy the Act’s

standards.”

The act gives the FCC broad jurisdiction over interstate and

foreign telephone communications and the carriers which provide

such communications; intrastate communications are excepted.”

General Telephone provides service to a part of California only

and so is not subject to the comprehensive direct supervision of

the FCC and does not file general tariffs with it. To the extent

the facilities of a connecting carrier such as General are used for

interstate or foreign communications, it usually files a state tariff

that conforms to the tariff the interstate carrier has filed with the

FCC. In the case of telephone service, this mechanism of a

“conforming tariff” means that when the facilities of an intrastate

telephone company are used for interstate communications, the

company is thus indirectly subject to the tariffs filed by AT&T.

Terminal equipment is primarily used for intrastate services

and is generally provided by a connecting carrier rather than an

interstate cariier. For this reason, state public utility commis-

sions have in the past exercised authority over the connection of

such equipment, as CPUC did with General. Now, however the

FCC asserts “primary authority” over interconnection of cus-

tomer-provided equipment, to the exclusion of state regulation."*

This exercise of jurisdiction was affirmed in North Carolina Util.

Comm'n v. FCC, $37 F.2d 787 (4th Cir.), cert. denied, 429 U.S.

1027 (1976).

CHALLENGES TO AT&T’S EXCLUSION OF FOREIGN

ATTACHMENTS.

Tariffs filed with the FCC immediately following passage of the

Communications Act generally prohibited the interconnection of

customer-provided equipment. The restrictions were similar to

those contained in tariffs required by most state utility commis-

sions before the Act was adopted."*

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In 1965, AT&T's tariff prohibiting foreign attachments was

challenged in an antitrust action. The Court of Appeals held

that the antitrust complaint was properly stayed while the case

was referred to the FCC to determine the legality of the prohibi-

tion under the FCA. See Carter v. American Tel. & Tel. Co., 250

F. Supp. 188 (N.D. Tex.), aff'd, 365 F.2d 486 (Sth Cir. 1966),

cert. denied, 385 U.S. 1008 (1967). In 1966 the FCC began its

investigation, and in 1968 the Commission issued its watershed

decision in Use of the Carterfone Device in Message Toll Tele-

phone Service, 13 F.C.C.2d 420, reconsideration denied, 14

F.C.C.2d 571 (1968) [Carterfone|; this decision was strongly

presaged by the foundation laid in Hush-A-Phone Corp., 22

F.C.C. 112 (1957) (on remand)."* The FCC found the then-

applicable tariff unreasonable because it “prohibit [ed] the use of

harmless as well as harmful devices.” Carterfone, 13 F.C.C.2d

at 424. The FCC struck down the entire tariff and allowed the

carriers to “submit new tariffs which will protect the telephone

system against harmful devices, and [which] may specify techni-

cal standards if they wish.” Jd. at 426. The Commission offered

no specific guidance as to the content of the new tariffs.

AT&T responded in November of 1968 by filing an amended

version of Tariff No. 263 [the post-Carterfone tariff]. This tariff

permitted acoustical or inductive connection of customer-pro-

vided terminal equipment. It continued, however, to prohibit the

direct electrical connection of network control signalling units.”

Under the tariff, these devices could only be interconnected indi-

rectly by means of the protective connecting arrangement

(PCA). The PCA had to be provided and installed by the tele-

phone company before equipment such as a call diverter could be

connected.

Various parties objected to the tariff and requested the FCC to

reject or suspend it. The FCC declined to do so but it also

declined to affirm its validity. The Commission ruled that the

post-Carterfone tariff filed by AT&T did not violate the precise

holding in Carterfone. American Telephone and Telegraph Co.

“Foreign Attachment” Tariff Revisions, 15 F.C.C.2d 605

A-7

(1968), reconsideration denied, 18 F.C.C.2d 871 (1969)

[AT&T “Foreign Attachment” Tariff Revisions|.” The Com-

mission further indicated that it planned to undertake a broad

study of interconnection practices and permitted the tariff to go

into effect, while explicitly and significantly withholding its

approval of the tariff.”

Proceeding informally at first, the FCC embarked on an exten-

sive investigation of the interconnection issue.” These proceed-

ings culminated in Proposals for New or Revised Classes of

Interstate and Foreign Message Toll Telephone Service (MTS)

and Wide Area Telephone Service (WATS)—First Report and

Order, | First Report|.“ The FCC concluded that the conditions

on interconnection of customer-provided terminal equipment

contained in Tariff No. 263 unnecessarily restricted the cus-

tomer’s right to make reasonable use of telephone services and

facilities and that such conditions constituted an unjust and

unreasonable discrimination. In the same report, the FCC pre-

scribed a system of registration for customer-provided equipment

based on various technical specifications. See 47 C.F.R.

§§ 68.100-.506 (1980). For equipment which di¢ not meet the

specifications, the carriers were permitted to require PCAs.

Developments before the CPUC have loosely paralleled those

before the FCC. General Telephone’s tariffs filed with the

CPUC prior to 1966 prohibited the connection of customer-pro-

vided equipment to the telephone system. Before Carterfone, the

CPUC strongly disapproved General’s restrictions on devices like

Divert-A-Call.* After Carterfone, General filed a tariff with the

CPUC which mirrored the amended tariff No. 263 filed by

AT&T with the FCC. This General tariff was challenged in

1972. Subsequently, on October 24, 1973, the CPUC com-

menced an investigation into the terms and conditions of inter-

connection of customer-provided equipment. On April 22, 1975,

the PUC issued an interim Decision, which became final in May,

1976, and which, like the FCC First Report, adopted a dual

system of direct electrical connection of certified devices and the

use of protective connecting arrangements for uncertified devices.

A-8

Following is a summary of the regulatory pattern applicable to

the interconnection cf customer-provided equipment. Prior to

1966, the tariffs filed by General Telephone and AT&T prohib-

ited the connection of any customer-supplied terminal equipment

and there was virtually no active regulatory effort by either the

CPUC or the FCC. The year 1966 marked the start of agency

regulatory activity, and between 1966 and 1975 both the FCC

and the CPUC undertook studies of the problem. The

Carterfone decision in 1968 established that there was no justifi-

cation for a telephone company to enforce a bianket prohibition

on all foreign attachments and it further established that tariffs

for such attachments should be designed only to prohibit devices

dangerous to the system. After the FCC Carterfone decision,

the direct electrical connection of terminal equipment was

affected by telephone company tariffs which required PCA’s,

furnished by the company, as a condition to permitting direct

electric connection of terminal equipment. In 1975, the FCC

proposed a comprehensive new plan based largely on the require-

ment of registration or certification for terminal equipment. The

CPUC proposed a similar plan, which become final the following

year

Phonetele first entered the business of developing and manufac-

turing telephone restriction equipment in late 1970, about two

years after the post-Carterfone tariffs were filed. Phonetele’s

complaint was filed on December 15, 1974, and is based on the

defendants’ conduct after the FCC’s Carterfone decision. In

addition to alleging that the PCA requirement was anticompeti-

tive, Phonetele’s complaint alleged that AT &T misinterpreted its

own tariffs, delayed the availability of PCA’s for Phonemasters

outside of California, and charged three and one half times as

much for PCA’s outside California as in California, all without

'justification.* DASA’s complaint was filed in late 1973 and was

based primarily on acts which occurred during the period of

active regulatory investigation by the FCC and CPUC but before

the registration program was adopted. DASA alleged that the

A-9

pattern of conduct described in controlling AT&T tariffs and

tariffs filed by General with the CPUC violated sections | and 2 of

the Sherman Act.”

Il

IMPLIED ANTITRUST IMMUNITY

Whether there is an implied immunity under the Communica-

tions Act is a question of Congress’ intent in passing the Act. M1.

Hood Stages, Inc. v. Greyhound Corp., 555 F.2d 687, 691 (9th

Cir. 1977), cert. denied in part, 434 U.S. 1008, vacated and

remanded on other grounds, 437 U.S. 322 (1978)." The

Supreme Court has given repeated emphasis to the proposition

that antitrust immunities are to be strictly construed and not

lightly inferred. An implied immunity may be found only where

there is “a convincing showing of clear repugnancy between the

antitrust laws and the regulatory system.” United States v.

National Ass'n of Sec. Dealers, 422 U.S. 694, 719-20 (1975)

[NASD]; See also Gordon v. New York Stock Exch., Inc., 422

U.S. 659, 682 (1975). “These widely repeated refrains . . . are of

limited value in application,”"” however. One point must be

plain: we must recognize there is no simplistic and mechanically

universal doctrine of implied antitrust immunity; each of the

Supreme Court's cases is decisively shaped by considerations of

the special aspects of the regulated industry involved. From this

two further points follow. First, we do not accept as dispositive

any of the elaborate taxonomies that have attempted to wrest an

abstract framework out of the case law.” Second, the uncritical

transfer of abstract characterizations about the implied immunity

of one industry to the different circumstances of another industry

is not a reliable method of analysis." Vague metaphors such as

“aggressive regulation” are likewise inadequate tools of analysis.

Relying heavily on NASD and Gordon, defendants posit three

principal arguments in support of implied immunity. First, .

defendants claim application of the antitrust laws would subject

them to inconsistent and conflicting standards and obligations,

thereby demonstrating a clear repugnancy between the antitrust

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laws and the FCA. Second, defendants maintain the conduct at

issue here is subject to pervasive regulatory authority and thus

impliedly immune from the antitrust laws. Third, defendants

argue that even if the regulatory scheme is not deemed pervasive,

antitrust immunity is required because the conduct is aggressively

regulated by an agency under direct statutory authority.

A. Gordon

Turning to the third argument first, we cannot accept defend-

ants’ overly broad reading of Gordon. According to the defend-

ants, Gordon requires antitrust immunity where the challenged

conduct is aggressively regulated by an agency vested with direct

statutory authority to do so, regardless of whether the regulatory

scheme, taken in its entirety, is sufficiently “pervasive” as to

require immunity, and regardless of whether the agency ulti-

mately approves or disapproves the challenged conduct. On

close examination Gordon does not support such an extensive

immunity doctrine.” The necessity of considering implied

immunity decisions in the context of the industries they govern is

well illustrated by Gordon and the other securities cases. The

securities laws were conspicuously marked from their outset by a

reliance on self-regulation. The need to allow a self-regulating

industry the freedom to discharge its statutory duties and the

inappropriateness of subjecting to antitrust liability the rulemak-

ing and enforcement functions Congress charged the industry

with performing decisively shaped the Court’s implied immunity

analysis in the securities cases.”

Several reasons absent from this case combined to support the

Court’s decision in Gordon. The practice of fixed exchange rates

at issue in Gordon had been explicitly considered by Congress in

passing the Securities Exchange Act of 1934. Furthermore, sec-

tion 19(b) of the Act, 15 U.S.C. § 78s(b) (1976), expressly gave

the SEC authority over exchange practices with respect to “the

fixing of reasonable rates of commission,” notwithstanding Con-

gress’ knowledge that this would otherwise be a classic per se

antitrust violation. See Gordon, 422 U.S. at 664-67, 685. This

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explicit grant of authority to the SEC, together with Congress’

particular awareness of the very price-fixing practices challenged

in the antitrust suit, was evidence that Co»gress intended the

Commission’s authority to displace the antit ust laws. A second

difference between these appeals and Gordon is that the Court

held that the SEC’s supervision over the practices of the regulated

entities was the legal equivalent of “an affirmative order to the

exchanges to follow fixed rates.” Jd. at 689 n.13.

B. NASD

We also reject defendants’ pervasive regulation argument.

According to AT&T and General, NASD requires that antitrust

immunity be implied where the challenged activity is subject to

regulation by an agency under a pervasive or comprehensive regu-

latory scheme, regardless of whether the agency actually exer-

cised its authority to regulate the conduct in question. In NASD

the Government sought injunctive relief against agreements to fix

prices and restrict sales of mutual funds in secondary market

transactions between dealers, between investors and dealers, and

between investors. 422 U.S. at 701. The Government’s com-

plaint challenged both vertical (counts II-VIII) and horizontal

(count I) anticompetitive activity. /d. at 701-02. The Court

concluded that the vertical restraints were immune from antitrust

challenge, but it is critical that the restraints so immunized were

explicitly contemplated by statute.”

Count I of the Government’s complaint alleged a horizontal

conspiracy between NASD and its members to prevent the

growth of a secondary dealer or brokerage market for mutual

fund shares by means of anticompetitive interpretation and exten-

sion of NASD rules. /d. The vertical agreements could not have

been implemented without some form of concert, i.e., rulemaking

and rule enforcement. Thus the defendants’ horizontal conduct

was logically wecessary to carry out the legitimate agreements

and the sanctioned vertical restraints, if not directly responsive to

A-12

a regulatory command. Therefore the Court reasoned the con-

certed activity acquired a kind of derivative immunity by virtue of

its relation to the immune restraints implemented by the con-

certed action.”

Antitrust immunity is not conferred by the bare fact that

defendants’ activities might be controlled by an agency having

broad powers over their conduct. There is no general presump-

tion that Congress intends the antitrust laws to be displaced

whenever it gives an agency regulatory authority over an indus-

try. Cases prior and subsequent to NASD preclude such an

expansive immunity doctrine. See, e.g., Otter Tail Power Co. v.

United States, 410 U.S. 366 (1973). Cf. Cantor v. Detroit

Edison Co., 428 U.S. 579, 597 (1976) (implied state law exemp-

tion). In this respect the area of immunity from antitrust laws is

not coterminous with areas of agency jurisdiction or agency

expertise. The zones of application of each doctrine in specific

cases may be quite different, depending particularly on the spe-

cific regulatory history preceding a given lawsuit.

There are several relevant distinctions between NASD and

these appeals which indicate immunity does not arise in this case.

First, as was true in Gordon, the NASD Court concluded that

when Congress passed the controlling securities statutes, it was

aware of the challenged anticompetitive practices and intended to

permit them unless the SEC determined otherwise. See 422 U.S.

at 722-28. The Court construed the legislative history to mean

that Congress intended to give the SEC the exclusive power to

disapprove the challenged practices. There is no corresponding

legislative history in the case before us. The FCC is not necessa-

rily equipped to police competition in the furnishing of telephone

terminal equipment or to enact rules in this regard, other than as

necessary to protect the system from damage. Neither congres-

- sional mandates nor expressed agency policy leads to any differ-

ent conclusion. Second, in both Gordon and NASD the Court

concluded that the SEC had continued to sanction the challenged

practice during the period covered by the antitrust complaint .

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well as many years previously. That crucial factor is conspicu-

ously absent from this case; in fact the contrary is true.” Third,

the nature of the SEC’s regulatory responsibility under the Malo-

ney Act differs decisively from the FCC’s responsibility under the

FCA. The SEC is required to disapprove any change or addition

to an association rule “unless such change or addition appears to

be consistent with the requirements of . . . this section.” 15

U.S.C. §780-3(j) (1970) (now codified in 15 USC.

§ 78s(b)(2) (1976)). In contrast, the Commission is not

required under law to pass any judgment on a proposed tariff, and

it does not necessarily approve as agency policy the content of

every tariff permitted to go into effect. MCI Telecommunica-

tions Corp. v. FCC, 561 F.2d 365, 374 (D.C. Cir. 1977), cert.

denied, 434 U.S. 1040 (1978); Associated Press v. FCC, 448

F.2d 1095 (D.C. Cir. 1971). Fourth, in NASD the Court found

that the practices challenged in count I were closely related to the

activities challenged in counts II-VIII, and the latter were

expressly contemplated by the federal statutes. There is no cor-

responding specific statutory authorization, however, for the

allegedly anticompetitive tariffs challenged in this case. See also

MCI Communications Corp. v. American Tel. & Tel. Co., 462 F.

Supp. 1072, 1094-95 n.27 (N.D. Ill. 1978); Northeastern Tel.

Co. v. American Tel. & Tel. Co., 477 F. Supp. 251, 257-58

(D.Conn. 1978), rev'd, 651 F.2d 76 (2d Cir. 1981). We do not

read NASD to indicate that the FCA-based immunity is either a

logical requirement of that decision or consistent with controlling

analytic principles generally.”

The most compelling distinction in this case, however, is the

Carterfone mandate, which may be read not only as precluding a

repugnancy argument, but also as precluding an inconsistency

argument and affirmatively suggesting that an antitrust remedy is

eminently consistent with and complementary to the regulatory

scheme.” The Carterfone decision was itself responsive to a stay

in an antitrust case pending in the federal courts, and the FCC’s

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decision contemplated that the federal court would “pass ulti-

mately upon the antitrust issues after proceedings before the

Commission should be concluded.” Carterfone, 13 F.C.C.2d at

421.

A regulatory mandate sufficient to confer implied antitrust

immunity may in some cases exist in the presence of the following

three elements: First, explicit congressional approval of the ulti-

mate anticompetitive effect of the challenged conduct; second,

explicit authorization by Congress to an agency or private entity

to order the challenged anticompetitive conduct; and third, no

inconsistency between the challenged conduct and an express

policy of the governing agency. Such a mandate is absent here.

Instead of the three elements outlined above, there is clear incon-

sistency between the challenged conduct and the agency’s inter-

pretation of regulatory policy. The case before us does not

present the elements that would support a finding of implied

immunity under this analysis. To the contrary, we find the

Carterfone mandate permits freedom of choice to customers and

allows system access to competitors and foreign equipment, sub-

ject only to restrictions necessary to avoid damage to the tele-

phone network to preserve its utility for the customer.

C. Carterfone

Defendants’ primary contention is that after the Carterfone

decision the regulatory agencies put the carriers on the horns of a

dilemma: defendants were required to expand opportunities for

the use of customer-provided equipment with the nationwide tele-

communications network, but at the same time were purportedly

charged with ensuring that the increased use of customer-pro-

vided equipment would not endanger the safety, reliability, and

efficiency of the network. These obligations, they claim, are

conflicting and inconsistent unless antitrust immunity is implied;

otherwise, the unidimensional focus on competition embodied in

the antitrust laws would conflict with the broader concerns

embraced by the public interest standard. Thus, from the regu- .

lated entity’s viewpoint, a plain repugnancy allegedly exists

A-15

between the antitrust laws and the Communications Act. While

we acknowledge that this argument has some force, we cannot

agree that a perceived repugnancy is sufficient to imply immu-

nity—there must be an actual repugnancy between the antitrust

laws and the regulatory system. Here, no such actual repug-

nancy is present; indeed we find the antitrust remedy complemen-

tary to the regulatory scheme clarified by Carterfone.”

The concept of plain repugnancy must be examined from both

the agency's and the regulated carrier’s perspective. The rules

for implying antitrust immunity on the basis of regulatory stat-

utes reflect two broad concerns: the agency must have sufficient

freedom of action to carry out its regulatory mission, and the

regulated entity should not be required to act with reference to

inconsistent standards of conduct. See NASD, 422 US. at 722-

25; Gordon, 422 U.S. at 689." In short, the primacy of the

regulatory regime must not be threatened, either from the

agency's or the regulated entity’s viewpoint.

According to AT&T, finding no immunity in this case would

unfairly subject it to conflicting standards with potential liability

for violation of either and would also impair the functioning of the

regulatory process.“' We agree with AT&T that where an actual

conflict between the Sherman Act and the FCA exists, courts

should not reconcile the two statutes in such a way that the

rational choice for AT&T is to ignore the FCA standards and

attempt to comply with the antitrust laws. Thus, for example,

where conduct is compelled by the regulatory agency, not imply-

ing antitrust immunity would be unfair to the regulated entity

and would frustrate agency policies.

AT&T argues that the FCC adopted the post-Carterfone tar-

iffs when it permitted them to go into effect and that it is entitled

to antitrust immunity accordingly.“ We reject this contention.

The FCC does not expressly approve or adopt as agency policy the

content of every tariff it permits to become effective. By permit-

ting a tariff to go into effect, the FCC does not assert that it has

examined the content of the tariff and found it necessary or

appropriate to effectuate the regulatory program, nor does it have

A-16

an obligation under the Act to make such a finding. See 47

U.S.C. § 204 (1976); MCI Telecommunications Corp. v. FCC,

561 F. 2d 365, 374 (D.C. Cir. 1977), cert. denied, 434 U.S. 1040

(1978); Associated Press v. FCC, 448 F.2d 1095 (D.C. Cir.

1971). In the instant case, for example, the FCC was explicit in

not embracing as agency policy the precise content of the post-

Carterfone tariffs. It permitted the tariffs to go into effect while

the agency conducted its own examination of the interconnection

issue, but emphasized that “in doing so we are not giving any

specific approval to the revised tariffs.” AT&T “Foreign Attach-

ment” Tariff Revisions, 15 F.C.C.2d at 610. More particularly,

we do not believe the FCC approved the tariff with respect to

antitrust considerations or with the kind of endorsement neces-

sary for antitrust immunity.“

From the FCC’s perspective, applying the antitrust laws in this

case involves no conflict between pro-competitive antitrust poli-

cies and agency policies. The FCC did not adopt the post-

Carterfone tariffs as interim agency policy, and it eventually

determined that the requirement of a PCA for all interconnec-

tions of customer-provided equipment was unreasonable under

the public interest standard of the FCA.“ To permit a court

additionally to hold the same conduct unlawful under the Sher-

man Act does not jeopardize any policy adopted by the agency.“

The final point of AT&T's and General’s plain repugnancy

argument is grounded in the remedial structure of the FCA.

They contend that the Act provides a complete and self-contained

remedial scheme, including availability of damages, for violations

of the public interest standard. We note this involves a number of

suppositions. First we are asked to find an implied legislative

intention to award damages to competitors for competitive injury

specifically, and we are asked to make the further inference that

the assumed remedy was impliedly intended to displace the anti-

trust laws. Potential liability for violation of the FCA also is part

of AT&T's contention that it is subject to sanctions under con-

flicting substantive standards.

A-17

Although we think the assertion that damages are available to

competitors under the FCA is open to question,“ the existence of

the remedy would not dictate immunity from the antitrust laws in

any event.” First, the mere existence of a damages remedy

within the Act does not indicate a congressional intent to displace

the antitrust laws. The extent of the remedy differs significantly

from the reach of the antitrust laws, so it is more probable Con-

gress meant to supplement rather than displace the antitrust

laws.“

AT&T's argument that the FCA’s possible damages remedy

and the antitrust laws subject it to conflicting substantive stan-

dards is nothing more than a restatement of its principal conten-

tion, already discussed above. To the extent the carrier’s conduct

violates the FCA, those actions were neither compelled by the

FCC nor adopted as agency policy. Such conduct should be and

is subject to antitrust scrutiny since it is the product of the regu-

lated entity’s independent initiative and judgment.” Conduct is

exempt from the antitrust laws only when the regulated entity is

required to pursue a particular course of action to comply with an

identifiable and specific mandate of the regulatory statute.

We believe that this discussion of immunity applies with equal

force to Phonetele’s allegations of harmful ancillary practices by

AT&T.”

D. State Regulation

DASA’s complaint is based principally on General's filing of a

state tariff conforming to the amended No. 263. Some of the

matters pleaded in the complaint, such as the rates charged in.

connection with the PCA’s, appear to be entirely regulated by the

CPUC. Prior to 1974, state commissions had broad authority to

regulate interconnection practices.*' General has not specifically

argued that the state action exemption applies to the facts of this

case, although it has argued that state regulatory activity should

be judged under the same standards as FCC regulation, since the

state regulation is itself a federal policy of the Communications

A-18

Act. Irrespective of the standard we apply, state action exemp-

tion or federal immunity, the result is identical: the challenged

conduct is subject to antitrust scrutiny. To the extent federal

policy embraces state regulatory activity, the foregoing discussion

is applicable, see TAN 28-50, pp. 10-20, supra, and immunity

from the antitrust laws will not be implied. As the following

analysis indicates, moreover, the possibility of immunity based on

Parker v. Brown, 317 U.S. 341 (1943), is similarly foreclosed.

The most recent Supreme Court decision analyzing the scope

of the state-action exemption is California Retail Liquor Dealers

Ass'nv. Midcal Aluminum, Inc., 445 U.S. 97 (1980). There, in

reaffirming its earlier precedents in this area, the Court distilled

from those prior decisions two requirements necessary to obtain

immunity under Parker v. Brown: (1) the challenged restraint

must be clearly articulated and affirmatively expressed as state

policy; and (2) that policy must be actively supervised by the

state itself. Jd. at 105. See also New Motor Vehicle Bd. v. Orrin

W. Fox Co., 439 U.S. 96 (1978); City of Lafayette v. Louisiana

Power & Light Co., 435 U.S. 389 (1978).% The Court has

clearly stated that “state authorization, approval, encourage-

ment, or participation in restrictive private conduct confers no

antitrust immunity.” Cantor, 428 U.S. at 592-93 (footnotes

omitted ).”*

In light of the foregoing principles, we conclude that the CPUC

never embraced the PCA tariff in such a way as to make antitrust

immunity appropriate.* The CPUC did not strike down the

PCA tariff when it was filled by General, but this fact alone is

insufficient to confer Parker immunity. See, e.g., Cantor, 428

U.S. at 592-93; Goldfarb v. Virginia State Bar, 421 U.S. 773,

790-91 (1975).

We do no think the oversight exercised by the CPUC prior to

announcement of its registration program constituted clear evi-

dence of an active state policy to displace competition in the area

of customer-provided equipment.” The CPUC did order Gen-

era! to permit connection of the Divert-A-Call subject to agree-

ment on safety measures, and in late 1973 the CPUC began an

A-19

investigation into interconnection practices. As with regulation

by the FCC, however, a competitor may sue for damages based on

conduct which oceurred before the agency adopted any policy on

interconnection of foreign attachments, since a decision in such a

suit, rendered after disapproval by the agency, could not threaten

to disrupt a considered policy of the CPUC.”

IV

ANTITRUST LIABILITY AND THE SIGNIFICANCE OF

REGULATION

Our holding that appellees have no immunity does not mean

that we disregard their status as a regulated common carrier.

That status is relevant; it is a “fact of market life." While a

given regulatory scheme may not amount to the degree of neces-

sity required to confer implied immunity on all activities of a

regulated entity, some degree of necessity may be established as a

matter of fact in individual cases. When the regulated entity

assertedly attempts to respond to its duties as a common carrier

by filing and implementing an anticompetitive tariff, the antitrust

laws do not apply to the tariff without regard to the technical and

lega! constraints flowing from the regulatory structure. If a

defendant can establish that, at the time the various anticompeti-

tive acts alleged here were taken, it had a reasonable basis to

conclude that its actions were necessitated by concrete factual

imperatives recognized as legitimate by the regulatory authority,

then its actions did not violate the antitrust laws. At this stage of

the proceedings, it appears this inquiry will depend largely on

whether the facts show the companies did reasonably conclude,

given their expertise, that uncontrolled NCSU interconnection

would endanger their own equipment or disrupt their own signal

transmissions in identifiable ways, and also that the tariff as filed

was the most reasonable, narrowly focused mechanism then avail-

able to prevent such real harm from occurring.” These matters

must be developed at trial.

These factual justifications, the resolution of which is necessa-

rily open at this point, are to be distinguished from the various

A-20

legal issues in the case which we now foreclose. The defendants

may not justify their actions based on some mistake of law in

interpreting the FCA, or judicial or FCC decisions. It will not be

open to a defendant to argue that it was entitled as a matter of

right to file any tariff it chose or that it was obliged to file a tariff

absent the kind of factual necessities we have outlined above.”

After the Carterfone decision, a defendant may not assert that it

was entitled by law or agency policy to a monopoly in the furnish-

ing and supply of terminal equipment.

The defense outlined above, the justification of regulatory

necessity, must be established in the context of the specific claims

made out in the pleadings.

A. Tying Clairas

Phonetele alleges that AT&T violated section 3 of the Clayton

Act, apparently by tying AT&T customers to acceptance of

AT&T's interconnecting devices. Tying can constitute a per se

violation of both section 3 of the Clayton Act and section | of the

Sherman Act. See Moore v. Jas. H. Matthews & Co., 550 F.2d

1207, 1211-13 (9th Cir. 1977). Conduct that does not meet the

requirements of either per se rule, however, may still constitute a

violation of the section | rule of reason. Fortner Enterprises, Inc.

v. United States Steel Corp., 394 U.S. 495, 500 (1969). See

United States Steel Corp v. Fortner Enterprises, Inc., 429 U.S.

610, 612 n.1 (1977).

The tying per se rule is exceptional in that it permits the

defendant to offer justifications for undertaking the tie. Baker,

The Supreme Court and the Per Se Tying Rule: Cutting the

Gordian Knot, 66 Va. L. Rev. 1235, 1250 (1980). See, e.g.,

Moore, 550 F.2d at 1217. A tie-in may be justified if imple-

mented for a legitimate purpose and if no less restrictive alterna-

tive is available. Siegel v. Chicken Delight, Inc., 448 F.2d 43, 51

(9th Cir. 1971), cert. denied, 405 U.S. 955 (1972); see, e.g.

United States v. Jerrold Elecs. Corp., 187 F. Supp. 545, 557, 560-

61 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961). The

defendant, however, has the burden of showing that the tie-in was

A-21

reasonable for the entire time it ws in effect. See Jerrold Elecs.

Corp., 187 F. Supp. at 558. Ifa regulated entity in this case can

establish a defense consistent with the outline set out above, it will

then have a justification which is a defense to the illegal tying

charge.”

B. Violations of Section 2 of the Sherman Act

Both plaintiffs allege that defendants have monopolized in vio-

lation of section 2 of the Sherman Act. In general, a section 2

claim requires two principal elements in addition to antitrust

injury: (1) possession of monopoly power in the relevent market

and (2) willful acquisition or maintenance of that power. Hunt-

Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924 (9th

Cir. 1980, cert. denied, 101 S.Ct. 1369 (1981); California Com-

puter Prods. v. International Business Machs. Corp., 613 F.2d

727, 735 (9th Cir. 1979). A monopolist may not invidiously use

its power in one market, even if lawfully obtained, to harm com-

petition in another market. See Pacific Coast Agricultural

Export Ass'n v. Sunkist Growers, Inc., 526 F.2d 1196 (9th Cir.

1975), cert. denied, 425 U.S. 959 (1976). Although regulation

in certain instances has been considered in determining if monop-

oly power exists," we need not consider this issue at present.

Rather, we are concerned with the conduct element of the monop-

olization claim.

Willful acquisition or maintenance means that the monopolist

must have “engaged in ‘willful’ acts directed at establishing or

retaining its monopoly, ‘as distinguished from growth or develop-

ment as a consequence of a superior product, business acumen, or

historic accident.’” California Computer Prods., 613 F.2d at

735 (quoting United States v. Grinnell Corp., 384 U.S. 563, 571

(1966)). The defendants here may protect themselves against a

charge of willful monopolistic conduct by the same showing of a

reasonable response to factual imperatives affecting a regulated

common carrier that are applicable to the tying charge. See

Mid-Texas Communications Sys., Inc. v. American Tel. & Tel.

Co., 615 F.2d 1372, 1389-90 (Sth Cir.), cert. denied, 101 S.Ct.

286 (1980); Watson & Brunner, Monopolization by Regulated

A-22

“Monopolies”: The Search for Substantive Standards, 22 Anti-

trust Bull. 559, 577-79 (1977). Similarly, in the absence of a

direct showing of a specific intent to monopolize in support of any

section 2 attempt or conspiracy claims, see Watson & Brunner,

supra, at 583 n.23, the defendants may attempt to rebut an

anticompetitive characterization of their conduct, see generally

California Computer Prods., 613 F.2d at 737, by the identical

showing of reasonable conduct as a regulated carrier, see id.;

Sherman v. British Leyland Motors, Ltd., 60\ F.2d 429, 453 n.47

(9th Cir. 1979).

C. Violations of Section | of the Sherman Act

In response to the allegations of section | rule of reason

violations in this case, defendants may offer their showing of

reasonable conduct to rebut plaintiffs’ evidence to the con-

trary. Should claims of section | per se violations other

than tying be made, the defendants may respond by offering

the same justification applicable to the tying claims.

D. Conclusion: Regulatory Constraints as a Defense to

Antitrust Claims

As noted in the preceding sections, regulatory and operating

constraints imposed on the defendants may be taken into account

in ascertaining liability for the section 1, section 2, and tying

allegations. That conclusion finds support in both caselaw and

commentary. In Silver v. New York Stock Exch., 373 US. 341,

360-61, 365 (1963), the Court was confronted with a challenge to

the New York Stock Exchange’s requirement that its members

remove private direct telephone wires which had enabled a non-

member broker/dealer to communicate directly with the trading

desks of member firms. Although the Court refused to find

antitrust immunity for exchange self-regulation, id. at 360-61, it

nonetheless indicated that it was prepared to permit the “inter-

posing of a substantive justification” for challenged conduct

which, but for the regulatory setting, would have been deemed per

se illegal. Jd.”

A-23

Jacobi v. Bache & Co., 520 F.2d 1231 (2d Cir. 1975), cert.

denied, 423 U.S. 1053 (1976), also involved rejection of an

immunity defense and the creation of a mechanism permitting the

antitrust court to evaluate the impact of a regulatory scheme in a

per se context. The Jacobi court’s analysis of the evidence pre-

sented at trial indicates its vicw that a standard of objective

reasonableness was appropriate fo: ciumination of a stock

exchange rule challenged as price-fixing.” See id. at 1239.

The Fifth Circuit, in Mid-Texas Communications Sys., Inc. v.

American Tel. & Tel. Co., 615 F.2d 1372 (Sth Cir.), cert. denied,

101 S. Ct. 286 (1980), contemplated a request for implied immu-

nity from a non per seclaim. It held, in a case analogous to these

consolidated cases, that section 20i({a) of the FCA imposed a

duty on Southern Bell Telephone Co. (Bell) to resist requests for

interconnection of local independent telephone companies when it

perceived ihose requests were not in the public interest.“

Although unwilling to accord Bell antitrust immuaity for its

refusal to interconnect an applicant who wished to provide local

phone service that Bell also wished to provide, the court granted

Bell a new trial, recognizing that “to the extent that [Bell] based

its decision . . . on articulable concerns relating to the public

interest as defined in [the FCA, it was] entitled to a measure of

protection from the effects of the antitrust laws.” Jd. at 1381.

The court ruled that, in resolving the monopolization claim the

fact-finder was to consider the extent to which the regulatory

scheme affected Bell's actions in refusing interconnection. /d. at

1385-90. The court concluded that: “The important issue in this

case is whether Bell’s action was reasonable under the antitrust

law in light of the relevant factors concerning the public interest

standard.” Jd. at 1390. Thus, the Fifth Circuit too has adopted

a standard of objective reasonableness in assessing a regulated

entity’s conduct under the antitrust laws. Those principles are

applicable here.

Our views are consistent with this and other courts’ decisions

on the significance of regulation in an antitrust case in other than

an immunity context.” ‘!n International Tel. & Tel. v. General

A-24

Tel. & Elecs. Corp., 518 F.2d 913 (9th Cir. 1975) [GT&E},

General Telephone & Electronics Corporation defended a

charged violation of section 7 of the Clayton Act on the ground

that it was part of a regulated, hence noncompetitively oriented

industry, and argued that advantages were to be gained by fur-

ther vertical integration of the telephone industry. While dis-

missing the argument as irrelevant, this court clarified its position

with regard to the effect of regulation:

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

tion 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 regula-

tion is significant, but not because it embodies a doctrinal

scheme different from the antitrust law; the sole legal

perspective is that afforded by the antitrust law. Rather,

the impact of regulation must be assessed simply as

another fact of market life.

Id. at 935-36 (footnote omitted ).”

As the preceding discussion indicates, the proper role of anti-

trust courts is to accommodate the peculiar circumstances under

which regulated entities operate. Professors Areeda and Turner

state the proposition succinctly:

[ A] ntitrust courts can and do consider the particular cir-

cumstances of an industry and therefore adjust their usual

rules to the existence, extent, and nature of regulation.

Just as the administrative agency must consider the com-

petitive premises of the antitrust laws, the antitrust court

must consider the peculiarities of an industry as recog-

nized in a regulatory statute.

1 P. Areeda & D. Turner, supra note *, at 1223d. See Note,

supra note “, 57 Tex. L. Rev., at 825.

We thus recognize that those considerations advanced in favor

of implied immunity, while not providing a blanket exemption, do

bear on the case in a limited way. The logic of complying with a

regulatory mandate is relevant as an antitrust defense, but the

A-25

same logic has internal limits which do not justify any and all acts

ostensibly taken in response to the FCA. There is no absolute

antitrust immunity or exemption by virtue of federal or state law

in this case, but the defendants below may offer to show that their

actions were justified by the constraints of the regulatory schemes

in which they operated.

REVERSED and REMANDED.

A-26

FOOTNOTES

1. Many courts have addressed the question; the Second, Third,

Fifth, and Eighth Circuits have refused to accord immunity under simi-

lar circumstances. See Northeastern Tel. Co. v. American Tel. & Tel.

Co., 651 F.2d 76 (2d Cir. 1981); Sound, Inc. v. American Tel. & Tel.

Co., 631 F.2d 1324 (8th Cir. 1980); Essential Communications Sys.,

Inc. v. American Tel. & Tel. Co., 610 F.2d 1114 (3d cir. 1979); Litton

Sys., Inc. v. American Tel. & Tel. Co., 487 F. Supp. 942 (S.D.N.Y.

1980); Monitor Business Machs., Inc. v. American Tel. & Tel. Co.,

1978-1 Trade Cas. {62,030 (C.D. Cal. 1978); Jarvis, Inc. v. American

Tel. & Tel. Co., 481 F. Supp. 120 (D.D.C. 1978); Interconnect Planning

v. American Tel. & Tel. Co., 465 F. Supp. 811 (S.D.N.Y. 1978); Macon

Prods. Corp. v. American Tel. & Tel. Co., 359 F. Supp. 973 (C.D. Cal.

1973). In addition, the District Court for the District of Columbia has

twice found no blanket immunity in a civil suit by the United States

Government that concerned in part terminal equipment. United States

v. American Tel. & Tel. Co., 461 F. —_ 1314 (D.D.C. 1978); United

States v. American Tel. & Tel. Co., 427 F. Supp. 57 (D.D.C. 1976).

Several courts have addressed the analogous problem in the areas of

private longlines communications and interconnection with local tele-

phone companies, generally finding no implied immunity. See, e.g.

Mid-Texas Communications Sys., Inc. v. American Tel. & Tel. Co., 615

F.2d 1372 (Sth Cir.), cert. denied, 101 S. Ct. 286 (1980); MCI Com-

munications Corp. v. American Tel. & Tel. Co., 462 F. Supp. 1072

(N.D. Ill. 1978). One court of appeals has addressed the immunity

issue in the fairly specialized field of radio/telephone paging systems,

and found such immunity on the basis of the state action exemption.

Mobilfone v. Commonwealth Tel. Co., 571 F.2d 141 (3rd Cir. 1978).

The general problem has attracted some attention in the literature. See

Note, The Application of Antitrust Law to Telecommunications, 69

Calif. L. Rev. 497 (1981); Note, Antitrust and Regulated Industries:

A Critique and Proposal - Reform of the Implied Immunity Doctrine,

57 Tex. L. Rev. 751 (1979); Note, AT&T and the Antitrust Laws: A

Strict Test for Implied Immunity, 85 Yale L.J. 254 (1975).

2. In view of the actions taken by the FCC and the CPUC, DASA’s

request for equitable relief is moot.

3. Specifically, the complaint alleges, without limitation, the follow-

ing acts on the part of the defendants:

1. The knowing filing of anticompetitive and unlawful tariffs

prohibiting any interconnection of non-telephone company

equipment;

2. Replacement of those tariffs, following a determination of

their illegality, with new, pu fully anticompetitive tariffs

requiring (a) the installation of unnecessary ee couplers

actually designed to nt the Divert-A-Call from working and

(b) the pa t of unnecessary and unreasonable installation

and monthly charges;

3. Ford's sale of call diverters to General Telephone, accom-

panied by General's assistance of Ford’s efforts to develop a

A-27

diverter comparable to DASA’s, as well as General Te -

Ford iations towards Ford's future sales to General of its

improved call diverters;

4. General Telephone’s use of the inconvenience and

increased costs imposed on Divert-A-Call users by its tariffs as a

point in the promotion of its own call diverters;

5. General's enforcement of its tariffs with threats of termi-

nation of Divert-A-Call users’ phone service;

6. General Telephone’s failure to follow the CPUC’s 1972

order to negotiate in good faith with DASA reasonable assur-

ances regarding quality control, installation, and repair that

would permit direct connection of Divert-A-Calls;

7. Attempts by General and its co-conspirators to frustrate

CPUC and other governmental proceedings dealing with inter-

connection in order to prolong their unfair competitive

advantage.

These acts, DASA contends, harmed competition, telephone users,

and itself.

4. In the event that the defendants and co-conspirators did not have

monopoly power in the relevant market, DASA claims that (1) there

was a dan possibility that a — would be established; (2)

the defendants and co-conspirators specifically intended to create such a

monopoly; (3) the previously detailed acts were in furtherance of an

attempt and conspiracy to monopolize; and (4) that attempt should be

enjoined and damages should be awarded to DASA. Finally, DASA

charges the defendants and co-conspirators with wrongful interference

with DASA’s contractual relations with its customers.

5. The complaint does not detail misconduct by Western Electric

and Bell Te Laboratories, the manufacturing and research arms

of AT&T. complaint, in that it alleges an overly protective tariff

and delay and error in the design of Ty couplers, however,

implies misconduct by the AT&T subsidiaries.

6. Phonetele charges that AT&T and the ting companies have

misinterpreted the tariffs so as to apply to the while know-

ing that the Phonemaster is not covered by the tariffs, or, even if the

Phonemaster is covered, knowing that the requires nothi

more for connection than a simple terminal block. Phonetele, a

2 & the poor quality of the PCA made available in California

and to the fees associated with that coupler, also complains of AT&T's

delay in making a similar protective coupler available in other parts of

the United States. When a similar coupler finally was made available

outside of California, Phonetele charges that it was three and one-half

times as expensive as the already too expensive California coupling

arrangement. Phonetele claims that the imposition of protective coup-

ling arrangements has caused unnecessary design and installation

problems and attendant delays and has caused either Phontele or

tele’s customers to bear unnecessary costs.

A-28

In sum, Phonetele claims that AT&T and the operating companies

have used their monopoly position to ensure that their own customers

shall use only telephone company equipment.

7. See Phonetele, Inc. v. American Tel. & Tel. Co., 435 F. Supp. 207

(C.D. Cal. 1977); DASA Corp. v. General Tel. Co., 1977-2 Trade.

Cas. (CCH) 161,610 (C.D. Cal. 1977).

8. Section 203(a) of the Act, 47 U.S.C. § 203(a) (1976), requires

such carriers to file tariffs with the FCC “showing all charges . . . and

os the classifications, practices, and regulations affecting such

charges.”

9. 47 USC. § 203(b) (1976).

10. See Washington Util. & Myre Comm'n v. FCC, 513 F.2d

1142, (9th Cir.), cert. denied, 423 U.S. 836 (1975). See generally

FCC v. RCA Communications, Inc., 346 U.S. 86 (1953); Hawaiian Tel.

Co. v. FCC, 498 F.2d 771, 777 (D.C. Cir. 1974); Northeastern Tel. Co.

v. American Tel. & Tel. Co., 477 F. Supp. 251, 253 (D. Conn. 1978),

yA 651 F.2d 76 (2d Cir. 1981); Satellite Bus. Sys., 62 F.C.C. 2d 997

(1977).

There is a pro-competitive policy embodied in the FCA, although it is

a corollary of the more basic policy of favoring customer utility and

freedom of choice. See | for New or Revised Classes of Inter-

state and Foreign ——y, | oll Telephone Service (MTS) and Wide

Area Telephone Service (WATS), Second Report and Order, 58 F.C.C.

2d 736, 740 (1976) [Second Report).

Il. 47 U.S.C. § 204 (1976). The FCC y “7 ete of

the new tariff for up to five months. /d. § 204 (Supp. IV 1980). If the

FCC has not completed its hearings by that date, the new tariff becomes

effective subject to subsequent invalidation by the Commission.

12. Failure to obey an FCC order will result in a $1,000 fine for

violation, to be levied each day in the case of continuing offenses.

47 Use. § 205(b) (1976). A carrier found to have violated the Act is

liable to any person injured as a result of that violation for the “full

amount of — sustained,” plus the attorney's fees of the injured

person. 47 U.S.C. § 206 (1976). Section 207 establishes two avenues

of recovery. An injured party may sue for damages “in any district

court of the United States”, or Soy ow file a complaint with the

Commission pursuant to section 208. When a person claiming injury

files a complaint with the Commission, the carrier is required to respond

in writing. 47 U.S.C. § 208 (1976). If, after receiving the carrier's

response, the party chooses to pursue his complaint, the Commission

must investigate whether there a r to be any reasonable grounds

supporting the complaint. /d. If the FCC udes that the party is

entitled to Tog} it may order the carrier to pay the complaining

party. 47 U.S.C. § 209 (1976).

For other descriptions of the FCA, see, e.g., Essential Communica-

tions Sys., Inc. v. American Tel. & Tel. Co., 610 F.2d 1114, 1117-20

(3rd Cir. 1979); 446 F. 1,4 at 1095; Northeastern Tel. Co. v. Ameri-

can Tel. & Tel. Co., 477 F Supp. 251, 253 (D.Conn. 1978), rev'd, 651

F.2d 76 (2d Cir. 1981).

A-29

13. The Act es states that nothing contained in the chapter

on common carriers “shall be construed to apply or to give the Commis-

sion jurisdiction with respect to (1) charges, classifications, practices,

services, facilities, or regulations for or in connection with intrastate

communication service by wire or radio of any carrier .. . .” 47 U.S.C.

§ 152(b) (1976). That section further provides that, ‘with certain

exceptions (47 U.S.C. §§ 201-205 (1976)), the | Commission shall not

have jurisdiction over any “connecting carrier,” i.e., a carrier which

provides interstate communication only through physical connection

with another carrier not controlling it or controlled by it. /d.

14. In the present case, for example, the CPUC regulates General.

Yet because terminal equipment generally has the potential to be used in

interstate telephone connections, ary restriction on - connection con-

tained in the tariffs filed by AT&T would also apply to terminal equip:

ment of intrastate carriers. See Telerent Leasin , 45 F.C

204, 216 n.21 (1974). Until recently, however, t appeared to be no

reason why a state could not apply more restrictive regulations for the

interconnection of customer-provided terminal equipment.

15. In 1956 AT&T's blanket prohibition against connecting any

a was struck down as a violation of the FCA. Hush-A-

as v. United States, 238 F.2d 266 (D.C. Cir. 1956), after remand,

C.C. 112 (1957). The “Hush-A-Phone” was a cup-shaped device

which attached to the mouthpiece of the handset to provide privacy for

Gouer eens Seer es There was no electrical

connection between the telephone and the Hush-A-Phone. AT&T

responded to this decision by filing a tariff which prohibited all “direct

electrical connection” and interconnection by any means of customer-

provided equipment. See Carterfone, 13 F.C.C. 2d at 437-38.

16. Many state public utilities commissions apparently felt pn the

telephone company must maintain end-to-end pm nm gg by mmemny

the integrity and reliability of the telephone network. For example,

when —y telephone companies permitted users to provide their own

- some state Any agencies ordered the — =

‘thet —s rom the customers, thus highi ge

oom ’s ity for maintaining the —. Sone e.g

Winchester Tel. Co., P.U.R. 1915A 928 (Ill. Pub. Util. Comte 1913),

Franksville Tel. Co., P.U.R. 1917A 270 (Wis. R.R. Comm'n 1916);

Littlepage v. Mosier Valley Tel. Co., P.U.R. 19i18E 425 (Ore. Pub.

Serv. Comm'n 1918); Swanson, P.U. R. 1920E 633 (Cal. R.R. Comm'n

1920). See also, Quick Action Collection. New York Tel. Co., P.U.R.

1920D 137 (NJ. 1 b- Comm'rs 1920) —— —. by

yay = to replace comes oa pe OS of

pty iyo Tel Co., 2 P any 2aT, 59.

(Cale -_R. Comm'n 1933) (same) (collecting cases).

17. The plaintiff in that action manufactured a device known as the

“Carterfone.

18. See note 38, infra.

A-30

19. “Network control signals” are electronic impulses which acti-

vate connections between te centers, control switches, and start

and stop the equipment for billing. Devices that generate or

activate network control signals are a cat of terminal equipment

known as “network control signaling units” (NCSUs). A ing to

the defendants, plaintiffs’ devices are network control signaling units

and have the potential to — * system operations and message

accounting if not ly manufactured, installed and maintained.

See also notes 38, infra (discussing legal significance of

NCSU /non-NCSU distinction).

20. We must emphasize that our int tion of this statement by

the Commission su s our holding. post-Carterfone tariff was

in “in conflict” with Carterfone in the sense that Carterfone did not deal

— with customer replacement of terminal equipment, and the

ommission had not been, in 1968, in a position to say whether the

suggested possibility of greater ve ad from NCSUs was so substantial

or ewYY as to it a blanket prohibition by AT&T. See note

21,3 ay 43, ~¥ (discussing Carterfone and subsequent interpreta-

tions .

21. In our opinion, these and other matters warrant further

consideration by the Commission before it determines whether

and what further action, if any, may be required. We believe

that we will be in a better position to make these determina-

tions after we have had a reasonable Se © closely

observe the effects of the substantial changes now being effec-

tuated by the telephone companies in their interconnection

tariffs, the extent to which such changes satisfy reasonable

requirements of their subscribers for . . . communication serv-

ices or facilities, and the implementation by the telephone

companies of their representations that they are actively

engaged in devising equipment and ting procedures to

eust tho cugueneed tapi a eustamas or flexible access to the

switched network. Thus, we will permit the tariff revisions to

become effective as scheduled with the understanding that in

doing so we are not giving any specific approval to the revised

tariffs.

AT&T “Foreign Attachment” Tariff Revisions, 15 F.C.C.2d at 610

(emphasis added)

The Commission took this stance because it was then “in no position

to determine the extent to which” interconnection of customer-provi

. equipment could properly be itted “consistent with efficient and

economic service.” Id. See also AT&T “Foreign Attach-

ment” Tariff Revisions, 18 F.C.C.2d 871, 873 (1969) (denying peti-

tions for reconsideration); Western States Tel. Co., 19 F.C.C.2d 1968,

1072-73 (1969). It did, however, indicate that AT&T could consider

Ca — oN Fe 2d . STD ST) (dems = “

arterfone, CC2d at 2, ying petitions for

|

A-31

22. The FCC commissioned a study by the National Academy of

Sciences and gathered information from aha sources. In June, 1972,

the FCC began formal proceedings to determine whether the post-

Carterfone tariffs should be revised. Many users, equipment suppliers,

and carriers participated in the hearings. The agency created a federal-

State joint board to investigate interconnection practices. At about the

same time, many state utilities commissions undertook independent

investigations of the same issues. The potential for conflicting regula-

tory schemes led the FCC in 1974 to assert “paramount” or “primary”

jurisdiction over the terms and conditions governing the interconnection

of all equipment used in interstate communications. Telerent Leasin

Corp., 45 F.C.C.2d 204 (1974), aff'd sub nom. North Carolina Util.

Comm'n v. FCC, 537, F.2d 787 (4th Cir.), cert. denied, 429 U.S. 1027

(1976). After the Telerent decision, state utilities commissions still

have authority over the rates and charges for interconnection and car-

rier-supplied terminal equipment. See North Carolina Util. Comm'n,

552 F.2d at 1047-48.

23. 56 F.C.C.2d 593 (1975), modified in part, 57 F.C.C.2d 1216,

(1976), aff'd sub nom. North Carolina Util. Comm'n v. FCC, 552 F.2d

1036, (4th Cir.), cert. denied, 434 U.S. 874 (1977).

24. In 1966, the CPUC found a call diverter functionally similar to

the Divert-A-Call not pe ae any significant hazard to the telephone

system. The CPUC red General to allow interconnection of that

ice without a connecting arrangement or to purchase and supply the

device itself.

25. DASA’s yy in interest, Com-U-Trol, filed an action

before the CPUC in February, 1972, to compel General Telephone to

allow interconnection of the Divert-A-Cail. Although the CPUC

ordered that Generai “shall permit the direct electrical connection of

Divert-A-Calls to the telephone network subject to the condition that

complainant shall provide reasonable assurances that quality control,

installation, and repair procedures . . . necessary for the Preservation of

network — and safeiy will be uniformly followed,” Interim Deci-

sion N. 80972, Com-U-Trol and General were unable to come to agree-

ment on the necessary procedures.

26. See TAN 5 & 6, p. 3, and notes 5 & 6., supra.

27. See TAN 2-4, pp. 2-3, and notes 2-4, supra.

28. Nosection of the FCA expressly confers immunity in the area of

interconnection, and defendants do not contend + or intended any

blanket immunity. See Sound, Inc. vy. American Tel. & Tel. Co., 631

F.2d 1324, 1327 (8th Cir. 1980). Rather, the narrower claim is that

immunity should be implied in the discrete context of interconnection.

29. Northeastern Tel. Co.v. American Tel. & Tel. Co., 477 F. Supp.

251, 256 (D. Conn. 1978), rev'd, 651 F.2d 76 (2d Cir. 1981).

30. See Notes, supra note |.

31. For example, the immunity analysis in securities cases, and the

deference of the Court to any administrative action or conduct claimed

to be “necessary to make the securities laws work,” must be understood

A-32

with reference to the grave historical crises caused by the absence of

regulation in those industries. The Court has been exceptionally reluc-

tant to allow via the antitrust laws any tampering with the regulatory

framework that might threaten the recurrence of similar harm to inves-

tors. See NASD, 422 US. at 705-11; Gordon, 422 U.S. at 681-82;

Jacobi v. Bache & Co., 520 F.2d 1231, 1234 (2d Cir. 1975), cert.

denied, 423 U.S. 1053 (1976). In contrast, potential harms to the

public by accommodating ee to the policy of the antitrust laws

in other industries, such as the telephone interconnection industry, has

wh been well demonstated. See TAN 32-33, pp. 11-12, & note 33,

infra.

32. The plaintiffs in Gordon challenged primarily the practice of the

securities exchanges and their members of using fixed rates of commis-

sion for certain kinds of sales. 422 U.S. at 661. The Court held that

the challenged practices of the exchanges and their members were

immune from antitrust attack. Gordon not hold that whenever a

federal agency has the authority to a ¢ or prohibit conduct by a

regulat ys | and is engaged in detailed study of particular conduct,

that conduct which occurs during the period of agency study may not be

the basis for an antitrust action. Such a situation, without more, does

not establish a plain repugnancy between the regulatory scheme and the

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

(1973), is precisely contrary and controlling on this issue. See also

note 31, supra (special characteristics of self-regulating securities

industry); TAN 32-33, pp. 11-12, & note 33, infra (same).

It is critical here that the pre-Carterfone version of Tariff 263 was

initiated by the carrier and not the FCC. If the original practice being

studied by the agency was not undertaken by the regulated entity to

comply with a directive of the agency, and there is no evidence that

Congress was either aware of the particular anticompetitive practice or

gave the agency specific power to authorize it, we fail to see the rele-

vance of agency study to immunity for anticompetitive injury suffered

during the period of agency review. See also note 38 infra (discussing

significance of Carterfone.)

33. See Silver v. New York Stock Exch., 373 US. 341, 349-57

(1963); Gordon, 422 US. at 660-82; NASD, 422 US. at 720-30.

te Stewart concisely described this unusual facet of the securities

industry:

The purpose of the self-regulation provisions of the Securities

Exchange Act was to delegate governinental power to working

institutions which would undertake, at their own initiative, to

enforce compliance with ethical as well as | standards in a

com a —- industry. This self-initiatin

regulation can ectively only if the itself is allowed

to operate free from a constant threat of antitrust penalties.

Silver, 373 U.S. at 371 (Stewart, J., dissenting). See also Note, supra

note 1, 69 Calif. L. Rev. at 513-14.

34. The Court held the vertical restraints immune because of sec-

tion 22(f) of the Investment Company Act, 15 U.S.C. § 80a-22(f)

A-33

(1976), which prohibited restrictions on the transfer of mutual fund

shares except as specified in the registration statement, but in any event

not “in contravention of such rules and regulations as the [SEC] may

gee fl in the public interest. At the time the lawsuit was begun, the

EC had never exercised its authority under this section to promulgate

rules governing transfer of mutual funds shares, although during the

lawsuit the SEC indicated it planned to exercise its regulatory authority.

422 US. at 718-19 n.31. The Court reasoned:

{T]he agreements challenged in counts II-VIII are among the

kinds of restrictions Congress contemplated when it enacted that

section. Ard this conclusion necessarily leads to a determina-

tion that they ave immune from liability under the Sherman Act,

for we see no way to reconcile the Commission’s power to

authorize these restrictions with the competing mandate of the

antitrust laws.

427 USS. at 721-22.

35. The Court noted that the theory of the Government's section |

charge in count | of the complaint was imprecise and obscure. 422 US.

at 730-31. Originally the complaint seemed to attack the establishment

and maintenance of the rules and the rules themselves, id. at 730-31

n.42; later the focus shifted to the way the defendants enforced and

interpreted the rules. In any event, the practices attacked were a logical

corollary to some degree of a system of rules desi to prevent a

secondary market, and this ultimate goal the Court found clearly sanc-

tioned by the Congress. There is in the case before us no ana

ae for clearly anticompetitive behavior or for practices in aid of

thereol.

The activities in NASD were not required or specifically authorized

by | particular securities statute, but rather by an integrated scheme

of self regulation overseen by the SEC. The issue presented was thus

“whether the SEC’s exercise of meme authority under [the Invest-

ment Company Act] and the Maloney Act is sufficien tly asive to

confer an implied immunity.” /d. at 730. The Court noted that under

the Maloney Act the SEC must disapprove an Association rule or

change in a rule unless it is consistent with the regulatory policies of the

Act, id. at 732, and that the SEC is authorized to require changes in the

Association rules. For 35 years the SEC had, in the Court's view,

copreves the vertical restraints challenged in counts II-VIII. The

SEC’s authority to regulate the defendants’ interpretation and applica-

tion of these restrictive rules was just as broad as its authority over the

initial pee of the rules. The Court reasoned: “[W Je can see

no meaningful distinction between the Association’s rules and the man-

ner in which it construes and implements them. Each is equally a

subject of SEC oversight.” /d. at 733. The Court noted that Tesora -

tion rules were subject to careful scrutiny by the SEC, id. at 734, and

concluded that antitrust immunity was necessary to make the regulatory

scheme function.

36. See Hush-A-Phone, 22 F.C.C. 112 (1957) (after remand).

See also TAN 38, p. 16, & note 38, infra.

A-34

37. In Cantor, decided after NASD, the Court reaffirmed that it

“has consistently refused to find that regulation gave rise to an implied

exemption without first determining that the exemption was necessary

in r to make the regulatory Act work, ‘and even then only to the

minimum extent necessary.” Cantor, 428 U.S. at 597 (footnote omit-

ted) (quoting Silver v. New York Stock Exch., 373 U.S. 341, 357

(1963)).

38. See note 32 supra. As early as 1956, the justification for

restricting foreign attachments had been authoritatively construed to be

limited to instances of impairment of the telephone system. See Hush-

A-Phone Corp. v. United States, 238 F.2d 266, 268-69 (D.C. Cir.

1956), after remand, 22 F.C.C. 112 (1957). This point was reasserted

in 1968 in —— terms, in the FCC's Cuenivnr decision which

receded the filing of the tariffs at issue here. The Commission there

eld that a tariff was intrinsically unreasonable if it restricted intercon-

nection for reasons other than actual impairment of the system or its

utility to users. The following language is representative of the Com-

mission's directive that carriers be as narrowly specific in preventing

interconnection and as open to customer choice and thereby the compe-

tition of foreign attachments as possible:

{O]ur conclusion here is that a customer desiring to use an

interconnecting device to improve the utility to him of both the

telephone system and a private radio system should be able to do

$0, SO long as the interconnection does not adversely affect the

telephone company’s operations or the telephone system's utility

for others. A tariff which prevents this is unreasonable; it is also

unduly discriminatory when, as here, the telephone company’s

own interconnecting equipment is approved for use. The vice of

the present tariff, here as in Hush-A-Phone, is that it prohibits

the use of harmless as well as harmful devices.

There has been no adequate showing that nonharmful inter-

connection must be prohibited in order to permit the telephone

company to carry out its system responsiblities. ... We are not

holding that the telephone companies may not prevent the use of

devices which actually cause harm, or that they may not set up

reasonable standards to be met by interconnection devices.

. . The telephone companies would remain free to make

improvements to the telephone system and could reflect any such

improvements in reasonable revised standards for nontelephone

company provided devices used in connection with the system.

rere ool oa —_ of oy devices — then have the

responsibility ering for sale or use only such equipment as

would de, =e with such revised yy

eee t the tele, companies may not have known prior

to the proceedings — that the Carterfone was in fact harm-

less is irrelevant, since they barred its use without regard to its

= upon the a system. Furthermore, the tariff was

the carrier's own. It was not prescribed by the Commission. . . .

A-35

[ W Jhere the carrier itself initiates the rate or practice its lawful-

ness remains open, not only to a prospective finding but also to a

retroactive one.

Carterfone, 13 F.C.C.2d at 424-25 (emphasis added).

One further point must be added. We do not accept as significant an

argument that the equipment at issue in Carterfone was not networ

control signalling equipment, whereas at least some of the equipment at

issue here might be characterized as such. The rule we read in

Carterfone is that the carriers were put on notice that tariffs might

reasonably prohibit only those foreign attachments that posed a signifi-

cant actual danger to the system. While a tariff might reasonably treat

the connection of foreign network signalling equipment differently from

the connection of other equipment that was not, this would be simply

derivative of the actual danger criterion, in that the former type of

equipment alone might pose such a danger. We find no significance to

the distinction apart from this criterion, however.

The Commission, as well as this court, has clearly and repeatedly held

that while the precise holding of Carterfone did not decide the issue of

customer replacement of NCSU equi t, the broad and bindin

principle of Carterfone, and Hush-A-Phone before it, applied to a

telephone equipment. As we said in International Tel. & Tel. Corp. v.

General Tel. & Elecs. Corp, 518 F.2d 913, 933 (9th Cir. 1975):

Carterfone declared void those tariffs filed with the FCC and

state ere es by all domestic telephone operatin

companies prohibiting the interconnection of subscriber-own

equipment with the carrier’s telephone system. As a result of

the Carterfone decision, all telephone subscribers are now free, in

theory, to buy their own telephone equipment from suppliers of

their choice. But telephone operating companies have suc-

ceeded in minimizing the impact of Carterfone through tariffs

—— telephone companies to supply and install interface

evices.

( Footnote and citation omitted). We are bound by our previous inter-

pretation of Carterfone. See also First Report, 56 F.C.C.2d at 594-96

(“our Carterfone decision was not limited to the Carterfone device per

se, but was rather a broad general policy. [. . .j [T]his broad

Carterfone policy applied equally to devices which had direct electrical

connections.); American Tele and Te ph Co.'s

Tariff Revisions in Tariff No. 263 ie Mebane Home Telephone

Co., 53 F.C.C.2d 473, 476-78 (1975) [Mebane Home Telephone Co.}:

The foregoing adequately demonstrates the broad principle

underlying Hush-A-Pone and Carterjone, namely, the sub-

—* right to = pay way na org interconnected device

without causing harm to the te company’s operations.

We see no reason why this broad a should not extend to

interconnected devices such as PBX’s and key systems which

may replace telephone system equipment. [. . .] determin-

ing factor should be whether t is harm to the telephone

network, irrespective of whether the particular interconnection

device is one of the nature involved in Carterfone or a PBX

A-36

system or key system. To make a distinction based solely on

whether there is a substitution of telephone company equipment,

would be an arbitrary and unreasonable infringement of the

subscriber's right in the absence of technical harm or other pub-

lic detriment.

This point was made recently by an FCC hearing examiner:

The defendant([s’] attempt to limit the broad general policy

expressed in Hush-a-Phone and Carterfone to exclude devices

with direct electrical connections must be rejected. There is

simply no justification for such a construction. The important

and critical factor is whether the device is harmful or harmless,

a of whether a direct electrical connection may be

involved. More specifically, there was no justification for tariffs

which precluded the connection of devices by direct electrical

connections which were harmless to the system.

Western States Tel. Co., FCC Docket 16883, slip op. at 58 (Initial

Decision of ALJ, released April 10, 1981).

See also note 20, supra.

39. See note 38, supra.

40. As one student commentator has noted, “One goal implicit in

implied immunity analysis is to avoid unfairly subjecting the antitrust

defendant to we ee ey ey standards, penalizing through the anti-

trust laws conduct that the regulator in some sense ordered.” Note,

Antitrust and Regulated Industries: A Critique and Proposal =

cf Ay of the Implied Immunity Doctrine, 57 Tex. L. Rev. 751, 824

41. Both the antitrust laws and the FCA permit the FCC and the

courts to prescribe conduct, through hearings and injunctive relief,

respectively, and both laws provide for damages remedies. If a utility

a a course of conduct seeking to comply with the standards of the

FCA, AT&T argues it is more likely to be held liable for treble damages

under the antitrust laws; but if the utility adopts Sherman Act standards

as its directive and files tariffs designed to maximize competition,

AT&T suggests it may be faulted for not heeding the public interest

standards of the FCA. We indicate below, however, that these concerns

may be assuaged without our finding implied immunity. See TAN 57-

67, pp. 22-30, infra.

42. The issue of ag a al of the post-Carterfone tariffs

relates not so much to the policy of deference to a regulatory agency as it

does to the fairness to the regulated entity. Since the district court

decisions in DASA and Phonetele occurred after the FCC had declared

the post-Carterfone tariffs unlawful, subsequently permitting an anti-

trust action for damages does not conflict with an agency policy. Cf.

Note, supra note 40, 57 Tex. L. Rev. at 819-20 (retroactivity of First

aa on issue of fairness, not on issue of conflict giving rise to

immunity).

A-37

43. The majority of courts addressing the issue have concluded that

the FCC did not approve the post-Carterfone tariffs for = of

determining antitrust immunity. The district court in Essential may be

a to hold an = conclusion. See 446 F. Supp. at 1102,

rev'd, 610 F.2d 1114 (3d Cir. 1979). The court concluded that “the

tariffs were sanctioned as an interim means of protecting the network

while the agency developed the necessary data to formulate its registra-

tion program.” 446 F. Supp. at 1102.

Although the court’s factual description of the ~a + action may be

correct, we cannot agree with its legal conclusions. We have explained

our interpretation of the Commission’s action on the “ony

tariffs above. See notes 20 & 38, supra. Even if the FCC’s positions

during the 1968-1975 period was ambiguous in some respects, however,

see, e.g., AT&T “Foreign Attachment” Tariff Revisions, 18 F.C.C.2d at

$72 (on reconsideration), the FCC cannot reasonably be interpreted as

having adopted the post-Carterfone tariffs as agency policy for pu

of determining antitrust immunity. See also Northeastern, 477 F.

Supp. at 259-60.

In any event, the district court in Essential was reversed. Essential

Communications Sys., Inc. v. American Tel. & Tel. Co., 610 F.2d 1114

(3d Cir. 1979).

44. Ina related lawsuit, the FCC has indicated that conduct which

it has prescribed or ye mer y Op should be entitled to antitrust

immunity, but there should be no “blanket immunity” for all conduct

embodied in tariffs filed with the FCC and permitted to go into effect.

Memorandum of FCC as Amicus Curiae, reprinted in 62 F.C.C.2d

1103 (1975). See United States v. American Tel. & Tel. Co., 427

F.Supp. 57, 59 (D.D.C. 1976).

45. By contrast, if a plaintiff sued AT&T under the Sherman Act

for damages or injunctive relief based on AT&T's implementing the

registration program on file with the FCC, such a suit probably would

conflict with a considered policy adopted by the FCC. To allow the

antitrust action to frustrate the goals of the FCA as defined by the FCC

in the registration program would, in the agency’s view, involve a plain

repugnancy and require antitrust ory Cf. Mt. Hood Stages, Inc.

v. Greyhound Corp., 555 F.2d 687, 692-93 (9th Cir. 1977) (in context

of state regulation), cert. denied in part, 434 U.S. 1008, vacated on

— o—. 437 U.S. 322 (1978); Note, supra note 40, 57 Tex. L.

ev. at .

46. The Third Circuit in Essential Communications Sys., Inc. v.

American Tel. & Tel. Co., 610 F.2d 1114 (3d Cir. 1979), held in a

similar case that immunity was ina iate because the plaintiff was a

competitor and not a customer of AT&T. The court concluded that the

FCA was intended to protect customers of carriers against discrimina-

tory rates and charges but was not designed to regulate the conduct of

carriers vis-a-vis competitors. We have some doubt ry t%y the

court's interpretation of the Act’s history. Competitors of AT&T have

initiated and participated in numerous proceed before the FCC.

See, e.g., Comtronics, Inc., 57 F.C.C.2d 1202 (1976); Computoll Corp.,

A-38

56 F.C.C.2d 35 (1975); American Tel. & Tel. Co., 56 F.C.C.2d 14

(1975); United Tel. Co. of the Carolinas, 52 F.C.C.2d 717 (1975); CPI

Microwave, Inc., 52 F.C.C.2d 173 (1975).

In a similar vein, several courts, on somewhat different rationales and

with varying degrees of analysis, have indicated their doubt concerning

the availability or effectiveness of the damages remedy when a competi-

tor sues a regulated entity for violation of the FCA. See, e.g., Mid

Texas, 615 F.2d at 1380 (“[T]he FCC [is not] empowered to award

damages in favor of [an] injured competitor” for violation of FCA);

Nader v. FCC, 520 F.2d 182, 206 (D.C. Cir. 1975) (remedial system

incomplete; no damages remedy for competitors) (dicta) (by implica-

tion); Litton Sys., Inc. v. American Tel. & Tel. Co., 487 F. Supp. 942

(S.D.N.Y. 1980) (damages remedy more useful in theory than prac-

tice); MCI Communications Corp. vy. AT&T, 462 © Supp. 1072, 1088

(N.D. Ill. 1978) (no damages remedy under FC/ ° injury suffered b

competitor) (dicta); United States v. American jel. & Tel. Co., 461 F.

ty 1314, 1328 n.43 (D.D.C. 1978); Essential, 446 F. Supp. at 1100-

SS yeh First Report not retroactive). But see Phonetele, 435 F.

upp. at 213.

Perhaps an authoritative answer to this question is on the horizon. A

hearing examiner has awarded damages to a competitor of AT&T for

conduct similar to that “| > here. Western States Tel ©o., FCC

Docket No. 16883 (Initial ision of ALJ, released April i5, 1981).

It — to be seen whether the Commission and the courts sustain the

award.

Even if we were to accept that competitors had recourse to a remedial

scheme under the FCA, and even were we further to accept that there

might be different substantive standards, this would fall far short of a

showing that the two remedies would be inconsistent. The law is full of

instances of conduct that might give rise to two different types of liabil-

ity, claims, or causes of action, and the difference is not thought synony-

mous with inconsistency. As even the predicates of this argument are

dubious, we will not speculate at length about theoretical conflicts in a

remedial vacuum.

There are two reasons for this. First, the Initial Decision in Western

States Telephone indicates that the standard for any liability would not

be inconsistent with er antitrust analysis, though of course the

damages are not trebled. Jd. at 62-70. Second, the freedom of a party

— by anticompetitive conduct to elect between an administrative

FCA remedy and a judicial cause of action under the Clayton Act is

a acceptable; the latter need not derogate or interfere with the

ormer:

Petitioner’s failure to seek Shipping Act reparations does not

affect its rights under the antitrust laws. The rights which peti-

tioner claims under the ant trust laws are entirely collateral to

those which petitioner might have sought under the Shipping

Act. This does not suggest that petitioner might have sought

recovery under both, but petitioner did have its choice.

A-39

Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213, 224

(1966).

47. Wedo note that under some inte tions of the rule of reason,

the absence of a damages remedy under the FCA weighs against finding

an implied antitrust immunity and gives the antitrust court a role in

oy 4 public interest standards of the Act. See Mid-Texas, 615

F.2d at 1380.

48. A contrary interpretation might lead to the conclusion that any

— damages remedy within a regulatory act, whether or not focused

solely on antitrust violations, would give rise to antitrust immunity. We

refuse, however, to rely so heavily on such a thin reed especially in a

of — er Court precedents and the Court’s repeated admonitions that

repeal of the antitrust laws is not to be lightly inferred. See, e.g.,

Carnation, 383 U.S. at 224 (petitioner had option of seeking recovery

under either Shipping Act or antitrust laws). It is unlikely that a

plaintiff could recover damages under both statutes, see id., so there is

no danger of multiple liability.

49. Cf. Cantor, 428 U.S. at 594 (“nothing unjust in a conclusion

that... [defendant's] participation in the decision is sufficiently signifi-

cant to require that its conduct implementing the decision . . . conform to

applicable federal law”); Northeastern, 477 F Supp at 263 (defendant

initiated challenged practice “not at the command of the state, but after

exercising its own business judgment”); United States v. American Tel.

& Tel. Co., 461 F.Supp. 1314, 1327-28 (D.D.C. 1978):

“The allegations of the complaint describe conduct that quite

obviously was not stimulated by regulatory supervision or coer-

cion; it is of a character that reflects defendants’ business judg-

ment that its profits might be maximized if potential customers

were — from entering the various markets AT&T

controls.”

50. Phonotele’s complaint pleaded several matters ancillary to the

tariff: It was alleged that AT&T delayed the availability of omnes

arrangements for consumers outside California for over three years a

charged consumers outside California over three times the monthly

service charge for the same service within California without justifica-

tion. Finally, Phonetele alleged that AT &T deliberately misinterpreted

its own tariffs when it required a PCA for the Phonemaster. Accordin

to Phonetele, tariff 263 did not cover the Phonemaster. See TAN 5-6,

p. 3, and notes 5 & 6, supra.

Regarding immunity for the ancillary conduct, the FCC may have

primary jurisdiction to hear complaints concerning alleged misinterpre-

tation or bad faith implementation of filed tariffs, but we have already

concluded that this fact alone does not require implied antitrust

immunity.

51. This changed after Telerent. See TAN 13-14, pp. 5-6, & notes

13, 14, 22, supra. Even after 1974, state commissions still retained

authority to regulate the rates charged in connection with customer-

A-40

provided equipment, and one of the antitrust allegations is that General

charged excessive prices, reflected in filed tariffs, in an effort to monopo-

lize the relevant markets.

52. In this vein, the Court has already held that antitrust immunity

should not be conferred when a state agency passively accepts a public

utility’s tariff. See Midcai, 445 US. at 104. Cf Cantor v. Detroit

Edison Co., 428 U.S. 579 (1976) (implied state action). As the Court

explained in Goldfarb v. Virgina State Bar, 421, U.S. 773, 791 (1975),

“[i]t is not enough that . . . anticompetitive conduct is ‘prompted’ by

State action; rather, anticompetitive activities must be compelled by

direction of the State acting as a sovereign.”

53. Cf. Bates v. State Bar of Arizona, 433 U.S. 350 (1977) (state

action exemption); Goldfarb v. Virginia State Bar, 421 U.S. 773

(1975) (same). This is especially the case where the entity claimin

the benefit of the state action exemption is not a public corporation, suc

as a municipally owned utility, but is a private enterprise subject to state

regulation. See City of Lafayette v. Louisiana Power & Light Co., 435

U.S. 389 (1978).

54. Other courts which have refused to imply antitrust immunity

under the FCA for the activities of AT &T have also held those activities,

and parallel measures taken before state utilities commissions, un

tected by the Parker doctrine. See, e.g., Mid-Texas, 615 F.2d at 1380-

81; Essential, 610 F.2d at 1125; Litton Systems, 487 F. Supp. at 955-57.

55. But see Jeffrey v. Southwestern Bell, 518 F.2d 1129, 1133 (Sth

Cir. 1975) (rate approval by city council held sufficiently “sovereign” ).

Whatever degree of state sanction beyond mere authorization or

approval is required by the Supreme Court's cases, cf. Cantor, 428 U.S.

at 592-93 (state action exemption); Goldfarb, 421 U.S. at 790 (same),

the CPUC did not adopt or embrace the PCA requirement as state

policy beyond the mere fact of permitting General to file the tariff

containing the PCA requirement. Thus, the first requirement of Mid-

cal is not met in this case.

We do recognize a possible distinction between this case and Cantor,

in that the CPUC’s concern over the safety of the telephone network and

its corresponding power to regulate the conditions of interconnection, as

well as its concern with rates charged in connection with customer-

provided 7 i t, are at the core of its regulatory concerns, see I P.

Areeda & D. Turner, Antitrust Law 1 214b4 (1978), whereas provision

of light bulbs in Cantor did not relate to the central purpose of the

regulatory agency. We do not mean to suggest that Parker immunity

never applies to tariffs initiated by the regulated entity. See 1 P. Areeda

& D. Turner, supra, at 19 212-215. CPUC did not, however,

express its concern or exercise its power in such a way as to provide

immunity for General’s conduct.

Professors Areeda and Turner have concluded, albeit Rings

that where there is adequate supervision and clear state intent,

tion of foreign attachments to the telephone system by state utilities

commissions probably should be immune from antitrust attack. See id.

19 214b4 & 215b2, at 86-87, 96. This conclusion would appear to apply

A-41

equally to regulation by state commissions and also federa! commissions

such as the FCC. We agree with Professors Areeda and Turner on this

issue, but we do not think that our holding will “render i able the

regulatory programs of most states.” /d. % 215b2, at 96. hold only

that neither the FCC nor the CPUC intended to adopt the content of the

post-Carterfone tariffs as federal or state policy, respectively, when they

permitted the tariffs to go into effect.

56. It is possible, however, that General may be entitled to antitrust

immunity on another ground. Supreme Court and lower court deci-

sions indicate that a defendant's freedom of choice in taking the alleg-

edly anticompetitive action is an important factor in p do mA

whether implied regulatory immunity or immunity under the state

action exemption is boom yr Cf. Cantor, 428 U.S. at 592-93 (state

action question), G , 421 U.S. at 790. As we noted earlier in this

opinion, when the facilities of an intrastate telephone company are used

for interstate communications, they are subject to the tariffs filed by

AT&T. To the extent General's decision to require a protective con-

necting arrangement was dictated by AT &T’s tariff revisions filed with

the FCC, its own PCA tariff may have been a justified, if not a coerced,

compliance with the requirements of the federal and state latory

schemes. See TAN 13-14, pp. 5-6, & note 14, supra (relation between

federal and state regulatory schemes); TAN 57-67, pp. 22-30, infra

(dictates of regulatory scheme under which defendant operates may be

used to establish a factual defense in particular cases).

57. International Tel. & Tel. Co. v. General Tel. & Elecs. —-.

518 F.2d 913, 935-36 (9th Cir. 1975) (footnote omitted). See also

Otter Tail Power Co. v. United States, 410 U.S. 366, 381-82 (1973):

We do not suggest, however, that the District Court, concluding

that Otter Tail violated the antitrust laws, should be impervious

to Otter Tail’s assertion that compulsory interconnection or

wheeling will erode its integrated system and threaten its capac-

ity to serve adequately the public.... Since the District Court

has made future connections subject to Commission approval

and in any event has retained jurisdiction to enable the parties to

apply for “necessary or appropriate” relief and yy will

give effect to the policies embodied in the Federal Power Act, we

cannot say under these circumstances that it has abused its

discretion.”

58. The defendants might, for example, attempt to demonstrate

why methods of protecting the system which did not on particu-

larized knowledge about the technical specifications of all types of

equipment that might be interconnected, would have been cither inade-

= or not reasonably foreseeable. One such method is ted by

the FCC-proposed tariff in 1975, namely the requirement that those

desiring to connect yo —- first notify the telephone com-

pany with the provision that the telephone company could temporarily

iscontinue service to any customer whose oo was ~—_—

— 7 to the telephone network. See First Report, 56 F.C.C.

at “12.

A-42

59. Counsel for General assert that in Carterfone “(t}he FCC

ordered the telephone companies to submit new tariffs [to protect the

telephone system]” (emphasis added). The words of the Commission

are at no point in the decision ambiguous as to this issue and simply will

not bear this interpretation:

In view of the unlawfulness of the tariff there would be no point

in merely declaring it invalid as applied to the Carterfone and

permitting it to continue in operation as to other interconnection

devices. This would also put a clearly improper burden upon the

manufacturers and users of other devices. The appropriate rem-

edy is to strike the tariffs and permit the carriers, if they so

desire, to new tariff provisions in accordance with this

opinion. We make no rulings as to damages since that relief has

not been requested. As noted above, the carriers may submit

new tariffs which will protect the telephone system against harm-

ful devices, and may specify technical standards if they wish.

Carterfone, 13 F.C.C.2d at 425-26 (footnote omitted) (emphasis

added ).

The Carterfone decision offered AT&T a choice between action and

inaction. In our view, section 203 of the FCA does not require a carrier

to file a tariff a an omission to act. Even if such a statut

requirement had existed, the mere compulsion to file a descriptive tari

would not in any way have justified the filing of a restrictive tariff. The

defendants do not argue that they were compelled to resist interconnec-

tion by the possibility of liability for any damage caused by uncontrolled

interconnection. See TAN 64-65, pp. 27-28, & note 64, infra (discuss-

ing Mid-Texas).

60. This court in Moore yey a claim for immunity based on

state regulation, but it is not clear from the Moore opinion precisely

what argument the panel rejected. The briefs in that case reveal that

the defendants-appellees argued only that an —— statute which

authorized, but did not require, cemeteries to promulgate rules in very

general terms could be interpreted to cover the challenged tying prac-

tices. Moore is distinguishable on this point because the defendants-

appellees in that case offered a conjectural and wholly state law ground

as a justification. Here we are dealing with a state regulation that is in

many ——e appendage of the dominant federa! regulatory program.

We are also not permitting conclusory assertions of conjectural regula-

tory justification, as in Moore, but are only allowing an opportunity to

prove ‘ae defined type of regulatory necessity as a concrete

matter act.

—_ a. oo dictum in the Cantor opinion, = —— the Moore

‘pa i vily, strongl —— our view. After acknowledging

. — 4 of the treble mages provision of the antitrust laws,

t ourt stated:

The concern about nme liability has arguable rele-

vance to this case in two ways. F the hazard of veolating the

antitrust laws were enha by the fact of regulation, or if a

regulated company had engaged in anticompetitive conduct in

A-43

reliance on a justified understanding that such conduct was

immune from the antitrust laws, a concern with the punitive

aspects of the treble-damage remedy would be appropriate. But

neither of those circumstances is present in this case.

428 U.S. at 599. Thus, were the Court to encounter a ae a

justifiable reliance on the perceived dictates of a state or f | regula-

tory scheme, some measure of relief from the antitrust laws would

probably result. We have decided that such relief should be incorpo-

rated into the standard of antitrust liability.

61. See, eg Travelers Ins. Co. v. Blue Cross of W. Pa., 361 F.

Supp. 774, 780 (W.D. Pa. 1972), aff'd, 481 F.2d 80 (3d Cir.), cert.

denied, 414 US. 1093 (1973). oS International Rys. of Cent.

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

decree had eliminated “monopolist’s” power to control prices), cert.

denied, 429 U.S. 835 (1976).

62. The Court found the requirement completely unjustifiable and

struck it as violative of the Sherman Act mainly due to the lack of

procedural — accompanying the deprivation of the private wire

service. 373 US. at 361.

Similarly, in United States v. Marine Bancorporation, Inc., 418 US.

602 (1974), the government challenged under section 7 of the Clayton

Acta between two banks based on the potential competition

doctrine. Noting the “extensive federal and state regulatory barriers to

entry into commercial banking,” the Court specifically held that “the

application of the [ potential competition] doctrine to commercial bank-

ing must take into account the unique federal and state latory

eo on entry into that line of commerce.” /d. at 627-28 (footnote

omitted ).

63. The Jacobi case dealt with self-regulation by the New York

Stock Exchange, under the Securities Exchange Act. We are aware

that the Jacobi panel relied on Silver, and placed on the plaintiff the

burden of showing that the challenged conduct of the regulated entity

was neither “germane” to the “yy. of the Securities Act

nor consistent with reason. See 520 F.2d at 1239. The Silver Court,

hewever, did not go so far as to detail ee eS

applied to a proferred latory defense and where the burden of proof

might lie. See 373 US. at 366.

While the Silver Court located its action under the “aegis of the rule

of reason,” id., at 360, it also spoke of a regulatory justification “in

answer to the —— of an — qty id. S —_— ~ of the

“interposing” of such a justification, id. at . us, alt we

agree with SOL. REL BL 4

we read Silver to imply that the burden of maintaining a regulatory

justification lies on the defendant. We think this allocation of the

rden (1) minimizes the distortion of the elements of substantive

antitrust violations that would result were we to attempt to apply a “rule

of reason” analysis beyond the scope of section 1 and (2) places the

burden of production on the party with the best access to evidence and

expertise. Accordingly, our allocation is consistent with our desire to

A-44

avoid undue interference with plaintiffs’ exercise of their right to seek

the protection of the “fundamental national economic policy” repre-

sented by the antitrust laws, see National Gerimedical Hospital v. Blue

Cross, 49 U.S.L.W. 4672, 4676 (U.S. June 15, 1981), (quoting Orter

Tail Power Co. v. United States, 410 U.S. 366, 374 (1973)), while

accommodating fairness by permitting regulated entities “breathing

space” between the dictates of the regulatory regime and the antitrust

laws. See Silver, 373 U.S. at 360.

The Initial Decision in Western States Telephone makes a similar

point:

Contrary to the arguments of the telephone company defendants,

the bu of establishing that the Western States telephones

were harmful to the telephone system was on the defendants. In

this connection, the Commission made clear in Docket 19528

First Report and Order, 56 FCC 2d 593, 596 that the Carterfone

decision “ the burden of proof squarely upon the carri-

ers—not the users or this Commission—to demonstrate that a

particular unit or class of customer-provided equipment would

cause either technical or economic harm to the telephone net-

work...” Thus, while the designation order in this case

the burden of proof on the question of damages on ern

Staies, the order placed the question of harm from intercon-

nected equi ton the carrier. (See 62 FCC 2d 1070, 107!

(1977)). Hence, defendants’ arguments to the contrary are

rejected. It appears clear that the defendants were in the best

ition to establish either the or absence of harm aris-

ing from the Western States te . They had access to the

information —- to a resolution of such question. Resale

and Shared Use of Common Carrier Services and Facilities, 60

FCC 2d 261, 284-285 (1966). Referral of Chastainv. AT&T,

49 FCC 2d 749, 751 (1974).

Western States T Co., FCC Docket No. 76883, slip op. at 59-60

(Initial Desision of ALJ, released Apri! 10, 1981).

64. Other courts have reached similar conclusions. Although the

Fifth Circuit found sore sort of duty to resist interconnection by other

carriers if perceived nut to be in the public interest, this was not based on

any extensive analysis of authority, and is in any event of only tenuous

here as the court was interpreting a subsection of the FCA

fundamentally different from that before us; interconnection of carriers

is massive compared to that of most individual subscribers, and both the

effects on the network and the carriers’ regulatory duties may be sub-

stantially different from those involved in this appeal. See Mid-Texas,

615 F.2d at 1380-81. Cf TAN 58-59, mp. 23. note 59, supra (no duty to

file post-Carterfone tariff imposed by fone decision).

65. The th Circuit, in Sound, Inc. v. American Tel. & Tel. Co.,

631 F.2d 1324 (8th Cir. 1980), implicitly adopted a similar view when it

denied a company antitrust immunity and designated for fact-

finding at trial the question whether the company a PCA

requirememt because it did not know how otherwise to protect the

A-45

integrity of its own equipment. See id. at 1330 n.7. The Second

Circuit has made a jury question of the propriety of the design of a PCA

in an antitrust case challenging the design of the PCA, but not the filin

of the underlying tariff. See Northeastern Tel. Co. v. American Tel.

Tel. Co., 651 F.2d 76 (2d Cir. 1981).

66. In GT&E, implied immunity was not at issue, and GT&E did

not even attempt to demonstrate that the dictates of the regulatory

scheme imposed on it an obligation, either actual or perceived, to

acquire the telephone companies. Rather, the sole claim was grounded

in the advantages gained through vertical integration, an issue irrelevant

even “in the a of any regulation whatsoever.” GT&E, 518 F.2d

at 935. Since nothing unique or liar to the regulatory system

caused, either directly or tangentially, the defendant's conduct, there

was no reason to skew the doctrinal scheme of the antitrust laws.

67. The Supreme Court apparently has taken a similar view in

National Gerimedical Hospital v. Blue Cross, 49 U.S.L.W. 4672 (US.

June 15, 1981), where, after refusing to accord Blue Cross implied

antitrust immunity on the basis of its claim to have been acting to

further the purposes of the National Health Planning and Resources

Development Act of 1974, 42 U.S.C. § 3001, the rt noted that

litigation on the merits should give attention to the “particular economic

context” in which the alleged antitrust misconduct occurred. See

National Gerimedical, 49 U.S.L.W. at 4676 0.19.

A-46

J. CLAIBORNE (dissenting):

The cases of DASA Corporation, etc. v. General Telephone Co.

of California, et al. (No. 77-2936) [*“DASA”] and Phonetele,

Inc. v. American Telephone and Telegraph Co., et al., (No. 77-

3877) [“Phonetele”] present the same issue: Is American Tele-

phone & Telegraph Co. and its operating companies [“A.T. &

T.”] immune from liability under the Sherman Act (15 U.S.C.

§§ | et. seq.) with respect to competing manufacturers of “inter-

connection equipment” because of the way in which they are

regulated by the Federal Communications Commission

(“F.C.C.”)? This issue has been heavily litigated of recent, and

Courts and commentators are sharply divided. See generally,

Note, AT&T and the Antitrust Law: A Strict Test for Implied

Immunity, 85 Yale L.J. 254 (1975); Essential Communications

Systems, Inc. v. A.T. & T., 446 F. Supp. 1009 (D.N.J. 1978),

revd., 610 F.2d 1114 (3rd Cir. 1979); Litton Systems, Inc. v.

A.T. & T., No. 76 Civ. 2512 (WCC) [in which District Judge

Conner of the Southern District of New York declined to follow

the 270 page recommendation of Magistrate Sinclair on this

issue}.

Phonetele manufacturers the “Phonemaster,” which is a special

purpose mini-computer, designed specifically to interface with the

national telephone network. Phonetele installs the Phonemaster

on the customer's premises, at his/her telephone terminal. The

Phonemaster then controls the amount of telephone service by

restricting outgoing calls to selected area codes, exchange

prefixes, and lines; it does this by electronically observing the

_ Outgoing dial signals, translating them, comparing them to a core

memory, and then allowing or disallowing the call based upon the

consumer’s programmed restrictions. The Phonemaster, unlike

the terminal, operates on 110 volt current.

DASA manufactures a telephone call diverter known as

“Divert-a-Call.” A call diverter can automatically transfer each

A-47

incoming telephone call at one particular number to any other

designated telephone anywhere within the United States or

Canada.

The nation’s telephone system consists of a switch network that

links the facilities of more than 1,700 cooperating telephone com-

panies extending throughout the country. The four basic ele-

ments of this network are the terminal equipment (such as the

telephone itself located on the customer’s premises), the pair of

wires or “loop” that connects the telephone set to the central

office, the switching equipment, and the trunk facilities that con-

nect the central offices to each other. “Network control signals”

are electronic impulses which activate the devises that set up and

take down connections between centers, control switches, and

start and stop the equipment used for billing. Devices that gener-

ate or activate network control signals are a category of terminal

equipment known as “network control signaling units,” or

“NCSU’s.” Automatic transfer devices such as “Divert-a-Call”

and “Phonemaster” are NCSU’s. Such devices if not carefully

designed, manufactured, installed, and/or maintained, can cause

improper signals to be received at the central office, thereby dis-

rupting systems operations and message accounting.

In 1966, the F.C.C commenced its Carterfone proceedings with

respect to A.T. & T. Tariff 132, which blanked and unqualifiedly

prohibited customer-provided equipment. In 1968, the F.C.C.

concluded that Tariff 132 was overbroad as applied to ancillary

devices such as the Carterfone, which was not an NCSU but

which merely provided a means of achieving a form of intercon-

nection between the public toll telephone system and private

mobile radio systems by acoustic and inductive coupling. Use of

the Carterfone Device in Message Telephone Service, 13 F.C.C.

2d 420 (1968). The F.C.C. ordered the telephone companies to

submit a new tariff which would protect the telephone system

against harmful devices and, in response thereto, A.T. & T. sub-

mitted Tariff No. 263, which became effective on January 1,

1969. This tariff permitted acoustic and inductive connections

A-48

under specified conditions, and continued to prohibit direct elec-

trical connection of customer-provided NCSU equipment, unless

a customer wished to use indirect interconnection through a coup-

ling arrangemert furnished and maintained by the telephone

company. Immediately after filing of the same, several parties

filed objections thereto; however, the F.C.C. rejected these objec-

tions, holding that Tariff No. 263 was not in conflict with the prior

Carterfone ruling. 15 F.C.C. 2d 605; 18 F.C.C. 2d 871. In its

decision permitting revised tariff No. 263 to go into effect, the

F.C.C stated that it would undertake an extensive study to ascer-

tain whether any modifications or limitations on the interconnec-

tion of customer-provided NCSU equipment where necessary,

desirable and technically feasible.

Accordingly, the F.C.C. commissioned a study of the whole

matter of interconnection by the National Academy of Sciences

(cf. 18 F.C.C. 2d 871) and ordered a Federal-State Joint Board

investigation of interconnection in cooperation with the state reg-

ulatory agencies under 47 U.S.C. § 410(c) (cf. 35 F.C.C. 2d

539). Additionally, both the National Association of Regula-

tory Utility Commissioners (“NARUC”) and at least 17 differ-

ent state commissions—including California—undertook their

own independent investigations of this same problem during the

same period. This led to an order by the F.C.C. in which it

asserted “paramount” jurisdiction over the terms and conditions

governing the interconnection of all equipment used in interstate

communications thereby permitting the F.C.C. effectively to

limit the options available to the States in this area. Telerent

Leasing Corp. 45 F.C.C. 2d 204, affd., sub. nom., North Carolina

Util. Comm'n. v. F.C.C., 537 F. 2d 787 (4th Cir. 1976), cert.

denied, 429 U.S. 1027 (1976).

Based on a Report and recommended Order of the Federal-

’ State Joint Board and after several revisions thereof the Commis-

sion released its First Report and Order on November 7, 1975,

adopting a federal registration program for the regulation of

interconnection of customer-provided devices. 56 F.C.C. 2d 593.

A-49

The Commission noted that former Tariff No. 263 was one man-

ner in which to protect the network, but concluded that the

approach of that tariff was unnecessarily restrictive in view of the

Commission's finding that it would be technically and adminis-

tratively feasible to establish a system of equipment registration

which would provide the necessary minimal protection against

network harm. If so registered with the F.C.C., such equipment

no longer requires a protective connecting arrangement; but if not

so registered, the telephone companies may continue to require

the use of a protective connecting arrangement for the intercon-

nection of NCSU’s. The federal registration program promul-

gated by the F.C.C. is set forth in Sub-part 68 of the F.C.C.’s

regulations (47 C.F.R. §§ 68.100 et. seq.). A.T.&T. subsequen-

tly filed a revised tariff with the F.C.C. which purportedly reflects

the requirements of the F.C.C.’s registration program. The new

registration program will be subject to continuing review and

modification by the Commission as actual experience under the

program warrants. 56 F.C.C. 2d at 613.

Developments before the California Public Utilities Commis-

sion (“P.U.C.”) have loosely paralleled those before the F.C.C.

General Telephone tariffs filed with the P.U.C. prior to 1966

prohibited the connection of customer-provided equipment to the

telephone system. In 1966, the P.U.C. found a call diverter

functionally similar to the Divert-a-Call not to present any signifi-

cant hazard to the telephone system and the P.U.C. ordered

General Telephone to allow interconnection of that device with-

out a connecting arrangement or to purchase and supply the

device itself. DASA’s predecessor-in-interest, Com-U-Trol, filed

an action before the P.U.C in February of 1972, to compel Gen-

eral Telephone to allow interconnection of the Divert-a-Call.

Although the P.U.C. ordered that General “shall permit the

direct electrical connection cf Divert-a-Calls to the telephone

network subject to the condition that complainant shall provide

reasonable assurances that quality control, installation, and

repair procedures . . . necessary for the preservation of network

integrity and safety will be uniformly followed,” Com-U-Trol

A-50

and General were unable to come to agreement on the necessary

procedures. Subsequently, on October 24, 1973, the P.U.C.

commenced a general investigation into the terms and conditions

of interconnection of customer-provided equipment. On April

22, 1975, the P.U.C. issued an Interim Decision, which was even-

tually finalized in May, 1976 and which, like the F.C.C. First

Report, adopted a dual system of direct electrical connection of

certified devices and the use of protective connecting arrange-

ments for uncertified devices.

The Communications Act of 1934, or Title 47, Chapter 5 of the

United States Code, contains the statutory scheme by which the

federal government regulates wire communications. The Act

specifically confers jurisdiction over “all instrumentalities, facili-

ties, and apparatus . . . incidental to interstate communications

services upon the Federal Communications Commission.” 47

U.S.C. §§ 151,153(a), 153(e). Under this regulatory scheme,

Appellees, like other common carrier enterprises, are required to

file tariffs describing all rates and practices, including the terms

and conditions for the interconnection of customer-provided

equipment, before service can be offered to the public. Cf. 47

U.S.C. § 203(a). No changes can be made in the tariffs once

they are filed and published, except after ninety (90) days notice

to the F.C.C. and to the public (47 U.S.C. § 203(b)(1)), unless

the Commission exercises its discretion and does so pursuant to 47

U.S.C. § 203(b)(2). The Commission may not prescribe a new

rate or practice contained within a telephone company tariff

without first granting a full opportunity for a hearing before it.

47 U.S.C. § 204(a); A.T.&T. v. F.C.C., 487 F. 2d 865, 874 (2nd

Cir. 1973). The Commission has the authority to institute an

inquiry on its own motion with respect to matters raised before it

(47 U.S.C. § 403), and whenever it conducts an investigation it

_has the duty to state its conclusions in writing (47 U.S.C. § 404).

The Commission also has the power to reer any matter arising in

the administration of the 1934 Act to a joint board to be com-

posed of members from each of the states in which the wire

A-51

communication affected by or involved in the proceeding takes

place or is proposed, pursuant to 47 U.S.C. § 410, which power

the F.C.C. in fact exercised in the case at bar.

After such a hearing, the F.C.C. is empowered with the duty to

determine what the just and reasonable charge or the just, fair

and reasonable classification, regulation or practice shall be and

to make cease and desist orders accordingly. In other words, if

the agency concludes that the tariff is not in compliance with the

Act or regulations thereunder, it must order the tariff cancelled or

modified as the circumstances warrant. 47 U.S.C. § 205(a). If

the agency accepts the tariff and permits it to become effective,

the regulatory statutes specifically require the carriers to enforce

the tariff fully and fairly unless and until it has been superseded

by a new tariff filed and reviewed under this same procedure. 47

U.S.C. § 203(c).

The standard under which the F.C.C. acts in administering the

Act is not the standard of “free and unfettered competition,”

upon which the Sherman Act is premised (cf. Northern Pac. R.

Co. v. United States, 356 U.S. 1, 4, 78S. Ct. 514, 517, 2 L. Ed. 2d

545 (1958)) but a standard broader than that, namely, the stan-

dard of protecting the public interest in communications. Cf.

Scripps-Howard Radio v. F.C.C., 316 US. 4, 14, 62 S. Ct. 875,

882, 86 L. Ed. 1229 (1942). By this, it is meant that all charges,

practices, classifications and regulations for and in connection

with such communication service shall be just and reasonable.

47 U.S.C. § 201(b). Thus, antitrust considerations may be rele-

vant to the F.C.C.’s determination of the legality of a tariff under

this Chapter, but they are not determinative, except where 47

U.S.C. § 202 applies directly; other factors which the F.C.C.

takes into account in determining the “public interest” include

network safety and ef ‘ciency, the need of the public for reliable

service at reasonable ‘ates, the proper allocation of the rate bur-

den in the public interest, the financial integrity of the carriers,

and the future needs of both the users and carriers. Compare 62

F.C.C. 2d 997 (1977); 59 F.C.C. 2d 344 (1976); 34 F.C.C. 949

A-52

(1963); 17 F.C.C. 152 (1952): 10 F.C.C. 244 (1943); and see

Mid-Texas Communications v. American Tel. & Tel. Co., 615 F.

2d 1372, 1379 (Sth Cir. 1980), and cases cited therein.

Where a common carrier violates this standard or omits to do

anything which is required by the Act to be done, it can be liable

to the person(s) injured thereby for damages plus attorney's fees.

47 U.S.C. § 206. Jurisdiction is in the United States District

Courts or with the Commission, but not both simultaneously. 47

U.S.C. § 207. In fact, the F.C.C. currently has pending before it

a reactivated proceeding involving alleged damages resulting

from the post-Carterfone interconnection tariffs. Western States

Tel. Co. v. A. T. & T., 19 F.C.C. 2d 1068 (1969), 62 F.C.C. 2d

1170 (1977). The District Courts have jurisdiction to enforce

any orders of the F.C.C. pursuant to 47 U.S.C. § 401.

Both appellants are relatively new businesses, having spawned

in the early 1970's as a result of the post-Carterfone events here-

tofore described. Phonetele and DASA both filed their actions in

1974. The essence of Phonetele’s complaint is that the defend-

ants have conspired to limit sales of the Phonemaster by restrict-

ing the manner in which the device can be “interconnected” with

the national telephone system. While the complaint does not

specifically so state, Phonetele must concede as a matter judi-

cially noticeable that the sole means by which Appellees have

allegedly done so is by the filing of the tariffs heretofore

described. DASA apparently alleges that General Telephone

and Ford Industries, Inc. (Ford) a manufacturer of a competing

call diverter for General Telephone, have conspired to eliminate

competition for the production, sale and leasing of automatic call

diverters; that General has filed “anticompetitive” tariffs with the

P.U.C. with the purpose of eliminating and restraining competi-

tion in the field of peripheral telephone equipment; that after such

tariffs were determined to be unlawful, General unnecessarily

required a coupler supplied by it for the attachment of the Divert-

a-Call to the telephone system; that the charges for these couplers

A-53

were unreasonable; that the couplers were designed to prevent the

proper functioning of the call diverters; that General and co-

conspirators sought to prevent DASA from obtaining rulings

from the P.U.C. and other public bodies as to the validity of tariff

provisions relating to the inter-connection of customer-provided

terminal equipment; and that General conspired with Ford so that

Ford would be able to control the market for call diverters.

The District Court in both cases below granted the Appellees’

motion for judgment on the pleadings/motion to dismiss on the

grounds that the subject of interconnection of terminal equipment

with the telephone network system is impliedly immune from

antitrust attack in the federal courts. Phonetele, Inc. v. A.T. &

T., 435 F. Supp. 207, 214 (C.D. Cal. 1977). These appeals

follow.

A.

The starting point for any consideration of the issue at bar’ are

the well settled principles that repeal of the antitrust laws by

implication is not favored and not casually to be allowed; only

where there is a “plain repugnancy between the antitrust and

regulatory provisions” will repeal be implied. United States v.

Philadelphia National Bank, 374 U.S. 321, 350-351, 83 S. Ct.

1715, 1734-1735, 10 L. Ed. 2d 915 (1963), and cases cited

therein. Repeal is to be regarded as implied only if necessary to

make regulatory provisions work, and even then only to the maxi-

mum extent necessary. Silver v. New York Stock Exchange, 373

U.S. 341, 357, 83 S.Ct. 1246, 1257, 10 L. Ed. 2d 389 (1963).

While these principles tend to lead in the direction of the

majority opinion, they cannot be considered in a vacuum.

Rather, one must examine them in operation in recent Supreme

Court cases, and see where this case fits within the spectrum

already established by the Supreme Court. The four most recent

Supreme Court opinions on the issue of implied antitrust immu-

nity are: Gordon v. New York Stock Exchange, 422 U.S. 659, 95

S. Ct. 2598, 45 L. Ed. 463 (1975); United States v. National

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

A-54

2427, 45 L. Ed. 2d 486 (1975) [*NASD”]; Hughes Tool Com-

pany v. Trans World Airlines, Inc., 409 U.S. 363, 93 S. Ct. 647,

34 L. Ed. 2d 577 (1973); and Cantor v. Detroit Edison Co., 428

U.S. 579, 96 S. Ct., 3110, 49 L. Ed. 2d 1141 (1976). After

reading these cases and gleaning their intelligence, I believe that

any Court faced with the issue at bar must ask the following

questions: | ) Has Congress conferred upon the regulatory agency

sufficient authority to regulate the conduct which is alleged to be

anticompetitive? 2) Does the history of the regulatory agency’s

activities with respect to the regulation of this conduct suggest no

laxity in the exercise of this authority? 3) If the federal antitrust

laws were to be construed by a federal court as outlawing the

regulated activity, is there reason to believe that the agency’s

regulation of the industry in question will no longer be able to

function effectively? If a Court answers all three questions in the

affirmative, then it must find implied immunity and dismiss the

antitrust action.

The Gordon case involved an action against the New York

Stock Exchange (NYSE), the American Stock Exchange

(AMEX) and two member firms thereof, claiming that the sys-

tem of fixed commission rates utilized by the Exchanges for the

periods of time in question violated §§ 1 and 2 of the Sherman

Act. The Supreme Court affirmed the dismissal of the com-

plaint. First, the Court noted that the general policy of the

Securities Exchange Act of 1934 was of self-regulation by the

exchanges coupled with oversight by the Securities and Exchange

Commission (S.E.C.). 422 U.S. at 666-667; 95 S. Ct. at 2603-

2604. The Court then thoroughly examined the actual post-1934

experience of S.E.C.-imposed rates on the NYSE and AMEX; to

summarize, the S.E.C. gradually abolished said rates between

1934 and 1975, refusing to take the position that fixed rates were

required in all instances, but recognizing the established practice

of minimum rates and the practicality that some level of fixed

rates was necessary for a large period of time in order to insure

the financial health of the brokers in question and that an imme-

diate withdrawal of minimum rates could have disastrous

A-55

financial consequences upon the brokers as well as indirect but

consequential harm to investors. The Court also noted that Con-

gress, while expressing some dissatisfaction with the progress of

the S.E.C. in implementing competitive rates, was generally con-

tent to allow the S.E.C. to proceed without new legislation. 422

U.S. at 668-682; 95 S. Ct. at 2606-2611. The Court then stated:

... [T]o deny antitrust immunity with respect to commis-

sion rates would be to subject the exchanges and iheir

members to conflicting standards. It is clear from our

discussion . . . that the commission rate practices of the

exchanges have been subjected to the scrutiny and

approval of the S.E.C. If antitrust courts were to impose

different standards or requirements, the exchanges might

find themselves unable to proceed without violation of the

mandate of the courts or of the S.E.C. Such different

standards are likely to result because the sole aim of anti-

trust legislation is to protect competition, whereas the

S.E.C. must consider, in addition, the economic health of

the investors, the exchanges, and the securities industry.

Given the expertise of the S.E.C., the confidence the Con-

gress has placed in the agency, and the active roles the

S.E.C. and the Congress have taken, permitting courts

throughout the country to conduct their own antitrust

proceedings would conflict with the regulatory scheme

authorized by Congress rather than supplement the

scheme.

422 U.S. at 689-690; 95 S. Ct. at 2614-2615.

The NASD case involved, inter-alia, an alleged conspiracy and

horizontal combination among NASD’s members to prevent the

growth of a secondary dealer market in the purchase and sale of

mutual-fund shares.* Section 22(f) of the Investment Company

Act of 1940 authorizes mutual funds to impose restrictions on the

negotiability and transferability of shares, provided they conform

with the fund's registration statement and do not contravene any

A-5S6

rules and regulations that the S.E.C. may prescribe in the inter-

ests of the holders of the outstanding securities. Section 22(d)

provides that no dealer shall sell mutual fund shares to any person

except a dealer, a principal underwriter, or the issuer, except at a

current public offering price described in the prospectus. The

Maloney Act of 1938 (§ 15A of the Securities Exchange Act of

1934) supplements the S.E.C.’s regulation of over-the-counter

markets by providing a system of cooperative self-regulation

through voluntary associations of brokers and dealers. In

affirming the dismissal of the complaint as to Count I, the

Supreme Court held that where Count I alleged activities which

were neither required by Section 22(d) nor authorized by Section

22(f), but where the S.E.C.’s supervisory powers over the NASD

is extensive, and weighs competitive concerns as a factor in regu-

lating the secondary market of mutual funds shares purchases

and sales, Count I is immune from antitrust liability. 422 U.S. at

730-733; 95 S. Ct. at 2428-2429. In particular, the Court stated:

There can be little question that the broad regulatory

authority conferred upon the S.E.C. by the Maloney and

Investment Company Acts enables it to monitor the activi-

ties questioned in Count I, and the history of Commission

regulations suggests no laxity in the exercise of this

authority. To the extent that any of appellees’ ancillary

activities frustrate the S.E.C.’s regulatory objectives it has

ample authority to eliminate them.

Here implied repeal of the antitrust laws is necessary to

make the regulatory scheme work. [cite] In generally

similar situations, we have implied immunity in particular

and discrete instances to assure that the federal agency

entrustec with regulation in the public interest could carry

out that responsibility free from the disruption of conflict-

ing judgments that might be voiced by courts exercising

jurisdiction under the antitrust laws. [cites] In this

instance, maintenance of an antitrust action for activities

so directly related to the S.E.C.’s responsibilities poses a

substantial danger that appellees would be subjected to

A-57

duplicative and inconsistent standards. This is hardly a

result that Congress would have mandated. We thereiore

holed that with respect to the activities challenged in

Count | of the complaint, the Sherman Act has been dis-

placed by the pervasive regulatory scheme established by

the Maloney and Investment Company Acts.

422 US. at 734-735; 95 S. Ct. at 2450.

In TWA, the appellee brought an antitrust action against

Hughes Tool Co. (Toolco) and others under the Sherman Act as

a result of the manner in which Toolco had exercised its control-

ling interest in TWA, with particular reference to Toolco’s

asserted acts to control and dictate the acquisition and financing

of aircraft by TWA. As an organization engaged in phases of

aeronautics, Toolco could not acquire control of an air carrier

such as TWA without consent of the Civil Aeronautics Board

(C.A.B.). In 1944, the C.A.B. approved de facto control of

TWA by Toolco as comporting with the provision of § 408 of the

Federal Aviation Act. That provision permits acquisitions of

control that the C.A.B. finds are not inconsistent with the public

interest and that will not result in monopoly. Section 415 of the

Act endows the C.A.B. with the power to supervise all transac-

tions between carriers and their owners on a continuing basis.

And, Section 414 immunizes any conduct approved by a C.A.B.

order issued under § 408 from antitrust liability. The C.A.B.,

after full hearings into the Toolco-TWA relationship, found that

Toolco’s financial and other support was of great importance to

TWA and concluded that the continued interest of Toolco in

TWA appears to be essential to the best interests of the carrier

and the public. The C.A.B.’s approval was made subject to the

conditions of the 1944 order. As a result, from 1944 to 1960,

every acquisition and lease of aircraft by TWA from Toolco and

each financing by TWA from Toulco received C.A.B. approval

pursuant to § 408.

The Supreme Court reversed a default judgment in favor of

TWA, holding that the conduct of Toolco was impliedly immune

from the sanctions of the antitrust laws. Appellants herein seek

A-58

to distinguish this case and the case upon which the Supreme

Court based its ruling in TWA, Pan American World Airways,

Inc. v. United States, 371 U.S. 296, 83 S. Ct. 476, 9 L. Ed. 2d 325

(1963), on the basis that the Communications Act of 1934 does

not have provisions similar to Sections 408 and 414 of the Federal

Aviation Act. While this fact is true, the distinction is without a

difference since it is clear that the TWA Court did not base its

holding or restrict its holding to a strict interpretation of those

two sections. Rather, the Court stated:

Competition and monopoly—two ingredients of the anti-

trust laws—are thus standards governing the CAB’s exer-

cise of authority in granting, allowing, or expanding or

contracting the control which Toolco had over TWA by

reason of the various orders issued by the CAB under

§ 408. In this context, the authority of the Board to grant

the power to “control” and to investigate and alter the

manner in which that “control” is exercised leads us to

conclude that this phase of CAB jurisdiction . . . preempts

the antitrust field.

409 US. at 385; 93 S. Ct. at 659-660.

We repeat, however, what we said in the Pan American

case that the Federal Aviation Act does not completely

displace the antitrust laws . .. One of the most conspicuous

exceptions would be the combination or agreement

between two air carriers involving trade restraints. [cite]

There may be other exceptions. But where, as here, the

CAB authorizes control of an air carrier to be acquired by

another person or corporation, and where it specifically

authorizes as in the public interest specific transactions

between the parent and the subsidiary, the way in which

that control is exercised in those precise situations is under

the surveillance of the CAB, not in the hands of those who

can invoke the sanctions of the antitrust laws.

409 US. at 387, 93 S. Ct. at 661.

A-59

Finally, in Cantor, the respondent, a private utility which was

the sole supplier of electricity in southeastern Michigan, also

furnished its residential customers, without additional charge,

with almost 50% of the most frequently used standard-sized light

bulbs under a longstanding practice antedating state reguiation of

electric utilities. This marketing practice for light bulbs is

approved, as part of respondent’s rate structure, by the Michigan

Public Service Commission, and may not be changed unless and

until respondent files, and the Commission approves, a new tariff.

The Supreme Court held that the respondent’s marketing prac-

tice was not immune from antitrust liability, stating:

Michigan’s regulatory scheme does not conflict with fed-

eral antitrust policy and, conversely, if the federal anii-

trust laws should be consirued to outlaw respondent’s light

bulb-exchange program, there is no reason to believe that

Michigan's regulation of its electric utilities will no longer

be able to function effectively. Regardless of the outcome

of this case, Michigan’s interest in regulating its utilities’

distribution of electricity will be almost entirely

unimpaired. We conclude that neither Michigan’s

approval of the tariff filed by respondent, nor the fact that

the lamp-exchange program may not be terminated until a

new tariff is filed, is a sufficient basis for implying an

exemption from the federal antitrust laws for that

program.

428 US. at 598; 96 S. Ct. at 3121.

With these four cases, the statutory scheme and the activity of

the F.C.C. in regulating the interconnect industry in mind, it is

readily apparent to me that the three aforementioned questions

must be answered in the affirmative. On this basis, then, I

respectfully dissent.

As to the first question, Congress has given the power to private

individuals to sue A.T. & T. and its operating companies for

damages where it implements a tariff which constitutes an unjust

A-60

or unreasonable practice. As heretofore stated, the standard of

“unjust and unreasonable” can include but is not necessarily

restricted to anticompetitive practices.

As to the second question, it is clear that the F.C.C. has taken

an active interest in regulating the entire field of interconnection,

to the point of preempting the state public utility /service commis-

sions in this regard. And, after seven years of concentrated

study, it has adopted a “middle ground.” That is to say, it has

neither adopted A.T. & T.’s position of totally restricted competi-

tion nor Appellants’ position of totally unfettered competition,

but a registration program which is designed to protect the com-

panies with sound interconnection products against the tariff

practices of A.T. & T. and simultaneously to protect A.T. & T.

and the public from companies with unsound interconnection

products.

As to the third question, since the Court is to deal in theoretical

possibility, I must conclude that circumstances could exist

whereby the judgment of a federal court would disenable the

F.C.C. to function effectively in this particular field of regulation.

If | assume for the time being that Phonemaster’s requirement of

110-volt current to operate must require a coupling arrangement

which requires A.T. & T. engineering expertise, and if I assume

for the time being that Divert-a-Call is or will become a hazard to

the network system and cause both annoyances to the customers

and disruption to A.T. & T.’s billing procedures, then it becomes

obvious that the F.C.C. should have the power to prevent or

restrict Appellants’ ability to compete in the marketplace; the

public interest would require no less. However, anticompetitive

practices on the part of A.T. & T. could constitute per se viola-

tions of the Sherman Act and thereby require that Appellants be

allowed to compete and A.T. & T. pay treble damages. Of

course, these assumptions may well prove to be totally without

foundation in time. However, the point is clear: this is not a case

of a public utility commission whose legislative mandate clearly

has nothing to do with the regulation of the light bulb sales

industry, as in Cantor. The F.C.C. is to act in the public interest

A-61

in the regulation of the communications industry, and the history

surrounding this action indicates that the F.C.C. has deemed the

public interest in the interconnect industry to be vital. Whether

wisely or not, it has formulated a plan by which to regulate that

industry, and an antitrust judgment could well indeed make a

mockery of that plan.

I am aware that in urging t \¢ affirmance of the Courts below |

would create a conflict, in that the Third Circuit in Essential,

supra, faced with the same precise issue and the same operating

facts, held that A.T. & T. and its operating companies could not

be shielded impliedly from antitrust immunity. After studying

that opinion, however, and with all due respect for the Third

Circuit, I simply find it to be unpersuasive, especially in light of

Gordon and NASD and the total lack of attention which the

Essential Court gave to those two cases.

In arriving at its holding, the Essential Court drew a distinc-

tion between a customer for communications services and a com-

petitor for communications services. The Court reasoned that

the F.C.C. has the primary responsibility to insure that enforce-

ment of the common carrier’s duty to offer service to all who seek

it on reasonable terms and conditions, but the federal courts, not

the F.C.C., has the primary responsibility for the enforcement of

antitrust laws which implies the permission of potential competi-

tors in communications services to have access to the Bell System

network. 610 F. 2d at 1122.

It is difficult to glean the authority from which the Essential

Court derived that distinction; most certainly, it did not derive the

distinction from the NASD and Gordon cases, which involved

alleged restrictions of competitors of the regulated industries in

question and nonetheless found implied antitrust immunity to

exist. It appears from the Essential opinion that that Court

derived the distinction from some dictum in Keogh v. Chicago &

A-62

Northwestern Ry. Co., 260 U.S. 156, 161-163, 43 S. Ct. 47, 49-

50, 67 L. Ed. 183 (1922), involving an action against a shipper

who had filed tariffs with the 1 C.C. by a customer.

In this regard the Essential Court plainly misread Keogh, as

that case had nothing to do with the doctrine of implied antitrust

immunity. The holdin, of Keogh is that a railroad shipper may

not bring an action under 15 U.S.C. § 15 for rebate of rates found

by the L.C.C. to be reasonable and nondiscriminatory and fixed

accordingly; this holding is clearly a resolution of a conflict

between the Interstate Commerce Act and the Clayton Act. Cf.

260 U.S. at 162-163, 43 S. Ct. at 49. The Keogh Court did say,

though, that under 15 U.S.C. §§ 1 et. seq. a combination of

carriers to fix reasonable and nondiscriminatory rates may be

illegal, and this would be actionable under the antitrust laws. Cf.

260 US. at 161-162; 43 S. Ct. at 49,

I do not think that an “implied irnmunity distinction” can be

read into Keogh, since that case dealt not with the pervasive

regulation of a regulatory agency with broad powers, as here, but

statutory construction with respect to specifically defined powers

of a regulatory agency. To the extent that I am wrong in that

regard, however, it is correct to say that the Supreme Court

rendered the “Keogh distinction” meaningless ten years later in

United States Navigation Co., Inc. v. Cunard S. S. Co., Inc., 284

U.S. 474, 52S. Ct. 247, 76 L. Ed. 408 (1932). Cunard involved

an antitrust action against shippers who allegedly conspired to fix

general tariff rates and establish lower contract rates for shipping

among the general members with the intent of driving the plain-

tiff, a competitor, out of business. In other words, in the lingo of

the Essential Court, this action involved not customers of a regu-

lated industry, but competitors. Nonetheless, the Supreme

Court affirmed the dismissal of the action. Noting that this

matter as well lay within the jurisdiction of the I.C.C. under the

Shipping Act (49 U.S.C. §§ 801 et. seq.), the Cunard Court

actually extended, as opposed to distinguished the Keogh opinion

as follows:

A-63

A comparison of the enumeration of wrongs charged in the

bill with the provisions of the sections of the Shipping Act

above outlined conclusively shows, without going into

detail, that the allegations either constitute direct and

basic charges of violations of these provisions, or are so

interrelated with such charges as to be, in effect, a compo-

nent part of them; and the remedy is that afforded by the

Shipping Act, which to that extent supersedes the anti-

trust laws. Compare Keogh v. C & N. W. Ry. Co. [cite

omitted]. The matter therefore is within the exclusive

preliminary jurisdiction of the Shipping Board. The

scope and evident purpose of the Shipping Act, as in the

case of the Interstate Commerce Act, is demonstrative of

this conclusion... .

284 US. at 485; 52S. Ct. at 250-251. See also far East Confer-

ence v. United States, 342 U.S. 570, 72S. Ct. 492, 96 L. Ed. 576

(1952).

While that was the holding of the Essential Court, three other

factors appeared to play a part in that Court's ratio decidendi:

first, that nothing in the 1934 Act explicitly directs the F.C.C.

when exercising its authority to take into account antitrust con-

siderations (610 F. 2d at 1120); second, the statutory scheme also

includes a “savings clause, Section 414, which, combined with 47

U.S.C. § 221(a), conferring express immunity from an:!trust

litigation in a situation not applicable herein, demorstrates that

no blanket immunity from antitrust law was intended by Con-

gress (610 F. 2d at 1120); and third, that in the Essential Court's

opinion, the fact that the F.C.C. suspended its judgment on the

question of interconnection did not rise to the level of agency

activity requiring a finding of implied immunity (610 F. 2d at

1124).

The first and the third factors fly in the face of the Gordon and

the NASD opinions. Neither statutory scheme in those cases

involved a specific statute which required the S.E.C. to consider

competitive considerations in regulating the broker-dealers in

question; yet, the Supreme Court demonstrated that the history

A-64

and practice of that regulatory agency was to consider that factor,

along with other factors, in determining the public interest. So it

is here. And, the F.C.C. suspended its judgment with respect to

the enormous problem of interconnection for a period of time

exceeded by the S.E.C.’s suspension of its judgment pending

further study and review in Gordon; yet, all nine justices of the

Gordon Court were satisfied that the S.E.C. was active enough in

the regulation of broker commission rates to find implied immu-

nity therein.

The second factor states the key argument presented by Appel-

lant Phonetele and the United States, appearing as amicus

curiae, 47 U.S.C. § 221(a), or the Willis-Graham Act, grants the

F.C.C. the exclusive right to consolidate telephone companies or

allow existing companies to acquire the whole or part of another,

free from any potentially or actually conflicting Acts of Congress.

47 U.S.C. § 414 states that “nothing in this chapter contained

shall in any way abridge or alter the remedies now existing at

common law or by statute but the provisions of this chapter are in

addition to such remedies.” From these two statutes the argu-

ment is that Congress clearly expressed its intent that A.T. & T.

be subject to antitrust remedies, except in the limited situation of

Section 221 (a); and since Section 221(a) clearly has no applica-

tion to this lawsuit, Appellees must be subject to potential treble

damages under the Sherman Act.

The existence of the saving clause does not alter the well-settled

principle that persons such as the Appellant must exhaust their

administrative remedies prior to bringing an action in a court of

law. United States Navigation Co. v. Cunard S. S. Co., supra,

284 US. at 485-486, 52 S. Ct. at 251, and cases cited therein.

And, in the field of antitrust litigation, dismissal of antitrust suit,

where an administrative remedy has superseded the judicial one,

is the usual course. Pan American World Airways, Inc. v. United

States, supra, 317 U.S. at 313, n. 19; 83 S. Ct. at 486-487, n. 19,

and cases cited therein. Thus, the existence of the saving clause

A-65

has no effect upon the doctrine of implied immunity. See also

Pan American World Airways, Inc., supra, 317 U.S. at 321, 83S.

Ct. at 490 (J. BRENNAN, Dissenting).

More fundamentally, this Court rejected the argument pre-

sented based upon Section 221(a) five years ago in the case of

International T. & T. Corp. v. General T. & E. Corp., 518 F. 2d

913 (9th Cir. 1975). That case involved an antitrust action

brought by I. T. & T. against G. T. & E., alleging that G.T. &

E.’s acquisitions of 33 telephone operating companies had ena-

bled it to effect a growing foreclosure of competition within the

telecommunications equipment-manufacturing industry. In dic-

tum the Court stated:

... The availability of a statutory exemption upon applica-

tion to the FCC greatly reduces the danger of collision

between the “two regimes . . .” and even if a statutory

exemption is not obtained [under 47 U.S.C. § 221(a)] or

is not available a defendant can make a claim of implied

immunity which will be tested under the “repugnancy”

standards of Philadelphia National Bank [supra] and its

successors, thus insuring that the policies of the regulatory

statute will not be thwarted.

518 F. 2d at 918-919. There are two circumstances in which a

court may look beyond the express language of a statute in order

to give force to Congressional intent: where the statutory lan-

guage is ambiguous; and where a literal interpretation would

thwart the purpose of the overall statutory scheme or lead to an

absurd result. International T. & T. Corp. v. General T. & E.

Corp., supra at 917-918, and cases cited therein. In this case, if

one were to interpret Section 221(a) to mean that that was the

only instance in which telephone companies were immune from

antitrust litigation, such an interpretation would thwart the pur-

pose of the overall statutory scheme. If the F.C.C. had no power

to consider the anticompetitive acts of the common carriers under

its jurisdiction, the result might well be different. But, it is

A-66

undisputed that the F.C.C.’s powers are very broad and its man-

date to protect the public interest includes the power to consider

such anticompetitive acts which, in the case of the interconnect

industry, it has done. And, as is evident from the decisions of the

F.C.C. heretofore cited, the F.C.C. does not and cannot consider

itself bound exclusively by principles of competition in protecting

the public interest.

I cannot agree with the majority's decision to remand. The

majority states:

We thus recognize that those considerations advanced in

favor of implied immunity, while not providing a blanket

exemption, do bear on the case in a limited way. The

logic of complying with a regulatory mandate is relevant

as an antitrust defense, but the same logic has internal

limits which do not justify any and all acts ostensibly

taken in response to the FCA. There is no absolute anti-

trust immunity or exemption by virtue of federal or state

law in this case, but the defendants below may offer to

show that their actions were justified by the constraints of

the regulatory schemes in which they operated.

These were the issues squarely before the trial judge and

decided by him in an eloquent and brilliant decision. It defies

logic to remand issues already heard and decided.

I recognize that this dissent is authored in a time in which it is

politically fashionable to criticize regulatory agencies for their

very existence and to criticize the telephone companies for their

very existence as a monopoly. Nonetheless, we are first and

foremost a nation of laws and the principle of stare decisis is the

single most important key to the cohesiveness of our society.

After examining the principles of law in the factual settings of

Gordon and NASD, and after examining the extent to which the

F.C.C. has attempted to regulate the interconnection industry, |

find it inconceivable to do anything but affirm. Therefore, |

respectfully dissent.

A-67

FOOTNOTES

1. At oral argument we requested supplemental briefs on the issue

of whether the activities of Appellees were immune from antitrust litiga-

tion due to state regulation under the doctrine of Parker v. Brown, 317

U.S. 341 (1943) and its progeny. Upon reconsideration, this case is

inappropriate for a consideration of that issue. First of all, it was not

raised to either Court below. Secondly, the F.C.C. in its Telerent

decision effectively preempted the states from regulating the area of the

interconnection industry; to the extent that the states regulate at all, at

least with res to the California P.U.C., it is in a manner perfect!

consistent with the F.C.C. registration pepen of 47 C.F.R. §§ 68.1

et. seq. See Phonetele, Inc. v. American Telephone & Telegraph, 435 F.

Supp. at 213, n. 12.

2. For the sake of brevity discussion of the alleged vertical conspir-

acy and Counts II-VIII of that complaint is omitted here.

Appendix B

A-68

(Filed March 15, 1982)

Order

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos, 77-3877

77-2936

PHONETELE, INC.,

Plaintiff-Appellant,

vs.

AMERICAN TELEPHONE AND TELEGRAPH COMPANY;

WESTERN ELECTRIC COMPANY, INCORPORATED;

BeL_t TELEPHONE LABORATORIES, INCORPORATED,

Defendants-Appellees.

DASA CORPORATION, ETC.,

Appellant,

vs.

GENERAL TELEPHONE COMPANY OF CALIFORNIA, ef. al.,

Appellees.

Before: KENNEDY and FLeTcuHer, Circuit Judges, and

CLAIBORNE,* District Judge.

The opinion is amended as follows. The sentence in the text

which begins in the right hand column at page 6269 of the slip

opinion carries over to 6270 (beginning “At this stage” ) is strick-

en, and the following sentence is inserted in place:

At this stage of the proceedings, it appears this inquiry will

depend largely on whether the facts show the companies

did reasonably conclude, given their expertise, that uncon-

trolled NCSU interconnection would endanger their own

equipment or disrupt their own signal transmissions in

identifiable ways, and also that the tariff as filed was a

reasonable, properly focused mechanism, considering

other alternatives then available, to prevent such real

harm from occurring.”

* Honorable Harry E. Claiborne, Chief Judge, United States District

Judge for the District of Nevada, sitting by designation.

Appendix C

A-69

(Filed July 26, 1977)

Memorandum of Decision

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

Case No. CV 74-3566-WPG

PHONETELE, INC.,

Plaintiff,

Vv.

AMERICAN TELEPHONE AND TELEGRAPH COMPANY;

WESTERN ELectTrRic COMPANY, INCORPORATED; BELL

TELEPHONE LABORATORIES, INCORPORATED,

Defendants.

Phonetele, Inc. filed this antitrust suit against American Tele-

phone and Telegraph, Inc. (AT&T), Western Electric Co., Inc.

and Bell Telephone Laboratories, Inc., charging violations of the

Sherman (15 U.S.C.A. §§ 1, 2 (Supp. 1977)) and Clayton (15

U.S.C. § 14 (1970)) Antitrust Acts. Phonetele alleges that the

violations grew out of various tariffs that AT&T filed with the

Federal Communications Commission (FCC) and which, the

plaintiff contends, had the effect of impeding Phonetele’s sales in

the telecommunications marketplace.

Phonetele manufactures a device called a “Phonemaster,”

which is an electronic device designed to be linked to the national

telephone network. Once attached to a telephone instrument, the

Phonemaster prevents outgoing calls to telephones that are not in

pre-selected area codes or exchanges. Thus, it can bar the com-

pletion of unauthorized or misdialed long distance calls, which in

turn can result in considerable savings to telephone subscribers.

The essence of Phonetele’s complaint is that the defendants

have conspired to limit sales of the Phonemaster by restricting the

manner in which the device can be “interconnected” with the

national telephone system. Prior to 1968, tariffs’ filed by AT&T

A-70

with the FCC prohibited the interconnection of customer-pro-

vided equipment with the national telephone network. However.

this practice was invalidated by the FCC in Carterfone, 13 F.C.C.

2d 420, reconsideration denied 14 F.C.C. 2d 571 (1968). Fol-

lowing that decision, AT&T filed a tariff that permitted intercon-

nection so long as AT&T hardware was used to form the linkage

between the Phonemaster and the telephone network. The tariff

also

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