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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1983
- **Citation:** 459 U.S. 1145

## Text

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

A-3

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."*

A-6

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

A-10

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

A-11

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 .

A-13

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

A-14

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

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communication affected by or involved in the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_0247%3A2. Public record. Not legal advice.