Motion to Dismiss or Affirm — Maryland v. United States Tandy Corporation v. United States North American Telephone Association v. United States Illinois v. United States

- Supreme

FILED

DEC 22 1982

Nos. 82-952, 82-992, 82-953 & 82-10DJ, ovanmene u. STEVAR,

t CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

STATE OF MARYLAND, et a/., PEOPLE OF THE

STATE OF ILLINOIS, TANDY CORPORATION, and

NORTH AMERICAN TELEPHONE ASSOCIATION,

Appellants,

VS.

UNITED STATES OF AMERICA and WESTERN

ELECTRIC COMPANY and AMERICAN TELEPHONE

AND TELEGRAPH COMPANY,

Appellees.

On Appeal From The United States

District Court For The District

of Columbia

MOTION TO AFFIRM

HowarbD J, TRIENENS*

ALFRED A, GREEN

Jim G. KILPATRIC

195 Broadway

New York, New York 10007

(212) 393-5111

GeorRGE L. SAUNDERS, JR.

Joun D. ZeGLIs

Davip W. CARPENTER

Sip_ey & AUSTIN

One First National Plaza

Chicago, Illinois 60603

(312) 853-7000

Attorneys for Appellees

Western Electric Company

and American Telephone

And Telegraph Company

*Counsel of Record

QUESTIONS RESTATED

The Modification of Final Judgment (“MFJ”) in this case

grants the United States the structural relief it has sought in over

thirty years of antitrusi litigation with the Bell System. Under the

MFJ, the Bell System is engaged in a massive reorganization in

which it will divest its local exchange functions as of January 1,

1984. The questions presented in these appeals are:

1. Whether direct Supreme Court review of the chal-

lenges to the MFJ and the prompt elimination of the uncer-

tainty that threatens a vital national industry is “of general

public importance in the administration of justice” within

the meaning of the Antitrust Expediting Act?

2. Whether States may, consistent with the Supremacy

Clause, nullify the MFJ and prevent its implementation by

interposing regulatory statutes that have already been held

not to immunize the Bell System from antitrust remedies?

3. Whether the District Court abused its discretion in en-

tering a judgme'it, by consent of the parties, that substantial-

ly achieves the Justice Department’s antitrust objectives?

**

TABLE OF CONTENTS

Page

GUESTIONS RESTATED cccccccccccccccccccssecs ¥

TABLE OF AUTHORITIES .ccsccccccvsscssicsees ill

STATEMENT OF THE CASE ccccccsesvcssccccces 2

REASONS FOR SUMMARY AFFIRMANCE....... 15

I. Expedition Of These Appeals Under The Expediting

Act Is A Matter Of Paramount Public Importance . 15

II. The Appeals Have No Substance And Should Be

DUMMOTEY AGMMIOE oo ccccscvecevesceccccceces 18

A. The States’ Claim That They May “Veto” The

Implementation Of The MFJ Is Contrary To The

Sherman Act And The Supremacy Clause .... 20

B. Tandy’s And NATA’s Challenges To The MFJ’s

Treatment Of CPE And Patent Licensing Are

PR FC acuctc more auecs ieatieeecs exch eas 25

1. The CPE Provisions Of The MFJ Do Not Vi-

SS Bee ED cca cckexwassconseseeene 26

2. The Termination Of Mandatory Patent

Licensing Was Entirely Appropriate ...... 28

CONCLUSION ccccccccccccccccccccccccccccccens 30

iii

TABLE OF AUTHORITIES

CASES

Allocation of Frequencies in the Bands Above 890

me, 27 F.C.C. 359 (1959), reconsid. denied, 29

holies OSS CIDER) ca cicvanseivasdsceasases

AT&T Co, (Data Speed 40/4), 62 F.C.C.2d 21

(1977), aff'd sub nom. IBM v. FCC, 570 F.2d 452

C20 CH, 1978) oc cicccsccaceccvcussuvavenes

AT&T “Foreign Attachment” Tariff Revisions, 15

F.C.C.2d 605 (1968), reconsid. denied, 18

fe oe Pet. | err yr rrr re

AT&T, Restrictions on Interccanection of Private

Line Services, 60 F.C.C.2d 939 (1976)........

Bell System Tariff Offerings of Local Distribution

Facilities For Use By Other Common Carriers, 46

F.C.C.2d 413 (1974), aff'd sub nom. Bell Tel. Co.

of Pennsylvania v. FCC, 503 F.2d 1250 (3d Cir.

1974), cert. denied, 422 U.S. 1026 (1975) .....

Brown Shoe Co. v. United States, 370 U.S. 294

CRDESD oc ccncescseuedeskeaseadueueeene

California Retail Liquor Dealers Ass'n vy. Midcal

Aluminum, Inc., 445 U.S. 97 (1980) ......66.

California Public Utilities Comm'nvy. United States,

FID Wide GOW CIGSO Ne ei nciccvaateseucadekon

Carson v. American Brands, Inc., 450 U.S. 79

CRPOED cbbocsetancndeisiestenesciae

Carterfone, 13 F.C.C.2d 420, reconsid. denied, 14

PAA ae ST CIR) cn vesccstvecsvexeavanns

Page(s)

16

23

21

25

Cooper v. Aaron, 358 U.S. 1 (1958)... cece ees

Delaware Valley Citizens’ Council For Clean Air v.

Pennsylvania, 674 F.2d 976 (3d Cir.), cert. denied,

51 U.S.L.W. 3287 (October 12, 1982) ........

Edgar v. Mite, US. , 50 U.S.L.W. 4767

SE CUEED H6nbcceceednredocevccecees

Establishment of Domestic Communications —Sat-

ellite Facilities By Non-Governmental Entities,

PCI PED ch ccccccescccececares

Exxon Corp. v. Governor of Maryland, 437 U.S.

Lh) EPP errr erererrer ree reer

FERC v. Mississippi, US. , 30 U.S.L.W.

PTE h, SURED cccwscccccecvectecvcess

Fidelity Federal Savings & Loan Ass'n v. de la

Cuesta, U.S. , 50 U.S.L.W. 4916 (June

TTCUGLEGS 656 s6eb4 bee seess stuns

First Computer Inquiry, 28 F.C.C.2d 267 (1971),

aff'd in part and rev'd in part sub nom. GTE Ser-

vice Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973)..

Grunin v. International House of Pancakes, 5\3

F.2d 114 (8th Cir.), cert. denied, 423 U.S. 864

EPEC EerrPerererrreer errr

Interstate and Foreign MTS and WATS, First

Report and Order, 56 F.C.C.2d 593 (1975) ....

Interstate and Foreign MTS and WATS, Second

Report and Order, 58 F.C.C.2d 736 (1976), aff'd

sub nom. North Carolina Utilities Comm'n vy.

FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434

DEUMEED ph sdndeseccccecceccecceces

Interstate and Foreign MTS and WATS, Third

Report and Order, 67 F.C.C.2d 1255 (1978)...

Page(s)

21

20

22

21

19

MCI Telecommunications Corp., Investigation into

the Lawfulness of Tariff FCC No. 1 Insofar as it

urports to Offer Execunet Service, 60 F.C.C.2d

25 (1976), rev'd, MCI Telecommunications

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

denied, 434 U.S. 1040 (1978) ......cceeeeees

Metropolitan Housing Development Corp. v. Vil-

lage of Arlington Heights, 616 F.2d 1006 (7th

Che. ISGP cv cvccccncvevenscccsaccesececen

Microwave Communications, Inc., 18 F.C.C.2d 953

(1969), reconsid. denied, 21 F.C.C.2d 190

RUSE Cckerdlek cand pee aw esa ante balb sean

NLRB vy. Ochoa Fertilizer Corp., 368 U.S. 318

RUDGE) ccnvccsecccccccsccccesecsoeectecess

North Carolina v. Swann, 402 U.S. 43 (1969)....

North Carolina Utilities Comm'n v. FCC, 537 F.2d

787 (4th Cir.), cert. denied, 429 U.S. 1027

CURE 62bo04cs0be sd Cheek aeeaedeabascsanan

North Carolina Utilities Comm'n v. FCC, 552 F.2d

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

SOUT a Scape cscars CaN eeas een eetaasannne

Parker v. Brown, 317 U.S. 341 (1943) ........5.

Patterson v. Newspaper & Mail Deliverers’ Union,

S54 F.28 POT ADE CH, 1979) ccccvcacccccuces

Phonetele, Inc. v. AT&T, 664 F.2d 716 (9th Cir.

1981), petition for certiorari pending, No.

DIDO cba dcrcudecwonceudndpeessncgcoses

Page(s)

vi

Regulatory Policies Concerning Resale and Shared

Use of Common Carrier Domestic Public

Switched Network Services, 83 ¥.C.C.2d 167

(1980), reconsid. denied, 86 F.C.C.2d 820

CIDBE) vcconcccsncccscesesesseuteneavenes

Regulatory Policies Concerning Resale and Shared

Use of Common Carrier Services and Facilities,

60 F.C.C.2d 261 (1976), amended on reconsid.,

62 F.C.C.2d 588 (1977), aff'd sub nom. AT&T v.

FCC, 572 F.2d 17 (2d Cir.), cert. denied, 439 U.S.

BPP RUPEES 604540606100 000605056540 0500%

Second Computer Inquiry, 77 F.C.C.2d 384 (1980),

aff'd sub nom. Computer & Communications In-

dusiry Ass'n v. FCC, No. 80-1471 (and con-

solidated cases) (D.C, Cir. November 12, 1982).

Specialized Common Carrier Services, 29 F.C.C.2d

870 (1971), aff'd sub nom. Washington Utilities

& Transportation Comm'n vy. FCC, 513° F.2d

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

ERDTOER sOCicRtdd as vedpeasseuenearabiceonecs

Swift & Co. v, United States, 276 U.S. 311 (1928).

Telerent Leasing Co., 45 FC.C.2d 204 (1974),

aff'd sub nom. North Carolina Utilities Comm'n

v. FCC, 537 F.2d 787 (4th Cir.), cert. denied, 429

Ra ORs SUP POE CSE NS ceacnsantuctseeuess

United States v. Allegheny-Ludlum Industries, Inc.,

517 F.2d 826 (Sth Cir. 1975), cert. denied, 425

Ra PROUT TOD cecetecrdcevssesnessvncaes

United States v. ASCAP, 442 F.2d 601 (2d Cir.

Page(s)

6, 8,9

19, 26

20

vii

United States v. AT&T, 1976-2 Trade Cas. 461,097

i

United States v. AT&T, 427 F.Supp. 57 (D.D.C.

1976), cert. denied, 429 U.S. 1071 (1977), cert.

denied, No. 77-1009 (D.C. Cir. May 27, 1977),

cert. denied, 434 U.S. 966 (1977)... cece ee ees

United States v. AT&T, 461 F.Supp. 1314 (D.D.C.

Rae ri va kescicrncavecces

IDS) a ncvccccccccccccccccccccccccceccces

United States v. Armour & Co,., 402 U.S. 673

|) BR eet A eee Aa

United States v. Associated Milk Producers, Inc.,

394 F.Supp. 29 (W.D.Mo. 1975), aff'd, 534 F.2d

113 (8th Cir.), cert. denied sub nom. National

Farmers’ Organization, Inc. v. United States, 429

RE SEED ocacnceneresccvcecccencens

United States v. Bechtel Corp., 648 F.2d 660 (9th

Cir.), cert. denied, 454 U.S. 1083 (1981) ......

United States v. California Co-operative Canneries,

BPP Wits GID CUPEP Pe cocccecessvccosececece

United States v. City of Alexandria, 614 F.2d 1358

PP TOON cob ob vee bdeoecsecesncesccss

United States v. General Electric Co., 1977-2 Trade

Cas. 161,659 (E.D. Pa. 1977)... cee ee eee ees

United States v. Gillette Co., 406 F.Supp. 713 (D.

PE: SOIOD fe cdoneseeensncasdbceveceness

United States vy. National Broadcasting Co., 449

F.Supp. 1127 (C.D.Cal. 1978)... ..cccccceces

Page(s)

19, 26

26

25

vill

United States v. Singer Manufacturing Co., 374

IPT GieweWnedeces cusesddcdéceds

United States v. Swift & Co., 286 U.S. 106 (1932).

United States v. Ward Baking Co., 376 U.S. 327

ip PP Trrererrrrerere rr rerrrrreree

Washington v. Fishing Vessel Ass'n, 443 U.S. 658

RUPTPS cccccescesasecnscceccecsveccececes

Washington Utilities & Transportation Comm'n vy.

FCC, 513 F.2d 1142 (9th Cir.), cert. denied, 423

SU PORRUNIDD aucetasstansncceceescceess

Young v. Katz, 447 F.2d 431 (Sth Cir. 1971).....

STATUTES

Antitrust Procedures and Penalties Act, 15 U.S.C.

DPE cceUlapetdedaenssaascedeseane.s

Antitrust Expediting Act, 32 Stat. 823, as amended,

PP RP EMEP Cacagacudeucacsnessccocens

Communications Act of 1934, 47 U.S.C. § 151 ef

DU SAME CHRe ENG ndasebensddasevceseseses

Ill. Rev. Stat., 1981, Ch. 111%, pars. 8, 29(a)....

yo Dip Yom Urs” |) PP rerrrrrreeerreeeerrrn

MISCELLANEOUS

Hearings Before Subcommittee on Antitrust and

Monopoly Of The Senate Judiciary Committee

On S. 782 and S. 1088 (1973) ........e0e eee

Hearings Before The Subcommittee on Monopolies

and Commercial Law Of The House Judiciary

Committee On H.R. 9203, H.R. 9947 and S. 782

REDPED cheese sdevesveccnesessecccccccecces

Page(s)

16

20

26

21

14-18

15, 17

Page(s)

H.R. Rep. No. 91-1129, 91st Cong., 2d Sess. nw

(ISTO) ccscccvcccccesccccncccesecvocceces 17

H.R. Rep. No. 93-1463, 93d Cong., 2d Sess.

CUDTE) cccccccnccencccectccesencesesesaee 15, 16, 28

H.R. 12323, 94th Cong., 2d Sess. (1976) ........ 8,9

H.R. 13015, 95th Cong., 2d Sess. (1978) ........ 9

H.R. 3333, 96th Cong., Ist Sess. (1979) ........ 9

H.R. 6121, 96th Cong., Ist Sess. (1979) ........ 9

H.R. 6121, 96th Cong., 2d Sess. (1980) ......... 9

H.R. 5158, 97th Cong., Ist Sess. (1981) ........ 9

S. Rep. No. 91-1214, 91st Cong., 2d Sess. (1970) . 15-17

S. Rep. No. 93-298, 93d Cong., Ist Sess. (1973)... = 15, 19, 28

S. 611, 96th Cong., Ist Sess. (1979)... ...0 eens 9

S. 622, 96th Cong., Ist Sess. (1979)... ce eee wees 9

S. 2827, 96th Cong., 2d Sess. (1980) «0.6... 0s 9

S. 898, 97th Cong., Ist Sess. (1981) ........005. 9

Nos. 82-952, 82-992, 82-953 & 82-1001

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

STATE OF MARYLAND, e7 a/., PEOPLE OF THE

STATE OF ILLINOIS, TANDY CORPORATION, and

NORTH AMERICAN TELEPHONE ASSOCIATION,

Appellants,

VS.

UNITED STATES OF AMERICA and WESTERN

ELECTRIC COMPANY and AMERICAN TELEPHONE

AND TELEGRAPH COMPANY,

Appellees.

On Appeal From The United States

District Court For The District

of Columbia

MOTION TO AFFIRM

On August 24, 1982, the District Court, with the consent of the

parties, entered the Modification of Final Judgment (*“MFJ”) in

this case. This judgment orders a structural reorganization of

American Telephone and Telegraph Company (“AT&T”)' and

its subsidiaries (“the Bell System”) that achieves the Justice

Department’s antitrust objectives in its over three decades of liti-

gation with the Bell System. However, the existence of legal chal-

lenges to the MFJ, no matter how insubstantial, profoundly

affects the Bell System’s ability to implement this judgment and

to provide telephone service for the nation while proceeding with

this massive reorganization. The resulting uncertainty has fore-

closed the Bell System from the debt markets in which it has

traditionally raised essential capital, left its more than one million

‘Appellee Western Electric Company is a wholly-owned subsidiary of

AT&T. AT&T has no parent company. In addition to its wholly-owned

subsidiaries, AT&T has ownership interests in the Southern New En-

gland Telephone Company, Cincinnati Bell, Incorporated, and the

Cuban American Telephone and Telegraph Company. This statement is

made pursuant to Rule 28.1.

2

employees unsure of where they will be working, and inhibited,

impeded, and complicated investment, regulatory, and operation-

al decisions both by the Bell System and the telecommunications

industry as a whole.

The only way to put a timely end to this potentially crippling

uncertainty is for these appeals to be decided by this Court this

term, pursuant to the Antitrust Expediting Act. Moreover, the

appeals are each so insubstantial that they all may be summarily

affirmed, without burdening this Court's docket. AT&T therefore

moves for summary aflirmance of each of the appeals.

STATEMENT OF THE CASE

Throughout this century, the Bell System has provided inte-

grated, end-to-end telephone service. The Bell System’s wholly-

owned Bell Operating Companies (“BOCs”) have franchised

monopolies that provide local exchange telecommunications ser-

vice for approximately eighty percent of the nation’s telephone

subscribers under state public utility regulation. The BOCs’ local

exchange facilities also originate and terminate both intrastate

long distance (“intercity”) calls regulated by the States and inter-

state intercity calls regulated by the Federal Communications

Commission (“FCC”) under the Communications Act of 1934,

47 U.S.C. §151 et seq. The BOCs also own interexchange facili-

ties that provide intercity transmissions for both intrastate and in-

terstate calls, whereas AT&T's Long Lines Department owns

portions of the network used exclusively for interstate transmis-

sions.

The Bell System is technologically integrated. Through West-

ern Electric Co., it manufactures equipment for use by Bell

System Companies in providing telecommunications service.

Through Bell Telephone Laboratories, the Bell System conducts

basic research and development. The BOCs have each executed

License Contracts with AT&T that require them to make

payments to AT&T to fund research, development, and central

support for their activities.

In the past thirty-five years, the Justice Department has twice,

in 1949 and 1974, filed civil actions under the Sherman Act that

sought major structural reorganizations of the Bell System. In

each case, the Justice Department alleged that the structure of

the Bell System provides it with both the incentive and the ability

to leverage its power in the regulated monopoly markets to fore-

close or impair competition in related competitive markets.

This Action And The 1956 Judgment. This action was com-

menced in 1949 in the United States District Court for the Dis-

trict of New Jersey. Because state and federal regulatory authori-

ties then required certificated telephone carriers to maintain end-

to-end responsibility for telecommunications service, the only

area of Bell System operations in which competition was feasible

was equipment manufacturing. The Department's complaint al-

leged that the Bell System had monopolized this market and

sought (Prayer, paras. 10-18) both the divestiture of Western

Electric and the compulsory, nondiscriminatory licensing of all

Bell System patents for reasonable royalties.

In January, 1956, the parties stipulated to the entry of a Final

Judgment that did not require the divestiture of any major part of

the Bell System. However, in allowing the Bell System to preserve

its integrated character, the Final Judgment essentially limited

the Bell System to providing regulated communications services

and manufacturing the equipment used for such services’ and

compelled the licensing of all Bell System patents on reasonable

terms. On January 24, 1956, the District Court entered the Final

Judgment upon its presentation by counsel for the parties.

’Sections II(i) and V of the Final Judgment limited AT&T and the BOCs

to, with some exceptions, the provision of “communications services .. . the

charges for which are subject to public regulation under the Communica-

tions Act of 1934 [or state laws].” Section IV of the Final Judgment limited

Western Electric to manufacturing equipment of a type used by AT&T and

the BOCs in providing communications services subject to public regula-

tion,

4

Events Between 1956 and 1974, In the ensuing two decades,

technological developments and changes in regulatory policies in-

troduced competition into major new areas of telecommunica-

tions.

In a series of decisions in the late 1960s and 1970s, the FCC

authorized telephone subscribers both to attach customer provid-

ed equipment to telephone company terminals and, more impor-

tantly, to substitute their own equipment for the carrier provided

equipment that is located on a customer's premises and that

provides access to the telephone network (“customer premises

equipment” or “CPE™).' States opposed these FCC decisions,

claiming that the competitive provision of CPE would drive the

prices of the equipment down to cost and thereby jeopardize the

States’ abilities to establish above-cost rates that could subsidize

basic services and promote their traditional universal service ob

jectives.* The States further argued that because they regulated

intrastate telephone service, they had plenary authority under the

Communications Act of 1934 (47 U.S.C. §§152(b)(1), 221(b)) to

prevent the use of customer provided CPE for any intrastate

telecommunications service, notwithstanding that CPE was also

used in common for interstate service.

‘Carterfone, 13 F.C.C.2d 420, reconsid. denied, 14 F.C.C.2d 571

(1968); AT&T “Foreign Attachment” Tariff Revisions, 1S ¥.C.C.2d

605 (1968), reconsid. denied, 18 F.C.C.2d 871 (1969); Interstate and

Foreign MTS and WATS, First Report and Order, 56 V.C.C.2d 593

(1975); Telerent Leasing Co., 45 F.C.C.2d 204 (1974), aff'd sub nom.

North Carolina Utilities Comm'ny, FOC, 537 F.2d 787 (4th Cir), cert.

denied, 429 U.S. 1027 (1976); Interstate and Foreign MTS and WATS,

Second Report and Order, 58 ¥.C.C.2d 736 (1976), aff'd sub nom.

North Carolina Utilities Comm'n vy. FOC, 552 F.2d 1036 (4th Cir),

cert. denied, 434 U.S. 874 (1977); Interstate and Foreign MTS and

WATS, Third Report and Order, 67 F.C.C.2d 1255 (1978).

“See, ¢e.g., North Carolina Utilities Comm'n vy. FCC, 552 F.2d 1036,

1048 (4th Cir.), cert. denied, 434 U.S. 874 (1977); see generally United

States v. AT&T, No. 74-1698 (D.D.C.), Stipulation Package No. 7

(paras. 10-18, 52-56) (hereinafter referred to as “Stipulation Package

No. ge

5

The Bell System supported the states’ claims, but they were

rejected. The FCC was held to have paramount regulatory author-

ity over facilities jointly used for intrastate and interstate commu-

nications. The states’ plenary regulatory authority, in contrast,

was held to be limited to those facilities “separable from and. . .

not substantially affect[ing] the conduct or development of inter-

state communications.” North Carolina Utilities Comm ny. FCC,

537 F.2d 787, 793 (4th Cir.), cert. denied, 429 U.S. 1027 (1976);

accord, North Carolina Utilities Comm'nv. FOC, 552 F.2d 1036,

1045-46 (4th Cir.), cert. denied, 434 U.S. 874 (1977). These deci-

sions gave rise to an intensely competitive industry (“interconnect

industry”) in which hundreds of firms such as IT&T, Rolm,

Exxon, Northern Telecom, Tandy, and others began furnishing

CPE and other equipment to telephone subscribers for intercon-

nection to the telephone network. See Stipulation Package No.

42B.

Another series of decisions under the Communications Act in-

troduced competition into the provision of intercity services.

These decisions authorized specialized common carriers to

provide specified intercity services’ and required franchised local

exchange carriers to provide the new entrants with interconnec

tions to their local distribution networks and to originate and ter-

minate intercity calls for them. These decisions were opposed by

the Bell System and by some States as well.’ Each contended that,

by allowing specialized common carriers selectively to serve high

density routes, the decisions would disrupt the nationwide aver-

aged rate structure, weaken the ability of interstate services to

‘Allocation of Frequencies in the Bands Above 890 me, 27 F.C.C. 359

(1959), reconsid. denied, 29 F.C.C. 825 (1960); Microwave Commu:

nications, Inc., 18 F.C.C.2d 953 (1969), reconsid. denied, 2) ¥.C.C.2d

190 (1970); Establishment of Domestic Communications —Satellite

Facilities by Non-Governmental Entities, 22: F.C.C.2d 86 (1970);

Specialized Common Carrier Services, 29 F.C.C.2d 870 (1971), aff'd

sub nom. Washington Utilities & Transportation Comm'ny, FCC, 513

F.2d 1142 (9th Cir.), cert. denied, 423 U.S. 836 (1975).

"See, ¢.g., Washington Utilities & Transportation Comm'n v. FCC,

513 F.2d 1142 (9th Cir.), cert. denied, 423 U.S. 836 (1975).

6

supp ort local rates through the jurisdictional cost separations

processes, and thereby jeopardize the ability of regulatory com-

missions to set rates to achieve universal service goals. Nonethe-

less, by the late 1970s and early 1980s, the authority of these

competing carriers had been expanded to the point that they

could participate in the transmission of any interstate call, either

through their own facilities or through resale of the services of

Bell System companies.’

Finally, technological developments during the twenty-five

years after entry of the 1956 Judgment substantially eliminated

the earlier distinctions between regulated telecommunications

service and unregulated data processing. These developments

created actual and potential competition between telecommu-

nications carriers and data processing vendors in the provision of

CPE, enhancements of basic telecommunication services, and in-

formation services.”

‘See Bell System Tariff Offerings of Local Distribution Facilities For

Use By Other Common Carriers, 46 F.C.C.24 413 (1974), aff'd sub nom,

Bell Tel. Co, of Pennsylvania vy, FCC, 503 F.2d 1250 (3d Cir. 1974),

cert, denied, 422 U.S, 1026 (1975); American Tel, & Tel. Co., Restric-

tions on Interconnection of Private Line Services, 60 V.C.C.2d 939

(1976); MCI Telecommunications Corp., Investigation into the Lawful-

ness of Tariff F.C.C. No, 1 Insofar as it Purports to Offer Execunet Ser-

vice, 60 F.C.C.2d 25 (1976), rev'd, MCI Telecommunications Corp. v.

FCC, 561 F.2d 365 (D.C. Cir, 1977), cert, denied, 434 U.S, 1040 (1978);

Regulatory Policies Concerning Resale and Shared Use of Common

Carrier Services and Facilities, 60 F.C.C.2d 261 (1976), amended on

reconsid,, 62 F.C.C.2d 588 (1977), aff'd sub nom. AT&T v. FOC, 572

F.2d 17 (2d Cir.), cert. denied, 439 U.S. 875 (1978); Regulatory Policies

Concerning Resale and Shared Use of Common Carrier Domestic Pub-

lic Switched Network Services, 83 ¥.C.C.2d 167 (1980), reconsid. de-

nied, 86 F.C.C,2d 820 (1981),

‘See, ¢.g., First Computer Inquiry, 28 F.C.C,.2d 267 (1971), aff'd in

part and rev'd in part sub nom. GTE Service Corp. v, FCC, 474 F.2d 724

(2d Cir. 1973); American Telephone & Telegraph Co. (Data Speed

40/4), 62 F.C.C.2d 21 (1977), aff'd sub nom. IBM v, FCC, 570 F.2d 452

(2d Cir. 1978); Second Computer Inquiry, 77 F.C.C.2d 384 (1980),

aff'd sub nom, Computer & Communications Industry Ass'n v, FCC,

No. 80-1471 (and consolidated cases) (D.C, Cir, November 12, 1982),

7

Despite the technological developments that characterized this

period generally, local exchange functions have largely retained

their natural monopoly characteristics. Providers of CPE, inter-

city services, and information services continue to require access

to local exchange facilities to compete in these markets,

1974 Case. In 1974, the United States brought a second civil

antitrust action under the Sherman Act against the Bell System,

United States v. AT&T, et al., No. 74-1698 (D.D.C.). The

Governinent alleged that intervening events demonstrated that the

1956 Judgment did not prevent the Bell System. from monopoliz-

ing telecommunications equipment markets and that the Bell

System had further, through control of its franchised local ex-

change monopolies, unreasonably restrained competition in the

intercity service and CPE markets in which the FCC had in-

troduced competition. The Department again sought the struc-

tural separation of the Bell System’s monopoly activities from its

other businesses, praying for the divestiture of the BOCs and the

divestiture and dissolution of Western Electric. Complaint,

Prayer, paras, 3-5, The Justice Department thereafter modified

its prayer for relief to seek divestiture only of those parts of the

Bell System that provide local exchange functions.’

AT&T moved to dismiss this suit on the ground that, although

it has no blanket antitrust immunity, the specific conduct at issue

was subject to pervasive federal regulation and complementary

state regulation — and thus was impliedly immune from the Sher-

man Act." The District Court twice denied this motion, holding

that neither federal nor siate regulation immunized AT&T from

this suit for structural relief, and the Court of Appeals and this

"Stipulation "ackage 82; see Plaintiff's First Statement of Conten-

tions and Proof, pp. 526-27 (November 1, 1978).

“AT&T also sought to dismiss claims in the case on the grounds that

the 1956 Judgment was res judicata, but these claims were also rejected

by the District Court. United States v. AT&T, 1976-2 Trade Cas.

461,097 (D.D.C, 1976).

8

Court denied AT&T's petitions to have this ruling reviewed,

United States v. AT&T, 461 F.Supp. 1314, 1320-21 (D.D.C,

1978); United States vy. AT&T, 427 F.Supp. 57 (D.D.C. 1976),

cert, denied, 429 U.S, 1071 (1977), cert. denied, No, 77-1009

(D.C, Cir, May 27, 1977), cert. denied, 434 U.S, 966 (1977),

After the Bell System's threshold defenses were rejected, the

District Court established innovative procedures to expedite its

pretrial proceedings and trial, United States v. AT&T, supra, 461

F.Supp. at 1343-49, These procedures enabled the completion of

discovery, the narrowing of the issues, and the commencement

and substantial completion of the trial within the next three and a

half years.

Trial of the case commenced in March, 1981. In each of the

three major areas of the case CPE, intercity services, and

telecommunications equipment the Government's proof con-

sisted of evidence, vigorously disputed by AT&T, that the Bell

System had intentionally abused its control over its franchised

local exchange monopolies to discriminate against competitors

and to cross subsidize its prices in competitive markets, At the

close of the Government's case, the District Court held that there

had been suflicient evidence to put AT&T to its proof and denied

AT&T's motion to dismiss, United States v, AT&T, 524 F.Supp.

1336 (D.D.C, 1981); Tr. 14909-10,

Throughout the period of the 1974 case, the FCC and Congress

extensively debated a number of issues raised by the 1974 case

and the 1956 Judgment. Both forums considered the adoption of

regulatory or legislative devices to prevent or reduce the possibili-

ty that AT&T would abuse its local franchise monopoly to obtain

advantages in related competitive markets." A focal point of the

"See, ¢.g., FOC CC Docket No, 78-72 (exchange access); Second

Computer Inquiry, 77 F.C.C.2d 384 (1980); FCC CC Docket No,

80-742 (License Contracts); FOC CC Docket No, 80-53 and No, 19129

(Phase Il) (Bell System Procurement Practices); H.R. 12323, 94th

(Footnote continued on next page)

9

debate was whether and to what extent the 1956 Judgment would

and should foreclose AT&T from participating in markets in

which computer technologies had merged with the technologies

that provide telecommunications services and in which traditional

rate of return regulation had ceased to be appropriate.” The

FCC's decision in one proceeding that raised this issue the

Second Computer Inquiry led AT&T and the United States on

March 4, 1981, to begin to litigate the question of the proper in-

terpretation and scope of the 1956 Judgment.”

AT&T had vigorously contended, in all of these forums, that it

had not abused its control of its local exchange monopolies and

that the public interest would best be served by maintaining the

end-to-end integration of the Bell System. Nevertheless, it had

(Footnote continued from previous page)

Cong., 2d Sess. (1976); H.R. 13015, 95th Cong., 2d Sess. (1978); HLR,

3333, 96th Cong., Ist Sess. (1979); S. 611, 96th Cong., Ist Sess. (1979);

S. 622, 96th Cong,, Ist Sess, (1979); H.R, 6121, 96th Cong., Ist Sess.

(1979); S. 2827, 96th Cong., 2d Sess. (1980); S. 898, 97th Cong., Ist

Sess, (1981); H.R. 5158, 97th Cong., Ist Sess. (1981).

"See, e.g., H.R. 6121, 96th Cong., 2d Sess. §218 (1980); S, 898, 97th

Cong., Ist Sess, §229 (1981).

"In the Second Computer Inquiry, supra, 77 ¥.C.C.2d 384 (1980),

the FCC established a new nontarill form of regulation for the Bell Sys-

tem’s CPE and its enhancements of basic telecommunications service.

Because the Justice Department had taken the position that the 1956

Judgment would bar AT&T from continuing to provide these services

once this new regulatory scheme was implemented, AT&T moved for

construction of the Final Judgment on March 4, 1981, The Memoran-

dum in Support of The Motion For Construction further stated (p, 17)

that the 1956 Judgment had become “obsolete and unjustifiable” and

that the only “long term resolution” of the problems it raised was to

vacate it or modify it to reflect the changed environment, In an order is-

sued on September 23, 1981, the District Court held that, as written, the

1956 Judgment allowed the continued provision of CPE and enhanced

services, despite the change in the form of public regulation, The United

States’ appeal from this order was subsequently dismissed on the ground

that the proposed modification of the Final Judgment had eliminated

any controversy between the parties, United States v. Western Electric

Co., No, 81-1960 (3d Cir, February 2, 1982), See also JA, 82 1.198.

10

become increasingly apparent that continuing the Bell System's

present ownership of local exchange monopolies along with com-

petitive operations would be a source of increasing controversy

and uncertainty, Even if it won United States v. AT&T, the Bell

System's common control over franchised local monopolies and

competitive businesses would unavoidably expose it to future

antitrust challenges and to onerous legislative and regulatory re-

strictions, And if the 1956 Judgment were held to foreclose Bell

System participation in computer and other markets that had

merged with traditional telecommunications, the Bell System's

ability to continue to innovate and enhance its services would

have been severely impaired.

The Modification Of Final Judgment. Against this background,

AT&T concluded that the best way to end the uncertainty and to

obtain freedom from the constraints of the 1956 Judgment and

from continuing antitrust exposure was to agree to the precise

structural reorganization that the Justice Department was seek-

ing in the 1974 case: the divestiture and complete separation of

the Bell System's local exchange functions from its intercity,

CPE, and manufacturing businesses, Thus, on January 8, 1982,

AT&T and the United States stipulated to the entry of a

modification of the 1956 Judgment that would achieve the Justice

Department's objectives,"

The proposed modification required that, within eighteen

months of its entry, the Bell System be split between its local ex-

change functions and other functions, through a number of dis-

crete steps. Exchange boundaries (or “local access and transport

areas” (“LATAs”)) must be drawn to determine which facilities

are intraexchange facilities to be divested and which are interex-

“Simultaneously with the filing of this stipulation, the parties volun-

tarily dismissed the 1974 Case pursuant to Fed. R. Civ. P. 41(a)(1) (ii).

change facilities that AT&T will retain,” See §1V(G); JA.

178-79. AT&T must then transfer to the BOCs — or to a BOC-

owned central stall organization resources to enable them to

provide local exchange functions independently of AT&T after

divestiture. §1(A)(1); J.A. 174. The BOCs’ facilities and re-

sources relating to local exchange functions must then be separat-

ed by transferring the CPE and interexchange facilities to newly

created entities. §1(A)(2); J.A. 174. And the License Contracts

and other contracts that integrate the BOCs with the rest of the

Bell System must be terminated, §1(A)(3); J.A. 174. Finally, the

local exchange carriers (“divested BOCs”) must be spun olf,

§1(A)(4); JA, 174-75." Because this structural reorganization

eliminates the whole basis for the 1956 Judgment, the proposed

modification vacates the injunctive provisions of that judgment in

their entirety, J.A. 173.

"Specifically, LATA boundaries determine which traflic is interex-

change traflic and which is intraexchange tratlic, LATAs thus allow the

preponderant use of facilities to be measured for the purpose of making

ownership determinations at divestiture. See also gVIING); JA. 184,

The sole significance of LATAs after divestiture is that they define the

areas in which the divested entities provide local exchange functions and

define prohibited interexchange services, See §§11(A), (B) & (D); JA,

175-76.

"A series of corporate transactions will be required to reconfigure the

BOCs as local exchange companies and to spin them off from AT&T,

To separate exchange and non-exchange assets, the Bell System plans

that each BOC will create two wholly-owned subsidiaries, one to which

the BOCs’ interexchange facilities will be transferred and another to

which the BOCs’ customer premises equipment (CPE) will be trans-

ferred, The BOCs will then distribute the stock of these subsidiaries to

AT&T which, as a result, will hold its ownership of the BOCs’ exchange

facilities separately from its ownership of the BOCs’ interexchange and

CPE assets, AT&T will then create seven new subsidiaries and transfer

to these companies the stock of the BOCs that provide exchange service

in each of seven regions of the country as well as one-seventh ownership

interests in the central staff organization, AT&T will then spin off the

regional companies by distributing its stockholdings in those companies

to existing AT&T stockholders, See Plan of Reorganization (filed in

District Court December 16, 1982), pp. 440-71,

12

The proposed modification also imposes restrictions on the

divested BOCs, It requires that they provide exchange access to

all interexchange carriers that is equal in type and quality to that

provided AT&T and prohibits discrimination in favor of AT&T

and its affiliates in procuring equipment, §§II(A), (B), Appendix

B; J.A. 175-76, 187-90. To assure that the BOCs may not them-

selves obtain competitive advantages through abuse of control of

their local exchange facilities, the proposed modification

prohibited the BOCs from providing interexchange services, in-

formation services, CPE, and any services other than exchange

and exchange access service or natural monopoly services actually

regulated by tariff. §I1(D); J.A. 176.

No services will be discontinued as a result of the MFJ, All the

facilities and personnel providing telephone service before divesti-

ture will continue to provide telephone service after divestiture,

The difference will be that new AT&T affiliates will retain the

Bell System's CPE and interexchange facilities and functions in

each State while the separately owned BOCs will provide local

exchange service,

Public Interest Proceedings. After the modilication was

proposed, this case was transferred to the United States District

Court for the District of Columbia, The District Court recognized

that any significant delays in the decision to enter the proposed

modification would threaten a vital national industry, J.A, 148-

49, 205-06; see also April 8, 1982 Order, pp. 5-6. At the same

time, because of the proposed modification’s enormous signifi-

cance, the District Court, with the parties’ consent, ordered

procedures which it conducted with great expedition — that

gave the general public rights of participation that went beyond

those prescribed by the Antitrust Procedures and Penalties Act of

1974, 15 U.S.C, §§16(b)-(h) (’ Tunney Act”), After over 600 in-

dividual comments on the proposed modification were received,

the District Court ordered additional briefing on eight broad sets

of issues, conducted a two day nonevidentiary hearing on June 29

13

and June 30, 1982, and afforded all commentors an opportunity

to indicate, through explicit offers of proof, whether a further

evidentiary hearing would be necessary to resolve any issues re-

lated to its public interest determination. See May 25, 1982

Memorandum, p. 4.

Many commentors challenged the effectiveness or appropriate-

ness of specific provisions of the proposed modification. All the

States and state commissions, directly or through their national

association, filed comments that also challenged the proposed

modification’s effectiveness on far more fundamental grounds.

Each noted that splitting the Bell System pursuant to the MFJ

would require a number of one-time transactions that, under the

literal terms of the applicable state statutes, could not occur with-

out explicit prior state regulatory approval. Each argued that the

States, which generally opposed the split, had “unassailable au-

thority to veto” the divestiture and to cause a “balkanized scheme

of telephone service.”"’ Because these claims went to the question

whether the Decree could be effective, all conceded that this issue

should be resolved as part of the District Court's public interest

determination. See J.A. 37 n.100.

On August 11, 1982, the District Court issued a 178-page opin-

ion concluding that the asic split of the Bell System was an en-

tirely appropriate antitrust remedy and obviously in the public in-

terest. J.A. 58, 66. The Court’s opinion rejected nearly all the

challenges to specific provisions of the proposed modification.

J.A. 73, 75, 77, 79, 101-04, 106, 124. The Court rejected the

States’ claims that they could block or undo the implementation

of the Decree, holding that prior approval requirements were

effectively preempted, but on/y to the limited extent they might be

invoked to block the one-shot transactions. J.A. 47-48. The Dis-

"Joint Comments of Alabama, 23 other states, ef a/. p. 12; Arizona

Comments, pp. 7, 10, 13-15; see also Michigan P.S.C. Comments, p. 6;

Alabama P.S.C. Comments, pp. 4-5; Maryland P.S.C. Comments, pp.

7-11; District of Columbia Comments, p. 12; National Association of

Regulatory Utility Commissions (“NARUC”) Comments, pp. 30-42.

In all, some sixty-six state and state utility commissions as well as

NARUC filed such comments.

14

trict Court did conclude that several changes would have to be

made in the proposed modification before it would be approved,

including a provision that the divested BOCs be permitted to

provide, but not manufacture, CPE. J.A. 104-109. The District

Court stated that it would promptly approve a modification that

adopted its proposed revisions. J.A. 172.

On August 19, 1982, the Department of Justice filed a memo-

randum (pp. 1-2) stating that it was prepared to agree to all the

District Court’s proposed revisions because “the alternatives

available wouid pose unacceptable costs to the public interest.”

However, the Department urged the District Court to reconsider

its position on CPE in one respect. In the Department's view, the

divested BOCs could be allowed to market “simple CPE” im-

mediately. In contrast, it stated that their provision of “complex

CPE” could pose greater competitive dangers and that a decision

on BOC entry into these markets should be postponed until a

hearing could explore the competitive costs and benefits of BOC

participation. /d., pp. 2-3. On August 23, 1982, the District Court

rejected the Department’s proposal. J.A. 196-200. On August 24,

1982, the parties stipulated to the entry of the Modification of

Final Judgment that contained all the District Court’s proposed

revisions, and it was entered later that same day. Although the

MF gives the Bell System until February 24, 1984, to implement

the reorganization, financial considerations dictate that it must be

completed by January 1, 1984. Tr. 25130, 25456-57.

On August 26, 1982, the District Court authorized approxi-

mately 110 public and private entities and organizations to inter-

vene in this case for purposes that include appeal of the entry of

the Modification Of Final Judgment. J.A. 192-94; see J.A. 201-

203. Eighteen appeals were filed, one of which (Jack Faucett As-

sociates, Inc.'s) has been dismissed. On November 10, 1982, the

District Court, pursuant to the Expediting Act (15 U.S.C.

§29(b)), issued an order directing that the appeals be taken di-

rectly to this Court. J.A. 204-208.

15

REASONS FOR SUMMARY AFFIRMANCE

This case epitomizes the Government antitrust actions in

which Congress intended to retain direct Supreme Court review

of a District Court’s final judgment. To subject this case to the

delays of the ordinary appellate processes would threaten a criti-

cal national industry. The questions presented in the appeals,

moreover, are purely legal issues that can be readily decided by

this Court. Indeed, each of the four appeals is so appropriate for

disposition by this Court and the issues which they raise are so in-

substantial that the judgment below should be summarily

affirmed.

I. Expedition Of These Appeals Under The Expedit-

ing Act Is A Matter Of Paramount Public Impor-

tance.

In the Antitrust Expediting Act, 32 Stat. 823, as amended, 15

U.S.C. §29(b), Congress found that public antitrust cases can

have an enormous “impact on the economic welfare of this na-

tion,” that they “are unlike other cases,” and that it is often

necessary and appropriate to expedite the final decision in such

cases by making final judgments directly appealable to this

Court. H. R. Rep. No. 93-1463, 93d Cong., 2d Sess. 14 (1974);

see S. Rep. No. 93-298, 93d Cong., Ist Sess. 3-4 (1973); United

States v. California Co-operative Canneries, 279 U.S. 553, 558

(1929). In the 1974 amendments to the Act, Congress eliminated

the previous requirement that there be direct Supreme Court

review in all Government antitrust cases, see 15 U.S.C. §29(a),

finding that the requirement imposed an undue burden on this

Court, particularly in cases requiring review of voluminous

records." However, Congress retained direct appeals for those

"See S. Rep. No. 93-298, supra, p. 8 (1973); Hearings Before The

Subcommittee On Antitrust and Monopoly Of The Judiciary Commit-

tee On S. 782 and S. 1088, pp. 16, 113 (1973); Hearings Before Sub-

committee On Monopolies and Commercial Law On H.R. 9203, H.R.

9947 and S. 782, pp. 36, 183 (1973); S. Rep. No. 91-1214, 91st Cong.,

(Footnote continued on next page)

16

Government antitrust cases in which “the district judge who ad-

judicated the case enters an order stating that immediate con-

sideration of the appeal by the Supreme Court is of general public

importance in the administration of justice.” 15 U.S.C. §29(b). In

such cases, the Act provides that this Court may then either “dis-

pose of the appeal. . . in the same manner as any other direct ap-

peal” or remand it to the appropriate court of appeals, where it

will be subject to the ordinary appellate procedures. /d.

The Expediting Act, however, was not intended to “bestow on

the Supreme Court an unqualified discretion to hear or not hear a

case.”” H.R. Rep. No. 93-1463, supra, pp. 13-14 (1974). On the

contrary, Congress “intended that the Supreme Court hear cases

that are of general public importance in the administration of the

antitrust laws.” /d. The standard for direct appeals is nor that the

case raises novel or unsettled legal issues or is otherwise immedi-

ately review-worthy. Compare 28 U.S.C. §1254(1) (Supreme

Court review prior to judgment in the Court of Appeals). To the

contrary, Congress intended to expedite cases that have “serious

(Footnote continued from preceding page)

2d Sess. 2 (1970); H.R. Rep. No. 91-1129, 91st Cong., 2d Sess. 3-6

(1970) (reprinting letter from Attorney General of the United States).

In making these findings, Congress relied on the earlier statements of

members of this Court. See United States v. Singer Manufacturing Co.,

374 U.S. 174, 175 n.1 (1963); Brown Shoe Co. v. United States, 370

U.S. 294, 364-65 (1962) (Harlan, J., concurring). But see United States

v. Singer Manufacturing Co., 374 U.S. at 197 (White, J., concurring).

"The legislative history of the 1974 Amendments sharply distin-

guishes between the standards under 28 U.S.C. §1254(1) and those

under the Expediting Act:

“The Committee was well aware that under current law—-Section

1254 of title 28, U.S. Code, which is not affected by this legislation

—either party may by-pass the court of appeals and seek direct

review by the Supreme Court. The Committee does not intend to

duplicate or displace that through its amendment. Section 1254

does bestow on the Supreme Court an unqualified discretion to hear

or not hear a case. The Committee amendment does not, It is in-

tended that the Supreme Court hear cases on direct review that are

of general! public importance in the administration of the antitrust

laws.” H.R. Rep. No. 93-1463, supra, pp. 13-14 (1974).

17

legal and economic consequences going beyond the mere private

interests of the individual litigants” as well as those that are in-

dependently review-worthy.”

The appeals from the entry of the MFJ present precisely the

kind of case that Congress intended to preserve for direct

Supreme Court review -regardless of the merits or legal sig-

nificance of the questions presented. As the District Court repeat-

edly found (e.g., J.A. 33, 148-49, 153, 205-06), the implementa-

tion of the MFJ implicates a most fundamental national interest.

The Bell System provides services critical to the national econ-

omy and the national defense, and it must continue to provide vi-

tal service while it engages in a massive undertaking to comply

with the MFJ before January 1, 1984. Any significant delays in

the final judicial resolution of whether, when, or how the Bell Sys-

tem is to be restructured would create uncertainty that would

threaten the Bell System network and severely jeopardize its

ability to serve the public during this critical period. It would

mean that the Bell System would continue to be all but foreclosed

from the debt markets from which it traditionally has raised most

of the outside capital necessary to maintain and improve the

network,” that operational and regulatory decisions would be

severely inhibited and impeded, and that the Bell System’s more

than one million employees would be unsure of where they will be

employed. As the District Court found, significant delays in the

final resolution of this case will “disrupt AT&T's own opera-

°° ee:

tions,” “inhibit investment and other business decisions necessary

“Hearings Before Subcommittee On Antitrust and Monopoly On S.

782 and S. 1088, pp. 32, 41 (March 15, 1973) (quoting S. Rep. No. 91-

1214, 91st Cong., 2d Sess. 4 (1970) and H. R. Rep. No. 91-1129, 91st

Cong., 2d Sess., 6 (1970), reprinting the position of the Attorney Gener-

al of the United States).

"Since the MFJ was proposed on January 8, 1982, the Bell System

has not issued any BOC bonds, its traditional method of raising much of

the outside capital needed to finance the approximately $18-$20 billion

required each year for expansion and modernization. Tr. 25130, 25456-

57.

18

to the maintenance and improvement of the telecommunications

network,” “jeopardize the ability of the Bell System's compo-

nents to raise the outside capital needed for the modernization

and expansion of [the] network,” and “adversely affect the entire

telecommunications industry and thus, indirectly, the nation as a

whole.” J.A. 148-149; see also April 8, 1982 Order, pp. 5-6.

Expedition of the appeals under the Expediting Act will end

this uncertainty and the accompanying risks to the public at the

earliest possible time. In contrast, to remit the appeals to the or-

dinary procedure of initial review in the Court of Appeals, peti-

tions for certiorari, and possibly further review in this Court could

extend an intolerable “state of limbo” (id., p. 6) beyond the date

that the Bell System is required to complete the divestiture. See

J.A. 205-06. A failure to expedite could hold the most severe ad-

verse consequences for the public. Nor would retaining jurisdic-

tion over these appeals create a precedent that would burden the

docket of this Court. This case of unprecedented economic impor-

tance to the public is the first time that the Justice Department

has sought expedition of an appeal in the eight years since

Congress amended the Antitrust Expediting Act.

Il. The Appeals Have No Substance And Should Be

Summarily Affirmed.

The appeals that have been filed from the entry of this antitrust

judgment call for immediate consideration by this Court. Unless

there is a claim of fraud, mistake or lack of jursidiction, “a decree

... rendered by consent is always affirmed, without considering

the merits of the cause.” Swift & Co. v. United States, 276 U.S.

311, 323-24 (1928) (Sherman Act consent judgment) (emphasis

added; citations omitted); accord, NLRB v. Ochoa Fertilizer

Corp., 368 U.S. 318, 323 (1961). A District Court's approval of a

settlement in a case affecting the public is otherwise reviewable, if

at all, only to determine whether the court abused its discretion in

agreeing with the parties that the settlement was reasonable and

19

in the public interest.” In the Tunney Act -whose procedures

were adopted by the District Court Congress did not intend to

change the standard of review of consent decrees.”

Two different types of appeals have been filed from the entry of

the MFJ. First, Illinois, Maryland and thirteen other States have

challenged the jurisdiction of the District Court to enter any De-

cree—whether litigated or by consent--that unconditionally

orders structural relief requiring asset transfers and other trans-

actions that would otherwise require state approval under regula-

tory statutes.” Second, Tandy and the North American Telephone

Association (“NATA”’) challenge the MFJ on the ground that

isolated provisions of the MFJ do not order relief that, in the

views of these parties, would be desirable. Both sets of appeals are

wholly insubstantial and should be summarily affirmed.

*See, e.g., Patterson v. Newspaper & Mail Deliverers’ Union, 514

F.2d 767, 771-72 (2d Cir. 1975) (settlement of employment discrimina-

tion suit); Metropolitan Housing Development Corp. v. Village of Ar-

lington Heights, 616 F.2d 1006, 1015 (7th Cir. 1980) (Fair Housing

Act); United States v. Allegheny-Ludlum Industries, Inc., 5\7 F.2d

826, 846-50 (Sth Cir. 1975), cert. denied, 425 U.S. 944 (1976) (Title

VII); Grunin v. International House of Pancakes, 513 F.2d 114, 123

(8th Cir.), cert. denied, 423 U.S. 864 (1975) (settlement of antitrust

class action); Young v. Katz, 447 F.2d 431, 432-33 (Sth Cir. 1971) (set-

tlement of class action stockholder suit). See also United States v. Bech-

tel Corp., 648 F.2d 660, 663 (9th Cir.), cert. denied, 454 U.S. 1083

(1981) (government antitrust consent decree). The only circumstance in

which a court has employed de novo review is where the District Court

refuses to enter the proposed consent decree. See United States v. City of

Alexandria, 614 F.2d 1358 (Sth Cir. 1980).

»”The Tunney Act procedures were enacted to assure that the District

Court would be fully informed before deciding whether to enter a

proposed decree, not to alter the pre-existing case law as to when consent

decrees may properly be entered. H. R. Rep. No. 93-1463, supra, pp. |1-

12 (1974); S. Rep. No. 93-298, supra, pp. 3-6 (1973). See United States

v. National Broadcasting Co., 449 F.Supp. 1127, 1141-42 (C.D. Cal.

1978); United States v. Associated Milk Producers, Inc., 394 F.Supp.

29, 44-45 (W.D. Mo. 1975), aff'd, 534 F.2d 113 (8th Cir.), cert. denied

sub nom. National Farmers’ Organization, Inc. v. United States, 429

U.S. 940 (1976).

“The majority of the States that raised this issue in the court below

and their national association (see p. 13 n. 17, supra) did not join in

these appeals.

20

A. The States’ Claim That They May “Veto”

The Implementation Of The MFJ Is Contrary

To The Sherman Act and The Supremacy

Clause.

The basis for the States’ challenge to the District Court’s juris-

diction to enter the MFJ is that each State has statutes that

provide for public regulation of intrastate telephone service and

that require, among other things, prior state regulatory approval

before a regulated firm may convey or transfer any facilities used

to provide intrastate service. As the States recognize, the MFJ

orders the BOCs to transfer CPE and interexchange facilities

used to provide intrastate service and to engage in similar one-

shot transactions that would otherwise require prior approval of

state agencies. The States further assert, erroneously, that the

MEFJ will conflict with their ongoing regulation of intrastate tele-

phone service after the divestiture is concluded, The States’ claim

is that a Sherman Act judgment cannot order conduct inconsis-

tent with state law and that the MFJ must therefore be set aside.

The States’ claims are extreme, startling, and wholly without

merit. If they were valid, no decree could be entered under the

Sherman Act whether litigated or by consent” — that uncondi-

tionally ordered the restructuring of a regulated utility.” A Sher-

man Act decree would only be advisory and could, at most, order

the parties to use their “best efforts” to obtain necessary state

*Litigated decrees and consent decrees are both “judicial acts”, Unit-

ed States v. Swift & Co., 286 U.S. 106, 115 (1932); Pope v, United States,

323 U.S. 1, 12 (1944), and neither may be entered unless found to be ap-

propriate antitrust remedies and within the public interest. Litigated de-

crees and consent decrees are accorded equal preemptive effects, United

States v. Swift & Co., supra, 286 U.S. at 114-15; Delaware Valley Cit-

izens’ Council For Clean Air v. Pennsylvania, 674 F.2d 976, 980-81 (3d

Cir.), cert. denied, §1 U.S.L.W. 3287 (October 12, 1982); United States

v. ASCAP, 442 F.2d 601 (2d Cir, 1971); J.A. 38-39 n, 102.

*The effect on the States would have been identical if the 1974 case

had been litigated to judgment and the Government had obtained the

relief it sought, or even if a judgment had been entered by default.

21

regulatory approval. Whether and to what extent a decree could

be implemented would be committed to future regulatory

proceedings in 51 different jurisdictions, each of which could

block or condition the Decree’s implementation and produce, in

the States’ own words, “balkanization,”

This Court has repeatedly held that the Supremacy Clause of

the Federal Constitution forecloses any claim that the existence

of state laws or state regulation can limit the power of federal

tribunals to effectuate federal law. For example, where federal

administrators have adopted regulations to carry out federal laws,

the Supremacy Clause forbids the States from interposing local

laws — even when they are valid for all other purposes to prevent

or impede the regulation from being immediately effective. See

Fidelity Federal Savings & Loans Ass'nv, dela Cuesta, US.

, 50 U.S.L.W. 4916 (June 28, 1982); California Public Utili-

ties Comm'n v. United States, 355 U.S. 534 (1958) (preempting

prior approval statute), Similarly, in fashioning remedies to effec-

tuate federal law, federal courts have the authority to order con-

duct that is inconsistent with local laws, and no claim can be made

that state law operates as a limitation on the federal court’s juris-

diction:

“State-law prohibition against compliance with the District

Court’s decree cannot survive the command of the Su-

premacy Clause of the United States Constitution .. . [t]he

federal court unquestionably has the power to enter the var-

ious orders that state official and private parties have chosen

to ignore, and even to displace local enforcement of those

orders if necessary to remedy the violations of federal law

found by the court.”’ Washington v. Fishing Vessel Associa-

tion, 443 U.S. 658, 695-96 (1979).

See also Cooper v. Aaron, 358 U.S. 1, 18-19 (1958); North Caro-

lina v. Swann, 402 U.S. 43, 45 (1969).

The States here insist that different principles apply under the

Sherman Act because of the existence of pervasive public utility

22

regulation. The short answer to this claim is that no State chal-

lenges the earlier holdings that state regulation of the Bell System

is not so extensive or comprehensive that it immunizes the con-

duct at issue in the 1949 and 1974 cases from antitrust remedies,

Nor could any such claim be made, The MF is designed to create

more competitive conditions in interstate markets in which the

FCC introduced competition and which are outside the states’

plenary regulatory authority,

Because Congress did not intend that state regulation would be

a substitute for Sherman Act controls over AT &T in these cases,”

Congress could not have intended that the States have “unassail-

able authority” to block or condition the implementation of rehef.

Once it is determined that state regulation does not immunize a

defendant from antitrust controls, the federal court must have the

power to enter a decree that effectuates antitrust policy, even if it

requires conduct that conflicts with state statutes that are valid

for all other purposes, Otherwise, federal antitrust jurisdiction

would be effectively transferred to 51 different regulatory com-

missions and antitrust enforcement against interstate businesses

would be “balkanized,” contrary to the obvious intent of

Congress.” As Judge Greene correctly stated in rejecting the

states’ argument, the “practical consequences of such a rule to

antitrust enforcement could be devastating.” J.A. 45,

“Although AT&T does not claim a blanket immunity from the anti-

trust laws, it does contend that some of its specific conduct was so inte-

grally related to pervasive federal regulation that it should not be sub-

jected to a trial under the different standards of the antitrust laws with

respect to that conduct. See Phonetele, Inc. v., AT&T, 664 F.2d 716 (9th

Cir. 1981), petition for certiorari pending, No, 81-2359.

“Because the interstate telecommunications network is a single inter-

active network, the Commerce Clause of the Federal Constitution would

prevent the States from unreasonably blocking transactions and “bal-

kanizing™ its effective operations even if there were no Sherman Act,

See, e.g., Edgarv. Mite, U.S. ,50U.S.L.W. 4767 (June 23, 1982);

FERC vy. Mississippi, US. , 50 U,S.L.W. 4566 (June 1, 1982).

Where, as here, the transactions are required to implement a federal

statute, the lack of state authority follows a fortiori,

23

The States’ argument that Parker v, Brown, 317 U.S. 341

(1943), dictates a different result in this case is meritless, It

proceeds from a fundamental misconception of both the state ac-

tion exemption and the MF J, Parker v. Brown and its progeny, to

be sure, establish that the Sherman Act was not intended to

prevent States from “supplanting competition with regulation”

(Md J.S. p. 11), or to “[destroy] the States’ power to engage in

economic regulation,” Exxon Corp, vy, Governor of Maryland,

437 US. 117, 133 (1978). Thus, an “actively supervised” and

“clearly articulated” state regulatory scheme may not be in-

validated merely because there is a conflict between the statute

and the central policy of the Sherman Act, California Retail

Liquor Dealers Ass'n vy, Midcal Aluminum, Inc., 445 U.S, 97,

105 (1980),

But contrary to the State's suggestions, the MFJ does nor in-

validate any state statute, It is directed to private parties, not

state officials. And it interferes with state regulation in only one

limited respect; it unconditionally orders a one-shot realignment

of assets within the present Bell System (from the BOCs to new

AT&T affiliates). Although the MFJ effectively preempts state

prior approval and related requirements insofar as they could

block, impede, or undo the divestiture ordered by the MFJ, these

statutes will remain valid for all other purposes.

The States’ assertions that the MFJ will interfere with their on-

going regulation of intrastate telephone service is erroneous,

First, Maryland’s Brief is simply wrong in stating (p. 14) that

LATA boundaries will be periodically reconfigured after the

divestiture and that there will be ongoing transfers, The only pur-

poses of the LATA boundaries are to govern the one-time split of

the Bell System and to define the areas in whica the divested BOCs

are to provide exchange and exchange access services, These

boundaries do not affect the states in their regulatory determina-

tion as to whether a telephone call is charged for as a flat rate call

24

or toll call-—as the earlier public interest proceedings made ex-

plicit.”

Second, the reorganization neither removes any facilities from

service nor requires the competitive provision of any service,

What it does is realign the resources of the Bell System so that

AT&T will retain control of CPE and interLATA facilities now

on the books of the BOCs, The States will be able to exercise all

their existing regulatory authority over the entities that result

from the reorganization, They may regulate rates for intrastate

service to the full extent of their statutory authority and, in con-

nection therewith, may value the assets used to provide this ser-

vice and apply their prior approval requirements to transactions

relating to intrastate service. Contrary to Illinois’ claim (J.S.

20-21), they may similarly regulate all aspects of the relationship

between independent telephone companies and the newly created

Bell entities. A state commission may order the BOCs to

interconnect with the independents for the joint provision of

intraLATA toll service, order AT&T to interconnect with in-

dependents to provide joint interLATA service, and regulate the

division of charges between them. See, e.g., Ill. Rev, Stat., Ch.

111%, pars. 8, 29. Despite Maryland’s contrary argument (p, 14),

States will continue to be free to treat intrastate toll service as a

regulated monopoly and to pursue whatever regulatory policies

they choose — as the District Court explicitly recognized (JA, 46-

47,n.117).” There, accordingly, is no basis for any claim that the

MF J supplants ongoing state regulation.

"See, ¢.g., Justice Department's Competitive Impact Statement, pp.

45-49; AT&T Reply Comments, pp. 21-24.

“The reason that the BOCs’ interexchange facilities are being trans-

ferred to AT&T is to create more competitive conditions in the provision

of interstate intercity services for which the facilities are also used, not to

supplant any state policy relating to intrastate service.

25

B. Tandy’s and NATA’s Challenges To The

MF J's Treatment Of CPE and Patent Licens-

ing Are Frivolous.

In contrast to the States’ broad challenge to the District

Court's jurisdiction, NATA and Tandy have appealed from the

entry of the MFJ on the narrow grounds that its provisions relat-

ing to CPE and patent licensing do not, in their views, sufficiently

promote competition, Quite apart from the fact that Tandy and

NATA are competitors with their own antitrust remedies and no

apparent litigable interests in this case, their appeals are

frivolous, Their claims misconceive the nature of consent judg-

ments and the role of appellate courts in reviewing them,

A judgment entered by consent is normally a compromise,

“(I]n exchange for the saving of cost and the elimination of risk

the parties each give up something they might have won had they

proceeded with the litigation.” United States v. Armour & Co.,

402 U.S. 673, 681 (1971); accord, Carson vy, American Brands,

Inc., 450 U.S, 79, 86-88 (1981). In the Tunney Act, Congress in-

tended to encourage the continued use of consent decrees, Con-

trary to Tandy’s claim (J.S, 12, 18), the fact that isolated provi-

sions of a consent decree may not afford all the antitrust relief

that “conceivably” could have been ordered after trial can never

be grounds for disapproving a decree, for that is the very essence

of a consent judgment. United States v. Allegheny-Ludlum In-

dustries, Inc., 517 F.2d 826, 850-51, 863 (Sth Cir. 1975), cert.

denied, 425 U.S. 944 (1976), The appropriateness of a decree

depends on whether it, when considered as a whole, is a reason-

able compromise and consistent with the overall public interest,

See, e.g., United States v. Gillette Co., 406 F.Supp. 713, 716 (D.

Mass 1975) (Aldrich, J.).

Tandy’s arguments are based on the premise (see Tandy J.S.

12, 15, 18) that a court reviewing the entry of a consent judgment

26

may pick and choose among its provisions and selectively rewrite

them. This premise is false. Because the provisions of the decrees

are interrelated and represent a single bargain, appellate courts

are “powerless to rewrite the provisions of a settlement

agreement” lest they change a provision that was essential to one

party's assent. Pattersonv. Newspaper & Mail Deliverers’ Union,

514 F.2d 767, 772 (2d Cir. 1975) (Mansfield, J.); accord, United

States v. Allegheny-Ludlum Industries, Inc., supra, 5\7 F.2d at

850-51."

Against this background, the claims that the District Court

acted improperly in approving the MFJ are spurious, Even when

analyzed in isolation, the CPE and patent licensing provisions

promote antitrust objectives and, in any event, are reasonable

compromises between conflicting positions, And when they are

considered, as they must be, in the context of the MFJ as a whole

-—-which orders the precise structural relief that the Justice

Department sought in three decades of litigation no claim can

be made that the District Court abused its discretion in approving

the MFJ.

1. The CPE Provisions Of The MFJ Do Not

Vitiate The Decree.

Although Tandy and NATA are both participants in the CPE

market, they challenge the CPE provisions of the MFJ on

grounds which are at odds with one another. NATA coniends

that the MFJ should have prohibited the divested BOCs from

providing CPE at all. Tandy, in contrast, supports the decision to

allow the BOCs to provide CPE, but it objects to the fact that

they will be divested without any retail outlets. The fact that two

" Accord, United States v. General Electric Co., 1977-2 Trade Cas.

961,659 at 72,717 (E.D.Pa. 1977); United States v. Associated Milk

Producers, Inc., 394 F.Supp. 29, 42 (W.D.Mo. 1975), aff'd, 534 F.2d

113 (8th Cir.), cert. denied, 429 U.S, 940 (1976); see generally United

States v. Ward Baking Co., 376 U.S. 327 (1964).

27

market participants take these inconsistent positions should, by

itself, demonstrate that the MFJ’s treatment of the issue is not

outside the zone of reasonableness.

The entire basis for NATA’s claim is that the modification

proposed by the parties on January 8, 1982, prohibited the BOCs

from offering any CPE. NATA appears to contend that the Dis-

trict Court should have deferred to the initial position of the Jus-

tice Department and approved the modification in the form in

which it was originally proposed. However, the question whether

the January 8, 1982, proposal was properly rejected is not before

the Court; neither the parties nor NATA have sought appellate

review of that decision. NATA’s argument that courts should

give great weight to the Justice Department’s views supports the

conclusion that the MFJ was properly entered. The Department

consented to the MFJ that was entered on August 24, 1982, on

the basis that it was in the public interest.

More fundamentally, it is frivolous of NATA to suggest that

the treatment of CPE creates such great potential for competitive

abuse that the MFJ must be vacated in its entirety. The MFJ sig-

nificantly reduces any threats to competition resulting from BOC

participation in these markets. By prohibiting BOC manufactur-

ing of CPE and ordering the transfer of the BOCs’ CPE and CPE-

related resources to AT&T, the MFJ ends the integration of the

BOCs’ existing customer premises equipment businesses with

their exchange services and assures that any BOC that reenters

the market after divestiture will not have an embedded CPE busi-

ness to support discriminatory conduct or cross-subsidization. See

J.A. 104-09, 196-200.

Tandy’s position that the BOCs should be divested with their

phone stores would have made the MFJ even less consistent with

the Department's antitrust objectives; franchised local exchange

monopolies would have retained aspects of an embedded CPE

business. Moreover, because the BOCs will be divested without

any CPE and because some divested BOCs may choose not to

28

enter this business, it would have been inconsistent to assign the

stores to the BOCs. Nor will the division of assets have any ad-

verse effect on the competitiveness of the CPE market. Indeed,

each divested BOC that chooses to enter this business in the future

will have customer contacts that will enable it rapidly to establish

a market presence, as the District Court found. J.A. 108 n. 248.

Therefore, there is nothing in the CPE provisions of the MFJ that

is unreasonable, much less that would vitiate the MFJ.

2. The Termination Of Mandatory Patent

Licensing Was Entirely Appropriate.

Tandy’s argument that the District Court should not have ap-

proved termination of the 1956 Judgment’s requirement of com-

pulsory patent licensing without first conducting an evidentiary

hearing is also frivolous. Much of the attractiveness of consent

judgments is that they avoid the expense, delay, and uncertainty

of litigation. For this reason, the Tunney Act makes it explicit

that a District Court should resort to trial-type hearings “only

where it is imperative ... for the purpose of eliciting additional

facts,” S. Rep. No. 93-298, supra, pp. 6-7; H. R. Rep. No. 93-

1463, supra, p. 8, and that the District Court has broad discretion

in selecting the procedures to make its public interest determina-

tion. 15 U.S.C. §16(e), (f). This discretion was not abused.

First, Tandy is in no position even to object to the failure to

hold a hearing. It failed to comply with the District Court's

request in its May 25, 1982, Memorandum that any person who

proposes an evidentiary hearing make an explicit showing as to

the necessity of a hearing, its duration, and the number and types

of witnesses and other participants.” In any event, the issues

*Specifically, the District Court’s Memorandum of May 25, 1982,

stated (p. 4) that any person who believed an evidentiary hearing to be

necessary “shall state why the issue cannot be resolved without such a

hearing, the precise purpose of the proposed proceeding, its estimated

duration, the number and type of witnesses and exhibits to be adduced,

and the identities of others who would be expected to participate in the

hearing.’ Tandy did not even purport to attempt to comply with this

order.

29

Tandy now identifies as appropriate for hearing (J.S. p. 14) are so

vague and diffuse that they would have defied judicial resolution

within any reasonable period of time.

Second, the termination of the patent licensing provisions was

entirely reasonable. Indeed, as the Justice Department argued

below, “retaining the requirements in the context of the divesti-

ture mandated by the modification would, itself, be anticompeti-

tive.” Br. of United States In Response to District Court’s May

25, 1982 Mem., p. 50. The patent licensing requirement was

previously imposed— without any adjudication of liability or any

opportunities for public comment—-in exchange for preserving

the integrated Bell System. Its premise was that patents funded in

whole or in part by revenues from franchised monopolies should

be made available to all. See Justice Department’s Competitive

Impact Statement, pp. 44-45. Because the MFJ orders the dives-

titure of franchised monopolies and ends the License Contracts,

the premise for the 1956 Judgment’s provision vanishes. To im-

pose an unconditional requirement on the post-divestiture AT&T

to license all its patents when its competitors are under no such

obligation would disserve, not promote, the purposes of the anti-

trust laws. J.A. 78-79 and n.191.

30

CONCLUSION

The District Court has shown that a trial court can expeditious-

ly manage big antitrust cases and assure that the uncertainty that

they create does not imperil vital national industries. The expedi-

tion of this appeal under the procedures Congress has established

will enable the judicial system to continue to protect these public

interests.

For the reasons stated, the appeals from the entry of the MFJ

should be decided by this Court. Each is so lacking in merit that

they all should be affirmed summarily. This will remove the un-

certainty that threatens the national telecommunications network

and clouds the Bell System’s operations while it proceeds with the

largest corporate reorganization in our nation’s history.

Respectfully submitted,

HOWARD J. TRIENENS*

ALFRED A. GREEN

Jim G. KILpatric

195 Broadway

New York, New York 10007

(212) 393-5111

GEORGE L. SAUNDERS, JR.

Joun D. ZEGLIS

Davip W. CARPENTER

SIDLEY & AUSTIN

One First National Plaza

Chicago, Illinois 60603

(312) 853-7000

Attorneys for Appellees

Western Electric Company

and American Telephone

And Telegraph Company

December 22, 1982

*Counsel of Record