Appendix — American Telephone & Telegraph Co. v. Litton System, Inc.

Oilice - Supreme Court, U.S.

FILED

No. 82- JUN 28 1983

IN THE ALEXANDER L. STEVAS,

Supreme Court of the United States

October Term, 1982 .=

AMERICAN TELEPHONE AND TELEGRAPH COM-

PANY, WESTERN ELECTRIC COMPANY, INC., BELL

TELEPHONE LABORATORIES, INC., NEW YORK TELE-

PHONE COMPANY, INC., NEW JERSEY BELL TELE-

PHONE COMPANY, SOUTHERN BELL TELEPHONE

AND TELEGRAPH COMPANY, THE OHIO BELL TELE-

PHONE COMPANY, SOUTHWESTERN BELL TELE-

PHONE COMPANY, THE PACIFIC TELEPHONE AND

TELEGRAPH COMPANY, and PACIFIC NORTHWEST

BELL TELEPHONE COMPANY,

Petitioners,

VS.

LITTON SYSTEMS, INC., LITTON BUSINESS TELE-

PHONE SYSTEMS, INC., LITTON BUSINESS SYSTEMS,

INC., and LITTON INDUSTRIES CREDIT CORPORA-

TION,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

APPENDIX TO PETITION FOR WRIT OF CERTIORARI

HOWARD J. TRIENENS*

195 Broadway

New York, New York 10007

(212) 393-5111

GEORGE L. SAUNDERS, JR.

Davip W. CARPENTER

Jim G. KILPATRIC One First National Plaza

RAYMOND BRENNER Chicago, Illinois 60603

Davip J. RITCHIE (312) 853-7000

Siptey & AUSTIN LEONARD JOSEPH

Dewey, BALLANTINE, 140 Broadway

BusHsBy, Patmer, & Woop New York, New York 10005

(212) 820-1100

Of Counsel Counsel for Petitioners

*Counsel of Record

TABLE OF CONTENTS

PAGE

Appendix A—Opinion of Court of Appeals for the

BOCORE COM oo vceccceseveteicswece la

Appendix B — District Court’s Opinion Denying The Mo-

tion To Dismiss And Motion For Partial

Summary Judgment ...ccccscvcsscscs 93a

Appendix C — District Court’s Opinion Denying Motion

For A Judgment Notwithstanding The

Verdict Or For A New Trial .......... 129a

Appendix D— Order Of Court Of Appeals Denying Peti-

tion For Rehearing, With Suggestion For

entering 10 BAGG sicicccccvascvess’ 133a

Appendix E— Excerpts From The Trial Record....... 135a

Excerpts From AT&T’s Comments In

POC TFSTB svc vcvcccnnssesianeve 136a

Excerpts From Bell’s Proposed Jury In-

GEIONE b co cei ventwaepavens esse 145a

Excerpts From Bell’s Written Objec-

tions To The District Court’s Draft In-

POTENGI anno ck Coane etétedpenoes 150a

Excerpts From District Court’s Instruc-

tions And Transcript .............+. 152a

Appendix F—AT&T ‘Foreign Attachment” Tariff

Revisions, 15 F.C.C.2d 605 (1968) ..... l6la

Appendix G— Notice Of Inquiry, Proposed Rulemaking

and Creation of Federal-State Joint Board

(Docket 19528), 35 F.C.C.2d 539 (1972). 175a

Appendix H — First Supplemental Notice, Docket 19528,

GOP ALALDE SiS (1STS) cvciecinsecece 18la

Appendix | —-Pertinent Statutes And Regulations..... 187a

Sherman Act §2, 15 U.S.C. §2....... 188a

Communications Act of 1934, §§201,

205, 47 U.S.C. §§201, 205 ........ 188a

47 C.F.R. $68.102 (1982)........... 190a

Appendix J — Citations To State Regulatory Decisions. 19la

———

APPENDIX A

Opinion of Court of Appeals

for the Second Circuit

2a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

——

No. 1323-26, 1344—August Term, 1981

(Argued June 14, 1982 Decided February 3, 1983)

Docket Nos. 81-7598, 7766, 7776, 7778, 7856

aoe

LITTON SYSTEMS, INC., LITTON BUSINESS TELEPHONE Sys-

TEMS, INC., LifTON BUSINESS SYSTEMS, INC., and LIT

TON INDUSTRIES CREDIT CORPORATION,

Plaintiffs-Appellees-Cross Appellants,

—_V—

AMERICAN TELEPHONE AND TELEGRAPH COMPANY, WEST

ERN ELECTRIC COMPANY, INC., BELL TELEPHONE LABO-

RATORIES, INC., NEW YORK TELEPHONE COMPANY,

INc., NeW JERSEY BELL TELEPHONE COMPANY,

SOUTHERN BELL TELEPHONE AND TELEGRAPH COM-

PANY, THE OHIO BELL TELEPHONE COMPANY, SOUTH-

WESTERN BELL TELEPHONE COMPANY, THE PACIFIC

TELEPHONE AND TELEGRAPH COMPANY, and PACIFIC

NORTHWEST BELL TELEPHONE COMPANY,

Defendants-Appellants-Cross Appellees.

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L!TTON SYSTEMS, INC.,

SOUTHWESTERN BELL TELEPHONE COMPANY,

Defendant-A ppellee.

Before:

OAKES, MESKILL and KEARSE,

Circuit Judges.

aol

Appeal from jury verdict in an antitrust action in the

United States District Court for the Southern District of

New York, William C. Conner, Judge, finding defendant

liable for willful maintenance of monopoly power and

attempted monopolization and awarding plaintiff dam-

ages in its capacity as competitor and customer of defen-

dant. Affirmed.

+

HOWARD J. TRIENENS, New York, NY (Jim G.

Kilpatric, William J. Jones, David J.

Ritchie, New York, NY; Leonard Joseph,

Harvey Kurzweil, Joseph Angland, Fred

R. Biesecker, Dewey, Ballantine, Bushby,

Palmer & Wood, New York, N.Y.; Frank

C. Cheston, Henry T. Brendzel, of coun-

sel), for Defendants-Appellants-Cross-

Appellees.

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WILLIAM SIMON, Howrey & Simon, Washing-

ton, DC (Theodore F. Craver, Larry L.

Yetter, Litton Industries, Inc., Beverly

Hills, CA; Peter E. Fleming, Jr., Curtis,

Mallet-Prevost, Colt & Mosle, New York,

N.Y.; John Bodner, Jr., Francis A.

O’Brien, John W. Nields, Jr., Ralph Gor-

don, Albert O. Cornelison, Jr., Kevin P.

McEnery, Lewis M. Barr, Lisa A. Gok,

Howrey & Simon, Washington, DC) for

Plaintiffs-Appellees-Cross Appellants.

OAKES, Circuit Judge:

This appeal is taken from jury awards exceeding ninety

million dollars before trebling entered by the United

States District Court for the Southern District of New

York, William C. Conner, Judge, in an antitrust action

brought by Litton Systems, Inc. and some of its subsidi-

aries (Litton) against the American Telephone and Tele-

graph Company and some of its subsidiaries (AT&T). The

awards were based on special jury findings that AT&T

used its telephone monopoly illegally to monopolize the

telephone terminal equipment market, thereby excluding

Litton as a competitor, and imposing costs on Litton as a

customer, of the AT&T system. The jury found that this

was accomplished principally through opposing the adop-

tion of certification standards and the imposition of

tariffs filed with but not approved by the Federal Com-

munications Commission (FCC). The tariffs required

telephone customers to connect equipment purchased

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from AT&T’s competitors to the telephone system only

through the use of a device designed by AT&T.

This device—called an “interface device” by Litton and

a “protective connecting arrangement” (PCA) by

AT&T—was used in lieu of a system of “certification

standards.” These standards would have regulated, as

they indeed now do regulate, the kind of equipment that

can be connected with the AT&T system to ensure inter-

connection compatibility. Under the AT&T tariff, how-

ever, Litton had to pay for the privilege, so to speak, of

connecting to the system with a “black-box” of AT&T’s

devising. The tariff was eventually rejected by the FCC in

favor of certification standards, and Litton’s principal

argument before the jury and to the district court was

that AT&T’s bad faith opposition to certification stan-

dards drove Litton out of the telephone terminal equip-

ment market in the interim period between the filing and

the ultimate rejection of the tariff. While our recounting

of the facts will disclose many other complexities, pro and

con, of Litton’s case, certainly a crucial factor is the

FCC’s ultimate finding that the interface device was not

needed to protect the AT&T network from harm. Various

network users had long purchased equipment from

AT&T’s competitors, using it without an interface with

“no demonstration of . . . harm” to the AT&T network.

Proposals for New or Revised Classes of Interstate and

Foreign Message Toll Telephone Service (MTS) and Wide

Area Telephone Service (WATS), 56 F.C.C.2d 593, 598

(1975). The gist of Litton’s case and the jury’s findings is

that the interface device was unnecessary and uneconomi-

cal and that AT&T at all times knew this was so, and that

despite clear prior indications from the FCC that the

tariff would be set aside as unreasonable and destructive

of competition, AT&T nevertheless proposed and fought

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to maintain the tariff—all in bad faith in order to exclude

competition in the terminal equipment market.

AT&T raises a score of issues on appeal. In addition to

disputing the evidence underlying the jury’s verdict,

AT&T argues that its opposition to certification standards

was privileged under the First Amendment by virtue of

the Noerr-Pennington doctrine because it merely advo-

cated a position before a government agency. AT&T also

claims that the district court erred in its evidentiary

rulings, instructions to the jury, and handling of special

interrogatories, and that the jury’s damage award was not

supported by substantial evidence and was inconsistent

with certain jury findings in AT&T’s favor. The jury

verdict for Litton as an AT&T customer is attacked as

both unsupported by the evidence and improper under

the “filed tariff” doctrine of Keogh v. Chicago & North-

western Railway Co., 260 U.S. 156 (1922) and the ‘target

area’ standing doctrine, see Calderone Enterprises Corp.

v. United Artists Theatre Circuit, Inc., 454 F.2d 1292,

1295 (2d Cir. 1971), cert. denied, 406 U.S. 930 (1972).

Finally, AT&T argues that Litton’s misconduct during

discovery, which resulted in the denial of attorneys’ fees

to Litton, warranted outright dismissal of the case. Litton

appeals the denial of attorneys’ fees and conditionally

cross-appeals on the basis that the district court’s instruc-

tions to the jury prevented it from recovering its full

measure of damages.

Bearing in mind that in reviewing the jury’s verdict the

evidence must be viewed in the light most favorable to

Litton, we affirm, holding the Noerr-Pennington doctrine

inapplicable to Litton’s suit as a competitor. We have

considered all the parties’ contentions and have found

none requiring reversal. We find that the evidence was

sufficient, both in terms of its weight and from the

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standpoint of causation, to support the damage award

and that the district court’s instructions to the jury and

evidentiary rulings were free from prejudicial error. We

also uphold the verdict for Litton gua customer—no

small sum, albeit almost wholly insignificant relative to

the principal verdict. Although we are not without doubt,

perhaps because the amounts involved are so large, we

uphold the district court’s imposition of discovery sanc-

tions under Federal Rule of Civil Procedure 37 and

therefore deny Litton’s unconditional cross-appeal. Our

disposition of the case renders consideration of Litton’s

conditional cross-appeal unnecessary. In affirming, we

take due note that this case was a model of judicial

technique for handling a serious, complex, and difficult

jury trial. Irrespective of what we might say regarding

certain of the rulings below that we think were question-

able or debatable, if not reversible error, we commend the

district court’s handling of the case.

1. BACKGROUND

A. Early Restrictions on Interconnection

Prior to 1956, AT&T had an absolute monopoly over

long distance telephone service and local telephone service

in areas accounting for over eighty percent of this coun-

try’s telephones. Independent telephone companies, fa-

miliar to many rural users, interconnected with AT&T’s

long distance network and provided local telephone ser-

vice in those areas not serviced by AT&T. The AT&T

“telephone network” comprised local central office

switching systems as well as the wires and cables linking

them with the businesses and homes of customers. This

monopoly, administered under the aegis of the FCC, was

recognized as perfectly lawful and proper.

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But AT&T had another monopoly—not similarly sanc-

tioned—over the sale and lease of individual telephone

sets and business telephone systems. Broadly speaking, a

business telephone system can be classified into one of

two general categories. The first, a Key System, allows a

single telephone set to connect several others through the

use of buttons on the telephone. Key Systems are used

primarily by small offices. The second category, a PBX

System, employs a central console or switching mecha-

nism to allow interconnection of up to several thousand

telephones. Key Systems and PBXs—stipulated as the

relevant product market in this case—are referred to in

the industry as “telephone terminal equipment.” AT&T’s

monopoly over such equipment (including residential tele-

phones) was preserved after the expiration of Alexander

Graham Bell’s original patents by the simple expedient of

prohibiting the attachment of non-AT&T equipment to

the AT&T system. AT&T enforced this policy by cutting

off service to customers who attached non-AT&T equip-

ment.’ This practice was approved first by state regula-

tory agencies and later by the FCC after it assumed

regulatory responsibility for telecommunications under

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

Because telephone terminal equipment sends electrical

signals into the network, this policy was at that time

considered necessary to ensure the safe and effective

operation of the nationwide telephone network.’

| Western Electric, an AT&T subsidiary, manufactures telephone ter-

minal equipment sold by AT&T.

2 The AT&T brief describes the potential harms to the telephone

network from “unbridled terminal equipment” as follows:

Improper voltages generated or transmitted by customer-provided

terminal equipment can cause potentially hazardous electric shock

to telephone company customers and employees. Longitudinal

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After World War II, however, various users sought to

connect devices that AT&T had always considered “for-

eign attachments” to the telephone network. Efforts to

challenge AT&T's absolute prohibition against intercon-

nection of non-AT&T equipment met with some limited

success as early as 1947 when, in Use of Recording

Devices, 11 F.C.C. 1033 (1947), the FCC approved the

use of machines to record telephone conversations be-

cause such use was not “detrimental to the quality of

telephone service.” /d. at 1048. At the same time, the

Commission ruled that interconnection must be made

through “[a]dequate connecting arrangements,” id. at

1048-49, but the responsibility for installing and main-

taining connecting arrangements was vested in AT&T. The

FCC’s concern for the network’s integrity was manifested

in perhaps its most extreme form in Hush-A-Phone

Corp., 20 F.C.C. 391 (1955), where it prohibited the use

of a mouthpiece shield designed to enhance user privacy

imbalance usually results from improper grounding of the tele-

phone lines and can cause a user to hear increased noise or another

voice (/.e., crosstalk) on the telephone line. Excessive signal power

also causes noise and crosstalk. Faulty network control signaling

can cause numerous problems, including wrong numbers, false busy

signals, and incorrect billing. . . . Although a minor problem

might be acceptable to a particular customer, the combined effect of

many such problems could impair telephone service for other

customers.

Brief at 11 n.9

It is to be noted, however, that no proof of actual harm to the

telephone network from interconnection with competitors’ terminal

equipment was ever adduced before the FCC, see Proposals for New

or Revised Classes of Interstate and Foreign Message Toll Telephone

Service (MTS) and Wide Area Telephone Service (WATS), 56 F.C.C. 2d

$93, 596, 598 (1975) (First Report & Order), or in this case. The FCC

certification standards as set forth in the order cited above, and as

subsequently amended, are nevertheless designed to prevent the occur-

rence of the four basic potential harms—hazardous voltages, excessive

signal power levels, excessive longitudinal imbalance, and improper

network control signalling. /d. at 601-11.

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because, although the shield did not harm the network,’ it

could cause garbling of conversation. The Commission’s

ruling was set aside and remanded by the unanimous

decision in Hush-A-Phone Corp. v. United States, 238

F.2d 266, 269 (D.C. Cir. 1956),* which found the ruling

“neither just nor reasonable.” In characterizing the ruling

as an “unwarranted interference with the telephone sub-

scriber’s right reasonably to use his telephone in ways

which are privately beneficial without being publicly det-

rimental,” id., the Hush-A-Phone court suggested that

actual harm to the telephone network was to be the

principle governing the validity of interconnection prohi-

bitions.

On remand, the FCC adhered to this principle by

ordering AT&T to modify its tariffs to eliminate restric-

tions against the use of the Hush-A-Phone device and

“any other device which does not injure [AT&T's] em-

ployees, facilities, the public in its use of [AT&T’s]

services, Or impair the operation of the telephone sys-

tem.” Hush-A-Phone Corp. v. American Telephone &

Telegraph Co., 22 F.C.C. 112, 114 (1957). The ruling thus

implicitly acknowledged that the AT&T network could be

harmed by some forms of interconnection. See notes 2 &

3, supra. At the same time, the Commission’s reference to

“any other device” made it clear that the scope of the

3 This depends on how “harm” is defined; AT&T has always advanced

the idea that anything causing a user to hear increased noise or another

voice (crosstalk) is harmful and that longitudinal imbalance and

excessive signal power do just that. See note 2 supra.

4 The court stated:

To say that a telephone subscriber may produce the result in

question by cupping his hand and speaking into it, but may not do

so by using a device which leaves his hand free to write or do

whatever else he wishes, is neither just nor reasonable.

238 F.2d at 269.

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ruling extended beyond use of the Hush-A-Phone device.

Nevertheless, AT&T cast its revised tariff so as to prohibit

interconnection of customer-provided telephone systems.”

At about the same time the 4/ush-A-Phone controversy

was wending iis way through the Commission and the

courts, a Texas inventor by the name of Thomas F. Carter

was inventing a mobile radio device that allowed its users

to conduct two-way conversations with persons using

ordinary, stationary telephones. The “Carterfone” used

inductive and acoustic principles to connect the mobile

user with a telephone “base station” that completed the

5 Tariff FCC No. 132 provided in part:

B. GENERAL REGULATIONS

7. Unauthorized Attachments or Connections.-—-No equipment,

apparatus, circuit or device not furnished by the telephone company

shall be attached to or connected with the facilities furnished by the

telephone company, whether physically, by induction or otherwise

jexcept as provided in this tariff.] In case any such unauthorized

attachment or connection is made, the telephone company shall

have the right to remove or disconnect the same; or to suspend the

service during the continuance of said attachment or connection; or

to terminate the service.

24. Miscellaneous Devices Provided by the Customer.—The pro-

visions of paragraph 7 preceding shall not be construed or applied

to bar a customer from using devices which serve his convenience in

his use of the facilities of the telephone company in the service for

which they are furnished under this tariff, provided any such device

so used would not endanger the safety of telephone company

employees or the public; damage, require change in or alteration of,

or involve direct electrical connection to, the equipment or other

facilities of the telephone company; or interfere with the proper

functioning of such equipment or facilities, or impair the operation

of the telephone system or otherwise injure the public in its use of

the telephone company’s services. [Except as otherwise provided in

this tariff,] nothing herein shall be construed to permit the use of [a

recording device] or of a device to interconnect any line or channel

of the telephone company with any other communications line or

channel of the company or of any other person.

Quoted in Use of the Carterphone Device, 13 F.C.C.2d at 437 (brack-

ets in original; footnotes omitted).

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link to the telephone network.° Carter began marketing

his device in 1959, and within a few years he had sold

several thousand units in the United States and through-

out the world. The AT&T tariff filed in response to the

Hush-A-Phone decision was consistently interpreted as

prohibiting the use of the Carterfone. See Use of the

Carterphone Device in Message Toll Telephone Service,

13 F.C.C.2d 430, 438 (1967). Carter challenged the tariff

in 1967, and the FCC hearing examiner found that with

the exception of a single trivial incident, id. at 436, the

Carterfone performed “satisfactorily without causing

technical problems detectable by the user.” Jd. at 433.

Because the Carterfone had no adverse effect on the

telephone network, the examiner ruled that its use fell

within the rationale of Hush-A-Phone Corp. v. United

States, 238 F.2d 266 (D.C. Cir. 1956), and that it was

“unjust and unreasonable to continue to prohibit use of

the Carterphone for the purpose of interconnection after

its beneficial and harmless nature has been demon-

strated.” 13 F.C.C.2d at 439.

The Commission decision following the hearing held

that the tariff was “unreasonable and unduly discrimina-

tory.” Use of the Carterfone Device in Message Toll

Telephone Service, 13 F.C.C.2d 420, 423 (1968). In con-

trast to the hearing examiner’s conclusion that “a general

prohibition against the use of interconnection devices is

{not] unjust or unwise,” Carterphone, 13 F.C.C.2d at

440, the Commission found the fact

6 The Carterfone transmitted to a two-way radio at the base station

serving the mobile radio system. To connect a telephone user to the

mobile radio user, the base station’s telephone handset was placed on a

cradle in the Carterfone which automatically switched the radio to the

transmitting mode when the mobile user spoke, and returned it to the

receiving mode when he stopped—all this without any direct electrical

connection to the telephone network.

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[t}hat the telephone companies may not have known

prior to the proceedings herein that the Carterfone

was in fact harmless is irrelevant, since they barred

its use without regard to its effect upon the telephone

system. Furthermore, the tariff was the carrier’s

own. It was not prescribed by the Commission.

13 F.C.C.2d at 425. The Commission further underscored

its rejection of a blanket prohibition against interconnec-

tion when it noted that “[{n]o one entity need provide all

interconnection equipment for our telephone system any

more than a single source is needed to supply the parts for

a space probe.” /d. at 424. It then invited the submission

of “new tariffs which will protect the telephone system

against harmful devices” and specifically stated that “the

carriers . . . may specify technical standards if they

wish.” /d. at 426.

AT&T immediately sought reconsideration of the Com-

mission’s decision. In its order denying reconsideration,

the Commission in a very real sense cemented its previous

decision as follows:

We held that the Carterfone filled a need, that its

use did not adversely affect the telephone system,

that its use was nevertheless precluded by the tariff,

and that the tariff was unlawful, and had been in the

past, because it prohibited the use of the Carterfone

and other interconnecting devices without regard to

actual harm caused to the telephone system. We did

not prescribe the terms of a new tariff, but left that

to the initiative of the telephone companies, pointing

out that they were in no wise precluded from adopt-

ing reasonable standards to prevent harmful inter-

connection. Basic to our holding was a rejection of

A.T.& T.’s position that because A.T.& T. cannot

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control the interconnected private system, intercon-

nection is by definition a degradation of the message

toll telephone system without regard to the quality of

the interconnecting device or of the interconnected

mobile radio system, i.e., without regard to actual

harmful effects. We viewed this position’ and the rule

embodying it as unreasonable. .

The primary contention upon reconsideration is

that our decision permits the use of a myriad of

customer-provided devices for interconnection

without adequate exploration of the technical and

economic problems. This record convinces us that

there can be inter-connection without harmful techni-

cal effects. ...

Use of the Carterfone Device in Message Toll Telephone

Service v. American Telephone & Telegraph Co., 14

F.C.C.2d 571, 572 (1968).

We found no substantial factors outweighing the

necessity of eliminating the arbitrary tariff. Stan-

dards to prevent the introduction of harmful inputs

can be devised, and enforcing them would be no

more difficult than enforcing the present absolute

prohibition. Furthermore, notification to the carrier

of the installation of a connecting device, which

would be a reasonable requirement, would greatly

relieve any problems of discovering the source of any

harmful interconnection. The record also showed

that terminal devices may be used under a standard

making actual harm a factor, and the distinction

between terminal devices and interconnection ap-

pears to be solely one of function unrelated to

inherent propensity for injurious effects.

Id. at n.2 (citations omitted).

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Significantly, the Commission also noted the broad

sweep of its decision:

We also reject the related claim that the decision

goes beyond the issues. To say, as some of the parties

do, that the hearing related solely to the Carterfone

and not to the validity of the tariff’s broad prohibi-

tion would make the hearing essentially meaningless.

The issues plainly included consideration of the basic

validity of the tariff if it was the total prohibitory

effect of the tariff which rendered its application to

the Carterfone unreasonable. As we pointed out in

our June decision, such a fault in a tariff can only be

remedied by its revision. It should be noted in this

connnection that it was well understood that this was

an “interconnection” case, and A.T.& T. and General

both argued on a broad base the need for a general

prohibition against all interconnection not arranged

by them.

Id. at 573. (footnotes and citations omitted)

We quote from the Memorandum Opinion and Order

denying the petition for reconsideration at length for two

reasons. First, a redacted version was submitted to the

jury, a matter disputed by AT&T and considered by us,

infra. Second, we believe that the clarity of the Commis-

sion’s language was such that from AT&T’s perspective it

had to be clear as a bell, so to speak, that at least as of the

1968 Carterfone decision, if not before, it was unreason-

able, unjust, and discriminatory to prohibit interconnec-

tion of terminal equipment without respect to any harm

such devices might cause. The ruling by its very. terms

“require[d] tariffs reasonably addressed to the asserted

problems.” 14 F.C.C.2d at 573. It was therefore incum-

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bent upon AT&T to devise tariffs that would permit

attachment of non-harmful devices.

B. The Interface Tariffs

We suspect that the parties would disagree little with

what we have said about the state of affairs up until the

time of the Carterfone decision; at least they would agree

on the facts, if not our interpretation of them. But what

happened after Carterfone is hotly debated. Two quite

different cases were presented to the jury and argued to

us. The telephone company’s scenario runs somewhat as

follows.

1. The AT&T Version

The Carterfone decision was to become effective on

November 1, 1968, whereupon—intolerably to AT&T—

there would be no tariff provisions at all to limit equip-

ment interconnection or specify interconnection

standards. AT&T thus faced the prospect of proposing

interconnection standards on very short notice with no

FCC guidance and novel problems of “real” risks. See

note 2 supra. In 1967, AT&T had formed a Tariff Review

Group—perhaps in anticipation of the Carterfone rul-

ing—to review possible tariff modifications. Although the

Review Group thought performance or certification stan-

dards were feasible, this approach was viewed as posing

weighty problems of a non-technical nature. Specifically,

we are told, the Review Group feared that promulgation

and enforcement of such standards by AT&T itself would

raise serious antitrust questions. At the same time, the

Review Group thought that improperly installed or main-

tained “good” equipment threatened the system’s integ-

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rity as much as “bad” equipment, and therefore

concluded that a substantial degree of protection could be

effected by requiring interface hardware—the “protective

connecting arrangement” or PCA. AT&T ultimately fol-

lowed the Review Group’s recommendation and adopted

the PCA rather than the certification standards approach.

Thus, in late October of 1968, AT&T filed a tariff

requiring the use of a PCA to interconnect terminal

equipment. AT&T was to provide, install, and maintain

the PCA at the customer’s expense as fixed by the filed

tariff.

The filing of the tariff sparked a spirited response, with

twenty-nine parties filing responsive pleadings and com-

ments. Opponents of the tariff argued that the PCA

approach was a flawed response to Carterfone because it

failed to specify interconnection standards, barred the use

of customer-provided telephones for network control sig-

nalling, and discriminated generally in AT&T’s favor. In

late December of 1968, the Commission permitted the

proposed tariffs to take effect, stating in American Tele-

phone & Telegraph Co. “Foreign Attachment” Tariff

Revisions, 15 F.C.C.2d 605, 609-10 (1968), that the deci-

sion in “Carterfone does not hold that a customer may

substitute his own equipment or facilities (whether it be

telephone instruments, loops, poles, or central office

equipments) for that furnished by the telephone com-

pany.” Although the Commission allowed what we will

call the “interface tariffs” to take effect, it explicitly

stated that its action was not to be construed as “giving

7 The PCA mechanism generally combined in a single housing a

“network control signalling unit,” which AT&T had always claimed

was necessary to protect against wrong numbers, false busy signals and

incorrect billing, and a “connecting arrangement”; hence the term

“protective connecting arrangement.”

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any specific approval to the revised tariffs,” id. at 610,

leaving entirely open the possibility of further action. In

the interim, the Commission directed all segments of the

telecommunications industry to engage in “informal engi-

neering and technical conferences,” to ascertain what

“further changes are necessary, desirable, and technically

feasible” in AT&T’s tariff offerings. /d. at 610.

AT&T tells us that terminal equipment interconnection

was the subject of much thought and engineering and

economic consideration after the Commission decided to

allow the interface tariffs to take effect. Throughout this

period, however, AT&T concedes that it had no “statisti-

cally meaningful” data regarding actual harm to the

network due to interconnection. AT&T Brief at 17-18 &

n.21. But, AT&T points out, a National Academy of

Sciences (NAS) report commissioned by the FCC ulti-

mately found—the report took some ten months to pre-

pare—that network harm could be caused by a variety of

factors. The report concluded that, on balance, the PCA

requirement was appropriate because, although a prop-

erly enforced certification system could also protect the

network from harm, the responsibility for creating and

administering such a system should be shouldered by a

regulatory agency rather than a private concern. In ap-

parent response to the NAS report, the FCC formed a

PBX Advisory Committee in May of 1971. The commit-

tee, composed of representatives of various interested

parties including, of course, AT&T, studied the feasibility

of interconnection without the PCA requirement. AT&T

continued to maintain that unlimited interconnection

could harm the network.°

8 The only data AT&T produced, however, addressed effects on the

network, such as crosstalk, rather than causes. Thus, in response to a

request by the FCC Common Carrier Bureau for comments on

5723

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In June of 1972, while the PBX Advisory Committee

was preparing its final report, the FCC instituted rule-

making proceedings addressing the interconnection is-

certification standards proposals in October of 1973, AT&T in part

submitted the following:

It is often argued that the impact on the quality of service of the

interconnection of customer-provied equipment is merely potential

and not real or actual. This is simply not true. In fact, our

experience is clearly to the contrary. For example, current studies

[the “Hunt Studies”] indicate that intercity private line serving links

equipped with at least one customer-provided terminal generated

trouble reports at a rate at least 50 percent higher than did serving

links equipped with telephone company-provided terminals only.

The studies now in progress on message telephone lines are showing

like results—the trouble report rate for lines equipped with cus-

tomer-provided terminals is more than 25 percent higher than lines

connected solely to telephone company-provided terminals. As we

have previously reported to this Commission with respect to inter-

state voice grade private line data services, where the same mini-

mum protection criteria apply as on the public switched

telecommunications network, a sizable percentage (8.5 percent) of

the customers utilizing their own data transmitting equipment were

applying signal power in excess of the established network protec-

tive criteria, thereby degrading the service of other customers. The

same survey showed, in the case of a particular type of connection

or interface which is comparable to that encountered on public

switched network services, that 18 percent of the customer-provided

terminals violated the minimum network protection criteria by a

substantial degree.

The comments did state, however, that:

Complete and exhaustive statistics demonstrating all the harms

from uncontrolled interconnection or the total impact on the

quality of service might not be obtainable, given the nature of the

problem studied. Certain effects simply are not measurable. How

many wrong numbers or how much crosstalk occurs from the use of

customer-provided terminals can only be observed at the time of or

during their occurrence. The difficulties in making such measure-

ments are apparent. However, the data cited above are sufficiently

consequential to suggest that interconnection has an adverse impact

on the quality of service. Certainly, for the reasons set forth in these

comments, further loosening of interconnection policies, such as

customer options embodied in the certification proposal before the

Commission in this proceeding, is not in the public interest and

should not be adopted.

(Footnote omitted).

5724

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sues. The FCC took the “extraordinary” step of

convening a Federal-State Joint Board (Joint Board)

pursuant to 47 U.S.C. § 410(c) (1976), to determine

“whether, and to what extent, there is public need. . . to

go beyond what we ordered in Carterfone and permit

customers to provide, in whole or in part” network

control signalling units and connecting arrangements.

Proposals for New or Revised Classes of Interstate and

Foreign Message Toll Telephone Service (MTS) and Wide

Area Telephone Service (WATS), 35 F.C.C.2d 539, 542

(1972). AT&T points to these developments to buttress its

claim that the need for and propriety of the PCA require-

ment was very much an open question, emphasizing the

fact that it took the FCC almost four years after Carter-

fone to address the interconnection issue.

The PBX Committee submitted its final report shortly

after the Joint Board convened in 1972. The report

included a model certification program based on a “bar-

rier PBX system” that would incorporate protective cir-

cuitry obviating the need for a PCA.” But by this time,

after “lengthy internal debate,” AT&T Brief at 21, AT&T

decided to oppose certification standards as an unneces-

sary substitute for the PCA requirement. Mr. John de-

Butts, then AT&T Chairman, announced this position in

a speech before the National Association of Regulatory

Utility Commissioners (NARUC) in late September of

1973. DeButts stated in his speech that the nationwide

switching network was “too valuable a resource to risk a

perhaps irreversible threat to its performance that would

9 AT&T claims that no equipment available at that time met the

standards of the “barrier PBX” posited by the Advisory Committee

and suggests that the concept was approved over its objection by

non-AT&T chairpersons’of Advisory Committee subcommittees. See

AT&T Brief at 19-20 n.24.

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ensue from fragmentation of responsiblity for that per-

formance.” Shortly thereafter, AT&T formally opposed

the certification standard approach by filing comments in

the FCC rulemaking proceedings.” That this opnosition

to certification standards was undertaken in bad faith was

a principal special finding of the jury on which the verdict

against AT&T turned.’

AT&T’s decision to stand behind the PCA requirement

greatly upped the odds against adoption of a certification

standards system. AT&T seems to agree with Litton that

the deButts speech was a coda marking Litton’s demise as

a competitor, but denies that it opposed certification

standards in bad faith and argues that Litton’s failure in

the terminal equipment market was inevitable by late

1973, if not earlier. According to AT&T, Litton’s efforts

10 Elaborating some of the concerns expressed by deButts in his earlier

speech, the comments stated:

The public interest . . . will inevitably be impaired by the duplica-

tion of facilities and the division of responsibility that will ensue

from further interconnection in an industry where compatibility of

components and precise coordination of process are crucial. Inter-

connection has had an adverse impact on the innovative process in

the telephone industry and the impact of certification would be even

more detrimental.

. . . [A]ny program of certification would, in our view, inevi-

tably lead to the uncontrolled connection of customer-provided

equipment to the telecommunications network. The ability to allo-

cate responsibility for network performance would perforce be

destroyed.

i The finding of predatory or anticompetitive conduct was based in

part on “opposing certification in bad faith.” Other such conduct

initially found was “bad faith refusal to sell inside wiring at all or on a

reasonable basis.”

After returning its initial verdict, at which time the jury could not

agree on whether the interface device tariff had been filed in bad faith

and whether there had been “bad faith delay in making cutovers,” the

jury further deliberated at the court's request and found for Litton on

these issues as well: hence our use of the term “a principal special

finding.”

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to establish itself in this market were short-lived, poorly

executed, and plagued with internal difficulties ranging

from inadequate staffing to high-level corporate bribery.

Litton entered the market in 1971, selling equipment

made by other companies, with the hope that it could

quickly develop its own products to feed the distribution

and service network it created immediately after Carter-

fone. But by 1973, AT&T claims, Litton had failed to

develop the caliber of product needed to compete with

AT&T's evolving line of terminal equipment. This fact,

coupled with the revelation that certain Litton officials

had bribed their way into contracts with terminal equip-

ment users, prompted Litton to exit the market in early

1974. AT&T’s rendering of Litton’s short, unhappy run

in the terminal equipment race suggests that Litton lost

because it sprinted early and winded quickly, and not

because AT&T squeezed Litton into the rail with the PCA

requirement.

In any event, Litton decided to withdraw from the

terminal equipment market in early 1974. It was not until

November of 1975, AT&T points out, that the FCC

adopted regulations establishing certification standards.

Proposals for New or Revised Classes of Interstate and

Foreign Message Toll Telephone Service (MTS) and Wide

Area Telephone Service (WATS), 56 F.C.C.2d 593, 599-

613 (1975) (First Report & Order).'’ Although the FCC

12 AT&T claims that certain FCC proceedings occurring prior to the

adoption of certification standard regulations had the effect of placing

the FCC's imprimatur upon the PCA requirement. See Telerent Leas-

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

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

U.S. 1027 (1976); AT&T-Mebane Home Telephone Co., 53 F.C.C.2d

473 (1975). It is difficult to see how either of these decisions can be

read to qualify the FCC's earlier, explicit statement that it was not

approving the proposed tariffs, however. Telerent was a declaratory

judgment order expressing the Commission's disapproval of a state

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declined to include PBX and Key Systems in the certifica-

tion program at that time, it expressed doubt regarding

the Joint Board's recommendation that this equipment

presented technical problems warranting general exclu-

sion. AT&T perforce concedes that this ruling included

statutory findings that the interface tariffs were “unneces-

sarily restrictive” and amounted to “unjust and unreason-

able discrimination.” /d. at 598. A few months later, the

FCC amended its regulations to cover PBX and Key

Systems that employed protective circuitry, /nterstate and

Foreign Message Toll Telephone Service, 58 F.C.C.2d 736

(1976) (Second Report & Order). The FCC’s order was

affirmed on appeal. North Carolina Utilities Commission

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

874 (1977).'’ Thus, as of October 1977, after certiorari

was denied by the Supreme Court, interconnection of

non-AT&T equipment employing protective circuitry be-

came a possibility. Finally, in April of 1978, the FCC

issued a third order eliminating the protective circuitry

requirement for properly registered and installed PBX

and Key Systems. /nterstate and Foreign Message Toll

Telephone Service, 67 F.C.C.2d 1255 (1978) (Third Re-

port & Order).

utility commission's proposed rule that would absolutely prohibit the

interconnection of customer-provided equipment on any intrastate

portion of the telephone network. The Commission held that the

proposed rule was contrary to the thrust of Carterfone and recently

instituted proceedings considering the possibility of liberalizing the

post-Carterfone tariffs. In Mebane a local telephone company sought

exemption from so much of the post-Carterfone tariffs as allowed

interconnection of customer-provided equipment. Although the Com-

mission upon its own motion granted the local carrier an opportunity

to demonstrate the need for a waiver from the tariffs on the basis of

economic injury, it specifically ruled that, under Carterfone, customers

must generally be allowed to provide their own equipment.

3 The appeal covered both the First and Second Report and Order in

Docket No. 19528. 56 F.C.C.2d 593 (1975); 58 F.C.C.2d 736 (1976).

The latter related to key systems and PBXs. See 552 F.2d at 1044.

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To summarize, the AT&T scenario sketches a hard-

fought battle before the FCC with good faith efforts

being made to protect the network. AT&T points out that

it was not alone in opposing certification standards;

several other interested parties—e.g., NARUC, the Joint

Board, and several state utility commissions—supported

the PCA approach. AT&T relies on this support, and on

the fact that it took over four years from the time Litton

exited the terminal equipment market for the FCC to

establish certification standards, to back up its claim that

it was not AT&T’s “bad faith” opposition to certification

standards that drove Litton from business. As might be

expected, Litton’s scenario plays out quite differently.

2. The Litton Case

In Litton’s scenario, AT&T is cast as a Dorian Gray. To

paraphrase Commissioner Johnson’s dissent from the

order staying the effect of Carterfone wending AT&T

response, to Litton, the PCA requirement was much as if

an electric utility prohibited customers from using a

toaster unless it was designed, manufactured, and in-

stalled by the utility itself. Litton’s case against AT&T

relies heavily on the fact that AT&T has never been able

to make a case for the PCA requirement. Litton reminds

us that AT&T has not demonstrated—before the FCC or

at the trial of this case—a single instance in which the

network had been harmed by a competitor’s terminal

equipment. Litton Brief at 8. Nevertheless, AT&T im-

posed the PCA requirement on all equipment sold by its

competitors. Strikingly, in one case involving two Atlanta

hotels using the very same brand of PBX equipment, no

interface was required for the equipment that AT&T

purchased from a third-party manufacturer and leased to

one hotel, while an interface was required when the other

5729

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hotel purchased its equipment directly from the third-

party manufacturer. Litton suggests, as did the Fourth

Circuit in North Carolina Utilities Commission, that the

PCA requirement was a naked attempt to maintain

“private lawmaking authority over independent manufac-

turers.” 552 F.2d at 1051 (emphasis omitted). The PCA

requirement stood for almost ten years, giving AT&T a

chance to interfere with the normal course of every sale of

terminal equipment by Litton and all of AT&T’s other

competitors.

Litton’s argument that AT&T opposed the development

of certification standards in bad faith is based on evi-

dence that Litton believes clearly demonstrates, first, that

AT&T was aware that it could not substantiate its claims

of harm to the network; second, that AT&T knew that

without the PCA requirement it was vulnerable to com-

petition; and, finally, that AT&T could have developed

certification standards itself immediately after Carterfone

but opted not to in order to buy the time necessary to

meet competition in the terminal equipment market.

Litton put into evidence a number of AT&T documents

to support the contention that AT&T simply could not

demonstrate that the PCA requirement was necessary to

protect the network from harm. Specifically, Litton

points to an in-house report apparently prepared in 1971

by one of two AT&T representatives to the PBX Advisory

Committee’* which stated:

A Credibility Gap Exists

{[L]imited interconnection on the message network

and greater interconnection on private line facilities

14 Litton claims in its brief that this report was prepared by a Mr.

Byers. This appears to be the case; although the copy of the report in

the appendix is unsigned, Byers’ initials are typed in at the top. In any

event AT&T does not dispute Litton’s attribution of the report.

5730

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has been in existence for a long period of time and

the carriers still find it virtually impossible to cite

cases of harm ... result{ing]) from .. . inter-

connect{ion] . ... This inability to demonstrate

cases of harm. . . is causing the manufacturers. . .

users and regulatory bodies to . . . challenge the

expansive efforts which [AT&T] insists must be taken

to avoid the network pollution.

Litton Brief at 29-30 (emphasis omitted). To like effect is

a 1972 report submitted to AT&T management by the

Director of AT&T’s Management Sciences Division stat-

ing that AT&T was in its “weakest position now, because

even though everyone concedes that serious breaches of

our tariffs by illegal or unauthorized equipment has

grown over the years, we have not been able to produce

evidence of harm to anyone.” /d. at 30. The report

recommended that the interface requirement be re-

scinded. Litton points out that AT&T’s sole evidence of

potential harm to the system was derived from the Hunt

Studies referred to in note 8 supra and which were cited

by AT&T to the FCC as support for the interface require-

ment. Various AT&T officials conceded that the studies

did not “prove anything.” Nevertheless, we know that

deButts maintained in his 1973 speech and in the forma!

filings later submitted to the FCC that there were data

supporting AT&T’s position on network harm from inter-

connection.

Litton argues that a portion of the PCA device cham-

pioned by AT&T was really no more than the dial or

pushbutton mechanism of a telephone—the network con-

trol signalling unit—that only duplicated the function of

the same mechanism in AT&T’s competitors’ equipment.

Moreover, AT&T knew at the outset that the PCA re-

5731

27a

quirement was useless; a Task Force of the Tariff Review

Group charged by AT&T management with developing

“the strongest possible case to resist customer ownership

of telephone equipment” had concluded in early 1968 that

a PCA requirement would only “shift{] . . . [existing]

restrictions on customer-owned devices to similar restric-

tions through the provision of an arbitrary and redundant

Telephone Company device that duplicates the customer’s

equipment.” Litton highlights the fact that the internal

AT&T Task Force characterized the PCA requirement as

“a redundant, artificial and economic barrier to those

wishing to purchase their own equipment.” Thus, accord-

ing to Litton, AT&T’s own documents reveal its aware-

ness as stated in a presentation by an AT&T executive at a

Traffic Service Advisors’ meeting in 1972 that “[o]nly the

1s The task force report said, inier alia:

An attempt to design an interface, or a family of interfaces,

sufficient to minimize all adverse effects of customer-provided

equipment poses an economic and administrative problem. . . .

Such an interface device would be priced at a level of at least what

our existing equipment offering is now. This would, of course,

result in what effectively might be considered to be an unjustified

economic restriction in allowing a customer to provide his own

device. And the provision of an interface does noi, in itself,

necessarily provide the full protection we desire... .

The report also stated: “In general, the arguments against the provi-

sion of an interface remain the same, /.e., redundancy, artificial

economic barrier to the customer, impracticalities of administration,

doubtful acceptance of customers, etc.” The task force, in making its

report to the Tariff Review Group explicitly rejected the interface

device requirement and specifically endorsed technical standards:

The entire concept of customer-owned equipment must be based

on tariff type-approval of all terminal equipment, wiring, and

apparatus, rather than on interfaces that would attempt to provide

the degree of safety, quality of service, and flexibility for future

services that we may wish to provide. The provision, by the Bell

System, of families of interfaces for specific devices or of one

interface, sophisticated enough to work with all services, would

erect a redundant, artificial and economic barrier to those wishing

to purchase their own equipment.

5732

28a

‘black box’ .. . stands as the last hardware barrier

between us and the final challenge of unbridled, unlim-

ited, no-holds-barred competition.”

In Litton’s account, AT&T’s support for the PCA

requirement was based more on a concern for its share of

the terminal equipment market than it was on concern for

the safety of the telephone network. Thus, AT&T kept the

interface device not only to exclude competition but also

to palliate its own competitive inadequacies because,

despite the vaunted reputation of Bell Laboratories,

AT&T had done little in the years prior to Carterfone to

update its terminal equipment. Accordingly, notwith-

standing the opinion expressed by several members of the

AT&T Tariff Review Group that the PCA requirement

was not responsive to Carterfone,'° AT&T imposed the

requirement in order to give it time to develop competi-

tive terminal equipment. At trial, Litton put in evidence

another AT&T document, the McKinsey Report, indicat-

ing that AT&T had product development and marketing

problems that prevented it from meeting competition in

the post-Carterfone era. Litton also claims that when

AT&T finally did update its terminal equipment line, it

did so with “Chinese copies” of successful Japanese

products.

Finally, Litton maintains that AT&T could have

adopted certification standards no more than a year after

Carterfone. \n support of this claim Litton again points

to internal AT&T documents and memoranda suggesting

that AT&T management believed the development of

certification standards was inevitable by 1972, or 1973 at

16 See the minutes of Tariff Review Group meeting of July 11, 1968

noting that members Cohen, North, and Miller “feel and expressed

themselves that current tariff efforts, particularly with respect to

interconnection, is [sic] not at all responsive to FCC Carterfone

decision.”

5733

29a

the latest. Litton Brief at 31-32. Litton suggests that

AT&T’s participation in the PBX Advisory Committee

was a ruse or delaying tactic, and that the decision to

oppose certification was concealed from the FCC while

AT&T appeared to cooperate with the Advisory Commit-

tee so as to avoid the appearance of bad faith.

If there is an individual villain in Litton’s piece it is Mr.

John deButts. DeButts took over as Chairman and CEO

of AT&T about four years after Carterfone and stressed

the fact to his management that AT&T would have only

one policy with respect to ce tification standards: opposi-

tion. In the face of recommendations from subordinates

that a certification standards approach was preferable to

the PCA requirement, deButts nevertheless opposed the

standards. Moreover, Litton argues that the AT&T posi-

tion on certification, as dictated by deButts, was taken

with full knowledge that the FCC would ultimately reject

this position. Litton claims that AT&T understood that its

opposition to certification exposed it to antitrust liability,

citing an AT&T film simulating an antitrust trial of a suit

similar to the one eventually filed by Litton and urging

employees to destroy incriminating company documents.

DeButts apparently remarked to AT&T lawyers shortly

after his speech that he had created more opportunities

for lawyers than anything “since Sherman wrote his

famous law.”

We thus arrive again at what both parties agree was a

pivotal point for Litton in the interface tariff chronology:

the deButts speech of 1973. In contrast to AT&T’s claim

that the PCA requirement amounted to only a little

protection for the system that also served to avoid the

antitrust difficulties that might flow from an AT&T

enforced certification program, Litton argues that

5734

30a

AT&T’s opposition to certification—its insistence upon

the PCA requirement—posed psychological and

economic market barriers that drove Litton from the

terminal equipment market. On the psychological side,

Litton claims that the very imposition of the PCA re-

quirement, without regard to its cost or inconvenience,

caused customers to doubt the quality of Litton’s prod-

uct. Litton analogizes its burden under the interface

tariffs to that which would face a foreign car manufac-

turer if its ability to sell in the American market were

conditioned upon including a giant fire extinguisher in the

car’s trunk. Litton also presented evidence tending to

show that AT&T engaged in slash and burn tactics calcu-

lated to make cutover from AT&T to Litton equipment as

bothersome as possible for Litton and its customers alike.

AT&T installers from time to time would chop off exist-

ing AT&T wiring flush with office walls in preparation for

the installation of Litton equipment. AT&T made the

PCA requirement onerous for customers in other ways as

well: refusing to acknowledge receipt of letters arranging

cutover dates, changing cutover dates, or failing to pro-

vide the necessary PCA equipment. Finally, Litton argues

that AT&T’s PCA devices themselves occasionally

malfunctioned, thus adding actual injury to technological

insult.

The PCA requirement also effected a direct economic

barrier to Litton’s market entry insofar as it increased the

cost of installing and using Litton equipment. Although

this case did not involve single line telephone sets, i.e.,

residential telephones, Litton is quick to point out that

the PCA requirement precluded all of AT&T’s competi-

tors from entering this market because the PCA cost

alone exceeded the cost of renting a telephone from

5735

3la

AT&T." Litton argues that these costs also effectively

foreclosed sales of Key Systems involving five lines or

less, estimated to be over 90% of the Key System market.

In the market for larger Key Systems and PBX Systems,

the PCA requirement was, in effect, a surcharge imposed

by AT&T on customers using non-AT&T equipment sold

by Litton and other competitors. When it became clear in

late 1973 that AT&T would fight for the PCA require-

ment, Litton believed its only recourse was to cut its

losses and leave the terminal equipment market because

by that time AT&T had copied the successful products

Litton was offering, narrowing whatever competitive ad-

vantage Litton would have had even in the absence of the

PCA surcharge.

Thus, in Litton’s scenario, AT&T , support for the

PCA requirement—its opposition to certification stan-

dards—was no more than a rear guard effort to delay the

effect of Carterfone, undertaken in bad faith in order to

handicap competitors. The deButts speech slammed shut

what was, from Litton’s perspective, the “window of

opportunity” created by Carterfone. Litton had intended

to take advantage of this opportuniiy by following the

same three-step market development program it had used

successfully in other product markets.'* First it engaged in

17 The monthly charge for the AT&T interface device was about $6.00,

as compared to a residential phone rental rate of about $1.25 a month,

Litton claims that the PCA requirement increased its Key Systems

customers’ costs by some 18 to 35 percent, depending on the size and

type of installation, over what they would have been in the absence of

the requirement. In the PBX Systems market, Litton claims the PCA

requirement increased its customers’ costs by 8 to 20 percent. Litton

Brief at 48-49.

18 Litton’s market strategy as outlined in its 1971 Business Telephone

Systems Interconnect Opportunity Plan comprised three essential

steps. The first step involved the creation of an extensive distribution

and service network covering major metropolitan areas. In this first

stage Litton planned to sell reliable terminal equipment manufactured

5736

i re,

32a

the sale of reliable products manufactured by other con-

cerns—this to allow Litton the opportunity to establish an

immediate market presence while it readied its own prod-

ucts. Litton compares its 1980 gross sales of close to five

billion dollars with its start in 1953 as a small electronics

company and emphasizes its highly successful progress

and depth of skill in the telecommunications industry. In

fact, Litton had extensive engineering and installation

expertise in terminal equipment—highly sophisticated ter-

minal equipment for special customers like airports and

the Department of Defense. Litton’s statistics indicate

that, if anything, its performance exceeded its own expec-

tations. Within a year and a half of its decision to enter

the terminal equipment market, it was making close to

one quarter of all interconnect sales. To counter AT&T’s

claim that Litton had no marketable products of its own

in the early 1970’s, Litton argues that AT&T itself was

responsible for this: it refused to interconnect the innova-

tive Litton “plexcom” switch, which was “years ahead”

of anything AT&T had to offer. By this time, according to

Litton, AT&T’s anticompetitive efforts had taken their

toll in increased prices and decreased sales. When the

deButts speech made it clear that AT&T would continue

to resist the implementation of Carterfone, Litton claims

that, like many other manufacturers during that period, it

simply could not remain in the market.

Ultimately, the jury agreed in the main with Litton,

finding that AT&T opposed certification standards in bad

faith and that other AT&T conduct involving the supply

by established firms while it continued its own research and develop-

ment efforts. In the second stage, Litton planned to introduce its own

equipment to customers. In the third and final stage, the sales and

distribution network would be expanded to cover the entire country, at

which time Litton would sell and distribute its own products na-

tionwide.

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of PCAs and the sale of inside wiring was unreasonable

and injurious to Litton as a competitor. The jury also,

after rendering the main verdict with respect to liability

and damages, found that AT&T /iled the interface tariffs

in the first instance in bad faith. Despite arguments made

here that the damage award was based on a study relying

on unsupported assumptions that made it impossible for

the jury to estimate the damages attributable only to

conduct found illegal, liability was found in a specific

amount, namely, in the case of Litton gua competitor,

$91,990,000, and in the case of Litton qua customer,

$268,243. The sum of these figures, $92,258,243, was

trebled as provided by 15 U.S.C. § 15.

Il. DISCUSSION

A. Introduction

As the factual summary above suggests, there is little in

this case that the parties agree upon. AT&T contends that

a portion of the jury’s verdict and two of its factual

findings must be set aside because they were made “belat-

edly” and as a result of coercion. Second, AT&T argues

that under the Noerr-Pennington doctrine the jury was

precluded from finding that certain practices relied on to

support both the initial and the “belated” verdict were

anticompetitive or predatory. Third, AT&T maintains that

there was insufficient evidence to support any of the

jury’s factual findings and the entire verdict must there-

fore be set aside. Fourth, again in an evidentiary vein,

AT&T claims that various rulings by the trial court judge

on the admissibility of evidence so prejudiced its defense

that it is entitled to a new trial. AT&T's fifth argument

flanks the merits, so to speak, and attacks the jury’s

damage awards. Finally, AT&T argues that the entire case

5738

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should have been dismissed as a sanction for Litton’s

discovery misconduct. Litton argues inat this misconduct

was an excusable oversight and that the district court’s

sanction—denial of any attorneys’ fees—was impermis-

sibly severe.

B. The “Belated” Jury Findings

After eight days of deliberation, the jury found AT&T

guilty of monopolization and an attempt to monopolize

the relevant product market. In response to special inter-

rogatories the jury specifically found three AT&T prac-

tices—opposition to certification, delay in providing

interface devices, and conduct in connection with the sale

of inside wiring—anticompetitive and predatory. Because

the jury found that AT&T’s monopolization was the

proximate cause of Litton’s injury, it entered an award

for Litton as both a competitor and customer of AT&T.

The jury initially failed, however, to reach unanimity on

three matters: (1) whether the attempted monopolization

proximately caused Litton’s injury, and whether either (2)

the original filing of the interface tariff or (3) delay in

effecting cutover from AT&T to Litton equipment was

anticompetitive or predatory. The trial judge asked the

jury to attempt to reach a unanimous result one way or

the other on the remaining issues and the jury indicated

its willingness to do so. After deliberating a short while,

the jury returned with affirmative answers favorable to

Litton on all three questions. AT&T makes an extensive

argument that these “belated” findings were coerced and

therefore should be set aside. Although the verdict on the

monopoly charge can be sustained, and the damage

award affirmed, if there is support for each of the initial

three findings made pursuant to Federal Rule of Civil

Procedure 49, see Northeastern Telephone Co. v. AT&T,

5739

35a

651 F.2d 76, 94-95 (2d Cir. 1981), cert. denied, 102 S. Ct.

1438 (1982), disposition of the threshold claim that these

later findings must be set aside will enable us to consoli-

date our discussion of the more difficult Noerr-Penn-

ington issues AT&T raises.

It was, of course, completely appropriate to submit

special interrogatories to the jury, particularly in a case as

complex and protracted as this one.'’ In asking the jury to

specify whether it found each of the alleged predatory

practices to have been proved, the trial court was merely

following Berkey Photo, Inc. v. Eastman Kodak Co., 603

F.2d 263, 299 (2d Cir. 1979), cert. denied, 444 U.S. 1093

(1980). For whatever reason, the jury did not agree

unanimously on two interrogatories and the proximate

cause component of the attempted monopolization

charge. There was nothing unusual, much less erroneous,

in the trial court’s resubmission of these questions. See,

e.g., Turchio v. D/S A/S DEN NORSKE AFRICA, 509

F.2d 101, 105 (2d Cir. 1974) (if the jury fails to answer

interrogatory it is appropriate to resubmit the interrog-

atory “a second and third time to obtain answers to the

unanswered questions”).””

19 The practice has been described as “usually preferable to the opaque

general verdict.” Skidmore v. Baltimore & Ohio RR. Co., 167 F.2d 54,

67 (2d Cir.), cert. denied, 335 U.S. 816 (1948). See also Wright, The

Use of Special Verdicts in Federal Court, 38 F.R.D. 199, 206 (1966)

(submission of special verdicts can serve to clarify confusing or

complicated litigation).

20 Indeed, if the jury had found against Litton on the proximate cause

question relating to the attempted monopolization charge, the trial

court judge might reasonably have inferred that this was inconsistent

with the jury’s general verdict and damage award. The record indicates

that this possibility was of some concern to both the trial court judge

and the attorneys for both parties. In light of the express provision in

Fed. R. Civ. P. 49(b) that a trial court may “return the jury for further

consideration of its answers and verdict” in order to eliminate any

inconsistencies between a general verdict and special findings, we do

5740

36a

AT&T's contention that the jury was somehow

“coerced” into rendering answers favorable to Litton

upon resubmission cannot be squared with the facts. The

jury did not indicate that it was deadlocked on these

questions; it indicated that it was divided. That the jury

took its task seriously and deliberated conscientiously is

manifest; before rendering its initial verdict the jury

requested guidance from the court as to whether it could

continue if it was divided on a question. AT&T can hardly

argue that the jury was predisposed to find in Litton’s

favor given the fact that it found against Litton on two

out of four theories of liability and divided on a third.”'

AT&T’s argument that the jury had no incentive to find

against Litton on the unresolved proximate cause ques-

tion because the initial verdict would stand in any event is

pure speculation. Even if we were to concede AT&T’s

premise that the jury was likely to shirk its duty conscien-

tiously to reconsider these questions—a premise we find

highly questionable given that the jury served over five

months without a single absence and deliberated for eight

days*—the conclusion that it was likely to resolve these

questions in Litton’s favor simply does not follow.”

not see how it can be error to “return the jury for further considera-

tion” of an interrogatory it did not answer.

2! Specifically, the jury found against Litton on its claim that AT&T

engaged in a conspiracy to monopolize (claim three) and in a con-

spiracy to restrain trade (claim four).

22 The trial court judge praised the jury at the close of the trial as

follows:

Not a single juror has missed a single day because of illness or any

other personal matter. . . . That is absolutely amazing. . . . You

have also been the most punctual jury I have ever had. . . . You

have been a vindication of the jury system and all that it means.

23 AT&T's argument that the jury had no incentive to find against

Litton on one claim because it had found for Litton on another is a

$741

37a

Nor do we find anything coercive in the trial judge’s

instructions. The jurors were informed that their answers

to the questions were “important” and that they should

listen to the views of their fellow jurors without abandon-

ing their own conscientiously held views. Far from being

coercive, this instruction was completely in keeping with

the recognition that:

A system which requires the unanimous verdict of a

jury. . . can function satisfactorily in most cases

only because most jurors are reasonable . . . and

after a certain amount of discussion has produced a

large majority in favor of one view, those in the

minority may be willing to join the majority in the

belief that if so many other reasonable people have a

contrary view, the views of the minority may well be

mistaken. Instructions . . . in both state and federal

courts stress the importance of jurors listening to the

views of one another and making allowance for the

fact that there can be a reasonable difference of

Opinion.

Grace Lines, Inc. v. Motley, 439 F.2d 1028, 1033 (2d Cir.

1971) (Lumbard, C.J., concurring). The instructions here

fall far short of those sustained in e.g., United States v.

Corcione, 592 F.2d 111, 117 n.5 (2d Cir.), cert. denied,

440 U.S. 975 (1979) (after jury deadlocked on criminal

charge, trial judge instructed jury that it should “consult

with one another and . . . deliberate with a view to

reaching agreement if you can possibly do so”); United

States v. Robinson, 560 F.2d 507, 511 n.6 (2d Cir. 1977),

criticism that can be made whenever a plaintiff's case involves multiple

claims, any one of which would be sufficient to support a damage

award. Thus viewed, AT&T's position is more an indictment of the

jury system than an argument against resubmission.

$742

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cert. denied, 435 U.S. 905 (1978) (jury instructed that

“fijt is important that a decision . . . be reached here,

and I really see no good reasons why a decision cannot be

reached”).* Litton was entitled to a jury determination

on all of its claims and we do not believe the trial court

judge erred eith~* in resubmitting the claims or in in-

structing the ju. s he did. There is no factual or logical

basis for AT&T’s arguments that resubmission of these

questions tipped the balance in Litton’s favor.”

C. AT&T’s Noerr-Pennington Claims

According to AT&T, the “fundamental error that per-

vaded the trial of this case was the failure of the trial

court to recognize that the principal . . . conduct upon

which the judgment is based . . . was protected” under

24 AT&T’s contention that the trial court judge “pressured” the jury

into resolving the undecided questions in Litton’s favor is based on the

following instruction:

{A]ny question that is left unanswered creates a possible problem

for the parties and the Court. I don’t need to give you specific

examples of that. It is a fact that we would like positive answers of

either ‘yes’ or ‘no’ to the questions, if you can possibly agree after

discussing the matter again. . . to see whether or not you can’t in

good conscience adopt [the views of other jurors} as your own. It

will clear up a lot of problems for us if you can.

(Emphasis added.)

This instruction correctly emphasized both the importance of reach-

ing a verdict and the necessity of doing so only in accordance with the

conscientiously held views of each juror. If the trial court judge had

elaborated upon the “possible problem” —i.e., inconsistency between a

general verdict in Litton’s favor and negative finding on the attempted

monopolization proximate cause question—we might be inclined to

agree with AT&T that the effect could be to bias the jury. But this is

precisely the effect that the trial court judge avoided by phrasing the

instruction as he did.

2s We note that under the trial court judge's instructions the jury could

have, but did not, increase the damages it previously awarded Litton.

Empirically, this undercuts AT&T's contention that the jury was

predisposed to find against it.

5743

39a

the doctrine developed in Eastern Railroad Presidents

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

(1961) and United Mine Workers v. Pennington, 381 U.S.

657 (1965). AT&T Brief at 43. AT&T argues that both its

opposition to certification standards and its original filing

of the interface tariffs should not have been submitted to

the jury because this conduct did not, as a matter of law

under the evidence adduced by Litton, fall within the only

exception—the so-called “sham” exception—to Noerr-

Pennington.

Noerr, it will be recalled, involved a deceptive political

campaign waged as part of the bitter economic feud

between the railroad and trucking industries for control

of the interstate, heavy freight hauling market. Trucking

industry representatives sued a railroad’trade association,

alleging that a publicity campaign advocating legislation

favorable to the railroads violated the Sherman Act

because the campaign’s sole purpose was to hamper the

trucking industry’s ability to compete with the railroads.

The Court held that “the Sherman Act . . . does not

apply to . . . activities compris[ing] mere solicitation of

governmental action with respect to the passage and

enforcement of laws,” 365 U.S. at 138, irrespective of

whether the activities might be considered fraudulent or

deceptive. The Noerr holding was, strictly speaking, a

matter of statutory construction,” but First Amendment

concerns clearly informed the decision. The Court feared

that an expansive construction of the Sherman Act would

impinge upon the right to petition and impair the govern-

ment’s ability “to take actions through its legislature and

executive that operate to restrain trade.” 365 U.S. at

% = See 965 U.S. at 132 0.6. See generally, Fischel, Antitrust Liability for

Attempts to Influence Governmental Action: The Basis and Limits of

the Noerr-Pennington Doctrine, 45 U. Chi. L. Rev. 80, 82-84 (1977).

5744

40a

137.*’ These factors, as well as the “essential dissimilar-

ity” between joint efforts to seek legislation and “agree-

ments traditionally condemned” under the Act, id. at

136, led the Court to conclude that Congress could not

have intended the Act to reach such behavior. In reaching

this result, the Court found the question of intent irrele-

vant, stating that “insofar as the railroads’ campaign was

directed toward obtaining governmental action, its legal-

ity was not at all affected by any anticompetitive purpose

it may have had.” 365 U.S. at 139-40. In dictum, how-

ever, the Court indicated that “[t]here may be situations

in which a publicity campaign, ostensibly directed toward

influencing governmental action, is a mere sham to‘cover

what is actually nothing more than an attempt to interfere

directly with the business relationships of a competitor

and the application of the Sherman Act would be justi-

fied.” Id. at 144.

The Pennington decision restated, and to some extent

arguably amplified, Noerr. In Pennington an industry

union and large firms urged the Secretary of Labor to

establish minimum wage levels that would have the effect

of squeezing out smaller firms.” The Court held that

27 The Court was concerned that construing the Sherman Act to reach

essentially political activity would hamper the “ability of the people to

make their wishes known to their representatives,” 365 U.S. at 137,

thus invoking a traditional First Amendment theme. See also id. at

138; A. Meiklejohn, Political Freedom 26-28 (1948); Bork, Neutra/

Principles and Some First Amendment Problems, 47 Ind. L.J. 1

(1971).

28 The conduct challenged in Pennington included efforts to induce the

TVA, a government corporation, to curtail its purchases of coal at

reduced prices on the spot market. The Supreme Court did not address

the issue, but some lower courts have concluded Noerr Pennington

does not immunize anticompetitive efforts directed at government

agencies acting in a proprietary capacity—i.e., as buyers or sellers. See,

e.g., Sacramento Coca-Cola Bottling Co. v. Chauffeurs Teamsters &

Helpers Local No. 150, 440 F.2d 1096, 1099 (9th Cir.), cert. denied, 404

5745

4la

“Noerr shields from the Sherman Act a concerted effort

to influence public officials regardless of intent or pur-

pose. . . . Joint efforts to influence public officials do

not violate the antitrust laws even though intended to

eliminate competition.” 381 U.S. at 670. Pennington

made it clear that efforts directed at executive officials or

agencies—as distinguished from the legislative and public-

ity efforts involved in Noerr—were protected. Pennington

also emphatically reaffirmed Noerr’s holding that anti-

competitive intent did not make an otherwise legitimate

attempt to secure governmental action or express a politi-

cal position illegal; the Court stated that “[s]uch conduct

is not illegal, either standing alone or as part of a broader

scheme itself violative of the Sherman Act.” /d.

The last case generally cited in any exegesis of the

Noerr-Pennington doctrine is California Motor Transport

Co. v. Trucking Unlimited, 404 U.S. 508 (1972). This case

involved a group of trucking companies that opposed

“ ‘with or without probable cause, and regardless of the

merits of the cases,’” each and every license application

made by the group’s competitors to a state regulatory

agency. /d. at 512. California Motor Transport both

expanded and limited the Noerr-Pennington doctrine.

Although the Court ultimately held against the defen-

dants, it broadened and strengthened the base of the

doctrine by holding, first, that it applied to administrative

and adjudicative proceedings and, second, that it was

constitutionally based.” At the same time, the Court

U.S. 826 (1971); George R. Whitten Jr, Inc. v. Paddock Pool

Builders, Inc., 424 F.2d 25, 33 (ist Cir.), cert. denied, 400 U.S. 850

(1970). A Fifth Circuit case, and a district court decision in the Third

Circuit, are contra. See Household Goods Carriers’ Bureau v. Terrell,

452 F.2d 152 (Sth Cir. 1971) (reh. en banc); United States v. Johns-

Manville Corp., 259 F. Supp. 440 (B.D. Pa. 1966).

2 = 404: U.S. at 510-11. The California Motor Transport Court squarely

held that First Amendment rights of petition and association underlay

5746

42a

imposed limits upon the doctrine by holding that the

plaintiff's allegations triggered the application of the

Noerr sham dictum.

AT&T points primarily to the Noerr and Pennington

decisions and argues that even if its conduct was under-

taken for anticompetitive reasons, it was nevertheless

protected. To this Litton replies that Noerr-Pennington is

inapplicable because AT&T injured Litton not by request-

ing or as a result of governmental action, but by virtue of

what AT&T itself did in filing and maintaining the inter-

face tariffs while opposing the only feasible alternative—

certification standards—in bad faith. In the alternative,

Litton maintains that this case presents a “paradigm of

the ‘sham’ exception to the Noerr doctrine.” Thus, there

are two strings to the Litton bow: inapplicability of the

Noerr-Pennington doctrine because the injury flowed

from actions not within the scope of the doctrine, and

applicability of the “sham” exception. Judge Meskill and

I agree with Litton on both counts for reasons we set

forth below; Judge Kearse concurs only on the second

ground and does not join in the immediately following

portion of the opinion.

1. Applicability of the Noerr-Pennington Doctrine

AT&T characterizes its filing of the interface tariffs

after Carterfone as an “application” to the FCC, and

contends that “Noerr-Pennington . . . does not permit

antitrust liability to be based on such applications to a

regulatory agency.” AT&T Brief at 82. In essence, AT&T’s

argument is that its conduct in devising and filing the

the Noerr- Pennington doctrine. The Noerr Court only went so far as to

Suggest that an interpretation of the Sherman Act contrary to the one it

adopted “would raise important constitutional questions.” 365 U.S. at

138.

$747

> ayy!

43a

tariffs is immunized because the tariffs were contested

and AT&T defended them before the FCC. If this argu-

ment were accepted, a common regulatory practice” de-

signed to protect consumers would instead shield from

antitrust liability the very entities the practice seeks to

restrain and regulate. In an earlier case involving this

same defendant we concluded that pervasive regulation of

the telecommunications industry does not, without more,

confer antitrust immunity. See, Northeastern Telephone

Co., 651 F.2d at 83; see also International Telephone &

Telegraph Corp. v. General Telephone & Electronics

Corp., 518 F.2d 913, 935-36 (9th Cir. 1975); ¢f., United

States v. American Telephone & Telegraph Co., 524

F.Supp. 1336, 1357-60 (D.D.C. 1981) (declining to decide

whether compliance with regulatory mandates insulates a

defendant from antitrust liability.) If extensive substantive

regulation does not warrant an antitrust exemption, then

surely an essentially procedural aspect of regulation—

tariff filing—cannot.

Apart from the obvious difficulty of reconciling the

effect of AT&T’s Noerr-Pennington argument with the

Supreme Court’s repeated admonition that antitrust ex-

3” See, e.g., 14 C.F.R. § 221.3 (1982) (Civil Aeronautics Board) (re-

quiring all domestic and foreign air carriers to file “tariffs showing all

rates, fares, and charges” for air transportation); 18 C.F.R. § 35.1(a)

(1982) (Federal Energy Regulatory Commission) (requiring “{ejvery °

public utility [to] file. . . full and complete rate schedules . . . setting

forth all rates and charges for any transmission or sale of electric

energy”); 46 C.F.R. § 531.3 (1981) (Federal Maritime Commission)

(requiring “le]very domestic offshore carrier [to] file . . . tariffs

showing its actual rates, fares and charges”). Filing requirements like

those cited above and those imposed by the FCC under § 47 C.F.R.

§ 61 ef seq. (1981) hearken back to the original justification for

administrative regulation of industries affected with a public interest:

preventing discrimination on the basis of price or terms of service. See

generally Jaffe, The Effective Limits of the Administrative Process: A

Reevaluation, 67 Harv. L. Rev. 1105, 1106-07 (1954).

5748

44a

emptions are to be countenanced only where “there is a

‘plain repugnancy between the antitrust and regulatory

provisions,’ " Gordon v. New York Stock Exchange, Inc.,

422 U.S. 659, 682 (1975), quoting United States v. Phila-

delphia National Bank, 374 U.S. 321, 350 (1963); see also

Silver v. New York Stock Exchange, 373 U.S. 341, 357

(1963), we believe that AT&T’s position must be rejected

for a more fundamental reason. AT&T erroneously as-

sumes that a mere incident of regulation—the tariff filing

requirement—is tantamount to a request for governmen-

tal action akin to the conduct held protected in Noerr and

Pennington. But in this case, as in Continental Ore Co. v.

Union Carbide & Carbon Corp., 370 U.S. 690, 707

(1962), the Noerr-Pennington doctrine is “plainly inappo-

site” because AT&T was “engaged in private commercial

activity, no element of which involved seeking to procure

the passage or enforcement of laws.” The decision to

impose and maintain the interface tariff was made in the

AT&T boardroom, not at the FCC; AT&T’s power to

exclude Litton and other competitors from the telephone

terminal equipment market resulted not from the FCC’s

regulatory authority but from AT&T’s exclusive control

of the telephone network.’' AT&T cannot cloak its ac-

tions in Noerr-Pennington immunity simply because it is

required, as a regulated monopoly, to disclose publicly its

rates and operating procedures. The fact that the FCC

might ultimately set aside a tariff filing does not trans-

form AT&T’s independent decisions as to how it will

conduct its business into a “request” for governmental

a See also United States v. American Telephone & Telegraph Co., 524

F. Supp. 1336, 1352-53 (D.D.C. 1981) (analyzing AT&T's monopoly

over local telephone service in terms of the “essential facility” or

“strategic bottleneck” doctrine).

5749

fp 45a

action or an “expression” of political opinion.” Similarly,

the FCC’s failure to strike down a tariff at the time of its

filing does not make the conduct lawful, particularly

where, as in this case, the agency specifically declines to

rule on a tariff’s legality.

We therefore follow the plurality in Cantor v. Detroit

Edison Co., 428 U.S. 579, 601-02 (1976), where four

Justices rejected AT&T’s amicus curiae argument that a

tariff filing was protected as a request for governmental

-action under Noerr-Pennington. In Cantor, the plurality

held that a tariff filed by an electric utility could not

32 Under applicable federal regulations, AT&T could have at any time

revoked the interface tariff on its own initiative by filing another

tariff. 47 C.F.R. § 61.57(a) (1981). We concluded almost ten years ago

in American Telephone & Telegraph Co. v. FCC, 487 F.2d 865, 871-76

(2d Cir. 1973) that sections 203 and 205 of the Communications Act of

1934 contemplated “carrier initiated rate changes” that the FCC could

set aside only in the manner prescribed by the statute itself. The

obverse of this, of course, is that a tariff is an independent exercise of

the carrier’s business judgment that receives no government imprima-

tur until and unless the FCC reviews the tariff in response to a

complaint or upon its own initiative. A number of other courts have

reached the same conclusion. See Phonetele, Inc. v. American Tele-

phone & Telegraph Co., 664 F.2d 716, 7° . 735 (9th Cir. 1981) (FCC

does not adopt or approve tariff filings it permits to become effective;

tariff filings are “the product of the regulated entity’s independent

initiative and judgment”); Sound, Inc. v. American Telephone &

Telegraph Co., 631 F.2d 1324, 1330 (8th Cir. 1980) (“Bell, not the

FCC, proposes its rates, regulations and restrictions . . . . In filing

each tariff, Bell implements its own business judgment. . . .”); MCI

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

cert. denied, 434 U.S. 1040 (1978) (“[T]he tariff provisions of the

Communications Act . . . embody a considered legislative judgment

that carriers should in general be free to initiate . . . new rates or

services . . . unless and until the Commission, after hearing, deter-

mines that such rates or practices are unlawful. . . .”).

We note that AT&T's argument does not rely on the “filed tariff”

doctrine of Keogh v. Chicago & Northwestern Ry., 260 U.S. 156, 162

(1922). See City of Groton v. Connecticut Light & Power Co., 662

F.2d 921, 929 (2d Cir. 1981) (“filed tariff” doctrine inapplicable where

regulatory agency expressly refuses to commit itself and tariff is

ultimately disapproved).

5750

46a

evade scrutiny under the antitrust laws simply because it

was filed in accordance with state law and approved by a

state agency. The Cantor plurality stated that

nothing in the Noerr opinion implies that the mere

fact that a state regulatory agency may approve a

proposal included in a tariff, and thereby require

that the proposal be implemented until a revised

tariff is filed and approved, is a sufficient reason for

conferring antitrust immunity on the proposed con-

duct.

Id. Chief Justice Burger did not concur in that portion of

the plurality’s opinion discussing Noerr-Pennington, but

his objection went to the plurality’s construction of the

“state action” exemption doctrine under Parker v.

Brown, 317 U.S. 341 (1943), and he said nothing in

disagreement with the plurality’s interpretation of Noerr.

Justice Blackmun’s concurrence also did not address

Noerr, but rather would rely on “a rule of reason, taking

it as a general proposition that state-sanctioned anticom-

petitive activity must fall like any other if its potential

harms outweigh its benefits.” 428 U.S. at 610. Although

we are aware that plurality opinions can provide only

limited guidance on an issue a majority of the Court did

ot address,” we believe that to the extent that both

33 The Court has indicated that in interpreting plurality holdings lower

courts should look to the “narrowest ground” relied upon in a

concurring Justice's opinion. See Marks v. United States, 430 U.S.

188, 193 (1977); Gregg v. Georgia, 428 U.S. 153, 169 n.15 (1976)

(plurality opinion). Although this rule seems of limited utility where,

as here, the concurring Justices do not address the issue in question, it

seems plausible to assume that if either Chief Justice Burger or Justice

Blackmun felt there was merit to the Noerr-Pennington argument made

by the defendant or AT&T as amicus, they would not have concurred

pred a ave set -vabedinr yore Kay bers Foy Ew

written by Justice Stewart and joined by Justices Powell and

5751

47a

Justice Blackmun and Chief Justice Burger were unwill-

ing to equate “state action” with a utility’s adherence to a

tariff filing required by state law, they would reject a

fortiori the argument that the tariff filing amounted to a

request for governmental action.™

Much of our analysis relating to the filing of the

interface tariffs applies to AT&T’s opposition to certifica-

tion. Opposition to certification is simply the other side

of the interface tariff coin; AT&T’s filing and main-

tenance of the PCA requirement was the very embodi-

ment of opposition to the only feasible alter-

native—certification standards. To be sure, AT&T argues

that its “opposition” to the development of certification

standards was by definition protected under Noerr-Penn-

ington because it amounted to no more than espousing a

position before an administrative body. But our review of

would hold AT&T's conduct in this case protected under Noerr-Penn-

ington. Although the dissenting opinion stated that

Parker, Noerr, and Goldfarb point unerringly to the proper

disposition of this case. . . . The utility company. . . engages in

two distinct activities: It proposes a tariff and, if the tariff is

approved, it obeys its terms. The first action cannot give rise to

antitrust liability under Noerr and the second—compliance with the

terms of the tariff under the command of state law—is immune

from antitrust liability under Parker and Goldfarb.

428 U.S. at 624, the tariff in question in Cantor was apparently

specifically approved by the state regulatory agency. /d. at 583. In this

case, of course, the FCC took pains to state that permitting the tariff

to take effect was not to be construed as approval of the tariff.

34 We note that Chief Justice Burger stated in his concurring opinion

that the plurality “correctly concludes: ‘The Commission's approval of

respondent's decision to maintain such a program does not .. .

implement any statewide policy.’ ” 428 U.S. at 604. The Eighth Circuit

has recently read Cantor as not providing Noerr-Pennington protection

for tariff filings. See City of Kirkwood v. Union Electric Co., 671 F.2d

1173, 1181 (8th Cir.), petition for cert. filed, $1 U.S.L.W. 3026 (U.S.

June 11, 1982) (No. 81-2278). See also United States v. Title Insurance

Rating Bureau of Arizona, Inc., 517 F. Supp. 1053, 1059-60 (D. Ariz.

1981).

5752

48a

the evidence presented by Litton suggests that AT&T’s

post hoc characterization of the opposition-to-certifi-

cation issue is distorted. Litton’s evidence indicated that

AT&T made unsupportable claims to the FCC regarding

network harm, feigned cooperation with the PBX Advi-

sory Committee’s efforts to develop certification stan-

dards, and generally attempted to buy as much time as

possible to improve its Own competitive position at the

expense of Litton and other competitors.** The effect of

this was to maintain the interface tariffs and whatever

anticompetitive or exclusionary effect that flowed there-

from. AT&T’s opposition to certification accordingly

embraced much more than merely advocating a position

before the FCC.

2. The “Sham Exception”

Even if our conclusions regarding the applicability of

Noerr-Pennington are incorrect, the doctrine is subject to

the sham exception suggested by way of dictum in Noerr

and relied on in California Motor Transport. In Califor-

nia Motor Transport the defendant instituted proceedings

challenging the regulatory approval sought by the plain-

tiff not with the expectation of prevailing but for pur-

poses of harassment and delay. The Court held that where

“the administrative and judicial processes [are] abused,”

404 U.S at 513, in an attempt to stifle competition,

33 We review this evidence in greater depth in our discussion of the

sham exception, infra, but we believe that this evidence tends to show

that the conduct fairly considered under the rubric of “opposition to

certification” amounted to more than simply an expression of AT&T's

opinion. Cf. City of Kirkwood v. Union Electric Co., 671 F.2d at 1181

(“The Noerr-Pennington doctrine will not protect a utility which

plaintiff} seeks to compel [the defendant] to respond in damages, but

rather for |the defendant's} conduct in the market place.”).

5753

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Noerr-Pennington is inapplicable. The focus of the

Court’s concern in California Motor Transport was the

“illegal result” of the abuse, specifically, “effectively

barring respondents from access to the agencies and the

courts.” Jd. Although the Court conceded that an

“abuse” standard involved “a difficult line to discern and

draw,” a leading antitrust commentator has suggested

that this line is crossed when

the defendant’s activity was intended to injure the

plaintiff directly rather than through a governmental

decision. When the antitrust defendant had not truly

sought to influence the governmental decision, his

invocation of governmental machinery is a

sham. . . . [W]here he had no reasonable expecta-

tion of obtaining the favorable ruling, his effort to

do so was a sham.

P. Areeda, Antitrust Law ¢ 203.la (Supp. 1982).

Professor Areeda’s view of the heart of the sham

exception—invoking the process of administrative or ad-

judicatory decisionmaking for the injury that the process

alone will work upon competitors—possesses the virtue of

accommodating the Supreme Court’s concern in Califor-

36 We reject the suggestion made in AT&T’s brief that the applicability

of the sham exception turns on whether a competitor is barred from

access to administrative agencies or the courts. The Supreme Court's

opinion in California Motor Transport cited access barring as one

example of the illegal results that might flow from abuse of the

administrative process. One of the allegations in California Motor

Transport that the Court found sufficient to trigger the sham exception

is similar to the one Litton made in this case, namely that the

defendants “became ‘the regulators of the grants of rights, transfers

and registrations.’ ” 404 U.S. at S11. ne See ee

opinions have referred to the sham exception’s availability without

regard to the necessity of “access barring,” see, e.g., City of Lafayette

v. Louisiana Power & Light Co., 435 U.S. 389, 405 (1978); Vendo Co.

v. Lektro-Vend Corp., 433 U.S. 623, 635 n.6 (1977) (Rehnquist, J.,

concurring).

5754

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nia Motor Transport that these processes not be abused

with impunity behind claims of Noerr-Pennington immu-

nity. To be sure, there are difficulties involved in deter-

mining whether a defendant “truly sought to influence

the governmental decision” and whether there was a

“reasonable expectation” of doing so. One indicium of

whether a defendant could have reasonably expected its

position to prevail, and therefore whether the invocation

of process was actually an attempt to influence a decision

rather than an attempt to interpose delay, is a “pattern of

baseless, repetitive claims.” 404 U.S. at 513. Thus, we

held in Landmarks Holding Corp. v. Bermani, 664 F.2d

891, 896 (2d Cir. 1981) that an attempt by a defendant to

delay the construction of a competitor’s shopping mall by

carefully orchestrating a series of court and administra-

tive actions designed to defeat a zoning variance was not

protected under Noerr-Pennington.

But repetition is but one indicium of a sham claim;

under California Motor Transport’s abuse standard

“many other forms of illegal and reprehensible practice

. . May corrupt the administrative or judicial processes

and. . . result in antitrust violations.” 404 U.S. at 513.

In Landmarks Holding, for example, our conclusion that

the judicial and administrative processes had been abused

was based in part upon “unethical lawyer conduct” which

included, inter alia, requests for delays that the defen-

dant’s own documents proved were “purely bull.” 664

F.2d at 894.”

In deciding whether Litton adduced sufficient evidence

to demonstrate that AT&T’s conduct in connection with

the interface tariff and opposition to certification was a

37 Cf. Note, Limiting the Antitrust Immunity for Concerted Attempts

to Influence Courts and Adjudicatory Agencies: Analogies to Mali-

cious Prosecution and Abuse of Process, 86 Harv. L. Rev. 718, 726-35

(1973).

5755

Sla

sham, we are of course required to view the evidence in

the light most favorable to Litton, giving it the benefit of

all inferences that the evidence fairly supports regardless

of whether contrary inferences might be drawn. Con-

tinental Ore Co., 370 U.S. at 696; Taxi Weekly, Inc. v.

Metropolitan Taxicab Board of Trade, Inc. , 539 F.2d 907,

911 (2d Cir. 1976). With this in mind, and with reference

to the Litton case set out above in I(B)(2) which we think

is fairly supported by the evidence, we believe that the

sham exception is applicable to AT&T’s conduct. As early

as the ultimate decision in Hush-A-Phone, AT&T knew

that the FCC’s basic position was that AT&T could not

exclude “any device”—a category clearly including tele-

phone terminal equipment—absent a showing of actual

harm. The lengthy litigation in Carterfone was a matter

of industry-wide knowledge and interest; the decision was

viewed at the time as a smashing blow to AT&T and as a

“window of opportunity” for AT&T’s competitors. Any-

one reading the language of the Carterfone rehearing

decision and the Tariff Review Group Task Force Report

we have quoted above could conclude that neither filing

of the interface tariff nor opposition to certification

squared with the FCC’s mandate in Carterfone.

AT&T nevertheless consistently maintained that the

PCA requirement was necessary to protect the telephone

network. This was not so much a “pattern of ...

repetitive claims” as it was a unitary, ongoing claim.”

There was sufficient evidence to allow the jury to con-

clude that this claim was “baseless”; AT&T’s own reports

38 =6 The Circuits are spiit on whether a single claim is sufficient to

support application of the sham exception. See Clipper Exxpress v.

Rocky Mountain Motor Tariff Bureau, Inc., 674 F.2d 1252, 1266-67 &

n.24 (9h Cir. 1982) (concluding that a single claim can be a sham and

citing cases on both sides of the proposition).

5756

52a

pointed out that the interface device was redundant,

uneconomic, and unnecessary. Time and again AT&T

inveighed against the harm that would flow from certifi-

cation standards without once demonstrating a single

instance of harm from what its own reports indicated was

a trend in the direction of “illegal” or “unauthorized”

interconnection. AT&T asserts that evidence of harm was

difficult to produce because of its transitory nature and

because the PCA requirement was effective, but the jury

could have reasonably concluded—on the basis of evi-

dence indicating that governmental agencies and some

1600 non-AT&T telephone companies were intercon-

nected without a PCA—that AT&T’s ongoing claim of

harm to the system was baseless.

There was also evidence tending to indicate that AT&T

affirmatively misled the FCC with respect to the need for

the PCA requirement and the difficulty of developing

certification standards. For example, while it opposed

certification standards pursuant to the policy announced

before NARUC in the deButts speech, AT&T provided

the FCC with a study that its own author believed did not

prove anything. Similarly, AT&T’s own documents indi-

cate that many of its senior executives thought that

certification standards could be developed within a matter

of months. Indeed, some AT&T documents demonstrated

that many AT&T executives believed the standards were

inevitable regardless of the position AT&T adopted.

Not surprisingly, AT&T argues that intra-corporate

division of opinion on an issue of this nature is inevitable

and therefore not indicative of an attempt to subvert the

regulatory process. But again, a review of the evidence in

the light most favorable to Litton compels us to conclude

that the jury could reasonably have inferred that AT&T

opposed the development of certification standards in a

5757

53a

manner calculated to delay the day when Carterfone’s

pro-competitive mandate would become fully effective.

Litton introduced evidence, and AT&T concedes in its

brief, that AT&T “did not complete some of its ‘home-

work assignments’ on time” in connection with the PBX

Advisory Committee’s efforts to develop certification

standards. AT&T Brief at 20. And, although AT&T had

decided in March of 1973 that it would oppose certifica-

tion standards, it continued to work with the Advisory

Committee in accordance with an internal “Tactics Mem-

orandum” which concluded that withdrawiffg from the

committee would accelerate “decisions in favor of certifi-

cation.” This evidence is sufficient to support an in-

ference that AT&T did what it could to delay and

obfuscate the efforts undertaken by the FCC and other

interested parties to develop certification standards. As a

textbook example of a monopolist in control of an

essential facility, see United States v. Terminal Railroad

Association, 224 U.S. 383 (1912), it is difficult to con-

clude that these efforts could not have amounted to an

abuse of the administrative process. The result, to draw

an obvious analogy to California Motor Transport, was

that Litton and other terminal equipment competitors

were barred from access to the telephone network system.

AT&T had no realistic hope that the FCC would

approve the interface device; its own people thought that

the device was a redundant “artificial barrier” to com-

petition. It nevertheless consciously pursued a policy of

delaying the time when the FCC would strike down the

PCA requirement. It implemented this policy by making

baseless claims relative to potential harms to the network

while opposing certification standards in every way possi-

ble. AT&T argues that it actually wanted the FCC to

5758

54a

approve the interface device and reject certification stan-

dards, but as Professor Areeda points out

[t]o be sure, [a competitor] would always be pleased

to obtain a governmental decision against his rival.

But where he had no reasonable expectation of

obtaining the favorable ruling, his effort to do so [is]

a sham.

P. Areeda, supra, at 5. AT&T’s conduct was not under-

taken in the hope of influencing governmental action, but

in the hopepof delaying it.” See Landmarks Holding

Corp. v. Berman, supra. As such, it amounted to the sort

of abuse of the administrative process that falls within the

Noerr-Pennington sham exception. The jury’s determina-

tion to that effect is sustainable if the instructions were

correct.

3. The Trial Court’s Noerr-Pennington /nstructions

AT&T challenges the Noerr-Pennington instructions on

two grounds. First, AT&T claims that the instructions

entitled “Opposition to Registration” and “First Amend-

ment Protection and the Bad Faith Exception” had the

effect when taken together of denying it any Noerr-Penn-

ington defense because the jury could have premised its

39 Professor, now Circuit Judge, Bork has suggested that the antitrust

law must develop standards to address the anticompetitive effects of

litigation and administrative actions instituted solely to harass and

injure a competitor’s rivals. See R. Bork, The Antitrust Paradox 357

(1978). The need to ensure that the regulatory processes not be used to

thwart competition seems all the more pressing where, as here, there is

serious doubt regarding whether the process can function at all without

the regulated entity’s full cooperation. See United States v. American

Telephone & Telegraph Co., 524 F. Supp. at 1359 (former Chief of

FCC’s Common Carrier Bureau testified at trial that FCC may be

“incapable of effectively regulating a company of AT&T’s size, com-

plexity, and power”).

5759

55a

verdict merely on anticompetitive intent. Second, AT&T

argues that the First Amendment values that Noerr-Penn-

ington reflects require the use of a “clear and convincing”

rather than a “preponderance” evidentiary standard.

AT&T’s first point can be answered by reviewing the

jury instructions, as we must, in their totality. See, e.g.,

Norfleet v. Isthmian Lines, Inc., 355 F.2d 359, 362-63 (2d

Cir. 1966). AT&T maintains that the instructions were

flawed because they established a “good faith/bad faith”

dichotomy that conditioned the availability of the Noerr-

Pennington defense on good faith, and equated bad faith

with anticompetitive intent. The instructions that AT&T

objects to are set forth in the margin.“ Because we must

assume that the jury discharged its obligation to apply the

law in accordance with the trial judge’s instructions, our

40 The court’s charge on the issue of “Opposition to Registration” —

before the Noerr-Pennington defense was mentioned—was as follows:

You have also heard about Bell's opposition to proposals made

before the FCC that the PCA tariffs be replaced by various

programs of certifying or registering equipment with the FCC. The

question for your decision is whether Bell's opposition was inter-

posed in bad faith for the purpose of excluding competition or

whether Bell took this position because it believed that the registra-

tion proposals being made were not in the public interest and would

not provide sufficient protection to Bell System employees, cus-

tomers and the telephone network.

AT&T Brief at 63. AT&T correctly argues that a “purpose of excluding

competition” does not suffice to create antitrust liability. The charge

went on to say:

Many of these actions, if successful, might be haimful to a

competitor. Nevertheless, the First Amendment guarantees that

persons or corporations may participate in good faith efforts to

influence the passage or enforcement of laws or government regula-

tions or to influence public officials regardless of whether the

results of the government action they seek would be harmful to

competition.

Id. at 64. AT&T argues that the jury was not given a definition of

“good faith,” but “bad faith” had just been defined as meaning “for

the purpose of excluding competition.”

5760

56a

review is limited to whether the instructions misled the

jury as to the applicable law. AT&T’s brief fails to

consider, as we must on review, that portion of the charge

where the court explicated what it meant by good faith

and bad faith. That portion follows:

You are also instructed that petitioning an adminis-

trative agency such as the FCC or seeking review in

the courts may result in delays because administra-

tive or judicial procedures are often time consuming.

Creating such delays does not constitute willful exer-

cise of monopoly power as long as the petition or

application to the courts is based on a good faith

interest in influencing the agency or obtaining a

court ruling.

However, there is an exception to the general rule

that efforts to influence public officials do not vio-

late the antitrust laws, and that is the so-called sham

or bad faith exception. If a campaign, ostensibly

directed toward influencing government action, is a

mere sham or artifice to cover what is essentially

nothing more than an attempt to smother competi-

tion by a pattern of knowingly filing baseless claims

or making misrepresentations to administrative agen-

cies in a way designed to deprive competitors of

meaningful access to those agencies, the First

Amendment protections are lost and the Sherman

Act applies.

To be sure, the contours of the sham exception are far

from clear; the courts have themselves had difficulty

defining the doctrine. See Fischel, Antitrust Liability for

Attempts to Influence Government Action: The Basis and

Limits of the Noerr-Pennington Doctrine, 45 U. Chi. L.

Rev. 80, 104 (1977). The instruction here apprised the

5761

57a

jury that “creating . . . delays” did not constitute an

antitrust offense regardless of anticompetitive intent.

While the instruction might have been more explicit as to

the nature of bad faith, it accurately, if in general terms,

tracked the Supreme Court’s explication of the sham

exception in California Motor Transport, and comported

in its essentials with our discussion of the sham exception,

supra. We cannot agree that the instructions were erro-

neous when viewed as a whole.

The trial court judge did not charge the jury that the

sham exception had to be demonstrated by “clear and

convincing” evidence. While AT&T cites libel, patent,

and fraud cases in support of its argument, it points to no

authority holding that the sham exception should be

subject to the higher standard of clear and convincing

evidence.*! AT&T argues that the standard should be

required in cases such as this to avoid a chilling effect on

4) The libel cases include New York Times Co. v. Sullivan, 376 U.S.

254, 285-86 (1964) and Yiamouyiannis v. Consumers Union of United

States, Inc., 619 F.2d 932, 940 (2d Cir.), cert. denied, 449 U.S. 839

(1980).

The fraud and civil perjury cases include: Clark v. John Lamula

Investors, Inc., 583 F.2d 594, 597 ».2, 600 (2d Cir. 1978) (securities

fraud); Geller v. Commissioner of Internal Revenue, 556 F.2d 687, 690

(2d Cir. 1977) (income tax fraud); McDonnell v. American Leduc

Petroleums, Ltd., 456 F.2d 1170, 1176 (2d Cir. 1972) (fraud under New

York and California law); Barr Rubber Products Co. v. Sun Rubber

Co. , 425 F.2d 1114, 1120-21 (2d Cir.), cert. denied, 400 U.S. 878 (1970)

(civil perjury). See also 86 Harv. L. Rev., supra note 37, at 724-25

(recommending clear and convincing evidence standard for sham

exception claims).

The patent case is Cataphote Corp. v. DeSoto Chemical Coatings,

Inc., 450 F.2d 769, 772 (9th Cir. 1971), cert. denied, 408 U.S. 929

(1972); see also Handgards, Inc. v. Ethicon, Inc., 60' F.2d 986, 996

(9th Cir. 1979), cert. denied, 444 U.S. 1025 (1980) (allegation in

antitrust case that patentee’s infringement suit prosecuted with knowl-

edge of patent invalidity).

We take due note that the charge in MC/ Communications Corp. v.

American Tel. & Tel. Co., Nos. 80-2171, 80-2288 (7th Cir., Jan. 12,

1983), was put in terms of “clear and convincing” proof.

5762

58a

speech. We recognize that the standard of proof may well

be a substantive element of a claim or defense, see, e.g.,

Palmer v. Hoffman, 318 U.S. 109, 117 (1943), but by

requiring a plaintiff to prove that a defendant’s conduct

was a sham, the Supreme Court has already struck a

rough balance between the competing First Amendment

and antitrust interests. And as the Court pointed out in

United States v. Topco Associates, Inc., 405 U.S. 596,

610 (1972), the antitrust laws are as important to the

preservation of economic freedom and the free enterprise

system as the Bill of Rights is to the protection of our

fundamental personal freedoms. We see no reason to

impose any higher burden of proof on the antitrust

plaintiff asserting sham than would ordinarily be applica-

ble in any civil issue. See Herman & MacLean v. Huddle-

ston, 51 U.S.L.W. 4099, 4103 (U.S. Jan. 24, 1983)

(preponderance of the evidence standard applicable in

securities fraud action under Section 10(b), noting that

the interests of defendants in such cases do not differ

from the interests of defendants “sued for violations of

. antitrust . . . laws, for which proof by a prepon-

derance of the evidence suffices”).

D. Sufficiency of Proof

Our discussion above indicates that we believe there

was ample evidence to justify the jury’s findings regard-

ing the filing of the interface tariff and opposition to

certification. We also conclude, after reviewing the evi-

dence in the light most favorable to Litton, that the jury

could reasonably have found that AT&T’s conduct in

connection with the supply and installation of PCAs, the

sale of inside wiring, and “cut-over” from AT&T to

Litton equipment was predatory.

5763

59a

AT&T argues that Litton’s evidence as to delays in the

supply and installation of PCAs consisted of no more

than “some vendor and customer complaints.” But Lit-

ton’s evidence, some of which we summarize here, tended

to show that PCA shortages were chronic, that they were

intentionally maintained or “contrived,” and that AT&T

misled the FCC with respect to the magnitude of this

problem. For example, Litton introduced a 1970 memo-

randum written by an AT&T vice president stating that

AT&T had

repeatedly been contacted by the FCC staff and

Outside attorneys with respect to connecting arrange-

ments not being available. So far we have been able

to placate the situations with explanations of “a

possible misunderstanding or only a temporary de-

lay” and assurances that no serious supply problems

exist—followed of course by a four alarm fire ap-

proach to meet the particular demand. It is doubtful

that this approach will continue to avoid formal

action of some sort by the FCC.

The shortages nevertheless continued, as evidenced by

complaints received by AT&T from its own local affili-

ates.

In June of 1972, for example, Illinois Bell, in a telex to

AT&T headquarters in New York, explained that because

“so many defective units [KS 20721 couplers] have been

received we have difficulty in providing this interface unit

and meeting customer due dates.” And, in October of

1972, an Ohio Bell executive stated in a letter to Ohio

Bell’s Assistant Vice President that “[A]n increasing num-

ber of vendors have complained bitterly because of our

failure to supply this equipment. In many recent cases we

have been unable to even quote any kind of a realistic

5764

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delivery date.” This same letter posed a question that no

doubt puzzled the jury:

How can we continue to insist on the use of an

interconnect device when we are unable to provide

such a device? It seems to me that these problems

must be given the highest level of attention at Ohio

Bell, Western Electric and A. T. & T. before we end

up with a large-scale customer revolt and potential

legal action for restraint of trade.

AT&T’s response to this letter confirmed the existence of

a “critical supply situation . . . throughout the system,”

which resulted in 76% of customers’ PCA requests in

New England being “missed” by an average of 10 days,

although AT&T had an average lead-time of 24 days to

fill the requests. The shortages were discussed at a June

14, 1973 meeting of the Bell Interconnecting Equipment

Coordinating Committee and the minutes of the meeting

disclose recognition of “some very serious service com-

plaints” and “extreme service problems” with certain

PCA hardware.

We believe that the evidence thus revealed more than

isolated “customer and vendor” complaints; Litton’s evi-

dence tended to show that AT&T was aware of PCA

supply problems and failed to take the steps necessary to

correct them. In view of AT&T’s own policy of requiring

interconnection only through a PCA, we do not think it

was unreasonable for the jury to conclude that these

shortages were orchestrated to frustrate Litton and other

terminal equipment competitors.

The jury could also reasonably have inferred from the

evidence introduced by Litton that some of AT&T’s

practices in connection with “inside wiring”—i.e., wiring

owned by AT&T but located on or in a customer’s

$765

6la

premises—were anticompetitive. AT&T professed its will-

ingness to sell the wiring if a customer wanted to “cut

over” from AT&T to a competitor’s equipment, but

Litton’s evidence tended to show, first, that AT&T would

often negotiate in bad faith by quoting unreasonably high

prices for the wiring and, second, that in “many, many

instances” AT&T chopped this wiring off flush with a

customer’s walls. Indeed, a South Central Bell general

manager noted at one point that the practice of destroy-

ing inside wiring was “unreasonable and could very well

be interpreted as. . . vindictive.” That is the conclusion

the jury reached and we see no reason to overturn it.”

42 AT&T argues that the only evidence was that on three isolated

Occasions one operating company, Southwestern Bell, chose not to sell

its cable to Litton but that even as to these instances there was no

showing of bad faith on Southwestern Bell’s part; again the evidence is

argued to be insufficient under Berkey. But the former Litton BTS Vice

President of Operations said:

In installations, we would find that when a customer was having the

Bell system removed, the Bell folks would just come in like with an

axe and just chop up the multipin connector wiring at walls. Gosh,

darndest thing I ever saw. Just couldn’t believe people would do

that. That particular thing we tended to get over over a period of

time and we ended up up [sic] some coordination meetings to try get

the Bell folks to leave the premises on a reasonable basis as opposed

to one of appearing to be mad.

He added that:

A. It wasn’t one customer. It was many many installations where

that would occur and | just do not reniember.

Q. Did you ever observe that situation?

A. Yes. Because | couldn’t believe it, so | went and looked

myself.

Q. How often did you do that?

A. Twice.

Q. When you referred to damage, is it the same damage at each

customer’s premises?

A. The two that I observed was the same damage and that was

just going along and cutting the wires at the walls.

Q. When you say cutting the wires at the walls, can you be a bit

more specific about the nature of the damage?

5766

62a

Finally, AT&T argues that Litton failed to introduce

sufficient evidence to justify the jury’s conclusion that

AT&T’s delay in making “cutovers”—the final step in-

volved in switching from AT&T to non-AT&T equip-

ment—was anticompetitive. The record indicates,

however, that Litton introduced, inter alia, testimony

from representatives of various terminal equipment com-

petitors to the effect that cutover delays frustrated their

attempts to install equipment on schedule. The jury could

have concluded from this and other evidence of intransi-

gent cutover practices that AT&T’s conduct injured Lit-

ton and other terminal equipment competitors.”

AT&T takes the position that these practices amounted

to no more than de minimis injury under Berkey Photo

Inc., 603 F.2d at 288-89; see also Federal Prescription

Service Inc. v. American Pharmaceutical Ass’n, 663 F.2d

253, 268-71 (D.C. Cir. 1981), cert. denied, 50 U.S.L.W.

3587 (U. S. Jan. 25, 1982). We disagree. AT&T’s seriatim

attacks upon the jury’s findings invite us to approach

Litton’s proof as if this case involved “completely sepa-

A. Yes. There are pairs of wires that are grouped together in

cables and are wrapped in some plastic covering that come to a key

phone or single phone or whatever, different size connectors. They

would be chopped right off at the wall so you had no capability of

coming to those wires with your connectors and so forth, even

though you might be purchasing a cable from them.

43 AT&T points to Northeastern Telephone Co. v. American Telephone

& Telegraph Co., 651 F.2d 76, 94 (2d Cir. 1981), cert. denied, 102 S.

Ct. 1438 (1982), where we set aside a jury verdict because the plaintiff

“introduce[d] [no] evidence whatsoever” that an AT&T affiliate pro-

vided poor service to the plaintiff's customers after the purchase and

installation of the plaintiff's terminal equipment. But Litton’s claim is

that shortages, missed cutover dates, etc., prevented it both from

satisfying existing customers and luring prospective customers because

it could not “cutover” on schedule. Unlike Northeastern, there is

evidence in this case to support Litton'’s claim that the problems

associated with delay were real.

$767

63a

rate and unrelated lawsuits . . . tightly compartmentaliz-

ing the various factual components and wiping the slate

clean after scrutiny of each.” Continental Ore Co., 370

U.S. at 698-99. But on the basis of any one of these

practices—all of which were supported by sufficient evi-

dence—the jury could have reasonably concluded that

Litton suffered competitive injury.“ The jury’s finding

that this conduct was predatory, i.e., undertaken with an

anticompetitive intent in an attempt to injure Litton, is all

the more reasonable given the synergistic nature of these

practices in relation to Litton’s primary claim that it was

excluded from the terminal equipment market. AT&T

argues at length that Litton failed to prove that the

shortages, delays, and inside wiring episodes were deliber-

ate, but this ignores the fact that “[c]ircumstances in

which intent can be inferred other than from conduct

which is itself exclusionary will no doubt be rare. . .

[T]he relationship between intent and conduct is intimate:

thought enlivens the deed; it can also be inferred from the

deed.” L. Sullivan, Antitrust § 39, at 105 (1977).

E. Evidentiary Rulings

AT&T challenges several of the trial court’s rulings on

the admissibility of evidence, arguing that the exclusion

or limited admission of some evidence prevented it from

proving that Litton chose to leave or was driven from the

terminal equipment market because of adverse publicity

resulting from a bribery scandal and other corrupt prac-

tices. AT&T also maintains that the trial court judge erred

“4 See Northeastern Telephone Co., 651 F.2d at 95 n.28, citing Califor.

nia Computer Products, Inc. v. International Business Machines

Corp., 613 F.2d 727 (9th Cir. 1979) (holding that no synergistic effect

arises from individual allegedly anticompetitive practices where proof

in numerous critical aspects is utterly lacking).

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in admitting some evidence that was unduly prejudicial to

AT&T while excluding similar evidence favorable to

AT&T on the issue of the reasonableness of the PCA

requirement. The cumulative effect of these errors, AT&T

argues, requires reversal. We deal with these arguments in

the order advanced by AT&T.

1. Exclusion of the Roberts Notes

In 1973 Litton conducted an internal investigation of

possible employee misconduct related to the sale of Litton

terminal equipment. A Litton attorney, Norman Roberts,

made notes of his interviews with various Litton employ-

ees during the course of this investigation. AT&T argues

that these notes constitute a “devastating admissio[n]”

against Litton insofar as they reveal that Litton employ-

ees gave potential customers “calculators, girls and any-

thing else” to make a sale, that “sales morale and

performance [were] . . . way down,” and that “skim-

ming” and “funny deals” were commonplace. AT&T

claims that the notes were admissible under Federal Rule

of Evidence 801(d)(2)(D), which excludes from hearsay

“admission[s] by [a] party-opponent” in the form of

statements made by a party’s “agent or servant concern-

ing a matter within the scope of his agency or employ-

ment, made during the existence of the relationship.”

AT&T’s claim that Roberts’ notes—which summarized

what various Litton employees recounted to him about

wrongdoing on the part of other Litton employees—were

admissible because the multiple levels of hearsay were all

made in the course and scope of employment, is not

persuasive. See Northern Oil Co. v. Socony Mobil Oil

Co., 347 F.2d 81, 85 (2d Cir. 1965). The fact that Roberts

summarized what some Litton employees said aout

other employees in the course of his investigation Goes

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not bring the events he summarized within the “scope of

his agency or employment” under 801(d)(2)(D). See J.

Weinstein, 4 Evidence 801-164 (1981) (“Gossip does not

become reliable merely because it is heard in an office

rather than a home.”) The hearsay which he summarized

may weil have been inadmissible even if testified to by the

employees interviewed. See Oreck Corp. v. Whirlpool

Corp., 639 F.2d 75, 80 n.3 (2d Cir. 1980), cert. denied,

454 U.S. 1083 (1981). In any event, AT&T made no

attempt at trial to lay the necessary foundation for the

admission of the notes under 801(d)(2)(D) or any other

rule, and simply argues here that the terms of

801(d)(2)(D) were satisfied. We decline to hold that the

trial court committed reversible error by failing to admit

the notes, either for their truth or otherwise, particularly

in view of the fact that AT&T could have overcome the

trial court’s objections by examining Roberts himself or

those Litton employees he interviewed. See Litton Sys-

tems, Inc. v. . T&T Co., 91 F.R.D. 574, 578 (S.D.N-Y.

1981). We note that while Judge Kearse disagrees with our

hearsay analysis, she agrees that there was no reversible

error.

2. The San Mateo Bribery Incident

In November of 1973 four of Litton’s executives in its

terminal equipment division were indicted for paying

bribes to an employee of the state college system in San

Mateo, California. The trial court permitted AT&T to

prove that the officials were indicted and subsequently

discharged, but excluded evidence of the bribery under

Federal Rule of Evidence 403 because of its emotional

and prejudicial content. We note that the trial court at

one point indicated that it would consider admitting the

bribery evidence if AT&T would allow Litton to offer

5770

66a

proof that AT&T had bribed public officials; AT&T

declined the offer. Plainly the trial court did not abuse its

discretion in exciuding this evidence.

3. The Mellor Memorandum

AT&T argues that the trial court erred in not admitting

for its truth a memorandum taken by James Mellor, a

Litton senior vice-president, that summarized Mellor’s

conversation with Leonard Mende, one of the Litton BTS

(Business Telephone Systems) executives who had been

discharged as a result of the San Mateo incident. Mellor’s

notes of this conversation indicate that he told the dis-

charged executive that the San Mateo scandal had

“screwed up a very promising business activity.” The trial

court admitted the memorandum for the purpose of

showing what Mellor had said to Mende, but refused to

admit the memorandum for its truth—i.e., as proof that

the San Mateo scandal caused Litton to leave the terminal

equipment market. AT&T makes the same argument

under 801(d)(2)(D) with respect to this evidence that it

makes with respect to the Roberts notes, and the reserva-

tions we expressed earlier are applicable here. In any

event, Mellor himself testified that the contents of the

memorandum accurately summarized what he said, and

the memorandum was examined by the jury and quoted

in AT&T’s opening and closing arguments. We therefore

cannot see how AT&T was prejudiced by the trial court’s

decision not to admit the memorandum for its truth.

4. The Selph Deposition

The trial court granted AT&T special leave to take the

deposition of a Litton employee who had been discharged

in connection with the San Mateo incident. In granting

5771

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AT&T’s request to take this deposition, the trial court

limited discovery to those matters made relevant as a

result of Litton’s eleventh-hour disclosure of the Roberts

notes. AT&T argues that some of Selph’s deposition

testimony that the PCA device had no effect on Litton’s

sales should have been admitted, particularly in view of

the fact that the trial court allowed Litton to introduce

deposition testimony outside the scope of a similar special

leave. We attribute this difference in treatment to a

difference in the content of the testimony. In granting

special leave to take the Selph deposition the trial court

imposed certain limitations that AT&T ignored; the dis-

cretion involved in reopening discovery could be cast

aside if parties could ignore such limitations with impu-

nity. In any event, the cumulative nature of the evidence

excluded belies any claim that AT&T was prejudiced.

5. Admission of Hoxie’s Testimony

AT&T contrasts the trial court’s exclusion or limited

admission of all of the above evidence with the admission

of testimony by Lowell Hoxie, a former Litton vice

president in charge of the terminal equipment division’s

marketing and administration group. Hoxie testified that

problems associated with defective PCAs, short supply,

and missed delivery dates imposed “incredible cost[{s]” on

Litton, the effects of which were “devastating” to Lit-

ton’s efforts to establish itself in the terminal equipment

market. The trial court rejected the argument that this

testimony was inadmissible as hearsay because, although

Hoxie testified in part from recollection of oral reports

made by subordinates, much of his testimony was based

on first hand knowledge and observation or reports made

in the ordinary course of business. The testimony was

therefore admitted under Federal Rule of Evidence

$772

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803(24), which provides for the admission of hearsay

statements not specifically enumerated in Rule 803. The

trial court found that the testimony had sufficient “cir-

cumstantial guarantees of trustworthiness,” Fed. R. Evid.

803(24), to justify its admission because the reports, even

if oral, were made in the ordinary course of business. The

court also explained that it was doing so to avoid the

“expensive and very inefficient” alternative of “call[ing]

enough witnesses to furnish non-hearsay substantiation of

[the] summary” offered by Hoxie. Thus, although the

trustworthiness of recollections of the sort Hoxie’s testi-

mony contained is open to question, see Bowman vy.

Kaufman, 387 F.2d 582, 586-87 (2d Cir. 1967), the poten-

tial hearsay taint of Hoxie’s testimony is not sufficient to

justify reversal.

6. Evidence Relating to the Reasonableness

of the Interface Tariffs and AT&T’s

Opposition to Certification

AT&T objects to the trial court’s treatment of three

other items of evidence, all of which were offered by

either AT&T or Litton as bearing on the reasonableness of

the interface tariffs or AT&T’s opposition to certification

standards. The first ruling to which AT&T takes excep-

tion is the admission of various FCC decisions that

described AT&T’s tariffs as “unreasonable,” “illegal,”

“discriminatory,” or “unlawful.” Although the trial court

excised the words “unlawful” and “illegal” at AT&T’s

request, it refused to remove portions stating, for exam-

ple, that the interface tariff was “unnecessarily restric-

tive” and an “unjust and unreasonable discrimination.”

According to AT&T, the different meanings of “reason-

ableness” under the Sherman Act and the Communica-

tions Act justified its request to have these words

5773

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removed and the jury was unavoidably prejudiced by the

trial court’s failure to do so.

We agree with Litton that these decisions were central

both to Litton’s claim that the PCA device was unneces-

sary and Litton’s rebuttal of AT&T’s defense that the

interface tariff was an attempt to comply with previous

FCC rulings. The order excluding all portions of the FCC

rulings stating that the tariffs were “unlawful” or “ille-

gal” gave AT&T all to which it was entitled because the

FCC continually held after Hush-A-Phone that AT&T’s

practices were not necessary to protect the telephone

system. The findings thus directly undercut the predicate

of AT&T’s argument that the PCA requirement was

“reasonable” under the antitrust laws because it was an

attempt to follow regulatory policy. The findings were

properly admitted under Federal Rule of Evidence

803(8)(C) as factual findings resulting from an investiga-

tion made pursuant to authority granted by law.*° More-

over, the court’s charge made it clear to the jury that the

term “reasonable” as used in the rulings did not necessar-

ily signify the same thing as “reasonableness” under the

antitrust laws and were therefore not binding.

AT&T’s second objection contrasts the admission of

the above FCC decisions with the trial court’s exclusion

45 AT&T cites to our decision in City of New York v. Pullman Inc. , 662

F.2d 910 (2d Cir. 1981) as support for the proposition that a finding

made by a government agency for one purpose should be excluded

from other proceedings considering the same or similar facts because

of the undue weight a jury might accord such findings. In City of New

York, however, we affirmed the trial court’s exclusion of an interim

staff report of a government agency because the report was “(bly its

own terms, . . . not the final report or finding of a government agency

within the meaning of [Fed. R. Evid. 803(8)(C)].” /d. at 914. In the

alternative, we noted that the trial court judge had not abused his

discretion in deciding that admission of the report was inadvisable

under Fed. R. Evid. 403. /d. at 915. Here, of course, there is no

question that the FCC decisions are within the scope of 803(8)(C).

5774

70a

of a 1969 New York State Public Service Commission

decision upholding the interface as a reasonable means of

protecting the network against harm. The trial court

excluded the 1969 decision upon its own motion on the

grounds that the monthly charge for the interface consid-

ered there was fifty cents, as opposed to the average

monthly charge of over six dollars for the interface device

challenged in this case. AT&T argues that it was deprived

of an opportunity to prove to the jury that AT&T was not

alone in its belief that the interface device was absolutely

necessary to protect the telephone system from harm. Cf.

Mid-Texas Communications Systems, Inc. v. American

Telephone & Telegraph Co., 615 F.2d 1372, 1390 (Sth

Cir.), cert. denied, 449 U.S. 912 (1980).

We view this evidence as arguably probative of AT&T’s

position, and find it difficult to justify the exclusion of

this decision in light of the admission of the various FCC

rulings. Although there is a considerable difference in

cost between the two interface devices, this goes more to

the weight to be accorded the evidence than its admissibil-

ity; any confusion or prejudice probably could have been

avoided by appropriate instructions. But we are also

mindful of the fact that this was a complicated and

extensive trial, involving four and one-half years of pre-

trial proceedings, five months of trial, more than 18,000

pages of testimony and 945 exhibits. If a jury trial of this

size and complexity is to be had at all, the trial court must

have the discretion to limit the evidence at some point.

We cannot find that this exclusion amounted to prejudi-

cial error.

AT&T’s final objection to the trial court’s evidentiary

rulings involves a 1976 report prepared by a former

member of the PBX Advisory Committee. The report

indicated, inter alia, that AT&T’s competitors viewed

5775

Tla

some of its practices in connection with the PCA require-

ment and general pricing scheme as anticompetitive. The

trial court recognized that the report was hearsay, and

therefore refused to admit it for its truth, but admitted

the evidence for the limited purpose of showing what was

reported to AT&T. But by 1976 Litton had left the

terminal equipment market and the PBX Advisory Com-

mittee had completed its work. We therefore cannot see

how the report bears on the only issue for which it could

have been relevant, viz., whether AT&T knew that the

Committee felt that AT&T’s opposition to certification

was in bad faith. Thus the ruling was erroneous, and the

possible prejudicial effect—the report stated that AT&T’s

competitors felt that “Bell pricing has virtually killed the

Interconnect market”—is troubling. We view the trial

court’s ruling as unfortunate, but do not believe that this

ruling, or any of the other rulings, denied AT&T a fair

trial even when considered collectively. Fed. R. Evid.

103(a); Fed. R. Civ. P. 61. See, e.g., McKinnon v. Skil

Corp., 638 F.2d 270, 276 (Ist Cir. 1981) (ruling, if erro-

neous, harmless as not affecting “substantial rights”).

F. The Verdict for Litton as Customer

In addition to the injuries it sustained as AT&T’s

competitor, Litton alleged that it was entitled to recover

$491,778.57 spent for the installation and rental of AT&T

interfaces on its own, internal telephone equipment for

the eleven year period running from January 1, 1969 to

the end of 1979. The jury awarded Litton exactly six-

elevenths of this amount, $268,243, possibly reflected in

the jury’s initial determination that AT&T opposed certi-

fication in bad faith from and after 1973 until the end of

1978. We do not, for reasons stated in our discussion of

Litton’s claims as a competitor, believe that this verdict

5776

72a

should be overturned on Noerr-Pennington grounds. But

AT&T offers us three other reasons—one factual and two

legal—to overturn the verdict. We reject each of them in

turn.

AT&T’s first argument goes to the sufficiency of the

evidence supporting the jury’s verdict.* Specifically,

AT&T complains that the evidence was insufficient be-

cause Litton failed to itemize its expenses for the charges

on an annual basis. AT&T waived this objection by failing

to challenge the figures or request that the witness pre-

senting them break them down. Fed. R. Civ. P. 46.

Taking another tack, AT&T argues that Litton should

have mitigated its damages by removing the interface

devices as soon as the tariff requiring them was invali-

dated.*” Aside from being inconsistent with its earlier

argument that the jury apportioned the damages without

evidentiary support, this argument cannot succeed be-

cause Litton’s failure to remove the devices is readily

explicable on the grounds that the expense of removal—

46 AT&T argues that the jury had no rational basis for apportioning

damages as it did because “the vast majority” of PCA charges could

have occurred in years the jury thought it had excluded from consider-

ation. Brief at 125 & n.117. This could be correct but in the absence of

a breakdown we or the jury might just as easily have assumed that the

vast majority of charges could have occurred in the six years 1973-78

which AT&T says were the years utilized by the jury. In any event in

light of the jury’s later finding that the PCA tariffs were filed in bad

faith the ultimate award seems to err on the low side, if any. We

assume that AT&T does not want a retrial limited to this issue.

47 An antitrust plaintiff has a duty to mitigate damages. See Borger v.

Yamaha Int’l Corp., 625 F.2d 390, 398-99 (2d Cir. 1980); Triebwasser &

Katz v. American Telephone & Telegraph Co., 535 F.2d 1356, 1360 (2d

Cir. 1976). But if AT&T is correct that the jury’s award reflects a

six-year period running only from the beginning of 1973 until the end

of 1978, when the FCC order setting aside the last protective circuitry

requirement became final, the damage award was fair. Moreover,

failing to mitigate was an affirmative defense which AT&T omitted

either to plead or prove.

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some of the devices were permanently wired into the

equipment—might have exceeded the savings resulting

from removal.

AT&T’s second argument against the verdict for Litton

as customer relies on the “filed tariff” doctrine an-

nounced in Keogh v. Chicago & Northwestern Railway

Co., 260 U.S. 156 (1922). There the Supreme Court held

that a shipper could not recover under the antitrust laws

for injuries sustained as a result of allegedly unreasonable

rates that had been filed with and approved by the

Interstate Commerce Commission. We have recently held,

however, that the Keogh doctrine is inapplicable to ulti-

mately “disapproved tariffs... when. . . the regula.

tory agency expressly refuses to commit itself pending

investigation.” City of Groton v. Connecticut Light &

Power Co., 662 F.2d 921, 929 (2d Cir. 1981). In reaching

this conclusion we relied, in part, upon our decision in

Northeastern Telephone Co. v. American Telephone &

Telegraph Co., 651 F.2d at 83-84, which held that a tariff

filing does not immunize a regulated entity from antitrust

scrutiny, and in part on the lower court’s opinion in this

case, Litton Systems, Inc v. American Telephone & Tele-

graph Co., 487 F. Supp. 942, 951 (S.D.N.Y. 1980). See

City of Groton, supra, at 931. Unless otherwise advised

by higher authority, we do not intend to disavow City of

Groton or the import of our discussion on the interplay

between regulation and antitrust immunity in Northeast-

ern Telephone Co.

This case can be distinguished from Keogh and deci-

sions holding the filed rate doctrine applicable, see

McLeran v. El Paso Natural Gas Co., 357 F. Supp. 329,

331-32 (S.D. Tex. 1972), aff’d without opinion, 491 F.2d

1405 (Sth Cir. 1974); City of Newark v. Delmarva Power

& Light Co., 467 F. Supp. 763, 769-771 (D. Del. 1979),

$778

74a

because the issue here is not the reasonableness of the

interface tariff rate as compared to some other rate that

might have been charged, but instead whether the PCA

requirement itself was reasonable, i.e., whether there

should have been any charge at all. We thus believe that

the concerns expressed in Keogh involving the possible

inconsistency between the operation of the antitrust laws

and an independent regulatory scheme designed to fix

reasonable rates under a statute are not implicated here.

We therefore affirm the iower court’s holding with re-

spect to the inapplicability of the Keogh doctrine.

AT&T’s third and final argument goes to Litton’s

standing to seek damages as a customer. Essentially,

AT&T argues that when Litton donned a customer’s hat it

placed itself outside the “target area” that delineates one

plaintiff from another in terms of standing to sue. The

“target area” doctrine was first enunciated in Billy Baxter,

Inc. v. Coca Cola Co., 431 F.2d 183, 187 (2d Cir. 1970),

cert. denied, 401 U.S. 923 (1971), where we stated that

[A] plaintiff must allege a causative link to his

injury which is ‘direct’ rather than ‘incidental’ or

which indicates that his business or property was in

the ‘target area’ of the defendant’s illegal act... .

These terms do not provide talismanic guides to

decision but they do indicate the need to examine the

form of violation alleged and the nature of its effect

on a plaintiff’s own business activities.

Customers are not per se outside the target area. See,

e.g., Reiter v. Sonotone Corp., 442 U.S. 330, 341 (1979);

Pfizer, Inc. v. Government of India, 434 U.S. 308, 313-15

(1978); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,

429 U.S. 477, 486 n.10 (1977); Hanover Shoe, Inc. v.

United Shoe Machinery Corp., 392 U.S. 481, 494 (1968);

$779

15a

Mandeville Island Farms, Inc. v. American Crystal Sugar

Co., 334 U.S. 219, 236 (1948). The test is ultimately one

of directness. We have thus looked to whether the con-

spiracy was “aimed” at a particular entity in the area of

the economy threatened by anticompetitive conduct, see

Calderone Enterprises Corp. v. United Artists Theatre

Circuit, Inc., 454 F.2d 1292, 1295 (2d Cir. 1971), cert.

denied, 406 U.S. 930 (1972), and to whether the injury in

question was central to the attainment of the anticompeti-

tive objective rather than a mere incident thereto, see

Schwimmer v. Sony Corp., 637 F.2d 41, 48-49 (2d Cir.

1980).

The Supreme Court has recently rejected an argument

similar to the one AT&T makes here in connection with

Section 4 of the Clayton Act. In Blue Shield of Virginia v.

McCready, 50 U.S.L.W. 4723, 4726-27 (U.S. June 21,

1982) the Court recognized standing of a health insurance

subscriber who was denied reimbursement for psychologi-

cal therapy under a policy term providing reimbursement

for such services only if they were rendered by psy-

chotherapists. The petitioners in McCready adverted to

the “target area” doctrine, citing our decision in

Calderone Enterprises, supra. In holding that the peti-

tioner’s injury was not too remote the Court pointed out

that the “target area” test does not “imply that it must

have been the purpose of the [defendants] to injure the

particular individual claiming damages,” 50 U.S.L.W. at

4726 n.15 (citing Schwimmer, supra).

In this case, as in McCready, it avails AT&T little to

argue that customers are outside the target area because

the anticompetitive effect, if any, of the interface tariff

was aimed at terminal equipment manufacturers rather

than customers. While an intent to injure a specific entity

may well be sufficient to satisfy the target area test, our

5780

76a

emphasis in Schwimmer on whether the injury was central

to the attainment of the anticompetitive objective sug-

gests that this is not always necessary. In this case, the

jury found that AT&T imposed the interface tariff in

order to maintain its monopoly position in the terminal

equipment market. The tariff was “aimed” in the first

instance at AT&T’s customers in the sense that it applied

to every user that chose to interconnect non-AT&T equip-

ment. The tariff was perhaps the only way, and it was

certainly the most efficient way, that AT&T could burden

competitors seeking to establish themselves in the ter-

minal equipment market. Thus, the injury to Litton as a

customer was not remote even if injury to customers was

not AT&T’s first objective.

G. The Damage Study

AT&T argues that the damage award for Litton as a

competitor must be overturned because it was based on a

study that incorporated assumptions that were both un-

substantiated in the record and contrary to some of the

jury’s findings regarding the legality of certain AT&T

practices. Litton’s damage study, the so-called “Lost

Profits Study,” was prepared by Richard Hexter, whose

substantial qualifications we set forth in the margin.“ The

two year study used a variety of sources to generate sales,

48 Hexter received his MBA from Harvard University and has taught

graduate courses in finance and management at Columbia and Yale

Universities. Prior to forming his own firm in 1975, Hexter worked for

1S years with Donaldson, Lufkin & Jenrette, an investment banking

firm, where he served first as an industry analyst and later as the head

of that firm's corporate financing, investment banking and venture

capital division. Hexter was also familiar with the telecommunications

industry as a result of his service as a board member of Arcata

National Corporation and his study of Litton while he was with

Donaldson, Lufkin & Jenrette.

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77a

profit, and market share data for Litton’s position in the

interconnection market from 1972 until 1990.

We note at the outset that the study was conservative in

that it assumed that Litton would forego short term

profits to achieve larger market shares and profits from

1979 on. The jury awarded Litton estimated profits up to

and including 1978, in keeping with the trial court’s

instruction that Litton had an obligation to reenter the

market when the interface tariff was finally set aside in

1978. We also note preliminarily, in order to provide some

perspective on the magnitude of the telephone terminal

equipment market and the jury’s award, that Litton

sustained an out of pocket loss of some $53 million

before it left the market. Although we do not know

AT&T’s profits, its revenues from the sale of terminal

equipment during this period was at one point in excess of

$1.2 billion. By AT&T’s own admission, Litton was the

“number one formidable adversary” in this market and

Hexter testified that if Litton had obtained a market

share of even 6.9%, its 1982 profits alone would have

been $37 million. Hexter’s Lost Profits Study was typical

of its genre in that it was based on an estimate of what

Litton’s experience would have been in the absence of the

interface tariff (the “but for” world) as opposed to

Litton’s actual experience (the “real world”).

As the only evidence introduced in support of Litton’s

damage claim as a competitor, the Hexter study conven-

iently provides a single target for the two salvos AT&T

fires. The first is that the record fails to support certain

assumptions upon which the study is based. The second is

that the study incorporated assumptions regarding the

absence of pricing and other practices that the jury either

did not consider or determined not violative of the anti-

trust laws. We reject AT&T's argument that Litton’s

5782

“

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78a

damage study was based on unsupported assumptions or

practices held lawful by the jury and affirm the jury’s

award.

1. Support for the Hexter Study in the Record.

AT&T argues that Hexter’s projections—the heart of

the Lost Profits Study—were based on a host of mutually

independent assumptions which find no support in the

record. The argument is that the Lost Profits Study

should therefore not have been admitted and that the

verdict must be set aside. See Yentsch v. Texaco, Inc., 630

©.2d 46, 59 n.19 (2d Cir. 1980); Herman Schwabe, Inc. v.

United Shoe Machinery Corp., 297 F.2d 906, 912-13 (2d

Cir.), cert. denied, 369 U.S. 865 (1962). AT&T specifically

attacks six “assumptions” of the Hexter study.

The first of these relates to Hexter’s assumption tliat

certification standards would have been adopted by early

1973 “but for” AT&T’s opposition. AT&T argues that

because various other groups also were opposed to certifi-

cation, there is no evidence that AT&T’s conduct was

responsible for the FCC’s failure to implement a certifica-

tion program any earlier than it did. But Litton demon-

strated that various AT&T executives admitted that they

could have filed standards within a year of the Carterfone

decision. This supports the premise, as not unreasonable

or contrary to common sense, see Auto West, Inc. v.

Peugeot, Inc., 434 F.2d 556, 566-67 (2d Cir. 1970), that if

AT&T had behaved legally there would have been no

interface device after early 1973.” The validity of this

“ AT&T suggests that because other groups also opposed certification

standards, Litton must prove a negative—v.e., that this opposition had

nothing to do with Liton's injury—in order .o recover. Although

Litton was required to prove a “causal connection” between its injury

and AT&T's illegal conduct, it was sufficient to demonstrate that

AT&T's conduct was a substantia! or materially contributing factor.

5783

79a

premise is the very heart of the jury’s verdict that AT&T

filed the interface tariff and opposed certification in bad

faith.

The second assumption AT&T challenges concerns the

amount of money Litton would have invested in research

and development in Hexter’s “but for” world. As sup-

port, AT&T points to the Business Opportunity Plan

Litton prepared before it entered the market. The plan

called for an investment of $1,452,000 in research and

development from 1972 to 1976, but Hexter assumed that

Litton would have invested $14,828,000 in the same

period. But of course R & D does not immediately bear

fruit; by making a higher estimate of Litton’s investment

than was contemplated in the Business Opportunity Plan

the effect was to decrease profits for Litton’s early years

in the terminal equipment market.“’ Because the jury only

awarded damages for lost profits in the years from 1972

to 1978, to the extent that Hexter’s study might have

overestimated R & D investment, Litton rather than

AT&T was disadvantaged. In any event, AT&T’s refer-

ence to the Business Opportunity Plan only substitutes

one set of assumptions for another. In fact, there was

evidence in the record from the author of the Business

Opportunity Plan that Litton had intended from the

beginning to spend more on R & D than the plan

projected. There was also testimony to the effect that

Litton was ready to invest whatever was needed to make

See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S.

100, 114 n.9 (1969); Continental Ore Co. v. Union Carbide & Carbon

Corp., 370 U.S. 690, 702 (1962)

so Indeed, under the profit scheme in Hexter’s model, Litton sustained

lasses in 1972 and 1973. We also note that Litvom introduced evidence

showing that its early performance in the terminal equipment market

exceeded the projections contained in the Business Opportunity Plaa

and that R & D expenditures were increased accordingly.

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the business succeed. The AT&T argument is thus both

irrelevant and mistaken.

AT&T’s third argument is that Hexter’s assumptions

about the size of the total terminal equipment market and

Litton’s share of that market were not supported by the

record. But we note that damages in antitrust cases “are

rarely susceptible of the kind of concrete, detailed proof

of injury which is available in other contexts,” Zenith

Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100,

123 (1969), thus bringing the elasticity of Story Parch-

ment Co. v. Paterson Parchment Paper Co., 282 U.S.

555, 563 (1931), into play. See also Bigelow v. RKO Radio

Pictures, Inc., 327 U.S. 251, 264-65 (1946). Accordingly,

“where there is a basis on which a jury can reasonably

infer significant antitrust injury, [the court] should be

very hesitant before determining that damages cannot be

awarded.” Berkey Photo, Inc., 603 F.2d at 304. Hexter’s

estimates were based upon a two year analysis of industry

data available from Litton, AT&T, and public sources,

and a review of more than thirty terminal equipment

studies. His study projected that by 1978 AT&T would

still have 79 percent of the terminal equipment market

with the remaining 21 percent shared by all non-AT&T

competitors. This estimate was conservative as compared

to a study done by General Electric, which estimated that

by as early as 1975 competitors would divide 30 percent

of the market. Hexter’s estimate of Litton’s share of the

total non-AT&T terminal market was also con-ervative;

his estimates never exceeded 14.5 percent when in fact

Litton’s actual share before it left the terminal equipment

market was at one point between 23 and 25 percent.

AT&T also complains about Hexter’s treatment of

Litton’s bad debt costs. The argument is that Hexicr

ignored Litton’s actual experience and postulated these

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costs on the basis of a composite profile based on six

well-run, thriving companies in high technology indus-

tries. For the limited time Litton sold and leased equip-

ment, its bad debts amounted to almost 12 percent of its

sales, while Hexter’s model assumed that they would

amount to less than 2 percent. According to Hexter’s

testimony, however, these companies were the six most

comparable; three of them were actually in the terminal

equipment business. We believe that Hexter’s decision to

use these estimated bad debt figures was based on the

plausible assumption that Litton’s actual experience in

the start-up phase of its business was not representative of

what those costs would be in later years.*! We note in any

event that Hexter’s estimates of Litton’s profits for the

1972 to 1976 period averaged less than | percent of sales,

and the estimated profits of only 6.7 percent of sales for

1977 and 1978, was about half of AT&T’s profits on its

overall sales. We think that AT&T’s argument as to

Hexier’s treatment of this single cost factor goes only to

the weight of the evidence and does not compel rejection

of the damage study or overturning the verdict. Greene v.

General Foods Corp., 517 F.2d 635, 665 (Sth Cir. 1975),

cert. denied, 424 U.S. 942 (1976).

The fifth Hexter assumption that AT&T challenges is

that there would be “tough but equal” price competition

and that Litton and other terminal equipment companies

“would be able to compete profitably against whatever

Bell tariffs were filed.” AT&T argues that it had an

51 That AT&T’s objections go to the weight and not the validity of the

evidence used in the study seems plain. From the more than one

hundred cost, expense, and other factors Hexter used in his study,

AT&T attacks one figure—bad debts as a percentage of sales—to

challenge Hexter’s treatment of costs. AT&T’s argument that Hexter’s

model should have somehow reflected the fact that 80 per cent of all

new businesses are unsuccessful is frivolous.

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inherent pricing advantage and that therefore neither

Litton nor any other competitor could compete equally.

This court has, of course, emphasized that a monopolist

may lawfully take advantage of benefits deriving from its

size or integration, see Berkey Photo, Inc., 603 F.2d at

276, but AT&T has completely mischaracterized Hexter’s

assumption. Hexter’s assumption concerning “tough but

equal competition between the products and the people in

the field” related not only to pricing, but included “price

and features.” His assumption was that “the companies

would compete on their ability to sell, properly install and

service the equipment.”

The assumption that Litton would have been able to

compete successfully was borne out by Litton’s initial

success in the terminal equipment market and evidence

tending to indicate that AT&T itself thought that some of

Litton’s products possessed desirable f

This text is long and has been trimmed here. Open the source document for the complete record.