Petition — American Telephone & Telegraph Co. v. MCI Communications Corp.

a Say i : refy, U

: | FILED

AUG 10 1943

No. 83 - j

— teert> STEVAS,

In The Geers ~~ enaeeemcuc

Supreme Court of the United States

October Term, 1983

AMERICAN TELEPHONE AND TELEGRAPH

y

COwiPANY,

Cross-Petitioner,

MCI COMMUNICATIONS CORPORATION and

MCI TELECOMMUNICATIONS CORPORATION,

Cross-Respondents.

ON CROSS-PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS FOR THE SEVENTH CIRCUIT

CROSS-PETITION FOR A WRIT OF CERTIORARI

Of Counsel:

Jim G. KILPATRIC

RAYMOND BRENNER

SIDLEY & AUSTIN

Dated: August 10, 1983

*Counsel of Record

HOWARD J. TRIENENS*

GEORGE L. SAUNDERS, JR.

THEODORE N. MILLER

One First National Plaza

Chicago, Illinois 60603

(312) 853-7000

Counsel for Cross-Petitioner

Court, U.S.

QUESTIONS PRESENTED

This cross-petition for a writ of certiorari raises important

questions concerning the accommodation of the antitrust laws to

the detailed regulatory scheme of the Communications Act of

1934 (47 U.S.C. §§151 er seq.).

First, wliether a common carrier's refusal voluntarily to allow

another carrier to interconnect with its facilities is subject to anti-

trust challenge where Section 201(a) of the Communications Act

contemplates the denial of interconnections that are not in the

public interest and provides a self-contained regulatory mecha-

nism for the requesting currier to secure the interconnections if its

request is found to be in the public interest by the responsible

regulatory agency?

Second, in the event the antitrust laws are applicable to such

denials of voluntary interconnection, whether a common carrier

that has denied interconnections is entitled to jury instructions

which explain the structure and effect of Section 201(a) and

which require that the carrier’s decision not to interconnect be

evaluated in the context of that regulatory scheme and against a

standard of objective reasonableness, rather than against a gener-

alized standard of subjective intent?

il

STATEMENT REQUIRED BY RULE 28.1

In addition to wholly-owned subsidiaries, cross-petitioner

American Telephone and Telegraph Company (“AT&T”) has

ownership interests in The Southern New England Telephone

Company, Cincinnati Bell, Incorporated, and the Cuban Ameri-

can Telephone and Telegraph Company.

ill

TABLE OF CONTENTS

CIES TIRING PRESEIVE DE cess ccsvicvencens i

STATEMENT REQUIRED BY RULE 28.1..... ii

ys Fk ee | >. er ere iv

CP RESP RAE WY nck een ese ereserccedee's’s |

FURIE ATS ccctaresanscusvetscediusevans 2

STATUTORY PROVISIONS INVOLVED......

DEA TUMORS Che FON CADE oo ccs ccscicccs nee 2

to

A. Factual and Regulatory Background......

B. Proceedings in the District Court.........

C. The Court of Appeals’ Decision..........

REASONS FOR GRANTING THE WRIT .....

I. Proper Accommodation Of The Antitrust

Laws With Section 201(a) Of The Com-

munications Act Required Dismissal Of

MCI's Interconnection Charges ......... 10

ou OD WwW

II. The Instructions Sanctioned By The Court

Of Appeals Failed To Provide Adequate

Guidance To The Jury Regarding The Ac-

commodation Of The Sherman Act And

The Communications Act ..........0055 13

A. An Instruction Specifying The Sig-

nificance Of Section 201(a) Was Essen-

aE SR ND oa ciao pane ete 6 13

B. The Antitrust Liability Of A Regulated

Firm Should Be Determined By Refer-

ence To An Objective Standard ...... 16

COP LATION 5 bk a kxwreeeeas dhewedue vas teens 19

iV

TABLE OF AUTHORITIES

Cases

American Tel. & Tel. Co., 42 F.C.C. 1 (1949) ..

Bell System Tariff Offerings of Local Distribution

Facilities for Use by Other Common Carriers,

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

Co. of Pa. v. FCC, 503 F.2d 1250 (3d Cir. 1974),

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

FCC v. RCA Communications, Inc., 346 U.S. 86

8 | A PNR Ree ESE S, en LE oe

Gordon v. New York Stock Exchange, Inc., 422

SP LED ESD 5 kb ek back bu cuapese keke

Hospital Building Co. v. Trustees of Rex Hospital,

691 F.2d 678 (4th Cir. 1982), petition for cert.

filed, 51 U.S.L.W. 3738 (U.S. April 6, 1983)

(No. 82-1633), cross-petition for cert. filed, 5\

U.S.L.W. 3807 (U.S. April 28, 1983) (No. 82-

PEER E SETS 1A Cha DES ER MED ERNE HESS OP ens

Hughes Tool Co. v. Trans World Airlines, Inc.,

eR Re SOPRA aPi Neon ceunevavessbecias

Keogh v. Chicago & N.W.R. Co., 260 U.S. 156

1S SE rr a Ree eT ee

MCI Communications Corp. v. American Tel. &

Tel. Co., 496 F.2d 214 (3d Cir. 1974), vacating

369 F. Supp. 1004 (E.D. Pa. 1973)..........

MCI Telecommunications Corp. v. FCC, 561 F.2d

365 (D.C. Cir. 1977), cert. denied, 434 U.S.

PREC URE Canty csi chen careeeeeeeeNes

Mid-Texas Communications Systems, Inc. v.

American Tel. & Tel. Co., 615 F.2d 1372 (Sth

Cir.), cert. denied, 449 U.S. 912 (1980)......

Page(s)

12

17

10

passim

Vv

Cases

Northeastern Tel. Co. v. American Tel. & Tel. Co..,

651 F.2d 76 (2d Cir. 1981), cert. denied, 455

en ee ce etek nbeebeces

Pan American World Airways, Inc. v. United

PPE Sic BOR EPOR) cosccccvcasvses

Phonetele, Inc. v. American Tel. & Tel. Co., 664

F.2d 716 (9th Cir. 1982), cert. denied, 103 S. Ct.

I Ct oa ws awe wee deeccdaees

Silver vy. New York Stock Exchange, 373 U.S. 341

SG pea G ard ha Ginko ae WA eA p06 b'caes oe

Southern Pacific Communications Co. v. Ameri-

can Tel. & Tel. Co., 556 F. Supp. 825 (D.D.C.

1983), appeal pending, No. 83-1102(D.C. Cir.).

Specialized Common Carriers, 29 F.C.C.2d 870

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

Transportation Comm'n vy. FCC, 513 F.2d 1142

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

Terminal Warehouse Co. v. Pennsylvania R. Co.,

er ec caahecwaeedeees eects

United States v. American Tel. & Tel. Co., 524 F.

ee CUE Deo a6 sinc vicccceuces

United States v. American Tel. & Tel. Co., 461 F.

SOO OE,, BUTE ev ccndccctccsecves

United States v. Marine Bancorporation, Inc., 418

8 ee Tre

Page(s)

17

3,4

vi

Cases

Page(s)

United States vy. Radio Corporation of America,

og TE) ee 10

Statutes

Communications Act of 1934, 47 U.S.C. § 201(a) . passim

Pee EE, 85 CI. 62 oc ici clcneccaes 2

No. 83 -

In The

Supreme Court of the United States

October Term, 1983

AMERICAN TELEPHONE AND TELEGRAPH

COMPANY,

Cross-Petitioner,

v.

MCI COMMUNICATIONS CORPORATION and

MCI TELECOMMUNICATIONS CORPORATION,

Cross-Respondents.

ON CROSS-PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES

COURT OF APPEALS FOR THE SEVENTH CIRCUIT

OPINIONS BELOW

The opinion of the Court of Appeals (App. la),' as modified by

its order of April 11, 1983, denying rehearing, is reported at 708

F.2d 1081. The order of the Court of Appeals denying petitions

for rehearing (App. 24la) is not reported. The judgment of the

District Court is not reported; however, its instructions to the jury

and the jury's special verdict are appended to the Court of Ap-

peals’ opinion (App. 209a-237a). The order of the District Court

denying cross-petitioner AT & T’s motion to dismiss on the ground

that the challenged conduct is not subject to the antitrust laws is

reported at 462 F. Supp. 1072.

“App.” references are to the Appendix filed by cross-respondent MCI

as petitioner in No. 83-32. In addition, “Tr.” references are to the trial

transcript, “DX” references are to AT&T's trial exhibits, and “AT&T

Inst.” references are to AT & T’s proposed instructions in the trial court.

2

JURISDICTION

The judgment of the Court of Appeals was entered on January

12, 1983. Timely petitions for rehearing, with suggestions for

rehearing en banc, were denied on April 11, 1983. On July 8,

1983, AT&T filed a petition for a writ of certiorari limited to the

propriety of the Court of Appeals’ remand to the District Court

for a retrial on damages only ( No. 83-21). MCI Communications

Corporation and MCI Telecommunications Corporation

(““MCI"’) filed a petition for a writ of certiorari on July 11, 1983

(No. 83-32), and the petition was received by AT&T on that

same day. This cross-petition for a writ of certiorari is filed pur-

suant to Rule 19.5 of the Rules of this Court. The jurisdiction of

this Court is invoked pursuant to 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

Section 201(a) of the Communications Act of 1934, 47 U.S.C.

§ 201(a):

“It shall be the duty of every common carrier... in accor-

dance with the orders of the Commission, in cases where the

Commission, after opportunity for hearing, finds such action

necessary or desirable in the public interest, to establish phys-

ical connections with other carriers.”

Section 2 of the Sherman Act, 15 U.S.C. § 2:

“Every person who shall monopolize . . . any part of the

trade or commerce among the several States . . . shall be

deemed guilty of a felony... .”

STATEMENT OF THE CASE

Because no final judgment has yet been entered against it,

AT&T restricted its own petition to this Court (No. 83-21) to the

narrow but important issue of whether the Court of Appeals erred

in limiting the retrial of this case to damages only. In the

procedural posture of this case, review of this limited issue is ap-

propriate because it would not require a review of the record and

because that error is fundamental to the further conduct of the

case. Now that MCI has sought review of substantive issues in

this case relating to pricing and damages, AT&T in this cross-

petition seeks review of the Court of Appeals’ substantive rulings

with respect to the remaining interconnection charges. Those in-

terconnection charges are s interrelated with MCI’s pricing

charges and its damages theory that, in addition to the substan-

tive reasons discussed below, considerations of judicial economy

dictate that if the Court were to grant MCI’s petition, it should

also grant AT&T's cross-petition.

All these petitions arise from MCI’s allegations in its complaint

in this case that AT&T had unlawfully monopolized the intercity

business telecommunications market by engaging in 22 separate

actions, the bulk of which fell into one of the following categories:

(1) the imposition of unlawful restrictions upon MCI’s right to

obtain certain kinds of interconnections; (2) the imposition of

excessive prices for the interconnections that were provided; and

(3) a pattern of predatory pricing with respect to services that

were competitive with those offered by MCI. Of the 22 charges in

its complaint, MCI has been successful in sustaining six—all

limited to the controversy over the kinds of interconnections to

which MCI was entitled prior to the resolution of that issue in

April 1974 by the Federal Communications Commission

(“FCC”). At this stage of the case, therefore, antitrust liability

against AT&T rests essentially upon the charge that AT&T

violated Section 2 of the Sherman Act by refusing to give MCI

certain interconnections—a charge focused upon AT &T’s denial

of interconnections for FX and CCSA services.

A. Factual and Regulatory Background.

As AT&T pointed out in its petition in No. 83-21, the dispute

over the kinds of interconnections to which MCI was entitled

grew out of the ambiguities of the FCC's decision in Specialized

Common Carriers, 29 F.C.C.2d 870 (1971), aff'd sub nom.

4

Washington Utilities & Transportation Comm'n v, FCC, 513

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

Specifically, the dispute related to whether that decision autho-

rized new carriers such as MCI to provide switched communica-

tions services such as FX (Foreign Exchange) and CCSA (Com-

mon Control Switching Arrangements), and whether, therefore,

AT&T had a corresponding obligation to provide MCI with con-

nections to Bell switching machines to enable MCI to offer such

services (App. | la, 88a).’

Despite the length and complexity of the Specialized Common

Carriers decision, it did not define what “specialized” services the

new carriers were authorized to provide or what obligations the

existing carriers were expected to assume in order to assist the

new carriers. As the Court of Appeals recognized, the Specialized

Common Carriers decision was, in this respect, “extremely

opaque” and “hardly a model of clarity’ (App. 1 la, 88a). Indeed,

the trial court characterized it as an “abomination” and “one of

the worst examples of legal draftsmanship I have ever seen”

(App. Illa n.13), Although the FCC did not mention FX and

CCSA in its decision, to the extent that the decision was intelligi-

ble on this question, it appeared to hold that MCI and the other

new carriers were not authorized to provide FX and CCSA.’

*As described by the Court of Appeals, “FX and CCSA services are

similar to local exchange service in that they provide a connection into a

switching machine in a telephone company central office” (App. 8a-9a

n.10). FX service permits a user to make and receive calls in a distant

city as if they were local calls and is frequently used by hotel and airline

reservation services. CCSA service permits “large subscribers .. . to link

far flung branches or offices to cach other via private telephone lines con-

nected through switches in the telephone company office” (/d.).

‘In its decision, the FCC did not define the services it had authorized

the specialized carriers to provide (App. 11a). Instead, it found the new

entrants’ “proposed facilities and services’ to be in the public interest

and authorized those carriers to provide the services “proposed"’ (29

F.C.C.2d at 920). The services “proposed” by MCI were limited to

“specialized” point-to-point private line services and did not include ser-

(Footnote continued on next page)

5

After the Specialized Common Carriers decision, AT &T took

the position in its negotiations with MCI concerning interconnec-

tion that the decision related solely to the services “proposed” by

MCI and thus that MCI was not entitled to interconnections for

FX and CCSA (Tr. 4432-43; Tr. 4807-10). MCI contended in

these negotiations and during informal conferences with some

FCC staff members in the summer and fall of 1971 that it was

entitled to such connections.‘ When AT&T adhered to its position

and the staff advised MCI that it would have to present the mat-

ter to the FCC if it wanted a definitive interpretation of the deci-

sion, it failed to do so. Indeed, for all intents and purposes, MCI

appeared to abandon its claim to FX and CCSA interconnections,

for in October 1972, both MCI and the FCC took the position—

in their briefs defending the Specialized Common Carriers deci-

sion in review proceedings initiated by the Washington Utilities

and Transportation Commission before the Ninth Circuit—that

the decision “did not permit the offering of ‘switched’ service

(such as FX and CCSA service)" (App. 24la).’

(Footnote continued from previous page)

vices requiring connections to Bell switching machines, such as FX and

CCSA. MCI expressly represented in its comments to the FCC that it

had “no plans to provide switched voice services,” that its services would

involve “no switching between customers” and that its “service offerings

will be strictly point-to-point” (DX 13, pp. 13, 167-68; DX 14, pp. 3 n. 3,

138-39) (emphasis in original).

‘In those FCC staff meetings, MCI was told that it would not obtain

switched network connections, but neither MCI nor the FCC staff

members took any steps to resolve the question whether AT&T's impo-

sition of such a limitation was inconsistent with the Specialized Com-

mon Carriers decision (Tr, 4295-98),

*At trial, MCI Vice-President Kenneth Cox, a former FCC Commis-

sioner, acknowledged the position taken by MCI in its brief, but at-

tempted to dismiss its express endorsement and adoption of the FCC's

Statement regarding the limited scope of the Specialized Common Car-

riers decision as reflecting “inadequacies’’ MCI “did not think... im-

portant enough to try to set the record straight” (Tr. 10313-15).

6

Notwithstanding the FCC’s position before the Ninth Circuit,

the then Chief of its Common Carrier Bureau, Bernard Strass-

burg, sent MCI a letter on October 19, 1973, stating that in his

opinion MCI had been authorized to provide FX and CCSA ser-

vices. On the basis of this letter, MCI secured an injunction from

the United States District Court for the Eastern District of Penn-

sylvania requiring AT&T to provide FX and CCSA interconnec-

tions; but that injunction was vacated by the Third Circuit on the

ground that a “legitimate dispute” existed as to whether MCI

was authorized to provide these services because the meaning of

the Specialized Common Carriers decision was ‘unclear.’

In the meantime, the FCC itself had initiated a proceeding to

examine this question, and in April 1974, it issued a decision in

which it acknowledged that its “prior orders may not have been

perfectly clear,” but ruled nevertheless that the specialized car-

riers had been authorized to provide FX and CCSA services.’

Recognizing that this ruling was in conflict with its 1972 brief to

the Ninth Circuit, the Commission directed its General Counsel

to send the new decision to that court “to dispel any ambiguities

the brief may have created” (46 F.C.C.2d at 425 n.14). From

then on, AT&T furnished the necessary interconnections to en-

able MCI to offer FX and CCSA.

B. Proceedings in the District Court.

MCI filed this suit in March 1974, shortly before the intercon-

nection controversy was addressed and resolved by the FCC. The

complaint alleged, inter alia, that by refusing to provide FX and

CCSA interconnections since 1971, AT&T had violated Section

2 of the Sherman Act.

*MCI Communications Corp. v. American Tel. & Tel. Co., 496 F.2d

214, 224 (3d Cir. 1974), vacating 369 F. Supp. 1004 (E.D. Pa. 1973).

"Bell System Tariff Offerings of Local Distribution Facilities for Use

by Other Common Carriers, 46 F.C.C.2d 413, 427 (1974), aff'd sub

nom. Bell Tel. Co. of Pa. v. FCC, 503 F.2d 1250 (3d Cir, 1974), cert.

denied, 442 U.S. 1026 (1975).

7

Prior to trial. AT&T moved to dismiss the complaint on the

ground that the challenged conduct was not subject to the anti-

trust laws. The District Court denied AT&T's motion (462 F.

Supp. 1072), and the case then proceeded to trial.

uring the trial, the District Court decided that the meaning of

the Specialized Common Carriers decision should be treated as a

question of fact to be resolved by the jury (Tr. 3788, 8537-38).

Consistent with that view, but only after some vacillation,* the

court permitted both parties to introduce whatever evidence they

chose on the meaning of that decision. Thus, Mr. Strassburg, the

former Chief of the Common Carrier Bureau, was permitted to

testify over AT&T's objection that he wrote the FCC’s decision

and that in his view that decision was “crystal clear” in autho-

rizing the provision of FX and CCSA by MCI and the other

specialized carriers (Tr. 9980, 9801-03, 9886-87).

AT&T requested the trial court to decide the meaning of the

Specialized Common Carriers decision as a matter of law and to

instruct the jury that AT&T had no obligation to provide FX and

CCSA interconnections to MCI (Tr. 3780, 3785, 3790; AT&T

Inst. No. 39, 39C). Alternatively, AT&T requested that the jury

be instructed that, given the representations of MCI and the FCC

and other undisputed facts demonstrating the widely held view

that the decision did not encompass FX and CCSA, no liability

could be found based upon AT &T’s denial of intes: onnections for

those services (AT&T Inst. 39D, 39E). Finally, and again alter-

natively, AT&T requested that Section 201(a) of the Communi-

cations Act—the provision governing the rights and obligations

of carriers involved in an interconnection dispute—be adequately

*Early in the trial, the District Court precluded AT &T from present-

ing evidence bearing on the public interest considerations justifying its

refusal to interconnect (Tr. Dec. 3, 1979, p. 71; Tr. Jan. 24, 1980, p. 47;

Tr. Feb. 1, 1980, pp. 3-4; Tr. 3960-61, 4002-04, 9934). The trial court

eventually reversed this ruling, but by that time both sides had conclud-

ed their direct cases and the trial court had already told the jury that the

case would end in a few days (Tr. 9921).

8

explained to the jury and that the jury be instructed that it could

not find AT&T liable unless it found that AT&T's denial of FX

and CCSA interconnections was objectively unreasonable in the

context of that regulatory scheme and (1) MCI’s failure formally

to request such interconnections even from the FCC staff until

October 1973, and (2) MCI’s and the FCC’s representations con-

cerning the scope of the FCC’s decision (AT&T Inst. 39°, 39C’).

The District Court refused all the instructions requested by

AT&T on these issues. Instead, the jury was instructed to “find

that AT&T was guilty” if it determined that AT&T “did know or

had good reason to believe they had been ordered to provide the

interconnections” (Inst. 27, App. 220a). Even if the jury found

for AT&T on that issue, however, it had to overcome a second

hurdle. The jury was further instructed that because of a 1977

decision of the Court of Appeals for the District of Columbia Cir-

cuit,’ involving a different controversy and decided three years

after the FX-CCSA controversy ended, that “as a matter of law

_. at the time MCI requested FX and CCSA interconnections it

was authorized to render those services” (App. 221a). Thus, if

the jury did “not find that the Specialized Common Carriers deci-

sion ordered AT&T to provide FX and CCSA interconnections,

it was instructed even then to hold AT&T liable if it found that

“AT&T acted with anti-competitive intent” (App. 222a). With

the 1977 case injected into this instruction, therefore, the jury was

not instructed to base its determination on what AT&T knew or

should have known at the time of the denial of interconnections

for FX and CCSA~— between 1971 and 1974.

*MCI Telecommunications Corp. v. FCC, 561 F.2d 365 (D.C. Cir.

1977). cert. denied, 434 U.S. 1040 (1978). In that case, the District of

Columbia Circuit, while acknowledging that “the Commission did not

perhaps intend [the Specialized Common Carriers decision] to open the

field of common carrier communications generally,” held that the FCC

in 1971 had failed to take the steps necessary to impose any restrictions

on the operating authority of MCI and the other specialized carriers. As

the Court of Appeals in the present case recognized, the District of

Columbia Circuit's holding was “perhaps startling” (App. 94a) and

“may have taken AT&T and the FCC by surprise” (App. 93a).

9

The jury found against AT&T on all the charges submitted to

it involving interconnection restrictions.

C. The Court of Appeals’ Decision.

The Court of Appeals affirmed the denial of AT&T's motion to

dismiss. With respect to interconnection, the court recognized

that the “FCC has authority to compel interconnection under sec-

tion 201(a) of the Act,” but held that this did not preclude ap-

plication of the Sherman Act because “the initial decision

whether to interconnect rests with the utility” and “the FCC did

not control or approve of AT &T’s actions here” (App. 26a-27a).

The Court of Appeals agreed with AT&T that the trial court’s

instructions concerning the effect of regulation “fell short,” but it

held that the error was harmless. While the court reversed one of

MCI's interconnection claims by employing a standard of objec-

tive reasonableness (App. | 15a-120a), it upheld the jury’s ad-

verse findings on the other interconnection claims by assessing

those claims under a subjective intent standard. The Court of Ap-

peals concluded that “regardless whether AT&T reasonably

believed that Specialized Common Carriers did not require inter-

connections,” the jury was entitled to conclude that “AT&T did

not act in good faith when it purportedly determined that the pub-

lic interest justified its denial of interconnections” (App. 102a)."”

REASONS FOR GRANTING THE WRIT

The questions presented in the cross-petition are substantial.

Indeed, as will be shown below, standing alone they merit review

"Approximately one month before the Court of Appeals’ decision, in

a case by another of AT&T's competitors involving identical claims,

Judge Charles Richey, after a bench trial, found that AT&T did not

violate the antitrust laws. On the FX-CCSA issue specifically, Judge Ri-

chey found “that AT&T acted reasonably in refusing voluntarily to

provide FX or CCSA interconnections until the FCC’s April 1974 deci-

sion.’ Southern Pacific Communications Co. v. American Tel. & Tel.

Co., 556 F. Supp. 825, 986 (D.D.C. 1983), appeal pending, No. 83-1102

(D.C. Cir.).

10

by this Court at some stage of this case, for properly resolved they

require dismissal of MCI’s entire claim.

I. Proper Accommodation Of The Antitrust Laws With Section

201(a) Of The Communications Act Required Dismissal Of

MCT’s Interconnection Charges.

The question of accommodating the Sherman Act with Section

201(a) of the Communications Act is, as Judge Harold H. Greene

observed in United States vy. American Tel. & Tel. Co., 524

F. Supp. 1336, 1359 (D.D.C. 1981), “obviously a difficult one,”

for which “there is little judicial precedent.’’ However, the ques-

tion is of vital importance not only to participants in the telecom-

munications industry, but to other regulated firms as well.

This Court has held that matters at the heart of a pervasive

scheme of common carrier regulation are not subject to antitrust

prosecution, whether or not the specific conduct at issue has been

ordered by regulatory authorities. See Hughes Tool Co. v. Trans

World Airlines, Inc., 409 U.S. 363, 387 (1973); Pan American

World Airways, Inc. vy. United States, 371 U.S. 296, 300-05

(1963); Terminal Warehouse Co. v. Pennsylvania R. Co., 297

U.S. 500, 511-15 (1936)."" The critical questions are whether

‘Although this Court has not addressed the question of whether the

antitrust laws may properly be applied to common carriers subject to

Title I] of the Communications Act, it has rejected efforts to apply the

antitrust laws to common carrier regulation under the Interstate Com-

merce Act, the statute upon which the Communications Act was

modeled. See Terminal Warehouse Co. v. Pennsylvania R. Co., supra,

Keogh v. Chicago & N.W.R. Co., 260 U.S. 156 (1922). See also United

States v. Radio Corporation of America, 358 U.S. 334 (1959), where

this Court observed that the broadcasting industry, regulated under

Title II] of the Communications Act, was far less “extensive[ly] con-

trol[led]"* than common carriers regulated under Title II. Lower courts

are split on the question whether Section 201(a) displaces antitrust

liability. Compare Southern Pacific Communications Co. v. American

Tel. & Tel. Co., supra, 556 F. Supp. at 1095-96, with Mid-Texas Com-

munications Systems, Inc. v. American Tel. & Tel. Co., 615 F.2d 1372

(Sth Cir.), cert. denied, 449 U.S. 912 (1980), and United States v.

(Footnote continued on next page)

antitrust immunity is “necessary to make the regulatory scheme

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

(1963), and whether without immunity the regulated firm “would

be... subject{ed] .. . to conflicting standards.’ Gordon v. New

York Stock Exchange, Inc., 422 U.S. 659, 689 (1975).

Both factors are present here. Section 201(a) of the Commu-

nications Act presupposes that some interconnections are not in

the public interest and will be denied, and it entrusts the ultimate

decision of whether a particular interconnection is in the public

interest to the FCC. In order for the regulatory scheme to work,

however, Section 201(a) “places the initial onus of refusal on

Bell’’ because “without the refusal, an undesirable interconnec-

tion could occur.” Mid-Texas Communications Systems, Inc. v.

American Tel. & Tel. Co., 615 F.2d 1372, 1380 (Sth Cir.), cert.

denied, 449 U.S. 912 (1980). Moreover, in assessing an intercon-

nection request, carriers are required to consider factors other

than the effect on competition. FCC v. RCA Communications,

Inc , 346 U.S. 86, 93-94 (1953). Indeed, because a denial of inter-

connections inevitably results in an obstruction to entry, intercon-

nections could never be denied if only competitive factors were

considered.

The Court of Appeals simply did not face up to the workings of

Section 201(a). Instead, it upheld denial of AT&T's motion to

dismiss simply because “the FCC did not control or approve of

AT&T's action here” (App. 26a-27a). Such reasoning turns Sec-

tion 201(a) on its head. If the question of antitrust liability

depends upon whether the regulatory agency subsequently ratifies

(Footnote continued from previous page)

American Tel. & Tel. Co., 461 F. Supp. 1314 (D.D.C. 1978). In other

contexts not involving Section 201(a), the lower courts have generally

rejected arguments that communications common carriers are not sub-

ject to the antitrust laws. See, e.g., Northeastern Tel. Co. v. American

Tel. & Tel. Co., 651 F.2d 76 (2d Cir. 1981), cert. denied, 455 U.S. 943

(1982).

12

the carrier’s initial interconnection refusal, then to protect them-

selves from treble damage liability, carriers would be forced as a

practical matter to grant every demand for interconnection

regardless of the merits of the request, regardless of the unre-

solved public interest questions, and regardless of whether such

interconnection may burden the carrier's customers with un-

necessary costs. Such an approach would thwart “the delicate

mechanism by which the FCC determines which developments in

the telecommunications industry might best serve the public in-

terest.” United States v, American Tel. & Tel. Co., 524 F. Supp.

1336, 1359 (D.D.C. 1981). It would allow the entity seeking in-

terconnection “to do at will what [the FCC] cannot do without a

finding, after opportunity for a hearing, that such action is ‘neces-

sary or desirable in the public interest,’ and would result in a clear

circumvention of the Congressional intent expressed in Section

20l(a) of the Act.” American Tel. & Tel. Co., 42 F.C.C. 1, 20

(1949).

The assertion of antitrust jurisdiction over the interconnection

charges in this case permitted wastefully duplicative litigation,

and allowed the unseemly spectacle of a jury trying to interpret a

regulatory decision that neither the trial court nor the Court of

Appeals found intelligible, reaching a decision inconsistent with

representations made by both the plaintiff and the regulatory

agency to another Court of Appeals, and generally second-guess-

ing actions taken by a utility caught in the midst of a decade of

evolution, change and turmoil in the regulatory process. Such a

result was not only unfair to AT&T, but entirely unnecessary to

protect MCI, whose entitlement to the interconnections at issue

was resolved by the FCC promptly upon MCI’s bringing the mat-

ter to the Commission for resolution. This is precisely the situa-

tion this Court has sought to avoid in holding that matters going

to the heart of a pervasive scheme of regulation should not be sub-

ject to antitrust liability.

13

Il. The Instructions Sanctioned By The Court Of Appeals Failed

To Provide Adequate Guidance To The Jury Regarding The

Accommodation Of The Sherman Act And The Communica-

tions Act.

Even where the regulatory scheme in question does not displace

the antitrust laws, this Court has emphasized the necessity of an-

titrust courts taking account of the regulatory scheine, stressing

that the “failure to do so would produce misconceptions that go to

the heart” of antitrust doctrines. United States v. Marine Bancor-

poration, Inc., 418 U.S. 602, 627 (1974). To allow the regulators

and the regulated firms “sufficient breathing space within which

to carry out [their] mandate,” this Court has directed that a Rule

of Reason analysis be employed even though a per se rule would

normally be applicable if the defendant were not subject to

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

360 (1963). By upholding the trial court’s refusal to instruct the

jury with respect to Section 201(a) and by employing a subjective

intent test, the Seventh Circuit's decision violates these fun-

damental principles.

A. An Instruction Specifying The Significance Of Section 201(a)

Was Essential In This Case.

In Mid-Texas Communications Systems, Inc. v. American Tel.

& Tel. Co., supra, the Fifth Circuit, after analyzing the interrela-

tionship of Section 20I(a) and Section 2 of the Sherman Act ina

case challenging Bell's refusal to interconnect with a new local

telephone company, held that the trie! court “erred” in failing to

give instructions that spelled out the “structure and effect” of

Section 201(a) (615 F.2d at 1389):

This holding is based on the structure and effect of section

201(a) under which the FCC, upon appropriate demand, is

empowered to determine whether a particular interconnec-

tion is in the public interest. ... [I]t is possible that in certain

situations, interconnection will not be in the public interest. ...

In those instances, public policy will be vindicated only if in-

14

terconnection is denied. Prevention can occur only if the

private utility denies interconnection in the first instance.

Where the private concern properly denies an interconnec-

tion, it would be contrary to the public policy to permit anti-

trust liability against it.”

The Seventh Circuit's failure to require the trial court to give

the Section 20l(a) instruction requested by AT&T cannot be

reconciled with the Fifth Circuit's holding in Mid-Texas. With

the meaning of the Specialized Common Carriers decision left an

open question by the trial court, instructing the jury with respect

to Section 201(a) was imperative. MCI’s own witness conceded

that its request for FX and CCSA interconnections raised public

interest questions within the FCC’s area of responsibility (Tr.

10097), and Section 201(a) is specifically structured to permit

resolution of such questions by the FCC after the interconnec-

tions initially have been withheld. Indeed, the Court of Appeals

recognized the importance of Section 201(a) and held that the

trial court’s “instruction fell short to the extent that it did not ex-

plain the particular provision of the Act” (App. 97a). The Court

of Appeals, however, did not consider this error “fatal”, because

in its view the defect was merely the lack of sufficient “detail” of

regulation (id.)."°

The fault of the instruction, however, was not in the lack of

“detail”, but rather the refusal to tell the jury at all about

AT&T's defense and the crucial point of Section 201(a)—that

AT&T had a regulatory duty to decide in the first instance

“The Court of Appeals also attempted to justify the admittedly defec-

tive instruction on the ground that AT&T had an opportunity to argue

the matter during closing argument (App. 97a). This same contention

was squarely rejected in Mid-Texas (615 F.2d at 1390 n.16):

“Bell's presentation of evidence on regulation and discussion during

closing argument cannot in and of itself justify the district court's

failure to provide guidance on the issue for without specific instruc-

tion the jury has no indication how such evidence was to be used in

its deliberations. To hold otherwise would be to abrogate the dis-

trict court’s duty to instruct the jury accurately.”

15

whether a given interconnection was in the public interest and

should be withheld subject to a proceeding before the FCC. The

Court of Appeals’ decision thus conflicts directly with the holding

in Mid-Texas where the Fifth Circuit reversed because the failure

to instruct the jury concerning the “‘structure and effect” of Sec-

tion 201(a) “is too central to be harmless error” (615 F.2d at

1390 n.16).

In Silver v. New York Stock Exchange, supra, 373 U.S. at 360,

this Court specifically defined the significance of regulation in the

antitrust arena:

“The entire public policy of self-regulation, beginning with

the idea that the Exchange may set up barriers to member-

ship, contemplates... restraints of trade which might well be

unreasonable absent sanction by the Securities Exchange

Act. Without the oversight of the Commission to elaborate

from time to time on the propriety of various acts of self-

regulation, the Exchange is left without guidance and with-

out warning as to what regulative action would be viewed as

excessive by an antitrust court. ... But, under the aegis of the

rule of reason, traditional antitrust concepts are flexible

enough to permit the Exchange sufficient breathing space

within which to carry out the mandate of the Securities Ex-

change Act.”

The instructions given in this case do not remotely satisfy the

standards articulated in Si/ver. No mention was made of the fact

that the Communications Act, like the Securities Exchange Act,

“contemplates restraints of trade that might well be unreasonable

absent sanction by the... Act’; no mention was made of the fact

that absent specific guidance from the responsible regulatory

agency, a regulated firm is left “without guidance and without

warning as to what regulative action would be viewed as excessive

by an antitrust court;’’ and no mention was made of the critical

concept that the antitrust laws must be interpreted, when applied

to extensively regulated firms, in a manner sufficiently flexible to

provide “breathing space” within which the regulatory process

can continue to function (373 U.S. at 360).

16

In this case, the trial court not only did not describe and explain

the pertinent portions of the Communications Act to the jury, it

did not even mention them. Notwithstanding the pervasive im-

pact of regulation on the interconnection issue, the instructions

treated regulation and its impact upon the reasonableness of

AT&T's conduct almost as though it did not exist. Such a result

cannot be squared with Mid-Texas or Silver.

B. The Antitrust Liability Of A Regulated Firm Should Be De-

termined By Reference To An Objective Standard.

The failure of the trial court to instruct the jury regarding the

structure and effect of Section 201(a) was exacerbated by its in-

structing the jury to use a subjective intent standard in assessing

MCI's interconnection charges. Such a standard subverts the

very nature of the regulatory scheme because it necessarily invites

a finding of anticompetitive intent when interconnections are

withheld even where such action is taken pursuant to the regula-

tory scheme.

As explained above, Section 201(a) envisions that a carrier will

withhold interconnections when the request raises unresolved

public interest questions so that those questions can be addressed

by the FCC. Such action, however, by definition involves an ob-

struction of entry. Yet the Court of Appeals held that the jury

could have properly rejected AT&T's Section 201(a) defense on

the ground that “the evidence supports an inference that...

AT&T ...used the public interest standard in bad faith” because

“AT&T intended to obstruct MCI’s entry into the market” (App.

100a). This is tantamount to saying that all refusals of intercon-

nection on public interest grounds are unlawful because a carrier

must be regarded as intending the obvious consequences of its ac-

tions.'’ A separation of “good faith’ from “bad faith” refusals

"The problem is most acute where, as here, the Commission ultimate-

ly determines that the requested interconnection is in the public interest.

Although the carrier may have only been complying with the procedure

(Footnote continued on next page)

17

simply cannot be made on the basis of a carrier’s subjective intent

“to obstruct... entry.”

A subjective intent standard, therefore, has the anomalous

effect not only of abrogating the Rule of Reason by converting an

interconnection refusal into an antitrust violation, but of frustrat-

ing the intent of Congress embodied in the Communications Act

that interconnections will in some circumstances properly be

refused. A regulated firm must have a zone of reasonableness

within which it may legally act on its interpretation of the statu-

tory scheme — even if, as here, its acts are not subsequently ap-

proved by the regulatory body. The only way to ensure that the

mandate of the regulatory scheme is followed is to assess whether

the utility's action “was reasonable... in light of the relevant fac-

tors concerning the public interest.” Mid-Texas, supra, 615 F.2d

at 1390. The focus on subjective intent ignores these interests and

led the Court of Appeals to treat the existence of effective regula-

tory supervision, which ought to undercut any possibility of a

finding of monopolization, as supportive of the jury's finding of

bad faith.

It is for this reason that other Courts of Appeals have applied

an objective standard when evaluating a regulated firm's conduct

in an antitrust case. See, e.g., Mid-Texas, supra, 615 F.2d at

1390; Phonetele, Inc. v. American Tel. & Tel. Co., 664 F.2d 716,

737-43 (9th Cir. 1982), cert. denied, 103 S. Ct. 785 (1983);

Northeastern Tel. Co. y. American Tel. & Tel. Co., supra, 65)

F.2d at 93 (focusing on reasonableness of the conduct, not

whether it was “undertaken with an altruistic purpose”); Hospi-

tal Building Co. v. Trustees of Rex Hospital, 69\ F.2d 678, 686

(Footnote continued from previous page)

prescribed in the Communications Act, which empowers the FCC—not

the carrier—ultimately to resolve public interest questions, the jury will

necessarily infer from the Commission's action that the carrier's conduct

was unlawful. In such instances, the carrier will be subjected to treble

damage liability simply because it did not accurately predict how the

FCC would ultimately resolve the public interest questions raised.

18

(4th Cir. 1982), petition for cert. filed, 51 U.S.L.W. 3738 (U.S.

April 6, 1983) (No. 82-1633), cross-petition for cert. filed, 5\

U.S.L.W. 3807 (U.S. April 28, 1983) (No. 82-1762) (defendant's

conduct must be “objectively assessed”).

The decision of the Seventh Circuit on the interconnection

charges squarely conflicts with the holdings of these other Courts

of Appeals and even conflicts with its own holding in this case

rejecting a “state of mind” test in evaluating MCI's predatory

pricing claims, because such a test is “unworkable” and “encour-

age[s] inconsistent and quixotic results” (App. 46a).

No more “quixotic” outcome than the result below can be

imagined. With the District Court and the Court of Appeals both

recognizing the ambiguity in the Specialized Common Carriers

decision, with both the FCC and MCI telling the Ninth Circuit in

1972 that the decision did not encompass switched services such

as FX and CCSA, and with MCI never formally raising the

matter with the FCC until October 1973, a properly instructed

jury——aware of Section 201(a) and applying a standard of ob-

jective reasonableness—could not rationally have reached the

verdict now before this Court.

19

CONCLUSION

In the event this Court grants MCI’s petition for a writ of cer-

tiorari, it should also grant review of the questions presented in

this cross-petition.

Respectfully submitted,

HOWARD J. TRIENENS*

GEORGE L. SAUNDERS, JR.

Of Counsel: THEODORE N. MILLER

Jim G. KILPATRIC One First National Plaza

RAYMOND BRENNER Chicago, Illinois 60603

SIDLEY & AUSTIN (312) 853-7000

Dated: August 10, 1983 Counsel for Cross-Petitioner

* Counsel of Record.

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