Appendix — California v. United States
Supreme Court brief1983
Ask Donna
What actually matters in this document.
Text
Oo bf dad Nis ts
4 - Nos...
FILED
-
IN THE NOY 3 1993
Supreme Court of the Unite States. stevs,
—y
October Term, 1983
THE PEOPLE OF THE STATE OF CALIFORNIA
AND THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA,
Appellants,
VS.
UNITED STATES OF AMERICA, AMERICAN TELEPHONE
AND TELEGRAPH COMPANY, et al,
Appellees.
NEW YORK STATE DEPARTMENT OF PUBLIC SERVICE,
Appellant,
vs.
UNITED STATES OF AMERICA, AMERICAN TELEPHONE
AND TELEGRAPH COMPANY, et al,
Appellees.
ON APPEAL FROM THE UNITED STaTes District Court
FOR THE DISTRICT OF COLUMBIA.
APPENDIX TO JURISDICTIONAL STATEMENTS OF THE
PEOPLE OF THE STATE OF CALIFORNIA, THE PUBLIC
UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
oh THE NEW YORK STATE DEPARTMENT OF PUBLIC
ERVICE
DAVID E. BLABEY JANICE E. KERR
LAWRENCE G. MALONE J. CALVIN SIMPSON
TIMOTHY P. SHEEHAN GRETCHEN DUMAS
MARK FOGELMAN
Three Empire State Plaza 5066 State Building
Albany, New York 12223 San Francisco, California 94102
(518) 474-2510 (415) 557-0470
Attorneys for the New York Attorneys for the People of
State Department of Public the State of California and
Service the Public Utilities Commission
of the State of California
—————————————————— ————
Betevia Times Pubbshing Co
Betevia. N.Y. (716) 344-2000
TABLE OF CONTENTS
OPINIONS AND ORDERS ag
August 11, 1962, Opinion ................. 1-172
August 24, 1982, Modificction of Final
eta D Gs bc clkdc cece seeseres 173-190
August 26, 1982, Order Admitting Intervenors 191-194
ee cae ccc cceeecsocss 195-330
July 28, 1983, Memorandum............... 331-340
August 5, 1983, Memorandum and Order .... 341-350
September 7, 1983, Order Certifying Appeal... 351-354
NOTICE OF APPEAL
People and Public Utilities Commission of
the State of California................... 355-356
New York State Department of Public Service . 357-358
STATUTORY PROVISIONS
EE A 359-363
EE 363-364
1
OPINION DENYING APPROVAL OF PROPOSED
MODIFICATION OF FINAL JUDGMENT AND
RECOMMENDING CHANGES
(Filed: August 11, 1982)
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
v.
AMERICAN TELEPHONE AND
TELEGRAPH COMPANY; WESTERN
ELECTRIC COMPANY, INC.; AND BELL
TELEPHONE LABORATORIES, INC.,
Defendants.
UNITED STATLS OF AMERICA,
Plaintiff,
v.
WESTERN ELECTRIC COMPANY, INC.,
AND AMERICAN TELEPHONE AND
TELEGRAPH COMPANY,
Defendants.
UNITED STATES OF AMERICA,
Plaintiff,
v.
AMERICAN TELEPHONE AND
TELEGRAPH COMPANY, et al.,
Defendants.
Civil Action
No. 74-1698
Civil Action
No. 82-0192
Misc. No.
82-0025 (PI)
2
OPINION
These actions are before the Court! for a determination
whether a consent decree proposed by the parties is in the
“public interest’* and should therefore be entered as the
Court’s judgment. Over six hundred comments from inter-
ested persons, many of them objecting to various aspects of
the proposal, have been received, and the Court has consid-
ered briefs submitted by the parties and others, and it has
heard extensive oral argument. This opinion discusses the
principal questions raised by these interested persons, and it
embodies the Court’s decision on the appropriateness of the
proposed decree under the Tunney Act’s public interest
standard.
The opinion is divided into twelve parts. Part I relates the
history of the litigation and the terms of the proposed decree.
The next two sections contain analyses of two underlying
legal issues — the standard of review to be applied by the
Court under the Tunney Act (Part II) and the relationship
between the decree and state regulation (Part III). The
following section (Part IV) considers the question whether
the divestiture of the local Operating Companies is in the
public interest. Two sections discuss the removal of restric-
‘A number of prior opinions of this Court dea! with earlier phases of
these cases. The principal opinions in that category are reported at 461 F.
Supp. 1314 (D.D.C. 1978) and 524 F. Supp. 1336 (D.D.C. 1981). Other
opinions and memoranda may be found at 1982-1 Trade Cas. © 64,623
(D.D.C. 1982); 1982-1 Trade Cas. © 64,522 (D.D.C. 1982); 1982-1 Trade
Cas. € 64,521 (D.D.C. 1982); 1982-1 Trade Cas. € 64,476 (D.D.C. 1982);
1982-1 Trade Cas. § 64,465 (D.D.C. 1982); 524 F. Supp. 1381 (D.D.C..
1981); 524 F. Supp. 1331 (D.D.C. 1981); 1981-2 Trade Cas. € 64,203 (D.D.C.
1981); 516 F. Supp. 1237 (D.D.C. 1981); 1981-1 Trade Cas. € 63,987 (D.D.C.
1981); 1981-1 Trade Cas. { 63,938 (D.D.C. 1981): 1980-81 Trade Cas. ¢
63,711 (D.D.C. 1981); 1980-81 Trade Cas. § 63,705 (D.D.C. 1981); 1980-81
Trade Cas. { 63,696 (D.D.C. 1980); 88 F.R.D. 47 (D.D.C 1980); 498 F.
Supp. 353 (D.D.C. 1980); 86 F.R.D. 603 (D.D.C. 1980); 1980-1 Trade Cas.
€ 63,244 (D.D.C. 1980); 84 F.R.D. 350 (D.D.C. 1979); 88 F.R.D. 323
(D.D.C. 1979); and 86 F.R.D. 603 (D.D.C. 1979).
* Antitrust Procedures and Penalties Act, 15 U.S.C. §§ 16(b)h) (here-
inafter referred to as the Tunney Act). See Part I(C) and II infra. The
statute was sponsored by Senator Tunney of California.
tions from AT&T — Section V as a general matter, and
Section VI in the context of the provision of information and
of electronic publishing services. The next two sections
directly relate to the Operating Companies: Section VII
considers whether the proposed limitations on Operating
Company activities are in the public interest and Section VIII
whether the decree makes adequate provision for access by
intercity carriers to Operating Company networks. Part IX
discusses the issues arising from the division of assets between
AT&T and the Operating Companies; Part X considers special
issues and provisions; and Part XI deals with problems of
implementation and enforcement. Part XII contains the Court’s
summary and conclusion.
I
PRELIMINARY CONSIDERATIONS
A. History of the Litigation
On January 14, 1949, the government filed an action in the
District Court for the District of New Jersey against the
Western Electric Company, Inc.’ and the American Telephone
and Telegraph Company, Inc. (Civil Action No. 17-49).* The
complaint alleged that the defendants had monopolized and
conspired to restrain trade in the manufacture, distribution,
sale, and installation of telephones, telephone apparatus,
equipment, materials, and supplies, in violation of sections 1,
2, and 3 of the Sherman Act, 15 U.S.C. §§ 1, 2, and 3.° The
relief sought included the divestiture by AT&T of its stock
ownership in Western Electric; termination of exclusive
* Western Electric is the wholly owned subsidiary of AT&T that manu-
factures telecommunications equipment for AT&T’s Long Lines Depart-
ment and the Operating Companies. In addition, Western Electric provides
telecommuni*ations equipment and services to government agencies and,
to a limited extent, the independent telephone companies.
* After the transfer of the action to this Court (see pp. 17-18 infra) it
was doc‘wed here as Civil Action No. 82-0192. The 1949 lawsuit will
generally be referred to herein as the “Western Electric action.”
5 The action thus focused on the practices of defendants with respect to
the telecommunications equipment industry.
4
relationships between AT&T and Western Electric; divesti-
ture by Western Electric of its fifty percent interest in Bell
Telephone Laboratories;’ separation of telephone manufac-
turing from the provision of telephone service; and the
compulsory licensing of patents owned by AT&T on a non-
discriminatory basis.
The court record reveals little activity in the case between
the date of the filing of the complaint in 1949 and the entry
of a consent decree in 1956. Except for the notation that an
answer was filed in April, 1949, there are no record entries
until the Fall of 1951 when the government filed and the
court ordered compliance with several discovery requests.
Following the discovery order, there is another two-year gap,
and it is not until April 27, 1953, that another record entry
is found. This entry indicates that defendants were given two
additional months to complete their compliance with the
government's 1951 discovery requests. The next reference is
to the transcript of a hearing held on January 24, 1956, during
which the consent decree was approved as being in the public
interest. See pp. 7-8 infra.
The gaps in the court record are partly filled by a report
of a committee of the United States House of Representatives’
which conducted an intensive investigation of the circum-
stances surrounding the entry of the consent decree. Report
of the Antitrust Subcommittee of the House Committee on
the Judiciary on the Consent Decree Program of the Depart-
ment of Justice, 86th Cong., lst Sess., January 30, 1959
(Committee Print) [hereinafter Subcommittee Report]. That
report reveals that the parties were quite active betw~en the
time of the filing of the government’s discovery requests in
1951 and the signing of the consent decree in 1956.
* Bell Telephone Laboratories, AT&T's telecommunications research and
development facility, is a jointly owned subsidiary in which AT&T and
* Western Electric each own 50 percent of the stock.
7 In a Tunney Act proceeding the Court is not limited by the rules of
evidence but may take into account facts and other considerations from
many differen: sources. See, e.g., 15 U.S.C. § 16/f).
5
As early as February 28, 1952, the president of Bell
Laboratories, Dr. M. J. Kelly, met with Secretary of Defense
Robert A. Lovett and other members of the Department of
Defense to enlist their help in persuading the Justice De-
partment to suspend prosecution of the action* until the end
of the Korean War,’ a suspension the Attorney General
refused to grant.'°
AT&T continued its attempts to end the litigation as soon
as the Eisenhower Administration took office. Its executives
and lawyers met with officials of the Departments of Defense
and Justice throughout the first six months of 1953. Subcom-
mittee Report at 51-52. These efforts culminated in a meeting
on June 27, 1953, during a judicial conference held at White
Sulphur Springs, West Virginia, between T. B. Price, AT&T’s
general counsel, and Attorney General Herbert Brownell.
According to a memorandum prepared by Price following this
meeting, Atterney General Brownell said that he believed
that “a way ought to be found to get rid of the case,” and
that AT&T “could readily find practices that [they] might
agree to have enjoined with no real injury to [their] business.”
Memorandum of T. B. Price (March 3, 1954) reprinted in
Subcommittee Report at 53-54."
* That same day, counsel for AT&T met with Attorney General J.
Howard McGrath to make the same request, contending that the antitrust
litigation was forcing key Bell Laboratories and Western Electric executives
involved in important national defense projects to divert their attention
from that work to preparations for trial. Subcommittee Report at 45-46.
* Secretary of Defense Lovett requested the postponement in a letter to
the Attorney General dated March 20, 1952. As stated by the Committee,
[indefinite postponement was requested by the Defense Department
despite the fact that neither Mr. Lovett .. . nor anyone else in the
Department had made an independent investigation to determine
whether trial of the suit would actually impede the mobilization effort
or whether Bell System personnel working on defense matters would
actually be needed for preparation of trial of the case.
Subcommittee Report at 47.
The Defense Department continued to advocate this position for the
remainder of 1952. Subcommittee Report at 51.
"In reviewing Price’s memorandum and other information concerning
6
Shortly after this meeting, AT&T again urged the Defense
Department “to intercede with the Justice Department to
have the case settled on a basis that would not require
divorcement of Western.” Subcommittee Report at 55. To
that end, Secretary of Defense Charles E. Wilson had a letter
hand-carried to Attorney General Brownell urging him to end
the litigation without divesting Western Electric. The ration-
ale stated for this position was that the severance of Western
Electric would “effectively disintegrate the coordinated or-
ganization which is fundamental to the successful carrying
forward of these critical defense projects,” and would be
contrary to the vital interests of the Nation.” Subcommittee
Repori at 56. The Wilson letter was actually prepared by
AT&T.”
Periodic negotiations between AT&T and the government
continued through 1954 and 1955, and by early December,
1955, the government and AT&T had reached an agreement.”
the meeting, the Antitrust Subcommittee characterized the government's
position as follow:
There can be little doubt that by his statements to Mr. Price at the
White Sulphur Springs meeting, Attorney General Brownell mani-
fested a willingness to have the Justice Department consider a token
settlement and for>go a decree consistent with the public interest —
an attitude denoting partiality toward the defendants incompatible
with the duties of his public office.
Subcommittee Report at 55.
‘ During the summer of 1953, the Defense Department asked AT&T to
prepare a memorandum explaining why that department should be inter-
ested in the termination of the antitrust litigation. AT&T obliged, and in
early July, it provided the Defense Department with a memorandum which
urged settlement of the suit without the divestiture of Western Electric.
The memorandum was drafted in such a way as to make it appear that the
Defense Department rather than AT&T has prepared it and, with two
relatively minor exceptions, a letter identical to the memorandum was sent
out the next week to the Attorney General over the signature of Secretary
of Defense Wilson. Subcommittee Report at 55-56.
' The Subcommittee described in some detail how it uncovered evidence
of the negotiating process between AT&T, the Department of Defense,
and the Department of Justice. It appears that, as part of an attempt to
investigate the Justice Department’s policies and practices regarding
antitrust consent decrees, the Subcommittee requested the Attorney
7
The consent decree which was the product of this process
includ 2d neither the divestiture of Western Electric’* nor any
©. the other structural relief originally requested by the
government. Instead, an injunction was issued which pre-
cludeu AT&T from engaging in any business other than the
provision of common carrier communications services; pre-
cluded Western Electric from manufacturing equipment other
than that used by the Bell System; and required the defend-
ants to license their patents to all applicants upon the payment
of appropriate royalties.
Despite the substantial differences between the structural
relief requested in the government’s 1949 complaint and the
relief actually provided by the proposed decree, the District
General make available the files relating to the negotiation and signing of
the Western Electric consent decree. Subcommittee Report at X-XI. The
Department refused to produce the files, and it also declined to supply
answers to specific questions. According to the Subcommittee (Report at
XIID, “(t]he extent to which the Department of Justice went to withhold
information from the committee in this investigation is unparalleled in the
committee’s experience.” In its view, the Department’s reluctance to
provide information “resulted from a desire to cover up those facts which
the Department considered to be embarrassing.” Subcommittee Report at
XIII, 42.
Because of the Department's failure to cooperate, the subcommittee
acquired the necessary information from “correspondence, memorandums
[sic], and other files from AT&T, Western Electric Co., the Department
of Defense, and the Federal Communications Commission.” Subcommittee
Report at XIV. Moreover, with regard to the information provided by the
Defense Department, the subcommittee criticized that agency for providing
the very same material to AT&T, even though it contained internal
memoranda and correspondence between the Secretary of Defense and the
Attorney General. Indeed, it appears that the Defense Department gave
AT&T all of this material the day after AT&T made an oral request for.
the documents. Subcommittee Report at 43.
“ The Justice Department contacted the Federal Communications Com-
mission to determine the Commission’s position on the issue of the
divestiture of Western Electric, advising AT&T that it was doing so. AT&T
immediately contacted each FCC Commissioner individually to convey the
Bell System’s position on the issue. Subcommittee Report at 71-73.
Ultimately, the Commission informed the Justice Department that it did
not regard the divestiture of Western Electric as essential.
8
Court for the District of New Jersey accepted the proposal
on January 24, 1956, after a brief hearing, stating:’°
I feel that I can unhesitatingly accept the recommen-
dation of the Attorney General, that this judgment is in
the public interest, and that it is a satisfactory adjustment
of this very, very vexatious problem; and 1 ain therefore
happy to go along with the recommendation made by
the Attorney General and shall forthwith sign this
judgment.
After the decree was approved, no major developments
occurred in the case for the next several years. Until 1981,
the entries in the court record’* concern primarily the patent
licensing provisions. ?”
‘8 United States v. Western Electric Co., Civil Action No. 17-49, C.A.
82-0192, Transcript, January 24, 1956, at 5. The transcript of the hearing
at which the decree was approved is six pages in length. The only substantive
question the Court asked was whether the defendants would be required
to provide patent licensees with “a general exposition of the know-how” in
addition to providing them with manufacturing drawings, blueprints, and
specifications. The government responded in the affirmative. This one
assurance, however, appears to have been directly contrary to AT&T's
interpretation of their obligation under the decree. During the House
Subcommittee’s hearings, Chairman Emanuel Celler criticized AT&T’s
counsel for failing to correct the court’s misimpression, stating “[b]y your
silence, it strikes me that there was something very much akin to deception
on the court, because the court must have had an erroneous impression as
to what the decree implied and he signed that decree.” Hearings at 2258,
reprinted in Subcommittee Report at 95-96.
‘6 The only exception prior to 1980 is a dispute that occurred in the late
1960s when a private communications system carrier sought leave to
intervene as a party plaintiff to challenge New Jersey Bell's offering of
what the proposed intervenor characterized as a private communication
system to hospitals in violation of the decree. The District Court denied
the motion to intervene (United States v. Western Electric, C.A. No. 17-
49, C.A. No. 82-0192, Order, February 26, 1968) and the Supreme Court
affirmed (Clark Walter & Sons, Inc. v. United States, 392 U.S. 659 (1968).
‘7 However, there was significant activity early in 1981. On May 2, 1980,
the Federal Communications Commission had issued its so-called Computer
II decision. Second Computer Inquiry, 77 F.C.C2d 384 (1980), on recon-
sideration, 84 F.C.C.2d 50 (1980), on further reconsideration, 88 F.C.C.2d
512 (1981), appeal pending sub nom. Computer & Communications
Industry Ass'n. v. FCC, et al., No. 80-1471 (and Consolidated Cases). In
9
This was the status of the Western Electric suit when the
government filed a separate antitrust action on November
20, 1974, in this Court against AT&T, Western Electric, and
Bell Telephone Laboratories, Inc. (Civil Action No. 74-1698)."*
The complaint in the new action alleged monopolization by
the defendants with respect to a broad variety of telecom-
munications services and equipment in violation of section 2
of the Sherman Act. In this lawsuit, the government initially
sought the divestiture from AT&T of the Bell Operating
that decision, the FCC in essence modified the interstate telecommunica-
tions regulatory structure in three ways: first, it distinguished between
basic transmission services traditionally provided by common carriers and
enhanced network services such as those used for computer data processing;
second, it found that enhanced services and customer premises equipment
should not be regulated as common carrier offerings; and third, it concluded
that AT&T should be allowed under the Communications Act to offer such
services and such equipment but only through a fully separate subsidiary.
The Computer and Communications Industry Association and others have
appealed the Computer II decision to the Court of Appeals for this Circuit,
and that appeal is still pending.
In the wake of the FCC’s decision, AT&T and Western Electric on
March 4, 1981, filed a “Motion for Construction” of the consent decree in
the Western Electric case with the District Court in New Jersey requesting
a ruling that the decree would not bar AT&T from furnishing the services
authorized by Computer 1]. The motion was opposed by the government,
but on September 4, 1981, the Court granted AT&T's request. United
States v. Western Electric Co., 1981-2 Trade Cases © 64,275 (D.N.J. 1981).
The government initially took an appeal to the Court of Appeals for the
Third Circuit. On January 8, 1982, contemporaneously with the proposed
settlement of these cases, the government and AT&T filed a joint motion
to dismiss the appeal and to vacate as moot the District Court’s order. The
Third Circuit granted the motion on February 2, 1982, and on March 12,
1982, the District Court vacated its order. United States v. Western
Electric, C.A. No. 17-49, C.A. No. 82-0192, Order, March 25, 1982.
* The government has indicated that it brought the 1974 suit because
in its judgment the 1956 consent decree was not adequate to prevent
activities that unreasonably restrained competition in telecommunications
equipment markets, and did not protect against antitrust violations in the
intercity telecommunications field. Competitive Impact Statement at 5 filed
by the Department of Justice February 10, 1982. This Court has held that
the 1956 decree did not bar the filing of the 1974 action under the doctrine
of res judicata. United States v. AT&T, supra, 524 F. Supp. at 1374. The
1974 lawsuit will generally be referred to herein as the “AT&T action.”
10
Companies (hereinafter generally referred to as Operating
Companies or BOCs)'® as well as the divestiture and disso-
lution of Western Electric. While the action was pending, the
government changed its relief requests several times asking,
at various times or in various alternatives, for the divestiture
from AT&T of Western Electric and portions of the Bell
Laboratories.”
Pretrial discovery began shortly after the defendants filed
their answer in February 1975, but during the next three-
and-one-half years, that discovery was effectively halted for
over thirty months.*! On February 7, 1978, the Court referred
the case to the Magistrate for preparation of a discovery
schedule. Pursuant to that authority, the Magistrate issued
two orders on April 27, 1978, but attempts at discovery led
to various disagreements, and by the Summer of 1978, very
little progress had been made.
On September 11, 1978, the Court issued an opinion which
disposed of all then outstanding legal issues™ and laid out the
'* The twenty-two Bell Operating Companies, most of which are wholly
owned by AT&T, provide the means by which local telephone service is
furnished. Bell customers presently also gain access to the network for
both local and long distance telecommunications services through the
Operating Companies. These Operating Companies are regulated by the
various state public utility commissions. They may encompass several
states, a single state, or only a single metropolitan area.
»” The divestiture of all or at least some of the Operating Companies
remained one of the government's principal alternative relief requests. See
Part 1V infra.
2! Discovery was first stayed for almost twenty-two months while the
Court resolved certain jurisdictional issues (Pretrial Order No. 1) and then
again, this time by the Court of Appeals, while defendants appealed and
then sought certiorari from an order this Court had issued on November
24, 1976.
= Three major legal issues were addressed, as follows: (1) whether the
Court had jurisdiction over the action in light of the federal and state
regulatory scheme; (2) whether all of the departments and agencies of the
United States constituted the party plaintiff in this suit for purposes of
discovery: and (3) whether the government could secure documents obtained
in private antitrust suits against the defendants. Defendants unsuccessfully
sought a writ of mandamus from the Court of Appeals and a writ of
certiorari from the Supreme Court with respect to portions of the order.
11
future course of the pretrial proceedings. See United States
v. AT&T, supra, 461 F. Supp. 1314. In brief, the proceedings
were designed to coordinate discovery and the definition of
issues and move both forward simultaneously and with ex-
pedition. To these ends, the parties were directed to file over
the following eighteen months four™ successive Statements
of Contentions and Proof which precisely and in detail defined
their legal and factual contentions.“ Each Statement was to
be more specific and more focused than the last, and discovery
at each stage was to be limited to the issues raised in the
most recent Statements.”
Upon the completion of this process, and pursuant to a
further pretrial order, the parties began a structured stipu-
lation process. This process was designed to produce, and it
did produce, stipulations of all uncontested facts and conten-
tions, a catalogue of all contentions that remained in dispute,
and the proof (both testimonial and documentary) that would
be used to support each contention. As a result of this process,
the case was essentially divided into 82 segments or episodes,*
many of which constituted major antitrust disputes in their
own right. These episodes provided the structure for the
presentation of evidence at trial.”
= Ultimately only three Statements of Contentions and Proof were filed
because the fourth Statement became unnecessary.
* Plaintiff's final Statement consisted of 1870 pages; defendants’ third
Statement of 2145 pages.
* To oversee discovery disputes, the Court relied upon the United States
Magistrate and upon two Special Masters appointed by the Court. In
Pretrial Order No. 16, the Court also ordered the Special Masters to
supervise the judicial notice procedure established by the Court. The
purpose of this procedure was to determine what documents would be
admitted into evidence, notwithstanding their appearance as hearsay
documents, for the truth of the matters stated therein. See United States
v. AT&T, supra, 498 F. Supp. 353. For both discovery and judicial notice
disputes, the parties could appeal the rulings of the Magistrate and of the
Special Masters to the Court.
* The 82 episodes were recorded on over 4,200 computer printout pages.
By the time of trial, some episodes and some contentions had been dismissed
by the parties.
* For a more detailed explanation of this process, see United States v.
AT&T, supra, 88 F.R.D. 47.
12
The trial itself began on January 15, 1981. At the request
of the parties, the trial was recessed immediately after the
opening statements* for a period of six weeks in order to
afford an opportunity for a negotiated settlement.** When
the settlement discussions proved fruitless. the trial resumed
on March 4, 1981. The government presented close to one
hundred witnesses, many thousands of docur ents, and ad-
ditional thousands of stipulations. After the conclusion of the
government’s case, defendants moved to dismiss the action
ona variety of grounds. That motion was denied on September
11, 1981. United States v. AT&T, supra, 524 F. Supp. 1336.
Defendants commenced their case-in-chief on August 3, 1981,
and during the next five months they presented approximately
250 witnesses™ and tens of thousands of pages of documents.
Defendants were scheduled to complete the presentation
of their evidence on about January 20, 1982, and it was
expected that the government's rebuttal evidence would be
presented between that date and February 10, 1982, when
the trial would have ended. However, early in January, 1982,
the Court was advised of the proposed decree described
below.
B. The Proposed Decree
On January 8, 1982, the parties to these two actions filed
with the District Court for the District of New Jersey a
stipulation consenting to the entry by the Court of the
* Under 15 U.S.C. § 16(a), in any civil or criminal antitrust suit brought
by the United States, a final judgment or decree to the effect that a
defendant has violated the antitrust laws “shall be prima facie evidence
against such defendant under said laws as to all matters respecting which
said judgment or decree would be an estoppel as between the parties
thereto: Provided, That this section shall not apply to consent judgments
or decrees entered before any testimony has been taken.”
* Initially, only a two-week recess had been sought and granted, but
this was subsequently extended to allow the incoming Reagan Adminis-
tration and the new leadership of the Department of Justice to evaluate
the pending settlement proposals. See this Court’s Memorandum Orders
of January 16 and January 30, 1981.
® The trial record in this case contains over 24,000 transcript pages.
13
“Modification of Final Judgment” filed therewith.*2 On the
same day, they attempted to file in this Court a dismissal of
the AT&T action pursuant to Rule 41(a)(1)(ii), Federal Rules
of Civil Procedure. This Court ordered that the dismissal be
lodged, not filed,* and, in accordance with that order and the
provisions of the Tunney Act, the dismissal has not yet been
effected. See note 52 infra.
In their settlement proposal, the parties proposed that the
Court enter the following judgment with respect to both
lawsuits.*
Section I of the proposed decree would provide for signif-
icant structural changes in AT&T. In essence, it would remove
from the Bell System the function of supplying local telephone
service by requiring AT&T to divest itself of the portions of
its twenty-two Operating Companies which perform that
function.
The geographic area for which these Operating Companies
would provide local telephone service is defined in the pro-
posed decree by a new unit, the “exchange areca.” According
to the Justice Department, an exchange area “will be large
* The parties have designated their agreement as a “Modification of the
Final Judgment.” However, since the agreement encompasses far more
than a modification of the 1956 judgment — and, indeed, as described at
pp. 13-17 infra, deals primarily with the AT&T lawsuit — it would be
misleading to refer to the agreement as a modification of the 1956 decree.
The agreement will generally be referred to herein as the “proposed
decree.”
* The parties also filed a Memorandum suggesting procedures for
evaluating the settlement proposal and a motion to transfer the Western
Electric action to this Court. In addition, they filed a joint motion to
dismiss the appeals pending in the Court of Appeals for the Third Circuit
from the District Court’s decision concerning the 1956 consent decree, See
note 15 supra.
* Order filed January 8, 1982.
™ The description of the agreement in this part of the opinion is general
in nature, and it takes account neither of various qualifications and
excertions in the agreement itself nor of the possible impact of a plan of
reorganization which AT&T will be required to submit later. These, more
specific, issues are discussed in Parts IV through XI infra.
14
enough to comprehend continguous areas having common
social and economic characteristics but not so large as to
defeat the intent of the decree to separate the provision of
intercity services from the provision of local exchange serv-
ice.”*5 Court approval would be required for the inclusion in
an exchange area of more than one standard metropolitan
area or the territory of more than one State.”
The Operating Companies would provide telephone ‘service
from one point in an exchange area to other points in the
same exchange area — “exchange telecommunications”” —
and they would originate and terminate calls from one ex-
change area to another exchange area — “exchange access.”*
The interexchange portion of calls from one exchange area to
another exchange area® would, however, be carried by AT&T
and the other interexchange carriers, such as MCI and
Southern Pacific Co.*
The proposed decree sets forth general principles governing
the configuration of the Operating Companies* which AT&T
would be required to divest.** Under the proposal, AT&T
%* Competitive Impact Statement at 30. The exchange areas would
generally be smalier than the area served by a so-called Class Four Office.
% AT&T would have the initial responsibility for drawing the boundaries
of exchange areas, ut its plan would have to be submitted to the
Department of Justice for its approval.
* Also referred to herein as intraexchange service. This may roughly be
equated with local telephone service.
* That is, they would provide local access to interexchange carriers.
® In general, this is the service commonly known as long distance service.
“ The Operating Companies must also provide access services to link
their subscribers with companies providing information services. This
category of service, discussed in Part VI, infra, includes information
retrieval, automatic telephone answering services, and electronic publish-
ing.
“ The number of new Operating Companies is not specified in the
settlement proposal. AT&T has indicated that its reorganization plan will
provide for the amalgamation of the twenty-two Operating Companies into
seven regional Operating Comapnies.
“ The proposal would permit AT&T to determine the method by which
divestiture will take place.
ed
15
would be required to endow the companies with sufficient
personnel, facilities, systems, and rights to technical infor-
mation to enable them to provide exchange telecommunica-
tions and exchange access services.* These personnel, sys-
tems, facilities and rights would be drawn from the Operating
Companies and from AT&T and its other affiliates. AT&T
would be permitted to choose to transfer some of these
elements directly to the new Operating Companies and to
place others in a central entity jointly owned by them.
AT&T would be required by the proposed decree to for-
mulate a plan of reorganization which complied with these
principles, and to submit the plan to the Department of
Justice within six months after the Court approved the decree.
The plan would not be effective without the Department's
approval.
After divestiture, the new Operating Companies would be
required to provide, through a centralized body, a single
point of contact for national security and emergency pre-
paredness. They would be permitted to use this or a similar
central body to provide those services, such as administration
and engineering, which “can most efficiently be provided on
a centralized basis.” In addition, until September 1987, AT&T,
Western Electric, and Bell Laboratories would have to pro-
vide on a priority basis, all research, development, manufac-
turing, and other support services necessary to enable the
Operating Companies to fulfill the requirements of the pro-
posed decree. #
Section II of the proposed decree would complement these
structural changes by various restrictions which are said to
“ If a facility had both intraexchange and interexchange functions, it
could not be jointly owned by AT&T and the Operating Company, but it
could be shared through a leasing or similar arrangement, provided the
Operating Company retained control over the intraexchange portion of the
facility.
“ The proposal would further bar AT&T from reacquiring the stock or
assets of the divested Operating Companies, and it would require the
cancellation of the License Contracts between AT&T and the Bell Operating
Companies and of the Standard Supply Contract between Western Electric
and the Operating Companies.
16
be designed (1) to prevent the divested Operating Companies
from discriminating against AT&T's competitors, and (2) to
avoid a recurrence of the type of discrimination and cross-
subsidization that were the basis of the AT&T lawsuit.
The first group of these provisions wuuld require the
divested Operating Companies to provide services to inter-
exchange carriers* equal in type, quality, and price to the
services provided to AT&T and its affiliates.“ In addition,
they would be prohibited from discriminating between AT&T
and other companies in their procurement activities, the
establishment of technical standards, the dissemination of
technical information, their use of Operating Company facil-
ities and charges for such use, and their network planning.
The Justice Department has indicated that it intends these
provisions to be “construed broadly to encompass all potential
areas of favoritism, subtle as well as overt, that may arise in
relationship between the divested BOCs and AT&T and its
competitiors.” Competitive Impact Statement at 26-27.
The second type of restriction imposed upon the Operating
Companies is said to be intended to prevent them from
engaging in any non-monopoly business so as to eliminate the
possibility that they might use their control over exchange
services to gain an improper advantage over competitors in
such businesses. Thus, the Operating Companies would not
be permitted (1) to manufacture or market telecommunica-
tions products and customer premises equipment; (2) to
provide interexchange services, (3) to provide directory ad-
“ The information access functions performed by the Operating companies
for providers of information services would also be subject to the equality
requirement.
“ Appendix B of the proposed decree describes in greater detai! the
requirement imposed by Section II on the Operating Companies to provide
equal access to all interexchange carriers. According to the Competitive
Impact Statement, these provisions are based on the principles (1) that
the Operating Companies should have latitude to provide access in the
manner they deem most efficient, (2) that they must meet performance
and pricing criteria to ensure equal access, and (3) that a transition period
is necessary to phase in these equal access requirements. See Part VII
infra.
17
vertising such as the Yellow Pages; (4) to provide information
services; and (5) to provide any other product or service is
not a “natural monopoly service actually regulated by tariff.”
The Operating Companies would have the authority, however,
to engage in what are called the “inherent” functions of
procurement, engineering, marketing, and management.
Section III of the agreement provides that the decree would
be binding on AT&T and the Operating Companies and their
successors and that it would not constitute any evidence
against, an admission by, or an estoppel against AT&T or
the Operating Companies.‘
The proposed decree contains a number of enforcement
provisions. Section V would impose a requirement upon AT&T
and the Operating Companies to inform their employees of
their obligations under the decree. Section VI would grant
to the Department of Justice the right of access to AT&T
and the Operating Companies to inspect books, interview and
depose employees, and demand reports.* Section VII pro-
vides that the Court would retain jurisdiction for the purpose
of issuing orders to construe or carry out the settleinent, to
modify it, to enforce compliance, and to punish violations,
upon ap, lication of the parties and, after the reorganization,
upon the application of an Operating Company.
Finally, the proposed decree would vacate the final judg-
ment entered on January 24, 1956 in the Western Electric
case, eliminating the restrictions imposed upon AT&T by
that decree.
On January 11, 1982, Judge Vincent Biunno of the District
Court for the District of New J ersey, following a brief hearing,
approved the proposed decree, interpreting it solely as a
modification of the 1956 consent judgment, but he did not,
The limitation of the proposed decrees res judicata effect is apparently
designed to prevent its use in private antitrust litigation as prima facie
evidence of AT&T’s liability pursuant to section 5(a) of the Clayton Act,
15 U.S.C. § 16(a). See note 25 supra and Part X infra.
“ There are special exceptions for privileged materials, and information
collected may not be disseminated except to the FCC and in connection
with court proceedings to secure compliance.
18
initially, agree to the parties’ request for a transfer of the
Western Electric action to this Court.
The following day, this Court held a hearing and continued
in effect its order that the stipulation of dismissal which the
parties had attempted to file in the AT&T action here be
simply lodged pending completion of the appropriate public
interest proceedings. Judge Biunno thereafter granted the
parties’ motion for a transfer of the Western Electric action,
that action was docketed here under Civil Action No. 82-0192
and, by order of this Court, it was consolidated with the
AT&T action. At the same time, this Court vacated the order
of January 11, 1982, which had approved the proposed decree,
and it ordered that procedures equivalent to those required
by the Tunney Act be applied to the consolidated actions. *
C. Procedures in Connection with the Settlement
Proposal
The Tunney Act provides that a proposal for a consent
judgment submitted by the United States in an action brought
under the antitrust laws may not be entered by the Court
without prior compliance with certain procedures. These
procedures include a sixty-day comment period, publication
of a competitive impact statement by the Department of
Justice; a sixty-day period for the receipt of public comments,
and a determination by the Court that “the entry of such
judgment is in the public interest.” For the purpose of this
public interest determination the Court may consider
(1) the competitive impact of such judgment, including
termination of alleged violations, provisions for enforce-
ment and modification, duration or relief sought, antici-
pated effects of alternative remed'es actually considered,
and any other considerations bearing upon the adequacy
of such judgment;
® Order filed January 21, 1982. See Part I(C) infra.
© 15 U.S.C. § 16e).
19
(2) the impact of entry of such judgment upon the
public generally and individuals alleging specific injury
from the violations set forth in the complaint including
consideration of public benefit, if any, to be derived from
a determination of the issues at trial.
Procedurally the Court may
(1) take testimony of Government officials or experts
or such other expert witnesses, upon motion of any party
or participant or upon its own motion, as the court may
deem appropriate;
(2) appoint a special master and such outside consult-
ants or expert witnesses as the court may deem appro-
priate; and request and obtain the views, evaluations,
or advice of any individual, group or agency of govern-
ment with respect to any aspecis of the proposed judg-
ment or the effect of such judgment, in such manner as
the court deems appropriate;
(3) authorize full or limited participation in proceed-
ings before the court by interested persons or agencies,
including appearance amicus curiae, intervention as a
party pursuant to the Federal Rules of Civil Procedure,
examination of witnesses or documentary materials, or
participation in any other manner and extent which
serves the public interest as the court may deem appro-
priate;
(4) review any comments including any objections filed
with the United States under subsection (d) of this
section concerning the proposed judgment and the re-
sponses of the United States to such comments and
objection. and
(5) take such other action in the public interest as the
court may deem appropriate.
15 U.S.C. § 16(e), (f).
When they filed the present proposed decree, the govern-
nent and AT&T took the position that the Tunney Act did
not apply because (1) their submission in the District Court
for the District of New Jersey was merely a “modification”
of an existing consent judgment, as distingushed from the
20
entry of a judgment,*! and (2) no consent judgment at all was
filed in this Court, but only a dismissal of the pending action. ™
In the opinion of this Court, that reasoning may most
charitably be described as disingenuous. It that reasoning
were deemed acceptable, the parties here —- and in similar
antitrust actions — could subvert the clearly expressed will
5! The theory apparently was that the Tunney Act does not apply to
such modifications of existing decrees because most modifications are
relatively minor and of interest unly to the parties involved. There appears
to be conflicting law on this subject. Compare United Stutes v. Motor
Vehicle Manufacturers Ass’n., 1981-2 Trade Cas. € 64,370 (C.D. Cal. 1981)
with United States v. Swift & Co., 1975-1 Trade Cas. € 60,201 (N.D. IIL.
1975). Nevertheless, the government recognizes that when a major modi-
fication of an existing decree is proposed, the Tunney Act procedures “help
facilitate thorough exposition and review.” See Letter of Assistant Attorney
General William F. Baxter to the Court (January 18, 1982). To this end,
Tunney act or comparable procedures have been followed at least in cases
where major modifications of decrees have been made. See note 67 infra.
% As the Court has previously commented (see Tr. 25040-45), there
appear to be at least two problems with the parties’ “dismissal” theory.
First, for all intents and purposes, the settlement would dispose primarily
not of the 1949 action (which matured into a consent decree in 1956 — 26
years ago) but of the lawsuit that at the time of the settlement was actively
in trial and had been in trial for ten months. Indeed, as the recitation in
Part I(B) above demonstrates, the proposed decree deals almost exclusively
with AT&T — rather than Western Electric — issues. These basic facts
cannot be obscured by the facile expedient of filing the proposal in New
Jersey and denominating it a modification of the New Jersey decree.
Second, while Fed. R. Civ. P. 41(a)(1) provides that the parties may file a
dismissal without leave of court under certain circumstances, this may not
be done where a statute provides otherwise. In the view of the Court, the
Tunney Act is just such a statute.
Contrary to the parties’ continued protestations that, notwithstanding
these considerations, the AT&T litigation has been dismissed because they
allegedly filed a dismissal notice, the lawsuit is pending and very much
alive. As noted, this Court issued an order on January 8, 1982, that the
dismissal notice was only to be lodged, not filed. Whatever may be the
proper rule in other circumstances — a matter on which the Court expresses
no opinion — at least when the dismissal of a major antitrust action has
substantive aspects or is so closely tied to a “modification” of another
decree as is the case here, Tunney Act procedures apply. The parties have
not appealed the Court’s decisions which refused the filing of the dismissal
notice and required application of Tunney Act procedures.
21
of Congress by a mere act of labelling. The Tunney Act was
designed to expose to public scrutiny and to a judicial public
interest determination the settlements negotiated between
the Department of Justice and the various antitrust defend-
ants. The instant agreement, whatever the label the parties
chose to affix, settled two such lawsuits. That settlement,
moreover, not only disposed of what is the largest and most
complex antitrust action brought since the enactment of the
Tunney Act but the settlement itself raises what may well
be an unprecedented number of public interest questions of
concern to a very large number of interested persons and
organizations. See note 60 infra. As the Court made clear
from the very day the settlement was announced, it was not
and is not prepared to allow this circumvention of the
congressional purpose.™
In any event, the parties have now stated in various ways
and before various forums (including before this Court) that,
irrespective of their opinion of the technical applicability of
the Tunney Act, they are willing* to have the Tunney Act
procedures applied by this Court.” In view of those repre-
sentations, it became unnecessary for the Court to pass
specifically upon the technical applicability of the Act. Instead,
the Court on January 21, 1982, entered an order which,
pursuant to the parties’ consent and the Court’s general
* Tr. 25039-46. See also Part II(A) infra.
* This willingness took especially concrete form after the Court expressed
its views on the matter on January 12, 1982. See note 50 supra; letter
from Assistant Attorney General Baxter to the Court (January 18, 1982);
letter from Jim G. Kilpatrick, General Attorney for AT&T, to the Court
(January 18, 1982).
* The parties have also stated that in their view the early approval by
the New Jersey District Court of the settlement proposal does not preclude
this Court from following the full Tunney Act procedures. See, e.g.
Response of the United States to Public Comments, May 20, 1982 (herein-
after Department of Justice Response to Comments); Reply Comments of
the American Telephone and Telegraph Co., May 21, 1982 (hereinafter
AT&T Reply Comments); letter of the parties to the Court dated January
18, 1982; statement of counsel for the parties, January 12, 1982 (Tr. 25,016-
26).
22
equitable powers,” applied the substantive Tunney Act pro-
cedures to the instant settlement.
Following the entry of that order, and in compliance
therewith,” the parties filed the appropriate pleadings and
reports.™ After the Court issued its January 21 order — and
% See, ¢.g., United States v. Swift & Co., 1975-1 Trade Cas. $ 60,201
(N.D. Ill. 1975); United States v. Ling-Temco-Vought, Inc., 315 F. Supp.
1301 (W.D. Pa. 1970); United States v. F. & M. Schaefer Brewing Co.,
1968 Trade Cas. © 72,345 (E.D.N.Y. 1967); United States v. Carter Products,
Inc., 211 F. Supp. 144 (S.D.N.Y. 1962).
* However, on February 5, 1982, in its filing disclosing its lobbying
activities in conformity with section 11 of the Court's order of January 21,
1982, AT&T stated that it made that filing “{iJn conformance with § 2(g)
of the Antitrust Procedures and Penalties Act (APPA’), 15 U.S.C. § 16(g)”
rather than under the Court's order. In its subsequent public advertise-
ments, AT&T has likewise taken the position that the settlement proposal
is being reviewed by this Court “as provided in the antitrust statutes.”
See, ¢.g., AT&T Advertisement “A Plea for Orderly Policy-making,”
Washington Post, March 28, 1982, at A28.
“ On January 28, 1982, the government published the proposed decree
in the Federal Register (47 Fed. Reg. 4166 (1982)); on February 5, 1982,
AT&T filed with the Court its description of the written and oral com-
munications made on its behalf with any officers or employees of the United
States regarding the proposed decree; on February 10, 1982, the govern-
ment filed with the Court its Competitive Impact Statement, and on
February 17, 1982 published it in the Federal Register (47 Fed. Reg. 7170
(1982)); beginning on February 19, 1982, the government made copies of
the proposed decree available at the twenty-six district courts specified in
the Court’s order of January 21, 1982; over a period of two weeks in
February, 1982, the government published in newspapers of general
circulation in these twenty-six districts, a summary of the proposed decree
and the Competitive Impact Statement and directions for the submission
of written public comments; from February 19 to April 20, 1982, there was
a sixty-day public comment period; on April 21, April 23, April 27, and
May 4, 1982, the government filed these written comments with the Court;
as set forth in the Court’s order of May 5, 1982 and in lieu of publishing
all written comments, on May 10, 1982, the government issued a press
release describing the procedures for obtaining copies of comments, and
on May 17, 1982 published the press release in the Federal Register (47
Fed. Reg. 21214 (1982)); on May 17, 1982, the government published in
the Federal Register the name and address of everyone who filed a written
comment and the number of pages in each comment (47 Fed. Reg. 21214
(1982)); and on May 20, 1982, the government made available in each of
the twenty-six districts referred to above a copy of every comment received.
23
even prior to that time® — a considerable number of individ-
uals and entities sought to intervene in these proceedings for
various purposes.” On February 5, 1982, the Court issued
an order denying all such requests.” The Court also received
% Those motions to intervene filed prior to the Court's issuance of the
January 21 order were denied in that order.
® Among those who have sought to intervene, submitted procedural or
substantive suggestions, or entered their appearances through counsel are
the following: Alabama Public Service C ommission; Alarm Industry Tele-
communications Committee; State of California; Public Utilities Commission
of California; Computers and Communications Industry Association; Con-
tinental Telephone Corporation; Independent Data Communications Man-
ufacturers Association; Jack Faucett Associates, Inc.; the States of Maine,
Alabama, Arizona, Colorado, Idaho, Illinois, Iowa, Louisiana, Maryland,
Massachusetts, Minnesota, Montana, New Hampshire, New Mexico, North
Dakota, Oregon, Rhode Island, Tennessee, Texas, Utah, Vermont, Wash-
ington, West Virginia, and Wyoming; MCI Communications Corp.; State
of Michigan; Michigan Public Service Commission; State of Missouri; State
of New York; New York State Consumer Protection Board; Public Service
Commission of the State of New York; National Association of Regulatory
Utility Commissioners; National Citizens Committee for Broadcasting;
Public Citizen; Consumer Federation of America; Rep. Ron Mottl; Media
Access Project; Consumer Utility Board of Wisconsin; State of New Mexico;
North American Telephone Association; Southern Pacific Communications
Corp.; Tandy Corp.; Tennessee Public Service Commission; U.S. Telephone
Communications, Inc.; Public Service Commission of the District of Colum-
bia: Public Advocate of New Jersey; Consumer Counsel of Ohio; National
Association of State Consumer Advocates; General Communications, Inc.;
Control Data Corp.; International Telephone and Telegraph Corp.; Federal
Communications Commission; Illinois Commerce Commission; Citizens of
the State of Florida; Office of Communications United Church of Christ:
Public Service Commission of Wisconsin; General Telephone & Electronics
Corp.
*: The order explained that under the Tunney Act, permission to intervene
is strictly within the Court's discretion; that it was premature to allow
anyone to intervene because the public comment procedures provided
ample protection for all legitimate interests at this stage of the proceedings:
that at the end of the public comment period, the Court would establish a
framework to ensure effective participation in further proceedings and
would again consider what status should be given to participants; and that
the denials to intervene were without prejudice to appropriate applications
to intervene made at some later date.
Subsequent requests for intervention were disposed of on a similar basis.
On March 25, 1982, for example, the Court denied the petition to intervene
24
a considerable number of comments from individual citizens.
All such comments were filed in the Public Interest Docket,™
and duplicates were turned over to the Department of Justice
for its response in accordance with paragraph 8 of the January
21, 1982 order.®
by the Public Service Commission for the District of Columbia and it
reiterated (1) that there is no absolute right to intervene in these
proceedings, and (2) that for the reasons stated in the February 5, 1982
order, no useful purpose would be served by allowing permissive inter-
vention at this stage. Following the entry of that order, the Commission
petitioned the United States Court of Appeals for a writ of mandamus
directing this Court to permit it to intervene. In an order issued April 8,
1982, this Court denied a motion for a stay of ali proceedings pending the
appellate review, finding that none of the elements required for the granting
of such relief had been satisfied. On June 1, 1982, the Court of Appeals
denied the petition for a writ of mandamus, granted AT&T's motion to
dismiss, and denied as moot the Commission's motion for a stay of
proceedings, its motion for oral argument, and its motion to expedite
appeal. In an accompanying Memorandum, the Court of Appeals stated
“(w]e conclude that the District Court was correct in denying intervention
of right at this stage of the proceedings.” United States v. AT&T, C.A.
No. 82-1321, Order and Memorandum (D.C. Cir. June 1, 1982).
Petitions to intervene filed by other participants were denied in orders
issued April 14, May 5, and June 4, 1982. In addition, on August 2, 1982,
the Court of Appeals granted the motion of the State of Michigan to dismiss
voluntarily its appeal of this Court’s denial of its motion to intervene.
United States v. AT&T, No. 82-1389 (D.C. Cir. Aug. 2, 1982). However,
in an order issued May 25, 1982, which established further procedures to
focus and sharpen the various issues raised during the public comment
period, the Court invited all interested persons to apply for intervenor or
amicus curiae status to the extent that they believed and could demonstrate
that such status was necessary and appropriate to protect their particular
interests. For subsequent developments regarding intervention, see Part
XI infra.
@ In its February 5, 1982 order, the Court established a separate docket,
Misc. No. 82-0025 (PI), for the filing of all documents relating to the public
interest proceedings. The documents in this file have been treated as part
of the record and have been utilized by the Court in considering the various
issues raised in the public interest proceedings. For this docket, normal
filing rules were waived to permit maximum participation by individual
citizens as well as by persons and organizations represented by counsel.
* On July 27, 1982, the chairman of the Subcommittee on Telecommun-
ications, Consumer Protection, and Finance of the House Committee on
Energy and Commerce, and four of his colleagues, forwarded to the Court
25
During the months of April and May, 1982, the Department
of Justice filed with the Court the comments it had received
during the preceding sixty days, and on May 20, 1982, it filed
its response to those comments.™
On May 25, 1982, the Court issued a Memorandum gov-
erning further proceedings. The Memorandum identified a
number of key issues that were raised by the cotfiments and
the responses, and it invited the parties and the various
interested persons to brief these issues in a form more suitable
to judicial adjudication than the necessarily somewhat diffuse
comments. A hearing was held on June 29 and 30, 1982, at
which time the issues were further elucidated and refined.®
The Court’s substantive conclusions based upon the com-
ments, responses, briefs, oral arguments, and the entire
record herein, are discussed below.
II
POWER OF THE COURT IN THIS
PUBLIC INTEREST PROCEEDING
Under the Tunney Act, the Court may approve the decree
proposed by the parties only if it first determines that such
approval is “in the public interest.” Before discussing the
substantive provisions of the proposed decree, it is appro-
priate to set out the standards which will guide the Court’s
public interest review.”
a letter with a number of recommendations and copies of the subcommittee’s
hearings on H.R. 5158, a bill to amend the Telecommunications Act of
1934. Copies of the letter were ser ed on counsel for both parties; the
Court ordered a copy placed in the court jacket; and it has considered
these views pursuant to subsection (f)(2) of the Tunney Act.
“ The next day, pursuant to leave of Court, AT&T filed its own reply
to the comments.
*® Twenty counsel from eighteen organizations presented oral argument
during this two-day hearing.
* 15 U.S.C. § 16(e). While the Court has not held that the Tunney Act
applies of its own force in this case, it is following the requirements of the
statute in these proceedings. See pp. 19-22 supra.
© The standards are the same whether the judgment is regarded as
“new” or as a modification of the 1956 decree in the Western Electric action.
See United States v. Motor Vehicle Manufacturers Ass'n, 1981-2 Trade
26
A. Purpose of the Tunney Act
In enacting the Tunney Act, Congress sought to ensure
that the Justice Department’s use of consent decrees in
antitrust cases would fully promote the goals of the antitrust
laws and foster public confidence in their fair enforcement.*
The legislators found that prior practice, which gave the
Department almost total control of the consent decree process,
with only minimal judicial oversight, failed to accomplish
these ends.
The legislative history shows that Congress was particu-
larly concerned that the “excessive secrecy” of the consent
decree process deprived the public of the opportunity to
scrutinize and comment upon proposed decrees, thereby
undermining confidence in the legal system.® In addition, the
legislators found that consent decrees often failed to provide
appropriate relief, either because of miscalculations by the
Justice Department” or because of the “great influence and
Cas. § 64,370 (C.D. Cal. 1981) (applying Tunney Act); United States v.
General Electric Co., 1977-2 Trade Cas. § 61,659 (E.D. Pa. 1977) (applying
public interest test); United States v. Swift & Co., 1975-1 Trade Cas.
60,201 (N.D. Ill. 1975) (applying public interest test). Courts have applied
a stricter standard of review only when modifications of existing decrees
are contested by one of the parties. See United States v. Swift & Co., 286
U.S. 106 (1932); Note, Construction and Modification of Antitrust Decrees,
77 Colum. L. Rev. 296, 304 (1977).
* The importance of consent decrees as an antitrust enforcement tool —
as evidenced by the fact that they were entered in approximately 80
percent of the government's cases at the time the Tunney Act was passed
— was the source of much of the legislators’ concern. See H.R. Rep. No.
93-1463, 93d Cong., 2d Sess. 6 (1974); 119 Cong. Rec. 3455 (1973) (Remarks
of Sen. Gurney).
® 119 Cong. Rec. 24598 (1973) (Remarks of Sen. Toney). See also 120
Cong. Rec. 36343 (1974) (Remarks of Rep. Mezvinsky); 120 Cong. Rec.
. 36343-44 (1974) (Remarks of Rep. Jordan).
™ Senator Tunney stated:
Regardless of the ability and negotiating skill of the Government’s
attorneys, they are neither omniscient nor infallible. The increasing
expertise of so-called public interest advocates and for that matter the
Sas Sanat Greet ote Sevines Saenee, Serre, S
antitrust victims may well serve to provide data, analysis,
or alternatives which would improve the outcome.
27
economic power” wielded by antitrust violators.” The history,
indeed, contains references to a number of antitrust settle-
ments deemed “blatantly inequitable and improper” on these
bases.
To remedy these problems, Congress imposed two major
changes in the consent decree process. First, it reduced
secrecy by ordering disclosure by the Justice Department of
the rationale and the terms of proposed consent decrees and
by mandating an opportunity for public comment.” Second,
it sought to eliminate “ ‘judicial rubber stamping’ of proposals
submitted to the courts by the Department,” by requiring an
explicit judicial determination in every case that the proposed
119 Cong. Rec. 3452 (1973). Senator Tunney further suggested that a lack
of resources further hampered the Justice Department's enforcement efforts
(119 Cong. Rec. 24600 (1973)) and that the Department sometimes simply
did not insist upon sufficient remedial action by the defendant. 119 Cong.
Rec. 24598 (1973).
" S. Rep. No. 93-298, ¥3d Cong., Ist Sess. 5 (1973); H.R. Rep. No. 93-
1463, supra at 6. See also 120 Cong. Rec. 36341 (1974) (Remarks of Rep.
McClory).
119 Cong. Rec. 24598 (1973) (Remarks of Sen. Tunney). References
were made, among others, to Cascade Natural Gas Corp. v. El Paso
Natural Gas Corp., 386 U.S. 129 (1967), where the Supreme Court found
that the Department of Justice had consented to a decree which completely
failed to alleviate the conditions found to violate the antitrust laws; to the
1956 decree in the Western Electric action (see Part I supra); and to the
questionable circumstances surrounding the consent decrees entered in
1971 in cases involving the International Telephone and Telegraph Corp.
(see The ITT Dividend: Reform of Department of Justice Consent Decree
Procedures, 73 Colum. L. Rev. 594, 603-06 (1973)). 120 Cong. Rec. 36342-
43 (1974) (Remarks of Rep. Holtzman); 120 Cong. Rec. 36345 (1974)
(Remarks of Rep. Gunter); Antitrust Procedures and Penalties Act:
Hearings on S.782 and S.1088 Before the Subcomm. on Antitrust and
Monopoly of the Senate Comm. on the Judiciary, 98d Cong., 1st Sess. 76,
120, 135-36, 142-43, 147, 163-64, 181 (1973) [hereinafter cited as Senate
Hearings}; Consent Decree Bills: Hearings on H.R. 9203, H.R. 9947, and
S. 782 Before the Subcomm. on Monopolies and Commerical Law of the
House Comm. on the Judiciary, 93d Cong., Ist Sess. 162-68 (1973).
™ 15 U.S.C. §§ 16(0)}(d), (g). These procedures have been fully applied
in this case. See pp. 21-24, supra.
decree was in the public interest.” I. is clear that Congress
wanted the courts to act as an independent check upon the
terms of decrees negotiated by the Department of Justice,”
and this Court will review the instant settlement in that
spirit.
B. Factors to be Considered
Although the statute is explicit as to the Court’s obligation
to make a public interest determination, it provides relatively
little guidance as to the meaning of “public interest” in this
context. What is clear is that, whatever other factors a
™ H.R. Rep. No. 93-1463, supra at 8. See also 120 Cong. Rec. 36344
(1974) (Remarks of Rep. Jordan); 119 Cong. Rec. 3452 (1973) (Remarks of
Sen. Tunney). Thus, Congress rejected case law to the effect that courts
should not “assess the wisdom of the Government's judgment in negotiating
and accepting [a] consent decree.” Sam Fox Publishing Co. v. United
States, 336 U.S. 683, 689 (1961). See also Swift & Co. v. United States,
276 U.S. 311, 321-32 (1928). The statute represents an endorsement of the
line of cases in which courts examined proposed consent decrees to
determine whether they were in the public interest. £.g., United States
v. Ling-Temco-Vought, Inc., 315 F. Supp. 1301 (W.D. Pa. 1970); United
States v. Carter Products, Inc., 211 F. Supp. 144 (S.D.N.Y. 1962). See
Senate Hearings, supra note 7, at 147-48 (Testimony of Hon. J. Skelly
Wright).
% Accord, United States v. National Broadcasting Co., 449 F. Supp.
1127, 1142 (C.D. Cal. 1978); United States v. Morgan Drive Away, Inc.,
1976-1 Trade Cas. ¢ 60,949 at 69,191 (D.D.C. 1976); United States v.
Gillette Co., 406 F. Supp. 713, 715 (D. Mass. 1975).
% The Court’s powers are not restricted by the circumstance that bills
are pending in Congress concerning several of the issues raised in this
case. The Tunney Act requires the Court to evaluate the decree proffered
to it by the parties, and it is clear that it may not avoid this mandate
mert.y because Congress might at some future date enact legislation in
the same field. Just as the Court refused to delay the trial of the AT&T
action when it was apprised of the possibility of legislative action (see
order filed July 29, 1981; Transcript of Proceedings, July 29, 1981, at 8
10, 13-14) so it could not now abdicate its responsibilities with respect to
the profferred decree because of possible future legislative activity. Con-
gress may, of course, enact legislation overturning a decree entered by
this Court.
™ The statute specifies several criteria which a court “may” consider in
making its public interest determination (see 15 U.S.C. §§ 16(e\(1), (2))
court may take into account, it must begin by defining the
public interest in accordance with the antitrust laws. S. Rep.
No. 93-298, supra, at 3; H.R. Rep. No. 93-1463, supra, at
11-12. It is therefore to the basic purposes of the antitrust
laws that we must first turn.
The Supreme Court has repeatedly held that, in enacting
the Sherman Act, Congress sought to “preserv[e] free and
unfettered competition as the rule of trade.” Northern Pacific
Railway Co. v. United States, 356 U.S. 1, 4 (1958). See also
National Society of Professional Engineers v. United States,
435 U.S. 679, 692 (1978); United States v. Crescent Amuse-
ment Co., 323 U.S. 173, 187 (1944). Competition has not been
endorsed by the Congress and the courts as a purely academic
matter. The need to safeguard free competition is a direct
result of the fundamental premise of our economic system
that
unrestrained interaction of competitive forces will yield
the best allocation of our economic resources, the lowest
prices, the highest quality and the greatest material
progress, while at the same time providing an environ-
ment conducive to the preservation of cur democratic
political and social institutions.
Northern Pacific Railway Co. v. United States, supra, 356
U.S. at 4. See also National Society of Professional Engineers
v. United States, supra, 435 U.S. at 695.”
This policy is embodied in two types of legal standards —
those applied to the liability phase of antitrust cases and
those which govern the relief phase. Since the Court’s deter-
mination here is concerned solely with remedies, the decisions
granting relief after a finding of liability form the most relevant
but the legislative history indicates that the listing of these factors was
not meant to limit the court’s inquiry. S. Rep. No. 93-298, supra, at 6; 120
Cong. Rec. 36344 (1974) (Remarks of Rep. Jordan); 119 Cong. Rec. 24599
(1973) (Remarks of Sen. Tunney). These criteria therefore cannot be
regarded as embodying the standard against which a proposed decree is
to be measured. For further discussion of these factors, see note 93 infra.
™ There is an obvious conceptual similarity between competition in
commerce as the foundation of our economic system and competition in
ideas as the basis of our political system.
yardstick for determining whether the proposed consent
decree will further antitrust policies, and the Court will
therefore use these decisions as its basic standard.
Antitrust remedies, it is usually said, must “effectively pry
open to competition a market that has been closed by de-
fendants’ illegal restraints.” Jnternational Salt Co. v. United
States, 332 U.S. 392, 401 (1947). See also 2 P. Areeda & D.
Turner, Antitrust Laws § 327 (1978). A decree must “break
up or render impotent the monopoly power found to be in
violation of the Act,” that is, it must leave the defendant
without the ability to resume the actions which constituted
the antitrust violation in the first place. For these reasons,
the decree should not be limited to past violations; it must
also effectively foreclose the possibility that antitrust viola-
tions will occur or recur. As the Court noted in /nternational
Salt Co. v. United States, supra, 332 U.S. at 400,
it is not necessary that all of the untraveled roads to
[anticompetitive conduct] be left open and that only the
worn one be closed. The usual ways to the prohibited
goals may be blocked against the proven transgressor.
See also National Society of Professional Engineers v. United
States, supra, 435 U.S. at 697-98; United States v. United
States Gypsum Co., 340 U.S. 76, 88 (1950); Associated Press
v. United States, 326 U.S. 1, 22 (1945); United States v.
Crescent Amusement Co., supra, 323 U.S. at 188; United
States v. United Shoe Machinery Corp., 110 F. Supp. 295,
346-47 (D. Mass. 1953), aff'd, 347 U.S. 521 (1954).”
™ United States v. Grinnell Corp., 384 U.S. 563, 577 (1966). See also
United States v. United Shoe Machinery Corp., 391 U.S. 244, 251 (1968);
Schine Chain Theatres, Inc. v. United States, 334 U.S. 110, 128-29 (1948).
™ On this basis, the Court may at the relief stage prohibit practices
which have not been found unlawful if such a prohibition is necessary to
avoid the recurrence of monopolization. United States v. United Shoe
Machinery Corp., supra; see also Hartford-Empire Co. v. United States,
323 U.S. 386, 409 (1945). In addition, restraints may be imposed upon the
defendant which are designed to allow the development of nascent com-
petition within the relevant market. Ford Motor Co. v. United States, 405
U.S. 562, 575, 578 (1972).
31
While the issue of competition and the effects on competition
which are at the heart of the antitrust laws should thus be
deemed matters of paramount concern, it is clear from the
cases that other factors are not irrelevant.*' As the Supreme
Court has put it, antitrust violations should be remedied
“with as little injury as possible to the interest of the general
public” and to relevant private interests. United States v.
American Tobacco Co., 221 U.S. 106, 185 (1911). See also,
United States v. E.I. duPont de Nemours, 366 U.S. 316, 327-
28 (1961). When choosing between effective remedies, a court
should impose the relief which impinges least upon other
public policies. United States v. American Tobacco Co.,
supra; United States v. E. I. duPont de Nemours, supra;
United States v. Terminal Railroad Ass'n, 224 U.S. 383, 410
(1912). Thus, the Court would be justified in rejecting the
proposed decree or requiring its modification® if it concluded
that the decree unnecessarily conflicts with important public
policies other than the policy embodied in the Sherman Act.
C. Degree of Deference to the Proposal Submitted by
the Parties
Where, as here, a court is evaluating a settlement, it is
not as free to exercise its discre*ion in fashioning a remedy
as it would be upon a finding of liability. For when parties
enter into a consent decree, they
" The parties to this litigation as well as most interested third persons
have expressly recognized that, in assessing whether the proposed decree
is in the public interest, the Court may consider factors other than its
effect on competition.
™ However, where only one form of relief will effectively remedy the
antitrust violation, it is that relief which must imposed, regardless of its
impact on other interests. National Society of Professional Engineers v.
United States, supra, 435 U.S. at 697-98; United States v. E.1. duPont de
Nemours, supra, 366 U.S. at 327-28.
= The Court has the power to insist that the proposed decree take
account of these other values. See United States v. Ling-Temco-Vought,
Inc., 315 F. Supp. 1301 (W.D. Pa. 1970), where the court refused to enter
a proposed consent decree until the parties acted to safeguard the pension
rights of the employees of the defendant.
32
waive their right to litigate the issues involved in the
case and thus save themselves the time, expense, and
inevitable risk of litigation. Naturally, the agreement
reached normally embodies a compromise; in exchange
for the saving of cost and the climination of risk, the
parties each give up something they might have won
had they proceeded with the litigation.
United States v. Armour & Co., 402 U.S. 673, 681 (1971). If
courts acting under the Tunney Act disapproved proposed
consent decrees merely because they did not contain the
exact relief which the court would have imposed after a
finding of liability, defendants would have no incentive to
consent to judgment and this element of compromise would
be destroyed. The consent decree would thus as a practical
matter be eliminated as an antitrust enforcement tool, despite
Congress’ directive that it be preserved. See S. Rep. No. 93-
298, supra, at 6; H.R. Rep. No. 93-1463, supra, at 6.
It follows that a lower standard of review must be applied
in assessing proposed consent decrees than would be appro-
priate in other circumstances. H.R. Rep. No. 93-1463, supra,
at 12. For these reasons, it has been said by some courts that
a proposed decree must be approved even if it falls short of
the remedy the court would impose on its own, as long as it
falls within the range of acceptability or is “within the reaches
of public interest.” United States v. Gillette Co., 406 F. Supp.
713, 716 (D. Mass. 1975). See also United States v. Bechtel
Corp., 648 F.2d 660, 666 (9th Cir. 1981); United States v.
Carrols Development Corp., 454 F. Supp. 1215, 1222 (N.D.N.Y.
1978); United States vy. National Broadcasting Co., 449 F.
Supp. ; C.D. Cal. 1978). Although these decisions
are not necessarily b ing,” this Court will follow a similar
approach.
It does not follow ieee principles, however, that
courts must unquestioningly accept a profferred decree as
long as it somehow, and however inadequately, deals with
the antitrust and other public policy\problems implicated in
the lawsuit. To do so would be to revert to the “rubber
™ There is no authoritative precedent from the Supreme Court or the
Court of Appeals for this Circuit on this issue.
33
stamp” role which was at the crux of the congressional
concerns when the Tunney Act became law. This consideration
is especially potent in these cases, for several reasons.
First. This is not an ordinary antitrust case. The American
Telephone and Telegraph Company, with its various compo-
nents and affiliates, is the largest corporation in the world
by any reckoning,® and the proposed decree, if approved,
would have significant consequences for an unusually large
number of ratepayers, shareholders, bondholders, creditors,
employees, and competitors. Beyond that, it is clear that the
divestiture of the Operating Companies, combined with the
entry of AT&T into new competitive markets, will be an
enormous undertaking, fraught not only with many problems
and difficulties, but also with a potential for substantial private
advantage at the expense of the public interest. In view of
these considerations, and of the potential impact of the
proposed decree on a vast and crucial sector of the economy
and on such general public interests as the cost and availability
of local telephone service, the technological development of
a vital part of the national economy, national defense, and
foreign trade, the Court would be derelict in its duty if it
adopted a narrow approach to its public interest review
responsibilities.®
* The Bell System's total operating revenues in 1979 were over $45
billion, and in 1980, they ex--2eded $50 billion. These sums represent almost
two percent ef the gross ...r10nal product of the United States in each of
these years. The Bell System’s net income for 1979 and 1980 was $5.6
billion and $6 billion, respectively. During 1979, the Bell System’s net
assets devoted to telephone service were valued at approximately $99.3
billion. At the end of 1979, the Bell System employed over one million
people, and it was thus the largest employer in the United States with the
exception of the federal government. Episode 5/57A, stipulation pars. 6,
8-9, 20. For a more impressionistic account of AT&T's size, see S. Kleinfeld,
The Biggest Company on Earth (1982).
™ There have been suggestions by some that the issues in these cases,
involving as they do national telecommunications policy, should be left by
the Court for Congress to decide. For the reasons stated in note 76 supra
and otherwise, this is inappropriate. At the same time, a subject of this
importance should not be decided solely by an agreement between the
Department of Justice and a single company. The involvement of the
Judiciary under the Tunney Act thus provides a useful safeguard.
34
Second. Some of those who during the legislative hearings
took a narrow view of the judicial responsibilities under the
Act suggested that the courts would generally not be able to
render a sound judgments on settlements because they would
not be aware of all the relevant facts.*’ But that factor is of
relatively little relevance here, for this Court has already
heard what probably amounts to well over ninety percent of
the parties’ evidence both quantitatively and qualitatively,
as well as all of their legal arguments.™ It is thus in a far
better position than are the courts in the usual consent decree
cases® to evaluate the specific details of the settlement.”
Third. These actions, and this settlement, have an unfor-
tunate history. The 1956 Western Electric consent decree
was evidently the product of the very kind of influence and
pressure that Congress subsequently sought to prevent through
the Tunney Act procedures. See pp. 3-7 supra. That identical
settlement, and the identical parties, are now before the
Court. Nor can those events simply be dismissed as ancient
history, irrelevant to the events of 1981-82. One needs only
to recall the peculiar circumstances under which the instant
settlement proposal was sought to be filed in the courts* and
the recurrence of an inappropriate collaboration in the course
” See, e.g., Senate Hearings, supra note 72, at 71.
® In addition, the Court has received comments and briefs concerning
the proposed decree from several hundred interested persons, as well as
voluminous submissions from the parties.
*® In United States v. Ling-Temco-Vought, Inc., supra, 315 F. Supp. at
1309, the absence of a record forced the court to rely upon the parties’
assurances that the proposed decree was in the public interest.
® In fact, the parties sought review of the proposed decree in this Court
precisely because of its “substantial expertise on the competitive situation
in the telecommunications industry.” Letter from Assis‘ant Attorney
General William F. Baxter, dated January 18, 1982.
* See pp. 19-21 supra. Because of the method the parties chose, that
proposal might either have escaped Tunney Act review altogether or it
might at best have been reviewed only to the extent agreeable to them.
See, e.g., the Memorandum in Connection with Stipulation and Modification
of Final Judgment, filed by the parties in the District Court in New Jersey
which refers to the procedures in restrictive terms, mentioning specifically
only the publication and Federal Register requirements of the Tunney Act.
of the litigation between the Department of Defense and
AT&T similar to that which occurred in 1952-54. See United
States v. AT&T, 524 F. Supp. 1331 (D.D.C. 1981). These
circumstances do not foster a sense of confidence that the
assessment of the settlement and its implications may be left
entirely to AT&T and the Department of Justice.
None of this means, of course, that the Court would be
justified in simply substituting its views for those of the
parties. But it does mean that the decree will receive closer
scrutiny than that which might be appropriate to a decree
proposed in a more routine antitrust case.
The Court concludes that, taking into account the various
legislative and decisional mandates discussed above, it will
apply the following standard to its evaluation of the proposed
decree. After giving due weight to the decisions of the parties
as expressed in the proposed decree, the Court will attempt
to harmonize competitive values with other legitimate public
interest factors. If the decree meets the requirements for an
antitrust remedy — that is, if it effectively opens the relevant
markets to competition and prevents the recurrence of anti-
competitive activity, all without imposing undue and unnec-
essary burdens upon other aspects of the public interest —
it will be approved.® If the proposed decree does not meet
® See also note 145 infra.
* This standard encompasses the criteria specified in the Tunney Act
except for “consideration of the public benefit, if any, to be derived from
a determination of the issues at trial.” 15 U.S.C. § 16(eX2). This factor
directs the Court to consider the effect of the proposed decree upon the
ability of private antitrust plaintiffs to recover against the defendant for
injuries alleged to have resulted from the activity chelienged in the
government. See 119 Cong. Rec. 3452 (1973) (Remarks of Sen. Tunney).
However, the legislative history indicates that this is a secondary factor
in the assessment of the decree and that the government’s agreement to
make information and evidence available to private plaintiffs will ordinarily
be sufficient. S. Rep. No. 93-298, supra at 6-7; H.R. Rep. No. 93-1463,
supra at 8.
The vigor with which several private plaintiffs have pursued actions
against AT&T indicates that further prosecution of the government’s case
is not warranted on this basis. In addition, the Justice Department has
indicated its willingness to provide trial record materials to private
plaintiffs. Competitive Impact Statement at 49 n. 34.
this standard, the Court will follow the practice applied in
other Tunney Act cases™ and as a prerequisite to its approval,
it will require modifications which would bring the decree
within the public interest standard as herein defined.™
III
CONFLICT BETWEEN THE PROPOSED DECREE AND STATE
REGULATION
A number of interested persons, principally States and
state regulatory commissions,” contend that this Court lacks
the power to enter the decree proposed by the parties without
the approval of the regulatory commissions acting under state
law. The decree would require AT&T to take various actions
for which regulatory approval is required under state law,”
and it would restrict the Operating Companies with respect
to activities which they are authorized to engage in under
state regulation.™ Because of this conflict, say the States,
the decree may not be entered until the requisite permission
from the various state agencies has been secured. The
Department of Justice and AT&T assert in response that
state law” is preempted to the extent that it bars execution
of the decree.’
™ See, ¢.g., United States v. Gillette Co., supra, 406 F. Supp. at 714-
15.
* The Court finds no basis in law or policy for the suggestion made by
the FCC and some others that it may have the power to modify the
proposed decree over the objections of the parties and enter it on its own
motion on that basis. If the parties decline to incorporate the Court's
recommended modifications, the 1956 decree in the Western Electric action
will remain in effect, the AT&T trial will resume, and the Court will then
make its own decision as to liability and, if appropriate, as to remedy. In
view of the substantial completeness of the record, the parties might elect
not to adduce additional evidence, in which event tic Court would make
its decision based on the present record.
* All of these persons will be referred to hereinafter as the States.
” Such as transferring assets.
™ For example, long distance telecommunications and provision of cus-
tomer premises equipment.
* The District of Columbia Public Service Commission contends that the
effect of the antitrust laws upon the District regulatory statutes cannot be
37
A. General
This is not the first case in which States have argued that
a federal court decree based upon federal law may not validly
require actions prohibited by state law. These claims are
almost as old as the Republic. One needs to recall only the
analyzed under the preemption doctine because both are congressional
enactments. However, courts have characterized such loca: statutes as
state laws for the purpose of reconciling them with national policies. See
D.C. Federation of Civil Associations, Inc. v. Volpe, 434 F.2d 436 (D.C.
Cir. 1970); Columbia Plaza Limited Partnership v. Cowles, 403 F. Supp.
1337, 1341 (D.D.C. 1975); District of Columbia v. Greater Washington
Central Labor Council, 442 A.2d 110 (D.C. 1982). The preemption doctrine
would thus be an appropriate gauge of Congress’ intent concerning the
relationship between the D.C. statute and the antitrust laws.
The recent decision in Feldman v. Gardner, 661 F.2d 1295 (D.C. Cir.
1981), cert. granted ov. other grounds, 30 U.S.L.W. 3998.09 (June 28,
1982), in which the court held that the District of Columbia Court of
Appeals is immune from antitrust liability, does not require a different
result. That case concerned antitrust liability, not the respect to be
accorded District of Columbia statutes in implementing an antitrust remedy.
In light of the Feldman Court's conclusion that the District “remains a
federal enclave lacking the sovereignty inherent in statehood,” it would be
anomalous if statutes concerning purely local affairs could thwart vindication
of a national policy when the statutes of the sovereign states cannot have
such an effect. 661 F.2d at 1307.
' The Court must decide the preemption issue at this juncture even
though no State has yet taken specific action which conflicts with the terms
of the proposed decree. In the first place, many States have made it
abundantly clearly that, unless the Court acts, they will proceed in a
manner inconsistent with the decree. Further, the Court must delineate
its powers now with respect to the conflicting state claims so as to avoid
issuing an overbroad decree. Finally, the possibility that provisions of the
decree could be vetoed by regulators on a state-by-state basis, with the
resulting “balkanized scheme of telecommunications service” (Joint Com-
ments of Alabama, et al., at 12) would obviously have a bearing on the
basic question whether the proposed decree would and could effectively
open the telecommunications industry to competition. If the States’ claims
are valid, the Court and the parties might have to search for different
means to implement the mandate of the Sherman Act herein. It follows
that a resolution of this legal issue is necessary if the Court is to render a
proper determination under the Tunney Act. It may be noted, too, that
the parties to the settlement as well as those who object thereto are in
agreement that a decision by this Court at this time is both appropriate
and necessary.
gen sulle
great school desegregation disputes of the last thirty years,
in the course of which a number of States justified their
failure to comply with federal court injunctions by asserting
that compliance was impossible because of the conflicting
requirements of state law. The Supreme Court repeatedly
and consistently held that the Supremacy Clause of the
Constitution’ rendered invalid any state authority that
conflicted with the federal court order. North Carolina State
Board of Education v. Swann, 402 U.S. 43, 46 (1971); Griffin
v. County Schoo! Board, 377 U.S. 218, 231-34 (1964); Cooper
v. Aaron, 358 U.S. 1 (1958); see also Morgan v. McDonough,
540 F.2d 527 (1st Cir. 1976); United States v. Indianola
Municipal Separate School District, 410 F.2d 626, 630-31
(5th Cir. 1969). More recently, in Washington v. Washington
State Commercial Passenger Fishing Vessel Ass’n, 443 U.S.
658, 695 (1979), the Court once again rejected the argument
that state law restrictions could provent a state regulatory
agency from complying with a federal court’s decree, reiter-
ating that “(s]tate-law prohibition against compliance with
the District Court’s decree cannot survive the command of
the Supremacy Clause of the United States Constitution.”
While the basis for preemption is the Constitution, a
preemptive effect in an individual case may be based on that
document, on treaties, or on federal statutes such as the
Sherman Act, which constitute valid exercises of federal
power. See California Retail Liquor Dealers Ass'n v. Midcal
Aluminum, Inc., 445 U.S. 97 (1980). In other words, if this
Court has the authority under the Sherman Act to issue the
proposed decree, state regulatory statutes are unenforceable
to the extent that they prevent compliance with its terms.'@
i Art. VI, cl. 2 states:
This Constitution, and the Laws of the United States which shall
made in Pursuance thereof; . . . shall be the Law of the Land;
and the Judges in every State shall be bound thereby, Thing in
the Constitution or Laws of any State to the Contrary :
“@ The fact that the decree would be issued pursuant to the parties’
consent is irrelevant to its status, for a consent decree has the same effect
as a decree issued after a finding of liability on the merits. United States
v. Swift & Co., 286 U.S. 106, 115 (1982). Accordingly, courts have found
=
The States cannot and most of them do not dispute that
the conditions sought to be remedied by the decree fall within
the broad sweep of the Sherman Act. Like the Commerce
Clause of the Constitution,’ the Sherman Act “extend[s]
beyond activities actually in interstate commerce to reach
other activities that, while wholly local in nature, nevertheless
substantially affect interstate commerce.” McLain vy. Real
Estate Board of New Orleans, Inc., 444 U.S. 232, 241 (1980).
See also Hospital Building Co. v. Trustees of Rex Hospital,
425 U.S. 738, 743 (1976). Similarly, the States do not dispute
that the power of the Court under Section 4 of the Sherman
Act, 15 U.S.C. § 4, to “prevent and restrain” violations of
the statute is broad enough to encompass the decree proposed
by the parties in this case. Their argument bypasses these
general constitutional and antitrust principles to rely instead
on certain specific aspects of the exercise of federal antitrust
power, as follows.
1. Tenth Amendment
Several States assert — citing National League of Cities
v. Usery, 426 U.S. 833 (1976) — that the proposed decree
would unconstitutionally invade powers reserved to them
under the Tenth Amendment. In that case, the Supreme
Court held that Congress was foreclosed from extending
minimum wage and maximum hour employment standards to
persons employed by the States themselves, ruling (426 U.S.
at 851-52) that activities in areas such as
fire prevention, police protection, sanitation, public health,
and parks and recreation .... are typical of those
performed by state and local governments in discharging
their dual functions of administering the public law and
furnishing public services. Indeed, it is functions such
that consent decrees displace state law to the same extent as do judgments
on the merits. Brown v. Neeb, 644 F.2d 551, 563 (6th Cir. 1981); United
States v. American Society of Composers, Authors, and Publishers, 442
F.2d 601 (2d Cir. 1971).
Art. I, § 8, cl. 3. See Heart of Atlanta Motel, Inc. v. Katzenbach,
379 U.S. 241, 258 (1964); Katzenbach v. McClung, 379 U.S. 294 (1964);
Wickard v. Filburn, 317 U.S. 111 (1942). ;
40
as these which governments are created to provide,
services such as these which the States have traditionally
afforded their citizens. If Congress may withdraw from
the States the authority to make those fundamental
employment decisions upon which their systems for
performance of these functions must rest, we think there
would be little left of the States’ ‘separate and inde-
pendent existence,’ . . . [T]he dispositive factor is that
Congress has attempted to exercise its Commerce Clause
authority to prescribe minimum wages and maximum
hours to be paid by the States in their capacities as
sovereign governments. . . . We hold that insofar as the
challenged amendments operate to directly displace the
States’ freedom to structure integral operations in areas
of traditional governmental functions, they are not within
the authority granted Congress by Art. I, § 8, cl. 3.
(footnotes omitted).
The Court made it abundantly clear that its decision was not
to be regarded as a wholesale retreat from the principle of
federal supremacy in the event of federal-state conflict; rather,
the decision was strictly limited to the proposition that the
Tenth Amendment imposes limitations on the “exercise of
congressional authority directed . . . to the States as States.”
Id. at 845.
The progeny of National League of Cities have continued
to distinguish sharply between federal regulation of States
and such regulation of “private persons and businesses ‘nec-
essarily subject to the dual sovereignty of the government
and of the State in which they reside.’” Hodel v. Virginia
Surface Mining & Reclamation Ass’n, 452 U.S. 264, 286
(1981), quoting National League of Cities v. Usery, supra,
426 U.S. at 845. See also, Federal Energy Regulatory Com-
mission v. Mississippi, 50 U.S.L.W. 4566 (June 1, 1982). As
to the latter category of regulation, said the Court, there is
“no Tenth Amendment impediment to congressional action.”
Hodel v. Virginia Surface Mining & Reclamation Ass’n,
supra, 452 U.S. at 286.
The proposed decree imposes obligations only on private
business. By its terms, it does not apply to the States at all;
pursuant to the congressional power over interstate commerce
41
it simply regulates private activities which are without any
doubt subject to that power. To be sure, some of these
activities may also be subject to state regulation; but such
confluence is not, and has never been held to be, regulation
of “States as States.”
The Supreme Court recently considered an analogous prob-
lem in Federal Energy Regulatory Comm’n v. Mississippi,
supra. One of the statutory provisions at issue in that case
permitted the Federal Energy Regulatory Conimission to
exempt certain private facilities from state laws. While the
Court divided as to the application of the Tenth Amendment
to other sections of the statute, it was unanimous in upholding
this particular provision because, as the majority noted, “the
Federal Government may displace state regulation even
though this serves to ‘curtail or prohibit the States’ prerog-
atives to make legislative choices respecting subjects the
States may consider important.’” 50 U.S.L.W. at 4570,
quoting Hodel v. Virginia Surface Mining & Reclamation
Ass'n, supra, 452 U.S. at 290. See also 50 U.S.L.W. at 4575
n. 1 (O’Connor, J., dissenting).
2. Communications Act
Some States argue next that in enacting the Communica-
tions Act, Congress intended to prevent federal preemption
of the state regulation of telecommunications permitted by
that statute. There is no evidence whatever to support this
proposition. Absent specific indication of congressional intent,
the Court declines to read the Communications Act so as to
immunize these state laws from preemption by other federal
statutes.
Furthermore, the States’ authority under the Communi-
cations Act is limited to “local services ... that in their
nature and effect are separable from and do not substantially
affect the conduct or development of interstate communiva-
tions.” North Carolina Utility Commission v. FCC, 537 F.2d
787, 793 (4th Cir. 1976). The decree, of course, concerns
matters which are beyond this limited grant of jurisdiction.
Finally, even if the Communications Act did support certain
kinds of state regulation, it would not help the States here.
42
This Court has heard a variation of the argument they make
when it was raised, again and again, by AT&T and has
rejected it every time. United States v. AT&T, supra, 524
F. Supp. at 1345; United States v. AT&T, supra, 461 F.
Supp. at 1320-30. As the Court previously stated, regulation
under the Communications Act is neither sufficiently explicit
nor sufficiently pervasive™ to allow it to stand in the way of
the enforcement of the antitrust laws.'’® All other courts
which have had occasion in recent years to consider the
subject of telecommunications antitrust immunity on account
of regulation under the Communications Act have reached
the same conclusion. Phonetele, Inc. v. AT&T, 664 F.2d 716
(9th Cir. 1981); Sound, Inc. v. AT&T, 631 F.2d 1324, 1327-
31 (8th Cir. 1980); Mid-Texas Communications Systems, Inc.
v. AT&7, 615 F.2d 1372, 1377-82 (5th Cir. 1980); Essential
Communications Systems, Inc. vy. AT&T, 610 F.2d 1114 (8rd
Cir. 1979). See also, National Gerimedicai Hospital and
Gerontology Center v. Biue Cross, 452 U.S. 378 (1981). If
the Communications Act itself and direct regulation by the
FCC pursuant to that Act do not impair antitrust liability, a
fortiori mere implied recognition in the Act of state regulation
— assuming that there is such recognition — cannot stand in
the way either of a finding of such liability or of the taking
of necessary remedial action in implementation of the mandate
of the Sherman Act.
B. Parker v. Brown
The States’ primary contention is that the decree is barred
by the state action exemption from the antitrust laws first
announced in Parker v. Brown, 317 U.S. 341 (1943). In that
case, the Supreme Court upheld a regulatory program which
™ See generally, Gordon v. New York Stock Exchange, 422 U.S. 659
(1975); Otter Tail Power Co. v. United States, 410 U.S. 366, 373-78 (1973).
'‘* The Federal Communications Commission has consistently taken the
same position. Jn the Matter of Amendment of Subpart F of Part i of the
Commission's Rules, 42 F.C.C. 905, 906, 910-12 (1969); Jn the Matter of
the Applications of the Connecticut Water Co. & Woolridge Bros., Inc.,
25 F.C.C. 1867, 1878 (1958). See also, Memorandum filed with this Court
by the FCC as amicus curiae on December 30, 1975.
43
restricted competition among raisin growers by setting prices
and limiting production. Finding no suggestisn in the legis-
lative history of the Sherman Act that such state action was
to be restrained, the Court declined to ex shat the Sherman
Act preempted the state law.
The Parker doctrine, which has beeg “restated and applied
a number of times since then,’ “reflects Congress’ intention
to embody in the Sherman Act the federalism principle that
the States possess a significant measure of sovereignty under
our Constitution.” Community Communications Co. v. City
of Boulder, 50 U.S.L.W. 4144, 4147 (Jan. 13, 1982). See also
Areeda, “Antitrust Immunity for ‘State Action’ After Lafay-
ette,” 95 Harv. L. Rev. 435, 436 (1981). At the root of the
rule is the principle that federalism permits the States to
impose a regime of economic regulation which is different
from and inconsistent with the free competition principle
mandated by the antitrust laws.
There are several reasons why the States’ reliance on the
Parker doctrine is misplaced.
In the first place, since the doctrine in rooted in the
desirability of state experimentation and regulation, it is not
at all self-evident that it is applicable to the type of activity
involved in these cases. The telecommunications network is,
technologically and economically, a national network with
interdependent components.’ Congress has recognized this
interstate characteristic, with its impacts on the national
economy and national defense, by exercising its power under
the Commerce Clause to reserve federal control over inter-
state communications. North Carolina Utility Commission
v. FCC, supra. It may be doubted that the Parker doctrine
™ California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc.,
445 U.S. 97 (1980); New Motor Vehicle Board vy. Fox, 439 U.S. 96 (1978);
City of Lafayette v. Louisiana Power & Light Co., 486 U.S. 389 (1978);
Cantor v. Detroit Edison Co., 428 U.S. 579 (1976); see generally 1 P.
Areeda & D. Turner, Antitrust Law, supra at §§ 212-220.
Even after the division of the network into various separate entities
as a result of the divestiture, it will still be a national network in its
operational sense. See Part X(A) infra.
44
may reasonably be extended to this kind of an activity which
is national par excellence.
In any event, the Parker v. Brown line of cases does not
establish that all state regulation per se serves to immunize
activities from the federal antitrust laws. Such an immunity
exists only if (1) the restraint is clearly articulated and
affirmatively expressed as state policy, and (2) the policy is
actively supervised by the State. California Retail Liquor
Dealers Ass’n v. Midcal Aluminum, Inc., supra, 445 U.S.
at 105. Moreover, preemption is precluded only under special
circumstances and to achieve a specific goal: to allow the
states to implement alternatives to the Sherman Act system
of free competition. It is against these standards that the
States’ contention here must be tested.
The conduct that is the subject of these antitrust actions
is clearly not beyond the reach of the federal antitrust laws’®
— a conclusion with which the States are in agreement.'®
That is so because some of that conduct (i.e., the allegedly
anticompetitive activity of AT&T in the intercity services
market) is not under state regulation at all; and because the
remainder (i.e., AT&T’s activity in the local services and
equipment markets) is regulated by the states only in the
sense that the local Operating Companies are required to file
tariffs with respect thereto — actions which the courts have
consistently held to be insufficient to qualify under the Parker-
Midcal “active supervision” standard." To put it another
® See Phonetele, Inc. v. AT&T, supra; Sound, Inc. v. AT&T. supra,
631 F.2d at 1327-31, 1334-35; Essential Communications Systems, Inc. v.
AT&T, supra, 610 F.2d at 1125; Northeastern Telephone Co.v. AT&T, 477
F. Supp. 251 (D. Conn. 1978), rev'd on other grounds, 651 F.2d 76 (2d Cir.
1981); United States v. AT&T, supra, 461 F. Supp. at 1320-30.
“ Brief on Topic Five of the Public Service Commission of Wisconsin,
et al. at 8; Brief on Topic Five of State of California, et al., at 3.
" To be sure, the States are closely regulating such activities as the
transfer of assets by entities within their jurisdictions and the types of
business operations in which the Operating Companies may engage. But
these subjects of state regulation are not the target of antitrust actions
before the Court; the conduct that is being challenged is that of AT&T in
the intercity services and equipment markets and, as indicated supra, that
conduet is not being regulated by the States at all.
45
way, it is clear that state regulation would not be a defense
during the liability phase of this or any other antitrust action
based on similar conduct.
Since the conduct which is the subject of these lawsuits is
thus well within the jurisdiction of the federal antitrust laws
— as distinguished from the regulatory jurisdiction of the
States — it would make no sense to hold that, in providing
a remedy for the anticompetitive conduct,'"' the Court must
refrain from interfering with state regulation.'” Such a
holding would in effect place this conduct in a non-man’s land
— not regulated by the states sufficiently to meet the Parker-
Midcal test, yet immunized from effective federal antitrust
jurisdiction because the antitrust remedy is barred by state
regulations unrelated to this conduct.'”
The practical consequences of such a rule to antitrust
enforcement could be devastating.
No effective, unconditional antitrust judgment could be
entered and enforced with respect to any subject matter area
in which the states had established a system of regulation.
The federal antitrust court would have to await the outcome,
the benevolent agreement, of the local regulatory authorities
before it could implement its decree. Should one or more
States or their regulatory bodies object, the decree could not
be enforced, irrespective of the necessity for such enforcement
in the vindication of federal antitrust policy." It is incon-
ceivable that Congress could have intended to defer to state
4! The same rationale applies to its equivalent, a consent decree. Although
the States’ argument is directly addressed to the decree proposed by the
parties, it is clear that the principle they es;~use, if correct, would apply
to judgments on the merits as well.
"2 Tt may be for this reason that no court has ever applied the Parker
doctrine to thwart an antitrust remedy when the conduct in question was
not shielded from liability.
"3 For example, in these cases, anticompetitive activity in the intercity
carrier market would be protected because the remedy — divestiture —
could be precluded by state regulations concerning the transfer of assets.
™ An antitrust defendant would need to find just one sympathetic local
regulatory body to achieve immunity from structural relief at the behest
of a federal antitrust court.
46
laws in such a way as to preclude a court from effectively
remedying an antitrust violation. Without effective relief,
“the Government has won a lawsuit and lost a cause.”
International Salt Co. v. United States, supra, 332 U.S. at
401.5
Deference to state law in this type of situation would leave
the Sherman Act powerless to eliminate anticompetitive
activity,'* even though the activity was not subject to state
regulation sufficient to preclude application of the antitrust
laws. This result is directly contrary to the thesis of the state
action doctrine: that “[t]he national policy in favor of com-
petition” is supplanted only when state regulation will take
its place.*"’ California Retail Liquor Dealers Ass'n v. Midcal
Aluminum, Inc., supra, 445 U.S. at 106.
‘ There is an obvious difference between direct state regulation and
inchoate, general federal antitrust policy, on the one hand, and a conflict
between such regulation and an explicit, valid federal court order, on the
other. Parker deals only with the eubstantive scope of the antitrust laws,
that is, with the situatior which arises when a State has determined that,
with respect to certain activities within its jurisdiction, the competition
mandated by the Sherman Act is inappropriate for valid state public policy
reasons. But there is nothing in the doctrine that would prevent the
antitrust laws from prevailing when there is a conflict between a necessary
antitrust remedy in a case in which the federal antitrust court has
jurisdiction and in which the antitrust laws have been validly applied as a
substantive matter and state regulatory schemes which would prevent
such a remedy from being implemented. To hold otherwise, would be to
stand proper deference to the policy of another political entity under the
American constitutional system on its head.
“ For example, the principal alternative to divestiture, a cetailed
injunction governing defendants’ operations, would certainly conflict with
state laws even more directly and on a continuing basis. While the remedy
of damages would presumably still be available, it would not necessarily
force defendants io cease any anticompetitive conduct. Moreover, there is
no indication in the statute or in any court decision that the damages
remedy is broader than the power to grant injunctive relief. The States’
other alternative — an immediate spin-off of the Bell Operating Companies
— would not open the telecommunications market to competition and would
have severe adverse effects upon the national telephone system. See Part.
XI(D) supra.
"7 Nothing in the proposed decree would require a State to replace its
regulatory system with a system of competition: they may continue to
47
In these particular cases, the rule proposed by the States
would reduce the Court’s judgment to little more than an
advisory opinion: AT&T would have to obtain the approval
of the public utilities commission of every State before that
judgment would actually be implemented. As the States
themselves have said, if their claim were accepted, they would
have the “unassailable authority to veto” the divestiture and
to cause a “balkanized scheme of telecommunications service”
should they so choose.'*
The Court concludes that the state action doctine does not
restrict the judicial power to impose an appropriate remedy
under the Sherman act.
C. Avoidance of Unnecessary Conflict with State Law
The absence of absolute limitations upon a court’s remedial
powers under the Sherman Act does not mean that the court
is free to ignore the States’ legitimate interests.
It is well established that interference with state interests
is not a favored approach; it is a measure to be employed
only when necessary to vindicate federal law. Thus, a judicial
remedy may infringe upon state law only to the extent
necessary effectively to protect the federal interest. See
Milliken v. Bradley, 433 U.S. 267, 280-81 (1977); Morgan v.
McDonough, supra, 540 F.2d at 534."* Moreover, in exercis-
ing their discretion in fashioning antitrust remedies,” courts
are obligated to minimize the impact of their decrees upon
require a regulated monopoly in, say, local telephone service or intrastate
toll service.
'M# See Joint Comments of Alabama and twenty-three other States at 12.
"* It is presumably in reliance on these principles that the Department
of Justice has conceded that “the Court should assure itself that the
provisions of the proposed (decree) will not unnecessarily conflict with
important state interests.” Brief at 70. Another manifestation of the respect
accorded to state interests is the courts’ reluctance to impute to Congress
an intent to bar the States from an entire field of regulation. See, ¢.g.,
Ezzon Corp. v. Governor of Maryland, 437 U.S. 117, 128 (1978); Florida
Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142 (1968).
™ See, ¢.g., Ford Motor Co. v. United States, supra, 405 U.S. at 573;
United States v. E. 1. duPont de Nemours & Co., supra, 366 U.S. at 322.
| = )
48
other public policies (see Part II supra), including, of course,
the policy against unnecessary interference with state inter-
ests.
Were the Court to fashion its own remedy following a
finding of liability, it would accordingly be obligated to
minimize interference with state law to the extent that may
be done without vitiating or weakening the remedial measures
required as a result of the findings made in the litigation. It
is difficult to believe that when the parties arrive at a consent
decree they have greater powers to override these principles
than would the Court in drafting its own decree. In any
event, whatever the parties may do, the Court would certainly
be justified in taking the policy against unnecessary interfer-
ence with state law and state policy into account when it
passes upon the proposed judgment in a public interest
proceeding.
It follows from what has been said that those provisions in
the proposed decree which are necessary to vindicate the
federal interest in the enforcement of the antitrust laws will
be approved notwithstanding the fact that they may conflict
with the state laws or interests. However, in its overall
consideration of the public interest, the Court will also take
into account that a particular provision may be merely
peripheral to the federal interest but have a substantial
adverse impact on state laws."
IV
THE DIVESTITURE
A key feature of the proposed decree is the divestiture of
the Operating Companies from the remainder of AT&T. In
order to determine whether that divestiture is in the public
interest, the Court must decide first whether it is a remedy
that is likely to eliminate anticompetitive conditions within
the telecommunications industry. In addition, the Court must
assess the efficacy of alternative remedies, and it must also
weigh the effect of the divestiture on the public interest
‘™ See Part VII infra.
49
generally, particularly on the level of charges for local tele-
phone service.
A. Conditions Necessitating Antitrust Relief
1. Evidence of Anticompetitive Actions by AT&T
In its complaint and in documents filed thereafter (i.e., the
several Statements of Contentions and Proof), the govern-
ment asserted that AT&T monopolized the intercity telecom-
munications market and the telecommunications product mar-
ket in a variety of ways in violation of the Sherman Act.
The evidence that was produced during the AT&T trial
indicates that, at least with respect to several of the govern-
ment’s claims, this charge may be well taken. It would be
inappropriate for the Court at this juncture to draw definitive
conclusions with regard either to the sufficiency of the
evidence to sustain a finding of liability or to the validity of
AT&T's various legal and factual defenses. The Court is not
called upon, in this public interest proceeding, to render a
final judgment on this case; indeed, not all the evidence that
may bear on the issues has yet been adduced.’ It is not
improper, however, for the Court to consider whether the
state of proof at trial was such as to sustain this divestiture
as being in the public interest. See 15 U.S.C. §§ 16(b)(2), (e).
In its intercity case, the government alleged that AT&T
used its control over its local monopoly to preclude competition
in the intercity market. The government proved inter alia
that after 1968 AT&T included a “customer premises” pro-
vision in its interconnection tariff which deterred potential
competitors from entering the market;! that it refused to
'@ See p. 12 supra.
50
provide FX and CCSA services to specialized common carriers
and domestic satellite carriers until 1974 when the FCC
specifically ordered it to do so;'* and that it attempted to
prevent competitors from offering metered long distance
service that would compete with AT&T's own regular long
distance service.'>
AT&T’s basic rationale for these policies was that it was
attempting to prevent competitors from “cereamskimming.”*
As viewed by AT&T, it would have been able successfully to
combat creamskimming if it had priced each of its routes on
the basis of the costs for operating that route. However, it
concluded that the FCC had rejected this approach when it
endorsed national rate averaging in the interest of promoting
the goal of universal service. Accordingly, AT&T argued
that, since rate averaging is inconsistent with competition,
and since the basic rate averaging policy had been required
and then AT&T’s services for the remainder of the route (e.g., from Chicago
to Bethesda, Md.) because the St. Louis customer did not have the
“premises” in Chicago that AT&T required for interconnection. Thus, to
receive service for Bethesda as well as for Chicago, the customer was
required to purchase both services from AT&T. See United States v.
AT&T, supra, 524 F. Supp. at 1354.
* FX (foreign exchange) service permits a customer to make or receive
local calls through a distant switching center by effectively providing a
long extension cord in the form of a dedicated line between the customer's
location and a telephone company switching system in the distant location
(the foreign exchange). See United States v. AT&T, supra, 524 F. Supp.
at 1355 n. 77. CCSA (common control switching arrangement) is essentially
a miniature AT&T long distance network, except for the fact that it is
used by only one customer, albeit a customer, such as the federal
government, with large telecommunications needs.
1% The government also alleged inter alia that AT&T discriminated
against competitors in providing access to local exchange facilities; that it
conducted interconnection negotiations with competitors in bad faith; and
‘% Creamskimming is a term the Bell System used during the AT&T
trial and elsewhere to describe the practice of its competitors to concentrate
their intercity services on routes where the volume of business is high and
the costs of service are low.
51
by the FCC as being in the public interest, it was acting
reasonably under the Communications Act in preventing
competition as best and as long as it could.”
What this line of reasoning fails to consider is that, at least
by the mid-1970s, the FCC had clearly begun to promote
competition in telecommunications. The government con-
tended during the trial — correctiy, in the Court’s view —
that AT&T had an obligation to follow the more recent FCC
policy rather than its previous policies which may have suited
it better,'* particularly since there was never a direct FCC
rule against de-averaging. Moreover, even if, because of the
lack of definite guidance from the FCC, AT&T’s actions were
to be regarded as reasonable under the Communications Act
standards, it does not at all follow that these same actions
were immunized under the standards of the Sherman Act.”
What is significant about these events is that AT&T was
able to adopt the policies described above in large part because
of its control over the local exchange facilities. For example,
it was because of its ownership and control of the local
Operating Companies — whose facilities were and are needed
for interconnection purposes by AT&T’s competitors — that
AT&T was able to prevent these competitors from offering
'*? See, ¢.g., testimony of John D. deButts (August 27, 1981); Mark
Garlinghouse (December 11, 1981); and William Ellinghaus .August 12,
1981).
'* Obviously, AT&T preferred to operate as a monopoly provider of
intercity services rather than to be forced to compete with other common
carriers. (This is particuarly true because once the FCC adopted a policy
of competition, AT&T would be required to allow competitors to intereon-
nect with the AT&T network). Thus, AT&T's self interest dovetailed
neatly with its public interest argument.
‘” Under the antitrust laws, the burden would be on AT&T to show
that what would otherwise be clearly unreasonable restraints on competition
were cleansed by the regulatory directives. See, e.g., National Gerimedical
Hospital and Gerontology Center v. Blue Cross, 452 U.S. 378 (1981);
Sound, Inc. v. AT&T, 631 F.2d 1324 (8th Cir. 1980); Mid-Teras Com-
munications Systems, Inc. v. AT&T, 615 F.2d 1372 (5th Cir. 1980);
Essential Communications Systems, Inc. v. AT&T, 610 F.2d 1114 (3rd
Cir. 1979); United States v. AT&T, 524 F. Supp. at 1345, n. 14; United
States v. AT&T, 461 F. Supp. at 1320-30. '
52
FX and CCSA services. Similarly, AT&T was able to deter
competition by manipulating prices for access to the Operating
Company networks.'”
AT&T's control over the local Operating Companies was
central also to the anticompetitive behavior alleged with
respect to the second facet of the government’s case, that
involving customer-provided terminal equipment.
The government proved that AT&T prohibited the attach-
ment of competitors’ equipment to the network except through
a protective connecting arrangement (PCA). There was evi-
dence that some experts (including a panel of the National
Academy of Sciences)"*' believed that such a PCA was
necessary'™ if the nationwide telephone network was to be
protected from a variety of harms.'* On the other hand, the
government’s evidence indicated that AT&T required PCAs
for equipment that in all probability could not harm the
network; that there were delays in providing PCAs; that the
PCAs were over-designed and over-engineered, and, thus,
over-priced; that PCAs were required for competitive equip-
1® See, ¢.g., United States v. AT&T, supra, 524 F. Supp. at 1364-65 n.
118; testimony of William Ellinghaus and Mark Garlinghouse on cross
examination, note 127 supra. AT&T's cost data were often confusing,
incomplete, and inaccurate, and although some of its distinguished econo-
mists provided helpful and sophisticated economic analysis (e.g., William
J. Baumol, December 7, 1981), others (e.g., Jules Joskow, October 23,
1981) did little to explain away the shortcomings of these data. At least
on the basis of the evidence heard before the trial was recessed, the Court
would be unable to conclude that AT&T's past pricing strategy div sot
pose anticompetitive problems.
1% See Technical Analysis of the Common Carrier/User Interconnections
Area by the Panel on Common Carrier/User Interconnections, National
Academy of Sciences (1970), PX781 (admitted in evidence on behalf of
defendants at Tr. 13500, August 24, 1981).
See, e.g., testimony of Charles Elmendorf (November 17, 1981);
Robert B. Brunson (August 25, 1981).
‘8 Throughout the trial, AT&T referred to four harms to the network:
hazardous voltages, longitudinal imbalance, excess signal power, and
improper network control signaling. These harms, it was alleged, could
cause a variety of problems, ranging from severe physical injury to humans
to a small amount of noise on a telephone line.
53
ment while identical equipment sold by AT&T did not require
their use; and that PCAs could not guard against all four
potential harms to the network.'™
Additionally, the alternative option of certification’® was
available but never seriously pursued by Bell.’* Moreover,
when ultimately certification was directly mandated by the
FCC as a substitute for the protective connecting arrange-
* ment, the telephone network — AT&T’s predictions to the
contrary notwithstanding — did not cease to function in its
customary fashion. Indeed, AT&T was unable during the trial
to prove any actual harm to the network from the elimination
of the PCAs.
In its procurement part of the case, the government alleged,
and there was proof, that AT&T used its control over the
local Operating Companies to force them to buy products
from Western Electric even though other equipment manu-
facturers produced better products or products of identical
quality at lower prices. Here, too, AT&T’s control of the
Operating Companies was central to the allegedly anticom-
petitive behavior.'*’
_ _ ™ See, ¢.g., direct and cross examination of Donald H. Erickson (August
6, 1981), Edward Goldstein (August 4, 1981), and William Ellinghaus
(August 12, 1981). It should also be noted, however, that, with respect to
a number of these problems. AT&T did provide factual explanations of
varying degrees of persuasiveness. Compare the testimony of Lawrence
A. Hohmann (August 24, 1981) with that of Robert B. Brunson (August
25, 1981) who was convincing notwithstanding severe cross examination
by the government.
‘% Under a certification program, non-Bell equipment may be connected
directly to the AT&T network — without the use of a PCA — provided
that the equipment has been certified as meeting certain technical standards.
‘* There is some merit to AT&T's claim that it was the FCC, rather
than AT&T, that was responsible for the delay in the development of
standards. Specifically, although the question of certification as opposed to
PCA arose as early as 1968, the FCC did not request technical comments
on the standards it had proposed until 1975.
‘* It should be noted, however, that the government's procurement case
was not extremely strong. In the first piace, it consisted only of sixteen
individual “episodes.” Measured against the large field of procurement
decisions in which the Bell Svstem was engaged, this was not a formidable
54
Without making definitive findings on any or all of the
issues, it is certainly clear that — to the extent that the
proposed decree is offered by the government on the premise
that it will destroy the basis of past anticompetitive behavior
— the Court would not be justified in rejecting it as consti-
tuting a remedy for non-existent anticompetitive acts.
2. Concentration of Power in the Telecommunications
Industry
There is an additional reason, largely independent of the
factors discussed above, which supports some type of antitrust
relief in this case: AT&T’s substantial domination of the
telecommunications industry in general.
The antitrust laws are most often viewed as only a means
for ensuring ‘free competition in order to achieve the most
efficient allocation of society’s resources. See pp. 28-29 supra.
However, Congress and the courts have repeatedly declared
that these laws also embody “a desire to put afi end to great
aggregations of capital because of the helplessness of the
individual before them.” United States. v. Aluminum Com-
pany of America, 148 F.2d 416, 428 (2d Cir. 1945) (footnote
omitted). See also Standard Oil Co. v. United States, 221
U.S. 1, 50 (1911); United States v. Trans-Missouri Freight
Ass’n, 166 U.S. 290, 323-24 (1897).
number. It is difficult to evaluate, and the Court will not now evaluate,
whether this relative paucity of evidence was due to intrinsic problems of ,
proof when dealing with a company of the size of AT&T, or whether,
having conscientiously and carefully surveyed Bell’s activities, the govern-
ment was simply unable to produce more than sixteen questionable episodes
because there was no more even arguably anticompetitive activity. More-
over, even as to those sixteen episodes the proof was not overwhelming.
Where the government's evidence tended to demonstrate
acts, AT&T’s market share was generally not high; where market share
was high, there was relatively little evidence of anticompetitive acts.
The part of the case dealing with pricing of equipment sold by Western
Electric was dismissed on September 11, wa. ‘Se, United States v.
AT&T, supra, 524 F. Supp. at 1380-81.
55
The legislators who enacted the Sherman Act voiced con-
cerns beyond the effects of anticompetitive activities on the
economy: they also greatly feared the impact of the large
trusts which then dominated the business world on the nation’s
political system, and they regarded the power of these trusts
as an evil to be eradicated. Thus, Senator Sherman stated:
If the concentrated powers of [a] combination are in-
trusted to a single man, it is a kingly prerogative,
inconsistent with our form of government, and should
be subject to the strong resistance of the State and
national authorities. If anything is wrong, this is wrong.
If we will not endure a king as a political power we
should not endure a king over the production, transpor-
tation, and sale of any of the necessaries of life.
21 Cong. Rec. 2457 (1890).'*
These views have been repeatedly echoed since that time,
as, for example, during the congressional debates at the time
of the enactment of the 1950 amendments to the Clayton Act.
See 96 Cong. Rec. 16450 (1950) (Remarks of Sen. Kefauver);
95 Cong. Rec. 11494 (1950) (Remarks of Rep. Bryson); 95
Cong. Rec. 11486 (1949) (Remarks of Rep. Celler). See also
Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962).
As Justice Douglas stated in his dissenting opinion in United
States v. Columbia Steel Co., 334 U.S. 495, 536 (1948):
Power that controls the economy should be in the hands
of elected representatives of the people, not in the hands
of an industrial oligarchy. Industrial power should be
decentralized. It should be scattered into many hands
so that the fortunes of the people will not be dependent
on the whim or caprice, the political prejudices, the
emotional stability of a few self-appointed men. The fact
that they are not vicious men but respectable and social-
minded is irrelevant. That is the phi and the
command of the Sherman Act. It is on a theory
of hostility to the concentration in private hands of power
'™ See also 21 Cong. Rec. 2460, 2569 (1890) (Remarks of Sen. Sherman);
21 Cong. Rec. 2596 (1890) (Remarks of Sen. George).
56
so great that only a government of the people should
have it.'%
Our political system is designed so that the power of one
group may be checked by the power of another. The antitrust
laws require this same approach in the economic sphere.
Obviously, if one company controlled an essential part of the
economy, it would be in a position to gain an undue influence
over economic decisions and, as a result, most likely ‘over
political decisions. Thus, the antitrust laws seek to diffuse
economic power in order to promote the proper functioning
of both our economic and our political systems. See generally,
A. D. Neale, The Antitrust Laws of the United States of
America, 422-23 (1962): Blake & Jones, Antitrust Dialogue:
Defense, 65 Colum. L. Rev. 337, 384 (1965).
The significance of these concepts is accentuated by the
context in which the Court must consider the public interest
in these cases. The telecommunications industry plays a key
role in modern economic, social, and political life. Indeed,
many commentators have asserted that we are entering an
age in which information will be the keystone of the economy”
as steel was when Justice Douglas wrote in the Columbia
Steel Co. case."
‘9 A number of distinguished commentators have challenged this inter-
pretation of the antitrust laws, claiming that the promotion of consumer
welfare through ensuing free competition is their sole goal. See R. Bork,
The Antitrust Parador 50-89 (1978): 1 P. Areeda & D. Turner, Antitrust
Law, supra at §§ 103-112. Resolution of this dispute may be crucial when
the two objectives point to different solutions. Here, where the remedy
necessary to promote free competition is also likely to reduce the concen-
tration of economic power, consideration of the latter would appear to be
less controversial. In any event, the cases and the legislative history of
the Sherman Act empower the Court to consider broad public interest
goals, such as this one, in evaluating the need for an antitrust remedy.
See, e.g., G. Robinson, Ed., Communications for Tomorrow (1978).
‘" Commentators from a wide range of the ideological spectrum agree
on this conclusion. Thus, Professor Arthur Schlesinger, Jr. ree
as stating that “Kari Marx held that history is shaped by control of the
means of production; in our times history is shaped by control of the means
of communication.” T. White, America in Search of Itself at 101 (1982).
Charles Marshall, AT&T executive vice president, and consumer advocate
57
The only pervasive two-way communications system is the
telephone network. It is crucial in business affairs, in provid-
ing information to the citizenry, and in the simple conduct of
daily life. In its present form, AT&T has a commanding
position in the industry. The men and women who have guided
the Bell System appear by and large to have been careful not
to take advantage of its central position in America’s economic
life. There is no guarantee, however, that future managers
will be equally carefiil.'** In any event, it is antithetical to
our political and economic system for this key industry to be
within the control of one company.
For these reasons, the Court concludes that the loosening
of AT&T’s control over telecommunications through the
divestiture of the Operating Companies will entail benefits
which transcend those which flow from the narrowest reading
of the purpose of the antitrust laws.
B. Effect of the Divestiture
The remedy in an antitrist action — whether imposed by
a court or agreed upon between the parties — is measured
both by how well it halts the objectionable practices and by
its prospects for minimizing the likelihood that such practices
will occur in the future. See Part II supra. Where, as here,
the Court has heard substantially all of the evidence, it is
appropriate that it weigh the proposed remedy against the
evidence in that context.
As indicated in Part IV(A) supra, the ability of AT&T to
engage in anticompetitive conduct stems largely from its
Ralph Nader have likewise both noted the displacement of the industrial
age by the information age. Telecommunications Act of 1982: Hearings
on H.R. 5158 Before the Subcomm. on Telecommunications, Consumer
Protection, and Finance of the House Comm. on Energy and Commerce
(Part 2), 97th Cong., 2d Sess. 111, 587 (1982).
“* One may speculate, for example, on the effect on the political life of
58
control of the local Operating Companies. Absent such control,
AT&T will not have the ability to disadvantage competitors
in the interexchange and equipment markets.
For example, with the divestiture of the Operating Com-
panies AT&T will not be able to discriminate against intercity
competitors, either by subsidizing its own intercity services
with revenues from the monopoly local exchange services, or
by obstructing its competitors’ access to the local exchange
network. The ldcal Operating Companies will not be providing
interexchange services, and they will therefore have no
incentive to discriminate. Moreover, AT&T’s competitors will
be guaranteed access that is equal to that provided to AT&T,
and intercity carriers therefore will no longer be presented
with the problems that confronted them in that area. See
Part VIII, infra.
Abuses will also be unlikely in the equipment interconnec-
tion area, for the simple reason that the Operating Companies
will not manufacture equipment and will therefore lack AT&T's
incentive to favor the connection of one manufacturer’s equip-
ment over another’s. Even as to the part of the government’s
case dealing with procurement, the divestiture of the Oper-
ating Companies will go a long way toward eliminating the
potential for anticompetitive behavior. Any pro-Western
Electric bias on the part of these companies will be eliminated
once the intraenterprise relationship between the Operating
Companies and Western Electric is broken.'*
To the extent, then, that the proposed decree proceeds on
the assumption that the structural reorganization will make
it impossible, or at least unprofitable, for AT&T to engage
in anticompetitive practices, it is fully consistent with the
public interest in the enforcement of the antitrust laws. The
soundness of this remedy becomes even more apparent when
it is compared with other relief alternatives.
: ‘” Any cross subsidization of AT&T's intercity services and equipment
manufacturing operations with revenue from its monopoly local exchange
services will likewise be eliminated.
59
C. Alternative Remedies
In order to determine whether the divestiture proposed by
the parties is the remedy which will most effectively fulfill
the goals of the antitrust laws, it is appropriate for the Court
to evaluate the various alternative remedies that may have
been considered or proposed. See 15 U.S.C. § 16(e)(1).
Three alternatives to the divestiture of the Operating
Companies emerged in the course of the AT&T litigation.
The first would have required the divestiture of Western
Electric and Bell Laboratories from AT&T.' The second,
similar in concept if not in detail, would have had as its most
salient feature the divestiture from AT&T of portions of
Western Electric and Bell Laboratories and of several Bell
Operating Companies.’ The third was a strictly injunctive,
non-structural remedy, which would have imposed detailed
constraints upon AT&T’s activities." None of these alter-
|
“ This remedy was first proposed in the government’s complaint. See
Complaint at 14.
“8 Competitive Impact Statement at 50-51. The Operating Companies
retained by AT&T would have been required to provide local telephone
service through a separate subsidiary; several other problems would have
been dealt with by injunctive provisions.
This proposal was considered by the parties in early 1981, just prior to
the start of the trial in the AT&T action. At that time, in a successful
effort to secure a continuance (see p. 11 supra), the parties advised the
contrary, no proposal was ever drafted. Competitive Impact Statement at
sit ikon Ok dan. Saha eaaeeead its dleeweeel ter tan peition Miiieliiaiaten
to the.negotiations that gave rise to the [present settlement].” /d. at 51.
It would hgve required AT&T to grant non-discriminatory access for
60
natives would be as efficacious as the divestiture of the
Operating Companies embodied in the proposed decree. '*
1. Divestiturgpf Western Electric and Bell Laboratories
The divestiture of all or part of Western Electric and Bell
Laboratories from AT&T, with or without the divestiture of
some, but not all, of the Bell Operating Companies,'* suffers
from several defects in comparison with the parties’ present
proposal: (1) it would not be as effective in eliminating
anticompetitive conduct, and (2) it would have a greater
adverse impact on future contributions of the Bell System to
the national economy.
The inadequacy of the divestiture from the Bell System of
its research and manufacturing arms as an antitrust remedy
is obvious: it would not eliminate AT&T’s ability and incentive
to take anticompetitive actions against its competitors in the
intercity market. The remedy would thus be ineffective in
the very area in which the government’s proof in the AT&T
action was strongest.'** In addition, this remedy would not
eliminate AT&T’s de*facto contro] of the national telecom-
munications system. Although the company would no longer
dominate the manufacturing and research markets, it would
still control the essentials of American telecommunications
— virtually all intercity and local services. The divestiture
would thus not fulfill the goal of deconcentrating AT&T’s vast
economic power.
The divestiture of Western Electric and Bell Laboratories
would suffer from an additional defect. Considerable evidence
“" The Court’s evaluation of these remedies is conducted strictly in the
context of its decision on the adequacy of a negotiated settlement. If the
AT&T action were to proceed to final judgment and liability were found,
the Court might determine that the measures discussed in this segment of
the opinion are appropriate remedies, either as alternatives to the dives-
titure of the Operating Companies or in addition to such divestiture.
* Because of their conceptual similarities, the first and second alternate
remedies are being discussed together.
'* The additional divestiture of several Bel] Operating Companies would
remedy this problem only as to the areas served by these divested
companies. F
61
was adduced during the AT&T trial concerning the central
role of Bell Laboratories — and to a lesser degree of Western
Electric — in innovation in the telecommunications industry
and, more broadly, in industrial research." AT&T argued
vigorously that the present structure of the Bell System was
in significant part responsible for this admirable record
because the researchers were linked with a manufacturer —
Western Electric — and with two service organizations —
the Operating Companies and the Long Lines Department.’*
The Court is of the opinion that there is considerable merit
to these contentions. Bell Laboratories has been a positive
force both in basic and in applied research, and this research
has had a beneficial effect on the nation’s economic position
in all of its varied aspects.’ It also seems to be true that
the links between Bell Laboratories and the manufacturing
and service arms of the Bell System have been of assistance
in the achievement of these technological successes.
On this basis, then, the separation of Bell Laboratories
from all of these functions could have an adverse effect upon
future research and development,'™ and it may for that reason
be regarded as less desirable than the present proposal which
would leave Bell Laboratories associated with a manufacturer
and two service organizations — Long Lines and AT&T’s
new information services — which would supply the practical
experience that would be useful in stimulating the research
operations.
Testimony of Solomon Buchsbaum (September 23, 1981); testimony
of Edward E. David, Jr. (November 4, 1981); testimony of David Packard
(November 6, 1981); see also Exhibit D-1-134.
‘* Testimony of Morris Tanenbaum (September 8, 1981); testimony of
William D. Nordhaus (November 5, 1981); testimony of Bruce C. Netschert
(November 12, 1981); testimony of Paul R. Lawrence (November 6, 1981);
testimony of Nathan Rosenberg (November 10, 1981).
‘® This includes basic scientific advance, cheaper and better products for
consumers, foreign trade, and national defense.
™ In light of AT&T's agreement to divest the Operating Companies,
the predictions made by a number of eminent witnesses regarding the dire
consequence certain to follow from such divestiture appear in retrospect
_ to have been vastly overrated.
62
2. Injunction
The second major alternative to the proposed decree is an
injunction which would be enforced by special masters ap-
pointed by and responsible to the Court. This alternative,
too, suffers from a number of defects.
It would be difficult to formulate an order that would
effectively deal with all of the different kinds of anticompe-
titive behavior that are claime’ to have occurred over a
considerable period of time, in various geographical areas,
and with respect to many different subjects. There is evidence
which suggests that AT&T's pattern during the last thirty
years has been to shift from one anticompetitive activity to
another, as various alternatives were foreclosed through the
action of regulators or the courts or as a result of technological
development.'* In view of this background, it is unlikely
that, realistically, an injunction could be drafted that would
be both sufficiently detailed to bar specific anticompetitive
conduct yet sufficiently broad to prevent the various conceiv-
able kinds of behavior that AT&T might employ in the
future. '®
An even more formidable obstacle is presented by the
question of enforcement. Two former chiefs of the FCC’s
Common Carrier Bureau, the agency charged with regulating
AT&T, testified that the Commission is not and never has
been capable of effective enforcement of the laws governing
‘4 It is claimed, for example, that after the legal defense against
interconnection of non-Bell equipment became impossible to sustain, AT&T
shifted to claims that inferior equipment was being produced by non-Bell
“8 For these reasons, and because of the enforcement problems discussed
below, courts have generally rejected this type of detailed injunction in
favor of the “surer, cleaner remedy of divestiture.” United States v. E. 1.
duPont de Nemours & Co., supra, 366 U.S. at 834. See also United States
v. Paremount Pictures, Inc., 384 U.S. 181, 165-75 (1948); United States
v. Crescent Amusement Co., supra, 323 U.S. at 189-90.
AT&T's behavior.” In their view, this inability was due to
structural, budgetary, and financial deficiencies within the
FCC as well as to the difficulty in obtaining information from
AT&T. Whatever the true cause, it seems clear that the
problems of supervision by a relatively poorly-financed, poorly-
staffed government agency over a gigantic corporation with
almost unlimited resources in funds and gifted personnel are
no more likely to be overcome in the future than they were
in the past.'*”
These difficulties would be exacerbated if enforcement of
a broad injunction were vested in court-appointed special
masters. To be sure, such officials have proved in the past to
be capable of performing relatively narrow, short-term re-
sponsibilities, and to perform them well. But the type of
broad injunctive relief that would be needed in these cases
would require quasipermanent supervision of all of AT&T's
activities by not one or two special masters but by a vast
staff. In short, what would be required would be a re-creation
of the FCC’s Common Carrier Bureau in the guise of an arm
of the Judiciary. Such a development would be undesirable
for many different reasons.'* Furthermore, there is no reason
to believe that, in the end, a judicially-created bureaucracy
would be any more capable than the FCC itself of performing
the unending task of vigilance and oversight that would be
required to ensure that an integrated Bell System did not
engage in anticompetitive conduct.
D. Effect of the Divestiture Upon Other Interests
A number of individuals have written to the Court and to
the Department of Justice urging the rejection of the proposed
decree. They contend that AT&T in its present, integrated
form has rendered excellent and affordable telephone service
to the citizens of this nation, including those with modest
incomes and those who live in sparsely populated areas. Many
note that AT&T’s securities have been a mainstay of the
small investor, with along history of stable prices and dividend
payments. Given that record, the argument goes, the break-
up of AT&T could not possibly be in the public interest.
While the Court has very carefully considered these con-
cerns,’ it has concluded that they are not sufficient to
overcome the considerations supporting divestiture.
The divestiture of the Operating Companies will not nec-
essarily have an adverse effect upon the cost of local telephone
service.'® The decree would leave state and federal regulators
with a mechanism — access charges — by which to require
a subsidy from intercity service to local service. By means of
these access charges, the regulators are free to maintain local
rates at current levels or they may so set the charges as to
increase or decrease local rates.'*!
'® Careful consideration and independent analysis have been particularly
appropriate because these objections were primarily voiced by individual
citizens who lacked the resources to present detailed briefs.
© There is a dispute, reflected at the trial as well as in other forums,
over the question whether local telephone service has ever actually been
subsidized by intercity service as AT&T has consistently claimed. See
Testimony of John D. deButts (August 27, 1981); testimony of William J.
Baumol (December 7, 1981). The government contended that, to the
contrary, local telephone revenues have subsidized AT&T's intercity rates
(see Testimony of William H. Melody (June 8, 1981); testimony of Nina
Cornell (June 19, 1981); testimony of Bruce Owen (June 22, 1981)) and
since the trial was aborted by the settlement, no final decision was reached
on this issue.
™ Although the decree requires the Operating Companies to file “cost
justified” tariffs for access charges, it leaves to the regulators the decision
as to what costs should be included within this calculation. Department of
Justice Response to Comments at 106-107; AT&T Reply Brief at 22-23. If
the regulators chose to retain the cost allocation presently used in the
As to the second claim, there is simply no evidence or
reason to believe that, funding aside, the quality of service
will decline as a result of divestiture. The divested Operating
Companies will not be technical backwaters: they will have
substantial incentives to upgrade their networks and to
provide high-quality interconnections for other carriers in
order to maximize revenues from access charges and from
local rates.
As noted above, it is unlikely that the divestiture will
impair the research capabilities of Bell Laboratories. See pp.
61-62 supra. The scientists and engineers working in that
organization will retain their incentive to improve the equip-
ment and technology used to provide local telephone service,
if only because the largest potential customers of Western
Electric — Bell Laboratories’ companion in the “new” AT&T
complex — will be the divested Operating Companies.’® In
addition, AT&T’s information services and interexchange
services can be provided to customers only over the Operating
Companies’ facilities, again creating large incentives for
continued improvement and upgrading of these facilities.’*
In the final analysis, it is apparent that, as with so many
public issues, a choice must be made.
There has long been a debate over the relative merits of
separations and seitlements process, the subsidy from interexchange
revenues to local rates will remain at current levels. Under the proposed
decree, state regulators will set access charges for intrastate interexchange
service and the FCC will set access charges for interstate interexchange
service. Department of Justice Response to Comments at 106-107; AT&T
Reply Brief at 22-23. If a subsidy is required beyond that implicit in the
access charges, it may be provided by state or federal legislation. See,
e.g., H.R.. 5158, 97th Cong, 2d Sess. § 234 (proposal for a National
Telecommunications Fund).
“® Indeed, their incentive may be even greater after divestiture than it
was before, since after divestiture Western Elect~ic will have lost its
anticompetitive advantage and will instead be fore-d to compete with other
manufacturers on the basis of quality and price for the Operating Companies’
The concerns of investors are similarly unfounded. They will retain
all their legal remedies for any improper actions by AT&T im connection
with the ¢:vestiture. See Part 1X infra.
regulation and competition. The evidence adduced during the
AT&T trial indicates that the Bell System has been neither
effectively regulated nor fully subjected to true competition.
The FCC officials themselves acknowledge that their regu-
lation has been woefully inadequate to cope with a company
of AT&T’s scope, wealth, and power. The efforts of various
arms of government to introduce true competition into the
telecommunications industry have been similarly feeble. The
antitrust suit brought by the Department of Justice in 1949
ended in 1956 with a consent decree which imposed injunctive
relief that was patently inadequate. It took from 1968 when
the Carterfone decision’* was handed down by the FCC to
1978 when the United States Court of Appeals decided
Execunet II’® to establish even the very principle of com-
petition so that it was beyond dispute. Future regulatory and
injunctive remedies are unlikely to be more successful than
were similar efforts in the past. In short, the choice is between
a Bell System restrained by neither regulation nor true
compé@tition and a Bell System reorganized in such a way as
to diminish greatly the possibility of future anticompetitive
behavior.
The history of the American economic system teaches that
fair competition is more likely to benefit all, especially con-
sumers, than an industry dominated by a single-company
monopolist. There is no reason to believe that the experience
of the telecommunications industry will be contrary to that
rule.
For all of these reasons, the Court concludes that the
divestiture from AT&T of companies providing local telephone
service is in the public interest.
V
ABSENCE OF RESTRICTIONS ON AT&T
Under the terms of the proposed decree, the line of business
restrictions and the licensing requirements imposed by the
™ 13 F.C.C.2d 420 (1968).
MCI Teletommunications Corp. v. FCC, 680 F.2d 580 (D.C. Cir.
67
1956 consent decree in the Western Electric case would be
removed and AT&T would be free to compete in all facets of
the marketplace.’* Some of the opponents of the proposed
decree argue that several of the restrictions contained in the
1956 decree should not be eliminated, and others contend
that the Court should also impose additional restrictions, not
present in the 1956 decree. For the reasons explained in this
part of the opinion and Part VI below,’” the Court finds that,
with one exception (see Part VI(B) infra), the imposition of
restrictions on AT&T would not be in the public interest.
The antitrust laws do not require that a company be
prohibited from competing in a market unless it caa be
demonstrated that its participation in that market will have
anticompetitive effects. Past restrictions on AT&T were
justified because of its control over the local Operating
Companies. With the divestiture of these local exchange
monopolies, continued restrictions are not required unless
justified by some other rationale.
A. AT&T Power in the Interexchange Market
Virtually all those who suggest that restrictions beyond
those in the proposed decree be imposed on AT&T make the
same general arguments. Their basic claim is that AT&T still
possesses monopoly power in the interexchange market’*
and that it will leverage this power by cross subsidizing its
competitive services with monopoly revenues.'® These inter-
exchange monopoly revenues, it is said, will subsidize a
* The only limitation regarding AT&T's business activities is that it
This part of the opinion considers general restrictions on AT&T; Part
VI deals with restrictions on the provision of information services.
“8 See Part V(C) for a discussion of the claim that AT&T has monopoly
power in the equipment manufacturing market.
® In addition to advancing the cross-subsidization argument, those who
advocate restrictions on AT&T also raise contentions based on discrimi- _
nation. However, because these discrimination claims take on a variety of
forms dependent on the context, the Court will address them in its discussion
of the specific restrictions that have been proposed. i
68
variety of business activities, ranging from competitive in-
terexchange routes to equipment manufacturing to alternative
local distribution facilities.
The validity of these arguments depends, of course, upon
the soundness of the claim that after the divestiture AT&T
will still possess monopoly power in the interexchange market.
If AT&T lacks such power, it would be unable to reap
supracompetitive profits with which to support its other
activities; it would only recover a profit commensurate with
its interexchange operations.
There can be no doubt that AT&T’s market share in the
interexchange market is high. Although it is not possible to
focus on a precise figure inasmuch as the number of market
share estimates is almost us varied as the number of persons
submitting comments, even AT&T concedes that as late as
1981 its share of interexchange revenue was around 77
percent.’ But the inquiry of whether AT&T possesses
monopoly power in the interexchange areas does not end with
a description of AT&T's size or its market share.
As de
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.