Appendix — Southern Pacific Communications Co. v. American Telephone & Telegraph Co.

Office-Supreme Court, US.

Ki a4

84- 10890 FILED

JAN 3 1985

No. ALEXANDER L. STEVAS,

— ioe

IN THE

Supreme Court of the United States

OcTOBER TERM, 1984

SOUTHERN PaciFIC COMMUNICATIONS COMPANY, ef al,

Petitioners,

Vv.

AMERICAN TELEPHONE & TELEGRAPH COMPANY, ef al,

Respondents.

APPENDIX TO PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

STEPHEN AILES FREDERICK P. FURTH

RICHARD A. WHITING (Counsel of Record)

RICHARD DIAMOND THOMAS R. FAHRNER

AMES H. PIpKIN DANIEL S. MASON .

IOHN R. LaBoviTz CHARLES P. WOLFF

STEPTOE & JOHNSON MICHAEL P. LEHMANN

1250 Connecticut Avenue, N. w. Craic C. CorsBITT

Washington, D.C. 20036 FURTH, FAHRNER, BLUEMLE & MASON

Telephone: (202) 862-2000 201 Sansome Street, Suite 1000

San Francisco, California 94104

Telephone: (415) 433-2070

Dated: January 3, 1985 Attorneys for Petitioners

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S56

APPENDIX A

a Ee

Notice: This opinion is subject to formal revision before publication

in the Federal Reporter or U.S.App.D.C. Reports. Users are requested

to notify the Clerk of any formal errors in order that corrections may be

made before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 83-1102

SOUTHERN PACIFIC COMMUNICATIONS

Co., ET AL., APPELLANT

Vv.

AMERICAN TELEPHONE AND TELEGRAPH CO., ET AL.

Appeal from the United States District Court

for the District of Columbia

(Civil Action No. 78-0545)

Argued March 20, 1984

Decided June 26, 1984

Frederick P. Furth, with whom Thomas R. Fahrner,

Daniel S. Mason, Charles P. Wolff, Michael P. Lehmann,

Craig C. Corbitt, Stephen Ailes, Richard A. Whiting,

Richard Diamond and James H. Pipkin were on the brief,

for appellant. Edmund W. Burke also entered an appear-

ance for appellant.

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George L. Saunders, Jr., with whom Michael S. Yauch,

C. John Buresh, Stewart A. Block, Howard J. Trienens

and Raymond Brenner were on the brief, for appellees.

Julie D. Nelson also entered an appearance for appellees.

Before WALD and EDWARDS, Circuit Judges, and

SWYGERT,* Senior Circuit Judge, United States Court of

Appeals for the Seventh Circuit.

Opinion for the Court filed by Circuit Judge EDWARDS.

EDWARDS, Circuit Judge: This appeal arises out of a

private antitrust action brought by Southern Pacific Com-

munications Company and Transportation Microwave

Corporation (collectively “SPCC”) against the American

Telephone and Telegraph Company and the local Bell op-

erating telephone companies (collectively “AT&T”), al-

leging that AT&T monopolized the market for intercity

business telecommunications services in the United States

in violation of section 2 of the Sherman Act.' Following

a lengthy trial, the District Court entered judgment for

the defendants and dismissed the case. The plaintiffs

appeal from this judgment. —

oma by designation pursuant to 28 U.S.C. § 294(d)

1 Section 2 of the Sherman Act provides, in pertinent part,

that “[e]very person who shall monopolize ... any part of the

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

deemed guilty of a felony.” 15 U.S.C. §2 (1982). The pree-

ent action was brought pursuant to §4 of the Clayton

Act, which provides in pertinent part that “any person who

shall be injured in his business or property by reason of any-

thing forbidden in the antitrust laws may sue therefor in any

district court of the United States in the district in which

the defendant resides or is found or has an agent, without

respect to the amount in controversy, and shall recover three-

fold the damages by him sustained, and the cost of suit, in-

cluding a reasonable attorney’s fee.” 15 U.S.C. § 16(a)

(1982).

2 Southern Pacific Communications Co. v. AT&T, 556 F.

Supp. 825 (D.D.C. 1982) (as amended Jan. 10, 1988) (here

inafter cited as Mem. Op.).

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Figuratively speaking, this case is an appellate judge’s

nightmare. It not only presents an enormous record and

poses some extremely difficult and controversial issues of

great public importance, but also is lamentably tainted with

charges of judicial bias. The central issue at trial was

whether AT&T had wrongfully used monopoly power to

exclude competition. Yet, in his Memorandum Opinion,

the District Judge strongly expressed his personal policy

view that an AT&T monopoly, and not competition, is in

the public interest in the telecommunications industry.

Moreover, in drafting his extremely lengthy Memoran-

dum Opinion, the trial judge simply copied—word-for-word

(including even typographical errors)—most of AT&T’s

proposed findings of fact and conciusions of law. Vir-

tually every assessment of the credibility of witnesses,

finding of fact and conclusion of law is in favor of

AT&T. Finally, almost as if to ensure a preferred re-

sult, the trial court’s' judgment is supported by layer

upon layer of alternative holdings on the issues of im-

plied antitrust immunity, monopoly power, unlawful

maintenance of monopoly power, injury-in-fact and proof

of damages.

We would be remiss if we did not state our dismay

over certain aspects of the trial court’s decisionmaking

in this case. We are not so naive as to suggest that trial

judges should never use proposed findings of counsel; in-

deed, such a suggestion would be absurd and would belie

the reality of trial practice in the United States. Nor

do we mean to suggest that trial judges may never tip

their hands with regard to possible final judgments in

a case. We do not even mean to suggest that trial judges

must be devoid of personal views about legal issues.

Rather, we mean to intimate that, because of their posi-

tions of great public responsibility, District Judges often

must walk a very narrow course in the performance of

their jobs on the bench. A District Judge, particularly

one adjudicating a case of considerable public moment,

must scrupulously avoid giving the parties or the public

| catia catia

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any basis for perceiving that he is deciding the case

otherwise than pursuant to an application of controlling

law to the facts and in the exercise of his impartial,

independent, considered judgment. In our view, the trial

judge has raised a serious concern that he failed to heed

this precept in the present case.

Judges certainy may hold personal views on law and

policy and may express those views under appropriate

circumstances. But the Memorandum Opinion in this

case, in which the District Judge held that the antitrust

laws do not apply to the defendants’ conduct and alter-

natively that the defendants’ conduct did not violate those

laws, was an inappropriate place for the Judge to ad-

vocate a personal policy view contrary to the policy un-

derlying the antitrust laws. Moreover, it is never jus-

tifiable for a judge to abdicate to a party his duty to

provide a reasoned explanation for his decision. The

misplaced advocacy and extensive copying of findings and

conclusions that occurred in this case at least created a

danger that the parties and the public would perceive

that the Judge impermissibly decided the case on the

basis of his personal views rather ‘than on the basis set

forth in the Memorandum Opinion.

This is indeed precisely what has occurred in this

case: SPCC’s principal argument on appeal is that it

was denied a fair trial because of the District Judge’s

legal and policy bias. Because of the questionable cir-

cumstances confronting us, we have considered this ar-

gument with the greatest of care. Despite our dismay

over this matter, we have concluded, for the reasons set

forth at length in Part II below, that SPCC has failed to

prove that the District Judge allowed his personal, legal

and policy views impermissibly to affect his decision-

making.

Accordingly, we must affirm the District Court’s judg-

ment provided that the court’s conclusions are based on

correct legal standards and the court’s findings of fact

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are not clearly erroneous. We specifically decline to aban-

don the “clearly erroneous” standard as SPCC advo-

cates: we believe that the type of de novo review sug-

gested by SPCC would be wholly inconsistent with the

function of an appellate court. Nevertheless, in light of

the special circumstances of this case, we have reviewed

the District Court’s findings against the record with par-

ticular, even painstaking, care. We emphasize, however,

that this review is only for the purpose of determining

whether the findings of the trial court must be set aside

under the “clearly erroneous” standard.

We conclude that the District Court erred in holding

that AT&T enjoys implied antitrust immunity with re

spect to the conduct at issue in this case. We also con-

clude that the District Court’s holding that AT&T lacked

monopoly power is based on an erroneous legal analysis.

However, we sustain, the District Court’s alternative

holding that AT&T did not maintain its monopoly power

by engaging in predatory pricing or other exclusionary

conduct. Because this holding is sufficient to affirm the

District Court, we uphold the judgment in favor of

AT&T without addressing the District Court’s alterna-

tive holdings on the issues of injury-in-fact and proof of

damages.

I. BACKGROUND

A. Competition in the Intercity Private Line Market

Prior to 1969, AT&T had a lawful monopoly in the

| market for interstate, intercity private line common

carrier telecommunications services.» AT&T provided

* This case principally involves three types of private line

services: point-to-point, FX and CCSA. The District Court —

| described these services as follows:

Point-to-point private line service, which plaintiffs in-

itially sought authorization to provide, connects two cus-

. tomer locations with a dedicated circuit that does not re-

quire use of switching systems because the circuit is

a

A-6

these services through its Long Lines Department acting

in partnership with the local Bell and independent op-

erating telephone companies. These services were pro-

vided over the same nationwide network that was used

to provide ordinary switched telephone services.‘

In 1959, the Federal Communications Commission

(“FCC”) had liberalized the licensing of privately-owned

microwave systems in Allocation of Frequencies in the

Bands Above 890 Mc, 27 F.C.C. 359 (1959), recon. denied,

29 F.C.C. 825 (1960). The Above 890 decision, however,

available to the customer on a continuing and exclusive

basis. In contrast, foreign exchange (FX) and common

control switching arrangement (CCSA) services, which

are involved in certain of plaintiffs’ interconnection

charges, require dedicated intercity circuits, but also pro-

vide a connection into a switching system, located in a

telephone company switching center.

Mem. Op. at 856 n.11 (citations to record omitted). For a

more detailed description of FX and CCSA services, see Mem.

Op. at 986 nn.191-192.

* These services comprise local exchange telephone service

and long distance service. The District Court described these

services as follows:

Local exchange telephone service is the ordinary serv-

ice used in nearly all homes and businesses. From a tech-

nical standpoint, it involves a wire cennection from the

telephone set to a switching system in a nearby telephone

company switching center that is in turn connected by

transmission trunks to switching systems in other switch-

ing centers within the exchange area.

Long distance service operates in a manner similar to

jocal exchange service but typicaily involves a two-step

process in which the user first gains access to the local

switching system through a dial tone and then requests

access to the long distance toll switching system (in many

cases the exact same switch) by dialing an area code

plus the number of the telephone the calling party wishes

to reach.

Mem. Op. at 855 nn.9-10 (citations to transcript omitted).

A-7

only permitted entities to build microwave systems in

order to provide telecommunications services for their

own use. In 1968, Microwave Communications, Inc.

(“MCI”) took the next step by filing an application with

the FCC to build a private microwave system between

Chicago and St. Louis in order to provide point-to-point

private line telecommunications services to business cus-

tomers on a common carrier basis. MCI represented in

its application that such a specialized carrier system was

necessary to make some of the benefits of the Above 890

decision available to small businesses by providing new

and innovative specialized point-to-point private line

services that were not being provided by the established

carriers. The FCC granted MCI’s application in 1969.

Microwave Communications, Inc., 18 F.C.C.2d 953 (1969),

recon. denied, 21 F.C.C.2d 190 (1970). The MCI decision

resulted in a deluge of applications from new “specialized

common carriers,” including SPCC, for authority to con-

struct and operate facilities for similar private line com-

munications systems between other specific city pairs. In

response, the FCC instituted a rulemaking proceeding to

determine “[w]hether as a general policy the public in-

terest would be served by permitting the entry of new

carriers in the specialized communications field.” Spe-

cialized Common Carriers, 24 F.C.C.2d 818, 827 (1970)

(Notice of Inquiry). In Specialized Common Carriers, 29

F.C.C.2d 870 (1971), affd sub nom. Washington Utilities

& Transportation Commission v. FCC, 518 F.2d 1142

(9th Cir.), cert. denied, 422 U.S. 886 (1975), the FCC

declared that “a general policy in favor of the entry of

new carriers in the specialized communications field would

serve the public interest, convenience, and necessity.”

29 F.C.C.2d at 920.

The Specialized Common Carriers decision left a num-

ber of significant questions unanswered. First, the de-

cision did not specify what services the “specialized com-

mon carriers” were a*ithorized to offer in the “specialized

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communications field,” but noted merely that they would

serve “evolving, new, diverse and specialized needs in a

dynamic, rapidly growing market.” 29 F.C.C.2d at 912.

Second, the decision did not indicate what competitive re-

sponse AT&T would be allowed to make to the entry of

the specialized common carriers into the market. Rather,

the Commission stated that:

We do not find it necessary at this time and on this

record to speculate concerning the manner in which

the existing carriers may seek to respond to com-

petitive conditions that may emerge in the market

for new and developing specialized communications

services. We do, however, stress our objective to

promote and maintain an environment within which

existing and any new carriers shall have an oppor-

System and Western Union in this market, so long

as their ye ere is not a ‘burden upon or sig-

tly Pe ee Thus,

tages, if any, that are inherent in the plant and

operations of those carriers. Moreover, we subscribe

fully to the views of our staff, endorsed by

partment of Justice, that there should not be

a ae for the new entrants or

artificial bolstering of operations that cannot suc-

ceed on their own merits” (Notice, paragraph 44).

29 F.C.C.2d at 915.°

* AT&T made competitive price responses both to the Above

890 decision and to the MCI and Specialized Common Car-

riers decisions. Four months after the Above 890 decision,

AT&T filed a new tariff, called Telpak, that offered substan-

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Finally, the decision did not dictate the terms and con-

ditions under which the specialized common carriers

would be entitled to interconnect with the Bell system.

The specialized common carriers proposed to provide inter-

city services primarily by microwave transmission. How-

ever, it was neither technically nor economically practical

to carry a signal by microwave directly to a customer’s

premises. To serve customers located in urban areas, it

was necessary for the specialized common carriers to

interconnect their intercity microwave systems with local

distribution facilities. These local distribution facilities

were only obtainable from the local telephone companies,

which, in nearly all locations served by SPCC, were owned

and controlled by AT&T. In addressing this critical issue

of interconnection, the Commission stated only that:

We reaffirm the view expressed in the Notice

(paragraph 67) that established carriers with ex-

change facilities should, upon request, permit inter-

connection or leased channel arrangements on rea-

sonable terms and conditions to be negotiated with

the new carriers, and also afford their customers the

option of obtaining loca] distribution service under

tial discounts for bundles of 60 channels (Telpak C) or 240

channels (Telpak D). Telpak was designed to eliminate the

incentive for entities to construct private microwave systems

Multi-Schedule Private Line (“MPL”) tariff,

offered low rates on high-density routes. After each of the

above tariffs was filed, the FCC suspended the tariff for the

then maximum period of 90 days. After that period, each tariff

went into effect and remained in effect throughout the lengthy

FCC investigation of its reasonableness.

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reasonable terms set forth in the tariff schedules of

the local carrier. Moreover, as there stated, “where

a carrier has monopoly control over essential facili-

ties we will not condone any policy or practice

whereby such carrier would discriminate in favor of

an affiliated carrier or show favoritism among com-

petitors.”

29 F.C.C.2d at 940 (footnote omitted).

As the new specialized common carriers began to enter

the market, disputes arose among these new carriers,

AT&T and the FCC concerning the types of services that

the new carriers were authorized to provide, the kinds of

interconnections to which they were entitled, the terms

and conditions upon which such interconnections would

be provided, and the nature of the competitive rate re-

sponse that AT&T would be permitted to make in its own

private line tariffs. The subjects of these disputes form

the vasis of the present antitrust suit.

B. The Parties

The plaintiffs in this case are SPCC and Transporta-

tion Microwave Corporation. The defendants are AT&T

and the 24 Bell operating companies.

SPCC was formed in January 1970 as a wholly owned

subsidiary of the Southern Pacific Company to provide

business and governmental private line communications

services over its wn intercity microwave network.

Shortly thereafter, SPCC filed initial applications with

the FCC, seeking to construct and operate specialized

common carrier microwave systems between Seattle and

San Diego and between Los Angeles and St. Louis. The

FCC granted these applications following its decision in

the Specialized Common Carriers inquiry, and SPCC

commenced commercial operations on December 26, 1973.

Transportation Microwave Corporation is a 95%-owned

subsidiary of the Southern Pacific group.

A-11

AT&T, through its Long Lines Department acting in

partnership with the Bell and independent operating tele-

phone companies, provides interstate and intercity tele

communications services in competition with SPCC. Each

of the Bell operating companies possesses a lawful, ex-

clusive franchise or monopoly in the geographic area in

which it provides service.

C. The Proceedings Below

SPCC filed its complaint in this action on March 27,

1978, alleging violations of the Sherman Act and seeking,

ultimately, $230.2 million in damages, trebled to $690.6

million pursuant to section 4 of the Clayton Act. SPCC’s

complaint contained a demand for trial by jury. AT&T

promptly filed a motion to dismiss, arguing that the chal-

lenged conduct was subject to pervasive regulatory con-

trol and hence was immune from antitrust scrutiny. The

District Court, Judge Richey presiding, rejected this ar-

gument and denied AT&T’s motion to dismiss on July 2,

1979. The parties engaged in extensive discovery between

1979 and 1981. In February 1982, SPCC waived its

earlier demand for a jury trial in order to try the case

before Judge Richey. The case was submitted for trial

on the charge that AT&T had possessed monopoly power

and had misused that power during the period from 1968-

1978 through conduct alleged to violate section 2 of the

Sherman Act.

Trial commenced on May 10, 1982, and lasted 33 trial

days. SPCC argued-at trial that AT&T had refused to

accept the FCC mandate permitting competition in the

intercity private line market. Plaintiffs also contended

that AT&T had used its monopoly power over prices and

its control of loca] distribution facilities unlawfully to

foreclose competition. AT&T conceded that it disagreed

in principle with the FCC’s policies because it believed

that these policies threatened to destroy the rate structure

that had been designed to foster the universal availability

EE

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of telephone service. AT&T argued, however, that it

opposed these policies only to the extent of speaking out

against them. According to AT&T, it was committed to

conducting its business fully in accordance with the

FCC’s decisions and orders and to providing competitors

with access to its essential facilities on fair terms to

the extent that doing so was consistent with its public

responsibilities. Furthermore, AT&T argued, to the ex-

tent that the FCC permitted it to compete, it did so fully

but fairly, using its superior efficiency due to economies

of scale and scope to provide service at a lower cost and

price than could be provided by SPCC.

SPCC completed its presentation of evidence, including

the testimony of 24 witnesses and the introduction of ap-

proximately 1,400 exhibits, on June 14, 1982. On June 8,

AT&T filed a motion for involuntary dismissal under

rule 41(b) of the Federal Rules of Civil Procedure. On

June 21, the District Court announced its decision to

defer ruling on AT&T’s motion until it had heard all of

the evidence. Between June 23 and July 2, AT&T pre-

sented the testimony of 147 witnesses* and introduced

over 7,900 exhibits. SPCC then presented rebuttal evi-

dence, consisting of the testimony of nine witnesses and

the introduction of 326 exhibits, and AT&T then intro-

duced 23 exhibits in surrebuttal evidence. As the con-

clusion of the trial, the District Court requested proposed

findings of fact and conclusions of law from both parties.

SPCC submitted 375 pages of proposed findings and con-

clusions and AT&T submitted 486 pages of proposed

findings and conclusions. Finally, on July 19, 1982, the

trial court heard closing arguments.

Five months later, on December 21, 1982, the District

Court issued 2 Memorandum Opinion and Order entering

judgment for the defendants and dismissing the case with

* Most of the testimony in this case was presented in writ-

ten form. Only 47 of AT&T’s witnesses actually appeared in

court. See Mem. Op. at 851 n.7.

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prejudice. The Memorandum Opinion, 605 typewritten

pages long, is reprinted in 275 pages of the Federal Sup-

plement. The opinion is overwhelmingly copied verbatim

from AT&T’s proposed findings of fact and conclusions

of law. According to the uncontradicted computation of

SPCC, the District Court adopted 730 of the 746 para-

graphs of AT&T’s proposed findings and conclusions; on

a line-by-line basis (excluding quotations), 80.5% of the

opinion is copied from AT&T's proposed findings and con-

clusions, 4.4% is copied from SPCC’s proposed findings

and conclusions (on al] nonsubstantive matters), and

15.1% is original material. See Appellants’ Opening

Brief at 20 & n.15; see also VI Record Excerpts at tab

97 (copy of Memorandum Opinion with each line at-

tributed to source). The District Court even copied

dozens of typographical errors from AT&T’s submis-

sion; these were corrected before publication by an order

filed January 10, 1983. In certain of the original por-

tions of the Memorandum Opinion, the District Judge

strongly expressed his agreement with AT&T’s view that

the FCC’s decisions opening the telecommunications in-

dustry to competition were inimical to the public interest.

Il. THE JUDICIAL Bias Issue

SPCC’s central argument on this appeal is that it was

denied a fair trial because of the District Judge’s bias.

SPCC alleges that the Judge was biased because he ap-

proached the trial with the firm personal beliefs that an

AT&T monopoly is in the public interest and that the

antitrust laws should not, and do not, apply to AT&T.”

| ’ The District Judge expressed his beliefs most prominently

in the course of the following discussion of implied antitrust

; immunity in the “Conclusion” section of his Memorandum

Opinion:

Under the controlling decisions of the Supreme Court,

it is undisputed that matters subject to a pervasive

scheme of public utility or common carrier regulation

are not subject to the antitrust laws. Pan American

a

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SPCC further contends that the District Court’s Memo-

randum Opinion—extensively copied from AT&T’s pro-

posed findings of fact and conclusions of law, and adverse

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

01, 306, 309, 83 S.Ct. 476, 479, 482, 484, 9 LEd.2d 325

(1963) ; Hughes Tool Co. v. Trans World Airlines, Inc.,

409 U.S. 363, 387-89, 98 S.Ct. 647, 660, 34 L.Ed.2d 577

(1973) ; United States v. Radio Corp. of America, 358 U.S.

application of the antitrust laws. Though this reverses

the Court’s earlier 1979 ruling on a Motion to Dismiss, it

is clear from all of the evidence now before this Court

with respect to this plaintiff, that every action complained

of in this case could have or should have been handled

by the appropriate regulatory bodies, which responsibility

the regulators miserably mishandled or failed to handle.

What the FCC actually did over the years was talk about

competition (in reality contrived) in order to achieve de-

regulation which has and will be shown to be contrary to

the best interests of millions of Americans throughout

the country and by those outside the profitable big city

areas with a resultant loss of service, quality, and higher

costs to those least able to afford this now essential serv-

ice. It is clear that defendants could not make one penny

more than what the various regulators allowed them.

Indeed, AT & T had a double burden—not only could

their rates not be too low, but neither could they be too

high. The states have done a particularly good job in

regulating the defendants in order to insure the highest

quality of service at the lowest possible cost for all of

their citizens. There are many instances in which AT&T

would seek a rate increase from the state, only to be de-

nied all of it or part of it. The states were also very ef-

fective in regulating the interconnection problems as well.

"ae picture became cloudy on the interconnection matter

only because the FCC attempted, and quite successfully,

to obtain jurisdiction over intrastate matters. Whether

this was in the public interest will remain for another

day. The bottom line of “public interest” has actually

A-15

to SPCC on all significant factual and legal questions—

merely gave vent to the Judge’s personal beliefs, and,

consequently, failed to reflect his impartial application of

been construed as what some powerful interests in this

country want as distinguished from what the public can

afford, namely, safe, reliable service to everyone (instead

of creamskimming the big city areas where profits are

maximized) at the lowest possible cost to all and par-

ticularly those least able to afford telecommunications

service, which should be our continued standard. This

Court believes that the antitrust laws were never in-

tended to destroy an essential public utility such as we

have here. It may be necessary for Congress and the

Justice Department to re-examine the problems herein

discussed and to bring about the return of responsible

regulation so that there will be no more contrived com-

petition in profitable areas only. This Court believes that

sound and honest regulation of telecommunications at the

federal and state level is our only guarantee of access to

this necessity throughout the whole country and not just

part of it. Regulation in this area of telecommunications

up until the 1970's at the federal and state levels has

served this country well and it is hoped that sometime

in the near future it will again do its proper job without

abdication to the greed of a few, no matter how big or

small.

It is necessary to mention the FCC again. It put the

Specialized Common Carriers into business for the bene-

fit of a few without taking into account the myriad of

problems to our people and our national! security. It was

the FCC that never found TELPAK (C & D) unlawful

for over 20 years, as well as delayed making other very

important decisions. It cannot be successfully disputed

that whatever the FCC mandated throughout the relevant

period of this case, that AT & T was obligated to, and

did in fact, follow, no matter whether it made any sense

in economics or law. It was primarily the FCC staff

during this entire period, after permitting the Specialized

Common Carriers entry into the market in the name of

competition (really contrived), whose performance, was,

to say the least, totally unprofessional and inadequate by

virtue of the likes of Messrs. Cox, Hinchman, Tucker,

and Scott. It was a result of their actions (or inaction)

as well as a thin majority of the Commissioners in the

A-16

the antitrust laws to the facts of the case. Thus, accord-

ng to SPCC, we should vacate the opinion of the District

‘‘ourt and remand the case for a new trial, without con-

«deration of the evidence. Alternatively, according to

Si?CC, we should abandon the “clearly erroneous” stand-

ard of review, and simply review the record to determine

whether the Judge’s convictions substantially influenced

his judgment.

We must emphasize at the outset the narrow focus of

SPCC’s argument. Although a claim is made that plain-

tiffs were denied a fair trial, SPCC does not allege that

the District Judge in any way interfered with plaintiffs’

efforts to present their case. To the contrary, SPCC con-

cedes that the Judge never foreclosed it from engaging in

discovery, introducing documentary or testimonial evi-

dence, engaging in cross-examination, presenting legal

arguments, or citing applicable legal precedents. Thus, as

SPCC also concedes, it was able to create a full, complete

record for us to review. Furthermore, although SPCC

asserts a charge of bias, there is no claim that the

District Judge was biased in the sense of having adjudged

the facts in advance of hearing the case. Cf. Cinderella

Career & Finishing Schools, Inc. v. FTC, 425 F.2d 583,

591 (D.C. Cir. 1970). Rather, SPCC asserts that the

District Judge was biased on'y in the sense that he held

firm views concerning law and policy and decided the

case on the basis of these views, thus depriving SPCC of

an impartial judgment.*

60’s and 70’s that has subjected AT & T to many lawsuits

in the antitrust field now pending today. Had the FCC

not engaged in its usual regulatory lag and dealt forth-

rightly and properly with the problems as they arose,

then few, if any, of the cases would now be before the

antitrust Courts, such as this one.

Mem. Op. at 1095-97 (emphasis in original) (footnotes

omitted) .

*SPCC alleged at oral argument that the District Judge

also was biased in the sense that he harbored a personal

ON CR i nn re

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A. Views on Law or Policy

It is well established that the mere fact that a judge

holds views on law or policy relevant to the decision of a

case does not disqualify him from hearing the case.* See,

animus against SPCC as a party. See Transcript of Ora! Ar-

gument at 7-8. This allegation is based solely on statements

the District Judge made to the effect that the specialized com-

mon carriers as a class were interested only in “creamskim-

ming the big city areas where profits are maximized” and not

in providing “safe, reliable service to everyone . at the

lowest possible cost to all and particularly those least able to

afford telecommunications service.” Mem. Op. at 1096 (em-

phasis in original); see Transcript of Oral Argument at 8.

We do not at all find that these and similar statements mani-

fest a personal animus against SPCC, but only that they re-

flect the District Judge’s policy views. Our review of the

trial record provides no support for SPCC’s allegation of per-

sonal animus. Indeed, at the conclusion of the trial, lead

counsel for SPCC thanked the District Judge for the “great

deal of goodwill toward the parties” that he had shown

“throughout this case.” Tria] Transcript at 6048. We also

find it significant that, after several years of pre-trial pro-

ceedings, SPCC waived its right to trial by jury to have the

case tried before the District Judge, and that SPCC never

sought to have the District Judge disqualified for personal

bias.

* The issue in the present case is whether the appellants

were denied a fair trial because of the District Judge’s alleged

bias, and not whether the District Judge should have dis-

qualified himself for bias. Judicial disqualification in the fed-

eral courts is governed by two sections of the Judicial Code,

28 U.S.C. §§ 144, 455 (1982). Section 144 provides in per-

tinent part:

Whenever a party to any proceeding in a district court

makes and files a timely and sufficient affidavit that the

judge before whom the matter is pending has a personal

bias or prejudice either against him or in favor of any

adverse party, such judge shall proceed no further

therein, but another judge shall be assigned to hear such

proceeding.

28 U.S.C. § 144 (1982). Section 455 provides in pertinent

part that “[a]ny justice, judge, or magistrate of the United

A-18

e.g., Association of National Advertisers, Inc. v. FTC,

627 F.2d 1151, 1174 (D.C. Cir. 1979) (“Administrators,

and even judges, may hold policy views on questions of

law prior to participating in a proceeding.”), cert. “enied,

447 U.S. 921 (1980); id. at i177 (Leventhal, J., con-

curring) (“even judges are not disqualified merely be-

cause they have previously announced their positions on

legal issues”) ; United States v. Haldeman, 559 F.2d 31,

136 n.332 (D.C. Cir. 1976) (en banc) (per curiam)

(“although fixed, an opinion on the law is not disqualify-

ing’), cert. denied, 431 U.S. 933 (1977). Indeed, we can

barely conceive of a judge coming to a case without hold-

ing at least certain preconceptions that may affect his

approach to the case. “The human mind, even at infancy,

is no blank piece of paper. We are born with predisposi-

tions; and the process of education, formal and informal,

creates attitudes in all men which affect them in judging

situations, attitudes which precede reasoning in particular

instances and which, therefore, by definition, are pre

judices.” In re J.P. Linahan, Inc., 188 F.2d 650, 651

States shal] disqualify himself in any proceeding in which his

impartiality might reasonably be questioned,” id. § 455(a),

and “also” shall disqualify himself “[w]jhere he has a per-

sonal bias or prejudice concerning a party,” id. § 455(b) (1).

These sections establish a more stringent standard for dis-

qualification than is required by the right to a fair trial guar-

anteed by the due process clause. See United States v. Halde-

man, 559 F.2d 31, 130 n.276 (D.C. Cir. 1976) (en banc) (per

curiam), cert. denied, 481 U.S. 983 (1977) ; accord In re IBM

Corp., 618 F.2d 9238, 982 n.11 (2d Cir. 1980); see also FTC

v. Cement Institute, 388 U.S. 688, 702 (1948) (most matters

relating to judicial disqualification do not rise to a constitu-

tiorial level) ; Tumey v. Ohio, 273 U.S. 510, 523 (1927) (“All

questions of judicial qualification may not involve constitu-

tional validity. Thus matters of kinship, personal bias, state

policy, remoteness of interest, would seem generally to be

matters merely of legislative discretion.”). Thus, a determi-

nation that a judge is not disqualified for bias necessarily

includes a determination that the right to a fair trial is not

violated by the judge’s presiding over the case.

ee

IE CO caine sce

Peet a Oe Pet ot

A-19

(2d Cir. 1943). If a judge approached every case com-

pletely free of preconceived views concerning the rele

vant law and policy, we would be inclined not to applaud

his impartiality, but to question his qualification to serve

as a judge.

Although it is both understood and accepted that judges

do not approach a case empty-headed, it “» also presumed

. that a judge will not prejudge any case. In each new

case the judge confronts a new factual context, new evi-

dence, and new efforts at persuasion. As long as the

judge is capable of refining his views in the process of

this intellectual confrontation, and maintaining a com-

pletely open mind to decide the facts and apply the ap-

plicable law to the facts, personal views on law and policy

do not disqualify him from hearing the case. The test

‘may be stated in terms of whether the judge’s mind is

“irrevocably closed” on the issues as they arise in the

context of the specific case. See FTC v. Cement Institute,

833 U.S. 6838, 701 (1948); see also Hortonville Joint

School District No. 1 v. Hortonville Education Association,

426 U.S. 482, 493 (1976) (“Nor is a decisionmaker dis-

qualified simply because he has taken a position, even in

public, on a policy issue related to the dispute, in the

absence of a showing that he is not ‘capable of judging a

particular controversy fairly on the basis of its own cir-

cumstances.’”) ; United States v. Haldeman, 559 F.2d 31,

1386 (D.C. Cir. 1976) (en banc) (per curiam) (“a

10 Cf. Laird v. Tatum, 409 U.S. 824, 885 (1972) (Memo-

randum of Mr. Justice Rehnquist) (“Proof that a Justice’s

mind at the time he joined the Court was a complete tabula

rasa in the area of constitutional adjudication would be evi-

dence of lack of qualification, not lack of bias.”); Jn re J.P.

Linahan, Inc., 188 F.2d 650, 652 (2d Cir. 1948) (“An ‘open

mind,’ in the sense of a mind containing no preconceptions

whatever, would be a mind incapable of learning anything,

would be that of an utterly emotionless human being, cor-

responding roughly to the psychiatrist’s descriptions of the

feeble-minded.”’) .

A-20

judge’s comment is disqualifying only if it connotes a

fixed opinion—‘a closed mind on the merits of the

case.’”’), cert. denied, 431 U.S. 933 (1977) .

In the present case, SPCC argues both that the District

Judge held firm views about the policies and issues in-

volved before hearing the case, and that his mind was

irrevocably closed. We conclude, however, that SPCC has

failed to establish either prong of this argument.

AT&T strongly disputes SPCC’s contention that the

District Judge held his policy or legal views prior to

hearing the case, and argues that, to the contrary, the

Judge developed his views during the course of the trial

in response to the arguments and evidence presented by

both parties. It seems clear that the Judge, at minimum,

did not initially believe that the antitrust laws are in-

applicable to AT&T’s allegedly anticompetitve conduct,

for, on July 2, 1979, the Judge entered a pre-trial order

rejecting AT&T’s motion to dismiss the case on the basis

of implied antitrust immunity. In that order, the Judge

noted that “{ijt is consistent with thie FCC’s general

goals for the specialized communications markei, as well

as with the agency’s determinations in particular cases,

that the antitrust laws and the Communications Act may

be applied simultaneously and complementarily.” Order

at 8. The Judge explained his change of position between

the pretrial] order and the final decision as being due to

the failure of the “proof adduced at this trial” to sub-

stantiate the “facts alleged in the pleadings.” Mem. Op.

at 1096 n.341. In other words, far from initially holding

a firm belief that the antitrust laws did not apply to

AT&T, the trial judge initially held the view that the

antitrust laws did apply to AT&T, and adopted the con-

trary view only after hearing the evidence. This hardly

supports SPCC’s charge of bias.

Moreover, we have examined the arguments and evi-

dence presented in this case, and find AT&T’s position

that the District Judge developed his policy views as well

debe ee

A-21

as his legal views during the course of the trial to be at

least highly plausible. The merits and demerits of the

FCC’s decision to allow competitive entry by the spe

cialized common carriers were extensively debated by

counsel during the trial. Indeed, SPCC itself, in an at-

tempt to prove AT&T’s anticompetitive intent, submitted

documentary evidence setting forth AT&T’s reasons for —

opposing the FCC’s decision. One such document, a speech

given by the then Chairman of the Board of Directors of

AT&T, Jobn D. deButts, to the annual convention of the

Nationa] Association of Regulatory Utility Commissioners

on September 30, 1973, is quoted in its entirety in the

Memorandum Opinion. See Mem. Op. at 894-902. A com-

parison of that speech with the views expressed by the

District Judge in the “Conclusion” section of the Memo-

randum Opinion™ reveals a striking similarity. -This

strongly suggests to us that the Judge developed his

policy views during the trial. Most importantly, SPCC

fails to offer any convincing evidence that the District

Judge held his policy views prior to hearing the case.

Even if we were to assume that the trial judge began

the case with certain firmly held views, SPCC has failed

to establish that the Judge held these views with an

“irrevocably closed” mind. Once again, the evidence sug-

gests the opposite. The first such evidence is the Judge’s

denial of AT&T’s pretrial motion to exclude SPCC’s FX

and CCSA™ claims from the case, and his denial of

AT&T’s motion at the close of SPCC’s case for involun-

tary dismissal under rule 41(b). These actions are in-

dicative of a judge who was fully prepared to hear all of

the evidence before reaching a final decision, not a judge

whose mind was irrevocably closed to persuasion. Second,

the Judge repeatedly stated throughout the trial that he

11 See note 7 supra.

12 For a brief description of FX and CCSA, see note 3

supra.

A-22

had not yet reached a conclusion on the merits of the case.

Finally, as noted earlier, the Judge never foreclosed

SPCC from engaging in discovery, introducing docu-

mentary or testimonial evidence, engaging in cross-

examination, presenting legal arguments, or citing ap-

plicable legal precedents.

If the Judge was as biased as claimed by SPCC, it is

B. Disagreement with Applicable Law or Policy

We recognize that SPCC’s argument goes beyond the

assertion that the District Judge held certain views on

law and policy with an irrevocably closed mind. SPCC

further argues in essence that the Judge ignored the ap-

plicable antitrust law and simply decided the case on the

basis of his view that an AT&T monopoly is good and

A-23

It is clear that the District Judge did hold the view

that AT&T’s former monopoly in private line telecom-

munications was in the public interest and that com-

petitive entry into this market was contrary to the public

interest. This view is inconsistent with the determina-

tion that the FCC made in Specialized Common Carriers,

29 F.C.C.2d 870 (1971), affd sub nom. Washington

Utilities & Transportation Commission v. FCC, 613 F.2d

1142 (9th Cir.), cert. denied, 423 U.S. 836 (1975), that

competitive entry into this market ie in the public in-

terest. The FCC’s determination was upheld by the Ninth

Circuit and was given broad effect by this court in

AT&T v. FCC, 5389 F.2d 767, 773-74 (D.C. Cir. 1976).

The District Judge’s proper role in deciding this case

was to apply the antitrust laws to the

policy of allowing competition. It was not part of his

official role in deciding this case to pass on, or

even to express his persona! views concerning, the FCC's

policy decision to allow competition.

It is well established, however, that a judge is not dis-

the

Association of National Advertisers, Inc. v. FTC, 627

F.2d 1151, 1175 (D.C. Cir. 1979) (Leventhal, J., con-

curring) (footnotes omitted), cert. denied, 447 U.S. 921

years of law about findings being clearly erroneous... , and

I don’t see how in the world in light of this record it could

be.” Transcript of Hearing at 112 (Mar. 80, 1983). We do

A-24

(1980). In the present case, however, it is alleged that

the District Judge not only disagreed in the context of

this case with the policy promoted by the antitrust laws,

but also that instead of putting his personal views aside

he allowed those views to dominate his judgment. SPCC

principally relies on three factors to support this latter

allegation: the statements made by the Judge in his Mem-

orandum Opinion, the fact that the Judge largely copied

his Memorandum Opinion from AT&T’s proposed find-

ings of fact and conclusions of law, and the fact that

virtually every determination of credibility, finding of

fact and conclusion of law is in favor of AT&T. For the

“ Thus, for example, a judge who was vehemently opposed

to the continuation of the Vietnam War was not disqualified

from determining whether a draftee had been unlawfully in-

A-25

rather on his conclusion—with which we disagree—that

AT&T was subject to a pervasive scheme of regulation.

One of the most troublesome comments that the Judge

made was that he “believes that the antitrust laws were

never intended to destroy an essential public utility such

as we have here.” Mem. Op. at 1097. We interpret this

comment, however, merely to be a restatement of his

conclusion that antitrust immunity can be implied from

the scheme of public utility regulation applicable to

AT&T.

In any case, even if the trial judge’s views of the public

interest did influence his judgment on the issue of im-

plied antitrust immunity, the decision does not rest on

the disposition of that issue.“ Rather, the Judge went

on to hold in the alternative that, even if the antitrust

laws do apply, SPCC has failed to prove that AT&T un-

lawfully maintained monopoly power through anticom-

petitive conduct. It is solely on the basis of that holding

that we affirm the District Court’s judgment, and we

find no evidence that the Judge’s policy views imper-

missibly influenced that holding.

2. Copied Findings of Fact and Conclusions of Law

SPCC also argues that the fact that the District Judge

A-26

that analysis after full consideration or merely copied it

mechanically.

The short answer to this argument is that, given the

absence of clear evidence to the contrary, we must pre-

sume that the Judge adopted these findings and conclu-

sions after full consideration. In United States v. Cres-

cent Amusement Co., 323 U.S. 173 (1944), the Supreme

Court noted:

The defendants finally object to the findings on

the ground that they were mainly taken verbatim

from the government’s brief. The findings leave

much to be desired in light of the function of the

trial court. But they are nonetheless the findings of

the District Court. And they must stand or fall

depending on whether they are supported by the

evidence.

Id. at 184-85 (citation omitted) ; accord United States v.

El Paso Natural Gas Co., 376 U.S. 651, 656 (1964) ;

Afshar v. Department of State, 702 F.2d 1125, 1144

(D.C. Cir. 1983) ; Valentino v. United States Postal Serv-

ice, 674 F.2d 56, 60-61 n.2 (D.C. Cir. 1982). Indeed, in

Valentino this circuit explicitly rejected the suggestion

that the District Court’s substantial acceptance of the

prevailing party’s proposed findings warrants departure

from the “clearly erroneous” standard of review. 674

F.2d at 60-61 n.2.

SPCC argues that this case is distinguishable from

Crescent Amusement Co., El Paso Natural Gas Co.,

Afshar, Valentino and similar cases because of the sheer

extensiveness of the copying. We find this argument un-

persuasive. Proportionately, the extent of the copying

was the same or less in the present case than in many

others. The total number of pages copied reflects the size

of the case more than the degree of abdication of the

judge’s responsibility for opinion writing.

Even apart from our presumption of regularity, how-

ever, we find that there is reason to believe that the

Se i me oe ke

A-27

Memorandum Opinion may reflect the actual thinking of

the District Judge on the issues. First, counsel for AT&T

explained at oral argument that AT&T’s proposed find-

ings of fact and conclusions of law were written to re

flect the views of the District Judge that had been freely

expressed throughout the tria] in response to the testi-

mony of the witnesses, the submissions of documentary

evidence and the arguments of the parties. Our review

of the record convinces us that there is considerable merit

to this explanation. To an extent, therefore, AT&T

merely performed a stenographic function. Moreover, we

note that the District Judge did add a not insignificant

amount of origina] material, including supplementa] de-

terminations of credibility, findings of fact and conclu-

sions of law. This original material is interspersed

throughout AT&T’s submissions. This indicates to us

that the trial judge did not mechanically copy AT&T’s

proposed findings and conclusions, but rather considered

them and elaborated upon them where he considered it

necessary.

Finally, we note that careful appellate review provides

some safeguard against adoption of findings and con-

clusions that reflect excessive zeal of advocacy. Courts

of appeals are able independently to review the legal

analysis of a trial court’s opinion for error, regardless of

whether that anaiysis was written in the first instance

by the District Judge or by the prevailing party. And,

as long as the court of appeals has a full record—which

SPCC concedes we do in this case—the court of appeals

can “examine[] the decision with special care” for clear

error in the findings of fact. Valentino v. United States

Postal Service, 674 F.2d at 60 n.2. We may contrast this

situation with the situation in Crandell v. United States,

703 F.2d 74 (4th Cir. 1983), one of the cases principally

relied upon by SPCC. In Crandell, all of the findings in

the district court’s memorandum opinion relating to two

key issues were lifted virtually verbatim from a report

prepared by a government witness. 708 F.2d at 76.

A-28

During the trial, the District Judge had prevented the

plaintiff from effectively cross-examining this witness. Jd.

In contrast, as SPCC concedes, the District Judge in the

present case never foreclosed SPCC from presenting its

case and developing a full record for review.

Nevertheless, we wish to make clear that we cannot

endorse the District Judge’s action in extensively copying

the proposed findings of fact and conclusions of law pre-

pared by counsel for AT&T. As the Supreme Court noted

in El Paso Natural Gas Co., this practice “is an abandon-

ment of the duty and the trust that has been placed in

the judge.” 376 U.S. at 657 n.4 (quoting J. Skelly

Wright, Seminars for Newly Appointed United States

District Judges 166 (1963)). As the present case illus-

trates, the parties, the public and the reviewing court

can never be certain that the judge actually decided the

case on the grounds given in the copied Memorandum

Opinion. Confidence in the integrity of the judicial proc-

ess inevitably suffers when judges succumb wholesale to

this practice.

3. One-sided Findings and Conclusions

Finally, SPCC argues that it is difficult to credit to

anything except judicial bias the fact that virtually every

determination of the credibility of witnesses, finding of

fact and conclusion of law in the Memorandum Opinion

is in favor of AT&T. We conclude that the statistical

one-sidedness of the trial court’s evidentiary, factual and

legal rulings simply cannot be used to support an in-

ference of judicial bias. As the Second Circuit has noted:

A trial judge must be free to make rulings on the

merits without the apprehension that if he makes a

disproportionate number in favor of one litigant, he

may have created the impression of bias. Judicial

independence cannot be subservient to a statistical

study of the calls he has made during the contest.

FA eek tte AI

A-29

In re IBM Corp., 618 F.2d 923, 929 (2d Cir. 1980) (re

jecting IBM’s argument that the disproportionate number

of rulings by the trial judge against IBM and in favor

of the Government constituted evidence of judicial bias).

This position is also supported by the Supreme Court’s

decision in NLRB v. Pittsburgh Steamship Co., 337 U.S.

656 (1949). In that case, a trial examiner without ex-

ception had found the witnesses for the company untrust-

worthy and those for the union reliable, and the Board

had adopted the examiner’s findings. The court of ap-

peals held that this fact alone showed bias: “It is enough

to say that the unvarying repudiation of every witness

for the petitioner because of falsity, evasion or faint

recollection, along with the consistent exaltation of every

union witness as truthful, forthright and accurate, de-

stroys completely any confidence that might otherwise be

placed in the findings of the trial examiner and stamp/[s]

them as arbitrary.” 337 U.S. at 658 (quoting Pittsburgh

Steamship Co. v. NLRB, 167 F.2d 126, 129 (6th Cir.

1948)) (brackets in original). The Supreme Court re

versed, holding that “total rejection of an opposed view

cannot of itself impugn the integrity or competence of a

trier of fact.” Id. at 659.

C. Case Law Relied on by SPCC

SPCC relies primarily on five cases to support its argu-

ment that the District Judge should be reversed for bias:

Crandell v. United States, 703 F.2d 74 (4th Cir. 1983) ;

Nicodemus v. Chrysler Corp., 596 F.2d 152 (6th Cir.

1979) ; Faulkner Radio, Inc. v. FCC, 557 F.2d 866 (D.C.

Cir. 1977); Reserve Mining Co. v. Lord, 529 F.2d 181

(8th Cir. 1976) ; and Knapp v. Kinsey, 232 F.2d 458 (6th

Cir.), cert. denied, 352 U.S. 892 (1956).

In Faulkner Radio, this court remanded a case to the

FCC because the administrative law judge, in resolving a

conflict between the testimony of two parties who were

A-30

lawyers and the testimony of opposing witnesses who were

non-lawyers, apparently acted on the assumption that the

FCC accords greater weight to the testimony of lawyers

thar to that of non-iawyers. Although the appellant

couched its argument in terms of “bias,” the court re-

manded because it considered it likely that the judge’s

credibility determinations were “predicated upon a ma-

terial error of law.” 557 F.2d at 870. Thus, Faulkner

. Radio does not suggest that we should vacate the opinion

below and remand the present case for a new trial with-

out consideration of the evidence, as SPCC argues, but

only that we should carefully review the District Judge’s

determinations of credibility and findings of fact to make

certain that they, too, are not predicated upon material

errors of law.”

In each of the other four cases relied on by SPCC, the

court of appeals held that the district judge’s conduct

during the trial deprived the losing party of due process.

This conduct consisted in part of statements made by the

judge indicating bias, but also in each case involved sig-

nificant—even egregious—interference by the judge with

the attempts of the losing party to present its case. In-

deed, in three of the cases the court of appeals concluded

that the district judge had “simply assumed the role of

an advocate” for the prevailing party. Crandell, 703 F.2d

4° SPCC argues that many of the District Court’s determina-

tions of credibility in the present case were predicated on im-

permissible grounds. We have considered SPCC’s allegations,

and conclude that the District Court fully supported each de-

termination of credibility critical to its holding on the issue

of unlawful maintenance of monopoly power on the basis of

legitimate considerations, such as demeanor, objectivity, ex-

pertise, experience, and the logic of the testimony. As we

have already noted, it does not matter that certain of these

findings were initially drafted by counsel for AT&T. What

is important is that the District Judge adopted these findings

as his own, that they have a basis in the record, and that

there is nothing to suggest that they are clearly erroneous.

A-31

at 77; see Reserve Mining Co., 529 F.2d at 185 (“Judge

Lord seems to have shed the robe of the judge and to

have assumed the mantle of the advocate.”) ; Knapp, 232

F.2d at 467 (district judge “figuratively speaking, stepped

down from the bench to assume the role of advocate for

the plaintiff’). In none of these four cases was the deci-

sion of the court of appeals founded solely on the district

judge’s expressions of policy views and speculation that

the district judge impermissibly based his decision on

those views rather than on the applicable law.

D. Summary

We recognize the difficulty of proving that a trial judge

not only held certain views about law or policy, but also

approached a case with an “irrevocably closed” mind or

actually substituted his pe~sonal views for controlling law

in deciding a case. As we have indicated, there is a

strong presumption against disqualifying a judge solely

on the basis of his views about law or policy. Indeed, we

assume that most judges do have personal views; but we

also presume that these views do not invariably cause a

judge to prejudge a case or to abandon his public re

sponsibility to preside over a fair and wholly impartial

adjudication. In other words, we expect that most judges

are faithful to their enormous public trust.

In the present case, however, the issue of bias has been

seriously raised in a context that we find troubling. We

therefore have examined the trial judge’s conduct in con-

siderable detail. We find the plaintiffs’ charges of bias

to be unsupported by the factors SPCC cites, whether

considered individually or together as a whole. Accord-

ingly, we reject these charges and deny SPCC’s requests

that we reverse and remand for bias or that we abandon

the “clearly erroneous” standard of review of the Dis-

trict Court’s factfinding.

A-32

III. THE ANTITRUST ISSUES

A. Introduction

Turning now to the substantive issues that formed the

subject of the trial, we note that the District Court out-

lined four elements of proof that SPCC had to satisfy in

order to prevail on its antitrust claims:

(1) that the defendant possesses monopoly power in

a relevant market; (2) that the defendant has un-

lawfully exercised that power to attain, or maintain,

a monopoly in the relevant market; (3) that the

plaintiff has suffered injury in fact as a result of

those unlawful acts; and (4) that damages in a

reasonably ascertainable amount have been proved.

Mem. Op. at 870 (citations omitted). The District Court

then concluded in a series of alternative holdings that

SPCC had failed to satisfy any of these elements of proof.

Finally, in the “Conclusion” section of its Memorandum

Opinion, the District Court held that, in any event, all

of AT&T’s rates and practices challenged by SPCC were

immune from antitrust scrutiny because they were sub-

ject to a pervasive scheme of public utility or common

carrier regulation. Thus, the District Court’s judgment

for AT&T rests on five principal alternative holdings.

B. The “Clearly Erroneous” Standard of Review

On appeal, SPCC raises two general arguments on the

merits. First, SPCC argues that “[o]n each and every

issue on this appeal, SPCC presented evidence sufficient

to prevail before an impartial decisionmaker.” Appel-

lants’ Reply Brief at 5. Thus, SPCC essentially seeks to

relitigate its charges against AT&T. SPCC repeats the

allegations that it unsuccessfully made to the District

Court, cives to evidence in the record that supports these

allegations, and urges the Court of Appeals independently

to review the evidence. These arguments assume that we

have adopted SPCC’s suggestion that we abandon the

A-33

“clearly erroneous” standard on the ground that the trial

court’s factfinding was tainted by the District Judge’s

policy bias.*7 As discussed above in Part II, however, we

reject SPCC’s charge of judicial bias. Accordingly, we

are bound by the rule that findings of fact in actions

tried without a jury “shall not be set aside unless clearly

erroneous, and due regard shall be given to the oppor-

tunity of the trial court to judge of the credibility of the

witnesses.” FED. R. Civ. P. 52(a). The Supreme Court

has stated that “[a] finding is ‘clearly erroneous’ when

although there is evidence to support it, the reviewing

court on the entire evidence is left with the definite and

firm conviction that a mistake has been committed.”

United States v. United States Gypsum Co., 333 U.S.

364, 395 (1948).

Thus, under the “clearly erroneous” .standard, our re-

view of findings of fact is critically limited. This point

was aptly emphasized in Krasnov v. Dinan, 465 F.2d

1298 (8d Cir. 1972), as follows:

“In reviewing the decision of the District Court,

our responsibility is not to substitute findings we

could have made had we been the fact-finding tri-

bunal; our sole function is to review the record to

determine whether the findings of the District Court

were clearly erroneous, i.e., whether we are ‘left with

a definite and firm conviction that a mistake has

been committed.’” Speyer, Inc; v. Humble Oi] and

17The closest SPCC comes to arguing that the District

Court’s findings of fact should be set aside under the “clearly ~

erroneous” standard is the following:

Under the proposed standard of review, it is unneces-

sary for this Court to even reach the question of how the

district court’s opinion would be reviewed under a clearly

erroneous test. However, even if such a test were ap-

plied, we do not concede, as AT&T alleges (AT&T Br.,

p. 23), that any or all of the district court’s factfindings

should be affirmed.

Appellants’ Reply Brief at 4 n.4.

A-34

Refining Co., 403 F.2d 766, 770 (3d Cir. 1968). It

is the responsibility of an appellate court to accept

the ultimate factual determination of the fact-finder

unless that determination either (1) is completely

devoid of minimum evidentiary support displaying

some hue of credibility, or (2) bears no rational re-

lationship to the supportive evidentiary data. Un-

less the reviewing court establishes the existence of

either of these factors, it may not alter the facts

found by the trial court. To hold otherwise would be

to permit a substitution by the reviewing court of its

finding for that of the trial court, and there is no

existing authority for this in the federal judicial

system, either by American common law tradition or

by rule and statute.

Id. at 1302-03. We fully subscribe to this position and

adhere to it in our review of the record in this case.

The District Court’s lengthy Memorandum Opinion con-

tains extremely detailed discussions of the evidence. On

each factual issue, the District Court fully discusses the

evidence introduced by SPCC as well as the evidence in-

troduced by AT&T, and explains exactly why it finds

AT&T’s evidence persuasive and SPCC’s unconvincing.

In each instance where SPCC disagrees with the District

Court’s findings of fact, we have reviewed the evidence

discussed by the District Court as well as the evidence

cited by SPCC. In a number of these instances, we

acknowledge that a factfinder rationally could resolve the

conflicting evidence in a manner contrary to the determi-

nation of the District Court. In every instance, however,

there is cleariy substantial evidence to support the find-

ings of the District Judge; and in no instance have we

been left with the definite and firm conviction that a

mistake in factfinding has been committed by the trial

court.

Because of the nature of this case, we have been

tempted to recite in detail every factual issue raised by

UP shel eA ah ml i le tlt

Lilla ls des

A-35

appellants, including an explicit description of the rele-

vant evidence in the record and an explanation of how

that evidence as a whole supports the District Court’s

findings. We have decided, however, that this would both

involve us in a task that is wholly unnecessary to our

legitimate appellate function and result in a pointiess

exercise. For us to detail every factual issue would be

essentially to repeat scores of pages of the District

Court’s comprehensive Memorandum Opinion. We are

aware, however, that by merely stating our conclusions

without engaging in such detailed discussions, we leave

ourselves open to the charge that we have failed to con-

sider the evidence. We therefore wish to emphasize that

we have considered the evidence in the record relating to

each and every factual issue raised by SPCC.** Indeed,

it is only because of the need to engage in this time-

consuming effort that'it has taken us such a long time—

over three months—to arrive at our decision and to re-

lease our opinion in this case.

Because we conclude that the District Court’s findings

are supported by the evidence and are not clearly errone-

ous, we focus our attention on SPCC’s second general

argument: tnat each of the District Court’s alternative

holdings is based on fundamental errors of law. We

agree with SPCC’s argument that the District Court’s

holding on the issue of implied antitrust immunity is in-

correct as a matter of law. We also agree that the court’s

holding that AT&T lacked monopoly power is based on

erroneous . _ 1] analysis. We conclude, however, that the

District Court’s alternative holding that AT&T did not

“unlawfully exercise[] that power to attain, or maintain,

a@ monopoly in the relevant market” must be sustained.

In particular, we conclude that, given the District Court’s

findings of fact, SPCC has failed to prove that AT&T

18 However, because we do not reach the issues of injury-

in-fact and proof of darnages, we have not considered the

factual disputes pertaining to these issues.

a

A-36

engaged in predatory pricing even under the legal test

proposed by SPCC. We further conclude that the District

Court in fact applied the correct legal test to evaluate

SPCC’s charges that AT&T engaged in exclusionary inter-

connection practices. We therefore affirm the judgment

of the District Court solely on the ground that SPCC

failed to satisfy this second element of proof, 1.e., mainte-

nance of monopoly power by exclusionary conduct.”

Given this disposition of the case, it is unnecessary for

us to consider SPCC’s legal and factual arguments on

the issues of injury-in-fact and proof of damages.

C. Implied Antitrust Immunity

The District Court concluded that AT&T enjoys im-

plied antitrust immunity, at least with regard to the

pricing and interconnection practices at issue in this case,

on the ground that these practices are subject to per-

vasive regulatory control under a public interest standard .

different from and inconsistent with the application of :

the antitrust laws. See Mem. Op. at 1095-97. We reject

this conclusion.

The Supreme Court has repeatedly noted that “[rje

peals of the antitrust laws by implication from a regula-

tory statute are strongly disfavored, and have only been

found in cases of plain repugnancy between the antitrust

and regulatory provisions.” Otter Tail Power Co. v.

United States, 410 U.S. 366, 372 (1973) (quoting United

Se ee

19 “E’xclusionary” conduct may be defined as “conduct, other

than competition on the merits or restrajnts reasonably ‘neces-

sary to competition on the merits, that reasonably appear

capable of making a significant contribution to creating or

maintaining monopoly power.” 3 P. AREEDA & D. TURNER,

ANTITRUST LAW { 626, at 83 (1978). The issue is whether

the defendant's conduct is reasonable in light of its business

needs, or whether it unreasonably excludes competition. See

Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 230

(1st Cir. 1983).

A-37

States v. Philadelphia National Bank, 374 U.S. 321, 350-

51 (1963)). The decision of the District Court in the

present case notwithstanding, it is well settled that such

repugnancy does not exist between the antitrust laws and

the regulatory scheme applicable to AT&T’s pricing and

interconnection decisions. See, e.g., MCI Communications

Corp. v. AT&T, 708 F.2d 1081, 1101-05 (7th Cir.), cert.

denied, 104 S. Ct. 234 (1983); Phonetele, Inc. v. AT&T,

664 F.2d 716, 726-37 (9th Cir. 1981), cert. denied, 103

S. Ct. 785 (1983) ; Northeastern Telephone Co. v. AT&T,

651 F.2d 76, 82-84 (2d Cir. 1981), cert. denied, 455 U.S.

943 (1982); Mid-Texas Communications Systems v.

AT&T, 615 F.2d 1372, 1377-82 (5th Cir.), cert. denied,

449 U.S. 912 (1980); Sound, Inc. v. AT&T, 631 F.2d

1324, 1227-31 (8th Cir. 1980) ; Essential Communications

Systems v. AT&T, 610 F.2d 1114, 1116-25 (3d Cir.

1979) ; United States v. AT&T, 461 F. Supp. 1314, 1320-

30 (D.D.C. 1978). We agree with the consistent analysis

presented in these cases, and see no point in repeating it

yet another time. We merely emphasize that, under the

applicable regulatory scheme, the initial decision to file a

tariff establishing rates or to provide interconnections to

a competing specialized common carrier rests with AT&T,

and AT&T’s tariffs and interconnection decisions often

become effective without FCC scrutiny or approval. At

minimum, long regulatory delays often have preceded

final FCC approval or disapproval of AT&T’s allegedly

predatory rates,” refusals to interconnect, or unreason-

able and discriminatory terms and conditions of access

to local distribution facilities. As Judge Greene con-

cluded in United States v. AT&T, “it would be a gross

misconception of the realities to equate the instant statu-

tory scheme, the relatively weak regulatory controls

which have implemented that scheme, and defendants’

alleged activities which offend both the antitrust laws and

the regulatory purposes, with the kind of explicit regu-

» See note 5 supra.

A-38

lation endorsing industry conduct which the Supreme

Court has held in relatively few instances to be incon-

sistent with antitrust enforcement.” 461 F. Supp. at

1328.7

D. Monopoly Power

The offense of monopolization under section 2 of the

Sherman Act has two elements: “(1) the possession of

monopoly power in the relevant market and (2) the

willful acquisition or maintenance of that power as dis-

tinguished from growth or development as a consequence

of a superior product, business acumen, or historic acci-

dent.” United States v. Grinnell Corp., 384 U.S. 563,

570-71 (1966). Monopoly power is “the power to control

prices or exclude competition.” Jd. at 571 (quoting

United States v. E.l. du Pont de Nemours & Co., 351

U.S. 377, 391 (1956)). In cases involving unregulated

industries, courts frequently approach the problem of

measuring market power by defining the relevant product

and geographic market and computing the defendant’s

market share. Monopoly power is then ordinarily in-

ferred from a predominant share of the market. See id.

Reliance on statistical market share is a questionable

21 Notwithstanding the District Court’s holding on the issue

of implied antitrust immunity, the court clearly recognized

the inadequacy of the regulatory scheme, as implemented by

the FCC, to prevent anticompetitive behavior. Thus, the Dis-

trict Court noted that “every action complained of in this

case could have or should have been handled by the appropri-

ate regulatory bodies, which responsibility the regulators

miserably mishandled or failed to handle.” Mem. Op. at 1096

(footnote omitted) (emphasis added). The District Court

further noted that “[i]t was the FCC that never found TEL-

PAK (C & D) unlawful for over 20 years, as well as delayed

making other very important decisions,” and that “[iijad the

FCC not engaged in its usual regulatory lag and dealt forth-

rightly and properly with the problems as they arose, then

few, if any, of the cases would now be before the antitrust

Courts, such as this one.” Jd. at 1097 (emphasis in original).

ee ees

A-39

approach in cases involving regulated industries, how-

ever. A predominant market share may merely be the

result of regulation, and regulatory control may preclude

the exercise of monopoly power. Therefore, in such cases

market share should be at most a point of departure in

determining whether monopoly power exists. Ultimately,

a court should focus directly upon the ability of the regu-

lated firm to control prices or exclude competition. See

MCI Communications Corp. v. AT&T, 708 F.2d 1081,

1106-07 (7th Cir.), cert. denied, 104 S. Ct. 234 (1983) ;

Watson & Brunner, Monopolization by Regulated “Mo-

nopolies”: The Search for Substantive Standards, 22

ANTITRUST BULL. 559, 565-68 (1977).

The District Court’s analysis of monopoly power in

the present case is consistent with the above principles.

The District Court defined the relevant market as “the

interstate, intercity private line market (excluding sole

source governmental] telecommunications needs and short

haul) in the geographic areas which plaintiffs elected to

serve, or would have served in their ‘but for’ world.”®=

Mem. Op. at 1097; see id. at 871-77. The District Court

then determined that AT&T’s market share ranged from

a high of 95.6% to a low of 66.5%, sufficient to support

an inference of monopoly power. Id. at 878. Neverthe-

less, the District Court concluded that this inference was

rebutted by AT&T’s inability in fact to control prices or

exclude competition. In particular, the District Court re-

jected SPCC’s argument that AT&T had monopoly power

by virtue of various barriers to market entry, such as

costs and delays inherent in the regulatory process, sub-

stantial] capital outlays and lengthy construction programs

needed to build intercity telecommunications systems,

2 SPCC argues that the relevant market should be defined

as the nationwide market for all business and government in-

tercity telecommunications services. Mem. Op. at 871; see

Appellants’ Opening Brief at 27 n.23. Given our disposition

of this case, we need not decide this issue.

A-40

brand loyalty enjoyed by AT&T, and AT&T’s control of

interconnection with its local distribution facilities. See

id. at 880-84. The District Court noted that entry ac-

tually had occurred at a rapid pace. See id. at 884-85.*

Finally, the District Court concluded that the complete

control over prices and access to local distribution facili-

ties exercised by the FCC and the state regulatory agen-

cies precluded AT&T from exercising monopoly power.

See id. at 885-88.

SPCC argues on appeal! that the District Court’s con-

clusions on the issues of barriers to entry and regulatory

control were based on erroneous legal analysis, and that

the court’s overall conclusion that AT&T lacked monopoly

power therefore must be set aside. We agree. In con-

cluding that the regulatory agencies prevented AT&T

from controlling price or excluding competition, the Dis-

trict Court erred, as it had in its analysis of implied

antitrust immunity, in failing to consider the realities of

the regulatory scheme. That scheme leaves pricing and

interconnection decisions to AT&T in the first instance.

The regulatory agencies are not always able to respond

to alleged abuses immediately and effectively.

The District Court also erred in ruling that costs and

delays imposed by the regulatory process are not barriers

to entry. The District Court based this ruling on the

ground that the regulatory agencies, and not AT&T, are

responsible for these costs and delays. The defendant’s

innocence or blameworthiness, however, has absolutely

nothing to do with whether a condition constitutes a

barrier to entry. Any market condition that makes entry

more costly or time-consuming and thus reduces the

effectiveness of potential competition 2s a constraint on

the pricing behavior of the dominant firm should be con-

sidered a barrier to entry, regardless of who is responsi-

27 SPCC argues that this finding is overstated. See Appel-

lants’ Opening Brief at 27; Appellants’ Reply Brief at 19-20.

Sh ee ee ee ee ee er

Ri at a ae

A-4]

ble for the existence of that condition. Thus, the costs

and delays of the regulatory process clearly constitute

barriers to entry. On this point, Judge Greene noted in

United States v. AT&T, 524 F. Supp. 1336 (D.D.C.

1981), that

@ persuasive showing has been made that [AT&T

has] monopoly power (wholly apart from FCC or-

ders with respect to interconnection) through vari-

ous barriers to entry, such as the creation of bottle

necks, entrenched customer preferences, the regula-

tory process, large capital requirements, access to

technical information, and disparities in risk. These

factors, in combination with the evidence of market

shares, suffice at least to meet the government’s in-

itial burden, and the burden is then appropriately

placed upon defendants to rebut the existence and

significance of barriers to entry. On that basis, the

defendants’ regulatory defense to the government’s

claim of monopoly power must and will be rejected.

Id. at 1347-48 (footnotes omitted); see also G. BROCK,

THE TELECOMMUNICATIONS INDUSTRY 198, 213-15 (1981).

Similarly, as noted by Judge Greene, the need for large

capital outlays and lengthy construction programs in or-

der to enter the market, and the need to overcome brand

preference established by the defendant’s having been

first in the market or having made extensive “image” ad-

vertising expenditures, also constitute barriers to entry.

United States v. AT&T, 524 F. Supp. at 1348; see also

Transamerica Computer Co. v. IBM, 481 F. Supp. 965,

976 (N.D. Cal. 1979), aff'd, 698 F.2d 1877 (9th Cir.),

cert. denied, 104 S. Ct. 370 (1983) ; see also 2 P. AREEDA

& D. TURNER, ANTITRUST LAW {I 409d-409e (1978) ;

Joskow & Klevorick, A Framework for Analyzing Preda-

tory Pricing Policy, 89 YALE L.J. 213, 228-29 (1979).

Finally, and perhaps most critically, AT&T’s control of

interconnection with its local] distribution facilities con-

stitutes a barrier to entry. See 2 P. AREEDA & D.

TURNER, ANTITRUST LAW {| 409f (1978); G. Brock, THE

A-42

TELECOMMUNICATIONS INDUSTRY 198-99, 216-18 (1981).

The District Court erroneously dismissed this factor on

the ground that the FCC has power to mandate inter-

connection pursuant to 47 U.S.C. § 201(a) (1976), again

ignoring the realities of control by AT&T in the first in-

stance and of regulatory delay and inefficiency in policing

alleged abuses.

It is not clear to us whether the District Court still

would have found that AT&T lacked monopoly power had

it properly considered the effect of regulatory control and

barriers to entry. Accordingly, if the issue of monopoly

power were dispositive, we would have to remand the

case to the District Court. The court went on, however,

to hold in the alternative that AT&T did not use its

power over price and entry in an excijusionary manner.

Because we conclude that this holding is supported even

under the legal standards proposed by SPCC, we affirm

the judgment of the District Court dismissing SPCC’s

monopolization action.

E. “Willful Acquisition or Maintenance’ of Monopoly

Power

As noted in Part IILD above, the second element of

the offense of monopolization is the “willful acquisition

or maintenance of [monopoly] power as distinguished

from growth or development as a consequence of superior

product, business acumen, or historic accident.” United

States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

SPCC argues that AT&T willfully maintained its monop-

oly power by engaging in predatory pricing and exclu-

sionary interconnection practices.

1. The Predatory Pricing Charges

SPCC alleges that AT&T willfully maintained monop-

oly power through predatory pricing of the Telpak,”

% SPCC also argues that the structure of Telpak was anti-

competitive even if Telpak was not preditorily priced. The

District Court rejected SPCC’s arguments after full consid-

A-43

Hi/Lo and MPL tariffs.> AT&T used each of these tar-

iffs to reduce prices in response to competition. Follow-

ing the FCC’s Above 890 decision, AT&T faced competi-

tion in the market for bulk private line services from

the users of these services, who were permitted to con-

struct private microwave systems for their own use.

AT&T responded by offering a greatly reduced bulk rate

under the Telpak tariff. Similarly, following the MC/

and Specialized Common Carriers decisions, AT&T faced

competition from the specialized common carriers in the

market for single channel private line services along low

cost, high density routes. AT&T responded by reducing

prices for these services first under the Hi/Lo tariff and

later under the MPL tariff.

Ordinarily, price cuts are a necessary and desirable re-

sponse to competition. Courts and commentators have

recognized, however, that there may be circumstances in

which price cuts serve an anticompetitive purpose. In

particular, there is concern that a firm might deliberately

sacrifice present revenues for the purpose of driving ri-

vals out of the market and then recoup the losses through

higher profits earned in the absence of competition.”

eration. See Mem. Op. at 947-58; accord MCI Communica-

tions Corp. v. AT&T, 708 F.2d 1081, 1180-81 (7th Cir.), cert.

denied, 104 S. Ct. 284 (1988). We agree with the District

Court’s analysis. We note that the Telpak structure was de-

signed for legitimate business reasons to duplicate the eco-

nomic characteristics of the private microwave systems that

large users of AT&T’s private line services considered con-

structing for their own use following the FCC’s Above 890

decision. The District Court found after fully reviewing the

evidence that AT&T continued to maintain and market Telpak

throughout the 1960’s and 1970’s as a competitive alternative

to private microwave. See Mem. Op. at 953-55. This finding

is supported by the evidence and is not clearly erroneous.

28 For a brief description of these tariffs, see note 5 supra.

2¢ See, e.g., Barry Wright Corp. v. ITT Grinnell Corp., 724

F.2d 227, 231 (1st Cir. 1983); MCI Communications Corp.

v. AT&T, 708 F.2d 1081, 1112 (7th Cir.), cert. denied, 104

A-44

The problem of differentiating between lawful price cuts

and predatory price cuts presents considerable theoretical

and practical difficuities, and has been the subject of a

heated debate among scholars of antitrust law.?’ In par-

ticular, courts and commentators have disagreed about

whether the test shouid be based purely on the relation-

ship between the firm’s prices and costs, or whether evi-

dence of subjective intent also should be considered. In

addition, there is disagreement about which measures of

cost are theoretically and practically appropriate.

In the present case, SPCC raises a barrage of objec-

tions to the District Court’s analysis of the predatory

pricing issue. According to SPCC, the District Court

S. Ct. 284 (1988) ; Northeastern Telephone Co. v. AT&T, 651

F.2d 76, 86 (2d Cir. 1981), cert. denied, 455 U.S. 943 (1982) ;

Areeda & Turner, Predatory Pricing and Related Practices

Under Section 2 of the Sherman Act, 88 Harv. L. REv. 697,

698 (1975).

Some commentators have argued that this type of conduct

is irrational and unlikely to occur in the case of an unregu-

lated firm. See, e.g., R. BORK, THE ANTITRUST PARADOX 144-

60 (1978); Easterbrook, Predatory Strategies and Counter-

strategies, 48 U. CHI. L. REV. 263 (1981) ; McGee, Predatory

Pricing Revisited, 23 J. LAW & ECON. 289 (1980). A differ-

ent argument leading to the same conclusion can be made in

the case of a firm subject to overall rate-of-return regulation.

See, e.g., Testimony of Kenneth J. Arrow, United States v.

AT&T, Civ. Action No. 74-1698 (D.D.C.), at 35-37.

27 The seminal and most influential article has been Areeda

& Turner, Predatory Pricing and Related Practices Under Sec-

tion 2 of the Sherman Act, 88 HaRv. L. REv. 697 (1975). For

other prominent views, see, ¢.g., R. BORK, THE ANTITRUST

PARADOX 144-60 (1978); R. POSNER, ANTITRUST LAW: AN

ECONOMIC PERSPECTIVE 184-96 (1976); Baumol, Quasi-

Permanence of Price Reductions: A Policy for Prevention of

Predatory Pricing, 89 YALE L.J. 1 (1979); Joskow & Klevo-

rick, A Framework for Analyzing Predatory Pricing Policy,

89 YALE L.J. 213 (1979) ; Scherer, Predatory Pricing and the

Sherman Act: A Comment, 89 Harv. L. REv. 869 (1977);

Williamson, Predatory Pricing: A Strategic and Welfare An-

alysis, 87 YALE L.J. 284 (1977).

Piste Kee take

A-45

made incorrect findings of fact concerning AT&T’s costs,

misconstrued the significance of the measures of cost

used, and applied an incorrect legal test. In order to

provide a framework for discussing the District Court’s

analysis and the contentions of the parties, we shall con-

sider first the issue of the proper legal test to apply.

SPCC alleges that the District Court improperly adopted

the Areeda-Turner test,* and urges us essentially to

adopt the Ninth Circuit’s Jnglis-Transamerica test.”

The Areeda-Turner test establishes conclusive presump-

tions that prices are either lawful or predatory depend-

ing solely on the relationship between those prices and

certain measures of the firm’s costs. According to Pro-

fessors Areeda and Turner, a price at or above average

total cost * should be conclusively presumed lawful. This

should be so even if the price is not profit-maximizing in

the short run and even if the price was set in order to

preserve or enhance market share by deterring rivals.

The rationale for this rule is that when a firm prices at

or above average total cost, its total revenues cover its

total costs, including a normal return on investment.

Such pricing can drive out only less efficient rivals; that

28 See Areeda & Turner, Predatory Pricing and Related

Practices Under Section 2 of the Sherman Act, 88 HaRV. L.

REv. 697 (1975); see also 8 P. AREEDA & D. TURNER, ANTI-

TRUST LAW {if 711-721 (1978 & Supp. 1982).

29 See Transamerica Computer Co. v. IBM, $98 F.2d 1377

(9th Cir.), cert. denied, 104 S. Ct 870 (1983); William

Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668

F.2d 1014 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982).

* Average total cost is the sum of fixed cost and total

variable cost, divided by output. Fixed cost is the sum of all

costs that do not vary with output; total variable cost is the

sum of all costs that vary with changes in output. Areeda

& Turner, Predatory Pricing and Related Practices Under

Section 2 of the Sherman Act, 88 Hakv. L. REv. 697, 700

(1975).

A-46

is, rivals who are unable to produce equivalent goods or

services at as low a cost as the monopolist. Such com-

petition based on superior performance must, according

to Areeda and Turner, be considered competition on the

merits.

Professors Areeda and Turner further argued that a

price at or above reasonably anticipated short run mar-

ginal cost *' also should be conclusively presumed lawful.”

Areeda and Turner acknowledged that such pricing could

drive out equally or more efficient rivals who have less

staying power than the monopolist, and therefore possibly

might not maximize long run consumer welfare. Never-

theless, Areeda and Turner concluded that allowing pric-

ing a3 low as marginal cost is desirable because it pro-

duces the competitive and socially optimal result in the

short run. Finally, Areeda and Turner recognized that

marginal cost cannot readily be inferred from conven-

tional business accounts, and therefore proposed that

average variable cost * be used as a proxy for marginal

cost.

The Ninth Circuit has rejected the idea th.t courts

should distinguish lawful from predatory pricing solely

on the basis of the relationship between the firm’s prices

and costs. Instead, under the Ninth Circuit’s test, “to

establish predatory pricing a plaintiff must prove that .

the anticipated benefits of defendant’s price depended on

its tendency to discipline or eliminate competition and

*1 Marginal cost is the increment to total cost that results

from producing an additional increment of output. /d.

= Under the Areeda-Turner test, a price below reasonably

anticipated short run marginal cost (or its proxy, average

variable coe*) is conclusively presumed predatory, unless at

or above average total cost. Jd. at 733.

53 Average variable cost is the sum of all variable costs di-

vided by output. Variable costs are costs that vary with

changes in output. Jd. at 700.

CARLA DIL MAD BN a LM A te Rahs, NE RISE AMO EN Ha te

‘ porary

ca ice

A-47

thereby enhance the firm’s long-term ability to reap the

benefits of monopoly power.” Wiiliam Inglis & Sons Bak-

ing Co. v. ITT Continental Baking Co., 668 F.2d 1014,

1035 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982).

The Ninth Circuit has, however, adopted a cost-based

test for the purpose of allocating the burden of proof.

Thus, according to the Ninth Circuit, if the plaintiff

proves that the defendant’s prices were below average

variable cost, the plaintiff has established a prima facie

case of predatory pricing and the burden shifts to the

defendant to prove that the prices were justified without

regard to any anticipated destructive effect they might

have on competitors. Jd. at 1036. If the plaintiff proves

that the defendant’s prices were below average total cost

but not below average variable cost, the plaintiff bears

the burden of proving by a preponderance of the evidence

that the defendant’s pricing was predatory in the sense

that “the anticipated benefits of defendant’s price de

pended on its tendency to discipline or eliminate competi-

tion and thereby enhance the firm’s long-term ability to

reap the benefits of monopoly power.” Jd. at 1035-36.

Finally, if the plaintiff cannot prove that the defendant’s

prices were below average total cost, the plaintiff must

prove by clear and convincing evidence—i.e., that it is

highly probably true—that the defendant’s pricing policy

was predatory in the above sense. Transamerica Com-

puter Co. v. IBM, 698 F.2d 1877, 1388 (9th Cir.), cert.

denied, 104 S. Ct. 370 (1983).

Application of the above tests is complicated in the

present case because AT&T is a multiservice firm. The

measures of cost it uses for its private line services are

“long run incremental cost” (“LRIC”) and “fully dis-

tributed cost” (“FDC”) rather than average variable

cost or average total cost. The District Court did not

precisely define these measures of cost. The court noted

that “[IJong run incremental costs or average incre-

mental costs are a form of marginal costs reflecting the

change in total costs caused by changes in output over a

A-48

longer period of time.” Mem. Op. at 922 (citations to

record omitted).* The court described FDC as follows:

Fully distributed cost is an accounting concept fo-

cusing on the historical costs reflected in the books

of the company. Fully distributed costs require an

allocation of the firm’s total costs to the firm’s vari-

ous product lines. [T]he allocation methods used to

compute fully distributed cost are inherently arbi-

trary and have no economic basis.

Mem. Op. at 922 n.105 (citation: to record omitted).

With this background, we are reaacy to turn to con-

sideration of the District Court’s analysis of SPCC’s pred-

atory pricing charges and to SPCC’s objections to that

analysis. First, the District Court held that a cost-based

standard must be adopted to judge SPCC’s predatory

pricing claims. Next, the court concluded that “marginal

or incremental cost” is the appropriate cost to consider.

The court then found that SPCC failed to prove that

Telpak, Hi/Lo or MPL were priced below incremental

cost. Accordingly, the court held that SPCC failed to

prove that AT&T had engaged in predatory pricing. Al-

though the court rejected FDC as an appropriate measure

of cost for identifying predatory pricing, the court never-

theless made findings that Telpak, Hi/Lo and MPL were

* The court cited an article by Professor Baumo! that de-

fines “average incremental cost” as foiiows :

(T]he average incremental] cost of product X is defined

as total company cost minus what the total cost of the

company would be in the absence of production of X, all

divided by the quantity of X being produced. Total costs

refer to those that would prevail in the long-run with the

output combinations specified.

Baumol, Quasi-Permanence of Price Reductions: A Policy

for Prevention of Predatory Pricing, 89 YALE LJ. 1, 9 n.26

(1979) ; see also Joskow & Klevorick, A Framework for An-

alyzing Predatory Pricing Policy, 89 YALE L.J. 218, 252 n.79

(1979).

at OR Nghe ph 2 iD hb cds dA RAN? os

A-49

priced above FDC as well as above LRIC. See Mem. Op.

at 918-33. |

In conducting the above analysis, the District Court

purported to adopt the Areeda-Turner test. The court

did not, however, as SPCC alleges, rely on the somewhat

controversial Areeda-Turner rule thai a price at or above

reasonably anticipated short run marginal cost (or its

proxy, average variable cost) is conclusively presumed

lawful. When the court stated that “marginal or incre

mental cost” is the appropriate cost to consider, it was

referring to long run incrementai cost. The court noted

that “[{l]ong run or average incremental costs .. . in-

clude certain items of long term expense that are typically

considered fixed and would generally be excluded from a

calculation of average variable cost, such as the cost of

plant and equipment, as well as the cost of capital. It

is generally recognized that long run or average incre

mental cost approximates anticipated average total cost

for various levels of production.” Mem. Op. at 922 (foot-

note and citations omitted). Thus, the court adopted only

the relatively uncontroversial Areeda-Turner rule that a

price at or above average total cost is conclusively pre

sumed lawful.

SPCC argues on appeal that the District Court made

errors of both fact and law. First, SPCC argues that the

District Court erred in finding that Telpak, Hi/Lo and

MPL were priced above LRIC and FDC. Second, SPCC

argues that the District Court erred in rejecting FDC as

an appropriate measure of cost. According to SPCC,

LRIC, at least as used by AT&T, corresponds to average

variable cost, and FDC corresponds to average total cost.

Third, SPCC argues that the District Court erred in

adopting the Areeda-Turner test rather than the /nglis-

Transamerica test. In sum, SPCC argues that the Dis-

trict Court should have ruled in its favor on its preda-

tory pricing charges on the basis of each of the three al-

ternative grounds provided by the /nglis-Transamerica

A-50

test: (1) SPCC proved that AT&T priced below average

variable cost (which SPCC equates with LRIC); (2)

SPCC proved that AT&T priced below average total cost

(which SPCC equates with FDC) with predatory intent;

and (3) even if SPCC did not prove that AT&T priced

below average total cost, SPCC proved by clear and con-

vincing evidence that AT&T priced with predatory intent.

In response to these arguments, we must note that we

have serious doubts about the usefulness of FDC as a

measure of cost to be used in distinguishing lawful from

predatory pricing. We also have serious doubts about

the correctness of SPCC’s characterization of LRIC and

FDC in terms of average variable cost and average total

cost. Given the District Court’s findings of fact in the

present case, however, it is unnecessary for us to resolve

these issues. It is also unnecessary for us to decide today

precisely what rule for identifying predatory pricing this

circuit should adopt. We hold only that, accepting

arguendo SPCC’s legal arguments, SPCC cannot on the

facts of this case prevail on any of tie three grounds it

advances.

First, we conclude that the District Court’s findings

that AT&T priced Telpak, Hi/Lo and MPL above both

LRIC and FDC are not clearly erroneous. The evidence

supporting these findings is discussed at considerable

length in the District Court’s opinion. Briefly, AT&T

submitted a number of cost studies showing that the

See MCI Communications Corp. v. AT&T, 708 F.2d 1081,

1114-25 (7th Cir.), cert. denied, 104 S. Ct. 234 (1983) ; North-

eastern Telephone Co. v. AT&T, 651 F.2d 76, 89-90 (2d Cir.

1981), cert. denied, 455 U.S. 943 (1982); cf. Aeronautical

Radio, Ine. v. FCC, 642 F.2d 1221, 1246-47 (D.C. Cir. 1980)

(Wilkey, J., dissenting) (arguing that it was arbitrary and

capricious for the FCC to prescribe fully distributed cost as

a standard for establishing minimum rates in competitive

markets), cert. denied, 451 U.S. 920 (1981).

% See MCI Communications Corp. v. AT&T, 708 F.2d 1081,

1114-25 (7th Cir.), cert. denied, 104 S. Ct. 234 (1983).

Se ee ee —_

A-5]

Telpak, Hi/Lo and MPL rates were projected to be above

LRIC and FDC, and actually were above those costs.

AT&T’s studies were corroborated by a study performed

by an independent accounting firm. A number of econo-

mists testified that AT&T’s cost studies were as soundly

conceived and carried out as such studies practicably can

be. In contrast, SPCC did not introduce a single study

purporting to show AT&T’s actual costs. SPCC intro-

duced several internal AT&T documents allegedly show-

ing that Telpak was not profitable. The District Court

found these documents inconclusive:

For the most part, the Court cannot tell what kind

of analysis underlies these documents or what they

were intended to reflect; and for this reason alone,

the Court cannot give this evidence any significant

weight. It appears, however, that several of the

documents do not even relate to Telpak’s revenue/

cost relationship and that several others in fact show

that [sic] Telpak rates to be covering costs. More-

over, other of the documents do not appear to refiect

current conditions at all, but rather to show rough

projections into 1977 and 1980 which were asso-

ciated with some kind of rate planning effort (e.g.,

PX2-0168; PX2-0175). But by 1977, AT & T had

filed to terminate Telpah, thus rendering these pro-

jections of little significance. On balance, the Court

cannot find that these unexplained documents are

sufficient to meet plaintiffs’ burden of proof, particu-

larly when compared to AT & T’s detailed, formal

Mem. Op. at 929-30 (footnotes omitted). SPCC also in-

troduced the testimony of two cost witnesses, Mr. Tucker

and Mr. Scott, who took AT&T’s own cost studies, ad-

justed them for alleged errors in data and methodology,

and then recalculated the cost figures. The recalculated

figures showed that Hi/Lo and MPL were priced below

LRIC and FDC. SPCC concedes, however, that “Messrs.

Scott and Tucker did not purport to establish the true

FDC and LRIC for Hi/Lo and MPL.” Appellants’ Open-

A-52

ing Brief at 86. In any case, the District Court found

that Mr. Tucker and Mr. Scott were not knowledgeable

about AT&T’s actual plant, engineering, or costs; that

there were unexplained inconsistencies in their studies;

and that AT&T’s witnesses effectively responded to Mr.

Tucker’s and Mr. Scott’s criticisms and demonstrated that

their calculations seriously overstated AT&T’s costs. Fi-

nally, SPCC relied on the testimony of its principal cost

witness, Dr. Melody. The District Court found that Dr.

Melody’s testimony was refuted by AT&T’s witnesses.

We have reviewed the evidence and testimony sum-

marized above and conclude that the District Court’s

findings that Telpak, Hi/Lo and MPL were priced above

LRIC and FDC are supported by the evidence and are

not clearly erroneous.

Having established that the District Court’s findings

concerning AT&T’s costs are not clearly erroneous, we

now turn to SPCC’s argument that it has proved preda-

tory pricing under the /nglis-Transamerica test. SPCC

concedes that FDC is equivalent to average total cost.

Thus, even under SPCC’s view, the District Court’s find-

ings that Telpak, Hi/Lo and MPL were priced above

FDC mean that Telpak, Hi/Lo and MPL were priced

above average total cost. In order to prevail under the

Inglis-Transamerica test that it advocates, therefore,

SPCC must present clear and convincing proof that

AT&T priced with predatory intent; that is, that “the

anticipated benefits of defendant’s price depended on its

tendency to discipline or eliminate competition and

thereby enhance the firm’s long-term ability to reap the

benefits of monopoly power.” Inglis, 668 F.2d at 1035.

SPCC argues that it met this requirement by proving

that AT&T priced below its short run profit-maximizing

level in order to eliminate competition from the special-

ized common carriers.” The District Court considered

**We note that the First Circuit recently rejected the

Transamerica rule after thoughtful consideration and held

A-53

SPCC’s charge that AT&T priced below the profit-

maximizing rate and found that the charge was unsup-

ported. See Mem. Op. at 964-65. The District Court also

considered SPCC’s “intent” documents and found that

these documents could not be read as evincing an anti-

competitive intent within the meaning of Inglis. See id.

at 890-912, 922 n.106. We have reviewed the record and

conclude that these findings are supported by the evi-

dence and are not clearly erroneous. Accordingly, even

assuming arguendo that the IJnglis-Transamerica test ad-

vocated by SPCC is the appropriate test to use, we con-

clude that SPCC has failed to prove that AT&T engaged

in predatory pricing.”

2. The Interconnection Charges

SPCC alleged at trial that AT&T unlawfully main-

tained its monopoly power by engaging in various ex-

clusionary interconnection practices. SPCC’s theory was

that AT&T was required to provide SPCC with full and

noudiscriminatory access to the Bell operating companies’

local distribution facilities under the “essential facilities”

doctrine of the antitrust laws. AT&T argued in defense

that, to the extent that it had engaged at all] in the al-

leged interconnection practices, its conduct was justified

by its duty under the regulatory scheme to interconnect

only when such interconnection is in the public interest.

The District Court ruled in favor of AT&T on each of

SPCC’s interconnection charges. See Mem. Op. at 972-

that prices above both marginal and average tota! cost, even

if not profit-maximizing, are conclusively presumed lawful.

Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 233-

36 (ist Cir. 1983); accord MCI Communications Corp. v.

AT&T, 708 F.2d 1081, 1114 (7th Cir.) (decided before Trans-

america), cert. denied, 104 S. Ct. 234 (1983).

%* And, a fortiori, as the District Court concluded, SPCC

has failed to prove that AT&T engaged in predatory pricing

under the Areeda-Turner test.

A-54

1054. SPCC’s principal argument on appeal is that the

District Court applied a legally incorrect standard for

upholding AT&T’s assertions of what SPCC terms the

“regulatory justification defense.” SPCC also contends

‘that the District Court made errors in its factfinding.”

On appeal, SPCC focuses on five practices or courses

of conduct in which AT&T allegedly engaged. Briefly,

SPCC’s allegations, each of which was rejected by the

District Court, are as follows. First, according to SPCC,

AT&T engaged in a course of conduct prior to SPCC’s

commencement of operations on December 26, 1973, that

was intended to delay SPCC’s entry into the market.

SPCC sets forth the following scenario to support its

first charge: Before SPCC could commence operations,

it was necessary for AT&T and SPCC to establish the

terms and conditions upon which AT&T would provide

SPCC with interconnections to the Bell operating com-

panies’ local distribution facilities. In order to delay hav-

ing to provide these interconnections, AT&T negotiated

in bad faith with SPCC over the terms of a draft facili-

ties contract. When these negotiations were nearing com-

pletion, AT&T unilaterally and in bad faith decided to

provide the interconnections pursuant to facilities tariffs

rather than pursuant to contract. Moreover, AT&T de-

cided to file its tariffs with the state regulatory commis-

sions rather than with the FCC. In October 1973, how-

ever, the FCC learned of this plan and ordered the tariffs

to be filed with the FCC.

Second, according to SPCC, AT&T refused to provide

SPCC with interconnections that would enable SPCC to

provide certain switched services, known as FX and

* We have considered each of these factual contentions,

and upon review of the record conclude that the District

Court’s findings of fact relating to SPCC’s interconnection

charges are supported by the evidence and are not clearly

erroneous.

A-55

CCSA services.“ It is contended that AT&T based its

refusal in bad faith on the pretext that the Specialized

Common Carriers decision did not authorize SPCC to pro-

vide these services, and that it would be contrary to the

public interest for AT&T voluntarily to provide inter-

connections with its switched network, since such inter-

connections would have an adverse economic, technical

and operational impact on the Bell system. On April 23,

1974, however, the FCC ruled that the Specialized Com-

mon Carriers decision had authorized the specialized

common carriers to provide FX and CCSA services.

Third, according to SPCC, AT&T reclassified certain

interstate circuits as intrastate circuits in order to deny

SPCC interconnections and to place SPCC at a competi-

tive disadvantage.

Fourth, SPCC claims that AT&T provided SPCC with

interconnections and services that were operationally and

technically inferior to those provided to AT&T’s own

Long Lines Department.

Finally, according to SPCC, AT&T charged SPCC dis

criminatorily and excessively high prices for intercon-

nections.

Each of the above charges is based on the theory that

the Bell operating companies’ loca] distribution facilities

are “essential facilities.” By using its control over ac-

cess to these essential facilities, AT&T had the ability to

extend its natural monopoly power in the market for

local public switched telephone service to the competitive

market for intercity private line service. The antitrust

laws therefore prohibit AT&T from unreasonably and

discriminatorily restricting access to these essential fa-

cilities. See Hecht v. Pro-Football, Inc., 570 F.2d 982,

992-93 (D.C. Cir. 1977), cert. denied, 436 U.S. 956

(1978) ; see also Otter Tail Power Co. v. United States,

“For a brief description of FX and CCSA services, see

note 5 supra.

A-56

410 U.S. 366 (1973); United States v. Terminal Rail-

road Association, 224 U.S. 383 (1912) ; MCI Communica-

tions Corp. v. AT&T, 708 F.2d 1081, 1132-33 (7th Cir.),

cert. denied, 104 S. Ct. 234 (1983); United States v.

AT&T, 524 F. Supp. 1336, 1352-53 (D.D.C. 1981).

Absolute equality of access to essential facilities, how-

ever, is not mandated by the antitrust laws. In United

States v. Terminal Railroad Association, the Supreme

Court required that access to essential facilities be af-

forded to competitors “upon such just and reasonable

terms and regulations as will, in respect of use, charac-

ter and cost of service, place every such company upon as

nearly an equal plane as may be with respect to expenses

and charges as that occupied by the proprietary compa-

nies.” 224 U.S. at 411. Similarly, in Hecht, this circuit

stated that essential facilities must be shared on “fair

terms,” and noted that “[t]jhe antitrust laws do not re

quire that an essential facility be shared if such sharing

would be impractical or would inhibit the defendant’s

ability to serve its customers adequately.” 570 F.2d at

992-93; see also United States v. AT&T, 524 F. Supp. at

1360-61 (“problems of feasibility ‘and practicability may

be taken into account by the Court in determining the

sufficiency under the law of the access to essential facili-

ties granted by defendants to non-Bell carriers”).

Denials of access or restrictive interconnection prac-

tices also possibly may be justified on the basis of AT&T’s

duties as an enterprise regulated under a “public inter-

est” standard. AT&T’s duty to provide interconnections

with other carriers is governed by section 201(a) of the

Communications Act, which provides:

It shall be the duty of every common carrier en-

gaged in interstate or foreign communication by

wire or radio to furnish such communication service

upon reasonable request therefor; and, in accord-

ance with the orders of the Commission, in cases

where the Commission, after opportunity for hear-

A-57

ing, finds such action necessary or desirable in the

public interest, to establish physical connections with

other carriers, to establish through routes and

charges applicable thereto and the divisions of such

charges, and to establish and provide facilities and

regulations for operating such through routes.

47 U.S.C. § 201(a) (1976). When AT&T is presented

with an interconnection request, it must decide in the

first instance whether or not voluntarily to grant the re-

quest. Public policy will be vindicated only if AT&T

makes this decision on the basis of the “public interest”

standard of section 201(a) as it has been interpreted by

the FCC. See Mid-Texas Communications Systems v.

AT&T, 615 F.2d 1372, 1389 (5th Cir.), cert. denied, 44°

U.S. 912 (1980). It would therefore be contrary to pub-

lic policy to permit antitrust liability against AT&T on

the basis of interconnection decisions so made. See id.

In our view, and in the view of other circuits that have

considered the issue, this regulatory justification defense

is only applicable if AT&T’s asserted “public interest”

basis for its interconnection decision is reasonable and

if AT&T actually made its decision at the time in good

faith on that basis rather than solely on the basis of com-

petitive considerations. The “reasonableness” component

of this test requires that AT&T have a reasonable basis

in terms of concerns for the public interest that are con-

crete, articulable, and recognized as legitimate by the ap-

propriate regulatory agencies. See, ¢.g., Phonetele, Inc.

v. AT&T, 664 F.2d 716, 737-88 (9th Cir. 1981), cert.

denied, 103 S. Ct. 785 (1983). As the Fifth Circuit noted

in Mid-Texas, however, “[t]hough the refusal may be

based upon articulable concerns of public policy, it may

also be possible to rationalize a decision whose purpose is

anticompetitive.” 615 F.2d at 1380. Thus, the “good

faith” component of the test is required as well. Accord-

ingly, the Fifth Circuit held in Mid-Texas that Bell could

defend its denials of interconnections only “to the extent

A-58

that Bell based its decision here on articulable concerns

relating to the public interest as defined in section

201(a).” Jd. at 1881 (emphasis added). The Fifth Cir-

cuit further stated that “[i]f Bell was correct in its as-

sessment [that interconnection was contrary to the pub-

lic interest], and if its purpose in refusing interconnec-

tion was to vindicate the public interest, then the refusal,

despite its obvious anticompetitive effect, would have been

proper and entitled to protection from antitrust scru-

tiny.” Id. at 1890 (emphasis added).

In sum, we agree with the standard articulated by the

Seventh Circuit, which includes both objective and sub-

jective components:

An ideal instruction would very briefly explain, for

example, that a carrier has an obligation under the

Communications Act to interconnect, but may deny

interconnections if it determines that the public in-

terest is to the contrary; and that if the carrier at

the time had a reasonable basis in regulatory policy

to conclude, and in good faith concluded, that denial

of interconnections is required by concrete, articula-

ble concerns for the public interest, then there is no

liability under the antitrust laws.

MCI Communications Corp. v. AT&T, 708 F.2d 1081,

1138 (7th Cir.), cert. denied, 104 S. Ct. 234 (1983).

SPCC argues that the District Court in the present

case erred as a matter of law by adopting and applying

a test requiring only objective reasonableness. In con-

sequence, according to SPCC, the District Court repeat-

edly upheld AT&T’s after-the-fact rationalizations for its

refusals voluntarily to provide interconnections and for

the exclusionary practices in which it allegedly engaged

after the FCC ordered it to provide interconnections.

SPCC argues that the District Court ignored the evi-

dence it introduced allegedly proving that AT&T’s conduct

was anticompetitively motivated and that AT&T’s as-

serted public interest concerns were pretextual.

A-59

It is true that the District Court’s discussion of the

applicable legal standard for SPCC’s interconnection

charges focused on the element of objective reasonableness.

See Mem. Op. at 972-78. The District Court stated that

“2 denial of interconnection prior to an FCC determina-

tion of the public interest will be deemed reasonable un-

der the antitrust laws if there was an objectively reason-

able basis for believing that the interconnection was not

in the public interest based on recognized public interest

considerations.” Mem. Op. at 976. It is clear, however,

that the District Court recognized and required the ele

ment of subjective good faith as well. For example, the

District Court approvingly discussed the Fifth Circuit’s

analysis in Mid-Texas of the regulatory justification de-

fense, which requires both reasonableness and good faith.

Indeed, the District Court noted that “the Fifth Circuit

recognized that it would be ‘contrary to public policy to

permit antitrust liability’ to be imposed where the car-

rier denies interconnection on the basis of legitimate

public interest factors.” Mem. Op. at 977 (emphasis

added) .

More to the point, the District Court conducted a

thorough examination of all of SPCC’s evidence that

AT&T acted with anticompetitive intent, and found that

AT&T acted throughout in good faith. The District

Court conceded that AT&T disagreed in principle with

the policy decisions of the FCC and intended to oppose

those decisions by speaking out against the FCC’s policies.

The District Court found, however, that in spite of this

disagreement, AT&T was determined to live with the Spe-

cialized Common Carriers decision as long as it remained

official policy and to cooperate fully with the FCC, to fol-

low the FCC’s orders, and to treat SPCC and the other

specialized common carriers in a fair and nondiscrimina-

tory manner. Moreover, the District Court found that

AT&T made certain that its employees and the presidents

of the Bell operating companies understood AT&T’s com-

A-60

mitment to this policy of full cooperation. The District

Court’s discussion of this evidence and elaboration of

these conclusions precede its discussion of the regulatory

justification defense in the Memorandum Opinion; accord-

ingly, there was no reason for the trial court to focus on

the subjective good faith element of that defense, which

it had already established had been satisfied.

Furthermore, in its subsequent discussion of SPCC’s

various specific interconnection charges, the District

Court repeatedly reasserted its findings that AT&T acted

in good faith. To take just one example, SPCC asserts

that in accepting AT&T’s regulatory justification for its

refusal voluntarily to provide FX and CCSA interconnec-

tions, the District Court erred “[i]n accepting... after-

the-fact rationalization[s] while ignoring pervasive evi-

dence of AT&T’s bad faith.” Appellants’ Opening Brief

at 43. Yet, in discussing AT&T’s denial of FX and

CCSA interconnections, the District Court noted that it

had

examined carefully a number of AT & T documents

put into evidence here by SPCC which SPCC asserts

show that AT & T knew that its conduct was in-

consistent with the FCC’s orders. The court finds, to

the contrary, that none of these documents support

that proposition directly or indirectly. What they do

show is a general concern by Bell System employees

at various levels about the potentially adverse eco-

nomic, technical and operational consequences of

FCC policy trends and possible future FCC direc-

tives.

Mem. Op. at 997 n.209.

We therefore reject as unfounded SPCC’s argument

that the District Court erred as a matter of law by

adopting and applying an incorrect legal standard to

judge the sufficiency of AT&T’s assertions of the regula-

tory justification defense.

A-61

CONCLUSION

We reject SPCC’s charge that it was denied a fair

trial because of the District Judge’s alleged legal and

policy bias. We sustain the District Court’s holding that

SPCC failed to prove that AT&T engaged in predatory

pricing or other exclusionary conduct in violation of sec-

tion 2 of the Sherman Act. Because this holding is suffi-

cient to support the District Court’s judgment in favor of

AT&T, the judgment of the District Court is

Affirmed.

APPENDIX B

B-|

UNITED STATES DISTRICT COURT,

DISTRICT OF COLUMBIA.

SOUTHERN PACIFIC

COMMUNICATIONS COMPANY. e7 ai...

Plaintiffs.

Vv. q Civ. A No. 78-0545.

AMERICAN TELEPHONE AND

TELEGRAPH COMPANY. ef al.

Defendants.

“

Stephen Ailes. Richard A. Whiting. Richard Diamond.

Edmund W. Burke. John R. Labovitz. Ellen M. McNamara.

Janet L. Kuhn. Ralph A. Taylor. Jr.. Michael C. Miller. Philip

L. Malet. John W. Rumely, Jr.. Kevin J. Brosch. Maureen

O'Keefe Ward. James R. Young, Mark F. Horning. Steptoe &

Johnson, Washington, D.C., for Southern Pacific Commu-

nications Co.. et al.

George L. Saunders. Jr.. Michael S. Yauch, Kenneth K.

Howell. Chicago. Ill.. Lee A. Monroe. Washington. D.C..

Theodore N. Miller. C. John Buresh. Chicago. Ill., David J.

Lewis. Washington. D.C.. Gerald A. Ambrose, Robert E.

Mason. Jules M. Perlberg. John C. Woulfe, Chicago, IIl..

Langley R. Shook. Stewart A. Block. Washington, D.C.. Craig

L. Caesar. Charles H. Kennedy. Deborah H. Morris. Chicago,

Ill.. Alan L. Morrison. Julie D. Nelson. William P. O’Neill.

Merinda D. Wilson. Sidley & Austin. Hugh N. Fryer. John M.

Friedman. Jr.. James F. Bendernagel. Jr.. Washington, D.C..,

Dierdre A. Burgman. Steven M. Bierman. Thomas DeRosa,

Robert Hirth. New York City. Craig King. Washington, D.C.,

John J. Langhauser. New York City. G. Ridgley Loux.

Washington. D.C.. Martha Solinger. Kenneth Thomas, Scott

Univer. Alan M. Unger. Dewey. Ballantine. Bushby. Palmer &

Wood. New York City. Howard J. Trienens. Jim G. Kilpatric,

Richard C. Schramm. William J. Jones. New York City, Peter

C. Breitstone. Kathleen F. Carroll, New York City. Deborah S.

Droller. Washington. D.C.. Norman E. Gamble, A. Jared

Silverman. J. David Stoner. Roger J. Siebel. New York City.

American Telenhone & Teleocranh Wilev A Rranton Thomas

B-2

TABLE OF CONTENTS

Page

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STANDARDS FOR ESTABLISHING A VIOLA-

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“PRICED WITHOUT REGARD TO COSTS”... B-153

PLAINTIFFS’ ADDITIONAL CLAIMS WITH

IE SE ETI ccccsssctnsssscccnsonstznimidistssthenans B-177

SPCC’S CLAIMS REGARDING THE STRUC-

i B-178

SPCC’S CLAIMS REGARDING MaAINTE-

NANCE OF TELPAK DURING THE 1970S...... B-189

SPCC’S CLAIMS REGARDING JOINT TELPAK. B-194

PLAINTIFFS’ ADDITIONAL CLAIMS WITH

ES Oe PO IP sivsiccersnsntitctenisariguendiasinasesminess B-196

THE CHARGE THAT HI/LO UNDERCUT

PU CIID enisssitnichashicniditinaediaial tics B-207

B-3

Page

THE CHARGE THAT AT&T DID NOT

ee B-209

THE CHARGE THAT AT&T “PRE-

ANNOUNCED” HI/LO 200.00... .sscceeesecseceseeseseseensers B-211

LACK OF INJURY IN FACT...........:eeceseeeeesereereres B-214

THE INTERCONNECTION CLAIMS ..........--020-+++: B-223

THE APPLICABLE LEGAL STANDARD FOR

INTERCONNECTION CLAIMG..........--c0eeeseeee00+ B-225

DENIAL OF ACCESS TO INTERCITY

Neen nc ccsccnee B-235

CS B-237

INTERCITY FACILITY LEASING.........--.2:-cess00ee00 B-247

DENIALS OF FX AND CCSA_INTER-

COTE TIIOIN, cececcccccccccceccccccsocccccccccoccscccccosccocecees B-249

INTERSTATE FX AND CCSA ........ccccseseneeseeenseneeees B-249

INTRASTATE FX......ccccccccesscccceseererccsesscsssncessessenenees B-270

TERMS AND CONDITIONS OF THE PROVI-

SION OF LOCAL DISTRIBUTION FACIL-

TTI... scciisicibaadaliipeibdsdbtatteemintecerrresnscceceeseoseconcoceoes B-275

“COERCION” AND “DURESS” .........---2scceceeereeeees B-277

FILING OF STATE TARIFFG..... ......---.--eesesseeseereeees B-288

RATES FOR LOCAL DISTRIBUTION FACIL-

ee nn B-296

LOCAL DISTRIBUTION AREAS....--.sscscssssssssseeseee B-302

INTERCONNECTION REQUIREMENTS ........--. B-305

JOINT END-TO-END TESTING........-s-sscsseesseessneeees B-310

PRACTICES, PROCEDURES, AND PERFORM-

FR iiaitaiacetatadiinniatsiatetsancnsseeressccccccccccocsoscsccooes c eee

NON-COOPERATION ......0...:ccccseccssseerecserscssseressererees B-321

ORDERING PROCEDURES .............---sccseeseseeereees B-338

INSTALLATION AND REPAIR .........----ecceeseeereeees B-345

INSTALLATION ncccccccccceccscocccscsccceccccscccccscscscsccccoceees B-347

a ccsasevsevenvnccoccevcssooosscooose B-360

OTHER CLAIMS ....ccccsccccosssccscocsscccccscccsccocsssccoccccoces B-369

RELIANCE UPON FCC DECISIONS ON

PRICING AND INTERCONNECTION

CR TIES ceccoccccccnccncencescnccivesecescoscscossccccsccscoscoccsccooees B-372

B-4

THE APPLICABLE LEGAL STANDARD FOR

PROVING FACT OF INIUR Y .....c..ccccccscscccsccoeseee

EVIDENCE RELATING TO ALLEGED LOSS

OF FE Vee ctesncenccsveseccocensscsacsonssnsscoonsentiniactesvetes

EVIDENCE RELATING TO ALLEGED LOSS

FF Ca EE ctrtrciecnpnnecennsnmmnncqnesiciansenminetpaneusone

EVIDENCE RELATING TO ALLEGED IN-

CREAR Bee EOD crcecseserccsccineeoseavesovcccsesenvenvesess

OTHER CAUSES OF SPCC’S LOSSES..........-:00:0000+

ADEOUINT GP DADRA wictecccccsccssccsccovecoseccccossoeses

SPCC'S DAMAGE EVERFENCGE wnccccccceccccccccscsnsoccssscee

SUFFICIENCY OF THE “BUT FOR” DAMAGE

RE lie kenritinsnoccieraieancinsiinntnntemniciiveioatioensiacesstiocimencogsense

MARKET SHARE ASSUMPTIONS ...........:22c0ee0ee0e0:

DEMAND ASSUMPTIONG............ccsccccscseccssccsscseseee

PRICE ABB UREE BID ccccsccccccsneccescestoccscessocssosscossees

ASSUMPTIONS ABOUT THE PLAN OF THE

BUT FU” COREPARE YD cecrcoccssosesnccccrccrenscesossesccsee

OTHER ASSUMPTIONS ABOUT THE CON-

DUCT OF THE “BUT FOR” COMPANY............

DISCOUNT RATE ASSUMPTIONS ..........:cccceceeeeees

ASSUMPTIONS ABOUT THE “DAMAGED”

PRIVATE LINE BUSINESS....cccccccccorcccccsccccccecsoess

PIECE OUT CLA IIS ....ccccccsocsesccescoccosessocssescossssoevsces

SEGREGATION OF DAMAGES. .........::cscceecesseeseeees

THE SUFFICIENCY OF SPCC’S ALTERNATE

MEASURES OF DAMAGES. .......-cccccccseccoccecceccress

CORE AI saninccotescrccconssonpnseenenscovesseteccobeseonesnnsesons

B-5

MEMORANDUM OPINION

CHARLES R. RICHEY, District Judge.

INTRODUCTION

This action was originally filed on March 27, 1978,’ and

was brought by Southern Pacific Communications Company

and Transportation Microwave Corporation (SPCC) against

the American Telephone and Telegraph Company (AT & T)

and the Bell System operating companies.2 The complaint was

predicated upon Sections | 3 and 2 4 of the Sherman Act (15

U.S.C. §§ 1,2) and alleged that the Bell System had monopo-

lized and conspired and attempted to monopolize a relevant

market in telecommunications service and had conspired to

restrain trade in the market. The plaintiffs withdrew their

Section | claim at status call on September 2, 1981 (Tr. 7-8),

1 This case was originally assigned to the late Judge Waddy and later

reassigned to this Judge on August 7, 1978.

2 Virtually all of the Bell System operating companies named as defend-

ants are wholly owned subsidiaries of AT & T. These include Southwest Bell

Telephone and Telegraph Company: South Central Bell Telephone Com-

pany: Illinois Bell Telephone Company; Bell Telephone Company cf Pennsy!-

vania: Diamond State Telephone Company: Michigan Bell Telephone Com-

pany: Northwestern Bell Telephone Company: New Jersey Bell Telephone

Company: Ohio Bell Telephone Company: the Chesapeake and Potomac

Telephone Company of D.C.; The Chesapeake and Potomac Telephone

Company of Virginia: The Chesapeake and Potomac Telephone Company of

West Virginia; Indiana Bell Telephone Company: Pacific Northwest Bell

Telephone Company: New England Telephone and Telegraph Company;

and the Mountain States Telephone and Telegraph Company ( Agreed Facts

8-3-015-016). In addition, as of December 31, 1981, AT & T owned a

majority interest in The Pacific Telephone and Telegre~h Company, which in

turn owned 100 percent of Bell Telephone Company of Nevada ( Agreed Fact

8-3-017): and AT & T owned a minority interest in Southern New England

Telephone Company and Cincinnati Bell, Inc. (Agreed Fact 8-3-018).

3 Every contract combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the several States, or

with foreign nations, is declared to be illegal... (15 U.S.C. § 1).

4Every person who shall monopolize. or attempt to monopolize, or

combine or conspire with any other person or persons, to monopolize any part

of the trade or commerce among the several States, or with foreign nations,

shall be deemed guilty of a misdemeanor, and. on conviction thereof, shall be

punished by fine not exceeding fifty thousand dollars, or by imprisonment not

exceeding one year, or by both said punishments, in the discretion of the

court. (15 U.S.C. § 2).

B-6

and the case was submitted to the Court for trial on the merits,

sitting without a jury, on the charge that AT & T had monopoly

power and had misused that power through conduct alieged to

violate Section 2 of the Sherman Act. For the alleged

violations, the plaintiffs seek $230.2 million,4(#) for damages,

which is trebled to $690.6 million pursuant to Section 4 5 of the

Clayton Act. (15 U.S.C. § 15). After waiver by both parties of

jury demands, trial commenced on May 10, 1982.6 SPCC

completed its presentation of evidence, including the testimony

of 24 witnesses and approximately 1,400 exhibits, on June 14,

1982. The trial consumed thirty-three trial days for both sides,

including opening and closing arguments.

Defendants filed a motion for involuntary dismissal under

Rule 41(b) of the Federal Rules of Civil Procedure on June 8,

1982, and filed supplementation and proposed findings of fact

and conclusions of law on June 12, 1982. Plaintiffs filed their

memorandum in opposition on June 15, 1982, after which the

Court heard oral argument on defendants’ motion. On June 21,

1982, the Court announced its decision to defer ruling on

defendants’ motion until it had heard all of the evidence.

4(a) This is in marked contrast to the plaintiffs’ claim made in their

opening statement of $567 million or $1.7 billion trebled damages.

5 Any person who shal] be injured in his business or property by reason

of anything forbidden in the antitrust laws may sue therefor in any district

court of the United States in the district in which the defendant resides or is

found or has an agent, without respect to the amount in controversy, and shall

recover threefold the damages by him sustained, and the cost of suit,

including a reasonable attorney’s fee. (15 U.S.C. § 15).

6 At the Court’s urging, the parties entered into a period of intensive

negotiations prior to trial designed to stipulate to uncontested facts, to set

forth each side’s respective contentions and to identify the evidence to be

presented by each side at trial. Although the purpose of these negotiations

was to narrow the issues and simplify the trial, the Court is convinced that,

through no fault of either party, the process was largely a failure and that it

consumed substantially more resources and time than could possibly have

been warranted. Nevertheless, the parties were able to reach agreement on

certain background facts which, to a limited extent, avoided the presentation

of evidence and has proved useful to the Court in the preparation of these

extensive findings.

B-7

Defendants began presenting their evidence, which includ-

ed testimony of 1477 witnesses and introduction of over 7,900

exhibits on June 23, 1982, and concluded their case on July 2,

1982, after only eight trial days. Plaintiffs presented their

evidence in rebuttal on July 9 and 12, 1982, through the

testimony of nine witnesses. On July 13, 1982, plaintiffs

introduced 326 rebuttal exhibits and defendants introduced 23

surrebuttal exhibits. Both parties filed proposed findings of fact

and conclusions of law on July 15, 1982, and reply findings on

July 17, 1982. The Court heard oral argument on July 19,

1982.

The following memorandum opinion shall constitute the

Court’s findings of fact and conclusions of law, as mandated by

Rule 52(a) of the Federal Rules of Civil Procedure.

PARTIES

Southern Pacific Communications Company

Southern Pacific Communications Company (SPCC), a

plaintiff in this case, is a wholly-owned subsidiary of the

Southern Pacific Company (Agreed Fact 8-3-002). The South-

ern Pacific Company is a large and highly diversified holding

company. In addition to ownership of Southern Pacific Trans-

portation Company (SPTCo) and SPCC, Southern Pacific

Company has extended interests in real estate, natural re-

sources, and leasing (Agreed Fact 8-3-020; Furth, PX6-0001 at

3-7). In 1980, Southern Pacific Company had assets of $5.3

billion and total revenues of $2.8 billion.

SPTCo owns and operates one of the nation’s largest

intercity private microwave systems (Agreed Fact 7-1-009).

Construction of this private microwave system began following

7 Virtually all of defendants’ witnesses submitted their direct testimony in

written form including 78 witnesses who submitted both their direct testimony

and cross-examination from United States v. American Telephone & Tele-

graph Company, No 74-1698 (D.D.C.). Forty-seven of defendants’ witnesses

appeared in court, for either supplemental direct testimony and/or cross-

examination. The plaintiffs submitted most of their direct testimony in written

form as well and were then turned over for cross-examination. This process,

which expedited the trial considerably was agreed to by plaintiffs and

defendants.

B-8

the FCC’s Above 890 7‘a) decision in 1959. (Furth, PX6-0001

at 11). When the entire system was completed in 1969, it

consisted of approximately 650,000 voice circuit miles and

7,664 route miles from Portland through Oregon, California,

Arizona, New Mexico, Texas, Louisiana, Arkansas, Missouri, to

Illinois (id. ).

SPCC was formed in January, 1970, to provide commu-

nication services to business, industry, government and

educational entities over a domestic network between such

locations as the Federal Communications Commission (FCC)

authorized (Furth. PX6-0001 at 12-13). SPCC’s initial plan

involved using the existing microwave sites of SPTCo where

feasible (id. at 13). Portions of SPCC’s microwave system

initially were constructed upon the towers, facilities, and right-

of-way of the SPTCo private microwave system (Agreed Fact

7-1-009).

On February 9, 1970, SPCC filed its initial application with

the FCC seeking authority to construct and operate a special-

ized common carrier microwave radio system between Seattle,

Washington, and San Diego, California (Furth, PX6-0001 at

13). SPCC filed an additional application in April, 1970, for

authority to construct a system between Los Angeles and St.

Louis (id. ).

Following the FCC’s general authorization of competition

in its 1971 Specialized Common Carriers Decision ( PX1-0159,

29 F.C.C.2d 870 (Dkt. 18920), and the subsequent FCC grant

of SPCC’s construction application PX1-0267, 37 F.C.C.2d 245

(1972)), SPCC commenced commercial operations on Decem-

ber 26, 1973 (Furth, PX6-0001 at 14; Grant, PX6-0004 at 9).

7(a) Allocation of Frequencies in the Bands Above 890, 27 F.C.C. 359

(1959) (Docket No. 11866, Report & Order) permitted private nght of way

companies, like pipelines and railroads persons eligible for authorizations in

the Police, Fire, Highway Maintenance, Forestry Conservation, Local and

Government Radio services; and other organizations whose rates and charges

are reguiated by a governmental entity to provide their own private micro-

wave system.

B-9

In 1974, SPCC purchased 100% of the stock of Video

Microwave, Inc., the voice and data facilities of United Video,

Inc. and purchased through Sunset Communications, a wholly-

owned subsidiary of Southern Pacific Company, 95% of the

stock of Transportation Microwave Corp. (TMC), also a

plaintiff in this case. In 1976, SPCC purchased certain assets of

Data Transmission Company (DATRAN ), including a micro-

wave system extending from Houston to Chicago via Kansas

City and St. Louis (Agreed Fact 8-3-020).

Today, SPCC offers a variety of services over a multi-

million circuit mile system consisting of its own terrestrial

microwave transmission facilities, complemented by leased

wire, microwave, and satellite facilities (Furth, PX6-0001 at

14).

Throughout the development of SPCC, Southern Pacific

Company has provided it with substantial financial support.

Since 1972, Southern Pacific Company has _ invested

$173,547,000 in equity in SPCC and has guaranteed another

$174,000,000 in debt. (id.). SPCC has grown from a company

with assets of $9,552,303 in 1973 to one with $278,484,000 in

1980 (SPCC annual reports filed with the FCC (S-7T)). To

date, SPCC has yet to make a profit in private line with its

losses going from $1,025,969 in 1973 to over $15,000,000 in

1980 (id.). However, there is no dispute that SPCC is a

presently profitable company, due principally to the provision

of switched services, known as “SPRINT.” (See S-7T 1981

Annual Report submitted by SPCC on April 30, 1982 and the

May 27, 1982, Wall Street Journal at 18).

American Telephone & Telegraph Company

The American Telephone and Telegraph Company (AT &

T), a defendant in this case, is the parent company of more

than 40 subsidiary corporations (Agreed Fact 8-3-003).

The major subsidiaries of AT & T are the Western Electric

Company, Inc., Bell Telephone Laboratories, Inc., and the Bell

Operating Telephone Companies (BOC). Together these

companies make up what is known as the Bell System ( Agreed

Fact 8-3-004).

B-10

As of December 31, 1981, AT & T owned 100% of the

stock of Western Electric Company. AT & T and Western

Electric each owned 50% of Bell Telephone Laboratories

(Agreed Fact 8-3-005). At the time this suit was filed, AT & T

owned directly or indirectly, all of the stock of 17 operating

telephone companies, the majority of the stock of two com-

panies, and a minority of the stock of five others.® (Agreed

8 AT & T’s wholly-owned subsidiaries include: Southwestern Bell Tele-

phone Company, which in 1979 served approximately 80.9 percent of the

telephones in Arkansas, Kansas, Missouri, Oklahoma, and Texas; New York

Telephone Company, which in 1979 served approximately 90.6 percent of the

telephones in New York State; Southern Bell Telephone and Telegraph

Company. which in 1979 served approximately 67.7 percent of the telephones

in Florida. Georgia. North Carolina, and South Carolina; South Central Bell

Telephone Company. which in 1979 served approximately 82.6 percent of the

telephones in Illinois: The Bell Telephone Company of Pennsylvania, which

in 1979 served 81.3 percent of the telephones in Pennsylvania: The Diamond

State Telephone Company, which in 1979 served 100 percent of the tele-

phones in Delaware: Michigan Bell Telephone Company, which in 1979

served approximately 87.1 percent of the telephones in Michigan; North-

western Bell Telephone Company. which in 1979 served approximately 71.5

percent of the telephones in lowa, Minnesota, Nebraska, North Dakota and

South Dakota: New Jersey Bell Telephone Company, which in 1979 served

approximately 97.6 percent of the telephones in New Jersey; The Ohio Bel!

Telephone Company, which in 1979 served approximately 62.1 percent of the

telephones in Ohio: The Chesapeake and Potomac Telephone Company of

Maryland, which in 1979 served approximately 99.8 percent of the telephones

in Maryland, the Chesapeake and Potomac Telephone Company of D.C.,

which in 1979 served 100 percent of the telephones in the District of

Columbia: The Chesapeake and Potomac Telephone Company of Virginia,

which in 1979 served approximately 77.9 percent of the telephones in

Virginia: The Chesapeake and Potomac Telephone Company of West

Virginia. which in 1979 served approximately 86.6 percent of the telephones

in West Virginia: Indiana Bell Telephone Company, Inc., which in 1979

served approximately 69.2 percent of the telephones in Indiana; and Wiscon-

sin Telephone Company which in 1979 served approximately 69.1-percent of

the telephones in Wisconsin.

As of December 31. 1981, AT & T acquired shares of three operating

telephone companies in which it previously had a majority interest: Pacific

Northwestern Bell Telephone Company, which in 1979 served approximately

71.6 percent of the telephones in Washington, Oregon and Northern Idaho;

New England Telephone and Telegraph Company, which in 1979 served

approximately 97.3 percent of the telephones in Maine, Massachusetts, New

Hampshire, Rhode Island and Vermont: and the Mountain States Telephone

and Telegraph Company, which in 1979 served approximately 94.4 percent of

the telephones in Arizona, Colorado, Southern Idaho, Montana, New Mexico,

Utah, Wyoming and El] Paso County, Texas.

(Footnotes continued on following page)

a ee ree

B-11

Facts 8-3-015, 8-3-016, 8-3-017, 8-3-018). There are now no

minority interests in AT & T-owned companies. AT & T is the

minority owner of two BOCs. (Brown, Tr. 5353).

The 24 consolidated companies had approximately 145.9

million telephones in service as of December 31, 1980, approxi-

mately 81% of the total in the United States (PX4-0874 at 3).

Each of the Bell operating telephone companies possesses an

exclusive franchise or government granted monopoly in the

geographic areas in which it provides service ( See e.g., Grant,

Tr. 646). As of December 31, 1980, these companies’ oper-

ating areas included 31.4% of the land area of the United

States. The 24 Bell operating companies are also named

defendants in this case (Complaint). Independent telephone

companies now almost 1500 in number, provide service to

about 36 million telephones in over half of the geographic areas

of the United States having telephone service (Testimony of

Richard A. Lumpkin S-6187 at 1-2). The independents have

current annual revenues near $12 billion about half of which is

derived from toll services and have approximately $39 billion

invested in facilities and equipment. (id. )

The assets of AT & T and its consolidated subsidiaries

were over $125 billion at the end of 1980. As of May 31, 1981,

they had reached $129.5 billion (Agreed Fact 8-3-007).

In 1980, AT & T’s total operating revenues were approxi-

mately $50.8 billion. Local service accounted for approxi-

mately $22.5 billion of this total; toll service accounted for

approximately $26.1 billion; and directory advertisement and

miscellaneous accounted for approximately $2.7 billion

(Agreed Fact 8-3008 ).

(Footnotes continued from preceding page)

As of December 31, 1981, AT & T owned a majority interest in The

Pacific Telephone and Telegraph Company, which, in turn owned 100

percent of the Bell Telephone Company of Nevada. In 1979, The Pacific

Telephone and Telegraph Company served approximately 71.6 percent of the

telephones in California. and Bell Telephone of Nevada served approxi-

mately 32.2 percent of the telephones in Nevada.

As of December 31, 1981, AT & T owned minority stock interest in the

Southern New England Telephone Company, which in 1979 served approxi-

mately 97.0 percent of the telephones in Connecticut; and Cincinnati Bell,

Inc.. which in 1979 served approximately 94.5 percent of the telephones in

twelve counties located in Ohio, Kentucky, and Indiana (Agreed Facts 8-3-

015-019).

B-12

In 1980, AT & T’s total operating expenses were approxi-

mately $34.2 billion and its net income was approximately $6.1

billion. Its total operating revenues for the twelve months

ending May 31, 1981 were over $53 billion. Its net income for

the same period was approximately $6.3 billion (Agreed Fact

8-3008). AT & T is the largest corporation in the world. ( PX1-

0017 at 2005).

As of year end 1980, AT & T employed over one million

people, making it the largest employer in the United States next

to the federal government (Agreed Fact 8-3-011). In fact, it

has more employees than the active duty strength of the United

States Army, according to plaintiffs’ lead cuunsel who formerly

was the Secretary of the Army.

The Long Lines Department (Long Lines) of AT & T in

partnership with the Bell and independent operating telephone

companies provides interstate and intercity telecommunication

service in competition with SPCC (Agreed Facts 7-2-016, 7-2-

018: Tr. 12; deButts, S-T-131 at 11-13; Owen, PX6-0005 at 4-5;

Grant, PX4-0004 at 11-12; Vasilakos, PX6-0006 at 8; Kushan,

PX6-0011 at 4; deButts, S-T-131, tab A at 29-30; Brown, Tr.

5334). At the end of 1980, Long Lines had total asseis of

approximately $7 billion and operating revenue of $3.5 billion.

These figures represented approximately 5.2% of AT & T’s total

assets and approximately 6.9% of AT & T’s total operating

revenues respectively. At the end of 1980, the Long Lines

Department had operating expenses of approximately $2.5

billion and net income of approximately $551.1 million

(Agreed Fact 8-3-013).

In 1980, AT & T had 24 General Departments which

provided the Bell operating companies with advice and assis-

tance pursuant to “License Contracts” between AT & T and the

Bell operating companies. AT & T bills the operating com-

panies for these services. In 1980, AT & T collected $1.03

billion in revenues from the Bell operating companies under

these “License Contracts” (Agreed Fact 8-3-014).

B-13

BACKGROUND

Although SPCC’s allegations relate almost exclusively to

actions taken, or alleged to have been taken, during the period

1968-1978, the Court believes that those actions and the

charges relating to them can best be understood in the context

of the conditions in the telecommunications industry prior to

that period. Therefore, before turning to those allegations and

the evidence adduced by the parties at trial, the Court will

briefly review the largely uncontested facts with respect to the

conditions during the pericd in which the industry came to be

regulated as a monopoly and with respect to the circumstances

immediately preceding the changes primarily in the federal

regulatory policy that occurred during the 1968-1978 decade.

Prior to World War II, the telecommunications industry

was extensively regulated and was widely regarded as a lawful

monopoly (Agreed Facts 7-3-043-044). Local exchange tele-

phone service was provided under franchise by one of the Bell

System operating companies or by one of the many independ-

ent telephone companies, depending upon the geographical

area involved (Agreed Fact 7-2-017).9 Long distance service

was provided by the Long Lines Department of AT & T in

partnership with the Bell and independent operating telephone

companies (Agreed Facts 7-2-016, 7-2-018; Tr. 12; deBuits, S-

T-131 at 11-13).1° The independent companies recognized the

need for agreement on equipment compatibility, operating

8 Local exchange telephone service is the ordinary service used in nearly

all homes and businesses. From a technical standpoint, it involves a wire

connection from the telephone set to a switching system in a nearby telephone

company switching center that is in turn connected by transmission trunks to

switching systems in other switching centers within the exchange area (Tr. 14-

15).

‘2 Long distance service operates in a manner similar to local exchange

service but typically involves a two-step process in which the user first gains

access to the local switching system through a dial tone and then requests

access tc the long distance toll switching system (in many cases the exact

same switch) by dialing an area code plus the number of the telephone the

calling party wishes to reach (Tr. 16-17).

B-14

procedures and division of revenues to facilitate the joint

provision of long distance service (Agreed Fact 7-2-016).

Under this network partnership, which developed early in this

century, telephone service was provided on an end-to-end basis

through an arrangement under which the Bell companies and

the independent companies assumed joint responsibility for the

service. This unique partnership arrangement often required a

telephone company operating in one part of the network to take

action which did not contribute directiy to that company’s

ability to discharge service obligations in its franchised area. In

return. the telephone company was reimbursed for the costs it

incurred, including a return on investment, in connection with

the provision of intercity service (Hough, S-T-1 at 12-14).

Private line services, which are the focus of the issues in this

case, were provided jointly by Long Lines and the operating

telephone companies over the same facilities used for long

distance service (Agreed Facts 7-1-018—020)."'

" Point-to-point private line service. which plaintiffs initially sought

authorization to provide, connects two customer locations with a dedicated

circuit that does not require use of switching systems because the circuit is

available to the customer on a continuing and exclusive basis (Tr. 17-18, 37-

39% Grant. PX6-0004 at 2-4; Grant. Tr. 637). In contrast, foreign exchange

(FX) and common control switching arrangement (CCSA) services, which

are involved in certain of plaintiffs’ interconnection charges, require dedicated

intercity circuits, but also provide a connection into a switching system.

located in a telephone company switching center (Grant, PX6-0004 at 5-7;

Grant. Tr. 637-39).

B-15

During the late 19th century and the early decades of the

20th century, the technology of the new industry advanced to

the point where it was technologically possible to connect

exchanges together throughout the country, and thus to create a

nationwide interconnected network (Agreed Fact 7-2-010).'2

However, the technological interdependence of the components

of the network gave rise to a need to coordinate operations and

the provision of service throughout the network. To meet this

need. AT & T consolidated hoth local and toll facilities into its

evolving system ( Agreed Facts 7-2-007—008; see also exhibits

cited in Regulation and History Doc.Sub. at 2-6 & App. A).

Regulation of the industry began in 1879, three years after

the invention of the telephone, in recognition both of the

natural monopoly character of the industry and of the increas-

ing importance of telephone service to commerce and society

(Agreed Facts 7-3-002—004; Tr. 11; Letwin, S-T-140 at 8).

The purpose of these early regulatory statutes was to assure the

provision of telephone service in the public interest (Agreed

Fact 7-3-017; Hough, S-T-i at 15; Letwin, S-T-140 at 10).

Because of public dissatisfaction with duplicative exchange

service,’ competition in telecommunications services was dis-

couraged ( Agrced Facts 7-3-002, 7-3-015), and local telephone

companies—both Bell and independent—were franchised as

12 Switching greatly simplifies the problem of communicating among a

large number of terminals. Each terminal! in a network can be connected to a

central point and switched to any other connected terminal through a

switching machine. The large number of switching machines achieves savings

in transmission costs between any two terminals ( Hough. S-T-1 at 3-4; S-3X).

The choice of routing is an economic decision based on the level of demand.

“the opportunities for sharing. and distance. If demand between two local

machines is sufficiently high. a direct trunk group is provided to carry a major

portion of the traffic. In intercity communications, demand is concentrated or

pooled so that high capacity transmission systems with scale economies can be

employed ( Hough. S-T-1! at 3-8: S-3W).

19 Jt is interesting to note that in the early years of the 20th century, there

were competing telephone companies in approximately one-half of all cities with

a population over 4000 (Agreed Fact 7-3-009). Initially, the public had

welcomed this competition. After a fairly brief experiment, however, the public

and its officials overwhelmingly concluded that competition in telephone service

was inefficient and wasteful ( Letwin, S-T-140 at 15). The general experience

with competition in this field was that it caused inconvenience, higher costs, and

degraded service quality (Letwin, S-T-140 at 15; see also exhibits cited in

Regulation and History Doc.Sub. at 7-10 & App. B(/)). (Emphasis added )

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monopolies within their respective operating territories ( Agreed

Fact 7-2-017; Tr. 11; see also exhibits cited in Regulation and

History Doc.Sub. at 7-10 & App. B(1)).

Although there appears to be some dispute about the

reasons, in long distance service the same practical effect .

resulted. With the passage of the Communications Act of 1934,

Congress provided that interconnection between telephone

companies be ordered only where the public interest would be

served by such interconnection (47 U.S.C. §201(a)). In so

doing, Congress refused to do what some had urged—namely,

to make it an automatic duty of each carrier to interconnect

whenever requested to do so by another carrier ( Letwin, S-T-

140 at 34). Moreover. as discussed below, there were arrange-

ments under which the Bell and independent telephone com-

panies divided revenues from long distance service on a basis

that would essentially subsidize local service. Defendants have

taken the position that the limited night of interconnection

prevented uneconomic duplication of plant and facilities; and

further, that the division of revenues policies spread the benefits

of these economies widely to users throughout the country. The

logic of this position is persuasive, and, in any event, consistent

with congressional policy reflected in the Communications Act

that telephone service be made widely available at reasonable

costs (see generally exhibits cited in Regulation and History

Doc.Sub. at 10-15 & App.B(2)).

There is no dispute that the emergence and growth of

telecommunications regulation was also attributable to public

recognition that the telephone had ceased to be a laboratory

curiosity or a luxury to be afforded by a few, but had become

essential to everyday life and commerce ( Agreed Fact 7-3-001;

Letwin, S-T-140 at 9). Moreover, there appeared to be a widely

held belief at the time—and no serious dispute among the parties

here—concerning the natural monopoly character of much of the

business ( Letwin, S-T-140 at 8-9). As a result, market forces

were not trusted to provide quality service as widely as was

4 Section 151 of the Federal Communications Act (47 U.S.C. § 151)

(S-1203B) provides that telecommunications service should be regulated “to

make available, so far as possible, to all the people of the United States a

rapid. efficient, Nation-wide and world-wide wire and radio communication

service with adequate facilities at reasonable charges.” ( Emphasis supplied. )

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thought to be socially desirable and at prices which were

affordable by most households (Agreed Facts 7-3-002—003).

Telephone companies were thus subjected to schemes of public

utility regulation and to common carrier duties under which the

carriers were not allowed to conduct their businesses as ordinary

commercial enterprises ( Agreed Fact 7-3-015; Hough, S-T-1 at

15-17: deButts, S-T-131 at 7-12: Letwin. S-T-140 at 10-14; see

also exhibits cited in Regulation and History Doc.Sub. at 7-9 &

App.B(1)).

The duties and obligations imposed upon the telephone

companies varied over time and from State to State. However,

the most significant of these duties as it relates to the issues in

this case was the requirement to serve every subscriber within a

carrier’s operating territory, even if service had to be rendered at

a price that did not fully cover all relevant costs ( Agreed Facts 7-

3-023—026, 7-4-002—003; Hough, S-T-1 at 15-16; Letwin, S-

T-140 at 37-38; deButts, S-T-131 at 14; see also exhibits cited in

Regulation and History Doc.Sub. at 23-26 & App.C). Con-

sistent with the regulatory goal of promoting widely available

telephone service at reasonable rates, the carriers structured their

rates such that users of some services paid significantly more than

the cost of their service in ord-r that service could be provided

elsewhere at prices that were low in relation to cost (Agreed

Facts 7-4-012—013; deButts, S-T-131 at 15-17; Letwin, S-T-

140 at 42-51; see also exhibits cited in Regulation and History

Doc.Sub. at 26-35 & App.C).

With respect to ratemaking for long distance services, the

same regulatory policies resulted in the Bell System’s price-cost

margins being skewed in order to make services more affor-

dable in some areas and to some groups of users ( Letwin, S-T-

140 at 50-51). The practice of nationwide rate aver-

aging—which gave rise to the controversy over whether new

entry should be permitted by specialized carriers such as SPCC,

and if so, what kinds of rate adjustments AT & T should make

to respond to such competition—required the same price for

calls of equal! distance, notwithstanding differences in the cost of

transmitting messages between different points in the country

(Agree? Facts 7-4-014—015; Department of Pub. Serv. of

Washington v. Pacific Tel. & Tel. Co., 8 F.C.C. 342 (1941) (S-

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1302); Hough, S-T-1 at 16; deButts, S-T-131 at 17; Letwin, S-

T-140 at 42-51; see also exhibits cited in Regulation and

History Doc.Sub. at 33-35 & App.C). The combination of rate

averaging and continued technological advances in the effi-

ciency of transmitting large volumes of messages between cities

caused defendants’ uniform long distance rates to reflect ever-

widening margins on high-density routes (which are very

profitable under an averaged rate structure) and low-density

routes (where the uniform rate may be at or below the cost of

service ). Although plaintiffs attempted to dispute this proposi-

tion at trial, as discussed more fully below, no credible evidence

was Offered to establish the contrary proposition. In fact, many

of the documents introduced by plaintiffs themselves explain

and document this common phenomenon.

In addition to promoting the expansion of service to rural

and other high cost areas, the Bell Systern’s intercity rate

structure was used to support low rates for basic exchange

service. This was accomplished under jurisdictional separations

procedures through which the FCC and the state commissions

have allocated to the interstate rate base ever greater portions

of the cost of facilities used jointly for local and interstate

services.‘5 For example, in 1971, the separations process

'S These procedures were developed on a cooperative basis by the FCC

and state regulatory commissions pursuant to the decision of the Supreme

Court in Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 148-49, 51 S.Ct.

65. 68. 75 L.Ed. 255 (1930) (S-1152: Jenes, S-T-53 at 4-6). They involve a

process by which the cost of equipment and facilities used jointly for the

provision of local service and interstate long distance service, such as the

telephone instrument itself, is allocated between the intrastate rate base and

the interstate rate base of the telephone companies. To the extent that the

costs of commonly-used equipment or facilities vary with the amount of their

usage. the costs may be assigned to the interstate or intrastate jurisdiction

based upon that usage. However, where the costs do not vary with usage, the

determination of the appropriate jurisdictional assignment may be based on

public policy considerations (Jones, S-T-53 at 2-4). Over the years—and

particularly in response to pressures from the state commissions to keep local

and intrastate toll rates lower than they otherwise would be—the separations

procedures have been applied in such a way that increasingly large amounts

of these joint costs have been shifted from the intrastate rate base of both Bell

and independent operating companies to the interstate rate base ( Agreed

Fact 7-4-020; Hough, S-T-! at 17; Jones, S-T-53 at 6). As a result of the

separations process, which has been prescribed by the FCC since 1967 in a

Separations Manual ( Agreed Fact 7-4-021 ), local revenue requirements, and

hence local rates, are lower than they otherwise would have been by this

amount. and interstate long distance rates are higher than they otherwise

(Footnotes continued on following page)

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shifted approximately $126 million of

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