The opinion of the court was delivered by: GREENE
Defendants have moved to dismiss this action pursuant to Rule 41(b) of the Federal Rules of Civil Procedure, asserting that the government, having concluded its case-in-chief, has failed to demonstrate a right to relief. The complaint charges violations of section 2 of the Sherman Act, 15 U.S.C. § 2, by the American Telephone and Telegraph Company (AT&T) and two of its subsidiaries, the Western Electric Company (Western), and the Bell Telephone Laboratories, Inc. (Bell Labs), the basic allegation being that the defendants (Bell System)
have monopolized the telecommunications market in the United States.
Following a period of intensive pretrial activity,
trial was begun on January 15, 1981, and the first witness was called on March 4, 1981.
The presentation of evidence on behalf of the government spanned a period of four months,
and it included the examination of close to one hundred witnesses and the introduction of thousands of documents and additional thousands of stipulations. In keeping with the massive nature of the action, defendants have filed a memorandum of over 550 pages in support of their motion, and the government's brief in opposition is almost equally lengthy. Thus, there is a voluminous record before the Court. Although not every detail of the evidence is discussed in this opinion, it does consider fully all the principal issues (whether or not they are being finally decided) in order to provide to the parties the Court's views on the structure of this factually and legally complex case. Before examining the specific issues raised by the record, the Court must resolve several preliminary questions.
A. The first question to be determined concerns the standard to be applied in determining whether the government's case is adequate to withstand the motion.
Rule 41(b) provides in part that
After the plaintiff, in an action tried by the court without a jury, has completed the presentation of his evidence, the defendant, without waiving his right to offer evidence in the event the motion is not granted, may move for a dismissal on the ground that upon the facts and the law the plaintiff has shown no right to relief. The court as trier of the facts may then determine them and render judgment against the plaintiff or may decline to render any judgment until the close of all evidence.
This Rule, and judicial interpretations thereof, grant to the courts considerable discretion in their treatment of motions to dismiss in non-jury cases. A court faced with a Rule 41(b) motion-unlike one passing on a motion for a directed verdict in a jury case-is not required to view the record in the light most favorable to the plaintiff, or to deny the motion if a prima facie case has been made out; rather, it is empowered to weigh and evaluate the evidence the plaintiff has presented and to grant the motion if it is convinced that, on the merits, the evidence preponderates against the plaintiff. Ellis v. Carter, 328 F.2d 573, 577 (9th Cir. 1964); Island Service Co. v. Perez, 309 F.2d 799, 803 (9th Cir. 1962); Huber v. American President Lines, 240 F.2d 778 (2d Cir. 1957).
Yet a court is not required to grant a defendant's motion at this stage of the proceedings even if under the law that motion might have been granted. SEC v. Murphy, 626 F.2d 633, 659 (9th Cir. 1980). Rule 41(b) and the case law permit a trial judge to decline to render any judgment at all until the close of all the evidence. Weissinger v. United States, 423 F.2d 795, 797 (5th Cir. 1970). The decision on the motion to dismiss is a "tentative and inconclusive ruling on the quantum of plaintiff's proof," which does not preclude a court from making findings and conclusions at the close of the case that are inconsistent with its prior tentative ruling. Armour Research Foundation v. Chicago, Rock Island & Pacific Railroad Co., 311 F.2d 493, 494 (7th Cir. 1963).
Several of the courts of appeal have admonished trial judges to grant Rule 41(b) dismissals sparingly. "Except in unusually clear cases the district judge can and should carry defendant's Rule 41(b) motion with the case-or simply deny it, since the effect will be the same-let the defendant put on his evidence, and then enter a final judgment at the close of the evidence." Riegel Fiber Corp. v. Anderson Gin Co., 512 F.2d 784, 793 n. 19 (5th Cir. 1975); cf. Poller v. Columbia Broadcasting System Inc., 368 U.S. 464, 473, 82 S. Ct. 486, 491, 7 L. Ed. 2d 458 (1962). The reason for caution in such instances is that "an appellate reversal for error in granting the motion may require an entire new trial." SEC v. Murphy, supra, 626 F.2d at 659; see White v. Rimrock Tidelands, Inc., 414 F.2d 1336 (5th Cir. 1969). This concern is particularly pertinent to the present action, in light of the lengthy course of the pretrial and trial proceedings up to this point, and the desire of no doubt all those involved to avoid the expenditure of time and resources that would result from the necessity of a second trial. In its weighing of the government's evidence, the Court has kept these general principles in mind.
The episode-by-episode approach must be rejected.
From a purely technical point of view, there is but a single claim of violation of the Sherman Act before the Court, and procedurally that claim may not be segmented for dismissal purposes.
Substantively, too, defendants' approach is inappropriate. It is true that the government's evidence may be weaker with respect to certain episodes than to others; for example, defendants have raised serious questions as to whether the misfortunes befalling certain of Bell's competitors were caused by the Bell System or by defective products or mismanagement within the competing companies. See, e.g., p. 1351, infra. However, the theory of the government's case is, basically, that the defendants engaged in a general, overall practice of anticompetitive behavior and that, in implementation of that practice, they resisted competition from weak and strong companies alike. Upon that basis, the government's claim is not defeated by the circumstance that some of Bell's competitors may have fallen prey to their own internal difficulties rather than to Bell System activities; even if actual injury to a competitor was not caused by the conduct of defendants, proof of that conduct may still be relevant as evidence of their intent to discourage all competitors, large and small. See Hecht v. Pro-Football Inc., 187 U.S. App. D.C. 73, 570 F.2d 982, 990 (D.C.Cir.1977). In any event, fragmentation of the government's proof on the basis of "episodes" designed essentially only for pretrial procedural purposes (see note 7, supra) has no basis either in precedent or in logic.
It is clear, moreover, that otherwise innocent or ambiguous behavior may violate the Sherman Act when considered together with the remainder of the conduct. See Poller v. Columbia Broadcasting System, Inc., supra, 368 U.S. at 468-69, 82 S. Ct. at 488-89; Maryland and Virginia Milk Producers Association, Inc. v. United States, 362 U.S. 458, 471-72, 80 S. Ct. 847, 855-56, 4 L. Ed. 2d 880 (1960); Schine Chain Theatres v. United States, supra, 334 U.S. at 119, 68 S. Ct. at 952; American Tobacco Co. v. United States, 328 U.S. 781, 809, 66 S. Ct. 1125, 1138, 90 L. Ed. 1575 (1946). Such behavior may thus be relied upon to sustain other evidence so as to form a pattern of conduct made unlawful by that statute.
Notwithstanding all of these considerations, it is apparent that, in a case of this scope and size, it would be impossible to examine the evidence without somehow dividing it into separate parts, even if only for the purposes of analysis. The evidence introduced during the trial appears to divide naturally into supporting three major kinds of claims (within the overall Sherman Act claim):
(1) claims relating to customer-provided terminal equipment
(discussed in Part III of this opinion); (2) claims relating to intercity communications services
(discussed in Parts IV, V, VI, VII and VIII of this opinion); and (3) claims relating to the procurement by the Bell System of telecommunications equipment manufactured by "general trade suppliers," i. e., non-Bell companies (discussed in Parts IX, X and XI of this opinion).
The validity of each of these major claims, in turn, depends upon the resolution of a number of factual and legal issues and, within the parameters of these claims, this opinion will consider these various issues under separate headings. This division and subdivision into issues should not obscure the fact, however, that the Court will be considering the evidence in the context of a single Sherman Act claim on a course-of-conduct basis.
C. In addition to various fact-based issues, defendants raise certain legal defenses which, in their view, compel dismissal of all or part of the action at this time. These defenses are discussed hereinafter together with the major subjects to which they primarily relate. However, one of these defenses-that the present controversy is properly within the exclusive jurisdiction of the Federal Communications Commission (FCC) and that defendants' activities are therefore impliedly immune from the antitrust laws-potentially governs all or almost all of the case. This claim has previously been addressed and rejected by the Court. See United States v. Am. Tel. & Tel. Co., supra, 461 F. Supp. at 1320-30. The intent of Congress to repeal the antitrust laws through a regulatory scheme must be clear if a court is to find an immunity from these laws,
and the question whether such an intent should be imputed to the Congress is no more certain now, in light of the government's evidence, than it was at the time of the Court's previous ruling. Accordingly, that ruling will not be disturbed at this time.
Monopoly Power and Regulation
Under United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S. Ct. 1698, 1703-04, 16 L. Ed. 2d 778 (1966), 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. Part of the government's burden herein is to define one or more relevant markets and to prove that defendants possess monopoly power in these markets
-that is, that they have the power to control price or to exclude competition therein. United States v. Grinnell Corp., supra, 384 U.S. at 570, 86 S. Ct. at 1703. The term "relevant market" refers to the "area of effective competition" in which the defendants operate. Standard Oil Co. of California v. United States, 337 U.S. 293, 299-300 n. 5, 69 S. Ct. 1051, 1055, 93 L. Ed. 1371 (1949).
The government has identified three relevant markets: local telecommunications service,
intercity telecommunications service,
and telecommunications equipment.
In addition, it has subdivided the equipment market, identifying two submarkets:
(1) a terminal equipment market, and (2) a "Bell Market," that is, a market consisting of the equipment purchased by the Bell Operating Companies and Long Lines.
The government alleges that defendants have monopoly power in each of these markets and, to prove the existence of such power, evidence has been offered of market share, barriers to entry, size, and the exercise of power.
There are two major issues between the parties with respect to the government's market definition: (1) whether the government properly considered the impact of regulation, and (2) whether it properly defined and quantified the equipment market and the submarkets.
In this part of the opinion, the Court will discuss only the first of these issues. The second issue, because it relates most directly to the procurement aspect
of this case, is discussed in Part X below, in conjunction with the section dealing with procurement conduct.
Defendants argue primarily
that the government's reliance upon high market shares is fundamentally unsound in the context of a regulated industry because such reliance ignores the substantial periods of time during which the Federal Communications Commission restricted entry, thereby effectively granting monopolies to the Bell System. See United States v. Marine Bancorporation, Inc., 418 U.S. 602, 631-32 n. 34, 94 S. Ct. 2856, 2874-75, 41 L. Ed. 2d 978 (1974).
In this view, the government's demonstrations of market share "are almost totally irrelevant" because the "alleged markets (are treated) not as products of regulation, but as though they had come into being through a long history of open competition" (Memorandum, p. 26).
Although defendants' point may have some conceptual validity,
it is not grounds for dismissal, for two reasons.
First, a broad legal dispute exists between the parties concerning the relationship between the Communications Act (and FCC orders issued pursuant thereto) and the Sherman Act. Defendants argue that none of the markets for terminal equipment, point-to-point private line intercity service, FX and CCSA service, and MTS-type service (see infra) could become an "area of effective competition" within the meaning of the antitrust laws until the FCC had mandated interconnection to vendors in these areas. That argument, however, is but a variation of defendants' broader claim that compliance with the communications laws satisfies all obligations under the antitrust laws, and as such it is vigorously contested by the government which contends that the antitrust laws impose obligations beyond whatever requirements are set by the FCC under the Communications Act. As indicated below in Part V, and for the reasons there stated, a decision on that issue is premature. In the absence of a determination that the regulatory scheme confers antitrust immunity, the practical effect of regulation will therefore be considered by the Court "simply as another fact of market life." International Tel. & Tel. Co. v. General Tel. & Elec. Corp., 518 F.2d 913, 935-36 (9th Cir. 1975).
Second, even if defendants are ultimately sustained on this issue, the government's market contentions would still not fail, for these contentions do not rely exclusively, or even primarily, upon market shares to prove monopoly power. While such shares clearly constitute one part of the proof, evidence has also been offered on barriers to entry,
all of which tend to prove such power. Although the size and conduct factors do not appear to be highly probative,
a persuasive showing has been made that defendants have monopoly power (wholly apart from FCC orders with respect to interconnection) through various barriers to entry,
such as the creation of bottlenecks,
entrenched customer preferences, the regulatory 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 initial 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.
The Court will next consider evidence concerning, and the various issues surrounding, the claim that defendants engaged in anticompetitive conduct.
Interconnection of Customer-Provided Terminal Equipment
A. Until 1968, the connection to the public network of any piece of equipment not provided by an operating telephone company was prohibited by what was called the "foreign attachment provision" of Tariff No. 263.
A principal rationale for this ban was that the interconnection of equipment of undetermined origin and quality might injure the network as a whole. The FCC struck down this tariff in its Carterfone decision (13 F.C.C.2d 420 (1968)),
which determined the practice of prohibiting equipment interconnection "without regard to its effect upon the telephone system" to be unlawful and unreasonably discriminatory. 13 F.C.C.2d at 425. The FCC held that customers had a right to the unimpeded use of their own equipment, and that the Bell System could more appropriately protect the telephone network from harm (1) by preventing of the use of devices "which actually cause harm," and (2) by establishing "reasonable standards to be met by interconnection devices." 13 F.C.C.2d at 424. Defendants' response to this decision forms the principal basis of the government's claim in this area.
B. The government's proof may be summarized as follows. Evidence submitted under the aegis of ten of the eleven "equipment episodes" describes the experience with the PCA requirement of a number of individual companies which were engaged in the business of marketing terminal equipment directly to end users.
The testimony and exhibits presented in support of the government's contentions in these episodes tended to show that the PCA requirement was unnecessary;
that the PCAs imposed by Bell were overly engineered and that their cost, when added to that of the terminal equipment itself, either foreclosed non-Bell manufacturers from the particular equipment market or made it difficult for them to compete with Western Electric;
that PCAs were often unavailable, that their delivery was sometimes substantially delayed, or that they were incompatible with non-Bell equipment;
and that the stated need for the PCA and the defects of some PCAs caused customers to fear that, unlike Western Electric products, non-Bell equipment was unsafe and unreliable.
The eleventh episode is the "umbrella" package,
concerning more generally Bell practices and policies with regard to the interconnection of customer-provided terminal equipment. The evidence presented in conjunction with this episode tended to show the following.
As of 1968, the time of the Carterfone decision, defendants had considered at least two options to protect the network from harm by customer-provided equipment: the PCA requirement and a certification program. A certification program-that is, a means by which non-Bell equipment would be permitted to be connected to the network after it had been certified to meet certain technical standards-would have obviated the need for the PCAs, with their costs, problems, and drawbacks, and it would thus have been consistent with the FCC's Carterfone mandate to liberalize interconnection policy.
Nevertheless, defendants decided to implement a PCA tariff
rather than the certification option.
The government's evidence further tended to show that, during the five-year period after 1968, defendants concluded that the implementation of some kind of certification program was feasible,
but they nevertheless decided to oppose any liberalization of their interconnection policy (whether by certification or otherwise) out of concern over the effect on their revenues and market position.
Defendants were at that time also aware of (and they encouraged) the barrier to competition created by the unavailability and inadequate maintenance of the PCAs as well as of the additional economic barrier these devices created because of their added cost.
The government's proof further indicated that defendants were unable ever to find empirical support for the proposition that the PCA policy was necessary to prevent actual harm to the telecommunications network.
Finally, the evidence showed that, at approximately the same time that the FCC initiated its own certification docket on June 14, 1972,
Bell decided to continue to withhold support from any effort to establish a certification program in order to "buy time" for internal restructuring so as to enable it to prosper in a competitive market.
C. In the course of the trial, defendants made serious attempts to shake the credibility of each of the government's witnesses through cross examination and to cause them to concede that the facts they had related and the conclusions they had drawn from these facts were inaccurate and unwarranted. Some of the witnesses did, to a greater or lesser degree, make concessions which detracted from the force of their direct testimony.
However, by and large, the evidence adduced sustained the government's charges.
The Court will not comment upon the credibility of every single witness at this stage of the proceedings. Suffice it to say that when it is stated herein that the evidence demonstrated or tended to show the existence of certain facts, the Court has determined that the witnesses and documents have credibly established these facts to be true. Defendants will, of course, have the opportunity, as part of their own case, to introduce evidence both to contradict the government's proof and to show affirmatively that the facts are not what the government's witnesses described them to be. But, as indicated, on a factual basis the government's terminal equipment interconnection case presently stands unimpeached.
D. The other defenses to that case must also be rejected, generally for similar reasons.
First, defendants contend that the reasonableness of their actions should be judged in light of the Bell System's affirmative legal responsibility to protect the telephone network from harm (13 F.C.C.2d at 424), and the fact that the government's own witnesses conceded that at least a potential for harm to the network exists from the interconnection of substandard telephone equipment.
But these contentions must be examined in light of the overriding consideration that, by controlling who could obtain PCAs, when, and at what cost, Bell was in a position to control the entry of potential competitors into the market-much as if it controlled the only source of a raw material essential to the manufacture of a particular product,
or an essential facility such as a bridge
or a stadium
which competitors needed to use to conduct their business. See 2 Areeda & Turner, supra, P 409f, pp. 305-06. Although the record at this point contains many suggestions that the interconnection of inferior equipment may cause harm
to the network,
it does not show that the actual, or even the potential, harms associated with such interconnection were sufficiently substantial
to render a practice so fraught with anticompetitive implications as the PCA tariffs reasonable under the antitrust laws. See Northeastern Tel. Co. v. American Tel. & Tel. Co., supra, 651 F.2d 76, 1981-1 Trade Cas. at 76,322. Any showing in that regard must therefore await defendants' own evidence.
Second, defendants claim (1) that they believed that the PCA requirement conformed to the approach prescribed by the FCC in Carterfone and was therefore reasonable, and (2) that the difficulties experienced by some competitors in entering the terminal equipment market were due not to the PCA requirement but to their own bad business judgment, their shoddy merchandise, and the like. While there is some evidence to support these claims, there is also considerable evidence to the contrary.
Suffice it to say that on both of these issues, the government has made a more than adequate showing and that the burden falls upon defendants to refute that showing through their own proof.
Third, defendants argue that, inasmuch as a number of the individual episodes involve devices for which Western Electric did not manufacture a competitive model, no inference of anticompetitive intent or behavior could be drawn from the evidence of defendants' conduct contained in those episodes. But the theory of the government's case is not simply that the Bell System acted to smother competition with regard to particular pieces of equipment manufactured by Western Electric. Rather, the contention is that defendants' actions were designed to preserve Bell's anti-interconnection stance and thereby to prevent encroachment by other manufacturers upon markets (whether or not served by Bell) from which inroads could be made into Western's position as the dominant supplier of telecommunications equipment in the United States. For this purpose, the question of whether or not Western Electric actually manufactured a competing model of a particular device is of limited relevance.
Fourth, defendants contend that the episodes containing evidence of the experience of individual competitors in the interconnect industry constitute an insignificant sampling of what occurred in that industry during the relevant period, and that they should be disregarded by the Court for that reason. However, the scope of this case is such that, were every single event having possible relevance to be presented before this Court, the trial might well extend beyond the lifetimes of all current participants. Hence, it is not surprising that the government chose to present evidence of what it felt to be representative chapters in the relationship between the Bell System and those who sought to interconnect their equipment with the Bell network. There are at this time insufficient grounds for finding that these chapters are not representative.
The Court concludes that the evidence sustains the allegation that defendants have used their local exchange monopolies to foreclose competition in the terminal equipment market by refusing unreasonably to interconnect equipment not provided by the Bell System, or by unreasonably impeding such interconnection, and that neither the government's interconnection claim nor the subsidiary contentions relating thereto should be dismissed.
Intercity Services Offered in Competition with AT&T Long Lines
The government's claims with regard to the intercity services offerings of non-Bell carriers revolve around one central point: that because the Bell System (with its Operating Companies) possesses a monopoly in the distribution of local telecommunications services,
meaningful competition in the provision of intercity services is precluded unless the non-Bell carriers are able to obtain interconnection with the Bell local distribution facilities under non-discriminatory terms and conditions. Long distance and other intercity lines are essentially useless unless they can be connected to the local switches from which both business and residential customers may be reached.
A. It may be helpful at the outset to state the applicable legal standard. Any company which controls an "essential facility" or a "strategic bottleneck" in the market violates the antitrust laws if it fails to make access to that facility available to its competitors on fair and reasonable terms that do not disadvantage them. United States v. Terminal R.R. Assn. of St. Louis, supra; Otter Tail Power Co. v. United States, supra; Hecht v. Pro-Football, Inc., supra; Gamco, Inc. v. Providence Fruit & Produce Building, Inc., 194 F.2d 484 (1st Cir. 1952); Woods Exploration and Producing Co., Inc. v. Aluminum Corp. of America, 438 F.2d 1286, 1300-09 (5th Cir. 1971). Such access must be afforded "upon such just and reasonable terms and regulations as will, in respect of use, character and cost of services, place every such company upon as nearly as equal plane as may be." United States v. Terminal R.R. Association, supra, 224 U.S. at 411, 32 S. Ct. at 515.
In the view of the Court, it is clear that the local facilities controlled by Bell are "essential facilities" within the meaning of these decisions and that, to the extent that the antitrust laws provide the legal standards governing the conduct here at issue,
defendants are obligated to provide the kind of non-discriminatory access which the cases contemplate.
B. The government introduced testimonial and documentary evidence
tending to show that defendants have sought in a variety of ways to exclude the competition by restricting interconnection to the local facilities, as follows.
Second, after the Carterfone decision, defendants were able to erect a substantial barrier to entry into the intercity services market through the "customer premises" provision of their interconnection tariff. Under this provision, AT&T would interconnect its existing intercity facilities with those of a competitor only if the interconnection took place in switching equipment on the premises of the customer at a point where telecommunications either originated or terminated. One of the principal problems with this ...