tour at some point in their careers. Personnel rotate through Western Electric, Bell Labs, the Operating Companies, and AT&T central headquarters with some regularity, and they come to acquire a familial attitude towards the different parts of the Bell System as they rise through its ranks. Through this process, those holding management positions in the Bell Operating Companies appear to adopt the objectives, incentives, and prejudices of AT&T and Western top management as their own.
In short, the government has demonstrated that incentives other than those arising from vertical integration per se have underlain the procurement decisions of the Bell Operating Companies, and the Columbia Steel line of cases is therefore inapplicable.
Second. Defendants next assert that, to the extent that the government's procurement claims rely at all on the Bell System's integrated structure, they are barred under the doctrine of res judicata. See note 70, supra. This argument assumes that, because the government sought divestiture of Western in the 1949 suit as a remedy for alleged antitrust violations in connection with the manufacture and sale of telephone equipment, and because the government consented to entry of a judgment which did not divest Western, it is now barred from arguing as part of the procurement portion of its case that the vertical integration of the Bell System helps to foster a "buy Western bias."
This application of the res judicata doctrine would be tantamount to granting to the Bell System perpetual immunity from antitrust scrutiny of its procurement conduct as long as its structure remained essentially what it was in 1956. The Supreme Court has made it clear, however, that res judicata does not "confer ... a partial immunity from civil liability for future violations." Lawlor v. National Screen Service Corp., 349 U.S. 322, 329, 75 S. Ct. 865, 869, 99 L. Ed. 1122 (1955). Where a defendant has previously entered into a consent judgment with the government in a prior antitrust case, the government has a choice among three alternatives: to seek to enforce the existing decree, to attempt to have that decree modified due to changed circumstances, or to bring a new action based on new antitrust violations. See United States v. Armour & Co., 402 U.S. 673, 674-75, 91 S. Ct. 1752, 1753-54, 29 L. Ed. 2d 256 (1971). The government here has chosen the third alternative, and the Court will not bar it from doing so on res judicata grounds.
Third. Defendants argue that their alleged failure to release technical information or compatibility specifications to the general trade cannot serve as a basis for antitrust liability, relying primarily upon Berkey Photo, Inc. v. Eastman Kodak Co., supra. Berkey competed with Kodak in processing film (photofinishing). Its claim was that Kodak's introduction, without advance notice to the industry, of a new film, requiring a new photofinishing process which could be done only with equipment purchased from Kodak, allowed Kodak to begin processing the new film several weeks before its competitors and thus gave Kodak a competitive advantage. Berkey also claimed that Kodak's failure to disclose the chemicals used in the new process caused Berkey greater expense and competitive injury. The court held that the advantages in information flow possessed by an integrated firm do not constitute antitrust violations, unless they provide a means for the firm to gain a competitive advantage in one market through monopoly power in another. 603 F.2d at 291
There are two fundamental differences between Berkey and the instant case. First, in Berkey the entity failing to disclose information to the industry was different from the buyers of the service to whom the information was useful; in the present case, it is the Bell System which both has failed to release the information and has purchased the equipment which cannot be properly designed without the information. Second, Berkey was still able to process the new film despite Kodak's failure to disclose the chemicals used in the new process, albeit at greater expense; but no piece of equipment can be interconnected with the country-wide public switched network
unless it conforms to the compatibility standards set by Bell.
An inability to obtain Bell technical information/compatibility standards thus constitutes an insuperable barrier to entry to the market (and the record does not show a reasonable basis for defendants' having withheld this type of information).
In addition to proving anticompetitive conduct, the government has, of course, also the obligation to demonstrate monopoly power in the relevant markets. As indicated in Part II, supra, it has identified for this purpose, inter alia, a telecommunications equipment market with two submarkets, one for terminal equipment, the other a so-called "Bell market." Defendants' objections to the government's definition and calculation of markets in the equipment area will be considered herein under three headings: (1) that the aggregation of markets is unsound economically and legally; (2) that there has been no proof that defendants enjoy market power either in the aggregate markets or in the submarkets; and (3) that the government's contention that a Bell market exists is without legal precedent and is devoid of evidentiary support.
A. On the first issue, defendants argue that markets must be defined for antitrust purposes in the purely economic terms of substitutability in use or cross-elasticity of demand. See the Supreme Court's holding in United States v. duPont, supra, 351 U.S. at 395, 76 S. Ct. at 1007, that markets must be defined to include only such goods and services as are "reasonably interchangeable by consumers."
Beyond that, defendants claim that the aggregation of markets prejudices their case, first, by masking an alleged downward trend in their market shares over time (see note 35, supra ), and second, by improperly joining two types of economic markets: those in which their market share is high but for which the government did not prove significant anticompetitive conduct, together with those for which improper conduct may have been proven but in which their market share is relatively low. This kind of joinder, it is said, leaves a misleading impression of an unlawful exercise of market power in an overall equipment market; one cannot simply add proof of the acquisition of a monopoly through legitimate competition to proof of an unsuccessful attempt at anticompetitive conduct and come up with unlawful monopolization under the Sherman Act.
While cross-elasticity of demand is certainly the most important determinant of market definition under the antitrust laws, it is well-established that under certain circumstances markets may be aggregated on a basis other than economic substitutability. For example, in United States v. Grinnell, supra, the Supreme Court aggregated central fire alarm and burglar alarm systems without suggesting that these services are economic substitutes to any extent. Rather, after finding that the systems were not interchangeable, the Court nevertheless combined them on the basis of "commercial realities" and the fact that most firms offering one of the services also offered the other.
Similarly, in United Shoe, supra, the court expressly aggregated submarkets into an overall shoe machinery market "regardless of the relationship of a particular machine type to another type or to a particular process." 110 F. Supp. at 302-303.
There is, indeed, direct precedent for the combination of telecommunications equipment "as diverse in function and cost as simple telephone instruments and complex central-office switching equipment" into one aggregate market on the grounds of industry recognition, coincidence of supplying firms, and the integrated nature of the telecommunications system. See International Tel. & Tel. Co. v. General Tel. & Elec. Corp., supra, 518 F.2d at 934-35.
To be sure, aggregation is not always permissible. If aggregating markets leads to the appearance of a causal link between defendants' anticompetitive conduct and their monopoly power which disappears the moment the markets are treated separately, then clearly the aggregation would be improper. See 3 Areeda & Turner, supra, P 627b, p. 84.
But the evidence before the Court does not demonstrate that this is the case.
While it has been represented that defendants manufacture over 200,000 different products (many of which do not have high cross-elasticities of demand), and while it is true that the government offered proof specifically with regard to only a small fraction of that number, it is also true that much of the anticompetitive conduct described by the government's witnesses transcends individual products and broadly applies to the whole equipment spectrum. For example, in the terminal equipment interconnection area, many of the government's allegations regarding the unreasonableness of the PCA requirement and the lack of availability of the PCAs are applicable to the entire range of terminal equipment products. Similarly, in the procurement area, the government's allegations relating to the denial of technical information to the general trade suppliers, to the incentives for Operating Companies to purchase from Western Electric regardless of a product's merit, and others, pertain to the whole gamut of products procured by the Operating Companies.
In the interests of avoiding duplicative evidence and useless overburdening of the plaintiff, it is not necessary to require proof that the anticompetitive conduct resulted in the maintenance by defendants of a monopoly in each individual product market for each piece of telecommunications equipment without close substitutes.
Instead, such proof may be made in the aggregate. See e.g., United States v. General Electric Co., supra. Accordingly, the Court has determined that, for present purposes, the government's definition of an aggregated telecommunications equipment market and an aggregate terminal equipment submarket constitutes an acceptable approach.
Of course, if defendants are able to demonstrate that the factual predicates for aggregation are lacking-that is, if they can show that highly disparate market shares exist among the individual submarkets, and that the anti-competitive conduct alleged by the government was proved only with regard to products for which Bell's share was so low as to belie any claim of monopoly power-then disaggregation may at that time become appropriate. In the absence of such proof, however, the Court will not fault the government for not having performed the virtually impossible and redundant task of proving that each anticompetitive act of the defendants occurred in the context of, and led to the preservation of a monopoly share in, every type of equipment manufactured by Western Electric.
B. Somewhat more compelling is defendants' claim that the government has failed to prove that they possess market power in the aggregate equipment market.
Certainly, their observation that the evidence of market share is sparse is well taken.
The government's witnesses in this area appear to have been sorely unprepared to support credibly the government's critical contentions. But this failure is not fatal as there was ample evidence, both testimonial and documentary, of significant barriers to entry,
and such barriers, as indicated supra, when combined with market share evidence, suffice to meet the government's burden.
C. In Brown Shoe Company v. United States, supra, 370 U.S. at 325, 82 S. Ct. at 1523, the Court stated that the boundaries of a submarket
may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.
The government asserts that for a variety of factors-because the demands of the Operating Companies for Western Electric products are not sensitive to changes in the relationship between Western's prices and the prices of competitors, the Operating Companies are distinct customers, Western is a specialized vendor (selling only to Bell companies), and the industry recognizes the existence of a Bell market-its alleged "Bell market" squarely fits within this Brown Shoe definition. That, however, is too mechanical a reading of the Supreme Court's opinion. As the Court of Appeals for the Ninth Circuit stated in International Tel. & Tel. Co. v. General Tel. & Elec. Corp., supra, 518 F.2d at 932,
(The) indicia were listed (in Brown Shoe ) with the intention of furnishing practical aids in identifying zones of actual or potential competition rather than with the view that their presence or absence would dispose, in talismanic fashion, of the submarket issue. Whether or not a court is justified in carving out a submarket depends ultimately on whether the factors which one purported submarket from another are "economically significant' in terms of the alleged anticompetitive effect.