applicability here. If market value were to be used in the instant case, valuation proceedings would have to be conducted for all of the billions of dollars worth of AT&T's assets.
AT&T has correctly pointed out the overwhelming nature of this task by referring to the extensive, complex, and lengthy valuation proceedings in the Conrail case.
Valuation proceedings for the Bell System assets would necessarily be even more complicated and unmanageable than those involving Conrail, for the value of AT&T's assets is not only substantially greater than that of the Conrail assets, but the court there had at least the advantage of valuating assets from bankrupt estates.
In contrast, the Bell System is an ongoing business, and market dynamics would therefore be of much greater significance here than they were in Conrail.311
The Court finds that there is no justification for abandoning the well-established practice of valuing assets at net book for purposes of the proposed decree.
C. The Division of Assets and Debts
It has further been suggested by a number of interested persons that AT&T might manipulate the actual division of assets and liabilities to the detriment of the Operating Companies.
Initially it may be observed that AT&T has the responsibility, separate and apart from the proposed decree, to ensure that the Operating Companies are spun off as financially viable entities. As their majority, and in some cases sole shareholder, AT&T has the fiduciary duty to protect all those with interests in these companies, including creditors. See Pepper v. Litton, 308 U.S. at 306; see also Superintendent of Insurance v. Bankers Life, supra, 404 U.S. at 12; Hanraty v. Ostertag, supra, 470 F.2d at 1099. Other shareholders are protected by similar principles. See Kamin v. American Express Co., 86 Misc. 2d 809, 383 N.Y.S.2d 807, 812, aff'd, 54 A.D.2d 654, 387 N.Y.S.2d 993 (Ct. App. 1976); United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-64, 61 L. Ed. 1119, 37 S. Ct. 509 (1917); Lewis v. Anderson, 615 F.2d 778, 782 (9th Cir. 1979); Rosengarten v. International Tel. & Tel. Corp., 466 F. Supp. 817, 822 (S.D.N.Y. 1979); Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 927, 393 N.E.2d 994 (Ct. App. 1979). Antitrust principles, too, impose a duty on the divesting corporation to establish the newly-divested business with a sound financial structure. Utah Public Service Commission v. El Paso Natural Gas Co., 395 U.S. 464, 470, 23 L. Ed. 2d 474, 89 S. Ct. 1860 (1969); Ford Motor Co. v. United States, 405 U.S. 562, 31 L. Ed. 2d 492, 92 S. Ct. 1142 (1972); Maryland Milk Producers' Assn. v. United States, 362 U.S. 458, 4 L. Ed. 2d 880, 80 S. Ct. 847 (1960). It should not lightly be assumed that AT&T's managers will violate this trust and expose themselves to substantial liability.
Beyond that, the Court is satisfied that, with some modifications, there are adequate safeguards to protect against abuse.
Perhaps the most important guarantee against improper manipulation is the one included in the proposed decree itself: that assets will be divided according to the functions they perform.
Thus, the Operating Companies will receive those assets necessary to perform exchange telecommunications and exchange access functions, and the remaining assets will be held by AT&T. There appears to be wide agreement that at least eighty percent of the assets may be readily identified and assigned on this basis. With respect to this portion of the assets it is therefore necessary only to ensure that the functional division will actually be carried out. A number of measures will serve this purpose.
First, in addition to its own review and approval of the division of assets, the Department of Justice has invited federal and state regulatory bodies as well as AT&T's competitors and other interested persons to examine the distribution of assets provided for in the plan of reorganization. See, e.g., Department of Justice Response to Comments at 15-21; Tr. 25,402. If it should appear that assets have been improperly assigned, the errors may be brought to the Department's attention, and it will then presumably take corrective action. Second, should the Operating Companies find, once they are divested, that they lack sufficient assets to perform their obligations under the decree, they may petition the Court under Section VII of the proposed decree for necessary relief. Third, the Court will continue its supervision of the decree, and it will in particular seek to ensure that the plan of reorganization is consistent with the decree's principles, including the principles which govern the distribution of assets. See Part XI infra. In view of the relatively ministerial nature of the task, these safeguards should be fully adequate to guarantee the proper allocation of the single- function assets.
A more substantial problem is presented by the valuation of the remaining twenty percent of the assets -- those representing multifunction facilities (that is, facilities providing functions for services rendered both by AT&T and by the Operating Companies). These include such important assets as land and buildings, cables, central office switching facilities, warehouses, underground conduit, manholes, and toll terminals. The proposed decree provides in Section I(A)2 that "there shall be no joint ownership of facilities, but appropriate provision may be made for sharing, through leasing or otherwise, of multifunction facilities so long as the separated portion of each BOC is ensured control over the exchange telecommunications and exchange access functions."
The parties appear to differ in their interpretation of this provision. The Department of Justice states that the entity which makes predominant use of a facility will "generally" be entitled to its ownership.
AT&T, on the other hand, interprets this provision to mean that multifunction facilities will be allocated on the basis of "reasonable, neutrally applied criteria," without, however, specifying what these criteria would be.
In the view of the Court, it is essential that the predominant use test proposed by the government be applied to multifunction assets. Like the functional test that will be used generally in the division of assets, the predominant use test is a clear-cut standard which minimizes subjective factors and thus the potential for improper manipulation of the allocation process. Moreover, such a test provides the Court with a readily reviewable standard should the division of these facilities be called into question.
By contrast, the test proposed by AT&T is vague and it leaves to that Company's management a vast amount of discretion precisely in the area where there is the most incentive for abuse. For clearly, it would be to AT&T's interest to select for itself assets of high utility and relatively low book value, while leaving to the Operating Companies the more costly but outmoded equipment, the least attractive real estate, and the under- used plant. The possibility that AT&T will act on these incentives is too real to leave the distribution of the assets to AT&T's discretion under a "reasonable criteria" standard.
Because the predominant use test is an essential ingredient for the fair and successful implementation of divestiture, the Court will require in the public interest that the proposed decree be modified explicitly to incorporate that test. Such inclusion will permit the Court to oversee with some assurance of success that the division of assets will be fairly carried out.
Questions have also been raised regarding the appropriate debt-equity ratios to be assumed by the Operating Companies and AT&T. AT&T has stated that it is willing to divest the Operating Companies with debt ratios of approximately forty-five percent and to assume its representative share of the outstanding debt, by assuming debt issues that have interest rates and maturities which reflect the average terms of the particular Operating Company debt.
The Department of Justice endorses AT&T's statement of intentions adding, however, that the Operating Companies should be left with debt issues that reflect terms and conditions comparable to the debt held by the Bell System as a whole. Department of Justice Response to Comments at 30; Department of Justice Brief at 62.
The Court sees no reason for rejecting the parties' plan. The suggestions made by various third persons
do not differ significantly from those submitted by the parties, and these persons have certainly not shown that the parties' proposals are at all unreasonable. However, as is true with respect to several other matters, the Court considers that its Tunney Act responsibilities require it to demand more of the parties on subjects which have significant public interest aspects than statements of intentions embodied in briefs or written comments, or made during oral argument. Accordingly, the Court will require that the proposed decree be modified to incorporate the forty-five percent debt ratio
and the government's and AT&T's representations with regard to the quality of the Operating Company debt,
to the end that on the basis of such a modification the Court will be in a position, if necessary, to insist that the statements of intention of the parties are actually implemented.
The Court is satisfied that the provisions in the proposed decree, as modified, along with traditional corporate principles, provide a sound framework for the division of the assets and of the debt. The interests of the Operating Companies, including those of its creditors and future shareholders, will be protected by the functional division of assets, the predominant use test for multifunction facilities, and the guidelines established for the division of the corporate liabilities. The procedures established for the review of the reorganization plan and its implementation will further help to ensure that the principles of the decree will be carried out. See Part XI infra. Finally, the fact that AT&T has a fiduciary obligation, separate and apart from the decree, to approach the divestiture in good faith and to protect the interests of all involved will further help to guarantee that the division of assets will be carried out in the public interest.
Special Provisions and Concerns
A number of those who have commented on the proposed decree have raised special problems which are outside the scope of the general categories discussed above. The Court has considered all of the issues presented by these comments, and it finds that none constitutes grounds for withholding approval of the proposed decree. Five of the most important concerns are discussed below.
A. Department of Defense Concerns
The comments of the Department of Defense indicate continued opposition to the concept of the divestiture of the Operating Companies, and they suggest that the Department prefers an integrated AT&T as a defense asset.
These comments ignore the testimony adduced during the AT&T trial, much of it by witnesses with close ties to the Defense Department,
to the effect that, far from relying directly or even primarily on AT&T, the Department and its allied agencies have in recent years increasingly placed their trust in their own, or in other non-AT&T sources for their communications needs.
In any event, the Department now appears to recognize that its stated interests cannot override the government's basic divestiture decision, and it thus concentrates the bulk of its remarks on recommendations for achieving a telecommunications network that will be effective for national defense and emergency purposes once divestiture is accomplished.
Some of these recommendations require no action by the Court because they address matters of definition;
request the resolution of conflicts that are theoretical at best;
or discuss problems which have little to do with the settlement.
However, there is one series of comments that has substantial merit.
The Department notes that Section I(B) of the proposed decree directs the Operating Companies to "provide, through a centralized organization, a single point of contact for coordination of BOCs to meet the requirements of national security and emergency preparedness," and it correctly observes that there is no elaboration on the purpose and scope of the "single point of contact" requirement. The Department focuses on five specific areas in this regard, three of which constitute legitimate subjects of concern: (1) the lack of a requirement in the proposed decree that the Operating Companies commit specific resources to this point of contact; (2) the question of funding and regulatory treatment for this facility; and (3) the degree of authority the facility would possess to instruct the Operating Companies to cooperate in emergency situations, particularly in regard to the assignment to each other of necessary resources.
The Court expects that AT&T's plan of reorganization will resolve these issues in a manner which satisfies the Defense Department's legitimate needs without impairing the basic antitrust purposes of the judgment.
B. Interests of AT&T Employees
The Communications Workers of America
submitted both comments and briefs, stating that it favors approval of the proposed decree. Its primary interest is in continued national bargaining in telecommunications following the reorganization of AT&T, and it requests that the proposed decree explicitly provide that nothing therein will preclude such a procedure. In the view of the Court, there is no need for such a modification. There is nothing in the proposed decree or in general principles of law which would preclude or interfere with such bargaining, and there accordingly is no reason whatever why, following the entry of the decree and the reorganization, such bargaining cannot continue as in the past.
The Communications Workers have further advised the Court that in August 1980 the union entered into a memorandum of understanding with AT&T
which specified that employees of the Bell System who were transferred to separate AT&T subsidiaries or affiliates would be entitled to certain protections.
Again, it is clear that, notwithstanding the separation of the Operating Companies from the Bell System, there will be no obstacle either to adherence by any of the restructured segments of the Bell System to the terms of existing collective bargaining agreements or to their abiding by such memoranda of understanding as may have been or may hereafter be negotiated with the union.
The purpose of the divestiture is to establish conditions which will prevent the type of anticompetitive activities which the government has charged in its complaints in the two lawsuits presently before the Court. These activities, and hence the settlement of the lawsuits, do not involve AT&T's labor relations and, more particularly, they have nothing to do with the Communications Workers of America or its relationship with the Bell System. See also, 15 U.S.C. § 17; 29 U.S.C. § 52. It follows that the union, on the one hand, and AT&T, and the divested Operating Companies, on the other, will be entirely free to arrange their mutual labor relationships as the Bell System and the union did in the past, irrespective of the structural changes that may be brought about by the decree.
C. Prima Facie Effect of the Decree in Private Litigation
Section 5(a) of the Clayton Act, 15 U.S.C. § 16(a) provides that
a final judgment . . . rendered in any . . . proceeding brought by . . . the United States under the antitrust laws to the effect that a defendant has violated such laws shall be prima facie evidence against such defendant [in a private action] as to all matters respecting which said judgment would be an estoppel as between the parties thereto.
Several parties argue that they are entitled to the benefits of the presumption established by this provision in any suits they may have brought or may hereafter initiate against AT&T charging conduct similar to that involved in the government's AT&T action presently before this Court.
AT&T presents two arguments in opposition to this suggestion.
First, it contends that the proposed decree is only a modification of the 1956 decree, and that, since that decree was entered before any evidence had been taken in the Western Electric case, section 5(a) of the Clayton Act does not apply by its own terms. See note 334 supra. The Court has rejected this highly artificial argument in other contexts (see Part I supra) and it again rejects it here. The parties may not escape either the mandate of the law or the possibility of liability by the transparent device of attaching their settlement to an old, largely dormant case rather than to an action that is currently in litigation, especially where almost the entire settlement relates to the current lawsuit.
AT&T's second argument has considerably more merit. As indicated, the statute establishes a presumption usable in private litigation only on the basis of a judgment "to the effect that a defendant has violated [the antitrust] laws." Not only does the proposed decree fail to include a finding or admission that AT&T has violated these laws,
but Section III of the decree specifically provides that the judgment "shall [not] constitute any evidence against, an admission by, or an estoppel against any party or [Operating Company]." In view of that unequivocal provision, it would appear to this Court that the judgment herein would not have a prima facie effect in private litigation. However, as the Department of Justice correctly points out, the ultimate decision with respect to this issue must rest with the court in which such litigation may be brought. Response to Comments at 136. The Court will therefore decline to enter any specific decision or finding regarding this subject.
D. Conflict with Federal Regulation
Several interested parties have suggested that there may be a conflict between the proposed decree and regulation by the Federal Communications Commission, and that the decree therefore should not be entered unless and until the Commission has given its formal approval.
It is true that FCC certificates are required under the Communications Act for a number of transactions necessary to implement the divestiture. See 47 U.S.C. §§ 214(a), 221(a), 310(d). It is not likely, however, that a controversy will actually arise with respect to any of these matters. The FCC has already declared that "the basic settlement appears to be fair and reasonable," and it has suggested throughout its participation in these actions that there will be no difficulties with regard to implementation. Brief of FCC as amicus curiae at 9. The Supreme Court has admonished the lower courts not to adjudicate potential conflicts between an antitrust decree and a federal regulatory statute until there is a concrete case or controversy in that respect. Otter Tail Power Co. v. United States, 410 U.S. 366, 377, 35 L. Ed. 2d 359, 93 S. Ct. 1022 (1973). Accordingly, the Court need not and will not decide specific questions of possible conflict at this time.
The Federal Communications Commission has suggested in a somewhat similar vein that the decree should accommodate the federal regulatory scheme by the addition of a clause modeled on the so-called Terminal Railroad proviso. In United States v. St. Louis Terminal, 224 U.S. 383, 56 L. Ed. 810, 32 S. Ct. 507 (1912) the Supreme Court directed the entry of a decree which, inter alia, changed some billing practices and eliminated a special charge for certain types of rail traffic. Because of a concern that these provisions created a potential conflict with Interstate Commerce Commission regulation of interstate rail transportation, the Court ordered that a proviso be attached to the effect that the decree did not affect the ICC's powers. 224 U.S. at 412. The District Court entered a decree in conformity with the Supreme Court directive (see Terminal R.R. Ass'n v. United States, 266 U.S. 17, 25, 69 L. Ed. 150, 49 S. Ct. 5 (1924)); and it is a clause paralleling that decree that the FCC requests here.
It is not at all clear why the FCC asks for inclusion in the decree in these cases of the Terminal Railroad proviso. The Commission acknowledges that
The addition of such a provision would not change the substance of the proposed [decree]. There is no reason to suppose that either party to the settlement ever intended to affect any Commission power. Moreover, the failure to add such a proviso would not expand the court's power or contract the Commission's power.