Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.

SOUTHERN PAC. COMMUNS. CO. v. AT&T

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA


December 21, 1982

SOUTHERN PACIFIC COMMUNICATIONS COMPANY, et al., Plaintiffs,
v.
AMERICAN TELEPHONE AND TELEGRAPH COMPANY, et al., Defendants

[EDITOR'S NOTE: PART 2 OF 4. THIS DOCUMENT HAS BEEN SPLIT INTO MULTIPLE PARTS ON LEXIS TO ACCOMODATE ITS LARGE SIZE. EACH PART CONTAINS THE SAME LEXIS CITE.]

MEMORANDUM OPINION

UNITED STATES DISTRICT JUDGE CHARLES R. RICHEY

THE APPLICABLE LEGAL STANDARD FOR PREDATORY PRICING CLAIMS

 Before turning to the evidence introduced at trial with respect to plaintiffs' pricing claims, the Court believes it appropriate to address the legal standards which properly govern its consideration of those claims. Prior to trial, the parties submitted extensive briefs on the applicable legal standard for predatory pricing, and the Court has considered those in reaching its decision here. In summary, the Court concludes that a cost-based standard must be adopted to judge plaintiffs' predatory pricing claims and that a standard based on marginal or incremental cost is the most consistent with the pro-competitive thrust of the antitrust laws. The Court recognizes that the Courts of Appeals have not taken a uniform position with respect to the extent to which prices above marginal cost may be considered predatory, but the Court's analysis of the evidence in this case convinces it that a marginal or incremental cost standard is appropriate here. In any event, the Court finds no authority for a non-cost standard such as plaintiffs propose, and does not see how such a standard could be adopted without the risk of penalizing the very kind of price competition the antitrust laws are intended to foster. *fn100"

 From the Court's review of the authorities, it appears that a showing of below-cost pricing has consistently been held to be an essential element of a plaintiff's prima facie case. For example, in Broadway Delivery Corp. v. United Parcel Service, Inc., 651 F.2d 122, 131 (2d Cir.), cert. denied, 454 U.S. 968, 70 L. Ed. 2d 384, 102 S. Ct. 512 (1981), the Second Circuit held:

 

"The plaintiffs' evidence of predatory pricing was in itself seriously deficient. Whether or not one agrees that proof of pricing below marginal or average variable cost is essential to a predatory pricing claim, the plaintiffs could not demonstrate price predation by the defendants without proof permitting a careful assessment of the relationship between the defendants' prices and costs. See generally 3 P. Areeda & D. Turner, supra, PP 710-11. The plaintiffs' proof did not permit a reasonable fact-finder to make this assessment." (Emphasis supplied.)

 The Ninth Circuit in Hanson v. Shell Oil Co., 541 F.2d 1352, 1359 (9th Cir. 1976), cert. denied, 429 U.S. 1074, 50 L. Ed. 2d 792, 97 S. Ct. 813 (1977) held, that:

 

"Hanson's failure to show that Shell's prices were below its marginal on average variable costs was a failure as a matter of law to present a prima facie case under § 2." (footnote omitted).

 Similarly, where the plaintiff has failed to show that the defendant intentionally priced below cost, directed verdicts have often been granted. See, e.g., Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d 427, 432-33 (7th Cir. 1980); International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714, 724 (5th Cir. 1975), cert. denied, 424 U.S. 943, 47 L. Ed. 2d 349, 96 S. Ct. 1411 (1976); California Computer Products, Inc. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979).

 As the Ninth Circuit stated:

 

"While proof of pricing below marginal or average variable cost is prerequisite to a prima facie showing of an attempt to monopolize, such a showing if made, would not show a per se violation. There may be nonpredatory and acceptable business reasons for a firm engaging in such pricing. Plaintiff's showing of below-cost pricing merely clears the first hurdle and raises the question of justification."

 Hanson v. Shell Oil Co., supra 541 F.2d at 1359 n.6.

 This uniform insistence on proof of below-cost pricing is rooted in the central pro-competitive purposes of the Sherman Act, which seeks to promote price competition. As the Supreme Court emphasized in Schine Chain Theatres, Inc. v. United States, 334 U.S. 110, 120, 92 L. Ed. 1245, 68 S. Ct. 947 (1948), "price cutting without more is not a violation of the Sherman Act" but "is indeed a competitive practice." Any rule which unduly restricts vigorous price competition, therefore, would penalize firms from taking the very action which is expected and encouraged of them and would lead to a situation in which "the antitrust laws would thus compel the very sloth they were intended to prevent." Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 62 L. Ed. 2d 783, 100 S. Ct. 1061 (1980).

 It is also clear to the Court that the principles encouraging price competition on the merits are fully applicable to firms with a "dominant" share of the market. As the Ninth Circuit explained in California Computer Products, supra, 613 F.2d at 742:

 

"Where the opportunity exists to increase or protect market share profitably by offering equivalent or superior performance at a lower price, even a virtual monopolist may do so."

 The same conclusion was reached by the Second Circuit in Northeastern Tel. Co., supra, 651 F.2d at 93:

 

"[A] monopolist's right to compete is not limited to actions undertaken with an altruistic purpose. Even monopolists must be allowed to do as well as they can with their business."

 Consequently, the Court is in full agreement with the proposition that the evidence must show "more than an intent to win every sale, even if that would result in the demise of a competitor . . . before it can be concluded a defendant has the type of exclusionary intent condemned by the antitrust laws." Transamerica Computer Co. v. IBM Corp., 481 F. Supp. 965, 1010 (N.D. Cal. 1979).

 The fact that a "monopolist's" competitive pricing practices may be directed at particular competitors and may even cause them financial harm does not impinge upon the protection accorded vigorous competition. The purpose of the Sherman Act is to preserve the opportunity and incentive to compete, not to coddle competitors:

 

"Even legitimate price decreases will necessarily have a non-remunerative effect upon other firms in the market. These decreases will reduce competitors' profit margins and they may drive the inefficient firm out of business while the firm which originally reduced prices continues to make a profit. It is the very nature of competition that the vigorous, efficient firm will drive out less efficient firms. This is not proscribed by the antitrust laws. 'Antitrust legislation is concerned primarily with the health of the competitive process, not with the individual competitor who must sink or swim in competitive enterprise.'"

 Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848, 855 (9th Cir. 1977), cert. denied, 439 U.S. 829, 58 L. Ed. 2d 122, 99 S. Ct. 103 (1978). See also Chillicothe Sand & Gravel Co., supra, 615 F.2d at 431.

 Because of this recognized importance of price competition, the Court "must exercise great care in differentiating between legitimate price competition and that 'predatory pricing' which constitutes a restraint of trade." Janich Bros., Inc., supra, 570 F.2d at 856. Accordingly, the Court cannot rest a finding of predatory pricing on some vague, subjective theory such as "pricing without regard to cost." Rather, the Court concludes that in order for plaintiffs to meet their burden of proof, plaintiffs must demonstrate "the relationship between . . . prices and costs in order to determine whether . . . price behavior was predatory." International Air Industries, Inc., supra, 517 F.2d at 722, 723.

 Although the Courts of Appeals have not all taken uniform positions on what the appropriate cost standard should be, there does not appear to be any dispute in the cases that a marginal cost *fn101" analysis is an important, if not essential, starting point for any determination of predatory pricing.

 Most directly relevant to this question is the recent decision in Northeastern Tel. Co., supra, a case involving predatory pricing charges advanced against AT & T. Reviewing established economic principles, the Court of Appeals explained the rationale for its conclusion that "the relationship between a firm's prices and its marginal costs provides the best single determinant of predatory pricing" (651 F.2d at 87-88):

 

"Marginal cost pricing . . . fosters competition on the basis of relative efficiency. Establishing a pricing floor above marginal cost would encourage underutilization of productive resources and would provide a price 'umbrella' under which less efficient firms could hide from the stresses and storms of competition. Moreover, marginal cost pricing maximizes short-run consumer welfare, since when price equals marginal cost, consumers are willing to pay the expense incurred in producing the last unit of output. At prices above marginal cost, per contra, output is restricted, and consumers are deprived of products the value of which exceed their costs of production."

 In the Second Circuit's view, therefore, a marginal cost standard was "consistent with the pro-competitive thrust of the Sherman Act," and it also minimized the risk and cost of "inadvertently condemning" as predatory pricing what in fact may have been vigorous price competition (id.). Accordingly, the Second Circuit held that "prices below reasonably anticipated marginal costs will be presumed predatory, while prices above reasonably anticipated marginal cost will be presumed non-predatory" ( id. at 88).

 Although Northeastern involved the same telecommunications industry *fn102" and the same defendants as are involved in this case, and thus impresses the Court as particularly applicable here, it is only one of a number of decisions relying upon a marginal or incremental cost standard to assess predatory pricing claims. See, e.g., Superturf, Inc. v. Monsanto Co., 660 F.2d 1275, 1281 (8th Cir. 1981) ("even if Monsanto is a monopolist, it was within its rights to respond to the lower prices of its competitors while still pricing above its marginal costs"); Murphy Tugboat Co. v. Crowley, 658 F.2d 1256, 1259 (9th Cir. 1981) (defendants' prices were not "predatory" where there was no allegation that the prices were below marginal costs); Chillicothe Sand & Gravel Co., supra, 615 F.2d at 432 (use of marginal or average variable cost is both a "relevant and extremely useful factor in determining the presence of predatory conduct"); Pacific Engineering & Production Co. v. Kerr-McGee Corp., 551 F.2d 790, 795-97 (10th Cir.), cert. denied, 434 U.S. 879, 54 L. Ed. 2d 160, 98 S. Ct. 234 (1977) ("evidence of marginal cost . . . is extremely beneficial in establishing a case of monopolization through predatory pricing"); International Air Industries, Inc., supra, 517 F.2d at 723-24 ("we do not believe that the monopolist's pricing behavior could be deemed anticompetitive unless the monopolist set a price below its own marginal cost"); California Computer Products, supra, 613 F.2d at 742-43 (directed verdict proper where plaintiff "failed to produce evidence of pricing below marginal or average variable cost").

 The Court of Appeals for this Circuit has not yet had occasion to address this issue squarely. It has, however, recognized "the general prevalence of the incremental or marginal cost idea in the law of predatory pricing" in Sherman Act cases. American Tel. & Tel. Co. v. FCC, 195 U.S. App. D.C. 223, 602 F.2d 401, 410 n.49 (D.C. Cir. 1979).

 Marginal or incremental cost pricing has also been espoused as the correct costing method by a number of commentators on antitrust policy. The leading analysis reaching this conclusion was by Professors Areeda and Turner in Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975). See also 3 P. Areeda & D. Turner, Antitrust Law P 715(a)-(c) at 164-74 (1978). Since then, the relevance of marginal or incremental costs for assessing predatory pricing claims under the antitrust laws has also been espoused by other well-known commentators. See, e.g., Bork, The Antitrust Paradox: A Policy at War with Itself, pp. 154-55 (1978); McGee, Predatory Pricing Revisited, 23 J.L. & Econ. 289, 292-93 (1980).

 In the Court's view, the economic concept of marginal cost is not only widely recognized, but elementary. Marginal cost is the increase in the total costs that results from producing an additional unit of output. When the price of a dominant firm's product equals the product's marginal cost, only less efficient firms will suffer; more efficient firms will be covering the additional costs of production and contributing to the common costs of operation or even operating profitably. Therefore, establishing a pricing floor above marginal cost would encourage underutilization of productive resources and would provide a price "umbrella" under which less efficient firms could hide from the competitive process. See Northeastern Tel. Co., supra, 651 F.2d at 87-88; California Computer Products, supra, 613 F.2d at 743; International Air Industries, supra, 517 F.2d at 724.

 In this case, AT & T based its competitive private line rate adjustments primarily on a method known as long run incremental costs ("LRIC"). *fn103" Long run incremental costs or average incremental costs are a form of marginal costs reflecting the change in total costs caused by changes in output over a longer period of time (Froggatt, S-T-2 at 34-35; Eastmond, S-T-11 at 20; Ankner, S-T-10 at 2-9; Baumol, S-T-4 at 10, U.S. Tr. 23156; Olley, S-T-29 at 14). Long run or average incremental costs thus include 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. *fn104" It is generally recognized that long run or average incremental cost approximates anticipated average total cost for various levels of production. 3 P. Areeda & D. Turner, Antitrust Law P 712 (1978); Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 Yale L.J. 1, 9 n.26 (1979); Joskow & Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 Yale L.J. 213, 252 n.79 (1979). *fn105"

 The only question that seems to be open in the Courts of Appeals decisions is whether, on the particular facts, some standard over and above marginal costs may also be considered. *fn106" In this respect, defendants' witnesses, particularly its expert economists, all strongly endorsed the use of incremental cost as the appropriate measure of predatory pricing in the circumstances of this case (Baumol, S-T-4 at 10-12, 19-20, U.S. Tr. 23152-65, Tr. 3748-49; Olley, S-T-29 at 13, 15-17, Tr. 5381-82; Arrow, S-T-30 at 4-8, Tr. 4345; Braeutigam, S-T-204 at 9-11, 14-17, Tr. 5048; S-1623B). And Dean Rostow testified that it was both his personal view, and the conclusion of the President's Task Force on Communications Policy, that long run incremental costs should be the appropriate pricing standard for the competitive telecommunications industry (Rostow, Tr. 3655-61; S-1873 at 234).

 In addition, the Antitrust Division of the Department of Justice has advocated the use of incremental cost pricing for the telecommunications industry. Thus, on appeal from the FCC's decision in Docket No. 18128, the Antitrust Division argued that, in contrast to fully distributed costs which leads to "umbrella pricing," long run incremental costs "is not only pro-competitive but aids the users of services for which there is not competition." Brief for the United States at 34-35, filed August 21, 1978, Aeronautical Radio, Inc. v. FCC, No. 77-1333 (D.C. Cir.) (S-5716 at 34-35). *fn107" This appears to be a long-standing position of the federal government (see Long Run Incremental Costs/Telpak Doc. Sub.). It is apparent that the rest of the federal government was in disagreement with the FCC's decision to follow FDC. The policy of the Department of Justice was also echoed by the Department of Defense. In its March 19, 1976, brief in support of Exceptions of the Executive Agencies of the United States to the Recommended Decision of the Chief Common Carrier Bureau, released on January 19, 1976, it stated (S-4154 at 2, 3):

 

"The Chief, Common Carrier Bureau, in his Recommended Decision herein has, however, ignored this evidence, and, relying upon erroneous legal precedent and overlooking the extensive economic advantages of an incremental cost pricing approach to ratemaking, found incremental cost (termed "marginal cost pricing" by the CCB) theory to presently be inapplicable to the pricing of Bell's competitive interstate services. The CCB has, however, also determined that incremental cost pricing "could" be acceptable in the future provided various "modifications" are made in the present approach (DOD Exceptions 4-12).

 

The DOD, on behalf of the Federal Executive Agencies, is of the opinion that the record herein has adequately demonstrated the present theoretical acceptability of incremental cost pricing in determining the appropriate earnings relationships among and earning levels of Bell's various interstate services, and that it is merely AT & T's presently proposed LRIC methodology that is unsupportable and unlawful. DOD further believes that the CCB's equivocation (see DOD Exception 7) in failing to actively seek to determine how the appropriate modifications and controls essential to an implementation of incremental cost theory to the pricing of Bell's competitive interstate services is without justifications."

 See also S-4167; S-4230.

 The Court notes that DOD's comments were right on point. For the author of the decision finding FDC the appropriate costing methodology in lieu of LRIC, Mr. Walter Hinchman, admitted under oath that he knew nothing about cost, much less the difference between LRIC and FDC. (Hinchman, Tr. 4980-2) Moreover, Mr. Hinchman testified that he never even read the record in Docket 18128 (Hinchman, Tr. 4981).

 Additionally, plaintiffs' parent, Southern Pacific Company, has long advocated the use of incremental costs in setting railroad rates under the Interstate Commerce Act (Miller, Tr. 431-33). *fn108" This has also been the long-standing position of the Association of American Railroads, of which Southern Pacific is a member (Baumol, Tr. 3747-40; S-1623B; S-1822C). *fn109" The Interstate Commerce Commission has now adopted that standard by virtue of the Staggers Rail Act of 1980, 49 U.S.C. § 10701a(c) (2) (1980). *fn110" See Western Coal Traffic League v. United States, 219 U.S. App. D.C. 327, 677 F.2d 915 (D.C. Cir. 1982).

 Perhaps the most interesting aspect of the plaintiffs' contentions that FDC should be the appropriate pricing methodology, is that SPCC used LRIC in at least seven of its cost studies submitted to the FCC. By letter dated March 31, 1975 in Transmittal No. 37, SPCC filed cost data to support changes in its private line tariffs. (S-3499B) On page 6, the Transmittal stated:

 

"The basis of ratemaking used in presenting the data. . . . is a long run variable (or incremental) cost basis. This is appropriate because SPCC would incur negligible increases in overhead expenses due to the increased sales which we have shown will result . . . ."

 See also S-4050 at 6; S-4614B at 36; S-4937B; S-4999B; S-5265B; S-5637D.

 Although the FCC adopted fully distributed cost in Docket No. 18128 as the standard for pricing of telecommunications services, the record here shows that this was not a foregone conclusion and may have been primarily motivated by a desire to protect inefficient new carriers such as SPCC from the full economic consequences of competition, rather than on a reasoned economic basis (Rostow, Tr. 3662-64; Owen, Tr. 5713-15; Baumol, S-T-4 at 8; Strassburg, S-T-171 at U.S. Tr. 23386-87). Indeed, the Court finds it of interest that following the hearings in Docket No. 18128, the FCC staff apparently agreed that LRIC should be adopted as the appropriate standard under the Communications Act, and a proposed decision to that effect was drafted by members of the Common Carrier Bureau in November 1973 (Strassburg, S-T-171 at U.S. Tr. 23444-46; *fn111" S-2676; S-2825). *fn112"

 In any event, the Court is convinced that a predatory pricing standard based upon fully distributed costs would be inconsistent with sound legal and economic principles, and therefore, it must reject plaintiffs' alternative position that the Court should adopt such a standard to the extent that it requires, as it has, a showing of a cost-price relationship to establish predatory pricing. The Court of Appeals in Northeastern rejected a similar argument, concluding that a fully distributed cost test "would promote economic inefficiency, would be difficult to apply, [and] would elevate the interests of single market competitors over those of consumers . . ." (651 F.2d at 90).

 The Court's conclusion is not altered by plaintiffs' reliance upon Utah Pie Co. v. Continental Baking Co., 386 U.S. 685, 18 L. Ed. 2d 406, 87 S. Ct. 1326 (1967), and the FCC's decision in Docket No. 18128, neither of which supports the use of a fully distributed cost test to assess a claim of predatory pricing under Section 2 of the Sherman Act. With respect to Utah Pie, as Areeda and Turner have pointed out, the Court was unclear on which cost measurement it used to find 'below cost' pricing." Areeda & Turner, supra, 88 Harv. L. Rev. at 727 n.59. Similarly, the FCC decision in Docket No. 18128 was expressly limited to regulatory pricing issues. AT & T, 61 F.C.C.2d 587 (1976). As the Court of Appeals for this Circuit has recognized, the standards applied under the Communications Act "may be more restrictive than those common in antitrust cases," referring specifically to "the Commission's use of [fully distributed costs]" as the basis for pricing. American Tel. & Tel. Co. v. FCC, 195 U.S. App. D.C. 223, 602 F.2d 401, 410 n.49 (D.C. Cir. 1979). Moreover, even in the regulatory context at issue on appeal from the Commission's decision in Docket No. 18128, Aeronautical Radio, Inc. v. FCC, 206 U.S. App. D.C. 253, 642 F.2d 1221 (D.C. Cir. 1980), cert. denied, 451 U.S. 920, 101 S. Ct. 1998, 101 S. Ct. 1999, 68 L. Ed. 2d 311 (1981), Judge Wilkey urged that the FCC's adoption of fully distributed cost pricing be held to be beyond the discretion of the FCC because LRIC was the only appropriate standard to assure "economic efficiency," emphasizing that " so long as rates are above LRIC, agencies and courts can rest assured that monopoly service customers are NOT subsidizing the firm's operations in the competitive market. . ." (642 F.2d at 1239-41) (emphasis in original).

  The principal opponent of LRIC and the principal advocate of FDC in this case was plaintiffs' witness, Dr. Melody. *fn113" The thrust of his argument, as the Court understands it, is that use of long run incremental costs is inappropriate where a firm such as AT & T provides both competitive and monopoly services and operates under an overall rate of return set by regulators. Dr. Melody asserts that under these conditions use of LRIC to set rates for competitive services leads to unlawful cross-subsidy because common costs are borne by the monopoly service and thus that fully distributed costs should be used instead. Dr. Melody's view concerning what constitutes a "cross-subsidy" has no apparent support among other economists who testified in this case (see Baumol, S-T-4 at 31; Olley, S-T-29 at 14-17; Arrow, S-T-30 at 5-7, 30-31). The Court notes that this view is also in conflict with the testimony of L. W. Doritz, VP, Mo. Pub. Serv. Comm'n, before House Subcomm. on Telecom., Consumer Protection & Finance who stated (S-6197 at 7-8):

 

"A major concern of the United States Department of Justice that triggered its decision to file the current antitrust lawsuit against AT & T related to the alleged use of profits from monopoly services to subsidize competitive offerings. DOJ maintained that the Bell System could raise monopoly prices in order to cut prices offered in the competitive arena and still maintain the same rate of return on overall investment. This view does not comport with the actual pricing of telecommunications services in Missouri.

 

All telephone services provided in Missouri by SWBT (Southwestern Bell Telephone) with the exception of interstate toll are regulated by the Missouri Commission. Consequently, in Missouri, SWBT could not lower the prices of its competitive services (principally CPE) and raise the prices of its monopoly services without the approval of the Missouri Commission." (Emphasis supplied).

 It is clear to the Court that it was not Bell that was the problem, but rather the FCC's own ineptitude.

 Moreover, the Court cannot reconcile Dr. Melody's views with the case law, particularly Northeastern Tel. Co., supra. The Court of Appeals in Northeastern squarely addressed the principal argument made here by Dr. Melody against an incremental cost standard -- that this standard is inadequate because it creates the potential for AT & T to cross-subsidize losses from competitive services with excess profits from monopoly services. The Second Circuit labeled such an argument "seriously flawed" (651 F.2d at 90), and the Court is satisfied that that reasoning is applicable here.

 As the Second Circuit pointed out, there is no valid distinction between the ability of a regulated and an unregulated firm to cross-subsidize, and to abandon the marginal cost rule for diversified firms would create "a haven for inefficient competitors" (651 F.2d at 90). Additionally, the cross-subsidy argument "emphasizes the interests of single-market rivals over those of consumers and the competitive process" (id.). Finally, this argument ignores the basic principle that the marginal cost standard itself is sufficient to detect unlawful cross-subsidization, because "when price exceeds marginal or average variable cost, no subsidy is necessary" (id.). *fn114"

 Significantly, the Department of Justice Antitrust Division has also rejected the kind of cross-subsidy argument made by Dr. Melody. As pointed out above, in the appeal from the FCC's Docket No. 18128 decision, the Antitrust Division argued that an incremental cost test, not a fully distributed cost test, should be the appropriate pricing standard for the telecommunications industry. In that case, the Antitrust Division also explained that incremental cost pricing does not result in "cross-subsidization in any sense used by either economists or public utility regulators because monopoly (or other low elasticity) customers are not paying part of the other service, the one that is putatively subsidized. They are paying only costs which they would have to bear in the absence of that other service" (S-5716 at 38).

 The Court thus concludes that marginal or incremental cost is the appropriate standard for judging plaintiffs' predatory pricing claims. The Court will now turn to the evidence submitted with respect to these claims.

 EVIDENCE CONCERNING WHETHER AT & T'S RATES WERE BELOW COST

 With respect to each of the tariffs attacked in this case, plaintiffs have not relied upon the marginal cost test or any other cost-based test for determining predatory pricing. *fn115" Rather, counsel for plaintiffs proceeded on an entirely different theory of proof, arguing that they needed only to show that AT & T set its rates in "disregard of its actual costs." Plaintiffs thus focused their attention principally on asserted errors in AT & T's cost studies that plaintiffs claim rendered those studies inadequate as a basis for pricing. Plaintiffs' principal expert witness, Dr. Melody, repeatedly emphasized that "I have been unable to do a cost study to tell you what AT & T's costs are" (Melody, Tr. 2407, 2453-54, 2458, 2470). Similarly, while plaintiffs' other cost witnesses, Mr. Tucker and Mr. Scott, criticized the FDC and LRIC cost studies for Hi/Lo and MPL and offered readjustments to those studies, their intention was only to show that AT & T "priced without regard to cost" and that AT & T's cost were higher than what was reported to the FCC. Before these witnesses testified, plaintiffs' counsel emphasized: "They are not going to quarrel with the way the studies were done, they are simply going to look at the data . . . . I want to stress for the Court we are not saying that those are AT & T's actual costs" (Tr. 1755-56). And Dr. Melody in his rebuttal testimony re-emphasized that neither the Scott nor the Tucker calculations were intended to be a "proper costing" of AT & T's services (Melody, Tr. 5619; see also Lim, Tr. 5927). *fn116"

 Defendants, on the other hand, introduced into evidence numerous detailed studies showing that the rates set in the challenged tariffs were projected to be above cost -- under both LRIC and FDC methods -- and further that they were actually above cost. Although plaintiffs have challenged some of the methodology used in AT & T's LRIC and FDC studies, the Court, for the reasons stated below in discussing those criticisms, has concluded that AT & T's costing methods were reasonable and appropriate. Accordingly, the Court finds that the cost studies submitted by defendants are competent evidence that defendants' prices were above cost for each of the challenged tariffs. With respect to Telpak, defendants submitted studies calculated on various FDC methods from 1967 through 1979 which had been performed at the request of the FCC and filed with the Commission (Johnston, S-T-5 at 76-78 & Att. 9). n117 The results of these studies confirm that, in the time period at issue in this case, Telpak was producing earnings in excess of all costs attributed to the service under even the most stringent of the fully distributed cost methods (Hough, S-T-1 at 41). For instance, set forth below are the results of studies conducted pursuant to FDC Method 7 (the method ultimately selected by the FCC in its 1976 Docket No. 18128 decision), compared with the total net return on investment for all of AT & T's interstate services (S-4727B; Johnston, S-T-5 at Att. 9): 5 Year 1973 1974 1975 1976 1977 Average Telpak 12.2% 12.2% 12.6% 9.0% 8.1% 10.8% Total Interstate 8.6% 8.5% 8.5% 9.2% 9.6% 8.9%

19821221

© 1992-2004 VersusLaw Inc.



Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.