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

December 21, 1982

SOUTHERN PACIFIC COMMUNICATIONS COMPANY, et al., Plaintiffs,
v.
AMERICAN TELEPHONE AND TELEGRAPH COMPANY, et al., Defendants [Part 1 of 4]



The opinion of the court was delivered by: RICHEY

MEMORANDUM OPINION

 UNITED STATES DISTRICT JUDGE CHARLES R. RICHEY.

 INTRODUCTION

 This action was originally filed on March 27, 1978, *fn1" and was brought by Southern Pacific Communications Company and Transportation Microwave Corporation [SPCC] against the American Telephone and Telegraph Company [AT & T] and the Bell System operating companies. *fn2" The complaint was predicated upon Sections 1 *fn3" and 2 *fn4" of the Sherman Act (15 U.S.C. §§ 1, 2) and alleged that the Bell System had monopolized and conspired and attempted to monopolize a relevant market in telecommunications service and had conspired to restrain trade in the market. The plaintiffs withdrew their Section 1 claim at status call on September 2, 1981 (Tr. 7-8), and the case was submitted to the Court for trial on the merits, sitting without a jury, on the charge that AT & T had monopoly power and had misused that power through conduct alleged to violate Section 2 of the Sherman Act. For the alleged violations, the plaintiffs seek $230.2 million4a for damages, which is trebled to $690.6 million pursuant to Section 4 *fn5" of the Clayton Act. (15 U.S.C. § 15). After waiver by both parties of jury demands, trial commenced on May 10, 1982. *fn6" SPCC completed its presentation of evidence, including the testimony of 24 witnesses and approximately 1,400 exhibits, on June 14, 1982. The trial consumed thirty-three trial days for both sides, including opening and closing arguments.

 Defendants filed a motion for involuntary dismissal under Rule 41(b) of the Federal Rules of Civil Procedure on June 8, 1982, and filed supplementation and proposed findings of fact and conclusions of law on June 12, 1982. Plaintiffs filed their memorandum in opposition on June 15, 1982, after which the Court heard oral argument on defendants' motion. On June 21, 1982, the Court announced its decision to defer ruling on defendants' motion until it had heard all of the evidence.

 Defendants began presenting their evidence, which included testimony of 147 *fn7" witnesses and introduction of over 7,900 exhibits on June 23, 1982, and concluded their case on July 2, 1982, after only eight trial days. Plaintiffs presented their evidence in rebuttal on July 9 and 12, 1982, through the testimony of nine witnesses. On July 13, 1982, plaintiffs introduced 326 rebuttal exhibits and defendants introduced 23 surrebuttal exhibits. Both parties filed proposed findings of fact and conclusions of law on July 15, 1982, and reply findings on July 17, 1982. The Court heard oral argument on July 19, 1982.

 The following memorandum opinion shall constitute the Court's findings of fact and conclusions of law, as mandated by Rule 52(a) of the Federal Rules of Civil Procedure.

 PARTIES

 Southern Pacific Communications Company

 Southern Pacific Communications Company (SPCC), a plaintiff in this case, is a wholly-owned subsidiary of the Southern Pacific Company (Agreed Fact 8-3-002). The Southern Pacific Company is a large and highly diversified holding company. In addition to ownership of Southern Pacific Transportation Company (SPTCo) and SPCC, Southern Pacific Company has extended interests in real estate, natural resources, and leasing (Agreed Fact 8-3-020; Furth, PX6-0001 at 3-7). In 1980, Southern Pacific Company had assets of $5.3 billion and total revenues of $2.8 billion.

 SPTCo owns and operates one of the nation's largest intercity private microwave systems (Agreed Fact 7-1-009). Construction of this private microwave system began following the FCC's Above 8907a decision in 1959. (Furth, PX6-0001 at 11). When the entire system was completed in 1969, it consisted of approximately 650,000 voice circuit miles and 7,664 route miles from Portland through Oregon, California, Arizona, New Mexico, Texas, Louisiana, Arkansas, Missouri, to Illinois (id.).

 SPCC was formed in January, 1970, to provide communication services to business, industry, government and educational entities over a domestic network between such locations as the Federal Communications Commission (FCC) authorized (Furth, PX6-0001 at 12-13). SPCC's initial plan involved using the existing microwave sites of SPTCo where feasible (id. at 13). Portions of SPCC's microwave system initially were constructed upon the towers, facilities, and right-of-way of the SPTCo private microwave system (Agreed Fact 7-1-009).

 On February 9, 1970, SPCC filed its initial application with the FCC seeking authority to construct and operate a specialized common carrier microwave radio system between Seattle, Washington, and San Diego, California (Furth, PX6-0001 at 13). SPCC filed an additional application in April, 1970, for authority to construct a system between Los Angeles and St. Louis (id.).

 Following the FCC's general authorization of competition in its 1971 Specialized Common Carriers Decision ( PX1-0159, 29 F.C.C.2d 870 (Dkt. 18920), and the subsequent FCC grant of SPCC's construction application PX1-0267, 37 F.C.C.2d 245 (1972)), SPCC commenced commercial operations on December 26, 1973 (Furth, PX6-0001 at 14; Grant, PX6-0004 at 9).

 In 1974, SPCC purchased 100% of the stock of Video Microwave, Inc., the voice and data facilities of United Video, Inc. and purchased through Sunset Communications, a wholly-owned subsidiary of Southern Pacific Company, 95% of the stock of Transportation Microwave Corp. (TMC), also a plaintiff in this case. In 1976, SPCC purchased certain assets of Data Transmission Company (DATRAN), including a microwave system extending from Houston to Chicago via Kansas City and St. Louis (Agreed Fact 8-3-020).

 Today, SPCC offers a variety of services over a multi-million circuit mile system consisting of its own terrestrial microwave transmission facilities, complemented by leased wire, microwave, and satellite facilities (Furth, PX6-0001 at 14).

 American Telephone & Telegraph Company

 The American Telephone and Telegraph Company (AT & T), a defendant in this case, is the parent company of more than 40 subsidiary corporations (Agreed Fact 8-3-003).

 The major subsidiaries of AT & T are the Western Electric Company, Inc., Bell Telephone Laboratories, Inc., and the Bell Operating Telephone Companies (BOC). Together these companies make up what is known as the Bell System (Agreed Fact 8-3-004).

 As of December 31, 1981, AT & T owned 100% of the stock of Western Electric Company. AT & T and Western Electric each owned 50% of Bell Telephone Laboratories (Agreed Fact 8-3-005). At the time this suit was filed, AT & T owned directly or indirectly, all of the stock of 17 operating telephone companies, the majority of the stock of two companies, and a minority of the stock of five others. *fn8" (Agreed Facts 8-3-015, 8-3-016, 8-3-017, 8-3-018). There are now no minority interests in AT & T-owned companies. AT & T is the minority owner of two BOCs. (Brown, Tr. 5353).

 The 24 consolidated companies had approximately 145.9 million telephones in service as of December 31, 1980, approximately 81% of the total in the United States (PX4-0874 at 3). Each of the Bell operating telephone companies possesses an exclusive franchise or government granted monopoly in the geographic areas in which it provides service (See e.g., Grant, Tr. 646). As of December 31, 1980, these companies' operating areas included 31.4% of the land area of the United States. The 24 Bell operating companies are also named defendants in this case (Complaint). Independent telephone companies now almost 1500 in number, provide service to about 36 million telephones in over half of the geograhic areas of the United States having telephone service (Testimony of Richard A. Lumpkin S-6187 at 1-2). The independents have current annual revenues near $12 billion about half of which is derived from toll services and have approximately $39 billion invested in facilities and equipment. (id.)

 The assets of AT & T and its consolidated subsidiaries were over $125 billion at the end of 1980. As of May 31, 1981, they had reached $129.5 billion (Agreed Fact 8-3-007).

 In 1980, AT & T's total operating revenues were approximately $50.8 billion. Local service accounted for approximatley $22.5 billion of this total; toll service accounted for approximately $26.1 billion; and directory advertisement and miscellaneous accounted for approximately $2.7 billion. (Agreed Fact 8-3-008).

 In 1980, AT & T's total operating expenses were approximately $34.2 billion and its net income was approximately $6.1 billion. Its total operating revenues for the twelve months ending May 31, 1981 were over $53 billion. Its net income for the same period was approximately $6.3 billion (Agreed Fact 8-3-008). AT & T is the largest corporation in the world. (PX1-0017 at 2005).

 As of year end 1980, AT & T employed over one million people, making it the largest employer in the United States next to the federal government (Agreed Fact 8-3-011). In fact, it has more employees than the active duty strength of the United States Army, according to plaintiffs' lead counsel who formerly was the Secretary of the Army.

 The Long Lines Department (Long Lines) of AT & T in partnership with the Bell and independent operating telephone companies provides interstate and intercity telecommunication service in competition with SPCC (Agreed Facts 7-2-016, 7-2-018; Tr. 12; deButts, S-T-131 at 11-13; Owen, PX6-0005 at 4-5; Grant, PX4-0004 at 11-12; Vasilakos, PX6-0006 at 8; Kushan, PX6-0011 at 4; deButts, S-T-131, tab A at 29-30; Brown, Tr. 5334). At the end of 1980, Long Lines had total assets of approximately $7 billion and operating revenue of $3.5 billion. These figures represented approximately 5.2% of AT & T's total assets and approximately 6.9% of AT & T's total operating revenues respectively. At the end of 1980, the Long Lines Department had operating expenses of approximately $2.5 billion and net income of approximately $551.1 million (Agreed Fact 8-3-013).

 In 1980, AT & T had 24 General Departments which provided the Bell operating companies with advice and assistance pursuant to "License Contracts" between AT & T and the Bell operating companies. AT & T bills the operating companies for these services. In 1980, AT & T collected $1.03 billion in revenues from the Bell operating companies under these "License Contracts" (Agreed Fact 8-3-014).

 BACKGROUND

 Prior to World War II, the telecommunications industry was extensively regulated and was widely regarded as a lawful monopoly (Agreed Facts 7-3-043--044.) Local exchange telephone service was provided under franchise by one of the Bell System operating companies or by one of the many independent telephone companies, depending upon the geographical area involved (Agreed Fact 7-2-017). *fn9" Long distance service was provided by the Long Lines Department of AT & T in partnership with the Bell and independent operating telephone companies (Agreed Facts 7-2-016, 7-2-018; Tr. 12; deButts, S-T-131 at 11-13). *fn10" The independent companies recognized the need for agreement on equipment compatibility, operating procedures and division of revenues to facilitate the joint provision of long distance service (Agreed Fact 7-2-016). Under this network partnership, which developed early in this century, telephone service was provided on an end-to-end basis through an arrangement under which the Bell companies and the independent companies assumed joint responsibility for the service. This unique partnership arrangement often required a telephone company operating in one part of the network to take action which did not contribute directly to that company's ability to discharge service obligations in its franchised area. In return, the telephone company was reimbursed for the costs it incurred, including a return on investment, in connection with the provision of intercity service (Hough, S-T-1 at 12-14). Private line services, which are the focus of the issues in this case, were provided jointly by Long Lines and the operating telephone companies over the same facilities used for long distance service (Agreed Facts 7-1-018 -- 020). *fn11"

 During the late 19th century and the early decades of the 20th century, the technology of the new industry advanced to the point where it was technologically possible to connect exchanges together throughout the country, and thus to create a nationwide interconnected network (Agreed Fact 7-2-010). *fn12" However, the technological interdependence of the components of the network gave rise to a need to coordinate operations and the provision of service throughout the network. To meet this need, AT & T consolidated both local and toll facilities into its evolving system (Agreed Facts 7-2-007 -- 008; see also exhibits cited in Regulation and History Doc. Sub. at 2-6 & App. A).

 Regulation of the industry began in 1879, three years after the invention of the telephone, in recognition both of the natural monopoly character of the industry and of the increasing importance of telephone service to commerce and society (Agreed Facts 7-3-002 -- 004; Tr. 11; Letwin, S-T-140 at 8). The purpose of these early regulatory statutes was to assure the provision of telephone service in the public interest (Agreed Fact 7-3-017; Hough, S-T-1 at 15; Letwin, S-T-140 at 10). Because of public dissatisfaction with duplicative exchange service, *fn13" competition in telecommunications services was discouraged (Agreed Facts 7-3-002, 7-3-015), and local telephone companies -- both Bell and ...


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