government of the bulk of the embedded customer premises equipment (CPE) located on government's property in the Bell Atlantic area, including some 200,000 telephone sets currently leased to the government. The contract also included provisions for "follow on" services by Bell Atlantic with respect to this CPE, such as maintenance, rearrangements, and additions, and a one-year warranty. Bell Atlantic intends to retain in its employ and to use in connection with the GSA contract several hundred Bell System employees who otherwise would have been assigned to AT&T as of the time of divestiture. According to AT&T's motion, all of these past and proposed actions of Bell Atlantic violate the decree, the plan of reorganization, and AT&T policy.
Bell Atlantic has responded, asserting that its contract with GSA and its plans with respect thereto are in violation neither of the decree nor of the plan of reorganization; that factual disputes exist regarding AT&T's policies and their impact on Bell Atlantic; and that there is no basis for judicial inference with its contract with GSA.
In view of the urgency of AT&T's request, and Bell Atlantic's concurrence that an early decision by the Court was required, the Court convened an immediate hearing at which counsel for the two protagonists as well as counsel for the government presented legal argument.
The decree in this case provides for the division of the Bell System's assets, liabilities, functions, and personnel between AT&T and the various Operating Companies as of the time of divestiture. Specifically, section I(A)(2), (4) requires that the "facilities, personnel and books of account . . . relating to . . . the provision of customer premises equipment" shall at that time be retained by AT&T (as distinguished from their assignment to the Operating Companies). See United States v. AT&T, 552 F. Supp. 131, 192 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S. Ct. 1240, 75 L. Ed. 2d 472 (1983). It is clear from these provisions that, as of January 1, 1984 -- less than three weeks from the date of Bell Atlantic's contract with GSA and less than one week from today -- Bell Atlantic would have no power to make any disposition regarding the CPE and CPE-related services and personnel at issue here: all of them will from that date on be exclusively AT&T's. The question here is whether there is any reason why Bell Atlantic could not sell or otherwise dispose of these assets, and to enter into contracts regarding these services and that personnel, in advance of that date.
Except for unrelated matters, the only specific provision regarding CPE in the decree itself is that referred to above. There is no reference in the decree to the ownership, the power of disposition, or the assignment of CPE or CPE-related functions or personnel prior to divestiture -- for good reason, as will be seen below. However, the plan of reorganization, approved by the Court on July 8, 1983, ( United States v. Western Electric Co., 569 F. Supp. 1057 (D.D.C. 1983), aff'd., 464 U.S. 1013, 104 S. Ct. 542, 78 L. Ed. 2d 719 (1983)), does contain several clauses which have relevance to the present dispute. That plan assigns to AT&T, not the Operating Companies, the CPE assets and related accounts, the CPE installation and maintenance functions, and virtually all personnel performing such functions.
In the Court's view, there can be no doubt that, at a minimum, these provisions forbid execution of that part of the Bell Atlantic-GSA contract which contemplates "follow on" services to be performed by CPE-related employees. In fact, the Department of Justice has conceded as much, and in a sense so has Bell Atlantic (although that company contends that in this respect the plan has, somehow, become obsolete).
What about the sale of CPE itself, apart from maintenance contracts and personnel assignments? Initially, it is not at all clear that the contract with GSA can be neatly separated into its various component parts as the Department of Justice, for one, has advocated. If the provisions for maintenance of the CPE by Bell Atlantic personnel are inconsistent with the decree and therefore cannot be implemented -- as the Department appears to concede -- it may well be that the entire contract fails. Beyond that, however, there is no sound basis for Bell Atlantic's position that it is free to sell CPE prior to divestiture against the wishes of AT&T.
As indicated, the decree does not explicitly prohibit such sales. That is not particularly surprising. The decree fails to regulate Operating Company conduct at the pre-divestiture stage in all or almost all respects, for good reason. Prior to divestiture, these companies have no independent discretion vis-a-vis AT&T; to the contrary, they are subject to AT&T's ultimate control just as they have been for a hundred years. It would have been redundant for the decree to prohibit the Operating Companies from engaging in activities objected to by AT&T with respect to a period of time when they were and are under AT&T's legal and practical control and supervision. Thus, if no provision is made in the decree to guard against the sale or dissipation by the Operating Companies of the assets which under the decree are assigned to AT&T it obviously is because prior to divestiture AT&T could always prevent such activities by a stroke of the pen. The decree's silence on this issue therefore does not permit the drawing of the inference that the Operating Companies may do with CPE as they wish.
Bell Atlantic, with some support from the Department of Justice, argues that it has authority from AT&T to sell CPE, and it points in that regard to AT&T's failure to object to, indeed its support of, the sale by the Operating Companies of single-line telephones to the public. But such sets are being sold pursuant to explicit authority from AT&T in the form of a memorandum from its president and its vice-chairman of the board.
Moreover, whatever AT&T may or may not have objected to in the past,
it is clear that it does object to the present sale to GSA. Until January 1, 1984, Bell Atlantic and the other Operating Companies are not independent of AT&T,
and upon the registration of such an objection -- absent contrary decree provisions (see infra) -- the Court hears AT&T's voice rather than that of Operating Companies.
To be sure, the Court has encouraged the Operating Companies to give it their candid views (and they have done so) and to assert their independence from AT&T in negotiations regarding the plan of reorganization and the implementation of the divestiture generally (and they have done that). But it does not follow that when, prior to divestiture, there is a dispute between AT&T and an Operating Company with respect to a matter on which the decree and the plan of reorganization either supports the former or is, at best, silent, the Court would be justified in adopting the Operating Company position over that of AT&T. Bell Atlantic is simply wrong in its assumption that it is AT&T's obligation to find provisions in the decree which are inconsistent with the Bell Atlantic position.
In view of Bell Atlantic's subordinate role prior to January 1, 1984, it is its burden to point to decree or plan provisions affirmatively sustaining its position if it wishes to prevail over the objections of its parent.
In sum, considering solely the narrow legal issues arising under the decree, the plan of reorganization, and the AT&T corporate structure,
the Bell Atlantic contract cannot withstand AT&T's objections.
As the parties have recognized, the stimulus for Bell Atlantic's entry into the current contractual relationship is its desire to get its "foot in the door" with respect to the sale and maintenance of CPE to the government, a large and important customer. Having sold 200,000 telephone sets to GSA, and having secured a one-year agreement for the serving of these sets by its employees, Bell Atlantic no doubt believes -- perhaps correctly -- that it may thereafter be able to keep the government's CPE business on a more permanent basis. Bell Atlantic's marketing tactic may be admired for its ingenuity; but it is directly at odds with the purposes and principles underlying the decree.
As originally drafted by the parties, the consent decree prohibited the Operating Companies from both the manufacture and the marketing of CPE. As the Department of Justice explained again and again, since the Operating Companies will retain their monopoly "bottleneck" positions in the markets in which they will operate, they would with respect to CPE have both the incentive and the ability to duplicate the behavior attributed to the Bell System: they might subsidize the prices of their own equipment for sale to the public with revenues from their monopoly services; they might purchase their own equipment or that of favored manufacturers even if it was of lower quality or higher price than that made or sold by competitors; and they might supply their own manufacturing arms, in-house or otherwise, with information regarding interconnection and other standards not available to competitors in the CPE market.
The Court recognized the validity of these concerns. With respect to the manufacture of CPE, it sustained the decree's complete ban. As regards marketing, the Court ruled that significant procompetitive and other public interest objectives could be achieved by permitting the Operating Companies to enter this field, and that the dangers feared by the Department of Justice could be reduced to tolerable levels by approval of decree provisions designed to minimize the advantages accruing to the Operating Companies from their monopoly position. Thus, the Court noted in its Memorandum of August 23, 1982, on a government motion for reconsideration, that the Operating Companies
will be limited to a narrow range of products and services; they will not be permitted to manufacture CPE; and they will not have a base either in embedded equipment or in existing retail outlets or other marketing facilities. Thus, they will enter the CPE market with a zero market share -- certainly a difficult starting point from which to establish a monopoly position.
The decree, as modified and entered, thus constitutes a carefully balanced whole: the Operating Companies are allowed to market CPE notwithstanding the possible dangers stemming from their monopoly position and their pre-existing relationships, but they may do so only on a basis that includes safeguards against their exploitation of these built-in advantages to the detriment of competitors. Foremost among these safeguards are the requirement that the Operating Companies enter the CPE business with a zero market share and that they not carry over into the post-divestiture world the job functions and the employees related to CPE.
Bell Atlantic's actions, whether or not they violate specific terms of the decree or of the plan of reorganization (see Part I supra), represent a plain violation of this design, of these purposes. Throughout the history of the Tunney Act proceedings -- in its consideration of the plan of reorganization as well as in its review of various requests for clarification, modification and waiver -- the Court has consistently given substantial weight to the principles and purposes underlying the decree.
It will do so again in this instance.
Whatever technical justifications have been advanced by Bell Atlantic in support of its dealings with GSA, it is difficult to believe that anyone could have seriously thought that this company had the right, consistently with the scheme of the decree, to sell the embedded CPE just a few days before it was required to surrender it to AT&T
and by this means to pyramid its position into long-term CPE marketing advantages.
This court is firmly committed to the ability of the Operating Companies to market CPE once they become independent, if only because this is likely to strengthen their financial health and thus, depending upon the point of view, reduce upward pressures on local rates or eliminate an excuse for increases in those rates. But such result-oriented considerations must yield to the integrity of the judgments entered by the Court and to fairness to the parties to this litigation.
It is accordingly hereby ordered that Bell Atlantic shall forthwith assign and transfer to AT&T, effective as of the date of divestiture, its contract or contracts with GSA for the sale or maintenance of embedded business CPE, and that it shall likewise transfer to AT&T as of the date of divestiture the maintenance personnel related to such CPE.