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UNITED STATES v. GTE CORP.

December 13, 1984

UNITED STATES of America, Plaintiff,
v.
GTE Corporation, Defendant



The opinion of the court was delivered by: GREENE

 On May 4, 1983, the government filed this antitrust action under Section 15 of the Clayton Act, 15 U.S.C. § 25, challenging the acquisition by GTE Corporation of the telecommunications enterprises of Southern Pacific Company (which operates "Sprint" long distance service) *fn1" as a violation of Section 7 of the Act, 15 U.S.C. § 18.

 The complaint alleged that the effect of the acquisition may be substantially to lessen competition in the provision of interexchange telecommunications services *fn2" (particularly in those areas where GTE provides local telecommunications services). In addition, the government challenged GTE's provision of information services under section 4 of the Sherman Act, 15 U.S.C. § 4, alleging that it creates a substantial probability that GTE will monopolize these information services in the markets it serves. *fn3" On the same day the complaint was filed, the government and GTE also filed a proposed consent decree to settle the case. It is that consent decree that is presently before the Court.

 I

 Factual Background

 The decree, if approved and entered by the Court, *fn4" would permit GTE to acquire the telecommunications enterprises of Southern Pacific subject to a number of conditions which may be summarized as follows: (1) GTE's local monopoly operations must be kept separate from its long distance and other competitive operations; (2) the GTE Operating Companies *fn5" may not discriminate among interexchange carriers *fn6" and they must provide equal access to all competitors on a phased-in basis; (3) the GTE Operating Companies may not provide interexchange services, they may not own facilities used to provide such services, and they must phase out their interexchange operations currently offered in conjunction with AT & T; (4) for a period of ten years, GTE may not acquire any other firm providing interexchange telecommunications services; (5) the GTE Operating Companies may not provide information services except through separate subsidiaries and subject to a number of limitations; (6) in the event that GTE violates the decree, the Department of Justice may return to the Court to seek further relief; and (7) the Court retains jurisdiction to construe, modify and enforce the terms of the decree.

 Under section 2(b-h) of the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16(b)-(h), the decree does not become effective unless approved by the Court as being in the public interest (see generally, United States v. AT & T, 552 F. Supp. 131, 143-53 (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). *fn7" Accordingly, the parties, in compliance with the Act, submitted the decree to the Court for its approval. *fn8" Also in compliance with the Act, the Department of Justice filed and published a competitive impact statement which described the events that gave rise to the alleged antitrust violations and which explained the restrictions contained in the proposed decree and their anticipated effect on competition. *fn9" The Court thereafter identified a number of issues on which oral argument would be helpful, and it heard argument on those issues from the Department of Justice, GTE, and the principal opponents of the proposed settlement.

 II

 The AT & T Precedent

 A. General

 The antitrust theories underlying the government's lawsuit in this case are similar to those which were advanced in the AT & T case. It is the government's position here as it was there that when a single firm provides in the same market both local monopoly telecommunications services and competitive long distance services, it has the incentive and the ability to foreclose or to impede competition in the competitive (or potentially competitive) market by discriminating in favor of its own long distance carrier. *fn10" The government also urges, as it did in AT & T, that the integration of long distance and local telecommunications services in a single enterprise creates the incentive and the ability to cross-subsidize the competitive operations with profits from the regulated monopoly operations and thereby to eliminate or impair competition. *fn11"

 According to the Department of Justice, the objective of the proposed decree in this case, like that of the decree in the AT & T case, is to circumscribe this kind of interference with the free competitive market by such practices. To achieve that objective, the decree herein parallels the AT & T decree in several respects.

 For example, both the Bell Operating Companies and the GTE Operating Companies are required under the respective decrees to provide equal access to all competing interexchange carriers and information service providers, and they are prohibited from discriminating against any such competitors. *fn12" Both the decree in AT & T and the decree herein also provide for the separation of the local operations from the competitive operations. But the two decrees fundamentally differ with respect to the degree of separation required: in AT & T, the consent decree provided for and the Court ordered a complete structural separation, requiring AT & T to divest itself of the Bell Operating Companies, and prohibiting these companies from engaging in interexchange and information services. *fn13" The decree in this case, by contrast, permits GTE to enter the interexchange business (by acquiring Sprint) and to remain in the information services business even though it will also continue to engage in the local telephone business. Instead of complete separation, the safeguard here adopted to protect against anticompetitive practices is the imposition, by way of an injunction, of various conditions and restrictions.

 With the AT & T precedent fresh in the mind of the telecommunications industry, opponents of the proposed decree contend that here, too, nothing short of a complete separation will protect competition and the public: on that basis, they argue that it would be inconsistent with AT & T and illogical for the Court to approve the acquisition of Southern Pacific's telecommunications enterprises (including Sprint) by GTE. These opponents suggest that, notwithstanding the various conditions and restrictions incorporated in the decree, the merger in one company of Sprint's long distance and GTE's local telephone operations will permit GTE to stifle competition in the interexchange and information markets through abuse of its local monopoly bottlenecks.

 B. Differences from AT & T

 The difference between the solution proposed by the Department of Justice with respect to the GTE lawsuit and that which was proposed by the Department and agreed to by the Court in AT & T thus lies at the heart of the determination the Court must make. After careful consideration of that issue, the Court has concluded that, notwithstanding a number of similarities between the two cases, the factual differences between them are so substantial that it would not be justified in rejecting the decree proposed by the parties *fn14" on the basis of the AT & T precedent. These differences may be summarized as follows.

 First. The telecommunications operations of a combined GTE-Sprint company differ markedly in size and scope from those of AT & T. Prior to divestiture, the Bell System dominated every aspect of the telecommunications industry -- its intercity enterprise served every one of its local monopolies, and in combination, they provided local telephone service to over eighty per cent of the nation's telephones. Although, to be sure, Sprint (which began service in late 1973), is now the third largest interexchange carrier, even at that it accounts for only one per cent of all long distance telephone calls. *fn15" Locally, GTE, through its ownership of seventeen Operating Companies, is the largest of the "independent" telephone companies; yet it provides local exchange services to only eight per cent of the nation's telephones. Different standards are appropriately applied where there is this great a difference in size. *fn16"

 Second. Unlike the Bell Companies which were dominant almost everywhere, the GTE companies are relatively thinly dispersed over 31 states. In fact, in terms of concentration, the GTE companies serve roughly half as many telephones per square mile as do the Bell Operating Companies. *fn17" This dispersion has, of course, substantial consequences in terms of monopoly control. *fn18" And, while the Bell Operating Companies serve the vast majority of the high-density, heavily-populated metropolitan areas (the areas most attractive to the interexchange carriers which are the potential long distance competitors), the GTE Operating Companies serve primarily the nation's rural and suburban areas. *fn19" The effect on potential competition of a local-long distance consolidation is thus likely to be quite different. *fn20"

 Third. AT & T in its pre-divestiture mode was a vertically integrated company which had existed in its then-current form for more than a century. Its interexchange enterprise served every one of its local monopolies. In addition, the network which served both the local and intercity enterprises was characterized by predominantly common costs. In contrast, the GTE Operating Companies and Sprint have not enjoyed any previous relationship and they have no history of common costs. *fn21" For this reason, the separation requirements as applied to the GTE Operating Companies may be expected to have greater efficacy and to be easier to police than they would have been if applied to AT & T in lieu of divestiture.

 Fourth. Any discrimination in favor of Sprint that deviated from or violated the proposed decree's equal access and nondiscrimination requirements would be relatively easy to detect. The technical interconnection arrangements between the Operating Companies and the Sprint enterprise -- unlike the comparable arrangements within the Bell System -- do not antedate the entry of competing carriers, and discrimination in favor of Sprint's and against the other interexchange carriers would therefore be more readily identified. Moreover, GTE's implementation of equal access will be judged not only against the requirements of the decree, but also against two objective benchmarks: (1) the Bell Operating Companies' provision of equal access; and (2) the provision of equal access by the GTE Operating Companies in the cities not served by Sprint.

 Fifth. The GTE Operating Companies have a long-standing partnership with AT & T. *fn22" As a member of that partnership, GTE had an incentive to favor AT & T, and it is claimed to have acquiesced in AT & T's various allegedly anticompetitive activities. *fn23" By requiring the GTE Operating Companies to terminate their partnership with AT & T, the decree will tend to remove GTE's incentive and ability to favor that company which has frustrated the achievement of a more competitive interexchange market. *fn24"

 Sixth. In addition to the dissolution of the AT & T-GTE partnership, GTE's acquisition of Sprint has other procompetitive aspects not present in the AT & T situation which must also be weighed in the balance. That acquisition may actually increase competition in the interexchange telecommunications market because it will enable GTE, a financially strong and vigorous firm, to enter the long distance field and to provide Sprint with the capital investment it needs to compete vigorously with AT & T, still the dominant force in that market. *fn25"

 For these reasons, *fn26" the Court concludes that the GTE situation is sufficiently different from that which was before the Court when it was presented with a consent decree in AT & T that the public interest does not necessarily require here the remedy that was adopted there. *fn27" The Court accordingly will not reject the acquisition by GTE of the Southern Pacific affiliates, including the Sprint operations, on the basis merely of the AT & T precedent.

 C. Regional Companies

 There is a second AT & T-related problem, however, and it is more troubling. Those who oppose the GTE acquisition argue as follows. Whatever may be the genuine differences between GTE and the Bell System as a whole, no such differences exist between GTE and the Regional Holding Companies, the inheritors of the Bell System's local monopoly operations. The real comparison that must be made, therefore, is between GTE and these Bell companies, and on that basis GTE has been treated far more favorably than have its Bell counterparts. Unlike the Bell companies, GTE is allowed, under its decree, to offer both local monopoly and competitive interexchange and information services (albeit in separate subsidiaries, see infra), whereas the Bell Regional Holding Companies are restricted to local telephone service and are strictly forbidden, under the AT & T decree, to engage in interexchange and information services on any basis. *fn28"

 To be sure, in some significant respects, particularly size and scope of operations, GTE more or less matches the Bell Regional Holding Companies (at least the smaller ones). In other ways, however, the two types of entities differ to some substantial degree.

 Each of the Bell regional companies has a very strong, dominant position in local telecommunications in the area in which it serves; GTE's operations, by contrast, are widely scattered. *fn29" Moreover, the Regional Holding Companies also have the facilities to provide all the intercity and inter-LATA traffic throughout their regions, while the GTE Operating Companies control little by way of intercity facilities, and what facilities they do have are by and large of the entrance type which do not cover the areas in which the companies operate. (Transcript of Hearing at 40-41). Finally, internal planning documents of GTE and Sprint indicate that Sprint's interexchange network will, even by 1985 or 1986, reach only sixteen GTE cities (Transcript of Hearing at 42), and the Department of Justice has observed that of all access lines in existence, only one or two per cent are in GTE cities, and that Sprint has the fewest of these. (Transcript of Hearing at 41). All these factors suggest that entry by other interexchange carriers into the local markets dominated by GTE is far less likely and the anticompetitive effects of improper GTE actions will be both less probable and more easily detectable.

 Because of these differences, and because of its relatively limited role in considering a consent decree (as distinguished from the responsibilities it would have in entering a judgment after a finding of liability), the Court has concluded that it would not be justified in rejecting the proffered decree on the basis of the Regional Holding Company precedent. However, the issue is a close one, and the Court has reached its decision only because of the strictness and firmness of the decree's injunctive and separate-subsidiary provisions. *fn30"

 The Court accordingly now turns to these provisions.

 III

 Safeguards Against Improper Conduct

 A. Cross-Subsidization

 As discussed supra, in any situation where both competitive and monopoly services are offered over jointly-owned or jointly-operated facilities, there is a significant danger of cross-subsidization which will harm competitors and competition in the unregulated competitive markets. *fn31" The decree deals with this problem primarily by requiring GTE to maintain total separation within the corporation between the local Operating Companies ...


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