These arguments have substantial weight, and the Court has considered them with great care. Ultimately, however, it has concluded that it was not improper for the Department of Justice to agree to and for the Court to approve (see note 14, supra) a separate subsidiary solution here while insisting in the context of the Bell System situation on the remedy of a strict divestiture.
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.
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.
The Court accordingly now turns to these provisions.
Safeguards Against Improper Conduct
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.
The decree deals with this problem primarily by requiring GTE to maintain total separation within the corporation between the local Operating Companies and the newly-acquired Southern Pacific companies,
Section IV prohibits the Operating Companies from (1) transferring to or obtaining from the acquired entities any assets, operations, or lines of business;
(2) maintaining with the acquired entities common directors, officers, or employees (other than the chief executive officer and the president of GTE), common facilities or assets, or common books of accounts, costs, or expenditures; (3) providing to or using for the benefit of the acquired entities any proprietary Operating Company telecommunications information; (4) furnishing to or receiving from the acquired entities any administrative,
engineering, research and development, or similar services;
(5) providing jointly with the acquired entities telecommunications or information services, or jointly owning with them the assets used to provide such services; and (6) marketing or identifying their services with those of the acquired entities (except that the Operating Companies may inform their subscribers in a nondiscriminatory manner of the services offered by the interexchange carriers).
In the same vein, the proposed decree also limits financial and other interactions between GTE and the acquired entities. Section IV(A)(5) requires that all financing of these entities be provided directly by GTE, its wholly-owned financing affiliates, or unaffiliated sources. Under section IV(A)(7), the acquired entities may obtain services, information, and products from other GTE affiliates (other than the Operating Companies) only pursuant to contracts, and "on terms and conditions no more favorable than such services, information, and products are offered to the [Operating Companies]". Finally, the acquired entities must pay the fully allocated cost of any services, information, and products obtained from a GTE affiliate that are not offered by the affiliate to the Operating Companies. Section IV(A)(7)(b). In brief, the decree prohibits even the more indirect, subtle vehicles for cross-subsidization that are ordinarily the most difficult to detect.
These requirements will make it difficult for GTE to intermingle the operations and finances of the Operating Companies and the acquired entities, and will increase the likelihood that any cross-subsidization from the regulated monopoly to the competitive operations would be detected. In addition, section IX of the decree grants to the Department of Justice extensive rights of investigation to ensure that GTE, the Operating Companies, and the acquired entities comply with these, and all other provisions of the decree.
The Court concludes, on the basis of all the cited provisions, that the decree adequately guards against the risks of anticompetitive cross-subsidization.
The acquisition of Sprint by GTE is claimed by opponents of the decree to threaten competition in the interexchange market because that acquisition gives GTE both the incentive and the opportunity to use its control over the local monopolies to discriminate in favor of its own interexchange carrier, Sprint. Section V(B) deals specifically with this problem by prohibiting the Operating Companies from discriminating against the various interexchange carriers in the (1) establishment and dissemination of technical information and interconnection standards; (2) interconnection and use of exchange services and facilities, or the charges for each element of service; and (3) provision of new exchange access and the planning for and implementation of the construction or modification of facilities used to provide such access.
Again, while these provisions, and the separate-subsidiary requirements discussed above, are not as efficacious as requirements totally separating the GTE Operating Companies from Sprint and GTE's other competitive operations, for the reasons discussed above, the Court believes that they are adequate, under these circumstances, to protect competition and competitors from discriminatory activity.
The decree has also been criticized by its opponents on the ground that it will facilitate continued collusion between GTE and AT & T based on their longstanding partnership (see note 22, supra). In fact, not only does the decree not enhance the potential for GTE-AT & T collusion, it diminishes it, for it requires the Operating Companies to terminate their partnership over a transition period.
C. Reduced Competition
MCI argues that, should the Court approve GTE's acquisition of Sprint, additional competition in interexchange telecommunications will be foreclosed because it is improbable that any new firm will enter the market de novo. It is obviously uncertain how the interexchange market will develop -- what firms will enter and what firms will be forced out by economic pressures. Within that framework, it is true that GTE's acquisition of Sprint eliminates the possibility that GTE will enter the market as a separate interexchange competitor (in addition to Sprint),
and in theory this reduces competition. But the injury is truly theoretical only. Because substantial capital is needed for de novo entry, it is unlikely that GTE would actually have entered the interexchange market on its own. In any event, even if GTE had done just that, its internal expansion into the market would have posed virtually the same dangers to competition as does its acquisition of Sprint. In short, any reduction in competition resulting from that acquisition is speculative, and it is offset, moreover, by the decree's equal access and non-discrimination provisions, as well as by the requirement that GTE must terminate its longstanding partnership with AT & T. All of these are of course developments which will tend to promote competition in the interexchange market.
Finally, section VI of the decree prohibits GTE for a ten-year period from acquiring either directly or indirectly an equity interest in, or the assets of, any other carrier providing interexchange telecommunications services in the United States. Thus, any further GTE growth in the interexchange market must come from internal expansion rather than by merger or acquisition. It may be that a subsequent horizontal merger between GTE-Sprint and another interexchange carrier ten years hence could pose additional dangers to competition.
That, however, is an issue for another day when the precise facts of any such merger, the size of the to-be-acquired company, and the then-existing competitive conditions may be evaluated. The Court finds that the ten-year ban on GTE acquisitions of other interexchange carriers further and adequately reduces the risk that competition in the interexchange telecommunications market will be significantly foreclosed.
D. Future Divestiture
Section VII(B) of the decree specifies that the Court may, upon Department of Justice application, order further relief including the divestiture from the new merged company of either Sprint or, at the election of GTE, the Operating Companies. This relief may be granted if GTE engages in a pattern of substantial violations of the separate-subsidiary requirements (section IV), the equal access or non-discrimination obligations (section V), or the schedule for phased-in equal access (Appendix B), or if any GTE Operating Company violates these provisions in a manner that materially injures the ability of interexchange carriers or information providers to compete with GTE or Sprint.
This is obviously a very significant provision, for it establishes a relatively quick, certain remedy in the event that GTE or one of its affiliates engages in anticompetitive conduct notwithstanding the injunctive provisions of the decree. The Department of Justice, moreover, has assured the Court that it will not hesitate to seek divestiture under this section if that should be necessary or appropriate to ensure continued progress toward a competitive telecommunications industry.
The decree does not, however, specify the standards which will govern the Court either in making findings of violations sufficient to order a subsequent divestiture or in determining whether such violations have occurred. The Department of Justice, at oral argument, explained its understanding of what standards and procedures would apply in a proceeding pursuant to section VII(B). However, an enforcement provision as important as this, which could give rise to many different constructions if the occasion for its exercise ever arose, requires more clarity and certainty than a mere statement in an oral hearing. Accordingly, as a prerequisite to its approval of the decree,
the Court will require that the parties incorporate into the decree the Department's representations to the Court concerning section VII(B).
This additional provision (see Part VIII, infra), shall include the following. In any proceeding under section VII(B), the government will have the burden of proving by a preponderance of the evidence that GTE or a GTE Operating Company violated the decree either by engaging in a pattern of substantial violations or by violating the decree in a manner which materially injures competitors, as described in that section. The government would not have to show that the conduct rose to the level of a violation of the antitrust laws;
it would not have to establish the relevant product or geographic market; it would not have to show that a pattern of substantial violations by GTE injured competition or any competitors; and it would, of course, not be required to prove damages. Finally, if the Department demonstrated one of the factual predicates set out in section VII(B) and the Court ordered divestiture, the GTE Operating Companies would nevertheless continue to be bound by the remaining injunctive provisions of the decree.
With the exception just noted, the Court finds that the various provisions of the decree contain appropriate safeguards against improper conduct, and that the sanction of divestiture, in particular, provides a significant deterrent against noncompliance.
At the same time, because the decree permits GTE to merge its local monopoly enterprise with a long distance enterprise, these provisions are necessary to prevent anticompetitive conduct. The Court therefore concludes that these provisions are in the public interest.
As is true with respect to AT & T, the provision of information services
by GTE creates a substantial probability that it may monopolize such services in markets where it is also engaged in the local exchange business.
In fact, because technology-advanced information services, which are expected eventually to be among the most profitable aspects of the telecommunications industry, are only beginning to be marketed commercially on a significant scale, their provision by a local exchange monopolist poses perhaps an even greater threat to competition than does a monopolist's participation in the interexchange market. As the Court stated in AT & T, if the Operating Companies were excluded from the information services market,
They will have an incentive, as time goes on, to design their local networks to accommodate the maximum number of information service providers, since the greater the number of carriers the greater will be the Operating Companies' earnings from access fees. Thus, competition will be encouraged from the outset. If, however, the Operating Companies were permitted to provide their own information services, their incentive would be the precise opposite: it would be to design their local networks to discourage competitors, and thus to thwart the development of a healthy, competitive market. 552 F. Supp. at 189-90 (footnotes omitted).