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UNITED STATES v. AT&T

January 13, 1986

UNITED STATES OF AMERICA, Plaintiff,
v.
WESTERN ELECTRIC COMPANY, INC., et al., Defendants


Harold H. Greene, United States District Judge.


The opinion of the court was delivered by: GREENE

Pending before the Court for decision are a number of motions by various Regional Holding Companies for clarification of the decree. *fn1" The motions represent the view of several of the Regional Companies *fn2" that they are entitled under the decree to engage in a substantial range of telecommunications activities without obtaining waivers pursuant to section VIII(C) of the decree. In each case, the proffered interpretation is opposed by other entities, both commercial and governmental, which argue that the particular activities are prohibited by the decree.

 After careful scrutiny of all the relevant factors, the Court has determined that the interpretations of the decree advocated by the Regional Companies in these motions are inconsistent with the language, history, and purposes of the decree, *fn3" and that all the motions for clarification *fn4" must therefore be denied. Before discussing the motions in detail, it is appropriate to restate the basic purpose underlying the prohibitions imposed by the decree on the local companies.

 I

 General Considerations

 A central rationale for the divestiture of AT&T was the recognition that, when one company engages both in monopoly activities -- e.g., the provision of local telecommunications service -- and in competitive activities -- e.g., the provision of interexchange *fn5" and information services -- it possesses the incentive and the ability improperly to exploit its local monopoly power in at least two ways.

 First, such a company may subsidize its competitive ventures with income generated by the local telephone ratepayers (who, unlike the customers of a competitive enterprise, lack the ability to go elsewhere for their telephone service and who can therefore be charged whatever rates the local regulators can be persuaded to approve); *fn6" and second, it can give preferential treatment *fn7" to its own competitive affiliates, thereby impeding the success of non-affiliated competitors or even forcing them out of business. *fn8" Evidence was adduced by the government in the trial of this case that the Bell System was guilty of such practices. *fn9"

 The history of the government's struggles with AT&T *fn10" indicated to those who negotiated and approved the current consent decree that, when the local companies were divested to continue on their own the provision of the local monopoly telecommunications services, they had to be prohibited from engaging also in competitive long distance and information services. *fn11" Accordingly, a specific prohibition to that effect -- one of the few decree provisions directly applicable to the local companies -- was incorporated in the decree. *fn12"

 The logic of such a provision was as obvious as its incorporation in the decree was crucial. Without it, the result of the break-up would have been to exchange one nationwide monopoly with the incentive and ability to exploit monopoly power and injure competition for several smaller monopolies with the identical incentives and abilities. The only distinction between the "old" Bell System and the present Regional Company system was and is that the Bell monopoly was nationwide in scope while each of the seven Regional Companies possesses an equally powerful monopoly *fn13" in a particular geographic region. *fn14"

 Insofar as the threat of injury to competition, competitors, and ratepayers is concerned, that distinction is one without a difference, for the "bottleneck" *fn15" monopolies continue to exist as before. These bottlenecks -- i.e., the local companies with their ownership of the local switching systems and thus of the pathways which the interexchange and information providers must use if they wish to reach the ultimate consumers *fn16" -- merely changed hands: instead of being controlled by the management of AT&T, they are now being controlled in each region by the management of a particular Regional Company. However, the ability to exploit the bottlenecks anticompetitively has remained precisely the same. It was on this basis that the prohibition against the provision of interexchange and information services became a central part of the decree.

 That prohibition has far from outlived its usefulness. *fn17" Indeed, it could with some justification be argued that the Regional Companies, though obviously smaller than the Bell System, present dangers to competition that are in some respects even greater than those presented by that System.

 AT&T was imbued with a service mentality, a tradition dating from the days of the chairmanship of Theodore Vail and continued through that of John deButts and Charles Brown. Although the company may have engaged in some or all of the anticompetitive activities with which it was charged, the balance wheel of the service tradition was always present. By contrast, the Regional Companies, or some of them, indicate by their public statements, their advertisements, and their rush to diversification, combined with their relative lack of interest in basic telephone service itself, *fn18" that an ascent into the ranks of conglomerate America rates far higher on their list of priorities than the provision of the best and least costly local telephone service to the American public. *fn19" Anyone faced with the prospect of permitting these companies to enter competitive markets, particularly the interexchange and the information markets, *fn20" would therefore have to exercise considerable caution lest the companies be empowered, even encouraged, to use their local monopoly advantage as a means to decimate the competition in these markets and thus to enhance further their conglomerate ambitions. *fn21"

 Through the memoranda filed by the Regional Companies in support of the Ameritech motion runs the thread that greater competition and the participation of more competitors in the telecommunications markets are in the public interest *fn23" -- certainly an unexceptionable point as a generality. However, such arguments are drained of much of their persuasive force when they are applied to a situation where the would-be competitors could readily take advantage of their monopoly status in a variety of ways vis-a-vis their non-monopolistic competition. *fn24"

 For that reason, the participation of the Regional Companies in the markets they wish to enter *fn25" would not be likely to promote genuine, fair competition; the more probable outcome would be that such entry would deny to others engaged in commerce in those markets the level playing field to which they are entitled under law, under the decree, and in plain equity and justice. *fn26"

 The current motions must and will be considered in that context.

 II

 Shared Tenant Services

 In its shared tenant services motion, Ameritech *fn27" is asking for an order which would "clarify" the decree *fn28" to the effect that it permits the Regional Companies to provide certain shared tenant services, *fn29" -- the marketing of automatic carrier selection and traffic analysis. *fn30"

 The shared tenant services market has developed substantially over the past few years, *fn31" for such services present several advantages to both developers and tenants. *fn32" Accordingly, several independent companies have entered these markets, and the Regional Companies now seek to penetrate them as well. However, as will be seen, the shared tenant services at issue in this motion are interexchange services, and the local companies are therefore prohibited by the decree from providing them.

 A. Regional Company Contentions

 The Regional Companies concede that the proposed activities are in the gray area of an "overlap" between exchange and interexchange activities, *fn33" but they go on to argue that where this is the case, the decree permits them to engage in all of the activities involved in the overlapping areas, both exchange and interexchange. *fn34" That reasoning is erroneous if only because it proves too much. The very nature of modern telecommunications requires the two functionally distinct systems to meet: access to interexchange services is obtained through the local exchange provider and both use the same equipment. *fn35"

 The overlap is thus inherent in the technology, *fn36" and to cede the area it covers to the Regional Companies would allow them to enter the interexchange market by the back door on a wholesale basis *fn37" when their front-door entry into that market is prohibited by the most basic provisions of the decree. See section II(D)(1) of the decree which provides, without exception or ambiguity, that "after completion of the reorganization . . . no [Operating Company] shall . . . provide interexchange telecommunications services . . . ." In short, the "overlap" argument entirely lacks merit.

 B. Shared Tenant Services Are Interexchange Services

 There is an even more fundamental reason why the requests of the Regional Companies must be rejected -- one that relates to the kinds of activities that are subsumed under the rubric of shared tenant services.

 Both from the point of view of the statutory language and from that of the purpose of the decree, the prohibitions in section II(D) restrict the Operating Companies not merely from providing transmissions from a point in one exchange area to a point in a different exchange area but also from engaging in activities that comprise the business of providing interexchange services.

 If the decree had been intended to restrict the local companies only from the interexchange transmissions themselves, a prohibition on the provision of "interexchange telecommunications" would have been entirely adequate. But the decree goes further to prohibit these companies in section II(D)(1) from providing "interexchange telecommunications services." The term "services" obviously has, and it must be accorded, meaning and, as will now be seen, ...


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