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UNITED STATES v. WESTERN ELEC. CO.

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA


December 3, 1987

United States of America, Plaintiff,
v.
Western Electric Company, et al., Defendants

The opinion of the court was delivered by: GREENE

HAROLD H. GREENE, United States District Judge

 Pending before the Court are (1) questions regarding the meaning of the term "manufacture" in section II(D)(2) of the decree, and (2) issues relating to enforcement of the decree.

 I

 Background

 In April of 1985, *fn1" AT&T *fn2" filed with the Department of Justice requests for enforcement of the decree's prohibition on Regional Company manufacturing of telecommunications equipment and customer premises equipment. *fn3" For more than two years, the Department did not respond to the requests; it did not take enforcement action; and it did not inform the Court that the requests had been made. See infra. Earlier this year, the Court was advised by a number of different parties that the Department had failed to take steps to remedy various alleged violations of the decree, including violations of the restriction on manufacturing. *fn4" The Court thereupon issued an order, on May 18, 1987, requesting the Department to respond to these complaints, and the Department's Response thereafter for the first time brought its position on the manufacturing controversy to the attention of the Court. *fn5"

 On June 19, 1987, following the May 27 revelations, AT&T filed with the Court a motion for a declaratory ruling regarding the meaning of the term "manufacture" in section II(D)(2) of the decree, advising it of the Department's inaction. *fn6" The Department responded on August 21, 1987 *fn7" and, at or about the same time, most of the Regional Companies submitted their own memoranda with the Court. *fn8" On September 10, 1987, AT&T filed a reply to the various responses and oppositions to its motion. The Court is thus now called upon to rule on the meaning of the term "manufacture" in section II(D)(2) of the decree. *fn9"

 II

 Failure of Department of Justice to Act

 A. Past Practice

 Before proceeding to a consideration of the substantive issues raised by the AT&T motion, it is appropriate, in response to AT&T's vigorous complaints and those of others (e.g., IDCMA and NATA), to consider the failure of the Department of Justice to take enforcement action for well over two years after receipt of requests therefor. During that period, the Department came to accept the view that the definition of the term "manufacture" presents a difficult issue, and that the best course of action therefore was to halt enforcement until the Department's triennial report was due in court in the spring of 1987, and, in connection therewith, a report by the Department's consultant, Dr. Peter Huber. At that time, according to the Department, it might be appropriate for the Court to repeal the manufacturing restriction *fn10" and the problem would thus be mooted. *fn11" There are several faulty assumptions underlying that line of reasoning.

 First, as discussed infra, the question as to the meaning of the term "manufacture" is not as difficult as the Department believes it to be. Rather, it represents a fairly straightforward legal issue subject to resolution by reference in the usual way to the language of the decree and the purposes underlying it.

 Second, even if the issue were difficult, that would not constitute an adequate justification for a decision not to resolve it or to fail to enforce the underlying decree provision. Few issues that arise in litigation have only a single obvious, non-controversial answer, whether it be in suits at common law or in the enforcement of statutes or court judgments. If the difficulty of the issues were grounds for avoiding action, let alone for repealing the problematic text, the enforcement of the law, civil or criminal, statutory or embodied in judgments, would shrink drastically. *fn12" Much of the Internal Revenue Code, for one, might not be enforced at all.

 Third, at a minimum, the alleged difficulty of the questions is not grounds for a failure to notify those requesting enforcement, the court which had entered the decree, or both, that no action was being taken, thus denying them the opportunity to make their own judgments as to the next step, if any. *fn13"

 Fourth, there was no valid basis in 1985 for tying the decisionmaking process to the 1987 triennial review of the decree. If such a relationship were to be considered appropriate, enforcement of the decree, at least with respect to the more "difficult" issues, would proceed only in one year out of every three, the remaining two years being reserved for contemplation of the probable effects of the next triennial review. *fn14" In short, the complaints regarding the Department's failure to act are well taken. *fn15"

 B. Expectations for the Future

 These problems would, however, appear to be a thing of the past. The Department of Justice has now repeatedly announced that it is firmly committed to the enforcement of the decree in this case. *fn16"

  Thus, the Department stated in a document submitted to this Court in May of this year that it

 

. . . completely agrees with the Court as to the nature of our enforcement responsibilities. It would be improper for the Department not to investigate alleged decree violations or to fail to take enforcement action against violations of any provision of the decree solely because we thought that particular restrictions were no longer necessary. As long as the decree's current restrictions remain in effect, we recognize that it is the Department's responsibility to enforce them in good faith under traditional prosecutorial standards. It has been and will continue to be our policy to do so. The Department has made numerous public statements to that effect in the past, and we reiterate the policy today. *fn17"

 Similarly, when Assistant Attorney General Charles F. Rule was testifying before the Senate Committee on the Judiciary in support of his confirmation, he assured the Committee

 

. . . that we take our obligation very seriously. We have told the staff, and I think the staff takes their obligation very seriously, to enforce the decree. If a decree restriction is involved, then we will take appropriate action . . . Whether or not I think a particular restriction in a decree is a good idea or a bad idea is irrelevant to my obligation to enforce the decree. I recognize that . . . . *fn18"

 Unfortunately, not all officers of government are behaving with a like sense of responsibility. The Chairman of the Federal Communications Commission recently took the unusual, if not unprecedented, step for the head of a regulatory agency, of exhorting those whom the agency regulates to refuse to comply with orders duly issued by this Court, stating that he was "quite frankly, surprised by the apparent acquiescence of some of the Bell Operating Companies in the ongoing administration of the [decree in this case]." Address of Hon. Dennis R. Patrick, October 13, 1987. The only acquiescence that occurs between the Court and the Regional Companies is that the companies carry out the Court's judgments and orders directed to them, as they must under law. An incitement to noncompliance, if successful, could thus have serious consequences.

 In the same address, the FCC Chairman also questioned the legitimacy of the Court's jurisdiction, presumably again for the benefit of those whom the Commission regulates, characterizing as a willingness "to supplant the role of Congress" the Court's enforcement of the decree in this case. That decree (1) was entered pursuant to a landmark Act of Congress *fn19" (Sherman Act, 15 U.S.C. ยงยง 1-3); *fn20" (2) it is the product of a lawsuit brought by one Attorney General of the United States and it was settled, largely upon the terms of the decree presently being enforced, by the authority of a successor Attorney General; *fn21" and (3) it has been explicitly sustained by the Supreme Court of the United States. *fn22" In short, the decree here is one of the few judicial judgments to bear the stamp of authority of all three branches of government. Not to enforce it would be irresponsible.

 Whatever private parties may properly argue in the heat of advocacy, such thoughtless statements by a high official of government are unfortunate. Notwithstanding these appeals for noncompliance, however, this Court will continue, as it has done in the past, to make every effort to avoid or minimize interference with FCC jurisdiction and operations where this can be done without jeopardizing the core provisions of the decree. *fn23" See, e.g., Memorandum and Order of December 14, 1984, which deferred dissolution of contracts between AT&T and its Operating Companies for over a year, notwithstanding the requirements of section B(1) of Appendix B of the decree, in order to afford the FCC additional time within which to approve tariffs to replace these contracts.

 However, there should also be no doubt that this Court will carry out its constitutional and statutory responsibility to protect and enforce the decree in this case, as in other cases, against violation, obstruction, or interference by anyone, public or private, as federal judges have done throughout history. *fn24" In that context particularly, the Court is heartened by the statement of Assistant Attorney General Rule and the policy expressed in the Department's May 27 Response. These reaffirmations, together with the Court's views expressed herein on the need for leaving no doubt about enforcement, should go a long way toward clearing up any misunderstandings with regard to the protection of a decree that, after all, is largely the product of evidence adduced by the Department of Justice in a trial conducted by this Court.

 III

 Manufacture Includes Both Fabrication and Product Design and Development

 The basic substantive issue before the Court on AT&T's motion is whether the manufacturing restriction prohibits only the fabrication of equipment or also the design and development prior to and in conjunction with fabrication. The Regional Companies contend that only fabrication is prohibited by the decree. *fn25" Initially this was also the view of the Department of Justice as it was expressed in its Response of May 27, 1987 *fn26" and in testimony of then Acting Assistant Attorney General Rule before the Senate Committee on the Judiciary. *fn27"

 There is no valid basis for the position that only fabrication is prohibited by section II(D)(2). The term "manufacturing" has different meaning and breadth in different circumstances. For example, according to leading business textbooks, it includes both the physical act of fabricating and the design of the product being made. *fn28" On the other hand, there are some general purpose dictionaries, cited by the Regional Companies, that define the term only as making a product suitable for use by labor or machinery, *fn29" and, depending upon the context and the purpose of the law, there are statutes that provide similar definitions. *fn30" Some ambiguity may thus be said to inhere in the term itself, but that ambiguity is completely resolved when resort is had to the contemporaneous intent of the parties to the consent decree: *fn31" there cannot be the slightest doubt that the parties intended by section II(D)(2) to bar the Regional Companies from the entire manufacturing process, including design, development, and fabrication.

 The decree was aimed at preventing in the future the anticompetitive practices in which the Bell System was assumed to have been engaged in the past. *fn32" Yet the Bell Systems' practices in the design and development of equipment were responsible for the section II(D)(2) restriction as much as, if not more than, its practices with regard to fabrication. In fact, in virtually every "manufacturing episode" that was the subject of a pretrial charge by the government or that produced evidence at the trial, it was design and development manipulation that was the focus or the sole subject rather than discrimination with respect to fabrication. *fn33" See United States v. AT&T, 524 F. Supp. 1336 (D.D.C. 1981), which discusses the "manufacturing" or "procurement" evidence adduced by the government at the trial. *fn34" To the same effect, see, Department of Justice Memorandum of August 16, 1981 at 366-387, 391-410; *fn35" Department of Justice Report filed February 2, 1987; *fn36" Response of the United States to Waiver Motion of BellSouth, March 26, 1984; *fn37" Department of Justice Competitive Impact Statement at 15; and AT&T's Response to Objections to Plan of Reorganization at 524, 535.

 In short, the evidence underlying the decree strongly suggests that the Bell System used its local monopoly position to disadvantage and to drive out of business competing manufacturers of equipment primarily through discrimination and cross-subsidization at the design and development stages. Unless it be assumed, contrary to all reason and logic, that the parties intended to aim the "manufacturing" restriction at something different or far less comprehensive *fn38" than what the evidence had revealed by way of anticompetitive conduct, the conclusion is inescapable that the restriction includes product design and development. Indeed, if the Regional Companies are correct, *fn39" that is, if they could engage in design and development of telecommunications and customer premises equipment, they would have the same incentive and ability to undermine competition and competitors as did the Bell System, and additionally they would now also have the incentive and ability to decimate the newly-emerged thriving, competitive equipment market. *fn40" See Opinion of September 10, 1987 at 79. *fn41"

 Based upon this evidence, the Department has now likewise concluded that the section II(D)(2) restriction has considerably greater scope than mere fabrication, and it accordingly states, with commendable candor, that

 

A manufacturing restriction that prohibited fabrication but permitted all design and development would not have assuaged the concerns expressed, at the time the decree was entered, by the Department and the Court about cross-subsidization, discriminatory purchasing, and interconnection discrimination. The likelihood of cross-subsidization was greater in the design and development area than in fabrication. The risk of cross-subsidization arose primarily from the existence of joint and common costs that made improper allocation of costs between regulated and unregulated activities difficult to detect. And it would have been more difficult to distinguish equipment research, design and development expenses from network research, design and development expenses than to distinguish equipment fabrication expenses from those associated with network activities.

 

In addition, because it is the designer or developer of that interface that needs information about the network, the concern about discrimination in network changes or in access to information about changes in network standards arose primarily from BOC involvement in designing or developing the manner in which equipment interconnects with the BOC's network, rather than merely specifying generic or functional requirements. For these reasons, the parties and the Court believed that, under the conditions they anticipated would exist at divestiture, if the BOCs were allowed to perform design functions that included designing or developing interface specifications, they could use and gain an anticompetitive advantage from network information not available to their competitors. Merely requiring the BOCs to use independent fabricators to assemble products based on interface specifications designed and developed by the BOCs would not have removed the potential for discrimination on which the equipment restrictions were based (footnotes omitted).

 Department Response at 15-16.

 IV

 The Restriction on Manufacture is Not Indefinite

 That conclusion alone resolves the Department's asserted dilemma in not knowing whether to enforce the manufacturing restriction because allegedly the term "manufacturing" is "somewhat amorphous" and the intent of the parties with respect to design and development activities is difficult to ascertain. *fn42" Even if it be assumed, arguendo, that there is a substantial basis for the existence of such a difficulty -- but, as will be discussed infra, there is not -- it would not follow that the restriction found in section II(D)(2) of the decree may be disregarded and left to atrophy through non-enforcement.

 Certainly, any attempted fabrication activities of the Regional Companies could be halted through enforcement (since there is no doubt as to the decree's application to them), *fn43" and so could design and development activities which, by anyone's understanding, *fn44" including that of the Department of Justice, are properly encompassed within the restriction. If there was lack of complete clarity as to the remainder, that could have been handled, as contested legal matters are handled every day in thousands of courtrooms and administrative or other enforcement offices throughout the nation, by the exercise of individualized judgment. In short, even on the Department's own terms the non-enforcement option it chose during the past several years has no sound basis. Beyond that, as will now be shown, most of the difficulties of interpretation on which the Department relies are non-existent.

 A. Use of the Term "Provide "

 The Department states that the "Court's opinions . . . suggest that in requiring modification of the decree to allow the BOCs to 'provide' CPE, the Court may have intended to allow them some limited role in the design and development of CPE." *fn45" There is no basis whatever for that assumption. The Court made crystal clear in the explanation of its recommendation that the decree be modified to permit the Regional Companies to provide CPE that the term "provide" or "providing" was meant to be synonymous with marketing or selling (as distinguished from designing or developing).

 The Court used the term providing, rather than one of its synonyms, only so as to be consistent with other, existing provisions of the proposed consent decree. *fn46" In every one of those instances, it is plain from the context that the term "provide" or "provision" was to be synonymous with furnishing, marketing, or selling. Absent evidence to that effect, there is no reason to believe that this Court, when it used the identical term in its proposed amendment of the decree, or the parties when they accepted that amendment, intended it to have an entirely different meaning, i.e., design and development.

 Not only is there no such evidence, but all the evidence is to the contrary. The section of the Opinion, which explains the Court's rationale for requesting the amendment to allow the Regional Companies to provide CPE, is headed "Marketing of Customer Premises Equipment." AT&T, 552 F. Supp. at 191. The discussion in the text is entirely devoted to issues of marketing CPE in the sense of selling, in contradistinction to manufacturing. *fn47" There is not a single word in that explanation or in any materials filed by anyone else at the time of the adoption of the amendment (or since), that would lend the slightest support to the proposition that, in addition to permitting post-fabrication selling, the term "provide" was also meant to allow the Regional Companies to engage in pre-fabrication research and development. *fn48"

 B. Generic versus Product Development

 According to the Department, the parties and the Court intended the Regional Companies to have a substantial role in the design and development of telecommunications equipment and the software used in their own networks as well as a more limited role in the design and development of CPE. *fn49" In support of that conclusion, the Department refers to Regional Company engineering functions, and it relies on the fact that under the AT&T Plan of Reorganization, Bellcore *fn50" and the Regional Companies were to perform network planning and central office engineering, including planning capacity, design, layout, procurement, design recommendations for transmission systems, and installation of central office equipment. *fn51" The Department also points to AT&T's Response to the Plan of Reorganization in which it is stated that Bellcore would provide to the Regional Companies "systems engineering, generic requirements, and technical evaluation functions" to assist them in making individual purchasing decisions, and that Bellcore's technical evaluation function "includes technical evaluation of design alternatives." *fn52" All of this, including the failure further to define "generic requirements," indicates to the Department that some design is permitted, and some is not, that no boundary can be discerned between permitted and the prohibited design, and that accordingly the dimensions of the decree's manufacturing restriction cannot be ascertained. *fn53"

 These arguments are not persuasive. *fn54" All the references cited by the Department are to exchange services or the design and engineering of exchange networks55 -- that are permitted both by the language of the decree and the intention of its authors -- and none of them is to the design and development of telecommunications or customer premises products -- that are prohibited. The distinction was made clear as early as 1983, in connection with the adoption of the AT&T Plan of Reorganization, when AT&T stated in its Response to Comments on the Proposed POR (at 535) that "the process [of systems engineering and specification of generic requirements by an Operating Company] merely informs vendors of [Operating Company] needs and requirements. The specific design of the product, including its features and functions within the broad parameters of the generic requirements . . . will be determined by the manufacturer." *fn56"

 Nor is that distinction surprising or difficult to apply either in theory or in practice. *fn57" The design, maintenance, and operation of the exchange networks constitutes the principal business of the Regional Companies under the decree, and it would be specious to argue that they are prohibited from engaging in this essential facet of that business.

 But the performance of such work is a far cry from the design of specific products -- a process that takes place after generic specification for the network have been determined and disseminated. *fn58" It is at that point that an equipment manufacturer designs the telecommunications or CPE products as well as the detailed plans on how to build such products or systems. That design function is an integral part of "manufacturing," and as such it is prohibited to the Regional Companies under section II(D)(2). *fn59"

 V

 Order

 For the reasons stated, AT&T's motion is hereby granted, and the Court declares, in the exercise of the authority vested in it by section VII of the decree, that the manufacturing restriction embodied in section II(D)(2) of the decree prohibits the Regional Companies' design and development of telecommunications products and customer premises equipment as well as their fabrication.


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