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UNITED STATES v. WESTERN ELEC. CO.

October 14, 1988

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



The opinion of the court was delivered by: GREENE

 The issues before the Court concern Regional Company practices with respect to so-called "calling cards," that is, telephone credit cards, and with respect to telephones owned by the Regional Companies that are located in public places (e.g., airports, service stations, street corners). Unlike many of the recent controversies in this case, the current issues do not involve the line of business restrictions on the Regional Companies; what is claimed here by the Department of Justice, with support from a number of the interexchange carriers, is that the Regional Companies have been favoring AT & T in violation of the nondiscrimination and equal access provisions of the decree.

 The Department of Justice has filed a motion *fn1" pursuant to the decree, *fn2" seeking an order to enjoin (1) the continuing assignment to AT & T of all long distance calls *fn3" made on Regional Company credit cards; (2) preferential treatment accorded by these companies to AT & T's calling cards; and (3) the routing exclusively to AT & T of long distance calls from public telephones owned by the Regional Companies. The Court grants the motion in substantial part, but it denies some aspects of the requested relief.

 I

 Regional Company Calling Cards

 This is the first time the Court has considered in detail telephone calling cards in light of the decree. Calling cards have assumed considerable importance in consumer telecommunications, as roughly fifty percent of operator-assisted *fn4" telephone traffic is now conducted by means of such cards. It is appropriate to outline briefly the evolution of the processing of these charge cards for making telephone calls.

 A. Background

 Prior to divestiture, the Bell Operating Companies performed billing functions for all Bell System calls. In order to permit customers to credit calls to their accounts when away from their home telephones, these companies issued so-called "calling cards" which enabled the holder to charge both local and long distance calls to the account number appearing on the card. The customer could accomplish this task by punching the calling card number on a touchtone telephone, by reading the number to an operator, or by inserting the card into the telephone.

 Although with the breakup of the Bell System, AT & T and the Regional Companies issued separate calling cards, they continued to share information concerning the identity of the customers who held cards and the validity of these cards. This sharing was specifically authorized by the Plan of Reorganization. *fn5" Under the Plan, the Regional Companies received the Data Base Administration Systems (hereinafter referred to as the DBA systems) which are used, inter alia, to assign and maintain calling card numbers, while the so-called Billing Validation Application database, necessary, inter alia, to validate calling cards, *fn6" was assigned to AT & T. *fn7" By virtue of the Plan, the Regional Companies are required to provide data base maintenance service under contract to AT & T. *fn8" The decree itself (in section I(A)(2)) gives the Regional Companies the right to continue to use AT & T's billing validation database for the limited purpose of validating local calling card calls. *fn9"

 The existence and use of common databases not surprisingly led AT & T and the Regional Companies to adopt the same calling card number for any particular customer. Moreover, the contractual relations between the Regional Companies and AT & T resulted in the refusal of the former to share the information contained in these databases with any interexchange carriers other than AT & T; AT & T is therefore the only interexchange carrier to receive from the Regional Companies the information necessary to validate its calling cards.

 The effect of these practices is that all long distance calls made with Regional Company calling cards are assigned to AT & T, and, as might be expected, the other interexchange carriers complain vociferously about this arrangement. After thorough examination, the Court has concluded, as did the Department of Justice, that these practices discriminate in favor of AT & T in violation of the decree.

 B. The Decree Permits Regional Companies To Issue Calling Cards

 MCI, US Sprint, and ALC Communication Corporation, all of them interexchange carriers, argue that the decree entirely forbids the Regional Companies to issue calling cards which may be used by the holder to charge long distance calls, *fn10" the argument being that the very issuance of such cards constitutes an interexchange telecommunications service prohibited to the Regional Companies by the decree. *fn11" However, the Court concludes that the issuance by the Regional Companies of calling cards is not part of the interexchange business, and that the availability for use of Regional Company calling cards for long distance calling is not otherwise inconsistent with the decree.

 The issuance of calling cards does not constitute an interexchange telecommunication service; rather, it is an "exchange access" service, a term which is defined in the decree as including the "provision of information necessary to bill customers." *fn12" This billing function permitted by the decree is not restricted to local calls; the Regional Companies are actually required by section II of the decree *fn13" to furnish exchange access services "for the interexchange services of any interexchange carrier." *fn14"

 This understanding of the decree is further supported by the assignment of the DBA systems to the Regional Companies by the Plan of Reorganization. In fact, the Plan explicitly notes that these systems may be used to "update and maintain Calling Card and other billing information files . . . ." *fn15" More, the DBA systems lawfully update and maintain calling card information for both local and long distance calls. *fn16" Since the DBA systems properly handle long distance calls under the authority of the Regional Companies, it is appropriate to conclude that these companies were intended to be able to bill long distance calls made from their calling cards.

 The issuance by the Regional Companies of calling cards for long distance calls not only does not offend the terms of the decree; it is also consistent with its purposes. The purpose underlying the prohibition against the provision of interexchange services by the Regional Companies is the prevention of competition by these companies with the interexchange carriers for long distance business. United States v. Western Electric Co., 627 F. Supp. 1090, 1100 (D.D.C. 1986). There is no threat of such competition in this instance.

 Regional Company calling cards good for long distance calling create no incentives to favor their own long distance operations: the Regional Companies are prohibited from engaging in the long distance business. Moreover, the calling cards will not create incentives for the Regional Companies to favor one interexchange carrier over another; once the appropriate changes are made (see Part III, infra) the calling card holder (Part VII-A) or other third parties (Part VII-D) -- not the Regional Company -- will select the interexchange carrier as well as any additional interexchange services. *fn17" Indeed, Regional Company calling cards for long distance calls may be said actually to promote long distance competition, for they will permit a customer to select an up and coming interexchange carrier which is as yet unable to supply its customers with a calling card of its own. *fn18"

 It is also worthy of mention that calling cards are today a ubiquitous billing mechanism. They provide a convenient payment method for calls made away from the customer's usual telephone, an increasingly common occurrence. But they are a convenience to the customer only as long as they do not become too complicated for regular use. A prohibition on the use of the Regional Company calling cards for long distance calling would frustrate consumers who would be required to change cards every time they changed over from a local to a long distance call. In view of these customer complications, that kind of a prohibition is unwarranted in the absence of incentives for discrimination, and such incentives, as noted above, are absent.

 Thus, on any basis -- the language of the decree, its purposes, and the maintenance of an important aspect of universal service -- the conclusion is inescapable that Regional Companies may issue calling cards usable not only for local but also for long distance calling -- provided, of course, that they do not discriminate among the various interexchange carriers with respect to these cards. The Court now turns to that subject.

 II

 Claimed Calling Card Decree Violations

 Under the specific terms of the decree, the Regional Companies must offer exchange access as well as billing services on an equal and nondiscriminatory basis. *fn19" This mandate applies to the provision of billing services through Regional Company calling cards as to any other billing service. *fn20" For the reasons stated below, the Court concludes that the Regional Companies have used their calling cards in ways that treat interexchange carriers unequally and discriminate in favor of AT & T.

 In its enforcement motion, the Department of Justice asserts that the Regional Companies' calling cards are used to AT & T's advantage in three ways. According to the motion (1) most, if not all, the Regional Companies provide to AT & T commercially important calling card validation data *fn21" that they do not make available to other interexchange carriers; (2) some of these companies market or advertise their calling card in a manner that promotes AT & T's interexchange services over those of other interexchange carriers; and (3) several of the Regional Companies include an international number on their calling card that credits calls only to AT & T in circumstances where other interexchange carriers cannot obtain comparable international numbers. The Regional Companies have not, by and large, seriously contradicted this factual information. What remains to be decided is the consistency of these practices with the decree.

 Validation

 With limited exceptions, the Regional Companies currently provide billing validation data *fn22" to AT & T, but not to other interexchange carriers. *fn23" At the time of divestiture, no other interexchange carrier offered operator services, and as a consequence only AT & T requested this validation information. That is no longer the case. US Sprint's predecessor GTE Sprint began to phase in operator services in early 1986, *fn24" and MCI expects to begin to do so shortly. Even some resellers and alternative service providers furnish the operator service necessary for the acceptance of calling card calls. None of these companies will or can *fn25" accept calls charged to Regional Company calling cards as long as the Regional Companies refuse to provide the information necessary to determine whether the caller is using a legitimate calling card. *fn26"

 Obviously, AT & T derives a considerable competitive advantage from its sole access to the validation databases it shares with the Regional Companies. That advantage extends beyond the capture of direct calling card business. The inability of other interexchange carriers to accept calls made by way of Regional Company calling cards causes customer annoyance and discourages further attempts in other contexts to use any carrier other than AT & T. Beyond that, the lack of calling card validation capacity also hampers the attempts of competing interexchange carriers to persuade large businesses, hotels, and other major customers to presubscribe to their service.

 All of the Regional Companies profess in their filings a willingness in theory to end their discriminatory validation practices, *fn27" but apparently only US West and Pacific Telesis have offered validation data or validation service to companies other than AT & T since the time the Department filed its motion. *fn28"

 Not only is the failure to provide validation information to AT & T's competitors discriminatory; unlike some other services that are part of the calling card service (see infra), validation is not technically difficult. *fn29" In fact, no Regional Company contends that the provision of validation data to the interexchange carriers is not feasible, and none has contradicted the Department's assertion that no serious technical difficulty exists. Nevertheless, it is apparent that the companies will not actually make the data available *fn30" unless there is a court order. *fn31"

 Accordingly, the Court is ordering *fn32" the Regional Companies to cease discriminating in favor of AT & T in the provision of validation data on or before January 1, 1989. *fn33" Each Regional Company must certify to the Court on or before that date that it is currently making available and will continue to make available to all interexchange carriers requesting it the same validation data *fn34" for its calling cards that the company provides to AT & T, at the same prices, and on the same terms and conditions as are extended to AT & T. *fn35" Certification must include a description of the validation data, including updates that are available, and state the prices, terms, and conditions on which the Regional Companies validation data are available to AT & T and to the other interexchange carriers. *fn36"

  IV

 Marketing and Advertising

 Beginning in 1987 with the issuance of the Regional Companies' magnetic-encoded plastic calling cards, some of the Regional Companies began to advertise the cards for both long distance and local calls. For example, Bell Atlantic campaigned that its card "lets you charge local and long distance calls directly to your phone bill." These advertisements did not reveal that the Regional Companies automatically routed interexchange service to AT & T, nor did they inform the public, contrary to the implication in their announcements, that the Regional Companies themselves do not provide long distance service (which they are of course prohibited from doing).

 On March 27, 1987 MCI requested a Department of Justice enforcement investigation which led to a June 5, 1987 letter from the Department to the Regional Companies advising them of the impropriety of such advertising. *fn37" The Department's advice was, of course, entirely correct. Any Regional Company advertising at this juncture will have the direct foreseeable effect of promoting AT & T services over those of the other interexchange carriers. *fn38" This violates the nondiscrimination provisions of the decree.

 Shortly after they received the Department's letter, most Regional Companies ceased such advertising, *fn39" and all of them have now recognized that these advertisements promoting the use of their calling cards for long distance use are improper. However, what they contend is that, in view of the changed situation, a court order is unnecessary. *fn40" That is the principal question still before the Court on advertising at this time.

 Although under the law injunctive orders will issue where the possibility remains that the prohibited conduct will recur, *fn41" the Court is reluctant to issue such orders here where that may be redundant or unnecessary. See also, note 38, supra. Accordingly, and since all the Regional Companies have discontinued their objectionable advertising, the Court will at this time refrain from dealing with the marketing and advertising subject by such an order. Of course if the Regional Companies, or any one of them, should in any way evade the prohibition on false *fn42" or misleading *fn43" advertising, prompt judicial action will follow.

 Notwithstanding the Court's decision not to issue an order at this time on the general subject of advertising, it is necessary in view of past practices identifying the Regional Company calling cards with AT & T, that misleading impressions be cleared up and that customers be informed that they have a free choice. In spite of the fact that Regional Company calling card instructions have specifically stated that long distance calls should be dialed on an 0 basis, neither the cards nor the related information advised customers that when they dialed on such a basis, i.e., without an access code, their long distance calls were and still are carried by AT & T rather than by their own presubscribed interexchange carrier. *fn44" To remedy the effects of the prior discriminatory practices, the Regional Companies must, by January 1, 1989, notify their calling card customers that (1) any interexchange services charged to the card will be provided by an interexchange carrier, not by the Regional Company; (2) the interexchange carrier will not ...


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