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United States v. SBC Communications

March 29, 2007

UNITED STATES OF AMERICA, PLAINTIFF,
v.
SBC COMMUNICATIONS, INC. AND AT&T CORP., DEFENDANTS.
UNITED STATES OF AMERICA, PLAINTIFF,
v.
VERIZON COMMUNICATIONS, INC. AND MCI, INC., DEFENDANTS.



The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge

OPINION

In the span of a couple of weeks in early 2005, four of this nation's largest telecommunications companies announced that they had agreed to merge, leaving only two companies in their place. Mergers of this magnitude have, as can be expected, engendered heated opposition, which has been reflected in the filings of numerous interested parties in this case. Arguments have been put forth regarding the mergers' effects in several major industries, including residential telephone service, cellular telephone service, and internet services. This Court, however, is not tasked with deciding whether these mergers as a whole run afoul of the antitrust laws, nor whether they are altogether in the public interest, nor whether they should be approved by other branches of the federal government. This Court's role is much more limited. The only question facing this Court, under the procedures crafted by Congress, is whether the divestitures agreed upon by the merging parties and the Department of Justice are "in the public interest."

Pending before the Court is plaintiff United States' motion for entry of the proposed final judgments in each of these civil antitrust cases. The procedure governing acceptance of these proposed judgments is specified in Section 2(b) of the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16(b)-(h), otherwise known as the Tunney Act. Upon consideration of the motions and supporting memoranda, the filings of several amici curiae admitted for this case, the responses and replies thereto, the arguments made by all parties at multiple hearings, the applicable law, and the entire record, the Court determines that entry of the proposed final judgments is in the public interest. Therefore, for the reasons stated herein, plaintiff's motion for entry of final judgments in both cases is GRANTED.

BACKGROUND

I. Background of Proposed Final Judgments

A. SBC-AT&T Merger

SBC Communications, Inc. ("SBC"), formerly Southwestern Bell, is a regional bell operating company ("RBOC"), formed as one of the seven regional holding companies to result from the breakup of AT&T's local telephone business in 1984. United States v. SBC Comm., Inc., 05-2102-EGS, Compl. ¶ 7 (hereinafter "SBC Compl."). In 2005, after having acquired two other RBOCs, Pacific Telesis and Ameritech, during the 1990's, SBC served over 50 million switched access lines, both residential and business, in 13 states. Id. SBC has fiber optic or copper connections to virtually all of the commercial buildings in its franchised territory. Id.

AT&T Corp. ("AT&T") is the nation's largest interexchange carrier ("IXC"), offering traditional long distance telephone service, as well as one of the largest competitive local exchange carriers ("CLEC"), offering local network exchange and access for voice and data services. Id. ¶ 8. AT&T serves consumers and businesses across the United States and around the globe, and owns significant local network assets within SBC's 13-state operating territory including direct fiber optic connections to numerous commercial buildings. Id. Pursuant to an Agreement and Plan of Merger dated January 30, 2005, SBC agreed to acquire AT&T for approximately $16 billion. Id. ¶ 9.

B. Verizon-MCI Merger

Verizon Communications, Inc. ("Verizon"), formerly Bell Atlantic Corporation ("Bell Atlantic"), is the nation's largest RBOC. United States v. Verizon Comm., Inc., 05-2103-EGS, Compl. ¶ 7 (hereinafter "Verizon Compl."). Bell Atlantic was another of the seven regional holding companies to result from the AT&T breakup. Id. Since that time, Bell Atlantic acquired Nynex, another RBOC, and GTE Corporation, an ILEC that provided local exchange and other services in 28 states, and formed Verizon. Id. In 2005, Verizon served over 50 million switched access lines, both residential and business, in 29 states plus the District of Columbia. Id. Verizon has fiber optic or copper connections to virtually all of the commercial buildings in its franchised territory. Id.

MCI, Inc. ("MCI") is one of the nation's largest IXCs, offering traditional long distance telephone service, as well as one of the largest CLECs, offering local network exchange and access for voice and data services. Id. ¶ 8. MCI serves consumers and businesses across the United States and around the globe and owns significant local network assets within Verizon's 29-state operating territory including direct fiber optic connections to numerous commercial buildings. Id. Pursuant to an Agreement and Plan of Merger dated February 14, 2005, as amended on March 4, March 29, and May 2, 2005, Verizon agreed to acquire MCI for approximately $8.54 billion. Id. ¶ 9.

C. Alleged Competitive Harms

Plaintiff, the United States through the Department of Justice ("DOJ"), filed complaints in both of these cases on October 27, 2005. The government sought to enjoin the mergers on the grounds that the mergers would "substantially lessen competition for (a) Local Private Lines that connect hundreds of commercial buildings in [SBC and Verizon]'s franchised territory to a carrier's network or other local destination, and (b) other telecommunications services that rely on Local Private Lines." SBC Compl. ¶ 1; Verizon Compl. ¶ 1. Specifically, the complaints are concerned with hundreds of commercial buildings in metropolitan areas where the two merging parties (either SBC and AT&T, or Verizon and MCI) are the only two firms that own or control a direct wireline connection to the building. SBC Compl. ¶ 3; Verizon Compl. ¶ 3. The government alleged that due to these competitive harms, the mergers violated Section 7 of the Clayton Antitrust Act, 15 U.S.C. § 18. SBC Compl. ¶ 32; Verizon Compl. ¶ 32.

The complaints address the same type of competitive harm for each merger, and differ only in geographic scope due to the territorial coverage of the RBOCs, SBC and Verizon. The SBC Complaint addresses harms in metropolitan areas in SBC's territory, specifically with regard to buildings where SBC and AT&T are the only two firms that own or control direct wireline connections. SBC Compl. ¶ 3. Analogously, the Verizon Complaint addresses harms in metropolitan areas in Verizon's territory, specifically with regard to buildings where Verizon and MCI are the only two firms that own or control direct wireline connections. Verizon Compl. ¶ 3. Apart from that difference, and the identities of the parties, the complaints are drafted virtually identically.

The government's detailed description of the alleged competitive harm is based on "local loops" and "local private lines," which are components of telecommunications networks operated by the merging parties. Local loops, sometimes referred to as "last-mile" connections, are typically either copper or fiber-optic transmission facilities that connect commercial buildings to a carrier's network. SBC Compl. ¶ 12. These last-mile connections are necessary assets for providing service to business customers located in the building. Id.

The government defines a Local Private Line ("LPL") as a dedicated, point-to-point circuit offered over copper and/or fiber-optic transmission facilities that originates and terminates within a single metropolitan area and typically includes at least one local loop. Id. ¶ 13. LPLs are sold in both retail markets (to business customers) and wholesale markets (to other carriers). Id. LPL circuits are sometimes referred to as "special access." Id. Depending on how they are configured, LPLs can be used to carry voice traffic, data, or a combination of the two. Id. ¶ 14. LPLs may be purchased as standalone products, but are also an important input to value-added voice and data telecommunications services that are offered to business customers. Id.

For the vast majority of commercial buildings in its respective territory, either SBC or Verizon is the only carrier that owns a last-mile connection to the building. SBC Compl. ¶ 15; Verizon Compl. ¶ 15. Thus, in order to provide voice or data telecommunications services to customers in those RBOC-only buildings, competing carriers typically must lease the connection from SBC or Verizon as LPL service, i.e. special access. SBC Compl. ¶ 15; Verizon Compl. ¶ 15.

For a small percentage of commercial buildings (though accounting for a substantial percentage of customer demand and revenue), other competitors (CLECs) have built or acquired their own last-mile fiber-optic connections, separate from the RBOCs, to connect their networks to the buildings. SBC Compl. ¶ 16.*fn1 Once a CLEC has incurred the high fixed cost to construct a last-mile connection to a building, the CLEC can usually provide service to business customers in the building at a lower cost than it would otherwise be able to do if it had to lease the connection from the RBOC. Id. It can also provide alternative access to other CLECs seeking to serve business customers in the building, i.e., LPL service can be resold on the wholesale market. Id.

AT&T is among the leading CLECs in SBC's territory in the number of buildings it has connected with its own last-mile fiber facilities, as is MCI in Verizon's territory. SBC Compl. ¶ 17; Verizon Compl. ¶ 17. For hundreds of buildings in SBC's and Verizon's territory, AT&T and MCI respectively are the only CLECs with a last-mile connection into the building. SBC Compl. ¶ 17; Verizon Compl. ¶ 17. In these buildings, the instant mergers would thus reduce the number of carriers with last-mile connections from two to one. SBC Compl. ¶ 18; Verizon Compl. ¶ 18. The parties accordingly refer to these buildings as "2-to-1" buildings.

The government states that the relevant product markets affected by the mergers are the markets for LPLs, and voice and data telecommunications services that rely on LPLs. SBC Compl. ¶ 19.*fn2 LPLs themselves are a recognized service category among telecommunications carriers and end-user business customers, as customers typically purchase LPLs in standard bandwidth increments. Id. ¶ 21. LPLs are distinct from switched local exchange telephone services. Id. ¶ 22. Switched local exchange lines route calls through a central office, do not necessarily use a dedicated circuit, and thus do not offer the guaranteed bandwidth, high service levels, and security that LPLs provide. Id. Carriers often rely on LPL circuits to connect a business customer's location to their networks, enabling the carrier to supply value-added data networking, Internet access, local voice, and long distance services to the business customer. Id. ¶ 23. AT&T and MCI were among the largest competitors to SBC and Verizon respectively in the market for LPLs. SBC Compl. ¶ 20; Verizon Compl. ¶ 20.

Based on this background, the government claims that the mergers would eliminate competition for LPL service to 2-to-1 buildings, resulting in higher prices for both retail and wholesale customers. SBC Compl. ¶ 25; Verizon Compl. ¶ 25. The government also claims that the mergers would tend to lessen the competition for retail voice and data telecommunications services provided over LPL access to 2-to-1 buildings. SBC Compl. ¶ 26; Verizon Compl. ¶ 26.

The government acknowledges that other competitors (CLECs) could build new last-mile connections to buildings in response to the mergers, but that such entry is difficult, time-consuming, and expensive. SBC Compl. ¶ 27. The government identified five factors that affect whether a CLEC would build a new last-mile connection to a particular building: (1) the proximity of the building to the CLEC's existing network interconnection points; (2) the capacity required at the customer's location (and thus the revenue opportunity); (3) the availability of capital; (4) the existence of physical barriers, such as rivers and railbeds, between the CLEC's network and the customer's location; and (5) the ease or difficulty of securing the necessary consent from building owners and municipal officials. Id. Because their costs are so substantial, firms typically only build a connection after they have secured a customer contract of sufficient size to justify the anticipated construction costs. Id. ¶ 28.

Therefore, the government states that although entry may occur in some 2-to-1 buildings, conditions for entry are unlikely to be met in hundreds of those buildings, and thus entry is unlikely to eliminate the competitive harms that would result from the mergers. SBC Compl. ¶ 29; Verizon Compl. ¶ 29. Accordingly, the government alleged that the mergers would violate Section 7 of the Clayton Act because they eliminate or substantially lessen competition in the markets for LPLs and voice and data telecommunications services that rely on LPLs, and would correspondingly raise prices for those products. SBC Compl. ¶ 32; Verizon Compl. ¶ 32.

D. Proposed Remedy

The government's proposed remedies for the alleged antitrust harms of the mergers are specified in the proposed final judgments. See Pl.'s Mot. for Entry of Final J. at 2-3. Apart from the difference in geographic scope due to the identities of the parties, the proposed final judgments are practically identical and require the same type of divestitures. See id., Proposed SBC-AT&T Final J. at 1-17 & Proposed Verizon-MCI Final J. at 1-16.

The proposed final judgments require defendants, within 120 days after the closing of the mergers, or five days after notice of the entry of the Final Judgment by the Court, whichever is later, to divest the "Divestiture Assets." Proposed SBC-AT&T Final J. at 5.*fn3 The Divestiture Assets are defined in terms of an indefeasible right of use ("IRU"), a long-term leasehold interest that gives the holder the right to use specified strands of fiber in a telecommunications facility. Id. at 4. All of the IRUs must be for a minimum of 10 years, may not include any recurring fee, and cannot limit the right of the acquirer to use the asset as it wishes. Id.

The Divestiture Assets consist of IRUs for lateral (or last-mile) connections to hundreds of buildings in the identified metropolitan areas along with transport facilities sufficient to enable the IRUs to be used by the purchaser to provide telecommunications services. Id. at 3. The divestitures must be accomplished in such a way as to satisfy the United States that the Divestiture Assets can and will be used by the acquirer as part of a viable, ongoing telecommunications business. Id. at 7. All Divestiture Assets in a given metropolitan area must be divested to a single acquirer unless otherwise approved by the United States. Id. at 7-8.

To ensure that the acquirer has adequate capacity to serve customers in a given location, the lateral connection to be divested will consist of an IRU for the greater of (1) eight fiber strands or (2) one-half of the currently unused fiber strands in AT&T's or MCI's facilities serving the building. Id. at 4. The strands shall connect the point of entry of the building to the splice point with fiber used to serve different buildings. Id. The fiber strands may be provided from those controlled by either of the merging parties. Id. To ensure that the acquirer can connect the last-mile connections to its network facilities, the divestiture includes IRUs for transport facilities sufficient to connect the divested last-mile connections to locations mutually agreed upon by defendants and the acquirer. Id. at 3.

Each proposed final judgment includes a list of specific buildings for which lateral connections must be divested. Id. at 18-27. Using information provided by the parties and other CLECs, the government compiled a list of 2-to-1 buildings as described in the complaints. Pl.'s Resp. to Ct.'s Order of July 25, 2006, at 8. The government then applied an algorithm to determine if entry by another competitor was likely for each 2-to-1 building, based on the criteria identified in the complaints. Id. The proposed final judgments encompass all 2-to-1 buildings where it was determined that entry by another competitor was unlikely. Id.*fn4

The proposed final judgments also include additional terms regarding notice of the proposed divestitures, financing, preservation of assets, compliance inspections, and a ban on reacquisitions. Proposed SBC-AT&T Final J. at 11-15. The proposed final judgments are set to expire ten years from the date of their entry. Id. at 16. They also specify that this Court retains jurisdiction to enable any party to apply at any time for further orders and directions as may be necessary to carry out or construe the judgments. Id. at 15.

II. Procedural History

A. Tunney Act Procedures

The government filed the complaints in both of these cases on October 27, 2005. At the same time, the government filed stipulations and proposed final judgments designed to remedy the alleged anti-competitive harms. Pl.'s Mot. for Entry of Final J. at 2-3. Amended proposed final judgments for both cases were filed on November 28, 2005. Id. at 3. In December, the Court consolidated the two cases. Order, Dec. 21, 2005.

In compliance with the procedures mandated by the Tunney Act, the government filed Competitive Impact Statements ("CIS") for both mergers with the Court on November 16, 2005. The government also published the proposed final judgments and CISs in the Federal Register on December 15, 2005. See SBC-AT&T CIS, Proposed Final Judgment, Complaint, Amended Stipulation, 70 Fed. Reg. 74,344 (Dec. 15, 2005); Verizon-MCI CIS, Proposed Final Judgment, Complaint, Stipulation, 70 Fed. Reg. 74,350 (Dec. 15, 2005) (Verizon-MCI Merger). Finally, the government published separate summaries of the terms of the proposed final judgments in the Washington Post for seven days beginning on December 8, 2005 and ending on December 14, 2005. Pl.'s Mot. for Entry of Final J. at 3. Within the 60-day period for public comments, which ended on February 13, 2006, three comments were received. Id. These comments were filed by the Alliance for Competition in Telecommunications ("ACTel"), COMPTEL, and the New York Attorney General.

The government filed the pubic comments and its response to the comments with the Court on March 21, 2006. The comments and response were also published in the Federal Register on April 5, 2006. See Response to Public Comments on the Proposed Final Judgments, 71 Fed. Reg. 17,164 (Apr. 5, 2006). On that same day, the government filed with the Court its Certificate of Compliance with the Tunney Act procedures, and its motion for entry of the proposed final judgments.

The SBC-AT&T merger closed on December 18, 2005, and the Verizon-MCI merger closed on January 6, 2006. Pl.'s Resp. to Public Comments at 7 n.10. The government states that this is in keeping with its standard practice that neither the stipulations nor pending proposed final judgments prohibit the closing of the mergers. Id. (citing ABA Section of Antitrust Law, Antitrust Law Developments 387 (5th ed. 2002)).

B. Amici Curiae

Over the course of the proceedings, several parties have been granted leave to participate as amici curiae. See 15 U.S.C. § 16(f)(3). "COMPTEL is an association of competitive local communications providers that are both wholesale customers of and competitors to the merging parties in the Local Private Line service markets that are the subject of the Complaints." COMPTEL's Mot. to Intervene at 5. COMPTEL members include Sprint Nextel, XO Communications, RCN Corporation, Covad Communications, and over 300 other members. Id. Defendants AT&T and MCI were members of COMPTEL prior to the mergers. Id. The Court permitted COMPTEL to participate as an amicus on May 10, 2006.

ACTel is a group of firms whose "members includes both [CLECs] and [IXCs] that buy Local Private Lines from the merging companies." ACTel's Mot. to Intervene, Ex. 1 at 3 (comments to Proposed Final Judgments). ACTel members combine these purchased LPLs with additional facilities, technology, and services to sell their own value-added telecommunications services, sometimes in competition with the merging ...


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