Northeastern Telephone Co. v. American Tel. & Tel. Co.

Citation651 F.2d 76
Decision Date27 May 1981
Docket NumberD,No. 762,No. 80-7740,762,80-7740
Parties1981-1 Trade Cases 64,027 NORTHEASTERN TELEPHONE COMPANY, Plaintiff-Appellee, v. AMERICAN TELEPHONE AND TELEGRAPH COMPANY; Western Electric Company, Inc.; and The Southern New England Telephone Company, Defendants-Appellants. ocket
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

J. Robert Sheehy, Waco, Tex. (Philip E. McCleery, Sheehy, Lovelace & Mayfield, Waco, Tex., and J. Daniel Sagarin, Harrigan, Hurwitz, Sagarin & Rutkin, PC, Milford, Conn., of counsel), for plaintiff-appellee.

Howard J. Trienens, New York City (Harold S. Levy, William J. Jones, J. Paul McGrath, John M. Goodman, Andrew B. Donnellan, Jr., Frank C. Cheston, New York City, Lewis H. Ulman, William J. O'Keefe, Peter J. Tyrrell, New Haven, Conn., Dewey, Ballantine, Bushby, Palmer & Wood, New York City, of counsel), for defendants-appellants.

Before KAUFMAN and KEARSE, Circuit Judges, and BRIEANT, District Judge. *

IRVING R. KAUFMAN, Circuit Judge:

In Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 100 S.Ct. 1061, 62 L.Ed.2d 783 (1980), this Court plumbed the crosscurrents of Section 2 of the Sherman Act, 15 U.S.C. § 2, holding that dominant firms, having lawfully acquired monopoly power, must be allowed to engage in the rough and tumble of competition. This case presents us with the opportunity to elucidate and to apply the rationale of Berkey in the context of the American telecommunications industry. It presents an antitrust suit brought by Northeastern Telephone Co., a relatively small supplier of telephone equipment, against a mammoth and legendary enterprise the American Telephone & Telegraph Co. (AT&T). Joined as defendants were Western Electric, the manufacturing arm of the Bell System, and Southern New England Telephone Co. (SNET), the local Bell affiliate serving virtually all of Connecticut.

For much of their existence, these entities have escaped the rigors of competition, sheltered in part by tariffs filed with the Federal Communications Commission (FCC). In 1968, however, the Commission exposed a significant portion of their business to competitive pressures. We are here called upon to apply the teachings of Berkey to the actions appellants took in response to this infusion of rivalry. To oversimplify somewhat, the question presented is whether appellants did no more than to engage in vigorous competition, or instead, attempted to subvert the competitive process by unfair or unreasonable means. Because we hold that Northeastern has, for the most part, failed to prove that appellants' conduct exceeded the bounds of competitive propriety outlined in Berkey, we reverse the judgment below in several major respects. As to the design of the "protective coupler arrangement" required by appellants for use with Northeastern's telephone equipment, we remand for a new trial on liability and damages.

I. FACTUAL BACKGROUND AND PROCEEDINGS BELOW

A brief overview of the history of competition in the relevant market is necessary to our analysis of the legal questions raised in this appeal. For many years, customers of Bell System affiliates, 1 including customers of SNET, 2 were prohibited from connecting their own terminal equipment into the Bell communications network, even if those items were identical to the equipment supplied by local Bell affiliates. This prohibition, which was embodied in tariffs filed with the FCC, completely foreclosed competition in the terminal equipment market. In 1965, however, at the urging of a federal district court in the Northern District of Texas, the FCC began an investigation into the reasonableness of this practice. Three Many companies were attracted to the new market. Some, like Nippon Electronics and International Telephone & Telegraph (ITT) were huge conglomerates; others, like Northeastern Telephone, were diminutive firms. Indeed, Northeastern was among the smallest of the new entrants. It was formed by two Connecticut businessmen in 1972 on a total capital investment of $1,000. Its first corporate headquarters were in the basement of an old church, and its founders primarily did maintenance work on equipment sold by ITT. Its revenues that first year were only $70,000. In succeeding years, however, the company expanded dramatically, adding approximately one new office per annum. It is now headquartered in Milford, Connecticut, and its revenue in its seventh year of operation, 1978, exceeded $3,000,000.

years later, the Commission invalidated the tariffs, ruling that AT&T's refusal to allow interconnection of customer-provided equipment violated § 201(b) of the Federal Communications Act, 47 U.S.C. § 201(b). Thus was the "interconnect industry" born. See In re Use of Carterfone Device, 13 F.C.C.2d 420, reconsideration denied, 14 F.C.C.2d 571 (1968).

The competitive battle between Northeastern and SNET was waged on two fronts; public branch exchanges (PBXs) and key telephones. 3 A PBX consists of three elements: the equipment located on a customer's premises and used to switch calls from one telephone line to another; a switchboard which controls that operation; and the associated telephone sets and wiring. Key telephones, which are a familiar sight in business offices, are equipped with keys or buttons to give the set access to more than one telephone line.

During the first few years of their rivalry, both Northeastern and SNET obtained PBXs from outside suppliers often Nippon Electronics. But in January 1977, SNET submitted, and the Connecticut Division of Public Utilities Control (DPUC) approved, a tariff enabling the utility to offer two PBXs manufactured by Western Electric the Dimension 100 and the Dimension 400. 4 These units, particularly the Dimension 400, were well-received by Connecticut businessmen. We are told that SNET marketed over one hundred Dimension PBXs between March 1977 and February 1978.

The competitive environment in the business terminal equipment market, while not fatal to Northeastern's continued survival, was doubtlessly hostile. Metaphorically, Northeastern was a mosquito challenging an elephant. Even in its best year, its annual revenues from all of its operations were less than one-twentieth of the returns SNET earned in the terminal equipment market alone. But similar size disadvantages face any aspiring entrant wishing to dislodge a dominant firm. The antitrust laws assume these risks, and Northeastern must be taken to have accepted them. Appellee alleges, however, it was also the victim of business practices not countenanced by the Sherman Act. Specifically, Northeastern contends that SNET's prices for its Dimension PBXs and its key telephones were predatorily low, and that the customized payment option SNET offered to some of its business customers, the so-called "two-tier payment plan," had anticompetitive effects. Northeastern also complains that other aspects of appellants' activities were intended to stifle competition: their advertising and marketing methods, their introduction of new products, and their use of their monopoly power over telephone service to distort competition in the business equipment market.

Finally, Northeastern challenges conduct related to the revised tariffs AT&T filed in response to the FCC's Carterfone decision. After the Commission had invalidated the The NAS consumed the next four years, from 1968 to 1972, in preparing its report. It concluded, finally, that although the protective coupler requirement was "an acceptable way of assuring network protection," a registration system also merited consideration. Under such a system, the FCC would promulgate minimum specifications designed to protect the telecommunications network from electrical harm. Equipment meeting these standards would be exempt from the coupler requirement, but couplers would still be mandatory for unregistered items. Three years after adopting the NAS report, the FCC implemented this recommendation and invalidated AT&T's post-Carterfone tariffs. See In re Proposals for New or Revised Classes of Interstate and Foreign Message Toll Telephone Service and Wide Area Telephone Service, First Report and Order, 56 F.C.C.2d 593 (1975); Second Report and Order, 58 F.C.C.2d 736, on reconsideration, 61 F.C.C.2d 396 (1976), 64 F.C.C.2d 1058, aff'd sub nom. North Carolina Utilities Commission v. F.C.C., 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874, 98 S.Ct. 222, 54 L.Ed.2d 154 (1977).

proscription against interconnection of customer-owned terminal equipment in 1968, AT&T proposed tariffs requiring that all such equipment be interconnected via a "protective coupler arrangement," to be provided, installed, and maintained by the local operating companies at the customer's expense. These couplers were intended to protect the telecommunications network from certain electrical problems that might result from the use of faulty or incompatible equipment. Although several telecommunications firms objected to these tariffs, the FCC allowed them to take effect pending the outcome of a study it had commissioned by the National Academy of Sciences (NAS). The Commission noted, however, that in taking this approach it was "not giving any specific approval to the revised tariffs." In re A.T.&T. "Foreign Attachment" Tariff Revisions, 15 F.C.C.2d 605, 610 (1968), reconsideration denied, 18 F.C.C.2d 871 (1969).

Northeastern does not challenge the legality of the invalidated tariff. It contends instead that the protective couplers were intentionally overdesigned, making them unnecessarily expensive and subject to break down. In particular, Northeastern complains that the couplers required an external power source 5 and that they had six-wire leads while Northeastern's PBXs were designed for two-wire interconnection. These features, Northeastern maintains, unreasonably hampered its efforts to compete in the business terminal equipment...

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