708 F.2d 1081 (7th Cir. 1983), 80-2171, MCI Communications Corp. v. American Tel. and Tel. Co.

Docket Nº:80-2171, 80-2288.
Citation:708 F.2d 1081
Party Name:MCI COMMUNICATIONS CORPORATION and MCI Telecommunications Corporation, Plaintiffs-Appellees, v. AMERICAN TELEPHONE AND TELEGRAPH COMPANY, Defendant-Appellant.
Case Date:January 12, 1983
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 1081

708 F.2d 1081 (7th Cir. 1983)

MCI COMMUNICATIONS CORPORATION and MCI Telecommunications

Corporation, Plaintiffs-Appellees,

v.

AMERICAN TELEPHONE AND TELEGRAPH COMPANY, Defendant-Appellant.

Nos. 80-2171, 80-2288.

United States Court of Appeals, Seventh Circuit

January 12, 1983

Argued April 19, 1982.[*]

As Modified Feb. 9, 1983.

As Modified on Denial of Rehearing

April 11, 1983.[**]

As Modified After Denial of Rehearing

April 18, 1983. **

Certiorari Denied Oct. 1, 1983.

See 104 S.Ct. 234.

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Chester T. Kamin, Chicago, Ill., for plaintiffs-appellees.

Howard J. Trienens, Sidley & Austin, Chicago, Ill., for defendant-appellant.

TABLE OF CONTENTS

OPINION OF THE COURT I. FACTS ...................................................... 1092 A. Background and Initial Entry of MCI ..................... 1093 B. The Interconnection Disputes ............................ 1096 C. The Execunet Decision ................................... 1097 D. The Pricing Controversies Between MCI and AT&T ........................................... 1098 E. MCI's Damage Evidence ................................... 1099 II. REGULATION AND THE ANTITRUST LAWS .......................... 1100 A. The Federal Regulatory Scheme for Telecommunications ..................................... 1100 B. Implied Immunity ........................................ 1101 C. The Impact of Regulation ................................ 1105 III. PREDATORY PRICING .......................................... 1111 A. Jury Instructions ....................................... 1111 B. Below Cost Pricing ...................................... 1112 C. Defining Measures of Cost ............................... 1114 D. The Proper Cost Standard ................................ 1119 E. Cross-subsidization ..................................... 1123 F. Insufficiency of the Evidence ........................... 1125 G. Pre-announcement ........................................ 1128 H. Telpak Marketing Plan ................................... 1130 IV. INTERCONNECTIONS ........................................... 1131 A. FX-CCSA Interconnections ................................ 1132 1. The Essential Facilities Doctrine .................... 1132 2. The Meaning of the Specialized Common

Carrier Decision .................................... 1133 3. "Retroactive" Application of Execunet ................ 1136 4. Instructions on Regulatory Policy .................... 1137 5. Insufficient Evidence ................................ 1139 6. Evidentiary Rulings .................................. 1141 7. Substantial Impact ................................... 1143 B. Tying ................................................... 1144 C. Disconnections .......................................... 1145 D. Denial of Interconnections for Service Outside of Local Distribution Areas .................... 1145 E. Multipoint Service ...................................... 1147 F. Inappropriate or Inefficient Interconnections ........... 1150 V. BAD FAITH NEGOTIATIONS AND NOERR-PENNINGTON 1153 A. The State Tariff Filings ................................ 1153 B. Bad Faith Negotiations .................................. 1158 C. Other Conduct ........................................... 1159 VI. DAMAGES .................................................... 1160 A. MCI's Proof of Damages .................................. 1160 B. Causation of Damages .................................... 1161 C. The Flawed Assumptions of the Lost Profits Study .......................................... 1164 D. Remand for a Partial New Trial .......................... 1166 VII. THE CONDUCT OF THE TRIAL ................................... 1169 A. Fair Trial .............................................. 1169 B. Theories of Defense ..................................... 1173 VIII. CONCLUSION ................................................. 1174 DISSENT ............................................................ 1174 I. HI-LO AND PREDATORY PRICING ................................ 1175 A. The Inappropriateness of Exclusively Cost-Based Standards ................................... 1175 1. The History and Goals of the Sherman Act ............. 1177 2. LRIC and Consumer Welfare in the Monopoly Context ............................................. 1180 B. Evidence of AT&T's Predatory Pricing .................... 1184 II. PRE-ANNOUNCEMENT OF HI-LO .................................. 1186 III. DAMAGE PROOF ............................................... 1187 A. Disaggregation .......................................... 1187 B. Assumptions ............................................. 1192 1. The Revenue Assumption ............................... 1192

APPENDIX ............................................................ 1195 A. Jury Instructions ....................................... 1195


Throughout the opinion the following abbreviations are used: Trial Transcript-Tr., Plaintiff's Exhibit - PX, Defendant's Exhibit - DX, and Appendix of this Opinion - App.

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Before WOOD and CUDAHY, Circuit Judges, and FAIRCHILD, Senior Circuit judge.

CUDAHY, Circuit Judge.

In this extraordinary antitrust case, 1 defendant American Telephone and Telegraph Company ("AT & T") appeals from a judgment in the amount of $1.8 billion, entered on a jury verdict, in a treble damage suit brought by plaintiffs MCI Communications Corporation and MCI Telecommunications Corporation (collectively "MCI") under section 4 of the Clayton Act, 15 U.S.C. Sec. 15 (1976). 2

I. FACTS

MCI's original complaint, filed March 6, 1974, contained four separate counts: monopolization, attempt to monopolize, and conspiracy to monopolize--all under section 2 of the Sherman Act 3--and conspiracy in restraint of trade--under section 1 of the Sherman Act. MCI alleged that AT & T had committed twenty-two types of misconduct, classifiable into several categories including predatory pricing, denial of interconnections, negotiation in bad faith and unlawful tying. MCI claimed at trial, on the basis of a lost profits study originally prepared in part for financing purposes, that it had suffered damages of approximately $900 million as a result of AT & T's allegedly unlawful actions. 4

The case was tried to a jury between February 6 and June 13, 1980. After completion of MCI's case in chief, the district court directed a verdict in favor of AT & T on seven of the twenty-two alleged acts of misconduct. 5 The remaining fifteen

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charges--all based on section 2 of the Sherman Act--were submitted to the jury. A special verdict form required the jury to make a separate finding of liability as to each of the fifteen charges, but permitted the jury to award damages in a single lump sum, without apportioning MCI's claimed financial losses among AT & T's various lawful and unlawful acts. The jury found in favor of MCI on ten of the fifteen charges submitted, and awarded damages of $600 million--a sum equal to two thirds the total damage figure claimed in MCI's aggregated lost profits study. 6 The district court trebled this damage award, as required by section 4 of the Clayton Act, resulting in a judgment of $1.8 billion, exclusive of costs and attorneys' fees.

AT & T filed motions for judgment notwithstanding the verdict or, in the alternative, for a new trial on June 23, 1980. These motions were denied without opinion on July 29, 1980. On August 25, 1980, AT & T filed its notice of appeal. On September 8, 1980, MCI filed a notice of cross-appeal. 7 In this opinion, we reject challenges to certain jury findings upon which AT & T's liability was based, sustain other challenges, and remand for a new trial on the issue of damages.

  1. Background and Initial Entry of MCI

    Prior to 1969, the telecommunications industry was regulated as a lawful monopoly. Local exchange service was and still is provided exclusively by one of the twenty-three Bell System operating companies or by one of some 1600 independent telephone companies, depending upon the geographical area involved. 8 Long distance service was provided by the Long Lines Department of AT & T in partnership with these operating companies. 9 The network of long distance transmission facilities was owned in substantial part by Long Lines; however, the interexchange facilities of the local telephone companies, including both transmission and switching facilities, were used in conjunction with Long Lines facilities whenever efficiency required. The local exchange facilities and switching machines belonging to the local companies were also used at each end of a regular long distance call.

    This same nationwide network was used as well by AT & T to provide other intercity telephone services, including point-to-point private lines, foreign exchange lines ("FX") and common control switching arrangements

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    ("CCSA"). Point-to-point private lines (also called tie lines) are connections between two locations that do not require the use of local switching machines because the lines are available to the customer on a continuing and exclusive basis. FX and CCSA, although classified for tariff purposes as private line services, do require interconnection with local switching machines. 10

    In 1963, Microwave Communications, Inc., the predecessor corporation to MCI, 11 requested permission from the Federal Communications Commission ("FCC") to construct and operate a long distance telephone system between Chicago and St. Louis. The proposed system consisted of a terminal in...

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