Illinois Bell Telephone Co. v. F.C.C., s. 84-1145

• Citation: 740 F.2d 465
• Decision Date: 29 June 1984
• Docket Number: Nos. 84-1145,84-1382 and 84-1475,s. 84-1145
• Parties: ILLINOIS BELL TELEPHONE COMPANY, Wisconsin Bell, New England Telephone and Telegraph Company, New York Telephone Company, and Nynex Corporation, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents. Mountain States Telephone and Telegraph Company, et al., Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 465

740 F.2d 465

ILLINOIS BELL TELEPHONE COMPANY, Wisconsin Bell, New England

Telephone and Telegraph Company, New York

Telephone Company, and Nynex

Corporation, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of

America, Respondents.

Mountain States Telephone and Telegraph Company, et al., Intervenors.

Nos. 84-1145, 84-1382 and 84-1475.

United States Court of Appeals, Seventh Circuit.

Argued June 7, 1984.

Decided June 29, 1984.

Alfred Winchell Whittaker, Kirkland & Ellis, Raymond F. Scully, Dilworth, Paxson, Kalish & Kauffman, Washington, D.C., for petitioners.

John E. Ingle, Deputy Assoc. Gen. Counsel, F.C.C., Mary Jo Manning, Wilkes, Artis, Hedrick & Lane, Chtd., Washington, D.C., for respondents.

Before BAUER and POSNER, Circuit Judges, and SWYGERT, Senior Circuit Judge.

POSNER, Circuit Judge.

A number of telephone companies formerly owned by the American Telephone and Telegraph Company, and still known as the Bell operating companies, have petitioned us under 28 U.S.C. Sec. 2342(1) (which vests the courts of appeals with exclusive jurisdiction to review certain orders issued by the Federal Communications Commission, see 47 U.S.C. Sec. 402(a), including orders promulgating rules, see Columbia Broadcasting System v. United States, 316 U.S. 407, 419, 62 S.Ct. 1194, 1201, 86 L.Ed. 1563 (1942)) to set aside an order made by the FCC at the conclusion of a notice-and-comment rulemaking proceeding. The order promulgated a rule that forbids the divested Bell operating companies after July 1, 1984, to sell or lease telecommunications equipment to their customers, or to sell certain specialized services to them, other than through separate subsidiary corporations created for this purpose. FCC, Furnishing of Customer Premises Equipment, Enhanced Services and Cellular Communications Services by the Bell Operating Companies, 49 Fed.Reg. 1190 (Jan. 10, 1984). The Commission's power to adopt such a rule as an incident to its authority to regulate the interstate telecommunications industry under Title II of the Communications Act of 1934, as amended, 47 U.S.C. Secs. 201-224; see 47 U.S.C. Sec. 154(i), is not questioned. Nor is it questioned that the standard that should guide our review is whether the rule is arbitrary or capricious. See Administrative Procedure Act, 5 U.S.C. Secs. 553, 706(2)(A); FCC v. National Citizens Comm. for Broadcasting, 436 U.S. 775, 802-03, 98 S.Ct. 2096, 2115-16, 56 L.Ed.2d 697 (1978).

The rule has a long history behind it (on which see generally Brock, The Telecommunications Industry: The Dynamics of Market Structure (1981)) without which it would be thoroughly incomprehensible. At one time AT & T completely dominated the provision of telephone handsets and other terminal equipment used by customers of its regional subsidiaries--Illinois Bell, New England Telephone and Telegraph Company, and the other, and today free-standing, Bell operating companies. If you lived in one of the areas served by a Bell operating company (and more than 80 percent of the nation's telephone subscribers did and still do) and you wanted telephone service, you had to get it from the operating company. The company would run a line from your premises to a central office containing switching equipment. Other lines owned by the company connected up all the central offices in the city or other locality, while AT & T's Long Lines Division provided intercity ("long distance") service. AT & T's Western Electric subsidiary manufactured the telephone handsets (as well as the other transmission, switching, and terminal equipment used in or attached to the telecommunications network) and sold them to the operating companies which in turn leased them to the subscribers as part of basic telephone service. The tariffs under which telephone service was sold forbade the subscriber to attach anything to the line that was not provided by the operating company ("foreign attachments"), or to service the telephone himself--the operating company took care of that too, and would replace the phone if it broke down, wore out, or became obsolete. Thus the Bell System manufactured, owned, installed, maintained, and replaced the telephones and other terminal equipment used by its subscribers. Rates for telephone service were of course regulated but Western's prices to the operating companies were not--not directly, anyway.

This thoroughgoing integration of equipment and service was praised as a source of cost savings and guarantee of service quality but it was also, and as time went by increasingly, criticized. At first it was criticized on two grounds: that it might enable AT & T to transfer profits from a regulated to an unregulated activity by having Western Electric charge the operating companies an inflated price for the equipment they bought from Western (some state regulatory authorities responded to this danger by regulating Western's prices to the operating companies, see, e.g., Illinois Bell Tel. Co. v. Illinois Commerce Comm'n, 55 Ill.2d 461, 483-84, 303 N.E.2d 364, 376 (1973)); and that it might enable AT & T to exclude Western's competitors from the enormous equipment market represented by the Bell operating companies. Later it was also criticized because the Bell System was thought to be slow in introducing new kinds of terminal equipment made possible by advances in communications and computer technology and in otherwise responding to customer needs. These criticisms began to persuade the FCC and the Justice Department's Antitrust Division in the late 1960's. The FCC rescinded AT & T's "foreign attachments" tariff in 1968. Use of Carterfone Device in Message Toll Telephone Service, 13 F.C.C.2d 420, on reconsideration, 14 F.C.C.2d 571 (1968). AT & T responded by requiring subscribers who wanted to attach their own terminal equipment to lease from it an expensive device linking the equipment to the telephone line, called a "protective connecting arrangement," which many believed was an unnecessary hindrance to foreign attachments. Eventually the Commission rescinded this tariff as well. See Proposals of New or Revised Classes of Interstate and Foreign Message Toll Telephone Service, 56 F.C.C.2d 593 (1975) (First Report ), 58 F.C.C.2d 736 (1976) (Second Report ) aff'd under the name of North Carolina Utilities Comm'n v. FCC, 552 F.2d 1036 (5th Cir.), modified, 64 F.C.C.2d 1059 (1977); for additional detail on the history of AT & T's efforts to discourage foreign attachments see Litton Systems, Inc. v. AT & T, 700 F.2d 785, 790-98 (2d Cir.1983), and Brock, supra, ch. 9.

Working parallel to a Commission increasingly bent on prying open the telephone industry to competition, the Justice Department in 1974 brought the most ambitious antitrust suit in history, seeking nothing less than the dismemberment of the world's largest corporation, as AT & T then was. While the Department thus sought to change the structure of the industry by breaking up its principal firm, the FCC--wanting to protect the new competitors that it had midwifed by rescinding various exclusionary Bell tariffs--imposed increasingly stringent restrictions on AT & T's ability to compete. Among these was a requirement that AT & T establish a separate subsidiary to handle the marketing of terminal equipment to Bell System subscribers. See Second Computer Inquiry, Final Decision, 77 F.C.C.2d 384, 398, on reconsideration, 84 F.C.C.2d 50 (1980), 88 F.C.C.2d 512 (1981), aff'd under the name of Computer & Communications Industry Ass'n v. FCC, 693 F.2d 198 (D.C.Cir.1982). The subsidiary was to be separate not merely in the arid formal sense of having a separate corporate charter but in the practical sense of having a completely different staff and different business premises from AT & T and the operating companies. (The requirements for a separate subsidiary, as they will be applicable to the divested companies under the order reviewed here, are set forth at 47 C.F.R. Secs. 64.702(c), (d).)

Before the new subsidiary could be formed, AT & T, after a year of trial of the Justice Department's antitrust suit, agreed in 1982 to an elaborate consent decree settling the suit. United States v. AT & T, 552 F.Supp. 131 (D.D.C.1982), aff'd without opinion under the name of Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). The decree allowed AT & T to keep Western Electric and also its interest in the two Bell operating companies (Cincinnati Bell Telephone Company and Southern New England Telephone Company) in which it was a minority shareholder, but required it to spin off the other 22 Bell operating companies. These were to remain separate corporations but were also to be grouped into seven geographically contiguous systems each owned by a holding company known as a Regional Bell Operating Company. The customer-equipment part of the decree (discussed at 552 F.Supp. 189-93) transferred the ownership of all terminal equipment owned by the operating companies to AT & T and forbade the operating companies to manufacture equipment. But it did not forbid them to reenter the terminal-equipment market by selling or leasing to their subscribers or others equipment that the operating company could buy from Western Electric (still owned by AT & T, but no longer affiliated with the operating companies) or any other manufacturer, as it chose. The decree also forbade the operating companies to provide "information services," that is, computer processing of data transmitted over the telecommunications network. But an operating company can get a waiver of this prohibition by persuading the court that "there is no substantial possibility" that it will be able to "use its monopoly power to impede competition." Id. at 195. Several requests for waiver are now pending before the district judge who approved the decree. He considered requiring the operating companies to provide terminal equipment if at all only through separate...