US v. Western Elec. Co., Inc., Civ. A. No. 82-0192 (HHG).

• Decision Date: 25 July 1991
• Docket Number: Civ. A. No. 82-0192 (HHG).
• Citation: 767 F. Supp. 308
• Parties: UNITED STATES of America, Plaintiff, v. WESTERN ELECTRIC COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

767 F. Supp. 308

UNITED STATES of America, Plaintiff, v. WESTERN ELECTRIC COMPANY, INC., et al., Defendants.

Civ. A. No. 82-0192 (HHG).

United States District Court, District of Columbia.

July 25, 1991.

OPINION

HAROLD H. GREENE, District Judge.

The issue before the Court in this, the most recent chapter of this antitrust case, is whether the Court should remove the restriction on information services imposed as part of the consent decree. Under a decision of the Court of Appeals, such removal is required if this Court is not able to conclude from the evidence that the entry of the Regional Companies into the presently restricted market would be certain to lessen competition.

I History

This lawsuit was brought by the Department of Justice on behalf of the United States against the American Telephone and Telegraph Company in November 1974. Following a period of discovery and of pretrial motions, an eleven-month trial began in January 1981. See generally, United States v. American Tel. & Tel. Co., 552 F.Supp. 131 (D.D.C.1982), affirmed sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). Shortly before the taking of evidence was to be concluded, the parties agreed upon and submitted to the Court a proposed consent decree.

The Court held extensive Tunney Act¹ proceedings, in which all organizations, private and public (including twenty-nine States), with an interest in the decree were permitted to intervene and to participate. The Court approved the decree with some modifications on August 24, 1982, and entered it on that date as a final judgment. The Supreme Court affirmed that judgment on February 28, 1983.²

The seven Regional Companies,³ which had inherited all the local telephone companies of the Bell System at the time the System's assets were split up, were subjected under the terms of the decree to several restrictions. These restrictions were based upon the kinds of anticompetitive activities that the local companies had engaged in while they were still a part of the Bell System, or were likely to engage in because the ability and the incentive therefor were present. As here relevant, one of the provisions of the decree prohibits the Regional Companies from providing inter-exchange and "information services,"⁴ such services being defined as follows:

"Information service" means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information which may be conveyed via telecommunications, except that such service does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.

552 F.Supp. at 229.

In 1987, in response to an initiative of the Department of Justice, the Court conducted a so-called triennial review of the continuing need for the restrictions imposed by the decree. At that time, again, the Court permitted wide participation in and intervention by interested parties, both private and governmental.

Following that review, the Court removed the restriction on the transmission of information, as well as a comprehensive catch-all restriction on the entry of the Regional Companies into non-telecommunications markets. However, the Court concluded that there was no basis for removing the three "core" restrictions—those on interexchange services, the generation of information, and the manufacture of equipment. See generally, United States v. Western Electric Co., 673 F.Supp. 525 (D.D.C.1987).

The basic rationale for keeping intact the core restrictions was that the Regional Companies retained their monopoly control of the local telephone switches and wires, with the consequence that competitors of these companies in the markets affected by the restrictions could reach their ultimate customers only at the Regional Companies' sufferance. These companies, reasoned the Court, were in the same position as their predecessor Bell System, which "could with ease discriminate against competitors by such practices as delaying interconnections, providing inferior connections, charging exorbitant prices, or refusing to attach competitors' products altogether. The Regional Companies are also able to subsidize their competitive products with funds syphoned off from the monies paid in by the ratepayers...." 673 F.Supp. at 600, 602.

The Regional Companies and several other parties, including the Department of Justice, took appeals. The Court of Appeals affirmed the decisions of this Court on several issues, but it reversed and remanded the issue of information services. United States v. Western Electric Co., 900 F.2d 283 (D.C.Cir.), cert. denied sub nom. MCI Communications Corp. v. United States, ___ U.S. ___, 111 S.Ct. 283, 112 L.Ed.2d 238 (1990). The appellate tribunal held that, inasmuch as none of the original parties to the consent decree⁵ is opposing the removal of the information services restriction, the appropriate provision of the decree to govern judicial decisions with respect thereto is section VII of that decree⁶ (which, the appellate court said, establishes a public interest standard), rather than section VIII(C)⁷ (which deals only with removals of restrictions contested by one of the original parties).⁸ 900 F.2d at 295, 305-07.

The Court of Appeals went on to indicate that, in view of the expertise of the Department of Justice in enforcing the antitrust laws, this Court was to defer to that Department with respect to a number of issues.⁹ Inasmuch as this Court had in several respects applied legal standards differing from those laid down in the Court of Appeals opinion, the case was remanded for further fact-finding with respect to the information services restriction under the criteria established by the appellate court.

Following the issuance of the appellate mandate, this Court once again entertained briefs from all the parties, including the intervenors which would be affected by the decision, and it heard oral argument during two successive days. In addition to their legal arguments, various parties and intervenors also submitted voluminous evidence in the form of affidavits and exhibits.¹⁰ These affidavits, exhibits, and arguments form the basis for the instant decision.

The Court will consider first the various aspects of the substantive issues¹¹ discussed by the parties to the proceeding.

II Market Power

The Court of Appeals has stated that the exercise of market power is a necessary prerequisite to damage to competition under the antitrust laws, and that "unless the entering BOC will have the ability to raise prices or restrict output in the market it seeks to enter, there can be no substantial possibility that it could use its monopoly power to `impede competition.'" 900 F.2d at 296. The issue is whether the Regional Companies possess market power within the meaning of that definition.

A. Market Power in General

The Regional Companies note that market power is deemed to exist when there are substantial barriers to entry, a large market share, and a paucity of substitutes, and they contend most notably that they presently lack any market share in the information services market and therefore could not possibly have market power. Moreover, according to the affidavits and exhibits submitted by these companies, they could not hereafter obtain significant market share in competition with the many large companies already in the market,¹² and they would be unable in practice to raise their competitors' costs (through either higher tariffs or degraded access to the local exchange). Even if they could achieve such ends, the Regional Companies argue, they might at most be able to raise prices in the local exchange market, but not in the information services market—the critical area for antitrust analysis according to the Court of Appeals.

The most detailed evidence adduced by the Regional Companies on market power is an affidavit of Franklin Fisher, a professor of economics at the Massachusetts Institute of Technology.¹³ According to Professor Fisher, the Regional Companies would be able to achieve market power only if (1) they had the ability to raise the costs of their rivals; (2) this ability gave them power over the price of information services; (3) regulators were unable to defeat this anticompetitive behavior; and (4) efficiency losses due to anticompetitive conduct by the Regional Companies outweighed the benefits to the public of the Regional Companies' presence in the market.¹⁴ In this Part of this Opinion, the Court will examine only the first and second factors described by Professor Fisher; the third and fourth factors are discussed in Parts III and VI, respectively.

Professor Fisher asserts in amplification of his conclusions that the information services market is national in scope, and that this fact permits independent information services providers to move their operations to the territory of a Regional Company that does not discriminate against them.¹⁵ Moreover, according to the Fisher affidavit, the Regional Companies will not be able to discriminate at the consumer end of the telephone circuits because of the difficulty of acting selectively there, and the only way they could have power over price would be through collusion among all of them, which would be difficult to achieve inasmuch as seven different companies are involved.¹⁶ Professor Jerry A. Hausman similarly contends that discrimination by a Regional Company would be inconsistent with market data and economic theory, in substantial part because the Regional Companies will compete against each other.¹⁷

Other evidence submitted by the Regional Companies denies the existence of incentives to engage in anticompetitive acts. Thus, Dennis Carlton and George Stigler, both professors of economics at the University of Chicago, contend that the Regional Companies do not have an...