Illinois Bell Telephone Co. v. F.C.C.

• Decision Date: 01 August 1989
• Docket Number: No. 88-1077,88-1077
• Citation: 883 F.2d 104
• Parties: , 107 P.U.R.4th 557 ILLINOIS BELL TELEPHONE COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, Bell Atlantic Telephone Companies, United States Telephone Association, North American Telecommunications Association, People of the State of California, et al., Mountain States Telephone and Telegraph Co., et al., International Communications Association, Independent Data Communications Manufacturers Association, Inc., New York Telephone Co., Pacific Bell and Nevada Bell, GTE Service Corporation, Southwestern Bell Telephone Co., Central Telephone Co., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 104

883 F.2d 104

280 U.S.App.D.C. 32, 107 P.U.R.4th 557

ILLINOIS BELL TELEPHONE COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents Bell Atlantic Telephone Companies, United States Telephone Association, North American Telecommunications Association People of the State of California, et al., Mountain States Telephone and Telegraph Co., et al., International Communications Association, Independent Data Communications Manufacturers Association, Inc., New York Telephone Co Pacific Bell and Nevada Bell, GTE Service Corporation Southwestern Bell Telephone Co., Central Telephone Co., Intervenors.

No. 88-1077.

United States Court of Appeals, District of Columbia Circuit.

Argued May 16, 1989.

Decided Aug. 1, 1989.

As Amended Aug. 1, 1989.

Alfred W. Whittaker, Richmond, Va., with whom Floyd S. Keene, Milwaukee, Wis., was on the brief, for petitioners.

Laurel R. Bergold, Atty., F.C.C., with whom Diane S. Killory, Daniel M. Armstrong, C. Grey Pash, Jr., Attys., F.C.C., Catherine G. O'Sullivan and Andrea Limmer, Attys., Dept. of Justice, Washington, D.C., were on the brief, for respondents.

Linda L. Oliver, Washington, D.C., and John E. Ingle, Attys., F.C.C., also entered appearances for respondents.

Albert H. Kramer and Denise Bonn, Washington, D.C., were on the brief for intervenor North American Telecommunications Ass'n.

Herbert E. Marks, James L. Casserly and David Alan Nall, Washington, D.C., were on the brief, for intervenor Independent Data Communications Manufacturers Ass'n, Inc.

James R. Young and Lawrence W. Katz entered appearances for intervenor Bell Atlantic Telephone Cos.

Martin T. McCue, Washington, D.C., entered an appearance, for intervenor U.S. Telephone Ass'n.

Janice E. Kerr, J. Calvin Simpson, San Francisco, Cal., and Ellen S. Levine entered appearances, for intervenor People of the State of Cal., et al.

Dana A. Rasmussen, Robert B. McKenna and Debra T. Yarbrough, Washington, D.C., entered appearances for Mountain States Tel. and Tel. Co., et al.

Brian R. Moir entered an appearance, for intervenor International Communications Ass'n.

Mary McDermott and Martin J. Silverman entered appearances for intervenor New York Telephone Co.

Robert A. Barada, Jeffrey B. Thomas, Cincinnati, Ohio, and Stanley J. Moore entered appearances for Pacific Bell and Nevada Bell.

Richard McKenna and Daniel L. Bart entered appearances for intervenor GTE Service Corp.

William C. Sullivan, Michael J. Zpevak and Liam S. Coonan, St. Louis, Mo., entered appearances for intervenor Southwestern Bell Telephone Co.

Theodore D. Frank, Washington, D.C., entered an appearance for Central Telephone Co.

Before MIKVA, SILBERMAN and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

The Ameritech Operating Companies ("Ameritech" or "petitioners"), a commonly-owned association of five Bell Operating Companies ("BOCs") spun off pursuant to a settlement of an antitrust suit brought by the government against AT & T, see United States v. AT & T, 552 F.Supp. 131 (D.D.C.1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983), seek review of an order of the Federal Communications Commission. The order conditions the BOCs' marketing of customer premises equipment ("CPE") (other than through entirely separate CPE subsidiaries) on their agreement to provide "independent CPE vendors ... with a meaningful opportunity to market Centrex and other BOC network services through sales agency plans or other functionally equivalent means." Furnishing of Customer Premises Equipment by the Bell Operating Companies and the Independent Telephone Companies, 2 F.C.C. Rcd 143, 156 (1987) ("BOC Structural Relief Order "). Ameritech contends that the Commission has imposed these conditions arbitrarily and in contravention of statutory provisions reserving to the states the regulation of intrastate communications services. We deny the petitions.

I.

A.

Until 1980, the provision of most CPE by common carriers was subjected to rate regulation under Title II of the Communications Act of 1934, 47 U.S.C. Secs. 201-224 (1982). In that year, however, the Commission instituted a major restructuring of its Title II regulatory program, removing from Title II coverage the provision of CPE and so-called "enhanced services" and reserving Title II regulation solely for the offering of "basic" transmission service. See Amendment of Section 64.702 of the Commission's Rules (Second Computer Inquiry), 77 F.C.C.2d 384 (1980) ("Computer II "), recon., 84 F.C.C.2d 512 ("Computer II Reconsideration "), further recon., 88 F.C.C.2d 512 (1981), aff'd sub nom. Computer & Communications Industry Ass'n v. FCC, 693 F.2d 198 (D.C.Cir.1982), cert. denied, 461 U.S. 938, 103 S.Ct. 2109, 77 L.Ed.2d 313 (1983). ¹ The FCC believed deregulation of all but the basic service market would benefit consumers by enhancing customer choice and encouraging more efficient use of telecommunications networks. Sales of CPE and enhanced services were thereafter treated according to the Commission's "ancillary" jurisdiction under Title I of the Act, 47 U.S.C. Secs. 151-158 (1982), which provides the Commission general authority over, inter alia, "all interstate and foreign communication by wire," 47 U.S.C. Sec. 152(a) (1982), defined in the statute to include "all instrumentalities, facilities, [and] apparatus ... incidental to such [communication]." Id. Sec. 153(a). In Computer II, the FCC exercised this ancillary jurisdiction to preempt the states from regulating the offering of CPE and enhanced services. Insofar as CPE was concerned, preemption of inconsistent state regulation was believed necessary in order to fulfill the federal deregulatory objective because CPE was used to support both interstate and intrastate communications. See Computer II, 77 F.C.C.2d at 455-57.

The Commission, however, conditioned the opportunity for common carriers to provide CPE and enhanced services on the carriers' agreement to keep separate accounts for their regulated and unregulated activities. Id. at 475-76. Special treatment was accorded AT & T and its then wholly-owned BOCs; because of their monopoly over access to telecommunications networks and the risk that they would use their monopoly power to gain leverage in the competitive CPE market, the Commission required these companies to form separate subsidiaries to market CPE and enhanced services. Id. at 477. The Commission, aware that these structural separation requirements were not without efficiency costs, believed that the benefits of separation in terms of protecting the health of the competitive CPE market would outweigh whatever costs separation entailed. After the breakup of AT & T, the Commission imposed substantially the same structural separation requirements on the divested BOCs, based on the notion that their near-monopoly power in offering network access would give them an unfair advantage in the markets for CPE and enhanced services. See Policy and Rules Concerning the Furnishing of Customer Premises Equipment, Enhanced Services and Cellular Communications Service by the Bell Operating Companies, 95 F.C.C.2d 1117 (1983) ("BOC Separate Subsidiary Order "), aff'd sub nom. Illinois Bell Telephone Co. v. FCC, 740 F.2d 465 (7th Cir.1984), recon. denied, 49 Fed.Reg. 26,056 (June 26, 1984), 56 Rad.Reg.2d (P & F) 581 ("BOC Separate Subsidiary Reconsideration "), aff'd sub nom. North American Telecommunications Association v. FCC, 772 F.2d 1282 (7th Cir.1985). The Commission's structural separation orders were affirmed in all respects on direct review. See Computer & Communications Industry Ass'n v. FCC, 693 F.2d 198 (D.C.Cir.1982) (affirming Computer II ), cert. denied, 461 U.S. 938, 103 S.Ct. 2109, 77 L.Ed.2d 313; Illinois Bell Telephone Co. v. FCC, 740 F.2d 465 (7th Cir.1984) (affirming BOC Separate Subsidiary Order ); North American Telecommunications Ass'n v. FCC, 772 F.2d 1282 (7th Cir.1985) (affirming BOC Separate Subsidiary Reconsideration ).

Soon after "modified" separation requirements were imposed on the divested BOCs, a number of the BOCs, including Ameritech, petitioned the Commission to allow their CPE subsidiaries to market CPE jointly with network services, and to permit the BOCs to pay their subsidiaries commissions on the network services portion of their sales. The BOCs required such authority, the Commission was told, because large telecommunication customers typically desired to purchase basic services, enhanced services, and CPE from a single vendor--the communications equivalent of "one-stop shopping." Unless the BOCs' CPE subsidiaries were permitted to engage in joint marketing, they would be unable to compete effectively with independent vendors (who were free to offer CPE-network service packages), and consumers would be deprived of meaningful choices as to communications packages. See American Information Technologies Corp., 98 F.C.C.2d 943, 945, 951-52 (1984) ("Sales Agency Order "), recon. denied, 59 Rad.Reg.2d (P & F) 309 (1985) ("Sales Agency Reconsideration ").

The Commission found joint marketing to be "in the public interest," id. at 945, but recognized the "potential for anti-competitive abuse and cross-subsidy" inherent in such arrangements, id. at 953, including the possibility that the BOCs would use commission payments to their CPE subsidiaries as a means of "shift[ing] costs from unregulated activities to regulated services." Id. at 955. To ameliorate the FCC's concerns in this respect, Ameritech proposed to enter into "substantially similar marketing [and commission] agreements with a 'reasonably manageable' number of unaffiliated CPE vendors." Id. at 947 (quoting Ameritech petition). The Commission ultimately approved those arrangements, subject, inter alia, to the following conditions:

[E]ach BOC must allow a reasonable number of bona...