DuPont Glore Forgan Inc. v. Am. Tel. & Tel. Co.

• Decision Date: 19 July 1977
• Docket Number: No. 73 Civil 2447.,73 Civil 2447.
• Citation: 437 F. Supp. 1104
• Parties: DuPONT GLORE FORGAN INCORPORATED et al., Plaintiffs, v. AMERICAN TELEPHONE AND TELEGRAPH COMPANY et al., Defendants and Third-Party Plaintiffs, v. UNITED STATES of America, Third-Party Defendant.
• Court: U.S. District Court — Southern District of New York

437 F. Supp. 1104

DuPONT GLORE FORGAN INCORPORATED et al., Plaintiffs, v. AMERICAN TELEPHONE AND TELEGRAPH COMPANY et al., Defendants and Third-Party Plaintiffs, v. UNITED STATES of America, Third-Party Defendant.

No. 73 Civil 2447.

United States District Court, S. D. New York.

July 19, 1977.

Nickerson, Kramer, Lowenstein, Nessen, Kamin & Soll, New York City, for plaintiffs; Eugene H. Nickerson, Robert M. Heller, Michael S. Oberman, Greg A. Danilow, Philip J. Hess, New York City, of counsel.

Davis, Polk & Wardwell, New York City, for defendants and third-party plaintiffs; Guy Miller Struve, Hiram D. Gordon, L. Gordon Harriss, Richard J. Cunningham, New York City, of counsel.

OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW

EDWARD WEINFELD, District Judge.

In this class action, plaintiffs seek to recover from the American Telephone and Telegraph Company ("AT&T") and twenty-three companies affiliated with it (the "operating companies") a portion of the federal communications excise taxes which defendants collected from plaintiffs and paid over to the United States Government. Plaintiffs claim that those taxes were collected by reason of a contract, combination or conspiracy among the defendants in restraint of interstate commerce, in violation of Section 1 of the Sherman Act,¹ and seek treble damages. Alternatively, plaintiffs contend that the defendants violated an alleged statutory duty under the Excise Tax Reduction Act of 1965² ("the Act"), and seek recovery of taxes paid as a proximate result of the defendants' alleged breach of duty.³

The case arises out of a provision of the Act which exempted from the excise tax generally imposed on local telephone service, "private communication service," such as intercommunication between different telephones in the subscriber's office, if a separate charge is made for such intercommunication.⁴ The plaintiffs are users of Centrex systems, a form of business telephone service which permits both intercommunication and calls to and from the outside telephone network. The gist of their complaint is that the defendants failed to establish a separate charge for the intercommunication portion of Centrex between 1965 and 1971 or 1972, and that, as a result, the plaintiffs paid a greater amount of excise tax than they would have paid had such a separation of charges been made.⁵

I. FACTUAL BACKGROUND

a. The Parties

The plaintiff class consists of all persons who were taxable⁶ Centrex subscribers of one or more of the defendant operating companies at any time between January 1, 1966, the effective date of the Act, and the effective date in 1971 or 1972 of the operating companies' tariffs establishing a separate Centrex charge for intercommunication, and who did not request exclusion from the class. This includes over a thousand subscribers with over 1,400 Centrex locations.

Collectively the defendants, along with certain other subsidiaries of AT&T,⁷ are sometimes referred to as the Bell System. The relationship among the various companies of the Bell System was described by one witness as a "federal system." Each of the operating companies is an independently organized, autonomous corporation managed by its own board of directors, providing local telephone service,⁸ including Centrex service, in one or more states. Each operating company also connects with the facilities of other telephone companies, including non-Bell System companies and the Long Lines Department of AT&T, to provide long-distance calls to and from its service area. The local telephone service, including Centrex service, of each of the operating companies is subject to regulation under state laws intended to protect the public against excessive or unduly discriminatory rates.⁹ Within its service area each operating company is the only company authorized under these laws to render Centrex service. These laws further require that the types of telephone service and the rates charged by each operating company be set forth in tariffs filed with the public utility commission in each state.¹⁰ In general, no changes can be made in rates or service until an amendment to the tariff is filed with, and allowed to become effective by, the public utility commission.¹¹ Thus each of the operating companies, within its service areas, is a regulated monopolist.

Although the operating companies are independently organized, they are closely affiliated with each other and with AT&T. AT&T owns all of the capital stock of sixteen of the operating companies, at least 70% of the capital stock of five, and a substantial minority interest in the other two.¹² An AT&T officer sits on the board of directors of each of the operating companies except one, and transfers of personnel between the operating companies and AT&T are common. The president of each of the operating companies is chosen with the concurrence of the chairman of the board of AT&T.

The operating companies are also affiliated with AT&T by virtue of license agreements. Under these agreements each operating company uses AT&T's patented telephone equipment within its service area. The license agreements obligate AT&T to engage in research and development and to provide technical advice and assistance to the operating companies in a wide range of matters. This assistance is rendered, for example, by responses to specific inquiries from the operating companies, by conferences involving personnel from all the operating companies and AT&T, and by memoranda and newsletters prepared by persons at AT&T and distributed throughout the Bell System. Through system-wide task forces and committees the operating companies often participate in preparing materials on which AT&T's recommendations are based. As a result, AT&T's advice is usually followed by the operating companies, with variations to account for local situations. Of particular relevance to this case is the fact that most of the operating companies generally relied on AT&T for information and advice relating to the federal excise tax.

b. Characteristics of Telephone Service

The nature of this case requires a fairly detailed description of some of the technical aspects of telephone service. Ordinary telephone service consists of the privilege of making calls within a local exchange area and, upon payment of an additional amount (message units or a toll charge), outside that area, plus the privilege of receiving telephone calls from any telephone within or outside the local exchange area. A subscriber receives access to the telephone network through a "line" or "loop" (usually consisting of a pair of wires) which is run from the telephone company central office to the subscriber's premises. At the subscriber's end, the line terminates in a "station," a broad term to describe the telephone instrument or other equipment used by the subscriber. When the subscriber makes a telephone call, switching equipment at the telephone company central office (or, in the case of long distance calls, at several telephone company offices) connects his line to the line of the called telephone, thereby completing the call. This ability to place calls through the telephone network is known as "exchange access."

A business or other organization which has a large number of personnel at one location generally will have more than one exchange access line and more than one station. Such a subscriber often finds that there are many calls between its own stations and desires a specific service for such intercommunication. Equipment for intercommunication can be leased or purchased from a non-Bell System company or provided by an operating telephone company. However, prior to 1968, the defendants' tariffs provided that non-Bell System equipment could not be connected with the telephone network.¹³ Thus, a subscriber who obtained his intercommunication equipment from a competitor of one of the defendants required two telephone systems ?€” one for exchange access and one for intercommunication.

(i) PBX Service

For many years prior to the introduction of Centrex service in 1961, the operating companies provided the capability of intercommunication among a subscriber's stations and exchange access through Private Branch Exchange ("PBX") service. The switching equipment for PBX service is generally located on the subscriber's premises. Each of the subscriber's stations is connected to this PBX switching equipment by a station line, and the switching equipment is connected in turn to the telephone company central office by a number of "trunks," or pairs of wires (physically similar to the lines used for ordinary telephone service) which provide exchange access. However, since not all of a PBX subscriber's stations are likely to be making outside calls at once, a PBX subscriber generally has many fewer trunks than stations. In addition, one or more attendant positions such as switchboards or consoles are connected to the PBX switching equipment. A PBX subscriber generally pays a separate monthly charge for the service provided by each PBX station, each PBX trunk, each attendant position and the PBX switching equipment, as well as charges for any supplemental services furnished.

An incoming call to a PBX system arrives over one of the trunks connecting the PBX switching equipment to the telephone company central office, and rings at the attendant's position. After answering the phone and ascertaining which individual or extension the caller wishes, the attendant completes the call by establishing a connection between the trunk line on which the call is coming in and the desired station line. If a person wants to make an outgoing call from one of the PBX stations, his station line is connected through the PBX switching equipment ?€” either manually by the attendant (as with incoming calls) or automatically ?€”to one of the trunks connecting the PBX switching equipment to the telephone company central office. The call is then dialed and routed...