Mountain States Tel. and Tel. Co. v. F.C.C.

• Decision Date: 22 October 1991
• Docket Number: No. 88-1262,88-1262
• Citation: 939 F.2d 1021
• Parties: , 124 P.U.R.4th 177 The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION, et al., Respondents, American Telephone and Telegraph Co., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1021

939 F.2d 1021

291 U.S.App.D.C. 193, 124 P.U.R.4th 177

The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, et al Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION, et al., Respondents American Telephone and Telegraph Co., et al., Intervenors.

No. 88-1262.

United States Court of Appeals District of Columbia Circuit.

Argued Jan. 23, 1989.

Decided July 23, 1991.

As Amended Aug. 20, 1991.

Rehearing En Banc Denied Oct. 22, 1991.

Robert B. McKenna, with whom Dana A. Rasmussen was on the brief, for petitioners.

Laurel R. Bergold, Attorney, F.C.C., with whom Catherine G. O'Sullivan and Andrea Limmer, Attorneys, Dept. of Justice, and Diane S. Killory, General Counsel, Daniel M. Armstrong, Associate General Counsel, and John E. Ingle, Deputy Associate General Counsel, F.C.C., were on the brief, for respondents.

Alfred Winchell Whittaker, with whom Melanie S. Fannin, David K. Hall, Floyd S. Keene, Linda Kent, Mark J. Mathis, Martin T. McCue, Patricia J. Nobles, Thomas A. Pajda, William C. Sullivan and Thomas L. Welch were on the briefs, for intervenors Southwestern Bell Telephone Co., U.S. Telephone Ass'n, and Ameritech, Bell Atlantic and NYNEX subsidiaries.

Francine J. Berry and Jules M. Perlberg entered appearances for intervenor American Tel. and Tel. Co.

Liam S. Cooper, Gregory J. Christoffel and Patricia J. Nobles entered appearances for intervenor Southwestern Bell Telephone Co.

Saul Fisher, Mary McDermott and Martin J. Silverman entered appearances for intervenors New York Telephone Company and New England Tel. and Tel. Co.

Michael J. Karson and James R. Young entered appearances for intervening Bell Atlantic subsidiaries.

Roderick A. Mette entered an appearance for intervenor TRT Telecommunications Corp.

Before STARR ^* and BUCKLEY, Circuit Judges, and ROBINSON, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge ROBINSON.

ROBINSON, Senior Circuit Judge:

Petitioners ¹ are common carriers providing local telephone and other telecommunications services as subsidiaries of U.S. West, Inc., one of seven regional Bell operating companies emerging from the breakup of American Telephone and Telegraph Company (AT & T). ² Joined by numerous intervening counterparts, ³ petitioners challenge orders ⁴ of the Federal Communications Commission directing AT & T and the regional Bells to alter their accounting treatment of a judgment suffered and litigation expenses incurred by AT & T in a lawsuit charging civil violations of the federal antitrust laws. ⁵ The carriers contend that these orders transgress the Communications Act of 1934 ⁶ and the Administrative Procedure Act, ⁷ claims which respondents ⁸ vigorously resist. For the reasons that follow, we vacate the orders and remand the case to the Commission for further proceedings.

I. THE ADMINISTRATIVE HISTORY

In 1976, Litton Industries, Inc., instituted an antitrust action against AT & T and its subsidiaries alleging unlawful monopolization of the telephone terminal equipment market. Early on, the Commission's Common Carrier Bureau directed AT & T to account for, and report quarterly to the Commission, the expenses incurred in defending the action in order "that all such expenses are separately identified and maintained, for subsequent determinations as to whether these costs are properly chargeable to consumers or to stockholders." ⁹ Following a lengthy trial, a jury returned a verdict in Litton's favor, which was trebled to a judgment of some $276 million. ¹⁰ The Second Circuit affirmed on appeal ¹¹ and the Supreme Court declined further review. ¹²

Meanwhile, a separate antitrust suit, brought by the Department of Justice against AT & T, ended in a 1982 consent decree dismantling the unified Bell System and restructuring its components into AT & T and seven regional operating companies. ¹³ In the process, petitioners, which had been subsidiaries of AT & T and parts of the Bell System, became subsidiaries of U.S. West, Inc., one of the seven. ¹⁴

Throughout the more than seven-year pendency of Litton, AT & T recorded its litigation expenses in "above the line" accounts as items normally treatable for ratemaking purposes as costs of doing business. ¹⁵ Shortly after Litton reached its terminus, the Commission's Common Carrier Bureau informed AT & T ¹⁶ and the regional Bells ¹⁷ that the amount of the judgment, including accrued interest, and their accumulated litigation expenses ¹⁸ should be transferred "below the line to Account 370," ¹⁹ and thus were not ordinarily to be reflected in charges to ratepayers. The Bureau's letter instructed the regionals to submit their supporting rationale if they felt that some or all of the items should be charged to other accounts. The regionals did object, ²⁰ and thereupon the controversy before us was born.

The Commission modified the Bureau's proposal in one respect. It agreed with the carriers that interest on the judgment should be charged to a below-the-line account accorded special treatment in ratemaking proceedings. ²¹ The Commission, however, shared the Bureau's view that the amount of the judgment and the litigation expenses should be charged below the line, and thus deprived of any ratemaking significance unless the propriety of a role in ratemaking was demonstrated. ²² We summarize as briefly as feasible the course of the Commission's reasoning. ²³

The carriers argued "[t]hat lawsuits are a recurring fact of life in operating a business," ²⁴ and "[t]hat requiring [them] to record the judgment in account 370 would deny them the opportunity of seeking recovery of these costs in rate proceedings." ²⁵ In response, the Commission made known its doubt that payouts for antitrust judgments should be recoverable:

We agree generally that lawsuits are not uncommon in operating a business, and that companies must defend themselves against charges brought against them. We do not agree, however, that being found guilty of violating a statute should be regarded as a routine part of operating a business. Indeed, we believe that such a finding raises a serious question as to the allowability of the costs associated with such cases for ratemaking purposes, particularly the cost of the penalty imposed by the court. In this regard, account 370, which is used to record costs not ordinarily recognized for ratemaking, specifically provides that "penalties and fines for violations of statutes" shall be recorded therein. In our view, this provision of account 370 clearly describes the judgment against AT & T in the Litton case. ²⁶

The Commission did not, however, share carriers' concern that below-the-line accounting of the judgment would necessarily emasculate it as a factor in ratemaking:

The accounting classification of an item is not the final determinant of the ratemaking treatment. Any item of cost recorded in nonoperating (below-the-line) accounts can be identified by a carrier during a rate proceeding and included in rates if the carrier makes a positive and complete showing and the regulatory commission agrees that the costs should be allowed. ²⁷

With respect to the expenses of litigation, the Commission was influenced by "several indications in the past that the litigation costs associated with antitrust cases would be reviewed and questioned in future rate proceedings and that the outcome of the litigation may have a bearing on the allowability of these costs." ²⁸ The Commission took the Supreme Court's decision in NAACP v. FPC ²⁹ as authority to treat such expenses as "any other illegal, unnecessary, or duplicative costs." ³⁰ The Commission hastened to add that expenses of antitrust litigation, like those of antitrust judgments, were not completely foreclosed from recoupment in ratemaking proceedings:

In the next general interstate and exchange access tariff filings by AT & T and the [Bell operating companies], we will examine these expenses to the extent that the carriers seek to avoid the ratemaking impact of this reclassification upon their revenue requirements. Because our accounting classification is not the final determinant of ratemaking treatment ..., the carriers will have the opportunity to demonstrate that portions of the litigation costs should be absorbed by interstate ratepayers. For example, litigation expenses that can be attributed specifically to the defense of counts on which AT & T was exonerated may be transferred back into the revenue requirement upon a proper showing by the carriers. ³¹

On petitions for reconsideration, the Commission adhered to those holdings and expanded its reasoning somewhat. After announcement of its original decision, the Commission had conducted a rulemaking proceeding to establish general policies governing accounting treatment of adverse antitrust judgments and associated litigation expenses. ³² Therein, the Commission had determined that litigation expenses were to be recorded in above-the-line operating accounts as incurred, but if a final, adverse and nonappealable decision was entered against the carrier, the cumulative litigation expense would be disallowed in the next appropriate tariff proceeding. ³³ This approach, the Commission said, while differing in some particulars, was fully consistent in principle with that taken in the Litton Order. ³⁴ Summing up the effect of the two, the Commission stated:

In both the Litton Order and the USOA Antitrust Costs Order, we adopted an approach that would in the first instance presumptively remove from the ratemaking process the costs of litigation resulting from a carrier's violation of federal antitrust laws, while at the same time providing the carrier with an opportunity to show that in the circumstances of a particular case, it should be entitled to include such costs in interstate rates. This approach, in our view, strikes the proper balance between protecting ratepayers from having to bear the financial consequences of carriers' unlawful actions and permitting carriers to...