Phonetele, Inc. v. American Tel. & Tel. Co.

• Decision Date: 06 November 1989
• Docket Number: No. 88-6353,88-6353
• Citation: 889 F.2d 224
• Parties: 1989-2 Trade Cases 68,835 PHONETELE, INC., Plaintiff-Appellant, v. AMERICAN TELEPHONE & TELEGRAPH COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 224

889 F.2d 224

1989-2 Trade Cases 68,835

PHONETELE, INC., Plaintiff-Appellant, v. AMERICAN TELEPHONE & TELEGRAPH COMPANY, et al., Defendants-Appellees.

No. 88-6353.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 11, 1989.

Decided Nov. 6, 1989.

Rick M. Stein, Sanger & Stein, Palm Springs, Cal., for plaintiff-appellant.

George L. Saunders, Jr., Sidley & Austin, Chicago, Ill., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before FLETCHER and NELSON, Circuit Judges, and PRO, ^* District Judge.

FLETCHER, Circuit Judge:

Phonetele, Inc. appeals the judgment of the district court in favor of AT & T and related defendants (hereafter referred to collectively as "AT & T") on Phonetele's antitrust causes of action. Phonetele's principal claim on appeal is that the district court could not have found, on the evidence presented to it, that AT & T had carried its burden of proof on its affirmative defense of regulatory justification. Phonetele also argues that the district court erred in defining the relevant market, and that Phonetele was deprived of a fair trial because the district court delayed its decision for four years. We affirm.

I. FACTS

Phonetele manufactures and sells the "Phonemaster." The Phonemaster is a device of the type known generically as a "call restrictor," connected between a telephone and the rest of the telephone network to prevent the user from placing calls beyond a predetermined area. Its primary market consists of medium-to-large companies with numerous telephone extensions. The Phonemaster allows the company to restrict phone usage by employees or customers. It is a sophisticated device that not only can prevent unauthorized long-distance calls, but also can allow the company to designate exceptions, for example allowing employees to make long-distance calls only to certain area codes or prefixes.

This dispute first came before us in Phonetele, Inc. v. AT & T, 664 F.2d 716 (9th Cir.1981) (Phonetele I ), where we reversed the district court's dismissal of Phonetele's complaint. ¹ We held that, although the defendants' status as regulated common carriers did not confer antitrust immunity on them, an affirmative defense based on the realities of regulation was available to them:

While a given regulatory scheme may not amount to the degree of necessity required to confer implied immunity on all activities of a regulated entity, some degree of necessity may be established as a matter of fact in individual cases. When the regulated entity assertedly attempts to respond to its duties as a common carrier by filing and implementing an anticompetitive tariff, the antitrust laws do not apply to the tariff without regard to the technical and legal constraints flowing from the regulatory structure. If a defendant can establish 664 F.2d at 737-38 (emphasis added). The district court assumed throughout this case, and AT & T does not dispute, that AT & T's restrictions on interconnection would be an antitrust violation unless AT & T could justify the restrictions.

                that, at the time the various anticompetitive acts alleged here were taken, it had a reasonable basis to conclude that its actions were necessitated by concrete factual imperatives recognized as legitimate by the regulatory authority, then its actions did not violate the antitrust laws.    At this stage in the proceedings, it appears this inquiry will depend largely on whether the facts show the companies did reasonably conclude, given their expertise, that uncontrolled NCSU [Network Control Signal Unit 2 ] interconnection would endanger their own equipment or disrupt their own signal transmissions in identifiable ways, and also that the tariff as filed was a reasonable, properly focused mechanism, considering other alternatives then available, to prevent such real harm from occurring
                

Phonetele's appeal accordingly focuses on AT & T's conduct in seeking, opposing and implementing various regulatory measures directly affecting the Phonemaster. A brief history of telephone regulation as it relates to such "ancillary" devices ³ is therefore necessary for an understanding of this case.

The Bell System originally had complete responsibility for the operation of the telephone system and ownership of all telephone equipment, including the user's telephone itself. Tariffs existed prohibiting the attachment of any non-Bell equipment to the network. In 1947, the Federal Communications Commission (FCC) allowed recording devices to be physically attached to the telephone line on the condition that the equipment necessary to make such physical connection was provided, installed, and maintained by the Bell System. Use of Recording Devices, 11 F.C.C. 1033 (1947). Then, in 1968, the FCC entered its Carterfone decision. Use of the Carterfone Device in Message Toll Telephone Service, 13 F.C.C.2d 420 (1968). That decision announced a broad holding:

[A] customer desiring to use an interconnecting device to improve the utility to him of ... the telephone system ... should be able to do so, so long as the interconnection does not adversely affect the telephone company's operations or the telephone system's utility for others. A tariff which prevents this is unreasonable....

There has been no adequate showing that non-harmful interconnection must be prohibited in order to permit the telephone company to carry out its system responsibilities.... We are not holding that the telephone companies may not prevent the use of devices which actually cause harm, or that they may not set up reasonable standards to be met by interconnection devices. These remedies are appropriate; we believe they are also adequate to fully protect the system.

13 F.C.C.2d at 424.

AT & T was invited to file new tariffs. It responded with new tariffs providing that permission to attach ancillary equipment was conditioned upon attachment through a "connecting arrangement" to be supplied by AT & T. The FCC allowed these tariffs to go into effect without hearing or investigation but refused to approve them expressly. American Telephone and Telegraph Co. "Foreign Attachment" Tariff Revisions, 15 F.C.C.2d 605, 610 (1968).

The FCC appears to have taken this somewhat ambivalent position because of the novelty of its policy requiring the Bell System to permit interconnection. Interconnection posed technical and economic problems of considerable complexity. Carterfone The FCC requested the National Academy of Sciences (NAS) to review the technical problems of interconnection and to make recommendations. The NAS issued its report in June, 1970. This report identified four general types of harm which could result from the electrical connection of ancillary devices: (1) dangerously high voltages; ⁴ (2) excessive amplitude; ⁵ (3) improper line balance; ⁶ and (4) improper control signals. ⁷ The NAS concluded that PCAs were a technically acceptable way to prevent these harms from occurring. It also concluded that a registration program would be effective only if it provided for approval of designs, certification of installation methods, testing of equipment, and oversight of maintenance.

pened up the possibility of a great many manufacturers designing and selling equipment to be attached to the network. The FCC therefore implemented a study period. Two means of preventing harm to the network were readily apparent. One was to require protective connecting arrangements (PCAs), the option selected by AT & T. The other was to develop standards for interconnecting attachments. This latter option had several problems. Either AT & T would have had to set standards and ensure compliance itself (an option subject to anticompetitive problems), or else a federal bureaucracy would have been required to do so.

The FCC next commissioned a consultant's report on the practical methods by which the NAS recommendations could be implemented. This report was critical of the time, expense, and effort needed to implement a registration program as envisioned by the NAS. Nevertheless, the FCC began studying the possibility of a standards approach for certain types of equipment. It started with a device called the PBX. ⁸ Phonetele asked the FCC to study a standards program for call restrictors, but the FCC declined to do so.

By 1972, it became apparent that the FCC was leaning towards adopting a streamlined registration system without certification of installation, testing or maintenance. AT & T was bitterly opposed to such a system, and openly expressed its opposition. AT & T decided to continue the PCA requirement and to resist the imposition of a streamlined registration program. ⁹

In 1975, the FCC proposed a comprehensive new registration program. Proposals for New or Revised Classes of Interstate and Foreign Message Toll Telephone Service (MTS) and Wide Area Telephone Service Meanwhile, proceedings directly involving the Phonemaster were taking place before the California Public Utilities Commission (CPUC). Phonetele was preparing to market the Phonemaster in California in late 1970. It notified AT & T of the need for a PCA. A Bell Labs engineer, under time pressure from Phonetele, designed a PCA, which was denominated the CTD. A schematic drawing was delivered to Phonetele in March 1971. Phonetele indicated the PCA was suitable. The CTD was used only by the Pacific Telephone and Telegraph Company ("PT & T") in California, where it was redenominated the ZZAGM. ¹⁰ At some point Phonetele adopted the position that a PCA was unnecessary and that the Phonemaster could be connected directly without harm.

(WATS)--First Report and Order, 56 F.C.C.2d 593 (1975), modified in part, 57 F.C.C.2d 1216 (1976), aff'd sub nom. North Carolina Util. Comm'n v. FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874, 98 S.Ct. 222, 54 L.Ed.2d 154 (1977). Under this program, the FCC would set standards for all ancillary electrical...