S Austin Coalition Comm v. SBC Commun & Ameritech, 99-1477

• Decision Date: 28 September 1999
• Docket Number: No. 99-1477,99-1477
• Citation: 191 F.3d 842
• Parties: (7th Cir. 1999) South Austin Coalition Community Council, et al., Plaintiffs-Appellants, v. SBC Communications Inc. and Ameritech Corporation, Defendants-Appellees
• Court: U.S. Court of Appeals — Seventh Circuit

Page 842

191 F.3d 842 (7th Cir. 1999)

South Austin Coalition Community Council, et al., Plaintiffs-Appellants, v. SBC Communications Inc. and Ameritech Corporation, Defendants-Appellees.

No. 99-1477

United States Court of Appeals, Seventh Circuit

Argued September 21, 1999

Decided September 28, 1999

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 3014--Blanche M. Manning, Judge.

Before Easterbrook, Kanne, and Evans, Circuit Judges.

Easterbrook, Circuit Judge.

Ameritech and SBC Communications, two of the "Baby Bells" carved out of AT&T as part of the antitrust divestiture finally approved in 1983, have agreed to merge. The Antitrust Division of the Department of Justice concluded that the merger is generally compatible with competition, though as a condition of receiving the Department's approbation the merging firms promised in a consent decree to spin off SBC's cellular phone business in St. Louis and other places where it now competes with Ameritech. Dissatisfied with the prospect that the merger would proceed with only this accommodation, five plaintiffs (all of them Ameritech customers) filed this suit under 15 U.S.C. sec.26, seeking an injunction on the ground that the merger would violate the antitrust laws. The district court dismissed the suit as premature, concluding that the dispute will not be ripe for adjudication until all required state and federal approvals have been obtained--for the agencies might insist on changes that would substantially alter the merger's competitive effects. 1999 U.S. Dist. Lexis 949 (N.D. Ill.).

The Baby Bells (more formally, the regional Bell operating companies) were created as monopolies of local telephone service, separated from AT&T's national network to facilitate competition in interstate service. See William J. Baumol & J. Gregory Sidak, Toward Compe-tition in Local Telephony (1994). Each Baby Bell must afford nondiscriminatory access to all interexchange carriers, and the consent decree required each to refrain from competing in long- distance markets (for fear that it would use its monopoly of local lines to restrict competition in long-distance communications). A fundamental assumption behind the 1983 reorganization is that local phone service is a natural monopoly because average total costs of both land lines and call switching decline through the entire range of demand. Thus the seven Baby Bells (with one local exchange carrier subsidiary for each state) were left as monopolies, with prices constrained by state public utilities commissions, while the competitive national and international segments of the business were regulated by the Federal Communications Commission. The organization of local exchange carriers did not matter much.

Technological changes have drawn the premise of the 1983 reorganization into question. Communications now do not necessarily depend on costly land lines; the market for cellular phone service is (or can be) competitive. The local switching service also has changed; formerly done by expensive electromechanical solenoids and relays, switching now is handled by computer. Many large customers have found it economical to install private branch exchanges in order to bypass the Baby Bells, something that would not be feasible if local switching still were a natural monopoly. The regional phone companies have built a great deal of new infrastructure, much of it optical fiber that can carry much more traffic than does copper; cable TV firms and Internet service providers likewise have installed high-capacity circuits, producing at least potential competition between cable and phone companies to supply the same services. At least three more methods, each amenable to multiple suppliers, are coming into use. David D. Clark, et al., High-Speed Data Races Home, 281 Scientific American 94-115 (Oct. 1999). The Internet has blurred the distinction between local and long-distance communications, see Illinois Bell Telephone Co. v. WorldCom Technologies, Inc., 157 F.3d 500 (7th Cir. 1998), and many of the Baby Bells want to enter the long-distance, cable, and broadband data markets- -or each others' local phone markets, now that the service no longer is a natural monopoly. Federal legislation during the late 1990s relieved the Baby Bells of many strictures adopted in 1983 and altered the law in other ways, setting the stage for more competition. See AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 119 S. Ct. 721 (1999). But with a greater potential for competition comes a greater potential profit from reducing competition. When all local markets were natural monopolies, no one would have cared whether two Bell operating companies merged. Today, however, each of the Baby Bells--now grown up--offers potential (and perhaps actual) competition to check the ambitions of every other telecommunications company. It may be that technology has changed so much that today competition is unstoppable, and the absorption of one Baby Bell by another would not impede entry at the local level. This is the position SBC and Ameritech advocate. But it has yet to be tested in litigation.

The problem, as the district court saw things, is that the precise shape of the merger, and the conditions of entry in its wake, cannot yet be known. Ameritech is the local-service provider in Illinois, Indiana, Michigan, Ohio, and Wisconsin; SBC operates in Arkansas, California, Connecticut, Kansas, Missouri, Nevada, Oklahoma, and Texas. Illinois and Ohio asserted regulatory jurisdiction over the merger; the firms also need the approval of the Federal Communications Commission. By the time the district judge dismissed the suit, none of the agencies had acted, and the judge observed that they...