U.S. v. Western Elec. Co., Inc.

• Decision Date: 06 April 1994
• Docket Number: Nos. 92-5079,92-5111,s. 92-5079
• Citation: 12 F.3d 225
• Parties: , 1993-2 Trade Cases P 70,449 UNITED STATES of America v. WESTERN ELECTRIC COMPANY, INC., et al., Bell Atlantic Corporation, Appellant. to 92-5113, 92-5167 and 92-5168.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 225

12 F.3d 225

304 U.S.App.D.C. 199, 1993-2 Trade Cases P 70,449

UNITED STATES of America v. WESTERN ELECTRIC COMPANY, INC., et al. Bell Atlantic Corporation, Appellant.

Nos. 92-5079, 92-5111 to 92-5113, 92-5167 and 92-5168.

United States Court of Appeals District of Columbia Circuit.

Argued April 14, 1993.

Decided Dec. 28, 1993.

Rehearing In Banc Denied April 6, 1994. ^*

Appeals from the United States District Court for the District of Columbia (D.C. Civil No. 82-0192).

Nancy C. Garrison, Atty., U.S. Dept. of Justice, argued the cause, for appellant United States of America in No. 92-5168. With her on the brief were J. Mark Gidley, Acting Asst. Atty. Gen., and Catherine G. O'Sullivan, Atty., U.S. Dept. of Justice.

Michael W. McConnell, argued the cause for the Bell Co. appellants. With him on the joint brief were Stephen M. Shapiro, Michael K. Kellogg, and Lawrence S. Robbins (for the Bell Companies), James R. Young, John Thorne, and John M. Goodman (for Bell Atlantic Corp.), Walter H. Alford, Mark D. Hallenbeck, and Frederick W. Johnson (for BellSouth Corp.), Richard W. Odgers, Margaret DeB. Brown, and James L. Wurtz (for Pacific Telesis Group), Raymond F. Burke and Gerald E. Murray (for NYNEX Corp.), James D. Ellis, Liam S. Coonan, and Martin E. Grambow (for Southwestern Bell Corp.), and Jeffrey S. Bork (for US West, Inc.). Clifford Sloan filed an appearance, for appellant Ameritech Corp.

David Carpenter, argued the cause for appellee American Tel. & Tel. Co. ("AT&T"). With him on the brief were Francine J. Berry and Howard J. Trienens. Mark C. Rosenblum filed an appearance, for AT&T.

Anthony C. Epstein argued the cause, for intervenors Independent Data Communications Mfrs. Ass'n, Telecommunications Industry Ass'n, Tandy Corp., and MCI Communications Corp. With him on the brief were Chester T. Kamin, Michael H. Salsbury, and Carl S. Nadler, Herbert E. Marks, James L. Casserly, John L. McGrew, John W. Pettit, and Neal M. Goldberg. Thomas K. Crowe filed an appearance, for intervenor Tandy Corp. David A. Nall filed an appearance, for intervenor Independent Data Communications Mfrs. Ass'n, Inc. Albert H. Kramer and Robert F. Aldrich filed the brief, for intervenor North American Telecommunications Ass'n.

Albert Halprin filed the brief for amicus curiae Northern Telecom, Inc. Before WALD, BUCKLEY, and WILLIAMS, Circuit Judges.

Opinion for the court filed by Circuit Judge BUCKLEY.

Dissenting opinion filed by Circuit Judge STEPHEN F. WILLIAMS.

BUCKLEY, Circuit Judge:

The 1982 antitrust consent decree providing for divestiture of the American Telephone and Telegraph Company ("AT&T") prohibits its former local exchange subsidiaries, the Bell Operating Companies ("BOCs"), from engaging in certain lines of business, including the manufacture of telecommunications products, either "directly or through any affiliated enterprise." The question presented is whether a contractual relationship under which American Information Technologies Corporation ("Ameritech") would provide funds to an independent company for product development in exchange for royalties on sales of the product to third parties may render the independent company an "affiliated enterprise." The district court answered this question in the affirmative by denying the Department of Justice's ("DOJ") motion for a declaratory judgment that the term "affiliated enterprise" covers only those concerns in which a BOC has either more than a de minimis equity interest or operational control. The court also denied Ameritech's request for a waiver from the consent decree's line-of-business restrictions to permit it to enter such funding/royalty arrangements.

We hold that the term "affiliated enterprise" was intended to cover all arrangements in which the BOCs share directly in the revenues of entities engaged in prohibited businesses, and hence that the district court acted properly by denying the DOJ's motion for a declaratory judgment. We remand, however, to permit a fuller exploration of the question whether Ameritech is entitled to a waiver.

I. BACKGROUND

The AT&T consent decree ("Decree") imposes restrictions on the product and service markets that the BOCs may enter. The restrictions were intended to ensure that the BOCs would not use their monopoly control over local telephone exchanges to impede competition in other markets. See United States v. American Tel. & Tel. Co., 552 F.Supp. 131, 186-94 (D.D.C.1982) ("Decree Opinion "), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). Section II(D) of the Decree provides:

After completion of the reorganization ... no BOC shall, directly or through any affiliated enterprise:

1. provide interexchange telecommunications services or information services;

2. manufacture or provide telecommunications products or customer premises equipment (except for provision of customer premises equipment for emergency services); or

3. provide any other product or service, except exchange telecommunications and exchange access service, that is not a natural monopoly service actually regulated by tariff.

Id. at 227-28 (emphasis added). The district court has subsequently modified the decree by eliminating the prohibitions on non-telecommunications businesses, United States v. Western Elec. Co., 673 F.Supp. 525, 597-99 (D.D.C.1987), and on providing information services. United States v. Western Elec. Co., 767 F.Supp. 308, 332 (D.D.C.1991), aff'd, 993 F.2d 1572 (D.C.Cir.1993). The manufacturing and interexchange restrictions, however, remain in force. See generally United States v. Western Elec. Co., 900 F.2d 283, 300-05 (D.C.Cir.1990) ("Triennial Review") (declining to lift these restrictions).

The Decree does make it possible for a BOC to obtain a "waiver" of the line-of-business restrictions under certain conditions. Specifically, under section VIII(C),

[t]he restrictions imposed upon the separated BOCs by virtue of section II(D) shall be removed upon a showing by the petitioning BOC that there is no substantial possibility that it could use its monopoly power to impede competition in the market it seeks to enter. Decree Opinion, 552 F.Supp. at 231. Under procedures established by the district court, a BOC seeking a section VIII(C) waiver must first submit its request to the DOJ, which reviews the request and then presents its conclusions to the court. See United States v. Western Elec. Co., 592 F.Supp. 846, 873-74 (D.D.C.1984).

Ameritech is a regional holding company ("RHC") that is subject to the same restrictions as the BOCs. See United States v. Western Elec. Co., 797 F.2d 1082, 1087-89 (D.C.Cir.1986) ("Line of Business Restrictions "). On June 16, 1988, Ameritech asked the DOJ to move for a waiver permitting it to enter certain "funding/royalty arrangements" with companies that design, develop, and manufacture telecommunications products. Under the arrangements, Ameritech would provide financial support to "facilitate these companies' efforts to bring their ideas to market," but "[t]he role of designing, developing, and manufacturing the products [would] lie exclusively with the funded company." Joint Appendix ("J.A.") at 393. In return for its financial commitment, Ameritech would "receive royalties on the sales of the product to third parties if it is successfully developed." Id. Ameritech further represented that all funding/royalty arrangements would include "a 'most-favored nation' pricing clause" ensuring that the price of the product to Ameritech would be "no higher than that paid by third-parties." Id. at 397 n. 3. Finally, in response to a DOJ request, Ameritech agreed that "either the regulated or unregulated side of its business may provide funding for product development but only the side of the business providing the funding would receive any royalties." Id. at 490.

On January 4, 1989, the DOJ responded to Ameritech's request by filing a motion for a declaratory judgment that the proposed funding/royalty arrangements did not constitute manufacturing "directly or through an affiliated enterprise." Specifically, the DOJ urged the court to declare that the term "affiliated enterprise refers only to entities in which a BOC has a more than de minimus [sic] equity interest (5% or more) or exercises operational influence." Id. at 434 (internal quotation marks omitted). Because the funding/royalty arrangements satisfied neither of these criteria, the DOJ claimed that they were not prohibited by section II(D).

In the alternative, the DOJ argued in a footnote that if the court found that the funding/royalty arrangements did implicate section II(D), "a waiver pursuant to section VIII(C) should be granted" because there was "no substantial possibility that Ameritech could use its monopoly power to impede competition in the markets it seeks to enter...." Id. at 429 n. 4. The DOJ supported this conclusion with a scant three sentences of analysis but added that it "would be willing to address in a more detailed fashion the waiver issues, if such elaboration would be of assistance to the court." Id. at 429-30 n. 4.

More than three years later, on January 31, 1992, the district court denied the DOJ's motion for a declaratory judgment. See United States v. Western Elec. Co., No. 82-0192, mem. op. at 6, 1992 WL 26683 (D.D.C. Jan. 31, 1992) ("Ameritech Decision "). The court stated that it had already "considered and rejected the Department's contention that 'affiliated enterprise' be narrowly construed to apply only to those enterprise[s] in which a Regional Company has an equity interest." Id. at 3. In particular, the court relied on United States v. Western Electric Co., No. 82-0192, 1986 WL 11238 (D.D.C. Aug. 7, 1986), rev'd on other grounds, 894 F.2d 430 (D.C.Cir.1990), in which it held that no waiver was necessary for NYNEX's purchase of a conditional right to acquire a company engaged in the provision of interexchange service, see id. at 6-8, but...