United States v. Western Elec. Co., Civ. A. No. 82-0192.

• Citation: 627 F. Supp. 1090
• Decision Date: 13 January 1986
• Docket Number: Civ. A. No. 82-0192.
• Parties: UNITED STATES of America, Plaintiff, v. WESTERN ELECTRIC COMPANY, et al., Defendants.
• Court: U.S. District Court — District of Columbia

627 F. Supp. 1090

UNITED STATES of America, Plaintiff, v. WESTERN ELECTRIC COMPANY, et al., Defendants.

Civ. A. No. 82-0192.

United States District Court, District of Columbia.

January 13, 1986.

COPYRIGHT MATERIAL OMITTED

Kevin R. Sullivan, Michael Altschul, Luin Fitch, J. Philip Sauntry, for U.S.

Jim G. Kilpatric, for AT & T.

Michael H. Salsbury, for MCI.

Kenneth E. Millard, for Ameritech.

Robert V.R. Dalenberg, Marion Stanton, for Pacific Telesis.

OPINION

HAROLD H. GREENE, District Judge.

Pending before the Court for decision are a number of motions by various Regional Holding Companies for clarification of the decree.¹ The motions represent the view of several of the Regional Companies² that they are entitled under the decree to engage in a substantial range of telecommunications activities without obtaining waivers pursuant to section VIII(C) of the decree. In each case, the proffered interpretation is opposed by other entities, both commercial and governmental, which argue that the particular activities are prohibited by the decree.

After careful scrutiny of all the relevant factors, the Court has determined that the interpretations of the decree advocated by the Regional Companies in these motions are inconsistent with the language, history, and purposes of the decree,³ and that all the motions for clarification⁴ must therefore be denied. Before discussing the motions in detail, it is appropriate to restate the basic purpose underlying the prohibitions imposed by the decree on the local companies.

I General Considerations

A central rationale for the divestiture of AT & T was the recognition that, when one company engages both in monopoly activities —e.g., the provision of local telecommunications service—and in competitive activities —e.g., the provision of interexchange⁵ and information services—it possesses the incentive and the ability improperly to exploit its local monopoly power in at least two ways.

First, such a company may subsidize its competitive ventures with income generated by the local telephone ratepayers (who, unlike the customers of a competitive enterprise, lack the ability to go elsewhere for their telephone service and who can therefore be charged whatever rates the local regulators can be persuaded to approve);⁶ and second, it can give preferential treatment⁷ to its own competitive affiliates, thereby impeding the success of non-affiliated competitors or even forcing them out of business.⁸ Evidence was adduced by the government in the trial of this case that the Bell System was guilty of such practices.⁹

The history of the government's struggles with AT & T¹⁰ indicated to those who negotiated and approved the current consent decree that, when the local companies were divested to continue on their own the provision of the local monopoly telecommunications services, they had to be prohibited from engaging also in competitive long distance and information services.¹¹ Accordingly, a specific prohibition to that effect— one of the few decree provisions directly applicable to the local companies—was incorporated in the decree.¹²

The logic of such a provision was as obvious as its incorporation in the decree was crucial. Without it, the result of the break-up would have been to exchange one nationwide monopoly with the incentive and ability to exploit monopoly power and injure competition for several smaller monopolies with the identical incentives and abilities. The only distinction between the "old" Bell System and the present Regional Company system was and is that the Bell monopoly was nationwide in scope while each of the seven Regional Companies possesses an equally powerful monopoly¹³ in a particular geographic region.¹⁴

Insofar as the threat of injury to competition, competitors, and ratepayers is concerned, that distinction is one without a difference, for the "bottleneck"¹⁵ monopolies continue to exist as before. These bottlenecks—i.e., the local companies with their ownership of the local switching systems and thus of the pathways which the interexchange and information providers must use if they wish to reach the ultimate consumers¹⁶—merely changed hands: instead of being controlled by the management of AT & T, they are now being controlled in each region by the management of a particular Regional Company. However, the ability to exploit the bottlenecks anticompetitively has remained precisely the same. It was on this basis that the prohibition against the provision of interexchange and information services became a central part of the decree.

That prohibition has far from outlived its usefulness.¹⁷ Indeed, it could with some justification be argued that the Regional Companies, though obviously smaller than the Bell System, present dangers to competition that are in some respects even greater than those presented by that System.

AT & T was imbued with a service mentality, a tradition dating from the days of the chairmanship of Theodore Vail and continued through that of John deButts and Charles Brown. Although the company may have engaged in some or all of the anticompetitive activities with which it was charged, the balance wheel of the service tradition was always present. By contrast, the Regional Companies, or some of them, indicate by their public statements, their advertisements, and their rush to diversification, combined with their relative lack of interest in basic telephone service itself,¹⁸ that an ascent into the ranks of conglomerate America rates far higher on their list of priorities than the provision of the best and least costly local telephone service to the American public.¹⁹ Anyone faced with the prospect of permitting these companies to enter competitive markets, particularly the interexchange and the information markets,²⁰ would therefore have to exercise considerable caution lest the companies be empowered, even encouraged, to use their local monopoly advantage as a means to decimate the competition in these markets and thus to enhance further their conglomerate ambitions.²¹

Moreover, unlike the Regional Companies, the Bell System was constrained significantly by the 1956 consent decree in that many of the newer technological markets, e.g., computers, were out of its reach, and the System's managers were therefore content to concentrate their efforts on telecommunications. The Regional Companies, by contrast, are already expanding in almost every conceivable way, from real estate ventures to foreign trade, from publishing to computer retailing. Financial subsidies from ratepayer-supported local telephone activities to these many types of operations are both easier to hide and harder to detect than subsidies to only a few "outside" enterprises, and so are manipulations of the local loops to disadvantage the many competitors in the myriad of enterprises in which the Regional Companies are engaged.²²

Through the memoranda filed by the Regional Companies in support of the Ameritech motion runs the thread that greater competition and the participation of more competitors in the telecommunications markets are in the public interest²³—certainly an unexceptionable point as a generality. However, such arguments are drained of much of their persuasive force when they are applied to a situation where the would-be competitors could readily take advantage of their monopoly status in a variety of ways vis-a-vis their non-monopolistic competition.²⁴

For that reason, the participation of the Regional Companies in the markets they wish to enter²⁵ would not be likely to promote genuine, fair competition; the more probable outcome would be that such entry would deny to others engaged in commerce in those markets the level playing field to which they are entitled under law, under the decree, and in plain equity and justice.²⁶

The current motions must and will be considered in that context.

II Shared Tenant Services

In its shared tenant services motion, Ameritech²⁷ is asking for an order which would "clarify" the decree²⁸ to the effect that it permits the Regional Companies to provide certain shared tenant services,²⁹—the marketing of automatic carrier selection and traffic analysis.³⁰

The shared tenant services market has developed substantially over the past few years,³¹ for such services present several advantages to both developers and tenants.³² Accordingly, several independent companies have entered these markets, and the Regional Companies now seek to penetrate them as well. However, as will be seen, the shared tenant services at issue in this motion are interexchange services, and the local companies are therefore prohibited by the decree from providing them.

A. Regional Company Contentions

The Regional Companies concede that the proposed activities are in the gray area of an "overlap" between exchange and interexchange activities,³³ but they go on to argue that where this is the case, the decree permits them to engage in all of the activities involved in the overlapping areas, both exchange and interexchange.³⁴ That reasoning is erroneous if only because it proves too much. The very nature of modern telecommunications requires the two functionally distinct systems to meet: access to interexchange services is obtained through the local exchange provider and both use the same equipment.³⁵

The overlap is thus inherent in the technology,³⁶ and to cede the area it covers to the Regional Companies would allow them to enter the interexchange market by the back door on a wholesale basis³⁷ when their front-door entry into that market is prohibited by the most basic provisions of the decree. See section II(D)(1) of the decree which provides, without exception or ambiguity, that "after completion of the reorganization ... no Operating Company shall ... provide interexchange telecommunications services...." In short, the "overlap" argument entirely lacks merit.

B. Shared Tenant Services Are Interexchange Services

There is an even more...