US v. Nynex Corp., Cr. No. 90-0238 (HHG).

• Decision Date: 16 February 1993
• Docket Number: Cr. No. 90-0238 (HHG).
• Citation: 814 F. Supp. 133
• Parties: UNITED STATES of America v. NYNEX CORPORATION.
• Court: U.S. District Court — District of Columbia

814 F. Supp. 133

UNITED STATES of America v. NYNEX CORPORATION.

Cr. No. 90-0238 (HHG).

United States District Court, District of Columbia.

February 16, 1993.

Michael P. Harmonis, Carl Willner, Kenneth W. Gaul, Katherine E. Brown, Antitrust Div., U.S. Dept. of Justice, Washington, DC, for U.S.

Scott W. Muller, Linda Chatman Thomsen, J. Andrew Heaton, Davis Polk & Wardwell, Washington, DC, Guy Miller Struve, Seth Richard Lesser, Davis Polk & Wardwell, New York City, for NYNEX.

OPINION

HAROLD H. GREENE, District Judge.

Defendant NYNEX Corporation was indicted for criminal contempt under 18 U.S.C. § 401(3) for allegedly violating Section II(D)(1) of the decree entered by this Court in United States v. American Tel. & Tel. Co., 552 F.Supp. 131 (D.D.C.1982).¹ After numerous pretrial motions were resolved,² a bench trial was conducted, and both parties thereafter submitted proposed findings of fact and conclusions of law. For the reasons set forth below, the Court concludes that NYNEX is guilty of criminal contempt.³

I

NYNEX, as one of the Regional Companies spun off in the divestiture of AT & T, is bound by the provisions of the decree in the case of United States v. AT & T, 552 F.Supp. 131 (D.D.C.1982). Pursuant to Section II(D)(1) of that decree, "no Regional Company shall, directly or through any affiliated enterprise ... provide ... information services."⁴ And Section IV(J) of the decree defines "information service" to mean:

the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information which may be conveyed via telecommunications....⁵

NYNEX is a Delaware corporation with its headquarters in New York City. NYNEX Development Company (Devco), a wholly-owned subsidiary of NYNEX, was charged by its parent with identifying software companies that might be suitable for acquisition by NYNEX. On April 11, 1986, NYNEX acquired Telco Research, which designed and sold various telecommunications-related software products.

As a NYNEX subsidiary, Telco was subject to NYNEX's control, exercised primarily through Victor Cunningham, Devco's Director of Business Development,⁶ Gad Selig, Devco's Vice-President for Business Development, and A. Theodore Engkvist, President of Devco. After acquiring Telco, Mr. Engkvist became Telco's Chairman of the Board of Directors and Mr. Selig became a member of that Board. These new Board members actively participated in operating Telco, assisted in assimilating the newly-acquired business into NYNEX, and reviewed the business plans which NYNEX required Telco to develop and which were required to be approved by NYNEX prior to implementation. Tr. at 403-404.⁷ In addition, through quarterly meetings of personnel from both companies, NYNEX oversaw Telco's business operations to ensure that they were consistent with NYNEX's corporate interest. Engkvist Deposition (3/8/88) at 117, 120-21, 126, 128-30, 138-39.

NYNEX concedes that it knew of the decree; that the information services prohibition of the decree applied to conduct that it undertook "through any affiliated enterprise"; that Telco, as a wholly-owned subsidiary was an "affiliated enterprise"; and that the acquisition of Telco presented potential decree issues. See NYNEX Corporation's Proposed Findings of Fact and Conclusions of Law at 2-3; Section II(D), Section IV(C).

Moreover, NYNEX unquestionably understood that a crucial component of its responsibilities was to ensure Telco's decree compliance. The decree imposes an affirmative obligation on the Regional Companies to guarantee that all subsidiaries and their employees carry out the terms of the decree. See Section III. NYNEX's officers recognized that Telco was not sufficiently well-versed in the requirements of the decree to locate decree trouble spots, and that it was NYNEX's responsibility to identify and solve Telco's decree obligations. Hearity Deposition (2/14/88) at 169-70; Selig Deposition (1/22/88) at 166; Cunningham Deposition (11/2/87) (Raff.) at 77-79.

Indeed, prior to the purchase, NYNEX undertook a legal review for potential decree issues. As evidence that it understood its decree responsibilities, NYNEX determined that the so-called Tariff Library service being offered by Telco constituted a clear decree violation, and accordingly it ordered Telco to discontinue this service. However, for reasons explained below, NYNEX also was obligated to discontinue, or at least substantially to modify, Telco's MCI service bureau (see infra) because this, too, was a prohibited information service. As now will be seen, it is clear that NYNEX failed to do so.

The information service at issue is Telco's contract with MCI Communications Corp. (MCI) which allowed MCI-Midwest employees to access Telco's computer facilities and software at Telco's premises in Nashville, Tennessee via the telephone lines.⁸ It is this service that is known as the "MCI service bureau." Pursuant to the contract, Telco licensed MCI to use Telco's "Voice Network Architect" computer program on a computer system located at Telco's offices which, at the time of the acquisition, was a Digital Equipment Corp. MicroVAX II ("MicroVAX") computer. Telco owned the MicroVAX, but the computer's capacity was used by MCI. MCI used the service bureau to design long-distance networks for MCI's customers ("network design studies").

The network design studies were performed by means of the following steps: (1) MCI mailed computer tapes containing customer telephone calling pattern data to Telco; (2) Telco loaded the data onto its computers and, if necessary, converted them into a format readable by the Voice Network Architect software; (3) Telco electronically transferred the data to the MicroVAX computer where they were stored; (4) the MCI employee performing the network design study gained access to the MicroVAX computer via telephone lines and generated a design for a telephone network and (6) either Telco printed and mailed the results to MCI or the MCI employee retrieved the final study results by phone.

The MCI service bureau continued in operation for ten months after NYNEX's acquisition of Telco. It was terminated, on February 18, 1987, only after NYNEX learned that it was being investigated with respect thereto by the Justice Department. The indictment charges that the MCI service bureau constituted the provision of an "information service," which, as noted, Regional Companies such as NYNEX were strictly prohibited from providing (at the time of the conduct in question⁹) under Section II(D) of the decree.

II

NYNEX raises three defenses. First, it is claimed that the MCI service bureau was not an information service, but was merely the lease of customer premises equipment plus software ("CPE plus software"). Second, even if the arrangement was an information service, NYNEX's officers did not know that it was and were not advised differently. Third, in any event, any violation of the decree was not willful. Each of these defenses is addressed below.

NYNEX's characterization of the MCI Service bureau as a lease of CPE plus software coupled with various "ancillary activities" is incorrect. Under the NYNEX theory, the agreement between Telco and MCI was not for the provision of an information service, but instead it merely arranged for the lease of a MicroVAX computer and related software dedicated to MCI's use.

Central to the Court's rejection of this defense is the difference in carrier involvement between a lease of CPE and the provision of an information service. As defined in the decree, CPE means "equipment employed on the premises of a person (other than a carrier) to originate, route, or terminate telecommunications, but does not include equipment used to multiplex, maintain, or terminate access lines." Section IV(E). In essence, CPE is the lease or sale by a Regional Company of telephone equipment, such as telephone headsets, switching systems, or, perhaps, a computer, to be used on the customer's premises. While the Regional Company may retain ultimate ownership, day-to-day control of the equipment is in the hands of the customer. In contrast, as detailed below, an "information service" contemplates a much more active and interactive carrier role, such as the manipulation of data.

As an initial matter, the Court notes that there is no contemporaneous evidence whatever that NYNEX believed the service to be CPE plus software. In fact, the evidence demonstrates that NYNEX officers considered and rejected this characterization of the service. When Cunningham explained the service bureau to him, Hearity clearly stated that he did not believe that the contract could be characterized as being a lease agreement. Hearity Deposition (2/14/88) at 147. When evaluating how to alter the service bureau to legalize it under the decree, Cunningham suggested that the service bureau be modified into a lease agreement. Government Exhibit 56 at ONT 1890. Obviously, had NYNEX truly believed that the existing arrangement was a lease of CPE, alteration of the service bureau to transform it into a lease would have been unnecessary.

More crucially, the service bureau simply was not customer premises equipment. Contrary to NYNEX's contention, MCI did not have exclusive control, either physical or constructive, over the MicroVAX—as it would have had to have if this was merely a lease of CPE. The computer was always owned by Telco, not MCI, and was located on the Telco premises. Telco employees acted as systems managers and otherwise controlled the MicroVAX. MCI's computer access was controlled by Telco, which had the sole power to add or delete passwords. Furthermore, the agreement limited MCI's use of the service bureau to using the Telco Research network architect program.

Nor was the MicroVAX dedicated to MCI. The MCI-Midwest Agreement granted Telco Research complete discretion to choose the type of computer processor to be used by...