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IT&T v. AT&T

January 23, 1978;

INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION, Plaintiff,
v.
AMERICAN TELEPHONE AND TELEGRAPH COMPANY, WESTERN ELECTRIC COMPANY, INC. and BELL TELEPHONE LABORATORIES, INC., Defendants



The opinion of the court was delivered by: GOETTEL

MEMORANDUM OPINION

 GOETTEL, District Judge.

 This is round one of a heavyweight antitrust contest between International Telephone and Telegraph Corp. ("ITT") and American Telephone and Telegraph Company ("AT&T"), alleged to be the largest corporation in the world. Three pretrial motions are pending. First, AT&T and the other defendants move to dismiss Count II of ITT's two-count complaint for failure to state a claim upon which relief can be granted. Second, ITT moves under Fed. R. Civ. P. 16 for an order "to conclusively adjudicate" certain facts based on the findings of an earlier Federal Communications Commission ("FCC") proceeding involving AT&T. Finally, ITT also moves to stay or dismiss the counterclaims alleged by AT&T in its answer. For the reasons stated below, defendants' motion to dismiss Count II is granted, and both of the plaintiff's motions are denied.

 I. Summary of the Pleadings

 ITT's complaint alleges violations of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and section 7 of the Clayton Act, 15 U.S.C. § 18. The complaint is a general attack on the economic structure of the Bell system, which, under AT&T's ownership, is the predominant supplier of telephone services to the American public. The system is composed of AT&T, which owns substantial stock in and is alleged to control various other corporate components: Western Electric ("Western"), the manufacturing and supply unit of the system; Bell Telephone Laboratories, Inc. ("Bell Labs"), the research and development arm; and the various local Bell operating companies which provide telephone service to consumers. All but one of the operating companies are named as non-defendant co-conspirators.

 Count I of the complaint alleges that the defendants have engaged in an unlawful combination and conspiracy to restrain trade unreasonably, and that they have monopolized, and attempted to monopolize, the manufacture, distribution and sale of telecommunications equipment in violation of the Sherman Act. The gravamen of this charge is that defendants have caused the Bell operating companies to purchase equipment only from Western, rather than from independent manufacturers. Accordingly, the complaint alleges that defendants have conspired to ensure that Western would be the manufacturer of substantially all the telecommunications equipment needed by the operating companies, and that the operating companies would refrain from purchasing better and less expensive equipment from manufacturers other than Western. Specifically, ITT alleges that it has manufactured "channel banks," a general type of switching equipment, which were better or cheaper than those built by Western, but that the operating companies have nonetheless primarily purchased their channel banks from Western. The alleged conspiracy to restrain trade is said to have resulted in lost sales to ITT, and other damages, in excess of $50,000,000. ITT requests treble damages.

 Count II of the complaint repeats all of the preceding Sherman Act allegations, and then asserts that the effect of AT&T's holding of all of Western's stock has been to lessen competition substantially and to tend to create a monopoly in the sale of telecommunications equipment in violation of section 7 of the Clayton Act. Paragraph 5 of the complaint alleges that AT&T acquired its Western holdings in 1882, which was thirty-two years before the enactment of the Clayton Act in 1914.

 AT&T's answer asserts various denials and defenses. It also alleges two counterclaims against ITT on much the same grounds that the complaint is based. In the counterclaims, AT&T alleges that ITT has engaged in predatory pricing and has unfairly disparaged Western's products. In addition, defendants claim that ITT has engaged in the same kind of preferential purchasing practices of which they are accused. It is in this context that the three motions arise.

 II. The Motion to Dismiss Count II

 Defendants' motion under Fed. R. Civ. P. 12(b)(6) is addressed only to Count II of ITT's complaint, the Clayton Act claim. Defendants argue that the acquisition in 1882 of Western Electric by AT&T cannot be the basis of a claim under section 7 of the Act. *fn1" With the exception of a recent district court bench opinion, *fn2" no court has directly addressed the issue whether section 7 may be applied to pre-Clayton Act acquisitions.

 Section 7 of the Clayton Act, as originally enacted in 1914, provided:

 
"No corporation engaged in interstate commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation engaged in interstate commerce, where the effect of such acquisition may be to substantially lessen competition between the corporation so acquired and the corporation making the acquisition or to restrain such commerce in any section or community, or tend to create a monopoly of any line of commerce."

 Ch. 323, § 7, 38 Stat. 730. In 1950, section 7 was amended to include within its proscription the acquisition of the assets of another corporation. Act of Dec. 29, 1950, ch. 1184, 64 Stat. 1125 (codified at 15 U.S.C. § 18 (1970)). Paragraph 5 of section 7, both as originally enacted and after the 1950 amendments, provides:

 
"Nothing contained in this section shall be held to affect or impair any right heretofore legally acquired . . . ."

 Ch. 323, § 7, 38 Stat. 730; ch. 1184, 64 Stat. 1125. Defendants contend that this "non-retroactivity" clause precludes a section 7 challenge to AT&T's pre-1914 acquisition of Western Electric stock.

 In opposing the motion to dismiss Count II, plaintiff relies primarily on United States v. E.I. duPont de Nemours & Co., 353 U.S. 586, 1 L. Ed. 2d 1057, 77 S. Ct. 872 (1957). In that case, the Government challenged in 1949 duPont's holding of 23 percent of the stock of General Motors Corp., as a violation of both the Sherman and Clayton Acts. The duPont acquisitions of General Motors stock occurred in 1917 and 1919, approximately thirty years before the Government brought suit. The defendant argued that the Government could not assert a section 7 claim so long after the acquisition took place, when the original acquisition was otherwise lawful.

 The Supreme Court disagreed. It held that the holding and use of stock could, in effect, ripen into a Clayton Act violation years after the acquisition:

 
"The appellees argue that the Government could not maintain this action in 1949 because § 7 is applicable only to the acquisition of stock and not to the holding or subsequent use of the stock. This argument misconceives the objective toward which § 7 is directed. The Clayton Act was intended to supplement the Sherman Act. Its aim was primarily to arrest apprehended consequences of intercorporate relationships before those relationships could work their evil, which may be at or any time after the acquisition, depending upon the circumstances of the particular case. The Senate declared the objective of the Clayton Act to be as follows:
 
'. . . Broadly stated, the bill, in its treatment of unlawful restraints and monopolies, seeks to prohibit and make unlawful certain trade practices which, as a rule, singly and in themselves, are not covered by the Act of July 2, 1890 [the Sherman Act], or other existing antitrust acts, and thus, by making these practices illegal, to arrest the creation of trusts, conspiracies, and ...

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