The opinion of the court was delivered by: CONNER
This antitrust action is before the Court on objections filed by both sides, pursuant to 28 U.S.C. § 636(b)(1), to the Recommended Decision of Magistrate Kent Sinclair, Jr. submitted September 21, 1979, on defendants' motion for judgment of dismissal on the pleadings or for partial summary judgment.
The complaint charges violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, by conspiring and attempting to restrain trade in and to monopolize, and by monopolizing, the interstate sale and leasing of telephone terminal equipment, including private branch exchange ("PBX") and key telephone system ("KTS") equipment designed to interconnect defendants' telephone trunk lines selectively with a number of individual telephones within an office, store, plant or other facility. The complaint alleges that defendants sought to and did accomplish these illegal objectives by, inter alia, (1) filing with the Federal Communications Commission ("FCC") and with state regulatory agencies self-effectuating tariffs which provided that terminal equipment supplied by others could be interconnected with defendants' trunk lines only if there was interposed between them an interface device provided and maintained by defendants, said tariffs being supported by "incomplete, misleading and erroneous information"; (2) falsely disparaging the terminal equipment offered by competitors, including plaintiffs; (3) deliberately making the required interface equipment unnecessarily complicated, expensive and inefficient and delaying its production, installation and service; (4) predatorily pricing defendants' terminal equipment below its production cost; and (5) depriving plaintiffs of fair access to state regulatory agencies by improper payments to officials thereof and illegal political contributions.
Plaintiff Litton Systems, Inc. ("Litton") is a Delaware corporation with its principal office in Beverly Hills, California, selling products and services in a wide range of business areas, including aerospace, communications, computers, shipbuilding and minerals exploration. Until 1974, its wholly-owned subsidiary, plaintiff Litton Business Telephones Systems, Inc. ("BTS") manufactured and sold telephone terminal equipment in competition with defendants. The complaint alleges that BTS sustained losses and eventually went out of business as a result of defendants' antitrust violations.
Defendants (collectively referred to hereinafter as "AT&T" or "Bell") include American Telephone & Telegraph Co.; its manufacturing subsidiary, Western Electric Company; its research subsidiary, Bell Telephone Laboratories, Inc.; and seven of its fully- or majority-owned regional operating companies. Intrastate telephone service is provided by the regional operating companies, whose rates and practices operations are controlled by state and local regulatory agencies, while interstate service is provided by AT&T's Long Lines Division under regulation by the FCC.
After extensive discovery, defendants moved for judgment of dismissal on the pleadings on the grounds that all aspects of operation of the Bell system, specifically including the interconnection of equipment thereto, are subject to pervasive regulation by the FCC and by state regulatory commissions, and that the purposes of such regulation are incompatible with the objectives of the antitrust laws, so that such activities are impliedly immune from the antitrust laws under the doctrine of such decisions as Pan American World Airways, Inc. v. United States, 371 U.S. 296, 83 S. Ct. 476, 9 L. Ed. 2d 325 (1963) ("Pan Am "); Hughes Tool Co. v. Trans World Airlines, Inc., 409 U.S. 363, 93 S. Ct. 647, 34 L. Ed. 2d 577 (1973) ("Hughes Tool "); Gordon v. New York Stock Exchange, 422 U.S. 659, 95 S. Ct. 2598, 45 L. Ed. 2d 463 (1975) ("Gordon "); United States v. National Association of Securities Dealers, 422 U.S. 694, 95 S. Ct. 2427, 45 L. Ed. 2d 486 (1975) ("NASD ") and Parker v. Brown, 317 U.S. 341, 63 S. Ct. 307, 87 L. Ed. 315 (1943), as specifically applied to the regulation of the market in ancillary telephone equipment in such cases as Essential Communication Systems, Inc. v. American Tel. & Tel., 446 F. Supp. 1090 (D.N.J.1978), rev'd, 610 F.2d 1114 (3d Cir. 1979) rehearing denied, No. 78-2521 (3d Cir., filed November 23, 1979). Defendants alternatively moved for partial summary judgment or judgment on the pleadings on the ground that their alleged activities in attempting to influence administrative action were shielded from antitrust liability by the First Amendment under the "Noerr-Pennington " doctrine established by Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81 S. Ct. 523, 5 L. Ed. 2d 464 (1961) ("Noerr ") and reaffirmed in United Mine Workers v. Pennington, 381 U.S. 657, 669-70, 85 S. Ct. 1585, 1592-93, 14 L. Ed. 2d 626 (1965) ("Pennington "). Plaintiffs, on the other hand, contend that defendants, by their false and misleading submissions to the regulatory agencies, have attempted to subvert the regulatory process, so that the "sham" exception to the Noerr-Pennington doctrine, recognized in such cases as California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 92 S. Ct. 609, 30 L. Ed. 2d 642 (1972) ("California Motor Transport "), is applicable.
The motions were referred to Magistrate Sinclair for recommended decision pursuant to 28 U.S.C. § 636(b)(1)(B). In an unusually exhaustive and meticulous Recommended Decision 270 pages in length, exclusive of a 58-page appendix, Magistrate Sinclair recommended granting of the motion and dismissal of the entire complaint. He concluded that plaintiffs' "core" claims relating to defendants' activities before the FCC and the state regulatory commissions were immunized from antitrust liability in view of the pervasive regulation of the industry and because the specific conduct in question had, for the most part, been expressly sanctioned by the responsible agencies. He further recommended that the "peripheral" claims relating to defendants' alleged "business torts" such as disparagement of competitive terminal equipment be dismissed as ancillary to the "core" activities and likewise subject to remedial action by the agencies.
In the alternative, Magistrate Sinclair recommended stay of the action and referral of all the claims therein to the FCC for consideration in the first instance, pursuant to the principle of primary jurisdiction, as articulated, for example, in United States v. RCA, 358 U.S. 334, 79 S. Ct. 457, 3 L. Ed. 2d 354 (1958).
The Magistrate further recommended denial of defendants' motion for partial summary judgment under Noerr-Pennington on the ground that there were material issues of fact bearing on the "sham" exception, particularly with respect to defendants' intentions relative to their challenged activities before the regulatory agencies.
In support of and in opposition to their exceptions to the Recommended Decisions, the parties have made massive and numerous written submissions. After due consideration thereof, and of the authorities cited therein, the Court has concluded, with due deference to the painstaking and conscientious effort of Magistrate Sinclair, that his recommendations that the action be dismissed on grounds of implied antitrust immunity or stayed pending referral for initial review by the FCC cannot be adopted. His recommended denial of defendants' motion to dismiss under the Noerr-Pennington doctrine is adopted. Defendants' motions are therefore denied in their entirety.
There is an inherent and obvious tension between the emphasis on unrestrained competition underlying the antitrust laws and the "public interest" rationale underlying other instances of governmental regulation of business activity. The Sherman Act is premised on the theory that "the unrestrained interaction of competitive forces will yield the best allocation of our economic resources," Northern Pacific Ry. v. United States, 356 U.S. 1, 4, 78 S. Ct. 514, 517, 2 L. Ed. 2d 545 (1958), and, to some extent, on the political and social desirability of smaller, competitive businesses, see United States v. Falstaff Brewing Corp., 410 U.S. 526, 540-43, 93 S. Ct. 1096, 1104-06, 35 L. Ed. 2d 475 (1973) (Douglas, J., concurring in part); Northern Pacific Ry., supra, 356 U.S. at 4, 78 S. Ct. at 517. The assumption underlying economic regulation, on the other hand, is that unrestrained competition in certain industries will not adequately serve the public interest either because the activity involved is, from the standpoint of economic efficiency, a "natural monopoly" (certain utility activities, for example, see Otter Tail Power Co. v. United States, 410 U.S. 366, 369, 93 S. Ct. 1022, 1025, 35 L. Ed. 2d 359 (1973)); or because the business conduct involved should be judged by criteria other than or in addition to competitiveness, such as convenience to the public or nondiscrimination in providing services (e.g., certain activities of common carriers, see Georgia v. Pennsylvania R.R. Co., 324 U.S. 439, 453, 456-67, 65 S. Ct. 716, 725-30, 89 L. Ed. 1051 (1945)), or the industry's importance to foreign commerce of the United States (e.g., the shipping industry, see Far East Conference v. United States, 342 U.S. 570, 573, 72 S. Ct. 492, 493, 96 L. Ed. 576 (1972); Note, Antitrust and the Shipping Industry, 12 N.Y.U.J. Int'l L. & Pol. 115 (1959)), or the economic health of the regulated industry, see, e.g., Gordon, supra, 422 U.S. at 689, 95 S. Ct. at 2614 (protection of investors and stock exchanges). See generally II A. Kahn, The Economics of Regulation : Principles and Institutions (1971). Where Congress has established a regulatory agency to supervise the conduct of business within an industry according to a standard of "public interest," therefore, subjecting a regulated firm to antitrust liability based on competitiveness factors alone, as the antitrust laws require, see, e.g., National Society of Professional Engineers v. United States, 435 U.S. 679, 688, 98 S. Ct. 1355, 1363, 55 L. Ed. 2d 637 (1978) (§ 1 case), may result in imposing on the business standards of conduct inconsistent with those established by Congress for that industry.
Regulated industries "are not per se exempt from the Sherman Act," Georgia v. Pennsylvania R. R. Co., 324 U.S. 439, 456, 65 S. Ct. 716, 725, 89 L. Ed. 1051 (1945), even if the specific conduct complained of has been expressly approved by the agency charged with regulatory responsibility. United States v. Radio Corp. of America, 358 U.S. 334, 79 S. Ct. 457, 3 L. Ed. 2d 354 (1959). Rather, a court determining the applicability of the Sherman Act to a regulated industry must consider whether and to what extent Congress intended to exempt activities of that industry from the antitrust laws.
In some industries, Congress has recognized the potential for conflict between the regulatory statutes and the antitrust laws and has expressly granted antitrust immunity for specified conduct; for example, in the interstate telephone field, FCC-approved mergers of telephone companies are expressly exempted. 47 U.S.C. § 221(a) (1970). No such express immunity is claimed in this case.
Courts have, in addition, found an implied antitrust immunity for certain activities in other industries covered by a regulatory scheme. Such immunity has been implied in two restricted instances: (1) when the agency's regulation of the industry is so pervasive that Congress may be assumed to have determined that unrestrained competition will not adequately protect the public interest, see Otter Tail Power Co., supra, 410 U.S. at 373-4, 93 S. Ct. at 1027-28; Silver v. New York Stock Exchange, 373 U.S. 341, 358-60, 83 S. Ct. 1246, 1257-1258, 10 L. Ed. 2d 389 (1963); RCA, supra, 358 U.S. at 348-49, 79 S. Ct. at 465-66; see also Cantor v. Detroit Edison Co., 428 U.S. 579, 584, 96 S. Ct. 3110, 3114, 49 L. Ed. 2d 1141 (1976) (discussion of pervasive state regulation); or (2) when a regulatory agency is authorized by statute to exercise, and has in fact exercised, authority over the particular practice under attack (as contrasted with the general field of activity) in a way which effectuates the regulatory scheme, Gordon, supra; NASD, supra; Pan Am, supra; Keogh v. Chicago & Northwestern Ry. Co., 260 U.S. 156, 43 S. Ct. 47, 67 L. Ed. 183 (1922); see Silver, supra, 373 U.S. at 361-63, 83 S. Ct. at 1259-60.
The Supreme Court has articulated an exacting standard for the implication of antitrust immunity: "Repeal of the antitrust laws is not favored and not casually to be allowed. Only where there is a "plain repugnancy between the antitrust and regulatory provisions' will repeal be implied." Gordon, supra, 422 U.S. at 682, 95 S. Ct. at 2611. "Repeal is to be regarded as implied only if necessary to make the (regulatory scheme) work, and even then only to the minimum extent necessary." Silver, supra, 373 U.S. at 357, 83 S. Ct. at 1257.
In an unusual article arguing the legal merits of a pending action the government civil antitrust suit against the principal defendant here (United States v. American Telephone & Telegraph Co., 427 F. Supp. 57, D.D.C.) the author distilled from the case law the following five criteria for determining whether antitrust immunity should be implied:
"(1) the conduct challenged in the antitrust complaint, as well as rates, entry, and investment in the market, should be continually subject to the supervisory authority of the regulatory agency; (2) the agency should have the power to grant the relief requested by the antitrust plaintiff; (3) the benefits of competition should enter into the agency's public interest calculation; (4) agency expertise should be particularly useful in deciding issues in the antitrust suit; and (5) the antitrust suit should involve important regulatory policy questions." Note, AT&T and the Antitrust Laws: A Strict Test for Implied Immunity, 85 Yale L.J. 254, 258 (1975).
"Any claim of immunity which can meet all of these criteria should certainly succeed."
Despite the author's conclusion that all five of the criteria are satisfied in the government's case against AT&T, as discussed more fully hereinafter, two judges have successively ruled in that case that there was no implied immunity for the activities of AT&T.
Because the touchstone of implied immunity is congressional intent, any discussion of implied immunity in the telephone industry must begin with a consideration of the content and legislative history of the Federal Communications Act.
The history of federal regulation of interstate communications carriers began with the Mann-Elkins Act of 1910, Pub.L. No. 218, 36 Stat. 539 which amended the Interstate Commerce Act to bring communications carriers under the jurisdiction of the Interstate Commerce Commission ("ICC"), 36 Stat. at 544, and established a mechanism for their regulation. A decade later, recognizing the desirability of unification of telephone networks and elimination of duplicative facilities, Congress, in the Willis-Graham Act of 1921, Pub.L. No. 15, 42 Stat. 27, empowered the ICC to grant antitrust exemption to mergers or acquisitions of local telephone companies which it found to be in the public interest.
In 1934, the regulatory apparatus was drastically revised by the Federal Communications Act, 47 U.S.C. §§ 151 et seq. ("the 1934 Act"), which created a separate agency, the FCC, with authority to regulate the interstate telephone, telegraph and radio communications industries. Congress expressly recognized that, by a series of mergers and consolidations, and by the creation of holding companies, AT&T had achieved a monopoly position in interstate telephone toll and private line services. H.Rep.No.1273, Pt. III, No. 1, 73d Cong., 2d Sess. 856-60 (1934); S.Rep.No.781, 73d Cong., 2d Sess. at 2 (1934). Although Congress expressed the belief that the ICC should have scrutinized these annexations more carefully for possible abuses, H.Rep.No.1273, supra at 930-32, it reaffirmed the ICC's authority to grant antitrust exemptions for mergers in the public interest, 47 U.S.C. § 221, while reinforcing the ICC's power to insure the provision of efficient service at reasonable and non-discriminatory rates. 47 U.S.C. § 201; see S.Rep.No.781, 73d Cong., 2d Sess., 1-5 (1934).
The 1934 Act gives the FCC broad regulatory powers over telephone carriers, leaving to the FCC itself the responsibility for determining the scope of these powers. S.Rep.No.781, 73d Cong., 2d Sess. 1-2 (1934). Among the powers central to its mission are the control over the construction of new telephone lines and facilities and the discontinuance of service over existing facilities, such entry and exit requiring an FCC certificate of public convenience and necessity. 47 U.S.C. § 214(a), (b). Upon allowing entry of a new carrier, the Commission may order interconnection of its lines with those of existing carriers. 47 U.S.C. § 201(a).
The 1934 Act declares illegal any unjust, unreasonable, discriminatory or preferential charge or practice. 47 U.S.C. §§ 201(b), 202(a). At least ninety days before implementing any new charge or practice, the carrier must file with the Commission and publish generally a tariff setting forth the proposed charge or practice. 47 U.S.C. § 203 (1978 Supp.). No company may function as a communications carrier unless such tariffs have been filed, 47 U.S.C. § 203(c), and the carrier must not deviate from the tariff until it is modified as provided by law. 47 U.S.C. § 203(b), (c).
The Commission may conduct hearings to determine the reasonableness of the charge or practice and may suspend its effective date for a maximum of five months. 47 U.S.C. § 204(a) (Supp.1978). If it determines that the charge or practice is unreasonable, the Commission may promulgate a substitute which it deems just and reasonable. 47 U.S.C. § 205(a). It may enforce its orders by injunction and by a fine of $ 1,000 for each day of violation. 47 U.S.C. §§ 205(a), (b). And an injured party may obtain damages for unreasonable discrimination in a proceeding before the Commission or in an action in a district court. 47 U.S.C. § 207.
In aid of its determination of the reasonableness of rates and charges, the Commission regularly evaluates the property of the carrier, 47 U.S.C. §§ 213(a), (c), and is empowered to require the filing of annual reports, and to prescribe accounting practices and allowable depreciation charges. 47 U.S.C. §§ 219, 220.
In the 1934 Act, there is no express direction that the FCC, in determining the reasonableness of rates or practices, should take into account antitrust considerations. However, the power to enforce certain sections of the Clayton Act is conferred on the FCC by Section 11 of that Act, 15 U.S.C. § 21. That section specifically provides that no judgment of the FCC "shall in anywise relieve or absolve any person from any liability under the antitrust laws." 15 U.S.C. § 21(e). Moreover, Section 414 of the 1934 Act negates any inference that the federal regulatory scheme was intended to supplant the antitrust laws:
"Nothing in this chapter contained shall in any way abridge or alter the remedies now existing at common law or by statute, but the provisions of this chapter are in addition to such remedies." 47 U.S.C. § 414.
A major portion of Magistrate Sinclair's Recommended Decision (pages 32 to 166) is devoted to an exhaustive description of the elaborate system of regulations and rules which the FCC has promulgated for the purpose of regulating the telephone industry. From even a cursory review of that material, it is obvious that the FCC has both the statutory authority and the regulatory framework for controlling the operations of AT&T so as to prevent many of the anticompetitive abuses alleged in the complaint, particularly those relating to rates and interconnection practices.
In actual operation, however, the regulatory ideal of the 1934 Act is far from realization. The volume of tariff filings is simply far too great to permit meaningful review of all of them by the Commission.
During the 12-month period from September 1974 through August 1975, the Commission received 1,371 tariff filings totalling 11,491 pages, and was able to investigate only a small percentage of them. The Commission itself has therefore stated that the tariffs "generally proceed from the carrier's independent judgment." Memorandum of the FCC, filed December 30, 1975, as cited in United States v. AT&T, 461 F. Supp. 1314, 1326-27 (D.D.C.1978).
The laxity and lag in the FCC's control over AT&T's tariff practices is particularly evident in the history of the equipment interconnection restrictions challenged here.
For many years, AT&T's tariffs on file with the FCC flatly prohibited subscribers from connecting to the Bell System any apparatus not obtained from one of the Bell companies. In 1956, this restriction was finally invalidated not by the FCC but by the Court of Appeals for the District of Columbia in an action brought by the manufacturer of a mechanical shield adapted to be clipped onto a telephone mouthpiece to provide privacy and reduce noise pickup. Hush-a-Phone Corp. v. United States, 99 U.S.App.D.C. 190, 193, 238 F.2d 266, 269 (D.C.Cir.1956), rev'g 20 F.C.C. 391 (1955), on remand, 22 F.C.C. 112 (1957). The court ruled the restriction unreasonable under Section 201(b) of the 1934 Act as an "unwarranted interference with the telephone subscriber's right reasonably to use his telephone in ways which are privately beneficial without being publicly detrimental."
Disregarding the broad language of the Hush-a-Phone ruling and construing it in the narrowest sense as relating only to mechanical attachments, AT&T filed a new tariff which prohibited "direct electrical connection" of any type of device with the telephone lines.
In 1965, an action was brought in the Northern District of Texas by the manufacturer of a device for connection of a base radio station to the telephone lines so that users of two-way mobile radios could communicate through the telephone system, charging that the revised tariff violated the antitrust laws. The court referred the controversy to the FCC for determination in the first instance under the principle of primary jurisdiction. Carter v. American Telephone & Telegraph Co., 250 F. Supp. 188 (N.D.Tex.), aff'd, 365 F.2d 486 (5th Cir. 1966), cert. denied, 385 U.S. 1008, 87 S. Ct. 714, 17 L. Ed. 2d 546 (1967). Thereupon, eleven years after filing of the tariff and only after being prompted by the court reference, the FCC began its first investigation of the legality of the restriction. Once the Commission was prodded into action, however, it took little time to determine that the restriction was unreasonable within the contemplation of Section 201(b) of the Act, and to direct AT&T to file a new tariff permitting the connection of equipment obtained from other sources, where such connection would not adversely affect the performance of the telephone system. In re Use of the Carterfone Device, 13 F.C.C.2d 420, reconsideration denied, 14 F.C.C.2d 571 (1968). Although the Commission recognized that the integrity of the network was a legitimate concern, it expressly rejected AT&T's contention that such integrity required that only Bell-supplied equipment be electrically connected to the system. It also declined to limit the scope of its ruling to the Carterfone device, because allowing the AT&T tariff to continue in effect with respect to other electrically connected equipment would constitute "a clearly improper burden upon the manufacturers and users of other devices," 13 F.C.C. at 425. It stated that AT&T could prohibit the interconnection of only those devices which actually cause harm to the system and could set up reasonable standards to exclude harmful equipment.
Again disregarding the broad implications of the Commission action, AT&T filed new tariffs permitting the electrical interconnection of customer-supplied equipment but imposed the requirement that such equipment be connected to the telephone lines only through "protective connecting arrangements" supplied and maintained by AT&T. Objections were filed to these "post-Carterfone " tariffs by a number of suppliers of competitive equipment and by the United States; however, the Commission ruled that because the new tariffs did not contravene the express directives of Carterfone (since that case involved the interconnection of ancillary equipment rather than "replacement of (a) part of the telephone system"), it would permit the tariffs to become effective pending commission review, emphasizing that "in doing so, we are not giving any specific approval to the revised tariffs." The Commission simultaneously ordered its staff to commence immediately a technical investigation to consider what further changes were necessary in light of a number of unresolved questions. AT&T "Foreign Attachment" Tariff Revisions, 15 F.C.C.2d 605, 610-11 (1968), reconsideration denied, 18 F.C.C.2d 871 (1969).
This investigation covered the next four years and resulted in a report concluding that the objective of protecting the integrity of the system would be served by permitting the interconnection of customer-supplied equipment meeting technical standards to be specified. The FCC accepted the report and initiated a Notice of Inquiry and Proposed Rule Making. Proposals for New or Revised Classes of Interstate and Foreign MTS and WATS, 13 F.C.C.2d 539 (1972). Three years later, on November 7, 1975, the Commission promulgated standards for the registration of equipment that would "provide the necessary minimal protection against network harm." Proposals for New or Revised Classes of Interstate and Foreign MTS and WATS, First Report and Order, 56 F.C.C.2d 593, 599 (1975), on reconsideration, 57 F.C.C.2d 1216, 58 F.C.C.2d 716, 59 F.C.C.2d 83 (1976). To forestall further evasion of the spirit of its mandate, the FCC ordered AT&T not to require the interposition of an interface device between registered customer-supplied equipment and the telephone system or to "impose other conditions contrary to the Carterfone policy without prior approval of the Commission." 56 F.C.C.2d at 599.
This registration system has been in effect since 1975.
Since the parties do not contend that the Federal Communications Act confers express immunity from the antitrust laws to telephone carriers regulated by the FCC, this case must turn on the applicability of the two types of implied immunity described above: (1) immunity implied because the regulatory scheme established by Congress is so pervasive as to impliedly repeal the operation of the antitrust laws; or (2) immunity implied because the FCC, in accordance with its regulatory mandate, has ruled specifically as to interconnection of ...