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Northeastern Telephone Co. v. American Telephone and Telegraph Co.

decided: May 27, 1981.


Appeal from a judgment of the United States District Court for the District of Connecticut, Warren W. Eginton, Judge, awarding appellee $16,547,076 in damages and $747,813.38 in attorneys' fees for appellants' multiple violations of the Sherman Act. Reversed as to five of appellee's six claims of anticompetitive conduct. The remainder of the judgment is vacated and the case is remanded for a new trial on liability and damages only as to appellants' design of the "protective coupler arrangement."

Before Kaufman and Kearse, Circuit Judges, and Brieant, District Judge.*fn*

Author: Kaufman

In Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 100 S. Ct. 1061, 62 L. Ed. 2d 783 (1980), this Court plumbed the crosscurrents of Section 2 of the Sherman Act, 15 U.S.C. § 2, holding that dominant firms, having lawfully acquired monopoly power, must be allowed to engage in the rough and tumble of competition. This case presents us with the opportunity to elucidate and to apply the rationale of Berkey in the context of the American telecommunications industry. It presents an antitrust suit brought by Northeastern Telephone Co., a relatively small supplier of telephone equipment, against a mammoth and legendary enterprise the American Telephone & Telegraph Co. (AT&T). Joined as defendants were Western Electric, the manufacturing arm of the Bell System, and Southern New England Telephone Co. (SNET), the local Bell affiliate serving virtually all of Connecticut.

For much of their existence, these entities have escaped the rigors of competition, sheltered in part by tariffs filed with the Federal Communications Commission (FCC). In 1968, however, the Commission exposed a significant portion of their business to competitive pressures. We are here called upon to apply the teachings of Berkey to the actions appellants took in response to this infusion of rivalry. To oversimplify somewhat, the question presented is whether appellants did no more than to engage in vigorous competition, or instead, attempted to subvert the competitive process by unfair or unreasonable means. Because we hold that Northeastern has, for the most part, failed to prove that appellants' conduct exceeded the bounds of competitive propriety outlined in Berkey, we reverse the judgment below in several major respects. As to the design of the "protective coupler arrangement" required by appellants for use with Northeastern's telephone equipment, we remand for a new trial on liability and damages.



A brief overview of the history of competition in the relevant market is necessary to our analysis of the legal questions raised in this appeal. For many years, customers of Bell System affiliates,*fn1 including customers of SNET,*fn2 were prohibited from connecting their own terminal equipment into the Bell communications network, even if those items were identical to the equipment supplied by local Bell affiliates. This prohibition, which was embodied in tariffs filed with the FCC, completely foreclosed competition in the terminal equipment market. In 1965, however, at the urging of a federal district court in the Northern District of Texas, the FCC began an investigation into the reasonableness of this practice. Three years later, the Commission invalidated the tariffs, ruling that AT&T's refusal to allow interconnection of customer-provided equipment violated § 201(b) of the Federal Communications Act, 47 U.S.C. § 201(b). Thus was the "interconnect industry" born. See In re Use of Carterfone Device, 13 F.C.C.2d 420, reconsideration denied, 14 F.C.C.2d 571 (1968).

Many companies were attracted to the new market. Some, like Nippon Electronics and International Telephone & Telegraph (ITT) were huge conglomerates; others, like Northeastern Telephone, were diminutive firms. Indeed, Northeastern was among the smallest of the new entrants. It was formed by two Connecticut businessmen in 1972 on a total capital investment of $1,000. Its first corporate headquarters were in the basement of an old church, and its founders primarily did maintenance work on equipment sold by ITT. Its revenues that first year were only $70,000. In succeeding years, however, the company expanded dramatically, adding approximately one new office per annum. It is now headquartered in Milford, Connecticut, and its revenue in its seventh year of operation, 1978, exceeded $3,000,000.

The competitive battle between Northeastern and SNET was waged on two fronts; public branch exchanges (PBXs) and key telephones.*fn3 A PBX consists of three elements: the equipment located on a customer's premises and used to switch calls from one telephone line to another; a switchboard which controls that operation; and the associated telephone sets and wiring. Key telephones, which are a familiar sight in business offices, are equipped with keys or buttons to give the set access to more than one telephone line.

During the first few years of their rivalry, both Northeastern and SNET obtained PBXs from outside suppliers often Nippon Electronics. But in January 1977, SNET submitted, and the Connecticut Division of Public Utilities Control (DPUC) approved, a tariff enabling the utility to offer two PBXs manufactured by Western Electric the Dimension 100 and the Dimension 400.*fn4 These units, particularly the Dimension 400, were well-received by Connecticut businessmen. We are told that SNET marketed over one hundred Dimension PBXs between March 1977 and February 1978.

The competitive environment in the business terminal equipment market, while not fatal to Northeastern's continued survival, was doubtlessly hostile. Metaphorically, Northeastern was a mosquito challenging an elephant. Even in its best year, its annual revenues from all of its operations were less than one-twentieth of the returns SNET earned in the terminal equipment market alone. But similar size disadvantages face any aspiring entrant wishing to dislodge a dominant firm. The antitrust laws assume these risks, and Northeastern must be taken to have accepted them. Appellee alleges, however, it was also the victim of business practices not countenanced by the Sherman Act. Specifically, Northeastern contends that SNET's prices for its Dimension PBXs and its key telephones were predatorily low, and that the customized payment option SNET offered to some of its business customers, the so-called "two-tier payment plan," had anticompetitive effects. Northeastern also complains that other aspects of appellants' activities were intended to stifle competition: their advertising and marketing methods, their introduction of new products, and their use of their monopoly power over telephone service to distort competition in the business equipment market.

Finally, Northeastern challenges conduct related to the revised tariffs AT&T filed in response to the FCC's Carterfone decision. After the Commission had invalidated the proscription against interconnection of customer-owned terminal equipment in 1968, AT&T proposed tariffs requiring that all such equipment be interconnected via a "protective coupler arrangement," to be provided, installed, and maintained by the local operating companies at the customer's expense. These couplers were intended to protect the telecommunications network from certain electrical problems that might result from the use of faulty or incompatible equipment. Although several telecommunications firms objected to these tariffs, the FCC allowed them to take effect pending the outcome of a study it had commissioned by the National Academy of Sciences (NAS). The Commission noted, however, that in taking this approach it was "not giving any specific approval to the revised tariffs." In re A.T.&T. "Foreign Attachment" Tariff Revisions, 15 F.C.C.2d 605, 610 (1968), reconsideration denied, 18 F.C.C.2d 871 (1969).

The NAS consumed the next four years, from 1968 to 1972, in preparing its report. It concluded, finally, that although the protective coupler requirement was "an acceptable way of assuring network protection," a registration system also merited consideration. Under such a system, the FCC would promulgate minimum specifications designed to protect the telecommunications network from electrical harm. Equipment meeting these standards would be exempt from the coupler requirement, but couplers would still be mandatory for unregistered items. Three years after adopting the NAS report, the FCC implemented this recommendation and invalidated AT&T's post-Carterfone tariffs. See In re Proposals for New or Revised Classes of Interstate and Foreign Message Toll Telephone Service and Wide Area Telephone Service, First Report and Order, 56 F.C.C.2d 593 (1975); Second Report and Order, 58 F.C.C.2d 736, on reconsideration, 61 F.C.C.2d 396 (1976), 64 F.C.C.2d 1058, aff'd sub nom. North Carolina Utilities Commission v. F.C.C., 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874, 98 S. Ct. 222, 54 L. Ed. 2d 154, 98 S. Ct. 223 (1977).

Northeastern does not challenge the legality of the invalidated tariff. It contends instead that the protective couplers were intentionally overdesigned, making them unnecessarily expensive and subject to break down. In particular, Northeastern complains that the couplers required an external power source*fn5 and that they had six-wire leads while Northeastern's PBXs were designed for two-wire interconnection. These features, Northeastern maintains, unreasonably hampered its efforts to compete in the business terminal equipment market.

Northeastern instituted the present suit in 1975, alleging that SNET, in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, had monopolized and had attempted to monopolize the business terminal equipment market in Connecticut.*fn6 Appellee charged further that SNET, AT&T, and Western Electric had conspired to monopolize that market, also in violation of § 2, and had conspired to restrain trade, in contravention of § 1, 15 U.S.C. § 1.

The case was originally assigned to Judge Daly, before whom appellants moved to dismiss the complaint on the ground that their allegedly anticompetitive conduct was exempt from antitrust scrutiny. Judge Daly denied that motion in November 1978, D.C., 477 F. Supp. 251, and, after ten more months of preliminary maneuvering, the trial commenced before Judge Eginton and a jury. Two weeks later, Northeastern filed an amended complaint, adding its objections to appellants' Dimension PBX tariffs. By agreement of the parties, the trial was bifurcated.

Northeastern's proof at the liability phase centered on the six types of conduct it alleged to be anticompetitive: pricing, advertising, marketing, introduction of new products, SNET's alleged use of its utility function to impede competition, and appellants' design of the protective coupler. The presentation of this evidence and of appellants' proof in opposition required almost three weeks. When both sides finally rested, the jury was asked to respond to fourteen interrogatories. It returned a verdict for Northeastern on all four of the claims, finding that each of appellants' six challenged activities was anticompetitive. Upon presentation of further evidence on damages, the jury awarded appellee $5,515,692. Of this amount, $3,368,906 was for lost profits; $2,146,786 was for damage to Northeastern's "going concern value." Pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15, the district court ordered that the amount be trebled, to the sum of $16,547,076.

Appellants then moved for judgment n. o. v. or for a new trial, renewing their claims of antitrust immunity and arguing that Northeastern had not presented sufficient evidence to support the verdict. Judge Eginton denied the motions, D.C., 497 F. Supp. 230, holding that except with respect to the evidence concerning SNET's pricing of key telephones, the jury had an ample basis upon which to predicate its findings of liability and damages. He then awarded Northeastern an additional $747,813.38 in attorneys' fees, as authorized by 15 U.S.C. § 15. This appeal followed.



A threshold question prevents our proceeding directly to Northeastern's Sherman Act claims. Appellants assert that the design of the protective coupler cannot be attacked on antitrust grounds because implementation of the coupler requirement was subject to review by the Federal Communications Commission.*fn7 It is to this issue that we now turn.

Appellees claim no explicit exemption; it is on a more elusive defense that they base their parry: "implied immunity." This principle represents an effort to resolve the inherent conflict between the Sherman Act's mandate of robust competition and the "public interest" standard underlying governmental regulation of business activity. The touchstone of this analysis is Congressional intent, see Otter Tail Power Co. v. United States, 410 U.S. 366, 93 S. Ct. 1022, 35 L. Ed. 2d 359 (1973), since the principle is founded on the notion that, in some circumstances, a Congressional delegation of regulatory authority carries with it the implication that the antitrust laws shall not apply to the conduct thus regulated. There are two narrowly-defined situations in which "repeal" of the Sherman Act will be inferred: first, when an agency, acting pursuant to a specific Congressional directive, actively regulates the particular conduct challenged, see, e. g., Gordon v. New York Stock Exchange, Inc., 422 U.S. 659, 685-86, 688-89, 95 S. Ct. 2598, 2614, 45 L. Ed. 2d 463 (1975), and second, when the regulatory scheme is so pervasive that Congress must be assumed to have forsworn the paradigm of competition, see, e. g., United States v. National Association of Securities Dealers, Inc., 422 U.S. 694, 730, 95 S. Ct. 2427, 2448, 45 L. Ed. 2d 486 (1975); Otter Tail Power Co. v. United States, supra, 410 U.S. at 373-74, 93 S. Ct. at 1027-1028. In either case, immunity will not lightly be inferred. "Repeal of the antitrust laws by implication is not favored and not casually to be allowed. Only when there is a "plain repugnancy between the antitrust and regulatory provisions' will repeal be implied." Gordon v. New York Stock Exchange, Inc., supra, 422 U.S. at 682, 95 S. Ct. at 2611, quoting United States v. Philadelphia National Bank, 374 U.S. 321, 350-51, 83 S. Ct. 1715, 1734, 10 L. Ed. 2d 915 (1963). As a further limitation, "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 v. New York Stock Exchange, 373 U.S. 341, 357, 83 S. Ct. 1246, 1257, 10 L. Ed. 2d 389 (1963).

Beyond setting out these basic principles, cases involving federal regulatory bodies other than the FCC are of limited usefulness in the present inquiry. See Essential Communications Systems, Inc. v. American Telephone & Telegraph Co., 610 F.2d 1114, 1116-17 (3d Cir. 1979); L. Sullivan, Antitrust 743-44 (1977). Whenever claims of implied immunity are raised, they must be evaluated in terms of the particular regulatory provision involved, its legislative history, and the administrative authority exercised pursuant to it. See Gordon v. New York Stock Exchange, Inc., supra; United States v. Philadelphia National Bank, supra.

This analysis has been undertaken with regard to the communications industry in several recent and comprehensive opinions, which trace Congressional efforts to regulate this area from their origin in the Mann-Elkins Act of 1910, Pub.L.No.218, 36 Stat. 539, through the Willis-Graham Act of 1921, Pub.L.No.15, 42 Stat. 27, to their present incarnation the Federal Communications Act of 1934, 47 U.S.C. §§ 151-609 (the 1934 Act). See, e. g., Essential Communications Systems, Inc. v. American Telephone & Telegraph Co., supra, 610 F.2d at 1116-21; Litton Systems, Inc. v. American Telephone & Telegraph Co., 487 F. Supp. 942, 947-50 (S.D.N.Y.1980). See also MCI Communications Corp. v. American Telephone & Telegraph Co., 462 F. Supp. 1072 (N.D.Ill.), aff'd sub nom. American Telephone & Telegraph Co. v. Grady, 594 F.2d 594 (7th Cir. 1978) (per curiam), cert. denied, 440 U.S. 971, 99 S. Ct. 1533, 59 L. Ed. 2d 787 (1979); United States v. American Telephone & Telegraph Co., 461 F. Supp. 1314 (D.D.C.1978). No purpose would be served by repeating this exegesis here. It is sufficient to state that having conducted an independent review of the 1934 Act and its legislative history, we find that immunity cannot be inferred on either of the two grounds previously discussed. We note first that the Act does not expressly authorize the FCC to approve protective coupler designs that unreasonably restrict competition. Compare Gordon v. New York Stock Exchange, Inc., supra (section 19(b)(9) of Securities Exchange Act of 1934 directed Securities Exchange Commission to supervise specific conduct challenged; if not immunized, conduct would have constituted per se violation of Sherman Act). While this observation is unsurprising, since protective couplers were unknown in 1934, it does rebut appellants' argument that immunity may be inferred on the basis of specific Congressional authorization.

Appellants' second assertion, that they are entitled to immunity on the vague ground of pervasive regulation, is also without merit. The pervasiveness of a regulatory scheme is not susceptible of precise quantification, see 1 P. Areeda & D. Turner, Antitrust Law P 224 (1978). But it is not meant to be, since regulation is not an end in itself; it is only a means of inferring that Congress intended to free the regulated industry from the discipline of competition. The more focused inquiry is whether the industry is so extensively regulated that application of the antitrust laws would be incompatible with the regulatory framework, that is, whether immunity must be inferred to make the system work. See United States v. National Association of Securities Dealers, Inc., supra, 422 U.S. at 734, 95 S. Ct. at 2450; Silver v. New York Stock Exchange, supra, 373 U.S. at 357, 83 S. Ct. at 1257.

A brief review of the FCC's treatment of the protective coupler tariff demonstrates that applying the Sherman Act to the matter of coupler design would not frustrate federal regulation of the telecommunications industry. AT& T filed this tariff in response to the FCC's decision barring telecommunications carriers from prohibiting the interconnection of customer-owned terminal equipment. See Carterfone, supra. The Commission, realizing that an adequate study of the revised tariff would take several years,*fn8 allowed it to take effect pending further investigation. It emphasized, however, that "in doing so, we are not giving any specific approval to the revised tariffs." AT&T "Foreign Attachment" Tariff Revisions, supra, 15 F.C.C.2d at 610-11. Seven years later, the FCC invalidated the tariff and substituted a registration system which freed equipment meeting certain technical specifications from the protective coupler requirement. That the Commission never approved the protective coupler tariff demonstrates that no conflict will arise between the Federal Communications Act and the antitrust laws if we hold that appellants are subject to antitrust liability for designing the coupler as they did. See Essential Communications Systems, Inc. v. American Telephone & Telegraph Co., supra, 610 F.2d at 1124. See also Litton Systems, Inc. v. American Telephone & Telegraph Co., supra. Accordingly, we reject appellants' claim that the design of the protective coupler escapes scrutiny under the Sherman Act.*fn9



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