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CONRAC CORP. v. AT&T

August 31, 1982

CONRAC CORP., Plaintiff,
v.
AMERICAN TELEPHONE & TELEGRAPH COMPANY, et al., Defendants


Sofaer, District Judge.


The opinion of the court was delivered by: SOFAER

OPINION AND ORDER

ABRAHAM D. SOFAER, D.J.:

 Conrac Corporation ("Conrac") has initiated an antitrust suit against American Telephone & Telegraph Company ("AT&T"), various AT&T subsidiaries, TeleSciences, Inc. ("TeleSciences") and certain officers of AT&T and TeleSciences. (The claims against all individual defendants were dismissed by oral opinion on August 16, 1982). Both Conrac and TeleSciences are relatively small telecommunications manufacturing companies. AT&T is, of course, one of the world's largest corporations. Through its local operating subsidiaries and its Western Electric manufacturing subsidiary, AT&T dominates the telecommunications industry in the United States.

 TeleSciences and the Government as well as Conrac have alleged that this AT&T dominance involved various violations of the antitrust laws. The Government's suit, initiated in 1974, was settled in January 1982. Under this recently approved settlement, the AT&T operating subsidiaries will become independent entities early in 1984. At substantially the same time as the Government/AT&T settlement was reached, TeleSciences and AT&T agreed to a settlement of an antitrust suit TeleSciences had brought against AT&T in September 1980. Under their settlement, AT&T agreed to pay TeleSciences forty cents for every dollar below $300 million in sales by TeleSciences to AT&T operating subsidiaries over an eight-year period. While the amount of sales so far made or planned under this agreement is unclear, AT&T has to date paid TeleSciences $40 million as a deposit against its future obligations under the settlement.

 Conrac initiated the instant suit in April 1982. It delayed filing an action against AT&T until then because it expected an award of substantial business from AT&T which subsequently did not materialize. In response to a shareholder's question at Conrac's annual meeting, Conrac Chief Executive Officer Donald H. Putnam stated:

 
When it had become quite apparent that the bulk of the market had indeed been saved for Western Electric, TeleSciences instituted suit, I believe in '80. We quite consciously decided not to institute suit because at that point we had some very attractive business in negotiation with AT&T, and felt it was not good practice to sue a customer from whom we expected a great deal of volume. As circumstances turned out, I suspect we should have sued. TeleSciences received a very generous settlement from AT&T last year.

 Conrac's complaint charges AT&T with illegally exercising its monopoly power to foreclose competition in the market for equipment designed to monitor telephone system usage (in industry parlance, "telecommunications support equipment"). These antitrust violations are substantially the same as those previously claimed by TeleSciences. In addition, however, Counts VI, VII and VIII allege that the TeleSciences/AT&T settlement violates the antitrust laws. Accordingly, Conrac seeks to enjoin that settlement and to obtain treble the damages that it causes from TeleSciences as well as AT&T.

 This opinion concerns TeleSciences' motion to dismiss the counts involving its settlement with AT&T. TeleSciences bases its motion on two grounds: first, failure to state a claim upon which relief may be granted and, second, absence of subject matter jurisdiction due to a lack of ripeness. (TeleSciences also moved the Court to dismiss separately Count VIII, which charges various violations of New York State's antitrust laws, on grounds of federal preemption. This aspect of TeleSciences' motion is deferred.) Neither of the grounds asserted would justify outright dismissal at this time, but a stay is warranted of all proceedings concerning Counts VI, VII and VIII, save a limited amount of discovery, pending the outcome of plaintiff's remaining suit against the AT&T defendants or further order of the Court.

 Conrac's theory of TeleSciences' antitrust violation begins with the assertion that the TeleSciences/AT&T settlement creates "a powerful, inexorable 'buy-TeleSciences' bias." (Complaint para. 79.) According to Conrac, this bias amounts to a "conscious division of the market" which, rather than relieving AT&T's monopoly on the telephone equipment market, actually creates "further foreclosure of substantial competition." (Pl. Mem. at 7.) TeleSciences does not deny Conrac's claim that the settlement could greatly boost its volume of business with AT&T. TeleSciences asserts, however, that the settlement would thus increase, not foreclose, competition by providing an incentive for AT&T's operating subsidiaries to fulfill their telephone equipment needs from a company other than AT&T's manufacturing subsidiary Western Electric. Moreover, TeleSciences questions the extent to which its agreement with AT&T will inevitably lead the operating company subsidiaries to increase their purchases from TeleSciences in view of the settlement of the Government's suit against AT&T whereby the operating companies will become independent entities. Finally, TeleSciences maintains that even if Conrac's legal theory has merit, its claims are unripe. In affidavits by one of its executives, the company claims no order or sale involving any product also manufactured by Conrac has been made under the AT&T settlement. (Def. Motion Ex. F & Def. Reply Mem. Ex. A.) TeleSciences therefore insists no case or controversy presently exists between TeleSciences and Conrac in that Conrac has suffered no conceivable antitrust injury from the TeleSciences/AT&T settlement.

 TeleSciences' motion to dismiss is largely premature. Substantial discovery would be required on the issue of ripeness to define a relevant market by which to test TeleSciences' assertion that none of the products sold to the AT&T operating companies under the settlement was "in competition" with Conrac products. (Def. Reply Mem. at 2; see Pl. Sur-Reply Mem. at 9.) Moreover, although a cash settlement alone could plainly not provide a basis for a colorable antitrust claim, the $40 million payment received by TeleSciences as an advance against sales contemplated by the settlement, could conceivably represent antitrust injury to Conrac when viewed as part and parcel of an agreement substantially foreclosing the market for its products.

 There is also little merit to TeleSciences' effort to obtain a dismissal under Federal Rule of Civil Procedure 12(b) (6). The complaint states a claim upon which relief may be granted and does not rely solely on a statement of legal conclusions to support this claim. By making it clear that the TeleSciences/AT&T settlement is at the crux of its claims, Conrac has plainly afforded TeleSciences adequate notice under Rule 12. See George C. Frey Ready Mix Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 554 (2d Cir. 1977). To the extent TeleSciences' 12(b) (6) motion, laced as it is with a variety of factual assertions, should be read as a motion for summary judgment, see Fed. R. Civ. P. 12(b), it is inappropriate prior to the completion of even the most limited discovery. See George C. Frey Ready Mix Concrete, Inc. v. Pine Hill Concrete Mix Corp., supra.

 Nonetheless, several considerations weigh in favor of imposing sua sponte a stay on Conrac's claims concerning the TeleSciences/AT&T settlement. The courts have a strong interest in encouraging and, indeed, protecting facially legitimate settlements. "Compromises of disputed claims are favored by the courts; and, presumptively, the parties to the compromise in question possessed the right to thus adjust their differences." Williams v. First National Bank, 216 U.S. 582, 595, 54 L. Ed. 625, 30 S. Ct. 441 (1910) (citation omitted). The Second Circuit only recently pointed out: "There are weighty justifications, such as the reduction of litigation and related expenses, for the general policy favoring the settlement of litigation." Weinberger v. Kendrick, 698 F.2d 61, slip. op. at 73 (2d Cir. 1982) (Friendly, J.). Because the costs of defending even the most unmeritorious antitrust claims are often high, see generally Posner & Easterbrook, Antitrust 595-600 (2d ed. 1981), suits challenging antitrust settlements as themselves violative of the antitrust laws could create a substantial disincentive to such settlements. Given the general policy favoring settlements and the presumption in favor of their legality, the value of the settlement process must not be diminished by permitting suits challenging antitrust settlements to proceed to trial without due scrutiny.

 In the particular circumstances of this case a stay of Conrac's claims involving the TeleSciences/AT&T settlement provides an attractive device to protect the settlement from potentially unmeritorious or unnecessary litigation, while at the same time inflicting no prejudice upon plaintiff. "The power to stay proceedings is incidental to the power inherent in every court to control the dispositions of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance." Landis v. North American Co., 299 U.S. 248, 254-55, 81 L. Ed. 153, 57 S. Ct. 163 (1936) (Cardozo, J.); see Enelow v. New York Life Ins. Co., 293 U.S. 379, 382, 79 L. Ed. 440, 55 S. Ct. 310 (1935).

 AT&T is clearly the major target of the Conrac suit. Staying proceedings involving AT&T's settlement with TeleSciences will not prejudice Conrac's prosecution of its primary monopolization claims against the dominant firm in the telephone equipment market. Nor is such a stay likely to forestall Conrac from resuming its suit against TeleSciences at the appropriate time. The Court's condition on its stay is that Conrac be allowed discovery of all sales and payments made pursuant to the AT&T/TeleSciences settlement. Conrac ...


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