Global Telecommunications Regulation TCOM 5173

The 1949 DOJ Suit • Deferred from 1939/40 due to WWII • Alleged that AT&T was violating the Sherman Antitrust Act • Sought to separate WECo from AT&T and break it into three separate companies • “Captive (bottleneck) monopoly” in the DOJ’s eyes • Operating companies could buy from ONLY WECo • Unregulated, WECo could charge a premium for everything it sold to AT&T (c) 2004 Charles G. Gray

The 1956 Consent Decree • Eisenhower administration cozy with business • New AG reviewed all pending cases • AT&T hired a close friend to lobby the AG • The Decree (12 January 1956) • AT&T would stay out of the computer business (such as it was) • AT&T kept WECo • Congress held hearings and used the forum to embarrass the Justice Department (c) 2004 Charles G. Gray

The DOJ Reaction • Stunned at the “settlement” • Believed AT&T had: • Improperly used its political muscle • Circumvented the legal process • Cheated the American people • Began a comprehensive file on AT&T’s actions, waiting for the “right time” • The time arrived in the Fall of 1973 (c) 2004 Charles G. Gray

MCI Enters the Picture • June, 1972 – McGowan took MCI public • Announced network build-out plan to 165 cities • AT&T “Hi-lo” tariff (effective June 1974) • McGowan retained numerous prestigious DC law firms to invoke “conflict of interest” if AT&T tried to hire them later • McGowan influenced Sen. Hart on the Antitrust Committee (Industrial Reorganization Act-did not pass the Senate) (c) 2004 Charles G. Gray

Other Factors in Play • McGowan “captured” the young liberal lawyers and economists at the DOJ • Data processing industry was lobbying the FCC for better/faster services • AT&T was holding out to recover “sunk” costs • McGowan lobbied the Senate to break the local companies away from AT&T • MCI attorney read a “confidential” AT&T plan to file individual state tariffs (c) 2004 Charles G. Gray

Conflict Escalates • 1973 - deButts speech to the NARUC in Seattle • The “Unusual Obligation” speech • AT&T should continue its monopoly “in the public interest” • deButts to Strassburg: – “No hard feelings” • Strassburg – Chief of FCC CCB • “Father” of telecommunications competition • 40 year FCC veteran, Chief of the CCB • Wrote the SCC decision in 1971 • Wrote the MCI FX decision – 4 Oct 1973 • Determined to “bring AT&T down” (c) 2004 Charles G. Gray

The MCI FX Decision • FCC “approved” without really understanding • Investigation launched to define approved services • AT&T sued, Federal Court upheld the FCC • Appeals court overruled, remanded to the FCC • AT&T disconnected all MCI FX service • Worked the weekend to pull them all • DeButts later had serious regrets over his action • 1974 – MCI filed sweeping antitrust suit against AT&T (c) 2004 Charles G. Gray

Other Contributing Factors • AT&T service failures-late 1960’s in NYC • Growth of satellite and microwave service • Emerging “computer age” • Concern that AT&T couldn’t keep up • Suppression of new technologies • General view that AT&T “controlled” the FCC • Concept of “continuing surveillance” of AT&T • Strassburg ended “informal coordination” • FCC launched a big investigation of AT&T (c) 2004 Charles G. Gray

Nevada Bell Illinois Bell Indiana Bell Michigan Bell New England T&T New Jersey Bell Northwestern Bell Pacific Northwest Bell Pacific T&T South Central Bell Southern Bell Southwestern Bell Bell Tel of PA Chesapeake & Potomac C & P of Maryland C & P of Virginia C & P of W. Virginia Diamond State Tel Mountain States T&T New York Telephone Ohio Bell Wisconsin Telephone The Bell Operating Companies (c) 2004 Charles G. Gray

AT&T and Public Policy • AT&T viewed MCI as a customer • Followed the state tariffs for providing service • DOJ viewed MCI as a competitor • The Bell System viewed their actions as protecting the network • DOJ viewed it as only protecting the AT&T monopoly • Public policy was shifting to favor competition (c) 2004 Charles G. Gray

1974 – The Politics • Nixon/Agnew/Ford White House • Department and agency power increased • Attorney General Saxbe • Unpredictable, political renegade • DOJ attorneys advised AT&T they would recommend a suit • AT&T to brief AG prior to decision • Saxbe announced “I intend to bring an action” • No presidential approval, Treasury and DoD strongly objected (c) 2004 Charles G. Gray

DOJ Responds to the “Scandal” • FCC had concluded that it could not control WECo’s pricing • Advances in technology made the 1956 decree more embarrassing to DOJ • Two separate DOJ investigations • One open and “by the rules” • Another, with clandestine meetings with White House and Senator Hart • Competitors were fearful of testifying (c) 2004 Charles G. Gray

The Basis for the Suit • AT&T was violating the Sherman (1890) and Clayton (1914) Antitrust Acts • Concept of “bottleneck monopoly” • Essential Facilities • Intercity LD was bottleneck that lead to Kingsbury • State regulated BOCs were the bottleneck to IXC competition in 1973 • AT&Ts PCA requirements • Precedent in Supreme Court “Otter Tail” case (c) 2004 Charles G. Gray

The DoJ 1974 Suit • Filed 20 November 1974 • Alleged that AT&T: • Monopolized and conspired to monopolize various telecommunications markets • General terms, expected to be expanded as investigations followed • Relief sought: • Divest WECo and divide it up • Divest some or all of the operating companies • Bell Labs postponed for a later decision (c) 2004 Charles G. Gray

The 1974 Suit in Limbo • February 1975 – Judge Joseph Waddy assigned to the case (terminally ill w/ cancer) • AT&T filed a motion to require every federal government department to preserve every document relevant to AT&T • DOJ called a hearing • AT&T (Saunders) asserted that the FCC had jurisdiction – not the judge • Judge postponed “discovery” pending resolution of the jurisdiction question (c) 2004 Charles G. Gray

AT&T’s Response • deButts declared AT&T’s innocence to the press • AT&T would never approach the government for a consent decree • AT&T would prove its case in a court of law • deButts – belligerent – government should follow tradition of regulated monopoly • AT&T was a “good corporate citizen” (c) 2004 Charles G. Gray

AT&T Defensive Efforts • Sought to have the suit dismissed • Illegal due to the existing “consent decree” • Court lacked jurisdiction since the “relevant questions” were already before the FCC • All appeals ultimately failed (c) 2004 Charles G. Gray

The MCI Execunet Gambit • FCC had approved FX service in 1973 • One “open” end, one “closed” end • AT&T lobbyist demonstrated Execunet to the FCC – to their horror • Two “open” ends, back to back • MCI had filed a “modular tariff” • FCC staff didn’t understand it, but approved it anyway • McGowan had deceived the FCC • Exhausted all of his “political capital” there (c) 2004 Charles G. Gray

The “Bell Bill” • “The Consumer Communications Reform Act of 1976” (or, “The Bell Bill”) • Introduced by the (sole) Congressman from Wyoming • No prior coordination with the House Subcommittee on Communications or the FCC • AT&T learned about it through the newspaper (c) 2004 Charles G. Gray

Provisions of the “Bell Bill” • AT&T would become the nation’s single phone monopoly • MCI and competitors would be forced out • AT&T would be immunized against any antitrust action • AT&T could buy out any competitors • Equipment and service regulation would revert to the states (cancel 1968 Carterfone) • Competition would effectively die (c) 2004 Charles G. Gray

deButts’ Last Stand • De Butts seen by Congress and competitors as “blindingly arrogant” • Confrontational style with Congress and FCC • Scared many Congressmen, due to a million employees who could vote • A “shepherd” was appointed in every congressional district • To mobilize employees • Follow the congressman around, attending meetings, etc. • Rep. Wirth inquired about the cost of AT&T’s lobbying, and deButts lost all credibility • “I doubt that there is a single AT&T person working full-time on this bill” (c) 2004 Charles G. Gray

Rules for Legislative Success • Walk softly • Lose graciously • Flatter continuously • Gloat never • Let the congressman take credit for: • “Forging complex legislation” • “Hammering out a compromise” • AT&T did none of the above on the “Bell Bill” (c) 2004 Charles G. Gray

The Winds of Deregulation • Liberals saw competition leading to decentralized ownership and more diverse economy • Conservatives just wanted the government off of business’s back • A sweeping force • Airlines - Trucking • Natural Gas - Oil • Banking - Others (c) 2004 Charles G. Gray

The 1978 Van Deerlin Bill • Intended to completely rewrite the TA of 34 • Competition as the main means of controlling both broadcasting and telecommunications • Relieved AT&T from the 1956 Consent Decree • Required AT&T to divest itself of WECo • Set up fund to subsidize local rates • Mandated compulsory IXC interconnection • Most provisions were exactly opposite those called for in the CCRA (c) 2004 Charles G. Gray

1978 Political Landscape • The Consumer Communications Reform Act (CCRA) was dead • But it had induced a strong negative reaction to AT&T • The Van Deerlin Bill was dead • Statement of principles and an agenda for discussion • Nobody ever thought it would become law • No public crisis perceived, therefore no strong public support (c) 2004 Charles G. Gray

MCI’s Position - 1978 • The DOJ antitrust suit was revived, with the US Supreme Court deciding that the FCC was ineffective, and the courts should decide • Judge Harold Greene was assigned • The MCI antitrust suit was nearing trial • MCI was now a billion dollar company • DOJ intended to “ride on the shoulders” of the MCI antitrust case (c) 2004 Charles G. Gray

The AT&T Red and Blue Teams • The Red Team • Personified by deButts (retired in 1979) • “The phone company is always right” • Equipment competition would bring down the network • Long distance competition was inefficient • The Blue Team • Led by “Charlie” Brown • Saw the coming of competition and wanted to prepare for it • Completely opposite viewpoints of moving the business forward (c) 2004 Charles G. Gray

Judge Harold Greene • A Jew, born in Germany, escaped the Nazis in 1939 • Served in the US Army (MI) • Top of his class at Georgetown Law School • Civil Rights Division under R. Kennedy • Strong belief in America’s system of checks and balances • Intent on moving the AT&T case forward expeditiously (c) 2004 Charles G. Gray

Early Attempts to Settle • 1979-1980 - DOJ lead attorney Anderson’s offer to AT&T • Unknown to the “front office” • “the menu” - undated, on plain paper • Brown willing to negotiate • Trienens, lead attorney for AT&T negotiated • Anderson resigned prior to completion of negotiations (c) 2004 Charles G. Gray

First Settlement Criteria • The “Crown Jewels” • Pacific Bell • The “Bellwether” approach • Southern New England Telephone • Cincinnati Bell • The “United Fruit” approach • WECo to spin off one third of itself into a new company to fully compete • Divest Pacific Bell, Cincinnati Bell, SNET (c) 2004 Charles G. Gray

Change of Players • New Chief of Antitrust appointed by Carter • Sanford Litvack • Unwilling to consider a settlement • Internal bickering and turf wars between DOJ attorneys • Litvack refused to speak to Trienens about the “menu” • Brown and Trienens completely baffled (c) 2004 Charles G. Gray

The MCI Antitrust Case • 13 June 1980 – “Black Friday” to AT&T • MCI awarded $1.8B in damages • Reversed on appeal/new trial in 1985 to $300M • Annual interest alone of $162M while the case was on appeal • First year MCI had ever showed a “profit” • Half of the DOJ antitrust case paralleled the MCI case • Severe psychological blow to AT&T management and employees alike (c) 2004 Charles G. Gray

Another “Bell Bill” (1980) • Comprehensive rewrite of CA 34 • Cleared by the House Communications Subcommittee • “Blessed” by AT&T • End computer restrictions from 1956 Consent decree • Make WECo a fully separated subsidiary • Rodino, (House Antitrust Subcommittee) killed it in his committee (c) 2004 Charles G. Gray

The Crimson Sky Deal • Trial date set for 15 January 1981 • AT&T and DOJ began meeting 22 Dec 80 • Devised rules for IXC interconnection • General framework decided by 5 January • Presented as generally agreed by both parties • Facing threat of a new administration • The “Piggyback Problem” • Requested trial delay for three months • Judge Greene denied the request (c) 2004 Charles G. Gray

The Trial Begins • Gerry Connell newly named as the DOJ lead attorney • Read from his notes (poorly) • Enumerated dates and episodes • Monotonous, plodding opening statement • Saunders, attorney for AT&T • Polished orator, quoted Voltaire • Spoke for six hours without notes • Concentrated on the MCI case, and the FX and Execunet decisions (c) 2004 Charles G. Gray

The Trial on Hold • Judge Greene queried the status of the “Crimson Sky” proposed settlement • Settlement was substantial • Major provisions agreed by both sides • Approved by working-level lawyers • The Reagan administration was still an uncertainty • Judge Green recessed the trial until 4 March (c) 2004 Charles G. Gray

Politics and Bureaucrats • Reagan’s nominations for AG and Asst AG recused due to conflict of interest • William French Smith • Edward Schmults • William Baxter headed the Antitrust Division • Litvak decided that the “equal access” part of the agreement would never work • Trienens believed that settlement was imminent • Litvak told Trienens that it was all off (c) 2004 Charles G. Gray

Political Opposition to the Suit • Reagan commented against it while campaigning • Others • William French Smith (AG designate) • Edwin Meese (Counselor) • Malcolm Baldridge (Commerce) • Caspar Weinberger (Defense) • DCA strongly opposed the breakup of AT&T • Threat to national security • JCS – classified (secret) letter (c) 2004 Charles G. Gray

Trial Testimony • Connell was an expert in dealing with Judge Green • DOJ brought numerous witnesses • Characterized AT&T (and IBM) as dancing elephants • Connell (DOJ) concentrated on mundane particulars and indisputable facts • Saunders (AT&T) concentrated on regulation, politics and the history of the industry (c) 2004 Charles G. Gray

The Baldridge Proposal • Secretary of Commerce • NTIA chief Wunder • Former Congressman – worked on many unsuccessful telecom bills • Concern over trade deficits (mostly Japan) • Cabinet Council on Commerce and Trade • “Task Force on Telecommunications Policy” established by Meese (Counselor to the President) • Commerce - Defense • Agriculture - Energy • FEMA - AG not included (on purpose) (c) 2004 Charles G. Gray

Basis for the Proposal • Perception of President Reagan’s position • National defense and security • The Defense Communication System • Trade deficits • No evident objection from key members of Congress • Opinion that the public did not care, and would not respond (c) 2004 Charles G. Gray

The Reagan Meeting • Task force was sure of Reagan’s approval to drop the case • Baxter rebutted strongly • Shortcomings of the legislative solution that Commerce had proposed • DOJ had been excluded from the task force • Importance of unity and due process within the administration • No decision – President went to lunch (c) 2004 Charles G. Gray

Judge Greene’s Warning • Baldridge proposal was leaked to the press • “I don’t propose to act on the basis of press reports . . .” • Saw the government’s case as “respectable” • Highly disturbed by even a hint of outside political interference • Greene intended to decide the case on its merits “under the existing antitrust laws” (c) 2004 Charles G. Gray

More Bad News for AT&T • Litton PCA case decided in favor of Litton • AT&T had demanded the use of PCAs as a condition for connecting “foreign attachments” • Court awarded $276.6M in damages • Served notice on the Administration that any dismissal of US vs. AT&T would have to be rigorously explained to Congress and the public (c) 2004 Charles G. Gray

The Trial Continues • Hundreds of witnesses • AT&T brought in “celebrities”, movie stars, ex-cabinet members, senators, business leaders • Legal maneuvering on both sides • AT&T perceived that it was losing • Judge Greene zeroed in on the procurement practices of the operating companies • “Familial attitude” of Bell employees stifled competition (c) 2004 Charles G. Gray

The Wirth Report • November 1981 – “Telecommunications in Transition: The Status of Competition in the Telecommunications Industry” • Scuttled any hope that AT&T had of a legislative solution • More restrictions needed on AT&T • Cross-subsidies between AT&T units continued to be a major problem • Drove AT&T to propose the “inter-intra” split (c) 2004 Charles G. Gray

AT&T’s Three Alternatives • Presented to the Board of Directors • Continue to fight, in court, in Congress, at the FCC • No Surrender • S.898 “Quagmire II” negotiations • DOJ/Baxter had gained the upper hand • Inter-intra split • Divest the (less profitable) operating companies • National security was a major concern • “Sweet revenge” on MCI (c) 2004 Charles G. Gray

Global Telecommunications Regulation TCOM 5173