Monday, June 13, 2016

1980 :: June 13 :: MCI wins antitrust lawsuit against AT&T

MCI was an innovative long distance company that radicalized the telecommunications market. Started in the 1960s, the business plan was to use radio licenses to provide long distance service between Chicago and St. Louis. MCI's application to provide service was approved by the FCC in 1969. But AT&T and the BOCs didnt like this much, and refused to interconnect with MCI. MCI had difficulty negotiating interconnection with AT&T, hired special counsel skilled in negotiations, and brought the issue before the FCC. In 1973, AT&T threw a curveball by filing interconnection tarriffs in 49 state PUCs, transforming MCI's transaction costs from one interconnection agreement, to 49 different agreements in each jurisdiction. In 1974, AT&T disconnected MCI. Finally, frustrated, In 1974, MCI, along with the Department of Justice, filed an antitrust suit against AT&T. On June 13th, 1980, the Court ruled in favor of MCI, awarding MCI $1.8 billion in damages. Two years later, AT&T would negotiate with DOJ the resolution of their antitrust lawsuit, agreeing to the breakup of the Bell System.

MCI v. AT&T, 708 F.2d 1081 (7th Cir. 1983)

In 1963, Microwave Communications, Inc., the predecessor corporation to MCI,11  requested permission from the Federal Communications Commission ("FCC") to construct and operate a long distance telephone system between Chicago and St. Louis. The proposed system consisted of a terminal in each city and microwave radio relay towers connecting the terminals. Through this system, MCI intended to provide long distance, private line telephone service to business and industrial subscribers whose needs justified the exclusive or semi-exclusive use of a long distance telephone line. MCI also sought interconnections from its terminals to ordinary local telephone facilities, principally telephone wires running in conduits beneath the street. These interconnections were essential to MCI's ability to do business, since they provided the telephone or computer linkage between MCI's terminals and its individual customers in each city.
In 1969, after lengthy administrative proceedings in which AT & T and the other general service carriers opposed MCI's application, the FCC approved MCI's proposal. Microwave Communications, Inc., 18 F.C.C.2d 953, 966 (1969); 21 F.C.C.2d 190 (1970).12  The FCC's decision specifically authorized MCI to provide only point-to-point private line service not requiring connection to the nationwide switched network--that is, tie lines that would connect two or more locations without the use of switching machines. 18 F.C.C.2d at 953-54. The FCC also retained jurisdiction to order appropriate local interconnections.
The MCI decision resulted in a deluge of new applications to the FCC for authority to construct and operate facilities for specialized common carrier services. MCI filed applications for authority to provide specialized services among more than 100 cities. Other companies filed similar applications, creating a situation in which, in many instances, more than one carrier was seeking to provide specialized services over the same route. To deal with this situation, the FCC instituted a broad rulemaking inquiry designed to permit consideration in one proceeding of the policy questions raised by these numerous applications. Specialized Common Carriers, 24 F.C.C.2d 318 (1970) (Notice of Inquiry).
In June 1971, the FCC handed down its Specialized Common Carriers decision, approving in principle the entry of specialized carriers into the long distance telecommunications field, and declaring as a matter of policy that there should be open competition in the specialized services to which the decision applied. 29 F.C.C.2d 870 (1970). Because AT & T, reversing its earlier position, agreed to negotiate with MCI and other new entrants for local interconnections, the FCC elected to defer consideration of MCI's claim that AT & T was misusing its power over local telephone service to gain a competitive advantage over potential specialized competitors.
The FCC's Specialized Common Carriers decision was hardly a model of clarity.13  The decision did not define the specialized services to which it referred, nor did it define the corresponding obligations that the FCC expected the general carriers (primarily AT & T) to assume in order to assist the new carriers. AT & T contended, both at the time of the FCC decision and throughout the pendency of this lawsuit, that the Specialized Common Carriers decision authorized only point-to-point private line services not requiring switched network connections, and that the obligations of the Bell System extended only to providing local distribution facilities for these point-to-point private line services. MCI, by contrast, has consistently taken the position that the Specialized Common Carriers decision authorized it to provide FX and CCSA type services, as well as point-to-point private lines, and that AT & T had a corresponding obligation to provide it with the switched network connections required for these services. MCI also contended, both before and after the Specialized Common Carriers decision, that AT & T was obligated to provide it with local distribution facilities at the same rate at which AT & T provided such facilities to Western Union, under a longstanding contract between those two carriers. AT & T disagreed, claiming that the contract then in effect with Western Union did not reflect AT & T's current costs, and that the price charged to MCI for local distribution facilities should be set so as to recover AT & T's costs on a current basis.
In September 1971, AT & T entered into interim contracts with MCI defining the kinds of interconnections that AT & T would provide for MCI's initial Chicago-St. Louis route and establishing the price for those interconnections. These contracts did not permit switched network connections for FX or CCSA type services, nor was the price set by the contracts for local distribution facilities comparable to that charged to Western Union.
During this same time period, the original MCI investors joined forces with William McGowan, an experienced business executive and engineer, to form a venture that envisioned the eventual construction and operation of a nationwide long distance telephone system. After scrutiny of the market it believed had been opened by the Specialized Common Carriers decision, MCI created a plan contemplating sales of 74,000 circuits (leased telephone lines) having an average length of 500 miles per circuit, or approximately 37 million circuit miles14  by the end of 1975. According to this plan, MCI expected its revenues to average $1.00 per circuit mile excluding AT & T's local connection charges, which MCI intended to pass on to its customers. Projected annual revenues for 1975 were approximately $350 million. Armed with these projections, MCI proceeded to raise $110 million by June 1972, making it one of the largest start-up ventures in the history of Wall Street. The funds were raised after review and analysis by leading lenders and large equipment suppliers who were either lending the funds or underwriting or guaranteeing the financing.
MCI commenced operations over its Chicago-St. Louis route on January 1, 1972. In the fall of 1972, MCI began construction of the first segment of its nationwide system, extending east and south from the original Chicago-St. Louis route. MCI initially expected to complete the first portion of its national network and commence customer service over major parts of the system by late summer 1973. Expansion to a second and a third group of smaller cities was to follow over the next three years. MCI planned to fund these capital expenditures from its initial $110 million capitalization, from substantial additional anticipated financing and from operating revenues.
During late 1972, while construction was progressing, MCI entered into negotiations with AT & T over the provision by AT & T of interconnections and local distribution facilities on the expanded MCI system. Because MCI had previously experienced difficulty obtaining satisfactory interconnections for its Chicago-St. Louis segment, MCI hired an experienced lawyer-negotiator to secure a national interconnection agreement with AT & T that would permit MCI to serve the entire market it believed the FCC had opened. These negotiations began in September 1972, and continued with little progress for the next nine months.
During this same period, MCI appealed to the FCC for help in breaking down what it viewed as AT & T's unreasonable negotiating stance. Through a series of informal complaints and conferences with FCC staff, MCI charged that AT & T was treating it unfairly, on the question of interconnections, in at least three respects:
(1) MCI claimed that AT & T was unlawfully denying it interconnections to the switched network for FX and CCSA services and for point-to-point service to customers located outside a local distribution area,15  including multipoint service;16 
(2) MCI claimed that it was being charged excessive and discriminatory prices for the local distribution facilities provided by the Bell System; and
(3) MCI claimed that it was being harassed by Bell System employees in the provision of local distribution facilities through delays, improper installation, improper maintenance and other similar practices.
AT & T denied each of these charges. Both in its direct dealings with MCI and in its responses to FCC staff members, AT & T adhered to the position that the Specialized Common Carriers decision authorized only private line service not requiring switched network connections. AT & T also contended that it was providing MCI with all the interconnections to which MCI was entitled and that the prices it was charging for those interconnections were not excessive or unfair.
In August 1973, with negotiations still pending, and without informing MCI, AT & T decided to file with forty-nine of the state utility commissions interconnection tariffs that would be equally applicable to all carriers--including MCI and Western Union. By filing interconnection tariffs with the state commissions rather than with the FCC, AT & T made it more difficult for MCI to oppose the tariffs, since, in the words of one AT & T official, the interconnection "controversy would spread to 49 jurisdictions." PX 2148 at 2031. Even after making this unilateral tariff decision, AT & T continued to "negotiate" with MCI. After MCI accidentally learned of the state tariff plan, however, AT & T formally broke off all contract negotiations.
In early October 1973, several top MCI officials met with Bernard Strassburg, Chief of the FCC Common Carrier Bureau, to discuss a plan designed to resolve the interconnection controversies between MCI and AT & T. Pursuant to this plan, FCC Chairman Burch, on October 4, 1973, issued a letter on behalf of the Commission, rejecting AT & T's resort to state regulatory agencies as unlawful and asserting exclusive FCC jurisdiction over the interconnection dispute. Shortly thereafter, MCI wrote to Mr. Strassburg, inquiring as to the nature and scope of the services that MCI was authorized to provide and for which AT & T was obliged to supply interconnections under the Specialized Common Carriers decision. Mr. Strassburg replied by letter dated October 19, 1973, that these services included FX and CCSA, as well as services outside local distribution areas and multipoint services. On November 2, 1973, MCI filed a complaint in federal district court under section 406 of the Communications Act asking that AT & T be ordered to provide interconnections for these services.
On December 31, 1973, the United States District Court for the Eastern District of Pennsylvania issued a preliminary injunction ordering AT & T to provide all of the interconnections sought by MCI, on the theory that such interconnections were contemplated and required by the FCC's Specialized Common Carriers decision. MCI Communications Corp. v. AT & T, 369 F. Supp. 1004 (E.D. Pa. 1973). AT & T provided the required interconnections, but immediately appealed the district court's injunction. Meanwhile, the FCC, on December 13, 1973, issued its own order requiring AT & T to show cause why it should not be held to have violated the Specialized Common Carriers decision by refusing to provide the interconnections requested by MCI.
On April 15, 1974, the Third Circuit reversed the preliminary injunction issued against AT & T. MCI Communications Corp. v. AT & T, 496 F.2d 214 (3d Cir. 1974). On April 16, 1974, despite assurances that the FCC's "show cause" decision was expected "any day now," and despite FCC warnings that disconnection of MCI's customers would violate the Communications Act, AT & T ordered its local operating companies to disconnect MCI's customers on twenty-four hours notice. MCI alleged that the resulting disconnections caused turmoil among its customers and seriously damaged its reputation for reliable service. On April 23, 1974--eight days after the Third Circuit had vacated the injunction obtained by MCI--the FCC issued a decision ordering AT & T to provide the disputed interconnections.17  Bell System Tariff Offerings of Local Distribution Facilities for Use by Other Common Carriers, 46 F.C.C.2d 413, aff'd sub nom. Bell Telephone Co. v. FCC, 503 F.2d 1250 (3d Cir. 1974), cert. denied, 422 U.S. 1026, 95 S. Ct. 2620, 45 L. Ed. 2d 684 (1975). The FCC held that it had intended to include both FX and CCSA services within the terms "specialized" or "private line" services as those terms were used in the Specialized Common Carriers decision. 46 F.C.C.2d at 425-27. AT & T provided the requested interconnections within ten days of the FCC's order.
In October 1974, MCI filed a tariff with the FCC for what the tariff referred to as metered use private line services, principally a service called "Execunet." Although the FCC did not immediately perceive it as such, this tariff was apparently designed to permit MCI to provide ordinary switched long distance service to users in any city to which its microwave system extended. See MCI Telecommunications Corp., 60 F.C.C.2d 25, 40-43 (1976) (the "Execunet decision"). When the FCC discovered the nature and purpose of the new tariff, it declared the tariff unlawful and ordered MCI to discontinue providing ordinary long distance message service on the ground that the Specialized Common Carriers decision limited MCI's authorization to the provision of private line services. 60 F.C.C.2d at 35-44, 58.
MCI appealed the FCC's Execunet decision to the Court of Appeals for the District of Columbia Circuit and, in July 1977, the Court of Appeals set the decision aside. MCI Telecommunications Corp. v. FCC, 561 F.2d 365 (D.C. Cir. 1977), cert. denied, 434 U.S. 1040, 98 S. Ct. 781, 54 L. Ed. 2d 790 (1978). In its opinion, the Court of Appeals assumed, without deciding, that "a service like Execunet was not within the contemplation of the [FCC] when it made the Specialized Common Carriers decision," 561 F.2d at 378, but held that the FCC had not conducted a sufficient hearing--either during the Specialized Common Carriers proceeding or at any subsequent time--to justify any limitation on the operating authority of MCI and the other new specialized carriers. Id. at 378-80.

The 1980 decision by the District of Columbia Circuit--handed down long after the events involved in the instant case occurred--rendered virtually meaningless the debate between MCI and AT & T over the proper interpretation and definition of the specialized private line services to which the Specialized Common Carriers decision applied. AT & T also claims that it was only by virtue of this Court of Appeals decision that MCI was able to achieve profitability since, according to AT & T, MCI's costs for private line services (including FX and CCSA) substantially exceeded the rates AT & T was then charging its large users under the Telpak tariff. See infra, pp. 1099-1100.
MCI's original complaint, filed March 6, 1974, contained four separate counts: monopolization, attempt to monopolize, and conspiracy to monopolize--all under section 2 of the Sherman Act3 --and conspiracy in restraint of trade--under section 1 of the Sherman Act. MCI alleged that AT & T had committed twenty-two types of misconduct, classifiable into several categories including predatory pricing, denial of interconnections, negotiation in bad faith and unlawful tying. MCI claimed at trial, on the basis of a lost profits study originally prepared in part for financing purposes, that it had suffered damages of approximately $900 million as a result of AT & T's allegedly unlawful actions.4 
The case was tried to a jury between February 6 and June 13, 1980. After completion of MCI's case in chief, the district court directed a verdict in favor of AT & T on seven of the twenty-two alleged acts of misconduct.5  The remaining fifteen charges--all based on section 2 of the Sherman Act--were submitted to the jury. A special verdict form required the jury to make a separate finding of liability as to each of the fifteen charges, but permitted the jury to award damages in a single lump sum, without apportioning MCI's claimed financial losses among AT & T's various lawful and unlawful acts. The jury found in favor of MCI on ten of the fifteen charges submitted, and awarded damages of $600 million--a sum equal to two thirds the total damage figure claimed in MCI's aggregated lost profits study.6  The district court trebled this damage award, as required by section 4 of the Clayton Act, resulting in a judgment of $1.8 billion, exclusive of costs and attorneys' fees.

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