Gilroy, Angele A.

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JAN 0 6 1983 Congressional Research Service The Library of Congress Washington, D.C. 20540 STATUS OF THE JUSTICE DEPARTMENT/AMERICAN TELEPHONE AND TELEGRAPH COMPANY ANTITRUST SETTLEMENT: A BRIEF OVERVIEW Angele A. Gilroy Analyst in Industrial Organization Economics Division August 30, 1982 CONTENTS I .  BACKGROUND INFORMATION ............................................. I 11. MODIFICATIONS INCORPORATED INTO THE JANUARY 8 ,  1982 ,  SETTLEMENT , . . . 2 111, FUTURE PROCEDURAL S T E P S  BEFORE DIVESTITURE ......................... 4 STATUS OF THE JUSTICE DEPARTMENT/AMERICAN TELEPHONE AND TELEGRAPH COMPANY ANTITRUST SETTLEMENT: A BRIEF OVERVIEW I. BACKGROUND INFORMATION On November 20, 1974, t h e  J u s t i c e  Department i n s t i t u t e d  an a n t i t r u s t  a c t i o n  a g a i n s t  t h e  p a r e n t  o r g a n i z a t i o n ,  American Telephone and Telegraph Co. (ATcT), i t s  wholly owned manufactur ing s u b s i d i a r y ,  Western E l e c t r i c ,  and B e l l  L a b o r a t o r i e s ,  t h e  j o i n t l y  owned r e s e a r c h  and development arm, charg ing  t h e  d e f e n d a n t s  wi th  us ing t h e i r  monopoly p o s i t i o n  t o  i n h i b i t  c o m p e t i t o r s  i n  t h e  telecommunications market .  D i v e s t i t u r e  o f  t h e  e x i s t i n g  components o f  ATdT was sought  on t h e  b a s i s  t h a t  i t  remains  t h e  b e s t  way t o  a s s u r e  t h a t  t h e  company cannot  use revenues  from i t s  monopoly s e r v i c e s  t o  s u b s i d i z e  advanced comnunications s e r v i c e s  i n  t h e  competi- t i v e  m a r k e t p l a c e ,  o r  use i t s  monopoly c o n t r o l  over  t h e  communications network t o  h i n d e r  c o m p e t i t i v e  a c c e s s .  A proposed n e g o t i a t e d  s e t t l e m e n t ,  however, was reached between t h e  two par- t i e s  on January 8, 1982. Although s t i l l  s u b j e c t  t o  c l a r i f i c a t i o n ,  t h e  b a s i c  terms of  t h i s  i n i t i a l  s e t t l e m e n t  r e q u i r e d  t h e  d i v e s t i t u r e  o f  t h e  l o c a l  exchange s e r v i c e s  and a c c e s s  f u n c t i o n s  o f  t h e  22 B e l l  o p e r a t i n g  companies,  whi le  permit-  t i n g  t h e  e n t r a n c e  of  t h e  remaining AT6T network i n t o  unregu la ted  marke t s .  The newly d i v e s t e d  l o c a l  o p e r a t i n g  companies were r e s t r i c t e d  t o  p r o v i d i n g  o n l y  r e g u l a t e d  monopoly telecommunications s e r v i c e s ,  w i t h  t h e  i n t e r e x c h a n g e  ( l o n g  d i s t a n c e )  f u n c t i o n s  and unregu la ted  a c t i v i t i e s ,  such a s  t h e  s a l e  o f  customer premises  equipment and t h e  p u b l i s h i n g  of Yellow Pages d i r e c t o r i e s ,  r e v e r t i n g  back t o  t h e  remaining ATdT network. 1/ To ensure  equal  a c c e s s  and equipment procurement - t o  a l l  c o m p e t i t o r s ,  t h e  newly formed l o c a l  o p e r a t i n g  companies were a l s o  s u b j e c t  t o  a d d i t i o n a l  b e h a v i o r a l  requirements .  2/ - 11. MODIFICATIONS INCORPORATED INTO THE PROPOSED JANUARY 8 ,  1982, SETTLEMENT Although t h e  two p a r t i e s  reached agreement on a  s e t t l e m e n t ,  t e r m i n a t i o n  of t h e  a n t i t r u s t  s u i t  was dependent on approval  o f  t h e  s e t t l e m e n t ' s  terms by U.S. D i s t r i c t  Court  Judge Harold Greene. 3/ Judge Greene d i d  no t  have t h e  power t o  - modify t h e  terms o f  t h e  s e t t l e m e n t ,  but  was r e q u i r e d  e i t h e r  t o  accep t  o r  r e j e c t  i t  based on i t s  p r o v i s i o n s .  Af te r  an examination of t h e  t e s t imony  presented dur-  ing l e n g t h y  o r a l  and w r i t t e n  c o m e n t  p e r i o d s ,  however, Judge Greene s t a t e d  i n  an August 11,  1982, o p i n i o n  t h a t  he would o n l y  approve t h e  s e t t l e m e n t  i f  t h e  p a r t i e s  were w i l l i n g  t o  modify i t s  c o n t e n t s  t o  i n c o r p o r a t e  s e l e c t e d  concerns .  41  Although - Judge Greene approved of  t h e  proposed s e t t l e m e n t ' s  b a s i c  framework, t h a t  i s ,  t h e  d i v e s t i t u r e  of  t h e  l o c a l  o p e r a t i n g  companies and t h e  e n t r a n c e  o f  AT&T i n t o  un- r e g u l a t e d  m a r k e t s ,  he  r e q u i r e d  t h e  i n c o r p o r a t i o n  of  10 m o d i f i c a t i o n s  b e f o r e  he would approve t h e  s e t t l e m e n t .  These m o d i f i c a t i o n s  which Judge Greene f e l t  would 1/ M o d i f i c a t i o n s  t o  t h e  January  8 proposed s e t t l e m e n t  which among o t h e r  p r o v i s i o n s  e n a b l e  t h e  l o c a l  o p e r a t i n g  companies t o  p rov ide  customer premises equipment and pub l i sh  Yellow Pages,  a s  we l l  a s  l i m i t  AT&T1s e n t r y  i n t o  " e l e c t r o n i c  p u b l i s h i n k , "  were incorpora ted  i n t o  t h e  f i n a l  s e t t l e m e n t .  See p. 3 ,  4 f o r  a  l i s t -  - - ing  of s p e c i f i c  pro 21 For a  more 1982 ,-proposed s e t t  S e r v i c e .  P roposa l s  munica t ions  I s s u e s  3 /  P a r t i e s  i n  i s i o n s  which modified t h e  terms of  t h e  ~ a n u i i r ~  s e t t l e m e n t .  d e t a i l e d  a n a l y s i s  o f  t h e  p r o v i s i o n s  con ta ined  i n  t h e  January 8 ,  ement,  s e e :  U.S. L i b r a r y  o f  Congress. Congress ional  Research f o r  t h e  Revis ion o f  t h e  C m u n i c a t i o n s  Act of 1934: Telecom- by] Angele A. Gi l roy.  I s s u e  B r i e f  81150, c o n t i n u o u s l y  updated.  t h e  s e t t l e m e n t  anreed t o  f o l l o w  procedures  s e t  f o r t h  i n  t h e  - .  - - 1974 Tunney Act (P.L. 93-528) which r e q u i r e d  t h e  p u b l i s h i n g  of a  c o m p e t i t i v e  i m -  pact  s t a t e m e n t ,  a  p u b l i c  c o m e n t  p e r i o d ,  and a  j u d i c i a l  d e t e r m i n a t i o n  t h a t  t h e  s e t t l e m e n t  i s  i n  t h e  pub l i c  i n t e r e s t .  4 /  For a  copy of  Judge Greene 's  August 11, 1982, o p i n i o n ,  s e e :  United S t a t e s  v. Am7 Telephone an4 Telegraph Co., e t  a l . ,  43 A n t i t r u s t  & Trade Reg. Rep. ( B N A ) ,  NO. 1077, S-1 (D.D.C. Aug. 11, 1982). r e s o l v e  p u b l i c  i n t e r e s t  d e f i c i e n c i e s  con ta ined  i n  t h e  i n i t i a l  s e t t l e m e n t  would: a .  Permit  t h e  d i v e s t e d  l o c a l  o p e r a t i n g  companies t o  p r o v i d e ,  but  n o t  manu- f a c t u r e  customer premises equipment, b .  Grant t h e  d i v e s t e d  l o c a l  ~ p e r a t i n g  companies t h e  r i g h t  t o  produce,  pub- l i s h ,  and d i s t r i b u t e  "Yellow Pages" d i r e c t o r i e s  and t r a n s f e r  t o  t h e  o p e r a t i n g  companies a l l  necessa ry  f a c i l i t i e s ,  i n f o r m a t i o n ,  and personnel  t o  provide  t h i s  s e r v i c e .  c .  Remove p r e s e n t  r e s t r i c t i o n s  on t h e  d i v e s t e d  l o c a l  o p e r a t i n g  companies r e g a r d i n g  t h e  p r o v i s i o n  o f  in terexchange s e r v i c e  and equipment manufac- t u r i n g  i f  t h e  o p e r a t i n g  company can prove t o  t h e  c o u r t  t h a t  " t h e r e  i s  no s u b s t a n t i a l  p o s s i b i l i t y "  t h a t  i t s  l o c a l  monopoly power could  be  used t o  impede compet i t ion  i n  t h e  market  i t  wishes  t o  e n t e r .  d.  P r o h i b i t  ATCT from o f f e r i n g  " e l e c t r o n i c  pub l i sh ing"  s e r v i c e s  over  i t s  own t r a n s m i s s i o n  f a c i l i t i e s  f o r  a minimum of seven y e a r s .  51 ATCT, how- e v e r ,  i s  permit ted  t o  provide  e l e c t r o n i c  d i r e c t o r y  informaTion a s  w e l l  a s  t ime  and weather i n  a r e a s  i n  which, a s  of  January  8, 1982, i t  was a l r e a d y  engaged i n  t h e  p r o v i s i o n  of  such s e r v i c e s .  e .  Require any d i v e s t e d  l o c a l  o p e r a t i n g  company which i s  p rov id ing  b i l l i n g  s e r v i c e s  f o r  ATCT's in terexhange s e r v i c e s  t o  n o t i f y  cus tomers  on t h e i r  in te rexchange  b i l l  t h a t  such a  s e r v i c e  i s  no t  connected t o  t h e i r  ex- change ( l o c a l )  s e r v i c e  and may be provided by o t h e r  companies. f .  Require any d i v e s t e d  l o c a l  o p e r a t i n g  company t o  charge  t a r i f f s  f o r  ex- change access  which r e f l e c t  t h e  q u a l i t y  o f  t h e  s e r v i c e  provided.  That i s ,  i f  a c c e s s  t h a t  i s  l e s s  than  equal  i n  type  and q u a l i t y  t o  t h a t  g iven t o  ATCT i s  provided t o  o t h e r  in te rexchange  c a r r i e r s ,  t h e  p r i c e  charged f o r  such a c c e s s  should be p r o p o r t i o n a t e l y  d i s c o u n t e d .  g .  T r a n s f e r  from ATCT t o  t h e  d i v e s t e d  l o c a l  o p e r a t i n g  company any j o i n t  f a c i l i t i e s  o r  o t h e r  a s s e t s  which a r e  predominant ly  used by t h e  d i v e s t e d  o p e r a t i n g  companies. (The c o u r t ,  upon p e t i t i o n ,  may g r a n t  an excep t ion  t o  t h i s  requirement .  ) h .  Require t h a t  a t  t h e  t ime of d i v e s t i t u r e  t h e  l o c a l  o p e r a t i n g  companies have deb t  r a t i o s  of  approximate ly  45 percent  61 and t h e  q u a l i t y  o f  - 51 As de f ined  i n  P a r t  V I I I ,  p. S-94, o f  Judge ~ r e e n e ' s  August 11, 1982, o p i n i z n ,  " e l e c t r o n i c  pub l i sh ing"  means " the  p r o v i s i o n  o f  any in fo rmat ion  which ATdT o r  i t s  a f f i l i a t e s  h a s ,  o r  has  caused t o  b e ,  o r i g i n a t e d ,  a u t h o r e d ,  compiled,  c o l l e c t e d ,  o r  e d i t e d ,  o r  i n  which i t  h a s  a  d i r e c t  o r  i n d i r e c t  f i n a n c i a l  o r  pro- p r i e t a r y  i n t e r e s t ,  and which i s  d i s semina ted  t o  an u n a f f i l i a t e d  person through some e l e c t r o n i c  means." 61 P a c i f i c  Telephone and Telegraph Co., one o f  t h e  22 l o c a l  o p e r a t i n g  com- p a n i e s  f a c i n g  d i v e s t i t u r e  w i l l  have a d e b t  r a t i o  requirement  of  50 pe rcen t  due t o  i t s  p r e s e n t  l e s s  f a v o r a b l e  economic c o n d i t i o n .  t h e  d e b t  be  r e p r e s e n t a t i v e  o f  AT&T's d e b t .  (The c o u r t ,  upon p e t i t i o n ,  may g r a n t  an excep t ion  t o  t h i s  requirement . )  i. Grant t h e  c o u r t  t h e  power t o  i s s u e  o r d e r s  f o r  t h e  implementa t ion,  en- forcement o f  compliance,  and punishment o f  v i o l a t i o n s  o f  t h e  dec ree .  j. P r o h i b i t  t h e  implementation of  t h e  r e o r g a n i z a t i o n  p lan  f o r  d i v e s t i t u r e  u n t i l  c o u r t  approva l  i s  g ran ted .  D e s p i t e  Judge Greene 's  r e j e c t i o n  of  t h e  J u s t i c e  Department 's  r e q u e s t  t o  l i m i t  t h e  d i v e s t e d  l o c a l  o p e r a t i n g  companies s o l e l y  t o  t h e  p r o v i s i o n  o f  " r e s i d e n t i a l  and s i n g l e - l i n e  b u s i n e s s  customer premises equipment," 7 /  both  p a r t i e s  agreed t o  - Judge Greene ' s  m o d i f i c a t i o n s .  Once t h e s e  m o d i f i c a t i o n s  were i n c o r p o r a t e d  i n t o  a  newly f i l e d  s e t t l e m e n t  , Judge Greene' s approval  q u i c k l y  followed (August 24, 1982) ,  t h e r e b y  d i s m i s s i n g  t h e  a n t i t r u s t  s u i t .  111. FUTURE PROCEDURAL STEPS BEFORE DIVESTITURE The next  p r o c e d u r a l  s t e p  i n  t h e  implementation o f  t h e  s e t t l e m e n t  i s  t h e  pre- s e n t a t i o n ,  w i t h i n  s i x  months, of  ATbT's p lan  d e t a i l i n g  t h e  d i v e s t i t u r e  p rocess .  Th i s  p l a n ,  which f i r s t  r e q u i r e s  both  J u s t i c e  Department and j u d i c i a l  approva l ,  must then be c a r r i e d  ou t  w i t h i n  12 months. Although AT&T h a s  not  f o r m a l l y  submit ted  a  d i v e s t i t u r e  p l a n ,  on February  19,  1982,  i t  d i d  r e v e a l  a  t e n t a t i v e  "planning model" f o r  d i v e s t i t u r e  t h a t  would group t h e  l o c a l  o p e r a t i n g  companies i n t o  seven independent ,  r e g i o n a l  c o r p o r a t i o n s  each having i t s  own s t o c k ,  c h i e f  e x e c u t i v e  o f f i c e r ,  and board.  Th i s  p l a n  c a l l s  f o r  a  t h r e e - l e v e l  s t r u c t u r e  where e x i s t i n g  s e r v i c e  a r e a s  w i l l  remain i n t a c t  keeping t h e i r  c u r r e n t  name, ho ld ing  groups  w i l l  ove r see  t h e  r e g i o n a l  g roups ,  and a  cen- t r a l  o r g a n i z a t i o n  w i l l  c o o r d i n a t e  n a t i o n a l  de fense  and p o s s i b l y  o t h e r  undisc losed 7 /  For a  copy of  t h e  J u s t i c e  Department 's  memorandum i n  response  t o  Judge ~ r e e n e ' s  o p i n i o n  of  August 11, 1982, see :  Da i ly  Report f o r  Execu t ives  ( B N A ) ,  No. 161, August 19,  1982. p. B1. f u n c t i o n s .  While t h e  seven r e g i o n a l  d i v i s i o n s  were  d e s i g n a t e d  b y  a  t a s k  f o r c e  which i n c l u d e d  four  l o c a l  o p e r a t i n g  company p r e s i d e n t s ,  t h e  p a r e n t  c o r p o r a t i o n  v a s  r e s p o n s i b l e  f o r  t h e  appointment o f  each  r e g i o n ' s  c h i e f  o p e r a t i n g  o f f i c e r .  ATLT would l i k e  t o  have t h e  d i v e s t i t u r e  completed by J a n u a r y  1984. Judge Greene ' s  d e c i s i o n  t o  hold h e a r i n g s  and s e e k  t h i r d - p a r t y  c o w e n t s  on t h e  d i v e s t i -  t u r e  p l a n ,  however,  w i l l  most l i k e l y  d e l a y  ATbT's d i v e s t i t u r e  t a r g e t  d a t e .  

Status of the Justice Department/American Telephone and Telegraph Company Antitrust Settlement: A Brief Overview

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Status of the Justice Department/American Telephone and Telegraph Company Antitrust Settlement: A Brief Overview

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