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Essential Communications Systems Inc. v. American Telephone & Telegraph Co.

decided: October 30, 1979; As Amended November 5, 13, 1979.

ESSENTIAL COMMUNICATIONS SYSTEMS, INC.
v.
AMERICAN TELEPHONE & TELEGRAPH CO., WESTERN ELECTRIC CO., AND NEW JERSEY BELL TELEPHONE CO.



Before Seitz, Chief Judge, and Gibbons and Higginbotham, Circuit Judges.

Author: Gibbons

Opinion OF THE COURT

This is an appeal from an order dismissing a private treble damage action and a request for injunctive relief brought under sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 26 (1976), on the ground that the conduct alleged in the complaint was exempt from antitrust scrutiny because it occurred in an industry and an area subject to regulation by the Federal Communications Commission (FCC). We reverse.

I. PLEADINGS AND PROCEEDINGS IN THE DISTRICT COURT

The plaintiff is Essential Communications, Inc. (Essential), a corporation engaged in the distribution of telephone station equipment for use at telephone customers' premises. The defendants are American Telephone and Telegraph Company (AT&T), the parent corporation of the Bell System, which comprises the largest telephone communications system in the United States, Western Electric Company (WECo.), AT&T's equipment manufacturing subsidiary, and New Jersey Bell Telephone Company (NJ Bell), one of the AT&T's operating subsidiaries.

On May 17, 1973, Essential filed a complaint charging AT&T, WECo. and NJ Bell with violations of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 (1976), in that they sought to exclude from the market for telephone terminal equipment a device, called a Code-a-Phone, distributed by Essential. The complaint alleges that prior to November 1, 1968, the Bell System maintained a monopoly in the distribution, installation and service of telephone terminal equipment, by virtue of filed tariffs which prohibited customers from attaching to the Bell System station equipment obtained from any source other than Bell. On that date the decision of the Federal Communications Commission (FCC) in Carterfone*fn1 became effective, which according to the complaint, opened up the telephone terminal equipment market to competition and which encouraged Essential to commence distributing, installing, and servicing that equipment. Among the equipment distributed by Essential is the Code-a-Phone, manufactured by Ford Industries, Inc., and supplied by Ford both to Essential and to NJ Bell. This device, when electrically connected to a telephone customer's telephone line automatically answers, transfers, and records incoming calls. Thus Essential and NJ Bell allegedly became competitors in the distribution, installation, and service of Code-a-Phones. However, following the Carterfone decision the defendants, in an effort to hinder Essential's competition, filed with the FCC a new tariff which required customers of the Bell Systems to lease from Bell an interface device called a protective connecting arrangement (PCA) before they would be allowed to connect Essential's equipment to the Bell System network. The PCA is alleged to be unnecessary for the protection of the network since the Ford Code-a-Phones distributed by Essential were identical with those distributed by NJ Bell, and no such device is required for the latter. It is also charged that NJ Bell unreasonably delayed in furnishing PCAs to Essential's customers, and caused service difficulties for those customers by improperly installing and servicing PCAs. The complaint seeks treble damages and unspecified injunctive relief.

On October 3, 1973, by consent of the parties, the district court action was stayed so that the New Jersey Public Utilities Commission might consider the propriety of the PCA tariff. However, in 1974, the FCC asserted exclusive jurisdiction over regulation of the interconnection of customer-provided terminal equipment. When FCC jurisdiction was sustained by the Fourth Circuit Court of Appeals,*fn2 the New Jersey Public Utilities Commission concluded that it lacked jurisdiction to consider the validity of the PCA tariff, and the district court stay was revoked.

On August 1, 1977, the defendants moved to dismiss the complaint because the activity complained of, being subject to regulation by the FCC, was impliedly exempt from the antitrust laws. Finding in the Federal Communications Act of 1934, 47 U.S.C. §§ 151-609 (1976), an intention to repeal the antitrust laws in areas in which the FCC has exercised its regulatory authority, the district court granted the motion.*fn3 Thereafter, the court denied as untimely a motion to amend the complaint by adding an allegation that the defendants had committed a fraud upon the FCC by inducing the agency not to suspend the PCA tariff. This appeal followed.

II. EXEMPTION BY VIRTUE OF FEDERAL LAW

As will be developed herein, this appeal presents no issue of express statutory exemption from the antitrust laws. It involves, rather, the alleged incompatibility between the procompetitive policies of the antitrust laws and the pervasive scheme of regulation for the industry. Because the scheme of regulation varies from statute to statute, and the competitive situation varies from industry to industry, there is no general doctrine of antitrust exemption for regulated industries. In some cases, the agency charged with regulation is also explicitly charged with the responsibility for maintaining competition,*fn4 and in others, as here, there is no such specific statutory delegation. In some industries, the economic desirability of maintaining a natural monopoly in the service being rendered precludes competition and instead substitutes pervasive regulation, while in others there is room for both competition in and regulation of the service.*fn5 Thus the extent to which antitrust enforcement is consistent with governmental regulation varies from industry to industry. The Sherman Act, embodying as it does a preference for competition, has been since its enactment almost an economic constitution for our complex national economy.*fn6 A fair approach in the accommodation between the seemingly disparate goals of regulation and competition should be to assume that competition, and thus antitrust law, does operate unless clearly displaced.*fn7 In determining whether antitrust law has been displaced, the starting point must be the statute under which the industry in question is regulated, in this case the Federal Communications Act of 1934, 47 U.S.C. §§ 151-609 (1976).*fn8

A. The Federal Regulatory Scheme for Telecommunications

The first venture of the federal government into the regulation of telecommunications was section 7 of the Mann-Elkins Act of 1910, ch. 309, § 7, 36 Stat. 539 (1910), which added telephone and telegraph companies to the list of common carriers subject to the jurisdiction of the Interstate Commerce Commission (ICC).*fn9 That venture, however, hardly subjected the telecommunications industry to pervasive regulation. Indeed, prior to 1910 no federal regulation of common carriers could be so described. The Interstate Commerce Act of 1887 had required that railroads publish and file with the ICC rates that were just and reasonable, and prohibited certain discriminations. See Interstate Commerce Act, ch. 104, §§ 1, 2, 3, 6, 24 Stat. 379 (1887). Tariffs were generated solely by the carriers, and the role of the ICC was limited essentially to the effectuation of consumer protection and the antidiscrimination policy which were the chief purposes of the legislation. Id. In the Elkins Act of 1903, ch. 708, 32 Stat. 847 (1903), and the Hepburn Act of 1906, ch. 3591, 34 Stat. 584 (1906), the ICC was given more extensive tariff authority, including the authority to set aside tariffs and to fix maximum rates.*fn10 When the Mann-Elkins Act made telecommunications companies common carriers, it imposed upon them the obligation to provide service on request at just and reasonable rates, without unjust discrimination or undue preference.*fn11 They were made subject, in other words, to the basic consumer protection and antidiscrimination policy of the 1887 Act. The ICC was given jurisdiction to enforce these obligations.*fn12 But while the Mann-Elkins Act continued and enlarged the ICC tariff jurisdiction over railroads, it did not subject telecommunications companies to the broadened ICC tariff regulatory jurisdiction.*fn13 Even the existence of broadened ICC tariff regulatory jurisdiction over railroads was not, as of 1912, deemed to exempt railroads from the antitrust laws.*fn14 A fortiori the less regulated telecommunications companies were not exempt. Finally, when Congress, in 1914, enacted the Clayton Act, it was made expressly applicable to all common carriers.

The Transportation Act of 1920, ch. 91, 41 Stat. 456 (1920), substantially increased the already pervasive regulation of the railroad industry by the ICC. It also made express provision for the authorization of pooling and other anticompetitive provisions which might otherwise have violated the Sherman or Clayton Acts.*fn15 But the Transportation Act, except for a minor increase in ICC power to enforce the anti-rebate duty,*fn16 left the regulation of telecommunications common carriers virtually unchanged.*fn17 Thus under the aegis of the ICC, the competition principle was being curtailed in the railroad context in the interest of the economies thought to flow from the development of such natural monopolies, while the telecommunications companies remained fully subject to the antitrust laws.

Competition among telephone services in the same geographic area was, in the early part of the century, a fact of life. The enactment in 1914 of the Clayton Act's antimerger provisions*fn18 presented a serious obstacle to the rationalization of a national telephone network. The Willis-Graham Act addressed the problem of competing local telephone exchanges, presenting as it did the specter of waste and inconvenience from the duplication of facilities. See Willis-Graham Act of 1921, ch. 20, 42 Stat. 27 (1921) (current version at 47 U.S.C. § 221 (1976)). That statute authorized the ICC to approve the consolidation of properties of telephone companies into single companies if such consolidation is "of advantage to the persons to whom ...


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