The biggest antitrust trial in history is set to open this week with the future of the nation's telecommunications industry at stake.
Pitted against each other are the United States government and the American Telephone & Telegraph Co. which already has spent more than a quarter of a billion dollars in a six-year proceedural battle leading up to the trial.
The case is expected to go to trial Thursday before U.S. District Judge Harold Greene. As of Nov. 30, 1980 the government has spent $9.6 million directly on the suit, while AT&T says the company has spent more than $250 million on its defense.
Only within the last several weeks, have the two sides made serious attempts at settling the case. In a private meeting with Greene last Monday, a conceptual framework for a settlement was laid out by the two sides, but Greene, citing a series of delays in the start of the case, told the parties he would not grant their request for yet another postponment.
Greene described as "puzzling" the "relative neglect" of the possibility of settling the case and noted that with final agreement on the settlement 60 to 90 days away, the incoming Reagan administration would be faced with approving the plan.
"In view of the many sensitive economic, technological and other policy questions which are implicated in this litigation, unquestioning concurrence [of the new Justice Department] can obviously not be taken for granted." Greene wrote.
Since 1974, when the case was filed, the telecommunications industry and AT&T have changed dramatically, moving from the cozy world dominated by the regulated monopoly the phone company had been to a confusing patchwork of new regulations, staggering technological innovation, intense competition for portions of the telephone business and judicial and legislative action that has left the Bell System in a murky transition.
But there is no more important forum in the battle that is reshaping the merging of the nation's telephone and computer industries than the Washington courtroom that will be the site of the government's antitrust case against AT&T. For the Justice Department is, quite simply, trying to split AT&T into separate, independent companies.
After presenting what may be a year-long case to Greene, Justice Department lawyers will ask Greene to separate Bell's local and long distance facilities and also split the companies that provide that local service from the Western Electric Co. Inc. and Bell Telephone Laboratories Inc., the two subsidiaries that provide equipment and basic research to Bell's 23 operating companies.
Yet, despite the enormity of the proceeding before Greene, AT&T, on several other fronts, may find 1981 the year of the courtroom. An appeal of a jury's award last spring of $1.8 billion to MCI Communications Corp. in a private antitrust trial and another case with similar financial stakes brought in New York City by Litton Industries against the phone company will be heard also beginning this week.
In addition, AT&T officials may go to a federal court in New Jersey within the next several months to seek a "clarification" of a controversial 1956 consent decree with the government that ended an earlier antitrust suit and ostensibly bars the company from entering unregulated businesses, like the computer field.
In the government's current case, however, a team of Justice Department lawyers will be out to document what they charge is an historic pattern of monopoly behavior.
A 1978 Department of Justice filing alleges that AT&T and "their co-conspirators have used their positions of dominance in long-distance transmission, equipment manufacturing, and local franchise monopolies, and the leverage derived therefrom, to suppress this new competition and to maintain and enchace their monopoly power.
"Simply put, defendants have abused their position of dominance through a number of exclusionary and restrictive practices designed to preserve and extend their market power and monopoly positions throughout the markets for telecommunications service and telecommunications equipment. In short this is a classic Sherman Act Section 2 case which presents no novel questions of anti-trust law," the government concluded.
Despite the disclaimer, however, the case is anything but simple. The suit involves hundreds of thousands of pages of document, has involved literally thousands of lawyers, paralegals and clerks.
The subject matter of the suit is no simpler. For at issue is not only the behavior of the nation's largest company, but also the communications regulatory apparatus of the Federal Communications Commission, perhaps the federal government's most complex regulatory agency.
AT&T's defense will be pinned largely on the company's relationship with the Federal Communications Commission and the state regulatory bodies, AT&T's basic defense is that it acted to discharge its regulatory obligations to "provide the public with high-quality telecommunications at reasonable rates," to protect that system, to compete fairly and "mitigate the cream-skinning" efforts of new competitors and to "obey the orders of all regulatory agencies and courts," the company said in a 1980 filing.
The company repeatedly asserts that its business relationships with competitors, particularly in the late 1960s, took place at a time when competition in telecommunications was still in a formative, uncertain state and AT&T actions must be considered in the context of the times.
Further, in every forum available, including the court, the company has argued that if the government convinces Greene to order divestiture, not only will the company's shareholders and one million employes suffer, but the public's phone rates and service, the national economy and the defense of its borders will also suffer as a result.
The company has told the court that the financial implications of divestiture are staggering and would require Greene "to restructure the onwership and financing of $100 billion of fixed assets which produces some $40 billion in annual revenues. This restructuring would result in severe financial consequences for the surviving components, as well as for the public and members of the financial community."
"Under that kind of horizontal dismemberment, the cost of local service would necessarily go up," said AT&T Associate General Counsel Harold Levy. "The support and contribution" of Bell equipment and long-distance branches to local service rates "would be lost and that would be a significant cost incurred to the public over time," Levy said.
On national defense, the company has argued that its network system "has produced unparalleled scientific research and development and significant contributions to national security. There is no reasonable possibility," ATT concluded, "that the untried, fragmented structure proposed by the antitrust division would produce comparable results," noting the company's contribution to the nation's missle, defense, space and scientific programs.
There is little dispute that the Bell System is in many ways the company that it claims to be -- one that has delivered possibly the best phone service in the world through a combination of basic research, and innovation and a work ethic based on public service.
On the other hand, it is also a company that documents introduced in last year's MCI suit against AT&T indicate was arrogantly tied to operating under the cozy confines of monopoly power, unwilling to acknowledge, let alone offer service to competitors like MCI who fought the FCC to permit competition in fields like the long-distance-calling market.
Judging by the verdict in that case, a jury was convinced that AT&T set out to "choke off" MCI, as an MCI lawyer put it. MCT's case was based on charges that AT&T denied the Washington-based company the interconnections to the Bell local telephone network that it needed to link consumers with the MCI long-distance microwave system.
In the Litton case, the charges have a similar ring. Litton's business interest in the early 1970s was in telephone equipment, a field the California firm was ultimately forced to leave because of "enormous business losses it incurred as a result of the anticompetitive practices of the Bell System," Litton said in a pretrial brief.
"The Bell System is an archetype: A lethargic monopolist who ignored the needs of its customers, and who in response to the emergence of innovative new competitors used a whole host of uncompetitive acts and practices to maintain and to perpetuate its monopoly in the telephone terminal equipment market," the Litton company charged. Whether the jury agrees with the Bell competitor as they did in the MCI case is another question.
But the similarity of the charges in the private and the government case is no coincidence. The government has received substantial help, particularly in the discovery process, from plaintiffs in the private suits. A complex, unprecedented process of negotiating stipulations, or basic premises of law and fact in the case that Greene initiated, may help avoid the legal quagmire that has strangled the government's case against International Business Machines Corp.
Whether or not the government can prove the charges to Greene is one question. But many policymakers, communications experts, and past and present congressional aides agree that if the government, typically with far less standing than the defendants, can successfully manage the case, it may well prove the charges.
The larger question may well be whether or not the government's request for divestiture -- an antitrust remedy that President-elect Ronald Reagan criticized during the recent campaign -- makes sense in the 1981 communications environment.
While legislation proposing AT&T divestiture has never moved in Congress, the House Commerce Committee last summer and numerous prominent Senators have endorsed measures that would permit Bell to get into the computer field through a separate, independent subsidiary, a far less significant restructuring proposal and one that Bell wholeheartedly endorses.
The Federal Communications Commission has issued in final form a decision that adopts such a structural alternative, although that ruling has launched what is certain to be a lenghty appeals process. AT&T enthusiastically has begun the complex process of restrucutring itself under those guidelines.
But those legislative and regulatory initiatives set up precedents that most observers say Greene may not be able to ignore. "Although the judge is not legally bound by either of those decision, they may present to him a way -- assuming the case is not settled -- of formulating relief that may be attractive," said Harry M. Shooshan, former chief counsel of the House communications subcommittee.
But other federal officials, including several former chiefs of the FCC's Common Carrier Bureau, like Walter Hinchman, have concluded otherwise, saying that only divestiture can solve the problems raised by AT&T's size and ability to finance one subsidiary with the funds of another.
Hinchman told the House Judiciary Committee last fall that he is "convinced that the only effective, lasting resolution of this problem is to be found in the partial or total divestiture of AT&T's intercity telecommunications operations from its local exchange operations . . . and divestiture of its equipment manufacturing and sales operations from all of these."
On the other hand, Greene could also issue other decrees such as a consent-type agreement barring the phone company from repeating the conduct in question. In addition, the judge could spin off a handfull of the operating companies and leave most of the Bell System in tact.
There is some speculation, however, that Greene may never get to make that decision. "It's never too late for responsible people to admit they were wrong, and I'd be willing to shake the hand of any government lawyer who was responsible enough to say we made a mistake in bringing the case." AT&T's Levy said with a chuckle.
Although Atorney General designate William French Smith had been a member the board of an AT&T California subsidiary and may have to take himself out of the AT&T suit, some industry sources have suggested that the government might be forced to somehow come up with a new consent decree, since AT&T may have a more accessible ear in the business-oriented Regan White House.
Recent settlement negotiations have progressed farther than at any other time. This may indicate that AT&T wanted to lay the groundwork for settling the case before the new administration takes power. By doing so, potential charges that the Reagan team was pulling back from the case for improper reasons could be muted. The political risks of settlement would therefore decrease.
But by permitting the case to move through the court, the new administration could send a signal to the nation that it will not back off from tackling the type of white collar crime that antitrust cases are made of.
"If the government makes it clear that you can't do away with this, it would resonate throughout the business world," said a former government antitrust prosecutor. "If they do what the law requires, the new administration, which is suspected of being too close to business, sends a signal that they want the free market to hold sway even for what may be the largest private agglomeration of wealth in the world."