A federal judge yesterday refused to approve a plan to break up the Bell System negotiated by American Telephone & Telegraph Co. and the Reagan administration unless several major changes were made to protect telephone customers across the country.
U.S. District Court Judge Harold H. Greene said the overall AT&T divestiture plan -- which calls for the largest corporate breakup in U.S. history -- was "plainly in the public interest."
But some major changes are needed to give emerging competitors a fair chance and to protect local telephone customers from poorer service and higher telephone bills, Greene concluded in a 178-page opinion.
Under the plan, AT&T's 22 wholly owned local telephone companies, which account for about two-thirds of the Bell System's $138 billion assets, would be spun off as independent enterprises. In return, AT&T would be permitted to enter the fast-growing computer business.
In embracing the divestiture plan, Greene said, "It is antithetical to our political and economic system for this key industry to be within the control of one company."
Greene gave AT&T and the Justice Department 15 days to accept his proposed changes. If they are adopted, Greene said he would immediately drop the government's 8-year-old antitrust case against the Bell System. A trial on the antitrust charges was nearing conclusion before Greene when it was abruptly suspended Jan. 8, following announcement of the divestiture plan by the Reagan administration and AT&T.
If AT&T and the government reject his views, Greene said he would resume the trial promptly. Failure to adopt his changes would continue the government's 25-year-old policy of barring AT&T from entering the computer business, the judge said.
The desire to escape this restriction and end the trial were the chief reasons AT&T agreed to the divestiture plan.
Many of the changes Greene is seeking are almost identical to provisions in legislative divestiture proposals that AT&T has vehemently opposed.
For example, Greene said that AT&T must be barred for at least seven years from offering any electronic publishing service, such as using its telephone lines to provide news and financial reports on home video screens. This is necessary to make sure AT&T does not stifle competition and gain a monopoly over this developing service, the judge said.
And, Greene ruled, the divested local companies should not be limited to providing only local telephone service, as the settlement now requires.
Instead, Greene said these companies must be permitted to compete with AT&T in the sale of telephone equipment, a move that would benefit consumers, and bring more revenue to the local companies, thereby helping to keep rates low.
Greene also directed AT&T to give the local companies control over the lucrative yellow page operation, which under the settlement signed Jan. 8 would have remained with AT&T -- a move that Greene said could have driven up local rates.
And in what lawyers called a "virtually unprecedented move," Greene gave himself significant power to oversee the implementation of the settlement plan to make sure the breakup was carried out according to his instructions. Not only does Greene want to review the actual divestiture plan -- which AT&T has to submit to the Justice Deparmtent within six months -- but he wants the right to hold hearings and take testimony from the chief executives of the divested local companies to make sure his orders are not being circumvented.
AT&T Chairman Charles L. Brown said the company was "pleased that the court has acted expeditiously in finding the basic framework to be 'plainly in the public interest.' We'll immediately undertake consideration of the modifications in consultation with the Department of Justice."
Assistant Attorney General William F. Baxter, the government's chief architect of the settlement, said he was pleased that the judge had acted so quickly. Baxter, in San Francisco for the American Bar Association, said he had no reaction to the specific orders in the opinion because he hadn't seen it.
Nonetheless, James P. Denvir III, the government's chief lawyer in the AT&T trial, said, "We're pleased that Judge Greene has accepted the basic premise of the consent decree -- the divestiture. But we're disappointed that he didn't accept everything we wanted."
State regulators and congressmen who have criticized the proposed settlement on the ground that it did not adequately protect telephone customers were basically pleased with the judge's order requiring safeguards to keep rates from rising steeply.
"Overall, the judge has significantly improved the proposed settlement which was already a major step in the right direction," said Rep. Timothy E. Wirth (D-Colo.), author of a controversial proposal that would have imposed tougher divestiture requirements on AT&T. "Yet it is only a step," he said, calling for further congressional action.
Reaction among AT&T's competitors was mixed. Details on Page C1.
Communications and Justice Department lawyers -- who all declined to be identified -- predicted that Baxter and Brown would ultimately agree to the judge's order, despite misgivings.
For one thing, they noted, the judge has endorsed the divestiture plan -- the centerpiece of the settlement -- and the changes he has ordered, although significant, are overshadowed by the basic plan.
Moreover, AT&T has indicated that it would reluctantly accept several of the modifications Greene wants, including his demands that the Bell System be barred from offering electronic publishing services and that the local companies be allowed to offer yellow pages and telephone equipment.
One communications lawyer said, "He made them an offer they can't refuse," since failure to agree would mean resumption of a trial neither side wants and would prohibit AT&T's move into computer operations.
Greene made it clear, in his opinion, that if the trial were to resume, AT&T would have a great burden to prove that it did not try to monopolize the telecommunications business. "The evidence that was produced during the AT&T trial indicates that, at least with respect to several of the government's claims, this charge may be well taken," Greene said.
The current structure of AT&T -- in which one company has control over the research, development, manufacturing of telephone equipment as well as almost complete control over the long-distance and local telephone service -- "has enabled AT&T for many years to undermine the efforts of competitors seeking to enter the telecommunications market," Greene said.
Divestiture will be a boon to competition, Greene said, because AT&T would no longer be able to use its control over the local telephone system to the disadvantage of competitors.