Lead Opinion
Opinion for the court filed by Circuit. Judge BUCKLEY.
Dissenting opinion filed by Circuit Judge STEPHEN F. WILLIAMS.
The 1982 antitrust consent decree providing for divestiture of the American Telephone and Telegraph Company (“AT&T”) prohibits its former local exchange subsidiaries, the Bell Operating Companies (“BOCs”), from engaging in certain lines of business, including the manufacture of telecommunications products, either “directly or 'through any affiliated enterprise.” The question presented is whether a contractual relationship under which American Information Technologies Corporation (“Ameritech”) would provide funds to an independent company for product development in exchange for royalties on sales of the product to third parties may render the independent company an “affiliated enterprise.” The district court answered this question in the affirmative by denying the Department of Justice’s (“DOJ”) motion for a declaratory judgment that the term “affiliated enterprise” covers only those concerns in which a BOC has either more than a de minimis equity interest or operational control. The court also denied Ameri-tech’s request for a waiver from the consent decree’s line-of-business restrictions to permit it to enter such funding/royalty arrangements.
We hold that the term “affiliated enterprise” was intended to cover all arrangements in which the BOCs share directly- in the revenues of entities engaged in prohibited businesses, and hence that the district court acted properly by denying the DOJ’s motion for a declaratory judgment. We remand, however, to permit a fuller exploration of the question whether Ameritech is entitled to a waiver.
I. BACKGROUND
The AT&T consent decree (“Decree”) imposes restrictions on-the product and service markets that the BOCs may enter. The restrictions were intended to ensure that the BOCs would not use their monopoly control over local telephone exchanges to impede competition in other markets. See United States v. American Tel. & Tel. Co.,
After completion of the reorganization ... no BOC shall, directly or through any affiliated enterprise:
1. provide interexchange telecommunications services or information .services;
2. manufacture or provide telecommunications products or customer premises equipment (except for provision of customer premises equipment for emergency services); or
3. provide any other product or service, except exchange telecommunications and exchange access service, that is not a natural monopoly service actually regulated by tariff. .
Id. at 227-28 (emphasis added). The district court has subsequently modified the decree by eliminating the prohibitions on non-telecommunications businesses, United States v. Western Elec. Co.,
The Decree does make it possible for a BOC to obtain a “waiver” of the line-of-business restrictions under certain conditions. Specifically, under section VIII(C),
[t]he restrictions imposed upon the separated BOCs by virtue of section 11(D) shall be removed upon a showing by the petitioning BOC that there is no substantial possibility that it could use its monopoly power to impede competition in the market it seeks to enter.
Ameritech is a regional holding company (“RHC”) that is subject to the same restrictions as the BOCs. See United States v. Western Elec. Co.,
On January 4, 1989, the DOJ responded to Améritech’s request by filing a motion for a declaratory judgment that the proposed funding/royalty arrangements did not constitute manufacturing “directly or through an affiliated enterprise.” Specifically, the DOJ urged the court to declare that the term “affiliated- enterprise refers only to entities in which a BOC has a more than de minimus [sic] equity interest (5% or more) or exercises operational influence.” Id. at 434 (internal quotation marks omitted). Because the funding/royalty arrangements satisfied neither of these criteria, the DOJ claimed that they were not prohibited by section 11(D).
In the alternative, the DOJ argued in a footnote that if the court found that the funding/royalty arrangements did implicate section 11(D), “a waiver pursuant to section VIII(C) should be granted” because there was “no substantial possibility that Ameri-tech could use its monopoly power to impede competition in the markets it seeks to en-ter_” Id. at 429 n. 4. The DOJ supported this conclusion with a scant three sentences of analysis but added that it “would be willing to address in a more detailed fashion the waiver issues, if such elaboration would be of assistance to the court.” Id. at 429-30 n. 4.
More than three years later, on January 31, 1992, the district court denied the DOJ’s motion for a declaratory judgment. See United States v. Western Elec. Co., No. 82-0192, mem. op. at 6,
It is beyond dispute ... that a Regional Company that funds in large part the activities of a small manufacturer, and that has the option of funding its activities in the future, exercises a great deal of influence over the decisions of that company regardless of whether or not it has an equity interest in the company. Nor can it be doubted that a company that stands to earn substantial royalties on the Sale of a product has an incentive to discriminate in favor of the product. There is the risk a company would cross-subsidize the price of the product and pass on artificially high prices to its ratepayers. There ,is therefore no rational basis under the decree for distinguishing the risks posed by such a royalty arrangement from those posed by an equity investment in a manufacturer.
Id. at 5-6. Finally, the court rejected the suggestion that the DOJ’s approach was preferable because it would promote greater certainty for those in the telecommunications industry. The court noted that the concept of “operational influence” in the DOJ’s interpretation “is hardly a clear-cut term,” and that in any event “perceived difficulty of resolving issues under the decree is not a basis for ignoring decree'restrictions.” Id. at 6 n. 2.
On March 3,1992, the court denied Ameri-teeh’s motion for reconsideration.- Shortly thereafter, the court issued a farther Memorandum and Order intended to “clariffy] the status of Ameritech’s waiver request,” United States v. Western Elec. Co., No. 82-0192, mem. op. at 2,
The DOJ and the seven RHCs (collectively, “appellants”) now appeal the district court’s rulings. They are opposed by AT&T and a coalition comprised of the Independent Data Communications Manufacturers Association, the North American Telecommunications Association, the Telecommunications Industry Association, Tandy Corporation, and MCI Communications Corporation (collectively, “appellees”).
II. Disoussion
Appellants argue that (1) the district court erred by rejecting the DOJ’s purely structural definition of the term “affiliated enterprise”; and (2) even if the district court correctly construed that term, it should have granted Ameritech’s waiver request. We affirm the district court’s ruling on the definitional issue, although we do so on the basis of an interpretation of “affiliated enterprise” that covers all revenue sharing arrangements between the BOCs and entities engaged in prohibited businesses. We remand, however, for further consideration of the waiver request.
A. The Definition of “Affiliated Enterprise”
The district court’s construction of the Decree is subject to de novo review. See Triennial Review,
Our inquiry begins, of course, with the text of the Decree. Unfortunately, it is not dis-positive. At no point does the Decree define the term “affiliated enterprise,” see Conditional Interest Appeal,
“Affiliate” means any organization or entity, including defendant Western Electric Company, Incorporated, and Bell Tele- - phone Laboratories, Incorporated, that is under direct or indirect common ownership with or control by AT&T or is owned or controlled by another affiliate.
Decree Opinion,
Because the text of the Decree is not dispositive as to the meaning of “affiliated enterprise,” the DOJ would have us adopt the usual corporate understanding of affiliation as a relationship involving ownership or control. See, e.g., Black’s Law Dictionary 54 (5th ed. 1979) (“affiliate company” defined as a “[c]ompany effectively controlled by another company”). Our task, however, is to apply the Decree as it was written and understood by the parties. To-this end, we must “ground[ ] [our interpretation] in the ... contemporaneous understandings of its purposes, not in our own conception of wise policy.” Conditional Interest Appeal,
For example, during the Tunney Act proceedings that preceded entry of the Decree, the DOJ addressed the issue of capacity sharing arrangements between .the BOCs and interexchange carriers. According to the DOJ, such arrangements would run afoul of the line-of-business restrictions “to the extent that, as a practical matter, such agreements amount to a joint venture with the sharing enterprise, or otherwise give the
Similarly, immediately prior to divestiture, the question arose whether AT&T could, on an interim basis, maintain “division of revenue” arrangements with the BOCs as a means of compensating them for exchange access services. See United States v. Western Elec. Co.,
Section 11(D)(1) of the Decree provides, inter alia, that following divestiture no BOC shall provide interexchange telecommunications. That prohibition clearly extends to any arrangement, including one based on division of revenues, between a BOC and an interexchange carrier that gives the.BOC a direct financial stake in the success or failure of the interexehange carrier.
J.A. at 273 n. *. The district court subsequently endorsed this view by finding that the division of revenue proposal was “viola-tive of the decree in that it continues Operating Company participation in interexchange telecommunications prohibited by section 11(D)(1) of the decree.” United States v. Western Elec. Co.,
In other contexts, furthermore, the term “affiliate” encompasses -relations beyond ownership or control. See, e.g., 15 U.S.C. § 79b(a)(ll) (defining a company’s “affiliate[s]” to include not only entities connected through ownership and control, but also those that “stand in such relation to [the] specified company that there is hable to be ... an absence of arm’s-length bargain-ing_”). One particularly pertinent example is the FCC’s longstanding “cross-ownership” rule. This rule was developed to prevent local telephone companies from using their control over essential facilities to impede competition in the cable television market, see National Cable Television Ass’n, Inc. v. FCC,
More broadly, to the extent that the terms of the Decree are ambiguous, we are obliged by our precedent “to read the Decree’s line-of-business restrictions in light of the parties’ jointly intended purpose to stymie efforts by a local monopoly to use its stranglehold on
As this court has explained, the line-of-business restrictions were intended to preclude three different types of anticompetitive conduct that were associated with AT&T’s predivestiture business practices:
The first was AT&T’s alleged efforts to impede independent manufacturers by affording Western Electric, AT&T’s manufacturer subsidiary, privileged access to the technical specifications of AT&T’s exchange systems. The second was AT&T’s alleged policy of “cross-subsidizing” Western Electric’s development efforts through funds derived from AT&T’s local exchange monopoly, permitting Western Electric to undercut its competitors while passing on its losses to AT&T’s service customers. And the third was AT&T’s alleged “favoritism” — its willingness to buy Western Electric products instead of cheaper, better products manufactured by Western Electric’s competitors.
Manufacturing Appeal,
Finally, it is noteworthy that at the outset of these proceedings, Ameritech itself apparently believed that its proposed' funding/royalty arrangements implicated the line-of-business restrictions. When Ameritech approached the DOJ about these arrangements, Ameritech did not contend that they fell beyond the ambit of section 11(D). Instead, it argued only that a waiver should be granted under section VIII(C). Thus, Ameritech clearly understood that, whatever its meaning in other contexts, the term “affiliated enterprise” as used in the Decree was intended to encompass more than ownership and control relationships.
In light of these considerations, we hold that the district court properly rejected the DOJ’s definition of the term “affiliated enterprise.” At the same time, however, we decline to endorse the district court’s test, under which an affiliated enterprise exists if a BOC has a “substantial incentive and ability unfairly to impede competition by use of its monopoly position in the market it is entering.” Ameritech Decision, mem. op. at 4 (quotation marks, ellipsis, and citation omitted). Instead, we find that the term “affiliated enterprise” covers all arrangements, contractual or otherwise, in which the BOCs have a direct and continuing share in the revenues of entities engaged in prohibited businesses. We adopt this position for several reasons.
As an initial matter, the district court’s interpretation is necessarily flawed because it overlaps with and renders inoperative the standard for granting waivers under section VIII(C). The critical consideration in deter
Moreover, even in the absence of this structural defect, the district court’s test generates substantial uncertainty as to which contractual arrangements do and do not create an affiliated enterprise. The district court’s approach turns on the court’s own assessment of the competitive risks of particular arrangements. As a result, it is difficult for actors in the telecommunications industry to know ex ante which agreements they may enter without invoking the waiver process. To compound the difficulty, the district court’s test is potentially applicable to a wide variety of contractual arrangements that do not involve revenue sharing, including exclusive marketing agreements and extended supply contracts. Accordingly, the test may improperly chill arrangements that promise substantial economic benefits without meaningful risk of anticompetitive effects.
By contrast with these problems, an interpretation of affiliated enterprise that covers all revenue sharing arrangements is simple and easily administered. More to the point, however, such a reading comports with the parties’ contemporaneous understandings of the line-of-business restrictions, as reflected in the DOJ’s comments and the district court’s ruling on revenue-sharing arrangements between the BOCs and interexchange carriers. It is also faithful to our obligation to construe ambiguous terms in such a way as to effectuate the purposes of the Decree. Among the most important of these was- to “sharply limit[ ] the ability of businesses with bottleneck control' of local telephone service to utilize their monopoly advantages to affect competition in competitive markets.” Line of Business Restrictions,
B. The Waiver Request
Section VIII(C) of the Decree does not merely authorize a waiver; it requires the district court to grant a waiver if “there is no substantial possibility that [the petitioning BOC] could use its monopoly power to impede competition in the market it seeks to enter.” Decree Opinion,
At the outset, we reject the district court’s position that Ameritech’s “request for a waiver was never properly before [it].” Ameritech Waiver Ruling, mem. op. at 2. The DOJ did relegate discussion of a waiver to a mere footnote in its declaratory judgment motion, choosing instead to focus almost-exclusively on its preferred definition of the term “affiliated enterprise.” But other parties to the proceeding — most prominently Ameritech itself — argued the matter at length. Moreover, Ameritech carefully fol
It is true that, because the DOJ failed to address the waiver issue in a meaningful way,'the district court did not have the benefit of the type of “predictive economic analysis” from the DOJ that this court has emphasized as being critical to making waiver decisions. See CCS Waiver Opinion,
Moving to the district court’s substantive ruling that Ameritech was not entitled to a waiver, we agree with appellants that this ruling is flawed because the district court failed to apply the “market power” test elaborated in Triennial Review. The district court’s cursory opinion states only that “the conditions Ameritech suggests for its funding/royalty arrangement would not sufficiently minimize its incentives and ability to favor a funded manufacturer.” Ameritech Waiver Ruling, mem. op. at 2. The proper inquiry under the market power test, however, is not whether a BOC may “favor” particular manufacturers; it is whether such favoritism is likely to result in reduced output or higher prices in a particular product or service market. As our dissenting colleague points out in his excellent analysis of current realities in the field of telecommunications, there may be good reason to believe that in this case it would not.
Appellees contend that even if we were to remand this case for' consideration under the proper standard, denial of Ameritech’s waiver request would follow directly from Triennial Review. In that case, we declined to lift the manufacturing restriction on the ground that, at least in the market for telecommunications equipment (i.e., transmission equipment and central office switches), the BOCs continued to possess sufficient market power to enable them to reduce output and raise prices by purchasing equipment exclusively from their “manufacturing affiliates” and cross-subsidizing those affiliates. See Triennial Review,
We find that Triennial Review does not foreclose Ameritech’s waiver request. The question presented in that case was Whether there should be a “complete removal of the manufacturing restriction.” Id. at 304 (emphasis in original). Accordingly, there is not even a hint that we considered the different ways in which a BOC might be affiliated with a manufacturer, or the effects that various forms of affiliation might have on a BOC’s ability to exercise market power in telecommunications product markets. Moreover, at least on théir face, the proposed funding/royalty arrangements appear likely to limit the potential for Ameritech to engage in the forms of anticompetitive conduct that the manufacturing restrictions were designed to prevent. As the district court observed in modifying the Decree to permit the BOCs to market customer premises equipment (“CPE”), “[ajnticompetitive activities undertaken by two separate corporations rather than by two components of the same corporation are likely to be' far more difficult to accomplish because of increased problems of coordination and the greater possibility of
Turning first to the matter of eross-subsi-j dization, Ameritech’s proposal includes several safeguards designed to minimize the possibility that it could cross-subsidize the funded manufacturer with revenues from its local exchange monopoly. “Cross-subsidization may take a variety of forms.” United States v. Western Elec. Co.,
■ An alternative form of cross-subsidization postulated by appellees is for the regulated firm to purchase products from a manufacturing affiliate at inflated prices. The firm then passes the costs on to ratepayers, while the affiliate may'exploit its excess profits by underselling competitors to gain power in the product market. The risk of this form of cross-subsidization, however, is limited in the first instance by Ameritech’s most favored nation clause, which would ensure that the price paid to a funded manufacturer would be no greater than the market price paid by third parties. Even if the most favored nation clause proved unenforceable, however, this type of cross-subsidization seems unlikely. Ameritech would "receive no direct benefit from the purchase of equipment at inflated prices, as the proposed arrangements provide for the payment of royalties only on sales to third parties. Instead, Ameritech would benefit only if the manufacturer used the proceeds of the sales to reduce the price of its product to third parties, thereby increasing sales volume and hence Ameritech’s royalties. This possibility strikes us as highly speculative, especially in light of the manufacturer’s independence from Ameritech control. Moreover, if a manufacturer were to engage in such a scheme, it would run the risk of detection by either its competitors or Ameritech’s regulators. Cf. Decree Opinion,
Moving to the question of discriminatory interconnection, Ameriteeh’s proposal does not entirely eliminate the risk that it would provide a funded manufacturer with privileged access to its technical requirements or adopt standards preferentially, beneficial to that manufacturer. Nevertheless, it is likely that interconnection standards that systematically favor funded manufacturers would be highly conspicuous. Cf. id. at 191 (noting that “it would be quite difficult for an Operating Company to conspire successfully with
Finally, as appellees point out, the funding/royalty arrangements might result in Ameritech purchasing equipment solely from its funded manufacturer, regardless of whether that manufacturer’s product represents the best price/quality combination. Accordingly, there would likely be some foreclosure of the relevant markets to independent manufacturers. Still, Triennial Review found that this foreclosure would not, by itself, lead to the exercise of power in the CPE market “[s]ince the BOCs purchase only a minute percentage of the nation’s CPE output.”
Before closing, it is important to address the district court’s concern that the conditions included in Ameritech’s proposal would ■ be difficult to' enforce. We agree that it is entirely proper for the district court to consider the enforceability of proposed Decree modifications. We also recognize that the broad, prophylactic line-of-business restrictions were necessitated in part by AT&T’s ability to evade regulatory constraints, see Decree Opinion,
In the present case, the district court’s concern for enforceability may be well-founded with respect' to Ameritech’s most favored nation pricing clause, as price comparisons may be inhibited by the heterogeneous, highly customized nature of many telecommunications products. But cf. Distribution Waiver. Opinion,
III. CoNClusion
Throughout their arguments to this, court, appellants have emphasized that, in the absence of ownership and control, a funding/royalty arrangement between an RHC and a manufacturer poses few competitive risks. In light of the realities of today’s telecommunications product markets, they may well be right. Scores of new companies are competing vigorously in virtually every area of the market, and the stringent prophylactic measures adopted in 1982 by the parties to the Consent Decree may no longer be necessary- in order to forestall potential abuses of monopoly power by the BOCs. It is for this reason that the. Decree permits any BOC to seek adjustment to changed economic circumstances by either applying to the district court for a modification of its provisions under section VII or for a waiver under section VIII(C). Our task, however, is to apply the Decree as it was written and understood by the parties, and not as it might have been written if they had had the benefit of hindsight. We therefore affirm the district court’s denial of the DOJ’s declaratory judgment motion, and we remand the case for further exploration of the waiver request as it is under the waiver provision that the potential for anticompetitive abuses is properly considered.
So ordered. .
Dissenting Opinion
dissenting:
The AT&T Modified Final Judgment dismantled the old Bell System. See United States v. AT&T,
The indirect results are far more serious. In adopting this sweeping idea of affiliation, the court looses the concept from its core meaning of control, characteristically exercised through some kind of ownership. The court substitutes an amorphous notion that seiems likely to obstruct a wide range of BOC efforts to advance entry into telecommunications by firms that, by any ordinary standard, would be viewed as independent. Although the court’s interpretation has modest support in some parol evidence, it has none
This dissent will first consider some specific clues to the meaning of “affiliated enterprise” in § 11(D) of the consent decree: the language of § 'II(D) in relation to other references to affiliation in the MFJ, uses of the concept of affiliation in other antitrust consent decrees of substantially the MFJ’s vintage, parol evidence as to the parties’ intent át the time the decree was agreed to, and the later behavior of the parties. Then it will consider whether the majority’s expansive interpretation can be justified in terms of the anti-competitive risks that drove adoption of the decree. ‘
Decree references to affiliation. Section II(D)’s use of the term “affiliated entity” is not the decree’s only reference to affiliation. Section IV(A) defines as an affiliate of AT&T “any organization or entity ... that is under direct or indirect common ownership with or control by AT&T or is owned or controlled by another affiliate.” MFJ Opinion,
The decree also defines the BOCs so as to explicitly encompass affiliates under the usual understanding of the term; § IV(C) states that “the BOCs mean [any corporation listed on an attached appendix] and any entity directly or indirectly owned or controlled by a BOC or affiliated through substantial common ownership.” Id. The definition indicates an intent to reach entities either owned or controlled by BOCs, or affiliated with the BOC through a common parent with substantial ownership in both entities. Again, affiliation appears to depend on ownership or control.
As the panel properly notes, however, § 11(D) also refers to affiliation. Thus, although “BOCs” by definition under § IV(C) include affiliates under the usual understanding of the term, § 11(D) explicitly applies the ban not only to BOCs but also to any “affiliated enterprise”. The majority, invoking the maxim that contracts should be interpreted so as to give meaning to every provision, concludes that the § 11(D) reference must somehow encompass more than § IV(C). Maj.Op. at 230.
Like so many constructional maxims, this one seems questionable. An alternative view is that the seemingly redundant definition arose’ either from neglect, or, more likely in the intensely lawyered atmosphere surrounding this decree, to make assurance doubly sure. Cf. Fort Stewart Schools v. FLRA,
The decree’s pervasive tendency to repeat references to affiliation supports the abundance-of-caution view. In referring to AT&T in §§ 1(A) 1, 11(B), VIII(B) and VIII(D), the decree in each case adds mention of its “affiliates”, which is redundant because § IV(B) has already defined AT&T as including its affiliates. In addition, §§ III and V refer to the defendants, the BOCs and their affiliates, again redundantly in light of the definitions of AT&T and the BOCs. Under the majority’s interpretive method, evidently, supplementary meanings must be found for each of these seemingly redundant usages. While the pattern convinces me that the drafters emphatically intended to cover affiliates, I see no support for the view that they meant
References to affiliate in other antitrust consent decrees. The question of affiliation is obviously posed in antitrust settlements generally, so we may look to such consent decrees for some sign of their meaning in that context. In a sample of 70 consent decrees from July 1980 to the present,
The provisions of this Final Judgment applicable to Reveo shall also apply to each of its officers, directors, agents, employees, affiliates, subsidiaries, successors and assigns, and to all other persons in active concert or participation with any of them who receive actual notice of this' Final Judgment by personal service or otherwise.
See, e.g., United States v. Reveo D.S., Inc., and Zale Corp., Proposed Final Judgment and Competitive Impact Statement, 46 Fed. Reg. 13,418, 13,419 (Feb. 20, 1981).
While these decrees typically do not bother to define “affiliates”, the applicability clause — which lumps affiliates in with “officers, directors, agents, employees, ..., subsidiaries, successors and assigns” — suggests a narrow meaning. Affiliates are grouped with entities that the defendant (or a parent) is entitled to commit to the consent decree by virtue of ownership or control, in contrast to “all other persons in active concert or participation”, seemingly a catch-all for persons who may actively assist the defendant in violating the decree.
Only- five of the consent decrees reviewed explicitly define affiliation. All óf these definitions include some form of ownership or substantial control. In United States v. Gillette Co., Proposed Final Judgment and Competitive Impact Statement, 55 Fed.Reg. 12,-567,12,571 (April 4,1990), the decree defined an “ ‘Affiliate’ of a legal entity” as “a person controlled, directly or indirectly by a common parent of that legal entity.” A decree in the telecommunications context uses a similar definition:
“Affiliate” or “affiliates” means any organization or entity in which, directly or indirectly, the named person has control or substantial ownership. For purposes hereof, “substantial ownership” means a direct or indirect equity interest (or the equivalent thereof) of fifty percent (50%) or more of an entity. Any parent company of a named person shall also be deemed its affiliate.
United States v. Pacific Telesis Group, Proposed Final Judgment and Competitive Impact Statement, 51 Fed.Reg. 9277, 9278 (March 18, 1986). What “the equivalent thereof’ means in the above definition is not clear, but it seems to require an interest somehow comparable to the specified equity share — 50%.
Another telecommunications decree, United States v. GTE Corp., Proposed Final Judgment and Competitive Impact Statement, 48 Fed.Reg. 22,020, 22,021 (May 16, 1983), published nine months after the MFJ Opinion, states that affiliate “means any organization or entity in which, directly or indirectly, GTE has any ownership or equity interest or control.” GTE also defines “BOC” as including the corporations’ “successors and assigns, and any entity directly or indirectly owned or controlled by a BOC or affiliated through substantial common ownership.” Id.
One decree spells out not only the concept of affiliation but the idea of “control” embedded therein:
“Affiliate” means, with respect to any Person, any other Person directly or indirectlycontrolling, controlled by or under common control with such Person ... For purposes of this definition ‘control’ (including ‘controlling’, ‘controlled by’ and ‘under common control with’) shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of .a Person, whether through the ownership of voting securities or by contract or otherwise.
United States v. Alcan Aluminum Ltd., Proposed Final Judgment and Competitive Impact Statement, 49 Fed.Reg. 40,454, 40,459 (Oct. 16,1984). Though broad, the definition of control here seems to depend on legal or contractual power over the other firm’s management and policies. There is no hint that it would reach links that merely afford one firm an incentive to influence or favor the other.
Finally, one decree defines “subsidiary” and “affiliate” together, with the former defined as “a company of which the parent owns more than 50% of capital stock”, while the latter implies “an entity of which the defendant has more than 50% nonstock ownership interest or has less than 50% interest and exercises or has the right to exercise control.” United States v. Hercules Incorporated, Proposed Final Judgment and Competitive Impact Statement, 45 Fed.Reg. 85,-840, 85,841 (Dec. 30, 1980).
The decrees, then, are united by a theme of genuine control. They represent the product' of the Antitrust Division’s lawyers, many of them in the period in which those same lawyers negotiated the MFJ. If those lawyers wanted some drastically broader coverage, one would expect them to say so.
Pre- and post-decree statements by the Department of Justice. The majority places considerable weight on certain assertions by the Department of Justice — before and after adoption of the decree — as to the reach of the áffiliation concept of § II(D). See Maj. Op. at 230-31. First a general caution. Par-ol evidence may be used to clarify an ambiguity, and I am ready to assume arguendo that
§ II(D)’s redundant reference to affiliation creates an ambiguity. But there is nothing within the decree, or within standard usage of the affiliation concept in antitrust decrees, remotely suggesting a stretch beyond the twin ideas of ownership and control. While I can well imagine parol evidence helping us to work' out the exact line within the zone framed by those basic ideas, I doubt the validity of its use to substitute a completely new concept. Cf. Tataranowicz v. Sullivan,
In any event, the pre-decree history yields a Justice Department reference to possible capacity-sharing arrangements between the future BOCs .and interexchange carriers and information providers:
First, to the extent that, as a practical matter, such [capacity-sharing] agreements amount to a joint venture with the sharing enterprise, or otherwise give the BOC a stake in its financial success, e.g., payments on a per-unit-of-traffic basis (exclusive of tariffed access charges), the modification’s prohibition against the BOC’s reintegration into interexchange or information services markets would be violated.
Response to Public Comments on Proposed Modification of Final Judgment, 47 Fed.Reg. 23,320, 23,347 (May 27, 1982) (emphasis added) (cited at Maj.Op. at 230-31).
The remark seems strikingly discursive. It refers first to joint ventures, suggesting a focus on highly integrated activities. Then it suggests that any BOC “stake in [the other firm’s] financial success” would be fatal — a test that if taken seriously would doom a whole range of relations with suppliers and customers whose financial collapse would’ injure a BOC. Then it refers to “payments on a per-unit-of-traffic basis”, a phrase possibly suggestive of some revenue-sharing arrangement, but without much precision.
In assigning weight to this remark, one must also look at the overall context. The Department was, of course, the initiator of the underlying antitrust suit, and presumably a prime mover behind the line-of-business restrictions; that it should have sought to work expansive notions into the parol evidence is not surprising. The significance (if any) of its pre-decree statements depends not so much on Justice’s assertions but on AT&T’s apparent failure to respond (appellants have not called our attention to any responses).
Yet the significance even of AT&T’s silence is questionable. First, we do not have a grasp of the total volume of contentions floated at the time; other claims may have seemed more egregious and therefore more demanding of refutation. Second, who was around to do any rebutting? The BOCs were mere embryos within AT&T. To the extent that AT&T managers may have anticipated more of a future with the new AT&T than with the BOCs, they would not have been inclined to attack understandings that would protect the new AT&T from later competition. At a minimum, the AT&T management faced, as we have noted before, “a significant inherent conflict of interest” with respect to these restrictions. See United States v. Western Electric Co.,
The majority then turns to an assertion of the Department of Justice made November 10, 1983, after the decree was adopted (August 24, 1982) and even after the Supreme Court had affirmed the judgment (February 28, 1983). The remark broadly attacks a division of revenues arrangement between a BOC and AT&T, an arrangement proposed by AT&T and resisted by the BOC in question, Bell Atlantic. See 'Maj.Op. at 230-31. It is hard to know what to make of this, but since the BOC was objecting to something AT&T wished to foist upon it, the context is hardly one where BOCs can be said to have “acquiesced” in a particular DOJ claim. At most, we seem to have evidence of the prac-. tice of the parties under the contract — evidence overwhelmed by AT&T’s own conduct in matters far closer to home, namely its agreement to pay royalties to BOCs as a method of reimbursement for development funding. I now turn to that conduct.
AT&T Conduct. AT&T concedes that since adoption of the MFJ there have been what it calls “a few instances” in which it agreed to undertake development work for a BOC if the BOC paid the expenses, in exchange for a reduced purchase price or royalties on sales to other buyers. See J.A. 558-59. So far as appears, these were all entered into without any request for waivers under § VIII(C). One gets some idea of what “a few” means to AT&T when one goes on to read that there were six such agreements (evidently a trivial fraction in AT&T’s eyes) in which the royalty pay-out was not capped at the initial development expenses. Id. at 559.
AT&T leans heavily on this distinction— the cap on royalties — to dismiss the significance of its own conduct. See id. But even for the capped agreements, the BOC must have had — until the cap was reached — the financial stake in sales of the product that AT&T now claims is absolutely forbidden under the MFJ. Further, even if we zeroed in only on the six uncapped transactions, six seems like a substantial run of the parties’ course of conduct. “‘[S]how me what the parties did under the contract and I will show you what the contract means.’ ” Thompson v. Fairleigh,
Finally, AT&T urges us to disregard the six uncapped transactions on the basis of a claim that “after AT&T’s management and counsel became aware of the form of these agreements, a memorandum was sent to AT&T sales personnel in December, 1987,” directing that all such future arrangements should be of the capped variety. J.A. 559. Again, the cap only diminishes the scale of AT&T’s violation of the principle that AT&T and the majority find in the decree. Further, the implicit excuse that AT&T’s “management and counsel” were wholly unaware of these transactions is no help. If the contracts were binding (and there is no assertion to the contrary), they must have been entered into by persons with adequate authority. They are acts of AT&T.
* * *
Although there seems only the weakest formal ease for reading “affiliated enterprise” to encompass any firm sharing revenue with a BOC, it makes sense to see whether such arrangements so clearly impinge on the pro-competitive purposes of the MFJ that the wrench of the language deserves serious consideration.
The majority identifies three ways in which a royalty arrangement of the kind agreed upon by Ameritech and David Systems might imperil the antitrust objectives of the decree. As a result of the agreement the BOC could (1) grant the funded manufacturer privileged access to its technical requirements or adopt preferential standards; (2) engage in cross-subsidization, paying inflated prices on its own purchases, thus enabling the funded manufacturer to “undersell its competitors and gain power in other markets”; and (3) buy from the funded manufacturer even if the price/quality relationship of the manufacturer’s product was inferior to its competitors’. Maj.Op. at 232-33.
Of course it is true that a BOC could act in these ways with respect to a funded manufacturer. That alone is surely not enough — a BOC could act that way towards any firm. The question would seem to be whether the funding/royalty relationship is likely to create such strong incentives to engage in this behavior, and with such serious likelihood of anticompetitive impacts, that we should regard the funding relationship as substantially akin to garden-variety affiliation.
Let us first take cross-subsidization, the most concrete of the hazards, and, in fact, the template for the other two. The feared result — “gain[ing] power in other markets” — of course cannot inflict an antitrust injury unless the BOC and funded company can overcome all the conventional hazards to successful predatory pricing; the prospects of driving competitors out, and the hurdles to any new entry, must be so great that the present discounted value of the hypothetical future monopoly overcharges exceeds the present discounted value of the guaranteed upfront losses. See Brook Group v. Brown & Williamson Tobacco Corp., — U.S.-,- -,
The question, though, is how conducting such an operation through a funded independent manufacturer, which simply owes the BOC a royalty on sales of the funded product, compares with doing so through a genuine affiliate. The answer is that it is a rather feeble substitute. Although overpayments to the funded firm may be “free” to the BOC, the money is by no means free to the funded entity. Once in the fundee’s hands, the money is its own, so that investing it in a scheme of predation is just as costly for the fundee as for any firm in any ordinary market not subject to price regulation. The absence of
Of course the BOC could seek to enter into side agreements with the fundee, committing it to use the funds for predation. But the absence of control, which we must assume under the majority analysis, clearly increases .the hazards of such a conspiracy; the number of people necessarily brought in increases, and there are at least two chains of command to be silenced rather than one. The district court recognized this distinction at the time it approved the decree: .“Anti-competitive activities undertaken by two separate corporations rather than by two components of the same corporation are likely to be far more difficult to accomplish because of increased problems of coordination and the greater possibility of detection.” MFJ Opinion,
The two other concerns identified by the majority suffer from the same basic problem. Preferring the fundee despite an inferior price/quality relation seems just an intricate way of overpaying it. Again, the absence of ownership or control of the fundee, or ownership of both entities by a common parent, deprives .the BOC of the ability to assure that these overpayments, perhaps “free” from its perspective but surely not from that of the fundee, will be applied in accordance with its purpose rather than the fundee’s. Similarly, favoring the fundee with advance technical information or with discriminatory technical standards also appears to be simply a complicated way of shifting value to the fundee at the expense of the BOC (or, by the assumption we are indulging here, the BOC’s customers). Without control over the fun-dee’s use of the profits that derive from this advantage, the BOC is in a weak position to achieve its goals.
Again, I cannot argue that the funding- and-royalty arrangement is absolutely without antitrust risk; probably nothing is without such risk. What seems plain to me is that whatever risks exist in that context are trivial compared with those that the drafters assumed applicable to entry by a BOC into the forbidden lines of business via a conventional affiliate.
In fact, funding/royalty arrangements are likely to enhance competition in telecommunications products by providing a new source of funding for smaller companies with innovative ideas. BOCs have a comparative advantage in judging the prospects for investments in research and development of products complementary, to their business, and an obvious interest in ensuring that such innovation occurs. They thus can diminish the imperfection of financial markets due to normal lenders’ lack of information about the market and the technology. The funding/royalty arrangement increases the likelihood of such financial assistance, for it enables the BOC to commit capital in a form that entitles it to share in the high returns on very successful projects, just as a wildcatter arranges to share in the rare success among exploratory oil and gas wells. Similarly, just as a wildcatter assembles leases in the area of intended exploration so as to capture as much as possible of the value of the information that a successful well will yield (and to prevent free riding by others), so a BOC taking substantial risk on a new technology would want to diminish free-riding by other buyers, which is precisely what the royalty arrangement permits.
The BOC’s investment, to be sure, carries a marginal anticompetitive risk. A BOC may
The majority’s methodology is somewhat unclear to me. Once it abandons what it correctly identifies as the “usual” understanding of affiliation, see Maj.Op. at 230-31, it turns, unguided by any contract language, to parol evidence and postdecree assertions of the Department of Justice. These include, as we have seen, direct or indirect references .(1) to revenue-sharing with a firm in a forbidden line of business and (2) to arrangements giving a BOC “any stake” in the success of such a firm. The majority does not commit itself as between these two formulae. If revenue-sharing is forbidden because, it involves a BOC “stake” in the funded enterprise, or because of the anticompetitive hazards sketched by the majority, then any loan is equally forbidden, and a variety of long-term arrangements such as requirements contracts are at risk. A decision embracing so radical an interpretation should confront its implications. On the other hand, if revenue-sharing is singled out from other arrangements by which a BOC might have a stake in a funded entity’s success in a forbidden line of business, then we should learn just what the analytic distinction is.
For purposes of this case, all that is needed is that we recognize that § II(D)’s reference to “affiliated entity” is within the conventional range of affiliation, and thus requires ownership or control by the BOC, or the ownership of both entities by a common parent. As the David Systems transaction is outside that range, we need not settle the narrow dispute as to whether § II(D)’s reference to affiliation simply incorporates § IV(C)’s definition or calls for a slightly broader one such as that advanced by the Department of Justice
This case is full of ironies. The first, of course, is that AT&T is hereby enabled to' use the line-of-business restrictions, adopted in the name of pro-competitive purposes, to stifle competition from small firms that might enter the telecommunications products markets as a result of BOC funding, thus protecting, for example, its 49%' share of sales of central office switches. Further, it is only because of AT&T’s role as a successor party to the MFJ that it is able to press its claim here. United States v. Western Electric Co.,
A second irony is that it is now seriously asserted in some quarters that the nature of the long distance and local telephone markets may be precisely the opposite of what was assumed at the adoption of the MFJ. That assumption, of course, was that the technology of the long distance market would be radio, that its unit costs would not decline with volume, and that it therefore would be competitive; the assumption for local exchanges was that their technology would be wire, that unit costs would decline throughout the relevant market, and that therefore it would be a natural monopoly. To the extent that glass fiber is replacing radio for long distance, and cellular radio emerges as the optimal technology in the local loop, these
In any event, our job is to construe the agreement as written. As I can find.no basis at all for conceiving “affiliated enterprises” to include funded royalty payors, either in the decree’s language, the tradition, of antitrust consent decrees, the skimpy parol evidence, the practice of the parties, .or the overall purposes of the MFJ, I respectfully dissent.
Notes
. LEXIS Library: Genfed, File: Fedreg, Search Request: "competitive impact statement” and affiliat!
. The AT&T brief goes on to quote a remark that the decree prevents "the reemergence of any division of revenues procedures to supplant the exchange access tariff provisions." Competitive Impact Statement in Connection with Proposed Modification of Final Judgment, 47 Fed.Reg. 7170, 7178 (Feb. 17, 1982) (cited in AT&T Br. at 11-12). Because of the statement's focus on
. See Peter Huber, The Geodesic Network: 1987 Report on Competition in the Telephone Industry, 14.8 (1987) (reporting very large economies of scale in development of switches, with prospect the 18 firms manufacturing digital switches worldwide in 1984 will likely to fall to fewer than a dozen); see also Comments of David Systems, Inc., in Support of Ameritech’s Revised Request for a Waiver to Allow the Receipt of Royalties On Third-Party Sales of Telecommunications Products, 5 (DOJ June 30, 1988) (Joint Appendix 408) ("no one buyer has a large enough share of the market to make it economically attractive to produce a product for that one buyer alone”).
. The Department of Justice urges us. to read "affiliated enterprise" in § 11(D) to include entities in which a BOC has a more than.de minimis equity interest (5% or more) or exercises substantial management control. Brief for Appellant United States of America at 2.