Opinion ID: 414451
Heading Depth: 3
Heading Rank: 2

Heading: The Litton Case

Text: 32 In Litton's scenario, AT & T is cast as a Dorian Gray. To paraphrase Commissioner Johnson's dissent from the order staying the effect of Carterfone pending AT & T response, to Litton, the PCA requirement was much as if an electric utility prohibited customers from using a toaster unless it was designed, manufactured, and installed by the utility itself. Litton's case against AT & T relies heavily on the fact that AT & T has never been able to make a case for the PCA requirement. Litton reminds us that AT & T has not demonstrated--before the FCC or at the trial of this case--a single instance in which the network had been harmed by a competitor's terminal equipment. Litton Brief at 8. Nevertheless, AT & T imposed the PCA requirement on all equipment sold by its competitors. Strikingly, in one case involving two Atlanta hotels using the very same brand of PBX equipment, no interface was required for the equipment that AT & T purchased from a third-party manufacturer and leased to one hotel, while an interface was required when the other hotel purchased its equipment directly from the third-party manufacturer. Litton suggests, as did the Fourth Circuit in North Carolina Utilities Commission, that the PCA requirement was a naked attempt to maintain private lawmaking authority over independent manufacturers. 552 F.2d at 1051 (emphasis omitted). The PCA requirement stood for almost ten years, giving AT & T a chance to interfere with the normal course of every sale of terminal equipment by Litton and all of AT & T's other competitors. 33 Litton's argument that AT & T opposed the development of certification standards in bad faith is based on evidence that Litton believes clearly demonstrates, first, that AT & T was aware that it could not substantiate its claims of harm to the network; second, that AT & T knew that without the PCA requirement it was vulnerable to competition; and, finally, that AT & T could have developed certification standards itself immediately after Carterfone but opted not to in order to buy the time necessary to meet competition in the terminal equipment market. 34 Litton put into evidence a number of AT & T documents to support the contention that AT & T simply could not demonstrate that the PCA requirement was necessary to protect the network from harm. Specifically, Litton points to an in-house report apparently prepared in 1971 by one of two AT & T representatives to the PBX Advisory Committee 14 which stated: A Credibility Gap Exists 35 [L]imited interconnection on the message network and greater interconnection on private line facilities has been in existence for a long period of time and the carriers still find it virtually impossible to cite cases of harm ... result[ing] from ... interconnect[ion] .... This inability to demonstrate cases of harm ... is causing the manufacturers ... users and regulatory bodies to ... challenge the expansive efforts which [AT & T] insists must be taken to avoid the network pollution. 36 Litton Brief at 29-30 (emphasis omitted). To like effect is a 1972 report submitted to AT & T management by the Director of AT & T's Management Sciences Division stating that AT & T was in its weakest position now, because even though everyone concedes that serious breaches of our tariffs by illegal or unauthorized equipment has grown over the years, we have not been able to produce evidence of harm to anyone. Id. at 30. The report recommended that the interface requirement be rescinded. Litton points out that AT & T's sole evidence of potential harm to the system was derived from the Hunt Studies referred to in note 8 supra and which were cited by AT & T to the FCC as support for the interface requirement. Various AT & T officials conceded that the studies did not prove anything. Nevertheless, we know that deButts maintained in his 1973 speech and in the formal filings later submitted to the FCC that there were data supporting AT & T's position on network harm from interconnection. 37 Litton argues that a portion of the PCA device championed by AT & T was really no more than the dial or pushbutton mechanism of a telephone--the network control signalling unit--that only duplicated the function of the same mechanism in AT & T's competitors' equipment. Moreover, AT & T knew at the outset that the PCA requirement was useless; a Task Force of the Tariff Review Group charged by AT & T management with developing the strongest possible case to resist customer ownership of telephone equipment had concluded in early 1968 that a PCA requirement would only shift[ ] ... [existing] restrictions on customer-owned devices to similar restrictions through the provision of an arbitrary and redundant Telephone Company device that duplicates the customer's equipment. 15 Litton highlights the fact that the internal AT & T Task Force characterized the PCA requirement as a redundant, artificial and economic barrier to those wishing to purchase their own equipment. Thus, according to Litton, AT & T's own documents reveal its awareness as stated in a presentation by an AT & T executive at a Traffic Service Advisors' meeting in 1972 that [o]nly the 'black box' ... stands as the last hardware barrier between us and the final challenge of unbridled, unlimited, no-holds-barred competition. 38 In Litton's account, AT & T's support for the PCA requirement was based more on a concern for its share of the terminal equipment market than it was on concern for the safety of the telephone network. Thus, AT & T kept the interface device not only to exclude competition but also to palliate its own competitive inadequacies because, despite the vaunted reputation of Bell Laboratories, AT & T had done little in the years prior to Carterfone to update its terminal equipment. Accordingly, notwithstanding the opinion expressed by several members of the AT & T Tariff Review Group that the PCA requirement was not responsive to Carterfone, 16 AT & T imposed the requirement in order to give it time to develop competitive terminal equipment. At trial, Litton put in evidence another AT & T document, the McKinsey Report, indicating that AT & T had product development and marketing problems that prevented it from meeting competition in the post-Carterfone era. Litton also claims that when AT & T finally did update its terminal equipment line, it did so with Chinese copies of successful Japanese products. 39 Finally, Litton maintains that AT & T could have adopted certification standards no more than a year after Carterfone. In support of this claim Litton again points to internal AT & T documents and memoranda suggesting that AT & T management believed the development of certification standards was inevitable by 1972, or 1973 at the latest. Litton Brief at 31-32. Litton suggests that AT & T's participation in the PBX Advisory Committee was a ruse or delaying tactic, and that the decision to oppose certification was concealed from the FCC while AT & T appeared to cooperate with the Advisory Committee so as to avoid the appearance of bad faith. 40 If there is an individual villain in Litton's piece it is Mr. John deButts. DeButts took over as Chairman and CEO of AT & T about four years after Carterfone and stressed the fact to his management that AT & T would have only one policy with respect to certification standards: opposition. In the face of recommendations from subordinates that a certification standards approach was preferable to the PCA requirement, deButts nevertheless opposed the standards. Moreover, Litton argues that the AT & T position on certification, as dictated by deButts, was taken with full knowledge that the FCC would ultimately reject this position. Litton claims that AT & T understood that its opposition to certification exposed it to antitrust liability, citing an AT & T film simulating an antitrust trial of a suit similar to the one eventually filed by Litton and urging employees to destroy incriminating company documents. DeButts apparently remarked to AT & T lawyers shortly after his speech that he had created more opportunities for lawyers than anything since Sherman wrote his famous law. 41 We thus arrive again at what both parties agree was a pivotal point for Litton in the interface tariff chronology: the deButts speech of 1973. In contrast to AT & T's claim that the PCA requirement amounted to only a little protection for the system that also served to avoid the antitrust difficulties that might flow from an AT & T enforced certification program, Litton argues that AT & T's opposition to certification--its insistence upon the PCA requirement--posed psychological and economic market barriers that drove Litton from the terminal equipment market. On the psychological side, Litton claims that the very imposition of the PCA requirement, without regard to its cost or inconvenience, caused customers to doubt the quality of Litton's product. Litton analogizes its burden under the interface tariffs to that which would face a foreign car manufacturer if its ability to sell in the American market were conditioned upon including a giant fire extinguisher in the car's trunk. Litton also presented evidence tending to show that AT & T engaged in slash and burn tactics calculated to make cutover from AT & T to Litton equipment as bothersome as possible for Litton and its customers alike. AT & T installers from time to time would chop off existing AT & T wiring flush with office walls in preparation for the installation of Litton equipment. AT & T made the PCA requirement onerous for customers in other ways as well: refusing to acknowledge receipt of letters arranging cutover dates, changing cutover dates, or failing to provide the necessary PCA equipment. Finally, Litton argues that AT & T's PCA devices themselves occasionally malfunctioned, thus adding actual injury to technological insult. 42 The PCA requirement also effected a direct economic barrier to Litton's market entry insofar as it increased the cost of installing and using Litton equipment. Although this case did not involve single line telephone sets, i.e., residential telephones, Litton is quick to point out that the PCA requirement precluded all of AT & T's competitors from entering this market because the PCA cost alone exceeded the cost of renting a telephone from AT & T. 17 Litton argues that these costs also effectively foreclosed sales of Key Systems involving five lines or less, estimated to be over 90% of the Key System market. In the market for larger Key Systems and PBX Systems, the PCA requirement was, in effect, a surcharge imposed by AT & T on customers using non-AT & T equipment sold by Litton and other competitors. When it became clear in late 1973 that AT & T would fight for the PCA requirement, Litton believed its only recourse was to cut its losses and leave the terminal equipment market because by that time AT & T had copied the successful products Litton was offering, narrowing whatever competitive advantage Litton would have had even in the absence of the PCA surcharge. 43 Thus, in Litton's scenario, AT & T's support for the PCA requirement--its opposition to certification standards--was no more than a rear guard effort to delay the effect of Carterfone, undertaken in bad faith in order to handicap competitors. The deButts speech slammed shut what was, from Litton's perspective, the window of opportunity created by Carterfone. Litton had intended to take advantage of this opportunity by following the same three-step market development program it had used successfully in other product markets. 18 First it engaged in the sale of reliable products manufactured by other concerns--this to allow Litton the opportunity to establish an immediate market presence while it readied its own products. Litton compares its 1980 gross sales of close to five billion dollars with its start in 1953 as a small electronics company and emphasizes its highly successful progress and depth of skill in the telecommunications industry. In fact, Litton had extensive engineering and installation expertise in terminal equipment--highly sophisticated terminal equipment for special customers like airports and the Department of Defense. Litton's statistics indicate that, if anything, its performance exceeded its own expectations. Within a year and a half of its decision to enter the terminal equipment market, it was making close to one quarter of all interconnect sales. To counter AT & T's claim that Litton had no marketable products of its own in the early 1970's, Litton argues that AT & T itself was responsible for this: it refused to interconnect the innovative Litton plexcom switch, which was years ahead of anything AT & T had to offer. By this time, according to Litton, AT & T's anticompetitive efforts had taken their toll in increased prices and decreased sales. When the deButts speech made it clear that AT & T would continue to resist the implementation of Carterfone, Litton claims that, like many other manufacturers during that period, it simply could not remain in the market. 44 Ultimately, the jury agreed in the main with Litton, finding that AT & T opposed certification standards in bad faith and that other AT & T conduct involving the supply of PCAs and the sale of inside wiring was unreasonable and injurious to Litton as a competitor. The jury also, after rendering the main verdict with respect to liability and damages, found that AT & T filed the interface tariffs in the first instance in bad faith. Despite arguments made here that the damage award was based on a study relying on unsupported assumptions that made it impossible for the jury to estimate the damages attributable only to conduct found illegal, liability was found in a specific amount, namely, in the case of Litton qua competitor, $91,990,000, and in the case of Litton qua customer, $268,243. The sum of these figures, $92,258,243, was trebled as provided by 15 U.S.C. Sec. 15.