Opinion ID: 414451
Heading Depth: 2
Heading Rank: 1

Heading: Early Restrictions on Interconnection

Text: 5 Prior to 1956, AT & T had an absolute monopoly over long distance telephone service and local telephone service in areas accounting for over eighty percent of this country's telephones. Independent telephone companies, familiar to many rural users, interconnected with AT & T's long distance network and provided local telephone service in those areas not serviced by AT & T. The AT & T telephone network comprised local central office switching systems as well as the wires and cables linking them with the businesses and homes of customers. This monopoly, administered under the aegis of the FCC, was recognized as perfectly lawful and proper. 6 But AT & T had another monopoly--not similarly sanctioned--over the sale and lease of individual telephone sets and business telephone systems. Broadly speaking, a business telephone system can be classified into one of two general categories. The first, a Key System, allows a single telephone set to connect several others through the use of buttons on the telephone. Key Systems are used primarily by small offices. The second category, a PBX System, employs a central console or switching mechanism to allow interconnection of up to several thousand telephones. Key Systems and PBXs--stipulated as the relevant product market in this case--are referred to in the industry as telephone terminal equipment. AT & T's monopoly over such equipment (including residential telephones) was preserved after the expiration of Alexander Graham Bell's original patents by the simple expedient of prohibiting the attachment of non-AT & T equipment to the AT & T system. AT & T enforced this policy by cutting off service to customers who attached non-AT & T equipment. 1 This practice was approved first by state regulatory agencies and later by the FCC after it assumed regulatory responsibility for telecommunications under the Communications Act of 1934, 47 U.S.C. Sec. 151 et seq. Because telephone terminal equipment sends electrical signals into the network, this policy was at that time considered necessary to ensure the safe and effective operation of the nationwide telephone network. 2 7 After World War II, however, various users sought to connect devices that AT & T had always considered foreign attachments to the telephone network. Efforts to challenge AT & T's absolute prohibition against interconnection of non-AT & T equipment met with some limited success as early as 1947 when, in Use of Recording Devices, 11 F.C.C. 1033 (1947), the FCC approved the use of machines to record telephone conversations because such use was not detrimental to the quality of telephone service. Id. at 1048. At the same time, the Commission ruled that interconnection must be made through [a]dequate connecting arrangements, id. at 1048-49, but the responsibility for installing and maintaining connecting arrangements was vested in AT & T. The FCC's concern for the network's integrity was manifested in perhaps its most extreme form in Hush-A-Phone Corp., 20 F.C.C. 391 (1955), where it prohibited the use of a mouthpiece shield designed to enhance user privacy because, although the shield did not harm the network, 3 ] it could cause garbling of conversation. The Commission's ruling was set aside and remanded by the unanimous decision in Hush-A-Phone Corp. v. United States, 238 F.2d 266, 269 (D.C.Cir.1956), 4 which found the ruling neither just nor reasonable. In characterizing the ruling as an unwarranted interference with the telephone subscriber's right reasonably to use his telephone in ways which are privately beneficial without being publicly detrimental, id., the Hush-A-Phone court suggested that actual harm to the telephone network was to be the principle governing the validity of interconnection prohibitions. 8 On remand, the FCC adhered to this principle by ordering AT & T to modify its tariffs to eliminate restrictions against the use of the Hush-A-Phone device and any other device which does not injure [AT & T's] employees, facilities, the public in its use of [AT & T's] services, or impair the operation of the telephone system. Hush-A-Phone Corp. v. American Telephone & Telegraph Co., 22 F.C.C. 112, 114 (1957). The ruling thus implicitly acknowledged that the AT & T network could be harmed by some forms of interconnection. See notes 2 & 3, supra. At the same time, the Commission's reference to any other device made it clear that the scope of the ruling extended beyond use of the Hush-A-Phone device. Nevertheless, AT & T cast its revised tariff so as to prohibit interconnection of customer-provided telephone systems. 5 9 At about the same time the Hush-A-Phone controversy was wending its way through the Commission and the courts, a Texas inventor by the name of Thomas F. Carter was inventing a mobile radio device that allowed its users to conduct two-way conversations with persons using ordinary, stationary telephones. The Carterfone used inductive and acoustic principles to connect the mobile user with a telephone base station that completed the link to the telephone network. 6 Carter began marketing his device in 1959, and within a few years he had sold several thousand units in the United States and throughout the world. The AT & T tariff filed in response to the Hush-A-Phone decision was consistently interpreted as prohibiting the use of the Carterfone. See Use of the Carterphone Device in Message Toll Telephone Service, 13 F.C.C.2d 430, 438 (1967). Carter challenged the tariff in 1967, and the FCC hearing examiner found that with the exception of a single trivial incident, id. at 436, the Carterfone performed satisfactorily without causing technical problems detectable by the user. Id. at 433. Because the Carterfone had no adverse effect on the telephone network, the examiner ruled that its use fell within the rationale of Hush-A-Phone Corp. v. United States, 238 F.2d 266 (D.C.Cir.1956), and that it was unjust and unreasonable to continue to prohibit use of the Carterphone for the purpose of interconnection after its beneficial and harmless nature has been demonstrated. 13 F.C.C.2d at 439. 10 The Commission decision following the hearing held that the tariff was unreasonable and unduly discriminatory. Use of the Carterfone Device in Message Toll Telephone Service, 13 F.C.C.2d 420, 423 (1968). In contrast to the hearing examiner's conclusion that a general prohibition against the use of interconnection devices is [not] unjust or unwise, Carterphone, 13 F.C.C.2d at 440, the Commission found the fact 11 [t]hat the telephone companies may not have known prior to the proceedings herein that the Carterfone was in fact harmless is irrelevant, since they barred its use without regard to its effect upon the telephone system. Furthermore, the tariff was the carrier's own. It was not prescribed by the Commission. 12 13 F.C.C.2d at 425. The Commission further underscored its rejection of a blanket prohibition against interconnection when it noted that [n]o one entity need provide all interconnection equipment for our telephone system any more than a single source is needed to supply the parts for a space probe. Id. at 424. It then invited the submission of new tariffs which will protect the telephone system against harmful devices and specifically stated that the carriers ... may specify technical standards if they wish. Id. at 426. 13 AT & T immediately sought reconsideration of the Commission's decision. In its order denying reconsideration, the Commission in a very real sense cemented its previous decision as follows: 14 We held that the Carterfone filled a need, that its use did not adversely affect the telephone system, that its use was nevertheless precluded by the tariff, and that the tariff was unlawful, and had been in the past, because it prohibited the use of the Carterfone and other interconnecting devices without regard to actual harm caused to the telephone system. We did not prescribe the terms of a new tariff, but left that to the initiative of the telephone companies, pointing out that they were in no wise precluded from adopting reasonable standards to prevent harmful interconnection. Basic to our holding was a rejection of A.T. & T.'s position that because A.T. & T. cannot control the interconnected private system, interconnection is by definition a degradation of the message toll telephone system without regard to the quality of the interconnecting device or of the interconnected mobile radio system, i.e., without regard to actual harmful effects. We viewed this position 2 and the rule embodying it as unreasonable.... 15 The primary contention upon reconsideration is that our decision permits the use of a myriad of customer-provided devices for interconnection without adequate exploration of the technical and economic problems. This record convinces us that there can be inter-connection without harmful technical effects.... 16 Use of the Carterfone Device in Message Toll Telephone Service v. American Telephone & Telegraph Co., 14 F.C.C.2d 571, 572 (1968). 17 We found no substantial factors outweighing the necessity of eliminating the arbitrary tariff. Standards to prevent the introduction of harmful inputs can be devised, and enforcing them would be no more difficult than enforcing the present absolute prohibition. Furthermore, notification to the carrier of the installation of a connecting device, which would be a reasonable requirement, would greatly relieve any problems of discovering the source of any harmful interconnection. The record also showed that terminal devices may be used under a standard making actual harm a factor, and the distinction between terminal devices and interconnection appears to be solely one of function unrelated to inherent propensity for injurious effects. 18 Id. at n. 2 (citations omitted). 19 Significantly, the Commission also noted the broad sweep of its decision: 20 We also reject the related claim that the decision goes beyond the issues. To say, as some of the parties do, that the hearing related solely to the Carterfone and not to the validity of the tariff's broad prohibition would make the hearing essentially meaningless. The issues plainly included consideration of the basic validity of the tariff if it was the total prohibitory effect of the tariff which rendered its application to the Carterfone unreasonable. As we pointed out in our June decision, such a fault in a tariff can only be remedied by its revision. It should be noted in this connection that it was well understood that this was an interconnection case, and A.T. & T. and General both argued on a broad base the need for a general prohibition against all interconnection not arranged by them. 21 Id. at 573. (footnotes and citations omitted) 22 We quote from the Memorandum Opinion and Order denying the petition for reconsideration at length for two reasons. First, a redacted version was submitted to the jury, a matter disputed by AT & T and considered by us, infra. Second, we believe that the clarity of the Commission's language was such that from AT & T's perspective it had to be clear as a bell, so to speak, that at least as of the 1968 Carterfone decision, if not before, it was unreasonable, unjust, and discriminatory to prohibit interconnection of terminal equipment without respect to any harm such devices might cause. The ruling by its very terms require[d] tariffs reasonably addressed to the asserted problems. 14 F.C.C.2d at 573. It was therefore incumbent upon AT & T to devise tariffs that would permit attachment of non-harmful devices.