Opinion ID: 565147
Heading Depth: 1
Heading Rank: 1

Heading: the administrative history

Text: 10 In 1976, Litton Industries, Inc., instituted an antitrust action against AT & T and its subsidiaries alleging unlawful monopolization of the telephone terminal equipment market. Early on, the Commission's Common Carrier Bureau directed AT & T to account for, and report quarterly to the Commission, the expenses incurred in defending the action in order that all such expenses are separately identified and maintained, for subsequent determinations as to whether these costs are properly chargeable to consumers or to stockholders. 9 Following a lengthy trial, a jury returned a verdict in Litton's favor, which was trebled to a judgment of some $276 million. 10 The Second Circuit affirmed on appeal 11 and the Supreme Court declined further review. 12 11 Meanwhile, a separate antitrust suit, brought by the Department of Justice against AT & T, ended in a 1982 consent decree dismantling the unified Bell System and restructuring its components into AT & T and seven regional operating companies. 13 In the process, petitioners, which had been subsidiaries of AT & T and parts of the Bell System, became subsidiaries of U.S. West, Inc., one of the seven. 14 12 Throughout the more than seven-year pendency of Litton, AT & T recorded its litigation expenses in above the line accounts as items normally treatable for ratemaking purposes as costs of doing business. 15 Shortly after Litton reached its terminus, the Commission's Common Carrier Bureau informed AT & T 16 and the regional Bells 17 that the amount of the judgment, including accrued interest, and their accumulated litigation expenses 18 should be transferred below the line to Account 370, 19 and thus were not ordinarily to be reflected in charges to ratepayers. The Bureau's letter instructed the regionals to submit their supporting rationale if they felt that some or all of the items should be charged to other accounts. The regionals did object, 20 and thereupon the controversy before us was born. 13 The Commission modified the Bureau's proposal in one respect. It agreed with the carriers that interest on the judgment should be charged to a below-the-line account accorded special treatment in ratemaking proceedings. 21 The Commission, however, shared the Bureau's view that the amount of the judgment and the litigation expenses should be charged below the line, and thus deprived of any ratemaking significance unless the propriety of a role in ratemaking was demonstrated. 22 We summarize as briefly as feasible the course of the Commission's reasoning. 23 14 The carriers argued [t]hat lawsuits are a recurring fact of life in operating a business, 24 and [t]hat requiring [them] to record the judgment in account 370 would deny them the opportunity of seeking recovery of these costs in rate proceedings. 25 In response, the Commission made known its doubt that payouts for antitrust judgments should be recoverable: 15 We agree generally that lawsuits are not uncommon in operating a business, and that companies must defend themselves against charges brought against them. We do not agree, however, that being found guilty of violating a statute should be regarded as a routine part of operating a business. Indeed, we believe that such a finding raises a serious question as to the allowability of the costs associated with such cases for ratemaking purposes, particularly the cost of the penalty imposed by the court. In this regard, account 370, which is used to record costs not ordinarily recognized for ratemaking, specifically provides that penalties and fines for violations of statutes shall be recorded therein. In our view, this provision of account 370 clearly describes the judgment against AT & T in the Litton case. 26 16 The Commission did not, however, share carriers' concern that below-the-line accounting of the judgment would necessarily emasculate it as a factor in ratemaking: 17 The accounting classification of an item is not the final determinant of the ratemaking treatment. Any item of cost recorded in nonoperating (below-the-line) accounts can be identified by a carrier during a rate proceeding and included in rates if the carrier makes a positive and complete showing and the regulatory commission agrees that the costs should be allowed. 27 18 With respect to the expenses of litigation, the Commission was influenced by several indications in the past that the litigation costs associated with antitrust cases would be reviewed and questioned in future rate proceedings and that the outcome of the litigation may have a bearing on the allowability of these costs. 28 The Commission took the Supreme Court's decision in NAACP v. FPC 29 as authority to treat such expenses as any other illegal, unnecessary, or duplicative costs. 30 The Commission hastened to add that expenses of antitrust litigation, like those of antitrust judgments, were not completely foreclosed from recoupment in ratemaking proceedings: 19 In the next general interstate and exchange access tariff filings by AT & T and the [Bell operating companies], we will examine these expenses to the extent that the carriers seek to avoid the ratemaking impact of this reclassification upon their revenue requirements. Because our accounting classification is not the final determinant of ratemaking treatment ..., the carriers will have the opportunity to demonstrate that portions of the litigation costs should be absorbed by interstate ratepayers. For example, litigation expenses that can be attributed specifically to the defense of counts on which AT & T was exonerated may be transferred back into the revenue requirement upon a proper showing by the carriers. 31 20 On petitions for reconsideration, the Commission adhered to those holdings and expanded its reasoning somewhat. After announcement of its original decision, the Commission had conducted a rulemaking proceeding to establish general policies governing accounting treatment of adverse antitrust judgments and associated litigation expenses. 32 Therein, the Commission had determined that litigation expenses were to be recorded in above-the-line operating accounts as incurred, but if a final, adverse and nonappealable decision was entered against the carrier, the cumulative litigation expense would be disallowed in the next appropriate tariff proceeding. 33 This approach, the Commission said, while differing in some particulars, was fully consistent in principle with that taken in the Litton Order. 34 Summing up the effect of the two, the Commission stated: 21 In both the Litton Order and the USOA Antitrust Costs Order, we adopted an approach that would in the first instance presumptively remove from the ratemaking process the costs of litigation resulting from a carrier's violation of federal antitrust laws, while at the same time providing the carrier with an opportunity to show that in the circumstances of a particular case, it should be entitled to include such costs in interstate rates. This approach, in our view, strikes the proper balance between protecting ratepayers from having to bear the financial consequences of carriers' unlawful actions and permitting carriers to include such costs in rates when properly justified on equity or other public interest grounds.... [O]nce a final, adverse, and nonappealable antitrust judgment has been entered against a carrier, both Orders mandate a course of action specifically designed to prevent carriers from improperly passing the litigation expenses to ratepayers and thereby avoiding the financial consequences of their unlawful actions. 35 22 The Commission also undertook to clarify the interpretation it gave NAACP v. FPC in the Litton Order. Several parties had complained that the Commission had misconstrued and misquoted that decision, 36 and had erroneously ruled that it supported disallowance for ratemaking purposes of expenditures for litigation of alleged violations of antitrust laws. 37 The Commission acknowledged that its earlier discussion had implied that the case could be read as a general direction to federal regulatory agencies to record litigation expenses stemming from a regulatee's illegal conduct in below-the-line accounts in order to prevent their inclusion in revenue requirements, 38 and that it had come belatedly to the realization that the Court was addressing expenses and costs different from those at issue in the Litton Order, 39 but concluded: 23 [W]hile NAACP v. FPC remains persuasive authority for the power of a regulatory agency to disallow expenses resulting from its regulatees' illegal conduct, that decision does not by itself mandate either disallowance or the below-the-line accounting treatment of the Litton litigation expenses, since it addresses a factual situation somewhat different than this proceeding. Nevertheless, even though the accounting treatment of litigation expenses in the Litton Order is not compelled by NAACP v. FPC, we affirm that treatment on the policy grounds discussed.... 40 24 The Commission pointed out that in the Litton Order it had made plain that the carriers would have the opportunity in subsequent ratemaking proceedings to demonstrate what if any portions of their litigation expenses should be passed on to ratepayers. 41 25 The Commission then turned to the antitrust judgment. It reaffirmed the determinations made in the Litton Order 42 and added a salient comment: 26 A theme that runs through petitioners' pleadings is that judgments paid in antitrust proceedings are not penal, but merely remedial, and thus properly included in operating expenses. However, we do not view the distinction between penal and remedial payments to be controlling for the purpose of determining the proper accounting treatment of antitrust judgments, because both types of payments arise after a court has concluded that a law has been violated. Antitrust damages are not the result of common law tort actions for accidental damages to persons or property, but are the consequences of a firm's violation of statutes designed to serve important public interests. Thus, the untrebled portion of the judgment in the Litton suit reflected the damages the jury found Litton to have suffered as a result of conduct by AT & T that was found to be unlawfully anticompetitive. The payment of these damages does not, in our view, constitute a normal operating expense. 43 27 Petitioners then came to this court. They contend that below-the-line accounting and the accompanying presumption decreed in the Litton Order is arbitrary, capricious and otherwise contrary to law. 44 No complaint is registered with respect to the treatment accorded to the antitrust judgment or interest thereon, and our review is correspondingly limited.