Opinion ID: 565147
Heading Depth: 1
Heading Rank: 3

Heading: the legal question

Text: 34 The Communications Act imposes upon the Commission the duty of regulating the rates chargeable for interstate telecommunications service 67 with a view to ensuring that they are just and reasonable. 68 The Commission fixes the rate of return to which the carrier is entitled, 69 whereupon the carrier sets its charges at levels sufficient to produce projected revenues covering projected operating costs together with the authorized return on capital. 70 35 More than a half-century ago, the Supreme Court admonished regulatory agencies to give heed to all legitimate expenses that will be charges upon income during the term of regulation. 71 We ourselves have observed that [i]f [expenses are] properly incurred, they must be allowed as part of the composition of the rates. Otherwise, the so-called allowance of a return upon the investment, being an amount over and above expenses, would be a farce. 72 The Commission is in accord; it says that [g]enerally, in determining rate of return, public service commissions must consider the sum required by the utility to meet its operating expenses. 73 But, as the Commission has aptly put it, regulatory authorities may disallow expenses actually incurred in the company's operation where the challenged expense is found to be exorbitant, unnecessary, wasteful, extravagant, or incurred in the abuse of discretion or in bad faith, or of a non-recurring nature. 74 36 The Commission has established a uniform system of accounts to which regulated carriers must adhere. 75 Expenses paid by carriers must be categorized and recorded in designated accounts in accordance with the Commission's detailed instructions. When the Litton antitrust suit got underway and for about eight years thereafter, the carriers kept track of their expenditures therefor in above-the-line accounts, 76 expecting that in ratemaking they would be factored into the carriers' operating costs in conformity with the Commission's accounting rules. 77 In 1982, the Commission, after an investigation into the propriety of then-existent practices in this regard, found that the present ratemaking treatment of litigation expenses adequately protects the public interest and that no new policy need be implemented at this time. 78 Concomitantly, the Commission assigned to its Telecommunications Industry Advisory Group, which then was rewriting the Commission's uniform system of accounts for telecommunications companies, the responsibility of determining whether and to what extent any change is necessary in the accounting or reporting of litigation expenses or settlements of antitrust lawsuits in order to facilitate ratemaking scrutiny of such expenses. 79 Yet, only two years later and apparently without awaiting a response from the group, 80 the Commission issued the accounting directive and formulated the presumption that bred the current controversy. 37 Beyond cavil, the Commission's Litton Order erects a formidable though not impregnable barricade to recovery of a carrier's antitrust litigation expenditures in a lost cause. Above-the-line accounting creates a presumption that such expenses will normally be included in the [carrier's] revenue requirement. 81 In contrast, as the Commission itself has noted, its Litton approach in the first instance presumptively remove[s] from the ratemaking process the costs of litigation resulting from a carrier's violation of federal antitrust laws. 82 Moreover, the presumption for ratemaking purposes created by recording costs in a 'below-the-line' account is difficult to rebut; 83 the carrier must make a positive and complete showing convincing the Commission that the costs should be allowed for ratemaking purposes. 84 38 We have not been referred to any authority either mandating or unequivocally authorizing the Commission's singular accounting prescription or presumption. In the Litton Order, the Commission relied upon the Supreme Court's decision in NAACP v. FPC 85 for the proposition that litigation expenses attributable to a carrier's antitrust violation are, without more, excludable from rate computations. 86 On rehearing, the Commission admitted that it had exaggerated the impact of the decision, 87 but insisted that it remains persuasive authority for the power of a regulatory agency to disallow expenses resulting from its regulatees' illegal conduct. 88 We think the Commission has read NAACP too loosely. 39 The question the Court addressed in that case was to what extent, if any, the Federal Power Commission, in the performance of its functions under the Federal Power Act ... and the Natural Gas Act ... has authority to prohibit discriminatory employment practices on the part of its regulatees. 89 One of the contentions was that the Commission is under a duty to promote the public interest, and thus that it is authorized if not required to promulgate rules prohibiting its regulatees from engaging in discriminatory employment practices, since ending discrimination in employment is in the public interest. 90 The Court spurned so broad an argument 91 but it did agree that in view of the commands of both statutes to establish just and reasonable rates, [t]he Commission clearly has the duty to prevent its regulatees from charging rates based upon illegal, duplicative, or unnecessary labor costs. 92 The Court continued: 40 To the extent that such costs are demonstrably the product of a regulatee's discriminatory employment practices, the Commission should disallow them. For example, when a company complies with a backpay award resulting from a finding of employment discrimination in violation of Title VII of the Civil Rights Act of 1964 ..., it pays twice for work that was performed only once. The amount of the backpay award, therefore, can and should be disallowed as an unnecessary cost in a ratemaking proceeding. 41 To the extent that these and other similar costs, such as attorney's fees, can be or have been demonstrably quantified by judicial decree or the final action of an administrative agency charged with consideration of such matters, the Commission clearly should treat these costs as it treats any other illegal, unnecessary, or duplicative costs. 93 42 By our analysis, NAACP v. FPC does not underpin the Commission's unqualified and wide ranging thesis. Illegality of carrier conduct from which an antitrust litigation expense stems does not inexorably compel or warrant either rejection or stigmatization of the expense as a factor in rate calculations. As the Court made explicit, the agency is authorized to consider the consequences of discriminatory employment practices on the part of its regulatees only insofar as such consequences are directly related to the Commission's establishment of just and reasonable rates in the public interest, 94 and we think the Federal Communications Commission is correspondingly limited when it deals with antitrust litigation expenses. Moreover, a pervasive element in ratemaking is reasonableness, which demands inquiry beyond the bare fact of antitrust violation. Of course, our present concern is accounting and presumption, not ratemaking, but the Commission forged the kinship of the three when it leaned on its expected ratemaking treatment of such expenses in its attempt to validate the related accounting and burden-of-proof requirements. 43 Our conclusion is buttressed by two Supreme Court decisions in the closely analogous field of taxation. In Commissioner v. Heininger, 95 a dentist who was unsuccessful in defense of his denture advertisements against a charge of fraud was denied an income tax deduction for his litigation costs on the ground that they were not ordinary and necessary business expenses. The theory was that since dentists do not usually resort to deception in advertising their wares, the expenses, which he would not have incurred but for the fraud, could not be regarded as either ordinary or necessary. 96 The Supreme Court characterized this reasoning as unsound 97 and held that the expenses were deductible: 44 It is plain that [the dentist's] legal expenses were both ordinary and necessary if those words be given their commonly accepted meaning. For [the dentist] to employ a lawyer to defend his business from threatened destruction was normal; it was the response ordinarily to be expected. Since the record contains no suggestion that the defense was in bad faith or that the attorney's fees were unreasonable, the expenses incurred in defending the business can also be assumed appropriate and helpful, and therefore necessary. 45      Upon being served with notice of the proposed fraud order [the dentist] was confronted with a new business problem which involved far more than the right to continue using his old advertisements.... So far as appears from the record [the dentist] did not believe, nor under our system of jurisprudence was he bound to believe, that a fraud order destroying his business was justified by the facts or the law. Therefore he did not voluntarily abandon the business but defended it by all available legal means. To say that this course of conduct and the expenses which it involved were extraordinary or unnecessary would be to ignore the ways of conduct and the forms of speech prevailing in the business world. 98 46 Similarly, in Commissioner v. Tellier, 99 a securities dealer convicted of securities and mail-fraud offenses claimed an income tax deduction for the legal fees incurred in defending himself. Although it was conceded that the fees were ordinary and necessary expenses of the dealer's securities business, the deduction was disallowed on the ground of public policy, and that, the Supreme Court ruled, was error. When Congress has been wholly silent, the Court noted, [o]nly where the allowance of a deduction would 'frustrate sharply defined national or state policies proscribing particular types of conduct' has disallowance been upheld; 100 furthermore, the 'policies frustrated must be national or state policies evidenced by some governmental declaration of them.'  101 That, the Court said, was not the case before it: 47 No public policy is offended when a man faced with serious criminal charges employs a lawyer to help in his defense. That is not proscribed conduct. It is his constitutional right. 102 48 The action of the Commission under scrutiny encounters yet another difficulty. By the Commission's formula, only if the carrier loses in the antitrust suit are the expenses thereof moved below the line, and only then does the presumption against their consideration in ratemaking come into play. Success or failure in the antitrust litigation thus becomes the sole determinant of these consequences, and this success-failure standard has met disfavor in parallel contexts. In Commissioner v. Heininger, 103 the Supreme Court indicated that the dentist's litigation expenses were deductible without regard to the success of the defense, 104 and the Fourth Circuit has reached the same result. In Appalachian Electric Power Co. v. FPC, 105 the utility lost its bid to establish judicially that it needed no license to construct a power plant, and thereafter it was denied recoupment of its litigation expenses. Since the utility was unsuccessful, the agency reasoned, the money it spent did not benefit [or] contribute anything to ... the construction, operation or maintenance of the licensed project.... 106 The court disagreed; in its view, there can be no question but that the proper expenses of the litigation should be treated, not as a general loss chargeable against earned surplus, but as an expense ... necessary to the development of the project. 107 The court explained: 49 The fact that the litigation was not successful is no reason for not capitalizing its necessary cost as a part of the cost to the company of the property involved. The government was asserting rights with respect to the property which, if sustained, would greatly impair its value. The company had the best of reasons for thinking that these rights were not well founded.... In this posture of affairs it was not only wise but necessary that a court decision be obtained to set these questions at rest; and there is no reason why the cost of such proceedings should not be treated as a part of the cost of the property to which they related. It is no answer to say, as does the Commission, that the litigation was for the purpose of avoiding a license and that the only cost allowed by the statute is the cost of a licensed project. The litigation was unquestionably undertaken for the benefit of the project ... and the costs of that litigation were a part of the legitimate costs of bringing that project into being. Any business man would so regard them, any purchaser of the project would so regard them and there is nothing in the [governing legislation] which requires that they be treated in any other manner. 108 50 We thus are not persuaded that the Commission's legal rationale for its broad position finds a safe haven in the caselaw. The Commission makes clear that an adjudicated antitrust violation, standing alone, will invariably trigger its accounting directive and the accompanying presumption, but pertinent decisions convince us that logic and reasonableness require a wider and more discriminating focus. In its order on reconsideration, however, the Commission defended its action on regulatory policy as well as legal precedent. 109 We turn, then, to examine this alternative ground.