Front Page:The Last Resort

Posted 07/01/2001

The Last Resort
Competitors Turn To Antitrust Actions Amid Mounting Frustration with '96 Act

By Gail Lawyer

With the carcasses of their comrades littering the path toward a full, open local telecom market, competitive local exchange carriers are getting more serious in their quest to force the Bells to comply with the guidelines of the Telecommunications Act of 1996.

Feeling that FCC enforcement efforts have fallen short and that they're being held hostage by the incumbents' gamesmanship, many CLECs are looking at a more drastic measure--the antitrust suit.

The Competitive Telecommunications Association (www.comptel.org), a Washington, D.C.-based trade association, formed in May an antitrust task force. Its duty is to accumulate evidence of Bell company misdeeds, says H. Russell Frisby Jr., CompTel's president. Several telecommunications law firms are telling their CLEC clients to document everything in anticipation of future litigation.

While a couple antitrust cases have been filed in the past, those were settled out of court and did little to set a precedent that others could follow. However, a handful of serious cases currently are in the courts. They have been filed by Intermedia Communication Inc. (www.intermedia.com), Ntegrity Telecontent Services Inc. (www.ntegrity.com) and Covad Communications Co. (www.covad.com), which has two cases before judges now. Depending on the how they play out this summer and beyond, they could provide the model other competitive service providers need to muster the courage to fight their own court battles. Many suits claiming the same wrongs could be the evidence needed to draw the attention of the U.S. Department of Justice (www.usdoj.gov) to the issues CLECs face in their dealings with the giant telcos.

But antitrust lawsuits are not something a company should enter into on a whim. "Antitrust is an effective weapon in the arsenal, but the legal equivalent to the nuclear bomb," says Andy Lipman, senior partner and vice chairman of Swidler Berlin Shereff Friedman LLP (www. swidlaw.com). "It's used in warfare, but not without a lot of prethought and consideration."

Antitrust cases are costly and time-consuming, which plays to the Bells' favor. Many CLECs are so busy running their businesses that they don't feel the benefits of antitrust actions would outweigh the harm it could do if they were distracted from their day-to-day operations.

Plus, the facts needed to support such a case are difficult to make, says Phil Weiser, an associate professor of law and telecom at the University of Colorado, who, from 1996 to 1998, served as a senior counsel to former DOJ antitrust chief Joel Klein.

"This is a tricky and developing area of the law, when we have an incumbent monopolist in deregulation," Weiser says. "Part of that uncertainty and discomfort accounts for the lack of DOJ action."

Many people secretly question why the industry trade associations have not spearheaded an antitrust attack on the Bells. The answer is simple. "The nature of the beast requires a single plaintiff showing specific damages and harm, particularly in the case of CLECs, because they all have different business plans, technology, approaches and ways they interact with the incumbent," says Lipman. "The logistics of multiple players makes its cost prohibitive, if the courts would even allow it, adding on layers of complexity."

Because the competitive telecom trade associations haven't taken specific actions--beyond CompTel's recently formed task force--that doesn't mean they don't think the industry should move toward an antitrust solution.

"The reason why its coming forward now is that in the past, companies have relied on the hope of FCC implementation," says Frisby. "We're recognizing the limits to that now. And at the same time, the Bells are trying to change the rules by getting the act amended" through the controversial Internet Freedom and Broadband Deployment Act of 2001 (H.R. 1542), which was approved by the U.S. House Energy and Commerce Committee.

The bill would deregulate the Internet and high-speed data services for the Bell telephone companies. That would make it easier for them to offer such services without meeting the competitive checklist in Section 271 of the Telecom Act.

CLECs say that such relief--if it becomes law--would put an even deeper chasm between themselves and the incumbents. They explain the bill would not require the Bells to open up their markets to CLECs before gaining FCC approval to offer in-region long-distance services.

"Ultimately [antitrust] will happen," says Royce Holland, chairman and CEO of Allegiance Telecom Inc. (www.allegiancetele. com). "There's too much of a temptation to do bad on the ILEC's part."

While competitors have built their own networks, many still rely to some extent on the Bells for interconnection and other issues that impact provisioning of CLEC customers.

"If your business plan is particularly dependent on the good behavior of an incumbent, then some sort of antitrust litigation is likely. It's almost unreasonable to expect perfect behavior," says Bob Atkinson, executive director of the Columbia Institute for Tele-Information (CITI) at Columbia University (www.citi.columbia.edu). But, he notes, "competition has taken hold, and despite the doom and gloom, companies with a good business plan and good management will survive."

In fact, CLECs have seen their market share almost double during the past year, according to statistics the FCC (www.fcc.gov) recently released. In 2000, competitors had an 8.5 percent market share, serving 16.5 million lines. Compare that to 1999, when competitors chalked up a 4.4 percent market share with 8.3 million lines served.

Despite the gains reported in the FCC survey, many companies now are scrambling for financing to continue day-to-day operations. The capital crunch is going to make any expensive, time-consuming antitrust actions tougher.

Beyond the antitrust lawsuits cost, there's the existing business relationships that must be considered.

"We've tried to avoid the legal recourse because [the Bells] are our vendors and we don't want every order we send through to have to go through an attorney," says Mike Newkirk, president and CEO of BTI Telecom Inc. (www.btitele.com). "We've been cautious about choosing our battles. It's certainly been a struggle. I affectionately call it a 'hostile vendor relationship.'"

Through the Years

The problems associated with pursuing antitrust actions against the Bells are long-lived.

At Teleport Communications Group "we had an annual antitrust review and came close to filing suits at various times. But we never did, for a variety of reasons," says Atkinson, who, before joining CITI, was the senior vice president of regulatory and external affairs at Teleport, one of the country's first CLECs. "Our suit was judged to be pretty sound, but if you're a young public company, antitrust suits are a sign of a last gasp or failure. It wasn't like we needed an antitrust suit to survive, and we weren't going to file an antitrust suit just for nuisance value. It has serious consequences."

CalTech International Telecom Corp. (www.citc.com) knows how serious the consequences are.

The company was formed in January 1995. It had a business plan to bundle and resell local and long-distance service to customers in California and Illinois. About two-and-a-half years later, the company opted to file an antitrust lawsuit against Pacific Bell (www.pacbell.com). It charged the BOC with violations under Section 2 of the Sherman Antitrust Act. CalTech claimed that it had problems such as customers losing features, dialtone and long-distance service when being cut over from PacBell, says Jeffrey Elkins, CalTech's president and CEO. The company also claimed that sometimes it would take months to migrate a customer from the incumbent to CalTech, and that it was forced to use paper fax for submitting orders, rather than doing so electronically.

In early 1998--less than a year after filing the suit--CalTech stopped providing service, but stayed in existence to see the lawsuit through, says Elkins. The case finally went to trial in November 2000, and after a six-week jury trial, the verdict was 8-0 in favor of CalTech. The judgment has since been vacated, according to Elkins, who is now in the process of shutting the company down.

A few weeks after CalTech initiated its lawsuit in June 1997, Electric Lightwave Inc. (ELI, www.eli.net) followed with its own antitrust action against US West Inc. (now part of Qwest Communications International Inc. (www.qwest.com). ELI alledged the telco was not providing it with adequate interconnection services and facilities.

The lawsuit had a number of unusual twists because part of it dealt with infractions against an early interconnection agreement ELI and US West signed before the FCC came out with its rules on interconnection in 1997. The court bifurcated the case, sending the claims on the initial interconnection agreement to arbitration as the agreement required. The court oversaw the other half of the case. The result: After arbitration, the companies settled out of court, according to Susan McAdams, the former vice president of external affairs at ELI, who is now vice president of external and legal affairs at New Edge Networks (www.newedgenetworks.com).

While CalTech and ELI's antitrust claims dealt more with voice service, Covad has filed suit regarding antitrust violations in the data realm. The company first filed suit against SBC Communications Inc. (www.sbc.com) in 1998, alleging denial of central office facilities, and that the BOC was using its position in the voice market to gain an advantage in the DSL business. Last year, that case was settled out of court before it went to trial for a combination of a business deal and financial package worth three-quarters of a billion dollars. Under the settlement, SBC agreed to purchase a specific amount of Covad services over a given time period or pay a set fee, says Jason Oxman, Covad's senior counsel.

Covad followed with similar suits against Verizon Communications (www.verizon.com) in April 1999 and BellSouth Corp. (www.bellsouth.com) in December 2000. Those suits are currently in the discovery phase, according to Oxman.

Two other antitrust suits are playing out regarding abuse of ILEC power in the local telephone market.

Ntegrity filed its suit in March 2000 in response to a lawsuit Verizon filed against the competitor. In November 1999, Verizon sued Ntegrity for unpaid bills. "We refused to pay because they were grossly inaccurate," says Keith Machen, Ntegrity's vice president and general counsel. "So we counterclaimed and that's where we're alleging all antitrust violations."

"Verizon was trying to put us out of business like they did all the other CLECs," says Machen. The company opened its doors in 1998 with plans to be a reseller of Bell Atlantic (Verizon's predecessor) service in Maryland, New Jersey and Pennsylvania. "We quickly ran into many of the issues that others ran into with resale, and because of a combination of things, we decided to move to a BOC independent business model," adds Machen. Even though the company had acquired "several thousand customers" as a reseller, it evolved into a building-centric strategy.

"They ruined our resale business model. They damaged us and we expect to be compensated," says Machen, who notes the company is seeking between $50 million to $150 million in damages, which would trebled under antitrust rules. "Their conduct is costing consumers in the states we serve billions of dollars in lost potential savings."

The Ntegrity case, which Verizon's request for dismissal was overturned, is now in the discovery phase. The cost and time it could take for settlement doesn't concern Ntegrity. Machen says that Ntegrity has a "creative arrangement with our attorneys that is keeping our out of pocket expenses minimized."

Another case that deals with local telephony is one that Intermedia filed in July 2000 against BellSouth. "Why we took an antitrust position [is because] the problems we were incurring were on a regionwide basis. It was frustrating, especially when multiplied times all the BellSouth states," says Heather Gold, Intermedia's vice president of industry policy.

The case initially was dismissed because of the district court judge's interpretation of the decision in the Goldwasser vs. Ameritech case in the U.S. Court of Appeals for the 7th Circuit. In the Goldwasser case, which was a consumer class action complaint against the telco, the judge ruled that the Telecom Act superceded antitrust laws. The judge in Intermedia's case said that as a result of her reading of the Goldwasser decision, Intermedia's claims were denied.

Intermedia has appealed, with amicus briefs filed in support of the appeal by the FCC and DOJ, which have indicated they believe the Goldwasser decision was applied incorrectly to Intermedia's case. Intermedia expects oral arguments to begin later this year, after both sides file their briefs and replies.

The Goldwasser case has caused so much consternation within the industry that Congress has gotten involved and is trying to clarify the relationship between telecommunications and antitrust laws. Congressmen Chris Cannon (R-Utah) and John Conyers Jr. (D-Mich.) introduced in May the American Broadband Competition Act of 2001 (H.R. 1697). The so-called "Cannon-Conyers bill" clarifies that any violation of the federal telecom law can be considered as a violation of the antitrust laws. The proposed legislation provides that a trial court "may consider any conduct that violates any obligations or requirements imposed by the Communications Act of 1934...in determining whether the defendant has engaged in anticompetitive or exclusionary conduct."

Also, sources say the Cannon-Conyers proposal essentially is in direct contrast to the Tauzin-Dingell bill, because it would apply the antitrust laws to local telephone monopolies and protect broadband services from "continuing monopolization."

Luckily for the CLECs, the new Democratic majority in the Senate bodes well for support of such competitor-friendly legislation. But while there's no consensus, the proposed bill could face a fight between the House Commerce and Judiciary committees. Cannon and Conyers are members of the latter.

Other Options

Since antitrust cases are time-consuming and too costly for most competitive providers to pursue, what other options are there?

Stronger FCC and state regulatory bodies enforcement and the possibility of structural separation of Bell companies into independent wholesale and retail entities are two of the most likely ways to resolve many of the problems CLEC face.

"But we're a long way from having those apply," says John D. Windhausen Jr., president of the Association for Local Telecommunications Services (www.alts.org). "The FCC has a number of tools in its arsenal that it hasn't fully exercised. It's not a matter of issuing isolated fines. The FCC needs to think creatively about how to mandate stronger performance across the board."

In recent months FCC chairman Michael K. Powell has asked Congress to pass legislation that would give the FCC more enforcement authority. Specifically, he has asked that the maximum fine be increased to $10 million from the current $1.2 million.

"Powell's heart is in the right place, but the numbers are still too small," says CompTel's Frisby. "RBOCs have been assessed $500 million in fines (already). He's talking about $10 million fines--that's about 83 minutes of Verizon's annual revenues. Those numbers aren't going to work."

What many CLECs say is the ultimate remedy is structural separation of the Bells' retail and wholesale operations.

"The end game is structural separation, and I believe that eventually the BOCs will do that themselves," says Allegiance's Holland. "BOCs are now in a position that they have to be a growth company. It's hard to shift to be a growth company from an earnings-based company. They could take low tech types of assets and CO structure, and put a lot of debt into that company, with legions of employees. It is analogous to AT&T (Corp. www.att.com) putting their slow growth business into a tracking stock or a spin-off. The surviving company would be deregulated and wouldn't have to meet [Section] 271" requirements for long-distance entry.

That type of separation isn't something the incumbents are anxious to undertake. But several states may push the BOCs into it sooner rather than later. For example, in late March, Pennsylvania regulators ordered a "functional structural separation" of Verizon's operations in that state. While Pennsylvania didn't require true separation of the telco's operations, the company must operate its wholesale and retail division at arm's length. Regulators in the state say there will be a strong code of conduct maintained and increased penalties tied to discriminatory practices by Verizon

"Pennsylvania came close. They had the right policy, but backed off at the last minute," says Windhausen. "A lot of other states are looking, but no one has had the courage" to require full structural separation yet.

In the end, making true competition a reality will take a complex blend of regulatory action--such as structural separation and enforcement--and legal remedies. Antitrust lawsuits may be an important aspect in breaking the Bells' so-called bottleneck in the local exchange, but alone they're not the ultimate solution.

"I don't think antitrust is a silver bullet," says Colorado professor Weiser. "What will make telecom competition work takes many things, and legal and regulatory will be a part of that. It's a mistake to say 'only if' and have hopes pinned on an antitrust case."