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[The information requested above follows:]
COMPUTER & COMMUNICATIONS
Arlington, Va., November 28, 1978. Hon. John BRECKINRIDGE, Chairman, Subcommittee on Antitrust, Consumers and Employment, Committee on
Small Business, House of Representatives, Washington, D.C. DEAR CONGRESSMAN BRECKINRIDGE: During the course of my appearance before your subcommittee on July 20, 1978, you asked that I submit some additional materials for the record. These materials are enclosed as attachments and briefly highlighted in the paragraphs to follow. CORRESPONDENCE WITH THE DEPARTMENT OF JUSTICE RELATIVE TO 1956 CONSENT DECREE,
U.S. v. A.T. & T. In June of 1976, our association wrote the Department of Justice and informed them that the Teletype Corporation, a wholly owned subsidiary of Western Electric, in turn a wholly owned subsidiary of A.T. & T. was selling the electro-mechanical portion of the printer used with the Teletype Dataspeed 40 printer to other manufacturers in violation of the 1956 consent decree. Since the device being sold by Western was (and is) a component subassembly of a tariffed offering, but not in and of itself an operable and therefore tariffable device, we believed it to represent unfair and improper competition. Clearly the device benefited from cross subsidization from Bell Laboratories, Western Electric and A.T. & T. Our letter is attached as Exhibit A.
The Department of Justice's initial response is shown as Exhibit B.
A.T. & T.'s response is shown as Exhibit C. It is of interest to note in paragraph two, A.T. & T.'s contention that they are, in their view, free to manufacture and market outside of the Bell System any equipment “of a type . . . for use in furnishing common carrier communications services”.
At a subsequent meeting on September 3, between ourselves and Mr. John Wilson of the Enforcement Section of the Antitrust Division, we queried Mr. Wilson just how far this exceedingly broad interpretation went. We asked for example, since A.T. & T. uses light bulbs to illuminate the buildings that are used in furnishing common carrier services, were they free to go into the light bulb manufacturing business in direct competition with General Electric and Westinghouse? We were informed that they probably could.
Additional examples included transistors, paper products, and office furniture and each elicited a similar response. Finally we asked, “Well, can they go into the business of manufacturing and selling automobiles and trucks since these are also used in furnishing common carrier communications services?” The response: “Well, we'd probably have to look into that but ..."
Clearly, these interpretations make a mockery of a decree that was entered in lieu of a court ordered divestiture of Western Electric as a means of reducing A.T. & T.'s monopoly power and its misuse of that power.
Mr. Wilson's follow up letter is shown as Exhibit D. Effectively the door was slammed in our face with no further hope of action from the Department of Justice. Since the courts refused standing to non parties seeking interpretation of enforcement of consent decrees entered into by the U.S. Government, we had no route of appeal open to us.
On April 7, 1978, we filed a second complaint with the Department relative to an even more flagrant violation of the 1956 A.T. & T. decree. (Exhibit E.) In this instance, A.T. & T. is actively and aggressively marketing packages of computer programs (software) in direct competition with private sector companies. These software products were developed by Bell Laboratories, which is funded by a tax on revenues imposed on the local telephone operating companies by A.T. & T. and is therefore money out of the residential subscribers' pocket.
The products in question have not been tariffed and because of their very nature are not likely to be tariffed. Consequently, we considered this to be a clear cut case of a flagrant violation of both the letter and intent of the decree and an example of A.T. & T.'s use of its monopoly position in one market to enter other, unrelated markets.
As of November 28, 1978, we were still waiting action on the part of the Justice Department.
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HARASSMENT OF NON PARTIES IN MAJOR ANTITRUST CASES In the U.S. v. IBM case more than 120 Subpoenas Duces Tecum were served by the defendant, IBM, on companies within and without the computer industry. These subpoenas were exceedingly broad in scope, burdensome and costly to comply with.
In the case of witnesses for the government, IBM attorneys showed no mercy. The subpoenas that were issued reached to the confidential product and business plans of the individual witness' employer and thus represented a threat to the very survival of economic viability of his company. Depositions literally went on for days, thus effectively removing one or more key executives from the ongoing day to day management of their companies.
On more than one occassion, industry executives have stated that although they wanted to see justice done in the U.S. v. IBM case, they would do their best to avoid ever becoming involved as a third party in a U.S. antitrust case again--the price was too high.
In our own case, IBM singled out our association as the target for a massive discovery effort. When first served with the Subpoena Duces Tecum, our response was one of good faith. We didn't collect industry statistics, so we did not believe that we had anything of relevance to the defendant but we produced what we, and our counsel, deemed to be responsive to the subpoena. Initially our offices were visited by two attorneys and three paralegals from Brown & Bain of Phoenix, Arizona working for Cravath, Swaine and Moore, IBM's defense counsel. This stage of discovery proceeded smoothly with both parties working and cooperating in good faith. As a result, we did not seek to quash or restrict what, on its surface, was a very broad document demand.
That was our mistake, for soon after the cut-off date for the filing of a motion to quash or restrict, a team of seven attorneys and five paralegals descended on our offices from Cravath, Swaine and Moore. They arrogantly informed us that the subpoena had been written to reach every single item in our or our members' possession including correspondence to and from the press, the Congress, the executive branch and our members.
The unreasonable scope of IBM's "discovery” is borne out by some statistics. IBM copied all or part of 82 percent of the file folders in our offices. Of 19,848 pages of material on our premises, IBM choose to copy 8,763 pages or slightly less than half. During the course of discovery, which lasted a period of more than two months, our four person staff was effectively neutralized and unable to carry out its mission.
Subsequently, we found that many of our friends in the press, in the industry and in the Department of Justice were reluctant to communicate with us for fear that their communications would fall into IBM's hands and lead to reprisals. In retrospect, it would appear that this was IBM's intention all along since they did not issue a similar subpoena to their own trade association (CBEMA) which has been in existence far longer and which has compiled statistics that ostensibly would be of value to a defendant in a major antitrust case.
One of the more glaring examples of witness harassment occurred in the Telex v. IBM case which is documented in the Telex Brief to the court shown as Exhibit F. In this instance, Telex contended that shortly after filing their witness list with the court many of the witnesses who had previously agreed to testify at the trial reneged after being contacted by IBM representatives. In one instance for example, it is known that the prospective witness was visited by an IBM executive and told that they (IBM) would see to it that he would never work in the industry again if he were to testify for Telex. Other instances of contact and pressure on prospective witness' employers are cited in the attached court filing.
For other instances of harassment by A.T. & T. we would refer you to the record of hearings held by Senator Hart on the Industrial Reorganization Act, Parts 5, 6, and 7 on the computer and communications industry.
The bottom line in all of this is that antitrust enforcement is not achieving the objectives of the Sherman Act. Eighty percent of the cases that are brought end up in consent decrees that are seldom enforced or modified to reflect changing conditions and past decree anticompetitive strategies.
Those big cases that do go to trial wind up in a procedural morass and require literally decades to adjudicate. By the time the case is finally resolved, the defendant has used its monopoly power to redefine whole industries in a manner that assures the perpetuation of its monopoly power and market position.
The sad part is that Wall Street has now concluded that "prudent" investments are only those made in dominant or monopoly firms since they are essentially "safe" investments. This drying up of capital for the entrepreneurs, new start ups and smaller companies creates a self fulfilling prophecy. Very sincerely yours,
A. G. W. BIDDLE, President. Attachments.
June 14, 1978.
DEAR MR. MCALEER: It has been brought to our attention that the A.T. & T. subsidiary, Teletype Corporation, is currently offering a data printer on an OEM (original equipment manufacturer) basis in possible violation of the 1956 Consent Decree. This offering, the “teletype Model 40 OEM printer,” is depicted in a recent advertisement set out in an attachment to this letter.
The general thrust of the 1956 Consent Decree against A.T. & T., as we have always understood it, was intended to preclude A.T. & T., Western Electric, and the Western subsidiaries from engaging in the manufacture of products which are unrelated to the provision of communication services. The underlying theory being that the telephone ratepayer should not be made to subsidize non-communications products and services which are available in the competitive markets. In other words, once equipment has been tariffed by A.T. & T. et al., it may be sold on a competitive basis, but equipment which has not received tariff cannot be manufactured or sold competitively.
Looking to the particular wording in paragraph 4 of the Consent Decree it reads in relevant part:
"The defendants are . ... enjoined ... from commencing, and . . . from continuing, directly or indirectly, to manufacture for sale or lease any equipment which is of a type not sold or leased or intended to be sold or leased to companies of the Bell System ... except equipment used in the manufacture or installation of equipment which is of a type sold or leased ..."
The clear meaning of this language indicates, as we have said, that A.T. & T., Western Electric, and the Western subsidiaries in this case Teletype, are expressly prohibited from manufacturing and selling equipment which has not been tariffed. Our concern with the model 40 OEM printer is that it is neither a tariffed offering nor do we believe it is even capable of being tariffed. It stands alone as a "naked” printer, without cover, without necessary interface electronics, and without a finished assembly. Hence, in reality what Teletype is offering here is an integral component, not a useable end product, and thus a nontariffed item prohibited by the terms of the 1956 Consent Decree.
Moreover, Teletype cannot look to the clause in paragraph 4 which excepts equipment used in the manufacture of equipment that is itself tariffable to justify this offering. The language of this exception contemplates that certain economies can be achieved if an A.T. & T. manufacturing subsidiary is permitted to produce its own component parts rather than function solely as the assembler of other manufacturer's components. However, the wording is specific in that it excepts from the paragraph's general prohibitions the manufacture but not the sale of component equipment. As we interpret this sentence, then, it means that though component equipment can be manufactured, it cannot be sold or leased unless it too is tariffable.
Any other interpretation of paragraph 4 would render it meaningless. Should Teletype be allowed to offer component equipment on a competitive basis simply because they are ingredients of a tariffed offering we might soon find Teletype selling a full-range of electronic gear, printing ribbon, spools, pedestals, furniture, cables, plugs, jacks, and virtually any item which Teletype might conceivably build into one of its tariffed products. Clearly, this is not what the framers of the 1956 Consent Decree had in mind.
Therefore, as we believe that this Teletype offering is in violation of the 1956 Consent Decree and on behalf of our member companies against whom the Teletype OEM printer unfairly competes, we request your immediate attention to this serious matter. Sincerely,
TERRY G. MAHN,
U.S. DEPARTMENT OF JUSTICE,
Washington, D.C., August 4, 1976. Re: United States v. Western Electric Company TERRY G. MAHN, Esquire, Computer Industry Association, Rosslyn, Va.
DEAR MR. MAHN: This is in response to your letter dated June 14, but postmarked July 15 and received at the Justice Department July 16, 1976. Your letter raises the question whether Teletype Corporation may offer the Model 10 OEM printer under the provisions of Section IV of the Judgment in the above-captioned action.
We are in the process of obtaining additional information concerning this equipment in order to assist us in formulating an answer. Sincerely yours,
John L. WILSON, Attorney, Antitrust Division.
New York, N. Y., August 19, 1976.
DEAR MR. Wilson: This is in response to your letter of August 5, 1976, in which you ask a number of questions relating to Teletype Corporation's Model 40 OEM printer.
It is clear that Teletype Corporation has the right to offer the Model 40 OEM printer for sale under Section IV of the Final Judgment in the above referenced action, since it is equipment “of a type . . . sold . . . to Companies of the Bell System, for use in furnishing common carrier communications services.”
The printer you refer to is manufactured by Teletype with platens of only two widths—80 column and 132 column-both of which are sold to operating companies of the Bell System and to Western Electric Company at the same price charged for identical printers to non-Bell OEM's, resellers, lessors, common carriers, and the United States and Canadian Governments and their prime and sub-contractors. Most of the Bell sales are to Western Electric Company which resells to the Bell Operating Companies at a price reflecting additional services provided by Western.
The Model 40 printer is a communications facility which is used by operating telephone companies in the provision of interstate communications service, the charges for which are regulated under FCC Tariff Nos. 260 and 267 (using the 80 column platen) pursuant to the Communications Act of 1934 and intrastate communications service, similarly regulated, under various state regulatory commission tariffs (using both platens). If I can be of any further assistance, please do not hesitate to contact me. Very truly yours,
F. MARK GARLINGHOUSE,
U.S. DEPARTMENT OF JUSTICE,
Washington, D.C., September 10, 1976. Re: United States v. Western Electric Company TERRY G. MAHN, Esquire, Computer industry Association, Rosslyn, Va.
DEAR MR. MAHN: This will supplement our letter of August 4, 1976, to you regarding the Teletype Model 40 OEM printer.
At our meeting on September 3 I advised you of the substance of the information we have obtained regarding this unit.
Based on the information presently available, we are satisfied as to the following points:
(1) The Model 40 printer falls within the definition of the word "equipment" contained in Section II (h) of the Judgment.
(2) This printer is sold by Teletype Corporation to “companies of the Bell System" a defined term.
(3) The Bell operating companies use this printer in furnishing "common carrier communications service."
(4) Thus the business of manufacturing and selling this printer is a business of a character or type engaged in for companies of the Bell System within the meaning of Section IV (B) of the Judgment.
Based on the foregoing, we do not plan any further action with respect to your complaint. Sincerely yours,
John L. WILSON, Attorney, Antitrust Division.
Arlington, Va., April 7, 1978.
DEAR MR. SHENEFIELD: I am writing to express the strong concern of the Computer & Communications Industry Association (CCIA) that American Telephone & Telegraph (A.T. & T.) and its subsidiary Western Electric Co. are providing data processing products such as computer software to the private sector, in violation of its 1956 Consent Decree agreement with the Department of Justice. We urge that these offerings be enjoined immediately.
The software products offerings with which we are concerned are described in the marketing material entitled “Software by the Bell System” which is reproduced in Appendix A. Appendix B contains a February 19, 1978 advertisement appearing in Datamation magazine for the same "Bell System Software.” The software products offered in these materials include "system programs” which monitor the overall operation of a computer system, utility programs” which perform general purpose functions such as text-editing and typesetting, and "applications programs' which perform specific engineering and scientific functions. Virtually none of this software is oriented toward using computers directly to provide common carrier communications services; i.e., while such software might be used in an engineering or scientific laboratory context, it is not intended to be used as part of the public common carrier communications network.
The impact of these products on the competitive sector is immediate and substantial. One recent estimate is that 600 copies or licenses for the "UNIX” System alone have been sold for about $25,000 each, or approximately $15 million total. The 1956 Consent Decree provides in pertinent part in Section IV:
(A) (A.T. & T. and Western Electric) are each enjoined from commencing, and . : . from continuing, directly or indirectly, to manufacture for sale or lease any equipment ? which is of a type not sold or leased or intended to be sold or leased to Companies of the Bell System, for use in furnishing common carrier
communications services. Further, Section V provides in part:
A.T. & T. is enjoined and restrained from engaging, either directly or indirectly through its subsidiaries other than Western and Western's subsidiaries, in any business other than the furnishing of common carrier communications
services. In addition to the concerns addressed in this present letter CCIA has earlier made objection to the Justice Department that the offering of a data printer by Teletype Corporation, and A.T. & T. subsidiary, is also a violation of the 1956 Consent Decree. Our letter stating this objection dated June 14, 1976 is contain in Appendix C, along with responses from A.T. & T. and from Mr. John L. Wilson, an attorney with the Judgment Enforcement Section of the Antitrust Division. Our specific concern was and is that the “teletype Model 40 OEM printer"was being offered by Teletype nonregulated firms outside the communications industry and
United States v. Western Electric Co., et al. (Civil Action No. 17-49), CCH 1956 Trade Cas. Para, 68, 246 (D. N.J. 1956). * The term "equipment" is defined in the Decree to include "systems
or any other product."
OEM stands for "original equipment manufacturer,” denoting the fact that the printer was a component intended to be assembled into a finished product by other manufacturers.