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Jeff Elkins calls it his “smoking gun.” Legally, he's not allowed to talk about it in detail. All he can say is that his lawyers found it buried in a cramped 5-by-10-foot room in a Pacific Bell facility with no windows and no ventilation.
It was the spring of 2000, near the deadline for gathering evidence in the antitrust suit Elkins had filed against Pacific Bell on behalf of his company, DSL provider CalTech International. CalTech's lawyers dug through 32 dusty boxes full of Pac Bell company records that day. What they eventually found, stuck between two sheets in those towers of paper, was a document so incriminating it ultimately won the case for CalTech.
According to Elkins, CalTech's president and CEO, the papers proved that the sloth and error with which Pac Bell served its competitors was not only intentional, but directed by upper management. Pac Bell eventually settled the case for an undisclosed sum, presumably to avoid setting any legal precedent that other CLECs could use. But ironically, the settlement itself became a kind of precedent for disgruntled CLECs with their own interconnection complaints — each hoping to discover their own smoking guns and cash in on the combative relationships between start-ups and incumbents.
Since the CalTech case began, eight companies have filed 10 antitrust suits against RBOCs, claiming that Bell misconduct — billing errors, provisioning delays and unfair marketing tactics — constituted an unlawful effort to harm competition. Of those 10, four were dismissed at the district level and are pending in various stages of appeal. Two are still languishing in district court pending decisions on Bell motions to dismiss. Four won settlements; the most recent, by Georgia-based CLEC NOW Communications, occurred in May.
No matter how the remaining cases fare, though, there are likely to be more. Antitrust suits carry with them the possibility of trebled (or tripled) damages, making them a tempting gambit for struggling CLECs. And because RBOCs have been known to pay off plaintiffs before a final judgment to avoid setting legal precedent, a growing number of CLEC lawyers are brushing up on antitrust law and considering action.
In January, Pulver.com — a voice-over-IP start-up that also makes money by hosting conferences — began holding monthly teleconferences to rally and coach those waging antitrust suits as well as those considering one. In four months, the number of participants grew from 20 to 50.
“We don't have a pending antitrust case — yet,” Tom Cosky, vice president of regulatory affairs at Z-Tel Communications, said in a Pulver teleconference in late April. Likewise, Chris Savage, attorney for Cole, Raywid & Braverman (which represents a variety of CLECs such as Global NAPs and Centennial Communications) added that none of his clients has an active antitrust case now — “but stay tuned.”
“It's definitely an option we're considering,” said Royce Holland, CEO of Tier 1 CLEC Allegiance Telecom. “It's not imminent, but it's getting riper by the day.”
CLECs have no shortage of grievances about RBOC relations, but few have cash to burn for a protracted legal battle. Most of them are staying on the sidelines for now, learning vicariously from the current pack of plaintiffs.
However, in one of its three cases, troubled DSL dealer Covad Communications was able to turn its antitrust suit into a ticket out of bankruptcy, further tempting would-be litigants. “[Covad is] thrilled about their return on investment,” said Dan Berninger, managing director of Pulver.com.
SBC settled its antitrust suit with Covad in September 2000 by offering, among other things, a $150 million equity investment and a sales contract worth $600 million over six years. Looking for a quicker way out of bankruptcy, Covad renegotiated the deal a year later, trading the previous offer for a package that included an upfront payment of $75 million and a $50 million loan. In addition, SBC forgave $15 million Covad owed the RBOC for co-marketing efforts.
Over the long term, the latter package isn't worth as much as the original settlement, but Covad's new deal allowed it to emerge from bankruptcy a month later. And, Berninger said, it showed other CLECs a way to escape long-term debt.
“I fully expect all of them to come out with the ‘Covad model,’” said Berninger. “Aggressive antitrust litigation is the way to get paid, to get out of bankruptcy.”
Still, antitrust claims aren't easy money by any stretch of the imagination. They're tough to argue and they take forever, and the Bells are no pushovers in court. Cavalier Telephone, for example, is fighting its case against Verizon using three in-house lawyers; Verizon met them with 11 lawyers, including representatives from four outside firms. Ntegrity's lawyer, Diane Parker, has been waging her client's own suit against Verizon since March 2000 on a contingency basis, only getting paid if she wins. Ntegrity went out of business almost a year ago.
“So far, the antitrust cases have not been a good way [for CLECs] to get money,” said John Thorne, who represents Verizon in both antitrust cases. “Look at the track record. The district courts have mostly dismissed these cases.” Four of the six active cases were dismissed at the district level on the grounds of an appellate-level decision made in July 2000 in a consumer antitrust suit known as Goldwasser v. Ameritech. The other two will likely go the same way.
Richard Goldwasser was a Chicago Ameritech customer who filed an antitrust claim against the company in 1997 on the basis that its anti-competitive behavior — dragging its feet on loop-provisioning, mishandling billing, etc. — excluded CLECs from competing, denying Goldwasser the benefits of a competitive market. District and appellate courts agreed that Goldwasser had no antitrust case, determining that the rules Ameritech was breaking were all duties imposed by the Telecom Act of 1996, and that consequently, Ameritech was only guilty of violating the Telecom Act, not the Sherman Act (the principal antitrust law).
Essentially, Ameritech wasn't harming its competition; it just wasn't helping as much as it should, and antitrust law doesn't generally require companies to aid their competitors. Therefore, the court said, this matter was best addressed by regulators, not robes.
This precedent makes it virtually impossible to litigate RBOC-CLEC conflicts as antitrust cases. As one participant of Pulver's April teleconference put it, “If Goldwasser is the law, we are majorly screwed.”
Not surprisingly, plaintiffs now spend much of their time trying to find a way around Goldwasser. It isn't easy. For one, they need to couch their grievances outside the context of the Telecom Act, and there are very few examples of companies being required to help their competitors.
Most plaintiffs have cited a controversial 1985 case called Aspen Skiing Co. v. Aspen Highlands Skiing Corp., in which four neighboring ski resorts sold passes to customers that gave them access to all four competing hills. When the three largest hills decided to exclude the smallest from the joint-pass promotion, the Supreme Court said their “refusal to deal” with their competitor was anti-competitive because their only purpose was to sink that competitor.
Another rare example of such obligation is the seminal MCI v. AT&T, in which the court ruled in 1983 that AT&T was anti-competitive for not letting MCI use the “essential facilities” it needed to compete — namely, AT&T's local network. That case, of course, ultimately resulted in the 1984 breakup of AT&T and the creation of today's RBOCs.
Plaintiffs in today's antitrust cases have cited both the Aspen Ski case and the MCI case in their complaints, arguing that RBOCs not only own the “essential facilities” they need to compete, but that RBOCs' misdeeds in serving CLECs amount to a “refusal to deal.” Plaintiffs tried convincing judges that the FCC and the Department of Justice agree with them by submitting amicus curiae briefs (basically written testimony) from both agencies that underscore the “antitrust savings clause” in the Telecom Act, which says the Act does not “modify, impair or supersede” existing antitrust law. The clause shouldn't be interpreted as granting RBOCs immunity from antitrust law, say the DOJ and FCC. But RBOC lawyers claim they're not seeking antitrust immunity, which brings the polemic back to square one.
CLECs have also claimed “legislative history” supports them in an amendment to the Internet Freedom and Broadband Deployment Act (a.k.a. Tauzin-Dingell) that says Goldwasser has been misapplied. But because Tauzin-Dingell is not law — it was passed by the House but is expected to die in the Senate — it's a stretch, if not a pun, to call it “legislative history.”
Still, lawyers on both sides agree that the odds of a case beating the Goldwasser argument rest largely on the leanings of each particular judge. Some plaintiffs have already gotten past Goldwasser, even if only temporarily. Ntegrity beat a Verizon motion to dismiss based on Goldwasser in November 2000, but when the judge who denied the motion fell ill, the case was handed over to another judge who reheard the motion. That judge is still deciding whether to dismiss the case. So far, Goldwasser is the only case to reach a decision at the appellate level. It will surprise no one if the two district courts still considering this issue uphold the higher court's ruling; district courts usually do. But appeals courts routinely contradict their peers, making the four appeals courts that currently have Bell antitrust cases pending more likely to make up their own minds about the Goldwasser argument. Even RBOC counsels admit there's a chance at least one of the circuit courts will reverse Goldwasser. From there the case would likely be appealed to the Supreme Court — all of which would take a really, really long time.
“The Supreme Court tends to take about one antitrust case per year,” said Verizon's Thorne.
But to most plaintiffs, a payoff would be preferable to a Supreme Court fight, and their best chance at a settlement depends on the evidence-gathering “discovery” phase of a trial at any judicial level. In the discovery phase, they can vet Bell employees, root through countless e-mails and search dark, dusty rooms for the ultimate prize: proof of predatory intent. If these plaintiffs can show, as CalTech did, that the harm Bells caused them was intentional, they stand a good chance of getting paid handsomely for it.
“[Pac Bell] knew they were going to lose a lot of money to competition — billions. And the only way to survive that was to slow it down,” said CalTech's Elkins. The smoking gun document “came from the most senior levels of the corporation. It took midway through the trial before anyone conceded that this group even existed.”
Some CLECs are so eager to get inside the dark rooms of discovery that they've suggested using a back door to get there. “We need to turn these guys into the tobacco companies,” said another participant in Pulver's April teleconference. “Tobacco wasn't a drug until we knew the facts, and then you saw how quickly the law changed. That's our best tactic for getting around Goldwasser. Utilize state proceedings and other types of litigation that aren't necessarily antitrust cases to bring facts, get discovery and amend your complaint…add an antitrust claim.”
If anyone has lasting success in beating a path past Goldwasser, Berninger expects a stampede of new plaintiffs to follow it with their own antitrust suits. “The people that will drive this process will be, essentially, ambulance chasers,” he said. “The same people that drive malpractice and asbestos suits. Attorneys that are very wealthy and see a gold mine here.”
In addition to CLECs, Berninger imagines consumers and limited partners of venture capital funds that invested in CLECs will stake their own claims. “Anyone who receives a phone bill is an injured party because they're paying prices that are higher than they would be if this was a competitive market.”
But even some of Berninger's own comrades in arms admit he's being overly quixotic. “I don't think there's going to be a ton of CLEC antitrust suits out even if Goldwasser dies a bloody and final death,” said Cavalier General Counsel Steve Perkins.
As for investors and consumers, it's much harder for them to prove they have a right to remuneration, or what lawyers call “standing,” in these matters. A New York district court in April dismissed a class action antitrust suit filed on behalf of consumers by the law offices of Curtis V. Trinko. (The appeal is now pending in the 2nd Circuit.) Meanwhile, RBOCs' perennial legal adversaries MCI and AT&T have kept their distance in this fight, though AT&T counsel Larry Lafaro told the April Pulver conference the company was “interested in eliminating Goldwasser to the extent we can.”
But while plaintiffs huddle together month after month to rethink their strategies, the defendants in these antitrust cases don't seem particularly nervous about the future. In response to Berninger's vision of a flood of new litigants, a polite Thorne said only, “Sounds like an optimist.”
CalTech vs. Pacific Bell
Settled in December 2000 for an undisclosed amount
Covad vs. SBC
Settled in September 2000: $150 million in equity investment + $600 million in sales over 6 years (later renegotiated)
Intermedia vs. BellSouth
Settled in 2001 for an undisclosed amount
NOW Communications vs. BellSouth
Settled in May for an undisclosed amount
Electric Lightwave vs. U S West
Settled in June 1999 for an undisclosed amount
CASES STILL PENDING
Cavalier Telephone vs. Verizon
Dismissed by Virginia district court in March; appeal pending in 4th Circuit
Covad vs. BellSouth
Appeal pending in 11th Circuit in Atlanta
Covad vs. Verizon
Dismissed by D.C. district court in May; Appeal pending
CoreComm vs. Ameritech/SBC
SBC motion to dismiss pending in Ohio district court
Curtis V. Trinko Law Offices vs. Verizon
Dismissed by N.Y. district court; Appeal pending in 2nd Circuit
Ntegrity vs. Verizon
Waiting for N.J. district court decision on Verizon motion to dismiss
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© 2008 Penton Media Inc.