In addition to legislation needed to accomplish effective revision of the Department of Justice's consent settlement procedures, the committee recommends that Congress consider an amendment of section 5 of the Clayton Act to give the court, in an antitrust case, discretion as to whether or not the consent decree would be available for use by private litigants to establish a prima facie case in treble damage litigation.

CHAPTER II

A. T. & T. CONSENT DECREE

INTRODUCTION

On January 24, 1956, by consent of the Attorney General, the Federal district court in New Jersey entered a final decree settling the 7-year-old antitrust prosecution which had sought judicial separation of the American Telephone & Telegraph Co. and its wholly owned manufacturing subsidiary, Western Electric Co., Inc. On the one hand the decree has been characterized by top-ranking officials in the Justice Department's Antitrust Division as "one of the most important in antitrust history"; a "major victory" for the Government and "miraculous" from the Government's standpoint. Contrariwise, a widely read business publication has commented that the "antitrust consent decree against American Telephone & Telegraph Co. hailed last week by Government attorneys as a 'major victory' * * * turned out on second look to be hardly more than a slap on the wrist for the biggest corporation in the world." 3

In face of these conflicting claims one thing is certain, namely, the far-reaching importance of the basic issue in the case-monopolization of the manufacture and sale of telephone equipment-to the administration and enforcement of the antitrust laws.

Economic status of A. T. & T.

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Adding to the significance of the case are the nature and volume of the defendants' business. To borrow from largely undisputed allegations of the complaint on this score, since 1900 A. T. & T. has been an operating, holding and service corporation composed of a series of corporate subsidiaries and departments, with the A. T. & T. at the apex of the system, supervising and controlling its entire operations. This complex of corporate subsidiaries and departments is commonly referred to as the "Bell System."

A. T. & T. owns, controls and directly operates, through its longlines department, more than 98 percent of the facilities used in the rendition of long-distance telephone communication service in the United States. Through corporate subsidiaries, corporate stock ownership and contracts, it owns and controls the dominant companies and approximately 85 percent of all the facilities used in the rendition of local telephone communication service in the United States. Fur

1 United States v. Western Electric Company, Incorporated and American Telephone & Telegraph Company, Civil Action No. 17-49 (D. Ct. N. J.). The complaint is reprinted in part II (American Telephone & Telegraph Co.) hearings before the Antitrust Subcommittee of the House Committee on the Judiciary on the Consent Decree Program of the Department of Justice (85th Cong., 2d sess.), p. 1719 (cited hereinafter in this chapter as "hearings.")

2 New York Times, January 25, 1956.

Business Week, February 4, 1956, p. 26.

Complaint, pars. 41-47; hearings, pp. 1731–1735.

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ther, A. T. & T. conducts research work; makes manufacturing and engineering surveys in telephone, general communication and various noncommunication fields; owns and controls a predominant number of patents relating to telephone, telephone equipment, and communication operations; owns more than 99 percent of the stock of Western Electric, a corporation which has an overwhelming percentage of the manufacture and sale of telephones, telephone equipment, and apparatus in the United States; and owns in equal shares with Western, the entire stock of Bell Telephone Laboratories, Inc., a corporation engaged in research work and experimental functions for the Bell System. A. T. & T. directly and through its corporate operating subsidiaries, controls telephone plant valued, as of December 31, 1957, at more than $19 billion, utilizing over 52 million telephones. A. T. & T. and its telephone operating subsidiaries have total annual operating revenues in excess of $6 billion.

The Bell System owns and operates substantially all of the wire facilities used in the transmission of programs for radio and television broadcasting and all transoceanic two-way radio-telephone service in the United States. It also supplies facilities for a large part of press news and telephotograph service, and operates a nationwide teletypewriter exchange service. Approximately 85 percent of all facilities used in the rendition of local telephone service in the United States, including all such service in the large cities, are owned and operated by 22 subsidiaries of A. T. & T., all but four of which are wholly owned by A. T. & T.

Western Electric has been the manufacturing branch of the Bell System since 1882 and is also the purchasing and supply branch of the system. It is engaged directly in the manufacture, sale, and distribution of over 90 percent of all telephones, telephone apparatus, and equipment manufactured and sold in the United States. Of the remaining 10 percent manufactured by others, a substantial part is produced under contract with Western, in accordance with Western's specifications and prices, for Bell System use. Virtually all of the Bell System requirements for telephones, telephone apparatus, equipment, materials, and supplies are purchased by the operating companies from Western. The only notable exception is building materials. In addition, Western has manufactured and sold, either directly or through corporate subsidiaries, various types of nontelephone apparatus, such as teletype machines, sound motion-picture recording and reproducing equipment, teletypewriters, submarine telephone and telegraph cable and public address equipment. Together with A. T. & T., Western owns and controls a predominant number of patents in the manufacturing fields in which it operates.

In fields other than telephony, A. T. & T. and Western have dominated and controlled the furnishing of wire circuits and other facilities on which network radio and television broadcasting is dependent; the manufacture and licensing of submarine telephone and telegraph cables, and terminal apparatus used in connection therewith; and the development of multiple frequency broad-band cable, including the coaxial type which serves to give the Bell System a dominant position in news, photo and television transmission involving the use of wire facilities.

As of December 31, 1957, Western Electric had assets totaling roximately $1 billion, its gross income for that year totaling roximately $212 billion.

In terms of value of assets, A. T. & T. is by far the largest private corporation in the world. Its $16 billion of total resources as of the end of 1957 were more than twice those of the next ranking concern and more than eight times those of the country's second largest utility. Western Electric is the Nation's 19th largest industrial corporation measured by value of assets and the 11th largest, measured by volume of sales.R

The complaint; essential allegations

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The complaint filed by the then Attorney General Tom C. Clark on January 14, 1949, was based largely on the findings of a 669 page Report of the Federal Communications Commission on its Investigation of the Telephone Industry in the United States a 4-year investigation authorized by the Congress for which a total of $1,500,000 was appropriated, supplemented by additional investigation, including numerous conferences between various members of the staff of the Federal Communications Commission 10 and members of the Antitrust Division staff.

Fundamentally, the complaint charged that A. T. & T. and its subsidiary, Western Electric had been engaged in a continuing conspiracy to restrain and to monopolize and were monopolizing the manufacture, distribution and sale of telephones, telephone apparatus and equipment, in violation of sections 1 and 2 of the Sherman Act.

The complaint alleged that A. T. & T.'s and Western's control of the market for telephones and equipment permitted them to control both plant investments and operating expenses on the basis of which regulatory agencies fix rates, and that the absence of effective competition in the manufacture of telephones and telephone equipment had resulted in higher prices paid for such equipment by the Bell System and tended to defeat effective public regulation by Federal and State regulatory bodies of rates charged subscribers for telephone service.

The complaint accused A. T. & T. and the Bell operating companies of refusing to purchase from manufacturers other than Western Electric, even though equipment manufactured by such other companies might be superior in operating economy, service, and initial cost. It alleged further that the situation created by the closed market in which the Bell System operating companies bought, as well as the closed market in which Western Electric sold telephone equipment, had been used by A. T. & T. to delay the introduction into the Bell System as standard equipment of improvements in the art of telephony in order that maximum returns might be secured from existing equipment even though less expensive and more efficient equipment was available.

According to the complaint, the alleged conspiracy between A. T. & T. and Western consisted of a continuing agreement and concert of action, the substantial terms of which were:

First, that A. T. & T. and Western agreed to acquire control of the market in the United States for substantially all telephones, telephone

See the Fortune Directory, Supplement to Fortune, July 1957, p. 28.

See the Fortune Directory, Fortune, July 1958, p. 132.

H. Doc. 340, 76th Cong., 1st sess., 1939 (hereinafter referred to as "FCC Report"), Public Res. 8, 74th Cong.

apparatus, and equipment through allegedly predatory patent policies; acquisitions of independent telephone companies; and agreements with telegraph companies that they would not engage in telephone service;

Second, that A. T. & T. and Western agreed to eliminate all substantial competition in the manufacture and sale of telephone equipment required by the Bell operating companies and the long-lines department of A. T. & T. (1) by giving Western Electric the exclusive right to manufacture and sell telephone equipment to the Bell operating companies and to A. T. & T.'s long-lines department; (2) by requiring the Bell operating companies and American Telephone & Telegraph long-lines department to purchase and acquire equipment exclusively from Western Electric; (3) by standardizing equipment used in the Bell System in such manner as to prevent its purchase from any company except Western; (4) by vesting in A. T. & T. power to control operations of all branches of the Bell System so that they are unable to make independent decisions on procurement;

Third, that A. T. & T. and Western agreed to acquire independent, competing telephone manufacturers;

Fourth, that A. T. & T. and Western agreed to eliminate competition of foreign telephone manufacturers by arranging with them that Western Electric would be their exclusive agent in the United States;

Fifth, that A. T. & T. and Western agreed to suppress competition in alternative methods of communications by patent control in mediums not related to wire telephony; by restrictive cross-licensing patent arrangements; and by dividing fields of manufacture and sale with concerns in the telecommunications and nontelecommunications fields; Sixth, that A. T. & T. and Western agreed to exercise the power resulting from their unified control of research and development and the manufacture and operations of telephone equipment so as to produce monopoly profits for A. T. & T. (1) by securing from Western noncompetitive prices for telephone equipment sold by Western to the Bell operating companies and to the long-lines department of A. T. & T., and by using such noncompetitive prices as the basis for determining investment in telephone plant upon which subscribers' rates are based; (2) by continuing the manufacture by Western and the sale by Western to the Bell operating companies and to the longlines department of A. T. & T. of various types of telephone equipment, knowing that the cost of such equipment was higher than that of available, alternative types manufactured by Western Electric's competitors; (3) by suppressing improvements and developments in the art of telephony and improved types of telephones, telephone apparatus, and equipment; (4) by refusing to purchase from manufacturers other than Western and by refusing to introduce into the Bell plant equipment produced by competing manufacturers even though the defendants knew that such equipment was superior in service, operating economy, and initial cost;

Seventh, that A. T. & T. and Western agreed to discriminate in price between different purchasers and substantially to lessen competition in the manufacture and sale of telephone equipment (1) by selling to companies not within the Bell System at prices higher than those harged the Bell operating companies; (2) by allowing Western to

facture for sale outside the Bell System without charge for