TCS Daily

A Tangled Web

By Bruce Fein - March 17, 2003 12:00 AM

The Baby Bell monopolists appear engulfed in antitrust hot water. They misled the Federal Communications Commission over their new fiber investment plans in the event regulatory unbundling obligations were withheld. They got what they wished for, but then reneged on their investment promises. The destruction or exclusion of competition was their predatory purpose. They should have learned from the versification of Sir Walter Scott in Lochinvar: "Oh, what a tangled web we weave, When first we practice to deceive!"

Regulatory agencies like the F.C.C. routinely rely on industry representations in fashioning major policies through rulemakings or otherwise. Regulatory decrees characteristically pivot on guesses as to their influence on industry behavior and prosperity. The system breaks down if industry participants shortchange the truth and deceive regulators about their intentions if a particular rule were adopted. And such deception is compounded when the deceiver is a monopolist and the aim is predatory - to obtain a regulation to be employed to crush competitors.

The new fiber investment deception of the F.C.C. by the Baby Bells fits the antitrust complaint filed by the Federal Trade Commission against Union Oil Company of California (Unocal)(Docket No. 9305, March 4, 2003) like a glove. The California Air Resources Board (CARB) initiated rulemaking proceedings in the late 1980s to fashion "cost-effective" regulations and standards governing the composition of low emissions, reformulated gasoline (RFG). According to the complaint, Unocal actively participated, but deceived the CARB over its intellectual property claims to emissions research results showing the directional relationships between certain gasoline properties ("T50") for the purpose of obtaining RFG regulations that would require competitors to pay handsome patent royalties. Through its knowing and willful misrepresentations and other bad faith deceptive conduct, Unocal created and maintained the materially false impression that it neither possessed nor would enforce any relevant intellectual property rights that could undermine the cost-effectiveness and flexibility of the CARB RFG regulations. But for Unocal's fraud, CARB would not have adopted RFG regulations that substantially overlapped with Unocal's concealed patent claims. Unocal's misrepresentations, on which CARB and other participants in the rulemaking process reasonably and detrimentally relied, have harmed competition and led directly to the acquisition of monopoly power for technology to produce and supply California's summer-time reformulated gasoline.

The new fiber deceit of the monopolist Baby Bells during the F.C.C.'s unbundling rulemaking proceedings is indistinguishable from that of Unocal before the CARB. A material concern to the Commission and other rulemaking participants was whether withholding unbundling rules that would enable competitors to lease fiber network elements would unleash Baby Bell facilities investments. It was a major worry of the Commission that the telecommunications industry, a flagship of the American economy, was flagging. With new fiber, it was hoped, would come new jobs and a marvelous explosion of consumer benefits and business efficiencies.

The Baby Bells preached or insinuated to the Commission, key members of Congress, and the industry generally that new fiber investments would rocket and the public interest touchstone of the law honored with a no-unbundling Commission rule. In reliance on that impression, the Commission's February 20, 2003 order granted the wishes of the Baby Bells. They received complete unregulated control over all new fiber broadband networks. Commissioner Kevin J. Martin made clear that the order pivoted on the Baby Bell created broadband investment expectations: "We have crafted a balanced package of regulations to revitalize the industry by spurring investment in next-generation broadband infrastructure...."

But the Baby Bells instantly renounced the new fiber investment impression generated by their rulemaking assertions and omissions. Outrage predictably ensued, even among warm friends of the Baby Bells. Thus, Chairman Michael K. Powell scolded: "Here is a lot of crying, crybaby reaction to the decision." And Representative John D. Dingell (D-Mich.), one of the phone monopolists' most obedient supporters in Congress, declared: "I expect the Bells to use this newfound regulatory freedom to do what they have promised, which is to invest rapidly and on a significant scale in local broadband networks."

The United States Supreme Court indicated in California Motor Transport Co. v. Trucking Unlimited (1972) and Otter Tail Power Co. v. United States (1973) that deceit or sister reprehensible tactics in quasi-adjudicatory rulemaking proceedings for predatory purposes violate the antitrust laws. That is the understanding of the FTC's Unocal complaint, and draws support from former federal judge and antitrust expert Robert H. Bork. Writing in The Antitrust Paradox, Judge Bork observes: "Predation through the misuse of governmental processes appears to be a common but little-noticed phenomenon...In this area, antitrust can not only perform a valuable service to consumers but, as a byproduct, can also contribute to the integrity and efficiency of administrative and judicial processes."

In sum, the Baby Bell new fiber deception of the F.C.C. is a second edition of the Unocal deception of the CARB. Federal and state antitrust authorities and congressional oversight committees should respond accordingly. Rulemakings before the F.C.C. are too important to telecommunications competition to be twisted by misrepresentations and misimpressions.

Bruce Fein is former general counsel of the F.C.C. and contributing editor to TCS.

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