[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 SAVING THE SAVINGS CLAUSE: CONGRESSIONAL INTENT, THE TRINKO CASE, AND 
THE ROLE OF THE ANTITRUST LAWS IN PROMOTING COMPETITION IN THE TELECOM 
                                 SECTOR

=======================================================================

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 19, 2003

                               __________

                             Serial No. 62

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary


                                 ______

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                            WASHINGTON : 2003
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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama              MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel


                            C O N T E N T S

                              ----------                              

                           NOVEMBER 19, 2003

                           OPENING STATEMENT

                                                                   Page
The Honorable F. James Sensenbrenner, Jr., a Representative in 
  Congress From the State of Wisconsin, and Chairman, Committee 
  on the Judiciary...............................................     1
The Honorable John Conyers, Jr., a Representative in Congress 
  From the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     3

                               WITNESSES

Honorable R. Hewitt Pate, Assistant Attorney General, Antitrust 
  Division, United States Department of Justice
  Oral Testimony.................................................     4
  Prepared Statement.............................................     6
Mr. Alfred C. Pfeiffer, Jr., Partner, Bingham McCutchen LLP, on 
  behalf of the Association for Local Telecommunications Services 
  and the CompTel/ASCENT Alliance
  Oral Testimony.................................................     8
  Prepared Statement.............................................    10
Mr. John Thorne, Senior Vice President and Deputy General 
  Counsel, Verizon Communications Inc.
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
Mr. Christopher J. Wright, former General Counsel, Federal 
  Communications Commission, Partner, Harris, Wiltshire & Grannis 
  LLP
  Oral Testimony.................................................    26
  Prepared Statement.............................................    27

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Linda T. Sanchez, a 
  Representative in Congress From the State of California........    59
Post-hearing responses from the Honorable R. Hewitt Pate.........    61
Post-hearing responses from Mr. Alfred C. Pfeiffer...............    69
Post-hearing responses from Mr. John Thorne......................    85
Post-hearing responses from Mr. Christopher J. Wright............    91

 
 SAVING THE SAVINGS CLAUSE: CONGRESSIONAL INTENT, THE TRINKO CASE, AND 
THE ROLE OF THE ANTITRUST LAWS IN PROMOTING COMPETITION IN THE TELECOM 
                                 SECTOR

                              ----------                              


                      WEDNESDAY, NOVEMBER 19, 2003

                  House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10 a.m., in Room 
2141, Rayburn House Office Building, Hon. F. James 
Sensenbrenner, Jr. (Chairman of the Committee) presiding.
    Chairman Sensenbrenner. The Committee will be in order. The 
Committee on the Judiciary has exclusive jurisdiction over all 
Federal antitrust laws and exercises oversight of the Federal 
agencies charged with their implementation. As Chairman of this 
Committee, I have made it a priority to rigorously assess the 
implementation of the antitrust laws. I have also sought to 
ensure that the lawmaking authority of the Congress and its 
exclusive legislative prerogatives are accorded the executive 
and judicial deference the Constitution commands.
    The elimination of AT&T's telephone monopoly is widely 
regarded as a landmark procompetitive achievement inextricably 
rooted in the antitrust laws. While the former Bell monopoly 
had operated for decades in the comprehensive State and Federal 
regulatory scheme, the Government relied on the antitrust laws 
to provide the procompetitive remedy that regulation could not 
and cannot provide alone.
    However, only two decades later the continued application 
of the antitrust laws in the telecommunications sector is under 
legal assault. The purpose of today's hearing is to examine how 
we have gotten to this point and how Congress can emphasize its 
clear intent in this important debate. While the 1982 consent 
decree produced almost immediate competitive gains in the long 
distance telephone market, local telephone service was still 
the exclusive province of the regional Bell companies who 
inherited much of the local infrastructure of the former AT&T 
monopoly. As a result, this Committee and Congress as a whole 
continued to spearhead efforts to ensure that the antitrust 
laws serve as an effective procompetitive tool.
    The Telecommunications Act of 1996 represented the most 
decisive expansion of congressional resolve to bring 
competition to the telecom industry. The findings section of 
the 1996 act states that its purpose is, ``To promote 
competition and reduce regulation in order to secure lower 
prices and higher quality service for American 
telecommunications consumers by opening all telecommunications 
markets to competition.''
    In the 1996 act Congress enacted an explicit antitrust 
saving clause in the legislation. In plain language, it 
provides clear and unmistakable congressional guidance to both 
regulators and judges. The antitrust savings clause contained 
in section 601(c)(1) of the 1996 act provides that, ``Nothing 
in this act or the amendments made by this act shall be 
construed to impair, modify or supersede the applicability of 
any of the antitrust laws. The clarity of this saving clause 
leaves very little to the imagination of a regulator or a 
judge. However, the imaginations of regulators and judges can 
sometimes be more active than we can predict, and in some cases 
their apparent misunderstanding of the will of Congress is 
disappointing and difficult to comprehend.
    This saving clause was by no means the only significant 
antitrust provision contained in the 1996 act. To promote 
competition, section 271 requires DOJ to examine competitive 
conditions and local markets before the FCC approves the Bells' 
applications to provide long distance service. This elevated 
the Justice Department's role, reaffirming the centrality of 
antitrust laws and the act's effective operation. The antitrust 
laws provide relief to competitors when a monopoly maintains 
its position by inflicting significant injury on a competitor. 
When anticompetitive injury results from violations of the 
Telecom Act of 1996, the antitrust laws may also come into 
play.
    Congress emphatically did not intend to create a safe 
harbor in which monopolists could violate the antitrust laws 
with impunity. Rather, the antitrust laws in the 1996 act are 
mutually reinforcing and remedial systems. Violations of the 
1996 act may or may not establish an actionable antitrust 
claim, but the plain language and logical framework of the act 
preserve an antitrust remedy for sustained anticompetitive 
conduct.
    Nonetheless, a record of considerable judicial confusion 
has developed over the last few years. In the Goldwasser 
decision of 2000, the Seventh Circuit Court of Appeals 
dismissed an antitrust claim against Ameritech and held that 
the 1996 act must take precedence over general antitrust laws. 
Last year, in the case of Law offices of Curtis Trinko v. 
Verizon the Second Circuit sharply departed from the reasoning 
contained in Goldwasser and recognized that a violation of the 
1996 act may also violate the antitrust laws.
    On March 3 of this year the Supreme Court took the case and 
oral arguments were heard last month. There is much at stake in 
this case. If Trinko is overturned, the historic role of the 
antitrust laws in promoting competition in the telecom sector 
and the clear intent of Congress will be judicially subverted. 
If this occurs, a swift and decisive legislative correction 
will be necessary and, rest assured, will be forthcoming. 
Everyone can rest assured that the antitrust laws will continue 
to apply to this industry.
    I am also concerned about the standard for a section 2 
violation that DOJ has proposed in the Trinko case and we will 
examine that issue today as well.
    With that, I recognize the Ranking Member for his remarks.
    Mr. Conyers. Thank you, Mr. Chairman, and I join in 
welcoming the witnesses. In the 1996 Telecom Act this Committee 
and Congress was quite specific in its intentions with regard 
to the savings provision that the Chairman referred to, and 
here is what we said. ``Nothing in this act or amendments made 
by this act shall be construed to modify, impair or supersede 
the applicability of any of the antitrust laws to the 
telecommunications industry.'' That means no matter what else 
we were doing in the Telecommunications Act that year, we were 
not changing a period, a comma, or a word of antitrust law.
    Now, Mr. Deputy Attorney General, how could we have drafted 
that any more clearly? What would you have us write in the 
English language that would make it clear that antitrust is not 
being modified at all? And yet, the Department's position in 
case after case before Trinko, their position was exactly the 
opposite. In Intermedia and BellSouth, the Department of 
Justice expressly supported a finding that Intermedia had 
stated an antitrust claim alleging violations of the Telecom 
Act. In Covad and BellSouth, DOJ said in no uncertain terms 
that violations of the Telecom Act do constitute antitrust 
violations.
    This is the Department of Justice position repeatedly. And 
now, the Department comes before the Committee without even an 
explanation as to why it has changed its position. It is like 
there is no precedent, there is no reason for us to worry about 
why you had the exact opposite point of view in other cases.
    The Department of Justice ignores the history of antitrust 
and telecommunications, because there are hardly any persons in 
this hearing room that are not aware that FCC has no record 
worth talking about when it comes to antitrust. They just don't 
do it. Some people don't do windows. FCC doesn't do antitrust. 
You know that. And that is why it was that DOJ brought all the 
major cases, antitrust cases, busting up AT&T in 1954 and in 
1974. As a matter of fact, it was the Department using 
antitrust that broke up AT&T in the first place.
    Now, I and Hyde and Sensenbrenner and our staffs spent lots 
of time in 1996 in an effort to not only preserve antitrust 
laws in the Telecom Act, but to carve out a clear role for the 
Department in approving Bell entry into long distance. We 
worked hand in glove with the Department on these efforts, and 
that is why I feel disappointed today at the Department 
position, and I hope that we can bring this into alignment.
    Now, maybe we can pull this thing out before we have to 
legislate. I am told that Trinko might be determined by the 
Supreme Court without reaching the antitrust savings clause 
issue. And as a result, this Department and our new antitrust 
chief will have another opportunity to revisit this issue.
    Now, here is the crossroads we are at. 1996, historic, but 
now we are at a crossroads where we are either going to go back 
to the bad old days of monopolies or we are going to move 
forward to real competition that has to include meaningful 
antitrust oversight, and so I hope that these hearings today 
will help us reach that objective.
    Chairman Sensenbrenner. Thank you. Without objection, all 
Members may include opening statements in the record at this 
point.
    Our first witness is the Honorable R. Hewitt Pate, who 
served as Assistant Attorney General for the Antitrust Division 
in the Department of Justice since June 16 of this year. 
General Pate is a graduate of the University of North Carolina 
and the University of Virginia Law School, where he graduated 
first in his class.
    Our second witness is Alfred C. Pfeiffer, Jr. Mr. Pfeiffer 
is a partner in Bingham McCutchen's litigation group and 
cochairs the firm's antitrust and trade regulation group. He 
appears today on behalf of the Association of Local 
Telecommunications Services and the Competitive 
Telecommunications Association. Mr. Pfeiffer specializes in the 
application of the antitrust laws in the technology sector and 
is a graduate of St. Joseph's College and Yale Law School.
    The third witness is John Thorne. Mr. Thorne is Executive 
Vice President and Deputy General Counsel at Verizon. Prior to 
joining Verizon, Mr. Thorne worked at the Ameritech 
Corporation. Mr. Thorne is also a lecturer in 
telecommunications law at Columbia University and graduated 
from Kenyon College and the Northwestern University School of 
Law. He is the counsel of record in the Trinko case.
    The final witness is Christopher Wright, a partner in the 
Washington, D.C. Law firm of Harris Wiltshire and Grannis. Mr. 
Wright previously served as Deputy and then General Counsel of 
the Federal Communications Commission and as an assistant to 
the Solicitor General. He has argued 27 cases before the 
Supreme Court and is a graduate of Harvard College and Stanford 
Law School.
    Would each of the witnesses please rise and raise your 
right hand and take the oath? [Witnesses sworn.]
    Let the record show that each of the witnesses answered in 
the affirmative. Without objection, the written statement of 
each of the witnesses will be included in the record as a part 
of their testimony. We would like to ask the witnesses to 
confine their remarks to 5 minutes and then we will utilize the 
5-minute rule when opening the witness panel up to questions.
    Mr. Pate.

 TESTIMONY OF THE HONORABLE R. HEWITT PATE, ASSISTANT ATTORNEY 
   GENERAL, ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF 
                            JUSTICE

    Mr. Pate. Thank you very much, Mr. Chairman. I appreciate 
this opportunity to be here with you today to talk about Trinko 
and other issues that relate to the important historic role 
this Committee has played in making sure that antitrust 
enforcement contributes to a competitive telecom industry. I 
completely agree, Mr. Chairman, with the antitrust philosophy 
that you recently expressed in your speech at the Phoenix 
Center. A strong commitment to antitrust is in complete accord 
with the respect for a free market that is the hallmark of 
conservatism because its proper application preserves and 
promotes the integrity of the free market.
    I also agree with your sentiment there that we have to 
guard against misuse of antitrust to obtain outcomes through 
the legal system that couldn't be obtained in a competitive 
market. Now, you said all that more eloquently, but those basic 
points, I think, are very sound ones.
    We at the division have built a strong record in telecom 
over many years from negotiating and enforcing the MFJ in the 
AT&T case you referenced to working with this Committee to pass 
a procompetitive 1996 act, including working with this 
Committee to create the section 271 process under which the 
Antitrust Division has played, we believe, an important and 
constructive role in opening local telecom markets to 
competition. We have applied a very rigorous and a very 
exacting test under section 271. That process has taken several 
years. It has taken frankly longer than I think many observers 
expected at the time the act was passed.
    But we believe the Bell companies have now come a long way. 
In terms of opening those markets, long distant authority under 
section 271 has now been approved in every State but Arizona, 
where an application is pending. We think the 1996 act set a 
sound course for spurring increased competition, continued 
innovation and wider consumer choice in the telecom sector. 
Spurred by the long distance incentive, the former local 
exchange monopolies of the Bell system have now taken steps to 
open their markets to competition.
    In addition, new technologies such as those being 
introduced by wireless and cable companies, which have taken, 
again, somewhat longer than was expected at the time of the 
passage of the act with respect to cable telephony, those 
services are now in a position to have the potential for 
affording additional attractive competitive choices for 
consumers.
    We have investigated, as you know, a number of telecom 
mergers since the passage of the 1996 act, including SBC 
Ameritech, WorldCom Sprint, and others, and we think our role 
in merger enforcement will be, has been and will continue to be 
an important part of keeping the sector competitive.
    With respect to Verizon v. Trinko, which both the Chairman 
and Ranking Member mentioned in opening statements, in that 
case the Second Circuit had allowed a monopolization claim to 
go forward under section 2 of the Sherman Act on the basis of 
Verizon's failure to comply with the interconnection agreement 
it had negotiated pursuant to the market opening requirements 
of the 1996 act.
    I agree with everything that both you, Mr. Chairman, and 
the Ranking Member have had to say with respect to the savings 
clause and we have been consistent both before my tenure at the 
Department and during it that nothing in the 1996 act exempts 
or creates an implied immunity from the antitrust laws for 
conduct occurring in the telecom sector. A corollary on this, 
in our view, which is also clearly found in the language of 
that savings clause, is that passage of the 1996 act did not 
have the effect of increasing obligations under the antitrust 
laws or incorporating the much more dramatic and necessary 
market opening requirements imposed on local telecom companies 
in that act.
    So as our economy depends on a more robust, innovative, 
competitive telecom industry, vigorous antitrust enforcement is 
going to continue to play a crucial role. This Committee has a 
strong order of leadership in this sector and we look forward 
to continuing our work with you to ensure that business and 
consumers receive the benefits of the competitive telecom 
marketplace.
    Thank you.
    [The prepared statement of Mr. Pate follows:]

                  Prepared Statement of R. Hewitt Pate

    Good morning, Mr. Chairman and members of the Committee. I 
appreciate the opportunity to discuss the work of the Antitrust 
Division in protecting competition in the telecommunications 
marketplace.
    The Antitrust Division appreciates this Committee's strong support 
for sound and vigorous antitrust enforcement. As you noted recently, 
Mr. Chairman, this commitment to antitrust is in no way inconsistent 
with respect for the free market. On the contrary, the proper 
application of the antitrust laws serves to preserve and promote the 
integrity of the free market upon which America's economic vitality 
depends.
    The Antitrust Division has a strong record of vigorous enforcement 
and competition advocacy in the telecommunications sector over many 
years. The MFJ, our 1982 consent decree breaking up the AT&T monopoly, 
created an environment in which competition could flourish in all parts 
of the industry, except for the local telephone exchange service 
market, which the MFJ permitted the states to retain as a regulated 
monopoly, with most of the continental United States served by one of 
seven regional Bell operating companies. The Telecommunications Act of 
1996, enacted with the Division's active support, eliminated legal 
restrictions on competition in local telephone service and established 
a national policy favoring competition and deregulation in all 
telecommunications markets. Following passage of the 1996 Act, the 
Division successfully advocated the procompetitive interpretation and 
implementation of the Act's local-market-opening provisions, and helped 
successfully defend the constitutionality of the Act's transitional 
restrictions on the Bell companies' entry into long distance.
    Under the special role this Committee was instrumental in assigning 
to the Division, the Division has also evaluated long-distance service 
applications by the Bell companies under Section 271 of the Act, which 
requires a Bell company to meet certain local-market-opening criteria 
before the FCC grants it the ability to offer long distance telephone 
service in a state in which it is the incumbent local phone service 
provider. The Division developed a rigorous standard for use in 
evaluating section 271 applications: whether the local exchange market 
in the state in question was ``fully and irreversibly open to 
competition.'' By explaining in detail how we would apply the standard 
in a variety of situations, and by devoting substantial resources to 
working with the Bell companies, other interested parties, and state 
commissions on the issue, the Division has helped enable the Bell 
companies to meet section 271's requirements in every state but 
Arizona, where an application is currently pending.
    The Division carefully evaluated each application under its 
standard. The Division recommended that the FCC deny applications in 
five states; in all of these instances, the Bell company had to take 
additional steps to open its local exchange market to competition 
before refiling its application. In most states, the Division stopped 
short of recommending denial, but noted potential problems that it 
urged the FCC to review carefully before making its decision, and in 
some cases the application had to be refiled. In two states, the 
Division was able to recommend FCC approval without reservation.
    Our evaluations examined whether the local exchange market was 
fully and irreversibly open to competition in terms of each mode of 
entry: resale of the Bell's local services, use of the competitive 
local exchange carriers' own facilities, and use of unbundled network 
elements. Our evaluations have focused on concerns about whether the 
systems used by competitors to access information from the RBOCs are 
appropriately robust, about whether needed inputs are provided to 
competitors in a timely and accurate manner, and about how changes to 
these systems have been instituted and how competitors have been 
notified.
    Looking back, the ``pro-competitive, deregulatory framework'' 
Congress established in the 1996 Act set a sound course. We have seen 
significant progress in bringing increased competition to 
telecommunications markets. Spurred by the incentive of being permitted 
to enter the long distance market, the former local exchange monopolies 
of the Bell System have taken the necessary steps to open their markets 
to competition by facilities-based carriers, resellers, and network 
element users. New technologies, such as those being introduced by 
wireless and cable companies, are offering or have the potential to 
offer additional competitive choices to consumers. High-speed Internet 
service is available through cable as well as through the incumbent 
local telephone companies, with other competitors seeking ways to 
enter. Telecommunications services are being offered in attractive 
packages by a variety of competitors, and the number portability 
required by the Act, and which the FCC is now implementing, is going to 
make it even more convenient for consumers to take advantage of the 
choices. While more still needs to happen before the 1996 Act realizes 
its full promise in all telecommunications markets, it is abundantly 
clear that Congress made the right decision in opting for competition 
to spur continued innovation and increased choices for consumers.
    Now that the transitional phase embodied in section 271 is drawing 
toward its conclusion, much ongoing work will remain to ensure that 
competition continues to take root and grow. While much of that work 
will fall to the FCC in enforcing the Telecommunications Act, we will 
continue to have our role of enforcing the antitrust laws against 
anticompetitive mergers, unlawful restraints of trade, and 
monopolization of telecommunications markets. We will also consult with 
the FCC, and provide comments as appropriate, on competition issues 
raised by existing or proposed regulations.
    We have investigated a number of telecommunications mergers since 
passage of the 1996 Act, assessing not only whether the mergers might 
harm current competition but also whether they might impair potential 
competition from emerging or create new barriers to entry in the range 
of markets implicated by the technological revolution taking place in 
this sector. We have brought several important enforcement actions in 
the last few years.

         LOur 1999 challenge to SBC's acquisition of Ameritech 
        resulted in the parties divesting one of their two competing 
        cellular telephone systems in 17 markets, including Chicago and 
        St. Louis.

         Our challenge that same year to Bell Atlantic's 
        acquisition of GTE and its joint venture with Vodafone resulted 
        in divestiture of overlapping wireless operations in 96 markets 
        in 15 states.

         Our challenge in 2000 to AT&T's acquisition of Media 
        One focused on harm to competition in the market for 
        aggregation, promotion, and distribution of broadband content, 
        and resulted in divestiture of AT&T's interest in the Road 
        Runner broadband Internet access service, along with 
        limitations on certain kinds of agreements between AT&T and 
        Time Warner, who purchased the divested Road Runner interest.

         Our lawsuit that year to block the merger of WorldCom 
        and Sprint to protect competition in a variety of markets, 
        including residential long distance service, Internet backbone 
        service, data network and custom network services to large 
        business customers in the U.S. and international private line 
        services between the U.S. and numerous foreign countries, led 
        the parties to abandon the merger.

         Our challenge that year to SBC's joint venture with 
        Bell South to create a nationwide wireless network resulted in 
        divestitures in 15 wireless markets in three states.

    While I am not able to comment on any particular merger that is 
pending or that might be proposed in the future, I can assure members 
of this Committee that the Antitrust Division will look very carefully 
at any significant mergers in this industry, and take whatever 
enforcement action may be warranted, to ensure that they do not harm 
competition.
    We are also being vigilant in monitoring the telecommunications 
marketplace for unlawful restraints of trade. In August, we filed the 
first charges in our ongoing nationwide criminal investigation into 
possible bid-rigging and other unlawful collusion involving the E-Rate 
program, a federally funded program created under the 1996 Act to 
subsidize the provision of telecommunications, Internet access, and 
internal communications to economically disadvantaged schools and 
libraries. Duane Maynard of Arvada, Colorado, a former electrical 
contractor pled guilty to participating in a bid-rigging scheme 
involving a E-Rate project in the West Fresno, California Elementary 
School District. He and others had conspired to ensure that Maynard's 
company would be the successful bidder for the general contract, that 
no other co-conspirator would submit a competing bid, that co-
conspirator companies would serve as subcontractors on the project, and 
that any competing general bid would be stricken as nonresponsive. 
Maynard agreed to accept a higher sentence for having earlier given 
false testimony before the grand jury, and to assist us in our ongoing 
investigation.
    In the monopolization area, we are continuing, almost eight years 
after passage of the 1996 Act, to work through issues regarding the 
Act's interpretation and its relation to the antitrust laws. We 
recently completed oral argument before the Supreme Court as amicus in 
Verizon v. Trinko, in which the Second Circuit had allowed a 
monopolization claim under section 2 of the Sherman Act to go forward 
against an incumbent local exchange carrier on the basis of the 
carrier's failure to comply with the interconnection agreement it had 
negotiated pursuant to the market-opening requirements of the 1996 Act. 
We believe the proper resolution of the issue in this case, whether 
passage of the 1996 Act augmented or altered the duties that section 2 
of the Sherman Act imposes on dominant local exchange 
telecommunications providers, is critical for preserving the integrity 
and vitality of the antitrust laws. The antitrust savings clause in the 
1996 Act makes clear that the antitrust laws continue to apply fully in 
telecommunications, and are in no way displaced by the 1996 Act's own 
requirements. A corollary to this is that passage of the 1996 Act did 
not have the effect of increasing any party's obligations under the 
antitrust laws. Consistent with existing precedents, and consistent 
with the Division's position since its 1991 amicus brief in 
Consolidated Rail Corp. v. Delaware & Hudson Railway Co., and followed 
in our Microsoft and American Airlines filings, we are taking the 
position that, for an incumbent's denial of an essential facility to a 
rival to constitute a section 2 violation, the denial must be predatory 
or exclusionary--that is, it must make business sense for the incumbent 
only because it has the effect of injuring competition. While the 
Telecommunications Act can and does impose other requirements, we 
believe it is important to preserve the distinction between a violation 
of the Telecommunications Act and a violation of the Sherman Act.
    Mr. Chairman, in the coming years, our economy is likely to depend 
more than ever on a robust, innovative, competitive telecommunications 
industry. Vigorous antitrust enforcement will continue to play a 
crucial role in fostering and protecting competition in this important 
sector. This Committee has a strong record of leadership in this 
critical area, and the Antitrust Division looks forward to continuing 
to work with you to ensure that businesses and consumers receive the 
benefits of a competitive telecommunications marketplace.
    I would be happy to try to answer any questions the Committee may 
have.

    Chairman Sensenbrenner. Thank you, General Pate.
    Mr. Pfeiffer.

    TESTIMONY OF ALFRED C. PFEIFFER, JR., PARTNER, BINGHAM 
     McCUTCHEN LLP, ON BEHALF OF THE ASSOCIATION FOR LOCAL 
  TELECOMMUNICATIONS SERVICES AND THE COMPTEL/ASCENT ALLIANCE

    Mr. Pfeiffer. Mr. Chairman, Ranking Member Conyers, 
distinguished Members of the Committee, I am greatly pleased to 
have the opportunity to come before you this morning and 
present the views of ALTS and the CompTel/ASCENT Alliance 
regarding the importance of continued vigorous antitrust 
enforcement to conduct that may also be regulated under the 
Telecommunications Act of 1996. I think it is fair to say that 
between them ALTS and the CompTel/ASCENT Alliance represent 
virtually the entire competitive telecommunications sector and 
the threat to that sector today from the trinity of ineffective 
regulatory enforcement, the FCC recent Triennial Review order 
which single-handedly deregulates broadband, and the challenge 
to the applicability of the antitrust law as posed by the 
Trinko case, those dangers are very real.
    Let me focus on Trinko with my comments here. The Justice 
Department's position in the Trinko case before the Supreme 
Court, I do believe, represents a dramatic about face. As 
Ranking Member Conyers mentioned in his comments, the 
Intermedia case and in the Covad case, both against BellSouth 
in the 11th Circuit in 2001, the Government not only rejected 
any claim of immunity in those cases from the 1996 act, but 
also recognized that the failure to comply with the access 
obligations imposed by the 1996 act can result in antitrust 
liability.
    The position that is being taken in the Trinko case is the 
opposite of that. The Government is now proposing a new test 
that would be applicable to antitrust claims that involve 
sharing applications, including sharing obligations, under the 
1996 act. The Government says that a competitor now must show 
that a monopolist is essentially engaging in conduct akin to 
predatory pricing, and they allude directly to the predatory 
pricing standard in their brief, and that they must forego 
monopoly profits before there can been an antitrust violation.
    I would submit with respect to the Department and to Mr. 
Pate that there is no case that says that that is the only way 
in which exclusionary conduct can be shown under the antitrust 
laws. In fact, quite to the contrary, the antitrust laws have 
long imposed sharing obligations whenever it's necessary to 
stop a monopolist from extending monopoly power from one market 
into another market. From the Leitch v. Barber case in the 
1930's to the Covad antitrust litigation in the 1990's, whether 
the monopoly is from a pattern, from a great idea, from an 
accident of history or from any other means, a monopolist 
cannot use access to its monopoly as a means to extend that 
power into a second market, and the lower courts have all 
agreed with that. That's why in the courts at least the 
essential facilities doctrine is not a controversial doctrine.
    I would also add that, distressingly, this new quasi-
predatory pricing standard that's being proposed is directly 
contrary to the history of the breakup of the old AT&T and Bell 
system monopoly. In those cases AT&T was found to have violated 
the antitrust laws when it refused to deal with its competitors 
and even when it nominally agreed to deal with them but didn't 
do so on reasonable terms. When the Government and the Bells 
turn their backs on that history and pretend it never existed, 
they are engaging in a frontal assault on the savings clauses 
contained in the 1996 act, and I feel that's exactly what the 
Bells are doing in this industry and in the Trinko case right 
now.
    The dangers that competitive providers would face without 
strong antitrust enforcement are highlighted by recent news of 
a dinner hosted by SBC, Verizon, BellSouth and their trade 
association. I agree with the Los Angeles Times on the need for 
an investigation of whether any antitrust violations occurred 
in connection with that meeting, and here's why. We know that 
the Bells collectively sought contributions from their 
equipment suppliers to fund a campaign to eliminate 
competition. We know one Bell executive who spoke with the 
Times said, ``Manufacturers may feel their arms are being 
twisted.'' And we know from the head of the Telecommunications 
Industry Association that the manufacturers felt the Bells were 
using ``pressure tactics.''
    We also know the Bells have chosen not to compete with one 
another despite repeated promises to do so. Given these facts, 
there's sufficient evidence to warrant an investigation into 
whether the antitrust laws are endangered here. Needless to 
say, in light of all that's going on, now is not the time to 
weaken antitrust oversight of the telecom industry. Perhaps 
what is needed is for the Committee to simply amend the 
Telecommunications Act of 1996 and underline and perhaps double 
underscore the savings clauses and put exclamation points after 
them so that there can be no mistake about Congress's intent.
    Thank you.
    [The prepared statement of Mr. Pfeiffer follows:]

             Prepared Statement of Alfred C. Pfeiffer, Jr.

    Mr. Chairman, Ranking Member Conyers, and distinguished members of 
the Committee:
    I am pleased to have the opportunity to present the views of the 
Association for Local Telecommunications Services (``ALTS'') and the 
CompTel/ASCENT Alliance regarding the importance of the continued 
application of the antitrust laws to activities that may also be 
subject to regulation under the Telecommunications Act of 1996. 
Collectively, these two trade associations represent virtually the 
entire competitive telecommunications industry. My primary goals here 
today are to impress upon the Committee the absolutely critical role 
that the antitrust laws play in creating and sustaining competition in 
telecommunications markets, and to explain why the Department of 
Justice's position in the Trinko case threatens that competition.
    I am a partner in the law firm of Bingham McCutchen, where I co-
Chair the firm's Antitrust and Trade Regulation group. I have practiced 
antitrust law for over 18 years, and have particular experience 
litigating antitrust claims that arise in the telecommunications 
industry. In addition, I am the Chair of the Communications Industry 
Committee of the American Bar Association's Section on Antitrust. The 
views contained in this testimony are in no way officially endorsed by 
or reflect those of the American Bar Association.
    ALTS is the leading national industry association to promote local 
telecommunications competition. ALTS represents facilities-based 
providers, called Competitive Local Exchange Carriers (``CLECs''), that 
build, own, and operate competitive local networks. ALTS' mission is to 
promote facilities-based competition. ALTS member companies deploy 
circuit and packet switches, DSLAMs, fixed wireless antennas, fiber 
optic trunks, and other facilities in direct competition with the Baby 
Bells. Like all competitors, ALTS companies must purchase from the 
monopoly phone companies parts of the ubiquitous local telephone 
network to connect customers to competitive facilities. To this end, 
ALTS believes nondiscriminatory access to all local monopoly 
transmission facilities must be afforded CLECs so that consumers are 
allowed to enjoy the benefits and advantages that come with 
competition.
    The CompTel/ASCENT Alliance was formed in November 2003 by the 
merger of the two leading trade associations in the competitive 
telecommunications industry, the Competitive Telecommunications 
Association (CompTel), founded in 1981, and the Association of 
Communications Enterprises (ASCENT)(combined as ``CompTel/ASCENT''). 
With 400 members, CompTel/ASCENT is the largest and oldest association 
representing comptetitive facilities-based carriers, providers using 
unbundled network elements, global integrated communications companies, 
and their supplier partners. CompTel/ASCENT, which is based in 
Washington, D.C., includes companies of all sizes and profiles that 
provide voice, data and video services in the U.S. and around the 
world. Despite a wide variety of business models, CompTel/ASCENT 
members share a common objective: To create and sustain true 
competition in the telecommunications industry.

                           EXECUTIVE SUMMARY

    The debate over access to the monopoly-controlled local telephone 
network is nothing new. For almost as long as there been a telephone 
network, there has been the question of the extent to which competitors 
should be provided access to the nonduplicable portion of the network. 
Given that the local phone network was built on the backs of ratepayers 
and supported by government-mandated guaranteed rates of return, both 
regulation and the antitrust laws have always been the instruments for 
providing competitive access to the network. This has been the case 
through the three phases of telecommunications antitrust history: the 
single regulated monopoly, AT&T the break-up of AT&T and the 
injection of competition into the telecom market by the 1996 Act.
    Competition in the telecom market in the last 7 years is plainly 
evident. The Consumer Federation of America estimates that consumers 
are already saving up to $5 billion annually. Investment in 
infrastructure continues with ALTS estimating investments over $76 
billion in next generation telecom networks. The Phoenix Center also 
has found that local competition has boosted wireline telecom 
employment 17% above historical trends, adding 92,000 wireline jobs. 
CompTel estimates that if local phone competition laws are preserved 
nationwide, consumers could save an additional $9 billion. In addition, 
innovation is best evidenced by the introduction and other facilities-
based competitors of innovative broadband solutions, such as the 
integrated access product that offers small and medium-sized businesses 
voice and data over the same loop at remarkably lower prices than the 
Bell Company price. Similarly, this innovation is demonstrated by the 
availability of residential DSL service, which sat on the Bell 
monopolies' shelves until competitors brought the product to market 
after the 1996 Act.
    The benefits of competition are not because of the strong 
enforcement of competition and antitrust laws, but in many respects in 
spite of them. The Bells have not been willing partners in the 
development of competition. Examples of Bell efforts to erect barriers 
to competition are too numerous to name but include sluggish 
responsiveness to requests for access to Bell lines, lost work orders, 
excessive charges to co-locate facilities, efforts to legislatively 
raise wholesale rates to keep competitors out of markets, and proposals 
to change the pricing formula for determining fair wholesale rates 
despite the support of the present formula--TELRIC--by Congress, the 
FCC and the Supreme Court. This is to say nothing of the Bells' efforts 
in the courts to extinguish the applicability of the antitrust laws to 
them, a move made more serious by recent reports about theBells' secret 
meetings to extinguish competition laws.
    I recognize the principal purpose of this hearing is not to delve 
into the serious concerns raised by the U.S. Telecom Association's 
secret dinner meeting in Washington and the memorandum accompanying the 
exclusive dinner describing its efforts--with the help of SBC, Verizon, 
and BellSouth--to arm twist the Bells' suppliers into rebating or 
giving a kick back of their revenues to launch a $40 million campaign 
to end competition. However, this meeting puts in the starkest terms 
the monopolistic mindset of the Bell companies and the lengths to which 
they will go to maintain their dominant power in the telecom market. I 
fully concur with Ranking Member Conyers' statement that this meeting 
may well constitute impermissible activity and raises some troubling 
issues concerning the exertion of collective pressure over the 
manufacturers.
    The threat looming to competition in the telecom sector is real 
given the trinity of weak regulatory enforcement, antitrust laws whose 
applicability is mired in litigation, and the recent Triennial Review 
Order that single handedly deregulated the broadband market. First, 
with regard to regulatory enforcement, the Bells themselves recognize 
fines as merely the cost of doing business and FCC Chairman Powell has 
concurred that the FCC's current enforcement authority ``is 
insufficient to punish and deter violations.'' Second, the Triennial 
Review Order, despite concerns by a majority of FCC Commissioners, 
determined that requirements for the Bells to provide competitors with 
access to linesharing (the means by which competitors bring broadband 
into homes and businesses) would be phased out. The FCC also eliminated 
a competitor's access to any hybrid last mile facility that has an ATM 
or packet-based technology, further pushing CLECs out of the small and 
medium sized business market. Finally, if the Supreme Court finds in 
Trinko that the antitrust laws do not apply to the telecom industry, we 
will then be returned to a wholly unregulated telephone monopoly 
unchecked by enforcement powers, regulation, or the antitrust laws.
    Such an outcome would have been unheard of in 1996 when Congress 
clearly intended for the antitrust laws to apply to the telecom 
industry. The Act is unambiguous in two savings clauses, the first of 
which states: ``nothing in this Act or the amendments made by this Act 
. . . shall be construed to modify, impair, or supersede the 
applicability of any of the antitrust laws.'' The Act also expressly 
confirms that ``[t]his Act and the amendments made by this Act shall 
not be construed to modify, impair, or supersede Federal, State or 
local laws unless expressly so provided in such Act or amendments.''
    Though three Federal Circuits have rejected Verizon's claim that 
somehow the savings clauses only mean that antitrust laws apply when 
there is predatory pricing, we face the possibility that the Supreme 
Court will find in Verizon's favor and severely limit the applicability 
of the antitrust laws. Particularly disturbing is the Justice 
Department's about face in support of Verizon's position.
    As the competitive industry has argued to the Supreme Court, a 
ruling in Verizon's favor would be inconsistent with antitrust 
precedent. The antitrust case law, in both regulated and unregulated 
industries, demonstrates that no monopolist may engage in the 
exclusionary conduct the Bells have practiced in the last 7 years. 
Predatory pricing need not be shown to demonstrate an antitrust 
violation. In the first instance, the Bells' ownership of the telephone 
network is the quintessential example of an essential facility, which 
under decades of antirust rulings the Bells can be required to share 
with its rivals if the Bells try to leverage it for monopoly power over 
another market such as broadband. Additionally, monopoly conduct that 
forces competitors to raise their costs in an effort to destroy 
competition also would violate the antitrust laws. Neither of these 
cases require a showing of predatory pricing.
    Given the Judiciary Committee's tireless role in overseeing the 
antitrust laws, and in particular, its efforts in 1996 to ensure that 
the antitrust laws continued to apply to the telecom industry, this 
hearing in and of itself should be an important and clear signal to the 
Justice Department that antitrust enforcement must be available to 
complement regulatory enforcement of the industry. Perhaps more 
importantly, it may require this Committee's leadership again to enact 
legislation--perhaps merely underlining the 1996 Act's savings clauses 
and adding two exclamation points--to serve notice and make clear that 
telecom consumers deserve the protection of both regulatory and 
antitrust enforcement.

   I. ANTITRUST LAWS ARE ESSENTIAL TO TELECOMMUNICATIONS COMPETITION

    This debate over access to the facilities ILECs control is not new. 
Local telephone monopolists have long been using their control over the 
nonduplicable local network--a network that literally connects by wire 
all end users in a given geographic region--to exclude competition in 
other markets that depend on access to that monopolized local network. 
And long before the 1996 Act, courts applied well-established antitrust 
principles to make sure competitive providers could obtain such access. 
Just as the antitrust laws first paved the way for open competition in 
the long distance telecommunications markets, the antitrust laws remain 
a necessary tool for overall telecommunications competition to remain 
and grow.

A. Background: Antitrust Law in the Telecom Sector
    In general, the development of telecommunications antitrust law can 
be viewed in three phases: (1) the single regulated monopoly, AT&T (2) 
the antitrust break-up of AT&T into a long-distance company and the 
Regional Bell Operating Company (``RBOC'') local monopolies; and (3) 
the introduction of competition to local telephone markets by the 1996 
Act. It is important to remember that regulation, such as that entailed 
by the 1996 Act, has been a constant in the telecom sector, through all 
these phases. Despite that regulation, the antitrust laws have always 
applied to the industry, just as they should today.
    In the first phase, the telephone system was almost entirely 
controlled by a single monopoly (AT&T), which was regulated, but not 
subject to meaningful competition. The Communications Act of 1934 
(``1934 Act'') combined with various state legislation to provide an 
intricate structure of regulation. See Jarvis, Inc. v. AT&T, 481 F. 
Supp. 120, 122 (D.D.C. 1978). Even under this regulatory regime, AT&T 
had a duty to permit competing carriers, like MCI, to interconnect with 
its local exchange network. See MCI Comms. Corp. v. AT&T, 708 F.2d 
1081, 1134-36 (7th Cir. 1983), citing MCI Telecomms. Corp. v. FCC, 561 
F.2d 365 (D.C. Cir. 1977), cert. denied, 434 U.S. 1040 (1978). Local 
telephone monopolists have long been required to provide competitors 
full access to their local networks, including to their local loops, 
through a process called interconnection. See In the Matter of 
Establishment of Policies and Procedures for Consideration of 
Application to Provide Specialized Common Carrier Services in the 
Domestic Public Point-to-Point Microwave Radio Service and Proposed 
Amendments to Parts 21, 43, and 61 of the Commission's Rules, 29 
F.C.C.2d 870, 940,  157 (1971) (``Specialized Common Carrier''). The 
FCC regulated that interconnection duty and AT&T was famously found to 
have violated the antitrust laws for failing to comply with it--
ncluding for its failure to lease local loops to competitors, a core 
part of the RBOCs' current anticompetitive strategy. AT&T's failure to 
allow competitors like MCI to interconnect, despite that duty, spawned 
numerous antitrust actions. The federal courts uniformly held that the 
1934 Act and the detailed FCC orders and regulations implementing it 
did not exempt AT&T from antitrust liability.
    The second phase of modern telecommunication law resulted from the 
United States' antitrust suit against AT&T, alleging it had used its 
local network monopoly to stifle competition in other, related markets, 
like long distance, that depended on access to the local network. See 
United States v. AT&T, 552 F. Supp. 131, 139 (D.D.C. 1982), aff'd sub 
nom., Maryland v. United States, 460 U.S. 1001 (1983). The lawsuit 
resulted in the 1983 ``Modified Final Judgment'' (``MFJ''), which 
prevented such unlawful leveraging by establishing separate companies 
(the RBOCs) to take ownership of the local networks in their respective 
regions. See id., at 227. From the MFJ until Congress passed the 1996 
Act, the RBOCs continued to operate as protected monopolies with 
guaranteed rates of return over virtually all local telephone service. 
See AT&T v. Iowa Utilities Bd., 525 U.S. 366, 371 (1999).
    In the third phase, post-1996 Act, Congress ``ended the 
longstanding regime of state-sanctioned monopolies,'' id., and 
established a ``pro-competitive, deregulatory national policy 
framework' for telecommunications, opening all telecommunications 
markets to competition so as to make advanced telecommunications and 
information technologies and services available to all Americans.'' 
First Report and Order and Further Notice of Proposed Rulemaking: In 
the Matters of Deployment of Wireline Services Offering Advanced 
Telecommunications Capability, FCC 99-48, No. 98-147, 1999 WL 176601, 
at 13, (Mar. 31, 1999) (citing 47 U.S.C. Sec. 251). The 1996 Act 
requires RBOCs to make the local networks they control available to 
CLECs, on ``just, reasonable and nondiscriminatory'' terms pursuant to 
``interconnection agreements.'' 47 U.S.C. Sec. 251(c)(3), (c)(6).
    After the 1996 Act, competition in local telecommunications markets 
began to grow. New competitors sprang up and began to offer entirely 
new services to consumers, particularly broadband DSL. Investment in 
infrastructure occurred--and continues to occur--at a rapid clip. For 
instance, ALTS reports that new entrants in the local market have 
invested over $76 billion in next-generation telecommunications 
networks since the Act was passed.\1\ Even more, new competitors have 
been successful in bringing lower prices to consumers in the 
traditional monopoly market of local phone service. The Consumer 
Federation of America estimates that local phone customers across the 
country are saving up to $5 billion annually, thanks entirely to 
competition.\2\ CompTel estimates that if competition is preserved 
nationwide, consumers can save an additional $9 billion. And, most 
importantly, millions of Americans now, for the first time, have a 
choice for their local telecommunications provider.
---------------------------------------------------------------------------
    \1\ Available at http://www.alts.org/Filings/2003AnnualReport.pdf
    \2\ Available at http://www.consumerfed.org/unep--200310.pdf
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    This success can be attributed to a bedrock principle of antitrust 
law that Congress recognized and sought to implement through 
regulations set forth pursuant to the 1996 Act. That is, in order to 
promote competition in a monopoly market, and in order to move quickly 
to a fully functioning free market, access to the essential facilities 
of the telephone network must be made available to new entrants. This 
core principal, perhaps more than any other, provides the foundation 
upon which local competition is built. Congress mandated that access to 
the essential facilities of the phone network be achieved through 
``unbundling.'' The FCC determines which parts of the network must be 
unbundled and shared with competitors.
    Despite the clear goals of the 1996 Act, the RBOCs did not freely 
open their networks to CLEC competitors. In fact, they did the exact 
opposite. They threw up every operational, legal, and regulatory hurdle 
they could find to prevent competition from developing the local 
markets. Knowing that delay was in their favor, the RBOCs used the 
court system to tie up competitive policy created by the regulators. 
During the wait for the courts to act, they snubbed the implementation 
of regulatory orders, using delay tactics to enable them to ``wait 
competitors out of the market.'' As a result, the RBOCs delayed 
competitive entry for nearly seven years. Such a process cannot be what 
Congress had in mind when it passed the 1996 Act.

B. The Looming Threat
    It is no exaggeration to say that the very future of local telecom 
competition hangs in the balance as the committee considers the matters 
before it today. The goals of Congress to create a competitive local 
telecom marketplace are in severe jeopardy. We do not propose that the 
RBOCs' exclusionary conduct represents the only challenge facing CLECs. 
Nor do we propose that Congress should protect CLECs from the ordinary 
workings of the competitive marketplace. But it would be inexcusable if 
the RBOCs were permitted to eviscerate local competition because they 
convinced the courts that Congress did not intend them to continue to 
be bound by the antitrust laws.
    The 1996 Act did not create a regulatory enforcement mechanism to 
ensure that monopolies actually complied with the obligations of their 
interconnection agreements. Instead, Congress did two things: (1) it 
retained the enforcement remedies that existed under the 1934 Act; and 
(2) it made clear that it intended the antitrust laws to remain a 
vibrant enforcement tool to prevent local telephone monopolists from 
abusing their retained monopoly power.
    First of all, regulatory enforcement of the unbundling requirements 
of the Act has been, to say the least, weak. The FCC acknowledges this. 
FCC Chairman Michael Powell told Congress that ``[g]iven the vast 
resources of many of the nation's ILECs,'' the FCC's current fining 
authority of $1.2 million per offense ``is insufficient to punish and 
deter violations in many instances.'' Letter from Chairman Powell to 
House and Senate Appropriations Committees of 5/4/01. In fact, the FCC 
did not take a single step to enforce any unbundling requirement until 
this year.
    Secondly, the Bell companies were granted vast deregulation with 
regards to broadband services by the FCC in the recently completed 
Triennial Review. In particular, the FCC eliminated CLEC access to 
hybrid lines (part copper and part fiber) that use packet-based 
technology. This relief granted to the Bells violates the statute and 
is arbitrary and capricious for several reasons. First, the FCC 
decision to grant relief based on the deployment of a particular 
technology violates the statute's mandate that its rules be 
nondiscriminatory and technology neutral. Second, the FCC's reliance 
upon Section 706 as justification for granting such relief is blatantly 
inconsistent with the plain language of Section 706 itself which 
requires the FCC to promote both local competition and investment in 
broadband. Moreover, with Bell efforts to extend such relief into the 
small and medium sized enterprise (SME) market, where there is no 
alternative provider, essentially relegates the small businesses of 
America to a deregulated Bell monopoly. In reaching such a conclusion, 
the FCC failed to account for the differences between small business 
customers and others that demand similar type services. Moreover, the 
decision is unreasonable because the FCC ignored the D.C. Circuit's 
mandate that unbundling relief be subject to a granular analysis of the 
marketplace.
    The FCC also eliminated an unbundling requirement called line 
sharing. Line sharing enabled competitors to compete with the Bells for 
residential DSL services. As line sharing is phased out, it will become 
increasingly difficult for any competitor to offer local broadband 
services to customers, pushing the residential market, like the small 
business market, away from a competitive market and back towards an 
unregulated monopoly market.
    This result is even more troubling when one considers that the 
antitrust laws have not been vigorously applied in the local market 
since the 7th Circuit's decision in the Goldwasser case. Goldwasser was 
the first case to ignore the savings clause, and started the ball 
rolling to where we are today. The ever-opportunistic Bell companies 
seized on Goldwasser to seek immunity from the antitrust laws. 
Inexplicably, the DOJ followed suit and also seeks to insulate the 
local monopolies from antitrust scrutiny.
    Given the inability of the FCC to enforce the laws, given the vast 
deregulation granted to the Bell companies just a few months ago, and 
given the Department's incredible about-face as to their reading of the 
savings clause, it is no stretch to say the local telecommunications 
market is dangerously close to becoming an unregulated monopoly. This 
result is alien to the pro-competitive spirit of the Act, and must be 
averted.

              II. LTRINKO AND THE SAVINGS CLAUSE CONUNDRUM

    The 1996 Act does not supplant or change the antitrust laws. It 
states so unambiguously through both a savings clause directed 
specifically at antitrust enforcement and an additional general savings 
clause:

        SAVINGS CLAUSE . . . nothing in this Act or the amendments made 
        by this Act . . . shall be construed to modify, impair, or 
        supersede the applicability of any of the antitrust laws.

        NO IMPLIED EFFECT This Act and the amendments made by this Act 
        shall not be construed to modify, impair, or supersede Federal, 
        State or local laws unless expressly so provided in such Act or 
        amendments.

1996 Act, Pub. Law No. 104-104, 110 Stat. 143, Sec. Sec. 601(b)(1), 
(c)(1) (1996) (reprint at 47 U.S.C. Sec. 152 note) (hereinafter cited 
as ``1996 Act, Sec. 601''). Though the RBOCs for a time argued that the 
1996 Act created a form of quasi-immunity, now CLECs, RBOCs and the 
government all nominally agree that Congress intended for antitrust 
remedies to apply in full force to anticompetitive conduct whether or 
not subject to the 1996 Act.
    While this should really be the end of the discussion, it is only 
the beginning. Presented with the quandary of resolving the 
inconsistency between their call for immunity under the 1996 Act and 
the unambiguous savings language, the RBOCs--and later the Department 
of Justice--came up with the perfect solution for making an end run 
around the savings clauses. The RBOCs now take the position that 
antitrust remedies apply, but that their refusal to grant access to the 
networks they control would never qualify as exclusionary under 
established antitrust principles. In effect, they seek the creation of 
a new rule that essentially imposes a predatory pricing requirement 
before a monopolist may be found to have engaged in an actionable 
refusal to deal. That proposed amendment to the Sherman Act is both 
unfounded and ill-advised.
    The new rule the RBOCs and the government now propose is 1) 
inconsistent with well-established antitrust principles (as the Supreme 
Court put it in Kodak, what the RBOCs seek here would be ``a radical 
departure in this Court's antitrust law,'' 504 U.S. at 479-80 n.29), 2) 
inconsistent with the position previously asserted by the FCC and the 
DOJ in antitrust cases involving the 1996 Act, and 3) inconsistent with 
the government's own pre-1996 Act antitrust enforcement actions. For 
these reasons the Second, Ninth and Eleventh Circuits have rejected the 
position Verizon and the government now assert in the Trinko case now 
pending before the Supreme Court. Should the Supreme Court agree with 
that position, the savings clauses in the 1996 Act would be rendered 
meaningless and CLECs will find it all the more difficult to offer 
consumers competitive telecommunications products in what, in effect, 
will be deregulated monopoly markets.

A. Inconsistency with Antitrust Precedents
    Many decades of antitrust law, in both regulated and unregulated 
industries, make clear that no monopolist may engage in the type of 
exclusionary conduct the RBOCs have practiced so relentlessly for the 
past seven years. The claims against Verizon in Trinko, for example, 
are nothing new. Rather, they arise from the same conduct--abuse of the 
unique monopoly power inherent in the local telephone network--that led 
to the breakup of the old AT&T Bell System twenty years ago. 
Nonetheless, the RBOCs, DOJ, and FTC argue that courts should analyze 
claims against RBOCs using the same ``sort of analysis [employed] with 
respect to predatory pricing.'' US/FTC Brief 16. That would be a 
massive change to, not an application of, the antitrust laws. It is 
true the courts ``have recognized that conduct is exclusionary where it 
involves a sacrifice of short-term profits or goodwill that makes sense 
only insofar as it helps the defendant maintain or obtain monopoly 
power.'' Id. But that is not the only form of conduct that qualifies as 
exclusionary. Rather, Section 2 jurisprudence recognizes that ``the 
means of illicit exclusion, like the means of legitimate competition, 
are myriad.'' Id., 14 (quoting Microsoft, 253 F.3d at 58).
    That is why courts analyzing claims of exclusionary conduct have 
focused not on attempts to establish a list of practices that are (or 
are not) exclusionary, but have analyzed instead the ``anticompetitive 
effect'' of the challenged conduct. Microsoft, 253 F.3d at 58. Thus, 
conduct is exclusionary if it ``harms the competitive process.'' Town 
of Concord v. Boston Edison Co., 915 F.2d 17, 21 (1st Cir. 1990) 
(Breyer, J.). In Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 
U.S. 585 (1985), the Supreme Court recognized the broad and flexible 
nature of exclusionary conduct: ``If a firm has been `attempting to 
exclude rivals on some basis other than efficiency,' it is fair to 
characterize its behavior as predatory.'' 472 U.S. at 605 (quoting R. 
Bork, The Antitrust Paradox, 138 (1960)). Aspen went on to quote the 
Areeda and Turner definition of exclusionary conduct: ``behavior that 
not only (1) tends to impair the opportunities of rivals, but also (2) 
either does not further competition on the merits or does so in an 
unnecessarily restrictive way.'' Id. at 605 n.32, (quoting P. Areeda & 
D. Turner, 3 Antitrust Law 626b, 78 (1978)). While the fact pattern in 
Aspen certainly met that test, the Court has never--in Aspen, Kodak or 
elsewhere--pronounced that only forsaking profits would do so. Indeed, 
the Seventh Circuit has interpreted Aspen to mean ``a monopolist may be 
guilty of monopolization if it refuses to cooperate with a competitor 
in circumstances where some cooperation is indispensable to effective 
competition.'' Olympia Equipment Leasing Co. v. Western Union Telegraph 
Co., 797 F.2d 370, 379 (7th Cir.) (Posner, J.)rehearing denied, 802 
F.2d 217 (1986), cert. Denied, 480 U.S. 934 (1987). That is precisely 
what Trinko and CLECs have alleged. The ILECs refuse to deal with CLECs 
with the specific knowledge that their refusal makes it impossible to 
compete.

            1. The Courts Have Not Applied a Predatory Pricing 
                    Requirement
    Antitrust precedents do not support the assertion that competitors 
must make a showing akin to predatory pricing before they may proceed 
with a refusal to deal claim. The claim ignores the history of 
antitrust enforcement in the telecom sector and, in doing so, ignores 
the savings clauses in the 1996 Act.
    Although there has been much implied criticism of the label of 
essential facilities, the concept itself is surprisingly well-accepted. 
The concept is hardly controversial in principle: when a vertically 
integrated monopolist controls a facility that cannot practicably be 
duplicated, and which is essential to competition in some other 
markets, the monopolist may not use its control over that facility to 
gain a monopoly over those other markets. While the Supreme Court has 
never formally adopted the doctrine as such, it is in fact derived from 
a Supreme Court decision. United States v. Terminal R.R. Ass'n of St. 
Louis, 224 U.S. 383 (1912). And every Circuit Court of Appeal has 
adopted the doctrine, and all agree as to its elements. Hecht v. Pro-
Football, Inc., 570 F.2d 982 (D.C. Cir. 1977), cert. Denied, 436 U.S. 
956 (1978); Interface Group, Inc. v. Massachusetts Port Auth., 816 F.2d 
9, 12 (1st Cir. 1987); Delaware & Hudson Ry. Co. v. Consol. Rail Corp., 
902 F.2d 174, 179 (2d Cir. 1990), cert. Denied, 500 U.S. 928 (1991); 
Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 748 (3d Cir. 
1996); Advanced Health-Care Servs. v. Radford Cmty. Hosp., 910 F.2d 
139, 150 (4th Cir. 1990); Mid-Texas Communications Sys., Inc. v. AT&T 
Co., 615 F.2d 1372, 1387 n.12 (5th Cir. 1980); Directory Sales Mgt. 
Corp. v. Ohio Bell Tel. Co., 833 F.2d 606, 612 (6th Cir. 1987); MCI 
Communications Corp. v. AT&T, 708 F.2d 1081, 1132-33 (7th Cir. 1983); 
City of Malden v. Union Elec. Co., 887 F.2d 157, 160 (8th Cir. 1989); 
Vernon v. Southern California Edison Co., 955 F.2d 1361, 1366-67 (9th 
Cir. 1992), cert. Denied, 506 U.S. 908 (1992); Aspen Highlands Skiing 
Corp. v. Aspen Skiing Co., 738 F.2d 1509, 1520 (10th Cir. 1984), aff'd 
on other grounds, 472 U.S. 585 (1985); Covad Communications Co. v. 
BellSouth Corp., 299 F.3d 1272, 1285-88 (11th Cir. 2002); Intergraph 
Corp. v. Intel Corp., 195 F.3d 1346, 1356-57 (Fed. Cir. 1999).
    The concept of essential facilities is consistent with decades of 
antitrust rulings by the Supreme Court, which have routinely denounced 
efforts by monopolists to extend their monopolies from one market into 
another. Kodak, 504 U.S. at 479-80 n.29 (Supreme Court ``has held many 
times that power gained through some natural and legal consequence such 
as a patent, copyright, or business acumen can give rise to liability 
if `a seller exploits his dominant position in one market to expand his 
empire into the next.' ''); Leitch Mfg. Co. v. Barber Co., 302 U.S. 
458, 463 (1938) (attempted extension of monopoly from one market into 
another is illegal ``whatever the nature of the device'' used to do 
so).
    There can be no doubt that the local telephone network is a 
paradigm example of an essential facility. The networks the RBOCs 
control were built up--with no risk, a rate of return guaranteed by 
ratepayers--over many decades, and simply cannot be duplicated. Even 
the government recognizes that a telecom antitrust case, MCI's struggle 
against AT&T, is the ``leading case'' dealing with the essential 
facilities doctrine. Here is how the government described the ruling in 
MCI: ``a monopolist may be required to assist rivals by sharing a 
facility if the monopolist can `extend monopoly power from one stage of 
production to another.' '' (Brief For The United States And The Federal 
Trade Commission As Amici Curiae, No. 02-682 (``Trinko Amicus Brief'') 
at 12)

            2. Other Conduct, Such As Raising Rivals' Costs, Is 
                    Exclusionary
    The RBOCs' proposed test is obviously flawed because it exempts 
from liability any anticompetitive conduct that does not involve the 
sacrifice of profits. Among other things, it thus immunizes the well-
recognized propensity of monopolists to destroy competition without 
ever foregoing a cent of profit, by raising their rivals' costs. See 
generally Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive 
Exclusion: Raising Rivals' Cost to Achieve Power Over Price, 96 Yale 
L.J. 209, 224 (1986) (``Raising rivals' costs can be a particularly 
effective method of anticompetitive exclusion. This strategy need not 
entail sacrificing one's own profits in the short run. . . .''); see 
also Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 
2001 Colum. Bus. L. Rev. 257, 318-23 (2001) (discussing economic logic 
behind raising rivals' cost theory). Raising rivals' costs has been a 
primary mechanism by which RBOCs have destroyed competition.
    Where a monopolist, like the RBOCs, controls inputs that are 
necessary to competition in other markets, it can thwart that 
competition by raising its rivals' costs of obtaining them. That may 
happen directly, as with the type of price squeeze condemned in the 
landmark Alcoa case, United States v. Aluminum Co. of America. 148 F.2d 
416, 437-38 (2d Cir. 1945); see also Steven C. Salop, Economic Concepts 
and Antitrust Analysis, 56 Antitrust L.J. 57, 58-59 (1987) (evil of 
price squeeze is not predatory pricing; ``rather, it is a claim that 
firms exclude rivals and gain power over price by raising their rivals' 
costs''). Monopolists have also found more subtle means to inflate 
their competitors' costs. See, e.g., Ball Memorial Hosp., Inc. v. 
Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1339-40 (7th Cir. 1986) (``When 
a firm finds a way to confront its rivals with higher costs, it may 
raise its own prices to consumers without drawing increased output from 
them.''); Forsyth v. Humana, Inc., 114 F.3d 1467, 1478 (9th Cir. 1997), 
aff'd, 525 U.S. 299 (1999) (reversed summary judgment; policy raised 
factual question of whether conduct raised competitor's costs); 
Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal and 
Professional Publications, Inc., 63 F.3d 1540, 1553 n.12 (10th Cir. 
1995) (raising rival's costs ``would qualify as anticompetitive conduct 
unless [defendants] could demonstrate a legitimate business 
justification for it'').
    RBOCs have perpetrated both types of raising-rivals'-costs 
schemes--especially against facilities-based CLECs. The RBOCs have 
engaged in direct price squeezes, and routinely employ countless 
mechanisms, including stall and delay tactics, to make the 
interconnection process as time-consuming and costly as possible, all 
with no purpose but to extend their monopoly over the local telephone 
network into monopoly power over downstream markets such as the market 
for Internet access.
    That is the state of antitrust protection that the savings clauses 
were meant to preserve. The attempt by the RBOCs and the government to 
eliminate those protections, and to challenge RBOCs only when they 
engage in the equivalent of predatory pricing, makes the savings 
clauses a nullity.

B. Inconsistency with Prior Interpretations of the 1996 Act
    The position the government takes in Trinko also appears to be a 
radical and unexplained departure from the Government's prior position 
concerning CLEC antitrust claims against RBOCs. Until Trinko, the 
government did not mention or apply any special standard applicable to 
refusal-to-deal claims by competitors in this context. Indeed, the 
government opined to several federal courts of appeals that claims 
brought by CLECs almost identical to those brought by the Trinko 
plaintiffs stated antitrust claims.

            1. Early FCC Position Recognized Need for Antitrust 
                    Enforcement
    In implementing sections 251 and 252 of the 1996 Act (governing the 
arbitration for and approval of interconnection agreements between 
ILECs and CLECs), the FCC formally acknowledged that its regulations 
did not provide the ``exclusive remedy'' for anticompetitive conduct. 
First Report and Order, In re Implementation of the Local Competition 
Provisions in the Telecommunications Act of 1996, FCC 96-325, 1999 WL 
452885, 11 FCC Rcd 15499 (Aug. 8, 1996),  124. The FCC emphasized 
that, in addition to judicial review of arbitrations setting the terms 
of interconnection agreements, ``parties have several options for 
seeking relief if they believe that a carrier has violated the 
standards under section 251 or 252,'' id., expressly including private 
antitrust enforcement: ``we clarify . . . that nothing in sections 251 
and 252 or our implementing regulations is intended to limit the 
ability of persons to seek relief under the antitrust laws.'' Id., at  
129.
    The FCC has also observed that even minor delays in providing 
interconnection to local telephone networks ``can represent a serious 
and damaging business impediment to competitive market entrants'' 
including facilities-based CLECs and AT&T, the CLEC serving Trinko. 
Second Report and Order, In the Matter of Implementation of the 
Telecommunications Act of 1996, 13 F.C.C.R. 17,018,  3 (July 14, 
1998). FCC and state administrative agencies simply do not have the 
power to deter such conduct, nor to compensate its victims. Antitrust 
remedies, including treble damages and attorneys' fees, are necessary 
to make the ILECs, with their vast resources, obey the law.

            2. 2001: DOJ and FCC Support CLEC Antitrust Claims
    In an amicus curiae brief submitted to the Eleventh Circuit in 
Intermedia Comms., Inc. v. BellSouth Telecomms., Inc., No. 01-10224-JJ 
(11th Cir., filed Mar. 28, 2001), a case in which BellSouth raised 
similar issues as Verizon raises in Trinko, the DOJ and the FCC 
expressly supported a finding that Intermedia had stated an antitrust 
claim by alleging violations of Section 251 of the 1996 Act. The DOJ 
and FCC opined to the Court of Appeals for the Eleventh Circuit in 2001 
that a CLEC's allegations of an ILEC's ``failure to provide reasonable 
interconnection'' under the 1996 Act--remarkably similar to the 
allegations asserted by the Trinko plaintiff and by CLECs in other 
lawsuits against RBOCs--sufficiently ``allege[d] exclusionary conduct 
by a firm with monopoly power that lacks business justification and 
that harms competition.'' See Brief for the United States and Federal 
Communications Commission as Amici Curiae in Support of Appellants, 
Intermedia Communications, Inc. v. BellSouth Telecommunications, Inc., 
No. 01-10224-JJ (11th Cir. filed Mar. 28, 2001) at 25-26. Indeed, in 
its brief, the government described ``exclusionary conduct'' as: 
``conduct that `not only (1) tends to impair the opportunities of 
rivals, but also (2) either does not further competition on the merits 
or does so in an unnecessarily restrictive way. . . . If `valid 
business reasons' do not justify conduct that tends to impair the 
opportunities of a monopolist's rivals, that conduct is exclusionary.'' 
Id., at 21 (quoting Aspen, 472 U.S. at 605, n. 32) (emphasis added).
    In that same brief, the DOJ and the FCC also resoundingly rejected 
any interpretation of the 1996 Act that would provide BellSouth with 
antitrust immunity based on the existence of the 1996 Act. There, the 
DOJ and FCC stated:

        The United States and the FCC believe that it is essential that 
        developing case law reflect an appropriate reconciliation of 
        the [1996 Act] and the Sherman Act, affording the public the 
        benefits of all the tools Congress has chosen to foster 
        competition in this critical sector of the economy. The 
        district court in this case [Intermedia] correctly stated the 
        law: conduct that would have violated the Sherman Act before 
        the enactment of the TCA still violates it today, whether or 
        not it also violates the TCA. In doing so, the district court 
        implicitly rejected BellSouth's argument that enactment of the 
        TCA implicitly repealed Section 2 of the Sherman Act with 
        respect to anticompetitive conduct involving competitor's 
        access to local telecommunications networks.

Id., at 7-8.
    In another amicus curiae brief submitted to the Eleventh Circuit in 
Covad Communications Company v. BellSouth Telecomms., Inc., No. 01-
16064-C (11th Cir., filed Dec. 17, 2001), a case in which BellSouth 
unsuccessfully raised arguments similar to those Verizon raises in 
Trinko, the DOJ and the FCC expressly rejected BellSouth's argument 
that ``an incumbent monopoly provider of local telecommunications 
services cannot, as a matter of law, violate the antitrust laws by 
refusing to provide rivals access to its network on reasonable terms.'' 
Id., at 11. Again, the government expressly recognized that violations 
of Section 251 of the 1996 Act may constitute antitrust violations. 
``Disputes over the terms on which a potential rival may obtain access 
to an incumbent local exchange carrier's network, whether or not they 
involve violations of the 1996 Act, will normally provide no basis for 
a finding of antitrust liability, provided the incumbent's conduct 
makes no significant contribution to maintenance of its monopoly. But 
if an incumbent engages in exclusionary conduct that effectively 
prevents the emergence of substantial competition, a dispute over terms 
of access may be part of a claim under Section 2.'' Id., at 26 
(emphasis added).
    These declarations are not ancient. The government offered its 
views in Intermedia in May 2001 and in Covad in December 2001. Yet in 
2003, in Trinko, the government repudiated those views, and opined that 
violations of the access duties imposed by the 1996 could never, as a 
matter of law, give rise to antitrust liability. Brief for the United 
States and the Federal Trade Commission as Amici Curiae Supporting 
Petitioner, Verizon Communications Inc. v. Law Offices of Curtis V. 
Trinko, LLP, No. 02-682 (Supreme Court, filed May 2003) at 16. Notably, 
the FCC did not join in the Trinko brief. Congress has not amended the 
antitrust laws since the United States and the FCC first opined on 
these issues. The change in the government's position is not justified.

C. Inconsistency with Pre-1996 Telecom Antitrust Enforcement
    Perhaps most troubling about the government's change in position is 
that it so thoroughly rejects the history of antitrust enforcement in 
this very industry. Long before the 1996 Act, the Unites States brought 
an antitrust enforcement action against AT&T, then the local telephone 
monopolist, for failure to provide interconnection on reasonable terms. 
AT&T moved to dismiss at the close of the government's case-in-chief. 
In its brief in opposition to the motion, the government established 
that AT&T's conduct, much like the RBOC conduct at issue in Trinko and 
other CLEC-initiated antitrust litigation, fell well within the purview 
of the antitrust laws as interpreted and enforced by the government. 
See Plaintiff's Memorandum in Opposition to Defendant's Motion for 
Involuntary Dismissal Under Rule 41(b), United States v. AT&T Co., No. 
74-1698 (D.D.C., filed Aug. 16, 1981).
    The government emphasized the exclusionary effects of raising-
rivals'-costs schemes similar to those employed by Verizon and other 
ILECs:

        Even with respect to those limited facilities AT&T agreed to 
        provide, it imposed a number of cumbersome and unnecessary 
        technical and operational practices on its competitors which 
        increased their costs and lowered the quality of their service, 
        in marked contrast to the efficient interconnection 
        arrangements made available to AT&T's own intercity private 
        line connections. Id., at 79.

        Broadly, the major features of AT&T's exclusionary conduct in 
        the intercity services market have been the manipulation of the 
        terms and conditions under which competitors are permitted to 
        interconnect with AT&T's existing services and facilities, 
        including those of the local exchange operators . . . Id., at 
        67.

The approach suggested by the RBOCs and the government in Trinko, 
however, which would require the equivalent of predatory pricing to 
state a refusal to deal claim, would place all that plainly 
anticompetitive conduct beyond the reach of the antitrust laws. The 
government did not suggest the Court impose such a requirement on its 
claims against AT&T:

        While there may be instances in which a refusal to interconnect 
        has no antitrust ramifications, that is simply not the case 
        where a monopoly carrier seeks to use its market position to 
        exclude a competitor. Id., at 65.

        Although a company may normally choose to deal with whomever it 
        wishes, a monopolist violates Section 2 of the Sherman Act if 
        it refuses to deal with a competitor with the purpose of 
        maintaining or extending its monopoly. [cites] Such conduct is 
        unlawful because a refusal to supply or buy may be used to 
        extend monopoly power into adjacent markets, and an integrated 
        firm with monopoly power in one market can gain a competitive 
        advantage in others by refusing entirely to deal with its 
        rivals or by imposing arbitrary and discriminatory terms on 
        them. Courts have consistently condemned such behavior. Id., at 
        80-81.

    Again, the antitrust laws have not changed in the interim. The 
antitrust laws did, indeed, impose precisely the kinds of sharing 
obligations mandated by the 1996 Act, long before that act came to 
pass. As a result, the attempt by the ILECs and the DOJ to rewrite 
history is simply an end-run around the unambiguous savings clauses in 
the 1996 Act.

                            III. CONCLUSION

    Mr. Chairman and members of the committee, regulations can promote 
competition and protect consumers. But in all markets, the antitrust 
laws are a crucial backstop. This is especially true in the area of 
wireline telecommunications, where the market is dealing with the very 
substantial vestiges of a government-sponsored monopoly. It is even 
more true in the local telecommunications market, where increasing 
deregulation of the monopoly leaves little between monopoly market 
power and the consumer.
    I should emphasize that the main benefit of anti-trust laws isn't 
the fact that anti-competitive actions are the subject of civil or 
criminal sanction; it is the fact that many thousands of anti-
competitive actions are averted, as potential market predators are 
dissuaded by the prospect of such sanctions. The limited sanctioning 
ability of regulatory agencies--mainly relatively minor fines--lack the 
deterrent effect of the tools provided by anti-trust laws.
    I believe there are two things that this Committee and this 
Congress should pursue to ensure the promotion of competition and the 
protection of consumers. The first can begin today. Congress should 
make clear to the Department of Justice that regulatory enforcement and 
anti-trust enforcement are not an either-or choice; rather they 
compliment each other. Congress should further encourage DOJ to 
intervene wherever possible to make this clear to the courts, and to 
actively monitor and participate in rulemakings at the FCC to ensure 
that competition is not undermined.
    The second measure is more difficult, but probably more important. 
Congress should clarify once and for all in statute that the savings 
clause in the 1996 Act means exactly what it says. It has been 
humorously suggested that the courts might get the message if the 
section were amended by underlining it and adding two exclamation 
points. But whatever form that clarification takes, it should make 
clear that telecommunications consumers deserve the protection of both 
regulatory and anti-trust enforcement. Additionally, we further support 
Chairman Sensenbrenner's suggestion that, should the Supreme Court 
reach the merits in Trinko and adhere to the Bell company position, 
this Committee should work rapidly to remedy that result.
    Competition is at a crucial stage in the local market. Consumers 
are beginning to truly taste the benefits of a more free market. But 
the FCC has granted vast deregulation to the Bell companies, to the 
point where only the antitrust laws can ensure that competition 
continues to flourish. Do not let the monopolies convince you that 
somehow those laws do not or should not apply.

    Chairman Sensenbrenner. Thank you very much, Mr. Pfeiffer.
    Mr. Thorne.

  TESTIMONY OF JOHN THORNE, SENIOR VICE PRESIDENT AND DEPUTY 
                    GENERAL COUNSEL, VERIZON

    Mr. Thorne. Mr. Chairman, Ranking Member Conyers, Members 
of the Committee, thank you very much for the opportunity to 
testify here today. I've got to say that the subject is 
important and to me at least so interesting it makes me want to 
write a book about it, and I did, and teach a class about it 
even. It is a critically important issue.
    Preliminarily, Mr. Chairman, I want to say that I think 
there is less disagreement from at least Verizon and I think 
the other companies in similar positions about savings clause 
and immunity than might meet the eye. Verizon argued the Trinko 
case in the Supreme Court without referring to the savings 
clause until the reply brief, when it had been addressed by 
Trinko on the other side. We don't see the savings clause being 
abrogated one bit by the position that Verizon took.
    Likewise, we do not argue any immunity from the antitrust 
laws. Verizon not only sells service, it's a large buyer of 
products and services from others. We are in favor of full 
antitrust enforcement in telecom and other industries.
    The argument we made in the Supreme Court was centered only 
on the issue of whether to--whether antitrust should be 
expanded from where it had been before to require successful 
companies to lend a helping hand to their rivals, creating 
competition, creating competition through forced cooperation in 
the form of turning over customers and facilities to rivals at 
discounted prices. We argued that that expansion had not been 
justified and that there were no prior cases that required 
anything like that and that there was no justification for an 
expansion here.
    I would like to say that it's not just Verizon making an 
argument about the proper scope of antitrust. We were supported 
in the Supreme Court by a number of important parties: The 
Communications Workers of America, who at the time they wrote 
their amicus brief for us were not exactly on the friendliest 
of terms. We were negotiating a new agreement. They were 
threatening a strike. But on behalf of their 730,000 members 
they put in an amicus brief arguing that antitrust had never 
required the dismantling of successful businesses.
    The Telecommunications Industry Association, the 
manufacturers of equipment and software to the entire industry, 
approximately a thousand companies, companies like Lucent and 
Nortel and Alcatel, put in a brief supporting Verizon and the 
Government's position in the case. And I've got to say they 
were there under no pressure to file amicus briefs in the 
Supreme Court. To the contrary, they are happy selling 
equipment, fiber-optic equipment, switches, other equipment to 
the CLECs.
    Lucent's stock price was at its highest point when it was 
selling the most to the CLECs. They just want to see the market 
grow. They want to see the maximum output. They're in the same 
position as consumers in just wanting to see the market perform 
well. Their brief to the Supreme Court argued that there's a 
fallacy some people entertain that somehow all of the 
investment in the industry already occurred and only needs to 
be shared now. Instead they say the investment needed is 
continuing, that there is a huge and highly variable amount of 
investment occurring. It was as high as $50 billion a year a 
few years ago. It's down to an historic low of $20 billion this 
year. They would like to see that turned around. They think 
expansion of antitrust will deter investment. They're a 
beneficiary from investment on any side, ILECs or CLECs.
    Other companies outside the telecom industry, United Parcel 
Service, Visa, Honeywell, Kodak put in an amicus brief saying 
that if you expand antitrust you're not just addressing a 
telecom issue. You're affecting all industry. And they argued 
that expanding antitrust the way Trinko had argued would affect 
their business, in fact in one case, UPS, had affected their 
business. There's a decision in the Southern District of New 
York that has caught up UPS, and there are some other decisions 
as well outside of telecom following Trinko.
    The Washington Legal Foundation put in an amicus brief 
arguing that there are special problems of abuse by class 
actions if you expand the substantive basis of liability class 
actions will follow, and indeed that's happened here. We have, 
I think, 35 or 36 class actions that have been filed against 
telephone companies alone all over the country in seven or 
eight States. There's been a class of all telephone users in 
California certified against SBC.
    Finally, the eight States of Virginia, Alabama, Delaware, 
Indiana, Nebraska, New Hampshire, Oklahoma and Utah filed an 
amicus brief arguing that the essential facilities doctrine 
cannot expand antitrust. The normal requirements need to be 
met. And second, and I hope this will be pleasing to you, the 
second major heading of their brief with which we agree is, I 
quote, in passing the Telecommunications Act of 1996, Congress 
intended neither to expand nor to contract the ability of an 
antitrust claim. That was our position. That's their position, 
and I hope that's what comes out of this hearing.
    [The prepared statement of Mr. Thorne follows:]

                   Prepared Statement of John Thorne

    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify before the Committee regarding Verizon 
Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, No. 02-682 
(U.S.). I am the counsel of record for Verizon in the Trinko case. I 
also teach telecommunications law at the Columbia Law School and have 
written several academic treatises on these subjects.\1\
---------------------------------------------------------------------------
    \1\ The 2004 supplement to P. Huber, M. Kellogg & J. Thorne, 
Federal Telecommunications Law (2d ed. 1999), which will be published 
later this month, reviews the FCC and court decisions under the 1996 
Telecommunications Act and antitrust law in this area. I will provide 
to the Committee's staff a copy of the supplement when it is available.
---------------------------------------------------------------------------
    Competitors and class action plaintiffs' lawyers have widely tried 
to turn Section 2 of the Sherman Act for the first time into a 
supplemental mechanism for redoing what the 1996 Telecommunications Act 
already does--but doing it through radically different and 
inappropriate means, including jury decisions, treble damages, and 
class actions. This inappropriate attempted expansion of antitrust, not 
the 1996 Act's Savings Clause, is the core issue in the Supreme Court 
in Trinko. The transformation of Section 2 that the plaintiffs in 
Trinko and other cases ask for is not just unjustified, but 
tremendously draining of resources in an industry that cannot afford 
it. Editorials about the case have recognized that the proposed 
expansion of antitrust is a ``Frankenstein'' monster created by 
plaintiffs' lawyers who ``see a gold mine here.'' \2\
---------------------------------------------------------------------------
    \2\ Editorial, Son of Frankentobacco, Wall St. J., Aug. 23, 2002, 
at A12.
---------------------------------------------------------------------------
    The Trinko and other complaints ask the courts to recognize a new 
Section 2 duty. They ask that Section 2 require a monopolist to turn 
over its sales to rivals by sharing assets at specially discounted 
prices--that is, they seek to impose on every monopolist a duty to 
dismantle itself. But that hasn't ever been a Section 2 duty and 
shouldn't now be made into one. The 1996 Act does impose such duties, 
through Sections 251 and 252 as they've been implemented. But the 1996 
Act is a comprehensive regime for making, calibrating, and flexibly 
adjusting the judgments that are unavoidably needed to implement a duty 
to share at special discounts. The required judgments cannot properly 
be transformed into antitrust judgments. And the existence of the 1996 
Act regime, with all its statutory guarantees of fast regulatory and 
judicial response to access demands, is one good reason to avoid, not 
to start, expanding Section 2 into what would unmistakably be new 
territory.
    The claim by Trinko and other plaintiffs would change Section 2 
into a condemnation of monopoly itself. But Section 2, going back at 
least to the 1920 US Steel case, has not done that. US Steel declares 
that Section 2 ``does not compel competition'' and does not condemn 
``size.'' \3\ Other cases have reaffirmed that possession of a 
monopoly, if obtained without violating the Sherman Act, is not a 
Section 2 offense. What that means is that Section 2 doesn't compel a 
monopolist to give rivals a helping hand in displacing its own sales, 
that is, in dispossessing itself of its monopoly. Although the 1996 Act 
does impose a duty to create competition, Section 2 of the Sherman Act 
has never imposed that duty. It has been restricted to preventing 
monopolists from interfering with independently arising competition 
through conduct that can properly be condemned.
---------------------------------------------------------------------------
    \3\ United States v. United States Steel Corp., 251 U.S. 417, 451 
(1920).
---------------------------------------------------------------------------
    That distinction is fundamental and has always been respected. 
Section 2 has never required a retailer to change itself into a 
wholesaler, or a service provider to transform itself into a renter of 
facilities, as made clear, for example, in the Fourth Circuit's Laurel 
Sand decision.\4\ In common sense and doctrinal terms, it is a 
legitimate business decision as a matter of law to just continue making 
one's sales and enjoying the fruits of one's investments, as much for a 
monopolist as for any other firm. In a system premised on competition, 
not cooperation, any firm may refuse to turn over its business to 
rivals, let alone to create an elaborate and burdensome apparatus for 
dealing with any would-be intermediary that asks for a piece of the 
business--an apparatus that, in the telecommunications context, has 
required billions of dollars in expenses to create special ordering 
systems, multi-level responses to customers, constant negotiations and 
disputes over the prices of individual access elements and the when and 
how of making them available.
---------------------------------------------------------------------------
    \4\ Laurel Sand & Gravel, Inc. v. CSX Transportation, Inc., 924 
F.2d 539, 545 (4th Cir. 1991).
---------------------------------------------------------------------------
    There are a host of reasons why Section 2 has quite properly never 
been applied to impose a duty to start sharing assets with rivals at 
special discounts. One short-hand summary might be as follows. Any such 
antitrust duty presents unmanageable risks of doing more harm than 
good--of impairing the short-run and long-run investment incentives 
that the Sherman Act most fundamentally protects, and of generating 
transaction and administrative costs that offset benefits. The 
antitrust system just isn't institutionally suited to reliably 
counterbalancing those risks and costs. The antitrust system therefore 
has never taken on the challenges that are inherent in implementing 
duties of sharing--challenges that Justice Breyer recognized in his 
opinion in the Iowa Utilities Board case a few years ago \5\ and that 
the D.C. Circuit, speaking through Senior Judge Williams, recognized in 
the United States Telecom Ass'n case somewhat more recently.\6\
---------------------------------------------------------------------------
    \5\ AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999).
    \6\ United States Telecom Ass'n v. FCC, 290 F.3d 415 (D.C. Cir. 
2002), cert. denied, 123 S. Ct. 1571 (2003).
---------------------------------------------------------------------------
    These are challenges that historically have been left to regulatory 
regimes, not the antitrust system. Then-Judge Breyer explained this in 
his opinion for the First Circuit in the Town of Concord decision.\7\ 
Today, the 1996 Act assumes those challenges in the telecommunications 
setting.
---------------------------------------------------------------------------
    \7\ Town of Concord v. Boston Edison Co., 915 F.2d 17 (1st Cir. 
1990).
---------------------------------------------------------------------------
    The 1996 Act ``access duties'' require decisions about what network 
elements and services must be shared, at what prices, on what other 
terms, and for how long. These judgments are technically complex, 
requiring an understanding of the operation and economics of 
telecommunications networks and services. They must be based on facts 
and reasoned economic analysis and must operate within the statutory 
constraints of the 1996 Act, like any agency decisions. But the 
judgments are necessarily experimental in assessing, on the one hand, 
when sharing on particular terms seems likely to produce the kinds of 
benefits contemplated by the statute and, on the other hand, when such 
sharing, by making piggybacking too attractive, is likely to undermine 
the kind of independent competitive investments the statute seeks to 
promote. The judgments must therefore be ever-changing. The 1996 Act is 
comprehensively undertaking the task of making those judgments, at both 
the federal and state levels. And it does so through an expert, 
flexible, agency-centered process that is more suited to making, and 
constantly adjusting, the necessary judgments. That separate regime 
highlights why the antitrust system is not suited to the task.
    The only circumstances where Section 2 has recognized a single-firm 
duty to engage in some kinds of dealing with rivals is a narrow one: 
where the firm has refused to sell to rivals (or rivals' customers) 
what the firm was already voluntarily selling to others on the desired 
terms. That particular kind of stark discrimination has been present in 
every one of the cases finding liability for a refusal to deal--in 
Lorain Journal,\8\ in the 1920s and 1990s Kodak decisions,\9\ in Otter 
Tail,\10\ and in Aspen Skiing,\11\ as well as in the concerted action 
cases of Terminal Railroad \12\ and Associated Press.\13\ It was also 
present in the Seventh Circuit's MCI case,\14\ apparently the first and 
only case of liability under the there-formulated ``essential 
facilities doctrine.'' (That doctrine, as Justice Breyer has noted, is 
not a Supreme Court doctrine. It was formulated in MCI, but it got 
little attention there because its application was not even contested 
by AT&T on the local-access claims; AT&T's sole argument was a defense 
of good-faith practice under a changing regulatory regime. No later 
appellate application of the doctrine has resulted in affirming 
liability, and such later interpretations of this doctrine have made 
clear its proper limits--including the Fourth Circuit's Laurel Sand 
decision mentioned above.)
---------------------------------------------------------------------------
    \8\ Lorain Journal Co. v. United States, 342 U.S. 143 (1951).
    \9\ Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 
359, 368-69, 375 (1927); Eastman Kodak Co. v. Image Technical Servs., 
Inc., 504 U.S. 451 (1992).
    \10\ Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).
    \11\ Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 
(1985).
    \12\ United States v. Terminal Railroad Ass'n, 224 U.S. 383 (1912).
    \13\ Associated Press v. United States, 326 U.S. 1 (1945).
    \14\ MCI Communications Corp. v. AT&T, 708 F.2d 1081 (7th Cir. 
1983).
---------------------------------------------------------------------------
    The discrimination situation--the stark refusal to make available 
to competitors (or their customers) the very services and terms being 
voluntarily made available to other customers--has been the pre-
condition to demanding of a monopolist an explanation for a refusal to 
share: if you're selling this to others at a price that is profitable 
and lets you recoup your investment, what reason is there for not 
selling the same thing at the same price to a rival? There might be 
answers--differential treatment can be justified; it isn't by itself 
illegal--but without that discrimination there has not been liability 
for refusals to share. There are at least two basic reasons. First, 
where the defendant is already voluntarily offering the desired terms, 
there is no antitrust intrusion on the basic competitive choices of (a) 
what to sell and (b) at what price--the choices through which a firm 
enjoys the rewards of successful investments. There is, accordingly, 
much less reason to worry about deterring long-run and short-run 
investments by requiring the results to be shared. Second, the 
institutional task for courts is much more manageable in this 
situation. The voluntarily sales furnish a standard of conduct--
equality--that the courts do not have to define on their own.
    It is worth highlighting how different is the situation where a 
claim is made for sharing on newly forced terms (as opposed to terms 
already being offered voluntarily) and, therefore, why Section 2 has 
never recognized such a claim. Any effort to demand sharing of assets 
on new terms requires something antitrust juries and judges, through a 
treble-damages system, can't reliably do. To elaborate a little on what 
I've summarized above, the problem that has never been undertaken in 
the antitrust system is to strike a balance so as not to do more harm 
than good, both in the short run and in the long run.
    Long-run investment incentives would be threatened by a Section 2 
rule that says you must share the reward if your investments turn out 
successful enough. The essence of the US Steel point about the limited 
reach of Section 2 is that antitrust respects that truth. Indeed, this 
is a fundamental reason for having property rights in the first place, 
as Professor Elhauge has recently elaborated in his Stanford Law Review 
article.\15\ US Steel and the Standard Oil \16\ case note that the 
Sherman Act respects these property rights.
---------------------------------------------------------------------------
    \15\ Elhauge, Defining Better Monopolization Standards, 56 Stan. L. 
Rev. (forthcoming Nov. 2003), www.law.harvard.edu/faculty/elhauge.
    \16\ Standard Oil Co. v. United States, 221 U.S. 1 (1911).
---------------------------------------------------------------------------
    Even in the short run, there are at least three problems with 
sharing duties--as recognized in the FCC's Triennial Review Order and 
in the opinions of Justice Breyer and Senior Judge Williams mentioned 
above. First: a duty to share assets risks diminishing the incumbent's 
investments in creating those assets in the first place, and in 
maintaining and upgrading them, for the rewards must be shared but the 
risks fully borne. Local telephone networks in particular need such 
investment: they do not spring from the ground, but require the 
constant attention of hundreds of thousands of employees and billions 
of dollars investment. Second: a duty to share risks deterring 
independent investments by new entrants: sharing may be cheaper, and is 
certainly less risky, than investing in one's own facilities. Third: a 
duty of incumbents to share can harm the best new entrants, those who 
do build their own facilities: they are faced with competition not just 
from the incumbent but from all the rivals who can cheaply share the 
incumbent's assets. On top of these risks, the costs of implementing 
and administering any sharing duty can be very substantial, so that any 
market benefits must be large enough to exceed those costs. And: if the 
incumbent can't reliably determine the required sharing terms in 
advance--if there are vague legal standards requiring years of costly 
and uncertain litigation--the risk of retrospective treble damages 
skews choices toward overgenerous sharing.
    Again, my point is not that, conceptually, there is no situation 
where these risks and costs could be outweighed by the possible 
benefits in encouraging investment in unshared assets that compelled 
sharing of some assets might make possible. The Supreme Court 
recognized in the Verizon v. FCC case that it is ``not obviously 
unreasonable'' to conclude that there are such situations where 
compelled competition has net benefits and that the 1996 Act is 
Congress's experiment to identify such situations.\17\ But that 
experiment is being conducted through expert agencies and 
administrative processes that can be flexible--in adopting and revising 
and abandoning particular sharing duties; in quickly responding to 
access demands; in knowledgeably evaluating complaints about 
implementing complex interconnection agreements; in designing 
performance measures, with accompanying levels of penalties, that 
reflect the newness and complexity of the tasks they are imposing.\18\ 
The antitrust system, without this kind of expertise and flexibility, 
has thus never recognized sharing duties on newly forced terms.
---------------------------------------------------------------------------
    \17\ Verizon Communications Inc. v. FCC, 535 U.S. 467, 510 (2002).
    \18\ Current available annual penalties regarding Verizon's 
performance exceed $1.24 billion. Attachment A summarizes the 
performance regime and these penalties.
---------------------------------------------------------------------------
    The importance of flexibility was illustrated just recently in the 
FCC's recent Triennial Review Order.\19\ A few years ago the FCC 
required incumbents to share pieces of the spectrum available on their 
loops, so-called line-sharing. But it now has concluded that that 
judgment is mistaken, as it actually can discourage independent 
competition.\20\
---------------------------------------------------------------------------
    \19\ Review of the Section 251 Unbundling Obligations of Incumbent 
Local Exchange Carriers, Report and Order and Order on Remand and 
Further Notice of Proposed Rulemaking, CC Docket Nos. 01-338, et al., 
FCC 03-36 (released Aug. 21, 2003) (Triennial Review Order).
    \20\ Triennial Review Order para.para. 255-261.
---------------------------------------------------------------------------
    That is just one illustration of the judgments that regulators at 
both the federal and state levels must make. The many massive FCC 
orders, and the numerous state-level orders that have been issued over 
the years, display the magnitude and complexity of the task and the 
range of subjects that must be addressed, and re-evaluated, in light of 
changing circumstances. They address access to different kinds of 
switch-to-customer connections (different kinds of ``loops''), 
different kinds of interoffice trunks and switches, different forms of 
access to central offices, varieties of computerized ordering, billing, 
and other operation-support systems. With respect to all these matters, 
the agencies must determine the terms on which they think that there 
will be greater benefit than harm in forcing the incumbents to share, 
rather than forcing new entrants to take the risks of investing on 
their own. Yet the cases brought by Trinko and other plaintiffs would 
have all these judgments made under Section 2 of the Sherman Act before 
juries and judges, working alongside the agencies but applying 
different standards and operating under different timeframes.
    The sharing duties alleged in those cases would not only be novel 
as a matter of antitrust law and unjustifiable for the substantive and 
institutional reasons I've mentioned. The 1996 Act is itself a good 
reason for not expanding Section 2 newly to recognize such duties. 
Doctrinally, the comprehensive regime of the 1996 Act furnishes one 
reason not to expand Section 2 under the often-recognized principle 
that a general statute, especially a common-law like one such as the 
Sherman Act, shouldn't be newly expanded to cover what more specific 
federal regimes already are addressing. That familiar principle has 
been recognized by the Supreme Court in a number of contexts, including 
in the ERISA context in the 2003 Black & Decker case,\21\ and it is 
reflected in the Seventh Circuit's Goldwasser decision \22\ in this 
area particularly.
---------------------------------------------------------------------------
    \21\ Black & Decker Disability Plan v. Nord, 123 S. Ct. 1965 
(2003).
    \22\ Goldwasser v. Ameritech Corp., 222 F.3d 390 (7th Cir. 2000).
---------------------------------------------------------------------------
    Expanding Section 2 in this context is distinctly unnecessary in 
this area, given the 1996 Act. The 1996 Act gives statutory rights to 
quick decisions for regulators on access demands, subject to judicial 
review. That system, including the reviewing courts, cannot be expected 
to fail unless the antitrust system, including the same courts, would 
fail as well. Then-Judge Breyer relied on a similar point for the First 
Circuit in the Town of Concord decision.
    Expanding Section 2 in this context is particularly unwise in this 
area. Doing so would raises serious problems of disruption of and 
interference with the regulatory processes for implementing the 1996 
Act. Expanding Section 2 in this area, in fact, would re-introduce the 
very kind of judicial regulatory regime that Congress rejected when it 
effectively ended Judge Greene's role in the 1996 Act, returning the 
task of fine-tuned telecommunications regulation to administrative 
agencies.
    Expanding Section 2 would reduce the agencies' flexibility in 
performing their delicate balancing task demands, especially their 
ability to enforce ceilings on sharing duties, which are as important 
as floors in that regime, for it is the refusal to allow sharing that 
induces the independent investments by new entrants that constitutes 
genuine competition. The process of weaning entrants off no-longer-
justified sharing, or excessively favorable terms of sharing, can only 
be impaired by adding antitrust--the threats of treble-damages, class 
actions, hard-to-change injunctions, and, even, the sheer expense of 
defending complex antitrust suits, even while participating in the two-
level regulatory proceedings superintending the very same matters.\23\
---------------------------------------------------------------------------
    \23\ E.g., Remarks of John A. Rogovin, FCC General Counsel, 
Manhattan Institute (Oct. 30, 2002), available at www.manhattan-
institute.org/html/clp--10-30-02.htm (``unquestionably there is going 
to be a lot of tension'' between antitrust and FCC implementation of 
the 1996 Act; ``[I]t's difficult to imagine how a private case getting 
into this `essential facilities' issue--dealing, for example, with the 
local loop--is not going to bump up quite seriously into what the 
commission is doing'').
---------------------------------------------------------------------------
    There are hundreds, maybe thousands, of agreements between 
incumbents and competitors. They are lengthy, complex, and detailed, 
all doing something new and involuntary. Disputes are inevitable under 
many of the open-ended and technical terms of the agreements, which is 
why there are built-in performance standards and penalties and 
expeditious dispute-resolution mechanisms, like the one that resolved 
the problem here in months. Yet recognizing the claims of Trinko and 
others would allow all these disputes to be made into antitrust cases 
simply by adding the allegation of a pattern of violations intended to 
slow overall marketwide entry. Those suits threaten years of costly, 
uncertain, and risky litigation before diverse juries deciding whether 
the incumbents dismantled themselves rapidly or helpfully enough. That 
prospect tilts the 1996 Act balance in only one direction.
    In particular, it impairs the expeditious resolutions of problems 
under the 1996 Act. In the Trinko case itself, for example, AT&T and 
Verizon had a state-approved agreement saying ``don't go to court to 
redress grievances,'' but instead use fast nonjudicial processes to 
resolve problems. They used those processes: the underlying problem was 
fully resolved, with compensation paid, in a few short months. The 
prospect of treble-damages antitrust class actions can only impair the 
ability of the 1996 Act regulatory regime to achieve such efficient 
resolutions--and only drains resources from telecommunications 
investment, which is now so sorely needed.
    Thank you again for the opportunity to testify before the Committee 
today. I am happy to answer any questions.

                               __________

                              ATTACHMENT A

    Each state has adopted a Performance Assurance Plan that defines 
automatic penalties to be paid by incumbent local carriers to the CLECs 
for performance deficiencies. These PAPs have been repeatedly adjusted 
in their details as state commissions have found different aspects of 
performance to require different levels of motivation. The total level 
of available penalties is quite high. The first PAP, established in New 
York, was justified as sufficient because it put at risk a sizeable 
fraction of Verizon's annual profits from the state. In reviewing New 
York's PAP, the FCC concluded: ``We believe it is useful to compare the 
maximum liability level [under the PAP] to Bell Atlantic's net revenues 
derived from local exchange service--after all, it is primarily its 
local service profits that Bell Atlantic would have a theoretical 
incentive to `protect' by discriminating against competing local 
carriers. * * * In 1998, Bell Atlantic reported a Net Return of $743 
million in New York: $269 million [the amount then at risk under the 
PAP] would represent 36% of this amount.'' Application of Verizon New 
York, 15 FCCR 3953, para. 436 (1999). The New York PAP subsequently was 
increased to $293 million, or 39% of Verizon's Net Return.
    The current total of available annual penalties in Verizon's states 
(not counting New Jersey) is $1.24 billion. New Jersey has no annual 
cap on the penalties that could be incurred. Aside from New Jersey, the 
total amounts of available penalty levels were set initially as a 
fraction of profits from the state (usually 39%), but because profits 
have declined while the penalties have stayed the same or increased, 
the fraction of Verizon's profits that could be forfeited is generally 
much larger than 39%. For example:




    Chairman Sensenbrenner. Thank you, Mr. Thorne.
    Mr. Wright.

  TESTIMONY OF CHRISTOPHER J. WRIGHT, FORMER GENERAL COUNSEL, 
FEDERAL COMMUNICATIONS COMMISSION, PARTNER, HARRIS, WILTSHIRE & 
                          GRANNIS LLP

    Mr. Wright. Thank you, Mr. Chairman and Ranking Member 
Conyers. I very much appreciate the opportunity to be here.
    I've also worked on these issues for years. While working 
for Solicitor General Starr, I worked on the Kodak case that 
Mr. Pfeiffer mentioned, and as General Counsel of the FCC under 
Chairman Kennard I learned just how difficult it is to 
introduce competition into the local telecom market.
    Mr. Thorne and I were on a panel about 2 months ago, and I 
asked him whether under Verizon's theory of Trinko it was an 
antitrust violation if the CEO of a Bell company instructed his 
managers to do everything they can to undermine competition 
from companies that must lease network elements from the Bell 
company. I provided an example in which the CEO directed his 
managers to slow deployment of loops to competitors and to 
provide discriminatory maintenance of those essential loops. In 
my hypothetical the CEO justified his behavior on the ground 
that the company would make more money if it maintained its 
monopoly on the retail market. Mr. Thorne answered that that 
would not be a violation of the antitrust laws, which is an 
accurate representation of the view they presented to the 
Supreme Court. I'd be very interested in hearing whether Mr. 
Pate thinks discriminatory provisioning of essential telecom 
facilities violates the antitrust laws.
    As has been stated, the Government's Trinko brief takes the 
position that a monopolist normally may refuse to deal if it 
would make higher profits by maintaining and extending a retail 
monopoly than it would by wholesaling facilities to 
competitors. It appears that the Government thinks the only 
circumstances in which there's no business justification for 
such action is a situation where the monopolist sacrifices its 
short-term profits.
    I think, as Mr. Pfeiffer has said, that raising rivals 
costs is as effective as sacrificing profits and is a 
traditional basis for finding anticompetitive behavior and it 
certainly fits into what the Supreme Court in Kodak ruled, that 
it is an antitrust violation under section 2 for a company to 
use monopoly power to foreclose competition, to gain a 
competitive advantage or to destroy a competitor.
    So in our view, we believe the savings clause clearly 
preserves such claims. As Ranking Member Conyers stated, one of 
the arguments that has been advanced is that Telecom Act 
remedies are sufficient, we don't need antitrust enforcement. 
Of course that's not an answer to the savings clause, which 
saves antitrust remedies without respect to whether Telecom Act 
remedies are sufficient. And Congress, no doubt, saved 
antitrust law because it knew that the threat of treble damages 
might motivate the Bell companies to lease their essential 
facilities to competitors on a nondiscriminatory basis when 
their natural inclination would be to undermine competition.
    But in any event, Telecom Act remedies are not sufficient, 
as Ranking Member Conyers said, as Chairman Powell of the FCC 
has repeatedly stated, and the FCC has not been an enforcement 
agency for some time. I am proud that I helped Chairman Kennard 
create an enforcement bureau. I know there are good people in 
that bureau. I know that they're trying to turn it around, but 
it is far from having the capacity and competence of an 
antitrust court.
    While I disagree with the Antitrust Division's position in 
Trinko, its position is premised on the theory that enforcement 
of the requirements of the Telecom Act will be sufficient to 
open local telecom markets to competition. I certainly agree 
that proper interpretation and enforcement of the Telecom Act 
is also essential.
    As I explained in my written comments, section 271 of the 
act is now the most important provision of the act. Although 
the Bells speak of it as if its significance was limited to 
defining what they had to do to open their markets to 
competition, section 271 also requires the Bells to continue to 
comply with the competitive checklist or lose the ability to 
provide long distance service.
    Verizon and the other Bells have flooded the FCC with 
forbearance petitions asking the Commission to relieve them of 
the obligation to comply with section 271 now that they have 
gotten their side of the bargain and entered the long distance 
market.
    Mr. Pate is right. The Antitrust Division has played an 
essential role under section 271 so far on advising the FCC on 
how to implement the Telecom Act, including recommending that 
the Commission adopt a TELRIC pricing standard, which it did. 
The Division should continue to play that important role.
    Thank you very much.
    [The prepared statement of Mr. Wright follows:]

              Prepared Statement of Christopher J. Wright

    Thank you for the opportunity to present my views on the very 
important issues you are considering at this hearing. I have dealt with 
these issues over the last two decades while working for the Solicitor 
General, as General Counsel of the Federal Communications Commission, 
and, most recently, while representing telecommunications companies. 
Because of that experience, I understand just how difficult it has been 
to dismantle the monopolies given to the Bell Operating Companies.
    The main point I would like to make is that proper enforcement of 
the antitrust laws and section 271 of the Communications Act is 
critical to ensuring that local telecommunications markets become as 
vibrantly competitive as the long-distance market and the wireless 
market. Proper enforcement of the antitrust laws and section 271 will 
give consumers real choices, but faulty enforcement will lead to a 
reversal of the modest steps that have been made toward opening local 
telecommunications markets to competition and could lead to the 
extension of the Bells' dominance into the long-distance market.
    The Importance of Antitrust Enforcement. I know the Committee is 
very familiar with the Trinko case and the other cases involving the 
antitrust savings clause, such as Goldwasser.\1\ And the Committee 
certainly knows that Congress included a savings clause in the 1996 Act 
to make clear that ``nothing in this Act . . . shall be construed to 
modify, impair, or supersede the applicability of any of the antitrust 
laws.'' \2\ Despite the savings clause, the Bells have relied on some 
unfortunate dicta in Goldwasser to argue that the enactment of section 
271 and the other market-opening provisions of the Telecommunications 
Act of 1996 preempted the application of the antitrust laws in the 
telecom sector. That argument is a loser: On account of the antitrust 
savings clause, there is simply no way to conclude that, if a Bell 
company violates both the Telecommunications Act and the antitrust 
laws, a person injured by the action may not bring an antitrust action. 
The Department of Justice never endorsed the Bells' preemption argument 
in its broadest form--indeed, the Antitrust Division opposed the Bells 
on that issue in the lower courts--and in the Supreme Court the Bells 
have not emphasized the preemption argument in its straightforward 
form.
---------------------------------------------------------------------------
    \1\ Verizon Communications, Inc. v. Law Offices of Curtis V. 
Trinko, Sup. Ct. No. 02-682 (argued Oct. 14, 2003); Goldwasser v. 
Ameritech Corp., 222 F.3d 390 (7th Cir. 2000).
    \2\ Section 601(b) of the 1996 Act (codified at 47 U.S.C. Sec. 152 
note).
---------------------------------------------------------------------------
    Verizon and the government have instead advanced positions that 
would unduly restrict the application of the antitrust laws. Those laws 
require monopolists to make their facilities available to competitors 
in circumstances where that is essential to permit the development of 
competition. For example, in the Kodak case, the Supreme Court held 
that Kodak could not refuse to sell parts used to repair Kodak copiers 
to independent service organizations that sought to compete with Kodak 
in the market for servicing copying machines.\3\ Without that 
requirement, the Court recognized, Kodak could leverage its monopoly in 
the parts market into the service market. In earlier cases, the Court 
reached similar conclusions. For example, in Otter Tail the Court held 
that section 2 of the Sherman Act required an electric utility to sell 
power at wholesale to municipalities that wanted to replace the utility 
as the retail provider of electric power.\4\ And in the MCI v. AT&T 
case that played a key role in the break-up of AT&T, the Seventh 
Circuit held that telecommunications facilities are the archetypal 
example of essential facilities.\5\
---------------------------------------------------------------------------
    \3\ Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 
451 (1992).
    \4\ Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).
    \5\ MCI Communications Corp. v. AT&T Co., 708 F.2d 1081 (7th Cir. 
1983).
---------------------------------------------------------------------------
    In the Trinko case, Verizon has attempted to distinguish Kodak and 
Otter Tail by pointing out that in those cases the defendant had 
voluntarily agreed to deal with competitors at some point in time. 
While that is so, it is truly a distinction without a difference. In 
fact, that approach would reward companies that consistently take every 
possible step to prevent the emergence of competition. And that 
approach would make the antitrust laws a dead letter in the telecom 
sector. Under the interpretation of the antitrust laws advanced by 
Verizon in Trinko, it would not violate the Sherman Act if a Bell 
company CEO told his managers that, because the company would have 
higher profit margins without competition, they should do everything 
they can to undermine competitors that must lease essential facilities 
from the Bell company--including slow-rolling deployment of those 
facilities and providing discriminatory treatment with respect to 
maintaining those facilities--as long as the company never voluntarily 
agreed to lease facilities to competitors.
    The Antitrust Division supported Verizon in Trinko, but it 
emphasized a different argument. The Antitrust Division stated that, to 
find an antitrust violation, a court must always find evidence of 
exclusionary conduct and advanced an unduly restricted interpretation 
of that phrase. In the federal government's view, ``exclusionary 
conduct'' is a ``demanding standard,'' and it appears that the 
``sacrifice of short-term profits'' in order to injure competition is 
the only form of anticompetitive behavior the Antitrust Division finds 
sufficient.\6\ While the ``sacrifice test'' makes sense in the 
predatory pricing cases where it originated, it does not make sense in 
the context of essential facilities and monopoly leveraging cases like 
Trinko. Under the test, it would be a valid defense for a monopolist to 
argue that it makes ``business sense'' for it to exploit its dominant 
position and undermine the development of competition because it would 
make more money if it maintains and extends its monopoly than it would 
if competition develops. But competition will never develop in local 
telecommunications markets--and never would have developed in the long-
distance market--if that were the standard.
---------------------------------------------------------------------------
    \6\ Brief for the United States and the Federal Trade Commission in 
Sup. Ct. No. 02-682, Verizon Communications, Inc. v. Law Offices of 
Curtis V. Trinko, at 7-8.
---------------------------------------------------------------------------
    The Antitrust Division's analysis rests on a faulty understanding 
of the effect of the savings clause in particular and the 1996 Act in 
general. Under the Act, Bells with authority to provide long-distance 
service must lease specific ``network elements'' to competitors at 
cost-based rates. While not every violation of the duties established 
by the 1996 Act necessarily is an antitrust violation, repeated 
failures to provide nondiscriminatory access to essential network 
elements, taken in order to frustrate the development of competition, 
are straightforward violations of section 2 of the Sherman Act under 
Kodak, Otter Tail, and MCI v. AT&T. That conclusion is reinforced by 
the 1996 Act because, under antitrust law, it has always been 
appropriate to consult ``extrinsic law'' to determine what is 
anticompetitive.
    Yet the Antitrust Division seems to think the legal regime Congress 
established in 1996 immunizes the Bells from antitrust liability, 
despite the savings clause. Most particularly, as its brief makes 
clear, in the Division's view the fact that Congress required the Bells 
to lease network elements at wholesale rates that are lower than the 
retail rates the Bells could charge if they maintained their monopolies 
provides a valid justification that has the effect of conferring 
immunity from the antitrust laws.\7\ That is backwards: although not 
every violation of the Telecommunications Act is a violation of the 
antitrust laws, the fact that the Telecommunications Act requires the 
leasing of network elements at cost-based rates does not immunize 
failures to do so, taken to impede competition, from antitrust 
liability. To the contrary, as the government acknowledged in its 
brief, under the antitrust laws the ``violation of extrinsic statutory 
or legal duties may be significant in determining whether conduct is 
exclusionary for antitrust purposes.'' \8\ By enacting the savings 
clause, Congress made clear that antitrust law--including the normal 
rule that it is appropriate to consult extrinsic law to determine what 
is anticompetitive--continues to apply.
---------------------------------------------------------------------------
    \7\ Id. at 3 n.1.
    \8\ Id. at 25 n.10.
---------------------------------------------------------------------------
    Moreover, Congress did not go to the trouble of making clear in the 
1996 Act that it was saving the antitrust laws from preemption so that 
antitrust laws would be construed to have no role to play in that 
effort. To the contrary, Congress understood that the antitrust laws 
had played a key role in opening the long-distance market to 
competition and knew that the threat of antitrust remedies could play 
an important role in opening local markets to competition. And, 
contrary to the position espoused by the Antitrust Division in Trinko, 
it makes no sense to contend that the Bells may present a legitimate 
business justification in an antitrust action by arguing that they 
don't want to do what the 1996 Act compels them to do because they will 
be better off if they retain their monopolies.
    In addition, contrary to the arguments advanced by Verizon, the 
existence of the regulatory regime Congress created in 1996 makes 
application of the Sherman Act easier. Congress has established a 
process to determine what network elements the Bells must lease to 
competitors and the prices for leasing them. An antitrust court 
therefore need not struggle with questions about the price at which 
those facilities must be leased, but can concentrate on determining 
whether a company violated its legal duties in order to maintain or 
extend its monopoly. Thus, rather than the sacrifice test, the 
appropriate antitrust standard is whether a defendant impeded access to 
a facility it is legally required to provide to competitors in order to 
thwart competition.
    With respect to antitrust enforcement, I would also like to make 
the point that regulatory remedies by themselves are unlikely to be 
effective. I say that as someone who worked for seven years at the 
Federal Communications Commission and, while there, helped Chairman 
Kennard establish the new Enforcement Bureau. I also know that the 
Bureau has an excellent staff and that there are many able staff in the 
state commissions around the country. But I also know how limited their 
resources are, how ferociously the Bells have fought since 1996 to 
enter the long-distance markets without really opening their local 
markets to competition, and how resource-intensive the development of a 
case demonstrating anticompetitive actions can be. In addition, the FCC 
primarily views itself as a rulemaking body, and it deals with Bell 
company representatives every day while acting in its quasi-legislative 
capacity. It is very difficult for it to put on its quasi-adjudicative 
hat and act as a judge with respect to those companies--and I don't 
think anyone who is familiar with the Commission disagrees that the FCC 
is more comfortable when making rules than when resolving complaints. 
And finally, as Chairman Powell has stated repeatedly, the FCC's 
authority to punish carriers that violate the Telecom Act is quite 
limited.
    For those reasons, there really is no question that the Bell 
companies are much more likely to provide nondiscriminatory access to 
their essential facilities if antitrust remedies are available than if 
there is merely the possibility of regulatory action. And experience 
since 1996 has confirmed that consumers--and especially residential and 
small business customers--have no prospect of benefiting from the 
competitive alternatives Congress intended to provide by means of the 
1996 Act unless competitors may lease those facilities on 
nondiscriminatory terms and at cost-based rates.
    Section 271 enforcement is more important than ever. The FCC will 
soon grant the final petition authorizing a Bell company to enter the 
long-distance market. Although the Bells seem to think that section 271 
is therefore now less important, in fact section 271 is now more 
important than ever. Section 271 specifies what a Bell company must do 
to enter the long-distance market and also what the Bells must do to 
continue to provide long-distance service. Section 271(d)(6) makes 
clear that a Bell company's authorization to provide long-distance 
service should be suspended or revoked if it does not continue to 
comply with section 271's competitive checklist. That means that 
section 271 has superseded section 251, which governs all incumbent 
local exchange carriers, as the principal statutory provision governing 
the Bell companies. Before the section 271 petitions were granted, the 
requirements of section 271 did not actually apply to the Bell 
companies--those requirements told the Bell companies what they must do 
to obtain authorization to provide long-distance service. After a 
section 271 petition has been granted, however, section 271 has 
increased legal significance--a violation of the checklist now calls 
for the imposition of the remedies listed in section 271(d)(6).
    As I know this Committee is well-aware, Congress crafted section 
271 to require the Bell companies to take the steps necessary to let 
competitors into their markets before the Bells were permitted to enter 
the long-distance market, and there is a real danger of the Bells 
extending their dominance into the long-distance market on account of 
their control of essential facilities if they are not required to 
continue to take the steps necessary to open their markets to 
competition. In particular, they must lease their essential facilities 
to competitors at nondiscriminatory rates. Because that requirement is 
so critical, the competitive checklist in section 271 requires the Bell 
companies to lease four specified network elements--loops, transport, 
switching, and signaling--on a nondiscriminatory basis at cost-based 
rates. By leasing those four network elements--which have come to be 
known as the ``platform of network elements'' or ``UNE-P''--a 
competitor may enter local markets as easily as the Bells may enter the 
long-distance market, which the Bells do by leasing capacity from 
interexchange carriers at the cost-based rates available in that highly 
competitive market. The competitive choices now available to 
residential customers and small businesses primarily depend on 
nondiscriminatory access to the platform of network elements.
    The Bells relied heavily on the existence of competitors using the 
platform of network elements in support of their section 271 
applications. Early on, they persuaded the FCC that a competitor 
leasing the platform is a ``facilities-based'' competitor within the 
meaning of ``Track A'' of section 271. Now they argue that a competitor 
using the platform of network elements provides merely ``synthetic 
competition.'' That is not so--any more than the competition the Bells 
provide in the long-distance market is ``synthetic'' because they lease 
facilities to provide long-distance service. But in any event the Bells 
can't have it both ways--they can't be permitted to point to UNE-P 
competitors as evidence that their local markets are open to 
competition so they may enter the long-distance market and then turn 
around and eliminate the ability of those competitors to provide 
service. That is a classic bait-and-switch tactic.
    But that is only one example of the arguments the Bells are already 
advancing in an attempt to renege on their side of the bargain embodied 
by section 271. There are at least three other examples. First, in the 
recent Triennial Review proceeding, the Bells persuaded the FCC to 
adopt an ``impairment'' standard under section 251 which provides that 
incumbent local exchange carriers do not have to lease network elements 
to competitors even where those competitors ``would suffer from a 
substantial cost disadvantage'' and ``are likely to sell less of their 
product'' without access to the network elements.\9\ In other words, 
under the FCC's new test, a competitor is not necessarily ``impaired'' 
in providing competitive service if its product is non-competitive 
without access to the network elements Congress identified as essential 
to the development of competition. It is hard to see what 
``impairment'' means if it does not apply in that circumstance, as 
Judge Bork explained in a letter that the Commission followed in part, 
but only in part.\10\
---------------------------------------------------------------------------
    \9\ Review of the Section 251 Unbundling Obligations of Incumbent 
Local Exchange Carriers; Implementation of the Local Competition 
Provisions in the Telecommunications Act of 1996; Deployment of 
Wireline Services Offering Advanced Telecommunications Capability, 
Report and Order and Order on Remand and Further Notice of Proposed 
Rulemaking, FCC No. 03-36, para. 112 (rel. Aug. 21, 2003) (``Triennial 
Review Order'').
    \10\ Letter from R. Bork to Chairman Powell, attached to filing by 
A&T in FCC Docket 01-338 (Jan. 10, 2003).
---------------------------------------------------------------------------
    Second, the Bells persuaded the FCC that, even though the 
competitive checklist specifically requires the Bells to lease network 
elements under the ``cost-based'' standard adopted by Congress for 
network elements in 1996, and even though it is undisputed that loops, 
transport, switching, and signaling are ``network elements,'' the Bells 
do not necessarily have to charge cost-based rates for those network 
elements. And the FCC seemed to think that the Bells could set the 
prices for those network elements in some cases without arbitration by 
state commissions, who are charged by the 1996 Act with the task of 
establishing rates for network elements when the parties cannot 
agree.\11\ But Congress did not establish both substantive and 
procedural rules for determining the prices of network elements so that 
the Bells could ignore those rules.
---------------------------------------------------------------------------
    \11\ Triennial Review Order, para.para. 656-64.
---------------------------------------------------------------------------
    Third, Verizon filed a petition asking the FCC to ``forbear'' from 
enforcement of the four items on the section 271 checklist if a new 
entrant is not ``impaired'' without access to the network element under 
the FCC's new test. The FCC recently denied that request, explaining 
that the section 271 checklist could not be more clear that Bell 
companies that are authorized to provide long-distance service must 
lease the four network elements to competitors without regard to the 
impairment test.\12\ Verizon has brought suit challenging that 
decision. It also has filed a modified forbearance request asking the 
Commission to refrain from enforcing the checklist insofar as it 
requires the Bells to lease network elements that may be used to 
provide high-speed transmission capabilities, and that petition is 
pending.\13\
---------------------------------------------------------------------------
    \12\ Public Notice, Commission establishes comment cycle for new 
Verizon petition requesting forbearance from application of section 
271, FCC 03-263 (Oct. 27, 2003) (citing Triennial Review Order).
    \13\ Id.
---------------------------------------------------------------------------
    The Bells' new arguments are aimed at reversing the modest gains 
competitors have made in offering competitive alternatives by 
eliminating the availability of the platform of network elements. For 
example, with respect to residential and small business customers, it 
is entirely clear that, without the platform of network elements, the 
competition provided by MCI's Neighborhood plan and similar offerings 
would simply not be possible. And the Bells can make network elements 
unavailable just as effectively by pricing them at discriminatory rates 
as by refusing to lease them at all. The Antitrust Division played a 
critical role in 1996 by filing comments explaining that in detail and 
urging the FCC to adopt a long-run incremental cost pricing standard, 
which we did.\14\ Five former chief economists of the Division--a 
bipartisan group, I would like to add--also played a critical role that 
year by making a filing urging the FCC to stand by its pricing rule 
after the Eighth Circuit, at the Bell companies' urging, overturned 
it.\15\ Of course, the FCC stood by its pricing rule and the Supreme 
Court ultimately upheld it in Verizon v. FCC.\16\ Nevertheless, and 
despite many more pressing matters, the FCC has opened a proceeding at 
the Bells' request to revisit its pricing rules.
---------------------------------------------------------------------------
    \14\ Comments of the U.S. Department of Justice, FCC CC Docket 96-
98 (May 16, 1996) at 31.
    \15\ Letter from B. Owen et al. to R. Hundt, FCC CC Docket 96-98 
(Dec. 2, 1996).
    \16\ Verizon Communications, Inc. v. FCC, 5535 U.S. 467 (2002).
---------------------------------------------------------------------------
    The positions currently being advanced by the Bells are very much 
in keeping with the Bells' consistent efforts since 1996 to enter the 
long-distance market while keeping their local markets closed to 
competition. As I am sure many of you recall, SBC persuaded a district 
court judge to declare section 271 unconstitutional as a Bill of 
Attainder on New Years' Eve 1997. That decision, designed to allow them 
to provide long-distance service without opening their local networks 
to competition, was overturned, of course.\17\ And the Bell companies' 
position was all the more startling because Congress had enacted 
section 271 exactly as the Bell companies had urged in order to avoid 
any constitutional problem.\18\
---------------------------------------------------------------------------
    \17\ SBC Communications, Inc. v. FCC, 154 F.3d 226 (5th Cir. 1998).
    \18\ BellSouth Corp. v. FCC, 162 F.3d 678, 690-91 (D.C. Cir. 1998).
---------------------------------------------------------------------------
    In addition to arguing that section 271 is unconstitutional, SBC 
also argued that the FCC had erroneously denied their section 271 
application for Oklahoma on the basis that there was no competition 
when, SBC claimed, there was competition--it pointed out that four 
employees of a would-be competitor were getting service from their 
employer on a test basis. Of course, the D.C. Circuit rejected the 
argument that such evidence established that SBC had opened the 
Oklahoma market to competition.\19\ But the point is that the Bells 
early on advocated positions that would have permitted them to enter 
the long-distance market without showing that their local markets were 
open to competition. Along the same lines, Verizon argued that a more 
obscure provision--section 272(e)(4)--authorized it to enter the long-
distance market without satisfying the competitive checklist--another 
argument that the courts rejected that would have permitted the Bells 
to provide long-distance service while retaining their local 
monopolies.\20\
---------------------------------------------------------------------------
    \19\ SBC Communications, Inc. v. FCC, 138 F.3d 410 (D.C. Cir. 
1998).
    \20\ Bell Atlantic Telephone Cos. v. FCC, 177 F.3d 1057 (D.C. Cir. 
1997).
---------------------------------------------------------------------------
    The Bells also argued that they should be permitted to disconnect 
network elements solely for the purpose of raising their rivals' costs. 
Or, the Bells argued in the alternative, they should be permitted to 
impose ``glue charges''--payments not to disconnect network elements in 
the first place. The Supreme Court condemned the Bells' argument, using 
very strong language. ``As the Commission explains,'' the Court said, 
the Bells sought to ``'disconnect[] previously connected elements, over 
the objection of the requesting carrier, not for any productive reason, 
but just to impose wasteful reconnection costs on new entrants.'' \21\ 
The Court saw no more reason to permit the BOCs to ``impose wasteful 
costs'' on competitors than to permit them to ``sabotage network 
elements.'' \22\ However, in a confusing footnote that apparently was 
added to the Triennial Review Order at the last minute, the FCC appears 
to have concluded that Bells with authority to provide long-distance 
service need not combine network elements, at least in some 
circumstances.\23\ That would either effectively deny competitors the 
ability to use the platform of network elements or raise their costs 
for no productive reason.
---------------------------------------------------------------------------
    \21\ AT&T Corp., 525 U.S. at 394, quoting FCC Reply Brief at 23.
    \22\ AT&T Corp., 525 U.S. at 394.
    \23\ Triennial Review Order, supra, n. 1989.
---------------------------------------------------------------------------
    The common thread in each of the arguments the Bells advanced 
before their section 271 applications were granted is that the Bells 
wanted to enter the long-distance market without taking the steps 
necessary to open their local markets to competition. The common thread 
in each of the arguments the Bells are currently advancing is that, now 
that they have obtained authorization to provide long-distance service, 
they want to stop taking the steps that made competition possible. But 
Congress made very clear in section 271(d)(6) that the Bells must 
continue to comply with the checklist after they have entered the long-
distance market. No other approach would make sense. As the Supreme 
Court said in the Verizon decision, the Bells ``have an almost 
insurmountable competitive advantage'' on account of their ownership of 
network elements resulting from their prior status as franchised 
monopolists.\24\ Competitors must continue to be able to lease those 
bottleneck elements at nondiscriminatory rates or the competition that 
has developed will disappear.
---------------------------------------------------------------------------
    \24\ Verizon, 535 U.S. at 490.
---------------------------------------------------------------------------
    This Committee's close attention to the FCC's resolution of these 
issues is therefore more important than ever. Enforcement of section 
271's obligations is no longer in the background, but is now at the 
forefront. I therefore urge the Committee to ensure that section 271 is 
implemented as Congress intended, and that the Bells are not permitted 
to close local markets to competition now that they have entered the 
long-distance market.
    It also would also be helpful if the Antitrust Division urged the 
FCC to require the Bell companies to provide nondiscriminatory access 
to the four network elements Congress listed in section 271 at cost-
based rates. The Division's comments in 1996 were very helpful in 
establishing those requirements. The Division also has expressed doubt 
concerning the merit of a number of section 271 applications that the 
FCC nevertheless has approved, despite the FCC's duty under the statute 
to give ``substantial weight'' to the views of the Department of 
Justice--which highlights the need for continued oversight. In any 
event, it surely would make no sense, but instead would completely 
undermine the role Congress assigned the Department, if the FCC were 
now to forbear from enforcement of the requirements of section 271.
    Finally, although I disagree with the Antitrust Division's position 
in Trinko, its position is premised on the claim that enforcement of 
the requirements of the 1996 Act is sufficient to open all 
telecommunications markets to competition. Given that position, it is 
all the more important for the Department of Justice to make sure that 
the requirements of the 1996 Act, and especially the requirements of 
section 271, are applied as Congress intended.

    Chairman Sensenbrenner. Thank you very much, Mr. Wright.
    The questions will be done pursuant to the 5-minute rule, 
and Mr. Tracci on my staff has noted who has arrived in what 
order and that's--the Members will be called in the order in 
which they arrived, alternatively by side, starting with me.
    General Pate, one of the reasons why I feel so strongly on 
this issue is that the Telecom Act does not give standing to 
consumers to try to enforce the provisions of the law, whereas 
the antitrust laws do. And you mentioned in your testimony that 
the Department has taken the position in its Trinko amicus 
brief that an incumbent's denial of an essential facility to a 
competitor would only constitute the antitrust violation where 
it involves a sacrifice of short-term profits. That makes sense 
only insofar as it helps the defendant obtain or maintain 
monopoly power. You mention that this standard was advanced by 
the Department in its Microsoft and American Airlines filing. 
However, it is my understanding that that standard was not 
adopted by the Court in either of these cases.
    Can you cite a judicial precedent where the standard that 
you have advocated has been found to apply in the telecom 
sector, and do you think that the acceptance of this standard 
by the Supreme Court in Trinko would recast traditional 
antitrust analysis in the manner that would undermine the scope 
and application of the savings clause?
    Mr. Pate. With respect to Microsoft, we advanced that 
standard. It is not our reading of the opinion that the Court 
rejected it or used a balancing test, but rather that it was a 
standard that we advanced and that the Court's opinion can be 
read to indicate acceptance of that standard. There is a 
balancing discussion elsewhere in the case that has to do with 
what analysis should be applied once conduct is found to be 
exclusionary, which is the purpose for which we apply the ``but 
for'' test that you're talking about.
    In American Airlines, likewise, while the Court found that 
our factual submission didn't meet the standard, we do not read 
the opinion to reject that standard, which we were happy about 
because we thought that was a--excuse me.
    Chairman Sensenbrenner. Well, doesn't that just get to half 
the argument Mr. Wright has advanced to say, okay, you know, if 
the standard says you don't cut your short-term profits because 
of this behavior, but you drive up your competition's costs so 
that they become noncompetitive in the marketplace? Isn't that 
the same result?
    Mr. Pate. No. The point that we're making in the Trinko 
brief is, first, that the savings clause preserves antitrust, 
does not modify antitrust.
    Chairman Sensenbrenner. But you're trying to change how 
antitrust has been viewed in this area in the brief that you 
have advocated. And you know, I think Mr. Wright makes a good 
point. There are two sides to the coin. One is to engage in 
monopolistic activity by sacrificing your short-term profits. 
The other side of the coin, which you have not addressed and I 
think you ought to, is driving up the competition's costs so 
that they can't be competitive. Same result occurs either way.
    Mr. Pate. The antitrust laws we believe, as interpreted by 
the Supreme Court, strongly support the position we take in 
Trinko. They're based in the Court's decision in Aspen. They've 
been consistently applied by the Department in Microsoft and 
American Airlines and in the telecom sector. And with respect 
to the Intermedia brief, which was mentioned earlier, which was 
filed in March of 2001, before I came on duty at the 
Department, we supported reversal of the district court's 
opinion there which had dismissed the plaintiff's claim. But in 
the course of doing that we quoted the very same standard, and 
to quote from that brief, we said that conduct is not deemed 
exclusionary for purposes of section 2 of the Sherman Act 
unless it lacks a valid business purpose; i.e., it makes no 
business sense apart from its tendency to exclude and thereby 
create or maintain market power.
    So that is the standard we're applying, including in cases 
where we believe the particular plaintiff has stated a good 
case. It is not, as has been suggested, in any sense an about 
face.
    Chairman Sensenbrenner. I don't think you've answered my 
question.
    Gentleman from Michigan, Mr. Conyers.
    Mr. Conyers. I thank the witnesses for their testimony. I 
turn to the infamous memo of the United States 
Telecommunications Association and--at the dinner. I take from 
your expression you've at least heard about it, Mr. Pate.
    Mr. Pate. I've read newspaper reports about it, that's 
right.
    Mr. Conyers. Okay. Mr. Pfeiffer, heard about it or seen it?
    Mr. Pfeiffer. Yes, sir.
    Mr. Conyers. All right. You're under oath, guys. Thorne, 
heard about it or seen it?
    Mr. Thorne. I have heard about it. I have not seen it and I 
was not at the dinner.
    Mr. Conyers. But your President was.
    Mr. Thorne. I understand.
    Mr. Conyers. And you don't talk to him, do you?
    Mr. Thorne. No, I do talk to Mr.----
    Mr. Conyers. You do? Did he mention the dinner to you?
    Mr. Thorne. I have not talked to him, but I saw the 
newspaper account about it.
    Mr. Conyers. I said did he mention the dinner to you?
    Mr. Thorne. He did not.
    Mr. Conyers. Okay. And you're not going to ask him about it 
either, are you?
    Mr. Thorne. I will if that's helpful to you.
    Mr. Conyers. Well, would it be helpful to you? I mean, 
you're the Vice President.
    Mr. Thorne. My understanding of what----
    Mr. Conyers. Are you the Vice President?
    Mr. Thorne. I'm the Senior Vice President and Deputy 
General Counsel of Verizon.
    Mr. Conyers. And this wouldn't be helpful to you and your 
President to talk about this where, in which it was stated 
we're going to describe to them as our 3-year goal for 
comprehensive Federal legislation to substitute market-based 
competition for Government-managed competition. And our 
immediate short-term objectives in furtherance of this broader 
goal in current proceedings before the FCC on UNE-P/TELRIC 
pricing broadband and UCF--USF.
    Do you know what that sounds like? A strategy for dumping 
the Telecom Act of 1996.
    Mr. Thorne. With all respect?
    Mr. Conyers. Yes, with all respect.
    Mr. Thorne. With all respect----
    Mr. Conyers. Yes.
    Mr. Thorne. It sounds to me like an attempt by an industry 
under siege to try to get back on its feet and I think it's 
best summarized--my view of this is best summarized by what the 
Chairman said last week at the Phoenix Center, that having the 
affected industry come together to discuss lobbying and 
legislation and regulatory strategy is fair, and I quote, 
lobbying campaigns are part of the American tradition and that 
is so important in this sector.
    Mr. Conyers. Absolutely. Well, I'm glad he told you that 
because I agree with him. I want to make it clear that 
companies and individuals are free to join together and make 
plans to lobby their Government. That's a first amendment right 
that applies to everybody. What is not protected is, and in 
fact is a violation of our antitrust laws, is trying to use 
market power to coerce suppliers to participate in a lobbying 
campaign.
    Now there's a line in there, my friend. And when in this 
memo we're talking about how much we're going to collect from 
people to a 3-year financial commitment to this campaign, 
somebody's coming close to the line. You know, I suggest you 
talk to the President, Thorne, I mean, it wouldn't hurt, about 
this. This is pretty serious stuff, even if it's legal.
    Mr. Thorne. It's obviously serious to get the industry to 
come together and----
    Mr. Conyers. No, it's obviously serious to talk about 
hitting up the suppliers for money to change the law. That's 
what's obviously serious.
    Mr. Thorne. With all respect again.
    Mr. Conyers. Yes, some more respect. Okay.
    Mr. Thorne. Mr. Ranking Member.
    Mr. Conyers. There's a lot of respect going around here 
today.
    Mr. Thorne. The manufacturers have of their own accord 
supported a reduction of the requirements of the FCC and the 
States and the agreements have imposed of sharing because they 
see too much sharing deterring----
    Mr. Conyers. Okay. Can we talk about this after you've 
talked to your President?
    Mr. Thorne. I would be happy to meet with you and discuss 
this.
    Mr. Conyers. The answer is yes, right?
    Mr. Thorne. Yes, it is.
    Mr. Conyers. Okay.
    Chairman Sensenbrenner. The gentleman from North Carolina, 
Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman. Gentlemen, good to have 
you all with us. Mr. Pate, let me put a two-part question to 
you.
    Is it your opinion that the Trinko case expands antitrust 
liability, A, and B, are there industries or business entities 
that are subject to regulation by Federal or State agencies or 
both that are not subject to antitrust laws?
    Mr. Pate. That's an important question, yes. The reason we 
participated in the case is because we believe that the Second 
Circuit opinion in Trinko unduly expanded antitrust liability 
for all sectors of the economy in a way with respect to 
monopoly leveraging that had been rejected by the Supreme Court 
and with respect to essential facilities was beyond any proper 
interpretation of section 2. So that's why we are in the case.
    Number two, as to those industries, it has been our 
position at the Division that special purpose regulations 
should not exempt industry antitrust oversight. That's in 
different areas that's gotten different hearings in the courts. 
We recently were on the losing side of an attempt to argue in 
the securities industry that securities regulation should not 
exempt participants from the antitrust laws. In a recent case 
we were on the losing side of that. But the traditional 
Division position has been in general terms against exemptions 
to the antitrust laws.
    Mr. Coble. But are there in fact people who enjoy 
exemption, industries or business entities?
    Mr. Pate. Well, certainly there are a number of antitrust 
exemptions that Congress has passed, Capper-Volstead in the 
agriculture area, McCarran-Ferguson in the insurance industry. 
There are examples of that. My point is that we generally want 
to see that sort of thing be as narrow as possible and 
generally are very skeptical about any calls to increase 
exemptions from the antitrust laws, which we think are critical 
to protecting consumers.
    Mr. Coble. Mr. Thorne, do you believe that the 
telecommunications industry should be exempt from certain 
antitrust laws?
    Mr. Thorne. I do not, and for the reason that I mentioned 
before, that we are a customer of telecommunications products 
and services and want to see competition all around. It 
benefits us if the markets grow unrestrained.
    Mr. Coble. And I don't mean this critically, Mr. Thorne. I 
don't think you've ever said that, but your body language tells 
me that you'd probably like to see the telecommunications 
industry exempt. Am I misreading your body language?
    Mr. Thorne. No, no. Let me be clear. Perhaps the--we have 
not argued for an exemption. Now, whether we might like it in 
some other world in a different hearing, a different universe 
maybe, I mean we can talk about that. But we have not argued 
for an exemption and there are good reasons not to because we 
are on the customer side for a very large budget of 
expenditures each year, and so we benefit from free competition 
in the industry. And I don't actually know how you would exempt 
one industry and not others at the same time.
    Mr. Coble. And for the record, I'm one of your customers, 
and I am not complaining about the service I get from you all.
    Mr. Thorne. Thank you very much.
    Mr. Coble. Mr. Pfeiffer and Mr. Wright, let me put this 
question to each of you. Is it your opinion that the 1996 
Telecommunications Act is promoting competition and forcing the 
Bell companies to open their local markets?
    Mr. Pfeiffer. If I may, yes, I do believe that the 1996 act 
was designed and says it was designed to promote competition. 
I'm not sure that it necessarily opens markets in the sense 
that the antitrust laws would not have otherwise required those 
markets to be opened. I think it does specify in more detail 
steps that need to be taken. But I think the requirement to 
share an essential facility like the monopolized local 
telephone network has existed for decades under the antitrust 
laws and I don't believe the 1996 act changes that. I don't 
believe it created that duty.
    Mr. Coble. Mr. Wright.
    Mr. Wright. Let me just add that one important change the 
1996 act made was prior to 1996 when it was illegal to provide 
competitive telecommunications service, local service, in most 
States and section 253 of the Telecom Act preempted such rules. 
So prior to 1996 an antitrust claim would have been dismissed 
on the ground that State law prohibited competition. But after 
1996 there is a different result in that respect.
    Mr. Coble. I see my amber light, which tells me the red 
light is imminent. So I will yield back.
    Chairman Sensenbrenner. The gentleman from Virginia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman. Mr. Pate, what were the 
factual findings of what Verizon did, what were the findings of 
the lower court?
    Mr. Pate. Are you speaking about the Trinko case?
    Mr. Scott. Right.
    Mr. Pate. It was assessed on a rule 12(b)(6) standard with 
reference to the allegations in the complaint so that the 
allegations were failure to meet the interconnection 
obligations under an interconnection agreement negotiated with 
respect to New York service under the 1996 act. But there were 
not factual findings.
    Mr. Scott. So the allegations--you're saying the 
allegation, what was the allegation then that got thrown out, 
that they did not comply with the 1996 act?
    Mr. Pate. In summary the allegations were that in the 
context of the competitive provider's resale of wholesale 
service obtained from Verizon to retail customers that in a 
number of very specific respects Verizon's conduct did not meet 
the standards set forth in the 1996 act.
    Mr. Scott. Are you talking about overcharging and providing 
a different level of service?
    Mr. Pate. I'm not sure that I recall an allegation of 
overcharging, but levels of service, exactly that, that in a 
number of specific respects the service that was alleged to be 
provided by Verizon was not--was alleged not to meet the 
standard of the 1996 act.
    Mr. Scott. What is the sanction for doing that under the 
Telecom Act?
    Mr. Pate. Well, in this----
    Mr. Scott. If that was factually true, what would the 
sanction be?
    Mr. Pate. I was not involved in these proceedings, but my 
understanding of what happened in this case was that there was 
a fine of $10 million imposed in administrative proceedings.
    Mr. Scott. Now, was it your understanding that the 
legislative intent of the Telecom Act would be that antitrust 
provisions would be in addition to whatever the sanctions might 
be under the Telecom Act?
    Mr. Pate. Well, it's my understanding of--as Ranking Member 
Conyers put it--that given the language that says that the 1996 
act does not modify the antitrust laws, that if conduct 
violated those laws before the 1996 act it would still be a 
violation of the antitrust laws. If it did not violate the 
antitrust laws then the 1996 act didn't change that. The 
antitrust laws were left fully and applicable in the same way 
that they were prior to the act.
    Mr. Scott. Violation of a law to enhance a monopoly 
position would constitute a violation of the antitrust law, 
wouldn't it?
    Mr. Pate. It could. But I don't think that in this context, 
well, certainly in this context it is not fair to say that each 
and every one of the specific market opening requirements of 
the 1996 act have any support as violations of the antitrust 
law in and of themselves. And I think every court that has 
addressed the situation has agreed that the 1996 act was 
intended to do something different from and beyond what the 
antitrust laws do in terms of imposing sharing obligations.
    Mr. Scott. But if you violate the law to enhance your 
monopoly position, wouldn't that constitute a violation of 
antitrust?
    Mr. Pate. The antitrust laws don't look to other statutes 
to incorporate standards and thereby be an enforcement 
mechanism for any other regulatory statute whether it be 
telecom, franchise protection or otherwise. Rather, the 
antitrust laws set forth standards to determine whether conduct 
is anticompetitive. That's one of the key points that we're 
making in the Trinko submission, that to adopt the very 
specific list of obligations that Congress created in the 1996 
act would in fact modify the standards of the antitrust laws, 
and the savings clause among other things makes clear that that 
would not be the correct application.
    Mr. Scott. Well, if a--Verizon, in this case, were to 
consistently provide the differential, a differentiated service 
and were able to maintain a monopoly position because people 
wouldn't want the bad service, they would want the good 
service, and they were able to maintain a monopolistic 
position, that wouldn't be a violation of the antitrust law?
    Mr. Pate. It could be. It is not our position that because 
conduct is the same type of conduct that's covered by the 1996 
act that there could never be an antitrust violation. Rather, 
the point is that the specific list of obligations in the 1996 
act which go well beyond antitrust, that the violation of those 
don't necessarily state an antitrust claim. And that in this 
specific case, and we've reached contrary conclusions in other 
specific cases, but in this specific case what the plaintiff 
was doing was alleging specific failures under that laundry 
list of 1996 act obligations.
    Mr. Scott. And making it impossible for anybody to 
effectively compete?
    Mr. Pate. Well, that's a conclusion that I think is not 
supported in terms of looking at the specific list of 
allegations in the complaint, which the plaintiff had two 
opportunities to amend before the district court dismissed it. 
It's a question of what are the allegations in a particular 
case as opposed to any sort of theory on our part that 1996 act 
conduct can't ever be the subject of an antitrust violation. 
That's an important distinction.
    Chairman Sensenbrenner. The time of the gentleman has 
expired.
    Mr. Scott. Mr. Chairman.
    Chairman Sensenbrenner. The gentleman from Alabama, Mr. 
Bachus.
    Mr. Bachus. Thank you, Mr. Chairman. Assistant Attorney 
General Pate, I want to commend you for, I think, trying to 
explain to this Committee what the antitrust laws are and what 
they aren't, and it's my recollection that antitrust laws are 
designed to tell companies stop doing things that harm your 
competition, you know. It's not designed to tell companies to 
go out and help your rivals by giving them certain things. Am I 
correct?
    Mr. Pate. That's an important part of the point we're 
making in Trinko. I wouldn't say that it never imposes an 
obligation to assist your rivals. Clearly sometimes it does. 
But we say that in order to have antitrust law perform 
important functions, those times need to be when the refusal to 
assist is done for reasons that clearly indicate 
anticompetitive behavior. If you think about it, the antitrust 
laws are telling people to go out and compete with one another, 
not to get together and share monopolies. That's something that 
may have been and was, in the judgment of Congress, necessary 
to jump-start competition under the 1996 act. That's not 
generally the approach to the antitrust laws.
    Mr. Bachus. But you know when you take the antitrust laws 
and you start trying to get them to be used to compel companies 
to go out and assist their competition, that's not what the 
antitrust laws were ever intended to do. Now, the 1996 act did 
actually put some affirmative duties on the companies to, you 
know, to share their facilities, to share their lines. But, I 
mean, that's a different thing apart from antitrust laws. I 
think the----
    Mr. Pate. Well, I certainly generally agree that antitrust 
is much more directed to preventing affirmative misconduct 
against rivals and that's something we do all the time. In some 
cases it may impose a duty of assistance, but that's something 
that we have to be very careful about, and that's part of the 
point that we are making in the Trinko case.
    Mr. Bachus. Well, let me address this to Mr. Thorne and 
maybe going on with this. But, Mr. Thorne, the 
Telecommunications Act does require you to enter into 
agreements with carriers that may request to use your services 
or facilities?
    Mr. Thorne. That's correct.
    Mr. Bachus. Now, knowing that, these agreements are subject 
to regulatory approval, I think. Is that right? In fact there 
are performance standards, you all have to do certain things?
    Mr. Thorne. Every agreement must be approved by the State 
commission unless the State commission declines, in which case 
the FCC must approve it.
    Mr. Bachus. And under the Telecommunications Act, did we 
not set the FCC and the State commissions up as the people that 
would regulate these affirmative duties?
    Mr. Thorne. The structure as you've described is one of 
agreements between customers as to how they would like to do 
business. Approved by States with FCC rules as the guideposts. 
This particular agreement, for example, between Verizon and 
AT&T, at AT&T's insistence we'd agreed not to haul each other 
into court, that if there were a service glitch we would fix 
this quickly without litigation, and that's what happened here.
    Mr. Bachus. But you know, to use all these new requirements 
that have been put onto you in the 1996 act, to say that if you 
don't do those you're guilty of antitrust violations to me is a 
sort of new body of jurisprudence.
    Mr. Thorne. There are no cases that require companies to 
dismantle themselves and turn over their facilities and 
customers at discounted prices. There are no cases under the 
antitrust laws prior to this one.
    Mr. Bachus. What about legal scholars? What have they said 
about these new court decisions that actually say that, you 
know, that anybody that has a telephone, if you violate any of 
these new requirements or they think you do, that they can take 
you into court?
    Mr. Thorne. Well, Professor Hovencamp, University of Iowa, 
who maintains the----
    Mr. Bachus. Now, he is the--the Members may know, he is the 
leading authority on antitrust.
    Mr. Thorne. I think he is recognized as the leading 
authority. He's consulted with Verizon. He's also consulted 
with Covad. But the supplement to his treatise, which is his 
own academic word for prosperity, is that the Trinko case was 
wrongly decided. Professor Einer Elhauge at Harvard University 
thinks Trinko was wrongly decided. That's a new stand for a lot 
of your article. Professor Richard Epstein of University 
Chicago--I could list more.
    And, actually, some of the judges that are recognized as 
antitrust experts, starting with Richard Posner in his second 
edition of his antitrust law treatise, he was just awarded the 
Sherman prize, I think, a week ago by the Antitrust Division. 
Judge Niemeyer in the Fourth Circuit, Judge Tjoflat in the 
Eleventh circuit, and I don't want to leave out Judge Diane 
Wood, who was a deputy in the Antitrust Division of the Clinton 
administration who wrote for the Seventh Circuit, the 
Goldwasser decision.
    Mr. Bachus. Let me just simply----
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    I think at the end of the day I won't ask any questions, 
but I do want to just make a couple of observations.
    Reading from the memorandum that was distributed in 
preparation for this hearing, the section entitled Purpose of 
the Hearing, the last sentence says, the hearing will examine 
the role of the antitrust laws in preserving competition in the 
telecom sector, the intent of Congress when it included an 
antitrust savings clause in the 1996 act, the relationship 
between the antitrust laws and the 1996 act in promoting 
competition in the telecommunications marketplace, and possible 
legislative remedies to judicial circumvention of the antitrust 
savings clause contained in the 1996 act.
    I think all of those are appropriate purposes for having a 
hearing such as this, and I applaud the Chairman and the 
Ranking Member of the Committee for having this hearing for 
those purposes.
    I'm troubled that we may be putting too much emphasis on 
the possibility or an effort to intimidate the court to rule a 
particular way, and I would observe that the sentence before 
that last sentence that I just read emphasizes to us that the 
Supreme Court granted cert on March 3, 2003, and oral arguments 
took place on October 14, 2003, in the Trinko case.
    So I really am not planning to ask any questions about that 
case.
    If there was one thing I observed during the deliberations 
leading to the passage of the Telecommunications Act of 1996, 
it is that there was never a single occasion on which any of 
the players, except possibly the consuming public, showed up in 
my office and were not well represented. I think everybody is 
going to be well represented, has been well represented in the 
Trinko case.
    I may have some questions about where the Justice 
Department has drawn the line; and if we get to a juncture 
where we need to do something under this rubric in the last 
sentence of possible legislative remedies to judicial 
circumvention of antitrust savings clause contained in the 1996 
act, I'll be right here with this Committee and be ready to 
jump on that bandwagon, but I think to the extent we start to 
separate ourselves on this Committee as being on one side of 
this case or the other side of this case, I'm a little 
uncomfortable with that.
    So I think the purpose of the hearing is great. I hope we 
will stick to that purpose, and I trust that the judicial 
process will yield a result at some point, and if the 
legislative process then finds it necessary to respond to that, 
I'll be right here.
    I thank you, gentlemen, for being here to testify and for 
the wonderful job that I guess all of you are doing in 
connection with this case. Thank you so much.
    Chairman Sensenbrenner. Thank you.
    The gentleman from Ohio, Mr. Chabot.
    Mr. Chabot. Thank you, Mr. Chairman.
    Mr. Pate, the general consensus in the telecommunications 
industry seems to be that some consolidation is both likely and 
probably necessary. There are four RBOCs and several large 
independent telephone companies and three large long distance 
companies and half a dozen major wireless companies and a whole 
lot of excess capacity that could, at least in part, be 
rationalized through consolidation. Most of the regulatory 
barriers such as spectrum caps and line of business 
restrictions have been eliminated, leaving only the antitrust 
laws as a potential legal barrier to merger activity.
    I'd be interested to hear your thoughts on what would 
constitute good consolidation or bad consolidation without 
discussing specific combinations. What issues would trouble you 
about vertical combinations and what issues would trouble you 
about horizontal combinations, given that none of us are really 
smart enough to know exactly what the right number of 
competitors is? Can we be assured that you'll balance the need 
for rationalization and efficiency against the need to also 
ensure that consumers continue to have the benefits of a fully 
competitive marketplace?
    Mr. Pate. Well, the answer to the last part of your 
question is clearly yes. One thing that we don't do is spend 
time trying to decide what good consolidations there would be 
or how we think the industry ought to look. That is for private 
entities to decide. As to bad combinations, certainly we are 
going to examine in each geographic market--taking the wireless 
area where we look at the particular service providers in a 
geographic market, we're going to look as we do at any case 
whether a combination would lead to diminished competition and 
increased prices for consumers; and if it would, we'll stop it. 
That's what we've done in our merger program generally.
    We do take account of efficiency, and so if there is a 
place where companies can achieve efficiencies in a way that 
lead us to think the merger would actually have benefits for 
consumers, then obviously that merger ought to be approved. But 
as to what specific combinations and consolidations, I couldn't 
speculate about that.
    Mr. Chabot. Right. I wouldn't expect you to get into that.
    Next, would you agree with the premise that even in a 
market where there may be substantial competition there can be 
submarkets such as the market to serve small businesses that 
are not vibrantly competitive? Can you identify any such 
markets in the telecommunications industry? If so, what steps 
can the Department undertake to ensure the development of more 
competition in these areas; and what remedial action might the 
FCC or Congress undertake to ensure the development of more 
competitive choices in any such areas?
    Mr. Pate. Well, the term submarket I think is disfavored in 
the antitrust case law, but that's a technical point. The point 
you make is that we need to look at different product markets 
within the telecom sector. I think it's been observed by any 
number of folks in this industry that competitive entry has 
been greater, for example, in the business sector than in the 
residential sector. That involves complicated pricing and 
access issues that the FCC grapples with.
    So, again, I wouldn't try to give you a policy prescription 
as to parts of the industry that ought to be regulated in a 
different way, but, yes, if we're evaluating a merger, we look 
at the different product market segments and geographic market 
segments and make sure that competition is protected in each of 
those individually. That's how we approach it.
    Mr. Chabot. Okay.
    Finally, in a response to a question from the Committee 
after your last appearance here, you suggested that the 
telecommunications and media section within the division, ``Is 
responsible for investigating proposed mergers and potentially 
any competitive conduct in a wide variety of communications and 
media markets, as well as engaging in competition advocacy as 
appropriate at the State and Federal levels.'' Can you be more 
specific about the staffing and funding levels for the section 
as well as what in the absence of any significant merger 
activity the employees principally do? And how does the size of 
the telecommunications and media section compare to other 
working groups within the division?
    Mr. Pate. I would say it's roughly of the same size of the 
six civil sections that we have at the Antitrust Division, in 
the neighborhood of 25 full-time attorneys. It's also supported 
by some of our 50 to 60 economists in that group.
    In that particular section, they'd be surprised to hear the 
suggestion they're not busy with mergers. They have, for 
example, the news corps direct TV transaction under review and 
others. They have responsibilities that go beyond simply the 
section 271 function they've been performing or looking at 
telecom mergers.
    We do consult with the FCC at a staff level to make sure 
the technical expertise we developed in serving the function 
that this Committee and Congress gave us in section 271 is 
available. Where appropriate, we file comments and engage in 
competition advocacy out of that section.
    We don't break our budget down in a section by section way, 
but that ought to give you a rough idea of the people and what 
they do there.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from Virginia, Mr. Boucher.
    Mr. Boucher. Well, thank you very much, Mr. Chairman.
    I also want to say a word of welcome to each of these four 
witnesses today and thank you for sharing your time and your 
expertise with us. We have, I think, benefitted from the 
testimony you've provided.
    I'm interested in the scope of the savings clause and its 
application in the Trinko case, which is the primary subject of 
our conversation today. As I read the savings clause, it 
basically says that conduct that would have been an antitrust 
violation apart from the provisions of the 1996 act would still 
remain an antitrust violation after that act is adopted. So in 
order to determine the reach of the savings clause in the 
Trinko case, one would have to ask if there is a duty for the 
local exchange carriers to turn over portions of their 
facilities to competitors at discounted rates that arises from 
the antitrust law alone, not looking to the 1996 act but just 
looking to the antitrust law.
    In posing my question to you as to whether or not the 
antitrust law standing alone imposes that kind of duty, let me 
suggest that the line of cases that refer to refusal to deal 
really are not appropriate in this context and are not proper 
examples because they relate to exclusionary treatment of one 
competitor or one class of competitors from a benefit that is 
conferred by the monopoly power upon others, and we really 
don't have that kind of exclusionary treatment alleged in the 
facts of the Trinko case or, for that matter, the Goldwasser 
case that preceded it.
    So the question that I would pose to you is, apart from the 
refusal to deal doctrine, does antitrust law taken alone impose 
any duty on monopoly providers to make their facilities 
available to competitors? Do they have any antitrust obligation 
to do that?
    Mr. Pate, let me begin with you; and others who might want 
to comment are welcome to do so. Mr. Pate.
    Mr. Pate. Well, I thank you, Congressman Boucher.
    I think the passage of the 1996 act itself is a good 
indication that the antitrust laws were not and have not been 
thought to impose on a monopolist the duty to dismantle itself 
and to break itself into wholesale and retail markets. That was 
a legislative judgment of what was needed to jump-start 
competition in an area that had been a Government-sanctioned 
monopoly. The '96 act does that.
    I wouldn't go so far as to say there would never be an 
obligation to share under the antitrust laws under the standard 
that we've set out. If in fact, for example, a firm has excess 
capacity, particularly if they've been offering it to others, 
but even if they didn't, if a clear showing could be made that 
they were refusing to enter into a profitable transaction for 
the purpose of preventing competition from arising, that could 
state a claim. We evaluate that on a case-by-case basis. In the 
Trinko case, we concluded that, rather, what was going on was 
an assertion that the laundry list of specific '96 act 
obligations amounted to an antitrust claim; and, in our 
judgment, it did not.
    Mr. Boucher. Thank you.
    Let me ask Mr. Thorne if he would care to comment.
    Mr. Thorne. Just briefly.
    All of the prior cases requiring sharing of a--by a single 
firm of what it sells have involved the feature of 
discrimination. The firm was already in the business under the 
demanded terms of selling to others and then had refused--when 
a competitor or customer came to it and said we'd like to buy 
what you're selling to others had refused just to those--to 
those potential customers.
    Mr. Boucher. So you're saying those earlier cases would 
fall within the bounds of the refusal to deal doctrine?
    Mr. Thorne. All of them did and for two good reasons. One 
is the institutional problem of courts in setting new terms of 
sharing that aren't already voluntarily provided that the 
institutional concerns that are now solved through 
interconnection agreements, State approvals and the FCC; and, 
second, the worry that competition manifests itself through 
increased output and investment and you'll deter investment if 
you require too much sharing, and deciding when sharing has 
become too much is the kind of thing better trusted to an 
agency than an antitrust jury that is unable to revisit the 
issue.
    Mr. Boucher. So you're not aware of instances where this 
obligation on the part of a monopoly provider has been imposed 
outside of the refusal to deal line of cases?
    Mr. Thorne. That's correct. In fact, the cases----
    Mr. Boucher. Let's give Mr. Pfeiffer an opportunity to 
comment. I think he probably has a contrary view.
    Mr. Pfeiffer. Yes, I do. I think I have a very strongly 
contrary view.
    The notion that the sharing obligations of the 1996 act 
were new requirements as it was phrased earlier, I think it is 
a misnomer. The MCI and AT&T cases going back to the 1980's 
required exactly this kind of sharing. Collocation, one of the 
elements under the '96 act, was affirmatively required in the 
AT&T litigation. Leasing of local loops for the exclusive use 
of the party leasing them was required under the prior 
antitrust law. That was not a new creation of the 1996 act. 
That was, with respect, what the AT&T litigation was all about, 
was interconnection, which included those two aspects.
    I would also have to say with regard to refusal to deal 
cases, Kodak has been thrown out as an example of that. I had 
the fortune or misfortune of working on the Kodak antitrust 
litigation for over 10 years. The micrographics portion of that 
case never involved prior sales, and so the notion that that 
was a discrimination aspect of that case is in fact inaccurate.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from Texas, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Pate, first of all, let me thank you for your service 
to our country. To me, you're an example of the type of public 
servant who could be found in either Republican or Democratic 
administrations and who is very competent, who doesn't get the 
recognition or appreciation that perhaps you deserve. There are 
many people like you, but I just wanted to say we appreciate 
your testimony and your service to your country today.
    My first question is actually directed to you, and this is 
not a setup, by the way. The first question is to ask you to 
respond to an assertion Mr. Pfeiffer made in his written 
testimony where he said that the Department's position in the 
Trinko case would threaten competition in the 
telecommunications market. I think I know how you feel, but 
would you--I don't know that that question has been directly 
addressed, and would you do so? At a time--well, after the way 
you led off, I'd have a hard time disagreeing with anything you 
would say, and I thank you for that, but maybe quoting Mr. 
Pfeiffer allows me to do that.
    Mr. Pate. No, we obviously do not think that we're taking a 
position in Trinko that would harm competition in telecom 
markets. What we're doing, rather, as has been suggested, is 
pointing out the distinction between--and with all respect to 
Mr. Pfeiffer, I think it's impossible to read the background of 
the '96 act. What the courts have said about it, what was said 
in the legislative history, I believe that Congress didn't 
think it was doing something dramatically new to jump-start 
competition. But, because of that, we think it's important to 
distinguish between that special jump-starting of competition 
in the '96 act and the general duties that section 2 of the 
Sherman Act imposes, which, while they're important, are not 
the same as the '96 act obligations.
    Mr. Smith. Thank you, Mr. Pate.
    Mr. Pfeiffer and Mr. Thorne, and perhaps in that order, 
another question I don't think has been addressed today is the 
effect of the Trinko case on the investments in the 
telecommunications industry. What impact do you think that that 
case will have?
    Mr. Pfeiffer. Well, I think in the wake of the 1996 act, as 
was, I believe, mentioned in my testimony, there has been 
scores of billions of dollars invested in competitive 
telecommunications networks. To the extent that Trinko cuts off 
the ability for those competing firms to gain access to provide 
those innovative products and alternative services you will see 
not only the wasting of those assets, as has already occurred 
with ousted companies like Northpoint and Rhythms and others, 
you will also see the inability for competitors to come in and 
make other additional investments. You will see a loss of the 
jobs that have been created in the competitive sector and a 
loss of innovation and a loss of consumer choice.
    Mr. Smith. Mr. Thorne, you may have a different view.
    Mr. Thorne. Well, somewhat. I don't want to make an 
argument that sharing of existing facilities can never be 
beneficial. The judgment of Congress in the '96 act is that 
some sharing is a good thing to give the FCC the proxy to 
figure out how much sharing is.
    I do believe strongly that too much sharing does deter 
investment. It deters investment by the ILECs who built the 
facilities who have to share. It deters involvements by the 
CLECs who are sharing rather than building their own. And the 
equipment manufacturers who weighed in on the side of the 
Government in Verizon in this case strongly believe that 
there's a lot of opportunity for the market to grow that is 
being damped by too much sharing egged on by the antitrust 
cases.
    The Wall Street Journal editorial that talks about the 
class action potential for abuse talks about the cheerleaders 
of the class actions thinking of telecom now as the next 
asbestos or tobacco to be brought down, brought low. It's a 
gold mine for lawyers. It's clearly the opposite of the 
investment that is needed.
    Mr. Smith. Thank you, Mr. Thorne.
    Mr. Chairman, thank you.
    Chairman Sensenbrenner. Thank you very much.
    The gentleman from Massachusetts, Mr. Delahunt.
    Mr. Delahunt. Thank you, Mr. Chairman. I have just a few 
simple questions, and I'll direct them to Mr. Pate.
    In response--I want to just follow up on the earlier 
question by the Chair of the Committee. I presume that where 
there's a factual basis where there is a driving down of--
rather, an escalation of costs to the competitor, you would 
consider that a violation of the antitrust statute. Is that----
    Mr. Pate. I don't think it's correct to say that it has 
been our view or the view of any court that simply to assert 
raising a rival's cost, as it's called in some of the 
literature, in and of itself states a violation of the 
antitrust laws. We, of course, look at whether there's going to 
be an assertion of an anticompetitive effect from any course of 
conduct, but the standard that we look at in this case of an 
asserted duty to share is one that's based on whether the 
conduct made business sense standing on its own and apart from 
exclusion of competition, not simply at the rival's cost 
structure.
    Mr. Delahunt. See, I think that's the problem I have. 
Because if the effect of the action--and I'm not even referring 
specifically necessarily to Trinko or to even the 
telecommunications--is to drive up the costs of a competitor, 
to injure a competitor, I think that would create a very strong 
inference that there is an anticompetitive patent of conduct 
that should be considered violative of the antitrust scheme.
    Mr. Pate. Well, the point you make is an important one, and 
it's key to focus on the difference between cases where the 
assertion is that the competitor needs to help and assist its 
rival versus one where the competitor is taking an affirmative 
act against the rival. So if you drive up your rival's costs 
by--to take the extreme example used earlier--burning their 
factory down, obviously you're right. But if the question is 
that the incumbent has, let's say, a valuable distribution 
system, that it's developed and its rival says, hey, we'd like 
you to give that to us because our cost structure would be 
lower if we got to use your facilities rather than our own, 
then that's a very different question and that's why----
    Mr. Delahunt. My time is fleeting.
    Mr. Wright, you had a question that I thought you wanted to 
pose to Mr. Pate. Why don't you use some of my time to pose 
that question?
    Mr. Wright. Well, thank you very much, because I think 
we're getting very close to where the answer is.
    So what if a Bell company said we have a duty to lease 
loops to a competitor but we're going to do it on a 
discriminatory basis in order to raise the rival's cost because 
we'll make more money if we maintain our monopoly in the retail 
market, is that a violation of the Sherman Act and the 
Antitrust Division field?
    Mr. Delahunt. I'll adopt Mr. Wright's question as my own, 
Mr. Pate. Would you respond?
    Mr. Pate. Well, I think the question tries to characterize 
the situation in the way that suggests the answer--if what 
you're saying is that the incumbent company has said--which is 
I think the way that it would be more likely characterized--
that if we are going to meet our obligations under the '96 act 
but do it to the letter and not necessarily the way the CLEC 
would prefer to see that done, then that can be characterized 
by the competitive exchange provider in exactly the terms that 
you assert. That's why we think the way to approach this is to 
take an objective test, not focus on, you know, what is the 
intent, and try to say would the conduct make business sense 
but for exclusion and not looking solely at the question of 
what does that conduct do in terms of simply looking at the 
rival's cost structure. So----
    Mr. Delahunt. Mr. Pfeiffer, do you have anything to add?
    Mr. Pfeiffer. Yes, sir. Thank you.
    I guess the example that I would give is how can it make 
business sense for companies to do the things that they stand 
accused of doing in these cases? For example, with regard to 
the collocation, which is putting equipment into a central 
office, I have personally experienced denials, flat-out denials 
by the Bells that there's any space available. We've had to go 
to court to get an order allowing us to inspect the central 
office. When we've gone there, there's been room for a bowling 
alley.
    Mr. Delahunt. Let me interrupt you, because my time is 
running out. I guess the question is, where would a 
corporation's conduct not be considered justified by a 
legitimate business reason? Presumably there's always a 
legitimate business reason that one can establish. That's my 
problem, Mr.----
    Mr. Pate. If it's established on the facts. I mean, we're 
getting into the question of evaluating cases on a case-by-case 
basis. In the context of evaluating the complaint, you've got 
to assume the allegations are true. Different cases have 
different outcomes.
    We took a position in Intermedia that would have said a 
complaint stated a claim in Covad that you shouldn't have an 
immunity but that you couldn't tell on the record whether there 
was a claim; and in Trinko, given the allegations there and two 
chances to amend, that we didn't think that particular 
complaint stated a claim.
    So maybe Mr. Wright's client could come up with a situation 
where the answer would be different, but that doesn't in any 
way suggest that our Trinko position is an effort to undermine 
the savings clause or anything about the '96----
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from Arizona, Mr. Flake.
    Mr. Flake. Thank you, Mr. Chairman. I thank the witnesses 
for testifying.
    Mr. Thorne, do you support or does Verizon support the 
Seventh Court's Circuit Court of Appeals' analysis in the 
Goldwasser case? It may have been addressed before, but I 
apologize----
    Mr. Thorne. It was not addressed before. The answer is yes, 
but different people read it different ways, so let me describe 
very briefly how I read it.
    The first thing that Judge Wood wrote was that the 
antitrust laws had never before required companies to dismantle 
themselves at discounted prices for rivals. The antitrust laws 
had never done that prior to the Telecom Act.
    Then the question was, how does the Telecom Act affect that 
prior decision? And her reading was to expand antitrust into 
the same area that the '96 act was covering would be a double 
mistake, first, for the reasons that antitrust had not been 
expanded before and, second, because of possible interference 
with the '96 act.
    Mr. Flake. Mr. Pate, what was your analysis?
    Mr. Pate. Well, with all due respect to Mr. Thorne, when we 
got into this line of cases, we believed that the RBOCs were 
asserting a line of argument that could suggest immunity or 
preemption. That is why the Department's has been consistent in 
these cases in saying that what you do is evaluate them under 
section 2 of the Sherman Act standing alone. You don't look to 
the '96 act as a potential source of preemption.
    There have been some things in the Goldwasser opinion that 
are clearly correct, such as the characterization that the '96 
act added duties, but other parts of it that some folks read as 
an implied preemption of the antitrust laws, and we have been 
concerned to say that that is not the right way to read the 
savings clause. And that is the position we took in the Supreme 
Court in Trinko as well.
    Mr. Flake. Do you take the position that Chairman 
Sensenbrenner of this Committee takes, that a legislative fix 
is now needed?
    Mr. Pate. Well, I'm not here to take any position on 
specific legislation. I'm not aware, though, of--I certainly 
would not agree that anything in the Trinko brief that we in 
the Federal Trade Commission filed indicates that the savings 
clause is not being respected.
    Maybe that is a helpful response.
    Mr. Flake. Mr. Pfeiffer, currently, 96.8 percent of local 
and residential small business markets are controlled still by 
the RBOCs, 82.5 percent the local medium and large-sized 
business markets. Only nine States--10 States, I guess, have 
now met the requirements of the FCC. At what point is there a 
marker--at what point would the competitors say that 
competition, has been reached? What kind of methodology can be 
used?
    Mr. Pfeiffer. I think in the sense of that competition has 
been reached to the point that no more sharing obligations are 
required. If that's your question, I think the difficulty is--
and this relates to the investment question that went earlier. 
The local network, the last-mile network is never going to be 
duplicated. Access to that is going to have to continue to be 
provided. That existed, again, well prior to the 1996 act for--
just to allow the emergence of long distance competition. And 
in the 1996 act, as Mr. Wright pointed out, they eliminated the 
State restriction against local competition, but access to that 
local last-mile facility is always going to be required. So I 
don't know that I can set a benchmark of now we've got 70 
percent or 55 percent Bell control, because they will still 
control the local loop, the last mile.
    Mr. Flake. Mr. Thorne, you maintain it's lack of investment 
that is really--why we haven't had as much competition and that 
is why the Bells want a little more freedom there. Mr. Pfeiffer 
and his industry claims that it's lack of access. Which is it?
    Mr. Thorne. Well, just to again answer briefly, my view of 
the state of local competition is probably a bit--from my point 
of view may be pessimistic, but from the consumers' point of 
view very, very optimistic. There has been a large shift of 
local loop competition to competitors. In New York, for 
example, the Trinko case came up. A year ago, 25 percent of the 
customers had been shifted to CLECs. There's a large amount of 
intermodal competition now from cable companies and from 
wireless companies which are going to be accelerated by the 
porting of telephone numbers. I guess that happens end of this 
week or beginning of next week. There's a large amount of 
competition.
    Then the question becomes, do you want to accelerate 
competition further, and what is the best way to do that? We 
think that too much sharing actually has more costs than 
benefits, because it deters investment.
    Mr. Flake. Last word on that, Mr. Pfeiffer.
    Mr. Pfeiffer. I don't see how you can talk about deterring 
investment in the local loop facilities. The case law has 
consistently recognized that it is not practical to duplicate 
the local loop, and I don't think that there's any reasonable 
way to disagree with that. You're talking about untold billions 
of dollars and years it would take to replicate a physical wire 
to every house and every business in the United States. There's 
no ability to do that, and it would be an unwise application of 
investment money to have people duplicate that.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from California, Mr. Berman.
    Mr. Berman. Thank you very much, Mr. Chairman. Thank you 
for holding this hearing, and I thank the witnesses for really 
a very well-put testimony.
    Mr. Pate, I'd like to pursue a little more an area that Mr. 
Conyers got into earlier, not in any questions to you, but 
let's take two hypotheticals and let me see if you agree with 
me.
    A group of competitors decide to--they have a common 
interest in trying to change a law or a regulation and take a 
common position with respect to a Government policy, and they 
try to enlist a group of their own suppliers and persuade them 
that they have that same interest as well. My assumption is 
that that is protected activity, first amendment protected, 
Noerr-Pennington protected. Is that a fair assumption?
    Mr. Pate. Well, I'd want to be careful about saying that. 
Noerr-Pennington provides broad rights of companies even to act 
collectively, which they ordinarily can't do under the 
antitrust laws, in order to petition the Government. That 
would, I expect, include discussing that with other potential 
petitioners, but we'd be concerned to make sure that that 
doesn't involve a sham meeting where prices are being fixed or 
something of that nature. So----
    Mr. Berman. Well, let's assume it's only about trying to 
get the Government to change a policy.
    Mr. Pate. Well, I think you're right then in saying that 
the case law provides pretty broad latitude for things that 
involve petitions to the Government under the first amendment 
and the antitrust laws as the courts construe them.
    Mr. Berman. Now let's take the other hypothetical, that the 
competitors who decide to do this seek to enlist the clout of 
their suppliers by directly threatening them with cutting off 
their status as suppliers unless they pony up both financially 
and in terms of their lobbying resources to this cause. Is that 
still protected at this time under this hypothetical?
    Mr. Pate. Well, as you know, an actual group boycott is 
something that is illegal under the antitrust laws. It still 
comes under the category of per se illegality.
    As to the question of threatening to engage in that 
activity, I can't imagine every hypothetical. I wouldn't want 
to say that you couldn't imagine a situation where that would 
raise concern. But what the antitrust laws would be concerned 
about is, as I say, a group boycott where economic power is 
actually used to compel some sort of conduct. It wouldn't even 
need to be that. A group boycott in and of it can create 
serious problems under the antitrust laws.
    Mr. Berman. By the way, what if it's not a group boycott? 
What if it's just an individual company wanting the supplier to 
participate and contribute to the effort with the direct threat 
that that supplier would lose----
    Mr. Pate. Well, we've spent a lot of time this morning 
talking about what the duties are of companies in the 
unilateral context, but, generally speaking, a company is free 
to deal with or decline to deal with a supplier for its own 
business reasons when it's acting unilaterally.
    Mr. Berman. What are the facts then in this group conduct? 
What would be the factual things you would be looking for in 
deciding whether it was protected activity or anticompetitive 
activity that arguably would be in violation of existing law?
    Mr. Pate. Well, I think the group boycott cases suggested 
that if there has been an actual agreement that's been followed 
up with denial of business that's done on a collective basis 
then that can be considered a group boycott, a concerted 
refusal to deal, to use the other term that the case law 
employs.
    Mr. Berman. Well, then back up one second again. The threat 
to do that--the threat to do that, is that a relevant fact? 
Let's assume we're not at the point where we know what the 
consequences of whether the--in other words, if you're saying 
that the action of refusing to deal is the only place where we 
would get into it, then what you're saying is if they are 
successful--if their threat persuades the suppliers to 
participate, then there's no illegality. In other words, to the 
extent that the conduct produces the result they want as 
opposed to producing the boycott that there's nothing wrong 
with it. Is that what you mean to be saying?
    Mr. Pate. Well, the cases I'm familiar with arise in the 
conduct--in the context where there's been an actual agreement 
and some evidence of a boycott. I can't imagine----
    Mr. Berman. No, no, no, no. Wait----
    Chairman Sensenbrenner. The gentleman's time has expired.
    Before calling on the next Member of the Committee, I would 
like to welcome a group of students from a D.C. public high 
school, a program to build community leaders. This is sponsored 
by the Close Up Group and the Capital Communications Program.
    What we're talking about here today is the application of 
antitrust laws to the telecommunications industry. When you 
start talking about the fine points of antitrust laws, it 
usually puts people to sleep; and I apologize if that's what is 
happening to you folks. However, this has direct implication of 
how much your phone is going to cost 10 years from now. So 
we're talking about how much money stays in your pocket and how 
much money may go out to pay the phone company, whether you 
have a land line or go to a long distance service or a package 
service or the like. So, welcome, please stay awake, because 
your pocketbook is impacted here.
    The gentlewoman from California, Ms. Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman. I just have a couple 
of quick questions, actually, really for Mr. Thorne.
    The goal of the USTA is to win comprehensive Federal 
legislation to substitute market-based competition for 
Government-managed competition. At least that's what you've 
stated. And I'm interested in what the competitive behavior has 
been in the areas where you are free to compete. You're free to 
enter other Bell operating territories and lease their lines, 
and I'm wondering whether you're doing so. You've complained 
that the leased lined from other Bell operators is at a very 
low rate, and I guess my question is, is if that's the case, 
why don't you go into those other areas, take advantage of 
those low rates and compete? Can you tell me why that's not 
happening?
    Mr. Thorne. I'd be happy to. That's a good question.
    First, just to disagree with respect to some parts of the 
premise which are that the Bell companies have not competed, in 
fact they have. Verizon wireless, Verizon communications 
wireless business is providing the highest quality wireless 
service throughout the country in competition with every other 
wireless provider and----
    Ms. Lofgren. But that is not the question. Most people 
still have a land line. They don't have a wireless line as 
their main effort. So there's the market. How many markets are 
you competing with in that market?
    Mr. Thorne. Just, again, with respect--the growing part of 
the business, the part of the business where we see the 
greatest opportunity, we have not hesitated one bit to compete 
with others and to do it very effectively, as wireless 
illustrates.
    But let me go to the use of the UNE loops at TELRIC prices. 
If Verizon were the only one offering a UNE loop in--pick a 
favorite city in California.
    Ms. Lofgren. How about San Jose, my home?
    Mr. Thorne. In San Jose, if we were the only ones, then the 
margin we could look at as the difference between the current 
retail and the depressed TELRIC UNE price--and that could be a 
pretty big margin, 50, 60 percent--but we would not be the only 
CLEC going into San Jose. We'd be there with AT&T and with MCI 
and with a bunch of others.
    Ms. Lofgren. If I may, because we don't have that much time 
and also I have to go to the floor to speak on an issue that is 
on right now, Covad is in our county, and they've litigated 
vigorously to be able to compete. You've complained that the 
prices are too low. If they're too low, I don't understand why 
some RBOC doesn't come in and take advantage of those low rates 
to compete in San Jose. Why has that not happened?
    Mr. Thorne. The margin that Verizon would look at is the 
difference not between the RBOC retail and the discounted 
wholesale price but between the CLEC retail, the other CLECs 
that are there; and it's a much thinner margin. Now, Covad in 
particular has a checkered history as----
    Ms. Lofgren. I think that's quite rude and unfair to say.
    Mr. Thorne. Well, with respect to, again, Margot Neitus, 
one of your constituents, a grandmother who used to work for 
Covad, said she was directed to falsify trouble reports about 
Bell Atlantic and Verizon service and that when she said that 
is dishonest----
    Ms. Lofgren. I think--actually, I get a lot of complaints 
about your company as well, and I'm not here to attack Verizon 
or anyone else. I'm just wondering about why there appears to 
be an arrangement not to compete, and I don't think that it is 
appropriate to start bringing up issues without having, you 
know, the object of your attack able to respond. I think that's 
just tawdry behavior.
    Mr. Thorne. Well, there's absolutely no truth to the 
premise that there's been a refusal to compete. The opposite is 
true.
    Ms. Lofgren. Well, how many markets are you competing 
against other RBOCs?
    Mr. Thorne. Through wireless and through----
    Ms. Lofgren. No, land line. No, name one--do you have one 
or two areas where you're competing?
    Mr. Thorne. We're competing with a variety of methods----
    Ms. Lofgren. No, but I'm asking specifically, are you 
competing anywhere on your land line for local service?
    Mr. Thorne. We're competing, as I said, intermodally 
through wireless----
    Ms. Lofgren. No, you're not answering my question, sir. I 
would assume, then, you would know where you're competing. Is 
that correct?
    Mr. Thorne. That's not correct.
    Ms. Lofgren. No, on the land lines, are you competing 
anywhere?
    Mr. Thorne. We're not using UNE loops of other RBOCs, 
because the margins there between the retail that CLECs charge 
and the wholesale that's available in UNE loops is thin. But 
you're----
    Ms. Lofgren. All right. I yield back the balance of my 
time, Mr. Chairman.
    Chairman Sensenbrenner. The gentlewoman from California, 
Ms. Sanchez.
    Ms. Sanchez. Thank you, Mr. Chairman.
    I just want to--I have one question actually to ask, but I 
want to preface my question just with the remarks that, as a 
freshman, I'm here to learn as much as I can about as many 
issues as I can; and at this late date in my first year I'm 
still not an expert on telecom. So I'm going to apologize up 
front.
    I do want to associate myself with the comments made by my 
colleague, Mr. Watt. It's obvious that there is a very complex 
issue, and so I'm interested in some thoughtful discussion and 
hearing as many points of view about this issue as possible.
    Both sides sort of today have testified in detail about the 
impact that the outcome of the Trinko case will have on their 
businesses on the antitrust law and on competition in the 
telecom market, but I haven't really heard a lot--or I've heard 
some generalities, actually, about the impact that it's going 
to have on customers. So this question is directed specifically 
to Mr. Thorne and then to Mr. Pfeiffer. I'd like you to please 
describe in detail how customers will be impacted by the 
Supreme Court--if the Supreme Court rules in favor of Verizon 
in the Trinko case and how customers will be impacted if the 
court rules against Verizon in the Trinko case.
    Mr. Thorne. That's a big question. Let me just address it 
in a couple of ways and make sure Mr. Pfeiffer has a chance to 
say what he would like to.
    A very specific way in which customers will be affected by 
the outcome is if massive class actions go forward against the 
incumbent telephone companies and drain their resources in 
litigating and settling class action cases, then there will be 
less investment, there will be more sharing; and the extra 
sharing will itself deter investment by both the incumbents, 
who, having to share, will invest less and the CLECs, who, 
being able to share and having a triple-your-business-plan, 
money-back guarantee through antitrust, will prefer to share 
rather than make independent investments that they could make. 
So the deterred investment will adversely affect customers.
    The other--and it's a smaller way, but it's unique to this 
case where customers will be affected. There, CLECs have made 
bargains with Verizon and other ILECs.
    AT&T here made a bargain that it preferred to deal with 
Verizon on a no-litigation basis. Rather than litigate, which 
can take years to get a service fixed if there were a glitch, 
it preferred to immediately resolve the problems. That's what 
happened here. AT&T was paid with the other CLECs a total of 
$10 million of compensation that was available to remit to any 
affected customers. The service glitch was quickly, quickly 
solved; and the next day a class action law firm in its own 
name brought this case, reopening what had just been settled by 
AT&T and Verizon.
    So customers are benefitted if the agreements their CLECs 
strike can be enforced.
    Ms. Sanchez. Mr. Pfeiffer.
    Mr. Pfeiffer. Thank you. I think there are a couple of 
aspects to answering your question.
    One is, if the Supreme Court in Trinko rules that antitrust 
supervision is inappropriate for any matters governed by the 
1996 act, which is what is being advocated, then what you're 
left with essentially is supervision by the FCC. Chairman 
Powell has publicly stated that the remedies available to the 
FCC are inadequate. The fine authority they have is inadequate 
to deter unlawful conduct by the Bells; and so you're, first 
off, starting with the inability to deter unlawful conduct.
    The notion that somehow investment in the networks is going 
to be deterred if the Supreme Court upholds the antitrust 
applicability here to me makes no sense. The obligations to 
share that are being violated are obligations under both the 
antitrust laws and under the 1996 act. So to the extent that 
the Bells are now tells us that if the antitrust laws go away, 
they won't feel bound by the 1996 act would seem to me to be a 
pretty striking admission that they're not taking the '96 act 
seriously.
    The final point that I would say is, holding DSL up as an 
example, those DSL competitors who did not avail themselves of 
their antitrust rights are no longer here. They have been 
driven out of business, every one of them.
    Covad, which did avail itself of its antitrust rights and 
sued to get access to the network, got access, reduced its 
costs by doing that and is, as a result, providing concrete 
benefits today to consumers. They are the only competitive 
alternative to the Bells for that broadband product. That is a 
direct innovation that the Bells were not providing and a 
direct benefit to consumers. You will see that lost.
    Ms. Sanchez. Thank you, gentlemen.
    I yield back the balance of my time.
    Chairman Sensenbrenner. The gentleman from Utah, Mr. 
Cannon.
    Mr. Cannon. Thank you, Mr. Chairman. I apologize for not 
being here earlier, and I apologize to the panel if I ask 
redundant questions, but there are some issues that are of 
concern, and I appreciate the panel being here today for that 
purpose.
    Mr. Pate, before the breakup of AT&T, the Bell system 
attempted to assert that because its conduct was subject to 
regulation it should be shielded from antitrust prosecution for 
behavior that occurred within the scope of its regulated 
business. The Bell system clearly wanted such an outcome, as 
the regulator had demonstrated over time an inability to curb 
the abuses of the monopoly. But, thankfully, Judge Green made 
it clear that he would not accept such an argument.
    Today, unfortunately, we have a somewhat similar situation. 
The Bells claim that the antitrust prosecution isn't 
appropriate to deal with the violations of the market-opening 
provisions of the act, and the chairman of the FCC claims that 
he will be tough on enforcement but admits that he lacks the 
tools to be tough.
    If the chairman of the FCC doesn't have the tools and you 
give away the antitrust jurisdiction that is intended to 
backstop the FCC, how in the world are we ever going to get 
these local markets opened? How can we deregulate before we are 
certain that the residual monopoly control over the last mile 
has been dissipated?
    Mr. Pate. Well, the Division took the position back in the 
AT&T case that it was incorrect to argue that regulatory 
supervision took the antitrust laws out of play, and that is 
the same position that we take in the Trinko case today, that 
we've taken consistently in the briefs we filed under the 1996 
act savings clause. That's a different thing from saying that 
all of the provisions of the 1996 act are enforceable through 
section 2 of the antitrust laws, and the savings clause doesn't 
say that. To the contrary, it says that the 1996 act was not 
intended to modify the antitrust laws.
    But as to your question about preemption of antitrust 
through regulation, I agree with what you say, and that's been 
our consistent position.
    Mr. Cannon. Thank you.
    Mr. Thorne, what do you think the effect of the Trinko case 
decision could be on investment in the telecommunications 
industry?
    Mr. Thorne. That's a good question. I think that the Trinko 
case, if it's decided against Verizon, will deter investment at 
two levels. It will deter investment by the incumbents who, 
having to share more, will invest less in what things have to 
be shared because they bear all the risk of the investment and 
any upside would have to be shared. It will deter investment by 
the competitors who will prefer to take the less risky and 
cheaper method of sharing rather than making independent 
investments that they're able to make.
    Just one quick response to your question, if I can shed 
some light on it. I read chairman Powell's remarks about the 
level of available penalties, but in Verizon's case, when we 
put this--and I put this in my written testimony. There are 
annual available penalties, well over a billion dollars, if we 
seriously screw up the provisioning of wholesale lines to our 
rivals. State by State the commissions have imposed amounts 
that now are large fractions or in some cases exceed the 
profits we get from telephone service if we mess up 
provisioning to our rivals, and that is under the existing 
agreements and existing State and FCC enforcement mechanism 
without antitrust.
    Mr. Cannon. Thank you.
    Do you believe the failures to comply with the obligations 
contained in the 1996 act can also form the basis of a Sherman 
claim?
    Mr. Thorne. The sorts of violations of the '96 act alleged 
in the Trinko case and some similar cases that are pending in 
the Courts of Appeals, the answer is no. Because those are 
requests not to avoid interfering with independent rivals' 
activities but instead to lend a helping hand by turning over 
facilities and customers at discounted rates. That is something 
the antitrust law has never required.
    Mr. Cannon. In your testimony you emphasize the limited 
scope of the essential facilities doctrine. Do you believe that 
the local telecommunications infrastructure constitutes an 
essential facility?
    Mr. Thorne. Given the amount of competition through 
competing wires by cable companies, competition from wireless 
companies, including Verizon Wireless's own very successful 
wireless company, I think the answer has now become no, that 
the local loop is no longer essential. There are other ways you 
can make telephone calls. And for some services like broadband 
services that DSL and cable modem compete for, the preferred 
method is now something not on a cable company. The preferred 
method is--I mean, sorry, not on a telephone system but on a 
completely independent system. So I don't think even under the 
essential facilities rubric we would any longer qualify.
    Mr. Cannon. Thank you, Mr. Chairman. I yield back.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentlewoman from Texas, Ms. Jackson Lee.
    Ms. Jackson Lee. Thank the Chairman, and I thank the 
witnesses.
    I am reminded of a famous philosopher who said, can't we 
all get along? And I'm reminded of this room, in 1996, I think 
it was my first term here in the United States Congress, and 
the work that we thought we were doing was to find a good 
balance as relates to opening up the markets and as well being 
able to preserve the sanctity of competitiveness, and I truly 
believe that that is a key responsibility of this Judiciary 
Committee.
    I'd just like to cite for the record the number of 
employees that we have in Texas that are dependent upon the 
telecommunications industry, so I don't come to these questions 
and this issue very lightly. I have the burden of close to 80 
percent of the State's 168,688 telecom employees fell into this 
category, and that is service providers, and that was 
documented in year 2000, whereas equipment makers employed only 
20 percent. Ninety-six percent of telecom establishments in 
Texas are service providers. The remaining 4 percent have 
equipment making as their primary focus. Texas is only second 
to California in service provider jobs.
    I only say that to say that the eyes of Texas are upon me 
in terms of the inquiries and where we are today, and I will 
try to be focused in my questions to those who are here.
    Let me start with Mr. Pate so that I can understand this a 
little better. I know that, as the antitrust section, we've 
always looked to you to be the standard bearer for competition 
in antitrust protection. I'm a little confused as to the 
position you took in the Trinko case, was to join in with 
Verizon, as I understand it, and the FTC. Is that my 
understanding?
    Mr. Pate. Well, certainly the case that we filed a joint 
brief with the Federal Trade Commission and that----
    Ms. Jackson Lee. To say what----
    Mr. Pate.--position we take is that the Second Circuit's 
decision should be reversed. So, in that sense, yes, we are 
taking the same position as Verizon----
    Ms. Jackson Lee. Explain your position then, please.
    Mr. Pate. The position we're taking is that the Second 
Circuit was in error by advancing theories of antitrust law 
that did not have support under section 2 of the Sherman Act as 
it's been interpreted, both by creating a facilities cause of 
action that doesn't require a showing of exclusionary conduct 
under section 2 and by adopting a monopoly leveraging theory. 
We take the view that the Second Circuit was right in saying 
that the savings clause of the 1996 act makes clear that for 
the incumbent phone companies like Verizon to suggest that they 
have an immunity from antitrust law is wrong. So there are two 
sides to the position we're presenting. They're both important.
    Ms. Jackson Lee. Let's pursue the latter, if you would. 
We're here in the Judiciary Committee. You're in the executive 
in the antitrust section of the Department of Justice. How do 
we find a balance if we just look globally and look overall on 
this very difficult industry, now 1996, where 7 years later 
we're back in a controversy again of ensuring competition and 
recognizing that the Baby Bells, in essence, large employers of 
my constituents, have almost become larger than, say, AT&T. How 
do we ensure competition with the present structure?
    Mr. Pate. Well, I don't know that it's really ever going to 
be a possibility that everybody will just get along. There are 
different interests in this industry, and it's the job that 
this Committee performs to let those interests be heard and to 
strike a balance. In the 1996 act, you did that in a very 
complex and comprehensive way, not drawing the line all the way 
in favor of the CLECs nor all the way in favor of the regional 
Bells but putting in place a mechanism where those markets 
could be opened.
    While I don't--while I agree that it's very important that 
we're vigilant about competition on land line services as 
they've existed, it's also true that, while it's taken a long 
time, there are very positive signs in terms of competition 
from cable telephony, from other service methods and that local 
markets are getting more competitive as the section 271 
obligations were met. So I think you all in this Committee have 
a key role in striking that balance. That's what the '96 act 
was all about.
    Ms. Jackson Lee. I guess what we're trying to do now.
    Mr. Thorne, will you tell me what is wrong with regulating 
price, particularly when we have noted in the competition that 
we've seen prices go up on local service? What's wrong with 
that, and what's wrong with using antitrust laws to ensure 
there's competitiveness and competitiveness with prices?
    Mr. Thorne. Philosophically, the best way to regulate 
prices is with competition, let competitors compete to lower 
their cost structure and improve their service and have the 
price set by independent rivalry. That is the best method.
    The second best method and the one that's used at the 
retail level for telephone service is to have regulators set 
retail prices, and that's what still happens in Texas for 
retail prices. There have been some adjustments in the 
rebalancing of residential and business and urban and rural 
areas where the prices were once more uniform and are now 
coming closer to what their costs are.
    The regime we've got under the '96 act offers rivals a 
serious discount, 50, 60 percent off the retail price to use 
the same physical facilities. So take Verizon in Texas, we can 
offer a service for--I know the New York numbers by heart. I 
don't know the Texas numbers, but in New York it's probably a 
better example. We get an average of about $40 a month for 
retail service. We offer the same physical facilities to a 
rival at $13, leaving quite a bit of margin for--or opportunity 
for the rivals to sell. That's the second tier of regulation 
that's applied under the '96 act but has never been applied 
under the antitrust laws.
    Chairman Sensenbrenner. The gentlewoman's time has expired.
    Let me thank the witnesses for coming and debating a very 
important issue. Let me say that we may be seeing you all back 
after the Trinko case is decided. So don't get too far away.
    The Committee stands adjourned.
    [Whereupon, at 12:02 p.m., the Committee was adjourned.]


                            A P P E N D I X

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               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Linda T. Sanchez, a Representative 
                in Congress From the State of California

    I thank Chairman Sensenbrenner and Ranking Member Conyers for 
convening this important hearing today to hear testimony on antitrust 
laws in the telecommunications industry, the ``savings clause'' in the 
Telecommunications Act of 1996, and the impact of the Supreme Court's 
upcoming decision in the Verizon Communications Inc. v. Law Offices of 
Trinko (``Trinko'') case.
    After reading the witness statements of advocates of Incumbent 
Local Exchange Carriers (ILECs), Competing Local Exchange Carriers 
(CLECs), the Department of Justice in Trinko, and the Chairman of this 
Committee, it is clear that there is disagreement on how to promote 
competition in the telecommunications industry. The first priority of 
all parties involved, the ILECs (Verizon, SBC, BellSouth, and Qwest), 
CLECs (competitors without ownership of local network infrastructure), 
the Federal Communications Commission, the Department of Justice (DOJ), 
the Supreme Court, and the Committee on the Judiciary should be to 
promote competition in a way that benefits the consumer. This 
Committee, with exclusive Congressional jurisdiction over antitrust 
laws and their implementation by both the Department of Justice and the 
Federal Trade Commission, must continue its long history of promoting 
competition in the telecommunications industry by enacting legislation 
and overseeing agencies to accomplish that purpose.
    For instance, the Telecommunications Act of 1996 (1996 Act) is 
comprehensive legislation designed to promote competition in the 
telecom market. In particular, the 1996 Act's ``savings clause'' 
promotes competition by providing that ``Nothing in this Act or the 
amendments made by this Act shall be construed to modify, impair, or 
supersede the applicability of any of the antitrust laws.'' I agree 
with the position of the Chair and Ranking Member that the savings 
clause specifically, unmistakably says that violations of Sections 251 
or 271 of the 1996 Act may also create an antitrust cause of action 
under Section 2 of the Sherman Act.
    In several cases argued in federal courts the issue of causes of 
action under both the 1996 Act and the Sherman Act have been debated. 
In Goldwasser v. Ameritech Corp. (``Goldwasser'') the Seventh Circuit 
court of appeals held that antitrust claims cannot survive if the 
allegations of anticompetitive conduct are ``inextricably linked'' to 
violations of the 1996 Act. The Goldwasser court held that violations 
of the 1996 Act should be examined under the specific enforcement 
structure of the 1996 Act alone--not under antitrust laws, and that the 
1996 Act imposes duties on the ILECs that are not found in the 
antitrust laws.
    In the Trinko case, the Second Circuit Court of Appeals held, in a 
case factually similar to Goldwasser, that the plaintiffs may maintain 
a cause of action under Section 2 of the Sherman Act where plaintiffs 
allege conduct that violates the 1996 Act. The court also recognized 
that violations of the 1996 Act might also be characterized as 
anticompetitive or exclusionary conduct that violates the Sherman Act. 
The Trinko court disagreed with the Goldwasser court's ruling denying a 
plaintiff's ability to maintain freestanding antitrust actions just 
because those actions might have stated a separate claim under the 1996 
Act. The DOJ filed an amicus brief in the Trinko case siding with 
Verizon and, many argue, imposed a more stringent test for antitrust 
liability.
    The ILECs join Verizon in arguing that causes of action under 
Section 2 of the Sherman Act cannot be simultaneously maintained with 
violations of the 1996 Act. For the ILECs, the Trinko case is about the 
inappropriate expansion of Section 2 of the Sherman Act not the 1996 
Act's savings clause. The ILECs argue that sections 251 and 252 of the 
1996 Act impose affirmative duties on ILECs to grant CLECs access to 
their network, and thereby help CLECs to compete. The regulatory duties 
imposed by the 1996 Act provide a comprehensive structure to ensure 
that ILECs share local network facilities with CLECs. The Sherman Act, 
on the other hand, imposes a duty not to harm competitors, but no duty 
to help competitors. As such, ILECs argue causes of action under 
Section 2 of the Sherman Act should be dismissed when the 
anticompetitive behavior is within the regulatory framework of the 1996 
Act.
    The CLECs side with plaintiff Trinko, a CLEC customer. The CLECs 
believe that the argument espoused by Verizon and the DOJ's amicus 
brief undermines the applicability of the antitrust laws in the telecom 
industry and does not give full effect to the savings clause in the 
1996 Act. According to the CLECs, anticompetitive behavior by one of 
the ILECs may create a cause of action under both the 1996 Act and the 
Sherman Act. They contend DOJ must aggressively exercise its antitrust 
authority to deter anticompetitive behavior in the telecom industry, as 
opposed to aligning with the Bell companies as it did in Trinko.
    The CLECs also argue that the ILECs are trying use their near 
monopoly power to change the law governing the FCC's TELRIC pricing 
methodology for unbundled elements. The change would enable the ILECs 
to raise the prices competitors pay for network elements, which would 
mean higher consumer prices, less competition, and larger ILEC profits. 
The CLECs believe this result could have a negative impact on 
consumers. They estimate that 30 million local lines are now served by 
CLECs, and that the resulting competition lowers prices, phone bills, 
and improves service. They cite reports by Consumer Federation of 
America and The Association for Local Telecommunications Services 
estimating that 50 million consumers have saved approximately $5 
billion dollars on their phone service, and that CLECs have invested 
$76 billion since the 1996 Act was enacted, and anticipate $71 billion 
in telecom investment over the next five years. The CLECs believe that 
the savings enjoyed by customers is the direct result of the regulatory 
regime and oversight exercised by the Judiciary Committee over the 
telecom industry.
    The arguments by both the ILECs and their competing CLECs in cases 
like Trinko and in testimony submitted for the hearing today are 
persuasive. Both the ILECs and CLECs contend that their interpretation 
of the law will benefit consumers, which remains the ultimate goal. 
However, I also recognize that each of the companies will interpret the 
law in a way that is most profitable for them. My interpretation of the 
law is that the 1996 Act imposes duties on ILECs and CLECs to conduct 
their businesses in a way that promotes competition and benefits the 
consumer. I agree with the Chairman and Ranking Member that the savings 
clause unequivocally maintains the operation of the Section 2 of the 
Sherman Act in the telecommunications industry and in some lawsuits 
where causes of action are also brought under the 1996 Act. The 
application of the 1996 Act and Section 2 of the Sherman Act must be 
carefully performed on a case-by-case basis.
    The question that remains unanswered for me is: given emerging 
technologies in the ever-changing telecommunications market, what acts 
or omissions by ILECs and CLECs are anticompetitive? With the 
development of digital subscriber line (DSL) technology, wireless, 
cable, and satellite technologies, consumers have more 
telecommunications options today than existed when the 1996 Act was 
enacted. In light of the Supreme Court's upcoming decision in the 
Trinko case, it is important for the Committee on the Judiciary to 
continue to hold hearings on the telecommunications industry and the 
impact developing technologies have on competition in the industry. 
Further hearings will help to clarify whether the ILECs position or the 
CLECs position should be adopted. Additional hearings will also help us 
determine whether more regulation, less regulation, or maintaining the 
present level of regulation is the best way to maximize competition and 
benefits for consumers.
    I thank the Chairman and Ranking Member for the opportunity to 
include my statement in the hearing record. I look forward to future 
hearings on the telecommunications industry and working with my 
colleagues on the Judiciary Committee to promote competition and ensure 
the best service for consumers.

        Responses to Post-Hearing Questions From R. Hewitt Pate

















      Responses to Post-Hearing Questions From Alfred C. Pfeiffer

































          Responses to Post-Hearing Questions From John Thorne



 Answers to questions submitted by Chairman F. James Sensenbrenner, Jr.
1. Do you believe that failures to comply with the obligations 
contained in the 1996 Act can also form the basis, or a partial basis, 
of a Sherman Act claim?

    In Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 
LLP, No. 02-682, 540 U.S.___ (Jan. 13. 2004), the Court held that the 
1996 Act does not immunize incumbent local exchange carriers from 
antitrust scrutiny; at the same time, the Court also held that the 
regulatory duties imposed under the 1996 Act are not incorporated into 
the antitrust laws. The Court thus held that the ``antitrust-specific 
saving clause'' in the 1996 Act--which provides that nothing in the Act 
``shall be construed to modify, impair, or supersede the applicability 
of any of the antitrust laws''--preserves those claims that ``satisfy 
established antitrust standards.'' Slip op. at 6 (internal quotation 
marks omitted); see id. at 7.
    The Court then held that ``alleged insufficient assistance in the 
provision of service to rivals''--as required by the 1996 Act--``is not 
a recognized antitrust claim'' under the Supreme Court's existing 
precedents. The Court also noted--applying established antitrust 
principles--that antitrust analysis must take account of regulatory 
context and the degree to which regulation addresses anticompetitive 
concerns. In the case of the 1996 Act, the Court held that ``[t]he 
regulatory framework that exists . . . `significantly diminishes the 
likelihood of major antitrust harm.' '' Id. (quoting Town of Concord v. 
Boston Edison Co., 915 F.2d 17, 25 (1st Cir. 1990)).

2. As a legislative drafting matter, how do you think Congress could 
have been more clear in asserting its intent that the antitrust laws 
should continue to apply in the telecom sector?

3. Could the Trinko case undermine the clear intent of Congress in that 
regard?

    The Court's opinion in Verizon v. Trinko, quoting from the 
antitrust-specific saving clause of section 601(b)(1) of the 1996 Act, 
affirmed that telephone companies ``are not shielded from antitrust 
scrutiny. . . .'' Slip op. at 6. Thus, the Court agreed with the 
Federal Communications Commission that ``the saving clause preserves 
those claims that satisfy established antitrust standards.'' Id. 
(internal quotation marks and citation omitted). The Court left no 
doubt that the antitrust laws continue to apply in the telecom sector.

4. Do you support the Seventh Circuit Court of Appeals' analysis in 
Goldwasser v. Ameritech? Please explain if and how you disagree with 
this decision.

    I believe that the case was correctly decided. The Seventh Circuit 
held that the antitrust laws had never before required companies to 
dismantle themselves at discounted prices for the benefit of their 
competitors--a holding that the Supreme Court now has affirmed. In 
response to the further question of whether the 1996 Act should change 
this analysis, the Seventh Circuit found that to expand antitrust laws 
to cover the same area as the 1996 Act would be a mistake, not only 
because excessive forced sharing risks deterring the independent 
competitive efforts that antitrust promotes, but also because any 
benefits of antitrust expansion are less apparent in an area already 
subject to the 1996 Act duties and because expanding antitrust could in 
fact interfere with the 1996 Act.

5. Would it violate Section 2 of the Sherman Act if Verizon denied 
competitors access to local loops or interconnection, because doing so 
would enable Verizon to make more money than it would by complying with 
regulatory requirements? Do you think loops and interconnection are 
essential facilities, and if not, what essential facilities do you 
think Verizon controls if any?

    I do not believe that loops are essential facilities for reasons 
more fully explained in response to Ranking Member Conyers's second 
question, below.
    The obligation that Verizon has under the 1996 Act to provide 
competitors access to local loops or interconnection at cost-based 
rates is a regulatory obligation that does not exist under the 
antitrust laws, for the reasons explained in Verizon v. Trinko.
    It is worth emphasizing that if a denial of loops or 
interconnection were to occur, the 1996 Act guarantees a fast, 
judicially reviewable agency determination. And, if either party to an 
interconnection agreement or the regulators believe it advisable, the 
agreements can provide for expedited nonjudicial enforcement 
mechanisms. In the Verizon v. Trinko case, the specific service problem 
identified in the complaint, a flaw in new software to confirm that 
Verizon had fulfilled the orders which had been placed, was resolved 
promptly, with compensation paid to CLECs who experienced the problems. 
The Supreme Court reviewed this history in some detail in concluding 
that ``the regime was . . . effective. . . .'' Slip op. at 14.

6a. Does Verizon sell DSL to consumers who buy voice services from a 
competitor that uses unbundled elements? If not, does that mean that a 
customer who has Verizon DSL can't switch their voice service to a 
competitor and keep Verizon DSL? 6b. Not all competitors who sell voice 
even sell DSL, so couldn't such an approach deter the customer from 
buying voice from a competitor and tend to preserve Verizon's local 
market share?

    Please refer to my response to Ranking Member Conyers's third 
question.

6c. Wouldn't Verizon be sacrificing profits gained from the DSL sale 
(which has been asserted by RBOC witnesses before Congress to be a more 
profitable offering currently and in the future than voice service) 
simply to deny the competitor a voice customer?

    For Verizon to offer DSL on a stand-alone basis would require 
development of new systems and processes and would negate the 
efficiencies of offering a joint service. Thus, the additional costs 
associated with offering DSL service on a stand-alone basis would 
likely require Verizon to charge a significantly higher price for the 
product than it charges for DSL service offered over the same telephone 
line that Verizon uses to provide voice service. Moreover, the market 
for broadband service is extremely competitive. Accordingly, offering a 
higher-priced stand-alone DSL service would likely be neither 
profitable for Verizon nor good for consumers.
    Verizon is currently in discussions with CLECs to see whether they 
would be interested in reaching an agreement with Verizon to provide 
DSL service to their voice service customers. Those commercial 
discussions are continuing and have not yet produced an agreement. 
Whether such a service would be profitable depends upon the agreement 
that the parties reach about price and other terms.

6d. As a legal matter, could Verizon rightfully refuse to sell DSL 
service to anyone who purchased wireless service from a Verizon 
competitor?

    To my knowledge, this issue has never arisen. The closest legal 
authority I am aware of is the decision of the United States District 
Court for the Southern District of Florida which recently rejected 
claims that either antitrust or the general provisions of the 
Communications Act required BellSouth to sell stand-alone DSL service. 
Levine v. BellSouth Corp., Order on Defendant's Motion To Dismiss, No. 
03-20274-CIV-GOLD/SIMONTON (S.D. Fla. Jan. 27, 2004). The fact that 
Verizon does not have market power in either broadband or wireless 
service makes legal compulsion in this area unlikely.

7a. Does Verizon have a copy of the USTA documents prepared in 
connection with the closed-door dinner your CEO and other Bell CEOs had 
with the CEOs of manufacturers and, if so, could you share a full copy 
since one page is missing from the copies that many of us have seen?

    I understand that there is no missing page. Rather, the page that 
appears to be a continuation of something new is missing a single word, 
as was the original.

7b. Did Mr. Seidenberg obtain antitrust advice in connection with the 
October 31 CEO dinner before attending?

    Mr. Seidenberg obtains antitrust advice from Mr. William Barr, 
Verizon's General Counsel, and his staff.

7c. Has Verizon had any follow-up discussions with USTA, any 
manufacturer, or other Bell company since October 31 concerning 
contributions or support by manufacturers for the Bell position and, if 
so, what was the content of those discussions?

    USTA and its members, including its manufacturer members, regularly 
discuss regulatory reform proposals.

8. What impact on facilities-based competition is there from the Bells 
usually having access to most multi-tenant office and residential 
buildings for free while competitors are denied access altogether or, 
when it is available, often have to pay significant sums to get it?

    The premise of the question is incorrect. Bell companies do not 
have access to multi-tenant office and residential buildings for free 
while competitors are denied access altogether or have to pay 
significant sums to gain access. A comprehensive survey by the Real 
Access Alliance and available at http://www.realaccess.org/, prepared 
in response to the FCC's request for market information in Competitive 
Networks Order, 15 FCC RCD 22983, 2000 FCC Lexis 5672 (released October 
25, 2000), found that there were multiple telecommunications providers 
for tenants in almost all of the multi-tenant buildings surveyed, with 
an average of 4.5 providers for small buildings, 2.8 providers for 
medium buildings, and 2.9 providers for large buildings.
    Second, in many states like New York, Verizon has made a 
significant investment in house and riser cable in multi-tenant office 
and residential buildings. Thus, it often incurs significant costs over 
and above the costs incurred by competitors to serve such buildings. 
Also, as the ``provider of last resort,'' Verizon is often required to 
incur expenses to serve buildings and market segments that its 
competitors deem financially unattractive.
    Finally, it is clear that landlord access charges have not affected 
facilities-based competition in Verizon's favor. For example, in New 
York, a large proportion of the population works and lives in multi-
tenant office and residential buildings. Despite Verizon's supposed 
advantage in such buildings, as of June 2003, incumbent telephone 
companies in New York had lost 3.5 million lines (28%) to competitors. 
Nationwide, incumbent telephone companies had lost 26.9 million lines 
(15%) to competitors. See FCC, Local Telephone Competition: Status as 
of June 30, 2003, Tables 6, 7, 8 (Dec. 22, 2003), at http://
www.fcc.gov/Bureaus/Common--Carrier/Reports/FCC-State--Link/IAD/
lcom1203.pdf

9. If the standard of exclusionary conduct articulated by the DOJ and 
Verizon in its amicus briefs had been adopted before the 1982 consent 
decree, would Verizon even exist, would the breakup of AT&T have been 
possible?

    The Supreme Court's decision in Verizon v. Trinko makes clear that 
the standard of exclusionary conduct that it applied reflects 
traditional antitrust principles. Conduct that violated the antitrust 
laws before the 1996 Act was adopted continues to violate the antitrust 
laws.
    In this regard, Verizon has taken pains to distinguish the conduct 
at issue in the AT&T cases from the conduct alleged by the plaintiff in 
Verizon v. Trinko. For example, in MCI Communications Corp. v. AT&T Co. 
708 F.2d 1081 (7th Cir. 1983), AT&T had denied telecommunications 
services that it voluntarily provided to others (presumably at a 
profit) to certain long-distance competitors for the purpose of 
protecting monopoly profits in the long-distance market. As the Court 
made clear, nothing of a similar nature was alleged in Verizon v. 
Trinko.
    Notably, the Seventh Circuit in MCI Communications Corp. v. AT&T 
Co. 708 F.2d 1081 (7th Cir. 1983), rejected antitrust claims that are 
comparable to the claims rejected in Verizon v. Trinko. The court of 
appeals rejected MCI's demand that AT&T be required to allow MCI to buy 
and resell AT&T's long distance service in order for MCI to fill out 
its new long-distance network; instead, to compete MCI had to build its 
own network. 708 F.2d at 1148-49. As the Seventh Circuit later 
explained, ``AT&T's refusal to voluntarily assume 'the extraordinary 
obligation to fill in the gaps in its competitor's network did not 
suffice to support a finding that it was trying to maintain its 
monopoly of long-distance service by anticompetitive means.'' Illinois 
ex rel. Burris v. Panhandle Eastern Pipe Line Co., 935 F.2d 1469, 1484 
(7th Cir. 1991).

10. As you know, the essential facilities doctrine recognized by all 
circuit courts of appeal imposes an affirmative obligation upon 
monopolists to make facilities deemed essential to competition 
available to competitors. Do you believe that the standard that DOJ 
articulates in its brief would affect the application of the essential 
facilities doctrine?

    The premise of the question is incorrect. Essential facilities 
liability has not been found ``by all circuit courts of appeal,'' and 
the Supreme Court had never embraced the doctrine. Instead, courts have 
repeatedly found limitations that have led to the rejection of 
virtually every claim. For example, a defendant need not transform its 
business from a service business to a facilities rental business 
(Laurel Sand & Gravel Inc. v. CSX Transp., Inc., 924 F.2d 539, 544-45 
(4th Cir. 1991)), and need not abandon its facilities or cease using 
them (MCI, 708 F.2d at 1133). Other courts have found that a defendant 
has not denied access, but rather has provided unsatisfactory 
accesswithout creating liability. Ideal Dairy Farms, Inc. v. John 
Labatt, Ltd., 90 F.3d 737, 748 (3d Cir. 1996). Still other cases 
involve joint denial of access to a facility or collective activity, 
and hence are not unilateral refusals to deal at all. Hecht v. Pro-
Football, Inc., 570 F.2d 982 (D.C.Cir. 1977).

11. In your testimony, you discuss some of Justice Breyer's 
observations concerning the confluence of regulations and statutes. Do 
you think that the 1996 Act and antitrust laws are not coterminous 
remedies for anticompetitive harm?

    The 1996 Act and the antitrust laws are very different. ``The 1996 
Act is in an important respect much more ambitious than the antitrust 
laws'' in that it attempts to ``eliminate the monopolies'' of incumbent 
LECs; Section 2 ``seeks merely to prevent unlawful monopolization.'' 
Slip op. at 16 (internal quotation marks omitted). For example, the 
1996 Act, as implemented, prescribes low prices for forced sharing to 
attract entry, whereas ``the antitrust laws . . . permit firms to 
charge whatever prices they can obtain in the marketplace.'' Solicitor 
General Brief in Trinko v. Verizon Communications, Inc., 2002 U.S. 
Briefs 682, 18 (citing Berkey Photo, Inc. v. Eastman Kodak Co., 603 
F.2d 263, 274 n.12 (2d Cir. 1979) and other cases); see also FCC, 
August 2003 Local Competition Order  107 (in the 1996 Act ``Congress 
chose to use a different standard'' from the ``essential facilities 
doctrine'').

12. Does the 1996 Act provide standing to consumers harmed by the 
anticompetitive conduct of RBOCs or other telecom providers?

    It would depend on the nature of the claim. If the claim is like 
the plaintiff's in Verizon v. Trinko, that the defendant breached a 
duty owed to another telecom firm, and that as a result, the consumer 
suffered injury, then the consumer's injury is derivative of the 
alleged injury to the other telecom firm. In these circumstances, 
standing should be denied. ``[A] plaintiff who complained of harm 
flowing merely from the misfortunes visited upon a third person by the 
defendant's acts [is] generally said to stand at too remote a distance 
to recover.'' Holmes v. Securities Investor Prot. Corp., 503 U.S. 258, 
268-69 (1992). Although the Court did not reach this issue, three 
concurring Justices wrote that plaintiff lacked standing under this 
principle.
   Answers to questions submitted by Ranking Member John Conyers, Jr.
1. Verizon and the other Bells are required in Section 271--the 
provision pursuant to which DOJ has evaluated long-distance entry 
applications--to maintain compliance with its terms once they gain 
long-distance entry at the risk of having that long-distance authority 
rescinded. Is it true that Verizon has asked the FCC to relax the 
provisions of the competitive checklist, which is a core part of 
Section 271, now that it has gotten long-distance entry?

    Verizon petitioned the FCC to forbear from imposing unbundling 
obligations under Section 271 for those network elements that the FCC 
had already determined do not have to be unbundled under Section 251. 
Verizon subsequently narrowed its request for forbearance and is not 
currently seeking relief with respect to narrowband network elements, 
and is now prosecuting the application only with respect to broadband 
elements, such as fiber-to-the-premises loops, packet-switched 
features, functions and capabilities of hybrid loops, and packet 
switching.
    In the Triennial Review Order, the FCC found that imposing 
unbundling obligations on broadband facilities is both unnecessary, 
because competing providers do not need access to those facilities, and 
affirmatively harmful, because it would ``undermine the incentives of 
both incumbent LECs and new entrants to invest in new facilities and 
deploy new technology.'' Report and Order and Order on Remand and 
Further Notice of Proposed Rulemaking (``Triennial Review Order''), 
Review of the Section 251 Unbundling Obligations of the Incumbent Local 
Exchange Carriers, CC Docket Nos. 01-338 et al., FCC 03-36 (rel. Aug 
28, 2003)  3. The Commission also found that ``relieving incumbent 
LECs from unbundling requirements for those networks will promote 
investment in, and deployment of, next-generation networks,'' and 
``[t]he end result is that consumers will benefit from this race to 
build next generation networks, and the increased competition in the 
delivery of broadband services.'' Id.  272.

2. Do you think loops and interconnection are essential facilities and, 
if not, what essential facilities do you think Verizon controls?

    No. Everything in the local exchange network is being duplicated by 
at least five classes of competitors: cable companies; wireless 
companies; former interexchange carriers, such as AT&T and MCI; CLECs; 
and other incumbent telephone companies. These firms in various ways 
purchase their own switching and transmission equipment, modify 
existing networks to offer telecommunications services, purchase rights 
of way on telephone poles or electric lines for building new 
connections, and use wireless equipment. The 1996 Act removed all legal 
barriers to local service competition, and guaranteed the right of 
interconnection, so that there is no need to build a network that 
reaches each and every customer in order to compete. With over 6 
million independent loops (see FCC, Local Telephone Competition: Status 
as of June 30, 2003 (December 2003), http://ftp.fcc.gov/Bureaus/
Common--Carrier/Reports/FCCState--Link/IAD/lcomm1203pdf, Tables 3, 10), 
147 million wireless lines (Id., Table 13) and substantial independent 
investment in other facilities, such as switches (see FCC, August 2003 
Local Competition Order, FCC 03-36, 436), it cannot be claimed that the 
incumbents' networks are essential.
    Two recent developments emphasize this point. The first is the 
FCC's adoption, in November 2003, of intermodal local number 
portability (``LNP''), which requires local exchange carriers to 
transfer customers' land-line telephone numbers to wireless carriers. 
The second is the announcement by each of the major cable companies of 
their offering of ``Voice over Internet Protocol'' or VoIP telephony. 
With VoIP, customers use cable company lines for voice telephone 
service. Every function provided by the local network--including the 
transmission path to the home--is subject to multiple competitive 
supply and cannot be considered essential.
    Moreover, as a matter of antitrust doctrine, the Supreme Court in 
Verizon v. Trinko rejected the possibility that the ``essential 
facilities'' doctrine might provide a basis for a claim of rivals to 
use the incumbents' networks. The Court noted that ``the indispensable 
requirement for invoking the doctrine is the unavailability of access'' 
to the essential facility and held that ``where a state or federal 
agency has effective power to compel sharing and to regulate its scope 
and terms'' there can be no ``essential facilities'' claim. Id. 
(internal quotation marks omitted).

3a. Does Verizon sell DSL to consumers who buy voice services from a 
competitor who uses unbundled elements? If not, does that mean that a 
customer who has Verizon DSL can't switch their voice service to a 
competitor and keep Verizon's DSL?
    Currently, Verizon sells voice and DSL on a single phone line. A 
customer desiring to purchase DSL on that line also purchases Verizon's 
basic dialtone service on that line. The customer is free to deal with 
as many other voice providers as are desired on other phone lines, and 
Verizon has no policy of refusing to deal with customers who purchase 
voice services from other providers.

3b. Not all competitors who sell voice even sell DSL, so couldn't such 
an approach deter the customer from buying voice from a competitor and 
tend to preserve Verizon's local market share?
    No. Competitors who wish to offer both voice and broadband services 
are free to do so. Voice CLECs have reached arrangements with DSL CLECs 
to offer combinations of such services. Cable companies offer both 
voice and broadband services as a package. The FCC has specifically 
found that forcing Verizon to provide DSL service to competitors' voice 
customers would be anticompetitive, because it would discourage 
competitors from developing competing combinations of voice and data 
services.
    In the recent Triennial Review proceedings, CompTel (the 
Competitive Telecommunications Association) asked the FCC to require 
ILECs like Verizon to provide DSL service on the same line on which 
CLECs were providing voice service. The FCC rejected CompTel's request, 
explaining that that there is no impediment to competition once 
competitors have the ability, as they do, to lease the entire loop and 
make both voice and DSL service available over that loop, either alone 
or with another firm: voice CLECs can ``take full advantage of an 
unbundled loop's capabilities by partnering with a second competitive 
LEC that will offer [. . .] DSL service.'' Triennial Review Order, op. 
cit.,  270. Requiring ILECs to supply DSL service to voice CLECs would 
be harmful to competition because it ``may skew competitive LECs' 
incentives'' and thus discourage development of ``bundled voice and [. 
. .] DSL service offering[s].'' Id. ``[S]uch results would run counter 
to the goal of encouraging competition and innovation.'' Id.

4. Has Verizon entered the market and competed on a large scale against 
other Bell companies in territories adjacent to areas where Verizon is 
the incumbent carrier?

    Verizon is actively competing in the home markets of other Bell 
companies, and has, for many years, been competing across the country 
against other incumbent local carriers in both the traditional local 
telephone market and in the wireless and long distance markets. 
Verizon's predecessor company, Bell Atlantic, was the first of the 
post-divestiture Bell companies to begin offering services outside its 
territory. See United States v. Western Elec. Co., 797 F.2d 1082, 1089-
90 (D.C. Cir. 1990).
    In the past three and a half years, Verizon has spent well over 
$500 million to allow it to compete in providing both narrowband and 
broadband services in out-of-region areas. Pursuant to the terms of the 
FCC order approving the merger of Verizon and GTE in 2000, the company 
committed to spending at least $500 million. A September 2003 FCC order 
has confirmed that Verizon has not only satisfied the merger 
commitment, but has greatly exceeded it.
    Verizon continues to compete actively in other Bell company 
markets. For example, Verizon Avenue provides a broad range of 
telecommunication services to multi-tenant unit facilities both inside 
and outside of franchise; our Enterprise business unit has instituted a 
program--Enterprise Advance network--which offers a robust portfolio of 
voice/data network services to large business customers who are located 
out-of-region; we have also served large business customers in near 
out-of-region areas in Washington State, Texas, and California in 
competition with other RBOCs for years; and the company has begun to 
offer voice over internet protocol service to small business customers 
out-of-region.
    Verizon's wireless service is aggressively marketed nationwide and 
competes directly with other Bell companies' own landline local and 
long distance services. Most of Verizon Wireless's customers are 
located outside its affiliated ILEC territories.

5a. How has Verizon done as a long-distance carrier? How many lines 
does it serve and what sort of long distance market shares has it 
generated?

    As of the end of the fourth quarter, 2003, Verizon had 16.6 million 
long distance access lines in service. Verizon Press Release, Verizon 
Reports Solid Overall Fourth-Quarter Growth and Year-End Results, Based 
on Strong Fundamentals (Jan. 29, 2004). There are approximately 
185,700,000 access lines in the United States. See FCC, Trends in 
Telephone Service, Table 7.1 (Aug. 7, 2003), at http://www.fcc.gov/
Bureaus/Common--Carrier/Reports/FCC-State--Link/IAD/trend803.pdf

5b. Has it sold long-distance aggressively out-of-region, or primarily 
in-region, and why?

    Verizon is selling long distance service both in and out of region, 
in connection with its local services, its wireless services, and its 
enterprises services.

5c. Does Verizon have its own long-distance network that it uses to 
provide long-distance service or does it lease facilities from other 
carriers?

    Verizon has its own network and also leases from other carriers.

6. What percentage of the wireless market for residents and for 
businesses does Verizon estimate it has in the areas where it is the 
incumbent local wireline service provider? What about in areas where 
Verizon is not the incumbent RBOC?

    Verizon does not exchange the type of information with its 
competitors that would enable it to calculate shares in this fashion.

7. Has CLEC competition affected the prices and bundles offered by 
Verizon and, if so, how?

    Verizon's service offerings in the marketplace are driven by an 
understanding of our customers' requirements as well as responses to 
the offerings of all of our competitors. These competitors can be 
facilities based and other local exchange companies, wireless 
providers, cable companies, long distance companies, or the next 
generation of VoIP competitors that provide voice communication 
services by riding ``on top'' of a customer's existing broadband 
connection.
    Based on customer requirements and competitive offerings, Verizon 
tries to provide a variety of alternative offerings to our customers 
that will cause our customers to stay with us, and cause those who have 
left us to return. These offerings include: customized calling plans 
(with or without long distance), packages of custom calling features 
that offer significant discounts over stand-alone rates, and bundles 
that provide our most attractive rates for customers who purchase 
combinations of local, regional toll, long distance, broadband, and/or 
wireless services from Verizon and demand the convenience of a single 
bill for these services.

                               __________
     Responses to Post-Hearing Questions From Christopher J. Wright

    Thank you for the opportunity to respond to the following 
questions.
          Questions from Chairman F. James Sensenbrenner, Jr.
1. In your testimony, you discuss the pro-competitive benefits of 
Section 271 of the Telecommunications Act. Please elaborate on how this 
provision has expanded competition and consumer choice in the telecom 
sector.

    Section 271 has proven to be the most effective regulatory tool in 
opening local markets to competition. The basic problem is that, in 
order to open those markets to competition, the four Bell Operating 
Companies (``BOCs'') must cooperate with their rivals. That is because 
the BOCs have what the Supreme Court called ``an almost insurmountable 
competitive advantage'' because of their control of essential 
facilities. Verizon Communications Inc. v. FCC, 535 U.S. 467, 490 
(2002). Congress responded in the 1996 Telecommunications Act by 
requiring BOCs to lease their essential facilities to competitors.
    More specifically, Congress enacted Section 271, which gives the 
BOCs an incentive to open their markets to competition: It replaced the 
judicial decree that barred the BOCs from providing long-distance 
service with rules providing that, after the BOCs took a series of 
affirmative steps to open their markets, they could provide long-
distance service. Most importantly, the ``competitive checklist'' in 
Section 271 requires the BOCs to lease four network elements (loops, 
transport, signaling, and switching) to competitors on 
nondiscriminatory terms and at cost-based rates, thus establishing a 
``floor'' that permits competitors to enter local markets on the same 
terms that BOCs may enter the long-distance market. In my opinion, 
obtaining authorization under Section 271 was the most important factor 
motivating the BOCs to take the steps they have taken to permit local 
competition to develop.
    Yet the FCC recently concluded in its Triennial Review Order that 
BOCs do not have to provide nondiscriminatory access at cost-based 
rates to all network elements under Section 271, a ruling that 
competitors have challenged. United States Telecom Association v. FCC, 
D.C. Cir. No. 00-1012 (to be argued Jan. 28, 2004). The BOCs also asked 
the FCC to ``forbear'' from requiring them from providing access to 
switching. While the FCC denied that request, the BOCs have challenged 
it. Verizon Telephone Companies v. FCC, D.C. Cir. No. 03-1396 (to be 
argued Apr. 22, 2004

2. Do you think Section 271 of the 1996 is a sufficient safeguard 
against anticompetitive conduct in the telecom field or are the 
antitrust laws necessary as well?

    I do not think Section 271 is sufficient by itself. In addition to 
the FCC's faulty implementation of Section 271 in the Triennial Review 
Order and the BOCs' forbearance request, additional remedies are 
particularly needed because each BOC has now obtained authority 
pursuant to Section 271 to provide long-distance service in each state 
that it serves. Although Section 271 requires the BOCs to continue to 
lease their essential facilities to competitors, it will be necessary 
for competitors to call violations to the attention of regulators and 
persuade them to take action, and the administrative remedy is likely 
to be a direction to the offending BOC to do what it already was 
supposed to do. (And the FCC has construed Section 271 not to require 
nondiscriminatory access at cost-based rates.) Proper application of 
the antitrust laws to ensure that the BOCs do not undermine the 
competition that has developed in order to maintain and extend their 
monopolies is therefore now more important than ever.

3. You mention in your remarks that the Goldwasser case is an 
unfortunate precedent. Why is this so?

    In my view, there is dicta in Goldwasser that is unfortunate. I do 
not disagree with the holding of the case--that an antitrust plaintiff 
must show more than a violation of the 1996 Telecommunications Act. But 
the Seventh Circuit made some statements in a portion of its opinion 
that suggest that, if an action violates the 1996 Telecommunications 
Act, it does not also violate the antitrust laws. That is simply not 
compatible with the antitrust savings clause that Congress adopted.

4. You state in your testimony that competition would never take place 
in the telecom sector if the ``profit sacrifice test'' articulated by 
the DOJ is embraced by the Court. Can you elaborate on this point?

    The government takes the position that the only way a plaintiff may 
show a violation of the antitrust laws in this context is by showing 
that it is sacrificing short-term profits. But a BOC does not need to 
sacrifice any profits in order to maintain and extend its monopolies. 
Providing discriminatory access to essential facilities will drive up 
competitors' costs and benefit the BOC in the short-run as well as the 
long-run. Contrary to the government's position, the antitrust laws do 
not permit monopolists to exploit their monopoly power to maintain and 
extend their dominance. Rather, as the Supreme Court stated in Eastman 
Kodak Company v. Image Technical Services, Inc., 504 U.S. 451, 482-83 
(1992), quoting long-standing precedent, ``[t]he second element of a 
Sec. 2 claim is the use of monopoly power `to foreclose competition, to 
gain a competitive advantage, or to destroy a competitor.' ''

5. Do you think the suit brought by the Government that resulted in the 
break-up of the Bell system might have proceeded differently if the 
Trinko standard was the law then?

    The Bell System case illustrates the problem with the government's 
new standard. The Bell System could have shown that it was not 
sacrificing any short-term profits by providing discriminatory access 
to its essential facilities. Rather, the Bell System was attempting to 
maintain its retail dominance in the long-distance market and, of 
course, a retail monopoly is more lucrative than providing retail 
service in a competitive market. Therefore, under the government's new 
standard, the Bell System would not have been liable under the 
antitrust laws. The Bell System was attempting to foreclose 
competition--which, under Kodak, was enough to satisfy the antitrust 
laws--but it was not sacrificing short-term profits to do so.

            Questions from Ranking Member John Conyers, Jr.

1. If competitive switches were available, do you think the ILECs 
presently have the capacity to cut-over smoothly and quickly to those 
switches the several million customers being served by competitors as 
well as the many customers who are switching their service to 
competitors?

    It is absolutely clear that the ILECs are not currently able to 
transition residential and small business customers to competitors' 
switches in sufficient numbers. As the New York Commission recently 
told the FCC, Verizon's hot cut performance would have to increase by 
4400% if competitors were required to use their own switches. It would 
take 11 years just to move existing customers served by competitors 
from ILEC switches. See Triennial Review Order, FCC 03-63 (Aug. 21, 
2003),  469. If competitors are not permitted to lease switching from 
ILECs, residential and small business customers will have few or no 
competitive alternatives.

2. What has happened with regard to competition and pricing to the 
market for special access since deregulation? Is further regulation now 
required in the special access market?

    Rates for special access have risen and competition has decreased. 
But that unfortunate result may be remedied by enforcing the provisions 
of the 1996 Telecommunications Act providing that any 
telecommunications carrier may lease network elements at cost-based 
rates to provide any telecommunications service, including special 
access. Yet in its Triennial Review Order the FCC denied long-distance 
companies the right to lease network elements to provide special 
access. Now that the BOCs have entered the long-distance market, that 
allows them to ``price squeeze'' long-distance companies by charging 
them supra-competitive rates to connect their long-distance lines to 
customers. The result is that competitors are unfairly disadvantaged in 
competing in the developing market for ``bundled'' telephone service, 
which includes local, long-distance, and enhanced services such as 
voice-mail. Of course, consumers therefore have fewer desirable 
alternatives.
    The competitors have challenged this aspect of the Commission's 
Triennial Review Order, and that challenge is pending. United States 
Telecom Association v. FCC, D.C. Cir. No. 00-1012 (to be argued Jan. 
28, 2004). Further legislative action may be required if the court does 
not correct the FCC's error.

3. Has the DOJ ever won a Section 2 case where DOJ suggested, and the 
Court accepted, the definition of exclusionary conduct, including the 
sacrifice test, that DOJ has urged in Trinko? I know that Mr. Pate may 
have mentioned Microsoft, but the D.C. Circuit sitting en banc instead 
seemed to apply unanimously a balancing or proportionality test, 
correct? How hard would it be for the government to prevail in a 
Section 2 case under the DOJ's Trinko standard, and would that 
constitute a departure from existing precedent?

    I am aware of no case where a court applied the government's 
sacrifice test and the government prevailed--and I doubt the government 
could prevail under the standard it proposes except in a case involving 
predatory pricing. In Microsoft, as you state, the court did not apply 
the sacrifice test--it analyzed ``whether the monopolist's conduct on 
balance harms competition.'' United States v. Microsoft Corporation, 
253 F.3d 34, 59 (D.C. Cir. 2001) (en banc). Under the sacrifice test, 
the outcome in the Kodak case decided by the Supreme Court in 1992 and 
the Court's earlier decision in Otter Tail Power Co. v. United States, 
410 U.S. 366 (1973), would have been different. In neither of those 
cases did the monopolist sacrifice short-term profits. Rather, as is 
the case in the telecommunications industry today, the incumbent 
monopolists were attempting to maintain and extend their dominance by 
refusing to deal with competitors because it would be more profitable 
to maintain a retail monopoly than to compete.

4. Do you think the suit brought by the Government that resulted in the 
break-up of the Bell system might have unfolded differently if the 
Trinko standard was the law then?

    As stated above in response to the fifth question from Chairman 
Sensenbrenner, the Bell System would have prevailed if the standard 
proposed by the government in Trinko had been the law then. The Bell 
System could have successfully defended on the basis that, although it 
was undermining competition from would-be long-distance competitors by 
refusing to lease essential facilities to them on nondiscriminatory 
terms, it was not sacrificing short-term profits.

5. What impact, if any, do you think it would have on ILEC behavior if 
they win Trinko on the merits and get a new Section 2 standard adopted 
by the Court, perhaps the standard urged by DOJ?

    Adoption of DOJ's standard would likely have a devastating impact 
on the development of competition in local telephone markets, 
especially since all of the Section 271 applications have now been 
granted. As I have stated, until the last long-distance application was 
approved last month, the BOCs had an incentive to provide essential 
facilities to their competitors on reasonable terms so that they could 
enter the long-distance market. Now that the BOCs have entered the 
long-distance market, regulators must rely primarily on remedies that 
Chairman Powell has repeatedly stated are ineffective. I nevertheless 
urge the FCC to vigorously enforce Section 271(d)(6)--which requires 
the BOCs to continue to provide nondiscriminatory access to their 
facilities. And I urge this Committee and DOJ to advise the FCC to do 
so and to resist the BOCs' flood of ``forbearance'' petitions asking 
the FCC to stop enforcing Section 271's requirements. But there is 
absolutely no question that the availability of treble damages in 
antitrust actions is necessary to deter the BOCs from undermining 
competition by refusing to deal with competitors or providing 
discriminatory access to their essential facilities.

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