Courts Coming Through for CLECs

As conventional wisdom has it, the regional Bell operating companies (RBOCs) are ready to close the noose around the competitive local exchange carriers' necks.

But wait, not so fast. Recent court victories for the CLECs point to them gaining renewed life in the battle for broadband access over RBOC lines.

Last week Covad Communications Inc. (OTC: COVD) and CoreComm won preliminary motions in federal court that will allow them to continue antitrust cases against Baby Bells. Decisions by the U.S. Court of Appeals for the Eleventh Circuit in Atlanta and the U.S. District Court in Cleveland both went in favor of the CLECs.

These decisions indicate the legal tide may be turning. In 2000, the U.S. Court of Appeals for the Seventh Circuit in Chicago shot down the option of bringing antitrust claims against RBOCs. But now, as more courts are willing to hear antitrust cases, CLECs appear to be fighting back.

"Congress and the Federal Communications Commission (FCC) are very pro-RBOC," says Evin Lederman, a telecom research analyst for Okumus Capital, a hedge fund that manages more than $500 million. "So the only hope the competitive carriers have is the courts. The fact that the courts are hearing these cases certainly is very positive."

Here's how things are unfolding:

  • In the Seventh Circuit's decision on Goldwasser vs. Ameritech in 2000, the court ruled that Richard Goldwasser, an Ameritech customer who had brought the suit against the company, had no antitrust case. It concluded that Ameritech was guilty of violating rules in the 1996 Telecom Act, but not the Sherman Act, the principal statute of antitrust law. And since that ruling, many antitrust suits against RBOCs stemming from the Telecom Act have been dismissed.

  • In June 2002, a decision by the U.S. Court of Appeals for the Second Circuit in New York concluded that Verizon Communications Inc. (NYSE: VZ) and other regional RBOCs, may be subject to antitrust lawsuits.

  • On Wednesday of last week, the U.S. District Court in Cleveland refused to dismiss a case brought by CLEC CoreComm against SBC Communications Inc.'s Ameritech unit. Ameritech had sought dismissal based on the Seventh Circuits' ruling.

  • Last Friday, the U.S. Court of Appeals for the Eleventh Circuit in Atlanta ruled that Covad can proceed with an antitrust case against BellSouth Corp. (NYSE: BLS). This case claims the DSL Internet services provider was denied access to phone lines and subjected to unfair pricing. The Eleventh Circuit court said a lower court, which based its decision on the Seventh Circuit’s ruling in the Goldwasser case, erred when it reasoned the 1996 Telecommunications Act prevented Covad from bringing its claims against BellSouth.

With two different U.S. Courts of Appeals in conflict with the previous Circuit Court ruling, the stage could be set for a Supreme Court case and a chance to challenge RBOC dominance in the last mile.

“We are disappointed in the court’s ruling on Friday,” says Joe Chandler, a spokesperson for BellSouth Corp. (NYSE: BLS), speaking of last week's decision in the Eleventh Circuit. “But taking a look at the options relative to this case we are still very confident that we will prevail and that our arguments will hold.”

Despite the difficult legal environment over the past two years, nine companies have still managed to file 11 antitrust suits against the RBOCs, alleging misconduct in billing practices among other anticompetitive practices. Companies such as Covad and CoreComm along with Cavalier Telephone and Ntegrity are among the plaintiffs.

Because antitrust decisions usually carry high monetary fines, raising the financial stakes could be enough to force RBOCs to play fair. Five of the 11 antitrust suits filed against RBOCs in the past two years have already been settled. Covad actually used an antitrust settlement involving SBC to help it get out of bankruptcy back in September 2000.

“Companies that lose antitrust cases usually revise their conduct much more than they would have if they had just been given a slap on the wrist by regulators,” says Rebecca Dick, counsel at Swidler Berlin Shereff Friedman LLP, which is representing CoreComm in its case against SBC.

Some experts say the groundwork is being laid for the eventual breakup of the RBOCs. Daniel Berninger of
Pulver.com, an antitrust research firm supported by the CLEC industry, says he sees many similarities between these cases and the ones preceding the breakup of AT&T Corp. (NYSE: T).

"Making them pay is step zero," says Berninger. "Before AT&T was broken up, the courts were also uncomfortable with antitrust cases. And there was quite a long delay before the antitrust laws were enforced. Things seem to be happening much quicker this time around."

But others are skeptical that the RBOCs will ever be trust-busted. "They are the only companies in the telecom sector that are even close to being healthy," says Lederman of Okumus Capital. "I highly doubt they'd be broken up."

Lederman argues that the climate in the industry is different now than it was in the early 1980s when AT&T was broken up. Today, consumers are much more willing to sacrifice price for service.

And first, CLECs have to win these cases, which is not always an easy thing to do. RBOCs have deep pockets. For example, Cavalier, which is suing Verizon, has three in-house lawyers assigned to its antitrust case. By contrast, Verizon assigned 11 lawyers to the case, including four from outside firms. In March of this year, a court dismissed Cavalier’s $600 million antitrust suit, but the case is now on appeal.

"Winning a preliminary motion is still a long way from winning at trial, but at least the Bells are losing the ability to knock out cases early,” says Dick, one of CoreComm's lawyers. “This gives CLECs more of a chance to air their allegations at a trial.”

— Marguerite Reardon, Senior Editor, Light Reading
sauron5 12/4/2012 | 10:00:11 PM
re: Courts Coming Through for CLECs By the time they get around to actually doing
anything, they'll have to start archeological
expeditions to dig up the remains of the
equipment suppliers...

nobollox 12/4/2012 | 10:00:10 PM
re: Courts Coming Through for CLECs The courts can decide whatever they want, but as soon as Congress votes it in, it becomes the law. Senator McCain just recently submitted his new broadband regulation. From what I understand it leaves the regulation "in place" for businesses, but creates a minimally regulated environment for broadband residential customers.

Antitrust cases are decided on law that has nothing to do with technology or BB access. These hinderances (from the RBOC point of view) can be dealt with within the realm of the new legislation.

Consultant 12/4/2012 | 10:00:07 PM
re: Courts Coming Through for CLECs NoBollox,

Your comments are riddled with assumptions that are not obvious. All attempts to rewrite the Telecom Act have failed and McCain's attempts are likely to fail as well.

If the ILECs are counting on new legislation passing a Democratic Senate, don't count on it.

The ILECs have done nothing for American except milk their legally imposed monopolies. They neither earned their customers nor their respect.

Eat your heart as CLEC market share in NY exceeds the 25% mark and the MCI Neighborhood plan places a dagger in the ILEC heart.

Oh, and look forward to those pending rating cuts on RBOC bonds.

fgoldstein 12/4/2012 | 9:59:06 PM
re: Courts Coming Through for CLECs The recent Covad v. BellSouth remand decision is good reading. It boxes Goldwasser into a box that a pinky ring would have trouble fitting in. Goldwasser has been the RBOCs' hope. The Covad remand held, basically (disclaimer: IANAL), that Goldwasser only means that violations of the Telecom Act are not, per se, antitrust; antitrust violations still have to be shown. As in every other case, I'd assume.

The decision dwells on the black letter wording of the Telecom Act, which explicitly states that it does NOT contradict antitrust law. Not to mention Congressional intent, and President Clinton's signing speech, which mentioned that antitrust protection remains intact.

So the ILECs have a real problem on their hands. They've assumed that antitrust doesn't apply, and they're very wrong. This could be the salvation of the CLECs.
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