Playing Hardball

Posted: 04/2002

Playing Hardball
More Competitors File Antitrust
Suits Against BOCs While
AGs Consider Action

By Kim Sunderland

THERE’S MORE THAN ONE WAY to break up a monopoly Bell company, say the competitive carriers making power plays against the incumbents with antitrust lawsuits. It appears their biggest booster could be separate involvement by state attorneys general .

“When the AGs get involved there will be real changes in BOC behaviors, because they’re going to launch aggressive discovery,” says a Washington source who asked to remain anonymous. “And then all the information about how the BOCs are trying to decimate the competitive industry will finally come out.”

Such hardball legal tactics have been used before under similar market conditions, several sources say.

The current business landscape parallels that of 1974 when antitrust complaints forced the ultimate breakup of AT&T Corp. Now, as then, there’s a recession; a recent technology investment boom followed by increased skepticism on Wall Street; incumbents that still haven’t fully opened up their local markets to competition; and companion competitive companies either are restructuring or being forced to file for bankruptcy.

The picture isn’t pretty.

The BOCs are using much the same strategy AT&T employed when it fought to maintain its monopoly. For instance, the BOCs specifically claim regulation and pricing established through the tariff process makes them immune to antitrust complaints.

Then there’s the money issue.

In its case, AT&T spent at least $350 million to protect its monopoly from a handful of companies that had invested millions trying to compete. This time, though, hundreds of companies are involved and the investment at risk runs into the billions.

Take Ntegrity Telecontent Services as an example. The company started out as a reseller in 1998 with plans to peddle Bell Atlantic service in Maryland, New Jersey and Pennsylvania. Shortly thereafter, Ntegrity ran into resale problems and because of a combination of things, decided to move to a BOC-independent business model. Even though the company had acquired “several thousand customers” as a reseller, according to company executives, it then morphed into a building-centric strategy to save itself.

But it was too late.

Company president and chief executive A. Keith Machen says Bell Atlantic, now Verizon Communications Inc., ruined Ntegrity’s resale business model. “Basically, we’re out of business and Verizon put us out of business,” Machen says.

Verizon, however, says it was forced to sue Ntegrity for nonpayment under the two companies’ resale agreement. “After several years of nonpayment from Ntegrity, Verizon last year terminated wholesale service to this CLEC,” says Harry J. Mitchell, director of media relations for Verizon’s Mid-Atlantic Bureau. “Any suggestions that Verizon took this step for any reason other than nonpayment are absurd and flat-out wrong.”

“Simply put,” Mitchell tells PHONE+, “this is a garden-variety collections matter.”

“We refused to pay because they were grossly inaccurate,” Machen says. “So we counterclaimed and that’s where we’re alleging all those antitrust violations.”

Machen says Verizon was trying to put Ntegrity out of business “like they did all the other CLECs.”

“They ruined our resale business model,” says Machen. “They damaged us and we expect to be compensated.” He notes the company is seeking between $50 million to $150 million in damages, which would treble under antitrust rules. “Their conduct is costing consumers in the states we serve billions of dollars in lost potential savings.”

The Ntegrity case, which Verizon’s request for dismissal was overturned, is now in the discovery phase. The cost and time it could take for settlement doesn’t concern Ntegrity. Machen says Ntegrity has a “creative arrangement with our attorneys that is keeping our out-of-pocket expenses minimized.”

Cavalier Telephone, the most recent CLEC to join the growing list of competitive telecom providers to have filed antitrust lawsuits against the BOCs — and Verizon isn’t the only one — sings a similar tune. Cavalier’s $635 million suit against Verizon charges the telco’s conduct toward consumers and competitors is “illegal and predatory.” In its suit, filed in federal court in Richmond, Va., Cavalier seeks $135 million in compensatory damages and $500 million in punitive damages. The suit also calls for widespread changes in the way Verizon does business.

“Over the past three years, Verizon has done everything in its power to keep out lower prices and innovative services by keeping companies like Cavalier out of the markets in Richmond, Hampton Roads and Northern Virginia. While most competitive telephone companies are rapidly becoming extinct, Cavalier is one of the few has persevered through Verizon’s deadly gauntlet of overcharges, delays, technical snafus, and illegal practices,” Cavalier President Brad Evans says.

Cavalier alleges Verizon has overcharged it by millions of dollars and that Verizon’s ordering system has flaws that cause delays and errors in processing competitors’ orders. Other charges include illegal marketing practices by Verizon and technical restrictions that limit Cavalier’s ability to provide DSL and Internet services.

Verizon, meanwhile, has filed a motion to dismiss Cavalier’s lawsuit. Mitchell says, “overall, we feel Cavalier’s claims have no merit. Cavalier serves about 100,000 lines and it’s adding 10,000 lines a month. This success belies Cavalier’s claims against Verizon.”

Verizon also contends that Cavalier’s complaint follows a pattern set by a handful of the hundreds of companies competing in local telecommunications markets in the wake of the adoption of the Telecommunications Act of 1996.

“In addition to pursuing remedies for enforcement of the 1996 Act with state and federal regulators, such companies identify supposed defects in ILECs’ performance under government-approved interconnection agreements and seek to transform such alleged failures into treble-damages windfalls,” states Verizon’s lawsuit. “In light of settled antitrust precedent directly on point [however], these allegations fail to state a claim.”

But Cavalier claims Verizon’s conduct violates section 2 of the Sherman Act, and several other federal and state laws. The Sherman Act was designed to protect consumers from discriminatory practices of monopoly suppliers and was the legal foundation the U.S. Department of Justice used against Microsoft Corp.

The DOJ, however, hasn’t taken any specific action on possible antitrust violations by the Bell companies, as it did against Microsoft, because of complications and ambiguities related to opening up the local telephone market.

Involvement by the attorneys general could change all that because the federal government would have to get more involved in the situation, several lawyers say. “When the feds get involved there will be massive changes,” says aWashington lobbyist.

And the BOCs certainly don’t want an AG involved because it’s bad publicity, a Washington lawyer adds. But the AGs, are involved. Several attended the first networking meeting in Washington in which representatives from all five companies with active antitrust complaints — Covad Communications Co., Cavalier Telephone, NowCommunications, CoreComm and Ntegrity — aim to reprise the antitrust battles that led to the breakup of AT&T.

The pulver.com meeting regarded emerging telecom antitrust enforcement efforts and gave the CLECs an opportunity to share local market horror stories, as well as the status of their antitrust cases. When asked about possible movement on the antitrust front by the AGs, one says, “We’ll see.”

Meanwhile, the Competitive
Telecommunications Association (CompTel), a Washington, D.C.-based lobbyist for the competitive industry, continues kicking into gear its relatively new antitrust task force. Its duty is to accumulate evidence of any alleged BOC misdeeds, says H. Russell Frisby Jr., CompTel’s president.

At the same time, several telecommunications law firms have advised their CLEC clients to document everything in anticipation of future litigation.