Chapter 2 - Background
2.10 The U.S. vs. Western Union Lawsuit -- 1949-1956
When Harry S. Truman surprised the experts and won election in 1948, he finally felt free, unencumbered as the Roosevelt stand-in, to make the Administration over with people who believed as he did, including the aggressive use of antitrust to save the economy for competition. Monopolies were the enemy. And AT&T, the biggest of them all, had escaped the leveling cleaver of antitrust. Or so believed Holmes Baldridge who became the new chief of the Antitrust Division’s General Litigation Section. Baldridge had harbored for years the frustrations of not seeing the conclusions of the STI investigation of the 1930’s implemented – an investigation of which he had served as chief counsel.421
If Baldridge needed new justification, he had it handed to him on December 22, 1948, when the Hush-A-Phone Corporation (HAPC) filed a complaint with the FCC against AT&T, charging that its Foreign Attachment Tariff Restrictions prohibited telephone subscribers from using its product – the Hush-A-Phone. The Hush-A-Phone, available since 1929, was simply a plastic cup that fit over the telephone microphone to increase the privacy of telephone conversations and reduce extraneous noise. As innocent as it would seem, AT&T and the Bell operating companies viewed the Foreign Attachment Tariff Restrictions as banning not only electrical interconnection of devices to the telephone network, but any type of physical attachment of anything to a facility, up to and including a plastic cover on a telephone book in a public phone kiosk.422 In place since 1911, the Tariff read:
Equipment, apparatus and lines furnished by the Telephone Company shall be carefully used and no equipment, apparatus of lines not furnished by the Telephone Company shall be attached to, or used in connection therewith, unless specifically authorized in this tariff.423
On January 14, 1949, the Truman Justice Department filed a civil antitrust suit against AT&T and its manufacturing subsidiary WE – United States v. Western Electric. The Justice Department charged that the two companies had established a monopoly in the manufacture, distribution, and sale of telephone equipment. It asked the court to divest AT&T of WE and split WE into three separate companies, to force WE to sell its 50 percent interest in Bell Labs to AT&T, to require AT&T to competitively bid all purchases, and to license its patents to all applicants. Despite the facts that AT&T’s financial performance deteriorating, and a just completed investigation by the California PUC had concluded that WE prices were 45 percent below an average of Independent manufacturers prices,424 the Justice Department, that is Baldridge, was not going to be confused. AT&T was a monopoly and needed to be broken-up.425
On July 14, 1949, Jordaphone Corporation of American (JCA) and Mohawk Business Machines Corporation (MBMC) added fuel to the fire, jointly filing a formal complaint with the FCC against AT&T, charging its foreign attachment tariffs prohibited telephone subscribers from using telephone answering devices they manufactured.
The FCC held hearings on both the HAPC and joint JCA and MBMC cases in 1950. In the Case of HAPC, AT&T argued, among other things, that: “Well, you know, the Hush-A-Phone distorts speech, and any one of 200 million people in this country might be called by, or might call, someone using a Hush-A-Phone. They’re going to get a lousy telephone call. That’s harm. They’re not getting what they paid for.”426 In the JCA and MBMC case, AT&T argued, among other things, that the devices in question could accidentally leave a circuit open, and since no other telephone call could then be put through, harm resulted.
On February 16, 1951, the FCC released its initial decision on the HAPC case – dismissal in favor of AT&T. HAPC petitioned for review to the Court of Appeals. Oral arguments were scheduled for November.
On November 13, 1951, the FCC released its initial decision in JCA and MBMC – dismissal in favor of AT&T. JCA and MBMC petitioned for review to the Court of Appeals. Oral arguments were scheduled for June 1952
Meanwhile, the Truman Administration’s Justice Department, even though constrained by the lack of funds and thus staff, continued filing antitrust suits – thirty of them.427 On January 21, 1952, one was filed against International Business Machines (IBM) which constituted approximately 90% of the highly visible punch card business. (As a consequence, government tried to restructure the leading firms in both industries that would converge to give rise and context to computer communications. These would not be the last monopoly suits the Justice Department would file against either AT&T or IBM.)
The election of Dwight D. Eisenhower President in 1952 brought to antitrust enforcement a more conservative, pro-business philosophy. Stanley N. Barnes, the new Assistant Attorney General in charge of the Antitrust Division of the Justice Department, sought to resolve as many of the 144 active antitrust cases he inherited as quickly as possible.428 In April and July, private meetings among AT&T and Justice Department personnel were held. Justice Department people suggested they were willing to abandon their efforts to divest AT&T of WE, and to settle out-of-court, via a consent decree. Only they needed something in return, to save face, and to counter the perception that they were being soft on monopolies. (A consent decree would be an important concession for it did not mandate treble damages in outstanding private antitrust suits, as a court decision against AT&T would.)
As the months passed, AT&T successfully marshaled Department of Defense (DOD) support for their cause, with DOD personnel lobbying Barnes for case dismissal. AT&T had become indispensable to the DOD, building missiles, managing Sandia National Laboratories, and soon to receive a major contract for the SAGE Project. AT&T had persuaded the DOD that divesting AT&T of WE, and then sub-dividing WE, was sure to impact its ability to meet and respond to critical national security requirements. So new ideas and new conditions left AT&T knowing they could survive intact, that is if they could find a face-saving compromise for the Justice Department.
On May 5, 1954, the Court deciding the JAC case issued its final decision. It ruled in favor of AT&T – JAC’s telephone answering devices need not be tariffed. But, reflecting the uncertain division of jurisdictional responsibilities between the FCC and the state PUC’s, if a PUC tariffed the use of telephone answering devices, then the JAC device had to be allowed.
The antitrust negotiations that had begun in the Spring of 1953 between the Justice Department and AT&T had now dragged on for over two years. In the Fall of 1955, the Justice Department solicited FCC advice on the issues of the antitrust suit. A first response was prepared by the chief of the CCB. The Commissioners thought it too weak in representing FCC powers, and sent it back for redrafting. The job was assigned to CCB staff lawyer Bernard Strassburg.429 He wrote of the Commission’s powers to examine rate bases and to take appropriate actions; pointing out rate reductions that had been negotiated. He also wrote two other paragraphs, paragraphs that were deleted in the response passed on by the Commissioners. One paragraph dealt with the simple fact that they did not know if WE’s prices were as low as they might be in a competitive market. The second recognized that the FCC’s powers depended on the resources they had – inferring they did not have enough – one of the issues that had prompted the creation of the FCC in the first place.
Independently, on December 21, 1955, Judge David Bazelon handed down the Court decision on the Hush-A-Phone case. Judge Bazelon reasoned that since the same effect of the Hush-A-Phone plastic cup could be created by cupping one’s hands around the microphone, such a tariff was an:
unwarrented interference with the telephone subscriber’s right reasonably to use his telephone in ways which are privately beneficial without being publicly detrimental. Prescribing what changes should be made in the tariffs to render them just, fair, and reasonable and determining what orders may be required to prohibit violation of subscribers rights thereunder are functions entrusted to the Commission.430
Another lingering issue was about to be decided, for the burst of activity in December between the Justice Department and AT&T led to the announcement on January 24, 1956 that an out-of-court settlement of U. S. v. Western Electric had been reached. By terms of the agreement, AT&T:
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Did not have to divest itself of Western Electric,
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Was enjoined and restrained from engaging….in any business otherthan the furnishing of common carrier communications services,431
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Was required to license Bell patents to any applicant that agreed to paya reasonable royalty and agreed to make available their patents to Bell,432 and
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Western Electric could not manufacturing equipment other than that used by the Bell System, or the Government.
AT&T had again foiled the Federal Government’s efforts to introduce competition into telecommunications. In essence, no one was willing to risk the uncertainty of what might happen if AT&T were forced to do what it steadfastly resisted; and not without reason, for not only had AT&T created the world’s finest telephone system, but as the world’s largest corporation, any negative impact to its hundreds of thousands of employees and shareholders would certainly have political consequences. So the Justice Department did what it could to prevent the monopolist from interfering with other, competitively-determined, markets, and constrained AT&T, and WE, to common carrier communications.
AT&T had also fought off the efforts by other companies to connect non-AT&T devices to their network.433 Granted their tariffs had to be just, fair, and reasonable, but who was to say what those words meant other than AT&T; and challenging AT&T’s interpretations had proven lengthy, and expensive, with little hope the FCC would rule against AT&T. The tradition of fighting any changes at the periphery of the network, a tradition dating to the 19th century, had again proven successful.
So the world of telecommunications as AT&T had walled itself away, steeled against change, seemingly harmonious with the pace of the 1950’s, but soon to be at odds with the great changes to be introduced by computers. That story follows.
- [421]:
Henck, p. 57:Baldridge later made it clear, at congressional hearings long after he left the government and after the case ended with a consent decree, that the complaint had been largely his personal project.
- [422]:
Slomin
- [423]:
Excerpted from the Jordaphone Case, FCC Dockets No. 9383 and 9701
- [424]:
Stone, pp. 70-76
- [425]:
AT&T did not need to feel special. A barrage of cases were filed, including against many companies. Stone p. 69
- [426]:
Slomin
- [427]:
Theodore P. Kovaleff, Business and Government During the Eisenhower Administration, Ohio University Press, 1980. p. 11
- [428]:
Kovaleff, p. 51
- [429]:
Henck, pp. 59-62
- [430]:
HAPC Case
- [431]:
1956 Trade Case P68,246
- [432]:
Business Week, March 3, 1956, pp. 80-81.The government had to give up any idea of splitting up Western Electric in return for the broad patent relief it thought was needed to break AT&T’s strong position. And to preserve its corporate setup, AT&T had to agree to free its patents to all comers.Author: It is debatable whether this resulted in new behavior, for AT&T already had a liberal licensing policy, and even moved aggressively to transfer technology, such as in the case of the transistor.
- [433]:
Mark Clark, “Suppressing Innovation: Bell Laboratories and Magnetic Recording,” Technology and Culture, 1993, p 535. Clark writes that the attitude of AT&T continued to be: “To provide universal service at a superior level of quality became AT&T’s formula for corporate prosperity. Such quality service, AT&T management believed, could only be insured if AT&T had control over every part of the telephone network and everything attached to it. Any technical innovation that might affect service was treated by AT&T with suspicion….It had consistently fought against the attachment to its circuits of devices it did not control.”