THE ESSENTIAL FACILITIES DOCTRINE IN THE DEREGULATED TELECOMMUNICATIONS

INDUSTRY

By John T. Soma1, David A. Forkner, and Brian P. Jumps

ABSTRACT

The Telecommunications Act of 1996 required the formerly monopolistic telephone local exchange companies to open their networks up for competitors' use. This shift from anticompetitive federal regulation to mandated competition shook up an industry and necessitates another look at the basic antitrust jurisprudence undergirding the pro-competitive rationale. As this article points out, sections 251 and 252 of the Act, while purporting to encourage competition, actually may hamper entry into the local services market and provide a disincentive for current market participants to innovate. These deleterious effects can be overcome, the authors postulate, by returning to antitrust principles enumerated in the essential facilities doctrine.

TABLE OF CONTENTS

I. INTRODUCTION 566

II. TELECOMMUNICATIONS REGULATORY BACKGROUND 567

A. Divestiture of the Bell Operating Companies *

B. Line-of-Business Restrictions on the Local Operating Companies *

C. Equal Exchange Access *

III. THE IMPETUS FOR AND PURPOSE OF THE 1996 TELECOMMUNICATIONS ACT 573

IV. THE CURRENT MANDATE 576

V. THE ESSENTIAL FACILITIES DOCTRINE WITHIN THE DEREGULATED TELECOMMUNICATIONS MARKET 580

A. Antitrust's Doctrinal Justifications and the Essential Facilities Doctrine *

B. The Doctrine's Historical Underpinnings: Supreme Court Recognition Of The Essential Facilities Doctrine *

1. The Essential Facilities Doctrine as Applied to Horizontal Combination Cases: Concerted Action In Violation of Section 1 *

2. Monopoly Misuse Cases in Violation of Section 2 *

3. Lower Courts' Distillation of Supreme Court Doctrine: The MCI Test *

4. Control of an Essential Facility by a Monopolist *

5. The denial of the use of the facility to a competitor *

6. The feasibility of providing the facility *

C. The Role of the Regulatory Regime Within the Essential Facilities Doctrine *

VI. T HE ROLE OF THE ESSENTIAL FACILITIES DOCTRINE WITHIN THE DEREGULATED TELECOMMUNICATIONS INDUSTRY 606

VII. CONCLUSION 613

I. Introduction

After six decades of regulation, the judicial break-up of the Bell System, and no fewer than four legislative endeavors to regulate telecommunications, the advent of the Telecommunications Act of 1996 (1996 Act)2 attempts to create the collapse of an anticompetitive telecommunications industry "like the walls of Jericho."3 A transition away from an antiquated regulatory paradigm, however, is "never complete and immediate."4 Rather, the transition toward a truly competitive telecommunications environment necessitates the return to basic antitrust jurisprudence.5 Specifically, invocation of the essential facilities doctrine within section 2516 and section 2527 of the 1996 Act provides the doctrinal tool necessary to unravel the Gordian knot of federal telecommunications regulation.8

Part I of this article reviews the telecommunications regulatory history preceding the 1996 Act. Part II examines the 1996 Act and its purposes. Part III explains the interconnection, unbundling, and resale provisions of the 1996 Act. Part IV evaluates the emergence of the essential facilities doctrine and provides its historical underpinnings and doctrinal justifications. Finally, part V posits a vital role for the essential facilities doctrine within a deregulated telecommunications industry to achieve facilities-based competition and an ordered transition toward competition.

II. Telecommunications Regulatory Background

Telecommunications, as an industry, has transformed from "technical balkanization" to a "reality of technological convergence."9 This technological convergence, however, has not engendered a consonant response in the regulatory field. Of consequence, only four significant governmental responses have occurred in the past 63 years,10 the last of which is the 1996 Act.11 These responses furnish the relevant telecommunications regulatory and legal backdrop for this discussion.12

The Federal Communications Act of 1934 (1934 Act)13 provided the original and only national telecommunications policy for more than sixty years. Congress enacted the 1934 Act to address the monopoly of the Bell System14 over telephony in the United States.15 Functionally, the most important attributes of the 1934 Act were the creation of a dualistic regulatory scheme and the establishment of the Federal Communications Commission (FCC).16 Pursuant to the 1934 Act, the FCC inherited the regulatory authority over interstate wire and radio communications, a dominion formerly held by the Interstate Commerce Commission.17 The states retained regulatory control over intrastate wire and radio communications.18

The AT&T antitrust litigation provided the next two pertinent regulatory and legal developments. Until 1984, the Bell System represented both the largest company19 and the largest monopoly in the world.20 The Bell System controlled "nearly every sector of the telecommunications industry within the United States," of which the most influential included long-distance service, local communications networks, and telecommunications equipment manufacturing and leasing.21 The Department of Justice (DOJ) initially addressed the anticompetitive aspects of the Bell System in 1949, which resulted in the 1956 Consent Decree.22 In 1974, the DOJ attacked AT&T's Bell System again, resulting in the 1982 Modified Final Judgment (MFJ).23 Although both actions sought structural adjustments, it was not until the 1982 MFJ that radical changes transpired.24

The 1949 DOJ suit against the Bell System sought to end the anticompetitive equipment manufacturing and leasing activity of Western Electric.25 The DOJ alleged "that the defendants had monopolized and conspired to restrain trade in the manufacture, distribution, sale, and installation of telephones, telephone apparatus, equipment, materials, and supplies, in violation of Sections 1, 2, and 3 of the Sherman Act."26 Thwarting divestiture, AT&T utilized its political influence over the DOJ by arguing that a divestiture of Western Electric from the Bell System would "effectively disintegrate the coordinated organization which [was] fundamental to the successful carrying forward of critical defense projects" contrary to the "vital interests of the nation."27 In 1956, to serve the interests of the public, the United States District Court for the District of New Jersey approved the Consent Decree absent any structural changes within the Bell System.28 AT&T, however, did agree to focus exclusively on the telecommunications industry and, of course, remain regulated by the FCC and the 50 state public utility commissions (PUCs). Remedially, the 1956 Consent Decree was considered "virtually useless in restraining AT&T's exercise of its anticompetitive capabilities."29

The DOJ's next offensive stratagem against the Bell System began on November 20, 1974,30 when the DOJ filed suit against AT&T, Western Electric, and Bell Telephone Laboratories alleging that AT&T had violated section 2 of the Sherman Act by monopolizing a range of telecommunications services and equipment markets.31 Again, the DOJ brought suit seeking remedial divestiture of the Bell Operating Companies (BOCs) and the dissolution of Western Electric.32 The MFJ resulted from Judge Harold Greene's review of the Consent Decree proposed by the parties.33 The MFJ mandated divestiture of the BOCs, inclusion of line-of-business restrictions on the BOCs, and equal exchange access.34

A. Divestiture of the Bell Operating Companies

The first remedy mandated by the MFJ was the total divestiture of the 22 BOCs.35 Due to this forced divestiture, seven surviving independent Local Exchange Carriers (LECs)36 emerged as the controllers of the local telephony service domain.37 Each of the seven LECs maintained a monopoly over several local networks, also known as "exchange areas" or "local access and transport areas" (LATAs).38 Each exchange area was designed to be "large enough to comprehend contiguous areas having common social and economic characteristics but not so large as to defeat the intent of the decree to separate the provision of intercity services from the provision of local exchange service."39 In essence, the LECs would "provide[] telephone service from one point in an exchange area to other points in the same exchange area (called 'exchange telecommunications'), and to originate and terminate calls from one exchange area to another exchange area (called 'exchange access')."40 Any interexchange of a call from one exchange area to another remained the province of AT&T and other interexchange carriers like Sprint and MCI.41

The rationale underlying the divestiture of the BOCs was that AT&T would be unable to exercise monopoly control over the long-distance market without control of access to the local operating networks.42 Prior to the divestiture, AT&T restrained competitors' endeavors to provide competitive long-distance service by requiring customers of competing carriers to dial significantly more numbers to acquire network access than users of AT&T long-distance.43 AT&T also refused to provide a number of specialized local services to competing long-distance service purchasers.44 Last, evidence during the suit demonstrated that AT&T subsidized its long-distance rates with monopoly profits from its local access operations.45

Central to all of these practices was the fact that the BOCs were "functioning as bottlenecks."46 The BOCs possessed facilities deemed essential to competition for the competing interexchange carriers. These facilities were the local network. Local networks dictated all access to long-distance communications, and thus, all "user premises telephone equipment had to be connected to the local network."47 The MFJ countered AT&T's monopolistic anticompetitive practices with divestiture48 because the local networks were "textbook examples of natural monopolies."49

 

B. Line-of-Business Restrictions on the Local Operating Companies

The MFJ also included restrictions on the newly created independent LECs to avert the recurrence of monopolistic control by the Bell System. 50 Of importance to this discussion were the restrictions on the LECs' ability to enter interexchange markets.51 These particular restrictions were thought necessary because, even with heavy regulation from the district court and the FCC, each of the seven independent LECs maintained monopolistic control over their corresponding local access networks.52 As with the Bell System before divestiture, any company with monopoly control over the local access networks could discriminate against competing interexchange carriers with respect to interconnection facilities essential for service.53 This discrimination could occur by means of complete denial, or if they allowed access, inferior quality of access and transmission.54 Further, the LECs would have the impetus and the capacity to cross-subsidize their prices with profits from the local exchange markets.55

Although the restrictions applied to all seven of the independent LECs, a provision in the MFJ allowed courts to waive the competition restriction under certain circumstances.56 Originally, a petitioning LEC only had to demonstrate that "no substantial possibility" existed that the LEC "could use its monopoly power to impede[] competition in the market" it sought to enter.57 Subsequent case law, however, expanded the requirements to include the public interest considerations so prevalent throughout the MFJ.58 Examples of these considerations include protection of equal access for interexchange carriers and the maintenance of quality telephony services.59

C. Equal Exchange Access

Part VIII of the MFJ focused on the removal of barriers to interconnection.60 A central concern was the inherent bias in favor of AT&T that existed in the telephone network.61 To alleviate this bias, the MFJ required that by September 1, 1986, the LECs would have to provide access services to competing interexchange carriers that were "equal in type, quality and price" to the services provided to AT&T and its affiliates.62

III. The Impetus For And Purpose Of The 1996 Telecommunications Act

Since the MFJ, the advent of new technologies has continually altered the telecommunications landscape. Though by no means complete, many monopolies in the local telecommunications markets have been eroded.63 Cellular communication providers, cable providers, and "bypass" access carriers64 serve as the catalysts for change.65 Although questions exist whether these alternatives can provide direct competition, "satellites, cellular service, land microwave networks, and expanded fiber optics have been viewed as technologies capable of allowing direct competition in transmission of local calls."66 Moreover, "[n]ew developments in switching facilities" and "coaxial cables" may also furnish potential competition. These changes provided the impetus for the 1996 Act.67

The purpose of the 1996 Act is to "promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies."68 The 1996 Act's delineated goals were to establish a "national policy framework" calculated to deploy private sector advanced telecommunications services to all customers in the United States by opening up competition.69 In addition, the 1996 Act sought to: (1) promote and encourage affordable advanced telecommunications; (2) spur economic growth; and (3) preserve and advance universal service.70 Congress also issued a series of findings pertaining to the stated goals.71 Among these findings were that: (1) competition should supplant regulation as the impetus for technological advancement;72 (2) the monopolistic nature73 of local telephony market hindered competition74 and necessitated a cooperative effort on the part of both the state and federal systems75 to develop a regulatory regime76 that facilitated a transition77 from regulation to a competitive marketplace; (3) a competitive marketplace engenders technological development;78 and (4) the protections of antitrust law within a competitive marketplace ensure economic growth and universal access.79 The importance of these findings is set forth in part V in conjunction with a discussion of the deficiencies of the 1996 Act and the overlay of antitrust law to its current interconnection mandate.80

IV. The Current Mandate

Section 251(a) of the 1996 Act81 imposes a general duty upon all telecommunications carriers82 to "interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers."83 The 1996 Act also requires LECs to provide: (1) resale of telecommunication services;84 (2) nondiscriminatory access to "telephone numbers, operator services, directory assistance, ... directory listing[s;]"85 and (3) access to "poles, ducts, conduits, and rights-of-way" to competing telecommunications service providers.86 Section 251(c) imposes coterminous requirements on incumbent local exchange carriers (ILEC).87 ILECs88 must provide interconnection to facilities and equipment at the request of any challenging local exchange carrier (CLEC)89 and unbundled access to "network elements."90 In order to render interconnection and unbundled access economically feasible, ILECs must permit physical collocation of their competitors' equipment.91 Additionally, in order to effectuate price competition, the 1996 Act requires ILECs to resell their telecommunications services to CLECs at wholesale prices.92

Section 251's interconnectivity, unbundling, and resale mandates are premised upon the supposition that permitting competitors to interconnect with an incumbent's network, expedites both price-based competition and facility based competition: ultimately enabling the generation of an acquired customer base from which new entrants may construct rival facilities. The 1996 Act's interconnectivity, unbundling, and resale mandates remain effective until "explicitly superseded by regulations prescribed by the Commission."93 Notwithstanding an express legislative override, the only limitation on the Act's interconnectivity and unbundling mandates is a simultaneous requirement that the rates, terms, and conditions of interconnectivity and unbundled access be just, reasonable, and nondiscriminatory.94

A host of harmonious standards exists for determining the reasonableness of rates, terms, and conditions of interconnectivity.95 The result is a quagmire of disjunctive standards. In response to the anticipated conflict between ILECs and CLECs, the 1996 Act imposes a system of dispute resolution by which either party may request mediation by a state commission during the negotiation process.96

Failure to reach a negotiated settlement for interconnectivity within 135 days97 leads to mandatory binding arbitration to settle any remaining unresolved issues.98 The 1996 Act designates the State as the arbitrator of the dispute99 and mandates the resolution of all contested issues no later than nine months after the dispute becomes the subject of arbitration.100 The state commission must review all negotiated and arbitrated agreements.101 Rejection of an agreement is warranted if the agreement fails to comply with the interconnection requirements of section 251 or the pricing standards of section 252(d).102 Despite these ostensible requirements, the 1996 Act purports to entitle an aggrieved party to appeal a state commission's determination to a federal district court.103

V. The Essential Facilities Doctrine Within The Deregulated Telecommunications Market

Section 251 clearly imparts a duty to deal on the part of telecommunication providers, LECs, and ILECs with respect to facilities and equipment useful for providing telephony services.104 Antitrust law confers a corresponding duty to deal in the form of the essential facilities doctrine.105 The essential facilities doctrine imparts liability on a monopolist who denies competitor access to a resource essential106 for competition in a relevant antitrust market.107 This confined duty to confer access to an essential resource provides a viable mechanism to supplant section 251's general duty to share equipment necessary for the provision of local telephony services.

In addition to offering an ordered deregulation of the local exchange market, the essential facilities doctrine provides an alternative avenue for challenging a monopolist's conduct. To understand fully the role of the essential facilities doctrine in the deregulation of the local exchange market, however, it is necessary to examine antitrust's doctrinal justifications, the essential facility doctrine's role within antitrust jurisprudence, and the doctrine's historic underpinnings.

A. Antitrust's Doctrinal Justifications and the Essential Facilities Doctrine

Congress enacted the antitrust laws to promote economic efficiency108 via the protection of the competitive process.109 Courts and commentators have recognized that distortion occurs in the competitive process when a monopolist refuses access to an essential facility.110 The instances in which a monopolist has a duty to provide access to an essential facility is "one of the most 'unsettled and vexatious' issues in antitrust law."111 Antitrust law rarely mandates access to a monopolist's facility for several reasons: (1) liberal access encourages firms to abstain from significant investment initiatives in an attempt to free ride on the investment of their competitors; (2) access inhibits firms from undertaking risky and costly investment in the absence of countervailing first-mover advantages; and (3) mandated access does not have pro-competitive effects unless the terms and conditions of access are reasonable. Absent reasonable access requirements, a monopolist can either permit access on terms that are so onerous that, as a practical matter, access is unavailable112 or charge monopoly rents for access, in which case price competition becomes impossible.113

Despite these implications, antitrust policy supports a limited duty to deal only when an actual probability exists for enhancing competition.114 The essential facilities doctrine facilitates competition in two circumstances: (1) a monopolistic consortium of competitors jointly controls an essential facility enabling the consortium to restrain trade;115 and (2) a single monopolist controls an essential facility and via this control unilaterally forecloses competition in a relevant antitrust market.116 Antitrust liability attaches only when a particular resource is central to a competitor's viability in the marketplace.117 Liability primarily occurs when a monopolist obtains a substantial cost advantage by possessing an essential resource118 that competitors cannot practicably duplicate;119 the monopolist possesses a natural monopoly; and the monopolist has no valid business justification for denying access to the essential resource.120

B. The Doctrine's Historical Underpinnings: Supreme Court Recognition Of The Essential Facilities Doctrine

In support of the essential facilities doctrine, two clusters of Supreme Court precedents have emerged: concerted horizontal combination cases in violation of section 1 of the Sherman Act121 and unilateral monopoly misuse cases in violation of section 2.122 Concerted action among unrelated enterprises occurs infrequently, is readily detectable, and is easily remedied.123 Unilateral activity, however, is pervasive, evades detection, and frequently requires remedial measures that consign the courts' duties to those of a regulatory agency.

1. The Essential Facilities Doctrine as Applied to Horizontal Combination Cases: Concerted Action In Violation of Section 1

The seminal case establishing the essential facilities doctrine pursuant to section 1 of the Sherman Act is United States v. Terminal Railroad Ass'n of St. Louis.124 The Terminal Railroad Association (Association) was a unitary corporation consisting of fourteen competing railroads.125 The Association acquired numerous independent terminal companies and operated them as a united system.126 The Association sought to control all practicable means of railroad access through St. Louis by acquiring ownership of all trackage, access bridges, and terminal facilities necessary for effective interchange in the St. Louis terminal.127 At the time, St. Louis was the terminus for numerous trunk-line railroads and a critical terminal for a substantial amount of rail transportation.128

The Association permitted all railroads to use its facilities, whether or not they were Association members.129 While no showing existed that the Association had excluded nonparticipating carriers, there was nothing preventing the Association from doing so.130 Consonant with the simplest economic theory of vertical integration, the Association charged nonmembers the same price for terminal access that they charged themselves.131 This price, however, constituted monopoly rents132 that disadvantaged nonparticipating carriers.133

The Supreme Court recognized that in ordinary circumstances, a number of independent entities could combine for the purpose of controlling or acquiring terminals for their common but exclusive use.134 If access or exclusion terms were excessively onerous, competitors had the ability to exercise the right and power to construct plausible substitutes.135 Two factors were determinative of the inability to construct plausible substitutes in this case. First, the Association was a natural monopoly.136 The geographical constraints made the construction of a viable rail alternative infeasible.137 The minimum efficient scale also easily accommodated all existing railway traffic.138 Secondly, control over the trackage and access bridges created a bottleneck. Limiting access to the St. Louis interchange threatened to substantially curtail travel along an extensive rail network on either side of the interchange.139

Given the essential nature of the St. Louis interchange140 and resultant inability to construct a viable substitute,141 the Court viewed the Association's unified ownership142 as "an obstacle, a hindrance, and a restriction upon interstate commerce."143 Rather than ordering dissolution of the Association, the Court entered a decree requiring the consortium to allow nonparticipating competitor railroads access to the facilities essential for the St. Louis interchange.144 The Court ordered access for the ten remaining railroads "upon such just and reasonable terms as shall place such [railroads] upon a plane of equality in respect of benefits and burdens [incurred by Association members]."145 Forcing the Association to admit competitors to their collaboration enabled the Court to avoid becoming a regulatory agency charged with ordering the rationing of the Association's assets.146

The Court's focus upon the essential nature of the trackage, access bridges, and terminals accessing the St. Louis terminal lends support for the existence of the essential facilities doctrine.147 Even the most contentious critics148 acknowledge that the Terminal Railroad decision imparts a limited responsibility upon competitors who jointly acquire a natural monopoly to allow reasonable access for rivals.149

The rationale undergirding Terminal Railroad was eventually extended in Associated Press v. United States.150 Approximately 1,200 newspapers joined together creating the Associated Press News Organization (AP). The AP provided a vehicle for the gathering, transmission, and exchange of news reports created by domestic and foreign newspaper members.151 The collaboration realized significant economies of scale resulting in the saturation of the news gathering market.152 Although the AP generally extended membership to all news-generating newspapers,153 the AP bylaws established oppressive entry requirements for applicant papers in competition with existing local incumbents.154 Each existing member could "block membership by competing newspapers and thereby remain the exclusive outlet for AP news in its locality."155 Blocked entrants were able to access a limited number of alternative news gathering organizations.156

Despite the existence of limited competition among newsgathering enterprises,157 the Supreme Court, in a plurality opinion, determined that the concerted effort of AP members to exclude local competitors violated section 1 of the Sherman Act.158 Justice Frankfurter's concurring opinion offers the only clear support for the essential facilities doctrine.159 Equating the AP with a public utility,160 Justice Frankfurter opined that AP was clothed in public interest and must, therefore, deal with its rivals.161 Although the remaining Justices expressly disclaimed Frankfurter's public utility rationale for the opinion,162 it provides a useful perspective for invoking the essential facilities doctrine.

Despite confusion over the proper rationale underlying the decision,163 the case seems to stand for the proposition that in limited situations, collaborators must allow access to rivals on nearly equal terms.164 These limited circumstances exist when competitors collaboratively conceive a profitable facility, the facility is essential to the competitive viability of rivals and to a competitive market, and admission of rivals is consonant with the legitimate goals of the collaboration.165

2. Monopoly Misuse Cases in Violation of Section 2

The Otter Tail Power Co. v. United States166 decision formed the foundation of the essential facilities doctrine within the single firm context.167 Otter Tail Power Co. (Otter Tail) was a regulated public power utility168 that maintained an upstream monopoly in electric transmission lines169 while simultaneously selling power at the retail level.170 Otter Tail refused to sell wholesale power to municipal systems171 and to transfer electric power from one utility to another over the facilities of an intermediate utility.172 Additionally, Otter Tail instituted litigation aimed at forestalling or delaying the establishment of alternative systems, and invoked contract provisions aimed at denying municipal systems access to alternative suppliers requiring the use of Otter Tail's transmission lines.173 The effect of Otter Tail's refusal to deal was the elimination of competition in the downstream market.174

The Court determined that Otter Tail violated section 2 of the Sherman Act by intentionally exploiting its wholesale energy monopoly power to gain a competitive advantage at the retail level.175 The Court affirmed the decree enjoining Otter Tail to either sell its own power or wheel power supplied by other wholesalers to the downstream retail market.176

The Otter Tail decision has generated a torrent of conflicting commentary over the duties owed to competitors by the owner of an essential facility. Some commentators suggest that Otter Tail does not establish a general duty to deal.177 The unique circumstances surrounding the case serve as the premise of this argument. 178 Otter Tail possessed a natural monopoly subject to governmental regulation. The regulatory agency had the authority and capacity to regulate prices and terms of transmission. The existence of agency oversight supplanted the need for the Court to assume the role of energy transmission regulator.179 Some commentators conclude that in these limited circumstances, a duty to deal exists.180

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.181 represents the second unilateral refusal to deal case considered by the Supreme Court.182 Aspen Skiing Company (Ski Co.) and Aspen Highlands Skiing Corp. (Highlands) competed in the Aspen Ski basin skiing facilities market.183 Ski Co. owned three of the four skiing mountains in Aspen184 and thereby obtained control of 80 percent of the Aspen area ski ticket sales.185 For many years, Ski Co. cooperated with Highlands, the owner of the fourth mountain,186 to jointly provide a four-mountain, multi-area, six-day, ski pass.187 Ski passes are typically sold on a daily basis, but the four mountain pass enabled skiers to access any of the four mountains throughout a six-day ski week.188 Ski Co. and Highlands sold the six-day pass at nearly 14 percent below the equivalent six-day daily rate.189 Initially, Ski Co. and Highlands divided revenues received from the multi-area pass based upon the actual usage of their respective facilities.190 The Highlands facility typically received 16 to 18 percent of total revenues from the multi-area pass.191

Ski Co. threatened to discontinue the multi-day pass unless Highlands was willing to reduce its percentage of the revenue to 13.2 percent without regard to actual usage.192 Despite the abandonment of this particular effort to reduce Highlands' share, Ski Co. became increasingly dissatisfied.193 Ski Co. continued its efforts to reduce Highlands' revenue share from the four-mountain pass. Ultimately, Ski Co. refused to continue its participation in the four-area ski pass.194

After discontinuing the four-area pass, Ski Co. instituted its own three-area pass allowing access exclusively to its three skiing facilities.195 Highlands made several attempts to accommodate Ski Co.'s new position including marketing its own multi-area pass that contained coupons exchangeable for Ski Co.'s day pass, at day pass prices.196 Despite the backing of a local bank, Ski Co. refused to accept Highlands' coupons.197 Highlands responded by offering to purchase passes directly from Ski Co.198 Ski Co. refused to sell any skiing passes to Highlands despite continual requests from Highlands.199 The result of Ski Co.'s actions was a significant decline in Highlands' revenue share of the skiing market.200 Ski Co.'s lower prices also had the practical effect of capturing consumers unwilling to purchase a more expensive Highlands' pass.201 Once Ski Co. was determined to be a monopolist in possession of a unique facility, its actions constituted a de facto exclusive dealing arrangement.202

Ski Co. justified its actions on the grounds that (1) Highlands was an inferior skiing facility; (2) the method of determining actual usage was unsatisfactory; and (3) accepting Highlands' coupons created an undue administrative burden. Ski Co. offered these explanations despite no evidence of a greater administrative burden, Highlands' willingness to provide qualified accountants to survey usage rates, and Ski Co.'s continued dealings with inferior ski facilities in other markets.203

The Tenth Circuit determined that the multi-day, multi-area, ski pass was an essential facility;204 and that Ski Co.'s actions evidenced intent to create or maintain a monopoly.205 Without addressing the essential facilities claim,206 the Supreme Court affirmed the decision.207 The Court declared that a monopolist does not have an unqualified duty to deal with competitors, but refusals to deal may have "evidentiary significance."208 The Court seemed to suggest that the refusal to deal might evidence an anticompetitive intent for the purposes of determining impermissible exclusionary conduct. Ski Co.'s radical departure from its cooperative effort with Highlands,209 coupled with a lack of valid business justifications,210 formed the basis of the Court's conclusion that Ski Co. willfully acquired, maintained, and used its monopoly power in the destination ski resort market for anticompetitive and exclusionary purposes and this violated section 2 of the Sherman Act.211 Affirming the lower court's decision, the Court upheld a jury instruction requiring jurists to find the defendant liable if "the defendant acted 'with exclusionary or anticompetitive purpose or effect.'"212 Despite the possibility that nearly any act by a monopolist could render a monopolist liable pursuant to this jury instruction,213 several factors limit the instruction's application.214

First, the Court's formulation emanates from the particular factual background of the case. The Court never implied that monopolists have a general duty to cooperate with rivals.215 Secondly, the decision does not mandate the particular terms on which Ski Co. must deal with Highlands. Nothing in the opinion prevents Ski Co. from charging monopoly prices for its goods and services either to its customers or to Highlands. Finally, the decision allows a monopolist to deny access to particular goods, services, and facilities if a legitimate business reason exists.216 The Court seemed to suggest that a legitimate business justification negates a monopolist's anticompetitive purpose.

3. Lower Courts' Distillation of Supreme Court Doctrine: The MCI Test

Attempts to distill Supreme Court precedent in a consistent and predictable way has confounded lower courts and generated a torrent of conflicting commentary.217 Given the Court's insistence on an ad hoc approach to the essential facilities doctrine, the key issue is its proper scope. Courts should employ a theoretical framework that limits the doctrine's applicability to situations that enhance competition. This is the only viable reconciliation of Supreme Court precedent, antitrust law's conventional underpinnings, and congressional intent as embodied in the Telecommunications Act of 1996.218

In MCI Communications Corp. v. American Telephone & Telegraph Co.219 (MCI), the Seventh Circuit devised a useful test delineating the applicable standards for invoking the essential facilities doctrine.220 MCI filed its original complaint on March 6, 1974, alleging four counts, including "monopolization, attempt to monopolize ... conspiracy to monopolize ... and conspiracy in restraint of trade ...."221 A major contention by MCI was the extent to which AT&T allowed MCI to interconnect with "local circuits."222 According to MCI, it was imperative that MCI make contact with the AT&T operating companies' local networks to provide "full end-to-end transmission."223 MCI attested that AT&T unlawfully proscribed interconnections for particular switches and local lines.224 MCI further alleged that AT&T unlawfully refused multipoint interconnections.225 These behaviors, according to MCI, "constituted an abuse of AT&T's monopoly power over facilities essential to MCI's success."226 The court set forth a four-part test to discern the merits of MCI's essentiality claim. This test has come to dominate the essential facilities landscape.227 Pursuant to MCI, courts must examine the following factors: "(1) control of the essential facility by a monopolist; (2) a competitor's inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility."228 The second element of the test is effectively part of the definition of what constitutes an essential facility. If a competitor can reasonably or practically duplicate229 the facility, the facility is not essential.230 The fourth element implicates the question of whether a legitimate business justification exists for the refusal to provide access to the facility.231 An analysis of each aspect of this test illuminates the proper role of the essential facilities doctrine.

4. Control of an Essential Facility by a Monopolist

The essentiality of a facility is the initial condition required by the doctrine before a duty to deal attaches. A facility is essential only when two conditions are satisfied: (1) an alternative viable facility is impossible or unduly expensive to construct;232 and (2) the facility is central to the competitor's viability in the relevant antitrust market.233 A number of factors operate to satisfy the first condition: geographical and topographical conditions prevent construction of alternatives; a legal license precludes duplication;234 a natural monopoly exists;235 the unique physical characteristics of the resource are not duplicable; a bottleneck exists;236 the governmental regulatory environment prohibits the construction; the existing resource satisfies the minimum efficiencies of scale; public subsidies are necessary for construction and are lacking;237 a minimum market condition exists;238 natural fortuity disallows the construction of an alternative;239 lags in technology render the alternative infeasible or unduly expensive; or any other factor that provides a substantial cost disincentive for the creation of a viable alternative.240

Although a substantial reproductive cost may render a facility essential,241 the key factor is that the reproductive cost be enormous.242 The requisite high costs are most frequently typified by the existence of public subsidization. The substantiality of the requisite cost advantage, however, involves difficult questions of degree. A competitor can invariably replicate a facility at some price, constrained only by technological and legal impediments. The existence of technological impediments, legal prohibitions, or the necessity of public subsidization, coupled with a natural monopolistic market condition, are all factors in determining if a facility is essential.243

Satisfaction of the second condition proves equally onerous because successful invocation of the doctrine imposes two distinct requirements: (1) a competitor must demonstrate that the facility is central244 to competitive viability, and (2) in a relevant antitrust market.245 Examination of these requirements in inverse order necessitates the owner of the essential facility first to be a monopolist in the relevant antitrust market.246 An analysis of the relevant antitrust market requires an examination of the market allegedly controlled by the owner of an essential facility and the market for the unique facility itself.247 To illustrate the distinction, suppose an ILEC in the telecommunications industry owns all of the copper telephone lines that comprise the local exchange grid. Although the ILEC is a monopolist of copper telephone lines, the essential facilities doctrine is not premised upon a copper telephone line monopoly. Rather, application of the doctrine requires the examination of competition in the relevant market controlled by the facility, anticompetitive radiations among local telephony service providers. If cellular, fiber-optic, cable, and satellite technologies effectively compete with the copper telephone lines, the ownership of copper telephone lines would not be central to the provision of telephone service within the relevant market.248 Possession of a copper telephone line monopoly would also not be central to competitive viability if: (1) the copper telephone lines are available from another source;249 (2) copper telephone lines are easily duplicable by a competitor;250 or (3) other technology provides an equivalent substitute.251 Allowing access to copper telephone lines within the confines of these divisions enables a competitor to simply substitute itself for the incumbent local exchange provider. This substitution creates few (if any) pro-competitive effects and has the potential of chilling desirable behavior.252

Determining the required level of monopolistic control that ownership of an essential facility must have before antitrust liability attaches has spawned numerous judicial decisions. Some courts treat the threat of downstream monopolization as the sine qua non of a valid essential facilities claim.253 Other courts require that the control of the facility actually be accompanied by the power to eliminate competition in the relevant downstream market.

5. The denial of the use of the facility to a competitor

Under the essential facility doctrine, a valid antitrust claim is contingent upon the denial of access to the essential facility.254 Obviously, a competitor permitted to access an essential facility has little room to contest the actions of a monopolist. The denial need not be a total denial; rather, it is sufficient that the "terms of [access] be unreasonable in price, profit margin, time obligation, or other substantive criteria."255 Additionally, denying access does not automatically implicate antitrust liability.256 Antitrust liability is premised on the enhancement of competition.257 Denying access to a competitor or potential competitor may do little to effectuate competition.258 Output and price-competition are unaffected so long as the monopolist is permitted to charge monopoly rents for use of the facility.259 A different result occurs when the monopolist operates in a regulatory environment. When a regulated monopolist denies access to a competitor and this denial aids in the evasion of rate regulation or undermines the regulatory competition enhancement scheme, an antitrust claim exists.260

In situations involving firms that do not compete in the market dominated by the essential facility owner, a duty to deal does not attach, as a monopolist has little incentive to restrain competition in an upstream or downstream market in which the monopolist does not compete.261 A monopolist refusing to deal with a non-competitor may have a negative impact upon firms in competition in a downstream market. For example, dealing with firm A while simultaneously refusing to deal with firm B, firm A's competitor, may enable firm A to charge lower prices, thereby distorting competition in a downstream market. Courts recognizing this phenomenon have entertained an essential facilities claim in situations where a monopolist has refused access to a non-competitor.262 This precedent, however, ignores the fact that refusal to deal with non-competitors neither produces competitive dominance in a vertically related market263 nor bolsters the monopolist's power in the monopolized market.264 The absence of these effects necessarily confines the essential facilities doctrine to refusals of a competitor or a potential competitor to deal with the owner of the essential facility.265

6. The feasibility of providing the facility

The scope of the doctrine is further limited by the existence of a legitimate business justification for denial of access.266 Several ensuing subordinate questions arise. First, what constitutes a legitimate business purpose and what criteria are to be used to evaluate whether a business purpose is legitimate?267 Second, does the fact-finder have unfettered discretion to determine the legitimacy of the business justification?268 Third, does the monopolist have deference in devising a legitimate business justification? Fourth, does the monopolist's state of mind factor into the legitimacy afforded the business justification? And finally, does a legitimate business justification accompanied by an anticompetitive intent warrant a finding of illegitimacy?269

The answers to these questions continue to confound courts and commentators. In general, "a business justification is valid if it relates directly or indirectly to the enhancement of consumer welfare."270 A proper distillation of a legitimate business justification defense, however, must recognize such a defense at both a micro and a macro level.271 The micro level consists of the particular facts of each case.272 For example, if a firm can demonstrate that providing access would violate an existing regulatory scheme, a legitimate business justification exists.273 Telephone interconnection cases provide good examples. AT&T was a natural monopoly protected from rivalry by public restrictions on entry.274 Prior to divestiture, AT&T provided local and long-distance service.275 Rival producers of long-distance service needed to connect their long-distance lines with callers through the local telephone exchanges.276 AT&T allegedly misused its local monopolies to protect its long-distance power by denying or obstructing those interconnections.277 The Seventh Circuit held that notwithstanding any duty to interconnect, AT&T may deny interconnection if it had a "reasonable basis in regulatory policy to conclude, and in good faith concluded that denial of interconnection is required by concrete, articulable concerns for public interest ...."278 AT&T failed to articulate any such legitimate reason.279

The proper methodology for determining the legitimacy of the monopolist's business justification at the micro level begins with the plaintiff's burden to persuade the fact-finder that the defendant's refusal is unreasonable.280 The burden of production then shifts to the defendant to provide evidence establishing a legitimate business justification.281 An important caveat exists: Claims of economic self-interest rarely serve as a legitimate justification for denying access.282 A firm is never obliged to sacrifice legitimate business objectives.283 Upon evidencing a legitimate business justification, the plaintiff is charged with demonstrating that the defendant's justification is merely pretextual.284

The essential facilities doctrine also recognizes a legitimate business justification at the macro level.285 Macro legitimate business justifications do not pertain to any particular firm, but constitute "propositions of general policy."286 For example, the justification for refusing access to a patented invention does not implicate the practicality of providing access. Such a denial is predicated on social policy grounds that access would both deprive a lawful monopolist of its legitimate rewards and chill desirable innovative activities.287 Determining whether access deprives a lawful monopolist of legitimate rewards or chills desirable behavior288 provides the requisite criteria for determining the applicability of legitimate business justifications at the macro level. Macro level policy decisions necessitate the oversight of a judge rather than a jury.289 This requirement facilitates the development of consonant standards for similar firms in similar markets, and removes the determination of national economic policy from the unqualified hands of jurors.290

C. The Role of the Regulatory Regime Within the Essential Facilities Doctrine

Invocation of the essential facilities doctrine necessarily implicates the prices upon which the court orders compulsory access. Plaintiffs invariably will challenge the defendant's access price on the grounds that the price: (1) is so excessive as to constitute a denial of access, (2) impedes price competition, or (3) precludes a reasonable rate of return.291 Courts are often ill-equipped adequately to assume the role of a price regulatory agency by entertaining such claims.292 Courts willing to undertake a price control function still must grapple with the unyielding antitrust principal that a legal monopolist may charge monopoly rents for an essential facility.293 Charging monopoly rents for access does little to effectuate competition within a relevant antitrust market.294 Additionally, the essential facilities doctrine heavily relies on legal precedent derived from various courts resulting in a lack of coherence and consistency.295

The regulatory environment rectifies many of the problems that elude antitrust enforcement.296 For example, the existence of a regulatory agency both facilitates the price control function and provides an industry-specific solution. Regulatory agencies have the expertise and continuing relationship with a regulated industry so as to eliminate the presumption that a monopolist may charge monopoly rents for access.297 It is within this regulatory context that the essential facilities doctrine has unique relevance.298 The case for applying the doctrine is strongest when a regulated monopolist's "denial of access aids [the monopolist] in evading rate regulation or undermines the regulator's plan to encourage rivalry in either the primary or adjacent markets."299 This situation currently confronts the telecommunications industry.

VI. The Role Of the Essential Facilities Doctrine Within The Deregulated Telecommunications Industry

Despite the transformation of the telecommunications industry from "technical balkanization" to a "reality of technological convergence," the local telephony market remains highly concentrated.300 Currently, ILECs control 99.7 percent of the local exchange market.301 The advent of section 251 was intended to provide a transitory legislative decree aimed at facilitating a competitive local exchange market via interconnectivity, unbundling, and resale provisions.302 Despite its purpose, congressional enactment of section 251 is incongruous with a transitional regulatory regime free from artificial impediments. The result is price competition without limitation and retarded growth in facilities-based competition.

Section 251 is premised upon the notion that competition, rather than regulation, provides the necessary incentive to spur innovation and alternative telephony services.303 Section 251, however, establishes highly discounted resale rates, unbundling below-full-cost items, and ordered interconnectivity.304 ILECs confronted with below cost resale and unbundling requirements have little incentive to invest in the public network when doing so automatically benefits competitors.305 Section 251's interconnectivity, unbundling, and resale provisions also discourage incumbents and competitors from directing their efforts toward alternative technologies and delivery systems. Entrants permitted to access an incumbent's facilities are obligated to obtain market share by engaging in price warfare for delivery differentiation.306

Absent substantial improvements in efficiency, price competition necessarily entails revenue losses. Telecommunication providers are forced to lower prices to obtain a sizeable customer base.307 Discursively, the development of alternative telephony infrastructure is highly capital intensive and generally requires subsidization via the price mechanism.308 Reduced revenue coupled with capital intensive technological development threatens to create stasis for the industry where competitors simply divide a dollar market without simultaneously facilitating new demand sources via technological differentiation.309 The resulting predicament threatens to freeze current communication modes for the next ten years.310

Additionally, section 251's resale, unbundling, and interconnectivity requirements remain effective until explicitly superseded by regulations prescribed by the FCC.311 The absence of any clear statutory time limitation on section 251 expressly contradicts congressional findings312 and undermines the rationale underlying the 1996 Act. Three problem areas may arise. First, Congress intended section 251 to expedite facility-based competition by first fostering price-based competition on the assumption that price-based competition enables new entrants to acquire a requisite customer base from which they may construct rival facilities.313 Many of the new entrants, however, are multi-billion-dollar service providers such as AT&T, Sprint, and MCI. These service providers have historically invested billions of dollars in their brand images and have obtained more than 80 percent customer awareness.314 Entrants armed with an arsenal of name-brand recognition and capital base do not seem to require the ability to piggyback off incumbents' facilities.

Second, section 251 makes no distinction among these multi-billion-dollar entrants and smaller revenue based entrants with respect to interconnectivity, unbundling, and resale. Smaller revenue based entrants face a daunting challenge in attempting to compete with large scale service providers other than incumbents possessing name-brand recognition and large capital bases.315 The 1996 Act thus paves the way for an oligopolistic market structure in which well-financed and well-known entrants piggyback off the facilities of incumbents, driving prices down and stripping the incumbents of their most profitable customers while simultaneously overpowering smaller, revenue-based competitors. Third, an absence of temporal limitations on the 1996 Act forces incumbents to provide access, resale, and unbundling in perpetuity. Incumbents are thus forced to commit massive resources to the sustenance of the current copper wire system. As technological developments render this system obsolete, incumbents are placed at a competitive disadvantage. Entrants are encouraged to resell copper wire service in an effort to cross subsidize the development of new technology. Without proper judicial interpretation, the 1996 Act could simultaneously relegate incumbents to ditch diggers and force service repair personnel to maintain an outdated exchange system for competitor exploitation.

Ironically, the 1996 Act provides no evidence of congressional intent to divest incumbents of their local networks, even if some natural monopolies survive.316 Indeed, the 1996 Act verifies congressional intent that ILECs be vigorous competitors.317 Mandating interconnection, however, enables a competitor to abstain from economically and technologically duplicating the incumbent's facilities. The 1996 Act permits a competitor simply to request interconnection without further justification or explanation.318 Competitors thus have little incentive to construct alternative rival facilities or engage in highly capital intensive technological development.319 LECs are faced with a Hobbesean choice of either incurring substantial development costs while risking the potential of allowing competitor access, or choosing not to take the development initiative, instead relying upon competitors to develop the new facility. Either choice has deleterious consequences upon competition by discouraging the development of new facilities among competitors.

The solution lies in the antitrust principles embodied within the essential facilities doctrine. Congress explicitly recognized the role of antitrust enforcement in the deregulation of the telecommunications industry but failed to interlineate antitrust principles properly within the confines of section 251.320 Instead, Congress generated a highly complex regulatory environment. The Interconnection Order alone comprises more than 700 pages of regulations and guidelines.321 The highly regulatory environment is entirely inconsistent with congressional findings that the "deployment of existing and future advanced, multipurpose technologies will best be fostered by minimizing government limitations on the commercial use of those technologies."322

Fortunately, the existing provisions of section 251, coupled with modification of section 252 pricing terms, enable a regulatory reduction and the infusion of the essential facilities doctrine. Section 251 requires that access, resale, and unbundling be just, reasonable, and nondiscriminatory. In determining just, reasonable, and nondiscriminatory interconnectivity, resale, and unbundling terms the following criteria should be considered. First, the duration of ordered resale must reflect the relative size of each entrant. Well-established interexchange market carriers should receive less deference than fledgling exchange providers when determining the continuance of the resale provisions as applied. Second, below-cost resale must be limited in duration to the time necessary to give each carrier an adequate opportunity to establish a necessary customer base. Carriers such as MCI and AT&T obviously need less time to establish the requisite customer base than lesser-known entrants. This limitation would preclude carriers with substantial name recognition and an established customer base from overly relying on an incumbent's facilities. Third, regulators must determine access and unbundling terms by drawing upon the essential facilities doctrine. The essentiality of a facility becomes the first relevant inquiry.323 The particular facility must be central to competition in the local telecommunications market and not practicably duplicable.324

Within the local exchange networks, operational features such as switching elements, transport elements, signaling systems, and databases seem to satisfy these requirements.325 The essentiality of ILEC's local exchange networks arise inter alia from legal licenses; the existence of a bottlenecks; a historically rigid regulatory environment; the satisfaction of minimum efficiencies of scale by the existing local exchange loop; the necessity of public subsidies for the development of relevant exchange loop elements and telephony services; the presence of a minimum market within rural areas; the high cost associated with the development of technologically viable alternatives; and the ability of ILECs to cross-subsidize future endeavors by their ownership of the local exchange loop.326 Despite the fact that technological development promises to erode the essentiality of the facilities and generate facilities-based competition,327 ILECS currently supply the wires, which provide the path for the vast majority of voice and data services reaching consumers.328 Replication of the essential elements built over 120 years and valued at $270 billion would cost trillions of dollars.329 Thus, ILECs have effectively obtained a vital bottleneck on the local exchange market.330

The essential facilities doctrine recognizes that the effect the copper telephone line monopoly has is limited over time.331 As cellular, fiber-optic, cable, and satellite technologies become more prevalent, ownership of a copper telephone delivery system no longer remains central to the provision of telephone service within the relevant exchange market.332 If the potential market entrant is able to duplicate the copper lines monopoly with a new telecommunications technology, the essential facilities doctrine does not apply.333 Thus, the essential facilities doctrine recognizes the dynamic nature of the telecommunications industry and serves as a catalyst for advanced multi-purpose technologies.334 Potential market entrants unwilling to forgo the expanding telecommunications market will either develop alternate facilities or merge with other telecommunications providers to engender facilities-based competition with the incumbent provider.335

The second inquiry pertains to the denial of the essential facility to a competitor.336 Because the 1996 Act mandates interconnectivity and unbundling, this question seems moot. The terms of access, however, remain relevant. Access terms pertaining to a facility deemed essential should remain consistent with section 252. The essential facilities doctrine forecloses an entrant's ability to free ride on nonessential facilities owned by the ILECs.

The final inquiry pertaining to the essential facilities doctrine is the feasibility of providing access to the facility.337 The 1996 Act partially addresses this issue. Section 251 permits regulators to deny access plans that are contrary to the public interest.338 This broad policy statement recognizes a legitimate business justification for denying access at the macro level. The ability to deny access plans should also extend to micro legitimate business justifications when an incumbent can establish that access is not technically or economically practicable. The nature of the existing local loop limits the applicability of a micro level business justification.

Disputes will invariably arise over the essentiality of a particular facility or the existence of a legitimate business justification. Infusing the essential facilities doctrine into the 1996 Act's interconnectivity, unbundling, and resale provisions, however, provides a superior mechanism to continuing adherence to the rigid anticompetitive terms of section 251339 for achieving ordered deregulation of the telecommunications industry. Simply allowing access to copper telephone delivery systems without invocation of the essential facilities doctrine enables a competitor to substitute itself for the incumbent local exchange provider. This substitution has limited pro-competitive effects and has the potential of chilling desirable behavior. Nothing in the legislative history of the 1996 Act suggests that Congress intended such a skewed competitive result.

VII. Conclusion

Recognition of the essential facilities doctrine provides invaluable transition rules and criteria in the ordered deregulation of the telecommunications industry. Infusing essential facilities principles within section 251 of the 1996 Act creates investment incentives and ensures a competitive marketplace by mandating interconnectivity, resale, and unbundling at competitive rates only when a monopolist denies access to a facility essential to competition in the local telecommunications market that cannot be practicably duplicated by a competitor.340 The essential facilities doctrine thus provides an incentive for facilities-based competition necessary to achieve the congressional goal that "all Americans, regardless of where they may work, live, or visit, ultimately have comparable access to the full benefits of competitive communications markets."341