Federal communications law makes a lot of enemies, and I am not referring just to businesses. State laws, administrative law, consumer protection law, bankruptcy law, and any number of other areas of law seemingly conflict with federal communications law. In each instance, the FCC tells courts that the latter is irreconcilable with the former and that the latter should trump the former.

The topic of this conference might be paraphrased as the role of antitrust law in a world of communications regulation. Of course, the two seemingly do not blend well. An underlying theme of several papers at this conference may be characterized as follows: in lawfully complying with government rules that regulate business practices, private businesses should not be liable for Sherman Act antitrust claims so long as the regulatory compliance is lawful. Regulation is often treated as exogenous and uncontrollable, implicitly lawful and correct. In the face of this powerful force of government regulation, other forms of law must be secondary. In the vernacular, government regulation trumps all other forms of law. One might easily conclude that antitrust law should not extend to heavily regulated sectors such as telecommunications, perhaps even that antitrust law should cede its authority in the presence of overregulation.

I have a different story to tell. My story is that regulation, particularly in the realm of telecommunications, should not necessarily be considered either exogenous or lawful. Practitioners of antitrust and other forms of law should not simply wave the flag of surrender at the first utterance of the words "government regulation," and certainly not the words "Federal Communications Commission." The primary reason that antitrust law and communications law collide is not that they are inherently incompatible for technological or legal reasons but rather that communications law has become such a random collection of ad hoc decisions that it necessarily interferes with any set of rules actually grounded in law. All too often, communications law has become a euphemism for misguided and, at times, unlawful regulation.

Communications regulation could be firmly grounded in law, but it is not; and therein lies the salient problem that has given birth to thousands of unintended consequences, such as the stylized use class-action suits and Sherman Act antitrust law to attack bad results under communications regulation. These efforts give new meaning to the old cliché that two wrongs do not make a right.

It is quite easy to construct a scenario under which all of the elements of antitrust law could be exercised precisely and consistently with communications law. It is a scenario in which telecommunications regulation follows the narrow confines of communications law. Sadly that is not the current world of communications regulation. Instead, we have regulation today, as we have had for much of the past century, that interferes with competition, and thus with meaningful antitrust law.

Competition and antitrust law

Antitrust law is an elegant and subtle interpretation of consumer interests and claims in a competitive market. Antitrust law seeks to protect consumer interests by preventing extraordinarily anticompetitive behavior by rational market participants.

Antitrust law has little if any meaning in a market in which competition is proscribed. At the end of the 20th century, competition, albeit a heavily regulated form, began to creep into telecommunications markets. In the United States, regulated competition first emerged in wireless services, and later the possibility of wireline competition developed after passage of the Telecommunications Act of 1996. Make no mistake: the competition that has been permitted under the Act in the telecommunications sector is hardly pure economic competition as much as it is managed and regulated competition. The government manages with a heavy hand the entry and exit into the telecommunications market; the government sets prices and quality of service; the government dictates who must be served and under which specific conditions. Little happens without prior approval by the government.

Much of antitrust law is based on a simple economic paradigm: could a rational firm profitably raise prices for a non-transitory period as a result of a specific anticompetitive action. The action could be a merger or it could be collusion among ostensible competitors. The economic paradigm is a difficult concept in a world of heavy government regulation. How can a firm profitably raise prices if only the government can set--or review and preapprove--prices? How can a firm engage in an unlawful antitrust activity if all of its activities are reviewed and approved by the government? How can an event lead to an anticompetitive result when the government, rather than market forces, determine market outcomes?

Antitrust law is built on a framework of the rational behavior of a profit-seeking firm. It will behave as the dictates of a market permit it, but always it is acting rationally in its self-interest. Consequently, antitrust law has a natural tension with regulation that requires a firm to engage in activities, or behavior, that a rational firm would not hold. In a nutshell, communications law, even after the Telecommunications Act of 1996, is a series of regulations instructing firms to engage in irrational behavior.

How would the unfamiliar realms of regulated communications law and competitive antitrust law coexist? Not surprisingly, not well.

Federal merger review

Every year businesses, both large and small, merge for any number of reasons. The federal government has sophisticated antitrust laws to ensure that these mergers do not result in anticompetitive combinations. Two federal agencies, the Department of Justice's Antitrust Division and the Federal Trade Commission, enforce these laws with large professional staffs. The initial screen for federal antitrust review of mergers is the Hart-Scott-Rodino filing, a clear, predictable, lawful process. In fiscal year 2001, nearly 2,400 transactions each worth more than $50 million were required to report under the Hart-Scott-Rodino procedures. These transactions included all reportable mergers in the telecommunications, broadcast, satellite, and other industries regulated by the FCC.

The Department of Justice and the Federal Trade Commission coordinate and divide the review of transactions to avoid reviewing the same transaction, both to conserve limited staff resources and to avoid placing the same parties in a form of double jeopardy. After a preliminary review of material in an initial submission of information for a Hart-Scott-Rodino transaction, an antitrust agency may request additional information, a "second request," usually reserved for larger, more complicated, or potentially anticompetitive mergers. Knowledgeable antitrust attorneys can predict based on precedents the likelihood that a particular transaction will be subject to a second request. Such second requests are infrequent, and in recent years have ranged between 1.99 and 3.85 percent of reportable transactions. Stated slightly differently, the two federal antitrust agencies review in excruciating detail approximately 100 transactions annually, including several in the communications sector regulated by the FCC.

Under the Clayton Act, the federal antitrust authorities can challenge anticompetitive mergers in federal court. Of the 43 mergers for which the Department of Justice sought a second request in FY 2001, it found 32 to be anticompetitive if permitted to proceed as initially proposed.1 In 8 cases, the DOJ filed a complaint in federal court, and the merging parties entered a consent decree without further litigation,2 including WorldCom's acquisition of Intermedia Communications and NewsCorp.'s acquisition of ChrisCraft.3 In the remaining 24 cases, the DOJ informed the merging parties of anticompetitive problems which the parties either resolved or withdrew the merger application altogether.4

A similar pattern emerges at the FTC. Of the 27 mergers for which it sought a second request in FY 2001, in 23 instances it notified merging parties that it intended to challenge them.5 Eighteen sets of parties settled with consent decrees (including AOL in its acquisition of Time Warner), four withdrew their applications, and in only one instance did the FTC actually file in federal court.6 In FY 2001, approximately 3 percent of reportable transactions received a more detailed second request, and of those, roughly 3 out of 4 were notified of a pending challenge unless modifications to the merger were made. Thus, slightly more than 2 percent of reportable transactions fail to pass federal antitrust review and are subsequently modified. Actual court challenges are extremely rare, much less than one percent of transactions. It is difficult if not impossible to look at the federal merger review process and reach any conclusion other than it is professional, lawful, and not in need of redundant federal reviews.

Merger review activities at the FCC

That conclusion has yet to be reached at the FCC. The FCC, in contrast, has no specific statutory authority to review mergers, except under the limited Clayton Act Section 7, just for communications common carriers, authority which apparently has never been exercised by the FCC. Instead, the FCC relies on the license transfer process, sections 214 and 310 under the Communications Act of 1934.7

In 1999, Chairman Kennard created a formal "Merger Review Team" with its own web location within the Office of General Counsel.8 Its web site lists mergers under review but fails to describe the screening technique used to decide which mergers will be reviewed. Yet the mergers intensively reviewed by the FCC are only a small portion of all mergers, only a small portion of mergers within the communications sector, and only a small portion of all license transfers at the FCC. The mergers reviewed by the Merger Review Team only involve entities heavily regulated by the FCC and usually acquisitions worth billions of dollars.

No written rules, no court precedents, not even the faintest form of written guidance instructs the public as to which mergers will be subjected to the intensive review of the Merger Review Team. No law gives guidance, but any communications lawyer knows exactly unlawful unwritten rule to qualify for the Merger Review Team: large acquisitions between heavily regulated firms with opportunities for rent extraction. Of course antitrust and competition concerns can not plausibly be the primary motivation for these reviews; each such review parallels a professional antitrust review at the DOJ or FTC.

The Merger Review Team process at the FCC is not only unseemly, but it imposes real costs on merging parties. The length of these delays ranges from 73 to 730 days. Of the 48 mergers listed at the FCC web site, only 5 took 90 days or less to review consistent with the Communications Act direction. In contrast, the delays averaged nearly 224 days, and the median delay is nearly 190 days. Thus, more than half of the delays last more than half a year, twice as long as the Communications Act instruction.

There is no clear pattern across industry sectors; a merger in any sector can take substantial time, although those license transfers handled on delegated authority tend to take substantially less time those reviewed by the full Commission. The median delay for license transfers decided by the full Commission is 248 days, while the median delay on delegated authority is only half as long. Thus, license transfers handled on delegated authority tend to have delays approximately one month longer than Communications Act guidance, while those decided by the Commission have an additional four month delay.

The exact cost of a delay in the FCC's response to a petition, such as license transfers for a merger, is impossible to calculate. In addition to the direct costs of the lost revenues and additional costs listed above, there are many indirect costs of a business plan delayed unnecessarily by the government. Investors and key employees lose faith in the business plan; businesses begin to crumble before regulatory relief is granted.

The importance of 1996

Before 1996, major mergers in the communications sector were rare, often restricted by a range of regulations limiting ownership. The infrequent major transaction in the sector typically involved acquisition by a firm without substantially regulated assets.9 FCC reviews of these transactions tended to focus on compliance with the existing burden of FCC rules rather than on novel concepts of broader competition within the national economy, although even these reviews were certainly not frequent enough for the FCC to develop merger review guidelines. As far as I can discern, none of these mergers before the Telecommunications Act of 1996 led to conditions placed by the FCC that went beyond preexisting FCC rules. Thus, before the passage of the Act, the FCC did not look at merger reviews as an opportunity to trample administrative freedom and create company-specific rules.

The Telecommunications Act of 1996 unleashed decades of pent-up demand to rationalize better the structure of business organizations in the communications sectors. The year 1996, with more than one hundred billion dollars worth of announced mergers in the communications sector, saw a substantial increase in merger activity in the communications sector over prior years.10 The initial mergers after the Act tended to be reviewed along the same narrow basis--often by bureaus on delegated authority rather than by the full Commission--that the infrequent pre-Act mergers had been reviewed.11

The Bell Atlantic-NYNEX combination was the watershed merger that established a bold departure from precedent by the FCC to create company-specific laws in response to mergers.12 In an aggressive order, one of the last major orders under Chairman Reed Hundt, the FCC dismissed the limitations of the Clayton Act and asserted a new "public interest" standard for the review of mergers that implicitly meant the FCC could impose any conditions for any reason on any merger.13

The merger review process that the FCC initiated in the Bell Atlantic - NYNEX merger had the following steps:

• Avoid written rules about which mergers will be reviewed and what process will be followed;
• Transform the license transfer process into a way to find "public interest" benefits to outweigh the harms or lack of benefits resulting from the merger;
• Seek wide ranging comments in opposition to the merger from interested parties, at times even using public fora to attack the merger;14
• Delay approval of the license transfer;
• Articulate long-term conditions to create firm-specific rules that the FCC could not on its own lawfully impose on all such similarly-situated firms;
• Compel the merging parties to "volunteer" to offer the conditions.

Technically, the FCC did not "approve" the Bell Atlantic-NYNEX merger only subject to "surprise" conditions on unwilling and unwitting parties: such a sequence would have led to a lengthy "hearing" process. Instead, the FCC negotiated with the merger parties in advance and made clear that, absent the stipulated conditions, the merger, which had already languished for more than a year at the FCC, would be delayed still longer. The FCC imposed the negotiated conditions only on the newly merged Bell Atlantic, conditions that, if they had any merit, could not have lawfully been applied to the incumbent local exchange industry, much less a single firm in the industry. The merging parties were compelled to "volunteer" to offer the stipulated conditions, and in so doing, foreclose most avenues for litigation appeal of the "voluntary" conditions. In most areas of law, contracts entered under duress are not binding, but under administrative law, the condition of duress is rarely if ever argued.

From the perspective of an agency accumulating power, the Bell Atlantic-NYNEX merger was an unmitigated success. The form and substance of the conditions that the FCC imposed were far different from the form that an antitrust agency would have imposed. Whereas a private party before a purely executive branch agency might have challenged in court, in Congress, or in both, the discretionary use of power, the newly merged Bell Atlantic did not challenge the outcome. Indeed, it would have had an awkward case given that it had "volunteered" to the conditions.

The FCC never looked back to the detached form of merger reviews that it had exercised before the Bell Atlantic-NYNEX transactions. Afterward, the detailed, "public interest" merger review became the norm rather than the exception. Even without clear legal authority, the FCC invented a merger review process confident that no one would challenge it; I once labeled it "Can-Opener" merger review law.15 The vast majority of subsequent merger reviews by the full Commission imposed conditions that went beyond the then existing FCC rules.

The merger reviews became examples of the worst forms of government administrative behavior. The following is a list of the failings from just one merger review--SBC-Ameritech: (1) the transaction does not violate any extant statute or rule; (2) the alleged harms are speculative and unrelated to the merger; (3) the conditions do not remediate the alleged harms; (4) the conditions are inconsistent with the Communications Act; (5) the conditions are disproportionate to the alleged potential harms; (6) the conditions place undue administrative burdens and costs on both the FCC and participants in the telecommunications market; (7) the conditions are either voluntary and therefore unenforceable or involuntary and therefore judicially reviewable; (8) the FCC lacks merger review authority; (9) the order was adopted pursuant to extraordinary procedures that undermine the appearance of impartial decisionmaking; (10) the order was adopted pursuant to an ad hoc and potentially arbitrary rule; and (11) the order fails to articulate intelligible principles to cabin the "public interest" test for mergers.16

These and other failings are found in practically each merger reviewed by the FCC. The problems associated with FCC merger reviews were so rampant that hearings were held in Congress on the subject both by the House Judiciary Committee17 and the House Commerce Committee.18

Some of the most egregious examples of policy exploits masquerading as merger reviews were in the context of mass media license transfers. For example, Sinclair Communications and Paxson's acquisition of Cornerstone were among the worst. For details, see my paper or book.

Some major mergers are reviewed by the full Commission, and some on delegated authority are reviewed by at the bureau level. The FCC has no clear rules to determine where a merger will be reviewed.19 Most major mergers reviewed by the full Commission are approved with only ad hoc conditions beyond those necessary to bring the merging parties into compliance with FCC rules. The net effect of these ad hoc merger conditions is company-specific rules and regulations. In contrast, major mergers reviewed by bureaus are unlikely to face conditions beyond what is necessary to bring the licensees into compliance with FCC rules.

None of the major mergers was disapproved--designated for hearing-- between FY 1997 and FY 2002. The first major merger to be designated for hearing was the EchoStar-Hughes transaction, which was designated for hearing in FY 2003.

The FCC review might make more sense if it were limited to issues related just to FCC rules or statutes,20 but few if any of the FCC reviews fail to mention antitrust and economic competition issues. Indeed, some of the reviews seem based entirely on antitrust analysis.21

Of course, not all major mergers, much less all mergers, are reviewed by the FCC. In dozens of instances, the merging parties held substantial FCC licenses, at times substantially exceeding those held by parties subject to the FCC merger review process.22 These mergers, however, did not involve two heavily regulated companies; thus, they were not reviewed.

Throughout this period, the FCC has generally refused to codify its merger review process, so as to preserve as much discretion for itself as possible. Of course, it would be awkward if not impossible to write defensible merger review guidelines that the FCC will review on detail the license transfers of those entities that are otherwise heavily regulated by the FCC. More than ten thousand license transfers are reviewed each year by the FCC and submitted for public comment,23 but few are designated as "major" by the Merger Review Team.24 Some of the transfers that are not designated as "major" receive comments, have conditions placed on the transfers, and may even have transfers designated for hearing.

For broadcast radio mergers, the FCC belatedly did establish merger review guidelines.25 Under these guidelines, the FCC has both approved some radio mergers and designated others for hearing. FCC review of radio mergers is inconsistent with the Telecommunications Act of 1996.26

Conclusion

Different laws need not be in conflict with one another. Certification of classes, the Sherman Act, and communications law can all work well together, but only if each is itself lawful. Unreasoned application of one law can make all related applications of law look improper.

The FCC's review of license transfers has made a mockery of the Clayton Act review of mergers and acquisitions by the federal antitrust agencies. Merging parties are subjected to various forms of regulatory double jeopardy not faced by merging parties in other industries. Peculiar and potentially unlawful results are reached leading to a patchwork quilt of company-specific rules. So much for "Equal Justice Under Law." The sad but pervasive sentiment in the communications sector is that justice under communications law is difficult to find, but not nearly so difficult as equal justice.

The Sherman Act is difficult to interpret, much less implement, in the context of heavily regulated industries, such as telecommunications. The inference should not necessarily be drawn, however, that antitrust law should recede in the presence of government regulation such as the federal and state regulation of telecommunications. To the extent the Sherman Act has legitimacy, and I am not willing to dismiss that possibility, it should be equally applicable in all contexts. Where regulation makes a mockery of the application of the Sherman Act, it is all too possible that regulation, rather than the Sherman Act, should yield.

Notes

* The views expressed are those of the author alone and do not necessarily reflect the views of the American Enterprise Institute which takes no positions on public policy matters. Parts of this paper draw heavily on material from my forthcoming booking, A Tough Act to Follow.

1 Federal Trade Commission, Federal Trade Commission HSR Annual Report to Congress for FY 2001, at 14.

2 Ibid.

3 Ibid. at 15-16.

4 Ibid.

5 Ibid., at 19.

6 Ibid. at 19 and 22.

7 The fullest explanation of the FCC's asserted authority to review mergers and impose unrelated conditions under the "public interest doctrine" is found in the Bell Atlantic-NYNEX merger. See . See also Phoenix Center publication .

8 See Fcc web site, Office of General Counsel.

9 E.g., the acquisition of Capital Cities-ABC by Disney, or the acquisition of CBS by Westinghouse.

10 See Phoenix Center publication.

11 Some of the early mergers after the passage of the Act included U.S. West-Continental Cablevision (handled by the Cable Bureau), SBC-Pacific Telesis, and 

12 FCC 97- __, Bell Atlantic-NYNEX.

13 Ibid.

14 See FCC En Banc Hearings on major mergers (1998) and AOL-Time Warner.

15 See H. Furchtgott-Roth, "Can-Opener Merger Review Law," Keynote address to the American Law Institute - American Bar Association, October 5, 2000.

16 See FCC, Applications of Ameritech Corp., Transferor, and SBC Communications, Inc., Transferee, For Consent to Transfer Control of Corporations Holding Commission Licenses and Lines Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95, and 101 of the Commission's Rules, CC Docket 98-141, Statement of H. Furchtgott-Roth, concurring in part and dissenting in part, October 6, 1999. This statement uses these 11 deficiencies as headings.

17 U.S. House of Representatives, House Committee on the Judiciary, Subcommittee on Commercial and Administrative Law, Hearing on Novel Procedures for License Transfer Proceedings, May 25, 1999. See, in particular, testimony of H. Furchtgott-Roth.

18 U.S. House of Representatives, House Committee on Commerce, Subcommittee on Telecommunications, Trade, and Consumer Protection, Hearing on the Telecommunications Merger Review Act of 2000, March 14, 2000. See, in particular, testimony of H. Furchtgott-Roth.

19 See Separate Statement of H. Furchtgott-Roth, in FCC, DA 99-1200, In re Applications of AirTouch Communications, Inc. Transferor and VODAFONE GROUP, PLC. Transferee, For Consent to Transfer of Control of Licenses and Authorizations, File Nos. 0000003690, et al., Memorandum Opinion and Order, by the Chief Wireless Telecommunications Bureau, June 21, 1999.

20 This is the position that I took in concurring and dissenting statements on FCC merger reviews.

21 See EchoStar-Hughes decision.

22 See HFR statements.

23 See Comment of Comm. H. Furchtgott-Roth at FCC En Banc Hearing on ILEC Mergers, December 14, 1998.

24 See FCC web cite Office of General Counsel, www.fcc.gov/ogc.

25 See Nov. 2001.

26 See AM-FM merger, HFR dissenting statement.

Harold Furchtgott-Roth is a visiting fellow at AEI.