## Facts

- Northeastern Telephone Company sold telephone terminal (customer-premises) equipment in Connecticut, competing with Southern New England Telephone Company (SNET), a regulated telephone carrier affiliated with AT&T and Western Electric.
- After regulatory changes opened portions of the terminal-equipment market to competition, Northeastern alleged defendants sought to preserve dominance through exclusionary practices.
- The challenged conduct included:
  - SNET’s terminal-equipment pricing, including a two-tier purchase/lease plan Northeastern claimed was below cost.
  - Advertising, marketing, and sales practices alleged to favor Bell-affiliated equipment and disadvantage rivals.
  - Alleged use of SNET’s regulated, multiproduct structure to allocate joint costs to monopoly segments and enable low prices in competitive segments.
  - Design and specification of “protective couplers” (network interface devices), allegedly configured to increase rivals’ costs or impede use of competing equipment without adequate technical justification.
- At trial, Northeastern urged a “fully distributed cost” approach to predatory pricing, arguing that marginal or variable cost measures were inadequate for a regulated multiproduct utility capable of cross-subsidization.
- The jury returned a general verdict largely for Northeastern and awarded substantial antitrust damages under § 2 of the Sherman Act.
- Defendants appealed, challenging liability, damages, and asserting that regulation limited or displaced antitrust scrutiny.

## Issues

1. Whether defendants’ pricing, marketing, product introduction, equipment design, and related conduct constituted exclusionary or monopolizing conduct under § 2 of the Sherman Act.
2. Whether SNET’s pricing could be deemed predatory under a proper cost standard, and whether the “fully distributed cost” approach was legally erroneous.
3. Whether federal or state telecommunications regulation impliedly immunized some or all of the challenged conduct from antitrust liability.
4. Whether a general verdict could stand when it may have rested on multiple theories, many of which were legally incorrect or unsupported.

## Decision

- The court reversed the judgment on most theories of liability and vacated the damages award.
- The court held that the record generally did not show conduct exceeding lawful, aggressive competition, and that Northeastern’s proof was inadequate on most claims.
- The court rejected the effective use of a fully distributed cost standard for predatory pricing; Northeastern failed to show below-incremental-cost pricing.
- The court found sufficient evidence to permit a jury to decide whether the protective-coupler design and related specifications were exclusionary product-design conduct under § 2.
- Because the jury’s general verdict could have rested on invalid theories, the court remanded for a new trial limited to the protective-coupler design claim.

## Legal Principles

- A firm with lawfully acquired monopoly power is not liable under § 2 for vigorous competition unless its conduct is unreasonably exclusionary and tends to impair the competitive process.
- Predatory pricing ordinarily requires pricing below an appropriate measure of incremental, marginal, or variable cost; allocating fixed and joint costs through a fully distributed cost test risks condemning lawful competition by multiproduct firms.
- Nonprice conduct such as advertising and marketing is not exclusionary absent proof that it creates meaningful barriers to entry or forecloses competition through unfair means.
- Product design or technical standards can constitute exclusionary conduct under § 2 when design choices unnecessarily raise rivals’ costs or restrict interoperability without a legitimate technical justification.
- Regulation does not, by itself, create implied antitrust immunity; immunity requires a clear conflict between antitrust enforcement and the regulatory scheme, and discretionary conduct remains subject to § 2 scrutiny.

## Conclusion

The Second Circuit set aside most of the monopolization verdict because the evidence did not establish unlawful exclusionary conduct and the predatory-pricing theory relied on an improper cost standard, but it ordered a new trial on whether defendants’ protective-coupler design decisions unlawfully excluded terminal-equipment competitors.


Northeastern Tel. Co. v. Am. Tel. & Tel. Co., 651 F.2d 76 (2d Cir. 1981)