$// MO&O, Qwest transfer of control, ENF-94-006, DA 94-1603 //$ $/ 47 U.S.C. 310 Limitation on Holding and Transfer of Licensees /$ DA 94-1603 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In re the Application of ) ) MCI COMMUNICATIONS CORPORATION, ) ) Transferor, ) ) and ) ) SOUTHERN PACIFIC ) File No. ENF-94-006 TELECOMMUNICATIONS CORPORATION, ) ) Transferee, ) ) For Consent to Transfer Control ) File No. 9413177 of Qwest Communications, Inc. ) MEMORANDUM OPINION AND ORDER Adopted: December 27, 1994; Released: December 28, 1994 By the Chief, Common Carrier Bureau: I. INTRODUCTION 1. In this order we address the above-captioned application of MCI Communications Corporation ("MCI") and Southern Pacific Telecommunications Company ("Southern"), which seeks Commission consent to transfer control of Qwest Communications, Inc. ("Qwest") from MCI to Southern, pursuant to Section 310(d) of the Communications Act of 1934, as amended ("Act"). We conclude that the record of this proceeding presents no substantial and material questions of fact and that the proposed transaction will serve the public interest. We, therefore, grant the application. II. BACKGROUND 2. Qwest provides domestic interexchange telecommunications services, through its digital microwave transmission network and interconnection with other carriers, to customers located throughout the eastern, southern, and midwestern United States. As part of its network, Qwest holds 155 Common Carrier Point-to-Point Microwave Radio Service licenses. MCI, the sole shareholder, owns and controls Qwest. 3. MCI has entered into an agreement ("Agreement") to sell Qwest to Southern, a closely held Delaware corporation that provides domestic long-distance transmission services and facilities to interexchange carriers and commercial businesses. Pursuant to the Agreement, Southern is to pay MCI approximately $20 million for all of the issued and outstanding shares of the capital stock of Qwest, thereby transferring control of Qwest from MCI to Southern. In addition, within two years of closing, MCI has committed to order $3.5 million of private line telecommunications services from Qwest. Further, for a period of one year after the sale of Qwest to Southern, MCI has agreed that it will neither solicit nor accept orders from a Qwest customer if Qwest provides such customer the same telecommunications service between the same cities. 4. On March 18, 1994, MCI and Southern ("Applicants") filed the above-captioned application for Commission consent to transfer control of Qwest from MCI to Southern. The Commission gave public notice of the application on April 6, 1994, and Microwave Acquisition Company (MAC) timely filed a Petition to Deny on May 6, 1994. The Applicants filed an Opposition to Petition to Deny on May 19, 1994, followed by MAC's Reply to Opposition to Petition to Deny on June 1, 1994. Thereafter, the Applicants filed a June 13, 1994, Supplement to Opposition to Petition to Deny; MAC filed a June 30, 1994, Supplement to Petition to Deny; and the Applicants filed a July 11, 1994, Response to Supplement to Petition to Deny. The Applicants also filed a July 26, 1994, letter from Cheryl A. Tritt and William J. Byrnes (counsel to Southern and MCI, respectively) to William F. Caton, Acting Secretary, Federal Communications Commission, and a November 1, 1994, letter from Cheryl A. Tritt and William J. Byrnes to A. Richard Metzger, Jr., Deputy Chief, Operations, Common Carrier Bureau. MAC also filed a November 7, 1994, letter from Donald J. Evans (counsel to MAC) to A. Richard Metzger, Jr. Generally, the "pleading cycle" in Commission proceedings consists of a petition, motion or request, followed by oppositions and then replies. We accept the additional pleadings filed by the parties, however, so that our determination on the application will be based on as complete a record as possible. 5. Pursuant to the terms of the Agreement, MCI also filed a second application for Commission consent to a pro forma assignment of 15 additional Point-to-Point Microwave licenses from MCI Telecom to its wholly-owned subsidiary Qwest (application file number 9413176). This second application was filed concurrently with the captioned application to transfer control of Qwest to Southern. Although pro forma assignment applications are not subject to the public notice and other requirements of Section 309 of the Act, the Commission gave informational notice of this second application before granting it on April 11, 1994. Section 21.11(d) requires consummation of assignments within 45 days of Commission approval. On June 3, 1994, MCI Telecom requested waiver of this rule because, as reported on both applications, the pro forma assignment was requested pursuant to the Agreement under review in the captioned application. In view of these circumstances and the fact that the approved assignee is a wholly- owned subsidiary of the assignor, we waive Section 21.11(d) for the second, previously granted, application to the extent indicated in the ordering clause of the instant order. III. DISCUSSION A. Southern's Basic Qualification to be a Licensee 6. Section 310(d) of the Communications Act (the Act) requires that the Commission find that the public interest, convenience and necessity will be served by the transfer of control of a company holding radio licenses. That determination requires the Commission to review, as may be appropriate, the citizenship, character, financial, technical and other qualifications of the transferee applicant. 7. Southern, an existing Commission licensee and interstate communications common carrier, states that its qualifications are a matter of public record and that it is committed to the continued provision of high quality service to the public. Specifically, if the Commission approves the transfer, Southern asserts that it intends to expand the quality and availability of services so that Qwest customers will be able to subscribe to Southern's WATS, 1 plus, 1-800, and Travel Card services. Qwest customers would also gain access to new video teleconferencing and construction-services programs. Southern also certified that the subject facilities are constructed and operating in accordance with the Commission's Rules, and the Commission's records indicate that Southern does not hold any common carrier authorizations for facilities that have not been constructed. Accordingly, if we approve the proposed transfer and MCI and Southern consummate the Agreement, Southern will not need to raise additional capital to construct facilities, as required under the Commission's Rules, to avoid license forfeiture. MAC, the only entity that opposed the application, does not dispute Southern's basic financial or technical qualifications. 8. We conclude, based on the record of this proceeding, that Southern has the necessary financial resources and technical expertise to ensure that communications services provided by Qwest are consistent with the public interest. Accordingly, Southern satisfies the Commission's threshold qualification requirements. We also conclude, based particularly on Southern's construction certification, that the circumstances of the proposed transaction do not indicate "trafficking" in Commission licenses. B. MAC Petition to Deny 9. MAC, in brief, argues that the Commission should deny the application because the proposed Agreement may endanger the existence of small long-distance telephone carriers, and would substantially lessen competition in relevant geographic and product markets. MAC also contends that the application should be denied on procedural grounds. We address these issues below, as part of our public interest determination, after first reviewing MAC's standing to raise these objections. 10. Standing. Section 309(d)(1) of the Act authorizes only parties in interest to file petitions to deny. In this regard, the Applicants and MAC agree that MAC entered into a contract with MCI in 1992 for the purchase of Qwest. This contract was never consummated and MAC asserts that it has filed an action in state court against MCI and Southern seeking monetary damages and specific performance. According to MAC, irreparable harm would result if Qwest is transferred to Southern rather than MAC because Qwest is a unique communications system that has no equivalent in the marketplace. MAC claims standing to petition to deny the captioned application based on this alleged injury. The Applicants counter that MAC does not have standing under the more recent precedent discussed below. 11. The courts have held that persons claiming standing must allege and prove three elements: (1) personal injury, (2) that is "fairly traceable" to the challenged action, and (3) that there is a substantial likelihood that the relief requested will redress the injury claimed. Taking MAC's pleaded facts as true, we find that the alleged injury to MAC is "fairly traceable" to MCI's asserted contract breach, not the Commission action that MAC opposes in this proceeding. Commission consent to the pending application does not require or cause the transfer of control of Qwest. Nor does such consent resolve the merits of MAC's contention that MCI breached its agreement with MAC. Moreover, grant of the relief requested by MAC in this proceeding (i.e., denial of the transfer) would not redress any injury caused by MCI's alleged breach. Rather, denial of the application would simply require MCI to remain in control of Qwest. By contrast, MAC can obtain redress for any injury caused by MCI's alleged breach in its state court action, since that court can order specific performance or other appropriate relief. The Commission has previously held that such contractual disputes should be resolved by a court of competent jurisdiction, not the FCC. Further, MAC could seek injunctive relief in the state proceeding to prevent consummation of the transfer until the state court litigation has been concluded. For the foregoing reasons, we conclude that MAC does not have standing to file a petition to deny the proposed transfer of Qwest to Southern. Nonetheless, pursuant to 47 C.F.R.  21.30(b), we will treat MAC's petition as an informal objection and consider its arguments in making our public interest determination. C. Competitive Impact of the Agreement 12. Our examination of a transfer of control under the public interest standard of Section 310(d) of the Act includes consideration of the effect of the transfer on competition. Section 7 of the Clayton Act proscribes the acquisition of the stock or assets of a company by another company "where in any line of commerce in any section of the country" the effect of such acquisition may be "substantially to lessen competition, or to tend to create a monopoly." Section 11 of that statute empowers the Commission to enforce Section 7 in the case of "common carriers engaged in wire or radio communications or radio transmissions of energy." The courts have construed this to mean that the requirements of Section 11 of the Clayton Act and the applicable provisions of the Communications Act "are satisfied when the Commission seriously considers the antitrust consequences of a proposal and weighs those consequences with other public interest factors." 13. We note at the outset that the U.S. Department of Justice and the Federal Trade Commission (FTC) had an opportunity to review the subject application as well as filings made by each of the Applicants pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Neither governmental agency filed objections before the Commission to the proposed acquisition or otherwise questioned its lawfulness. Moreover, the Applicants report that the FTC has granted their request for early termination of the Hart-Scott- Rodino waiting period. 1. Relevant Market 14. The applicable judicial precedents direct that our Section 7 analysis begin with a determination of the relevant market in which competition may be threatened. For purposes of Section 7, we must delineate both the relevant product market (i.e., the "line of commerce") and the relevant geographic market (i.e., "section of the country"). 15. Relevant Product Market. MAC asserts that each terrestrial transmission technology, such as digital microwave, analogue microwave, and fiber, as well as service to small long- distance carriers, and service to Federal agencies, is a discrete product market. The Applicants counter that interstate, interexchange telecommunications service is the relevant product market. 16. Based on substantial evidence in the record, the Commission concluded in 1983 that telecommunications transmission media -- coaxial cable, terrestrial microwave, fiber optics, or satellite transponders and earth stations -- generally can be adjusted readily to provide virtually any interexchange telecommunication service efficiently. The Commission also found that customers typically view such services as reasonably interchangeable and increasingly purchase bandwidth capacity, not a service for a specific type of transmission or a service provided by a specific transmission medium. On the basis of these two findings, the Commission concluded that different transmission media do not demarcate different product markets. More specifically, the Commission has determined that all domestic, interstate, interexchange telecommunications services, including specialized common carrier services, comprise a single relevant product market. Based on this precedent, the absence of any substantial evidence raising doubts about the validity of the Commission's 1983 findings, and our analysis of the record, we conclude that domestic, interstate, interexchange telecommunications services is the relevant product market for analyzing the competitive impact of the Agreement. 17. Relevant Geographic Market. MAC asserts that each city pair served by Qwest is a relevant geographic submarket of the nationwide market and that the proposed Agreement, when analyzed by each submarket, would substantially lessen competition. MAC adds that the Applicants, by limiting the geography covered by their non-compete agreement to city pairs where Qwest serves existing customers, have acknowledged that each city pair is a relevant submarket. The Applicants counter that there is one nationwide geographic market for domestic interexchange telecommunications services, with no submarkets. Based on this premise, the Applicants assert that the Agreement actually increases competition slightly. 18. We are not persuaded by MAC's contention that each city pair is a relevant geographic submarket. As a preliminary matter, it does not follow that the geographical scope of the non-compete agreement identifies relevant submarkets because these provisions simply reflect that Qwest does not serve customers in every city pair in the nation. Relevant geographic markets, however, are not defined by the areas served by one of many market participants. The Commission, moreover, has previously concluded that the relevant geographic market for interstate, interexchange telecommunications services is national, with no relevant submarkets, because of supply substitutability and low entry barriers. More to the point, as the Commission found in 1983, it would be inaccurate to segment the market into distinct city pairs or even domestic regions, as MAC suggests, because many networks have alternative routing capabilities with nationwide or near nationwide service areas. We conclude thus that, in the absence of substantial evidence raising doubts about the validity of the Commission's earlier findings, the national market is the relevant geographic market for analyzing the competitive impact of the Agreement. 2. Market Power 19. The Commission's rules classify carriers as dominant or non-dominant based on their ability to exercise market power. Because it lacks market power, a non-dominant carrier does not have the ability or incentive to price its services unreasonably, to discriminate among customers unjustly, to terminate or reduce service unreasonably, or to overbuild its facilities. After analyzing the domestic interexchange telecommunications services market, the Commission concluded in 1980 that specialized common carriers, such as MCI Telecom, Southern and Qwest, are non-dominant carriers. 20. While a high market share alone does not necessarily demonstrate market power, market share is one key factor in determining market power, and a small market share does suggest the absence of market power. Qwest is currently owned by MCI, the nation's second largest interstate, interexchange carrier with a 17.9 percent market share as measured by total toll service revenues among long-distance carriers. According to the Applicants, Southern and Qwest's combined market share would be approximately 0.10 percent (0.001) of the market. The Applicants also submitted an analysis of market concentration, before and after the proposed transaction, as measured by the Herfindahl- Hirschman Index ("HHI"). By this analysis, market concentration would actually decrease slightly if we approve the application and the Applicants execute the Agreement. MAC attempts to refute this conclusion by suggesting that we deem Qwest to be an independent carrier, rather than wholly-owned by MCI. MAC alleges that Qwest was an independent carrier before MCI purchased it in 1992 and, according to MAC, MCI always intended to hold Qwest temporarily and sell it to MAC. MAC provides no basis for this novel approach, however, and we likewise find no factual or legal basis. The record reflects that Qwest is an MCI subsidiary, and we note that the Commission's consent to MCI's acquisition of Qwest is a final action that is no longer subject to administrative or judicial review. 21. MAC also asserts that we should not approve the Agreement because Southern has entered the "retail long-distance market" and, as such, is not a "carrier's carrier." According to MAC, moreover, "[u]nless Qwest is acquired by an independent company [that does not compete for long-distance customers], small carriers will be forced to lease transmission capacity from a large national competitor, thus exposing themselves to predation by the large carrier [because they will have to divulge call volume and other usage data]." MAC's allegations regarding future "predation" by Southern are, however, unsupported and amount to speculation. Further, if a carrier engages in unlawful anticompetitive conduct, the Commission's complaint process provides an effective remedy for rectifying such violations of the Act. The Act, moreover, prohibits the Commission from considering whether the public interest would be served by transferring a licensee to a person other than the proposed transferee. 3. Non-compete Provisions 22. We further conclude that MAC has failed to sustain its claims that the non-compete provisions of the Agreement (noted in paragraph 3 above) constitute an illegal restraint of trade or are otherwise contrary to the public interest. The Commission has recognized the acceptability of covenants not to compete where the restraint is: 1) ancillary to the sale of a business; 2) designed to prevent a seller with an ongoing, competing business from impairing the value of the property or business sold by immediately attracting the existing customers of the transferred business; and 3) reasonably limited as to duration and geographic scope. Based on the Agreement submitted by the Applicants, we find that the sole restraint on MCI is ancillary and incidental to the lawful purpose of selling the existing Qwest operation to Southern. It assures Southern that MCI will not seek to attract existing Qwest customers before Southern establishes its relationship with those customers as part of the ongoing Qwest business. Specifically, we find in the circumstances of this transaction that the one-year duration of the non-compete agreement is reasonable. We further find that restricting the scope of the prohibition to telecommunications services to Qwest customers, as of the closing date and only between the same city-pairs that the customers are currently served by Qwest, is a reasonable limitation. MCI is free to seek to provide service to existing Qwest customers between points that the customers do not currently receive service from Qwest. MCI also may compete immediately to serve any customers not currently serviced by Qwest. It is also noteworthy that MCI would not be required to compensate Southern for serving an otherwise "off- limits" Qwest customer if such customer leaves Qwest because Southern/Qwest does not deliver service "consistent with a level of network performance previously provided such customer" by MCI/Qwest. 4. Conclusion -- Competitive Impact 23. We find no basis for MAC's assertions that transferring control of Qwest from MCI to Southern would harm competition. Consequently, we conclude, based on the record, that approval of the proposed transfer of control will not substantially lessen competition. D. Procedural Matters 24. Completeness of Answer to FCC Form 704, Question 7. An application is unacceptable for filing and may be dismissed if the applicant's answers to questions are incomplete. FCC Form 704 required the Applicants to file "a statement on how control is to be transferred, and copies of any pertinent contracts, agreements, instruments, certified copies of Court Orders, etc." MAC asserts that the captioned application is defective because the Applicants did not file copies of exhibits and schedules, such as their non- compete agreement, that are referenced in the Agreement. 25. We disagree and are satisfied that the record of this proceeding is sufficient for us to reach a determination. First, the 56 page Agreement submitted by the Applicants as part of the application reflects that the Applicants would execute ancillary agreements at closing. Second, the material terms of the ancillary agreements that are relevant to our determination are summarized in the Agreement. Third, under the Agreement, the Applicants would be bound contractually to execute such ancillary agreements "substantially similar to the form" of the summary that is a part of the record. Fourth, we are satisfied that these summaries remain accurate because the Applicants have not filed any amendments reporting modifications, and applicants are required to furnish additional or corrected information to the Commission promptly if their pending application is no longer substantially accurate and complete in all significant respects. 26. Delegated Authority. The Commission announced over two years ago that its Private Radio Bureau offices in Gettysburg, Pennsylvania, would assume responsibility for processing Common Carrier Point-to-Point Microwave applications. The Commission clarified that while routine functions would be handled by the Gettysburg offices, the Commission's Washington, D.C. offices of the Common Carrier Bureau would continue handling all non-routine applications and requests, including petitions to deny that raise other than technical or interference issues. The Commission subsequently amended Parts 0 and 21 of its rules to provide that Point-to-Point Microwave Service applications, correspondence and amendments not requiring filing fees must be submitted to: Common Carrier Radio Services, 1270 Fairfield Road, Gettysburg, PA 17325. 27. Pursuant to these procedures the Private Radio Bureau received the captioned application, assigned a file number, reviewed the application preliminarily and determined that it appeared complete. Thereafter, the Private Radio Bureau listed the captioned application as accepted for filing on a public notice, performed other ministerial tasks, and referred it to the Common Carrier Bureau after receiving MAC's petition. 28. MAC asserts that the Private Radio Bureau did not have delegated authority to process the application because "[n]owhere has the Commission delegated to the [Private Radio Bureau] or the Chief of the [Private Radio Bureau] the authority to act on Part 21 common carrier applications such as the one presented here." MAC claims that because the Private Radio Bureau lacked such authority, preliminary processing of the application -- receipt, acceptability review, public notice, and the petition period -- must start anew. 29. We are not persuaded by MAC's assertions in this regard. First, the Private Radio Bureau processed the captioned application pursuant to published, well-established rules and procedures. Second, the Commission has recently confirmed that it delegated such authority to the Private Radio Bureau. Third, had the Common Carrier Bureau performed this initial processing -- the result that MAC seeks -- our actions would have been the same as the Private Radio Bureau's: we would have found the application acceptable for filing and placed it on public notice. Fourth, as specified in the published procedures noted above, the Common Carrier Bureau is considering the captioned application and MAC's petition. Accordingly, we conclude that MAC's objections to our procedures for processing this application are without merit. 30. Public Notice. MAC asserts that the public notice that announced the captioned application did not fairly apprise the public of all of the licenses involved in the proposed transfer. The public notice identified the Commission file number (9413177), the current licensee's name (Qwest), a reference or "lead" license (WHO694), and the application type (transfer). MAC claims that this notice was deficient because it did not list all 155 Qwest licenses. Consequently, MAC contends that the Commission must issue a new notice identifying all 155 Qwest licenses, and accept petitions to deny the application for 30 days thereafter. The Applicants counter that the Commission's public notice did fairly apprise the public of all of the Qwest licenses involved. 31. The authority that MAC cites does not support the contention that the notice was deficient. Those cases dealt with Commission notices that announced deadline dates for filing competing applications against previously-filed applications for either new licenses or enlarged service areas of existing licenses. These "cut-off" notices, however, did not identify all of the frequencies and service areas involved. The court ruled that such notices were insufficient because they did not specify all of the frequencies and service areas that would be foreclosed to competing applicants after the specified cut-off dates. 32. In the instant case, by contrast, the notice did not establish a cut-off date to file competing applications for the frequencies and service areas covered by the 155 Qwest licenses, because the public did not have a right to file such applications for the authority granted by the Qwest licenses. The sole purpose of the notice was to allow the filing of petitions to deny the proposed transfer of control of Qwest. Thus, the notice would have been valid without listing any of Qwest's licenses. By giving notice of the application to transfer control of Qwest, the Commission fairly apprised the public of the pending proposal to transfer all of Qwest's licenses because a transfer of control, by definition, involves all Commission licenses held by the licensee identified on the notice. 33. Finally, as noted in paragraph 5 above, the Commission also gave informational notice of the second, pro forma assignment application related to the Agreement. We reject MAC's various procedural assertions related to this second application because this second application was not subject to the public notice and other procedures that apply when control of a licensee is transferred to a new party. 34. Section 214. The Commission has granted non-dominant carriers blanket authority under Section 214 of the Act to construct or operate new telecommunications facilities, provided that they obtain all necessary Commission authorizations to use any radio frequencies associated with their networks. The Commission previously has presented an extensive explanation of the legal authority and policy determinations that justify applying different requirements under Section 214 to dominant and non- dominant-carriers and we need not repeat them here. 35. MAC asserts, however, that the Commission's grant of blanket authority under Section 214 to non-dominant carriers is invalid in light of a recent U.S. Supreme Court opinion. The Court ruled that the Commission's authority to modify any tariff- filing requirement does not include authority to make tariff filings permissive for all non-dominant long distance carriers. MAC contends that this decision bars the approval of MCI/Southern's application until Southern "applies for and receives the certificate specified by Section 214." The Applicants respond that the Court's opinion addresses the Commission's authority under Section 203 of the Act and does not address its authority under Section 214. 36. MAC concedes that the Commission decision adopting Section 63.07 of its Rules "was never appealed" and was not before the Court in the MCI case. The Commission's Section 214 rules and policies thus remain unaffected by the Court's opinion regarding the Commission's permissive detariffing policy. We conclude that MAC's assertion concerning the validity of Section 63.07 does not raise a substantial and material question of fact. Rather, MAC's objection amounts to an impermissible collateral attack on a Commission decision that is no longer subject to administrative or judicial review. Based on the record of this proceeding, we find that Southern is a non-dominant carrier, subject to the provisions of Section 63.07 of the Commission's Rules. We, therefore, deny MAC's objections that are based on Section 214 of the Act. IV. CONCLUSION 37. We conclude that the proposed transfer pursuant to the terms of the Agreement should provide significant benefits to the public. We find no basis in the record for concluding that consummation of the proposed transfer will have anticompetitive effects in the market for interstate interexchange telecommunications services. We further find that Southern is legally, technically, financially, and otherwise qualified to operate Qwest's licenses and that grant of this application for consent to transfer control of Qwest to Southern will serve the public interest. MAC is not a party in interest to this proceeding. Moreover, having reviewed its petition as an informal objection, we find that it raises no substantial and material questions of fact and that its objections to the proposed transfer are unfounded. Accordingly, we grant the proposed transfer of control of Qwest to Southern. V. ORDERING CLAUSES 38. Accordingly, IT IS ORDERED, pursuant to 47 U.S.C.  154(i), 154(j), 308, 309, and 310(d), and authority delegated in 47 C.F.R.  0.291, that the captioned application of MCI Communications Corporation and Southern Pacific Telecommunications Corporation that seeks Commission consent to transfer control of Qwest Communications, Inc. from MCI to Southern IS GRANTED. 39. IT IS FURTHER ORDERED that Section 21.11(d) is WAIVED for application file number 9413176 to the extent that the pro forma assignment approved by the Commission on April 11, 1994, must be completed no later than the completion deadline date applicable to the captioned application under  21.11(f). 40. IT IS FURTHER ORDERED that the May 6, 1994, Petition to Deny, as supplemented, filed by Microwave Acquisition Company IS DENIED. FEDERAL COMMUNICATIONS COMMISSION Kathleen M.H. Wallman Chief, Common Carrier Bureau