Federal Communications Commission FCC 98-226
Before the
Federal Communications Commission
Washington, D.C. 20554
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In the Matter of )
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Enforcement of Section 275(a)(2) of the )
Communications Act of 1934, as amended by )
the Telecommunications Act of 1996, )
Against Ameritech Corporation )
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Motion for Orders to Show ) CCBPol 96-17
Cause and to Cease and Desist )
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MEMORANDUM OPINION AND ORDER ON REMAND
AND ORDER TO SHOW CAUSE
Adopted: September 15, 1998 Released: September 25, 1998
By the Commission:
TABLE OF CONTENTS
Paragraph
I. INTRODUCTION 2
A. Overview 2
B. Procedural Background 2
C. Ameritech's Acquisition of Assets 7
II. DISCUSSION 8
A. Definition of "Alarm Monitoring Service Entity\ 8
B.Whether Ameritech Obtained "Financial Control" Over Circuit City's Alarm Monitoring Division 12
III. ORDERING CLAUSES 18
I. INTRODUCTION
A. Overview
We revisit in this Order on Remand a "Motion for Orders to Show Cause and to Cease and Desist" filed by the Alarm Industry Communications Committee (AICC) against Ameritech Corporation (Ameritech). The Commission's initial order in this proceeding[1] denied AICC's motion on the ground that Ameritech's acquisition of the alarm monitoring assets of a division of Circuit City Stores, Inc. (Circuit City) did not come within the ambit of section 275 of the Communications Act, as amended by the Telecommunications Act of 1996.[2] That order was vacated on review by the United States Court of Appeals for the District of Columbia Circuit and remanded to the Commission.[3] As directed by the court, we have considered anew the issues raised in this proceeding in light of the concerns identified by the court regarding our prior determination. Based on a more thorough analysis, we now conclude, for the reasons discussed below, that Ameritech's acquisition of Circuit City's alarm monitoring assets violates section 275(a)(2). We therefore grant, in part, AICC's motion and order Ameritech pursuant to section 312(c) of the Act,[4] to show cause why a cease and desist order should not be issued pursuant to section 312(b).[5]
B. Procedural Background
On June 28, 1996, Ameritech acquired all the assets of Circuit City's Home Security Division, Circuit City's division exclusively devoted to providing alarm monitoring services. On August 12, 1996, AICC filed with the Commission a motion requesting the Commission to issue an Order to Show Cause and to Cease and Desist against Ameritech. AICC claimed in that motion that Ameritech's acquisition of Circuit City's alarm monitoring assets and its solicitation of further purchases of alarm monitoring assets from unaffiliated alarm monitoring service providers violate section 275(a)(2).[6] That provision permits a Bell Operating Company (BOC) or BOC affiliate that was engaged in providing alarm monitoring services as of November 30, 1995, to continue to do so, provided that it
may not acquire any equity interest in, or obtain financial control of, any unaffiliated alarm monitoring service entity after November 30, 1995 and until 5 years after the date of enactment of the Telecommunications Act of 1996, except that this sentence shall not prohibit an exchange of customers for the customers of an unaffiliated alarm monitoring service entity.[7]
AICC contended that Ameritech obtained "financial control" of an "unaffiliated alarm monitoring service entity," in violation of section 275(a)(2), by acquiring Circuit City's alarm monitoring assets.[8] AICC urged the Commission to (1) direct Ameritech to show cause why it should not be required to rescind its purchase of Circuit City's alarm monitoring assets; and (2) issue a cease and desist order, requiring Ameritech to rescind its purchase of Circuit City's alarm monitoring assets and to refrain from attempting to acquire the assets of additional alarm monitoring service providers until February 8, 2001, the date on which the five-year statutory moratorium on BOC entry into alarm monitoring services expires.[9]
The Commission established a pleading cycle for comments on AICC's motion on August 23, 1996 and received comments from Ameritech and reply comments from AICC.[10] On March 25, 1997, the Commission released its Memorandum Opinion and Order, denying AICC's motion.[11] The Commission ruled that Ameritech's acquisition of the alarm monitoring assets of Circuit City's Home Security Division did not come within the ambit of section 275(a)(2) on the basis of a finding that a division is not an "entity" within the meaning of that subsection.[12] The Commission reasoned that "the statutory language regarding 'alarm monitoring service entity' is unambiguous" and that "the plain meaning of the term requires that an 'entity' have an independent legal existence."[13] Because the Home Security Division was an unincorporated division of Circuit City, the Commission concluded that the Division did not have an independent legal existence and, therefore, was not an "entity" for purposes of section 275(a)(2).[14] Having determined that Ameritech's acquisition of Circuit City's assets did not implicate section 275, the Commission did not address other issues raised by the parties, such as the meaning of "financial control," and denied AICC's Motion for Orders to Show Cause and to Cease and Desist.[15]
AICC appealed the Commission's Circuit City Order to the D.C. Circuit on April 2, 1997. The court stayed the Commission's order pending appeal.[16] On December 30, 1997, the court issued an opinion vacating and remanding the Commission's order. The court held that the Commission erred in concluding that the term "unaffiliated alarm monitoring entity," as used in section 275(a)(2), is "unambiguous" and that there is a plain meaning of the term that requires the entity to have an independent legal existence.[17] The court rejected the Commission's reliance on a dictionary definition to give meaning to the term "entity" because this approach did not take into account other possible interpretations of the term, statutory objectives, or Congressional intent. The court specifically rejected the Commission's reliance on Black's Law Dictionary's definition of "entity" as "an organization or being that possesses a separate existence for tax purposes" on the basis that other dictionary definitions of "entity" are broad enough to include an unincorporated division, such as Circuit City's Home Security Division. Further, the court rejected the Commission's contention that section 274(i)(6), which defines "entity" for purposes of a BOC's entry into electronic publishing, supports its interpretation of "entity."[18] The court determined that the list of examples of "entity" provided in section 274(i)(6) was not an exhaustive list and could include an unincorporated division because the list was not limited to separate legal organizations.[19]
The court also expressed concern that the Commission's interpretation of "alarm monitoring service entity" could not be reconciled with other clauses of section 275(a)(2). Specifically, it observed that the Commission's interpretation of section 275(a)(2) would permit Ameritech to buy all the assets of a division, but preclude Ameritech from buying one share of stock in the corporation.[20] The court could see no reason why Congress would draw such a distinction between asset and equity acquisitions.[21] It also noted that the Commission's treatment of "entity" would make "superfluous" the final clause in section 275(a)(2), which permits the exchange of customer accounts.[22] This final clause, the court suggested, would make sense only if section 275(a)(2) placed restraints on asset acquisitions. The court concluded that the disputed language was "uncertain," and vacated and remanded the case to the Commission "to decide how best to resolve the ambiguity in the phrase 'alarm monitoring service entity.'"[23] The court stated that it did not intend to foreclose the Commission from interpreting the phrase narrowly, but that the Commission's interpretation must be based on more than a single dictionary definition.[24]
The parties subsequently filed supplemental comments addressing points raised during the oral argument before the court and in the court's decision.[25] The Common Carrier Bureau sent Ameritech written requests for further information and documentation relating to the Ameritech/Circuit City transaction.[26] These requests sought information regarding, among other things, the types of assets Ameritech purchased, the number of Circuit City employees it hired, and the buildings or other facilities it acquired from Circuit City. Ameritech's responses to the Common Carrier Bureau's request for information,[27] and the pleadings filed throughout this proceeding, establish the following relevant, undisputed facts regarding Ameritech's acquisition of Circuit City's alarm monitoring assets.
C. Ameritech's Acquisition of Assets
Prior to Ameritech's June 28, 1996 acquisition of Circuit City's alarm monitoring assets, Circuit City provided alarm monitoring services through its Home Security Division. The Home Security Division's services included providing alarm protective equipment, installing the equipment, and monitoring signals activated by the equipment.[28] These services were provided under the names "Circuit City Monitored Security Systems" and "Circuit City Home Security Systems."[29] At the time of the asset acquisition, sixteen employees worked exclusively for the Home Security Division.[30] Circuit City had a Director of the Home Security Division to manage the alarm monitoring service operations.[31] Circuit City also maintained a separate accounting of the Division's finances.[32]
Ameritech purchased Circuit City's alarm monitoring service assets with cash, pursuant to an Asset Purchase Agreement signed by Circuit City and Ameritech.[33] The assets purchased included all of Circuit City's alarm monitoring contracts, machinery and equipment, intellectual property and goodwill, and books and records pertaining to the alarm monitoring business.[34] Ameritech also acquired the building Circuit City had used as its headquarters for alarm monitoring services and as its alarm monitoring facility.[35] In addition, Ameritech made offers of employment to fifteen of the sixteen Circuit City employees whose work was fully dedicated to the Home Security Division.[36] Twelve of those employees accepted Ameritech's offer of employment.[37]
Ameritech subsequently integrated Circuit City's alarm monitoring assets and employees into its existing SecurityLink operations.[38] Ameritech sent letters to Circuit City's former customers explaining that Ameritech would now provide their security services.[39] To Ameritech's knowledge, Circuit City did not continue to provide alarm monitoring services or subsequently engage in a new alarm monitoring service business.[40]
II. DISCUSSION
A. Definition of "Alarm Monitoring Service Entity"
The D.C. Circuit remanded the Circuit City case to the Commission "to resolve the ambiguity in the phrase 'alarm monitoring service entity,'" based on more than a dictionary definition. Consistent with the court's directive, we consider Ameritech's Circuit City transaction in light of the concerns expressed by the court regarding the Commission's prior holding. Based on this more extensive analysis, we believe that the Commission's initial Circuit City Order defined "entity" too narrowly as an organization requiring a separate legal existence. We now conclude on remand, after examining the statutory objectives underlying section 275(a)(2), that a broader definition of "entity" that includes any organizational unit such as Circuit City's Home Security Division is more consistent with the Congressional purpose underlying section 275(a)(2). This interpretation is also consistent with the idea that "entity" is "the broadest of all definitions which relate to bodies or units,"[41] which is recognized by the D.C. Circuit and reflected in judicial and statutory definitions of "entity" in other contexts. Accordingly, we reject the Commission's prior construction of the term "entity" as used in section 275(a).
When the meaning of a statute is ambiguous, it is appropriate to turn to legislative history for guidance.[42] The legislative history of section 275(a)(2), however, sheds little light on how we should define "alarm monitoring service entity." As the D.C. Circuit noted, there are directly contradictory statements by individual legislators regarding whether asset purchases violate section 275(a)(2).[43] The legislative history therefore provides no conclusive guidance in determining whether Congress intended to prohibit the acquisition of alarm monitoring assets from an unincorporated division.
As the legislative history does not offer any guidance on the meaning of "entity" in section 275(a)(2), we next consider whether a broader interpretation of the term is consistent with the statutory intent of that section. We find that a broader interpretation of "entity" allows for a sensible reading of section 275 and gives meaning to all its various provisions.[44] The term "entity" can be interpreted narrowly to refer only to a separate legal entity, or more broadly to encompass any organization or unit. Defining "entity" narrowly as an organization that has a separate legal existence raises the question that troubled the D.C. Circuit: Why would Congress prohibit a grandfathered BOC from obtaining control of an alarm monitoring service provider through the purchase of a single share of stock, but allow that BOC to obtain all the assets of that company by structuring the transaction as an asset acquisition?[45]
Ameritech advances several arguments in response to this question, none of which we find persuasive. First, Ameritech argues that Congress intended to prohibit equity acquisitions, while permitting the acquisition of assets, because section 275(a)(2) does not expressly bar asset acquisitions.[46] We agree that section 275(a)(2), on its face, does not prohibit all asset acquisitions. We concluded in a previous order,[47] and reaffirm here, that it does prohibit transactions that result in financial control over the selling company and that the statutory language does not exclude asset acquisitions from the prohibition.[48] Ameritech further explains that Congress made this distinction because it was primarily concerned with preventing hostile takeovers.[49] The D.C. Circuit found Ameritech's explanation unpersuasive. The court described this argument as "far-fetched" because it does not account for section 275(a)(2)'s prohibition of all types of equity acquisitions, including takeovers welcomed by the target company or the acquisition of even one share of stock.[50] Ameritech subsequently added, in its Supplemental Comments, that section 275(a)(2)'s prohibition of only equity acquisitions was a result of legislative compromise and that the Commission must honor that compromise.[51] There is no evidence, however, that Congress intended to forge such an illogical compromise and, as stated above, the legislative history offers no guidance on this point. The D.C. Circuit could find no reason why Congress would have distinguished between asset and equity transactions when the transactions achieve the same result -- i.e., the acquisition of an alarm monitoring business, and, on further reflection, neither can we. As the D.C. Circuit noted, there is no evidence that Congress was more concerned with the form of the transaction rather than its substance.[52]
Rather, we conclude that Congress apparently viewed section 275(a)(2) as a pro-competitive provision and that it meant to authorize grandfathered BOCs to continue in the alarm business and to grow that business only through competition, not through equity acquisitions or asset acquisitions that result in financial control.[53] Congress, in enacting section 275, appeared concerned about ensuring a "level playing field" between the BOCs and the alarm monitoring industry.[54] A broader interpretation of "entity," for purposes of determining section 275(a)(2)'s restrictions, therefore comports best with this stated intent. We can find no reason "why it would have mattered to Congress whether a potential target of Ameritech ran its alarm monitoring business through a wholly-owned incorporated subsidiary or, as here, through an unincorporated operating division."[55] If section 275(a)(2) prohibited asset acquisitions only from separate subsidiaries, companies could easily circumvent the law by transforming a subsidiary into an unincorporated division.[56] A more rational interpretation is that Congress intended to prohibit equity transactions and non-equity acquisitions that result in financial control of any type of entity, regardless whether the entity has a separate legal existence.