State Ex Rel. Util. Com'n v. Nat. Merchandising

Annotate this Case

220 S.E.2d 304 (1975)

288 N.C. 715

STATE of North Carolina ex rel. UTILITIES COMMISSION et al., Respondents, v. NATIONAL MERCHANDISING CORPORATION, Complainant.

No. 51.

Supreme Court of North Carolina.

December 17, 1975.

*307 Smith, Moore, Smith, Schell & Hunter by Bynum M. Hunter and Benjamin F. Davis, Jr., Greensboro, for complainant appellant.

Edward B. Hipp, Commission Atty., Maurice W. Horne, Deputy Commission Atty., and John R. Molm, Associate Commission Atty., Raleigh, for N. C. Utilities Commission.

Jerry W. Amos, Brooks, Pierce, McLendon, Humphrey & Leonard by James T. Williams, Jr., Greensboro, for North State Tel. Co., the Concord Tel. Co. and Lexington Tel. Co.

William C. Fleming, Durham, for Gen. Tel. Co. of the Southeast.

Taylor, Brinson & Aycock by William W. Aycock, Jr., Tarboro, for Carolina Tel. and Tel. Co.

Kimzey, Mackie & Smith by James M. Kimzey, Raleigh, for United Tel. Co. of the Carolinas, Inc.

A. Terry Wood, Hickory, for Cent. Tel. Co.

LAKE, Justice.

The complainant is not a public utility. G.S. 62-3(23). Consequently, its production in another state and distribution in North Carolina of plastic covers for telephone directories, even if not immune to State regulation by reason of the Commerce Clause of the Constitution of the United States, a question not now before us and which we do not decide, are not subject to regulation by the Utilities Commission. G.S. 62-2; G.S. 62-30; G.S. 62-31.

The order of the Commission from which the complainant appeals does not purport to require anything of the complainant or to prohibit or regulate any of the complainant's *308 activities. The order leaves the complainant free to manufacture and distribute plastic covers for telephone directories and to print thereon advertising matter. What the order does is to require each telephone company operating in this State to file with the Commission a tariff declaring telephone directories, furnished to subscribers, to be the property of the telephone company and forbidding any person (i. e., the telephone subscriber) to attach to the directory any cover not furnished by the telephone company, with an exception not germane to this appeal, upon the pain of having such person's telephone service suspended. Thus, the order of the Commission is, ostensibly, directed against the telephone subscriber who has purchased, or otherwise acquired, from a source other than the telephone company itself, a cover for the telephone directory supplied to him by the telephone company. The order forbids the telephone subscriber to place this cover upon such directory even though the subscriber, after examining it, concludes that it is more attractive in appearance, or contains information more beneficial to him in his use of the telephone, than is or does the original cover of the directory. Such subscriber may retain such cover on his desk, table or telephone stand and use it as he sees fit so long as he does not attach it to the directory. If he does the latter, the telephone company is authorized, though not required, to discontinue telephone service to him.

The tariff of North State Telephone Company, against which the complaint of the complainant was directed, and which was previously in effect with the approval of the Commission, was to the same effect.

Although the tariffs in question leave the complainant free to manufacture and distribute its covers, their effect is, necessarily, to discourage telephone subscribers from placing such covers on the directories in their homes, offices and places of business. Thus, the tariffs discourage prospective advertisers from contracting with the complainant for the placing of their advertisements on the covers and, therefore, substantially handicap the complainant in carrying on its business. GS 62-73 provides that a complaint may be filed with the Utilities Commission "by any person having an interest * * * in the subject matter of such complaint," alleging that any "rule, regulation or practice is unjust and unreasonable." We think it clear that the complainant had and has the requisite interest in the original tariff of the company and in the rule so promulgated by the Commission and, therefore, had standing to file the complaint which initiated this proceeding. Consequently, the complainant has standing to prosecute this appeal. GS 62-92; GS 62-96.

Upon this appeal we may reverse the decision of the Commission and declare the said rule so promulgated by it to be null and void if the order of the Commission is in excess of its statutory authority or jurisdiction or is arbitrary or capricious. GS 62-94; Utilities Commission v. Telephone Co., 281 N.C. 318, 336, 189 S.E.2d 705; Utilities Commission v. Morgan, Attorney General, 277 N.C. 255, 267, 177 S.E.2d 405.

The Utilities Commission, being an administrative agency created by statute, has no regulatory authority except such as is conferred upon it by Ch. 62 of the General Statutes. Utilities Commission v. R. R., 268 N.C. 242, 245, 150 S.E.2d 386. Obviously, the Commission may not, by its order, require or authorize a rule or practice by a public utility company which is forbidden by statute, or authorize such company to refuse to perform a duty imposed upon it by statute, unless Ch. 62 of the General Statutes has conferred such authority upon the Commission.

The order of the Commission now before us purports to authorize a telephone company to discontinue telephone service to a subscriber who pays his telephone bills promptly and complies with every rule of the company except that he places upon the directory, furnished him by the company, a cover which, while in place, prevents him *309 from looking at a picture, which the telephone company considers attractive, and prevents him from reading the name of the company, the names of the towns, telephone directories for which are included in the book, a suggestion that the subscriber consult the yellow pages and such other information about its service as the company may see fit to put on the original cover of the directory.

GS 62-140 requires a telephone company serving in this State to render telephone service, without discrimination, to all within its service area who apply therefor. Dale v. Morganton, 270 N.C. 567, 155 S.E.2d 136; Salisbury & S. Ry. Co. v. Power Co., 179 N.C. 18, 30, 101 S.E. 593, rehear. dism. 179 N.C. 330, 102 S.E. 625. A refusal by the company to serve without a reasonable justification therefor is a violation of the company's duty and the Commission has no authority to permit it. We are, therefore, brought to this question: It is reasonable for a telephone company to discontinue service to a subscriber for the sole reason that such subscriber elects to place an opaque cover upon the directory supplied to him by the company? We conclude that it is not.

No one requires the subscriber to place such cover on the directory. He does so solely because he, after observing all that appears on the original cover of the directory and what appears on the added cover, concludes that the appearance of the added cover is more attractive or the information contained thereon is more useful to him than that which appears on the original cover.

It is completely unrealistic to say that, having placed the added cover on the directory, the subscriber will no longer remember the name of his telephone company or the towns, telephone subscribers in which are listed in the directory, or that the directory contains a yellow page section. The fact that the book is actually composed of several directories, each relating to a separate town, does not mean necessarily that subscribers in such other towns may be called toll free. A subscriber having frequent occasion to call a person or persons in another town will remember that the directory for such other town is included within his book whether or not the original front page of the book is obscured by an added cover. If he does not, such information is readily obtained by him through the simple process of flipping quickly through the pages of the book.

It is equally unrealistic to attempt to justify such discontinuance of telephone service on the ground that the printing on the added cover of telephone numbers of the advertising customers of the producer of the cover is an infringement of the telephone company's copyright of its directory. It is entirely possible and probable that the producer of the cover obtained his information as to the telephone number of his advertising customer from such customer, not from reading the directory. In any event, nothing in the record before us indicates that this was not the source of the complainant's information. Furthermore, the order in question does not prohibit the producer of the cover from printing thereon such telephone numbers or from distributing such cover to telephone subscribers, even if it be assumed that the Utilities Commission has jurisdiction to deal with a violation of the copyright law. What the order in question does is to declare that the telephone company may discontinue service to its subscriber solely because the subscriber sees fit to place a cover on the directory supplied to him for use in his home or place of business. We are cited to no authority holding this a violation of the copyright law.

We find no reasonable basis in the evidence contained in the record for the Commission's finding that the attachment of the added cover to the directory poses a serious threat to the quality of the telephone company's service. The mere assertion by officials of the various telephone companies testifying at the hearing that *310 such threat to the quality of the service results from the attachment of the added cover is not evidence sufficient to support such a finding. The evidence is that the printed list of "emergency numbers" and numbers for public institutions such as schools and churches, may include an occasional "wrong number" by reason of human error by the producer of the cover or a subsequent change in the number originally shown correctly. Obviously, there is no greater likelihood of such "wrong number" upon the added cover than there is in a list of such numbers compiled by the telephone subscriber himself and written by him in a space provided therefor by the telephone company on the back page of the original cover of the directory. In any event, the possibility of occasional use of a "wrong number" is not a reasonable ground for discontinuance of the subscriber's telephone service.

Another contention of the telephone companies in support of the Commission's order is that, as the order declares, title to the directory is reserved by the telephone company when it delivers the directory to the subscriber's residence or place of business for the subscriber's use in placing telephone calls and, therefore, the attachment of the added cover to the book is a trespass on the company's property. It is a matter of common knowledge that, except under most unusual circumstances, a telephone directory so delivered to a subscriber remains in the subscriber's possession until it is replaced by a later directory and is then discarded by the subscriber into the trash can or contributed by him to a scrap paper collection. If however, it be technically a trespass upon the telephone company's property to attach an opaque cover to its directory, so delivered to its subscriber, Ch. 62 of the General Statutes does not confer upon the Utilities Commission jurisdiction to prevent or redress such trespass. If the attachment of the cover be a trespass, it is the subscriber, not the producer of the cover, who is the trespasser and it is the subscriber whose telephone service is authorized to be discontinued by this order of the Commission. A trespass so technical in nature and trivial in consequence is not a reasonable ground for discontinuance of the subscriber's service by the telephone company.

Notwithstanding the disclaimer by the Commission, the record makes it abundantly clear that the real reason for the objections of the telephone companies to the use of the complainant's covers by the telephone subscribers is that such covers carry advertisements of local businesses and, therefore, compete with the telephone company's yellow page advertising. This State has adopted the policy of granting to a telephone company a monopoly upon the rendering of telephone service within its service area. GS 62-110. Nothing in Ch. 62 of the General Statutes, however, confers upon a telephone company a monopoly upon advertising by its business subscribers. The order of the Utilities Commission attempts to do this by forbidding subscribers to the telephone company's service to attach a cover to the directory supplied by the company to such subscriber. In so doing, the Commission has acted in excess of its statutory authority and has acted arbitrarily and capriciously.

The separate briefs filed by the complainant, the Commission, and each of the telephone companies who are parties to this appeal, and our own research have brought to our attention only two decisions by courts of last resort upon the question presented by this appeal. Both involve the present complainant and both decisions were in its favor. New England Tel. & Tel. Co. v. National Merchandising Corp., 335 Mass. 658, 141 N.E.2d 702; National Merchandising Corp. v. Public Service Commission, 5 N.Y.2d 485, 186 N.Y.S.2d 47, 158 N.E.2d 714. See also: Hush-A-Phone Corp. v. United States, 99 U.S.App.D.C. 190, 238 F.2d 266.

Decisions by the intermediate appellate courts of Illinois and Missouri are to the contrary. Illinois Bell Telephone Co. v. *311 Miner, 11 Ill.App.2d 44, 136 N.E.2d 1; National Telephone Directory Co. v. Dawson Mfg. Co., 214 Mo.App. 683, 263 S.W. 483. Also to the contrary is a decision by Chief District Judge Craven in Citizens Telephone Co. v. Tel Service Co., 214 F. Supp. 627 (W.D.N.C.). In that case, Judge Craven had before him a suit for an injunction and monetary damages brought against a producer of directory covers, the case being in the Federal court by reason of diversity of citizenship. As Judge Craven pointed out in his decision, he was called upon to apply the law of North Carolina and there was no decision of this Court upon the question. He granted the injunction in reliance upon Illinois Bell Telephone Co. v. Miner, supra. His decision is, of course, not binding upon this Court and we do not find its reasoning persuasive. Furthermore, Judge Craven did not have before him the question of the right of the telephone company to cut off a subscriber's telephone service because of the subscriber's use of such a cover upon the directory supplied to him by the telephone company.

In New England Tel. & Tel. Co. v. National Merchandising Co., supra, the Massachusetts Court said:

"The evidence does not justify a finding that interference with the company's service to the public will be caused by the use of the covers. The directory is not connected with the telephone company's mechanical and electrical system. * * "The evidence, closest to having relevance on this issue, is proof of three errors only (each on a separate cover among the numerous covers distributed by National) in numbers listed on National's covers, one caused by a telephone number change after the cover was published, one caused by clerical error, and one based on a mistake in transcription. These errors appear to have been corrected with promptness and energy, and there is no evidence that they caused any difficulty. It was conceded that inevitably there are errors in the telephone company's directories also. Any interference with service from this type of error is too trivial to warrant injunctive relief. "It is suggested that important service instructions are concealed by the cover. Once read, such instructions rapidly become understood and of no importance. There is no basis in the evidence for concluding that any noticeable interference with service occurs from concealing these instructions, even by an opaque cover. "It is unimportant that the telephone company retains title to the telephone directories, if it does. The subscriber is certainly given by the telephone company a license to use the directories on his own premises. He has sole possession of a directory while he remains a subscriber. * * * "Apart from the company's tariffs, no contract between the subscribers and the telephone company not to use covers on telephone directories has been proved. * * * We think the provisions of the tariffs, already quoted, do not create such a contract. * * * We adopt this construction the more readily because it avoids * * * serious questions of the validity of the tariff as reasonable under applicable statutes * * * and conceivably also on constitutional grounds. Questions of reasonableness might well be presented by a tariff requirement that subscribers agree (as a condition of obtaining an essential monopolistic, regulated public service which the telephone company is bound to furnish to the public) that they will not attach National's covers or similar covers to the directories. Such a requirement could be designed only to further a private advertising interest of the telephone company. * * "Although the telephone company has a protected and necessary monopoly in furnishing telephone service, that does not mean that it can prevent the use by its subscribers of accessories with its *312 equipment and books `in ways which are privately beneficial without being publicly detrimental.'"

The Massachusetts Court, accordingly, found the reasoning of the Illinois Court of Appeals and of the Missouri Court of Appeals in the Illinois Bell Telephone Co. v. Miner, supra, and National Telephone Directory Co. v. Dawson Mfg. Co., supra, not persuasive and held there was no error in the denial of an injunction sought to prevent the producer from distributing such covers. It would seem necessarily to follow that the subscriber's use of such a cover by attaching it to the directory is not justification for a cutting off of his telephone service.

In National Merchandising Corp. v. Public Service Commission of New York, supra, the New York Court of Appeals had before it for consideration the Public Service Commission's approval of a standard tariff provision similar to that which has been approved by the Utilities Commission in the present matter. The Court said:

"The tariff, as approved by the commission, ostensibly governs the contractual relations of the telephone company and its subscribers, but its admitted purpose is to inhibit the activities of National and other firms engaged in similar enterprises. * * * "The repository of the commission's regulatory authority is the Public Service Law, and the commission is powerless to exceed the authority conferred on it by that statute. * * * The commission may not posit its jurisdiction upon the possible impact of these covers on advertising revenues. It is one thing to have limited jurisdiction over advertisements in the directory to see that all advertisers are treated equitably, and to insure that maximum revenues are derived from the sale of advertisements * * *; it is quite another thing to assert jurisdiction to immunize these telephone companies from competition, where the telephone companies engage in activities which do not come within the scope of an essential public service. * * * "Further, this attempted usurpation of power cannot be justified on the ground that the activity of National constitutes unfair competition or interference with the telephone companies' property rights since these matters are for the courts. * * * "We conclude, therefore, that the commission lacks authority to prohibit, either directly or indirectly, a lawful business enterprise from competing with the telephone companies in nonpublic service areas * * *. "We conclude then that there is no rational basis for that part of the tariff regulation which forbids the use of directory covers which contain advertising. Indeed, this type of regulation constitutes an unwarranted invasion of the home of a subscriber, who should remain free to use such covers, once in his possession, as he sees fit."

We find the reasoning of the Massachusetts and New York Courts persuasive and conclude that the order of the Commission is in excess of its statutory authority and is arbitrary and capricious. The decision of the Court of Appeals is, therefore, reversed and the order of the Utilities Commission is declared null and void.


BRANCH, J., did not participate in the consideration or decision of this matter.