Judge Denies Cable & Wireless' Request to Enjoin MCI on Sale of Internet Business

(June 15, 1998)  U.S. District Court Judge Thomas Jackson denied a motion of Cable & Wireless to enjoin MCI from negotiating to sell its Internet business to any other company.  MCI and WorldCom are under pressure from U.S. and E.U. regulators to divest some Internet assets.   On May 27, MCI agreed to sell certain assets to British telecommunications company Cable and Wireless.

WorldCom (ticker: WCOM) provides long distance, local, and Internet services in the U.S. and around the world.  It is a major provider of Internet backbone.  UUNet is a subsidiary of WorldCom.  MCI (ticker: MCIC) is the second largest long distance carrier in the U.S.  It also provides local, wireless, and information technology services.  It too is a major provider of Internet backbone.  MCI and WorldCom announced last fall plans to merge, and shareholders have since approved the deal.

However, the proposed merger needs the approval of several government regulators, including the Antitrust Division of the U.S. Department of Justice, the Federal Communications Commission, and the Competition Directorate of the European Commission.

The EU Commissioner in charge, Karol Van Miert, a Belgian Socialist, has stated the merger as originally planned, and even with the sale of MCI Internet backbone assets to Cable and Wireless, would not be approved.  The grounds stated for blocking the merger are that it would concentrate too much control over Internet backbone in one company.

Cable and Wireless filed a Complaint against MCI and WorldCom in U.S. District Court in Washington DC last Wednesday to try to prevent MCI from selling its Internet assets to anyone other than Cable and Wireless.

Cable and Wireless alleged in its complaint that it is entitled to injunction relief to enforce its May 27 contract with MCI to buy certain of MCI's Internet backbone service assets.

Cable and Wireless also alleged that it believes that the Department of Justice and the E.U. do not view the MCI contract with Cable and Wireless to be "sufficient to permit regulatory approval of the Merger", and that MCI consequently intends to divest additional Internet assets in an effort to obtain the necessary approvals. (Complaint, ¶ 19-22.)

Cable and Wireless alleged that "[t]he refusal to negotiate in good faith with Cable & Wireless regarding modifications to the (contract) ... constitute[s] a breach by MCI ... of obligations provided for in the contract."  (Complaint, ¶ 30.)

Cable and Wireless further alleged that the "injury resulting from this breach of the contract leaves Cable & Wireless with no adequate remedy at law. Cable & Wireless has suffered and will continue to suffer irreparable injury as a result of the acts of defendants complained of herein. That injury will continue unless and until these actions are declared to be unlawful and enjoined by this Court."  (Complaint, ¶ 31.)

Cable and Wireless asked the Court to give it "a temporary restraining order, and preliminary and permanent injunctions, enjoining MCI, MCI Telecom, and WorldCom, and their representatives or affiliates, from terminating the Transaction and from soliciting offers or proposals for, entering into agreements with or engaging in discussions with respect to, or providing any third party information regarding, the sale of all or a portion of" MCI's Internet business.  (Complaint, Prayer.)

However, Judge Jackson denied the motion on the grounds that Cable and Wireless did have an adequate remedy at law: monetary damages.  The contract, which was filed under seal, provided for stipulated damages of $25 Million in the event of breach by MCI.

The ruling clears the way for MCI to negotiate with other bidders for its Internet assets.

In a related suit, long distance telephone company GTE filed a Complaint against MCI and WorldCom last month alleging that the MCI WorldCom merger would create a monopoly in the national market for Internet backbone service in violation of § 7 of the Clayton Act.