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January 29, 1991

WESTPAC AUDIOTEXT, INC., et al., Plaintiffs,
G. MITCHELL WILKS, et al., Defendants

Fern M. Smith, United States District Judge.

The opinion of the court was delivered by: SMITH


 State action is a murky, intensely fact-bound inquiry, which often reduces to an easy-to-frame but hard-to-answer issue: How much state "encouragement" of private conduct is enough to transform that private conduct into "state action"?

 Defendants Pacific Bell ("PacBell") and GTE California ("GTEC") have attempted to withhold billing and collection procedures from plaintiffs, the providers and listeners of sexually explicit, non-obscene telephone services often referred to as "dial-a-porn." *fn1" Without billing and collection services, plaintiffs will soon go out of business.

 Plaintiffs argue that the first amendment protects their rights to speak freely, to receive information freely, and to associate freely. Defendants contend that the first amendment controls governmental conduct, not the conduct of private corporations. The issue, in a nutshell, is whether GTEC and PacBell are "state actors" and, therefore, subject to the first amendment.

 A close examination of the relationship between the state of California and defendants indicates that the state has encouraged the phone companies' efforts to suppress dial-a-porn providers in ways sufficient to find that plaintiffs will probably succeed on the merits of their state action argument.


 The following findings in support of this Court's state action ruling do not alter the procedural posture of this case; the Court's Order of October 27, 1989 remains in effect. In that Order, the Court entered a preliminary injunction against PacBell, but reserved decision on the state action issues raised by section 2884.2. The recent addition of GTEC as a defendant has required the Court to revisit the state action issue as to both phone companies.

 The evidentiary requirements for preliminary injunctions are less strict than those in motions for summary judgment, and the weight given to the affidavits and other evidence is a matter for the Court's discretion. 11 C. Wright & A. Miller, Federal Practice and Procedure § 2949 at 470-75 (1973). The bulk of the Court's findings are based on legislative history and other public documents, evidence that would be admissible at trial. Fed. R. Evid. 803(8); 902(4); 902(5); 1005.

 The statute at issue here, California Public Utilities Code section 2884.2, had its origins in Senate Bill 1844 (Stats. 1988, ch. 1261, § 1). That bill was sponsored by PacBell and introduced by State Senator Russell in January 1988. Its aim was to reverse the CPUC's "content neutral policy" with respect to adult information providers. See CPUC Dec. 87-01-042 at 35, para. 16; CPUC Dec. 88-07-40 at 2.

 As PacBell and its legislative allies shepherded the bill towards enactment, the focus of SB 1844 became increasingly narrow. The original version would have divested the CPUC of jurisdiction over all rates that the phone companies were charging all information providers. The statute was refined in March 1988 to oust the CPUC of jurisdiction over billing and collection services that the phone companies provided to all live or recorded audio or interactive messages. The phone companies' billing and collection services, the draft bill stated, "are not subject to the jurisdiction and control of the [CPUC] but are a matter for contractual arrangement between the telephone corporation and the information provider." Sen. Bill 1844, March 1, 1988 version.

 Underscoring the legislature's knowledge that PacBell was attempting an end-run around potential first amendment problems, the analyst suggested that the bill might benefit by "adding language to clarify [PacBell's] intent of specifically attacking dial-a-porn providers." Id. at 4. See also Assemb. Comm. Report, SB 1844, June 13, 1988 at 2-3 (PacBell originally sought to avoid content-based language in the bill because it wanted its decision to withhold services to be "free of a constitutional taint."). The additional language was needed to correct a fundamental problem with earlier versions of the bill -- the means proposed were far too broad to achieve the bill's relatively narrow ends. If the goal was to attack dial-a-porn, there was no need to divest the CPUC of jurisdiction over all information providers.

 The final version of SB 1844 followed the analyst's suggestion and clarified the specific intent to attack dial-a-porn. Codified as section 2884.2, it provided that the CPUC would not have jurisdiction over the billing and collection services that the phone companies rendered to harmful matter providers. *fn2" These billing and collection services would be "a matter for contractual arrangement between the telephone corporation and the information provider." Section 2884.2 went into effect on January 1, 1989. CPUC Dec. 89-02-066, Feb. 24, 1989, at 33.

 After obtaining legislative approval, PacBell moved on to the CPUC. On February 24, 1989, the CPUC issued a lengthy decision approving a settlement with PacBell regarding the tariff for PacBell's Information Calling Services. *fn3" Id. The settlement involved PacBell's new "900 Information Calling Services," which set up area code 900 for certain pre-recorded messages, live group conversations, interactive messages, and similar services on a wide variety of subjects. A portion of the CPUC decision was entitled, "Is the 900 Settlement Consistent with the Law."

 The CPUC decision reviewed three pieces of new legislation, including section 2884.2, and concluded that the settlement was inconsistent with section 2884.2. "The settlement includes tariff terms which regulate billing and collection practices for all [information providers], including those who offer services containing harmful matter. To conform to [section 2884.2], the tariff should expressly exclude [information providers] of harmful matter from the terms which regulate all billing and collection practices." CPUC Dec. 89-02-066 supra, at 33. The CPUC's rationale was that, because billing and collection practices regarding harmful matter providers were no longer within the jurisdiction of the CPUC, the settlement could not regulate those billing and collection services at all. See id.

 Emphasizing PacBell's freedom to contract as it saw fit, the CPUC decision noted, "Regardless of whether the telephone company chooses to make independent contractual arrangement for billing and collection of messages containing harmful matter, the tariff should not restrict the transportation of any lawful message or communication" (emphasis added). Id. The opinion reiterated that the 900 settlement should be modified to state: "The tariff should not apply to the billing and collection of services which contain harmful matter. Billing and collection for these services are a matter for contractual arrangement between the telephone corporation and the [information provider]." Id. at 34-35.

 By conditioning approval of the overall 900 settlement on PacBell's willingness to remove harmful matter providers from the proposed tariff, the CPUC gave PacBell a powerful economic incentive to distance itself from the harmful matter providers. See id. (setting forth the ways in which the proposed 900 settlement had to be modified to comply with the new statutory scheme). *fn4" Evidence indicates that the CPUC and PacBell worked closely together fine-tuning the 900 regulatory scheme. N. Selby dec. paras. 25-27, Aug. 16, 1989.

 The end result was that entry into the potentially lucrative 900 business was conditioned on the terms imposed by the CPUC. At the same time, PacBell continued doing everything it could on the legislative and regulatory fronts to enable it to avoid entering into "contractual arrangement[s]" with the harmful matter providers.

 Thus, when the CPUC applied the provisions of the bill PacBell sponsored to the tariff that PacBell had applied for, PacBell achieved its goal -- the removal of state regulatory authority over some of its services. This allowed PacBell to attempt to cut off billing and collection services to the harmful matter providers. Sen. Comm. Report, supra, at 2.

 Given these facts, plaintiffs have demonstrated sufficient state "encouragement" of the telephone companies' conduct to warrant a finding of substantial likelihood of success on the merits on the state action issue. Today, in California, a phone company's decision not to contract with a harmful matter provider is a decision that appears fairly attributable to the state.


 I. Background law.

 The fourteenth amendment to the Constitution provides a check on government conduct, not private conduct. It incorporates most of the protections of the Bill of Rights and makes them applicable to the states. See Near v. Minnesota, 283 U.S. 697, 701, 75 L. Ed. 1357, 51 S. Ct. 625 (1931) (first amendment held applicable to the states).

 Plaintiffs alleged that defendants have infringed upon their free speech rights. To prove a violation of their first amendment rights, plaintiffs must show they were harmed by "state action," not by private conduct that abridged their rights. See Burton v. Wilmington Parking Authority, 365 U.S. 715, 721-22, 6 L. Ed. 2d 45, 81 S. Ct. 856 (1961); 2 R. Rotunda, J. Nowak, J. Young, Treatise on Constitutional Law: Substance and Procedure § 16.1 (1986). In a case like this one, in which the plaintiff alleges that a private party's conduct must be attributed to the state because it involved "state action," the plaintiff must show that the state "has provided such significant encouragement, either overt or covert, ...

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