The Deal of the Century

by Coll, Steve;

  One afternoon shortly after the drafted final judgment arrived in his office, Litvack and his deputy, Richard Favretto, set aside time to read carefully the equal-access rules that had been negotiated by the two sides. In the margins of his draft, Litvack wrote skeptical questions like “Who?”, “How?”, and “When?” next to the passages about equal access.

  When he was finished reading, Favretto came into Litvack’s office. “What do you think?” he asked.

  “What do you think?” said Litvack.

  “Forget it,” was Favretto’s answer. “This thing ain’t never going to work.”

  “You’re right,” acknowledged Litvack. “I’m afraid you’re right about that.”

  But despite Litvack’s discouraging assessment, the decision was not yet final. When the two teams of staff lawyers had negotiated the document reviewed by Litvack, they had set aside some issues that they were unable to agree upon. Most of those issues concerned the equal access rules. The idea was that just before Judge Greene’s deadline, Litvack and Trienens would personally sit down and iron out the remaining disputes. The final meeting between the two was scheduled for February 23. Trienens even flew to Washington for the session. Based on conversations with his own staff, he believed that the deal would be concluded in a matter of days.

  The night before his meeting with Trienens, Sandy Litvack called Jim Denvir. “I just want to go over these issues once more before I talk to Howard,” he said. “The question is, what can we live with? If he won’t move on most of these rules, can we do better by going to trial?”

  “I think we can do better,” Denvir told him.

  The next day, when Trienens called Litvack about the scheduled meeting, Litvack told him preemptively that the deal was off. Trienens was stunned and angry. After seven years and millions of dollars in expenses, AT&T was just days away from finally solving its antitrust problems. Why had Justice suddenly changed its mind?

  The truth was difficult to determine, especially for Howard Trienens and Charlie Brown. Litvack had discussed his concerns about the equal access rules with some of the Justice staff lawyers, but he had not emphasized them to Trienens. And strangely, when Litvack wrote to Judge Greene that same day to inform him that the settlement talks had collapsed, he did not mention his own objections to Crimson Sky. Instead, Litvack blamed the deal’s failure on the Reagan administration, and specifically its recently announced Antitrust chief nominee, Stanford University law professor William Baxter.

  Litvack did write, “As of this date, no final settlement agreement has been reached … and, in my view, it is extremely doubtful one will be reached by March 2.” But then, Litvack went on to tell Judge Greene, “However, even if such an agreement were achieved within the specified time, the fact is that the terms of any such proposal would have to be reviewed by the new assistant attorney general, who will be responsible for the decision in light of the recusal of Attorney General Smith and Deputy Attorney General Schmults.… On February 20, President Reagan announced his intention to nominate William F. Baxter to be my successor. I am advised that while Professor Baxter will consider the AT&T case as a priority matter, he has not reviewed and will not be in a position to review the terms of any proposed agreement, or to reach any view one way or the other … until after March 2.”

  What made the circumstances of Crimson Sky’s collapse all the more confusing to Trienens and Brown was that, in the days following Litvack’s unilateral announcement, Baxter let it be known that it was he, not Litvack, who had finally decided that the deal was no good. This directly contradicted Litvack’s assertion to Greene that Baxter would “not be in a position to … reach any view one way or the other” until after the judge’s early March deadline. Years later, Litvack and Baxter continued to have opposite recollections about the matter. Litvack remembered that he did not discuss the case with Baxter until after a decision was made, while Baxter recalled that Litvack was ready to approve the deal until he (Baxter) decided that it was unacceptable.

  To Trienens and Brown, the confusion was especially disheartening, but by no means was it an isolated example of the ways in which politics and bureaucratic infighting skewed the relationship between the phone company and the government. As had been the case with Ken Anderson’s menu deal, Crimson Sky was undermined by the pending departure of Justice’s main negotiator, Litvack. But also like the menu settlement, Crimson Sky probably would never have been initiated if Litvack hadn’t wanted to make his mark on the AT&T case before he left the government. To AT&T, the whole thing seemed like a vicious circle. Each departing Justice lawyer offers a deal to the phone company, and then the deal is nixed by the lawyer’s successor, who thinks that he should be the one to decide on any settlement. When the successor leaves, he offers his own deal, and the cycle begins again.

  In late February 1981, when Sandy Litvack cleared out his belongings from the Antitrust chief’s cavernous office in the main Justice building, leaving behind hard feelings and the remnants of a once-promising deal, no one on either side would have guessed that his successor, William Baxter, an ideological academic who hadn’t argued in a courtroom since before 1960, would be the one to break the pattern. Much to George Saunders’ satisfaction, it appeared now that U.S. v. AT&T would be decided in court by Judge Harold Greene, “the man who had the answers.”

  Chapter 17

  Litigating to the Eyeballs

  The first time that the Justice staff lawyers working on the AT&T case met Bill Baxter, their new boss, was on Friday, February 27, an unseasonably warm winter day in Washington.

  The lawyers—Gerry Connell, Peter Kenney, Jim Denvir, Jeff Blumenfeld, and two or three others—walked down from their office on 12th Street to the main Justice building. The sun was bright and the air was fresh and springlike. It was a day that offered spiritual renewal, even to lawyers who had been working seventy or eighty hours a week on one case for six consecutive months.

  They found Baxter in one of the deputy assistant attorney general’s offices near the Antitrust chief’s office on the third floor; Sandy Litvack had not yet completely moved out, so Baxter was ensconced in temporary quarters. The purpose of the meeting was purely introductory, a chance for working-level lawyers to meet the man who would dictate policy to them over the next four years. There had been some uneasy humor on the way down. None of the top lawyers running Justice’s case against AT&T was an ideological conservative, and several of them had strongly held liberal views. Politics was not generally of overriding importance to the staff lawyers—Gerry Connell, for example, had worked easily with nearly a dozen Antitrust chiefs for over two decades—but the lawyers felt some trepidation about what impact the triumphant, conservative “Reagan revolution” would have on Justice’s Antitrust division. Regardless of political ideology, the staff lawyers felt strongly that the division’s work was important and that it ought not to be emasculated.

  As a result of some detective work, however, they did know that even if Baxter intended to reduce the division’s staff by half, or if he was inclined to dismiss pending cases left and right, as had been rumored, the new Antitrust chief was unlikely to interfere with the AT&T trial team.

  Baxter had been formally nominated by President Reagan the day before, Thursday, although rumors of his appointment had been floating around Washington since early February. As soon as Baxter’s name had surfaced, several of the Justice staffers had rushed over to the nearest law library to look up everything that had been written by the prospective Antitrust chief in law reviews, academic journals, and the like. The trial team lawyers assumed that any Reagan nominee would take a conservative, perhaps even hostile, view of antitrust law enforcement. And since Baxter, if he was confirmed as expected by the Senate, would soon have the power to dismiss cases that he didn’t like, the lawyers wanted to know if he had ever expressed any strong opinion about U.S. v. AT&T.

  The search was at first disheartening, because on just about every issue of antitrust law Baxter conf
ormed to expectations. He was a starkly ideological conservative, a free-market theoretician, a man so certain that his own economic views were right that he didn’t hesitate to call the U.S. Supreme Court “wacko” and “ludicrous” when it disagreed with him. Though he was not formally trained in economics, he often described himself as an economist because his opinions about antitrust enforcement were based on his own, somewhat peculiar, notions about economic efficiency. Many practices that liberal and moderate antitrust lawyers viewed with suspicion Baxter considered acceptable, even desirable, by-products of free-market wheeling and dealing. For example, he believed that some kinds of mergers between large corporations should actually be encouraged and that some forms of price-fixing by companies benefited consumers. Too often, Baxter said, the Justice department’s antitrust enforcement “penalized [big companies] for their large size.” Big was not necessarily bad, Baxter believed, an opinion he shared, to the consternation of many of the Justice staff lawyers, with George Saunders and the executives of AT&T.

  As for the AT&T case itself, however, the law review articles and interviews revealed a surprising quirk in Baxter’s rigid conservative ideology. It seemed, at least according to his published writings, that Baxter considered U.S. v. AT&T to be, as one of the trial team lawyers put it later, “the one good thing the Antitrust division had done in the last thirty years.” The reason Baxter liked the case had nothing to do with its factual merits, or with the history of John deButts, MCI, and telephone industry competition. Rather, Baxter was enamored of the government’s relief theory in the case—which sought complete separation of the regulated local operating companies from relatively unregulated Western, Bell Labs, the Long Lines—because it was a flawless example of the free-market economic model Baxter believed in. Baxter argued that no one company should be able to integrate regulated and unregulated divisions of its business, because then it could use the “safe” profits from its regulated side to subsidize the prices of its unregulated products. Such “cross subsidies,” Baxter wrote, skewed the otherwise pristine mechanisms of a free-market economy. Of course, the role of subsidies in the telephone industry was so complex as to be inscrutable, and in some cases the subsidies were designed to achieve social goals such as low-cost local phone service. But Baxter believed that unfettered competition was the only efficient way to achieve such social ends.

  In person that afternoon, Baxter seemed to some of the AT&T trial team lawyers to be much like his writings: brilliant but academic, stridently ideological, arrogant, dispassionate. He was a severe-looking man in his early fifties, with coal-black slicked-down hair, cold, dark eyes, sunken cheeks, and a sallow complexion. He chain smoked unfiltered cigarettes, and his manner of speech was laconic and affected. Even in casual conversation, he seemed to be constantly on guard, distant, though he never hesitated to speak his mind bluntly if economics or legal theory was being discussed. Opinions about Baxter among the trial team lawyers varied, but to some he seemed like a mean-spirited Victorian schoolmaster—cold, empirical, utilitarian. Baxter was always talking about the importance of “data.” He was divorced, but he had come to Washington with a Stanford University statistician with whom he lived. Once asked why he did not marry the woman, Baxter said because to do so would raise his tax bill. Some of the Justice lawyers thought Baxter’s answer summed him up very nicely. Others, though, took note of Baxter’s acidly dry sense of humor and the sincere enthusiasm he displayed when talking about skiing, tennis, or tournament bridge, and they chalked his impassive qualities up to the eccentricities of a sheltered university professor.

  Whether or not they gave Baxter’s personality the benefit of the doubt, the trial team lawyers were uniformly skeptical about his practical qualifications for his job as Antitrust chief. Historically, nearly all the political appointees who ran the division had at least some real-world experience as litigators: they knew how to try a case, how to assemble and prepare witnesses, how to evaluate judges or an opponent’s litigation strategy. Sandy Litvack, for example, was a lawyer who knew little about the intricacies of economic theory but who could “prep” a cross examination as well as any trial lawyer in the division. “Fundamentally, I’m a litigator,” Litvack said frequently. The AT&T trial team and its leader, Gerry Connell, were not looking to Baxter for hands-on assistance as the trial progressed, but they were concerned that without any practical understanding of how a trial was conducted, Baxter might hinder their courtroom battle against George Saunders.

  As the meeting got under way that Friday, those fears were quickly borne out. “I think you understand what I think about this case,” Baxter said coolly. He then reiterated his view that it was economically harmful for AT&T to own Long Lines, Western Electric, and all the operating companies. But while summarizing his opinions, Baxter never once referred to any of the specific facts in the case—the controversies over PCAs, FX lines, Execunet, and so on—as evidence that supported his theory. Instead, it seemed to some of the trial lawyers that Baxter believed that he could simply sit down with AT&T and explain to them the theory of why it was harmful for them to own the operating companies and they would naturally agree to divest them.

  “There’s a problem with settling the case once it goes to trial. There’s a question about estoppel,” one of the staff lawyers said, referring to Howard Trienens’ worry that once evidence was taken, private litigants could piggyback on U.S. v. AT&T if it was settled.

  Deadly serious, Baxter replied, “Well, maybe you could put on your bad evidence first.”

  The trial team lawyers stifled laughter. Afterwards, Baxter’s suggestion became a basis for them to refer to the new Antitrust chief as a “space cadet.” Sometimes, when a similarly off-the-wall Baxter remark was reported to the trial staff, one of them would cup his hands over his mouth and squawk, “Earth to Baxter. Earth to Baxter. Come in.”

  “Trial’s starting pretty soon, right?” Baxter asked. There was an edge to that question, as if Baxter was concerned that the career lawyers might be disappointed about the collapse of Crimson Sky. “Are you going to prove that there’s a monopoly here, an unregulated part of the business there, and that they’re cross-subsidizing each other?”

  “That’s right,” Gerry Connell answered. “That’s the case.” Or at least, that was the part of the case pertaining to divestiture relief—the only aspect of U.S. v. AT&T that Baxter seemed to care about.

  “That’s fine,” said Baxter. “Go ahead and do it. Let me know if you need anything.”

  When William Baxter’s nomination was announced by President Reagan, Howard Trienens and George Saunders had instructed AT&T’s legal staff to locate and copy the same law review articles, speeches, and interviews that had been assembled by the Justice trial team. For Trienens and Charlie Brown, the news that Baxter regarded the government’s case against AT&T as perhaps the Antitrust division’s only meritorious endeavor in the last several decades was especially devastating: on the heels of Crimson Sky’s unexplained collapse, it was the second major blow for the phone company in less than a week. In fact, based on statements made by Baxter, Trienens believed that it was the new Antitrust chief, not Sandy Litvack, who had unilaterally ended the Crimson Sky negotiations and ordered the government lawyers to prepare for trial on March 4. Trienens and Brown had both cautiously assumed that President Reagan would appoint an Antitrust chief who shared Regan’s apparent view that U.S. v. AT&T was a mistake. When questions about the case occasionally arose during the 1980 presidential campaign, Reagan had responded by telling a story about his days in Hollywood. He recalled that the price of a first-class stamp in the 1940s was just a few cents, while a long-distance phone call was fairly expensive. Since that time, Reagan said, the price of postage had risen almost tenfold, while the cost of long-distance calls had dropped dramatically. “And, of course,” the candidate said, emphasizing his theme that big government was the root of America’s problems, “the government is suing the phone company.” The line had garnered Rea
gan a few laughs on the stump, and it had heartened the executives at AT&T. Why, then, had Reagan appointed a man to run the Antitrust division who did not even consider the substantial divestiture offered by AT&T in Crimson Sky to be an adequate settlement? The answer, Trienens suspected, was that the Reagan transition team, which briefed the president about his major appointments, had never investigated Baxter’s opinions about the case. They had probably assumed that since Baxter took such a generally conservative view of antitrust enforcement, he therefore had no great sympathy for the government’s prosecution of the phone company.

  This miscalculation about Baxter was especially frustrating to Brown and Trienens because both of them knew, based on personal conversations before and after the campaign, that several of Reagan’s closest advisors—William Smith, counselor Edwin Meese, Commerce Secretary Malcolm Baldrige, Defense Secretary Caspar Weinberger, and others—believed unequivocally that the government’s case against the phone company was misguided and that it should be dismissed. Since Attorney General Smith was recused, however, Baxter was the top-ranking official at the Justice department in charge of U.S. v. AT&T. That meant that if the AT&T sympathizers in the Reagan inner circle were going to intervene in the case before liberal Judge Greene had a chance to rule on it at trial, they would have quickly to do an end run around Baxter and the Antitrust division.