The Deal of the Century

by Coll, Steve;

  No one on either side of the courtroom doubted that this was a deliberate strategy on Greene’s part. No matter what Greene was thinking about the merits of the case, no matter if he was prepared to order the breakup of the phone company or not, there was no question that he was deeply disturbed by even the specter of outside political interference in U. S. v AT&T. That the interference was coming from a Republican administration philosophically at odds with the judge was far from irrelevant. But the more important point was that Greene himself had been, for four years, displaying the case as an example of how federal courts could manage complex antitrust litigation. If the case was scuttled by politicians, the lesson would be lost. As long as it was in his courtroom, Greene wanted to decide the case himself, on the merits, “under the existing antitrust laws.” He was not going to give it up without a fight.

  For George Saunders and the AT&T trial team, Greene’s outburst that Thursday was not only embarrassing, it was profoundly discouraging. Despite the research they had done into Greene’s background, which suggested that the phone company faced an uphill fight in the judge’s courtroom, the AT&T lawyers had convinced themselves that they were winning, that Saunders’ impressive oratory and enterprising cross-examination had brought Judge Greene at least back to the middle, if not all the way over to AT&T’s side. In the midst of an exhausting, full-throttle trial like U.S. v. AT&T, such self-confidence, even if it was deluded, was sustaining to lawyers working eighteen hours a day, seven days a week. And while Greene’s speech that morning was far from a verdict, it was nonetheless deflating and demoralizing since it raised serious questions about whether the judge’s mind was, to some degree, already made up. That was a thought that no litigator six or eight months from the completion of trial could afford to contemplate.

  But the news only got worse for AT&T. The next Monday, in New York City, a federal jury returned its verdict in the private antitrust suit brought by Litton against the phone company. The Litton case was the largest of over two dozen private phone equipment suits filed against AT&T during the 1970s, almost all of which pertained to the protective coupling arrangements John deButts had required rival companies to buy when equipment competition was first unleashed. As it had done with the MCI case, Justice had piggybacked much of the phone equipment section of its own suit against AT&T on documents and depositions developed by Litton. After seven days of deliberations, the New York jury announced that it found AT&T guilty of anticompetitive practices, and it awarded Litton $276.6 million in damages. As much as Judge Greene’s speech on Thursday, the verdict served notice to Commerce, Defense, and White House officials that a dismissal decision would have to be rigorously explained and defended before Congress and the public. Now much of the Justice case against AT&T—MCI and Litton—had been tried before juries in private antitrust suits. The results were unambiguous: two wins and more than $2 billion in damage awards. Because the verdicts and awards pertained to past conduct and not to the future of the telephone industry, they had little bearing on the relief section of Justice’s case, where the government sought to break up the phone company in order to enhance future competition. But on the liability side, on the question of whether or not AT&T was guilty of violating the antitrust laws, George Saunders and his client were beginning to look extremely vulnerable.

  Just before 3:00 P.M. on Wednesday afternoon, two days after the Litton verdict was announced, Gerry Connell stood at the podium before Judge Greene and said, “With that, Your Honor, I am going to say that plaintiff rests.”

  Outside the windowless courthouse, forty-mile-an-hour winds were buffeting the city, and lightning and thunder were crashing from a black sky. It was indeed an ominous day for the department of Justice. It had taken seven years, millions of dollars, three lead attorneys, five Antitrust chiefs, and two judges—but the deed was done. A “respectable” antitrust case seeking the breakup of the largest corporation in the world had been presented in federal court. Judge Greene, for one, was so pleased he could hardly contain himself.

  “All right,” he told Connell. “I think the plaintiff is entitled to rest in more ways than one.

  “I should say that perhaps the four months here have been an exhausting time, particularly for the two lead counsel, Mr. Connell and Mr. Saunders, who have been here every minute of every day—and I don’t know what hours they have spent outside the courtroom and I really wouldn’t want to find out. Also, I am sure this has been an exhausting time for the staffs of the parties. But it was all done, and particularly so far as the government is concerned … I want you to know I appreciate the effort that has gone into it.”

  “Thank you, Your Honor,” Connell said. But the judge wasn’t finished.

  “Despite the considerable pressure of getting the evidence in on time, the fact is it was presented, and without indicating anything at all one way or the other about the merits, I think you did manage in four months to properly present your side of the case. So I appreciate that.”

  “I thank you for those remarks,” Connell said again.

  Now Saunders stood up. “I would simply like to say that I think the graciousness and the fairness with which this court has handled this case and treated counsel for both sides is appreciated by every lawyer who has come into this court. I think we are all dedicated to making the judicial process work in a very difficult case, and I think the government is entitled to their congratulations for doing their side of it, and I hope we get ours.”

  Greene replied, “I have really appreciated the efforts both sides have made and the graciousness and the willingness to try to show that this process can work, which in a way is a goal of the court.”

  “I cannot improve on the comments of the court or of my Brother Saunders. I will not try to, Your Honor. Thank you very much,” Connell concluded.

  And with that, Judge Greene recessed U.S. v. AT&T until August 3, a month away, when AT&T would begin to present its defense, assuming the Reagan administration did not dismiss the case in the interim.

  The bubbly congratulations and good cheer in court that day reflected both the genuine affection that had developed between Connell, Saunders, and Greene, and also their mutual suspicion that the recess of the case might well be permanent. The two sides even held a picnic at Fort Hunt Park in Washington to celebrate the progress in court. The long, intense hours in trial had bonded the opposing lawyers in a way that their more cold-blooded superiors—Baxter, Trienens, and Charlie Brown—could never fully appreciate. The trial lawyers sometimes saw themselves as common soldiers, wedded by the culture of war even as they served the ancient enmities and prejudices of their generals. At the picnic, the Justice lawyers showed up in blue and white T-shirts that said, “Reach out, reach out and crush someone.” The AT&T lawyers wore yellow shirts that bore the acronym, “TWOM,” in reference to the name Judge Greene had seized on in court to describe George Saunders’ AT&T trial team, “The Well-Oiled Machine.” In a softball game, Saunders and Connell pitched, and the machine beat the government, 17–12. Judge Greene declined to umpire and instead played volleyball.

  Chapter 23

  Baxter’s Finesse

  On the Wednesday following the picnic, George Saunders and Bill Baxter flew separately to Aspen, Colorado, to attend the annual conference on antitrust law sponsored by National Economic Research Associates (NERA), a prominent economics consulting firm based in New York. Saunders and Baxter were scheduled to appear on separate panels at the conference, at which prestigious antitrust lawyers from around the country traditionally gathered for three days to read technical papers, discuss issues, and play a lot of golf and tennis. That evening, Saunders and Baxter checked into The Gant, a hotel-condominium complex in the shadow of the Rocky Mountains.

  Following one of the tedious panel sessions on Friday, Jules Joskow, an executive with NERA, was chatting with Baxter in one of The Gant’s conference rooms. Joskow had once done some consulting work for AT&T on the Justice case and he was familiar with the trial
now in recess in Washington.

  Casually, Joskow suggested, “Bill, how about you and me and George sitting down and talking about the economic theory of the case?”

  “That would be wonderful,” Baxter said.

  “I’m not calling a meeting,” Joskow emphasized. “I’m not calling a settlement conference. Let’s just sit down and talk—no promises, no suggestions.”

  Baxter agreed. A short time later, Joskow found Saunders and told him about the proposition. Saunders was gleeful. He had never spent time with Baxter before, face-to-face, and besides, there was nothing Saunders enjoyed more than a chance to talk and argue. Saunders and other AT&T lawyers had heard the Justice trial team refer to Baxter as a “space cadet,” but few of them doubted that the Antitrust chief was brilliant in his own, perhaps strange, way. Since Saunders believed he could convince Judge Greene, a certified Kennedy liberal, that U.S. v. AT&T was a fraud, there was no reason for him to doubt that he could also persuade the conservative Baxter.

  “Look, Bill,” Saunders said when he saw Baxter. “I don’t want to talk settlement. I want to convince you that this case has no merit.”

  “All right,” Baxter replied laconically.

  That afternoon, the three met in Joskow’s comfortable hotel room. They ordered a bottle of white wine, and the debate began.

  In a virtual summation of his opening argument to Judge Greene, Saunders went through each section of the case and argued that the Justice department’s charges were either trivial, irrelevant, explainable because of confusing and fast-changing regulations, or, in the case of the MCI story, part of a larger conspiracy to skim profits from the Bell System. Saunders was his ever-passionate self. He talked about Bell Labs and Western Electric and their role in major technological advances during the last century. What would be the consequences for the country if Greene ordered the divestiture of Western and Bell Labs? Saunders asked. Would Baxter consider that to be in the national interest?

  “I would oppose that,” Baxter said, as if that would make a difference. But in fact, he was adamant on the point. According to the Antitrust chief’s theoretical views about the telecommunications industry, it was important that AT&T’s Long Lines, Western, and Bell Labs subsidiaries be integrated. They represented the part of AT&T’s business that could be quickly deregulated. The local operating companies, however, would always have to be regulated like other utilities, Baxter said. Therefore, they had to be divested. All of them. There was simply no other way.

  But what about the case itself? “These are trumped up charges,” Saunders said. “How can you break up the entire phone company when so many of the charges in court have already been made irrelevant by changes in the marketplace?”

  “Oh, we have enough to get at you,” Baxter replied.

  The remark was appalling to both Joskow and Saunders. Baxter had demonstrated during the debate that he understood the broad outline of facts being contested before Judge Greene. But it was also clear that the details of the case bored him, that the only thing he was really concerned about was the economic theory behind divestiture of the operating companies. The lawsuit itself, the MCI story and the history of early 1970s phone industry competition, was little more than the means to an end for Baxter, and it was “enough.” The Justice lawsuit Baxter was in charge of, though, sought not only the breakup of the operating companies but also the divestiture of Western. If Baxter “would oppose that,” then was he willing to drop divestiture of Western from the suit? That, Baxter indicated, would have to be discussed with Gerry Connell and the trial staff. And Saunders knew that Connell would never go along: there was nothing for Connell to gain by dropping a major part of his case in the middle of trial. So when the bottle of wine was drained and Saunders’ breath was expended, the lawyers were back at square one. Baxter was immovable.

  That weekend, however, when he flew back to Washington from Colorado, it was becoming increasingly unclear whether Baxter could continue much longer to stonewall the combined forces of AT&T and the Reagan administration. It was one thing for a stubborn academic to be unrelenting about his principles. It was another for him to be just as inflexible about his political tactics. At every crucial turn thus far—the Crimson Sky deal, the spat with Weinberger, the Senate legislation he refused to support, Baldrige’s dismissal proposal—Baxter had declined to cede even an inch to his adversaries. When Weinberger’s call for dismissal hit the newspapers in April, for example, teams of lawyers from Justice and Defense had been organized to see if some compromise could be negotiated. A month later, Baxter broke the talks off, declaring that they had reached an impasse. Similarly, after the June 12 cabinet meeting, the White House had instructed Baldrige and Baxter to see if there was some way Justice could publicly support the telecommunications legislation, known as Senate Bill 898, that was so important to Bernie Wunder and the Commerce department. Again, Baxter had refused to budge. The bill, which was grudgingly supported by AT&T, proposed to solve the phone industry competition problem by forcing the phone company to establish separate subsidiaries for its unregulated businesses while preserving the integrity of the national network. Baxter told Commerce he could not support such a formula because it did not go far enough to prevent cross-subsidies between the “regulated monopoly” and “unregulated, competitive” sides of AT&T.

  When he arrived back at his Justice office on Monday, July 13, it was apparent to Baxter that he needed to devise some new approach to his stalemate with Commerce and the White House. On Wednesday, the Cabinet Council on Commerce and Trade, chaired by Malcolm Baldrige, was scheduled to meet again for the first time since June 12 to discuss the AT&T case. It was Baxter’s impression, derived mainly from his conversations with Jim Baker, that while the administration urgently wished to dispose of U.S. v. AT&T in some manner, the White House was not yet prepared to impose a solution that was unacceptable to its Antitrust chief. So far, however, Baxter had given the administration no indication that he was willing to meet them halfway. Baxter recognized that if he went to the Wednesday cabinet meeting with nothing new to offer, he would in effect be admitting to Jim Baker, Ed Meese, and Malcolm Baldrige that the debate over the case was hopelessly deadlocked. Baldrige could rightly claim that nothing had changed after more than a month of internal discussions, and he could argue that it was time now for decisive action by the President. Baxter saw, too, that his own position was weakened by his steadfast refusal to suggest changes or offer amendments that would make S.898 acceptable to him. The legislation, after all, was the most important ostensible reason behind Commerce’s dismissal proposal. Everyone in the administration except Baxter, it seemed, believed that in theory it was Congress, not the courts, that should make telecommunications policy.

  In bridge, a game at which Bill Baxter was exceptionally proficient, a player can “finesse” his opponents’ best cards by holding back the highest card in his own hand while challenging his adversaries with cards of lesser value. The idea is to play the finesse for as long as possible in the hope that by the time the opponent reveals his strong card, it will be too late for it to do any damage. Such was the strategy Baxter unveiled at the Wednesday morning cabinet council meeting in the Roosevelt Room of the White House.

  President Reagan was absent, having decided to spend his day in a series of meetings with White House staff, newly appointed ambassadors, and business leaders, and so the atmosphere in the cabinet room was far more relaxed than it had been a month earlier. There was discussion again about the merits and potential political consequences of dismissal, but Baxter preempted any heated debate by announcing that, for the first time, he would be willing to consider a nondivestiture solution to the problem of phone industry competition, and that if the proper amendments could be drafted, he would even be willing to support S.898 publicly. For the Commerce officials, so long at odds with Baxter and by now in a state of high agitation over their failure to accomplish either dismissal or unity on legislation, Baxter’s announcement was a ma
jor breakthrough. Discussion shifted quickly to the details of the amendments to S.898 that Baxter wanted to propose; they were complex, technical changes to the bill. One would provide tougher standards by which to measure whether companies like MCI were being granted equal access to AT&T’s local exchanges. A second outlined new regulations about how the basic operating companies could purchase phone and other equipment from outside suppliers. Together, they added a new layer of rules to S.898, which Baxter had previously criticized as too regulatory. But none of the Commerce officials minded, since even with these amendments, S.898 would still preserve the integrity of the national phone network. Intrigued, Bernie Wunder and Sherman Unger scheduled a meeting with Baxter in his Justice office at two-thirty that afternoon to begin work on the amendments immediately. The finesse play had begun.

  The danger, of course, was that Baxter might be quickly trumped by the White House. Now that the Antitrust chief had admitted that there was a nondivestiture solution to phone industry competition that he might be willing to accept, Baldrige, Weinberger, and Meese could claim that there was no longer any reason to continue prosecuting U.S. v. AT&T. Baxter’s willingness to compromise had gotten him past the cabinet council meeting, but it had bought him nothing more than time. Another cabinet meeting was scheduled for Tuesday, July 28. By then, the amendments to S.898, known somewhat facetiously as Baxter I and Baxter II, would be drafted. Senator Packwood, S.898’s main sponsor, had announced during the second week of July that his bill was “doomed” if the Justice case against AT&T was not abandoned. If Baxter supported the bill, with his amendments, wasn’t he now obligated to accept dismissal of U.S. v. AT&T?

  Baxter, however, had not really changed his mind about the case. His amendments were mainly a tactical ploy, not a shift in his principles. Even during the two weeks after the July 15 cabinet council meeting, when he worked with Commerce to draft the amendments, he always qualified his support for S.898 by saying he would back the bill “if it’s done right.” At the same time, Baxter and Rose continued to press their argument to Jim Baker and his supporters on the White House staff that the political consequences of dismissal would be catastrophic for President Reagan. Baxter knew that the status of the Justice case was still touch and go, but his strategy was to keep pushing on every front—distracting Commerce by compromising on the amendments, but resisting dismissal in the White House. On the latter front, Malcolm Baldrige continued to oppose Baxter and Rose. He insisted to Baker and the President that there would be no great outcry if the case was dropped, and that the only losers by such a decision would be the dozens of private antitrust lawyers who hoped to piggyback on the Justice case and make handsome livings at the expense of the phone company.