by Coll, Steve;
The irony was that scandal, far from paralyzing the department’s political appointees, was precisely what drove them to move the AT&T suit along during the final days of the Nixon administration.
The scandal in question, however, was not a contemporary one. True, the fallout over Watergate, and particularly the perjury charges against Nixon’s former attorney general, John Mitchell, had called into question the essential integrity of the Justice department. At Justice, there were career lawyers as well as political appointees who wanted to resurrect quickly the department’s reputation for independence and objective law enforcement, and a lawsuit filed against AT&T would certainly help that campaign. But the real reason that the front office took seriously young Phil Verveer’s recommendation that a suit be filed had to do with the legacy in the department of another scandal, now almost twenty years old, which had cast a still-lingering shadow over the Antitrust division’s relations with AT&T.
The scandal had never acquired a clever moniker like Watergate or Teapot Dome, and the truth was that it was little remembered outside the Antitrust division. But within the division, it had taken on an almost mythical status among the career lawyers, because to them it was a classic example of how the political power of large corporations interfered with Justice’s enforcement of the antitrust laws. Although Congress and the FCC had, for most of the century, informally blessed AT&T’s telephone monopoly, lawyers in the Antitrust division had never been comfortable with the exclusive telephone franchise of so large a corporation. In the early 1900s, before the FCC was even established, AT&T had built its basic network monopoly through ruthless business practices that rivaled the tactics of such notorious ninteenth-century monopolists as John D. Rockefeller. When a rival company built a new local telephone exchange, AT&T would refuse to interconnect the exchange with its own network, and it would pressure the upstart company until it sold out to AT&T on favorable terms. Justice had sued the phone company over its practices, and in 1919 a deal was struck between Theodore Vail, then AT&T’s chairman, and President Woodrow Wilson. The deal was known as the Kingsbury Commitment. AT&T agreed to end its predatory feeding on small telephone companies, and in exchange, the government agreed informally to anoint AT&T as the nation’s telephone monopoly—subject to federal regulation. For the next thirty years, the arrangement had worked without major interruption. The FCC was established during Franklin Roosevelt’s New Deal, and AT&T slowly transformed itself from an acquisitive monopolist into a steady, regulated utility.
In 1949, however, the Antitrust division had again been aroused by AT&T’s communications monopoly, this time because of the phone company’s manufacturing subsidiary, Western Electric. The division lawyers saw that because AT&T’s operating companies bought all their telephones from Western Electric, AT&T had a “captive monopoly” in the phone equipment business. Justice sued again, seeking to force the divestiture of Western.
The complex suit dragged on for years, and by 1956 it was still not ready for trial. In the interim, the political circumstances that had made the suit possible in the first place had changed—fiesty Democrat Harry Truman had been succeeded by Republican Dwight Eisenhower in the White House. The economy was in the midst of a long, robust expansion, and the lethargic Eisenhower administration was enjoying a cozy relationship with American business. Eisenhower’s attorney general, Herbert Brownell, Jr., announced soon after his swearing in that he would be examining all pending antitrust suits to see if they ought to be dismissed. AT&T siezed the opportunity and hired a friend of Brownell’s, businessman Bayard Pope, to persuade Brownell gently that the AT&T case should be thrown out. “A way ought to be found to get rid of the case,” Brown all agreed in a private meeting with AT&T at a West Virginia resort. “AT&T could readily find practices that it would agree to have enjoined with no real injury to its business.”
And that was precisely the deal that was struck: on January 12, 1956, a “consent decree” was filed in a New Jersey federal court settling the case. In exchange for being allowed to keep its giant Western subsidiary, AT&T agreed not to enter the computer business. At the time, it was a modest, even specious, concession; computers were in their infancy, and AT&T was not staking much of its future on them. Congress and the public were outraged. The House antitrust subcommittee held seventeen days of investigative hearings on the deal, and it used the forum to ridicule and embarrass the Antitrust division.
The wounds from that 1956 scandal never healed inside the Antitrust division. Many of the division’s lawyers believed that AT&T had abused its political power, circumvented the legal process, and cheated the American public. Throughout the 1960s, the division maintained files about AT&T’s activities, waiting for the right moment to go after Western Electric again.
The moment arrived, coincidentally, at the instant of Bill McGowan’s desperate financial crisis in the fall of 1973.
While McGowan and his lieutenants were educating Phil Verveer late in 1973 about the state of competition in the telephone industry, a secret Antitrust division investigation of AT&T—unknown even to Verveer—was simultaneously under way. The investigation had been authorized by Tom Kauper, the assistant attorney general appointed by President Nixon to head the Antitrust division. Kauper was a brilliant Republican academic who had come to Justice on leave from the University of Michigan. It was an irony—telling of the incestuous relationships inevitable among America’s elite lawyers—that prior to teaching at Michigan, Kauper had worked for the Chicago law firm of Sidley & Austin, whose largest client was AT&T. Howard Trienens, the Sidley managing partner who hired Kauper, would eventually spend more than seven years of his professional life, and earn more than a million dollars, fighting a government lawsuit filed under the Antitrust division reign of his former Sidley recruit.
Kauper and his Antitrust front office deputy, Keith Clearwaters, had been persuaded by some older career lawyers, who had been with the division during the 1956 scandal, that the FCC was incapable of regulating the phone equipment market and that it was time, once again, for Justice to consider suing AT&T over its Western subsidiary. The FCC had recently concluded a long investigation of Western by declaring, in effect, that it could not control Western’s pricing policies. The career lawyers had pulled out the division’s files on AT&T and had shown them to Clearwaters. They argued that advances in telecommunications technology had made the tainted 1956 deal even more of an embarrassment to Justice. Even AT&T was now unhappy with the deal, for computer technology was advancing with astonishing speed, and so was the interdependence between computers and communications. Because of the 1956 consent decree, AT&T had no choice but to stand on the sidelines while competitors such as IBM and Xerox raced into the future.
Clearwaters conducted the investigation for Antitrust chief Kauper, and what he found excited him. While Phil Verveer was following the Antitrust division’s normal investigative procedures—subpoenaing documents, interviewing potential witnesses, filling out detailed reports—Clearwaters was holding a series of clandestine meetings at the White House and with Senator Hart’s antitrust subcommittee staff. The White House’s Office of Telecommunications Policy turned over to Clearwaters voluminous files it had accumulated on AT&T. So did lawyers working for Hart; they even gave Clearwaters typed transcripts of interviews with AT&T competitors who said they were afraid to testify in public before the antitrust subcommittee. Clearwaters organized the material and eventually handed it over to Verveer, who told Kauper he was “not amused” that a concurrent investigation of AT&T had been conducted behind his back. Kauper successfully mediated the dispute between Verveer and Clearwaters, and the two inquiries were finally folded into one. The findings were included in the lawsuit drafted by Verveer.
The Clearwaters investigation was crucially important because it captured the imagination of the Antitrust division’s politically conservative front office. If Keith Clearwaters, during the winter and spring of 1974, had not daily described in urgent tones to Tom Kauper
the promising results of his surreptitious meetings, Kauper might never have taken seriously the recommendations of young Phil Verveer, who, Kauper knew, was a committed liberal. Once the investigations were folded together, though, everyone in the division was happy: Verveer, who was still nominally in charge; the political appointees, who felt they had done the most important work; and the older career lawyers, who sensed that the evil spirit of the 1956 AT&T scandal was about to be exorcised.
By spring of 1974, the unlikely alliances had taken firm hold, and a united Antitrust division was prepared to recommend to the attorney general that a lawsuit be filed against AT&T by the U.S. government.
Fortunately for AT&T, there was no attorney general.
Elliot Richardson had resigned a few months earlier over Nixon’s firing of Watergate Special Prosecutor Archibald Cox, and no one had been named to replace him. On August 9, 1974, President Nixon went on national television to announce his resignation. He was succeeded by Gerald Ford, a former congressman who had never been on a national ticket and who immediately promised to heal the nation through quiet, stable, and uncontroversial stewardship of the federal government.
Presumably Ford’s cure for a nation in the midst of its worst political crisis in a century would not include the filing of a lawsuit seeking to break apart the country’s biggest corporation. Shortly before he resigned, Nixon had finally appointed William Saxbe as attorney general. Saxbe was an aging former senator from Ohio and a man who, like the new president, enjoyed spending as much time as possible on the golf course. No one in the Antitrust division seriously expected that Saxbe would be interested in attacking AT&T. Phil Verveer, for one, assumed the matter of the lawsuit was over, and by the fall of 1974 he had turned his attention to other tasks that had piled up on his desk.
He was not the only one to be astounded by the brief but lively reign of U.S. Attorney General William Saxbe.
Chapter 6
“I Intend to Bring an Action”
There was something about William Saxbe that conjured the image of a wayward relative—an eccentric uncle who vanishes for long stretches and then reappears at a family reunion brandishing strange carvings for the children, who sits on the porch spinning apocryphal tales of boom and bust in African diamond country until, one morning, he disappears again. Perhaps it was Saxbe’s puckish blue eyes, so alive with energy and mischief, or the elfin ears attached to his round, balding head. Or maybe it was the wad of chewing tobacco forever stuffed in his cheek, or the way. Saxbe punctuated his words by launching foul streams of amber juice toward the old spitoons in his office and in the attorney general’s conference room. Then, too, there were the convivial stories he liked to tell about his hunting trips, his golf game, and his days as a political roisterer in the Ohio legislature. When lawyers in the Antitrust division talked about Saxbe—even those, like Phil Verveer, who disagreed with Saxbe’s Republican politics and felt that he did not work very hard at his cabinet-level job—they had to smile a little and admit, “He is a character.”
As for his predilections about enforcement of the nation’s antitrust laws, Saxbe was considered a mystery, even by the Republican appointees in the Antitrust division’s front office.
There was an important reason, apart from his natural playfulness, that Saxbe appeared to be detached from his job during the summer and fall of 1974, when the proposed lawsuit against AT&T came to his attention. Saxbe felt estranged from both the Nixon and Ford White Houses; before Nixon’s resignation, Alexander Haig, the president’s last chief of staff, had been Saxbe’s only friend in the executive branch. The reason had less to do with Saxbe than with disintegrating morale and worsening crisis within the administration, which by 1974 had the White House senior staff in a state of distraction. After Ford took over, Saxbe’s relationship with the White House deteriorated further because Saxbe tried to delay a series of domestic wiretaps ordered by Henry Kissinger’s State Department. The ploy angered Ford, who was forced eventually to sign a personal order overruling Saxbe. By November, three months into the Ford administration, Saxbe was working short hours and was talking infrequently with the White House staff.
Saxbe was well aware, however, that there was a positive side to his poor relations with the White House: freedom. Whereas most attorney generals were constrained by the policy objectives of their president, Saxbe knew no such bounds. Nixon had abandoned policy-making during his last days, and Ford was a mere figurehead in the first months of his term, unable to put his own political team in place yet. Thus Saxbe could pursue the single goal he had privately set for himself when he took office: to reestablish the Justice department’s integrity and independence. In sorting through the abuses of power uncovered during his renowned Watergate investigation, Senator Sam Ervin of North Carolina had suggested that perhaps the Justice department should be separated from White House control. It was an idea Saxbe opposed, but more important, it was a signal to him of the deep suspicion in Congress and among the public about Justice’s integrity.
Saxbe knew there was only one way he could reverse public opinion about the Justice department—through bold, decisive, and independent action. The proposed lawsuit that reached his desk in November 1974 would do the job very nicely.
On Wednesday, November 20, 1974, President Ford was in Tokyo, Japan, in the midst of a goodwill tour of several Far East countries. In the morning, he attended a judo match. Later in the day, the president went sightseeing in the former Japanese royal capital of Kyoto.
Eight thousand miles to the east, in Washington, D.C., the morning broke foggy and rainy. At nine-thirty, in Saxbe’s wood-paneled office on the fifth floor of the main Justice building at 10th and Pennsylvania, the attorney general met with several senior Antitrust division lawyers to discuss the AT&T case. Tom Kauper, the Antitrust chief, was at a White House economic policy meeting that morning, and he had sent Keith Clearwaters in his stead. Kauper had insisted that Clearwaters bring along Hugh Morrison, Phil Verveer’s supervisor, a veteran division career lawyer who had an affection for Irish whiskey and cigarettes. Clearwaters and Morrison were supposed to brief Saxbe about a presentation to be made at eleven that same morning by Mark Garlinghouse, AT&T’s general counsel. A few weeks earlier, Garlinghouse had been offered a personal meeting with Saxbe so that AT&T could attempt to dissuade the attorney general from filing the proposed antitrust suit.
No one in the Antitrust division was entirely sure why, but in recent weeks the proposed AT&T lawsuit had undergone an urgent revival. Earlier in the fall, AT&T had been invited by Tom Kauper to respond informally to the proposed suit. Garlinghouse and a flock of other AT&T lawyers had met with Antitrust division staffers and had attempted, using flip charts, graphs, and even a slide show, to persuade them that breaking up AT&T would not be in the public’s best interest.
“Are you so damn sure you can do this to the benefit of the consumer in this country?” Garlinghouse had asked during one meeting.
But such protestations had no effect on Clearwaters and Kauper. Clearwaters, who like Tom Kauper was a moderate Republican, felt that the public interest argument was valid only in relation to splitting off the local operating companies from 195 Broadway, not in relation to the divestiture of Western Electric. And Clearwaters didn’t care much about the operating companies part of the proposed lawsuit; that was Verveer’s investigation, the one that had been developed in cooperation with MCI. Clearwaters never believed that the Verveer investigation was worth filing a lawsuit over, but he did believe in his own inquiry into Western and the 1956 scandal. His attitude was, as he put it later, “Just give me my little piece. If Verveer wants more chunks off, OK.”
So although Garlinghouse didn’t know it, he was wasting his breath with talk about AT&T’s “unusual obligation” to manage the nation’s telephone network. The front office of the Antitrust division, where the power to recommend lawsuits lay, was more concerned with the divestiture of Western Electric. Complaints about the operating companies
had been included in the suit partly to keep Verveer and the division staffers from rebelling over Clearwaters’ secret investigation of Western.
After AT&T’s presentations to division staff, Clearwaters called Garlinghouse and told him, “We have made up our minds to recommend the suit to the attorney general. We are going to make that recommendation with the understanding that AT&T can meet with the AG before he makes up his mind and state its point of view. Also, we don’t have any specific time frame as to when we’re going to file the suit. You’ll have your chance to have an audience with Saxbe and to try to dissuade him.”
So now it was up to Clearwaters and Morrison to prepare Saxbe for what he would hear from Garlinghouse at eleven o’clock that morning. Saxbe sat in a high-backed leather chair facing the two Antitrust division lawyers.
Clearwaters suspected that the reason Kauper had insisted he bring Morrison to the briefing was that Kauper was afraid Clearwaters would not insist forcefully enough that Saxbe keep an open mind while listening to AT&T’s presentation. Kauper had repeatedly told Garlinghouse, John deButts’ chief legal adviser, that Saxbe had not yet made up his mind about the suit and that AT&T would have a fair chance to present its case to the attorney general. It would be a blemish on Kauper’s honor if Saxbe did not live up to that commitment, if he did not treat Garlinghouse evenhandedly. No one in the Antitrust front office, not even Kauper, was certain of Saxbe’s attitude about the case, but they had received the impression in recent weeks that he might be interested in filing it. And they knew Saxbe well enough to be sure that diplomacy was not one of the attorney general’s personal strengths.