by Coll, Steve;
Trienens, and especially Saunders, were itching to launch a counterattack against the government attorneys who had filed the antitrust suit, including Antitrust chief Tom Kauper, who years before had started his brief career at Sidley on the same day as George Saunders. Though they had not been involved in the discussions with Saxbe and Kauper—Dewey, Ballantine had handled those, before it lost control to Sidley & Austin—Saunders and Trienens knew well what had transpired. Saunders was infuriated. Many lawyers achieve a cool detachment about their clients’ problems, so as to offer the most objective advice possible, but that was not Saunders’ style. Like John deButts, Saunders believed passionately that AT&T was being victimized by greedy opportunists such as Bill McGowan, who used politics and the regulatory system to skim AT&T’s profits, and by overeager government attorneys such as Verveer, who Saunders believed was carrying out a personal, political vendetta against the phone company simply because it was so large.
Saunders also believed, as did Trienens, that the Justice department did not have a legitimate antitrust case. How could a company violate the antitrust laws, they asked, when its every move—its prices, the services it could offer, the profits it could earn—was regulated by the FCC and dozens of state utility commissions? The same federal government that, through the FCC, strictly controlled AT&T’s behavior was at the same time, through the Justice department, suing the company over the very acts it had sanctioned.
This argument—that all of the significant antitrust violations attributed to AT&T were really just attempts by the company to comply with confusing and conflicting FCC regulation—would become the heart of Saunders’ defense for AT&T. But in the meantime, there was a way to use that argument to cut off Verveer and his young government lawyers at the knees. Saunders could argue, legitimately, that if one agreed that AT&T was subject to “pervasive regulation” by the FCC, then a dispute such as the one with MCI belonged at the commission, not in court. This was not an antitrust case, Saunders argued, it was a regulatory dispute. The FCC, after all, created MCI in the first place, and the commission should be responsible for solving problems that arose from that act. The FCC was an expert agency: it knew the telecommunications industry inside and out and was thus better equipped than a federal judge to straighten out industry problems. Saunders would argue to the court that it had no jurisdiction over the government suit and that the matter belonged at the FCC.
Even if this strategy failed, Saunders and Trienens knew there was no harm in trying. If they spent years arguing the point only to lose in the end, so what? They would have bought valuable time for John deButts, who was still trying to rally public opinion against competition in the phone business. And if they managed to postpone discovery in the Justice case while the jurisdictional question was resolved, they would have effectively shut down Verveer’s Justice investigation, thus dashing McGowan’s hope that the government lawsuit would pressure AT&T to give MCI what it wanted.
Even George Saunders conceded afterwards that what happened on the morning of February 20, 1975, was not Phil Verveer’s fault.
Verveer was ill-prepared for the nine-thirty hearing before Judge Joseph C. Waddy, in the federal district court building in Washington, D.C., but that was mostly because no one was sure what was on the judge’s agenda. Waddy had been assigned the government case when it was filed in November, and he had not yet met with lawyers from either side. He was an able, if undistinguished, black judge who happened also in February 1975 to be dying of cancer. The morning hearing had ostensibly been called by Verveer and his Justice superiors, though once it began, no one seemed sure what it was supposed to accomplish. The government lawyers were in a hectic state over a bit of gamesmanship concocted by Saunders earlier in the month. Purely for tactical reasons, Saunders had filed a motion with Waddy asking that the federal government be required to preserve every document in its possession that might be relevant to the AT&T case—not just at the Justice department and the FCC, where there was obviously a lot of paper AT&T was interested in, but at almost every other federal agency as well. There was no way the government could comply with such an order—there was too much paper about telephones in too many places—but if the motion was granted and the Antitrust division failed to abide by it, the government could be held in contempt of court. It was the sort of ploy a lawyer like Saunders used to shake up his opposition, to put them on the defensive early in litigation.
And this time, the ploy worked.
“Our concern is whether or not we need instruct the rest of the federal government to retain the sorts of documents which their motion seeks to have preserved,” Verveer told Waddy agitatedly as the hearing began.
“Well,” Waddy asked, puzzled, “is that the rest of the federal government now or only those agencies that have been designated by AT&T? As I read it, the defendants have backed off from their broad concern and have now designated forty-four agencies that are involved.”
“I believe that’s correct,” Verveer conceded.
“That’s what it appears to me. If I’m wrong, correct me,” Waddy said, suggesting that he didn’t think Saunders’ request sounded all that unreasonable.
Saunders, sensing a kill, approached the courtroom lectern.
“Let me get your name again,” Waddy asked.
“Your Honor,” Saunders drawled, “my name is George Saunders.”
“Yes, Mr. Saunders.”
“The government’s position is quite simple. They want to continue to destroy on a daily basis any paper that is normally destroyed in the federal government. We say that ought to stop today. We think the law on this point is clear.”
“The government hasn’t filed a motion,” Waddy said. “It has merely asked to come in, and I understood it was representing both Justice and AT&T when it asked to come in today.”
“As I understand what the government asked to come in for today,” Saunders replied, posturing boldly, “it was to inform Your Honor that they have problems complying with the law, and they would like to have the permission of the court not to comply with the law.”
Saunders began to warm to his theme and continued. “What we are looking for in this case is not just the idle opinion of government employees who say that the Antitrust division made a mistake by filing this case. If that’s what we needed, we have it in the newspapers all over the country, all the time. What we’re looking for is hard evidence from government employees who recognize that what this case amounts to”—and here Saunders turned dramatically to point at Verveer and the group of young lawyers who had accompanied him to court—“is an adventure by a handful of lawyers in the Antitrust division who have decided that they would like to break apart the Bell System, and who now have what seems to me to be the unmitigated gall to walk into this court and say, ‘You’re not entitled to defend yourselves!’”
At that moment, with Saunders’ finger pointed at him, Tom Mauro, a self-described “populist” who had been hired to work with Phil Verveer, decided privately that this hearing was about to become a major disaster.
Waddy was openly hostile to Verveer after Saunders’ speech, peppering the young government attorney with accusatory questions, keeping him off balance, and preventing him from making any substantial points in response to Saunders.
And suddenly Saunders was on his feet again, this time thundering to Waddy that the case didn’t even belong in his court at all, that it belonged at the FCC. “AT&T is regulated by the FCC,” Saunders told him. “We are told what we must do. We are told what we cannot do. We are told who is permitted to compete in the communications industry. We are told the terms and conditions of that competition. We follow the orders of the FCC. If we don’t follow those orders, the FCC has ample power to slap our hands. Basically, we believe this is not a proper case for the antitrust laws.…”
Waddy was nodding his head; he was interested in Saunders’ argument. He was so interested, in fact, that he told Verveer that he wanted to postpone discovery—in effect
, shut down the case—until this jurisdictional question was resolved. Verveer was flabbergasted. Such a decision would play into AT&T’s hands splendidly.
“I don’t think it is necessary,” Verveer said.
“Nonetheless, discovery probably should be postponed until after the court rules,” Waddy answered.
“Your Honor, we’ll undertake to …”
“That will be the order,” Waddy snapped.
“All right, Your Honor.”
Three months after filing, the case had been stopped dead in its tracks by Saunders and AT&T. Waddy’s order meant, in effect, that neither side could develop any new evidence and that the case would be in a state of suspended animation until he decided whether it belonged in federal court or at the FCC.
That morning, neither Verveer nor Saunders could have predicted that, at least in part because of Judge Waddy’s terminal illness, it would take three years to resolve the jurisdictional question. Far from restructuring the telecommunications industry, as Phil Verveer hoped, U.S. v. AT&T would be nothing but an inactive embarrassment to the Justice department for thirty-six long months.
“On a scale of one to ten, you get an eleven,” an AT&T attorney told Saunders when the hearing was over.
The phone company’s glee would not last long, however. In just a matter of weeks, it would be forced to confront a monumental and permanent restructuring of the telephone industry that was not ordered by Judge Waddy, the Justice department, Congress, or the FCC, but devised by the phone company’s relentless opponent, Bill McGowan.
Chapter 8
McGowan’s Gambit
One day in early May 1975, less than three months after the government antitrust suit ground suddenly to a halt, Walter Hinchman was visited in his FCC office in northwest Washington, D.C., by an AT&T lobbyist.
A telecommunications engineer with strong procompetition views, Hinchman had succeeded Bernie Strassburg as chief of the FCC’s Common Carrier Bureau in the fall of 1973. He had perpetuated Strassburg’s policy of “regulation by competition,” and he had helped MCI consolidate its victories over AT&T at the commission, especially its controversial authorization to sell FX lines to business customers. Hinchman had little patience for AT&T’s argument that FX service represented a sneaky encroachment by MCI into the switched telephone network. The new Common Carrier chief was highly suspicious of AT&T. He was more hostile to the phone company than even Strassburg had been during his last months on the job.
Hinchman knew, however, that FX service represented a line the FCC could not permit MCI to cross. The commission had said repeatedly that it would never allow competitors like MCI to enter the regular long-distance business, for to do so would wreak havoc on the delicate system of public interest subsidies and regulation that had been established in the telephone industry since World War II. Hinchman believed that even though FX involved open access to local exchanges on one end of the line, the service should nonetheless be categorized as a “private line,” since it was tied to a single point on the other end—an airline reservations office or a company’s national customer service center, for example. For Hinchman, FX was as far as the definition of “private line” could be stretched.
The AT&T lobbyist knocked on Hinchman’s door around noon, without an appointment. “I want to show you this thing,” he said, holding up a card that had a series of codes written on it.
“What’s this?” Hinchman asked.
“I want to show you a new service that’s available from MCI. Come on down the hall.”
There was a Touch Tone phone near Hinchman’s office. The lobbyist gave Hinchman the card he was holding and said, “Here, punch in these digits.”
Hinchman obliged. He heard a pause, some connecting clicks, a ring, and then … the Chicago weather. Hinchman was starting to feel a little queasy. He had just dialed, apparently over MCI lines, from a random phone in Washington to a random phone in Chicago, a regular long-distance phone call. How could that happen? MCI was not authorized to provide switched long-distance service.
“What do you think you just did?” the lobbyist asked in a self-satisfied tone.
Hinchman became cautious; he knew that if this service was what it appeared to be, it meant serious trouble. MCI might even have violated the law. The Common Carrier chief did not want to start discussing the matter in a hallway with an AT&T lobbyist. Such a conversation could come back to haunt a government employee.
“You tell me,” Hinchman said, backing away. “I don’t know. Maybe it was a local call. I don’t want to speculate. I get the impression that this is not an AT&T service and that you’ve got a complaint. If you’ve got a problem, you know the procedures.”
“Don’t you think this is something the bureau should investigate?” the lobbyist asked.
“I don’t know what this is. File a complaint.”
Hinchman returned to his office and began to call frantically around the commission. He learned quickly that AT&T lobbyists had held similar private demonstrations for a number of FCC commissioners and that the commissioners were outraged. “My God! This is long distance!” one of them had shouted.
Next, Hinchman tried to talk with his staff at the Common Carrier Bureau, especially with those who were involved in supervising and approving MCI’s tariffs. No one was sure what had happened. The service in question was called “Execunet,” Hinchman discovered, and it had been filed with and approved by the bureau staff the previous fall. MCI had been selling Execunet since January. But how could this have happened? Hinchman wanted to know. How could the bureau staff have approved a service that they knew perfectly well MCI was prohibited from selling?
The answer, as it emerged over the next several months, was that Bill McGowan had tricked and betrayed his supporters at the FCC and in Congress.
In testimony before the Hart antitrust subcommittee, in filings with the FCC, in speeches before industry groups, and in dozens of private meetings with congressional and FCC staff during the early 1970s, McGowan had said clearly that MCI did not intend to enter the regular long distance market. That was AT&T’s territory, its natural monopoly. MCI’s reason for being, its authorized franchise, was not to duplicate AT&T’s switched telephone network but to offer “new and innovative services” in private lines and business communications. This assertion by McGowan—that he was not really a threat to AT&T because no matter how successful he was, the phone company would still reap billions each year from regular long distance—was a key reason why MCI enjoyed widespread support in Congress and at the FCC. If one accepted McGowan’s word that MCI would confine itself to private lines, then AT&T chairman John deButts’ apocalyptic warnings about the consequences of competition in the telephone industry sounded a little hysterical. What harm could tiny MCI do to AT&T? Regular long-distance revenues were many times greater than those from private lines. Surely a monopoly as large as AT&T could afford to compete in a few specialized areas without jeopardizing the high quality and low cost of consumer telephone service.
McGowan claimed later that he was telling the truth when he spoon-fed regulators and politicians that argument, that he really didn’t intend to enter the switched MTS (message toll service) long-distance market in the early 1970s. By the time the controversy over Execunet was resolved, there were plenty of telephone industry insiders—not all of them friends of AT&T—who were convinced that from the beginning MCI’s publicly professed plans had been little more than a profitable lie orchestrated by Bill McGowan.
Whether McGowan had always secretly been planning to slip into the regular long-distance market will likely never be known. During the late 1970s and early 1980s, the MCI chairman spent tens of millions of dollars and hundreds of courtroom hours defending his company’s conduct during MCI’s and the government’s antitrust suits against AT&T, and he always maintained that Execunet was a kind of happy accident, not a conspiracy, and that it had been properly authorized by the FCC even though the commission strongly believed otherwise
. Despite extensive discovery of MCI’s internal files by AT&T, McGowan’s position was never conclusively contradicted in court. The evidence suggests, however, that as far back as October 1973, in the aftermath of John deButts’ Seattle speech, and fully eighteen months before Walter Hinchman and the FCC commissioners learned what McGowan had wrought, the MCI chairman was planning his incursion into the switched long-distance network.
It was a risky strategy. McGowan’s gambit, if successful, would make MCI a billion-dollar, Fortune 500–sized company within five years; if it failed, MCI would likely land in bankruptcy court.
The key to the strategy was cash. In the fall of 1973, McGowan had urged an angry Bernie Strassburg to authorize MCI to sell FX lines because McGowan desperately needed a new source of revenue for his company. MCI was in default to its bankers, it was laying off employees, and its microwave construction project was stalled. McGowan had hoped then that FX revenues would alleviate MCI’s cash crunch. But the protracted legal fight over FX, and John deButts’ decision after a court ruling in March 1974 to disconnect in one weekend all of MCI’s FX customers, had squeezed the revenue flow.