The Deal of the Century

by Coll, Steve;

Anderson told the Antitrust division’s front office that his resignation would be effective at the end of January 1980. What he didn’t tell them was that in the interim, while they were searching for a new lawyer to run the AT&T case, Anderson was going to try to settle the lawsuit.

  Among the small team of lawyers working on the AT&T case, various motives were ascribed to Anderson’s secretive settlement attempt late in the fall of 1979. Some said that Anderson felt guilty that he was abandoning the case just as it was beginning to heat up again, and that the settlement initiative was therefore an attempt to atone for his sudden departure. Others described the effort as more of a selfish “swan song,” an attempt by Anderson to take credit himself for the outcome of the case before he left the department.

  Anderson himself claimed two different motives. First, he said the “taffy pull” over AT&T between the FCC, Congress, and Justice was probably not in the public interest. If there was a way to conclude the matter fairly, he was now in favor of doing so. Second, Anderson did not trust the Antitrust front office to prosecute the case vigorously after he left. The politically appointed Antitrust chief’s slot was vacant at the time because of John Shenefield’s promotion to associate attorney general. That meant the front office was run mainly by career lawyers, particularly an attorney named Don Flexner. Anderson and Flexner detested each other. Flexner was a leading advocate of the “Anderson is a loose cannon” school of thought within the division. He felt that Anderson had handled some aspects of the AT&T case in a sloppy manner, especially the question of relief. The telecommunications industry had changed dramatically since the lawsuit was filed in 1974, but Justice had never reconsidered its goals in the case. The original relief contentions seeking divestiture of Western and all the operating companies had been something of an internal compromise back in 1974, a way to reconcile two different teams of Justice investigators. With Judge Greene now pushing to take the case to trial, Flexner and others in the front office felt that it was time for a serious reevaluation of the case. What did Justice want from AT&T? Why? How would the arguments be presented in court? The front office felt that these were questions that Anderson, preoccupied with his expedient pretrial tactics, had grossly neglected. So Flexner had taken some lawyers from a different Antitrust section and had created a Relief Task Force, whose charge was to evaluate the case and make specific recommendations about what Justice should seek when the suit went to trial. The task force irked Anderson and his key lieutenants, especially since it had been created by Anderson’s enemy, Flexner. To make his feelings clear, Anderson hung a Goya print on his office wall. The painting depicted a firing squad with their rifles aimed at a group of prisoners. One of the prisoners was already lying on the ground in a pool of blood. Someone on Anderson’s team of lawyers taped a note to the painting that said, “Relief Task Force,” though the note did not indicate whether the task force was supposed to be the firing squad or its victims. Anderson’s private settlement proposal was a way to steal the task force’s thunder and to preempt a more visible role for Flexner in the case.

  The question for Anderson was, What should his offer to AT&T be? There was no doubt that without some divestiture by the phone company, no deal could succeed; an injunctive settlement would look like a sellout to both the Antitrust front office and the public. AT&T would have to sever a limb or two. So late in the fall, Anderson called Howard Trienens, who was by now working at 195 Broadway, waiting to succeed Mark Garlinghouse as Charlie Brown’s vice-president and general counsel.

  Anderson told Trienens that he was resigning for personal reasons and that before he left he thought the case should be settled. “The first question to you guys is, Are you prepared to accept divestiture of something? Because if you’re not, I’ve got to go out and find a job. I’ve got other things to do.”

  Trienens said that he would have to talk with AT&T’s chairman.

  Not surprisingly to Trienens, Brown told his general counsel-to-be that he was willing to explore any realistic settlement framework. He instructed Trienens to meet with Anderson. Neither Brown nor Trienens, of course, knew that Anderson was acting on his own. They both assumed that the Antitrust front office had approved, and maybe even had insisted upon, Anderson’s unexpected overture.

  Within a few weeks, Trienens flew to Washington and met with Anderson and some of his staff at the Justice department.

  Anderson’s key lieutenants were two young government lawyers named Alexander Pires and Peter Kenney. Pires had been hired personally by Anderson, and he was similar to his boss in many respects. The son of Portuguese immigrants, Pires had been a boxer in Boston before entering law school, and he took a pugilistic approach to his profession. He was a large, barrel-chested man with a square jaw and curly black hair. Like Anderson, his specialty was litigation tactics, and when he talked about the AT&T case, he sometimes used phrases like “bloody limbs” or “knockout punch.” Kenney contrasted sharply with the styles of Anderson and Pires. He actually had been hired by Phil Verveer just before his resignation, and he was more like Verveer than Anderson. Kenney was careful, detailed, and organized, and though he was no zealot about politics, he did have liberal views through which he filtered and measured the AT&T case. His thoroughness acted as a kind of counterweight to the urgent expediency of Anderson and Pires. Kenney was the one who had a firm grasp of the case’s technical, economic, and legal details; it would be very difficult for Anderson to negotiate a deal without him. But neither Kenney nor Pires was entirely comfortable with Anderson’s decision to fly solo on a settlement proposal to AT&T. The two lawyers were both going to be around after Anderson left, and they wanted to continue the case. Pires hoped to take over Anderson’s job. Neither of them felt that Anderson, under the circumstances, was likely to get much divestiture from AT&T, and they knew that even if he did, there would be hell to pay when the front office found out what Anderson had done.

  Howard Trienens knew none of this when he arrived at Ken Anderson’s office that winter to discuss a settlement. If he had, he might very well have turned around and flown back to New York. But since Trienens believed that Anderson represented a united front at the Justice department, he took the negotiations seriously.

  Anderson began by presenting Trienens with a document, undated and typed on plain white paper, that was referred to as “the menu.” It was a list of ideas about how AT&T and the government might settle the antitrust case in the public interest. The menu was the brainchild of a lawyer named Ken Robinson, who had worked for a while in the Antitrust division under Anderson. Robinson had left Justice earlier that year to work for the Commerce Department’s National Telecommunications and Information Agency (NTIA), the executive branch office in charge of telecommunications policy. Robinson was not well liked by most of the Antitrust lawyers who worked on the AT&T case. He was seen as a kind of impractical academic, a man more interested in ideas than law. Moreover, he was regarded as a closet AT&T sympathizer, someone who displayed no sense of outrage about AT&T’s anticompetitive acts during the early 1970s. In fact, Robinson later made it plain that he thought the government’s suit against the phone company was a serious mistake. When he arrived at NTIA in 1979, Robinson quickly began to develop ideas about how the suit might be settled, and he sent them over to Anderson, who happened not to be one of the Antitrust lawyers who regarded Robinson with suspicion.

  When Anderson and Trienens looked over the menu together, they agreed that it contained some ideas that might form the basis of a realistic settlement. Ideally, any settlement would accomplish three things: it would enhance phone equipment competition, it would allow long distance competitors like MCI equal access with AT&T to the phone company’s local exchanges, and it would not seriously disrupt the high-quality, low-cost telephone service enjoyed by the American public. From Trienens’ point of view, that meant that while AT&T could accept some divestiture, a settlement would have to stop far short of the total breakup of Western Electric and all the basic operating
companies, which the government was seeking in its lawsuit. Anderson, on the other hand, needed a couple of severed limbs both for their symbolic political value and as a means to ensure that AT&T did not revert to anticompetitive practices in the future. In 1956, after all, Justice had accepted a deal that contained no divestiture, and less than twenty years later it had been forced to sue AT&T again over many of the same competition issues.

  There were three ideas on Ken Robinson’s menu that seemed to fit both Trienens’ and Anderson’s criteria for a settlement. They were known as “the crown jewels,” “the bellwether approach,” and “the United Fruit approach.” Combined, they would form the basis of a deal far more palatable to AT&T than the Draconian divestiture being sought in the lawsuit.

  Among AT&T’s twenty-two basic operating companies, there were four or five that were large and prominent enough to be considered “crown jewels”: Pacific Telephone, Illinois Bell, Southwestern Bell, New York Telephone, and perhaps Southern Bell. All of them had assets worth more than $5 billion, and annual revenues greater than $1 billion. For starters, the menu suggested that AT&T divest itself of one of these “jewels.” Among the four or five, there was one obvious candidate: Pacific Telephone. Considering its size, Pacific was easily the worst performing operating company in the Bell System, mainly because of tough local regulations in California. The company was burdened by a huge debt and its profit margins were low. Trienens told Anderson that if AT&T was to sacrifice a jewel, Pacific would be the one. Anderson agreed. Pacific’s $14.5 billion in assets made it the largest of all AT&T’s operating companies, and thus it would be a fine prize for the Justice department.

  The idea behind the crown jewel divestiture was called “the bellwether approach.” Bill McGowan had complained from the beginning that the Bell operating companies discriminated against MCI because they were owned by MCI’s main competitor, AT&T. McGowan said that no matter how many rules were written about equal access to local exchanges and no matter how many times AT&T claimed to have renounced its anticompetitive ways, MCI would still face a structural disadvantage in competition with AT&T because the phone company owned all the local exchanges. But rather than divesting all the operating companies and drastically disrupting AT&T’s centralized phone network, the bellwether approach suggested that one company—especially a crown jewel—might be enough. If a company like Pacific were made independent, it could be used to measure the performance and compliance of the other, AT&T-owned operating companies. If a dispute such as the one over FX lines arose, independent Pacific’s behavior would provide a legal test, a point of comparison for the other operating companies. And to make sure that Pacific itself did not try somehow to take advantage of its special bellwether status, the menu suggested that AT&T also divest itself of two relatively small operating companies in which it owned a partial interest: Southern New England Bell and Cincinnati Bell. Though they were not really as large as Pacific, they also could serve as bellwethers.

  In the opinion of both Trienens and Anderson, crown jewel divestiture and the bellwether approach, together with some negotiated rules about equal access to the local exchanges, would effectively solve the problems raised by long-distance competition. Bill McGowan might not think it was enough, but it was certainly more divestiture than a lot of lawyers—even some working on the case for Justice—believed would result from a trial of U.S. v. AT&T. To assess the reactions of McGowan and the other procompetition forces in Washington, Anderson drove over one night in the midst of his talks with Trienens to the home of Walter Hinchman, the former FCC Common Carrier Bureau chief, who was now a consultant to the Justice department as well as MCI and other new long-distance companies. Hinchman told Anderson that he thought the proposal was a good one.

  But there was still the question of Western Electric and phone equipment competition. On the menu, this problem was addressed by what Ken Robinson had termed “the United Fruit approach.” In the early 1970s, as part of an antitrust agreement with the U.S. government, United Fruit had agreed to take a large portion of its own assets and spin them off, instantly creating a new company large and experienced enough to compete with United Fruit in its own business. Robinson’s idea was that AT&T would do the same with Western Electric. Anderson and Trienens talked about the idea, and Trienens expressed serious interest. Losing one-third of Western would be a significant sacrifice for AT&T, but Trienens’ instinct was that it was an affordable price in exchange for having the government case out of the company’s way. It would certainly mean that the 1956 prohibitions on computer manufacturing would be lifted. When Trienens talked to Charlie Brown about it, Brown agreed.

  So there it was: a deal. Pacific, Cincinnati, Southern New England, and one-third of Western, plus some negotiations about equal access to the local exchanges. Enough severed limbs for Ken Anderson. The national telephone network essentially preserved for Charlie Brown. A more favorable competitive environment for Bill McGowan. The uncertainty in the telecommunications industry caused by the antitrust case over with. And the public—well, probably only Wall Street would even notice that anything had happened.

  In January 1980, shortly before he left his job at the Justice department to enter private practice, Ken Anderson finally told the Antitrust division’s front office about his talks with Trienens. He told them that AT&T was seriously interested in the framework they had discussed.

  “No commitment has been made,” Anderson stressed. “All I want to do is give you an option.”

  To some of the key lawyers in the division’s front office, an “option” from Anderson was like a Christmas present from a known terrorist: they assumed it was dangerous, and they were not about to open it up and look inside. A new Antitrust chief, Sanford Litvack, had just been appointed by President Jimmy Carter. Litvack was a well-known antitrust litigator with the prestigious New York law firm of Donovan, Leisure, Newton & Irvine. Don Flexner, whose enmity to Anderson went way back, told Litvack when he arrived that Anderson was not to be trusted. Anderson, for his part, let it be known inside the division that Flexner was “scared shitless” by the proposal because Flexner was the sort of lawyer who had to have a hundred economists “paw over” any deal before Flexner would feel safe in approving it. Litvack arrived just as the back-and-forth sniping was becoming intense. He told everyone involved with the settlement proposal to “slow down.” Within weeks, Flexner had persuaded Litvack that the best way to proceed was to let his Relief Task Force finish its report about the department’s goals in U.S. v. AT&T. In the meantime, Litvack told Anderson’s team of lawyers he would not consider a deal with AT&T.

  Howard Trienens and Charlie Brown, meanwhile, could not figure out what had happened. Trienens thought that he was moving close to a settlement. When Anderson left, he told Trienens that the matter had been passed up to the front office and that Trienens should establish contact with them to continue the negotiations. But no one in the front office would return Trienens’ calls. In frustration, Trienens called Anderson at his new office to find out what was going on.

  “What do I have to do?” he asked. “You have no idea what I had to do to get to this point within the company. This is a big step forward, if not a giant leap, and nobody in the division is even returning my calls.”

  “The moment’s right,” Anderson said. “You’ve got some momentum. Why don’t you put this thing in a nice little package and take it up to Benjamin Civiletti, the attorney general? Goose ’em a little bit.”

  “I don’t want to go over the front office lawyers’ heads,” Trienens replied. “That could cause a lot of problems.”

  So Trienens continued to wait. In March, shortly after Litvack took over as Antitrust chief, he put in another call. This time Litvack picked up the phone.

  Trienens reminded him of the menu discussions AT&T had had with Anderson and said that he hoped to meet with Litvack to continue the negotiations.

  “I think it’s premature to discuss anything at this time,” Litvack sa
id abruptly. “I want a lot more than the menu.”

  And then Litvack hung up on the phone company.

  Chapter 14

  Crimson Sky

  Howard Trienens and Charlie Brown, from their vantage at AT&T’s corporate headquarters in Manhattan, never understood the internal turf wars, personality conflicts, and individual ambitions that caused the Justice lawyers in Washington to appear as uncompromising prosecutors one day and flexible negotiators the next. Even if they had understood, it is doubtful the knowledge would have done anything more than contribute to the mounting frustration and depression they felt about the phone company’s ever-deepening entanglement with the U.S. government. Between regulation by the FCC, attempts to pass legislation in Congress, and the ongoing Justice antitrust case, Washington seemed to Charlie Brown like “a three-ring circus.” Except neither Brown nor Trienens found amusement in the display. Justice’s on-again off-again attitude toward the menu settlement deal seemed to be just another confounding side show.

  So when Sandy Litvack called Howard Trienens in New York on Tuesday, December 16, 1980, offering once again to talk about a deal—it was now fully nine months since Litvack had unilaterally ended the menu negotiations—Trienens did not inquire about the reasons for Justice’s most recent turnabout. He simply told Brown that the negotiations were on again, and he made an appointment to see Litvack in Washington on Friday.

  Of course, Brown and Trienens could make an intelligent guess about why Litvack was suddenly willing to talk. Just as Ken Anderson had been when he initiated the menu discussions, Litvack was now a lame duck. In November, Ronald Reagan had been elected president over Jimmy Carter in a landslide. That meant Litvack would have to vacate his office when Reagan nominated his own Antitrust chief sometime after January. Trienens, Brown, and Litvack all knew that any Reagan nominee would likely be a conservative opponent of many of the Antitrust division’s policies and practices and that the nominee probably would not be sympathetic to the AT&T case. If Litvack settled the case before Reagan could nominate his successor, then Litvack could take credit for the deal and prevent a conservative from undermining, or even abandoning, the case.