The Deal of the Century

by Coll, Steve;

  At the same time, there were reasons why Brown and Trienens were even more anxious now to make a deal than they had been a year ago. Six months before Litvack’s call, on Friday, June 13—“Black Friday” as it was known by AT&T’s lawyers—a federal jury in Chicago had returned its verdict in MCI’s private antitrust suit against the phone company, the case that closely mirrored U.S. v. AT&T. Unimpressed with George Saunders’ impassioned arguments on AT&T’s behalf, the jury had found the phone company guilty and awarded MCI $1.8 billion in damages, the largest private antitrust award in American history. “Fully half of the Justice case is our case,” McGowan told reporters when the verdict came in. “We’ve provided the government with a blueprint on how to conduct a trial.” The MCI chairman could scarcely restrain his glee. And for good reason: just the yearly interest on the damage award, which would be withheld until all appeals were settled, amounted to $162 million, more than MCI’s entire 1979 revenues ($144 million).

  Howard Trienens was confident that there had been irregularities about the judge’s instructions on damages to the jury, and that those irregularities would cause the $1.8 billion to be thrown out on appeal. But in many ways, that was beside the point. The verdict, together with all the publicity about the size of the damage award, had dealt AT&T a severe psychological blow. The working-level lawyers at Justice who were preparing U.S. v. AT&T for trial gloated about the verdict to the phone company’s lawyers, and it was clear that the government, despite Ken Anderson’s unexpected resignation, was now highly enthusiastic about its case. Judge Greene was continuing to push the suit toward trial, and he had set early January 1981 as a firm starting date. Trienens was not afraid of a trial—George Saunders assured him that AT&T’s case was in better shape than the government’s—but one could hardly be encouraged by events in Chicago. For his part, Saunders was feverishly anxious to bring the case to court, and to vindicate himself with a victory. “Another billion-eight and they may throw me out on the street,” he joked to the AT&T trial team. So Trienens did not tell Saunders about the phone call from Litvack. It was better that the trial team continue to prepare as if there was no chance of settlement.

  Another reason that Brown and Trienens were ready to deal was that their congressional strategy for settling the company’s problems had also fallen apart the previous June. After two years of hands-on work by Brown, Trienens, and AT&T’s government relations office in Washington, a comprehensive rewrite of the 1934 Communications Act had finally cleared the House Communications Subcommittee with AT&T’s blessing. The bill would have ended the computer restrictions of the 1956 consent decree and would have solved the Western Electric problem by establishing a “fully separated subsidiary” company, still owned by AT&T, to sell phone equipment. But before the bill could be voted on and passed to the Senate, Peter Rodino, chairman of the House antitrust subcommittee, intercepted the legislation and killed it in his committee. Despite claims to the contrary by AT&T, Rodino said he was afraid that if the bill passed, the government’s antitrust suit would be stopped cold because many of the competition issues would be resolved.

  So even though AT&T’s top executives assumed that the election of Ronald Reagan augured well for their relationship with the government, Trienens was nonetheless seriously prepared to negotiate with Litvack when he flew to Washington on Friday, December 19. He also realized, however, that Litvack’s lame-duck status offered AT&T at least some advantage in the talks; since Litvack had made the first overture, he must be somewhat eager to strike a deal. Sitting on Litvack’s couch in the Antitrust chief’s spacious fifth-floor office in the main Justice building, Trienens opened the discussion by listing for Litvack all the reasons why AT&T shouldn’t be interested in negotiating with him.

  “The next guy’s going to be much more friendly,” Trienens said. “There’s no real reason why we should talk to you at all.… So you might be wondering why I’m here.”

  “Howard, the thought has crossed my mind,” Litvack said.

  “There is something that we’d be willing to talk about.” Trienens reminded Litvack of the menu framework that had been worked out with Anderson nearly a year before: divestiture of Pacific Telephone, Cincinnati Bell, and Southern New England Telephone; divestiture and spin-off of 40 percent of Western Electric; and presumably, some injunctive rules governing AT&T’s behavior to be negotiated with Justice.

  “We have put that on the table before, and we’d be willing to talk about it again,” Trienens said.

  “What does that mean?” asked Litvack.

  “I’m offering it now. What else do you need?”

  “A framework for equal interconnection with the other long-distance companies,” Litvack answered.

  This was the big question mark. Unlike Ken Anderson, Litvack had taken great pains to be sure that he consulted with as many division lawyers as security permitted about his proposal to AT&T. If a deal was struck, Litvack wanted to be certain that it wasn’t undermined by dissenting trial team lawyers who thought that they had been sold up-river by their politically appointed Antitrust chief. When Litvack discussed the menu terms with the Justice lawyers running the AT&T case—attorneys who, in some cases, had been poring over the details of telephone industry competition for half a decade—he heard loud and clear that “crown jewel,” “bellwether,” and “United Fruit” divestiture were not enough to make a settlement work. Also needed would be a set of strict, enforceable rules governing interconnection between AT&T and MCI. The division’s Relief Task Force, which had been appointed a year before at the time Ken Anderson first approached AT&T about a settlement, had concluded that Justice’s most important goal in the case should be to sever the structural conflict of interest faced by Bell’s operating companies, which in theory were supposed to treat AT&T and MCI equally but which in fact were owned and managed by 195 Broadway. If the lawsuit was successful, the goal would be achieved by forcing the divestiture of all the operating companies, as well as Western Electric. The trial team lawyers told Litvack that there might be a way, short of the total breakup of AT&T, to reach the same end through negotiation. If the rules were strict enough, and if compliance with them was independently verifiable, then divestiture of only Pacific, Cincinnati, Southern New England, and 40 percent of Western would be acceptable. For Trienens and Brown, the obvious benefit of such terms was that the integrity of the nation’s telephone network would be preserved. While the system of subsidies that kept the cost of local service low would inevitably be disrupted by competition with MCI and others, the quality of that service would not be seriously impaired.

  Litvack told Trienens that the interconnection agreement would be the key to the deal. The terms of divestiture would not be an issue, since both sides agreed to the divestiture discussed by Anderson and Trienens earlier in the year. For the settlement to work, Justice and AT&T would have to negotiate quickly a document that laid out the rules for equal interconnection.

  And time was of the essence for AT&T. The trial was scheduled to begin on January 15, less than four weeks away from Litvack and Trienens’ Friday meeting. Once the trial began, the value to AT&T of any settlement might be severely diminished. There was a section of the antitrust Clayton Act which held that once evidence was entered in a case like U.S. v. AT&T, it could be used on a prima facie basis by other companies suing AT&T for antitrust violations if the United States won its case or if the case was settled by consent decree. That meant that dozens of companies could piggyback on the government case without having to enter and prove their own evidence. The price to AT&T of such piggybacking, in the form of antitrust damage awards, would likely run to billions of dollars. There was some dispute among the AT&T and Justice lawyers about whether the rule applied in this particular case, but Trienens’ view was that there was no reason to take chances. Once the trial began, it would probably be best for AT&T to abandon settlement talks and try to win the case, thus preventing piggybacking by private litigants.

  Equally impor
tant was secrecy. If word leaked out that AT&T and Justice were close to a deal, all kinds of problems could ensue. Companies such as MCI and the phone equipment manufacturers, who by 1980 had banded together in a procompetition Washington lobby group, might fear that the settlement wouldn’t go far enough to protect their interests, and they could put pressure on Congress to intervene. Also, AT&T did not want its settlement discussions disclosed either to its employees or to Wall Street. Disclosure might dampen morale, hamper the company’s bond market offerings, or spark a run on AT&T stock. The secrecy problem was not an unusual one in the Antitrust division, where government lawsuits were frequently settled by consent decree, but the size and scope of the AT&T case made it especially important that leaks be prevented. As they concluded their Friday meeting, Litvack and Trienens agreed that they would restrict knowledge of the negotiations to as few lawyers as possible, and that they would hold the talks, at least at first, some place where they were not likely to be discovered. The Antitrust lawyers who would be working on the negotiations set up a protected file in the division’s computer system so that only a person who knew the proper password could review the consent decree as it was drafted and revised. Luin Fitch, the lawyer who set up the file, chose the passwords crimson sky. Fitch had just finished reading the popular historical novel Shogun, and in the book Crimson Sky was the code name for a general’s plan to take over the Japanese empire in the event of war. The name stuck, and for years afterward the Justice lawyers used it to refer to their December 1980 negotiations with AT&T.

  Litvack and Trienens scheduled the first meeting for Monday, December 22, in a private suite rented by AT&T at the Four Seasons Hotel on Pennsylvania Avenue, ten blocks from the White House. Several lawyers from each side were present, and they concentrated immediately on devising the rules for equal interconnection. One side would offer a draft, and the other would revise it and identify unacceptable passages. The teams worked separately over Christmas and met again at the Four Seasons on Saturday, Sunday, and the following Tuesday. Litvack and Trienens were not directly involved in the detailed discussions since each had appointed “point men” from his trial staff. By Wednesday, New Year’s Eve, the teams of lawyers had agreed on two things: they had devised a general framework acceptable to both sides, but they had also agreed that they needed more than two weeks—when the trial was due to start—to hammer out the specific language of the decree. When he talked to Litvack, Trienens would say, “Look, we can’t start trial. If we start trial, it’s all over.”

  On New Year’s Eve, Litvack was on vacation in Vermont. After talking with his “point men,” he called Trienens. “OK,” Litvack conceded. “We’ve got a concept. We’ll go in with you to see Greene and ask for some time.”

  It wasn’t until the next Monday, January 5, that everyone who mattered was able to get back to Washington. It had been a deadly holiday for the lawyers on both sides. Few of them had taken more than Christmas day off from work. Throughout the two weeks, the weather had been cold and overcast with periodic sleet and ice storms. When they gathered late Monday afternoon in Litvack’s office, the sky they saw through his southern windows was not crimson but a disheartening gray. The temperature outside was falling into the twenties.

  After a review of where the talks stood, Litvack picked up his phone and dialed Judge Greene’s chambers, only to find out that Greene had gone for the day.

  “Can we call him at home?” Litvack asked. No, and the clerk wouldn’t give out the judge’s number. (It happened that Greene was one of the few federal judges in the country whose home number was listed in the phone book, but Litvack naturally assumed it was unlisted.) So Litvack left a message, and the clerk promised to pass it on to Greene. A few minutes later, the call came back: Greene would meet them in his chambers at eight o’clock that night.

  After dinner, Litvack, Trienens, and some of the other lawyers piled into their cars and headed over to the courthouse seven blocks away. Greene’s chambers were on the second floor of the building. The chambers were a richly decorated, comfortable place. There was an exquisitely detailed, red Bokhara rug on the floor, and red leather chairs with brass studs were placed before the judge’s polished desk, which was modeled after one used by George Washington. On the wall nearby was a framed copy of the first draft, in Greene’s handwriting, of the 1964 Civil Rights Act.

  “I apologize for the phone call,” Litvack began.

  “I do have a reporter here,” Greene said, referring to the stenographer who had set up his machine on a nearby conference table. “There was some mention on the phone about confidentiality. I don’t know about confidentiality. As of the moment, so far as I am concerned, it is a matter of public record. Go ahead, Mr. Litvack.”

  “As I said, we do apologize, and I would not have bothered you, as you know, unless we thought it was extremely urgent. At the outset, I am concerned a bit about the nature of the record which we make. With your permission, at the end I may move to ask you to seal the record, if that seems appropriate to you at that time.”

  “These are my law clerks and my secretary,” Greene said, motioning. “So there is no outsider here. We do not have the Washington Post here.”

  Litvack continued. “The purpose of our asking to get together with you so promptly was because we have been having conversations between and among ourselves, sort of on and off—really more off than on—over a relatively long period of time, and more recently and more concertedly over the last week or eight days, with a view toward trying to determine whether or not we could reach any kind of agreement that might resolve the litigation.

  “Those conversations have sort of come to a head, and we are now in a position where I think both sides can report to you that we have what I will call an agreement on a concept and a framework for the settlement.… One, we want to tell you that we do have that kind of understanding. And two, as I am sure you can guess, we think under the circumstances both sides would like to request that the trial be put off for a sufficient time to enable us to try to put together for the court a decree.”

  “I should say,” Trienens chipped in, “that so far as the telephone company is concerned, strategically and as far as litigation, we are ready to go. We are ready to go to trial on the fifteenth. It is probably better for us to start now, if it has to be tried.

  “On the other hand, we have the government of the United States coming at us from at least three different directions: Mr. Litvack’s forces; the FCC, which is endeavoring to restructure this industry in fairly major ways; and the rest of the executive branch coming at us from quite a different direction. It has been very difficult for our client to determine how to plan for the future, with all of these things going on, and with fast-moving technology, and with this uncertainty for some period. An opportunity to deal with the United States government speaking with one voice, as this would be, is a thing we have to take very seriously.”

  But Greene wasn’t persuaded. After years of pushing and pushing to bring to the case to trial, to prove that the courts could manage complex antitrust litigation, he was not going to postpone the case because of a “framework” for a deal. “You obviously do not have a settlement today, and you are not going to have a settlement in two weeks,” he told Litvack. “With all due respect, somebody else is going to be in your position in two weeks or two months, or whenever.”

  “Surely,” Litvack admitted. The Reagan transition team was already at work.

  “And we do not know anything about any of that, do we?”

  “Yes and no. Yes, you are right. We do not have a settlement today and we are not going to have one in two weeks, in terms of a signed document to submit to anyone. But we do have some very key, specific principles that the two parties have agreed upon. It was not just a ‘It would be nice to resolve this matter’ kind of conversation.

  “And this is an institutional thing,” Litvack continued. “This is not me out on a frolic. I mean, I realize the controversy that this may ultima
tely cause. We are prepared to do it. And if I am there at the end to take the credit or the blame, then so be it. And if I am not, then someone else will deal with that.”

  “What you want me to do, in effect, is postpone everything in the hope that all of this is going to fall into place. Is that what it comes down to?” Greene asked.

  “Obviously, that is a way of putting it,” Litvack said.

  “Why is this all coming up now?” Greene asked impatiently. “Why didn’t it come up a year ago, or six months ago, or three months ago? Why is it coming up ten days before the trial?”

  “Well, I can’t answer you as to a year ago. I can answer you as to the limited time …”

  Greene cut Litvack off. “Why is it coming up today?”

  “Well, your honor, I …”

  “At eight-thirty on the 5th of January?”

  “I can’t give you an answer to that, except to say that the parties have talked on and off for some time. We find ourselves here.”

  “And you really don’t—I don’t know if you want to put this on the record or not—but you do not really know whether your successors in the Reagan administration are in agreement with this.”

  “Oh, no, I clearly don’t know that. I mean, I don’t even know who my successors are, let alone whether they are in agreement. But …”

  Again, Greene interrupted. “We are fifteen days from the new administration taking over. To be blunt about it, how can you talk about settling a case sixty to ninety days from now when that is about to happen?”

  “I guess the best answer I can give you is that this is a settlement proposal and a proposition which, again, is not a personal one to me. It is institutional. Now, can someone come in and replace me and repudiate the whole thing? The answer is yes. Of course they can. Is that likely to happen? And I feel a little awkward saying all of this … I have no reason to believe, if I may say this without getting political, that the next administration is going to be any tougher on antitrust than I am.”