The Deal of the Century

by Coll, Steve;

  “I hope this works,” were the first words Saunders said to Judge Greene when the trial reconvened after lunch. It happened that Saunders was referring to a wireless microphone that had been rigged for him by some engineers at Bell Labs so that Saunders could wander about the courtroom, as was his style, and still be heard on the court’s public address system. But if he had been talking about the personal and professional challenge ahead of him, the words would have been as true.

  The stylistic contrast between Connell and Saunders was vivid. While Connell had stood rigid and perspiring for two hours behind the wooden lectern, reading from his notebook, Saunders roamed freely, drawing energy from the rapt attention of his audience. While Connell spoke flatly and occasionally stuttered or paused to search for the right word, Saunders’ Alabama-accented voice rose and fell fluidly, its dramatic inflections reverberating with meaning. Connell’s argument had been little more than a factual list of the government’s charges against AT&T. Saunders, who spoke for six hours without notes, waxed eloquent and philosophical about the history and purposes of regulation, the background of telephone industry competition, the details of the FX and Execunet controversies at the FCC, the ambitions of Bill McGowan, and above all, the reasonableness of John deButts’ responses to the challenges his company faced in the early 1970s.

  Saunders began his argument by homing in quickly on Judge Greene’s close personal relationship with Bobby Kennedy. “As I sat in my hotel room this week trying to figure out a plan for this opening statement, I couldn’t help but recall being in this city twenty years ago during a pre-inauguration week. And in thinking about that, I was struck by the difference in the mood in this country today as compared to twenty years ago.

  “Twenty years ago this country faced a lot of serious problems. We had a crisis in civil rights, we had a problem in the Middle East, many other things. At that time, however, there was a feeling in the country that we were capable of dealing with our problems. When John Kennedy said in his inaugural speech that the torch of leadership had moved from one generation to another, I believed, and I think most Americans believed, that the new generation was capable of carrying that.

  “As we stand here today, this country has lost a great deal of its confidence. The economy of the country is in chaos. In 1960, we still believed that American businesses could compete effectively and vigorously with business in any other country in the world.… As I stand before this court today, I appear on behalf of the greatest business enterprise this world has ever produced. I say that matter-of-factly because it is a matter of fact … AT&T is one of the few remaining examples, as George Will recently put it, of ‘conspicuous quality’ left in the world.

  “Let there be no mistake: the government is here to destroy that enterprise. Why? You heard the government today describe their charges. On their face, as described, many of them are trivial. There is no substantial basis in law or fact for this case, and we will prove it in court. But I couldn’t help think, when I heard Mr. Connell talking, about the time I wrote a political platform for a political candidate, who can remain nameless. It wasn’t long, after we got through with the platform in that negotiation, when someone said, ‘That’s a fine platform.’ I said, and I meant it, ‘Yes, it touches on every subject that is important to the people of this state, and it avoids every issue.’

  “That’s what happened this morning. Mr. Connell went through the subjects, but he avoided the issues.…”

  And on Saunders went. Like most of his speeches, it seemed at times interminable. But also like most of his speeches, it was brilliantly crafted and eloquently delivered. When possible, he referred back to Connell’s specific remarks.

  “Mr. Connell says, quoting a sage, ‘Regulation means you never have to say you are sorry.’ In fact, regulation means that you always have to say you are sorry, because what we are dealing with in this case is a situation in which, starting with that decision in 1968 [Carterfone], the commission has evolved a set of rules that have changed on a year-to-year basis.

  “I don’t read Mr. Segal, but Voltaire in describing a trip across France once said, ‘In crossing France, laws change about as often as you change horses.’ And in crossing the decade from 1968 to 1978, regulations—which, to this company, that’s [sic] laws, that is what we have to follow—changed more often than we were able to find horses, or elephants, and we were constantly being told by the regulators not only that they were going to change the rules but that we should have known it to start with.”

  The heart of Saunders’ opening argument concerned the controversies over MCI’s FX lines, and to a lesser extent Execunet, at the FCC. In the end, both sides would accept the view that U.S. v. AT&T was, as Saunders put it later that afternoon, “the MCI case relitigated with some trimmings.” On paper, a significant part of the government’s case against AT&T dealt not with MCI but with the controversies over telephone equipment competition and John deButts’ PCA strategy. The terminal equipment side of the case was not trivial, but by 1981 it was largely irrelevant, both legally and economically. The goal of U.S. v. AT&T, the reason that the Justice department was willing to spend millions of dollars to bring it to trial, was relief—the breakup of the phone company. To justify such a drastic measure, the government had to prove that telephone industry competition was still being stifled by AT&T and that the only way to stop the phone company’s ongoing anticompetitive behavior was to break it apart. To that end, the terminal equipment case was generally useless because the problem had already been solved. After Charlie Brown’s blue team took over AT&T, they had agreed to the very equipment competition program against which John deButts had fought vigorously for nearly a decade. Beginning in 1979, a competitive equipment manufacturer had only to register his product with the FCC to ensure that it met certain technical standards. After that, he was free to sell it to consumers in whatever way he pleased. No protective coupling arrangement was required. No approval from AT&T was needed. And thus, by the time Gerry Connell and George Saunders presented their opening arguments to Judge Greene, equipment competition was flourishing. Forcing AT&T to divest itself of all its local operating companies would do little, if anything, to make it more prolific.

  Not so with the MCI part of the case—or, at least, that’s what Gerry Connell argued. Bill McGowan still complained frequently and articulately that it was the structural arrangement of AT&T—the fact that the local exchanges were owned by MCI’s competitor, Long Lines—that held back full long-distance competition among MCI, AT&T, Sprint, and others. Until the operating companies were divested, McGowan said, MCI and other competitors would never be treated equally. The FX controversy was important because it was the seminal example in U.S. v. AT&T of how the phone company’s ownership of both Long Lines and the local exchanges had caused it to block competition. It was also the easiest story for a judge or jury to understand. If one accepted McGowan’s version of the story—that FX was a private-line service and that AT&T deliberately refused to provide it to MCI because deButts objected to competition—then the government’s relief contentions began to make sense. But if one accepted George Saunders’ version of the story—that McGowan had cynically manipulated the FCC into authorizing FX lines, much as he had later done with Execunet—then U.S. v. AT&T was little more than an expensive farce, or, as Saunders liked to put it, “the biggest rip-off of the century.” Of course, a jury in Chicago had been presented with the two versions of the FX story and had decided that they liked Bill McGowan’s better, $1.8 billion better.

  “The core issue,” Saunders said that afternoon, “is, did the commission authorize MCI to provide foreign exchange and common control switching arrangements services, or did they not? That is the issue.”

  And if U.S. v. AT&T was to be decided in the courtroom, if Judge Greene was to make a decision about whether to break up the phone company based on Gerry Connell’s and George Saunders’ best arguments, the MCI story would be key. Saunders believed that this time he wo
uld persuade the court that the motives and actions of Bill McGowan and the FCC in the early 1970s were ambiguous, if not wholly dishonest, and that John deButts had tried his best to respond to them while remaining loyal to his own deep-seated notions about the phone company’s public trust. Perhaps Saunders would have better luck in front of a judge than a jury. Greene was an intelligent man, and he might better appreciate Saunders’ impressive oratory than a jury of nonlawyers. Greene, too, might better tolerate Saunders’ occasionally wild pomposities; as a judge, Greene was accustomed to immodest lawyers. Even on the afternoon of AT&T’s opening argument, Greene already seemed to like Saunders and to be impressed and engaged by him.

  But the real question that Thursday afternoon was whether any of them—Connell, Saunders, or Greene—would have the opportunity to put their mark on what Connell had called “history’s biggest case,” or whether the Crimson Sky settlement would relegate the entire matter to the obscure annals of American antitrust law.

  Chapter 16

  The Sky Falls

  At 5:45 P.M. on Thursday evening, after George Saunders had agreed to resume his opening argument on Friday and the hundreds of reporters and spectators had cleared the courtroom, Judge Greene summoned Gerry Connell, Peter Kenney, and Jim Denvir from the Justice department, and Howard Trienens’ assistants Robert McLean and Jim Kilpatric from AT&T, to the judge’s chambers next door to the courtroom. If Greene was going to agree to recess the trial before any evidence was taken, in order to give the two sides time to work out the details of the Crimson Sky settlement he would have to act swiftly. Saunders was long-winded, but by Monday at the latest the opening arguments would be concluded and Gerry Connell would call his first witness against AT&T.

  “The reason I asked to meet with you again,” Greene began, slumped behind his desk, “is, of course, I have been considering the request for postponement. And while it isn’t absolutely necessary, I thought it might be helpful if you could expand a little bit on how the agreement of yesterday differs from the one that was discussed on January 5. I don’t particularly want to know the substantive details, because I certainly don’t want you to say anything that would prejudice the case in any way if the settlement fell through and we would have to go to trial.”

  McLean reiterated what Trienens had told Greene the day before: The settlement was substantial, its major provisions were agreed upon by both sides, and, while the attitude of the Reagan administration was still an uncertainty, the deal had been approved by the working-level lawyers under Connell. The terms of the deal were, McLean said, “a professional recommendation” by the Justice lawyers.

  “I think that’s significant,” Greene said.

  “Just to amplify a little on the last point,” said Connell, “I haven’t consulted with every person on my staff, which is now very large. I have conferred with every person that either I or Peter Kenney or Jim Denvir thought ought to be consulted because of their knowledge of the issues and their responsibilities on the case. Those people support the proposal we have. Again, I am willing, if Your Honor wanted, to disclose in more detail what we have, but I won’t if you don’t want it.”

  “I am not sure it wouldn’t be perfectly appropriate, but you know lawyers are always cautious, so I don’t think it is necessary,” Greene said. “I obviously wouldn’t have asked you to come in unless I had some feeling that perhaps I should go along with this. I haven’t decided yet, but obviously we don’t have a great deal of time. In any event, whatever I do I will certainly let Mr. Saunders finish his opening statement.”

  “That should give us several days,” Jim Denvir cracked.

  “Yes,” Greene said. “Sometime tomorrow I will let you know.”

  The next day, Greene issued an order recessing the trial until March 4, some six weeks away, so that AT&T and Justice could put the finishing touches on the Crimson Sky deal. Finally, everyone was on board. Greene was impressed enough by the seriousness of the negotiations and the full participation of staff-level Justice lawyers to suspend his obsession with speedy progress in the case. Brown and Trienens were willing to sacrifice a piece of Western and several operating companies to avoid a costly trial and to preserve the integrity of the nation’s phone system. Litvack and the Antitrust front office hoped to prevent their Reagan administration successors from abandoning altogether Justice’s prosecution of AT&T. And the division’s leading staff lawyers on the case, Connell, Kenney, and Denvir, who all seriously doubted that Greene would ever successfully order the breakup of a company as large and powerful as AT&T, figured that the Crimson Sky terms represented a substantial victory for Justice; tens of billions of dollars in assets would be divested by AT&T. All in all, on Friday, January 16, Crimson Sky looked like a foolproof way to end the decade-long controversy over telephone competition. Of the major players, only George Saunders, who was convinced that he could vindicate himself and his client in court, was unhappy about the deal. And Saunders was not in a position to share his feelings with anyone but his closest confidants on the AT&T defense team.

  Since the fact that settlement talks were taking place was now widely known, the negotiations between Justice and AT&T moved from the clandestine quarters at the Four Seasons Hotel to an unused office at the U.S. District Courthouse. Robert McLean, Jim Kilpatric, Luin Fitch, and Jim Denvir did the bulk of the day-to-day work at the courthouse. Trienens and Litvack talked only rarely; both were waiting to review whatever document their staffs produced. Despite plummeting morale caused by the apparent imminence of a settlement, Connell and Saunders spent most of their time urging their respective trial staffs to prepare for resumption of the case on March 4, if the negotiations broke down.

  By Thursday, January 22, less than a week after Greene’s recess order, Justice had drafted for discussion a complete, nineteen-page consent decree. In it, the divestiture of the three operating companies was covered in a single sentence: “Defendants are ordered and directed to dispose of all stock or other equity interest in Pacific Telephone and Telegraph Company, Southern New England Telephone Company, and Cincinnati Bell Telephone Company on or before one year from the date of entry of this Final Judgment.” The provisions about the Western Electric spin-off were more complex, but they were essentially unchanged from what Trienens had personally offered to Litvack more than a month before. “Defendants are ordered to transfer to the new company assets, including cash, lines of credit, sufficient manufacturing capacity and personnel to manufacture, install, and service … equipment,” the document said. The bulk of the document concerned the detailed terms of an interconnection agreement: how companies like MCI would be assured equal access to the local phone network. The draft concluded with a section labeled “Z: Statement of the Public Interest.” The entire section read, “Entry of this Final Judgment is in the public interest.”

  To say that the deal was in the public interest was one thing, but to claim that it was in the political interest of the incoming Reagan administration was another, and by the end of January, the problem of whether Reagan would approve Crimson Sky was becoming especially sticky. One difficulty was that the two men Reagan had named to head his Justice department were legally prohibited from considering the matter. Los Angeles attorney William French Smith, long a close friend of Reagan’s, had been nominated to be attorney general, but Smith had for years been on the board of directors of Pacific Telephone and thus was forced to recuse himself from any role in the AT&T case. Privately, Smith’s friends and colleagues made it clear that the new attorney general thought that the case was a mistake and probably should be dismissed outright, but they also made it clear that Smith would go to great lengths to avoid even the appearance of involvement in the matter. Reagan’s designated number-two man at Justice, Deputy Attorney General Edward Schmults, a conservative Wall Street attorney, was also recused because of dealings that his law firm had with AT&T. Since, in late January, Reagan had not yet named an Antitrust chief, there was not a single political appointee at Justi
ce who was in a position to review Democrat Sandy Litvack’s deal. If Litvack went ahead and approved the settlement anyway before leaving the department, he would be taking the risk that his decision might later be overturned.

  Meanwhile, the teams of staff lawyers continued to refine the proposed “final judgment” of U.S. v. AT&T. Early in February, a revised draft of the document was finally sent to the Antitrust front office for Litvack’s review. In just a couple of weeks, Litvack would be leaving Justice to return to his private practice at Donovan, Leisure in New York. Despite the lack of guidance from the new Republican administration, Litvack had no choice but to make his decision about the deal immediately. If the trial was to continue, if Gerry Connell was to begin presenting the government’s case on March 4, the trial staff lawyers needed to redouble their preparatory work; Litvack knew that morale on the staff had slipped because of the impending settlement, and that Justice’s case was not in proper shape. All along, Litvack’s concern about the Crimson Sky terms had focused on the negotiations over equal interconnection for MCI and other long-distance companies. He had readily accepted AT&T’s terms for divestiture, but he had also withheld judgment on the final package until the two sides had agreed on equal access rules. After all, the division’s own Relief Task Force, headed by Jim Denvir, had concluded that the most important goal of the case was divestiture of all the operating companies, not just Western, because the advent of long-distance competition by MCI and others meant that Long Lines should ideally be separated from the local exchange monopolies. The equal access rules were a kind of injunctive substitute for such a radical breakup for the entire phone company. If they worked, they might achieve the goal of equal competition without forcing the subsidized operating companies to make it financially on their own.