The Deal of the Century

by Coll, Steve;

  “I do have somewhat the same perception,” said Connell self-effacingly. Connell and the government lawyers seated behind him were clearly enjoying Saunders’ predicament. Ever since the September 11 opinion, AT&T’s defense had become an increasingly hopeless affair, they thought, and this was the pinnacle of Saunders’ desperation—a moment to be savored. “I can’t figure out what Alexander Haig is going to contribute to this lawsuit, or Senator McGovern.”

  “I didn’t even see Senator McGovern,” Greene said, consulting the offensive list again.

  “In December,” Connell said helpfully. “I can’t understand why these people have to be called.”

  “I am telling you right now, Mr. Saunders,” Greene continued angrily, “there had better be some very good reasons for these, because whatever lobbying, whatever publicity campaigns are going to be made, they will have to be made in congresses or in other forums.

  “In this court, the issues are going to be tried according to the facts. And this court isn’t going to be impressed with big names. If these people are being brought in here simply to get publicity for the defendant’s case, it is not going to be a very favorable development as far as I am concerned.”

  “Well, Your Honor, I must express my disappointment that the court would suggest that that is my motivation,” said Saunders, attempting a recovery. “I am trying to try this case as best I know how. I am trying it as a lawsuit. Every witness who is on that schedule has a hard fact or opinion for which he has, I think, a suitable role in this case. I am trying to get across what I consider to be some very fundamental facts that, as I sense the proceedings in this case, have not been easy to get across.”

  That was a vast understatement. The AT&T trial lawyers had concluded that Greene might well be intractable about the case. It was impossible, however, to throw in the towel.

  “For example,” Saunders went on, “last summer we presented Your Honor with a document signed, adopted, and sent to the President of the United States by the secretary of defense, and you will notice I have a lot of witnesses on here from the department of Defense in an effort to prove the facts set forth in that document. Now, I believe those facts are true; they have been held as opinions by the people most knowledgeable in that part of the government for a long time, and I think the document has not been given the attention it deserves.

  “Now, with respect to the other people, take Senator McGovern, for example …”

  But Greene had taken enough. “I am not going to go into all of that right now,” he interrupted. “You are going to have to show good cause. For most of the more exotic people, who don’t know anything about telecommunications or the network, you will have to have some showing why they are necessary. Otherwise, I am not going to let them testify. I don’t care how high up they are or who they are.”

  “Now, all I can say is, I am trying to do my best, Judge,” Saunders said. “I am not trying to turn this case into a circus. I am trying as best I can to lay out all the facts that I think are relevant to this decision, because I fervently believe if this court sees all the facts, the answer to this case is easy.”

  Saunders meant what he said. He had never stopped believing in the righteousness of his defense, even after the September 11 opinion, and even as his client was initiating plans to surrender his cause. At the same time, his posturing about simply trying to “lay out all the facts” was somewhat disingenuous. The “parade of stars,” as it came to be known, was a calculated and indeed desperate ploy, though not of the sort Judge Greene assumed. It was not publicity Saunders was after, it was ideological credibility. As the defense presentation had worn on that fall, Saunders and his trial team had become increasingly despondent about the seemingly immutable suspicion Greene expressed about the motives and character of AT&T’s executives, past and present. In October, they had tried to combat the judge’s attitude with sheer numbers of witnesses: at one point, Saunders proposed to call the presidents of every Bell operating company to testify to their benign attitude toward phone equipment competition and MCI during the 1970s. The idea was, as one of the AT&T lawyers put it later, “If Judge Greene thinks these AT&T people are liars, he’s going to have to see and listen to all of them. We’ve got a million employees and he’s going to see all of them.” A tangential benefit of this strategy, which was called “Octoberfest” by the phone company trial team, was that it would build a record of pro-AT&T testimony that might be useful when Greene’s verdict was appealed.

  But Greene rebelled against this festival of witnesses. “I would think that these operating company presidents have better things to do than sit here and give this essentially repetitious testimony, day after day, and I have something better to do, too.” The judge was careful not to prevent the presidents’ testimony arbitrarily—such action could come back to haunt him on appeal, since the views of ranking AT&T executives were clearly relevant to the case. But the vehement “guidance” he offered on the matter caused Saunders to rethink his plans, and the vast majority of the presidents were never called.

  Bitten, the AT&T trial team retreated to its caucus suite at the Madison Hotel. “What can we do to convince this guy?” Saunders asked, referring to Greene. “What haven’t we tried?” It was then that Saunders seized on the “parade of stars” idea. The plan was, as one of the AT&T lawyers put it later, to tell Judge Greene, in effect, “Look, you dumb son of a bitch, this is not a liberal-conservative thing. Good, honest people who you respect share our opinion on this thing.” One Sunday morning, the senior trial team convened in Saunders’ suite to discuss what kinds of witnesses might be able to soften Greene’s harsh attitude toward the phone company.

  “If you could have anybody in the world come in and talk to Greene—anybody in the whole world—who would it be?” Saunders asked his partners.

  They made a list on a blackboard and tried, once again, to work up the judge’s psychological profile. George McGovern was an obvious candidate. Maybe a Kennedy. Benjamin Hooks, NAACP president and a former FCC commissioner, seemed a good choice. They tried to narrow the profile even further. What about someone who shared Greene’s most fundamental life experience, his escape from Nazi Germany? Someone suggested a man named Frederick Heig, a scientist from Austria who had escaped the Nazis. One of the trial team lawyers finally tracked him down, but it turned out that Heig was a little hard of hearing and was not terribly distraught about the potential breakup of the Bell System. Later, an AT&T executive named Saul Buchsbaum suggested for the list Arno Penzias, the Nobel Prize-winning Bell Labs scientist who had published the “big bang” theory most scientists believe was behind the creation of the universe. Saunders was excited by the idea. One of his partners called Penzias’ house in the New York area. Penzias’ wife explained that the celebrated scientist was in Germany, giving a speech honoring the fiftieth anniversary of a synagogue that survived the Nazi holocaust. “Perfect!” the AT&T lawyers exclaimed. They reached Penzias in Germany, and he agreed to fly straight to New York from Munich. An AT&T lawyer met him at the airport and flew him down to Washington in a corporate jet.

  Of all the stars paraded before Judge Greene that fall, Dr. Penzias was easily the most engaging, though whether he was at all effective was another question. Saunders conducted the examination himself, and Penzias spoke articulately and delightfully about the spirit of the Bell System, his breakthrough scientific work at Bell Labs, and the importance of preserving AT&T as it had existed for a century. Greene clearly was fascinated by his honored guest, and he even asked some entirely digressive questions about the big bang theory. Later, when Penzias addressed the merits of U.S. v. AT&T, Greene asked gently if it wouldn’t be possible to preserve the benefits of Bell Labs even if some or all of the operating companies were divested.

  “The kind of relationship we have, talking to people, the fact that we work for the same company, I think makes a big difference,” Penzias answered thoughtfully. “A Nobel Prizewinner has a lot of advantages. One of the dis
advantages is that almost everybody calls me ‘sir’; it is very hard to get through that kind of barrier. But as telephone people working for the same company, I have an easier time getting through it. People are willing to talk. Down in Mississippi, talking to somebody about the kinds of problems they have—poverty, not much money, a lot of rural problems—it helps that we work for the same place, we are interested in the same problems. There is really a connection.”

  Gerry Connell’s cross-examination strategy when Saunders’ star witnesses appeared was mainly to ignore or discount them. Often, he conducted no cross at all. When he did stand to ask a few, brief questions, it was to say, in effect, “You’re a nice, honest man, but you don’t really know anything about the phone industry, do you?”

  Penzias, for example, had said that Bell Labs without the operating companies would be like a “sinking ship,” because the luxury of long-term research it currently enjoyed would be replaced by short-term pressures for product development. So Connell simply asked him, “Do you understand what we are talking about is leaving Bell Labs, Western Electric, and AT&T Long Lines in one piece?”

  “Yes, sir,” Penzias said.

  “And that’s a sinking ship?”

  “Absolutely.”

  “All right, sir,” said Connell, quietly sardonic. “No further questions, Your Honor.”

  Saunders recognized that Connell’s taciturn questioning was very effective, but he hoped his celebrities would nonetheless have a subtle, transforming effect on Greene.

  “I came to the FCC as a so-called consumer activist,” Benjamin Hooks testified. “And I had the know-it-all opinion that all business was bad. I mean, there’s no question about where I stood on the telephone system. It had to be bad. And I came there determined to hit them pretty hard. But unfortunately I came in contact with facts that sort of changed my opinion about a lot of things.”

  See, Saunders was saying to Greene, here is a black man, a liberal, a man with whom you presumably share a certain instinct and ideology about the world. And he is telling you that it is OK to like the Bell System, to appreciate it as a monopoly that serves consumers well.

  It didn’t work, of course. Greene allowed many of the star witnesses to testify, but he grew increasingly impatient with them. And since the celebrities seemed to have no effect on the judge, their presence only spoke to the stark desperation of AT&T’s defense team. “We were sitting around with our feet up on the desk, smoking cigars,” one of the government lawyers described it later. “We were in the driver’s seat, and they were going crazy. We were sure we had won on liability. The only question was divestiture.”

  On that crucial issue, too, which was now driving the business strategy debate at 195 Broadway, Saunders hoped the celebrity witnesses would have some effect on Greene. Throughout the fall, the judge had repeatedly displayed sharp skepticism on the need to keep Western Electric and its companion research arm, Bell Labs, integrated with the Bell System. Even though the Justice lawyers had since 1974 shifted the emphasis of their relief contentions from divestiture of Western to divestiture of the operating companies—a shift that coincided with Bill Baxter’s passionate views about the case—Greene concentrated his courtroom questions and remarks about relief on Western. When AT&T witnesses talked about the benefits of the “vertical” integration of Western and the operating companies, Greene jumped into the testimony with active and skeptical cross-examination. It was clear to lawyers on both sides, as it had been to the “peer review” analysts hired by Howard Trienens, that the judge did not believe any great harm would ensue if some or all of Western was broken off. It seemed to the lawyers that Greene was less strident about operating company divestiture, which was the Justice department’s overriding goal in the case.

  The irony of this development was not lost on the lawyers from either camp. A year earlier, before trial began, the Justice attorneys preparing U. S. v. AT&T had been immensely skeptical about the relief side of their case, especially in the areas of phone equipment competition and procurement, where Western was vulnerable. The government lawyers had been reasonably confident that they could establish in court that John deButts’ PCA strategy was anticompetitive and had been conducted in bad faith. But unlike the MCI part of the case, which both sides regarded as the key to U.S. v. AT&T, proving liability on the equipment competition issues did not suggest, ipso facto, that divestiture or even injunctive relief was necessary. The FCC’s 1979 phone equipment registration program had rendered moot the issue of “harm to the network,” and perhaps even the entire equipment case. An effective and open system for equipment competition was now in place. Western Electric’s market share had diminished drastically. New equipment products, mainly Japanese but some American, were sprouting like mushrooms in a rain forest. By contrast, the allegations in the MCI part of the case were based on a situation that, despite MCI’s explosive growth after Execunet, had not really changed: competitive Long Lines and the monopolistic operating companies were still owned by the same corporation. If one believed that long-distance competition could succeed over time, and if one accepted MCI’s version of the history of telecommunications regulation in the early 1970s, then divestiture of the operating companies was a logical, if no less radical, idea.

  That just wasn’t true of the divestiture of Western. Even if the judge was convinced, as the government contended, that deButts’ PCA strategy had been nothing more than a cynical attempt to postpone equipment competition until AT&T was better prepared to meet it, Greene could not order Western’s divestiture as a means to punish the phone company for its behavior. Punitive divestiture was not allowed in a government antitrust suit. Structural relief could only be ordered if it addressed ongoing or future competitive problems, not those in the past. If a company had been harmed in the past by deButts’ PCA strategy, it had the right to sue AT&T for monetary damages. Many had, and some had won. But such awards had no direct relevance to the relief aspects of Justice’s phone equipment competition allegations.

  To compound the irony, Greene seemed willing to justify the divestiture of Western on the basis of the relatively ineffective “procurement” section of the government’s case, a section that the Justice lawyers had considered their weakest going into trial. Saunders and his trial team had assumed, too, that the procurement allegations would be relatively easy to defeat. The government contended that Bell’s operating companies deliberately and systematically ignored outside suppliers when they purchased phones and other equipment to lease to consumers, and that the operating companies had a “pro-Western bias or in-house bias” that inhibited competition. The trouble with the government’s evidence in this section was that it was almost entirely anecdotal. Even some of the government lawyers conceded that the stories they had to tell about procurement did not add up to much of a grand conspiracy.

  Nonetheless, Greene had detected and zeroed in on a contradiction in AT&T’s defense. Saunders argued that the operating companies made their procurement decisions solely on the basis of quality; there was no pro-Western bias. At the same time, Saunders contended that Western’s products were far superior to its competitors’, and he introduced evidence to prove the point. But logically, if Western’s products were superior because the Bell manufacturer better understood the workings of the phone system and the needs of the operating companies, as Saunders said, then the operating companies should have a pro-Western bias. It would have made far more sense for AT&T to argue, as one of the government lawyers put it later, “You’re damn right we have a pro-Western bias. That’s the only way we can get the job done.” The trouble was that during the 1970s, AT&T had repeatedly assured the FCC that its operating companies had no such prejudices; such assurances had been necessary to buy peace with the company’s federal regulators. When the AT&T lawyers talked with their government opponents outside the courtroom about their self-contradictory procurement defense, they only sighed, “We had to try the facts as we found them.”

  By Novemb
er, it was clear that the issue had become a major theme with Judge Greene. In his opinion on the motion to dismiss, he had written about how Western was like a “counselor” to the operating companies and that the “familial attitude” of Bell employees stifled competition by prejudicing procurement decisions. To testifying Bell executives and Saunders’ celebrity witnesses alike, he reiterated his skepticism about the capacity of Bell employees to treat outside suppliers fairly. And each time he did so, he added more credence to Howard Trienens’ and Charlie Brown’s growing fear that the ultimate price of U.S. v. AT&T would be divestiture of some or all of Western Electric and Bell Labs, the twin jewels of the high technology future AT&T’s chairman envisioned.

  Chapter 28

  Fence with a One-Way Hole

  The internal office line on Ed Block’s phone was ringing, and Block punched the button. It was his boss, Charlie Brown. “Come see me, please,” Brown said impassively.

  Block, whose Texas accent and natural candor had not been entirely diluted by three decades as a corporate public relations executive, was just a few steps down the hall from the chairman’s office. It was not unusual for Brown to summon his senior vice-president for public relations for consultations, and there was no reason to assume on this chill December day that the chairman’s call was anything but routine.

  Brown was behind his desk in the small and modest executive bay that he had retained as his office since the days before becoming leader of the world’s largest and richest corporation. To one side, a window opened on an unobstructed view of the Brooklyn Bridge. Across from Brown’s desk there was a rarely used conference table for six, now piled high with assorted memoranda, legal briefs, and other papers. Adjacent to the office was a small meeting room with a couch, three chairs, a television, and a video recorder. The chairman had his coat off, as usual when he was in his office. Though he sometimes seemed a stiff and exceedingly sober man, Brown relaxed somewhat in meetings with his trusted executives. He walked about his office while talking, perching occasionally on a window ledge or on the edge of his desk. But he did not prop his shoes on its polished surface or roll up the sleeves of his shirt.