The Deal of the Century

by Coll, Steve;

  On Biunno went. Unprompted, he talked about leases, and about the concept of local service subsidies, and about his career as a lawyer in private practice, and about the fact that there were independent telephone companies in New Jersey, and about “peak load demand” in the phone industry, and about how a small business’s phone system is put together, and about a photocomposition plant in Newark that he recently visited, and about how a small microwave dish can reduce business communications costs, and about a case that he tried in 1980, and about a few other things, too. Occasionally Biunno would pause and Carr would say, “Of course.…” But as soon as the lawyer opened his mouth, Biunno caught his breath and jumped back in again. After talking virtually nonstop for about half an hour, the judge finally asked “What do the defendants wish to add to what has been said?”

  Bob McLean, the Sidley & Austin lawyer who had accompanied Carr to Newark, didn’t have much to add.

  “I take it,” Biunno said, “the parties feel the day-to-day detail that Judge Greene has been exposed to will equip him to deal with the proposal with great facility, as against someone, no matter how familiar with the subject”—a veiled reference to the judge himself, whose windy ramble had seemed largely designed to establish his own expertise in telecommunications matters—“who has not been so exposed.”

  “That’s part of it, Your Honor,” Carr answered, stepping carefully around the judge’s ego. “Quite frankly, it’s just much simpler for us to deal with the District Court in the District of Columbia on matters involving day-to-day appearances.…”

  “Would you agree with the impression I have that the decision, the business decision of the parent company to turn loose the twenty-two operating companies, in effect eliminates, takes out of the picture, so to speak, the basic ground for controversy that underlay the antitrust case?”

  “That is very much our view,” said Carr.

  “That is our view, Your Honor, also,” added McLean.

  “And this is a business decision. This could have been done regardless of the antitrust suit, I suppose.”

  McLean tried to answer. “As a lawyer, Your Honor, I’ve always been trained to try to stay out of business decisions. I think Mr. Brown, the chairman of the board …”

  But Biunno didn’t want to hear it, and he cut in. “I say it could have been done as a business decision even if there were no antitrust suit.”

  “It certainly could have been done, yes,” McLean said, giving up.

  And with that, Biunno told the two lawyers that he would issue a decision on their request for transfer as soon as possible. The hearing was adjourned.

  Later that afternoon, the judge was scheduled to enter the hospital for a minor operation, and so before he left to prepare for the surgery, he issued his decision. Carr and McLean were dumbfounded. Biunno had agreed to their request and ordered the transfer of the 1956 consent decree to Judge Greene, but he had also approved the inter-intra settlement as being in the public interest—without any public comments or hearings. It was an open question as to whether Biunno’s decision was even legal, but, more important, it was a political disaster. It was bad enough that Judge Greene had not been informed about the reasons for the parties’ circuitous maneuverings. Now the judge was going to return to Washington and find that the very thing he had tried to prevent with his “lodged” strategy—settlement of the case without judicial review—had occurred in spite of his efforts. Carr had never imagined that Biunno would approve such a massive antitrust deal without any examination of its terms, its impact on the public, or its impact on competition in the telephone industry. Even after the deed was done, no one was able to suggest a satisfactory reason for Biunno’s decision.

  But since the judge was about to go under the knife, there was neither time nor opportunity to urge him to change his mind. Gerry Connell and George Saunders in Washington would have to straighten things out the next day, when Greene returned from his Caribbean holiday.

  The judge, looking tanned and fit when he arrived in his courtroom just after two on Tuesday afternoon, was livid, although he was also quite confused about just what had happened to his landmark case while he was out of the country.

  “We are here to find out what goes on, and why,” he said perfunctorily to Connell and Saunders. “And the parties are invited to tell me what goes on, and why.”

  Connell tried to explain what Justice was attempting to accomplish by its legal sleight of hand. It was perfectly willing to submit the inter-intra deal to the “functional equivalent” of Tunney Act public interest proceedings, but it did not believe that the Act technically applied. Connell also told Greene that none of them expected Biunno to approve the deal, that they had not asked him to do so.

  “It is certainly a peculiar procedural posture, is it not?” Greene asked.

  “I am not going to deny it is a little peculiar, Your Honor. It was not the way the road had been mapped out, and it just took a small turn.”

  “Did it occur to anybody that this was not the way to proceed? We have a suit that has been ongoing for eleven months here. It is being settled, and it is being settled in a place and proceeding that is twenty-five years old, and where the Tunney Act doesn’t apply, and where the public interest doesn’t need to be considered. Did anybody think about those things?”

  “I think everybody thought about them, Your Honor,” Connell answered. “The fact is that the 1956 decree has always been one of the very significant elements of ongoing dispute between the parties.… The parties felt there needed to be a single package.”

  “It also avoided the Tunney Act.”

  “It is not our desire to avoid the Tunney Act as such. Again, I would like to assure Your Honor that it is our intention to proceed and comply entirely with the spirit of the Tunney Act.”

  “There is something I am missing,” Greene said a minute later, “and it must be my fault, having been away, and I don’t understand these arguments. I take it everybody is eager to have the Tunney Act apply and give the public a chance to comment and have the court pass on the public interest and so on?”

  “Absolutely,” Saunders confirmed.

  “If everybody is so eager to do it, wouldn’t that have been the simple thing to do, to file the settlement in the court where the Tunney Act applies, namely this court?”

  “No,” Saunders answered, “because this is not a settlement of this case. In no sense is it a settlement of this case. If you pardon my use of tense, this case was dismissed last Friday. It doesn’t exist anymore.”

  “No, it is only dismissed when the court orders the dismissal filed, and the court has not done that.” Greene was heated.

  But Saunders came back even stronger. “I cannot mince words on this one. This court has no power to restrain the filing of the dismissal filed last Friday. This case is history, Your Honor.

  “Now, let me explain why this case is not a settlement, what has happened. I think I told Your Honor, and if you look at page 240 of the transcript of my opening statement you will see it, the biggest concern of the telephone company was the consent decree of 1956. We cannot live with that decree.… As I understand what happened, and my understanding is based on personal conversations with Mr. Brown as well as Mr. Trienens, the company came to the realization that if it was going to be permitted to exist as a free enterprise, this was the price—a considerable price, a price that wrenches the heart of the Bell System’s employees, and candidly, its lawyers. It is not what we sought. As a matter of fact, it is precisely what Mr. Connell sought in this court—precisely. But what is the choice? The choice is to keep the Bell System as an integrated enterprise with regulations that will strain it, or satisfy the national consensus, which says that in order for the Bell System to be free, it must be much smaller. And that was the decision that was made.…

  “I told Your Honor last January that this case raised a truly fundamental issue. It is a broad, profound, philosophical, almost legal issue. What is the relationship betwe
en a public utility and the antitrust laws? How do you put those two things together? What are the obligations? And Your Honor has expressed it yourself: ‘Hey, you are just a big corporation, go out and make money, quit pretending that you are really concerned with the public interest.’ That tone.

  “You know, the company … it may be hard for a lot of people to believe it, but for a hundred years this company has been based on the notion of public service. A lot of Bell System people cried this morning, and not because they are not going to make any more money.… We can live with this as a money-making institution. The problem is, what does it do to the public? What does it do to the concept of universal service? And the message that has been coming out from Congress, and from this court, is, ‘That is none of your business. The market protects the public interest. You are being arrogant in thinking you even have a responsibility to consider it.’”

  “If there is a lack of certainty in regard to the consent decree or settlement, or whatever you wish to call it,” Greene said, “it is because it was filed in a court where there is some doubt about the jurisdiction and the application of the statute. I don’t understand—it certainly can’t be blamed on me. I was not even in the country. You did that one by yourself.”

  “I am not blaming it on you,” Saunders answered. “We tried our best, and things have not gone the way we wanted. We will have to deal with the problem. I do say, the problem can only be exacerbated by failing to give effect to papers that have been filed in this court on Friday … you know, the Tunney Act was essentially passed to prevent the government from giving up its antitrust position too cheaply. It’s pretty hard to say that is what happened here. The very people who are screaming in the newspapers that this is contrary to the public interest … I can’t help but think, ‘Where were you?’”

  “Some of them were here, were your witnesses,” Greene said, smiling.

  “You are not kidding, Judge. ‘Where were you?’ Judge, I can only end by saying this was a great case, we all had a lot of fun, you handled the case magnificently, but the case is over, and we must face the fact.”

  Appearing far more relaxed than he had an hour earlier, Greene called for a brief recess so that he could make up his mind about what to do next. When he returned, he began a long, uninterrupted speech by ladling out sweet praise to both the government and AT&T lawyers. About Connell’s team, he said, “Unlike the usual case where the United States is the party, it appears that in this particular instance the balance of resources may have favored the government’s opponents. Also, judging from some of the remarks that were made at the trial, not all the departments of the government necessarily supported what the litigators were trying to do. Yet a small group led by Mr. Connell did an outstanding public service in presenting this important case.” About the defense lawyers, he said, “They fought with vigor and imagination and determination. Never in sixteen years on the bench have I seen anyone fight so ably and well to present their case. The well-oiled machine was really well-oiled and tremendously effective. I never felt they tried to do anything other than to win the case on the merits.… And there was Mr. Saunders, whose ability to recall every detail of the case and relate it to the whole and make a convincing presentation of both the evidence and the law is truly astounding.”

  Greene then went on to say that since Justice and AT&T had created this mess over the Tunney Act in New Jersey, it was up to them to solve it—and quickly. Greene wanted the case out of Biunno’s hands and back in his courtroom. He intended to take control and to make his own determination of whether the inter-intra deal was in the public interest. By the next Monday, he expected the parties to straighten everything out. Then, Greene would vacate Biunno’s order approving the settlement, and the Tunney Act proceedings would begin under his supervision. If Justice and AT&T refused to cooperate, Greene would reassess his options and consider resuming the trial of U.S. v. AT&T.

  Neither Connell nor Saunders could permit that to happen. Baxter had flown off to Europe for his international antitrust conference; Charlie Brown was busy explaining his decision on television news programs and at Wall Street luncheons. Clamor on Capitol Hill about the deal was cresting and the politicians had to be placated. There was no choice but to give Greene precisely what he wanted—the right to make his own decision about the settlement.

  When the two lawyers stepped out of the district courthouse onto Constitution Avenue that Tuesday afternoon, January 12, 1982, a frigid wind from the north was whistling through the capital city, and only a few huddled passersby hurried along the street. Across the way, the barren oaks and elms lining the open Mall rustled stiffly. To one side stood the west facade of the Capitol, its once bright sandstone faded and crumbling from the seasons.

  Before that chilly and majestic scene, it was possible, just possible, for a sentimental lawyer to feel that something important had passed beyond his grasp and into history.

  Aftermath

  Chapter 33

  Congress Awakens

  An obvious but unanticipated consequence of Ed Block’s public relations strategy for AT&T was that if the phone company was somehow going to be a “winner” by giving Bill Baxter all the divestment he wanted, then inevitably there would have to be some perceived “losers” in the Bell breakup. Rather quickly after the deal with Justice was announced, the victims were identified: the divested operating companies, and by extension, the tens of millions of local telephone consumers they served. No sooner were Wall Street and the business press done praising Charlie Brown for his “brilliant” act of capitulation and corporate self-destruction than howls of outrage about the suddenly clouded future of the “best phone service in the world” began to echo in the unctuous halls of Congress.

  It was not enough for Charlie Brown and Howard Trienens to ask bitterly, as George Saunders had, “Where were you?” At all costs, congressional intervention in the settlement had to be prevented. For Brown and AT&T, the strategic advantages of the inter-intra split, and there were a number of them, all derived from the radical purity of full divestiture. Legislative tinkering could only pollute the deal.

  By sacrificing two-thirds of his company’s assets, Brown hoped to gain in return quick and sweeping deregulation of the “surviving” AT&T. It turned out, as it had so many times during the 1970s when the phone company meddled in politics, that AT&T’s assessment of the mood in Washington was naive. But during the first weeks and months of 1982, there was no time to worry about whether the new AT&T would be rapidly deregulated in reward for its sacrifice. A far more pressing task was to hold the rabble rousers in Congress at bay. What Brown, Trienens, and Block considered “the worst of all possible worlds” was the prospect that Congress might respond to the breakup by finally enacting the heavily regulatory legislation it had failed to pass for so many frustrating years. If that happened, the “fence with a one-way hole” would be resurrected around AT&T, and Brown would have succeeded only in shrinking the size of his captive company.

  Ed Block had not drafted any plans for how AT&T should respond to outrage about the impact of Charlie Brown’s “masterstroke,” as the chairman of the FCC was calling it, on the divested operating companies and local consumers. If he had thought such a reaction was possible, Block would have planned for it. But in the weeks before the deal with Justice was announced, the public relations department had been working under the logical assumption that most people would consider the breakup of the century-old Bell System to be an overall “negative” for AT&T. Brown had instructed Block to do what he could to soften the impact of that negative reaction.

  It was not simply that Block had done his job too well. There was good reason for congressmen and consumer activists to be concerned about the viability of the operating companies and the future of cheap, high-quality, local phone service after divestiture. If it was true, as AT&T had been saying for more than a decade, that revenues from profitable long-distance service subsidized the high cost of the local telephone infrastruc
ture, then wouldn’t divestiture of the operating companies inevitably result in higher local rates to make up for the local subsidies? And wouldn’t the quality of local service suffer because the now cash-poor operating companies would be unable to invest sufficiently in their local plant? Obviously, these were not new issues. For one thing, they had been the foundations of George Saunders’ relief defense in the trial before Judge Greene. At the Friday press conference, Brown and Baxter had both answered questions about higher local rates with the same answer: It was competition in the phone industry generally, not the breakup of the Bell System, that was the culprit.

  “The introduction of competition into the telephone business, as I think is well known by most of you, has had the effect over the years of driving prices toward costs,” Brown said. “I don’t see that this decree has any great significance from that standpoint. The main reason for that is the introduction of competition itself.” A few minutes later, Baxter chimed in, “The local operating companies have a very powerful position … but as Mr. Brown has said, competition will tend to bring prices in line with costs.”

  There were three reasons why this sales job by the two settlement architects did not hold up in the first weeks and months after the inter-intra split was unveiled to the public. The most obvious problem was that the history of U.S. v. AT&T and of the politics of telephone industry competition was simply not “well known by most” of Congress and the media, as Brown seemed to assume. The fact that the inter-intra breakup was the culmination of a long and sordid history of industrial intrigue, ideological conflict, and political cowardice was not widely appreciated. Since it was impossible to understand Brown’s deal with Justice in isolation from its historical context, most reporters and politicians looked at the division of the Bell System’s spoils and pronounced AT&T the victor, even though the phone company had just surrendered a costly and profoundly demoralizing war against its competitors and the government. On the one hand, the reporters and politicians did not know enough about the phone industry’s recent history to assess independently whether Brown and Baxter were right about the inevitability of higher local rates, regardless of divestiture. On the other hand, since they wrongly assumed that Brown had gotten exactly what he wanted from Baxter, they were suspicious about any explanation offered jointly by Ma Bell and the Reagan administration.