The Decision to Divest

Incredible or Inevitable?
By Trudy E. Bell, Senior Associate Editor
© Copyright 1999 IEEE

Reprinted from IEEE Spectrum Online

June 2000 - Volume 37 - Number 6

The contest that ultimately fractured the Bell System was as much a clash between the participants' deeply held philosophies as it was about antitrust laws.

The telephone was ringing in a condominium of the Park City, Utah, Ski Lodge on the evening of Jan. 2, 1982, as Assistant Attorney General William F. Baxter was walking in after his first day on the snowy mountain slopes. The voice on the other end of the line was that of Charles L. Brown, chairman of the board of AT&T, calling from Florida.

"Maybe we could work out the settlement this way," Brown said. And he proposed a compromise to the last impasse that had stymied negotiations for breaking up the largest corporation in the world: American Telephone & Telegraph.

Over the previous two weeks, Baxter and two trusted assistants had been secretly negotiating for countless hours with Brown and AT&T's general counsel, Howard J. Trienens, striving for an out-of-court settlement during a three-week recess in the trial of the antitrust suit filed by the U.S. government against AT&T seven years earlier. The settlement being negotiated would completely separate local telephone service from long-distance services. The negotiations had stalled over how the surgical split should be made in the facilities–whether certain trunk lines should be considered part of the long-distance or the local facilities.

Exhausted and frustrated, Baxter had given up and left Washington, D.C., for the ski slopes to try to get some much-needed rest. Now, with Brown's call, nightly negotiations resumed.

Within five days Baxter had approved the final version of the short agreement and began his trip back to Washington. At the Salt Lake City airport he called an unidentified "highly placed official" at the White House from a pay telephone to say that he had completed the deal. It was a fairly tense conversation. The official asked, "Is this what you recommend we do?"

Baxter said, "Yes, I thought I'd made that clear."

"Well," came the reply, "that's what we'll do then."

Back in Washington, at 8 a.m. on Friday, Jan. 8, Baxter and Trienens signed the agreement in Baxter's office. The deed was done. Four hours later the decision was made public. Television, radio, and front-page newspaper headlines announced the news: effective Jan. 1, 1984, the century-old telephone system that had come to be known as "Ma Bell" was to be no more.

There followed two intense years of the largest corporate reorganization ever undertaken: dividing the Bell System into eight major entities. A new, competitive AT&T was designated to handle long-distance service, research and development, manufacturing, and other technologies merging computers and communications. Seven regional holding companies, still operating under state regulatory agencies, assumed responsibility for providing local telephone service. Because the divestiture restructured the dominant participant in the telecommunications industry, it fundamentally altered that industry, domestically and internationally. In the wake of the settlement of the AT&T antitrust suit, a host of Monday-morning quarterbacking questions have arisen. For many, the settlement was an utter shock: Why, after such staunch defense of the Bell System's network of end-to-end telephone service, did AT&T's chairman capitulate with such seeming abruptness to the demands of the U.S. Department of Justice? Was AT&T broken up in opposition to the wishes of the Reagan administration? Did AT&T secretly want divestiture in order to be able to get into formerly forbidden new technologies, as was rumored at the time? Was the divestiture ultimately in the best interests of the consumer and the country?

It may take a decade or more to know all the answers. But now, nearly two years after the divestiture became reality, it is possible to step back from the emotions and the confusion aroused at the time and make some objective observations. Examination of documents and publications, as well as interviews with some of the participants, lead to several key conclusions.

First, the divestiture of AT&T did not occur in a vacuum. On the contrary, it was the culmination of a long history of legislative, judicial, and regulatory decisions intended to foster competition in telecommunications. These issues and interests, which are so intricately interwoven that any article can highlight only some of the major themes, have determined the present structure of the U.S. telecommunications industry.

Second, unlike the situation with many lawsuits, there are no heroes or villains. From the point of view of the participants, the suit was as much a clash between the fundamentally opposing social philosophies of laissez-faire economics and corporate stewardship of the public interest as it was about violation of antitrust laws. Precisely because there were two internally consistent philosophies that were argued by principled, sometimes impassioned individuals fighting for what they deeply believed, the case and its outcome have an unusual poignancy.

Third, the trial itself was an intensely human drama. Its settlement seems to have been determined as much by personalities as by principles, evidence, and points of law. In fact, some of the observers and the participants feel that had at least three key positions–those of Chairman Brown, Assistant Attorney General Baxter, and Judge Harold H. Greene–been filled by different individuals, the outcome might have been radically different.

In 1934 the Communications Act was passed by the U.S. Congress and signed into law by President Franklin D. Roosevelt, creating the Federal Communications Commission. Part of its purpose was to regulate telecommunications "in the public interest"–a phrase that, incidentally, has no legal definition that can be cited as a yardstick. One of the FCC's missions was, in the words of the 1934 act, "to make available, so far as is possible, to all the people of the United States, a rapid, efficient, nationwide, and worldwide wire and radio communication service with adequate facilities at reasonable charges."

Within AT&T, this explicit mission was reinforced by a corporate culture that evolved within the company under Theodore N. Vail, the business's general manager and its president from 1907 to 1919, whose philosophy became a corporate motto that stood for decades: "One policy, one system, universal service."

As a monopoly, AT&T could set prices so that long-distance rates subsidized local rates. In addition, there was a subsidy within the long-distance rate structure itself, with revenues earned on well-trafficked, densely populated routes helping to keep down rates on less economic, low-volume routes.

Because the company relied heavily on the manufacturing expertise of its subsidiary, Western Electric, AT&T could assure uniform quality in all equipment, ranging from the vast switches in central offices to individual handsets in homes. And as the Bell System became larger, richer, and more established, research and development in the associated Bell Telephone Laboratories evolved from work devoted to just improving telephone service to scientific research in related fields that might not mature for decades.

In short, the Bell System began to see itself as a pillar of U.S. society, as essential a part of the country's infrastructure as highways and railroads, with a unique commitment to the public interest. Its blue-chip stock became a symbol of constancy and reliability, a guaranteed investment for the future that was more than once presented to college graduates or new parents, and was viewed as a haven for widows and orphans.

Three seeds of destruction

In 1949 the Justice Department filed a major antitrust suit against both AT&T and Western Electric. The department accused AT&T of conspiring with Western Electric to restrain trade in the manufacture, distribution, sale, and installation of all forms of telephone apparatus in violation of the Sherman Antitrust Act. To prevent such restraint of trade, the Justice Department sought to separate the manufacture of telephones from the provision of telephone service itself. It proposed that AT&T divest itself of Western Electric, and that Western Electric give up its 50 percent ownership of stock in Bell Laboratories.

The suit dragged on for seven years, never going to trial. Instead there was an out-of-court consent decree, or Final Judgment, in 1956. Under the 1956 decree, the Bell System was allowed to remain intact on condition that it restrict its business to "common carrier communications services," subject to regulation. Western Electric was barred from manufacturing equipment other than the type used by the Bell System. AT&T, Western Electric, and Bell Laboratories were required to license their patents to all applicants-both domestic and foreign-upon the payment of reasonable royalties.

In agreeing to the 1956 consent decree, however, Bell System managers failed in three key ways to anticipate adequately the accelerated pace of technology–even that coming out of their own Bell Laboratories.

First, the decree precluded the Bell System from following its own pioneering technologies into other lines of business–such as selling solid-state components or computers (although AT&T was free to develop Bell Labs technology, such as the transistor, for use within its own system).

Second, the decree's mandate that the Bell System license all its patents to all comers ensured that other companies, both domestic and foreign, could use Bell technology outside of regulated telephone markets against the Bell System.

Third, although the decree effectively forbade the Bell System from entering non-telephone markets, it could not prevent other companies from entering AT&T's own market of local and long-distance telephone service.

Chipping away at Bell

The ink of the 1956 consent decree was scarcely dry before the first telephone competitors moved in. The challenges grew more intense through the 1960s and into the early 1970s. A number of crucial court cases and FCC decisions paved the way for the entry of independent firms wanting to offer competing equipment and services.

The managers of the Bell System were disturbed by these intrusions. They believed that the quality of service and its universality were best provided by one regulated communications utility responsible for end-to-end service. They therefore felt that a single regulated monopoly was in the public interest.

They feared that allowing consumers to attach their own non-Bell equipment to the network–equipment that they might have bought cheaply from competitors–would eventually degrade the quality of the network because the equipment had not been built to the high Bell System standards.

They also felt that providing high-quality communications to every consumer who wanted it through one overall end-to-end system was a "natural monopoly." They feared that allowing competitors into the long-distance business would "skim the cream" from selected profitable market segments at lower prices. Thus AT&T, left with a smaller customer base in those markets, would lose revenue that it would otherwise redistribute to sparser markets being served at prices below their actual cost–thereby increasing the prices for service to a large portion of the country.

The Bell System fought competitors that wished to offer either new equipment or services to consumers, battling with all the tools at its disposal: opposition before the FCC and in the courts, competitive pricing responses, restrictive tariffs, applications for additional FCC rulings, and reconfiguring the telephone network only under the direction of the FCC to give other common carriers (such as MCI and Sprint) standard access to the local exchanges.

By the 1960s and 1970s, alarmed by what was later characterized as a "fence with a one-way hole" through which competitors could enter but AT&T could not fight back, the Bell System and its allies pressed Congress for a new telecommunications policy bill that would update the 1934 Communications Act. The company wanted affirmation of the premise of universal service as a natural monopoly and the Bell System as the regulated quasi-utility to fulfill that service.

Competitors did not take such an exalted view of the Bell monopoly. In fact, to the companies that squarely faced the Bell System's opposition, the company's behavior looked downright anti-competitive and predatory. Thus several competitors–notably MCI–sued the Bell System for unfair anti-competitive practices under the Sherman Antitrust Act.

Meanwhile, technology marched on.

The Bell Laboratories' transistor was appearing in computer products of many different companies, and the products also incorporated some of the computer logic, design, and information theory pioneered at Bell Labs. Under the 1956 consent decree, however, these computer products could not be manufactured and sold by the Bell System.

Even more tantalizing for the Bell System, there was beginning to be much public talk about the dawning of a new age of information, one in which people and computers would communicate through one nationwide or even worldwide network that eventually would make the world a "global village." The nationwide telephone network clearly was in a prime position to become that universal information network. But again the 1956 consent decree precluded the Bell System from offering anything but regulated common-carrier voice and data communications while licensing away patents on many exciting Bell Laboratories developments pertinent to the information age. See "The Iargest corporation ever".

Chafing under the now-onerous restrictions of the 1956 consent decree, in the 197Os the Bell System managers sought legislation in Congress and regulatory decisions in the FCC that would relax restrictions that had prevented the Bell System from entering other lines of business. Ultimately the FCC handed down a ruling in 1980 called the Second Computer Inquiry Decision (often called Computer II for short). It did three things:

• It distinguished between basic transmission services, traditionally provided by common carriers, and enhanced network services such as those incorporating data processing.
• It found that enhanced services and customer premises equipment should not be regulated as common-carrier offerings, whereas basic services should be so regulated.
• It concluded that AT&T should be allowed to sell equipment and enhanced services, but only through a separate subsidiary.

The Computer II decision opened the way for an explosion of new telecommunications products and services both by new suppliers and AT&T.

The U.S. takes on AT&T

Meanwhile, in 1974 officials at the Justice Department took a look at the private antitrust suits being brought against the Bell System, particularly a widely publicized suit filed by MCI that March. To the Justice Department, the Bell System's behavior also smacked of possible antitrust violations. And so in November 1974 it dwarfed all the private litigation by bringing it's own suit against AT&T, Western Electric, Bell Telephone Laboratories and the 22 Bell operating companies–the most massive civil suit in U.S. history.

The premise behind the suit was fundamentally simple. The Justice Department alleged that AT&T monopolized the long-distance telephone business by exploiting its control of the local telephone companies to restrict competition from other telecommunications systems and carriers by denying interconnection with the local phone service. It further alleged that since Western Electric supplied substantially all the telecommunications requirements of the Bell System, AT&T restricted competition from other manufacturers and suppliers of customer-premise equipment. As a consequence of these practices, AT&T allegedly denied the benefits of a free and competitive market to purchasers of telecommunications service and equipment.

As in most Government civil antitrust suits, the relief sought was not punishment for past deeds, but a cure that would prevent continued future violations. Initially the Government sought the divestiture from AT&T of the Bell operating companies, the divestiture and fragmentation of Western Electric, and whatever relief against Bell Laboratories was deemed appropriate; however, while the action was pending, the Government changed its relief requests several times.

Between 1974 and 1980, both the Justice Department and AT&T went through an elaborate "discovery" phase, in which documents were gathered on both sides. "I drew the case the first day I came up to work," recalled Harold H. Greene, who in 1978 was promoted to the Federal District Court from the District of Columbia Superior Court, where he was chief judge. Before that he was with the civil rights division of the Justice Department, where he had been involved in drafting the Civil Rights Act of 1964 and the Voting Rights Act of 1965.

During that time, there were several abortive attempts by the Justice Department and the Bell System to settle the suit before going to trial. Since no settlement was reached, however, Greene announced that the trial of the antitrust case would begin on Jan. 15, 1981, in the Federal Courthouse in Washington, D.C.

U.S. view: let the market decide

In February 1981, William Baxter, a professor of antitrust law at Stanford University, was appointed assistant attorney general as part of the new Reagan administration. In early April, Baxter let the Bell System know through its general counsel, Howard Trienens, what he wanted: nothing less than spinning off all the local operating companies to become independent entities, thereby releasing AT&T's hold over "bottleneck facilities" that could prevent competitors from having access to the system.

"Baxter never made a proposal of settlement," Trienens said in recalling the April meeting. "He just said he'd keep going until he got divestiture. It was his welcome to Washington–telling me his firm position." Implicit in such an agreement was the prospect that the slimmed-down AT&T would be released from the restrictions of the 1956 consent decree.

Although a similar plan had originated in the Justice Department before Baxter's arrival, Baxter had long before perceived the same solution himself. In fact, he had discussed it with Stanford students in various law seminars on regulated industries, although he had not envisioned it might be put into practice.

To Baxter, the proposal for a full divestiture along functional lines accorded well with his philosophical background, which was in tune with the Chicago school of economics. That philosophy, which originated in the University of Chicago, is generally hostile to government regulation of economic activity. In Baxter's view, functional divestiture would leave the local operating companies subject to regulation–which he felt was appropriate because he regarded them as natural monopolies. At the same time, divestiture would serve to deregulate much of the remaining activity of AT&T, and would facilitate the entry and eventual deregulation of long-distance service.

To Baxter, divesting AT&T of its manufacturing arm, Western Electric, was irrelevant to the cure of separating the natural monopoly functions from the potentially competitive segments, because the vertical integration of Western Electric with the other competitive segments had little, if any, potential for predation or other anti-competitive behavior. [See "The case of IBM".]

In early April, Trienens rejected the proposal of a full divestiture. Baxter temporarily gave up on the prospect of settling matters out of court, and vowed to "litigate the suit to the eyeballs."

The courtroom: 'high drama'

As is the procedure with most complex civil antitrust trials, first the plaintiff presented all its evidence, followed by the presentation of evidence by the defense. In addition to Judge Greene, there were two other key figures in the courtroom. The chief trial lawyer for the Justice Department was Gerald A. Connell, a 20-year veteran of the antitrust division with an offhand, plain-speaking manner; the chief trial lawyer for AT&T was George Saunders, a partner in Sidley & Austin in Chicago, who characterized himself as "just a country lawyer from Alabama."

The number of documents entered into evidence on both sides totaled "several million pieces of paper," said Saunders, much of which had to be physically brought into court and presented to Judge Greene. The mechanics of organizing that mass of information was no mean engineering feat; AT&T devised a system that was dubbed "the well-oiled machine," recalled Saunders.

The originals were stored near the courthouse on three floors of a commercial building that AT&T had rented for the purpose. Each evening, Saunders and his associates would determine which documents would be necessary the next day in court. According to Saunders, the originals would be retrieved by an army of some 300 paralegals and administrative assistants, photocopied all night, labeled, placed into file folders, and "by 5a.m. the trucks would start rolling," hauling them to AT&T's preparation rooms in the courthouse. There they would be placed in shopping carts that were wheeled into the courtroom. As Saunders or some other AT&T lawyer called for each document during the day's testimony, it would be handed to that lawyer in its proper turn, and the lawyer would use it in the examination then in progress.

In preparation for the presentation of evidence, both Connell and Saunders staged mock trials to prepare witnesses for what they might expect in the courtroom. Such mock trials, a standard procedure for most major suits, consisted of "sitting a witness down and running through every question precisely the way you expect to ask it, and seeing if he remembers the answers," Connell explained. "You have to script witnesses," he said, to minimize the risk of them getting so nervous at being on the stand that they might become incoherent. AT&T got around that problem somewhat by having about 90 percent of its witnesses submit written testimony–made available to the Justice Department lawyers and Greene a day or two in advance–and then just summarize that testimony before cross-examination.

"Normally during the Government's case there were one to four witnesses in a day," Connell recalled. "Only one witness stayed on as long as two-and-a-half days. It was either fascinating or deadly dull, depending on whether you were participating or not. And this went on for 130 days."

The view from the witness stand was a bit less casual, as one might anticipate when the plaintiff was the United States and the defendant was the largest corporation in the world. In fact, in the words of one witness, the day-to-day trial was "high drama, I assure you."

The courtroom itself, which contained anywhere from several dozen to 100 people, depending on the evidence to be presented that day, "looked like a large high school auditorium," the witness recalled. "There were wooden benches, like pews in an austere church–and a sense of power hanging in the room."

In this witness's memory, "Greene wanted to be in absolute control over what went on. He would be impatient with fools, or anyone wasting his time, and he drew a pretty fine line when that happened. He didn't have to raise his voice, but heaped scorn on his victim, and there was absolute silence in the courtroom. Sometimes I thought he was being facetious or sarcastic and the poor witness didn't realize it, and was led into terrible traps. When [W.M.] Ellinghaus, the AT&T president, testified, he was made to look like a telephone Christian, like it was his religion to give the best possible service at the lowest possible cost to the American public."

Connell agreed: "Greene controlled it and saw to it that the trial moved briskly. If he thought a lawyer was asking even a slightly repetitive question, he was very quick to descend. You needed to keep the examination tight and terse and to the point."

In the early July heat of the Washington, D.C., summer, the prosecution finished its presentation. AT&T, submitting a 500-page brief, moved for dismissal on the ground that upon the facts and the law the plaintiff had not shown a right to relief. "I truly thought they hadn't made a case," Saunders recalled. "All they'd presented was a bunch of anecdotes from a bunch of nice old men and liars"–this last noun impugning what he perceived to be vested interests influencing the testimony of several witnesses.

Judge Greene, however, had no intention of dropping the suit, his response to the case made by the Justice Department being quite different. In a legal opinion of September 11, 1981, he stated: "The motion to dismiss is denied. The testimony and the documentary evidence adduced by the Government demonstrate that the Bell System had violated the antitrust laws in a number of ways over a lengthy period of time… The burden is on defendants to refute the factual showings…"

AT&T feels the pressure

Greene's preliminary opinion, Connell recalled, was "a big, big blockbuster" that boosted the confidence of the plaintiff.

For AT&T, however, things were looking grim. Greene's opinion was "pretty devastating," said William Keefauver, general counsel of Bell Laboratories who had helped present the laboratories' witnesses. "He put a very high hill there for us to climb over before we even started."

Saunders felt that keenly: "Before AT&T even put in any evidence, we knew we were confronted with a judge who wasn't hearing our side of the case. That was the concern."

First, the suit was creating uncertainty both within the company and among its stockholders as to what technological enterprises it could plan to pursue and what its corporate future would be. This uncertainty was compounded by the fact that since 1978 other antitrust suits by private companies–apparently encouraged by the existence of the Justice Department's suit-were being filed against AT&T at a rate of one every three or four months, by such plaintiffs as ITT and Litton, among others.

Second, legislation that the Bell System had hoped Congress would enact to declare some sort of public policy on telecommunications was repeatedly stalled. Moreover, since October 1981, the parties had been trying to settle the case out of court with an elaborate decree whose injunctions against certain kinds of behavior embodied the principal provisions of legislation then being considered in Congress. This injunctive decree was about 100 pages long and growing.

Third, the litigation was draining company resources. At its peak, some 3000 personnel were assigned to the suit, and top executives and managers had to devote large chunks of time to preparing their testimonies. By its end, litigating the suit had cost AT&T an estimated $375 million over more than seven years. (The costs to the Justice Department were more modest but not inconsiderable–125 people assigned to the case at its peak, including 55 lawyers, and a traceable cost of $18 million.)

Late in the trial Trienens asked Saunders for his opinion about what was going to happen. Saunders replied that, based on the record, he believed that Greene would order the Bell System to divest Western Electric–an opinion that was independently supported by an outside law firm called in to review the record. But Saunders felt that such a decision could be reversed on appeal, as did Trienens. However, even the possibility of losing Western Electric was a source of grave concern; according to Saunders, chairman Brown felt that "if AT&T lost Western Electric and Bell Labs, it would have lost its technological capability and become [a utility] more or less like a water company."

The options facing Brown at this point seemed to be three: submit to an onerous injunctive decree and keep the company intact; appeal the probable verdict and fight the litigation, which might take years; or accept the proposed functional divestiture in exchange for being released from the 1956 consent decree.

The way things were looking, explained Trienens, "even if we won the case, we would be tied up with information-flow restrictions and not freed from the '56 consent decree." Under those circumstances, he said, "the physical cost of keeping the Bell System together would be greater than the cost of taking it apart." Already the separate subsidiary requirements of the Computer II decision alone were costing the company some $1 billion per year in duplicate facilities and functions. Moreover, the injunctive decree as it was shaping up would have virtually destroyed information flow between Bell Laboratories and either Western Electric or the network. "And when the people who are supposed to be vertically integrated can't talk to each other, that sort of defeats the purpose," Trienens concluded.

"Unless we could cut this Gordian knot, and soon," Brown later wrote, "the market opportunities created by our own technology might pass us by."

Cutting the Gordian knot

On the afternoon of Wednesday, Dec. 16, 1981, Trienens called Baxter, and told him, "While we're working on a long decree, why not try your hand at a short one. I'll recommend that my client sees it," Trienens recalled. "Baxter said, ‘I'll write it.’ "

"So I was asked to draft it up," said Richard Levine, director of the office of policy planning in the Justice Department's antitrust division and one of Baxter's assistants.

At the Justice Department, the new negotiations for a divestiture decree were handled in strict secrecy, in parallel with the more public negotiations that were continuing on an injunctive decree. Only three people in the Justice Department were aware of the divestiture negotiations at the time: Baxter, Levine, and Deputy Assistant Attorney General Ronald Carr.

On the AT&T side, the entire board of directors was aware of it, accounting for some 18 or 19 people, said Trienens.

The trial was recessed for the holidays on Friday, Dec. 18, and Greene established a schedule for resuming it after the New Year that would end AT&T's testimony by Jan.20.

On the evening of Dec.21, the Christmas party of Sidley & Austin was held in Chicago. At the party Trienens beckoned Saunders aside and showed him the Justice Department's first draft of the proposed settlement agreement, which had been completed that day. "When I saw it," Saunders recalled, "I thought he [Trienens] was to be humored–after all, he was the head of the firm and the vice president and general counsel of AT&T, and he did have to consider every option. But I also thought it was crazy. I never thought he was serious."

Eight days later, when Saunders was back in Washington, D.C., in exhausted sleep in the Madison Hotel after late preparations for the trial's resumption, he was awakened at 7 a.m. by Trienens, who summoned him to AT&T's suite and showed him a slightly longer version of the agreement. As Saunders was examining it, Brown walked in and asked if it was ready.

"I was stunned," Saunders recalled. "Humoring your boss is okay, but this was crazy. I said, 'Don't let me interrupt, but do I understand that something like this is seriously considered? It is absolutely flat against the face of what we testified under oath!' And Brown said, 'I know we have a little testimony.' A little testimony! So it was Dec. 29 before I realized we were going through anything other than a necessary exercise. I never thought Charlie [Brown] would do it. From then on in it was downhill."

By Dec. 31, Baxter felt that agreement on both sides was close enough that he made a brief public announcement that negotiations were going on. But then the negotiations stalled over the treatment of local trunk lines. "At that point," Baxter related, "I said, 'The hell with it, we'll go back to trial and I'm going skiing.' "Then Brown called him in Utah, and the last phase of the settlement was negotiated in the first few days of January.

Connell was made aware of the settlement two days before it was announced: "It was quite a shock. I didn't think it was going to come about. Everyone on my side of the case was stunned–and quite gratified, because here in this settlement we got the relief we asked for, and we won without writing all those briefs!"

Greene, who was on vacation himself on St. Martin in the Caribbean, was one of the last major participants to find out about the settlement agreement before it was announced; he was made aware of it only on the morning of Jan. 8 when it was filed in his court. "I was surprised," he recalled. "I thought that if they were going to settle, they would have done it sooner." After making major alterations of his own, he finally approved it with a long accompanying opinion on Aug. 11, 1982.

The settlement, less than nine pages long, became the Modification of Final Judgment, the title referring to the fact that it modified the Final Judgment or consent decree of 1956. With Greene's signature, the Bell System's future structure was determined.

Second-guessing Congress and the White House

Many people have criticized the prosecution of the AT&T lawsuit, contending that national telecommunications policy–which determines the fundamental structure of the industry–has no business being set in a court of law. It would have been far more appropriate, the critics argue, if such policy had been determined by Congress, guiding the courts.

Greene maintained that, on the contrary, Congress had given such guidance to the courts: the Sherman Antitrust Act. "The Sherman Act is similar in the economics sphere to the Bill of Rights in the personal sphere," he observed. "Now, Congress has exempted a number of industries from the Sherman Act–insurance, baseball, and civil aviation. The executive branch of the Government brought a lawsuit in accordance to the directions of Congress, who hadn't exempted telecommunications. My obligation was to apply the Sherman Act. In fact, it would have been a gross dereliction of duty if I hadn't gone along with it."

Nor was the Justice Department setting out to determine telecommunications policy, said Connell. "The antitrust division brought an antitrust case," he said. "Granted, it was a big case, calling into question the very structure of AT&T–and therefore it would have an influence on telecommunications policy." He added: "All the court did was approve an agreement that both the parties said was okay. What's the court supposed to do? Not approve the decree? That, too, would have impacted policy."

The question of whether the White House could have dropped the case is also a matter of sensitivity. Several members of Reagan's cabinet opposed the suit, among them Secretary of Commerce Malcolm Baldrige and Secretary of Defense Caspar Weinberger.

Baxter, Connell, and Saunders, among others, all believe to varying degrees that Greene wrote such a strong opinion in September, when he denied AT&T's motion to dismiss the case, because he wanted to discourage the Reagan administration from throwing out the case. "After that opinion, it would have been difficult for the Administration to dismiss the case," Connell remarked. "It would have left them open to the accusation that the Government is favoring malefactors of great wealth." See "Perennial adversaries".

Greene responded that he had no such intention. "It should be clearly borne in mind that, at that juncture, I could and did appropriately consider only the Government's evidence," he stated. "AT&T's proof was not yet in, and for that reason it was necessarily not considered for the opinion. Under the circumstances, it would not be reasonable to construe the opinion as a necessary indication of the result following the presentation of all the evidence... much less as some sort of a signal for political or other outside force. I do not decide cases before all the evidence is in, and I have neither the expertise nor the desire to exert any kind of influence."

In any event, there was never any direct order from the White House to drop the case or not to break up the Bell System, said Baxter. He pointed out, however, that there was a seldom-appreciated factor causing the White House to remain aloof, which made Baxter's own decision and responsibility weigh heavily. "As a consequence of the Watergate mentality, political Washington thought that it was not proper for the White House to come tell me exactly how they would prefer I manage the case," he observed. "But when a case involves major policy issues as this one did, it's seriously wrong to say that the President should not participate in policy making in that case. And it is a misstructuring of the U.S. government to find yourself with an assistant attorney general having no choice really but to make those decisions for himself, and a White House that is politically constrained to preserve isolation."

Baxter said he "was never totally sure" how the Reagan administration felt about breaking up AT&T. "But I did have the feeling that everyone should know whose decision it was." He cited the tense telephone call from Salt Lake as "another one of those instances when they were saying 'It's your monkey.' No one else would take responsibility, so I had to."

 

The clash of opposing convictions

To this day there is debate over whether the AT&T chairman, Brown, had to accept Baxter's proposal for full divestiture of the local operating companies–and why he did so.

"I don't think Greene or any judge ever would have ordered an $80 billion divestiture," said Connell. "My guess is that Greene would have entered a decree that would have had a lot of injunctions for [giving competitors] equal access [to the network] in a highly regulated way."

Baxter agreed that had Greene been allowed to decide the case, he probably would have ordered a much less sweeping divestiture, but one that "would have been much more damaging from a business viewpoint," said Baxter. "The amount of money involved doesn't tell how much damage would have been done. You're performing surgery on a living organism, and the question is: Do you end up with two healthy heretofore Siamese twins, or a couple of dead masses?

"My guess is that AT&T feels that Greene would have done something both vindictive and stupid," he continued. "He was very hostile to the company, as his written opinions revealed. Old-fashioned populism might account for some of this, but much of the hostility seemed to develop in the course of the trial." He added, "I knew how to break the company up without damaging it much. And being released from the '56 consent decree was certainly an attractive feature of the package I was offering."

Trienens pointed out that, contrary to Baxter's hypothesis, Brown's decision to settle for full divestiture was "not driven by his opinion of the outcome of the case. It was driven by the status quo, given the regulatory and legislative restrictions" under which the company would have been placed even if AT&T had won the lawsuit. In that instance, he said, "the future for the company was much more bleak" than it was in accepting divestiture.

In the succinct analysis of another AT&T lawyer, "We thought we could win, but the victory would have been Pyrrhic, because we would have been stuck with regulated voice communications."

"There was a giant generational change in AT&T when Brown took over from [his predecessor, John] deButts," observed Steve Coll, a staff writer for the Washington Post who interviewed more than 100 people for a book-length history of the antitrust suit to be published by Charles Scribner's Atheneum Press. "Brown was the first chairman to ever entertain the question of 'Why are we holding onto the local phone companies?' Brown had a vision of the future being the information age, and that the future of communications is the melding of computers and communications. And he wanted to be strategically positioned to do that. He figured the price of keeping Western Electric was losing the operating companies."

What might Greene have done had the trial run to its end?

Greene exclaimed, with some amusement: "Nobody believes when I say I don't know what I would have done, but it's really true! I didn't know AT&T well enough to have any feeling one way or the other, let alone hostility. I was just barely keeping my head above water day to day." If the case had not been settled out of court, he said he would have asked both parties to submit new briefs after all the evidence was in, studied those, and written a new opinion. He estimated that deciding a major antitrust suit like this one would have taken "at least five or six months, minimum" after the trial was over. See "Defining terms".

The price of choice

In spite of Brown's choice to link AT&T's future to the information age, there is still tension in the company about the settlement of the antitrust suit. A number of people involved in the breakup report that even now they get "hate mail," some of it from engineers retired from AT&T. One observed: "At the lower levels, there's an almost pathological horror that somebody has put asunder an electronic network that most of these people spent their lives building."

At the top levels in AT&T, executives are weary of being asked questions about the divestiture and their role in it. The extent of this weariness can be evaluated by the fact that, when permission was finally granted to interview Brown, it was under the explicit condition that no historical questions about the case be asked: "If the past comes up, I'm to arise and yank you out of the room," warned the media representative at AT&T's corporate headquarters in New York City who arranged the interview.

Much of this tension stems from the fact that a lot of people within AT&T feel that the divestiture was unfair and unnecessary–precisely because it stemmed as much from differences in economic philosophies as from corporate behavior. "It was not an antitrust issue at all," declared Ian Ross, president of AT&T Bell Laboratories. Bell Laboratories' Keefauver amplified: "It was framed in the context of antitrust, but it was certainly not the type of situation that the Sherman Act or the Clayton Act were originally enacted to deal with. The issue was really focused on industry structure, not a particular company's conduct. Now, to get the [desired] structure they had to allege conduct, and it was made to sound like antitrust."

Saunders, who fought to defend AT&T each day in court, was even more outspoken: "I think that the charges in the Bell case were an absolute fabrication," he stated flatly. For this and other reasons, Saunders regards the outcome of the case as morally wrong, and declared: "If you treat this thing evenhandedly, you are doing something evil."

On the Government's side, Connell disagreed, saying that had AT&T been more willing to allow some competition over the years, "They wouldn't have even gotten sued by us. Thou shalt not monopolize in violation of Section 2 of the Sherman Act!"

In response to this direct opposition of the two trial lawyers, Baxter remarked: "A successful litigator always believes in his client absolutely implicitly, no holds barred: God is on his side in-to the valley of death, and righteousness and truth are on their side! George [Saunders] is a fine litigator. And there's a lot of the same [sense of mission] in Jerry Connell.

"I believed in different things," he went on. "I didn't believe in the guilt of AT&T or the innocence of AT&T. I believed that it was terribly important that if the company were taken apart, it must be taken apart in a way that made business sense–that its efficiency not be impaired." He added after some thought: "They felt betrayed by the gradual change in public policy that had come along and culminated in my surgery. They very sincerely believed in their position and felt they'd been trapped." See "The briar patch?".

 

Was divestiture in the public interest?

Was AT&T correct in arguing that end-to-end universal service overseen by one agency best served the public interest? Or was the Justice Department wise in maintaining that opening the market to competition would encourage innovation and diversity of services, and that everyone would benefit?

At less than two years A.D. (after divestiture), it is still too early to say for sure. For one thing, telecommunications in the United States is not yet fully competitive. In addition, two years is too short to be able to assess the long-term effect, if any, of divestiture on the innovation both within and without the former Bell System. As for individual telephone customers, many are still confused about who is responsible for what telephone equipment and service. It is still unclear whether this confusion is part of a long transition or is a permanent fact of life.

"I'm not willing to say that telephone service is for the rich folks or the big-city folks, without due regard to the infrastructure of the country," brooded Saunders. "Some things should not depend on the ability of people to pay. If we lived in a community where air could be bought and sold, should we deregulate air so that only people that could afford it could buy it?"

"But just because people need food to live doesn't mean you should give away food for free to everyone," objected the Justice Department's Levine. "I think the judgment about divestiture was correct. A lot of good things have happened. We have seven independent operating companies that can go into new ventures without overall control by AT&T. They're free to buy equipment from a lot of folks, giving a long-term benefit to telephone subscribers in choice and declining equipment prices. They can start to come up with a variety of new data services."

Baxter pointed out that the new competitive industry structure encourages prices based on actual costs instead of subsidies, and he claims this has made AT&T more efficient. Even allowing prices to rise for local and long-distance service in lower-trafficked areas may ultimately spur the introduction of new technologies, he pointed out. "Why must the whole country be wired with copper?" he asked. "There have to be alternative methods of delivering services. If the wirelines raise their prices, consumers can turn to a dish on their roof."

Greene asserted: "I think [divestiture] will accomplish what it's supposed to. I'm a great believer in the competitive system, and think that competition will bring us greater innovation and put American industry in information ahead of everyone else."

"I think the solution was an appropriate one," reflected Connell. "With one reservation. In the trial AT&T kept making an argument that the long-distance telephone business was a natural monopoly because it had natural economies of scale. To break up the company to allow competition was a futile act, they said, because once the FCC no longer regulated its telephone rates, AT&T could price the product in the free market–and AT&T's prices would be so low they will drive everyone out of business. So, why go through the exercise when it would be meaningless?

"That is my nagging thought," said Connell. "What if MCI and GTE Sprint go belly-up and AT&T recaptures all the market because it has economies of scale? What if AT&T is right?"

 

---

SIDE NOTES:

The Iargest corporation ever

Many impressionistic descriptions have been written about the scale of the Bell System. Here are just a few statistics that demonstrate what divestiture meant to the largest corporation in the world.

In 1983, the last full year before the divestiture took effect, the Bell System's total assets were some $150 billion, making it bigger than General Motors, IBM, General Electric, U.S. Steel, Eastman Kodak, and Xerox combined. Its annual revenues were nearly $70 billion, representing approximately 2 percent of the U.S. Gross national product. Its net income was nearly $6 billion, slightly smaller than the total budget for the National Aeronautics and Space Administration. It employed just under a million people, many of them long-term employees–making it the largest private employer in the country.

Effective Jan. 1, 1984, AT&T's total assets became just under $40 billion. It spun off three-quarters of its assets into the seven regional holding companies, each of which is roughly the size of ITT. In 1984 AT&T's annual revenues were about $33 billion, and its net income was just under $1.4 billion. It currently employs some 350 000 people. All these factors make it now a bit smaller than IBM. –T.E.B. [RETURN]

The case of IBM

On Jan. 8, 1982–the same day that the settlement of the AT&T case was announced–Assistant Attorney General William F. Baxter announced that the Department of Justice’s 13-year-antitrust case against IBM was being dropped after five years of trial in New York City The two cases displayed an intriguing historical symmetry.

Some of the parallels are obvious. For example, both were antitrust cases brought by the U.S. Department of Justice. Both were against the dominant company in the field. And both companies have an avowed Interest in entering each other's markets IBM is positioning itself to link computers through communications, and AT&T Is positioning itself to add computers and data processing to its communications network.

But there were also key divergences, said Richard Levine, who had been appointed deputy director of the Office of Policy Planning in the Justice Department's antitrust division In February 1978. He recalled that one of the first policy issues he was assigned to overseas was to ensure that the relief's obtained in the IBM and AT&T antitrust cases were consistent.

"Antitrust theory has something called the essential facilities doctrine, which says that If company owns an essential facility, It must give reasonable access to competitors," he explained. "AT&T's local exchanges were regarded as essential facilities, whereas long-distance operators were competitors. IBM had no such equivalent essential facilities."

As far as the sizes of the companies were concerned, Levine said that antitrust laws need try to determine whether "they got where they were because of skill and foresight or anti-competitive conduct." The evidence uncovered eventually caused the Justice Department to conclude that nothing IBM had done was unlawful under the prevailing antitrust standards; moreover, "No relief that we could figure out made any sense." So the case was dropped.

In retrospect, he observed, "The best relief in the IBM case was to release AT&T from the 1956 consent decree, so that AT&T could provide a significant competitive challenge in computers." –T.E.B. [RETURN]

Perennial adversaries

One unique aspect of the AT&T antitrust case is that the trial lawyers from the opposing sides and the judge ended up as friends. "People got along very well," explained Gerald A. Connell, who had served as the chief trial lawyer for the Department of Justice. "The case was tried without people getting bitter on both sides."

One tangible evidence of that mutual respect is an annual softball game, commemorating the litigants' first softball game, held in 1981 during the summer recess in the trial. "It gives us a chance to go back to a common bond, sit around, have a nice time, insult each other," Connell added. This year the fifth annual game was played on Friday Sept. 13, at Fort Hunt Picnic Area a few miles south of Alexandria, Va. The weather was sunny and crisp, the first autumn-like day of the year–apparently in keeping with the unbroken tradition of fine weather for the games.

George Saunders of the Chicago law firm of Sidley & Austin, who had served as the chief trial lawyer for AT&T, brought a box of yellow T-shirts he had designed for the occasion of the ball game. The shirts portrayed a broken Bell logo with the caption "Don't blame us–We told them this would happen," along with eight different ills such as "High prices," "Poorer service," "Loss of jobs"' and "Crybaby competitors." Grinning, he watched Connell pulled a T-shirt from the box and read it. "That’ s cute," Connell observed dubiously; he himself was sporting a shirt with the headline from the New York Daily News: "AT&T Empire Shattered."

And there was plenty of good-natured banter. A full team of AT&T people was ready to play by the 1 p.m. game time, but as yet Connell was the only representative from the Justice Department. "Where's the rest of your team?" an AT&T lawyer asked.

"Beating up on the BOCs [Bell Operating Companies], I figure," ConnelI returned.

Another time when Saunders batted a foul, he excused it with the remark: "Good intentions."

A Justice Department lawyer replied: "I've heard that defense before!"

The Justice Department team eventually did show. At a break halfway through the game, the three dozen participants congregated around picnic tables laden with barbecued spareribs and chicken, hot dogs, sloppy joes, potato salad, fruit, garnishes, and two kegs of beer–the food provided by the AT&T and Sidney & Austin team, and the park site, beer permit, and beer arranged by the Justice Department team.

"It was a fun trial, said Harold H. Greene with an eager smile; he had sat as judge.

"I'd like to do it all over again," agreed Saunders.

At another occasion Connell explained: "Those of us who were trying the case were sorry to see it was over. We enjoyed trying the case. Perhaps that's a limited perspective, and it may be an inappropriate one, but what the hell–I like trying cases. And this one was as satisfying an experience as one could have."

"Being in front of Harold Greene was particularly fun," Saunders said," because he was smart as hell, and he cared, and he ran it well."

"People were very professional and behaved with a lot of courtesy throughout, and the negotiations were very businesslike," explained Richard Levine, formerly of the Justice Department and now with the consulting firm Touche Ross Washington, D.C. "The case lasted a long time, and for several years their lives were interactions with each other. This was the result," he concluded, waving his arm toward the players on the softball field, who were playing the second half of the game.

Scoring was slapdash at best; at the game's conclusion AT&T was vaguely acclaimed the winner with no definite score–the fourth win out of the five games.

"I think we ought to start using Roman numerals for these games, like the Super Bowl," remarked one Justice Department lawyer, relaxing In the setting sun.

A Sidley & Austin lawyer raised his cup of beer. "I think we'll keep this until we're in wheelchairs." –T.E.B. [RETURN]

The briar patch?

Almost the moment that the AT&T antitrust settlement was announced, stories began circulating that AT&T's chairman, Charles L. Brown, had been very clever In getting rid of the regulated Bell operating companies, freeing AT&T to get into exciting, unregulated businesses.

One source, who had retired from AT&T after 26 years at Bell Laboratories, said he recalled that a confidential economic study had been done for the top management In AT&T sometime in 1980. It showed that the operating companies represented 70 percent of AT&T's investment but were yielding only 30 percent of the revenues; thus splitting off the operating companies "was not necessarily bad." He said: "The only thing that got in the way of settling with the Justice Department sooner Is that AT&T didn't want to lose $600 million a year that came to Bell Labs from the local companies."

Edward Goldstein, who recently retired as corporate vice president for strategy and development at AT&T after 36 years with the company and who Is now a principal In the Management Analysis Center Inc. in Cambridge, Mass., said this was "absolutely not the fact." He had done some economic analyses in the fall of 1981 that had shown that AT&T should separate the unregulated and regulated businesses even further than was being done, either through separate accounting systems or separate subsidiaries, but "it did not advocate or suggest divestiture." He added: "Although a few of us rebels thought it wouldn't be the worst calamity In the world, upper management absolutely did not want divestiture. Was It a case of 'Br’er Fox, don't throw me into the briar patch’? No!"

William F. Baxter, who as assistant attorney general had negotiated the settlement with Brown, stated: "So far as l am aware, there is absolutely no substance to the rumor. Furthermore, it is totally implausible. You can't explain an event that happened in January 1982 except by something that changed shortly before–the case going badly for AT&T."

Rlchard Levlne, who had been one of Baxter's assistants, observed: "A lot of people think that the AT&T peopIe drafted the MFJ [Modification of Final Judgment] but it's quite the opposite. AT&T fought the thing vigorously, even putting pressure on the Administration to drop the suit." He reflected: "I just don't know what swims around in peopIe's heads." –T.E.B  [RETURN]

 
Click on cartoon above to view full-size (keep in mind this cartoon was published in 1984)