The Decision to Divest
By Trudy E. Bell, Senior
© Copyright 1999 IEEE
June 2000 -
Volume 37 - Number 6
contest that ultimately fractured the Bell System was as much a clash between
the participants' deeply held philosophies as it was about antitrust laws.
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
"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
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
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.
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
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.
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
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
Meanwhile, technology marched
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
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
- 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
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
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
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."
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
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
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
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
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."
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
"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.
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
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
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
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
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
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
"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?
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
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
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
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
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
"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
"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?"
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.
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
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.
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
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,"
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.
of post-divestiture telecommunications terms
Access: a Iong-distance
carrier’s capability to enter the local network and reach all telephones in
a geographical area; also, a customer's ability to reach the long-distance and
international networks from a local telephone.
Bell operating companies (BOCs): 22 regulated local telephone
companies formerly owned wholly or In part by AT&T and now owned by seven regional
Bypass: use of private or leased transmission facilities to avoid
the local telephone company network.
Centrex: Central office equipment used by local operating companies
as an alternative to private-branch exchange (PBX) service on a company’s
Common carrier: a company that offers communications services to the
general public, subject to regulation by Federal and state regulatory
Computer Inquiry II: Federal Communications Commission decision that
subjected basic transmission services (provided by common carriers) to
regulation, but exempted enhanced network services (incorporating data
Equal access: access offered by the local networks to all Iong-distance
carriers that is equal to that provided to AT&T.
Exchange: a geographical area established by a regulated body for
the provision of telecommunications services; exchanges were formerly given
names whose first two letters were part of the three-digit prefix in telephone
Integrated-services digital network (ISDN): a digital network that
transmits information from point to point using the same format, without
regard to the originating nature of the communications (voice, data, or
Local access and transport areas (LATAs): 161 territories
established by the Modification of Final Judgment within which a local
operating company may offer its local exchange, long-distance, and special
services. LATAs were established to encompass areas of community interest;
they generally include a number of exchanges.
Modification of Final Judgment: the 1982 consent decree reached
between the Bell System and the Department of Justice specifying the way in
which AT&T would divest the local Bell operating companies as of Jan. 1,
1984. The title refers to the fact that this decree vacated the 1956 consent
decree, or Final Judgment, that had limited the company's activities.
Private branch exchange (PBX): private telephone switching system,
located on a customer’s premises.
Protocol: a formal set of conventions for data communications,
governing the format and relative timing of message exchange between two
Regional holding companies: seven companies that own the stock of
the Bocs in their respective geographic areas.
Tariff: a schedule of rates and charges at which a common carrier
offers its services to the public, which is filed with the Federal
Communications Commission or the state regulatory commission, and which has
the force of law. [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
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
Click on cartoon above to view full-size (keep in mind this cartoon was published in 1984)
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