Reagan/Baxter's
Legacy: "Pragmatic" Antitrust Enforcement
Is
Antitrust Dead?
How IBM Stacked Its
Board With Former Government Officials
"Laws are like spider
webs. If some poor weak creature comes up
against them, it is caught; but the bigger one can break through and get
away."
Solon (a Greek philosopher
--c.630-c.555 B.C.)
"IBM's actions in the
marketplace demonstrate a striking similarity with the above teachings
of Solon. The fact that 'might is right' philosophy still applies to the
world of high tech, makes one justifiably wonder just how much we have
truly progressed in the last 26 centuries."
ACR Jan/85 editorial
"Is IBM Wagging Users' Tails?"
PHOENIX, Mar. 7, 1989 - We
know that even the appearance or size of this ANNEX BULLETIN
(i.e., it's nearly three times longer than an average BULLETIN)
would suggest that this is no ordinary editorial. It isn't. It
isn't in more ways than just its physical dimensions.
For one thing, it has
been five and a half years in the making! It took dozens of
face-to-face meetings with key industry executives, legal experts,
and/or the government officials; it took more than a hundred
thousand miles in the air. It took hundreds of telephone
conversations. It took reading thousands of pages of legal
briefs and transcripts. It took clipping and checking out hundreds
of news articles, dozens of books.
But, perhaps even more
important than the mere volume of research that went into it, it
took keeping a continuous pulse on the industry during the last 20
years, so as to be able to judge what all these things meant. Now
it's up to you to judge if it was all worth the effort. |
IS ANTITRUST DEAD?
PHOENIX, Mar. 7, 1989 - "Why not do a piece on
the subject of 'antitrust is dead,'" suggested one of FORTUNE
magazine's editors during a discussion with us in New York in January
1988. Of course, he was referring to a common perception of Reagan
Administration's record in antitrust law enforcement.
Told of this suggestion during a recent dinner meeting in
Washington, the chief U.S. antitrust officer, Charles F. Rule, bristled
about such allegations. "That's not at all true," he said,
marshaling out a myriad of facts which seemed to support his theory that
"no other Administration was able to put together a record that even
comes close to ours."
So, there you have it. Such is the state of our recent
antitrust law enforcement that opinions range from "antitrust is
dead," to Reagan's being the best record of any Administration. Rule
acknowledged, however, that this was not the first time he has had to
answer such a troublesome question.
In his October 1988 address to Harvard Law School's 22nd
annual conference on antitrust law enforcement, for example, Rule said
that it had been more than a year and a half since he first challenged
critics to point out "one merger that we failed to challenge but that
nevertheless led to higher prices." He said that, "for the
critics, it seems that talk is cheap, specifics are rare and facts are
often nonexistent."
To prove his point, Rule (who goes by "Rick"
even though his first name is Charles), said he doubted that anyone in
that highly esteemed Harvard audience knew how many mergers the Justice
Dept. and the Federal Trade Commission challenged in 1987. He said that
the two government agencies probed 25 transactions, while "several
others were abandoned because the parties saw the writing on the wall
before a formal decision was made."
"To find out about these developments," Rule
chastised the otherwise highly respected East Coast press, "one would
have to look somewhere other than the New York Times, the Wall
Street Journal, or the Washington Post. They were too busy
'reporting' on lax antitrust enforcement to cover (his version of) the
story."
He pointed out that, during Reagan's Administration, the
Justice Dept. filed more than twice as many antitrust lawsuits as had been
the case before. Making this figure even more impressive, the number of
private antitrust cases dropped by 50% during the same time," Rule
asserts. "But, the press are not interested in these facts," he
laments. "Only in the big show-case news stories like IBM or
AT&T."
Of course, the press like the "big show-case"
stories. Almost as much as attorneys at the Justice Dept. seem to dislike
them. At a former assistant attorney general's confirmation hearing, for
example, (William Baxter's -- on March 19, 1981) Senator Joe Biden
(D-DE) said that he'd been told that there was "a great reluctance
among attorneys at the Antitrust Division to become involved in 'major'
cases." He said that was because "such cases are viewed as
unwise career moves." Consequently, Biden concluded that,
"nothing is done on cases where the most serious offenses may in fact
take place."
Why is the filing of big cases considered
"unwise?" Is it because the press coverage they attract tends to
highlight the inadequacies of the Justice Dept.? Whatever the answer, Rule
asserted in his January 1989 address to the Antitrust Section of the New
York State Bar Association that, "despite the monotonously inaccurate
criticism that antitrust enforcement is dead, (a) violation of the law can
have, and for hundreds of firms and individuals has had, very serious
consequences." Except for the bigger creatures perhaps, which,
according to Solon, "can break through (the legal system) and get
away."
Rule also told his Harvard colleagues, that the courts,
"correctly in my opinion -- have been careful to avoid the sins of
the past; they no longer mistakenly condemn vigorous, successful
competition as an antitrust violation."
Rule: IBM Antitrust Case -- A "Boondoggle" And
"A WPA Project"
Rule, not quite 34 yet, is a graduate of the Chicago Law
School who was brought into the Justice Dept. in 1981 by the man who
single-handedly dismissed the IBM case (William Baxter, a Stanford
University law professor). Rule minced no words about how he felt about
the government's 1969 case against IBM.
"It dragged on for 12 years (actually it was 13 --
we hope that the U.S. Assistant Attorney General's other facts are more
accurate), before it was finally dropped, long after the marketplace
and technological advances had cut IBM's market share." He added
that, "unless the next Administration (Bush's, that is) is
looking for a WPA for antitrust lawyers and economists -- I personally
would prefer job retraining -- you won't seem similar boondoggles anytime
soon."
A "boondoggle," a "make-work" project
for the lawyers -- these are strong words. Not much doubt, is it, about
how distasteful Reagan's antitrust enforcers found restraining such
"a vigorous, successful" American competitor like IBM? The fact
that in 1988, for example, IBM's non-U.S. subsidiaries (which try hard
to dodge their American heritage -- see ACR Dec/85 editorial -- "A
Chameleon") accounted for nearly three quarters of its net
profit, didn't seem to matter to Reagan's officials, anyway.
Baxter: A Fox Guarding A Chicken Coop?
In fact, following his dismissal of the IBM case in
January 1982, Baxter himself was accused by several parties appearing as
"amici curiae" ("friends of the court") in Judge David
Edelstein's court, of failing to disclose "his involvement (on
behalf of IBM) in the Memorex (v. IBM antitrust)
litigation during his confirmation hearings." In a June 1982 report,
an internal Justice Dept. investigation found that, if anything, Baxter
had overstated his role on behalf of IBM "possibly to puff his
credentials and to impress his deposition audience."
In 1976, Baxter declined an opportunity to work for Memorex
in its litigation against IBM because, he said he was already working for
IBM. But, the Justice Dept.'s Office of Professional Responsibility found
in its report that Baxter then wasn't working for IBM (i.e., for the Los
Angeles-based law firm O'Melveny, Myers which IBM had used in the
1970s for its West Coast antitrust cases against CalComp, Memorex and
TransAmerica). He had only briefly helped select some expert witnesses,
for which his consulting bill was only $1,500. The Justice Dept.'s report
speculated that Baxter was hoping to do extensive work for IBM had he been
requested to do so.
A minor "Big Blue" consultant, therefore, who
overstated his work for IBM "to puff up his credentials," but
who failed to disclose to the Congress that he had done so, was brought in
by the Reagan Administration to prosecute IBM! Talk about appointing a fox
to guard a chicken coop! Especially, considering that both the attorney
general, William French Smith, and his deputy attorney, Edward Schmults --
Baxter's superiors -- had recused themselves from acting in the IBM case
because of their prior work in other cases involving IBM. That left the
fox as the lone sentry in front of the coop.
Judge Edelstein wasn't buying it, either. In a hearing
called for March 2, 1982, the judge said that the court was "troubled
that a relationship such as the one revealed in Mr. Baxter's letter of
February 11th (1982 -- about his involvement in the Memorex v. IBM
case) apparently was not previously disclosed to the Senate Judiciary
Committee..." Later on in his hearing, the judge said that "the
apparent failure of Mr. Baxter to disclose this relationship seems to
create an appearance of impropriety."
The judge then proceeded to deliver a "sermon"
about Baxter's and the Justice Dept.'s inadequacies. "The court, from
the date it was informed of the dismissal of this case, has been concerned
that the Department of Justice may not have acted in the best interests
of the public" (emphasis added). But, the judge added "there
was little the court could do. By voluntarily dismissing the case the
(Justice) department and IBM circumvented judicial review and the
procedural safeguards of the Tunney Act" (which requires a
congressional review of any Justice Dept. settlements, but not
necessarily that of dismissals).
In other words, what Baxter and IBM did was a legal
"gotcha" which the judge resented. He went on to say "(the
fact) that the safeguards of the Tunney Act do not apply does not end the
Department of Justice's obligation to exercise independent judgment on
behalf of the public...This case literally cries out for a complete,
candid and thorough investigation of all the circumstances and the facts
surrounding this decision by the Department (of Justice) to drop the
case." He ordered the government attorneys present at the March 2,
1982 hearing to communicate the substance of his remarks to Baxter.
“Justice Is Blind...”
Source:
Annex Research
|
“... Really?”
Source:
Annex Research
|
Baxter's Absence From Court Drew Judge's Ire
Of course, it should be noted that Baxter evidently never
had the guts to show up in Judge Edelstein's courtroom on that fateful
day, January 8, 1982, when he decided to dismiss the IBM case because it
was "without merit." Which may account for some of the strong
anti-Baxter sentiments which the judge was showing.
According to the trial transcript as of January 8, 1982,
when the Justice Dept.'s assistant deputy attorney general Lipsky appeared
in court on Baxter's behalf, the judge said "I find that (Baxter's
absence) rather curious and to say the very least puzzling." As
Lipsky started to respond, "I am sure that he would be most willing
to give you such...," the Judge Edelstein cut him off with "I
leave everybody the opportunity to speculate about that."
At that point, IBM's lead attorney, Tom Barr, who had just
been speaking with Baxter on the phone from the judge's "robing
room" rose up to offer an explanation. "May I help you on that,
your Honor?" said Barr. "No, I don't think so, sir," the
judge snapped back. "I think I..." Barr tried to continue, but
was again interrupted by the judge. "I think I can eliminate any need
for speculation," Barr persisted. "I don't think so, Mr.
Barr," the judge cut him off once more. "This (Lipsky) is Mr.
Baxter's deputy." "Your Honor, I have had conversations with Mr.
Baxter," said Barr. "Mr. Barr, nothing further, please,"
the judge commanded. "As you please," Barr finally relented.
"Nothing," the judge said with determined finality.
Questioned about his absence from Judge Edelstein's court
at a subsequent hearing of the Senate's Judiciary Committee, Baxter said
"I simply felt I had to be here in Washington to make the
announcements and talk to the various far-flung members of my
staff..." In response to Senator Arlen Specter's (R-PA) question, he
did acknowledge, however, that the judge "was unhappy" about his
"failure to appear personally in that proceeding" (see the
transcript of the Senate Judiciary Committee hearing on January 25, 1982).
As can be seen from the heated exchanges in Judge Edelstein's courtroom on
January 8, 1982, to say that the judge was "unhappy" was
probably an understatement.
By failing to make a personal appearance in court on such
an important occasion, Baxter probably showed a lack of respect not just
for the judge who spent 10 years on this mammoth case, but also for the
$100 million or so which the U.S. taxpayers had spent during the 13-year
history of the case.
When questioned in the January 1982 hearing by the then
chairman of the Senate's Judiciary Committee, Strom Thurmond (R-SC), if
his decision to dismiss the IBM case "was contrary to the
recommendations of the (Justice Dept.'s) trial staff," Baxter said
"it is true that my decision in the IBM case was not agreed to, and I
am sure, would be disapproved by particular members of the trial
staff." He said he would "hesitate to attribute any particular
view to any particular individual," but he was "very, very clear
that there were members of the trial staff who did not approve of what I
was doing; indeed, strongly disapproved."
No wonder, therefore, that Judge Edelstein subsequently
charged that Baxter "ran roughshod over the member of his own trial
team" (see WSJ 1/26/82 issue). And Baxter's unilateral
decision to dismiss the case also scorched the opinions of many of his
respected colleagues and/or predecessors in the Justice Dept. Nine
attorneys general and seven assistant attorneys general during the
Johnson, (two) Nixon, Ford, and Carter Administrations -- all at least as
well qualified as he was -- evidently supported the government's antitrust
case against IBM!
Baxter: IBM Case Could Have Lasted "A Minimum Of 20
Years"
At the January 1982 Judiciary Committee hearing, Baxter
estimated that the length of the IBM case "from beginning to end
would have been at least a minimum of 20 years," an opinion which
prompted Senator Orrin Hatch (R-UT) to respond with "that's
incredible." Later on in the hearing, Baxter also said that on his
"really bad nights" he could "imagine the IBM case being
remanded for retrial in 1990, on the bases of a record that started in
1959."
But, Senator Arlen Specter (R-PA) kept questioning
Baxter's judgment in dismissing the IBM case. "The case had passed
the procedural step where a motion to dismiss was denied at the conclusion
of the Government's case," he said. "Was that not a weighty
factor to be considered by you that, essentially speaking, the trial judge
had come to a different conclusion than you had...?" Baxter replied
that he thought the case was "permitted to go on under a very loose
standard."
The allegation that Judge Edelstein let too much into the
record had been a familiar charge against him. For example, Senator Hatch
also accused the judge of what he called "bad management" which
"failed to expedite the case." Indeed, according to Faye
Chenault, IBM's manager of records at its Rotterdam, NY, facility, at the
time the case was dismissed, there were "1,254,924 record retention
boxes weighing approximately 22,000 tons." And just think -- that's
only for about half of the documents related to this case! IBM estimated
that "it has cost it over $2 million per year (just) to maintain one
million cubic feet of documents."
Examples Of Legal/Governmental Inefficiencies
Ironically, by letting the case drag on, Edelstein may
have been actually helping IBM's cause in the matter. You see, in a
fast evolving industry like computers, many decisions are no longer
relevant by the time the courts get to make them. In fact, in one of the
private antitrust cases from the mid-1970s, IBM's opponent actually went
bankrupt before the decision was ever rendered (Memory Technologies).
Another example of the inefficiencies which seem inherent
in our legal/governmental systems was IBM's 1984 settlement of the
European Economic Community's (EEC) December 1980 complaint (which the EEC
started investigating in 1977). The EEC originally charged IBM with four
violations of Article 86 of the "Treaty of Rome." Baxter himself
had actually lobbied for IBM during his stint at the Justice Dept., urging
the EEC to drop its case.
One of the four original charges was that IBM violated
Article 86 "by not offering S/370 central processing units without a
capacity of main memory being included in the price." In other words,
by bundling the memory with the processor. According to the terms of the
eventual settlement agreement, IBM gave in on this issue. It looked as if
the EEC scored a victory. But, it was a hollow one. By the time the
settlement was reached, there were no memory plug-compatible competitors
left in Europe -- thus an easy concession for IBM to make.
Baxter, Senator Hatch, Blamed "Incompetence" For
Delays
But, one probably cannot lay all the blame for the
excessive trial record and/or the numerous delays on Judge Edelstein's
shoulders alone. "The Justice Dept. continued to ask for
delays," Senator Hatch told Baxter at the January 1982 hearing.
"I suppose in part because they would file 1,800-page interrogatories
and other extensive pleadings ... which looks like the almighty power of
the Federal Government was being used to oppress rather than to resolve
these problems."
Hatch then noted that, "had it not been IBM, but had
it been some other private sector company, it could not have lasted; it
would have been broken by this case. That is probably true, is it
not?" he asked Baxter. "I think that incompetence," replied
Baxter "that is a harsh word but a softer substitute does not come to
mind -- played a larger role than the malice and oppressiveness that you
seem to be suggesting by your comments." Senator Hatch said that he
thought "incompetence" was "a very good word in this
case."
Baxter's loose use of the word "incompetence,"
however, was not necessarily limited only to the Justice Dept. attorneys,
as Senator Hatch may have meant it. Baxter might have also had the judge
himself in mind, for example. That's anyway, how the judge seems to have
taken it.
A seemingly infuriated Judge Edelstein told the Wall
Street Journal (see WSJ 1/26/82 issue) that he found Baxter's
remarks to the Judiciary Committee "self-serving" and
"absolutely appalling." "'If he (Baxter) is critical' of
the handling of the case, the judge said, 'I suggest that he is attempting
to disguise his myopia and misunderstanding of the antitrust laws and this
case specifically.'" He also told WSJ that "'even one with
prodigious intellect (i.e., implying that was not the case with Baxter)
couldn't be expected to come up with a reasoned evaluation' of the case in
the four or five months Mr. Baxter spent studying it."
Yet, less than three months earlier, the judge did not
disagree with the then assistant attorney general when, according to Tom
Barr's May 1982 affidavit, Baxter said in open court that he was "now
convinced that, despite the complexity of the record in this case, it is
in fact possible, I think, for me to learn enough about what is in that
record to put myself in the position where I would feel able to make
responsible decisions about the conduct of the litigation." Of
course, the fact that the judge said nothing or "did not
disagree," as IBM's top lawyer put it, didn't necessarily mean that
the judge agreed with Baxter, either.
Baxter's "Education" By IBM's Lawyers
By the time Baxter uttered the above words in Judge
Edelstein's court, he had already secured good tutors -- IBM's lawyers. He
requested and subsequently received their briefings (rather than by the
Justice Dept.'s attorneys) about the issues in the case. They took place
at his office almost every Friday for seven weeks between September and
December 1981. It should be noted that upon conclusion of his
"education" by IBM, Baxter decided the 13-year government's case
was "without merit."
The fact was that IBM's lawyers did such a good job of
selling their "view of the world" to an idealistic academic with
little "real world" trial or business experience (but, who
evidently hoped to do more consulting work for IBM), is an indication of
just how much IBM's "legal technology" is integrated with its
overall marketing effort. In fact, we think that it is the foundation of
everything else the company does (see the chart).
In conclusion of his questioning of Baxter, Senator Hatch
said that his concern was that "antitrust laws ought to be enforced.
If IBM broke those laws, then IBM ought to pay the consequences, and the
Government should expeditiously bring a competent case and resolve that in
the interest of the consumers of America."
Amen. Except, that this sounded like a political speech,
"wishful thinking" (if you like), considering a toothless bite
which the Justice Dept. demonstrated in this case.
How IBM Stacked Its Board With Former Government Officials
The most important question, however, was not how Baxter
felt about IBM. That was evident. The big question was how he got to be
plucked from the hallowed halls of the Stanford University Law School and
dropped into a powerful "real world" post? That question is
especially interesting considering that he returned to Stanford less than
a year after he dismissed the IBM case. And considering that all this
happened at such a crucial stage of the U.S. v. IBM 1969 case --
when all Baxter's superiors were disqualified from participating in the
decision-making.
Well, we don't have all the answers. For one thing, Baxter
never responded to our attempts a few years ago to get him to comment.
But, we think that we have enough at least to give you some food for
thought. And perhaps to raise some new questions about our antitrust law
enforcement, which may force some of IBM's current and/or former directors
to come forward with their versions of what actually happened. Maybe even
Baxter may reconsider and will talk to us now. What follows is a result of
exclusive research which has never been published before.
Early 1970s: Building Of The East Coast Team
Coming on the heels of CDC's December 1968 antitrust
lawsuit against IBM -- on the last day of Johnson's Administration -- the
government filed its massive 1969 case. Actually, the U.S. government
(Johnson's Administration) started investigating IBM for possible
antitrust violations in the mid-1960s, when Nicholas de Katzenbach was
Johnson's attorney general. It is reasonable to assume, therefore, that
Katzenbach was well versed with the theory of the government's case.
"If you can't beat them, join them," goes an old
saw. Substitute "hire" for "join," and you'll have the
basis of IBM's legal strategy in this case. In 1969, Katzenbach became an
IBM vice president and general counsel. By 1970, he was also elected to
the company's board of directors. Not since the mid-1950s, when Bruce
Bromley, a Cravath, Swaine and Moore attorney who represented IBM
in its 1952 antitrust dispute with the U.S. government, was awarded the
IBM board membership as a recognition for his service, did a lawyer sit on
the IBM board!
But, Katzenbach was only the first of many. By the time
the U.S. v. IBM trial ended, no less than eight lawyers, and ten
former government officials sat on IBM's board -- more than the equivalent
number on the boards of Bank of America, GM, Ford, Exxon, Aetna Insurance,
United Airlines, United Technologies -- COMBINED -- even though all
these companies, like IBM, are also leading American corporate giants in
their respective industries!
Asked to explain the reason for this at the company's 1984
Annual Meeting in Los Angeles, IBM's then chairman, John Opel, replied
"we select our directors on their ability to contribute to the
business, and if it sorts out at some point subsequent to that that
they're all dentists, or that they're all lawyers, it's of no consequence
to me" (see ACR Jun/84 issue).
Well, as the industry still awaits the first dentist to
join the IBM Board ... the way things got sorted out was that, after
reaching a peak of eight lawyers at the height of IBM's antitrust battles,
only three lawyers still remain (Katzenbach -- now retired from IBM as
general counsel, Scranton and Coleman)
IBM Board: "Revolving Door" For Former U.S.
Government Officials
A small IBM shareholder at its 1983 Annual Meeting in
Boston asked a similar question. He wanted Opel to explain "why so
many of our Directors are on our side of the revolving door from the U.S.
government...?" "I think that you are incorrect sir,"
replied Opel. "I think that you will find that most of our Directors
served on this Board before (emphasis added) they served the
government..."
Our "How IBM Stacked Its Board" chart (also see
Table 1), however, should help correct Opel's misinformation. It was IBM's
former chairman who evidently either didn't have his facts straight, or
misrepresented them so as not to have to deal with a ticklish question. At
the time (in 1983), of the ten IBM board members who had served in the
U.S. government, the only person who had been on the IBM board prior
to his government service was Tom Watson, Jr. -- himself a former IBM
chairman (he was the U.S. ambassador to the Soviet Union in the 1979-1980
period). All others -- Katzenbach, Vance, Irwin, Harris, Brown, Scranton,
Shapiro, Coleman, Hills -- had been appointed to the IBM Board after
their tours of duty in government service ended. Even Bechtel served on
the President's Commission on Housing in 1967-1969 prior to his
appointment to the IBM Board.
There were many other things they had in common. First,
all joined the Board after the government filed its case against
IBM in 1969. Second, their educational background, overlapping board
directorships, and other professional or business affiliations -- seem to
have played a part in how they were selected. In other words -- by
"old boys" networking.
For example, six IBM directors are Harvard alumni, five
earned their degrees at Yale (including the present IBM chairman, John
Akers), four at Stanford (including the former IBM chairman, Frank Cary),
where Baxter was and is a law professor, and where he himself earned his
degrees. Two pairs of IBM directors had gone through Princeton and
Columbia (see Table 2a).
Nor were the prominent universities the only places where
IBM directors got to rub their shoulders with each other. As of 1983,
there were 14 sets of overlapping corporate directorships between various
IBM Board members, with several of them involving even interlocking
directorships (e.g., Time Inc., Bankers Trust, Johnson & Johnson --
see Table 2b). There were also at least 15 other affiliations and/or
memberships which brought various IBM directors together. Among them, the
Business Council (Bechtel, Houghton, Opel, Shapiro, Rizzo), and the
Trilateral Commission (Brown, Coleman, Hills, Scranton, Vance), take the
two top spots -- each linking up five of IBM's directors (see Table 2c).
Split Loyalties
IBM's outside directors also took an active role in the
case. At one time, IBM's Board even had a special legal committee which
was "comprised of all outside attorneys on the board" (i.e.,
Coleman, Hills, Irwin, Scranton and Shapiro), according to a Katzenbach
affidavit. Members of this special IBM committee submitted affidavits in
support of IBM's motions to have Judge Edelstein disqualified. In 1979,
the five IBM "outside attorneys" concluded that he had "a
personal bias and prejudice against IBM, and in favor of plaintiff (i.e.,
the government), that his impartiality in this case may reasonably be
questioned, that he has a bent of mind that will prevent impartiality of
judgment..."
Actually, "all" IBM's "outside
attorneys" did not file affidavits in support of the company in 1979.
That's because some of them were cabinet-level members of the Carter
Administration at that time (Vance, Harris, Brown). Even though they were
by the very nature of their positions supposed to act in the best
interests of their clients -- the U.S. taxpayers, there were no affidavits
filed by them, in opposition to those by their former IBM peers,
and in support of the government which they served.
Which begs the question -- whose interests did they
actually represent while receiving government salaries -- that of IBM,
their former and, as it turned out, future benefactor, or that of the U.S.
taxpayers?
Late 1970s: The West Coast Team Nets Baxter?
While some of the Democrats among IBM's directors were in
Washington, two new former government officials, this time -- the
Republicans (Coleman, Hills) were appointed. Bill Coleman was (and is) a
partner of O'Melveny, Myers, which, besides representing IBM, also
used Baxter as a consultant in that controversial IBM v. Memorex
case. Carla Hills, meanwhile, is a Stanford University graduate (1955),
the same year Baxter received his "J.D." degree from Stanford.
And she was a member of the Stanford Executive Council before being
appointed to her current post as the Trade Secretary in President Bush's
cabinet.
Was all this a pure coincidence? Perhaps. But, there is
more. Curiously, the only other addition to the IBM Board in the late
1970s was Stanford's president Richard Lyman (in 1978)! And, Reagan's
first Secretary of the Interior, William Clark, attended Stanford the same
year Baxter received his post-graduate degree there (1951). A classmate,
perhaps?.
Add to it the fact that Steve Bechtel, the chairman of the
San Francisco-based Bechtel Group and an IBM director since 1976, and
Frank Cary, IBM's chairman during the most critical phase of the U.S.
v. IBM case (1973-1983), were also Stanford (1948) classmates -- and
one begins to realize that there would have to be some pretty awesome odds
for all these people to become involved coincidentally in some
fashion in the government's case against IBM. One cannot help but wonder
what the actuaries would calculate such odds to be? (see Tables 2a through
2c).
Watson Sr. Probably Would Have Been Proud
Of course, if IBM directors did use their connections to
manipulate Baxter into his government job, this would have been done in
the finest traditions of Tom Watson Sr. -- IBM's chairman for nearly five
decades. Although his father was a Democrat, Watson managed to find words
of praise for whoever happened to occupy the White House. With (F.D.)
Roosevelt he became quite chummy, helping him sell the "new
deal," although the Justice Dept.'s 1932 antitrust lawsuit against
IBM was in progress.
Watson is often mistakenly termed a "founder" of
the IBM company. Instead, this man, revered inside IBM almost like an
"icon" (his pictures used to hang on the walls of IBM offices),
joined the company which was to become IBM only after being
convicted in the U.S. government's first-ever criminal antitrust case in
1913. He was sentenced to a $5,000 fine and a year in jail on February 13,
1913 -- for his antitrust violations while working for NCR. He escaped
serving his sentence by taking part in NCR's flood relief efforts in Ohio
during that year. The incoming President (Woodrow Wilson), offered his
congratulations to NCR executives and urged a pardon for their
humanitarian work (see "IBM: Colossus In Transition," by
Robert Sobel). In 1915, the original judgment was overturned on a
technicality. The case was never refiled.
The "ultimate politician," Watson Sr., learned
to support all people in power, almost regardless of their political
beliefs or affiliations. For example, in the 1930s, he praised Mussolini,
and had even accepted awards from the fascist Italy and Hitler --
something which he later said he regretted -- as he rushed off to help the
American war effort (see Rex Malik's book "And Tomorrow...The
World?").
In 1952, when the outgoing Truman's (Democratic)
Administration filed its antitrust lawsuit against IBM, Watson Sr. was
reportedly outraged. That time he evidently bet on a wrong horse. He had
backed Dwight Eisenhower, a Republican! Watson charged that the Justice
Dept.'s lawsuit, which eventually led to the famous 1956 Consent Decree,
was a result of Harry Truman's vindictiveness.
In the end, what Watson Sr. learned most of all, was that
IBM's investments in its legal technology and government relations were at
least as important as its investments in technology and people.
Washington Post: IBM -- "A Corporate Rambo"
Given Baxter's apparent pro-IBM bias, it is no wonder that
an Oct/85 Washington Post editorial entitled "Is IBM Good For
America," commented among other things, that "with scores of
American companies screaming for protection from Japanese firms or
surrendering their production to them, the spectacle of Tokyo executives
quaking before an American corporate giant makes IBM seem a sort of a
corporate Rambo, a living symbol that the American industrial system still
has a little life left in it. This, more than anything else, lends
credence to the argument that IBM is a 'national resource' not to be
trifled with by antitrust or other punitive actions."
The Washington Post, on whose board of directors,
by the way, IBM's former general counsel, Nicholas de Katzenbach, had been
for years, concluded that, "although perhaps the greatest
U.S.-based corporation in history, there may be dangers in single-mindedly
signing up IBM as our 'centurion' in the growing battle with overseas
competitors. By emasculating the antitrust laws that may be the only
brakes on its growth, we might, out of fear of Japan, concede far too much
power to a corporation whose unbridled sprawl could spell disaster for the
entrepreneurs who have made this nation the world's innovative
wonder."
Jan/85: Commerce Defers To Justice Dept. For Consumer
Protection
Such concerns, however, left many Reagan Administration
officials unfazed. In our CMS Bulletin 85-06, 1/28/85, for example,
we quoted Tim Miles, a Commerce Dept. official who said that, "as
long as there is competition in the marketplace, that's just fine. The
Japanese vendors represent a real threat to our software industry and we
need strong competitors. And even if, in the end, IBM were the only one
left, so be it."
"... The Japanese will
probably use the same tactics in the software business as they did in
the consumer electronics industry," speculated the spokesman.
"They'll mass-produce the products and try to beat everyone else on
a price basis."
"What's wrong with
that," we wondered. Isn't the American consumer going to be better
off as a result? In the software business, lower prices are even more
important since they will help increase everyone's productivity.
Besides, this may also force our own vendors to become more
efficient."
"...Isn't there somebody in
our government whose job it is to look after the users' interests?"
we were beginning to get exasperated. "For example, certain IBM
mainframe software policies and rising prices are clearly detrimental to
end users. Are you familiar with what I am talking about?"
"Yes, I am. But, we can't
criticize a single competitor," explained the spokesman. "You
can afford to do it in private industry, but we can't." We told him
that, "when it comes to telling the truth, there should be no
difference between private industry and the government. They should both
be willing to speak the truth. And if the truth hurts, so be it."
"We do speak the truth,
too" the Commerce Dept. spokesman replied defensively. "But,
it's is not our job to criticize the software policies which you
mentioned. That's something for the Justice Department to handle."
The preceding conversation took place over four years ago.
Perhaps the most disturbing part about it is that, were it to take place
today, we wonder if it wouldn't be just as relevant.
Justice Dept. Turns Blind Eye On IBM's Software Monopoly
You see, asked during the recent dinner meeting what his
most important "mission in life" was as the assistant attorney
general in charge of Justice Dept.'s antitrust division, Rule confirmed
that it was "to protect the American consumers." A succinct
answer indeed, and one with a noble ring to it. Now, let's examine the IBM
mainframe software price trends, for example, to see how well the Justice
Dept. represented the American consumers' interests in that burgeoning
market.
Between 1980 and 1987, IBM's MVS prices increased
nine-fold without clearly measurable off-setting financial benefits to the
user (see CMS BULLETINS 87-29, 5/27/87 and 87-32, 6/08/87). That's
a 35% compound annual increase. The VM prices went up seven-fold during
the same period, or 32% compounded annually.
At the same time, IBM tightened up the terms and
conditions under which it markets software (to the customers'
disadvantage, of course, and possibly in violation of its 1956 Consent
Decree). The company started to implement increased portions of its
operating systems in microcode -- an act of physical bundling, if you
will. Of course, both measures were intended to protect its monopolistic
(i.e., sole-source) position from any competitive entries (see CMS
BULLETINS 85-10, 2/20/85, and 85-13, 2/26/85, and 89-08, 1/30/89).
Finally, IBM's 73.4% 1988 software gross margin, by far
the highest of any of its other business segments, leaves no doubt about
how profitable a monopoly can be.
Meanwhile, what did the antitrust division of the Justice
Dept. do about it (which, according to the Commerce Dept. anyway, is
supposed to be concerned about such things)? Evidently, not much --
judging by a lack of action despite such a lip service to congressional
inquiries as its launching of the 1984 "investigation" of IBM's
settlements with Hitachi and Fujitsu (see CMS BULLETIN 85-41, 7/30/85).
With "friends" like the Justice Dept., American
computer users don't seem to need any enemies, do they? Possibly the only
encouraging bit of news for the American consumers in the 1980s has come
not out of the Justice Dept., but out of the American Arbitration
Association's decision in the IBM-Fujitsu dispute (see CMS BULLETIN
88-63, 12/05/88).
IBM's 1983 Request Re. Consent Decree: How IBM Lawyers
Blew It?
It is even more interesting that, when IBM asked the
Justice Dept. in August 1983
Billy-boy Baxter”
|
(i.e., while Baxter was still in charge of its antitrust
division), to lift the 1956 Consent Decree, apparently all IBM needed to
do was respond to a routine Justice Dept. request, and IBM would have
probably gotten away with that, too.
"We might have been favorably inclined toward that
(request)," explained Rule, "had IBM lawyers pursued it more
aggressively. We asked for more information, but they never came back to
us." What a strategic "faux pas," as IBM is now finding out
having been once again pursued in Judge Edelstein's court by Allen-Myland
Inc. and the Computer Dealers and Lessors Association for alleged
violations of that Decree! (see CMS BULLETIN 89-08, 1/30/89).
Baxter/McGrath/Ginsburg/Rule Legacy: Pragmatic Law
Enforcement
From all that we've said so far about the Reagan Justice
Dept.'s assistant attorneys general's lack of effectiveness in antitrust
law enforcement, it would be easy to conclude that William Baxter, J. Paul
McGrath (who followed Baxter), Doug Ginsburg (who followed McGrath), and
Charles Rule -- should all be condemned for neglect of their duties. Easy,
perhaps, but also wrong.
You see, one thing that distinguishes Reagan's antitrust
law enforcers from their predecessors was that they chose only to fight
the battles they thought they could win -- against the smaller predators.
They were realists, pragmatists, if you will, who, like the good business
executives, accepted a bad system for what it was, and then tried to make
the most of it. They chose to focus on the criminal antitrust law
enforcement, especially against the individuals, and on the mergers.
One could argue, of course, that, as a result, they let
some "big creatures break through (the legal spider web) and get
away" -- to borrow Solon's argument. But, one could also argue that
it is not necessarily the job of the Justice Dept.'s officials to act as
crusaders, and try to correct the inadequacies of the American legal
and/or governmental system. That should be up to the President, the
Congress and the courts to fix.
So, if IBM and/or other industrial giants may have
"gotten away with murder" during the Reagan years at the expense
of American consumers, that's because all three branches of government
dropped the ball, and not just the Justice Dept. officials.
Better Return On Taxpayers' Money; A $1 Million
Overpayment!
In fact, measured on a "price/performance basis"
(i.e., in terms of the Justice Dept.'s return on taxpayers' investments),
Reagan's antitrust crew actually did a very good job. Despite an almost
$25-million cut in its budget since Reagan took office (about 36%), and
about 40% fewer professionals, the government antitrust lawyers filed 39%
more cases (100) in 1987, than was the case in 1978 (72). "(The)
Congress would likely be even less generous with an Administration that
tilts at windmills," said Rule, an admitted Republican.
The U.S. Congress would probably have been even less
generous had it known that Reagan predecessors' Justice Dept. heads
had overpaid some government expert witnesses by as much
as $1 million! That amount makes the Reagan Defense Dept.'s purchase of a
$700-hammer a good bargain by comparison.
Rule says he remembers receiving a $1 million refund check
from Dr. Alan McAdams, an economist, who acted as one of government expert
witnesses in the IBM case. "I promptly turned it over to the
IRS," says Rule. The Justice Dept.'s $1 million overpayment of
McAdams' fees was discovered by his auditors, years later. McAdams wrote
that he "just couldn't keep it in good conscience," says Rule.
Earlier in this report we mentioned that both Baxter and
Senator Hatch agreed that the Justice Dept.'s handling of the case was
full of "incompetence." It seems that "wastefulness"
would be just as appropriate an attribute.
1977: A Watershed Year In The Courts?
Rule also argues that, "the watershed year in the
courts was 1977 -- the year President Carter took office." He feels
that, "the most significant changes in antitrust policy in general,
and enforcement policy in particular, have been wrought -- or at least
blessed -- by the courts." That's why, Rule figures that those
changes would endure, well past the Reagan Administration's legacies.
The fact that, "the Supreme Court rarely considers a
major antitrust issue without first seeking the (Justice) Department's
views" -- a statement which Rule made in his address to his New York
antitrust colleagues -- should give you a fair idea of how
"unpoliticized" our system of justice is.
And here we were, at the outset of our research almost six
years ago, perhaps naively believing the old saw -- "justice is
blind." Maybe for the small and powerless that still holds true. For
the big and powerful companies, however, off of which it largely feeds, we
now think that "justice" has a 20/20 vision.
Happy bargain hunting!
Bob Djurdjevic
NOTE: The illustrations in this Annex
Bulletin come from the Annex Bulletin 95-57, Sep. 22, 1995 - "Free
Market Reality Debunked Baxter's Theory." The following verses
also originate from the same Annex Bulletin issue:
Antitrust
(Sinners’) Lullaby
Lessons
learned from the IBM, AT&T cases...
Some
trustbusters aren’t necessarily the corporate shareholders’
enemies; (Baxter - IBM case);
Some
trustbusters aren’t necessarily the American consumers’
friends; (Baxter - AT&T case);
So
if you’re up to here in antitrust sin,
Hold
your fear and thrust up your chin.
Above
all, have faith and never despair!
Just
point at the Japanese and shout: Look who’s there! Look who’s there!
And
while the Capitol Gang slash and bash the men from overseas,
Hire
the best board money can buy in Washington, Disease.
Have
them find you another
“Billy-boy Baxter,”
He’ll
put your Humpty-Dumpty together - faster.
The following anecdote also comes from
the Annex Bulletin 95-57, Sep. 22, 1995, in which we contrasted the
AT&T break-up to the Justice Department's failure to break up IBM:
How
Big Is the U.S. Telecom Industry?
The
Washington-based Federal Judge, Harold Greene, addressed a gathering of computer and communications
legal experts in Phoenix in January 1985.
For those of you who may not know Judge Greene, he is a tiny man,
maybe just over five feet tall, whose head was barely protruding above
the lectern.
But that did not stop him from presiding over one of the largest
corporate breakups in history - the AT&T divestiture
(1982-1984).
The
Judge at first confessed that he was getting lots of complaints from
AT&T customers from across the country.
Some angry people even wrote to the Judge asking him to correct
the errors on their AT&T’s bills.
Then
the Judge spoke about the mammoth challenge which the task of breaking
up AT&T has been.
Yet he said that the nine-year old son of his next door neighbor
was quite specific about the size of the industry.
"I
know exactly how big the telecommunications industry is," the boy
boasted confidently.
"It's four feet!"
"How
so?" wondered his Dad.
"Well,
I've heard Judge Greene say that he has had it up to here (motioning up
to his chin) with the U.S. telecommunications industry." J
APPENDICES TO THE "IS
ANTITRUST DEAD?" (1989)
Table 1 -- HOW IBM STACKED ITS BOARD
Table 2a -- HOW IBM NETWORKING WORKED
IBM Board Connections -- by college background
-------------------------------------------------------------------------------------
BROWN, Harold NY Columbia-Ph.D. 1949 Scientist 1972
MUNRO, Richard NY Columbia-post. grad. TIME INC. Executive
1979
HOUGHTON, Amory NY Harvard-A.B. 1950 CORNING Executive
1966
COLEMAN, William PA Harvard-LL.B. 1946 Lawyer 1977
LYMAN, Richard PA Harvard-MA/PhD 1948/54 Academic 1978
BURKE, James VT Harvard-M.B.A. 1949 JOHNSON & J. Exec
1980
HOUGHTON, Amory NY Harvard-M.B.A. 1952 CORNING Executive
1966
BEITZEL, George PA Harvard-M.B.A. 1955 Ex-IBM Executive
1972
IRWIN, John IA Princeton-A.B. 1937 Lawyer 1970
KATZENBACH, Nicholas PA Princeton-B.A. 1945 Lawyer/IBM
Exec 1970
BAXTER, William NY Stanford-J.D. 1955 Academic N/A
HILLS, Carla CA Stanford-A.B. 1955 Lawyer 1977
CLARK, William CA Stanford- Ed. 1951 US Scty of Inter. N/A
BECHTEL, Stephen IN Stanford-M.B.A. 1948 BECHTEL Exec.
1976
CARY, Frank ID Stanford-M.B.A. 1948 Ex-IBM Chairman 1968
LYMAN, Richard PA Stanford U.-Pres Academic 1978
AKERS, John MA Yale-B.S. 1956 IBM Chairman 1983
VANCE, Cyrus WV Yale-LL.B. 1942 Lawyer 1969
SCRANTON, William CT Yale-LL.B. 1946 Lawyer 1973
KATZENBACH, Nicholas PA Yale-LL.B. 1947 Lawyer/IBM Exec
1970
HILLS, Carla CA Yale-LL.B. 1955 Lawyer 1977
Source: Annex Research (c) Copyright 1989 by Annex
Research. All rights reserved. Unauthorized reproduction strictly
prohibited.
__________________________________________________________________
Table 2b -- HOW IBM NETWORKING WORKED
IBM Board Connections -- by overlapping directorships
----------------------------------------------------------------------------------------
BROWN, Harold NY Scientist AMAX 1972
COLEMAN, William PA Lawyer AMAX 1977
COLEMAN, William PA Lawyer American Can 1977
MOORE, William BANKERS TRUST Exec American Can 1958
BEITZEL, George PA Ex-IBM Executive Bankers Trust 1972
MOORE, William BANKERS TRUST Exec Bankers Trust 1958
COLEMAN, William PA Lawyer Chase Manhattan Bank 1977
LYMAN, Richard PA Academic Chase Manhattan Bank 1978
HOUGHTON, Amory NY CORNING Executive Citibank &
Citicorp 1966
SHAPIRO, Irving MN Lawyer Citibank & Citicorp 1974
HILLS, Carla CA Lawyer Corning Glass 1977
HOUGHTON, Amory NY CORNING Executive Corning Glass 1966
CARY, Frank ID Ex-IBM Chairman Hospital Corp. of A. 1968
SHAPIRO, Irving MN Lawyer Hospital Corp. of A. 1974
BURKE, James VT JOHNSON & J. Exec Johnson &
Johnson 1980
RIZZO, Paul NY Ex-IBM Vice Chmn Johnson & Johnson 1972
IRWIN, John IA Lawyer Morgan Gty Intl Cncl 1970
MOLLER, Maersk Denmark A.P. MOLLER Exec Morgan Gty Intl
Cncl 1970
AKERS, John MA IBM Chairman N.Y. Times 1983
SCRANTON, William CT Lawyer N.Y. Times 1973
VANCE, Cyrus WV Lawyer N.Y. Times 1969
LYMAN, Richard PA Academic Rockefeller Fnd-Pres 1978
BROWN, Harold NY Scientist Rockefeller Fnd 1972
COLEMAN, William PA Lawyer Rand Corporation 1977
BROWN, Harold NY Scientist Rand Corporation 1972
HARRIS, Patricia IL Lawyer Scott Paper 1971
SCRANTON, William CT Lawyer Scott Paper 1973
MUNRO, Richard NY TIME INC. Executive Time Inc. 1979
WATSON, Thomas OH Ex-IBM Chairman Time Inc. 1952
Source: Annex Research (c) Copyright 1989 by Annex
Research. All rights reserved. Unauthorized reproduction
strictly prohibited.
_______________________________________________________________
Table 2c -- HOW IBM NETWORKING WORKED
------------------------------------------------------------------------------------
BAXTER, William NY Academic Stanford Professor N/A
LYMAN, Richard PA Academic Stanford U.-Pres 1978
HILLS, Carla CA Lawyer Stanford Exec Council 1977
BAXTER, William NY Academic O'Melveny, Myers-cnslnt N/A
COLEMAN, William PA Lawyer O'Melveny, Myers-partner 1977
BECHTEL, Stephen IN BECHTEL Exec. Business Council 1976
HOUGHTON, Amory NY CORNING Executive Business Council 1966
OPEL, John MO Ex-IBM Chairman Business Council 1972
SHAPIRO, Irving MN Lawyer Business Council 1974
RIZZO, Paul NY Ex-IBM Vice Chmn Business Council-NY 1972
BURKE, James VT JOHNSON & J. Exec Business Roundtable
1980
OPEL, John KS Ex-IBM Chairman Business Roundtable 1972
SHAPIRO, Irving MN Lawyer Business Roundtable 1974
BECHTEL, Stephen IN BECHTEL Exec. Calif Inst of Techn 1976
BROWN, Harold NY Scientist Calif Inst of Techn 1972
WATSON, Thomas OH Ex-IBM Chairman Calif Inst of Techn 1952
COLEMAN, William PA Lawyer Council-Foreign Rel. 1977
KATZENBACH, Nicholas PA Lawyer/IBM Exec Council-Foreign
Rel. 1970
VANCE, Cyrus WV Lawyer Council-Foreign Rel. 1969
BEITZEL, George PA Ex-IBM Executive Eisenhower Exchange
1972
MOORE, William BANKERS TRUST Exec Eisenhower Exchange 1958
COLEMAN, William PA Lawyer NAACP Legal Defns 1977
KATZENBACH, Nicholas PA Lawyer/IBM Exec NAACP Legal Defns
1970
BECHTEL, Stephen IN BECHTEL Exec. Nat'l Eng Academy 1976
BROWN, Harold NY Scientist Nat'l Eng Academy 1972
IRWIN, John IA Lawyer Princeton U. trustee 1970
KATZENBACH, Nicholas PA Lawyer/IBM Exec Princeton U.
trustee 1970
BROWN, Harold NY Scientist Rockefeller Fnd 1972
VANCE, Cyrus WV Lawyer Rockefeller Fnd 1969
LYMAN, Richard PA Academic Rockefeller Fnd-Pres 1978
BROWN, Harold NY Scientist Trilateral Comm. 1972
COLEMAN, William PA Lawyer Trilateral Comm. 1977
HILLS, Carla CA Lawyer Trilateral Comm. 1977
SCRANTON, William CT Lawyer Trilateral Comm. 1973
VANCE, Cyrus WV Lawyer Trilateral Comm. 1969
BURKE, James VT JOHNSON & J. Exec United Negro Coll
1980
MUNRO, Richard NY TIME INC. Executive United Negro Coll
1979
BURKE, James VT JOHNSON & J. Exec United Way 1980
OPEL, John KS Ex-IBM Chairman United Way 1972
RIZZO, Paul NY Ex-IBM Vice Chmn United Way 1972
AKERS, John MA IBM Chairman Yale Adv Board 1983
BAXTER, William NY Academic Yale Law School-Prof N/A
KATZENBACH, Nicholas PA Lawyer/IBM Exec Yale Law
School-Prof 1970
Source: Annex Research
(c) Copyright 1989 by Annex
Research. All rights reserved. Unauthorized reproduction strictly
prohibited.
________________________________________
NOTE: The print edition of this report, of course, contains additional charts and tables not included
here.
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