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FROM ANNEX ARCHIVES - ANTITRUST
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?"
"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?"
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.
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).
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 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
(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!
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:
learned from the IBM, AT&T cases...
trustbusters aren’t necessarily the corporate shareholders’
enemies; (Baxter - IBM case);
trustbusters aren’t necessarily the American consumers’
friends; (Baxter - AT&T case);
if you’re up to here in antitrust sin,
your fear and thrust up your chin.
all, have faith and never despair!
point at the Japanese and shout: Look who’s there! Look who’s there!
while the Capitol Gang slash and bash the men from overseas,
the best board money can buy in Washington, Disease.
them find you another
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:
Big Is the U.S. Telecom Industry?
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
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
NOTE: The print edition of this report, of course, contains additional charts and tables not included here.
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Volume VI, No. 1989-17
Editor: Bob Djurdjevic
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