On August 27, 2010, the Justice Department’s Antitrust Division, led by Christine Varney, closed its investigation into the merger of United and Continental Airlines without taking any formal action. (The airlines transferred some takeoff and landing slots to Southwest, but the DOJ did not impose that condition via a court order.) The venerable New York law firm Cravath, Swaine & Moore, represented the airlines. According to Cravath, the lead partner on the antitrust review was Katherine Forrest.
Less than two months later, Varney hired Forrest to serve as one of her deputy assistant attorneys general at the Antitrust Division. It was a curious move. Forrest is highly regarded in the legal community and she was a well-paid partner at one of New York’s top firms. Why leave that for a short-term gig as a third-tier government lawyer? As the New York Law Journal noted at the time, when Cravath partners left the firm, it was generally for corporate general counsel gigs, not a deputy AAG’s post.
Well, after just three months on the job at DOJ, Forrest secured a slightly more prominent bureaucratic prize when New York Sen. Chuck Schumer recommended her for a vacant seat on the federal district court in Manhattan. The Senate Judiciary Committee held a confirmation hearing last month, and there’s no reason to believe the full Senate won’t approve her.
Which brings us back to Christine Varney, who announced her resignation yesterday, effective next month, from the DOJ’s Antitrust Division. She’s accepted a new position…as a partner at Cravath, Swaine & Moore. It’s the circle of life!
So in less than a year, Ms. Varney and Ms. Forrest pulled off quite the switcheroo. Varney effectively takes Forrest’s job at Cravath, cashing in on her two-plus years of “experience” running the Antitrust Division — the average Cravath partner earns about $3 million annually, according to one legal publication — while Forrest gets a lifetime appointment to the bench, where she’ll receive a nice taxpayer-funded salary while still collecting over $3.8 million in deferred compensation from Cravath over the next ten years.
For its part, Cravath gets a new antitrust partner who had a major hand in rewriting the DOJ-FTC horizontal merger guidelines — Varney announced those about a week before she approved the United-Continental merger — which will no doubt make her and the firm more attractive to clients who need future antitrust approval for their deals. Who better then the person who wrote the rules to advise you on how to follow them? (Of course, Varney’s successor could go in a completely different direction, since the “merger guidelines” are not binding law.)
So all these lawyers benefit handsomely at the expense of the corporations who pay not only for private firms like Cravath but also subsidize the majority of Antitrust Division expenses. It’s a little publicized fact that the Antitrust Division (and FTC) collects “filing fees” from companies that are legally required to submit their mergers — about 95% of which are approved without any formal investigation — to the antitrust agencies for approval. In 2010, about 63% of the Antitrust Division’s budget came from regulated companies and not the general taxpayers. Thus, companies like United Continental are paying for their prosecution and defense.
This is not a system that promotes frugality. If you’re Christine Varney and you know you will only hold your politically appointed office for a couple years at most, you need to maximize your potential marketability to future employers. That means new initiatives, targeting politically unpopular businesses, more cases — even ones that clearly don’t make any sense — and building alliances with outside law firms, like Cravath, that regularly do business with your department.
All this makes a former assistant attorney general for antitrust a valuable commodity to Big Law and Big Business alike. Varney’s immediate predecessor as AAG, Thomas Barnett, returned to his prior partnership at Covington & Burling, where he co-chairs the antitrust and consumer law group. Barnett’s predecessor, R. Hewitt Pate, is now general counsel at Chevron, a job he took over last year from Charles A. James, who was — wait for it — Pate’s predecessor as assistant attorney general.
That’s not to say there are no “ethics rules” applicable to Varney. She’s barred by law directly representing a client before the DOJ for two years. And Cravath will no doubt prohibit her from working on cases that she initiated at the Antitrust Division. But there’s no way to prevent her from advising clients — even ones she sat across the table from as AAG — and privately counseling them. And the mere fact she’s on the firm’s letterhead instantly makes Cravath a more appealing hire for companies, especially while the rest of the Obama regime remains in power.
As with most government-based “ethics” rules, the two-year lobbying ban is purely cosmetic. It doesn’t address the core of a rotten system that rewards people who aggressively work both sides of the regulatory fence. For example, what if during their meetings on the United-Continental deal, Katharine Forrest told Varney of her plans to leave Cravath, creating a back channel for Varney to express interest in joining the firm. Technically no law would be broken. And if Varney offered Forrest the DOJ position as a means of helping her transition to a federal judgeship — which she was no doubt under consideration for at the time she left Cravath — that also probably didn’t break any laws. As Varney herself might say in a “price-fixing” case, there can be collusion without any overt evidence as such.
Even if there was no fire here, there’s enough smoke to make you wonder. And the answer isn’t for Congress or the White House to make up some more phony “ethics” rules. It’s up to the companies who finance the antitrust system to demand substantive change. If you hire a firm — and pay a premium — to get advice from an ex-AAG or, worse yet, appoint such a person as your in-house counsel, then you are part of the problem.
It’s fallacy to argue that companies need to hire people like Christine Varney or Hewitt Pate because of their alleged expertise. This is the “It’s the cost of doing business” argument. Trust me, you can usually scare off the antitrust regulators by making some public noise and hiring a lawyer who makes it clear from the outset that they won’t negotiate with terrorists. The DOJ and FTC’s records aren’t so impressive in the face of full-force opposition before a nominally impartial court. Smart companies would cultivate dedicated in-house counsel to defend their shareholders’ interests at all costs — as opposed to double agents like Varney promoting their own standing within the antitrust community.