In early August 1978, Harry R. Hinkes, then a 68-year-old law judge at the Federal Trade Commission, walked into the office of another FTC judge and suddently announced that he planned to retire at the end of the month.
Although federal employes retire all the time, this announcement was a little different. Hinkes had been taking testimony for more than two years in the commission's landmark antitrust suit against the three largest members of the nation's cereal industry.
FTC officials panicked. Millions of dollars had been spent on the case, and they faced the possibility of retrying the entire cereal matter.
What followed is a complex and somewhat confusing tale of how the FTC kept Hinkes on board by offering him a $72,000 contract, approved by Ftc chairman Michael Pertschuk -- a contract largely viewed by federal management officials and others as an improper, possibly illegal deal. Pertschuk later said the arrangement by which Hinkes remained on the case was of "questionable validity."
There is no evidence that the Civil Service Commission, which monitored the affairs of these judges at that time, officially approved the contract. Marvin Morse, new director of the Office of Administrative Law Judges at CSC's successor, the Office of Personnel Management, recently said such contracts are not "lawful or proper . . . We would not approve such a contract."
A congressional prober puts it even more bluntly. "Basically, the FTC procured a judge like a piece of meat," said the source. "But I don't think what Hinkes did was ethical or proper either."
Although the case against Kellogg Co., General Mills Inc. and General Foods Corp. did continue, and the record of evidence is now closed, the three companies claim the whole matter has been unfairly and irreparably tarnished.
The cereal case is considered one of the government's four most important pending antitrust cases because it addresses the question of shared monopoly -- or industries in which a few companies control most of the market. At stake is the structure of the entire multibillion-dollar cereals industry -- and other similar industries.
Without question, the "Hinkes affair" as it has come to be known in legal circles, has delayed the cereal case by months. Further, it has brought out the best and the worst of congressional lobbying efforts in connection with the FTC and has resulted in the passage of an amendment by the House Civil Service Committee to bar clearly the practice of retaining these judges while they are annuitants (recipients of a fixed pension payment). t
A detailed look at the events in the Hinkes case now can be constructed through memos, sworn affidavits and internal commission documents.
On that August 1978 day, Hinkes told Ernest Barnes, assistant chief adminstrative law judge at the commission, that he could not afford to miss the opportunty to garner a 4.9 percent cost-of-living retirement bonus that he would not receive unless he retired by Sept. 1, Barnes recalled.
Barnes says he was surprised by Hinkes' announcement. Hinkes, who had first joined the federal government in 1945, had been hearing testimony in the cereal case for more than two years, and Barnes said he thought Hinkes had a commitment to see the case through.
If Hinkes had left the commission at the time, if was possible the case would have to be retired completely and perhaps could result in the commission being forced to drop the entire matter, FTC officials feared. About 36,000 pages of testimony already had been taken and it appeared at the time that the case was within a few weeks of completion. Only Hinkes' task of writing the initial decision remained for him to complete.
But there was one way out. Although Hinkes and Barnes disagree about who first raised the idea, Hinkes said he would consider signing a contract that would pay him enough money to keep him on board.
On Sept. 7, after considerable handwringing about the fate of the FTC's much-ballyhooed cereals case, Hinkes had his contract. It had been approved by Pertschuk, on the advice of counsel, and called for Hinkes to receive compensation, including his pension, of almost $72,000, considerably more than any other federal administrative law judge. The previous year, Hinkes had earned $47,500.
All sides in the case admit mistakes were made in the handling of the Hinkes question. To the FTC, it was a regrettable but innocent blunder.
But in time the blunder has become so serious that Pertschuk, in response to a proposal by the cereal companies, Friday reversed a year-and-a-half-old position and removed himself from commission consideration of motions regarding the Hinkes affair.
To cereal companies such as Kellogg's, the Hinkes contract was a violation of federal law that at least should result in a retrial of the case.
For members of a House Civil Service investigative subcommittee, it points up holes in the entire administrative law judge system. At the FTC, these judges, employes of the commission, hear significant cases such as the cereals case.
One high level official, Charles Dullea, former director of the Office of Administrative Law Judges at the Civil Service Commission, wrote to Raymond Jacobson, the executive director of the CSC, in 1978 to lay out the ramifications of the case for law judges and the entire federal work force. t
"You should be aware," he wrote, "of a situation, if the media learns about it, [the case] could be used to reflect adversely generally on federal employes and on the Corps, but with particularity on one ALJ. The conduct of the ALJ is shameful to say the least."
Hinkes' wife was ill in California, Hinkes said, and he was tired of the journey from Washington to the West Coast. "I had to leave the case or leave my wife, one of the two," Hinkes recalled in a sworn statement. "And I defy anyone to tell me I should have left my wife."
Barnes, in an affidavit, remembers it a bit differently. "The difference between his take-home pay and his retirement pay would be such that it was not worthwhile for him to continue working," Barnes said. "He therefore had decided that at his age he should retire now to take advantage of the cost of living bonus and the tax-free period of his retirement."
Hinkes says any statement that he had a commitment to stay on the case was an "untruth." Further, he recalled that Barnes called him "greedy" and "unpatriotic." In addition, Hinkes said that he would be willing to continue his work on the case in Los Angeles where his wife was getting medical treatment.
Barnes talked to Daniel H. Hanscom, the chief judge at the FTC, about a contractual arrangement. In conversation with Barry Kefauver, who then was the FTC's assistant executive director, Barnes insisted that the only option that would keep Hinkes on the case was a contract.
Kefauver discussed the contractual options with Dullea of Civil Service. According to Kefauver, in an affidavit, Dullea "expressed sympathy with the agency's dilemma and agreed that we apparently had no alternative but to yield to Judge Hinkes, given the substantial financial investment in the case."
Kefauver discussed the Hinkes contract situation with Daniel Schwartz, who at the time was deputy director of the Bureau of Competition.
"Schwartz stated that the agency had no alternative but to offer Judge Hinkes a contract or face the likelihood of retrying the whole cereal case," Kefauver recalled. The FTC officials concluded that the cereal case already had cost the FTC more than $5 million.
Later in August 1978, Pertschuk called Hinkes "and in a very brief conversation, indicated only that I hoped he would accept the contractural arrangement and complete the case," Pertschuk recalled in a 1978 statement, noting that he did not discuss with Hinkes the merits or handling of the case. Nevertheless, such a contact between a commission chairman and a sitting law judge is highly unusual, if not improper, experts say.
"Understanding as I did that the arrangement with Judge Hinkes presented no legal problems, I concluded that the potential benefit to all concerned in having the case concluded in a manner that did not entail significant delays and burdens on the parties, justified that arrangement to retain the services of Judge Hinkes," Pertschuk said in his statement.
But Pertschuk recalled that after he reviewed briefs of the parties in the case and realized that the contract had not been approved by the Civil Service Commission, he concluded that Hinkes' remaining on the case "was of questionable validity." Pertschuk approved the contract from a New England vacation spot where he spent that entire month and did not seek the views of other FTC members.
But Kellogg's goes a bit farther. Christopher McNaughton, the company's senior vice president and general counsel, told the House subcommittee this spring that the contract "destroyed ALJ Hinkes' judicial independence, created conflicts of interest between him and the respondents and otherwise created both the appearance and the fact of impropriety and bias."
According to the FTC contract with Hinkes, the agreement could be ended "for the convenience of the government, when it was determined that such action is in the best interest of the government," and an amendment to the contract could be negotiated and the payments extended.
Hinkes was to be paid according to completion of his "tasks" in the case. For instance, he would receive $10,800 as he finished hearing each of the three companies' defenses. Another $10,800 would be paid for Hinkes' preparation of findings of fact and law.
In effect, the quicker Hinkes moved the case along the sooner he was to have been paid.
With the contract in hand, Hinkes presided over the cereal case until Oct. 20, 1978, when the FTC stayed the case pending its handling of motions filed by Kellogg's and the other parties on the Hinkes affair.
On Dec. 8, 1978, the commission ruled that Hinkes was "unavailable" under federal law. He was removed from the case and replaced by another FTC judge, Alvin Berman, who resumed hearings in the case in October 1979, not having heard the testimony of 86 of the approximately 100 witnesses. Berman had pledged to finish his initial decison by October 1981.
The commission placed not only the cereal case, but also the Hinkes matter in Berman's hands. Berman withdrew from the Hinkes matter, noting that Hinkes was a personal friend. No ALJ would take the Hinkes case and the hot potato was thrown back into the laps of the commission itself.
Kellogg's and the other companies repeatedly have requested that an independent official be brought into the case to study the Hinkes affair and have asked Pertschuk to remove himself from both the antitrust case and the Hinkes inquiry.
Although the FTC has not been willing to bring in an outside judge, it is holding its own investigative proceeding, and FTC member David Clanton conducted a hearing on the Hinkes controversy. Affidavits were taken from some of the key officials involved in the case, and a decision on the Hinkes affair is expected soon.
Pertschuk denied in the motion filed Friday that he had prejudged the issues involved in the Hinkes matter, but said that resolving the motions before the FTC would involve evaluating "statements concerning matters in which I participated personally."
But the debate, legal maneuvering andlobbying on the Hinkes affair was only a beginning. While blasting the FTC's handling of the situation at every opportunity in the matter, the cereal makers took their case last year to Capitol Hill and found listeners in dozens of congressional offices.
Letters to the FTC began flowing in from members of Congress by the summer of 1979. The letters came from members of the House and the Senate who represent districts with special interests in cereal production: districts with Kellogg's facilities or districts where grain companies have substantial contracts with the cereal manufacturers. The letters sounded much the same, if not in a few cases, identical.
"Without in any way trying to prejudice this case, I believe that the appointment of Harry R. Hinkes by the FTC after is official retirement date to continue in this judicial capacity, raises some legitimate questions with respect to his appointment as an Administrative Law Judge as provided by the Administrative Procedures Act and the Civil Service Commission," wrote Sen. Donald Riegle (D-Mich.), a representative of the Kellogg Company's home state, in an Aug. 23, 1979 letter to Pertschuk. Two weeks later, Sen. Edward Zorinsky (D-Neb.), wrote a letter to Pertschuk with that identical language.
Letters on the Hinkes matter came to the FTC from members of Congress as powerful as Sen. Russell Long (D-La.), who said the case has come to his attention "via constituents in the Louisana rice industry who have done business for many years with the Kellogg Co."
Rep. Howard Wolpe, (D-Mich.), a first-term member from Battle Creek, Kelloggs' home base, has been investigating the matter for much of his congressional term.
Noting that Kellogg's has a plant in Memphis, Sens. Howard Baker (R-tenn.), the minority leader, and James Sasser (D-Tenn.) joined in, as did Sen. S. I. Hayakawa (R-Calif.) and many congressmen from grain trading states and from Michigan.
Most of the congressional activity on the Hinkes matter, from all indications, has been different in tone from the intense lobbying involved in this spring's congressional efforts to shut down the FTC's kidvid investigation of advertising directed at children or the antitrust case involving agriculture cooperatives.
All the congressional letters to the FTC clearly emphasize the procedural questions raised by losing a law judge in the middle of the case and the subsequent contract with Hinkes, rather than argue the merits of the antitrust action.
While the antitrust case dragged on, Rep. James Hanley (D-N.Y.), chairman of a civil service investigative subcommittee, was considering legislation to revamp the government's handling of administrative law judges, but like other members of Congress, Hanley steadfastly insisted that he would do nothing to interfere in the merits of the antitrust case. Spurred by Rep. Donald Albosta (D-Mich.), Hanley conducted hearings on the matter last month. And the full civil service committee passed the amendment to bar the contract process, unless it is approved by the OPM. FTC officials say the handling of the matter, even the relentless work of Wolpe in particular, has been fair and evenhanded.
Nevertheless, if the aggressive lobbying efforts by Kellogg's and the other respondants in the case of the questionable contract has ended with the passage of the amendment, the Hinkes matter remains a vital factor in the fate of the case. "It would be a shame to lose or have to retry a case we're winning," said an FTC official.