Vertical AT&T/TW Case Not Seen Posing Big Challenges for Judge, but Hurdle for DOJ

The judge overseeing the AT&T/Time Warner antitrust trial almost surely will evaluate the evidence and law dealing with the proposed vertical merger the same way he would a horizontal deal, experts told us. In opening argument Thursday (see 1803220033), companies' outside counsel Dan Petrocelli of O'Melveny told U.S. District Judge Richard Leon of Washington, "You're not going to need a crystal ball," since horizontal deals inherently reduce competition while verticals lead to increased business efficiencies and innovation.

Horizontal and vertical takeovers rely on much the same analyses of trying to forecast and quantify whether or how much prices will go up due to the deal, said Cornell Law School professor George Hay. For U.S. v. AT&T and Time Warner, the big fight will be about those numbers, Hay said: Even if Leon accepts the qualitative prediction pricing increases, the presumption is likely there will be some efficiencies with the transaction. Even if DOJ shows a likely price hike, if it's small, the judge could decide those efficiencies would more than offset the increase, Hay said, saying the judge isn't likely to do "a fine balancing" and instead will look to see if the price hike is trivial or not.

Antitrust trials -- whether horizontal or vertical -- involve extrapolation from existing data models and choosing from "two diametrically opposed predictions of the future," emailed International Center for Law & Economics Executive Director Geoffrey Manne. Theories of harm and the evidence presented can be different in vertical cases from horizontal ones, Manne said. Vertical cases tend to be about market foreclosure -- in AT&T/TW, regarding rivals' access to TW content under New AT&T -- but horizontal cases tend to be about direct competitive constraints on pricing power if a horizontal competitor is removed from the market, he said. The cases would involve "substantially," though not entirely, different evidence and models, he said.

The relative lack of vertical deal case precedent "doesn’t seem all that significant," Manne said, saying the economic theories of potential harm from vertical conduct "are pretty well-understood." It’s "hard to imagine the DOJ’s case looking much different if there were more precedent because it’s hard to imagine any basis for a claim in a case like this that didn’t turn on some version of the foreclosure story," he said. The bargaining power focus of the case is less well-tested, being very deal-specific, he said. Hay said there's little vertical case precedent, but the same goes for horizontal mergers, at least at the Supreme Court level, though there's precedent at the district and circuit court levels.

The standard under Section 7 of the Clayton Ac​t is whether the acquisition will substantially lessen competition, and Leon shouldn't look at the legal and economic evidence in AT&T/TW any differently from how he would view a horizontal deal, emailed American Antitrust Institute President Diana Moss. She called issues raised by merging parties over use of behavioral remedies in the past "a red herring. ... At this point, that is not the center of the debate for the court -- it’s considering the evidence on the legality or illegality of the merger."

A former DOJ antitrust trial attorney said the agency faces a notable hurdle in the vertical nature of AT&T/TW in that it can't point to loss of a competitor and thus easily show how the deal will result in fewer options for consumers. The DOJ legal burden is the same -- showing the deal would substantially lessen competition -- but it could also face difficulty because apparently both sides agree there isn't a strong threat of long-term foreclosure by New AT&T of video content to competitors.

A significant issue facing Leon is the nearly 50 years since a vertical merger was brought to trial, the former DOJ lawyer said. Lack of recent case law is potentially liberating, in that the judge can do what he wants, experts said.