DOJ Calls It Quits on AT&T/TW After Losing Appellate Ruling

With an appellate court Tuesday deciding DOJ didn't prove the case for stopping AT&T's buy of Time Warner (see 1902260017), Justice threw in the towel on any further challenges (see 1902260067). Experts had widely expected that.

"The Department has no plans to seek further review," a spokesperson emailed. "We are grateful that the Court of Appeals considered our objections to the District Court opinion."

Several said AT&T's pledge to keep some operational barriers between its MVPD arm and TW's Turner until Feb. 28 or the conclusion of DOJ's appeal, whichever came first (see 1806140041), had lessened the likelihood of Justice pursuing the case further, since it would be tougher to unscramble the New AT&T assets. AT&T in a statement said it "trust[s] that today’s unanimous decision from the D.C. Circuit will end this litigation" but didn't comment on the timing of completing the transaction. Many had expected AT&T to prevail (see 1812130004).

DOJ arguments that U.S. District Judge Richard Leon of Washington didn't understand the economic principles in the case and erred in rejecting the agency's model "are unpersuasive," the D.C Circuit said in the docket 18-5214 decision Tuesday. Ruling were Judges Judith Rogers, Robert Wilkins and David Sentelle, with Rogers penning the decision. The appellate court said regardless of mistakes the lower court might have made in evaluating inputs into DOJ's economic modeling, that model didn't take into account long-term programming contracts and how they constrain TW's Turner Broadcasting from raising content prices for distributors. It said the district court's finding plausible that New AT&T wouldn't be able to exert increased bargaining leverage through long-term blackouts, so content costs wouldn't go up because of the transaction.

The D.C. Circuit said AT&T put up an expert's analysis of real-world data of prior vertical combinations showing no notable effect on content prices, but DOJ lacked comparable analysis. Meanwhile, its own economic model and expert opinion pointing to price increases didn't account for Turner's no-blackouts, baseball-style arbitration offer, which would require different modeling, the court said. It's "troubling" Leon's ruling never cited 1984's Copperweld about corporate-wide profit maximization, but it's untrue Leon overlooked that economic principle altogether, judges ruled.

Klobuchar Concerned

Senate Judiciary Antitrust Subcommittee ranking member Amy Klobuchar, D-Minn., told reporters Tuesday she remains “concerned about this merger and I continue to be concerned about the consolidation that we're seeing all over the country.” One “of the things that has made American capitalism work is that we've had strong antitrust laws that are enforced and courts that actually stand by them,” she said. “Right now we have such a conservative Supreme Court that … every antitrust case that comes before them never meets the standards for a violation, and that's going to start filtering through the courts.”

Klobuchar touted her Merger Enforcement Improvement Act (S-306) and Consolidation Prevention and Competition Promotion Act (S-307) as a fix to flaws in federal antitrust interpretation. S-306 would update antitrust laws to reflect the current U.S. economy and give federal agencies access to better post-merger information to ensure combining companies are meeting federal requirements. S-307 would in part clarify existing antitrust statutes to say “mergers that increase consumer prices, lower the quality of goods, exclude competitors, undermine innovation, or allow a company to unfairly lower the prices it pays can be illegal.”

Deal opponents were disappointed. Public Knowledge said the D.C Circuit also acknowledged some errors and omissions of the lower court and the option "should not be read as a broad endorsement of Judge Leon's rose-colored view of the video marketplace, and it provides guidance for how the government can successfully challenge future anticompetitive vertical mergers."

Georgetown Law Institute for Technology Law and Policy Distinguished Fellow Gigi Sohn said the ruling shows need for antitrust law and DOJ deal guidelines revision, urging passage of the Consolidation Prevention and Competition Act. She said DOJ "placed ideology over a powerful argument against this merger" when it didn't argue New AT&T could favor TW programming using its ISP capabilities, seemingly "in fealty" to the FCC's Title II Communications Act net neutrality rollback.

Skipping High Court

DOJ didn't want this case to go to the Supreme Court, and seeking en banc review -- already a long shot -- if granted would have likely ended up there and reaffirmed Leon, hurting its ability broadly to do vertical merger enforcement, said Cleveland State University Thomas law professor Christopher Sagers. "If you have to lose this case, this is the least bad way to lose it" since it was an appeal of the facts, he said. The decision still was "pretty bad" for Justice as it stressed repeatedly the strength of AT&T's real-world evidence over the department's speculative theories, which could signal a high bar for future transaction challenges, he said.

That the D.C. Circuit decision was unanimous meant a big risk of embarrassment if DOJ had sought cert and was denied or, even worse, the Supreme Court accepts the case and upheld the lower courts, said antitrust expert George Hay, Cornell Law School professor. An antitrust lawyer said the D.C. Circuit issued a well-reasoned decision. A former DOJ antitrust trial lawyer said a cert petition wouldn't have made sense since the D.C. Circuit previously set precedent unfavorable to DOJ for challenging future deals, and Justice rans the risk of the high court taking up that precedent.

Antitrust lawyer Seth Bloom though noted DOJ had in its favor that the high court hasn't made an antitrust ruling since the early 1970s. But it was doubtful the deal approval would get reversed, he said.

"The case [was] effectively over" with "no chance" of appeal to the Supreme Court since it's a fact-based ruling, New Street Research's Blair Levin wrote investors before DOJ's announcement. He said the decision shows the difficulty of putting together a factual record enough to block a vertical deal, and that it could be bad news for T-Mobile/Sprint since DOJ "will be anxious to bring a suit they believe they can win" and reassert itself after the AT&T loss. The analyst said if Justice challenges T-Mobile/Sprint, the agency "would be heavy favorites to win" and if it sues to block the deal, the FCC likely would oppose the takeover, too.

The decision "is a victory for real-world market analysis over theoretical speculative models," especially since the video market is evolving more quickly than the government's outdated competitive market analyses, the Free State Foundation said.