By Peter Reap, J.D., LL.M.
The multi-state action seeking injunctive relief to halt the merger of the third and fourth largest wireless carriers in the United States failed to show that the merger would substantially lessen competition. Defendants rebutted the presumption of anticompetitive effects.
A multi-state action to stop the proposed $26 billion merger of T-Mobile and Sprint, the third and fourth largest wireless carriers in the United States, failed to show that the merger would substantially lessen competition in the market for retail mobile wireless telecommunications services (RMWTS) in violation of Section 7 of the Clayton Act, the federal district court in New York City has decided. Thus, the court declined to enjoin the transaction. The court rejected the states’ arguments that: (1) New T-Mobile would pursue anticompetitive behavior leading to higher prices or lower quality for telecommunications services that lessened competition; (2) Sprint would continue operating as a strong competitor in the national RMWTS market absent the merger; and (3) DISH would not enter the RMWTS market as a viable competitor nor live up to its commitments to build a national wireless network. T-Mobile and Sprint still must get sign-off on the deal from the California Public Utilities Commission (State of New York v. Deutsche Telekom AG, February 11, 2020, Marrero, V.).
The states filed their complaint in June 2019. In addition to the lead plaintiffs New York and California, attorneys general from Connecticut, D.C., Hawaii, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Oregon, Pennsylvania, Virginia, and Wisconsin took the case to trial.
Federal approval. Shortly after the states filed suit, the U.S. Department of Justice Antitrust Division, along with five states, announced a settlement with T-Mobile and Sprint regarding their competition concerns over their proposed merger in July. The proposed final judgment includes a substantial divestiture package in order to enable a viable facilities-based competitor to enter the market—satellite television provider DISH Network. The proposed final judgment is awaiting approval in the federal district court in Washington, D.C. In November, the Federal Communications Commission (FCC) officially voted to approve the transaction, with certain commitments as a condition of approval. In December, the Antitrust Division argued in a statement of interest that, because the settlements obtained by the Department of Justice and the FCC have already garnered strong relief on behalf of customers and will protect both the public interest and competition, the lawsuit to block the acquisition was moot.
Conflicting evidence. The court noted that the parties’ costly and conflicting models essentially "canceled each other out." Instead, the court focused on the credibility and demeanor of the witnesses in concluding that New T-Mobile was not likely to "enable its head-to-head competitors to increase wireless service prices or lower service quality and then simply follow their lead." The court considered the traditional elements of a merger challenge and held that the plaintiff states ultimately did not make their case.
Relevant product market. The parties agreed that the relevant product market was the RMWTS market. However, they disagreed on whether Mobile Virtual Network Operators (MVNOs) who leased space from Mobile Network Operators (MNOs) should be attributed market share or whether their subscribers and revenues should be attributed to the MNOs they leased network access from. The court determined that MVNOs should not be considered independent competitors in the RMWTS market, adopting the plaintiff states’ position that their shares should be attributed to the MNOs they leased from. Evidence showed that the MVNOs could not significantly restrain the pricing power of MNOs and only had a miniscule share of the RMWTS market, the court explained.
Relevant geographic market. The parties also agreed that there was a national RMWTS market but disagreed on whether there are additional local markets corresponding to the Cellular Market Areas (CMAs). The court again adopted the position of the plaintiff states, holding that local RMTWS markets should be considered in determining the relevant geographic market. The court noted that the FCC uses CMAs to delineate local market boundaries when analyzing the competitive impact of mergers. Further, the Justice Department and at least one other court have used CMAs to define local geographic markets when assessing the competitive impact of mergers, the court noted. Therefore, the national RMWTS market and the CMAs as defined by the FCC constituted the relevant geographic markets for this case, the court held.
Market analysis. The states satisfied their prima facie burden that the proposed merger would be anticompetitive by both of the two measures available to the court: (1) that the merged firm would have more than a 30 percent market share; or (2) using the Herfindahl-Hirschman Index (HHI), the HHI increases by over 200 points and results in a total HHI exceeding 2,500. Evidence showed that New T-Mobile would have a market share of either 37.8 percent by subscribers or 34.4 percent by revenues, and the national HHI would increase by 679 points for a total HHI of 3186. These figures were more than sufficient to establish a presumption that the proposed merger would be anticompetitive, the court decided. The court noted, however, that the market shares and HHIs established only a presumption and were not conclusive proof of the transaction’s likely competitive impact. Thus, the court went on to consider the defendants’ rebuttal evidence.
Defenses. The defendants satisfied their burden of rebuttal under the totality of the circumstances, according to the court. Although no one category of rebuttal evidence was dispositive in rebutting the plaintiff states’ prima facie case, it could be divided into three categories, each contributing to the court’s conclusion: (1) evidence that the efficiencies created by the merger will cause New T-Mobile to compete more vigorously in the RMWTS markets; (2) evidence that Sprint is a weakened competitor and is unlikely to compete vigorously in the RMWTS markets; and (3) the Justice Department and FCC reviews of the merger, particularly in their effort to establish DISH as a new competitor in the RMWTS markets, ameliorated any remaining concerns of anticompetitive effect, the court reasoned.
As for the first category, the court found that the defendants’ proposed efficiencies were cognizable and increased the likelihood that the merger would enhance competition in the relevant markets to the benefit of all consumers. The defendants identified efficiencies included more than doubling the standalone firms’ network capacity, savings of $26 billion in network costs and $17 billion in other operating costs; increased coverage in underserved markets; and accelerated deployment of 5G service. These efficiencies were sufficiently verifiable and merger-specific to consider as decreasing the persuasiveness of the prima facie case.
Further weakening the prima facia case was evidence that Sprint was a weakened competitor, with decreasing competitive relevance, poor network quality, and numerous financial constraints. Competitive means other than the proposed merger would be unable to resolve these difficulties, the court determined.
Deference to federal agencies. Finally, the court considered the federal agency approval of the deal. Both the Justice Department and the FCC heavily scrutinized the proposed merger and considered its likely effect on competition. The court stated that it accorded their views "some deference," but, noting the states’ argument that the views of the Justice Department and the FCC cannot simply be adopted at face value, the court treated the views of the agencies as informative but not conclusive. The remedies settled on by the FCC and Justice Department, most notably the Justice Department’s efforts to establish DISH as a fourth nationwide MNO and replacement for Sprint, contributed substantially to rebutting the plaintiff states’ prima facie case, the court explained. Taken together with the evidence that the merger’s efficiencies will cause T-Mobile to continue competing vigorously, and that Sprint’s competitive ability in the RMWTS markets will continue decreasing without the merger, the defendants successfully rebutted the states’ prima facie case, the court ruled. The combined weight of the three different types of rebuttal evidence showed that the concentration and market share statistics associated with the merger did not accurately reflect the variety of ways in which the merger was not likely to lessen competition, in the court’s view.
Additional evidence of anticompetitive effects. The plaintiff states attempted to respond to the successful rebuttal of their prima facie case by arguing that coordinated effects of the proposed merger would increase the likelihood that the three remaining MNOs would effectively agree to compete less strenuously and that unilateral effects of the proposed merger would cause New T-Mobile to charger higher prices than it would have absent the merger. Neither type of effect was reasonably likely, the court held. The fact that DISH intends to enter the RMWTS market and compete vigorously, couple with the high likelihood that New T-Mobile will compete aggressively, made improbable any potential coordinated effects of the merger. Moreover, loss of direct competition between T-Mobile and Sprint was not sufficient to make reasonable the probability that the proposed merger would substantially lessen competition through unilateral effect.
Particularities of the wireless industry. The court observed that the particularities of the wireless industry and its exceptional impact on the national economy created unusual procompetitive pressures and incentives while constraining anticompetitive forces. Given these considerations, New T-Mobile was not likely to pursue raising prices or lowering quality, especially in the near term, the court predicted, and Sprint was not likely to survive as a major competitive carrier of national scope and impact.
Reaction to the decision. Makan Delrahim, Assistant Attorney General in charge of the Department of Justice Antitrust Division said in response to the decision: "I am pleased and agree with Judge Marrero’s decision to deny the injunction, and particularly his conclusion that the department’s divestiture and remedy package resolves the competitive concerns in this case. This opinion is an important next step toward strengthening competition for high-quality 5G networks that will benefit American consumers nationwide." The agency’s announcement noted that in his opinion, Judge Marrero cited the Justice Department’s settlement as a key factor, observing that the Justice Department’s settlement made Dish "well poised to become a fourth MNO in the market, and its extensive preparations and regulatory remedies indicate that it can sufficiently replace Sprint’s competitive impact."
New York Attorney General Letitia James, on the other hand, said that the court ruling "marks a loss for every American who relies on their cell phone for work, to care for a family member, and to communicate with friends. From the start, this merger has been about massive corporate profits over all else, and despite the companies’ false claims, this deal will endanger wireless subscribers where it hurts most: their wallets. There is no doubt that reducing the mobile market from four to three will be bad for consumers, bad for workers, and bad for innovation, which is why the states stepped up and led this lawsuit."
FCC Chairman Ajit Pai welcomed the ruling. "The T-Mobile-Sprint merger will help close the digital divide and secure United States leadership in 5G," Pai said. "After the merger, T-Mobile has committed to bringing 5G to 97% of our nation’s population within three years and 99% of Americans within six years. Its 5G network will also reach deep into rural areas, with 85% of rural Americans covered within three years and 90% covered within six years."
However, FCC Commissioner Starks said, "The merger between T-Mobile and Sprint will dramatically alter America’s wireless landscape. The state Attorneys General presented a strong case. The court saw it differently. In particular, given how central DISH’s future role as a wireless competitor was to the court’s decision, I remain disappointed that those facts were not fully vetted in the merger [proposal] that I voted on. Nevertheless, the merging parties have made significant promises—to lower prices, to deploy 5G throughout the country, and to increase the diversity of their suppliers, employees and executives. Moreover, DISH has promised to build a 5G network from scratch in a few short years. I look forward to seeing how these companies will fulfill their promises to the American people."
The case is No. 1:19-cv-05434.
Attorneys: Amber Wessels-Yen, Office of the Attorney General, for State of New York. Glenn D. Pomerantz (Munger, Tolles & Olson LLP) and Brian Wang, Office of the Attorney General of California, for State of California. Michael Edward Cole, Office of the Attorney General, for State of Connecticut. Arthur Thomas Durst, Office of the Attorney General, for District of Columbia. John R. Tennis, Office of the Attorney General, for State of Maryland. Brian Edward Robison (Gibson, Dunn & Crutcher, LLP) and Joshua H. Soven (Wilson Sonsini Goodrich & Rosati) for Deutsche Telekom AG. Daniel P. Culley (Cleary Gottlieb Steen & Hamilton LLP) and Hallie Beth Levin (Wilmer Cutler Pickering Hale & Dorr LLP) for T-Mobile US, Inc. Bradley S. Lui (Morrison & Foerster LLP) and Steven Craig Sunshine (Skadden, Arps, Slate, Meagher & Flom LLP) for Sprint Corp. Charles Anthony Michael (Steptoe & Johnson, LLP) for Dish Network Corp.
Companies: Deutsche Telekom AG; T-Mobile US, Inc.; Sprint Corp.; Dish Network Corp.
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