TR Daily D.C. Circuit Upholds Trial Court in Allowing AT&T-TWI Merger
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Tuesday, February 26, 2019

D.C. Circuit Upholds Trial Court in Allowing AT&T-TWI Merger

The U.S. Court of Appeals for the District of Columbia today affirmed the decision issued last summer by Senior U.S. District Judge Richard Leon rejecting the Justice Department’s effort to block the merger of AT&T, Inc., and Time Warner, Inc.

The appeals court said the government failed to demonstrate that the district court committed clear error in its findings.

Responding to the appeals court’s decision today, Justice Department spokesman Jeremy Edwards said, “We are grateful that the Court of Appeals considered our objections to the District Court opinion. The Department has no plans to seek further review.”

AT&T General Counsel David McAtee said, “The merger of these innovative companies has already yielded significant consumer benefits, and it will continue to do so for years to come. While we respect the important role that the U.S. Department of Justice plays in the merger review process, we trust that today’s unanimous decision from the D.C. Circuit will end this litigation.”

AT&T and Time Warner concluded the merger two days after Judge Leon’s ruling last summer after the Justice Department agreed not to seek a stay of the ruling pending appeal and not to oppose the elimination of the waiting period imposed by the district court’s case management order in exchange for commitments from AT&T to “manage the [TWI] Turner networks as part of a separate business unit, distinct from the operations of AT&T Communications, which includes AT&T’s DIRECTV and U-verse businesses.” At the time, AT&T said the commitments would remain in force “until the earlier of February 28, 2019 or the conclusion of this case or any appeal by the Department of Justice” (TR Daily, June 14 and 15, 2018).

In today’s decision in “U.S. v. AT&T et al.” (case 18-5214), Circuit Judge Judith W. Rogers, who had presided over the oral argument (TR Daily, Dec. 6, 2018), wrote for the court that in presenting its case at trial, the government did not offer an analysis of data regarding vertical mergers to counter the analysis offered by the defendants, and that the expert opinion and economic modelling predicting increases in content pricing “failed to take into account [TWI subsidiary] Turner Broadcasting System’s post-litigation irrevocable offers of no-blackout arbitration agreements, which a government expert acknowledged would require a new model.”

Judge Rogers, who was joined in her opinion by Circuit Judge Robert L. Wilkins and Senior Circuit Judge David B. Sentelle, added, “Evidence also indicated that the industry had become dynamic in recent years with the emergence, for example, of Netflix and Hulu. In this evidentiary context, the government’s objections that the district court misunderstood and misapplied economic principles and clearly erred in rejecting the quantitative model are unpersuasive. Accordingly, we affirm.”

Judge Rogers noted that the government had not challenged the district court’s application to the AT&T-TWI vertical merger of “the burden-shifting framework in ‘United States v. Baker Hughes,’” a 1990 D.C. Circuit decision involving a horizontal merger. “But unlike horizontal mergers, the government cannot use a short cut to establish a presumption of anticompetitive effect through statistics about the change in market concentration, because vertical mergers produce no immediate change in the relevant market share,” Judge Rogers added, noting the 1984 guidelines issued by the Department of Justice and Federal Trade Commission for non-horizontal mergers.

“Instead, the government must make a ‘fact-specific’ showing that the proposed merger is ‘likely to be anticompetitive,’” she wrote.

“As the government has presented its challenges to the district court’s denial of a permanent injunction, the question for this court is whether the district court’s factual findings are clearly erroneous,” Judge Rogers wrote.

Looking at the evidence presented at the trial and the district court’s weighing and analysis of that evidence, Judge Rogers said, “In finding the government failed to ‘prov[e] that Turner [Broadcasting]’s post-merger negotiating position would materially increase based on its ownership by AT&T,’ …, the district court reached a fact-specific conclusion based on real-world evidence that, contrary to the Nash bargaining theory and government expert opinion on increased content costs, the post-merger cost of a long-term blackout would not sufficiently change to enable Turner Broadcasting to secure higher affiliate fees. Witnesses such as … Turner Broadcasting president Coleman Breland, AT&T executive John Stankey, and Time Warner CEO Jeff Bewkes, whom the district court credited, testified that after the merger blackouts would remain too costly to risk and that any change in that cost would not affect negotiations as the government’s theory predicted.”

Judge Rogers added, “On appeal, the government contends that the district court (1) misapplied economic principles, (2) used internally inconsistent logic when evaluating industry evidence, and (3) clearly erred in rejecting Professor Shapiro’s quantitative model. Undoubtedly the district court made some problematic statements, which the government identifies and this court cannot ignore. … At this point, however, the issue is whether the district court clearly erred in finding that the government failed to clear the first hurdle in meeting its burden of showing that the proposed merger is likely to increase Turner Broadcasting’s bargaining leverage.”

With regard to the Justice Department’s contention that Judge Leon discarded or erroneously applied Nash bargaining theory, Judge Rogers said that “the record shows that the district court accepted the Nash bargaining theory as an economic principle generally but rejected its specific prediction in light of the evidence that the district court credited.”

As for the Justice Department’s contention that “the district court misunderstood, and failed to apply, the principle of corporate-wide profit maximization,” Judge Rogers said that the department’s position overlooks the district court’s acceptance of “‘[government expert witness] Professor Shapiro’s (and the Government’s) argument that generally, “a firm with multiple divisions will act to maximize profits across them.”’ … And it ignores that if the merged firm was unable to exert the leverage required by the government’s increased leverage theory, then inquiring (as the district court did of Professor Shapiro) about an independent basis to conclude that the firm did have such leverage is not a rejection of the corporate-wide profit maximization principle.”

She said that “[t]he district court can be viewed as conveying its understanding that Turner Broadcasting’s interest in spreading its content among distributors, not imposing long-term blackouts, would redound to the merged firm’s financial benefit, not that Turner Broadcasting would act in a manner contrary to the merged firm’s financial benefit.”

Regarding the government’s argument that Judge Leon used “internally inconsistent reasoning when evaluating testimony from witnesses in the industry” by attributing the possibility of self-interest influencing the testimony of third-party distributors but overlooking that possibility in the case of testimony from executives from Comcast-NBCU and Time Warner, Judge Rogers wrote that “the potential for self-interest was not the only reason the district court found third-party distributor testimony of little probative value. Much of the third-party competitor testimony, the district court found, ‘consisted of speculative concerns,’ … and did not contain any analysis or factual basis to support key assumptions, such as how Turner Broadcasting’s bargaining leverage would change and how many subscribers distributors would lose in a blackout.”

“Finally,” Judge Rogers wrote, “the government contends that the district court clearly erred in rejecting Professor Shapiro’s quantitative bargaining model. … The district court accepted Professor Shapiro’s testimony about the $352 million cost savings from the merger. But it found that insufficient evidence supported the inputs and assumptions used to estimate the annual costs increases for rival distributors, crediting criticisms by Professor Carlton and Professor Rossi.”

Sen. Amy Klobuchar (D., Minn.), the ranking minority member of the Senate Judiciary Committee’s subcommittee on antitrust, competition policy and consumer rights, said in a statement, “Today’s disappointing D.C. Circuit decision, rejecting the government’s challenge to AT&T’s acquisition of Time Warner, is a setback for competition and American consumers. While I would support Justice Department efforts to pursue further appeals, I also strongly urge the Department to commit to conducting follow-up retrospective reviews of the markets affected by this merger to determine if further enforcement action is warranted.”

John Bergmayer, senior counsel at Public Knowledge, said, “It is disappointing but not surprising that the DC Circuit upheld Judge Richard Leon, as district courts have a great deal of discretion. While the outcome is not what we would have wanted, the court does acknowledge certain errors and omissions made by Judge Leon, and the opinion's scope is limited to a highly specific set of facts and arguments that were discussed during the trial. The opinion 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.”

Free State Foundation President Randolph May said, “The court’s affirmance of the AT&T/Time Warner merger is a victory for real-world market analysis over theoretical speculative models and a victory for letting the free market work absent a compelling case for the government dictating market outcomes. Anyone without blinders on can see that the dynamic video marketplace, with the rise of the Netflixes and Hulus of the streaming world, is changing faster than the government’s outdated word processing templates regarding competitive market analysis.”

In a research note, Blair Levin, an adviser to New Street Research LLP and a former FCC chief of staff, opined that the decision “does not make new law related to vertical deals but it does demonstrate the difficulty of generating a factual record that would be sufficient to block a vertical deal.”

Mr. Levin added that the court’s ruling “is a negative for the T-Mobile/Sprint deal because, we believe, the DOJ staff will be anxious to bring a suit they believe they can win. In our experience with DOJ litigators, a loss is not something that causes them to want to retreat, but rather something that makes them anxious to have a new battle. That would be even more true here where the playing field would be so much more advantageous to the government than the AT&T case. We don’t believe the decision will cause anyone at the DOJ to think the decision creates a problem in challenging the wireless deal. Without weighing in on the merits of what the DOJ should do, we believe that if the DOJ were to bring an action against the deal, the DOJ would be heavy favorites to win. (Further, if the DOJ sues to block, the odds heavily favor the FCC doing the same, in which case the matter goes to an Administrative Law Judge and the parties are very likely to just walk away.)” —Lynn Stanton, [email protected]

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