A panel of federal appellate judges today questioned a Department of Justice attorney closely on what in a lower court’s decision earlier this year rejecting the department’s bid to block the merger of AT&T, Inc., and Time Warner, Inc., constituted “clear error,” while repeatedly asking an attorney for AT&T how the courts can be confident that it will abide by its voluntary commitment not to withhold, or black out, Time Warner content during arbitration of disputes with third-party distributors.
In June, Senior U.S. District Judge Richard Leon today rejected the Justice Department’s antitrust lawsuit seeking to block the merger, saying that “the Government has failed to meet its burden to establish that the proposed ‘transaction is likely to lessen competition substantially’” (TR Daily, June 12).
During oral argument before the U.S. Court of Appeals for the District of Columbia Circuit U.S. v. AT&T, et al.” (case 18-5214), Senior Circuit Judge David B. Sentelle repeatedly suggested to Deputy Assistant Attorney General–antitrust Michael Murray that the government’s argument amounts to asserting that if a general principle or model — such as the idea that a merged firm will seek to maximize its overall profits, even if that cuts profits in a particular division — is true, it doesn’t have to prove that the application of the principle in the particular case shows that consumer harm would result from the merger.
The government needs to prove that programming blackouts would maximize the combined firm’s profits in order to demonstrate likely harm to consumers, Judge Sentelle suggested. He later similarly argued that the government seemed to think that the validity of the Nash bargaining model proves something, without having to show that its application in the given instance indicates a loss of consumer welfare.
Similarly, Circuit Judge Judith W. Rogers, who presided over the arguments, suggested that the district court acknowledged “that there is this principle” of assuming a unity interest by the merged firm and an incentive to maximize overall profit, but that “it didn’t necessarily follow that blackouts would maximize profits.”
If that was the district court’s view, “where is the clear error” required for the appeals court to overrule the district court, she asked.
Mr. Murray cited the imposition of a condition on the Comcast-NBCU merger approval that “assumes blackouts allow an increase in profits.”
He also said that the risk isn’t that the merged company would necessarily black out programming, but that it would have increased leverage in negotiations to obtain higher prices for its content, because the cost of a temporary blackout would be less overall to the vertically integrated company, which could expect to gain subscribers when competitors lost access to Time Warner programming.
Judge Sentelle said that the threat of a blackout has to be credible to be effective. Mr. Murray said that “the wealth of evidence” indicates that the threat is credible, because blackouts do occur.
In reaching its conclusion that there would be no increase in bargaining leverage, “the district court focused instead on whether blackouts will actually occur” after the merger while holding that before the merger Time Warner’s leverage came from the threat of a blackout, which is impermissibly inconsistent, Mr. Murray said.
Circuit Judge Robert L. Wilkins asked Mr. Murray how the district court considered the issue of Time Warner’s voluntary commitment to no blackouts during arbitration.
“We don’t think there was a finding [by the district court] on the arbitration offer the way that AT&T would like” the appeals court to believe, Mr. Murray said. He added that TWI’s arbitration offer was “too little, too late.”
Judge Wilkins noted a passage in Judge Leon’s ruling saying that the arbitration offer was similar to the condition imposed on Comcast-NBCU. “It seems like the district court relies on the arbitration offer to [give credit to] the other side’s experts,” he added.
Mr. Murray said the district court treated the arbitration offer as giving the analysis of AT&T’s economics expert “probative” value.
Judge Wilkins continued, “The court said, ‘I have confident that [TWI’s] arbitration offer would have real world effect.” Yet the government’s brief “doesn’t argue that any such finding is clear error,” Judge Wilkins said.
Mr. Murray said that the district court didn’t say that the arbitration offer changed the company’s leverage with respect to a blackout threat. He said that the arbitration wouldn’t be subject to de novo review by the FCC, as it was under the Comcast-NBCU condition, and that there is no market benchmark price for an arbitrator to use “because TWI is national, while Comcast is regional.”
Eric Citron, arguing on behalf of 27 antitrust scholars as amici, said that “it’s clear” that Judge Leon “thinks he has a special case” that is an exception to the Nash bargaining model “because AT&T will have an incentive to bargain after the merger.”
However, Mr. Citron said, “that the ordinary case for Nash bargaining: … how to divide a surplus when both sides have an incentive to bargain.”
Judge Wilkins noted that in his 1952 article on the bargaining model, mathematician John Nash, who later won the Noble Prize for economics, said that the threat has to be credible. Mr. Citron responded that “before the merger, [TWI video content subsidiary] Turner wasn’t giving away content for free. … We know there is some price at which Turner will walk away, and that price is changing” as a result of the merger.
Mr. Citron also said that Judge Leon “seems to think it was notable that [AT&T’s economic expert] acknowledge that a long-term blackout would cost the merged entity more,” but “that’s what makes it a Nash bargaining case.”
Mr. Citron added that the court should have been “concerned with the stakes of a blackout, not the odds of the blackout,” and that the odds are an output, not an input, of the model.
Mr. Citron also argued that the Supreme Court’s 1984 opinion in “Copperweld Corp. v. Independence Tube Corp.” requires that “we need to make sure the arbitration offer is ironclad” before taking it into consideration.
Peter Keisler, attorney for AT&T, said that the arguments of the government and Mr. Citron depend on AT&T’s ability to “wield the threat of the blackout,” which it no longer has in light of the terms of the arbitration offer.
Judge Wilkins asked about the confusion in parts of Judge Leon’s ruling between the cost efficiencies to the merged entity and the portion of those efficiencies that would be passed through to consumers.
Mr. Keisler said that the court accepted the use of the pass-through number in the model presented by the government’s expert witness, which predicted only a 0.2% increase in consumer prices.
Judge Wilkins noted that with so many subscribers, the total of a 0.2% increase could still be substantial.
“We think the percentage is the appropriate” way to view the matter, Mr. Keisler said.
He also argued that a 9% figure for threat of a blackout used by the government’s expert witness is derived from a report prepared for Charter Communications, which opposed the merger, and that the government’s witness was not aware that the figure had been changed at Charter’s request without empirical support.
By substituting the report’s original 5% figure, “the price increase flips to a price decrease,” Mr. Keisler said.
Judge Wilkins noted that the district court opinion didn’t cited “Copperweld” once and that there “wasn’t much acknowledging of the unity of the organization and maximization of profits.” In fact, he added, “the district court seems to disclaim the main holding of ‘Copperweld.’ … If we just affirm, aren’t we saying that [‘Copperweld’] isn’t that big a deal?”
Andrew Pincus, arguing on behalf of 37 economists who are amici in the case, said that the Nash model assumes no prior commitments in a “one-off bilateral negotiation,” which does not apply to programming carriage negotiations.
In a statement after the argument, an AT&T spokesperson said, “We appreciate the Court’s attention to the arguments of counsel and look forward to receiving its decision.” —Lynn Stanton, [email protected]
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