In a big win for M&A and another loss for the Trump Administration, a second federal court has ruled that the Justice Department did not make its antitrust case for blocking the AT&T-Time Warner merger.
A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit refused to unwind the merger Tuesday (Feb. 26), upholding a D.C. District Court decision. That panel had comprised Judges Judith W. Rogers, Robert L. Wilkins and David B. Sentelle.
Because the Justice Department was challenging the district court's denial of a permanent injunction of the deal, the court confined itself to the question of whether the lower court's factual findings were clearly erroneous. The conclusion was that they were not.
"[T]he government’s objections that the district court misunderstood and misapplied economic principles and clearly erred...are unpersuasive, accordingly, we affirm," the court ruled.
"At trial, the government presented expert opinion on the likely anticompetitive effects of the proposed merger on the video programming and distribution industry as forecast by economic principles and a quantitative model," wrote the court. "It also presented statements by the defendants in administrative proceedings about the anticompetitive effects of a proposed vertical merger in the industry seven years earlier."
The defendants responded with an expert’s analysis of real-world data for prior vertical mergers in the industry that showed “no statistically significant effect on content prices.” The government offered no comparable analysis of data and its expert opinion and modeling predicting such increases failed to take into account Turner Broadcasting System’s post-litigation irrevocable offers of no-blackout arbitration agreements, which a government expert acknowledged would require a new model. Evidence also indicated that the industry had become dynamic in recent years with the emergence, for example, of Netflix and Hulu."
AT&T -- which completed the Time Warner acquisition last June -- was sounding magnanimous in victory, and suggesting this should be the end of the legal story. “The merger of these innovative companies has already yielded significant consumer benefits, and it will continue to do so for years to come," said AT&T general counsel David McAtee. "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.”
Some parties to the case had wanted to the court to "speak definitively" on the "proper legal standard for evaluating vertical mergers," but the court didn't. "[T]here is no need to opine on the proper legal standards for evaluating vertical mergers because, on appeal, neither party challenges the legal standards the district court applied, and no error is apparent in the district court’s choices," Rogers wrote.
A district court judge had ruled against Justice and for the merger after DOJ sued to block the meld. DOJ had argued, and still does, that without programming (Turner) or distribution (DirecTV) divestitures the deal violated antitrust by providing the incentive and opportunity for the combined company to withhold must-have programming, including to over-the-top competitors, or deny distribution shelf space.
The judge said the government had failed to make its case, but DOJ appealed the decision, to the D.C. circuit, which has principal jurisdiction over communications-related merger issues, saying the judge had failed to recognize some basic economic facts.
AT&T countered that DOJ used bad numbers to come to the wrong conclusion about AT&T-Time Warner merger--that it would substantially lessen competition--and a lower court was right to reject that conclusion and allow the deal. It also raised the specter of President Trump's attacks on the deal as a possible motivating factor in Justice's unusual opposition to a vertical merger, though antitrust chief Makan Delrahim has suggested it was a strong preference for spin-offs over behavioral conditions--like access or carriage requirements--that motivated the decision.
Oral argument had been held Dec. 6, with a government shutdown intervening. Although the court was in session throughout the shutdown, it was still a pretty fast turn-around for the appeals court decision.
The decision was not a big surprise. While judges sometimes play devil's advocate by testing arguments with tough questions, during that Dec. 6 argument they hammered DOJ's argument that a lower court judge exhibited clear error in allowing the deal to go through and rejecting the government's economic analysis that the combined company would use its leverage to raise retail prices anticompetitively.
Again and again the judges asked just how DOJ had met its burden of proof and did not appear to like the answers.
DOJ could appeal the decision to the full court, or seek Supreme Court review.
"This should have been been expected," said Adonis Hoffman, chairman of Business in the Public Interest. "The challenge to the vertical merger was based on specious legal rationale and questionable political considerations." Hoffman is former chief of staff to FCC commissioner Mignon Clyburn.
“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," said Free State Foundation President Randolph May. "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."
"It is disappointing but not surprising that the D.C. Circuit upheld Judge Richard Leon, as district courts have a great deal of discretion," said Public Knowledge senior counsel John Bergmayer. "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."
Pictured: Randall Stephenson, AT&T chairman and CEO.