The proposed merger of AT&T and Time Warner was announced
on October 22, 2016. Seventeen months later, the Department of Justice’s antitrust
challenge to the AT&T/Time Warner merger is finally going to trial this
week. The opening arguments are scheduled for Wednesday, March 21, while the
first two days of the week are being devoted to motions in court before U.S. District Judge Richard Leon, who is presiding over the
case. The trial is expected to last six to eight weeks.
These two days of
motions, as well as the motions made by each party earlier this month, provide
important insights into how each side plans to make its case. Most of the early
motions being addressed by Judge Leon are on admissibility of evidence.
Both DOJ’s Complaint that initiated the case last
November and its pre-trial brief earlier this month gave
heavy emphasis to statements made by executives and employees of AT&T, Time
Warner, or DirecTV (a subsidiary of AT&T) that the DOJ claims show that the
merging parties recognize the potential for anticompetitive harm. AT&T objected to many of the documents DOJ planned to use as exhibits,
claiming they did not identify the author or context, and therefore should be
considered as unreliable hearsay or irrelevant. Judge Leon appears to have
generally agreed with this objection, unless the author can be identified and
can be available for cross-examination. Whether these documents are admissible may
affect the testimony of expert witnesses the DOJ presents who relied on these
documents in forming their views of the merger.
The DOJ also appears to
be relying on testimony and documents
from rival companies, so the parties are
arguing before the court over whether and how to keep information from rival
companies confidential. Relying on testimony from competitors in a vertical merger
case has significant potential pitfalls
for DOJ. The antitrust standards for reviewing mergers focus on harm to
competition, which is not the same as harm to competitors. Competitors might
object to the merger because then the merged company will harm them by being
better able to serve its customers. In anticompetitive horizontal mergers, the
injured parties will usually be the downstream customers or the upstream
suppliers of the merging companies. Since they compete on different levels from
the merging companies, it is usually fairly easy for a court to distinguish
between harm to competition and harm to competitors.
In vertical mergers, however, distinguishing
between harm to competition and harm to competitors can be much more difficult.
Complaining firms are likely to be at the same level in the supply chain as at
least one of the merging parties, so the harm alleged by the government could be
harm to a competitor that actually benefits customers. Such witnesses and their
documents must then be viewed with some skepticism by the court, because they
may well be complaining about being harmed by having to face a stronger and
more efficient competitor after the merger.
Judge Leon has previously ruled
that AT&T and Time Warner cannot present that the DOJ had improper
political motives in bringing the case. AT&T and Time Warner largely dropped this claim
in their pre-trial brief. It appears that Judge Leon is not going to give much leeway in court to
AT&T and Time Warner in arguing that this merger is being treated
differently from other mergers or that DOJ had an improper motive for challenging
the merger and instead is directing the focus of the trial on the
economic impact of the merger.
Judge Leon had also previously denied
a motion by DOJ to exclude evidence the merger parties plan to present that
they are offering to agree for seven years to
arbitration in any Turner Networks carriage disputes with cable systems and
other programming distributors that compete with ATT’s DirecTV and U-Verse. The
combined companies would also agree not to “black out” these channels while the
dispute is before an arbitrator. This ruling could be important at
trial. In its pre-trial brief, the DOJ indicates that it will rely
on case studies to show the economic impact of programming that is removed from
cable system when programming providers and distributors fail to reach
agreements on prices. If, however, the final decision on prices in programming
carriage dispute is made by an arbitrator and blackouts are prevented during
the arbitration process, then much of the harm alleged by DOJ would not occur. Certainly
the DOJ will argue that such arbitration is not sufficient, making this arbitration
offer a contentious issue during the trial.
The AT&T/Time Warner merger has
important implications for other vertical mergers. Last year the DOJ declined
to challenge, or even seriously investigate, the vertical merger of Amazon and Whole
Foods. Other currently proposed vertical mergers include
health insurer Cigna trying to buy pharmacy benefits
manager Express Scripts and CVS looking to acquire health insurer
Aetna. Various advocacy groups
are also calling on the DOJ to reconsider the 2011 merger of Comcast and NBC
Universal, which raises very similar vertical antitrust issues as the DOJ is
alleging for the AT&T/Time Warner merger.
For a substantive analysis of the
merger and the context in which it should be reviewed, see my February 8, 2018 Perspectives
from FSF Scholars entitled “The Proper Context for Assessing the
AT&T/Time Warner Merger.”
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