D.C. Circuit Holds That DOJ Failed To Prove AT&T/Time Warner Merger Is Anticompetitive
On February 26, 2019, a panel of the D.C. Circuit Court of Appeals affirmed the district court’s denial of the government’s request for a permanent injunction against the merger of AT&T and Time Warner. The opinion by Judge Judith Rodgers, joined by Judges Robert Wilkins and David Sentelle, rejected the government’s argument that the district court misunderstood and misapplied economic principles and erroneously disregarded testimony by key government witnesses. United States v. AT&T, Inc., Docket No. 1:17-cv-02511 (D.C. Cir. 2019).
The vertical merger of AT&T and Time Warner (collectively “AT&T”) will combine AT&T’s content distribution network with Time Warner’s content creation and programming units. The U.S. Department of Justice (“DOJ”) brought suit challenging the merger under Section 7 of the Clayton Act. The DOJ argued that the merged company’s ability to self-distribute content would enhance its negotiating leverage against third-party competitors by reducing the downside the merged entity would incur if it did not reach a content licensing deal with these third-party competitors. The district court ultimately found that the DOJ failed to prove that the merger was “likely to be anticompetitive,” and affirmed the district court’s denial of injunctive relief.
At trial, the DOJ presented testimony by third-party distributors who predicted the merger would affect negotiations with the merged entity. The DOJ also provided expert testimony explaining the Nash Bargaining Theory, which posits that the relative ability of parties to walk away from a negotiation is a key determinant of their relative negotiating leverage. The expert also presented a quantitative analysis based on the Nash Theory that predicted the merger would cause increased consumer prices.
Defendants presented testimony by negotiators and executives at vertically integrated media companies who testified that vertical integration had not affected their relationship with third-party distributors. Defendants also presented expert testimony based on empirical data showing that prior vertical mergers had not caused market prices to rise. Significantly, Defendants further noted that subsequent to the DOJ complaint, AT&T sent letters to approximately 1,000 distributors “irrevocably offering” to engage in arbitration over license renewals and agreeing not to engage in “black out” tactics, whereby content is withheld during negotiations. This point was critical at both the district court and appellate level.
The DOJ argued that district court ruling was clearly erroneous, first contending that the court inappropriately disregarded the Nash Bargaining Theory. The D.C. Circuit found that that the district court had accepted the Nash Theory in principle but credited Defendants’ empirical data as to its present application. The D.C. Circuit further found that the district court was not clearly erroneous when it estimated AT&T’s cost to walk away from negotiations with third-party distributors would only be marginally impacted by the merger. As a result, the district court was not clearly erroneous when it found that the merger would not impermissibly affect these negotiations’ dynamics or resulting market prices. The DOJ’s failure to contemplate AT&T’s post-complaint offers to distributors impacted the district court’s reasoning and was cited by the D.C. Circuit, which noted testimony from a government expert conceding that consideration of the offers’ effects “would require a new [quantitative] model.”
Next, the DOJ argued “that the district court misunderstood, and failed to apply, the principle of corporate-wide profit maximization.” The D.C. Circuit rejected this assertion, however, noting that the district court accepted the DOJ’s “contention that firms with multiple divisions typically act to maximize corporate-wide profits.” For example, the circuit court accepted the district court’s view that Turner Broadcasting (one unit of the combined company) would continue to distribute content licenses to multiple third-party distributors because it would be in the merged entity’s best interest.
Third, the DOJ argued that the district court acted inconsistently when it credited testimony by Defendants’, but not by the DOJ’s, lay witnesses. The DOJ characterized the court as having viewed their witnesses, representatives of third party distributors, as being biased but as having disregarded the bias of Defendants’ witnesses, who represented vertically integrated media companies. The D.C. Circuit, however, characterized the district court as having viewed the Defendants’ witnesses’ testimony as more credible, noting that, unlike the testimony by the DOJ’s witnesses, it was based on prior experience in real world negotiations.
Finally, the DOJ argued that the district court’s characterization of its expert’s qualitative analysis was clearly erroneous. The D.C. Circuit acknowledged that the district court meaningfully understated the analysis’ predictions concerning the merger’s impact on market prices. However, it also noted that the analysis had flaws, some of which were admitted by the expert at trial, which reduced the importance of the analysis and rendered the district court’s ultimate findings not clearly erroneous.
Notably, the D.C. Circuit declined to “hold that quantitative evidence of price increase is required in order to prevail on a Section 7 challenge” to a merger. The circuit court instead noted the potential for vertical mergers to cause competitive harms aside from mere price increases to consumers, the impacts of which are unlikely to be demonstrated through quantitative evidence of price increases. The D.C. Circuit’s AT&T opinion thus provides a key takeaway for both merging parties and enforcers: a merger may be successfully challenged without a quantitative model predicting price increases resulting from the merger.