Justice Department Sues to Block AT&T-Time Warner Merger

WASHINGTON — The Department of Justice sued to block the AT&T-Time Warner merger on Monday, warning that the combined company could drive up the cost of channels like HBO, CNN and TBS to rivals and ultimately the price that consumers pay for prized content.

The lawsuit was filed Monday afternoon in U.S. District Court in the District of Columbia, setting up a rare courtroom showdown over the next few months. The litigation is likely to focus on antitrust law and may touch on the motivations for the lawsuit, as President Donald Trump has been a frequent critic of Time Warner-owned CNN.

Makan Delrahim, the Justice Department’s antitrust chief, said that the lawsuit was triggered by concerns over competition, and has denied that there has been any White House influence in the merger proceeding.

“This merger would greatly harm American consumers,” Delrahim said in a statement. “It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy.”

The DOJ noted that Time Warner programming included HBO’s “Game of Thrones,” NCAA’s March Madness and Major League Baseball and NBA regular season and playoff games. In the lawsuit, the Justice Department claims that AT&T would “use its control of Time Warner’s popular programming as a weapon to harm competition.”

The transaction looked to be on its way to government approval only a few months ago, but in recent weeks, the Justice Department’s Antitrust Division has made it clear that it was prepared to challenge the transaction in court. They reportedly told AT&T executives that a remedy for their concerns would be to sell Turner Broadcasting or DirecTV, something that AT&T CEO Randall Stephenson said he would not do.

In a briefing with reporters, a Justice Department official emphasized the size of the transaction — which the DOJ valued at $108 billion — and noted that it was more than three times that of Comcast’s acquisition of NBC Universal in 2011. That deal was approved that deal with conditions.

The DOJ official said that the combined company could use its control over Time Warner content to force rivals to pay hundreds of millions of dollars more per year in distribution deals. The official also said that the company could have increased power to slow the growth of new video platforms, such as online streaming services and other technological advances.

The merger was first announced in October, 2016, right in the midst of the presidential campaign. At the time, Trump said that he opposed the deal and would seek to block it, but after the election, Wall Street analysts predicted that the Republicans would usher in a friendlier environment for mergers and the deal would actually win approval.

In a press conference on Monday, Stephenson said that the lawsuit “stretches the reach of antitrust law beyond the breaking point.”

He suggested that the Justice Department was diverting from decades of legal precedent, and he vowed to challenge the government’s rationale for the lawsuit in court.

“We have no intention of proposing a solution which would be beyond what the rule of law would require,” he said.

David R. McAtee II, senior executive vice president and general counsel of AT&T, said in a statement that “vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently.”

“We are confident that the Court will reject the Government’s claims and permit this merger under longstanding legal precedent,” McAtee added.

AT&T had hired Daniel Petrocelli, a partner at O’Melveny & Myers, as outside counsel in the merger proceedings, and he will be lead counsel if the case goes to trial. Petrocelli represented Fred Goldman in his wrongful death lawsuit against O.J. Simpson and Donald Trump in litigation brought against Trump University, and is known for his aggressive pursuit of discovery evidence and cross examination techniques.

“The theories in the DOJ’s complaint…simply have no proof and make no sense in the business world,” Petrocelli said.

At AT&T’s press conference, the company tried to bolster its case by showing footage of Delrahim commenting on the proposed transaction in October, 2016, shortly after it was announced, in which he said that he could not see it having major antitrust problems. A Justice Department official said that his comments were taken out of context at the time.

When word first surfaced of the Justice Department’s opposition to the merger earlier this month, it raised suspicions of just what motivated it, particularly among some Democrats on Capitol Hill. Rep. John Conyers (D-Mich.) and Rep. Dave Cicilline (D-R.I.) have called for a hearing on any interference from the Trump White House.

CNN has been one of Trump’s frequent punching bags, and some Senate Democrats had expressed concerns that the White House would use the news network as “leverage” over the merger review.

In the press conference, Stephenson said that he didn’t know whether the Justice Department lawsuit had anything to do with CNN’s coverage, but “Nobody should be surprised that this keeps coming up.”

In addition to Delrahim’s denial, the White House has said that Trump and Attorney General Jeff Sessions have not discussed the matter.

While the motives for the lawsuit are being questioned, a number of public interest groups and progressives also find themselves siding with the DOJ in its pursuit of vigorous antitrust enforcement. In unveiling a new platform for the middle class last summer. Senate Democrats even cited the merger as one of the examples of why stricter guidelines for antitrust laws are needed.

Stephenson has argued that the transaction is the type of “vertical” merger that has traditionally not raised red flags for regulators, as it does not overtly remove a competitor from the landscape. But throughout the review, critics have argued that its combination of distribution and content powerhouses would have a dramatic impact on the marketplace, and perhaps lead to further consolidation among media giants.

“Blocking this merger is the right thing to do — and we hope the Justice Department is doing it for the right reasons,” said Craig Aaron, the president and CEO of Free Press. “This deal would give AT&T way too much power to undercut competitors and raise costs on TV viewers and internet users everywhere.”

The Writers Guild of America West issued a statement welcoming the lawsuit.

“As we have stated since this deal was first proposed, the size, scope and potential harm to both consumers and content creators provide ample reason to block the merger on its merits,” the WGAW said. “The proposed combination of must-have content with vast control over distribution would give the company broad power to undermine competition, restrict access to programming and raise prices.”

Delrahim, who was confirmed as the antitrust division chief in September, has expressed a preference for structural conditions, like selling assets, as a remedy for problematic mergers versus so-called “behavioral” conditions. In a speech last week, he mentioned that critics of the Justice Department’s approval of the Comcast-NBC Universal transaction had found that the conditions placed on the deal were sufficient to protect the competitive landscape. Those conditions are set to expire next year.

In the lawsuit, the Justice Department even included comments that AT&T and DirecTV have previously made about vertical combinations of a distributor and content company.

“As AT&T has expressly recognized, however, distributors that control popular programming ‘have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition,'” the lawsuit states. “Specifically, as DirecTV has explained, such vertically integrated programmers ‘can much more credibly threaten to withhold programming from rival [distributors]’ and can ‘use such threats to demand higher prices and more favorable terms.'”

A Justice Department spokesman declined to comment on when and where the AT&T and DirecTV comments were made.

Its lawsuit outlined how AT&T would be able to use its leverage to raise prices and then gain video subscribers. In negotiations, rival distributors would have to give in to Time Warner’s demands, or risk losing those channels on their platforms. Without HBO, TNT and other channels, a subscriber may then just sign up with DirecTV.

“This improvement in Time Warner’s best alternative to a deal resulting from the proposed merger— and therefore in its negotiating leverage—would give the merged firm the ability to credibly demand higher prices than it otherwise would,” the Justice Department stated in its lawsuit.

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