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Judge Will Allow AT&T-Time Warner to Use Arbitration Offer in Defense of Merger

UPDATED WASHINGTON — A federal judge denied a Justice Department motion that sought to limit AT&T and Time Warner from presenting a key piece of evidence in defense of their proposed massive merger in an antitrust trial set to start on Monday.

That evidence is an offer that AT&T-Time Warner made to agree to go into “baseball-style” arbitration in any Turner Networks carriage disputes with distributors. The offer, unveiled after the government filed its antitrust lawsuit on Nov. 20, would extend for a period of seven years after the merger is completed. It also said it would not engage in any blackout of channels during the arbitration.

But the Justice Department sought to prevent the offer from being presented in court, arguing that it was “inconsistent with the structural focus of the Clayton Act, irrelevant, and therefore, inadmissible.” It also says it would “waste trial time and confuse the proceedings,” and that it does “not alter the structure of the underlying acquisition.”

In a court filing on Tuesday, AT&T-Time Warner said they made the arbitration offer “as a good-faith effort not only to address this alleged theory of harm, but also to confirm that they never had any intention to engage in such behavior in the first place.”

U.S. District Judge Richard Leon, who is presiding over the case, denied the Justice Department’s motion without comment.

The companies also have attacked one of the government’s expert witnesses, Carl Shapiro, an economist from University of California at Berkeley, who they say has presented flawed models and has failed to account for the arbitration offer’s effect “on post-merger bargaining leverage.” AT&T-Time Warner also pointed out in filings that the “central claim” of the government is that the merger will lead to a “theoretical 45-cent increase in the average monthly pay-TV bills for U.S television consumers — an increase of 0.4% in an average monthly bill.”

“In a crowning irony, the government complains that the Arbitration/No-Blackout Commitment was ‘devised and implemented without any review or even notice to this court’,” the companies said in their filing. “Yet it is the government that — after ample notice of the Commitment and full discovery into its details — now seeks to prevent the court from reviewing the [arbitration offer] and its effects on post-merger competition.”

But the Justice Department said the arbitration offer “puts the cart before the horse.”

“The question before the court in the first instance is whether the challenged acquisition — the transaction — would substantially lessen competition,” the DOJ attorneys said in their motion, unsealed on Tuesday. “Only after answering that question can the Court determine an appropriate remedy.”

The DOJ claims that the merger of AT&T with Time Warner will drive up prices for distributors, costs that will ultimately be passed on to consumers. It contends that the merger will give the combined company leverage to make such demands on rivals. AT&T-Time Warner says the transaction is just the type of vertical merger that has been approved by government antitrust lawyers for decades.

Also on Tuesday, Leon rejected an effort by former Justice Department officials to present an amicus brief in the case. John Dean, Preet Bharara and others, called for an inquiry into potential White House interference in the decision by the Antitrust Division to sue to try to block the merger.

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