WASHINGTON — AT&T’s merger with Time Warner faced a new round of judicial scrutiny on Thursday as a three-judge panel weighed whether there were clear errors in a district court decision that cleared the way for the transaction.
The panel — Judith Rogers, a Clinton appointee; Robert L. Wilkins, an Obama appointee; and David Sentelle, a Reagan appointee — gave little clear indication of which way they were leaning.
But they did ask a number of skeptical questions to the Justice Department’s attorney, Michael Murray, and pressed him on just where the government can show that the lower court erred in its decision.
In June, U.S. District Judge Richard Leon’s 172-page decision ruled in favor of AT&T, and rejected all of the government’s arguments.
The Justice Department claims Leon ignored the “economics of bargaining,” and that he “illogically and erroneously concluded” that the merger would not give Time Warner, now known as WarnerMedia, more leverage. The government contends that the merger will allow WarnerMedia to extract higher prices for Turner content from distribution rivals, and that AT&T-owned DirecTV would ultimately benefit.
Murray argued that Leon was inconsistent in that he accepted that, before the merger, Time Warner’s leverage came from the threat of a blackout. But in examining the post-merger landscape, Leon didn’t weigh the threat of a blackout but whether one was even possible.
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Sentelle, though, said the government had to do more than prove economic theory but “show that there is going to be harm to competition that is substantial.”
Much of the hearing, which lasted nearly two hours, was devoted to the merits of a model used by economist Carl Shapiro, that was presented during the six-week trial. The model showed that the merger would lead to an increase in consumer prices, but Leon found fault with the inputs that were used to calculate those figures.
AT&T’s attorney, Peter Keisler, several times noted that one of the “input” figures used in the calculation was changed, and ultimately made the merger’s consumer harm greater. The source of the figure, he said, was a consultant working for Charter Communications, who emailed one of the inputs while standing in an airport boarding line.
After he was retained by the government, Shapiro relied on the figures in his model, but was unaware of the changes that were made to the inputs, he said.
He said that the government’s case “absolutely fell apart” in the presentation of the model.
Murray, however, said AT&T’s focus on the inputs used was “a lot of smoke,” and that the figure was supported by a separate, sealed study from Comcast.
He also said the government’s case can be proven without quantifying the merger’s harms, something that courts have accepted in past precedent.
In November, 2017, just days after the Justice Department sued to block the merger, Time Warner offered to go into baseball-style arbitration with AT&T’s rivals that included a promise not to blackout Turner programming during carriage negotiations.
The judges asked whether they can ignore the fact that such an offer was made, as it would have an impact on bargaining leverage.
Wilkins told the DOJ’s lawyer that “you are saying that the district court erred because in the post-merger world, the efficacy of the [blackout] threat hasn’t changed.”
“How can we just ignore [the arbitration offer] and say that the district court has irrationally switched positions?”
Murray said that a number of AT&T’s distribution rivals testified that they rejected the offer.
Rogers pressed Keisler on whether the company would honor the arbitration offer, noting that in Leon’s opinion, “all we have is a footnote and a finding that AT&T won’t walk away.”
“We don’t make an offer in the marketplace and say, ‘We had our fingers crossed and won’t honor it,’ Keisler said.
“Well, we will take you at your offer,” Rogers responded.
Kaiser was interrupted by the judges questions far fewer times than the government’s attorney.
Also giving arguments were attorneys for two separate groups of antitrust scholars, who filed amicus briefs in the case in support of separate sides.
AT&T’s attorney did face some questions about an antitrust precedent, advanced in the Supreme Court decision in Copperweld Vs. Independence Tube Corp., that all units of a company will act to maximize the profits of the corporate parent. Wilkins noted that Leon did not cite that 1984 decision once in his opinion.
Keisler, however, said that Leon still embraced that principle, even if there is disagreement as to how a corporation would seek maximize its profits. He said that past vertical mergers like AT&T-Time Warner showed that the corporate goal is to get content on as many platforms as possible, not to negotiate in a different way to extract more money from rivals.
At least publicly, AT&T executives haven’t been worried about the appeal. CEO Randall Stephenson said his team was spending “zero effort” thinking about it.
The DOJ and AT&T already made an agreement to keep Turner’s assets a separate unit until Feb. 28 in order to limit impact should the government prevail.
The judges did not say when they would rule, but a decision may not come for several months.
“We appreciate the Court’s attention to the arguments of counsel and look forward to receiving its decision,” an AT&T spokeswoman said.
Jeremy Edwards, a spokesman for the Antitrust Division, said, “The Department of Justice appreciates the court’s careful consideration of this important case, and will await the court’s decision.”