Justice Department Urges Turner or DirecTV Sale as Remedy to AT&T-Time Warner Merger

WASHINGTON — The Justice Department is urging a federal judge to block AT&T-Time Warner’s proposed merger or require a significant sale of assets, rather than impose “behavioral” conditions on the deal like an agreement to arbitrate disputes with distribution rivals.

In its post-trial brief, unsealed on Tuesday, the government says that U.S. District Judge Richard Leon could allow the merger on the condition that it not include Time Warner-unit Turner networks, or that AT&T sell off DirecTV. It also said that it could prohibit AT&T from buying a controlling stake in Turner networks, meaning that AT&T could purchase a minority interest.

In the brief, the Justice Department takes aim at AT&T-Time Warner’s defense of its proposed merger, arguing that they “would have the court rewrite merger law.” They take specific aim at AT&T’s argument that they face a new competitive threat with competition from Facebook, Apple, Amazon, Google, and Netflix.

The DOJ says that “for all their discussion of these companies, defendants have not explained how their successes with disparate offerings in different markets are relevant to the court’s analysis of the potential harm in the markets at issue here.”

They say that AT&T-Time Warner seems “to be asking the court to find a new defense to an illegal merger: ‘we are getting killed by new competition in different markets.’ To date, only one substantive exception to an anticompetitive merger has been accepted in the law, a ‘failing firm’ defense.”

AT&T-Time Warner filed an unsealed version of its post-trial brief and other documents on Thursday.

As it reviewed the transaction last year, the Justice Department said that the deal could get the green light were it not to include Turner networks or DirecTV, but the companies rejected that proposal, saying that it diminished the rationale behind the transaction. The DOJ sued to block the deal, leading to a just concluded six-week trial. Leon said that he will announce his decision at a June 12 hearing, if not earlier.

The DOJ claims that the merger will give AT&T-Time Warner increased leverage over distribution rivals, ultimately leading to higher carriage fees for Turner content and higher prices for consumers.

AT&T-Time Warner has blasted the government’s case as falling far short of the threshold needed to show that the merger would cause anticompetitive harm.

In its brief, the Justice Department says that AT&T-Time Warner’s lead counsel, Dan Petrocelli, “misleadingly argued” in his closing statement that the legal standard is for the DOJ to show “convincing proof” that the merger will “substantially lessen competition.”

Rather, the DOJ cites case law in arguing that the standard is that there is a “reasonable probability” or “an appreciable danger” to harm to competition.

“The evidence at trial meets that standard,” the DOJ says in the 25-page brief.

Petrocelli also blasted one of the government’s contentions, that the mere threat of a blackout of the Turner networks by AT&T-Time Warner was enough to give it the increase bargaining leverage and ultimately extract higher prices from AT&T’s rivals. Leon even referred to the brinksmanship of carriage negotiations as “kabuki theater.”

“The real-world implications of not reaching a deal, however, determine each side’s leverage and, ultimately, the bargain they strike,” the Justice Department said in its brief. “Even catastrophic alternatives define high-stakes negotiations: in the Cold War, the most destructive weapons were never used, yet the arsenals and defenses available to each side undeniably influenced every negotiation between East and West. Leverage matters in video content negotiations because millions of dollars change hands depending on who blinks first.”

Other highlights:

Arbitration offer. Shortly after the Justice Department filed its lawsuit in November, Turner networks offered to go into “baseball-style arbitration” with AT&T’s rivals should the merger be approved.

But the DOJ dismissed the arbitration offer, made to 1,000 distributors, as “half-baked” and said that “a self-imposed remedy is no remedy at all — it does not replace the preferred free-market competition envisioned” by antitrust law. While arbitration has been imposed as a condition of past vertical mergers, like Comcast’s acquisition of NBCUniversal, the DOJ says that the AT&T-Time Warner merger is different.

“Never before has the country faced a merger involving the largest video distributor acquiring content its rivals need with a nationwide footprint that would provide no benchmarks for arbitration,” the DOJ said.

In its trial brief, AT&T-Time Warner rejected the notion that the arbitration offer would be a remedy, but that it was a “commitment.”

But the DOJ said that the arbitration offer should have “no place” in Leon’s decision on whether the merger is anticompetitive. “If defendants could avoid liability with a unilateral ‘promise’ to behave, the United States’ public interest mandate would be supplanted by post-litigation assurances of private parties,” the DOJ said.

FCC statements. In its original complaint, the Justice Department referred to past statements that AT&T and DirecTV have made to the FCC in expressing concerns about other vertical merger. The intent was to show that the companies have, in the past, acknowledged the threat that a combination of content and distribution can have to the competitive landscape.

“Although AT&T executives denied this ability and incentive to raise rivals costs when they were on the witness stand, AT&T and DirecTV have advocated this view since at least 2010, when the FCC has considered instances of vertical integration between” a multichannel distributor and a content provider, the DOJ said.

Leon placed limits the entry of the statements into the trial record, but the DOJ does refer to them in its brief. It notes that AT&T-Time Warner has called the idea that it will gain increased leverage over rivals, and could then extract increased carriage fees, as an “absurd” theory.

“Defendants have asserted the exact opposite before the FCC,” the DOJ says, adding that the companies should be “judicially estopped from denying that the change in bargaining leverage from vertical integration in this industry will enable the sort of harm the United States asserts.”

Comcast-AT&T ‘coordination.’ Petrocelli also criticized the DOJ for claiming that the merger would “coordinate” with Comcast to try to slow down the threat from emerging streaming distributors, like SlingTV and Hulu. He noted, among other things, that the DOJ never produced an economic model to try to prove that point.

But the government continues to make the case that the two companies would “share an incentive” to curb the growth of new entrants. It noted that “a number of factors” set the stage for coordination, including that the markets already are concentrated and that the barriers to entry are high. It also noted that coordination would require only Turner networks and NBCUniversal, something that would be easier to achieve than in other situations. The DOJ also cited the testimony of AT&T executive Daniel York, and noted that in one instance he had called a competitor for information about a new offering.

Another DOJ claim — that the merged company will have the ability to withhold the use of HBO as a promotional tool by rivals — also was dismissed by AT&T-Time Warner as something that would defy business sense. But the government said that AT&T “would have every reason to do so because the value of a lifetime customer of DirecTV is significantly greater than license fees that” rival distributors pay for HBO.

‘The Godfather’ reference. Perhaps because they are aware that Leon is a classic movie buff, the DOJ did slip in a citation from the movie “The Godfather,” claiming that the combined company would gain new power over distributors  and be able to make demands like an “offer [they] can’t refuse.” For the record, “The Godfather” and its sequels are not Paramount properties, not Warner Bros.



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