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Justice Department to Appeal AT&T-Time Warner Decision

WASHINGTON — The Justice Department filed a notice of appeal of a federal judge’s decision last month that paved the way for AT&T to acquire Time Warner.

“Notice is hereby given that the United States of America, plaintiff in the above named case, hereby appeals to the United States Court of Appeals for the District of Columbia Circuit from the final judgment entered in this action on June 12, 2018,” the DOJ said in its filing, signed by its lead counsel, Craig Conrath.

The notice was just one paragraph, but the Justice Department will be expected to file a lengthier brief. A spokesman for the Antitrust Division said that they had no comment.

AT&T chairman-CEO Randall Stephenson told Variety he was not surprised by the government’s move, nor is he worried about it posing a threat to the merger deal that closed last month after more than 18 months.

“We were expecting this,” Stephenson said in Sun Valley, Idaho, where he is attending the annual Allen & Co. conference this week. “The merger’s closed. We’re all about executing now.”

U.S. District Judge Richard Leon decided in favor of AT&T-Time Warner on June 12, in a definitive opinion that rejected all of the government’s arguments. He also strongly suggested that the Justice Department not to seek a stay to block the merger as it pursued an appeal. They took about a month to file the notice — they had a court deadline of 60 days to do so.

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Stephenson emphasized that AT&T has decades of legal precedent, right on up through Leon’s June 12 decision, on its side. “We’ve been to the court once and we got an order based on the law,” he told Variety. “The judge did a very fact-based, thoughtful and thorough order. It’ll be evaluated on those grounds.”

Many public interest groups and some lawmakers on Capitol Hill urged the government to appeal, even though they will likely face an uphill battle to get Leon’s decision overturned. The DOJ has been pressing Leon to publicly release the transcripts of many of the sidebar conferences he had with lawyers on both sides, which has raised some speculation that the government will raise issues over some of the judge’s evidentiary rulings.

AT&T completed its acquisition of Time Warner just days after Leon’s ruling, and has since rebranded Time Warner as WarnerMedia.

“The Court’s decision could hardly have been more thorough, fact-based, and well-reasoned,” David McAtee, AT&T’s general counsel, said in a statement. “While the losing party in litigation always has the right to appeal if it wishes, we are surprised that the DOJ has chosen to do so under these circumstances.  We are ready to defend the Court’s decision at the D.C. Circuit Court of Appeals.”

The Justice Department sued to block the vertical merger on Nov. 20, arguing that the increased leverage that AT&T would gain over DirecTV’s distribution rivals would force them to pay higher fees for Time Warner-owned Turner networks, ultimately driving up the costs for consumers. They also argued that AT&T-Time Warner would have the incentive to coordinate with Comcast-NBCUniversal to stem the growth of online streaming services. Another claim was that the merged company could limit DirecTV’s rivals from using HBO as a promotion platform.

But Leon rejected dismissed those claims, writing in his opinion that he found no “adequate basis to conclude that the challenged merger will lead to any raised costs on the part of distributors and consumers — much less consumer harms that outweigh the conceded $350 million in annual cost savings to AT&T’s customers.”

Were the Justice Department to convince an appellate court to overturn Leon’s ruling, there are a number of scenarios as to what could happen next. For instance, AT&T may be forced to sell off Turner networks, which was the focal point of the government’s case.

Diana Moss, the president of the American Antitrust Institute, noted that the parties signed an agreement that “makes it easier to avoid the egg unscrambling problem.”

In a filing two days after Leon’s ruling, AT&T confirmed that even with the closing of the Time Warner deal, they would keep Turner operations largely a separate unit until Feb. 28, 2019, the closing of the case or until the government’s appeal, whatever is earlier. That means that Turner is operating with the same number of employees and compensation levels. AT&T also said it would maintain a “firewall” between Turner and AT&T Communications, which includes DirecTV and U-verse.

Some public interest groups cheered the decision to appeal.

John Bergmayer, senior counsel at Public Knowledge, said in a statement, “Judge Leon’s decision contained numerous errors, and we believe the DOJ’s position should be vindicated.” He noted that since the transaction was approved, AT&T has raised the price of its DirecTV Now streaming service. AT&T said at the time that the price increase was bringing DirecTV Now “in line with the market — which starts at a $40 price point.”

At the time of Leon’s decision, Wall Street analysts predicted that AT&T’s victory in the lawsuit would lead to further media consolidation, as it would give some clarity on the types of transactions that could pass muster in the courts.

On June 13, Comcast put in a rival bid for many of the assets of 21st Century Fox, a move that led to The Walt Disney Co. upping its offer. Two weeks later, though, Disney secured the Justice Department’s green light for its acquisition of Fox, approval that came earlier than expected and  a leg up over Comcast as it made a competing offer.

Disney’s acquisition of Fox is largely a horizontal deal — the kind of transactions that usually raise more red flags among antitrust attorneys. Disney agreed to divest Fox’s regional sports networks as a condition, something that may have helped speed the process along.

Larry Downes, senior industry and innovation fellow at the Georgetown Center for Business and Public Policy, said that the Justice Department’s appeal carries risks for the government. Leon’s decision does not hold precedent, he noted, while the D.C. Circuit decision likely would.

“The court could use the opportunity to comment generally on the legal standards for opposing vertical mergers, for example, or reaffirm in broad terms the general principles of consumer harm that have guided antitrust law for the last forty years — rejecting, in effect, recent calls for expanding antitrust to take into account the economics of online platforms that don’t charge consumers and therefore don’t raise prices when they acquire other companies,” he said via email.

He said that while its possible the Justice Department is looking to get AT&T to agree to some modest conditions on the transaction, he doesn’t see much of a likelihood of that given Leon’s ruling.

“The DOJ is really gambling — and could wind up losing not just this case but its ability to challenge future deals in a wide range of industries currently undergoing disruption,” he said.

Ketan Jhaveri, former antitrust attorney at the Justice Department’s telecommunications task force and co-CEO of legal tech platform Bodhala, took a slightly different view. The appeal is important for the Antitrust Division, particularly for future vertical mergers. That is the type of transaction that Comcast would be putting forth were it to win the bid for the Fox assets.

“This is really important for enforcement going forward, and there are serious policy consequences here,” he said. “There is not a lot of downside; there is a lot of upside.”

He said that “the point of the appeal is probably not to unscramble to eggs of AT&T and Time Warner. It is much more on getting clarity on what this judge did, to reverse some of his analysis.”

Jhaveri said that one possible avenue for an appeal would be the way that Leon defined the market, like “the loose mentions of Netflix, Google, and Facebook as competitors.”

He pointed to the D.C. Circuit’s 2008 ruling in the FTC’s challenge of the merger of Whole Foods with Wild Oats.

In that case, he said, “the court strongly reversed a district court opinion that over-relied on evidence of competition between organic supermarkets like Whole Foods and traditional supermarkets like Safeway, noting that one has to look at ‘core customers’ of organic supermarkets who did not view the traditional supermarkets as competitors.

He added, “In the AT&T cases, these would be the tens of millions of households who still viewed cable as a must have and not as something substitutable with SVODs or internet platforms.”

Cynthia Littleton contributed to this report from Sun Valley, Idaho.

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