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Appeals Court Upholds Ruling in Favor of AT&T-Time Warner Merger

WASHINGTON — A federal appeals court upheld AT&T’s merger with Time Warner, rejecting a Justice Department effort to reverse a lower court decision that cleared the way for the transaction.

In a 3-0 decision, the appellate judges found the government’s claim, that the lower court “misunderstood and misapplied” economic principles, “unconvincing.”

The government is not planning a further appeal.

According to a source familiar with the events, Makan Delrahim, the chief of the Justice Department’s Antitrust Division, called AT&T’s general counsel David McAtee shortly after the decision was issued to congratulate him on the court victory and to inform him that the government would not take the case any further. Delrahim also congratulated Paul Cappuccio, who had been general counsel of Time Warner.

The ruling was not too much of a surprise. U.S. District Judge Richard Leon’s decision in favor of the companies, after a six-week antitrust trial, was definitive. As the Justice Department argued that Leon used faulty reasoning in reaching his decision, a three-judge appellate panel did not seem swayed during oral arguments in December.

The government claimed the merger would give AT&T leverage over rival multichannel distributors, and could demand higher prices for Time Warner’s Turner networks, including CNN, TNT. and TBS. Ultimately, the government claimed, consumers would face higher prices for their cable or satellite subscriptions.

During the litigation, AT&T agreed to manage Turner as a separate business unit from AT&T Communications, which includes DirecTV and U-verse, until Feb. 28. Time Warner was rebranded as WarnerMedia after the merger was completed last June.

“The merger of these innovative companies has already yielded significant consumer benefits, and it will continue to do so for years to come,” McAtee said. “While we respect the important role that the U.S. Department of Justice plays in the merger review process, we trust that today’s unanimous decision from the D.C. Circuit will end this litigation.”

Jeremy Edwards, a spokesman for the Justice Department, said, “We are grateful that the Court of Appeals considered our objections to the District Court opinion. The Department has no plans to seek further review.”

The appellate opinion, written by Judge Judith M. Rogers, concluded that Leon “undoubtedly” made “some problematic statements, which the government identifies and this court cannot ignore.” And they acknowledged that “uncertainty exists about the future real-world impact of the proposed merger on Turner Broadcasting’s post-merger leverage.” But they still supported Leon’s contention that the DOJ “failed to clear the first hurdle” in showing that the merger would indeed increase Turner’s bargaining leverage.

The judges noted that during the trial, AT&T presented expert analysis of past vertical mergers that showed “no statistically significant effect on content prices,” but the government did not offer comparable studies to rebut it.

The judges also pointed out that in presenting an economic model to the court showing that the merger would increase prices, the DOJ did not take into account Turner’s offer to go into arbitration with AT&T’s rival distributors. That offer was made after the DOJ filed its suit to block the merger and included a commitment by Turner not to black out its channels during carriage negotiations, preventing itself from using a potent source of leverage during negotiations.

“Evidence also indicated that the industry had become dynamic in recent years with the emergence, for example, of Netflix and Hulu,” the judges said in the opinion. “In this evidentiary context, the government’s objections that the district court misunderstood and misapplied economic principles and clearly erred in rejecting the quantitative model are unpersuasive.”

The appellate court also rejected the DOJ’s argument that Leon gave credence to testimony of AT&T and Time Warner executives while dismissing that of executives from rival companies. The judges agreed with Leon that much of that testimony from third-party rivals was “speculative.”

“By contrast, the Time Warner executives’ testimony did ‘not involve promises or speculations about the employees’ future, post-merger behavior’ and instead recounted ‘what these executives previously experienced when working within a vertically integrated company,'” the judges said in the opinion.

Patrice Cucinello, director at Fitch Ratings, said that the decision was “broadly anticipated.”

Since AT&T-Time Warner merged, Cucinello noted, there has been a carriage standoff that has left Dish Network customers without HBO, another of the Time Warner assets.

“Despite this ongoing carriage dispute, the ruling by the Appeals Court assuages ongoing uncertainty related to the AT&T and Time Warner merger and other potential vertical combinations,” Cucinello wrote.

Before he became attorney general, William Barr filed an affidavit in the case in February 2018, when he was still a board member for Time Warner, and questioned the government’s rationale for challenging the merger and whether it had a “genuine basis for bringing this enforcement action or instead was acting to serve a political end. I agreed with that view and I agree with it now.” AT&T-Time Warner’s legal team had sought to begin discovery on the question of whether President Donald Trump’s animus toward CNN played a role in the decision to challenge the merger, but Leon refused to bring that issue into the trial.

In his confirmation hearings, Barr said he would recuse himself from decisions over the case.

Delrahim denied that Trump’s opinion of the merger played a role in the decision to bring the case. “Those were not factors that played any role in my consideration of the Transaction and any suggestions to the contrary are false,” he said in his own affidavit.

During the litigation, AT&T often pointed out how rare it was for the Justice Department to bring a vertical merger case to trial, in contrast to horizontal transactions which immediately remove competition from the marketplace.

DOJ officials, however, say that many vertical transactions are settled before they ever make it to court. That was the case in 2011, when the government gave the greenlight to Comcast’s acquisition of NBCUniversal with a set of conditions on the companies’ marketplace behavior.

Delrahim, however, has made it a priority to demand “structural” conditions, in which companies are forced to divest assets to mitigate antitrust concerns. He has said that “behavioral” remedies placed on transactions put the DOJ in the position of acting like a regulator to monitor compliance, while some consumer advocates complain that they are difficult to enforce. In the weeks before the Justice Department filed suit in November 2017, AT&T-Time Warner refused demands that they shed the Turner assets as a condition of approval.

Hal Singer, economist and adjunct professor at Georgetown University’s McDonough School of Business, said, “the best outcome for the DOJ was to extract as many concessions from the merging parties as possible. But Delrahim assailed behavioral remedies and took a gamble on a court-imposed prohibition, potentially to satisfy his boss’ hatred of CNN. As a result, Delrahim secured zero protections for consumers.”

Others, though, said the case brings up challenges for antitrust enforcers in a fast-changing marketplace.

Gigi Sohn, fellow at the Georgetown University Law Center Institute for Technology Law and Policy, said the decision “demonstrates that U.S. antitrust laws and Justice Department merger guidelines are solely in need of reform.

“It has become nearly impossible for the government to meet its burden of showing that a merger violates the antitrust laws, especially when it comes to vertical mergers,” she said in a statement.

As definitive as their decision was in favor of the companies, the appellate judges did not rule out any challenge of a vertical merger. In fact, they said that “quantitative evidence” of a price increase was not required for the government to prevail on a challenge to a transaction. They said that vertical mergers “can create harms beyond higher prices for consumers, including decreased product quality and reduced innovation.”

Still, there is some worry that future challenges to vertical mergers will have difficulty prevailing in federal court.

Sen. Amy Klobuchar (D-Minn.), who is the ranking member of Senate Judiciary’s antitrust subcommittee, called the decision “disappointing” and said it’s “a setback for competition and American consumers.” She said the DOJ should do a retrospective reviews “of the markets affected by this merger to determine if further enforcement action is warranted.”

“I continue to be concerned about this merger, and I continue to be concerned about the consolidation that we are seeing all over of the country,” she told Variety after speaking to a conference of the National Association of Broadcasters.

“One of the things that has made American capitalism work is that we have had strong antitrust laws that are enforced and courts that actually stand by them,” she said. “And right now, we have such a conservative Supreme Court that they have literally, with every antitrust case that comes before them, never meets the standards for a violation. And that is going to start filtering through the lower courts, and that is why I think the only answer right now is to change the laws.”

She has introduced a bill to boost the resources of the Justice Department and the Federal Trade Commission by charging a fee to companies whose transactions are under review. Another bill would change the legal standard for reviewing mergers, in that it would shift the burden to the companies in mega-mergers to prove that their transactions do not harm competition.

The Judiciary Subcommittee also has scheduled a hearing, titled “Does America Have a Monopoly Problem?,” on March 5, with those testifying including Robert Reich and Joshua Wright.

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