The D.C. Circuit’s Feb. 26 ruling in United States v. AT&T Inc. offers several important takeaways from the first vertical merger challenge courts have seen in decades.
Judge Judith W. Rogers’ decision demonstrates the challenges that the U.S. antitrust regulators will face to challenge successfully a vertical merger.
Real-World Evidence Trumps Economic Theory
Much of the Department of Justice’s theory at trial and on appeal rested on an economic model (the Nash Bargaining Model) that predicted AT&T would have increased bargaining leverage post-merger. The theory posited that this increased leverage would ultimately result in higher prices for consumers.
At the district court, Judge Richard J. Leon accepted the economic theory but ultimately determined the theory failed to accurately predict outcomes in this industry. Instead, Leon credited real-world evidence from past vertical mergers, such as Comcast-NBCU, in holding the government had failed to meet its burden to demonstrate the merger was likely to be anticompetitive.
The DOJ argued on appeal that Leon had failed to properly consider the Nash Bargaining Model, but the circuit court upheld the lower court decision, noting that “in the context of a dynamic market where a similar merger had not resulted in a ‘statistically significant increase in content costs,’” the district court could fairly conclude that the economic model failed to accurately predict real-world effects.
Not All Witness Testimony Is Equal
Real-world evidence can trump business judgment as well. Witnesses for the DOJ consisted largely of AT&T competitors (video content distributors), who testified at trial that they believed the proposed merger would create anticompetitive harms.
Witnesses for AT&T, largely executives of the merging companies, testified that their experience in the industry demonstrated no such harm would occur. Leon largely credited the latter but not the former.
On appeal, the DOJ pointed to this discrepancy in arguing that the district court applied internally inconsistent logic in crediting some testimony over others. In the DOJ’s view, all of the testimony was presented by parties with at least some self-interest, and thus was roughly equally credible.
The circuit court, however, sided with the lower court again and noted that the testimony Leon failed to credit was both presented by self-interested parties and predicated on predicting future results. Much of the third-party testimony “consisted of speculative concerns and did not contain any analysis or factual basis to support key assumptions.”
These theories regarding a post-merger world ultimately failed to persuade the circuit court when compared to the real world examples AT&T’s witnesses drew.
Courts May Not Follow DOJ’s Lead Regarding Behavioral Remedies
The DOJ has emphasized recently that behavioral remedies are disfavored and that the antitrust agencies are enforcers, not regulators. Before this lawsuit was filed, the parties offered to negotiate with the DOJ regarding behavioral remedies, but the DOJ insisted that the only workable option was a structural remedy.
This set up an interesting dynamic when AT&T unilaterally offered arbitration agreements to approximately 1,000 distributors a week after the DOJ filed its lawsuit. Many wondered whether the agreements would be deemed enforceable. Leon found the agreements persuasive, referring to them as the “extra icing on a cake already frosted.” United States v. AT&T Inc., 310 F. Supp. 3d 161, 241 (D.D.C. 2018).
In Leon’s view, the DOJ had failed to make a persuasive showing even before the DOJ’s economist conceded he did not take the arbitration agreements into account.
The D.C. Circuit agreed and noted that “AT&T’s counsel represented the no-blackout commitment is ‘legally enforceable,’ and AT&T ‘will honor’ the arbitration agreement offers.” This demonstrates that the courts may be open to accepting behavioral remedies, even if the DOJ remains opposed to behavioral remedies.
If parties can convince a judge of the efficacy of a unilateral behavioral remedy, this will make it that much harder for the government to prevail.
This case demonstrates the challenges the government faces in providing the requisite evidence to successfully challenge a vertical merger. Unable to rely on a presumption of anticompetitive effects, as in the horizontal context, the government is put to the test to make a fact-specific showing that harms will outweigh efficiencies.
Future vertical cases, especially those not arguing foreclosure, will continue to pose a risk for the government at trial.
Joel Grosberg is a partner at McDermott, Will & Emery in Washington, D.C., where he defends clients on mergers, acquisitions, and joint ventures before the FTC, DOJ, state antitrust authorities, foreign competition authorities, as well as on antitrust litigation. Prior to joining McDermott, Grosberg was an attorney with the FTC where he handled a full range of antitrust matters.
Matt Evola is an associate at McDermott, Will & Emery in Washington, D.C., who focuses his practice on antitrust, regulatory, and litigation matters. He has assisted clients across a variety of industries where he advises on mergers and acquisitions and counsels clients on antitrust compliance.