The Justice Department’s appeal of AT&T Inc.'s $85 billion acquisition of Time Warner Inc. may not be a total loss.
Few expect the government to prevail in its attempt to undo a deal that’s already completed. But an appeals court judge might have provided hope of a smaller legal victory when he questioned during Dec. 6 arguments why the trial court that ruled in favor of AT&T didn’t consider an antitrust defense doctrine which assumes a company pursues maximum companywide profit even at the expense of a subsidiary.
The omission of the so-called Copperweld doctrine could prompt an appeals court ruling that leaves the merger intact, while aiding the Justice Department in similar future “vertical” deals involving a company buying a supplier, antitrust attorneys said.
The clarification could force companies eyeing vertical acquisitions to better articulate why their deal makes sense economically and place a heavier burden on them to illustrate its merit.
The DOJ generally focuses on reviewing “horizontal” deals, in which a company buys a rival. In the case of the AT&T deal, the DOJ argued that it would force other cable and satellite TV companies to pay more for Time Warner’s programming, such as CNN, HBO and TNT. Consumer prices could rise, and companies’ fights over programming carriage fees could result in Time Warner channels being blacked out in some markets, the DOJ argued.
U.S. District Court Judge Richard Leon ruled in June to let the deal proceed. The DOJ is appealing at the U.S. Court of Appeals for the District of Columbia Circuit.
What Would AT&T Do?
AT&T’s deal will likely stand, antitrust analysts said. Leon rooted his ruling based on the deal’s unique facts. And the three-judge federal appeals court panel can only overturn Leon’s decision if it finds a clear error in his interpretation of the facts.
“The standard for reversal is high because deference must be given to Leon’s fact findings,” Jennifer Rie, a Bloomberg Intelligence antitrust litigation analyst, said. A decision is expected before Feb. 28.
One of the members of the three-judge panel, Robert Wilkins, might have given the DOJ a small glimmer of hope. During the Dec. 6 oral arguments, Wilkins agreed with the Justice Department’s argument that Leon misstepped in failing to explicitly consider Copperweld in his decision.
Copperweld v. Independence Tube established an assumption that a company works to maximize its profits companywide — “joint profits” — and its subsidiaries can’t conspire with each other to restrain trade.
The DOJ argued that AT&T wouldn’t mind engaging in hardball negotiation tactics to get higher carriage fees for its programming even if they cause Time Warner channels to be blacked out at rival cable companies. Such blackouts may hurt its Time Warner unit’s revenue in the short-run, but could benefit its DirecTV unit since some customers of a competitor cable company may decide to defect to DirecTV. Time Warner changed its name to WarnerMedia after the deal closed.
This is anticompetitive, the DOJ argued. The possibility of AT&T pursuing such “joint profits” across subsidiaries is a Copperweld question that needs to be considered, the government argued.
Leon didn’t buy the argument. He said Time Warner negotiators would work to avoid blackouts since they could hurt Time Warner’s revenue and that blackouts rarely occur.
DOJ attorney Michael Murray argued that Leon, without citing Copperweld in his opinion, failed to understand how AT&T would operate once it owns Time Warner.
Wilkins said that Murray had “a fair point.”
“If we simply affirm here without really grappling with that, we’re saying that Copperweld isn’t really the legal presumption that the Supreme Court said that it is,” Wilkins said. “And isn’t that above our pay-grade?”
Wilkins appeared to want to clarify Copperweld in the AT&T-Time Warner case, even if his contention isn’t enough to reverse Leon’s decision, Rie said.
Such a clarification in the appeals court ruling could become a “good authority” that defendants have to better articulate defenses that illustrate the economic rationality of their deal, Chris Sagers, antitrust professor at Cleveland State University Cleveland-Marshall College of Law, told Bloomberg Law.
The Copperweld clarification may not be included in the appeals court ruling if a reputedly pro-business judge on the panel, David Sentelle, writes the opinion, Sagers said.
That could be problematic for the DOJ, Sagers said. “I take Judge Sentelle to be very conservative in matters of economic regulation.”
Sentelle seems to want the government to prove to a high degree what the merger’s anticompetitive harms will be, Sagers said. Sentelle’s opinion could contain language that could be “even more harshly restrictive of merger enforcement than the law already is,” he said.
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