What To Expect When You're Expecting an Antitrust Trial

Andrew Jay Schwartzman
Schwartzman

One of the most important antitrust cases in recent decades, the Department of Justice’s (DOJ) move to block AT&T from acquiring Time Warner, goes to trial in Washington, DC, on March 19. The significance of the case goes well beyond its impact on this huge transaction and on future media mergers. Here, with some necessary simplification, is what non-lawyers will want to know as the trial proceeds.

There are three reasons why this case is different from others that have gone to trial in recent memory.

First, the companies are not direct competitors; they seek to combine a program producer (Time Warner) with a content distributor (AT&T).  In recent decades, the DOJ (and the Federal Trade Commission, with which the DOJ shares antitrust jurisdiction) have been more aggressive about “horizontal” mergers of competing companies. Contemporary antitrust doctrine has tended to view “vertical” transactions more favorably in the belief that they generally create efficiencies that are passed on to consumers. The DOJ has often allowed vertical mergers to go forward, albeit often imposing conditions by means of settlements enforced by judicial consent decrees. More recently, the government has signaled that it would be more skeptical about vertical deals, especially in rapidly-evolving media and technology industries. However, few observers expected the DOJ to be willing to go a trial for the first time in many years in a major vertical case.

Second, when the government has settled vertical cases, it has often negotiated “behavioral” conditions, in which the merging parties agree not to engage in certain possibly anti-competitive practices for a number of years. In this instance, the DOJ refused to settle unless AT&T agreed to “structural” remedies by divesting ownership of significant portions of the Time Warner assets.  Here, too, there has been increased criticism of behavioral remedies in recent years. Some conservatives have objected to these deals because they involve significant ongoing regulatory scrutiny. Many progressives have opposed behavioral remedies because they haven’t worked very well and, once expired, the affected companies are free to engage in the very conduct which had motivated the antitrust challenge in the first place. Critics point to the 2011 consent decree which allowed Comcast to acquire NBC Universal as having been ineffective, and, to the extent it has protected competition, its provisions will soon expire. (Coincidently, but importantly, the ATT/TW trial judge also supervised adoption and implementation of the Comcast/NBCU consent decree.)

Third, and most controversially, there is a nearly-unprecedented political underlay to the case.  The defendants (i.e., AT&T and Time Warner) have attempted to argue that the case is tainted because President Trump improperly influenced DOJ’s decision to bring the case. Last month, the judge accepted DOJ’s assurances that it had not received any suggestions, much less directives, from the White House with respect to its decisionmaking, and refused to allow the defendants to pose further questions to DOJ and the Office of the President.  (Last week, a group of prominent former DOJ officials filed an amicus brief asking the judge to reconsider that holding, but he declined to do so.) 

The stakes are extremely high, far beyond the $500 million “break-up fee” that AT&T must pay if the deal is not consummated. It is widely believed that if the government wins, it will continue to insist on structural, rather than behavioral, remedies, and that this will dampen incentives for mergers and acquisitions in all sectors, including media and technology companies, and especially for vertical transactions that, until recently, have been considered to be sure to win approval.  By contrast, a government loss would be seen as a green light for more aggressive deals.  

As the trial begins, the basic outlines of the parties’ position are set out in their pretrial briefs. However, there is a great deal that is unknown. For one thing, some of the most important factual details have been redacted from the publicly-released versions of the briefs. Perhaps the biggest unknown is whether executives from AT&T/TW competitors will be willing to testify about harm their companies face if the transaction is not blocked. Even so, the basic allegations are clear: 

The government contends that the merged companies will have the power and the motive to withhold “must have” programming like HBO, CNN, TBS, and Time Warner motion pictures from competing program distributors. (Originally, the government said it would argue that the company would likely act unilaterally to withhold programming. However, as the case moved towards trial, DOJ has placed greater emphasis on arguing that ATT/TW and Comcast would act in coordination to withhold programming and/or raise prices charged to competitors.)  Use of this power, it says, will raise cable and satellite prices by at least 45 cents per month per subscriber and deter potential new competitors from entering the distribution markets.

The defendants reject all these allegations.  At the outset, they say that the government improperly focuses on traditional cable and satellite markets at a time when AT&T/TW face a strong competitive challenge from new “over-the-top” services that offer cable-like services, such as Sling TV. They also point to strong competition from original programming produced by Netflix, Hulu, Amazon Prime and other online distributors. Thus, they insist that combining AT&T and Time Warner is a necessary, defensive move, and new competition and efficiencies from the merger will keep prices down. They dispute the government’s 45 cents per month claim and argue that, in any event, 45 cents per month is not enough to establish that the merger will “substantially lessen competition” as is necessary to invoke antitrust statutes.   

A major point of contention in the trial is likely to turn on an offer the defendants made after the case began. They claim to have solved any potential competitive problems by making a binding offer that, for seven years, they adhere to “baseball-style” arbitration with major program distributors. Pursuant to this commitment, if AT&T cannot reach a satisfactory deal for “must have” programming, AT&T and its customers will each make their best offer to an independent arbitrator, who will select one of them. AT&T also agrees that it will not withhold key programming during the arbitration process.  

The government unsuccessfully filed a motion last week seeking to keep the arbitration offer out of the trial. It contended that the mechanism is unrelated to the issue of whether the deal is anti-competitive and should be considered, if at all, only as a possible remedy once the court rules in favor of the government on the issue antitrust liability. Now, with the judge’s blessing, the defendants will argue that the arbitration offer addresses any harms that the government has alleged and therefore there is no likelihood of harm that would justify an adverse ruling. 

The non-jury trial is expected to last about three weeks, and a decision will likely be issued by mid-May. There will undoubtedly be surprises as the trial proceeds, and the parties will surely adjust their strategies depending on the witnesses’ testimony and the judge’s reactions.  Indeed, if the judge appears to find merit in the government’s case or if he shows interest in the viability of the defendants’ arbitration offer, there may well be a settlement before the trial concludes.  Whatever happens, this trial will set precedents and have a dramatic influence on antitrust law for a long time to come.


 Andrew Jay Schwartzman is the Benton Senior Counselor at the Public Interest Communications Law Project at Georgetown University Law Center's Institute for Public Representation (IPR). Since February 2014, Schwartzman has been writing a monthly column for the Benton Foundation’s Digital Beat blog on telecommunications and media policy issues. Drawing on his decades of experience in the field, Schwartzman provides analysis of the legal issues in the key communications debates of the day, highlighting how law and policymaking interact. Find all of Schwartzman's articles here.

 

 


By Andrew Jay Schwartzman.