United States v. AT & T Inc.
310 F. Supp. 3d 161 (2018)
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Rule of Law:
A vertical merger, combining firms at different stages of a supply chain, is permissible under Section 7 of the Clayton Act if the government fails to prove by a preponderance of the evidence that the transaction is likely to substantially lessen competition, particularly when the merger also generates significant procompetitive efficiencies for consumers.
Facts:
- AT&T, a leading provider of communications and digital entertainment services, operates traditional MVPDs (multichannel video programming distributors) such as DirecTV and U-verse, and a virtual MVPD, DirecTV Now.
- Time Warner is a major content creator and programmer, owning Warner Bros. studios and popular linear networks including Turner (e.g., TNT, TBS, CNN) and HBO.
- In October 2016, AT&T and Time Warner announced a proposed $108 billion merger, inclusive of debt.
- The video programming and distribution industry has been undergoing rapid transformation, characterized by declining traditional MVPD subscriptions and television advertising revenues due to the rise of internet-based subscription video on demand (SVOD) services (like Netflix, Hulu, Amazon Prime) and digital advertising platforms (like Google, Facebook).
- Traditional programmers like Time Warner (specifically Turner and HBO) historically lacked direct customer relationships and granular data about viewer preferences, limiting their ability to innovate in content and targeted advertising, and experiencing 'bargaining friction' in affiliate negotiations.
- AT&T, as a content distributor, lacked control over the video content it offered and faced similar 'bargaining friction' when attempting to secure rights for innovative content offerings.
- Both AT&T and Time Warner concluded that vertically integrating through a merger would enable them to overcome these challenges, experiment with innovative video content and advertising, leverage AT&T's customer data, and better compete with new, vertically integrated market entrants.
- The merger agreement included a 'drop-dead date' of June 21, 2018, by which the transaction must be consummated, or AT&T would owe Time Warner a $500 million 'break-up fee'.
Procedural Posture:
- The U.S. Department of Justice's Antitrust Division launched an investigation of the proposed merger in October 2016.
- On November 20, 2017, the Government, through the Department of Justice, filed a lawsuit against AT&T, DirecTV, and Time Warner in the U.S. District Court for the District of Columbia to enjoin the proposed merger under Section 7 of the Clayton Act.
- About one week after the complaint, Turner sent an irrevocable offer for AAA arbitration to approximately 1,000 video distributors, guaranteeing continued carriage of Turner Networks during arbitration.
- Defendants filed their answer on November 28, 2017, and moved for an expedited trial date and a protective order.
- The District Court issued a protective order on December 8, 2017, and a Case Management Order and Scheduling Order on December 21, 2017, setting the trial for March 19, 2018, and stipulating no dispositive motions.
- AT&T and Time Warner extended the merger agreement's drop-dead date from April 22, 2018, to June 21, 2018, to accommodate the court's expedited trial schedule.
- Discovery proceeded on an expedited basis from late December 2017 to early March 2018, involving production of millions of documents and dozens of depositions.
- The District Court resolved pre-trial discovery disputes, including ordering the Government to provide historical third-party pricing data and denying defendants' oral motion to compel discovery on a selective enforcement claim.
- The trial began on March 19, 2018, and concluded with closing arguments on April 30, 2018, spanning 23 days of proceedings.
- On May 3, 2018, the parties filed their proposed Findings of Fact and Conclusions of Law.
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Issue:
Does the proposed vertical merger between AT&T, a multichannel video programming distributor, and Time Warner, a video content programmer, violate Section 7 of the Clayton Act by substantially lessening competition in the video programming and distribution market?
Opinions:
Majority - Richard J. Leon
No, the proposed vertical merger between AT&T and Time Warner does not violate Section 7 of the Clayton Act because the Government failed to meet its burden of proving that the transaction is likely to substantially lessen competition. The court found that the Government's three theories of harm—increased bargaining leverage for Turner, harm to virtual MVPDs, and restriction of HBO as a promotional tool—were not supported by sufficient evidence, and were outweighed by the merger's conceded procompetitive benefits. The court systematically rejected the Government's primary "increased-leverage" theory, which posited that a post-merger Turner would gain bargaining power with rival distributors, leading to higher affiliate fees, because the merged entity would partially offset blackout losses by gaining subscribers for DirecTV. The court found that the Government's "real-world objective evidence" (internal documents, regulatory filings, and third-party witness testimony) was either marginally probative, speculative, or contradicted by other evidence. Specifically, the court highlighted that Turner has never engaged in a long-term blackout, and doing so would be unprofitable for the merged entity, thus undermining the credibility of any blackout threat. The court also heavily criticized the Government's expert economic model, finding its inputs (long-term subscriber loss rate, diversion rate, and profit margin) unreliable, unsupported by evidence, or outdated. Furthermore, the model's failure to account for existing long-term affiliate agreements, which would significantly delay any predicted harms until at least 2021, rendered its projections not "sufficiently probable and imminent." Evidence from prior vertical integrations and testimony from executives of vertically integrated companies, analyzed by defendants' expert, showed no statistically significant effect on content pricing or affiliate negotiations. The court also rejected the Government's second theory, that AT&T would harm virtual MVPDs (like DirecTV Now's rivals) either unilaterally or in coordination with Comcast-NBCU. The court noted that AT&T, with its vast wireless business, has a strong incentive to maximize video content distribution, including through virtual MVPDs, to drive data consumption and wireless revenues, making unilateral harm illogical. The coordination theory was deemed overly speculative and ignored fundamental differences and competitive history between AT&T and Comcast, as well as the strong disincentives for both companies to forgo substantial revenues by withholding content due to long-term, staggered contracts. Finally, the court dismissed the Government's "promotion-withholding" theory regarding HBO. It found that HBO's business model relies "heavily" on promotions by distributors to drive subscriptions, making it illogical for AT&T to restrict such a vital tool. Additionally, the Government failed to show that HBO promotions were so valuable that restricting them would significantly harm competition, given other available promotional tools and content substitutes like Netflix. In conclusion, the court held that the Government failed to meet its burden under Section 7 of the Clayton Act to show that the proposed merger was likely to substantially lessen competition.
Analysis:
This case is legally significant as it represents the first major litigated vertical merger challenge by the U.S. Department of Justice in decades, signaling a renewed interest in such transactions. The court's detailed scrutiny of the Government's economic modeling and "real-world objective evidence" sets a high bar for proving anticompetitive effects in vertical mergers, particularly in the absence of a presumption of harm typically seen in horizontal mergers. It reaffirms that antitrust theory must be grounded in credible, empirical evidence of "probable" and "imminent" harm, not mere "possibilities" or speculative threats, especially when weighed against concrete, measurable procompetitive efficiencies like the elimination of double marginalization. The decision may encourage more vertical integration in dynamic, evolving industries where companies seek efficiencies and scale to compete effectively against new, integrated market entrants (e.g., SVODs).
