Justice Department Gives Roadmap for AT&T-Time Warner Merger Appeal

Jeffrey Bewkes Randall Stephenson
AP Photo/Evan Vucci

Time Warner Chairman and CEO Jeffrey Bewkes listens at right as AT&T Chairman and CEO Randall Stephenson testifies on Capitol Hill in Washington on Dec. 7, 2016.

Requesting an expedited appeal, the government says the trial judge "rejected fundamental principles of economics."

Want to understand the Justice Department’s appellate bid to unwind the merger between AT&T and Time Warner? A viewing of the 2001 Oscar-winning film A Beautiful Mind might not be a terrible place to start.

When a notice of appeal was filed in the antitrust case on July 12, the government didn’t provide any immediate word on what arguments it would bring to the D.C. Court of Appeals. On Wednesday, in a bid to expedite consideration of the appeal, the Justice Department teased its big argument: "In approving the merger, the district court rejected fundamental principles of economics, creating uncertainty that will have an outsized effect on vertical merger analysis," stated a court filing.

Here's something that will certainly factor — the theories of mathematician John Nash.

Recognize that the Justice Department doesn’t have much to work with when it comes to finding the type of reversible error that would vacate U.S. District Court Judge Richard Leon’s ruling allowing the merger. The run-up to the six-week trial in March and April was relatively uncontentious with maybe the most controversial pre-trial decision being how Leon precluded AT&T from probing Donald Trump’s interference in the Justice Dept.’s merger review. But that ended up being a government victory so it won’t be argued on appeal.

At the trial, the Justice Dept. didn’t make any significant objections to witnesses or evidence. And Leon’s 172-page ruling side-stepped any groundbreaking interpretation of law. For example, while AT&T contended that the government needed to show the challenged merger would be “likely to lessen competition substantially,” Leon wrote, “I need not further toil over discerning or articulating the daylight, if any, between ‘appreciable danger,’ ‘probable,’ ‘reasonably probable,’ and ‘likely’… That is because even assuming that the ‘reasonable probability’ or ‘appreciable danger’ formulations govern here… my conclusions regarding the Government’s failure of proof would remain unchanged.”

So what's left for an appeal?

That would be the judge’s conclusions upon the presentation of evidence. Judges are typically afforded tremendous discretion when it comes to fact-finding and fact-interpretation so any reversible error has to be a glaring one. The government’s best shot on appeal appears to be Leon’s conclusion that Turner wouldn’t be in a better position post-merger to extract higher fees from cable and satellite distributors.

That seems to fly in the face of conventional wisdom. As the Justice Dept. puts it in a footnote today, "The economics of bargaining is not new or out of the mainstream, as even a defense expert acknowledged. Until the district court’s decision, it has been uncontroversial in merger assessment."

Judge Leon saw nothing to believe that Tuner’s bargaining leverage in affiliate negotiations was likely to be enhanced upon a huge vertical merger. The government pointed to how CNN, TBS, and TNT would be under ownership in AT&T looking to attract subscribers to its other affiliate, DirecTV. The government had executives of DirecTV’s rivals testify about fears that content would be held hostage unless extortionate fees were paid. And finally, the government put forward an economics expert whose projections of price increases were built on work from the mathematician played by Russell Crowe in A Beautiful Mind. Leon wasn’t impressed. The DOJ, he wrote, “has failed to provide sufficient evidentiary support to show the Nash bargaining theory accurately reflects post-merger negotiations," and the model itself "rests on assumptions that are implausible and inconsistent with record evidence."

The Justice Department nods to all of this in its first substantial post-trial brief and even makes sure to mention that Nash won a Nobel Prize for his work pioneering bargaining theory.

"The government’s case is based on well-accepted and non-controversial economic principles of bargaining, but the district court effectively discarded those principles and their logical implication that the merged firm will raise prices to its rivals," write government lawyers. "In so doing, the Court committed multiple errors. For example, the court disagreed with basic bargaining economics—that a decrease in the harms suffered by a party from not reaching an agreement increases that party’s leverage even if reaching an agreement is a much better option than not reaching one..."

The topic seems to provide room for amicus briefs from consumer groups and Hollywood guilds warning of the impact of consolidated corporate power.

In the meantime, the government proposes delivering its full opening brief by August 5 with AT&T and Time Warner responding by September 20. Final briefs would then come in October.

AT&T isn't opposing the fast-tracked proceeding. The company has tapped Sidley Austin partner Peter Keisler to handle the appeal over the merger. Keisler spent a brief period late in the George W. Bush Administration serving as Acting Attorney General of the United States.

This article was originally published by The Hollywood Reporter


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