The Justice Department’s renewed effort to thwart AT&T’s merger with Time Warner rests on claims that a federal judge misunderstood “fundamental principles of economics,” according to court documents filed Wednesday.
Asking a federal appeals court to swiftly consider their case against the telecom giant, government lawyers said Judge Richard Leon of the U.S. District Court for the District of Columbia erred by rejecting “basic bargaining economics” when he ruled to allow the $85 billion deal in June.
Throughout a roughly six-week trial this spring, antitrust regulators argued that AT&T’s merger would make it harder or more expensive for rivals to stay in business and that it could lead to higher prices for consumers. Leon rebuffed the government, saying its arguments “rested on improper notions.”
AT&T went on to close its deal with Time Warner last month.
But federal officials say Leon failed to properly account for the role that threats can play in negotiations between programmers such as Time Warner and TV distributors such as Comcast or Cox. Time Warner controls popular channels, such as CNN and TNT, that many distributors say they need to serve their customers.
The Justice Department also said in its court filing that Leon overlooked a “basic economic axiom”: Time Warner could be motivated to behave anticompetitively, it said, if doing so would help AT&T’s own TV service, DirecTV, or if it benefited the parent company’s overall bottom line.
“The district court’s disregard of economic reasoning constitutes reversible error,” the Justice Department wrote to the U.S. Court of Appeals for the D.C. Circuit.
Leon declined to comment for this story, citing the pending litigation.
The merger between AT&T and Time Warner is the first of its kind that the Justice Department has taken to court since the Nixon administration. Analysts widely viewed the legal showdown as a bellwether for future mergers that may need the Trump Justice Department’s approval. For AT&T, winning the case meant opening a new chapter in the company’s history as a Facebook-like data machine — building a business that turns customer information into advertising. But Leon’s ruling, regulators said Wednesday, risks injecting greater “uncertainty” into the way the government analyzes merger proposals.
Before the Justice Department’s filing to the court, some skeptics had said that Leon adopted too narrow a view of the merger and its potential for harm. Some have pointed to AT&T’s decision in July to raise the price of subscriptions to its online streaming service, DirecTV Now, by $5 a month for new and existing customers. That argument is not reflected in the government’s filings this week.
“We’re in an unusual situation here, where the judge simply credited everything that AT&T said and discounted almost everything the government said,” said Jeffrey Blumenfeld, an antitrust lawyer at the firm Lowenstein Sandler.
Leon was not confused but simply disagreed with the government’s economic projections, said a person familiar with AT&T’s thinking, speaking on the condition of anonymity to discuss the ongoing litigation.
“His opinion makes clear that he understood the theory perfectly,” the person said. “He just found that, after weighing all the testimony, documents and other evidence, the facts didn’t support the theory in this particular case.”
A spokesman for the Justice Department declined to comment for this story.
Close watchers of the case -- and veterans of the Justice Department -- say the agency faces a tough task in undoing the tie-up of AT&T and Time Warner. They stress that the government must craft its arguments carefully or risk another scathing ruling that could make it even harder for the agency to challenge similar mergers in the future.
“When I first began practicing law, one of my earliest mentors taught me what is known as the first rule of holes, which is, when you’re in one, stop digging. That struck me as applicable here,” said Eric Mahr, who served as the director of litigation at the Justice Department’s antitrust division from 2015 to 2017 and now is a partner at Freshfields Bruckhaus Deringer.
"The most likely result of the DOJ's appeal of the district court's ruling is it can turn a rather narrow, fact-based, lower-court opinion into what would be authoritative precedent, coming from one of the most respected courts of appeals," Mahr said, meaning the ruling could be "more generally applicable" to mergers in telecom and other industries.
To critics of that telecom mega-deal, however, the nature -- and tone -- of Leon’s opinion make it “no surprise” that the Justice Department sought to challenge it, said Gene Kimmelman, the president of Public Knowledge and former chief counsel of the Justice Department’s antitrust division.
For one thing, Kimmelman said, the court “selectively favored witnesses,” including from Comcast, who argued that Turner, one of the content powerhouses under Time Warner, would negotiate carriage agreements with rival pay-TV companies independent of AT&T influence. That testimony helped fuel the argument that AT&T had no incentive to play hardball -- and threaten blackouts of popular TV channels -- in exchange for higher fees.
Analyst Craig Moffett agreed that might be “the only really debatable part of Judge Leon’s conclusion,” given the sheer deference he showed the companies' arguments that they weren’t merging solely to maximize profits. But, Moffett said, the appeals court is focused on “whether or not there are errors of law,” so there may be limited ground for the Justice Department to contest in the first place. In a research note Thursday, Moffett said he gives the agency’s appeal a low chance of success.
As a result, some experts say any consideration of AT&T’s recent decision to raise prices on DirecTV will be off the table. “The mere fact of a price increase in one particular business, to determine whether that resulted from the merger. . . would require a deep factual inquiry,” Mahr said. "At the court of appeals level, to say ‘Look, there was this price increase, that’s evidence the D.C. opinion should be reversed,’ it wouldn’t be something the court of appeals would do.”
To Public Knowledge, though, the recent price hike still served as an example of the severe repercussions from the merger — and the federal court’s review of it.
“The recent price increases clearly demonstrate the companies are not telling Judge Leon the full story about what their incentives were,” Kimmelman said. “And Judge Leon clearly did not see the danger of price increases when he made his ruling.”