The Justice Department urged a federal appeals court Thursday to reconsider AT&T’s $85 billion acquisition of Time Warner, arguing that the judge who approved the deal in June misunderstood fundamental economic principles and ignored how AT&T could unfairly extract higher fees from rivals by threatening to black out popular TV channels.
The Department of Justice delivered oral arguments in its appeal of a lower court decision that handed the agency a major defeat in one of the most closely followed antitrust trials in decades. The blockbuster case — the first time since the Nixon era that the government has gone to court to challenge this type of deal — was seen as a landmark legal dispute because it signaled how regulators and courts might treat mergers between companies that don’t compete with each other.
“A threat of blackout will allow Time Warner to increase the prices for its rivals,” said government attorney Michael Murray. But the three-judge appeals panel was quick to push back on the government’s case, questioning how the lower court failed to apply the law properly in siding with AT&T.
“You have to show that there was plain error in the district court,” Judge David Sentelle of the U.S. Court of Appeals for the D.C. Circuit told the government’s side. “You have to show that there is going to be a harm to competition.” Sentelle added that the government had to present evidence beyond economic theories to show that the merger would substantially lessen competition. Judge Judith Rogers also expressed skepticism as she prodded the government’s case.
AT&T attorney Peter Keisler said the company is prevented from blacking out programs, since it has pledged to allow distributors to pursue arbitration if a disagreement arises. He argued that this commitment undercut the government’s case. The company “has relinquished the source of leverage that the government identified, in its view, as the principal way to extract higher prices,” he said.
Rogers and Judge Robert Wilkins both asked AT&T to clarify if it intends to stand by its commitment to not pursue blackouts in a programming dispute. “We are absolutely committed to this,” Keisler said.
A spokesman for the Justice Department, Jeremy Edwards, said in a statement to The Washington Post: “The Department of Justice appreciates the court’s careful consideration of this important case and will await the court’s decision.”
AT&T said in a statement, "We appreciate the Court’s attention to the arguments of counsel and look forward to receiving its decision.”
Antitrust officials insist that AT&T’s tie-up with Time Warner is anticompetitive because the newly merged firm has the ability and incentive to raise costs for rivals and stifle competitors, ultimately raising prices and narrowing choices for consumers. But Judge Richard Leon of the U.S. District Court for the District of Columbia, who ruled in favor of AT&T this summer, said the Justice Department failed to show that the deal would harm consumers or market competition.
Through the purchase of Time Warner, AT&T acquired popular media brands, including CNN and HBO. In the appeal, AT&T argued that the deal would lead to lower prices for consumers and would allow the company to create mobile video products tailored to customers. AT&T also said the merged company could build a competitive digital advertising platform to challenge the dominance of ad giants such as Google and Facebook.
As corporations increasingly seek to expand by absorbing companies from different points on the supply chain, known as vertical integration, the outcome of the AT&T-Time Warner appeal could serve either as a massive green light or a rethinking of business plans. For antitrust regulators and the court system, a ruling in favor of AT&T may hamper efforts to more aggressively apply antitrust laws to mergers.
“Antitrust enforcement has been increasingly skeptical of vertical mergers, especially in the technology area,” said Andrew Schwartzman, a lecturer in public interest law at Georgetown University. “If the government loses this case it will set a precedent that will make it very hard for future enforcement for vertical mergers.”
Critics of the AT&T deal say that consumers have much to lose if it proceeds. “This is a very important case, because the bottom line for consumers is you may end up paying higher prices for some of your favorite TV and video content without having the benefit of better and lower-cost choices from competitors in the online video marketplace,” said Gene Kimmelman, the president of Public Knowledge, a consumer advocacy organization that opposes the merger.
After a ruling from the appeals court in the following months, the losing side can request that the entire bench of the court reconsider the case. They can also appeal to the Supreme Court. AT&T has pledged to manage Time Warner’s assets as a separate business unit only until Feb. 28, or if the appeals process concludes before then. A ruling against the company could eventually reverse the merger.