In Appeal of AT&T-Time Warner Merger, Justice Department Confronts Skeptical Judges

The government's economic theories against the merger sound nice, but a panel of D.C. Circuit judges questions the proof.
Andrew Burton/Getty Images; Ben Hider/Getty Images

On Thursday, the U.S. Court of Appeals for the District of Columbia Circuit took its turn grappling with the mega-merger between AT&T and Time Warner. The Justice Department hopes to overturn a trial judge's conclusion that the merger should be allowed to proceed, and the forthcoming appellate outcome will shape the future of the entertainment industry and may provide key guidance on "vertical mergers" between companies not directly in competition with one another.

At the hearing today, a panel of three judges —  Judith Rogers, David Sentelle and Robert Wilkins — peppered the parties with questions that in many ways showcase how this case represents the government's first challenge to a vertical merger in decades, and as such, the standards on what must be proved aren't particularly clear.

The U.S. government put forward evidence at a trial conducted last March and April that upon the AT&T-Time Warner marriage, the merging parties would have the ability and incentive to charge distributors higher fees for content and thus consumers will pay hundreds of millions of dollars more for television programming. The underlying theory of marketplace harm is that because AT&T also owns DirecTV and would stand to benefit from more consumers signing up for its service, AT&T would be more willing to tolerate blackouts when DirecTV's competitors like Dish and Charter can't reach licensing terms for Time Warner's networks including CNN, TBS and TNT. The government contends that U.S. District Court Judge Richard Leon ignored economic logic by rejecting the theory of enhanced bargaining leverage in a 172-page opinion last July. AT&T and Time Warner respond that the government simply failed to prove its case at trial that blackouts will become more likely and there is no reversible error.

Showcasing the reason why AT&T should be assumed to be a favorite on appeal, the judges pushed government attorney Michael Murray to identify the "clear error" in Leon's opinion.

"The wealth of evidence showed that blackouts are routinely threatened," responded Murray. "What the district court did instead was focus on whether blackouts would actually happen. That's an error. It can't be the case that before merger, the leverage comes from the threat of blackouts, but after the merger, the leverage comes from whether the blackouts would actually happen."

That didn't seem to be enough for the judges, particularly Sentelle, a Ronald Reagan appointee who stressed how Leon made a finding there was no material increase in the possibility of blackouts after examining the testimony of expert economists in the case.

Perhaps more troublesome for the government was a line of questioning led by Rogers, a Bill Clinton appointee who appears to now be the swing vote on this judicial panel.

"My understanding is that these are valid economic principles, but that it's not enough to cite the principle. You have to prove it fits," she commented before soon asking whether an economic theory without numbers backing the theory up is enough for the government to prevail.

Murray argued that so long as the number isn't zero — that is, a model showing raised prices for AT&T's rivals — the burden shifts to the defendants to prove some sort of efficiency whereby the benefits outweigh the harms. Throughout the hearing, though, Murray attempted to downplay the overall importance of quantification.

"You have to have numbers," retorted Sentelle. "You can't simply present an economic principle and say therefore I win."

"That is not what I'm arguing," said Murray. "What we are saying is that the government put on evidence on what will happen after the merger."

Rogers attempted to clean it up.

"[What's important is] the probability of what will happen," she said. "So [UC Berkeley Professor Carl] Shapiro identified how the incentives would change after the merger. That's not a precise number. But that's enough to prove the case?"

Murray answered yes.

Later, 27 antitrust scholars took their turn in attempting to show Leon's error.

Eric Citron, an attorney representing those scholars, stood in defense of John Nash's bargaining theories and how deals in the television industry instead of blackouts are what's normal and what's most predictable. But that's not the end of the story, he added.

"The judge should be concerned with what would happen to each side when a blackout occurs," he argued. "The judge needs to be concerned with the stakes of a blackout or failing to agree, not the odds of failing to agree."

While the judges also spent a good deal of time on AT&T's offer to arbitrate any impasse in licensing negotiations, the appeal may just come down to the trial judge's leeway in examining the evidence and coming to conclusions about shortcomings in economic theories.

AT&T attorney Peter Keisler stressed how his side showcased the problems in the government's economic modeling and how there wasn't any rebuttal evidence offered by the other side that supported the real-life application of these models showing raised prices on consumers.

"What the trial showed about the model was its extreme fragility in response to even modest changes," he said. "And even when you're applying all of the government's assumptions and inputs, it only predicts a 0.2 percent increase, which wasn't shown to be statistically significant."

If there was one point in which Keisler seemingly failed, it was his argument how the review of the AT&T-TW merger, in his words, "is not about the future of vertical mergers but about this specific case. If affirmed, it's not going to stop the government from bringing other cases."

Not every appeal, though, allows two hours for argument when one was scheduled. Or allows a competing set of scholars to appear at hearing to argue both pro and con. And it's not every day that the D.C. Circuit sends out a "public advisory" 24 hours before the hearing begins explaining the rules of decorum including that there are a limited number of seats and "line standers" won't be tolerated.

Or as Wilkins told Keisler, "You say this case has no implications; amici say otherwise."