Appeals Court Agrees to Hear More Voices in Battle Over AT&T-Time Warner Merger

Over the objections of AT&T and Time Warner, the D.C. Circuit Court of Appeals has decided to permit 27 antitrust scholars to speak up at a hearing later this week.
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This Thursday, the U.S. government will continue its efforts to block the $85 billion marriage between AT&T and Time Warner. The merging parties have expressed confidence going into oral arguments before the D.C. Circuit Court of Appeals and will likely be favored in their attempt to uphold a trial court's determination that the tie-up isn't enough of a competitive threat to be in violation of the Clayton Act.

Nevertheless, in a sign that the three appellate judges overseeing the case recognize the significance of their coming opinion in the first government challenge to a vertical merger in decades, the D.C. Circuit is allowing 10 minutes for 27 antitrust scholars who say U.S. District Court Judge Richard Leon didn't quite get it right in the June 12 opinion. The decision to allow new voices is somewhat extraordinary and perhaps a new reason for hope for the Justice Department.

The scholars include, among others, Nobel Prize winner Joseph Stiglitzand, former DOJ antitrust chief A. Douglas Melamed and Herbert Hovenkamp, who has authored a leading treatise on antitrust law. Although appeals courts typically just examine the trial record for errors of legal interpretation, these scholars are presenting an argument that is somewhat different from the contentions by Trump's Justice Department in the case.

The crux of the appeal is the government's contention that Judge Richard Leon ignored economic logic by allowing the merger to move forward. Specifically, the government points to how AT&T owns DirecTV, and upon the merger, will also own Turner networks including CNN, TBS and TNT. According to the government, this means that blackouts will be less disastrous for AT&T when those networks can't come to agreement with DirecTV's rivals on licensing terms. Customers may defect from distributors like Verizon, Dish and Comcast to DirecTV. That prospect, in turn, means that AT&T's rival distributors will be willing to pay more for CNN, TBS and TNT. The theory of enhanced bargaining leverage comes from work by mathematician John Nash and an economic expert who crunched the numbers and presented hundreds of millions more in consumer costs at the trial last spring.

The antitrust scholars raise a point that the DOJ didn't. The scholars emphasize that the mere threat of blackout is as serious as any potential for permanent blackout.

"The district court emphasized its belief that prolonged blackouts were infeasible, because they are so costly to both programmers and distributors," wrote the scholars in an amicus brief. "But the Nash bargaining model does not assume that there is a substantial likelihood that the buyer and seller will fail to reach an agreement, or, in the context of a merger, that the merger will make such a failure more likely. All that matters is how the merger would affect the costs of a blackout to the bargaining parties if a blackout did occur. Accordingly, even if a merger does not increase the likelihood of a blackout, and even if blackouts rarely occur, if the merger makes a blackout substantially less costly to one of two bargaining parties — here, Turner vis-à-vis AT&T’s distribution competitors — that increases the first party’s bargaining leverage and thereby alters the expected outcome of the negotiation. The first party gets a better deal. Here, that means that Turner gets higher prices."

After the antitrust scholars requested opportunity to participate in the Dec. 6 hearing, AT&T objected.

The company argued that the antitrust scholars had submitted an untimely motion, ignored empirical analysis showing no correlation between vertical integration in this industry and higher programming prices and ignored the DOJ's own theory of the case. AT&T urged the appeals court to not hear a group who hadn't fully reviewed the trial record and wished to present "abstract" issues at argument.

Over the objections of AT&T and Time Warner, the D.C. Circuit has decided to allow the antitrust scholars to speak up at the hearing later this week. Accordingly, the government won't be alone in arguing that Judge Leon ignored economic logic. Since Leon's decision allowing the merger, Time Warner's HBO has been blacked out on Dish, and while that wasn't something that was expected to come up during the hearing, the appeals court appears to be willing to take a bit of a broader view in tackling whether a different outcome needs to happen with regards to the merger.

The feeling that Judge Leon got it wrong is hardly a uniform one in the scholarly community. In fact, there were 37 other economists, antitrust scholars and former government officials who offered their own amicus brief presenting the view that the trial court correctly applied economic analysis to assess the effects of this vertical merger on consumers. Those other scholars didn't request any time to brief the judges at the oral hearing. Nevertheless, the D.C. Circuit will allow AT&T to apportion any of its 30 minutes to supporting amici as it sees fit.