Justice Dept. Doesn't Want Turner's No-Blackout Commitment Mentioned at AT&T Merger Trial

Justice Department lawyers say an offer to go to arbitration whenever there is a license dispute is not really enforceable and that a judge should first decide if the AT&T/Time Warner merger is unlawful before tackling remedies.

At a trial set to begin Monday concerning the proposed AT&T/Time Warner merger, the U.S. Department of Justice has asked a judge to preclude evidence or testimony about Turner's offer to submit to "baseball-style" arbitration whenever the owner of CNN and TBS reaches an impasse with a cable or satellite distributor. U.S. District Court Judge Richard Leon has rejected the motion.

Back in November, after the U.S. government sued to block the merger, AT&T and Time Warner introduced arbitration as a solution to any concern that the merging parties would unfairly use leverage in the television marketplace. The idea is that for seven years, Turner networks would be prevented from "going dark." Instead, distributors like Comcast or Dish would have the ability to fight for fair license terms at a private arbitration forum without the possibility that AT&T/Time Warner would pull signals.

The proposal was made in response to the government's original foreclosure claim that the merged entity would withhold Turner programming from rival MVPDs. The government's case has now become more narrow, with the Justice Department zeroing in on the possibility that AT&T might restrict use of its content to virtual MVPDs, meaning those like Dish Sling and PlayStation Vue that offer skinny bundles of channels online. The government is also alleging that the merger would mean that the cost of licensing Turner programming would go up and that this would amount to hundreds of millions of dollars more for consumers to watch their favorite TV shows.

The government now expresses its latest concern that the arbitration offer will distract from the core question of whether the merger will lessen competition.

"This case is about the legality of a merger under Section 7 of the Clayton Act," states the government's evidence preclusion motion (read here). "Absent relief from the Court, testimony on defendants’ Arbitration Offer — and any modifications they make during trial — would waste meaningful time and confuse presentation in a tight trial schedule. That time would be better spent on questions of whether the Transaction is unlawful and what remedies the Court should consider ordering upon making a liability determination."

The government is also arguing that the arbitration offer wouldn't really represent an enforceable commitment from AT&T/Time Warner and that it would take an anticompetitive "fix" away from public judicial oversight. In fact, the government is arguing that consideration of evidence regarding behavioral remedies would only be appropriate after the judge finds the transaction unlawful.

The defendants respond in their own brief that the arbitration offer is relevant to the government's price-increase theory.

"As defendants’ experts and other witnesses will establish at trial, the Arbitration/No-Blackout Commitment directly addresses the government’s theory of harm and in fact disposes of all the Turner-related claims in this case," writes defense attorney Daniel Petrocelli. "After the merger, Turner will not be able to threaten to withhold its television networks from distributors, because it will have relinquished the ability to withhold those networks. And without a credible threat to withhold Turner programming, the core premise of the government’s theory — that the merged firm will be able to scare distributors into paying higher prices — makes no sense. Instead, a distributor can invoke arbitration in which an arbitrator, not Turner, will determine the fair market value of its networks, subject to judicial review."

AT&T also argues in its opposition brief (read here) that the judge is perfectly capable of figuring out what's relevant without having to bar certain subjects at trial beforehand. (These sorts of motions are more typical of jury trials where the possibility of prejudicial evidence gets weighed.)

In an order late Tuesday, the judge sided with AT&T.

The government also pointed to a deposition from Time Warner CEO Jeffrey Bewkes on how the arbitration offer was designed solely for the purpose of this litigation.

Interestingly, Bewkes testified that "baseball-style" arbitration was his idea and how it swayed Dish chairman Charlie Ergen to favor the merger. Even more fascinating is that, apparently, Bewkes didn't need to run it past AT&T's brass.

"Did you consult with anyone at AT&T before deciding to send it?" a government lawyer asked.

Answered Bewkes, "I don't remember consulting with anyone at AT&T — and I myself did not."

Updated to reflect the judge's decision on the matter.