WASHINGTON — The Justice Department said a federal judge erroneously ignored “fundamental principles of economics and common sense” in siding with AT&T and Time Warner, a decision that allowed the massive media transaction to be completed in June.
The government made the argument in a 73-page brief filed on Monday, the opening salvo, as it appeals the ruling of U.S. District Judge Richard Leon. AT&T’s response brief is due on Sept. 20.
In his ruling, Leon concluded that the DOJ failed to show that the vertical merger would likely substantially lessen competition, based on an argument that the combined company would have increased bargaining leverage and drive up the prices that rival distributors pay for CNN, TNT, TBS, and other channels.
The Justice Department said that Leon “disregarded the economics of bargaining” by dismissing the idea that AT&T would gain increased leverage over rivals after the merger. It also said that Leon rejected “the foundational principle that a corporation with multiple divisions operates them to maximize the corporation’s overall profits.”
The DOJ also said that Leon “substantially constrained” the government’s presentation of evidence. It took issue with some of Leon’s rulings, including his restriction on the use of filings that AT&T and DirecTV each made to the FCC to express concerns about the competitive harm from other vertical mergers.
“Instead, on the last day of the trial, upon motion by the government, the court took judicial notice of ten brief excerpts from the documents ‘only for the fact that the statements were made’ after having directed the government not to use any of them in closing argument,” the DOJ said in the brief.
In his opinion, Leon wrote that the regulatory filings “do not come close” to providing sufficient evidence to prove the government’s argument.
The government also faulted the judge for limiting the time allowed for expert testimony, including that of Carl Shapiro, an University of California at Berkeley economist who produced a model showing that the merger would raise costs for all pay-TV subscribers. Leon agreed with AT&T that the data that Shapiro used was not “sufficiently grounded in the evidence.”
Makan Delrahim, the chief of the Justice Department’s Antitrust Division, said in a statement, “The lower court’s errors colored its view of the facts, leading to a decision that is simply wrong in light of the evidence the government presented at trial.”
The filing also offered a sense of why the Justice Department decided to appeal.
In its brief, the DOJ said the outcome “will shape the future of the media and telecommunications industries for years to come by setting the standard for determining whether industry participants will be permitted to merge into vertically integrated firms that control valuable programming content as well as the means of distributing that content to consumers.”
Leon issued his ruling on June 12, and AT&T completed its merger with Time Warner two days later.
David McAtee, AT&T’s general counsel, said in a statement, “Appeals aren’t ‘do-overs.’ After a long trial, Judge Leon weighed the evidence and rendered a comprehensive 172-page decision that systematically exposed each of the many holes in the Government’s case. There is nothing in DOJ’s brief today that should disturb that decision.”
A lot of the trial focused on whether AT&T-Time Warner’s leverage would be boosted by the threat of blackouts, the practice of pulling channels from a cable or satellite lineup when programming carriage negotiations end at an impasse.
Leon, the DOJ said, “illogically” concluded that Time Warner would have no increased leverage after the merger because blackouts were “infeasible.”
In doing so, Leon sided with AT&T-Time Warner’s legal team, led by Daniel Petrocelli, who said that such blackouts wouldn’t make sense because Turner would lose millions in lost carriage fees and ad revenue.
In his ruling, Leon wrote that the government “primarily relied on defendants’ own statements and documents as well as testimony of third-party competitor witnesses, most (but not all) of whom expressed concern regarding the challenged merger’s potential effects on their businesses. Neither category of evidence, however, is persuasive in proving that Turner’s post-merger negotiating position, would materially increase based on its ownership by AT&T.”
The DOJ, though, said that Leon misread the economics of bargaining leverage.
“Time Warner would bargain knowing that, if negotiations fail, the ensuing Turner blackout will prompt some of the rivals’ subscribers to switch to DirecTV, U-verse or DirecTV Now. Because the merged firm would pick up those subscribers, it would lose less from a blackout than would an independent Time Warner, thus gaining bargaining leverage.”
The DOJ also said Leon wrongly that AT&T-Time Warner “would not maximize the profits of the combined entity as a whole by extracting higher fees from rival distributors when negotiating with them for Turner content.”
“Corporate-wide profit maximization is an established principle of corporate and antitrust law, but the court rejected it on the basis of self-serving testimony from defendants’ executives,” the government said. At the same time, it noted, Leon still accepted that having Time Warner and DirecTV owned by the same corporate parent would save costs. The DOJ called Leon’s analysis “internally inconsistent.”
During the trial, executives from AT&T rivals like Charter and Cox Cable testified that the merged company would have increased leverage to demand higher prices for Turner content. But the DOJ contends that Leon discounted testimony from DirecTV’s rivals as “colored by self interest,” yet credited the testimony of AT&T executives. The government said that Leon “dismissed as ‘Poppycock!’ the idea that their self-interest potentially influenced their testimony.”
In his ruling, Leon also rejected the government’s other arguments, including that AT&T and Comcast would coordinate to ace out new streaming upstarts; and that AT&T would have the incentive to withhold HBO as a promotional tool by DirecTV’s rivals. The Justice Department signaled that it was no longer pursuing those arguments. In a footnote in its brief, it said that the claims “are at issue now only” in how it applies to its claim that AT&T will gain increased leverage over new streaming video distributors.