By Brent Kendall and Drew FitzGerald
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 13, 2018).
WASHINGTON -- The Justice Department is trying to undo AT&T
Inc.'s purchase of Time Warner Inc., appealing the ruling that last
month struck down one of the era's highest-profile antitrust
challenges.
The government initiated the appeal Thursday with a two-page
notice in federal court, a month after U.S. District Judge Richard
Leon rejected Justice Department arguments that the more than $80
billion cash-and-stock deal would suppress competition in the
pay-TV industry.
AT&T closed the acquisition a short time after Judge Leon's
ruling, but agreed to keep Time Warner's cable networks in a
business unit separate from AT&T's communication assets for
now, in case the government chose to appeal.
The appeal won't change anything at AT&T while the district
court's ruling remains in effect, but comes as an unwelcome
distraction for the company, where executives were eager to plunge
into the high-profile world of show business.
The matter now goes to the U.S. Court of Appeals for the
District of Columbia Circuit, where a three-judge panel will
consider the Justice Department's claims that Judge Leon was
incorrect. The appeals process could take many months, leaving
lingering uncertainty over AT&T's plans.
The Justice Department's lawsuit against the merger was one of
the most anticipated antitrust cases in a generation, and Judge
Leon's ruling was one of the department's most stinging losses.
The AT&T merger is a "vertical" one, combing its leading
position as a pay-TV distributor -- the so-called pipes, such as
its DirecTV satellite service -- with Time Warner content: its
popular cable channels including HBO, CNN, TNT and TBS.
In a more typical antitrust case, the government challenges
horizontal deals involving two companies in the same business that
compete head to head. The AT&T case marked the first time in 40
years that a court had seen a fully litigated challenge to a
vertical merger. And it was the first major enforcement action by
President Donald Trump's antitrust chief at the Justice Department,
Makan Delrahim, who filed the lawsuit two months after receiving
Senate confirmation.
The government filing Thursday was just an initial notice and
didn't say anything about what legal arguments it plans to make
against Judge Leon's ruling. The Justice Department declined to
comment beyond what it filed in court.
The government argued in its original case that AT&T would
be able to dictate higher carriage fees to competing distributors
by threatening to withhold its cable networks from rival pay-TV
providers, leading to higher prices for consumers.
The companies responded that their two businesses were
complementary and raised no concerns about competition, saying that
the merged company wouldn't have the market power to dictate price
increases.
AT&T and Time Warner questioned whether the lawsuit had
political motivations because Mr. Trump has stated he doesn't like
CNN. Mr. Delrahim and the department strongly denied that,
suggesting the companies were seeking to deflect attention from
legitimate antitrust concerns.
The lawsuit received support from advocates for vigorous
antitrust enforcement, including some Democratic politicians.
Judge Leon, in a strongly worded opinion, rejected the Justice
Department's arguments. The judge wasn't persuaded that AT&T
would have more leverage after the merger, and said the company
couldn't force anticompetitive prices for Time Warner channels
because it would lose money if rival distribution systems didn't
carry them.
The judge's ruling was based heavily on the facts of the case,
rather than broad legal conclusions about the viability of
challenges to vertical mergers. That could make it more difficult
for the government to win its appeal, since appellate judges give
deference to a trial court's factual findings.
The judge drew attention during the trial when he questioned
whether a key Justice Department theory, backed by a well-respected
economist, was a Rube Goldberg contraption.
AT&T said it is ready to defend Judge Leon's ruling.
"The court's decision could hardly have been more thorough,
fact-based and well-reasoned," AT&T general counsel David
McAtee said. "While the losing party in litigation always has the
right to appeal if it wishes, we are surprised that the DOJ has
chosen to do so under these circumstances."
If the appeals court were to side with the Justice Department
the move could unwind the deal, or, alternatively, lead to some
sort of middle-ground remedy.
Appeals in merger cases are unusual, in part because not many
merger cases go to trial. The government in recent years has won
most of the cases it did bring, making an appeal unnecessary.
The D.C. Circuit did handle a government merger appeal a decade
ago -- and the government won. The appeals court revived the
Federal Trade Commission's challenge to a grocery store acquisition
by Whole Foods Market. After the ruling, the FTC agreed to a
settlement in which Whole Foods sold off some stores it had
acquired but didn't have to unwind the entire transaction. More
recently, other courts have ruled for the government when it
brought appeals challenging hospital mergers.
After closing the merger, AT&T quickly renamed its
entertainment unit WarnerMedia, and new chief John Stankey spent
the past few weeks meeting employees of his new empire in New York,
Atlanta and Los Angeles to tell them they would be in capable
hands.
AT&T also launched a new pay-TV service on its cellular
network called WatchTV. The service, which used a new model to
determine payments to programmers, is free for subscribers on
unlimited data plans and $15 a month for other customers. Company
CEO Randall Stephenson announced his intentions for the new service
from the witness stand at trial.
AT&T recently raised monthly rates for another streaming-TV
service, DirecTV Now, by $5. Rival Dish Network's SlingTV did the
same. Critics of the merger argued the quick price jumps
demonstrated the concerns that had motivated the Justice Department
lawsuit.
AT&T's shopping spree continued after the Time Warner
merger, with a deal for digital ad service AppNexus worth $1.6
billion, according to people familiar with the matter.
The AppNexus deal is the latest move in the Dallas telecom
company's effort to wrest digital advertising dollars away from
Alphabet Inc.'s Google and Facebook Inc. AT&T executives said
at trial that access to TV ad space controlled by Time Warner's
Turner channels would allow them to sell more commercials tailored
to specific viewers based on demographic and behavioral data,
though the ad-selling unit was still in its infancy.
Write to Brent Kendall at brent.kendall@wsj.com and Drew
FitzGerald at andrew.fitzgerald@wsj.com
(END) Dow Jones Newswires
July 13, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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