Justice Department Appeals Ruling Allowing AT&T-Time Warner Merger -- Update

By Brent Kendall and Drew FitzGerald 

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 [e-mail] and Drew FitzGerald at [e-mail]

(END) Dow Jones Newswires

July 12, 2018 20:44 ET (00:44 GMT)

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