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The Justice Department’s suit to block the merger between AT&T Inc. and Time Warner Inc. heightens the need for new guidelines on “vertical” mergers — business combinations between companies that aren’t direct competitors — antitrust attorneys told Bloomberg Law.
U.S. District Court for the District of Columbia Judge Richard Leon ruled June 12 that the merger could go forward without conditions, rejecting the DOJ’s argument that the deal would make the pay-TV market less competitive.
Before the highly anticipated announcement in the suit, attorneys told Bloomberg Law that the DOJ’s views on vertical deals need to be more clearly defined no matter what happened. “Vertical merger guidelines absolutely need to be redone whatever the outcome of this case,” said Herbert Hovenkamp, antitrust law professor at the University of Pennsylvania.
Cases challenging vertical mergers are rare. The last time the DOJ tried a vertical case was in 1977 in U.S. v. Hammermill Paper Co., which it lost.
The vertical merger guidelines, issued in 1984, are the government’s rule book on how it investigates pending vertical deals and determines if they’re anticompetitive. Even before the AT&T-Time Warner case, many in the antitrust legal community viewed the guidelines as outdated. In 2017, the American Bar Association’s antitrust section requested new vertical guidelines in its presidential transition report.
The government needs to update the vertical guidelines in the wake of the AT&T-Time Warner decision, Hovenkamp said.
“Firms really should be able to know what’s legal and what’s not legal” ahead of making a deal “rather than finding out afterwards,” he added.
Updating the guidelines won’t be easy because the DOJ shares antitrust jurisdiction with the Federal Trade Commission, said Jonathan Jacobson, partner at Wilson, Sonsini, Goodrich & Rosati.
“New guidelines will require FTC/DOJ consensus,” he told Bloomberg Law. “I don’t see one agency issuing guidelines unilaterally on this kind of subject.”
The FTC has a slate of new commissioners that are even greener than Makan Delrahim, the DOJ’s antitrust chief who took over in September. The new FTC chairman, Joseph Simons, was confirmed last month along with three other new commissioners. The only holdover on the commission is former acting Chairman Maureen Ohlhausen, who will leave the agency as soon as she’s confirmed for a seat on the U.S. Court of Federal Claims.
The decision to challenge AT&T’s $85.4 billion acquisition of Time Warner isn’t a change in how DOJ officials view the application of the antitrust law to vertical deals but an adjustment in the department’s thought process for how to structure a merger so it passes muster.
Delrahim has said repeatedly that he prefers structural remedies, such as asset divestitures, rather than behavioral remedies, like corporate monitors, to ensure healthy competition even after an otherwise anticompetitive merger. Delrahim’s view is that the DOJ is an enforcer, not a regulator, and behavioral remedies force the department to be a watchdog over a company’s actions.
“The change is in remedies,” said Jacobson, who leads of the ABA’s antitrust section. “Prior deals were invariably settled with behavioral remedies, which Makan and many others do not like.”
During the initial review of the AT&T-Time Warner deal, the DOJ asked for the sale either of Turner Broadcasting, which includes must-have channels like CNN and HBO, or DirectTV, AT&T’s satellite service provider.
The DOJ said the deal, as is, poses competitive threats because the merged entity could raise the costs for its programming since it would be a more powerful content/service provider over other competing pay-TV companies. AT&T rejected the DOJ’s proposed sales, which led to the government’s suit in November challenging the merger.
In the 2011 merger between Comcast Corp. and NBCUniversal, Inc., the DOJ held the same view as it does today with AT&T-Time Warner: that increased market power in a vertical deal can result in foreclosure or exclusion of certain channels and video content, Hovenkamp said. The Comcast-NBCUniversal deal was approved through a consent decree in which Comcast and NBC promised to make NBC’s video content available to distributors for a fair and reasonable cost.
The difference between now and then is that Delrahim doesn’t want the DOJ to be in the position of policing AT&T-Time Warner promises, as it did when it extracted promises from Comcast and NBCUniversal. “The DOJ’s position on vertical mergers has been evolving for years, and this case [AT&T-Time Warner] represents that,” Hovenkamp said.
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