Effort to Block AT&T-Time Warner Deal Gets Mixed Reception

By Brent Kendall and Jacob Gershman Features Dow Jones Newswires

The Justice Department's lawsuit against the combination of AT&T Inc. and Time Warner Inc. drew a split reaction among antitrust experts a day after the government unveiled its high-stakes case.

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Advocates of aggressive antitrust enforcement voiced support for the Justice Department's challenge, which sets up a rare court battle over a vertically integrated merger.

The government argued in its Monday suit that combining AT&T video distribution strength with Time Warner's stable of popular cable channels would give one company too much control of the media landscape, which it warns would lead to higher prices and less innovation.

Gene Kimmelman, a critic of the AT&T deal and a former Justice Department antitrust official in the Obama administration, said the government's legal theory of harm to competition "is well established and has been used in numerous mergers," including when the Obama-era department raised objections to Comcast Corp.'s takeover of NBCUniversal.

The department back then was willing to settle the case in exchange for restrictions on Comcast's business conduct. The current Justice Department opposed that kind of settlement with AT&T, insisting the telecom giant sell off assets instead, something the company was unwilling to do.

"The only difference is the Justice Department decided to sue instead of agreeing to a consent decree," said Mr. Kimmelman, now the president of Public Knowledge, a public interest group.

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AT&T argues the lawsuit is an abrupt departure from the Justice Department's focus on mergers of rivals that would suppress head-to-head competition.

Critics of the government case say there's a good reason the Justice Department hasn't fully litigated a vertical merger case in decades, and that's because mergers between distributors and suppliers can produce efficiencies that benefit consumers.

Joshua Wright, an outspoken conservative on antitrust issues and a former member of the Federal Trade Commission, said he had no doubt that the department reviewed the case carefully, "but my initial reaction is that the complaint is underwhelming and not likely to prevail in federal court."

Mr. Wright, a George Mason University professor who was considered by the Trump administration as a candidate for the Justice Department's top antitrust job, said the government case lacked the needed theoretical foundation and economic evidence.

"There is simply not enough there beyond concerns about firm size and that Time Warner owns some popular content to satisfy the demands of a modern vertical antitrust claim," he said.

President Donald Trump's public objections to the merger, and his repeated criticisms of Time Warner's CNN, could complicate the case. Mr. Trump as a candidate had pledged his administration would block the deal, but the White House would typically play no role in a Justice Department merger review. The department has said the president didn't influence its decision to file a case.

On Tuesday, Mr. Trump weighed in on the deal shortly before departing the White House to spend Thanksgiving in Florida. The president said in response to a shouted question from a reporter that he should not comment on the litigation. Then he added: "Personally, I've always felt that that was a deal that's not good for the country."

Adding to the intrigue in the case, the companies' lead trial attorney is Daniel Petrocelli of O'Melveny & Myers LLP, who represented Mr. Trump in private litigation involving fraud claims against the now-defunct Trump University for-profit real estate school. Mr. Trump settled the case a year ago for $25 million. He denied the allegations and made no admission of wrongdoing in the settlement.

On Tuesday, the AT&T case was assigned to U.S. District Judge Richard Leon, a George W. Bush appointee in Washington, D.C. It's not the first major media merger that has come before his bench.

In 2011, he threatened to hold up the Comcast-NBC deal, saying he was concerned that the Obama administration's settlement lacked strong enough protections for online video distributors like Netflix Inc. He ultimately signed off on the deal but required additional oversight of the settlement's arbitration terms. A review of the effectiveness of the Comcast settlement could be a key issue in the AT&T case.

AT&T and Time Warner believe their deal should have been allowed with Comcast-style conditions if there were any legitimate government antitrust concerns. The Justice Department believes the Comcast settlement has proven ineffective, according to people familiar with the matter.

The last fully litigated government case against a vertical merger came in 1979, a trucking industry case the government lost. The Justice Department won a vertical case at the Supreme Court in 1972, involving Ford Motor Co.'s acquisition of a company that made spark plugs.

More recently, courts have looked at the potential anticompetitive harms of vertical mergers in private antitrust actions brought by competitors.

In 2000, for example, a New York federal judge refused to dismiss allegations by an independent Manhattan theater owner of an anticompetitive vertical merger between Sony Pictures Entertainment Corp. and Cineplex Odeon, which at the time was Manhattan's second largest theater chain.

The judge found it plausible that Sony and Cineplex would exploit its "new commanding position in the film industry" as a film distributor and exhibitor to prevent independent theater operators from booking "quality movies." Another judge dismissed the case in 2004 for lack of evidence.

--Louise Radnofsky contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com and Jacob Gershman at jacob.gershman@wsj.com

(END) Dow Jones Newswires

November 21, 2017 17:57 ET (22:57 GMT)