Court of Appeals’ Imminent AT&T/Time Warner Decision Could Either Embolden or Discourage DOJ in Scrutinizing Future Vertical Mergers

As AT&T and the U.S. Department of Justice (“DOJ”) await a decision from the U.S. Court of Appeals for the D.C. Circuit that could decide the fate of AT&T’s $85 billion deal to acquire Time Warner, antitrust observers are waiting to see if that decision—which could come as early as today—will consign DOJ’s renewed interest in vertical merger litigation to the dustbin of antitrust history.

The Court of Appeals is considering the government’s appeal of a June decision by U.S. District Judge Richard Leon denying DOJ’s request to enjoin the vertical merger of AT&T and Time Warner.  Once the appellate decision is announced, legal practitioners will read the tea leaves to determine if DOJ and the courts have the stomach for a renewed interested in vertical merger litigation.  The available evidence, including statements by the agency, investigations, and enforcement actions, provides insight into the DOJ’s views about such enforcement under the current administration.

Vertical Merger Guidelines

Unlike horizontal mergers between competitors, vertical mergers involve the combination of firms that do not compete in the same market but are often part of the same chain of distribution.

The DOJ and Federal Trade Commission’s Vertical Merger Guidelines (not updated since 1984) indicate antitrust enforcers will focus on vertical mergers only when they raise concerns by such things as increasing barriers to entry, facilitating collusion between the remaining firms, or, in the case of public utilities, allowing the combined entity to circumvent regulations.  In particular, the federal agencies express concern about situations in which that the acquisition by a regulated utility of a supplier may grant the combined entity market power over a necessary input.  With this market power, the newly merged firm may have incentives to cut off its competitors from the input or, in the alternative, raise costs on its rivals.  Alternatively, a merger between two entities may grant one party access to competitively sensitive information, such as price files.  Access to such information could allow the combined firm to collude with others in the market.

Vertical Merger Enforcement is Heating Up

The starting point for any discussion on increasing scrutiny of vertical merger enforcement at DOJ begins with the AT&T and Time Warner merger litigation.  This case is the first vertical merger to be litigated by a federal agency in nearly 40 years (last case was Ford Motor Co. v. United States, 405 U.S. 562 (1972)).

The AT&T case involves the combination of AT&T/DirecTV, the largest distributor of traditional subscription television, with Time Warner, a leading owner and operator of various television networks.  DOJ alleges that the combination would allow the combined firm to (1) raise prices as people desire access to Time Warner’s programming and (2) would impede competition from online video distributors who need access to Time Warner’s television programming including its “Turner” networks.

In the district court, Judge Leon denied the DOJ’s request to enjoin the proposed merger, finding that there was insufficient evidence to support the government’s assertions that the combined firm could leverage its market power over those that need access to Time Warner’s television programming.

While the appeal is pending, the DOJ has continued to voice its interest in vertical enforcement.  At a recent antitrust symposium, Assistant Attorney General Makan Delrahim noted that the government continues to scrutinize and evaluate vertical mergers and that, due to government scrutiny, “[s]ome transactions were abandon after the antitrust review.”  Delrahim was no doubt referring to the Comcast Corporation’s attempted acquisition of the same Time Warner company back in 2015.  Additionally, the DOJ’s investigation of Lam Research and KLA-Tencor Corporation, a combination of the leading supplier of semiconductors and a supplier of semiconductor inspection equipment, caused the parties to abandon the merger after the DOJ alleged that control of the inspection equipment would foreclose competition in the semiconductor marketplace.

Vertical Merger Enforcement is Unchanged

In large part, the DOJ’s challenge to AT&T/Time Warner merger is novel and unlikely to cause a systemic change in the agency’s view on vertical mergers – i.e., most vertical mergers need not be challenged, but can be fixed via attaching conditions.

Since 2018, three vertical mergers reviewed by DOJ, Bayer AG/Monsanto Company, CRH PLC/Pounding Mill Quarry Corporation, and  CVS Health/Aetna, have all been cleared by the agency with limited remedies.  In the case of CVS and Aetna, a combination of a large pharmacy chain and pharmacy benefit manager with a leading health insurer, the DOJ required that Aetna divest its Medicare Part D prescription drug plan to competitor WellCare Health Plans.  The settlement plan is currently being reviewed by Judge Leon after he raised concerns that the DOJ’s settlement proposal may not have addressed all the potential competitive concerns with the transaction.

Conclusion

The totality of the evidence paints a mixed picture.  While the DOJ has been aggressive in analyzing and reviewing some vertical mergers, the vast majority continue to be approved with various structural remedies.  The AT&T/Time Warner case demonstrates that the government is willing to test its theories in court, but a loss could lessen antitrust enforcers’ appetite for future cases.

The answer to the question of whether the government will be more aggressive in challenging vertical mergers in the future may well depend on whether the Court of Appeals agrees with DOJ’s concerns.  While an adverse ruling by the Court of Appeals is likely to cement this case’s status as an aberration, a victory by the DOJ could embolden more aggressive scrutiny of vertical mergers, either by this administration or a future one.

Edited by Gary J. Malone