Here’s the news from this Wachtell Lipton memo:
In a much-anticipated decision, the U.S. District Court for the District of Columbia today declined to enjoin AT&T’s $108 billion acquisition of Time Warner, rejecting the Department of Justice’s “vertical” theory of competitive harm and allowing the companies to close their merger without conditions.
In November 2017, the Antitrust Division of the Department of Justice sued to prevent AT&T from acquiring Time Warner, alleging the merger would (1) increase AT&T’s leverage and incentive to charge rival distributors more for Time Warner’s programming, (ultimately resulting in consumer price increases) and (2) stifle growth and entry of innovative distribution offerings, in violation of Section 7 of the Clayton Act. The lawsuit notably departed from the Antitrust Division’s prior precedent in “vertical” mergers—transactions involving firms that do not directly compete—including its 2011 decision to clear Comcast’s acquisition of NBC Universal, subject only to behavioral remedies. Principally at issue during trial was whether (1) AT&T and Time Warner have the requisite market power in video distribution and programming, respectively, to support the government’s theories of harm and (2) the defendants’ proposed behavioral fix, an arbitration arrangement very similar to one endorsed by the Antitrust Division in Comcast/NBC Universal, remedied the alleged competitive harm.
In Judge Richard Leon’s 172-page opinion, the Court was much less deferential to the government than in recent challenges of horizontal mergers. In the absence of significant judicial precedent—this was the first court challenge based on a vertical theory of competitive harm in 40 years—the Judge provided an exhaustive factual analysis and noted that the government’s challenge was complicated by “the recognition among academics, courts, and antitrust enforcement authorities alike that many vertical mergers create vertical integration efficiencies.”
The Court’s decision to deny the injunction was unconditional, but it is worth highlighting one of the subsidiary lines of argument as helpful guidance for future transactions. The Court credited AT&T’s letter commitment to arbitrate with rival distributors, even though the Justice Department had rejected the proposed remedy as inadequate. The proposed commitment supported defendants’ conclusion that the transaction would not result in price increases, and Judge Leon found that AT&T’s commitment “will have real-world effects,” and was “extra icing on a cake already frosted.”
Judge Leon’s opinion, while tied closely to the particular facts of the AT&T/Time Warner merger, provides much-needed guidance to transacting parties—and federal antitrust regulators—in vertical mergers, and highlights the evidentiary hurdles to making a successful Section 7 claim. It also serves as a reminder to transacting parties of the importance of monitoring the content of ordinary course and transaction-related documents. The government’s case in this matter included a limited pool of “bad” documents, and the Court’s decision chastised the government for overreaching in its interpretations of those documents. Many recent successful merger challenges, in contrast, featured clear statements about “taking out a competitor,” or otherwise ending, or at least reducing, aggressive competition. Finally, while regulators have historically succeeded in convincing courts to discount efficiency defenses in horizontal merger cases, the Court noted the particular importance of balancing merger efficiencies (conceded, in part, by the government in this case) with asserted harms in vertical mergers, which have traditionally been viewed as procompetitive.
Prior to today’s decision, Assistant Attorney General Makan Delrahim had expressed his desire to “return to the preferred focus on structural relief to remedy mergers that violate the law,” in light of the fact that “[b]ehavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and . . . demand ongoing monitoring and enforcement.” Notwithstanding those statements, there has long been a consensus that vertical mergers are generally procompetitive and, to the extent problematic, can be fixed with conduct remedies. That view is consistent with many merger enforcement decisions, including the FTC’s decision last week not to challenge Northrup Grumman’s acquisition of Orbital ATK, and will be buttressed by the AT&T/Time Warner decision.
Today’s decision demonstrates that while we can expect that the Antitrust Division and the FTC will remain vigilant and formidable, “big is bad” and similar challenges to deals will not succeed unless grounded in demonstrable proof of anti-competitive effects. The decision’s exhaustive factual analysis also reminds all potential transacting parties of the importance of close attention to detail in planning, documenting, executing and defending merger and acquisition transactions, whether horizontal or vertical.
– Broc Romanek