U.S. Appeal of AT&T-Time Warner Deal Gets Grilling by Court

(Bloomberg) -- The U.S. Justice Department encountered tough questioning from a federal appeals court about the government’s antitrust case seeking to undo AT&T Inc.’s takeover of Time Warner Inc.

Justice Department lawyer Michael Murray struggled on Thursday to persuade a three-judge panel in Washington that the lower court “clearly” erred when it allowed the $85 billion merger to proceed earlier this year.

“Where is the clear error?” Judge Judith Wilson Rogers asked Murray. She and the other judges heard more than 90 minutes of argument before about 200 people in the biggest courtroom at the Truman-era courthouse two blocks from the U.S. Capitol.

The appeals court case carries high stakes for AT&T. It’s counting on the Time Warner deal, which closed in June, to become a media powerhouse that can deliver Time Warner programming like HBO and CNN to its mobile-phone and pay-TV customers to combat online rivals like Amazon.com Inc. and Netflix Inc. A loss for the Justice Department could hinder the government’s ability to police mergers that don’t combine direct competitors.

The government’s suit challenging the transaction, filed last year, was the first in four decades that sought to block a so-called vertical merger -- in this case, Time Warner, a content company, combining with AT&T, the nation’s biggest pay-TV distributor. The case prompted speculation that it was politically motivated because of President Donald Trump’s constant criticism of one of those Time Warner properties, the CNN news channel.

The Justice Department denies that politics played any role. It said AT&T’s acquisition of Time Warner would give the company leverage in bargaining with cable and satellite-TV companies over Time Warner programming. That increased leverage would lead to higher costs for pay-TV competitors and higher prices for consumers, the government says.

In AT&T Merger Appeal, U.S. Has a Message: We Told You So

Jennifer Rie, an analyst at Bloomberg Intelligence who attended the hearing, said the court would probably side with AT&T. Rie said it appeared from the judges’ questions that at least two of them -- Rogers and David Sentelle -- would rule for the companies, and perhaps Judge Robert Wilkins too. She expects the court to rule by the end of February, when AT&T’s agreement to keep Time Warner division Turner Broadcasting as a separate business unit is to expire.

“Everybody knew it was going to be an uphill battle for the government because it was such a fact-intensive and thorough decision and the standard at ‘clear error’ was a high one,” she said.

Rogers asked the government’s lawyer about U.S. District Judge Richard Leon’s finding at trial that the industry had changed dramatically with new online competitors and declining subscribers to traditional pay-TV. AT&T had argued it needed the deal to compete in the new marketplace.

Murray acknowledged the shifting market but said AT&T will still use Time Warner to maximize profit. “Though the industry is certainly changing, the incentives are still the same,” he said.

Earlier: AT&T Seeks to Discredit Expert Testimony on Prices

AT&T lawyer Peter Keisler attacked the economic findings the Justice Department relied on in its case against the deal. He told the panel that the model used by Professor Carl Shapiro -- an economist at the University of California, Berkeley, and the government’s star witness at the trial -- suffered from “extreme fragility.”

Even assuming all of the government’s inputs as true, it results in a price hike of less than 1 percent, an increase that wasn’t shown to be statistically significant, he said.

“Just minor corrections completely flips the result,” Keisler said.

Sentelle pounced on weaknesses in Shapiro’s testimony, saying an economic model needs to have not only a thesis but also quantitative findings to back up its conclusions.

“You have to have numbers to make a model work,” Sentelle said.

Wilkins, the third member of the panel, pressed the government’s lawyer about an agreement by AT&T to go to arbitration if it can’t reach a resolution with a rival distributor for Time Warner content. AT&T agreed it won’t pull programming from the distributor during arbitration. Wilkins said the lower court found the arbitration offer was enforceable and would affect negotiations between AT&T and its competitors.

“And yet your brief doesn’t make an argument that any such finding was clear error,” Wilkins said.

Joining the argument was attorney Eric Citron, on behalf of 27 antitrust law scholars -- including Nobel Prize-winning economist Joseph Stiglitz -- who support the government’s position. Offering a counter-argument in support of the companies was Andrew Pincus, on behalf of 37 economists and lawyers including University of Chicago law professor Richard Epstein.

(An earlier version was corrected to say U.S. was grilled by appeals panel.)

To contact the reporters on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net;Andrew Harris in Washington at aharris16@bloomberg.net

To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net, David S. Joachim, Peter Jeffrey

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