On June 12, following a six-week trial, a federal court in the District of Columbia rejected the U.S. Department of Justice’s effort to block the megamerger between AT&T Inc. and Time Warner Inc. on antitrust grounds. The case is of note because it appears to signal a more aggressive approach by DOJ to vertical mergers and is the federal government’s first court challenge of a vertical merger in nearly 40 years. Since the late 1970s the enforcement agencies have challenged a very small percentage of vertical mergers and each of those matters was resolved by the parties without trial. The district court’s refusal to block the merger has the potential to check the government’s new-found aggressiveness vis-à-vis vertical mergers, pave the way for more and larger vertical mergers in the near future and provide companies and practitioners with greater clarity regarding the standards the antitrust enforcement agencies will apply in evaluating vertical mergers.
The federal Clayton Act prohibits mergers that may substantially lessen competition in relevant markets. While the Act itself makes no distinction between horizontal mergers of competitors and vertical mergers of non-competitors, since the 1970s the antitrust enforcement agencies have differentiated between the two types of mergers – rigorously reviewing and challenging horizontal mergers and historically allowing vertical mergers of non-competitors to proceed with limited, if any, restrictions. The agencies’ different approaches to horizontal and vertical mergers were based on economic teachings that horizontal mergers that eliminate competitors and increase market concentration risk harming consumer welfare through increased prices and/or reduced product offerings while vertical mergers tend to create efficiencies and cost savings that often inure to the benefit of consumers in the form of lower prices and innovation.
At trial, AT&T and Time Warner argued that integration of the companies’ distribution and content creation capabilities would result in significant cost savings to consumers and better position the merged entity to compete with companies such as Netflix and Amazon, which had already vertically integrated their content creation and distribution businesses. The government conceded the merger was likely to result in significant costs savings and efficiencies that would immediately inure to the benefit of AT&T’s subscribers but viewed the merger as likely to cause competitive harm by (i) enabling Time Warner to charge AT&T’s rivals more for popular channels and content (including HBO and CNN); (ii) creating an increased risk that the merged entity would act to halt the rise of newer internet-based providers; and (iii) enabling AT&T to disadvantage its rival distributors by preventing them from using HBO as a promotional tool. The court rejected each of the government’s arguments based on what it viewed as an insufficiency of evidence, denied the government’s request for an injunction to block the merger, and highly encouraged the government not to appeal the decision.
Regardless of the final outcome, the court’s ruling may result in the agencies updating their vertical merger guidelines (which have not been updated since 1984) and providing much-needed clarity to companies and practitioners regarding the agencies’ approach to evaluating and challenging vertical mergers under federal antitrust law. The decision, if appealed, may also result in additional guidance from the U.S. Supreme Court, which has not considered an antitrust challenge to a vertical merger since 1972.
Taft’s Antitrust Group has substantial expertise evaluating the antitrust risk of mergers and acquisitions and is available to assist clients evaluate and structure transactions to minimize antitrust risk.