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The AT&T/Time Warner merger marks the first time in 40 years that a court has decided a fully-litigated challenge to a vertical merger. On February 26, 2019 the D.C. Circuit affirmed unanimously Judge Leon's district court decision holding the Department of Justice Antitrust Division had failed to show that the proposed merger would violate Section 7 of the Clayton Act because it was not likely to substantially lessen competition. Did the court reach the right result and why? What does the decision mean for vertical merger enforcement and analysis moving forward? Are the antitrust agencies likely to issue new vertical merger guidelines? Join us for a discussion about these and other important lessons from the AT&T/Time Warner decision.
Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Corporations, Securities, and Antitrust Practice Group, was recorded on Friday, March 8, 2019, during a live teleforum conference call held exclusively for Federalist Society members.
Micah Wallen: Welcome to the Federalist Society’s teleforum conference call. Today’s topic is a litigation update on AT&T and Time Warner Cable. My name is Micah Wallen, and I’m the Assistant Director of Practice Groups at the Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today’s call.
Today, we are fortunate to have with us Joshua Wright, who is University Professor and Executive Director of the Global Antitrust Institute at Antonin Scalia Law School at George Mason University. We also have Jan Rybnicek, who’s a Senior Associate at Freshfields Bruckhaus and Deringer. After our speaker’s give their remarks, we will then go to audience Q&A. Thank you for sharing with us today. Jan, the floor is yours.
Jan M. Rybnicek: Great. Thanks, Micah. So as he introduced, we’re going to be speaking about the D.C. Circuit’s recent decision in the AT&T/Time Warner case. This is a very exciting time in the antitrust world. It’s been about 40 years since the last fully litigated vertical merger – vertical merger's being those combining companies at different levels of the same supply chain. So it’s also the first time in recent memory that we have a Court of Appeals decision in a vertical merger transaction, which I know makes Josh Wright particularly happy because he’ll be able to fill his case book with new material. Before we get into the meat of what’s been going on on the transaction and the litigation, let me give you a little bit of a road map of what we’re going to talk about.
First, we’ll give you a refresher on the transaction and the parties. Then, we’ll give you -- go back to Judge Leon’s district court decision and refresh you on what he held there. Next, we’ll talk about what the DOJ argued on appeal and what the D.C. Circuit said in response. And then finally, we’ll talk a bit about what the implications of the D.C. Circuit decision -- it could potentially be, both respective to how we think about the bargaining models that were prevalent in this transaction, how we think about vertical merger enforcement at the FTC and DOJ, and whether or not this tells us anything more about if we should be passing or articulating new vertical merger guidelines.
So before I turn it over to Josh, just a little bit about the transaction. Back in October of 2016, a lifetime ago at this point, AT&T announced that it agreed to pay around $85 billion for Time Warner. The transaction would combine AT&T’s paid TV subscriber base and mobile and broadband distribution with Time Warner’s vast library of contents. There was an investigation by the DOJ, as there always is on transactions of this nature, and to the surprise of most antitrust observers, the DOJ, in November 2017, filed suit. The crux of the DOJ’s argument was, essentially, that, by combining AT&T and Time Warner, the company would likely have substantially less in competition in the sale of video programming and distribution by letting AT&T use Time Warner’s content either to raise its competitors video programming costs or by withholding, quote/unquote, "must have content" to drive those same competitors -- customers to AT&T’s subsidiary, which is Direct TV. So that is kind of the setup for what happened in the transaction.
As many of you probably know, vertical mergers are treated much differently by the agencies than horizontal mergers. There is the lack of direct competitor consolidation in vertical mergers, unlike in horizontal mergers, and there are also always significant efficiencies from vertical integration, which tends to lead the agencies to either not challenge vertical mergers or, typically, kind of agree to fairly narrow behavioral remedies that are kind of tailored to address specific issue. With that preface, I’ll turn it to Josh to kind of give a refresher on what happened at trial and where Judge Leon came out and why.
Joshua D. Wright: Great. Thanks, Jan. I want to set up Judge Leon’s opinion a little bit, sort of just set the stage for talking about the D.C. Circuit’s opinion. Now, Judge Leon’s opinion is, I believe, 172 pages, so I am, by necessity, will be sort of hitting some highlights here. But I think it’s worth sort of starting from the beginning.
Jan mentioned the sort of nature of a vertical transaction, the theory of harm. If you think about your traditional horizontal merger, the theory of harm being that, when one competitor acquires another, you might have two effects going on. One is the horizontal merger eliminates some competition that exists in the marketplace, and we try to identify whether that’s true or whether there’s sort of other sources of competition will replace that lose by the merger.
So that’s sort of one side of a scale on horizontal merger analysis. And the other is whether the merger creates some efficiencies. The efficiencies part of the scale in the vertical merger context is going to still be there. We’re going to think about it slightly differently because there’s different sorts of efficiencies that arise from a vertical transaction than from a horizontal one, primarily being the elimination of double marginalization, being the sort of go-to first order efficiency comment of most vertical transactions. But on the anti-competitive side of the leger, the theory of harm in a vertical merger case is going to be a little bit different. The most prominent theory of harm usually being that, when a firm acquires some input in its supply chain, in this case when one combines sort of a network with a distributer with content, that it is going to give bargaining leverage to the post-merger firm.
AT&T gets ahold of Time Warner and now owns the content for Game of Thrones. It influences the bargaining leverage that the post-merger combination of AT&T and Time Warner have when they negotiate for access to Game of Thrones with other distribution networks, right? Maybe they’re able to extract higher prices that are then passed on to consumers. That’s sort of the theory in a nutshell. That is what the theory of harm, other variants of it, that Judge Leon -- that were in the DOJ’s complaint and that Judge Leon was sort of testing against the evidence. Section VII of the Clayton Act governs the question for vertical and horizontal mergers is whether the transaction is likely to substantially lessen the competition.
One of the really interesting things that I think has the, at least, the antitrust bar interested in the outcome of the case, Jan mentioned sort of the first fully litigated merger challenge in 40 years. Some enforcement action by both agencies on vertical mergers, but in terms of a sort of fully litigated challenge and a decision by a federal court, we don’t have that for a long time, certainly not in the modern antitrust era. One of the things that we’ve got on the horizontal side of merger analysis is agency guidelines, right? So there’s the 2010 is the last version. Agencies put out horizontal merger guidelines to kind of walk through what an analysis might look like. On the vertical merger guide -- on the vertical merger side—and we’ll return to this later when we talk about implications of the decision—no guideline document that’s relied upon in the same way as the horizontal merger guidelines to sort of spell out the analysis.
So I think people were pretty interested in seeing what sort of analytical rubric Judge Leon and then the D.C. Circuit would bring to bear. The standard sorts of things that an antitrust enforcement agency does, the types of evidence, if you will, that it puts together to establish its prima facia burden in a Section VII merger challenge, you can think about -- and this is sort of a rough cut, but you can think about evidence falling into a handful of buckets, right? So in a traditional horizontal merger case, one of those buckets is market shares, sort of structural evidence about the shares that the firms have now, the shares of the market that they’ll have before the merger.
A second bucket is economic analysis, right? The agencies will go and hire experts. In this case, the DOJ retained Carl Shapiro, former Chief Economist for the DOJ, an economist for the Council of Economic Advisors in the Obama Administration, very well-known, very well-respected economist in antitrust cases, to do some analysis to show -- to substantiate the DOJ’s theory that the merger would result in bargaining leverage that would increase the price of input to networks that compete with AT&T, and those prices would be passed on to consumers. That was sort of what they were trying to substantiate, that sort of economic analysis. Of course, on the other side of the economic analysis bucket is those efficiencies we spoke about earlier, and the burden is on the DOJ to show that the harm that they identify and attempt to quantify through models put together by their economic expert exceed any of those efficiencies.
And then the third sort of traditional bucket of evidence in these types of cases are documents, right? So you get documents that take the form of, usually, internal business statements from the companies about what they might be able to do after the merger or about how the merger might influence their bargaining leverage after it takes place. Those are sort of the three main buckets, and the DOJ relied primarily upon Carl Shapiro’s economic expert testimony, lots of evidence on ordinary court’s documents that were put before Judge Leon that they used to try to persuade the judge about what the likely effect of the merger would be.
That third bucket, the share bucket -- and I think Jan will talk about this a little bit later, but I do want to sort of highlight the point. One of the reasons shares, market shares, matter so much in the horizontal merger context is because we have in horizontal merger law this thing called the Philadelphia National Bank Presumption. It’s named after a Supreme Court case in the 1960s that essentially says, if the government puts on evidence that the post-merger share will go above 30 percent, then it shifts the burden of prove. So rebuttable presumption plays a major role in horizontal merger litigation but sort of doesn’t live in the vertical merger space, right? Vertical mergers don’t, by their nature, sort of by definition change horizontal market shares, so the presumption doesn’t play a role there, right? So we’re not going to rely on shares. What are we going to do instead? Economic evidence and documents.
So Judge Leon -- I had mentioned the 172 pages of the opinion -- a lot of it spent on working through documents that the DOJ had put on and maybe even more spent on sort of a painstaking walk through the details of Dr. Shapiro’s economic analysis and also the rebuttal economic analysis that AT&T/Time Warner put on by their experts, another former Chief Economist of the DOJ, Dennis Carlton. I’ll sort of briefly summarize what Judge Leon did with each, in the interest of time, and then sort of kick to Jan for the Court of Appeal’s reaction. But I want to talk a little bit about how Judge Leon handled each of those buckets.
In terms of the ordinary course documents, a main thrust of Judge Leon’s District Court opinion was that the ordinary document, ordinary course documents weren’t persuasive in terms of identifying likely effects from the merger. The DOJ put on evidence from business folks. They put on statements from priory regulatory filings, right? The parties had filed statements about other mergers in front of regulatory agencies. And so, in each of these cases, in a sort of long section of the opinion, Judge Leon sort of walks through and distinguishes some of these ordinary course documents from what he describes as, quote/unquote, "objective, real world evidence." He says generic statements about the likelihood of vertical integration causing this or that harm don’t tell us much about the effect of this sort of particular merger.
Judge Leon also sort of dismissed the probative value of the parties’ prior predictions regarding the Comcast/NBCU merger and what barring they had in assessing the AT&T/Time Warner merger. He emphasized that the documentary evidence put forth by the DOJ, when weighed against what he considered to be a considerable contrary evidence presented during the trial, didn’t provide much support for the contention that the combined merger would be able to gain leverage from the merger.
I think that sort of the low probative value placed upon documents is one of the interesting features of Judge Leon’s opinion. You will see, from time to time, in the horizontal merger context pretty high variance in the ways that courts handle ordinary course documents and their probative value. It is one thing when the ordinary course documents sort of tend to point in the same direction as the economics. I think part of what we saw in Judge Leon’s opinion was what he viewed as a conflict between the economic evidence and the documents. And as between two, he certainly resolved that tension in favor of the economic evidence. The economic evidence, to sort of wrap up my end of the description here, really come down to a couple of things.
One, the DOJ’s expert, Carl Shapiro, sort of built this what we’ll call bargaining model, the common tool or application used by economists, especially in these vertical settings where bargaining is an important part of the competitive dynamic, and tried to ask the question, “Hey, how does bargaining leverage change because of the merger? What’s going to happen to input prices? What’s going to happen to the price that the post-merger firm charged for Game of Thrones to other networks?” and tries to predict whether those prices will increase. Now, of course, the plaintiff’s expert answers affirmatively to that question. He says, “Yes, there’s going to be some price increase,” and sort of builds a model to try to estimate what that would be and compare it to any efficiencies arising from the merger. On the efficiency side, the plaintiff’s expert, which I thought was a pretty interesting feature of the district court litigation, the plaintiff’s expert conceded.
I think the number was $1.20 per subscriber in terms of marginal cost efficiencies associated with the merger. I think that adds up to something like $352 million in annual savings. That was for, I believe, Direct TV customers as a result of the merger. So you had the plaintiff’s expert conceding what is, I guess, from my experience looking at mergers, a pretty large efficiencies number sort of right off the bat. So the burden is for the plaintiff can they put on persuasive and robust economic evidence that sort of beats that $352 million a year in the form of the output of Dr. Shapiro’s model? Judge Leon -- a great chunk of those 170 pages are dedicated to walking step by step through that model. Part of it rejecting inputs, right?
Some conceptual objections to the model, but really a lot of the time spent looking at inputs of a model, right? So the model spits out a prediction about price, but you need some inputs for it, the long-term subscriber loss rate, the diversion rate—that’s the number of subscribers who, after they left their current TV distributer, might actually switch to Direct TV—lifetime values of customers that they use to calculate profit margins for AT&T. These are all inputs you need to sort of operate this model. A great part of Judge Leon’s opinion was spent walking through what he certainly perceived as inconsistencies or weaknesses in the inputs, the robustness, we’ll say, of the inputs that Dr. Shapiro relied upon.
He also raised what I will sort of describe as maybe more conceptual objections, describing at some point Dr. Shapiro’s model as a Rube Goldberg contraption. I think he also said that might be unfair to Rube Goldberg in part of the opinion. So clearly expressing some skepticism really aimed at how well—and this is always the challenge when proffering economic models as a form of evidence in trials—how well the model captures sort of real life institutional details of the competitive dynamics. And I think Judge Leon ended up rejecting, in large part, the outputs of Dr. Shapiro’s model, that is the predictive price increase, on the grounds that the model was sort of a complicated, just-so story in his view that really ignored some of the important features of competition in the market.
Instead—and this is sort of the last point about the economic evidence, and I’ll let Jan turn to the Court of Appeal’s opinion—he did credit, sort of in contrast to the bargaining model sort of theoretical prediction that Dr. Shapiro used, Dr. Carlton had put forth some -- I think most fair to call them merger retrospectives, looking at previous vertical mergers in the sort of similar market dynamics, sort of in the same market space, to test sort of -- looking backwards, test the DOJ’s theory. Did previous combinations of content and distribution, indeed, result in net increase of input prices? And he put together some evidence in his expert report suggesting that that simply wasn’t the case. Judge Leon did rely on those in indicating, or sort of bolstering his skepticism, about Dr. Shapiro’s testimony and the likelihood that it would predict the effects of this merger.
Those, I think, are the important highlights of Judge Leon’s opinion. Jan, do you want to take the Court of Appeal’s opinion?
Jan M. Rybnicek: Sure, Josh. So the DOJ appealed Judge Leon’s decision, and the principle arguments that the DOJ made on appeal were three. First, the DOJ argued that Judge Leon misapplied kind of basic economic principles, or misunderstood them. Second, the DOJ argued that Judge Leon had an internal inconsistency in how he evaluated industry evidence, testimonial evidence and other evidence. And then third, the DOJ argued that Judge Leon erred in rejecting Dr. Shapiro’s quantitative model that was presented by DOJ. I’ll probably focus most on the economic principles, as that kind of drove most of the D.C. Circuit opinion, but the other two are obviously important as well.
On the misapplication of economic principles, so this was basically broken out into two parts. First, DOJ specifically argued that, with respect to the Nash bargaining model that Josh referenced, that Judge Leon got that all wrong. And secondly, that Judge Leon completely ignored kind of a basic tenant of economics which is that corporate-wide profits will be maximized, rather than kind of individual units, for example.
So on the first point, on the Nash bargaining model, which was the foundation of the DOJ’s case, if you recall from what Josh said, DOJ’s argument was that, because the cost of long-term blackouts would be reduced for the combined company, for the combined AT&T/Time Warner, because if there was a blackout, some of those customers for other distributors would then switch to AT&T, right, the harm of going into a blackout would not be as dramatic as it were in the pre-merger world. So because the cost of those long-term blackouts would decrease, the DOJ’s kind of Nash theory predicted that AT&T would have greater bargaining leverage and, therefore, be able to extract higher prices.
That’s the crux of the DOJ’s argument. And DOJ argued on appeal that Judge Leon completely misunderstood what the Nash bargaining model really said. And their point is that they believe that Judge Leon erroneously believed that he actually had to find instances of blackouts out in the wild, out in the real world, for the DOJ’s case to be persuasive. And that misunderstanding of the Nash bargaining model led him down a path that was clearly erroneous and led to the rejection of the DOJ’s case.
The D.C. Circuit rejected the DOJ’s argument on this point. They found, clearly, that Judge Leon did not reject the Nash bargaining model as a theoretical point. He actually, explicitly, accepted the Nash bargaining model. But what he did is he evaluated its application in the specific transaction, in the specific industry, based on the facts that were presented to him.
And that evidence suggested that Turner Broadcasting would only have kind of a slight additional threat of blackouts as a result of the transaction. As the D.C. Circuit seized on testimony from Time Warner’s CEO, which said the difference would be, essentially, between having a thousand pound weight fall on you and a 950 pound weight. The difference is miniscule and doesn’t really add any meaningful leverage. And what gave Judge Leon comfort that this was the right result was, as Josh said, Dennis Carlton, Professor Carlton’s evaluation of three prior vertical mergers, in particular the NBCU transaction, which showed that in real-world scenarios there really is no meaningful bargaining leverage that is gained as a result of these types of vertical transactions. So although the theory is sound and certainly acceptable and not to be rejected based on the theory alone, the particular facts in this case do not hold up and support the DOJ’s case.
In addition, the parties’ unilateral decision to offer about a thousand distributors a commitment that they would enter into baseball-style arbitration should there be disagreements on price and also agree not to blackout during those arbitration periods played a significant role in the D.C. Circuit’s analysis. Those agreements effectively made it impossible for there to be any kind of price affect under the Nash bargaining model, or otherwise, during the seven years that this arbitration agreements would hold. I think Judge Rogers said, consequently, the government’s challenge and the district court’s treatment of its economic theory becomes largely irrelevant, at least during the next seven years.
The second economic theory that the DOJ challenged was this principle of companies will maximize profits corporation-wide. And essentially, it was a challenge to the proposition that, well, why wouldn’t the combined company leverage one unit to the benefit of the other? That’s what economic tenants teach us, is that they will maximize prices across both. But again, Judge Leon didn’t reject that principle. Instead, he looked at real world testimony, both from the parties as well as other distributors, in particular NBCU, to understand what happens out in the real world. And the conclusion was is that, and this isn't necessarily surprising given the purchase price for Time Warner, is that companies try to license their content as widely as possible. So they’ve made this content.
There’s little value to them in withholding that content and not licensing it to as many people as possible. And that’s kind of what was found in the testimony and in the evidence. So the D.C. Circuit pretty clearly rejected that argument on appeal.
Moving to the second and third arguments on appeal, the second was, in some ways, almost a throw-away argument. The argument was by DOJ that Judge Leon was inconsistent in which testimony he credited and which testimony he discredited and which testimony he found to be self-serving and which testimony he thought to be persuasive. And it’s true that Judge Leon discredited certain testimony from third-party competitors to the parties, other distributors. And he did that in part because he saw that there was potential self-interest there. But the D.C. Circuit found that that was not nearly the only reason why Judge Leon discredited that testimony and favored the testimony of the parties.
He said, quite frankly, that those third-party witnesses, or distributors that were DOJ witnesses, didn’t substantiate their claims at all. For those that attended the trial recall that, even in questioning from the judge, there were instances in which some of the assertions that were being made couldn’t be substantiated at the time. Whereas, the parties in NBCU, when providing testimony, would provide real world experience, which struck the judge as much more persuasive. And the D.C. Circuit found that this was completely reasonable.
And finally, the DOJ argued that Judge Leon erred in rejecting the government’s quantitative model, the model that was developed by Dr. Shapiro. The D.C. Circuit reflected and said, to Judge Leon’s point, the model failed to consider a lot of real-world scenarios, whether it’s the arbitration agreement or distinct contracts that prevented a lot of the harm from happening in the near term, a lot of the theorized harms from happening in the near term. And the D.C. Circuit found that all these infirmities with the quantitative model were well within Judge Leon’s power to kind of rule on and decide that, overall, the quantitative model, the inputs, and the suggestions that came out of the quantitative model, even assuming the Nash bargaining model as applied, that those weren’t persuasive and didn’t provide enough support for a price increase.
So those are the three challenges DOJ had on appeal. The D.C. Circuit rejected them pretty clearly. And quite frankly, it was a tough case to reign because the standard of review, clearly erroneous, is obviously very difficult, and there were no issues of law to be settled. But nevertheless, the D.C. Circuit opinion is the best roadmap we have, currently, for how vertical mergers will be handled in the judiciary. It was, again, very fact specific and specific to this transaction. And there weren’t necessarily any broad principles articulated. Though, maybe we can speak about this in a minute when we talk about the implications because there were some interesting, or potentially kind of tangents in which the D.C. Circuit talked about what types of harms are cognizable under the antitrust law.
The D.C. Circuit ruled, and the DOJ thereafter, I think, pretty quickly decided not to take the case further and appeal to the Supreme Court. So with that kind of overview of Judge Leon’s decision, DOJ’s arguments on appeal, and then the D.C. Circuit’s findings, I think we’d like to turn next to kind of what this means for the antitrust world, what it means for merging companies. And I think the place where we want to start, and I think Josh is going to kick us off, is what does this mean for kind of these bargaining models and how the antitrust agencies evaluate them, how they present them to court, whether or not they have any validity, and those types of issues?
Joshua D. Wright: Thanks, Jan. The bargaining models, I think we’re now sort of turning to implications, kind of go from narrow to broader, from the use of these models within cases to sort of what does the decision mean for vertical merger enforcement to maybe ending on a little bit of discussion about, even more broadly than that -- I think a lot of the antitrust bar is interested in whether the decision has any bearing on whether we end up with vertical merger guidelines or not. So the narrowest of those being the bargaining model. I think Judge Leon’s sort of rough treatment of the bargaining model and the Rube Goldberg references and the dismissal of the model combined with the way that the DOJ framed some of the arguments on appeal about maybe the judge was rejecting profit maximization as a whole or rejecting economics, or something like that, has led to some interesting discussion over the use of those models in other antitrust settings.
And we get bargaining models all over the place in antitrust. We get them in vertical mergers, like here. We get them in conducts cases that involve licensing disputes or contracts between manufacturers and distributors. We get them in the horizontal merger context sometimes, so bargaining models come up quite a bit in hospital merger cases or other horizontal merger cases in which the way that the rival firms negotiate with the distributors is sort of a key part of competition. I certainly know lawyers in the antitrust bar and lots of economists are interested in kind of where these bargaining models stand after Judge Leon’s sort of rough treatment of the particulars of Dr. Shapiro’s model and this opinion.
I guess I’ve got a couple of thoughts on that that I would start with. You know, my sense is that the bargaining models really aren’t going anywhere. I think the D.C. Circuit’s opinion makes clear they read Judge Leon’s opinion not as a broader, sweeping conceptual rejection of bargaining models or profit maximization or kind of any of the things you need to make those models go. So they were not rejecting the model but rather the inputs into it and whether the model adequately captured sort of dynamics of competition. One of my economics teachers, Armen Alchian, was fond of saying when an economic model and the real world are in conflict, the better economist blames the model, not the real world. And I think you see a lot of some of that play out in this debate and also in Judge -- excuse me, in the D.C. Circuit’s opinion.
But I certainly read, and more important than my own reading, the D.C. Circuit appears to read Judge Leon’s rejection of the model as more of a fact specific test of the robustness of the model to the institutional setting in which it’s applied, the particular market in which it’s applied. And sort of a common when economic models fail, in the sense that they’re not persuasive evidence in cases in front of Article III judges is often because -- not because the models are incorrectly calculated or anything like that. It’s often because either the inputs are not well specified or the judge is not persuaded that the model captures enough of the institutional dynamic that you believe its predictions. And I really think it is difficult to disentangle two things going on at the same time here.
So I think Judge Leon’s opinion was skeptical of Dr. Shapiro’s model because of that gap between the model and sort of real-world, competitive dynamics. But I think also maybe not enough attention has been paid to the important role that Dr. Carlton’s expert work did here. So Judge Leon spent a good amount of time on it. It gets some mention in the D.C. Circuit opinion, but not as much. But I really do think that Judge Leon’s skepticism of the theoretical predictions of the bargaining model were bolstered by this sort of merger retrospective type approach that Dr. Carlton took, sort of looking at -- sort of, hey, understand the theory of harm in this bargaining leverage.
But is that the way it works in actual markets? We’ve looked at these past mergers and can’t find evidence that it does. Maybe this merger is different, but certainly looking retrospectively influences the lens through which Judge Leon analyzed whether this particular merger would sort of somehow behave differently than the prior ones. And so, I think it’s very difficult to disentangle those questions. But I think what I take away, in terms of the future of bargaining models here, is not a very dramatic message that bargaining models sort of are no longer welcome or that there’s anything in the opinion to suggest that they’re no longer welcome.
But I do think there will be a lot of care taken about how robust the inputs to those models are. And I think it’ll be interesting to watch whether, more and more often, we see use of this retrospective sort of prior natural experiments as a way to help frame the likelihood of effects in merger challenges. Jan, do you want to talk about the sort of broad issues?
Jan M. Rybnicek: Yeah. We’ll just talk a little bit about kind of what this means for enforcement, and then we’ll get to the topic of guidelines. So just quickly on this, I think a lot of people look at this decision, the AT&T/Time Warner decision, and think it provides some revelations on how vertical merger enforcement will be dead after this or what have you. I think that’s probably not true. The DOJ and FTC are professional agencies. If they have the facts in front of them, they’re not going to hesitate to bring another vertical merger case if it’s supported by the evidence or to seek remedies to resolve issues. So I don’t think you can say that, as a result of this decision, then all of a sudden, we’re just not going to have any kind of review of vertical mergers or any kind of threat litigation or remedy. So that’s one.
I think, two, it does highlight again the importance of what Josh referred to as Philadelphia National Bank Presumption and market shares as a part of the tool in enforcement, in horizontal merger enforcement. This decision shows that, without that presumption, the agencies have a hard time winning. This, the prior case of Steris-Synergy, another case where there wasn’t use of the presumption, these are cases where the agencies have a harder time winning because they don’t get the benefit of pointing to market shares as kind of presumptive evidence of harm. And it does raise the question of how much work are those presumptions doing in regular horizontal cases, right? Should we be thinking about -- how should we be thinking about presumptions? Is concentration and competition the same thing? Probably not.
And should we be thinking about when the presumption should apply and when it shouldn’t more clearly than just looking at market shares and counting the number of firms on your fingers? That might actually lead you to a result that doesn’t necessarily enhance consumer welfare.
And then third, this decision by the D.C. Circuit and by Judge Leon raises the relevance of these kind of “fix it first” or litigation the fix propositions. So the parties in this case offered a thousand distributors the right to baseball arbitration if they had a disagreement on price post transaction. The D.C. Circuit, in a number of places, highlighted this fact as making any kind of harm in the next seven years impossible to discern and unlikely. So that unilateral decision by the parties to propose the baseball style arbitration to distributors did carry a lot of weight, ultimately.
And it resembled exactly what was done in the prior vertical merger in this area, NBCU. The baseball style arbitration was actually agreed to by DOJ as a consent, as a remedy agreed to in a court order. So I think the combination of the fact that those remedies worked in NBCU, as articulated in Dennis Carlton’s retrospective, and then the parties, AT&T and Time Warner’s decision to do it here in this case, did give them some benefit at trial and is something that I think parties going forward will also consider. And then finally, as Josh and I have mentioned on a few occasions, the value of these retrospectives that Professor Carlton did, I think they were persuasive in all aspects of the litigation and carry significant weight both in Judge Leon’s opinion and then also at the D.C. Circuit.
So I think those retrospectives, or attempts to do something similar, may be something we see more of on the horizon. So with those two big issues out of the way, we’re going to turn to vertical merger guidelines, which is a hotly contested topic in antitrust. It was subject to kind of the recent hearings that the FTC is holding on the current state of antitrust and whether it is up to the modern challenges. And there’s been a lot of debate and discussion over the last several years about whether or not we should do away with the 1984 guidelines, which, quite frankly, are irrelevant and outdated and issue some new guidelines. And I think people seize on the fact that Judge Leon, in the AT&T/Time Warner decision, actually cited the 1984 guidelines as kind of a need and an impetus for refreshing those guidelines.
While that is true, I think people should look also closely as to what proposition Judge Leon used those guidelines to cite. They weren’t necessarily controversial issues. It was for the proposition that vertical mergers have efficiencies, and they tend to be more often pro-competitive than anti-competitive, not really thinking about frameworks or ways that vertical transactions should be evaluated. So I think I’ll turn to Josh for his views on vertical mergers, and then maybe there is a little bit of light between our two opinions on this issue. But let’s see what he’s got to say.
Joshua D. Wright: Sure. And let me -- I’m actually going to rewind a little bit. I think I’ll sort of jump to vertical merger enforcement, but I think two quick notes about implications for vertical merger enforcement outside of guidelines that I would say. Jan talked a little bit about whether the decision means the death of vertical merger enforcement or something like that, and I certainly don’t think so. And I think, frankly, I had opined I think with a couple of others -- I didn’t necessarily think that the DOJ would prevail in this case. It’s a topic upon which reasonable minds differ, and I think it is safe to say, and I think the Antitrust Division deserves credit for going out -- they had taken a position that they thought the merger was anticompetitive and went out -- instead of taking a consent, they went out and took it to trial.
And I don’t think there’s really anything wrong when an agency does analysis, even if I disagree with the analysis, on the ultimate outcome. No, they’ve got access to evidence I don’t, and so I think, in those circumstances, this is what professional antitrust agencies are for. And I think the Antitrust Division deserves credit for going out and litigating a case they believe in litigating in, whatever the outcome. I think that certainly nobody would make the criticism of the current DOJ that they’re not willing -- if another vertical merger happened tomorrow and they wanted to challenge it, I bet my money that under A.A.G. Delrahim they’d go out and challenge the thing. So I don’t think by any stretch of the imagination that a Court of Appeals loss here changes vertical merger policy as a general sense.
As to vertical merger guidelines, then maybe we can get Jan and I to disagree a little here, of course the value of guidelines depends on what they say. In the horizontal context, those guidelines, I think, have done a great job communicating not only what the agencies are doing to outside parties, but also helping sort of educate Article III judges on the standard mode of analysis, sort of how to do these deals when they come in front of you. I think agency guidelines really do serve two primary purposes. One is to tell parties the way that agencies are thinking about deals, and a second is to help educate Article III judges who don’t hear antitrust cases all the time and sort of give them an analytical framework to do so.
I don’t think there’s any point in having guidelines if they don’t actually reflect sort of a consensus view on the tools used to analysis vertical mergers. So the questions that I think determine whether there is value to vertical merger guidelines are really does that consensus exist in the vertical merger space, right? Do we sort of agree on what the theories of harm are, what the efficiencies are, how to identify them and how to test them? Do courts need them? My own view of the D.C. Circuit opinion, I mean, people can like or not like the outcome of the analysis or disagree on the facts, but my sense is that the analytical framework used is sort of the analytical framework everybody talks about using in these cases.
There’s a theory of harm about bargaining leverage or foreclosure. That theory has testable implications. You test them against the data. Judge did that. On the efficiency side, there wasn’t that much of a dispute. The plaintiffs’ expert conceded $350 million a year of efficiencies, so maybe a little dispute over whether it’s higher than that. But the concession certainly sets the floor. So the battle was always going to be about guidelines don’t tell you answers. They tell you what questions to ask. And I don’t really think I’ve heard much of a criticism of the D.C. Circuit opinion that it asked the wrong questions. Maybe there’s value to guidelines if the sort of demand from it from outside, right, if the general perception is that nobody knows what the agencies are doing in vertical cases.
I could see some value in a set of guidelines so that, if the agencies depart from the conventional analysis, parties can take those guidelines and wave them around to an Article III court and say, “Wait a minute. You’ve identified best practices, and you’ve deviated from them here.” So I can see some value in guidelines under certain conditions. But unless one sort of sees the content and sort of how they’re drafted, I think it’s hard for me to be overly enthusiastic for the project. What about you, Jan?
Jan M. Rybnicek: Well, I mean, maybe there’s not that much room between our positions, but I think I’m probably even more skeptical of guidelines in this area. You and I have spent a lot of time working on guidelines at the FTC for Section V, which was an area that wasn’t developed at all and nobody really had a sense of what the law meant. Here, we know what the Clayton Act means and what kind of harms we’re looking for. So some guidelines are certainly less necessary than for Section V. But the real risk of guidelines, and this isn’t my original thinking. This has been thought of by lots of people, including Paul Yde. He’s the practice group leader at Freshfields Bruckhaus Deringer.
But is that they have a tendency of creating sufficient conditions rather than necessary conditions. So all of a sudden, you’ve got these guidelines that articulate some scenarios and staff inherently then starts to think that once you’ve ticked those boxes then you’ve got a case, which is not what vertical merger guidelines would ever be able to do. And I think the issue with our understanding of how vertical mergers operate and the economics related to them, I think identifying kind of an observable set of facts that will tend to lead to showings of anticompetitive harm is going to be pretty hard to find consensus around at this point and to document. We can certainly articulate theories of harm, and that’s been done in speeches and law review articles. And there’s plenty of guidance on that.
But in terms of actually creating something that resembles the horizontal merger guidelines, which I think is what lots of people think they’re going to do with vertical merger guidelines, then that’s going to be very challenging and very difficult to do in a meaningful way, in a way that does create kind of incentives to maybe prosecute these cases more often than it should be. So harm in transactions is typically -- is not frequent, but it’s even less frequent in vertical merger transactions. So creating a scenario in which vertical merger transactions are given more focus and more attention, and you create an on ramp that only leads you to kind of a litigation or enforcement posture is dangerous. What would be helpful is for the agencies to kind of communicate, whether it’s in speeches or kind of sure policy statements that are agreed upon between the agencies on kind of some of the high level issues that they agree upon, how they think about elimination of government marginalization, how they think about what are potential safe harbors.
I think that would be something that the -- that businesses would like to know going into it. So I think there are probably some principles, and a lot of those have been explained in speeches by the enforcement agencies. And there might be some value in kind of consolidating those in some agreed upon text between the agencies. But doing something that is as robust as a horizontal merger guideline seems that it may be challenging. I think we’re at the place where we might want to take some questions now from the audience.
Micah Wallen: Absolutely. Let’s go to audience questions. Not seeing any questions lined up right away. Did you both want to continue discussing and I’ll hop back on here if we get a question in the next few minutes?
Joshua D. Wright: I think we’ve covered most of what we want to. I guess I can filibuster a bit to see if we get one, but if we don’t, that’s okay, too. I do think -- Jan mentioned the value of statements and speeches, and I do know it’s maybe worth noting, for listeners interested in the topic, A.A.G. Delrahim recently gave a speech at the George Mason Antitrust Symposium that covered precisely sort of this topic of vertical merger enforcement and double marginalization that I think would be worth reading for anybody interested in the topic. And similarly, Christine Wilson, Commissioner Wilson at the FTC, also recently gave a speech on vertical mergers as well.
Jan M. Rybnicek: Yeah. That’s an issue that speaks more broadly to antitrust today, right? I think a big responsibility of the agencies, and Josh knows this well from being a former commissioner, is to kind of communicate to the world how you’re enforcing the antitrust laws and why decisions are being made. Some of that communication is to the antitrust bar. Some is to the business, but some is to general public. Justifiably, some of the public will look at the AT&T/Time Warner merger and say, “These are massive companies. What’s going on here?” And it really is the responsibility of the agencies to kind of explain, whether in the AT&T/Time Warner context or other context, where they might let a transaction clear or decide to agree to a consent with remedies.
It really is important for the agency, whether in policy statements or in speeches or elsewhere to articulate the role of the antitrust laws, how they’re applied, in kind of the most simplistic terms possible. And I think that the current agencies, both the FTC and DOJ, are aware of that and are doing work, as Josh just mentioned with two recent examples, of kind of refocusing on that part of their mission in terms of communicating the advocacy that they’re doing.
Micah Wallen: And we did actually have two questions lined up here.
Joshua D. Wright: Yeah. Fire away.
Dan McInnis: Hi, this is Dan McInnis with Thompson Hine. I have a question about DOJ credibility, which is DOJ called a witness on efficiencies who, I guess, is a repeat player for DOJ, who testified that there was not one single penny of efficiency savings in the proposed deal. What is the importance of having an efficiencies defense that’s in a guidelines, when in litigation, a government agency takes a position that is so far outside the realm of comprehension that that type of position had to undercut the government’s case, especially when the government’s own economist expert witness testified that there were hundreds of millions of dollars of cost savings?
Joshua D. Wright: Yeah. So this is Josh. I’ll take a first shot and see if Jan wants to add anything. The question seems borderline rhetorical, but I think you provided a good answer anyway, which is, look, a couple of things. One, I think the biggest problem in putting on one expert who says zero efficiencies and another who says $350 million a year is that putting on contradictory evidence among experts is never going to help your case in front of an Article III judge. And I think you sort of saw that play out. I think in the way that you would expect, and the way that you would actually sort of -- it also suggests the court is evaluating that testimony closely and favored the economic testimony over the conflicting testimony and also testimony that was more consistent with the merger retrospectives.
I think the other point I’d made -- you sort of linked that to the guidelines discussion, which is interesting. But I kind of think about it the other way. I sort of think about one potential value of guidelines as a check on agencies when -- you write down guidelines that talk about double marginalization, elimination of double marginalization and merger efficiencies. And when agencies walk into court and make arguments that are inconsistent with the guidelines, it gives parties a way to impeach the agencies, right? I think that that is often, or at least sometimes, a discipline on the agencies and Section VII horizontal merger cases, although not always. But I do think a potential role for guidelines, and again, $64,000 question, depends on how they’re written, but a potential value for guidelines to discipline that sort of thing.
It’s to give parties, when agencies deviate from sort of what’s in the guidelines, the ability to wave the guidelines in front of an Article III judge and say, “Look. This isn’t -- you’re doing something you said you wouldn’t do.” I don’t particularly see the conflicting testimony as the Antitrust Division coming out as saying there’s no merger deficiencies defense, or they’re not relevant. As much as I think it’s a little bit of a litigation error to put on contradictory testimony, I think the other interpretation is probably a little less charitable than the one -- I certainly understand where the question comes from. But I think it’s a little bit more of the agency putting on conflicting evidence and bearing the consequence of that with the judge. I don’t know. Jan, do you want to add anything?
Jan M. Rybnicek: No. I think that hit the nail on the head.
Joshua D. Wright: Well, let’s do the second question.
Micah Wallen: All right. We’ll now go to the next question.
Laura Peterson: Hello. Laura Peterson. What, please, are the lessons that we should take from this vertical merger challenge for working with and preparing expert economic witnesses for presenting models beyond what’s clear here, i.e. that the data underlying models have to be defensible and robust?
Jan M. Rybnicek: Yeah. I think -- this is Jan, and I’ll kick it to Josh. He might have some views. But in terms of working with economists, I think you need to really make sure that all the data that they’re working with -- the mounds of data that you provided them during the investigation stage, that the models that they’re running with do translate into real-world scenarios. I think that is a huge lesson from AT&T/Time Warner where the two may not have matched up on the DOJ side. And Professor Carlton was able to do a much better job of articulating a view of the effects from the transaction based on real-world evidence and scenarios.
I think, as a lawyer, you’re both working with the economist to kind of help them understand what kind of documents and evidence there is in the documentary evidence and whether or not it aligns with the economic evidence and how to square those if necessary, but also making sure that the models that they’re creating do fully take into consideration kind of the facts on the ground and how things may have changed regarding various periods of the data and then translating that, obviously, into a persuasive narrative.
Joshua D. Wright: Yeah. I don’t have much to add to that, and I wasn’t with the parties and wasn’t inside the DOJ so I don’t know anything about the preparation of the testimony. But just sort of speaking generally and not necessarily about this particular case, some of the places where inputs to the models faltered were things that I think might be avoidable with a little bit more lead time. So you need to stress test these models, and some of the stuff that came out was changes in the inputs that went in, or not using the most recent evidence, things like that. Which, look, Carl Shapiro is an excellent economist and does great work, and I think some of these things are having time to really stress test these models.
And I don’t know if that’s what happened here or not. But I don’t think that there’s any sort of big change or lesson. People know to be careful with the models. People know to stress test the models. People know to do sensitivity checks and robustness checks to get things sort of litigation ready. It may be in the case of bargaining models that folks are a little bit more sensitive to those things than they were prior to the decision. So I think maybe no new lesson but an important reminder.
Micah Wallen: All right. On behalf of the Federalist Society, I want to thank both of our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email email@example.com. Thank you all for joining us. We are adjourned.
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