The Justice Department urged a federal appeals court Thursday to reconsider AT&T Inc.'s $85-billion acquisition of Time Warner Inc., arguing that the judge who approved the deal in June misunderstood fundamental economic principles and ignored how AT&T could unfairly extract higher fees from rivals by threatening to black out popular TV channels.
The Justice Department delivered oral arguments in its appeal of a lower court decision that gave the agency a major defeat in one of the most closely followed antitrust trials in decades. The blockbuster case — the first time since the Nixon era that the government has gone to court to challenge this type of deal — was seen as a landmark legal dispute because it signaled how regulators and courts might treat mergers between companies that don't compete with each other.
"A threat of blackout will allow Time Warner to increase the prices for its rivals," said government attorney Michael Murray.
But the three-judge appeals panel was quick to push back on the government's case, questioning how the lower court failed to apply the law properly in siding with AT&T.
"You have to show that there was plain error in the district court," Judge David Sentelle told the government's side. "You have to show that there is going to be a harm to competition."
Sentelle added that the government had to present evidence beyond economic theories to show that the merger would substantially lessen competition. Judge Judith Rogers also expressed skepticism as she prodded the government's case.
AT&T attorney Peter Keisler said the company is prevented from blacking out programs because it has pledged to let distributors pursue arbitration if a disagreement arises. He argued that this commitment undercut the government's case. AT&T "has relinquished the source of leverage that the government identified, in its view, as the principal way to extract higher prices," he said.
Rogers and Judge Robert Wilkins both asked AT&T to clarify whether it intends to stand by its commitment to not pursue blackouts in a programming dispute. "We are absolutely committed to this," Keisler said.
Justice Department spokesman Jeremy Edwards said in a statement: "The Department of Justice appreciates the court's careful consideration of this important case and will await the court's decision."
AT&T did not immediately respond to requests for comment.
Antitrust officials insist that AT&T's tie-up with Time Warner is anticompetitive because the newly merged firm has the ability and incentive to raise costs for rivals and stifle competitors, ultimately raising prices and narrowing choices for consumers. But Judge Richard Leon, who ruled in favor of AT&T this summer, said the Justice Department failed to show that the deal would harm consumers or market competition.
Through buying Time Warner, AT&T acquired popular media brands, including CNN and HBO. In the appeal, AT&T argued that the deal would lead to lower prices for consumers and would enable the company to create mobile video products tailored to customers. AT&T also said the merged company could build a competitive digital advertising platform to challenge the dominance of ad giants such as Google and Facebook.
As corporations seek to expand by absorbing companies from different points on the supply chain — a process known as vertical integration — the outcome of the AT&T-Time Warner appeal could serve as either a massive green light or a prompt to rethink business plans. For antitrust regulators and the court system, a ruling in favor of AT&T may hamper efforts to more aggressively apply antitrust laws to mergers.
"Antitrust enforcement has been increasingly skeptical of vertical mergers, especially in the technology area," said Andrew Schwartzman, a lecturer in public interest law at Georgetown University. "If the government loses this case, it will set a precedent that will make it very hard for future enforcement for vertical mergers."
Critics of the AT&T deal say consumers have much to lose if the merger proceeds. "This is a very important case because the bottom line for consumers is: You may end up paying higher prices for some of your favorite TV and video content without having the benefit of better and lower-cost choices from competitors in the online video marketplace," said Gene Kimmelman, the president of Public Knowledge, a consumer advocacy organization that opposes the merger.