Thanks to the Court, Justice Done in AT&T/Time Warner Merger Challenge

DOJOur nation’s federal prosecutors recommend themselves as dispassionate champions of the law. As then-Attorney General Robert Jackson put it: “Although the government technically loses a case, it has really won if justice has been done.” The government, he said, should seek “truth and not victims.” The United States’ top lawyers repeat these sentiments often.

For the Justice Department’s Antitrust Division, seeking “truth and not victims” means prosecuting cases that benefit consumers. And it means winning with strong economic analysis rather than with legalistic maneuvering or chicanery.

By this measure the government’s lawsuit to block the merger of AT&T and Time Warner was a shambles.

The Antitrust Division must have known, during the year it investigated (and thus delayed) the merger, that the grounds for blocking the deal were weak. Start with the nature of the firm. A company will seek to expand until coordinating new production internally costs more than coordinating it through market purchases. Some things are harder to purchase on the market than others. A key factor is bargaining cost, which rises as a transaction becomes more complex.

A good example of a complex transaction is a sale of the right to distribute a bundle of television programs over a course of years. Time Warner—which owns HBO, CNN, TNT, and TBS—creates television programs. AT&T—which owns DirecTV—distributes programs to viewers. If the two companies merge, they can rid themselves of the substantial cost of bargaining over the terms by which AT&T may distribute Time Warner’s programs.

A merger, AT&T claimed, will eliminate bargaining costs, the problem of double marginalization, and various other inefficiencies. AT&T predicted that the combined entity will save $1.5 billion a year. That prediction was supported by more than theory: AT&T beat a similar forecast it made before merging with DirecTV.

AT&T said the deal will benefit consumers not only through lower prices, but also through increased innovation. Using Time Warner’s programs and AT&T’s cellular network, the new entity will provide new forms of content to smartphone users. Such innovation is crucial to AT&T and Time Warner, which must compete with recent vertically integrated market entrants such as Netflix and Amazon Prime.

The evidence showed, in short, that blocking the merger would harm consumers. The Antitrust Division sued anyway. Lacking strong economic analysis, it resorted to legalistic maneuvering and chicanery.

In an opinion issued last week, U.S. District Judge Richard Leon laid bare the government’s every unbecoming ploy:

  • In its complaint and pre-trial briefs, the government played up AT&T’s internal admissions that the merger would harm competition. But “as became clear at trial,” Judge Leon wrote, the government was relying on “snippets” of comments by “lower-level AT&T employees” unconnected to the merger. The government repeatedly “overemphasized the importance and relevance” of these excerpts.
  • In both a court filing and a press release, the government highlighted a Time Warner executive’s claim that a certain distributer would be “s***” without Time Warner programs. Judge Leon chastised the government for “rummaging through business records for tidbits that will sound impressive” but that say nothing about the merit of the government’s lawsuit.
  • The government claimed that Time Warner once threatened to withhold its content from a distributer because of a dispute over “a single penny” in the price of “one channel.” Actually, however, Time Warner had resisted a distributer’s bid to increase its rate by only a penny. The government’s description of Time Warner’s behavior was, Judge Leon noted, “misleading at best.”
  • The government’s main expert report set forth a statistically insignificant estimate of consumer harm. To get even that far, moreover, the report used “significantly flawed” subscriber-loss estimates, “biased and misleading” survey data, “outdated” AT&T revenue data, and various other faulty figures and assumptions.
  • The government contended that Netflix and Amazon Prime are not competitors of cable providers such as DirecTV. In response Judge Leon admonished the government for making claims that “defy reality.”
  • The government raised, as an independent ground for blocking the merger, the possibility that the merged entity will withhold HBO from competing distributers. “This,” Judge Leon wrote, was “a gossamer thin claim.” He rebuked the government for trying to block the merger with a baseless tack-on argument. HBO, he observed, is “in the fight of its life” against the likes of Netflix. Withholding HBO from competing distributers would simply spur (or hasten) its demise.
  • The government argued in a post-trial brief that the merger should be blocked because AT&T had noted, in some old FCC filings, that mergers in the media industry might harm competition. Judge Leon called this “last-minute” argument “manifestly unfair” to AT&T and Time Warner. He declined to substitute general statements in “decades-old regulatory filings” for the evidence showing that this specific merger will benefit consumers.

This list does not exhaust the instances in which the government bent the rules, twisted the facts, or pursued a line of argument that should have been beneath it.

Judge Leon’s opinion is an occasion for blushes at the Justice Department. As any public-choice economist will tell you, however, the Antitrust Division’s dismal performance should not surprise anyone. Joining the government does not miraculously transform ambitious attorneys into saints. Like other lawyers, federal prosecutors will sometimes use whatever tactic they think they can get away with. They will sometimes betray the government’s high-flown rhetoric about itself.

Also published by Forbes.com on WLF’s contributor page.

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