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3 critical points that sum up the suit against AT&T/Time Warner deal

How Trump's remarks against AT&T/Time Warner merger could affect the case, and other important points, writes Prof. Harry First.

Kena Betancur | AFP | Getty Images

Pedestrians walk past the Time Warner Center in New York on October 23, 2016.

There are three important points to make about the complaint that the Justice Department has filed under Section 7 of the Clayton Act to block the AT&T/Time Warner merger: (1) The main theory of the case is relatively straightforward and plausible. (2) Bringing this case into court for litigation may be unusual but is not surprising; and (3) The concern about political influence in making this decision is an unfortunate cost of candidate and President Trump's disregard for the institutions of justice.

(1) The theory of the case: According to the complaint, Time Warner commands a high price for Turner's very popular networks (TNT, TBS, CNN, and the Cartoon Network). AT&T owns Direct TV, a satellite service, that competes with cable and fiber optic systems in various geographic markets all around the country. The merger will allow AT&T/Time Warner to negotiate for even higher prices for Turner content than Time Warner could before the merger because the merged firm can credibly commit to walking away from a deal if, say, cable company A balks at the price.

Why would it be credible to give up the licensing revenue from company A now, when it wasn't credible before? The theory is that if the merged firm did stop providing Turner programs to company A, the merged firm could convince some of A's customers, who will no longer get Turner networks, to switch to DirectTV, which would be carrying Turner, and that the gain from those switches would be large enough to make the threat to walk away from the table credible.

What's bad about that behavior? The complaint alleges that company A would give in to the threat, pay AT&T/Time Warner more money for Turner programming, and pass those higher costs (or at least most of them) along to its customers. This means that consumers would be injured. Even if that didn't happen, these competitors of DirectTV would be less able to compete with the merged company because their costs would be higher than DirectTV's. This, too, would be anticompetitive.

Are there possible problems with the government's theories? Of course. A major question is how plausible its economists' estimates are on key parts of its theory: how many of company A's customers would drop their cable subscription without Turner's networks, how many would switch to DirectTV (rather than just cutting the cord), and how profitable would the new customers be.

And would the gain in DirectTV's profits be greater than the loss in licensing revenue that AT&T would suffer if it walked away from the bargaining table without a deal. After all, a credible threat must be a profitable threat. Finally, there is the question whether the price increases that cable companies will end up paying will really amount to "hundreds of millions of dollars," as the government alleges, and how much of that will be passed on to consumers.

But if the government can prove its allegations, then it will have met the standard required in the Clayton Act: proof that the merger's effect "may be substantially to lessen competition."

(2) How unusual is this case? Vertical mergers have been subject to the Clayton Act since it was passed in 1914, but the first such case wasn't brought until 1949, involving DuPont's acquisition of GM stock. There was a fair amount of litigation against vertical mergers in the 1960s and 1970s, by the government and by private parties, but litigation declined sharply in 1980s.

More recently, enforcement against vertical mergers has returned, but there has been no litigation in court. Cases have been settled with consent decrees, decrees that many criticized as too weak. So it is not really surprising to see this case being brought. What is more surprising is that the government was unwilling to take a weak settlement, for example, a promise by AT&T not to engage in such negotiating tactics, a promise which would have been difficult to enforce.

(3) The politics of this case have been unfortunate. Political values are important in antitrust, but political pressure on government enforcers undercuts their ability to make professional judgments about enforcement policy. Had this exact case been brought by a Clinton Administration, commentators would have been applauding antitrust enforcers for finally getting serious about vertical mergers and "just saying no."

Instead, because of candidate Trump's remarks last October that the merger is "a deal we will not approve in my administration," coupled with his hostility toward Turner-owned CNN, we look at the government enforcers with suspicion. Perhaps that suspicion is warranted, perhaps not. But we are now seeing the cost we pay when our institutions of justice are undermined at the highest levels.

Commentary by Harry First, the Charles L. Denison Professor of Law at New York University School of Law and Co-Director of the law school's Competition, Innovation, and Information Law Program.

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