The Department of Justice’s loss in its challenge to the merger of AT&T and Time Warner Inc., is probably a historic one, and definitely not just for the government. It is emblematic of both why American antitrust is largely dead as a meaningful policy and how it was killed by a conservative orthodoxy that overtook it during the past four decades.
The judge who wrote the 172-page opinion in the case, Richard J. Leon, is said to be a maverick, and a conservative libertarian dissident given to strong stances against government. That may be why he is reversed more often than any other judge in his district, at a rate almost twice as high as his district average. He is also apparently a bit of an odd fellow. At one point in the opinion, for example, and for no evident reason whatsoever, he quoted lyrics by “Nobel laureate Bob Dylan.” Another thing he did—as a personal trademark, apparently—was to pepper his many gratuitous little insults and stabs at humor with exclamation points. For example, he paraphrased one of the government’s arguments, and reacted to it by saying: “Please!”
But was the opinion a good one in its substance?
I say no! With exclamation points! It may be among the worst, most frustratingly awful antitrust opinions I have ever read!
Allowing AT&T and Time Warner Inc. to merge is a bad outcome not just for cable and content consumers but for the media and for antitrust enforcement generally. Our merger law is arguably the most important piece of our antitrust policy, because it is the only tool we have to stop concentration before it starts. After markets get concentrated, it can be very hard for the government to undo them retroactively if it turns out that concentration caused harm, or to otherwise police them effectively. But merger law is also uniquely difficult law to enforce precisely because it is prospective.
That an opinion this bad is more than good enough as far as our present law is concerned shows how broken the law is. Almost the entirety of it boils down to the nearly unreviewable fact-finding of one person in each case—the trial judge—subject to an extremely demanding standard of proof that consumers will be harmed that appears nowhere in the intent of Congress or any Supreme Court opinion. That we have wound up with a legal rule so regrettable and so different than Congress intended was the work of conservative lower-court judges, who took it on themselves during the 1980s and 1990s largely to kill the law, on their read of a factually idiosyncratic Supreme Court decision called United States v. General Dynamics. That they could do this—take General Dynamics and run with it so radically—reflects another very curious fact of merger law: The Supreme Court has not decided a single merger decision on the merits since 1975, and General Dynamics was one of the last among them. The lower courts have therefore done all this with no oversight from the Court at all.
The issues with Judge Leon’s opinion boil down to two problems: a fair number of the specific fact-findings in this behemoth saga don’t make sense, and on some key points they are self-evidently wrong; and they are relentlessly, obsessively, openly biased against the government.
As for the key factual errors, the most important was a repeated claim that the merged AT&T/Time Warner won’t be able to cause any harm to consumers or competition because it won’t completely cut competitors out from access to its content. Specifically, Leon found it hugely significant—emphasizing the fact dozens of times—that long-term “blackouts” in video distribution negotiations have been rare and almost always short-term.
This closely resembles an error so well known in antitrust that it has its own name—it is the “Cellophane fallacy.” Specifically, the courts recognized pretty early that you can’t infer from a defendant’s present inability to raise its prices any higher that it doesn’t have anticompetitive power. It might just be already charging the highest prices its market power will permit. Effectively the same is true here. The fact that AT&T/Time Warner won’t completely refuse to give out Game of Thrones emphatically doesn’t mean it can’t do harm.
In a bit more detail, Leon totally rejected the government’s main theory of injury, the “leverage” or “bargaining” theory. The idea of that theory is simple. The claim is that once a firm integrates, it may be able to raise the price of its own product profitably, because the business it loses will be more than compensated by gains to its new business, which has exclusive access to the product it’s always sold.
Saying that this can’t be true because actual, literal blackout remains unlikely is like saying that because nuclear weapons won’t be used they are irrelevant. It’s also like saying that because blackout is unlikely, a distributor can just pick whatever price it wants to pay for some content and then say, “Take it or leave it buddy. You’ve never blacked me out before, and you won’t now.”
But that is absurd. The government’s theory was not a model of the likelihood of actual blackout. It was a model of the psychological experience of bilateral negotiators with market power, who need something from one another and each can gauge that the other has some ultimate take-it-or-leave-it price. The government’s model claimed that the merger will move those ultimate prices, in ways that harm consumers. It could be wrong, but if it’s right then the merger is illegal. Leon fundamentally did not understand it, and his basis for rejecting it was irrelevant.
As for Leon’s anti-government bias, it was omnipresent, mostly in the extremely demanding standard by which he threw out perhaps hundreds of specific pieces of government evidence, while meanwhile accepting almost everything the defendants claimed, very frequently on nothing more than the fact that their own top executives came to court and told him so. There are dozens of examples, but maybe the single most galling was in his rejection of the government’s collusion theory. The government said the merger would make it easier for AT&T–Time Warner to collude with other big cable firms on prices, or to gang up against disruptive upstarts. The reason he said that wouldn’t happen, despite there being a long history within vertical merger theory that integration can make collusion easier, was that the man who will be CEO of AT&T’s video operation told him he wouldn’t do it. Let me say that again: A federal judge held that a big, vertically integrated oligopolist won’t conspire with a horizontal competitor because its CEO gave Scout’s honor.
Finally, and most importantly, there is a fundamental, implicit policy problem running throughout all of the reasoning in this opinion. It is hardly unique to Leon; it infuses all of modern merger law, and it begins with his appellate superiors going back to General Dynamics.
The theme was Leon’s view—based mainly on uncritical acceptance of the defendant’s own self-serving testimony—that the parties need this merger to compete with firms like Amazon Prime and Netflix. Specifically it needs the deal because those firms have already integrated internally, combining in-house video production with their own distribution. By extension, Leon found generally that all the relevant markets are dynamic and hotly competitive, and firms without this integration advantage must merge or die.
But that just raises a huge question that Leon never once asks: If Netflix and Amazon Prime could do that—build up premiere, internal content-production operations, organically—why can’t AT&T do the same thing? And because it’s obviously not impossible that they could, why shouldn’t the law require them to do it?
Our law already explicitly disfavors growth by acquisition, because of standards that Congress adopted in our merger law but lower courts read out of it. And there is a very good reason for it: Internal growth is actually competition. It’s the offering of a new thing to consumers, rather than just getting control over a thing they’ve already got.
I emphatically hope that the government appeals, but appeal will be an uphill battle. The opinion is mainly a “fact” opinion, as lawyers say, and as one federal judge famously said, appellate courts only reverse fact-findings so bad as to “strike [one] as wrong with the force of a five-week-old, unrefrigerated dead fish.” There are a few legal peculiarities in the opinion, particularly the emphasis on purported efficiency gains in crafting the basic legal standard for vertical mergers. Hopefully, the appellate court thinks this smells as much like dead fish as I do, or that one of those legal issues is sufficient to call for reversal, and applies the correct exclamation to Leon’s opinion: Please!
