Common Sense: AT&T-Time Warner Ruling Shows a Need to Reboot Antitrust Laws

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((Independent Recorder))@

The last time there was an antitrust ruling as important as the one handed down Tuesday by Judge Richard J. Leon, cellphones didn’t exist. There was no such thing as the internet. Personal computers were years away from mass adoption.

There had not been a federal court ruling on a vertical merger — a combination of a buyer and a supplier — since 1979. As a result, Judge Leon’s opinion, which cleared the way for the merger of AT&T and Time Warner, “will be enormously significant,” said Herbert Hovenkamp, an influential antitrust professor at the University of Pennsylvania. “To a significant extent, this court was writing on a clean slate.”

Judge Leon himself cited a “dearth” of modern judicial precedent.

For many antitrust experts, it was high time — no matter the outcome.

When it comes to vertical mergers like AT&T and Time Warner, “antitrust law is stuck in the 1980s,” said Tim Wu, a professor at Columbia Law School who has called for more vigorous antitrust enforcement against vertical mergers.

A chorus of antitrust experts has already been calling for a fundamental rethinking of the prevailing laissez-faire approach to vertical mergers, and Judge Leon’s ruling is likely to amplify their critique. (The government will probably appeal the decision. The case theoretically could reach the Supreme Court, which has not considered a vertical merger since 1972.)

In allowing the merger, Judge Leon in many ways took the path of least resistance. However persuasive its arguments, the Justice Department, which sued to prevent the deal, could not cite a single recent precedent for blocking it.

The last time the government brought such a case was in 1979. The Federal Trade Commission challenged the merger of Fruehauf, then the country’s largest manufacturer of truck trailers, and Kelsey-Hayes, which made truck components like heavy-duty wheels and antiskid brakes. The government lost.

Credit for the lack of such cases goes largely to Robert H. Bork.

Mr. Bork is best known as the solicitor general who fired the Watergate special prosecutor Archibald Cox and as a doomed Supreme Court nominee, not as an antitrust trailblazer.

But in 1978, a year before the Fruehauf case, Mr. Bork, at the time a Yale law professor, published “The Antitrust Paradox.” The book argued that the main purpose of antitrust law was to protect consumers by encouraging economic efficiencies and that authorities, therefore, should not focus on blocking vertical deals. The argument had a profound and immediate impact on antitrust analysis and has been cited by numerous courts, including the Supreme Court.

The Clayton Antitrust Act, which dates to 1914, bans mergers that may “substantially lessen” competition or “tend to create a monopoly.” It makes no distinction between vertical mergers and horizontal ones, in which a company buys a rival, thereby reducing the number of competitors in an industry. But in large part thanks to Mr. Bork’s analysis, horizontal mergers continue to receive intense scrutiny from the federal government, while most vertical mergers go forward, albeit often with conditions.

From the publication of “The Antitrust Paradox” through 2016, the government has challenged only 52 of the thousands of vertical mergers, and many of those challenges were focused on horizontal aspects of the deals. None of those cases went to trial. Most were resolved through consent decrees, including Comcast’s 2009 bid for NBCUniversal, which went forward after Comcast and the government agreed to a long list of restrictions on the combined company’s behavior.

The Justice Department last rewrote its vertical merger guidelines in 1984. (The horizontal guidelines have been revised three times since then.) The department largely embraced Mr. Bork’s logic.

But over the ensuing decades, more antitrust experts have questioned Mr. Bork’s laissez-faire approach to vertical merger enforcement, especially in cases involving media and intellectual property.

The most immediate impacts of the ruling on Tuesday are the removal of an obstacle to a megamerger and the likely bursting of a dam of mergers that were waiting the decision.

But the most important aspect of Judge Leon’s opinion is that it essentially embraces the Bork approach, which rested on a few premises: that markets are inherently competitive; that a firm’s dominance in one market cannot be leveraged into another; and that market success is a result of maximizing consumer welfare, not anti-competitive behavior. The theory is that vertical mergers produce efficiencies that can be passed on to consumers in the form of lower prices, higher quality or both.

Not surprisingly, AT&T argued in court that it had no incentive to withhold Time Warner’s programming from other distributors, that consumers would derive many benefits from the merger and that the combined companies would be in a better position to compete with upstarts like Amazon and Netflix, which already are vertically integrated.

This analysis may still hold true for mergers of essentially fungible components, like the truck beds and brakes at issue in the Fruehauf case.

But it’s not clear that logic holds in a case like AT&T’s merger with Time Warner. Not only does AT&T occupy a dominant position in a highly concentrated telecommunications market, but Time Warner product’s — like HBO’s “Game of Thrones” and CNN — aren’t at all fungible. If AT&T wants to withhold “must have” programming from a rival telecom company, or charge more for it, that company cannot readily replace it. That was the crux of the government’s case — that vertical mergers, at least in this context, can reduce competition and harm consumers.

“The big question was whether Judge Leon would accept where academics and economists have gone with this, or whether he’d stick with the old approach,” said Mr. Wu, the Columbia law professor, who is also a contributing opinion writer for The New York Times.

Judge Leon, who stressed that his decision should not be taken as a broad precedent, went with the old approach.

Although Mr. Bork’s fingerprints are all over the opinion, Judge Leon departed from Mr. Bork’s doctrine by acknowledging that vertical mergers “are not invariably innocuous.”

But the emergence of competitors like Netflix, Amazon and Hulu loomed large in his analysis. “I simply cannot evaluate the government’s theories,” he wrote in his opinion, without considering “the dramatic changes that are transforming how consumers are viewing video content.”

No matter the outcome if the decision is appealed, the Justice Department “is going to have to update the vertical merger guidelines,” said Steven C. Salop, professor of law and economics at Georgetown University Law Center.

Professor Salop outlined a possible new approach in an article last month in The Yale Law Journal. He proposed assessing the potential competitive harm from vertical mergers by using modern economic tools. His approach would examine the market power wielded by the parties to the merger and consider what remedies might be appropriate if the potential harm outweighed the benefits. Significantly, he would abandon the Bork presumption that vertical mergers benefit consumers.

Using that approach, the AT&T-Time Warner merger should have been blocked, he contends. Judge Leon’s opinion in many ways embraced his approach — and cited him in the opinion — while reaching the opposite result.

Mr. Hovenkamp, of the University of Pennsylvania, argues that it’s not wise or appropriate to view antitrust cases through the prism of a pre-internet, pre-broadband age. That’s especially true when the stakes include principles like consumers’ ability to engage in (or at least watch on TV) a free exchange of ideas.

“Antitrust is only a piece of this,” Mr. Hovenkamp said. “We’ll never roll back the clock,” he added, to an era when “the phone companies and most cable companies had nothing to do with media.”

“Now everyone thinks they have to be fully integrated to keep up,” he continued. “I feel uncomfortable with that both for antitrust and First Amendment reasons.”

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