Antitrust Challenge to AT&T-Time Warner Merger Circles Drain

WASHINGTON (CN) – The Justice Department faced an uphill battle Thursday in its bid to have the D.C. Circuit block the $85 billion merger of AT&T and Time Warner after a federal judge approved it unconditionally.

As the 90-minute hearing got underway this morning, U.S. Circuit Judge David Sentelle was the first to zero in on what would be a recurring theme: concerns with the government’s expert witness, Carl Shapiro, an economist at the University of California, Berkeley.

This past spring during the case’s six-week trial, Shapiro testified that the merger would cost American television consumers millions of dollars because AT&T, which owns DirecTV, would have increased leverage over rivals during carriage negotiations for popular Time Warner content, such as Turner Broadcasting System networks like CNN, TBS and TNT.

Shapiro connected his analysis to Nobel Prize winner John Nash’s economic theory of bargaining, warning that the possibility of a blackout on Turner channels would draw customers to AT&T.

But Judge Sentelle noted at the hearing today that Shapiro’s theoretical model is not necessarily applicable in the real world. U.S. Circuit Judge Judith noted that this is especially the case when blackouts are not a common result in real-world negotiations.

“It’s not enough to just cite the principal,” Rogers said. “You have to show that it fits.”

Justice Department attorney Michael Murray insisted that the exact quantifications of how prices may increase for consumers was not the burden the government needed to prove. According to the government’s appellate brief, it is enough to establish “reasonable probability” that competition could diminish.

Sentelle was especially vocal, however, in his questioning of the government’s attorney. Labeling Shapiro’s theory a “method of analysis … not a conclusion,” the judge asked whether the government had truly met its burden of proof without a quantifiable set of numbers run through Shapiro’s model to prove prices would rise.

Murray meanwhile drew jitters from the crowd with his reply: “I respectfully disagree.”

Though the lawyer said Shapiro’s conclusions of the mere risk of increased leverage should be enough to meet the government’s burden of proof, the appellate judges also pushed back on Shapiro’s hesitancy in accounting for the role of post-merger arbitration in his models.

Judge Robert Wilkins asked how the District Court could possibly ignore arbitration agreements as a factor when questioning the reliability of Shapiro’s theory.

“This arbitration is really too little too late,” Murray said, before Wilkins interjected.

Wilkins said: “It seems that the District Court relies on those arbitrations to credit the other side’s experts, and those experts killed your case.”

Prodded about whether the government should have taken a more serious look at arbitrations, Murray pointed to other suits in which arbitration was on the table, but also had the force of the Federal Communications Commission behind it for enforcement, which is not the case for this merger.

The court today also heard arguments from Eric Citron, an attorney representing antitrust scholars who submitted a friend of the court brief in the case.

Disputing the relevance of Shapiro’s model, Citron argued that Nash’s theory is based generally on how two parties reach an agreement. To say it proves guaranteed blackouts with increased leverage is a stretch, the lawyer added.

Citron said increased bargaining chips isn’t a special aspect to this case, it’s just a standard principal. It is not the “stakes” the government needs to be concerned with, Citron said, but the “odds.”

Andrew Pincus, an attorney for economists interested in the case, echoed the thought with a tasty metaphor. The government, he said, is trying to bake the Nash theory and its general assumptions about how things might work in the real world into a “cake.”

But Pincus said the theory by itself isn’t enough.

Peter Keisler, an attorney for Time Warner and AT&T, was a bit more impassioned meanwhile in his argument about the improbability of blackouts.

Citing the “complete ignorance” of the government’s expert witness, Keisler argued that the arbitration agreements mean that Turner has even less leverage, making blackouts a nonissue.

Rogers pressed Keisler on whether arbitration, if AT&T sticks to it, nullifies the government’s argument?

Yes was Keisler’s answer, with the lawyer adding that AT&T would stick by its commitment to reach compromises to avoid blackouts after the merger.

“We’ll take you at your word,” Rogers told Keisler, prompting more laughter from the sea of black and blue suits in the crowd.

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