AT&T Arbitration Offer Singled Out Ahead of Merger Verdict

The AT&T logo is positioned above one of its retail stores in New York in this Oct. 24, 2016, file photo. (AP Photo/Mark Lennihan, File)

WASHINGTON (CN) – With the fate of AT&T’s $85 billion acquisition of Time Warner in the hands of one federal judge, antitrust experts say the company’s arbitration offer could shape the outcome of the case.

AT&T has promised to enter into “baseball-style” arbitration should disputes arise over pricing for popular Turner Networks like CNN, TNT and TBS during carriage negotiations with distributors. AT&T proposed the offer, which will last for seven years, after the government sued on Nov. 20 to block the merger.

Turner, a division of Time Warner, would be barred as condition of the offer from blacking out its networks during arbitration.

Carl Shapiro (Photo via University of California, Berkeley)

The government has built its case against the transaction on economic analysis from economist Carl Shapiro, a professor at the University of California, Berkeley, who determined the merger could cost consumers up to $571 million by 2021.

According to the government’s theory, AT&T, which owns DirecTV, would have increased leverage to extract more onerous terms – including higher prices – from other pay-TV distributors by threatening to withhold popular Turner networks like CNN, TNT and TBS.

But AT&T has claimed over the course of six weeks of trial that the arbitration offer should alleviate the government’s anti-competitive concerns about the merger.

With no jury seated for the case, U.S. District Judge Richard Leon, a George W. Bush appointee, has a few options to resolve the case. He could determine the government’s evidence is too weak and approve the merger as is; he could block it; or he could deny it but require some type of remedy, like tweaking the arbitration offer.

Steven Salop of Georgetown University said the latter option would first require Leon to determine the merger is illegal.

“Then he could allow the merger to go forward with a remedy, which he would oversee,” said Salop, a professor of economics and law at Georgetown Law School.

Salop who once served as the associate director for special projects with the Bureau of Economics at the Federal Trade Commission, also suggested that Leon could tell AT&T to change its arbitration offer in a manner that would alleviate any antitrust violations.

But “that approach seems to be outside the normal judicial process,” Salop added.

George Hay (Photo via Cornell University)

Another economist, George Hay, who is the Charles Frank Reavis Sr. professor of law and economics at Cornell Law School, said Leon could in fact be contemplating whether the arbitration offer should be strengthened.

“The judge seemed attracted to the idea that some kind of arbitration agreement by AT&T might be sufficient to resolve any potential competitive issues but he seemed to suggest that AT&T’s current arbitration offer might not be good enough,” Hay said in an email. “The trick for him is to work out how to get a better arbitration agreement.”

Hay, who once served as the director of Economic Policy in the Justice Department’s Antitrust Division, said a consent decree could resolve the case but expressed doubt that would happen now.

“At this stage it seems unlikely that the government would accept such a decree,” he said.

Leon has prior experience with big antitrust cases that contain arbitration agreements, having prevailed over Comcast’s 51 percent purchase of NBCUniversal in 2011.

In that case, the Department of Justice approved the deal on the condition that Comcast sell online video distributor Hulu and offer customers stand-alone broadband service for $49.95 per month for three years — terms that Comcast accepted.

Clouds are reflected in the glass facade of the Time Warner building in New York on Oct. 24, 2016. (AP Photo/Mark Lennihan, File)

But the parties still had to appear before Leon because antitrust laws require judicial approval of merger settlements. Leon had expressed concerns that the deal would harm online video companies like Netflix, and finalized the deal only after ordering that data be tracked about whether online distributors invoked arbitration with the Justice Department over disputes with Comcast, and whether they pursued arbitration with the Federal Communications Commission.

During the AT&T antitrust trial, government attorneys highlighted what they said were flaws in AT&T’s arbitration offer. AT&T witness Michael Katz, a professor at the University of California, Berkeley, conceded during cross-examination that he hadn’t studied whether the arbitration offer could be legally enforced.

Any company that invokes AT&T’s arbitration offer would have to submit its offer to an arbiter who would then decide which offer would prevail based on which is closer to fair-market value. Executives from AT&T rivals testified at trial that fair-market value is not defined in the offer, and said it would be a risky exercise to potentially emerge from arbitration with a contract whose terms they don’t know.

Steven Salop (Photo via LinkedIn)

Professor Salop counted more flaws with AT&T’s proposal in an April 10 piece for Medium, noting that it would not include any new Time Warner channels, nor would it apply to HBO.

It would also enable AT&T to circumvent the arbitration process by allowing DirecTV to terminate contracts for something other than price disputes, he said.

Salop added in a phone interview that no party could conduct discovery until after it submitted an offer to the arbiter.

“Since Time Warner will have more information, that gives them a bargaining advantage that could lead to anticompetitive prices,” Salop said.

Stephen Calkins (Photo via Wayne State University)

Stephen Calkins, a law professor at Wayne State University, said that another option exists aside from Leon taking it upon himself to tweak the arbitration agreement: AT&T could itself offer a remedy.

“For instance, the judge could suggest that if AT&T committed to the court to honor the arbitration arrangement for 10 years (not just seven), he’d not enjoin the acquisition,” Calkins said in an email. “Then AT&T could make this commitment, and the judge could write an opinion saying that in light of the commitment there is no violation.”

In that scenario, AT&T would not be bound by a court order, but wouldn’t want to break its word, Calkins added.

Calkins, who served as the director of The Competition Authority of Ireland’s mergers division, said that Leon could also order a remedy, with AT&T’s approval, if he determines the deal is unlawful.

“With AT&T’s blessing he’d know that AT&T would not appeal, so he would not have to make an elaborate showing of a violation,” Calkins said.

Closing arguments in the case are scheduled for 11 a.m. Monday. Leon is expected to take several weeks to issue a written opinion.

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