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Feds Take AT&T-Time Warner Merger Fight to DC Circuit

The Justice Department argued to the D.C. Circuit Monday that the judge who approved the $85 billion AT&T-Time Warner merger back in June relied on faulty logic.

WASHINGTON (CN) - The Justice Department argued to the D.C. Circuit Monday that the judge who approved the $85 billion AT&T-Time Warner merger back in June relied on faulty logic.

A brief filed by Mary Wimberly, an appellate attorney with the Justice Department’s antitrust division, rehashes arguments the government made during the six-week antitrust trial, including that the merger would harm competition by giving AT&T – which owns DirecTV – greater leverage in negotiations with rival distributors.

"The district court held otherwise, 7\ but only by erroneously ignoring fundamental principles of economics and common sense," the 86-page brief says. "These errors distorted its view of the evidence and rendered its factual findings clearly erroneous."

In his lengthy June 12 opinion, U.S. District Judge Richard Leon rejected the government's arguments, finding the government's key expert witness - economist Carl Shapiro - had failed to consider real-world conditions or pricing data when analyzing the merger's impact.

The government had argued that prices could rise for consumers by as much as $571 million by 2021, since AT&T would be emboldened to withhold popular Turner Broadcasting networks - like TNT, TBS and CNN - to extract higher prices from distributors during carriage negotiations.

According to the government, those prices would ultimately fall to consumers. On the high end, Shapiro said that could amount to a 45 cent increase on monthly cable bills.

But Leon didn’t buy the government's theory that AT&T would go through with a blackout of Turner networks, noting when he delivered his opinion from the bench on June 12 that the theory of increased leverage lacked precedent. Leon also said the evidence did not support Shapiro's inputs, and that he failed to consider existing contracts with distributors that would bar blackouts.

The government on Monday slammed Leon’s rationale.

"The reasons the district court gave for finding zero increase in leverage are implausible and internally inconsistent," the government's appeal brief argues.

According to the brief, Leon also refused to allow prosecutors to submit important evidence, including AT&T's analyses of the possible competitive effects of its vertical merger with Time Warner, and FCC filings from AT&T and DirectTV that explained the potential harm to competition from vertical transactions.

The brief says Leon "strictly limited expert economic testimony" with narrow time constraints, and even refused to close the courtroom so prosecutors could get testimony about confidential business information from witnesses.

The brief also accuses Leon of favoring defense witnesses and evidence over the government's.

"The district court discounted much of the government's evidence from the industry as colored by self-interest," the brief says. "It voiced 'fundamental concerns' that the testimony of third-party distributors concerning the effects of the merger 'reflects self-interest rather than genuine concerns about harm to competition.'"

During trial, executives from AT&T's competitors - including Dish Network, Charter Communications and Cable One - all testified that the merger could harm their businesses.

The court nonetheless accepted testimony from AT&T and Time Warner executives without attempting to reconcile that inconsistency, the government's brief says.

During trial, AT&T and Time Warner argued that the merger would lower prices for consumers, and said the transaction was essential for the companies to withstand a rapidly changing entertainment industry that would otherwise leave them behind.

According to the government, the court incorrectly concluded that the two companies would not attempt to maximize profits during carriage negotiations.

"Corporate-wide profit maximization is an established principle of corporate and antitrust law, but the court rejected it on the basis of self-serving testimony from defendants’ executives," the brief says. "At the same time, however, the court embraced this same principle in accepting that the merger would result in cost savings through coordination between Time Warner and DirecTV."

The government has asked the D.C. Circuit to vacate the merger's approval and remand the case to Leon for further proceedings.

Categories / Appeals, Business, Entertainment, Media, National, Securities

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