In one of the most significant antitrust cases in recent years, AT&T won the right to merge with Time Warner when Judge Richard Leon ruled in their favor yesterday.

AT&T and Time Warner announced their merger in October 2016. The merging parties touted the synergies that they could achieve by combining AT&T’s distributional power with Time Warner’s unique content.

After an extensive review of the merger, the U.S. Department of Justice (DOJ) filed a complaint to block the deal in the District Court of the District of Columbia on 20 November 2017. The trial began on 19 March 2018 and continued for the next six weeks.

In opposing the transaction, the DOJ primarily relied on the theory that AT&T would use Time Warner’s “must have” content as leverage to extract higher affiliate fees from rival distributors, thereby harming competition in the content distribution market. This is somewhat different from the traditional “foreclosure” analysis in vertical deals, which focuses on the extent to which the acquirers’ competitors cannot compete effectively without access to the target’s product. The DOJ also argued that AT&T would act to deter new, virtual distributors by restricting their access to popular Time Warner content. Finally, the DOJ contended that the merged entity could restrict the use of HBO as a promotional tool by other distributors. This “vertical” theory of harm is not new, but the U.S. antitrust enforcement agencies had not challenged a merger on this theory in 40 years before this complaint was filed.

In rejecting the government’s theories of harm, Judge Leon found that the government ultimately “failed to meet its burden to establish that the proposed transaction is likely to lessen competition substantially.” Below are some key takeaways from the opinion.

1. Consumer harm is harder to prove for vertical mergers than it is for horizontal mergers.

When it challenges a horizontal merger, the government can rely on combined market share statistics to trigger a “presumption” that a transaction will “substantially lessen competition.” By contrast, there is no similar presumption that applies in a vertical merger challenge. Judge Leon noted that the government itself admitted that it was required to make a “fact-specific” showing that the proposed merger is “likely to be anticompetitive” in order to meet its burden under Section 7 of the Clayton Act. The AT&T case demonstrates how the economic complexities surrounding vertical deals can make it more difficult for the government to challenge vertical mergers—particularly when the government seeks to rely on theories of harm for which there is little precedent.

Judge Leon systematically analyzed the government’s evidence, including the underlying assumptions relied upon by the government’s economic expert in constructing the DOJ’s economic model. The judge was also dismissive of the DOJ’s reliance on past statements by AT&T and Time Warner in regulatory filings and in their ordinary course business documents, concluding that such statements were either only of “marginal” probative value or “speculative” in the case of competitor testimony relating to the merger’s future effects. Instead, Judge Leon placed greater stock in “real-world” studies based on data from past vertical transactions (including the Comcast/NBCU transaction in 2011) and testimony from industry executives about their past experiences participating in content negotiations.

2. Innovation and dynamic competition are important components of the competitive effects analysis.

Judge Leon devoted considerable attention to analyzing the changing media landscape, describing in detail various industry trends such as the “rise and innovation of over-the-top, vertically integrated video content services,” “declining [multichannel video programming distributor] subscriptions,” and the “shift toward targeted, digital advertising.” He specifically noted the numerous technological challenges AT&T and Time Warner would likely face if they do not merge as it becomes more difficult to capture the attention of consumers.

These developments directly informed Judge Leon’s substantive legal analysis, as he resolved that he could not “evaluate the Government's theories and predictions of harm . . . without factoring in the dramatic changes that are transforming how consumers view video content.” He positively referred to AT&T’s emphasis on the financial success of competing technologies in related markets, changes in consumer demand, and the need to play catch up in order to compete more effectively in a post-cable world. Similar narratives could be successful in future cases involving dynamic markets.

3. This outcome makes future DOJ merger enforcement more difficult, particularly in vertical cases.

The AT&T/Time Warner case has taken place in the context of a larger debate in antitrust law on the role of behavioral and structural remedies in addressing potential competitive harm from a vertical merger. Though the court did not wade directly into the remedy debate, Judge Leon positively cited the unilateral behavioral remedy adopted by the merging parties. Soon after the DOJ filed its complaint, Time Warner sent an irrevocable arbitration offer to over 1,000 video distributors to allay fears of heightened bargaining power. This remedy was modeled on the behavioral remedy in the Comcast/NBCU vertical deal from 2011, which was approved by the Federal Communications Commission, the DOJ, and Judge Leon. This strategy proved successful in the AT&T/Time Warner case, as it provided Judge Leon with a basis for assessing the merger’s potential competitive effects.

As a result of the court’s implicit approval of behavioral remedies, the DOJ now finds itself in a difficult place. DOJ officials have spent the past few months proclaiming the ineffectiveness of behavioral remedies, which has made the agency hesitant to use them in many vertical transactions. At the same time, standalone structural remedies may be overly broad in addressing competitive harm, as courts, as in the AT&T case, may be willing to look at past consent decrees the DOJ entered into as evidence that behavioral relief can address such concerns. Companies may look at this changing landscape and do what AT&T and Time Warner did: come up with unilateral remedies to strategically avoid the imposition of structural or external behavioral remedies altogether. Concurrent with the Court’s review of this vertical merger, the U.S. Federal Trade Commission just last week accepted a behavioral remedy as being sufficient to remedy potential vertical concerns in the Northrop Grumman acquisition of Orbital ATK. Therefore, despite the rhetoric from DOJ officials on the infirmities of behavioral remedies to address vertical concerns, we now have two decisions within a week that may demonstrate otherwise.

Because of the detailed and fact-specific nature of this opinion, it is unlikely that a reviewing court would disturb Judge Leon’s findings if the DOJ decides to seek an appeal on the merits. The outcome of this case will undoubtedly continue to affect future vertical transactions within this industry and beyond.