As previously reported in the Blog, Judge Sullivan in the United States District Court for the District of Columbia, surprised many antitrust lawyers by granting applications from a number of competitors and consumer groups and commencing extensive proceedings under the amended Tunney Act to review the consent decree reflecting Department of Justice approval of the merger between SBC and AT&T. On March 29, 2007 Judge Sullivan finally granted the Antitrust Division's motion to approve the consent decrees between the United States and SBC and AT&T, and between the United States and MCI and Verizon. SBC and Verizon can now sell off the assets of AT&T and MCI, respectively, listed in the consent decrees, ending the limbo in which the assets had been since December, 2005.
In December 2005, the Antitrust Division announced that it had reached an agreement with SBC and Verizon, resolving the anticompetitive issues it had found would arise if SBC were permitted to purchase AT&T and if Verizon were allowed to purchase MCI. Pursuant to its standard practices, the Antitrust Division filed a complaint and posted the competitive impact statement on its website, so that the public could comment upon it. Although normally courts approve such proposed final judgments shortly after they are filed, and often without any formal proceedings, Judge Sullivan responded to intervenors and chose to consider the consent decree much more closely, leaving the divestitures in limbo.
Interveners, including industry groups such as ACTel and CompTel, and state authorities, such as the New York Attorney General's office, argued that the Antitrust Division had erred in only requiring divestitures in so few buildings and that the proposed divestitures in those buildings were not sufficient, because customers would gravitate towards established entities and none of the proposed purchasers could match the size and services of the companies that were being purchased. In addition, the interveners argued that the Antitrust Division had misapplied its own antitrust guidelines in determining the extent of the competitive harm, as it had not followed its traditional concentration analysis and focused on only two of the five factors to calculate the likelihood of entry. In three hearings, two in July 2006 and one in November 2006, Judge Sullivan asked the Antitrust Division to justify its decision to have the merging parties only divest certain local private lines connecting a few hundred buildings when the merger potentially affected hundreds of cities throughout the country. In addition, in what some characterized as an unprecedented decision, Judge Sullivan required the Division to produce a large amount of the evidence and the expert reports on which it had relied when reviewing the merger.
No doubt to the Division's enormous relief, Judge Sullivan first held that his review of the proposed remedy was limited to the problems listed in the complaint, citing the D.C. Court of Appeals decision in United States v. Microsoft, 56 F.3d 1448 (D.C. Cir. 1995). Although the amici argued that the 2004 amendments to the Tunney Act had overturned the Microsoft decision and had expanded the scope of the court's review, Judge Sullivan held that a "close reading of the law demonstrates that the 2004 amendments effected minimal changes, and that this Court’s scope of review remains sharply proscribed by precedent and the nature of Tunney Act proceedings."
The Court did hold, however, that the 2004 Amendments had overturned Massachusetts School of Law at Andover, Inc. v. United States, 118 F.3d 776 (D.C. Cir. 1997), which had cited Microsoft for the proposition that the correct standard of review for the proposed remedies in the complaint was whether the proposed remedy was a "mockery of justice." The Court, however, found that Microsoft stood only for the proposition that a court may look beyond the complaint for unaddressed anticompetitive issues if approving the judgment without looking at those issues would make a "mockery of justice." "[I]t is only if the complaint underlying the consent decree is drafted so narrowly as to make a mockery of judicial power can the district court reject a consent decree due to matters outside the scope of the underlying complaint. In all other cases, a court cannot do so." Outside of a "rare case", "the Court cannot reject the proposed settlements merely because the government failed to address antitrust issues not raised in its complaints. Further, the Court must accord deference to the government’s predictions about the efficacy of its remedies, and may not require that the remedies perfectly match the alleged violations because this may only reflect underlying weakness in the government’s case or concessions made during negotiation."
The Court then held that the correct standard for evaluating the proposed remedies for the harms alleged in the complaint was the "public interest" standard, but that prior decisions had not provided any guidance on how courts were to apply that standard. "The Microsoft court was aware that Congress sought to foreclose 'judicial rubber-stamping,' and require an 'independent' determination of whether a proposed settlement is in the public interest. The great difficulty with the 'public interest' standard was that there was 'virtually no useful precedent.' At the very least, no appellate court had ever approved a district court’s rejection of a settlement as outside the public interest. This assessment appears just as true today as it did in 1995."
The Court also rejected the amici's arguments that the Court should evaluate the proposed remedy under the same standards as applied to a remedy imposed after a full trial. The limitations of the government's proposed remedy "'may well reflect an underlying weakness in the government’s case, and for the district judge to assume that the allegations in the complaint have been formally made out is quite unwarranted.'" Instead, the government needed only to show that its proposed remedy was reasonable, rather than capable of fully restoring competition to the pre-merger levels. "[T]he question is not whether a proposed remedy is the best one, but only whether it is 'within the reaches of the public interest.' . . . [T]he relevant inquiry is whether there is a factual foundation for the government’s decisions such that its conclusions regarding the proposed settlements are reasonable."
The Court looked over the government's explanation of its procedures and the proposed remedy, and found that the government had met the public interest standard. The Court held that the government had not erred by not relying upon the Herfindahl-Hirschman Index as the primary indicator of concentration, as the government provided a reasonable explanation for its decision to permit higher levels of concentration.
The Court next held that the government had carried its burden on the two more substantive issues: that customers generally preferred carriers who could offer bundled services over those that only offered voice services, and that customers often trusted more well-known carriers than they did new entrants. Although the Court held that the amici had raised valid issues, it held that the government had satisfied its burden of proving that the proposed remedies were reasonable. "While these shortcomings could reduce the effectiveness of the proposed settlements, they do not completely undermine the settlements. Even accounting for these issues, the government has presented a reasonable basis for concluding that the proposed settlements will replace much of the competition lost to the mergers, if perhaps not all of it. Therefore, the Court finds that the proposed settlements are reasonably adequate, and thus within the reaches of the public interest."
Finally, the Court held that the government had adequately supported its decision to judge the likelihood of a competing carrier entering a building based on only customer demand and distance from existing lines, even though the government's formula had not looked at the other factors. "While the government’s entry algorithm does not account for all relevant factors, it is a reasonable, practical prediction of likely entry. Quite reasonably, the algorithm is based on the two most important and easily measured factors — customer demand, a proxy for potential revenue, and distance, a proxy for overall cost." The court then granted the government's motion.
Although the hearings and factual inquiry undoubtedly generated consternation at the Antitrust Division, the final decision should prove satisfactory on balance. Judge Sullivan reiterates that the "public interest" standard is a fairly deferential standard of review, as he describes the government's burden as providing a "reasonable basis" for a court to find that the proposed remedy is "reasonably adequate". In addition, the decision clarifies that Microsoft is still valid despite the 2004 amendments to the Tunney Act, and that a court cannot look beyond the complaint unless the limitations of the remedy make a "mockery of justice." Finally, the decision emphasizes that older decisions that had required a remedy to completely restore competition to pre-merger levels are not relevant for looking at the efficacy of the proposed remedy in a Tunney Act hearing. Under the decision, therefore, courts will continue to give fairly substantial deference to the Department of Justice. However, merging parties and the Division, while appreciative of the deferential standard, will hope that future courts will not require the same length of time prior to approving mergers.