Professional Documents
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ATT-TW Opinion
ATT-TW Opinion
No. 18-5214
v.
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the State of Alabama, Robert Tambling, Assistant Attorney
General, Christopher M. Carr, Attorney General, Office of the
Attorney General for the State of Georgia, Andrew A. Pinson,
Solicitor General, Andy Beshear, Attorney General, Office of
the Attorney General for the Commonwealth of Kentucky,
Sean D. Reyes, Attorney General, Office of the Attorney
General for the State of Utah, Tyler R. Green, Solicitor
General, Peter F. Kilmartin, Attorney General, Office of the
Attorney General for the State of Rhode Island, Michael W.
Field, Assistant Attorney General, Alan Wilson, Attorney
General, Office of the Attorney General for the State of South
Carolina, and James Emory Smith, Jr., Deputy Solicitor
General, were on the bipartisan brief for amici curiae the States
of Wisconsin, et al. in support of defendants-appellees.
5
I.
6
(D.C. Cir. 2017). But unlike horizontal mergers, the
government cannot use a short cut to establish a presumption
of anticompetitive effect through statistics about the change in
market concentration, because vertical mergers produce no
immediate change in the relevant market share. See Dept. of
Justice & Fed. Trade Comm’n, Non-Horizontal Merger
Guidelines § 4.0 (June 14, 1984) (“1984 Non-Horizontal
Merger Guidelines”). Instead, the government must make a
“fact-specific” showing that the proposed merger is “likely to
be anticompetitive.” Joint Statement on the Burden of Proof at
Trial at 3–4. Once the prima facie case is established, the
burden shifts to the defendant to present evidence that the
prima facie case “inaccurately predicts the relevant
transaction’s probable effect on future competition,” Anthem,
855 F.3d at 349 (quoting Baker Hughes, 908 F.2d at 991), or to
“sufficiently discredit” the evidence underlying the prima facie
case, id. Upon such rebuttal, “the burden of producing
additional evidence of anticompetitive effects shifts to the
government, and merges with the ultimate burden of
persuasion, which remains with the government at all times.”
Baker Hughes, 908 F.2d at 983.
7
over 1,100 local multichannel video distribution markets. Id.
at 197. The government did not rely on any particular market
for enjoining the proposed merger; one of its experts
aggregated the alleged harms in the local markets to derive a
total measure of nationwide economic harm. See Proposed
Findings of Fact of the United States 13 (May 8, 2018).
8
of corporate-wide profit maximization.” Appellant Br. 29, 37–
38. Further, the government contends that the district court
used internally inconsistent logic when evaluating industry
evidence and clearly erred in rejecting its expert’s quantitative
model of harm.
II.
A.
The video programming and distribution industry
traditionally operates in a three-stage chain of production.
Studios or networks create content. Then, programmers
package content into networks and license those networks to
video distributors. Finally, distributors sell bundles of
networks to subscribers. For example, a studio may create a
television show and sell it to Turner Broadcasting System
(“Turner Broadcasting”), a programmer, which would package
that television show into one of its networks, such as CNN or
TNT. Turner Broadcasting would then license its networks to
distributors, such as DirecTV or Comcast.
9
situation, known as a “blackout” or “going dark,” is generally
costly for both the programmer, which loses affiliate fee
revenues, and the distributor, which risks losing subscribers.
Therefore, blackouts rarely occur, and long-term blackouts are
especially rare. The evidence indicated, however, that
programmers and distributors often threaten blackouts as a
negotiating tactic, and both may perform “go dark” analyses to
estimate the potential impact of a blackout in preparation for
negotiations.
The evidence before the district court also showed that the
industry has been changing in recent years. Multichannel video
programming distributors (“MVPDs”) offer live television
content as well as libraries of licensed content “on demand” to
subscribers. So-called “traditional” MVPDs distribute
channels to subscribers on cable or by satellite. Recently,
“virtual” MVPDs have also emerged. They distribute live
videos and on-demand videos to subscribers over the internet
and compete with traditional MVPDs for subscribers. Virtual
MVPDs, such as DirecTV Now and YouTube TV, have been
gaining market share, the evidence showed, because they are
easy to use and low-cost, often because they offer subscribers
smaller packages of channels, known as “skinny bundles.”
10
Leading SVODs are vertically integrated, which means
they create content and also distribute it. Traditional MVPDs
typically are not vertically integrated with programmers. In
2009, however, Comcast Corporation (“Comcast”) (a
distributor and the largest cable company in the United States)
announced a $30 billion merger with NBC Universal, Inc.
(“NBCU”) (a content creator and programmer), whereby it
would control popular video programming that included the
NBC broadcast network and the cable networks of NBC
Universal, Inc. The government sued to permanently enjoin
the merger under Section 7, alleging that Comcast’s “majority
control of highly valued video programming . . . would prevent
rival video-distribution companies from competing against the
post-merger entity.” United States v. Comcast, 808 F. Supp.
2d 145, 147 (D.D.C. 2011). The district court, with the
defendants’ agreement and at the government’s urging,
allowed the merger to proceed subject to certain remedies for
the alleged anticompetitive conduct post-merger, including
remedies ordered in a related proceeding before the Federal
Communications Commission (“FCC”). Id. One remedy in
the Comcast-NBCU merger was an agreement by the
defendants to submit, at a distributor’s option, to “baseball
style” arbitration — in which each side makes a final offer and
the arbitrator chooses between them — if parties did not reach
a renewal agreement. During the arbitration, the distributor
would retain access to NBC content, thereby mitigating
concerns that Comcast-NBCU may withhold NBC
programming during negotiations in order to benefit Comcast’s
distribution subscriptions. Comcast-NBCU currently operates
as a “vertically integrated” programmer and distributor.
11
billion transaction. AT&T Inc. is a distribution company with
two traditional MVPD products: DirecTV and U-verse.
DirecTV transmits programming over satellite, while U-verse
transmits programming over cable. Time Warner, by contrast,
is a content creator and programmer and has three units:
Warner Bros., Turner Broadcasting, and Home Box Office
Programming (“HBO”). Warner Bros. creates movies,
television shows, and other video programs. Turner
Broadcasting packages content into various networks, such as
TNT, TBS, and CNN, and licenses its networks to third-party
MVPDs. HBO is a “premium” network that provides on-
demand content to subscribers either directly through HBO
Now or through licenses with third-party distributors. The
merged firm would operate both AT&T MVPDs (DirecTV and
U-verse) and Turner Broadcasting networks (which license to
other MVPDs). The government alleged that “the newly
combined firm likely would . . . use its control of Time
Warner’s popular programming as a weapon to harm
competition.” Compl. 2.
12
B.
The government’s increased leverage theory is that “by
combining Time Warner’s programming and DirecTV’s
distribution, the merger would give Time Warner increased
bargaining leverage in negotiations with rival distributors,
leading to higher, supracompetitive prices for millions of
consumers.” Appellant Br. 33. Under this theory, Turner
Broadcasting’s bargaining position in affiliate negotiations will
change after the merger due to its relationship with AT&T
because the cost of a blackout will be lower. Prior to the
merger, if Turner Broadcasting failed to reach a deal with a
distributor and engaged in a long-term blackout, then it would
lose affiliate fees and advertising revenues. After the merger,
some costs of a blackout would be offset because some
customers would leave the rival distributor due to Turner
Broadcasting’s blackout and a portion of those customers
would switch to AT&T distributor services. The merged
AT&T-Turner Broadcasting entity would earn a profit margin
on these new customers. Because Turner Broadcasting would
make a profit from switched customers, the cost of a long-term
blackout would decrease after the merger and thereby give it
increased bargaining leverage during affiliate negotiations with
rival distributors sufficient to enable it to secure higher affiliate
fees from distributors, which would result in higher prices for
consumers.
13
competitors, such as cable distributors, testified that the merger
would increase Turner Broadcasting’s bargaining leverage.
14
2011 as well as prior vertical integration between News Corp.-
DirecTV and Time Warner Cable-Time Warner Inc., which
split in 2008 and 2009, respectively. Professor Carlton and
Professor Peter Rossi critiqued the “inputs” used by Professor
Shapiro in his quantitative model, opining for instance that
values he used for subscriber loss rate and diversion rate were
not calculated through reliable methods. Professor Carlton also
opined that Professor Shapiro’s quantitative model
overestimated how quickly harm would occur because it failed
to consider existing long-term contracts.
15
would remain unchanged.” Id. Acknowledging also the lack
of precedent and the complexity in establishing the correct
approach in a Section 7 challenge to a proposed vertical
merger, the district court viewed the outcome of the litigation
to “turn[] on whether, notwithstanding the proposed merger’s
conceded procompetitive effects, the [g]overnment has met its
burden of establishing, through ‘case-specific evidence,’ that
the merger of AT&T and Time Warner, at this time and in this
remarkably dynamic industry, is likely to substantially lessen
competition in the manner it predicts.” Id. at 194 (quoting
Proposed Conclusions of Law of the United States ¶ 25).
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likely to increase Turner [Broadcasting]’s bargaining leverage
in affiliate negotiations.” AT&T, 310 F. Supp. 3d at 199.
Although acknowledging, as Professor Shapiro had opined,
that the Nash bargaining theory could apply in the context of
affiliate fee negotiations, the district court found more
probative the real-world evidence offered by AT&T than that
offered by the government. The econometric analysis of
AT&T’s expert had examined real-world data from prior
instances of vertical integration in the video programming and
distribution industry and concluded that “the bulk of the results
show no significant results at all, but many do show a decrease
in content prices.” Id. at 216 (quoting Prof. Carlton, Tr. 2477
(April 12, 2018)); see id. at 207, 218. The district court also
credited the testimony of several industry executives — e.g.,
Madison Bond, lead negotiator for NBCU, and Coleman
Breland and Richard Warren, lead negotiators for Turner
Broadcasting — that vertical integration had not affected their
affiliate negotiations in the past. By contrast, the testimony
from third-party competitors that the merger would increase
Turner Broadcasting’s bargaining leverage was, the district
court found, “speculative, based on unproven assumptions, or
unsupported.” Id. at 214. Although Professor Shapiro’s
opinion was that the Nash bargaining theory predicted an
increase in Turner Broadcasting’s post-merger bargaining
leverage, leading to an increase in affiliate fees, the district
court found, in view of the industry’s dynamism in recent
years, that Professor Shapiro’s opinion (by contrast with
Professor Carlton’s) had “not been supported by sufficient real-
world evidence.” Id. at 224.
17
critiques by Professor Carlton and Professor Rossi, the district
court found errors in the model “inputs,” for example, the value
used for subscriber loss rate was not calculated through a
reliable method. Neither the model nor Professor Shapiro’s
opinion accounted for the effect of the irrevocably-offered
arbitration agreements, which the district court stated would
have “real world effects” on negotiations and characterized “as
extra icing on a cake already frosted,” id. at 241 n.51, i.e.,
another reason the government had not met its first-level
burden of proof.
III.
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finding that the government failed to clear the first hurdle in
meeting its burden of showing that the proposed merger is
likely to increase Turner Broadcasting’s bargaining leverage.
19
767 F.3d 1308, 1332 (Fed. Cir. 2014). The district court
concluded that the government presented insufficient real-
world evidence to support the prediction under the Nash
bargaining theory of a material increase of Turner
Broadcasting’s post-merger bargaining leverage in affiliate
negotiations by reason of less-costly long-term blackouts. The
government’s real-world evidence consisted of statements by
AT&T Inc. and DirecTV in FCC regulatory filings that vertical
integration, such as in the proposed Comcast-NBCU merger,
can give distributors an incentive to charge higher affiliate fees
and expert opinion and a quantitative model prepared by
Professor Shapiro. The expert opinion and model were subject
to deficiencies identified by AT&T’s experts, some of which
Professor Shapiro conceded. By contrast, AT&T’s expert’s
econometric analysis of real-world data showed that content
pricing in prior vertical mergers in the industry had not
increased as the Nash bargaining theory and the model
predicted. Given evidence the industry was now “remarkably
dynamic,” the district court credited CEO testimony about the
null effect of vertical integration on affiliate negotiations.
AT&T, 310 F. Supp. 3d at 194.
20
real-world pricing data and experiences of individuals
who have negotiated on behalf of vertically integrated
entities all fail to support the [g]overnment’s
increased-leverage theory.
21
the stakes for Turner Broadcasting would change only slightly,
so its threat of a long-term blackout “will only be somewhat
less incredible.” Id. at 224 (quoting Professor Shapiro); see
generally Brown Shoe, 370 U.S. at 328–29. Recognizing
Professor Shapiro applied the Nash bargaining theory in
opining that “if a party’s alternative to striking a deal improves,
that party is more willing and able to push harder for a better
deal because it faces less downside risk if the deal implodes,”
AT&T, 310 F. Supp. 3d at 223 n.35, the district court rejected
the assumption underlying the government’s theory that Turner
Broadcasting would gain increased leverage from this slight
change in stakes. It relied on testimony that the small change
in bargaining position from a less costly blackout would not
cause Turner Broadcasting to take more risks, specifically
noting the Time Warner CEO’s analogy of the cost difference
between having a 1,000-pound weight fall on Turner
Broadcasting and a 950-pound weight fall on it — the
difference being unlikely to change the risk Turner
Broadcasting would be willing to take. Id. at 224 n.36 (Jeff
Bewkes, Time Warner CEO, Tr. 3121 (April 18, 2018)).
22
The district court’s focus on the slight change in the cost of a
long-term blackout in finding Turner Broadcasting’s
bargaining leverage would not meaningfully change aligns
with determining whether the government’s evidence
established that a change in the post-merger stakes for Turner
Broadcasting would likely allow it to extract higher prices
during affiliate negotiations. The district court reasoned that
because long-term blackouts are very costly and would
therefore be infeasible for Turner Broadcasting even after the
merger, there was insufficient evidence that “a post-merger
Turner [Broadcasting] would, or even could, drive up prices by
threatening distributors with long-term blackouts.” Id. at 223
(emphasis in original). In finding the government failed to
“prov[e] that Turner [Broadcasting]’s post-merger negotiating
position would materially increase based on its ownership by
AT&T,” id. at 204, the district court reached a fact-specific
conclusion based on real-world evidence that, contrary to the
Nash bargaining theory and government expert opinion on
increased content costs, the post-merger cost of a long-term
blackout would not sufficiently change to enable Turner
Broadcasting to secure higher affiliate fees. Witnesses such as
a Turner Broadcasting president Coleman Breland, AT&T
executive John Stankey, and Time Warner CEO Jeff Bewkes,
whom the district court credited, testified that after the merger
blackouts would remain too costly to risk and that any change
in that cost would not affect negotiations as the government’s
theory predicted.
23
of the Comcast-NBCU merger because the Comcast-NBCU
merger was similar to the proposed merger — a vertical merger
in the video programming and distribution industry. There the
government had recognized, “‘especially in vertical mergers,
that conduct remedies,’ such as the ones proposed [in the
Comcast case], ‘can be a very useful tool to address the
competitive problems while preserving competition and
allowing efficiencies’ that ‘may result from the transaction.’”
AT&T, 310 F. Supp. 3d at 169 n.3 (quoting Hr’g Tr. 15:16–21
(July 27, 2011), Comcast, 808 F. Supp. 2d 145). Like there,
the district court concluded the Turner arbitration agreements
would have “real-world effect.” Id. at 217–18 n.30.
24
Further, the government’s contention that the district court
failed to properly weigh the probative force of the defendants’
statements in FCC filings is unavailing. During licensing and
rulemaking proceedings before the FCC, DirecTV stated “a
standard economic model” (i.e., the Nash bargaining theory)
predicts that the proposed Comcast-NBCU merger “would
significantly increase the prices other MVPDs pay for NBCU
programming,” and two years later stated, similar to AT&T
Inc. comments, that “vertically integrated MVPDs have an
incentive to charge higher license fees for programming that is
particularly effective in gaining MVPD subscribers than do
non-vertically integrated MVPDs.” 1 The district court took
judicial notice of these statements pursuant to Federal Rule of
Evidence 201, explaining it was “hesitant” to assign significant
evidentiary value to the prior regulatory filings because AT&T
and DirecTV made the statements acting as competitors whose
positions would be affected by FCC review. AT&T, 310 F.
Supp. 3d at 206. FCC rules require all regulated parties —
whether applicants seeking to transfer licenses in connection
with a proposed merger or competitors who oppose the merger
— to provide only “[t]ruthful and accurate statements to the
Commission” in adjudicatory proceedings. 47 C.F.R. § 1.17;
see FCC Amicus Curiae Br. 3. The statements were admissible
as party admissions pursuant to Federal Rule of Evidence
1
In re Matter of Applications of Comcast Corp., General Electric
Co. and NBC Universal, Inc., for Consent to Assign Licenses or
Transfer Control of Licensees, MB Docket No. 10-56, Reply
Comments of DirecTV, Inc., 4 (Aug. 19, 2010); In re Matter of
Revision of the Commission’s Program Access Rules et al., MB
Docket No. 12-68 et al., Comments of DirecTV, LLC 19 (June 22,
2012); In re Matter of Revision of the Commission’s Program Access
Rules et al., MB Docket No. 12-68 et al., Comments of AT&T Inc.
22 (June 22, 2012); In re Matter of Revision of the Commission’s
Program Access Rules et al., MB Docket No. 12-68 et al., Reply
Comments of AT&T Inc. 2 (July 23, 2012).
USCA Case #18-5214 Document #1774863 Filed: 02/26/2019 Page 25 of 35
25
801(d)(2), see Talavera v. Shah, 638 F.3d 303, 309 (D.C. Cir.
2011), yet even as admissions, the district court had to evaluate
their persuasive force in the circumstances before it, and the
district court did. See VirnetX, 767 F.3d at 1332; cf. General
Dynamics, 415 U.S. at 498; Owens v. Republic of Sudan, 864
F.3d 751, 790 (D.C. Cir. 2017).
26
efficacy of Turner Broadcasting’s irrevocable offers of no-
blackout arbitration agreements means the merger is unlikely
to afford Turner Broadcasting increased bargaining leverage.
27
28
To the extent the government maintains this testimony is
irreconcilable with the legal principle of corporate-wide profit
maximization, it gives no credence to the district court’s focus
on “the best way to increase company wide profits,” referring
to the merged firm. AT&T, 310 F. Supp. 3d at 222. In other
words, the district court was explaining that real-world
evidence reflected the profit-maximization principle. Even if
the district court could have made clearer that it understood the
principle was not a question of fact, the government does not
explain how considering how that is done in a particular
industry is contrary to the principle of corporate-wide profit
maximization.
29
Broadcasting’s irrevocable arbitration/no blackout
commitment is not implausible.
30
internally inconsistent reasoning when evaluating testimony
from witnesses in the industry.
31
contrast, the Time Warner executives’ testimony did “not
involve promises or speculations about the employees’ future,
post-merger behavior” and instead recounted “what these
executives previously experienced when working within a
vertically integrated company.” Id. at 219. Their testimony
was uniform among all testifying witnesses and corroborated
by that of a Comcast-NBCU executive — a competitor of
AT&T. To the extent the government also maintains the
district court improperly discounted the third-party distributor
testimony because it contradicted Professor Shapiro’s opinion
that Turner Broadcasting would not actually withhold content
from other distributors, any error in that regard does not
demonstrate the district court clearly erred in discounting their
testimony for the independent reasons that it rested on
speculative, future predictions and lacked adequate factual
support.
32
69, 578 (1972). Here, however, the government did not present
its challenge to the AT&T-Time Warner merger in terms of
creating non-price related harms in the video programming and
distribution industry, and we turn to the government’s
challenges to the district court’s handling of the quantitative
evidence regarding the proposed merger’s predicted effect on
consumer price.
33
to predict price increases farther into the future, particularly
given that the industry is continually changing and
experiencing increasing competition. This failure, the district
court found, resulted in overestimation of how quickly the
harms would occur. Professor Shapiro acknowledged that
predictions farther into the future, after the long-term contracts
expire, are more difficult. Tr. 2317 (April 11, 2018). Neither
Professor Shapiro’s opinion testimony nor his quantitative
model considered the effect of the post-litigation offer of
arbitration agreements, something he acknowledged would
require a new model. And the video programming and
distribution industry had experienced “ever-increasing
competitiveness” in recent years. AT&T, 310 F. Supp. 3d at
241. Taken together, the government’s clear-error contention
therefore fails.
34
because the government failed to meet its burden of proof
under its increased leverage theory at the first level, the error
regarding cost savings was harmless error, see Czekalski v.
LaHood, 589 F.3d 449, 453 (D.C. Cir. 2009); FED. R. CIV. P.
61.
35