Merger Control Rules for Vertical Mergers in the Wake of the AT&T-Time Warner Approval
Vertical mergers, unlike more-litigated horizontal mergers, are governed by few guidelines from antitrust regulatory organizations and, until recently, had never been challenged in federal court. The approval of a vertical merger between AT&T and Time Warner (“The Merger”), despite protests from the Antitrust Department of the U.S. Department of Justice (DOJ), has shed some light on merger control rules for vertical mergers. This post provides an overview of: (1) vertical merger laws; (2) The Merger; and (3) the governing principles that have emerged since the approval of the AT&T transaction. (Noah Brumfield, Antitrust & Trade Regulation Report (BNA)).
The DOJ’s challenge of The Merger surprised many because there has generally been an “assumption that vertical mergers are benign.” (Noah Brumfield, Antitrust & Trade Regulation Report (BNA); Harper Neidig, The Hill). Statistically, regulators challenge drastically fewer vertical than horizontal mergers annually (on average, 1-2 vertical compared to up to 30 horizontal). Id. Horizontal mergers are common targets of competition scrutiny, as they involve firms at the same point in the supply chain (classic “competitors”) merging, and therefore present a more obvious threat to market competition. In contrast, vertical mergers involve a buyer merging with or acquiring its supplier. Prior to the merger, Time Warner was contracting with AT&T’s DirecTV to distribute television networks such as HBO and CNN. The merger has allowed for the elimination of such contracting. (Elai Katz, NY Law Journal).
Although, historically few merger controlled rules applied to vertical mergers, both vertical and horizontal mergers are subject to specific regulations. In general, the federal competition regulatory regime requires companies of a certain size to seek pre-merger clearance from the Federal Trade Commission (FTC) for transactions that exceed a specific dollar amount. Most clearances are granted, but the FTC or DOJ may challenge the transaction if the merger would result in a “substantial lessening of competition in the relevant market,” as prohibited by Section 7 of the Clayton Act. (Mark McCareins, The Hill). A related piece of legislation, the Sherman Act, prohibits certain agreements “in restraint of trade,” and works to prevent deals that would result in market “monopolization.” (D. Bruce Hoffman, FTC).
In November 2017, the DOJ filed suit in the U.S. District Court for the District of Columbia to block the merger of AT&T and Time Warner. The government hypothesized that the merged entity would leverage its power to raise prices for non-AT&T cable providers or block these entities out entirely from Time Warner content, and this behavior would ultimately result in price increases to consumers. (Mark McCareins, The Hill). The Time Warner-AT&T case was the first vertical merger challenge to go to trial in four decades. The court held that the government failed to meet its burden, and The Merger could proceed. (Noah Brumfield, Antitrust & Trade Regulation Report (BNA)).
The court’s 172-page opinion focused not on whether the proposed merger posed harm to AT&T’s and Time Warner’s competitors, but whether it posed harm to consumers. Unfortunately for the DOJ, it had dedicated most of its argument to proving harm only to competitors. The Court concluded that the DOJ needed to “show that consumers are likely to be harmed by increased prices or reduced quality of services,” but it failed to do this. Competitive harm, at least in the context of vertical mergers, is inextricable from consumer welfare. (Noah Brumfield, Antitrust & Trade Regulation Report (BNA)).
While it is important for antitrust enforcement policies to be predictable, “predictability is not…the only measure of effective enforcement.” (D. Bruce Hoffman, FTC). Whether a proposed vertical merger poses harm to consumers is more of a fact-specific inquiry than one defined by bright-line rules, although certain factors like increased prices and decreased quality may tend to show consumer harm. Id. It is likely that more challenges to vertical mergers will come from the current presidential administration; however, companies can help prevent them by maintaining price and quality to protect their consumers.