Speedy Antitrust Approval

DOJ’s announcement of the settlement agreement is noteworthy because of the speed at which Disney was able to negotiate a remedy to a combination that raised a number of antitrust issues.  Though the parties received second requests on March 5, 2018, and Disney had only recently entered into a new agreement with 21CF on June 20, 2018, the DOJ and Disney were able to negotiate a divestiture worth approximately $20-23 billion within 6 months of review and 4 months after issuing information requests.  The dollar value of the Disney/21CF divestiture will likely double what the DOJ characterized as the largest divestiture in history in Bayer/Monsanto.

Disney was in a hurry to obtain antitrust approval because it is involved in bidding war with Comcast for the 21CF assets.  Indeed, Disney upped its offer on June 20^th because Comcast had started a bidding war for the 21CF assets on June 13^th.  Comcast has its own antitrust issues with its acquisition, but it was hoping to be on a level playing field with Disney in terms of the antitrust reviews at the DOJ. Indeed, Comcast said as much when it made its bid as it indicated that it had already provided documents and information to the DOJ in response to its civil investigative demand regarding the acquisition of 21CF assets.

Comcast was banking on the DOJ conducting a long drawn out second request investigation for Disney’s deal.  But, rather than conducting a lengthy review of the Disney/21CF deal, the DOJ entered into a quick settlement agreement.  This was surprising because the Disney/21CF deal raised a number of horizontal and vertical issues including increasing the size of its motion picture business, content library and cable programming, which would increase its bargaining leverage in negotiations with movie theatres and TV programmers on licensing fees, Multichannel programing distributors (MVPDs) and virtual MVPDs over affiliate fees for its channels, and video streaming services over licensing fees.  Moreover, Disney is taking control of Hulu and launching a number of subscription streaming businesses with the intent on foreclosing its content from rivals such as Netflix.  It could be that none of these issues amount to actual antitrust problems, but certainly they warrant some investigation.

Despite all of these other issues, the DOJ quickly focused on the overlap in cable sports programming.  The DOJ said in its Press Release that “to streamline agency clearance, Disney agreed to divest the 22 RSNs rather than continue with the Antitrust Division’s ongoing merger investigation.”  Anyone who has visited Disney World knows the value of fast passes.  Disney understands the value of time so it used a cooperative approach to get the greenlight for what appears to be the largest divestiture in history without an upfront buyer in record time.

Understanding that the DOJ’s major concern was the overlap in cable sports programming, Disney decided not to challenge that contention or negotiate a lesser divestiture, which would have lengthened the second request investigation many more months.  Disney likely could have argued that ESPN channels and local RSNs really do not compete head to head at all.  ESPN has market power as do the local RSNs to obtain increases in affiliate fees already.  Moreover, watching ESPN is no substitute for watching your home town team on the local RSN.  Disney, however, gave up on those arguments and agreed to a hefty structural remedy that took the issue off the table.

Makan Delrahim’s Editorial in the Washington Times Defending DOJ’s Fast Review

On July 12, 2018, Makan Delrahim wrote an editorial defending the speed in which Disney was able to negotiate a divestiture with the DOJ.  He noted that the divestiture agreement was a “victory for American consumers and should be heralded as an example of merger parties working effectively with Division investigators to resolve antitrust concerns.”  Delrahim noted that “each merger poses unique facts requiring unique market analysis.” He correctly stated that the pace of any review is largely in the hands of the merging parties, who control the timing of their Hart-Scott-Rodino (“HSR”) filings, as well as the pace and timing of compliance with the Division’s information requests.” He added that “parties can accelerate the review by pointing the Division to relevant information early in the investigation, promptly scheduling interviews, and remaining open to timely divestitures that resolve antitrust concerns.”

Competition Concern

The DOJ alleged that without the divestiture the acquisition would likely result in higher prices for cable sports programming licensed to MVPDs in each of the local markets that the RSNs serve.  As the DOJ explained, Disney (ESPN properties) and 21CF’s (RSNs) cable sports programming competed head to head.  The DOJ alleged that the ESPN properties and the 21CF’s RSNs compete to sell cable sports programming to MVPDs in various local markets across the United States.  Because of this competition, the complaint alleges that the proposed acquisition would likely result in MVPDs paying higher prices for cable sports programming in those local markets.

No Allegation of “Must Have” Programming

Interestingly, the DOJ did not allege that Disney or 21CF had “must have” programming.  Arguably, ESPN channels and RSNs would be considered “must have” programming for MVPDs and VMVPDs.  It could be that given Judge Leon’s Opinion in AT&T/Time Warner that the DOJ has given up on being able to prove that certain programming is “must have”.

No Upfront Buyer

Another interesting point is that the DOJ did not require an upfront buyer.  There could be good reasons for why no upfront buyer was necessary. Upfront buyers are usually required when the DOJ is not sure that any appropriate buyers exist or if all of the assets need to be divested to one buyer.  Here, there are numerous buyers and the DOJ decided that the RSNs can be sold to multiple buyers not to a single buyer.  In that scenario, Comcast could be a buyer for some RSNs located in geographic areas where it is not the incumbent cable provider; AT&T and Charter have very little in the RSN space and may want to buy other properties to gain a larger footprint; Discovery has international sports rights so they may be interested in some RSNs; Liberty Media has owned RSNs in the past; Youtube, Facebook, and Amazon may want to dip their toes into the RSN space; and Sinclair, which has a strong local presence in many markets and currently owns the Tennis Channel could be interested in some of the RSNs.

Lessons Learned

The DOJ’s quick settlement demonstrates that the DOJ is willing to streamline investigations if merging parties propose substantial structural fixes upfront.  The settlement and Mr. Delrahim’s editorial reminds merging parties that they control the timing and length of merger investigations.  Merging parties control how fast they file their HSR submissions and when they comply with the DOJ’s second requests.  Some merging parties take their time to comply, hold back submission of documents and information and delay offering any real significant divestitures until exhausting all of their economic arguments.  While the government gets a lot of blame for long antitrust reviews, merging parties are always in control of the timing.  This settlement agreement also demonstrates that the DOJ is willing to work with merging parties that are willing to cooperate in negotiating  a complete solution to a competition concern.  Consistent with its recent enforcement action in Bayer/Monsanto, the DOJ is willing to approve deals with significant divestitures.  Here, the divestitures are worth approximately $20-23 billion—more than double the size of the Bayer divestiture.  Finally, the settlement shows that the DOJ is willing to approve settlements without upfront buyers in situations where multiple buyers can acquire the divested assets, a single buyer is not necessary, and a number of potential buyers exist.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

On March 13, 2018, Judge Leon denied the DOJ’s motion to limit the defendants from presenting evidence regarding Time Warner’s irrevocable offer to distributors that it would go into “baseball-style” arbitration in any carriage disputes over Turner networks and promise not to engage in any blackout of channels during arbitration for a period of 7 years.  AT&T simply had the better of the arguments with respect to the commitment.  Of course it is relevant and the DOJ had sufficient notice – it was in the Answer – and has had the opportunity to conduct discovery related to the commitment.  The time for the DOJ to make this argument was early on before discovery started.

AT&T made a good case that Professor Shapiro’s failure to account for this commitment in his models may have been tied with the DOJ’s motion to have the Arbitration Offer removed from consideration.  Apparently, Shapiro acknowledged that the commitment would benefit distributors in negotiations and that his bargaining model does not account for this market reality in deposition testimony.  A major limitation of the DOJ’s otherwise very good pre-trial brief is that its arguments are theoretical and not based on the facts.  It is somewhat difficult to get a handle on the strength of the DOJ’s arguments in its pre-trial briefs because many passages and key quotations are redacted.  On the whole, AT&T’s pre-trial brief is stronger.  It certainly appears that AT&T is poised to punch holes in the DOJ’s experts’ theories and bargaining model.

It appears that the DOJ will attempt to make the case that the merger will drive up prices for distributors, costs that will ultimately be passed on to consumers and to make out a coordinated effects case suggesting that the vertically integrated AT&T/Time Warner would coordinate with Comcast/NBCU to harm virtual MVPDs.  These theories make sense.  But, a lot depends on the strength of the redacted information and AT&T documents in DOJ’s Pre-trial brief, third party witness testimony, and DOJ’s experts. It remains unclear what the redacted information may say, when the cited comments were made, and in what context.  The DOJ appears to have documents related to what AT&T’s plans are to fend off virtual MVPDs to protect its MVPD business.  If so that could be damaging to AT&T’s defense.  The DOJ will put on witnesses that will say that they pay a premium for Time Warner content and how the content is “must have”.  On the other hand, AT&T has come out swinging with suggestions that it has already punched holes into the DOJ’s experts and theories (bargaining model, price increase estimates, and the inputs to the bargaining model related to subscriber loss rates, gross margin data, and diversion of customers).

This should be a fun one.  As Judge Leon says, the trial starts on March 19^th.

Delrahim explained that effective antitrust enforcement lessens the need for market regulations and that behavioral commitments imposing restrictions on the conduct of the merged firm represents a form of government regulation and oversight on what should preferably be a free market.

Criticizing the early Obama administration for entering into several behavioral consent decrees that allowed illegal vertical mergers such as Comcast/NBCU, Google/ITA, and LiveNation/TicketMaster to proceed, Delrahim said there is bipartisan agreement that behavioral conditions have been inadequate. He shares the same skepticism that John Kwoka, a law professor and economist who previously served in various capacities at the Federal Trade Commission, Antitrust Division, and Federal Communications Commission, and American Antitrust Institute (AAI) President Diana Moss have about using regulatory solutions to address antitrust violations.  Specifically, Delrahim agrees with them that “allowing the merger and then requiring the merged firm to ignore the incentives inherent in its integrated structure is both paradoxical and likely difficult to achieve.”

In Delrahim’s words, “behavioral remedies are the wolf of regulation dressed in the sheep’s clothing of a behavioral decree.”  He identified several practical problems with behavioral conditions, namely:

• They are difficult to structure and negotiate.
• The mere existence of agreed upon arbitrators interfere with the competitive process of negotiating contracts.
• It is difficult to determine their expiration periods. Short remedies may be mere “Band-Aids” and not a fix, while long remedies make the DOJ a full-time regulator.
• They are unduly burdensome for the merged firm and the DOJ because they require monitoring the merged firm’s day-to-day operations.
• And they are challenging to enforce – especially the granular commitments of discrimination and information firewalls – because the DOJ often lacks the resources to do so effectively.

Delrahim then praised the later Obama administration’s efforts to block Comcast’s acquisition of Time Warner Cable and Lam Research’s acquisition of KLA-Tencor rather than impose ineffective behavioral remedies.  Both those deals were abandoned in the face of pressure from the DOJ.

Because he is skeptical that behavioral remedies can be effective, Delrahim said that under his leadership, the Antitrust Division will cut back on the 1300 behavioral consent decrees that are currently in place and focus, instead, on structural remedies to resolve antitrust concerns presented by mergers. He referred to the DOJ’s 2004 Remedies Guidelines, a report that states “conduct remedies generally are not favored in merger cases”.

Nevertheless, Delrahim left open the possibility that the DOJ may accept behavioral commitments in certain circumstances.  He noted that it would be a high standard to meet but that such commitments may be accepted when the DOJ has a “high degree of confidence that the remedy does not usurp regulatory functions for law enforcement.”  Delrahim said that behavioral remedies should avoid taking pricing decisions away from markets and should be simple enough so that the DOJ can oversee them. He further explained that behavioral remedies must completely cure the anticompetitive harms.  This line of thinking is consistent with his friend, former Antitrust Division chief Bill Baer who said that “consumers should not have to bear the risks that a complex settlement may not succeed.”

Finally, Delrahim underlined that if a merger is illegal and a proposed remedy does not resolve the competitive problem, the deal should be blocked and, conversely, if a merger does not raise competitive concerns, the DOJ will no longer accept a behavioral remedy just because it is offered.

Lessons Learned: According to Makan Delrahim, the Antitrust Division will cut back on behavioral commitments in consent orders that regulate conduct.  Instead, the Division will rely more on structural remedies such as divestitures to resolve anticompetitive concerns with mergers.  He made some good points with respect to the adequacy and effectiveness of behavioral remedies, which are difficult to structure and police.  On the surface, this policy announcement is not much different from current and past antitrust thinking.  Delrahim is simply making clear where he stands on the issue.  Divestitures of a business or a product line have always been the preferred remedy for any merger, be it horizontal or vertical.  However, the antitrust agencies have typically used behavioral remedies to resolve antitrust concerns presented by vertical mergers that result in efficiencies in order to retain the procompetitive benefits of the transaction.  But, it has never been the Division’s policy that conduct remedies will always be available and sufficient to resolve vertical antitrust concerns.  And while he acknowledges that behavioral remedies may be adequate where the Division has a high degree of confidence that the remedies can be effective, Delrahim is clearly signaling a far more restrained application of such commitments.  In fact, even under Obama the DOJ forced parties to vertical mergers to abandon their deals when the Division could not negotiate structural and/or behavioral remedies to resolve the anticompetitive concerns.  For instance, in 2016, the DOJ forced Lam Research and KLA-Tencor to abandon their vertical merger when it became clear that behavioral commitments were not sufficient.  In sum, Delrahim’s policy stance signals that he will continue to take an aggressive approach on how the DOJ resolves anticompetitive concerns presented by vertical mergers.  In particular, he seems especially unenthusiastic about behavioral remedies.  The DOJ’s recent lawsuit to challenge AT&T Inc.’s acquisition of Time Warner Inc. suggests Delrahim has the courage of his convictions.  How that deal plays out in court – or out of it – may well set the stage for the enforcement of vertical mergers in the foreseeable future.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

On November 2, 2016, the DOJ’s Antitrust Division filed suit alleging that DirecTV was the ringleader of a series of unlawful information exchanges between DirecTV and three of its competitors – namely, Cox Communications Inc. (“Cox”), Charter Communications Inc. (“Charter”) and AT&T (before it acquired DirecTV) – during the companies’ negotiations to carry the SportsNet LA “Dodgers Channel.”

SportsNet LA holds the exclusive rights to telecast almost all live Dodgers games in the Los Angeles area.  According to the complaint, DirecTV’s Chief Content Officer, Daniel York, unlawfully exchanged competitively-sensitive information with his counter-parts at Cox, Charter and AT&T while they were each negotiating with SportsNet LA for the right to telecast the Dodgers Channel.  Specifically, the complaint alleges that DirecTV and each of these competitors agreed to and exchanged non-public information about their companies’ ongoing negotiations to telecast the Dodgers Channel, as well as their companies’ future plans to carry – or not carry – the channel. The complaint also alleges that the companies engaged in this conduct in order to unlawfully obtain bargaining leverage and to reduce the risk that they would lose subscribers if they decided not to carry the channel but a competitor chose to do so. The complaint further alleges that the information learned through these unlawful agreements was a material factor in the companies’ decisions not to carry the Dodgers Channel. The Dodgers Channel is still not carried by DirecTV, Cox or AT&T. The DOJ allegations make out a buyer conspiracy case that violate Section 1 of the Sherman Act.  The DOJ further claims that the illegal information sharing corrupted the competitive bargaining process and likely contributed to the lengthy blackout.

The settlement is designed to ensure that when DirecTV and AT&T negotiate with providers of video programming, including negotiations to telecast the Dodgers Channel, they will not illegally share competitively-sensitive information with their rivals. The settlement also requires the companies to monitor certain communications their programming executives have with their rivals, and to implement antitrust training and compliance programs.

Lesson Learned:

The DOJ’s settlement demonstrates its resolve to prevent pay-television providers and specifically AT&T and DirecTV from engaging in illegal conduct that thwarts the competitive process. Moreover, the enforcement action indicates that the DOJ will take information that it learns regarding illegal activity through its antitrust review of a merger and pursue it.  So, the lesson is that the DOJ will bring civil and/or criminal actions against illegal conduct discovered during merger reviews.  Executives should understand that texting and emailing competitors to share competitively and strategically sensitive information to avoid competing is illegal.  While most of us would agree that the Dodgers may be holding out for too much money, the pay tv providers cannot engage in illegal conduct that thwarts the competitive process.  Fortunately, for DirecTV, the DOJ did not bring a criminal case rather it treated the conduct as a civil matter.  But, executives should be mindful that this type of conduct could potentially result in criminal as well as civil penalties.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com