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.

It is common practice in the early stages of litigation to be overly inclusive when identifying witnesses for trial, and just because Delrahim is named does not necessarily mean that he will testify. However, when alleging selective enforcement as a defense, AT&T will necessarily need to put on proof of the improper discrimination behind the DOJ’s decision to block its deal with Time Warner, and presumably no one would be in a better position to testify as to the DOJ’s decision than the actual decision maker: Delrahim.

In addition to its witness list, AT&T has also requested internal communications between Delrahim’s office and Attorney General Jeff Sessions, including emails, phone calls and other communications between the White House and officials at the DOJ.

The DOJ can certainly object to providing this information, and will likely do so. Putting an attorney on the stand is fraught with potential privilege and attorney work-product issues.   More importantly, the DOJ likely will move to strike AT&T selective enforcement defense, which should render Delrahim’s testimony and communications irrelevant.

Selective enforcement is notoriously difficult to prove, or even allege. The DOJ has extremely broad “prosecutorial discretion” in deciding to challenge a deal. If the DOJ challenges AT&T’s selective enforcement defense, AT&T will need to offer some form of proof that the DOJ based its decision to challenge this deal on some improper, discriminatory motive. AT&T is relying on President Trump’s opinionated tweets and public statements and arguably, the tweets here could support an argument that the DOJ is retaliating against CNN for exercising First Amendment rights.  Indeed, AT&T’s selective enforcement defense asserts that Delrahim, for political purposes, singled out its deal, in contrast to the DOJ’s 2001 decision to approve Comcast’s deal with NBCU, which raised similar vertical concerns. However, Judge Leon could just as easily rule that the President’s mere tweets, without more, is not enough to support a claim for selective enforcement because the DOJ has broad prosecutor discretion and has legitimate competition concerns about AT&T’s acquisition of Time Warner.  In that scenario, Judge Leon would block Delrahim from being called to testify, and further block production of his office’s communications with the White House.

However, this is not to say that AT&T strategy is not sound. Even if its defense of selective enforcement is stricken, it adds yet another ground for potential appeal. Furthermore, it undoubtedly puts unwanted pressure and publicity on the DOJ and the White House questioning the motives in challenging the deal. No one at the DOJ wants even the merest chance of a Court digging through its communications and second guessing its decisions in deciding which deals to challenge.   And in the current political climate, insinuations questioning the DOJ’s objectivity and bias could have a lasting negative impact on the DOJ, even if only in the court of public opinion.

A new Administration is entitled to change its merger enforcement priorities and how it remedies problematic mergers. The DOJ’s decision to sue-to-block rather than adopt conduct remedies is a matter of its own discretion, and does not constitute “selective enforcement” even where it may have the appearance of being ideologically or politically motivated. The federal courts have made clear that it is permissible for the executive branch to change enforcement views and priorities to reflect the changing politics of different presidential administrations.

The Antitrust Division is not the only part of the DOJ that has been making changes in its enforcement of the laws. Other parts of the DOJ have been aggressively enforcing the immigration and drug laws that were going unenforced. Even the Federal Trade Commission is making changes to how it resolves anticompetitive pharmaceutical mergers. For example, Bruce Hoffman, acting director of the Bureau of Competition at the Federal Trade Commission (FTC), recently announced that the FTC will no longer accept divestitures of inhalant and injectable pipeline drugs in pharmaceutical mergers. Going forward, to resolve competitive concerns raised by actual drugs potentially competing with pipeline drugs, the FTC will require the merging parties to divest the actual inhalant and injectable drugs that are currently being marketed. Historically, the FTC had accepted divestiture of pipeline assets to remedy potential competition concerns.

The selective enforcement defense is a distraction to the DOJ and to AT&T.  AT&T needs to keep its defense focused on the substantive antitrust issues where it is on solid ground. Consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV, Youtube Live, and PlayStation Vue as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive. And the lines between MVPDs, virtual MVPDs and SVODs are blurring. AT&T should stay focused on the dynamic market that currently exists and is continuing to evolve.  For example, Youtube Live has now signed an agreement with Time Warner for content.

Judge Leon will make the ultimate decision on whether the deal is anticompetitive.  Judge Leon is unlikely to rule in favor of A&T with regards to the selective enforcement defense, unlikely to have Delrahim testify and unlikely to force the DOJ to provide AT&T with discovery relating to the defense.

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

According to the DOJ, the proposed acquisition will result in higher prices for programming, thus harming consumers. The DOJ’s complaint alleges that the merged firm will have the increased ability and incentive to credibly threaten to withhold or raise the price of crucial programming content – such as Time Warner’s HBO, TNT, TBS, and CNN – from AT&T’s multi-channel video programmer distributor (“MVPD”) rivals. At present, Time Warner negotiates with an MVPD to reach a price that depends on each party’s willingness to walk away. But the transaction would change the bargaining leverage such that AT&T/Time Warner would have less to lose from walking away. Or so the DOJ alleges. According to this reasoning, post-merger, if the merged firm and an MVPD are unable to reach an agreement, some customers would switch from their current MVPD to AT&T/DirecTV in order to obtain the sought-after Time Warner content. In addition, the DOJ alleges that AT&T/DirecTV has approximately 25 million subscribers and that there are 18 Designated Marketing Areas (“DMAs”) – out of 210, nationwide – where AT&T/DirecTV has approximately 40% share of the local MVPD market.

However, AT&T’s response indicates that the DOJ’s complaint is a misguided effort to block a pro-competitive deal that poses no real threat to consumers. The DOJ’s theory betrays a lack of understanding of the current and rapidly evolving market for content and distribution. The merged firm will still have a strong financial incentive to license Time Warner’s programming to as many outlets as possible. Because local cable monopolies dominate local markets through the bundling of broadband and MVPD services, AT&T does not have a clear economic incentive to cut off rival video distributors. After all, such a strategy is risky because AT&T might lose more than it gains with only the possibility that a small number of subscribers would switch to AT&T/DirecTV. In fact, consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive. And the lines between MVPDs, virtual MVPDs and SVODs are blurring as Amazon Prime recently carried the Titans/Steelers game live. AT&T called out the DOJ for not providing any market analysis or empirical evidence to support its theory that consumers would be harmed.

Beyond that AT&T claims that the DOJ’s case is arbitrary and accuses them of selective antitrust enforcement. Neither argument holds water nor matters very much because at the end of the day, Judge Leon is going to make a decision based on the economic realities of the video distribution and content markets. Nevertheless, AT&T also responded that Comcast/NBCU raised the same vertical issues and in that case, the DOJ resolved the concerns with behavioral remedies.

While AT&T does not concede that the transaction results in competitive harm, it offers the same behavioral fix used and approved by Judge Leon in Comcast/NBCU. Contingent on deal completion, Time Warner formally and irrevocably offered its distributors licensing terms for 7 years after the merger that entitle them arbitration if there are any disputes over arbitration and forbids Time Warner from “going dark” on any current distributor. The merging parties have done this on their own and the beauty of it is that it does not require any oversight by the Court or the DOJ.

Given that the DOJ has been unwilling to negotiate a comprehensive set of behavioral conditions that would insure that AT&T’s video rivals are able to obtain the Time Warner programming that they desire, AT&T is taking matters into its own hands. In other words, AT&T is cutting out the regulatory middle-man.

Such a strategy allows AT&T to greatly increase its chances that the DOJ will simply drop its case. It is a win-win for everyone involved, the merging parties, the DOJ, and AT&T’s video rivals. The DOJ can save face as it will have done its job of preserving competitive pricing and availability of content while avoiding the risks of trial and without becoming a day-to-day regulator of the merged firm’s conduct. That said, the DOJ rarely accepts a fix without a signed consent decree and presumably this offer was not good enough to avoid the complaint.

Alternatively, if the case goes on to trial, the irrevocable offer to video distributors for Time Warner programming provides Judge Leon, as the fact finder, with some evidence to counter the DOJ’s allegations that AT&T would withhold or raise the price of content to its video distributor rivals. Given the ever evolving video and programming markets, a band-aid may be all that is necessary.

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

The vertical merger, which combines AT&T’s video distribution platform with Time Warner’s programming, could be the first such deal litigated in almost 40 years.

According to the DOJ’s Antitrust Division, the acquisition would substantially lessen competition by resulting in higher prices for programming, thus harming consumers. The DOJ’s complaint alleges that the merged firm will have the increased ability and incentive to credibly threaten to withhold or raise the price of crucial programming content – such as Time Warner’s HBO, TNT, TBS, and CNN – from AT&T’s multi-channel video programmer distributor (“MVPD”) rivals.

To support its case, the DOJ littered the Complaint with the merging parties’ own words and relied less on market and empirical evidence:

• “As AT&T has expressly recognized … distributors that control popular programming ‘have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition.’”
• “Specifically, as DirecTV has explained, such vertically integrated programmers ‘can much more credibly threaten to withhold programming from rival [distributors]’ and can ‘use such threats to demand higher prices and more favorable terms.’”
• “Indeed, AT&T/DirecTV describes the traditional pay-TV model as a ‘cash cow’ and ‘the golden goose.’”
• “In sum, as DirecTV itself has explained: ‘[V]ertical integration of programming and distribution can, if left unchecked, give the integrated entity the incentive and ability to gain an unfair advantage over its rivals. This ultimately results in higher prices and lower quality service for consumers.’”
• “AT&T/DirecTV [said it] intends to ‘work to make [online video services] less attractive.’”
• “AT&T itself has previously stated that access to some of the most popular television programming is ‘critical to preserve and promote competition and diversity in the distribution of video programming.’”
• “Following this merger, using a bargaining model similar to the one previously endorsed by DirecTV, the eventual price increases to the merged firm’s competitors for Turner networks due to the merged company’s increased power would likely be at least hundreds of millions of dollars.”
• “[Turner’s] CEO has stated that it has ‘leverage’ over Dish, whose online Sling TV service ‘is shit without Turner.’”
• “In a presentation prepared for a meeting with Time Warner executives related to this merger, AT&T noted that, after the merger, the merged company and just three other companies would control a large portion of all three levels of the industry: television studio revenue, network revenue, and distribution revenue. AT&T went on to explain that—given these high levels of concentration— its ‘Core Belief #1’ is that, notwithstanding the emergence of online video distributors, ‘[t]he economic incentives of major pay-TV players will encourage stability as the ecosystem evolves.’”

There does not appear to be any magic bullet here.  These “Hot Docs” appear to be dated, taken out of context, and clearly don’t tell the full story.  Nevertheless, the DOJ has historically used merging parties’ own words against them when drafting complaints so this one is no different.  Traditionally, hot docs provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.

Nevertheless, the DOJ still has a lot of hurdles to prove its case as economics plays a huge role in merger cases.  The DOJ’s theory demonstrates a lack of understanding of the current and rapidly evolving market for content and distribution.  The merged firm will still have a strong financial incentive to license Time Warner’s programming to as many outlets as possible.  Because local cable monopolies dominate local markets through the bundling of broadband and MVPD services, AT&T does not have a clear economic incentive to charge higher prices for Time Warner content or to cut off rival video distributors. After all, such a strategy would be risky. In fact, consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive.

Observation:

The DOJ will use merging parties’ past words against them when challenging their deal. The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and the judge.  The DOJ will focus on supposed “hot docs” to support its case when some market analysis and empirical evidence may be missing.  At the end of the day, however, a “smoking gun” document regarding anticompetitive intent, which apparently does not exist in this case, as it was not cited, will be rejected by a judge unless the DOJ provides the foundations of an antitrust cases through market analysis and empirical evidence.  The DOJ still has time to put together its case, but the complaint falls short on quantitive data.

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

AT&T/Time Warner

On January 12, 2017, AT&T Inc. (“AT&T”) Chief Executive Officer Randall Stephenson said that in his meeting with President-elect Donald Trump they touched on job creation, investment and competition, but he noted that AT&T’s merger with Time Warner Inc. (“Time Warner”) did not come up.  We find that hard to believe given President-elect Trump’s open reservations about the transaction and his ongoing battle with CNN.

Sean Spicer, the incoming White House press secretary, was asked by reporters on a January 12 conference call whether Trump still favors scuttling the deal.  “His primary focus is how companies will continue to create jobs” when he meets with CEOs, Spicer said.  “That’s generally been the subject of all of his meetings when he meets with these CEOs.”

During the campaign, President-elect Trump said he would block the proposed megamerger because he believes it would concentrate too much power in the media industry.  But the question is whether he actually opposes the deal or CNN’s coverage of him.

Anyhow, given that AT&T has figured out a way to avoid FCC scrutiny, the only obstacle for the merger is the DOJ’s antitrust review.

Bayer/Monsanto

On January 12, 2017, Bayer AG (“Bayer”), which is seeking regulatory approval for its $66 billion deal to buy U.S. seeds giant Monsanto Company (“Monsanto”), said the chief executives of both companies had a productive meeting with President-elect Donald Trump.  Trump spoke to Bayer CEO Werner Baumann, Monsanto CEO Hugh Grant and some of their advisers in New York, his transition team said on January 11.  A Bayer spokesman said “it was a productive meeting about the future of agriculture and the need for innovation.”  The companies also released a public statement that says they will “create several thousand new high-tech, well-paying jobs after integration is complete.”  The fate of of the Bayer/Monsanto proposed merger will be decided by Trump’s nominees to lead antitrust enforcement at the DOJ.

While the transaction raises serious antitrust concerns in a number of product markets that could result in competitive harm through higher prices to farmers and ultimately consumers, Bayer claims that it is willing to resolve the competitive problems through a settlement agreement.  However, it has not openly discussed what it actually proposes.  A number of antitrust concerns exist in various markets including soybean, cotton and canola seeds as well as LibertyLink-branded crops that are resistant to its glufosinate herbicide, an important alternative to Monsanto’s Roundup Ready seeds, among other things.

But uncertainty remains over how difficult it may be to structure a comprehensive remedy that resolves wide ranging competitive concerns and what the DOJ will make of the merged firm’s grip of the overall seed market because Monsanto has such a dominating position in the technology aspect of traited seeds.  An independent DOJ Antitrust Division would certainly explore whether the combination could harm actual competition as well as innovation competition going forward. For its part, Bayer has said that much needed innovation will come from combined seeds-chemicals offerings and that it needs to merge to compete against other integrated suppliers such as the future Dow/DuPont.

Will Meeting with the President Be Standard Procedure For Merger Parties Going Forward?

When the CEOs of AT&T, Monsanto and Bayer met President-elect Trump, they promised jobs and investment, which is great except for the fact that the Antitrust Division is investigating both deals. These meetings raise the question of whether President Trump will inject himself directly into merger reviews and whether it is appropriate for the White House to openly comment on merger reviews that pending at the antitrust agencies?

The antitrust agencies have guidelines on how to assess whether a merger violates the antitrust laws.  The DOJ has career antitrust attorneys’ and economists’ who analyze mergers.  They review company documents, interview executives of the merging parties, third parties, and consumers to determine whether the merger will lead to price increases.  American consumers deserve an independent analysis of the competitive effects of mergers because allowing an anticompetitive merger to through without conducting a thorough analysis could lead to consumer harm through higher prices and a loss of innovation.  Accepting the CEOs promises of jobs would simply be a bad deal for consumers.  First, the promise is a difficult one for the DOJ to enforce.  Second, job creation may not outweigh the competitive effects.

To be sure, merging companies typically tout the benefits of their deals.  But the antitrust staff at the agencies are tasked with scrutinizing whether those benefits would actually result from the merger, rather than from business decisions that would have been made anyway.  Moreover, the staff is usually conducting the investigation without the interference of superiors let alone the President.  The DOJ’s job is to make an objective law enforcement decision related to whether the transaction violates the antitrust laws.  The DOJ has put a lot of effort in trying to provide businesses some predictability about what types of mergers will raise competitive harm so their independence in making decisions is vitally important.

Politics Still Plays a Role in Merger Reviews

Although the antitrust analysis at the DOJ is normally done without direct political interference, this is not to say that politics never plays a role in antitrust reviews.  It would be naive to think otherwise.  For example, many antitrust observers believe that the Obama administration intervened in the approval of American Airlines and U.S. Airways, however, there was no clear evidence that any direct intervention occurred.  The allegations never came anything close to the inappropriate behavior that went on way back when President Nixon was in office.

But what is fairly common is that each administration can shape its own antitrust policy.  Indeed, the Obama administration’s Antitrust Division was fairly aggressive with regards to merger enforcement.  The Hillary Clinton campaign ran on a progressive antitrust enforcement agenda and when the Trump’s nominees are put into place, we would expect that DOJ’s rulings will reflect the prevailing administration’s policy views on antitrust.  But the primary concern with these high level meetings is that the DOJ’s antitrust reviews should be free of direct intervention by the President.

For what its worth, Trump’s cabinet pick for attorney general, Senator Jeff Sessions, said he didn’t discuss the AT&T/Time Warner merger in his meetings with Trump ahead of his confirmation and that the DOJ’s antitrust reviews will not be influenced by politics.  As head of the DOJ, Sessions would supervise the Antitrust Division.  During Sessions’ confirmation hearing on January 12, he testified before the Senate Judiciary Committee that he has “no hesitation to enforce antitrust law.”  Said Sessions, “I have no hesitation to say certain mergers should not occur.”  He also said that he would not impose conditions on pending mergers that are unrelated to competitive concerns triggered by those transactions. Some of his quotes include “I believe it would be wrong to further some separate, discrete agenda that is not reasonably connected to the merger itself.” And “we should ensure we have the highest integrity in antitrust adjudications because they can have great impact,” Sessions said. “The law is not crystal clear about what’s lawful and what’s not lawful and what the antitrust division is required to do; and it leaves dangers, if not politicization of it, it leaves dangers of policy agendas getting embroiled in it.”

OK, so does CNN need to be divested or not?

On April 25, 2016, the DOJ submitted a proposed final judgment allowing the creation of New Charter as long as the parties agreed to certain behavioral conditions. The DOJ required conditions to resolve its concern that New Charter would have a greater incentive and ability to impose contractual restrictions on video programmers (producers of TV shows and video content), thereby limiting their ability to distribute their content through online video distributors (“OVDs”), such as Netflix, Amazon or Hulu.  [1]  See Complaint.

New Charter became the second largest cable company and third largest multichannel video programming distributor. MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon. Prior to the merger, however, TWC already had substantial power over programmers’ content. The company used this power to influence programmers’ behavior towards its smaller OVD rivals. TWC was the most aggressive cable company or MVPD in terms of obtaining alternative distribution means (“ADM”) clauses in its contracts with programmers that prohibited or greatly restricted programmers from distributing their content to OVDs or through online distribution. Indeed, the DOJ specifically alleged that “[n]o [cable company] has sought and obtained these restrictive ADMs as frequently, or as successfully, as TWC.”  [2]  Complaint at 3.

Acknowledging that no horizontal overlap existed between the merging parties, the DOJ noted that “the Clayton Act is concerned with mergers that threaten to reduce the number of quality choices available to consumers by increasing the merging parties’ incentive or ability to engage in conduct that would foreclose competition.”[3]  Competitive Impact Statement.  Accordingly, the DOJ sought comprehensive relief to ensure that New Charter will not have the ability to foreclose OVD competition and deny customers the benefit of innovation and new services through ADM clauses and other restrictive contracting provisions.

Similarities Between the Charter/TWC and the ABI/SABMiller Mergers

There are many parallels between the Charter/TWC and the ABI/SABMiller transactions. Both deals involve multiple tiers between the producers and the customers.[4] Both transactions involve dominant firms that already have the ability and incentive to pressure companies in other tiers to enter into contracts that have the effect of restricting rivals’ access to consumers, and as a result of the merger, the newly formed mega company would have greater incentive and ability to impose restrictions and/or incentives that could raise entry barriers or foreclose its smaller rivals.

What rings true in Charter/TWC similarly rings true in ABI/SABMiller. For example, in the Charter/TWC complaint, the DOJ expressed concern that:

In the beer industry, it is the emergence of import, craft and small independent brewers that is providing important competition in both product diversity and pricing. For smaller brewers and importers to successfully compete with ABI, they need access to distributors, and ultimately retailers, in order to sell their products to consumers. Large brewers like ABI already enter into agreements that discourage distributors from selling rival beer and prevent retailers from offering adequate or prime shelving space to craft and independent brewers as well as importers.

While the current MillerCoors JV has allowed for open and independent distribution, there is reason to believe that ABI’s proposed divestiture of SABMiller’s share of the JV to Molson Coors to purportedly retain the current levels of competition in the United States, will actually result in New MillerCoors becoming more like ABI. Indeed, the present MillerCoors JV is not a true merger; it is an agreement of limited duration. Currently, MillerCoors is not fully incentivized to maximize its brand portfolio because capital invested in any brand would only benefit its true owner if the JV were to ever be terminated by the parties. Because it is not a full merger, there has not been any realistic incentive for the JV to pursue tactics like ABI’s share of mind incentive program.

Post-transaction, however, New MillerCoors will be a completed merger as Molson Coors will take over 100 percent ownership. New MillerCoors will have integrated management and the incentive and ability to pursue stronger agreements and incentive programs that restrict craft and independent brewers’, as well as importers’, access to distributors and retailers. To the extent that both a merged ABI/SABMiller and New MillerCoors pursue the same strategy, their effectiveness in eliminating craft will increase and distributors will eventually find it financially unattractive for distributors to carry craft brands as distributors are strong-armed into participation in incentive programs or given other carrot or stick threats such as ownership transfer approvals to compel compliance. Moreover, craft brewers will not be able to find or join rival distributors of scale which is critical for volume gains in all retail accounts.[6]

Thus, the competitive concerns in the ABI/SABMiller and MillerCoors transactions effectively mirror the concerns in Charter/TWC: “[t]o the extent a transaction, such as the one at issue here, enhances [a brewer’s] ability or incentive to restrain [craft and independent brewers’] access to [distributors and retailers], and thus to prevent [craft and independent brewers] from becoming a meaningful new competitive option, consumers lose.”[7]

The New Charter Remedies

The conditions that the DOJ negotiated with New Charter are entirely behavioral in nature and serve as a good example of remedies that would be beneficial in resolving the wide-ranging competitive concerns raised by the ABI/SABMiller merger.[8]  Proposed Final Judgment.  The remedies restrict New Charter’s post-merger conduct in the following ways:

• New Charter is prohibited from entering into or enforcing agreements with programmers that limit, or forbid, OVDs’ access to video content.

• New Charter is prohibited from entering into agreements that create incentives for video programmers to limit access of programming to OVDs.

• New Charter is prohibited from discriminating against, retaliating against, or punishing any video programmer for providing its content to any video distributor.

• New Charter is prohibited from entering into or enforcing agreements with programmers that make it financially unattractive for programmers to license their content to OVDs.

• New Charter is prohibited from entering into or enforcing unconditional most favored nation provisions against a programmer for licensing their content to OVDs.

In sum, the conditions contain broad prohibitions on restrictive contracting practices to ensure that New Charter will not replace ADMs with other contracting practices that would increase barriers for OVDs or otherwise make OVDs less competitive. Indeed, the prohibitions were put in place because the DOJ was concerned that New Charter could enter into certain contracts that are designed to circumvent the order, create incentives to limit distribution to OVDs, or create economic disadvantages for a programmer to license content to an OVD.

The New Charter Remedies Are Not Industry Specific

The behavioral remedies used to resolve the vertical foreclosure concerns raised by the creation of New Charter are applicable to any industry with a multi-tier supply chain and dominant firms that already exert power over other tiers of the supply chain. The DOJ’s goal in New Charter is to prevent the merged firm from raising barriers to entry for smaller horizontal rivals or otherwise make smaller horizontal rivals less competitive. The DOJ is concerned about a merged firm’s increased incentive and ability to protect its market power by denying or raising the costs of an input to its rivals. In other words, the DOJ is concerned about transactions that substantially enhance the merged firm’s ability and incentive to foreclose competition through restrictive contracting provisions or incentive programs that make it economically unattractive to work with the merged firm’s rivals. The New Charter conditions are aimed at protecting competition and consumer choice.

Like TWC, ABI has been squeezing its smaller rivals. Unlike TWC, ABI is a much more dominant firm within its industry. ABI influences the distribution tier through direct ownership or limiting distributors’ ability to carry competitors’ products through its “share of mind” incentive program. ABI’s incentive program discourages distributors from carrying rival beers if they want to be eligible for substantial financial rewards. Post-merger, ABI’s increased global scale and New MillerCoors’ full portfolio of brands will substantially enhance their ability and incentive to obtain provisions in their contracts or promotional agreements that restrict or limit the ability of distributors from distributing their smaller rivals’ products, foreclosing these smaller rivals from effectively competing. While there is nothing illegal about ABI using incentive programs that focus on increased sales of its beer, the DOJ needs to make sure that ABI’s contracts with distributors do not contain terms that create economic disadvantages for them carrying smaller brewers’ beers. The DOJ must be mindful that no beer producer has sought and obtained these incentive programs as frequently, or as successfully, as ABI.

The New Charter remedies line up very well with what the DOJ should do in the proposed ABI/SABMiller transaction. Comparable remedies in the proposed ABI merger would: (1) prohibit or limit ABI’s and New MillerCoors’ ability to use distributor incentive programs or MFN-type agreements with ABI or MillerCoors aligned distributors that create economic disadvantages or make it financially unattractive for them to distribute independent brewers’ beer; (2) prohibit ABI from retaliating or discriminating against distributors for distributing other brewers’ beers; and (3) prohibit ABI and New MillerCoors from engaging in other conduct that would foreclose other independent brewers’ ability to distribute their products to retailers.

Such conditions would not be overly restrictive. ABI and New MillerCoors should be allowed to incentivize their distributors to increase sales of their products. But, as the DOJ addressed in the case of New Charter, they should not be allowed to engage in promotional programs that are designed to make it unattractive for distributors to carry rival products.

Approving a merger is risky business and the DOJ is increasingly aware that it needs to be as thorough as possible to prevent post-merger mischief. The approach in Charter/TWC is sound, and DOJ should take a similar one with respect to ABI/SABMiller.

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

[1] See, Complaint, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016).

[2] Id. at 3.

[3] See Competitive Impact Statement, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016). “For example, a merger may create, or substantially enhance, the ability or incentive of the merged firm to protect its market power by denying or raising the price of an input to the firm’s rival.” Id.

[4] It does not matter that the Charter/TWC and the ABI/SABMiller merger concerns involve different tiers or that the power flows in different directions. What matters is that the effects are the same – both mergers involve using power over a different tier of the supply chain in order to disadvantage horizontal rivals.

[5] Complaint, supra note 1 at 3 (emphasis added).

[6] Most local markets are primarily, if not exclusively, served by an ABI aligned distributor and/or a MillerCoors aligned distributor as the only distributors of sufficient scale and scope to service all retail accounts on a daily basis.

[7] Mirroring the language in the Complaint at footnote 5.

[8] See, proposed final judgment, available at https://www.justice.gov/opa/file/846051/download. The behavioral remedies are outlined on pages 5-7.