Recently in Antitrust Division Category
November 4, 2016 11:09 AM
On Wednesday of this week (11/02), the Antitrust Division of the U.S. Department of Justice
AT&T arguing that its DirecTV subsidiary was the "ringleader of information sharing agreements" among rivals that "corrupted" competition among rivals to carry the Dodgers' cable TV channel. Complaint
at para 2. According to the DoJ, this is the primary reason that Dodgers' fans in L.A.--living outside of Time Warner Cable's ("TWC") service area have not been able to watch Dodgers' games since the 2013 season.
Unfortunately, the DoJ seems dangerously unaware of findings by a federal court--in an antitrust case on the exact same subject matter being litigated during the same time frame as the facts in the DoJ complaint--that the exclusive sports distribution contracts (that raise consumer rates) may well be the more obvious Sherman Act violation
. When we know what DirecTV knew--as a defendant to that litigation--we can better understand why the DoJ could not be more wrong in this case.L.A. Regional Sports Networks ("RSNs")
Until 2011, Fox Sports
was the leading RSN in the L.A. area. It had two channels, one of which distributed games of the Lakers, Kings, and the Anaheim Angels, and the other of which distributed the games of the Clippers, Dodgers, and Anaheim Ducks.
But, as Fox's contract with the Lakers was ending in 2011, TWC swooped in and paid $3 billion for the rights to broadcast the Lakers' non-national games for the next 20 years. As DoJ recounts in its complaint, TWC raised the prices to carry the Lakers (as a standalone channel) well above any range of what any of the other pay TV distributors considered fair value. DoJ Complaint
In 2013, Guggenheim Partners paid
an unheard of $2.15 billion for the Los Angeles Dodgers baseball team ("Dodgers"). The private equity investors then turned around and sold the exclusive rights to distribute Dodgers' games--in the form of a dedicated "Dodgers channel"--to TWC for an even-more-unheard-of price
of $8.3 billion. Reportedly
, TWC never budged on its demands, that every pay TV distributor (i.e
., competitors and other cable/satellite companies), would have to pay it--on a per-subscriber basis
for the rights to broadcast Dodgers games--regardless of how many of these distributor's customers want to watch the games
. Until Wednesday, the narrative was that TWC's "unmitigated disaster
" of a deal showed that perhaps there was some limit to the ever skyrocketing costs of sports programming. DoJ to TWC's Rescue
The DoJ contends
that DirecTV privately told other pay TV companies that it was not going to pay TWCs outrageous demands. The DoJ argues that, but for this exchange of information, TWC's competitors, and other pay TV distributors in the L.A. Dodgers home market, would have been happy to pay (and pass along to their consumers) the supra-monopoly prices being demanded by TWC.
Bizarrely, DoJ contrasts the "anticompetitive" situation of today with an earlier--presumably "competitive"--negotiation period, in which TWC (as the new RSN for the Lakers) extorts a price from Cox Communications' subscribers of "60% more" than Cox's internal analysis indicated the content was worth. Complaint
at para. 36. No, the DoJ's thinking is that if cable companies aren't just spending their customers' money and passing through rate increases, then something illegal is afoot.
The fact, though, is that the vertical distribution contracts--which are responsible for the sports programming price increases (that DoJ is incomprehensibly fighting for)--were under antitrust scrutiny, and coming up short, throughout the relevant time period covered by the DoJ suit. After looking at these contracts in the light of antitrust precedent, we can truly appreciate just how wrong the DoJ was to go after the victim--and not the cause--of spiraling sports programming costs. Consumers Fight Anticompetitive RSN Contracts
In 2012, consumers filed class action antitrust lawsuits against the MLB and the NHL in the Southern District of New York. See, e.g., Laumann v. NHL, et al
. and Garber v. Office of the Commissioner of Baseball, et al
., 907 F. Supp.2d. 462 (SDNY 2012)
. These cases squarely attacked the contracts at the heart of the exclusive "home television territory" ("HTT") distribution model. Specifically, consumers alleged that the contracts between the teams, MLB (and the NHL), and the RSNs of DirecTV and Comcast, illegally restricted competition in the broadcasting/streaming markets because these agreements also restrict the right of the "away" team--a non-party to these contracts--to sell its own broadcast feed to anyone in the HTT area of another RSN.
MLB fans can only watch games of their "home team" by purchasing a cable package from the RSN (or a distributor of the RSN, such as AT&T, Verizon FiOS, or a satellite or cable company). Fans of other teams could only watch the games of out-of-market teams by purchasing an out-of-market package ("OMP") from the leagues (for streaming customers) or from the RSN (distributing on behalf of the leagues).
The plaintiffs' successfully argued (at every pre-trial stage) that the complicated web of contracts between the teams, the leagues, and DirecTV and Comcast (which prevented a non-party to the contract (i.e.,
any "away team") from selling its own independently-produced feed of the game to any fan in any part of the country) were "contracts . . . in restraint of trade" in violation of the Sherman Act. The plaintiffs' contention was that, but for these contracts, fans could purchase the away-team feeds of games on an "a la carte" basis, even if they did not want to buy home team's cable package.The Case History/Court Findings
Throughout the case, DirecTV and Comcast (in the same role as TWC in the DoJ case), vigorously argued at every possible stage that, as the RSNs, they were merely accepting terms set forth by the Leagues and that they did not benefit from the exclusivity--and the higher-than-competitive consumer prices--that this exclusivity produced. The court rejected this argument in both the defendant's motions to dismiss in 2012 (opinion
) and their motions for summary judgment in 2014 (opinion
The court explained that,
evidence that the Television Defendants would not have entered the contracts at the prices prescribed but for the territorial restrictions, is sufficient evidence from which a fact finder could infer a tacit horizontal agreement among the RSNs and MVPDs.
Denying Defendant's Motions for Summary Judgment, at 50 (emphasis added). Further, in rejecting the defendant's motions for summary judgment, the court found,
The clubs in each League have entered an express agreement to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories. There is also evidence of a negative impact on the output, price, and perhaps even quality of sports programming.
. at 30/57.
In May of 2015, the court certified
the plaintiff's class to go forward to trial in order to seek injunctive relief, but not money damages, because there was no common monetary impact among the class members. This decision pretty much guaranteed that the case would settle
, which it did, on the eve of trial, earlier this year. The settlement agreement
, unfortunately, leaves intact the geographic market exclusivity, which, in turn, ensures that sports content costs will continue to spiral. To What End?
In many ways, this is/was the perfect case for an antitrust enforcement agency to bring--meritorious, but without the profit potential to ensure the efficacy of private enforcement. However, there is no evidence the DoJ was even aware of this antitrust litigation.
So, instead of taking up the consumer's side, the DoJ chose to sue on behalf of conduct that a United States District Court has already characterized as "express agreement[s] to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories" and their corresponding "evidence of a negative impact on the output, price, and perhaps even quality of sports programming." It is sad that the DoJ didn't follow antitrust developments in this field closely enough to know that agreements which result in distributors paying 60% premiums over value is the result of a "corruption of competition"--rather than competition itself.
Finally, it is interesting to consider that, until several months ago, DirecTV had every reason
to believe that a court would be likely to find that its RSN contracts
were an illegal restraint of trade. How ironic that, having dodged a bullet with respect to its RSN agreements, DirecTV would find itself the target of another lawsuit for not agreeing to pay the most anti-consumer RSN contract in America
December 31, 2011 3:54 PM
Well, here it is: New Year's Eve 2011, and--in case you haven't been reading along--over the past several months, I kind of took to calling Sprint "the Whale" in one of my blog posts based on their disproportionate (to their size in the market) influence in Washington (everything they do is "crazy big"). So when it came time to recognize a regulatory "player of the year", I have to give props where they're due, and congratulate the Whale.
Whether you like it or not, and whether by skill or luck, you have to give the Whale credit . . . of all the big telecom players/issues considered this year, the Whale pulled a clear-cut victory on their priority issue when AT&T and DT announced they were abandoning their deal to allow AT&T to acquire T-Mobile. This doesn't happen much, and you have to recognize that this is no easy feat. For this alone, 2011 was the year of the Whale, and 2012 will, by virtue of the Whale's win in 2011, by no means be the year of the consumer.
Not taking anything away from Sprint's achievement, the coordinated actions of the DoJ and the FCC, did ensure that AT&T was never going to get an opportunity to defend itself on the merits in front of an impartial arbiter. This is because, once it becomes clear that the regulator (which has much broader authority to deny the merger than that conferred on federal judges under Section 7 of the Clayton Act) has made up its mind to deny a merger, a court has a lot less incentive to even try an antitrust case.
Consider that a U.S. District Court--under its Section 7 analysis--can only prevent the merger if it finds that it will lessen competition. The FCC, on the other hand, seems free to ignore the analytical framework the court is bound by, and the FCC does not have to approve a merger unless the parties convincingly demonstrate that the merger "promotes" the public interest. Thus, the FCC always holds the final cards.
In cases like the DoJ/AT&T case--where DoJ seeks a permanent injunction (equitable relief that requires a longer trial/discovery period than traditional "extraordinary" merger relief, such as preliminary injunctions and temporary restraining orders, courts might well be much more likely to include the regulator in the process early, so as to avoid "wasting time." Unfortunately, administrative/judicial efficiency can come at the cost of the merging parties' due process rights.
So, Congratulations! are in order for Sprint this New Year's Eve, and, looking forward, I would say that the way the "2 layer" merger review process (Justice/FTC + Regulatory Agency review) was exploited this year by the Agency, will possibly tee up this issue for legislative elimination in 2012.
Happy New Years! to all my readers. Thanks for taking the time to read my blog--I'm grateful for every "unique" view that I get--so tell all your friends! Best wishes to all for a safe and successful 2012!
November 30, 2011 10:47 AM
Yesterday, the FCC issued an Order Dismissing the Applications of AT&T and Deutsche Telecom
for license transfers. This was not unusual. The way the Commission did it, and the drama leading up to yesterday's events was.
As AT&T's Jim Cicconi succinctly and thoroughly notes in a blog post
yesterday, the Commission's action was the only legally correct response to AT&T and DT's request to withdraw their license transfer applications. So far, so good, but then the FCC decided to include a 109 page document
entitled "Staff Analysis and Findings", which is primarily FCC staff's attempt to analyze the merger under Section 7 of the Clayton Act (the subject of pending litigation by the agency charged with enforcing Section 7 of the Clayton Act in a venue authorized to decide challenges brought under that statute) This is where it gets interesting.
Yesterday's action--the appending of the "Staff Analysis and Findings" to the Dismissal Order--was interesting, not only because it was unusual and unnecessary to accompany an order terminating an FCC matter, but because the Commission seemed so intent on releasing its own primarily antitrust analysis, when the parties are already engaged in active antitrust litigation in a court with the jurisdiction to decide antitrust claims.
While the Commission attempts to offer some superficially unpersuasive justifications in paragraph 8 of its order, these justifications are laughable. For example, they note that "a lot of people spent a lot of time on this"--in what large matter do they not? The Commission also argues that releasing the document "furthers transparency"--this is the one that is laughable. The Commission never releases
pre-decisional, deliberative documents. In fact, there is a Freedom of Information Act exception that allows agencies to withhold
exactly this information.
Finally, the FCC notes that "the parties could still re-file." But, doesn't this argue for just holding on to the original draft order? Far from persuading, the order's empty reasoning leaves the reader with the question of "why did the Commission really bother?" Comm-temptible?
Personally, when I heard the Commission planned to release a report containing the "Commission staff's" opinions (that were allegedly the basis of the draft designation order) along with an order approving the parties' withdrawal of their applications, my reaction was that the agency was engaging in a distasteful, rude, and uncivil disregard for the legal process
. After all, the proper authorities were already well engaged in antitrust litigation with the parties before a U.S. District Court.
You would hope that the FCC would show some respect for the rule of law, and the responsibilities of the judiciary, and simply take the action they were legally bound to take--dismissing the license transfers. But instead, the FCC displayed a relative contempt for the law
The Commission certainly understood that it was extinguishing its own jurisdiction over the applications it was dismissing. So, what purpose did the Commission have that was so important that would cause it to include--in a dismissal order--its own, non-expert, antitrust analysis that was admittedly not based on solid evidence (which is why the FCC wanted to refer the matter to an ALJ)?
It's hard to believe that the Commission wasn't aware that it would at least create the perception
that it was attempting to exert some extra-legal influence over the pending antitrust litigation. Thus, my initial reaction--when I heard what the Commission planned to do--was one of disappointment at the agency's disregard (if not contempt) for the integrity of the court proceeding. Or Comm-edic?
I spoke to a reporter last night who had talked to a lot of other attorneys. The reporter wanted to get my "take" on the Commission's action--which I just described. The reporter told me that I was the only person that had expressed this opinion. It turns out that most people were focused on the substance of the staff report, and what (generally negative) effect this report would have on AT&T's prospects for its antitrust litigation.
Many people opining on the matter claimed to be under the impression that the FCC was asked
to release its report at the request of the Antitrust Division
. Personally, I don't believe this to be true, because it just sounds silly on its face. The basis of this report was a draft order, prepared by Commission staff for the Commission's own internal purposes. The "draft order" was clearly converted to a "staff report and analysis" in an awfully short period of time, and this is what makes the "Antitrust Division request" theory all the more incredible.First
, what Antitrust Division attorney, working on their own case, would want to be stuck with a report, analysis, and support prepared by FCC staff, and released under a cloud of bias? It makes no sense. FCC staff did not write the Division's complaint, FCC staff have not reviewed the same evidence as the Division staff, so it is more likely that the FCC staff report would lock the Division into a weaker case than the Division should be able to make for itself.Second
, why would the Antitrust Division want its case, including supporting materials, laid out for AT&T's inspection for a full two and a half months prior to trial? What attorney would be comfortable with this arrangement?Third
, whether the DoJ asked for it or not, they now have to deal with the prospect of bias in the eyes of the court. Even though the defendant is a big company, courts are mindful of fairness. Any contradictory inconsistency between the Division's actual case and the staff report will be the government's burden to reconcile and justify. To What End?
There is no good answer for why the FCC included its report in its dismissal order. By showing bias at this point, can the FCC really re-claim the mantle of the "public interest?" If the case settles, or the parties win the litigation, can the FCC do anything more than process and approve a new application?
November 16, 2011 3:13 PM
Last week, the U.S. District Court for the District of Columbia, released its opinion
granting the Antitrust Division of the U.S. Department of Justice a preliminary injunction preventing H&R Block ("HRB") from acquiring the stock of "2SS Holdings, Inc.", the maker of TaxACT, a digital "do it yourself" ("DDIY") tax preparation software.
Since this news was released on November 2nd, many have speculated, opined and hypothesized--without basis--that this decision does not bode well for AT&T's acquisition of T-Mobile USA from Deutsche Telecom. According to just about everyone, the impact was decidedly positive for the DoJ's chances to win its case against AT&T/T-Mobile if it goes to trial next February in Judge Huvelle's courtroom.
The simplified reasoning was that because the government had just prevailed on its most recent horizontal merger challenge, it will likely prevail on its next horizontal merger challenge in the same district. These stories were the predictable result of a well-known human behavioral bias, known as the "error of recency
"--the notion that humans tend to overweight the value of recent actions. While the "hot hand fallacy" and the "gambler's fallacy" were identified with respect to how humans approach "random" (i.e
., "unrelated") events over 300 years ago, these biases continue to persist
What is interesting, though, is that the "hot hand fallacy" infected all major stories reporting, or commenting on, the event. The result was that the "legitimate" news stories (e.g
) were remarkably similar to the interest group blogs
. But, since no one has yet attempted to offer any perspective on the HRB case (unaffected by the error of recency), let's look at how the two cases might be perceived differently by a different court, with a different set of facts.Market DefinitionHRB
This is perhaps the most obvious difference between the two cases. The HRB case was, strategically, much more of a traditional horizontal merger case. The basic strategy in a horizontal merger case is for the plaintiff to seek to define the markets (product and/or geographic) very narrowly, and for the defendants to seek the broadest possible market definition. For example, if the alleged market was soft drinks, defendants would want to argue that all non-alcoholic beverages, including tap water, should be included in the product market.
It would not be going too far to say that HRB was all about product market definition. In fact, the court devoted more than half of its opinion to evaluating each party's claims regarding the properly-defined product market. Only if the court agreed with the DoJ's contention that DDIY software was a discreet product market, would the government have been able to show sufficiently high concentration numbers to make its case that this merger would lessen competition.
Defendants, on the other hand, were arguing that the market also included professionally-assisted tax preparation, and (fatally) consumers that file their tax returns without any assistance. The court found this definition impermissably broad, because the inclusion of "pen and paper" filers distorts the market because these filers were not purchasing any product or service, but merely performing a legally-compelled "chore."
Ultimately, the court found the DoJ most persuasively defined the relevant product market. After adopting "DDIY" as the product market, the concentration numbers were substantial. The market leader, Intuit, had around a 62% market share, with HRB and 2SS coming in second and third with approximately 15.5% and 13% shares, respectively. Now, let's compare the market definition facts of the AT&T case.AT&T/T-Mobile
Unlike the HRB merger, there are unlikely to be many, if any, novel proposed market definitions presented by this proposed wireless acquisition versus any of the many others for which the DoJ has alleged the same product and geographic markets it is alleging in the present complaint. Competitive Effects--HRB vs. AT&T/T-Mobile
Contrary to the assumptions of some commenters, however, mergers are not evaluated solely on concentration numbers. The HRB court, relying on U.S. v. Baker Hughes
, explained that "[t]he Herfindahl-Hirschman Index cannot guarantee litigation victories." Opinion at 53 of 86 (internal citations omitted). So let's compare the alleged anticompetitive effects of both proposed mergers.
First, we have to recognize that under the worst case for AT&T/T-Mobile, almost every geographic market starts with much lower concentration numbers--and smaller increases in concentration due to the merger--than in HRB. The higher initial concentration numbers, and the greater changes in concentration in HRB, make it easier to understand how the simple removal of one vigorous competitor (the court eschewed the term "maverick") could have an anticompetitive effect.
Second, consider also that the DDIY tax preparation market was a differentiated product market, in which the proposed acquiring/acquired firms were each other's closest substitutes. Thus, it was fairly easy to understand the DoJ's unilateral effects theory--that HRB could raise the price on its "high end" DDIY services and still capture lost sales through its ownership of the "low end" acquired brand.
On the other hand, it is unclear whether any true "differentiation" exists in the wireless mobile telecommunications service market. Unlike in HRB, the government has not alleged that retail consumers perceive AT&T and T-Mobile to be each other's closest substitutes. Thus, it seems unlikely that this merger will provide the post-merger firm with the opportunity to execute a unilateral price increase.The Effects of H&R Block on the AT&T/T-Mobile Merger
Did you really think I'd try to answer that question? I have no idea. It's obvious that the facts of the HRB merger made it into a more traditional battle over a narrow vs. broad product market. On the other hand, from the beginning the AT&T/T-Mobile merger has been about competitive effects. All we really know is that, while it's a gamble to try to predict the outcome of a case based on oral arguments, it's an odds-against bet to try to predict the outcome of one case based on the near-term results of an unrelated case.
November 10, 2011 2:14 PM
I'll be the first to admit that not everything I write is some kind of jewel that's just going to draw everybody in and make salient, compelling points in a hilariously entertaining fashion. Truth be told, sometimes I don't even try
. While I always write about subjects that hold some interest for me (and try to make points that other people aren't talking about), sometimes I write about things that seem to only
One of those times was about 6 weeks ago, in a post
entitled "Should the Merger Guidelines Come with Guidelines? The point of the post was that the Guidelines don't really account for barriers to exit (which increase barriers to prospective entry), especially when merger enforcement could exacerbate already-high entry barriers by adding "barriers to exit", which would not otherwise exist. Does anyone even follow the reasoning that the agency--by undertaking an enforcement action--can change the original characteristics of the market on which its action is focused? I didn't think so.
BUT, if you did read the whole post, you would have seen this quote "Perhaps China Telecom
, Carlos Slim, SingTel, or some other prolific foreign telecom investor, will, at some point, come to DT's rescue?" (emphasis added) If you read this far, then you wouldn't have been at all surprised to see this story
from Bloomberg a couple days ago, announcing that China Telecom plans to enter the U.S. market sometime in 2012. Interestingly, the President of China Telecom Americas does not rule out entering on an own-facilities basis, noting that "money is not a problem."
So, on the off chance that the government and AT&T are unable to work out a satisfactory compromise that allows AT&T to expand output, protects consumers and rewards DT's substantial investment, it looks like all hope might not be lost for DT. I write this for you 4 readers that did read
that post. Rest assured, I'm doing my best to provide a thorough analysis of all potential consequences of government actions--even unintended consequences
If you're one of my few readers . . . thank you . . . and please give your friends this message: "Telecomsense
: Just Shut Up and Read It!