United States: Three Lessons From AT&T/Time Warner And Three Strategies For Future Vertical Transactions


The challenges that the government faces in litigating vertical mergers was illustrated in the DOJ's recent loss in its challenge of AT&T's proposed acquisition of Time Warner. The result provides guidance for how companies can improve their odds of obtaining antitrust approval for similar transactions.

In Depth

The US Department of Justice's (DOJ) loss in its challenge of AT&T's proposed acquisition of Time Warner demonstrates the difficulties the government faces in litigating vertical mergers and provides a guide for how companies can improve their odds of obtaining antitrust approval for such transactions. This was the first litigated vertical merger case in four decades and the largest antitrust merger litigation under the Trump administration. Last week AT&T received the go ahead from Judge Richard J. Leon to proceed with the deal and the parties already closed the transaction. It is still unclear whether the DOJ will appeal the decision. Although this was a significant loss for the DOJ, Judge Leon's opinion was narrowly tailored to the particular facts of the industry. Therefore it is questionable whether the opinion will have a significant impact on future vertical merger enforcement by the US antitrust regulators.

The DOJ's main theory in the case was that the combination of AT&T's video distribution services, namely DirecTV's satellite TV offerings, and Time Warner's video content would provide Time Warner with increased bargaining leverage when negotiating with other video distributors who are AT&T's competitors. According to the DOJ, AT&T would have increased leverage over competitor video distributors because (1) some of the distributors' customers would depart due to the lack of Time Warner's networks in the distributor's offering and (2) of the customers that left, some would sign up for AT&T's competing video distribution services, DirecTV. Since both parties to the negotiation would recognize this change in negotiating position, AT&T's prices for Time Warner content would increase.

Judge Leon held that the DOJ failed to meet its burden to show that AT&T's acquisition of Time Warner would harm competition due to an increase in Time Warner's bargaining leverage. Judge Leon did not dispute the DOJ's theories on key legal principles, such as the relevant market, the burden of proof, and whether the DOJ's bargaining model was a viable theory to challenge a transaction. Instead, he found that the facts did not support a finding that the transaction would lead to a substantial lessening of competition. First, the key documents used by the DOJ were regulatory filings by AT&T or Time Warner in prior vertical mergers in the video distribution industry. The statements in these regulatory filings were made in an effort to prevent a competitor from completing its acquisition. Even so, the statements only suggest that vertical integration "can" create an unfair advantage in negotiations, without saying that vertical integration "will" lead to increased prices for video content. Second, Judge Leon gave little weight to the testimony from AT&T's competitors because, unlike with horizontal transactions, the affected "customers" of Time Warner were competitors of DirecTV and thus had a natural bias to oppose the transaction. In addition, Judge Leon found that the customer testimony was comprised largely of speculative statements that they would be harmed in negotiations without any quantitative analysis to support their assertions. Finally, Judge Leon found the DOJ's economic analysis was based on flawed assumptions not supported by the record. Importantly, Judge Leon found that prior vertical mergers in the industry had not led to higher prices for customers.

The obvious question remains: what does this mean for other vertical transactions facing US antitrust review? For companies considering vertical mergers, there are three main takeaways from the case.

1.       The DOJ Faces a High Burden to Prove Harm to Competition in Vertical Cases

Throughout the course of the trial, the differences in the legal standards governing a horizontal merger and a vertical merger became clear. Judge Leon's opinion specifically notes that the DOJ's "'familiar' horizontal merger playbook is of little use." Of course what Judge Leon is referring to is the government's typical strategy in horizontal merger cases, which is to establish a presumption of competitive harm by introducing evidence that a merger will lead to undue levels of market concentration. Essentially, if the government proves its market, it is almost home. Leon notes that because this presumption is not in play in a vertical case, the DOJ "must make a 'fact-specific' showing that the effect of the proposed merger 'is likely to be anticompetitive.'" This showing is "highly complex" and "institution specific." Unlike in a horizontal case where the main disputes often relate to market definition, in a vertical case the debate will center on the competitive effects analysis.

Further complicating matters, there are clear efficiencies in vertical transactions that the government does not dispute. Indeed, in AT&T/Time Warner the DOJ credited more than $350 million in annual efficiencies resulting from the elimination of double marginalization (EDM). Judge Leon refers to this type of efficiency as a "standard benefit" associated with vertical mergers because a merger between two companies operating at different levels in the supply chain almost automatically removes some margin. Since this type of efficiency is not disputed by the DOJ, any claimed price increase resulting from a vertical merger has to outweigh the claimed efficiencies.

In future cases, the DOJ will need substantial evidence from ordinary course business documents, more testimony from uninterested third party witnesses, and sound economic analysis of the likely competitive harms to be successful in a vertical merger challenge. Vertical cases, especially those not based on a foreclosure theory, cannot rely on simply alleging that the combined entity has an important product or a high market share. Rather the government needs to show clear harms that outweigh the credited efficiencies. Overall, this means that a vertical merger case presents more difficulties for the DOJ than a horizontal case and poses a higher risk for the agency should the case go to trial.

2.       The Effectiveness of Increased Bargaining Leverage as a Theory of Vertical Harm Remains Uncertain

The DOJ's theory in AT&T/Time Warner generally differs from its prior vertical merger enforcement. The main difference is that the DOJ did not allege that the merger would result in either foreclosing a vital input from downstream competitors or foreclosing a group of customers from upstream competitors. Instead the DOJ's main theory was that AT&T's ownership of Time Warner would provide Time Warner with increased bargaining leverage in negotiations with video distributors who are AT&T's competitors. This theory posits that by raising costs to AT&T's rivals, the proposed acquisition would harm competition and lead to price increases overall. The DOJ did not allege that AT&T would not continue to supply Time Warner content to its competitors.

As Judge Leon notes in his opinion, the DOJ could not point "to any prior trials in federal district court in which the Antitrust Division has successfully used this increased-leverage theory to block a proposed vertical merger." (The US Federal Trade Commission [FTC] has used this theory to challenge several horizontal hospital transactions.) After this decision, it remains true that no court has ever blocked a vertical merger where the government's theory is based on alleged increased costs to a rival without additional foreclosure allegations.

Nonetheless, Judge Leon did not reject an increased bargaining leverage theory as the basis for a vertical merger challenge. His opinion merely found that the facts here do not support a conclusion that there would, in fact, be increased bargaining leverage leading to higher prices or that this would outweigh any efficiencies. In the future, the DOJ will likely look for cases with stronger facts, including evidence of price increases from prior vertical mergers in the industry and more substantial economic analysis to show anticompetitive effects. However, for now, the effectiveness of an increased bargaining leverage theory, without additional foreclosure allegations, remains quite uncertain.

3.       DOJ and FTC May Be More Open to Conduct Remedies to Address Vertical Concerns When Presented with Litigation Risk

Since taking control of the Antitrust Division, Assistant Attorney General (AAG) Makan Delrahim has made his mark through a stricter policy on vertical merger remedies. Previously, the DOJ and FTC frequently accepted conduct remedies, such as non-discrimination commitments and information firewalls, to address potential concerns in vertical transactions. AAG Delrahim has made it clear that these types of remedies are strongly disfavored since they result in significant government oversight in an industry. The Trump administration views antitrust as law enforcement and does not want to take on a regulatory role in an industry due to a consent decree with continued monitoring of conduct remedies.

AT&T/Time Warner ended up as the test case for this new policy on vertical merger enforcement. The DOJ sought a structural remedy in the form of an injunction preventing the parties from merging or requiring a divestiture of Time Warner's key assets in Turner Broadcasting. In doing so, the DOJ ignored behavioral commitments made by AT&T in the form of an arbitration agreement that it sent shortly before the DOJ filed its complaint to all relevant Time Warner customers. This arbitration agreement mirrored behavioral remedies used by the DOJ in prior cases in this industry.

With the court's ruling against the DOJ, it is possible that the DOJ and FTC will be more cautious with vertical merger enforcement going forward since additional unfavorable precedent could harm the Trump administration's larger policy goals. In cases where the proof of vertical harm is not abundantly clear, the DOJ and the FTC are faced with the choice to (1) accept conduct remedies; (2) spend significant agency resources to litigate the transaction, with the potential to generate additional bad precedent; or (3) clear the transaction. This is a difficult choice, but the AT&T/Time Warner ruling may make the litigation option less appealing.

With these lessons in mind, parties to vertical transactions should consider the following strategies to improve the odds of obtaining US antitrust clearance:

  1. It is critical that merging parties have a strong, well-supported pro-competitive story. Judge Leon's opinion demonstrates the importance for merging parties to document and conduct a thorough efficiencies analysis. The regulators and courts are likely to give greater deference to the cost savings in vertical mergers as compared to horizontal mergers.
  2. In dynamic industries, where new technology or new competitors, are having an impact on competition, the merging parties' internal documents should reflect the new changes or competition. Although Judge Leon did not dispute the DOJ's alleged product market, he spent a large portion of the opinion discussing how the media industry was changing due to new competition from companies, such as Netflix, Google and others. These findings appeared to influence Judge Leon's views on the benefits and rationale of the transaction.
  3. Because the government's witnesses for vertical merger challenges are typically competitors, merging parties should consider early in the review whether they can address the competitors' concerns through a long-term contractual commitment or similar type of remedy. Although the US antitrust regulators may be reluctant to enter into a formal settlement with behavioral remedies, the US antitrust regulators are less likely to challenge a vertical merger without competitor complaints and testimony.

Three Lessons from AT&T/Time Warner and Three Strategies for Future Vertical Transactions

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Hughes Hubbard & Reed LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Hughes Hubbard & Reed LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions