AT&T/Time Warner Merger: 2 Points About DOJ's Case You Probably Haven't Read Anywhere Yet

Dec. 01, 2017 9:24 AM ETAT&T Inc. (T), TWX88 Comments
Max Greve profile picture
Max Greve
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Summary

  • A court's consideration of DOJ's case will turn upon both the merits of the instant case - is the merger anti-competitive? - as well as two other issues.
  • The other two issues are precedent and the First Amendment. These have been seen by many as offering further assurance of securing the deal.
  • If DOJ can win on the merits - though that is not clear yet - it is highly unlikely that either of these will swing the decision back in favor.
  • Precedent carries far less weight in anti-trust cases than it does in other fields of jurisprudence.
  • The First Amendment argument is stronger, but requires the court to consider out-of-court statements as outweighing the actual legal standard. This opens a box the Court only recently declined to open.

With the news that AT&T (NYSE:T) and TimeWarner (NYSE:TWX) have extended the deadline on their merger agreement, the battle lines are clearly drawn in their fight with the Department of Justice, and so far neither side is backing down. This actually marks the second extension on their deal, although last time it was in anticipation of a blessing, not a challenge, of their deal.

There was some brief thought that DOJ might be reconsidering in light of their failure to obtain the support of a single state Attorney General. But in truth DOJ was always likely to proceed with the suit, with or without the states, and that is precisely what ended up happening. DOJ officially filed suit last week.

Plenty has been written about the merger already here on Seeking Alpha, and I have no desire to bore the reader with repetitive statements. In this article, I will briefly summarize some of the other articles of my fellow contributors on the merits, for reference sake, and then proceed to consider two other points about the merger that I don't believe have received any significant attention so far, but which may prove crucial to the disposition of the case.

The Emerging Consensus

The general consensus in the market seems to be that AT&T has a strong case to beat back any DOJ challenge. Here on Seeking Alpha, the majority of opinion runs the same way. Contributor David Alton Clark, a longtime AT&T bull, sees the company standing on solid ground and does not believe DOJ has a case to force divestiture. Contributor David C. Kim took a look at the government's filing itself, and wasn't impressed, saying that he "almost felt sorry for AT&T" given its current market position vis a vis major tech conglomerates looking to disrupt its business. Many other articles have been posted with the same theme.

To be sure, the opinion is by no means unanimous. Contributor Jonathan Cooper swims against the current and thinks DOJ has a strong case that will, at minimum, consume substantial resources to litigate. And Contributor KIA Investment Research thinks the DOJ had a pretty weak case initially, but that the FCC may be about to give it a huge boost by moving forward with its net neutrality repeal proposal.

Between all these various articles, merits of the merger have already been amply debated, so I won't wade into there for now. However, I did want to add some perspective on the non-merits issues. When courts make decisions, they consider both the merits of the case - in this case, whether the merger is actually bad for competition - but also consider other issues that might compel a decision notwithstanding their view it is not the best decision. This case has identified two specific "outside the merits issues," and in my opinion the market is not weighing their significance accurately.

Legal Technicalities

First, just a quick word about my own qualifications. I am not a lawyer, and I do not claim to offer legal expertise. As a political science graduate, however, I did study at some length Supreme Court decisions on constitutional matters, and developed some degree of familiarity with court procedures as well as the principles which govern their application of things like precedent, standing, etc. I "speak the lingo," in other words, though I do not have a law degree.

I still would not presume to offer a legal interpretation except that offering investment advice on this particular issue has now become almost impossible to separate from legal issues, and other Contributors have already offered interpretations I believe are valid, but overlook two vital considerations. Since the box has already been opened, therefore, I join the discussion to make those two points.

Just one last technical point: whoever loses will have a clear path of appeal all the way to the Supreme Court, and the Supreme Court's prior decisions will guide the district court which hears the case first and whatever appellate body reviews it. The Supreme Court itself, meanwhile, relies on the lower courts to make finding of fact while they confine themselves to matters of law. In legal parlance it is often common to refer to "the court" when speaking of any court and "the Court" when speaking specifically of the Supreme Court. I will be using those terms somewhat interchangeably, since they influence each other so heavily throughout the process.

Beyond The Merits

As I said, the general opinion here and elsewhere in the market is in favor of AT&T. Blair Levin , a longtime FCC lawyer and former chief of staff to the FCC Commissioner is of the same view. He argues that AT&T has two distinct legal avenues of attack, one that there is no precedent to deem vertical mergers anticompetitive, another that in this particular case presidential interference poses an unacceptable risk to the First Amendment. This last has led even many merger opponents to criticize DOJ's move, citing the latter issue as the more important principle.

These are both points which could be considered non de novo arguments, that is, arguments which do not turn upon what the judge thinks of the particular case before them, but rather turn upon the protection of larger principles which sometimes require accepting non-optimal results in a specific instance. Basically, this argument is that aside from the merits of the merger, there is a need for the courts to reaffirm their commitment to maintaining a stable law (precedent) and protecting dissenters (First Amendment) from intimidation.

As I said, other Contributors have already given all the information necessary for readers to reach a conclusion about which way the merits will go. Assuming DOJ can win on the merits, however, I do not believe either of these other two points will hobble DOJ's case nearly as much as some believe. Their significance, I submit, has not been fully understood, even by the experts, because the prism they are examining them through is too narrow.

Precedent

Lawyers often place great weight on precedent, and they are usually right to do so. Courts place great weight on precedent in legal matters, where the law is supposed to be fixed and reliable. Definite and certain. But this is anti-trust. Courts do not actually get their power in anti-trust cases from the Constitution itself. They get it from the Congress, which under the "rule of reason" interpretation of the Sherman Anti-Trust Act allows courts to evaluate acts in restraint of trade for reasonableness. Because this is an economics field, rather than a purely legal one, the Supreme Court has held multiple times that courts are allowed to amend their approach in light of new economics developments, even where precedent might otherwise constrain them from doing so.

In State Oil Company v Kahn, for example, the Supreme Court unanimously overruled a precedent from 1963 prohibiting vertical maximum price fixing despite the fact that its usual criteria for overruling - that the ruling have been either proven unworkable in practice or rendered obsolete by a drastic change in circumstance - had not been met. Writing for the court, Justice Sandra Day O'Connor noted that while overruling is generally disfavored, there was "particularly in the area of antitrust law….a competing interest in recognizing and adapting to changed circumstances and the lessons of accumulated experience" In other words, in antitrust law, unlike most areas of jurisprudence, courts can change their views for no other reason than that they think they got it wrong before. Rather more like a legislature than a court.

O'Connor also placed heavy emphasis in that opinion on the weight of "scholarly research," in other words the advice the court was getting from private economists as well as the economists in the DOJ. There will be no shortage of advice urging a change in rules in this case as well. Though of course there will also be many who are pushing for the merger to go through.

The DOJ, however, will be squarely on the anti-merger side, if it comes to that, and DOJ economists have been given some deference historically. The only possible thorn in their side might be that they have not updated their own merger guidelines to reflect the new policy that they are urging, which is more a consistency argument than a precedent one. But if it looked like that was about to kill the case the Department could always "represent" to the court that such revisions were forthcoming. Altogether, the DOJ has a real chance of pushing back the precedent argument.

The First Amendment

The First Amendment argument is undoubtedly considerably stronger. There is strong precedent for the idea that conduct which is calculated to or has the effect of silencing a dissenting opinion in the "marketplace of ideas" is unconstitutional and can be voided by court order.

Certainly this objection is the flavor of the week in Washington, where several Senators have demanded the extent of the involvement of President Trump in making the determination be made public. Without a majority of the Senate, however, a subpoena to enforce that demand cannot be issues. With the Senate under the control of the President's own party that is unlikely. But AT&T has already said it will seek to subpoena official correspondence between the President and the Justice Department if the case goes to trial.

Needless to say, both President Trump and the DOJ deny having done anything improper in reaching this conclusion. Not that that decides the case. But one thing that is important to remember is that whether the DOJ had adequate grounds to stop the merger is itself the "on the merits" portion of the case. Under the court's doctrine of "constitutional avoidance" that issue must be considered before the constitutional issues are. In other words, the First Amendment argument itself only comes into play if the court has already decided that the merger otherwise could be blocked by DOJ, and is considering whether the First Amendment changes that interpretation.

Because of that, the court would essentially have decided the DOJ has the actual law on its side, and would then be turning to media reports and social media accounts of President Trump's unofficial - by which I mean not legally binding - statements and using them to outweigh those actual legal standards. Given the importance of protecting the First Amendment there are real arguments that perhaps this is precisely what it should do. I would only add one word of caution, however: this is not the first time that lawyers have sought to call the Supreme Court's attention to an out-of-court statement by a President.

The Last Really Big Econ Case

In the Obamacare case in 2012, when the government sought to designate the law as a tax law to preserve it - the Court had already indicated at oral argument it was not receptive to the Commerce Clause argument - opponents of the law cried foul. They pointed out that President Obama himself, as well as Nancy Pelosi and many of the other House and Senate Democrats, had specifically told the voters they were not passing a tax law in passing Obamacare. But only in public statements, not in the body of the law itself.

When the court handed down its ruling, it was severely divided. Not only was the vote 5-4, but the court opinion itself was fractured into three different pieces, each joined by different justices, and in two portions of the opinion no coalition of justices could assemble an overall majority. However, the majority did agree that the President's out of court statements did not change the legal force of the law. What mattered was what the law actually said, not what the President had mischaracterized it to say. This was just five years ago.

It is noteworthy that the Court did not, explicitly, state that out-of-court statements mischaracterizing laws were not relevant to legal decision making. It simply declined to alter its decision in light of them. Were it to reverse its approach in the current case and say that they are relevant, it would doubtless face a wave of recriminations from President Trump's supporters, who would have lost at the Court twice (didn't get Obamacare overturned or the merger stopped) but it would at least have some degree of plausible deniability.

The First Amendment argument is undoubtedly the stronger of the two, but given the degree to which such a sudden swing might endanger the Court's political neutrality, it is quite possible the Court will decline to swing the case on these grounds.

Conclusion

I do not see precedent as presenting a substantial obstacle to the blocking of the AT&T/TimeWarner merger, although consistency, which is not quite the same thing, might. The First Amendment may be a viable avenue of attack, but the Court will be stepping into a bit of a minefield if it declares that a merger that otherwise could be stopped must go through because of an out-of-court Presidential statement. It may not wish to do that.

These opinions are confined specifically to the twin issues of precedent and the First Amendment, what might be considered the "outside the merits" issues. It is an entirely separate question whether the DOJ can actually persuade a judge that the deal is anti-competitive in the first place, which would be a pre-requisite for any of this to even be relevant. But if DOJ can cross that bridge, I don't believe the precedent issue will stop it, and it's quite possible the First Amendment claim won't either.

This article was written by

Max Greve profile picture
2.66K Followers
Max Greve is a graduate of Northwestern University with a quadruple major in History, Economics, Political Science, and International Studies. Max is a full-time writer and in addition to stock market trends also writes articles on government, current events, macroeconomic trends, and last but not least, the ongoing inefficiencies of professional sports.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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