Appeals court backs AT&T acquisition of Time Warner

By Hadas Gold, CNN Business

(CNN) -- An appeals court has rejected the Justice Department's bid to overturn a ruling that cleared the way for AT&T's acquisition of Time Warner.

The decision, by a three-judge panel from the US Court of Appeals for the DC Circuit, caps off round two of the protracted legal battle between AT&T and the Justice Department. The Justice Department could decide to ask the full appeals court to hear the case or to appeal the ruling to the Supreme Court.

Time Warner has since been renamed WarnerMedia. CNN is part of WarnerMedia.

AT&T first announced its intention to purchase Time Warner, which included HBO, Warner Bros. and the Turner cable networks, in October of 2016. Just over a year later, the Justice Department sued to stop the deal on antitrust grounds, claiming that by owning Time Warner, AT&T would have "both the incentive and the ability to raise its rivals' costs and stifle growth of innovative, next-generation entrants."

AT&T, the Justice Department claimed, would have greater bargaining leverage over rival TV distributors because the company would have valuable live content from Turner's networks, like the sports that TNT carries and CNN's news coverage. The Justice Department contended that AT&T could during negotiations threaten to "black out" Turner's channels — that is, pull them from the rivals' lineups — tempting customers to drop their current providers and switch to AT&T services like DirecTV. The Justice Department alleged that AT&T would also have the power to raise the prices its competitors pay for their content.

The companies argued during the trial that they have no incentive to trigger a blackout because they rely on subscriber fees and advertisements to make money, and dropping a distributor would cause their networks too much financial harm. They also claimed that they need the merger to compete with the likes of Netflix, Google and Facebook, and to bring cost savings and new innovations to their customers.

The AT&T acquisition of Time Warner is considered a "vertical merger" because it's a content distributor, AT&T, buying a content producer, Time Warner. Typically vertical mergers are not given as close scrutiny on antitrust grounds, because unlike a "horizontal merger" in which two competitors are combined, a competitor isn't being taken out of the market. Time Warner's business units, like HBO and Warner Bros,. all remain in operation.

After a six-week trial, US District Court Judge Richard Leon ruled that the merger could proceed with no conditions, and in a 172-page opinion he ripped apart the government's case.

Shortly after the decision, AT&T closed the deal and changed Time Warner's name to WarnerMedia. But AT&T told the Justice Department it would maintain Turner and AT&T as separate business units and would place a firewall between the two until February 28, or the conclusion of any appeal.

The Justice Department then appealed Leon's decision, arguing in front of the three-judge panel in December that Leon erred in his decision because he committed "fundamental errors of economic logic and reasoning" in his decision and "discarded the economics of bargaining."

But the appellate judges aggressively questioned the Justice Department attorneys during the hearing, expressing skepticism of the government's theories.

The three judges who heard the appeal — Judith W. Rogers, Robert L. Wilkins and David B. Sentelle — were appointed by Presidents Clinton, Obama and Reagan respectively.

Though it's hard to determine how a judge will rule based solely on which president nominated them, a judge's prior rulings and writings can give some insight on how they approach such cases.

Traditionally when it comes to antitrust, liberals call for more government intervention in mergers, while conservatives prefer a hands-off approach. A group of Democratic senators, including presidential candidates Bernie Sanders and Elizabeth Warren, previously questioned the merger and urged the administration to consider blocking it.

Leon, the judge who ruled against the Justice Department at trial, was appointed by President George W. Bush.

In the unanimous appeal decision, the three judges said that the government failed to take into account an arbitration agreement that Turner had offered carriers in the event of a pricing or contract dispute. The judges also cited the rapidly changing and "dynamic" industry, citing the rise of Netflix and Hulu as new competitors.

"In this evidentiary context, the government's objections that the district court misunderstood and misapplied economic principles and clearly erred in rejecting the quantitative model are unpersuasive. Accordingly, we affirm," the judges wrote.

When the Justice Department first brought the case against AT&T, many legal observers wondered if President Donald Trump's open animus toward CNN affected the case, partly because they found it unusual for a Republican administration to bring such a lawsuit.

Trump's name didn't come up in the first trial, partly because Leon blocked discovery on some communications AT&T wanted to see between the White House and the Justice Department, and the argument was dropped.

But in their appeals brief, AT&T reminded the court of what Trump said when he was running for president, citing a press release from the Trump campaign that said the then-candidate would block the merger "and thus the wildly anti-Trump CNN."

"[M]any press outlets [questioned] whether the White House had improperly influenced DOJ's decision to bring the case," AT&T wrote in its brief.

The DOJ's losing streak in the courts has only further fueled that assumption, though the department has long denied it, including in a sworn affidavit.

This might not be the end of AT&T and the DOJ's legal battle. There is some desire in the legal community for the Supreme Court to rule on the case, because the court hasn't heard a case on a vertical merger since the 1970s. The DOJ has not said if it will appeal further.