DC Circuit

DC Circuit approves AT&T/Time Warner merger

In the recent decision on the well-known merger between AT&T, Inc and Time Warner, Inc, the US Court of Appeals for the DC Circuit upheld the US District Court for the District of Columbia’s decision denying the government’s request to enjoin the proposed merger under the Clayton Act. 1 In so doing, the Court was impacted by the District Court’s 2011 decision upholding the vertical merger between Comcast and NBC Universal.

In the video programming and distribution industry, there are traditionally three stages in the chain of production: programmers package content into networks and license the networks to distributors, and the distributors sell bundles of networks to subscribers. 2 In this vertical merger, AT&T (a distributor) sought to acquire Time Warner (a programmer). The government challenged the merger, arguing an increased leverage theory that by combining Time Warner’s programming with AT&T’s distribution, ‘the merger would give Time Warner increased bargaining leverage in negotiations with rival distributors[.]’ 3 According to the government, this increased leverage would lead to supracompetitive prices for millions of consumers. 4 The government’s theory was predicated on what is known as a ‘blackout period.’ A blackout period occurs if a programmer and distributor fail to reach an agreement on licensing fees; if so, the distributor loses the right to display the programmers’ content, resulting in a ‘blackout.’ 5 Blackouts are costly for both programmers and distributors: programmers lose licensing fees and distributors risk losing subscribers. 6 As a result, long-term blackouts are rare in the industry. The government argued that the costs of blackouts would be offset post-merger because customers who left a distributor due to Time Warner’s blackout could switch to distributor AT&T, allowing the merged entity to gain new customers. 7

The DC Circuit considered the government’s main arguments: the District Court improperly ‘discarded’ the economics of Nash bargaining, and the District Court failed to apply the principle of corporate-wide profit maximization. 8 The Nash bargaining theory is used to analyze two-party bargaining situations – such as the negotiations between the programmer and the distributor for licensing fees – in which both parties are better off if an agreement is reached. The DC Circuit found that the District Court accepted the government’s Nash bargaining theory, but concluded that there was insufficient evidence to support the Nash bargaining theory’s prediction that the post-merger bargaining leverage would increase as a result of less costly blackouts. 9 In particular, the District Court found that blackouts were still unlikely to occur post-merger. 10

The District Court also relied on the defendants’ expert’s analysis of the Comcast/NBC Universal merger. In that case, the parties and the government reached a settlement that allowed the vertical merger to proceed, subject to certain remedies, approved by the US District Court for the District of Columbia under the Tunney Act. 11 One of the remedies was an agreement by Comcast and NBC Universal to submit, at a distributor’s option, to arbitration in which each side makes a final offer, and the arbitrator decides between them, referred to as ‘baseball style arbitration.’ During the arbitration, the distributor would retain access to the programmer’s content, mitigating any blackout. In this case, Time Warner unilaterally and irrevocably offered approximately 1,000 distributors the opportunity to engage in baseball style arbitration, which included guarantees of no blackouts once arbitration is invoked. 12 Analogizing to the baseball style agreements in Comcast/NBC Universal, the District Court found this irrevocable offer to be further evidence that the merger would not lead to increased bargaining leverage. 13

Contrary to the government’s contention, the DC Circuit concluded that the District Court adopted the government’s economic theory, but concluded that the theory, as applied, inaccurately predicted post-merger price increases based on real-world evidence. 14

The DC Circuit also rejected the government’s contention that the District Court failed to assume that the combined AT&T/Time Warner would maximize corporate-wide profits. Corporate-wide profit maximization assumes that a business with multiple divisions will seek to maximize its total profits. 15 The District Court considered that Time Warner’s ‘interest in spreading its content among distributors, [and] not imposing long-term blackouts, would redound to the merger firm’s financial benefit, not that [Time Warner] would act in a manner contrary to the merged firm’s financial benefit.’ 16 In so doing, the District Court was explaining how corporate-wide profit maximization worked in this particular industry.

In upholding the District Court’s decision, the DC Circuit clearly relied on the expert analysis, outcome and real-world impact of the Comcast/NBC merger. In so doing, it emphasized that merger challenges are fact-intensive inquiries that depend on the real-world economic facts (as opposed to speculation about economic impact).

DC Circuit refuses to certify class in alleged price-fixing case

The US Court of Appeals for the DC Circuit recently upheld a decision in the US District Court for the District of Columbia to deny class certification on the ground that common issues did not predominate. The plaintiffs alleged that the railroads conspired to fix rate-based fuel surcharges. 17 According to the Court, the plaintiffs’ expert failed to demonstrate damages for 2,000 class members, or 12.7 per cent of the class. 18 The District Court initially certified the class, despite the defendants’ objection that the plaintiffs’ damages models resulted in false positives for certain class members. 19 On interlocutory review, the DC Circuit vacated the order, and remanded for reconsideration of the effects of false positives. 20 The DC Circuit clarified that for antitrust class actions, ‘common questions “cannot predominate where there exists no reliable means of proving classwide injury in fact”’ (‘predominance’). 21

On remand, the District Court denied class certification, finding that the plaintiffs could not establish predominance because the damage model: (1) inflated damages for intermodal traffic (ie, shipments traveling both by rail and another mode of transportation); (2) erroneously measured damages for shipments made under contracts outside the relevant time period; and (3) measured no damages for more than 2,000 members of the proposed class. 22

On appeal, the plaintiffs argued that the damages model resulted in negative damages for more than 2,000 class members as a result of ‘normal prediction error.’ 23 The DC Circuit rejected that argument, instead finding that the plaintiffs’ reasoning ‘describes a possible problem with [plaintiffs’] own evidence; it does not point to affirmative evidence – much less common affirmative evidence – that a conspiracy did in fact injure these shippers.’ 24

The plaintiffs also argued that their model did not fail to show predominance because they argued the law does not require common evidence as to all class members. The District Court acknowledged that there is a de minimis exception to the predominance requirement. Surveying cases, the District Court found the outer limits of the de minimis exception to be around 5 to 6 per cent. The District Court also stressed that the plaintiffs proposed no way other than full-blown, individualized short trials to segregate the uninjured class members. 25

The DC Circuit, for sake of argument, assumed the existence of a de minimis exception and focused on ‘when does the need for individualized proof of injury and causation destroy predominance?’ 26 The DC Circuit concluded that the District Court did not abuse its discretion in finding that the de minimis exception did not apply. Specifically, the DC Circuit cited the District Court’s analysis showing that the number of class members who experienced no injury under the plaintiff’s expert’s analysis was large, both as a percentage of the class (12.7 per cent) and as the total number of class members (more than 2,000 class members).

The plaintiffs also argued that the de minimis exception nevertheless applied because the revenue from those class members’ shipments accounted for less than 1 per cent of the defendants’ total revenue. 27 The Court made clear: ‘revenue is irrelevant to predominance, which looks to whether elements such as causation and injury may be proved through common evidence, not how much the defendants benefited from any wrongdoing.’ 28

Finally, the plaintiffs attempted to point to other evidence to prove alleged injury and causation on a classwide basis, such as testimony of a second expert and documents the plaintiffs alleged show that the defendants uniformly enforced fuel surcharges. 29 The Court was again clear: ‘No damages model, no predominance, no class certification.’ 30

The DC Circuit upheld the District Court’s decision denying class certification, but chose not to clarify the appropriate standard for assessing reliability of expert testimony. Federal Rule of Civil Procedure 23 provides four prerequisites for class certification, including predominance. 31 On appeal, the parties disputed whether the reliability of an expert’s testimony for purposes of establishing predominance was more rigorous than when assessing admissibility under Federal Rule of Evidence 702 and Daubert. 32 The DC Circuit chose not to resolve this question, finding that even if the damages model were sufficiently reliable, it did not establish classwide injury. 33 The question of whether the standard for reliability is different for admissibility versus predominance remains unresolved.

While the Court in this case could have resolved the dispute between reliability for purposes of admissibility at trial and for class certification, its ruling provides clarity on the importance of expert testimony establishing classwide injury. It also provides guidance that both the percentage of the class that is unaffected by an alleged conspiracy, and the actual number of class members experiencing no impact may be relevant in establishing classwide injury.

DC District Court approves Aetna/CVS proposed consent judgment

The US District Court for the District of Columbia recently determined that the proposed consent judgment in CVS’ $69 billion acquisition of Aetna was in the public interest. 34 As is typical in merger settlements, the government filed a lawsuit alleging that the merger would violate section 7 of the Clayton Act and simultaneously settled those charges. 35 The government alleged that the acquisition would substantially lessen competition in the market for the sale of individual Medicare Part D prescription drug plans (PDPs). 36 Under the proposed consent judgment, Aetna agreed to divest its individual PDP business to a competitor, WellCare Health Plans, Inc. 37

Under the Tunney Act, the government must publish its proposed final judgment and a competitive impact statement for public comment; the government must consider comments received and publish a response. 38 The government must then file the response with the court, and the court determines whether the proposed judgment is in the public interest. 39 In this case, the government received public comments critical of the proposed judgment and responded to those comments. 40 The Court concluded that the government’s response ‘left much to be desired,’ and held a hearing on the government’s motion to enter the proposed judgment to avoid ‘an uninformed public interest determination.’ 41 The Court heard testimony from CVS, Aetna and amici, including the American Medical Association.

A number of the comments or complaints that the amici made fell outside the market that was the subject of the government’s complaint and settlement. The government argued that the role of the court under the Tunney Act is narrow, and that the court cannot consider new theories of harm that the government did not allege in the complaint. 42 The Court, however, rejected the government’s argument; it held that while it cannot consider new claims the government did not make, it can consider new alleged theories of harm. 43 Accordingly, the Court clarified the scope of review pursuant to the Tunney Act: courts cannot ignore potential harms to the public interest raised by amici simply because the government did not allege them in the complaint.

The Court then considered (and largely rejected) the amici’s arguments. First, the amici argued that the divestiture to WellCare will not remedy the harm to the PDP market. 44 The Court, however, accepted CVS’ and the government’s rebuttal that the PDP market is moderately concentrated and highly competitive. 45 Specifically, CVS and the government established that switching costs for customers are low, brand recognition is less important, and WellCare has already been a successful competitor in the market. 46

Second, the amici argued that the proposed final judgment does not adequately address the effects to the adjacent market for pharmacy benefit management (PBM). 47 According to the amici, CVS is a ‘major player in the PBM market’ and could ‘leverage this power . . . to disadvantage companies that competed against its newly expanded health insurance business.’ 48 Again, the Court found the rebuttal more persuasive: ‘[n]otwithstanding CVS’s significant market share, the evidence showed that CVS must compete vigorously to retain its PBM customers.’ 49

Finally, the amici argued that the proposed final judgment could result in harm to HIV and AIDS patients by causing them to leave HIV- and AIDS-specific providers for providers who do not have the necessary specialized skill for treating these patients. 50 But the Court found no evidence that the proposed final judgment will result in CVS’ ability to steer patients away from their healthcare providers. 51

The Court thus held that the proposed final judgment was within the public interest and entered the judgment. 52

* The views expressed here are the author’s own and do not necessarily reflect the views of the law firm with which she is associated.


Notes

1 United States v AT&T, Inc., 916 F.3d 1029 (D.C. Cir. 2019).

2 Id. at 1033.

3 Brief of appellant at 33, United States v AT&T, Inc., No. 18-5214 (D.C. Cir. Aug. 6, 2018).

4 Id.

5 AT&T, Inc., 916 F.3d at 1034.

6 Id.

7 Id.

8 The Court also considered (and rejected) the government’s arguments that the District Court applied inconsistent reasoning in evaluating the trial testimony and improperly rejected the government’s expert’s quantitative model. See id. at 1045–47.

9 Id. at 1039.

10 Id. at 1040.

11 Id. at 1041.

12 Id. at 1041.

13 United States v AT&T, 310 F. Supp. 3d 161, 241, n.51 (D.C. Cir. 2018).

14 AT&T, Inc., 916 F.3d at 1040.

15 Id. at 1043.

16 Id.

17 In re Rail Freight Fuel Surcharge Antitrust Litig. 934 F.3d at 619, 620 (D.C. 2019) (Rail Freight I).

18 Id. at 621.

19 Id.

20 Id.

21 Id. (quoting In re Rail Freight Surcharge Antitrust Litig., 725 F.3d 244, 253 (D.C. Cir. 2013)).

22 Id. at 621–22.

23 Id. at 624.

24 Id.

25 Id.

26 Id. at 624.

27 Id. at 626.

28 Id.

29 Id.

30 Id. (relying on ruling in Rail Freight I).

31 Fed. R. of Civ. P. 23.

32 In re Rail Freight Fuel Surcharge Antitrust Litig., 934 F.3d at 623.

33 Id.

34 United States v CVS Health Corp., 407 F. Supp. 3d 45 (D.D.C. 2019).

35 Id. at 47.

36 Id. at 48–49.

37 Id.

38 Id. at 49–50.

39 Id. at 50.

40 Id.

41 Id. at 51.

42 Id. at 52 (internal quotation marks omitted).

43 Id. at 52–53.

44 Id. at 54–55.

45 Id. at 55–56.

46 Id.

47 Id. at 54, 56.

48 Id. at 56.

49 Id. at 57.

50 Id. at 54, 58.

51 Id. at 58.

52 Id. at 59.

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