- Technology companies have often relied on behavioral remedies, in which they agree to act in a certain way, in order to get mergers approved.
- The leader of the antitrust at the Department of Justice is very skeptical of that practice.
- Tech companies may be re-assessing their strategy on mergers in response to the policy.
The Department of Justice filed a brief Monday in its appeal of the June decision allowing AT&T to acquire Time Warner, arguing that the lower court's ruling showed "fundamental errors of economic logic."
However, when the DOJ first filed its appeal in July, the move raised suspicions that the department's aims were political rather than legal.
"That's a question that's been asked from day 1 of this transaction," Randall Stephenson told CNBC during Allen & Co.'s conference in Sun Valley, ID. "The rumors, the suggestions going around Sun Valley right now, it's all very interesting. People were speculating what's really going on."
The political factor in question is President Donald Trump, who has made his disdain for Time Warner's CNN known on many (many) occasions.
@realDonaldTrump: Check out the fact that you can't get a job at ratings challenged @CNN unless you state that you are totally anti-Trump? Little Jeff Zuker, whose job is in jeopardy, is not having much fun lately. They should clean up and strengthen CNN and get back to honest reporting!
There actually is a legal strategy at play, and one that has nothing to do with Trump's feelings about CNN. Rather, it all comes down to Makan Delrahim, the assistant attorney general who leads the DOJ's antitrust division, and his skepticism towards the kind of legal remedies Big Tech has come to rely on in vertical mergers.
There is a key way in which Delrahim is similar to his predecessors — independence. According to Jonathan Jacobson, chair of the American Bar Association's antitrust division and partner at Wilson Sonsini Goodrich & Rosati, there is a long tradition of the antitrust division staying independent of the White House's politics, and that appears to still be the case.
As for suspicions that Trump may have interfered? "I know for a fact that that's not true," said Jacobson. "Makan made his own decision based on what he believes, and there was no political fix in bringing the case or appealing."
The way in which Delrahim's perspective is different from that of previous administrations is his approach towards behavioral remedies, which are conditions placed on the acquiring company requiring them to or prohibiting them from taking certain actions. "Delrahim has been quite insistent that he does not want behavioral decrees," Jacobson said.
Under the Obama administration, the DOJ reached a settlement with Comcast that ultimately allowed it to acquire NBCUniversal. However, Comcast had to commit to certain stipulations, including a non-discrimination agreement and giving up its management rights in Hulu. All of the behavioral conditions placed on Comcast will expire by September 1.
The DOJ did not respond to request for comment. However, Delrahim delivered a speech in November to the ABA illustrating his thinking on behavioral consent decrees like those in Comcast/NBCUniversal, just four days before filing the complaint against AT&T.
"Behavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and they demand ongoing monitoring and enforcement to do that effectively," he said. "If a merger is illegal, we should only accept a clean and complete solution, but if the merger is legal we should not impose behavioral conditions just because we can do so..."
According to Doug Melamed, a professor at Stanford University, Delrahim's approach to behavioral remedies is actually very mainstream in the world of antitrust law. Most antitrust attorneys prefer structural remedies, which entail divestitures that fundamentally change the organization and interests of the merged company.
Delrahim's perspective does not necessarily call for more regulation — Disney received swift approval to for its $71.3 billion acquisition of Twenty-First Century Fox in June, as it agreed to the DOJ's structural condition that it divest 22 of Fox's regional sports networks. However, it does make it more difficult to work with a merger considered to be fundamentally anti-competitive. When it comes to AT&T and Time Warner, the DOJ unequivocally thinks that is the case.
"If AT&T is permitted to control Time Warner's most valuable media assets, the merged firm will have both the incentive and the ability to raise its rivals' costs and stifle growth of innovative, next-generation entrants that offer attractive alternatives to AT&T/DirecTV's legacy pay-TV model—all to the detriment of American consumers," the DOJ said in a July 18 motion to expedite appeal.
Internet service providers are not the only kinds of companies that have depended on behavioral remedies to get their acquisitions of smaller companies approved. When Google sought to buy travel software company ITA in 2010, the DOJ allowed the acquisition to go through with conditions including that it it develop and license travel software.
"Firms like Facebook, Amazon, Google, Microsoft and Apple have long-added new and terrific features by acquiring startups or near-startups," said Jacobson, who represents Google. "The concern now is whether these deals, that at least Silicon Valley would view as boons for consumers, are going to be imperiled by this policy."
It is not always clear whether a case will go through the DOJ, or through the Federal Trade Commission, which may be more open to compromise. Historically, the DOJ handled telecom, while the FTC took up cases on cable and digital platforms, according to Melamed. "The problem is when industries evolve," he said.
The shifted DOJ policy, paired with uncertainty as to which agency will oversee a deal, could have some tech companies re-assessing acquisition plans. "At the margin, I think it's been a deterrent," Jacobson said.
Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.