Litigation Update: AT&T and Time Warner Merger

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Corporations, Securities & Antitrust Practice Group, was recorded on Thursday, October 4, 2018 during a live teleforum conference call held exclusively for Federalist Society members.     

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon we will be discussing the ongoing litigation surrounding the proposed AT&T and Time Warner merger. My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the expert on today's call.

 

      Today we are happy to have with us the Honorable Joshua Wright, who is a former FTC Commissioner, and is the current Executive Director of the Global Antitrust Institute for the Antonin Scalia School of Law. After hearing from our speaker, we go to audience Q&A. Thank you for speaking with us. Josh, the floor is yours.

 

Hon. Joshua D. Wright:  Thanks, and thanks for having me. I thought what I might do is briefly do a short background on the case and the district court decision but spend most of the time talking about the arguments on appeal. But a little bit of background for those a little less familiar.

 

      So the acquisition was announced in October 2016. AT&T was paying approximately $85 billion for Time Warner. And in November 2017, DOJ filed its complaint seeking to block the transaction. It alleged -- it really had a couple of theories alleged in the complaint about why the transaction might give rise to a violation of Section 7 of the Clayton Act by substantially lessening competition in the sale of video programming and distribution; one of those theories being that the transaction might enable AT&T to use Time Warner's television content to raise its competitors' video programming costs. And the other by potentially withholding what the DOJ complaint describes as must-have Time Warner content to drive those same competitors' customers to AT&T's new post-merger subsidiary.

 

      By way of background -- and I think it's worth noting because some of this will come into the discussion of the appeal in a couple of the things that I think are interesting about the appeal. I know for antitrust academics like myself, one of the really interesting features about the case is how rarely we get a vertical merger litigated sort of fully. So I think sort of off-cited as the first fully-litigated merger challenge in 40 years. And I'm an antitrust casebook author so always in the market for fully-litigated opinions to shop around for the book and to have something to teach about how courts and agencies engage in antitrust analysis. And in the vertical merger space that's been slim pickings for a while. Judge Leon's 172 page opinion certainly is important for at least that reason.

 

      Also I think because as the FTC hearings are going on at the moment, including panels on how the agencies ought to be thinking about vertical mergers going forward, discussion about whether we need or don’t need vertical merger guidelines - I think certainly a timely topic for any one of those reasons.

 

      So following the six-week trial, Judge Leon issued a detailed opinion, 172 pages, again, that rejected DOJ's argument that the combination would violate Section 7 of the Clayton Act. I wanted to before sort of jumping into the arguments on appeal, highlight a couple of things that I thought were particularly important in Judge Leon's opinion that I think sort of tee up some interesting discussion for the appeal. The first, and it's a relatively basic point but I think an important one, one of the big differences between vertical merger litigation and horizontal merger litigation, that is in the way that courts analyze mergers between competitors as opposed to those between firms that are complements, that are in the same supply chains, sort of vertical mergers like AT&T, Time Warner, is there's an important legal distinction between the two.

 

      In the case of horizontal mergers analyzed under Section 7 of the Clayton Act, the government can avail itself of something we call the PNB presumption, named after the Philadelphia National Bank, a Supreme Court case in 1963, in which the Court said, we're going to have a sort of magic number threshold in terms of post-merger market share. That if the government can show that the post-merger share is above 30 percent, then we're going to automatically allow the government to dispel its prima facie burden of proof and shift the burden to the merging parties to show pro-competitive benefits.

 

      The agency guidelines rely on other sorts of evidence: economic analysis, customer testimony, all sorts of other things. So by no means in horizontal cases do the FTC or DOJ rely solely upon market-share statistics to get the job done so to speak. But it is true that such a showing, just sort of a plain market-share showing and a rather modest one with the post-merger share above 30, allows the government to shift the burden. In reality, that burden-shifting mechanism, that sort of PNB presumption, is pretty important in practice. There're very few instances in which the government has lost after shifting that burden - an interesting contrast to vertical merger cases where the government does not benefit from that presumption of illegality that derives from PNB. And so we haven't seen a fully-litigated challenge or what litigation might look like without that PNB presumption, without a structural market-share presumption of the legality. The case was always going to turn on other forms of evidence, whether it be customer testimony or economic analysis. And that, I think, is an important precursor to understanding Judge Leon's decision, 172 pages of which 130 or 140 are digging into, in a pretty detailed way, into customer docs and economic inputs and the like.

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      Another thing that I think is an important observation is often times in merger cases, but not always, we've got battles around what we describe as hot documents. So business documents that suggest one way or another either the purpose or effect of the transaction. Most of the time, documents featuring sort of enticingly boastful rhetoric about the effect of the transaction. The DOJ relied extensively on ordinary course documents, prior regulatory filings to support their increased leverage theory, describing it as real-world objective evidence and claiming in their briefs and during trial that anticompetitive intent can be sort of divined from these documents can be a pretty useful way of predicting anticompetitive effect.

 

      Judge Leon's opinion finds little probative value in those documents; dismisses some of the documents produced by lower-level employees as irrelevant to understanding what the parties were likely to do after the merger or in the absence of the merger; rejected the DOJ's reliance on prior regulatory findings as being not probative to understanding the economic effects of this transaction. And so -- not inconsistent with other merger opinions we see from time to time in the horizontal space, but I think certainly worth noting that Judge Leon's opinion placed a low value on predictions in business docs or boastful rhetoric from executives or statements made about prior mergers to other regulatory bodies, and instead, I think, focused greatly on weighing and understanding economic evidence and analysis. Indeed, I think probably a central theme in Judge Leon's opinion is a fight over economic analysis and certainly in the DOJ's appeal brief, and we'll turn to that in a moment. I think certainly quite a bit of that fight over how to interpret economic analysis and evidence really plays a central role in Judge Leon's opinion and no doubt also will be important in the way the D.C. Circuit evaluates the appeal.

 

      The court, I think, engaged very closely with the economic evidence, discussed the expert's models, testimony, their conclusions in length; did more work than I think is normally done in evaluating the quality of inputs to the models the various experts use. Judge Leon expressed a great deal of suspicion about particular applications of the DOJ expert, Carl Shapiro - the bargaining model that he applied to the merger at hand, questioned inputs to the model, questioned the fit of the model to the particular case at hand, spent about 40 pages of his opinion critiquing the model's inputs and assumptions one by one - in various placing taking issue with either input sources or methodology, which he, at one point, describes as significantly flawed. Three of the inputs to those models: the long-term subscriber loss rate—that's the number of subscribers that would leave the current TV distributor of Time Warner, withheld content, the diversion ratio—sort of a big important input in most antitrust cases, including merger cases. He took issue with the lifetime value of customers. He took issue with inputs that Dr. Shapiro used in his model with respect to each of those and indeed credited testimony from the party's expert, Dr. Dennis Carlton, that most of the DOJ's results would go away if you even tweaked one or two of these inputs or assumptions.

     

      And so at the end of the day, Judge Leon's analysis sort of found not only the inputs and assumptions used in the model—sort of rejected its predictions because he found the inputs and assumptions reliable—but also spent a good amount of time discussing why testimony from executives led him to the conclusion that parts of the model were really not a good fit for predicting the impact of this merger. That dispute, or Judge Leon's conclusion there, that dispute with the DOJ, I think, becomes a primary part of the argument in appeal - how one characterizes that dispute.

 

      Judge Leon characterizes dispute over one about inputs into economic models and, indeed, whether the models fit a particular economic context. Both of those things, obviously in my view, are part of what economists do, right? We not only write down models and apply them, but also test and think about how those models apply to specific facts. The DOJ characterizes Judge Leon's rejection of the application of models, in particular instances as rejections of economics writ large or rejections of the bargaining model Shapiro employs sort of across the board. We'll turn to that in a moment when discussing the DOJ's arguments. But, I mean, I've already foreshadowed my view that I certainly don't read Judge Leon's opinion as rejecting economic logic or bargaining models writ large but rather sort of taking issue on a factual basis with whether those models were appropriately applied in the case in front of him, sort of the standard thing that judges do in Section 7 cases.

 

      So Judge Leon's opinion - two other sort of quick notes that I think may be interesting in the appeal level. Two other things that I think are important sources of evidence that he relies upon for his conclusion. One is the court evaluates and discusses—again, sort of consistent with the rest of the opinion—discusses in pretty great detail evidence about potential efficiencies arising from the transaction amounting to something along the line of $350 million of efficiencies conceded by the government.

 

      And I think that's an important point for the appeal. The case sort of started off with the acknowledgment that even limiting one's focus to efficiencies arising -- one form of efficiencies: those arising from elimination of double marginalization that you had something like 70, I think 78's the number, over $70 million annually in efficiencies passed onto consumers. And I think walking into the case the idea that the government had acknowledged the burden of needing to show not only that the merger might have some negative downstream impact but also that that impact would have to outweigh what acknowledged were pretty significant consumer benefits arising from that transaction. I think that is one important part of Judge Leon's opinion.

 

      The other criticizing Dr. Shapiro's opinion ends up being a fairly central part of Judge Leon's lengthy analysis. I think it should be noted that the expert testimony that Dr. Carlton on the other side put in the Judge found fairly probative as well. So rather than complicated bargaining models and the like, Dr. Carlton's testimony, I think, did two things. One, it, sort of in a defensive role, poked holes in the predications arising out of Dr. Shapiro's bargaining model, but also did some analyses on prior transactions -- on prior vertical transactions and in the video programming and distribution industry, and said, "Listen, the DOJ's model would predict price increases here, but it turned out we didn't get them." And I think Judge Leon sort of points to that testimony as providing yet another reason to think that maybe these sort of more complicated bargaining models, at least applied here, were not probative of predicting the effects of this particular transaction. So for a law and economics person, I think an opinion that gives a lot to think about and a lot to discuss and sort of a welcomed heavy focus on economics.

 

      The DOJ's appeal, filed in August, characterizes Judge Leon's opinion as failing basic economics as sort of the primary argument, and really, I think—at least in my view—makes an attempt to convert some of the Judge's conclusions that either as a matter of fact the inputs into the model or the model's fit with the industry were lacking into sort of broader areas of logic. So [it] argues Judge Leon's conclusions meet a clearly erroneous standard because of what the DOJ describes as, and I'll quote, "fundamental errors of economic logic in reasoning."

 

      So their two major claims are that the DOJ ignores a profit maximization principle. DOJ argues that Judge Leon's finding that AT&T wouldn’t have increased bargaining leverage shows a misunderstanding of that principle. And the amici economist brief I felt like did a pretty good job responding to this point for those interested in reading it. But a firm might have plenty of good reasons to have each division strike its best deal that it can achieve in complex negotiations. The way that firms are structured it can be a lot of different ways in which they might be consistent with the profit maximization principle. I think that is a point that the DOJ debates with. But again, I think that economist amici brief does a good job discussing that. And for Judge Leon's part, with respect to that, points to industry testimony showing precisely why the strategy was used by vertically-integrated firms in the industry. So that's sort of one -- and I think the fundamental tension and issue in the appeal will be this sort of move by DOJ to convert factual disputes and disputes that are based on crediting industry testimony into sort of broader forms of economic area.

 

      The second category of argument that falls into that theme is, I think, a pretty interesting one, which is Judge Leon's rejection of the Nash bargaining model. So the way that I read the opinion—and I think certainly the way that it's written—is that Judge Leon says -- you know, doesn't reject the use of bargaining models writ large but rather says the predictions here aren't probative because the inputs and assumptions in the model - either there's factual problems with the inputs or problems with the fit of the model, given industry characteristics that the judge infers from business testimony. So, again, here the fundamental tension is DOJ attempts to portray those differences as ones about -- Judge Leon either abiding by or rejecting fundamental principles of economics. Here, again, I think quite a bit of the opinion is devoted—I think 40 pages—to a one-by-one discussion of why inputs into the model were flawed. Some of those flaws conceded at trial and combined with testimony, both from the DOJ's own expert and from Dennis Carlton, that tweaking some of those assumptions do away with the prediction that the DOJ offered, that the merger would be anticompetitive.

 

      So, again, I think there the DOJ's most forceful argument is the one they make about the threat of blackouts and its influence or potential influence on the bargaining model. They point to a passage in the decision in which—and I think this sort of exemplifies the nature of the dispute throughout—they point to this passage and say Judge Leon doesn't believe the threat of blackout is credible because there's a bunch of testimony that suggests it's not. And the DOJ attempts to portray that passage as indicating that the Judge simply doesn't understand that the threat of a blackout could affect leverage, even if a blackout doesn't exist. Again, I think a read of the opinion—at least the way I read it—suggests that the latter reading, the DOJ reading, is a bit strained. And that rather, I think probably the fairest reading and the one I think the D.C. Circuit is more likely to accept given Judge Leon's heavy reliance on testimony in front of him during the trial was that the court understood very well that the threat was important and how that threat related to the DOJ's bargaining theory, but rather its particular application here was a model that didn't fit the facts. Again, I think sort of pretty standard stuff of evaluating a model fit with facts for a judge in a merger case.

 

      Let me close with a couple of things that are sort of a hodgepodge of things I think are sort of interesting. And I don’t view the opinion as one that is particularly critical in terms of breaking new legal ground. It's a very fact-intensive opinion. So one looking for guidance in a casebook for a decision that lays out a comprehensive legal framework for evaluating merger decisions might be left disappointed that the opinion sort of lacked that overall framework. And that's not a criticism of the opinion itself. I just don’t think the opinion does much in terms of breaking new legal ground. But rather it's really a deep fact-intensive exercise that appears to weigh economic analysis heavier or more significantly than predications arising from customer testimony or hot documents. I think that's a manner in which, maybe ironically given the DOJ's arguments, I think really an opinion that is that fact-intensive in reviewing the economic analysis in a particular case in favoring it over documents and customer testimonies of something consistent with how economists have been arguing mergers ought to be analyzed for some time.

 

      I think I will conclude with the thought that I don’t find Judge Leon's result particularly surprising for a couple of reasons. One is that the number conceded for efficiencies in the transaction, you know, some $350 million, I think when you combine the conceded efficiencies figure—which [is] quite large. I can't think of an amount of efficiencies recognized by a court that large in a litigated transaction. And even if there is, it's a quite a significant number. And, again, recall that's a lower bound, right? That is just that illuminating double marginalization efficiencies. I don't think it's particularly surprising when you've got that much in consumer benefit conceded by the party challenging the deal and when the testimony of the economic expert arguing the merger's anticompetitive is statistically indistinguishable from zero. And that, again, is a point that Judge Leon pointed to in the opinion, and I think comes out again in these economists amicus briefs, which I think are definitely worth reading for those interested in following the decision. I mean, those two facts combined, I think, a statistical harm indistinguishable from zero and some certainty over a high number of efficiencies -- I think sort of nothing really surprising in the decisions. Certainly lots to quibble about and the DOJ, I think, does what it can to make larger what are really factual disputes over the economic inputs to the model. But from my own personal view, not a ton surprising in the outcome given those two sort of important facts. And I think those facts will matter a great deal in how the court of appeals evaluates the transaction as well.

 

      Micah, why don’t I stop there and let you turn to questions or we can do whatever's next.

 

Micah Wallen:  All right. Thank you, Josh. Let's go to audience questions. Not seeing any questions lined up right away. Josh, did you want to expound on anything further while we wait a few minutes for some questions to come in?

 

Hon. Joshua D. Wright:  Sure. Sure. I think, I mean, I said in the opening, the relationship between the outcome of this case and how the agencies will treat vertical mergers going forward, I think there are a couple of interesting components of that. One question is whether the outcome of this appeal will have much, if anything, to do with how the DOJ in particular - let's say both agencies - will move forward in terms of litigating vertical merger cases. I've seen a frequently expressed opinion that an appellate loss in AT&T/Time Warner—which is, I think, certainly the outcome that I think is most likely given Judge Leon's opinion—that an appellate loss might slow the DOJ down or might even have some chilling effect on vertical merger enforcement from the FTC.

 

      I guess I would say I don't find that outcome particularly likely. I think Assistant Attorney General Delrahim has, I think, for certain made clear that he is willing to bring cases that he believes in, whether or not the outcome of litigation is, as always, uncertain. I think he's shown and he's willing to take stances that the DOJ staff and he believe are appropriate. So I can't imagine the DOJ being slowed down at all. I don't think that that means they bring more vertical transactions or less. I think that we'll see business as usual from the Antitrust Division and sort of not impacted one way or another by a decision that doesn't go their way. I think that's just part of the business and sort of what happens when you're AAG and you bring tough cases. And I think if anything, AAG Delrahim should be applauded for being willing to bring a tough case that clearly his staff believed in.

 

      I think another interesting dimension is this connection to vertical merger guidelines. One of the strongest points in favor of vertical merger guidelines in iterations of that debate that have happened historically and I think are arising once again—I just heard them come up in the context of the recent FTC hearing panel on vertical mergers—is that both agencies might be open now to guidelines. One of the strongest cases made previously in favor of guidelines was of course we didn't have anything litigated. We don’t have decisions to point to. We don’t have an analytical framework set forth for analyzing vertical mergers. And so maybe guidelines would be valuable.

 

      I'm not particularly persuaded by the argument that this opinion changes much of that, right? So, important? I think an important precedential opinion in the sense that -- look, any area of antitrust law where you don’t have a litigated case for 40 years and you get one is going to be important. There is going to be important ways in which this decision shapes how other courts look at vertical merger challenges. And I don't think there's any way to avoid that. But in terms of doing something akin to what the horizontal merger guidelines do, sort of operating as a substitute for guidance on an analytical framework as a whole, I don't think that the opinion does that. And so I don't think it does much in terms of swaying the debate over vertical merger guidelines one way or another, although it is frequently invoked on either side of that debate. I think the vertical merger guideline debate and the debate over what vertical merger policy ought to be moving forward is going to be one that is lively over the next year. And the guidance that the agencies might give to courts on how to assess vertical mergers I think is something both agencies are going to be pretty interested in and I think is a space to watch, but I don't think particularly impacted one way or another too strongly by the outcome of this opinion or, of course, depending on what the court of appeals does, by the outcome of the appeal.

 

Micah Wallen:  And we do have a question lined by currently. So without further ado, let's move to our first question.

 

Aurora Peterson (sp):  Micah, thank you. It's Aurora Peterson. Hello, Josh. Josh, I wanted to --

 

Hon. Joshua D. Wright:  Hi.

 

Aurora Peterson:  Hi. I wanted to ask you about the [inaudible 30:31] with respect to efficiencies for the conclusion that the very high sum of efficiencies that was conceded—I think you mentioned $350 million—would, in fact, in good part at least, be passed along to consumers. More broadly, I wanted to get your opinion of the utility, if any, of the very constrained definition of efficiencies in the current merger guidelines, and perhaps more broadly if you have time you could also touch upon the specifics of the vertical merger guidelines we have now and how you would change them if you were a [inaudible 31:22] or a king and could do so. --

 

Hon. Joshua D. Wright:  Great. I will --

 

Aurora Peterson:  Thank you.

 

Hon. Joshua D. Wright:  Yeah. Let me run through all of those. Those are great questions. Thank you.

 

      So in most cases where the agencies or courts are analyzing efficiencies and the extent to which they are passed through to consumers, this can be a fairly complicated bit of economics to do. It usually depends. So there's some amount of efficiencies that are passed on -- some amount of cost savings associated with the transaction. And the horizontal merger guidelines, in any event -- well, we want to count the part of those that are passed on to ultimate consumers in some way, shape, or form. There are economic methods for sort of estimating or assuming pass-through rates that depend on the slope of the supply-and-demand curves. But [it] can be a pretty complicated exercise. Sometimes, instead, agencies or courts are presented with testimony where estimating pass-through of cost savings into prices through empirically examining prior transactions. I think here -- and so it's always sort of a less-than-the-total cost savings that are passed through.

 

      Of course, in here I think Shapiro's model had sort of built in a merger simulation model, which you're estimating a demand curve and you've got a supply curve sort of built into the model. So the pass-through is a product of the assumptions that the DOJ is putting into the model over the shape of those respective curves. So the pass-through rates are something that sometimes we get a little bit more fight over in litigated cases or even cases in front of the agency. Here, the conceded amount that was passed through, that's that sort of 70-something—forgive me for not remembering the exact number—but that 70-something per year that was passed through is the amount that was conceded to be passed through to consumers.

 

      I imagine one might have a little bit of debate over whether the pass-through rate could even sort of result in a higher number. And, again, recall that those are sort of the lower bound on efficiencies, right? That's the excepted amount from eliminating double marginalization. So we always know the pass-through rate is going to be smaller than the total cost savings. I don't think he had too much of a fight over the precise level of pass-through here.

 

      There is this really interesting, I think, feature of -- I mean, it's clear from Judge Leon's opinion that the efficiencies number mattered, even though I think the right way to think about the opinion legally is Judge Leon concluding that the evidence put forth by the DOJ didn't satisfy its prima facie burden, right? So we never get to efficiencies, I think. But it is fairly clear from the opinion that the impact of that number that Judge Leon certainly credited that evidence and thought that it was important, even though at the end of the day, he also finds that the evidence the DOJ put forward is not sufficient to dispel its burden at all on showing anticompetitive effect, including and up to sort of failure to show statistical significance of any of its real core harm results.

 

      In terms of the guidelines-based questions, sort of the last two that you mentioned, I think one was about treatment of efficiencies and the horizontal merger guidelines writ large, and the other was about gaps in the current vertical merger guidelines. Look, my view on the horizontal merger guidelines in efficiencies is -- we've done a lot of updating of the horizontal merger guidelines, right? The efficiencies section - we rewrite them in '92, put in the efficiencies section in '97, rewrite them again in 2010. But if you were to hold up the 1997, sort of the first version of the efficiencies guidelines and hold them up next to the 2010 guidelines, you're largely reading the same document. A little bit of altered wording, but the analytical framework is basically the same.

 

      And so I largely view the 2010 rewrite as a rewrite aimed at updating tools the agency uses when thinking about its own case. So we update the unilateral effects section. We update how much we think about competitive effects versus, say, structural stuff. We update to reflect that we think less about market structure and a little bit more about competitive effects. We update to talk about the shift towards using natural experiments to estimate whatever we can with respect to effects of diversion ratios. But really the supply side of the guidelines—you know, entry and efficiencies—haven't moved. That doesn't quite answer your question about what I would change, but I think there's quite a bit to do there on the entry and efficiencies section.

 

      So just for a couple of examples on the efficiencies section: there is a big distinction drawn between marginal-cost savings and fixed-cost savings. And that distinction is reflectively used inside the agency to say that real fixed-cost savings sort of don’t count or are always recognizable. As a matter of economics, you can think of cases in which that may not necessarily be the right way to think about fixed-cost savings. Plenty of people have written about that, but that's sort of one area. Another might be the treatment of out-of-market efficiencies. That also is an area where the guidelines take a pretty hard stance of saying if you can show real consumer benefits arising from the merger in some ancillary market, we're not going to count those. I think that's an area where, at least in some transactions, actually makes quite a bit of difference.

 

      With respect to the vertical merger guidelines, I guess my punchline there is pretty easy. I don't think that they're used, and I don't think they're influential at all with respect to how the agencies think about conducting analysis of vertical mergers or in the courts. I don't think that's a particularly good or bad thing. My own view is both the theoretical analytical framework for how we think about vertical issues—you know, raising reliable cost paradigm and all of that—I think that's changed quite a bit since those guidelines were written, as have the empirical evidence about what we think about how likely vertical issues are to cause competitive harm. I think we know a lot more in terms of both the economics and the empirics than we did at the time of those guidelines.

 

      So I'm not -- I'm certainly of the view that something could be written down to better reflect the modern understanding of vertical transactions. I do have some sympathy for the argument that you hear sometimes from the agencies, who tell you "We already know how to do these. We have a framework." And we don’t litigate these that often, so why write down guidelines to influence courts if we're going to litigate them once every 40 years—I mean, as a matter of resource allocation. But if vertical merger challenges are going to become a bigger part of antitrust enforcement, then having the agencies invest in educating courts on how they think about that I think is a fine idea to be discussed by the agencies, and one that I think will sort of continue to happen at these hearings and maybe be a more prominent conversation of antitrust policy discussions for the next couple of years.

 

Micah Wallen:  Thank you, Josh. And I had a question as well. It seemed like Judge Leon was at least open to the argument or even supportive of the argument AT&T was making to view this merger in the context of the rapid changes in the media landscape with new companies like Netflix and Hulu and also new arrivals of Google and Amazon. How do you see that argument playing out in the higher courts? And also, what do you think that means, if anything, for the other kind of big merger in the pipeline with T-Mobile and Sprint?

 

Hon. Joshua D. Wright:  I don't really take a strong view to its implication on other transactions. I think it is fairly clear the exercise that the court was engaging in was a very transaction-specific analysis.

 

 

      But with respect to the former question, there's no doubt I think the court pointed to what appears to be a sort of pretty dynamic content market being something that the Judge pointed to as sort of evidence that some of the predictions of the bargaining model and the underlying anticompetitive theory were sort of left persuasive. I think Judge Leon's analysis on that speaks for itself. I think he spent a lot of time writing and documenting the testimony that he heard with respect to that sort of dynamism and how it played out in his opinion.

 

      But with respect to its impact on appeal, I don't think much either way, to be honest. I mean, I think the outcome of the appeal is going to be is the court persuaded by DOJ's arguments that Judge Leon's long, detailed analysis of inputs into the model and scrutiny of whether the model fit the facts of the industry are those the types of error that are fact based and consistent with economic analysis on the one hand? Or are they evidence of some large gap in understanding of fundamental antitrust and economic principles? My own view - I think it is difficult to read the opinion as in the manner suggested by the DOJ appeal. My own view of the appropriate role of the economists certainly includes scrutiny of inputs into the model and questioning and testing even whether -- we call these robustness checks in economics paper, right? Whether the model fits the facts or whether slight tweaks makes results go away. I think in many ways what Judge Leon's opinion did was invite and conduct robustness checks on Dr. Shapiro's testimony and ultimately find it lacking. One can disagree on the merits or read different documents differently. But that's not what gets you wins on appeal. What gets you wins on appeal is category error or methodological error, sort of clear error. And I don't think you can get that out of what amounts to sort of the robustness checks that Judge Leon conducted on the primary piece of evidence in front of him being Dr. Shapiro's predication.

 

Micah Wallen:  I see. Thank you. We have one more question lined up. So without further ago, we'll move to the next question.

 

Caller 2:  Thank you very much, Commissioner Wright. I really appreciate the talk. One question I had is in his opinion, Judge Leon did note that there was some, we'll say, support among some of the D.C. Circuit judges - Judge Kavanaugh, Judge Ginsburg - for a presumption that most vertical mergers are going to be pro-competitive absent a showing of market power. But he ultimately sidestepped that question, and said, "I don’t need to go that far." What are your thoughts as to the likelihood that the D.C. Circuit might take this as an opportunity to address whether there should be such presumption? Or is the court going to stick very narrowly to just we're going to look at what he did viewing the facts and that's all we're going to say?

 

Hon. Joshua D. Wright:  That's a great question and an interesting one. Look, most of the analytical writing, I mean, when you point to Bork and my good friend and co-author and colleague, Doug Ginsburg, and what they've written on vertical restraints and vertical mergers, it was a while ago. And I think the inquiry over whether a presumption of legality is warranted is one that necessarily has to be based on empirics, you know, necessarily got to be based on what the empirical record shows with respect to the effects of vertical mergers.

 

      Now, I've written this elsewhere, my own view is if one engaged in that exercise—and, in fact, the Global Antitrust Institute, the sort of outfit that I run—just submitted a comment to the FTC hearings that makes this point. We sort of review all of the evidence of vertical transactions for the past 40 years and try to summarize what those data say. My own personal view is that the evidence on the competitive effects of vertical mergers is consistent with some kind of rebuttable presumption of legality and certainly more of a presumption that exists in sort of the existing framework. But that's my personal read of the evidence.

 

      I don't think that anything in Judge Leon's opinion suggests there was a sort of searching review of all of that evidence that would give the D.C. Circuit a hook for that kind of -- I would think that that would be quite of an adventurous trip from what exists as the already kind of heavy fact-intensive record. I mean, it's a direction that I think the law might go over time. But my own view is I would find that sort of opinion from the D.C. Circuit unlikely. I think the opinion is pretty much built for an appellate -- Judge Leon's opinion is pretty much built for a D.C. Circuit opinion that says, "Judge Leon reviewed the evidence carefully and came to conclusions that the plaintiff didn't meet its burden. We see no clear error. Goodbye." And I think that's the safest way to write the opinion. I think you may get more than that, but I'd be surprised if you got a lot more than that. And I think sort of writing into the D.C. Circuit's approach to vertical mergers of presumption based on an understanding of the overall body of evidence would be -- and maybe you can pull that from amicus briefs. It's an interesting idea. I'm a little skeptical they get that adventurous. But one I would, for my own personal view, be sort of welcome to see.

 

Caller 2:  Thank you very much.

 

Micah Wallen:  All righty. Well, on behalf of The Federalist Society, I want to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.