Vertical Merger Expert WitnessesIntroduction: 

In June of 2018, a trial was held in which the U.S. Department of Justice (DOJ) sued to block the acquisition of a news and entertainment company by a telecommunications entity. See, e.g., Dee Bansal et al., “Alert: Antitrust Trends in 2019: Enforcement Watch List for the Year to Come,” JDSupra, Jan. 10, 2019, at https://www.jdsupra.com/legalnews/alert-antitrust-trends-in-2019-35700/ (last visited Mar. 6, 2019). The district court that heard the case ruled in favor of the defendants, and the judgment was appealed by the government. See, e.g., id. The $85 billion acquisition was a vertical merger, and as a result of myriad factors, several antitrust attorneys have argued that “the potential for future challenges to vertical mergers…remains shrouded in uncertainty.” Id.  This article addresses some variables that may create unpredictability in vertical merger litigation.  

Discussion: 

Vertical mergers occur when companies that “supply products to each other” are combined, whereas horizontal mergers take place when competitors join forces and become one entity. See, e.g., id. The 2018 case is significant in many respects, partly because it is the first loss the DOJ has experienced in a merger lawsuit since 2004. See id. The district court’s decision was based on expert witness evidence regarding whether the proposed acquisition would discourage or decrease competition. See, e.g., id. The initial ruling determined that the DOJ’s expert witnesses had been adequately rebutted by the defense experts. See U.S. v. AT&T, Inc., et al., Case No. 1:17-cv-02511, p. 4 (D.C. Cir. Feb. 26, 2019), reprinted by  Sara Salinas, “AT&T’s merger with Time-Warner will stand, after DOJ loses its appeal and drops the case,” CNBC, Feb. 26, 2019, at https://www.cnbc.com/2019/02/26/appeals-court-upholds-decision-allowing-att-to-buy-time-warner.html (last visited Mar. 6, 2019).  

The D.C. Circuit Court of Appeals upheld the trial court verdict, determining that: 

At trial, the government presented expert opinion on the likely anticompetitive effects of the proposed mergeras forecast by economic principles and a quantitative model. It also presented statements by the defendants in administrative proceedings about the anticompetitive effects of a proposed vertical merger in the industry seven years earlier. The defendants responded with an expert’s analysis of real-world data for prior vertical mergers in the industry that showed no statistically significant effect on content prices. The government offered no comparable analysis of data and its expert opinion and modeling predicting such increases failed to take into accountpost-litigation irrevocable offers, which a government expert acknowledged would require a new model… .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. U.S. v. AT&T, Inc., et al.., supra, at 4. 

The DOJ decided to abide by the appellate court’s decision and did not petition the Supreme Court for review. See Sara Salinas, supra. Both courts’ conclusions were resolved by their assessments of competing expert witness evidence, and the defense experts were considered to have provided a more realistic and dynamic model than the government. See U.S. v. AT&T, Inc., et al., supra. Interestingly, after its loss in district court, the DOJ “closed investigations of” two other large vertical mergers. Dee Bansal et al., supra. This might suggest a trend of more leniency towards mergers of this type. 

However, uncertainties have arisen because of other steps the DOJ has taken with respect to vertical mergers. See id. For instance, the Department pursued and “obtained structural relief to resolve vertical concerns” raised by a pharmaceutical company’s merger with a biotechnology organization. See id. In addition, the Assistant Attorney General for the Antitrust Division of the DOJ, Makan Delrahim, recently announced that his division “will no longer accept…the ‘Band-Aid’ of behavioral remedies.” Id. This announcement was coupled with DOJ efforts to improve transparency in vertical merger investigations, and it suggests some unpredictability regarding how vertical mergers will be handled by the government and the outcome of potential litigation. See, e.g., id.  

Conclusion: 

In the face of legal ambiguities, expert witnesses are indispensable. Their guidance on economics, industry behavior, mergers and acquisitions, competition, and related matters can help provide clarity and resolution. The loss the DOJ suffered in late February with the appellate court may cause it to bring less litigation or, alternatively, to continue to bring suit in similar instances but strengthen its expert witness evidence along the lines suggested by the courts. The internal investigation reforms may require expert consultants to assist each party in strategies that are compliant and transparent. Attorneys may also benefit from expert assistance to determine adequate redress when the DOJ expresses concern. Antitrust litigators may encounter some uncertainties, but experts can offer invaluable insight to all concerned.