Justice Department may sue over AT&T Time Warner deal

On Thursday, the Wall Street Journal reported that the Justice Department is considering filing a lawsuit aimed at blocking telecommunications giant AT&T (T)’s bid to buy entertainment giant Time Warner Inc. (TWX). Time Warner shares fell 3.7%.

The news came as a surprise to Christopher Sagers, a professor at Cleveland-Marshall College of Law and an expert in antitrust law. That’s because AT&T’s $85 billion offer to buy Time Warner is a so-called vertical merger, meaning AT&T isn’t trying to buy a direct competitor.

“The big surprise is that they question it at all,” Sagers told Yahoo Finance. “The Department of Justice has rarely challenged vertical agreements and very rarely under Republican administrations.”

Vertical mergers occur when companies operating at different stages of the supply chain decide to join forces. They are typically subject to less antitrust scrutiny than horizontal mergers, which eliminate direct competitors and thus may affect prices and harm consumers. The U.S. government has prevented horizontal mergers in the past, including AT&T’s attempt to acquire T-Mobile (TMUS) and United Airlines’ (UAL) attempt to acquire rival US Airways.

A different beast with different antitrust concerns

The AT&T-Time Warner deal is different from a horizontal merger and raises different antitrust concerns. Instead of being a direct competitor to Time Warner, AT&T is a buyer and distributor of its content. This content includes, but is not limited to, CNN, HBO, DC Comics, and Warner Brothers.

The main antitrust concern with such a vertical merger is that AT&T will make in-demand content more expensive for other distributors such as Comcast (CMCSA) and Yahoo’s parent company Verizon (VZ). Another concern, as The New York Times noted, is that AT&T may only promote HBO content to its customers, not content from other providers such as Starz and Showtime. The Times noted that AT&T could also give its wireless customers unlimited time to watch HBO while counting content from other providers toward their data caps.

These concerns do not necessarily mean that the Justice Department will file a lawsuit to block the deal. Rather, the Justice Department may be using the threat of a lawsuit as a bargaining chip to get AT&T to agree to certain concessions to eliminate antitrust concerns. These concessions may include certain remedies, such as requiring AT&T not to increase prices for Time Warner content to competitors.

Notably, federal regulators approved Comcast’s bid to acquire NBC Universal in 2015 only after agreeing to a number of conditions, such as a promise not to restrict distributors’ access to content.

“I’m glad he’s at least willing to threaten a lawsuit.”

Even if regulators at the Justice Department sign a deal with AT&T, it’s significant that the Justice Department has put the deal on hold, according to John Kirkwood, a law professor at Seattle School of Law and a fellow at the American Law Institute.

“He cares about antitrust enforcement,” Kirkwood said, referring to the Justice Department’s new antitrust chief, Makan Delrahim. “I’m glad he’s at least willing to threaten a lawsuit.”

In some ways, this latest development is not surprising. After all, during the presidential campaign, Donald Trump specifically threatened to block AT&T’s agreement with Time Warner.

Still, Maria Raptis, a lawyer at Skadden, predicted in January that Trump would take a more conservative approach to antitrust enforcement than his predecessor Barack Obama. Indeed, Delrahim, who is currently in charge of antitrust enforcement at the Justice Department, recently said that the goal of antitrust law is to “maximize economic freedom subject to minimal government impositions.”

In this context, some have speculated that the government may be holding up the AT&T deal due to Trump’s dislike of CNN (which is owned by Time Warner).

“I always thought it was unlikely,” antitrust expert Sagers told Yahoo Finance.

Erin Fuchs is deputy editor at Yahoo Finance.

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