United States District Judge Emmett Sullivan, sitting in Washington, D.C., has thrown the already-consummated of AT&T/SBC and Verizon/MCI mergers into a state of confusion. Judge Sullivan is requiring the parties and the Antitrust Division of the Department of Justice ("DOJ") to produce evidence to support the alleged public interest purposes served by the consent decrees filed by the DOJ in 2005, to settle its allegations that the acquisitions were anti-competitive and violated Section 7 of the Clayton Act. In the past, federal courts have approved such negotiated consent decrees with little or no comment, attaching extreme deference to the consent decrees and signing them as a matter of course. Judge Sullivan has now stated, however, that the 2004 amendments to the Tunney Act (15 U.S.C.A. § 16 (2006)), passed in response to District of Columbia Circuit’s highly deferential review and approval of the consent decree in United States v. Microsoft, require that he give both mergers — which have already closed — a more in-depth review. The 2004 Amendments to the Tunney Act directed that "before entering any consent judgment proposed by the United States under this section, the court shall determine that the entry of such judgment is in the public interest," and then instructed the court to consider the impact of the entry of judgment "upon competition and upon the public generally." 15 U.S.C.A. 16(e). Judge Sullivan apparently has interpreted this provision as requiring him to review evidence himself, rather than relying upon the administrative agencies’ review of the evidence.

In October 2005, the Department of Justice announced that it had reached an agreement with MCI in its purchase of Verizon and with SBC in its purchase of AT&T. In its complaints and the Competitive Impact Statements filed simultaneously as required by the Tunney Act, the Department of Justice indicated that the only competitive problems with the acquisitions concerned individual buildings in certain cities where the only landline services were provided by the merging parties and there was little possibility of a rival company entering the particular building because of the difficulty of entry and the small number of potential customers. The DOJ found around 700 total buildings to have a problem, and required the acquiring party to divest the lesser of half of the unused bundles of fiber optic cable or eight unused bundles of fiber optic cable for each building. To complete the divestiture, the acquiring parties signed contracts with competing providers, with the contracts expiring on July 31, 2006.

As with prior mergers, the Department of Justice submitted its Competitive Impact Statement, its charging complaint, and the proposed final judgment to the District Court, and posted them on its website, inviting public comment. Two associations of competing small telephone companies, ACTel and COMPTEL, responded to the filings and argued that the DOJ should have also challenged buildings in which the merger would leave the building with only 2 or 3 providers, rather than only focusing on buildings in which the merger would leave only 1 provider. The merging parties and the government responded by arguing that the District Court’s inquiry was limited to the buildings at issue in the DOJ’s Complaint, which reflected the Department’s determination about the extent of anticompetitive impact which would result from each merger. Arguments about the DOJ’s supposed failure to challenge other buildings, or provide solutions to other perceived anticompetitive impacts from the mergers were, therefore, irrelevant to the Tunney Act analysis according to the DOJ and the merging telephone companies.

After extensive briefing, on July 12, 2006, Judge Sullivan held an unprecedented hearing to determine whether 1) the Court could fulfill its statutory duties under the amended Tunney Act by relying on the government’s examination of the evidence, or if the Court needed to have sufficient evidence itself to satisfy the requirements, 2) whether the government had produced enough evidence to satisfy the Court through its current filings, and 3) what the scope of the Court’s review should be. Judge Sullivan began by noting that the government had produced no affidavits, declarations, or expert reports in support of its request to have the final judgment approved, while ACTel had presented the report of an expert economist, which had laid out competitive problems with the merger.

The government and the parties presented a number of pieces of evidence at the hearing, including maps showing the fiber optic cables of competing parties, and charts showing the number of competitors to certain buildings, in an attempt to convince Judge Sullivan that the Court had sufficient evidence to make its public interest determination. In addition, the government and the merging parties argued strenuously that Judge Sullivan was limited to reviewing the effectiveness of the remedy as to the 700-odd buildings in which the complaint alleged a violation. To expand the scope of the review, the government argued, would impose upon its prosecutorial discretion and pose a constitutional separation of powers issue. Finally, the government noted that both the Department of Justice and the Federal Communications Commission had found serious flaws with the economist’s report relied on by ACTel, and had refused to seriously consider it.

ACTel and COMPTEL argued the proposed final judgment was too narrow to satisfy the “public interest” standard Judge Sullivan must now apply. They argued that the complaint was actually quite broad, as it did contain statements about the overall market power of the combined firms in much larger markets, not just the individual buildings for which divestiture had been ordered. In addition, ACTel argued that political pressure had forced the Department of Justice to approve the acquisitions as the price of obtaining confirmation of a new head for the Antitrust Division. Finally, the small telephone companies argued that the Court should require some sort of an evidentiary hearing to allow the parties to present evidence and expert testimony about the anticompetitive effects of the merger.

On July 25, 2006, Judge Sullivan held a status hearing, at which he indicated that he would require the government to submit “any material necessary for the Court to satisfy its judicial and statutory function” by August 7, 2006, with ACTel and COMPTEL having until August 17, 2006, to respond, and replies due by August 28, 2006. Judge Sullivan also indicated that it was premature to order an evidentiary hearing, but refused to rule out the possibility of such a hearing in the future.

The potential implications of Judge Sullivan’s actions to date are enormous. If consent decrees are subject to this level of delay, and retrospective examination in the future, then merging parties may be less inclined to close a merger until the Tunney Act process is over – significantly increasing delay and risk of not getting the deal done, while being more inclined to abandon a merger if a consent decree is required as a condition of approval, or correspondingly more inclined to fight the matter in court. It is also possible that future complaints accompanying consent decrees will be more tightly drafted to prevent objecting parties from arguing that the alleged violations extend beyond the proposed remedy. And exposing materials and deliberations in the DOJ merger review process in open court — which until now have been entirely closed to public view — could impact the merger review process in fundamental ways not yet apparent. Finally, depending upon what Judge Sullivan ultimately does, a direct constitutional clash between Congress, the executive and the courts under the separation of powers doctrine could be in the offing. We will report further developments as they occur.

Authored by:

David R. Garcia