A federal judge in Washington, D.C. on Tuesday cleared the $85.4 billion merger of AT&T and Time Warner, rejecting the claims of the United States Department of Justice that the transaction may “substantially lessen” competition or “tend to create a monopoly.” The DOJ is likely to appeal and/or seek to stay the closing of the transaction.
The landmark case was the DOJ’s first suit in 40 years seeking to block a so-called “vertical merger,” i.e., a merger between a buyer and a supplier. The DOJ has acknowledged since 1984 that although nonhorizontal mergers are “less likely than horizontal mergers to create competitive problems, they are not invariably innocuous.”
The court’s ruling is widely viewed as significant because it is the first vertical merger case in decades and, if it stands up on appeal, may influence the DOJ’s analysis of such transactions and deter future challenges to them.
But the decision’s importance in the health care industry, where relationships between merging parties are frequently more complex than in other industries, is not as clear. Some mergers that appear to be vertical – including hospital acquisitions of physician practices, the CVS Health acquisition of Aetna, and the integration or mergers of payors and providers, such as UnitedHealth’s acquisition of Surgical Care Affiliates – are not “pure” vertical mergers because they may have important horizontal components. For example, the parties in CVS-Aetna and Cigna-Express Scripts are not in a traditional buyer-supplier relationship, and there are elements of horizontal overlap that may need to be analyzed under a horizontal merger analysis approach.
Moreover, vertical transactions can raise important foreclosure concerns, including concerns regarding limiting access or market entry, and sometimes raise concerns as to collusion irrespective of whether there are horizontal aspects.
In addition, well-executed vertical integration in health care transactions may have procompetitive effects, as they can positively promote cost containment/reduction and aid the transition to value-based reimbursement.
In any event, the AT&T/Time Warner decision (assuming it is not reversed on appeal) is informative for pure vertical mergers, including for example, a health insurer acquiring a hospital system.
At trial in the AT&T/Time Warner case, the DOJ argued that AT&T occupies a dominant position in a highly concentrated telecommunications market, but Time Warner products — such as HBO’s “Game of Thrones” and CNN — are not fungible. As a result, the DOJ contended, if AT&T wants to withhold “must have” programming from a rival telecom company, or charge more for it, that company cannot readily replace it.
In response, AT&T argued it had no incentive to withhold Time Warner’s programming from other distributors, that consumers would derive many benefits from the merger and that the combined companies would be in a better position to compete with upstarts like Amazon and Netflix, which already are vertically integrated.
The court found after a six-week trial that the DOJ had not proven the proposed merger would lead to fewer choices for consumers and higher prices for television and internet services.
It is unclear if those arguments will prevail in the health care context, given the complexity of the transactions and the possibility that they may have both vertical and horizontal aspects.
Some commentators have called on the DOJ to revise its vertical merger guidelines, quoted above, which were last issued in 1984 and largely followed the reasoning of Robert Bork’s influential 1978 book, The Antitrust Paradox. Bork argued the main purpose of antitrust law is to protect consumers by encouraging economic efficiencies, and as a result, authorities should not focus on blocking vertical deals, which (he asserted) produce efficiencies that can be passed on to consumers in the form of lower prices, higher quality or both.
The AT&T/Time Warner ruling is widely expected to unleash a wave of vertical combinations in various industries, including media, entertainment and – perhaps to a lesser extent – health care.
 See U.S. Department of Justice Non-Horizontal Merger Guidelines, originally issued as part of “U.S. Department of Justice Merger Guidelines, June 14, 1984.”