Legal

No one likes to fight a war on two fronts, but it's especially not fun if you're AT&T and T-Mobile, and two different federal agencies are looking crossways at the antitrust implications of your proposed $39 billion merger. That's why the telecom giants made a strategic decision to walk away from one battlefield: It may be the only way eventually to win the war.

Last week, following a Federal Communications Commission statement that it planned to send the proposed deal to an administrative law judge for review, AT&T and T-Mobile parent Deutsche Telekom withdrew their FCC application seeking approval of the deal. The companies said they were doing so to "consolidate their strength and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice." On Monday the FCC agreed to the application withdrawal, but not without releasing a 111-page (discounting exhibits) report that said AT&T and T-Mobile "failed to carry their burden" of showing the transaction will serve the public interest and that "significant harms to competition" are likely to result.

There's good reason the telecoms made the choice to fight the DOJ in federal court rather than undergo a formal tangle with the FCC in an administrative proceeding. In telecommunications mergers, it's unusual to have a full-out dual review process, according to one antitrust lawyer who declined to be named for fear of damaging client relationships. "While people sometimes litigate with the DOJ over mergers, I don't think anyone has ever successfully litigated with the FCC," the lawyer said. "Conventional wisdom is if the FCC refers something to trial, the trial will never happen because no one will have stomach to deal with it."

It's in fact extremely rare for the FCC even to reach the point of designating a merger application for hearing. The last time was in 2002, when Echostar Communications Corp. was bidding for DirecTV. Those companies eventually dropped their bid.

Focusing on the DOJ case may also be desirable because of the differing burdens of proof between the FCC and the DOJ, said an antitrust law professor who asked not to be named because he has a tangential advisory role in the deal. In an FCC hearing, the companies would have to show that merging would actually be in the public's interest. In a DOJ trial, in contrast, the agency has the burden of proving the merger would be competitively harmful, the professor said. Since the DOJ trial would likely be finished and on appeal before an administrative case worked its way through the FCC -- a system that has never handled a merger trial of this magnitude -- the federal court is the more desirable option, the professor said.

AT&T and Deutsche Telekom have said they're going forward with plans to finalize the deal, and their stated intention of litigating against the DOJ suggests that they mean it. But they will ultimately have to win the FCC's approval, since that agency has the power to block the transfer of the licenses that make the deal worth doing. Withdrawing the FCC application might seem like a postponement of the inevitable, but AT&T and T-Mobile may have better facts on their side when they resubmit their application to the commission.

According to Jonathan Jacobson, an antitrust partner at Wilson Sonsini Goodrich & Rosati, it appears that the companies are going to "do what they can to prevail or consensually resolve the DOJ litigation and then carry that resolution over to the FCC." Should they eventually settle with the DOJ, the companies would be able to show the FCC that they've revised the transaction in a way that accommodates the Justice Department's concerns. Since the DOJ is interested in the same issues as the FCC, the companies would argue that the FCC should respect the new agreement and approve the resubmitted application, Jacobson said.

This argument, of course assumes AT&T and T-Mobile eventually win the DOJ battle, either through modifying the deal and reaching a settlement or by prevailing at trial. If they go to trial and lose, getting FCC approval would be of little consolation.

Attorneys from AT&T and T-Mobile did not respond to requests for comment.

(Reporting by Erin Geiger Smith)

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