In what is undoubtedly the best Labor Day present the Department of Justice ever gave America, DOJ has filed to block the AT&T/T-Mobile merger in court. One should not, however, expect AT&T to give up easily. Indeed, AT&T has already said it will fight the DoJ in court. On the plus side, the odds definitely favor the DoJ, which is why so many companies simply abandon the merger once DoJ has filed and why analysts who thought AT&T invincible are now declaring the deal dead.
Meanwhile, the Federal Communications Commission (FCC), an independent agency, still needs to make its decision on what it will do. Unlike DoJ, where the head of the Anti-Trust division makes the call (subject to the usual political checks, of course), the FCC must have a vote on an Order, which must get a majority of the Commission (3 votes). Since Congress repealed the FCC's ability to immunize phone mergers from antitrust back in 1996, the FCC cannot approve if DoJ wins in court. OTOH, the FCC is under no time pressure, and can wait to see how the court case turns out. At the same time, however, the court may decide to stay consideration until the FCC decides, since the merger cannot proceed without FCC approval.
All of this has huge implications for AT&T and its current bluster that it will fight DoJ for the right to eat T-Mo. Normally, AT&T could hope to get this wrapped up in a few months, and continue to try to use its political muscle to force a settlement. But the interaction between DoJ's challenge and the FCC lawsuit make it incredibly difficult for AT&T to get this done before Deutsche Telekom decides it wants its $6 billion cash 'n spectrum break up fee. As I explain below, AT&T must simultaneously persuade the FCC not to act while convincing the court to move at super speed, despite the fact that the usual way things work is for courts to wait for agencies to finish review (because the agency may remove the need for the court to act).
So How Does This Usually Work
In the usual course of events, when the DoJ challenges a merger, it files a complaint with the district court and also requests a preliminary injunction to prevent the companies from merging pending the outcome of the case. While the DoJ has the burden of proof, the relevant statute (the Hart-Scott-Rodino Act, or HSRA) does not require the DoJ to prove that the merger would certainly "substantially lessen competition or tend to create monopoly." The courts recognize that, when predicting the future, the agency is entitled to use its professional judgment.
Over at the FCC, the applicants have the burden of proof of showing that the merger will serve "the public interest, convenience, and necessity." While this includes consideration of antitrust, it is also a higher burden than just plain vanilla antitrust. How much higher is somewhat subjective, however. But the point is that if the merger fails on pure antitrust, it definitely (at least for the last 30 years) fails on the public interest standard. By contrast, if it survives the antitrust standard, it can still fail on the public interest standard.
In theory, the FCC does not reject mergers in the initial phase. AT&T filed its applications, and the Commission considers whether it is obviously in the public interest (or can be made so by suitable "voluntary" conditions) or if there remains "an issue of material fact" as to whether the merger serves the public interest. If they find an "issue of material fact" (which happened once in living memory, the DISH-DIRECTV merger), then the FCC votes to refer the matter for an evidentiary hearing before an Administrative Law Judge (ALJ).
Unlike the DoJ complaint, there is no way to appeal the FCC determination to go to an ALJ. The parties must "exhaust their administrative remedies" (i.e., have the hearing), THEN appeal the hearing result back to the full Commission. Only then can they appeal to the D.C. Circuit if they are denied. Since this process takes years and years and costs squindoodles of dollars (and lets face it, only happens when staff says the merger is a total dog) everyone treats referral to a hearing as a kiss of death.
What About Here With ATT-TMobile?
AT&T says it will fight DoJ, so FCC does not get off the hook by having the parties gracefully withdraw (as often happens when DoJ goes first). The most obvious (and most likely) thing for the FCC to do is follow the general shape of AT&T's antitrust complaint (and a few grace notes particular to telecom) and refer for a hearing. Remember, even if AT&T ultimately wins on pure antitrust, the same concerns may make the matter contrary to the public interest under the higher public interest standard. So it seems fairly straightforward that a DoJ complaint = issue of material fact that an ALJ would need to consider, and the if AT&T wins on the Antitrust side that is a factor to consider by the ALJ.
But, as I have pointed out, this case is unusual because it actually gives rise to the concern that the proposed merger violates Section 314 of the Communications Act. So the FCC has a rare option here. It can decide that the merger is ungrantable as a matter of law and dismiss the Applications. At that point, AT&T can appeal to the D.C. Circuit, a process which will take at least a year, possibly more, and where the agency gets lots of deference for its decision. And, even if AT&T wins its appeal, it gets the right to a hearing on the issue of material fact (does this violate Section 314). My bet is AT&T gives up at that point, or T-Mobile walks away and collects its $6 Billion in spectrum and cash.
Alternatively, the FCC can wait and do nothing. While that is the best possible outcome for AT&T, it probably works out poorly for FCC Chairman Julius Genachowski for 2 reasons. First, it wins him no friends with his fellow Democrats, who have now gone out on a limb and stood up for the principle of law, etc. It also keeps him in the public eye, drawing fire from both merger opponents (who will ask why the FCC has not moved forward to refer to a hearing) and merger supporters (who will try to stall as long as possible).
Most importantly, however, failure of the FCC to act may freeze progress on the DoJ litigation. As I said above, this normally gets resolved by the DoJ request for a preliminary injunction. Either DoJ wins on that, in which case opponents usually give up at that point. Or DoJ loses, in which case DoJ usually gives up because the merger can proceed and it is impossible to "unscramble the egg" after the merger is consummated.
Here, however, the merger can't proceed unless the FCC grants approval. So not only is there no need to ask for a preliminary injunction (and the Department of Justice has not asked for one), there is no need for the court to resolve the case (because the agency might say no to the merger). As a general rule, courts don't like to take action that may be rendered unnecessary by an agency -- so the usual rule is that if an agency decision might get the court off the hook, then they wait. this is particularly likely here, because the law requires an appeal from the FCC to go to the D.C. Circuit Court of Appeals, whereas the complaint is filed in the District Court for the District of Columbia Circuit. So district court is looking at a possible agency decision and appeal that may render whatever he does totally irrelevant.
So even if AT&T persuades the FCC not to act, it may end up in perpetual time warp because the court won't act unless the FCC acts. At which point T-Mo runs out the clock and collects its $6 billion in cash and spectrum in a year.
Bottom line is that there are really no good options for AT&T at this point. To come back for a victory, AT&T must (a) convince FCC to hold off; while, (b) convincing the court to go ahead despite the FCC being on hold. And then it has to win the case -- which the odds do not favor.
At some point, T-Mobile is going to exercise its option and walk. It has $6 billion in cash and spectrum, which will make it a heck of a lot more competitive (or more attractive to a potential buyer, if DT still wants to exit). AT&T can delay the inevitable by fighting. But while AT&T still has a theoretical road to victory, I don't think anyone seriously wants to take that bet.