Sprint, Cellular South Allege Injuries from Proposed AT&T/T-Mobile Combination

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A private antitrust suit, seeking to enjoin AT&T Inc.’s proposed acquisition of T-Mobile USA, Inc., is still alive after the federal district court on Wednesday refused to dismiss on the ground that complaining competitors lacked “antitrust standing” to challenge the transaction.

The court found that, under many theories, Sprint Nextel Corporation and Cellular South, Inc., failed to allege antitrust injury. However, the complaining competitors adequately alleged antitrust injury with regard to the proposed acquisition’s effects on the market for mobile wireless devices. In addition, the motion to dismiss was denied insofar as it attacked Cellular South’s antitrust injury as a purchaser in the market for Global System for Mobile Communications (GSM) roaming.

The private actions followed the Justice Department’s filing of a complaint on August 31 to challenge the proposed acquisition—valued at approximately $39 billion. Sprint—the third largest national provider of mobile wireless services, with 50 million wireless customers—filed suit on September 6. On September 19, regional carrier Cellular South, Inc., and its wholly owned subsidiary Corr Wireless Communications, L.L.C., filed their complaint. They serve more than 887,000 customers located in Mississippi, Tennessee, Alabama Florida, and other surrounding states.

AT&T is the second largest national carrier, with 95 million customers. T-Mobile is the fourth largest national carrier, with 34 million customers.

In order to assess antitrust injury at the pleadings stage, the court had to make two distinct inquiries: (1) does plaintiff’s complaint allege a threatened injury-in-fact? And (2) does the threatened injury result from an anticompetitive aspect of defendant’s proposed conduct, i.e., that which would make the transaction illegal under the antitrust laws? The complaining competitors sought relief under § 16 of the Clayton Act, 15 U.S.C. § 26. The court explained that the antitrust standing inquiry under § 16 was “less demanding” than the standard under § 4 because § 16 “provides for injunctive relief, not treble damages.”

The court ruled that both Sprint and Cellular South adequately alleged a threatened antitrust injury with regard to the proposed acquisition’s effects on their access to mobile wireless devices. The complaining competitors alleged a merger-to-monopsony in support of this allegation.

The firms competed horizontally as sellers of wireless services and a broad array of wireless devices, including basic mobile phones, smartphones, tablets, and other products that access their voice and data networks, and as purchasers of wireless devices. Sprint and Cellular South alleged that post-merger, increased market concentration would enable the largest carriers (AT&T and Verizon) to coerce exclusionary handset deals. AT&T’s buying power post-merger could enable it to dictate terms to device manufacturers and otherwise impair the complaining competitors’ access to these necessary inputs. The threatened injury-in-fact was substantiated by the fact that AT&T and Verizon wielded their purchasing power in the past, the court noted.

Moreover, Cellular South alleged that the proposed acquisition threatens its access not only to handsets that are particularly desirable, but also, more fundamentally, to whole “ecosystems” of devices and network infrastructure—and customers. Cellular South claimed that AT&T and Verizon had exercised their purchasing power in the markets for devices and network equipment to propagate “their own separate ‘ecosystems’ of compatible infrastructure . . . that cannot be utilized by other competitors,” and that the proposed acquisition would increase the big carriers’ "incentive and power to exclude competitors from those ecosystems."

Cellular South also adequately alleged an antitrust injury in the market for GSM roaming based on the reduction in the number of potential roaming partners and resulting higher roaming prices, the court held. Cellular South alleged a vertical effect from the merger in that it would pay more to procure necessary inputs. Cellular South’s Corr Wireless subsidiary used GSM transmission technology and had been a roaming customer of T-Mobile and currently is a roaming customer of AT&T. Even if Corr Wireless represented only a small part of Cellular South’s business, Cellular South’s allegations suggested that its threatened loss from the merger was plausible, in the court’s view.

The court determined that Sprint and Cellular South lacked standing to challenge the proposed merger on the ground that it would lead to higher retail wireless rates. The possibility that a post-merger AT&T could raise market prices did not, without more, threaten injury-in-fact to Sprint and Cellular South. Raising market price or limiting output, while causing harm to consumers, would actually benefit competitors, the court explained.

Sprint also was found to lack standing to allege injury in the market for wireless spectrum. The court rejected Sprint’s contentions that AT&T’s acquisition of additional spectrum holdings from T-Mobile would “improperly shift the costs of spectrum development to Sprint and other carriers” and “further weaken their ability to compete on the merits by increasing their costs and delaying their access to new equipment.”

The November 2, 2011, decision in Sprint Nextel Corporation v. AT&T Inc., Civil Action No. 11-1600 (ESH), will appear at CCH 2011-2 Trade Cases ¶77,664.

Trade Regulation Tidbits

This posting was written by the editorial staff of the CCH Trade Regulation Reporter.

News, updates, and observations:

 House Judiciary Committee Ranking Member John Conyers, Jr. (D, Mich.) and Congressman Ed Markey (D, Mass.), a senior member of the Energy and Commerce Committee and former chairman of the Communications, Technology and the Internet Subcommittee, held a press conference on June 1 to raise antitrust and public interest concerns surrounding the proposed merger of AT&T and T-Mobile wireless telecommunication companies.

"It is time for the Department to exercise its power and look closely at this national, horizontal merger," said Rep. Conyers. “The AT&T–T-Mobile deal is like a telecommunications time machine that would send consumers back to a bygone era of high prices and limited choice," Congressman Markey said. "AT&T and Verizon have divided the nation into Bell East and Bell West. Approving consolidation of the number of nationwide carriers from 4 to 3 and then inevitably to 2 would return consumers to a duopoly in the national wireless market."

 Rep. Ron Paul (R, Texas) recently introduced two bills that would make it easier for dietary supplement marketers to make health claims for their products.

The proposed Freedom of Health Speech Act (H.R. 2045) would require the FTC to prove health claims false before censoring them. Under the measure, the FTC would be prohibited from commencing an investigation into false advertising by an advertiser of dietary supplements unless it possesses before the commencement of such investigation clear and convincing evidence that the advertisement is false and misleading. In a false advertising action against a dietary supplement advertiser, the burden of proof would be on the FTC "to establish by clear and convincing evidence that the advertisement is false, that the advertisement actually caused consumers to be misled into believing to be true that which is false, and that but for the false advertising content the consumer would not have made the purchase at the price paid." With respect to claimed health benefits for a dietary supplement, the FTC would be required to "additionally establish based on expert scientific opinion and published peer-reviewed scientific evidence that the claim is false."

The proposed "Health Freedom Act" (H.R. 2044) would revoke Food and Drug Administration rules prohibiting nutrient-disease relationship claims. It would also prohibit the federal government from prohibiting claims that a dietary supplement mitigates, treats, or prevents a disease or condition, unless the claim has been proven false following a trial on the merits. Both measures were introduced on May 26.

 The FTC on June 6 released the agenda for a public workshop addressing legal and policy issues surrounding the inclusion of patented technology in collaboratively set industry standards. The workshop will be held on June 21 at the FTC’s Conference Center at 601 New Jersey Avenue, NW, Washington, DC. Commissioner Edith Ramirez will provide opening remarks and Bureau of Economics Director Joseph Farrell will offer closing remarks. Industry experts will participate in roundtable discussions of the following key issues: disclosure of patent rights prior to adoption of a standard; disclosure or negotiation of licensing terms for patents prior to adoption of a standard; and licensing strategies following implementation of a standard, including the significance of commitments to license patents on RAND terms.

There will also be a presentation on standard setting organization experiences with ex ante disclosure of licensing terms by Professor Jorge Contreras. Additional information is available here on the FTC website.