If you want an early indication of the strength of a dozen states’ effort to stop Paramount‘s proposed acquisition of Warner Bros Discovery, it will come soon.
That’s because California Attorney General Rob Bonta and 11 of his colleagues filed a motion for a a request for emergency relief, or a request for temporary restraining order and preliminary injunction. If it is granted, a TRO would put a halt to the $110 billion transaction for at least a couple weeks, while a preliminary injunction would go longer as the legal process plays out.
In weighing an injunction during the proceedings, a judge will weigh a number of factors – among them, whether there would be irreparable harm if the merger were to close, whether the states would be likely to succeed on the merits, and whether such an order is in the public interest. The judgment would not be a final one for the case itself – that would be left to a trial – but a preliminary injunction would give the states leverage, perhaps for a settlement.
Paramount has touted the federal Department of Justice and a number of other regulatory approvals already in place, but opponents have waged a very vocal campaign against it, with figures ranging from Jane Fonda to Sen. Elizabeth Warren (D-MA) warning of dire consequences from the transaction. There has been considerable focus on the impact of the merger on CBS News and CNN, which will be under one corporate entity. Given the changes and tumult at CBS News since Skydance took ownership last year, there is plenty of consternation over what may be in store for CNN.
Yet a number of the concerns expressed won’t be part of the next legal steps. Instead, the focus will be on antitrust law and precedent – an area that can be exceedingly wonkish. On Tuesday, the case was assigned to U.S. District Judge P. Casey Pitts, who is being asked to rule on the emergency motion before July 22. A hearing has been set for Friday. There also is a potentially related case, the Writers Guild of America’s separate legal challenge to the merger that was filed today, litigation that focuses on the impact on the labor market.
In their lawsuit, the states claim that the merger would stifle competition in areas of wide-release theatrical distribution, anticipated top-grossing blockbusters and basic cable channel licensing.
In their argument for a TRO, the states claim that the merger is “presumptively unlawful,” pointing, among other things, to market share. They argued that a Supreme Court precedent did not specify a threshold for “undue concentration”; instead, “it was satisfied that 30% sufficed.” But they also noted that courts have applied the presumption of undue concentration to figures below that.
That’s important, because some of the figures from the states are in the ballpark of 30%, but not quite at it. The states noted in their filing, “The merger would give the combined entity approximately 27% of the wide-release theatrical film distribution market – as measured by the 600+ theatre release threshold – and approximately 30% of the anticipated top-grossing theatrical film distribution market – as measured by the 3,000+ theatre release threshold.” The AGs also noted that two companies – Paramount-WBD and Disney – would together control 59% of the market for the top-grossing films. The companies, they wrote, also would control 27% of the basic cable channel market, based on affiliate fees, and 34% as measured by viewership.
Some antitrust experts see the plaintiffs facing certain challenges in the case, but by no means do they consider the litigation to be frivolous.
“The complaint of the states is good enough to give Paramount and Warner Brothers a hard time,” William Kovacic, professor of law and director of the Competition Law Center at the George Washington University, wrote via email. “The companies know that they must take this challenge seriously. That is why they have mobilized a high-powered legal team (including Paul Clement and Jeff Kessler) to fight off the lawsuit. The states also have a capable team, so both sides are well represented.”
Kovacic, former chair of the Federal Trade Commission, noted that a “protracted contest does the companies no good. This leads me to think that they will pursue a settlement that takes the spoken promises of the company executives and backs them up with a binding order, and perhaps includes other concessions designed to strengthen the position of the traditional theater distribution channel.”
The states’ lawsuit does not include a claim about the potential loss of jobs – a key concern of guilds and unions, especially given the $6 billion target for cost savings from the merger – but it does make mention of the potential adverse effects, Kovacic noted.
“This concern also could be addressed with funding commitments not to reduce the workforce for some period of time,” he wrote.
Defining The Market
A key part of antitrust cases is how a judge decides what the relevant market is. In other words, if the market is narrow, that makes it more difficult for combining firms to make the case that their transaction will not harm competition.
What quickly got a lot of attention was the states’ claim that one of the markets was that for “anticipated top grossing films,” a submarket of wide theatrical distribution that they say is the “backbone of the movie theatre business.”
Paramount contends that the state AGs’ lawsuit is a “flawed application of antitrust laws” and “is inconsistent with sound competition policy and the competitive realities of the media marketplace.”
While Paramount and other critics may characterize the market for anticipated blockbusters as a legal contrivance, it did bring to mind a claim that the Justice Department brought in its challenge to the proposed combination of Penguin Random House with Simon & Schuster. In that case, the government focused on the market for anticipated top-selling books and, more specifically, to the harm to author payments due to the reduced competition. After a trial that featured testimony from figures including Stephen King, the government prevailed, and the merger was abandoned.
“Some might also wonder (and Defendants will also argue that) ‘anticipated top-grossing’ is just a made-up qualifier to yield an artificially narrow submarket. But there’s good, recent support for that in the case law,” John Mark Newman, law professor at the University of Memphis, wrote on X as he singled out the Penguin-Simon & Schuster case.
Diana Moss, vice president and director of competition policy at the Progressive Policy Institute, wrote via email that she “would expect controversy over the definition of the wide-release and top-grossing film distribution markets.”
She added, “Streaming has expanded dramatically in the last several years. A judge will need to decide if film distribution should be defined narrowly around theaters only, or more broadly around theaters and streaming. If a judge is convinced of a larger market, then the state claim might be in jeopardy, so the AGs should be prepared to vigorously defend their argument.”
Battling Big Tech
Paramount has leaned heavily into the argument that the merger would be “pro-competitive,” a common talking point in any major transaction. In this case, though, the company points to the dominance of Netflix and the need for a robust rival in the streaming space.
Today on CNBC, Jeffrey Kessler, who is helping to lead its defense, said, “The company believes strongly in this, and they would take this up to the Supreme Court if they had to.”
He said, “This is an antitrust case. To stop a merger, the merger has to be anti-competitive. This merger is pro-competitive. Anybody who knows the entertainment industry knows it is in deep trouble.”
A recent report from Stephen Moore, economic adviser to Donald Trump, and Robert Wolf, economic adviser to Barack Obama, made the case that the rapidly changing nature of the business cannot be ignored. “The available evidence, including the breadth of entertainment choices, the scale of larger technology-backed rivals, and Paramount’s commitments to increase theatrical output – suggests consumers would not be harmed by the merger,” they wrote.
The look-to-the-future arguments were part of AT&T’s case as it faced a DOJ challenge to its acquisition of Time Warner in 2018. A judge ruled for AT&T-Time Warner, and the company also won an appeal.
Moss wrote, “Even though that was a vertical merger and this is a horizontal one, if a judge gives credence to these arguments (as in AT&T-Time Warner), the states might have a uphill battle defending the claim that the merger is presumptively anticompetitive and, therefore, illegal. Of course, the unwinding of AT&T-Time Warner three years after the merger was consummated indicates that there were no efficiencies at all! The states should use examples like this to defend their case.”
The state AGs also cite the impact of other recent mergers, including Disney’s acquisition of Fox assets in 2018, claiming it more than halved theatrical output, with thousands of jobs lost. Paramount has argued that the numbers were impacted by the Covid pandemic and the pending launch of Disney+, a contrast to its strategy of getting more films into wider distribution.
Then, as now, the influence of Trump hung over the legal proceedings. The judge in the AT&T case declined to go down that route, and the Paramount-WBD case likewise focuses on the legal arguments, not politics. But in his Monday press conference announcing the case, California Attorney General Rob Bonta accused the White House of influence over the Justice Department’s sign-off on the merger. Oregon Attorney General Dan Rayfield told reporters that he still may seek Paramount records of its lobbying campaign to win favor for the transaction.
In the immediate term, though, all eyes will be on Pitts. His decision on the states’ TRO and injunction requests could set the stage for a lengthy legal battle, or a small blip on the way to one of the largest media mergers in history.
