Judge Not Prepared to Rubber-Stamp DoJ Megamerger Approvals

The continued post-merger scrutiny of the combinations of AT&T Corp. and SBC Communications, and Verizon Communications Inc. and MCI Inc. could mean the Department of Justice and the FCC will have a harder time approving the melding of AT&T Inc. and BellSouth Corp.

A federal judge on Wednesday made no decisions as to whether the government made sure AT&T and SBC, and Verizon and MCI, divested enough of their resources to protect competition and the public interest when they merged. Instead, in the third hearing on the matter, Judge Emmet G. Sullivan scheduled another meeting, for July 25, because as he said several times throughout the eight-hour procedure he was not prepared to rubber-stamp the Department of Justices approval of the megamergers.

The judge said he had some serious doubts about the case, said Jonathan Lee, COMPTELs senior vice president of regulatory affairs. Sullivan said in part he was concerned about the lack of public participation in the proceedings.

COMPTEL in May was granted friend of the court status and is acting as a consultant if the judge has questions best answered by a party other than the Department of Justice or Verizon or the new AT&T.

Sullivan, of the U.S. District Court for the District of Columbia, has agreed to help decide whether the governments requirement that AT&T and Verizon divest some of their unused fiber networks was sufficient and good for public interest. The Department of Justice last fall said such a move would satisfy antitrust statutes. The case is based on the 1974 Tunney Act, which requires federal courts to approve antitrust consent decrees, or agreements, filed by the Department of Justice. A 2004 amendment allows a judge to independently determine whether mergers have served the public good. Cases based on the Tunney Act presume the government failed to consider the publics best interest.

The outcome of this case will have direct implications for AT&Ts upcoming, expected acquisition of BellSouth. In spite of the long odds that CLEC legal challenges to already approved mergers would be successful, Sullivan has taken the case and appears serious about examining DoJ’s consent decree, said Jessica Zufolo, telecom analyst for Medley Global Advisors LLC in a research note, adding, FCC and DoJ officials may move more cautiously in examining the [AT&T-BellSouth] transaction and possibly take more aggressive steps to avoid additional legal complications in federal court. Increased public pressure on all federal agencies to apply a greater scrutiny in mergers may result, regardless of the outcome of this case.

The first arguments in this case began in May and could last through fall. If they do, Zufolo said, it will be very difficult for the FCC and the DoJ to use the previous merger analysis as a template for the [AT&T-BellSouth Corp.] merger, which until now had been largely expected.

Sullivan also told the court he has received no evidence from the DoJ and Bell companies. The July 25 conference will be a routine status hearing, the first step in the process toward an evidentiary hearing, which would require the defendants to cooperate. The status hearing likely will give the parties in the case a better sense of what the judge will do next, Zufolo said. She said Sullivans questions on Wednesday seemed focused on learning more about the evidence used by DoJ to assert that the deals were in the public interest. The judge asked the DoJ counsel whether they used any experts to assist in their analysis and, if so, whether they would be available to give testimony. Similar questions were directed at the Verizon and AT&T counsels, but both expressed a general reluctance to engage in an evidentiary process and tried to steer the judge away from that path, but failed to convince him otherwise.

Lee added it was unclear on Wednesday whether the Bells and DoJ are trying to make the court reject the consent decree so they can file an appeal. I dont know whether thats their game or if theyre foot-dragging, he said.

AT&T Inc.
BellSouth Corp.
Department of Justice
Medley Global Advisors
Verizon Communications Inc.

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