Reexamining the legacy of dual regulation: reforming dual merger review by the DOJ and the FCC.

• Author: Weiser, Philip J.
• Position: The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospective

1. INTRODUCTION II. THE VICES AND VIRTUES OF REDUNDANT REGULATORY MERGER REVIEW A. The Perils of FCC Merger Review B. Regulatory Oversight as Complementary to Antitrust III. THE ANTITRUST AGENCIES' EMERGING STANCE ON MERGER REMEDIES A. Conduct Remedies Imposed Pursuant to Merger Review B. Structural Remedies Revisited C. European Union Stance on Antitrust Remedies IV. TOWARD A NEW STRATEGY FOR MERGER REMEDIES A. Reforming Antitrust Remedies B. The Role of Regulatory Agencies in Merger Review C. Toward New Practices for Merger Review and a New Institutional Regime V. CONCLUSION I. INTRODUCTION

   The AT&T antitrust case produced, for a twelve-year period, a world of two regulators: the AT&T consent decree court (with assistance from the U.S. Department of Justice) and the FCC. In general, the two authorities worked in tandem with one another, but the mismatch of tasking a judge with overseeing an ambitious regulatory regime led Congress to terminate the AT&T consent decree in the Telecommunications Act of 1996 (1996 Act) and replace it with FCC oversight. (1) At the same time, however, the 1996 Act left in place a regime of dual merger review. In so doing, Congress ignored the concerns of the dual regulation in this context. Over the last twelve years (the same time period that the AT&T consent decree was in force), the limitations of dual regulation in the merger review context have become clear and call for reform.

   Many calls for reform of merger review in the telecommunications industry begin with a premise of the 1996 Act: one regulator is enough, and the reign of the redundant regulator should be ended. To that end, Harold Furchtgott-Roth, a former FCC Commissioner, has called for an end to FCC oversight of mergers between telecommunications providers, developing his critique in a number of his separate statements while he served on the FCC and in testimony to the U.S. Antitrust Modernization Commission. (2) In so doing, he amplified the criticism offered by a number of commentators, former FCC officials, and practitioners, all of whom bemoan the FCC's lack of a clear competition policy standard, penchant for imposing conditions unrelated to the merger itself, and tendency to delay the ultimate approval of the transaction. (3)

   Over the last decade, the FCC has vacillated in its approach to merger review and offered plenty of ammunition to its critics. One constant is that, except for the very rare case, (4) it does not bar two firms from merging on competition policy grounds. Rather, it generally imposes conditions on the merger. In the worst of cases, the FCC, as former Chairman Powell once criticized, "places harms on one side of a scale and then collects and places any hodgepodge of conditions--no matter how ill-suited to remedying the identified infirmities--on the other side of the scale." (5) In the best of cases, the FCC imposes conditions that address competition policy concerns raised by the merger and enables the Department of Justice's Antitrust Division (DOJ) or the Federal Trade Commission (FTC) to clear a merger that would otherwise pose potential objections.

   Taking a lesson from the experience with the AT&T consent decree, the challenge for reforming the existing merger review regime is to design a system where antitrust authorities play the central role in analyzing a merger's competitive effects and regulators play the central role in imposing and enforcing regulatory remedies. At present, the U.S. system sometimes veers toward a worst case scenario where federal antitrust authorities--the FTC and DOJ--impose regulatory remedies that overlap with regulatory policy and regulatory agencies perform duplicative merger reviews and impose remedies unrelated to the mergers themselves. Moreover, antitrust merger remedies themselves are often not developed through a transparent, consistent, or predictable process. In short, there is compelling need for institutional reform of antitrust merger remedies in general and in particular with respect to how the FCC oversees mergers between telecommunications companies.

   Part II of this Article explains the practice of the FCC in reviewing mergers involving regulated firms. Part III discusses the practice of the DOJ, FTC, and European Union in reviewing mergers of telecommunications companies. Part IV outlines some directions for reforming the U.S. system of merger review and merger remedies in the telecommunications arena. Part V offers a short conclusion.

2. THE VICES AND VIRTUES OF REDUNDANT REGULATORY MERGER REVIEW

   As a technical matter, the FCC does not review mergers qua mergers. Although the FCC does have authority under the Clayton Act to review mergers involving regulated firms, it instead relies on its authority to evaluate whether the acquiring firm should be permitted--under the broad and ill-defined "public interest" test--to acquire and operate the licenses held by the to-be-acquired firm. (6) As discussed in subpart A, this unrestrained mandate creates considerable opportunity for mischief. (7) Nonetheless, as discussed in subpart B, FCC merger-related actions can address competition policy concerns raised by a merger and aid the DOJ or the FTC in overseeing regulatory remedies.

   1. The Perils of FCC Merger Review

      In questioning the role of regulatory merger review, critics such as former FCC Commissioner Furchtgott-Roth focus on the unnecessary delays and costs occasioned by this process. More problematic, however, is how regulatory merger review invites a process of negotiated "voluntary" conditions that often substitute for careful policymaking. (8) Notably, such conditions are developed without the benefit of notice and comment, are often negotiated in haste, and are not subject to judicial review. Nonetheless, given the FCC's ability to simply withhold approval of a license transfer--without any time limitation (9)--parties understandably view such conditions as a cost of doing business.

      For a case in point, the merger between AOL and Time Warner demonstrates how FCC merger review invites questionable policy judgments. In that case, the FCC's decision was suspect in three distinct ways. First, the agency's authority to review that merger resulted from the fact that the merger was structured as AOL's acquisition of Time Warner rather than the other way around. Notably, because AOL did not possess any licenses granted by the FCC, there would have been no statutory basis for FCC review had Time Warner acquired AOL. Second, the FCC used its authority over the merger to impose a regulatory mandate unrelated to the merger itself (imposing an interoperability mandate as to the instant messaging system previously operated by AOL). (10) Finally, the FCC's cursory judgment on a matter outside its traditional realm of regulation was highly questionable on the merits (11)--a fact the FCC later recognized when it lifted the condition only two years later. (12)

      The interoperability mandate imposed by the FCC in the AOL/Time Warner merger illustrates the tendency of the agency to reach judgments in haste that are better considered as part of a more deliberate inquiry. In that case, the FCC conducted a very cursory inquiry, not only of the merits of its action, but also into the thorny question of whether it possessed jurisdiction to regulate instant messaging at all. With little analysis of this question, the FCC concluded that instant messaging and "AOL's [names and presence database] are subject to our jurisdiction under Title I of the Communications Act." (13) As then-Commissioner Powell pointed out in dissent, it was questionable for the FCC to reach such a judgment in haste, as "such a grand conclusion should only be reached after very careful and thoughtful deliberations and full comment by a wide range of interested parties." (14) By divorcing the FCC's analysis from real-world adjudication or even the need to justify its decisions, this practice has the effect of deferring the need to address issues properly considered in a broader and more thorough rulemaking or adjudicatory context.

   2. Regulatory Oversight as Complementary to Antitrust

      Despite eases like AOL/Time Warner, the FCC can play a constructive role in merger review in certain eases. For a perfect illustration of the FCC's use of such authority, consider, for example, its review of the News Corp./DirecTV merger. In that case, the FCC concluded that the union of DirecTV and News Corp.'s programming interests (including the Fox broadcast network, cable channels like FX and Fox News, and regional sports channels) raised a plausible risk of vertical leveraging whereby News Corp. would abuse its ownership of those properties so as to disadvantage rival distributors. (15)

      To address the competitive concerns raised in the News Corp./DirecTV merger, the FCC required DirecTV not only to be subject to a regime similar to the "program access rules," (16) which govern vertically integrated cable providers, but also to adhere to additional requirements related to its control over regional sports channels and local television stations. (17) As to the imposition of program-access-like rules on the merged firm, the FCC harmonized them with its program access rules by making them applicable so long as the program access rules remained in effect and subjected complaints related to the merger conditions to the same process used for the program access rules. (18) As to the rules governing regional sports networks and local television stations, the FCC developed a special procedure (i.e., an arbitration regime) to ensure that cable companies continued to receive reasonable access to such programming. (19)

      In acting in the News Corp./DirecTV case, the FCC carefully coordinated its decision with the DOJ. In the wake of the FCC's action, the DOJ concluded that "[t]he restrictions imposed by the FCC as a condition for granting its approval of the transaction will reduce News Corp.'s ability to...