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From Antitrust Law Daily, August 14, 2013

Consent decree resolving antitrust concerns over Verizon agreements with cable companies, spectrum swap approved

By Jeffrey May, J.D.

The federal district court in Washington, D.C. has approved a consent decree resolving a civil action brought last August by the U.S. Department of Justice and the State of New York, challenging a series of agreements between Verizon Wireless and four of the largest U.S. cable companies regarding the sales of bundled wireless and wireline services and the formation of a technology research joint venture. In addition to requiring the parties to modify their agreements, the consent decree allowed both Verizon’s proposed acquisitions of a portfolio of unused wireless spectrum licenses from the cable companies and T-Mobile USA’s contingent purchase of a significant portion of that spectrum from Verizon (U.S. v. Verizon Communications, Inc., August 13, 2013, Collyer, R.).

In August 2012, the Justice Department filed a complaint against Verizon and four of the nation’s largest cable companies—Comcast Corporation, Time Warner Cable Inc., Bright House Networks, LLC, and Cox Communications, Inc.—challenging a series of commercial agreements that allowed them to sell bundled offerings that included Verizon Wireless services and a cable company’s residential wireline voice, video, and broadband services. Simultaneously, the government filed the proposed consent decree intended to settle the charges.

Verizon is one of the nation’s largest providers of wireline telecommunications services, including both video and broadband services as well as bundles that contain those products. In parts of the mid-Atlantic region, Verizon offers fiber-based voice, video, and broadband services under the trade name “FiOS,” in competition with at least one of the cable companies.

The government alleged that in New York City, Philadelphia, and Washington, D.C., the commercial agreements, without modification, would have resulted in Verizon Wireless retail outlets selling two competing “quad-play” offerings: one including Verizon Wireless services and a cable company’s services and the other including Verizon Wireless services and Verizon FiOS services. In addition, the agreements contained a variety of mechanisms that were likely to diminish Verizon’s incentives and ability to compete vigorously against the cable companies with its FiOS offerings. The agreements allegedly harmed the parties’ long-term incentives to compete insofar as they created an exclusive sales and product development partnership of potentially unlimited duration.

The cable companies would have been restricted to one wireless partner, Verizon Wireless, and the participants in a joint technology venture would have been restricted to that forum—and limited to working with the partners in that venture—for integrated wireline and wireless product development. Moreover, Verizon Wireless’s ability to sell Verizon’s FiOS product was restricted to the currently planned FiOS footprint, even if in future years Verizon contemplated further FiOS expansion.

Under the consent decree, the parties were required to limit the scope and duration of the marketing agreements. Verizon Wireless was prohibited from selling the cable companies’ cable services in areas in which Verizon offers FiOS service. Verizon also was prohibited from selling the cable companies’ cable services in areas in which it was likely to offer such services in the near term.

With respect to provisions in the commercial agreements that allow the defendants to develop integrated wireline and wireless telecommunications technologies through a research and development joint venture, Joint Operating Entity LLC, the consent decree required the defendants who were members of the JOE to withdraw from the JOE by December 2, 2016. The defendants were permitted to petition the United States for permission to continue to participate in the JOE.

The consent decree placed other limits on the joint venture to ensure that the agreements would not dampen the companies’ incentives to compete against one another going forward. Upon dissolution of the joint venture, members would receive a non-exclusive license to all the joint venture’s technology, and each may then choose to sublicense to other competitors.

The proposed consent decree also limited exclusivity provisions. Verizon Wireless was prohibited from enforcing any exclusivity provisions of the commercial agreements that would bar any of the cable companies from selling wireless services on behalf of a carrier other than Verizon Wireless after December 2, 2016. The parties also were prohibited from modifying the commercial agreements without prior written approval of the Justice Department.

The action was highlighted in a recent comment to the Federal Communications Commission (FCC) on FCC policies governing mobile spectrum holdings. The case was held out as an example of the Justice Department's efforts to preserve competition in the telecommunications industry—"a key priority" for the Justice Department. Cooperation between the Justice Department and FCC on the investigation also was noted.

Shortly after the settlement with the Justice Department was announced last August, the FCC announced that it had concluded its own parallel investigation into the same agreements. At that time, the FCC noted that the agency's concerns with the commercial agreements had generally been addressed by the Justice Department consent decree.

Public interest determination. In a separate opinion, the court explained its determination that the consent decree was in the public interest under the Antitrust Procedures and Penalties Act (APPA) or Tunney Act. The consent decree sufficiently remedied the anticompetitive impact of the challenged agreements, according to the court. The court considered and rejected objections raised by third parties. For instance, the objectors argued that the relief could have been defined more broadly in order to give Verizon the incentive to expand FiOS services. However, the government had reasonably considered and rejected this objection, the court explained. It was unlikely that Verizon would have expanded FiOS beyond the areas required by existing franchise agreements. Objections outside the scope of the complaint also were rejected.

This is Case 1:12-cv-01354-RMC.

Attorneys: Jared A. Hughes for Department of Justice. Mary Ellen Burns for State of New York. Janet L. McDavid (Hogan Lovells US LLP) for Verizon Communications, Inc. Arthur J. Burke (Davis, Polk & Wardwell LLP) for Comcast Corp. Joseph J. Simons (Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P.) for Time Warner Cable Inc. John Parker Erkmann (Dow Lohnes PLLC) for COX Communications, Inc. Robert G. Kidwell (Mintz Levin Cohn Ferris Glovsky & Popeo, P.C.) for Bright House Networks, LLC.

Companies: Bright House Networks, LLC; Comcast Corp.; Cox Communications, Inc.; Time Warner Cable Inc.; Verizon Communications, Inc.

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