AT&T’s General Jim Cicconi Surrenders To Genachowski At Appomattox Court House.

We remember the surrender of General Robert E. Lee at the Battle of Appomattox Courthouse as the end of the Civil War, despite the fact that Confederate forces remained in the field for several weeks thereafter. The announcement by AT&T and Deutsche Telekom (DT) that they have told the Federal Communications Commission (FCC) to dismiss their application to transfer T-Mo to AT&T “without prejudice” is rather similar. To quote Craig Moffett: “the fat lady hasn’t started singing yet, but she’s holding the mike and the band is about to play.” (We’ll ignore that the fat lady is supposed to be singing opera.) This is reinforced by AT&T informing the SEC for the first time that it expects to pay DT the break up fee, which it values at $4bn ($3 bn cash, $1 bn spectrum) rather than the $6 bn announced last March (the spectrum rights appear to have been devalued $2 bn).

More than you could ever want to know about FCC procedure below . . . .

The letter filed by AT&T assumes that the FCC will allow them to withdraw. It states:

“AT&T Inc. and Deutsche Telekom AG hereby withdraw, effective immediately, all of the pending applications in this docket, as listed in the Public Notice released by the Commission on April 28, 2011, and, in accordance with the Rules, the applications are to be dismissed without prejudice.”

 

AT&T has since said publicly, albeit without citing any authority, that they may withdraw as a matter of right and that the FCC not only does not need to approve its request, it has no power to stop it from withdrawing the application and thus preventing the FCC from actually voting on the Hearing Designation Order.

The problem for AT&T is that, contrary to what it continues to believe, it does not actually control what the FCC does. Yeah, I know, that comes as a big surprise to folks. And for the second time within a space of a month, I am giving a big yasher koach to Julius Genachowski for taking on something big. I outline the options below, along with how this might impact the DoJ antitrust case.

What Does It Mean To Dismiss The Applications Without Prejudice?

Technically, AT&T maintains it is not giving up but withdrawing its application “without prejudice.” This would allow DT and AT&T to come back and file the exact same application all over again. One may rationally ask: “Dude, you just lost. What the heck makes you think you can just come back later?” As AT&T and DT explain in their statement, they intend to “focus on obtaining antitrust clearance from the Department of Justice.” Since if AT&T and DT can clearly afford to do both at the same time, as they have been doing for the last several months while simultaneously spending ridiculous amounts of money on advertising and lobbying, this explanation does not explain anything. So let us run through a couple of real explanations.

Taking AT&T at Face Value: Why Withdraw?

First, let us take the company at its word and assume they intend to continue the fight against DoJ in court. By all accounts, the FCC’s hearing designation order (HDO) is devastating to AT&T’s case. It rejects AT&T’s evidence about how the merger creates jobs, finding instead that the merger will cost lots of jobs. It will also reduce overall investment, raise prices to consumers, and is not necessary to get rural broadband deployed.

This is, of course, what DoJ said in its complaint and what merger opponents have said all along. But when the Federal Communications Commission, the agency delegated by Congress to oversee the telecommunications industry, makes a pronouncement like this with a vote of the full Commission, that actually means something. Arguably, under something called the “Chevron Doctrine,” courts must defer to such findings as binding unless “clearly erroneous, arbitrary or capricious.” But even if the court in the antitrust case does not regard these findings as binding under Chevron, since the trial court is operating under separate authority (Clayton Act not Communications Act) and is quite capable of making its own finding of fact, Judge Huvelle will still look at the FCC’s determination and weigh them accordingly. Instead of an argument between DoJ and AT&T over market definition, jobs, and everything else with DoJ carrying the burden of proof, it effectively shifts to “why shouldn’t I believe the FCC? They are the expert agency, why are they wrong?”

By contrast, if the FCC doesn’t issue the HDO, and AT&T somehow wins the antitrust case, it can try to resubmit its application with a favorable judicial determination on the relevant market definitions and with strong political arguments that if AT&T could beat DoJ under antitrust, it ought to get a free pass from the FCC under the public interest standard of the Communications Act. True, as I and others keep saying, the antitrust standard and the Communications Act standard are different, with the Communications Act “public interest” standard including antitrust, but going beyond antitrust, but a miracle win in district court would give AT&T ammunition to take exactly the same application and try to ram it through the FCC. Similarly, if AT&T could somehow force DoJ to settle (despite [every sign even before this that DoJ did not have any interest in settling]), it could reapply and try to get the settlement approved by the FCC.

In other words, AT&T is saying to the FCC: “Please let us slink off in the hope that we can either force DoJ to settle or miraculously win and then come back and use these changed facts to beat the snot out of you.”

Does The FCC Have To Grant The Request To Dismiss Without Prejudice?

Despite AT&T’s insistence to the contrary, I do not believe the FCC is required by law to grant AT&T’s request to withdraw without prejudice. While the FCC (and courts of law) are usually pretty easy about this sort of thing if all parties to a matter are happy with the matter disappearing, you generally don’t get to sneak off at the end when it becomes clear you are about to lose.  Courts generally do not allow a plaintiff to withdraw “without prejudice” at the end of a trial to avoid losing, and the FCC is under no obligation to play dumb and say: “Gawrsh, I guess if AT&T just goes away without prejudice then everything will be okey-dokey again here in Portals.”

AT&T has not cited any actual authority, but I will note that even if the FCC does have rules on point, the FCC has a general clause that allows it to waive any of its procedural rules “for good cause shown, in whole or in part, at any time by the Commission.” (47 C.F.R. 1.3) I would include “not allowing parties to weasel out of proceedings at the last minute so they can try to game the system after imposing millions of dollars of cost on merger opponents, intending to come back and impose costs all over again as soon as politically possible” as good cause. Finally, if all else fails, under Section 403 of the Act, the Commission could vote the Hearing Designation Order as a declaratory ruling on what will happen if AT&T/T-Mobile refiles.

So I don’t think the FCC is required to flush the HDO down the toilet and let AT&T have a free go at a miracle play on the antitrust side. But lets pretend that the FCC decides to play it safe and dismisses the application without prejudice just to see where this takes us.

What Happens If The FCC Dismisses Without Prejudice?

In theory, AT&T and DT can pursue its case at the district court. But the district court is under no obligation to allow the case to go forward, and plenty of reason not to go forward. As a start, federal courts do not issue “advisory opinions.” It requires a live “case or controversy” for parties to have what is called “standing.” Without standing, the case cannot go forward. Specifically, one of the requirements for standing is that a decree by the court will actually have some impact on the parties before it.

Arguably, AT&T and DT no longer have standing because they cannot complete their merger without a transfer of licenses. The court might say: “Look, even if I issue a decree in your favor, it doesn’t matter, because it doesn’t help. So I’m dismissing the case, come back when you have a live case or controversy.” AT&T has a reasonable counter-argument, however, because as I keep saying, the antitrust laws and the Communications Act are different. AT&T can say: “But Your Honor, we do have a live case or controversy. The FCC has not said it won’tcomplete the license transfer, and nothing in the antitrust laws requires us to apply for both at the same time. So we have a live ‘case or controversy’ since your decision is a necessary step and we might still get FCC approval afterward.”

Assuming AT&T makes it past the standing hurdle, it then will need to explain why the court should not hold the case in abeyance pending AT&T resubmitting its application. Here, DoJ (or the court on its own motion) would say: “It may be OK legally for the trial to proceed, but it makes absolutely no sense because to do so because it may be a total waste of time given that the FCC was poised to refer the matter to a hearing, which strongly indicates that it would ultimately find the license transfer is not in the public interest. So why should I waste my time on an incredibly long, complicated case when you don’t even have an application in front of the FCC at this point? You may end up filing a totally different application if you negotiate some kind of settlement, which would also make moving forward here a waste of time.  Besides, I’m not stupid. It’s obvious you are trying to game the system by avoiding the FCC decision, hoping to win here, then using that to browbeat the FCC into submission. I am not happy with people playing games in my court. So we will just keep this case on ice until you refile your application with the FCC and we see what happens over there.”

Unlike standing, where if the court finds no standing the court must dismiss the case, holding a case in abeyance is a matter of discretion. Judge Huvelle could always say: “Sure, what the heck, we’re all scheduled for trial and stuff. I’m operating under a different statute and the FCC is free to do whatever it wants even if AT&T wins here. So lets go ahead and let the games begin!” But abeyance is pretty common in a situation where it looks like a decision by an administrative agency will render a decision by the court moot. For example, the D.C. Circuit routinely holds petitions for review of FCC rules in abeyance when parties file Petitions for Reconsideration with the FCC if there is substantial overlap between the Petition for Review before the court and the Petition for Recon before the FCC.  The principle is usually referred to “judicial economy,” i.e., why should the court do a whole bunch of work when it might end up being a huge waste of time.

In addition, in this case, it is pretty obvious what AT&T is trying to do. Judges generally don’t like it when people play cutsie games to gain advantage, and Judge Huvelle has shown little patience for it. Holding the case in abeyance until AT&T and DT refile would require them to refile and take their lumps at the FCC, or give up. So while the withdrawal of the applications may not result in the antitrust case sitting on ice, that’s the way I would bet.

But Maybe Held In Abeyance Is What AT&T Really Wants.

Given how incredibly unlikely AT&T is to win at this point, even if it gets to withdraw without prejudice, why is AT&T drawing this out? Do they really think they can win in district court? Why not just call it quits, or vow to fight it out before the FCC’s administrative law judge?

I am not privy to AT&T’s inner workings, so all of this is pure guess work on my part. (Or, to quote a former Republican front runner, “I don’t have the facts to back this up, but . . .”) But I think a number of things are going on here. First, AT&T was, once again, caught by surprise on the timing. Genachowski, to his credit, played this like a total master. (And who ever thought I would write that sentence?) He kept his cards close, counting on his reputation for avoiding political conflict with powerful entities like AT&T, then sprang it on them when Congress was out of town and AT&T could not pull together powerful political pushback. The announcement that the Chairman would do this on circulation, rather than wait 3 weeks for the December Public Meeting¸ further limited AT&T’s options.

Caught by surprise with very limited options, AT&T had two choices: try to tough it out and lobby like Hell to prevent a vote, or try to pull the applications to avoid an HDO. As between these two bad choices, AT&T probably made the right calculus. It seems extremely unlikely that AT&T could prevent a vote for the HDO. Neither Democrat is likely to undercut both the Chairman and the Department of Justice, even if he or she wanted to vote against it. Nor is it certain the McDowell would vote against a designation for hearing. As I have observed before, McDowell is not a corporate shill so much as a true believer in the Gods of the Marketplace. This is precisely the case where McDowell might say: “Well, this is definitely the thing to do, refer to a hearing rather than leverage our authority to extort concessions. There are real questions about market power here, and they ought to be resolved by a hearing as required by law.” Heck, this kind of once-in-a-blue-moon vote is precisely the sort of thing that burnishes credentials as a genuine believer in the free market rather than simply pro-big business.

So attempted withdrawal of the application is really the only option to avoid an HDO. The fact that it may mean the antitrust case gets held in abeyance may, in fact, be a plus for AT&T. At this point, AT&T is now conceding to the Securities and Exchange Commission that it will probably have to pay the break up fee. But AT&T can still hope to renegotiate the break up fee with DT by stretching out the proceeding. As I’ve said several times before, if DT knows it can’t get the deal done, it will want to unwind as quickly as possible so it can maximize the value of T-Mo to another buyer, or as a stand alone initial public offering (IPO). While one Wall St. analyst recently valued such an IPO at $28 billion, that will decline if T-Mobile remains shackled to the deal and continues to experience churn as a result.

So AT&T may be content to have the case in abeyance before the district court. At this point, keeping the case open is the only leverage it has to renegotiate the break up fee. If the case is in abeyance, AT&T can threaten to leave it that way until the break up fee comes due in September 2012 unless DT agrees to renegotiate the fee downward.

Bottom Line: It’s Over, the Only Question Is When.

As I noted above, while we remember Lee’s surrender at Appomattox as the end of the Civil War, the War continued for several months. It took time to negotiate the surrender of more than 115,000 Confederate soldiers still in the field. So too with AT&T’s efforts to acquire T-Mobile. Technically, it is not over. AT&T and DT have not given up, and considerable last minute maneuvering still remains. Finally, given AT&T’s vast resources and determination, the chance remains that they may pull some last minute rabbit out of the hat to revive the deal.

But if I have to bet, I think folks in the future will point to Chairman Genachowski’s decision to circulate a proposed HDO, and AT&T’s effort to withdraw its application, as the key moment when AT&T admitted defeat in its effort to acquire T-Mobile.