The Department of Justice sued DirecTV, and its parent company, AT&T (T) , Wednesday for acting as the ringleader of an alleged conspiracy that ended up preventing the Los Angeles Dodgers' sportsnet from being carried in much of the team's TV market.
The lawsuit, filed in the U.S. District Court for the Central District of California, alleges that DirecTV unlawfully exchanged competitively sensitive information with Cox Communications, Charter Communications (CHTR) and AT&T during the companies' negotiations for the right to telecast Dodgers Channel, which is co-owned by the Dodgers Major League Baseball team.
The DOJ said DirecTV and its pay-TV competitors exchanged non-public information about their companies' ongoing negotiations to telecast the Dodgers Channel, as well as their companies' future plans to carry -- or not carry -- the channel in order to obtain bargaining leverage in their respective talks with SportsNet LA.
The DOJ is asking for a court order stipulating that the kinds of bilateral information sharing it says DirecTV engaged is is unlawful, that DirecTV and AT&T be permanently banned from transmitting non-public information concern their negotiating strategy with other pay-TV outfits and that the companies be required to monitor communications of executives involved in negotiations over programming carriage. The DOJ is seeking monetary compensation sufficient to cover the costs of bringing the litigation and any other relief the court deems proper.
The lawsuit against AT&T may complicate its effort to win regulatory approval for its planned $85.4 billion acquisition of Time Warner Inc. (TWX), which was announced late month. (TWX spun off cable operator TWC in 2009 and the two companies no longer have a connection.) The acquisition of TWX must be approved by the Justice Department. Typically, however, antitrust officials insist that merger reviews are little affected by unrelated civil investigations that happen to be ongoing at the time.
Nevertheless, the lawsuit couldn't come at a worse time for AT&T which is eager to build popular and political support for its ambitious offer to acquire TWX. In the 10 days since the agreement was announced, members of Congress as well as consumer groups have cautioned that AT&T buying Time Warner will raise prices for pay-TV services by eliminating natural competitors.
"It's definitely unwelcome news for AT&T in terms of the Time Warner deal," said an industry observer. "It will certainly give ammunition to opponents of the deal that AT&T's acquisition of Time Warner's content could pose problems for the marketplace."
Cox and Charter, which both provide cable TV service to portions of the L.A. market, were not sued because the Department of Justice wanted to focus on DirecTV's role as the organizer of the alleged conspiracy. AT&T is target of the lawsuit only because it acquired DirecTV in 2015 not because of actions it may have taken during its talks with SportsNet LA regarding possible carriage on AT&T's U-Verse pay TV service, which is delivered to L.A. area viewers over telephone lines.
The DOJ alleges that DirecTV was motivated to organize its competitors against the Dodgers Channel after having been burned in negotiations with Time Warner Cable in 2011 over rights to carry Los Angeles Lakers basketball games. After DirecTV balked at the asking price, TWI reached out to smaller pay-TV providers with a time-sensitive offer guaranteeing that they will get the best price available for carriage. The other carriers accepted the offer and began using the availability of Lakers games to draw subscribers from DirecTV. Just over a week into the 2012-2013 season DirecTV caved and agreed to pay TWC's full asking price for the Lakers channel.
The unlawful information sharing was also intended to reduce the risk that pay-TV operators would lose subscribers if they decided not to carry the channel but a competitor chose to do so.
According to the DOJ, the information learned through these unlawful discussions was a material factor in the companies' decisions not to carry the Dodgers Channel. The Dodgers Channel is still not carried by DirecTV, Cox or AT&T.
"Dodgers fans were denied a fair competitive process when DirecTV orchestrated a series of information exchanges with direct competitors that ultimately made consumers less likely to be able to watch their hometown team," said Deputy Assistant Attorney General Jonathan Sallet of the Justice Department's Antitrust Division. "Competition, not collusion, best serves consumers, and that is especially true when, as with pay-television providers, consumers have only a handful of choices in the marketplace."
AT&T's General Counsel David McAtee, noted that negotiations with SportsNet LA occurred before AT&T acquired DirecTV but added that the pay-TV firms acted independently in choosing not to carry the Dodgers Channel.
"The reason why no other major TV provider chose to carry this content was that no one wanted to force all of their customers to pay the inflated prices that Time Warner Cable was demanding for a channel devoted solely to LA Dodgers baseball," McAtee said in a prepared statement. "We make our carriage decisions independently, legally and only after thorough negotiations with the content owner. We look forward to presenting these facts in court."
At the time of the talks, SportsNet LA was owned by the Los Angeles Dodgers and Time Warner Cable. Charter, one of the participants in the alleged conspiracy, acquired TWC in May 2016 and, ironically, is now a part owner of SportsNet LA.
Charter Communications couldn't be reached Wednesday for comment.
Currently the Dodgers Channel is only carried by Charter and its subsidiary, Bright House Networks and reaches less than half the Southern California market.
AT&T is certain to argue that its decision not to carry SportsNet LA was purely a business matter and that the DOJ has no grounds to get involved in private contractual disputes, and that these were permissible conversations. "This is clearly a shot across the bow of the cable companies to not engage in this type of behavior," said an industry observer close to the matter.
The issue of Los Angeles Dodgers games being unavailable for millions of households in Southern California for nearly three years has been championed by local officeholders who have complained to both the DOJ and the FCC about the unwillingness of other pay-TV providers to carry SportsNet LA.
The complaint, which numbered more than 50 pages, demonstrated that the DOJ had been investigating the matter for months if not years. In effect, the order argues that AT&T's actions, along with those of Charter Communications CHTR and privately-held Cox Communications of Atlanta, amounted to a restraint on competition, that pay-TV providers colluded to prevent Time Warner Cable from marketing SportsNet LA to its customers in those area, a violation of the Sherman Act.
It's unclear who initiated the investigation, whether it came from Time Warner Cable or the government, but the depth of the complaint reveals long-running back-and-forths between the DOJ and the companies. The DOJ maintains that AT&T shared non-public information about its customers with Cox and Charter, making it more difficult for Time Warner Cable to compel any of its rivals to carry the network.