Anthropic Sues Government & Paramount-WBD Deal

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1:39This is Bloomberg Law with June Grosso from Bloomberg Radio. Anthropic, the AI company, is suing the Trump administration to stop what it calls an unlawful campaign of retaliation. The Pentagon designated Anthropic as a supply chain risk, following a dispute over limits the company wants on how its products are used. In particular, its technology not being used for mass surveillance of Americans or to power fully autonomous weapons. It's the first time the federal government is known to have used the designation against a U.S. company. Anthropic is asking a court to issue a preliminary injunction to block the government's ban while the legal fight plays out.

2:30My guest is Dorothy Lund, a professor at Columbia Law School and co-director of the school's Ira M. Milstein Center for Global Markets and Corporate Ownership. Dorothy, Defense Secretary Pete Hegseth designated Anthropic as a national security supply chain risk. That's a designation that's usually used to bar companies that are linked to foreign adversaries. Yeah, this is quite unusual. I think this is the first time in U.S. history that an American company has been given this designation. So if you look at the companies typically on this list, it's companies with ties to China, ties to Russia, that, you know, the government wants to say there's particular risk.

3:15You know, we would be very cautious about contracting, you know, this Chinese company or this Russian company. It's never happened before that a U.S. company has been given this designation. What are the grounds for Anthropic suit against the government? My understanding is that essentially Anthropic is saying this designation is not being given for the right reasons. Instead, this is retaliation for our refusal to accede to certain demands that you made that we didn't want to accede to. So, you know, you haven't really identified a security threat that would cause us to really deserve this label.

3:53Instead, you're just punishing us and retaliating against us for not going along with what you've demanded from us in a way that violates our rights. Anthropic had said that it refused to remove guardrails against its technology being used for mass surveillance of Americans or to power fully autonomous weapons. Can companies like this, when they're dealing with the Pentagon, the military, put in reservations like that in their contracts? Yeah, you know, the typical sort of thinking here is that, you know, it's a matter of corporate governance or, you know, corporate decision making for a company that is providing a service to set certain guardrails on that, right?

4:40You know, this should only be used in certain ways. And the client, even if the client is the Pentagon, the client has the right to say, well, I don't want to work with you. I don't like this contractual limitation that you've given me, but I can break my contract with you. I can go with somebody else and, you know, we'll deal with whatever repercussions the contract says about that. But this is how things work in a free world, right? And sort of another interesting moment where the Trump administration, you know, historically, the conservative ideology has been very accepting of this idea that private markets will lead to the right results, right?

5:21You wouldn't want to have the government interfering with private markets. And if a private entity doesn't want to do a deal on certain terms, you know, that's that and the market will sort it out. There may be, there'll be somebody else that's willing to provide that product at that price or that service under those terms, but that the government wouldn't then, you know, try to get into that space and influence it. And so I think it's sort of this interesting moment, again, of the Trump administration doing something that historically conservative politicians have not wanted to do, which is to interfere with markets and sort of how markets set prices and terms and contracting parties that don't like it can walk away, but there's nobody forced to contract with anybody else.

6:04The government filed papers in opposition to Anthropic's motion for a preliminary injunction. And it said that Anthropic showed hostility in its negotiations with the Pentagon. And that led the government to question whether it was a trusted partner. And quote, for national security reasons, the terms of service for plaintiff, Anthropic, PBC's artificial intelligence technology have become unacceptable to the executive branch. But the government didn't point to anything that would be a security justification for the designation as a supply chain risk. So it sort of missed the point. Yeah. And just back to where we started in this conversation, you know, the idea of somebody posing a supply chain risk is this idea of like, you know, foreign infiltration, The idea that some foreign government that is hostile to the United States is going to get some information or some advantage by virtue of this organization freely contacting in the United States.

7:11So even under the terms that the government is bringing up in its lawsuit, the idea that there's hostility towards the government, it doesn't really even speak to this idea of foreign infiltration. It just sounds like negotiations didn't go so well. And so, again, I think the hook to the designation seems to be quite tenuous. Anthropic is asking the court for a preliminary injunction, as I mentioned, saying it could damage the company's reputation and cause multiple billions of dollars in losses this year. The hurdles to get a preliminary injunction are high. Do you think Anthropic might clear those hurdles?

7:51Typically, a preliminary injunction, in order to win, you have to show that without giving this injunction, there's going to be irreparable harm. And there has to be a strong likelihood of winning on the merits, right? And by the way, this harm can't be something that can be fixed after the fact using money damages. And so I think here in this case, I think this is a really a good example of where a preliminary injunction would make a lot of sense. I think, okay, so OpenAI is going to lose this government contract, right, the Department of Defense. And so that is hundreds of millions of dollars, but it's ultimately not a big deal.

8:28But I think the bigger impact here is the government's demand that no federal agency do work with Anthropic and also that other third-party entities that contract with the government also stop doing business with Anthropic. And that for a company that is in an early stage of growth, that is, you know, in a really competitive race, AI race, not just in the United States, but also globally, for them to sort of be blacklisted like this is really quite harmful. I mean, you know, I think there are commentators who've looked at this and said this is the equivalent of giving Anthropic the death penalty.

9:08And I don't think that's a real exaggeration. I think, you know, in this moment for Anthropic to lose the ability to contract with a broad swath of entities would really be damaging. It might not be able to recover from that. Forgetting the legalities for a moment, even if Anthropic wins and this is lifted, this ban, I mean, is any agency in the government and the Trump administration then going to start doing business with Anthropic, knowing how the Trump administration feels about Anthropic? I mean, what the consequences are, even if it wins this lawsuit. For sure. I think the Trump administration really believes in loyalty.

9:51And now that they've sort of been given this scarlet letter by President Trump and Pete Hegseth, I'm sure that, you know, loyalists and individuals across the government will be wary to work with Anthropic. I think, the government has directed all federal agencies to stop using Anthropic. So I think your intuition is right there. Although I think the consequences for Anthropic, although that's not great, there's a much broader market, right? Anthropic is looking to a lot of different places for clients, including other governments, other corporate clients. And by the way, there's been a little bit of backlash already against OpenAI in the wake of their signing up a deal.

10:37with the government. So, you know, you could imagine that I don't know quite how this would sort out. Would Anthropic be rewarded by some swath of clients for sticking to its guns and would be able to make up that loss in the future? Maybe. And will OpenAI suffer some backlash for its decision to kind of get in there and essentially poach this client? Maybe. So I think It's just not clear how this is all going to shake out. Other tech companies have filed legal briefs to support Anthropic. Do you think that there is a concern that if this punitive label on Anthropic sticks, that it would establish a precedent?

11:21Oh, yeah, absolutely. I mean, we're already in a moment, a sort of unprecedented moment in American history of executive branch interference with private markets. And I don't want to say this is only a feature of this administration that's happened during the Biden administration and prior administrations as well. But I think we've really seen the Trump administration take this to new heights. And so I'm sure tech executives all over are looking at this and saying, we don't want to be in a situation where we don't want to agree to certain terms with the U.S. government, whether it be price or substance.

11:58And then the U.S. government basically puts us on a list that ensures that we can't survive. You know, I think that's a scary thought. That's a scary path to walk down. And I think, you know, even beyond just sort of the typical tech company, I think AI companies should be looking at this moment and be quite chilled because I think, you know, the AI industry is looking down the barrel of a complex relationship with government. You know, it could be some people say, well, because this technology is so important, it should be nationalized. Others say, you know, this is going to have to be really carefully regulated.

12:31And so those regulations haven't come. And I think Anthropik thought, well, let's get in with the government and hopefully we'll have some ability to influence the path and future direction of how this goes. And it didn't work out so well for them. So, again, I think, you know, for the subset of tech executives that are also working in artificial intelligence, you know, this is sort of a chilling moment because it's just showing you how the government is really willing to go far in interfering with private markets and their functioning. And it suggests, again, the people that say, well, artificial intelligence should be subject to really burdensome regulation and a lot of government interference.

13:08It suggests that, yeah, the Trump administration is on board for that. Does it fit in anywhere that the government is using Anthropics AI in the war with Iran right now? Yeah. So I think this is a way in which this decision for the government to not just decide, you know, OK, sure, maybe Pete Hegseth doesn't like how the conversations are going with Anthropik. Like maybe Pete Hegsus says, we don't like how these conversations are going. We no longer want to work with them going forward. And let's figure out a way to sort of disentangle this. You know, the second step, though, of trying to basically decapitate this company that is really providing a valuable service for the U.S.

13:52military and its ongoing operations that I think most sensible people think there aren't great replacements available. So, you know, this is sort of a moment where government is handcapping its own military and causing the military, you know, if you have everything sort of up and running on Anthropik to then pivot to a completely different platform that most people think is not as well cut out for this task, you know, that's a time-consuming, distracting, burdensome, expensive endeavor. So to sort of handicap yourself like that. And then sort of, again, this is, Anthropic is one of the most important and vital artificial intelligence companies that's produced in America, right?

14:35So it's also handicapping a homegrown champion company in this race for AI dominance. So, again, it's sort of a funny strategy on multiple fronts. And, you know, if we want to be generous to the U.S. government, sure, that's totally within their right. If they think that their contracting party has terms that they don't want to abide by, you know, you have the right to walk away. But then to take this extra step of kneecapping them is just bizarre. It may be bizarre, but is it unusual for the Trump administration? And what's the real goal here? I think this gets back to where we started to with the sort of free speech element.

15:15You know, the goal, I think, in this moment is to send a message to the market, which is your failure to bend the knee is going to cause huge punitive repercussions. Right. That's a message that they're trying to send. And it's just sort of funny from a conservative, quote unquote, conservative executive, because the typical conservative ideology here is like, let markets sort themselves out. We're not going to have a heavy handed government thumb on how markets work, right? And so in this moment, you know, it's almost like we're seeing something from a playbook of a socialist country or something like that, where fealty to the executive is everything.

16:00Well, we'll see what the court thinks about this. A hearing is scheduled for next Tuesday. Thanks so much for joining me, Dorothy. That's Columbia Law School professor Dorothy Lund. This message is brought to you by Apple Card. Apple Card members can earn unlimited daily cash back on everyday purchases wherever they shop. This means you could be earning daily cash on just about anything, like a slice of pizza from your local pizza place or a latte from the corner coffee shop. Apply for Apple Card in the Wallet app to see your credit limit offer in minutes. Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City Branch.

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18:29If anybody is not using AI to make their developers who write software 30 % more productive today with the goal of being 70 % more productive. Yeah. So we are not asking our clients to be the first experiment on it. We say, you can leverage what we did. We're happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology. It's getting people to accept that there's a different way to do things. To listen to the full conversation, visit ibm.com slash smarttalks.

19:10The dust has settled with Paramount winning the bidding war for Warner Brothers Discovery with an offer that valued the company at about$111 billion, including debt, for the acquisition of the entire company, WBD's film library, studio, and HBO Max streaming service, as well as its cable assets, including CNN. The Justice Department's Antitrust Division didn't take any action to delay the closing of the deal before the termination of the statutory waiting period. But that doesn't stop the DOJ from stepping in. And the states can also step in and investigate the deal, which is exactly what California Attorney General Rob Bonta says is happening.

19:57My guest is Antitrust Attorney Richard Wolfram. Why you think the Justice Department didn't take any action at all to delay the closing of this deal? The Justice Department looked at two primary markets, although we don't know because all it did was take no action. And in taking no action, it issues no statement. And it presumably looked at the streaming market and the market for the studios themselves. There are five big studios. In the streaming market, what the DOJ and the FTC do typically when we assess mergers is look at the concentration. There are various angles or criteria by which to assess the change in concentration.

20:47And in this case, simply adding up the streaming markets, you get less than 30%. The 30 % is viewed traditionally under a seminal Supreme Court antitrust case called Philadelphia National Bank as the minimum threshold beyond which a concentration would trigger a presumption of illegality under Section 7 of the Clayton Act. It is a prophylactic, kind of prospectively looking statute that says that a merger could be illegal if the effect of the merger may be substantially to affect competition. There are other criteria. There's an economic test called the Herfindahl-Hirschman test. Another way of looking at it would be a loss of head-to-head competition.

21:35They did not use that. Interestingly, the DOJ did rely on a loss of head-to-head competition in the HPE Juniper merger, but that's a longer story. The second market would be the studio consolidation. And in overall percentages, that also, by some measures, and I have no inside information, but by most measures, that also would come under 30%. And the HHIs also would not trigger the presumption of illegality under Section 7. So that's why I think that the DOJ did not act. interestingly there is another element to this and that is the inclusion of CNN in the purchase. It was not to be included in the Netflix deal.

22:23It was going to be divested or hived off to another separate company with the other cable channels. Last week we saw the state step in to continue the Live Nation antitrust trial after the federal government settled. So might the state step in here as well. Yes. The Attorney General for California, Rob Bonta, announced two Fridays ago that California is investigating. He said the deal is not done or it's not over. And he is enlisting other states. Prominently, New York and Illinois have been mentioned. I wouldn't be surprised if there were not others. And I think the states have a bone in their teeth, to put it a little crudely because of this recent example of the settlement by the DOJ in the Live Nation case.

23:13And there is a lot of smoke around how that happened. It appears to have happened without any consultation with the 40 attorney team of the DOJ on the case or with the states. And now as we have something like 32 or 33 states with the District of Columbia pursuing it, And they're stepping into that vacuum. They see this as part of a trend. So I think that absolutely the states are interested in this. I think they will be reexamining several of these perspectives. I don't think they're going to have an easy time in showing any presumptive illegality with respect to the streaming market. And by the way, Rob Bonta has articulated these two markets in particular.

24:02I think that they may have some arguments. I'm not advocating, but I think they have some arguments with respect to the studio consolidation. The figure I've seen among the five majors is that a combined Paramount Warner entity would have something like 27 % of the market. That doesn't ring the bell under that Philadelphia National Bank threshold standard that I mentioned, nor likely under the HHI analysis. But there's a breakdown of that, and there are pros and cons about that. So that 27 % sort of represents the total revenue across all business lines of the studios. If that is broken down into theatrical movie gross receipts, then that percentage defined as a sub-market amounts to something like 40%.

24:54You've got a large percentage of those big five. So that becomes a concern, and the HHIs in that case would trigger a presumption of illegality. Then the question becomes, who is getting hurt? Where is the competition being affected, and who does that affect? You're going to stay with me, Richard. Coming up, we're going to talk more about what might happen, including whether the states may step in. I'm June Grosso, and you're listening to Bloomberg. Support for the show comes from Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game.

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26:14Advisory services by Public Advisors, SEC registered advisor, crypto services by ZeroHash. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. Hello, hello. I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business? My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side. For example? If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind.

27:02If anybody is not using AI to make their developers who write software 30 % more productive today with the goal of being 70 % more productive. Yeah. So we are not asking our clients to be the first experiment on it. We say, you can leverage what we did. We're happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology, it's getting people to accept that there's a different way to do things. To listen to the full conversation, visit ibm.com slash smarttalks.

28:08We'll be right back. could increase risks and volatility. Monthly income is not guaranteed. Prepare by BlackRock Investments, LLC. Paramount won the bidding for Warner Brothers Discovery with an offer that valued the company at approximately$111 billion, including debt, and included the acquisition of the entire company. The Justice Department's Antitrust Division didn't take any action to delay the closing of the deal, but that doesn't stop the DOJ from stepping in. And the states can also step in and investigate the deal, which is what California Attorney General Rob Bonta recently announced that state was doing.