States Sue to Stop Paramount Takeover of Warner Bros.

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2:00This is Bloomberg Law with June Grosso from Bloomberg Radio. Movie theaters, basic cable TV distributors, and audiences on every sofa and in every movie seat would feel the impact of this unlawful merger. California is leading a lawsuit by 12 states to block what would be the largest merger in the history of Hollywood, the combining of two of the largest entertainment companies in the world. The antitrust lawsuit claims that Paramount's$110 billion takeover of Warner Brothers' discovery would result in less competition, higher prices, and fewer options on big and small screens. The Justice Department declined to challenge the deal last month, and California Attorney General Rob Bonta called out backdoor deals trampling on consumers and free markets.

2:59Antitrust enforcement is a check on billionaires currying favor with the president so he'll do their bidding. thousands of actors directors writers and other industry professionals have voiced unequivocal opposition to the paramount deal arguing that further consolidation will lead to job losses and fewer choices for filmmakers and moviegoers paramount said the lawsuit distorts settled antitrust law and maintained that its merger would create a stronger competitor against dominant streaming and technology platforms. My guest is an expert in antitrust law, Professor Harry First of NYU Law School.

3:44Harry, the states claim that this deal would create a media behemoth.

3:50June Grasso:Interesting. So this was a paragraph that appeared in a book review that was written by Ty Burr, who had been the Boston Globe's movie reviewer for many years. It's a book about mergers at the movies. And he ends it by saying that this merger would reduce the number of media behemoths to a monopolistic five. So yes, but no. So yes, there are five big companies, but monopolistic and five don't go together. So maybe they do for Ty Burr and talking about power in sort of a colloquial way, but from a legal point of view, we're not talking about monopoly. But we are talking about significant power and or antitrust, it's market power.

4:44June Grasso:For Hollywood, it's money. For many people, it's cultural power. And apparently for the president, it's CNN. I mean, I don't know, but that seems to be what comes out. So it's lots of things colliding, you know, which makes the merger really interesting, you know, along many dimensions. So what makes it also interesting and horrible, in a way, is that the story plays out in a way that we're too familiar with today in the Trump administration, but really we've never seen before in this direct, overt way, which is there's the law and there's we don't care about the law. You know, it's, you know, what the president wants today.

5:32June Grasso:And, you know, this case has played along those two tracks. And the spoiler in this is also partly political, but has to play on the legal track, can't play on the political track. And that's the states. As you referred to there, the merger has been the subject of intense lobbying in D.C. as executives, including the head of Paramount, David Ellison, have tried to curry favor with President Trump and other administration officials. So tell us about the political background of the deal. The background, the political background starts unusually before Paramount's bid for Warner is accepted or really made legally.

6:17June Grasso:And if you read what the Justice Department did at the very end, they said in June that we've been investigating this for eight months. That's pretty interesting since the merger was just noticed to them in February. I know my math is bad, but it's not that bad. So that means they started investigating this case before the merger was officially notified. Now, normal practice is you can't get the Justice Department to tell you what they're going to do until you do something. You know, you can't call them up and say, excuse me, will you give me an advisory opinion? In some jurisdictions, you can.

6:56June Grasso:In the United States, you can't. But apparently, these people could, because this was going on at a time when the president was just putting a big, I don't want to say thumb, I don't know, hand, arm, whatever he's got on the scales for Warner. So Paramount hires the guy who used to head the antitrust division in Trump One to guide this thing through legally through the antitrust division. And he does a pretty good job for his client, whether it's for us is another story. But we didn't hire him, Paramount did. Okay, so in February, this deal gets cleared without what's called a second request. So in important mergers, the government says, excuse me, you can't close the deal until we look more deeply at all the documents.

7:48June Grasso:So you have to hold off until you've produced all the documents to our satisfaction. That's the norm in a big deal like this. Not for this deal. In February, they say, we're not even going to do a second request. They could have closed it in February, but they didn't. So they've continued to fight about it. But this is the political track to the deal. But then comes the legal track, which is they go through some sort of investigation, and they close the investigation, which they've already sort of closed by not issuing a second request. They close this just in June. And a couple things interesting about that.

8:28June Grasso:Normally, the Justice Department does not issue closing statements to explain what they're doing. It's very rare. So you might say, why did they do it here? Good story. They like to be transparent. You know, you remember you used to take those math exams, show your work, right? You didn't just guess at the answer. So they want to show their work. However, when people in this business show their work, they have certain incentives not to show all their work, but to show it in the most positive light. This is not a math problem. This is a question of judgment. So they file this closing statement.

9:04June Grasso:And one of the problems with filing closing statements is that the people who write them have certain goals. One is to justify what they've done. But another goal may be to short circuit other plaintiffs, because the federal authorities are not the only people who can sue to stop mergers, and specifically the states can. So if you can write this and say, you know, my God, this case was, you know, nothing there, baby. And you think the states are going to file, you know that a federal judge is going to read that, and maybe it will affect what they do. So some people believe, and it's possibly true, that one of the goals was to influence any possible state litigation.

9:49June Grasso:So that's the second interesting part. And the third part is how they wrote about the case. And it turns out to be interesting because it's so different from the state's complaint. And, you know, maybe they wanted to show their work in a positive light, but there are certain things that are not there and certain things presented in an interesting way. So they start out with streaming as, you know, nothing to see here. Well, in some ways, that That actually is the weaker part or the less suspicious part of the case. There are three major streaming services and a fourth, if you put in Disney, HBO Max and Paramount Plus.

10:32June Grasso:Do you watch Paramount Plus? No, I don't. No, neither do I. HBO has to be the winner of that comparison. So, you know, these are distant competitors. Netflix is dominant. You know, Amazon is strong. Disney is strong. So you can make a credible claim that it's still a very competitive market and not one to sue about. So that's where they start. And then they go to what they call linear TV, which I think is an interesting description. You know, I'm not sure exactly what they mean by that, except they've combined two words that indicate junk. Who watches, you know, TV in a line? I mean. To tell you the truth, Harry, I'm going to have to Google that unless you know.

11:21June Grasso:I don't know. Who does that? So it's supposed to be cable. Hard to say exactly. They're not really clear. But they say, you know, no problem here, because this kind of TV faces so much competition from pay services, from streaming, from live, from sports, from blah, blah, from wah, wah, from who knows, not a problem here. And then, of course, they say for last, the thing that you might start with first, which is studio film production, because this is where the parties are direct competitors. Paramount and Warner, you know, they make blockbusters. So you might think they'd start there, but, you know, nothing to see here, because after all, lots of competitors, Netflix makes theatrical releases.

12:13June Grasso:Yeah, I guess. Amazon makes stuff for Melania. Oh, sorry. And Disney, and there's lots of other stuff. And so don't worry about that. And don't worry about impact on workers in Hollywood, because all the incentives are to make more films and distribute them theatrically. So that's third on the list. So those are the three things. And nothing about viewpoint diversity, which a lot of people are worried about, but it's hard to make out as an antitrust matter. You know, CNN and CBS under the same tent. The concern about CBS, enough concern about CBS now, but now they're going to control CNN, Thorne and the MAGA side.

13:00June Grasso:So no mention of that doesn't give us any market shares. So that's the first thing you look for, but doesn't mention that. So those are omitted. And to cap it off nicely, the Wall Street Journal follows with a story that says, shock and amazement, the staffers working on this were surprised when the closing statement was issued, which they had no role in drafting. Sound familiar? It does sound very familiar something we've talked about recently. Stay with me, Harry. Coming up next on the Bloomberg Law Show, will the states be able to convince a judge to issue an injunction to stop the deal from going forward?

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16:22Let's create smarter business, IBM. California is leading a lawsuit by 12 states to block Paramount's$110 billion takeover of Warner Brothers' discovery. The antitrust lawsuit says the merger would result in less competition, higher prices, and fewer options on the big and the small screen. The Justice Department had declined to challenge the deal last month. I've been talking to antitrust professor Harry First of NYU Law School. Harry, did the states draft their complaint around or in response to what the Justice Department had stated in its summary of why it was declining to prosecute the case?

17:10June Grasso:So I'm glad that we had this call after they filed the complaint because I would not have predicted it. And, you know, if you were being skeptical of this complaint, you'd say this is the complaint to save all the parts of Hollywood that everyone says is dead. The theaters, the movie theaters, the big motion picture producers, theatrical producers, and the cable companies. And it's basic cable. It's not fancy cable that we pay for with bazillions of dollars. It's basic cable that gets you CNN, the basic channels, not the premium channels, not even HBO, but it gets you CNN. It gets you MTV. I don't know.

17:55June Grasso:It gets you those kinds of things. It gets you the over-the-air broadcasting. You know, it's basic cable. So that's the focus of this complaint. It's not on streaming. So they don't go after streaming either. This is, to my first reading, a non-ideological, carefully drafted complaint designed to stop this merger and not get embroiled in any fancy theories. There's no labor market theory in this. They start with the place where justice stops, which is wide-release theatrical films, you know, where the competition is direct. And then they go to the super sellers, the anticipated top-grossing theatrical films, which is something the Justice Department did in the booksellers merger.

18:51June Grasso:They looked at, you know, the New York Times bestsellers was the market there, the Bertelsmann case. So there are echoes there. This is carefully done. And then licensing of basic cable channels. And it points out how the two companies are bringing together Turner stuff, all sorts of stuff. And the cable companies need the package. You know, they need the bundle of stuff. And, you know, maybe the fancy people in Brooklyn have cut the cord, but there's still a lot of people who are looking at their cable. And it's aimed at that. And I think it's very clever. We now have concentration figures, Herfindahl-Hirschman Index, the fancy way of saying that these are concentrated markets.

19:37June Grasso:And the complaint references the merger guidelines, with federal merger guidelines. These are way over the top. Nice job. And sort of one final thing that I noticed, it's co-signed in council by a private law firm that's been hired by California, presumably by the states, and signed by a very highly respected antitrust litigator, Rich Parker, who had been head of the Bureau of Competition in the Federal Trade Commission a number of years ago. Very well-respected. This is a well done, to my reading anyway, well done, careful complaint. It's a good question, June. Is this a direct sort of response to the Justice Department?

20:23June Grasso:Not completely because it doesn't buy this linear TV, whatever that is. It avoids what may have been a trap for focusing on streaming markets, although maybe there is a question there of cutting off supply to streaming markets. But that's more of a vertical supplier buyer complaint. But they're looking directly at horizontal competition and price raising. So from my reading, well done. And we'll see, of course, where that goes. So this deal is not over yet. And it's not a throwaway complaint. So Paramount said in response to the lawsuit that the lawsuit is based on a misrepresentation of competition in the entertainment industry today.

21:07As numerous antitrust authorities around the world have concluded after months of review, this transaction creates a stronger competitor against dominant streaming and technology platforms who've harmed the market for theatrical exhibition and jobs in the entertainment industry.

21:24June Grasso:So that's a clever political statement. It's a bad legal statement. I mean, it's not an effective legal statement, but that's not supposed to be, I guess. You know, to say that the merger will help streaming is sort of irrelevant under basic antitrust law, which has not been challenged, that you can't justify a merger that hurts competition in one market by saying, oh, but look over here. Gosh, we've got some help over in a different market. So that's not going to work. Now, if you're going to somehow say this will help, actually, it's going to help competition in the market for theatrical movie releases.

22:01June Grasso:Well, you know, that's going to be a bit of a hard sell, I think, you know, going around in this, although the closing statement doesn't mention there's a lot of talk about their promise of 30 new films, you know, after this merger. and, you know, a lot of commentary saying, you know, what are you smoking? Those sort of promises tend to be discounted as a general matter. But people pointing out that releases have been contracted a number of years ahead with exhibitors. So, you know, the idea that all of a sudden you're going to increase output by 30 more, it's going to be up to them to prove that's going to be their burden.

22:40June Grasso:You know, the justification, you know, it's on them. So I don't know. I mean, I assume they will fight it. Yeah, they say they're going to vigorously fight it, as usual. Do you think that this is strong enough? Is it a given that a judge will put a hold on the merger until this suit is settled? So I think that's a great question. I hadn't thought about how likely that is. My guess is that the states are ready to litigate the merits of the case now. They have to be prepared to say, we want a preliminary injunction and we want it for a week, a month, whatever, but a short time. And then we'll have a hearing on the merits because everyone knows there's a big freight train here.

23:28June Grasso:There's a lot of money involved. We can't hang this up for a year playing around with when we're going to litigate it. So if I were they, my guess is Rich Parker and his team is ready to do that as well. I mean, the states must be stretched. They've got this, you know, Tegna merger that they're litigating. And that's a big deal. And they've got DirecTV in with them. So that's helpful. But, you know, they're not huge offices. I mean, California has a lot of people. But still, this is big litigation. And, of course, the parties, I mean, they have infinite money to throw at this. So, you know, they have to really be ready to say, we've taken lots of depositions.

24:10June Grasso:We're ready to go. We don't have to do anything more. We're ready to litigate this on the merits. So that's what I hope they're ready to do, because I think it's going to be really hard. Given that the second request was passed in February, I mean, maybe that's an argument that, well, they haven't been so quick to close it. Maybe they don't want to close it so quickly. There's a problem, maybe a problem with their financing. If they don't complete the merger by the 30th of September, Paramount has to pay Warner shareholders a 25 percent share ticking fee, which amounts to six hundred fifty million per quarter.

24:45The numbers are so big lately that it's like, is that a lot to them or not?

24:49June Grasso:Hey, it's a lot to me. I'm not sure that that stands in the way, you know, one way or the other. I mean, my guess is it's in their interest to get this merger going. I mean, they do want to do the merger. They fought so hard to get it that it's hard for me to imagine that it's in their interest to slow walk the litigation. Is any of that part of the litigation that the Justice Department made this decision because of politics, not because of law? I don't know how you litigate that in this context. It's not like the Justice Department is prosecuting you and you're saying, you know, that prosecution is politically motivated and we shouldn't have to answer your subpoenas.

25:35June Grasso:So I don't see how it's relevant. And it does strike me as something that would slow down the litigation, which I don't think the states would want. I don't know what they would achieve by slowing it down, unless they think that the financing would fall apart or the ticking fee would be so large that, you know, walk away from the merger. It's hard for me to see Paramount walking away from this merger. They've invested money and political capital in this. And so that's hard to see, too. So I don't see it. You know, you never know. But I mean, I see a rather careful complaint, actually, not some political broadside.

26:17Would this be before a judge or a jury?