monday, 20 november of 2017

CADE is examining the AT&T and Time Warner Economic concentration deal, with repercussions on Sky Brasil

Ericson M. Scorsim

AT&T, a telecommunications company, and Time Warner, a Pay TV programming licensing company, both with headquarters in the United States, required the approval of their merger before CADE, in Brazil.

The purchase by AT&T of Time Warner is taking place in several countries, with repercussions also in Brazil. In Brazil, Time Warner licenses programming channels and Sky is a Pay TV company.

CADE voted unanimously to approve the economic concentration related to the purchase by AT&T of the Time Warner company, grounded on Brazil's Antitrust Act (Law 12.529/11, article 88).

Another reason given to justify the interference of CADE, in this case, was the General Telecommunications Act that holds an express rule on CADE's power to examine economic concentration acts in the telecommunications industry, as per article 7, §1, §2 and §3.

The Brazilian Antitrust Authority understood that the corporate acquisition between AT&T and Time Warner does not pose significant risks to competition in the Pay TV market. The competitive analysis examined the licensing/programming markets (upstream market) and the Pay TV services distribution/operation market (downstream market). Thus, the possibility of economic concentration in the Pay TV market under the perspective of Antitrust Law.

Moreover, Reporting Commissioner, Gilvandro Araújo, presented some considerations on the evolution of audiovisual content distribution and production technologies, after the creation of OTT (Over-The-Top) companies, such as Netflix, Amazon, Apple TV, and others.

The Reporting Commissioner also suggested, in his vote, that the legal prohibition of vertical integration between Pay TV segments, established in the Conditioned Access Audiovisual Communication Services Act should be revoked given the evolution of the technologies in that industry.

Commissioner Cristiane Alkin Junqueira Schmidt also suggested that the sectoral regulation should be updated to hold a more flexible rule on the limits between Pay TV channels' programmers and the Pay TV services' operators; she also recommended that the corporate transaction under examination be approved without restrictions.

However, the Reporting Commissioner set some conditions in his vote to control the economic concentration, which we will now examine.

One of the obligations is for AT&T to keep Sky Brasil and the Time Warner channel programmers as separate legal entities, each with their own administrative and governance structure.

Another obligation is to offer Time Warner’s programming channels to non-affiliated packers and providers of pay-tv with all the programming channels licensed to Sky, upon non-discriminatory conditions. That is, the Time Warner Pay TV channels must be offered to their Pay TV competitors upon non-discriminatory conditions between the economic agents.

In this regard, the parties committed to the appointment of an independent consultant, responsible for helping CADE to monitor the compliance with the obligations assumed in the agreement signed with CADE for the approval of the merger transaction.

They also established that any conflicts between the channel programmers or the Pay TV services providers not affiliated with AT&T or Sky and the latter will be solved through arbitration.

The Reporting Commissioner's vote concludes:

"Thus, in my opinion, the approval of this Transaction by CADE does not mean the recognition of the lawfulness of the integration under Article 5 of the Conditioned Access Audiovisual Communication Services Act. If the Agencies claim that such provision has been violated, this will not offend the administrative res judicata formed by CADE's decision."

In this respect, it is important to highlight an enlightening excerpt from the vote given by Commissioner Alexandre Barreto de Souza:

"Another key issue seen in this Act of Concentration was the intertwining of antitrust issues with issues of other government agencies. In this sense, the Technical Notes issued by both the National Telecommunications Agency (ANATEL) and the National Agency of Cinema (ANCINE) indicated that the transaction presents evidence of a violation of Article 5 of Law 12,485, of September 12, 2011 (the Conditioned Access Audiovisual Communication Services Act).

It is important to make it clear that the actions of CADE in this Act of Concentration was limited to the antitrust aspects only, without the examination of issues belonging to the jurisdiction of other regulatory agencies.

I also point out that the proposed remedies seek precisely to solve any antitrust problems of the transaction. ANATEL and ANCINE will examine any issues outside the realm of antitrust norms, including possible violations of the Conditioned Access Audiovisual Communication Services Act. Thus, I stress that this merger under examination will require the authorization by the aforementioned agencies for its consummation, according to the respective legal responsibilities of each one.

CADE's decision on Merger No. 08700.001390/2017-14 reads: "The Plenary unanimously examined and approved the merger, conditioning it to the execution and fulfillment of a Merger Control Agreement (ACC, in its acronym in Portuguese), in accordance with the vote by the Reporting Commissioner."

At first, CADE understood that the merger between AT&T and Time Warner in the programming and pay-TV operation markets can go through under the perspective of the Brazilian antitrust legislation. However, as remedies to such merger in the Pay TV market, it imposed the conditions mentioned above, to be fulfilled under the Merger Control Agreement.

Subsequently, ANATEL, through its Antitrust Department, must now examine the case under the perspective of the sectoral legislation, in particular, the Conditioned Access Audiovisual Communication Services Act, Law 12.485/11 (Article 5).1

The focal point is the legal interpretation that ANATEL will give to Article 5 of Law 12485/11, that deals with the limit to the structural division between telecommunications companies and audiovisual content distribution and licensing companies in the Pay TV market.2

There are two possible solutions in the interpretation of the sectoral legislation by ANATEL in the exercise of its legal jurisdiction, regarding the regulation of the audiovisual communication sector.

First, ANATEL may approve the acquisition of Time Warner by AT&T, understanding that it does not violate the Brazilian laws on Pay TV, as there is no offense to Article 5 of said law, which deals with the structural separation between the Pay TV package distribution, programming, and licensing market and the operation of Pay TV services.

Second, in theory, ANATEL may order the structural separation between the telecommunications companies and the Pay TV programming, distribution, and licensing companies, given the possible legal prohibition of vertical integration between the Pay TV distribution, packaging, and programming segments and the Pay TV operations, as per Article 5 of Law 12.485/11. However, in this case, there must be actual evidence that the corporate transaction violates the respective sectoral law.

Therefore, it is possible, in theory, for ANATEL to acknowledge the unlawfulness of the acquisition of Time Warner by AT&T, ordering AT&T to sell the company Sky Brasil to possible interested parties. If Sky is to be sold, such corporate transaction will also have to be submitted to examination by CADE, to verify the lawfulness of such transaction.

On the other hand, we highlight that the aforementioned Article 5 of Law No. 12.485/2011 is the subject of a dispute regarding its legality, in Motions of Unconstitutionality filed before the Brazilian Supreme Court3. However, Reporting Justice Fux voted for the constitutionality of the said legal provision4. This case is still pending the final decision on its merit by the Supreme Court, as the trial of the respective motions of unconstitutionality has been suspended. For now, the presumption is of the constitutionality of Article 5 of Law 12.485/11.

Only the Brazilian Congress has the power to pass a law revoking said limit to the corporate interest held by companies in the Pay TV licensing, programming, and distribution segments.

Note that ANCINE also has a say in the matter. Under the terms of the respective law, ANCINE has the power to regulate and monitor the programming and packaging activities.

Note that ANATEL holds the regulatory jurisdiction to interpret Law 12.485/11, as per Article 29, sole paragraph of said law: "Anatel will regulate and inspect the distribution activity."

Anyhow, ANATEL and ANCINE must coordinate their understanding of the interpretation of the said law, otherwise, there will be conflicts in its legal interpretation, in detriment of legal security in the application of the law.

There is a possible risk of judicialization of the case on the interpretation of the sectoral regulation of the Pay TV market, related to the decisions issued by CADE, ANATEL, and ANCINE, which may decide against the Time Warner's acquisition by AT&T. Nevertheless, this could lead to the questioning of ANATEL's jurisdiction to order the sale of the company Sky Brasil, as this type of obligation falls more naturally under the jurisdiction of CADE.

In sum, as well defined by the Brazilian Antitrust Authority (CADE), the acquisition by AT&T, a telecommunications company, of the Time Warner company, which operates in the Pay TV programming market, involves an antitrust matter (requiring the application of Law No. 12,529/2011), as well as the issue of sectoral regulation (interpretation of Article 5 of the Conditioned Access Audiovisual Communication Services Act, Law 12.485/11).

ANATEL and ANCINE will soon issue their opinions on this interesting case related to the interpretation of the Brazilian audiovisual communication law.


1 According to Law 12.485/11.

2 "Article 5. The total and voting capital of sound and sound and image broadcast concessionaires and permittees and producers and programmers with headquarters in Brazil cannot be controlled or belong to collective interest telecommunications companies above the limit of fifty percent, and they must not directly explore such services.

3 On these legal limits to corporate concentration in the Pay Tv services operation and programming markets, See: Scorsim. Ericson M. Communications Law. Telecommunications. Internet. Broadcast TV and Pay TV. Curitiba: Edited by the Author, 2017, Amazon.

4 See: Adis 4.679, 4.759. 4.747 and 4.923 (Motions of Unconstitutionality before the Brazilian Supreme Court).

5 The following Justices accompanied the vote of the Reporting Justice: the recently deceased Teori Zavascki, Rosa Weber, and Edson Fachin. See: Scorsim. Ericson M. Communications Law Themes in the Case Law of the Brazilian Supreme Court. Curitiba: Author's Edition, 2017. Amazon.


*Ericson M. Scorsim is a lawyer specializing in Communications Law at Meister Scorsim Advocacia.

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