The case is now on course to explore any possible White House interference as prosecutors insist the mega-merger is not good for competition.

The U.S. government is formally contesting AT&T's proposed $85 billion deal to acquire Time Warner. On Monday, the Justice Department filed a complaint in D.C. federal court that claims the merger flouts antitrust law and would harm competition. The government demands AT&T and Time Warner be permanently enjoined from carrying out the proposed merger.


"AT&T/DirecTV would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers," states the complaint (read in full below). "The proposed merger would result in fewer innovative offerings and higher bills for American families."


The government's move claiming a violation of Section 7 of the Clayton Act comes after unsuccessful negotiations explored whether AT&T could do anything to satisfy government concerns. Earlier this month, reports circulated that the officials reviewing the merger suggested AT&T would gain approval by selling off either DirecTV or Turner Broadcasting, a division that includes CNN.


Since the media mega-deal was announced in October 2016, AT&T executives, including chairman and CEO Randall Stephenson, have publicly voiced confidence about getting approval. They've pointed out that the government hasn't historically blocked vertical mergers — that is, when a supplier and a distributor decide to marry. The most notable example is how the Justice Department allowed Comcast to purchase NBCUniversal in 2011. Instead, antitrust regulators have traditionally stood up to horizontal mergers when true competitors in a market seek the benefits of consolidation.


In its filing Monday, however, the government nods to how Time Warner owns Game of Thrones and the rights to broadcast NCAA March Madness, Major League Baseball games, and more, and says a vertical merger "may violate the antitrust laws where the merging parties would — by means of their control of an input that their competitors need — have the incentive and ability to substantially lessen competition by withholding or raising the price for that input."


The Justice Department raises the possibility that AT&T could keep HBO from rival distributors, and in the lawsuit, cites warnings of price increases by AT&T and its subsidiary DirecTV themselves at the time of the Comcast/NBCU merger.


Of course, a new administration now occupies the White House, and this landmark lawsuit will be read in political context as the proposed AT&T/Time Warner merger has touched a nerve almost from the get-go. On the campaign trail, Donald Trump cited the tie-up as concerning and expressed dissatisfaction with "too much concentration of power in the hands of too few," even if he also appointed an FCC chair in Ajit Pai who has pursued deregulation of media ownership rules.


Trump has also frequently slammed coverage of his administration by CNN including a tweet last Wednesday how he was "forced" to watch the news network while overseas and didn't like the "fake" news he was witnessing.


The Justice Department is supposed to operate independently in the executive branch, though, leading even critics of the AT&T/TW merger like Sen. Al Franken (D-Minn.) to sound the alarm about improper interference.


The Justice Department's new lawsuit thus sets the stage not only for a battle on competition grounds, but also an exploration into the White House's role and any First Amendment problems. On top of that, there could also be an inquiry into whether 21st Century Fox's Rupert Murdoch, a Trump confidant and suitor of Time Warner, played any behind-the-scenes role in the block of the merger. AT&T recently tapped Hollywood power attorney Daniel Petrocelli to defend the antitrust lawsuit.


In court, AT&T will attempt to poke holes in the argument that if the merger is allowed to proceed, it will harm consumers by substantially lessening competition among video distributors and slow online competition.


That latter charge — the suggestion that a vertical merger could impede newer competition from online video distributors — is a place the government has never gone before.


"AT&T/DirecTV perceives online video distribution as an attack on its business that could, in its own words, 'deteriorate the value of the bundle,'" states the complaint. "Accordingly, AT&T/DirecTV intends to 'work to make [online video services] less attractive.' AT&T/DirecTV executives have concluded that the 'runway' for the decline of traditional pay-TV 'may be longer than some think given the economics of the space,' and that it is 'upon us to utilize our assets to extend that runway.' This merger would give the merged firm key, valuable assets, empowering it to do just that."


Even before the filing of the lawsuit, AT&T had already prepped a response.


"Today's DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent," said AT&T general counsel David McAtee. "Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently."


In a press conference after the lawsuit filing, Stephenson remarked, "I'm surprised we're here and troubled by it. ... The best legal minds in the country agreed it would be approved since we don't even compete with each other. Yet here we are."


Stephenson added that the lawsuit came without due process and was a violation of the rule of law that would harm businesses by offering no good guideposts. He addressed speculation that the lawsuit was about CNN, saying, "Frankly, I don't know."


Raising the First Amendment flag, the exec said the company wouldn't back down and that AT&T had no intention of proposing a solution beyond what the rule of law requires. "This lawsuit has the world questioning what [businesses] can, should, or would do," he added. "It can have nothing but a freezing effect on commerce in general."


Petrocelli emphasized that it is the government's burden to prove the merger isn't in the public interest. He played an old recording of the Justice Department antitrust chief Makan Delrahim saying a vertical merger of this type wouldn't be a problem. In reaction to reporters who wanted to know if AT&T would collect discovery on the White House's interference, Petrocelli again pointed out that it would be the government's burden, but added that if something did turn up, it wouldn't be good for the merger-block efforts.


Wall Street has expressed increasing doubts about AT&T closing the Time Warner acquisition, with the latter's shares falling 15 percent in less than a month. That has left Time Warner with a market cap around $68 billion, well below the $85.4 billion AT&T agreed to pay for it.