A group of AT&T and Verizon wireless subscribers have filed a proposed class action arguing that the T-Mobile / Sprint merger – despite all of their emphatic assurances to the contrary – is harming consumers and should be unwound.

The suit was filed on June 17 in federal court in Chicago against Deutsche Telekom AG, T-Mobile U.S., Inc., and former Sprint Corp. owner SoftBank Group Corp. of Japan. The consumers allege the merger paved the way for anticompetitive conduct in violation of Section 7 of the Clayton Act and Section 1 of the Sherman Act (Dale, et al. v. Deutsche Telekom AG, et al., No. 1:22-cv-03189, N.D. Ill.).

 The April 2020 merger of T-Mobile and Sprint reduced the number of national retail mobile wireless carriers from four to three. As a result, consumers who subscribe to these carriers, including AT&T and Verizon customers, have paid billions more for wireless service, the suit maintains. One estimate predicted the merger would cost consumers as much as $9 billion a year.

DOJ, States Sued in 2019

In July 2019 the Department of Justice Antitrust Division and a group of states filed suit in U.S. District Court for the District of Columbia to block the deal (U.S. v. Deutsche Telekom AG, No. 1:19-cv-02232, D. D.C). To secure DOJ’s approval, the companies ultimately agreed to divest Sprint’s prepaid cellular business and additional wireless spectrum assets to satellite TV company, Dish Network Corp., and granted Dish an option to acquire at least 20,000 cell sites and hundreds of retail stores.

Assistant Attorney General Makan Delrahim, head of the Antitrust Division of the Department of Justice, said of the deal when it was proposed: “With this merger and accompanying divestiture, we are expanding output significantly by ensuring that large amounts of currently unused or underused spectrum are made available to American consumers in the form of high quality 5G networks.” The settlement was intended to provide Dish with the assets and transitional services it would need to become a competitive, nationwide, full-service facilities-based mobile network operator. The DOJ said Dish would enter the market in fourth place behind the new T-Mobile / Sprint company, with AT&T and Verizon jockeying for first place.

As we wrote in our July 29, 2019, post when the DOJ announced its proposed arrangement with the companies, “Instead of remedying the anticompetitive effects of an unlawful merger, the DOJ’s settlement encumbers consumers with the burden of an ill-conceived industrial adventure that is unlikely to provide any remedy at all.”

A separate action was brought by attorneys general from 14 states and the District of Columbia in U.S. District Court for the Southern District of New York to block the merger (New York v. Deutsche Telekom, S.D. N.Y.). Following a two-week trial, the judge ruled in favor of the merger. Because the DOJ had determined that the deal would be unlawful absent the conditions negotiated by the parties, the main issue at trial should have been whether the behavioral and structural remedies actually cured the potential risks to competition posed by the merger. Unfortunately, as we wrote in the Los Angeles Daily Journal on Feb. 26, 2020, the court primarily analyzed whether the parties were likely to implement the proposed remedies rather than whether the remedies, if implemented, were likely to cure the competition issues raised by the merger.

Critics might point out that that the T-Mobile / Sprint deal closed on April Fool’s Day 2020. With the reduction in competition, all three carriers have raised rates through higher plan prices, taxes, fees, and surcharges, according to plaintiffs in Dale v. Deutsche Telekom. As such, they seek to unwind the merger, create the viable fourth competitor that was promised, and recover damages from overcharges.

The Structure of U.S. Retail Cell Service Industry

The retail cell service market requires basic components in addition to handsets. These include antenna towers for local connections; fiber optic lines connecting the towers; computer software and hardware to manage the immense data flows; and a radio frequency spectrum. Prior to the merger, only AT&T, Verizon, T-Mobile, and Sprint were “mobile network operators” or MNOs. The industry presents “nearly insurmountable barriers” to new entrants desiring to become MNOs due to the resources, personnel, assets, and experience the industry demands, the complaint alleges.

T-Mobile and Sprint were smaller MNOs that were willing to cut prices and make offers to consumers in order to compete with AT&T and Verizon. T-Mobile ramped up competitiveness through equipment installment plans, lower-cost monthly service plans, and unlimited data plans. Sprint followed suit, aggressively slashing prices. The two disrupted the market and forced responses from AT&T and Verizon, creating the kind of competition that benefits consumers and innovation alike.

On April 29, 2018, when T-Mobile and Sprint announced their intention to merge, opposition came from all directions and prompted hearings before the House Energy and Commerce Committee and the House Judiciary Committee. Witnesses testified that such deals resulted in price inflation in Europe, and would have a similar result in the U.S., adversely affecting lower-income consumers by reducing choice of lower-priced plans.

Critics said the deal would also increase the risk that the small group of competitors would coordinate prices and T-Mobile would not be motivated to compete as fiercely as before the merger. Gone would be the days of Sprint’s low-cost high-value plans.

 T-Mobile knew Dish could never replace Sprint as an effective competitor, according to the Dale plaintiffs. As explained, to get a green light from the DOJ, T-Mobile sold Dish its prepaid phone business and other Sprint prepaid assets for $1.4 billion. T-Mobile and Sprint sold the arrangement to the DOJ on the theory that these concessions would enable Dish to ultimately replace Sprint as the fourth MNO in the industry, reducing the threat to competition. Internally however, T-Mobile’s executive team was “very skeptical” that such a network would be built, given the time and financial investment required, according to the complaint.

Declining to enjoin the merger as the 14 states and DC had asked, the Southern District of New York ruled that T-Mobile would continue to compete vigorously as the “Un-carrier”; that Sprint would not have survived as a strong competitor; and, that Dish would enter the wireless services market as a viable MNO. The parties’ subsequent actions and post-merger data demonstrate the companies misled the district court about their intentions and effects of the merger, the plaintiffs charge. Consumers have not benefited from the deal; instead they have paid billions more to AT&T, Verizon, and T-Mobile, the suit alleges. This reduced competition has only led to higher prices and profits for T-Mobile, a result that is directly counter to the spirit of pricing commitments made to regulators.

Because the merger has substantially reduced actual and potential competition in the sale of retail mobile wireless telecommunications services by MNOs, the plaintiffs have been paying and will continue to pay artificially inflated prices in this increasingly concentrated market.

Commentary: A Cautionary Tale at Best

This was always the most likely result of the T-Mobile / Sprint merger:

• The parties would fail to effectively implement the proposed behavioral remedies, many of which required significant cooperation among competitors.

• Dish, which has its own history of failing to satisfy commitments made to the federal government, would not become a viable fourth competitor, meaning the merger reduced the number of nationwide cell carriers from four to three.

• The increased concentration caused by the merger would lead to higher prices for consumers.

Unfortunately, there is little that can be done to restore competition at this point given the substantial barriers to entry in this market and exceedingly small chance a court orders this mega-merger to be unwound several years after it closed. It appears that, at best, we can hope this will serve as a cautionary tale for courts and antitrust agencies moving forward.