California And 11 Other States Sue To Block Paramount-Warner Bros. Discovery Merger

A group of a dozen state attorneys general filed suit to block Paramount‘s $110 billion acquisition of Warner Bros. Discovery, long-anticipated litigation to stave off a merger despite receiving clearance from the Trump administration Justice Department.

The lawsuit, filed in federal court in Sacramento on Monday, challenges the transaction as stifling competition for wide release theatrical film distribution, big budget motion picture distribution and licensing of basic cable television channels.

Read the Paramount-Warner Bros. lawsuit filed by state attorneys general.

The focus on those aspects of competition come amid concerns that the merger would lead to widespread layoffs as the combined company grapples with its debt burden. Broader concerns have been on the impact on the creative community and the information environment, with Paramount set to own two legacy news brands, CBS News and CNN, although that was not the subject of the lawsuit’s claims.

California Attorney General Rob Bonta, who led the lawsuit, said in a statement, “The unlawful merger of these two entertainment behemoths would lead to higher prices, lower quality, and less content for film and television, harming movie theaters, basic cable distributors, and ultimately, audiences on every sofa and movie theater seat in the U.S.”

Also joining the lawsuit are the attorneys general of Arizona, Colorado, Connecticut, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, Oregon and Washington.

“After this merger, for every dollar generated by wide-release theatrical films and basic cable channels in this country, the combined company will pocket more than a quarter. This merger, in short, would create a media behemoth,” the lawsuit stated.

The AGs claim that the merger will lead to “higher prices and degraded quality,” as a combined Paramount and Warner Bros. will be able to extract a greater portion of box office revenue from exhibitors. Paramount-WB represent about 27% of the box office, per Bonta’s office. The combined company will control more than 30% of big-budget theatricals for wide release, the lawsuit claimed, noting that the tentpole releases made up 88% of box office revenue over the last three years.

While theatrical distribution has gotten substantial attention as Paramount has sought regulatory approval for the WBD acquisition, much less focus has been paid to cable distribution, a sector of the industry that has been in decline.

The lawsuit noted that the combined company would control more than a quarter of all basic cable channels by revenue. The result, the lawsuit claimed, would be increased bargaining leverage with distributors. The company would roll up channels like MTV and TNT that were once Viacom and Turner powerhouses.

The lawsuit stated, “A distributor who rejects the combined company’s fee demands would risk losing, for example, CNN for news viewers, Nickelodeon and Cartoon Network for family households, HGTV and Food Network for lifestyle audiences, and TNT and TBS for sports and entertainment viewers. Faced with this threat, distributors would likely be forced to accept higher fees to distribute basic cable channels than they would absent the proposed merger. Those higher fees will likely be passed on to their subscribers in the form of higher monthly bills.”

Per Bonta’s office, the states have asked Paramount and Warner Bros. to hold off on closing the merger until after the judicial process is over. If the companies do not agree, the states then plan to seek a temporary restraining order.

Paramount has been steeling for a courtroom battle, hiring noted antitrust litigator Jeffrey Kessler, who most recently fought on behalf of the states as they challenged Live Nation and Ticketmaster’s market dominance.

The company’s most immediate concern is timing: Its deal for WBD includes a $7 million a day “ticking fee” if the transaction does not close by Sept. 30.

That’s why the most important part of the litigation may be in its initial stages, including whether a judge grants a temporary injunction that would put the transaction on hold. That’s what happened in the case of Nexstar with its proposed acquisition of Tegna, creating a broadcast station giant. Despite receiving federal approvals, a federal judge put the Nexstar-Tegna merger on hold, siding with state attorneys general and DirecTV in their claims that the merger would be anticompetitive. Nexstar is appealing, but that process looks to drag out the transaction for months or into next year.

A Paramount spokesperson said in response to the lawsuit, “The lawsuit filed by the state attorneys general, in the most generous light, reflects a fundamentally flawed application of the antitrust laws and is wrong on both the facts and the law. We will vigorously defend the transaction and demonstrate that this challenge is inconsistent with sound competition policy and the competitive realities of the media marketplace. Delaying this transaction will only harm entertainment workers who have already suffered over recent years as technology has disrupted their livelihood and cost California tens of thousands of entertainment jobs.”

Paramount has argued that the merger will boost competition, with a WBD combination better able to compete with streaming giants Netflix, Amazon Prime and Disney+. The company also has pledged to release at least 30 theatrical films per year, at a time when much of the industry is worried about the future of exhibition in general.

In their lawsuit, the state AGs argued that the commitment was “not legally enforceable,” and that it would “still permit Defendants to harm competition by reducing investment and innovation, degrading quality, and raising the price of those 30 films they produce.” The AGs did cite potential job loss, but did so in claiming that the efficiencies from the proposed merger do not outweigh the harms done. “Creative content that goes unproduced as a result of these disruptions is permanently lost,” the lawsuit stated.

While Democrats on Capitol Hill have warned about the merger, undoubtedly putting pressure on Bonta to act, Paramount’s lobbying efforts to win Trump administration approval has also helped put it in the partisan crosshairs, even though CEO David Ellison once said that he did not want the company to be politicized.

Ellison attended Trump’s State of the Union address earlier this year, appearing with one of the president’s allies, Sen. Lindsey Graham (R-SC) in a photo in which they each gave the president’s signature thumps up sign. In April, Ellison hosted a dinner for the Trump White House and CBS News correspondents in advance of the White House Correspondents’ Association dinner, an uneasy mix of the business interests of the company with the journalism side. And in June, Ellison mingled with Trump as he attended the UFC championship on the White House lawn, an event that was streamed on Paramount+.

In recent months, critics of the merger have held unofficial hearings in Southern California and on Capitol Hill, while groups include the Democracy Defenders Fund and the Writers Guild of America helped gather more than 5,000 signatures from talent and creatives opposing the transaction.

In their statement last month giving clearance to the merger, the Justice Department said that the “extensive investigatory record reviewed by the Division suggests that the impact of the transaction will be to increase competition across the media and entertainment ecosystem, with benefits for American consumers and workers.”