On a call around 9 p.m. on Thursday, Jeffrey Kessler, the top trial lawyer for the media behemoth Paramount, made a stunning proposal that could stall the company’s $111 billion merger with Warner Bros. Discovery well into next year.
Paramount, which is run by the tech scion David Ellison, was staring down a lengthy legal battle with state attorneys general, who in mid-July had sued to stop the blockbuster merger over antitrust concerns. Both sides seemed poised to spend weeks arguing about in-the-weeds legal motions and scheduling questions that precede a trial.
Then Mr. Kessler, the co-executive chairman of the law firm Winston Taylor, whom Paramount retained for the deal, called the states. Let’s forgo those early legal battles and move to a trial, he suggested, according to three people familiar with the call. Paramount would agree to halt its merger until June at the latest, while the court case played out, clearing the way for a legal showdown that could redefine Hollywood.
Mr. Kessler proposed the delay because Paramount thought going to a trial was the fastest way to complete the deal, according to two people familiar with the matter. At the same time, the company had already faced a series of early setbacks in the states’ lawsuit, including two court-imposed temporary pauses on the acquisition.
“On some level, the parties saw the handwriting on the wall,” said Eric Talley, a professor at Columbia Law School who specializes in corporate law and governance. “Rather than trying to fight it out right now, they waved a very, very small white flag to say, ‘OK, we’re going to delay this on our own accord.’”
The impending courtroom face-off is likely to be one of the most closely watched Hollywood trials in years, involving high-profile figures like Mr. Ellison and his father, the Oracle co-founder Larry Ellison, who is backing his bid for Warner Bros. Opposition to the deal has mounted in the entertainment industry: The Writers Guild of America has challenged it on the grounds that it will hurt screenwriters.
The delay means that some of America’s most important news and entertainment organizations are trapped in limbo. The fate of CNN, which is owned by Warner Bros., is uncertain. Likewise for HBO, a linchpin of the Warner Bros. streaming business. The ultimate destiny of the Warner Bros. film studio, and its trove of iconic movies, is still up in the air.
The lawsuit from the states is one of the final hurdles to the deal, after the Justice Department declined to challenge the acquisition last month. The states argue that allowing Paramount to merge with Warner Bros. would give the combined company too much power over films released in theaters and, in particular, the blockbusters that account for a large portion of studio revenues. Paramount says that the states are ignoring the dominance of streamers like YouTube and Netflix, viewing the industry through a narrow lens.
Paramount and the states both declared victory after they agreed to the delay. In a statement, Paramount said the pause was “a significant win” because it set up “a direct path to a trial.”
Rob Bonta, California’s attorney general, called it “great news,” adding that the states were “eager to continue to make our case.” A spokesman for Warner Bros. Discovery had no comment.
Paramount’s proposal changes its position from just two weeks earlier. On July 13, the state attorneys general requested a voluntary stop on the deal while the litigation played out. Paramount wasn’t willing to freeze past September.
The states went to court for a short pause and won, with Judge Araceli Martínez-Olguín of the U.S. District Court for the Northern District of California saying that the states had made “a strong showing” that the deal would hurt competition.
The company then faced a fight to convince Judge Martínez-Olguín that she should not pause the deal indefinitely while she considered the lawsuit, a so-called preliminary injunction. Paramount asked for an extensive hearing in mid- to late August to make its case against the injunction, and pressed repeatedly for the chance to bring witnesses to that hearing.
That timeline, the states had said in a July 15 filing, was “rushed” and “patently unfair,” because it did not give their lawyers much time to discover new evidence. Instead, the states said a full airing of the evidence — complete with witnesses on the stand — was best saved for a later, full-blown trial.
On Monday, Judge Martínez-Olguín scheduled a hearing on the injunction for Aug. 3, earlier than Paramount wanted, and did not say whether she would allow testimony from witnesses.
On Thursday, Judge Martínez-Olguín asked Paramount, the states and the Writers Guild to meet to try to determine a schedule for arguments over the injunction. She asked them to return with an update the next day, and gave no hint of whether she was likely to give Paramount the hearing it requested.
Hours later, on the call with the states and the Writers Guild, Mr. Kessler proposed the pause that would allow the case to go to trial.
Bill Kovacic, a former Republican chairman of the Federal Trade Commission, said that if the judge had put an indefinite pause on the deal, it could have created the perception of “further setbacks” for the merger. Instead, by moving right to a trial, the company will be able to marshal its most persuasive case.
“One explanation is that they want more time to formulate the case, to tell the story as completely and favorably as they can,” he said, adding that the states will also be able to use the time to build out their arguments.
Paramount’s willingness to wait until the deal’s expiration in June was meant to signal to Judge Martínez-Olguín that the company was trying to be constructive, two people familiar with the case said. But Paramount will still look to move as quickly as possible within the court’s guidance.
A prolonged delay will be costly for Paramount. To get its deal approved, Paramount agreed to pay Warner Bros. Discovery shareholders $650 million for every quarter the deal doesn’t close, beginning in October. And if regulators blow up the deal, Paramount owes Warner Bros. Discovery a $7 billion breakup fee.
So far, Warner Bros. has largely deferred to Paramount’s approach to the legal battle with the states, according to two people familiar with the matter.
Hashing out a trial date will be the next twist in the legal saga. In the flurry of negotiations on Thursday and Friday, Paramount and the states agreed to submit their proposed trial schedules next Friday. But they appear to be far apart on that point: Paramount is targeting a November court date, and the states have said they want to go to trial sometime next year, two people familiar with the matter said.
