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A proposed class action alleging an illegal tie between high-demand and low-demand channels by cable and satellite companies is dismissed without prejudice because the complaint failed to plead an injury to competition, the U.S. Court of Appeals for the Ninth Circuit ruled March 30 (Brantley v. NBC Universal Inc., 9th Cir., No. 09-56785, 03/30/12).
Writing for the court, Judge Sandra S. Ikuta said, “Businesses may choose the manner in which they do business absent an injury to competition.” She explained that an injury to competition includes tying arrangements, but only when the tie harms existing competitors, creates barriers to entry for new competitors in the tied market, or facilities horizontal collusion.
Ikuta added that a contrary rule adopting the plaintiffs' logic would have undermined the ability of musicians to sell a hit single only through purchase of an entire album or a writer to sell a short story only through a collection of short stories. Indeed, she said, an alternate ruling could have called into question cable channels because “such channels are themselves packages of separate television programs.”
The court left unmentioned that on June 3, 2011, it previously released an opinion dismissing the case. That ruling drew a large number of amicus briefs supporting a rehearing by the panel or en banc. Ikuta wrote that opinion as well and was joined by Judges Pamela Ann Rymer and Consuelo M. Callahan.
The June 3 ruling was withdrawn Oct. 31, and the court appointed a new judge--Barry G. Silverman--to replace Rymer, who had died in the interim.
Richard Brunell, the director of legal advocacy for the American Antitrust Institute, Boston, and the author of an amicus brief supporting rehearing, told BNA April 4 that he had been optimistic that the withdrawn opinion meant the panel would reconsider its prior ruling, but the new ruling was very similar.
Brunell said the ruling was correct to argue that the mere fact that there was harm to consumers does not mean there was injury to competition. Nonetheless, he explained, the complaint dealt with a traditionally suspect tying agreement and the entire industry was engaged in the practice.
He said that the U.S. Supreme Court's ruling in Leegin Creative Leather Products Inc. v. PSKS Inc., 551 U.S. 877, 75 U.S.L.W. 4643 (2007) said there could be a violation of the antitrust laws if there was an industry-wide adoption of resale price maintenance. The Ninth Circuit should have similar concerns in this tying case, which is also a vertical agreement raising antitrust concerns.
Brunell concluded that the opinion appeared to be “the reversal of the mantra that antitrust law is to protect consumers, not competitors.”
The practice of bundling channels has drawn attention from Congress and the Federal Communications Commission, which both have studied efforts to require companies to offer customers “a la carte” channel offerings.
Parents Television Council President Tim Winter, Los Angeles, who runs a Cable Choice campaign on the issue, told BNA April 4 that he had hoped the antitrust lawsuit would be successful because the cable industry had always been able to defeat legislative and regulatory efforts to require unbundling of channels.
Winter said that AT&T had attempted to offer a la carte channels to customers through its U-verse product, but it was “slammed on that and forced to sell in bundles” because programmers otherwise would not provide the company with channels.
He said that new entrants--particularly the small, privately-owned, family-friendly cable channel operators he worked with--could not obtain a fair price from cable companies that would allow them to enter the market because of the current system.
Winter added that a study found bundling costs consumers about $100 million a year.
Lara Pritchard, vice president of communications for Time Warner Cable, Northeast, told BNA that it would not comment on the ruling. Glenn D. Pomerantz, Munger Tolles & Olson LLP, Los Angeles, as well as the National Cable & Telecommunications Association did not respond to BNA's request for comment on the ruling.
The class action plaintiffs were on their third amended complaint at the time of the ruling. The first amended complaint was dismissed without prejudice for failure to show injury to competition, which led to a second amended complaint that alleged the bundling excluded independent programmers from the programming market that includes companies such as NBC Universal and Fox Entertainment Group.
The court explained that plaintiffs abandoned that approach after preliminary discovery efforts, which programmers and distributors--such as Time Warner and Echostar--said showed there was no evidence of foreclosure of competition in the programming market.
The parties stipulated that a third amended complaint would be allowed, but any dismissal would be with prejudice.
The district court and Ninth Circuit dismissed the claim.
The court explained that the tying claim would be analyzed under the rule of reason. The plaintiffs were required to show:
The issue at the heart of the tying case was whether the plaintiffs had shown injury to competition. The court also explained that tying involves a supplier selling a “tying product” only on the condition that a “tied product” is purchased, which in this case would be high-demand and low-demand channels, respectively.
Not all tying arrangements are illegal or harm competition, the court held. Only those ties that harm existing competitors, create barriers to entry for new competitors in the tied product market, or facilitate horizontal collusion are illegal.
Instead, the court said, the plaintiffs cited harms to consumers through reduced customer choice and increased prices, but “[b]oth effects are fully consistent with a free, competitive market.” As Leegin showed, the use of resale price maintenance to eliminate price reductions, and thereby raise prices, can be legal if no anticompetitive effect is shown.
Plaintiffs' allegations of decreased consumer choice and higher prices instead only provide support for the standing requirement of the tying claim, the court held.
The class also said that the industrywide nature of the practice raised injury to competition concerns. True, the court said, Leegin does support the argument that an industrywide practice can harm competition, but the plaintiffs failed to explain in the complaint how the widespread practice of bundling low-demand and high-demand channels injured competition.
Maxwell M. Blecher, Blecher & Collins PC, Los Angeles, argued for the class. Pomerantz argued for the programming and distributor defendants.
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