iIn Brantley et al. v. NBC Universal Inc.[1] the Ninth Circuit has for the second time affirmed the dismissal of a putative class action of retail cable and satellite television subscribers alleging violations of Section 1 of the Sherman Act. Plaintiffs alleged that television programmers and distributors had illegally tied the purchase of popular "must have" channels to less desirable, low demand channels, requiring subscribers to purchase expensive multi-channel packages as opposed to choosing channels in an à la carte fashion. According to the suit, the tying of the "must have" and low demand channels reduced consumers' choices and drove prices higher. Importantly, plaintiffs did not allege in their Third Amended Complaint that the tying of the "must have" and low demand channels foreclosed competition with independent programmers. Accordingly, after conducting a detailed rule of reason analysis, the Ninth Circuit affirmed the District Court's dismissal of the Third Amended Complaint due to the Plaintiffs' failure to properly allege injury to competition.[2]
Background
Programmers, such as NBC Universal, create television shows and sell them through their own television and cable channels to distributors, such as Time Warner Cable.[3] Indeed, each major programmer owns several channels and markets them to the cable and satellite operators, the "distributor" defendants here, in bundles. For example, to get access to the NBC Network, a distributor must also accept all the other channels in the NBC Universal group, such as MSNBC, CNBC and Bravo.[4]
Plaintiffs termed the sale from programmers to distributors as the upstream market. Distributors then offer the groups of channels to consumers. Plaintiffs referred to this as the downstream market. According to plaintiffs, the distributors necessarily offer that bundle of tied channels to consumers in the downstream market rather than allowing the consumers to purchase individual channels.[5] Plaintiffs contended that the defendants' tying and bundling practices violated the Sherman Act because the conduct reduces consumer choice and increases the prices paid for both the "must have" and low demand channels.[6]
The District Court Decision
The district court granted defendants' motion to dismiss the initial complaint with leave to amend because plaintiffs had failed to show that their alleged injuries were caused by a cognizable injury to competition, as required under the rule of reason test. Plaintiffs filed an amended complaint alleging that the programmers' practices foreclosed independent programmers from entering the upstream market and competing for low demand channels and programs. The district court denied the motion to dismiss the amended complaint because the plaintiffs had adequately pleaded that competing programmers had been injured. The court granted limited initial discovery into the alleged injury to competition.
After completing the initial discovery, the plaintiffs elected to amend their allegations that independent programmers had been excluded from the market. In a joint stipulation among the parties, plaintiffs filed a Third Amended Complaint which deleted all allegations that the programmers' and distributors' contractual practices foreclosed independent programmers from participating in the upstream market.[7] Defendants then filed another motion to dismiss for failure to state a claim and the district court dismissed the Third Amended Complaint with prejudice, finding that plaintiffs failed to allege any cognizable injury to competition.[8]
The Initial Ninth Circuit Decision
The Ninth Circuit initially affirmed the district court's dismissal with prejudice in an opinion dated June 3, 2011.[9] In that opinion, the appellate court reviewed the defendants tying of "must have" and low demand channels under the rule of reason test. It found that while the plaintiffs had alleged antitrust injury to consumers, that was insufficient by itself to allege the required harm to competition in order to sustain a claim under Section 1.[10]
According to the Ninth Circuit, while the plaintiffs are required to purchase bundles that include unwanted channels tied to "must have" channels in lieu of purchasing individual cable channels á la carte, antitrust law recognizes the ability of a business to choose how to sell its products.[11] Importantly, nothing in the Third Amended Complaint alleged that the distributors were forced to resell the bundled networks in packages. Quite the contrary, the distributors simply chose to pass on the bundles to consumers.[12]
The Ninth Circuit also rejected the argument that the challenged practices were so pervasive in the market that in the aggregate they constituted injury to competition. Although the Third Amended Complaint did allege that the result of the practice was higher prices, the Third Amended Complaint included no allegations that the bundled sale of "must have" and low demand channels had any affect on competing programmers efforts to produce competitive programming channels or a distributor's attempt to compete for customers.[13]
The Response To the Initial Ninth Circuit Decision
The initial Ninth Circuit opinion did not conduct an in depth analysis into the impact of the defendants' tying practices on the relevant market or the potential impact on competition. Rather, the Ninth Circuit appeared to gloss over the issue, relying upon the idea that vertical restraints that do not foreclose competitors or lead to horizontal agreements must be legal.
Numerous Amici Curiae filed briefs with the Ninth Circuit urging it to withdraw and reexamine the matter, claiming that the decision was too narrow in its analysis of whether vertical restraints would result in injury to competition. According to the American Antitrust Institute, for example, "the Panel's decision distorts the concept of "injury to competition" to immunize vertical restraints from antitrust liability unless they excluded rivals from the market or facilitate cartels. If left standing, this unprecedented constriction of antitrust law will impair the ability of private plaintiffs and the government to protect consumers against all manner of vertical restraints that have collusive effects including tying arrangements that impair consumer welfare."[14]
Amici were concerned because the Ninth Circuit's holding suggested that all possible manners of vertical restraints, such as resale price maintenance agreements, territorial distribution agreements, most favored nation, or other types of vertical agreements, would necessarily become per se lawful unless they excluded rivals from the market or supported an otherwise unlawful horizontal agreement. In light of the numerous Amici briefs, the Ninth Circuit withdrew its initial decision in October 2011, reconstituted the Panel, and issued a new opinion on March 30, 2012.
The Second Ninth Circuit Opinion
As in its initial decision, the Ninth Circuit reviewed the Section 1 claims under the rule of reason test.[15] It noted, however, that while in certain circumstances tying arrangements can be reviewed in the per se context, the plaintiffs had not pleaded their Section 1 Sherman Act claim as a per seviolation of Section 1.[16] The court added that under the rule or reason, the potential injury to competition threatened by tying arrangements is that the arrangement will either harm existing competitors or create barriers to entry for new competitors in the market for the tied product. In light of arguments from Amici, the court declared in more detail that market conditions might be such that a specific tying arrangement does not have anticompetitive effects, or may be a response to a competitive market rather than an attempt to circumvent competition. As a result, proper allegations setting forth injury to competition were essential under the rule of reason.[17]
In light of the fact that tying arrangements may have procompetitive effects, the Ninth Circuit stated that a plaintiff in a rule of reason tying case cannot succeed in successfully alleging injury to competition simply by alleging the existence of the arrangement. Rather, the court explained that the plaintiff must allege an actual adverse effect on competition caused by such an arrangement. Of most importance, plaintiffs may not substitute injury to themselves as the basis for establishing injury to competition. Plaintiffs must allege injury to competition and they must allege that the actual injury they sustained constitutes antitrust injury, that is, injury that has arisen directly as a result of the alleged violation and is of the type of injury the practice involved causes to competition.[18]
Ultimately, the Ninth Circuit did not alter its initial ruling. The Panel stated that the plaintiffs had not alleged that the tying of "must have" and low demand channels excluded other sellers of low demand channels from the market or raised any barriers to entry for new programmers.[19] As a result, plaintiffs had not pleaded injury to competition, rather than just injury to themselves.[20] Accordingly, the Panel affirmed the dismissal.
With a nod to the Amici briefs filed on the issue, the Panel took care to explain more clearly that allegations that an agreement merely reduced choices or increased prices did not sufficiently allege an injury to competition. A plaintiff must couple together reduced choice and high prices with some other actual anticompetitive effect.[21]
The Ninth Circuit also addressed plaintiffs' argument that because most or all of the programmers and distributors engaged in the tying practices, this necessarily gave rise to an injury to competition. The court noted that it would not rule out the possibility in some other case that competition could be injured or reduced by a widely applied practice. However, under the facts as pleaded, plaintiffs had not established that the widespread practice has had any impact on programmers or distributors trying to enter the market or introduce other low demand channels.[22]
Putting it simply, the Third Amended Complaint focused solely on the alleged injury to consumers alone, which does not qualify as injury to competition. Under the rule of reason, using a tying arrangement to force a consumer to purchase a product that the consumer would not otherwise have purchased is not an antitrust violation because no portion of the market that would otherwise have been available to competing sellers has been foreclosed unless the consumer alleges it had been planning on purchasing a competing product.
Conclusion
The Ninth Circuit's second Brantley opinion does provide a more in depth analysis of what constitutes injury to competition in a rule of reason case instituted by consumers. It does not, however, make it any easier for a plaintiff to plead a tying case or solve consumer protection issues through an antitrust claim. In light of the Ninth Circuit's reference to the requirements for pleading and proving a per se tying claim, it remains to be seen whether that type of claim could be used by consumers to challenge the tying of "must have" and low demand channels. For now, subscribers of cable and satellite television services in the Ninth Circuit will have to continue to take the good with the bad, so far as television options are concerned.
[1] 675 F3d. 1192 (9th Cir. 2012)
[2] Id. at 1204.
[3] Id. at 1195.
[4] Id.
[5] Id.
[6] Id. at 1196.
[7] Id.
[8] Id.
[9] 649 F. 3d 1078 (9th Cir. 2011)
[10] Id. at 1086.
[11] Id. at 1085-86.
[12] Id. at 1086.
[13] Id.
[14] See BRIEF FOR AMICUS CURIAE AMERICAN ANTITRUST INSTITUTE SUPPORTING PLAINTIFFS-APPELLANTS' PETITION FOR REHEARING AND REHEARING EN BANC, filed April 20, 2012 at p. 4.
[15] 675 F.3d at 1197-98.
[16] Id. at 1197 n. 7.
[17] Id. at 1198.
[18] Id. at 1200.
[19] Id. at 1201.
[20] Id.
[21] Id. at 1203.
[22] Id. at 1203-04.
