Last week, the U.S. Court of Appeals for the Second Circuit upheld a lower court decision dismissing a class action suit against Time Warner Cable, Inc. that accused the cable company of tying premium cable services to leasing set-top boxes. In a split decision, the court concluded that the complaint against Time Warner Cable failed to assert facts that, if true, would plausibly establish that: (1) set-top boxes and the premium programming they transmit are separate products for antitrust purposes; and (2) Time Warner Cable possesses sufficient market power in the relevant markets to establish an illegal tie-in.

This case dates back several years, with the original complaint filed in August 2008. In the initial complaint, plaintiffs alleged that Time Warner Cable violated the Sherman Act by requiring purchasers who bought a television channel package to lease the cable boxes necessary to transmit that programming from the company. After a number of similar suits were filed in other districts, the U.S. Judicial Panel on Multidistrict Litigation transferred the suits to New York federal court. There, a district court judge ultimately dismissed the third amended complaint, finding that the plaintiffs had not adequately pleaded that Time Warner Cable had the requisite market power over the applicable premium cable markets to commit an antitrust violation. The Second Circuit’s opinion is a result of an appeal of that dismissal.

On the issue of separate product markets, the court determined that the complaint “lacks any allegation that there have ever been separate sales of set-top boxes and cable services, whether or not ‘premium,’ in the United States, even in markets where cable providers face competition and, more specifically, in markets where Premium Cable Services are available through competing fiber optic networks that do not use set-top boxes.” As support, the court highlighted the Federal Communication Commission’s (“FCC’s”) long history of regulation of set-top boxes, as well as the FCC’s acknowledgement that its repeated efforts to spur a retail market have failed. The court also cited an FCC regulation that caps the amount that providers can charge to lease a set-top box. The court stated that it “doubt[s] that Time Warner would attempt to monopolize the market for bi-directional cable boxes when an FCC regulation caps the amount of profits that Time Warner may reap from that market.”

On the issue of market power, the court held that the plaintiffs “cannot plausibly derive Time Warner’s market power over Premium Cable Services from broad allegations about the nationwide market for basic cable,” concluding that the complaint “alleges no particular facts bearing on Time Warner’s share of the market for premium, two-way services, as opposed to basic cable services.” (Emphasis in original). The court also noted that while the complaint alleged that Time Warner competes with other, non-cable companies in the provision of Premium Cable Services in at least 22 geographic markets, “[n]o facts [were] alleged…concerning Time Warner’s share of these markets or how the presence of non-cable competitors affects Time Warner’s power over price in these markets.”

In his dissent, Judge Droney stated that dismissal of antitrust claims on the pleadings should be granted sparingly, and expressed his opinion that the plaintiffs sufficiently pleaded both separate product markets and sufficient market power.

The opinion comes as the FCC is considering new rules to spur competition among video navigation devices.