On February 24th, a Seventh Circuit Court of Appeals panel ruled unanimously that a District Court should not have dismissed a monopolization and tying arrangement suit brought against Comcast by Viamedia, a supplier of advertising services to cable companies and other television content distributors. Viamedia had claimed that Comcast excluded it from the cable television advertising markets in the Detroit, Chicago, and Hartford, Ct. metropolitan areas by refusing to work with programming distributors in those markets who do not use Comcast sales representatives in order to gain access to Comcast-controlled “Interconnects.” The panel ruled 2-1, however, that summary judgment dismissal should not have been granted on the claim that the conduct also constituted an unlawful tying arrangement.
Programming distributors can sell spot cable television advertising through an in-house sales staff such as Comcast’s, which also is vertically integrated downstream into programming distribution, or through independent representatives such as Viamedia. All the programming distributors in a geographic market join together to form an “Interconnect,” which is a cooperative that serves as a clearinghouse to buy advertising time on cable networks. The Interconnect is controlled by the largest distributor in the market. After a number of acquisitions, Comcast now controls Interconnects in 15 of the 25 largest “designated market areas” (“DMA’s”) in the U.S.
In 2011, Comcast informed Viamedia, an independent advertising representative, that after its Interconnect agreements expired in 2012, Viamedia would no longer have access to Comcast’s Interconnects in the Chicago, Detroit, and Hartford DMA’s and, according to Viamedia, Comcast immediately began to pursue Viamedia’s clients in those markets. Viamedia brought suit under Section 2 of the Sherman Act, claiming that Comcast’s actions effectively excluded Viamedia from the three applicable geographic markets. It thereafter amended its suit to add a claim that Comcast had entered into an illegal tying arrangement with two of Viamedia’s clients—Wide Open West (WOW!) and RCN—which are also competitors of Comcast’s programming distribution arm, by forcing them to enter into exclusive advertising representation agreements (“ad rep services”) with Viamedia as a condition to maintaining Interconnect access in their geographic markets.
The district court dismissed the refusal to deal claim for failing to state a Sherman Act claim, and granted summary judgment dismissing the tying claim. Viamedia appealed.
The Seventh Circuit Opinion
Of interest, The U.S. Department of Justice’s Antitrust Division filed an amicus brief stating that while it was not taking sides in the case, the Seventh Circuit should rule as a matter of law that a monopolist’s refusal to deal with a competitor does not violate the Sherman Act “unless it would make no economic sense” for the monopolist to do so except to eliminate or reduce competition— a standard that might actually be more favorable to monopolists than the current Supreme Court Trinko standard.
The Seventh Circuit panel, in a decision written by Judge Hamilton, was unanimous in ruling that the district court should not have dismissed Viamedia’s refusal to deal claim, although Judge Brennan, who dissented to the reversal of the district court’s summary judgment dismissal of the tying arrangement claim, made it clear that he had participated in the decision to reinstate the refusal to deal claim, which had been dismissed on the pleadings, solely because Viamedia had plausibly alleged that the refusal to deal “had no valid business purpose.”
Judge Hamilton, writing the panel’s opinion, declared that Viamedia had in fact presented evidence that its customers did not switch to Comcast because it offered a better-quality or lower-priced service, but because Comcast used its monopoly power over the Interconnects to effectively force them to switch from Viamedia to Comcast or not have access to Comcast’s Interconnects they needed to compete effectively. According to Judge Hamilton, WOW! And RCN “did not go willingly into Comcast’s arms,” and in fact “they “had economically rational reasons for seeking to avoid this entanglement” with a supplier that also was a dominant competitor “which would naturally have divided loyalties.”
Secondly, in achieving its allegedly monopolistic purposes, Comcast terminated a long term voluntary relationship with Viamedia, and during a three year period that Viamedia as well as RCN and WOW! did not have access to the Interconnects, Viamedia had presented evidence that Comcast lost about $40 million in revenues. Thus, according to the panel opinion, “Comcast deliberately adopted a strategy it knew would cost Comcast itself millions of dollars in the short run, but the strategy eventually gave it monopoly power in these local markets for advertising representation services.”
On appeal, the parties agreed to the three geographic markets noted above, as well as the fact that Comcast had monopoly power in those markets. The key issue on the refusal to deal claim was whether Comcast’s refusal to deal with Viamedia violated Section 2 of the Sherman Act as monopolization. The Seventh Circuit panel noted that there are “limited circumstances” under which such conduct violates Section 2 of the Sherman Act, and that the claims made by Viamedia met such requirements. The panel pointed out that Comcast’s conduct was similar to the facts in Lorain Journal Co. v. United State. There, the Supreme Court ruled that a monopolist newspaper violated Section 2 of the Sherman Act when it threatened to reject advertising from customers that advertised on a radio station that had entered the market in competition with a radio station owned by the newspaper. The Supreme Court ruled that the conduct constituted an unlawful successful effort “to destroy and eliminate” a competitor, “with no apparent efficiency justification.” The panel pointed out that Robert Bork had described Lorain Journal as “entirely correct” in his famous book The Antitrust Paradox.
The Seventh Circuit panel then relied on Aspen Skiing Co. v. Aspen Highlands Skiing Corp., as further support for its conclusion that the refusal to deal claim should not have been dismissed. Recognizing that the Supreme Court had declared in Verizon Communications, Inc. v. Law Offices of Curtis v. Trinko, LLP, that Aspen Skiing was “at or near the outer boundary” of Section 2 liability, the panel provided a chart identifying thirteen aspects of Comcast’s challenged conduct which, if proven at trial, went even further than the unlawful conduct in Aspen Skiing. Additionally, the panel responded to Comcast’s contention that it had valid business purposes for its conduct by commenting that those contentions should be considered by a jury.
The Court of Appeals reversed 2-1 the district court’s granting of summary judgment as to the tying claim, with Judge Brennan dissenting. Viamedia contended that Comcast conditioned the sale of Interconnect services (the tying product) to RCN and WOW! on their agreement to purchase all of their ad rep services (the tied product) from Comcast. Viamedia alleged that Comcast inserted itself between Viamedia and the two programming distributors by: (1) denying Viamedia access to the Comcast-controlled Interconnects, and : (2) then using its control over the Interconnects to demand that its smaller programming distributor competitors turn over to Comcast 100% of their spot advertising, including the sale of local advertising spots, an area in which Comcast and the two programming distributors had competed. According to Viamedia, this two-front strategy was successful, with Comcast gaining a monopoly in the ad rep services market, and also control over and insight into its programming distributor competitors that it could not have achieved otherwise.
The majority of the panel concluded that summary judgment should have been denied because Viamedia had offered sufficient evidence that Comcast had illegally tied the purchase of its ad rep services to the Interconnect access it already controlled. The panel majority ruled that Interconnect services and ad rep services are different functionally, and that there was separate demand for both services. It then referred to considerable evidence that Comcast had conditioned the programming distributors’ access to the Interconnects on hiring Comcast as their ad rep, and that Comcast had obtained a monopoly in both markets as a result of the challenged tying arrangement. Accordingly, summary judgment on the tying claim was reversed.
The majority then set out the steps the district court should take in the rule of reason analysis that it would have to conduct on remand: first, the evidence that supports a conclusion that the practices challenged constituted anticompetitive conduct; then, Comcast’s procompetitive justifications that justified the conduct; and finally, Viamedia’s support for a contention that there are less restrictive alternatives that could have achieved such benefits. Citing case law, the majority declared that customers and competitors, the two categories of allegedly injured parties, traditionally have been found to have standing in antitrust suits under the Sherman Act. Concluding that the factual disputes in the case were numerous, the lower court judgment was reversed and the case remanded for further proceedings.
As noted earlier, Judge Brennan dissented on the reversal of the dismissal of the tying claim. According to Judge Brennan, after their agreements with Viamedia expired in 2005, RCN and WOW! both voluntarily “sought exclusive, full-turnkey relationships with Comcast. Neither RCN nor WOW! ever sought Interconnect only services. The record contains no evidence that Comcast has ever declined” a programming distributor’s request for Interconnect-only services, and that 14% of Comcast’s agreements with such distributors have been Interconnect-only. For this reason, Judge Brennan concluded, Viamedia did not have standing to bring a tying suit because its injury was caused by Comcast’s refusal to deal, not any tying arrangement. Moreover, Viacom’s injury was injury to an individual competitor, not injury to marketwide competition.
The Comcast case, if not settled, may be far from over. First, Comcast may request En Banc review by the Circuit, and if denied may file a certiorari petition with the Supreme Court. If neither action is taken or successful, the case has been remanded for pre-trial discovery on the refusal to deal claim and/or a jury trial on the tying claim.
Of substantive interest, the DOJ’s position in the Viamedia case is that a monopolist’s refusal to do business with a competitor does not violate Section 2 of the Sherman Act, unless three factors are present: it has terminated a long-term voluntary business arrangement, it has foregone profit, and finally, has failed to come forward with evidence showing that there were efficiency reasons for its conduct.