Characterizing it  as “a consumer protection class action masquerading as an antitrust suit,” in  Brantley et. al. v. NBC Universal, Inc. et. al., the Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an antitrust suit brought by a purported class of consumers against television programmer/network owners, such as NBC Universal and Fox Entertainment Group, (“Programmers”), and cable and  satellite operators (“Distributors”) of systems to which the consumers subscribed.[1]  The Programmers were charged with violating § 1 of the Sherman Act by tying the channels they license to the Distributors to “programming packages” that grouped their popular “must-have” channels with less-popular channels that the Distributors did allegedly not desire.  The Distributors were charged with passing on the “programming packages” to consumers and not allowing them to purchase individual channels “a la carte.” According to the Complaint, the Programmers’ tying practice limited the Distributors’ ability to offer individual channels to consumers, which allegedly would eventually raise prices to consumers and destroy consumer choice.

The  Ninth Circuit panel applied a rule of reason analysis because the consumer plaintiffs did not dispute that such an analysis was appropriate, and  affirmed dismissal of the Complaint with prejudice, agreeing with the district court  that the plaintiffs  had failed to allege  the injury to competition necessary to support a rule of reason  Sherman Act claim.[2]  In doing so, the Ninth Circuit reaffirmed the well-established rule that harm to consumers, while necessary to an antitrust violation, is not by itself sufficient to support a Sherman Act suit.[3]  

The Complaint

Programmers, such as NBC Universal, create television shows and sell them to the Distributor defendants and others through their owned television and cable  “channels.”[4]  Each major Programmer owns several channels, and markets them to the cable and satellite operators (“Distributors”)  in a bundle.  For example, to get access to the NBC network,  a cable system must also accept all the other channels in the NBC Universal group (such as MSNBC, CNBC, and Bravo).[5]  The cable operator Distributor then offers the entire group of channels to consumers.  Thus, the Distributors allegedly must accept the entire bundle of channels offered by the Programmer and, in turn, have offered that bundle to consumers rather than individual channels--a practice generally called “full-line forcing”--a form of tying.

It will come as no surprise to television viewers that the channels in each Programmer’s arsenal are of differing levels of popularity.  For example, the Plaintiffs dubbed channels such as the NBC network the “must-have” channels, and the other channels in the NBC package as “low-demand” channels.[6]  As noted above, the Programmers’ full-line forcing according to Plaintiffs, prevented Distributors from purchasing single “must-have” channels and, allegedly, forced the defendant  Distributors to sell only multi-channel cable packages to consumers.  Without these limitations, Plaintiffs contended, Distributors would be able to purchase single channels and consumers would be able to purchase television stations from the Distributors  at lower subscription prices on an “a la carte” basis.[7]

Based upon these allegations, the consumer Plaintiffs contended that “the challenged bundling practices limit Distributors’ methods of doing business and reduces consumer choice, while raising prices.”[8]  This allegedly violated §1 of the Sherman Act,[9]  which proscribes unreasonable restraints on trade. 

The District Court

The district court granted a 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 antitrust rule of reason.[10]  Plaintiffs then filed an Amended Complaint, alleging that the defendant Programmers’ practices foreclosed independent programmers from entering and effectively competing with them.  This time the court denied Defendants’  Motion to Dismiss because the Amended Complaint had adequately pleaded that competing Programmers had been injured, and the court granted limited initial discovery as to the alleged injury to competition.[11] 

After completing initial discovery, however, the Plaintiffs’ elected to abandon their allegations that independent programmers had been excluded from the market, and filed a Third Complaint alleging only harm to the consumer class.[12]  A stipulation was entered to the effect that if the Defendants’ subsequent Motion to Dismiss was granted, Plaintiffs would not be permitted to file yet another Complaint.[13]  The district court did, in fact, grant Defendants’ third Motion to Dismiss, declaring  that the Plaintiffs had again failed  to allege  injury to competition.  The appeal to the Ninth Circuit followed.

The Ninth Circuit Decision

At the outset, the Ninth Circuit stressed  that the Plaintiffs’ failure to allege that the challenged “tying” (or “bundling”)[14] claims had excluded any Programmers of low-demand channels (the tied product) from the market.  As a result,  there was no allegation of injury to competition.[15]  It was insufficient to claim that “the sale of multi-channel packages harms consumers by  limiting the manner in which the cable and satellite systems compete with one another because they allegedly  are unable to offer individual channel programming,  thereby  reducing consumer choice, and ultimately increasing prices.”[16]  

Though the Plaintiffs did allege antitrust injury to consumers, that was insufficient alone to allege the required harm to competition.[17]  According to the Ninth Circuit, “[a]lthough  [the consumer] Plaintiffs may be required to purchase bundles that include unwanted channels in lieu of purchasing individual cable channels, antitrust law recognizes the ability of  businesses to choose how to sell their products. The Distributors were not forced to resell the “bundled” networks in packages, but chose to pass on the “bundles” to consumers. Since it was stipulated that no competing  Programmers were excluded from the market by the practice, competition had not been harmed either at the Programmer level or at the cable or satellite system level, since the Distributors voluntarily  had chosen to pass on the packages to consumers.

The Court recognized that the case was  somewhat similar to the Supreme Court’s decision almost 40 years ago in United States v. Loew’s, Inc.,[18] in which the Antitrust Division of the Department of Justice had successfully challenged major film distributors that had conditioned the licensing of popular feature films  to television stations  only if the stations  agreed to accept a block containing unwanted films, as well.[19]  According to the Ninth Circuit, in Loew’s, the Supreme Court specifically held that the full line forcing at issue in that case had forced  television stations not to accept movies from other distributors. Here, Plaintiffs had not alleged any such injury to competition from the alleged restrictive  arrangements.  Plaintiffs had not alleged that the cable and satellite systems were foreclosed from dealing with other programmers and channel owners.  In fact, such an allegation had specifically been disclaimed after limited discovery had taken place.[20]

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.[21]  Again, the court noted that harm to consumers in not enough, even in the face of a pervasive vertical tying arrangement.[22]  Although the Complaint did allege that higher prices resulted from the practice, it “included no allegations that [the sale of channels] in bundles has any effect on other programmers’ efforts to produce competitive programming channels or on [cable or satellite system] competition on cost and quality of service.”[23] 

Conclusions

In this decision, the Ninth Circuit confirmed the precept that the Sherman Act is not meant to protect consumers or individual competitors as such, but overall competition in the market in which a defendant competes.  Even in the face of a pervasive practice of vertical agreements that allegedly  limit consumer choice and may raise prices, antitrust  plaintiffs must show that competition in the market as a whole  is in someway harmed, usually  by showing that competitors of the defendant are being excluded or cannot enter the market as a result of the challenged practice.  Here, the plaintiffs failed to avoid a dismissal motion by the very  nature of cable television itself.  As anybody with a cable box can attest, the number of cable channels has proliferated substantially in recent years.  In a consumer market  that apparently has little or no capacity limitations, tying arrangements cannot effectively exclude other competitors, because  the suppliers to consumers--the cable and satellite systems-- can always just increase the number of channels they offer.   Although  that may have the regrettable effect of raising consumer prices and/or bombarding them  with a proliferation of programming, it is not, in and of itself, an antitrust violation.