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From Antitrust Law Daily, September 6, 2016

Time Warner subscriber can’t rewind dismissal of cable box tying claims

By Greg Hammond, J.D.

Various alleged subscribers to cable television services from Time Warner entities could not proceed with claims that Time Warner illegally tied certain premium cable television services to the leasing of interactive set-top cable boxes. The U.S. Court of Appeals in New York City affirmed the lower court’s order dismissing the complaint, finding that the subscribers failed to adequately plead facts that, if proven, would establish that: (1) the set-top cable boxes and the premium programming they transmit are separate products for the purposes of antitrust law; and (2) Time Warner possesses sufficient market power in the relevant markets to establish an illegal tie-in (In re Set-Top Cable Television Box Antitrust Litigation, September 2, 2016, Winter, R.).

The subscribers claimed that Time Warner used its market power over premium cable services in 53 United States markets to force its subscribers to lease set-top boxes or bi-directional cable boxes from Time Warner, to be returned if or when the subscription ends, as a condition of subscribing to the premium cable services. Consequently, consumers are unable to end a subscription and use their own cable box to buy a subscription from a different provider or receive that programming in another area. The district court dismissed the complaint on the grounds that the complaint failed to distinguish between markets in which Time Warner had competition for premium cable services, or to distinguish between Time Warner’s market power in basic cable services and its market power in premium services. The subscriber plaintiffs appealed.

Separate product markets. The complaint alleged that but for Time Warner’s unlawful tying requirement there would be a thriving market in which consumers would have a choice in their purchase of cable boxes. However, the court found, the complaint lacked 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 in markets where premium cable services are available through competing fiber optic networks that do not use set-top boxes.

Subscriber plaintiffs claimed that the set-top boxes and premium cable services were separate products because: (1) existing technology permits the sale of remotely programmable bi-directional cable boxes at retail; (2) Time Warner does not manufacture its own bi-directional cable boxes; (3) Time Warner separately itemizes charges for leasing bi-directional cable boxes and providing cable television services on consumers’ bills; (4) bi-directional cable boxes are sold separately at retail in markets outside of the United States, specifically South Korea; and (5) modems are sold separately from Internet services in the United States.

None of the allegations were sufficient to demonstrate separate product markets, according to the court. The first and second allegations addressed supply-side considerations, rather than the character of consumer demand, the court first determined. The third allegation, concerning separate itemized charges for cable boxes and cable television services, could not lead to an inference that Time Warner considers cable services and set-top boxes as separate products because the Federal Communications Commission (FCC) passed a rule requiring Time Warner to separately itemize these charges. The fourth allegation—concerning the availability of retail bi-directional cable boxes in some markets outside of the United States—was insufficient because there were no specific allegations that those markets were sufficiently similar to the U.S. market that it would be plausible to infer that Time Warner’s tie-in, rather than other market conditions, explained the retail unavailability of such cable boxes. Lastly—with regard to the fifth allegation—obvious differences between the provision of cable and Internet services negated any inference as to separate markets for bi-directional cable boxes.

Regulatory environment. The complaint also acknowledged that Congress specifically addressed the tie-in issues arising from the sale of cable services with cable boxes and the FCC has been deeply involved in this issue throughout the time period covered in the complaint. In particular, the FCC had unsuccessfully proposed regulations to create separate markets for set-top boxes and cable services, but its historic failure to do so over the time period covered by the complaint bolstered the appellate court’s conclusion that the subscriber plaintiffs have not plausibly alleged separate product markets for bi-directional cable boxes and premium cable services. Further, the FCC implemented a regulation that caps the price Time Warner or other providers may charge to lease set-top cable box equipment to consumers. Such a regulatory price control on the tied product, according to the court, makes the plaintiffs’ tying claim implausible as a whole.

Market power. Finally, the complaint failed to plausibly allege market power in the relevant product and geographic markets, the court concluded. The subscriber plaintiffs alleged that the major cable providers in the aggregate possess power over the market for basic cable in the United States; the firms do not generally compete with each other within the specified local markets; and because Time Warner "controls" the markets in which it provides basic cable services and because the provision of premium cable services relies upon the same basic infrastructure as basic cable services, Time Warner "naturally" has market power over premium cable services. These allegations were insufficient, according to the court, because they conflated the markets for basic and premium cable. The subscribers could not plausibly derive Time Warner’s market power over premium cable services from broad allegations about the nationwide market for basic cable.

Further, allegations that Time Warner competes with other, non-cable companies in the provision of premium cable services in at least 22 geographic markets, were insufficient to demonstrate market power, because no facts were alleged concerning Time Warner’s share of these markets or how the presence of non-cable competitors affected Time Warner’s power over price in those markets.

Dissent. In a dissenting opinion, Justice Droney noted that the complaint plausibly alleged a separate product market for consumer-purchased cable boxes, which was suppressed by Time Warner’s anticompetitive conduct. "In concluding otherwise, the majority imposes too high a bar on Plaintiffs," Justice Droney wrote.

The case is No. 11-2512-cv.

Attorneys: Robert Ira Harwood (Harwood Feffer LLP) for Angela Kaufman. Margaret Moran Zwisler (Latham & Watkins LLP) for Time Warner and Time Warner Cable, Inc.

Companies: Time Warner; Time Warner Cable, Inc.

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