- Ninth Circuit holds that plaintiffs, cable and satellite TV subscribers, fail to state an antitrust claim against television programmers and distributors where the complaint alleges bundling of “high demand” and “low demand” channels and alleges injury to consumers, but fails to allege injury to competition.
The Ninth Circuit affirmed the district court’s dismissal of plaintiffs’ third amended complaint with prejudice for failure to state a claim for relief under Section 1 of the Sherman Act. Specifically, the Ninth Circuit agreed with the district court that the complaint failed to allege any cognizable injury to competition.
Plaintiffs alleged that programmers, entities that own television programs and channels, and sell programming wholesale to distributors in the “upstream market,” have two categories of channels: "must-have," high-demand channels with a large number of viewers, and a group of less desirable, low-demand channels with low viewership. Plaintiffs alleged that programmers derive market power from their "must-have" channels because distributors, entities that sell programming to consumers in the “downstream market,” can’t market and sell a programming package without those channels. Plaintiffs alleged that programmers exploit this market power by bundling the high and low demand channels together for sale to distributors. Plaintiffs claimed that this bundling violated Section 1 of the Sherman Act by reducing consumer choice and inflating subscription fees.
The district court dismissed plaintiffs’ initial complaint for failure to show that their alleged injuries were caused by an injury to competition. Plaintiffs alleged in their amended complaint that the programmers' practice of selling bundled cable channels prevented independent programmers from entering and competing in the upstream market for programming channels. After the district court denied defendants' motion to dismiss that complaint, holding that plaintiffs had adequately pleaded both injury to competition and antitrust standing, the parties conducted initial discovery. Plaintiffs subsequently abandoned this theory and filed a third complaint deleting all allegations that the defendants’ bundling practices foreclosed independent programmers from participating in the upstream market. Plaintiffs also filed a motion requesting a ruling that they did not have to allege that potential competitors were foreclosed from the market in order to defeat a motion to dismiss. The parties agreed that defendants could file a motion to dismiss and that if they prevailed, plaintiffs’ third complaint would be dismissed with prejudice. The district court granted defendants’ motion to dismiss with prejudice because plaintiffs failed to allege any cognizable injury to competition and denied plaintiffs' motion to rule on the question whether allegations of foreclosed competition are required to state a Section 1 claim.
The Ninth Circuit affirmed the district court’s dismissal for failure to state a claim. It reasoned that while plaintiffs' complaint did allege a type of vertical restraint imposed by upstream programmers on downstream distributors, that restraint could not be construed as an injury to competition.
The court rejected plaintiffs’ argument that the sale of multi-channel packages harms consumers by (1) limiting the manner in which distributors compete with one another because distributors are unable to offer a la carte programming, (2) reducing consumer choice, and (3) increasing prices. The court found that these allegations, without more, don’t state a claim under Section 1 of the Sherman Act.
According to the court, limitations on the manner in which the distributors compete with one another do not constitute a cognizable injury to competition without proof of competitive harm. It found that plaintiffs’ complaint failed to identify any such harm. The complaint's allegations of reduced choice and increased prices address only the element of antitrust injury (whether the consumers have standing because they suffered the sort of injury that flows from an antitrust violation), not whether plaintiffs have satisfied the pleading standard for an actual violation. The court also noted that, although plaintiffs may be required to purchase bundles that include unwanted channels instead of individual channels, antitrust law recognizes the ability of businesses to choose the manner in which they do business absent an injury to competition.
The court also rejected plaintiffs’ argument that because most or all of the programmers and distributors engage in the bundling practice, it constitutes an injury to competition. While circumstances might arise in which competition is injured or reduced due to a widely applied practice that harms consumers, the court found that plaintiffs failed to explain how the defendants’ bundling practice injured competition (as opposed to consumers). The court found that the complaint included no allegations that the programmers' sale of cable channels in bundles has any effect on efforts by other programmers to produce competitive programming channels or on competition between distributors on cost and quality of service. In the absence of any allegation of injury to competition, as opposed to injuries to consumers, the court concluded that plaintiffs failed to state a claim for an antitrust violation.