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InreSetTopCableTelevisionBoxAntitrustLitigation
UNITEDSTATESCOURTOFAPPEALS
FORTHESECONDCIRCUIT
AugustTerm2012
(Argued:February19,2013
Decided:September2,2016)
DocketNo.112512cv
ANGELAKAUFMAN,individuallyandonbehalfofallotherssimilarlysituated,
JENNYLELL,LESIZUMI,individually,JEFFREYSEALS,anindividual,JASONDALEN,
MATTHEWMEEDS,individuallyandasarepresentativeofthosepersonssimilarly
situated,ALLANFROMEN,NOAMNAHARY,ROBERTMITCHELL,MATTHEW
MCALENEY,WILLIAMSTEINKE,DANIELLEKNERR,
PlaintiffsAppellants,
v.
TIMEWARNER,TIMEWARNERCABLE,INC.,DOES1through10,inclusive,
DefendantsAppellants,
ONAPPEALFROMTHEUNITEDSTATESDISTRICTCOURT
FORTHESOUTHERNDISTRICTOFNEWYORK
Before:
WINTER,CHIN,ANDDRONEY,CircuitJudges.
AppealfromanorderoftheUnitedStatesDistrictCourtforthe
SouthernDistrictofNewYork(Castel,J.),dismissingplaintiscomplaintagainst
TimeWarnerCableInc.alleginganillegaltieinofcertaincableservicestothe
leasingofcableboxes.Wearm.
JudgeDroneydissentsinaseparateopinion.
AFFIRMED.
MICHAELD.POSPISIL,(JohnF.Edgar,onthebrief),
EdgarLawFirmLLC,KansasCity,MI,and
RobertI.Harwood,PeterW.Overs,Jr.
HarwoodFeerLLP,NewYork,NewYork
forPlaintisAppellants.
MARGARETM.SWISLER(MatthewA.Brill,Jennifer
L.Giordano,onthebrief),Latham&
WatkinsLLP,Washington,D.C.,
DefendantsAppellees.
WINTERandCHIN,CircuitJudges:
VarioussubscriberstocabletelevisionservicesfromTimeWarner
entities(collectivelyTimeWarner)commencedthisactionbelow,alleginga
violationoftheShermanActinthetyingofcertainpremiumcabletelevision
servicestotheleasingofinteractivesettopcableboxes.Thedistrictcourt
(KevinCastel,Judge)dismissedtwoiterationsofthecomplaint,includingthe
ThirdAmendedComplaint,theoperativecomplaintforthepurposesofthis
opinion.Theplaintisappealed.
Wearm,holdingthattheThirdAmendedComplaintfailsto
adequatelypleadfactsthat,ifproven,wouldestablishthat:(i)thesettopcable
boxesandthepremiumprogrammingtheytransmitareseparateproductsfor
thepurposesofantitrustlaw;and(ii)TimeWarnerpossessessucientmarket
powerintherelevantmarketstoestablishanillegaltiein.
BACKGROUND
Theoriginalcomplaint,filedinAugust2008intheUnitedStates
DistrictCourtfortheDistrictofKansas,alleged,interalia,aviolationofthe
ShermanAct,15U.S.C.1,inTimeWarnersrequiringpurchaserswhoboughta
packageoftelevisionchannelstoleasefromTimeWarnercableboxesnecessary
totransmitthatprogramming.Similarlawsuitswerefiledinotherdistrictsand,
inDecember2008,theJudicialPanelonMultidistrictLitigationtransferredthe
casestotheSouthernDistrictofNewYork.TheplaintisfiledtheirFirst
AmendedComplaintshortlythereafter.Holdingthattheplaintisfailedto
pleadactualcoercionintheallegedtyingarrangement,thedistrictcourt
dismissedtheFirstAmendedComplaintunderFed.R.Civ.P.12(b)(6)withleave
toreplead.InreTimeWarnerInc.SetTopCableTelevisionAntitrustLitig.,Nos.08
MDL1995,08Civ.7616(PKC),2010WL882989(S.D.N.Y.Mar.5,2010).Aftera
conferencewiththedistrictcourt,theplaintisvoluntarilywithdrewtheSecond
AmendedComplaintandweregrantedleavetofileaThirdAmendedComplaint
(theComplaint).ThedistrictcourtdismissedtheComplaintbecauseitfailedto
plausiblyallegemarketpowerandadversecompetitiveeects.InreSetTop
CableTelevisionBoxAntitrustLitig.,Nos.08MDL1995,08Civ.7616(PKC),2011
WL1432036,at*13(S.D.N.Y.Apr.8,2011).
TheComplaintidentifiestherelevanttyingproductasPremium
CableServices,definedasdigitalcableservicesincorporatinginteractive
functions.(JointApp.174).Theinteractivefeaturesincludeprogramguides,
parentalcontroldevices,startoverfunctionality(allowingviewerstostarta
programfromthebeginning),andondemandprogrammingofmovies,sports,
andadultmaterial.PremiumCableServicesrequireasettopboxthatfunctions
bidirectionally,i.e.,itisabletotransmitsignalsfromthecableprovidertothe
consumerandviceversa.
TheComplaintallegesthatTimeWarner,usingitsmarketpower
overPremiumCableServicesin53UnitedStatesmarkets,forcesitssubscribers
toleasesettopboxesorbidirectionalcableboxesfromTimeWarner,tobe
returnediforwhenthesubscriptionsend,asaconditionofsubscribingtothe
PremiumCableServices.Consumersarethusnotabletoendasubscriptionand
usetheirowncableboxtobuyasubscriptionfromanewproviderorreceivethat
programminginanotherarea.TimeWarnerdoesnotmanufacturethesettop
boxesitleasestosubscribers;itpurchasesthemfrommanufacturerssuchas
Motorola,ScientificAtlanta,andSamsung.
ThedistrictcourtdismissedtheComplaintlargelyonthegrounds
thattheComplaintfailedtodistinguishbetweenmarketsinwhichTimeWarner
hadcompetitionforPremiumCableServices22ofthe53marketsorto
distinguishbetweenTimeWarnersmarketpowerinbasiccableservicesandits
marketpowerinpremiumservices.InreSetTopCableTelevisionBoxAntitrust
Litigation,2011WL1432036,at*1314.Thecourtheld,therefore,thatthe
plaintisdidnotplausiblypleadthatTimeWarnerhadtherequisitemarket
power.Itgrantedtheplaintisleavetorepleadforthefourthtime.Id.at*14.
Theyinsteadappealed.
DISCUSSION
WereviewadistrictcourtsgrantofamotiontodismissunderRule
12(b)(6)denovo,acceptingallallegationsintheComplaintastrueanddrawing
allreasonableinferencesinfavorofthenonmovingparty.Taylorv.Vt.Deptof
Educ.,313F.3d768,776(2dCir.2002).However,theallegationsmuststillbe
plausible,astandardthatasksformorethanasheerpossibilitythata
defendanthasactedunlawfully,Ashcroftv.Iqbal,556U.S.662,678(2009),anda
districtcourtmustretainthepowertoinsistuponsomespecificityinpleading,
BellAtl.Corp.v.Twombly,550U.S.544,558(2007)(internalquotationsomitted).
I.
TieIns
Atyingarrangementisanagreementbyapartytosellaproduct
butonlyontheconditionthatthebuyeralsopurchase[]adifferent(ortied)
product.Yentschv.Texaco,Inc.,630F.2d46,56(2dCir.1980)(quotingN.Pac.
Ry.Co.v.UnitedStates,356U.S.1,5(1958)).Thefearoftieinsisthata
monopolistinoneproductmarketwillseektoexpanditsmonopolyby
conditioningthepurchaseofthemonopolizedproductuponthepurchaseofa
productinaseparatemarket.
TostateavalidtyingclaimundertheShermanAct,aplaintiffmust
allegefactsplausiblyshowingthat:(i)thesaleofoneproduct(thetyingproduct)
isconditionedonthepurchaseofaseparateproduct(thetiedproduct);(ii)the
sellerusesactualcoerciontoforcebuyerstopurchasethetiedproduct;(iii)the
sellerhassufficienteconomicpowerinthetyingproductmarkettocoerce
purchasersintobuyingthetiedproduct;(iv)thetieinhasanticompetitiveeffects
inthetiedmarket;and(v)anotinsubstantialamountofinterstatecommerceis
involvedinthetiedmarket.E&LConsulting,Ltd.v.DomanIndus.Ltd.,472F.3d
23,31(2dCir.2006)(quotingDeJesusv.Sears,Roebuck&Co.,87F.3d65,70(2d
Cir.1996)).
Threeoftheseelementsareofparticularrelevancetothisappeal:
thetyingproductandtiedproductmustbeseparate,i.e.,eachmustbeina
separateanddistinctproductmarket;thesellermustuseactualcoercion;andthe
sellermusthavesufficientmarketpowerinthemarketforthetyingproductto
coercethepurchaseofthetiedproduct.Althoughtheseelementsoverlapthe
separateproductandmarketpowerrequirementsareusuallyessentialtothe
coercionelementwewilldiscussthemseparately.
Theseparateproductelementrequiresthattheallegedtying
productandtiedproductbeseparate,i.e.,theymustexistinseparateanddistinct
productmarkets.SeeJeffersonParishHosp.Dist.No.2v.Hyde,466U.S.2,1924&
n.39(1984)(findingseparateproductmarketsinpartbecausetheevidence
showedthatanesthesiologistsweremoreakintoofficebasedphysiciansthan
radiologistsandotherhospitalbasedphysicians),abrogatedonothergroundsbyIll.
ToolWorksInc.v.Indep.Ink,Inc.,547U.S.28,31(2006);EastmanKodakCo.v.Image
Tech.Servs.,504U.S.451,46263(1992)(findingseparateanddistinctproduct
marketsexistedbecausetwoproductshadbeensoldseparatelyinthepastand
still[were]soldseparatelytoselfserviceequipmentowners).Thisisbecauseif
thereisnoseparatemarketfortheallegedlytiedproduct,therecanbenofearof
leveragingamonopolyinonemarkettoharmcompetitioninasecondmarket.
Thesecondmarketsimplydoesnotexist.
Whethertwoproductsareseparateforpurposesofantitrustlawis
governedbytheconsumerdemandtest.SeeUnitedStatesv.MicrosoftCorp.,253
F.3d34,8589(D.C.Cir.2001).AstheDistrictofColumbiaCircuithasstated:
Theconsumerdemandtestisaroughproxyfor
whetheratyingarrangementmay,onbalance,be
welfareenhancing,andunsuitedtoperse
condemnation.Intheabstract,ofcourse,thereis
alwaysdirectseparatedemandforproducts:assuming
choiceisavailableatzerocost,consumerswillpreferit
tonochoice.Onlywhentheefficienciesfrombundling
aredominatedbythebenefitstochoiceforenough
consumers,however,willweactuallyobserve
consumersmakingindependentpurchases.Inother
words,perceptibleseparatedemandisinversely
proportionaltonetefficiencies.Onthesupplyside,
firmswithoutmarketpowerwillbundletwogoods
onlywhenthecostsavingsfromjointsaleoutweighthe
valueconsumersplaceonseparatechoice.Sobundling
byallcompetitivefirmsimpliesstrongnetefficiencies.
Ifacourtfindseitherthatthereisnonoticeableseparate
demandforthetiedproductor,therebeingno
convincingdirectevidenceofseparatedemand,thatthe
entirecompetitivefringeengagesinthesame
behaviorasthedefendantthenthetyingandtied
productsshouldbedeclaredoneproductandperse
liabilityshouldberejected.
Id.at8788(citationomitted).
Specifically,notyingarrangementcanexistunlessthereisa
sucientdemandforthepurchaseof[thetiedproduct]separatefrom[thetying
product]toidentifyadistinctproductmarketinwhichitisecienttooer[the
former]separatelyfrom[thelatter].JeersonParish,466U.S.at2122;accord
EastmanKodak,504U.S.at462.Relevantevidenceofseparateanddistinct
consumerdemandforthetyingproductandthetiedproductis,interalia,the
7
historyoftheproductsbeing,ornotbeing,soldseparately,EastmanKodak,504
U.S.at462,orthesaleoftheproductsseparatelyinsimilarmarkets,Microsoft,
253F.3dat8788.
Butevenifthereareseparateproductmarkets,atieinmaynot
violatetheantitrustlaws.Theelementofactualcoercionisdesignedtoweedout
themanycaseswherethebundlingofseparateproductsisduetoconsumer
demand.Ifaconsumerwantstopurchaseabundleoftheallegedtyingandtied
products,thesellerissimplysatisfyingconsumerdemandandmonopolization
concernsareirrelevant.Indeed,consumersoftenbenefitfromthebundlingof
separateproducts,evenwherethesellerhasmarketpowerinoneproduct.See
id.(discussingthepotentialbenefitsfromtying).Wheretheconsumerso
benefits,therecannotbecoercionandthebundlingdoesnotviolatetheantitrust
laws.Seeid.
Toillustrate,wewilluseexamplesattheendsoftheillegallegal
spectrum.First,autilitywithamonopolyprotectedbylaw,butsubjecttoprice
regulationintheserviceitprovidese.g.,electricitywouldbetemptedtotie
inanunregulated,separateproducte.g.,lightbulbstorecoupthemonopoly
profitdeniedbythepriceregulation.See10PhillipE.Areeda&Herbert
Hovenkamp,AntitrustLaw1732(3ded.2011);HerbertHovenkamp,Federal
AntitrustPolicy436(4thed.2011).Suchatieinwouldservenoeciencyinterest
benefittingconsumersandwouldbeillegalperse.SeeAreeda&Hovenkamp
1732.However,therearecountlesstieinsofphysicallyseparateproductsthat
benefitconsumersandposelittle,ifany,riskofanticompetitiveharm.Atthe
otherendofthespectrum,anunusuallyecientpadlockmanufacturermay
haveallofthemarketforpadlocksinaparticulargeographicareaandalso
requireawouldbepurchaserofapadlocktobuyasetofcompatiblekeys
packagedwiththelock.Thissortoftieinhaseciencygainsthatbenefit
consumersandwouldbelegal.1Betweenthesespectrumendingexamplesarea
rangeofplentifulclosecases.
Thethirdelementatissueheremarketpowerinthetyingproduct
isessentialtoawouldbemonopolistscoercionviatiein.Withoutthe
leverageofmarketpower,asellersinecienttieinwillfailbecausearational
consumerwillbuythetyingproductfromthesellerscompetitor.Asasimple
Apackagewithbothalockandkeysispreferredbyconsumersovera
lockandkeysasseparateproducts.Consumerswouldincurtransactioncostsfrom
havingtosearchforkeyscompatiblewithaspecificlockpackagingtheproducts
togetheravoidsthesecosts.Thelockandkeystieincreatesevenmorevaluetothe
consumerifaproblemwiththeproductarises.Whatifthelockwillnotturn?Without
thetiein,theconsumermaybefacedwiththelockmanufacturersayingtheproblem
lieswiththekeysandthekeymanufacturersayingtheproblemlieswiththelock.
1
example,ifoneofadozenfoodstoresinacommunityweretorefusetosellflour
unlessthebuyeralsotooksugaritwouldhardlytendtorestraincompetitionin
sugarifitscompetitorswerereadyandabletosellflourbyitself.N.Pac.Ry.Co.,
356U.S.at67.Hence,withoutmarketpower,thereislittleriskof
anticompetitiveharmfromthesellerstiein.
Marketpoweristheabilityofasinglesellertoraisepriceand
restrictoutput.EastmanKodak,504U.S.at464(quotingFortnerEnters.,Inc.v.
U.S.SteelCorp.,394U.S.495,503(1969)).Itcanbeshownbyspecificevidenceof
asellersabilitytocontrolpricesorexcludecompetitorsfromthemarket.See
K.M.B.WarehouseDistribs.,Inc.v.WalkerMfg.Co.,61F.3d123,129(2dCir.1995).
Marketshareisproxyformarketpower.Seeid.;EastmanKodak,504U.S.at464.
Ahighmarketsharealone,however,isinsucienttoinferasellersmarket
powerifothercharacteristicsoftheproductmarket,suchaslowbarriersto
entry,highcrosselasticityofdemand,ortechnologicaldevelopmentsinthe
industry,interferewiththesellerscontrolofprices.SeeTopsMkts.,Inc.v.Quality
Mkts.,Inc.,142F.3d90,9899(2dCir.1998)(Acourtwilldrawaninferenceof
monopolypoweronlyafterfullconsiderationoftherelationshipbetweenmarket
shareandotherrelevantmarketcharacteristics.).Indeed,inatyingcase,the
10
bestwaytopleadmarketpoweristoallegefactsthat,ifproven,establish
directlythatthepriceofthetiedpackageishigherthanthepriceofcomponents
soldincompetitivemarkets.Willv.ComprehensiveAccountingCorp.,776F.2d
665,67172(7thCir.1985)(Easterbrook,J.).
II.
SeparateProductMarkets
A.
CableBoxesGenerally
Cableboxes,whetherinteractiveornot,haveaphysicalappearance
separatefromtheprogrammingtheyreceive.Alaypersonmightviewthemas
theequivalentofaradio,andtherearesimilarities.Aradioreceivesandplays
signalstransmittedonvariousfrequenciesbynetworksandindependent
stations,andtheconsumercanusetheradiotonavigatebetweenprograms.
Whilerightstotheprogrammingareretainedbytheownersoftheprogramming
contentandprotectedbyabaragainstcopyingandretransmission,theconsumer
needsnocontractwiththenetworkorstationtoreceivetheprogramming.
Cableboxesaresomewhatsimilar.Theyreceiveandtransmit
programmingandallowtheviewertonavigatebetweenchannels.Butthereare
significantdierences.Signalsarenotpickedupfromtheair;theyarereceived
throughcablelinesownedbyproviders.Awouldbeviewermustsubscribeto
11
oneofseveralpackagesoftieredprogrammingoeredbyaparticularcable
providere.g.,basic,basicplusasportspackage,basicpluspremiumtoview
variousprogramsatvarioustimes.Networksandothercontentproducersretain
rightsagainstcopyingforcommercialuseandthecableprovidersretainrightsto
thepackagesofprogramming.Inshort,cableprovidersselltotheirsubscribers
rightstoviewingandcopyingforpersonaluseitspackagesofprogramming.
Acableboxmustbedesignedtoreceivethesignalfromaparticular
provider,whichrequirestheproviderscooperation.Andbecauseproviders
codetheirsignalstopreventtheft,acableboxmustalsobeabletounscramble
thecodedsignaloftheparticularprovider.Unsurprisingly,providersdonot
sharetheircodeswithcableboxmanufacturers.
Therefore,tobeusefultoaconsumer,acableboxmustbecable
providerspecific,likethekeystoapadlock.Althoughtheplaintisframetheir
claimasatiein,thecoreissueisacableprovidersrighttorefusetoenablecable
boxesitdoesnotcontroltounscrambleitscodedsignal.
B.
Allegations
TheComplaintallegesthat,[b]utforTimeWarnersunlawfultying
requirement...therewouldbeathrivingmarketinwhichconsumerswould
12
haveachoiceintheirpurchaseofcableboxes.JointApp.204.However,the
Complaintlacksanyallegationthattherehaveeverbeenseparatesalesofsettop
boxesandcableservices,whetherornotpremium,intheUnitedStates,evenin
marketswherecableprovidersfacecompetitionand,morespecifically,in
marketswherePremiumCableServicesareavailablethroughcompetingfiber
opticnetworksthatdonotusesettopboxes.
Thespecificfactualallegationsthatsupporttheclaimthatthesettop
boxesandPremiumCableServicesareseparateproductsarethat:(i)existing
technologypermitsthesaleofremotelyprogrammablebidirectionalcableboxes
atretail;(ii)TimeWarnerdoesnotmanufactureitsownbidirectionalcable
boxes;(iii)TimeWarnerseparatelyitemizeschargesforleasingbidirectional
cableboxesandprovidingcabletelevisionservicesonconsumersbills;(iv)bi
directionalcableboxesaresoldseparatelyatretailinmarketsoutsideofthe
UnitedStates,specificallySouthKorea;and(v)modemsaresoldseparatelyfrom
internetservicesintheUnitedStates.
Viewedindividuallyorcollectively,theseallegationsareinsucient.
Allegations(i)and(ii)theexistenceofrelevanttechnologyandTimeWarners
lackofmanufacturingoperationsaddresssupplysideconsiderationsrather
13
thanthecharacterofconsumerdemand,i.e.,whetherconsumerswouldpurchase
cableboxesseparatelyfromcableservicesifgiventhechoice.Further,wenote
thatsellerscommonlypurchasecomponentsfromvariousmanufacturersand
packagethecomponentstogetherforsaleasaunitaryproduct.Thus,thatTime
WarnerdoessowithsettopboxesandPremiumCableServicessayslittleabout
whetherthereareseparateproductmarketsforthesecomponentsasamatterof
antitrustlaw.Cf.JackWalters&SonsCorp.v.MortonBldg.,Inc.,737F.2d698,703
(7thCir.1984)(Posner,J.)([T]oholdthereforethateverycompositeproductisa
tiein,subjecttothehostilescrutinytowhichantitrustlawstillsubjectstieins,
wouldplaceindustryunderavastantitrustcloud,andhasbeenrejected.).
Inavacuum,allegation(iii)TimeWarnersseparateitemizationof
chargesforsettopboxesandcableservicesonconsumerbillscouldsuggest
thatTimeWarnerconsidersthemseparateproducts.InlightofanFCCrulethat
compelsTimeWarnertoseparatelyitemizethesecharges,however,suchan
inferenceisnotplausible.See47C.F.R.76.1206;Iqbal,556U.S.at681(weighing
allegations[that]areconsistentwithliabilityagainstmorelikelyexplanations
andconcludingthattheclaimisnotplausible).
14
Asforallegation(iv)theavailabilityofretailbidirectionalcable
boxesinsomemarketsoutsideoftheUnitedStatesthereisnoreasonably
specificallegationthatthosemarketsaresucientlysimilartotheU.S.marketin
relevantrespectssuchthatitisplausibletoinferthatTimeWarnerstiein,rather
thanothermarketconditions,explainstheretailunavailabilityofsuchcable
boxes.2Notablylackingisanyallegationthattherehaseverbeenseparatesales
ofcableboxesandcableservicesintheUnitedStates,eveninmarketswhere
cableprovidersareincompetitionwitheachotherorwithfiberopticcable
servicesthatemploydierenttechnology.SeeMicrosoft,253F.3dat88
([B]undlingbyallcompetitivefirmsimpliesstrongneteciencies.).
Similarly,asto(v),theseparatesalesofmodemsobvious
dierencesbetweentheprovisionofcableandinternetservicesnegateany
inferenceastoseparatemarketsforbidirectionalcableboxes.Asdescribedin
detailabove,acableboxusefultoconsumersmustbeproviderspecific,allowing
consumerstosubscribetoparticularpackagesofprogramming,whilemodems,
likeradios,transmitallavailablecontent.
Forexample,relevantcharacteristicsofthemarketinclude,amongother
things,theregulatoryenvironment,normsfortheprotectionofintellectualproperty
rights,security,theftpropensity,andconsumerpreferences.
2
15
TheComplaint,therefore,failstoallegefactsthat,ifproven,would
showtheexistenceofademandforbidirectionalcableboxesseparatefromthe
demandforPremiumCableServices.Likewise,itfailstoplausiblyallegethat
consumersarecoercedintoleasingsettopboxesfromTimeWarnerthatthey
wouldotherwisepurchaseelsewhere.
C.
TheRegulatoryEnvironment
OurconclusionthattheComplaintfailstoplausiblyallegeseparate
productmarketsforbidirectionalcableboxesandPremiumCableServicesis
supportedbyourexaminationoftherelevantstatutoryandregulatory
framework,asisrequiredbyexistinglaw.SeeVerizonCommcnsInc.v.Law
OfficesofCurtisV.Trinko,LLP,540U.S.398,41112(2004)(Antitrustanalysis
mustalwaysbeattunedtotheparticularstructureandcircumstancesofthe
industryatissue,includingtheexistenceofaregulatorystructuredesignedto
. ...perform[]theantitrustfunction,whichmaydiminish[]thelikelihoodof
majorantitrustharm.(internalcitationsandquotationmarksomitted));Taylor,
313F.3dat776(areviewingcourtmayconsiderthecomplaint,documents
attachedtothecomplaint,documentsincorporatedbyreferenceinthe
complaint,andpublicrecords,whenconsideringamotiontodismiss).
16
AstheComplaintacknowledges,Congresshasspecifically
addressedthetieinissuesarisingfromthesaleofcableserviceswithcableboxes
andtheFCChasbeendeeplyinvolvedinthisissuethroughoutthetimeperiod
coveredbytheComplaint.In1996,CongressdirectedtheFCCtoadopt
regulationstoassurethecommercialavailabilityofdevicesthatconsumersuse
toaccess[cableservices]...frommanufacturers,retailers,andothervendorsnot
affiliatedwithcableproviders.ExpandingConsumersVideoNavigation
Choices;CommercialAvailabilityofNavigationalDevices,81Fed.Reg.14,033,
14,033(Mar.16,2016)(internalquotationomitted).Congressalsodirectedthat
anysuchregulationsmustnotjeopardizesecurityof[cable]systems,orimpede
thelegalrightsofaproviderofsuchservicestopreventtheftofservice.Id.at
14,033(quoting47U.S.C.549(b)).Inotherwords,since1996,theFCChasbeen
taskedwithdisaggregatingsettopboxesfromthecableservicestheydeliver,or,
inantitrustterms,developingseparateproductmarketsforcableboxesandcable
services.
TheFCChasrecentlyacknowledgedthatnumerouseffortstocreate
thoseseparatemarketshavefailed,especiallyastobidirectionalcableboxesand
PremiumCableServices.See81Fed.Reg.at14,03334.Acombinationofthe
17
speedoftechnologicalchangeinthemarket,andvarioushardware,software,
security,andcollectiveactionproblemshaveimpededtheFCCsattemptsto
fosterseparatemarkets.Seeid.at14,03335(Cableoperatorsusedwidely
varyingsecuritytechnologies,andthebeststandardavailabletotheCommission
was...hardwarebased[and]workedonlywithonewaycableservices....[A]
newapproachthatwouldworkwithtwowayservices[failedbecauseit]wasnot
sophisticatedenoughtomeetcontentcompaniescontentprotectiondemands.).
InMarch2016,theFCCproposednewregulationsinafurtherattempttocreate
separatemarkets,seeid.,butitshistoricfailuretodosooverthetimeperiod
coveredbytheComplaintbolstersourconclusionthattheplaintiffshavenot
plausiblyallegedseparateproductmarketsforbidirectionalcableboxesand
PremiumCableServices.
Moreover,thoughitdoesnottouchonanyofthespecificelements
ofatyingclaimdiscussedabove,thereisanFCCregulationthatfurtherrenders
theclaimsinthiscaseimplausible.See47C.F.R.76.923.Thatregulationcaps
thepricethatTimeWarnerorotherprovidersmaychargetoleasesettopcable
boxequipmenttoconsumers.Id.76.923(f)(g)(providingthat[m]onthly
chargesforrentalofa[cablebox]unitshallconsistoftheaverageannualunit
18
purchasecostof[cableboxes]leased,includingacquisitionpriceandincidental
costssuchassalestax,financingandstorageuptothetimeitisprovidedtothe
customer,addedtotheproductofthe[hourlyservicecharge]timestheaverage
numberofhoursannuallyrepairingorservicinga[cablebox],dividedby12to
determinethemonthlyleaseratefora[cablebox].).Italsolimitswhich
maintenanceandfinancingchargesmaybeamortizedovertwelvemonthsand
providesthatTimerWarnermayincludeareasonableprofitinitsleasingrate.
Id.76.923(c).
Sucharegulatorypricecontrolonthetiedproductmakesthe
plaintiffstyingclaimimplausibleasawhole.WedoubtthatTimeWarner
wouldattempttomonopolizethemarketforbidirectionalcableboxeswhenan
FCCregulationcapstheamountofprofitsthatTimeWarnermayreapfromthat
market.Cf.Verizon,540U.S.at412(Theregulatoryframeworkthatexistsinthis
casedemonstrateshow,incertaincircumstances,regulationsignificantly
diminishesthelikelihoodofmajorantitrustharm.(internalquotationmarks
omitted)).Indeed,atypicaltieinworksinthereverseofthecircumstanceshere:
Governmentregulationofthetyingproductspricewillcausethemonopolistto
seekmonopolyrentsthroughsalesofanunregulatedtiedproduct.See
19
Hovenkampat436;cf.EastmanKodak,504U.S.at487([T]yingarrangementsmay
beusedtoevadepricecontrolinthetyingproductthroughclandestinetransferof
theprofittothetiedproduct;...andtheymaybeusedtoforceafulllineof
productsonthecustomersoastoextractmoreeasilyfromhimamonopoly
returnononeuniqueproductintheline.(emphasesadded)(quotingFortner
Enters.,394U.S.at513514(White,J.,dissenting))).
Theinsufficiencyoftheallegationsofaseparatemarketforbi
directionalcableboxes,theinabilityoftheFCCtocreatesuchamarket,andthe
priceregulationofthetiedproductfurtherpersuadeusthattheComplaintdoes
notpleadaplausibletyingclaim.
III.
MarketPower
Wealsoconcludethat,asthedistrictcourtheld,theComplaintdoes
notplausiblyallegemarketpowerintherelevantproductandgeographic
markets.
Asnotedabove,theComplaintdefinestherelevantproductmarket
asthatforPremiumCableServices(amarketseparatefrombasiccable).It
identifies53distinctgeographicmarketsinwhichTimeWarnerallegedlyhas
violatedtheantitrustlaws.Theplaintiffswere,therefore,requiredtoallegefacts
20
supportinganinferencethatTimeWarnerpossessedmarketpowerinthe
PremiumCableServicesmarketineachspecifiedgeographicmarket.SeeIll.Tool
Works,547U.S.at46([I]nallcasesinvolvingatyingarrangement,theplaintiff
mustprovethatthedefendanthasmarketpowerinthetyingproduct.);E&L
Consulting,472F.3dat32(evenpriortoTwombly,anantitrustdefendantcharged
withillegaltyingisentitledtosomespecificityastoeachelementofantitrust
claimalleged).
Broadly,theComplaintallegesthatmajorcableprovidersinthe
aggregatepossesspoweroverthemarketforbasiccableintheUnitedStates.It
alsoallegesthatthefirmsdonotgenerallycompetewitheachotherwithinthe
specifiedlocalmarkets.Further,becauseTimeWarnercontrolsthemarketsin
whichitprovidesbasiccableservicesandbecausetheprovisionofPremium
CableServicesreliesuponthesamebasicinfrastructureasbasiccableservices,
theComplaintallegesthatTimeWarnernaturallyhasmarketpowerover
PremiumCableServices.JointApp.180.
Theseallegationsareinsufficienttopleadmarketpower.They
conflatethemarketsforbasicandpremiumcable.3Theplaintiscannot
Theplaintiffsemphasizethatthepackagessoldbycableprovidersare
tieredsothateverysubscriberofpremiumservicesobtainsbasicservicesfromthe
3
21
plausiblyderiveTimeWarnersmarketpoweroverPremiumCableServicesfrom
broadallegationsaboutthenationwidemarketforbasiccable.WhileTime
WarnersdeliveryofPremiumCableServicesdependsonthetechnological
infrastructureitusestoprovidebasiccable,suchfactimplieslittleaboutthe
marketforPremiumCableServices,especiallygiventheComplaintsallegation
thatTimeWarnerscompetitorsdeploydierenttechnologytoprovidethesame
product.Indeed,theComplaintallegesnoparticularfactsbearingonTime
Warnersshareofthemarketforpremium,twowayservices,asopposedtobasic
cableservices.Antitrustlawrequiresplaintistopleadsuchfactsandthe
plaintisfailuretodosomeanstheyhavenotplausiblypledmarketpower.See
PepsiCo,Inc.v.CocaColaCo.,315F.3d101,108(2dCir.2002)(Intheabsenceof
directmeasurementsofadefendantsabilitytocontrolpricesorexclude
competition...marketpowernecessarilymustbedeterminedbyreferencetothe
areaofeectivecompetitionwhich,inturn,isdeterminedbyreferencetoa
specific,definedproductmarket.(internalcitationsomitted));seealsoRickMik
Enters.Inc.v.EquilonEnters.,LLC,532F.3d963,972(9thCir.2008)(atyingclaim
sameprovider.However,itwouldmakelittlecommercialsensetosellbasiccable
servicesseparately.Inanyevent,anallegationofalargemarketshareinbasicservices
meansnothinginthiscontextbecausesuchasharetellsusnothingaboutthemarket
shareinpremiumservices.
22
isinsucientwhereallegationsofmarketpowerarebasedonfactsabouta
broaderindustryratherthanthespecifictyingproductmarket).
Whatismore,theComplaintallegesthatTimeWarnercompetes
withother,noncablecompaniesintheprovisionofPremiumCableServicesin
atleast22geographicmarkets.Nofactsarealleged,however,concerningTime
Warnersshareofthesemarketsorhowthepresenceofnoncablecompetitors
aectsTimeWarnerspoweroverpriceinthesemarkets.Thus,withoutmore
specificallegations,aninferenceofmarketpowerisnotplausible.Cf.TopsMkts.,
142F.3dat99(aninferenceofmarketpowerisappropriateonlyafterfull
considerationoftherelationshipbetweenmarketshareandotherrelevant
marketcharacteristics).
TheComplaint,therefore,doesnotallegefactssucienttoinferthat
TimeWarnerpossessedmarketpoweroverPremiumCableServicesinthe53
specifiedmarketsandthetieinclaimfailsonthatgroundaswell.
CONCLUSION
Forthereasonsstated,weconcludethattheComplaintfailsto
plausiblyallegethatbidirectionalcableboxesareaseparateproductfromthe
PremiumCableServicesubscriptionstheytransmit.TheFCCslonghistoryof
23
regulationinthisareafurtherreinforcesourconclusions.Wealsoconcludethat
theComplaintfailstoplausiblyallegeTimeWarnersmarketpowerinthe
particularproductandgeographicmarketsdefinedintheComplaint.
WethereforeAFFIRM.
24
DRONEY,CircuitJudge,dissenting:
sparingly. George Haug Co. v. Rolls Royce Motor Cars Inc., 148 F.3d 136, 139 (2d
Cir. 1998) (quoting Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 746 (1976))
(internal quotation mark omitted). In the context of tying claims, dismissal is
inappropriate where a plaintiff has sufficiently alleged: (1) a tying and a
[separate]tiedproduct;(2)evidenceofactualcoercionbythesellerthatforced
thebuyertoacceptthetiedproduct;(3)sufficienteconomicpowerinthetying
product market to coerce purchaser acceptance of the tied product; (4)
anticompetitive effects in the tied market; and (5) the involvement of a not
insubstantial amount of interstate commerce in the tied market. E & L
Consulting, Ltd. v. Doman Indus. Ltd., 472 F.3d 23, 31 (2d Cir. 2006) (quoting De
Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996)) (internal quotation
marks omitted). The majority holds that Plaintiffs Third Amended Complaint
(the Complaint) fails to sufficiently plead at least two of these elements:
separate products and sufficient market power. I disagree and respectfully
dissent.
I.
Asthemajorityexplains,ourinquiryintotheseparateproductelement
isgovernedbytheconsumerdemandtest.[W]hetheroneortwoproductsare
involved turns not on the functional relation between them, but rather on the
character of the demand for the two items. Jefferson Parish Hosp. Dist. No. 2 v.
Hyde,466U.S.2,19(1984),abrogatedonothergroundsbyIll.ToolWorksInc.v.Indep.
Ink, Inc., 547 U.S. 28 (2006). Thus, to qualify as separate, the products must be
distinguishableintheeyesofbuyers.Id.
Here,PlaintiffsallegefactsplausiblyshowingthatPremiumCableServices
andsettopcableboxesconstituteseparateproductsdistinguishableintheeyes
ofbuyers.PlaintiffsallegethatTimeWarnerdoesnotdesignormanufactureits
owncableboxes,butratherpurchasesboxesfromthreemanufacturers,andthat
numerous other manufacturers are capable of producing cable boxes that are
technologically compatible with Time Warners services. However, even if
customerscouldpurchasecableboxesdirectlyfromanyofthesemanufacturers,
TimeWarnerwouldnotallowitscustomerstoreceivePremiumCableServices
withoutleasingacableboxfromit.Plaintiffsalsoallegethatthecostofleasinga
cable box from Time Warner is charged as an additional monthly fee, and that
customers are not given the choice of purchasing their box from Time Warner.
Plaintiffs further assert that robust markets for cable boxes exist in the many
countriesinwhichconsumersarenotcompelledtorentcableboxesfromtheir
cable providers. Joint App. 194. Supporting this allegation are Time Warners
ownstatementstotheFCCcomparingcableboxestocablemodemsforwhich
anopenmarketforcustomerowneddevicesexistsandindicatingitsbeliefthat
a similar market could emerge for cable boxes. Finally, Plaintiffs point to the
FCCsfailedCableCARDinitiativeasevidencethatmanufacturersarewillingto
enterthecableboxmarketbysellingdirectlytoconsumers.
Taking these factual allegations as true and drawing all reasonable
inferencesinPlaintiffsfavor,Taylorv.Vt.DeptofEduc.,313F.3d768,776(2dCir.
2002), I believe the Complaint plausibly alleges a separate product market for
consumerpurchased cable boxes, which is suppressed by Time Warners
anticompetitiveconduct.1Inconcludingotherwise,themajorityimposestoohigh
abaronPlaintiffs.
Notably, the district court reached the same conclusion below, holding that Plaintiffs
plausiblyallege[]thatcableboxesareseparateanddistinctfromPremiumCableServices.At
the pleading stage, the cable box appears to be a product that could be sold separately and
profitablybecauseeveryuserofTimeWarnersPremiumCableServiceisapotentialpurchaser
ofacablebox.InreTimeWarnerInc.SetTopCableTelevisionBoxAntitrustLitig.,Nos.08MDL
1995(PKC),08Civ.7616(PKC),2010WL882989,at*4(S.D.N.Y.Mar.5,2010).TimeWarnerdoes
notcontestthisdeterminationonappeal.
1
ThemajoritydismissestwoofPlaintiffsallegationsbecausetheyaddress
supplysideconsiderationsratherthanthecharacterofconsumerdemand.Maj.
Op.at1314.WhileIagreethatwemustfocusonconsumerdemand,supplyside
considerations are nonetheless relevant to our inquiry. Indeed, in analyzing
Plaintiffsallegations,themajorityitselfreliesonsupplysideconsiderations.See
id.at15.
The majority focuses also on the technological challenges associated with
independently manufactured cable boxes. It states that cable boxes are cable
providerspecific,likethekeystoapadlock,id.at12,andcharacterizesthecore
issue in this case as a cable providers right torefuse toenable cable boxesit
doesnotcontroltounscrambleitscodedsignal,id.Butthisfavorsthesuppliers
dubious technological concerns over the consumers right to choose between
competing products. See Gonzalez v. St. Margarets House Hous. Dev. Fund Corp.,
880 F.2d 1514, 1517 (2d Cir. 1989) (interpreting Jefferson Parish as focus[ing]
primarily on the anticompetitive effect of tying arrangements and the resultant
harm to consumer choice in the tiedproduct market, and not on the tying
entitys interest). See also United States v. Microsoft Corp., 253 F.3d 34, 87 (D.C.
Cir.2001)(interpretingJeffersonParishandidentifyingthecoreconcernoftying
in the U.S. market, to support the inference that cable boxes and cable services
compriseseparate,distinguishableproducts.
The FCCs failed efforts to disaggregate settop cable boxes from cable
services reinforce, rather than undermine, Plaintiffs claim. That the FCC
attempted to create an alternative device to cable boxes demonstrates that the
FCC views cable boxes and cable services as distinct products. This view is
further supported by the FCC regulation, identified by the majority, which
requires Time Warner to separately itemize the fees associated with these
products on consumer bills. Additionally, the FCCs failed attempts at
developinganalternativedevicearelargelyattributabletosolvabletechnological
issues and resistance from cable providers, and say little about consumer
demandforsuchadevice.Thus,inmyview,theregulatoryenvironmentseems
tosupportPlaintiffsallegations.
The majority also points to an FCC regulation, which sets a cap on the
price Time Warner may charge consumers for leasing settop cable boxes, as
support for the view that Time Warner would not attempt to monopolize the
cableboxmarketwhentheamountofprofitsitmayrealizeissolimited.Butthis
view misjudges the regulations effectiveness in curbing monopoly prices. The
FCCregulationsetsacaponleasingpricesbytyingthosepricestotheaverage
annual unit purchase cost of cable boxes. 47 C.F.R. 76.923(f). However,
without a competitive market in place, cable box manufacturers lack any
incentivetokeepthosepurchasecostslow.AsPlaintiffsallege,TimeWarnerhas
historically purchased its cable boxes from just three suppliers, and those
suppliersdonotmaketheircableboxesavailableforsaletothegeneralpublic.
Furthermore, the FCC regulation permits cable companies to pass along to
consumers the full cost of a cable box over the course of a single year, plus a
reasonable profit. 47 C.F.R. 76.923(c), (f), (g). Yet as Plaintiffs allege, the
useful life of a cable box is between 3 and 5 years. Joint App. 197. Thus,
notwithstandingtheFCCsregulation,TimeWarnermaychargeconsumersfees
thatexceedthetruecostofthecablebox,therebygeneratingconsiderableprofits.
Infact,TimeWarners2008AnnualReportwarnedinvestorsthattheemergence
ofacompetitivemarketforcableboxeswouldthreatenthesubstantialrevenues
generated from equipment rental and installation charges. I cannot conclude,
then,asthemajoritydoes,thattheFCCpricingregulationlessenstheplausibility
ofPlaintiffsclaim.
In sum, taken together and viewed ina light most favorable to Plaintiffs,
the allegations in the Complaint plausibly show that settop cable boxes and
Premium Cable Services are distinct products, which, if not for Time Warners
conduct,wouldbepurchasedseparatelybyconsumers.
II.
Astomarketpower,themajorityconcludesthatPlaintiffs:(1)failtoallege
sufficient facts bearing on Time Warners market share for premium cable
services, as opposed to basic cable services; and (2) fail to allege with requisite
specificity Time Warners market share in the relevant geographic markets. I
disagree.
The majority first concludes that Plaintiffs conflate the markets for basic
andpremiumcableservices.Notso.WhileitistruethatPlaintiffsallegationsare
largely drawn from data concerning the nationwide market for basic cable
services, those allegations bear on Time Warners market share in Premium
CableServicesaswell.AstheComplaintexplains,cableservicesarecumulative.
Thatis,aconsumerwhopurchasesPremiumCableServicesfromTimeWarner
also necessarily receives, and pays for, basic cable services. At the same time,
Plaintiffs allege that major cable companies, such as Time Warner, operate in
geographically discrete markets, and therefore exercise control over basic cable
services in those markets. Taken together, these allegations support the
reasonable inference that, if Time Warner exercises market power over basic
cableservicesinagivenmarket,itexercisesmarketpoweroverPremiumCable
Servicesinthatmarketaswell.
The majority next concludes that Plaintiffs fail to allege particular facts
bearingonTimeWarnersshareofthemarketforPremiumCableServices.Maj.
Op. at 22. But Plaintiffs allege that, by 2009, subscriptions to Time Warners
PremiumCableServiceshadgrownto8.9million,translatingintoa21%shareof
thetotalpremiumcablemarket.Plaintiffsalsopointtothehighbarrierstoentry
facing those wishing to compete with Time Warner in that market. As a result,
TimeWarnerslargestcompetitors,AT&TUverseandVerizonFiOS,had,asof
2009,significantlyfewerpremiumcableservicessubscribersthanTimeWarner.
Indeed, for allservices combined, Plaintiffs allege that UVerseandFiOS hada
total of 2.06 and 2.9 million customers, respectively. The next three largest
competitors,Plaintiffsallege,hadacombinedcustomerbaseoflessthan900,000
customers,whileseveralothersceasedoperationsordeclaredbankruptcy.These
allegationsaresufficienttoplausiblyallegethatTimeWarnerhasmarketpower
over premium cable services. See Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d
90, 98 (2d Cir. 1998) (explaining that market power may be shown directly, by
evidenceoftheabilitytocontrolpricesorexcludecompetition,orindirectly,by
evidenceofhighmarketshareandotherrelevantmarketcharacteristics,suchas
strength of the competition, barriers to entry, and elasticity of consumer
demand).SeealsoU.S.SteelCorp.v.FortnerEnters.,Inc.,429U.S.610,620(1977)
(identifying relevant inquiry into market power as whether the seller has the
power, within the market for the tying product, to raise prices or to require
purchaserstoacceptburdensometermsthatcouldnotbeexactedinacompletely
competitivemarket).
As to the majoritys second point, concerning market share in relevant
geographicmarkets,themerepossibilityofregionalvariationsinTimeWarners
market share does not defeat Plaintiffs claim. In this Circuit, a threshold
showing of market share is not a prerequisite for bringing a 1 claim. If a
plaintiff can show an actual adverse effect on competition, such as reduced
output...wedonotrequireafurthershowingofmarketpower.Toddv.Exxon
Corp.,275F.3d191,20607(2dCir.2001)(internalcitationandquotationmarks
omitted).Here,PlaintiffsallegethatTimeWarnerfacesnocompetitioninatleast
10
Given the overlapping nature of cable services, the precise number of distinct geographic
marketsatissueisdifficulttodiscern.Forsimplicityssake,Iusethesamenumbersadoptedby
themajority.
11
whattheclaimisandthegroundsuponwhichitrests(internalquotationmarks
omitted)).
*
Theroleofthecourtatthisstageoftheproceedingsisnotinanywayto
evaluate the truth . . . but merely to determine whether the plaintiffs factual
allegations are sufficient to allow the case to proceed. Doe v. Columbia Univ.,
Nos. 151536 (Lead), 151661 (XAP), 2016 WL 4056034, at *9 (2d Cir. July 29,
2016). I cannot conclude, as the majority does, that Plaintiffs allegations as to
product markets and market power, which support their tying claim, are
insufficient to allow the case to proceed. For these reasons, I respectfully
dissent.
12