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Plaintiffs Will Need To Think Outside The Cable Box To Save Tying Claims

Posted  August 15, 2011

Plaintiffs claiming that Cablevision abuses market power in requiring subscribers to rent cable boxes are going to have to think outside the box after being told by the U.S. District Court of New Jersey for the third time that their claims of illegal tying and monopolization are inadequate.

Judge Jose Linares has dismissed the second amended complaint in Marchese v. Cablevision Systems Corp., but given plaintiffs leave to replead their allegations that Cablevision’s requirement that subscribers to advanced interactive services use set-top boxes provided by that cable operator constitutes both an illegal tie under Section 1 of the Sherman Act, and monopolization under Section 2.

According to Judge Linares, plaintiffs’ latest complaint failed to adequately allege that Cablevision had market power over “Two Way Services.”  The judge also faulted the complaint for attempting to treat set-top boxes programmed for use on Cablevision’s system alone as a relevant market.  Plaintiffs’ pleading difficulties in this case illustrate the difficulty of defining relevant antitrust markets in media entertainment industries.

Premium digital cable services often include features that require two-way communication, such as interactive program guides, video-on-demand, and remote recording functions.  To access these features, consumers need to lease a set-top box from the cable operator.  Although most set-top boxes in the U.S. are built by two manufacturers (Motorola and Cisco), only boxes leased from the cable operator are programmed to work with that operator’s systems.

Consumers can access some one-way, non-interactive digital cable channels without a set-top box, using a small device called a CableCARD, which can be plugged into home equipment, to descramble the channels.  CableCARD-reliant devices offered by sellers not affiliated with the cable operator are not licensed to support two-way services.  In Marchese, the plaintiffs claimed that by requiring two-way customers to rent set-top boxes, Cablevision compelled its customers to pay for a product they don’t want – a Section 1 tying claim.

Market power is essential to tying claims.  A plaintiff has to show that the defendant has power in the market for a “tying” product – here, two-way cable services – and used that power to compel customers to pay for a “tied” product – the set-top box.  Plaintiffs’ pleading difficulties began when they originally defined the tying product as digital cable service generally.  The court dismissed that complaint because Cablevision’s subscribers could access some aspects of digital cable – basic one-way service – without a set-top box, and were not compelled to lease a box.  In response, plaintiffs amended their complaint to define the tying product market as two-way service.

This, too, created a pleading problem: to show that Cablevision had market power in two-way services, plaintiffs relied on statistics about Cablevision’s market share and prices for digital cable generally – the broader market definition that they were forced to abandon.  But, said the court, Cablevison’s clout in digital cable service generally didn’t establish that it had power in the narrower market for two-way cable service.  Because of this, the judge dismissed the Section 1 claim, giving plaintiffs one more opportunity to re-plead.

The court also dismissed a claim that Cablevision was monopolizing the market for set-top boxes that can be used on its systems by preventing other set-top boxes from working.  Here, Judge Linares found that set-top boxes programmed for use on Cablevision’s systems could not be a relevant market because the same set-top box hardware was also used for some other cable systems.

Generally speaking, a single company’s product cannot be a relevant market for antitrust purposes.  The court analogized this to “aftermarket” cases such as Kodak v. Image Technical Services, in which the Supreme Court ruled that parts and service for a particular brand of copier cannot be a relevant market unless some special circumstances are present.  Because Cablevision’s set-top boxes were also used on some other cable systems, albeit with different firmware, the court ruled that set-top boxes that run on Cablevision’s systems was not a legally relevant market that could be monopolized.

Tagged in: Antitrust Litigation, Monopolization,