11‐2512‐cv In re Set‐Top Cable Television Box Antitrust Litigation
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term 2012
(Argued: February 19, 2013 Decided: September 2, 2016)
Docket No. 11‐2512‐cv
ANGELA KAUFMAN, individually and on behalf of all others similarly situated, JENNY LELL, LES IZUMI, individually, JEFFREY SEALS, an individual, JASON DALEN, MATTHEW MEEDS, individually and as a representative of those persons similarly situated, ALLAN FROMEN, NOAM NAHARY, ROBERT MITCHELL, MATTHEW MCALENEY, WILLIAM STEINKE, DANIELLE KNERR,
Plaintiffs‐Appellants,
v.
TIME WARNER, TIME WARNER CABLE, INC., DOES 1 through 10, inclusive,
Defendants‐Appellants,
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
Before: WINTER, CHIN, AND DRONEY, Circuit Judges.
Appeal from an order of the United States District Court for the
Southern District of New York (Castel, J.), dismissing plaintiffsʹ complaint against
Time Warner Cable Inc. alleging an illegal tie‐in of certain cable services to the
leasing of cable boxes. We affirm.
Judge Droney dissents in a separate opinion.
AFFIRMED.
MICHAEL D. POSPISIL, (John F. Edgar, on the brief), Edgar Law Firm LLC, Kansas City, MI, and Robert I. Harwood, Peter W. Overs, Jr. Harwood Feffer LLP, New York, New York for Plaintiffs‐Appellants.
MARGARET M. SWISLER (Matthew A. Brill, Jennifer L. Giordano, on the brief), Latham & Watkins LLP, Washington, D.C., Defendants‐Appellees.
WINTER and CHIN, Circuit Judges:
Various subscribers to cable television services from Time Warner
entities (collectively ʺTime Warnerʺ) commenced this action below, alleging a
violation of the Sherman Act in the tying of certain premium cable television
services to the leasing of ʺinteractiveʺ set‐top cable boxes. The district court
(Kevin Castel, Judge) dismissed two iterations of the complaint, including the
Third Amended Complaint, the operative complaint for the purposes of this
opinion. The plaintiffs appealed.
We affirm, holding that the Third Amended Complaint fails to
adequately plead facts that, if proven, would establish that: (i) the set‐top cable
boxes and the premium programming they transmit are separate products for
the purposes of antitrust law; and (ii) Time Warner possesses sufficient market
power in the relevant markets to establish an illegal tie‐in.
BACKGROUND
The original complaint, filed in August 2008 in the United States
District Court for the District of Kansas, alleged, inter alia, a violation of the
Sherman Act, 15 U.S.C. § 1, in Time Warnerʹs requiring purchasers who bought a
package of television channels to lease from Time Warner cable boxes necessary
to transmit that programming. Similar lawsuits were filed in other districts and, in December 2008, the Judicial Panel on Multidistrict Litigation transferred the
cases to the Southern District of New York. The plaintiffs filed their First
Amended Complaint shortly thereafter. Holding that the plaintiffs failed to
plead actual coercion in the alleged tying arrangement, the district court
dismissed the First Amended Complaint under Fed. R. Civ. P. 12(b)(6) with leave
to replead. In re Time Warner Inc. Set‐Top Cable Television Antitrust Litig., Nos. 08
MDL 1995, 08 Civ. 7616(PKC), 2010 WL 882989 (S.D.N.Y. Mar. 5, 2010). After a
conference with the district court, the plaintiffs voluntarily withdrew the Second
Amended Complaint and were granted leave to file a Third Amended Complaint
(the ʺComplaintʺ). The district court dismissed the Complaint because it failed to
plausibly allege market power and adverse competitive effects. In re Set‐Top
Cable Television Box Antitrust Litig., Nos. 08 MDL 1995, 08 Civ. 7616(PKC), 2011
WL 1432036, at *13 (S.D.N.Y. Apr. 8, 2011).
The Complaint identifies the relevant tying product as ʺPremium
Cable Services,ʺ defined as ʺdigital cable services incorporating interactive
functions.ʺ (Joint App. 174). The interactive features include program guides,
parental control devices, ʺstart overʺ functionality (allowing viewers to start a
program from the beginning), and on demand programming of movies, sports,
and adult material. Premium Cable Services require a set‐top box that functions
bi‐directionally, i.e., it is able to transmit signals from the cable provider to the
consumer and vice versa.
The Complaint alleges that Time Warner, using its market power
over Premium Cable Services in 53 United States markets, forces its subscribers
to lease ʺset‐top boxesʺ or ʺbi‐directional cable boxesʺ from Time Warner, to be
returned if or when the subscriptions end, as a condition of subscribing to the
Premium Cable Services. Consumers are thus not able to end a subscription and
use their own cable box to buy a subscription from a new provider or receive that
programming in another area. Time Warner does not manufacture the set‐top
boxes it leases to subscribers; it purchases them from manufacturers such as
Motorola, Scientific Atlanta, and Samsung.
The district court dismissed the Complaint largely on the grounds
that the Complaint failed to distinguish between markets in which Time Warner
had competition for Premium Cable Services ‐‐ 22 of the 53 markets ‐‐ or to
distinguish between Time Warnerʹs market power in basic cable services and its
market power in premium services. In re Set‐Top Cable Television Box Antitrust
Litigation, 2011 WL 1432036, at *13‐14. The court held, therefore, that the
plaintiffs did not plausibly plead that Time Warner had the requisite market
power. It granted the plaintiffs leave to replead for the fourth time. Id. at *14.
They instead appealed.
DISCUSSION
We review a district courtʹs grant of a motion to dismiss under Rule
12(b)(6) de novo, accepting all allegations in the Complaint as true and drawing
all reasonable inferences in favor of the non‐moving party. Taylor v. Vt. Depʹt of
Educ., 313 F.3d 768, 776 (2d Cir. 2002). However, the allegations must still be
ʺplausible,ʺ a standard that ʺasks for more than a sheer possibility that a
defendant has acted unlawfully,ʺ Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), and ʺa
district court must retain the power to insist upon some specificity in pleading,ʺ
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007) (internal quotations omitted).
I. Tie‐Ins
A tying arrangement is ʺan agreement by a party to sell a product
but only on the condition that the buyer also purchase[] a different (or tied)
product.ʺ Yentsch v. Texaco, Inc., 630 F.2d 46, 56 (2d Cir. 1980) (quoting N. Pac.
Ry. Co. v. United States, 356 U.S. 1, 5 (1958)). The fear of tie‐ins is that a
monopolist in one product market will seek to expand its monopoly by
conditioning the purchase of the monopolized product upon the purchase of a
product in a separate market.
To state a valid tying claim under the Sherman Act, a plaintiff must
allege facts plausibly showing that: (i) the sale of one product (the tying product)
is conditioned on the purchase of a separate product (the tied product); (ii) the
seller uses actual coercion to force buyers to purchase the tied product; (iii) the
seller has sufficient economic power in the tying product market to coerce
purchasers into buying the tied product; (iv) the tie‐in has anticompetitive effects
in the tied market; and (v) a not insubstantial amount of interstate commerce is
involved 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)).
Three of these elements are of particular relevance to this appeal:
the tying product and tied product must be separate, i.e., each must be in a
separate and distinct product market; the seller must use actual coercion; and the
seller must have sufficient market power in the market for the tying product to
coerce the purchase of the tied product. Although these elements overlap ‐‐ the
ʺseparate productʺ and ʺmarket powerʺ requirements are usually essential to the
coercion element ‐‐ we will discuss them separately.
The ʺseparate productʺ element requires that the alleged tying
product and tied product be separate, i.e., they must exist in separate and distinct
product markets. See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 19‐24 &
n.39 (1984) (finding separate product markets in part because the evidence
showed that anesthesiologists were more akin to office‐based physicians than
radiologists and other hospital‐based physicians), abrogated on other grounds by Ill.
Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 31 (2006); Eastman Kodak Co. v. Image
Tech. Servs., 504 U.S. 451, 462‐63 (1992) (finding separate and distinct product
markets existed because two products had been sold separately in the past and
ʺstill [were] sold separately to self‐service equipment ownersʺ). This is because if
there is no separate market for the allegedly tied product, there can be no fear of
leveraging a monopoly in one market to harm competition in a second market.
The second market simply does not exist.
Whether two products are ʺseparateʺ for purposes of antitrust law is
governed by the ʺconsumer demand test.ʺ See United States v. Microsoft Corp., 253
F.3d 34, 85‐89 (D.C. Cir. 2001). As the District of Columbia Circuit has stated:
The consumer demand test is a rough proxy for whether a tying arrangement may, on balance, be welfare‐enhancing, and unsuited to per se condemnation. In the abstract, of course, there is always direct separate demand for products: assuming choice is available at zero cost, consumers will prefer it to no choice. Only when the efficiencies from bundling are dominated by the benefits to choice for enough consumers, however, will we actually observe consumers making independent purchases. In other words, perceptible separate demand is inversely proportional to net efficiencies. On the supply side, firms without market power will bundle two goods only when the cost savings from joint sale outweigh the value consumers place on separate choice. So bundling by all competitive firms implies strong net efficiencies. If a court finds either that there is no noticeable separate demand for the tied product or, there being no convincing direct evidence of separate demand, that the entire ʺcompetitive fringeʺ engages in the same behavior as the defendant then the tying and tied products should be declared one product and per se liability should be rejected.
Id. at 87‐88 (citation omitted).
Specifically, ʺno tying arrangement can exist unless there is a
sufficient demand for the purchase of [the tied product] separate from [the tying
product] to identify a distinct product market in which it is efficient to offer [the
former] separately from [the latter].ʺ Jefferson Parish, 466 U.S. at 21–22; accord
Eastman Kodak, 504 U.S. at 462. Relevant evidence of separate and distinct
consumer demand for the tying product and the tied product is, inter alia, the 7
history of the products being, or not being, sold separately, Eastman Kodak, 504
U.S. at 462, or the sale of the products separately in similar markets, Microsoft,
253 F.3d at 87‐88.
But even if there are separate product markets, a tie‐in may not
violate the antitrust laws. The element of actual coercion is designed to weed out
the many cases where the bundling of separate products is due to consumer
demand. If a consumer wants to purchase a bundle of the alleged tying and tied
products, the seller is simply satisfying consumer demand and monopolization
concerns are irrelevant. Indeed, consumers often benefit from the bundling of
separate products, even where the seller has market power in one product. See
id. (discussing the ʺpotential benefits from tyingʺ). Where the consumer so
benefits, there cannot be coercion and the bundling does not violate the antitrust
laws. See id.
To illustrate, we will use examples at the ends of the illegal‐legal
spectrum. First, a utility with a monopoly protected by law, but subject to price
regulation in the service it provides ‐‐ e.g., electricity ‐‐ would be tempted to tie‐
in an unregulated, separate product ‐‐ e.g., light bulbs ‐‐ to recoup the monopoly
profit denied by the price regulation. See 10 Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law ¶ 1732 (3d ed. 2011); Herbert Hovenkamp, Federal
Antitrust Policy 436 (4th ed. 2011). Such a tie‐in would serve no efficiency interest
benefitting consumers and would be illegal per se. See Areeda & Hovenkamp ¶
1732. However, there are countless tie‐ins of physically separate products that
benefit consumers and pose little, if any, risk of anticompetitive harm. At the
other end of the spectrum, an unusually efficient padlock manufacturer may
have all of the market for padlocks in a particular geographic area and also
require a would‐be purchaser of a padlock to buy a set of compatible keys
packaged with the lock. This sort of tie‐in has efficiency gains that benefit
consumers and would be legal.1 Between these spectrum‐ending examples are a
range of plentiful close cases.
The third element at issue here ‐‐ market power in the tying product
‐‐ is essential to a would‐be monopolistʹs coercion via tie‐in. Without the
leverage of market power, a sellerʹs inefficient tie‐in will fail because a rational
consumer will buy the tying product from the sellerʹs competitor. ʺAs a simple
1 A package with both a lock and keys is preferred by consumers over a lock and keys as separate products. Consumers would incur transaction costs from having to search for keys compatible with a specific lock ‐‐ packaging the products together avoids these costs. The lock and keys tie‐in creates even more value to the consumer if a problem with the product arises. What if the lock will not turn? Without the tie‐in, the consumer may be faced with the lock manufacturer saying the problem lies with the keys and the key manufacturer saying the problem lies with the lock. 9
example, if one of a dozen food stores in a community were to refuse to sell flour
unless the buyer also took sugar it would hardly tend to restrain competition in
sugar if its competitors were ready and able to sell flour by itself.ʺ N. Pac. Ry. Co.,
356 U.S. at 6‐7. Hence, without market power, there is little risk of
anticompetitive harm from the sellerʹs tie‐in.
Market power is ʺthe ability of a single seller to raise price and
restrict output.ʺ Eastman Kodak, 504 U.S. at 464 (quoting Fortner Enters., Inc. v.
U.S. Steel Corp., 394 U.S. 495, 503 (1969)). It can be shown by specific evidence of
a sellerʹs ability to control prices or exclude competitors from the market. See
K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 129 (2d Cir. 1995).
Market share is proxy for market power. See id.; Eastman Kodak, 504 U.S. at 464.
A high market share alone, however, is insufficient to infer a sellerʹs market
power if other characteristics of the product market, such as low barriers to
entry, high cross elasticity of demand, or technological developments in the
industry, interfere with the sellerʹs control of prices. See Tops Mkts., Inc. v. Quality
Mkts., Inc., 142 F.3d 90, 98‐99 (2d Cir. 1998) (ʺA court will draw an inference of
monopoly power only after full consideration of the relationship between market
share and other relevant market characteristics.ʺ). Indeed, in a tying case, the
ʺbest wayʺ to plead market power is to allege facts that, if proven, ʺestablish
directly that the price of the tied package is higher than the price of components
sold in competitive markets.ʺ Will v. Comprehensive Accounting Corp., 776 F.2d
665, 671‐72 (7th Cir. 1985) (Easterbrook, J.).
II. Separate Product Markets
A. Cable Boxes Generally
Cable boxes, whether interactive or not, have a physical appearance
separate from the programming they receive. A layperson might view them as
the equivalent of a radio, and there are similarities. A radio receives and plays
signals transmitted on various frequencies by networks and independent
stations, and the consumer can use the radio to navigate between programs.
While rights to the programming are retained by the owners of the programming
content and protected by a bar against copying and retransmission, the consumer
needs no contract with the network or station to receive the programming.
Cable boxes are somewhat similar. They receive and transmit
programming and allow the viewer to navigate between channels. But there are
significant differences. Signals are not picked up from the air; they are received
through cable lines owned by providers. A would‐be viewer must subscribe to
one of several packages of tiered programming offered by a particular cable
provider ‐‐ e.g., basic, basic plus a sports package, basic plus premium ‐‐ to view
various programs at various times. Networks and other content producers retain
rights against copying for commercial use and the cable providers retain rights to
the packages of programming. In short, cable providers sell to their subscribers
rights to viewing and copying for personal use its packages of programming.
A cable box must be designed to receive the signal from a particular
provider, which requires the providerʹs cooperation. And because providers
code their signals to prevent theft, a cable box must also be able to unscramble
the coded signal of the particular provider. Unsurprisingly, providers do not
share their codes with cable box manufacturers.
Therefore, to be useful to a consumer, a cable box must be cable‐
provider specific, like the keys to a padlock. Although the plaintiffs frame their
claim as a tie‐in, the core issue is a cable providerʹs right to refuse to enable cable
boxes it does not control to unscramble its coded signal.
B. Allegations
The Complaint alleges that, ʺ[b]ut for Time‐Warnerʹs unlawful tying
requirement . . . there would be a thriving market in which consumers would
have a choice in their purchase of cable boxes.ʺ Joint App. 204. However, the
Complaint lacks any allegation that there have ever been separate sales of set‐top
boxes and cable services, whether or not ʺpremium,ʺ in the United States, even in
markets where cable providers face competition and, more specifically, in
markets where Premium Cable Services are available through competing fiber
optic networks that do not use set‐top boxes.
The specific factual allegations that support the claim that the set‐top
boxes and Premium Cable Services are separate products are that: (i) existing
technology permits the sale of remotely programmable bi‐directional cable boxes
at retail; (ii) Time Warner does not manufacture its own bi‐directional cable
boxes; (iii) Time Warner separately itemizes charges for leasing bi‐directional
cable boxes and providing cable television services on consumersʹ bills; (iv) bi‐
directional cable boxes are sold separately at retail in markets outside of the
United States, specifically South Korea; and (v) modems are sold separately from
internet services in the United States.
Viewed individually or collectively, these allegations are insufficient.
Allegations (i) and (ii) ‐‐ the existence of relevant technology and Time Warnerʹs
lack of manufacturing operations ‐‐ address supply‐side considerations rather
than the character of consumer demand, i.e., whether consumers would purchase
cable boxes separately from cable services if given the choice. Further, we note
that sellers commonly purchase components from various manufacturers and
package the components together for sale as a unitary product. Thus, that Time
Warner does so with set‐top boxes and Premium Cable Services says little about
whether there are separate product markets for these components as a matter of
antitrust law. Cf. Jack Walters & Sons Corp. v. Morton Bldg., Inc., 737 F.2d 698, 703
(7th Cir. 1984) (Posner, J.) (ʺ[T]o hold therefore that every composite product is a
tie‐in, subject to the hostile scrutiny to which antitrust law still subjects tie‐ins,
would place industry under a vast antitrust cloud, and has been rejected.ʺ).
In a vacuum, allegation (iii) ‐‐ Time Warnerʹs separate itemization of
charges for set‐top boxes and cable services on consumer bills ‐‐ could suggest
that Time Warner considers them separate products. In light of an FCC rule that
compels Time Warner to separately itemize these charges, however, such an
inference is not plausible. See 47 C.F.R. § 76.1206; Iqbal, 556 U.S. at 681 (weighing
ʺallegations [that] are consistent withʺ liability against ʺmore likely explanationsʺ
and concluding that the claim is not plausible).
As for allegation (iv) ‐‐ the availability of retail bi‐directional cable
boxes in some markets outside of the United States ‐‐ there is no reasonably
specific allegation that those markets are sufficiently similar to the U.S. market in
relevant respects such that it is plausible to infer that Time Warnerʹs tie‐in, rather
than other market conditions, explains the retail unavailability of such cable
boxes.2 Notably lacking is any allegation that there has ever been separate sales
of cable boxes and cable services in the United States, even in markets where
cable providers are in competition with each other or with fiber optic cable
services that employ different technology. See Microsoft, 253 F.3d at 88
(ʺ[B]undling by all competitive firms implies strong net efficiencies.ʺ).
Similarly, as to (v), ‐‐ the separate sales of modems ‐‐ obvious
differences between the provision of cable and internet services negate any
inference as to separate markets for bi‐directional cable boxes. As described in
detail above, a cable box useful to consumers must be provider‐specific, allowing
consumers to subscribe to particular packages of programming, while modems,
like radios, transmit all available content.
2 For example, relevant characteristics of the market include, among other things, the regulatory environment, norms for the protection of intellectual property rights, security, theft propensity, and consumer preferences. 15
The Complaint, therefore, fails to allege facts that, if proven, would
show the existence of a demand for bi‐directional cable boxes separate from the
demand for Premium Cable Services. Likewise, it fails to plausibly allege that
consumers are coerced into ʺleasingʺ set‐top boxes from Time Warner that they
would otherwise purchase elsewhere.
C. The Regulatory Environment
Our conclusion that the Complaint fails to plausibly allege separate
product markets for bi‐directional cable boxes and Premium Cable Services is
supported by our examination of the relevant statutory and regulatory
framework, as is required by existing law. See Verizon Commcʹns Inc. v. Law
Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 411‐12 (2004) (ʺAntitrust analysis
must always be attuned to the particular structure and circumstances of the
industry at issue,ʺ including ʺthe existence of a regulatory structure designed to
. . . . perform[] the antitrust function,ʺ which may ʺdiminish[] the likelihood of
major antitrust harm.ʺ (internal citations and quotation marks omitted)); Taylor,
313 F.3d at 776 (a reviewing court may consider the complaint, documents
attached to the complaint, documents incorporated by reference in the
complaint, and public records, when considering a motion to dismiss).
As the Complaint acknowledges, Congress has 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 by the Complaint. In 1996, Congress directed the FCC to ʺadopt
regulations to assure the commercial availability of devices that consumers use
to access [cable services] . . . from manufacturers, retailers, and other vendors not
affiliated withʺ cable providers. Expanding Consumersʹ Video Navigation
Choices; Commercial Availability of Navigational Devices, 81 Fed. Reg. 14,033,
14,033 (Mar. 16, 2016) (internal quotation omitted). Congress also directed that
any such regulations must not ʺjeopardize security of [cable] systems, or impede
the legal rights of a provider of such services to prevent theft of service.ʺ Id. at
14,033 (quoting 47 U.S.C. § 549(b)). In other words, since 1996, the FCC has been
tasked with disaggregating set‐top boxes from the cable services they deliver, or,
in antitrust terms, developing separate product markets for cable boxes and cable
services.
The FCC has recently acknowledged that numerous efforts to create
those separate markets have failed, especially as to bi‐directional cable boxes and
Premium Cable Services. See 81 Fed. Reg. at 14,033‐34. A combination of the
speed of technological change in the market, and various hardware, software,
security, and collective‐action problems have impeded the FCCʹs attempts to
foster separate markets. See id. at 14,033‐35 (ʺCable operators used widely
varying security technologies, and the best standard available to the Commission
was . . . hardware based [and] worked only with one‐way cable services. . . . [A]
new approach that would work with two‐way services [failed because it] was not
sophisticated enough to meet content companiesʹ content protection demands.ʺ).
In March 2016, the FCC proposed new regulations in a further attempt to create
separate markets, see id., but its historic failure to do so over the time period
covered by the Complaint bolsters our conclusion that the plaintiffs have not
plausibly alleged separate product markets for bi‐directional cable boxes and
Premium Cable Services.
Moreover, though it does not touch on any of the specific elements
of a tying claim discussed above, there is an FCC regulation that further renders
the claims in this case implausible. See 47 C.F.R. § 76.923. That regulation caps
the price that Time Warner or other providers may charge to lease set‐top cable
box equipment to consumers. Id. § 76.923(f)‐(g) (providing that ʺ[m]onthly
charges for rental of a [cable box] unit shall consist of the average annual unit
purchase cost of [cable boxes] leased, including acquisition price and incidental
costs such as sales tax, financing and storage up to the time it is provided to the
customer, added to the product of the [hourly service charge] times the average
number of hours annually repairing or servicing a [cable box], divided by 12 to
determine the monthly lease rate for a [cable box].ʺ). It also limits which
maintenance and financing charges may be amortized over twelve months and
provides that Timer Warner may include a ʺreasonable profitʺ in its leasing rate.
Id. § 76.923(c).
Such a regulatory price control on the tied product makes the
plaintiffsʹ tying claim implausible as a whole. We doubt that Time Warner
would attempt to monopolize the market for bi‐directional cable boxes when an
FCC regulation caps the amount of profits that Time Warner may reap from that
market. Cf. Verizon, 540 U.S. at 412 (ʺThe regulatory framework that exists in this
case demonstrates how, in certain circumstances, regulation significantly
diminishes the likelihood of major antitrust harm.ʺ (internal quotation marks
omitted)). Indeed, a typical tie‐in works in the reverse of the circumstances here:
Government regulation of the tying productʹs price will cause the monopolist to
seek monopoly rents through sales of an unregulated tied product. See
Hovenkamp at 436; cf. Eastman Kodak, 504 U.S. at 487 (ʺ[T]ying arrangements may
be used to evade price control in the tying product through clandestine transfer of
the profit to the tied product; . . . and they may be used to force a full line of
products on the customer so as to extract more easily from him a monopoly
return on one unique product in the line.ʺ (emphases added) (quoting Fortner
Enters., 394 U.S. at 513–514 (White, J., dissenting))).
The insufficiency of the allegations of a separate market for bi‐
directional cable boxes, the inability of the FCC to create such a market, and the
price regulation of the tied product further persuade us that the Complaint does
not plead a plausible tying claim.
III. Market Power
We also conclude that, as the district court held, the Complaint does
not plausibly allege market power in the relevant product and geographic
markets.
As noted above, the Complaint defines the relevant product market
as that for Premium Cable Services (a market separate from basic cable). It
identifies 53 distinct geographic markets in which Time Warner allegedly has
violated the antitrust laws. The plaintiffs were, therefore, required to allege facts
supporting an inference that Time Warner possessed market power in the
Premium Cable Services market in each specified geographic market. See Ill. Tool
Works, 547 U.S. at 46 (ʺ[I]n all cases involving a tying arrangement, the plaintiff
must prove that the defendant has market power in the tying product.ʺ); E & L
Consulting, 472 F.3d at 32 (even prior to Twombly, ʺan antitrust defendant charged
with illegal tying is entitled to some specificityʺ as to each element of antitrust
claim alleged).
Broadly, the Complaint alleges that major cable providers in the
aggregate possess power over the market for basic cable in the United States. It
also alleges that the firms do not generally compete with each other within the
specified local markets. Further, because Time Warner ʺcontrolsʺ the markets in
which it provides basic cable services and because ʺthe provision of Premium
Cable Services relies upon the same basic infrastructure as basic cable services,ʺ
the Complaint alleges that Time Warner ʺnaturallyʺ has market power over
Premium Cable Services. Joint App. 180.
These allegations are insufficient to plead market power. They
conflate the markets for basic and premium cable.3 The plaintiffs cannot
3 The plaintiffs emphasize that the packages sold by cable providers are ʺtieredʺ so that every subscriber of premium services obtains basic services from the 21
plausibly derive Time Warnerʹs market power over Premium Cable Services from
broad allegations about the nationwide market for basic cable. While Time
Warnerʹs delivery of Premium Cable Services depends on the technological
infrastructure it uses to provide basic cable, such fact implies little about the
market for Premium Cable Services, especially given the Complaintʹs allegation
that Time Warnerʹs competitors deploy different technology to provide the same
product. Indeed, the Complaint alleges no particular facts bearing on Time
Warnerʹs share of the market for premium, two‐way services, as opposed to basic
cable services. Antitrust law requires plaintiffs to plead such facts and the
plaintiffsʹ failure to do so means they have not plausibly pled market power. See
PepsiCo, Inc. v. Coca–Cola Co., 315 F.3d 101, 108 (2d Cir. 2002) (ʺIn the absence of
direct measurements of a defendantʹs ability to control prices or exclude
competition . . . market power necessarily must be determined by reference to the
ʹarea of effective competitionʹ ‐‐ which, in turn, is determined by reference to a
specific, defined ʹproduct market.ʹʺ (internal citations omitted)); see also Rick‐Mik
Enters. Inc. v. Equilon Enters., LLC, 532 F.3d 963, 972 (9th Cir. 2008) (a tying claim
same provider. However, it would make little commercial sense to sell basic cable services separately. In any event, an allegation of a large market share in basic services means nothing in this context because such a share tells us nothing about the market share in premium services. 22
is insufficient where allegations of market power are based on facts about a
broader industry rather than the specific tying product market).
What is more, the Complaint alleges that Time Warner competes
with other, non‐cable companies in the provision of Premium Cable Services in
at least 22 geographic markets. No facts are alleged, however, concerning Time
Warnerʹs share of these markets or how the presence of non‐cable competitors
affects Time Warnerʹs power over price in these markets. Thus, without more
specific allegations, an inference of market power is not plausible. Cf. Tops Mkts.,
142 F.3d at 99 (an inference of market power is appropriate ʺonly after full
consideration of the relationship between market share and other relevant
market characteristicsʺ).
The Complaint, therefore, does not allege facts sufficient to infer that
Time Warner possessed market power over Premium Cable Services in the 53
specified markets and the tie‐in claim fails on that ground as well.
CONCLUSION
For the reasons stated, we conclude that the Complaint fails to
plausibly allege that bi‐directional cable boxes are a separate product from the
Premium Cable Service subscriptions they transmit. The FCCʹs long history of
regulation in this area further reinforces our conclusions. We also conclude that
the Complaint fails to plausibly allege Time Warnerʹs market power in the
particular product and geographic markets defined in the Complaint.
We therefore AFFIRM.
DRONEY, Circuit Judge, dissenting:
Dismissal of antitrust claims on the pleadings “should be granted very
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] tied product;” (2) “evidence of actual coercion by the seller that forced
the buyer to accept the tied product;” (3) “sufficient economic power in the tying
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.
As the majority explains, our inquiry into the “separate product” element
is governed by the “consumer demand test.” “[W]hether one or two products are
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, 466 U.S. 2, 19 (1984), abrogated on other grounds by Ill. Tool Works Inc. v. Indep.
Ink, Inc., 547 U.S. 28 (2006). Thus, to qualify as separate, the products must be
“distinguishable in the eyes of buyers.” Id.
Here, Plaintiffs allege facts plausibly showing that Premium Cable Services
and set‐top cable boxes constitute separate products “distinguishable in the eyes
of buyers.” Plaintiffs allege that Time Warner does not design or manufacture its
own cable boxes, but rather purchases boxes from three manufacturers, and that
numerous other manufacturers are capable of producing cable boxes that are
technologically compatible with Time Warner’s services. However, even if
customers could purchase cable boxes directly from any of these manufacturers,
Time Warner would not allow its customers to receive Premium Cable Services
without leasing a cable box from it. Plaintiffs also allege that the cost of leasing a
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
countries” in which consumers are not compelled to rent cable boxes from their
cable providers. Joint App. 194. Supporting this allegation are Time Warner’s
own statements to the FCC comparing cable boxes to cable modems—for which
an open market for customer‐owned devices exists—and indicating its belief that
a similar market could emerge for cable boxes. Finally, Plaintiffs point to the
FCC’s failed CableCARD initiative as evidence that manufacturers are willing to
enter the cable box market by selling directly to consumers.
Taking these factual allegations as true and drawing all reasonable
inferences in Plaintiffs’ favor, Taylor v. Vt. Dep’t of Educ., 313 F.3d 768, 776 (2d Cir.
2002), I believe the Complaint plausibly alleges a separate product market for
consumer‐purchased cable boxes, which is suppressed by Time Warner’s
anticompetitive conduct.1 In concluding otherwise, the majority imposes too high
a bar on Plaintiffs.
1 Notably, the district court reached the same conclusion below, holding that Plaintiffs “plausibly allege[] that cable boxes are separate and distinct from Premium Cable Services. At the pleading stage, the cable box appears to be a product that could be sold separately and profitably because every user of Time Warner’s Premium Cable Service is a potential purchaser of a cable box.” In re Time Warner Inc. Set‐Top Cable Television Box Antitrust Litig., Nos. 08 MDL 1995(PKC), 08 Civ. 7616(PKC), 2010 WL 882989, at *4 (S.D.N.Y. Mar. 5, 2010). Time Warner does not contest this determination on appeal. 3
The majority dismisses two of Plaintiffs’ allegations because they “address
supply‐side considerations rather than the character of consumer demand.” Maj.
Op. at 13‐14. While I agree that we must focus on consumer demand, supply‐side
considerations are nonetheless relevant to our inquiry. Indeed, in analyzing
Plaintiffs’ allegations, the majority itself relies on supply‐side considerations. See
id. at 15.
The majority focuses also on the technological challenges associated with
independently manufactured cable boxes. It states that cable boxes are “cable‐
provider specific, like the keys to a padlock,” id. at 12, and characterizes the “core
issue” in this case as “a cable provider’s right to refuse to enable cable boxes it
does not control to unscramble its coded signal,” id. But this favors the supplier’s
dubious technological concerns over the consumer’s right to choose between
competing products. See Gonzalez v. St. Margaret’s 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 tied‐product market,” and not on “the tying
entity’s interest”). See also United States v. Microsoft Corp., 253 F.3d 34, 87 (D.C.
Cir. 2001) (interpreting Jefferson Parish and identifying the “core concern” of tying
as “prevent[ing] goods from competing directly for consumer choice on their
merits”). Plaintiffs also specifically allege that cable boxes are remotely
programmable. In light of that allegation—which, on a motion to dismiss, we
assume to be true—the majority’s concern that providers will be forced to “share
their codes with cable box manufacturers,” Maj. Op. at 12, appears unfounded.
Finally, the majority faults Plaintiffs for failing to show that cable boxes
have ever been sold separately in U.S. markets. That Plaintiffs cannot do so,
though, should not be fatal to their claim—particularly at this stage of the
proceedings. In any event, there is an obvious explanation for this lack of
evidence: since at least 1996, cable operators have required that consumers lease
set‐top cable boxes to access their cable service packages.2 It is no surprise, then,
that Plaintiffs are unable to show a history of separate sales of set‐top boxes and
premium cable services in the United States. It is enough that Plaintiffs have
instead alleged separate sales of the same product in at least one different market
(South Korea), as well as separate sales of an analogous product (cable modems)
2 Indeed, in response to these practices, Congress enacted Section 629 of the Telecommunications Act of 1996, which directed the FCC to “adopt regulations to assure the commercial availability[] to consumers . . . of converter boxes . . . from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor.” 47 U.S.C. § 549(a). In implementing that legislation, the FCC noted that set‐top boxes “have historically been available only on a lease basis from the service provider.” In re Implementation of Section 304 of the Telecommunications Act of 1996, Report & Order No. 98‐116, 13 FCC Rcd. 14775, 14778 (F.C.C. June 24, 1998). 5
in the U.S. market, to support the inference that cable boxes and cable services
comprise separate, distinguishable products.
The FCC’s failed efforts to disaggregate set‐top 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 FCC’s failed attempts at
developing an alternative device are largely attributable to solvable technological
issues and resistance from cable providers, and say little about consumer
demand for such a device. Thus, in my view, the regulatory environment seems
to support Plaintiffs’ allegations.
The majority also points to an FCC regulation, which sets a cap on the
price Time Warner may charge consumers for leasing set‐top cable boxes, as
support for the view that Time Warner would not attempt to monopolize the
cable box market when the amount of profits it may realize is so limited. But this
view misjudges the regulation’s effectiveness in curbing monopoly prices. The
FCC regulation sets a cap on leasing prices by tying those prices to the “average
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
incentive to keep those purchase costs low. As Plaintiffs allege, Time Warner has
historically purchased its cable boxes from just three suppliers, and those
suppliers do not make their cable boxes available for sale to the general public.
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,
notwithstanding the FCC’s regulation, Time Warner may charge consumers fees
that exceed the true cost of the cable box, thereby generating considerable profits.
In fact, Time Warner’s 2008 Annual Report warned investors that the emergence
of a competitive market for cable boxes would threaten the substantial revenues
generated from equipment rental and installation charges. I cannot conclude,
then, as the majority does, that the FCC pricing regulation lessens the plausibility
of Plaintiffs’ claim.
In sum, taken together and viewed in a light most favorable to Plaintiffs,
the allegations in the Complaint plausibly show that set‐top cable boxes and
Premium Cable Services are distinct products, which, if not for Time Warner’s
conduct, would be purchased separately by consumers.
II.
As to market power, the majority concludes that Plaintiffs: (1) fail to allege
sufficient facts bearing on Time Warner’s market share for premium cable
services, as opposed to basic cable services; and (2) fail to allege with requisite
specificity Time Warner’s market share in the relevant geographic markets. I
disagree.
The majority first concludes that Plaintiffs conflate the markets for basic
and premium cable services. Not so. While it is true that Plaintiffs’ allegations are
largely drawn from data concerning the nationwide market for basic cable
services, those allegations bear on Time Warner’s market share in Premium
Cable Services as well. As the Complaint explains, cable services are cumulative.
That is, a consumer who purchases Premium Cable Services from Time Warner
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
cable services in a given market, it exercises market power over Premium Cable
Services in that market as well.
The majority next concludes that Plaintiffs fail to allege “particular facts
bearing on Time Warner’s share of the market” for Premium Cable Services. Maj.
Op. at 22. But Plaintiffs allege that, by 2009, subscriptions to Time Warner’s
Premium Cable Services had grown to 8.9 million, translating into a 21% share of
the total premium cable market. Plaintiffs also point to the high barriers to entry
facing those wishing to compete with Time Warner in that market. As a result,
Time Warner’s largest competitors, AT&T U‐verse and Verizon FiOS, had, as of
2009, significantly fewer premium cable services subscribers than Time Warner.
Indeed, for all services combined, Plaintiffs allege that U‐Verse and FiOS had a
total of 2.06 and 2.9 million customers, respectively. The next three largest
competitors, Plaintiffs allege, had a combined customer base of less than 900,000
customers, while several others ceased operations or declared bankruptcy. These
allegations are sufficient to plausibly allege that Time Warner has market power
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
evidence of the ability to control prices or exclude competition, or indirectly, by
evidence of high market share and other relevant market characteristics, such as
strength of the competition, barriers to entry, and elasticity of consumer
demand). See also U.S. Steel Corp. v. Fortner Enters., Inc., 429 U.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
purchasers to accept burdensome terms that could not be exacted in a completely
competitive market”).
As to the majority’s second point, concerning market share in relevant
geographic markets, the mere possibility of regional variations in Time Warner’s
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 . . . we do not require a further showing of market power.” Todd v. Exxon
Corp., 275 F.3d 191, 206–07 (2d Cir. 2001) (internal citation and quotation marks
omitted). Here, Plaintiffs allege that Time Warner faces no competition in at least
31 geographic markets.3 As for the remaining 22 markets, Plaintiffs allege that
Time Warner faces minimal competition. Specifically, Plaintiffs allege that U‐
verse and FiOS—Time Warner’s largest competitors—provide services to
approximately 500,000 subscribers each within geographic markets controlled by
Time Warner. And, as discussed above, Time Warner’s other competitors face
significant barriers to entry, and represent a total combined customer base of less
than 900,000. These numbers contrast with Time Warner’s total Premium Cable
customer base of 8.9 million, and support the inference that Time Warner
possesses sufficient market power across all relevant markets. Requiring a
greater degree of specificity from Plaintiffs would be inconsistent with this
Court’s extensive precedent to the contrary. See, e.g., Arista Records, LLC v. Doe 3,
604 F.3d 110, 120–21 (2d Cir. 2010) (rejecting argument that Iqbal “require[s] the
pleading of specific evidence or extra facts beyond what is needed to make the
claim plausible”); Braden v. Wal‐Mart Stores, Inc., 588 F.3d 585, 595 (2d Cir. 2009)
(reiterating that “it is sufficient for a plaintiff to plead facts indirectly showing
unlawful behavior, so long as the facts pled give the defendant fair notice of
3 Given the overlapping nature of cable services, the precise number of distinct geographic markets at issue is difficult to discern. For simplicity’s sake, I use the same numbers adopted by the majority. 11
what the claim is and the grounds upon which it rests” (internal quotation marks
omitted)).
* * *
“The role of the court at this stage of the proceedings is not in any way to
evaluate the truth . . . but merely to determine whether the plaintiff’s factual
allegations are sufficient to allow the case to proceed.” Doe v. Columbia Univ.,
Nos. 15‐1536 (Lead), 15‐1661 (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.