9th Circuit Withdraws Decision Dismissing Antitrust Claim Regarding Cable Channel Bundling

Photo by Vick the Viking

On October 31, 2011, the 9th Circuit withdrew its June 3 decision holding cable companies’ bundling of channels did not violate antitrust law, specifically the Sherman Act. The suit commenced in 2007 on behalf of a class of consumers against cable programmers, including NBC Universal, The Walt Disney Co., Time Warner, Comcast, and DirecTV. The companies packaged “must-have” cable channels with low-demand channels thus prohibiting cable distributors from offering the channels à la carte. The consumers alleged that this practice forced independent distributors out of the market.

The Sherman Act prohibits contracts, trusts, or conspiracies in unreasonable restraint of trade or commerce. One unreasonable restraint can be the practice of “tying” two or more products together that could otherwise be sold separately. The idea is that the seller has market power over the “tying product” and can leverage this power to exclude other sellers of the “tied product.” In the case of cable channels, the high-demand, “must-have” channels would be the tying product and the low-demand would be the tied product.

The District Court dismissed the case for failure to state a claim concluding that the plaintiffs failed to show how cable channel bundling keeps independent companies from entering and competing in the industry. The court contended that the plaintiffs did not plead facts asserting an antitrust claim, but instead asserted a class action suit by claiming that cable bundling harms consumers by limiting the way in which cable distributors compete with one another. Harm to consumers and limits on competition, without more, does not constitute injury to competition sufficient to bring an antitrust suit.

After receiving a flood of amicus briefs from organizations and consumer groups, the 9th Circuit withdrew its opinion and will seek a third judge to join the panel. Likely, the court will issue a more in-depth and detailed opinion. The court fell short in its analysis, merely stating that injury to consumers is not proof of injury to competition. It is probable that the court will set forth a clear pleading standard that lawyers must meet to assert injury to competition, rather than reverse the grant of the motion to dismiss. It is rare for a court to withdraw a decision on its own and rarer for a court to reverse that decision.

Seven States Join the U.S. Justice Department in Federal Court, Seeking to Block the Merger of AT & T and T-Mobile

AT & T proposed its $39 billion plan to buy T-Mobile USA. The deal will give AT & T a 40.6% market share in the cell phone industry, and will concentrate 80% of U.S. wireless customers in two companies – AT & T and Verizon wireless, thus creating a duopoly in the mobile service market. Not surprisingly, the acquisition is challenged by the Department of Justice, jointed by seven states, including New York, Massachusetts and California, under the Federal Antitrust Law.

Section 7 of the Clayton Act, an anti-merger statute, prohibits mergers that may substantially stifle competition “in any line of commerce, in any section of the country.” The Act especially disfavors horizontal mergers. A horizontal merger is a merger between two direct competitors who compete with each other in the same line of business and in the same geographic market. A horizontal merger will have adverse anti-competitive effects because it will eliminate competition between two merging parties, and will likely increase market shares and assets of the merged enterprise. The merger will be illegal per se, unless the merger will not create or tend to create a monopoly. Market concentration and market shares of two merging companies are the determinative factors in a horizontal mergers analysis. High market concentration and dominant market shares will establish a prima facie violation of the Act.

The merger between AT & T and T-Mobile is a horizontal acquisition because the two companies compete directly with each other in the cell phone market, and both provide a national-wide service, with market shares of 28.5% and 12.1%, respectively. The merger will allow AT & T to dominate the market, enable it to set prices and instill a fear in the smaller competitors. Consequently, it will lessen the competition and create a prima facie case that the merger is unlawful. In addition, the merger will create an industry where the top two companies handling 80% of the service. The high concentration may encourage AT & T and Verizon to seek a deal for their mutual advantage at the cost of consumers, and discourage new enterprises from entering into the wireless service business. Before the merger, the cell phone market has been already concentrated, with Verizon and AT & T claiming over 50% of U.S. wireless consumers. In an already highly concentrated market, the courts will condemn any merger that increases concentration, even if that increase is minimal. The merger will be enjoined unless AT & T can provide clear evidence that the merger will not adversely affect the competition in the cell phone industry.

AT & T can argue that the extremely competitive wireless market will prevent the merger from substantially stifling the competition. It can point out that, despite the wireless service industry in the United State being concentrated in Verizon and AT & T, the competition between Verizon and AT & T is vigorous and it is impossible for them to reach any mutual advantage agreement. At & T can further argue that the merger will only put AT & T at a more competitive position. As a result, the merger will encourage the competition.

This pro-competitive argument will not likely survive the scrutiny. A pro-competitive effect on a horizontal merger will justify the merger only when two merging firms were weak before the merger, and will not result in a dominant market. The evidence shows that: both AT & T and T-Mobile are strong and aggressive competitors, both have a significant amount of market shares in the wireless industry, neither of them are failing, and the merger will produce a dominant market as AT & T will be the No. 1 provider of mobile services. The merger will not only effectively eliminate a competitor, but will likely force a higher price on T-Mobile customers with an inferior service, the effects of which the Act was enacted to prevent.

Antitrust Officials Investigate MPEG-LA’s Patent Call Regarding VP8

The Department of Justice, along with the California State Attorney General’s Office, recently began an antitrust investigation into MPEG-LA’s call to various organizations and companies to identify whether they hold any essential patents used by the VP8 video codec. The main concern of the investigation is whether MPEG-LA is simply trying to stifle development and proliferation of the competing codec, as opposed to legitimately expressing concern over whether VP8, which is currently open source, contains patented material.

MPEG-LA is a Denver based company that licenses patent pools covering patents required for use of MPEG-2, H.264 and various other video encoding standards. H.264 is one of the most frequently used formats for the recording, compressing and distributing of high definition video. Both Microsoft and Apple own patents in MPEG-LA’s H.264 patent pool. Additionally, their browsers (IE9 and Safari, respectively) support H.264 and each of these companies has built H.264 into its operating system. MPEG-LA does not charge royalties for H.264 video that is delivered free to end users. However, MPEG-LA does charge royalties for devices that encode and decode H.264. Additionally, MPEG-LA charges royalties for H.264 video sold to end users for a fee.

VP8 is a video encoding format that many agree produces remarkably similar video delivery to H.264. It was originally developed by On2 Technologies. Google, having bought On2 last year, currently owns VP8. Shortly after having acquired VP8, Google responded to calls from the Free Software Foundation as well as others and open-sourced VP8. As such, Google does not collect any royalties whatsoever for the use of VP8. Mozilla and Opera Software have built VP8 support into their browsers. Adobe has agreed to build VP8 capability into its Flash Player plug-in.

MPEG-LA’s patent call is part of an effort to create a joint VP8 patent license. In order to participate in the joint license, a party must contain at least one essential patent in VP8. A team of patent evaluators with MPEG-LA will determine the essentiality of the patent. MPEG-LA has stated that it will only charge royalties for use of a given patent in VP8 after a certain number of years, which it has yet to determine. This investigation is taking place against the background of the World Wide Web Consortium’s (W3C) developing of html5, the next language for arranging and portraying content on the internet. It is still uncertain what video codec html5 will use to display video content. H.264 and VP8 are both considered prospects as the video codec of choice for this future format. Antitrust officials are concerned that MPEG-LA is attempting to frighten other companies from adopting the VP8 standard for fear of having to pay future royalties. MPEG-LA is doing so, officials worry, in order to improve its own position as the video codec of choice for the future.

Whether or not antitrust officials will decide to take legal action is a tough call. Part of their decision will hinge on whether they find that the software comprising these video encoding technologies is obvious; in other words, people could simultaneously and independently develop this technology. Material that is obvious is not patentable. Hence, should officials find the software obvious, they will be that much more likely to find MPEG-LA’s actions legally tenuous at best.

The Merger between AT & T and T-Mobile: Will it Go Through?

AT & T announced its $39 billion plan to buy T-Mobile USA. The deal, if approved by regulators, will give AT & T a 40.6% market share in the cell phone industry, and will concentrate 80% of U.S. wireless customers in two companies – AT & T and Verizon wireless, thus create a duopoly in the mobile service market. Despite AT & T’s likely argument that the cell phone market is intensely competitive and the deal will not easy the competition, the merger will have a hard time to pass the justice department’s scrutiny under the federal antitrust law.

Section 7 of the Clayton Act, an anti-merger statute, prohibits mergers that may substantially stiff competition “in any line of commerce, in any section of the country.” The Act especially disfavors a horizontal merger. A horizontal merger is a merger between two direct competitors who compete with each other in the same line of business and the same geographic market. A horizontal merger will have adverse anti-competitive effects because it will eliminate a competition between two merging parties, and will likely increase market shares and assets of the merged enterprise. Unless it will not create or tend to create a monopoly, the merge would be illegal per se. Market concentration and Market shares of two merging companies are the determinative factors in horizontal mergers analysis, and high market concentration and dominant market shares will establish a prima facie violation of the Act.

The merger between AT & T and T-Mobile is a horizontal acquisition because the two companies compete directly with each other in the cell phone market, and both provide a national-wide service, with market shares of 28.5% and 12.1%, respectively. The merger will give AT & T a dominant market, enable it to set prices and instill a fear in the smaller competitors. Consequently, it will lessen the competition and create a prima facie case that the merger is unlawful. In addition, the merger will create an industry with the top two companies handling 80% of the service. The high concentration may encourage AT & T and Verizon seeking a deal for their mutual advantage at the cost of consumers, and discourage new enterprises from entering into wireless service business. Before the merger, the cell phone market has been already concentrated with Verizon and AT & T taking more than 50% of U.S. wireless consumers. In an already highly concentrated market, the courts will condemn any merger that increases concentration, even if that increase is minimal. The merger will be enjoined unless AT & T can provide a clear evidence that the merger will not adversely affect the competition in the cell phone industry.

AT & T can argue that the extremely competitive wireless market will prevent the merger from substantially stiffing the competition. It can point out that despite the wireless service in the United State being concentrated in Verizon and AT & T, the competition between them is vigorous, it is not possible for them to reach an mutual advantage agreement, and the merger will only put AT & T at a more competitive position. As a result, the merger will encourage the competition.

This pro-competitive argument will not likely survive the scrutiny. A pro-competitive effect in a horizontal merger will justify the merger only when two merging firms were weak before the merger, and will not result in a dominant market. The evidence shows that both AT & T and T-Mobile are strong and aggressive competitors, both have significant amount of market shares in the wireless industry, neither of them is failing, and the merger will produce a dominant market as AT & T will be the No. 1 in the mobile service. The merger will not only effectively eliminate a competitor, but also likely force a higher price on T-Mobile customers with an inferior service, the effects that the Act was enacted to prevent.

Judge Doty: The Player’s Best Friend?

Three weeks ago, Federal District Court Judge David Doty sided with the NFLPA when he ruled that the NFL had violated the terms of the, then in place, collective bargaining agreement. By using its extraordinary market power, the NFL was able to force the networks wishing to carry its product to agree to provisions that required the networks to continue paying even if there was a work stoppage. Moreover, Doty continued, the NFL did so in preparation of a work stoppage, which was at least a few years away. Additionally, these provisions came at the expense of securing higher annual fees under the contracts if they removed the lockout terms. This was done because in the years prior to the lockout, where the NFL accepted lower annual fees, the fees were to be shared with the players; however, in the event of a lockout, the owners would have been able to keep all the revenue.

Judge Doty stressed that the NFL’s actions were taken with an eye toward locking out the players in a way that would hurt the players financially without a similar harm to themselves. In effect, the owners structured the deals, that were supposed to be negotiated to “maximize revenue for players,” to advance their own interests and not the players. The deals were done in a way to gain leverage for the owners in the event (an event that the owners were planning to occur) of a work stoppage. A plan Judge Doty put a stop to.

Although this was a win for the players, one wonders if the same logic won’t work against them in their upcoming April 6th hearing, a hearing brought by NFL players, led by the likes of Tom Brady, Peyton Manning, and Drew Brees, claiming that the lockout violates antitrust laws. However, this antitrust lawsuit is only available because the players decertified, a process they began in the fall of 2010. The decertification was done in such a public way in an attempt to gain leverage during negotiations and to allow this current lawsuit to take place. The NFL will/is going to argue that the decertification should be overlooked/ignored as it is a simple ploy to gain leverage whenever the two sides meet again at the bargaining table. It is certainly possible a Judge could look at the NFLPA’s actions the same way Judge Doty looked at the NFL owner’s actions when negotiating the TV deals and agree with the NFL to ignore the decertification.

BAR/BRI or Kaplan? Class Action Reveals They Are in Cahoots.

On December 6, 2010, a partial payment of $30,000,000 was approved for distribution amongst class members in involved in the BAR/BRI and Kaplan class action law suit. In Rodriguez v. West Publishing Company, plaintiffs sued on behalf of more than 300,000 class members who took a bar review course from BAR/BRI between August 1, 1997 to July 31, 2006. 2007 WL 2827379, *1 (C.D.C.A. Sept. 10, 2007). BAR/BRI is a subsidiary of West Publishing.

Plaintiffs claim that BAR/BRI agreed not to compete in the LSAT business and Kaplan agreed not to compete in the bar review business. Furthermore, plaintiffs argued that BAR/BRI’s offer to law students to pay the full amount for a bar prep course during their 1L year is anticompetitive because it forces test takers into a three year hold. Many students accepted the BAR/BRI lock-in rate and other bar prep courses faced a large barrier to market entry.

The settlement agreement removes the three year hold on law students when they enter into a contract with BAR/BRI. BAR/BRI has also agreed to abide by advertising requirements as noted by antitrust laws. Rodriguez, 2007 WL 2827379, *12. For five years, BAR/BRI will clarify that the law student’s initial enrollment payment does not commit the student to taking BAR/BRI or require the student to make a full payment to BAR/BRI. West Publishing terminated the co-marketing agreement between BAR/BRI and Kaplan that existed since 1997. See here for more details.

With the help of technology and perhaps with the ease of information flow, over 88,000 claims for over 130,000 BAR/BRI courses have been processed. This class action has been described as a class action money mill. Perhaps technology, which promotes quick news, has spurned a settlement amongst the parties. When it comes to big name litigation cases, there is an underlying public interest in settling and quieting litigation. In re Visa Check/Master Money Antitrust Litigation, 297, F. Supp. 2d 503, 510 (E.D.N.Y. 2003).

To read more about the settlement agreements for the two law suits against BAR/BRI, they are available online here and here.