Since 2008, cable customers have been suing cable operators across the country claiming operators violate the antitrust laws by forcing customers to lease set-top boxes from the operator to access “premium” cable services. Plaintiffs claim that the operators have “tied” one product (the service) to another product (the box) and that the arrangement is a per se violation of the antitrust laws (i.e., unlawful regardless of any alleged pro-competitive benefits).
The lawsuits have taken a number of different paths—with some surprising twists and turns:
- The first jury trial resulted in a verdict against Cox in 2015. But the trial court then set aside the verdict on the grounds it had rejected earlier on summary judgment.
- When another operator agreed to settle claims in a Philadelphia case, the district court refused to approve the deal, finding that the settlement class was not “ascertainable.” But last week, the Third Circuit quietly reversed in a summary decision, ruling that ascertainability is not relevant where the parties have agreed to the settlement class definition.
- Meanwhile, the FCC has jumped (back) into the fray by proposing rules to force cable operators to “Unlock the Box” —or, perhaps, give the FCC the keys.
A number of courts have dismissed set-top box tying claims for failure to plead or prove that the cable operator has sufficient “market power” to coerce a customer into leasing the set-top box because cable operators face competition from “overbuilders” and/or satellite services. Others dismissed because there was no proof that anyone would have sold stand-alone boxes “but for” the alleged tying.
Just before the Labor Day weekend, however, the Second Circuit established a new and different path. In Kaufman v. Time Warner, No. 11-2512-cv (2d Cir. Sept. 2, 2016), a panel affirmed 2-1 the district court’s ruling that the plaintiffs failed to allege market power. But that ruling was only a backstop. The majority’s principal ground for affirming dismissal was that premium cable services and the interactive boxes used to access them are not separate products at all. As such, the fundamental premise of any “tying” claim—two otherwise separate products tied together by the seller—simply does not exist.
The majority took two main tacks.
First, it analogized to a lock and key set: the lock (interactive cable service) only works with a particular key (a box programmed with the codes specific to that operator’s services that a particular customer paid for) and vice versa. Thus, in the majority’s view, “the core issue is a cable provider’s right to refuse to enable cable boxes it does not control to unscramble its coded signal.”
Second, when plaintiffs alleged that third-party boxes could be programmed remotely by the cable operator, the majority said it did not matter because that fact only potentially impacted supply, whereas product markets are defined by consumer demand. The majority found that the plaintiffs’ claims were doomed by the fact that premium services and boxes had never been sold separately in the U.S. – even where cable faces competition from other pay TV providers. The majority ruled that the lack of an historical, separate market “implies strong net efficiencies” and that consumers prefer to buy services and boxes together, like locks and keys.
Finally, while many plaintiffs have cited the FCC’s (old) “CableCARD” and (new) “Unlock the Box” initiatives as proof that there should be a separate set-top box market, the majority concluded just the opposite – the FCC’s efforts most likely failed due to the inefficiencies of creating a third-party market for secure content. The majority also doubted that a profitable “tying” scheme was plausible given regulatory price controls on set-top boxes.
The set-top box wars have been protracted and unpredictable. But the Kaufman majority’s approach could be a game-changer that allows cable operators to cut swiftly through the knot of “tying” claims.