Kaufman v. Warner
2016 U.S. App. LEXIS 16254
| 2d Cir. | 2016Background
- Plaintiffs (Time Warner subscribers) sued for an alleged Sherman Act tying: Time Warner conditions access to "Premium Cable Services" (digital, interactive two-way services) on leasing Time Warner's bi‑directional set‑top boxes.
- The MDL consolidated cases; the district court dismissed multiple complaints for failure to plead coercion, market power, and adverse competitive effects; plaintiffs appealed from dismissal of the Third Amended Complaint.
- The Complaint defined the tying product as Premium Cable Services (interactive features like program guides, on‑demand, "start over") and alleged Time Warner forced subscribers in 53 local markets to lease provider‑specific set‑top boxes it purchased from manufacturers.
- Plaintiffs alleged separate product markets for bi‑directional set‑top boxes based on available technology, itemized billing, retail sales abroad, and analogy to cable modems; alleged market power from Time Warner’s local control of cable infrastructure and share of premium subscribers.
- The Second Circuit affirmed dismissal, holding plaintiffs failed to plausibly allege (1) that set‑top boxes and premium programming are separate product markets under the consumer‑demand test, and (2) that Time Warner had sufficient market power in the defined premium markets to coerce a tie.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether set‑top boxes and Premium Cable Services are separate products for tying law | Boxes and services are distinct; manufacturers can make compatible boxes; separate retail markets exist abroad and for modems | Boxes are provider‑specific (like padlock keys); no evidence boxes sold separately in U.S.; supply‑side facts insufficient | Not separate: plaintiffs failed to plead consumer demand for separate purchase; regulatory history and technical/security realities undermine separate market inference |
| Whether Time Warner used actual coercion to force leasing | Leasing requirement coerces subscribers because they cannot use third‑party boxes to receive premium service | No plausible coercion where no separate tied product market exists and technical/security limits prevent third‑party use | Not plausibly alleged: coercion depends on separate market and market power; plaintiffs failed to plead those elements |
| Whether plaintiffs pleaded Time Warner's market power in each geographic premium market | Time Warner has large premium subscriber base and controls local infrastructure, faces little effective competition in many markets | Allegations conflate basic and premium markets; lack of market‑share facts for each geographic market; competition exists in many markets | Not pleaded: plaintiffs failed to allege market share or other facts showing ability to raise price or exclude competition in the defined premium markets |
| Effect of FCC regulation and industry structure on tying claim | FCC efforts and past failures show there could be separate device market; regulation requiring separate billing and FCC consideration support claim | FCC has long regulated device availability and caps lease prices; regulatory structure and price caps make monopolization of boxes implausible | Court relied on regulatory context to bolster dismissal: FCC failures to create a separate market and leasing price caps make a tying claim implausible |
Key Cases Cited
- Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (U.S. 1984) (consumer‑demand test for separate products in tying analysis)
- Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451 (U.S. 1992) (separate sales history as evidence of distinct markets)
- United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (discussion of consumer‑demand test and bundling efficiencies)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleadings)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading specificity and plausibility)
- Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (U.S. 2004) (consideration of regulatory framework in antitrust analysis)
- Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (U.S. 2006) (market power required in tying claims)
- E & L Consulting, Ltd. v. Doman Industries Ltd., 472 F.3d 23 (2d Cir. 2006) (elements of a tying claim)