ROB BRANTLEY, DARRYN COOKE, WILLIAM and BEVERLEY COSTLEY, PETER G. HARRIS, CHRISTIANA HILLS, MICHAEL B. KOVAC, MICHELLE NAVARRETTE, JOY PSACHIE and JOSEPH VRANICH, individually and on behalf of all others similarly situated v. NBC UNIVERSAL, INC., VIACOM INC., THE WALT DISNEY COMPANY, FOX ENTERTAINMENT GROUP, INC., TIME WARNER INC., TIME WARNER CABLE INC., COMCAST CORPORATION, COMCAST CABLE COMMUNICATIONS, LLC, COXCOM, INC., THE DIRECTV GROUP, INC., ECHOSTAR SATELLITE L.L.C., and CABLE VISION SYSTEMS CORPORATION
No. 09-56785
United States Court of Appeals, Ninth Circuit
June 3, 2011
7425
D.C. No. CV 07-6101 CAS VBK
Argued and Submitted March 7, 2011—Pasadena, California
Filed June 3, 2011
Before: Pamela Ann Rymer, Consuelo M. Callahan, and Sandra S. Ikuta, Circuit Judges.
Maxwell M. Blecher, Esq., Bletcher & Collins, PC, Los Angeles, California, for plaintiffs-appellants Rob Brantley, et al.
Glenn D. Pomerantz, Esq., Munger Tolles & Olson LLP, Los Angeles, California, and Arthur J. Burke, Esq., Davis Polk & Wardwell LLP, Menlo Park, California, for defendants-appellees NBC Universal, Inc., et al.
OPINION
IKUTA, Circuit Judge:
This case is a consumer protection class action masquerading as an antitrust suit. Plaintiffs are a putative class of retail cable and satellite television subscribers. They brought suit against television programmers (Programmers)1 and distributors (Distributors)2 alleging that Programmers’ practice of selling multi-channel cable packages violates Section 1 of the
I
The television programming industry can be divided into upstream and downstream markets. In the upstream market, programmers NBC Universal and Fox Entertainment Group own television programs (such as “Law and Order”) and television channels (such as NBC‘s Bravo, MSNBC, and Fox Entertainment Group‘s Fox News Channel and FX) and sell them wholesale to distributors. In the downstream retail market, distributors such as Time Warner and Echostar sell the programming channels to consumers.3
The nucleus of plaintiffs’ claims regarding the nature of the Programmers’ and Distributors’ alleged antitrust violation has remained constant throughout the various iterations of their complaint. According to plaintiffs, Programmers have two categories of programming channels: “must-have,” high-demand channels with a large number of viewers, and a group of less desirable, low-demand channels with low viewership. Plaintiffs allege that Programmers derive market power from their “must-have” channels because no Distributor can market and sell a programming package to consumers without those channels. Distributors contend that Programmers exploit this market power by bundling or tying the high and low demand
Based on these allegations, Plaintiffs claim that the Programmers and Distributors are in violation of Section 1 of the Sherman Act. Plaintiffs seek monetary damages under
The district court dismissed plaintiffs’ first complaint without prejudice on the ground that plaintiffs failed to show that their alleged injuries were caused by an injury to competition.
After preliminary discovery efforts on the question whether the Programmers’ practices had excluded independent programmers from the upstream market, the plaintiffs decided to abandon this approach.5 Pursuant to a stipulation among the parties, Plaintiffs filed a third amended complaint deleting all allegations that the Programmers and Distributors’ bundling practices foreclosed independent programmers from participating in the upstream market, along with a motion requesting the court to rule that plaintiffs did not have to allege that potential competitors were foreclosed from the market in order to defeat a motion to dismiss. The parties also agreed that Programmers and Distributors could file a motion to dismiss, and that if Programmers and Distributors prevailed, this third complaint would be dismissed with prejudice. The district court entered an order on October 15, 2009 granting Programmers’ and Distributors’ motion to dismiss the Third Amended Complaint with prejudice because plaintiffs failed to allege any cognizable injury to competition. The district court also denied plaintiffs’ motion to rule on the question whether allegations of foreclosed competition are required to state a Section 1 claim. Plaintiffs timely appeal.
II
[1] Section 1 of the Sherman Act prohibits “[e]very con
We generally evaluate whether a practice restrains trade in violation of Section 1 under the “rule of reason.”6 See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007). “In its design and function the rule [of reason] distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer‘s best interest.” Id. at 886. The parties do not dispute that the rule of reason applies in this case.
In order to state a Section 1 claim under the rule of reason, plaintiffs must plead facts which, if true, will prove “(1) a contract, combination or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intended to harm or restrain trade or commerce among the several States, or with foreign nations; (3) which actually injures competition.” Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1047 (9th Cir. 2008); see also Oltz v. St. Peter‘s Cmty. Hosp., 861 F.2d 1440, 1445 (9th Cir. 1988) (same). In order
In addition to pleading these three elements, an antitrust plaintiff must also plead facts that if taken as true would allow plaintiffs to recover for an antitrust injury, which is to say “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Big Bear Lodging Ass‘n v. Snow Summit, Inc., 182 F.3d 1096, 1102 (9th Cir. 1999) (internal quotation omitted); see also Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 344 (1990) (observing that antitrust injury is distinct from injury to competition and that “proof of a[n antitrust] violation and of antitrust injury are distinct matters that must be shown independently”) (quoting Phillip E. Areeda & Herbert Hovenkamp, Fundamentals of Antitrust Law ¶ 334.2c, at 330 (1st ed. Supp. 1989)).
Courts have identified two scenarios constituting an injury to competition for purposes of the third element of a Section 1 claim. First, agreements between competitors to harm or exclude other competitors (referred to as “horizontal collusion”) are deemed to injure competition because they insulate the colluding parties from horizontal competition. See F.T.C. v. Ind. Fed‘n of Dentists, 476 U.S. 447 (1986); see also Realcomp II, Ltd. v. FTC, 635 F.3d 815 (6th Cir. 2011) (holding that a horizontal agreement among “seven associations of competing real-estate brokers” relating to a web advertising policy “unreasonably restrained competition in the market for the provision of residential real-estate brokerage services.”). Horizontal collusion is not at issue here.
[2] Second, agreements that foreclose competitors from entering the market are likewise deemed to injure competition. See, e.g., Allied Orthopedic Appliances Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 996 n.1 (9th Cir. 2010);
[3] Two types of vertical restraints are potentially at issue here, tying and bundling. Tying is defined as an arrangement where a supplier agrees to sell a customer a product, but “only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.” Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6 (1958). The “tied” product is typically from a different but interdependent market (i.e. printer and printer cartridges). Such tying agreements can constitute an injury to competition when “the seller has market power over the tying product,” and the seller “can leverage this market power through tying arrangements to exclude other sellers of the tied product.” Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 912 (9th Cir. 2008).7 “Bundling”
III
We consider plaintiffs’ complaint in light of these principles. We review de novo a district court‘s dismissal under
Although plaintiffs’ complaint alleges a type of vertical restraint imposed by upstream Programmers on downstream Distributors, plaintiffs disavow any intent to allege that the practices engaged in by Programmers and Distributors foreclosed rivals from competing. Nor can we construe the description of the vertical restraints at issue as alleging this sort of injury to competition. If the restraint at issue here were characterized as a tying arrangement, the tying product would be the “must-have” channels, and the tied product would be the channels that consumers would not otherwise purchase. See United States v. Loew‘s, Inc., 371 U.S. 38 (1962) (discussing the block-booking and tying of bad movies to good movies), abrogated in part by Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006). However, the complaint does not allege that Programmers’ practice of selling tied “must-have” and low-demand channels excludes other sellers of low-demand channels from the market.8 Nor does the complaint allege that the Programmers’ bundling arrangement prevented any competitors from participating in either the upstream or downstream market.
Plaintiffs instead present an alternative theory as to how their complaint adequately alleges injury to competition. Specifically, they argue that the sale of multi-channel packages harms consumers by (1) limiting the manner in which Distributors compete with one another because Distributors are unable to offer a la carte programming, (2) reducing consumer choice, and (3) increasing prices. These allegations do not state a Section 1 claim.
[4] First, limitations on the manner in which Distributors compete with one another do not, without more, constitute a cognizable injury to competition. See Bd. of Trade, 246 U.S. at 238 (“Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence.”). In Leegin, the Supreme Court made clear that even in the face of clear limitations on distributors’ ability to compete, proof of competitive harm is required to state a cognizable antitrust claim. 551 U.S. at 898; see also Loew‘s, 371 U.S. at 44-45 (holding that tying agreements “are an object of antitrust concern for two reasons—they may force buyers into giving up the purchase of substitutes for the tied product, and they may destroy the free access of competing suppliers of the tied product to the consuming market”) (citations omitted). Plaintiffs do not identify such harm here.
[5] Nor do allegations regarding harm to consumers, either in the form of reduced choice or increased prices, state a Sec
[6] Here, the complaint‘s allegations of reduced choice and increased prices address only the element of antitrust injury (whether the consumers have standing because they suffered the sort of injury that flows from an antitrust violation), not whether the plaintiffs have satisfied the pleading standard for an actual violation.9 Although plaintiffs may be required to purchase bundles that include unwanted channels in lieu of purchasing individual cable channels, antitrust law recognizes the ability of businesses to choose the manner in which they do business absent an injury to competition. Pac. Bell Tel. Co. v. Linkline Commc‘ns, Inc., 129 S. Ct. 1109, 1118 (2009).
Plaintiffs’ reliance on Loew‘s, 371 U.S. 38, to support their argument that conduct that reduces consumer choice is sufficient to state an antitrust claim is unavailing. In Loew‘s, the United States brought antitrust actions against six major film
[7] Finally, we address plaintiffs’ contention that because most or all Programmers and Distributors engage in this bundling practice, we should hold that in the aggregate, the practice constitutes an injury to competition. Certainly circumstances might arise in which competition was injured or reduced due to a widely applied practice that harms consumers. See Leegin, 551 U.S. at 897 (indicating that vertical restraints, such as resale price maintenance, “should be subject to more careful scrutiny” if the practice is adopted by many competitors). But the plaintiffs here have not explained how competition (rather than consumers) was injured by the widespread bundling practice. The complaint included no allegations that Programmers’ sale of cable channels in bundles has any effect on other programmers’ efforts to produce competitive programming channels or on distributors’ competition on cost and quality of service. In the absence of any allegation of injury to competition, as opposed to injuries to consumers, we conclude that plaintiffs have failed to state a claim for an antitrust violation. See also Abcor Corp. v. AM Int‘l, Inc., 916 F.2d 924, 930-31 (4th Cir. 1990) (finding that aggregating a defendant‘s acts, none of which was anticompetitive individually, did not demonstrate an antitrust violation).