Tuesday, April 24, 2012

Antitrust Claims Against Cable Provider Pared, But Sent to Trial

This posting was written by E. Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Cable television programming service provider Comcast Corp. could have violated Sec. 1 or Sec. 2 of the Sherman Act by entering into swap agreements with other cable providers in the Philadelphia area and undertaking a course of action to block new entrants into its service areas, the federal district court in Philadelphia has ruled.

The complaining class of subscribers could not establish that Comcast’s swap agreements were illegal per se or that the company’s attempts to restrict access to installation contractors and to a sports network it owned constituted actionable predatory conduct. However, the class did offer enough evidence to support a claim of horizontal market allocation under the rule of reason and monopolization or attempted monopolization based on targeted price discounts to prospective customers of a new entrant into an area it served, in the court’s view. Comcast’s motion for summary judgment against the claims was granted in part and denied in part.

Per Se Illegality

Comcast’s swap agreements did not amount to a per se violation of the Sherman Act because the class failed to meet its summary judgment burden with respect to whether the swap transactions were naked market division agreements, rather than merely ancillary restraints on trade. The class did not create a genuine issue of material fact concerning whether the cable provider had anticompetitive intent in entering into the swap agreements.

Evidence that the company’s executives had a long-standing desire to "rationalize the cable industry" by consolidating positions in certain markets in exchange for giving up positions in other markets did not support the conclusion that the swap agreements were naked restraints of trade so plainly anticompetitive that no elaborate study of the industry was needed to establish their illegality. The ability of cable companies to provide new and advanced services, achieved through clustering their systems, required proof of facts that were substantially different from the classic horizontal price fixing and group boycott conspiracies generally found to be per se antitrust violations, the court said.

Allocation of Customers/Markets

Comcast was not entitled to summary judgment on the Sec. 1 claim outright on the basis that the counterparties to the swap agreements were never actual or potential competitors. For purposes of the subscribers’ Sec. 1 claim, their certification as a class (2012-2 Trade Cases ¶77,575) hinged on whether they could demonstrate that Comcast conspired with competitors to allocate markets, the court noted. The class offered sufficient evidence to create a jury issue on whether Comcast and the counterparties to the swap agreements were actual competitors.

An argument by the company that it and the counterparties were never competitors in the Philadelphia market—even though each offered cable services to subscribers in that market—because they operated cable systems in non-overlapping franchise areas and did not offer services to the same subscribers, at the same time, anywhere in the region was rejected.

Whether or not the franchise areas were overlapping was immaterial because the relevant geographic area was not limited to the individual franchise area. The class did not need to show that the defendant actually competed with the counterparties in the same franchise area. Based upon the proposed market definitions, it was sufficient that each provided cable television programming services in the Philadelphia direct marketing area.

Monopoly Claims

Comcast did not engage in unlawful monopolization or attempted monopolization by creating a Philadelphia area cluster through the use of the swap agreements to allocate the market between it and two competitors, the court found. The conduct may have been predatory, according to the court, but the class failed to show that the purportedly procompetitive justifications Comcast offered for its conduct were pretextual.

Those justifications included the realization of efficiencies in marketing, infrastructure, management, and operations, along with an ability to introduce new products such as high-speed Internet, telephone, high-definition television, and other video features and services. Evidence that it raised prices did not refute the claim of efficiency. The court rejected arguments by the class that Comcast could have achieved the same level of efficiency of clustering by overbuilding its competitors, rather than acquiring them or swapping for their assets, and that it never studied whether it was achieving its goals.

Comcast’s offering of targeted price discounts to subscribers in one county it dominated in order to convince them not to switch service to a competing cable overbuilder that was moving into the area could have violated Sec. 2 of the Act, the court decided. Because of the price freeze in areas the competitor entered, and increased prices in areas it did not, the rates paid by the company’s customers in overbuilt areas were allegedly 18 to 38 percent below the rates paid by its customers in areas where the overbuilder did not offer service. The implications of the disparate pricing policy were clear: but for the overbuilder’s failure to enter the City of Philadelphia, the defending cable provider’s customers in those areas would have enjoyed significantly lower prices.

That Comcast never offered below-cost prices to potential customers of the overbuilder did not mandate a finding that the discount program was not exclusionary conduct. Because it possessed market power, its decision to target promotional discounts to deter a new entrant could be deemed predatory and an exercise of market power to maintain its monopoly. Given that the company made no argument that the discount program had otherwise legitimate business justifications, the claim had to be submitted to a jury, the court concluded.

The decision is Behrend v. Comcast Corp., 2012-1 Trade Cases ¶77,862.

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