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.

Certification of Cable TV Subscriber Class in Antitrust Action Was Proper

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

Certification of a class of approximately two million non-basic cable television programming services customers in the Philadelphia area—alleging that cable provider Comcast engaged in unlawful monopolization, attempted monopolization, and market or customer allocation through a series of acquisitions and cable system swap arrangements—was a proper exercise of discretion, the U.S. Court of Appeals in Philadelphia has ruled.

The trial court satisfied the "rigorous analysis" standard established in In re Hydrogen Peroxide Antitrust Litigation (2008-2 Trade Cases ¶76,453) in determining that questions of fact or law common to class members predominated over individual issues, for purposes of meeting the certification requirements of Federal Rule of Civil Procedure 23(b)(3). Certification (2010-1 Trade Cases ¶76,869) was therefore affirmed.

The trial court’s finding that the plaintiffs established by a preponderance of evidence that they would be able to prove, through common evidence, not only class-wide antitrust impact in the form of higher costs for programming but also a common methodology to quantify damages on a class-wide basis was not clearly erroneous, the appellate court decided.

In granting certification, the lower court had limited the class’s theories of class-wide impact to the theory that Comcast’s clustering conduct through the swaps and acquisitions had deterred competition from overbuilders in the Philadelphia market.

Relevant Geographic Market, Antitrust Impact

Arguments that the trial court had failed to apply the correct legal standard for determining the relevant geographic market and had made clearly erroneous factual findings by relying on the plaintiffs' expert for proof of class-wide antitrust impact were rejected by the appellate court.

Comcast’s contention that the relevant geographic market was each complaining individual’s household would have set a market so small as to be impractical and inefficient, whereas the class’s market definition capturing the whole of the Philadelphia area was based on record evidence showing that customers throughout the aggregated area faced similar competitive choices.

Moreover, the trial court had carefully considered the plaintiffs’ theories of class-wide impact before concluding that the class met its burden of demonstrating that the anticompetitive effect of clustering on overbuilder competition was capable of proof through evidence common to the class.

The econometric analysis of the plaintiffs’ damages expert demonstrating that the alleged antitrust impact was class-wide and utilizing a “but-for” pricing model to reach a final conservative estimated overcharge value was sufficiently sound, the appellate court also concluded. The damages model provided a methodology that could establish damages on a class-wide basis using common proof.

Attacks by the cable provider on the merits of the model were premature and missed the point, the court said. Some variation of damages among class members did not defeat certification, the court noted.

Finally, the trial court did not lack any legal authority to certify a per se claim based on the class’s allegations, the appellate court held. Comcast’s request to have the appellate court declare on the merits that the plaintiffs could not establish a per se antitrust violation was beyond the scope of the certification decision from which it appealed, the court explained.

Partial Dissent

A separate opinion partially dissenting from the majority’s conclusion argued that damages could not be proven using evidence common to the entire class. According to the partial dissent, the damages expert’s testimony was incapable of identifying any damages caused by reduced overbuilding in the Philadelphia area—the plaintiffs’ only viable theory of antitrust impact—and thus did not fit the case. Therefore, it was irrelevant and should be deemed inadmissible at trial, leaving the class with no evidence of class-wide proof of damages.

Because of this, the partial dissent stated, the certification order should have been vacated to the extent that it provided for a single class as to proof of damages and remanded to the lower court to consider whether the class could be divided into subclasses for the purpose of proving damages.

The decision in Behrend v. Comcast Corp. will be reported at 2011-2 Trade Cases ¶77,575.

Grocers' Agreement to Share Profits During Labor Dispute Not Immune, But Not Barred Per Se

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

California's three largest grocery chains were not liable under federal antitrust law for entering into an agreement to share profits amongst themselves and with a fourth chain during, and for a short period after, an anticipated labor dispute, the U.S. Court of Appeals in San Francisco has ruled in a divided en banc opinion.

The agreement was not exempt from antitrust scrutiny under the non-statutory labor exemption. However, summary condemnation—whether as a per se violation or under a truncated “quick look” standard of analysis—was improper. Therefore, the denial of cross-motions for summary judgment by the defending grocery chains (2005-1 Trade Cases ¶74,805) and the plaintiff, the State of California, was affirmed.

While the lower court's entry of final judgment in the grocers' favor was likewise affirmed, the legality of the agreement under the rule of reason may ultimately not be determined in the case.

The parties had stipulated to the entry of final judgment for appellate purposes by narrowing their arguments. California agreed not to pursue the theory that the profit-sharing agreement violated Sec. 1 of the Sherman Act under a full rule of reason analysis, while the grocers agreed not to pursue various affirmative defenses they had pleaded, with the exception of the non-statutory labor exemption.

Agreement at Issue

The profit-sharing agreement at issue was a provision within a Mutual Strike Assistance Agreement (MSAA) entered into by the three defending chains and a fourth chain. In the MSAA, the chains agreed to lock out their union employees within 48 hours of a strike against any one or more of them, a traditional tactic in labor disputes to combat the union's anticipated use of “whipsaw tactics,” in which unions strike or picket only one employer in a multiemployer bargaining unit.

Antitrust Immunity

The profit-sharing provision constituted an offensive weapon used by the chains to prevail in the dispute, in the court's view. It was designed to maintain each defendant's pre-labor dispute market share. Such a provision, however, was not needed to make the collective-bargaining process work. It did not relate to any core subject matter of bargaining—namely wages, hours, and working conditions--but related principally to the temporary, artificial maintenance of the grocers' revenues. Thus, it was not immunized from antitrust review by the nonstatutory labor exemption, the court decided.

The inclusion of a non-member of the collective-bargaining unit (the fourth grocery chain) in the agreement only further counseled against application of the exemption,
the court said.

Per Se Illegality

Whether characterized as a profit-pooling agreement or a market allocation agreement, the profit-sharing provision was not so obviously anticompetitive to constitute an antitrust violation under a pure per se approach, the court held. In contrast to previous cases in which profit-sharing agreements were to endure for decades or permanently, the grocery chains' agreement was written to last only as long as the labor dispute, and to continue for a mere two weeks after the termination of any strike or lockout.

Unlike firms in most of the prior profit-sharing cases cited by the plaintiff—including Citizen Publishing Co. v. United States (1969 Trade Cases ¶72,730) and United States v. Paramount Pictures, Inc. (1948-1949 Trade Cases ¶62,244)—the defendants were not the only competitors in the affected areas. Thus, the agreement evaded any “easy label” of profit-pooling and could not sensibly be grouped together with or analogized to the very different arrangements described in those prior cases, the court said.

An attempt by the State of California to characterize the profit-sharing provision as a market allocation agreement was rejected because the pact did not prevent any of the defending grocers from actually making sales to consumers.

Quick Look Analysis

Summary condemnation under a truncated rule of reason or “quick look” analysis was also unwarranted, the court concluded. A quick look conclusion of antitrust illegality was inappropriate for many of the same reasons that per se treatment was incorrect.

The unique features of the agreement and the uncertain effect those features had on the grocers' competitive behavior and incentives during the revenue-sharing period rendered any anticompetitive effects of the agreement not obvious. To reach a confident conclusion on those effects, further development of the record was required, the court noted.

Dissenting Opinions

Several separate opinions filed by members of the court took issue with various aspects of the majority opinion. One such opinion concurred with the outcome but questioned whether the profit sharing agreement left the grocers “with an undiminished incentive to compete.”

A partial dissent contended that because the majority concluded that there was no categorical antitrust violation under the quick look doctrine, the court overstepped its Article III jurisdiction in ruling on the non-statutory labor exemption. Moreover, the partial dissent expressed “doubt that the majority decide[d] the labor exemption issue correctly because it fail[ed] to grapple with the complex dynamics” of the case.

Another partial dissent argued that the defendants' profit-sharing agreement could readily be determined to violate the antitrust laws under the intermediate “quick look” standard.

“[D]enying California the injunction to which it is entitled,” the partial dissent stated, “[was] contrary to the fundamental policies underlying our antitrust review, and encouraged future antitrust violations by these defendants and others who may seek to suppress the rights of their employees.”

The July 12 decision is State of California v. Safeway, Inc., 2011-1 Trade Cases ¶77,522.

Cable TV Subscribers May Bring Class Antitrust Action Against Provider

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

A proposed class of approximately two million non-basic cable television programming service customers in the Philadelphia area were entitled to proceed as a class with antitrust claims against their cable provider, Comcast Corporation, because they sufficiently demonstrated that common issues of law and fact predominated over individual matters in the litigation, the federal district court in Philadelphia has ruled. The predominance requirement was the only certification issue remaining in dispute.

Sherman Act Claims

The class representatives alleged a per se Sherman Act, Sec. 1 claim based on market allocation and a rule of reason Sherman Act Sec. 1 claim that certain transactions with other programming providers amounted to contracts and conduct in restraint of trade.

In addition, they alleged a Sherman Act Sec. 2 claim of monopolization and attempted monopolization. The attempted monopolization claim was based on anticompetitive conduct not only in the cable transactions, but also in regard to the provider's:

(1) Refusal to deal with a potential competitor,

(2) Substantial interference with the potential competitor's access to the contractors needed to build competing cable systems, and

(3) Pricing campaigns designed to prevent or destroy competition from the potential competitor.

The subscribers had previously been granted class certification in 2007 (2007-1 Trade Cases ¶75,696). Reconsideration of that decision was granted in light of an appellate holding in a hydrogen peroxide price fixing suit (2008-2 Trade Cases ¶76,453), suggesting that trial courts had been applying too lenient a standard of proof to the issue of whether proposed class plaintiffs would be able to use common evidence to prove antitrust impact.

Antitrust Impact

In the instant suit, the proposed class offered sufficient expert testimony to meet its burden of demonstrating that the element of antitrust impact was capable of proof at trial through evidence that was common to the class rather than individual to its members, the court said.

The common evidence of antitrust impact alleged by the class included swaps and transactions in the relevant geographic market that eliminated competition and resulted in increased prices, as well as the clustering of the Philadelphia market and regional sports programming content that led to decreased competition from direct broadcast satellite (DBS) competitors and, consequently, higher prices for all class members.

Geographic and Product Markets

The expert offered ample basis in support of his relevant geographic market definition and his market structure analysis to show that Comcast possessed market power in the geographic and product markets, the court found.

The court did, however, reject the expert’s theory of market allocation based on an allegation that cable companies acquired by Comcast had previously-competed for the award of original cable franchises, as well as a contention that the non-compete clauses contained in the acquisition agreements made reentry by the acquired firms into the Philadelphia market unlikely.

A market performance analysis, which offered several economic explanations for Comcast's ability to charge higher prices, included at least one theory susceptible to proof at trial through available evidence common to the class.

Anticompetitive Effects

The class failed to demonstrate that three of the expert’s contentions regarding the anticompetitive effects of Comcast’s clustering activity could be proven through common evidence:

(1) That its clustering activity made it economically feasible for the company to withhold regional sports programming from its competitors, resulting in reduced penetration rates by DBS competitors;

(2) That it reduced benchmark competition, on which customers rely to compare the prices charged by competitors in a market; and

(3) That it increased Comcast’s bargaining power in its negotiations with its content providers, such as cable networks, which allowed Comcast to negotiate lower prices for its content.

The class met its burden of demonstrating that Comcast’s clustering activity affected prices by reducing the extent of competition provided by overbuilders. The class successfully showed that the presence of an overbuilder constrained cable prices, the court noted.

Damages

Further, the subscribers made an adequate showing that there was a common methodology available to measure and quantify damages on a class-wide basis. Their damages expert's econometric analysis, which estimated benchmark prices against which to compare actual prices during the relevant period in the Philadelphia market, was appropriate, the court decided. His use of the national average DBS penetration rate for Comcast markets was a valid screen for the model.

The decision is Behrend v. Comcast Corporation, 2010-1 Trade Cases ¶76,869.

Settlements, Fees Upheld in Antitrust Class Action Against Insurers

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

In a class action alleging a bid rigging and market allocation conspiracy between insurance brokers and insurance carriers, the U.S. Court of Appeals in Philadelphia has upheld final approval of a $121 million settlement with insurer Zurich Financial Services and a $28 million settlement with insurance broker Arthur J. Gallagher & Co.

An award of $29.95 million for attorney fees and expenses in conjunction with the Zurich settlement was also affirmed.

Class certification requirements of Federal Rule of Civil Procedure 23(a) and (b) were satisfied with respect to both settlement classes, and both settlements were fair under Rule 23(e). Thus, objections to the settlement agreements and attorney fees award from dissatisfied class members were properly rejected.

Private Civil Actions, State Investigations

The settlements at issue followed the consolidation of a number of private civil actions. At about the same time, insurance industry investigations were being conducted by various state attorneys general and state departments of insurance.

Under the Zurich settlement, the insurer agreed to establish a $100 million settlement fund. In addition, Zurich entered into settlements with the states, requiring monetary payments. As a result, Zurich agreed to pay $121.8 million to settlement class members.

The Gallagher settlement provided for the payment of $28 million to settlement class members and included an agreement to implement various business reforms. Gallagher agreed to pay up to $8.885 million for class counsel’s attorney fees, litigation expenses, and incentive awards, but no party objected.

Certification of Settlement Class

Objecting class members challenged certification of the settlement class, arguing that there was a predominance of individual issues as opposed to common ones. However, common questions of law and fact existed with respect to each of the elements of the Sherman Act claim, the appellate court held.

For purposes of the Zurich settlement, common questions included whether Zurich conspired with any defending insurance brokers. There were also common questions with respect to the resulting anticompetitive effects of the alleged conspiracy. Moreover, whether class members were proximately injured by Zurich’s conduct was capable of proof on a class-wide basis, even if the amount of damage that each plaintiff suffered could not be established by common proof, the appellate court noted.

Refusal to Certify Subclasses

The district court did not abuse its discretion in refusing to certify separate subclasses, despite the variety of policyholders. Objectors argued that the court should have utilized subclasses or required separate representation for complaining insurance policyholders who purchased a primary insurance policy from or through one of the defendants and policyholders who purchased additional insurance policies in excess of their primary insurance coverage from or through one of the defendants.

The decision did not render the plan of allocation unfair, according to the appellate court. Divergent interests did not exist between the allocation groups to necessitate subclasses. All of the class members shared a unified interest in establishing Zurich’s liability for engaging in anticompetitive conduct, which increased the cost of premiums for all policyholders.

Moreover, the allocation plan was carefully devised to ensure a fair distribution of the settlement fund to the various types of claimants. Policyholders who likely incurred the most damage were entitled to a larger proportion of the recovery than those whose injuries were less severe.

An objector’s “nearly identical challenges” to the Gallagher settlement were also rejected. The essential elements of the antitrust claims involved common questions of law and fact that predominated over individual issues.

Attorney Fees

An award of $29.95 million for attorney fees, expense reimbursements, and incentive awards in the Zurich settlement was upheld by the appellate court. The district court properly concluded that class counsel’s efforts produced at least $100 million for the settlement class, plus $29.95 million separately designated for their fees.

The reasonableness of the fee award was properly evaluated under a percentage of recovery method, even though the settlement was not a typical common fund. Thus, the fee award was 23% of the minimum recovery attributable to class counsel’s efforts or, alternatively, 19.9% of the minimum recovery if expenses and incentive awards were subtracted from the total award. A lodestar cross-check also supported the award, according to the appellate court.

The September 8 decision is In re Insurance Brokerage Antitrust Litigation, 2009-2 Trade Cases ¶76,733. Text of the decision appears here.