Court Opinion

ID: 8414239
Source: CourtListenerOpinion
Date Created: 2022-11-02 20:53:10.84668+00
Date Added: 2024-06-11T16:48:07.607442
License: Public Domain

DRONEY, Circuit Judge,
dissenting:
Dismissal of antitrust claims on the pleadings “should be granted very sparingly.” George Haug Co. v. Rolls Royce Motor Cars Inc., 148 F.3d 136, 139 (2d Cir. 1998) (quoting Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 746, 96 S.Ct. 1848, 48 L.Ed.2d 338 (1976)) (internal quotation mark omitted). In the context of tying claims, dismissal is inappropriate where a plaintiff has sufficiently alleged: (1) “a tying and a [separate] tied product;” (2) “evidence of actual coercion by the seller that forced the buyer to accept the tied product;” (3) “sufficient economic power in the tying product market to coerce purchaser acceptance of the tied product;” (4) “anti-competitive effects in the tied market;” and (5) “the involvement of a not insubstantial amount of interstate commerce in the tied market.” E & L Consulting, Ltd. v. Doman Indus. Ltd., 472 F.3d 23, 31 (2d Cir. 2006) (quoting De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996)) (internal quotation marks omitted). The majority holds that Plaintiffs’ Third Amended Complaint (the “Complaint”) *149fails to sufficiently plead at least two of these elements: separate products and sufficient market power. I disagree and respectfully dissent.
I.
As the majority explains, our inquiry into the “separate product” element is governed by the “consumer demand test.” “[Wjhether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items.” Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 19, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984), abrogated on other grounds by Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 126 S.Ct. 1281, 164 L.Ed.2d 26 (2006). Thus, to qualify as separate, the products must be “distinguishable in the eyes of buyers.” Id.
Here, Plaintiffs allege facts plausibly showing that Premium Cable Services and set-top cable boxes constitute separate products “distinguishable in the eyes of buyers.” Plaintiffs allege that Time Warner does not design or manufacture its own cable boxes, but rather purchases boxes from three manufacturers, and that numerous other manufacturers are capable of producing cable boxes that are technologically compatible with Time Warner’s services. However, even if customers could purchase cable boxes directly from any of these manufacturers, Time Warner would not allow its customers to receive Premium Cable Services without leasing a cable box from it. Plaintiffs also allege that the cost of leasing a cable box from Time Warner is charged as an additional monthly fee, and that customers are not given the choice of purchasing their box from Time Warner. Plaintiffs further assert that robust markets for cable boxes exist in the “many countries” in which consumers are not compelled to rent cable boxes from their cable providers. Joint App. 194. Supporting this allegation are Time Warner’s own statements to the FCC comparing cable boxes to cable modems — for which an open market for customer-owned devices exists — and indicating its belief that a similar market could emerge for cable boxes. Finally, Plaintiffs point to the FCC’s failed CableCARD initiative as evidence that manufacturers are willing to enter the cable box market by selling directly to consumers.
Taking these factual allegations as true and drawing all reasonable inferences in Plaintiffs’ favor, Taylor v. Vt. Dep’t of Educ., 313 F.3d 768, 776 (2d Cir. 2002), I believe the Complaint plausibly alleges a separate product market for consumer-purchased cable boxes, which is suppressed by Time Warner’s anticompetitive conduct.4 In concluding otherwise, the majority imposes too high a bar on Plaintiffs.
The majority dismisses two of Plaintiffs’ allegations because they “address supply-side considerations rather than the character of consumer demand.” Maj. Op. at 144. While I agree that we must focus on consumer demand, supply-side considerations are nonetheless relevant to our inquiry. Indeed, in analyzing Plaintiffs’ allegations, the majority itself relies on supply-side considerations. See id. at 145.
The majority focuses also on the technological challenges associated with indepen*150dently manufactured cable boxes. It states that cable boxes are “cable-provider specific, like the keys to a padlock,” id. at 144, and characterizes the “core issue” in this case as “a cable provider’s right to refuse to enable cable boxes it does not control to unscramble its coded signal,” id. But this favors the supplier’s dubious technological concerns over the consumer’s right to choose between competing products. See Gonzalez v. St. Margaret’s House Hous. Dev. Fund Corp., 880 F.2d 1514, 1517 (2d Cir. 1989) (interpreting Jefferson Parish as “foeus[ing] primarily on the anticompet-itive effect of tying arrangements and the resultant harm to consumer choice in the tied-product market,” and not on “the tying entity’s interest”). See also United States v. Microsoft Corp., 253 F.3d 34, 87 (D.C. Cir. 2001) (interpreting Jefferson Parish and identifying the “core concern” of tying as “preventing] goods from competing directly for consumer choice on their merits”). Plaintiffs also specifically allege that cable boxes are remotely programmable. In light of that allegation— which, on a motion to dismiss, we assume to be true — the majority’s concern that providers will be forced to “share their codes with cable box-manufacturers,” Maj. Op. at 144, appears unfounded.
Finally, the majority faults Plaintiffs for failing to show that cable boxes have ever been sold separately in U.S. markets. That Plaintiffs cannot do so, though, should- not be fatal to their claim — particularly at this stage of the proceedings. In any event, there is an obvious explanation for this lack of evidence: since at least 1996, cable operators have required that consumers lease set-top cable boxes to access their cable service packages.2 It is no surprise, then, that Plaintiffs are unable to show a history of separate sales of set-top boxes and premium cable services in the United States. It is enough that Plaintiffs have instead alleged separate sales of the same product in at least one different market (South Korea), as well as separate sales of an analogous product (cable modems) in the U.S. market, to support the inference that cable boxes and cable services comprise separate, distinguishable products.
The FCC’s failed efforts to disaggregate set-top cable boxes from cable services reinforce, rather than undermine, Plaintiffs’ claim. That the FCC attempted to create an alternative device to cable boxes demonstrates that the FCC views cable boxes and cable services as distinct products. This view is further supported by the FCC regulation, identified by the majority, which requires Time Warner to separately itemize the fees associated with these products on consumer bills. Additionally, the FCC’s failed attempts at developing an alternative device are largely attributable to solvable technological issues and resistance from cable providers, and say little about consumer demand for such a device. Thus, in my view, the regulatory environment seems to support Plaintiffs’ allegations.
The majority also points to an FCC regulation, which sets a cap on the price Time Warner may charge consumers for leasing set-top cable boxes, as support for the view that Time Warner would not attempt to monopolize the cable box market *151when the amount of profits it may realize is so limited. But this view misjudges the regulation’s effectiveness in curbing monopoly prices. The FCC regulation sets a cap on leasing prices by tying those prices to the “average annual unit purchase cost” of cable boxes. 47 C.F.R. § 76.923(f). However, without a competitive market in place, cable box manufacturers lack any incentive to keep those purchase costs low. As Plaintiffs allege, Time Warner has historically purchased its cable boxes from just three suppliers, and those suppliers do not make their cable boxes available for sale to the general public. Furthermore, the FCC regulation permits cable companies to pass along to consumers the full cost of a cable box over the course of a single year, plus a “reasonable profit.” 47 C.F.R. § 76.923(c), (f), (g). Yet as Plaintiffs allege, “the useful life of a cable box is between 3 and 5 years.” Joint App. 197. Thus, notwithstanding the FCC’s regulation, Time Warner may charge consumers fees that exceed the true cost of the cable box, thereby generating considerable profits. In fact, Time Warner’s 2008 Annual Report warned investors that the emergence of a competitive market for cable boxes would threaten the substantial revenues generated from equipment rental and installation charges. I cannot conclude, then, as the majority does, that the FCC pricing regulation lessens the plausibility of Plaintiffs’ claim.
In sum, taken together and viewed in a light most favorable to Plaintiffs, the allegations in the Complaint plausibly show that set-top cable boxes and Premium Cable Services are distinct products, which, if not for Time Warner’s conduct, would be purchased separately by consumers.
II.
As to market power, the majority concludes that Plaintiffs: (1) fail to allege sufficient facts bearing on Time Warner’s market share for premium cable services, as opposed to basic cable services; and (2) fail to allege with requisite specificity Time Warner’s market share in the relevant geographic markets. I disagree.
The majority first concludes that Plaintiffs conflate the markets for basic and premium cable services. Not so. While it is true that Plaintiffs’ allegations' are largely drawn from data' concerning the nationwide market for basic cable services, those allegations bear on Time Warner’s market share in Premium Cable Services as well. As the Complaint explains, cable services are cumulative. That is, a consumer who purchases Premium Cable Services from Time Warner also necessarily receives, and pays for, basic cable services. At the same time, Plaintiffs allege that major cable companies, such as Time Warner, operate in geographically discrete markets, and therefore exercise control over basic cable services in those markets. Taken together, these allegations support the reasonable inference that, if Time Warner exercises market power over basic cable services in a.given market, it exercises market power over Premium Cable Services in that market as well.
The majority next concludes that Plaintiffs fail to allege “particular facts bearing on Time Warner’s share of the market” for Premium Cable Services. Maj. Op. at 148. But Plaintiffs allege that, by 2009, subscriptions to Time Warner’s Premium Cable Services had grown to 8.9 million, translating into a 21% share of the total premium cable market. Plaintiffs also point to the high barriers to entry facing those wishing to compete with Time Warner in that market. As a result, Time Warner’s largest competitors, AT&T U-verse and Verizon FiOS, had, as of 2009, significantly fewer premium cable services subscribers than Time Warner. Indeed, for all services combined, -Plaintiffs allege that U-Verse and FiOS had a total of 2.06 and 2.9 mil*152lion customers, respectively. The next three largest competitors, Plaintiffs allege, had a combined customer base of less than 900,000 customers, while several others ceased operations or declared bankruptcy. These allegations are sufficient to plausibly allege that Time Warner has market power over premium cable services. See Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90, 98 (2d Cir. 1998) (explaining that market power may be shown directly, by evidence of the ability to control prices or exclude competition, or indirectly, by evidence of high market share and other relevant market characteristics, such as strength of the competition, barriers to entry, and elasticity of consumer demand). See also U.S. Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610, 620, 97 S.Ct. 861, 51 L.Ed.2d 80 (1977) (identifying relevant inquiry into market power as “whether the seller has the power, within the market for the tying product, to raise prices or to require purchasers to accept burdensome terms that could not be exacted in a completely competitive market”).
As to the majority’s second point, concerning market share in relevant geographic markets, the mere possibility of regional variations in Time Warner’s market share does not defeat Plaintiffs’ claim. “In this Circuit, a threshold showing of market share is not a prerequisite for bringing a § 1 claim. If a plaintiff can show an actual adverse effect on competition, such as reduced output ... we do not require a further showing of market power.” Todd v. Exxon Corp., 275 F.3d 191, 206-07 (2d Cir. 2001) (internal citation and quotation marks omitted). Here, Plaintiffs allege that Time Warner faces no competition in at least 31 geographic markets.3 As for the remaining 22 markets, Plaintiffs allege that Time Warner faces minimal competition. Specifically, Plaintiffs allege that U-verse and FiOS — Time Warner’s largest competitors — provide services to approximately 500,000 subscribers each within geographic markets controlled by. Time Warner. And, as discussed above, Time Warner’s other competitors face significant barriers to entry, and represent a total combined customer base of less than 900,000. These numbers contrast with Time Warner’s total Premium Cable customer base of 8.9 million, and support the inference that Time Warner possesses sufficient market power across all relevant markets. Requiring a greater degree of specificity from Plaintiffs would be inconsistent with this Court’s extensive precedent to the contrary. See, e.g., Arista Records, LLC v. Doe 3, 604 F.3d 110, 120-21 (2d Cir. 2010) (rejecting argument that Iqbal “require[s] the pleading of specific evidence or extra facts beyond what is needed to make the claim plausible”); Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (2d Cir. 2009) (reiterating that “it is sufficient for a plaintiff to plead facts indirectly showing unlawful behavior, so long as the facts pled give the defendant fair notice of what the claim is and the grounds upon which it rests” (internal quotation marks omitted)).
“The role of the court at this stage of the proceedings is not in any way to evaluate the truth ... but merely to determine whether the plaintiffs factual allegations are sufficient to allow the case to proceed.” Doe v. Columbia Univ., Nos. 15-1536 (Lead), 15-1661 (XAP), 2016 WL 4056034, at *9 (2d Cir. July 29, 2016). I cannot conclude, as the majority does, that Plaintiffs’ allegations as to product markets and *153market power, which support their tying claim, are insufficient “to allow the case to proceed.” For these reasons, I respectfully dissent.

. Notably, the district court reached the same conclusion below, holding that Plaintiffs "plausibly alleged that cable boxes are separate and distinct from Premium Cable Services. At the pleading stage, the cable box appears to be a product that could be sold separately and profitably because every user of Time Warner's Premium Cable Service is a potential purchaser of a cable box.” In re Time Warner Inc. Set-Top Cable Television Box Antitrust Litig., Nos. 08 MDL 1995(PKC), 08 Civ. 7616(PKC), 2010 WL 882989, at *4 (S.D.N.Y. Mar. 5, 2010). Time Warner does not contest this determination on appeal.

. Indeed, in response to these practices, Congress enacted Section 629 of the Telecommunications Act of 1996, which directed the FCC to "adopt regulations to assure the commercial availability[ ] to consumers ... of converter boxes ... from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor.” 47 U.S.C. § 549(a). In implementing that legislation, the FCC noted that set-top boxes "have historically been available only on a-lease basis from the service provider.” In re Implementation of Section 304 of the Telecommunications Act of 1996, Report & Order No. 98-116, 13 FCC Red. 14775, 14778 (F.C.C. June 24, 1998).

. Given the overlapping nature of cable services, the precise number of distinct geographic markets at issue is difficult to discern. For simplicity's sake, I use the same numbers adopted by the majority.