Cablevision v. Viacom and the Sad State of Tying Doctrine

Thom Lambert —  10 July 2014

Whereas the antitrust rules on a number of once-condemned business practices (e.g., vertical non-price restraints, resale price maintenanceprice squeezes) have become more economically sensible in the last few decades, the law on tying remains an embarrassment.  The sad state of the doctrine is evident in a federal district court’s recent denial of Viacom’s motion to dismiss a tying action by Cablevision.

According to Cablevision’s complaint, Viacom threatened to impose a substantial financial “penalty” (probably by denying a discount) unless Cablevision licensed Viacom’s less popular television programming (the “Suite Networks”) along with its popular “Core Networks” of Nickelodeon, Comedy Central, BET, and MTV.  This arrangement, Cablevision insisted, amounted to a per se illegal tie-in of the Suite Networks to the Core Networks.

Similar tying actions based on cable bundling have failed, and I have previously explained why cable bundling like this is, in fact, efficient.  But putting aside whether  the tie-in at issue here was efficient, the district court’s order is troubling because it illustrates how very unconcerned with efficiency tying doctrine is.

First, the district court rejected–correctly, under ill-founded precedents–Viacom’s argument that Cablevision was required to plead an anticompetitive effect.  It concluded that Cablevision had to allege only four elements: separate tying and tied products, coercion by the seller to force purchase of the tied product along with the tying product, the seller’s possession of market power in the tying product market, and the involvement of a “not insubstantial” dollar volume of commerce in the tied product market.  Once these elements are alleged, the court said,

plaintiffs need not allege, let alone prove, facts addressed to the anticompetitive effects element.  If a plaintiff succeeds in establishing the existence of sufficient market power to create a per se violation, the plaintiff is also relieved of the burden of rebutting any justification the defendant may offer for the tie.

In other words, if a tying plaintiff establishes the four elements listed above, the efficiency of the challenged tie-in is completely irrelevant.  And if a plaintiff merely pleads those four elements, it is entitled to proceed to discovery, which can be crippling for antitrust defendants and often causes them to settle even non-meritorious cases. Given that a great many tie-ins involving the four elements listed above are, in fact, efficient, this is a terrible rule.  It is, however, the law as established in the Supreme Court’s Jefferson Parish decision.  The blame for this silliness therefore rests on that Court, not the district court here.

But the Cablevision order includes a second unfortunate feature for which the district court and the Supreme Court share responsibility.  Having concluded that Cablevision was not required to plead anticompetitive effect, the court went on to say that Cablevision “ha[d], in any event, pleaded facts sufficient to support plausibly an inference of anticompetitive effect.”  Those alleged facts were that Cablevision would have bought content from another seller but for the tie-in:

Cablevision alleges that if it were not forced to carry the Suite Networks, it “would carry other networks on the numerous channel slots that Viacom’s Suite Networks currently occupy.”  (Compl. par. 10.)  Cablevision also alleges that Cablevision would buy other “general programming networks” from Viacom’s competitors absent the tying arrangement.  (Id.)

In other words, the district court reasoned, Cablevision alleged anticompetitive harm merely by pleading that Viacom’s conduct reduced some sales opportunities for its rivals.

But harm to a competitor, standing alone, is not harm to competition.  To establish true anticompetitive harm, Cablevision would have to show that Viacom’s tie-in reduced its rivals’ sales by so much that they lost scale efficiencies so that their average per-unit costs rose.  To make that showing, Cablevision would have to show (or allege, at the motion to dismiss stage) that Viacom’s tying occasioned substantial foreclosure of sales opportunities in the tied product market. “Some” reduction in sales to rivals–while perhaps anticompetitor–is simply not sufficient to show anticompetitive harm.

Because the Supreme Court has emphasized time and again that mere harm to a competitor is not harm to competition, the gaffe here is primarily the district court’s fault.  But at least a little blame should fall on the Supreme Court.  That Court has never precisely specified the potential anticompetitive harm from tying: that a tie-in may enhance market power in the tied or tying product markets if, but only if, it results in substantial foreclosure of sales opportunities in the tied product market.

If the Court were to do so, and were to jettison the silly quasi-per se rule of Jefferson Parish, tying doctrine would be far more defensible.

[NOTE: For a more detailed explanation of why substantial tied market foreclosure is a prerequisite to anticompetitive harm from tie-ins, see my article, Appropriate Liability Rules for Tying and Bundled Discounting, 72 Ohio St. L. J. 909 (2011).]

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

2 responses to Cablevision v. Viacom and the Sad State of Tying Doctrine

  1. 

    Given that you characterize the “substantial financial penalty” alleged in the Cablevision suit against Viacom as “probably…denying a discount”, I can only wonder if you have actually familiarized yourself with the specific allegations in this case — which are not at all consistent with the notion that Viacom was merely “denying a discount” for the smaller package. Rather, Viacom is alleged to have demanded a substantially higher total price for a package of its core channels alone, than it was offering as a total price for the full suite of channels. As in the full set of channels was offered for x, and the smaller set of channels was offered for x+y, where y is alleged to have been in excess of $1 billion, on a multi-year deal that has been estimated to be in the ~$100 million per year range. (Full disclosure, I am a former Cablevision employee, but I do not possess any inside information respecting this claim, and nothing I say here reflects any inside information. This is all based on published reports.)

    If correct, that’s not merely denying a discount. That’s pretty reasonably characterized as a substantial (actually, a massive) financial penalty. It cannot be reasonably accounted for by actual cost savings (or even incremental revenues, such as advertising) achieved by the seller via bundling. And given the market power wielded via the core products, this is not merely bundling, it is tying.

    Now, you claim that such “bundling” is “in fact, efficient.” But efficient for whom? The argument you present in your referenced 2011 posting is entirely about how such is efficient for programmers, and perhaps also for distributors. (Note, however, that the assumptions for your theoretical model are not matched to typical distributor circumstances, where marginal costs are, typically, not negligible.) It is most decidely not an argument for how such is efficient or beneficial for consumers. (Unless you are of the odd belief that reduction/elimination of consumer surplus is somehow beneficial for consumers.)

    When it comes to consumers, even you, in that posting, can only bring yourself to claim that such “bundling” practices “will likely benefit consumers in the long-run.” Not exactly confidence inspiring. Given the market for programming has driven unrivaled consumer cost increases over a sustained period of decades, it seems to me that the claim that this market is actually efficient from a consumer perspective, and works to the benefit of consumers “in the long-run” is an extraordinary claim. And extraordinary claims require extraordinary proof, not mere assertion of “likely” benefit.

    And let’s not focus myopically on the tying issue, as if it existed in a vacuum. Because there are many other aspects of how programming is sold (e.g., penetration requirements to avoid onerous pricing penalties, discriminatory pricing among distributors, discriminatory blackouts of distributors) that, along with tying, have enabled programmers to extract exorbitant price increases — well beyond that which could be justified even by increased output — and which have produced sustained consumer detriment, over the course of decades.

    How many markets that are well-functioning, efficient, and beneficial-to-consumers have produced sustained hyperinflationary price increases to consumers, over the course of multiple decades? (Frankly, I’m hard-pressed to identify even a single other example of such. Heck, beside healthcare in the US, I’m hard-pressed to identify even other poorly-functioning markets that exhibit such sustained behavior.)

    How many have produced so few options for consumers to choose among (despite robust competition at the distributor level)? So few options, that substantial numbers of consumers abandon the market, as distributors are unable to offer lower-cost options to retain them?

    How many have produced ongoing reductions in consumer surplus? i.e., how many well-functioning markets are so beneficial to sellers that sellers are able to systematically control a higher and higher percentage of the transactional surplus? (And lest there be any debate as to whether this has happened, the increasing number of consumers dropping out of the market seems pretty clear evidence of ongoing shrinkage in the consumer surplus.)

    You are concerned as to whether programmer tying has had an anti-competitive effect on other programmers. (Btw, the empirical evidence is pretty much indisputable that it has, given that it has been all but impossible for independent programmers to gain carriage for new channels, at the same time that major programmers have vastly expanded the number of channels they sell.) But isn’t focusing on that failing to see the forest for the trees? Isn’t the real question of interest whether there has been harm to end-consumers?

    Even if there were no independent programmers to be harmed, doesn’t the need to allocate bandwidth to unwanted channels increase distributor costs, and ultimately raise prices for consumers, regardless? And haven’t the totality of circumstances described above led to dramatically increased consumer costs?

    Perhaps it’s a defect in the law that there is no requirement to demonstrate harm. But then again, perhaps these practices are so likely to be harmful that the burden ought to be placed on those who engage in them (or those who espouse them) to prove that they are, in fact, not harmful.

    There are unquestionably many markets that consumers (or consumer advocates) complain about, which actually serve consumers quite well. You have not come even close to making a convincing argument that this is one of them.

  2. 

    Anti-trust law turns the Statute of Monopolies on its head. The point of the Statute of Monopolies was to limit the power of the government (king) and strengthen property rights. US Anti-trust law weakens property rights, as in this case, and gives the government arbitrary power. Time to repel the anti-trust laws.