Thom‘s excellent post highlights the Ninth Circuit’s recent decision in Brantley and describes its implications both in terms of rejecting Professor Elhauge’s claim that metering ties and mere surplus extraction amount to competitive harm for the purposes of antitrust and also for the future of the quasi-per se rule of tying. Thom, in my view correctly, observes:
Given this procedural posture, the Ninth Circuit starkly confronted whether, as Elhauge maintains, the price discrimination/surplus extraction inherent in Stigler-type bundling is an “anticompetitive” effect that warrants liability. In affirming the district court and holding that plaintiffs’ claims of higher prices were not enough to establish anticompetitive harm, it effectively held, as I and a number of others have urged, that there should be no tying liability absent substantial tied market foreclosure.
I want to highlight another very interesting aspect of the decision, i.e. Brantley appears to reject the so-called “Consumer Choice” standard that has been gaining significant traction in the antitrust literature both in the U.S. and Europe. Averitt & Lande describe the consumer choice antitrust standard as follows:
It suggests that the role of antitrust should be broadly conceived to protect all the types of options that are significantly important to consumers. An antitrust violation can, therefore, be understood as an activity that unreasonably restricts the totality of price and nonprice choices that would otherwise have been available.
The central idea is that the efficiency perspective is hampered by “only” looking at things like prices and output (including quality-adjusted prices), and occasionally innovation. The fundamental observation of the “consumer choice” framework is that a reduction of “choice” (however defined, but lets come back to that), even if coupled with a reduction in price or increase in output, is a cognizable antitrust injury.
This approach is getting some traction. For example, Commissioner Rosch has argued both that the consumer choice standard is desirable and that, after the Supreme Court’s decision in Leegin, is the law (“injury to consumer choice (as well as an increase in price) is now recognized as injury to consumer welfare in the United States.”).
I’ve criticized the consumer choice standard, largely because it was likely to lead to systematic error in predicting the impact on consumer welfare. Indeed, in cases involving tradeoffs like reduced product variety at lower prices, the standard would systematically condemn conduct that is likely to improve consumer outcomes (e.g. competition for exclusives with retail shelf space). The bottom line is that I do not think there is any basis in either economic theory or empirical evidence to support the view that the consumer choice standard would be a better predictor of consumer outcomes than current tools allow. Thus, its application is likely to make consumers worse off.
So why does Brantley appear to reject the consumer choice standard? If I may borrow from Thom’s description of the case:
Brantley, et al. v. NBC Universal, Inc., et al., involved a challenge by cable television subscribers to T.V. programmers’ practice of selling cable channels only in packages. The plaintiffs, who preferred to purchase individual channels a la carte, maintained that the programmers’ policy violated Sherman Act Section 1. As the Ninth Circuit correctly recognized, the arrangement really amounted to tying, for the programmers would sell their “must have” channels only if subscribers would also take other, less desirable channels. (Indeed, the practice is closely analogous to the block booking at issue in Loew’s, where the distributor required that licensees of popular films also license flops.)
The district court dismissed plaintiffs’ first complaint without prejudice on the ground that plaintiffs failed to allege that their injuries (purportedly higher prices) were caused by an injury to competition. Plaintiffs then amended their complaint to include an allegation “that Programmers’ practice of selling bundled cable channels foreclosed independent programmers from entering and competing in the upstream market for programming channels.” In other words, plaintiffs alleged, the tying at issue occasioned substantial tied market foreclosure.
After conducting some discovery, plaintiffs decided to abandon that theory of harm. They prepared a new complaint that omitted all market foreclosure allegations and asked 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.” Defendants again sought to dismiss the complaint. The district court, reasoning that the plaintiffs had failed to allege any cognizable injury to competition, granted defendants’ motion to dismiss, and plaintiffs appealed.
The crux of the complaint, of course, is a reduction in consumer choice. The plaintiffs argue that a la carte programming would prevail in the absence of bundling and thus increase consumer choice. The Ninth Circuit describes the plaintiffs’ claim as follows: “the challenged bundling practice limits Distributors’ method of doing business and reduces consumer choice, while raising prices.” In the absence of allegations of market foreclosure or exclusion resulting in harm to competition, the complaint isolates the claim that a stand-alone reduction of consumer choice is actionable antitrust injury. The Ninth Circuit ties the complaint to consumer choice directly:
They argue that the sale of multi-channel packages harms consumers by (1) limiting the manner in which 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.
The Court is clear to note that “limitations on the manner in which Distributors compete with one another, without more, constitute a cognizable injury to competition,” citing Chicago Board of Trade. Contrary to Commissioner Rosch’s claims, the Ninth Circuit finds that Leegin explicitly rejects the consumer choice standard, observing that “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,” and also highlights the fact that “antitrust law recognizes the ability of businesses to choose the manner in which they do business absent an injury.” Further, the Court points out the mere fact that a common business practice is adopted by many firms in an industry — thus reducing the diversity of business arrangements and consumer choice — is likely a signal that the practice is efficient, not that it reduces consumer welfare.
In addition the Brantley’s implications for tying (and with respect to Professor Elhauge’s claims about non-foreclosure related consumer harm), it is a rather straightforward rejection of the consumer choice standard. I think this is all to the good for the reasons described above, and in Thom’s post. A movement to a vague “consumer choice” standard threatens to take the focus off of consumer welfare — and in some cases, is in direct conflict with it. The consumer choice movement runs counter to the modern trend (e.g. in the Horizontal Merger Guidelines) to directly measure the impact of business practices on consumer welfare instead of indirect proxies like market structure or “choice.”