Whereas the antitrust rules on a number of once-condemned business practices (e.g., vertical non-price restraints, resale price maintenance, price 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).]