Ninth Circuit Rejects Consumer Antitrust Challenge To Cable Television Bundling

The Ninth Circuit recently affirmed the dismissal of a consumer class action challenging the television programming industry’s practice of exclusively offering multi-channel cable packages. Brantley v. NBC Universal, Inc. No. 09-56785 (9th Cir. June 3, 2011). In so holding, the Court affirmed that allegations regarding widespread harm to consumers (either through increased prices, reduced choice, or both) — without some separate, cognizable injury to competition — fail to state a Section 1, Sherman Act claim.

Brantley involved a putative nationwide class of consumers suing two groups of industry participants: (1) programmers in the upstream market who sell television channels and programs to distributors; and (2) distributors in the downstream retail market who sell the programming to consumers. Plaintiffs alleged that programmers exploit market power derived from “must-have,” high-demand channels by bundling or tying them with less desirable, low-demand channels for sale to distributors, forcing distributors in turn to sell only higher-priced, multi-channel packages to consumers. Plaintiffs alleged that in the absence of such bundling, distributors would offer “a la carte programming” to meet consumer demand, thereby allowing consumers to purchase only those channels they wish to watch. Defendants’ vertical restraints thereby reduce consumer choice, raise prices, and limit competition between distributors. Indeed, plaintiffs cited to third party findings (including from the FCC) that the average cable subscriber is forced to pay for 85 channels that he does not watch to obtain the 16 he does, and that defendants’ bundling results in a net consumer welfare loss of $100 million.

In affirming dismissal, the Ninth Circuit held that given plaintiffs’ conscious decision not to allege any foreclosure of competitors, plaintiffs could not plead the requisite injury to competition.[1] Courts have identified horizontal collusion and foreclosure of rivals as the two types of injury to competition sufficient to state a Section 1 claim. While vertical restraints may result in foreclosure of rivals, they do not necessarily do so. The two types of vertical restraints implicated here — tying and bundling — may result in such injury to competition if: (1) for tying, the seller leverages its market power in the tying product to exclude other sellers of the tied product; or (2) for bundling, the bundler is able to use discounting, for example, to exclude rivals who do not sell as great a number of product lines. Applied to the facts of this case, the Court found neither allegations that programmers’ practice of tying “must-have” with low-demand channels excluded other sellers of low-demand channels from the market, nor allegations that defendants’ bundling excluded competitors from either the upstream or downstream markets.

Plaintiffs urged the Court to adopt an alternative theory of injury to competition. That is, defendants’ conduct harms consumers by: (1) limiting the manner in which distributors compete with one another; (2) reducing consumer choice; and (3) increasing prices. The Court, however, rejected each argument in turn. Relying on Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 US 877 (2007), it explained that limitations on distributors’ ability to compete, without proof of competitive harm, fails to state an antitrust claim. With respect to harm to consumers, it explained that price increases and reduced choice are perfectly consistent with a free, competitive market, and, without more, fail to state an antitrust claim. While the alleged harm to consumers may establish antitrust injury, it does not establish any cognizable injury to competition. Even if consumers are forced to purchase multi-channel packages that include unwanted channels for a higher price, the antitrust laws do not interfere with the ability of businesses to choose the manner in which they do business, absent an injury to competition.

Dealings with Vendors Shouldn’t Expose Trade Secrets

Companies that spend significant amounts implementing computer systems to thwart hackers and creating policies to prevent employees from stealing trade secrets are all too willing to disclose such secrets to vendors.

Here’s the problem. Just as every human being possesses a unique genetic code, every company has its own methods and processes. These trade secrets are the result of years of research and trial and error, and they are constantly evolving and improving. They are what distinguishes one company from another.

When a well-meaning vendor enters a business to discuss its product, perform a demonstration or propose a joint-development agreement, the host company often grants the vendor access to areas where the general public can’t go. It too readily shares details about products and systems. This could include customer information, manufacturing processes, or plans for future products. Compounding the problem, the host frequently signs a nondisclosure agreement, in which it agrees to keep confidential the vendor’s product information. However, no agreement is reached concerning the host’s sensitive information — a vendor can walk out the door with trade secrets.

What starts as a harmless product demonstration can quickly become a legal battle over trade-secret theft that can cost both sides hundreds of thousands of dollars in legal fees. In one local case, the host company, after an extensive trial of the vendor’s product, determined it was of little value and that its own plans for a similar product would achieve a much better result. When the host proceeded, the vendor sued. During two years of litigation, the parties fought over what was said during the demonstration and whether the host ripped off the vendor’s idea or the vendor made improvements to its own product based on what it learned from the host.

The risk of such litigation can be greatly reduced by following these steps:

  • Conduct a trade-secret audit. All companies should know what their most-valued business information is, information their competitors would love to obtain. Take time to document specifically this information. In the event there is ever litigation over the disclosure of trade secrets, this will serve a company well. Many a lawsuit has been thrown out because the plaintiff couldn’t adequately identify its trade secrets.
  • Improve the vendor-invitation process. Employees are often awed by new technology that promises to make their jobs easier, and they are quick to ask vendors to visit. Unfortunately, these employees fail to involve senior management, research and development departments, and the information technology staff to ensure a product fits in the company’s big picture. Companies should designate one employee to coordinate vendor visits and product demonstrations, and this person should ensure appropriate departments are involved to help decide whether to have the demonstration and whether the product is a good fit.
  • Do not maintain a public visitor’s log. Otherwise, a vendor can see a list of all recent visitors. The list generally includes reasons for visits, allowing vendors to see what other products a company is evaluating and what the company is working on. The vendor can share this information when visiting your competitors.
  • Be careful what you sign. Vendors often ask companies to sign nondisclosure agreements, which should always be reviewed by senior management and, if possible, in-house or outside counsel. Problems arise because the agreements tend to be too general. Some agreements say everything disclosed by the vendor is confidential, even if the rest of the world may already know it. By signing an overly broad agreement, companies take on far more obligations than they should and can accidentally restrict their own abilities to develop similar products. Senior management and attorneys can help make these agreements more specific and make sure appropriate exceptions are included for matters of general knowledge, information already known to the company, and plans that are already on the company’s drawing board.
  • Have your own nondisclosure agreement. Vendors often need to know some degree of a company’s sensitive information to ensure their product is a good match. Why agree to keep a vendor’s information secret if they are not willing to do the same for yours? Any nondisclosure agreement should be mutual, and it should describe the types of sensitive information to which the vendor is being granted access. Requiring the vendor to sign a nondisclosure agreement also imparts the message that trade secrets are a serious matter, further reducing the risk the vendor will disclose the information to others.
  • Keep detailed records. Companies should keep track of each vendor visit, identifying employees the vendor met, and describe all communications.

These steps will reduce greatly the risk of further litigation. If such litigation does occur, these steps will greatly increase a company’s chance of prevailing.

Time To Review Your Company’s Consumer Disclosures?

A series of recent federal court decisions highlight the importance of making sure your company’s online consumer disclosures are robust and accurate. If done properly, they just might help you avoid a class-action lawsuit.

In Berry v. Webloyalty.com, Inc., the court dismissed a putative nationwide consumer class action, concluding that the company’s business practices were not unfair or misleading as a matter of law because of the company’s disclosures. Slip Opinion, No. 10-1358 (S.D. Cal. Apr. 11. 2011).

The case involved “post-transaction marketing,” the practice of presenting a consumer with an offer from a third party after the primary transaction has been completed. This type of marketing generally involves a data-sharing arrangement, where the company completing the primary transaction passes data to a second company for marketing purposes. After the consumer takes some further action (e.g., entering an email address, checking a box and clicking “yes”), the second company charges the consumer for a new product or service using the payment information provided to the first company.

This practice has been criticized by certain legislators and officials at the Federal Trade Commission. Last December, Congress passed and the President signed the Restore Online Shoppers’ Confidence Act into law, targeting online post-transaction marketing; the law now requires additional disclosures to be made and prohibits third-party sellers from charging consumers for goods or services without the consumer’s express consent and from receiving certain financial information obtained during the initial transaction.

Notwithstanding any public debate over the propriety of these marketing practices, several federal courts have granted motions to dismiss in post-transaction marketing cases based on the companies’ disclosures. The most recent example is Berry, where the court took judicial notice of the company’s disclosures and ultimately dismissed the case, concluding that no reasonable consumer could have been misled, given the disclosures that were made.

After reviewing the online disclosures and terms of service, the court in Berry held that “the explicit and repeated disclosures that defendants made in their enrollment page suffices to defeat” all of the plaintiffs’ claims, including fraud, invasion of privacy and violations of the Electronic Communications Privacy Act, Electronic Funds Transfer Act and California’s Unfair Competition Law. Slip Op’n at 9. The court explained that by completing his transaction after receiving such disclosures, plaintiff had consented to the conduct about which he complained. Id. Although the plaintiff claimed he did not understand he would be charged for the third party’s product (here a membership club providing discounts on products and services), the court emphasized that the enrollment page disclosed more than five times that, by signing up, plaintiff would be charged $12 per month after an initial thirty-day trial period. Id. at 10.

Bsed on these disclosures, the court granted the defendants’ motion to dismiss, thus ending the case and potentially saving the companies millions in discovery costs and other expenditures.

Other federal courts have reached similar conclusions. In Baxter v. Intelius, Inc., No. 09-1031, (C.D. Cal. Sept. 16 2010), the court granted a motion to dismiss, concluding that “[t]he disclosures combined with the affirmative steps for acceptance are sufficient that, as a matter of law, the webpage is not deceptive.” Similarly, in In re Vistaprint, Marketing and Sales Practices Litigation, No. 08-1994 (S.D. Tex. Aug. 31, 2009), aff’d, No. 09-20648 (5th Cir. Aug. 23, 2010), the court held that a “consumer cannot decline to read clear and easily understandable terms that are provided on the same webpage in close proximity to the location where the consumer indicates his agreement to those terms and then claim that the webpage, which the consumer has failed to read, is deceptive.”

A key factor in each of these cases was the courts’ willingness to examine the company’s online disclosures in connection with a motion to dismiss. In each case, the plaintiffs opposed any review of the disclosures, arguing that they were outside the four corners of the complaint and may not be authentic. In Baxter and Vistaprint, the court rejected the argument because plaintiffs came forward with nothing to challenge the authenticity of the disclosures. In Berry, the court took the extraordinary step of allowing discovery on the authenticity and accuracy of the disclosures before ruling on the motion to dismiss. When the plaintiffs were unable to offer any evidence that the disclosures were not authentic, the court considered them in connection with the motion to dismiss and granted the motion.

These cases highlight two strategies that could help your company reduce the risk of class-action lawsuits.

First, the cases demonstrate that, even for controversial business practices, robust consumer disclosures may provide an effective defense against a consumer class-action lawsuit.

Action Step: Consider conducting a comprehensive review of your company’s consumer disclosures to evaluate whether your company is adequately protected and in compliance with existing law.

Second, the cases demonstrate the importance of being able to provide a court with accurate copies of the disclosures individual consumers saw and in a form that is subject to judicial notice in connection with a motion to dismiss.

Litigating a class action can be incredibly expensive and risky. One effective way to mitigate the risk is to have a strategy for defeating them at the earliest stages of the case, preferably on a motion to dismiss. But if you cannot provide accurate copies of the actual disclosures made to the named plaintiff, the court may be unwilling to consider them on a motion to dismiss and you may have lost one of your company’s most effective weapons against class actions.

Action Step: Consider reviewing your company’s systems for documenting consumer transactions to ensure you can provide accurate copies of consumer disclosures for any given transaction.

Two Respondents Receive Show Cause Order In Inv. No. 337-TA-763 – International Trade Commission

Chief ALJ Luckern issued an order to show cause why two respondents, Koko Technology Ltd. and Cyclone Toy & Hobby, should not be found in default in Inv. No. 337-TA-763, Certain Radio Control Hobby Transmitters and Receivers and Products Containing Same.  The respondents failed to respond to the complaint by April 4, 2011 and the Chief ALJ has required both respondents to respond to the show cause order by May 12, 2011.