Court in Tying Case Finds that Unfulfilled Desire is Not Foreclosure

 

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View John M. Gale Profile
EI Vice President John M. Gale has written extensively on telecommunications issues including retail availability of navigation devices and program bundling.

A jury decision against Cox Communications (Cox) in a tying case was recently overturned by the U.S. District Court in Western Oklahoma. The court’s decision turned on the difference between unfulfilled desire and foreclosure. Manufacturers expressed a desire to sell the tied product, but “…never was there any evidence the desire was prevented or blocked by actions from Cox.”

In 2009, plaintiff Cox subscribers filed a class action alleging that Cox had tied rental of a cable box to premium cable services. To receive some two-way services (pay-per-view, video-on-demand), subscribers needed a cable box that was only available from Cox. The initial national class was not certified when the judge did not support a national geographic market, but regional cases were certified in 2014. After some procedural disputes, the case went to trial in western Oklahoma in September of 2015. The plaintiffs proposed a tying market as premium cable services sold in an Oklahoma City geographic market. The tied market was cable boxes (sometimes termed multi-channel video programming distribution (MVPD) navigation devices). Whether the plaintiffs proposed the same geographic market for cable boxes was in dispute.

The jury found that Cox had tied the sale of a product in one market to a product in a separate market, that Cox had market power in the tying market (premium cable services), and that Cox prevented competing cable box suppliers from participating in the tied market, which caused a substantial foreclosure of commerce. Plaintiffs argued that absent the tie, they would have paid much less for cable boxes, as they could have purchased them from competing retailers. The jury awarded the Oklahoma class $6.31 million in damages before trebling.

Cox argued that it did not have market power in premium cable services due to competition from Direct TV, Dish, broadcast, and Internet-delivered video. Moreover, Cox subscribers could receive many, though not all, of its services through third-party devices, such as Tivo or Moxi. In addition, Cox claimed that it had told subscribers that they could purchase a cable box if they could find one. Cox also claimed that it took steps to assist manufacturers in making cable boxes to sell at retail, though no devices were commonly available for sale in Oklahoma City. Cox argued that there was no evidence it had hindered manufacturers from entering the cable box market.

In overturning the jury verdict, the court determined that plaintiffs had failed to offer any evidence that Cox had foreclosed any manufacturer that tried to sell a cable box at retail. Therefore, there was no evidence that absent the tie a substantial number of subscribers would have bought a cable box at retail (that Cox had foreclosed a “substantial volume of commerce”). The court found some evidence that manufacturers expressed a desire to sell cable boxes at retail in Oklahoma but no evidence that they had tried and failed due to actions by Cox.

In addition, the court found that plaintiffs had failed to show that they were harmed, since Cox had not foreclosed competition for the sale of cable boxes. When the court previously ruled on summary judgement motions, it rejected Cox’s argument that because no one else sold the tied product there could be no illegal tie. In that ruling, the court pointed out that Cox’s tying could have precluded entry and thus caused the lack of alternative providers of the tied product. That ruling seemed to invite plaintiffs to introduce evidence of how Cox’s actions foreclosed entry. In overturning the jury verdict, the court stated that plaintiffs had not introduced any evidence on this point. (Plaintiffs are appealing the court’s decision.)

This specific case is part of a long history of attempts to regulate the provision of cable boxes. With the introduction of premium services on cable systems in the 1980s, cable boxes were required for service. Pursuant to the 1996 Telecommunications Act, the Federal Communications Commission (FCC) promulgated rules mandating the retail availability of cable boxes. Cable Labs developed the CableCARD standard, which was designed to allow cable systems to maintain secure access through a proprietary device (the cable card). Consumers could purchase a cable box, or a cable card-ready television, at retail. Cable cards were never a popular alternative to renting a cable box from the service provider, partly because they did not allow two-way services. The device manufacturers never embraced the follow-on standard designed to allow two-way services, Tru2Way. In 2010, the FCC issued a notice of inquiry for a new standard, known as AllVid. As proposed, an AllVid device available at retail would operate as an interface between any service provider (cable, satellite, over the air, Internet) and any consumer device (TV, DVR, game console, computer, pad, etc.). While the FCC did not continue to promote a separate AllVid standard, it has attempted to include a retail availability standard as part of the Downloadable Security Technology Advisory Committee process.

Cable service providers have long been accused of tying device rentals to service and profiting from that tie. Service providers have argued that they need to maintain security through the cable box and that they have a stronger incentive than consumers to upgrade the cable box to provide new and enhanced services. They have argued that they would rather consumers purchase a device, as then consumers would bear both the risk the device would break and the cost of upgrades. More recently, many service providers are making their signals available on third-party devices. Subscribers can now access many services through a DVR, game console, or dedicated interface, such as Fire TV, Apple TV, or Roku.

Plaintiffs acknowledged that new ways of integrating multi-channel video sources into home networks are being introduced, but claimed that during the class period (February 1, 2005 through the present) there were no viable alternatives to renting a Cox-provided cable box. The court’s decision indicates that the lack of retail alternatives may not be the fault of service providers.