Feb. 27 (Bloomberg) -- Cablevision Systems Corp. sued Viacom Inc. for antitrust violations tied to the industry’s bundling of cable channels into subscriber packages, a practice that spurred a consumer challenge in 2007 that failed in court.
Cablevision alleged in a statement yesterday that it was forced to carry and pay for 14 less-watched ancillary networks it claimed its customers don’t want. Details of Cablevision’s allegations couldn’t be independently confirmed in court records as a result of a sealing order.
Cablevision, the fifth-largest U.S. cable company, said in the statement that it seeks an order voiding a December “carriage agreement,” and a court order barring New York-based Viacom from conditioning carriage of any or all of its core networks on Cablevision’s licensing Viacom’s less-popular channels. The programmer owns cable networks Nickelodeon, MTV and Comedy Central.
“Viacom and other programmers have long offered discounts to those who agree to provide additional network distribution,” Jeremy Zweig, a spokesman for Viacom, said yesterday in an e-mailed statement. Zweig said Viacom will fight what it contends is a “transparent attempt by Cablevision to use the courts to renegotiate our existing two-month-old agreement.”
Cablevision said in its press release that it seeks a court order requiring Viacom permit it to carry the core networks and ancillary products while negotiating a new agreement. The Bethpage, New York-based company said in its statement that it also seeks triple damages and legal fees.
Charlie Schueler, a spokesman for Cablevision, declined to comment on why the complaint was filed under seal.
“There are serious problems with the current programming environment,” said Alex Dudley, a spokesman for Time Warner Cable Inc., the second-largest cable company. “We think this lawsuit raises important issues, and we look forward to their resolution in the courts.”
Prior bundling suits alleging antitrust violations have been brought by consumers: Comcast, DirecTV, Time Warner Cable, Walt Disney Co. and NBC Universal Inc. were among the cable and satellite-TV programmers and distributors named in the antitrust suit filed in federal court in Los Angeles in 2007 over claims their bundling of channels prevents competition among providers of televised content by offering only “pre-packaged tiers” of programs and by refusing to allow customers to pay for only the channels they want.
In October 2009, Comcast, DirecTV Group Inc. and 11 other pay-TV providers won dismissal of the suit brought by consumers who said they were harmed by the industry practice of bundling programs in subscription packages that forced customers to pay for services they didn’t want.
Matthew Cantor, a partner at Constantine Cannon LLP, who was a lead attorney for plaintiffs in several antitrust disputes concerning electronic payments systems, said the “illegal tying” issues in the Cablevision case aren’t new.
“The issue of tying one less valuable network to a more valuable network has been one that has been dealt for years by programmers and distributors,” he said. “Programmers have sought to launch more innovative programs by bundling them with more established brands. But there are some sustantial defenses that can be made and no doubt the defense will have a number of arguments that will be thoroughly examined by the court.”
He said the case raises an important question.
‘’Can Cablevision make a credible economic argument that they paid more for the bundling offerings than the individual offerings?’’ Cantor said,
U.S. District Judge Christina Snyder in Los Angeles denied a request by lawyers for the consumers that they be allowed to proceed without showing the providers’ competitors had been excluded by the bundling practice. Both sides agreed that, if the judge denied the request, the case would be dismissed and the decision appealed.
In the suit, the plaintiffs accused the companies of preventing competition among TV providers by offering only prepackaged tiers of programs and by refusing to allow consumers to buy channels “a la carte.”
“Plaintiffs do not seek to allege that any actual or potential competitors have been foreclosed from the tied product market,” Snyder said in her ruling. “It is not sufficient to allege that a desirable version of a product is excluded from the market.”
The U.S. Court of Appeals in San Francisco last year affirmed Snyder’s decision. Writing for the court, Judge Sandra Ikuta said the complaint failed to plead an injury to competition.
‘Absent an Injury’
“Businesses may choose the manner in which they do business absent an injury to competition,” Ikuta said in the ruling.
Ikuta said such injuries include tying arrangements, yet only when the tie harms existing competitors, creates barriers to entry for new competitors in the tied market, or facilities horizontal collusion.
Cablevision’s complaint “doesn’t sound meaningfully different from the allegations in the consumers case that was dismissed by the 9th Circuit,” said Paul Riehle, chair of the Antitrust and Unfair Competition Practice Group at Sedgwick LLP in San Francisco.
Ikuta said a contrary rule adopting the plaintiffs’ logic would have undermined the ability of musicians to sell a hit single only by purchasing of an entire album or a writer to sell a short story only through a collection of short stories.
Ikuta said an alternate ruling could have called into question cable channels because “such channels are themselves packages of separate television programs.”
Viacom fell 3 cents to $57.28 in Nasdaq Stock Market trading. Cablevision rose 27 cents to $15.29 in New York Stock Exchange trading. The case is before U.S. District Judge Laura Taylor Swain.
“There’s no question that the current all-or-nothing system dictated by programmers is completely broken,” Darris Gringeri, a spokesman for DirecTV, said in an e-mailed statement. “Our customers have told us time and time again they don’t want to pay for channels they don’t watch. For programmers to force this system on all pay-tv customers, just so they can line their pockets with extra profits, is shameful.”
American Cable Association President and Chief Executive Officer Matthew M. Polka said his group has consistently said the practice of tying and bundling of major cable content companies forces cable operators to pay for channels they don’t want to offer to their customers.
“It’s a problem not just for Cablevision but also for hundreds of small and medium-sized cable operators. If the courts can address this problem, then we believe this would be a good outcome for consumers,” Polka said in a statement.
Viacom isn’t the only provider of cable-television shows and, as such, doesn’t have the market power that would be required to establish an antitrust violation, said Jeff Riffer, an antitrust lawyer with Elkins Kalt Weintraub Reuben Gartside LLP in Los Angeles.
“These are tough cases to make,” Riffer said. “Courts have ruled that companies can define how to sell their products.”
The case is Cablevision Systems Corp. v. Viacom International Inc., 13-01278, U.S. District Court, Southern District of New York (Manhattan). The California case was Brantley v. NBC Universal Inc., 07-06101, U.S. District Court, Central District of California (Los Angeles.)
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