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NEW YORK DIST. COMM. ON CABLE TV v. MANHATTAN CABL

December 18, 1986

NEW YORK DISTRICT COMMITTEE ON CABLE TV, Plaintiff,
v.
MANHATTAN CABLE TV, INC., TIME, INC., AMERICAN TELEVISION AND COMMUNICATIONS, INC., HOME BOX OFFICE, INC., THE CITY OF NEW YORK, EDWARD KOCH, Mayor, ANDREW STEIN, City Council President, HARRISON GOLDIN, Comptroller, DAVID DINKINS, CLAIRE SHULMAN, HOWARD GOLDEN, RALPH LAMBETTI and STANLEY SIMON, Borough Presidents, and MORRIS TARSHIS, Director of Franchises, Defendants



The opinion of the court was delivered by: SWEET

SWEET, D.J.

In this action, defendants Manhattan Cable TV, Inc. ("MCTV"), Time Incorporated ("Time"), American Television & Communications Corp. ("ATC") and Home Box Office, Inc. ("HBO") (collectively, the "Time defendants") have moved to dismiss the Amended Complaint of plaintiff New York Citizens Committee on Cable TV ("the Committee") pursuant to Fed.R.Civ.P. 12(b)(6) and, in the alternative, for summary judgment pursuant to Fed.R.Civ.P. 56 as to certain claims for relief under a franchise agreement dated August 18, 1970 under which MCTV provides service (the "Franchise Agreement"). *fn1" The Amended Complaint alleges that the Time defendants have violated § 2 of the Sherman Act by monopolizing, or attempting to monopolize, the lower Manhattan market for non-sports pay television programming, *fn2" that the Time defendants have violated § 612 of the Cable Communications Policy Act of 1984, 47 U.S.C. § 532 (the "Cable Act") and that MCTV has breached certain provisions of the Franchise Agreement. The motion to dismiss the Cable Act claim is granted for lack of standing and the motion to dismiss the remaining claims is denied for the reasons set forth below.

 The Amended Complaint

 According to the Amended Complaint, the Committee is an unincorporated association of cable television subscribers residing in lower Manhattan. MCTV, a wholly-owned subsidiary of Time, provides cable television service in lower Manhattan pursuant to the Franchise Agreement, through which the City of New York authorized MCTV's predecessor in interest to construct and operate a cable television system. Although MCTV's franchise is nonexclusive, MCTV is the only company which the City has authorized to provide cable television service in that area. Defendant ATC, also a wholly-owned subsidiary of Time, is in the business of owning and operating cable television systems and is the second largest such multiple systems operator in the nation.

 HBO (also a wholly-owned subsidiary of Time) produces two video programming services called "Home Box Office" (the HBO Service) and "Cinemax," which feature movies, sporting events and other forms of entertainment and information. HBO's programming services are delivered to cable systems nationwide via satellite. HBO's programming services are usually sold to cable subscribers as "pay" or "premium" services, that is, they generally are not included in the package of "basic" services provided to all subscribers for their basic subscription fee, but are provided only to subscribers who elect to take them at extra charge. In the lexicon of this litigation, HBO is a programmer.

 MCTV currently offers a basic cable service package consisting of 31 channels provided as basic services and three additional pay services. Two of these pay services are the HBO Service and Cinemax, both of which are affiliated with MCTV through Time. MCTV also carries a third pay service, Sportschannel, an unaffiliated sports-oriented pay service. MCTV does not carry any other unaffiliated pay cable services such as Showtime, Bravo or the Disney Channel, although its system has enough channels to permit it to do so if it wished.

 According to the Amended Complaint, MCTV has refused to grant "access" to its cable system to unaffiliated pay television companies, that is, programmers other than HBO. In 1978, Showtime, a pay television service unaffiliated with Time, requested access to one of the cable channels on MCTV's system. MCTV denied Showtime's request because, as the Committee admits, insufficient channels were available. Thereafter, Showtime continued to request access to MCTV's system. In 1981, after MCTV had expanded its channel capacity, it announced that Showtime would be given access to one of the new channels, but this offer was later withdrawn. Later in 1981, MCTV granted HBO's request for access to one of MCTV's channels for its new Cinemax service. The Amended Complaint alleges further that other pay television services unaffiliated with Time have requested but been denied access to MCTV's system, although it does not indicate when these alleged "denials" of "access" occurred.

 The Amended Complaint sets forth four claims for relief, of which only three remain. *fn3" Of these three, the first is a claim for relief under § 2 of the Sherman Act, 15 U.S.C. § 2. The Committee asserts that the Time defendants have monopolized, or attempted to monopolize, the market for pay cable movie and non-sports entertainment programming service in lower Manhattan. The Committee also asserts a claim for relief under § 612 of the Cable Act, 47 U.S.C. § 532, which requires certain cable operators to set aside a percentage of channel capacity for leased access by unaffiliated program suppliers. Finally, plaintiff asserts a pendent state claim as a third party beneficiary of certain access obligations imposed on MCTV by the Franchise Agreement with the City. The Committee seeks injunctive relief directing MCTV to make available reasonable channel capacity for leased access" by unaffiliated pay cable programmers to place them on equal footing with HBO and Cinemax.

 The Present Motion

 The Time defendants have raised a number of challenges to the sufficiency of the Amended Complaint. First, they point out that the Amended Complaint states that the alleged violation is in terms of "access," while the relief sought is in terms of leased access." Thus, they claim, the Committee seeks relief for allegedly wrongful refusals to provide leased access when the Committee does not allege that such refusals have ever occurred. Second, the Time defendants argue that the Committee's Sherman Act claims must be dismissed on the grounds of geographic and product market and state action immunity. Third, they contend that the Committee lacks standing to sue under the antitrust laws. Fourth, they maintain that the Committee lacks standing to sue under the Cable Act and, in any event, has failed to state a claim thereunder. Fifth, the Time defendants assert that the Committee lacks third party beneficiary status as a matter of law. Finally, the Time defendants urge that the First Amendment bars the relief the Committee requests.

 "Access" v. "Leased Access"

 When describing the conduct that gives rise to violations of law, the Amended Complaint speaks in terms of denial of "access." The claims for relief, however, request leased access" for unaffiliated programmers. The Time defendants assert that the Committee's failure to allege that MCTV has denied leased access" to Showtime and other unaffiliated services is fatal to its claims, since it seeks relief for allegedly wrongful refusals to provide leased access when it does not allege that such refusals have ever occurred.

 According to defendants, pay programmers may obtain "access" to a cable system in a number of ways of which leasing is only one. In the vast majority of cases the major programmers enter into licensing transactions with cable operators, whereby they receive payment from the operators in return for the latter's purchase of a service which they in turn sell to subscribers. See, e.g., American Television & Communications Corp. v. Floken, Ltd., 629 F. Supp. 1462 (M.D.Fla. 1986). Therefore, the defendants state that the allegations respecting MCTV's denials of "access" can only be understood to refer to decisions by MCTV not to purchase exhibition rights offered to it by Showtime and others, and not to any actual request for, or denial of, leased access to MCTVs system. Furthermore, they allege that neither Showtime nor any other major pay programmer has ever sought to lease one of MCTVs channels.

 Although the Committee cannot obtain equitable relief against conduct that has never occurred and is not threatened to occur, the term "access" does not necessarily exclude leased access as used in the "wherefore" clause, nor does the prayer for relief limit the Committee to the literal meaning of leased access." It would be premature to dismiss the complaint at the point based solely on the difference in the terminology used in the body of the complaint and the prayer for relief. Therefore, the motion to dismiss on this ground is denied.

 The Sherman Act Claims

 The Relevant Market

 The two essential elements of a claim of monopolization under § 2 of the Sherman Act are: (1) the possession of monopoly power in the relevant market, and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of superior product, business, acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966). The Time defendants do not dispute that MCTV's alleged refusal to deal constitutes an unlawful "willful acquisition or maintenance" so long as MCTV has "purpose to create or maintain a monopoly," United States v. Colgate & Co., 250 U.S. 300, 307, 63 L. Ed. 992, 39 S. Ct. 465 (1919). Nevertheless, they challenge the Committee's allegations of monopoly power in a relevant market by calling into question the Committee's definition of the relevant geographic and product market. See, e.g., Gilbuilt Homes, Inc. v. Continental Homes of New England, 667 F.2d 209, 211 (1st Cir. 1981).

 In the first instance, any restraint on "competition" in this case must be discussed in terms of three interdependent markets: the market in which MCTV sells a package of programming to subscribers (the "retail" market), the market in which MCTV buys or leases programming from various sources (the "wholesale" market), and the market in which programmers compete for the business of subscribers by MCTV's resale to subscribers. *fn4" In the "retail" market, which covers lower Manhattan and the product market of all cable services, MCTV has a de facto exclusive franchise to sell to subscribers and, therefore, a lawful monopoly. In the "wholesale" market, various programmers compete nationwide to sell their programs to cable operators. The Committee has not alleged HBO to have a large percentage of the programmers' market nationwide, and no claim of monopolization is stated with respect to this market.

 The market in which HBO and unaffiliated services compete for consumers' dollars is the market at issue here. These markets could be analogized to the sale of cookies to a grocer, who in turn sells them to consumers. The manufacturers of different brands of cookies compete to sell to the only grocer in town, who sells those cookies, along with other groceries, to consumers. While the manufacturers are not "retailers" as such, *fn5" that does not mean that the different brands of cookies on the grocer's shelf do not "compete" with each other in a legally significant sense. Cable programmers are ultimately competing for the dollars paid by consumers, whether or not that money is paid directly to them or to the cable system, which in turn buys from the programmer. The fact that MCTV is the sole seller in the "retail" market, and sets the price for each pay cable service, does not mean that it cannot injure competition. As long as only one competitor's product is offered to consumers through the cable system, or on the grocer's shelf, that consumer may be paying a monopoly price for the product. Thus, a distinct injury to competition has been alleged, the injury to consumers resulting from the improper exclusion of all but one pay television service.

 The relevant geographic market is defined simply as the geographic area where competition occurs. See Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327, 5 L. Ed. 2d 580, 81 S. Ct. 623 (1961). The purpose of ascertaining that market is to determine the extent to which prospective competitors can enter the market and prevent alleged violators from charging monopoly prices. See L. Sullivan, Antitrust 41 (1974).

 To define a market in geographic terms is to say that if prices were appreciably raised for the product within a given area, supply from other sources could not enter promptly enough to restore the old price. Id. In other words, a distinct market exists if sellers within the area are making price decisions protected from the need to take account of sellers outside the area. Id. at 68.

 By virtue of MCTV's city-granted monopoly and alleged refusals to deal with unaffiliated programmers, HBO is fully protected in lower Manhattan from the need to take account of the price decisions of any other programmers. The alleged refusal to deal eliminates all competition between programmers for consumers' dollars in lower Manhattan, whether or not HBO and Showtime compete effectively in other markets. Within the area of the franchise, it is impossible for competing programmers, given the alleged violation, to enter the market and prevent HBO from charging noncompetitive prices to MCTV that may be indirectly passed on to consumers. *fn6" The very nature of the alleged violation thus defines the geographic market.

 Absent an exclusive franchise and refusal to deal by MCTV, HBO would face competition in lower Manhattan from a nationwide programmers' market. Nevertheless, given MCTV's alleged violation, HBO has been effectively isolated from all competition which would force it to charge competitive prices. Thus, the franchise area, lower Manhattan, is the appropriate market.

 The purpose of defining a product market is identical to that of defining a geographic market: to determine whether supply from other sources in the form of other products would enter promptly enough to hold prices down to a competitive level. See L. Sullivan, Antitrust 41 (1976). The court's task, therefore, is to identify those products which are reasonably interchangeable with, and may therefore compete with, the defendant's products. See United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 395-400, 100 L. Ed. 1264, 76 S. Ct. 994 (1956). The product market analysis must focus on the interchangeability of the HBO Service and Cinemax with other programming. If, for instance, a small rise in HBO's prices would result in a large number of consumers abandoning their pay service subscriptions for the "basic" cable service, then the basic service would likely be in the same market.

 The Committee alleges that the proper product market is that for pay cable television movie and non-sports entertainment services. Its further allegations that there are "myriad . . . cable television programming services" and that cable operators choose among all of these services when selecting programming to provide to customers do not make its alleged product market deficient as a matter of law. The fact that MCTV chooses among these programming services in the "wholesale" market says no more about whether those services are reasonably interchangeable by consumers for the same purpose," United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 395, 100 L. Ed. 1264, 76 S. Ct. 994 (1956) (emphasis added), than the fact that a grocer chooses what foods to stock from a "myriad" of foods says about whether milk and bread are interchangeable to consumers. The perspective of the cable subscriber is of the utmost importance in defining the relevant product market. See Levitch v. Columbia Broadcasting System, Inc., 495 F. Supp. 649, 664-65 (S.D.N.Y. 1980), aff'd, 697 F.2d 495 (2d Cir. 1983). The fact that MCTV is putting together a program from different programming services, in fact, would seem to support the conclusion that at least some of the programming services are diverse and meant for different audiences.

 Defendants' claim that the Amended Complaint fails to allege sufficient facts as to non-interchangeability must also fail. Where the complaint specifically defines the alleged relevant product market, see Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177, 15 L. Ed. 2d 247, 86 S. Ct. 347 (1965), it need not go further and prove on the face of the complaint that that market is the proper one. The Committee's definition of the market as that for "pay ...


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