Federal District Court in Pennsylvania refused to dismiss conspiracy and monopolization claims against Comcast arising out of transactions in which Comcast had both purchased and sold geographically separate local cable television systems to competitors in exchange for other systems. Glaberson, et al. v. Comcast, et al., Civil Action No. 03-6604 (E.D. Pa. August 31, 2006). The rapidly consolidating cable television industry frequently uses transactions in which large cable companies "swap" cable systems in different geographic areas with the goal of assembling larger contiguous areas in which each cable company provides services. The economic motivation is that assembling larger contiguous areas makes administering such contiguous cable systems cheaper and more efficient. Such swaps are also done on the basis of swapping subscribers, rather than entire cable systems, again in an effort to increase the effective economic size of contiguous service areas.
In the transaction which prompted the Glaberson litigation, Comcast swapped cable systems and cable subscribers in various parts of the United States for competitors’ cable systems and subscribers in Philadelphia and Chicago. Comcast then swapped certain Chicago area subscribers for AT&T Broadband’s Philadelphia area subscribers. Finally, as part of the 2002 merger between Comcast and AT&T, Comcast acquired AT&T’s cable monopoly and cable subscribers in the Chicago area. Plaintiffs sued, and alleged that the ultimate result of these various swap agreements was that Comcast willfully obtained monopoly power in relevant geographic markets, defined as Comcast cable franchises located in Philadelphia and Chicago, and geographically contiguous areas, in certain designated counties. Plaintiffs alleged that after the transactions complained of, Comcast controlled 94% and 92% of the cable markets in areas referred to as the Philadelphia and Chicago "clusters," respectively, and that Comcast used its monopoly power acquired thereby to raise cable prices to artificially high supra-competitive levels.
Count 1 accused Comcast of conspiring with horizontal competitors to allocate markets through swap agreements, and that such horizontal market allocations were per se illegal violations of Section 1 of the Sherman Act. Counts 2 and 3 alleged that Comcast had monopolized, or attempted to monopolize, the product market for multi-channel video programming services within the Philadelphia and Chicago clusters in violation of Section 2 of the Sherman Act. Comcast moved to dismiss.
Comcast’s first argument was that plaintiffs lacked antitrust standing because the face of plaintiffs’ complaint did not demonstrate a direct causal connection between the transactions complained of and plaintiffs’ alleged injury of paying higher cable prices. This argument was based upon Comcast’s assertion that plaintiffs failed to allege any facts suggesting actual or likely future competition between Comcast and the transacting cable companies in the relevant markets prior to the transactions at issue. Given the nature of local cable system municipal monopolies, this argument could have had some force. Instead, the District Court first observed that, under Third Circuit law, it was required to assume the existence of a violation in determining whether plaintiff suffered injury as a result of the alleged violation. In this case, the court felt that it was required to assume as true that Comcast’s actions had reduced competition in the relevant markets, since plaintiffs had pleaded a reduction of actual and prospective competition in the Philadelphia and Chicago clusters that was the intended result of the challenged swap agreements. Having made that assumption, the court concluded that the alleged injury suffered by plaintiffs, payment of higher prices, resulted from Comcast’s ability to raise its cable prices as a result of the purported deliberate lessening of competition achieved through the transactions at issue. Having concluded that antitrust injury existed, the court had no problem quickly determining that plaintiffs were direct victims because they purchased cable services straight from Comcast at allegedly inflated prices, and that their alleged injury of higher cable prices was directly traceable to Comcast allegedly anticompetitive acquisitions.
Assuming the existence of a violation to test whether standing exists has threatened to create an arguably incorrect result in the Glaberson case. Comcast made the commonsense argument that substitution of Comcast as the exclusive provider of cable services in a given franchise area in the place of a pre-existing exclusive provider is a "competition neutral" transaction because no competition existed to begin with. This would seem to preclude a "conspiracy" from reducing actual competition in a particular local franchise area.
Comcast also attacked the sufficiency of plaintiffs’ Section 1 allegation. Comcast began by asserting that plaintiffs’ allegations of per se illegality were insufficient. Again, the District Court refused to accept the argument, holding again that it was required at the motion to dismiss stage to assume the correctness of the allegations. In so doing, the Court refused to take notice of swap agreements between AT&T and Adelphia which Comcast argued demonstrated that the swap agreement did not impose restrictions on the ability of any counter-party to re-enter or compete directly in the affected markets.
Comcast also argued that allegations of per se illegality were improper given that the transactions at issue were approved by government authorities at the federal, state and local levels. The District Court disagreed, relying instead on cases holding that approval by regulatory agencies did not make activities immune to the antitrust laws. Finally, given the Court’s ruling on antitrust standing, the Court then refused to consider Comcast’s arguments that the rule of reason allegations were insufficient because the relevant market allegations critical to the assertion of a rule of reason violation made no sense. Instead, the Court ruled that it need not consider Comcast’s arguments about the insufficiency of the Section 1 rule of reason claim due to failure to plead anticompetitive affect in a relevant product or geographic market because the Court had already ruled that the complaint stated a per se claim.
The Court then moved on to Comcast’s Section 2 arguments, and made it clear that even Section 2 would not cause the Court to examine plaintiffs’ relevant market allegations. Although the Court acknowledged that Third Circuit law required some inquiry into the relevant product and geographic markets at the pleading stage, the Court nevertheless found the relevant market allegations sufficient. The market definition deemed acceptable consisted of Philadelphia and Chicago Comcast "clusters," defined as "those areas covered by Comcast able franchises or any of its subsidiaries or affiliates located in Philadelphia, Pennsylvania, and Chicago, Illinois, and geographically contiguous areas or areas in close geographic proximity to Philadelphia, Pennsylvania, and Chicago, Illinois." The Court then noted that because of the commercial realities of the cable market, it is peculiarly local in nature. Citing cases holding that the relevant geographic market is the area in which a potential buyer looks for goods or services he seeks, not in which the seller sells, the Court felt compelled to hold that the alleged relevant market was economically plausible. Beyond that, the Court stated that further analysis would require factual examination inappropriate to a motion to dismiss.
It is hard to know whether the Glaberson decision is simply an aggressive application of certain procedural rules making motions to dismiss more difficult to win, or a genuine substantive aberration challenging long held conventional wisdom about how competition in the cable television space should be assessed. This case will have to be watched by all involved in evaluating competitive issues in the cable television industry to see whether it is just an outlier, or one of those decisions which requires recalibration of conventional wisdom about antitrust risk attendant to cable television swap transactions.
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