IKUTA, Circuit Judge:
Plaintiffs, a putative class of retail cable and satellite television subscribers, appeal the dismissal of the third version of their complaint against television programmers (Programmers)
The television programming industry can be divided into upstream and downstream markets. In the upstream market, programmers such as NBC Universal and Fox Entertainment Group own television programs (such as "Law and Order") and television channels (such as NBC's Bravo and MSNBC, and Fox Entertainment Group's Fox News Channel and FX) and sell them wholesale to distributors. In the downstream retail market, distributors such as Time Warner and Echostar sell the programming channels to consumers.
According to plaintiffs' third amended complaint, Programmers have two categories of programming channels: "musthave" channels with high demand and a large number of viewers, and a group of less desirable, low-demand channels with low viewership. Plaintiffs allege that "[e]ach programmer defendant, because of its full or partial ownership of a broadcast channel and its ownership or control of multiple important cable channels, has a high degree of market power vis-a-vis all distributors," and that Programmers exploit this market power by requiring distributors, "as a condition to purchasing each programmer's broadcast channel and its `must have' cable channels," to "also acquire and resell to consumers all the rest of the cable channels owned or controlled by each programmer" and "agree they will not offer unbundled [i.e., individual] cable
The district court dismissed plaintiffs' first amended complaint without prejudice on the ground that plaintiffs failed to show that their alleged injuries were caused by an injury to competition. In their second amended complaint, plaintiffs alleged that Programmers' practice of selling packaged cable channels foreclosed independent programmers from entering and competing in the upstream market for programming channels. The district court subsequently denied defendants' motion to dismiss, holding that plaintiffs had adequately pleaded injury to competition.
After preliminary discovery efforts on the question whether the Programmers' practices had excluded independent programmers from the upstream market, the plaintiffs decided to abandon this approach.
Section 1 of the Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the
We generally evaluate whether a practice unreasonably restrains trade in violation of Section 1 under the "rule of reason."
We review de novo a district court's dismissal of a complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1046 (9th Cir. 2008). In order to state a Section 1 claim under the rule of reason, plaintiffs must plead four separate elements. First, plaintiffs must plead facts which, if true, will prove "(1) a contract, combination or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intended to harm or restrain trade or commerce among the several States, or with foreign nations; (3) which actually injures competition." Id. at 1047; see also Oltz v. St. Peter's Cmty. Hosp., 861 F.2d 1440, 1445 (9th Cir. 1988) (same). In addition to these elements, plaintiffs must also plead (4) that they were harmed by the defendant's anti-competitive contract, combination, or conspiracy, and that this harm flowed from an "anti-competitive aspect of the practice under scrutiny." Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334, 110 S.Ct. 1884, 109 L.Ed.2d 333 (1990). This fourth element is generally referred to as "antitrust injury" or "antitrust standing." See, e.g., id.
In sketching the outline of an injury to competition for purposes of this third element, the claimant must identify a contract, combination or conspiracy that has an anticompetitive effect. Courts have held that agreements between competitors in the same market (referred to as "horizontal agreements") may injure competition. For example, a horizontal agreement that allocates a market between competitors and "restrict[s] each company's ability to compete for the other's [business]" may injure competition. United States v. Brown, 936 F.2d 1042, 1045 (9th Cir. 1991). A horizontal agreement (either explicit or tacit) to set prices may injure competition because the result of such an agreement, "if effective, is the elimination of one form of competition," namely price. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 213-14, 60 S.Ct. 811, 84 L.Ed. 1129 (1940) (quoting United States v. Trenton Potteries Co., 273 U.S. 392, 397, 47 S.Ct. 377, 71 L.Ed. 700 (1927)). Or a group of competitors may act in concert to harm another competitor or exclude that competitor from the market and thus "protect... dealers from real or apparent price competition" from the targeted competitor. United States v. Gen. Motors Corp., 384 U.S. 127, 146-47, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966). Plaintiffs' complaint does not allege the existence of any horizontal agreements.
Courts have also concluded that agreements between firms operating at different levels of a given product market (referred to as "vertical agreements"), such as agreements between a supplier and a distributor, may or may not cause an injury to competition. Vertical agreements that foreclose competitors from entering or competing in a market can injure competition by reducing the competitive threat those competitors would pose. Some types of vertical agreements can also injure competition by facilitating horizontal collusion. See Leegin, 551 U.S. at 893, 897-98, 127 S.Ct. 2705. Other types of vertical agreements do not necessarily threaten an injury to competition. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 54-57, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977) ("Such restrictions, in varying forms, are widely used in our free market economy" and "there is substantial scholarly and judicial authority supporting their economic utility.").
But courts distinguish between tying arrangements in which a company exploits its market power by attempting "to impose restraints on competition in the market for a tied product" (which may threaten an injury to competition) and arrangements that let a company exploit its market power "by merely enhancing the price of the tying product" (which does not). Jefferson Parish, 466 U.S. at 14, 104 S.Ct. 1551. For example, in Blough v. Holland Realty, Inc., we concluded that an alleged tying arrangement did not threaten an injury to competition. 574 F.3d 1084, 1088 (9th Cir. 2009). In that case, plaintiffs entered into contracts with defendant-homebuilders to purchase undeveloped lots plus newly constructed homes. In order to purchase the developed lots, plaintiffs were required to pay a percentage fee to defendant-realtors on top of the purchase price. Id. Plaintiffs alleged that the homebuilders were unlawfully tying the realtors' services to the sale of developed lots in violation of the Sherman Act. Id. We disagreed, holding that because the plaintiffs would not have otherwise purchased realtor services, the percentage fee was best viewed as part of the cost of purchasing the developed lot. Id. at 1090.
Further, market conditions may be such that a specific tying arrangement does not have anticompetitive effects. See Driskill v. Dall. Cowboys Football Club, Inc., 498 F.2d 321, 323 (5th Cir. 1974). For example, in Driskill, the plaintiff alleged that defendant, the Dallas Cowboys, had unlawfully tied the sale of undesirable preseason tickets to the sale of season ticket packages. Id. at 322. But the court noted that the Dallas Cowboys had a lawful monopoly in the market for the tied product, preseason tickets, so the tying arrangement could not adversely affect competition in the tied product market; there was no competition to affect. Id. at 323. As the Supreme Court has noted, "when a purchaser is `forced' to buy a product he would not have otherwise bought even from another seller in the tied product market, there can be no adverse impact on competition because no portion of the market which would otherwise have been available to other sellers has been foreclosed." Jefferson Parish, 466 U.S. at 16, 104 S.Ct. 1551; see also Blough, 574 F.3d at 1090 ("`[W]here there is no competition in the tied market, there can be no antitrust violation.'" (quoting Reifert v. S. Cent. Wis. MLS Corp., 450 F.3d 312, 318 (7th Cir. 2006))).
Indeed, courts have noted that a tying arrangement may be a response to a competitive market rather than an attempt to circumvent it. See Jefferson Parish, 466 U.S. at 12, 104 S.Ct. 1551 ("Buyers often find package sales attractive; a seller's decision to offer such packages can merely
Therefore, a plaintiff bringing a rule of reason tying case cannot succeed in stating the third element of a Section 1 claim merely by alleging the existence of a tying arrangement, because such an arrangement is consistent with pro-competitive behavior. See Hirsh v. Martindale-Hubbell, Inc., 674 F.2d 1343, 1349 n. 19 (9th Cir. 1982) ("[I]ntru[sion] upon consumers' freedom of choice by compelling the purchase of unwanted products ... has been implicitly rejected by the Supreme Court as a sufficient independent basis for antitrust liability."). Rather, the plaintiff must allege an "actual adverse effect on competition" caused by the tying arrangement. Jefferson Parish, 466 U.S. at 31, 104 S.Ct. 1551.
Plaintiffs may not substitute allegations of injury to the claimants for allegations of injury to competition. Plaintiffs must plead "antitrust injury," the fourth element necessary to state a Section 1 claim, in addition to, rather than in lieu of, injury to competition. See Atl. Richfield, 495 U.S at 334-35, 344, 110 S.Ct. 1884. That is, in order to state a claim successfully, plaintiffs must allege both that defendant's behavior is anticompetitive and that plaintiff has been injured by an "anti-competitive aspect of the practice under scrutiny." Id. at 334, 110 S.Ct. 1884 ("[I]t is inimical to the antitrust laws to award damages for losses stemming from continued competition." (quoting Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 109-10, 107 S.Ct. 484, 93 L.Ed.2d 427 (1986))). Specifically, to plead this element, plaintiffs must allege facts that if taken as true would allow them to recover for "an injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Big Bear Lodging Ass'n v. Snow Summit, Inc., 182 F.3d 1096, 1102 (9th Cir. 1999) (quoting Atl. Richfield, 495 U.S. at 334, 110 S.Ct. 1884) (internal quotation marks omitted).
We consider whether plaintiffs have stated a Section 1 claim in their third amended complaint in light of these principles. The key issue raised by this appeal is whether plaintiffs have adequately pleaded that the alleged Programmer-Distributor agreements actually injure competition.
There is no dispute that the complaint alleges the existence of a tying arrangement. In fact, according to the plaintiffs' complaint, the Programmer-Distributor agreements at issue consist of two separate tying arrangements. First, in the
But as explained above, tying arrangements, without more, do not necessarily threaten an injury to competition. Therefore, the complaint's allegations regarding the two separate tying arrangements do not, by themselves, constitute a sufficient allegation of injury to competition. Rather, plaintiffs must also allege facts showing that an injury to competition flows from these tying arrangements. We conclude that such allegations are not present in the complaint.
First, it is clear that the complaint does not allege the types of injuries to competition that are typically alleged to flow from tying arrangements. The complaint does not allege that Programmers' practice of selling "must-have" and low-demand channels in packages excludes other sellers of low-demand channels from the market, or that this practice raises barriers to entry into the programming market.
Instead of identifying such standard-issue threats to competition, the complaint alleges that the injury to competition stems from Programmers' requirement that channels must be sold to consumers in packages. According to the complaint, the required sale of multi-channel packages harms consumers by (1) limiting the manner in which Distributors compete with one another in that Distributors are unable to offer a la carte programming, which results in (2) reducing consumer choice, and (3) increasing prices. These assertions do not sufficiently allege an injury to competition for purposes of stating a Section 1 claim. First, because Section 1 does not proscribe all contracts
Second, allegations that an agreement has the effect of reducing consumers' choices or increasing prices to consumers does not sufficiently allege an injury to competition. Both effects are fully consistent with a free, competitive market. See Leegin, 551 U.S. at 895-97, 127 S.Ct. 2705; Continental, 433 U.S. at 55, 97 S.Ct. 2549. Even vertical agreements that directly prohibit retail price reductions, eliminating downward competitive pressure on price and thereby resulting in higher consumer prices (commonly referred to as resale price maintenance agreements), are not unlawful absent a showing of actual anticompetitive effect. See Leegin, 551 U.S. at 895, 127 S.Ct. 2705. As Leegin explained, higher consumer prices can result from pro-competitive conduct. Id. at 895-97, 127 S.Ct. 2705. Had the plaintiffs succeeded in pleading an injury to competition, the complaint's allegations of reduced choice (due to the inability to purchase a la carte programming) and increased prices would sufficiently plead the fourth element of a Section 1 claim, namely that they had been harmed by the challenged injury to competition. But here, these allegations show only that plaintiffs have been harmed as a result of the practices at issue, not that those practices are anticompetitive.
Plaintiffs disagree, and argue that under the rule in Loew's, 371 U.S. 38, 83 S.Ct. 97, and Ross v. Bank of America, N.A. (USA), 524 F.3d 217 (2d Cir.2008), they have sufficiently alleged an injury to competition by alleging that the agreements have the effect of reducing choice and increasing prices. This argument is unavailing. In Loew's, the United States brought antitrust actions against six major film distributors, alleging that the defendants had conditioned the license or sale of one or more feature films upon the acceptance
Blough, 574 F.3d at 1089-90 (quoting IX Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1724b, at 270 (2004 & Supp. 2009)); see also Jefferson Parish, 466 U.S. at 14, 104 S.Ct. 1551 ("When the seller's power is just used to maximize its return in the tying product market, where presumably its product enjoys some justifiable advantage over its competitors, the competitive ideal of the Sherman Act is not necessarily compromised."). Nor does plaintiffs' citation to Ross support their argument; that case involved allegations of horizontal collusion, which has not been alleged by plaintiffs in this case, and pertained to standing, not injury to competition. 524 F.3d at 223, 225.
Plaintiffs also contend that because most or all Programmers and Distributors engage in the challenged practice, we should hold that in the aggregate, the practice constitutes an injury to competition. We cannot rule out the possibility that competition could be injured or reduced due to a widely applied practice that harms consumers. See Leegin, 551 U.S. at 897, 127 S.Ct. 2705 (indicating that vertical restraints, such as resale price maintenance, "should be subject to more careful scrutiny" if the practice is adopted by many competitors). But the plaintiffs here have not alleged in their complaint how competition (rather than consumers) is injured by the widespread practice of packaging low- and high-demand channels.
Injury to competition must be alleged to state a violation of Sherman Act § 1. Kendall, 518 F.3d at 1047. Plaintiffs' complaint does not allege facts that "raise a reasonable expectation that discovery will reveal evidence of" injury to competition. Twombly, 550 U.S. at 566, 127 S.Ct. 1955. Thus, plaintiffs' complaint did not allege facts that, taken as true, "state a claim to relief that is plausible on its face." Id. at 570, 127 S.Ct. 1955. Dismissal was proper.
15 U.S.C. § 15(a).