United States: 6th Circuit Allows Amended Complaint Against Developer For Telecommunications Services Tying Claim

Residents of a small Nashville suburb, Thompson's Station, were given a second opportunity to litigate their antitrust actions against local developer Carbine & Associates, LLC ("Carbine"), Crystal Clear Communications ("Crystal Clear"), and others. A split Sixth Circuit Court of Appeals allowed a Plaintiff class's tying claims with respect to provision of telecommunications services to survive, remanding to the District Court for the Middle District of Tennessee for further proceedings. Courtney Cates et al. v. Crystal Clear Technologies, LLC, et al., No. 16-6714 (6th Cir., Oct. 30, 2017). The panel rejected a challenge under the Communications Act regarding the alleged exclusivity provisions of the contracts.

The Plaintiff class's claims arose from the development by Carbine of three neighborhoods in Thompson's Station. Plaintiffs alleged that in 2006 or 2007, Carbine entered multiple agreements to grant Crystal Clear the exclusive right to provide telecommunications services to the neighborhoods for 25 years. The terms of the agreements required that all homeowners make a one-time "infrastructure" payment of $1,500 to Crystal Clear, in addition to a monthly service charge, regardless of whether they use Crystal Clear's services. Plaintiffs' Complaint alleged (1) an unlawful tying arrangement under the Sherman Act, asserting Carbine used its market power to force homeowners to purchase services from Crystal Clear; and (2) violation of the FCC's 2007 "Exclusivity Order" under the Communications Act, which bars cable distributors from enforcing contracts with exclusivity provisions with respect to the provision of video programming services.

The District Court for the Middle District of Tennessee dismissed the suit for failure to state a claim. With respect to their tying claim, the Court held the Plaintiffs failed to identify a market for the tying product and allege that the Defendants had substantial power in the market, as well as that Plaintiffs failed to allege that the tying had a substantial effect on the tied market. Plaintiffs sought leave to file an amended Complaint, which was denied and subsequently appealed to the Sixth Circuit Court of Appeals.

The Sixth Circuit, in a split decision on October 20, 2017, granted Plaintiffs leave to file their Amended Complaint, but solely with respect to their tying claims. The three-judge panel issued three separate opinions. The focus of the opinions regarding the tying claims centered on whether the Plaintiffs had, as required, appropriately defined the relevant tying product market, as well as whether plaintiffs had pled adequately the required substantial effect in that market. Stripped to its essence, the question was whether the neighborhoods, located in a suburb of Nashville (approximately 30-35 miles from the city), could be considered their own geographic market.

Chief Judge Cole, writing for the majority and joined by Judge Moore, held that "[t]he proper definition of a tying product market and whether a defendant has market power within that market are fact-intensive questions best addressed following discovery." For purposes of a motion to dismiss, he found that the alleged product market was "plausible on [its] face." Judge Batchelder, in dissent, vehemently disagreed with the Chief Judge's conclusion that the definition of "The Neighborhood" of homes could be a relevant geographic market. "[I]t is self-evident," she wrote, "that the purported tying arrangement would have a substantial effect in the location where all purchasers of both the tying and tied product reside, i.e., the neighborhoods. This is a facile 'pleading maneuver' that artificially narrows the broader economic and geographic market for telecommunication services to create a 'fictitious market' in which any sales by Crystal Clear would cause a substantial effect."

With respect to the Communications Act claim, a different 2-1 majority held that the class' FTA exclusivity claim could not survive based on the Plaintiffs' own contradictory filings. Notably, while Plaintiffs alleged that Crystal Clear had agreed to be the "exclusive" provider of telecommunications services to the neighborhoods, in fact the underlying agreements mandated that homeowners be granted access to other service providers, undercutting their exclusivity claims. In dissent, Judge Moore considered Crystal Clear's agreements as a whole, determining that the "purpose and effect" was to grant Crystal Clear exclusive rights to provide telecommunications services to the neighborhoods. The panel used the terms "telecommunications service" and "video programming service" interchangeably, showing a lack of familiarity with these distinct terms under the Communications Act.

With three separate opinions, the Plaintiffs' tying claims are the only ones to survive, and the case has been remanded to the District Court for further proceedings. With the district court now directed to dig into the facts, it will be interesting to see how the relevant market eventually sorts out. Many antitrust cases turn on the market definitions, which in practical effect often decide the market power issue. If plaintiffs' "plausible" geographic market is ultimately found to be an actual relevant market and plaintiffs prevail substantively, it will cast a cloud on numerous exclusive agreements in these marketplaces. We still believe that such an ultimate result is unlikely, but the case warrants continued monitoring.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Bruce D. Sokler
Shawn N. Skolky
 
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