By Sam C. Ehrlich
The Los Angeles Dodgers enjoyed a hallmark season in 2016. The team captured their fourth straight National League West title and reached the National League Championship Series, staff ace Clayton Kershaw had another award-worthy season, and legendary broadcaster Vin Scully closed out his celebrated career with tremendous fanfare. However, for the third straight season, many Angelinos could not catch their team on television.
Since 2014, Dodgers games have been locally broadcasted by SportsNet LA, a regional sports network (RSN) jointly owned by the Dodgers and Time Warner Cable (TWC) (now part of Charter Communications). But due to disputes between TWC and other LA-area carriers, SportsNet LA is not made carried by most television distributors, including DIRECTV, AT&T, and Cox. Consequently, Dodger games are available to less than 50 percent of LA homes.
Based on alleged anticompetitive activity committed during this stalemate, on November 2, 2016, the Department of Justice (DOJ) sued DIRECTV (and AT&T, who now owns DIRECTV) in the District Court for the Central District of California in a civil action for violations of Section 1 of the Sherman Antitrust Act.
The Allegations
In their complaint, the DOJ alleged that DIRECTV operated as a “ringleader of information sharing agreements with three different rivals that corrupted … carriage negotiations and the competitive process that the Sherman Act protects” (p. 2). According to the DOJ, DIRECTV Chief Content Officer Daniel York exchanged information with his counterparts at Cox, Charter (before they purchased TWC), and AT&T while all four companies were all negotiating for the rights to carry SportsNet LA. Accordingly, consumers “were deprived of a fair competitive process” where if one or more of these competitors agreed to carry the channel, others would fall in line or risk losing subscribers.
Section 1 of the Sherman Act prohibits contracts, combinations, or conspiracies that unreasonably restrain trade.[16] Under this rule, an activity is generally ruled illegal if its anticompetitive effects outweigh its procompetitive benefits.
To show an anticompetitive agreement, the DOJ pointed to various text and voice messages between York and his colleagues, which they alleged constitute an illegal agreement to share information related to the carriers’ individual negotiations with TWC. These messages were often coded and discussed the offers each company received from TWC. York would often respond by suggesting that the pitch be rejected, and the DOJ gave evidence showing connections between these communications and decisions to reject these pitches.
Since DIRECTV directly competes for subscribers with every other carrier in the LA area and often markets themselves as customers’ best source for a wider range of live sports content, the DOJ pointed out that DIRECTV was “more susceptible” than other carriers to reach a deal (p. 5). In fact, the DOJ noted that one senior DIRECTV executive stated that if its competitors sat on the sidelines, DIRECTV would become the “first domino in the sequencing of deals” (p. 5). The DOJ argued that by orchestrating bilateral information sharing agreements, York and DIRECTV could control the situation and dictate the terms of the negotiation.
The DOJ saw a strong distinction between the current state of negotiations and the 2011 sale by TWC of a RSN focused on the Los Angeles Lakers. The DOJ pointed to communications stating that like with the Dodgers, DIRECTV and Cox initially found TWC’s offer for the Lakers channel much too high.
But here, the DOJ pointed out that TWC successfully employed a “divide and conquer” (p. 15-18) strategy where they enticed DIRECTV’s competitors with a size-insensitive most favored nation clause that guaranteed these smaller carriers the price of a larger distributor, which is against common industry practice. Carriers who accepted this offer then marketed to customers that they had access to Lakers games, while DIRECTV and Cox did not. Consequently, according to the DOJ, DIRECTV and Cox began hemorrhaging subscribers and were forced to give in to TWC’s demands, resulting in the two companies paying about 50-60% more per subscriber for the Lakers Channel than their internal analyses suggested it was worth.
The DOJ alleged that DIRECTV decided that if the carriers banded together, they could prevent similar circumstances and force TWC to negotiate on their terms. Indeed, York allegedly told his counterparts at Cox that he would let them know when DIRECTV was ready to sign a deal so that Cox could “protect any [most favored nation] terms, so [Cox] could choose to sign first” (p. 31).
Information Sharing Agreements as Sherman Act Violations
DIRECTV may argue that their actions do not violate illegal anticompetitive behavior because the carriers were simply sharing information, not working together to force lower prices. However, precedent shows that even an agreement to share information is illegal under Section 1 of the Sherman Act.
In US v. Container Corp., the DOJ sued a group of corrugated container manufacturers who had regularly requested recent price quotes from competitors with the expectation that they would reciprocate this courtesy when asked later.[17] In a 6-3 decision, the Supreme Court ruled this activity illegal, stating “price is too critical, too sensitive a control to allow it to be used even in an informal manner to restrain competition.”[18] Since the industry was dominated by “relatively few sellers,” the court found the “exchange of price data tends toward price uniformity” and unreasonably restricts competition.[19]
DIRECTV may argue that such information sharing in their industry to ensure fair prices for television channels and thus protect consumers. But based on the precedent set in Container Corp., DIRECTV will likely be unsuccessful arguing that point. Container Corp. shows that even if the activity may be innocent in nature, the Supreme Court will rule it illegal if it results in the anticompetitive effect of uniform pricing. And since the communications collected by the DOJ show a clear goal to bring down prices across the board, the courts will likely find these practices to be an illegal restraint on competition.
Conclusion
This lawsuit shows the DOJ is willing to act to fight information sharing agreements between these television giants and attempt to ease the accelerating frequency of battles between carriers and producers that leaves consumers without their favorite channels, shows, and baseball games. While it is too late for Dodger fans to see the final games of Vin Scully’s illustrious career, the DOJ’s actions may finally break the stalemate and allow Angelinos without the ability to switch carriers the opportunity to watch their team in 2017 and beyond.
Sam C. Ehrlich is a doctoral student in the Department of Sport Management at Florida State University.
[16] Sherman Antitrust Act of 1890, 15 U.S.C. § 1 (1890).
[17] 393 U.S. 333, 335 (1969).
[18] Id at 338.
[19] Id at 337.
