Sixth Circuit Holds That Homeowners Stated A Plausible Tying Claim Against Neighborhood Developers For Tying Purchase Of Telecommunications Services To The Sale Of Homes
11/14/2017On October 30, 2017, a divided panel of the United States Court of Appeals for the Sixth Circuit reversed a district court’s denial of plaintiffs’ motion to file an amended complaint alleging that the defendants—a group of affiliated real estate development companies—illegally used their alleged market power in the sale of homes in three centrally planned neighborhoods to force the plaintiffs to purchase telecommunication services from another defendant, Crystal Clear Technologies, LLC, a telecommunications company that the developers owned and controlled. Cates v. Crystal Clear Technologies, LLC, No. 16-6714 (6th Cir. Oct. 30, 2017). The majority affirmed, however, the district court’s dismissal of the plaintiffs’ claim that the arrangement between Crystal Clear and the defendant developers violated the Federal Communications Commission’s “Exclusivity Order” (In the Matter of Exclusive Service Contracts For Provision Of Video Services In Multiple Dwelling Units and Other Real Estate Developments, 22 FCC Rcd. 20235, 20251 (2007), 47 C.F.R. § 76.2000(a)), which prohibits cable television distributors from entering into exclusive contracts to provide video programming, on the grounds that the complaint and contracts themselves contradicted the allegation that the contracts were in fact exclusive.
The plaintiffs in the case are homeowners in three centrally planned neighborhoods in Thompson’s Station, Tennessee, a town near Nashville. When they were controlled by the developer defendants, the homeowners’ associations representing these neighborhoods agreed to long-term contracts that made Crystal Clear the exclusive agent for homeowners in procuring outside video programming services and gave it the exclusive right to market these services in the neighborhoods. The contracts also provided for certain mandatory fees and assessments that homeowners must pay whether they use Crystal Clear’s services or not. These contracts, plaintiffs alleged, constitute an illegal tying arrangement.
After the district court dismissed the original complaint for failure to adequately allege a tying product market, the plaintiffs proffered a new complaint that defined the tying product market as the sale of homes in “centrally planned communities within Thompson’s Station.” The district court found, however, that the complaint was still deficient because it failed to adequately allege a substantial impact in the relevant tied market, i.e., the market for the provision of telecommunications services.
The Sixth Circuit reversed. In an opinion by Chief Judge Cole, the majority concluded, without specifically addressing the contours of the relevant geographic market for the tied product (telecommunications services), that the allegations of harm, notably the total mandatory fees and assessments charged to members of the putative homeowner class on hundreds of homes in the three neighborhoods, were sufficient to plead a substantial impact in the relevant tied market. With regard to the tying product market, the majority held that plaintiffs plausibly alleged a relevant market for the tying product—the sale of homes—and that the defendants possessed market power in that market. In support of this holding, the Sixth Circuit relied on the allegations that the three neighborhoods made up “the majority of centrally-planned neighborhoods that are located in a small town setting in a county that is otherwise filled with more densely populated communities,” and possessed certain purportedly unique characteristics, such as providing “homeowners with access to superior area schools and local covenants that restrict home construction to houses typically purchased by middle to upper-middle income households.” Slip op. at 7. The Court went on reject plaintiffs’ exclusivity claim under the Federal Telecommunications Act, concluding that plaintiffs failed to allege facts showing that the telecommunications services agreements foreclosed other providers from providing service to these neighborhoods. Id. at 9.
Judge Alice M. Batchelder wrote a separate opinion, concurring with the majority in affirming dismissal of the FCC Exclusivity Order claim, but dissenting from the decision to allow the tying claim to proceed. Judge Batchelder explained that she would dismiss plaintiffs’ tying claim for two reasons: (1) plaintiffs’ alleged “neighborhood” market was too narrow and did not “correspond to the commercial realities of the telecommunication-services market, which exists at least in Thompson’s Station if not in the larger geographic area around Nashville,” and (2) plaintiffs did not allege “facts showing that the telecommunication-services sales in those three residential developments are economically significant in relation to the broader telecommunication-services market in Thompson’s Station or nearby Nashville.” Id. at 12.
Judge Karen Nelson Moore also concurred in part and dissented in part, agreeing with the panel opinion that plaintiffs had adequately stated a tying violation, but disagreeing with the conclusion that they had not stated a claim for violation of the FCC Exclusivity Order.
Historically, plaintiffs have had a difficult time alleging tying and exclusive dealing violations based on alleged relevant geographic and product markets that are limited to particular real property, such as an office complex, apartment building, or residential development. Even though a property may possess unique characteristics that distinguish it or make it more desirable than other nearby properties, courts have generally found that reasonable substitutes exist. Further, as Judge Batchelder’s dissent points out, “it is self-evident that [a] purported tying arrangement would have a substantial effect in the location where all purchasers of both the tying and tied product reside.” Id. at 12. Relevant geographic and product antitrust markets must “correspond to the commercial realities of the industry and be economically significant”; artificially narrowing the market to the area affected by the alleged restraint or controlled by a single owner does not answer the question of the effect of the restraint on the overall relevant markets. The majority opinion here emphasized that both market definition and the impact of the tie are factual inquiries, best resolved after discovery. It remains to be seen whether, after discovery, plaintiffs will be able to prove facts sufficient to establish the narrow markets they have alleged.