Biddle v. The Walt Disney Company

Background

Heather Biddle, Jeffrey Kaplan, Zachary Robertys, and Joel Wilson brought a proposed class action against The Walt Disney Company on behalf of monthly YouTube TV subscribers. They alleged that Disney, through ESPN and Hulu, entered carriage agreements with streaming live pay television providers, including YouTube TV and DirecTV Stream. According to the complaint, those agreements included an ESPN base-package requirement and most-favored-nation price clauses. The plaintiffs alleged that these terms increased subscription prices, limited the ability to offer cheaper packages without ESPN, and created barriers to entry for competitors.

The plaintiffs asserted one claim under Section 1 of the Sherman Act, which prohibits agreements that unreasonably restrain interstate trade. They pursued both a per-se theory, covering restraints considered plainly unlawful without a detailed market analysis, and a rule-of-reason theory, which requires evaluating the restraint’s competitive effects. They also sought damages, injunctive relief, attorney’s fees, and costs. Disney moved to dismiss the action under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally sufficient claim, and separately moved to stay discovery.

Per-Se Theory

The court held that the plaintiffs failed to allege a per-se violation. The carriage agreements between ESPN and streaming television providers were vertical agreements because the parties operated at different levels of the distribution chain. The plaintiffs did not allege that ESPN competed with those providers or that Hulu or Disney entered a horizontal agreement with a competitor. The court also declined to extend the parent-subsidiary “single economic unit” doctrine in the way the plaintiffs proposed.

The court further held that the ESPN base-package requirement and most-favored-nation clauses did not facially appear to be restraints that almost always restrict competition and reduce output. Although most-favored-nation clauses can have anticompetitive effects, the court stated that they are not per-se unlawful. The court therefore granted Disney’s motion to dismiss the per-se Sherman Act claim.

Rule-of-Reason Theory

The court denied Disney’s motion to dismiss the rule-of-reason claim. It found that the plaintiffs adequately alleged the streaming live pay television market in the United States as the relevant market. At the pleading stage, the court also found sufficient allegations that Disney had market power based on its control of ESPN, its controlling interest in Hulu, and the carriage agreements with leading streaming providers.

The court agreed that allegations of higher prices and reduced consumer choice alone would not establish the required injury to competition. But the plaintiffs also alleged that Disney’s agreements increased barriers to entry. Those allegations included the costs of building streaming infrastructure and the difficulty of securing enough carriage agreements and channels to compete effectively. Taking those allegations as true for purposes of the motion, the court found them sufficient to state an injury to competition under the rule of reason. The court therefore denied dismissal of this claim.

Damages and Leave to Amend

The court held that the plaintiffs could not maintain their damages claims under the indirect-purchaser rule from Illinois Brick. The court rejected the plaintiffs’ argument that an exception for coconspirators applied because that exception is limited to conspiracies among horizontal competitors to fix prices. Because the court found no adequately alleged horizontal agreement, it granted Disney’s motion to dismiss the damages claims.

The court granted the plaintiffs leave to amend because it could not conclude that the alleged pleading deficiency concerning a per-se violation could not possibly be cured by additional facts. The order stated that any amended complaint had to be filed by October 16, 2023, and that the plaintiffs could not add new claims or parties without court permission or the parties’ stipulation.

Disposition

The court granted in part and denied in part Disney’s motion to dismiss, with leave to amend. Specifically, it denied dismissal of the Sherman Act Section 1 rule-of-reason claim and granted dismissal of the per-se Sherman Act Section 1 claim and the damages claims. The court terminated Disney’s motion to stay discovery as moot.