Fendelander v. Walt Disney Company

Background

Michelle Fendelander, Ronda Lee Haines, Michael Hughes, John Manso, and Jasmine McCormick brought a proposed antitrust class action against The Walt Disney Company on behalf of monthly subscribers to DirecTV Stream and its predecessor services from April 1, 2019, through the present. The complaint alleged that Disney, through ESPN and Hulu, entered into anticompetitive carriage agreements with streaming live-pay-television providers, including DirecTV Stream and YouTube TV.

The alleged agreements included an ESPN base-term requirement and most-favored-nation price clauses. The base-term requirement allegedly required providers that carried ESPN to include it in their cheapest package. The most-favored-nation clauses allegedly required Disney to offer a provider the lowest price it offered to another market participant. Plaintiffs alleged that these terms raised subscription prices, prevented cheaper packages without ESPN, reduced consumer choice, and created barriers to entry in the streaming live-pay-television market. They sought injunctive relief, treble damages, attorneys’ fees and costs, and compensation for overpayment.

Motion to Dismiss

Disney moved to dismiss the complaint for failure to state a claim. The court analyzed plaintiffs’ single Sherman Act Section 1 claim under two theories: a per se theory, under which certain plainly anticompetitive agreements are automatically unlawful, and the rule of reason, which examines whether an agreement unreasonably harms competition.

Per Se Theory

The court rejected plaintiffs’ allegation of a per se violation. It characterized the carriage agreements between ESPN and streaming live-pay-television providers as vertical restraints because the parties operated at different levels of the distribution chain. The court declined to treat the agreements as horizontal agreements among competitors based on plaintiffs’ argument that Disney, ESPN, and Hulu operated as one economic unit. The court explained that its prior applications of the single-enterprise concept concerned whether corporate affiliates had participated in an alleged conspiracy, not whether an agreement should be treated as horizontal for all purposes under Section 1.

The court also held that the ESPN base-term requirement and most-favored-nation clauses were not, on their face, restraints that were almost always anticompetitive. Although most-favored-nation clauses can be used for anticompetitive purposes, the court stated that they are not per se unlawful. The court therefore dismissed the per se claim.

Rule-of-Reason Theory

The court allowed the rule-of-reason claim to proceed. At the pleading stage, it found adequate plaintiffs’ definition of the relevant market as streaming live-pay television in the United States. The court also found sufficient allegations of Disney’s market power based on Disney’s ownership interests in ESPN and Hulu, ESPN’s role as an important input for streaming live-pay-television products, and the carriage agreements with leading providers.

The court agreed that allegations of higher prices and reduced consumer choice alone would not establish an injury to competition. But plaintiffs also alleged that Disney’s agreements strengthened barriers to entry. Those allegations included the cost of building streaming infrastructure and the difficulty and expense of securing enough carriage agreements and channels to compete. Taking those allegations as true at the motion-to-dismiss stage, the court held that plaintiffs adequately pleaded an injury to competition under Section 1.

Damages

The court dismissed plaintiffs’ damages claim. Disney argued that the plaintiffs were indirect purchasers barred from seeking damages under Illinois Brick. Plaintiffs responded that they directly purchased streaming subscriptions from DirecTV Stream and that an exception applied because they alleged a conspiracy involving DirecTV Stream.

The court rejected that argument. It held that the co-conspirator exception applies only to conspiracies among horizontal competitors to fix prices. Because plaintiffs had not adequately alleged a horizontal agreement among competitors, the exception did not apply. The court therefore held that plaintiffs could not maintain their damages claim based on alleged overcharges passed through intermediaries in the distribution chain.

Leave to Amend and Disposition

The court granted plaintiffs leave to amend because it could not say that the alleged deficiency in the per se claim could not possibly be cured by additional facts. The court ordered that any amended complaint be filed by October 16, 2023, and stated that plaintiffs could not add new claims or parties without the court’s permission or the parties’ agreement.

The court granted in part and denied in part Disney’s motion to dismiss. Specifically, it denied the motion as to plaintiffs’ Sherman Act Section 1 rule-of-reason claim and granted the motion as to the per se claim and the damages claim. The court also terminated as moot Disney’s motion to stay discovery because of its ruling on the motion to dismiss.