Antitrust Law Daily Homeowners stated valid illegal tying claim against developers on repleading
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Tuesday, October 31, 2017

Homeowners stated valid illegal tying claim against developers on repleading

By Peter Reap, J.D., LL.M.

In a severely divided panel ruling that featured two opinions concurring in part and dissenting in part, the U.S. Court of Appeals in Cincinnati held that homeowners in three centrally-planned neighborhoods adequately alleged that the developers of their neighborhoods engaged in illegal tying by forcing the homeowners to purchase telecommunications services from Crystal Clear Technologies, an entity owned and controlled by the developers. The appellate court reversed a ruling of the federal district court in Nashville that refused to set aside its judgment dismissing the homeowners’ illegal tying claim, reasoning that the homeowners’ second amended complaint pleaded a substantial impact on the tied market of telecommunications services because alleging harm to particular neighborhoods equated to alleging harm to the general market covering those neighborhoods. The district court’s ruling that the plaintiffs did not violate the Federal Communications Commission’s 2007 "Exclusivity Order" was affirmed (Cates v. Crystal Clear Technologies, LLC, October 30, 2017, Cole, Jr., R.).

The plaintiffs are homeowners in three centrally-planned neighborhoods in Thompson’s Station, a small town in Williamson County, Tennessee. Carbine & Associates developed the neighborhoods through affiliated companies, Bridgemore Development Group, Tollgate Farms, and Hood Development. The developers also established and controlled owners’ associations for the neighborhoods. However, the developers have since transferred control of the owners’ associations to third-party entities.

From 2006 to 2007, while under the developers’ control, the owners’ associations each entered into communications services agreements with Crystal Clear. The agreements granted Crystal Clear the right to provide telecommunications services to the neighborhoods for twenty-five years, with an option for Crystal Clear to unilaterally renew for an additional twenty-five years. In addition, the agreements authorized Crystal Clear to be the exclusive agent for homeowners in procuring services from any outside providers and granted Crystal Clear the exclusive right to market services within the neighborhoods. Whether they use any of the services or not, under the agreements, homeowners must pay the owners’ associations a monthly assessment fee, and a one-time payment of $1,500 to Crystal Clear for the cost of constructing the telecommunications infrastructure.

The homeowners brought this suit alleging that the agreements constituted self-dealing, unjust enrichment, unconscionability, unlawful tying, market allocation, and unlawful exclusivity. The district court dismissed the first amended complaint under Federal Rule of Civil Procedure 12(b)(6) and declined to exercise supplemental jurisdiction over the remaining state-law claims. The plaintiffs then moved under Federal Rule of Civil Procedure 59 to alter or amend the judgment and under Rule 15 for leave to file a second amended complaint. The district court denied the plaintiffs’ motion after determining that the second amended complaint would fail to survive a motion to dismiss and was thus futile.

The homeowners timely appealed. The homeowners challenged only the district court’s decisions regarding their tying and exclusivity claims.

Illegal tying. In their tying claim, the homeowners alleged that the developers used their market power over the sale of homes to force the homeowners to purchase telecommunications services from Crystal Clear, thereby harming competition for the provision of telecommunications services. The district court found that the first amended complaint failed to state a tying claim because it did not define the tying product market in alleging the defendants’ market power in the sale of homes. The second amended complaint addressed this by defining the tying product market as centrally-planned communities within Thompson’s Station. The district court then determined that the second amended complaint alleged market power in a defined market, but that it was futile because it failed to allege a substantial impact on the relevant tied market.

The homeowners contested this on appeal, arguing that the second amended complaint pleaded a substantial impact on the tied market by alleging that the defendants harmed competition for the provision of telecommunications services. The majority agreed. While the homeowners alleged that the arrangement "substantial[ly]" affected "the sale of telecommunications in the Neighborhood[s]," they also alleged more broadly that the arrangement "ha[s] harmed competition for the provision of telecommunications." The exact amount of commerce impacted by the tying arrangement was unclear at this stage, but the homeowners alleged that the neighborhoods, and thus the list of potential plaintiffs, included hundreds of houses and over 1,000 homeowners subject to the arrangement, the court observed.

It could be reasonably inferred that alleging harm to particular neighborhoods equated to alleging harm to the general market that covers those neighborhoods, the court explained. By alleging that the agreements forced each household to pay one-time infrastructure fees of at least $1,500 and monthly assessment fees for Crystal Clear’s services, the homeowners pleaded an amount of commerce that would be substantial in both the neighborhoods and the telecommunications services market that covers those neighborhoods or beyond, according to the appellate court. Thus, the homeowners pleaded a substantial impact on the relevant tied market.

The developers’ argument that the lower court erred in concluding that the plaintiffs’ defined market for the tying product (the sale of homes) was proper, was rejected. The proper definition of a tying product market and whether a defendant has market power within that market were fact-intensive questions best addressed following discovery.

Exclusivity under the Federal Telecommunications Act. The Federal Communications Commission (FCC) has explicit authority to impose regulations specifying exclusive conduct that the Federal Telecommunications Act prohibits. Pursuant to this authority, the FCC issued the 2007 "Exclusivity Order" barring any cable distributor from "enforc[ing] or execut[ing] any provision in a contract that grants it the exclusive right to provide any video programming service (alone or in combination with other services) . . . ."

As evidence of the arrangement’s exclusivity, the plaintiffs submitted with their proposed second amended complaint the Agreements and a letter sent by MBSC, the new owner of the Bridgemore development, stating that Crystal Clear refused "to give up its exclusive easements that enable it to be the only provider in Bridgemore." The district court found that the second amended complaint and the plain text of the Agreements contradicted the letter submitted by the plaintiffs.

As the district court noted, there were several contradictions amongst the homeowners’ allegations and the agreements’ terms. The homeowners alleged both that the agreements make Crystal Clear the exclusive provider and that Crystal Clear is not truly a provider, contracting with DirecTV to be the actual provider. The homeowners noted the agreements’ terms describing the arrangement as "exclusive," but the agreements’ terms mandated that homeowners must have access to other providers. The homeowners alleged both that Crystal Clear’s easements are "exclusive" and that they are part of a non-exclusive franchise agreement. These contradictions foreclosed the homeowners’ exclusivity claim, the court held.

Conclusion. The appellate court reversed the district court’s denial of the homeowners’ motion seeking leave to file the second amended complaint on their tying claim; affirmed the district court’s denial of the motion seeking leave to file the second amended complaint on the exclusivity claim; and remanded the case to the district court for further proceedings.

Concur/dissent by Judge Batchelder. In her concurring in part and dissenting in part opinion, Judge Batchelder dissented from that portion of the majority’s opinion with respect to the illegal tying claim. Judge Batchelder would hold that the homeowners failed to state an antitrust tying claim because they did not allege that the purported tying arrangement affected a substantial volume of commerce in the tied market.

Concur/dissent by Judge Moore. Concurring in part and dissenting in part, Judge Moore argued that the homeowners sufficiently pleaded an exclusivity claim. Therefore, she respectfully dissented from that portion of the majority’s opinion dealing with the exclusivity claim.

The case is No. 16-6714.

Attorneys: Benjamin Andrew Gastel (Branstetter Stranch & Jennings, PLLC) for Courtney Cates. D. Alexander Fardon (Riley Warnock & Jacobson, PLC) for Crystal Clear Technologies, LLC and Carbine & Associates, LLC. Valerie Diden Moore (Butler Snow LLP) for Tollgate Village Association Inc.

Companies: Crystal Clear Technologies, LLC; Carbine & Associates, LLC; Tollgate Village Assn. Inc.

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