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Court Denies Dismissal of Lawsuit Over Hulu and ESPN

Court Denies Dismissal of Lawsuit Over Hulu and ESPN

Court Denies Dismissal of Lawsuit Over Hulu and ESPN

A lawsuit against Disney targeting its dual role as a content supplier and distributor in business dealings has cleared a legal hurdle, with a federal judge advancing a key antitrust claim over the entertainment monolith’s ownership of ESPN and Hulu.

U.S. District Judge Edward Davila on Tuesday rebuffed arguments to dismiss the lawsuit, finding that the company could’ve leveraged its purchase of Hulu to raise prices of live TV streamed over the internet across the market. Disney may have imposed anticompetitive terms on rivals, including AT&T’s DirectTV and Dish’s Sling TV, by forcing them to carry ESPN as part of the cheapest bundle they offer and instituting so-called most favored nation clauses, which ensure that ESPN affiliate fees negotiated with any given competitor represent an industrywide price floor, the court concluded.

YouTube TV subscribers suing Disney, however, were barred from seeking damages on antitrust claims in the case. They’re now limited to seeking a court order to block further violations of antitrust law.

As recently as 2013, more than 90 percent of households in the U.S. subscribed to cable to satellite TV packages. That figure cratered with the rise of streaming platforms. Starting with HBO in 2014 offering a subscription to its catalogue entirely over the internet, formerly cable-only services began to debundle their content from cable and satellite TV plans, which has since lost its status as a gatekeeper for must-see film and TV shows.

Following the industry-disrupting decoupling of content, 2015 saw the birth of what would become virtual multichannel video programming distributors when Dish-owned Sling TV offered subscribers the ability to watch a subset of traditional cable channels without a cable subscription. Other similarly-situated companies, including AT&T, Google and YouTube, subsequently entered the market with streaming live pay TV (SLPTV) options.

In 2022, YouTube TV subscribers sued Disney over allegations that the company inflated the prices for live TV streamed over the internet. The crux of the case lies in Disney’s control of a highly desired channel in ESPN and an SLPTV in Hulu and whether the entertainment giant negotiated anticompetitive carriage agreements for ESPN, raising subscriptions prices across the market. The complaint, which seeks to represent roughly five million YouTube TV subscribers, claimed a violation of the Sherman Act pertaining to unreasonable restraints of trade and various state competition and consumer protection laws.

Disney’s defense was multipronged. Among the main arguments it pressed was that the imposition of allegedly anticompetitive contractual terms harms SLPTV providers rather than consumers.

Judge Davila disagreed. While the carriage agreements at issue in the case are between ESPN and the SLPTV, the lawsuit properly alleges that Disney leverages the deals “and its control of Hulu” to suppress competition, with the aim of selling subscription packages to consumers, he found. The court pointed to allegations that Disney, from the moment it obtained control over Hulu, “raised prices with impunity — as well as the primary cost input of its competitors” in ESPN.

The first major carriage agreement negotiation Disney faced after taking control of Hulu was with AT&T’s DirecTV, which offered a rival streaming live TV offering over the internet called AT&T TV Now. As the existing deal approached expiration, Disney warned DirecTV subscribers that they’d lose access to ESPN and other channels it owned. On a Monday Night Football broadcast, then the most-watched show on cable, it said, “[S]o far AT&T has refused to reach a fair, market-based agreement with us, despite the fact that the terms we are seeking are in line with recent marketplace deals we have reached with other distributors.” AT&T capitulated five days later, forcing it to raise the price of its live TV streaming service base package by $15.

Through the carriage deal with AT&T, the lawsuit argued that Disney “not only ensured that AT&T/DirecTV Now could not undercut Hulu + Live TV on price, it ensured that its rival AT&T’s costs were high enough for streaming live TV programming that AT&T/DirecTV Now had to push its base price, which had to include ESPN, well above Hulu + Live TV’s price.”

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The court concluded that Disney may have imposed terms on rivals, which force them to carry ESPN as part of the cheapest bundle they offer and ensure that ESPN affiliate fees negotiated with any given competitor represent an industrywide price floor, “without suffering from price competition.”

But YouTube TV subscribers will not be able to seek damages on the antitrust claims, which allow for treble damages, after Davila found that they weren’t directly harmed by the allegedly anticompetitive conduct. The lawsuit “does not allege that Plaintiffs purchased SLPTV subscription packages from a member of a conspiracy, but rather from a victim of Disney’s anticompetitive conduct,” he wrote. They may be able to recover damages if they prevail on alleged violations of state competition and consumer protection laws.

Disney didn’t respond to a request for comment.

Amid Hollywood’s dual strikes last year, a brighter spotlight was put on Disney’s role as a content supplier and distributor. The Writers Guild of America issued a report warning of over-consolidation in Hollywood. It said Disney’s series of mergers — with Pixar, Marvel, Lucasfilm and others — led to price hikes for its streaming services, further vertically integrated the company, pushed creatives to give up revenue from future licensing of their TV content and “reduced output and innovation,” per the report. Dozens of writers wrote to the Federal Trade Commission in support of revisions to draft merger guidelines that allow courts to take into consideration a merger’s impact on labor.

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