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Commercial Division Dismisses Antitrust Defenses to Breach of Contract Claim

Although defenses based on antitrust law are usually disfavored in breach of contract actions, they are permitted when an agreement on its face would require actions violating antitrust law.  On September 20, 2016, in Time Warner Cable Enters. LLC v. Universal Communications Network, Inc., 652407/2015, 2016 BL 316191 before Justice Oing the Commercial Division found that cable distribution agreements requiring a company to pay to have its channel carried in additional markets are not invalid on their face.

The lawsuit involves a “Channel Lease Agreement” between Time Warner Cable (“TWC”) and Universal Communications (“Universal”) pursuant to which Universal’s Chinese language channel, New Tang Dynasty, would be carried by TWC in Los Angeles, Hawaii, and New York.  Universal paid $35,000 at the start of the agreement in January 2014, but paid nothing after that.  As a result, TWC sued Universal for breach of contract or quantum meruit.  Universal asserted a defense based upon TWC’s “significant [or] dominant” market share in New York.[i]  Universal alleged that TWC would not carry the New Tang Dynasty channel in New York unless Universal paid for Hawaii and Los Angeles as well.  According to Universal, this tying arrangement violated the Sherman Act and the agreement was therefore unenforceable.

Universal relied on Big Top Stores, Inc. v. Ardsley Toy Shoppe, Ltd., 64 Misc. 2d 894 (Sup. Ct., Westchester County 1970).  The defendant in Big Top was required to purchase 90% of its inventory from the plaintiff.  On inventory purchased from elsewhere, the defendant was required to pay the plaintiff 15% of the cost of those purchases.  The Big Top court dismissed the plaintiff’s complaint, agreeing with the defendant that the agreement had an unlawful tying arrangement.

The Court rejected the analogy to Big Top, pointing instead to American Broadcasting-Paramount Theaters, Inc. v. American Mfrs. Mutual Insurance Co., 42 Misc. 2d 939 (N.Y. Sup. Ct. 1963).  American Broadcasting held that an agreement requiring the defendant to pay to advertise on 130 stations, including 35 on which it did not want to advertise, did not violate antitrust law on its face.

Accordingly, the affirmative defenses asserting unenforceability based on antitrust law were dismissed. The Court’s decision reinforces that antitrust defenses may be raised in a lawsuit alleging a breach of contract but that they will only stand if a judgment would otherwise make the courts a facilitator of one of the restraints forbidden by antitrust law.

By William Schmedlin and Stephen P. Younger

[i] 2016 BL 316191, *1.