Time Warner Cable Ducks Dodgers-Lakers Bundling Suit

LOS ANGELES (CN) - A fight over Time Warner Cable's price increases in Los Angeles - allegedly to offset its $11 billion broadcast deals with the Lakers and Dodgers - is a federal issue that can't be hashed out in state court, a California appeals court held Monday.

The ruling comes nearly two years after Sherry Fischer and three other named plaintiffs filed an unfair business practices complaint against the cable giant, the Dodgers and the Lakers in L.A. Superior Court. They claimed Time Warner's $3 billion TV deal with the Lakers and an $8 billion deal with the Dodgers would end up costing subscribers upwards of $100 extra per year on their cable bills.

Time Warner bundled the games into its "enhanced" basic cable service, the plaintiffs said - charging subscribers for the programming whether they watched the games or not. They claimed surveys show that more than 60 percent of the population in the L.A. area does not follow either team and would opt out of the channels if they could.

Both Time Warner and the teams filed objections to the lawsuit, with the Dodgers and Lakers pointing out they had not committed any unfair acts and could not be held liable. Time Warner argued that federal law allows cable companies to bundle channels, providing a "safe harbor" against the class's unfair competition claims.

A trial court subsequently tossed the action, citing the express preemption of state law by federal statutes that govern the cable industry.

On appeal, the subscribers argued that Time Warner's addition of three channels to its enhanced basic cable lineup - along with the rate increases - resulted in a "negative-option billing practice" that is prohibited by the Federal Communications Commission, the agency that oversees the cable industry. Accordingly, the Cable Act does not expressly prohibit enforcement of state consumer-protection laws in this case, the class claimed.

But a panel for the Second Appellate District ruled on Monday that a 1995 decision by the 7th Circuit Court of Appeals - in a Wisconsin consumer-law case also involving Time Warner and negative-option billing - upheld the FCC's choice to preempt state challenges where rate structures are concerned.

"With Time Warner Cable v. Doyle as a guide, we conclude that the Cable Act is a proper exercise of the FCC's regulatory authority and preempts appellants' unfair competition law claims," Judge Laurence Rubin wrote for the panel. "First, as in Doyle, appellants seek restitution of the rate hike fees, thereby retroactively affecting rates Time Warner has already charged its customers.

"Second, the trial court took judicial notice of the channel lineups as they stood before and after the new sports channels were added. Only three of nearly 100 in the non-broadcast basic cable tier were affected," Rubin continued. "An FCC order interpreting the act states that tier changes of that nature are minor, not 'fundamental,' even if they are accompanied by a rate adjustment, and are therefore within the preemptive scope of the act.

By contrast, deleting all existing channels from a particular tier and replacing them with an entirely new set of channels would constitute a fundamental change to a tier of channels. In that hypothetical setting, negative option billing would be implicated and state laws that addressed such changes would not be preempted," Rubin wrote.

Forcing cable companies to notify customers every time they make minor changes to programming packages - even when the changes are accompanied by small rate increases - would be "seriously burdensome to cable operators," a fact that led the FCC to add the "fundamental change" rule that preempts this particular state-court action, the panel said.

"In short, the FCC, pursuant to its statutory authority, has made it clear that state consumer protection laws are preempted in regard to negative option billing practices that result in rate hikes due to the addition of a small number of channels because those rate hikes do not represent a 'fundamental change' in service," Rubin wrote. "The essence of appellants' complaint is to the contrary - nonfundamental changes are not preempted. Even though they seek leave to amend to allege that the three channel additions fundamentally altered the basic cable tier, such an allegation would not eliminate that defect, as the cited authorities indicate that such additions are not fundamental changes. We therefore hold that the action is necessarily preempted as to all respondents."

The panel added in a footnote that they were "keenly aware" that the issue affects millions of Southern California residents who feel that "although they now receive 10 times 57 channels or more," there's still nothing to they want to watch on TV.

"We simply hold that federal preemption principles bar application of state consumer protection laws in this case. Thus, consumers must present their complaints to Congress or the FCC," the panel concluded.

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