Expanded Basic. Choice. Choice Plus. Cable and satellite TV customers pay monthly fees for bundled channel packages of different sizes. The packages are becoming “skinnier,” allowing you to customize your service from a set of modules (i.e., the Family package, the Sports package, various language packages, etc.). But each module is still a pre-set bundle of channels.
Economists and regulators have long-debated whether a switch to an a la carte model would be cheaper and better. See e.g., Report on the Packaging and Sale of Video Programming Services to the Public, FCC Media Bureau, Nov. 18, 2004; Further Report on the Packaging and Sale of Video Programming Services to the Public, FCC Media Bureau, Feb.9, 2006; Gregory S. Crawford and Ali Yurukoglu, “The Welfare Effects of Bundling in Multichannel Television Markets,” The American Economic Review, Vol. 102, No.3, June 2012.
In the meantime, class action lawyers have launched a series of cases to try to “break the bundle.” Antitrust attacks have had middling results. See e.g., Brantley and Cablevision. And now the Eighth Circuit has decisively rejected claims that bundled monthly services contracts are “illusory” or include an implicit guarantee to consistently provide the same channel lineup.
In Stokes v. DISH Network, LLC, customers brought a class action against DISH after Turner and FOX News channels went “dark” on DISH for about a month each during 2014-2015 license disputes. The customers argued that they had paid for the advertised bundle and, therefore, either (i) DISH was required to credit customers for the missing pieces of the bundle or (ii) the entire monthly service for fee contract was based on an illusory promise and, therefore, unenforceable.
This was legal jujitsu, trying to turn the bundled service model against the distributors. And the potential implications for the industry were enormous. Negotiations between networks and distributors are increasingly contentious, resulting in more and more temporary suspensions of channels (especially around major sporting events) –or sometimes dropping channels altogether.
The Stokes customers’ creative move against the bundle met with initial success. The district court found that, under Colorado contract law, the standard monthly service agreement would be illusory if DISH were allowed to keep the entire monthly service charge when it did not provide all of the advertised channels in a package. The court reasoned that the contract could be saved, however, by reading in an obligation to credit customers for the missing channels under the implied covenant of good faith and fair dealing. The court rejected DISH’s arguments that no such implied “credit” right could exist because the service agreement specifically prohibited refunds for service changes and interruptions.
The district court recognized the implications of its rulings and allowed DISH to take an immediate, interlocutory appeal. On October 4, 2016, an Eighth Circuit panel unanimously reversed the district court. Stokes v. DISH Network, LLC.
First, the Eighth Circuit sharply and quickly dispensed with the premise that the services agreement would be illusory if DISH were not required to provide a credit or refund for dropped channels. The Circuit called the theory a “classic red herring.” The court reasoned that a promise is illusory only if it lacked consideration “from its inception.” For example, a time share agreement was not enforceable where the purchasers of the shares already owned the property. By contrast, the court reasoned, it was undisputed that DISH had provided hundreds of channels, including the Turner and FOX News channels, for years before the 2014-2015 interruptions. Because DISH provided actual consideration through its partial performance, the fact that DISH theoretically retained unlimited discretion over the actual packages was irrelevant.
Second, the Eighth Circuit rejected the claim that DISH had an implied obligation to credit customers for missing channels under the covenant of good faith and fair dealing. The court stated that under Colorado law, the duty of good faith and fair dealing “does not obligate a party to assume obligations that vary or contradict the contract’s express provisions, nor does it permit a party to inject substantive terms into the contract.” The court observed that the services agreement expressly and repeatedly provided that DISH could change the channel lineup at any time and that DISH was not financially liable for any “interruption, delay or failure to perform” that might arise from termination of its carriage agreements with one – or all – networks. There was no allegation that DISH had exercised its discretion over channel lineup in bad faith. And, given the express provisions of the contract, the appeals court refused to add a new obligation to credit customers for dropped channels.
Finally, the Eighth Circuit chided the district court for misreading several provisions of the services agreement. The court found that the “force majeure” provisions did not limit the broader limitation of liability for interruptions due to contract disputes.(Pay attention to those semi-colons!) It also found that a provision for equipment failures was irrelevant to disputes about dropped channels. And it rejected the district court’s fine-lined distinction between a right to a “refund” – which the agreement specifically disclaimed – and a right to a “credit,” which the district court assumed to be inherent in the overall bargain. The Circuit Court readily concluded that the parties had “unambiguously precluded” any and all “monetary relief” for service interruptions and changes to the channel lineup.
The Eighth Circuit’s decision gives comfort not only to traditional pay TV distributors, such as DISH, but to “new media” distributors of bundled content, such as Netflix.