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Current Developments in the Commercial Divisions of the
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Posted: October 6, 2016

Antitrust Violation Defense to Contract Claim Only if Contract Memorializes the Violation

On September 20, 2016, Justice Oing of the New York County Commercial Division issued a decision in Time Warner Cable Enterprises LLC v. Universal Communications Network, Inc., 2016 NY Slip Op. 31756(U), holding that an antitrust violation is a defense to a breach of contract claim only if the contract memorializes the violation, explaining:

The interposition of antitrust defenses in contract actions is generally disfavored due to concerns that successful interposition of antitrust defenses is too likely to enrich parties who reap the benefits of a contract and then seek to avoid the corresponding burdens. Thus, a contract which is legal on its face and does not call for unlawful conduct in its performance is not voidable simply because it resulted from an antitrust conspiracy. Antitrust defenses will, however, be upheld in cases where a judgment would result in enforcement of the precise conduct made unlawful by the Sherman Act. In other words, where a suit is based upon an agreement which has as its object and effect accomplishment of illegal ends which would be consummated by the judgment sought, the Court will entertain the defense that the contract in suit is illegal under theSherman Act. But when the contract sued upon is not intrinsically illegal such a defense will not lie.

. . .

In [Big Top Stores, Inc. v Ardsley Toy Shoppe, Ltd.], plaintiff, a franchisor of toy stores, entered into a franchise agreement with defendant. The franchise agreement expressly required defendant to purchase at least 90% of its merchandise from plaintiff. It further provided that if defendant purchased merchandise for his store elsewhere he was to pay plaintiff 15% of the cost of these purchases. Defendant failed to purchase 90% of its merchandise from plaintiff, and did not pay the 15% fee. In response, plaintiff sued demanding, inter alia, the 15% fee. Defendant interposed an affirmative defense that the franchise agreement was unenforceable because it was an unlawful tying arrangement. ┬ĚSupreme Court agreed and dismissed plaintiff’s complaint.

Universal’s reliance on Big Top is misplaced. In Big Top, the contract at issue expressly created the illegal tying arrangement and the penalty for violating this arrangement. Here, by contrast, the Agreement provides only that TWC will carry New Tang Dynasty in New York, Los Angeles and Hawaii, and does not contain any provision predicating carriage of New Tang Dynasty in New York on carriage in Los Angeles and Hawaii.

In light of this distinction, a more apt comparison is American Broadcasting-Paramount Theatres, Inc. v American Mfrs. Mutual Insurance Co. In that case, defendants breached a contract in which they agreed to sponsor a television program on 130 stations on plaintiff’s television network. Defendants asserted, as an affirmative defense, that the contract was unenforceable because it was part of an illegal tie-in, as plaintiff had required defendant to sponsor the show on 35 stations they did not want in order to get the sponsorship on 95 stations that defendants did want. Supreme Court found that the contract was valid on its face and did not create a restraint forbidden by the Sherman Act and, as a result, defendant’s antitrust affirmative defense was insufficient.

As in American Broadcasting, the Agreement here is, on its face, a valid economic transaction that does not memorialize the tying alleged by defendant or otherwise violate antitrust laws.

(Internal quotations and citations omitted).

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