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As you all know, Sirius (SIRI) was blasted last week on the news that a class action lawsuit alleging antitrust practices has been certified and will go to trial; however, the news is not as bad as it seems and could even present a buying opportunity before the case is settled.

The suit is alleging that Sirius has engaged in actions breaching the implied covenant of good faith and fair dealing. This comes as a result of the 2008 merger between Sirius and XM which required FCC approval. Upon this approval, the company had to agree to

Specific limitations on the exercise of its enhanced market power and promised that the merger would result in increased efficiencies that would be passed to the consumer in the form of lower prices.

Now subscribers are suing because they feel that the merger has resulted in inflated, noncompetitive prices, and more specifically a $1.98 royalty fee. Personally, if I were the court I would have struck down their standing argument by simply stating that they could unsubscribe if they don’t like the new prices. The fact that they feel they ‘need’ the service merely gives credence to its dominance.

They are also claiming deceptive business acts or practices, which were materially misleading, directed at consumers, and said consumers have suffered injury. The plaintiffs argue that this has been satisfied by Sirius's use of automatic renewal by credit cards and that the royalty fee was attached. It should be noted that they were given notice of this.

Solely from a stock perspective, many have claimed that the power of Sirius lies in its relative monopoly. Basically, they have a well established ‘moat.’ They are the only subscription satellite radio offering premium content superior to all others (including Pandora) by leaps and bounds. But this acknowledges other options and this will be important in the outcome of this case.

I just read the lower court’s opinion denying the class action (which was of course appealed and resulted in Thursday’s drop). It offers some alluding as to how the appellate court should rule. The most important paragraph from this decision is as follows, from Southern District of New York Judge, Harold Baer, JR.:

It is true that where, as here, there is no market alternative, a contract of adhesion with no meaningful opportunity for the aggrieved party to bargain indicates a degree of procedural unconscionability. There certainly appears to be an inequality of bargaining power, due to the lack of market alternative for SDARS and the lack of Plaintiffs' knowledge of the Royalty Fee structure. However, the uniqueness of SDARS is mitigated by the existence of FM and AM radio, which, while perhaps not interchangeable with SDARS, do present some market competition. ([A case] noting FM music as an alternative to Comcast's cable television). Moreover, while Plaintiffs allege that they were unaware of the Royalty Fee calculation structure, the fee comprises a relatively small portion of the overall agreement: generally $1.98 in conjunction with the $12.95 base subscription plan. As noted above, no Plaintiff was ultimately charged more than $1.98. Even granting some pricing irregularities, this scheme does not entail the kind of “surprise” or “oppression” indicating unconscionability. Blessing v. Sirius XM Radio Inc., S.D.N.Y. Nov. 17, 2010 (Westlaw).

Appellate courts often give deference to the factual findings of lower courts and this opinion seems skeptical of the existence of any anti-trust practices. By contracts of adhesion, the court is referring to contracts that most would not review in entirety or read at all. Sirius could very well be guilty of this, but the remedy would be compensatory. There would be no basis for the court to offer punitive damages.

Based on these findings, I am convinced that Sirius will prevail through this lawsuit. They do stand to lose some if ruled against for the plaintiffs or if they choose to offer settlement but the fact that this is even brought to court proves that Sirius has a clear competitive advantage over their competitors, but those competitors do exist, so there is no anti-trust issue here. I should also disclose that I am long SIRI at $1.03.

Source: Sirius Anti-Trust Lawsuit Offers Buy Opportunity