Antitrust Law Daily Redbox fails to assert that Disney’s download license terms violated antitrust law
Friday, July 19, 2019

Redbox fails to assert that Disney’s download license terms violated antitrust law

By Thomas Long, J.D.

Movie kiosk operator did not adequately allege market power or anticompetitive effect, and also failed to allege copyright misuse, but it could go forward with Lanham Act false advertising claims.

In the ongoing battle between movie rental and sale kiosk operator Redbox and movie production studio Disney Enterprises, Inc., and related companies, Redbox failed to state a claim for state and federal antitrust violations based on Disney’s restrictions on dissemination of digital download codes for its copyrighted content, but could go forward with a portion of its false advertising claims, the federal district court in Los Angeles has decided. Although Redbox adequately alleged a relevant market—the nationwide market for sales and rentals of movies and other entertainment products for home viewing—it failed to allege that Disney had market power in the broader market for home-viewed movies or that Disney engaged in anticompetitive conduct. Nor did Redbox plausibly allege that Disney misused its copyrights. Redbox was given leave to amend these claims. The court determined that Redbox adequately alleged that it had standing to sue Disney under the Lanham Act for alleged misrepresentations on Disney websites regarding its exclusive ownership and control of the download codes, which could carry the message to consumers that Redbox was engaging in unlawful behavior, causing it to lose sales (Redbox Automated Retail, LLC v. Buena Vista Home Entertainment, Inc., July 17, 2019, Pregerson, D.).

Defendants Disney Enterprises, Inc.; Buena Vista Home Entertainment, Inc.; Lucasfilm Ltd., LLC; MVL Film Finance LLC, and Movies Anywhere, LLC (collectively, "Disney") owned the copyrights to numerous well-known movies, including "Beauty and the Beast," "Frozen," and "Star Wars: Episode VII -The Force Awakens." Disney distributed its films in multiple formats through a variety of channels, including "Combo Packs," which bundled a DVD, a Blu-ray disc, and a piece of paper containing an alphanumeric code that could be inputted or redeemed at Disney’s websites or to allow a user to stream or download high-definition digital versions of the films. The exteriors of the Combo Pack boxes stated that "Codes are not for sale or transfer." The RedeemDigitalMovies and Disney Movies Anywhere websites set forth additional terms and conditions of use, purporting to prohibit consumers from redeeming digital codes that were sold or transferred separate from the original physical products.

Plaintiff Redbox Automated Retail, LLC ("Redbox") rented and sold movies to consumers via automated kiosks that dispensed DVD and Blu-ray discs. Redbox also offered a "Redbox on Demand" service that allowed consumers to stream or download movies owned by studios other than Disney. In the summer of 2017, Redbox began to offer digital downloads of Disney movies in the form of download codes. Redbox did not have a vendor agreement with Disney. It obtained the download codes by purchasing Disney Combo Packs at retail stores and removing the piece of paper bearing the download code from Disney’s packaging. Redbox then placed that piece of paper into its own Redbox packaging and offered the code for sale at a Redbox kiosk.

In a related lawsuit in the same district, Disney filed a complaint against Redbox, asserting that Redbox’s resale of Combo Pack digital download codes constituted contributory copyright infringement, was a breach of the contract that Redbox had entered into with Buena Vista when Redbox purchased Combo Packs, interfered with Disney’s contracts with users, and violated California false advertising laws. In August 2018, the court issued a preliminary injunction barring Redbox from selling or transferring digital download codes that allowed customers to download digital copies of Disney movies.

In the instant suit, Redbox alleged that Disney had unlawfully pressured distributors into refusing to sell retail copies of Disney titles to Redbox. Redbox also asserted that Disney engaged in false advertising by representing on Combo Pack packaging that Disney owned all digital movie codes and that the codes could only be redeemed by a person (or family member) who obtained the code as part of a Combo Pack, and that the codes may not be sold separately. According to Redbox, these representations were false because purchasers of Disney Combo Packs had an "unfettered" right to dispose of the DVDs, Blu-rays, and digital movie codes contained within them. Redbox filed a complaint containing causes of action for declaratory relief, copyright misuse, tortious interference with prospective economic advantage, false advertising under both state and federal law, unfair competition, and state and federal antitrust violations. Disney moved to dismiss all claims.

Antitrust claims—relevant market. Disney argued that Redbox did not adequately allege the elements of an antitrust violation under Section 1 of the Sherman Act. First, the court concluded that Redbox defined the relevant market with sufficient plausibility to survive a motion on the pleadings. Redbox alleged that Disney is restraining trade in "the nationwide market for rentals and sales of movies on DVD, Blu-ray and digital platforms for home entertainment" (the "home movies" market). Disney took the position that this definition was facially implausible because it did not include economic substitutes, such as cable TV, digital streaming, and special broadcast events. According to the court, Disney might be able to demonstrate on summary judgment that its asserted substitutes were reasonably interchangeable with home movies, the court was disinclined to think this was so. While a DVD could be viewed with an inexpensive player and a video screen, the substitutes suggested by Disney required additional equipment and services, as well as subscription fees, and the special events cited by Disney—such as the Olympic Games—must be viewed at set times.

Antitrust claims—market power. Second, Disney argued that Redbox failed to allege that Disney possessed market power in the market for home movies. Starting its assessment by looking to Disney’s market share, the court stated that the complaint’s allegation that Disney’s share of the home movies market was "greater" than 50 percent was not sufficient to establish Disney’s market power in the relevant market. Redbox’s assertion that Disney had "a dominant position" in the home movies market due to the unique strength of its brand was merely conclusory and not entitled to a presumption of truth. Moreover, there was no authority for the proposition that general brand strength demonstrated market power in a particular market. Accordingly, Redbox failed to adequately allege this element.

Antitrust claims—anticompetitive effect. Finally, the court decided that Redbox failed to allege that Disney’s actions had actual anticompetitive effects in the home movies market. Although Redbox contended that Disney’s misconduct harmed other rental outlets that provided less expensive alternatives for viewing Disney content and raised prices for Disney titles, this argument was irrelevant, because the market at issue was the broader market for home movies generally. Redbox made no allegations about anticompetitive effects in the broader home movies market. Therefore, the court dismissed Redbox’s antitrust claims, with leave to amend.

Declaratory relief. Redbox sought a declaration that the restrictive language on Disney’s Combo Pack packaging and websites was unenforceable. In the court’s view, the complaint did not adequately allege procedural or substantive unconscionability, as required for the requested relief under California law.

Copyright misuse. Even if copyright misuse can be brought as an affirmative claim (an issue on which courts were split), Redbox did not sufficiently allege misuse, the court said. The affirmative defense of copyright misuse prevented copyright holders from leveraging their limited monopoly (that is, the exclusive rights of reproduction, display, etc.) to gain control of areas outside the monopoly. Redbox alleged that Disney engaged in copyright misuse by (1) burdening consumers’ ability to sell the physical movie disc components of Combo Packs by imposing restrictive license terms on the download codes; (2) impinging upon distributors’ first-sale rights by preventing downstream sales to Redbox; and (3) restricting the resale of digital codes without purchasers’ assent. The court rejected all three arguments. First, the challenged license terms were not predicated on possession of physical discs, but on the manner in which the redeemer acquired the download code. Consumers who sold the discs was left with the same digital access rights he or she always enjoyed, and a consumer wishing to buy a digital access code was not required to buy discs. Second, an agreement between Disney and its distributors to forbid downstream sales to Redbox did not infringe on the distributors’ first sale rights because purchasers of copyrighted goods could agree to limit their commercial conduct through contract. Last, the first sale doctrine was inapplicable to digital codes but only to physical copies. Redbox’s copyright misuse claim was dismissed with leave to amend.

Tortious interference. Redbox alleged that Disney had harassed Redbox employees in retail stores and coerced distributors into refusing to sell to Redbox. However, there was nothing inherently improper about Disney entering into restrictive agreements with its distributors, and allegations of "harassment" and "coercion" were merely conclusory. Because the complaint did not allege any wrongful acts, the tortious interference claim was dismissed with leave to amend.

False advertising. Redbox fared somewhat better with its claims for false advertising under the Lanham Act, based on Disney’s alleged misrepresentations on Combo Pack boxes and its websites. Although Redbox lacked standing to sue under the California False Advertising Law due to its lack of actual reliance on Disney’s representations, statutory standing under the Lanham Act was broader, the court explained. The complaint alleged that Disney falsely stated that Disney owned all digital download codes, that they could only be redeemed by recipients of Combo Packs, and could not be transferred separately. According to Redbox, these misrepresentations deceived consumers into believing that Redbox did not have title to the components of the Combo Packs it had purchased and therefore that consumers could not lawfully purchase those components from Redbox. Because Redbox did not allege that consumers who bought a download code from Redbox ever saw Disney’s original packaging or even knew how Redbox got the codes, it failed to assert that it sustained loss as a result of Disney’s Combo Pack statements. However, Redbox could go forward with the Lanham Act claims to the extent they were predicated on alleged misrepresentations made on Disney websites. The court deemed it plausible that consumers could read the terms on the websites, conclude that Redbox was engaged in unlawful conduct, and decide not to buy additional codes from Redbox.

This case is No. 2:18-cv-00677-DDP-AGR.

Attorneys: Breton A. Bocchieri (Robins Kaplan LLP) for Redbox Automated Retail, LLC. Kelly M. Klaus (Munger Tolles and Olson LLP) for Buena Vista Home Entertainment, Inc., Disney Enterprises, Inc., Lucasfilm Ltd. LLC, MVL Film Finance LLC and Movies Anywhere LLC.

Companies: Redbox Automated Retail, LLC; Buena Vista Home Entertainment, Inc.; Disney Enterprises, Inc.; Lucasfilm Ltd. LLC; MVL Film Finance LLC; Movies Anywhere LLC

MainStory: TopStory Advertising Antitrust CaliforniaNews

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