Central District Of California Gives Poor Review To Movie Rental Antitrust Claims
On July 17, 2019, Judge Dean D. Pregerson of the U.S. District Court for the Central District of California dismissed antitrust claims alleging that a major media and entertainment conglomerate unlawfully restrained trade in the nationwide market for rentals and sales of movies on DVD, Blu-ray and digital platforms. Judge Pregerson determined that plaintiff had not met its pleading burden; specifically, it did not adequately allege market power or anticompetitive effects in the relevant market. Redbox Automated Retail, LLC v. Buena Vista Home Entertainment, Inc., CV 18-00677-DDP (AGRx), 2019 WL 3237376 (C.D. Cal. July 17, 2019).
Plaintiff, Redbox Automated Retail, LLC (“Redbox”), rents and sells movies for home entertainment through automated kiosks that it operates in various locations such as grocery stores and mass retailers. Defendants, Disney Enterprises and its affiliated production studios and distribution companies, form a multi-billion-dollar media conglomerate that sells and rents movies to consumers for home entertainment viewing. Disney distributes its films in “Combo Packs” that bundle a Blu-ray disc, DVD and a digital code that enables the consumer to stream or download the purchased movie from a website.
Since 2017, the parties have been involved in litigation surrounding plaintiff’s offering of defendants’ movies to consumers for home entertainment. In a prior case, defendants sued plaintiff for alleged breach of contract and copyright violations for its practice of purchasing Disney Combo Packs at retail stores, disassembling the packaged product, and reselling digital download codes to consumers as a separate product at its kiosks. Plaintiff countersued in the present case, alleging that defendants stifled competition in the home entertainment market, and unlawfully pressured third-party distributors to refuse sales of defendants’ movies to plaintiff. Defendants moved to dismiss.
The Court began by evaluating plaintiff’s antitrust claims under Section 1 of the Sherman Act and a parallel California state law. To prove a Section 1 violation under the rule of reason, an antitrust plaintiff must allege anticompetitive effects in one of two ways; either directly, or indirectly, by showing that defendant possesses market power in the relevant market.
The Court first analyzed the issue under the indirect standard, by evaluating whether the complaint adequately defined a relevant market. Plaintiff defined the relevant market as “‘the nationwide market for rentals and sales of movies on DVD, Blu-ray and digital platforms for home entertainment’ (the ‘home movie’ market).” Defendants argued that plaintiff’s alleged market was facially implausible because it did not include substitutes that were reasonably interchangeable with home movies, such as “cable television, digital streaming services such as Netflix, content platforms such as YouTube, and special events, such as the Olympics.” Although Judge Pregerson found this issue to be a close one, the Court concluded that the alleged market was sufficient to survive a motion to dismiss because defendants’ proposed alternatives could be distinguished from plaintiff’s proposal. Specifically, those alternatives might require the use of different and additional equipment, paid subscriptions (in the case of cable tv and streaming services) or access to live broadcast events.
Next, the Court turned to whether defendants possessed market power in the relevant market for home movies. To begin, the Court cited Ninth Circuit authority for the proposition that “[c]ourts generally require a 65% market share to establish a prima facie case of market power.” Although plaintiff’s complaint alleged that defendants’ market share in the home movie market was greater than 50 percent, the Court found this allegation insufficient to establish market power. The Court also rejected plaintiff’s argument that defendants maintained a “dominant position” in the home movies market pursuant to the “unique strength of the Disney brand,” reasoning that there was no authority supporting general brand strength as a proxy for market power.
Having found no anticompetitive effects through the indirect method, Judge Pregerson turned to the second potential avenue—effects. On this issue, plaintiff asserted that defendants limited the number of copies of Disney movies available for purchase by plaintiff and other rental companies and thus reduced output and raised prices for consumers of Disney films. The Court rejected these arguments, emphasizing that anticompetitive effects must be measured by reference to the relevant market—in this case, the “broader marker for home movies generally.” But plaintiff had only alleged anticompetitive effects in the market for Disney movies. Finding that this was not a legally cognizable market, the Court dismissed plaintiff’s antitrust claims but granted plaintiff an opening to refile an amended complaint.
Likewise, the Court rejected plaintiff’s claim that defendants engaged in copyright misuse by restricting resale of individual components of the Combo Packs, because this issue had been largely adjudicated in defendants’ earlier action against plaintiffs. The Court also rejected plaintiff’s claims of tortious interference for instructing its distributors not to sell movies to plaintiff, reasoning that defendant is within its rights to impose such restrictions on its distributors. The Court, however, allowed plaintiff’s false advertising and unfair competition claim to proceed.
While it remains to be seen whether plaintiff will continue to pursue antitrust claims or choose to move forward only on its surviving claims against defendants, the Court’s decision offers instructive insight on the formalistic requirements of adequate pleading under Section 1 of the Sherman Act.