Eddins v. Redstone

• Decision Date: 22 November 2005
• Docket Number: No. B168079.,B168079.
• Citation: 134 Cal.App.4th 290,35 Cal.Rptr.3d 863
• Court: California Court of Appeals
• Parties: Lee EDDINS et al., Plaintiffs and Appellants, v. Sumner REDSTONE et al., Defendants and Respondents.

35 Cal.Rptr.3d 863

134 Cal.App.4th 290

Lee EDDINS et al., Plaintiffs and Appellants, v. Sumner REDSTONE et al., Defendants and Respondents.

No. B168079.

Court of Appeal, Second District, Division 8.

November 22, 2005.

Fairbank & Vincent, Robert H. Fairbank and Dirk L. Vincent, Los Angeles; Greines, Martin, Stein & Richland, Kent L. Richland, Barbara W. Ravitz and Edward L. Xanders, Los Angeles, for Plaintiffs and Appellants.

Simpson Thacher & Bartlett, Kenneth R. Logan, Kyle A. Lonergan and Seth Ribner, Los Angeles, for Defendants and Respondents Sumner Redstone, Viacom Inc. and Paramount Home Entertainment, Inc.

Hogan & Hartson, Richard L. Stone and Poopak Nourafchan, Los Angeles, for Defendant and Respondent Twentieth Century Fox Home Entertainment, Inc.

Munger, Tolles & Olson, Glenn D. Pomerantz, David C. Dinielli and Paul J. Watford, Los Angeles, for Defendant and Respondent Universal Studios Home Video LLC.

Heller Ehrman, Robert G. Badal and Edward J. Slizewski, Los Angeles, for Defendant and Respondent Buena Vista Home Entertainment, Inc.

Gibson, Dunn & Crutcher, Scott A. Edelman and Christopher D. Dusseault, Los Angeles, for Defendant and Respondent Columbia TriStar Home Entertainment, Inc.

Vinson & Elkins, Robert C. Walters and Stacey H. Doré Simpson Thacher & Bartlett and Seth A. Ribner, Los Angeles, for Defendant and Respondent Blockbuster Inc.

Bill Lockyer, Attorney General of the State of California; Richard M. Frank, Chief Deputy Attorney General; Thomas Greene, Chief Assistant Attorney General; Kathleen Foote, Senior Assistant Attorney General; Barbara Motz, Supervising Deputy Attorney General; and Patricia L. Nagler, Deputy Attorney General, as Amicus Curiae on behalf of Plaintiffs and Appellants.

BOLAND, J.

SUMMARY

More than 250 independent video retailers sued Blockbuster Inc., its parent company Viacom Inc., Viacom's controlling shareholder, Sumner Redstone, and the home-video affiliates of five major Hollywood movie studios, alleging antitrust and price discrimination violations under California law. The complaint centers upon output revenue-sharing agreements between the movie studios and Blockbuster, under which Blockbuster purchases video cassettes of the studios' movies for rental to consumers. Under the agreements, Blockbuster purchases the videotapes at a low initial price, in exchange for a portion of the rental revenues and a long-term commitment by Blockbuster to purchase the entire output of movies from the studios. The plaintiffs do not challenge the agreements between Blockbuster and the studios. Instead, they allege Blockbuster and the studios conspired with each other to deny the same favorable terms and conditions to distributors for independent retailers. They also allege violations of the Unfair Practices Act — which forbids secret rebates, unearned discounts, and the secret extension of special privileges not available to all purchasers who buy on like terms and conditions — and the unfair competition law.

We affirm the trial court's summary adjudication in favor of Blockbuster and the studios on the plaintiffs' conspiracy claim under the Cartwright Act. We reverse the court's summary adjudication of plaintiffs' claims for violation of the Unfair Practices Act and the unfair competition law, except with respect to intra-enterprise transactions between Blockbuster and its sister company. Specifically, we conclude that:

• Summary adjudication of the plaintiffs' conspiracy claims is required under Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 107 Cal.Rptr.2d 841, 24 P.3d 493 (Aguilar), because "all of the evidence presented by the plaintiff, and all of the inferences drawn therefrom, show and imply unlawful conspiracy only as likely as permissible competition or even less likely," so that "a reasonable trier of fact could not find for the plaintiff." (Id. at p. 857, 107 Cal.Rptr.2d 841, 24 P.3d 493, italics and fn. omitted.)

• The trial court erred in concluding, as a matter of law, that the Unfair Practices Act does not apply to the different prices the studios are alleged to have charged to plaintiffs' distributors and to Blockbuster. Specifically:

• A plaintiff need not purchase on "like terms and conditions" in order to state an actionable claim that a competitor has received a secret rebate or unearned discount.

• Material questions of disputed fact exist as to whether the allegedly unearned discounts the studios gave Blockbuster were "secret" as required by the statute. The fact that the "general parameters" of Blockbuster's revenue-sharing agreements with the studios were widely reported in the media does not establish lack of secrecy as a matter of law, because other evidence indicated that several key economic factors in the agreements were not known to plaintiffs or to the general public.

• The "functional classification" defense, which permits a supplier to charge different prices to buyers in different functional classifications, such as wholesalers (the distributors) and retailers (Blockbuster), was improperly applied in this case. Blockbuster did not perform any function justifying a differential in price.

• The trial court failed to consider evidence of harm to competition in the secondary line of commerce, between Blockbuster and its competitors, and therefore erred in finding that two studios established, as a matter of law, a "meeting competition" defense to plaintiffs' section 17045 claim.

• The trial court correctly concluded that, because Blockbuster and its sister company Paramount are commonly controlled, they are part of a single economic enterprise, and transactions between them cannot form the basis for a section 17045 violation.

• Because it was error to grant summary judgment of the claims under the Unfair Practices Act, it was also error to grant summary judgment on the cause of action for violation of the unfair competition law. (Bus. & Prof.Code, § 17200 et seq.)

FACTUAL AND PROCEDURAL BACKGROUND

This action seeks treble damages, disgorgement and injunctive relief for violations of the Cartwright Act, the Unfair Practices Act and the unfair competition law. The suit was brought as a class action by Lee Eddins, doing business as Video Empire, and 250 other independent video rental retailers (collectively, Eddins) against Blockbuster Inc., the nation's largest video rental retailer; Viacom Inc., Blockbuster's majority shareholder; Sumner Redstone, Viacom's controlling shareholder; and the home-video affiliates of five major Hollywood movie studios ("studio defendants" or "studios"), which distribute videocassettes of feature motion pictures to video retailers for rental to the public.¹

Eddins's lawsuit alleges that, beginning in late 1997, Blockbuster and the studios conspired with each other to deny independent retailers the same favorable terms and conditions the studios provided to Blockbuster. The studios provided the favorable terms under long-term output revenue-sharing agreements the studios entered into with Blockbuster in 1997 and 1998. The studios, by allegedly denying the same terms to distributors who serve the independent retailers, fixed the prices charged to the independent retailers at an artificially high level. The suit also alleges the agreement among Blockbuster and the studios resulted in discriminatory pricing that was detrimental to the independent retailers competing with Blockbuster. Defendants moved for summary judgment, and the trial court granted their motion.

We first describe the background of the home video industry when the pertinent events occurred. We then explain the background of this case and court decisions in related litigation, and finally turn to the proceedings in this case.

1. General industry background.

The studio defendants sell videos directly to large chain-store retailers, including Blockbuster, who rent them to consumers. The studios also sell videos to distributors, who resell them to independent retailers, including Eddins and the other plaintiffs, who rent them to consumers. In 1997, when the events precipitating this lawsuit began, Blockbuster was the nation's largest single home-video rental retailer, with 24% of the national market. The independent retailers, comprised of small chains and single-store owners, accounted for about 55% of the market.

Until late 1997, the studios employed two options for purchasing rental videos. Retailers and distributors could purchase videos at a stated price, approximately $65 per tape, a method referred to as "traditional sales." Alternatively, they could participate in a "cherry-pick" revenue-sharing plan offered through Rentrak, one of the approximately ten distributors in the industry. Under "cherry-pick" revenue sharing, studios sold tapes for a low up-front fee plus a percentage of retailers' revenues from tape rentals, and the retailer selected the specific videos to purchase. Neither the traditional sales nor the cherry-pick revenue-sharing pricing models enabled retailers — whether large chains such as Blockbuster or independent retailers such as Eddins — to stock sufficient copies of "new release" titles to satisfy customer demand when it was highest, immediately after the video release of a movie. The lack of "copy depth" on newly-released videos resulted in customer frustration over their inability to rent the newly-released movies they most wished to see. As a consequence, the home-video market was languishing by 1997 as customers left video stores without renting a video.

Blockbuster was also languishing in 1997. According to Sumner Redstone, Blockbuster was "tanking" and the independent "moms and pops" were outcompeting Blockbuster. Blockbuster, however, developed an innovative concept for achieving copy depth on new releases, satisfying customer demand, and regaining its customers. Blockbuster proposed long-term, output revenue-sharing agreements to each studio. Under the agreements, Blockbuster...