Flash Electronics v. Universal Music & Video Dist.

Decision Date31 March 2004
Docket NumberNo. CV01-979(RJD).,CV01-979(RJD).
Citation312 F.Supp.2d 379
PartiesFLASH ELECTRONICS, INC. and East Texas Distributing, Inc., Plaintiffs, v. UNIVERSAL MUSIC & VIDEO DISTRIBUTION CORP., Universal Studios Home Video, Inc., Ingram Entertainment, L.L.C., V.P.D. IV, Inc., V.P.D., Inc. a/k/a Video Products Distributors, Defendants.
CourtU.S. District Court — Eastern District of New York

Frederic B. Goodman, Marin Goodman, LLP, New York City, for Plaintiffs.

Stuart N. Senator, Munger, Tolles & Olson, LLP, Los Angeles, CA, for Defendants Universal Music & Video Distribution Corp. & Universal Studio Home Video, Inc.

James K. Leader, New York City, John Calendar, Howrey, Simon, Arnold & White, LLP, Washington, D.C., Stuart N Senator, Munger, Tolles & Olson, LLP, Los Angeles, CA, for Defendant Ingram.

Robert Alan Johnson, Akin, Gump, Strauss, Hauer & Feld, LLP, New York City, Stuart N. Senator, Munger, Tolles & Olson, LLP, Los Angeles, CA, for Defendant V.P.D. IV, Inc.

Jonathan M. Jacobson, Abid Qureshi, Robert A. Johnson, Akin Gump Strauss Hauer & Feld LLP, New York City, for Defendant VPD, Inc.

MEMORANDUM & ORDER

DEARIE, District Judge.

This case focuses on allegedly anticompetitive conduct of a supplier and two distributors of home videos and digital video devices ("DVDs") in the United States. Plaintiffs Flash Electronics, Inc. ("Flash") and East Texas Distributing, Inc. ("ETD"), both wholesale distributors of videos and DVDs, claim that defendants Ingram Entertainment, L.L.C., Ingram Entertainment, Inc. (individually and collectively, "Ingram"), V.P.D. IV, Inc. and V.P.D., Inc. (individually and collectively, "VPD"), also wholesale distributors of videos and DVDs, have conspired with defendants Universal Music & Video Corp. and Universal Studios Home Video, Inc. (collectively and individually, "Universal"), suppliers of videos and DVDs, to deny plaintiffs the right to distribute Universal videos and DVDs in violation of the antitrust laws. Plaintiffs claim that defendants' actions violated both Sections 1 and 2 of the Sherman Antitrust Act ("Sherman Act"), 15 U.S.C. §§ 1-2, and the Robinson-Patman Act, 15 U.S.C. § 13. Plaintiffs also assert state law causes of action for breach of contract, tortious interference with a contractual relationship, and fraud. Defendants bring this motion to dismiss all of plaintiffs' claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons discussed below, defendants' motion is granted in part and denied in part.

BACKGROUND

Plaintiffs are two of the six major wholesale distributors of home videos and DVDs in the United States. Competitors Ingram and VPD are also among the six major national video distributors still in business. Universal, along with Sony, Paramount, Twentieth Century Fox, Time Warner and Disney, are the six major movie production studios in the country. Each of them produces and markets home videos and DVDs of motion pictures and television shows. To distribute their product, these studios supply videos and DVDs to wholesale distributors, such as plaintiffs, who, in turn, sell or license them to retail outlets in the "sell-through"1 and rental home video and DVD markets. Universal also sells its product directly to certain larger retail chains.

Plaintiffs assert that in the years prior to 2000, defendants Ingram and VPD began to pressure Universal to make them the exclusive distributors of Universal videos and DVDs in the United States. Plaintiffs contend that in September 2000 Ingram, VPD and Universal began negotiations to effectuate this plan. According to plaintiffs, the defendants met several times, in person and by telephone, and discussed plans concerning this venture. Plaintiffs specifically mention one meeting that allegedly took place at the Broadmoor Hotel in Colorado Springs, Colorado from September 18, 2000 to September 20, 2000. Am. Compl. ¶ 65.

Plaintiffs maintain that defendants eventually reached an agreement that gave Ingram and VPD exclusive rights to distribute Universal Videos in the rental market. According to the complaint, Universal also entered into an agreement with Valley Media, Inc. ("Valley"), another wholesale distributor, giving it the right to distribute Universal videos and DVDs in the "sell-through" market.2 Plaintiffs contend that the agreements required the distributors "to give certain exclusive and favorable terms to Universal over all other film studios," resulting in more active promotion of Universal products than those of other studios — an arrangement that plaintiffs analogize to "favored nations" treatment. Id. ¶ 72. Furthermore, according to plaintiffs, Universal's agreements with Ingram and VPD prohibited the two distributors from selling Universal products to plaintiffs. Id. ¶ 76(d).

Once the agreements were completed, defendants allegedly began taking steps to implement their plan. Prior to terminating its agreements with Flash and ETD, Universal asked plaintiffs for confidential customer information supposedly to "better evaluate its business in order to best support the plaintiffs with future promotions." Id. ¶ 66. Plaintiffs maintain, however, that Universal then passed this information along to Ingram and VPD, who contacted these retailers and told them that Flash and ETD were now "unauthorized" to sell Universal videos and DVDs — a statement that Flash and ETD maintain was, at the time, a misrepresentation because their agreements with Universal had not yet been terminated. Id. ¶¶ 73-74, 76(c), 76(f)-(g). Plaintiffs also claim that defendants exerted further pressure on retailers by "bribing" them not to do business with plaintiffs in exchange for free Universal videos and DVDs, and by "coercing" them to agree to buy Universal product from defendants alone, and to agree not to sell Universal product to plaintiffs. Id. ¶ 76(a)-(b), 76(e). Furthermore, plaintiffs claim that defendants threatened to interfere with their supply of films produced by "Dreamworks SKG," another movie studio, if plaintiffs continued to sell Universal products. Id. ¶ 76(i)-(j).

In October 2000, Universal terminated its agreements with Flash and ETD. That same month, Ingram purchased a controlling interest in Major Video Concepts, which was, at the time, the second largest of the then eight national wholesale distributors. Plaintiffs allege that this transaction gave Ingram control over roughly 50% of the "video rental market channeled through distributors." Id. ¶ 27. Plaintiffs also assert that VPD controls roughly 25% of the same market, giving the two companies a combined market share of 75%. Id. ¶¶ 28-29.

Plaintiffs contend that these agreements have had a profound effect on the wholesale distribution market for home videos and DVDs. According to plaintiffs, retailers prefer to buy videos and DVDs from wholesalers that can provide them with all of the product they require. Hence, those distributors who no longer can supply Universal videos and DVDs are at a distinct disadvantage. Id. ¶¶ 39-40. Plaintiffs assert that the effects are already being felt. According to plaintiffs, Valley has been eliminated from the wholesale video and DVD distribution market entirely, see id. ¶ 32,3 and Baker & Taylor, another wholesale distributor, has recently terminated several employees. Id. ¶ 80. Moreover, plaintiffs assert that Ingram and VPD now possess a market share that allows them to inflate prices. By way of example, plaintiffs note that Universal submitted a June 2001 price quote to a Staten Island retailer for the film "Family Man" that was $10 above cost, whereas previously a comparable movie would have been quoted at roughly $1 above cost. Id. ¶ 86.

Plaintiffs assert that the agreements between Universal, Ingram and VPD were calculated to eliminate competition in the video rental market and increase prices in violation of the antitrust laws. They claim that the defendants' agreements constitute a "group boycott" that is a per se violation of Section 1 of the Sherman Act. Additionally, plaintiffs contend that defendants have engaged in illegal "price-fixing," also a per se violation of Section 1 of the Sherman Act. Plaintiffs also claim that the agreements constitute a violation of Section 1 under the "rule of reason." Furthermore, plaintiffs assert that the agreements threaten to create a monopoly in the video and DVD distribution market in violation of Section 2 of the Sherman Act. Plaintiffs also contend that defendants engaged in impermissible price discrimination under the Robinson-Patman Act. Finally, plaintiffs maintain that defendants' actions surrounding the termination of plaintiffs' written agreements with Universal support claims for breach of contract, tortious interference with a contractual relationship and fraud.

DISCUSSION

A court considering a Rule 12(b)(6) motion must "assess the legal feasibility of the complaint." Global Disc. Travel Servs., LLC. v. Trans World Airlines, Inc., 960 F.Supp. 701, 704 (S.D.N.Y.1997). The court must determine "not whether a plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). In assessing the adequacy of the complaint, the court must take all of the allegations contained therein as true, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984), and draw all reasonable inferences in favor of the plaintiff. Todd v. Exxon Corp., 275 F.3d 191, 197 (2d Cir.2001); Hamilton Chapter of Alpha Delta Phi, Inc. v. Hamilton Coll., 128 F.3d 59, 63 (2d Cir.1997). A court may dismiss a complaint under Rule 12(b)(6) only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Todd, 275 F.3d at 197-98 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).

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