In re Napster, Inc. Copyright Litigation

• Decision Date: 03 February 2005
• Docket Number: No. C MDL-00-1369-MHP.,No. C 04-1166-MHP.,C MDL-00-1369-MHP.,C 04-1166-MHP.
• Citation: 354 F.Supp.2d 1113
• Court: U.S. District Court — Northern District of California
• Parties: In re NAPSTER, INC. COPYRIGHT LITIGATION UMG Recordings, Inc., et al. Plaintiffs, v. Hummer Winblad Venture Partners, et al., Defendants.

354 F.Supp.2d 1113

In re NAPSTER, INC. COPYRIGHT LITIGATION UMG Recordings, Inc., et al. Plaintiffs, v. Hummer Winblad Venture Partners, et al., Defendants.

No. C MDL-00-1369-MHP.

No. C 04-1166-MHP.

United States District Court, N.D. California.

February 3, 2005.

COPYRIGHT MATERIAL OMITTED

Glenn D. Pomerantz, Kelly M. Klaus, Munger, Tolles & Olson LLP, Stephen D. Alexander, Fried, Frank, Harris, Shriver & Jacobson, Richard Stephen Busch, Robins, Kaplan, Miller & Ciresi LLP, Los Angeles, CA, Peter L. Simmons, Fried, Frank, Harris, Shriver & Jacobson, Theodore Kevin Cheng, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York City, Paul Hamilton Duvall, King & Ballow, San Diego, CA, for Plaintiffs.

Ragesh K. Tangri, John Watkins Keker, Ravind Singh Grewal, Keker & Van Nest LLP, San Francisco, CA, for Defendants.

Michael H. Page, Keker & Van Nest, San Francisco, CA, for Defendants and Claimants.

MEMORANDUM AND ORDER

Re: Motion to Dismiss Defendants' Counterclaims

PATEL, District Judge.

This action arises from the litigation related to the alleged copyright infringement by Napster, Inc. On April 21, 2003, plaintiffs UMG Recordings, Inc. and twelve other record labels (collectively "plaintiffs") filed this action in the United States District Court for the Central District of California alleging that defendants Hummer Winblad Venture Partners, various related Hummer Winblad entities, and two Hummer Winblad partners (collectively "Hummer") engaged in contributory and vicarious copyright infringement by virtue of their investment in and control of Napster. Plaintiffs' complaint also alleges a number of related state law causes of action. The action was subsequently transferred to this court pursuant to 28 U.S.C. § 1407. Now before the court is plaintiffs' motion to dismiss Hummer's counterclaims, which assert violations of federal and state antitrust laws, see 15 U.S.C. § 1 et seq; Cal. Bus. & Prof. § 16700 et seq., as well as alleging that plaintiffs engaged in unfair business practices in violation of California Business and Professions Code § 17200 et seq. Having considered the arguments presented and for the reasons stated below, the court enters the following memorandum and order.

BACKGROUND¹

The various Hummer Winblad entities named as defendants are limited partnerships or limited liability companies formed for the purpose of making venture capital investments in select companies nationwide. Among the companies that Hummer invested in was Napster, a Delaware corporation that operated the eponymous "peer-to-peer" network for the online distribution of music before ceasing operations in July 2001. In May 2000, Hummer invested approximately $13 million in Napster and received a significant ownership interest in the company. In addition, defendant Hank Barry, a Hummer partner, served as a director and chief executive officer ("CEO") of Napster; a second Hummer partner, defendant John Hummer, also served on Napster's board of directors.

Each of the thirteen plaintiffs in this action is a record label that produces, manufactures, distributes, sells, and licenses the distribution and sale of sound recordings in phonorecords. See 17 U.S.C. § 101. Plaintiffs collectively own the copyrights to "thousands of copyrighted sound recordings." Pls.' Compl. ¶ 27. On December 6, 1999, eighteen record labels (including a number of the plaintiffs in the instant action) filed an action against Napster in this court, alleging that the company's peer-to-peer filesharing network enabled the online distribution of the record labels' copyrighted sound recordings without their consent. See generally A&M Records, Inc. v. Napster, Inc. ("Napster I"), 114 F.Supp.2d 896 (N.D.Cal.2000) (Patel, C.J.). The labels asserted that the alleged conduct constituted contributory and vicarious infringement of their copyrights in violation of their exclusive rights under section 106 of the Copyright Act, 17 U.S.C. § 106. On August 10, 2000, this court entered an order preliminarily enjoining Napster from "engaging in, or facilitating others in copying, downloading, uploading, transmitting, or distributing plaintiffs' copyrighted musical compositions and sound recordings ... without express permission of the rights owner." Id. at 927.

On appeal, the Ninth Circuit affirmed this court's conclusion that the record labels had demonstrated a substantial likelihood of prevailing on the merits of their causes of action for contributory and vicarious copyright infringement. See A&M Records, Inc. v. Napster, Inc. ("Napster II"), 239 F. 239 F.3d 1004, 1022, 1024 (9th Cir.2001). The Ninth Circuit remanded with instructions to modify certain aspects of the preliminary injunction, and this court entered an order consistent with the Ninth Circuit's instructions on March 5, 2001. See A & M Records, Inc. v. Napster, Inc. ("Napster III"), No. C MDL-00-1369 MHP, 2001 WL 227083 (N.D.Cal. Mar. 5, 2001). After concluding that it was not technologically feasible to comply with this court's order and continue operating its file sharing network, Napster ceased operations on July 1, 2001. Napster subsequently filed for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq.

On April 21, 2003, plaintiffs filed this action in the United States District Court for the Central District of California. On March 24, 2004, the action was transferred to this court for pretrial proceedings by order of the Judicial Panel on Multidistrict Litigation. See 28 U.S.C. § 1407. As in Napster I, plaintiffs' complaint asserts that Napster users infringed their exclusive rights in numerous copyrighted sound recordings and that Napster enabled this infringement by providing an integrated network for the online distribution of "MP3"-formatted music files. Pls.' Compl. ¶ 30. In addition, plaintiffs now allege that by virtue of its investment in and control of Napster's operations during the period from May 2000 to July 2001, Hummer engaged in contributory and vicarious infringement of plaintiffs' copyrighted sound recordings, thereby violating plaintiffs' exclusive rights under 17 U.S.C. § 106. Plaintiffs' complaint also asserts causes of action for common law misappropriation, Cal. Civ.Code § 980(a)(2), unfair competition in violation of California Business and Professions Code § 17200 and the common law of California, and civil conspiracy.

On August 13, 2004, Hummer answered plaintiffs' complaint and asserted various counterclaims related to plaintiffs' alleged anticompetitive behavior. Specifically, Hummer's counterclaims allege that plaintiffs conspired to exclude Napster and other independent music distributors from the online music distribution market. Hummer also asserts that plaintiffs participated in "the market for[] financing online recorded music distribution companies" and that they conspired to exclude unaffiliated financing entities from that market. Defs.' Countercl. ¶ 38. Based on these allegations, Hummer asserts causes of action for conspiracy in restraint of trade in violation of section 1 of the Sherman Act, 15 U.S.C. § 1, for violations of California antitrust laws ("the Cartwright Act"), Cal. Bus. & Prof.Code §§ 16726, 16750, and for unfair competition in violation of California Business and Professions Code § 17200 et seq. Now before the court is plaintiffs' motion to dismiss Hummer's counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6). In moving to dismiss, plaintiffs argue that Hummer lacks standing to maintain a private antitrust enforcement action under federal or state law. Plaintiffs also assert that this lack of standing dooms Hummer's unfair competition claim and thus urge the court to dismiss Hummer's counterclaims in their entirety.

LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). "[U]nless it appears beyond doubt that plaintiff can prove no set of facts in support of her claim which would entitle her to relief," a motion to dismiss must be denied. Lewis v. Telephone Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir.1996) (citation omitted); see also Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). When assessing the legal sufficiency of a plaintiff's claims, the court must accept as true all material allegations of the complaint, and all reasonable inferences must be drawn in favor of the non-moving party. See, e.g., Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir.1996) (citations omitted). Dismissal is proper under Rule 12(b)(6) "only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory." Navarro, 250 F.3d at 732 (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1988)).

DISCUSSION

I. Sherman Act

The first question presented by plaintiffs' motion to dismiss is whether Hummer has standing to bring a private action to enforce section 1 of the Sherman Act, 15 U.S.C. § 1. Section 1 prohibits "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade among the several States, or with foreign nations." Id. Although the Sherman Act provides only for governmental enforcement of antitrust laws, section 4 of the Clayton Act authorizes the award of treble damages to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." 15 U.S.C. § 15(a). "This provision is quite broad, and if `read literally, could afford relief to all persons whose injuries are causally related to an antitrust violation.'" American Ad Mgmt., Inc. v. General Tel. Co. of Cal., 190 F.3d 1051 1054 (9th Cir.1999) (quoting Amarel v. Connell, 102 F.3d 1494, 1507 (9th Cir.1996)) (original alteration omitted). Recognizing that this literal reading of the Clayton Act is inconsistent with Congress' intent in...