Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

• Decision Date: 02 July 2003
• Docket Number: No. CV 01-09923-SVW (PJWx).,No. CV 01-08541-SVW(PJWx).,CV 01-08541-SVW(PJWx).,CV 01-09923-SVW (PJWx).
• Citation: 269 F.Supp.2d 1213
• Parties: METRO-GOLD WYN-MAYER STUDIOS INC., et al., Plaintiffs, v. GROKSTER, LTD., et al., Defendants. Jerry Leiber, et al., Plaintiffs, v. Consumer Empowerment BV a/k/a Fasttrack, et al., Defendants.
• Court: U.S. District Court — Central District of California

269 F.Supp.2d 1213

METRO-GOLD WYN-MAYER STUDIOS INC., et al., Plaintiffs, v. GROKSTER, LTD., et al., Defendants.

Jerry Leiber, et al., Plaintiffs, v. Consumer Empowerment BV a/k/a Fasttrack, et al., Defendants.

No. CV 01-08541-SVW(PJWx).

No. CV 01-09923-SVW (PJWx).

United States District Court, CD. California.

July 2, 2003.

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Richard H. Cooper, Thomas G. Hentoff, Beth A. Levene, David E. Kendall, Robert J. Shaughnessy, Nicholas J. Boyle, Ana C. Reyes, Kevin Hardy, Joseph Marshall Terry, Williams & Connolly, Washington, DC, Matthew J. Oppenheim, Dean Garfield, Recording Industry Ass'n of America, Washington, DC, Gregory Paul Goeckner, Motion Picture Ass'n American, Encino, CA, Jan B. Norman, Mark D. Litvack, Jan B. Norman Law Offices, Encino, CA, for plaintiffs.

Michael H. Page, Mark A. Lemley, Stacey L. Wexler, Keker & Van Nest, San Francisco, CA, Jennifer Stisa Granick, Stanford Law School, Stanford, CA, for defendant.

ORDER GRANTING IN PART PLAINTIFFS' MOTION TO DISMISS COUNTERCLAIMS

WILSON, District Judge.

I. INTRODUCTION

On January 9, 2003, this Court denied a motion by Defendant Sharman Networks, Ltd. ("Sharman") to dismiss for, among other reasons, lack of personal jurisdiction. On February 18, 2003, Sharman filed a First Amended Answer and Counterclaims ("FAAC"). Sharman brings three federal counterclaims against Plaintiffs ¹: (1) "refusal to deal" in violation of Section 1 of the Sherman Act; (2) "conspiracy to monopolize" in violation of Section 2 of the Sherman Act; and (3) declaratory relief as to copyright misuse. Sharman also counterclaims under two provisions of California law, for trust against public policy and unfair business practices.

Now before the Court is Plaintiffs' Motion to Dismiss the Counterclaims. For the reasons set forth herein, the Motion is GRANTED IN PART. Further briefing is ordered as provided below.

II. FACTUAL BACKGROUND

A. Sharman's Business Plan: DRM Management

Sharman distributes Kazaa Media Desktop (the "Kazaa software"), one of the world's most widely-downloaded peer-topeer filesharing clients, and operates the Kazaa.com website. Sharman claims that, when it was formed, its founders intended to create a platform for distributing licensed copyrighted works, which end-users would pay to receive. (In other words, a user could "buy" a song online, instead of buying a CD at the mall.) These works would be protected by Digital Rights Management ("DRM") controls. A DRM control works like a lock, which only an authorized user can open. Thus, any person can download a DRM-protected file to their computer, but only those who have paid to access the file can actually open it (e.g., listen to it).

In the last year, Sharman has entered into a partnership with third-party "Altnet," which is not a party to this case. According to Sharman, Altnet licenses copyrighted works, and then encodes digital versions of those works with a DRM "lock." When a Kazaa user searches for content—say, music or video games—the Altnet files are displayed along with other content (some of which forms the basis of Plaintiffs' underlying lawsuit). An Altnet song or video game is downloaded like any other file. Unlike illegally traded files, however, only those who pay a fee to Altnet can actually use the Altnet files. Sharman alleges that this solution works: after only seven months, Altnet is issuing nearly fifteen million licensed files per month, for things such as video games, independent music content, and other works not owned or distributed by Plaintiffs. Sharman is paid a "fee" for those Altnet files distributed across the Kazaa software and "network."

While users can still illegally exchange unlicensed copyrighted works, Sharman has altered the Kazaa software to highlight licensed content from Altnet. Thus, when a user searches for a file using Kazaa, the DRM-protected Altnet content appears at the top of the list. Sharman also alleges that it uses (or can use) other "incentives" designed to promote the downloading of licensed content.

B. Alleged Conduct by Industry Plaintiffs

While there is considerable redundancy in the counterclaims, the essence of Sharman's grievance appears to be thus: Sharman alleges that Plaintiffs control as much as eighty-five percent of the market for manufacturing, labeling and distributing copyrighted music and films. Sharman further alleges that Plaintiffs together have acted monopolistically and in restraint of trade by refusing to license any copyrighted works to Altnet. This conduct, the FAAC claims, unlawfully precludes Sharman and Altnet from competing effectively in the market for distribution of licensed copyrighted works.

Sharman includes a number of other allegations, though it is not clear to which specific claim(s) they relate. Sharman alleges, for instance, that there are companies affiliated with Plaintiffs that themselves distribute filesharing software, and that Plaintiffs have not insisted that these companies police their systems in the same manner Plaintiffs demand of Sharman. Sharman also asserts that Plaintiffs distribute "fake" songs to harm Sharman's business.

Sharman counterclaims under Section 1 of the Sherman Act, which prohibits conspiracies or combinations in restraint of interstate commerce, and under Section 2, which bars monopolization of trade. See 15 U.S.C. §§ 1, 2.

Sharman also brings analogous state antitrust claims under California's Cartwright Act, see Cal. Bus. & Prof.Code §§ 16700, 16726, and separately claims that Plaintiffs' conduct violates the state's unfair competition law. See Cal Bus & Prof Code §§ 17200 et seq.

Finally, Sharman seeks a judicial declaration that Plaintiffs have misused their copyrights, and thus that those copyrights are unenforceable.

II. LEGAL STANDARD

Dismissal pursuant to Rule 12(b)(6) is appropriate where the plaintiff fails to state a claim upon which relief may be granted. Fed. Rules Civ. P. 12(b)(6). For purposes of this Motion, the Court accepts as true all non-conclusory, material allegations of the FAAC and construes them in the light most favorable to Sharman. See Newman v. Sathyavaglswaran, 287 F.3d 786, 788 (9th Cir.2002) (citing Schneider v. California Dep't of Corr., 151 F.3d 1194, 1196 (9th Cir.1998)). The Court also draws all reasonable inferences from these allegations in Sharman's favor. See Pareto v. F.D.I.C., 139 F.3d 696, 699 (9th Cir. 1998).

III. DISCUSSION

A. Section 1 of the Sherman Act

"To establish a section 1 violation under the Sherman Act, a plaintiff must demonstrate three elements: (1) an agreement, conspiracy, or combination among two or more persons or distinct business entities; (2) which is intended to harm or unreasonably restrain competition; and (3) which actually causes injury to competition, beyond the impact on the claimant, within a field of commerce in which the claimant is engaged (i.e., `antitrust injury')." McGlinchy v. Shell Chem. Co., 845 F.2d 802, 811 (9th Cir.1988).

While Plaintiffs effectively concede that the FAAC properly alleges the second element, they contest its sufficiency with respect to the other two. The Court begins with the third element, as Sharman's standing to bring both Sherman Act counterclaims depends upon whether it has properly alleged an antitrust injury.

1) Antitrust Standing

Section 4 of the Clayton Act provides that "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor ... and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee." 15 U.S.C. § 15(a). Despite the apparent expansiveness of this provision, and though the Supreme Court has intoned against engrafting artificial limitations on the private right of action, see, e.g., Pfizer, Inc. v. Government of India, 434 U.S. 308, 98 S.Ct. 584, 54 L.Ed.2d 563 (1978); Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656, 81 S.Ct. 365, 5 L.Ed.2d 358 (1961), standing under the Clayton Act is more limited than that required for Article III justiciability. See Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 529-35, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983).

"Therefore, courts have constructed the concept of antitrust standing, under which they `evaluate the plaintiffs harm, the alleged wrongdoing by the defendants, and the relationship between them,' to determine whether a plaintiff is a proper party to bring an antitrust claim." American Ad Mgmt., Inc. v. General Tel. Co., 190 F.3d 1051, 1054 (9th Cir.1999) (internal citation omitted). Although the standing inquiry is an elusive and highly contextual one, the Supreme Court has identified certain factors that inform the analysis, including:

1) the nature of the plaintiffs alleged injury (whether it is the type the antitrust laws were intended to forestall);

2) the risk of duplicative recovery;

3) the directness of the injury;

4) the speculative measure of damages; and,

5) whether damages would be complex to apportion.

American Ad Mgmt, 190 F.3d at 1055 (citing Associated General, 459 U.S. at 538-45, 103 S.Ct. 897; Bubar v. Ampco Foods, Inc., 752 F.2d 445, 449 (9th Cir. 1985)).

a. Nature of the Alleged Injury

The most important factor relates to the nature of the alleged injury, i.e., whether it is an "`injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful.'" Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334, 110 S.Ct. 1884, 109 L.Ed.2d 333 (1990) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977)). This reflects "the central interest [of the Sherman Act] in protecting the economic freedom of participants in the relevant market." American Ad Mgmt, 190 F.3d at 1057 (quoting Associated General, 459 U.S. at...