Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 1 of 23 Page ID #:634
`
`O
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`UNITED STATES DISTRICT COURT
`CENTRAL DISTRICT OF CALIFORNIA
`
`Case No. CV 18-00677 DDP (AGRx)
`
`ORDER RE: DEFENDANTS’ MOTION TO
`DISMISS
`
`[Dkt 58]
`
`))))))))))))))))
`
`REDBOX AUTOMATED RETAIL,
`LLC,
`
`Plaintiff,
`
`v.
`BUENA VISTA
`HOMEENERTAINMENT, INC.,
`DISNEY ENTERPRISES, INC.,
`LUCASFILM LTD, LLC, MVL FILM
`FINANCE LLC, AND MOVIES
`ANYWHERE LLC,
`
`Defendants.
`__________________________
`
`Presently before the court is Defendants Buena Vista Home
`Entertainment, Inc., Disney Enterprises, Inc., Lucasfilm Ltd. LLC,
`MVL Film Finance LLC, and Movies Anywhere, LLC (collectively,
`“Disney”)’s Motion to Dismiss Plaintiff’s First Amended Complaint
`(“FAC”). Having considered the submissions of the parties and
`heard oral argument, the court grants the motion in part, denies
`the motion in part, and adopts the following Order.
`I.
`Background1
`
`1 The general factual background underlying this dispute is
`(continued...)
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 2 of 23 Page ID #:635
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`Disney is a major movie production studio. (FAC ¶ 34.)
`Disney’s market share of movies rented or sold for home
`entertainment is greater than 50%. (Id. at ¶¶ 34-35.)
`Plaintiff Redbox Automated Retail, LLC (“Redbox”) rents and sells
`movies on DVD and Blu-Ray discs via automated self-service kiosks,
`which are located in grocery stores, fast-food restaurants, and
`other locations throughout the country. (Id. at ¶¶ 25-29.) Redbox
`generally acquires its stock of Disney movies by purchasing them at
`retail outlets such as big-box stores and grocery stores. (Id. at
`¶ 45.) Redbox often bought Disney movies as part of a “Combo
`Pack,” which includes a DVD, a Blu-ray disc, and a digital movie
`that can be accessed with a code contained within the Combo Pack.
`(Id. at ¶ 46.) Each digital movie code can only be redeemed once,
`through one of two Disney websites (the “redemption websites”).
`(Id. at ¶ 47.)
`In summer 2017, Redbox began selling the digital movie codes
`from its kiosks. (Id.) Soon after, Redbox alleges, Disney began
`pressuring distributors into refusing to sell retail copies of
`Disney titles to Redbox. (Id. at ¶¶ 49-56.) Disney also includes
`statements on Combo Pack packaging and on the digital movie codes
`representing that the components of Combo Packs cannot be rented or
`transferred separately. (Id. at ¶ 60.) The redemption websites
`also represent that Disney owns “[a]ll digital movie codes,” which
`can only be redeemed by a person (or family member) who obtains the
`
`1(...continued)
`laid out in more detail in this Court’s orders in a closely related
`case before this Court, Disney Enterprises, Inc., et al. v. Redbox
`Automated Retail, CV 17-08655 DDP (“Redbox I”). The relatively
`brief recitation of the facts herein is based upon Redbox’s FAC in
`this case.
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 3 of 23 Page ID #:636
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`code as part of a Combo Pack, and that the codes may not be sold
`separately. (Id. at ¶¶ 61-62.) Redbox alleges that these
`representations are false because, as a purchaser of a Disney Combo
`Pack, Redbox has an unfettered right to dispose of the DVDs, Blu-
`rays, and digital movie codes contained within the Combo Packs.
`(Id. at ¶¶ 64-65.)
`Redbox alleges that Disney’s actions and misrepresentations
`have stifled competition and dissuade consumers from purchasing
`digital movies from Redbox. (FAC ¶¶ 92, 94.) The FAC alleges
`causes of action for declaratory relief, copyright misuse, tortious
`interference with prospective economic advantage, false advertising
`under both state and federal law, unfair competition, and state and
`federal antitrust violations. Disney now moves to dismiss all
`claims.
`II. Legal Standard
`A complaint will survive a motion to dismiss when it
`“contain[s] sufficient factual matter, accepted as true, to state a
`claim to relief that is plausible on its face.” Ashcroft v. Iqbal,
`556 U.S. 662, 678 (2009)(quoting Bell Atl. Corp. v. Twombly, 550
`U.S. 544, 570 (2007)). When considering a Rule 12(b)(6) motion, a
`court must “accept as true all allegations of material fact and
`must construe those facts in the light most favorable to the
`plaintiff.” Resnick v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000).
`Although a complaint need not include “detailed factual
`allegations,” it must offer “more than an unadorned,
`the-defendant-unlawfully-harmed-me accusation.” Iqbal,556 U.S. at
`678. Conclusory allegations or allegations that are no more than a
`statement of a legal conclusion “are not entitled to the assumption
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`of truth.” Id. at 679. In other words, a pleading that merely
`offers “labels and conclusions,” a “formulaic recitation of the
`elements,” or “naked assertions” will not be sufficient to state a
`claim upon which relief can be granted. Id. at 678 (citations and
`internal quotation marks omitted).
`“When there are well-pleaded factual allegations, a court
`should assume their veracity and then determine whether they
`plausibly give rise to an entitlement of relief.” Id. at 1950.
`Plaintiffs must allege “plausible grounds to infer” that their
`claims rise “above the speculative level.” Twombly, 550 U.S. at
`555-56. “Determining whether a complaint states a plausible claim
`for relief” is “a context-specific task that requires the reviewing
`court to draw on its judicial experience and common sense.” Iqbal,
`556 U.S. at 679.
`III. Discussion
`A.
`Antitrust Claims
`Disney argues that Redbox has not adequately alleged an
`antitrust violation. Section 1 of the Sherman Antitrust Act
`prohibits contracts, combinations, and conspiracies that
`unreasonably restrain trade.2 15 U.S.C. § 1; Brantley v. NBC
`Universal, Inc., 675 F.3d 1192, 1197 (9th Cir. 2012). Some
`restraints, typically horizontal agreements between competitors,
`are unreasonable per se. Ohio v. Am. Express Co., 138 S. Ct. 2274,
`2284 (2018). All other restraints must be analyzed under the “rule
`
`2 The parties agree that federal cases interpreting the
`Sherman Act are applicable to claims under California’s Cartwright
`Act. See, e.g. Pecover v. Elecs. Arts Inc., 633 F. Supp. 2d 976,
`984 (N.D. Cal. 2009); Marin Cty. Bd. of Realtors, Inc. v. Palsson,
`16 Cal. 3d 920, 925 (1976).
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 5 of 23 Page ID #:638
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`of reason.” Id.; Brantley, 675 F.3d at 1197. “In its design and
`function the rule distinguishes between restraints with
`anticompetitive effect that are harmful to the consumer and
`restraints stimulating competition that are in the consumer’s best
`interest.” Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551
`U.S. 877, 886 (2007). To state a Section 1 claim under the
`rule of reason, a plaintiff must allege (1) an agreement,
`conspiracy, or combination between two or more entities that
`(2) the entities intend to harm or restrain trade and (3)
`actually injures competition with (4) resulting “antitrust
`injury” to the plaintiff. Brantley, 675 F.3d at 1197.; Auto.
`Sound Inc. v. Audiovox Elec. Corp., No. 12-762, 2012 WL
`12892938, at *3 (C.D. Cal. Dec. 3, 2012).
`1.
`Relevant Market
`Generally, to demonstrate injury to competition, a plaintiff
`“must delineate a relevant market and show that the defendant plays
`enough of a role in that market to impair competition
`significantly.” Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1413 (9th
`Cir. 1991). “Without a definition of the market, there is no way
`to measure the defendant’s ability to lessen or destroy
`competition.” Am. Express, 138 S.Ct. at 2285 (internal alteration
`and quotation marks omitted). The relevant market is the “area of
`effective competition,” including, where applicable, different
`products or services that serve as substitutes for each other.
`Id.; Oltz v. St. Peter's Cmty. Hosp., 861 F.2d 1440, 1446 (9th Cir.
`1988) (“The product market includes the pool of goods or services
`that enjoy reasonable interchangeability of use and
`cross-elasticity of demand.”). The market, which must include a
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 6 of 23 Page ID #:639
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`geographical component, must also be a product market, and cannot
`be defined by reference to consumers. Newcal Indus., Inc. v. Ikon
`Office Sol., 513 F.3d 1038, 1045 (9th Cir. 2008). Although the
`validity of an alleged market may present issues of fact, courts
`may dismiss antitrust complaints if the relevant market definition
`alleged is “facially unsustainable.” Newcal, 513 F.3d at 1038.
`The instant complaint alleges that Disney is restraining trade
`in “the nationwide market for rentals and sales of movies on DVD,
`Blu-ray and digital platforms for home entertainment” (the “home
`movie” market). (FAC ¶ 29.) Disney argues that this definition is
`facially implausible because it fails to include economic
`substitutes, including cable television, digital streaming services
`such as Netflix, content platforms such as YouTube, and special
`events, such as the Olympics. (Motion at 10.) Disney further
`argues that the FAC fails to allege why such alternatives are not
`adequate substitutes for home movies. (Id.)
`Although the issue is a close one, this Court concludes that
`the alleged market is not so facially implausible as to warrant
`dismissal at the pleading stage. Although Disney may, on summary
`judgment, be able to demonstrate that cable tv, streaming services,
`and the like are reasonably interchangeable with home movies, in
`the court’s experience, that is not necessarily so. A DVD, for
`example, can be viewed with little more than an inexpensive disc
`player and a video screen. The supposed substitutes proposed by
`Disney, in contrast, generally require additional equipment, such
`as a cable box or receiver, some sort of internet capability and
`equipment, such as a modem or router, or, in the case of broadcast
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 7 of 23 Page ID #:640
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`television, a digital tuner.3 Furthermore, unlike the products in
`the alleged market, the proposed alternatives appear to require
`some sort of monthly or ongoing subscription, such as in the case
`of Netflix or cable television, or must be viewed at set times, as
`in the case of live sports or special events like the Olympics.4
`Although the FAC does not explain why specific alternatives such as
`cable tv and Netflix are not reasonable substitutes for home
`
`3 Cases like Flash Elecs., Inc. v. Universal Music & Video
`Distribution Corp. and Redbox Automated Retail LLC v. Universal
`City Studios LLLP found markets such as “the whole distribution
`market for ‘sell-through’ and rental movie videos and DVDS” and
`“the market for new release DVDs,” respectively, to be facially
`plausible. Flash, 312 F. Supp. 2d 379, 392 (E.D.N.Y. 2004);
`Universal City Studios, No. CIV. 08-766RBK, 2009 WL 2588748, at *1
`(D. Del. Aug. 17, 2009). These cases, which were decided a decade
`or more ago, are not particularly instructive in this era of
`“smart” devices, particularly in light of Redbox’s inclusion of
`“digital platforms” in the alleged relevant market. Indeed, with
`the increased prevalence of connected TVs and other devices, even
`the hardware distinctions discussed above may become decreasingly
`relevant. Whether that is already the case, however, or whether
`“digital platforms” are part of the same market as DVDs and Blu-ray
`discs in the first instance, are questions best resolved at the
`summary judgment stage.
`4 It bears noting that the cost of certain of the proposed
`alternatives, such as premium cable tv, may significantly exceed
`the cost of home movies. Granted, “the scope of the relevant
`market is not governed by the presence of a price differential
`between competing products.” Twin City Sportservice, Inc. v.
`Charles O. Finley & Co., 512 F.2d 1264, 1274 (9th Cir. 1975) This
`is not to say, however, that price is necessarily completely
`irrelevant. Even where two products serve the same function, the
`price differential may be so great that the “commercial reality” is
`that the products do not share a cross-elasticity of demand or
`compete with each other. See Int'l Boxing Club of N. Y., Inc. v.
`United States, 358 U.S. 242, 250 (1959) (quoting United States v.
`E. I. du Pont de Nemours & Co., 351 U.S. 377, 404 (1956) (“[The
`relevant] market is composed of products that have reasonable
`interchangeability for the purposes for which they are
`produced—price, use and qualities considered.”)); Thurman Indus.,
`Inc. v. Pay 'N Pak Stores, Inc., 875 F.2d 1369, 1376 (9th Cir.
`1989) (20 percent price differential demonstrates low cross-
`elasticity of demand) (discussing Photovest Corp. v. Fotomat Corp.,
`606 F.2d 704, 713 (7th Cir. 1979).
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 8 of 23 Page ID #:641
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`movies, it does allege that DVDs, Blu-rays, and “digital movies
`generally require or can be used with equipment different from that
`needed for games, books, and other forms of home entertainment,”
`and that there is no cross-elasticity of demand between the
`identified products and “games, books, and other forms of home
`entertainment.” (FAC ¶ 31.) Compare UGG Holdings, Inc. v. Severn,
`No. CV04-1137-JFW FMOX, 2004 WL 5458426, at *4 (C.D. Cal. Oct. 1,
`2004) (finding inadequately pleaded market where plaintiff made no
`allegations or arguments as to why potential alternatives were not
`substitutes and failed to allege lack of cross-elasticity of
`demand). The relevant market allegations here are sufficient to
`survive a motion to dismiss.
`2.
`Market Power
`Disney also argues that Redbox’s claims fail because Redbox
`has failed to allege that Disney possesses market power in the
`market for home movies. A plaintiff can show anticompetitive
`effect in a relevant market either through direct proof of actual
`adverse effects or indirectly, through “proof of ‘market power’
`plus some evidence that the challenged restraint harms
`competition.” Am. Express, 138 S.Ct. at 2284; F.T.C. v. Indiana
`Fed’n of Dentists, 476 U.S. 447, 460–61 (1986) (“Since the purpose
`of the inquiries into market definition and market power is to
`determine whether an arrangement has the potential for genuine
`adverse effects on competition, proof of actual detrimental
`effects, such as a reduction of output, can obviate the need for an
`inquiry into market power, which is but a surrogate for detrimental
`effects.”) (internal quotations omitted); Oltz v. St. Peter's Cmty.
`Hosp., 861 F.2d 1440, 1448 (9th Cir. 1988) (“Because market
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`definition and market power are merely tools designed to uncover
`competitive harm, proof of ‘actual detrimental effects, such as a
`reduction of output, can obviate the need ... [for] elaborate
`market analysis.’”) (quoting Indiana Fed’n of Dentists, 476 U.S. at
`460-61).5
`Market share is the starting point for assessing market power.
`Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 925 (9th
`Cir. 1980). The Ninth Circuit has found that an allegation that a
`defendant controls sixty five percent of the relevant market is
`sufficient to allege market power. Id.; see also Image Tech.
`Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1206 (9th Cir.
`1997) (“Courts generally require a 65% market share to establish a
`prima facie case of market power.”); Lucas v. Citizens Commc'ns
`Co., 409 F. Supp. 2d 1206, 1220 (D. Haw. 2005).6 Here, the FAC
`alleges that Disney’s share of the home movies market is something
`“greater” than fifty percent. (FAC ¶¶ 34-35.) Even if true,
`however, that fact is not sufficient to establish Disney’s market
`
`5 Although the Ninth Circuit stated in Newcal that “a
`plaintiff must allege that the defendant has market power within a
`relevant market,” the court made no mention of Oltz, nor suggested
`that a plaintiff must allege market power even in the face of
`direct evidence of anticompetitive effect. The Ninth Circuit’s
`reasoning in Oltz is consistent with the Supreme Court’s recent
`decision in American Express and earlier decision in Indiana
`Federation of Dentists. An entity that lacks market power cannot
`act with anticompetitive effect. Proof of such effect demonstrates
`that the entity possessed the requisite power in the first
`instance. See, e.g., Todd v. Exxon Corp., 275 F.3d 191, 206 (2d
`Cir. 2001) (explaining that actual evidence of adverse effects on
`competition is a “strong indicator” of market power that renders
`any further showing of market power unnecessary).
`6 The Ninth Circuit has also suggested that, in the context of
`an attempted monopolization claim under Section 2 of the Sherman
`Act, a lower market share may, depending on other factors, suffice.
`Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1438 (9th Cir.
`1995) (finding 44 percent share sufficient).
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`power in the home movies market. Image Tech. Servs., 125 F.3d at
`1206. Redbox nevertheless argues, as the FAC alleges, that Disney
`has “a dominant position” in the home movies market due to the
`“unique strength of the Disney brand.” (FAC ¶¶ 36-37.) Such
`conclusory assertions, however, are not entitled to a presumption
`of truth. Furthermore, Redbox does not cite, and this court is not
`aware of, any authority for the proposition that general brand
`strength demonstrates market power in a particular market.7
`Although brand strength may be relevant in certain cases where a
`single-brand market is alleged, that is not the case here, as
`Redbox emphatically points out.8 See Newcal, 513 F.3d at 1046;
`Datel Holdings Ltd. v. Microsoft Corp., 712 F. Supp. 2d 974, 986
`(N.D. Cal. 2010). The court therefore agrees that the FAC does not
`adequately allege that Disney possesses market power in the home
`movies market.
`3.
`
`Anticompetitive Effect
`
`7 Some courts have discussed brand strength as a potential
`barrier to entry in the context of monopolization claims, separate
`and apart from market power. See, e.g., Intergraph Corp. v. Intel
`Corp., 3 F. Supp. 2d 1255, 1276 (N.D. Ala. 1998) (vacated on other
`grounds, 195 F.3d 1346, 1363 (Fed. Cir. 1999)); Com. of Pa. v.
`Russell Stover Candies, Inc., No. CIV. 93-1972, 1993 WL 145264, at
`*15 (E.D. Pa. May 6, 1993); cf. Rebel Oil, 51 F.3d at 1439-41.
`8 Redbox does not allege a relevant market in either Disney-
`branded products or Disney-branded movies. Indeed, Redbox takes
`exception to Disney’s effort, such as it is, to characterize
`Redbox’s FAC as alleging any single-branded market. (Opp. at 20 n.
`9.) Claims based upon the existence of any such market would
`likely be difficult to sustain. See Streamcast Networks, Inc. v.
`Skype Techs., S.A., 547 F. Supp. 2d 1086, 1094 (C.D. Cal. 2007)
`(“Courts have consistently refused to consider one brand to be a
`relevant market of its own when the brand competes with other
`potential substitutes.” (internal quotation omitted)).
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`The question remains, however, whether Redbox has sufficiently
`alleged actual anticompetitive effects.9 If so, further
`indications of market power may not be required. Indiana Fed’n of
`Dentists, 476 U.S. at 460-61; Oltz, 861 F.2d at 1448; Todd, 275
`F.3d at 206. With respect to anticompetitive effects, the FAC
`alleges that Disney’s misconduct “harms other rental outlets that
`provide a less expensive alternative for viewing Disney content,”
`“directly affects other low-cost rental options[, . . . and]
`reduces output and raises prices for consumers,” and that Disney’s
`“limitation on the numbers of copies available for purchase will
`hurt ‘Mom and Pop rental companies’ as well.” (FAC ¶¶ 6, 80, 58.)
`Redbox also alleges that, as a result of Disney’s actions, many
`Redbox customers “are unable to turn to other retailers for Disney
`titles.” (FAC ¶ 77 (emphasis added).) The FAC further states that
`“Redbox’s inability to purchase adequate numbers of Disney movies
`therefore represents an absolute reduction in output in this
`market.” (FAC ¶ 78 (emphasis added).)
`As discussed above, however, anticompetitive effects can only
`be measured by reference to a particular market. Am. Express, 138
`S.Ct. at 2285. The relevant market at issue here, as discussed
`above, is the home movie market for “rentals and sales of movies on
`DVD, Blu-ray and digital platforms.” Redbox’s allegations
`
`9 Disney’s arguments, like some of the cases in this subject
`area, appear to conflate injury to competition with antitrust
`injury. (See, e.g., Mot. at 8:22; Reply at 2:27-28 (quoting In re
`Webkinz Antitrust Litig., 695 F. Supp. 2d 987, 997 (N.D. Cal.
`2010)).) “[I]n order to state a claim successfully, plaintiffs
`must allege both that defendant's behavior is anticompetitive and
`that plaintiff has been injured by an anti-competitive aspect of
`the practice under scrutiny.” Brantley, 675 F.3d at 1200 (internal
`quotations omitted). The latter element is referred to as
`“antitrust injury” or “antitrust standing.” Id. at 1197.
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`regarding anticompetitive effects in the market for “Disney titles”
`are therefore irrelevant. The FAC includes no allegations about
`anticomptetitive effects in the relevant, broader market for home
`movies generally.10 Neither does the FAC allege any concrete, non-
`conclusory allegations about how retailers other than Redbox are
`harmed by Disney’s refusal to deal with Redbox. See Brantley, 675
`F.3d at 1198 (“[P]laintiffs must plead an injury to competition
`beyond the impact on the plaintiffs themselves.”). Indeed, “[a]
`manufacturer may choose those with whom it wishes to deal and
`unilaterally may refuse to deal with a distributor or customer for
`business reasons without running afoul of the antitrust laws.”11
`Dimidowich v. Bell & Howell, 803 F.2d 1473, 1478 (9th Cir. 1986).
`Because Redbox has not adequately alleged either that Disney
`possesses market power in the market for home movies or that
`Disney’s actions have had actual anticompetitive effects in that
`market, its antitrust claims are dismissed, with leave to amend.
`B.
`Declaratory Relief
`The FAC’s first cause of action for “Declaratory Relief” seeks
`a declaration that certain language on Disney’s Combo Pack
`
`10 Even assuming the reference to reduced output and higher
`consumer prices refers to that broader market, “allegations that an
`agreement has the effect of reducing consumers’ choices or
`increasing prices to consumers does not sufficiently allege an
`injury to competition.” Brantley, 675 F.3d at 1202.
`
`11 The Ninth Circuit did recognize, however, that a vertical
`combination might violate antitrust laws where a manufacturer
`coerces a distributor into adhering to resale restraints.
`Dimidowich, 803 F.3d at 1478. Although the FAC here does make
`several conclusory references to coercive conduct, it provides no
`specifics as to how Disney coerced distributors into involuntarily
`refusing to sell to Redbox, notwithstanding allegations that Disney
`harassed Redbox itself.
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 13 of 23 Page ID #:646
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`packaging and websites is unenforceable. (FAC ¶¶ 105.)
`Specifically, the FAC identifies terms stating that Disney owns
`“all digital movie codes,” that codes “are not for sale or
`transfer, and that “digital codes are authorized for redemption
`only by an individual who obtains the code as part of a
`combinations disc + code package . . ., or by a family member of
`that individual.” (FAC ¶¶ 61, 99, 100.) Although the first cause
`of action does not itself specify why these terms are allegedly
`unenforceable, the declaratory relief claim appears to be based
`upon allegations that the terms are unconscionable. (FAC ¶¶ 65,
`70.) Disney argues that, assuming that to be the case, the FAC
`nevertheless fails to allege the elements of an unconscionability
`defense.
`Under California law, a contract is invalid if it is both
`procedurally and substantively unconscionable. Armendariz v.
`Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000).
`Procedural unconscionability “concerns the manner in which the
`contract was negotiated and the respective circumstances of the
`parties at that time.” Ferguson v. Countrywide Credit Indus.,
`Inc., 298 F.3d 778, 783 (9th Cir. 2002). A procedural
`unconscionability analysis looks to two factors:(1) oppression,
`which focuses on bargaining power disparity and the resulting
`absence of meaningful choice, and (2) surprise, which turns on
`whether operative terms are hidden in lengthy forms drafted by the
`party seeking to enforce the contract. Id. “A contract is
`substantively unconscionable when it is so unjustifiably one-sided
`that it ‘shock[s] the conscience.’” Chavarria v. Ralphs Grocery
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 14 of 23 Page ID #:647
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`Co., 733 F.3d 916, 923 (9th Cir. 2013) (quoting Parada v. Superior
`Court, 176 Cal. App. 4th 1554, 1573 (2009)).
`Notwithstanding conclusory allegations that “the contract
`terms” are unconscionable, the FAC here does not adequately allege
`procedural or substantive unconscionability. Although the FAC
`makes no explicit mention of procedural unconscionability, it does
`allege that contractual terms restricting the transfer of digital
`codes only arise after consumers have already purchased the codes.
`(FAC ¶ 110.) This allegation of surprise, Redbox argues, is
`sufficient to satisfy the procedural unconscionability element of
`the defense. The court disagrees. As the FAC acknowledges, the
`Combo Pack boxes, which consumers encounter before they ever reach
`the websites, state that “codes are not for sale or transfer.”
`(FAC ¶ 99.) It is not plausible, therefore, that consumers are
`surprised when they see similar terms on the redemption websites.
`Redbox’s argument regarding substantive unconscionability is
`also unavailing. Redbox contends that the website terms are
`substantively unconscionable because, by requiring “consumers to
`certify that they did not purchase the codes separately, even if
`they had already done so,” the terms “effectively result[] in a
`forfeiture because consumers cannot redeem the Code without making
`a false certification.” (Opp. at 8:19.) Even on the face of the
`FAC, however, that allegation is simply untrue, at least as it
`applies to purchasers of Combo Packs, whose certifications would be
`accurate and truthful. Insofar as Redbox refers to its own
`customers, or other purchasers of standalone codes, Redbox cannot
`plausibly seek to lay any lack of prior disclosure, or resulting
`“forfeiture,” at Disney’s feet. The website terms are consistent
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 15 of 23 Page ID #:648
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`with the box-top disclosure that “codes are not for sale or
`transfer.” The redemption websites’ subsequent elaboration on that
`theme does not appear to require any consumer to forfeit any right
`he or she possessed, let alone shocks the conscience. To the
`extent standalone code purchasers, who never have any interaction
`with Disney or exposure to Disney packaging at the point of
`purchase, are frustrated in their efforts to redeem the purchased
`code, that frustration would appear to be a product of Redbox’s
`packaging decisions and the nature of Redbox’s characterization of
`the rights being conveyed.12 Redbox’s declaratory relief claim is,
`therefore, dismissed, with leave to amend.
`C.
`Copyright Misuse
`Disney also argues that Count Two of the FAC, which alleges
`copyright misuse, must be dismissed. As an initial matter, courts
`are split on the question whether copyright misuse may be brought
`as an affirmative claim, as opposed to as a defense. See, e.g.,
`Amaretto Ranch Breedables, LLC v. Ozimals, Inc., 790 F. Supp. 2d
`1024, 1033 (N.D. Cal. 2011); KTS Karaoke, Inc. v. Sony/ATV Music
`Publ'g LLC, No. CV1200014MWF, 2014 WL 12567169, at *3 (C.D. Cal.
`Jan. 14, 2014). This court need not address the split, however,
`because even assuming that copyright misuse can be brought as an
`affirmative claim, Redbox does not sufficiently allege misuse.
`
`12 Redbox’s substantive unconscionability argument does not
`discuss first sale doctrine issues, but appears to rely upon them,
`at least implicitly. If the first sale doctrine guaranteed Redbox
`the right to transfer digital codes, Redbox would certainly have a
`stronger claim of substantive unconscionability. As explained
`below, however, and in great detail in the related Redbox I case,
`the first sale doctrine is not applicable here. See Section III(C)
`and note 13, infra; Redbox I, Dkt. 74, 120.
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`This Court addressed the copyright misuse issue in great
`detail in two orders in the related case, and will not re-hash that
`entire discussion here. (Redbox I, Dkt. 74, 120.) In short,
`copyright misuse is an affirmative defense that “prevents copyright
`holders from leveraging their limited monopoly to allow them
`control of areas outside the monopoly,” and extends to any
`situation implicating “the public policy embodied in the grant of a
`copyright.” A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004,
`1026 (9th Cir. 2001). Redbox alleges that Disney engaged in
`copyright misuse by (1) burdening consumers’ ability to sell the
`physical movie disc components of Combo Packs by imposing
`restrictive license terms on the download codes, (2) impinging upon
`distributors’ first-sale rights by preventing downstream sales to
`Redbox, and (3) restricting the resale of digital codes without
`purchasers’ assent. (FAC ¶¶ 109-112.) None of these theories is
`viable.
`First, the license terms applicable to download codes allow
`Combo Pack purchasers and recipients to enjoy digital access
`regardless whether they keep or dispose of the physical discs.
`Digital access is conditioned not on possession of physical discs,
`but on the manner in which the redeemer acquired the download code.
`A Combo Pack owner who disposes of the discs is left with the same
`digital access rights he or she always enjoyed. Nor is a consumer
`who wishes to access a digital Disney movie required to purchase
`discs. As the FAC acknowledges, consumers can access movies
`digitally through services such as iTunes. (FAC ¶ 10.)
`Second, an agreement between Disney and its distributors to
`forbid downstream sales to Redbox does not infringe upon the
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`Case 2:18-cv-00677-DDP-AGR Document 106 Filed 07/17/19 Page 17 of 23 Page ID #:650
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`distributors’ first sale rights.13 “That the purchasers of
`copyrighted goods can agree to limit their commercial conduct
`through contract is undeniable.” Estate of Graham v. Sotheby's,
`Inc., 178 F. Supp. 3d 974, 983 (C.D. Cal. 2016), reversed in part
`on other grounds by Close v. Sotheby's, Inc., 894 F.3d 1061 (9th
`Cir. 2018), (citing United States v. Wise, 550 F.2d 1180, 1187 n.
`10 (1977) (“If the vendee breaches an agreement not to sell [a]
`copy, he may be liable for the breach but he is not guilty of
`infringement.”)); see also Metro-Goldwyn-Mayer Studios, Inc. v.
`Grokster, Ltd., 454 F. Supp. 2d 966, 997 (C.D. Cal. 2006) (“The
`right to exclude is inherent in