Wednesday, November 23, 2005
Appeals Court Revives Suit Against Blockbuster by Independent Video Rental Companies
By DAVID WATSON, Staff Writer
This district’s Court of Appeal yesterday revived an unfair competition suit against Blockbuster Inc. in which independent video retailers claimed the company negotiated with film studios to obtain secret discounts on the movies it purchased for rental.
The court’s Div. Eight said Los Angeles Superior Court Judge Victoria G. Chaney was right to dismiss the claim by some 250 independent video retailers that the arrangement constituted an illegal conspiracy under the federal Cartwright Act, which bars collusion in restraint of trade. But Justice Paul Boland, writing for the court, said Chaney erred in dismissing claims under California’s Unfair Practices Act, which bans secret rebates, unearned discounts, and the secret extension of special privileges not available to similarly situated purchasers.
The independent 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, challenging agreements under which Blockbuster obtained videos for rental at a reduced rate in return for agreeing to purchase the studios’ entire output and share rental revenues with them.
The Cartwright Act cause of action failed because the evidence the retailers presented did not exclude the possibility that the five studios acted independently in reaching their agreements with Blockbuster, and in deciding not to offer the same terms to the plaintiffs, Boland said. Nor, he said, were they able to meet the requirement under federal law of showing that the studios acted contrary to their own economic interest.
But the justice said Chaney made several errors in granting summary judgment on the independent retailers’ state law claims.
Chaney was wrong to find that, as a matter of law, a UPA plaintiff must show that a purchase was made on “like terms and conditions” in order to state an actionable claim that a competitor has received a secret rebate or unearned discount, Boland explained.
She also erred, the appellate jurist said, in finding that the plaintiffs had failed to raise questions of disputed fact about whether the allegedly unearned discounts were “secret” as required by the state 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,” Boland declared.
In addition, the justice said, Chaney “improperly applied” a portion of the UPA which permits suppliers to charge different prices to buyers in different “functional classifications,” such as wholesalers and retailers. Blockbuster “did not perform any function justifying a differential in price,” Boland wrote.
Finally, he explained, Chaney “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 the plaintiffs’ claim under the UPA.
Boland noted that at the time Blockbuster allegedly began negotiating the deals with the studios it controlled about a quarter of the video rental market — the largest share of any individual retailer. The independents retailers shared a little over half the market.
At that time, the appeals court pointed out, none of the arrangements available for purchasing videos from the studios allowed retailers to achieve “copy depth” on new releases, that is, a quantity of copies sufficient to satisfy the brief spike in initial demand. As a result, prospective renters were often leaving stores in frustration without renting anything.
Redstone described Blockbuster’s business as “tanking” in 1997, while the independent retailers — though also struggling — were increasing their market share.
Blockbuster’s revenue sharing scheme guaranteed the studios the same or greater income from their home video products, but allowed the company to obtain enough copies of new videos to meet the demand which immediately followed release, and Blockbuster was able to raise its market share to 40 percent by 2001.
A challenge to the arrangement by independents under the Sherman Act was rejected by a federal judge in Texas in 2002 and that ruling was affirmed by the Fifth U.S. Circuit Court of Appeals.
Chaney granted summary judgment for the defendants in the California litigation after a day-long hearing in 2003.
Attorney General Bill Lockyer’s office filed an amicus brief supporting the plaintiffs’ appeal, arguing that the trial judge failed to consider expert testimony that the studios could have offered them terms similar to those negotiated by Blockbuster. But Boland said the plaintiffs failed to direct Chaney’s attention to that testimony, which was part of the record in the Texas litigation.
“The trial court cannot be expected to address expressly every piece of evidence contained in a voluminous record, much less address evidentiary items on which a party has not relied to create a disputed issue of material fact,” Boland commented.
The justice said that while Chaney was correct in finding that Blockbuster and the plaintiffs were not similarly situated purchasers — Blockbuster was agreeing to buy all the movies the studios produced, and the independent retailers were not — the trial court misapprehended the significance of that fact under the UPA.
The language of Business and Professions Code Sec. 17045 referring to “privileges not extended to all purchasers purchasing upon like terms and conditions” does not apply to the first clause of the section, which bans the “secret payment or allowance of rebates, refunds, commissions, or unearned discounts,” Boland reasoned.
“If...a purchaser has no choice but to purchase ‘upon fundamentally different terms and conditions,’ because the terms given to the favored purchaser are neither available to nor known by the disfavored purchaser, it is difficult not to conclude that some form of price discrimination may have occurred,” the justice wrote. “—.In other words, it is not necessary to purchase ‘upon like terms and conditions’ in order to state a claim that a competitor received a secret rebate or unearned discount. If a supplier were free to give secret rebates or unearned discounts to customers purchasing under Plan A, unbeknownst to customers purchasing under significantly different Plan B, the very purpose of the prohibition on price discrimination would be undermined....”
Justice Laurence D. Rubin and Presiding Justice Candace Cooper concurred in the opinion authored by Boland.
The case is Eddins v. Redstone, B168079.
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