California Supreme Court Denies Review in Blockbuster Case

2/16/2006
Client Alert

On February 8, 2006, the California Supreme Court denied review of the California Court of Appeal’s decision in Eddins v. Redstone, 134 Cal. App. 4th 290 (2005).  Eddins is significant for its rulings under the so-called "secret rebate" provision of California’s Unfair Practices Act ("UPA"), California Business and Professions Code section 17045. 

Eddins involved a challenge by independent video rental stores to arrangements whereby Blockbuster made long-term commitments to take the full line of titles from motion picture studios and to provide the studios a percentage of revenues in exchange for reduced prices.  The plaintiffs alleged that the motion picture studios did not offer them these arrangements, and thus violated section 17045, California’s unfair competition law, California Business and Professions Code section 17200 (the "UCL"), and the Cartwright Act (California’s antitrust law). 

Eddins affirmed summary judgment for Blockbuster and the studios on the antitrust claims, but reversed as to plaintiffs’ section 17045 and UCL claims.  The Eddins court’s holding on the section 17045 claim is directly contrary to the Fifth Circuit’s conclusion in Cleveland v. Viacom Inc., 73 F. App’x 736 (5th Cir. 2003), which addressed the same arrangements. 

Section 17045 and the UCL

"Like terms and conditions."  Section 17045 of the UPA prohibits two types of unfair pricing: (1) secret payments, rebates, or unearned discounts and (2) secret extension of special services or privileges that are not extended to all purchasers purchasing upon like terms and conditions.[fn1]  At issue in Eddins was whether the last phrase—"not extended to all purchasers purchasing upon like terms and conditions"—qualified both the "secret payments" and the "secret extension of special services" clauses, or only the latter clause.  The Court of Appeal reversed the trial court’s decision and held that the phrase qualified only the latter clause.  Accordingly, the fact that Blockbuster purchased on different terms and conditions was not a defense to the plaintiffs’ "secret rebate" claim. 

The Court of Appeal’s conclusion is precisely the opposite of that reached by the Fifth Circuit in Cleveland, where it held that both the UPA and the Robinson-Patman Act prohibited price discrimination "only where customers are purchasing on like terms and conditions." 

When is a rebate "secret"?  Section 17045 requires that the payment, rebate or unearned discount be "secret."  In Eddins, the court acknowledged that where the "essential terms" of a rebate or unearned discount are known to plaintiffs and the public, the secrecy element of a UPA claim cannot be met.  The defendants relied on evidence that the plaintiffs and the public had knowledge of Blockbuster’s "copy depth" (i.e., the number of copies for a particular title), the price per video copy, and the studios’ revenue-sharing to argue that the essential terms were not secret.  The Eddins court, however, relied on plaintiffs’ argument that other "essential terms" of the agreement were not known and held that grant of summary judgment on the issue of "secrecy" was improper.

The Eddins decision thus suggests that to defeat a claim of "secrecy" on summary judgment, a defendant must demonstrate that all "essential terms" of the agreement were generally known.  This appears to be a more demanding standard than is suggested by prior case law and commentary.

Functional classification defense.  The courts have created a "functional classification" defense under section 17045 akin to that under the Robinson-Patman Act.  Thus, a supplier may lawfully offer different prices or other benefits to customers where the differential is based on the favored customer’s performing different functions or services and absorbing the associated risks and costs.  In Eddins, defendants argued that the functional classification defense barred plaintiffs’ claims because Blockbuster was a "retailer," which was distinct from the "distributors" for the independent retailers.  The Court of Appeal rejected this argument, noting that usually the distributor gets a discount, not the retailer, and that defendants’ argument "literally turn[ed] the [UPA], and the concept of price discrimination, on its head."  The court found that the studios had failed to identify any function or service that the distributors for the independent retailers did not perform and were thus precluded from obtaining summary judgment on the functional classification defense.

"Meeting competition" defense.  Unlike other provisions of the UPA, there is no statutory "meeting competition" defense to a claim under section 17045.  However, the California courts have held that evidence of meeting competition can be sufficient to negate required elements of a violation, particularly the requirement of a "tendency to destroy competition."  The Eddins court reversed the trial court’s grant of summary judgment on this issue.  It reasoned that whether a secret rebate or unearned discount tends to destroy competition is a "factual question" that must consider evidence of "harm to competition in the secondary line of commerce," that is, the line of commerce between Blockbuster and its competitors.  The court found that the trial court had erred in granting summary judgment to the studios without considering the harm to competition between Blockbuster and the independent retailers.

For these reasons, the Court of Appeal reversed the grant of summary judgment both on the section 17045 claim and on the UCL claim. 

Antitrust Claims

Following the summary judgment standard announced in Aguilar v. Atl. Richfield Co., 25 Cal. 4th 826 (2001), the court rejected plaintiffs’ claim that the movie studios conspired to refuse distributors the same output revenue-sharing terms that were provided to Blockbuster (horizontal conspiracy), or that Blockbuster had conspired with each of the movie studios to do the same (vertical conspiracy).  Under Aguilar, the plaintiff had the burden of presenting evidence that "would allow a reasonable trier of fact to find in his favor on the unlawful-conspiracy issue by a preponderance of the evidence," which cannot be achieved by "[a]mbiguous evidence or inferences showing or implying conduct that is as consistent with permissible competition . . . as with unlawful conspiracy . . . ." 

The Court of Appeal also found that plaintiffs had failed to meet this burden.  There was no evidence supporting the elements of "conscious parallelism," which allows a conspiracy to be inferred from defendants’ "parallel" actions.  The court found that "[n]ot a single item of circumstantial evidence" existed to demonstrate that any of the defendants had "consciously" refused to offer output revenue-sharing agreements because of any other studios’ refusal to do so. 

The Eddins court also rejected plaintiffs’ theory that the studios had acted against their self interest in denying the distributors the output revenue-sharing agreements.  Distinguishing the decision in Toys "R" Us, Inc. v. Fed. Trade Comm’n, 221 F.3d 928 (7th Cir. 2000), the court rejected plaintiffs’ theory that the studios’ refusal would create market power in Blockbuster, one of the studios’ largest customers, and that this market power would be against the studios’ interests.  Moreover, unlike Toys "R" Us, plaintiffs failed to provide evidence that Blockbuster agreed with or coerced the studios to withhold the terms and conditions from the purchasers’ competitors.  Plaintiffs’ evidence also failed to show any "plausible reason why the studios would conspire to favor Blockbuster by denying output terms to independents" or any other "plus factor" permitting the inference that the studios’ decisions were anything other than good-faith business judgments.

Accordingly, the Court of Appeal affirmed summary judgment for defendants on plaintiffs’ antitrust claims. 


Footnotes:

1: Section 17045 of the California Business and Professions Code provides in its entirety: "The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and where such payment or allowance tends to destroy competition, is unlawful."

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