Opinion
No. C 03-3948 WHA.
April 1, 2004
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS
INTRODUCTION
In this antitrust action, defendants move to dismiss plaintiff's complaint on numerous grounds. The primary issue, however, is whether a federal agency's establishment of royalty rates for copyrighted materials bars plaintiff's claims under the filed rate doctrine. This order holds that the filed rate doctrine applies and, thus, bars all of plaintiff's claims for the reasons discussed below.
STATEMENT
Plaintiff Webcaster Alliance, Inc., is a trade association whose members are engaged in the business of Internet radio, i.e., transmitting digitally over the Internet. Those who transmit digitally over the Internet are known as "webcasters." As with traditional radio stations, these webcasters have to obtain suitable content to attract listeners. As pertinent to the present motion, plaintiff's members are eligible for a statutory license for copyrighted materials under the Digital Millennium Copyright Act of 1998 ("DMCA").
The DMCA establishes a statutory right for webcasters to be eligible for a license for copyrighted sound recordings. 17 U.S.C. § 114(d)(2). This license is "compulsory" as to the copyright holders but "voluntary" as to the webcasters. The DMCA provides two means by which the royalty rates and terms for the compulsory license may be set. The first method is for the copyright owners and webcasters to voluntarily negotiate the rates and terms during a statutorily prescribed period. 17 U.S.C. § 114(f)(2)(A). Failing such voluntary agreement, the other method allows for the Librarian of Congress, upon the recommendation of a Copyright Arbitration Royalty Panel ("CARP"), to establish the rates and the terms. 17 U.S.C. § 114(f)(2)(B).
A CARP proceeding was instituted to establish royalty rates for webcasters, including plaintiff's members, who did not negotiate voluntary agreements with copyright owners. During the CARP proceeding, defendant Recording Industry Association of America, Inc. ("RIAA") acted as a negotiation agent on behalf of its members (First Am. Compl. ¶ 6). RIAA was at all relevant times (and still is) a trade association representing the corporate defendants Universal Music Group, Inc., Warner Music Group Inc., Bertelsemann Music Group, Inc., Sony Music Entertainment, Inc. and Capitol-EMI Music, Inc. During the CARP proceedings, RIAA submitted to the CARP a copy of its voluntary agreement with nonparty Yahoo, Inc., and 25 other voluntary agreements for consideration of what may constitute a reasonable market rate for licensing sound recordings ( see id. ¶¶ 9, 46).
The CARP found that RIAA developed a strategy in its voluntary negotiations with webcasters to establish "a high benchmark for later use as precedent, in the event a CARP proceeding were necessary" ( id. ¶ 45; see CARP Report reprinted as Def. Exh. 2 at 48). Accordingly, the CARP decided to give little weight to the 25 non-Yahoo agreements (CARP Report 51). It determined, however, that the Yahoo agreement reflected "reliable approximation of such rates in the marketplace we attempt[ed] to replicate" (CARP Report 74; see also First Am. Compl. ¶ 46). Accordingly, the CARP recommended rates partially based on the rates in the Yahoo agreement. It recommended a royalty rate of $0.0014 per performance to a single listener for basic webcasting services (CARP Report 77). Put differently, this rate would allow more than 700 performances for one dollar per listener.
The Librarian of Congress rejected in part the recommendation by CARP and instead set its own rates as the final rates (First Am. Compl. ¶ 8). The Librarian found that the fair market rate for licensing sound recordings was $0.0007 per performance per listener with an annual $500 minimum fee ( id. ¶ 9; see also Librarian's Determination of Reasonable Rates, 67 Fed. Reg. 45,240, 45,272 (Jul. 8, 2002)). This rate would allow more than 1400 performances for one dollar per listener.
These rates set by the Librarian of Congress are currently the subject of an appeal before the United States Court of Appeal for the District of Columbia (First Am. Compl. ¶ 50; Def. Br. 3). At the hearing, plaintiff admitted that its members did not participate in the underlying CARP proceeding. Plaintiff nor its members have chosen to participate in the appeal.
Following the publication of the Librarian's rates, many small webcasters objected to those rates as being too high. To provide relief from the Librarian's rates to these small webcasters, Congress enacted the Small Webcaster Settlement Act of 2002 ("SWSA"). Pub.L. No. 107-321, § 2(1), 116 Stat. 2780 (2002) (codified at 17 U.S.C. § 114). Among other things, the SWSA authorized the Librarian to designate SoundExchange, allegedly a subsidiary of RIAA, to set rates, terms and conditions and to enter into agreements on behalf of all copyright owners with small webcasters (First Am. Compl. ¶ 14). Any agreement entered by SoundExchange, in effect, became the industry-wide deal for all small webcasters ( id. ¶ 16). The SWSA, however, requires small webcasters who qualify under the conditions in the agreement to elect to be bound under the agreement negotiated by SoundExchange. 17 U.S.C. § 114(f)(5)(B). If small webcasters do not elect to participate, then the compulsory license under the Librarian's rates apply.
SoundExchange negotiated a licensing agreement with a trade association of small webcasters known as Voice of Webcasters ("VOW"). The VOW agreement provides, among other things, a royalty rate based on a percentage of revenue rather than the Librarian's rates which provides rate per performance ( id. ¶ 17). The VOW rates are allegedly excessive. Moreover, the VOW agreement contains other purportedly onerous requirements that is detrimental to the small webcasters ( id. ¶¶ 54-59).
Plaintiff filed this action to protest the "exclusionary licensing rates under both the LOC Rates and VOW Agreement" ( id. ¶ 18). Plaintiff alleged four causes of action: (1) unlawful restraint of trade by negotiating and setting anticompetitive rates in the Yahoo and VOW agreements under Section 1 of the Sherman Act, (2) monopolization by defendants who share a monopoly under Section 2 of the Sherman Act, (3) declaratory judgment for copyright misuse by refusing to license at reasonable terms, and (4) unfair competition under Section 17200 of California Business and Profession Code for allegedly anticompetitive royalty rates set by the Librarian (First Am. Compl. ¶¶ 67-89).
Defendants moved to dismiss plaintiff's complaint under numerous grounds. The parties presented extensive arguments at the hearing, mostly regarding plaintiff's antitrust claims. Upon careful consideration of the parties' submissions and arguments, this order finds most persuasive defendants' argument that the filed rate doctrine bars all of plaintiff's antitrust claims. Since this motion may be resolved primarily under the filed rate doctrine, this order finds unnecessary to resolve defendants' alternative grounds for dismissal.
ANALYSIS
1. LEGAL STANDARD.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests for legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Business v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Although materials outside of the pleading should not be considered, a court may consider all materials properly submitted as part of the complaint, such as exhibits to the complaint. See Hal Roach Studios, Inc. v. Richard Feiner and Co., 896 F.2d 1542, 1555 (9th Cir. 1990). It also may take judicial notice of "matters of public record." Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986).
All material allegations of the complaint are taken as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 340 (9th Cir. 1996). As such, a complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). However, "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim." Epstein v. Washington Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996). If dismissal is granted, leave to amend is only denied if it is clear that amendment would be futile and that deficiencies of the complaint could not be cured by amendment. See Noll v. Carlson, 809 F.2d 1446, 1448 (9th Cir. 1987).
2. FILED RATE DOCTRINE.
Defendants argue that all of plaintiff's claims arise out of plaintiff's discontentment with the Librarian's rates. Since a federal regulatory agency assigned to approve the rates determined the Librarian's rates, defendants argue that plaintiff's claims are barred by the filed rate doctrine. This order finds defendants' arguments persuasive.
The filed rate doctrine bars antitrust recovery by parties claiming injury from the payment of a filed or fixed rate. County of Stanislaw v. Pacific Gas Elec. Co., 114 F.3d 858, 862 (9th Cir. 1997). It applies both to federal antitrust actions and to state law causes of action relating to the rates established by federal agencies. Id. at 863. Although the doctrine has been criticized, the Supreme Court nevertheless affirmed the vitality of the doctrine that "has been an established guidepost at the intersection of the antitrust and interstate commerce statutory regimes for some 6 1/2 decades." Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409, 423 (1986). Even when there were allegations of fraudulent conduct during the regulatory proceedings, the Court upheld the rates approved by the regulatory agency as being reasonable. See Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246, 251-52 (1951).
In Montana-Dakota Utilities, the plaintiff's predecessor and the defendant entered into agreements that set the rates which were filed and accepted by the Federal Power Commission. At the time these inter-company agreements were executed, the two companies shared the same management through interlocking directorships and joint officers. Due to this interlocking management, the plaintiff alleged that the unreasonably high rates set under the inter-company agreement were obtained fraudulently. In addressing the fraud allegations, the Court focused on the gravamen of plaintiff's complaint, that is, the injury arising from the allegedly unreasonable rates being charged. Id. at 250. Then, the Court noted that the plaintiff has no right to reasonable rates except as established by statute. The same statute, however, vested the Federal Powers Commission with determining the rates. The Court resolved the conundrum by barring the plaintiff's claims ( id. at 251-52):
It cannot litigate in a judicial forum its general right to a reasonable, ignoring the qualification that it shall be made specific only by exercise of the Commission's judgment, in which there is some considerable element of discretion. It can claim no rate as a legal right that is other than the filed rate, whether fixed or merely accepted by the Commission, and not even a court can authorize commerce in the commodity on other terms.
We hold that the right to a reasonable rate is the right to the rate which the Commission files or fixes, and that except for review of the Commission's orders, the courts can assume no right to a different one on the ground that, in its opinion, it is the only or the more reasonable one.Montana-Dakota Utilities governs the present motion.
Plaintiff herein faces the same conundrum as the plaintiff in Montana-Dakota Utilities. Plaintiff herein seeks a license of copyrighted sound recordings on its own terms with a lower royalty rate. All of plaintiff's claims allege injury due to the royalty rates set by the licensing scheme under the DMCA and SWSA (First Am. Compl. ¶¶ 69-72, 76-78, 82, 89). Plaintiff alleges that the underlying Yahoo and VOW agreements set an inflated benchmark for reasonable royalty rates that small webcasters cannot afford. These royalty rates are alleged to be anticompetitive. Accordingly, plaintiff seeks an injunction "to restore competitive, conditions," that is, to adjudge that the royalty rates are not reasonable and enjoin enforcement of the royalty rates ( id. at 17).
Plaintiff, however, has no absolute right to a license for copyrighted sound recordings. Individual copyright owners have an absolute, statutorily granted right to refuse to license their works. See Stewart v. Abend, 495 U.S. 207, 228-29 (1990) ("nothing in the copyright statutes would prevent an author from hoarding all of his works during the term of the copyright"). Plaintiff can only extract a license from the corporate defendants due to the establishment of a statutory right under the DMCA and the SWSA.
The statutory scheme under the DMCA and the SWSA provides three different options for obtaining a license to webcasters. The first option is for the webcasters to enter into a voluntary agreement with the copyright holders. At the hearing, plaintiff admitted that he did not allege any facts in the complaint to infer that plaintiff's members approached the corporate defendants to obtain voluntary agreements. A second option is for the webcasters to elect to be bound under the rates and terms of the VOW agreement. The SWSA authorized the Librarian to designate a receiving agent to negotiate an agreement with small webcasters. The VOW agreement is the executed agreement between the Librarian's receiving agent SoundExchange and small number of webcasters. Plaintiff's members do not have to elect to be bound under that agreement. Evident from the complaint, they object to the VOW agreement. If plaintiff does not like the VOW agreement, then the DMCA provides the third and final option. The third option is for webcasters to obtain the statutory-provided license according to the rates and terms fixed by the Librarian. In sum, the statutory scheme requires copyright owners to provide a license to use its works under the terms of the VOW agreement or those set by the Librarian. Outside of these two options, the copyright owners do not have to license their works; plaintiff has no absolute right to a license outside the statutory scheme. To obtain the compulsory license, plaintiff is only required to pay the Librarian's rates.
This statutory scheme that allows plaintiff to have a compulsory license only authorizes the Librarian to determine the reasonableness of the royalty rates. The Librarian reviewed the recommendation of the CARP. During the underlying CARP proceeding, many webcasters (but not plaintiff) participated in the proceeding and asserted similar objection to the Yahoo agreement as plaintiff herein. 67 Fed. Reg. 45240, 45253-56 (Jul. 8, 2002). The Librarian reviewed these objections and rejected in part the CARP's recommendation. Instead of the recommended $0.0014 per performance per listener, the Librarian halved the recommended rate and set the royalty rate at $0.0007 per performance per listener. 37 C.F.R. § 261.3. As fixed by the Librarian, those rates are deemed reasonable, being approximately 700 performance for $1.00 per listener.
Plaintiff cannot now collaterally attack those rates through this proceeding. Nor can plaintiff raise now, as it did at the hearing, due process objections to the CARP or Librarian's proceeding to justify its or its members' failure to participate in the underlying proceedings. The D.C. Circuit has the exclusive review of the Librarian's decision. 17 U.S.C. § 802(g). As plaintiff noted in its complaint, the Librarian's rates have been appealed to the D.C. Circuit for review (First Am. Compl. ¶ 50). As represented by plaintiff, due process claims have also been raised in the appeal. Plaintiff's claims that attack the Librarian's rates as being unreasonable are barred by the filed rate doctrine. The Court is forbidden from undertaking such analysis. Montana-Dakota Utilities, 341 U.S. at 251-52.
Plaintiff argues that the filed rate doctrine is limited to the public utilities field and, thus, not applicable to intellectual property rights. Plaintiff cites no authority to support its position and none was found by the Court. Plaintiff's reliance on the subject matter (public utilities versus copyright) is misplaced. The underlying rationale for the establishment of a filed rate doctrine does not place any weight on the subject matter. Instead it focuses on the need for a uniform rate set by a federal agency. See Keogh v. Chicago Northwestern Railway, 260 U.S. 156, 163-64 (1922). In Keogh, the origin of the filed rate doctrine, the Supreme Court explained that the federal rate regulation was primarily intended to prevent the charging of discriminatory rates, an objective that would be disserved by affording antitrust recovery to some shippers but not all. Ibid. As such, this protection against discriminatory rate-setting applies to any field where a federal agency is authorized to establish reasonable rates for the industry. Such rationale is not limited to the public utilities field. Here, the Librarian was authorized to establish such rates and did so. The filed rate doctrine applies.
Plaintiff also contends that there is an antitrust injury independent from the Librarian's rates based on the Yahoo Agreement. First, plaintiff's own argument suggests that there is no independent injury but one deduced from the statutory licensing scheme. While arguing that the Yahoo agreement has an independent effect, plaintiff contends that "[p]laintiff's members have been deprived of a statutory right to license because Defendants have relied, both in the Librarian and in their voluntary arrangement strategy, on the Yahoo Agreement" (Opp. 6). Thus, their antitrust injury stems from "depriv[ation] of a statutory right to license," i.e., plaintiff's alleged inability to pay the Librarian's allegedly unreasonable rates. There is no independent effect of the Yahoo agreement alleged in plaintiff's argument. As admitted at the hearing, plaintiff did not make any allegations in the complaint that the Yahoo agreement was somehow used as the benchmark in voluntary negotiations between plaintiff's members and individual corporate defendants who are the copyright holders. Plaintiff also did not allege that the corporate defendants gave exclusive authority to RIAA. Second, regardless of plaintiff's arguments in its opposition, the complaint alleges antitrust injury solely based on the establishment of allegedly unreasonable royalty rates under the statutory licensing scheme. The statutory licensing scheme empowers the Librarian to set rates. The Librarian's rates are immune from attack by the filed rate doctrine. Third, plaintiff cannot assert an antitrust injury to the extent it now complains of governmental action in setting up the statutory scheme. See Sessions Tank Liners, Inc. v. Joor Mfg., Inc., 17 F.3d 295, 296 (9th Cir. 1994).
None of plaintiff's arguments is persuasive. Based on the allegations in plaintiff's own complaint, the filed rate doctrine applies. Plaintiff's asserted antitrust injury arises from the Librarian's rates established by the federal agency. As such, all of plaintiff's antitrust claims are barred by the filed rate doctrine. Accordingly, this order does not address defendants' alternative grounds for dismissal, e.g., statutory exemption under 17 U.S.C. § 114(e)(1), Noerr-Pennington immunity, and insufficient pleading.
3. UNFAIR COMPETITION CLAIM.
The filed rate doctrine also bars plaintiff's unfair competition claim under Section 17200 of the California Business and Profession Code. Plaintiff asserts in its complaint under this claim that plaintiff's members will suffer harm unless "Defendants are permanently enjoined from enforcing their copyrights on the basis of the anticompetitive royalty rates set forth in the LOC Rates" (First Am. Compl. ¶ 89). Thus, plaintiff only objects to the Librarian's rates under this claim. The filed rate doctrine applies both to federal antitrust actions and to state law causes of actions relating to rates established by federal agencies. County of Stanislaw v. Pacific Gas Elec. Co., 114 F.3d 858, 863, 866 (9th Cir. 1997). Nothing illegal has been alleged in addition to the antitrust claims. An unfair competition claim under Section 17200 requires allegations of an independent, unlawful action. Kentmaster Mfg. Co. v. Jarvis Prods. Corp., 146 F.3d 691, 695 (9th Cir. 1998) (citing Farmers Ins. Exchange v. Superior Court, 2 Cal.4th 377, 383 (1992)). To the extent the unfair competition claim is based on the same antitrust allegations, the state claim can properly be dismissed for the same reasons that the federal claims fail. Ibid.
4. COPYRIGHT MISUSE CLAIM.
The filed rate doctrine also undermines plaintiff's claim for copyright misuse. Plaintiff contends that defendants engaged in copyright misuse by "abus[ing] their dominance in the Sound Recordings Market by refusing to license their copyrights on commercially reasonable terms" (First Am. Compl. ¶ 92). Copyright misuse is a judicially created doctrine that is used to "prevent copyright holders from leveraging their limited monopoly to allow them control of areas outside [that] monopoly." A M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1026 (9th Cir. 2001). Thus, copyright misuse exists when plaintiff commit antitrust violations or enter unduly restrictive copyright licensing agreements. See In re Napster, 191 F. Supp.2d 1087, 1105 (N.D. Cal. 2002) (summarizing the law on copyright misuse).
Here, plaintiff cannot assert a violation of the antitrust laws as alleged in the complaint due to the filed rate doctrine. Moreover, there is no restrictive licensing agreement between plaintiff's members and defendants. Such allegation is foreclosed because plaintiff's claim is based on the defendants' purported refusal to license. The complaint, however, is void of any allegation that any of plaintiff's members approached defendants for a license and was refused. Even if defendants were approached, as stated above, the law would give the copyright holders an absolute right to refuse to license. Thus, plaintiff fails to allege any facts in support of this claim.
CONCLUSION
For the foregoing reasons, plaintiff's complaint is DISMISSED. It is, however, dismissed without prejudice to allow plaintiff to file an amended complaint if plaintiff can allege any unlawful act or injury that is not foreclosed by this order. Any such amended complaint must be filed within 20 days of the filing date of this order.