Disney Beats Antitrust Claim, But Must Face False Advertising Over Movie Download Codes

Black Panther -Letitia Wright-Publicity -H 2018
Courtesy of Marvel Studios

As streaming services like Netflix and Hulu have ascended, traditional players in entertainment have done all sorts of crazy things to keep up. Take Disney and Redbox, which have been in the throes of a legal battle for almost two years — one that witnessed a new decision on Thursday.

The decline of the home entertainment market caused Disney to begin selling "combo packs" comprised of a Blu-ray disc, a DVD and a code allowing the download of popular films such as Star Wars and Black Panther.  The decline of DVD rentals then caused Redbox to also look for a new product. The company begin using its kiosks to disassemble Disney's "combo packs" and re-sell the codes separately. Disney insisted in a lawsuit that this activity amounted to a breach of contract and a violation of copyright law. Redbox responded that that Disney was engaging in copyright misuse to protect its own coming streaming service. 

Round one ultimately went to Disney.

Although Disney was forced to modify restrictive licensing terms on the "combo packs," a judge concluded that Disney hadn't overextended its copyright control. Disney won an injunction against Redbox

But that didn't end the case because among other things, Redbox had counterclaims premised on the way that Disney had allegedly made misrepresentations and stifled competition in an effort to dissuade Redbox's activity in the marketplace. Specifically, Redbox accused Disney of pressuring distributors into refusing to sell retail copies of Disney titles to Redbox. Additionally, Redbox accused Disney of telling consumers false things in the "combo pack" packaging as well as its website.

U.S. District Court Judge Dean Pregerson throws out most of these counterclaims in a new decision, but not all.

With respect to an alleged violation of Section 1 of the Sherman Antitrust Act, the judge finds that Redbox hasn't demonstrated the anticompetitive effects from Disney's activity in the home entertainment market.

Redbox's complaint, he writes, fails to include "any concrete, non-conclusory allegations about how retailers other than Redbox are harmed by Disney's refusal to deal with Redbox."

The judge also won't declare the language on Disney's combo packs as unenforceable 

"Although the [amended complaint] 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," states the decision. "This allegation of surprise, Redbox argues, is sufficient to satisfy the procedural unconscionability element of the defense. The court disagrees. As the [complaint] acknowledges, the Combo Pack boxes, which consumers encounter before they ever reach the websites, state that 'codes are not for sale or transfer.'  It is not plausible, therefore, that consumers are surprised when they see similar terms on the redemption websites."

The decision also rejects copyright misuse and tortious interference claims ("[T]here is nothing inherently improper with Disney entering into restrictive agreements with its distributors") before getting to one claim that Redbox definitely can pursue — false advertising under the Lanham Act.

According to Redbox, Disney falsely stated that it owns all download codes, which can only be redeemed by recipients of combo packs.

"Although Redbox consumers do not ever encounter Disney’s Combo Pack packaging, code purchasers cannot redeem download codes without viewing Disney’s redemption website terms, including representations that Disney owns the download codes and that codes cannot be redeemed by standalone purchasers," writes Pregerson. "Disney argues that these representations cannot lead to lost sales for Redbox unless a consumer “determines that Redbox is engaged in unlawful conduct... and decides not to buy additional Codes from Redbox... That appears, however, to be precisely what Redbox alleges. Redbox has, therefore, alleged statutory standing under the Lanham Act.”

Here's the full decision.