C. DARNELL JONES, II, District Judge.
Pending before the court is a motion to dismiss, (Doc. No. 23), filed by defendants SESAC Holdings Inc., SESAC Inc., and SESAC LLC, (collectively "SESAC") seeking dismissal of Count I (Horizontal Price Fixing), Count II (Group Boycott/Refusal to Deal), and Count III (Monopolization) of the complaint on various grounds. First, defendant moves to dismiss Counts I and II on the ground that plaintiff failed to adequately allege that SESAC's purportedly anticompetitive conduct flowed from an agreement between SESAC and its affiliates. Defendant argues in the alternative that, even if the court does find an agreement between SESAC and its affiliates, the alleged conduct is not unlawful per se or under the rule of reason. Finally, defendant seeks dismissal of Count III on the ground that plaintiff failed to adequately plead exclusionary conduct or harm to competition. Plaintiff filed a response to the motion on February 8, 2013, (Doc. No. 26), defendant filed a reply on March 6, 2013, (Doc. No. 29), and the court heard oral argument on March 18, 2014. After a thorough review of the record, the court will
This case arises out of SESAC's allegedly anticompetitive copyright licensing practices. SESAC is one of three performing rights organizations ("PROs") that operate in the United States, the two others being the American Society of Composers, Authors and Publishers ("ASCAP") and Broadcast Music, Inc., ("BMI").
Plaintiff RMLC is a 501(c)(6) non-profit organization
SESAC is the only PRO in the United States that is not subject to a consent decree concerning its licensing practices. (Compl. at 8.) In 1941, the Department of Justice (DOJ) brought an antitrust claim against ASCAP, alleging that its blanket license was an illegal restraint of trade under § 1 of the Sherman Act. See Meredith Corp. v. SESAC LLC, 1 F.Supp.3d 180, 196-97, 2014 WL 812795, *11
(Compl. at 9.)
Because SESAC is not subject to a consent decree or other licensing regulation, plaintiff avers that it has a competitive advantage in the music licensing industry and has engaged in unlawful, anticompetitive licensing practices. First, it offers its repertory to customers exclusively in blanket license format and allegedly "refuses to offer any viable alternative to its blanket license." (Compl. at 20.) Moreover, SESAC obscures the works in its repertory, thereby making it impossible for radio stations to determine whether the music they air is part of SESAC's license. (Compl. at 11.) Although SESAC's website contains a list of its works, it disclaims "SESAC, Inc. makes no representations and/or warranties with respect to the accuracy or completeness of the information," and plaintiff alleges that the database "is updated regularly and may change on a daily basis." (Compl. at 11-12.) Moreover, the search feature does not scan for "advertising jingles (e.g., the five-note McDonald's advertising jingle), all of which effectively renders the search feature useless." (Compl. at 11, 12.) Even if the list were accurate, plaintiff points out, SESAC only allows "search[es] for one work at a time and requires the user to know the precise name of the song, writer, publisher, or artist for a given work." (Compl. at 11.) "Entering the name of a single writer or publisher, for example, can return numerous results and require further review of multiple levels of data and/or numerous additional confirmatory searchers to find a specific work or to attempt to determine that it is not listed." (Compl. at 11.)
Plaintiff also alleges that SESAC has compiled a critical mass of must-have, copyrighted works that radio stations cannot
Plaintiff contends that SESAC's licensing practices are anticompetitive in a number of ways. First, SESAC's strategy of bundling together must-have works makes the SESAC license indispensable. Its blanket license has allegedly generated monopolistic synergy: the blanket license is more indispensable to customers than the sum of its parts. Plaintiff argues that SESAC's affiliates are unwilling to directly license to stations because they can earn a greater profit by licensing through SESAC. Moreover, SESAC's reliance on de facto exclusive dealing arrangements all but ensures that its affiliates will continue to license exclusively through SESAC. Therefore, SESAC's actions allegedly destroy competition between SESAC and its affiliates.
RMLC also alleges that SESAC's licensing policies destroy competition between SESAC and other PROs. (Compl. at 14.) Because BMI and ASCAP are subject to consent decrees, they "must accept all qualified music composers and producers as affiliates" and must offer consumers a genuine choice between a blanket license
(Compl. at 14.)
In this vacuum of competition, plaintiff alleges that SESAC has been able to raise the price for its blanket license considerably in the past several years without expanding the size or enhancing the quality of its repertory. (Compl. at 16, 24.) Since 2009, SESAC has increased the price of the blanket license by a compounded rate of 8% to 20% a year for analog and web-site broadcasting. (Compl. at 24.) As for digital radio broadcasting, SESAC has raised prices by at least 5% a year. (Compl. at 24.) Plaintiff claims, "[n]one of the fee increases that RMLC's members have been forced to pay is tied to growth in the size or popularity of the SESAC repertory." (Compl. at 24.) These price increases have allegedly harmed terrestrial radio stations by forcing them to allocate an ever-expanding portion of their revenue to pay for SESAC's license. (Compl. at 22-23.)
RMLC filed the above-captioned lawsuit on October 11, 2012, seeking declaratory and injunctive relief on behalf of its member radio stations under § 1 and § 2 of the Sherman Antitrust Act (15 U.S.C. §§ 1 & 2) and § 16 of the Clayton Act (15 U.S.C. § 26). (Doc. No. 1.) The complaint sets forth three counts: Horizontal Price Fixing (Count I), Group Boycott/Refusal to Deal (Count II), and Monopolization (Count III). (Doc. No. 1.) On December 17, 2012, defendant SESAC filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), (Doc. No. 23), and plaintiff filed a response on February 8, 2013. (Doc. No. 26.) Plaintiff subsequently filed a motion for preliminary injunction, (Doc. No. 30), which this court denied. (Doc. No. 68.) Defendant's motion to dismiss has been fully briefed and is ripe for disposition.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir.2008) (internal quotation and citation omitted). After the Supreme Court's decision in Bell Atl. Corp. v. Twombly, "[t]hreadbare recitals of the elements of a cause of action, supported by
Given the relative complexity of this case, it is worth clarifying at the outset the specific conduct that plaintiff condemns as unlawful under § 1 and § 2 of the Sherman Act. The complaint is somewhat vague in this department. At oral argument, defendant argued that plaintiff's principal allegations target SESAC's blanket license. (Transcript of Oral Argument at 8.) Plaintiff disagreed:
(Transcript of Oral Argument at 26-27.)
After thoroughly reviewing the complaint, the court believes that plaintiff's § 1 and § 2 claims are based on the confluence of four of SESAC's licensing practices: SESAC's blanket license (and its refusal to offer other licensing options), its procurement of a critical mass of must-have works, its de facto exclusive dealing contracts with its affiliates and its lack of transparency as to the works in its repertory.
SESAC moves to dismiss Counts I and II of the complaint on alternative grounds, the first being that plaintiff has failed to allege an agreement between and among SESAC's affiliates and the second being that plaintiff has failed to plead that, even if there was an agreement, the object of that agreement was unlawful. Because plaintiff has failed to plausibly allege agreement, the court will not reach the merits of the second matter.
Section 1 of the Sherman Act provides, "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1. Section I "does not prohibit all unreasonable restraints of trade but only restraints effected by a contract, combination, or conspiracy." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 553, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 775, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984)). "[T]he crucial question is whether the challenged anticompetitive conduct stems from independent decision or from an agreement, tacit or express." Id. (quoting Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 540, 74 S.Ct. 257, 98 L.Ed. 273 (1954)). "While a showing of parallel business behavior is admissible circumstantial evidence from which the fact finder may infer agreement, it falls short of conclusively establishing agreement or ... itself constituting a Sherman Act offense." Id. (quoting 346 U.S. at 540-41, 74 S.Ct. 257).
Of course, the Federal Rules require a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8. The Supreme Court stated in Twombly, "[a]sking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement." 550 U.S. at 556, 127 S.Ct. 1955. In reconciling the Federal Rules with the Twombly Court's jurisprudence concerning conscious parallelism, courts must be mindful of false inferences:
Id. at 555, 127 S.Ct. 1955.
Count I of the complaint states a horizontal price fixing claim under § 1 of the Sherman Act. (Compl. at 25.) The Third Circuit has defined horizontal price fixing as an agreement between "competitors at the same market level ... to fix or control the prices they will charge for their respective goods or services." In re Flat Glass Antitrust Litig., 385 F.3d 350, 356 (3d Cir.2004). The term "horizontal price fixing" designates a price agreement between direct competitors, not successive entities in a supply chain, as in the case of an agreement between manufacturer and retailer. Texaco Inc. v. Dagher, 547 U.S. 1, 6, 126 S.Ct. 1276, 164 L.Ed.2d 1 (2006). The relevant inquiry, therefore, is whether SESAC entered into an agreement with its affiliates, either express or tacit, the object of which was to fix the price of SESAC's blanket license. As for Count II, a group boycott or refusal to deal is "a concerted refusal to deal on particular terms with [customers]." F.T.C. v. Indiana Fed'n of Dentists, 476 U.S. 447, 458, 106 S.Ct. 2009, 90 L.Ed.2d 445 (3d Cir.1986).
Plaintiff argues that SESAC has conceded in its brief in opposition that it had an agreement with its affiliates. To be sure, SESAC does acknowledge that it had licensing agreements with its affiliates: "SESAC and each affiliate do agree, of course, that SESAC may license the affiliate's copyrights." (Pl. Brief at 15-16.) However, plaintiff's § 1 claims are based on more than barebones licensing agreements. See supra at 9-10. The complaint alleges price fixing and group boycott violations, and neither party seriously contends that licensing agreements in their most basic form constitute price fixing or group boycotts. Therefore, plaintiff is incorrect
In this case, plaintiff argues that SESAC orchestrated a hub-and-spoke conspiracy, a form of agreement in which one party — the hub — facilitates agreement among a number of other parties — the spokes — which are usually organizations in the hub's supply chain. (Pl. Brief at 17-21.) A hub-and-spoke conspiracy requires agreements between each spoke and the hub and between and among each of the spokes themselves. Howard Hess Dental Labs., Inc. v. Dentsply Intern., Inc., 602 F.3d 237, 255 (3d Cir.2010) ("In other words, the `rim' connecting the various `spokes' is missing."). After reviewing the allegations of agreement and the parties' respective briefs, the court has concluded that plaintiff has failed to allege sufficient facts from which the court can draw a plausible inference of a hub-and-spoke conspiracy between and among SESAC and its affiliates. In particular, the court agrees with defendants that plaintiff has failed to plead the rim of a hub-and-spoke conspiracy by failing to plausibly allege agreements among SESAC's affiliates.
Plaintiff relies primarily on In re Insurance Brokerage Antitrust Litigation to support its hub-and-spoke claim. 618 F.3d 300 (3d Cir.2010). In that case, the Third Circuit held that allegations that each spoke had a similar agreement with the hub was insufficient, standing alone, to infer that the spokes had agreed amongst themselves. Id. at 327. The court held that there must be allegations of a "plus factor" that permits the court to infer that the identical agreements between the hub and each spoke reflect concerted action among the spokes themselves instead of merely indicating parallel conduct of entities that happen to perceive the market in a common light. Id. at 321-22. One such plus factor — and the one on which plaintiff relies here — is "evidence that the defendant acted contrary to its interests." Id. at 322. Plaintiff states, "it is against SESAC's affiliates' self-interest to force RMLC's members to enter into blanket licenses with SESAC .... [t]he affiliates' self-interest should be to maintain maximum flexibility to negotiate the best possible license fee for their work, including the ability to negotiate direct licenses with individual RMLC members." (Compl. at 19.)
Plaintiff's plus-factor argument fails for two reasons. First, it incorrectly presumes that SESAC's affiliates prefer licensing flexibility over the high royalty and efficient licensing benefits that SESAC offers its affiliates. SESAC's licensing agreements, even when viewed in the light most favorable to plaintiff, do not appear to be against the affiliates' self-interest. PRO licensing generally provides a number of economic benefits over direct licensing, as noted by the Supreme Court in Broad. Music, Inc. v. Columbia Broad. Sys., Inc.:
441 U.S. 1, 20-21, 99 S.Ct. 1551, 60 L.Ed.2d 1 (1979)
Even apart from the larger benefits of PROs, SESAC offers its affiliates higher profits and greater exclusivity than they could achieve through alternative forms of licensing.
Moreover, although plaintiff alleges that SESAC enters into de facto exclusive dealing agreements with its affiliates (indicating they are contractually precluded from direct licensing), a deeper investigation into plaintiff's allegations demonstrates that SESAC's affiliate agreements do not preclude direct licensing. First, plaintiff alleges that SESAC withholds royalties from affiliates that license directly. Second, plaintiff claims that SESAC refuses to offer carve-out rights to radio stations for musical works obtained directly from its affiliates. As to the first point, plaintiff alleges, "SESAC requires its affiliates that directly license to `notify SESAC in writing within 10 days of the license being granted and also provide a copy of the license. Royalties that are otherwise payable will not be paid to performances that are direct licensed.'" (Compl. at 20.) Far from uniformly precluding direct licensing, this provision merely demonstrates that SESAC is unwilling to pay royalties to an affiliate that chooses not to use its services. SESAC clearly has a legitimate business interest in maintaining a viable business model, one that would be undermined if affiliates were able to directly
Defendant SESAC moves to dismiss Count III of the complaint on the grounds that plaintiff failed to plead exclusionary conduct or harm to competition. Section 2 of the Sherman Act makes it unlawful to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations." 15 U.S.C. § 2. Monopolistic power is not itself prohibited by the terms of the Sherman Act, only the procurement or maintenance of monopoly power through what is commonly referred to as anticompetitive conduct.
As noted above, a § 2 claim requires a party to allege that the defendant possesses monopoly power. Monopoly power is defined as "the power to control prices or exclude competition." United States v. Grinnell Corp., 384 U.S. 563, 571, 86 S.Ct. 1698, 16 L.Ed.2d 778 (1966). A party may satisfy its obligation to plead monopoly power directly, by alleging that the defendant can raise prices without the fear of competitors raising output and driving down prices, or indirectly, by showing that the defendant possesses "a dominant share in a relevant market, and that significant `entry barriers' protect that market.'" Broadcom Corp., 501 F.3d at 307. Therefore, a party need only plead a relevant market if the complaint relies on circumstantial evidence of monopoly power. Id.
The parties discuss the relevant market at length throughout their briefs. Plaintiff's position is that the relevant market "is licenses to the copyrighted musical compositions and performances in SESAC's repertory" because, as plaintiff repeatedly suggests, defendant has procured
Despite the parties' compelling definitions of the relevant market, the court need not settle the issue at this stage because plaintiff directly alleges sufficient facts from which the court can make a plausible inference that defendant possesses monopoly power. For example, plaintiff pleads, "SESAC has profitably and sustainably maintained exorbitant prices that are far greater than those charged by ASCAP and BMI, and has done so without suffering a loss of sales." (Compl. at 16.) Furthermore, the complaint alleges that SESAC has raised prices from 8% to 20% each year since 2009 without any contemporaneous increase in the size or popularity of its repertory. (Compl. at 24.) These allegations directly allege monopoly power, so plaintiff has met its burden as to this element.
Monopoly power is not itself unlawful under the Sherman Act. Rather, monopoly power is only unlawful when it has been acquired or maintained by exclusionary conduct "as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." Broadcom Corp., 501 F.3d at 306-07. "Anticompetitive conduct may take a variety of forms, but it is generally defined as conduct to obtain or maintain monopoly power as a result of competition on some basis other than the merits." Id. The Third Circuit has concisely described anticompetitive conduct as follows:
West Penn Allegheny Health Sys., Inc. v. UPMC, 627 F.3d 85, 108-09 (3d Cir.2010).
Defendant insists that plaintiff's exclusionary conduct allegations are without
Defendant's first argument strains credibility. SESAC's affiliates are both actual suppliers and potential competitors, and defendant fails to convince the court that, in the absence of its allegedly monopolistic conduct, SESAC's affiliates would not compete with SESAC via direct licensing. In fact, plaintiff's complaint alleges that the only reason SESAC's affiliates do not directly license is because SESAC's monopolistic conduct allows it to charge supracompetitive prices for its blanket license, which it shares with its affiliates. Moreover, defendant's argument completely ignores ASCAP and BMI as potential competitors. Both of these PROs provide the music industry similar services as SESAC, and plaintiff adequately alleges that they could compete for SESAC's affiliates in the absence of defendant's allegedly anticompetitive conduct. As such, defendant's argument is without merit.
As to defendant's second argument, the court acknowledges that defendant's conduct is not exclusionary in the sense that SESAC contractually forces its affiliates to utilize its services or threatens with legal sanctions those who contemplate taking their business elsewhere. To be sure, SESAC utilizes a carrot rather than a stick approach to retaining affiliates. According to the complaint, SESAC offers its affiliates higher profits, and that retention strategy appears to be highly successful. (Compl. at 2, 18.) By all accounts, SESAC's affiliates appear to be more than satisfied with SESAC's allegedly "exclusionary conduct." Plaintiff acknowledges that less than one percent of its affiliates have ever left. (Compl. at 14, 17.) However, the litmus test for exclusionary conduct is not the financial well-being of competitors. Rather, this element focuses solely on the competitive process, not on competitors. Moreover, as noted above, SESAC's argument once again ignores the possibility that ASCAP and BMI could compete with SESAC in the absence of its allegedly monopolistic conduct.
The complaint cogently portrays how SESAC allegedly obtained and preserves its monopoly power through exclusionary conduct, not "growth or development as a consequence of a superior product, business acumen, or historic accident." Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 306-07 (3d Cir.2007). Plaintiff alleges that SESAC excludes competitors by obtaining a critical mass of must-have works, selling them exclusively in the blanket license format, discouraging direct licensing by refusing to offer carve-out rights and obscuring the works in its repertory. The court believes that plaintiff has sufficiently pleaded that these licensing practices constitute exclusionary conduct when practiced by a monopolist such as SESAC. ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 270 (de facto exclusive dealing as cognizable cause of action); U.S. v. Dentsply Intern., Inc., 399 F.3d 181, 193 (3d Cir.2005) (same). Moreover, the court believes that plaintiff has sufficiently pleaded that SESAC's lack of transparency exacerbates the exclusionary nature of
It is true, as defendant points out, that the terms of SESAC's contracts with its affiliates do not expressly exclude direct licensing. As a practical reality, however, the complaint contains sufficient allegations that SESAC has taken advantage of its position as the only non-regulated PRO by paying its affiliates supracompetitive profits and refusing to offer radio stations carve-out rights for copyrights obtained directly from its affiliates. Even in the absence of explicit contractual language, plaintiff's allegations establish that SESAC has effectively forged exclusive dealing relationships with its affiliates. See ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 270 (3d Cir.2012) (transactions that were "technically only a series of independent sales" could be exclusive dealing); U.S. v. Dentsply Intern., Inc., 399 F.3d 181, 193 (3d Cir.2005) (circumstances surrounding transactions and independent conduct of monopolist can constitute exclusive dealing arrangement as effectively as an explicit agreement).
As a last resort, SESAC argues that copyright law, by definition, establishes a legal monopoly to artistic works. (Def. Brief, at 26.) Plaintiff, however, does not allege that SESAC violated the Sherman Act merely by obtaining the rights to copyrighted works, nor could it. Such a position would clearly espouse an untenable reading of the Sherman Act. Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965). The Supreme Court has said:
Id. (quotation omitted).
Instead, plaintiff alleges that SESAC violated the Sherman Act by procuring a critical mass of must-have works, licensing those works exclusively in blanket license format, creating de facto exclusive dealing contracts and obscuring the list of works in its repertory. Therefore, defendant's argument is inapposite.
The hallmark of anticompetitive conduct is harm to competition, but the danger of anticompetitive conduct is harm to the consumer. The most common characteristics of unlawful monopolies are price increases, output decreases, and a deterioration in quality and service, all of which the antitrust laws seek to minimize. Babyage.com, Inc. v. Toys "R" Us, Inc., 558 F.Supp.2d 575, 583 (E.D.Pa.2008). That is precisely what plaintiff has alleged here. SESAC's anticompetitive conduct has driven up the price of copyright licenses and deteriorated the quality of service insofar as customers only have the option of purchasing a blanket license. The court believes that plaintiff has alleged a plausible claim for which relief can be granted under § 2 of the Sherman Act.
In light of the foregoing, the court has concluded that plaintiff has failed to state a plausible claim for which relief can be granted under Count I (Price Fixing) and Count II (Group Boycott/Refusal to Deal). Therefore, Defendants' motion to dismiss, (Doc. No. 23), will be
(Compl. at 23-25.)
Plaintiff also alleges, "all of RMLC's members have signed an authorization form that permits RMLC to `institute ... in the name of all authorizing stations proceedings to establish reasonable fees and terms for such licenses.'" (Compl. at 25.) Because defendant has not challenged RMLC's standing, however, the court will address the matter no further.
(Compl. at 20.)