Arista Records LLC v. Lime Group LLC

532 F.Supp.2d 556

ARISTA RECORDS LLC; Atlantic Recording Corporation; BMG Music; Capitol Records, Inc.; Elektra Entertainment Group Inc.; Interscope Records; Laface Records LLC; Motown Record Company, L.P.; Priority Records LLC; Sony BMG Music Entertainment; UMG Recordings, Inc.; Virgin Records America, Inc.; and Warner Bros. Records Inc., Plaintiffs/ Counterclaim Defendants, v. LIME GROUP LLC; Mark Gorton; Greg Bildson; M.J.G. Lime Wire Family Limited Partnership, Defendants, and Lime Wire LLC, Defendant/Counterclaim Plaintiff.

No. 06 Civ. 5936(GEL).

United States District Court, S.D. New York.

December 3, 2007.

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Katherine B. Forrest, Cravath, Swaine & Moore LLP, New York, NY, (Kenneth L. Doroshow, Recording Industry Association of America, Washington, DC, on the brief), for, Plaintiffs and Counterclaim Defendants.

Charles S. Baker, Joseph D. Cohen, Porter & Hedges, LLP, (Lauren Handler, Porzio, Bromberg & Newman, Morristown, NJ, on the brief), for Defendants and Counterclaim Plaintiff.

OPINION AND ORDER

GERARD E. LYNCH, District Judge.

Plaintiffs/counter-defendants are thirteen major record companies that filed a complaint alleging copyright infringement under federal law and assorted claims under New York State law against defendants Lime Group LLC, its wholly-owned subsidiary Lime Wire LLC ("Lime Wire"), two officers of the corporate entities, and a limited partnership controlled by one of the officers. (Compl. ¶¶ 29-35.)¹ All defendants have answered the Complaint. In addition, defendant/counter-plaintiff Lime Wire filed antitrust counterclaims under sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1 and 2, and section 4 of the Clayton Act, 15 U.S.C. § 15, alleging that counter-defendants conspired through various illegal means to restrain trade and monopolize the market for the digital distribution within the United States of copyrighted sound recordings over the internet. Lime Wire also asserts ancillary counterclaims under New York State law for conspiracy in restraint of trade, deceptive trade practices, and tortious interference with prospective business relations. Counter-defendants now move pursuant to Fed. R.Civ.P. 12(b)(6) to dismiss Lime Wire's counterclaims. For the reasons discussed below, the motion will be granted.

BACKGROUND

The following facts are taken from Lime Wire's Restated First Amended Counterclaims ("FAC") (Doc. # 42), except where noted. All factual allegations in the FAC are assumed to be true for purposes of this motion. See Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310, 312 (2d Cir.1993).

I. Technological Advances in the Music Distribution Industry

Counter-defendants are thirteen major record companies that collectively own the rights to "the vast majority of copyrighted sound recordings sold in the United States." (Compl. ¶ 23.) Through exclusive recording contracts with artists and control over promotion and physical distribution channels, counter-defendants have become the dominant players in the music distribution industry. (FAC ¶¶ 22, 30.) Four record labels (the "Major Labels") — each of whom own distribution companies that are parties to this litigation — sell and distribute over 85% of all recorded music in the United States.² (Id. ¶ 22.)

Traditionally, the recording, duplication, and physical distribution of music to retailers and consumers required considerable resources that few individual artists could afford without the assistance of record companies in the music distribution industry. (Id.) With the development of the internet and new technology in the 1990s, however, the costs of recording and distributing music dropped significantly. (Id. ¶ 23.) Artists could digitally record their own songs using their own equipment and personal computers, and digital music could be distributed at very low cost over the internet to consumers without the need for physical products (e.g., records, cassette tapes, and compact discs) or physical store locations. (Id.) "[U]iterdened by any tangible media" (id.), consumers Could play digital music on handheld devices such as iPods and cell phones and were no longer "dependent exclusively on the physical media products and distribution channels that historically had been controlled by the Counter-Defendants" (id. ¶ 27).

At the forefront of these technological advances were companies such as Napster, which developed a file-sharing application that allowed networked users to exchange digital files through centralized servers that acted as "brokers."³ (Id. ¶ 42) Counter-plaintiff Lime Wire designed and distributed a similar file-sharing application utilizing "peer-to-peer" ("P2P") technology, which allows users to search and download files directly from other online users without utilizing a centralized server.⁴ (Id. ¶ 43.) In addition to its P2P application, Lime Wire also created the "MagnetMix" website, which provided users of its software application with links to licensed, copyrighted music content. (Id.) At its creation, MagnetMix, provided links to such content for free, but Lime Wire alleges that it intended to utilize MagnetMix in conjunction with its P2P application "as a means to ultimately charge customers for downloading copyrighted content." (Id.)

II. Alleged Anticompetitive Conduct

In response to the technological changes affecting the music distribution industry, counter-defendants, through an array of allegedly anticompetitive activities, "conspired to delay and disrupt the entry and emergence of ... alternative means for distribution, and to extend their oligopoly in the distribution of recorded music over the new market for, the electronic distribution of music via the Internet." (Id. ¶ 28.)

A. Price-Fixing and Exclusive Distributorship Agreements

1. MusicNet and pressplay

In 2000, each of the Major Labels, through their distribution companies, launched its own website for the digital distribution of music. (Id. ¶ 33.) By mid-2001, the record companies changed course and formed two joint ventures — MusicNet and pressplay — that became the exclusive vehicles through which counter-defendants would license music content for online distribution.⁵ (Id. ¶¶ 34, 35.) Counter-defendants allegedly used these joint ventures "as conduits for colluding to fix prices" as they "provided a forum in which executives of the parent distribution companies met to discuss their own pricing and prices of competitors." (Id. ¶ 38.) Through the joint ventures, the record companies allegedly "pool[ed] their copyrights" and "effect[ed] a price-fixing arrangement" for licenses at both the wholesale and retail levels. (Id. ¶ 36.) In particular, the FAC alleges that "MusicNet's wholesale price was a share of a licensee's revenues, subject to a minimum payment, to be shared among the Major Labels, rather than a price per copy or work."⁶ (M) This pricing scheme purportedly "eliminated wholesale price competition among all the Counter-Defendants and their co-conspirators" and resulted in "excessive wholesale prices" for retailers and "higher than competitive prices" for consumers. (Id.) Pressplay, which apparently functioned as a retail distributor, similarly "set both wholesale and retail prices for other retail distributors." (id. ¶ 37.) Counter-defendants also allegedly coordinated to set fixed prices across the two joint ventures as both MusicNet and pressplay charged consumers "$9.95 per month" for their basic service plans. (Id. ¶ 38.) As a condition of receiving license agreements from the joint ventures, moreover, retail licensees were "obligated not to negotiate with the Major Labels directly." (Id.)

2. iMesh

Although counter-defendants eventually divested their interests in the two joint ventures (id. ¶ 39), they allegedly conspired again to control the distribution of their content by emerging P2P companies (id. ¶ 47; see id. ¶ 35). According to the FAC, the record companies conspired to deal exclusively with a P2P company called iMesh, which has "been granted a license by the Major Labels to allow distribution of their content," and offers the only filtering mechanism (acoustic fingerprinting technology) approved by the Recording Industry Association of America ("RIAA").⁷ (Id. ¶ 47.) Although counter-defendants do not own interests in iMesh (id.; see id. ¶ 56), they have allegedly implemented a plan "to coerce all P2P companies based in the United States to accept iMesh's purchase offers" and turn over their user base for conversion to the iMesh platform, or face litigation by the RIAA. (Id. ¶ 47.) When Lime Wire approached the RIAA to obtain licenses and seek approval of its hash-based filtering system,⁸ RIAA officials rejected its proposals and "demanded" that Lime Wire convert its user base and use only acoustic fingerprinting technology. (Id. ¶ 48; see id. ¶ 46.) iMesh also purportedly disclosed to Lime Wire the financial statements of another company that had recently settled with counter-defendants in an attempt to pressure Lime Wire to accept iMesh's buyout proposal. (Id. ¶ 48.) The record companies have also allegedly refused to license their content to third parties except under so-called "dead end licenses," which are one-time licenses to retrieve a digital file from a server. (Id. 152.) Because P2P applications do not utilize a centralized server, such "dead end" licensing allegedly precludes PIP retailers utilizing non-iMesh platforms from obtaining licenses from the Major Labels. (Id.)

B. Mandatory Licensing for Hash-Based Filtering

As noted above, Lime Wire developed and distributed a P2P application that enabled users to search and download files directly from other networked users without using a centralized server. (Id. ¶ 43.) In July 2003, Lime Wire also created the MagnetMix website, which provided links to licensed, copyrighted content through Lime Wire's P2P...