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“Contract, Combination or Conspiracy” – Can Peloton’s Lawsuit Survive the Music Publishers’ Motion to Dismiss?

“Contract, Combination or Conspiracy” – Can Peloton’s Lawsuit Survive the Music Publishers’ Motion to Dismiss?

This is a brief follow-up to my earlier post, Copyright Infringement? Peloton Punches Back With Antitrust.

Under Section 1 of the Sherman Act a “contact, combination or conspiracy” in restraint of trade is illegal. However, the Sherman Act says nothing about how much evidence is necessary to file a lawsuit alleging an illegal antitrust conspiracy. In other words, what factual allegations do you need in the complaint to avoid having it dismissed? In lawyer-speak: “what do we need to get into court?”

This question arises frequently in antitrust litigation, and it’s often a close call. Evidence of an antitrust conspiracy may exist, and it may be accessible via discovery, but the plaintiff needs to make enough factual allegations to avoid dismissal to get access to discovery and prove the conspiracy. If it can’t allege the illegal conduct in a complaint, it’s likely to face a motion to dismiss that will kill the case at its inception.

The Supreme Court has made this challenging for plaintiffs. In Bell Atlantic v. Twombly (2007), the Court held that a complaint alleging an antitrust conspiracy must plead “enough facts to state a claim to relief that is plausible on its face.” “[T]he complaint’s factual allegations must be enough to raise the right to relief above the speculative level, i.e., enough to make the claim plausible.” If the complaint doesn’t meet this “plausibility” standard, it will be dismissed on a motion filed by the defendant. 

The problem is that “plausibility” is highly case-specific. 

In my first post on Downtown Music Publishing v. Peloton1 I predicted that the music publishers would use this defense to try to dismiss Peloton’s counterclaim alleging that they had engaged in an illegal antitrust conspiracy. As expected, this is exactly what the publishers have done. 

To recap, in early 2019 nine independent music publishers filed suit against Peloton, claiming copyright infringement of more than a thousand musical works and seeking total damages as high as $150 million. Recently, the publishers filed an amended complaint that doubles the number of works infringed, as well as the damages.2

Peloton responded by denying it had engaged in copyright infringement and filing a counterclaim against the nine publishers and the National Music Publishers Association, Inc. (NMPA). The counterclaim alleged that, with the coordination of NMPA, the nine publishers engaged in a conspiracy to fix prices and boycott Peloton.

The law that has evolved under Twombly allows an antitrust plaintiff to allege a conspiracy based on direct evidence or circumstantial facts that support an inference that a conspiracy exists. Here is the essence of the publishers’ argument addressing the allegation of a direct conspiracy – 

Peloton does not even attempt to allege a direct case of conspiracy … Its complaint fails to plead the required “evidentiary facts: who, did what, to whom (or with whom), where, and when.” . . . Rather, Peloton relies on vague allegations that the Publishers . . . have engaged in collective negotiations of license terms and have exchanged information with each other about ongoing license negotiations at unidentified times and places. . . . Such allegations fall far short of pleading an agreement that can withstand dismissal. See Twombly … (holding that “a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality” where the allegations “mention[] no specific time, place, or person involved in the alleged conspiracies.”).

This argument is persuasive, and I expect the publishers to win on this point. The complaint is missing the allegations of “who, what, where and when” that are usually the basis for a direct conspiracy.

However, Peloton also can meet the “plausibility” standard based on circumstantial evidence that supports an inference of a conspiracy. And here things get murky. 

The music publishers undertake a lengthy, and frankly somewhat convoluted, explanation for why the publishers might have cut off negotiations with Peloton without engaging in an agreement or conspiracy – that is, that each of the publishers acted independently in its own economic self-interest. (Music publishers brief here).

Peloton responds – 

. . . absent their agreement in restraint of trade, each of the coordinating publishers’ own economic-self interest should have led them to enter into direct license agreements with Peloton. The facts at trial will reveal that Peloton had entered into multiple licensing agreements with dozens of publishers (including all the “majors”) on terms viewed as favorable by those many licensing publishers, and that Peloton similarly offered to license the counterclaim defendant publishers on favorable terms that, had they been acting individually, would have been in their economic interests to accept. The only plausible inference in such circumstances is that the counterclaim defendants believed that, by seeking to license collectively and otherwise refusing to deal with Peloton, they could extract supracompetitive fees.

This issue is a close call, but I’m going to predict that Peloton will win this motion – that the music publishers’ motion to dismiss Peloton’s antitrust case will be denied. The publishers’ argument is somewhat plausible, but so is Peleton’s. Where the parties’ positions are so evenly balanced I am doubtful that the court will dismiss Peloton’s antitrust claims.

Either way, the stakes are high for both sides. If the publishers succeed in getting the antitrust case against them dismissed, Peloton will have the right to an immediate appeal to the Second Circuit. But that takes time, and in the meantime Peloton (which just went public and raised $1.3 billion) will have lost the leverage its antitrust counterclaim gives it to negotiate a reasonable settlement of the publishers’ copyright case. Shareholders are unlikely to be enthusiastic about spending Peloton’s newly obtained capital to defend the publishers’ copyright case, and risk almost one-third of it if the publishers win.

On the other hand, if the publishers’ motion to dismiss is denied the publishers will be looking at expensive discovery before a summary judgment motion gives them their next opportunity to dismiss Peloton’s case. And, of course, discovery may reveal conduct that supports Peloton’s case.

Bottom line: this is a copyright and antitrust case worth watching.

FOOTNOTES:

A Few Observations From the Ninth Circuit En Banc Argument in Skidmore v. Led Zeppelin

A Few Observations From the Ninth Circuit En Banc Argument in Skidmore v. Led Zeppelin

I have a few observations on the Ninth Circuit September 23, 2019 en banc hearing in Skidmore v. Led Zeppelin. Video of the oral argument is embedded at the bottom of this post, and the transcriptions below are mine – I’ve left out a few words here and there to make this easier to read, but I didn’t leave out anything material.

Did Skidmore’s Attorney Give Away the Case?

Quite possibly.

Here are the key excerpts from the oral argument. (I’m labeling all of the judges’ questions as simply “judge,” but the questions were posed by different judges):

Judge: Are you conceding today that if you are confined to the deposit copy your copyright claims are not viable?

Skidmore Counsel: I think that it is very difficult for plaintiff to win based on the deposit copy since it’s such an inaccurate transcription of the composition ….

Judge: Is that a “yes”? …

Skidmore Counsel: Yes, I think that is the reality of the situation.

Judge: When you listen to these two recordings, the deposit copy and the performed copy by Led Zeppelin, I don’t see how any juror could find they’re substantially similar, even with expert testimony. So you’ve got to get your sound recording in to win this case, don’t you? . . .

Judge: If the law is that the deposit copy is the four corners of the copyright deposit there’s nothing else to retry, correct?

Skidmore Counsel: If that’s the law ….

Judge: And you lose the case unless [the jury hears the sound recording]; a hundred times out of a hundred, right? You’ve gotta get your sound recording in in order to win this case, don’t you?

Skidmore Counsel: I think so.

Later in the hearing, when Led Zeppelin’s attorney was arguing:

Judge: It seems to me that assuming the copyright analysis is limited to the deposit copy any error [in the jury instructions] is harmless because no reasonable juror could find that the alleged copying was unlawful appropriation of the deposit copy, so why could we assume that instructional error occurred and find any error harmless?

Counsel for Led Zeppelin: I agree wholeheartedly.

The problem here, from Skidmore’s perspective, is that the judges appeared unconvinced that the sound recording of Taurus should be admissible.

This sets up the scenario (referenced by the judge in the quote above) where the en banc court would not need to address the jury instruction issue that was grounds for reversal by the Ninth Circuit panel, and which at least one judge indicated was problematic. The court can bypass that as “harmless error.”

Whether the Ninth Circuit will take this easy way out remains to be seen, but it seems like a significant risk for Skidmore.

By the way, I’m being facetious when I ask whether Skidmore’s attorney “gave away the case.” As a strategic matter he may have had no choice. He may have concluded that he cannot win a retrial on the deposit copy (he lost the first trial when limited to that evidence), and he doesn’t want a remand on a technicality such as deficient jury instructions if he will be limited to that evidence.

The “Inverse Ratio” Rule

The inverse ratio rule provides that if the plaintiff establishes a high degree of access to its work by the defendant, a finding of copyright infringement may be based upon a lesser degree of similarity. This controversial doctrine exists only in the Ninth Circuit. The trial judge refused to give the jury an inverse ratio instruction, an issue Skidmore raised on appeal.

This doctrine may already be dead as a practical matter. In the 2018 Blurred Lines case (Gaye v. Williams) the original opinion suggested that there was some validity to this doctrine, and asked the trial court to reevaluate it on remand.1 But the Ninth Circuit issued an amended opinion deleting all references to the rule, arguably implying that it did not endorse it.

At the en banc hearing, one of the judges asked Led Zeppelin’s lawyer to address this doctrine, and the lawyer briefly explained why it was bad copyright law (a view widely shared in the copyright community). Quite possibly, this case will allow the Ninth Circuit to put this much-criticized doctrine to bed, once and for all.

The “Thin Copyright” Issue

As I discussed in some detail recently (Copyright Office Backs Led Zeppelin In Ninth Circuit En Banc Appeal), the United States filed an amicus brief urging the court to adopt a “virtually identical” test for musical works that contain only “a small number of standard elements” (as is the case with Taurus, they argued).

An attorney from the Department of Justice argued for the United States at the hearing, and frankly he didn’t push this issue as hard as he might have. He certainly didn’t propose a rule that the Ninth Circuit could adopt, and the judges appeared unreceptive to this argument. I’d be surprised if a new copyright rule establishing a thin copyright for some musical works came out of this case.

Conclusion

Courts are notorious for creating the wrong impression during oral argument. Many a lawyer has walked out of a hearing after getting knocked around by a judge thinking that she had lost, only to win when the ruling arrives. And vice versa.

With that caveat, I will venture a prediction that the Ninth Circuit will hold that (a) the copyright in pre-1978 works is limited to the deposit copy, and (b) Skidmore can’t prevail on the deposit copy. Accordingly, any errors in the jury instructions were harmless and the jury verdict of non-infringement is affirmed.

FOOTNOTES:

Copyright Office Backs Led Zeppelin In Ninth Circuit En Banc Appeal

Copyright Office Backs Led Zeppelin In Ninth Circuit En Banc Appeal

Update (9/25/19): A Few Observations From the Ninth Circuit En Banc Argument in Skidmore v. Led Zeppelin (link)

The appeal in Skidmore v. Led Zeppelin is scheduled to be reargued before an en banc Ninth Circuit appeals court panel on September 23, 2019 (watch it live online here), and the U.S. Copyright Office has taken the unusual step of submitting an amicus brief in support of Led Zeppelin.1

This important copyright case is discussed in my October 2018 post, Led Zeppelin, Spirit and a Bustle at the Ninth Circuit, so I won’t review the background in detail here. The works at issue are Spirit’s 1968 song Taurus2 and the opening section of Led Zeppelin’s Stairway to Heaven. A Ninth Circuit panel reversed the jury’s verdict (verdict here) in favor of Led Zeppelin and sent the case back for retrial based on errors in the jury instructions. Led Zeppelin petitioned the Ninth Circuit to hear the case en banc, and the court granted this request. This means that the appeal will be reheard by the chief judge and ten other Ninth Circuit judges.3 

The Ninth Circuit grants only about 1% of en banc petitions, and the Copyright Office rarely files an amicus brief in cases that have not reached the Supreme Court.4 The fact that both events have converged in this case underscores its importance. The music and copyright communities are watching closely.

The Copyright Office amicus brief makes two arguments.

TAURUS DEPOSIT COPY

Pre-1978 Unpublished Musical Works – Is the Sound Recording Covered By the Copyright? This has been an issue in several recent music copyright cases, and I’ve written about it in connection with the Blurred Lines and Ed Sherran cases, as well as the first Led Zeppelin appeal, decided by a 3-judge Ninth Circuit panel. The panel held that the copyright in unpublished works under the 1909 Act were defined by and limited to the deposit copy, not the sound recording. The Copyright Office urges the en banc court to reach the same conclusion.

This argument is based on an arcane copyright law technicality. However, the Copyright Office’s position is strong, and I expect the en banc court to reach the same conclusion that the panel reached. 

“Substantially Similar” or “Virtually Identical”? Copyright protection for pre-1978 sound recordings may be an important issue for Skidmore and Led Zeppelin, but the vast majority of musical works that are the focus of infringement claims involve current/post-1978 works. Therefore, the second issue addressed by the Copyright Office — whether the legal standard for infringement should be “substantially similar” or “virtually identical” —  is far more important to the music community.

At the trial of this case the presiding judge instructed the jury to determine whether there was copyright infringement based on the “substantial similarity” test. At trial, and in the first appeal of this case, Led Zeppelin’s lawyers argued that the musical elements from Taurus that were at issue should be protected by only a “thin” copyright, and therefore the test for infringement should be “virtually identical copying.” The premise underlying this argument is that Taurus is little more than a “selection and arrangement” of unprotectable musical elements, an argument that Skidmore vehemently disputes. 

The Ninth Circuit panel did not address this argument in the Led Zeppelin appeal. However, it subsequently rejected it in Williams v. Gaye (the Blurred Lines case), stating:

We reject the Thicke Parties’ argument that the Gayes’ copyright enjoys only thin protection. Musical compositions are not confined to a narrow range of expression . . . [A]s we have observed previously, music … is not capable of ready classification into only five or six constituent elements, but is instead comprised of a large array of elements, some combination of which is protectable by copyright . . . We have applied the substantial similarity standard to musical infringement suits before, . . . and see no reason to deviate from that standard now. Therefore, the Gayes’ copyright is not limited to only thin copyright protection, and the Gayes need not prove virtual identity to substantiate their infringement action.

The Copyright Office attempts to distinguish Taurus, urging the Ninth Circuit to give Taurus only thin protection, apply the “virtually identical” test, and affirm the jury verdict:

[Williams v. Gaye] did not involve an allegation that the infringing work copied only an arrangement of a small number of standard elements . . . the court did not consider the scope of protection for a single phrase comprising a small number of basic musical elements. The opinion should not be read as requiring more than thin protection for a portion of a musical work with such limited originality . . ..

Fundamentally, then, the allegedly copied material, as embodied in the deposit copy of Taurus, consists of the use and placement of a combination of basic and not copyrightable elements: the A-minor chord and the descending chromatic scale. While these elements have been selected and arranged to create the bass line pattern at issue, this particular combination, employing simple rhythm and the standard technique of arpeggiation, is itself relatively simple. Such a combination is subject, at most, to a thin copyright; there are not many ways to express this type of chromatically descending arpeggiated bass line and have it still be recognizable as such. Providing broad protection would effectively result in the protection of a musical idea, granting a monopoly on a common musical convention. Infringement should therefore occur only if the allegedly copied portion appears virtually identically in the two works.5

Not surprisingly, Skidmore takes a contrary view. He has filed a supplemental brief, responding to the Copyright Office’s amicus brief, arguing that “‘thin copyright ‘applies not to the ‘broader protection accorded artistic works,’ but instead to functional, fact-driven, or scenes a faire copyrights where there are a limited number of ways to express the ideas contained in the work.” In another filing (responding to the amicus briefs filed by intellectual property professors and musicologists), Skidmore asserts that “nowhere has this Circuit, or any Circuit, ever applied ‘thin’ copyright or virtual identity to music copyright cases, and have in fact at all points specifically warned against applying the concept to such artistic works.”

How the Ninth Circuit will handle this dispute is important to the future of music copyright law. However, the most immediate problem with the Copyright Office’s argument is that it is asks the appeals court to make a finding that the trial judge declined to make. The trial judge’s jury instructions make clear that while the jury could consider Taurus’s non-original or public domain elements in its deliberations, the judge did not conclude that Taurus was limited to those elements. Accordingly, the jury instructions use the “substantial similarity” test. Although its possible, it seems unlikely that the appeals court will make a ruling that the trial judge declined to make following courtroom testimony by experts on both sides of the case.

However, the issue raised by the Copyright Office needs to be viewed in a broader perspective. It is beyond dispute that copyright law struggles with music infringement. The broad application of copyright principles to works of varying types is one of copyright’s strengths, and has given copyright the ability to adapt to new forms of expression, from photography in the late 19th century to software today. However, these principles face a challenge when it comes to music, where copying and borrowing between musicians is an accepted part of musical practice and the venerable copyright law “idea/expression” distinction has little or no meaning.

The Ninth Circuit could resolve the two extremes presented by the Copyright Office and the parties in this case (“substantial similarity” vs. “virtual identity”) with a more flexible legal test that (except in the most extreme cases), leaves the decision up to the jury. Under this test the judge would instruct the jury that to the extent the jury finds the plaintiff’s music to be comprised of basic, common or public domain elements the jury should give it “weaker” protection. At the other extreme protection should be stronger. However, it would not be a judge-determined either/or test (as is the law today), but a flexible test where the jury would apply the standard on a continuum between these two poles.

 For example, Rick Beato makes a convincing case that Taurus uses a musical phrase contained in many pre-Taurus popular and classical pieces of music. If the jury is persuaded by an expert presenting this evidence, it would be free to conclude that the copyright in Taurus is thin, and judge Stairway To Heaven based on the “virtually identical” standard, or toward that end of the continuum. If Skidmore’s expert had persuasive evidence and opinion to the contrary, the jury might apply a standard more in the direction of “substantially similar.” However, in all but the most obvious cases that would be a decision for the jury, not a judge.

Beyond this, it would be welcomed if the Ninth Circuit took this opportunity to clarify or simplify music copyright law, which must be incomprehensible to most jurors. A glance at the jury instructions in Skidmore v. Led Zeppelin illustrates this (see, in particular instruction 21, which asks the jury to apply the dreaded Ninth Circuit “extrinsic/intrinsic similarities” test).6 It’s indisputable that the jury instructions in copyright cases are head-scratchingly complex to jurors (and to many lawyers). It’s not fair to musicians or jurors to require them to apply a body of law that has devolved to this level of complexity.

Sadly, the Ninth Circuit is known for moving in the direction of greater complexity, not less. Regardless of the outcome of this particular case, the odds are that the en banc decision in Skidmore v. Led Zeppelin will leave music copyright law in an even worse state than it is today.

FOOTNOTES