by Lee Gesmer | Jun 25, 2013 | Antitrust
If you want to bring an antitrust suit based on an illegal agreement among competitors (say, a boycott), you face a possible Catch-22: you can’t get the evidence you need to prove an illegal agreement until you file the suit (and conduct discovery), but you can’t file an antitrust suit unless you are able to provide sufficient evidence of the agreement in your complaint.
This is the problem the plaintiff faced in Evergreen Partnering Group v. Forrest, decided by the First Circuit on June 19th. Evergreen alleged that the defendants (a small group of companies that controlled the disposable plastics industry) refused in concert to deal with it—in other words, they boycotted Evergreen.
Massachusetts federal district court judge Richard Stearns dismissed the case on the complaint, holding that Evergreen had failed to plead a viable claim of conspiracy to boycott. In other words, the complaint didn’t contain enough “facts” to establish, directly or through inference, that the defendants had entered into an agreement to boycott. For example, each of the defendants could have acted alone (unilaterally), and if so there would be no antitrust violation. Evergreen was caught in the antitrust pleading “Catch 22.”
The First Circuit reversed, remanding the case to the district court for further proceedings. Interpreting the Supreme Court’s 2007 decision in Bell Atlantic v. Twombly (an antitrust case in which the Supreme Court issued an important decision establishing a “plausibility” pleading standard, as opposed to the long-standing “notice” standard), the First Circuit stated:
Twombly is therefore clear that, if no direct evidence of agreement is alleged, it is insufficient to exclusively allege parallel conduct at the pleadings stage. Rather, a complaint must at least allege the general contours of when an agreement was made, supporting those allegations with a context that tends to make said agreement plausible. … we have made clear that plaintiffs must establish that it is plausible that defendants are engaged in more than mere conscious parallelism, by pleading and later producing evidence pointing toward conspiracy. … It is also clear that allegations contextualizing agreement need not make any unlawful agreement more likely than independent action nor need they rule out the possibility of independent action at the motion to dismiss stage. Requiring such heightened pleading requirements at the earliest stages of litigation would frustrate the purpose of antitrust legislation and the policies informing it.
Evergreen met this standard, and therefore it will be allowed to proceed with its case. Whether it can come up with enough evidence to survive the next hurdle—summary judgment—and take its case to a jury, remains to be seen.
by Lee Gesmer | Jun 21, 2013 | Copyright
“Streaming copyrighted works without permission would drastically change the industry, to plaintiffs’ detriment. . . . The strength of [broadcasters’] negotiating platform and business model would decline. The quantity and quality of efforts put into creating television programming, retransmission and advertising revenues, distribution models and schedules — all would be adversely affected. These harms would extend to other copyright holders of television programming. Continued live retransmissions of copyrighted television programming over the Internet without consent would thus threaten to destabilize the entire industry.” – Second Circuit in WPIX, Inc. v. ivi, Inc. (2012)
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This is the last in this four-part series of posts. Click here to access Part 3.
Did the Second Circuit make a mistake in Cablevision and compound it by its decision in Aereo? What are the potential business, legal and legislative strategies available to the broadcast companies as Aereo continues its 22 city rollout? These are the questions I’ll discuss in this last of a four post series on the Aereo case.
Did the Second Circuit Misapply the Copyright Statute in Cablevision and Aereo?
The holdings in Cablevision and Aereo have been controversial in the copyright law community. Few observers doubt that there is a significant risk that courts outside the Second Circuit, including the Supreme Court, will knock out the key leg of Cablevision’s three-legged stool*: the holding that the retransmission of broadcast signals are not a public performance where each user receives its transmission from an individualized copy. As noted in post 3 of this series of posts, one federal court has already taken this step in California. Fox Television Stations v. BarryDriller (C.D. Cal. Dec. 27, 2012)
*The other two legs, which were not the basis for the broadcasters’ legal challenge in Aereo, are the holdings in Cablevision that (1) a transitory RAM buffer does not constitute an infringing copy; and (2) it is subscribers, not Cablevision, that exercise the “volitional conduct” that causes copies to be made on Cablevision’s system.
As discussed in post 2, the Copyright Act gives copyright owners the exclusive right “to perform the copyrighted work publicly.” The central question that courts outside the Second Circuit will have to answer is whether the Second Circuit correctly interpreted the Copyright Act’s confusingly drafted transmit clause:
To perform or display a work “publicly” means—
to transmit or otherwise communicate a performance or display of the work … to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times. (Copyright Act, § 101).
The Second Circuit’s decisions in Cablevision and Aereo hold that the word highlighted above—“it”—does not refer to the performance of the underlying work, but the transmission of the work. In effect, the Second Circuit reads the statute to define a public performance to require that the public be “capable of receiving the transmission,” rather than the performance. They hold that if only one person is capable of receiving an individualized transmission (as is the case with both the Cablevision and Aereo systems), there is no violation of the copyright holder’s exclusive right to perform the work.
However, there is wide disagreement with this interpretation of the law, which converts a transmission to thousands of members of the public 
from “public” to “non-public” by making thousands of copies of the underlying performance and transmitting separate copies to each member of the public. This doctrine is based on a loophole that, arguably, is not a valid construction of the statute and was never intended by Congress.
As the district court noted in BarryDriller, “the concern is with the performance of the copyrighted work, irrespective of which copy of the work the transmission is made from. Very few people gather around their oscilloscopes to admire the sinusoidal waves of a television broadcast transmission.” Put another way, the question is whether all copies of a performance embody the same performance, or whether each copy of a performance is its own distinct performance. In the first case Aereo was incorrectly decided, in the second case it was not.
In the Aereo decision itself Judge Chin’s powerful dissent took a different approach in arguing that Aereo’s system—which he described as a “sham” and an “over-engineered … attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law”—falls squarely within the definition of a public performance. Judge Chin argued that it is legally irrelevant, under the statutory definition, that Aereo uses an intervening process, in the form of individual antennas and multiple copies, before sending multiple transmissions to the public. His argument on statutory construction is simple:
1. To “transmit” a “performance” is “to communicate it by any device or process whereby images or sounds are received beyond the place from which they are sent.” (Copyright Act, § 101).
2. The terms “device” or “process” are broadly defined as “one now known or later developed.” (Copyright Act, § 101).
3. Aereo’s system of antennas and individual stored copies is a “device or process,” and using that device or process Aereo “transmits or otherwise communicates” copyrighted images to its subscribers. (Copyright Act, § 101).
Judge Chin argued that this statutory construction is also supported by the legislative history of the law and prior court opinions. Although he argued that Cablevision was wrongly decided (recall that Judge Chin was the district court judge in that case, and he found that Cablevision’s network-DVR did infringe the public performance right before being reversed by the Second Circuit), he also distinguished Aereo from Cablevision on various grounds, including the fact that Cablevision had a license to transmit the works that were saved on its network-DVR system, whereas Aereo had no license to the works it was taking from the airwaves and transmitting to its customers.
Judge Chin’s dissenting opinion could serve as the roadmap for the broadcasters in other circuits, or in an appeal to the Supreme Court. In fact, it’s argument could serve as the basis for a Supreme Court opinion reversing Aereo.
The Broadcasters: What Should They Do Now?
To say that the broadcasters are facing complicated strategic decisions in this case is an understatement. It goes almost without saying that they can lobby Congress to amend the law in such a way as to bring Aereo’s system within the definition of a public performance. However, amendments to the copyright statute, which underwent its last major rewrite in 1976, are few and far between.
They can also respond, as Fox has threatened to do, by cutting over-the-air transmissions altogether, so Aereo cannot obtain their programming. However, this threat seems like a bluff, since 
it would reduce their viewership and cut their advertising revenues, which are not affected by retransmissions by Aereo. As Holman Jenkins quipped in the Wall Street Journal, Fox’s threat to yank its signal from the air brings to mind the old joke about the hostage taker who puts a gun to his own head and says, “One false move and the idiot gets it.”
In addition, it likely will be a long time before Aereo’s service (or copycat services) will cut into the level of existing cable service, or grow to the point where an appreciable number of cable subscribers would “cut the cord” and impact the retransmission fees broadcasters are receiving from cable companies.*
* Nevertheless, skirmishing on this front has already begun with Senator John McCain’s bill that would penalize a broadcaster that withdrew its signal from the public airwaves.
Despite these practicalities, the broadcast industry is trying to stop this extension of the Cablevision case before it mutates into something that the broadcasters may not be able to anticipate today. After all, no one was predicting the Aereo system when Cablevision was decided in 2008. That case cost the broadcast industry nothing since, unlike Aereo, the beneficiaries were already cable subscribers, and the network-DVR did nothing more than move the DVR from the set-top to the Cablevision server head-end. Who is to say what new technology lies around the next turn in the technological bend that may be impossible to predict today but which, in hindsight, may be facilitated by Aereo? The broadcasters may conclude that their best strategy is to take legal action against every challenge to their traditional structure; even if Aereo is a minor economic irritant today, they should fight Aereo today, in order to head off unforeseeable future threats to their business models.
As far as the broadcasters’ specific legal strategy goes, it is clear that the broadcast industry’s best hope is to have the Second Circuit decision in 
Aereo reach the Supreme Court. As discussed above, there is a reasonable likelihood that the Supreme Court will reverse the Second Circuit’s decision in Aereo and put a stop to this particular problem well before it grows to a size that will threaten broadcast retransmission revenues.* Unfortunately for the broadcasters, the BarryDriller case has caused them to lose control of that strategy. While a Ninth Circuit decision upholding the district court’s injunction on an Aereo-like system may lead to the circuit split they need to obtain a Supreme Court appeal, they cannot control the legal positions taken in that case necessary to prepare the groundwork for a Supreme Court appeal. And, at least for now, they cannot offer the Aereo service in California.
*Coincidentally, Supreme Court Justice Ruth Bader Ginsburg’s daughter, Columbia Law School Professor Jane Ginsburg, has been one of the most outspoken critics of Cablevision and Aereo. Of Aereo Professor Ginsburg commented that the decision, which was issued on April 1, 2013, is “so inconsistent with statutory text and policy as to inspire surmise that that the ruling was an April Fool’s prank.” (See Aereo: The Second Circuit Persists in Poor (Cable)Vision). While it’s unlikely Justice Ginsburg would recuse herself for this reason, Justice Kagan may not participate in the case — she was the U.S. Solicitor General when Cablevision filed a Supreme Court appeal in that case, and the government opposed Supreme Court review.
The fact that the broadcasters have not filed suit in federal court in Massachusetts (Aereo’s second market, which went live in mid-May), is telling. The broadcasters’ strategy may be to wait and see whether the Second Circuit will grant their pending petition to review Aereo en banc. If it does, the broadcasters may hold off on litigation in other states pending the en banc ruling from the Second Circuit. If the Second Circuit doesn’t hear Aereo en banc, or if it hears it and upholds the panel decision validating Aereo, the broadcasters will likely watch Aereo as it releases its service across the country (keeping in mind that Aereo has stated it will go live in 22 cities this year). The broadcasters are likely to decide (based on legal precedent) that one of those circuits presents the best chance for a decision favorable to the broadcasters. Such a decision will set up the circuit split that would make the case attractive to the Supreme Court which, the broadcasters hope, will resolve the thorny issues that have arisen out of the copyright statute’s problematic definition of a public performance.
Another alternative is that the broadcasters will allow the BarryDriller case to move forward to the Ninth Circuit and see whether the Ninth Circuit upholds the district court decision in that case, again providing a circuit split. However, as noted, that option has risks, since the broadcasters cannot control BarryDriller’s legal strategy in that case, and therefore can’t be sure a decision by the Ninth Circuit will create the greatest likelihood of a circuit split that will make the case attractive to the Supreme Court.
To make things even more complicated, Aereo has itself gone on the offensive, filing a suit in New York asking the federal district court to enjoin CBS 
from bringing another copyright suit against Aereo in any other federal district. (See my earlier post on this case here). While, if successful, this would only affect CBS, it could be expanded to include other plaintiffs in the New York case, leaving the broadcasters only with affiliates to prosecute cases against Aereo in other districts. While the extent to which Aereo’s bold strategy (if it succeeds) will hobble the broadcasters’ legal offensive is uncertain, it may weaken the broadcasters’ attempt to sue Aereo in another district and obtain a precedent which, when set against the Second Circuit decision, will create a circuit split and lead to a successful Supreme Court appeal. Clearly, Aereo’s strategy seems intended to force the broadcasters to rely on BarryDriller and the Ninth Circuit to accomplish that.
If the “TV wars” sound complicated, it’s because they are. And, to use a military analogy, the Aereo campaign is only one front in a multi-front war that is in full swing as television migrates to the Internet. There is much, much more to come. Stay tuned.
by Lee Gesmer | Jun 17, 2013 | Noncompete Agreements
My late May post on Rent-A-PC, Inc. v. Robert March, et al. discussed a Massachusetts federal district court case in which Judge O’Toole refused to issue a preliminary injunction enforcing noncompete provisions against two former employees of Rent-A-PC because their job responsibilities had substantially changed since their non-compete agreements had been signed.
In a decision issued by a Massachusetts Superior Court Judge in May, the court refused to issue a preliminary injunction on the same grounds. In Intepros v. Athy one defendant, Paul Athy, had advanced from branch manager to regional vice president. Relying on the hoary case of F.A. Bartlett Tree Expert Co. v. Barrington (1968), as well as several more recent cases, the court held that this change in job title responsibilities, as well as changes in pay, constituted a material change rendering the noncompete agreement void and unenforceable.
A second defendant, Anne Marie Canty, had been hired and fired twice, and had signed a noncompete agreement on the first two hires. However, she was not asked to sign a noncompete agreement at the time of her third hire, a fact that left the employer without an enforceable noncompete agreement against her.
Ms. Canty’s case was open and shut: if you fire an employee don’t expect a noncompete provision from that employment to be enforceable if you rehire the employee and don’t get a new agreement.
Mr. Athy’s case is more difficult. Must an employer require an employee to sign a new noncompete agreement (or ratify an existing agreement) on the occasion of every promotion or change in salary? Not only is this an awkward condition to impose on the employer-employee relationship, but lets face it: many employers will forget. To make matters murkier, no court has provided a bright line as to how much an employment relationship must change before a new agreement becomes mandatory. In fact, one Massachusetts judge has ruled that the material change doctrine applies only when the change adversely affects the employee, such as in the case of a demotion or decrease in pay. (Sentient Jet LLC v. Mackenzie, Garsh, J. 2012).
Employers may attempt to use noncompete agreements that specifically anticipate job changes during the course of employment and provide that the non-compete clause will continue regardless of such changes, but no Massachusetts court has ruled on whether such a provision is enforceable.
Unfortunately, for now the material change doctrine seems to be an unavoidable stumbling block for Massachusetts employers.
by Lee Gesmer | Jun 13, 2013 | Contracts, Corporate Law, Litigation
Earlier this year, on the eve of trial in Baker v. Goldman Sachs in federal district court in Boston, I published a blog post describing the facts behind this unusual case, which involved the acquisition of Dragon Systems by Lernout & Hauspie in a $600 million all-stock deal. Soon after the acquisition closed the market discovered that Lernout had fabricated its Asian sales figures. This was quickly followed by Lernout’s bankruptcy, which left Dragon (owned by the Bakers, husband and wife founders) holding worthless Lernout stock. (Baker v. Goldman Sachs – The Business Deal From Hell).
The acquisition was negotiated and concluded in the first half of 2000, just as the technology bubble was beginning to deflate. 
After a lengthy trial the jury ruled in favor of Goldman Sachs on all issues except the claim that Goldman violated M.G.L. c. 93A, the Massachusetts statute that makes illegal “unfair or deceptive acts or practices.” Under Massachusetts law, that claim must be decided by the judge.
Now, Massachusetts federal district court judge Patti Saris has issued her decision on the Baker’s 93A claims, holding that Goldman Sachs did not violate 93A. This ruling is not a surprise; judges rarely find a violation of 93A when a jury rules against a plaintiff on the underlying claims, which in this case were negligence, breach of fiduciary duty and fraud.
However, her opinion is a fascinating look into how a transaction of this magnitude can go wrong. In addition, I read her opinion to imply that, in her view, the jury should have found Goldman Sachs negligent. Of course, there is no explanation for why the jury ruled against the Bakers – perhaps the Bakers were unsympathetic witnesses, or they drew a hostile jury. Perhaps the jury failed to understand the case, or the Baker’s case was poorly tried. These are the risks of the jury system–you may be convinced you have a great case and the jury can still rule against you. And, to rub salt in your wounds, you will never know why.
But, the case shows what goes on behind the scenes in a transaction of this sort, especially when your investment banker is Goldman Sachs, which was paid $5 million for its services to Dragon Systems. Here are a few points from Judge Saris’ opinion that caught my attention:
The Goldman Sachs Investment Banking Team Was Very Young. The team was comprised of three people. The leader of the team was only 31 years old. The second team member was 25 years old and was job hunting at the time. The third investment banker was a 21 year old recent college graduate. No senior Goldman Sachs investment banker did any work on the transaction.
=> The fact that Dragon allowed a 31 year old Goldman employee to be the leader on a $600 million deal of this importance to Dragon’s owners is a mystery. This brings to mind the saying, “young doctors, old lawyers.” For this case, I would change that to read, “young doctors, old lawyers and old investment bankers.” A degree from a prestigious business school does not equal experience.
Dragon Made a Critical Decision Without the Involvement of Its Investment Bankers. The sale of Dragon to Lernout initially had a large cash component – 50% cash/50% Lernout stock. But, this changed at a meeting at which Goldman Sachs was not present. Judge Saris wrote that “Janet Baker chose to pursue an all-stock transaction with [Lernout] for $580 million. By the end of the meeting, Janet Baker and [Lernout] signed a handwritten agreement setting forth a fixed exchange ratio for an all-stock acquisition of Dragon. … Janet Baker made this napkin agreement without consulting Goldman.”
=> The fact that the Bakers modified the deal without consulting Goldman Sachs suggests a lack of business sophistication on the part of the Bakers. A “napkin agreement” to sell your company for 100% stock, without including your investment banker in the decision? This was a huge decision, and by the time it was made it was too late for Goldman Sachs to advise against it. If you’re going to pay your New York investment bankers $5 million, keep them in the loop.
Goldman Sachs C.E.O. Lloyd Blankfein and C.O.O. Gary Cohn, in the boardroom of Goldman’s headquarters, in New York City
The Investment Bankers Are Not Your Friend, So Get Their Opinions and Assurances in Writing. Judge Saris wrote that “Goldman was dissatisfied with respect to Lernout’s answers on many due diligence questions up until the last moment. The transaction would likely not have gone forward if Goldman had voiced its ongoing concerns about financial due diligence. In his deposition, Wayner said he did not disclose any concerns he had about due diligence at the March 27 meeting because ‘the client did not ask.’”
=> Wow. Wayner was the senior Goldman team member. His testimony that he was concerned about due diligence but didn’t voice his concerns because “the client did not ask” shows how careful a client must be in dealing with its investment banker. When you are about to sell your company for $600 million in stock you should be waking up in the middle of the night worrying. And, before you fall back to sleep you should be emailing your investment banker and asking, “is there anything about this deal you’re concerned about that we should know before we jump?” The fact that an investment banker as prestigious, expensive and (supposedly) competent as Goldman Sachs took a “don’t ask, don’t tell” position toward its client says a lot about where investment banker interests lie. Could their $5 million fee on the sale of the company been in the back of Wayner’s mind when he weighed whether to tell the Bakers about his concerns?
Don’t Assume the Investment Banker is Creating a File You Can Use to Sue The If Things Go Wrong. Judge Saris wrote that Goldman Sachs has a “written policy encouraging its mergers and acquisitions department not to safeguard their written notes. The policy tells investment bankers to keep ‘[n]otes supporting due diligence,’ to throw out ‘[n]otes to self-citing unresolved problems,’ and ‘[w]hen in doubt, throw them out,’ unless litigation has commenced.”
=> In case you had any doubts, that’s what’s going on behind the scenes at Goldman Sachs, and probably other New York investment bankers. If you make a note to yourself regarding an unresolved problem in an M&A transaction, throw it out. Why? So it can’t be used in litigation against Goldman Sachs if there is a legal problem later.
Near the end of her lengthy opinion Judge Saris observes that “The reasons why small startup companies like Dragon go to a place like Goldman to assist with hatching their golden eggs is because they don’t have their own expertise to analyze revenue projections by asking tough questions to potential merger partners.” Reading between the lines of her opinion, one could conclude that Judge Saris felts that Goldman Sachs did not provide that expertise to Dragon. However, this decision was the province of the jury, and the jury ruled for Goldman Sachs on all of Dragon’s legal claims. Judge Saris’ ruling on Dragon’s Chapter 93A claims was Dragon’s last chance, and she concluded that Goldman Sachs did not engage in conduct that met the test of “unfair and deceptive practices,” as that law has been interpreted by the courts. Absent an appeal, her decision marks the end of a long road, strewn with missteps by Dragon and its advisors. Perhaps it will serve as a lesson for the future.
