Antitrust Law Daily Wrap Up, ANTITRUST—E.D.N.Y.: Antitrust and deceptive practices claims fail over alleged price fixing, monopolization in New York market for Korean videos, (Sep 25, 2013)

By Tobias J. Gillett, J.D., LL.M.

A Korean video rental store and its owner failed to state antitrust and deceptive practices claims under the Sherman Act, New York’s Donnelly Act, and New York’s Deceptive Practices Act against a distributor of Korean videos and participants in an alleged price fixing scheme between other video rental stores over the distributor’s decision to cease providing videos to the store, the federal district court in Brooklyn has ruled (Hong v. KBS America, Inc., September 19, 2013, Vitaliano, E.).

In 2004, Yong Ki Hong and Jung Hoon Lee decided to open a Korean video store in New York. They met with representatives of two of the three suppliers of Korean videos to New York stores, Moon Hwa Broadcasting Company (MBC) and KBS America, Inc. (KBSA), a wholly-owned subsidiary of KBS Korea Broadcasting System (KBS), a South Korean public broadcaster. According to the MBC representative, the KBSA representative suggested that Hong and Lee should buy an existing video store in Brooklyn and move it to Queens, and that KBSA would continue to supply the Queens store with videos following the move. The KBSA representative denied he made these statements.

Hong formed Hwan Media Inc. to purchase the Brooklyn store, assumed ownership of the store’s existing KBSA license, and moved the store to Queens. KBSA made several deliveries of videos to the Queens store, for which Hwan paid the lower Brooklyn rate for master tapes. The KBSA representative claimed he informed Hong each time that the tapes were for use in the Brooklyn store, not the Queens store. KBSA then stopped providing master tapes to the Queens store.

KBSA claimed that it cut off the supply of videos because Hong and Lee violated the terms of the store license by moving the store to Queens without informing KBSA management and without requesting a new license for the Queens store. Hong disputed that claim, contending that KBSA’s management was informed at the meeting with KBSA’s representative, and that it was never agreed that the license was site-specific and would not transfer to the Queens store. Instead, Hong claimed that KBSA terminated the Queens store pursuant to a price fixing scheme maintained by members of the New York Korean Video Store Owners Association, of which the owner of Han Kook Video, Yang Joong Kim, was president and the owner of Spring Video & Gift, Inc., Joseph Kong, was vice-president. Hong alleged that the Association members had an agreement to charge a uniform $1.50 price for video rentals, and that they pressured KBSA to cut off supply to the Queens store because it was charging only $1.00 per rental.

Hong and Hwan Media filed suit against KBSA, Spring Video, Han Kook Video, Kim, Kong, and the general manager of KBSA’s Eastern regional office, asserting claims for violations of Sections 1 and 2 of the Sherman Act, the New York Donnelly Act, and the New York Deceptive Practices Act, as well as common law causes of action. KBSA and its general manager filed a variety of counterclaims, including a claim for copyright infringement. The defendants moved for summary judgment, and KBSA and its general manager moved for summary judgment on certain of their counterclaims, including the counterclaim for copyright infringement.

Sherman Act. The court concluded that the plaintiffs failed to allege an injury that would support antitrust standing for their price fixing claim. The only injury that the plaintiffs alleged was their lost revenue due to KBSA’s termination of their video supply, the court observed. However, “a competitor’s lost profits is not an injury of the type the antitrust laws were intended to prevent.” Price fixing schemes were illegal under the antitrust laws because they may harm purchasers by increasing prices, but the plaintiffs did not allege that they paid higher prices for KBSA’s videos as a result of the scheme. Although the plaintiffs claimed that the alleged price fixing would create higher prices for customers and force customers to travel to Flushing to rent videos once the Queens store was terminated, those allegations did not confer antitrust standing on the plaintiffs, even if they would on the customers.

The plaintiffs also lacked antitrust standing for their Sherman Act Section 2 claims, the court concluded. The court noted that the plaintiffs’ “bald assertion” that KBSA controlled 60 percent of the market for suppliers of Korean videos would not, without more, prove that KBSA had monopoly power. Even if the plaintiffs did establish monopoly power, however, they would lack antitrust standing because “a product distributor may not sue a supplier under § 2 of the Sherman Act when its injuries are merely derivative of the supplier’s monopoly power against its competitors.” Since the plaintiffs did not compete with KBSA, but were instead its customers, their injury from KBSA’s alleged monopoly was derivative.

Donnelly Act. Because New York’s Donnelly Act had been modeled on the Sherman Act, and the plaintiffs provided no reasons for interpreting their Donnelly Act claims differently from their Sherman Act claims, the court found that the plaintiffs also lacked antitrust standing for their Donnelly Act claims.

Deceptive Practices Act. The plaintiffs’ claim under New York’s Deceptive Practices Act (DPA) also failed, according to the court. The court explained that to assert a claim under the DPA a plaintiff must show that the defendant engaged in “(1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice.” The court noted that “anticompetitive conduct that is not premised on consumer deception is not within the ambit of the statute.”

Here, the plaintiffs failed to demonstrate that the conduct alleged to have violated the DPA—the price fixing scheme—was materially misleading to consumers. Although such schemes may be illegal under the antitrust laws, they did not necessarily mislead consumers or deceive them into making purchases they otherwise would not have made, the court observed. A mere failure to disclose the scheme would not be enough. The plaintiffs failed to cite any evidence that the defendants had attempted to deceive customers regarding the scheme, and the court noted that Kong and Kim had even publicly announced the Association’s intent “to tamp down on increased price competition and ensure that uncooperative stores would be unable to operate.”

Copyright Act. The court declined to grant summary judgment to KBSA on its counterclaims that Hong, Hwan Media, and Lee had violated the Copyright Act by copying and distributing, without a license, programming for which KBSA possessed a sole and exclusive North American license. The court explained that the Second Circuit required a copyright infringement claimant to show “(i) ownership of a valid copyright; and (ii) unauthorized copying of the copyrighted work.”

The court concluded that a genuine issue of material fact remained regarding whether KBSA’s license was exclusive. A declaration and an affidavit from two KBSA executives stated that KBS had entered into an exclusive license agreement with KBSA, but the deposition testimony of one of the executives did not confirm that the license was intended to be exclusive. Moreover, the terms of KBSA’s licensing contract did not “state or suggest” that KBSA would be KBS’s sole and exclusive distributor in North America. Instead, the contract explicitly reserved KBS’s right to distribute its own programming in North America, and an exclusive license would exclude all others, including the licensor.

Although the contract required KBSA to obtain copyrights that KBS had not secured, and provided that KBS may represent KBSA in negotiations regarding KBSA’s copyright agreement, no evidence indicated that KBS had not secured any copyrights, that KBSA actually secured any copyrights, or that those materials appeared in the Queens store. While the contract claimed to delegate to KBSA the authority to protect KBS’s copyrights, the court noted that a copyright owner cannot “grant a non-exclusive licensee the right to sue for copyright infringement.”

A letter from a KBS official also failed to establish that KBSA possessed an exclusive license, the court found. The letter was inadmissible hearsay. Even if it could be considered, the language of the contract still appeared to directly contradict it. Therefore, a question of fact remained regarding whether KBSA held either a copyright or an exclusive license over any of the KBS programming allegedly rented at the Queens store.

A question of fact also remained regarding whether the owners of the Queens store had actually violated the license. KBSA claimed its licenses were site-specific, and supported that claim with affidavits from other store owners as to their understanding that their licenses included that limitation. KBSA claimed that the owners of the Queens store were instructed not to rent KBS content at a location other than the Brooklyn store, and that they violated the license by moving the store to Queens and by renting to non-walk-in customers.

In response, the Queens store owners contended that the license was not limited to the Brooklyn store, but would instead automatically transfer to the Queens location, and permitted rental to home delivery as well as walk-in customers. Moreover, they claimed that KBSA’s representative had approved of their plan to move their store to Queens, and had assured the owners that the license would transfer. Further, they contended that KBSA cut off their supply of videos not because of their breach of the license but because they refused to comply with an alleged price fixing scheme operated by other Korean video stores.

Since the parties presented “highly divergent narratives,” and both parties supported their interpretation of the agreement with competent evidence, it was clear that there was a genuine dispute of material fact as to the terms of the agreement, the court concluded. Therefore, summary judgment was inappropriate.

The case is No. 05-CV-1177 (ENV) (VMS).

Attorneys: Christine M. Bae (Kim & Bae, P.C.) for Yong Ki Hong. Karl Geercken (Alston & Bird LLP) for KBS America, Inc.

Companies: Hwan Media, Inc.; KBS America, Inc.; Spring Video & Gift, Inc.; Han Kook Video

Cases: Antitrust StateUnfairTradePractices NewYorkNews