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Redbox Automated Retail, LLC v. Disney Enterprises, Inc.

In countersuit in litigation between Disney and Redbox, district court grants in part and denies in part Disney’s motion to dismiss, dismissing with leave to amend Redbox’s antitrust, copyright misuse, tortious interference with prospective economic advantage, unfair competition and state false advertising claims, as well as claim for declaratory relief, leaving standing false advertising claim under the Lanham Act.

As part of a long-running litigation, Redbox filed a countersuit against several Disney entities alleging a number of claims, including copyright misuse, tortious interference with prospective economic advantage, false advertising under both state and federal laws, unfair competition, and a declaration that certain language on Disney’s packaging and websites was unconscionable and therefore unenforceable. 

Redbox, which rents and sells movies to consumers through tens of thousands of automated kiosks, acquires its collection of Disney movies by purchasing them at retail outlets, typically in “Combo Packs,” which include DVD, a Blu-ray disc and a digital movie that can be accessed with a code that can be redeemed only once through one of two Disney redemption websites. The Combo Pack packaging and the digital movie codes include statements that the components of Combo Packs cannot be rented or transferred separately. The redemption websites also state that Disney owns “[a]ll digital movie codes,” which can only be redeemed by a person who obtains the code as part of a Combo Pack, and that the codes may not be sold separately. 

In 2017, Redbox began selling individual digital movie codes separately from the DVD or Blu-ray disc. Disney filed suit against Redbox alleging copyright infringement, securing a preliminary injunction in August 2018 that bars Redbox from reselling the codes, finding that Disney was likely to establish that Redbox’s actions constituted contributory copyright infringement under terms of use Disney revised during the course of the litigation. (Read our summary of the district court’s decision here.)

In its First Amended Complaint (FAC), Redbox alleges that Disney pressured distributors into refusing to sell retail copies of Disney movies to Redbox; that the representations on the redemption websites, the movie codes and the Combo Pack packaging are false; and that Redbox has a right to dispose of the contents of the Combo Packs as a purchaser of the packs. 

The district court granted in part and denied in part Disney’s motion to dismiss the FAC, dismissing with leave to amend the antitrust, copyright misuse, tortious interference with prospective economic advantage, unfair competition and state false advertising claims, as well as the claim for declaratory relief, leaving stand the false advertising claim under the Lanham Act. 

Noting that courts are split on whether copyright misuse is an affirmative claim or only a defense, the district court concluded that Redbox had failed to sufficiently allege copyright misuse. First, Redbox alleged that Disney burdened consumers’ ability to sell the physical movie disc components of Combo Packs by imposing restrictive license terms on the download codes. The court disagreed, finding that the license terms on the download codes do not restrict the Combo Pack owner of the digital access rights because digital access is only conditioned on the manner in which the redeemer acquired the download code and not physical possession of the discs. 

Second, Redbox alleged that Disney “imping[ed] upon distributors’ first-sale rights by preventing downstream sales to Redbox.” The court found that any agreement between Disney and its distributors to forbid downstream sales to Redbox does not infringe upon the distributors’ first sale rights because Disney has the right to contractually limit the commercial conduct of the purchasers of its copyright goods.

Finally, Redbox alleged that Disney restricted the resale of digital codes without purchasers’ assent. While noting that this argument also appears to be based on the “first sale doctrine,” the court found that the first sale doctrine is inapplicable to digital codes and applies only to “‘particular’ copies that exist in the material world.” Recognizing that no physical object exists when a standalone code is transferred or prior to when the code is redeemed, the court held that “restrictions on resales of digital codes do not . . . face the same first sale doctrine obstacles that would apply to similar restrictions on physical discs.”

In response to the false advertising claims, Disney argues that Redbox lacks standing to assert its cause of action under both California law and the Lanham Act. California’s False Advertising law limits standing to “any person who has suffered injury in fact and has lost money or property as a result of a defendant’s alleged misrepresentations.” Here, Redbox alleges that consumers might refrain from purchasing download codes from Redbox on the basis of misrepresentations made by Disney. The court found that Redbox does not have standing to assert these claims absent evidence of its own reliance. 

Under the Lanham Act, however, standing is conferred more broadly as suits are permitted “by ‘any person who believes that he or she is likely to be damaged’ by a defendant’s false advertising.” Redbox alleges that Disney falsely states that Disney owns all download codes, which can be redeemed only by recipients of Combo Packs and cannot be transferred separately. This practice deceives consumers into believing that Redbox does not have title to the components of the Combo Pack. The court held that Redbox has not adequately alleged that Disney’s Combo Pack statements proximately cause Redbox’s loss of sales. That said, the court held that Redbox has statutory standing to assert False Advertising claims under the Lanham Act in connection with the misrepresentations on Disney’s websites, including representations that Disney owns the download codes and that codes cannot be redeemed by standalone purchasers. Therefore, the court denied Disney’s motion to dismiss as to the false advertising cause of action pursuant to the Lanham Act.

Summary prepared by Melanie Howard and Ava Badiee.