Fox Broadcasting v. Dish Network

Recent developments in broadcasting technology have changed the way that people watch television. Unsurprisingly, however, there has been some push back from traditional broadcasters, who see their business model as being under siege from these new innovations. We have written about one such case in our last couple posts. The recent case of Fox Broadcasting v. Dish Network is one example of this type of clash.

The defendant, Dish Network, had recently introduced a service, “Autohop”, that allowed customers to fast-forward through commercials on certain shows they had digitally recorded previously. Fox Broadcasting, which derives a great deal of its revenue through the sale of ad time, sued Dish Network in the Federal  district court in Central California, claiming a breach of the contract between Fox Broadcasting and Dish Network, as well as copyright infringement. Fox also sought preliminary injunction to stop the Autohop service while the case was still pending.

The district court used the four-factor test for determining whether or not a preliminary injunction was warranted, and ultimately decided that it was not. The first factor, whether Fox had established a likelihood of success on the merits of the case, was likely the most dispositive. This factor turned on whether or not it was DirectTV, or the consumer, that was party that made the digital copy of Fox’s programming for later viewing. In order for Fox’s copyright infringement case to be likely to succeed, it would have to show that it was DirectTV making those copies, and thus directly infringing its copyright. In support of its position, Fox argued that since it was DirectTV that operated the system that made the copies possible, and set rules such as how long the copies would last in the memory, as well as editing the start and end times of the recorded shows, that it should be judged to be directly responsible for making the copies. The district court disagreed with this assessment, and instead ruled that this fact pattern was more akin to a person making a copy of a show on a VCR, and that it is the end user who is making the copies, and who be most likely liable for a direct infringement suit.

The court next turned to whether or not Fox could show a likelihood that DirectTV had was liable for secondary copyright infringement by facilitating the direct copying of its users. As there was no real question that the users in question were copying Fox’s copyright material, the burden shifted to DirectTV to show that the users were protected by fair use. The long-held precedent is that a person is entitled, under the doctrine of fair use, to record a program for the purpose of time-shifting. Fox argued, however, that fair use did not allow customers to skip commercials or build a library of recorded programs. When the Betamax case was decided, the technology had not yet reached the point where either of purposes was feasible and so that court had not ruled on whether they were permissible under fair use or not. As to the matter of skipping commercials, the court was not sympathetic to Fox’s argument, noting that, although Fox owned the copyright to the television shows being recorded, it did not own the copyright to the commercials being skipped, and could not sue for copyright infringement under that theory.

The court then examining DirectTV’s AutoHop program under the Fair Use factors. First, the use was noncommercial; it was done by private consumers for their own viewing convenience, not as a commercial activity. Next the court looked at the “nature of the work” and “amount of substantiality of the work shown”, ultimately concluding that, even though the users in question copied the entirety of the material copyrighted by Fox, they had been invited to watch this event free of charge, and merely copied the work in order to make its viewing more convenient. Finally, the court looked at the last factor, how the use would affect the market for this work, which they ultimately concluded would not be adversely affected by the commercial skipping technology. Next week’s blog post will focus on the next steps that the court took in coming to the conclusion.

Part 4: Fiduciary Breach

The final argument that HRS proffered in an attempt to get the preliminary injunction overturned was that ORT’s claim that McChesney had breached his fiduciary duty lacked merit, and thus could not support a preliminary injunction.

This analysis turned on a pair of questions, both springing from ORT’s 2010 reorganization. First, there was the question of whether or not ORT was a member-managed or manager-managed LLC at the time of the alleged breach, because while the members of a member-managed LLC must act in good faith and deal fairly with their company, members of a manager-managed LLC only owe such duties if they are the manager of the corporation. As it appeared as though McChesney was not the manager of the LLC, whether he had an obligation to act in good faith would depend on what type of LLC ORT was at the moment of the alleged breach.

Given the facts of the case, it was not yet clear whether ORT was manager or member-managed at the time of the alleged breach. The court, however, ruled that it was ultimately immaterial: because it was still a question to be resolved, the circuit court properly used its discretion to preserve the status quo by a preliminary injunction while this question of corporate form was untangled.

HRS and McChesney next argued that McChesney was not a member of ORT at the time of the alleged breach, and therefore could not have committed a breach of fiduciary duty, as such duty was no longer owed.

Once again, there was a dispute over those facts. McChesney claimed that the other members of ORT had forced him out of the company, and that he no longer held any shares. ORT’s records, though not entirely clear on McChesney’s status themselves, nonetheless indicated that McChesney was still a member during the time of the alleged breach. The court ruled that what facts they did have indicated the presence of fair question that would have to be resolved through the litigation, and that was enough to justify a preliminary injunction.

Finally, McChesney argued that even if he had owed a fiduciary duty to ORT, he had not breached that duty. The court was unreceptive to such reasoning, noting briefly that given what McChesney was accused of doing -- intentionally attempting to scuttle the land deal because he did not care for it personally -- raised enough of a question to allow the court to issue a preliminary injunction.

Because ORT had raised a number of questions that were, on their face, sufficient to create some likelihood of success on the merits of these claims, the appellate court upheld the circuit court’s granting of a preliminary injunction to prevent HRS from foreclosing on the 8-acre parcel of land.

Kraft vs. Starbucks: The Beginning To The End (3)

In response, Starbucks argued that an injunction was unnecessary because Kraft failed to show that it would suffer irreparable harm in the absence of injunctive relief. Starbucks stated that it had the undisputed right to terminate the contract at any time because Kraft had materially breached the terms by failing to perform its obligations under the contract by “withholding sales presentations and other materials” and failing to improve Starbucks’ declining sales, thereby releasing Starbucks of its obligations under the contract. (Response, pp 6). Further, pursuant to the termination provision of the underlying contract, the damages that Kraft would suffer would be compensable by money damages based on Kraft’s alleged harm of losing the exclusive right to distribute a product through Starbucks. Kraft is the largest food company in North America, and revenues from Starbucks account for 1% of Kraft’s annual revenue. (Response, pp 16).

Is this numerical value significant enough to demonstrate irreparable harm to Kraft? Starbucks said no and cited the following cases. In Litho Prestige, Div. of Unimedia Group, Inc. v. News Am. Publ’g, Inc., 652 F. Supp. 804, 808 (S.D.N.Y. 1986), the court stated that an argument that a four percent business loss would cripple the plaintiff was “wholly unpersuasive”. In Reiter’s Beer Distribs., Inc. v. Christian Schmidt Brewing Co., No. 86 CS 534, 1986 WL 13950, at *11 (E.D.N.Y. Sept. 9, 1986), the court found no irreparable harm where sales of beers at issue constituted between 17% and 29% of distributor’s total sales. Based on these holdings, the potential 1% loss of Kraft’s annual revenue is far from demonstrating irreparable harm. 

Kraft vs. Starbucks: The Beginning To The End (2)

Two months after Kraft denied Starbucks’ offer, Starbucks accused Kraft of materially breaching the contract and informed Kraft that it would be terminating the contract effective March 1, 2011, unless Kraft “cured the alleged breaches within 30 days,” resulting in Kraft’s filing a complaint and motion for preliminary injunction. (Complaint, ¶ 58). In its complaint, Kraft alleged that Starbucks made misleading statements to the press, its investors and Kraft’s customers by “falsely maligning Kraft’s performance” in order to avoid the amount of money that Starbucks would be obligated to pay Kraft for its material breach of the business contract. (Complaint, ¶ 1).

Kraft argued that Starbucks’ breach allegations lacked merit because Kraft’s overall performance under the contract and its “effective in promoting Starbucks Products ha[d] been outstanding by any reasonable measure,” and that Starbucks’ attempt to terminate the contract without complying with its disputed resolution provisions was improper. (Complaint, ¶ 61, 67). Further, Kraft argued that Starbucks’ issuance of a press release impugning Kraft’s performance was misleading and caused an interference with Kraft’s customer relationships. (Complaint, ¶ 76).

Kraft’s argument that it would suffer irreparable harm if injunction was not granted was as follows: 1) Kraft would lose its right to arbitration, 2) Starbucks would continue to publicize the purported termination of its contract with Kraft thereby confusing the market, and 3) Kraft would have no adequate remedy at law, and “money simply [would] not be able to compensate Kraft for the damage that will ensue to its business and reputation.” (Complaint, ¶ 131).