Wednesday, October 27, 2010

Format wars: EcoDisc v. standard DVD

EcoDisc Technology AG v. DVD Format/Logo Licensing Corp., 711 F. Supp. 2d 1074 (C.D. Cal. 2010)

EcoDisc is the licensor of a new technology for making thin optical discs. Defendant DVD Forum is the optical disc standard-setting organization, and defendant DVDFLLC licenses the DVD Format standard and DVD Logo to disc replicators worldwide. The key question was whether replicators breach their license agreements by using defendants’ proprietary technology to make EcoDiscs, or instead whether the EcoDisc, like a BluRay or DVD+RW disc, is simply not covered by the license. EcoDisc’s 0.6mm discs are half as thick as a conventional DVD and also recyclable and “environmentally friendly” (watch those claims under the new Green Guides!). EcoDisc alleged that its discs are compatible with standard DVD players and can be played in 132 different playback systems.

The complaint alleged that defendants threatened all disc replicators that if they make the thinner EcoDisc they’ll be in breach of their license agreement and no longer permitted to make standard DVDs or use the DVD Logo, and also disseminated false information about the EcoDisc. EcoDisc alleged a conspiracy to keep EcoDisc out of the market, suing for antitrust violations, false advertising, tortious interference, trade libel, and unfair business practices under California law.

DVD Forum, a Japanese trade association, prevailed on its motion to dismiss for want of personal jurisdiction, without leave to amend.

DVDFLLC, which I’m going to call “defendant,” Defendant allegedly threatened all licensed replicators that making any 0.6mm disc would breach the license agreement and could lead to early termination. It represented that 0.6mm discs had caused damage to playback apparatus. It said similar things on its website. In 2009, it sued two licensees in the SDNY for making EcoDiscs, and distributed copies of the complaint to other licensees. After EcoDisc filed this lawsuit, defendant sent a letter to licensees offering an amendment to the license that would allow them to replicate 0.6mm discs if the packaging says “This disc is not a standard DVD, and may not operate in some drives or players” and if the licensee agrees to indemnify defendant for any costs or liabilities incurred in relation to the manufacture or sale of such discs.

Defendant argued that it was only seeking to prevent licensees from using the DVD Format and proprietary technology to make optical discs not fully compliant with its specifications. It further contended that playability problems of noncompliant discs damage the DVD Logo brand. EcoDisc, by contrast, alleged that the EcoDisc was awarded a 99.2% payability rating and can be safely played in the same manner as a standard DVD; ejection problems with certain Apple notebooks with slot-in drives came from the fact that the drives didn’t meet DVD specifications, and EcoDisc printed a visual warning on each EcoDisc against using them in Apple slot-in drives. As of November 2009, it alleged, EcoDiscs no longer have any known ejection issues on any disc drives, and it no longer puts warnings on its products.

Noerr-Pennington immunity protects against liability for petitioning the government; the court considered only its application to the antitrust claims, but observed that it has been applied to other contexts, including claims for intentional interference with prospective economic advantage. The immunity extends to conduct that’s incidental to petitioning activities, including presuit demand letters and settlement offers. Defendant’s communications with licensees and website announcements were sufficiently connected to litigation—given that defendant did in fact sue—to be covered.

There’s an exception to Noerr-Pennington immunity when litigation is a mere sham to cover an attempt to interfere with a competitor’s business, but it’s hard to invoke and EcoDisc didn’t succeed here. It would have to show that (1) defendant’s alleged threats were objectively baseless in the sense that it could not have reasonably expected to prevail in litigation and that (2) defendant’s subjective motivation was to interfere with EcoDisc’s business relationships. EcoDisc didn’t manage to plead that defendant’s conduct was objectively unreasonable. In fact, EcoDisc conceded that using the DVD Format specifications to produce noncompliant discs violates the license agreement, and that the EcoDisc is noncompliant. EcoDisc argued that licensees don’t need to use defendant’s format to create an EcoDisc, but didn’t adequately explain how EcoDiscs can be played on a standard DVD player without using defendant’s format standards. (Isn’t that also true of the DVD+RW? Then again, I have always had trouble figuring out the difference between the + and -.) EcoDisc even alleged that its discs have the same data structure and data layer as a conventional DVD-5. It did not adequately allege directly that replicators don’t use defendant’s proprietary information to make EcoDiscs. Thus, the allegations of the complaint don’t suggest that defendant’s belief that its proprietary standards were being improperly used by replicators was unreasonable.

The court left open the possibility that Noerr-Pennington immunity applied to Lanham Act claims because the false advertising claim was not pleaded with sufficient particularity under Rule 9(b). The 9th Circuit hasn’t ruled that 9(b) applies to Lanham Act claims, but many district courts have so held, and this one agreed. Though EcoDisc identified three separate communications containing allegedly false statements and thus satisfied the requirements of describing the time, place, and parties, it didn’t specify which particular statements were false or why they were false/misleading.

The motion to dismiss was granted with leave to amend. The court reserved decision on the state-law claims until plaintiff pleads a viable federal cause of action.

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