Z Channel Ltd. Partnership v. Home Box Office, Inc.

931 F.2d 1338, 1991 WL 65237

• Court: Court of Appeals for the Ninth Circuit
• Decided: April 30, 1991
• Docket: No. 88-6576
• Status: Published

Opinions

CANBY, Circuit Judge:

In this antitrust action, Z Channel Limited Partnership appeals the district court’s grant of summary judgment in favor of Home Box Office, Inc., (“HBO”) and several movie producer-distributors. Z Channel contends that the district court erroneously interpreted Newman v. Universal Pictures, 813 F.2d 1519 (9th Cir.1987), cert. denied, 486 U.S. 1059, 108 S.Ct. 2831, 100 L.Ed.2d 931 (1988), as requiring dismissal. HBO contends that events since the grant of summary judgment have rendered this case moot. We hold that this case is not moot, and that the district court erroneously applied Newman. Accordingly, we reverse and remand.

FACTS and PROCEEDINGS

Z Channel¹ and HBO both provide pay television services over cable to the Los Angeles area. HBO also produces and distributes movies to other cable providers, as do the other defendants. This lawsuit concerns agreements between Z Channel and its distributors, and between HBO and its distributors, prohibiting Z Channel from displaying paid advertisements. Z Channel contends that the enforcement of those agreements at the insistence of HBO violates antitrust laws. The facts, viewed in the light most favorable to Z Channel, the nonmoving party, are as follows.

For several years Z Channel displayed movies, which it acquired through licensing agreements from defendant studios or distributors (including HBO) who hold the copyrights to the titles. The licensing agreements between Z Channel and the defendant distributors were embodied, initially, in “master agreements” which set out the terms and conditions of the licensing of the first movies rented. These master agreements also contemplate a continuing relationship regarding future movie rentals, through subsequent “amendments” or “letter agreements.” Each amendment or letter agreement is separately negotiated and signed by the parties but, unless a modification is negotiated, the amendment incorporates by reference the terms of the master agreement. One provision of those master agreements precludes Z Channel from carrying paid advertising during the period for which the movies are licensed.²

HBO — as a cable channel — acquires movies from the other defendant distributors in the same manner. In HBO’s master licensing agreements with its distributors, there is a provision which prohibits those distributors from licensing the same movies to any other cable television channel which carries any paid advertising. Thus, Z Channel’s ability to display paid advertising is constrained by two sets of agreements: the “no-advertising” clauses in its master agreements, and the “no-licensing-to-advertisers” clauses in HBO’s master agreements.

In early 1988, Z Channel switched to a format that mixed movies and sports, and decided to display paid advertising during its sports segments. Such a format would have violated both sets of agreements prohibiting advertising.

Z Channel attempted to negotiate modifications in its licensing agreements with its distributors to permit paid advertising during sports programming. Apparently, those negotiations were to modify existing licenses and to permit more lenient licenses of future films.³ Z Channel alleges that it was unsuccessful in those negotiations, at least in part, because HBO insisted that the distributors comply with their no-licensing-to-advertisers agreements with HBO. Z Channel alleges that as a consequence of these events, it was required to show the sports programs (for which it had contracted) without paid advertising, and, further, that HBO cancelled its licensing agreement with Z Channel.

Subsequently, Z Channel brought this action, charging in Count One that the enforcement of and insistence on the various “no-advertising” agreements constituted unreasonable restraints of trade in violation of section 1 of the Sherman Act, for which Z Channel sought declaratory and injunctive relief. In Count Two, Z Channel charged that the agreements were the result of a group boycott, also in violation of section 1 of the Sherman Act, and sought declaratory and injunctive relief as well as damages. Z Channel also appended state law contract and tort claims, for which it sought damages.

After discovery, Z Channel abandoned Count Two. HBO sought summary judgment as to Count One and the district court granted it, finding that “Newman controls” (referring to Newman v. Universal Pictures, 813 F.2d 1519 (9th Cir.1987), cert. denied, 486 U.S. 1059, 108 S.Ct. 2831, 100 L.Ed.2d 931 (1988)). The district court thus ordered all counts dismissed. After this appeal was filed, new owners acquired Z Channel and have instituted an all-sports program. Apparently, Z Channel has completely stopped showing movies, and does not contemplate showing movies in the future.

ANALYSIS

I. Mootness

We are faced with a threshold issue of mootness. The only claim remaining in this case is that alleged in Count One of the complaint. The only relief expressly requested in connection with that Count was declaratory and injunctive relief, to permit Z Channel to show licensed movies along with sports programming that is interspersed with commercials. Because Z Channel has changed its format and neither shows nor contemplates showing movies, its prayer for declaratory and injunctive relief is clearly moot. For this reason, HBO contends that the entire appeal should be dismissed for mootness. Z Channel, on the other hand, contends that it is entitled to seek damages if it succeeds in proving its Count One claim, and that the case therefore is not moot. On this record, we agree with Z Channel.

If Z Channel is entitled to collect damages in the event that it succeeds on the merits, the case does not become moot even though declaratory and injunctive relief are no longer of any use. See Textile Workers Union v. Lincoln Mills, 353 U.S. 448, 459, 77 S.Ct. 912, 919, 1 L.Ed.2d 972 (1957). A case or controversy still exists because the parties are disputing whether enforcement of and insistence on the no-advertising agreements constituted an unreasonable restraint of trade. If Z Channel prevails, it may recover damages for loss of advertising revenue. Federal Rule of Civil Procedure 54(c) allows the district court to award damages if Z Channel proves facts entitling it to relief even though Z Channel never requested damages.

It is clear that Z Channel did not foreclose relief in damages by failing to ask for them in its Count One prayer. “[Ejvery final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if the party has not demanded such relief in the party’s pleadings.” Fed.R.Civ.P. 54(c) (emphasis added); see also Holt Civic Club v. City of Tuscaloosa, 439 U.S. 60, 66, 99 S.Ct. 383, 387, 58 L.Ed.2d 292 (1978) (“a meritorious claim will not be rejected for want of a prayer for appropriate relief”); Western District Council v. Louisiana Pacific Corp., 892 F.2d 1412, 1416-17 (9th Cir.1989) (holding case not moot because court could grant remedy of rescission even though plaintiff had not requested this remedy); Sias v. City Demonstration Agency, 588 F.2d 692, 696 (9th Cir.1978) (holding district court erred in concluding that it could not grant reinstatement because plaintiff failed to request such remedy); Sapp v. Renfroe, 511 F.2d 172, 176 n. 3 (5th Cir.1975) (plaintiff raises request for damages for first time on appeal; court notes Rule 54(c) allows award of damages in this situation).

HBO asserts, however, that it is far too late for Z Channel to talk of damages now. It points out that we dismissed a portion of an appeal for mootness in Dan Caputo Co. v. Russian River County Sanitation Dist., 749 F.2d 571, 574 (9th Cir.1984), because only declaratory and injunctive relief had been requested and the moment had passed when those remedies might have been useful. We think that HBO reads too much into Caputo. In Caputo there was no indication that damages were sought even as late as appeal, or that damages would have been appropriate for that challenge by a non-bidder to a public bid-solicitation process. As we said, “There remains no effective relief which we can offer Caputo/Wagner.” Id. The same situation prevailed in two other cases where we dismissed appeals because declaratory and injunctive relief had become moot; no damages were ever sought, and no case or controversy existed because the court was unable to grant effective relief. See Fair v. EPA, 795 F.2d 851, 854 (9th Cir.1986); Enrico’s Inc. v. Rice, 730 F.2d 1250, 1254 (9th Cir.1984).

Here, Z Channel now seeks damages,⁴ and Count One of its complaint, construed favorably to it, alleges restraints that could have resulted in financial damage to Z Channel. We conclude, therefore, that the damages remedy is sufficiently before us to preclude a dismissal for mootness. We turn, therefore, to the merits.

II. The Merits: Antitrust Injury

A grant of summary judgment is reviewed de novo. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989), cert. denied, — U.S. -, 110 S.Ct. 3217, 110 L.Ed.2d 664 (1990); State Farm Fire and Casualty Co. v. Martin, 872 F.2d 319, 320 (9th Cir.1989). Viewing the evidence in the light most favorable to the nonmoving party, we must determine whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989); Judie v. Hamilton, 872 F.2d 919, 920 (9th Cir.1989).

The anticompetitive activity that Z Channel complains of in Count One occurred in response to Z Channel’s decision, announced in early 1988, to carry advertising in connection with its sports broadcasts. Implementing that decision would have violated prohibitions on advertising contained in preexisting contracts between Z Channel and its distributors, and between those distributors and HBO. Much or all of the alleged harm to Z Channel arose either from the enforcement of those preexisting contract terms, or from the refusal to modify those terms in new contracts referencing the preexisting contracts. For that reason, thé district court concluded that Z Channel’s claim failed for lack of any showing of antitrust injury, under the rule announced in Newman v. Universal Pictures, 813 F.2d 1519 (9th Cir.1987), cert. denied, 486 U.S. 1059, 108 S.Ct. 2831, 100 L.Ed.2d 931 (1988). We conclude that the district court applied Newman too broadly, and we accordingly reverse.

Newman was a claim brought by Paul Newman, the actor, and George Roy Hill, a director, who had contracted to supply their services to Universal in the making of the feature films “Slapshot” and “The Sting.” The contracts provided for Newman and Hill to receive a percentage of revenue from exhibition of the films. Subsequently, technological developments led to a market for the films in videocassettes. Newman and Hill claimed that Universal and other major studios had conspired to apply the profit participation clauses in their contracts in such a way as to minimize the amounts paid to Newman, Hill and other artists.

We upheld a dismissal of Newman’s and Hill’s action for failure to state a claim of antitrust injury. Crucial to our analysis was the fact that the only injury to competition that was alleged or urged was the competition for Newman’s and Hill’s services in making the two named films. We said:

The subsequent conspiracy could not have affected the competition for Newman and Hill’s services at the time the contracts were made. Furthermore, the alleged conspiracy could not have affected appellants’ ability to negotiate with other studios for distribution of the video cassettes, because the existing contract covered distribution of the film in all forms.... Thus, if the alleged conspiracy did not restrain competition for Newman and Hill’s services in “The Sting” and “Slapshot,” there can be no resulting antitrust violation.

Id. at 1522.

The defendants extract from Newman a broad rule that interpretations and applications of contracts that preexist the anticompetitive activity cannot, as a matter of law, cause antitrust injury. The key, however, is not merely that Newman’s and Hill’s contracts predated the conspiracy; it was that the only competition alleged to be injured predated the conspiracy. When Newman and Hill signed contracts to perform in or direct “The Sting” and “Slap-shot,” the competition among movie producers for those services ended. A later conspiracy, whatever other damage it may have caused, could not injure that competition.

It is true in the case before us that some competition ended when Z Channel entered contracts to exhibit certain movies on its channel. Competition among distributors to rent those movies to Z Channel for cablecasting at the specified times clearly ended with the signing of that contract. Any later conspiracy to enforce that agreement could not cause injury to the competition among distributors for sale of the contracted movies or times.

But the present case involves two other forms of competition in existence when the defendants allegedly acted illegally. First, during the time when Z Channel was contemplating its inclusion of paid advertising during sports broadcasting, it was negotiating with distributors for licenses for new movies. Those negotiations involved competition among distributors to rent movies to Z Channel, and conversely, among cable channels (including Z Channel) to rent movies from distributors. Included (at least implicitly) in those negotiations for new licenses was Z Channel’s proposal to advertise during sports broadcasting.

Those negotiations were conducted in the shadow of the preexisting “master” licensing agreements, but they were, nevertheless, negotiations for new contracts. The master licenses permitted subsequent modification of any term, and the terms of the master license controlled only if new terms were not adopted by agreement of the parties.

Thus, the competition between cable channels and distributors for the license rights to films was continuing when the distributors were insisting on retaining their “no-advertising” clauses in new licenses, and, more significantly, when HBO was insisting that the other distributors continue to insist upon those clauses in any new licenses they might grant. To the extent that these actions by HBO and the other distributors injured that competition, the requirements of causation and competitive injury to Z Channel have been met.

Z Channel has also alleged injury to another, more general, area of competition in which it was participating at the time of the alleged antitrust violations — the struggle for competitive viability in the cable television market. Z Channel alleged that HBO coerced the distributor defendants to apply their licensing agreements with Z Channel to prevent Z Channel from advertising during its cablecasting of sports events. Second Amended Complaint para. 41. It further alleged that this action was taken so that “Z Channel, in the short run, will be a less effective and viable competitor to HBO and barred from entering the market for pay television offering both movie and sports programming, and, in the long run, would likely be eliminated as a competitor altogether_” Id. at para. 46. Thus,

Defendants’ interpretations and applications of their licensing agreements with plaintiff Z Channel Limited Partnership would have injurious effects on competition, including the diminishment of competition among and between pay television services and a restriction on consumer choice among pay television services and different pay television programming.

Id. at para. 53.

We think it clear from these allegations that Z Channel is asserting an injury to competition that postdates the anti-competitive activity of which it complains — the actions by HBO and the other defendants to enforce the “no-advertising” clauses in their existing licensing contracts, and to retain those clauses in new contracts. It may be true, as to those licenses already negotiated, that Z Channel had prospectively limited its future competition with other cable services when it entered the license agreements with “no-advertising” clauses.⁵ However, as to those licenses for which Z Channel was continuing to negotiate, it was clearly competing with other cable channels, not only for the rights to certain films, but also for survival and success in the cable television market.

Those distributors who, of their own independent choice, elected to enforce their “no-advertising” restrictions, or insisted on retaining those restrictions in subsequent licenses were doubtless entitled to do so. Assuming the legality of the contract,⁶ its collateral effect of limiting competition between Z Channel and other cable services would have been permissible.

Part of Z Channel’s case, however, is that the distributors were not free to relax their restrictions and permit Z Channel more vigorously to compete with other cable services, because HBO in its capacity as a competing cable service⁷ coerced the distributor defendants to enforce their agreements against Z Channel. According to Z Channel, HBO could accomplish this result because of its dominant market position and because its own contracts with distributors, at HBO’s insistence, contained clauses prohibiting distributors from licensing films covered by the HBO licensing agreement to other services if they advertised.⁸ This action by HBO and the acquiescence of the distributor defendants, enforced with the aid of HBO’s contracts with the distributors, is the anti-competitive activity of which Z Channel complains.⁹ And that conduct was clearly capable of causing an injury to the competition between Z Channel and the other cable services, including HBO.

The defendant distributors contend that each acted wholly independently in enforcing its “no-advertising” clause against Z Channel. They offered evidence in support of that position. Z Channel, however, offered contradictory evidence that HBO threatened action against the distributors under HBO’s contracts if the distributors did not enforce and retain the “no-advertising” restrictions against Z Channel, and that the distributors responded to that pressure. We cannot say as a matter of law that there is no triable issue whether HBO’s actions, acting upon the distributors, caused competitive injury to Z Channel.

We conclude, therefore, that Z Channel’s case is not foreclosed by Newman,¹⁰ because the anticompetitive activity of which Z Channel complains could have caused injury to competition between Z Channel and other cable services.¹¹ Having concluded that Newman does not control this case, we decide nothing further. The district court did not rule on the legality of the contracts in issue, the reasonableness of any restraints on trade, or any other possibly decisive issues, nor do we. We reverse simply because the district court’s conclusion that Newman controls was in error, and we remand for further proceedings. Nor, for lack of a sufficient record, do we address the asserted deficiencies in plaintiff’s standing that were likewise not ruled on in the disposition of the motion for summary judgment.

REVERSED AND REMANDED.

1 . Ownership of Z Channel has changed at least twice in the course of this litigation. The question of who owns Z Channel (and the rights to this litigation) has been presented as an issue of standing in this appeal, but, as indicated below, we remand for further factual findings in that regard. For the purposes of this opinion, we treat the ownership as if it were unchanged.

2 . The no-advertising clauses vary in their formulations, and thus in their scope. For purposes of this appeal we assume that they all prohibit advertising completely (during sports broadcasting as well as during movie broadcasting), since that interpretation is the most favorable to Z Channel, the party resisting summary judgment below. The district court, on remand, is not bound by this assumption, of course, and will have to interpret the various contracts, insofar as necessary to resolve the merits of Z Channel’s claim.

3 . The fact that Z Channel was negotiating for licenses for new movies during this time is not pleaded. In fact the complaint seems to indicate that Z Channel is only complaining of interpretation and application of existing licenses for films already licensed. See Second Amended Complaint, paras. 41-44. Z Channel first explicitly refers to continuing competition for new movies in its Opening Brief in this appeal. Appellant’s Opening Brief at 21 ("[T]he negotiating for and licensing of movies by defendants and Z Channel through licensing agreements and their subsequent amendments is an ongoing competitive process. This process has been taking place up to and through defendants’ imposition of their advertising prohibition.").

The evidence provided in opposition to summary judgment, however, indicates that, at least in part, Z Channel was negotiating for licenses for new movies when it was negotiating with the distributors about its ability to broadcast movies and also to broadcast paid advertising. Similarly, the evidence indicates that at least some of the movies licensed to Z Channel before it stopped showing movies were licensed after its attempt to broadcast advertising was frustrated.

We assume as true Z Channel’s allegations, even though they are ambiguous on this score, at best. Newman, 813 F.2d at 1522 ("In an antitrust action, the complaint need only allege sufficient facts from which the court can discern the elements of an injury resulting from an act forbidden by the antitrust laws.”) (citing Lucas v. Bechtel Corp., 633 F.2d 757, 760 (9th Cir.1980)).

4 . Unlike the dissent, we do not read Z. Channel’s opening brief as disavowing any claim for damages. Z Channel merely states that it was not seeking damages "arising from antitrust violations that produce the breach of a pre-existing contract.” Appellant’s Opening Brief, p. 14. Z Channel’s point is that it is not seeking the same kind of relief as that sought in Newman. The dissent takes the remarks out of context.

5 . Even as to those licenses already granted, all practical prospect of competition by means of advertising had not ended. Z Channel has alleged and offered some evidence to support the fact that it was negotiating with the distributors to relax their "no-advertising" restrictions. Indeed, two distributors did so, and they are not defendants in this action.

6 . Z Channel contends that the licensing agreements containing restrictions on advertising were themselves contracts in restraint of trade, in violation of section 1 of the Sherman Act. The district court did not rule on that point, nor do we. Of course, the contracts were ones to which Z Channel was itself a party.

7 . HBO also acted as a distributor, licensing Z Channel to show certain movies to which HBO owned the rights. With regard to restrictions it imposed on advertising by direct licensing agreement between itself and Z Channel, HBO is in the same position as the producer-distributor defendants.

8 . Indeed, there is evidence in the record supporting the inference that HBO was insisting on a broader restriction on licensing to advertisers than contained in its contracts with the other distributors. Those contracts prohibited HBO’s distributors from licensing the same movies they had licensed to HBO to other cable services that carried advertising. See, e.g., ER 154, Exh. B at 32. But the communications from the other distributors to Z Channel indicate that HBO was insisting that if HBO were to continue licensing any movies from the distributors, those distributors could license no movies to a cable service that carried advertising, regardless of whether there was overlap in the movies rented. See, e.g., ER 3, Exh. D (Mar. 3, 1988 letter from Twentieth Century Fox to Z Channel) ("[T]his confirms that 20th Century Fox cannot, under any circumstance, license films in the Pay TV window to any subscription Pay TV service which contains advertising.”); ER 5, at 13-14, para. 33 (Declaration of Joseph Cohen) ("[20th Century Fox executive] had received a ‘bad letter’ from HBO and would have to 'toe the line.’ She explained that this meant Fox could not allow Z Channel to exhibit Fox films if Z Channel were to contain any advertising. She added, ‘Fox doesn’t want to be the bad guys. We would love to keep giving Z Channel product but the advertising issue is of a big concern to HBO’ ”).

9 . The defendants contend that Z Channel’s Count One, so construed, depends upon a showing of conspiracy and any such showing is foreclosed because Z Channel abandoned its conspiracy count, Count Two, and it was dismissed with prejudice. We do not construe Z Channel's abandonment of its Count Two conspiracy claim as precluding any showing of joint action in support of its Count One claim. Z Channel has not helped to clarify matters at all by arguing that its Count One claim is a Section 1 "contract” claim and that contracts are mutually exclusive of conspiracies. It is difficult to understand how a contract in restraint of trade can be entered and enforced without agreement between parties. We also note that Count One alleges that the contracts between the distributors and Z Channel were contracts in restraint of trade, but does not directly allege that the contracts between HBO and the distributors, that forbade the distributors to license to operators who carried advertising, were contracts in restraint of trade. We do not regard that omission as fatal to Count One. The allegations of coercion of the distributors by HBO were broad enough to encompass use of its contract restrictions.

10 . It also is not foreclosed by Orion Pictures Distribution Corp. v. Syufy Enterprises, 829 F.2d 946 (9th Cir.1987), the only other case in this circuit to apply Newman. In Orion, we held that a breach of contract after the defendant had achieved monopoly power did not constitute "antitrust injury,” for a Sherman Act section 2 monopolization claim because the injury to competition in that case (allegedly acquiring monopoly power) had ended before the defendant’s injury (loss of revenue from the broken contract) occurred. Id. at 948-49.

11 . Nor do we regard this as a case like R.C. Dick Geothermal Corp. v. Thermogenics, Inc., 890 F.2d 139 (9th Cir.1989), which presented the question whether a plaintiff who might be viewed as peripheral to the competition in issue had antitrust standing and could claim antitrust injury. Here, Z Channel is alleging an injury to competition between itself and other cable producers. Assuming that Z Channel can prove its claims, it has no difficulty meeting the five-part test set forth by the plurality in Dick: the factors of directness of the injury, lack of more appropriate plaintiffs, and nature of the injury to it as a participant in the competitive market, easily bring Z Channel within the Dick plurality test. See id. at 146-48. The difference between Newman and the present case is particularly well captured in the statement by the Dick plurality that “[m]ere injury as a landlord or lessor entitled to royalties would not by itself be the kind of injury to competition that the antitrust laws are designed to prevent. ‘The requirement that the alleged injury be related to anticompetitive behavior requires, as a corollary, that the injured party be a participant in the same market as the alleged malefactors.’” Id. at 148, (quoting Bhan v. NME Hosp., Inc., 772 F.2d 1467, 1470 (9th Cir.1985)).