Herring Networks, Inc. v. AT&T Services, Inc.

          Present: The Honorable CHRISTINA A. SNYDER

          (IN CHAMBERS) - DEFENDANT AT&T SERVICES, INC.’S MOTION TO DISMISS PLAINTIFF’S COMPLAINT FOR FAILURE TO STATE A CLAIM (DKT. 14, FILED APRIL 25, 2016) DEFENDANT AT&T INC.’S MOTION TO DISMISS PLAINTIFF’S COMPLAINT FOR LACK OF PERSONAL JURISDICTION (DKT. 16, FILED APRIL 25, 2016)

          Honorable CHRISTINA A. SNYDER

         I. INTRODUCTION

         On March 9, 2016, plaintiff Herring Networks, Inc. (“Herring”) intiated this action against defendants AT&T Services, Inc. (“AT&T Services”) and AT&T, Inc. (collectively, “defendants”). Dkt. 1. Plaintiff asserts claims against defendants for: (1) fraud by concealment; (2) intentional misrepresentation; (3) negligent misrepresentation; (4) breach of the implied covenant of good faith and fair dealing; (5) promissory estoppel; (6) breach of oral contract; and (7) breach of implied in fact contract. Id.

         On April 25, 2016, defendant AT&T Services filed a motion to dismiss for failure to state a claim upon which relief can be granted, Dkt. 14, and defendant AT&T, Inc. filed a motion to dismiss for lack of personal jurisdiction, Dkt. 16.^[1] On May 23, 2016, plaintiff filed oppositions to both of these motions, Dkt. 32, 33, and on June 13, 2016, defendants filed replies in support of their respective motions, Dkt. 37, 38. Having carefully considered the parties’ arguments, the Court finds and concludes as follows.

         II. BACKGROUND

         Plaintiff’s complaint alleges the following facts: Herring is an independent, family-owned television programming company that owns and operates two television networks--a lifestyle entertainment channel called A Wealth of Entertainment (“AWE”) and a news channel called One America News Network (“OAN”). Compl. ¶¶ 16-19. Herring is a California Corporation with its principal place of business in San Diego, California. Id. ¶ 8. Defendants AT&T, Inc. and AT&T Services are Delaware corporations with their principal places of business in Dallas, Texas. Id. ¶ 9. AT&T, Inc. is the parent company of AT&T Services. Id. ¶ 10. Collectively, defendants are the second largest provider of mobile telephone services and the largest provider of fixed wireline telephone services in the United States. Id. ¶ 20. Defendants also provide broadband internet and subscription television services. Id. In June 2006, defendants launched AT&T U-verse (“U-verse”), a multi-channel television distribution service. Id. ¶ 21. From its launch, defendants included AWE as one of the channels on the U-verse platform. Id. ¶ 23. Several years thereafter, defendants also began including OAN on the U-verse platform. Id. ¶ 25.

         Owners of television networks, such as Herring, generate revenue through carriage (i.e. distribution) agreements with defendants. Id. Defendants’ customers, or subscribers, would pay a fee to obtain access to a variety of networks available on the U-verse platform. Id. In turn, defendants would pay the network owners an agreed upon licensing fee to distribute their content. Id. In early 2014, Herring and defendants entered into a renewed licensing agreement (the “U-verse Agreement”). Id. ¶ 26. Pursuant to the U-verse Agreement, defendants agreed to carry both AWE and OAN for a customary five-year period with one-year renewals and to pay Herring a monthly licensing fee of $0.18 per subscriber. Id.

         According to Herring, when the parties negotiated the U-verse Agreement, defendants led Herring to believe that they were committed to expanding their U-verse platform and increasing its subscriber base. Id. ¶ 27. Nonetheless, Herring contends that AT&T’s true intention was to wind down U-verse, acquire a competitor, DirecTV, and move subscribers from the U-verse platform to DirecTV’s platform. Id. ¶ 29. Herring alleges that defendants deliberately withheld this information from Herring. Id. In particular, Herring alleges that Ryan Smith, Vice President of Content at AT&T Services, made the following representations to Charles Herring, the President of Herring: (1) defendants expected U-verse to challenge and surpass its competitor Time Warner Cable (“TWC”)-at the time U-verse had less than half as many subscribers as TWC (approximately 5.3 million for U-verse compared to 11.4 million for TWC); (2) defendants were continuing U-verse’s expansion to additional markets and capturing a larger market share in the markets where U-verse had already launched; and (3) defendants had ambitious expansion plans. Id. ¶ 28. Herring further alleges that these representations were consistent with defendants’ public statements regarding their intention to grow U-verse. Id. ¶ 33. For example, in one of their Annual Reports, defendants stated:

As part of Project Velocity IP (VIP), we [AT&T] plan to expand our IP-broadband service to approximately 57 million customer locations, including U-verse services to a total of 33 million customer locations. We expect to be substantially complete in the 2015 and 2016 timeframe.

Id. Finally, Herring alleges that defendants misrepresented their plans to grow U-verse in public filings by AT&T, Inc.’s top executives, which Herring relied on. Id. ¶¶ 90, 97.

         In an early draft of the U-verse agreement, there was a clause that would have required defendants to carry Herring’s networks on any subsequently-acquired platforms. Id. ¶ 31. However, towards the end of the parties’ negotiations, new language was inserted into the U-verse agreement, which stated:

For the avoidance of doubt, nothing herein shall obligate AT&T to launch and carry the Services on any System that AT&T acquires during the Term if such System is not already distributing or obligated to distribute the Services.

Dkt. 17, Smith Decl, Ex. A, “U-verse Agreement” ¶ 4.B. Herring contends that this language effectively excused AT&T from any obligation to carry Herring’s networks on newly-acquired platforms, such as the DirecTV platform. Compl. ¶ 31.

         A month after the U-verse Agreement was finalized, defendants announced their plans to acquire DirectTV. Id. ¶ 46. In order for defendants to acquire DirecTV they needed to obtain regulatory approval from the Federal Communications Commission (“FCC”). Id. ¶ 48. According to Herring, the FCC has a Congressional mandate to foster a diverse, robust, and competitive marketplace for video programming, which includes ensuring fair and equal treatment for independent programmers. Id. ¶ 50. Thus, in order to obtain the necessary governmental approvals, defendants needed support and lobbying from independent programmers, such as Herring. Id. To this end, shortly after announcing the planned acquisition of DirecTV, executives from Herring and defendants met at AT&T Services’ Los Angeles offices. Id. ¶ 55. At this meeting, Aaron Slator, the president of AT&T Services, made the following proposal: If Herring publicly supported defendants throughout its acquisition of DirecTV, including by lobbying the FCC, defendants would ensure that DirecTV carried Herring’s networks on its platform. Id. ¶ 56. Slator said that the terms of carriage on DirecTV’s platform would be similar to the U-verse Agreement and that this new agreement would be reduced to writing after the acquisition of DirecTV was completed. Id. ¶ 57. He also stated that the new agreement would be for a customary five year term, with automatic one-year renewals-i.e., identical to the U-verse Agreement. Id. Finally, Slator informed Herring’s executives that while DirecTV would need to pay Herring less than the $0.18 per subscriber set forth in the U-verse Agreement, carriage on DirecTV’s platform would still be very lucrative for Herring. Id. ¶ 59. Slator told Herring’s executives that he had been authorized to make this proposal by his superiors at AT&T, Inc. Id. ¶¶ 55, 58. Herring agreed to this proposal and, thereafter, began advocating on defendants’ behalf and in favor of the DirecTV acquisition. Id. ¶¶ 60, 66-69. On July 24, 2015, AT&T’s acquisition of DirecTV was approved by the FCC and the AT&T/DirecTV merger was consumated. Id. ¶ 76. Nonetheless, defendants have not made either of Herring’s networks available on the DirecTV platform. Id. ¶ 36.

         In addition, Herring contends that, since acquiring DirecTV, defendants have aggressively solicited U-verse subscribers to move to DirecTV. Id. ¶ 35. AT&T has also publicly announced that it plans to make DirecTV its television service and wind down U-verse. Id. ¶ 37. Defendants’ efforts to phase out U-verse have been successful. Since the acquisition of DirecTV, U-verse has lost approximately 325, 000 subscribers, while DirecTV has gained more than 200, 000 during the same time. Id. As noted above, under the U-verse Agreement, Herring’s licensing fee is based on the number of U-verse subscribers. Accordingly, Herring contends that, by shifting subscribers from U-verse to DirecTV, defendants are undermining Herring’s bargained-for benefit under the U-verse Agreement. Id. ¶ 36-39.

         III. LEGAL STANDARD

         A. Motion to Dismiss for Lack of Personal Jurisdiction

         When a defendant moves to dismiss for lack of personal jurisdiction under Federal Rule of Civil Procedure 12(b)(2), the plaintiff bears the burden of demonstrating that the court may properly exercise personal jurisdiction over the defendant. Pebble Beach Co. v. Caddy, 453 F.3d 1151, 1154 (9th Cir. 2006). Where, as here, a court decides such a motion without an evidentiary hearing, the plaintiff need only make a prima facie showing of jurisdictional facts to withstand the motion to dismiss. Ballard v. Savage, 65 F.3d 1495, 1498 (9th Cir. 1995); Doe v. Unocal Corp., 27 F.Supp.2d 1174, 1181 (C.D. Cal. 1998), aff’d, 248 F.3d 915 (9th Cir. 2001). Plaintiff’s version of the facts is taken as true for purposes of the motion if not directly controverted, and conflicts between the parties’ affidavits must be resolved in plaintiff’s favor for purposes of deciding whether a prima facie case for personal jurisdiction exists. AT & T v. Compagnie Bruxelles Lambert, 94 F.3d 586, 588 (9th Cir. 1996); Unocal, 27 F.Supp.2d at 1181. If the defendant submits evidence controverting the allegations, however, the plaintiff may not rely on its pleadings, but must “come forward with facts, by affidavit or otherwise, supporting personal jurisdiction.” Scott v. Breeland, 792 F.2d 925, 927 (9th Cir.1986) (quoting Amba Mktg. Servs., Inc. v. Jobar Int’l, Inc., 551 F.2d 784, 787 (9th Cir.1977)).

         Generally, personal jurisdiction exists if (1) it is permitted by the forum state’s long-arm statute and (2) the “exercise of that jurisdiction does not violate federal due process.” Pebble Beach, 453 F.3d at 1154-55 (citing Fireman’s Fund Ins. Co. v. Nat’l Bank of Coops., 103 F.3d 888, 893 (9th Cir. 1996). California’s long-arm jurisdictional statute is coextensive with federal due process requirements, so that the jurisdictional analysis under state and federal law are the same. Cal. Civ. Proc. Code § 410.10; Roth v. Garcia Marquez, 942 F.2d 617, 620 (9th Cir. 1991). The Fourteenth Amendment’s Due Process Clause requires that a defendant have “minimum contacts” with the forum state so that the exercise of jurisdiction “does not offend traditional notions of fair play and substantial justice.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Depending on the nature of the contacts between the defendant and the forum state, personal jurisdiction is characterized as either general or specific.

         A court has general jurisdiction over a nonresident defendant when that defendant’s activities within the forum state are “substantial” or “continuous and systematic, ” even if the cause of action is “unrelated to the defendant’s forum activities.” Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 446-47 (1952); Data Disc, Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280, 1287 (9th Cir. 1977). The standard for establishing general jurisdiction is “fairly high” and requires that the defendant’s contacts be substantial enough to approximate physical presence. Bancroft & Masters, Inc. v. Augusta Nat’l Inc., 223 F.3d 1082, 1086 (9th Cir. 2000). “Factors to be taken into consideration are whether the defendant makes sales, solicits or engages in business in the state, serves the state’s markets, designates an agent for service of process, holds a license, or is incorporated there.” Id. (finding no general jurisdiction when the corporation was not registered or licensed to do business in California, paid no taxes, maintained no bank accounts, and targeted no advertising toward California).

         A court may assert specific jurisdiction over a claim for relief that arises out of a defendant’s forum-related activities. Rano v. Sipa Press, Inc., 987 F.2d 580, 588 (9th Cir. 1993). The test for specific personal jurisdiction has three parts:

(1) The non-resident defendant must purposefully direct his activities or consummate some transaction with the forum or resident thereof; or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws;

(2) the claim must be one which arises out of or relates to the defendant's forum-related activities; and

(3) the exercise of jurisdiction must comport with fair play and substantial justice, i.e., it must be reasonable.

Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 802 (9th Cir. 2004) (citing Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987)); see also Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475-76 (1985). The plaintiff bears the burden of satisfying the first two prongs, and must do so to establish specific jurisdiction. Schwarzenegger, 374 F.3d at 802.

         If the plaintiff establishes the first two prongs, then it is the defendant’s burden to “present a compelling case” that the third prong, reasonableness, has not been satisfied. Schwarzenegger, 374 F.3d at 802 (quoting Burger King, 471 U.S. at 477). The third prong requires the Court to balance seven factors: (1) the “extent of the defendant’s purposeful injection into the forum”; (2) the burdens on defendant from litigating in the forum state; (3) the “extent of conflict with the sovereignty of the defendant’s state, ” (4) the forum state’s “interest in adjudicating the dispute”; (5) the “most efficient judicial resolution of the controversy”; (6) the “importance of the forum to the plaintiff’s interest in convenient and effective relief”; and (7) the existence of an alternative forum. Ziegler v. Indian River County, 64 F.3d 470, 475 (9th Cir. 1995).

         B. Motion to Dismiss for Failure to State a Claim

         A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims asserted in a complaint. Under this Rule, a district court properly dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.’ ” Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). “[F]actual allegations must be enough to raise a right to relief above the speculative level.” Id.

         In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all material allegations in the complaint, as well as all reasonable inferences to be drawn from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be read in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory ‘factual content, ’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.”). Ultimately, “[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.

         Unless a court converts a Rule 12(b)(6) motion into a motion for summary judgment, a court cannot consider material outside of the complaint (e.g., facts presented in briefs, affidavits, or discovery materials). In re American Cont’l Corp./Lincoln Sav. & Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev’d on other grounds sub nom Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court may, however, consider exhibits submitted with or alleged in the complaint and matters that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); see Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001).

         As a general rule, leave to amend a complaint which has been dismissed should be freely granted. Fed.R.Civ.P. 15(a). However, leave to amend may be denied when “the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the ...