Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 1 of 72
The Honorable Marsha J. Pechman 1 2
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5 6 7 UNITED STATES DISTRICT COURT 8 WESTERN DISTRICT OF WASHINGTON 9 AT SEATTLE 10 ) IN RE COINSTAR INC. ) Case No. C11-133 MJP 11 SECURITIES LITIGATION ) ) LEAD CASE NO. C11-133 MJP 12 ) 13 ) ) CONSOLIDATED AMENDED 14 ) COMPLAINT ) 15 ) ) JURY TRIAL DEMANDED 16 ) 17 18 19 20 21 22
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25 26 27 CONSOLIDATED AMENDED COMPLAINT LABATON SUCHAROW LLP 28 NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 2 of 72
1 TABLE OF CONTENTS Page 2
3 NATURE OF THE ACTION 1 JURISDICTION AND VENUE 9 4 PARTIES 9 5 DEFENDANTS SHOULD BE TREATED AS A GROUP FOR PLEADING PURPOSES 11 CLASS ACTION ALLEGATIONS 12 6 CONTROL PERSON ALLEGATIONS 14 7 SUBSTANTIVE ALLEGATIONS 16 8 BACKGROUND 16 Coinstar And Its Redbox Business 16 9 Redbox’s Inability To Obtain New Release DVDs 18 10 The 28-Day Delay Agreements 20 First Quarter Financial Results Following Entry Of The 28-Day Delay Agreements 21 11 The Second Quarter 2010 “Anomaly” 22 The Third Quarter Mixed Results 24 12 CWs Confirm that Defendants Knew the Company Faced Revenue Shortfall in the Fourth Quarter 28 13 Defendants Knew about DVD Revenue Shortfall 28 14 Defendants Knew of Revenue Problems Stemming from the Rent and Return Anywhere Policy 31 15 Defendants Knew of Revenue Problems Resulting from Slow Blu-Ray Disc Rentals: 32 Weak Titles In 4Q10 And The 28-Day Delay 33 16 DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS MADE DURING THE CLASS PERIOD 35 17 October 28, 2010 3Q10 Press Release 35 18 October 28, 2010 3Q10 Earning Conference Call 36 October 28, 2010 3Q10 Form 10-Q 38 19 November 16, 2010 Investor Summit 41 November 17, 2010 Investor Conferences 42 20 THE TRUTH IS REVEALED 46 21 January 13, 2011 Disclosure 46 February 3, 2011 Disclosure 49 22 POST-CLASS PERIOD EVENTS 51 23 MISREPRESENTATIONS CONCERNED COINSTAR’S “CORE OPERATIONS” 52 54 24 LOSS CAUSATION AND ECONOMIC LOSS ADDITIONAL SCIENTER ALLEGATIONS 55 25 APPLICABILITY OF PRESUMPTION OF RELIANCE UNDER THE AFFILIATED UTE 26 DOCTRINE, AND/OR, IN THE ALTERNATIVE, THE FRAUD ON THE MARKET DOCTRINE 58 27 NO STATUTORY SAFE HARBOR 60 28 PRAYER FOR RELIEF 68 CONSOLIDATED AMENDED COMPLAINT i LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 3 of 72
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1. Lead Plaintiff Employees’ Retirement System of the State of Rhode Island 1 (“Rhode Island” or “Plaintiff”), by its undersigned attorneys, hereby brings this Consolidated 2 Amended Complaint (“Complaint”) against Coinstar, Inc. (“Coinstar” or the “Company”), Paul 3 Davis, Gregg A. Kaplan, J. Scott Di Valerio, Donald R. Rench, and Galen Smith 4 (“Defendants”). The allegations herein are based on Plaintiff’s personal knowledge as to its 5 own acts and on information and belief as to all other matters, such information and belief 6 having been informed by the investigation conducted by and under the supervision of its 7 counsel, which included interviews of former employees of Coinstar and other persons with 8 knowledge of the matters alleged herein (some of whom have provided information in 9 confidence; these confidential witnesses (“CWs”) will be identified herein by number (CW1, 10 CW2, etc.) and will be described in the masculine in all cases in order to protect their 11 identities); review and analysis of publicly available information, including United States 12 Securities and Exchange Commission (“SEC”) filings by Coinstar, regulatory filings and 13 reports, securities analysts’ reports and research data, investor conference transcripts, Company 14 advisories, press releases and other public statements issued by the Company, Company 15 pleadings in other litigation, and media reports about the Company. Plaintiff believes that 16 substantial additional evidentiary support will exist for the allegations set forth herein after a 17 reasonable opportunity for discovery. On behalf of itself and the class it seeks to represent, 18 Plaintiff alleges as follows: 19 NATURE OF THE ACTION 20 2. Plaintiff brings this action on behalf of itself and as a class action on behalf of 21 all persons and entities who purchased or otherwise acquired common stock of Coinstar 22 between October 29, 2010 and February 3, 2011 inclusive (the “Class Period”). 23 3. This class action is brought pursuant to Sections 10(b) and 20(a) of the 24 Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a); and 25 SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. 26 27 CONSOLIDATED AMENDED COMPLAINT LABATON SUCHAROW LLP 28 NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 5 of 72
1 4. Coinstar is a provider of automated retail solutions for consumers. The 2 Company’s core automated retail businesses include: (i) Redbox self-service digital video disc 3 (“DVD”) kiosks that dispense DVDs that may be rented or purchased by consumers, and (ii) 4 Coinstar branded self-service coin-counting machines that enable consumers to convert their 5 coins to bills. 6 5. As of early 2011, Redbox operated approximately 30,200 self-service kiosks in 7 26,100 locations, primarily leading mass retailers, drug stores, restaurants and convenience 8 stores, including Walmart, Walgreens, and McDonalds. The kiosks, placed either inside or 9 outside a retail establishment, provide the functionality of a traditional video rental store while 10 occupying an area of less than twelve square feet. To use a kiosk, a consumer selects a title, 11 swipes a valid credit card, and receives a DVD. By the Class Period start, approximately 80% 12 of Coinstar’s revenue was generated through the rental or sale of DVDs at Redbox kiosks. See 13 Coinstar’s 2010 Form 10K dated February 10, 2011, p. 25 (showing 2010 DVD revenue of 14 $1.16 billion and coin revenue of $276.3 million).
15 6. Redbox’s business model is primarily focused on renting standard definition, 16 new release DVDs to consumers for $1 per night. Unlike a traditional video rental store, which 17 stocks a much greater variety and volume of DVDs, a typical Redbox kiosk only has room for 18 630 DVDs, so Redbox cannot provide, and consumers do not expect, a wide variety of titles 19 when they rent a DVD from a Redbox kiosk. Because DVDs rent at a substantially higher rate 20 during the first few weeks following their release, the stocking of kiosks with a sufficient
21 number of new releases to satisfy customer demand is of paramount importance to the 22 Company’s success. 23 7. Historically, Redbox enjoyed a competitive advantage over other new release 24 movie distribution rental channels because movie studios made movies available on physical 25 formats like DVDs for a 30-45 day release window before releasing its movies to other 26 distribution rental channels, such as pay-per-view (PPV), video-on-demand (VOD), or 27 television. Redbox also enjoyed a competitive advantage over stores selling DVDs, because 28 CONSOLIDATED AMENDED COMPLAINT 2 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 6 of 72
1 movie studios made new release DVDs available to retailers selling movies and to Redbox 2 renting movies at the same time. Consumers wishing to view a newly released DVD 3 historically had the option of buying a movie for full price, or renting the same movie on the 4 same day for $1.00. 5 8. However, as Redbox grew and became more prominent in the new release, 6 movie distribution marketplace, it became increasingly difficult for Redbox to secure the new 7 release DVDs its customers demanded. Many studios believed that Redbox’s $1.00 per night 8 rentals were adversely impacting upon the sale of DVDs to consumers, who given the option, 9 often preferred to rent most genres of new release DVDs at the low $1.00 per night rate over 10 the significantly higher purchase price.
11 9. Prior to the Class Period, many of the historic advantages Redbox enjoyed over 12 its competitors had been eliminated. Studios began making their movies available on demand 13 for on-line streaming on the same day, or even before they made DVDs available for purchase 14 or rental. Additionally, some major studios began staggering the release of DVDs so that a 15 movie might be less available or unavailable for rental until as much as 28 days after the DVD 16 was made available for purchase at a retail outlet. 17 10. As the studios began to make new release DVDs more difficult for Redbox to 18 obtain, Redbox was forced to engage in the costly practice of sending its workforce to retail 19 outlets to buy, at full price, the new release DVDs its customers demanded, often in
20 unsatisfactory quantities. In an effort to facilitate easier access to new release DVDs, the 21 Company brought litigation against three major studios, Universal Studios Home Entertainment 22 (“Universal”), Twentieth Century Fox Home Entertainment (“Fox”), and Warner Home Video
23 (“Warner Bros.”), seeking to force the studios to allow Redbox to purchase new release DVDs 24 from the studios or distributors (“Studio Litigation”) upon release of those of DVDs for sale.
25 See Redbox complaints filed against Universal, Warner Bros. and Fox, attached hereto as 26 Exhibit A (“Studio Litigation Complaints”). 27 28 CONSOLIDATED AMENDED COMPLAINT 3 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 7 of 72
1 11. Redbox brought the Studio Litigation because it understood the importance to its 2 business model of securing access to new release DVDs no later than new movies were made 3 available to consumers for home viewing in any format. In its Studio Litigation Complaints, 4 Redbox acknowledged that “[o]ver thirty percent of a new-release DVD’s revenue is generated 5 during the first two weeks of its release” and “that consumer demand for a new-release DVD is 6 at its highest immediately after its release and declines substantially thereafter and within a 7 short time period.” See, e.g., Universal Complaint, attached as part of Exhibit A, at pp. 1, 8. 8 12. Ultimately, Redbox was forced by the high out-of-pocket and labor costs it 9 incurred in buying new release DVDs from retail outlets, as well as the uncertainty as to the 10 outcome of the Studio Litigation, to settle its claims with the studios. As part of the Studio 11 Litigation resolution, Redbox agreed to delay its acquisition of new releases DVDs for 28 days 12 after the studios first released the movies to the public through other sources (“28-Day Delay 13 Agreements”). This was a highly material concession, as Redbox obtained 30-40% of its DVD
14 supply from these three movie studios. Coinstar entered into these 28-Day Delay Agreements 15 with Fox, Universal, and Warner Bros. in February and April, 2010.
16 13. Redbox acknowledged that the 28-Day Delay Agreements would have an impact 17 on revenue and earnings, but claimed that the impact would be limited to a short period of 18 transition during the second quarter of 2010 (“2Q10”). The Company repeatedly stressed this 19 message in its public statements: “Having worked through the one-time transition to the [28-
20 day delay] window, we expect our comps to move back to double digit growth during the 21 second half of the year”; “April and May was the transition period for our delayed titles”; “We
22 successfully navigated the transition to a 28-day window, and expect the impact to lessen as we 23 move through the remainder of the year”; “As we cycle through this rotation and we start 24 seeing releases from the studios every week, it’s started to improve. That’s the reason that we 25 are really calling this a bit of an anomaly in Q2.”
26 14. Notwithstanding the fact that DVDs from Universal, Fox, and Warner Bros. 27 would be available to consumers for 28 days before they were available in Redbox kiosks, for 28 CONSOLIDATED AMENDED COMPLAINT 4 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 8 of 72
1 the duration of the studio contracts, Defendants claimed that the 28-Day Delay Agreements 2 were a one-time problem. As a JP Morgan analyst described at the end of July 2010, Coinstar 3 management “was optimistic following the near-term hiccup caused by the 28-day window 4 transition that occurred in April.” After that first 28-day “hiccup,” investors were led to believe 5 that there would be new movies appearing in the boxes every week, that the kiosks would be 6 adequately stocked with new hot titles, and that the 28-day delay would not impact revenue 7 moving forward. 8 15. The 28-Day Delay Agreements caused more problems for Redbox than 9 Defendants admitted. For 28 days, not just in the second quarter of 2010 but at all times while 10 the 28-Day Delay Agreements were in place, Redbox would find itself at a competitive 11 disadvantage, forced to fill its kiosks with “new releases” that were not really “new.” For 28
12 days, Redbox’s customers looking to view the new release videos had access to those videos 13 from sources other than Redbox. This hurt Redbox sales. 14 16. Defendants denied the known impact of the 28-Day Delay Agreements in the 15 face of growing evidence to the contrary. During the fourth quarter 2010, Defendants made 16 false statements of present fact, insisting that their problems with the 28-Day Delay 17 Agreements encountered in the second quarter 2010 were a thing of the past. In discussing the 18 effect of the 28-Day Delay Agreements, Defendants stated that it was “ in line with what we 19 had expected ,” and that Redbox’s issues with the studios who had imposed the 28-Day Delay
20 Agreements were behind it (“the good news is most of all of that is behind us ”). Defendants 21 also reported to investors that Redbox had a “ steady stream of good content from studios after 22 working through the transition to the 28-day release windows during the second quarter . ” 23 17. In reality, the 28-Day Delay Agreements created bigger problems beyond the 24 initial second quarter 2010 transition period, and Redbox’s problems with these agreements 25 were in no way “behind” it. Redbox customers went to the kiosks and saw stale, older titles 26 and as a result, rented fewer DVDs from the kiosks in subsequent quarters as well. The result 27 28 CONSOLIDATED AMENDED COMPLAINT 5 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 9 of 72
1 was consistent with what Defendants had claimed in the Studio Litigation: sales diminished as 2 the public learned that Redbox kiosks were not stocked with the truly new release DVDs. 3 18. As a result—and as Defendants knew—this 28-day delay was not a one-time 4 problem. It was a problem that would dog the Company from the time the agreements were 5 signed through the Class Period end. 6 19. Despite the fact that Redbox was unable to obtain new releases from three of its 7 main suppliers and was forced to rent movies from those studios 28 days after those DVDs 8 were already available to consumers elsewhere, on October 28, 2010 when the Company 9 announced revenue and earnings guidance – they significantly raised guidance for the full year 10 2010 (“FY10”) and issued glowing guidance for the 2010 fourth quarter (“4Q10”) and full year 11 2011 (“FY11”).
12 20. This announcement was made when Defendants already knew that they could 13 not—and would not— meet these inflated numbers. 14 21. Management knew that the 28-Day Delay Agreements led to revenue generation 15 problems, as it had pled in its Studio Litigation. These problems would become acute in 4Q10. 16 22. The slow down in DVD rentals during 4Q10 did not sneak up on Defendants. 17 As one securities analyst following Coinstar observed, “[g]iven that Redbox gets daily results 18 from every kiosk in its chain, it made its guidance increase announcement with an entire 19 month’s worth of Q4 data in hand. We presume the October data was very encouraging for
20 Redbox to have the confidence to raise guidance ...” (see infra ¶ 159). In fact, October kiosk 21 data (which Defendants had access to on a daily basis) was not “very encouraging”—instead it 22 unambiguously confirmed what Defendants already knew—that sales were significantly below 23 the internal forecasts they used to provide public guidance. 24 23. In fact, a former high-ranking employee of Redbox confirms that Defendants 25 Davis, Di Valerio, Kaplan and Smith all received “daily revenue updates.” With these reports 26 in hand, the former employee confirmed that October did not “track consistently” with the
27 internal projections and “fell short” of expectations. As a result, the Company took the highly 28 CONSOLIDATED AMENDED COMPLAINT 6 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 10 of 72
1 significant step of internally re-forecasting downward the anticipated revenue and earnings for 2 the remaining two months of 4Q10. With this re-forecast, Defendants acknowledged
3 internally, but not to the public, around late October 2010, that the numbers reflected in the 4 daily revenue updates “fell short” of the numbers needed to meet guidance. 5 24. In addition to having the benefit of a month’s worth of disappointing revenue
6 reports when they gave misleading guidance to investors on October 28, 2010, and knowing 7 that the 28-Day Delay Agreements were adversely impacting sales on an ongoing basis and 8 were not a one-time hiccup, Defendants also knew that Redbox’s revenue would be impacted in 9 other ways as well. 10 25. By 4Q10, between 5-10% of the slots in the Redbox kiosks were filled with poor 11 renting Blu-ray discs. Through the daily revenue reports and real-time information available 12 from its web-linked kiosks, Defendants would have known that Blu-ray sales were weaker than 13 anticipated. Redbox was also facing, as it had for some time, various inventory issues related 14 to its “rent and return anywhere” policy. As a result of this policy, DVDs migrated from one 15 kiosk to a kiosk in a different location. The result was a migration imbalance and customers 16 being unable to rent the titles they wanted at their preferred location. Additionally, going into 17 the fourth quarter 2010, Defendants knew that Redbox was faced with a weak slate of 4Q10 18 new release titles. Box office revenue for movie titles coming out in DVD and Blu-ray disc 19 format in 4Q10 was down 16% from 4Q09. Moreover, some of the hottest box office hits that 20 Redbox ordinarily would have received in December 2010 from Fox, Universal, and Warner
21 Bros. were delayed 28 days and not received until January (for example, “Inception” and 22 “Despicable Me”). Other titles were delayed so that much more of their revenue was received 23 in January and thereafter (for example, “Knight & Day”). The remaining “hits” that became
24 available to Redbox during the fourth quarter 2010 were animations which, although not 25 delayed 28 days, are widely acknowledged in the industry as not renting as well as they sell. 26 The culmination of these factors resulted in a dramatic hit to revenue during 4Q10. 27 28 CONSOLIDATED AMENDED COMPLAINT 7 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 11 of 72
1 26. On January 13, 2011, thirteen days after the fourth quarter’s end, Defendants 2 finally pre-announced a major 4Q10 revenue and earnings shortfall. This announcement
3 confirmed what the reports Defendants received each day throughout the Class Period had 4 already informed them: that the revenue and earnings guidance that Defendants chose to 5 provide to investors would not be met. Defendants’ previously announced 4Q10 revenue 6 guidance of $415-$440 million was reduced by between $24-$49 million , which on the high 7 end is a miss of over 11%. Defendants also used this opportunity to significantly reduce FY11 8 revenue guidance from $1.80 billion - $1.95 billion (which when issued was far above analyst 9 expectations) to $1.70 billion - $1.85 billion—a reduction of $100 million . The announcement 10 of a material shortfall in fourth quarter revenue and earnings came only eight weeks after the 11 Defendants had reconfirmed guidance in mid-November. The market, stunned by Defendants’ 12 abrupt about-face from their previously glowing assessments in late October (and again in mid- 13 November), sent the Company’s stock price plummeting more than 27% from $56.95 at the 14 close of business on January 13, 2011 to $41.50 at the close of business on January 14, 2010. 15 27. On February 3, 2011, Coinstar issued a press release announcing its actual 4Q10 16 and 2010 full year financial results which were well below its previously announced guidance 17 and analysts’ expectations. In the press release, Defendants attributed this shortfall to, among 18 other things: (1) decreased sales to customers as a result of the 28-day delay in new titles 19 imposed by several movie studios; (2) removal of material amounts of old inventory early in its
20 4Q10 as a result of poor inventory management and controls; (3) an overstock of poor- 21 performing higher priced “Blu-ray” discs; and (4) a high level of customers who utilized 22 Redbox’s expensive “rent and return anywhere” service.
23 28. In the same announcement, the Company also reiterated its January 13, 2011 24 FY11 guidance for Coinstar’s consolidated revenue, which was far below the guidance issued
25 on October 28, 2010. 26 27 28 CONSOLIDATED AMENDED COMPLAINT 8 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 12 of 72
1 29. Defendants’ corrective disclosure on February 3, 2011, led to Coinstar’s stock 2 price plummeting to $38.96 at the close of business on February 4, 2011 from $44.24 at the 3 close of business on February 3, 2011 and more than 40% from its Class Period high of $66.98. 4 30. As a result of Defendants’ wrongful acts and omissions, and the precipitous 5 decline in the market value of the Company’s common stock when the truth was revealed, 6 Plaintiff and other Class members have suffered significant losses and damages. 7 JURISDICTION AND VENUE 8 31. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange 9 Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC, 17 10 C.F.R. § 240.10b-5.
11 32. This Court has jurisdiction over the subject matter of this action pursuant to 28 12 U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa. 13 33. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 14 U.S.C. § 78aa, and 28 U.S.C. § 1391(b) because Coinstar’s principal place of business is 15 located in this District and the acts charged herein, including the dissemination of materially
16 false and misleading information, occurred in this District. 17 34. In connection with the challenged conduct, Defendants, directly or indirectly, 18 used the means and instrumentalities of interstate commerce, including, but not limited to, the 19 United States mails, interstate telephone communications and the facilities of the national
20 securities markets. 21 PARTIES 22 35. Plaintiff Rhode Island purchased Coinstar common stock during the Class 23 Period, as indicated in its Certification attached hereto as Exhibit B, and was damaged thereby. 24 36. Defendant Coinstar is a Delaware corporation with its principal place of 25 business located at 1800 114th Avenue SE, Bellevue, WA 98004. Since selling its E-Pay 26 Business in May 2010, Coinstar primarily operates two business segments: (i) DVD services, 27 through its wholly-owned subsidiary Redbox, which offers self-service DVD rentals through 28 CONSOLIDATED AMENDED COMPLAINT 9 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 13 of 72
1 30,200 self-service kiosks in 26,100 locations, primarily placed with leading mass retailers, 2 drug stores, restaurants and convenience stores including Walmart, Walgreens and McDonalds; 3 and (ii) Coin services, which offers self-service coin-counting services through over 18,900 4 machines located throughout the United States, Canada, Puerto Rico, Ireland, and the United 5 Kingdom. As of its 2010 third quarter (“3Q10”), approximately 80% of the Company’s 6 revenues were generated through the Company’s DVD services (Redbox). Coinstar trades on 7 the NASDAQ under the symbol “CSTR.”
8 37. Defendant Paul Davis (“Davis”) served as Coinstar’s Chief Executive Officer 9 (“CEO”) and as a member of the Company’s Board of Directors (“Board”) since April 1, 2009.
10 Prior to that, Davis served as Coinstar’s Chief Operating Officer (“COO”) from April 2008 to
11 March 2009. During the Class Period, Defendant Davis made materially false and misleading 12 statements about the Company through press releases, conference calls, and investor 13 presentations and certified the Company’s SEC filings.
14 38. Defendant Gregg A. Kaplan (“Kaplan”) served as Coinstar’s President and COO 15 since April 1, 2009. Prior to that, Kaplan served as CEO of Redbox from December 2005 16 through March 31, 2009. During the Class Period, Defendant Kaplan, as Coinstar’s President
17 and COO, assisted in the preparation and filing of the Company’s SEC filings. 18 39. Defendant J. Scott Di Valerio (“Di Valerio”) served as Coinstar’s Chief 19 Financial Officer (“CFO”) since March 2, 2010, after having joined the Company in January
20 2010 to work on transition matters prior to taking over his CFO appointment. During the Class 21 Period, Defendant Di Valerio made materially false and misleading statements about the 22 Company through press releases, conference calls, and investor presentations and signed and 23 certified Company’s SEC filings.
24 40. Defendant Galen Smith (“Smith”) served as Coinstar’s Corporate Vice 25 President, Finance and Treasurer, since January 2010, after having joined the Company in June 26 2009 as Director of Corporate Finance. During the Class Period, Defendant Smith, as 27 28 CONSOLIDATED AMENDED COMPLAINT 10 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 14 of 72
1 Corporate Vice President, Finance and Treasurer, assisted in the preparation and filing of the 2 Company’s SEC filings and participated in investor presentations. 3 41. Defendant Donald R. Rench (“Rench”) is Coinstar’s General Counsel and
4 Corporate Secretary. Rench joined Coinstar in March 2000 and served as Corporate Counsel 5 through August 2002. In March 2002, Rench assumed the responsibilities of corporate 6 secretary and in August 2002 was promoted to General Counsel. During the Class Period, as 7 General Counsel, Defendant Rench assisted in the preparation and filing of the Company’s 8 SEC filings.
9 42. Defendants identified in paragraphs 37-41, supra, are referred to herein as the 10 “Individual Defendants.” Coinstar and the Individual Defendants are collectively referred to 11 herein as “Defendants.”
12 DEFENDANTS SHOULD BE TREATED AS A GROUP FOR PLEADING PURPOSES 13 43. It is appropriate to treat the Individual Defendants as a group for pleading 14 purposes and to presume that the false, misleading and incomplete information conveyed in the 15 Company’s public filings, press releases, investor presentations, and other publications, as 16 alleged herein, were the collective actions of the narrowly defined group of Individual 17 Defendants identified above. During the Class Period, each of the Individual Defendants by 18 virtue of his high-level position with the Company, directly participated in the management of
19 the Company, was directly involved in the day-to-day operations of the Company at the highest
20 levels, and was privy to confidential proprietary information concerning the Company and its 21 business, operations, products, growth, financial statements, and financial condition as alleged 22 herein. Specifically, during and prior to the Class Period, senior executives of Coinstar and 23 heads of the business units, including Redbox, attended monthly meetings held by video 24 conference where Redbox business performance was discussed ( see ¶ 189), and Defendants 25 Davis, Smith, Di Valerio and Kaplan each received daily Redbox revenue reports as part of 26 their responsibilities for, inter alia, making projections and budgeting. By virtue of their high- 27 level positions during the Class Period, the Individual Defendants were also involved in 28 CONSOLIDATED AMENDED COMPLAINT 11 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 15 of 72
1 drafting, producing, reviewing and/or disseminating the false and misleading statements and
2 information alleged herein, and were aware of, or deliberately disregarded that the false and 3 misleading statements were being issued regarding the Company, and approved or ratified 4 these statements in violation of the federal securities laws.
5 CLASS ACTION ALLEGATIONS 6 44. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil 7 Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or 8 otherwise acquired Coinstar common stock during the Class Period and were damaged thereby 9 (the “Class”). Excluded from the Class are Defendants, the Company’s officers, directors, 10 employees, successors, and assigns, and any person, entity, firm, trust, corporation or other 11 entity related to, affiliated with, or controlled by any of the Defendants, as well as the 12 immediate families of the Individual Defendants. 13 45. This action is properly maintainable as a class action. 14 46. The Class is so numerous that joinder of all members is impracticable. 15 Throughout the Class Period, Coinstar stock traded on NASDAQ, a national securities 16 exchange. As of October 22, 2010, there were approximately 31,672,225 shares of issued and 17 outstanding Coinstar common stock. While the exact number of Class members is unknown to 18 Plaintiff at this time and can be ascertained only through appropriate discovery, Plaintiff 19 believes that the proposed Class consists of hundreds or thousands of members scattered
20 throughout the United States. Record owners and other members of the Class may be identified 21 from records maintained by Coinstar or its transfer agent and may be notified of the pendency 22 of this action by mail, using the form of notice similar to that customarily used in securities 23 class actions. 24 47. Plaintiff’s claims are typical of the claims of the members of the Class as all 25 members of the Class are similarly affected by Defendants’ wrongful conduct in violation of
26 federal law that is complained of herein. 27 28 CONSOLIDATED AMENDED COMPLAINT 12 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700
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1 48. Plaintiff is committed to prosecuting this action and has retained counsel 2 competent and experienced in class and securities litigation. Plaintiff has no interests 3 antagonistic to or in conflict with those of the Class. Accordingly, Plaintiff is an adequate 4 representative of the Class and will fairly and adequately protect the interests of the Class. 5 49. Common questions of law and fact exist as to all members of the Class and 6 predominate over any questions solely affecting individual members of the Class, including, 7 among others: 8 (a) whether the federal securities laws were violated by Defendants’ acts as 9 alleged herein; 10 (b) whether statements made by Defendants to the investing public during 11 the Class Period misrepresented or omitted material facts about the business, financial 12 condition, operations, internal controls, prospects and management of Coinstar; 13 (c) whether the Individual Defendants caused Coinstar to issue materially 14 false and misleading statements during the Class Period; 15 (d) whether Defendants acted knowingly or recklessly in issuing materially 16 false and misleading statements; 17 (e) whether the price of Coinstar common stock during the Class Period was 18 artificially inflated because of the Defendants’ conduct complained of herein; and
19 (f) whether the members of the Class have sustained damages and, if so,
20 what is the proper measure of damages. 21 50. The prosecution of separate actions by individual members of the Class would 22 create the risk of inconsistent or varying adjudications with respect to individual members of 23 the Class, which would establish incompatible standards of conduct for Defendants, or 24 adjudications with respect to individual members of the Class which would, as a practical 25 matter, be dispositive of the interests of the other members not parties to the adjudications or 26 substantially impair or impede their ability to protect their interests. 27 28 CONSOLIDATED AMENDED COMPLAINT 13 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 17 of 72
1 51. A class action is superior to all other available methods for the fair and efficient 2 adjudication of this controversy since joinder of all members is impracticable. Furthermore, as 3 the damages suffered by individual Class members may be relatively small, the expense and 4 burden of individual litigation make it impossible for members of the Class to individually
5 redress the wrongs done to them. There will be no difficulty in the management of this action 6 as a class action. 7 52. Plaintiff will rely, in part, upon the presumption of reliance established by the 8 fraud-on-the-market doctrine in that: Defendants made public misrepresentations or failed to 9 disclose material facts during the Class Period; the omissions and misrepresentations were 10 material; Coinstar common stock is traded in an efficient market; the Company’s shares were 11 liquid and traded with moderate to heavy volume during the Class Period; the Company traded 12 on NASDAQ, and was covered by analysts; the misrepresentations and omissions alleged 13 would tend to induce a reasonable investor to misjudge the value of the Company’s common 14 stock; and Plaintiff and members of the Class purchased Coinstar common stock between the 15 time the Defendants failed to disclose or misrepresented material facts and the time the true 16 facts were disclosed, without knowledge of the omitted or misrepresented facts. As such, 17 Plaintiff and the members of the Class are entitled to a presumption of reliance upon the 18 integrity of the market. 19 53. Based on the foregoing, this action is properly maintainable as a class action.
20 CONTROL PERSON ALLEGATIONS 21 54. Defendants Davis, Di Valerio, Kaplan and Rench, because of their positions of 22 control and authority as executives and senior officers and/or directors of the Company, had 23 access to the adverse, undisclosed information about Coinstar’s business through their access to 24 internal corporate documents and information, conversations and associations with other 25 corporate officers and employees, attendance at management and Board of Directors meetings 26 and committees thereof, and reports and other information provided to them in connection 27 therewith. 28 CONSOLIDATED AMENDED COMPLAINT 14 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 18 of 72
1 55. Each of these above officers, executives and/or directors of Coinstar, by virtue 2 of his high-level position with the Company, directly participated in the management of the 3 Company, and was directly involved in the day-to-day operations of the Company at the 4 highest levels. Defendants Davis, Di Valerio, Kaplan and Rench participated in drafting, 5 preparing, and/or approving the public statements and communications complained of herein 6 and were aware of, or recklessly disregarded, the material misstatements contained therein and 7 omissions therefrom, and were aware of their materially false and misleading nature. Customer
8 demand for the Company’s core products, DVDs, and the Company’s ability to manage its 9 DVD inventory, were fundamental, core aspects of Coinstar’s business and subjects that these 10 defendants followed, tracked, and were aware of at all times. 11 56. Defendant Davis, Di Valerio, Kaplan and Rench, as senior officers, executives 12 and/or directors of the Company, were able to and did control the content of the various SEC 13 filings, press releases, investor presentations and other public statements pertaining to the 14 Company during the Class Period. As senior officers, executives and/or directors of the 15 Company, these defendants were provided with copies of the documents and statements alleged 16 herein to be materially false and misleading prior to or shortly after their issuance or had the
17 ability and opportunity to prevent their issuance or cause them to be corrected. Accordingly, 18 Defendants Davis, Di Valerio, Kaplan and Rench are responsible for the accuracy of the public 19 reports, releases, and other statements detailed herein and are primarily liable for the
20 misrepresentations and omissions contained therein. 21 57. As senior officers and controlling persons of a publicly-held company whose 22 common stock was, during the relevant time, registered with the SEC pursuant to the Exchange 23 Act, traded on the NASDAQ, Defendants Davis, Di Valerio, Kaplan and Rench each had a duty 24 to promptly disseminate accurate and truthful information with respect to the Company’s 25 operations and business, and to correct any previously issued statements that were or had 26 become materially misleading or untrue, so that the market price of the Company’s publicly- 27 28 CONSOLIDATED AMENDED COMPLAINT 15 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 19 of 72
1 traded securities would be based upon truthful and accurate information. These defendants’ 2 wrongdoing during the Class Period violated these specific requirements and obligations. 3 58. Defendants Davis, Di Valerio, Kaplan and Rench are each liable as a primary 4 participant in a wrongful scheme and course of business that operated as a fraud and deceit on 5 purchasers of Coinstar’s common stock during the Class Period, which included the 6 dissemination of materially false and misleading statements regarding the state of its operations 7 and its financial guidance and concealment or omission of material adverse facts. The scheme: 8 (i) deceived the investing public regarding Coinstar’s operations and business, and the true 9 value of Coinstar’s common stock; and (ii) caused Plaintiff and other members of the Class to 10 purchase Coinstar’s common stock at artificially inflated prices, which fell as the truth 11 concerning Coinstar ultimately became known.
12 59. In making the statements complained of herein, Defendants Davis, Di Valerio, 13 Kaplan and Rench, who were senior officers and controlling persons of Coinstar, were acting
14 on behalf of the Company in the regular course of business. Therefore, each of the statements 15 made by these defendants is attributable to the Company. 16 SUBSTANTIVE ALLEGATIONS 17 BACKGROUND
18 Coinstar And Its Redbox Business 19 60. Redbox Automated Retail LLC was initially developed and funded by 20 McDonald’s Ventures, LLC, a wholly owned subsidiary of McDonald’s Corp. In or around 21 July 2002, Redbox deployed DVD rental kiosks in a “test market” in Washington, D.C. By
22 2005, Coinstar made an initial $20 million investment to purchase a 47.3% interest in Redbox. 23 In February 2009, Coinstar purchased the remaining interest in Redbox and since then has 24 operated it as a wholly owned subsidiary. Redbox presently provides approximately 80% of 25 Coinstar’s revenue . 26 27 28 CONSOLIDATED AMENDED COMPLAINT 16 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 20 of 72
1 61. Redbox’s business model is premised on providing a convenient and 2 inexpensive option for consumers wishing to buy or to rent new release DVDs to rent them for 3 $1.00 a night. 4 62. Redbox starts the process of purchasing DVDs from the studios 12 months 5 before their release, often before the movies are in theaters. As the release of titles in DVD 6 format approaches, Redbox executives receive firm release dates for the titles and assess each 7 new release’s likely popularity and rental demand based on a variety of criteria, including box 8 office returns, genre and whether the new release has been released subject to a 28 day delay. 9 Eventually, Redbox places an order for the new release DVDs based on its assessment of likely 10 demand from its customers. 11 63. Once Redbox obtains the titles for use in the next business quarter, it provides 12 these DVDs to consumers through a nationwide network of over 30,200 self-service kiosks in 13 26,100 locations. Each kiosk features an interactive touch screen, a robotic disk array system 14 and a web-linked electronic communications system that allows customers to rent or buy 15 DVDs. Consumers can also reserve DVDs online, made possible by real-time inventory 16 updates on Redbox’s website. The kiosks are supposed to be updated weekly with a supply of 17 new-release DVDs intended to keep the kiosks flush with a selection of new release titles for 18 consumers. Kiosks typically hold approximately 630 DVDs comprised of 70-200 individual 19 titles. A single kiosk may hold up to as many as forty-five (45) copies of a popular new-release 20 DVD.
21 64. Redbox customers are able to rent or buy DVDs in a standard-definition format. 22 For certain titles, consumers are also able to rent or buy discs in a Blu-ray format, which is a 23 high-definition disc format designed to maximize the viewing experience available from HD
24 televisions and to supersede the standard DVD format. Blu-ray discs are intended to be played 25 on Blu-ray disc players. 26 65. Blu-ray discs were first placed in Redbox kiosks in July 2010, renting for $1.50 27 per day. Standard-definition DVDs continued to be priced at a rental value of $1.00 per day. 28 CONSOLIDATED AMENDED COMPLAINT 17 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 21 of 72
1 66. Consumers are able to rent DVDs at one location and return them to another 2 Redbox location (termed the Company’s “rent and return anywhere” policy). According to an
3 article in Self-Service World magazine (Sept. 2007), if a consumer does not return the DVD the 4 next day, charges accrue for up to 25 days, after which the customer then owns the DVD 5 (without the original case) and rental charges cease. According to an article in USA Today 6 (August 13, 2009), consumers can also purchase some used DVDs from the kiosk for 7 approximately $7.
8 Redbox’s Inability To Obtain New Release DVDs 9 67. Prior to December 2008, Redbox purchased all, or nearly all, of its supply of 10 new-release DVDs from motion picture distributors, including Video Product Distributors 11 (“VPD”) and Ingram Entertainment, Inc. (“Ingram”). Through Redbox’s relationship with
12 these distributors, Redbox was able to stock its kiosks with new release DVDs on the same day 13 DVDs became available to the public elsewhere. Distributors also repurchased some DVDs for 14 re-sale after Redbox removed them from its kiosks. 15 68. After December 1, 2008, however, the distributors refused to fill Redbox’s 16 orders for new release DVDs for movies produced by Fox, Warner Bros. and Universal. As set 17 forth in Redbox’s Studio Litigation Complaints, the distributors’ actions forced Redbox to turn
18 to other more costly and inconvenient channels from which to purchase new release DVDs, 19 including retailers, such as Best Buy and Walmart. These retailers in turn also ceased or
20 severely limited their sales of DVDs to Redbox. Redbox desperately needed new release 21 DVDs to satisfy customer demand; the studios, distributors and retailers were making this 22 increasingly difficult.
23 69. As set forth in the Studio Litigation Complaints, Redbox believed that the 24 studios were behind the decisions of the distributors and retailers to refuse to provide new 25 release DVDs to Redbox. According to Defendant Davis’s statements during an investor
26 conference on November 17, 2010, these three studios supplied approximately 30% - 40% of 27 Redbox’s DVDs during the Class Period. 28 CONSOLIDATED AMENDED COMPLAINT 18 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 22 of 72
1 70. In the Studio Litigation Complaints, Redbox acknowledged “ [c/onsumer 2 preference for Redbox rentals can largely be attributed to its ability to conveniently provide 3 consumers with low-cost rentals on the same day that a DVD is released by a studio and 4 made available for home viewing” and that “ [o/ver thirty percent of a new-release DVD’s 5 revenue is generated during the first two weeks of its release ” and “that consumer demand for 6 a new-release DVD is at its highest immediately after its release and declines substantially 7 thereafter and within a short time period.” See, e.g., Universal Complaint, attached as part of 8 Exhibit A, at pp. 1, 8 (emphasis added). 9 71. With that background, Redbox claimed that these movie studios were 10 inappropriately preventing it from delivering on its business model: providing new release
11 DVDs in a convenient manner at an affordable price. Specifically, Redbox claimed that these 12 movie studios were exerting undue pressure on Redbox’s distributors and retailers to stop 13 selling new releases, or to delay sales of new release DVDs to Redbox. According to Redbox, 14 this resulted in consumers being “deprived of Redbox’s low-cost, highly convenient medium 15 for renting or purchasing [] DVDs” which forced Redbox to “turn to more expensive and
16 burdensome options for access to these movies.” Redbox claimed that these efforts were made 17 to force the Company to sign agreements with the movie studios limiting its ability to obtain 18 new releases in the time frame it wanted or in the quantities it required. It also claimed that the 19 movie studios were trying to prevent Redbox from profiting by selling these DVDs to movie
20 distributors for resale after their useful kiosk life was completed. 21 72. For example, in its litigation with Universal, Redbox averred that it was 22 presented with a proposal by Universal which would (1) prohibit Redbox from renting to 23 consumers any DVD until forty-five (45) days following the DVD sell-through street date; (2) 24 limit the number of DVDs of a single copyrighted work that any particular kiosk may carry; 25 and (3) require Redbox to destroy 100% of the units removed from a kiosk and certify that it 26 has done so. 27 28 CONSOLIDATED AMENDED COMPLAINT 19 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 23 of 72
1 73. Faced with what amounted to a “take it or leave it” proposition from the movie 2 studios, Redbox initially tried to leave it. Instead, Redbox filed the Studio Litigation. In these 3 lawsuits, Redbox asserted three main claims against the movie studios: copyright misuse, 4 tortuous interference and antitrust claims. In August 2009, the federal judge hearing the 5 Universal case rejected the first two claims, but allowed the antitrust claim to continue. 1 In 6 October 2009, Fox and Warner Bros. filed motions to dismiss Redbox’s lawsuits against them. 2 7 74. Facing an uncertain and possibly unsuccessful outcome, as well as the costly 8 and inefficient work around of buying DVDs from retailers, Redbox elected to enter into the 9 28-Day Delay Agreements. It did so notwithstanding the fact that the agreements, with their 28 10 day delay provisions, would have a long-lasting, adverse impact upon the Company and its 11 revenue, a point Defendants understood when suing the movie studios—but a point they 12 ignored when discussing the impact of these agreements directly with investors.
13 The 28-Day Delay Agreements 14 75. On February 16, 2010 and April 22, 2010, in a series of press releases signed by 15 Defendant Rench, Coinstar announced that it had entered into separate distribution agreements 16 with Warner Bros., Fox, and Universal. The distribution agreements allowed Redbox to 17 acquire DVDs directly from the studios as Redbox desired, but restricted Redbox’s receipt of 18 the DVDs and its right to place them in its kiosks until 28 days after the “street date,” the 19 earliest date established by these studios on which their respective DVDs are initially made 20 available to the general public. Although omitted from Coinstar’s February 16, 2010 and April
21 22, 2010 press releases discussing these agreements, the 28-Day Delay Agreements also 22
23 1 See Danny King, “Court OKs Redbox suit against Universal,” Variety (Aug. 18, 2009), 24 http://www.variety.com/article/VR1118007409?refcatid=18 (last visited June 13, 2011); see also Chris Tribbey, “Judge Throws Out Some Redbox Claims in Universal Suit.” Home Media Magazine, Aug. 17, 2009, http://www.homemediamagazine.com/redbox/judge-throws-out-some-redbox-claims-universal-suit-16764 (last 25 visited June 13, 2011). 26 2 Erik Gruenwedel, “Fox Says Redbox Lawsuit is Flawed,” Home Media Magazine, Oct. 1, 2009, http://www.homemediamagazine.com/redbox/fox-says-redbox-lawsuit-flawed-17210 (last visited June 13, 2011); Erik Gruenwedel, "Warner Also Seeks Redbox Lawsuit Dismissal". Home Media Magazine, Oct. 2, 2009, 27 http://www.homemediamagazine.com/warner/warner-also-seeks-redbox-lawsuit-dismissal-17215 (last visited June 13, 2011). 28 CONSOLIDATED AMENDED COMPLAINT 20 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 24 of 72
1 required Redbox to destroy the DVDs at the end of their useful lifecycle in the kiosks. This 2 had the effect of preventing Redbox from selling the used DVDs on the open market after their 3 rental life was exhausted, as had been done in the past. 4 76. Pursuant to the terms of these 28-Day Delay Agreements, Redbox dismissed the 5 Studio Litigation.
6 First Quarter Financial Results Following Entry Of The 28-Day Delay Agreements 7 77. On April 29, 2010, Coinstar announced first quarter (“1Q10”) results, reporting 8 revenue of $350.1 million and diluted earnings per share (“EPS”) from continuing operations of
9 $0.21. In keeping with its practice, Defendants provided investors with revenue and earnings 10 guidance for 2Q10 as well, informing investors that the Company expected to bring in revenue 11 of $370 – 390 million and EPS of $0.30 – 0.34. The Company also increased its full year 2010 12 (“FY10”) revenue estimate by approximately $65 million from the Company’s estimate issued 13 in its February 23, 2010 press release of $1.465 – 1.565 billion to $1.530 billion – 1.630 billion.
14 The Company also raised EPS estimates from $1.50 – 1.65 (issued February 23) to $1.82 – 15 1.94, a significant increase of $.29-.32.
16 78. On the same day, the Company held its 1Q10 earnings conference call. During 17 the call, Defendants discussed the newly adopted 28-Day Delay Agreements then in place: 18 As we announced last Thursday, we have signed agreements with Universal Studios and 20th Century Fox, and have dismissed our 19 lawsuits against both of them. The agreements enable us to secure new release DVD titles directly from Universal and Fox in 20 sufficient quantities 28 days after street date to meet consumer demand and protect our value pricing. At the same time, the 21 agreements include substantially lower product costs that will benefit our margins. With these agreements and the one with 22 Warner Brothers that we announced in February, we have now stabilized our supply chain and eliminated the workarounds we 23 had in place. 24 79. During this same call, Defendants indicated that a “major factor in our guidance 25 is the impact of the 28-day window. Including the recently signed agreements with Universal 26 Studios and 20th Century Fox, which we expect to be accretive to our revenue and margin for 27 the rest of the year, in particular, in Q3 and Q4.” When asked follow up questions about the 28 CONSOLIDATED AMENDED COMPLAINT 21 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 25 of 72
1 Company’s revenue guidance being up in the context of going from a workaround (the 2 temporary fix of buying new release DVDs at retail prices) to the 28-Day Delay Agreements, 3 Defendant Di Valerio reassuringly stated: “Well, one of the things that happens in the 4 workaround is we don’t necessarily get sufficient quantities [of DVDs] into the machines in the 5 time that we would like in order to be able to drive as much revenue as we would like out of 6 each kiosk. Now that we have secured our supply chain with the Universal and Fox deals, then 7 we have sufficient quantities to get in the machines, those 28 days after the release date, it is 8 providing us some uplift in revenue based off of our estimates where we're going to be on the 9 workaround side.”
10 80. Thus, Defendants led the market to believe that the agreements were a “win- 11 win” for all involved and that Redbox would now have enough new release titles to fill its 12 kiosks, which would drive revenue. 13 81. In response to Redbox’s reassuring statements regarding the upside of the deals 14 with the movie studios, analysts issued positive reports regarding the impact of the 28-Day 15 Delay Agreements. For example on April 30, 2010, analyst Michael Pachter of Wedbush
16 Securities Inc. reported: “The 28-day pre-rental sales window agreements that Redbox entered 17 into with Fox, Universal, and Warner Bros. eliminates the need for its “work around” strategy
18 (under which it was compelled to purchase content at retail) and should drive better margins 19 and revenue growth.”
20 82. The market responded positively to the Company’s statements and the positive 21 media reports, sending Coinstar’s stock price soaring from $38.21 on April 29, 2010 to $44.36
22 on April 30, 2010, on heavy volume. 23 The Second Quarter 2010 “Anomaly” 24 83. On July 29, 2010, Coinstar announced less than favorable 2Q10 results, which 25 missed revenue guidance Defendants issued at the end of 1Q10 by approximately $28-$48 26 million . Specifically, the Company announced revenue of $342.35 million, which fell well 27 28 CONSOLIDATED AMENDED COMPLAINT 22 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 26 of 72
1 below its previously announced revenue guidance in the range of $370.0 million to $390.0 2 million.
3 84. On the same day, the Company held its 2Q10 earnings conference call. In order 4 to further explain the disappointing second quarter results and to boost confidence that Redbox 5 would rebound, the Company made various statements during the call suggesting that the 6 second-quarter results were an anomaly caused by a one-time 28-day window transition period: 7 “Having worked through the one-time transition to the window, we expect our comps to move 8 back to double digit growth during the second half of the year” (p. 4); “April and May was the 9 transition period for our delayed titles...” (p. 4); “We successfully navigated the transition to a
10 28-day window, and expect the impact to lessen as we move through the remainder of the year” 11 (p. 6); “As we cycle through this rotation and we start seeing releases from the studios every 12 week, it's started to improve. That's the reason that we are really calling this a bit of an 13 anomaly in Q2. And I think it will adjust and get much better in the second half of the year
14 reflected in our guidance” (p. 7). 15 85. Also during this conference call, Defendants announced the rollout of Blu-ray 16 discs in the kiosks during Coinstar’s 2010 third quarter. Specifically, Defendant Davis stated
17 that Redbox planned to place Blu-ray discs in the majority of its kiosks by the end of the third 18 quarter and that it had already rolled out Blu-ray discs to 13,300 Redbox kiosks. 19 86. Analysts, initially surprised by the Company’s disappointing results, were quick
20 to hone in on the Company’s statements that 2Q10 was an anomaly following a one-time 21 transition period for the 28 day model. 22 87. On July 30, 2010, an analyst from JP Morgan issued a report highlighting a one- 23 time “hiccup” caused by the 28 day delay windows: “FY10 revenue guidance was increased for 24 the DVD segment and management was optimistic following the near-term hiccup caused by 25 the 28-day window transition that occurred in April.” On the same date, another report was 26 issued by an analyst from Craig Hallum Capital Group: “We believe the revenue shortfall at 27 Redbox this quarter is an anomaly and expect same store sales will return to previous levels in 28 CONSOLIDATED AMENDED COMPLAINT 23 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 27 of 72
1 Q3 and Q4. The major reason for the revenue shortfall in Q2 one-time impact from Redbox’s
2 switch-over to 28-day window from three studios.” Also on the same day, an analyst from 3 Brigantine Advisors reported “we believe that Q2 was impacted by transitional issues that 4 should be resolved in the back half of the year.”
5 The Third Quarter Mixed Results 6 88. On October 28, 2010, the Company announced results for 3Q10, which had 7 nowhere to go but up from 2Q10. 8 89. The Company announced results that included revenue of $380.2 million and 9 diluted EPS from continuing operations of $0.66. The revenue and EPS met guidance. 10 However, the results still prompted some analysts, including Merriman Capital and JP Morgan 11 to comment that the revenue from the Company’s DVD segment was below their estimates. 12 90. The Company suggested in its 3Q10 earnings conference call that these results 13 demonstrated a positive response from consumers after Redbox had worked through the 14 transition to the 28-day release windows during 2Q10. While these results were better than 15 those in 2Q10, the reason they were better was not because the Company had worked through 16 all its 28-day window issues in 2Q10, as the Company led investors and analysts to believe. 17 91. Instead, Redbox was the benefactor of a summer rental bump. Third quarter 18 months, and in particular July and August, are big revenue generators for Redbox because of 19 the summer holiday. As the Company reports in its 3Q10 Form 10-Q, the summer holiday 20 months historically were among the “highest rental months for DVD Services.”
21 92. In addition, a review of the DVD titles which became available in Redbox 22 kiosks in 3Q10 suggests that the majority of Redbox’s titles during these months were from 23 studios other than Fox, Warner Bros., and Universal and thus, not subject to the 28 day delay. 24 93. For example, despite the fact that Defendant Davis represented in an investor 25 presentation on November 17, 2010 that 30 – 40% of Redbox’s titles were from studios with 26 the 28-Day Delay Agreements, a review of the weekly listing of new release DVD titles 27 available in Redbox kiosks during the month of July, as depicted in the chart below, shows that 28 CONSOLIDATED AMENDED COMPLAINT 24 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 28 of 72
1 of the 36 titles (counting the same titles offered in both standard-definition and Blu-ray format 2 as one) that became available to Redbox customers for the first time that month, only seven — 3 or less than 20% — of the titles were from Fox, Universal, or Warner Bros. See “Week 4 Available at Redbox” Data from Inside Redbox ( www.insideredbox.com ), attached as Exhibit
5 C.
6 THIRD QUARTER 2010 DVD TITLE RELEASES - JULY
7 Week available 8 at Redbox Movie Title Studio 9 1 07/06/10 A Single Man Sony 2 Babysitter Wanted Ada 10 3 Barbie in a Mermaid Tale Universal 11 4 Brooklyn's Finest Anchor Bay Brooklyn's Finest (BLU-RAY) Anchor Bay 12 5 Casualties of War Sony 6 Dive Olly Dive! Under Pressure NCircle Entertainment 13 7 Street Boss Maverick 8 The Girl with the Dragon Tattoo Music Box Films 14 9 The Gold Retrievers Gaiam 15 10 07/13/10 American Bandits: Frank & Jesse James E1 Entertainment 16 11 American Pie: The Book of Love Universal 12 Caught In The Crossfire Lionsgate 17 13 Chloe Sony 14 Saint John Of Las Vegas Vivendi 18 15 Soccer Dog: European Cup Sony 19 Spongebob Squarepants: Triton's 16 Revenge Paramount 20 The 41-Year-Old Virgin Who Knocked 17 Up Sarah Marshall Fox 21 18 The Book of Eli Warner The Book Of Eli (BLU-RAY) Warner 22 19 The Bounty Hunter Sony
23 20 07/20/10 Animal Atlas: Animals And Us NCircle Entertainment 24 21 Cats And Dogs Warner 22 Clash of the Gods A&E 25 23 Green Zone Universal 24 IP Man Well Go USA 26 25 Operation: Endgame Anchor Bay 26 Super Hero Squad Show: Volume 1 Vivendi 27 27 Sutures MTI 28 28 The Bannen Way Sony CONSOLIDATED AMENDED COMPLAINT 25 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 29 of 72
1 THIRD QUARTER 2010 DVD TITLE RELEASES - JULY
2 Week available 3 at Redbox Movie Title Studio 4 29 The Runaways Sony 30 The Wronged Man Sony 5 6 31 07/27/10 Don't Look Up E1 Entertainment 32 Hot Tub Time Machine MGM 7 33 Jesse Stone: No Remorse Sony Percy Jackson & the Olympians (BLU- 8 34 RAY) Fox Percy Jackson & The Olympians: The 9 Lightning Thief Fox 35 The Missing Lynx Phase 4 Films 10 36 The Seventh Sign Sony 11 94. For August, the facts are equally striking. A review of the weekly listing of new 12 release DVD titles that became available to Redbox customers for the first time in August 13 2010, as depicted in the below chart, shows that of the 43 titles that came out that month, only 14 nine — or around 20% — were from Fox, Universal, or Warner Bros. See “Week Available at 15 Redbox” Data from Inside Redbox ( www.insideredbox.com ), attached as Exhibit C. 16 THIRD QUARTER 2010 DVD TITLE RELEASES - AUGUST 17 Week 18 available at 19 Redbox Movie Title Studio 1 08/03/10 A Prophet (Un prophete) Sony 20 2 After.Life Anchor Bay 21 After.Life (BLU-RAY) Anchor Bay 3 Dora's Big Birthday Adventure Paramount 22 4 Kick-Ass Lionsgate Kick-Ass (BLU-RAY) Lionsgate 23 5 Open House Lionsgate 6 The Ghost Writer Summit 24 7 To Save a Life Sony 25 8 08/10/10 Death at a Funeral (2010) Sony 26 Death at a Funeral (BLU-RAY) Sony 9 Greenberg Universal 27 10 Invincible Shaolin Funimation 11 La Mission Screen Media 28 CONSOLIDATED AMENDED COMPLAINT 26 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 30 of 72
1 THIRD QUARTER 2010 DVD TITLE RELEASES - AUGUST
2 Week available 3 at Redbox Movie Title Studio 4 12 Letters to God Vivendi 5 13 Nanny McPhee (2005) Universal 14 Our Family Wedding Fox Searchlight 6 15 Shaolin Prince Funimation 16 Sonic The Hedgehog: Doomsday Project NCircle Entertainment 7 17 The Duel Funimation 18 Under the Mountain Lionsgate 8 9 19 08/17/10 Burning Bright Lionsgate 20 Cash Lionsgate 10 21 Cemetery Junction Sony 22 Cop Out Warner 11 Cop Out (BLU-RAY) Warner 23 Dead Man Running Phase 4 Films 12 24 Furry Vengeance Summit 13 25 Preschool Parade NCircle Entertainment 26 The Last Song Disney 14 The Last Song (BLU-RAY) Disney 27 The Losers Warner 15 The Losers (BLU-RAY) Warner 16 28 08/24/10 $5 A Day Image 17 29 2.22 Momentum 30 Abandoned Anchor Bay 18 31 Batman Under the Red Hood Warner Batman Under the Red Hood (BLU- 19 RAY) Warner 32 City Island Anchor Bay 20 33 Clash of the Titans (2010) Warner Clash of the Titans (2010) (BLU-RAY) Warner 21 34 Repo Men Universal Repo Men (BLU-RAY) Universal 22 35 Survival Of The Dead Magnolia 23 36 The Back-Up Plan Sony 37 The Square Sony 24 38 08/31/10 9th Company Well Go USA 25 39 Beatdown Lionsgate 40 Diary of a Wimpy Kid Fox 26 Diary Of A Wimpy Kid (BLU-RAY) Fox 27 41 Diego's Ultimate Rescue League Paramount 42 Harry Brown Sony 28 43 Tyler Perry's Why Did I Get Married Too? Lionsgate CONSOLIDATED AMENDED COMPLAINT 27 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 31 of 72
1 THIRD QUARTER 2010 DVD TITLE RELEASES - AUGUST
2 Week available 3 at Redbox Movie Title Studio 4 Tyler Perry's Why Did I Get Married Too? (BLU-RAY) Lionsgate 5
6 95. Thus, approximately 80% of the new release titles in July and August were from 7 studios that did not impose the 28 day delay windows on Redbox. 8 96. With a DVD slate packed with non-28 day titles in two summer months that the 9 Company boasts are among the highest rental months for DVD services, it is not surprising that 10 Coinstar met its guidance in the 3Q10—it would be surprising if it did not. 11 CWs Confirm that Defendants Knew the Company Faced a Revenue Shortfall in the 12 Fourth Quarter 2010
13 Defendants Knew about the DVD Revenue Shortfall 14 97. CW1, a former Chief Accounting Officer at Redbox was employed from July
15 2008 through March 2011. CW1 confirmed that he supervised the Redbox accounting department which included Redbox’s Financial Planning and Analysis (“FP&A”) group. The 16 17 FP&A group was in charge of projecting Redbox’s finances. CW1 reported to Saul Gates, Coinstar’s Chief Accounting Officer, who in turn reported to Defendant Di Valerio. In his 18 19 capacity as a high ranking accounting executive of Redbox, CW1 was knowledgeable about 20 Redbox’s projections and forecasting practices during the Class Period. 21 98. CW1 advised that Redbox sent the FP&A group’s projections to Coinstar. CW1 22 added that the projections would have been submitted by Dave Osborne (Senior Director, Redbox’s FP&A) to Defendant Smith and Defendant Di Valerio. Based on CW1’s 23 24 information, it is clear that when lower sales and revenue for DVD rentals were projected,
25 Defendants knew it. 26 99. CW1 also advised that it was known internally that the “longer delay for a 27 release the less demand” for the product and in turn less revenue would be generated. CW1
759833 v6 28 [6/16/2011 18:42] 016587-0001 CONSOLIDATED AMENDED COMPLAINT 28 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 32 of 72
1 advised that internally they expected “degradation” of sales based on the implementation of the 2 28 day contracts. 3 100. Defendants not only knew that the delay in its receipt of new release DVDs from 4 three major studios was a likely detriment, according to information from CW1, they knew it 5 was actually impacting sales in 4Q10. CW1 advised that Coinstar’s executives, including 6 Defendants Davis, Kaplan, Di Valerio, and Smith, were able to and did track Redbox revenue 7 through “daily revenue updates” they received from Dave Osborne. According to CW1, the 8 “daily revenue update” was an excel spreadsheet that detailed revenue generated by Redbox on 9 a daily basis. CW1 advised that October 2010 did not “track consistently” with the internal
10 projections and “fell short.” According to CW1, Coinstar then internally “reforecasted”
11 projections for the remaining two months of the quarter. 12 101. Thus, by the end of October 2010, when Coinstar issued its bullish guidance for 13 4Q10, Defendants knew from a month’s worth of actual revenue results that sales were below 14 those previously forecasted for the quarter, and were therefore inconsistent with the numbers 15 they provided to analysts and investors. Instead of prompting them to revise the bullish 16 guidance they provided to investors, Defendants issued guidance that ignored actual results and 17 internally revised its forecast for the remaining two months. 18 102. CW1 also advised that Redbox and Coinstar held a “Monthly Business Review 19 Meeting” via video conference, and that at times during the Class Period, this meeting was
20 attended by all the Individual Defendants, Diane Pearce (SVP of Finance), Mitchell Lowe 21 (President of Redbox), Alex Chang (Senior Financial Analyst), and Dave Osborne (Senior 22 Director, Redbox’s FP&A).
23 103. CW2 was employed by Redbox as a financial analyst from June 2010 through 24 December 15, 2010. CW2 worked out of Redbox’s corporate office in Illinois and reported to 25 Dave Osborne (Senior Director, Redbox’s FP&A), who in turn reported to Defendant Smith.
26 CW2 advised that he was responsible for tracking the geographical data related to the kiosks 27 28 CONSOLIDATED AMENDED COMPLAINT 29 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 33 of 72
1 and where new kiosks should be placed. CW2 was able to corroborate some of the information 2 from CW1.
3 104. CW2 was aware of the monthly review meetings because they were attended by 4 his boss, Dave Osborne. CW2 added that he also was aware that these meetings were likewise 5 attended by Diane Pearce, Mitchell Lowe, other people from the finance department, and some 6 of the group heads. He confirmed that these meetings were held 7-10 days after month-end. 7 According to CW2, Redbox personnel would have met in one of the various conference rooms 8 at Redbox’s headquarters and they would video-conference with Coinstar. Since these meetings 9 occurred after the closing of the month, it is reasonable to infer that the monthly results were 10 discussed during these meetings. 11 105. CW2 also advised that he received a weekly report from Osborne that included a 12 “better-worse” comparison. CW2 confirmed that the weekly report would reflect a shortfall of
13 anticipated rentals, i.e. if Redbox projected 100 rentals and only rented 80 DVDs. According 14 to CW2, the weekly report would have shown “x rentals being higher or lower than 15 projections.” CW2 recalled that Defendant Smith and Mitchell Lowe were recipients of that
16 report, as two of dozens of names “cc’ed” on the distribution list. 17 106. CW3 was employed at Coinstar from October 2007 through April 2010 as the 18 Director of Finance. In this capacity, for the last three months of his tenure at the Company, he 19 reported directly to Defendant Di Valerio. CW3 also confirmed that during the time he was
20 employed at Coinstar, he attended monthly meetings, along with Defendants Di Valerio, Davis 21 (as CEO), and Kaplan (as President and COO), as well as the heads of the Company’s lines of 22 business. CW3 confirmed that the performance of DVD sales and rentals was discussed during 23 these meetings and that a monthly financial report was prepared by the finance staff of the 24 different divisions, approved by Mitchell Lowe of Redbox, and reviewed by all of the above- 25 noted executives. 26 107. CW3 also advised that during his employment at Coinstar, the finance staff of 27 each of Coinstar’s business lines, including Dave Osborne, made the earnings forecasts. 28 CONSOLIDATED AMENDED COMPLAINT 30 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 34 of 72
1 108. CW4 was employed by Redbox from February 2007 through October 2010 in 2 its Accounting Department and later, in its Finance Group. In CW4’s capacity as a financial 3 analyst in the Finance Group, he reported to Alex Chang (Senior Financial Analyst) and the 4 department reported to Dave Osborne (Senior Director – Redbox’s FP&A). CW4’s 5 responsibilities included monthly reporting, budgeting and forecasting. CW4 advised that
6 before his departure from Redbox, he was involved with putting together 4Q10 projections as 7 well as the FY11 projections and budget. 8 109. CW4 advised that Defendants Di Valerio, Smith, Davis and Kaplan all 9 participated in making financial projections and the budgeting process. CW4 identified his 10 former boss, Alex Chang, as the person who would have been focused on making sure that 11 Coinstar executives in Washington had revenue projections. CW4 recalled that after Redbox’s 12 acquisition by Coinstar, the Coinstar executives frequently tried to “micro-manage” Redbox’s
13 finances. CW4 recalled that he and his colleagues would frequently provide Coinstar 14 executives with projections for Redbox and the Coinstar executives would return with 15 unreasonable expectations. 16 Defendants Knew of Revenue Problems Stemming from the Rent and Return Anywhere Policy 17 110. CW5 is a former Regional Operations Manager of Redbox from November 2006 18 through February 2011, who supervised a team of field personnel in the Dallas/Ft. Worth area 19 and then the Oklahoma City region. During the Class Period, CW5 reported to Robb Meek, a
20 Regional Manager, who reported to Gary Chardavoyne and Adam Salerno (both Directors of 21 Operations at Redbox). In this capacity, CW5 advised that his job involved “everything to do 22 with the market.” According to CW5, he was responsible for supervising a team of field 23 personal, customer complaints, making sure the kiosks were working properly, supervising the 24 merchandisers (Field Service Representatives I) and the technicians (Field Service 25 Representatives II). CW5 further advised that he spent most of his time corresponding with his 26 staff and reviewing reports, such as Uptime Reports (which monitored whether a machine was 27 28 CONSOLIDATED AMENDED COMPLAINT 31 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 35 of 72
1 active) and Accuracy Reports (which tracked rentals and returns). CW5 did this to make sure 2 that his entire region was functioning properly.
3 111. CW5 reported that Coinstar had a corporate initiative to address what he 4 understood was a huge “migration” problem. CW5 explained that people would rent from 5 indoor Redbox machines (like those at Walmart) but would inevitably return them to outdoor 6 boxes (such as those at a 7-11 convenience store). This would cause problems because the 7 Walmart boxes would often be empty because customers did not want to make the effort to go 8 inside the store to return the discs. This created a huge problem for CW5’s team during the 9 Class Period because they had to redeploy the discs from outdoor machines, where the discs 10 were returned, to the indoor kiosks. 11 112. According to CW5, as early as the Christmas season of 2009, the outdoor 12 machines became so filled-up that people were “smashing the LCD screens” in frustration 13 because the kiosks would not accept their returns. 14 113. Based on CW5’s information, the “migration” problem Redbox experienced 15 with respect to this “rent and return anywhere” policy was evident – as is the fact that 16 Defendants were aware of these problems – since at least the 2009 Christmas season when the 17 strategy to deal with the migration issues was first put into place. 18 Defendants Knew of Revenue Problems Resulting from Slow Blu-Ray Disc Rentals 19 114. According to CW5, Blu-ray discs were a financial failure from the minute they
20 were put in the Redbox kiosks. According to CW5, his customer base did not have Blu-ray 21 players. As a result, CW5 explained that he and his colleagues immediately saw an increase in 22 damaged discs. CW5 believed that customers did not realize they were renting a Blu-ray disc 23 until they got home and attempted to play it in their regular DVD players, which would damage 24 the Blu-ray discs. CW5 added that the problems he witnessed with the Blu-ray discs ( i.e. , lack 25 of rentals and damaged discs) were apparent from the time Redbox started stocking them in the 26 kiosks through the end of his tenure in February 2011. 27 28 CONSOLIDATED AMENDED COMPLAINT 32 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 36 of 72
1 115. Redbox personnel also prepared a “thinning report,” which as explained by 2 CW5, would have been part of various reports that he reviewed and circulated to his 3 subordinates on a daily basis. The “thinning report” provided information about the rental 4 value of DVDs that were not renting well, in percentages (0 being the lowest and 100 being the 5 highest). CW5 explained that during the Class Period the “thinning report” was used to 6 determine which discs should be removed from the kiosks. According to CW5, in his region 7 and during the Class Period “75% of Blu-rays” had a “rental value” of “zero.” CW5 advised
8 that he could see this by logging into the kiosks and viewing the rental value for a particular 9 release. CW5 went on to say that many of the Blu-ray discs were sitting in kiosks and had not 10 been rented for “weeks and weeks.” The lack of activity for the Blu-ray releases caused them 11 to have a rental value of “0.” CW5 advised that he discussed this problem with Regional 12 Operating Supervisors all over the country and that from these discussions he believed this to 13 be a “nationwide” issue. CW5 confirmed that this issue was occurring during the fourth quarter 14 2010. 15 116. Given that Redbox “gets daily results from every kiosk in its chain, ” (¶159) 16 including Blu-ray rentals, and consistent with CW5’s observations discussed above, it is clear 17 that the problems that Redbox experienced with Blu-ray discs were well known to Defendants 18 during the Class Period. 19 Weak Titles In 4Q10 And The 28-Dav Delav
20 117. Box office revenue for movies already shown in theaters, scheduled for release 21 in DVD format during 4Q10, was down 16% in 4Q10, as compared to 4Q09. Defendants knew 22 this by October 28, 2010. (See infra, ¶¶ 155, 161). 23 118. Moreover, many of the hottest box office hits scheduled for home viewing 24 release in 4Q10 were from movie studios which had 28-Day Delay Agreements with Redbox. 25 This meant that instead of getting these DVDs when they became available elsewhere early in 26 the quarter, Redbox had to wait another 28 days before it could stock these titles in its kiosks. 27 The result was that several big titles were not in Redbox kiosks until January 2011. For 28 CONSOLIDATED AMENDED COMPLAINT 33 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 37 of 72
1 example, Warner Bros.’ “Inception,” ranked #6 in 2010 for total domestic gross sales in
2 theaters, grossing close to $300 million in the U.S. as of January 2, 2011 was delayed 28 days 3 and did not become available in Redbox kiosks until the week of January 4, 2011. See Exhibit 4 D. Universal’s “Despicable Me” was ranked #7 in 2010 for total domestic gross sales in
5 theaters, grossing over $250 million in the U.S. This title was also delayed 28 days and did not 6 become available in Redbox kiosks until the week of January 11, 2011. See Exhibit E. For both 7 of these successful titles, the corresponding Redbox revenue, albeit diminished, was received 8 by Redbox in 2011, and was undoubtedly further reduced by the fact that these titles became 9 available after the holiday vacation period ended. 10 119. Defendants also knew that still other hot titles would be shifted back from their 11 original release dates for various industry reasons and/or pursuant to the 28-Day Delay 12 Agreements with the studios, so that even though they may have been made available in 13 Redbox kiosks in December 2010, they were delayed such that most of their anticipated 14 revenue fell into 2011. For example, Fox’s “Knight and Day” generated over $76 million at the
15 domestic box office and did not become available at Redbox until the week of December 28, 16 2010. See Exhibit F. The revenue benefits of this box office hit was largely felt in 2011. 17 120. According to Inside Redbox ( www.insideredbox.com ), other box office hits 18 received by Redbox in 4Q10 were animations (“Shrek Forever After,” Toy Story 3,” “The 19 Search For Santa Paws,” “How to Train Your Dragon,” “Scooby-Doo Camp Scare” – to name
20 a few), which although not delayed 28 days, as an animated movie would not be expected to 21 rent as well as it would sell, a phenomenon well-known in the industry. See infra ¶161. In fact, 22 many of the top-selling DVDs of 2010 were animations – including many of the same 23 animation titles that were being stocked in Redbox kiosks in 4Q10, including “How to Train 24 Your Dragon” (ranked #6 in DVD sales); “Shrek Forever After” (ranked #18 in DVD sales); 25 “Toy Story 3” (ranked #2 in DVD sales); and “The Search for Santa Paws” (ranked # 29 in
26 DVD sales). See Exhibit G. 27 28 CONSOLIDATED AMENDED COMPLAINT 34 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 38 of 72
1 121. The above circumstances were well-known to the Defendants at the outset of 2 4Q10, such that by the Class Period start, Defendants knew that (1) their statements of present 3 fact as to the impact of the 28-Day Delay Agreements being largely behind them were false at 4 the time made; and (2) that they could not meet the bullish guidance they provided investors for 5 4Q10 or after. 6 DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS MADE DURING THE CLASS PERIOD 7 October 28, 2010 3Q10 Press Release 8 122. After the market closed on October 28, 2010, Defendants issued a press release 9 signed by Defendant Di Valerio announcing the results of Coinstar’s 2010 third quarter which 10 ended on September 30, 2010 (“3Q10 Press Release”). 11 123. The 3Q10 Press Release also provided bullish guidance for Coinstar’s 4Q10 and 12 2010 year-end results. For FY10, Coinstar management raised guidance (i) for consolidated 13 revenue to between $1.460 and $1.485 billion – significantly above the lower-end guidance 14 Defendants provided to investors only three months earlier of $1.425 billion; and (ii) for GAAP 15 EPS from continuing operations from $1.88 to $2.00 (issued on 7/29/10) to between $2.14 and 16 $2.20. For 4Q10, Coinstar management announced guidance (i) for consolidated revenue of 17 between $415 to $440 million – an increase of approximately $35 to $60 million from its 18 3Q10 actual results of $380.2 million; and (ii) for GAAP EPS from continuing operations of 19 between $0.79 and $0.85 – an increase from its 3Q10 actual results of $0.66. Coinstar also 20 provided the following guidance for FY11: consolidated revenue between $1.80 billion and 21 $1.95 billion; and GAAP EPS from continuing operations between $3.00 and $3.50. 22 124. Significantly, in providing investors with this guidance, Defendants were telling 23 investors that they anticipated the fourth quarter to be considerably stronger than its 24 traditionally strong third quarter, a quarter which includes the strong summer months of July 25 and August. 26 125. The statements made in the 3Q10 Press Release were materially false and 27 misleading at the time made because Defendants had no reasonable basis for the guidance 28 CONSOLIDATED AMENDED COMPLAINT 35 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 39 of 72
1 provided and were aware of undisclosed facts tending to seriously undermine the validity of the 2 guidance issued as to 4Q10, FY10 and FY11. 3 126. Specifically the Defendants knew at the time the statements were made but 4 failed to disclose to investors the following facts: 5 (a) Daily revenue reports they received and reviewed for the first month of 6 4Q10 did not track consistently with the Company’s internal projections and were falling 7 materially short of the Company’s public guidance;
8 (b) The disappointing early 4Q10 results led the Company to internally 9 reforecast downward its projections for the remaining two months of 4Q10; 10 (c) The 28-Day Delay Agreements would impact Coinstar’s financial results 11 on a long-lasting basis, well-beyond the transition to those agreements in 2Q10 and the impact 12 to 4Q10 revenue in particular would be acute and material as many of the best new releases 13 made available to consumers during 4Q10 would not be available in Redbox kiosks until 14 January, 2011; and
15 (d) Blu-ray disk sales were disappointing (that sales were slow and that 16 many were being returned broken), “rent and return anywhere” problems (that consumers were 17 often returning DVDs to different kiosks from the kiosks they rented from, which was creating 18 material imbalances in inventory, which in turn was preventing people from renting the titles
19 they wanted), and a poor 4Q10 title slate (evidenced by box office revenue being down for 20 DVD releases in 4Q10, box office hits being delayed in part or whole to 1Q11, and a number of 21 box office hits being animations, which typically do not rent well), which together contributed
22 to Defendants’ early understanding that Coinstar could not meet the aggressive guidance it 23 provided to investors, guidance that it was under no obligation to provide. 24 October 28, 2010 3Q10 Earning Conference Call 25 127. Following release of its 3Q10 financial results and new guidance, Defendants 26 held an earnings conference call (“3Q10 Earnings Call”). Both Defendants Davis and 27 28 CONSOLIDATED AMENDED COMPLAINT 36 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 40 of 72
1 Di Valerio participated on the call during which the Company reiterated the guidance provided 2 in the 3Q10 Press Release. Specifically, Defendant Di Valerio made the following statements: 3 So, moving to slide 17, for the full year 2010, we expect consolidated revenue between $1.46 billion and $1.485 billion, 4 narrowed from the previous range of $1.425 billion to $1.505 billion. EBITDA is expected to be between $291 million and 5 $297 million, up from $275 million to $290 million. We expect GAAP EPS from continuing operations between $2.14 and $2.20 6 on a fully-diluted basis, up from $1.88 to $2.00, and net redbox kiosk installs of 8,300 to 8,500. 7 Our guidance for the full year implies the following for our 8 fourth quarter of 2010. We expect consolidated revenue between $415 million and $440 million. EBITDA is expected to be 9 between $84 million and $90 million, and GAAP EPS from continuing operations between $0.79 and $0.85 on a fully-diluted 10 basis. 11 Now, let's take a look at 2011...We expect consolidated revenue between $1.8 billion and $1.95 billion...GAAP EPS from 12 continuing operations between $3 and $3.50 on a fully-diluted basis... 13 128. These statements were false and misleading for the same reasons articulated in 14 ¶ 126. 15 129. In addition, during this same call, Defendant Di Valerio made the affirmative 16 statement that as of this date, the Company had worked through its 28 day delay issues in 17 2Q10, that the delay in obtaining DVDs from the movie studios who imposed the 28 day delay 18 would not affect the Company’s revenues going forward and that it now had a steady stream of 19 great new release titles to which consumers had responded positively: 20 As we mentioned in July, we saw positive trends in the business 21 and expect our accounts to return to double-digit growth in the second half of the year. Consumers responded positively to a 22 steady stream of good content from studios after working through the transition to the 28-day release windows during the 23 second quarter . ...We are pleased with what we've accomplished in Q3, and looking at Q4, we continue to expect strong same- 24 store sales growth. *** 25 The fourth quarter has historically been our strongest quarter , and that's built into our guidance. The current schedule of titles 26 looks very strong , despite several titles shifting to later in the quarter or into 2011... 27 *** We are excited about all we've accomplished and all that lays 28 ahead in 2011. We will continue to find ways to drive profitable CONSOLIDATED AMENDED COMPLAINT 37 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 41 of 72
1 growth, while delighting our consumers and engaging our partners. We had an extremely strong Q3 and are excited about 2 the quarter ahead, which will wrap up Coinstar's best year, clearly driving value for our shareholders. 3 (Emphasis added). 4 130. The statements made in ¶ 129 by Defendant Di Valerio were materially false 5 and misleading and misrepresented and failed to disclose that by the date of this call, 6 Defendants were in possession of detailed daily revenue reports which showed that October 7 2010 did not track consistently with internal projections and fell materially short of public 8 guidance, which on or around this date resulted in the Company internally re-forecasting 9 projections downward for the remaining two months of the quarter. In addition, Defendants 10 knew by this date that the 28-Day Delay Agreements, poor slate of 4Q10 titles, Blu-ray 11 problems, and the inventory management issues associated with Redbox’s rent and return 12 anywhere policy, would have a material impact on 4Q10 revenue such that the Company would 13 not meet its 4Q10 and FY 2010 revised projections. 14 October 28, 2010 3Q10 Form 10-Q 15 131. Investors were provided additional information on October 28, 2010 to further 16 inflate their expectations for Coinstar’s 4Q10 and FY10. On this date, Coinstar’s third quarter 17 Form 10-Q (“3Q Form 10-Q”) was filed with SEC. The 3Q Form 10-Q, signed by Defendant 18 Di Valerio and certified by Defendants Davis and Di Valerio, contained the following 19 disclosure indicating that historically, DVD rentals were highest during the summer and at 20 year-end: 21 Seasonality 22 We have historically experienced seasonality in our revenue with 23 higher revenue in the second half of the year than in the first half of the year. Our DVD product line experiences lower revenue in 24 April and May due in part to improved weather and Daylight Savings Time, and in September and October, due in part to the 25 beginning of the school year and the introduction of the new television season. The year-end and summer holiday months have 26 historically been the highest rental months for DVD Services. 27 28 CONSOLIDATED AMENDED COMPLAINT 38 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 42 of 72
1 132. While the statements in the 3Q Form 10-Q about the seasonal nature of 2 Coinstar’s DVD business were nearly identical to the “Seasonality” disclosure in the 3 Company’s 2009 Form 10-K filed eight months earlier, Defendants knew or were reckless not
4 to have known at the time the 3Q Form 10-Q was filed that the historic, seasonal trends were 5 no longer applicable with the introduction of the 28-Day Delay Agreements and that by not 6 modifying the seasonality disclosure to reflect the new reality, investors were misled. 7 133. When Coinstar filed the 3Q Form 10Q, Defendants knew but failed to disclose 8 the following facts: 9 (a) Defendants were in possession of and reviewed daily revenue reports 10 which internally showed that one full month of 4Q10 did not track consistently with the 11 Company’s internal projections and was falling materially short of the Company’s public
12 guidance; 13 (b) The disappointing early 4Q10 results led the Company to internally 14 reforecast downward its projections for the remaining two months of 4Q10; 15 (c) The 28-Day Delay Agreements would impact Coinstar’s financial results 16 on a long-lasting basis, well-beyond the transition to those agreements in 2Q10 and the impact 17 to 4Q10 revenue in particular would be acute and material as many of the best new releases 18 made available to consumers during 4Q10 would not be available in Redbox kiosks until 19 January, 2011; and
20 (d) Blu-ray disc sales were disappointing (that sales were slow and that 21 many were being returned broken), “rent and return anywhere” problems (that consumers were 22 frequently returning DVDs to different kiosks than those rented from, which was creating 23 material imbalances in inventory which in turn was preventing people from renting the titles
24 they wanted), and a poor 4Q10 title slate (evidenced by lower box office revenue for DVD 25 releases in 4Q10, box office hits being delayed in part or whole to 1Q11, and a number of box
26 office hits being animations, which typically do not rent well), which together contributed to 27 28 CONSOLIDATED AMENDED COMPLAINT 39 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 43 of 72
1 Defendants’ understanding that Coinstar’s typical seasonality upswing for 4Q10 would not
2 materialize. 3 134. Ultimately, Defendants revised the boilerplate “Seasonality” disclosure 4 contained in the 2009 Form 10-K and repeated in the 3Q Form 10Q almost verbatim, so to 5 more accurately reflect the impact on seasonality of the 28-Day Delay Agreements in the 4Q10. 6 When Defendants filed Coinstar’s 2010 Form 10-K on February 10, 2011 (after the Class
7 Period end), Defendants belatedly disclosed what they privately understood when the 3Q Form 8 10-Q was filed, that the historic seasonal trends no longer applied in the post-28-Day 9 Agreement environment: 10 We have historically experienced seasonality in our revenue from our DVD Services segment. The summer months have 11 historically been high rental months for our DVD Services segment followed by lower revenue in September and October, 12 due in part to the beginning of the school year and the introduction of the new television season. In addition, the studio 13 licensing agreements we entered into during 2010 with Warner, Universal Studios, and 20th Century Fox provide that DVD titles 14 will be available 28 days after the DVD becomes available for purchase at retail outlets. These delayed rental windows have 15 resulted in the shifting of the availability of certain titles relative to historic patterns, most notably certain titles have shifted from 16 the fourth quarter holiday season into the first quarter of the following year. However, despite this shift, for 2011 we continue 17 to expect our lowest quarterly revenue and earnings in the first quarter and our highest quarterly revenue and earnings in the 18 second and third quarters. 19 135. In reaction to the statements made during the 3Q10 Form 10-Q, the 3Q10
20 Earnings Call, the related Press Release, positive media reports followed. 21 136. On October 29, 2010, analysts at Craig-Hallum Capital Group LLC reported 22 “CSTR Rings the Register on Q3; Huge Guidance and Digital Strategy On The Horizon; 23 Raising Estimates, Price Target Now $70” – “Based on strong Q3 results, particularly strong
24 margins, CSTR raised full year guidance for EPS. We are adjusting estimates ... First Glance 25 at 2011 Guidance a Big One...CSTR gave very strong guidance for 2011 ...including a jaw 26 dropping $175-$200 million in FCF (~$6/share) from continuing operations along with $350- 27 $380 million in adjusted EBITDA.” (Emphasis Added). 28 CONSOLIDATED AMENDED COMPLAINT 40 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 44 of 72
1 137. On November 2, 2010, RBC Wealth Management reported under the heading 2 “Good Quarter, Blowout Guidance , Flexible Digital Strategy for 2011” that despite the fact 3 that “[i]nitial FY11 guidance was established broadly above the prevailing consensus ” that 4 “[t]he market was quick to reflect the improved outlook,” and that the stock price “gapped up”
5 nearly 25% as a result. It also noted its belief that “[r]ecent uncertainties regarding the sourcing 6 of DVDs have been addressed, with agreements now in place with most of the major studios to 7 secure all of the company's expected purchases for FY10.” (Emphasis added). 8 138. In response to the “blowout” guidance and the accompanying false and 9 misleading statements made in the 3Q10 Earnings Call, shares of Coinstar increased
10 substantially. On October 29, 2010, shares of the Company’s stock traded up to almost $58.50 11 per share, before closing the trading day at $57.58 per share, trading on extremely heavy 12 volume of over 11.273 million shares traded (during the Class Period, the average trading 13 volume was 1.842 million shares). This represented an increase of almost 25% over the prior 14 day’s closing price of $46.26 per share.
15 139. On November 10, 2010, Bill Wilton on Forbes.com issued a glowing report 16 entitled “Coinstar’s Aggressive Growth Is Worth Your Spare Change,” stating: “ CEO Paul
17 Davis described the results as exceptional and went on to raise guidance, which spurred 18 analysts to do the same ” and adding that “[f]ollowing the earnings release, the stock quickly 19 jumped to an all-time high after the news.” (Emphasis added).
20 November 16, 2010 Investor Summit 21 140. On November 16, 2010, Defendant Di Valerio presented to analysts at the 22 Merriman Capital Investor Summit (“November 16th Summit”). Transcript excerpts obtained
23 from www.callstreet.com , are attached hereto as Exhibit H. During the November 16th Summit, 24 Defendant Di Valerio reiterated some of the exceptional guidance provided on October 28, 25 2010: 26 We talked to guidance. We increased our guidance across EPS, EBITDA, our cash flow and our consolidated revenues $1.46 to 27 $1.485 billion. Again demonstrating a very strong growth in 2010. Finishing out 2010 and we have provided insight into the 28 2011 fiscal year on a top side basis with $1.8 to $1.95 billion in CONSOLIDATED AMENDED COMPLAINT 41 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 45 of 72
1 revenue and EPS at $3.00 to $3.50 generating about $350 to $380 million of EBITDA. So again very strong results. And we’re 2 pleased to be able to continue out our expansion in kiosks, make corporate infrastructure investments, and still generate 175 3 million to $200 million in free cash flow in 2011. So a strong year is going into 2011 and we’ll certainly provide more context 4 around that year on our Q4 call in February. 5 See Exhibit H attached hereto, at pp. 2-3. 6 141. Defendant Di Valerio also discussed the increased inclusion of Blu-ray discs in 7 the kiosks: “We have put in Blu-ray in the kiosks, which is $1.50 price point. And as that 8 continues to expand as a percent of the kiosk I think they’ll that’s a natural price increase 9 because people are – will begin to rent Blu-ray versus standard def on certain titles.” See 10 Exhibit H attached hereto, at p. 5. 11 142. Defendant Di Valerio’s statements during the November 16th Summit were 12 materially false and misleading when made and omitted material facts because neither he nor 13 the Company had a reasonable basis for the guidance provided and Defendant Di Valerio was 14 aware of undisclosed facts which seriously undermined the accuracy of this guidance, as 15 detailed in ¶¶ 126, 130 and 133 above. In addition, by this date Defendants knew that the first 16 month of 4Q10 revenue had fallen short of expectations and Defendants had two weeks worth 17 of daily reports of November Redbox rentals, and that the Company had already re-forecasted 18 its internal projections downward for the remaining two months of the quarter. Accordingly, by 19 once again advising the public as to the prior stated guidance—by this point a known
20 misstatement—Defendants violated their legal duty to speak truthfully to update and/or correct 21 known misstatements. Additionally, Defendant Di Valerio’s comments about Blu-ray discs 22 omitted material information about Redbox consumer’s lack of interest in Blu-ray discs, as 23 evidenced by their slow rentals.
24 November 17, 2010 Investor Conferences 25 143. On November 17, 2010, Defendants Davis and Smith participated in the Morgan 26 Stanley TMT Conference (“Morgan Stanley TMT Conference”). Transcript excerpts from this
27 conference, obtained from “ Thomson Reuters Streetevents ,” are attached hereto as Exhibit I. 28 CONSOLIDATED AMENDED COMPLAINT 42 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 46 of 72
1 144. As memorialized in the Morgan Stanley TMT Conference transcript, during the
2 conference Defendant Davis made certain false statements about the impact of the 28-Day 3 Delay Agreements: 4 Dave Gober - Morgan Stanley - US Media & Cable/Satellite Analyst 5 Q: Sure. So I guess, another interesting aspect of the 3Q 6 numbers was that you saw some nice gross margin improvement and you talked a little bit about how your relationships with 7 videos have changed, and given that you're a new-release focused, those are critical relationships for you. Can you talk a 8 little bit about the evolution of where you are with the studios, and what you've seen in some of the studios where you've 9 created a 28-day window for -- kind of a sell-through window ? 10 Paul Davis - Coinstar, Inc. – CEO 11 Yes, we had a good relationship with most all the studios before this issue -- we had issues with three studios that we were 12 struggling with , and the good news is most of all of that is behind us . ...So of the studios that we agreed to a 28-day 13 window, which is Fox, Warner and Universal, they represent between 30% and 40% of our mix. So all the rest, we have day- 14 and-date contracts, long-term deals. And we have long-term deals with virtually every studio, I think it represents north of 90% of 15 our product supply. And I think we've made a big step in the right direction in improving those relationships. 16 See Exhibit I attached hereto, at p. 5 (emphasis added). 17 145. Defendant Davis’ statements in ¶ 144 were materially false and misleading at 18 the time made and omitted material facts as to the effects of the 28 Day Agreements for the 19 reasons set forth in ¶¶ 126, 130 and 133. Specifically, his statement that “most of all of that is 20 behind us” was materially misleading in light of the fact that he knew that Coinstar’s revenue – 21 especially in the 4Q10 – was taking a material hit, in large part because of these agreements 22 and the unavailability of the new releases its customers demanded, releases customers could 23 obtain from other sources, but not in Redbox kiosks. 24 146. On November 17, 2010, Defendant Di Valerio participated in the Morgan 25 Stanley Consumer & Retail Conference (“Morgan Stanley C&R Conference”). Transcript 26 excerpts from this conference, obtained from “ Thomson Reuters Streetevents ,” are attached 27 hereto as Exhibit J. 28 CONSOLIDATED AMENDED COMPLAINT 43 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 47 of 72
1 147. According to the Morgan Stanley C&R Conference transcript during his 2 conference presentation Defendant Di Valerio stated, in relevant part, the following: 3 We talked a bit about guidance on the call. I will just mention here that we are talking revenues of $1.46 billion to $1.485 4 billion for the full year revenue of 2010, with EPS $2.14 to $2.20 and free cash flow generation of about $100 million to $110 5 million, rounding out a very strong year for Coinstar, and it is certainly record revenue and EPS as we move through from 6 continuing operations. 7 We also talked about 2011 guidance -- our first look at 2011 guidance -- strong growth $1.8 billion to $1.95 billion, $350 8 million to $380 million of EBITDA grow, and we have EPS of $3.00 to $3.50 with free cash flow of between $175 million and 9 $200 million. Very -- again, we are pretty excited about 2011, as we move into our fourth quarter call we will provide additional 10 detail, but this is our first look at 2011. 11 See Exhibit J attached hereto, at p. 4. 12 148. The statements made in ¶ 147 were materially false and misleading and omitted 13 material facts for the same reasons stated at ¶¶ 126, 130, and 133. Indeed, by this date 14 Defendants knew that revenue had fallen short of expectations and the Company had already 15 internally re-forecasted projections downward for the balance of the quarter. Accordingly, by 16 once again reminding the public of its previously provided guidance, Defendants violated their 17 legal duty to speak truthfully to update and/or correct known misstatements. 18 149. In addition, during the same call, an analyst from Morgan Stanley asked two 19 important questions about Blu-ray sales and the impact of the 28-Day Delay Agreements: 20 Colter Van Domelen - Morgan Stanley – Analyst
21 Scott, two related questions. First of all, you have had a little over two quarters now with a 28 day delay, can you compare and 22 contrast the behavior of say around a Paramount title versus a Warner's title, how often it turns, what -- if you've seen any 23 diminution in demand from that 28 day window for people buying or seeing it some other way? 24 And then, you have much less experience with Blu-ray, but I am 25 wondering if there is any early lessons on -- is that affecting basket size, whether people are getting only one disc or the 26 number of nights that the discs are staying out, if you are seeing any difference between Blu-ray and standard? 27 See Exhibit J attached hereto, at p. 5. 28 CONSOLIDATED AMENDED COMPLAINT 44 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 48 of 72
1 150. These questions gave Defendant Di Valerio the perfect opportunity to come 2 clean and tell the truth about the 28 delay, especially in 4Q10, and the early lessons of Blu- 3 ray—but Defendant Di Valerio chose not to do so. Instead, he kept the campaign to misinform 4 going: 5 Scott Di Valerio - Coinstar - CFO
6 ...I think what I will tell you is that what we are seeing is about what we had expected to see and that [Blu-ray] space, but we had 7 very few Blu-ray titles or content in the kiosks at the end of the third quarter, we are building it up between 5% and 10% this 8 quarter.
9 So I think we will learn more as we move through the quarters, but we are pretty pleased with the performance of the Blu-ray 10 titles .... 11 On the 28-day window ..., [w]e had predicted and thought that the revenue for a 28-day title would be lower because the demand 12 would be lower since it is coming out 28 days later, that is coming true certainly, but again it is in line with what we had 13 expected . 14 And what we were doing is we buy -- as we negotiated the deals with Warner Brothers and Fox and Universal, we had indicated 15 we would buy less titles, less numbers -- less copies and that the price points would be lower than they would be if they were a 16 day-and-date title... 17 Again, good success so far with it. We continue to get better at that buys. And, again the turns on the 28-day titles are about in 18 line with what we had expected when we were going into it... 19 See Exhibit J attached hereto, at p. 5-6 (emphasis added).
20 151. Defendant Di Valerio’s statements in ¶ 150 were materially false and misleading 21 and served to reiterate the guidance Defendants provided three weeks earlier, notwithstanding 22 disappointing Blu-ray sales and the known impact that the 28-Day Delay Agreements were 23 having on DVD rentals for the reasons set forth in ¶¶ 126, 130 and 133.
24 152. Moreover, as to the 28 day titles, Defendant Di Valerio’s statement that the 25 revenue related to these titles “is in line with what we had expected” was misleading in light of 26 the fact that by November 17, 2010, Defendants knew from daily revenue reports that Coinstar 27 had materially missed revenue expectations for October, which led Defendants to internally 28 CONSOLIDATED AMENDED COMPLAINT 45 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 49 of 72
1 reforecast revenue downward for the last two months of 2010 as well. With respect to Blu-ray 2 discs, Defendant Di Valerio’s above statements were false and omitted material facts that he 3 knew or was reckless in not knowing. By this date, Defendants had months of daily data from 4 kiosks (see infra ¶159) and daily revenue reports, all of which demonstrated a lack of demand 5 for Blu-ray titles in the 4Q10. 6 153. As anticipated by Defendants, the November 16 and 17th conferences and the 7 prior guidance issued during 4Q10 had the effect of spurring analyst and the investing public’s
8 expectations of Coinstar. 9 154. On December 30, 2010, one day before the end of Coinstar’s 4Q10, 10 Barrons.com reported Piper Jaffray analyst Michael Olson’s view concerning Coinstar: 11 On Coinstar, Olson has a $74 price target, representing a 23 times multiple of his 2011 EPS estimate of $3.22. Coinstar’s DVD 12 rental kiosks, branded Redbox, which make up about 85% of revenue (the rest is things such as coin-counting machines) 13 should continue to scoop up share of rentals in 2011, as the retail rental of movies at bricks & mortar outlets falls from roughly 14 30% this year. Coinstar is in good shape as far as deals with the studios, and it has a chance to lower its cost of content, boosting 15 margins. He’s not overly worried about online distribution eating into that business much in the next 12 months. And 16 there’s upside as Redbox goes online, too. (Emphasis added). 17 THE TRUTH IS REVEALED
18 January 13, 2011 Disclosure 19 155. On January 13, 2011, following the close of trading, Defendants shocked
20 investors when Coinstar issued a press release announcing that its 4Q10 and 2010 full year 21 financial and operational results would be well below its previously stated guidance and 22 analysts’ expectations. Among other things, the January 13th press release stated: 23 Coinstar, Inc. Announces Preliminary 2010 Fourth Quarter Results and Updated Full Year 2011 Guidance 24 BELLEVUE, Wash., Jan. 13, 2011 /PRNewswire/ -- Coinstar, 25 Inc. (NASDAQ: CSTR) today announced certain preliminary financial results for the fourth quarter ended December 31, 2010. 26 The company expects revenue for the fourth quarter of 2010 to increase 31% year over year to $391 million, compared with 27 previous fourth quarter 2010 guidance in the range of $415 million to $440 million . 28 CONSOLIDATED AMENDED COMPLAINT 46 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 50 of 72
1 The company expected stronger performance from the titles scheduled for release during the 2010 fourth quarter holiday 2 season, particularly from the slate of 28-day delay and higher priced Blu-rayTM titles, despite a 16% lower box office for 3 scheduled releases compared with those in fourth quarter 2009 . In addition, in anticipation of demand for new releases that did 4 not materialize, Redbox removed older inventory early, impacting revenue and gross margin. Further, Redbox consumers 5 utilized “rent and return anywhere” to a higher level than expected, which caused temporary imbalances in available titles 6 across the kiosk network.
7 As a result, the company expects fourth quarter 2010 GAAP earnings per share (EPS) from continuing operations between 8 $0.65 and $0.69 on a fully diluted basis, compared with guidance in the range of $0.79 to $0.85. GAAP EPS includes a 9 reduction of $0.02 per share due to the expected increase in diluted share count of 1.3 million as a result of convertible debt 10 and option exercise dilution and $0.02 per share due to expected higher share based expense related to the higher share price at the 11 end of the quarter. 12 156. The Company went on to report: 13 The company expects fourth quarter adjusted EBITDA from continuing operations between $78 million and $82 million, a 14 year over year increase of 38.8% to 45.9%, compared with guidance in the range of $84 million to $90 million. EBITDA 15 was impacted by lower revenue and gross margin. 16 Coinstar also has revised its initial outlook for full year 2011 and now expects revenue between $1.70 billion and $1.85 billion, 17 adjusted EBITDA from continuing operations between $325 million and $355 million, and GAAP EPS from continuing 18 operations between $2.60 and $3.10, based on a share count of 33.3 million. (Emphasis added). 19 157. Thus, investors learned for the first time that due to the ongoing impact of the 20 Company’s 28-Day Delay Agreements (especially to 4Q10 revenue) and slow sales of Blu-ray 21 discs, the Company’s 4Q10 and FY 2010 financial results as well as FY 2011 prospects would 22 be significantly below what they had been led to believe by Defendants since October 2010. 23 In fact, the Company announced that it would be missing 4Q10 guidance by $24-$49 million 24 and would be lowering full year 2011 guidance by a stunning $100 million . 25 158. Following Defendants’ January 13, 2011 disclosure, trading in the Company’s 26 shares was immediately halted. When shares of the Company’s stock resumed trading the 27 following day, on January 14, 2011, Coinstar’s stock plunged to a low of $41.44 per share, 28 CONSOLIDATED AMENDED COMPLAINT 47 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 51 of 72
1 closing for the day at $41.50 per share – down $15.45 per share, more than 27%, from the prior 2 day’s closing price of $56.95 – on extremely heavy volume (19,358,900). 3 159. Investors were not the only ones shocked. After hearing the Company’s 4 disclosures, BTIG research analyst, Richard Greenfield, noted in his research posting: 5 What is remarkable about the pre-announcement is that Coinstar reported Q3 results on October 28th and notably raised guidance. 6 Given that Redbox gets daily results from every kiosk in its chain, it made its guidance increase announcement with an 7 entire month's worth of Q4 data in hand. We presume the October data was very encouraging for Redbox to have the 8 confidence to raise guidance. Yet, the company ends up missing by a wide margin and the impact is not a one-time event, as they 9 reduced 2011 full-year guidance as well . (Emphasis added). 10 160. Greenfield did not know at the time he wrote this—as investors did not know 11 when they purchased Coinstar stock after October 28, 2010—that the October data was 12 anything but “encouraging.” Instead, Company insiders knew at the time they raised guidance 13 that October did not “track consistently” with the internal projections but “fell short,” resulting
14 in the downward reforecasting of projections for the remaining two months of the quarter. 15 Despite this knowledge, Defendants persisted in issuing dramatically false statements. These 16 statements had the effect of misleading the investing public and analysts, who were led to 17 believe that Coinstar was poised for a strong upswing in revenue, which would continue 18 through 2011. At the same time, Defendants were in possession of internal daily revenue 19 reports and other undisclosed information showing that: October was not in line with the
20 Company’s revenue expectations; that it would not meet 4Q10 guidance; and that its revenue 21 stream was being materially impacted by factors including its 28-Day Delay Agreements, a 22 poor slate of 4Q10 DVD releases, its lack of Blu-ray sales and rentals, and its inventory 23 management issues associated with its “rent and return anywhere” policy. 24 161. On January 14, 2011, analyst Steve Dyer of the Craig-Hallum Capital Group 25 LLP reported that one of the reasons Coinstar missed 4Q10 guidance was that the [fourth] 26 quarter “featured some of the least impressive rental titles that we can recall ” and that in the 27 Company’s “first holiday season with the 28-day delay, box office releases were down 16%. 28 CONSOLIDATED AMENDED COMPLAINT 48 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 52 of 72
1 Management knew that when they offered guidance on October 28th .” He elaborated that 2 “Management expected titles released in Q4 to perform better during the holiday season even
3 though box office was 16% lower for the scheduled releases y/y. Animated movies made up 3 4 of the top 4 title releases, which typically don’t rent well , and likely contributed to the 5 underperformance.”
6 February 3, 2011 Disclosure 7 162. On February 3, 2011, the Company issued a press release announcing its actual 8 financial results for the fourth quarter and full year ended December 31, 2010. In this press
9 release, Defendant Davis admitted that while there was some growth, it was “not in line with 10 our expectations” and that “[w]e have taken definitive steps to correct the issues we 11 encountered with our redbox business in the fourth quarter.” The Company announced the 12 following financial information:
13 Revenue for the fourth quarter of 2010 increased 31% to $390.8 million compared with the fourth quarter of 2009, driven 14 primarily by growth in DVD revenue, which increased 38% to $319.6 million, and by Coin revenue which grew 7% to $71.2 15 million.
16 Income from operations for the fourth quarter of 2010 was $43.2 million, resulting in an operating margin of 11%, including $3.1 17 million in share-based payments expense related to the company’s agreements with Sony Pictures Home Entertainment 18 (Sony) and Paramount Home Entertainment Inc. This compares with income from operations of $29.7 million and an operating 19 margin of 10% in the fourth quarter of 2009, which included $0.3 million in share-based payments expense related to the Sony 20 agreement. 21 Income from continuing operations for the fourth quarter of 2010 was $22.4 million, with diluted earnings per share of $0.68, 22 compared with $11.6 million, and $0.37, in the fourth quarter of 2009. 23 Coinstar recorded a loss from discontinued operations of $10.7 24 million, net of tax, or a loss of $0.33 per share, in the fourth quarter. 25 Net income attributable to Coinstar, Inc. for the fourth quarter of 26 2010, which includes both continuing and discontinued operations, was $11.7 million, with diluted earnings per share of 27 $0.35. This compares with $3.4 million, and $0.11, in the fourth quarter of 2009. Revenue for 2010 was $1,436.4 million, an 28 increase of 39% compared with 2009. Income from operations CONSOLIDATED AMENDED COMPLAINT 49 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 53 of 72
1 for 2010 was $143.2 million compared with income from operations of $104.7 million in 2009. 2 Income from continuing operations for 2010 was $65.9 million, 3 with diluted earnings per share of $2.03, compared with $43.7 million, and $1.31, in 2009. 4 Net income attributable to Coinstar, Inc. for 2010 was $51.0 5 million, with $1.57 per diluted share, including a loss, net of tax, of $14.9 million from discontinued operations. This compares 6 with net income attributable to Coinstar, Inc. of $53.6 million, and $1.76, in 2009, which included income from discontinued 7 operations, net of tax, of $13.6 million offset by a net loss of $3.6 million attributable to noncontrolling interests. 8 Cash paid for capital expenditures for continuing operations for 9 the fourth quarter of 2010 was $38.4 million, compared with $46.5 million in the fourth quarter of 2009. Free cash flow from 10 continuing operations for the fourth quarter of 2010 was $48.6 million, compared with $8.4 million in the fourth quarter of 2009. 11 163. The same press release also announced that management was maintaining its 12 lowered FY11 guidance, first issued on January 13, 2011. Specifically, it announced FY11 13 guidance as follows: projected consolidated revenue between $1.70 billion and $1.85 billion; 14 EBITDA between $325 million and $355 million; GAAP EPS from continuing operations 15 between $2.60 and $3.10 on a fully diluted basis. 16 164. Later on February 3, 2011, following release of its 4Q10 and FY10 financial 17 results and the Company’s announcement that management was maintaining its lowered FY11 18 guidance as issued on January 13, 2011, Defendants held a conference call (“4Q10 Earnings 19 Call”) with analysts. Both Defendants Davis and Di Valerio participated on the call in which Di 20 Valerio made the following statements: 21 (a) In discussing the reduced 2011 guidance: “Specifically, we reduced the 22 estimated performance of 28 day delayed titles in the fourth quarter of 2011, adjusted the ramp 23 rate for Blu-ray, and reduced our expectations for rents per kiosk, per day for the year” (p. 8); 24 (b) “As we went through the quarter, we certainly get analysis as we go 25 through the quarter . And we go through and do the analysis around that, and made the 26 adjustments to the business in order to be able to drive the business” (p. 11); and 27 28 CONSOLIDATED AMENDED COMPLAINT 50 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 54 of 72
1 (c) “So there was a step down in the performance on the 28-day titles to 2 some extent, and then also adjusted our numbers on Blu-ray, so also pulled that down ” (p. 3 14). (Emphasis added). 4 165. Following these announcements, shares of the Company’s stock fell an 5 additional $5.28 per share, or 11.93 percent, to close on February 4, 2011 at $38.96 per share, 6 on unusually heavy trading volume. This was a more than 40% drop from its Class Period high 7 of $66.98 on high very volume. 8 166. Defendants continued to make public statements further demonstrating that they 9 knew that the guidance they gave investors in October about anticipated 4Q10 and FY10 10 performance was false when made and when reiterated thereafter. 11 POST-CLASS PERIOD EVENTS 12 167. On February 16, 2011, Coinstar and Redbox executives participated in 13 Coinstar’s Analyst Day presentation, including Mitchell Lowe (President of Redbox) and 14 Defendants Davis, Di Valerio, Smith, and Kaplan. Relevant excerpts of this presentation
15 transcript, obtained from “ Thomson Reuters Streetevents ,” are attached hereto as Exhibit K. 16 During the Analyst Day conference call , Redbox’s Mitchell Lowe made the following
17 statements: 18 So just to recap 2010...[w]e ended the work around which we did for the first several months of 2010. And that was, for those of 19 you who don't know, that was the program where for those three studios that refused to sell us product, we sent our field teams out 20 to purchase it at retail, prep it in the field, enter it into our systems and get it into the kiosks for our customers. ... 21 We also in the second quarter and through the rest of the year 22 transitioned to a 28-day delay , launched Blu-ray in the summer of last year to virtually every kiosk around the country ... 23 But of course it didn't come without challenges. The first one is 24 the complexities that were added by the 28-day delay product became pretty complex. Not only did demand shift between 25 quarter, but the seasonality, the history of seasonality that we've always tracked was thrown completely out of whack, with titles 26 that typically would come out at just before Thanksgiving coming out in the end of December, with titles that were holiday 27 titles before Christmas coming out in January ... 28 See Exhibit K attached hereto, at p. 22-23 (emphasis added). CONSOLIDATED AMENDED COMPLAINT 51 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 55 of 72
1 168. Thus, Defendants admit that, inconsistent with their previous statements about 2 the impact of the 28-day delay (“Having worked through the one-time transition to the [28-day] 3 window, we expect our comps to move back to double digit growth during the second half of 4 the year”; see also supra ¶¶ 13, 84), the transition was not limited to just the second quarter. In 5 fact, as Defendants anticipated and claimed in the Studio Litigation, the 28 day transition was 6 an ongoing problem that would effect Redbox sales for the “rest of the year” and beyond. 7 169. Defendants also admit that one of the main problems the Company faced was 8 that the 28-Day Delay Agreements affected seasonality and demand by shifting titles, including 9 holiday titles, into January 2011 (when there is likely less demand for holiday titles). Given 10 Redbox’s twelve-month lead up to picking new titles in the kiosks and the fact that Defendants 11 knew which titles would become available before the start of each quarter, it is unreasonable 12 for Defendants to say that they did not know of this shifting of 2010 holiday titles from Fox, 13 Universal, and Warner Bros. until after the holidays. 14 MISREPRESENTATIONS CONCERNED COINSTAR’S “CORE OPERATIONS” 15 170. Revenue derived from Redbox was the admitted core of the Company’s 16 business. Revenue from Redbox’s kiosks represented 80% of Coinstar’s overall revenue. 17 Defendants knew or were deliberately reckless in not knowing throughout the Class Period that 18 statements they made concerning and related to Redbox’s revenue and the state of its 19 operations were false and misleading.
20 171. Defendants knew that the 28-Day Delay Agreements would cause a significant 21 downturn when they sued the studios, and they knew it when they gave guidance for 4Q10 22 rental revenue. Defendants already knew that Blu-ray rentals were disappointing, that the 23 Company expected a weak slate of 4Q10 DVD titles in part because of the 28-Day Delay 24 Agreements, and that there were serious problems with inventory management. 25 172. Furthermore, in light of Defendants’ statements and admissions during the Class 26 Period and after, the statements of former employee CWs, contemporaneous analyst reports and 27 various pre and post Class-Period statements, it is beyond absurd to suggest that Defendants 28 CONSOLIDATED AMENDED COMPLAINT 52 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 56 of 72
1 were unaware of the issues concerning Redbox’s revenue and earnings when Defendants issued 2 and then reiterated their guidance, which was significantly above results during the peak 3 summer months of the 3Q10. 4 173. Defendants publicly discussed the major components of Redbox revenue at 5 every turn, including the importance of new releases to Redbox’s business model. For 6 example, during the October 28, 2010 Earnings Conference Call, Defendant Davis discussed 7 “Redbox’s ability to deliver new release titles” as being “unmatched” in the industry. During
8 the November 17, 2010 Morgan Stanley TMT Conference, Defendant Davis discussed new 9 releases as the cornerstone of the Redbox business model: “We built this model focused on 10 new releases .” (See Exhibit I, p. 1; November 17, 2010 TMT Conference Call) (emphasis 11 added). Indeed, during the Morgan Stanley TMT Conference, David Gober, an analyst at 12 Morgan Stanley, recognized that the Company was “new release focused.” ( See Exhibit I, p. 5; 13 November 17, 2010 TMT Conference Call) (emphasis added). During a July 29, 2010 earnings 14 conference call, Defendant Di Valerio admitted that “a key to our model is getting the
15 appropriate number of turns out of each title” and that “ [s]trength of titles is a key factor 16 determining the optimal inventory levels.”
17 174. As alleged above, Defendants knew that new releases were critically important 18 to their business model. Redbox sued Fox, Warner Bros., and Universal to maintain and 19 enhance its ability to deliver new releases to its customers. Defendants were aware that the 28-
20 Day Delay Agreements would affect their ability to rent DVDs coming from these three 21 studios, which Defendant Davis admitted represented “between 30% and 40% of our mix.” 22 (See Exhibit I, p. 5; November 17, 2010 TMT Conference Call). 23 175. Blu-ray disc revenue was also becoming increasingly important to Redbox. In 24 the October 28, 2010 Earnings Conference Call, Di Valerio discussed how for the fourth 25 quarter and the remainder of the year, “one of the key drivers in revenue [would] be Blu-ray.” 26 Throughout the fourth quarter, Redbox described how Blu-ray would account for 5-10% of 27 space in its kiosks – and so presumably at least 5-10% of DVD revenue. 28 CONSOLIDATED AMENDED COMPLAINT 53 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 57 of 72
1 176. Defendants tracked and had access to “daily revenue updates” which provided 2 them with data on Redbox’s performance on a daily basis . BTIG’s research analyst confirmed 3 this, writing that Redbox received “daily results from every kiosk in its chain.” There were
4 also monthly meetings attended by senior executives of Redbox and its parent Company, 5 Coinstar, where it can reasonably be inferred that the Individual Defendants all participated in 6 discussions regarding Redbox’s financial performance and outlook. ( See ¶ 188). 7 177. Not only did Defendants have actual access to information concerning the 8 Company’s revenue, but Defendants used this access to develop internal forecasts. Knowing 9 that results in October 2010 did not “track consistently” with the internal projections and “fell
10 short,” Defendants internally re-forecasted their revenue projections as early as October 2010 11 for the remaining two months of the year. 12 178. Because its Redbox subsidiary provided 80% of the Company’s revenue during 13 the Class Period, it is not surprising that Defendants keenly focused on Redbox’s revenue and 14 outlook during the Class Period.
15 LOSS CAUSATION AND ECONOMIC LOSS 16 179. Defendants’ wrongful conduct, as alleged herein, directly and proximately 17 caused the damages suffered by Plaintiff and the Class. 18 180. During the Class Period, as detailed herein, Defendants engaged in a scheme to 19 deceive the market and a course of conduct which artificially inflated the price of Coinstar’s
20 common stock by misrepresenting, or failing to disclose: (1) the true and ongoing impact of the 21 28-Day Delay Agreements and the impact it was having on Coinstar’s revenue; and (2) that
22 various internal indicia indicated to Defendants that the Company would not—and could not— 23 meet Defendants’ bullish guidance for 4Q10 or after.
24 181. Corrective disclosures issued on January 13, 2011 and February 3, 2011 25 informed investors, belatedly, what Defendants knew all along: that its revenue and earnings 26 guidance was too high and that the problems it experienced during the Class Period with 27 delayed titles, poor demand for Blu-Ray discs, and inventory problems made it impossible for 28 CONSOLIDATED AMENDED COMPLAINT 54 LABATON SUCHAROW LLP 745851 v1 NO. C11-133 MJP 140 BROADWAY [9/18/2010 18:53] NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 58 of 72
1 the Company to come close to the projected results. As a direct result of these disclosures, the 2 price of Coinstar common stock dropped precipitously. 3 182. The dramatic decline in Coinstar’s stock price at the end of the Class Period was 4 a direct result of the nature and extent of Defendants’ misrepresentations being revealed to 5 investors and to the market. The timing and magnitude of Coinstar’s stock price decline 6 negates any inference that the losses suffered by Plaintiff and the other Class members was 7 caused by changed market conditions and/or Company-specific facts unrelated to Defendants’ 8 wrongful conduct. Indeed, at the end of the Class Period, while Coinstar’s share price fell over 9 40% as a result of Defendants’ scheme and conduct, the Standard & Poor’s 500 securities index 10 was relatively stable. 11 183. During the Class Period, as a result of Defendants’ material misrepresentations 12 and omissions in the form of inflated guidance among other misstatements of present fact, 13 Coinstar’s stock traded at a high of $66.98 per share and never fell below $40.91 per share. 14 However, on February 3, 2011 (in extended trading) and on February 4, 2011, after Coinstar
15 revealed the truth of its financial condition, the stock dropped to prices more than 40% lower 16 than its Class Period high. 17 ADDITIONAL SCIENTER ALLEGATIONS 18 184. As alleged herein, Defendants acted with scienter in that each Defendant knew 19 that the public documents and statements issued or disseminated in the name of the Company
20 were materially false and misleading; knew that such statements or documents would be issued 21 or disseminated to the investing public; and knowingly and substantially participated or 22 acquiesced in the issuance or dissemination of such statements or documents as primary 23 violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by 24 virtue of their receipt of information reflecting the true facts regarding Coinstar, their control 25 over, and/or receipt and/or modification of Coinstar’s allegedly materially misleading
26 misstatements and/or their associations with the Company which made them privy to 27 28 CONSOLIDATED AMENDED COMPLAINT 55 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 59 of 72
1 confidential proprietary information concerning Coinstar, participated in the wrongful scheme
2 alleged herein. 3 185. Defendants were motivated to materially misrepresent to the SEC and investors 4 the true financial condition of the Company because their scheme and illegal course of conduct: 5 (i) deceived the investing public regarding Coinstar’s business, operations, and management
6 and the intrinsic value of Coinstar common stock; (ii) enabled Defendants to artificially inflate 7 the price of Coinstar common stock; and (iii) caused Plaintiff and other members of the Class 8 to purchase Coinstar common stock at artificially inflated prices. 9 186. Defendants Di Valerio, Davis, Smith, and Kaplan received contemporaneous 10 daily revenue reports showing Coinstar would not meet 4Q10 guidance and causing it to 11 internally reforecast guidance downward for the last two months of 2010 at or around the same 12 time as Defendants publicly forecasted exceptional guidance for 4Q10, FY10 and FY11. The 13 revenue data available to the Defendants contradicted their public statements. 14 187. Defendants received daily results from every web-linked kiosk in its chain 15 (¶159) and had disappointing results for almost the entire month of October when it chose to 16 increase guidance. The kiosk data available to Defendants contradicted their public 17 statements. 18 188. Defendants admit that as they go “ through the quarter, we certainly get 19 analysis as we go through the quarter ” (¶164). With this analysis in hand Defendants
20 internally reforecasted guidance downward for the last two months of 2010. Yet they continued 21 to make contradictory public statements in mid-November as to the accuracy of its guidance 22 and false statements of present fact that the effects of the 28-Day Delay Agreements were 23 largely behind them.
24 189. Coinstar and Redbox had Monthly Business Review Meetings. The monthly 25 meetings were generally held 7-10 days after month-end, by video-conference, and included 26 Coinstar and Redbox management, including their most senior executives and the heads of the 27 business lines. Based on CW statements, at times these meetings included discussions as to 28 CONSOLIDATED AMENDED COMPLAINT 56 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 60 of 72
1 how DVD sales and rentals were doing. Based on all of the above, and in light of the fact that 2 approximately 80% of Coinstar’s revenue was generated through Redbox kiosk sales, it can be 3 reasonably inferred that Redbox’s performance and financial forecasts were discussed during 4 the monthly meeting held during Class Period meetings attended by the Individual Defendants. 5 Therefore Defendants had knowledge of, or consciously disregarded, the Company’s state of 6 affairs that showed that the Company would not be able to meet guidance in 4Q10 and after. 7 190. Defendants knew, as they represented in the Studio Litigation, that the 28-Day 8 Delay Agreements, which impacted 30-40% of their DVDs, would be long-term and would 9 substantially impact revenue because: (1) “[c]onsumer preference for Redbox rentals can 10 largely be attributed to its ability to conveniently provide consumers with low-cost rentals on 11 the same day that a DVD is released by a studio and made available for home viewing”; (2) 12 “[c]onsumer demand for a new-release DVD is the highest during the weekend immediately
13 after its street date and declines substantially thereafter” and (3) “[o]ver thirty percent of a new- 14 release DVD’s revenue is generated during the first two weeks of its release” and that revenue 15 declines substantially thereafter. See, e.g., Universal Complaint, attached as part of Exhibit A, 16 at pp. 1, 8. Therefore, Defendants had knowledge of, or consciously disregarded, the on-going 17 impact of the 28-Day Delay Agreements. 18 191. Defendant Davis’ statement that Redbox’s problems with the studios was mostly 19 “behind us ” and Defendant Di Valerio’s statement that revenue for a 28 day title “is in line
20 with what we had expected ” were knowingly false and misleading when made, as 21 demonstrated by (1) Defendants’ averments in the Studio Litigation about the 28-Day Delay 22 Agreements’ lasting effects, (2) the internal revenue reports, kiosk data, and analysis 23 Defendants were privy to, and (3) the fact that by the time of these statements, Defendants had 24 already internally reforecasted revenue downward for the last two months of 2010 and knew 25 that October 2010 was not in line with guidance. 26 192. Defendant Di Valerio’s statements that Redbox’s fourth quarter titles looked 27 “very strong ” was knowingly false when made, as Defendants knew box office revenue for 28 CONSOLIDATED AMENDED COMPLAINT 57 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 61 of 72
1 DVD titles coming out in the 4Q10 was down 16% from 4Q09, that its fourth quarter DVD 2 slate was dominated by animations that would not rent well, that the 28-Day Delay Agreements 3 had the effect of delaying at least certain major holiday hits until January, and other box office 4 hits would also be delayed so that most of the revenue generated would be received in 2011, 5 not 2010. Defendants therefore had knowledge of, or consciously disregarded, the Company’s 6 poor DVD slate for the fourth quarter showing that the Company would not be able to meet 7 guidance. 8 APPLICABILITY OF PRESUMPTION OF RELIANCE UNDER THE AFFILIATED UTE DOCTRINE, AND/OR, 9 IN THE ALTERNATIVE, THE FRAUD ON THE MARKET DOCTRINE 10 193. Plaintiff is entitled to a presumption of reliance under Affiliated Ute v. United 11 States, 406 U.S. 128 (1972), because the claims asserted herein against the Defendants are 12 primarily predicated upon omissions of material fact which there was a duty to disclose. 13 194. Plaintiff is alternatively entitled to a presumption of reliance because, as more 14 fully alleged above, the Defendants failed to disclose material information regarding Coinstar’s 15 revenue guidance and known problems, not risks, regarding the impact of the 28-Day Delay 16 Agreements, slow sales of Blu-ray discs, inventory mismanagement, and its poor slate of DVD 17 titles in 4Q10. 18 195. Plaintiff is entitled to a presumption of reliance under the fraud on the market 19 doctrine of the Defendants’ material misrepresentations and omissions, because at all relevant 20 times, the market for Coinstar’s common stock was an efficient market for the following 21 reasons, among others: 22 (a) Coinstar’s stock met the requirements for listing on, and was listed and 23 actively traded on, the NASDAQ national market exchange, a highly efficient and automated 24 market; 25 (b) As a regulated issuer, Coinstar filed periodic public reports with the SEC 26 and the NASDAQ; 27 28 CONSOLIDATED AMENDED COMPLAINT 58 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 62 of 72
1 (c) Coinstar regularly communicated with public investors via established 2 market communication mechanisms, including through regular disseminations of press releases 3 on the national circuits of major newswire services and through other wide-ranging public 4 disclosures, such as communications with the financial press and other similar reporting 5 services; and 6 (d) Coinstar was followed by numerous securities analysts employed by 7 major brokerage firm(s) who wrote reports which were distributed to the sales force and certain 8 customers of their respective brokerage firm(s). Each of these reports was publicly available 9 and entered the public marketplace. Some of these securities analysts include: 10 (i) Barton Clark, Westward Capital Markets 11 (ii) Sam Steinman, Ulysses Management 12 (iii) Eric Wold, Merriman Capital
13 (iv) Michael Olson, Piper Jaffray 14 (v) Steve Frankel, Dougherty 15 (vi) Justin Patterson, Morgan Keegan 16 (vii) John Kraft, D.A. Davidson 17 (viii) Steve Wilson, Lapides Asset Management 18 (ix) Brad Carris, Franklin Equity Group 19 (x) Barry Stewart, Omega Advisors 20 (xi) Tersh Barler, Feilich Capital
21 (xii) Steve Dyer, Craig-Hallum 22 (xiii) Bill Lennan, Monness Crespi Hardt
23 (xiv) Michael Kass, Blue Mountain Capital 24 (xv) Andy Hargreaves, Pacific Crest 25 (xvi) Mario Gabelli, GAMCO Investors Inc. 26 (xvii) Ronald Bookbinder, The Benchmark Co. 27 28 CONSOLIDATED AMENDED COMPLAINT 59 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 63 of 72
1 196. As a result of the foregoing, the market for Coinstar common stock promptly 2 digested current information regarding Coinstar from all publicly available sources and 3 reflected such information in Coinstar common stock prices. Under these circumstances, all 4 purchasers of Coinstar common stock during the Class Period suffered similar injury through
5 their purchase of Coinstar common stock at artificially inflated prices and a presumption of 6 reliance applies. 7 NO STATUTORY SAFE HARBOR 8 197. The statutory safe harbor provided for forward-looking statements under certain 9 circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. 10 First, many of the identified false and misleading statements and omissions herein are not 11 forward looking statements, but are statements of current and historic fact regarding Coinstar’s 12 revenue and the state of its operations as a result of the 28-Day Delay Agreements. For 13 example: 14 (a) Defendants written statements as to “Seasonality” as contained in the 3Q 15 Form 10-Q filed on October 28, 2010, which detailed the Company’s historic experience with 16 seasonality and its past experience that year end holiday months were the highest rentals 17 months for DVDs (see ¶ 131); 18 (b) Defendant Di Valerio’s statements made during the 3Q10 Conference 19 Call that “Consumers responded positively to a steady stream of good content from studios
20 after working through the transition to the 28-day release windows during the second 21 quarter ” and reaffirming that “ the fourth quarter has historically been our strongest quarter , 22 and that's built into our guidance. The current schedule of titles looks very strong ...” 23 (c) Defendant Davis’s statements made during the Morgan Stanley TMT 24 Conference held on November 17, 2010: “we had issues with three studios that we were 25 struggling with, and the good news is most of all of that is behind us .” 26 (d) Defendant Di Valerio’s statements made during the Morgan Stanley 27 C&R Conference held on November 17, 2010 that “... we are pretty pleased with the 28 CONSOLIDATED AMENDED COMPLAINT 60 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 64 of 72
1 performance of the Blu-ray titles ...” and that with respect to the 28-day delay window “... it is 2 in line with what we had expected ...And, again the turns on the 28-day titles are about in 3 line with what we had expected when we were going into it...” 4 198. To the extent that any of the false and misleading statements identified herein 5 are mixed statements of current fact and forward looking projection, the portion of those 6 statements relating to current fact are not protected by the safe harbor. 7 199. Second, some of the specific statements pleaded herein were not identified as 8 “forward-looking statements” when made. For example, statements made during the Morgan
9 Stanley TMT Conference appear not to be accompanied by any Company reference to the 10 statements being forward looking in nature. 11 200. Third, to the extent there were any forward-looking statements that were 12 identified as such at the time made, there were no meaningful cautionary statements identifying 13 important factors that could cause actual results to differ materially from those in the 14 purportedly forward-looking statements. For example, all of Defendants’ Class Period
15 statements providing guidance were not accompanied by meaningful cautionary language 16 because the Defendants knew that the “risk” factors they warned of had already come to pass at 17 the time they made these statements. 18 201. Alternatively, to the extent that the statutory safe harbor does apply to any 19 forward-looking statements pleaded herein, Defendants are liable for those false forward-
20 looking statements because at the time each of those forward-looking statements was made, the 21 particular speaker knew that the particular forward-looking statement was false, and/or the 22 forward-looking statement was authorized and/or approved by an executive officer of Coinstar 23 who knew that those statements were false when made. 24
25 26 27 28 CONSOLIDATED AMENDED COMPLAINT 61 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 65 of 72
1 COUNT I Claim for Violations of Section 10(b) Of The Exchange Act and 2 Rule 10b-5(b) Promulgated Thereunder Against Defendants Coinstar, Davis, Di Valerio, Kaplan, and Rench 3 202. Plaintiff repeats and realleges each and every allegation contained above as if 4 fully set forth herein. This claim is asserted against Defendants Coinstar, Davis, Kaplan, Di 5 Valerio, and Rench. 6 203. During the Class Period, these defendants carried out a plan, scheme and course 7 of conduct which was intended to and, throughout the Class Period, did: (i) deceive the 8 investing public regarding Coinstar’s business, operations, management and the intrinsic value 9 of Coinstar’s common stock; and (ii) cause Plaintiff and other members of the Class to 10 purchase common stock at artificially inflated prices. In furtherance of this unlawful scheme, 11 plan and course of conduct, these defendants, and each of them, took the actions set forth 12 herein. 13 204. These defendants (a) employed devices, schemes, and artifices to defraud; (b) 14 made untrue statements of material fact and/or omitted to state material facts necessary to make 15 the statements not misleading; and (c) engaged in acts, practices, and a course of business 16 which operated as a fraud and deceit upon the purchasers of the Company’s common stock in 17 an effort to maintain artificially high market prices for Coinstar’s securities in violation of 18 Section 10(b) of the Exchange Act and Rule 10b-5. The above named defendants are sued as 19 primary participants in the wrongful and illegal conduct charged herein. 20 205. These defendants, individually and in concert, directly and indirectly, by the use, 21 means or instrumentalities of interstate commerce and/or of the mails, engaged and participated 22 in a continuous course of conduct to misrepresent and conceal adverse material information 23 about Coinstar’s earning potential, as specified herein. 24 206. These defendants employed devices, schemes and artifices to defraud, while in 25 possession of material adverse non-public information, and engaged in acts, practices, and a 26 course of conduct as alleged herein in an effort to assure investors of Coinstar’s value and 27 performance and continued substantial growth, which included the making of, or the 28 CONSOLIDATED AMENDED COMPLAINT 62 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 66 of 72
1 participation in the making of, untrue statements of material facts and omitting to state material 2 facts necessary in order to make the statements made about Coinstar and its business operations 3 in the light of the circumstances under which they were made, not misleading, as set forth more 4 particularly herein, and engaged in transactions, practices and a course of business which 5 operated as a fraud and deceit upon the purchasers of Coinstar’s common stock during the 6 Class Period. 7 207. Each of these defendants’ primary liability arises from the following facts, 8 among others set forth above: (i) they were high-level executives and/or directors at the 9 Company during the Class Period and members of the Company’s management team or had
10 control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities as a 11 senior officer and/or director of the Company was privy to and participated in the creation, 12 development and reporting of the Company’s internal budgets, plans, projections and/or 13 reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with 14 the other defendants and was advised of and had access to other members of the Company’s 15 management team, internal reports and other data and information about the Company’s 16 finances, operations, and sales at all relevant times; and (iv) each of these defendants was 17 aware of the Company’s dissemination of information to the investing public which they knew
18 or recklessly disregarded was materially false and misleading. 19 208. These defendants had actual knowledge of the misrepresentations and omissions
20 of material facts set forth herein, or acted with reckless disregard for the truth in that they failed 21 to ascertain and to disclose such facts, even though such facts were available to them. Such 22 defendants’ material misrepresentations and/or omissions were done knowingly or recklessly 23 and for the purpose and effect of concealing Coinstar’s operating condition from the investing
24 public and supporting the artificially inflated price of its common stock. As demonstrated by 25 defendants’ misstatements and omissions of the Company’s business and operations throughout
26 the Class Period, defendants, if they did not have actual knowledge of the misrepresentations 27 and omissions alleged, were reckless in failing to obtain such knowledge by deliberately 28 CONSOLIDATED AMENDED COMPLAINT 63 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 67 of 72
1 refraining from taking those steps necessary to discover whether those statements were false or 2 misleading.
3 209. As a result of the dissemination of the materially false and misleading 4 information and failure to disclose material facts, as set forth above, the market price of 5 Coinstar’s securities was artificially inflated during the Class Period. In ignorance of the fact 6 that market prices of Coinstar’s publicly-traded common stock was artificially inflated, and
7 relying directly or indirectly on the false and misleading statements made by these defendants, 8 or upon the integrity of the market in which the common stock trades, and/or on the absence of 9 material adverse information that was known to or recklessly disregarded by defendants but not 10 disclosed in public statements by them during the Class Period, Plaintiff and the other members 11 of the Class acquired Coinstar’s common stock during the Class Period at artificially high 12 prices and were damaged when the value of their common stock declined upon disclosure of 13 the truth about defendants’ false and misleading statements and omissions. 14 210. At the time of said misrepresentations and omissions, Plaintiff and other 15 members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff 16 and the other members of the Class and the marketplace known the truth regarding Coinstar’s 17 business and operations, which were not disclosed by these defendants, Plaintiff and other 18 members of the Class would not have purchased or otherwise acquired their Coinstar common 19 stock or, if they had acquired such common stock during the Class Period, they would not have
20 done so at the artificially inflated prices which they paid. 21 211. By virtue of the foregoing, these defendants have violated Section 10(b) of the 22 Exchange Act, and Rule 10b-5 promulgated thereunder. 23 212. As a direct and proximate result of these defendants’ wrongful conduct, Plaintiff
24 and the other members of the Class suffered damages in connection with their respective 25 purchases and sales of the Company’s common stock during the Class Period. 26 27 28 CONSOLIDATED AMENDED COMPLAINT 64 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 68 of 72
1 COUNT II Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5(a) and (c) Promulgated 2 Thereunder Against All Defendants 3 213. Plaintiff repeats and realleges each and every allegation contained above as if 4 fully set forth herein. This claim is asserted against Coinstar and the Individual Defendants. 5 214. This Count is brought solely and exclusively under the provisions of Rule 10b- 6 5(a) and (c). Accordingly, Plaintiff need not allege in this Count nor prove in this case that any 7 of the Defendants made any misrepresentations or omissions of material fact for which they 8 may also be liable under Rule 10b-5(b) and/or any other provisions of law. 9 215. During the Class Period, Defendants carried out a common plan, scheme, and 10 unlawful course of conduct that was intended to, and did: (i) deceive the investing public, 11 including Plaintiff and the Class; (ii) artificially inflate the market price of Coinstar common
12 stock; and (iii) cause Plaintiff to purchase Coinstar common stock at artificially inflated prices. 13 216. In furtherance of this unlawful plan, scheme and course of conduct, Defendants 14 employed devices, schemes and artifices to defraud, and knowingly and/or recklessly engaged 15 in acts, transactions, practices, and courses of business that operated as a fraud and deceit upon 16 Plaintiff and the Class in connection with their purchases of Coinstar common stock, in 17 violation of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) promulgated
18 thereunder. 19 217. Defendants’ fraudulent devices, schemes, artifices and deceptive acts, practices,
20 and course of business included the knowing and/or reckless misrepresentation of material facts 21 and knowing and/or reckless suppression and concealment of information when they had a duty 22 to speak truthfully, regarding Coinstar’s true earning capacity potential and profitability during
23 the Class Period including: (1) the true and ongoing impact of the 28-Day Delay Agreements 24 and the impact it was having on Coinstar’s revenue; and (2) that various internal indicia
25 indicated that the Company would not—and could not—meet Defendants’ bullish guidance for 26 4Q10 or after. Defendants engaged in this systematic perpetration of misrepresentation and 27 concealment of information while also serving as high-level corporate insiders who had 28 CONSOLIDATED AMENDED COMPLAINT 65 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 69 of 72
1 prominent and material roles in the preparation, creation, development and dissemination of 2 false financial information and/or suppression of material financial information.
3 218. Plaintiff and the Class reasonably relied upon the integrity of the market in 4 which Coinstar common stock traded. 5 219. During the Class Period, Plaintiff and the Class were unaware of Defendants’ 6 fraudulent scheme and unlawful course of conduct. Had Plaintiff and the Class known of 7 Defendants’ unlawful scheme and unlawful course of conduct, they would not have purchased 8 Coinstar common stock, or if they had, would not have done so at the artificially inflated prices 9 paid for such common stock. 10 220. As a direct and proximate result of Defendants’ scheme to defraud and such 11 unlawful course of conduct, Plaintiff and the Class suffered damages in connection with their 12 purchases of Coinstar common stock during the Class Period. 13 221. By reason of the foregoing, Defendants violated Section 10(b) of the Exchange 14 Act and Rule 10b-5(a) and (c) promulgated thereunder, and are liable to Plaintiff and the Class 15 for damages suffered in connection with their purchases of Coinstar common stock during the 16 Class Period. 17 COUNT III Claim for Violation of Section 20(a) of the 18 Exchange Act Against Defendants Davis, Di Valerio, Rench, and Kaplan 19 222. Plaintiff incorporates by reference and realleges each and every allegation
20 contained above, as though fully set forth herein. This claim is asserted against defendants 21 Davis, Di Valerio, Rench, and Kaplan. 22 223. During the Class Period, Defendants Davis, Di Valerio, Rench and Kaplan, 23 participated in the operation and management of Coinstar, and conducted and participated, 24 directly and indirectly, in the conduct of Coinstar’s business affairs. Because of their senior
25 positions, they knew the adverse non-public information about Coinstar’s misstatements of 26 income and expenses and false financial statements. 27 28 CONSOLIDATED AMENDED COMPLAINT 66 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 70 of 72
1 224. As officers and/or directors of a publicly owned company, these defendants had 2 a duty to disseminate accurate and truthful information with respect to Coinstar’s financial 3 condition and results of operations, and to promptly correct any public statements issued by 4 Coinstar that had become materially false or misleading. 5 225. Because of their positions of control and authority as senior officers, these 6 defendants were able to, and did, control the contents of the various reports, press releases, and 7 public filings, as well as presentations to securities analysts, money and portfolio managers, 8 and institutional investors, which Coinstar disseminated in the marketplace during the Class 9 Period. They were provided with copies of the Company’s reports and press releases alleged 10 herein to be misleading prior to or shortly after their issuance and had the ability and
11 opportunity to prevent their issuance or cause them to be corrected. Throughout the Class 12 Period, these defendants exercised their power and authority to cause Coinstar to engage in the 13 wrongful acts complained of herein. These defendants therefore, were “controlling persons” of
14 Coinstar within the meaning of Section 20(a) of the Exchange Act. In this capacity, they 15 participated in the unlawful conduct alleged which artificially inflated the market price of 16 Coinstar common stock. 17 226. Because of their positions with the Company, and their access to material non- 18 public information available to them but not to the public, these defendants knew that the 19 adverse facts specified herein had not been disclosed to and were being concealed from the
20 public and that the positive representations being made were then materially false and 21 misleading. These defendants are liable for the false and misleading statements pleaded herein. 22 227. Each of these defendants, therefore, acted as a controlling person of Coinstar. 23 By reason of their senior management positions and/or being directors of Coinstar, each of
24 these defendants had the power to direct the actions of, and exercised the same to cause 25 Coinstar to engage in the unlawful acts and conduct complained of herein. Each of these 26 defendants exercised control over the general operations of Coinstar and possessed the power 27 28 CONSOLIDATED AMENDED COMPLAINT 67 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 71 of 72
1 to control the specific activities which comprise the primary violations about which Plaintiff 2 and the other members of the Class complain. 3 228. By reason of the above conduct, the Defendants Davis, Di Valerio, Rench and 4 Kaplan are liable pursuant to Section 20(a) of the Exchange Act for the violations committed 5 by Coinstar. 6 PRAYER FOR RELIEF 7 WHEREFORE, Plaintiff prays for relief and judgment, as follows:
8 A. Certifying this case as a class action under Rule 23 of the Federal Rules of Civil 9 Procedure, and certifying Plaintiff as class representative and his counsel as class counsel; 10 B. Declaring that the Defendants violated §10(b) and 20(a) of the Exchange Act 11 and Rule 10b-5 promulgated thereunder; 12 C. Requiring Defendants to pay damages sustained by Plaintiff and the Class by 13 reason of the acts and transactions alleged herein; 14 D. Awarding Plaintiff and the Class appropriate compensatory damages; 15 E. Awarding Plaintiff and the other members of the Class the costs, expenses, and 16 disbursements of this action, including attorneys’ and experts’ fees and, if applicable,
17 prejudgment and post judgment interest; and 18 F. Awarding Plaintiff and the Class such other relief as this Court deems just, 19 equitable, and proper.
20 JURY DEMAND 21 Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff hereby 22 demands trial by jury of all issues that may be so tried. 23 24
25 26 27 28 CONSOLIDATED AMENDED COMPLAINT 68 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76 Filed 06/17/11 Page 72 of 72
1 Dated: June 17, 2011 Respectfully submitted, 2 By: s/ Dan Drachler Dan Drachler, WSBA #27728 3 ZWERLING, SCHACHTER & ZWERLING, LLP 4 1904 Third Avenue, Suite 1030 Seattle, Washington 98101 5 Telephone: (206) 223-2053 Facsimile: (206) 343-9636 6 Email: [email protected]
7 Local Counsel for Lead Plaintiff 8 9 By: s/ Jonathan Gardner Jonathan Gardner 10 Mark S. Goldman Serena Hallowell 11 LABATON SUCHAROW LLP 140 Broadway 12 New York, New York 10005 Telephone: (212) 907-0700 13 Facsimile: (212) 818-0477 Email: [email protected] 14 Email: [email protected] Email: [email protected] 15 Lead Counsel for Lead Plaintiff 16 17 18 19 20 21 22
23 24
25 26 27 28 CONSOLIDATED AMENDED COMPLAINT 69 LABATON SUCHAROW LLP NO. C11-133 MJP 140 BROADWAY NEW YORK, NEW YORK 10005 (212) 907-0700 Case 2:11-cv-00133-MJP Document 76-1 F led 06/17/11 Page 1 of 73
Exhibit A Case 1: t se-GO176841R104-33-MEDIDufammlnWnt eld 0 IFIcar 1Fraite 1Ftifge42taigb3e #: 143
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
REDBOX AUTOMATED RETAIL, LLC,
Plaintiff,
V. C.A. No. 08-766-RBK
UNIVERSAL STUDIOS HOME JURY TRIAL DEMANDED ENTERTAINMENT, LLC; UNIVERSAL CITY STUDIOS, LLLP; UNIVERSAL CITY STUDIOS PRODUCTIONS, LLLP, and FOCUS FEATURES, LLC,
Defendants.
FIRST AMENDED COMPLAINT
Plaintiff Redbox Automated Retail, LLC ("Redbox") alleges the following:
OVERVIEW
I. Redbox rents and sells digital video disks ("DVDs") to consumers through
innovative, consumer-friendly means: automated, self-service kiosks located in various retail
outlets. Consumer demand for Redbox has exploded since the company's inception in 2002,
primarily due to Redbox's efficient means of providing consumers with low-cost, easily
accessible DVD releases on the day those new-release DVDs become available to the general
public.
2. Under the guise of a "Revenue Sharing Agreement" (attached as Ex. A),
Defendants seek to eliminate Redbox's low-cost rental alternative for consumers. Specifically,
Defendants want to prohibit Redbox from renting or selling Universal DVDs until at least 45
days after they first become available to the public. Defendants know, however, that consumer
demand for a new-release DVD is at its highest immediately after its release and declines
substantially thereafter and within a short time period. Defendants also demand that Redbox Case 1: t se-G0176841R104-33-M1313ctiikamMent &I OINK: 1Fralte 21:175g243:tafgA3D #: 144
limit the number of copies of Universal DVDs that Redbox kiosks can stock and further require
that Redbox destroy all of its copies of previously-viewed Universal DVDs, so that none of the
previously-viewed new-release DVDs can be sold at a low price to consumers.
3. To drive home their "take it or leave it" proposition, Defendants have threatened
to terminate Redbox's two main distributors (VPD and Ingram) if they supply Redbox with
Universal DVDs or provide certain other services to Redbox — unless Redbox agrees to sign the
Revenue Sharing Agreement and participate in Defendants' attempts to decrease the supply of
copyrighted DVDs, reduce consumer choice in the marketplace and increase the prices that
consumers must pay during tough economic times. 4. Faced with Defendants' demands, VPD and Ingram have agreed to Defendants'
scheme and have refused to honor Redbox's orders for Universal DVDs since December 1, 2008.
Moreover, Defendants' have expanded their illegal boycott against Redbox to alternative sources
of supply, including other wholesalers and ordinary retail stores, thereby depriving Redbox of
ready access to new-release Universal DVDs.
5. Defendants illegally seek to extend and misuse their rights as holders of
copyrights for the new-release Universal DVDs and to either (1) eliminate the channel of low-
cost, highly-convenient kiosk rental and resale; or (2) unlawfully eliminate competition from
Redbox (and other kiosk outlets) at the current and competitive "Dollar-Per-Night" rental rate,
and thereby take control of kiosk distribution for new-release DVD entertainment through one or
more higher-priced automated retail distribution devices, such as the Mediaport Media ATM
system (Ex. D) or Universal's own "POP" machine (Ex. E).
6. Defendants' actions constitute copyright misuse, violate antitrust laws, and
tortiously interfere with Redbox's existing supply contracts with VPD and Ingram. Redbox thus
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seeks the following relief against and from Defendants: (1) injunctive relief; (2) declaratory
relief; (3) money damages; (4) attorneys' fees and costs; and (5) such further relief as this Court
deems just and appropriate. In particular, Redbox is entitled to a declaration against Defendants
that their conduct renders their copyrights unenforceable on Defendants' DVDs distributed
during the time frame that Defendants continue to engage in their inequitable and illegal conduct.
THE PARTIES
7. Plaintiff Redbox is a Delaware limited liability company with its principal place
of business in Oakbrook Terrace, Illinois.
8. Defendant Universal Studios Home Entertainment, LLC ("USHE") is a Delaware
limited liability company with its principal place of business in Universal City, California.
USHE markets and sells DVDs that are copies (as that term is defined in Section 101 of the
Copyright Act) of copyrighted motion pictures and other copyrighted audiovisual works, such as
television programs. USHE is indirectly owned by NBC Universal, Inc.
9. Defendant Universal City Studios Productions LLLP ("Universal City Studios
Productions") is a limited liability limited partnership organized under the laws of the State of
Delaware with its principal place of business located in Universal City, California. Universal
City Studios Productions is one of the world's leading creators and distributors of motion
pictures. Universal City Studios Productions, directly or through its affiliates, is engaged in the
business of developing, producing, and distributing to others the right to distribute and exhibit
copyrighted motion pictures in the United States and throughout the world. Universal City
Studios Productions is wholly and indirectly owned by NBC Universal, Inc. Universal City
Studios Productions also does business as "Universal Studios."
10. Defendant Universal City Studios LLLP ("Universal City Studios") is a limited
liability limited partnership organized under the laws of the State of Delaware with its principal
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place of business located in Universal City, California. Universal City Studios, directly or
through its affiliates, is engaged in the business of developing, producing, and distributing to
others the right to distribute and exhibit copyrighted motion pictures in the United States and
throughout the world. Universal City Studios is wholly and indirectly owned by NBC Universal,
Inc. Universal City Studios also does business as, and owns the federally registered service mark
"Universal Studios."
11. Defendant Focus Features, LLC ("Focus Features") is a limited liability company
organized under the laws of the State of Delaware with its principal place of business located in
Universal City, California. Focus Features, directly or through its affiliates, is engaged in the
business of developing, producing, and distributing to others the right to distribute and exhibit
copyrighted motion pictures in the United States and throughout the world. Focus Features is
indirectly owned by NBC Universal, Inc.
12. USHE is an affiliate of Universal City Studios Productions. Through USHE,
Universal City Studios Productions distributes copyrighted motion pictures and television
programs on DVD for the home viewing market.
13. USHE is an affiliate of Universal City Studios. Through USHE, Universal City
Studios distributes copyrighted motion pictures and television programs on DVD.
14. USHE is an affiliate of Focus Features. Through USHE, Focus Features
distributes copyrighted motion pictures and television programs on DVD.
15. Universal City Studios Productions, Universal City Studios and Focus Features
are collectively referred to in this Complaint as "Universal Studios." The DVDs distributed by
USHE for Universal Studios are referred to as the "Universal DVDs."
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THE NON-PARTY DISTRIBUTORS
16. On information and belief, Ingram Entertainment, Inc. ("Ingram") is a Tennessee
corporation with its principal place of business in La Vergne, Tennessee. Ingram is a wholesale
distributor of DVDs.
17. On information and belief, Video Product Distributors ("VPD") is a California
corporation with its principal place of business in Folsom, California. VPD is a wholesale
distributor of DVDs.
JURISDICTION AND VENUE
18. This Court has subject matter jurisdiction over Counts 1,11, III, IV and V of this
action pursuant to 28 U.S.C. § 1331, 17 U.S.C. §§ 101, et seq. (Copyright Act) and 15 U.S.C. §§
1, et seq. (Sherman Antitrust Act), and 28 U.S.C. §§ 1337, 1338. This Court has supplemental
subject matter jurisdiction over Count VI pursuant to 28 § U.S.C. 1367.
19. Pursuant to 28 U.S.C. §§ 2201-02, this Court may declare the rights and other
legal relations of the parties because there exists an actual controversy.
20. This Court has personal jurisdiction over USHE, Universal City Studios
Production, Universal City Studios and Focus Features because each of them does business and
resides in the State of Delaware.
21. Venue is proper in this jurisdiction pursuant to 28 U.S.C. § 1391 because each
Defendant is organized under the laws of the State of Delaware and thus resides in this State.
FACTUAL ALLEGATIONS
A. Redbox's Consumer-Friendly Business Model
22. Since the introduction of DVDs into the marketplace, the DVD has become the
dominant medium for the distribution of movies for home viewing.
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23. Redbox was founded in July 2002, when the company deployed DVD rental
kiosks in a "test market" in Washington, D.C. After initial success in that market, Redbox chose
Las Vegas, Nevada, as a second "test market" in 2003. These test markets established that
consumers would enthusiastically turn to this convenient, low-cost source for new-release DVD
rentals and sales, and the company expanded.
24. Redbox is an innovator. It has developed a highly-convenient, yet low-cost
option for consumers wishing to obtain DVDs. Redbox provides DVDs to consumers through a
nationwide network of over 12,000 self-service kiosks. Each kiosk features an interactive touch
screen and sign, a robotic disk array system and a web-linked electronic communications system
that allows customers to rent or buy DVDs. Kiosks typically hold up to 700 DVDs comprising
70-200 individual titles. The kiosks are updated weekly with a supply of new-release DVDs. A
single kiosk may hold up to as many as forty-five (45) copies of a popular new-release DVD.
25. Consumers use credit cards to rent or purchase DVDs from Redbox. They can
also search for and reserve DVDs online through Redbox's website. Consumers enjoy the ability
to rent DVDs at one location and return them at any other Redbox location, thanks to Redbox's
patented rent and return system. For instance, a family can rent the latest Disney movie at a
McDonald's restaurant on Friday night, and return it to their neighborhood Albertson's
supermarket when shopping the next day. In 2007, readers of "SelfServiceWorld" magazine
ranked Redbox as the No. 1 self-service application, besting other kiosks deployed by NCR,
IBM, Kodak and Starbucks, among others.
26. Consumers love Redbox. Consumer demand for Redbox rentals and sales has
grown substantially in the last four years. Redbox had 125 kiosks in 2004, had nearly 6500 by
the end of 2007 and had over 12,000 kiosks nationwide at the end of 2008. Consumer demand
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has enabled Redbox to surpass Blockbuster, Inc. in the number of DVD rental locations in the
United States. To date, consumers have rented more than 300 million DVDs from Redbox.
Consumers average approximately 50 DVD rentals per day per kiosk. Indeed, consumer demand
has supported Redbox's expansion such that Redbox installed a new kiosk, on average, every 90
minutes somewhere in the United States last year. As part of this expansion, Redbox hired over
600 new employees last year.
B. The Market For Redbox DVD Rental
27. Consumers currently find Redbox kiosks located in retail outlets such as
McDonald's restaurants, Walmart stores, grocery stores such as Albertson's, Stop 8c Shop,
Harris Teeter, Meijer's and others, and drug stores such as Walgreen's, throughout the
continental United States and Puerto Rico. Redbox typically has contracts with these retail
outlets. Much of Redbox's success depends on maintaining a business model that satisfies the
expectations of the retail outlets and consumers.
28. Consumers seeking to rent a new-release DVD generally search by specific title,
or by category or genre. Video rental stores are laid out this way. So are video rental websites
and so, too, are the menus of Redbox DVD rental kiosks. This is because consumers seeking to
rent a new-release musical comedy DVD are generally not interested in renting or buying a new-
release action DVD. Accordingly, Redbox, like others in the new-release DVD rental and resale
business, categorizes each DVD by title, release date and also by category or genre.
29. Consumers can rent new-release DVDs from Redbox kiosks for $1 per night — a
lower cost than alternative brick-and-mortar outlets or alternative sources for new-release DVD
rental. In comparison, Defendants have said in other litigation that some 175 million DVDs
were rented in the United States each month, at an average cost of approximately $3.25.
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30. Consumers can also purchase previously-viewed new-release DVDs from
Redbox, typically beginning 12 days after their release, for as little as $7. In comparison,
according to Defendants, 50 million new-release DVD movies were sold each month at an
average price of approximately $18.50 from other sources.
31. Consumer preference for Redbox rentals can largely be attributed to its ability to
conveniently provide consumers with low-cost rentals on the same day that a DVD is released by
a studio and made available for home viewing. This release date is known as the "street date."
By industry convention, the "street date" for nearly every new-release DVD is on Tuesday of the
week of its release. Consumer demand for a new-release DVD is the highest during the weekend
immediately after its street date and declines substantially thereafter. Over thirty percent of a
new-release DVD's revenue is generated during the first two weeks of its release. More than
sixty percent of the rental demand for a particular title occurs within forty-five days of the street
date. In this Complaint, a "new-release" DVD refers to those DVDs that are within the 45-day
period following their street date.
32. Because demand peaks for a new-release DVD in the first weekend following its
release, consumers value Redbox's ability to stock multiple copies (as stated above, as many as
45 copies per kiosk in some instances) of popular, high-demand new-release DVDs.
C. Redbox's Relationship With VPD And Ingram
33. Until Defendants implemented their boycott on December 1, 2008, Redbox had
been able to meet consumer demand for multiple copies of new-release DVDs for rental on a
title's street date because of its longstanding contractual and business relationships with its
distributors, VPD and Ingram. Before Defendants implemented their boycott on December 1,
2008, Redbox had purchased all, or nearly all, of its supply of new-release DVDs including new-
release Universal DVDs from VPD and Ingram. Until December 1, 2008, Redbox had enjoyed
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long term, mutually beneficial business relationships with VPD and Ingram However,
beginning December 1, 2008, in response to unlawful pressure from Defendants, these
distributors refused to fill Redbox's orders for Universal DVDs, as discussed more thoroughly
below. Absent interference from Defendants, Redbox would have continued to purchase all, or
nearly all, of its supply of Universal DVDs from VPD and Ingram into the foreseeable future.
34. Redbox has a supply contract with Ingram (the "Ingram Supply Contract"
(attached as Ex. B, redacted so as to protect sensitive commercial information)) that gives
Redbox the right to purchase Universal DVDs from Ingram, and similarly obligates Ingram to
sell to Redbox, upon Redbox's request, Universal DVDs marketed by USHE. Specifically,
Redbox's Supply Contract with Ingram requires Ingram to order DVDs from the studios. The
term "studios" has, throughout the relationship between Redbox and Ingram, always included
Universal Studios and its affiliates, including Defendants.
35. The Ingram Supply Contract also contains a "DVD Buy Back" clause that permits
Redbox to sell and obligates Ingram to "repurchase from Redbox (`Buy Back') new-release
DVD product" pursuant to a timeframe tied to the title's street date Under this arrangement,
Ingram purchases back significant amounts of previously-viewed DVDs from Redbox, and in
turn sells them to other buyers in the distribution stream.
36. Redbox has a similar business relationship with VPD, although the agreement is
not reflected in a single integrated document. However, until December 1, 2008, the VPD
contract had always permitted Redbox to buy Universal DVDs from VPD and receive these
Universal DVDs in advance of their street date. VPD, like Ingram, holds itself out as having the
ability to provide retailers like Redbox access to all of the titles released by the major Hollywood
studios, which includes Universal Studios. As with Ingram, Redbox is able to sell back
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significant amounts of previously-viewed DVDs to VPD, which in turn sells them to other
buyers in the distribution stream.
37. Before Defendants' and the distributors' boycott of Redbox, which began
December 1, 2008, Redbox purchased all, or nearly all of its supply of new-release Universal
DVDs from VPD and Ingram.
D. The New-Release DVD Industry And Market
38. New-release DVDs for rental or resale are perishable goods, like milk or fruit;
their value drops rapidly and materially almost from the first date they appear on the shelf
Because consumer demand for a particular new-release DVD is highest while new on the market,
consumer demand for a new-release DVD is different from consumer demand for back-catalog
DVDs, i.e., DVDs that have been on the market for longer than forty-five days. Like the
difference between first-run theatrical films and older films that are displayed in smaller theaters
and at lower prices, new-release DVDs constitute a separate market. In economic terms, the
cross-elasticity of demand between new-release DVDs and back catalog items is low. This is
reflected, among other ways, by different pricing and different marketing for new-release DVDs,
as opposed to older, back-catalog DVDs.
39. Because of consumer preference and industry practice, a particular new-release
DVD is not an acceptable substitute for another new-release DVD. Studios work hard to ensure
that a release in a particular category, or genre, does not share its street date with another release
in the same category or genre. Consumers seeking to rent a new-release DVD generally search
by title and by category or genre. Video rental stores are laid out this way. So are video rental
websites and so, too, are the menus of Redbox DVD rental kiosks. This is because consumers
seeking a family-oriented new-release DVD will not often rent a new-release action DVD
instead. Accordingly, Redbox, like others in the new-release DVD rental business, categorizes
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DVDs by titles, release date and also by their genre. Each category, or genre, constitutes a
distinct submarket within the overall new-release DVD market. Common categories, or genres,
include: action/adventure, comedy, drama, family and kids, honor and sci-fi, suspense and
others. There is low cross-elasticity of demand among consumers for new-release DVDs of
different genres. Consumers who want to see Angelina Jolie in an action shoot-'em-up (e.g.
"Wanted') are unlikely to accept a Meryl Streep musical comedy ("Marna Mia!") instead.
40. Release dates for new-release DVDs are timed so that a particular new-release
DVD title will face as little competition as possible with other new-release DVDs in the same
genre. Thus, for example, the Universal DVD "Wanted," was released on Tuesday, December 2,
2008, when it directly competed with few, if any, other new-release action-adventure DVDs.
41. Because of the inelastic demand for each particular new-release DVD, Defendants
possess significant market power for a new-release DVD and, in the alternative, within a specific
category or genre during the forty-five days following the street date. Consumers have few, if
any, acceptable substitutes for a particular new-release DVD in a particular category or genre
during the relevant time period.
E. August 26, 2008 Meeting Between Redbox And USHE
42. On Tuesday, August 26, 2008, USHE representatives visited Redbox's
headquarters in Oakbrook Terrace, Illinois. Specifically, USHE Vice Presidents Jamie Guzzaldo
and Dick Longwell, as well as a USHE in-house lawyer and an account representative, attended
the meeting on behalf of USHE. Redbox personnel at the meeting included Chief Operating
Officer Mitch Lowe, Vice President of Purchasing Scott Goldberg, and Senior Buyer Eric
Litynski.
43. During the meeting, USHE provided the Revenue Sharing Agreement to Redbox,
stating that Redbox had until the close of business the following day (i.e., August 27, 2008) to
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sign the Revenue Sharing Agreement. Redbox had no prior notice as to the nature of this
proposal, which would materially and adversely alter the conditions under which consumers are
able to rent and buy DVDs from Redbox kiosks.
44. During the meeting, USHE threatened that if Redbox refused to sign the Revenue
Sharing Agreement and the distributors continued to supply Universal DVDs to Redbox, USHE
would stop selling any Universal DVDs to VPD and Ingram
45. USHE also threatened to cut off sales to VPD and Ingram if they continued to
provide other services to Redbox, if Redbox did not sign the Revenue Sharing Agreement.
These other services include barcode labeling, packaging DVDs into Redbox jewel cases,
sorting, shipping and storage of the original DVD cases and artwork prior to street date, as well
as DVD repair.
46. USHE made these threats despite being aware of Redbox's longstanding business
and contractual relationships with Ingram and VPD.
47. Redbox has not signed the Revenue Sharing Agreement. In response, Defendants
have wrongfully compelled Ingram and VPD to cease shipping and selling Universal DVDs to
Redbox as of December 1, 2008. VPD and Ingram have now complied with Defendants'
demands, and as a result, Redbox no longer has access through its normal distribution channels
to new-release Universal DVDs.
48. Defendants have no contractual or other legally recognized right to restrict or
govern how or to whom VPD and Ingram resell Universal DVDs that they have purchased.
However, because of their dominant market power and position within the industry, Defendants
have the ability to unlawfully coerce VPD and Ingram to not sell Universal DVDs to Redbox.
Faced with the prospect of being denied access to Universal DVDs, VPD and Ingram have had
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no choice but to acquiesce to Defendants' demands, and accordingly have refused to fill
Redbox's orders for Universal DVDs — items which Redbox is entitled to pursuant to its supply
contracts with VPD and Ingram.
49. Following implementation of the boycott by VPD and Ingram, Redbox has been
forced to turn to other more costly and inconvenient channels from which to purchase Universal
DVDs since December 1, 2008. However, Defendants have sought to prevent Redbox from
buying new-release Universal DVDs from other wholesalers and retailers, and in some instances
have succeeded in expanding the boycott.
50. For example, Defendants have demanded that Best Buy and Walmart retail stores
cease or severely limit their sales of Universal DVDs to Redbox. This is evidenced by various
attempts by Redbox personnel to purchase multiple copies of Universal DVDs from Best Buys
and Walmarts after December 1, 2008. In some instances, these retailers canceled orders and
refused to sell Universal DVDs to Redbox personnel. In other instances, Redbox personnel were
told by retail stores that the stores would sell them no more than five copies of any Universal
DVD. In at least one instance a Redbox employee was escorted out of a retail store for
attempting to purchase multiple copies of a Universal DVD title.
51. Thus, Defendants' boycott of Redbox has now gone beyond an illegal agreement
with Redbox's primary distributors, and now has expanded into a concerted boycott at both the
wholesale and retail level. Defendants' actions have harmed consumers and harmed Redbox.
Consumers have been deprived of Redbox's low-cost, highly convenient medium for renting or
purchasing Universal DVDs and have been forced to turn to more expensive and burdensome
options for access to these movies. Redbox has been cut out of its normal distribution channels
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and has further been denied the ability to acquire Universal DVDs from alternative wholesale
and retail channels, thereby resulting in harm to the company.
F. Defendants' Revenue Sharing Agreement And Related Actions Are Unlawful And Substantially Harms Consumers, As Well As Redbox
52. The Revenue Sharing Agreement demanded by Universal is a naked restriction on
output that directly reduces the supply of new-release DVDs available to consumers and
artificially increases the prices that consumers must pay. The Revenue Sharing Agreement is
unlawful, among other reasons, because it has the effect of (1) artificially constraining output by
prohibiting Redbox from renting to consumers any DVD until "forty-five (45) days following
[the] DVD sell-through street date established by USHE with respect to a Title," (2) limiting the
number of DVDs of a single copyrighted work that any particular kiosk may carry based upon a
formula that correlates to the gross box office revenue of the movie; and (3) seeking to require
Redbox to "destroy 100% of the units removed from an active rental machine" and certify that it
has done so.
53. The Revenue Sharing Agreement will have the effect of restricting output,
eliminating competition in the rental and sales markets and artificially raising prices to
consumers.
54. In other litigation, Universal Studios has said "Studios have worked hard to create
distribution channels that: (a) provide consumers with choices about how they wish to access
entertainment programming at different price points for different time periods and different
purposes; and (b) allow us, as content owners, to earn revenues depending on how consumers
choose to access that programming." Plainly, Universal Studios seeks to reduce output, increase
prices, and artificially control the market for new-release DVD rentals and re-sales.
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55. Universal Studios seeks to use the monopoly power conferred by the Copyright
Act over first sale of a copyrighted DVD to either control or eliminate independent kiosk
operators, including Redbox, from the new-release DVD rental market. Universal Studios seeks
to do this because (1) the kiosk distribution system used by Redbox provides new-release DVDs
to consumers at a lower cost than Universal's favored methods of providing DVDs to consumers
($1 per night vs. $3.25 for the average rental; $7 sale price for a 12-day old DVD vs. $18.50 for a
new one) and (2) the kiosk distribution system allocates a much smaller share of revenue from
new-release DVD rentals and re-sales to Universal Studios than the distribution channels
preferred by Universal.
56. Redbox is a far less expensive way for consumers seeking to rent new-release
DVD's than the other methods that Universal Studios seeks to impose, such as internet download
services (the typical price of a new full-length movie purchased on iTtmes, for example, is
$14.99 and the so-called "rental" price for time-limited access to the downloaded copy is $3.99,
Universal has said) and Video-on-Demand (the average price of watching a video-on-demand
movie is $4.00). Defendants' true purpose in seeking to impose the Revenue Sharing
Agreement, and in orchestrating the boycott discussed herein, is to eliminate the independent
kiosk as a low-cost consumer choice and thereby create an artificial shortage of product and a
correspondingly high artificial price for rental or re-sale of new-release Universal DVDs.
Defendants seek to eliminate the low-cost, highly convenient and fast-growing Redbox channel,
preferred by consumers for one or more of the following reasons: because (1) Redbox (and other
independent kiosk vendors) threaten to undercut the artificial pricing of the distribution structure
that Defendants seek to establish; (2) By virtue of its monopoly power, Universal Studios seeks
to capture additional revenue from artificially high prices for new-release DVD rentals and re-
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sales and; (3) Defendants seek to unlawfully eliminate competition in the new-release DVD
kiosk rental business to clear the way for its own, higher-priced automated distribution systems.
COUNT I
DECLARATORY RELIEF: COPYRIGHT MISUSE
57. Redbox incorporates the allegations set forth in paragraphs 1 through 56, above,
as if fully set forth herein.
58. Copyright law provides copyright holders only a limited monopoly in order to
enhance retail competition and maximize dissemination of copyrighted works to the general
public. The first-sale doctrine prevents copyright holders from extending the monopoly beyond
the initial sale of the copyrighted work. Thus, Congress expressly provided that "[T]he owner of a particular copy ... lawfully made under [Title 17 of the United States Code] ... is entitled,
without the authority of the copyright owner, to sell or otherwise dispose of the possession of
that copy. .." 17 U.S.C. § 109(a).
59. The public policy behind copyright law favors the enhancement of retail
competition and the maximization of dissemination of copyrighted works. Anti-competitive
agreements or anti-competitive behavior, such as an unlawful group boycott, conflicts with this public policy, subverts the goals of copyright law and constitutes "copyright misuse," The
doctrine of copyright misuse prevents copyright holders from using their copyright and extend
their government-sanctioned monopoly beyond its proper scope. The existence of such anti-
competitive agreements or unlawful activity precludes the enforcement of the copyright during
the period of copyright misuse.
60. As indicated above, if Redbox had signed the Revenue Sharing Agreement,
Defendants would have continued to sell Universal DVDs to VPD and Ingram for distribution to
Redbox. The Revenue Sharing Agreement would, inter alia, restrict the output of each
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copyrighted DVD, eliminate competition for sales of recently released DVDs, and require
Redbox and its distributors to participate in a restraint of trade with Universal Studios, all of
which would stifle invention, creative expression and dissemination of copyrighted works.
Defendants' actions and the Revenue Sharing Agreement violate the public policy underlying
copyright law and therefore constitute copyright misuse.
61. Because Redbox did not agree to restrict output and raise prices, as required by
the Revenue Sharing Agreement, Defendants coerced an agreement from VPD and Ingram not to
distribute Universal DVDs to Redbox. Defendants coerced other potential sources of supply to
boycott Redbox, as well. Defendants' unlawful boycott is contrary to, and violative of the first
sale doctrine, restricting the statutory right of VPD, Ingram and others "to sell or otherwise
dispose" of the Universal DVDs that they have purchased. Defendants' attempts to thwart the
first sale doctrine of Section 109(a) of the Copyright Act violate the public policy embodied in
the grant of copyright, and constitute copyright misuse.
62. There is an actual controversy over Defendants' copyright misuse, because they
are actively attempting to force Redbox to agree to the proposed Revenue Sharing Agreement,
and have now cut off Redbox's usual sources of supply and numerous other wholesale and retail sources, as well. Both consumers and Redbox have already suffered harm as a result of
Defendants' coercion of VPD, Ingram, other distributors and major retailers to cease selling
Universal DVDs to Redbox as of December 1,2008.
63. Redbox is entitled to a declaration that Defendants' actions constitute copyright
misuse and that Defendants are precluded from enforcing copyrights for new-release Universal
DVDs. Further, Redbox is entitled to a declaration that so long as Defendants continue to
engage in their inequitable conduct, Redbox may lawfully reproduce and sell copies of
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copyrighted Universal DVDs, including but not limited to those listed on Ex. C, without
incurring any liability pursuant to copyright law.
COUNT H
SHERMAN ANTITRUST ACT: QUICK LOOK DOCTRINE
64. Redbox incorporates the allegations set forth in paragraphs 1 through 63, above,
as if fully set forth herein.
65. Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) states that "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared to be illegal."
66. The boycott of Redbox orchestrated by Defendants, and in the alternative, the
restrictions demanded by USHE in the Revenue Sharing Agreement, constitute naked restraints
on output that decrease the supply of copyrighted new-release DVDs in many, or all genres,
reduce consumer choice in the various submarkets in the new-release DVD marketplace and
artificially increase prices that consumers will have to pay to rent or buy new-release DVDs in
those submarkets, thereby negatively affecting consumer welfare. In simple terms, because of
the boycott, there are consumers who wanted to rent "Wanted" or "Mama Mice' from Redbox
for $1 per-night, but were unable to do so because of the boycott. These consumers either had to
do without, or pay more elsewhere.
67. In the alternative, compliance with Defendants' Revenue Sharing Agreement
would limit the number of copies of new-release Universal DVDs that individual kiosks may
contain; prevent consumers from renting new-release DVDs until forty-five days after their street
date; would require the ultimate destruction, rather than resale, of all previously-viewed
Universal new-release DVDs. Here, too, consumers would face artificially constrained supply
and artificially higher prices.
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68. The boycott of Redbox, designed to unlawfully eliminate Redbox's ability to rent
or re-sell new-release Universal DVDs, or, in the alternative, the restrictions required by the
Revenue Sharing Agreement, cannot possibly result in a net pro-competitive effect that would
enhance intra-brand competition with rentals or resales through other channels, such as brick-
and-mortar stores or the POP machine and Media ATM being introduced by Universal Studios.
They nakedly reduce output and increase prices paid by consumers. Nor does Defendants'
scheme enhance competition with new-release DVDs released by other copyright holders.
Defendants' boycott and the restrictions in the Revenue Sharing Agreement constitute activities
that are so plainly anti-competitive that even a "cursory exam" demonstrates that they constitute
unlawful and illegal restraint of trade in violation of Section 1 of the Sherman Act.
COUNT HI
SHERMAN ANTITRUST ACT: RULE OF REASON
69. Redbox incorporates the allegations set forth in paragraphs 1 through 68, above,
as if fully set forth herein.
70. Each copyrighted work recorded on DVD constitutes an individual product
market. Each copyrighted work is unique, and each such unique work has been granted a limited
governmental monopoly. The geographic market for each such copyrighted work is nationwide.
71. A copyright holder enjoys a "distribution right" and may initially sell, or not sell,
copies of a copyrighted work to others on such terms as he or she sees fit. However, the
copyright holder's distribution right is limited to the first sale of the copyrighted item. Under the
"first sale" doctrine, codified at 17 U.S.C. § 109(a) "the distribution right may be exercised
solely with respect to the initial disposition of copies of a work, not to prevent or restrict the
resale or other further transfer of possession of such copies."
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72. Defendants' right to control distribution of copyrighted new-release Universal
DVDs ends once the DVD has been sold. The distribution right may not lawfully be exercised
after the initial sale, "to prevent or restrict the resale or further transfer of possession of such
copies."
73. Defendants' boycott, as well as their threats of termination of sales of all product
to Ingram, VPD, other distributors and major retailers if they "transfer possession of copies"
(i.e., sell DVDs), to Redbox exceeds the scope of the government-granted distribution right, and
violates the antitrust laws as an illegal restraint of trade.
74. As such, by combining with its distributors and major retailers to boycott Redbox
because Redbox refused to sign the Revenue Sharing Agreement, Defendants have violated
Section 1 of the Sherman Act and unlawfully entered into an agreement to restrain commerce
within the United States.
COUNT IV
SHERMAN ANTITRUST ACT: RESTRAINT OF TRADE
75. Redbox incorporates the allegations set forth in paragraphs 1 through 74, above,
as if fully set forth herein, and pleads, as an alternative to Count III, as follows.
76. Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) states that, "Every
contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States, or with foreign nations, is declared to be illegal.
77. New-release DVDs are introduced to the nationwide marketplace on a weekly
basis. Within the new-release market, a particular new-release DVD competes with another only
to the extent that consumers view one as a reasonable substitute for the other. As described
above, each DVD category, or genre, constitutes a separate submarket. The reason that Redbox
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kiosks, like all new-release DVD outlets, carry dozens of titles at a time is because consumer
behavior plainly demonstrates that there are few, if any, substitutes for a given new-release DVD
title. If new-release DVDs were fungible, consumers would be satisfied with rental/resale outlets
that carried only a handful of titles. Consumers would be indifferent if rental and resale outlets
stocked ten, or a hundred, individual titles at one time. Thus, even if one does not accept the
premise that each copyrighted title is a monopoly (paragraph 70, supra), well-established
consumer preferences, as reflected by industry practice, demonstrates that there is low cross-
elasticity of demand among new-release titles belonging to different categories, or genres, and
that each such genre constitutes a distinct submarket.
78. The boycott imposed by Defendants, or in the alternative, the restrictions
demanded by USHE in the Revenue Sharing Agreement, will eliminate or significantly decrease
the supply of new-release DVDs in each relevant submarket, will reduce consumer choice in the
marketplace and will artificially increase prices that consumers have to pay to rent and/or buy
new-release DVDs.
79. By boycotting Redbox (and orchestrating a boycott of Redbox by others) for
Redbox's refusal to sign the unlawful Revenue Sharing Agreement, Defendants are in violation
of Section 1 of the Sherman Act and has entered into an unlawful agreement to restrain
commerce within the United States.
COUNT V
SHERMAN ANTITRUST ACT: VIOLATION OF SECTION I
80. Redbox incorporates the allegations set forth in paragraphs Ito 79 as part of this
Count.
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81. Under Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared to be illegal."
82. Despite the clear language of Section 1, Defendants, Ingram and VPD have
entered into an agreement that forbids Ingram and VPD from selling Universal DVDs to Redbox
and other kiosk operators. Defendants also obtained the agreement of other distributors and
major retailers not to sell (or to severely restrict sales) to Redbox.
83. Defendants have orchestrated this boycott to force Redbox to artificially restrain
output, raise prices and give Defendants a bigger cut of the revenues, or in the alternative to
force Redbox out of business or replace Redbox kiosks with Defendants' own "POP" and
"MediaATM" kiosk systems. Either way, Defendants will be able to reduce supply and increase
prices that consumers must pay to rent or buy Universal DVDs.
84. Defendants' agreements with distributors and retailers that they not sell to Redbox
is a group boycott in violation of the antitrust laws. For the same reason, the restraints on output
and pricing sought by the threatened Revenue Sharing Agreement represent an attempt to
artificially reduce output and raise prices in violation of the antitrust laws.
COUNT VI
INTENTIONAL INTERFERENCE WITH CONTRACTUAL/BUSINESS RELATIONSHIPS
85. Redbox hereby incorporates the allegations set forth in paragraphs 1 through 84,
above, as if fully set forth herein.
86. Redbox has a valid and existing contract with Ingram to purchase, among other
things, Universal DVDs.
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87. Redbox has a valid and existing contract with VPD to purchase, among other
things, Universal DVDs.
88. Defendants are aware of the existence of Redbox's supply contracts with its
distributors. This is evidenced by Defendants' threat to stop selling to VPD and Ingram if they
continue to sell Universal DVDs or otherwise provide services to Redbox.
89. Defendants' threat to no longer supply Universal DVDs to VPD and Ingram
constitutes an intentional inducement to those distributors to breach their supply agreements with
Redbox. This inducement is not protected by any recognized judicial, statutory, constitutional or
other privilege and therefore is not justified.
90. Defendants' threatened action to no longer supply Universal DVDs to VPD and
Ingram have made it impossible for those distributors to satisfy their contractual obligations to
Redbox. Indeed, Defendants' coercion of VPD and Ingram has caused those distributors to stop
selling Universal DVDs to Redbox notwithstanding Redbox's purchase orders for such product,
thereby resulting in a breach of their supply contracts with Redbox.
91. Defendants' actions, including but not limited to its attempt to force Redbox to
sign the Revenue Sharing Agreement, have been carried out with the improper motive of, inter
cilia, interfering with Redbox's contracts with VPD and Ingram.
92. Defendants' threatened action to no longer supply Universal DVDs to VPD and
Ingram has and will continue to result in substantial damages to Redbox. Damages have and will
continue to accrue not only as a direct result of the breach of the supply contracts, but also due to
the proximate causes of that breach, including loss of customers, decreased demand for Redbox
rentals and sales, and loss of customer goodwill.
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DEMAND FOR JURY
Redbox demands a trial by jury in this action for all issues so triable pursuant to
Fed. R. Civ. P. 38.
PRAYER FOR RELIEF
WHEREFORE, Redbox respectfully requests that this Court award the following
relief:
a. A declaration that Defendants' conduct constitutes copyright misuse, and thereby renders copyrights for Universal DVDs — however marketed, sold or distributed - unenforceable during the period of misconduct; b. Injunctive relief prohibiting Defendants from engaging in any efforts to limit the supply of Universal DVDs to Redbox;
c. A declaration that the Revenue Sharing Agreement and Defendants' threatened action against VPD and Ingram violate the Sherman Antitrust Act; d. Damages to the full extent permitted by law; e. Attorneys' fees and costs; and f. Such further relief as this Court deems just and appropriate. Of Counsel: /s/ Chad S.C. Stover Henry E. Gallagher, Jr. (No. 495) Charles S. Bergen Chad S.C. Stover (No. 4919) George R. Dougherty CONNOLLY BOVE LODGE & HUTZ LLP Michael S. Gulland 1007 North Orange Street GRIPPO & ELDEN LLC Wilmington, DE 19801 111 South Wacker Drive Telephone: (302) 658-9141 Chicago, IL 60606 Facsimile: (302) 658-5614 Telephone: (312) 704-7700 [email protected] Facsimile: (312) 558-1195 [email protected]
Frederick W. Stein Attorneys for Plaintiff Redbox Automated Retail, LLC One Tower Lane, Suite 1200 Oakbrook Terrace, Illinois 60181 Telephone: (630) 756-8255 Facsimile: (630) 756-8885
Dated: January 22, 2009
- 24 - 603000.17 Case 1:Cl9ae/0059240BliaBSNIJIbctiluetathlaSlt 716iled 1R 80/06/1P/age PO23E/WM #: 301
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
REDBOX AUTOMATED RETAIL, LLC, ) Civil Action No. 09-592-RBK ) Plaintiff, ) ) ) JURY TRIAL DEMANDED
) TWENTIETH CENTURY FOX HOME ) ENTERTAINMENT, LLC ) ) Defendant. )
AMENDED COMPLAINT
Plaintiff Redbox Automated Retail, LLC ("Redbox") makes the following allegations
against Defendant Twentieth Century Fox Home Entertainment LLC ("Fox" or "Defendant"):
OVERVIEW
1. Redbox is the nation's leading, low-cost alternative for consumers to rent DVDs
for home entertainment. Redbox rents and sells digital video disks ("DVDs") to consumers
through innovative, consumer-friendly means: automated, self-service kiosks located at various
retail outlets. Consumer demand for Redbox has exploded since the company's inception in
2002, primarily due to Redbox's efficient means of providing consumers with low-cost, easily
accessible DVD releases on the day those new-release DVDs become available to the general
public.
2. Historically, the movie industry has weathered recessions — and even a
depression — better than most other sectors of the economy. People simply need some form of
release from their financial pressures, even if just for a couple of hours, during tough economic
times. Redbox offers that release to millions of consumers across America through a simple,
831758 Case 1:Cl9ae/00592/-feeliaBSMDbctiluetatilat 716iled 1R 80/06/1P/age Pa023P0011/#: 302
$1.00 per night value proposition. Despite clear consumer preference to move to this lower-
priced alternative during this recession, Fox seeks to strangle that alternative to prop up an
artificially high pricing scheme. Fox's tactics — cutting off all source of supply unless Redbox
acquiesces to a business-killing "blackout period" — hearkens back to the days when Fox and
other providers of DVDs controlled the entire distribution chain under the old "studio system,"
when they sought to choke off the supply of content to the new television medium during its
infancy, and later, when they fought the introduction of the VCR in the 1980s. Now, despite the
fact that consumers are being battered by one of the toughest recessions in history, Fox again
wants to restrict supply and impose higher prices.
3. Fox seeks to eliminate consumers' ability to enjoy low-cost new-release DVD
rentals from Redbox. Specifically, on August 5, 2009, Fox contacted the two firms that
distribute new-release DVDs to Redbox, Ingram Entertainment, Inc. ("Ingram") and Video
Product Distribution ("VPD"), as well as all of Fox's other distributors, and asked for
confirmation that they would agree to withhold new-release DVDs from Redbox because
Redbox refused to agree to a 30-day blackout period during which consumers would be allowed
to procure these DVDs only through more expensive channels. Fox told the distributors that,
absent agreement, it would eliminate all supply to them. Faced with the choice Fox provided to
them, the distributors agreed to Fox's request and thereby chose to join Fox's boycott. Obtaining
agreement of the distributors was critical to Fox's illegal plans. Absent assurance that all
distributors would not sell to Redbox, Fox's plan would fail.
4. Consumer demand for a DVD is at its highest immediately after its release and
declines substantially within a period of weeks thereafter. Fox's unlawful actions harm
consumers by decreasing the available supply of copyrighted new-release DVDs, reducing
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consumer choice in the marketplace and increasing the prices that consumers must pay. Fox
seeks to unlawfully eliminate the popular and growing kiosk distribution channel, which
provides low-cost, highly-convenient new-release DVD rental. Fox seeks to eliminate
consumers' ability to enjoy Redbox's "Dollar-Per-Night" rental rate for new-release DVDs.
5. Fox's actions constitute copyright misuse, violate the antitrust laws, tortiously
interfere with Redbox's existing supply contracts with its distributors and with its
prospective business opportunities, and constitute unfair competition. Redbox seeks the
following relief against Fox: (1) declaratory relief; (2) injunctive relief; (3) money damages;
(4) attorneys' fees and costs; and (5) such further relief as this Court deems just and
appropriate. In particular, Redbox is entitled to a declaration that Defendant's conduct
renders its copyrights unenforceable so long as Fox continues to engage in its inequitable
and illegal conduct.
THE PARTIES
6. Redbox is a Delaware limited liability company with its principal place of
business in Oakbrook Terrace, Illinois.
7. Fox is a Delaware limited liability corporation with its principal place of
business in Los Angeles, California. Fox is one of the world's leading distributors of
motion pictures. Fox, directly or through its affiliates, is engaged in the business of
developing, producing, and distributing to others copyrighted motion pictures and other
video entertainment in the United States and throughout the world. Fox is a subsidiary of
News Corporation, the film, television, cable and publishing conglomerate owned by Rupert
Murdoch. Some of Fox's more popular movie franchises include the Star Wars, Ice Age, X-
Men, Die Hard, Alien, and Predator series.
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8. Fox distributes DVDs by and through various distributors, including Ingram
and VPD, both of which, in the absence of Fox's illegal and tortious behavior, would
continue to sell DVDs to Redbox as they have done for years. VPD and Ingram are
important wholesale distributors for Fox, whose cooperation was critical to Fox's plan to
effectively prevent Redbox from obtaining new-release DVDs.
9. Non-party Ingram is a Tennessee corporation with its principal place of
business in La Vergne, Tennessee. Ingram is a wholesale distributor of DVDs. As a
wholesale distributor, Ingram maintains numerous warehouses filled with DVDs, including
new-release DVDs. Ingram periodically replenishes the stock in its warehouse by ordering
large quantities of DVDs from Fox, as well as other providers of DVDs. Orders are placed
in bulk, not by customer. Ingram also has overstock DVDs that are available for sale.
Ingram has, since the effective date of the Fox boycott (October 27, 2009), refused to sell
any such products to Redbox.
10. Non-party VPD is a California corporation with its principal place of business
in Folsom, California. VPD is a wholesale distributor of DVDs. As a wholesale distributor,
VPD maintains numerous warehouses tilled with DVDs, including new-release DVDs.
VPD periodically replenishes the stock in its warehouse by ordering large quantities of
DVDs from Fox, as well as other providers of DVDs. Orders are placed in bulk, not by
customer. It also has overstock DVDs that are available to purchasers, but not to Redbox.
JURISDICTION AND VENUE
11. Subject matter jurisdiction exists over Counts I, II, III, IV and V of this action
pursuant to 28 U.S.C. § 1331, 17 U.S.C. §§ 101, et seq. (Copyright Act) and 15 U.S.C. §§ 1,
et seq. (Sherman Antitrust Act), and 28 U.S.C. §§ 1337, 1338. Supplemental subject matter
jurisdiction over Count VI exists pursuant to 28 § U.S.C. 1367. Pursuant to 28 U.S.C. §§ - 4 - Case 1 :Cl9ae/00592/-feellaBSIMBibctimetatilat Med 1R 80/06/1P/age Pa0253 #: 305
2201-02, this Court may declare the rights and other legal relations of the parties because
there exists an actual controversy between them.
12. Personal jurisdiction exists over Fox because it does business and resides in
the State of Delaware. Venue is proper pursuant to 28 U.S.C. § 1391 because Fox is
organized under the laws of the State of Delaware and thus "resides" for purposes of § 1391
within that state.
FACTUAL ALLEGATIONS
A. Redbox's Consumer-Friendly Business Model
13. Since the introduction of DVDs into the marketplace, the DVD has become
the dominant medium for the distribution of movies for home viewing.
14. Redbox was founded in July 2002, when the company deployed DVD rental
kiosks in a "test market" in Washington, D.C. After initial success in that market, Redbox
chose Las Vegas, Nevada as a second "test market" in 2003. These test markets established
that consumers would enthusiastically turn to this convenient, low-cost source for new-
release DVD rentals and sales, and the company expanded.
15. Redbox is an innovator. It has developed a highly-convenient, yet low-cost,
option for consumers wishing to obtain DVDs. Redbox provides DVDs to consumers
through a nationwide network of over 17,000 self-service kiosks. Each kiosk features an
interactive touch screen and sign, a robotic disk array system and a web-linked electronic
communications system that allows customers to rent or buy DVDs. Kiosks typically hold up
to 700 DVDs comprising 70 to 200 individual titles. The kiosks are updated weekly with a
supply of new-release DVDs. A single kiosk may hold up to as many as forty-five (45) copies of
a popular new-release DVD.
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16. Consumers use credit cards to rent or purchase DVDs from Redbox. They can
also search for and reserve DVDs online through Redbox's website. Consumers enjoy the ability
to rent DVDs at one location and return them at any other Redbox location, thanks to Redbox's
patented rent and return system. For instance, a family can rent the latest Disney movie at a
McDonald's restaurant on Friday night, and return it to their neighborhood Albertson's
supermarket when shopping the next day. In 2007, readers of "SelfServiceWorld" magazine
ranked Redbox as the No. 1 self-service application, besting other kiosks deployed by NCR,
IBM, Kodak and Starbucks, among others.
17. Consumers love Redbox. Consumer demand for Redbox rentals and sales has
grown substantially in the last five years. Redbox had 125 kiosks in 2004, had nearly 6500 by
the end of 2007 and had over 12,000 kiosks nationwide at the end of 2008. Consumer demand
has enabled Redbox to surpass Blockbuster, Inc. Redbox now has nearly four times the number
of DVD rental locations in the United States than Blockbuster has. To date, consumers have
rented nearly 500 million DVDs from Redbox. Consumers average approximately 50 DVD
rentals per day per kiosk, and in the first half of 2009, Redbox rented an average of 27 million
DVDs per month. Indeed, consumer demand has supported Redbox's expansion such that
Redbox installed a new kiosk, on average, every 58 minutes somewhere in the United States this
year. As part of this expansion, Redbox hired over 600 new employees during the past year.
B. The Market For Redbox DVD Rental
18. Consumers currently find Redbox kiosks located in retail outlets such as
McDonald's restaurants, Wal-Mart stores, grocery stores such as Albertson's, Kroger, Stop &
Shop, Harris Teeter, and Meijer's, convenience stores like 7-Eleven, and drug stores such as
Walgreen's, throughout the continental United States and Puerto Rico. Redbox has contracts
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with these retail outlets. Much of Redbox's success depends on maintaining a business model
that satisfies the expectations of the retail outlets and consumers.
19. Consumers seeking to rent a new-release DVD generally search by specific title,
or by category or genre. Video rental stores are laid out this way. So are video rental websites
and so, too, are the menus of Redbox DVD rental kiosks. This is because consumers seeking to
rent a new-release musical comedy DVD are generally not interested in renting or buying a new-
release action DVD. Accordingly, Redbox, like others in the new-release DVD rental and resale
business, categorizes each DVD by title, release date and also by category or genre.
20. Consumers can also purchase previously-viewed new-release DVDs from
Redbox, typically beginning 12 days after their release, for as little as $7.
21. Consumer preference for Redbox rentals can largely be attributed to its ability to
conveniently provide consumers with low-cost rentals on or soon after the day that a DVD is
released by a studio and made available for home viewing. This release date is known as the
"street date." By industry convention, the "street date" for nearly every new-release DVD is on
Tuesday of the week of its release. Consumer demand for a new-release DVD is the highest
during the weekend immediately after its street date and declines substantially thereafter. Over
thirty percent of a new-release DVD's revenue is generated during the first two weeks of its
release. More than sixty percent of the rental demand for a particular title occurs within forty-
five days of the street date. In this Complaint, a "new-release" DVD refers to those DVDs that
are within 30 days of their street date.
22. The primary reason that consumers prefer using Redbox, rather than alternative
means such as brick and mortar stores, is Redbox's low cost. Whereas consumers can rent from
Redbox for $1 per night, the average cost per rental from other sources is $3.41. Through
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convenience and lower cost per rental, Redbox saves consumers a total of more than $38 million
per month. The result of Redbox's more efficient distribution of new-release DVDs is not just
lower prices. Redbox customers report that they watch 20% more films because of Redbox's
low-cost, consumer-friendly model.
C. The New - Release DVD Industry And Markets
23. New-release DVDs for rental or resale are perishable goods, like milk or fruit;
their value drops rapidly and materially almost from the first date they appear on the shelf.
Because consumer demand for a particular new-release DVD is highest while new on the market,
consumer demand for a new-release DVD is different from consumer demand for back-catalog
DVDs, i.e., DVDs that have been on the market for longer periods. Like the difference between
fresh produce and canned goods, or the difference between first-run theatrical films and older
films that are displayed in smaller theaters and at lower prices, new-release DVDs constitute a
separate market. In economic terms, the cross-elasticity of demand between new-release DVDs
and back catalog items is low. This is reflected, among other ways, by different pricing and
different marketing for new-release DVDs, as opposed to older, back-catalog DVDs. The
demand for new-release DVDs is price inelastic due, in part, to the monopoly power arising from
government-granted copyrights. New-release DVDs also are relatively insensitive to changes in
price because of the manner in which the market for a new-release DVD is structured by the
providers of new-release DVDs, including, for example, the staging of the street dates for
new-release DVDs to avoid competition among new-release DVDs of the same genre. Other
relevant characteristics of the markets for new-release DVDs are set forth in the following
paragraphs.
24. Fox recruits new audiences for each of its theatrical films by advertising on its
television and cable networks, and then attempting to ensure that the audience will not defect to - 8 - Case 1 :Cl9ae/00592/-feeliaBSAADbctiluetailniat 716iled 1R 80/06/1P/age a025314'00110 #: 309
another film by scheduling, or rescheduling, the release date of its film to a date when there will
be no competition. For instance, the National Research Group supplies a "Competitive
Positioning" report to major providers of DVDs. The NRG polls likely moviegoers to project
how well upcoming movies will do against each other in each audience quadrant (males under
25, males over 25, females under 25, females over 25) should they be released during the same
time period. A "losing" provider will reschedule the release of a film to a different time period,
even if it is less advantageous (i.e. not the summer and not the holidays). For instance, Fox
avoided head-to-head competition with "War of the Worlds" during a coveted Fourth of July
weekend by releasing its "Fantastic Four" a week later. Similarly, Warner Brothers released
"Batman Begins" in mid- June, thereby avoiding competition with Fox's "Fantastic Four."
As a result all three films won their weekend box office and could advertise themselves, as
Fantastic Four did, as "America's No. I hit." On information and belief, the providers of DVDs
apply a similar approach to scheduling the release dates for their new-release DVDs.
25. Because of this industry practice, a particular new-release DVD is generally not
an acceptable substitute for another new-release DVD. Providers of DVDs work hard to ensure
that a release in a particular category, or genre, does not share its street date with another release
in the same category or gene. Moreover, consumers seeking to rent a new-release DVD
generally search by title, or by genre. Video rental stores are laid out this way. So are video
rental websites and so, too, are the menus of Redbox DVD rental kiosks. This is because
consumers seeking a family-oriented new-release DVD will not often rent a new-release action
DVD instead. Accordingly, Redbox, like others in the new-release DVD rental business,
categorizes DVDs by title, by release date and also by their genre. Each category, or genre,
constitutes a distinct submarket within the overall new-release DVD market. Common
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categories, or genres, include: action/adventure, comedy, drama, family and kids, horror and sci-
fi, suspense and others. There is low cross-elasticity of demand among consumers for new-
release DVDs of different genres. Consumers who want to see Keanu Reeves in a science fiction
film (e.g. "The Day the Earth Stood Still') are unlikely to accept a Jennifer Aniston comedy
("Marley and Me') instead.
26. Release dates for new-release DVDs are timed so that a particular new-release
DVD title will face as little competition as possible with other new-release DVDs in the same
genre. Thus, for example, the Fox DVD "Marley and Me," was released on Tuesday, March 31,
2009, when it directly competed with few, if any, other DVDs in its category.
27. Because of the inelastic demand for each particular new-release DVD, Fox
possesses significant market power for a particular new-release DVD and, in the alternative,
within a specific category or genre during the weeks immediately following the street date.
Consumers have few, if any, acceptable substitutes for a particular new-release DVD in a
particular category or genre during the relevant time period.
28. Because demand peaks for a new-release DVD in the first weekend following its
release, consumers also value Redbox's ability to stock multiple copies (as stated above, as many
as 45 copies per kiosk in some instances) of popular, high-demand new-release DVDs.
D. Redbox's Relationship With Ingram and VPD
29. Redbox has historically been able to meet consumer demand for multiple copies
of new-release DVDs for rental on a title's street date because of its longstanding contractual and
business relationships with its distributors, VPD and Ingram. Redbox has historically purchased
all, or nearly all, of its supply of new-release DVDs from these distributors, and Redbox had
enjoyed long term, mutually beneficial business relationships with VPD and Ingram.
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30. Redbox has a supply contract with Ingram (the "Ingram Supply Contract"
(attached as Ex. A, redacted so as to protect sensitive commercial information)) that gives
Redbox the right to purchase DVDs from Ingram, and similarly obligates Ingram to sell to
Redbox, upon Redbox's request, DVDs. Specifically, the Ingram Supply Contract requires
Ingram to order DVDs from providers of DVDs. The term "providers of DVDs" has, throughout
the relationship between Redbox and Ingram, always included Fox and its affiliates.
31. The Ingram Supply Contract also contains a "DVD Buy Back" clause that permits
Redbox to sell and obligates Ingram to "repurchase from Redbox ('Buy Back') new-release
DVD product" pursuant to a timeframe tied to the title's street date. Under this arrangement,
Ingram purchases back significant amounts of previously-viewed DVDs from Redbox, and in
turn sells them to other buyers in the distribution stream.
32. Redbox has a similar business relationship with VPD, although the agreement is
not reflected in a single integrated document. VPD has always permitted Redbox to buy Fox
DVDs from VPD and receive these DVDs in advance of their street date. VPD, like Ingram,
holds itself out as having the ability to provide retailers like Redbox access to all of the titles
released by the major Hollywood providers of DVDs, which includes Fox. As with Ingram,
Redbox is able to sell back significant amounts of previously-viewed DVDs to VPD, which in
turn sells them to other buyers in the distribution stream.
33. Notwithstanding these contractual relationships, VPD and Ingram have informed
Redbox that they will bow to Fox's direct demands. Both have stopped filling Redbox's orders
for Fox DVDs with release dates beginning October 27, 2009. Absent Fox's unlawful acts,
Redbox would have continued to purchase all, or nearly all, of its supply of Fox DVDs from
VPD and Ingram beyond October 27, 2009 and into the foreseeable future. Fox's ability to stop Case 1 ( se4105132ARED4-31B-MDI5ct1amemln38nt et 11F 10 .. 1Faille 1 z.• 57Ftafge.3D #: 312
Ingram and VPD from selling to Redbox is due to Fox's dominant market position and
monopolistic power within the industry with respect to its unique, new-release DVDs. Based on
Fox's communications with the distributors, each distributor has agreed not to supply Redbox.
Redbox lacks viable alternative wholesale channels from which to purchase the new- release
DVDs that it needs.
E. Fox's Decision To Tortiously Interfere With Redbox's Relationships With Ingram and VPD And To Shut Off Redbox's Supply Of New- Release DVDs
34. On August 5,2009, Chase Carey, Chief Operating Officer of Fox's parent
company, stated in a conference call with industry analysts that Fox saw Redbox's competition
as a "problem" that News Corporation would "actively" attempt to solve. (See Ex. B). Later
that day, Fox told Redbox that it was demanding that its wholesalers, including VPD and Ingram,
cease selling any new-release DVD to Redbox for at least 30 days after its street date.
35. But Fox did not stop there. Redbox employees have learned from speaking with
VPD and Ingram employees that Fox representatives contacted representatives of both VPD and
Ingram, seeking confirmation that both VPD and Ingram would agree to stop selling new-release
DVDs to Redbox during the 30-day blackout period. According to Redbox's sources, both VPD
and Ingram communicated to Fox that they would agree to stop selling new-release DVDs to
Redbox during the 30-day blackout period.
36. Discovery will show that Fox representatives contacted not only VPD and
Ingram, but also numerous other distributors and retailers of DVDs, seeking confirmation that
they would agree not to sell new-release DVDs to Redbox during the 30-day blackout period.
For example, Redbox representatives have attempted to purchase new-release DVDs from Wal-
Mart, Best Buy and Target and have been informed by Wal-Mart, Target and Best Buy that
Redbox may not purchase more than three copies of any new-release DVD. Ordinarily, each - 12- Case 1 se4105132ARDD4-3S-MD15ctidlemln38nt et 1 IF 0 .. 1FalIle 1 #: 313
retailer has an incentive to sell as many DVDs as possible to any purchaser who walked into a
store and wanted to buy DVDs. It makes no economic sense for any retailer to deny sales to
Redbox unless it knows that other retailers have also agreed not to meet Redbox's demand. On
information and belief, Fox continues to seek agreement with, and cooperation from, major
wholesalers and retailers to prevent sales of new-release DVDs to Redbox.
37. News of Fox's attempt to solve its "problem" with Redbox spread quickly,
prompting media reports with headlines such as "Fox Tries to Strangle Redbox." (Ex. C).
Wholesalers, including VPD and Ingram, agreed to comply with Fox's demand due to Fox's
dominant market position with respect to new-release DVDs and their need for the DVDs Fox
sells.
38. Fox's attempt to choke off Redbox's supply of new-release DVDs follows a failed
attempt to require Redbox to end its "dollar-a-night" pricing and to force Redbox to substantially
raise its prices to consumers. Redbox refused, and Fox's boycott followed.
F. Fox's Actions Are Unlawful And Substantially Harm Both Redbox and Consumers
39. Fox's actions, if not remedied by this Court, will restrict output, eliminate
competition in the rental and sales markets and artificially raise prices to consumers. Fox seeks
to restrict output, increase prices and artificially control the markets for new-release DVD rentals
and re-sales.
40. Fox has no legally valid right to restrict or govern how or to whom VPD and
Ingram resell Fox DVDs that they have purchased. But because of Fox's monopoly power
derived from its government-granted copyrights, and its position within the industry, Fox has the
power to unlawfully coerce VPD and Ingram to not sell new-release DVDs to Redbox. VPD and
Ingram have acquiesced to Fox's demands, and accordingly have refused to fill Redbox's orders
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for Fox DVDs beginning in October 2009 — even though Redbox is entitled to have these orders
filled pursuant to its supply contracts with VPD and Ingram. A list of titles affected by the
boycott appears at Ex. D. Thus, as a result of Fox's unlawful acts, Redbox no longer has access
to new-release DVDs through its normal wholesale channels.
41. Fox's actions, if allowed to stand unchecked, will artificially constrain output by
preventing consumers from renting new-release DVDs from Redbox and other kiosk rental
outlets. Fox's actions have no pro-competitive effects.
42. Fox's true purpose in demanding that VPD and Ingram stop selling to Redbox is
to eliminate the independent kiosk as a low-cost consumer choice and thereby create an artificial
shortage of product with a correspondingly high artificial price for rental or re-sale of new-
release DVDs. Fox seeks to eliminate the low-cost, highly-convenient and fast-growing Redbox
channel, because (1) Redbox (and other independent kiosk vendors) threaten to undercut the
artificial pricing of the distribution structure that Fox seeks to establish; and (2) by virtue of its
monopoly power, Fox seeks to capture excess revenue from artificially high prices for new-
release DVD rentals and re-sales.
43. Simply because Fox views Redbox's efficient, consumer-friendly business model
as a "problem" that it wants to "strangle" does not justify the unlawful measures it has taken.
Antitrust and copyright laws prohibit Fox's unlawful acts, as does tort law protecting Redbox's
longstanding business and contractual relationships with Ingram and VPD and Redbox's
prospective business opportunities.
COUNT I
DECLARATORY RELIEF: COPYRIGHT MISUSE
44. Redbox incorporates the allegations set forth in paragraphs 1 through 43, above,
as if fully set forth herein.
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45. Copyright law provides copyright holders only a limited monopoly in order to
enhance retail competition and maximize dissemination of copyrighted works to the general
public. The first-sale doctrine prevents copyright holders from extending the monopoly beyond
the initial sale of the copyrighted work. Thus, Congress expressly provided that "[T]he owner of
a particular copy . . . lawfully made under [Title 17 of the United States Code] . . . is entitled,
without the authority of the copyright owner, to sell or otherwise dispose of the possession of
that copy. . ." 17 U.S.C. § 109(a).
46. The public policy behind copyright law favors the enhancement of retail
competition and the maximization of dissemination of copyrighted works. Anti-competitive
agreements or anti-competitive behavior, such as an unlawful group boycott, conflicts with this
public policy, subverts the goals of copyright law and constitutes "copyright misuse." The
doctrine of copyright misuse prevents copyright holders from using their copyright to extend
their government-sanctioned monopoly beyond its proper scope. The existence of such anti-
competitive agreements or unlawful activity precludes the enforcement of the copyright during
the period of copyright misuse.
47. Fox's actions with respect to VPD and Ingram are unlawful, contrary to and
violative of, the first sale doctrine. Fox has improperly restricted the statutory right of VPD,
Ingram and other wholesalers to sell or otherwise dispose of the DVDs that they have purchased.
Defendant's attempts to thwart the first sale doctrine of Section 109(a) of the Copyright Act
violate the public policy embodied in the grant of copyright, and constitute copyright misuse.
48. There is an actual controversy over Fox's copyright misuse because it has now cut
off Redbox's wholesale supply sources. Consumers and Redbox will suffer harm as a result of
Fox's coercion of VPD and Ingram to cease selling DVDs to Redbox.
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49. Redbox is entitled to a declaration that Fox's actions constitute copyright misuse
and that Fox is precluded from enforcing copyrights for new-release DVDs. Further, Redbox is
entitled to a declaration that so long as Fox continues to engage in its inequitable conduct,
Redbox may lawfully reproduce and sell copies of copyrighted DVDs without incurring any
liability pursuant to copyright law.
COUNT II
VIOLATION OF SHERMAN ANTITRUST ACT: QUICK LOOK DOCTRINE
50. Redbox incorporates the allegations set forth in paragraphs 1 through 49, above,
as if fully set forth herein.
51. Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) states that "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared to be illegal."
52. The boycott of Redbox orchestrated by Fox constitutes a naked restraint of trade
that will decrease the supply of new-release DVDs in many, or all genres, reduce consumer
choice in the various submarkets in the new-release DVD marketplace and artificially increase
prices that consumers will have to pay to rent or buy new-release DVDs in those submarkets,
thereby negatively affecting consumer welfare. In simple terms, because of the restraint, there
are consumers who want to rent titles like "Night at the Museum 2" from Redbox for $1 per
night, but will be unable to do so because of the boycott. These consumers will now either have
to pay more elsewhere or do without.
51 Fox's actions will limit the number of copies of new-release DVDs that individual
kiosks may contain and prevent consumers from renting new-release DVDs until 30 days after
their street date. Consumers will face artificially constrained supply and artificially higher
prices.
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54. Fox's actions are intended to unlawfully eliminate Redbox's ability to rent or re-
sell new-release DVDs and have no pro-competitive effect that would enhance inter-brand or
intra-brand competition with rentals or resales through other channels, such as brick-and-mortar
stores. Fox's actions nakedly reduce output and increase prices paid by consumers for
new-release DVDs. Fox's scheme does not enhance competition with new-release DVDs
released by other copyright holders. Fox's actions are so plainly anti-competitive that even a
"cursory exam" demonstrates that they constitute unlawful and illegal restraint of trade in
violation of Section 1 of the Sherman Act.
COUNT III
VIOLATION OF SHER1VIAN ANTITRUST ACT: MISUSE OF COPYRIGHT ACT
55. Redbox incorporates the allegations set forth in paragraphs 1 through 54, above,
as if fully set forth herein.
56. Each copyrighted work recorded on DVD constitutes an individual product
market. Each copyrighted work is unique, and each such unique work has been granted a limited
governmental monopoly. The geographic market for each such copyrighted work is nationwide.
57. A copyright holder enjoys a "distribution right" and may initially sell, or not sell,
copies of a copyrighted work to others on such terms as he or she sees fit. However, the
copyright holder's distribution right is limited to the first sale of the copyrighted item. Under the
"first sale" doctrine, codified at 17 U.S.C. § 109(a) "the distribution right may be exercised
solely with respect to the initial disposition of copies of a work, not to prevent or restrict the
resale or other further transfer of possession of such copies."
58. Fox's right to control distribution of copyrighted new-release DVDs ends once
the DVD has been sold by Fox to a third-party purchaser. The distribution right may not
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lawfully be exercised after the initial sale, "to prevent or restrict the resale or further transfer of
possession of such copies."
59. Fox's boycott of Redbox exceeds the scope of the government-granted
distribution right, and violates the antitrust laws as an illegal restraint of trade.
60. As such, Fox has violated Section 1 of the Sherman Act and unlawfully entered
into agreements with VPD and Ingram to restrain commerce within the United States.
COUNT IV
VIOLATION OF SHERMAN ANTITRUST ACT: UNREASONABLE RESTRAINT OF TRADE
61. Redbox incorporates the allegations set forth in paragraphs I through 60, above,
as if fully set forth herein, and pleads, as an alternative to Count III, as follows.
62. Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) states that, "Every
contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States, or with foreign nations, is declared to be illegal."
63. New-release DVDs are introduced to the nationwide marketplace on a weekly
basis. Within the new-release market, a particular new-release DVD competes with another only
to the extent that consumers view one as a reasonable substitute for another. As described above,
each DVD category, or genre, constitutes a separate submarket.
64. The reason that Redbox kiosks, like all new-release DVD outlets, carry dozens of
titles at a time is because consumer behavior plainly demonstrates that there are few, if any,
substitutes for a given new-release DVD title. If all new-release DVDs were fungible,
consumers would be satisfied with rental/resale outlets that carried only a few titles. Consumers
would be indifferent if rental and resale outlets stocked three, ten or a hundred individual titles at
one time. Thus, even if one does not accept the premise that each copyrighted title is a
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monopoly, well-established consumer preferences, as reflected by industry practice, demonstrate
that there is low cross-elasticity of demand among new-release titles belonging to different
categories, or genres, and that each such genre constitutes a distinct submarket.
65. Fox's actions will eliminate or significantly decrease the supply of new-release
DVDs in each relevant submarket, will reduce consumer choice in the marketplace and will
artificially increase prices that consumers have to pay to rent and/or buy new-release DVDs.
66. By boycotting Redbox (and orchestrating a boycott of Redbox by others), Fox is
in violation of Section 1 of the Sherman Act and has entered into unlawful agreements to restrain
commerce within the United States.
COUNT V
VIOLATION OF SHERMAN ANTITRUST ACT: UNLAWFUL BOYCOTT
67. Redbox incorporates the allegations set forth in paragraphs Ito 66 as part of this
Count.
68. Under Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared to be illegal."
69. Despite the clear language of Section 1, Fox, Ingram and VPD have entered into
agreements that will forbid Ingram and VPD from selling DVDs to Redbox and other DVD
rental kiosk operators, including new-release DVDs.
70. Fox has orchestrated this boycott to artificially restrain output, raise prices and
give Fox a bigger cut of rental revenues, or in the alternative to force Redbox out of business.
Either way, Fox will be able to restrict supply and increase prices that consumers must pay to
rent or buy new-release DVDs.
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71. Fox's agreements with VPD and Ingram that they not sell to Redbox are unlawful
group boycotts in violation of the antitrust laws.
COUNT VI
TORTIOUS INTERFERENCE WITH CONTRACTUAL/BUSINESS RELATIONSHIPS
72. Redbox hereby incorporates the allegations set forth in paragraphs 1 through 71,
above, as if fully set forth herein.
73. Redbox has a valid and existing contract with Ingrain to purchase, among other
things, new-release DVDs.
74. Redbox has a valid and existing contract with VPD to purchase, among other
things, new-release DVDs.
75. Fox is aware of the existence of Redbox's supply contracts with its distributors.
This is evidenced by Fox's efforts to obtain the agreement of VPD and Ingram to cease selling to
Redbox.
76. Fox's threat to no longer supply DVDs to VPD and Ingram unless they boycott
Redbox constitutes an intentional inducement to those distributors to breach their supply
agreements with Redbox. This inducement is not protected by any recognized judicial, statutory,
constitutional or other privilege and therefore is not justified.
77. Fox's threatened action to no longer supply DVDs to VPD and Ingram has
made it impossible for those distributors to satisfy their contractual obligations to Redbox.
Fox's coercion of VPD and Ingram has caused those distributors to stop selling DVDs,
including new-release DVDs, to Redbox effective October 27, 2009, notwithstanding
Redbox's purchase orders for such product, thereby resulting in a breach of their supply
contracts with Redbox.
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78. Fox's actions have been carried out with the improper motive of, inter alia,
interfering with Redbox's contracts with VPD and Ingram.
79. Defendant's decision to cut off the supply of DVDs to Redbox through VPD
and Ingram has and will continue to result in substantial damages to Redbox. Damages
have and will continue to accrue not only as a direct result of the breach of the supply
contracts, but also due to the proximate causes of that breach, including loss of customers,
decreased demand for Redbox rentals and sales, attorneys' fees, and loss of customer
goodwill.
COUNT VII
TORTIOUS INTERFERENCE WITH PROSPECTIVE BUSINESS OPPORTUNITY
80. Redbox hereby incorporates the allegations set forth in paragraphs 1 through
79, above, as if fully set forth herein.
81. After implementation of the Fox boycott by VPD and Ingram, Redbox was
forced to turn to other channels from which to purchase DVDs. Redbox commenced
business relationships with other wholesalers and retailers, such as Best Buy, Target and
Wal-Mart, to continue its supply of DVDs.
82. Redbox reasonably expected that these other wholesalers and retailers, such as
Best Buy, Target and Wal-Mart, would supply it with DVDs, as they would for any other
purchaser who seeks to buy DVDs.
83. Because Redbox could no longer receive its supply of DVDs from VPD and
Ingram, these other wholesalers and retailers were Redbox's only means of acquiring DVDs
for its kiosk business.
84. Defendant has intentionally interfered with Redbox's supply relationship with
these other wholesalers and retailers, in order to prevent Redbox from buying new-release
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DVDs from other wholesalers and retailers and to maintain its illegal boycott against
Redbox.
85. Defendant's intentional interference is evidenced by instances in which
retailers have refused to sell DVDs and limited the number of DVDs that they would sell to
Redbox personnel.
86. In engaging in the conduct described above, Defendant intended to impair or
destroy Redbox's supply relationship with these other wholesalers and retailers, such as Best
Buy, Target and Wal-Mart. Defendants' conduct is not protected by any recognized
privilege and, therefore, is not justified.
87. Defendant obstructed Redbox's only remaining channels for the supply of
DVDs for its kiosks and resulting in the loss of economic profits it would have received in
renting and selling DVDs in its kiosks. Defendant's obstruction in the supply of DVDs to
Redbox has and will continue to result in substantial damages to Redbox, including loss of
customers, decreased demand for Redbox rentals and sales, and loss of customer goodwill.
COUNT VIII
UNFAIR COMPETITION
88. Redbox hereby incorporates the allegations set forth in paragraphs 1 through
87, above, as if fully set forth herein.
89. As described above in Counts VI and VII, Redbox reasonably expected that
these other wholesalers and retailers, such as Best Buy, Target and Wal-Mart, would supply
it with Fox DVDs. Defendant wrongfully interfered with Redbox's supply relationship with
these other wholesalers and retailers, in order to prevent Redbox from buying new-release
DVDs from other wholesalers and retailers and to maintain its illegal boycott against
Redbox.
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90. Defendant's actions constitute unfair competition, which have and will
continue to result in substantial damages to Redbox, including loss of customers, decreased
demand for Redbox rentals and sales, and loss of customer goodwill.
DEMAND FOR JURY
Redbox demands a trial by jury in this action for all issues so triable pursuant to Fed.
R. Civ. P. 38.
PRAYER FOR RELIEF
WHEREFORE, Redbox respectfully requests that this Court award the following
relief:
a. A declaration that Defendant's conduct constitutes copyright misuse, and thereby renders copyrights for DVDs — however marketed, sold or distributed - unenforceable during the period of misconduct;
b. Injunctive relief prohibiting Fox from engaging in any efforts to limit the supply of DVDs, including new-release DVDs, from third-parties, including VPD and Ingram, to Redbox;
c. Judgment that Fox's actions violate the Sherman Antitrust Act;
d. Damages to the full extent permitted by law;
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e. Attorneys' fees and costs; and
f. Such further relief as this Court deems just and appropriate.
Of Counsel /s/ Henry E. Gallagher, Jr. Henry E. Gallagher, Jr. (Bar ID #495) Charles S. Bergen Chad S.C. Stover (Bar ID #4919) George P. Dougherty Connolly Bove Lodge & Hutz LLP Colleen P. Sorensen (pro hac pending) 1007 North Orange Street GRIPPO & ELDEN LLC P.O. Box 2207 111 South Wacker Drive Wilmington, DE 19899 Chicago, IL 60606 Phone: (302) 888-6288 Phone: (312) 704-7700 Fax: (302) 658-0380 Fax: (312) 558-1195 Attorneys for Plaintiff Frederick W. Stein Redbox Automated Retail, LLC One Tower Lane, Suite 1200 Oakbrook Terrace, Illinois 60181 Phone: (630) 756-8255 Fax: (630) 756-8885
Dated: November 30, 2009
737063v1
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CERTIFICATE OF SERVICE
I hereby certify that on November 30, 2009, I electronically filed REDBOX'S
AMENDED COMPLAINT with the Clerk of Court using CM/ECF which will send
notification of such filing to the following, and I have also sent the foregoing in the
manner indicated:
VIA E-MAIL VIA E-MAIL
Yosef Riemer Beth Moskow-Schnoll (No. 2900) KIRKLAND & ELLIS LLP Barllard Spahr LLP 601 Lexington Avenue 919 North Market Street, 12 th Floor New York, NY 10022 Wilmington, DE 19801 Telephone: (212) 446-4802 Telephone: (302) 252-4447 Email: [email protected] Facsimile: (302) 355-0221 Email: [email protected] Corey C. Watson KIRKLAND & ELLIS LLP Neal Walters 777 South Figueroa Street Ballard Sphar LLP Los Angeles, CA 90017 Plaza 1000 - Suite 500 Telephone: (213) 680-8482 Main Street Email: [email protected] Voorhees, NJ 08043 Telephone: (856) 761-3438 Email: [email protected]
Is/ Henry E. Gallagher, Jr. Henry E. Gallagher, Jr. (DE Bar ID #495) Case 1: va/0061&40B1332€1■Aillocerinembetit 764ed 1P11180/06/1Ptage Pa§231 340:10 #: 138
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
REDBOX AUTOMATED RETAIL, LLC
Plaintiff,
VS. C.A. No. 09-613 (RBK) WARNER HOME VIDEO, a division of WARNER BROS. HOME ENTERTAINMENT, INC.,
Defendant.
AMENDED COMPLAINT
Plaintiff Redbox Automated Retail, LLC ("Redbox") makes the following allegations
against Defendant Warner Home Video, a division of Warner Bros. Home Entertainment, Inc.
("Warner or Defendant"):
OVERVIEW
1. Warner is the largest distributor of filmed entertainment in the world. Warner
distributes digital video discs ("DVDs") for home video use. These DVDs contain filmed
entertainment product produced or otherwise acquired by the various content-producing
subsidiaries and divisions of Warner's ultimate parent, Time-Warner, Inc. These subsidiaries
and affiliates include Warner Bros. Pictures, Warner Bros. Television, New Line, Home Box
Office and Turner Broadcasting System.
2. Redbox is the nation's leading, low-cost alternative for consumers to rent DVDs
for home entertainment. Redbox rents and sells DVDs to consumers through innovative,
consumer-friendly means: automated, self-service kiosks located at various retail outlets.
Consumer demand for Redbox has exploded since the company's inception in 2002, primarily
836094 Case 1: va/0061&40B1332€1■Aillocerinembetit 7164ed 1P11180/06/1Ptage Pa§2328•0110 #: 139
due to Redbox's efficient means of providing consumers with low-cost, easily accessible DVD
releases on the day those new-release DVDs become available to the general public.
3. Historically, the movie industry has weathered recessions and even a
depression better than most other sectors of the economy. People simply need some form of
release from their financial pressures, even if just for a couple of hours, during tough economic
times. Redbox offers that release to millions of consumers across America through a simple,
"Dollar-Per-Night" value proposition. Despite clear consumer preference for this lower-priced
alternative, Warner seeks to strangle that alternative to prop up an artificially high pricing
scheme. Warner's tactics cutting off Redbox's sources of supply unless Redbox acquiesces to
a business-killing "blackout period" hearkens back to the days when Warner and other
providers of DVDs controlled the entire distribution chain under the old "studio system," when
they sought to choke off the supply of content to the new television medium during its infancy,
and later, when they fought the introduction of the VCR in the 1980s. Now, despite the fact that
consumers are being battered by one of the toughest recessions in history, Warner again wants to
restrict supply and impose higher prices.
4. Warner seeks to eliminate consumers' ability to enjoy low-cost new-release DVD
rentals from Redbox. Specifically, Warner has communicated with the two firms that distribute
new-release DVDs to Redbox, Ingram Entertainment ("Ingram") and Video Product Distribution
("VPD"), as well as all of Warner's other distributors, and asked for confirmation that they
would agree to withhold new-release DVDs for a 28-day blackout period during which
consumers would be allowed to procure only through more expensive channels. Warner told the
distributors that, absent agreement, it would eliminate all supply to them. Faced with the choice
Warner provided to them, the distributors agreed to Warner's request and thereby chose to join
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Warner's boycott. Obtaining agreement of the distributors was critical to Warner's illegal plans.
Absent assurance that all distributors would not sell to Redbox, Warner's plan would fail.
5. Consumer demand for a DVD is at its highest immediately after its release and
declines substantially within a period of weeks thereafter. Warner's unlawful actions harm
consumers by decreasing the available supply of copyrighted new-release DVDs, reducing
consumer choice in the marketplace and increasing the prices that consumers must pay. Warner
seeks to unlawfully eliminate the popular and growing kiosk distribution channel, which
provides low-cost, highly-convenient new-release DVD rental. Warner seeks to eliminate
consumers' ability to enjoy Redbox's "Dollar-Per-Night" rental rate for new-release DVDs.
6. Warner's actions constitute copyright misuse, violate the antitrust laws, tortiously
interfere with Redbox's existing supply contracts with its distributors and with its prospective
business opportunities, and constitute unfair competition. Redbox seeks the following relief
against Warner: (1) declaratoryrelief; (2) injunctive relief; (3) money damages; (4) attorneys'
fees and costs; and (5) such further relief as this Court deems just and appropriate. In particular,
Redbox is entitled to a declaration that Defendant's conduct renders its copyrights unenforceable
so long as Warner continues to engage in its inequitable and illegal conduct.
THE PARTIES
7. Redbox is a Delaware limited liability company with its principal place of
business in Oakbrook Terrace, Illinois.
8. Warner is a Delaware limited liability corporation with its principal place of
business in New York, New York. Warner is one of the world's leading distributors of motion
pictures. Warner is a subsidiary of Warner Bros. Entertainment, Inc., which in turn is a
subsidiary of Time Warner, Inc. Time Warner, Inc.'s other subsidiaries include AOL, New Line
Cinema, Time Inc., HBO, Turner Broadcasting System, The CW Television Network,
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TheWB.com, Kids' WB, The CW4Kids, Cartoon Network, Adult Swim, CNN, DC Comics, and
Warner Bros. Games.
9. Warner currently distributes DVDs by and through various distributors, including
Ingram and VPD, both of which, in the absence of Warner's illegal and tortious behavior, would
continue to sell Warner DVDs to Redbox as they have done for years. VPD and Ingram are
important wholesale distributors for Warner, whose cooperation was critical to Warner's plan to
effectively prevent Redbox from obtaining new-release DVDs.
10. Non-party Ingram is a Tennessee corporation with its principal place of business
in La Vergne, Tennessee. Ingram is a wholesale distributor of DVDs. As a wholesale
distributor, Ingram maintains numerous warehouses filled with DVDs, including new-release
DVDs. Ingram periodically replenishes the stock in its warehouses by ordering large quantities
of DVDs from Warner, as well as other providers of DVDs. Orders are placed in bulk, not by
customer. Ingram also has overstock DVDs that are available for sale. Ingram has, since the
effective date of the Warner boycott (October 2009), refused to sell any such products to
Redbox.
11. Non-party VPD is a California corporation with is principal place of business in
Folsom, California. VPD is a wholesale distributor of DVDs. As a wholesale distributor, VPD
maintains numerous warehouses filled with DVDs, including Warner DVDs. VPD periodically
replenishes the stock in its warehouses by ordering large quantities of DVDs from Warner, as
well as other providers of DVDs. Orders are placed in bulk, not by customer. VPD also has
overstock DVDs that are available for sale, but not to Redbox.
JURISDICTION AND VENUE
12. Subject matter jurisdiction exists over Counts I, II, III, IV and V of this action
pursuant to 28 U.S.C. § 1331, 17 U.S.C. §§ 101, et seq. (Copyright Act) and 15 U.S.C. §§ 1, et
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seq. (Sherman Antitrust Act), and 28 U.S.C. §§ 1337, 1338. Supplemental subject matter
jurisdiction over Counts VI, VII and VIII exists pursuant to 28 § U.S.C. 1367. Pursuant to 28
U.S.C. §§ 2201-02, this Court may declare the rights and other legal relations of the parties
because there exists an actual controversy between them.
13. Personal jurisdiction exists over Warner because it does business and resides in
the State of Delaware. Venue is proper pursuant to 28 U.S.C. § 1391 because Warner is
organized under the laws of the State of Delaware and thus "resides" for purposes of § 1391
within that state.
FACTUAL ALLEGATIONS
A. Redbox's Consumer-Friendly Business Model
14. Since the introduction of DVDs into the marketplace, the DVD has become the
dominant medium for the distribution of movies for home viewing.
15. Redbox was founded in July 2002, when the company deployed DVD rental
kiosks in a "test market" in Washington, D.C. After initial success in that market, Redbox chose
Las Vegas, Nevada, as a second "test market" in 2003. These test markets established that
consumers would enthusiastically turn to this convenient, low-cost source for new-release DVD
rentals and sales, and the company expanded.
16. Redbox s an nnovator. It has developed a highly-convenient, yet low-cost
option for consumers wishing to obtain DVDs. Redbox provides DVDs to consumers through a
nationwide network of over 17,000 self-service kiosks. Each kiosk features an interactive touch
screen and sign, a robotic disk array system and a web-linked electronic communications system
that allows customers to rent or buy DVDs. Kiosks typically hold up to 700 DVDs comprising
70-200 individual titles. The kiosks are updated weekly with a supply of new-release DVDs. A
single kiosk may hold up to as many as forty-five (45) copies of a popular new-release DVD.
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17. Consumers use credit cards to rent or purchase DVDs from Redbox. They can
also search for and reserve DVDs online through Redbox's website. Consumers enjoy the ability
to rent DVDs at one location and return them at any other Redbox location, thanks to Redbox's
patented rent and return system. For instance, a family can rent the latest Disney movie at a
McDonald's restaurant on Friday night, and return it to their neighborhood Albertson's
supermarket when shopping the next day. In 2007, readers of "SelfSe ceWorld" magazine
ranked Redbox as the No. 1 self-service application, besting other kiosks deployed by NCR,
IBM, Kodak and Starbucks, among others.
18. Consumers love Redbox. Consumer demand for Redbox rentals and sales has
grown substantially in the last five years. Redbox had 125 kiosks in 2004, had nearly 6500 by
the end of 2007 and had over 12,000 kiosks nationwide at the end of 2008. Consumer demand
has enabled Redbox to surpass Blockbuster, Inc. Redbox now has nearly four times the number
of DVD rental locations in the United States that Blockbuster has. To date, consumers have
rented nearly 500 million DVDs from Redbox. Consumers average approximately 50 DVD
rentals per day per kiosk, and in the first half of 2009, Redbox rented an average of 27 million
DVDs per month. Indeed, consumer demand has supported Redbox's expansion such that
Redbox installed a new kiosk, on average, every 58 minutes somewhere in the United States this
year. As part of this expansion, Redbox hired over 600 new employees during the past year.
B. The Market For Redbox DVD Rental
19. Consumers currently find Redbox kiosks located in retail outlets such as
McDonald's restaurants, Wal-Mart stores, grocery stores such as Albertson's, Kroger, Stop &
Shop, Harris Teeter, and Meijer's, convenience stores like 7-Eleven, drug stores such as
Walgeen's, and Navy and Marine bases throughout the continental United States and Puerto
Rico. Redbox has contracts for these placements. Much of Redbox's success depends on
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maintaining a business model that satisfies the expectations of its retail outlets, as well as
consumers.
20. Consumer preference for Redbox rentals can largely be attributed to its ability to
conveniently provide consumers with low-cost rentals on or soon after the day that a DVD is
released by a provider of DVDs and made available for home viewing. This release date is
known as the "street date." By industry convention, the "street date" for nearly every new-release
DVD is on Tuesday of the week of its release. Consumer demand for a new-release DVD is the
highest during the weekend immediately after its street date and declines substantially thereafter.
Over thirty percent of a new-release DVD's revenue is generated during the first two weeks of its
release. More than sixty percent of the rental demand for a particular title occurs within forty-
five days of the street date. In this Complaint, a "new-release" DVD refers to those DVDs that
are within 28 days of their street date.
21. The primary reason that consumers prefer using Redbox, rather than alternative
means such as brick and mortar stores, is Redbox's low cost. Whereas consumers can rent from
Redbox for $1 per night, the average price that consumers pay to rent a movie from outlets such
as Blockbuster is approximately $4.00. Through convenient and lower cost rental, Redbox saves
consumers a total of more than $38 million per month. The result of Redbox's more efficient
distribution of new-release DVDs is not just lower prices. Redbox customers report that they
watch 20% more films because of Redbox's low-cost, consumer-friendly model.
C. The New-Release DVD Industry And Market
22. New-release DVDs for rental or resale are perishable goods, like milk or fruit;
their value drops rapidly and materially almost from the first date they appear on the shelf
23. Consumer demand for a new-release DVD is different from consumer demand for
back-catalog DVDs, i.e., DVDs that have been on the market for longer periods. Like the
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difference between fresh produce and canned goods, or the difference between first-run theatrical
films and older films that are displayed in smaller theaters and at lower prices, new-release
DVDs constitute a separate market. In economic terms, the cross-elasticity of demand between
new-release DVDs and back catalog items is low. This is reflected, among other ways, by
different pricing and different marketing for new-release DVDs, as opposed to older, back-
catalog DVDs. The demand for new-release DVDs is price inelastic, in part, due to the
monopoly power arising from government-granted copyrights. New-release DVDs are also
relatively insensitive to changes in price because of the manner in which the market for a
new-release DVD is structured by the providers of new-release DVDs, including, for example,
the staging of the street dates for new-release DVDs to avoid competition among new-release
DVDs of the same genre. Other relevant characteristics of the markets for new-release DVDs
are set forth in the following paragraphs.
24. Warner recruits new audiences for each of its theatrical films by advertising on its
television and cable networks, and then attempting to ensure that the audience will not defect to
another film by scheduling, or rescheduling, the release date of its film to a date when there will
be no competition. For nstance, the National Research Group which has been described as a
"secretive research group that helps run the movie business" supplies a "Competitive
Positioning report to major providers of DVDs. The NRG polls likely moviegoers to project
how well upcoming movies will do against each other in each audience quadrant (males under
25, males over 25, females under 25, females over 25) should they be released during the same
time period. A "losing" provider will reschedule the release of a film to a different time period,
even if it is less advantageous (i.e. not the summer and not the holidays). Warner avoided head-
to-head competition with Fox's "Fantastic Four" by releasing "Batman Begins in mid-June a
few weeks before the Fox release. Similarly, Fox avoided head-to-head competition with "War - 8 - 836094 Case 1: va/0061d406133261■Allocerinembetit 7161ed 1P11180/06/1Ptage 9a3taétD #: 146
of the Worlds" during a coveted Fourth of July weekend by releasing its "Fantastic Four" a week
later. As a result all three films won their weekend box office and could advertise themselves, as
Fantastic Four did, as "America's No. 1 hit." On information and belief, the providers of DVDs
apply a similar approach to avoiding competition through the scheduling of street dates for their
new-release DVDs.
25. Because of this industry practice, a particular new-release DVD is generally not
an acceptable substitute for another new-release DVD. Providers of DVDs work hard to ensure
that a release in a particular category, or genre, does not share its street date with another release
in the same category or genre. Moreover, consumers seeking to rent a new-release DVD
generally search by title, or by genre. Video rental stores are laid out this way. So are video
rental websites and so, too, are the menus of Redbox DVD rental kiosks. This is because
consumers seeking a family-oriented new-release DVD will not often rent a new-release action
DVD instead. Accordingly, Redbox, like others in the new-release DVD rental business,
categorizes DVDs by title, by release date and also by their genre. Each category, or genre,
constitutes a distinct submarket within the overall new-release DVD market. Common
categories, or genres, include: action/adventure, comedy, drama, family and kids, horror and sci-
fi, suspense and others. There is low cross-elasticity of demand among consumers for new-
release DVDs of different genres. Consumers who want to see a movie in the "Harry Potter"
series would not be likely to accept "17 Again" as a substitute for that film.
26. Release dates for new-release DVDs are timed so that a particular new-release
DVD title will face as little competition as possible with other new-release DVDs in the same
genre. Thus, for example, the Warner DVD teen comedy "17 Again,' as released on Tuesday,
August 11, 2009, when it directly competed with few, if any, other DVDs in its category.
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27. There are relatively few major releases in a given month, contrary to popular
belief Over the past three years, on average, only about five movies are released each month
which earned $50 million or more at the box office. Their street dates are coordinated to avoid
competition with other new-release DVDs in the same genre.
28. Because of the inelastic demand for each particular new-release DVD, Warner
possesses significant market power for a particular new-release DVD and, in the alternative,
within a specific category or genre during the weeks immediately following the street date.
Consumers have few, if any, acceptable substitutes for a particular new-release DVD in a
particular category or genre during the relevant time period.
29. Because demand peaks for a new-release DVD in the first weekend following its
release, consumers also value Redbox's ability to stock multiple copies (as stated above, as many
as 45 copies per kiosk in someinstances) of popular, high-demand new-release DVDs.
D. Warner's Decision To Tortiously Interfere With Redbox's Relationships With Ingram and VPD And To Shut Off Redbox's Supply Of New-Release DVDs
30. On August 13, 2009, Mark Horak and Mark Saksa, Warner's President and Vice
President- New Release Sales, respectively, telephoned Mitch Lowe, Redbox's President. Horak
and Salsa indicated that, for Warner DVDs with release dates beginning in October 2009,
Warner would only provide product subject to a 28-day blackout period. Horak stated that
Warner would demand that VPD, Ingram and other traditional distributors stop distributing new-
release DVDs to Redbox before the 28-day blackout period. Additionally, these distributors
would be asked to stop purchasing previously-viewed Warner DVDs from Redbox.
31. But Warner did not stop there. On information and belief, Warner representatives
contacted representatives of both VPD and Ingram, seeking confirmation that both VPD and
Ingram would agree to stop selling new-release DVDs to Redbox during the 28-day blackout
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period. Both VPD and Ingram communicated to Warner that they would agree to stop selling
new release DVDs to Redbox during the 28-day blackout period.
32. Discovery will also show that Warner representatives contacted not only VPD and
Ingram, but also numerous other distributors and retailers of DVDs, seeking confirmation that
they would agree not to sell new-release DVDs to Redbox during the 28-day blackout period.
Redbox representatives have attempted to purchase new-release DVDs from Wal-Mart, Best Buy
and Target and have been informed by Wal-Mart, Best Buy and Target that Redbox may not
purchase more than three copies of any new-release DVD. Ordinarily, each retailer has an
incentive to sell as many DVDs as possible to any purchaser who walked into a store and wanted
to buy DVDs. It makes no economic sense for any retailer to deny sales to Redbox unless it
knows that other retailers have also agreed not to meet Redbox's demand On information and
belief, Warner continues to seek agreement with, and cooperation from, major wholesalers and
retailers to prevent sales of new-release DVDs to Redbox.
E. Redbox's Relationship With Inpram and VPD
33. Redbox has historically been able to meet consumer demand for multiple copies
of new-release DVDs for rental on a title's street date because of its longstanding contractual and
business relationships with its distributors, VPD and Ingram. Redbox has historically purchased
all, or nearly all, of its supply of DVDs from these distributors, and Redbox had enjoyed long
term, mutually beneficial business relationships with VPD and Ingram.
34. Redbox has a supply contract with Ingram (the "Ingram Supply Contract"
(attached as Ex. A, redacted so as to protect sensitive commercial information)) that gives
Redbox the right to purchase DVDs from Ingram, and similarly obligates Ingram to sell to
Redbox, upon Redbox's request, DVDs. Specifically, the Ingram Supply Contract requires
Ingram to order DVDs from the providers of DVDs. The term "providers of DVDs" has,
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throughout the relationship between Redbox and Ingram, always included Warner and its
affiliates.
35. The Ingram Supply Contract also contains a "DVD Buy Back" clause that permits
Redbox to sell and obligates Ingram to"repurchase from Redbox (`Buy Back') new-release
DVD product" pursuant to a timeframe tied to the title's street date. Under this arrangement,
Ingram purchases back significant amounts of previously-viewed DVDs from Redbox, and in
turn sells them to other buyers in the distribution stream.
36. Redbox has a similar business relationship with VPD, although the agreement is
not reflected n a s ngle integrated document. VPD has always permitted Redbox to buy Warner
DVDs from VPD and receive these DVDs in advance of their street date. VPD, like Ingram,
holds itself out as having the ability to provide retailers like Redbox access to all of the titles
released by the major providers of DVDs, which includes Warner. As with Ingram, Redbox is
able to sell back significant amounts of previously-viewed DVDs to VPD, which in turn sells
them to other buyers in the distribution stream.
37. Notwithstanding these contractual relationships, VPD and Ingram have informed
Redbox that they will bow to Warner's direct demands. Both have stopped filling Redbox's
orders for Warner DVDs with release dates beginning in October 2009. The first Warner title
affected by Warner's edict is The Orphan, which has a street date of October 27, 2009. Other
affected titles include Terminator Salvation and Harry Potter and the Half Blood Prince, with
street dates of December 1,2009 and December 8, 2009, respectively. Under the 28-day
blackout, neither title would be available for rental during the peak 2009 Holiday Season.
38. Absent Warner's unlawful acts, Redbox would have continued to purchase all, or
nearly all, of its supply of Warner DVDs from VPD and Ingram beyond October 2009 and into
the foreseeable future. Warner's ability to stop Ingram and VPD from selling to Redbox is due - 12 - 836094 Case 1: se-001311-3aff0433-MDEIctiatamlnalnt eqd 1 IF 1Fatlge 1Bage263:1af0.3D #: 150
to Warner's dominant market position and monopolistic power within the industry with respect
to its unique, new-release DVDs. Based on Warner's communications with distributors, each
distributor has agreed not to supply to Redbox. Redbox lacks viable alternative wholesale
channels from which to purchase the new-release DVDs that it needs.
F. Warner's Actions Are Unlawful And Substantially Harm Both Redbox and Consumers
39. Warner's actions, if not remedied by this Court, will restrict output, eliminate
competition in the rental and sales markets and artificially raise prices to consumers. Warner
seeks to restrict output, increase prices and artificially control the markets for new-release DVD
rentals and re-sales.
40. Warner has no legally valid right to restrict or govern how or to whom VPD and
Ingram resell Warner DVDs that they have purchased. But because of Warner's monopoly
power derived from its government-granted copyrights, and its position within the industry,
Warner has the power to unlawfully coerce VPD and Ingram to not sell new-release DVDs to
Redbox. VPD and Ingram have agreed to Warner's demands, and accordingly have refused to
fill Redbox's orders for Warner DVDs beginning in October 2009 even though Redbox is
entitled to have these orders filled pursuant to its supply contracts with VPD and Ingram. A list
of Warner titles that will be affected by the boycott appears at Exhibit B. Thus, as a result of
Warner's unlawful acts, Redbox will no longer have access to new-release DVDs through its
normal wholesale channels.
41. Warner's actions, if allowed to stand unchecked, will artificially constrain output
by preventing consumers from renting new-release DVDs from Redbox and other kiosk rental
outlets. Warner's actions have no pro-competitive effects. Warner's true purpose in demanding
that VPD and Ingram stop selling to Redbox is to eliminate the independent kiosk as a low-cost
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consumer choice and thereby create an artificial shortage of product with a correspondingly high
artificial price for rental or re-sale of new-release DVDs. Warner seeks to eliminate the low-
cost, highly-convenient and fast- growing Redbox channel, because (1) Redbox (and other
independent kiosk vendors) threaten to undercut the artificial pricing of the distribution structure
that Warner seeks to establish; and (2) by virtue of its monopoly power, Warner seeks to capture
excess revenue from artificially high prices for new-release DVD rentals and re-sales.
COUNT I
DECLARATORY RELIEF: COPYRIGHT MISUSE
42. Redbox incorporates the allegations set forth in paragraphs 1 through 41, above,
as if fully set forth herein.
43. Copyright law provides copyright holders only a limited monopoly in order to
enhance retail competition and maximize dissemination of copyrighted works to the general
public. The first-sale doctrine prevents copyright holders from extending the monopoly beyond
the initial sale of the copyrighted work. Thus, Congress expressly provided that "[T]he owner of
a particular copy. . . lawfully made under [Title 17 of the United States Code] . . . is entitled,
without the authority of the copyright owner, to sell or otherwise dispose of the possession of
that copy .. ." 17 U.S.C. § 109(a).
44. The public policy behind copyright law favors the enhancement of retail
competition and the maximization of dissemination of copyrighted works. Anti-competitive
agreements or anti-competitive behavior, such as an unlawful group boycott, conflicts with this
public policy, subverts the goals of copyright law and constitutes "copyright misuse." The
doctrine of copyright misuse prevents copyright holders from using their copyright to extend
their government-sanctioned monopoly beyond its proper scope. The existence of such ant
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competitive agreements or unlawful activity precludes the enforcement of the copyright during
the period of copyright misuse.
45. Warner's actions with respect to VPD and Ingram are unlawful, contrary to and
violative of, the first sale doctrine. Warner has improperly restricted the statutory right of VPD,
Ingram and other wholesalers to sell or otherwise dispose of the Warner DVDs that they have
purchased. Defendant's attempts to thwart the first sale doctrine of Section 109(a) of the
Copyright Act violate the public policy embodied in the giant of copyright, and constitute
copyright misuse.
46. There is an actual controversy over Warner's copyright misuse because it has now
cut off Redbox's wholesale supply sources. Consumers and Redbox will suffer harm as a result
of Warner's coercion of VPD, Ingram, and other sources to cease selling Warner DVDs to
Redbox.
47. Redbox is entitled to a declaration that Warner's actions constitute copyright
misuse and that Warner is precluded from enforcing copyrights for new-release DVDs. Further,
Redbox is entitled to a declaration that so long as Warner continues to engage in its inequitable
conduct, Redbox may lawfully reproduce and sell copies of copyrighted Warner DVDs without
incurring any liability pursuant to copyright law.
COUNT II
VIOLATION OF SHERMAN ANTITRUST ACT: QUICK LOOK DOCTRINE
48. Redbox incorporates the allegations set forth in paragraphs 1 through 47, above,
as if fully set forth herein.
49. Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) states that "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared to be illegal."
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50. The boycott of Redbox orchestrated by Warner constitutes a naked restraint of
trade that will decrease the supply of new-release DVDs in many, or all genres, reduce consumer
choice in the various submarkets in the new-release DVD marketplace and artificially increase
prices that consumers will have to pay to rent or buy new-release DVDs in those submarkets,
thereby negatively affecting consumer welfare. In simple terms, because of the restraint, there
are consumers who want to rent titles like "Terminator Salvation from Redbox for $1 per-night,
but will be unable to do so because of the boycott. These consumers will now either have to pay
more elsewhere or do without.
51. Warner's actions are intended to unlawfully eliminate consumers' ability to enjoy
new-release DVDs for a Dollar-Per-Night, and to eliminate Redbox's ability to rent or re-sell
new-release DVDs. Warner's actions have no pro-competitive effect that would enhanceinter-
brand or ntra-brand competition with rentals or resales through other channels, such as brick-
and-mortar stores. Warner's actions nakedly reduce output and increase prices paid by
consumers for new-release DVDs. Warner's scheme does not enhance competition with new-
release DVDs released by other copyright holders. Warner's actions are so plainly ant
competitive that even a "cursory exam" demonstrates that they constitute unlawful and illegal
restraint of trade in violation of Section 1 of the Sherman Act.
COUNT III
VIOLATION OF SHERMAN ANTITRUST ACT: MISUSE OF COPYRIGHT
52. Redbox incorporates the allegations set forth in paragraphs 1 through 51, above,
as if fully set forth herein.
53. Each copyrighted work recorded on DVD constitutes an individual product
market. Each copyrighted work is unique, and each such unique work has been granted a limited
governmental monopoly. The geographic market for each such copyrighted work is nationwide.
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54. A copyright holder enjoys a "distribution right" and may initially sell, or not sell,
copies of a copyrighted work to others on such terms as he or she sees fit. However, the
copyright holder's distribution right is limited to the first sale of the copyrighted item. Under the
"first sale" doctrine, codified at 17 U.S.C. § 109(a) "the distribution right may be exercised
solely with respect to the initial disposition of copies of a work, not to prevent or restrict the
resale or other further transfer of possession of such copies."
55. Warner's right to control distribution of copyrighted new-release DVDs ends once
the DVD has been sold by Warner to a third-party purchaser. The distribution right may not
lawfully be exercised after the initial sale, "to prevent or restrict the resale or further transfer of
possession of such copies."
56. Warner's boycott of Redbox exceeds the scope of the government-granted
distribution ght, and violates the antitrust laws as an illegal restraint of trade.
57. As such, Warner has v olated Sect on 1 of the Sherman Act and unlawfully
entered into agreements with VPD and Ingram to restrain commerce within the United States.
COUNT IV
VIOLATION OF SHERMAN ANTITRUST ACT: UNREASONABLE RESTRAINT OF TRADE
58. Redbox incorporates the allegations set forth in paragraphs 1 through 57, above,
as if fully set forth herein, and pleads, as an alternative to Count III, as follows.
59. Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) states that, "Every
contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States, or with foreign nations, is declared to be illegal."
60. New-release DVDs are introduced to the nationwide marketplace on a weekly
basis. Within the new-release market, a particular new-release DVD competes with another only
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to the extent that consumers view one as a reasonable substitute for another. As described above,
each DVD category, or genre, constitutes a separate submarket.
61. The reason that Redbox kiosks, like all new-release DVD outlets, carry dozens of
titles at a time is because consumer behavior plainly demonstrates that there are few, if any,
substitutes for a given new-release DVD title. If all new-release DVDs were fungible,
consumers would be satisfied withrental/resale outlets that carried only a few titles. Consumers
would be indifferent if rental and resale outlets stocked three, ten or a hundred individual titles at
one time. Thus, even if one does not accept the premise that each copyrighted title is a
monopoly, well-established consumer preferences, as reflected by industry practice, demonstrate
that there is low cross-elasticity of demand among new-release titles belonging to different
categories, or genres, and that each such genre constitutes a distinct submarket.
62. Warner's actions will eliminate or significantly decrease the supply of new-
release DVDs in each relevant submarket, will reduce consumer choice in the marketplace and
will artificially increase prices that consumers have to pay to rent and/or buy new-release DVDs.
63. By boycotting Redbox (and orchestrating a boycott of Redbox by others), Warner
is in violation of Section 1 of the Sherman Act and has entered into unlawful agreements to
restrain commerce within the United States.
COUNT V
VIOLATION OF SHERMAN ANTITRUST ACT: UNLAWFUL BOYCOTT
64. Redbox incorporates the allegations set forth in paragraphs 1 to 63 as part of this
Count.
65. Under Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is declared to be illegal."
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66. Despite the clear language of Section 1, Warner, Ingram and VPD have entered
into agreements that will forbid Ingram and VPD from selling DVDs, including new-release
DVDs, to Redbox and other DVD rental kiosk operators.
67. Warner has orchestrated this boycott to artificially restrain output, raise prices and
give Warner a bigger cut of rental revenues, or in the alternative to force Redbox out of business.
Either way, Warner will be able to restrict supply and increase prices that consumers must pay to
rent or buy new-release DVDs.
68. Warner's agreements with VPD and Ingram that they not sell to Redbox are
unlawful group boycotts in violation of the antitrust laws.
COUNT VI
TORTIOUS INTERFERENCE WITH CONTRACTUAL/BUSINESS RELATIONSHIPS
69. Redbox hereby incorporates the allegations set forth in paragraphs 1 through 68,
above, as if fully set forth herein.
70. Redbox has a valid and existing contract with Ingram to purchase, among other
things, new-release DVDs.
71. Redbox has a valid and existing contract with VPD to purchase, among other
things, new-release DVDs.
72. Warner is aware of the existence of Redbox's supply contracts with its
distributors. This is evidenced, on information and belief, by Warner's efforts to obtain the
agreement of VPD and Ingram to cease selling to Redbox.
73. Warner's threat to no longer supply DVDs to VPD and Ingram unless they
boycott Redbox constitutes an intentional inducement to those distributors to breach their supply
agreements with Redbox. This inducement is not protected by any recognized judicial, statutory,
constitutional or other privilege and therefore is not justified.
- 19 - 836094 Case 1: se-c101311-3a3433-MDEIctiatamlnalnt eqd 1 IF 1Felge :to CRate3D #: 157
74. Warner's threatened action to no longer supply DVDs to VPD and Ingram has
made it impossible for those distributors to satisfy their contractual obligations to Redbox.
Warner's coercion of VPD and Ingram has caused those distributors to stop selling DVDs,
including new-release DVDs, to Redbox effective October 2009, notwithstanding Redbox's
purchase orders for such product, thereby resulting in a breach of their supply contracts with
Redbox.
75. Warner's actions have been carried out with the improper motive of, inter alia,
interfering with Redbox's contracts with VPD and Ingram.
76. Defendant's decision to cut off the supply of Warner DVDs to Redbox through
VPD and Ingram has and will continue to result in substantial damages to Redbox. Damages
have and will continue to accrue not only as a direct result of the breach of the supply contracts,
but also due to the proximate causes of that breach, including loss of customers, decreased
demand for Redbox rentals and sales, attorneys' fees, and loss of customer goodwill.
COUNT VII
TORTIOUS INTERFERENCE WITH PROSPECTIVE BUSINESS OPPORTUNITY
77. Redbox hereby incorporates the allegations set forth in paragraphs 1 through
76, above, as if fully set forth herein.
78. After implementation of the Warner boycott by VPD and Ingram, Redbox
was forced to turn to other channels from which to purchase DVDs. Redbox commenced
business relationships with other wholesalers and retailers, such as Best Buy, Target and
Wal-Mart, to continue its supply of DVDs.
79. Redbox reasonably expected that these other wholesalers and retailers, such as
Best Buy, Target and Wal-Mart, would supply it with DVDs, as they would for any other
purchaser who seeks to buy DVDs.
- 20 - 836094 Case 1: se-c101311-3a3433-MDEIctiatamlnalnt eqd 11F 117elge 2rage231RafO3D #: 158
80. Because Redbox could no longer receive its supply of DVDs from VPD and
Ingram, these other wholesalers and retailers were Redbox's only means of acquiring DVDs
for ts kiosk business.
81. On information and belief, Defendant has intentionally interfered with
Redbox's supply relationship with these other wholesalers and retailers, in order to prevent
Redbox from buying new-release DVDs from other wholesalers and retailers and to
maintain its illegal boycott against Redbox.
82. Defendant's intentional interference is evidenced by instances in which
retailers refused to sell DVDs or limited the number of DVDs that they would sell to
Redbox personnel.
83. In engaging in the conduct described above, Defendant intended to impair or
destroy Redbox's supply relationship with these other wholesalers and retailers, such as Best
Buy, Target and Wal-Mart. Defendant's conduct is not protected by any recognized
privilege and, therefore, is not justified.
84. Defendant obstructed Redbox's only remaining channels for the supply of
DVDs for its kiosks and resulting in the loss of economic profits it would have received in
renting and selling Warner DVDs in its kiosks. Defendant's obstruction in the supply of
DVDs to Redbox has and will continue to result in substantial damages to Redbox,
including loss of customers, decreased demand for Redbox rentals and sales, and loss of
customer goodwill.
COUNT VIII
UNFAIR COMPETITION
85. Redbox hereby incorporates the allegations set forth in paragraphs 1 through
84, above, as if fully set forth herein.
-21 - 836094 Case 1: se-901311-3aa3433-MDEIctiatamlnalnt eqd 1 IF 1Fatlge 22age232:1afg?.3D #: 159
86. As described above in Counts VI and VII, Redbox reasonably expected that
these other wholesalers and retailers, such as Best Buy, Target and Wal-Mart, would supply
it with DVDs, including new-release DVDs. On information and belief, Defendant
wrongfully interfered with Redbox's supply relationship with these other wholesalers and
retailers, in order to prevent Redbox from buying new-release DVDs from other wholesalers
and retailers and to maintain its illegal boycott against Redbox.
87. Defendant's actions constitute unfair competition, which have and will
continue to result in substantial damages to Redbox, including loss of customers, decreased
demand for Redbox rentals and sales, and loss of customer goodw 11.
DEMAND FOR JURY
Redbox demands a tr al by jury in this action for all issues so t able pursuant to Fed. R.
Civ. P. 38.
PRAYER FOR RELIEF
WHEREFORE, Redbox respectfully requests that this Court award the following relief
a) A declaration that Defendant's conduct constitutes copyright misuse, and thereby renders copyrights for DVDs however marketed, sold or distributed - unenforceable during the period of misconduct;
b) Injunctive relief prohibiting Warner from engaging in any efforts to limit the supply of DVDs, including new-release DVDs, from third-parties, including VPD and Ingram, to Redbox;
c) Judgment that Warner's actions violate the Sherman Antitrust Act;
d) Damages to the full extent permitted by law;
e) Attorneys' fees and costs; and
0 Such further relief as this Court deems just and appropriate.
- 22 - 836094 Case 1: se-001311-3aff0433-MDEIctiatamlnalnt etc' 11F 1Felge 21341:233:14?.3D #: 160
/s/ James S. Green Of Counsel: James S. Green (#0481) [email protected] Charles S. Bergen SEITZ, VAN OGTROP & GREEN, P.A. George R. Dougerhty 222 Delaware Avenue, Suite 1500 Colleen P. Sorensen P.O. Box 68 GRIPPO & ELDEN LLC Wilmington, DE 19899 111 South Wacker Drive Telephone: (302) 888-0600 Chicago, IL 60606 Facsimile: (302) 888-0606 Telephone: (312) 704-7700 Facsimile: (312) 558-1195
Frederick W. Stein REDBOX AUTOMATED RETAIL, LLC One Tower Lane, Suite 1200 Oakbrook Terrace, IL 60181 Telephone: (630) 756-8255 Facsimile: (630) 756-8885
Dated: November 30, 2009 Attorneys for Plaintiff
- 23 - 836094 Case 2:11-cv-00133-MJP Document 76-2 Filed 06/17/11 Page 1 of 3
Exhibit B Case 2:1 -cv-00133-MJP Document 76-2 F led 06/17/11 Page 2 of 3
CERTIFICATION
I, Mark A. Dingley, as General Counsel and Deputy Treasurer of the Office of the
General Treasurer, State of Rhode Island, hereby certify as follows:
1. I am fully authorized to enter into and execute this Certification on behalf of
the Employees' Retirement System of the State of Rhode Island ("ERSRI"). I have reviewed a
Complaint filed against Coinstar, Inc. ("Coinstar") alleging violations of the federal securities laws;
2. ERSRI did not purchase securities of Coinstar at the direction of counsel or in order to participate in any private action under the federal securities laws;
3. ERSRI is willing to serve as a lead plaintiff in this matter, including providing
testimony at deposition and trial, if necessary;
4. ERSRI's transactions in Coinstar during the class period are reflected in
Exhibit A, attached hereto;
5. ERSRI sought to serve as a lead plaintiff in the following class actions under
the federal securities laws during the last three years:
In re Sequenom, Inc. Securities Litigation, No. 3:09-cv-00921-LAB-WMC (S.D. Cal.)
6. Beyond its pro rata share of any recovery, ERSRI will not accept payment for
serving as a lead plaintiff on behalf of the class, except the reimbursement of such reasonable costs
and expenses (including lost wages) as ordered or approved by the Court.
I declare under penalty of perjury, under the laws of the United States, that the
foregoing is true and correct this 17 day of March 2011. ,tex( rat• -L Mark A. Dingley General Counsel and Deputy Treasu Office of the General Treasurer, S tat el fde Island Case 2:11-cv-00133-MJP Document 76-2 Filed 06/17/11 Page 3 of 3
EXHIBIT A
TRANSACTIONS IN COINSTAR, INC.
Price Per Transaction Type Trade Date Shares Share Cost / Proceeds Purchase 11/22/10 8,200.00 $63.13 Purchase 11/23/10 6,500.00 $63.99 Purchase 11/24/10 9,400.00 $65.63 Purchase 01/03/11 4,600.00 $56.65 Sale 01/14/11 -16,000.00 $43.11 $689,708.80 Sale 01/14/11 -12,700.00 $42.94 $545,372.29 Case 2:11-cv-00133-MJP Document 76-3 F led 06/17/11 Page 1 of 16
Exhibit C Inside Red box » Redbox New ReleasEs for July 6, 2010 CRISP 9 " I 1 -nV-nn1 33-M , HP Document 76-3 Filed 06117111 PAOP 2 Of 16
Hope von are ha.rna a meat holiday. Here H vonr list of mo.res coming to Red box this
A Single Man
Babysitter Wanted ii
Barbie in a Mermaid Tale
Brooklyn's Finest ii
Brooklyn's Finest (BLU-RAY) H
F.:c.c....4! Casualties of War
Dive Oily Dive! Under Pressure R
"lc Street Boss
The Girl with the Dragon Tattoo
The Gold Retrievers R
http:// insideredbox.com/redbox-new-releases-for-july-6-2010/[6/13/2011 7:00:0 PM] Inside Redbox » Redbox New ReleasEs for July 13, 2010 CRISP 9 11-ov-f1M13-M.HP Document 76:3 Fdeol 06/17111 Pone 3 of 16
Here ar -e the titles coming to Reclbox on July 13, 2010
American Bandits: Frank & Jesse James Pt; Starring: Peter Fonda. T,m Shell Genre: Drama. Drama. i -Vescern Release Year: 2010
American Pie: The Book of Love ii
Caught In The Crossfire
Chloe
Saint John Of Las Vegas
Soccer Dog: European Cup
Spongebob Sguarepants: Triton's Revenge NR
The 41-Year-Old Virgin Who Knocked Up Sarah Marsha Starring: Pryan Cal Michael Scoot Genre: Comedvcor Pelease Year: 2010
The Book of Eli
Genre: ActonAdver Pelease Year: 2010
The Book Of Eli (BLU-RAY) ii
http:// insidered box.com/redbox-new-releases-for-july-13-2010/[6/13/2011 7:56:06 PM] Inside Redbox » Redbox New ReleasEs for July 13, 2010 Case 2 . 11-cv-00133-MJP Document 76-3 Filed 06/17/11 Page 4 of 16
Release Year: 2010
The Bounty Hunter I P( ;-13 Starring: Gerard Boderiermiler Amston Genre: Acnon,Comecly Release Year: 2010
Share this:
http:// insidered box.com/redbox-new-releases-for-july-13-2010/[6/13/2011 7:56:06 PM] Inside Red box » Redbox New ReleasEs for July 20, 2010 CRISP 9 1 1 -rv 11111 13-M. HP nininumPnt 76:3 Filed 06/17111 Paolo, c of 16
Animal Atlas: Animals And Us \N
Cats And Dogs
PeIease 're=ir
Clash of the Gods
Green Zone IN
Operation: Endgame IN
Super Hero Squad Show: Volume 1 \N
Sutures
The Bannen Way
The Runaways H
http:// insidered box.com/redbox-new-releases-for-july-20-2010/[6/13/2011 7:56:50 PM] Inside Redbox » Redbox New ReleasEs for July 20, 2010 Case 2 . 11-cv-00133-M,JP Document 76-3 Filed 06/17/11 Page 6 of 16
Release Year: 2010
The Wronged Man
-'40 Starring: Julia Ornionc*ahershalailiashbaz Alf Genre: 0r31173opic.Crmie,0rama I PAA' Release Year: 2010
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http:// insidered box.com/redbox-new-releases-for-july-20-2010/[6/13/2011 7:56:50 PM] Inside Redbox » Redbox New ReleasEs for July 27, 2010 Case 2 . 11-cv-00133-M,JP Document 76-3 Filed 06/17/11 Page 7 of 16
Oil
Check out vihat is coming to Reclbox this veeki What vill YOU rent or recommend'
kr" Don't Look Up Starring: Eh Roth/ henry Thomas Genre: horrort horrori Thraler Release Year: 2009
Hot Tub Time Machine IN Starring: John CusacKClari, OL/ke, Crd1C7 Rob,nson. Rob Corddry,Sebashan Stan Genre: Acnon,Comedy,Aciventure Release Year: 2010
Jesse Stone: No Remorse NR Starring: Tom Selleckh.athy Ea4.er Genre: Dratila,CrItile,Dratild Release Year: 2010
Percy Jackson & the Olympians (BLU-RAY) It Starring: Logan Lerman/ Brandon T. JacAsont Alexancira Dadd3r10/ Sean Bean,P,erce Brosnan Genre: Acnon,k3117,/y/ Drama„.Ackentore ; Family Release Year: 2010
Percy Jackson & The Olympians: The Lightning Thief IN; Starring: Logan Lerman/ Brandon T. _IdelsOnf Aie\andid DaddM10; Sean Sean. Pierce Brosnan Genre: Ac n, m ly,Adve nture Family Release Year: 2010
The Missing Lynx Starring: Ancomo Eanderas Genre: FamayChadren Release Year: 200S
The Seventh Sign IN Starring: Dem, Hoore.M,0neel Genre: horror red/so ., Replay-. Thriller Release Year: 1955
Share this:
ass
http:// insidered box.com/redbox-new-releases-for-july-27-2010/[6/13/2011 7:57:34 PM] Inside Red box » Redbox New ReleasEs for August 3, 2010 CRISP 9 . 11 -nv1111133-M, HP nininumPnt 76-3 Filed 06/17111 Pane R of 16
(edit: "The ,chu5t Writer -is also coming this vieek.„ but rrka v riot be
Am/PH A Prophet (Un prophete)
Genre: Drama Crvnra. Drama Release Year: 2009
After.Life Ri Starring: C/rrstnaP 'cc,' Liar Genre: Drama Drama. T/rri1e
After.Life (BLU-RAY) II
Dora's Big Birthday Adventure \ R
Kick-Ass In
'Genre: AcEr Release Year: -(
Kick-Ass (BLU-RAY) IN
Genre: AcnonAdvenEure Release Year: 2010
Open House _ IN
■ The Ghost Writer II ;- 3
To Save a Life II ;- 3
http:// insideredbox.com/redbox-new-releases-for-august-3-2010/[6/13/2011 7:59:07 PM] Inside Red box » Redbox New ReleasEs for August 3, 2010 Case 2 . 11-cv-00133-M,JP Document 76-3 Filed 06/17/11 Pape 9 of 16
tho,
Release Year: 2008
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http://www.insideredbox.com/redbox-new-releases-for-august-3-2010/[6/13/2011 7:59:07 PM] Inside Red box » Redbox New ReleasEs for August 10, 2010 Case 2:11-cv-00133-M,AP Document 76-3 Filed 06/17/11 Page 10 of 16
Here are the titles coming to ReclboY this next desk. What car II you be %vatching 7
Death at a Funeral (2010) H Starring: Chns PocA; Danny Glover; LoAe Wilson Genre: Comedy Release Year: 2010
Death at a Funeral (BLU-RAY) Starring: Chns Pock. Luke Wilson.Martin Lawrence Genre: Comedy Release Year: 2010
Greenberg Starring: Ben Stiller,Greta Gerwg Genre: Comed ic Release Year: 2009
Invincible Shaolin \ Starring: Ch,en Stia.Sher1g 07,311g Genre: AcE,orLAcivencore Release Year: 1973
La Mission 12 I'v.` Starring: Benjamin Bratc; Erika Ale;:ander„Jeremy Ray Valdez Genre: Drama. Crania Release Year: 2009
Letters to God PG Starring: Tanner Nagu,re,3effi-ey EL.S. Johnson " Genre: Crania. Drama Release Year: 2010
Nanny McPhee (2005) Starring: Cohn Thrth,E;11(71.3 TI /0 (714).90t) Genre: Family, Children Release Year: 2005
Our Family Wedding 1 1( - 13 Starring: America Ferrera ; Forest Whica er Genre: Comedy ; ,gornance Release Year: 2010
Shaolin Prince \ Starring: Luna TI, Tong-Shinc See Genre: Achon; Advencore , Release Year: 1932
Sonic The Hedgehog: Doomsday Project Starring: Sonic the hedge/roc Genre: Family, Children Release Year:
http:// insideredbox.com/redbox-new-releases-for-august-10-2010/[6/13/2011 8:00:14 PM] Inside Red box » Redbox New ReleasEs for August 10, 2010 Case 2:11-cv-00133-M,JP Document 76-3 Filed 06/17/11 Page 11 of 16
The Duel \ R Starring: Lung TI„Roc Wang Genre: Acnon,Advennire Release Year: 2000
pi Under the Mountain PI; -13 Starring: TOM Cameron,Sophle McBride Genre: AcnothAdvennire.Tholler Release Year: 2009
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http:// insideredbox.com/redbox-new-releases-for-august-10-2010/[6/13/2011 8:00:14 PM] Inside Red box » Redbox New ReleasEs for August 17, 2010 Case 2:11-cv-00133-M,AP Document 76-3 Filed 06/17/11 Page 12 of 16
Here is v:hat is corning to Redbox this meek. What are your picks?
Burning Bright II -13 Starring: Br/aria bagan/ Garret Dalahunt Genre: Drama; Drama; Thrhi/er Release Year: 2009
Cash Starring : Sean Bean. Clips he MS WO rth Genre: Comedy,Drama.Crinie,Drama,Thufier Release Year: 2010
Cemetery Junction Il Starring: Chnshan Cool, e,Fehc , ry Jones Genre: Comedy Release Year: 2010
Cop Out Starring: Bruce Willis; Tracy Morgan Genre: Acnon,Comedy Release Year: 2010
Cop Out (BLU-RAY) Starring: Bruce WAS; TraC rgag Genre: Acbon,Comedy Release Year: 2010
Dead Man Running Starring: Curbs "50 Cent" JacAson, Tamer Hassan Genre: Acbon,Drarga,Cunie,Drama,Thraler Release Year: 2009
Furry Vengeance IP( Starring: Brendan Fraser,Brooke Sh,elds Genre: Comedy Release Year: 2010
Preschool Parade R Starring: NA Genre: F3117i1 AMM3:20:, C/ Os, Family Release Year
The Last Song Starring: Greg h.innear. Miley Cyrus.L , am Hemsworth Genre: Drania,Drama ; FarrThly,.R0117anCe Release Year: 2010
The Last Song (BLU-RAY) Starring: Greg h.itinear.Whiey Cyrus. bdtil Hemsworth Genre: C rania, Drama. Family.Roniance Release Year: 2010
http:// insideredbox.com/redbox-new-releases-for-august-17-2010/[6/13/2011 8:01:37 PM] Inside Red box » Redbox New ReleasEs for August 17, 2010 Case 2:11-cv-00133-M,AP Document 76-3 Filed 06/17/11 Page 13 of 16
The Losers IP( -13 - a 4 Starring: Jeffrey Dean Norgan,Zoe 5-31Cland —r&PS Genre: Acnon Release Year: 2010
Li74
The Losers (BLU-RAY) IPC-13 Starring: Jeffrey Dean NOTgdt),The 5.31Cidtid
,csaP5 Genre: Acnon Release Year: 2010
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http:// insideredbox.com/redbox-new-releases-for-august-17-2010/[6/13/2011 8:01:37 PM] Inside Red box » Redbox New ReleasEs for August 24, 2010 Case 2:11-cv-00133-M,JP Document 76-3 Filed 06/171 1 Page 14 of 16
Another good list of movies coming this v:eek. What will you be %vatching 7
$5 A Day PI -13 Starring: Alessandro Noiola ; ChnsEopher WalAen ; Sharon Scone Genre: Comedy,Drama ; Drama Release Year: 2003
2:22 Starring: Val fr,.,/177er.11,(1, Foss, Genre: DI-3,973,0Flle,Drania, Thriller Release Year: 2000
Abandoned Starring: Brittany Nurphy,Dean (73 , 0 Genre: Oratila,Thrlfier Release Year: 2010
Batman Under the Red Hood II -13 Starring: deg PaEr,ci: Hams (0,Jensen Achjes Genre: AcnorLDrama,AmmaEed,,Drama Release Year: 2010
Batman Under the Red Hood (BLU-RAY) P -13 Starring: Jensen AcHes (v),Bruce Greenwood (v) Genre: Accion,Drama,Ammaced,,Dram..3 Release Year: 2010
City Island Starring: Andy Garc , a,Aillanna Margunes Genre: Comedy,Drama,Drama.Family, Release Year: 2009