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ORTH-O-VISION, INC. v. HOME BOX OFFICE

June 27, 1979

Orth-O-Vision, Inc., Plaintiff,
v.
Home Box Office, Time Inc. and Morris Tarshis, Defendants.



The opinion of the court was delivered by: GAGLIARDI

Plaintiff Orth-O-Vision, Inc. ("Orth-O-Vision") has commenced this action against Home Box Office, Inc. ("HBO"), Time, Inc. ("Time"), and Morris Tarshis, Director of Franchises of the City of New York, alleging Inter alia, violations of the federal antitrust laws and breach of contract. Jurisdiction lies pursuant to 28 U.S.C. §§ 1337, 1343(3) and principles of pendent jurisdiction. Defendants Time and HBO have counterclaimed for violations of the Federal Communications Act, the Copyright Act, New York's Penal Law and the common law of unfair competition. Time and HBO now move for partial summary judgment on each of these claims and a permanent injunction restraining Orth-O-Vision from appropriating HBO's subscription program service. Alternatively, Time and HBO move for a preliminary injunction restraining Orth-O-Vision from infringing HBO's copyrights. For the reasons stated and to the extent indicated below, HBO's motion for partial summary judgment and a permanent injunction is granted.

Statement of Facts *fn1"

HBO, a subsidiary of Time, transmits a pay television subscription program service from a microwave transmitter atop the Empire State Building. HBO's programming consists both of programs originated and copyrighted by HBO and programs, such as motion pictures and sporting events, the performance rights to which it has acquired through licensing agreements. HBO leases its microwave transmitter from Microband Corporation of America ("Microband"), a common carrier licensed to provide Multipoint Distribution Service ("MDS") by the Federal Communications Commission ("FCC"). HBO has contracted with a number of affiliates to provide its program service to multiple fixed receive points, generally large residential buildings, for a monthly service fee. The affiliates, in turn, acting as middlemen, sell the program service to individual residents. Each building is equipped with reception equipment, including a microwave parabolic antenna, a frequency down-converter, an address decoder, and a coaxial cable or antenna lead-in wire which feeds the MDS generated signals to home television receivers. Individual subscribers pay a monthly fee to the affiliates for the program service.

 By written agreement dated April 3, 1974, Orth-O-Vision became an HBO affiliate. The agreement required Orth-O-Vision to remit monthly payments to HBO on a "per subscriber" basis. The agreement permitted Orth-O-Vision to market the HBO service in two apartment houses in Queens and expressly denied Orth-O-Vision the exclusive right to market the service in Queens or other areas. A standard "merger clause" read as follows:

 
This Agreement supersedes and cancels all prior negotiations and undertakings in the premises between the parties, contains all of the terms, conditions and premises of the parties hereto and shall be binding only when executed by both parties hereto. No officer, employee or representative of HBO has any authority to make any representation or promise not contained in this Agreement, and Affiliate has not executed this agreement on reliance of any such representation or promise.

 In addition, the agreement provided that in the event of Orth-O-Vision's breach of any of the terms or provisions, HBO "may, at its option, suspend delivery of the HBO Service until such default is ended or remedied, terminate this Agreement, or may declare this Agreement breached and all unpaid amounts including all Minimum Payments immediately due and payable."

 Orth-O-Vision's president, Alfred Simon, contends that in the course of the negotiation of the 1974 agreement, HBO officials represented to him that, notwithstanding the unambiguous contractual provisions to the contrary, Orth-O-Vision would be permitted to defer payments to HBO for its program service until such time as Orth-O-Vision had the financial capability to pay and that Orth-O-Vision would have the unlimited right to expand its operations throughout the Borough of Queens. Simon further contends that HBO reaffirmed these oral understandings after the execution of the 1974 agreement. Defendants deny having made any such oral representations to Simon either before or after the execution of that contract.

 From the commencement of their relationship in 1974, Orth-O-Vision's payments to HBO were sporadic and incomplete. In November, 1974, the parties met to discuss both Orth-O-Vision's indebtedness to HBO and its right to expand into other buildings. HBO's officers informed Simon that any further expansion had to be "on a solid financial base," and Orth-O-Vision agreed to make minimum monthly payments to HBO of $ 4500. Orth-O-Vision failed to meet this new payment schedule and in early 1975, HBO sent a letter to Orth-O-Vision stating that Orth-O-Vision's outstanding indebtedness exceeded $ 31,000 and threatening to terminate HBO's service within forty-five days. This threat was not carried out. In April, 1975, the parties met once again and Orth-O-Vision agreed to pay receivables on a current basis and an additional $ 27,000 over the following year to cover arrearages. Once again, Orth-O-Vision failed to make the required payments. In October, 1975, HBO sent Orth-O-Vision notice of termination of the contract because of its continued inability to pay. The parties again met to resolve their differences in November, 1975, and HBO agreed to rescind its termination in exchange for Orth-O-Vision's promise to make minimum monthly payments of $ 2,000 in liquidation of the total amount then due of $ 65,000. Orth-O-Vision's payments remained sporadic.

 Through 1975, the parties also disagreed as to Orth-O-Vision's right to expand its operations to other apartment buildings in Queens. HBO informed Orth-O-Vision that no further expansion would be permitted as a result of New York's enactment of legislation limiting the expansion of MDS systems within the state. *fn2" Orth-O-Vision contends, however, that HBO engaged in "selective enforcement" of the statute; while prohibiting Orth-O-Vision from entering new buildings in Queens, HBO allegedly permitted other affiliates to expand into other boroughs.

 In March, 1976, notwithstanding their earlier disputes, Orth-O-Vision and HBO met to discuss a new affiliation agreement. Simon contends that in the course of these negotiations HBO officials told him that Orth-O-Vision would have to give up its rights to deferral of payments to HBO. In addition, HBO's officials allegedly told Simon that Orth-O-Vision would not be permitted to expand until New York changed its law. Simon contends that he told HBO that he disagreed with its interpretation of New York law. Nevertheless, in July 1976, Orth-O-Vision and HBO entered into a new affiliate agreement superseding the 1974 agreement. Orth-O-Vision was represented by counsel during the course of these negotiations.

 Under the 1976 agreement, Orth-O-Vision agreed to pay to HBO $ 5.00 per month per subscriber. In a separate letter agreement, Orth-O-Vision agreed to pay back its indebtedness of approximately $ 118,000 in monthly installments of at least $ 2500. The new affiliate agreement listed approximately thirty-two apartment complexes to which Orth-O-Vision would be permitted to sell HBO's program service and expressly provided that any further expansion would require HBO's consent. The parties clearly viewed MDS as a precursor to cable television in Queens. HBO was expressly permitted to terminate the agreement on forty-five days' written notice if it entered into an agreement to supply programming to a cable television system franchised to operate in Queens. If HBO terminated the agreement pursuant to this clause, it would be required to "make all reasonable efforts" to encourage the cable television system to agree to purchase Orth-O-Vision's assets and subscribers "for reasonable compensation". In the event of Orth-O-Vision's breach, HBO again retained the right either to suspend delivery until the default were remedied, terminate the agreement, or declare the agreement breached and accelerate Orth-O-Vision's payment obligation. The agreement once again recited that it contained the "full understanding of the parties" and that any modification or waiver of its provisions would have to be in writing.

 Since commencing this lawsuit in June, 1977, Orth-O-Vision has not made any payments to HBO despite the fact that Orth-O-Vision has continued to market HBO's program service to Queens subscribers. Nor has Orth-O-Vision supplied HBO with the monthly subscriber reports required by the contract. Orth-O-Vision's stated justifications for these actions are: 1. the oral understanding with HBO permits Orth-O-Vision to defer payment until it is sufficiently profitable; and 2. the damages sought by Orth-O-Vision from HBO exceed the amount owed pursuant to the contract. Orth-O-Vision currently owes HBO approximately $ 750,000 and, over the entire course of its relationship with HBO, Orth-O-Vision has made payments of only $ 187,951.92. On August 17, 1978, counsel for HBO informed Orth-O-Vision, through its counsel, that the 1976 affiliate agreement was terminated and that Orth-O-Vision should cease the appropriation of HBO's signal. MDS technology did not permit HBO to discontinue its transmissions to Orth-O-Vision, but HBO did cease the shipment of subscriber program guides as required by the affiliate contract. In October, 1978, after a hearing, this court denied Orth-O-Vision's motion for a preliminary injunction requiring HBO to deliver the program guides on the grounds that Orth-O-Vision had failed to show irreparable injury and had shown doubtful success on the merits.

 Orth-O-Vision has continued to market HBO's program service with program guides that identify the service as Orth-O-Vision's and nowhere mention HBO. On November 2, 1978, counsel for HBO again informed Orth-O-Vision's counsel that HBO considered the contract terminated and that Orth-O-Vision's continued interception and use of the HBO signal violated federal and state law. Some of the programs transmitted by HBO are original works in which HBO owns and has registered the copyrights. From September, 1978 through February, 1979 twelve of these copyrighted works were transmitted approximately 50 times in the aggregate to all of HBO's New York area affiliates. Each of those transmissions was intercepted by Orth-O-Vision and retransmitted to its subscribers. HBO has sent monthly bills to Orth-O-Vision since the August, 1978 termination and has, on occasion, referred potential new customers to Orth-O-Vision.

 Orth-O-Vision's complaint alleges a conspiracy among defendants HBO, Time and Tarshis in violation of the federal antitrust laws for the purpose of limiting plaintiff's ability to supply pay-television originated by HBO to customers and potential customers in the New York metropolitan area. Orth-O-Vision alleges that Knickerbocker Communications Corporation ("Knickerbocker"), now a Time subsidiary, has applied for a franchise from New York City and State for the delivery of pay television services to the Borough of Queens, and that the defendants have sought to destroy plaintiff's business so that Knickerbocker would be able to obtain a franchise and operate without competition from Orth-O-Vision. In 1978, the New York City Board of Estimate granted a cable television franchise to Knickerbocker for the Borough of Queens. *fn3" Orth-O-Vision views the instant motion as part of the scheme to drive it out of business. Orth-O-Vision contends that if HBO prevails on this motion, Orth-O-Vision will be put out of business and Knickerbocker will acquire its good will without reimbursing Orth-O-Vision therefor, as required by the 1976 affiliate agreement.

 Discussion

 I. The Propriety of HBO's Termination of the 1976 ...


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