Allarcom Pay Television, Ltd. v. General Instrument Corp.

Citations: 69 F.3d 381; 1995 WL 640694Docket: No. 93-56222

Court: Court of Appeals for the Ninth Circuit; November 1, 1995; Federal Appellate Court

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Allarcom Pay Television, Ltd. appeals two district court orders that dismissed its claims under the Federal Communication Act (FCA) and various California state laws against General Instrument Corporation and Showtime Networks, Inc. The Circuit Court affirms the dismissal of the FCA claims but reverses the dismissal of state law claims.

In July 1992, Allarcom filed a complaint alleging it is the exclusive provider of English-language subscription television programming in Western Canada, having secured rights to exhibit films from major producers. Showtime, while licensed to exhibit the same films in the U.S., lacks authorization for such rights in Canada. Showtime transmits its programming via satellite, which is receivable in Allarcom's territory. General Instrument manufactures the VideoCipher II (VC II) system for scrambling satellite signals, which is used by several programmers in both the U.S. and Canada.

The complaint asserts that compromised VC II decoders, which can unscramble unauthorized signals, were widely sold and used in Allarcom’s territory, allowing unauthorized reception of Showtime’s programming. Allarcom alleges that both General Instrument and Showtime were aware of this misuse yet continued to sell the decoders, thereby undermining Allarcom's exclusive rights and causing financial harm. Specific claims include violations of the FCA related to facilitating unauthorized communications and copyright infringement, along with various state law claims. Allarcom seeks compensatory and statutory damages, a recall of VC II decoders, and injunctions against further sales and distribution of the decoders in their current form.

In December 1992, the district court dismissed Allarcom's complaint, ruling it failed to state a claim under the Federal Communications Act (FCA) and dismissed the FCA claim without leave to amend. The court also dismissed Allarcom's copyright infringement claim and most state law claims but allowed amendments. In January 1993, Allarcom filed a first amended complaint focusing solely on state law claims, alleging unfair competition and interference by General Instrument and Showtime. However, in July 1993, the court dismissed the amended complaint without leave to amend, finding that Allarcom's state law claims were preempted by the FCA and Federal Copyright Act.

Allarcom appealed both dismissals. The standard of review for a dismissal for failure to state a claim is de novo, with all factual allegations assumed as true. Regarding Showtime, Allarcom claimed it assisted in the piracy of satellite programming in violation of FCA 47 U.S.C. 605(a). The court concluded this allegation did not state a claim as Showtime owned its signal and thus was entitled to it. Allarcom's reliance on 47 U.S.C. 605(e)(4) was also unfounded, as it did not allege Showtime manufactured or distributed the device allegedly used for piracy.

Similarly, Allarcom's claims against General Instrument for violating 605(a) and 605(e)(4) were dismissed because it failed to provide sufficient facts showing that General Instrument distributed the VC II decoders with knowledge that they assisted in unauthorized decryption. The court noted that precedent from Shenango Cable TV, Inc. v. Tandy Corp. was not applicable due to subsequent amendments to the statute, which expanded the definition of prohibited distribution.

The VC II decoder distributed by General Instrument cannot pirate satellite broadcasts without modification, and Allarcom has not claimed that General Instrument sold modified versions. Allegations that General Instrument sells decoders knowing they may be altered do not constitute a valid claim under 47 U.S.C. § 605(e)(4). The VC II is recognized as a standard anti-piracy device, and its legitimate sale, both in Canada and the U.S., does not violate the Federal Communications Act (FCA). The district court's dismissal of Allarcom's FCA claim against General Instrument is upheld.

Regarding preemption of state law claims, both Showtime and General Instrument argue that the FCA either expressly or implicitly preempts Allarcom’s claims. However, the court finds that 47 U.S.C. § 556(c) allows state laws that impose consistent or greater obligations than the FCA. Legislative history supports this interpretation, indicating that states can enact laws regarding equipment distribution as long as they do not conflict with the FCA's rights or obligations. Allarcom's state law claims for unfair competition and other related actions do not contradict the FCA, meaning § 556(c) does not preempt these claims.

Showtime and General Instrument contend that Allarcom’s state law claims are implicitly preempted by federal law. Implied preemption occurs when a federal statute indicates exclusive federal control, when compliance with both federal and state laws is impossible, or when state law obstructs congressional objectives, as per Freightliner Corp. v. Myrick. However, in this instance, express preemption provisions in the relevant federal statute indicate that Congress did not intend to occupy the entire field, and the savings clauses in 605(e)(6) and 605(f)(first) explicitly preserve state communications law. Showtime and General Instrument did not demonstrate an inability to comply with both federal and state laws, and the state law does not impose conflicting obligations with the Federal Communications Act (FCA), thus not preempting Allarcom’s claims.

Regarding federal copyright law, 17 U.S.C. 301 preempts certain state actions, but does not extend to extraterritorial infringement. The district court found that if part of an infringement began in the U.S. and was completed abroad, U.S. copyright law would apply. However, an en banc panel later clarified that U.S. copyright law applies only if the infringement is fully completed within the U.S., rejecting the notion that mere authorization of extraterritorial acts constitutes infringement. In this scenario, any potential infringement initiated in the U.S. was only completed in Canada, so U.S. copyright law did not apply, and thus did not preempt Allarcom’s state law claims.

The district court correctly ruled that Allarcom failed to state a claim under the FCA against Showtime and General Instrument. However, it incorrectly concluded that Allarcom’s state law claims were preempted by federal communications or copyright law. The case is remanded for further proceedings, with each party bearing its own costs on appeal. Allarcom's reliance on factual allegations in its first amended complaint for its FCA claim is deemed misplaced, as only the original complaint's allegations will be considered for that claim.