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3 min read

Sham Exception to Litigation

Sham exception to litigation

Columbia Pictures Industries, Inc. filed a lawsuit against Professional Real Estate Investors, Inc. (PRE) for copyright infringement related to the rental of videodiscs to hotel guests. In response, PRE counterclaimed, accusing Columbia of using the copyright action as a cover-up for antitrust violations. The District Court ruled in favor of PRE on the copyright claim, a decision that was later affirmed by the Court of Appeals. However, upon reconsideration, the District Court granted Columbia's motion for summary judgment on PRE's antitrust claims, stating that the copyright action was not a sham because Columbia had legitimate grounds to bring it. The Court of Appeals upheld this decision, ruling that the existence of probable cause prevented the application of the sham exception. The Supreme Court ultimately affirmed this verdict, clarifying that litigation cannot be deemed a sham unless it is objectively baseless.

Court's Discussion of the Exception

The Court's discussion revolves around the "sham" exception to the antitrust immunity doctrine. This exception was first recognized in the case of Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. (Noerr), where the Supreme Court acknowledged antitrust petitioning immunity. In California Motor Transport Co. v. Trucking Unlimited, the Court extended this immunity to include administrative agencies and courts, defining a sham lawsuit as one that aims to restrict competitors' access to adjudicatory tribunals. In the present case, the Court asserts that a lawsuit cannot be considered a sham unless it is objectively baseless, irrespective of the litigant's subjective intent. PRE argues that the Ninth Circuit erred in requiring a sham lawsuit to be baseless as a matter of law, but the Court rejects this argument. The Court reiterates that evidence of anticompetitive intent alone cannot transform legitimate litigation into a sham. It establishes a two-part definition for "sham" litigation: it must be objectively baseless and conceal an attempt to interfere with a competitor's business.

Furthermore, the Court states that the existence of probable cause to initiate legal actions precludes a finding of sham litigation for antitrust defendants. In this case, the Court determines that Columbia had probable cause to sue PRE for copyright infringement and that PRE failed to establish the objective component of the sham exception. Additionally, the Court affirms the Court of Appeals' decision to deny PRE's request for further discovery regarding the economic circumstances of the underlying copyright litigation. The blog post fragment begins by highlighting the citation of Rule 11 of the Federal Rules of Civil Procedure. Justice SOUTER concurs with the Court's holding that a person cannot be held liable for antitrust violations as long as the lawsuit is not objectively baseless. However, Justice STEVENS disagrees with the Court's equation of "objectively baseless" with the likelihood of success on the merits. The Court distinguishes between abusing the judicial process to restrain competition and legitimately prosecuting a lawsuit that may potentially restrict competition if successful. It concludes that, based on the facts and the law at the time of Columbia's lawsuit, a reasonable litigant could realistically expect success on the merits. Ultimately, the Court affirms the judgment of the Court of Appeals.

Antitrust claims

The case also refers to Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., a dispute between a hotel operator and a movie studio involving copyright infringement and antitrust claims. The Court acknowledges the challenges in distinguishing between lawful and unlawful purposes in litigation between competitors and cites various cases that have taken different approaches to the "sham" exception. It emphasizes the importance of distinguishing between "sham" litigation and genuine litigation. The blog post concludes by noting that while the Court agrees with the explanation for why the copyright infringement action was not "objectively baseless," it does not agree with the rule announced for future cases. The case commences by discussing the difference between a "winning" lawsuit and one that lacks a reasonable foundation. It cites Christiansburg Garment Co. v. EEOC and Hughes v. Rowe as examples to underscore the need to avoid post hoc reasoning. The Court delves into the possibility of antitrust liability arising from a litigant's fraud or misrepresentation. It also explores the threshold for demonstrating probable cause in the context of the tort of "malicious prosecution." The case references several cases to illustrate the various approaches courts have taken towards the "sham" exception. Lastly, the Court emphasizes the importance of differentiating between "sham" litigation and genuine litigation, concluding that while it agrees with the explanation for why the copyright infringement action was not "objectively baseless," it disagrees with the rule set forth for future cases.