Sweet et al v. Google, Inc.

Filing 36

ORDER by Judge Edward M. Chen Granting 29 Defendants' Motion to Dismiss. (emcsec, COURT STAFF) (Filed on 3/7/2018)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 Plaintiffs, 8 Docket No. 29 GOOGLE INC., et al., Defendants. 11 12 For the Northern District of California United States District Court ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS v. 9 10 Case No. 17-cv-03953-EMC JAMES SWEET, et al., 13 Plaintiffs are James Sweet, Chuck Mere, and Zombie Go Boom, LLC (collectively 14 “Zombie”). Mr. Sweet and Mr. Mere are the owners of Zombie Go Boom, which operates a 15 channel – Zombiegoboom – on YouTube. Zombie has been able to “monetize” the content it 16 displays on its YouTube channel because Defendants Google, LLC and/or YouTube, LLC 17 (collectively, “YouTube”) have a program under which content providers can get a cut of the 18 revenue that YouTube makes from third-party advertisements. Zombie has filed a class action 19 lawsuit against YouTube, asserting that its revenues and the revenues of other content providers 20 have significantly fallen after YouTube put restrictions on the placement of advertisements that 21 did not meet YouTube guidelines. Currently pending before the Court is YouTube‟s motion to 22 dismiss. 23 24 25 Having considered the parties‟ briefs and accompanying submissions, as well as the oral argument of counsel, the Court hereby GRANTS the motion to dismiss. I. FACTUAL & PROCEDURAL BACKGROUND 26 In its first amended complaint (“FAC”), Zombie alleges as follows. 27 “YouTube is [a] video-sharing website, which contracts with content providers to upload 28 videos, to be viewed by members of the public worldwide.” FAC ¶ 19. YouTube has been able to 1 monetize the content on its website “by permitting third party advertisers, such as Wal-Mart, 2 Verizon, General Motors and many others, to place advertisements at the beginning of videos.” 3 FAC ¶ 22. YouTube shares the advertising revenue it makes with content providers, which is an 4 incentive for content providers “to focus on creating content as a full time job.” FAC ¶ 23. Zombie is a content provider who, prior to the alleged misconduct by YouTube, was able 5 6 to earn a living wage by working exclusively as a YouTube content provider. See FAC ¶ 24 7 (alleging that Zombie had over 1.6 million subscribers to its YouTube channel). From 8 approximately 2011, when the Zombiegoboom channel was founded, until the time of the alleged 9 YouTube misconduct, Zombie made approximately $10,000 to $15,000 per month. See FAC ¶¶ 10 25-26. YouTube uses a program called AdSense to control placement of advertisements, 12 For the Northern District of California United States District Court 11 depending on content provided and audience.1 See FAC ¶ 22. In or about March 2017, YouTube 13 changed the algorithm used in AdSense. Apparently, YouTube took action because, in early 2017, 14 it “was hit with a wave of bad press” after advertisements were placed on videos that contained 15 hate speech and sexually explicit material, FAC ¶ 28, which, in turn, led to “approximately five 16 percent of YouTube‟s advertisers [to] back[] out of agreements to place their advertisements on 17 YouTube‟s content providers‟ videos.” FAC ¶ 29. YouTube changed the AdSense algorithm 18 without notice (advance or otherwise) to the consent providers, without the consent of content 19 providers, and without sharing with content providers what exact substantive changes were made 20 to the algorithm. See FAC ¶¶ 5-6, 33, 36-38. (In spite of the above allegation, Zombie seems to 21 admit that YouTube did release new guidelines regarding restrictions put on the placement of 22 advertisements. See FAC ¶ 5.) The change to the AdSense algorithm was “an attempt to automatically weed out 23 24 inappropriate content, without the use of human oversight.” FAC ¶ 30. As it turns out, the 25 algorithm was not effective: (1) It “under-inclusively failed to capture and demonetize content that 26 1 27 28 AdSense has an algorithm that “automatically rates videos . . . in a similar way to movie ratings (G to R) or video game ratings such as E (for everybody) to M (for mature). After the videos are automatically put into a category, advertisers can then [choose] to filter their advertisements to only be placed on certain categories of videos.” FAC ¶ 33. 2 1 was sexually explicit, racist or otherwise not in compliance with the spirit of [YouTube‟s] 2 guidelines,” and (2) it “over-inclusively demonetiz[ed] content that did not violate the spirit of the 3 guidelines and was not objectionable to advertisers.” FAC ¶ 7. Zombie fell into the latter 4 category. See FAC ¶ 31. Zombie claims that there are “thousands of [other] examples” although 5 it identifies only one other example in its FAC. FAC ¶ 40 (referring to a review for a “„review of 6 a burger‟” which was deemed objectionable under the new AdSense algorithm). Zombie and 7 other content providers have dubbed the date that the algorithm was changed “Adpocalypse.” See 8 FAC ¶ 32. As a result of the algorithm change, Zombie‟s advertising revenue fell. For example, after 9 March 27, 2017, Zombie‟s advertising revenue fell from $300-$500 per day to $20-$40 per day. 11 See FAC ¶ 32. Adpocalypse has also affected Zombie in other economic ways. For example, prior to 12 For the Northern District of California United States District Court 10 13 Adpocalypse, a third party offered Zombie $60,000 to purchase all of its existing online content; 14 that offer, however, was rescinded after Adpocalypse. See FAC ¶ 45. Also, prior to Adpocalypse, 15 Zombie was offered $25,000 to promote other products (outside the context of YouTube); after 16 Adpocalypse, Zombie was able to contract for only $3,500 – and ultimately it received only 17 $1,1500 because the response to the promotion did not garner the business anticipated. See FAC ¶ 18 46. Based on, inter alia, the above allegations, Zombie has asserted the following claims for 19 20 21 relief: (1) Violation of California Business & Professions Code § 17200. In its opposition brief, 22 Zombie states that it is now proceeding with a theory of unfairness only, and not 23 unlawfulness or fraud. See Opp‟n at 23 n.19 (“Plaintiffs will agree to dismiss their 24 claims under the fraudulent and unlawful prongs of the UCL.”). As alleged in the 25 FAC, YouTube has engaged in unfair conduct because it “devised and executed a 26 material change to its advertising terms and AdSense practices, without providing any 27 notice, either before[,] during[,] or after, in any conspicuous manner, to Plaintiffs or 28 other providers,” and “[w]ith the intent and effect of stifling open and vigorous 3 1 competition in the market for content providers.” FAC ¶ 68(a). YouTube‟s conduct 2 was also unfair in that it has “forc[ed] Plaintiffs and Class members to adhere to [its] 3 undisclosed practices.” FAC ¶ 68(d). (2) Tortious interference with contractual relations and/or prospective economic 4 5 advantage. According to Zombie, “YouTube was aware that Plaintiffs and Class 6 members routinely enter into such related contracts with third parties, and that changes 7 to [the] monetization structure, including demonetizing videos without notice or 8 recourse, and altering the terms by which videos would receive compensation would 9 have a direct impact on these contractual arrangements.” FAC ¶ 95. (3) Breach of contract. Zombie alleges that the parties had a contract under which it was 10 “permitted to engage with YouTube as a content provider” and a contract that 12 For the Northern District of California United States District Court 11 “governed [the] monetization structure for the posting of [its] content on YouTube.” 13 FAC ¶ 101. Zombie further alleges that YouTube breached the contract(s) by “altering 14 the terms and conditions governing how Plaintiffs‟ and Class members‟ videos would 15 be monetized.” FAC ¶ 102. 16 (4) Breach of the duty of good faith and fair dealing. According to Zombie, YouTube‟s 17 conduct has “unfairly prevented [Zombie] from receiving the benefits of the [above] 18 contract[s].” FAC ¶ 110. 19 (5) Breach of quasi-contract. Zombie alleges that YouTube “created a contract or quasi- 20 contract through which [it] received and continues to receive a benefit of monetary 21 compensation without providing the consideration promised to Plaintiff and Class 22 Members.” FAC ¶ 117. YouTube now challenges Zombie‟s FAC in a 12(b)(6) motion to dismiss.2 Although 23 24 YouTube‟s motion is a 12(b)(6) motion, it has filed a declaration in support of the motion and 25 attached to the declaration are several pieces of evidence. The declaration is from a software 26 27 28 2 YouTube previously moved to dismiss Zombie‟s original complaint but that motion was never heard as Zombie took the opportunity to amend its complaint instead. YouTube argues that the amended pleading still has the same deficiencies as the original. 4 1 engineer at YouTube who testifies as follows:  2 Through the YouTube website, users can upload, share, and watch videos for free. See Hawkins Decl. ¶ 2. 3  4 To upload videos, a user must first create a YouTube account. During the process of 5 creating an account, a user must assent to YouTube‟s Terms of Services Agreement 6 (“TOS”). See Hawkins Decl. ¶ 3.  7 The TOS incorporates YouTube‟s Community Guidelines, “which prohibit and caution 8 users from uploading several categories of inappropriate video content.” Hawkins 9 Decl. ¶ 4.  10 A content provider has the option of participating “in a program that allows users to „monetize‟ their videos by allowing Google to display paid third-party advertisements 12 For the Northern District of California United States District Court 11 in or alongside those videos.” Hawkins Decl. ¶ 5. To participate in this program, 13 “users must manifest their asset to additional terms and conditions. For most users, 14 these are the standard „YouTube Partner Program Terms.‟” Hawkins Decl. ¶ 5 15 (emphasis added). The YouTube Partner Program Terms expressly incorporate the 16 TOS and „YouTube Partner Program Policies.‟” Hawkins Decl. ¶ 6.  17 With respect to Zombie, it assented to the TOS on March 29, 2011 when it first created 18 its YouTube account and YouTube channel. See Hawkins Decl. ¶ 7. In addition, it 19 assented to the YouTube Partner Program Terms “that were operative during the time 20 of the events alleged in the Complaint (March 2017)” on January 3, 2017. Hawkins 21 Decl. ¶ 8. 22 Attached to the declaration are the TOS, the Community Guidelines, the Partner Program 23 Terms, and the Partner Program Policies. See Hawkins Decl., Exs. 1-4. YouTube argues that the 24 Court may consider this evidence, even on a 12(b)(6) motion to dismiss, because Zombie 25 expressly referred to the TOS and Partner Program Terms in its complaint.3 See, e.g., Swartz v. 26 3 27 28 YouTube points, in particular, to ¶ 101 of the FAC which states as follows: “A contract existed between [Zombie] and Class members and [YouTube], which governed the terms and conditions by which [Zombie was] permitted to engage with YouTube as a content provider. Similarly a contract existed between [Zombie] and Class members and [YouTube] which governed 5 court may generally consider only allegations contained in the pleadings, exhibits attached to the 3 complaint, and matters properly subject to judicial notice” but, “in order to „[p]revent[] plaintiffs 4 from surviving a Rule 12(b)(6) motion by deliberately omitting . . . documents upon which their 5 claims are based,‟ a court may consider a writing referenced in a complaint but not explicitly 6 incorporated therein if the complaint relies on the document and its authenticity is unquestioned”) 7 (emphasis added). The Court agrees that it may take into consideration the exhibits attached to the 8 Hawkins declaration, in particular because the TOS and Partner Program Terms are referenced and 9 relied upon in Zombie‟s complaint, and the Community Guidelines and Partner Program Policies 10 are incorporated by reference in the TOS and Partner Program Terms, respectively. Zombie does 11 not dispute that the documents may be taken into consideration – in fact, Zombie asks the Court to 12 For the Northern District of California KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007) (stating that, “[i]n ruling on a 12(b)(6) motion, a 2 United States District Court 1 consider the documents itself. For purposes of the pending motion, the critical contract term is one contained in the 13 14 Partner Program Terms. That provision states as follows: 15 Advertising Revenues. YouTube will pay you 55% of net revenues recognized by YouTube from ads displayed or streamed by YouTube or an authorized third party on your Content watch pages or in or on the YouTube video player in conjunction with the streaming of your Content. YouTube is not obligated to display any advertisements alongside your videos and may determine the type and format of ads available on the YouTube Service. For clarity, YouTube reserves the right to retain all other revenues derived from the YouTube service, including any revenues relating to ads on search page results. 16 17 18 19 20 21 Hawkins Decl., Ex. 1 (YouTube Program Partner Terms at 1) (emphasis added). 22 II. 23 24 25 26 A. DISCUSSION Legal Standard To survive a [12(b)(6)] motion to dismiss for failure to state a claim after the Supreme Court‟s decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), [a plaintiff‟s] factual allegations [in the complaint] “must . . . suggest that the claim has at least a plausible chance of success.” In 27 28 [Zombie‟s] monetization structure for the posting of [its] content on YouTube.” FAC ¶ 101 (alleging such in breach-of-contract claim). 6 other words, [the] complaint “must allege „factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.‟” 1 2 . . . . [The Ninth Circuit has] settled on a two-step process for evaluating pleadings: 3 4 First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively. Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation. 5 6 7 8 9 10 Levitt v. Yelp! Inc., 765 F.3d 1123, 1134-35 (9th Cir. 2014). Notably, [t]he plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are “merely consistent with” a defendant's liability, it “stops short of the line between possibility and plausibility „of entitlement to relief.‟” 12 For the Northern District of California United States District Court 11 13 14 15 Iqbal, 556 U.S. at 678. 16 B. 17 Failure to State a Claim for Relief – All Claims In its motion to dismiss, YouTube makes a number of arguments but the primary one is 18 that all of Zombie‟s claims for relief lack merit because the conduct of which Zombie complains – 19 in essence, failure on the part of YouTube to post advertisements alongside Zombie‟s content – is 20 expressly permitted by the parties‟ contract: 21 22 23 24 25 26 27 28 [Zombie‟s] claims are precluded by the express terms of the parties‟ written contract. That agreement – the YouTube Partner Program Terms – could hardly be clearer that YouTube has no obligation to display ads in connection with Plaintiffs‟ videos: “YouTube is not obligated to display any advertisements alongside your videos and may determine the type and format of ads available on the YouTube Service.” . . . . It is a bedrock principle of California law that no cause of action will lie where it is based on lawful conduct expressly permitted by a governing contract. Mot. at 5-6 (footnote omitted; emphasis added). While the above provision places no limit on YouTube‟s decisionmaking with regard to 7 1 advertisements, Zombie nonetheless argues that the “disclaimer” (“YouTube is not obligated to 2 display any advertisements,” etc.) has implied limits, i.e., it must be applied in good faith or 3 otherwise the term is unconscionable and/or the contract illusory. 4 Zombie‟s unconscionability argument lacks merit. Zombie admits that unconscionability 5 requires both procedural and substantive unconscionability, although there is a sliding scale – i.e., 6 “the more substantively oppressive the contract term, the less evidence of procedural 7 unconscionability is required to come to the conclusion that the term is unenforceable, and vice 8 versa.” Baltazar v. Forever 21, Inc., 62 Cal. 4th 1237, 1244 (2016) (internal quotation marks 9 omitted). With respect to procedural unconscionability, Zombie contends that this element is 10 12 For the Northern District of California United States District Court 11 13 14 15 satisfied because the contract(s) between it and YouTube is one of adhesion. Whether the challenged provision is within a contract of adhesion pertains to the oppression aspect of procedural unconscionability [as opposed to the “surprise” aspect]. A contract of adhesion is imposed and drafted by the party of superior bargaining strength and relegates to the subscribing party only the opportunity to adhere to the contract or reject it. [A]bsent unusual circumstances, use of a contract of adhesion establishes a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives.” 16 Walnut Producers of California v. Diamond Foods, Inc., 187 Cal. App. 4th 634, 646 (2010) 17 (internal quotation marks omitted). Arguably, the label of “adhesion contract” is not entirely fair 18 in the instant case. The instant case is not, e.g., a consumer or employment case where adhesive 19 contracts are typically found. Even if the contract(s) at issue were deemed adhesive, that simply 20 establishes a minimal degree of procedural unconscionability such that Zombie would have to 21 establish a fair amount of substantive unconscionability in order to prevail. Cf. Darnaa, LLC v. 22 Google, Inc., No. 15-cv-03221-RMW, 2015 U.S. Dist. LEXIS 161791, at *5 (N.D. Cal. Dec. 2, 23 2015) (in a case where plaintiff sued regarding the removal and relocation of its music video on 24 YouTube, “find[ing] the level of procedural unconscionability to be slight, as plaintiff does not 25 lack meaningful choice”; even though YouTube “„is undoubtedly a popular video-sharing 26 website,‟” plaintiff “could have publicized the music video „by putting it on various other file- 27 sharing websites or on an independent website‟”). 28 Zombie argues there is substantive unconscionability because cases have held that a term 8 1 that allows a party to unilaterally modify a contract is unenforceable.4 See, e.g., Ingle v. Circuit 2 City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. 2003) (discussing a term that gave employer right 3 to modify or terminate any and all dispute resolution agreements with its employees unilaterally; 4 finding such term substantively unconscionable). But this case law is not on point because 5 Zombie has pointed to no term within YouTube‟s TOS or Program Partner Terms that gives 6 YouTube has such unilateral right to modify the contract. The term at issue in the instant case – 7 i.e., “YouTube is not obligated to display any advertisements alongside your videos,” etc. – has 8 been in the contract from its inception and is not a unilateral modification provision.5 Absent a viable theory of unconscionability, Zombie‟s argument against dismissal comes 9 to display any advertisements alongside your videos,” etc.) based on the implied covenant of good 12 For the Northern District of California down to its contention that there must be limits on the above provision (“YouTube is not obligated 11 United States District Court 10 faith and fair dealing. According to Zombie, absent application of such covenant, the contract is 13 illusory and thus unenforceable. While the implied covenant of good faith and fair dealing may be applied where contract 14 15 terms are silent (see, e.g., Rose v. Wells Fargo & Co., 902 F.2d 1417, 1426 (9th Cir. 1990) (stating 16 that “the implied covenant may only be used to supply a requirement of good cause for 17 termination [of employment] when the contract between the parties is silent or ambiguous on that 18 subject”), its application to contradict an express term of a contract is narrowly circumscribed. In 19 this regard, Third Story Music, Inc. v. Waits, 41 Cal. App. 4th 798 (1995), is instructive. The 20 plaintiff in Third Story was a company that owned the rights to the musical output of 21 22 23 24 25 4 Zombie primarily relies on federal case law because state case law is somewhat less forgiving. See Ridgeway v. Nabors Completion & Prod. Servs. Co., 139 F. Supp. 3d 1084, 1091-92 (C.D. Cal. 2015) (comparing California case law holding that a term providing for unilateral contract modification is permissible so long as the party‟s power to modify is limited by fairness and reasonable notice with federal case law holding that unilateral modification provisions can be unconscionable). 5 26 27 28 YouTube‟s TOS does seem to have a unilateral modification provision but that provision is not at issue here. See Hawkins Decl., Ex. 2 (TOS ¶ 1.B) (providing that, “[a]lthough we may attempt to notify you when major changes are made to these Terms of Service, you should periodically review the most up-to-date version [online and] YouTube may, in its sole discretion, modify or revise these Terms of Service and policies at any time, and you agree to be bound by such modifications or revisions”). 9 1 singer/songwriter Tom Waits from 1972 to 1983. The plaintiff entered into an agreement with the 2 defendant under which (1) the plaintiff was to produce master recordings featuring performances 3 of Mr. Waits and (2) the defendant had the right to, inter alia, manufacture, sell, distribute, and 4 license the recordings but the defendant “„may at [its] election refrain from any or all of the 5 foregoing.‟” Id. at 801. As consideration, the plaintiff was to receive, as a royalty, a percentage of 6 the amount earned by the defendant from its exploitation of Mr. Waits‟s music. In addition, the 7 defendant was required to pay a specific dollar amount as an advance on royalties. See id. 8 The plaintiff and defendant‟s dispute arose when the plaintiff wanted to license some of 9 Mr. Waits‟s recordings but the defendant refused because Mr. Waits did not personally approve dealing. In response, the defendant countered that “the clause in the agreement permitting it to „at 12 For the Northern District of California the licensing request. The plaintiff sued for breach of the implied covenant of good faith and fair 11 United States District Court 10 [its] election refrain‟ from doing anything to profitably exploit the music is controlling and 13 precludes application of any implied covenant.” Id. at 802. The plaintiff, in turn, argued that, 14 where a contract gives a party discretionary power, that power must be exercised in good faith. 15 The court posed the issue that is particularly apt here: “When an agreement expressly gives 16 to one party absolute discretion over whether or not to perform, when should the implied covenant 17 of good faith and fair dealing be applied to limit its discretion?” Id. (emphasis added). In 18 answering that question, the court looked first to a California Supreme Court case, Carma 19 Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal. 4t 342 (1992). There, 20 the parties entered into a lease agreement which provided, inter alia, that, if the tenant found a 21 potential sublessee and asked the landlord for consent to sublease, the landlord had the right to 22 terminate the lease, enter into negotiations with the prospective sublessee, and appropriate for 23 itself all profits. The Carma court noted that the implied covenant of good faith and fair dealing 24 has particular application in situations where one party is invested with discretionary power 25 affecting the rights of the other; such discretionary power must be exercised in good faith. 26 However, the Carma court ultimately upheld the right of the landlord to terminate the lease in 27 order to claim for itself all profit from the expected sublease. The landlord‟s right arose from an 28 express term in the parties‟ agreement, and, in general, an implied term should not be read to vary 10 1 an express term. The Third Story court recognized the tension in Carma and stated that it would try to 2 3 reconcile the “apparent inconsistency between the principle that the covenant of good faith should 4 be applied to restrict exercise of a discretionary power and the principle that an implied covenant 5 must never vary the express terms of the parties‟ agreement.” Third Story, 41 Cal. App. 4th at 6 804. The court noted first that it must take into account 7 a long-established rule concerning implied covenants. To be imposed “„(1) the implication must arise from the language used or it must be indispensable to effectuate the intention of the parties; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on the grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention had been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract.‟” 8 9 10 12 For the Northern District of California United States District Court 11 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Id. The Third Story court went on to discuss several cases “cited in Carma for the proposition that a discretionary power must be exercised in good faith.” Id. For example, [i]n Perdue v. Crocker National Bank (1985) 38 Cal. 3d 913, a bank was given discretion to set nonsufficient (NSF) charges to be paid by the customer. The contention was made that since the charges were subject to the bank‟s sole discretion, the contract lacked mutuality and was, in fact, illusory. (See Automatic Vending Co. v. Wisdom (196) 182 Cal. App. 2d 354, 356 [“„An agreement that provides that the price to be paid, or other performance to be rendered, shall be left to the will and discretion of one of the parties is not enforceable.‟”] By its ruling that “„under California law, an open term in a contract must be filled in by the party having discretion within the standard of good faith and fair dealing,‟” the court in Perdue was able to impose an objective standard and save an otherwise illusory agreement. Third Story, 41 Cal. App. 4th at 804. The Third Story court went on to explain that, in Perdue and other similar cases, the courts were forced to resolve contradictory expressions of intent from the parties: the intent to give one party total discretion over its performance and the intent to have a mutually binding agreement. In that situation, imposing the duty of good faith creates a binding contract where, despite the clear intent of the parties, one would not otherwise exist. Faced with that choice, courts prefer to imply a covenant at odds with the express language of the contract rather 11 than literally enforce a discretionary language clause and therefore render the agreement unenforceable. 1 2 Id. In short, the implied covenant was applied “to contradict an express contractual grant of 3 discretion when necessary to protect an agreement which would otherwise be rendered illusory 4 and unenforceable” – i.e., in order to effectuate the parties‟ intent to enter into a binding contract. 5 Id. at 806 (emphasis added); see also id. at 804-06 (discussing case and noting that “[t]he tendency 6 of the law is to avoid the finding that no contract arose due to an illusory promise when it appears 7 that the parties intended a contract”) (internal quotation marks omitted). But, the Third Story court 8 asked, “[d]oes a different result ensue where the contract is unambiguous, otherwise supported by 9 adequate consideration, and the implied covenant is not needed to effectuate the parties‟ expressed 10 The Third Story court looked at cases cited in Carma where the implied covenant was not 12 For the Northern District of California United States District Court 11 desire for a binding agreement? We believe it does . . . .” Id. at 806. applied to limit an express contractual provision giving complete discretion to one party. For 13 example, 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 [i]n Brandt v. Lockheed Missiles & Space Co., the employment contract at issue provided that when an employee‟s invention was deemed of sufficient value to apply for a patent and the patent application was granted, the employee would in all cases receive a total of $600. In addition, the agreement said the employer “may, but is not obligated” to grant to any employee an additional “Special Invention Award.” In response to two employees‟ claims that failure to make an adequate Special Invention Award in their case violated the covenant of good faith, the court held: “Few principles of our law are better settled, than that „[t]he language of contract is to govern its interpretation, if the language is clear and explicit. . . .‟ [¶] Here the language of the parties‟ contract of employment, i.e., the patent plan, could not be more clear and explicit. It says Lockheed‟s Invention Awards Committee „may, but is not obligated to grant a Special Invention Award,‟ and that its decision on such matters „shall be final and conclusive.‟ Lockheed had fully respected the patent plan‟s language; it may not reasonably be said that in doing so it violated a „duty of good faith and fair dealing.‟” (154 Cal. App. 3d at ¶. 1129-1130.) Third Story, 41 Cal. App. 4th at 807. The Third Story court emphasized that, in Brandt and the other like cases, one of the parties was expressly given a discretionary power but regardless of how such power was exercised, the agreement would have been supported by adequate consideration. There was no tension between the parties‟ express agreement and their intention to be bound, and no necessity to impose an implied covenant to create 12 mutuality. The conclusion to be drawn is that courts are not at liberty to imply a covenant directly at odds with a contract‟s express grant of discretionary power except in those relatively rare instances when reading the provision literally would, contrary to the parties‟ clear intention, result in an unenforceable, illusory agreement. In all other situations where the contract is unambiguous, the express language is to govern, and “[n]o obligation can be implied . . . which would result in the obliteration of a right expressly given under a written contract.” 1 2 3 4 5 6 7 8 Id. at 808 (emphasis added). Ultimately, the Third Story court found that the case before it was more like Brandt than Perdue. 9 The illusory promise [i.e., that the defendant could at its election refrain from all marketing efforts] was not . . . the only consideration given by the [the defendant]. Under paragraph 33 of the 1977 agreement and paragraph 34 of the 1972 agreement, [the defendant] promised to pay [the plaintiff] a guaranteed minimum amount no matter what efforts were undertaken. It follows that, whether or not an implied covenant is read into the agreement, the agreement would be supported by consideration and would be binding. 10 12 For the Northern District of California United States District Court 11 13 14 Id. The court added that, while the guaranteed payments did not appear to be large, “unless the 15 consideration given was so one-sided as to create an issue of unconscionability, the courts are not 16 in a position to decide whether legal consideration agreed to by the parties is or is not fair.” Id. at 17 808 n.5. 18 The question for the Court is whether the instant case is more like Perdue, where the 19 implied covenant was found to apply and thus restricted defendant‟s discretion, or Brandt and 20 Third Story, where the implied covenant was found not to contravene an express provision 21 conferring complete discretion on the defendant. The Court finds the latter applies. 22 Regardless of how YouTube exercised its discretionary power in determining whether to 23 display advertisements under the Partner Program Terms, the agreement (which consists of both 24 the TOS and Partner Program Terms) between Zombie and YouTube was supported by adequate 25 independent consideration. In particular, YouTube allowed Zombie to post videos on its forum 26 free of charge in exchange for getting a license to its content. See Hawkins Decl., Ex. 1 (YouTube 27 Partner Program Terms) (providing that, “[t]ogether with the YouTube Terms of Service [TOS] 28 and the YouTube Partner Program policies . . . , the following YouTube Partner Program Terms 13 1 apply to your participation in the YouTube Partner Program”); Hawkins Decl., Ex. 2 (TOS ¶ 6.A- 2 C) (providing that, “[a]s a YouTube account holder you may submit Content to the Service” and 3 that “you retain all of your ownership rights in your Content [but], by submitting Content to 4 YouTube, you hereby grant YouTube a worldwide, nonexclusive, royalty-free, sublicenseable and 5 transferable license to use, reproduce, distribute, [etc.] the Content in connection with the Service 6 and YouTube‟s . . . business”). The ability to post videos, even without advertising revenues, can 7 be valuable to content providers in reaching a wide audience. Moreover, the YouTube Partner 8 Program encompassed more than just advertising revenues; content can be monetized in other 9 ways such as subscription revenues. See Hawkins Decl., Ex. 1 (YouTube Partner Program Terms) from subscription fees that are attributable to the monthly views or watchtime of your Content as a 12 For the Northern District of California (providing that “YouTube will pay you 55% of the total net revenues recognized by YouTube 11 United States District Court 10 percentage of the monthly views or watchtime of all or a subset of participating content in the 13 relevant subscription offering (as determined by YouTube)”).6 Accordingly, the provision of the 14 Partner Program Terms conferring upon YouTube complete control over decisions regarding 15 advertisements need not be deemed subject to the implied covenant of good faith and fair dealing 16 in order to prevent the agreement from being illusory. To the extent Zombie suggests that YouTube does not in fact have complete discretion 17 18 under the YouTube Partner Program Terms, that argument has no merit. According to Zombie, 19 23 [t]he Partner Program Policies note[] that failing to comply with these policies could result in disabling ads from your content, making the default assumption that ads are not disabled form content. Further, the “Monetization Basics & Policies Pages” incorporated into the Partner Program Policies outline[] how ads will be served onto videos that are approved for the Partner Program, and goes as far to note that “[o]nce you turn on monetization, it may take some time for ads to appear,” not that ads may not appear at all. 24 Opp‟n at 21 (emphasis in original). This provision does not negate the sweeping force of the clear 20 21 22 25 26 27 28 6 One could argue that the subscription revenue term also gives discretionary authority to YouTube that should be limited by the implied covenant. However, Zombie made no such argument in its papers. And even though Zombie did raise the argument at the hearing, the discretion is fairly limited in nature – i.e., allowing YouTube to determine what the “subset of participating content” is. 14 1 and explicit provision: “YouTube is not obligated to display any advertisements alongside your 2 videos.” Nothing in the Partner Program Policies suggests that violation of the policies is the only 3 reason why YouTube is not obligated to display advertisements; it is simply one reason. III. 4 5 CONCLUSION Accordingly, the Court agrees with YouTube that all of Zombie‟s claims (the § 17200 6 claim; the claims for breach of contract, the implied covenant, and quasi-contract; and the claim 7 for tortious interference) are subject to dismissal given the explicit terms of the agreement. 8 Moreover, the dismissal is with prejudice. YouTube challenged Zombie‟s original complaint on 9 the same ground, which led to Zombie filing an amended complaint. Because Zombie‟s amended complaint failed to cure the deficiency, and because the terms of the agreement are clear, any 11 further amendment to the complaint would be futile. 12 For the Northern District of California United States District Court 10 For the foregoing reasons, YouTube‟s motion to dismiss is granted. The dismissal is with 13 prejudice. Accordingly, the Clerk of the Court shall enter judgment in accordance with this 14 opinion and close the file in this case. 15 This order disposes of Docket No. 29. 16 17 IT IS SO ORDERED. 18 19 20 21 Dated: March 7, 2018 ______________________________________ EDWARD M. CHEN United States District Judge 22 23 24 25 26 27 28 15

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