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Focus Music Entertainment, LLC v. Streamify, LLC

United States District Court, D. Maryland

December 5, 2018

FOCUS MUSIC ENTERTAINMENT, LLC Plaintiff,
v.
STREAMIFY, LLC, Defendant.

          MEMORANDUM OPINION

          ELLEN L. HOLLANDER, UNITED STATES DISTRICT JUDGE

         Plaintiff Focus Music Entertainment, LLC (“Focus”) filed suit against defendant Streamify, LLC (“Streamify”), a music streaming company. ECF 1 (the “Complaint”). Focus alleges, inter alia, that Streamify failed to deliver music streaming services pursuant to the terms of a services agreement (the “Agreement”). Id. The Complaint contains ten claims: “Breach of Contract” (Count I); “Breach of the Covenant of Good Faith and Fair Dealing” (Count II); “Intentional Breach of Fiduciary Duty” (Count III); “Constructive Fraud” (Count IV); “Fraud” (Count V); “Negligent Misrepresentation” (Count VI); “Professional Negligence” (Count VII); “Negligence” (Count VIII); “Unfair Competition” (Count IX); and “Unjust Enrichment” (Count X).[1] Focus seeks monetary and injunctive relief, in addition to attorneys' fees and costs. Id. at 25.

         Streamify has filed a “Motion to Dismiss, or in the Alternative, to Stay and to Compel Arbitration, ” pursuant to Fed.R.Civ.P. 12(b)(1), 12(b)(3), and 12(b)(6). ECF 11. It is supported by a memorandum of law (ECF 11-1) (collectively, the “Motion”), and two exhibits. ECF 11-2 -ECF 11-3. Streamify contends that the Agreement's arbitration provision requires arbitration of plaintiff's claims and, therefore, the action is subject to dismissal. ECF 11-1 at 3. It moves to dismiss the Complaint for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1); for improper venue, pursuant to Fed.R.Civ.P. 12(b)(3); and for failure to state a claim, under Fed.R.Civ.P. 12(b)(6). Alternatively, Streamify moves, pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., to stay the proceedings pending arbitration. Id. at 4.

         Focus filed an opposition to the Motion (ECF 12), accompanied by a memorandum of law (ECF 12-1) (collectively, the “Opposition”). It challenges the validity and enforceability of the arbitration provision as unconscionable. Streamify has replied. ECF 13 (the “Reply”).

         The Motion is fully briefed, and no hearing is necessary to resolve it. See Local Rule 105.6. For the reasons that follow, I will deny the Motion and transfer this case to the U.S. District Court for the Southern District of Texas.

         I. Factual Background

         Focus is a Baltimore-based music, entertainment, and technology company that “has several artists who[] make music and seek to distribute [their music] on the internet . . . .” ECF 1, ¶ 11. “Focus gains new listeners . . . through ‘organic' downloads and use of various music streaming services (e.g., Spotify, Apple Music and Tidal).” Id. ¶ 12. “‘Music Streaming' refers to a way of delivering sound - including music - without requiring the listener to download files from the internet.” Id. ¶ 13.[2]

         Streamify is a Texas music streaming agency based in Houston. Id. ¶ 6. “‘Music Streaming Agencies' are companies that specialize in the digital placement” of songs on streaming services “to increase engagement with their clients' brands, acquire new users for their clients, and related services.” Id. ¶ 17. “An agency will contract to increase their client[s'] plays because in turn, that will increase” their clients' popularity, fan base, play count, and royalties. Id.

         “‘Royalties' are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset. The music industry relies on royalties generated by the licensing of copyrighted songs and recordings as a primary form of payment for musicians.” Id. ¶ 18.

         “‘Spotify' is the leading music streaming service with over 75 million users” and “over 20 million subscribers” in 58 countries. ECF 1, ¶ 16. It “offers an interactive user experience to paying subscribers” and “a non-interactive user experience to free users . . . .” Id. “Interactive Streaming” provides listeners the choice of “which song plays next” and “usually pay[s] higher royalties. Id. ¶ 14. Conversely, “Non-interactive Streaming” is a streaming service that picks the next song based on listeners' preferences. Id. “Freemium” is the non-interactive streaming model used by Spotify, “where there is no charge to set up an account, but listeners hear ads between sets to help pay the cost to license the songs played.” Id. ¶ 15. Listeners of Spotify's Freemium service “receive non-interactive playlists based on chosen preferences.” Id. “However, Spotify desktop [F]reemium users can use the service interactively.” Id.

         Streamify offers the following services to clients, id. ¶ 19 (emphasis in original):

Streamify delivers plays to your tracks. Ordering plays takes a minute and then you can sit back and Streamify takes care of the rest. Our large partner network can deliver huge amounts of plays in short time. Totally unique users will play your tracks. All plays are absolutely real and eligible for royalties.

         In the summer of 2017, Focus and Streamify entered into the Agreement. Id. ¶ 24.[3] Focus claims that it “engaged Streamify to act as its music streaming agency between summer 2017 and late 2017 (the ‘Streamify Campaign') based on Streamify's representations of its expertise as a music streaming agency and provider of music streaming services.” Id. ¶ 20 (emphasis omitted). Specifically, “Focus relied on Streamify's expertise to recommend and engage networks and playlists best suited to encourage new listeners to stream its song ‘Get to the Money' on Spotify.” Id. ¶ 22. Focus maintains that it “entered into the Agreement based on Streamify's continued representations that it had the resources available to acquire real music streams, and provide the relevant insight, support, and services required to meet Focus' goal of acquiring new listeners in both existing and new markets.” Id. ¶ 28.

         According to the Complaint, it was “Streamify's role, ” as Focus's music streaming agency, “to select networks and supervise their conduct in order to cause legitimate music streaming and ultimately acquire royalties for Focus.” Id. ¶ 23. Through the Streamify Campaign, Focus “wished to gain more listeners & streams, and, ultimately, royalties.” Id. ¶ 22. And, pursuant to the Agreement, “Streamify promised to perform and deliver services and to provide ‘absolutely real' plays.” Id. ¶ 25.

         “During the Streamify Campaign, Streamify purchased inventory on behalf of Focus and its affiliates in a number of jurisdictions.” Id. ¶ 29. For music streaming in the United States, “Streamify purchased inventory from its networks on an ‘agent-principal' basis, ” i.e., “Streamify purchased inventory on Focus's behalf as Focus' representative in each transaction with networks and playlists.” Id. ¶ 30. For music streaming outside the United States, “Streamify purchased inventory from networks and playlists on its own principal behalf.” Id. ¶ 31. For all music streaming, whether on an agent-principal or principal basis, Focus asserts: “Streamify was responsible for the day-to-day oversight of networks and the vetting of playlists for qualify and fraud prevention, in accordance with the Agreement . . . .” Id. ¶ 32.

         “As part of managing the Streamify Campaign, ” asserts Focus, “Streamify was supposed to pay networks and playlists for real listeners to stream the song ‘Get to the Money.'” Id. ¶ 41. To track which network, playlist, or application generated streams of the song, “Streamify and Focus utilized a third-party streaming analytics and performance marketing platform, ” called Streambeet, Inc. (“Streambeet”). Id. ¶ 42. Streambeet's tracking service “collect[s] information about music streaming impressions.” Id. ¶ 43. Then, Streambeet “awards credit to the playlist, network, or music streaming agency” that generated the streams. Id.

         To optimize Focus's music streams, “Streamify require[d] networks and playlists participating in the Streamify Campaign to identify all streams running Focus advertisements.” Id. ¶ 44. Focus asserts: “Streamify was responsible for ensuring that the networks and playlists that it engaged reported accurate and legitimate information to [Streambeet].” Id. According to the Complaint, Streambeet “does not believe that it received accurate information from Streamify.” Id. ¶ 46.

         Focus asserts that in late 2017, it “became aware of the pervasive fraud in the Streamify Campaign, when Spotify removed its music from their website.” Id. ¶ 72. Plaintiff contends that during the Streamify Campaign, “Streamify willfully ignored indicia of fraud in order to keep collecting payments from Focus.” Id. at 12. In Focus's words, “Streamify sat idly by, ” as “thousands of Focus' dollars were squandered on nonexistent, nonviewable, and/or fraudulent music streaming.” Id. ¶ 66.

         Further, plaintiff alleges: “Streamify failed to disclose problems with the inventory it purchased because it knew that Focus would have stopped purchases from the implicated networks and playlists, would have insisted on remediation for fraudulent streaming, and would not have paid.” Id. ¶ 67. In addition, “Streamify's omissions and misstatements induced Focus to continue its relationship with Streamify” and “to increase spending on music streaming to thousands of dollars.” Id. ¶ 71.

         The Complaint explains: “Paying networks and playlists based on streams is a standard method of compensation in the music streaming industry.” Id. ¶ 50. However, “in the absence of monitoring by the music streaming agency . . . the model can invite fraud.” Id. Generally, there are two broad categories of “fraud” in the music streaming industry: “fraudulent installations” and “attribution fraud.” Id. ¶ 51.

         “‘Attribution fraud' refers to a scheme where networks or playlists seek credit for organic installations and for installations actually attributable to other media sources. Attribution fraud occurs when networks or playlists insert false information into [Streambeet's] attribution algorithm.” Id. ¶ 52. Forms of attribution fraud include the following, id. ¶ 53:

a. “‘Stream Spamming' is where a network or playlist fraudulently generates or reports Streams for users without those Streams actually having occurred. Stream spammers report . . . fake Streams so that when an end user organically installs the streaming service, it will appear as if the installation was attributable to a fraudulently reported stream, thus qualifying for payment. . . .”
b. “‘Fake or Malicious Sites' refers to a scheme where a network or playlist reports (and seeks payment for) significant numbers of streaming service installs as attributable to streams made on fake or malicious website URLs. . . .”
c. “‘Stacked Ads' or ‘Ad-stacking' refers to the schemes where a single inventory placement is filled with several streaming advertisements, even though only one advertisement is visible. When the viewer Streams on a stacked ad, several Streams are sent to [Streambeet], of which only one reflects legitimate user interest in a streaming advertisement. . . .”

(Alteration added).

         According to the Complaint, Streamify failed to identify and remedy various forms of fraud in the Streamify Campaign. Id. ¶¶ 54, 56-57. According to plaintiff, beginning in the summer of 2017, Streamify “likely provided Focus with fraud [transparency] reports.” Id. ¶ 59. Plaintiff maintains that “Streamify provided transparency reports to Focus and represented that such reports accurately reflected” Focus's “streaming experience” in the Streamify Campaign. Id. ¶ 47. The purpose of the transparency reports was “to facilitate the review of playlist validity and performance and to authenticate legitimate streams, so that Streamify could optimize Focus' music streaming.” Id. ¶ 60. “Because networks and playlists self-report[ed] data” included in the transparency reports, Focus asserts that it “relied on Streamify to police the quality and accuracy of that data . . . .” Id. Based on Streamify's representations in the transparency reports, “Focus' monthly music streaming spending on the Streamify Campaign grew from a couple hundred dollars to thousands of dollars.” Id. ¶ 49.

         In addition, plaintiff alleges: “Streamify allowed networks and playlists to falsify streaming experiences.” Id. ¶ 66. For example, even “after a playlist was caught” stream spamming, “Streamify would reward the bad actor with additional volume and opportunities to report fake Streams.” Id. ¶ 75. In addition, Streamify “misused its position as a marketplace leader and as Focus' streaming agency, to solicit improper ‘rebate' payments from networks and playlists in exchange for purchasing streaming inventories during the Streamify Campaign and failed to pass such discounts back to Focus.” Id. ¶ 76.

         Moreover, plaintiff contends that Streamify “failed to enforce Focus' prohibition against rebrokering, ” in which “networks or playlists take advertising offers and re-broker them to third parties to obtain a greater volume of streams.” Id. ¶ 77. Focus asserts: “Rebrokering is against the terms approved by Focus for use in the Streamify Campaign and also leads to a loss of control by the music streaming agency over the quality of the streaming and the amount of fraud.” Id. Furthermore, plaintiff asserts that Streamify “failed to disclose material conflicts of interest to Focus.” Id. ¶ 78. Because “Streamify purchased inventory during the Streamify Campaign from a third party source, ” Streamify was “dis-incentivized to police fraud committed by itself.” Id.

         Of the “more than $21, 000 [Focus] paid for music streaming managed by Streamify, ” plaintiff avers, “a material percentage of that amount was used by Streamify to purchase nonexistent, nonviewable, and/or fraudulent inventory from networks and playlists who [sic] Streamify knew or should have known were perpetuating fraud.” Id. ¶ 79. Focus maintains that had it “known of the extent of fraud in the Streamify Campaign earlier, it would have taken steps to mitigate its harm, including . . . denying approval for Streamify to purchase inventory from networks and playlists perpetuating fraud; obtaining remediation for fraudulent streaming and/or reporting; and/or terminating its relationship with Streamify and the networks and playlists it engaged for the Streamify Campaign.” Id. ¶ 81.

         For the Streamify Campaign, Focus paid $21, 000 “up front.” Id. ¶¶ 34-35. “Beginning in Fall 2017, [Focus] also agreed to pay additional monies to Streamify.”[4] Id. ¶ 37. In October 2017, “Streamify and Focus concluded business.” Id. ¶ 38.

         Of relevance here, Section 10 of the parties' Agreement, titled “Governing Law and Dispute Resolution, ” provides, in pertinent part, ECF 11-2:

This Agreement shall be governed in all respects by the laws of the State of Texas as if this agreement was entered into and to be performed entirely within Texas between Texas residents. Any controversy or claim arising out of or relating to this Agreement, the use of this Website, or otherwise related to the parties' business relationship shall be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. Any such controversy or claim shall be arbitrated on an individual basis, and shall not be consolidated in any arbitration with any claim or controversy or any other party. The arbitration shall be conducted in Houston, Texas, and judgment on the arbitration award may be entered by any court having jurisdiction thereof. . . .

         Additional facts are included in the Discussion.

         II. Legal Standards

         A. The Federal Arbitration Act

         Streamify moves to dismiss. Alternatively, under the Federal Arbitration Act, Streamify moves to stay proceedings and compel arbitration.

         The FAA, which was enacted in 1925, “provides for the enforceability of arbitration agreements and specifies procedures for conducting arbitrations and enforcing arbitration awards . . . .” McCormick v. Am. Online, Inc., ___ F.3d ___, 2018 WL 6204888, at *1 (4th Cir. Nov. 29, 2018). Under § 2 of the FAA, an arbitration contract is “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Thus, “the FAA elevates the arbitration of claims as a favored alternative to litigation when the parties agree in writing to arbitration.” McCormick, 2018 WL 6204888, at *2 (citing Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).

         In Adkins v. Labor Ready, Inc., 303 F.3d 496, 500-01 (4th Cir. 2002) (quoting Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir. 1991)), the Fourth Circuit explained.

In the Fourth Circuit, a litigant can compel arbitration under the FAA if he can demonstrate “(1) the existence of a dispute between the parties, (2) a written agreement that includes an arbitration provision which purports to cover the dispute, (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce, and (4) the failure, neglect or refusal of the defendant to arbitrate the dispute.”

         In Adkins, the Court also said, 303 F.3d at 500: “A district court . . . has no choice but to grant a motion to compel arbitration where a valid arbitration agreement exists and the issues in a case fall within its purview.” Accordingly, a court must “engage in a limited review to ensure that the dispute is arbitrable-i.e., that a valid agreement exists between the parties and that the specific dispute falls within the substantive scope of that agreement.” Murray v. United Food and Commercial Workers Int'l Union, 289 F.3d 297, 302 (4th Cir. 2002).

         Nevertheless, there must be an “independent jurisdictional basis” for suit in federal court. Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 581-82 (2008). Of significance here, “diversity jurisdiction would authorize a federal court to resolve disputes concerning the arbitration process. . . .” McCormick, 2018 WL 6204888, at *3.

         Section 3 of the FAA is also relevant. It provides, 9 U.S.C. § 3:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the ...

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