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noting "the 'gray area of the law' between the 30% and 65% thresholds identified by the Ninth Circuit."
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Case No. 19-cv-03801-KAW
06-04-2020
THE DISTANCE LEARNING COMPANY, Plaintiff, v. DERICK GENE MAYNARD, et al., Defendants.
ORDER GRANTING MOTION TO DISMISS
Re: Dkt. No. 43
Plaintiff The Distance Learning Company filed this putative class action against Defendants Bethany Susan Maynard and Derick Gene Maynard, asserting that Defendants are seeking "to suppress competition and maintain control in the field of online traffic schools." (First Amended Compl. ("FAC") ¶ 2, Dkt. No. 39.)
Pending before the Court is Defendants' motion to dismiss. (Defs.' Mot. to Dismiss, Dkt. No. 43.) Having considered the parties' filings and the relevant legal authority, the Court GRANTS Defendants' motion.
I. BACKGROUND
Plaintiff and the putative class operate online driver's education and traffic schools in California. (FAC ¶ 9, 14.) The California Department of Motor Vehicles ("DMV") permits any company to set up a new traffic school by paying a $450 application fee if they have a course curriculum, place of business, operator, and bond. (FAC ¶ 32.) California law requires that the DMV maintain a list of driving schools, both on-line and in hard copy for distribution in traffic courts. (FAC ¶ 28.) Plaintiff alleges that schools that appear on this list do not need to spend money on advertising or marketing because they must be added to the list. (FAC ¶ 29.) The list is not alphabetized, but auto-rotates every time a user accesses the DMV's website, displaying a random list of several dozen traffic schools. (FAC ¶¶ 47-48.)
Defendants are a husband and wife who also own and operate online traffic schools. (FAC ¶¶ 30, 40.) Plaintiff asserts that Defendants have abused a "loophole" in the current DMV statute and regulations. (FAC ¶ 33.) Specifically, Plaintiff alleges that Defendants have registered hundreds of traffic schools that operate out of the same office space, with the intent of flooding the DMV's list with numerous schools operated by the same owner and operator. (FAC ¶ 35.) "Defendants' schools, in many cases, have different names, but utilize the exact same website, place of business, curriculum, and instructor." (FAC ¶ 35.) Defendants jointly and severally run the traffic schools, which are located at the same physical access and "offer identical services for identical prices." (FAC ¶¶ 39, 41.) Altogether, Plaintiff alleges that Defendants "jointly operate 1,500 of the 2,790 of the DMV's licensed traffic schools, or 53.8% of the licensed traffic schools," including setting up 501 schools on a single day in January 2019. (FAC ¶¶ 37-38.)
Plaintiff alleges that Defendants have admitted in published news articles that the sole purpose of opening so many traffic schools "was to flush out businesses who were charging lower prices for the same services as Defendants." (FAC ¶ 44.) By creating so many traffic schools, "Defendant[s] can attempt to monopolize the DMV's website, and to create high barriers to entry for new traffic schools, in order to discourage competition." (FAC ¶ 39.) In short, by creating so many "alter-ego proxy schools," Defendants can "increase their likelihood of appearing at or near the top of the randomized list, thereby bettering their chance of being selected by a consumer, not through any legitimate competitive advantage, but through sheer volume and luck of the randomized draw." (FAC ¶ 50.) This is because consumers are unlikely "to scroll through and research all 2,700 plus traffic schools to find a suitable and competitive option, especially given the relatively low price point of these traffic school programs[. Thus], schools listed at or near the top of these randomized lists are the most likely to be selected by a consumer." (FAC ¶ 49.)
Plaintiff further alleges that Defendants' actions encourage price collusion. (FAC ¶ 72.) Plaintiff asserts that the average price of an online traffic school is $17.00/person, but that Defendants agreed to have their schools charge $7.00 higher than the industry average, an increase of 41% from the industry average. (FAC ¶¶ 70, 72.) Plaintiff believes consumers are unlikely to notice the change or care, permitting Defendants to "gouge consumers and prevent law-abiding legitimate competitors, such as Plaintiff, from being exposed to consumers . . . ." (FAC ¶ 76.)
On June 28, 2019, Plaintiff filed the instant case. (Compl., Dkt. No. 1.) On January 6, 2020, Plaintiff filed the operative complaint, alleging claims for: (1) violation of the Sherman Act § 1 (unlawful collusion), (2) violation of the Sherman Act § 2 (unlawful monopolization), (3) violation of the Sherman Act § 2 (attempted monopolization), (4) violation of the Unfair Competition Law ("UCL"), and (5) violation of the Cartwright Act. (FAC ¶¶ 81-136.)
On February 3, 2020, Defendants filed the instant motion to dismiss. On March 4, 2020, Plaintiff filed its opposition. (Pl.'s Opp'n, Dkt. No. 48.) On March 18, 2020, Defendants filed their reply. (Defs.' Reply, Dkt. No. 49.)
On May 5, 2020, the Court vacated the hearing, and requested supplemental briefing. (Dkt. No. 54.) On May 11, 2020, Plaintiff filed its supplemental brief. (Pl.'s Supp. Br., Dkt. No. 55.) On May 15, 2020, Defendants filed their supplemental brief. (Defs.' Supp. Br., Dkt. No. 56.)
On May 15, 2020, Plaintiff also filed a request for oral argument. (Dkt. No. 57.) Plaintiff did not explain why oral argument was needed. Having reviewed Plaintiff's request, the parties' filings, and the relevant legal authorities, the Court deems the matter suitable for disposition without a hearing pursuant to Civil Local Rule 7-1(b).
II. LEGAL STANDARD
Under Federal Rule of Civil Procedure 12(b)(6), a party may file a motion to dismiss based on the failure to state a claim upon which relief may be granted. A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims asserted in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001).
In considering such a motion, a court must "accept as true all of the factual allegations contained in the complaint," Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per curiam) (citation omitted), and may dismiss the case or a claim "only where there is no cognizable legal theory" or there is an absence of "sufficient factual matter to state a facially plausible claim to relief." Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009); Navarro, 250 F.3d at 732) (internal quotation marks omitted).
A claim is plausible on its face when a plaintiff "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citation omitted). In other words, the facts alleged must demonstrate more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
"Threadbare recitals of the elements of a cause of action" and "conclusory statements" are inadequate. Iqbal, 556 U.S. at 678; see also Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996) ("[C]onclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim."). "The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully . . . . When 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." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557) (internal citations omitted).
If the court grants a motion to dismiss, it should grant leave to amend even if no request to amend is made "unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (citations omitted).
III. DISCUSSION
A. Sherman Act § 1 (Antitrust Conspiracy)
"Section 1 of the Sherman Act prohibits '[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.'" Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1046 (9th Cir. 2008) (quoting 15 U.S.C. § 1). Defendants contend this claim must be dismissed because: (1) Plaintiffs fail to allege sufficient facts demonstrating an agreement or conspiracy between Defendants, and (2) Defendants are legally incapable of conspiring amongst themselves because there is a unity of interest. (Defs.' Mot. to Dismiss at 7, 8.)
i. Sufficiency of the Pleading
To plead a § 1 violation, a plaintiff must "plead not just ultimate facts (such as conspiracy), but evidentiary facts which, if true, will prove: (1) a contract, combination or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intended to harm or restrain trade or commerce among the several States, or with foreign nations; (3) which actually injures competition." Kendall, 518 F.3d at 1047. Conclusory allegations that the defendants entered into a contract, combination or conspiracy are insufficient; instead, a plaintiff must plead "enough factual allegations to suggest an agreement was made." Jones v. Micron Tech., Inc., 400 F. Supp. 3d 897, 914-15 (N.D. Cal. 2019); see also Kendall, 518 F.3d at 1047.
"Factual allegations concerning an agreement to restrain trade can take two forms: direct or circumstantial. Direct evidence factual allegations are explicit and require no inferences to establish the existence of a conspiracy." Jones, 400 F. Supp. 3d at 915 (internal quotation omitted). The Supreme Court has "suggested that to allege an agreement between antitrust co-conspirators, the complaint must allege facts such as a 'specific time, place, or person involved in the alleged conspiracies' . . . ." Kendall, 518 F.3d at 1047 (quoting Twombly, 550 U.S. at 565 n.10). In contrast, a plaintiff relying on circumstantial evidence "must present allegations of parallel conduct of the defendants as well as so-called 'plus factors.' Parallel conduct occurs when competitors act similarly or follow the same course of action . . . ." Jones, 400 F. Supp. 3d at 915 (citation omitted). Plus factors are circumstances that "point[] toward a meeting of the minds of the alleged conspirators," namely "economic actions and outcomes that are largely inconsistent with unilateral, lawful conduct but largely consistent with explicitly coordinated action." Id. (internal quotations omitted).
Here, Defendants argue that Plaintiff pleads inadequate facts of an agreement. (Defs.' Mot. to Dismiss at 7.) The Court disagrees. Plaintiff has alleged that Defendants entered into an agreement to flood the marketplace with duplicate traffic schools at the same time, using the same website, place of business, curriculum, and instructor. (FAC ¶¶ 35, 41, 83.) Such allegations go beyond "bare, unsupported conclusions" of an agreement, as it specifically identifies who is involved in the agreement, what was agreed to, how the agreement would be carried out, and the intended effects of the agreement.
Additionally, even if such allegations were insufficient to directly demonstrate an agreement, Plaintiff has pled sufficient circumstantial evidence of an agreement. Specifically, Plaintiff has alleged parallel conduct, namely registering hundreds of traffic schools using the same office space, website, curriculum, and instructor. (FAC ¶ 35.) Plaintiff has also alleged circumstances that point to a meeting of the minds; in addition to using the same resources, Defendants allegedly charged the same price and opened 500 traffic schools on the same day. (FAC ¶¶ 35, 36, 72.) It is difficult to imagine that such actions were coincidental, as Defendants suggest. (See Defs.' Mot. to Dismiss at 8.)
Accordingly, the Court finds Plaintiff has adequately pled an agreement between Defendants.
ii. Unity of Interest
In the alternative, Defendants argue that the § 1 claim must be dismissed because "there is a unity of interest among [Defendants] and the traffic schools they own," which makes Defendants "legally incapable of conspiring among themselves." (Defs.' Mot. to Dismiss at 8.) The Court agrees that as pled in the complaint, Defendants have a unity of interest.
"The distinction between unilateral and concerted conduct is necessary for a proper understanding of the terms 'contract, combination . . . or conspiracy' in § 1." Copperweld Corp. v. Indep. Tube Corp., 464 U.S. 752, 769 (1984). Specifically, "[n]othing in the literal meaning of those terms excludes coordinated conduct among officers or employees of the same company." Id. "The officers of a single firm are not separate economic actors pursuing separate economic interests, so agreements among them do not suddenly bring together economic power that was previously pursuing divergent goals." Id. Likewise, § 1 is not violated by coordination between a corporation and one of its unincorporated divisions, or between a parent and its wholly owned subsidiary. Id. at 770, 772. With respect to a parent and a subsidiary, this is because they "have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousness, but one." Id. at 771.
In determining whether entities are capable of conspiring, the key inquiry is whether the alleged agreement or conspiracy "joins together separate decisionmakers." Am. Needle, Inc. v. NFL, 560 U.S. 183, 195 (2010). The entities must be "separate economic actors pursuing separate economic interests, such that the agreement deprives the marketplace of independent centers of decisionmaking, and therefore of diversity of entrepreneurial interests, and thus of actual or potential competition." Id. at 195 (internal quotations omitted). Thus, "it is not determinative that two parties to an alleged § 1 violation are legally distinct entities." Id. at 196. Instead, "[t]he question is whether the agreement joins together 'independent centers of decisionmaking.' If it does, the entities are capable of conspiring under § 1 . . . ."
Plaintiff argues that Defendants are comparable to the NFL teams in American Needle, Inc. v. National Football League, which the Supreme Court found to be separate economic interests capable of conspiring under § 1. (Pl.'s Opp'n at 23-24.) There, the 32 NFL teams formed the National Football League Properties ("NFLP") to develop, license, and market their intellectual property, eventually granting exclusive licenses. 560 U.S. 183, 187 (2010). The defendants argued that the NFL, NFL teams, and NFLP were incapable of conspiring because they were a single economic enterprise. Id. at 188. The Supreme Court rejected this argument, explaining that "[t]he NFL teams do not possess either the unitary decisionmaking quality or the single aggregation of economic power characteristic independent action." Id. at 196. Rather, each team was "a substantial, independently owned, and independently managed business," with their corporate actions "guided or determined by separate corporate consciousness, and their objectives are not common." Id. (internal quotations omitted). Further, "[t]he teams compete with one another, not only on the playing field, but to attract fans, for gate receipts, and for contracts with managerial and playing personnel." Id. at 196-97. Significantly, the NFL teams also "compete in the market for intellectual property," as "[w]hen each NFL team licenses its intellectual property, it is not pursuing the 'common interests of the whole' league but is instead pursuing interests of each corporation itself." Id. at 197. Thus, each NFL team was a "separate, profit-maximining entit[y], and their interests in licensing team trademarks are not necessarily aligned." Id. at 198.
Plaintiff also argues that a determination of whether there is a unity of interest is premature at the pleading stage. (See Pl.'s Opp'n at 2 n.1.) As discussed below, however, based on Plaintiff's own allegations, there appears to be a unity of interest.
American Needle, Inc. is readily distinguishable from the instant case. There are no allegations that Defendants are or were competitors; instead, they are alleged to be a husband and wife, who would presumably have the same economic interest, especially given California's community property laws. (FAC ¶ 40; see also Cal. Fam. Code § 760 ("all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property").) This fact cuts against a finding that Defendants would ordinarily be competing against each other in the traffic school business absent the alleged conspiracy. Other allegations in the complaint further support a finding that Defendants have a unity of interest, including that Defendants "jointly operate" the schools, which use the same website, place of business, curriculum, and instructor. (FAC ¶¶ 35, 37.) In short, unlike the NFL teams, there is nothing to suggest that Defendants interest were never aligned with respect to owning and operating traffic schools, or that they are "independent centers of decisionmaking" who, by working together, deprive the marketplace of actual or potential competition.
Instead, these facts are more akin to Top Rank, Inc. v. Haymon. There, the plaintiff alleged that the Haymon defendants (professional boxing management companies) and the Waddell defendants (asset management and investment advisory firms) were conspiring together to monopolize the boxing sport. CV 15-4961-JFW (MRWx), 2015 U.S. Dist. LEXIS 164676, at *4-5 (C.D. Cal. Oct. 16, 2015). In dismissing the § 1 claim, the district court explained that the defendants had "no alleged separate interest, at least as it relates to the relevant management and promotion markets." Id. at *48. Of particular significance, the district court explained that "the Waddell Defendants, as asset management and investment advisory firms, are not actual or potential competitors of the Haymon Defendants. Accordingly, their alleged venture with the Haymon Defendants does not deprive the marketplace of independent centers of decisionmaking, or of a diversity of entrepreneurial interests, and thus of actual or potential competition." Id. (internal quotation omitted). Such is the case here, where Defendants are a husband and wife who would not ordinarily be competing against each other in business.
In its supplemental brief, Plaintiff concedes that under the American Needle test, a husband and wife would share aunity of interests. (Pl.'s Supp. Br. at 1.) Plaintiff, however, contends that this is not its allegation; rather, Plaintiff suggests that Defendants' 1,500 businesses are colluding with one another. (Id.) Plaintiff's argument is contrary to the pleadings; for example, the operative complaint alleges that "Defendants have together colluded to set up as many 'different' schools as possible, in order to flood the DMV's list with many schools which are all operated by the same owner/operator." (FAC ¶ 35 (emphasis added); see also ¶¶ 50 ("Defendants' intention in creating thousands of alter-ego proxy schools is to increase their likelihood of appearing at or near the top of the randomized list."), 83 ("Defendants entered into an agreement to flood the marketplace with fake/duplicate traffic schools at the same time"). These are actions that only Defendants, not their schools, could have taken; the schools did not create themselves, nor did the schools enter into an agreement to flood the market. As alleged, the schools are the conduit through which Defendants, the alleged conspirators, attempted to collude.
Further, even if Plaintiff had alleged the driving schools themselves were colluding, as alleged, it appears unity of interest would still apply. Here, the driving schools are jointly operated by individuals who, as Plaintiff concedes, have a unity of interest. Courts have found that no § 1 violation occurred when the "corporations were under common ownership and control . . . ." Century Oil Tool, Inc. v. Prod. Specialties, Inc., 737 F.2d 1316, 1317 (5th Cir. 1984); see also Livingston Downs Racing Ass'n, Inc. v. Jefferson Downs Corp., 257 F. Supp. 2d 819, 835 (M.D. La. 2002) ("Where two people together are controlling the affairs of separate corporations those corporations cannot conspire under § 1 of the Sherman Act.") Further, there are no allegations that the driving schools would compete with each other; rather, they are all part of a single operation to increase the market share for their common owner.
Absent allegations that would allow the Court to find that Defendants are competitors, the Court finds that as pled, Defendants have a unity of interest and therefore are legally incapable of conspiring under § 1. Accordingly, the § 1 claim is dismissed without prejudice. While it is unclear the driving schools are capable of conspiring with each other, the Court will allow amendment of this claim.
B. Sherman Act § 2 (Monopolization and Attempted Monopolization)
Plaintiff alleges that Defendants have engaged in unlawful monopolization and attempted monopolization, in violation of the Sherman Act § 2. (FAC ¶¶ 94, 102.) A monopoly claim has two elements: "(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). Attempted monopoly has four elements: "(1) specific intent to control prices or destroy competition; (2) predatory or anticompetitive conduct directed at achieving that purpose; (3) a dangerous probability of achieving 'monopoly power'; and (4) causal antitrust injury." Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1445 (9th Cir. 1995).
Here, Defendants effectively argue that Plaintiff's § 2 claims fail because Plaintiff has failed to adequately allege market power. In Rebel Oil, the Ninth Circuit explained that "reduction of competition does not invoke the Sherman Act until it harms consumer welfare." 51 F.3d at 1433. Thus, "an act is deemed anticompetitive under the Sherman Act only when it harms both allocative efficiency and raises the prices of goods above competitive levels or diminishes their quality." Id. In order to unilaterally "raise prices above competitive levels, the [defendant] must obtain sufficient market power." Id. at 1434. A defendant "has sufficient market power when, by restricting its own output, it can restrict marketwide output and, hence, increase marketwise prices." Id. To establish market power, "[t]he most common type of proof is circumstantial evidence pertaining to the structure of the market." Rebel Oil, 51 F.3d at 1434. Thus, "a plaintiff must: (1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run." Id. The Ninth Circuit has applied these same factors in both monopolization and attempted monopolization cases, although a lesser market share suffices for attempted monopolization. See Rebel Oil, 51 F.3d at 1432-34 (applying market power factors in an attempted monopolization case); W. Parcel Express v. UPS of Am., 190 F.3d 974, 975 (9th Cir. 1999) (applying market power factors in a monopolization case).
i. Relevant Market
First, Defendant argues that Plaintiff improperly limited the relevant market to online traffic schools because Plaintiff should have also included brick and mortar traffic schools. (Defs.' Mot. to Dismiss at 10.) The relevant market is "the pool of goods of services that enjoy reasonable interchangeability of use and cross-elasticity of demand." Tanaka v. Univ. of S. Cal., 252 F.3d 1059, 1063 (9th Cir. 2001) (internal quotation omitted). Thus, "defining the product market involves identification of the field of competition: the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business." Thurman Indus., Inc. v. Pay 'N Pak Stores, Inc., 875 F.2d 1369, 1374 (9th Cir. 1989).
A court may dismiss a monopolization claim if the plaintiff "alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products." ChriMar Sys. v. Cisco Sys., 72 F. Supp. 3d 1012, 1017 (N.D. Cal. 2014) (internal quotation omitted). Dismissal under Rule 12(b)(6), however, is only appropriate "if the complaint's 'relevant market' definition is facially unsustainable" because "the validity of the 'relevant market' is typically a factual element rather than legal element . . . ." Newcal Indus. v. Ikon Office Solutions, Inc., 513 F.3d 1038, 1045 (9th Cir. 2008).
Here, Plaintiff's limitation of the relevant market to online traffic schools is not "facially unsustainable." While Defendants point to Plaintiff's allegation that both online and brick and mortar schools appear on the DMV's list, this does not necessarily mean the services provided are interchangeable. (See Defs.' Mot. to Dismiss at 10; FAC ¶ 28.) As Plaintiff points out, online traffic schools may be "more convenient, less time consuming, and cheaper" than brick and mortar schools. (See Pl.'s Opp'n at 23.) Indeed, an individual may be able to use an on-line traffic school located anywhere in California, but would be limited to specific brick and mortar schools in their surrounding area. Thus, not all brick and mortar schools would have "actual or potential ability to deprive" the internet traffic schools "of significant levels of business." Thurman Indus., Inc., 875 F.2d at 1374. Whether Plaintiff's defined market is too narrow is a determination appropriately left for summary judgment or trial.
ii. Market Share
Second, Defendants argue that even if the relevant market is limited to only online traffic schools, Plaintiff has not alleged adequate market share. (Defs.' Mot. to Dismiss at 11.) "Calculation of the market share allows for a proper understanding of the defendant's influence and relative power in the relevant market. A dominant share of the market often carries with it the power to control output across the market, and thereby control prices." Image Tech. Servs. v. Eastman Kodak Co., 125 F.3d 1195, 1206 (9th Cir. 1997). For a monopolization claim, "[c]ourts generally require a 65% market share to establish a prima facie case of market power." Id. For an attempted monopolization claim, "a lower quantum than the minimum showing required in an actual monopolization case." Rebel Oil, 51 F.3d at 1438. Most attempted monopolization "cases hold that a market share of 30 percent is presumptively insufficient to establish the power to control price," although the Ninth Circuit has found that a market share of 44% was sufficient where "entry barriers are high and competitors are unable to expand their output in response to supracompetitive pricing." Id.
Here, Plaintiff alleges that Defendants have a 53.8% market share because Defendants own and operate approximately 53.8% of the DMV's licensed traffic schools. (FAC ¶¶ 37, 62, 73.) Thus, Plaintiff argues that this 54% market share is sufficient to survive a motion to dismiss because it lies in the "gray area of the law" between the 30% and 65% thresholds identified by the Ninth Circuit. (Pl.'s Opp'n at 19.) Operating 53.8% of online traffic schools, however, does not automatically mean Defendants conduct 53.8% of all online traffic school business; Defendants correctly argue Plaintiff has offered "no basis . . . for the implausible underlying assumption that market share in a given market is distributed evenly to all business in that market." (Defs.' Mot. to Dismiss at 11.) At best, Plaintiff can demonstrate that Defendants occupy 53.8% of the DMV's list, but even taking as true the allegation that consumers are likely to select the schools listed at the top of the list, this does not translate to market share. There is no allegation, for example, that most or even a meaningful number of consumers use the DMV's list to begin with, as opposed to an internet search. (See Defs.' Reply at 10.)
In its supplemental briefing, Plaintiff argues that the vast majority of business for online schools (80%)) does come from the DMV list. (Pl.'s Supp. Br. at 1.) Plaintiff also cites to the drop in its business and that of other online traffic schools since Defendants' alleged opening of thousands of online schools. (Id. at 1-2.) Such facts, however, were not in the operative complaint. It is also not clear that even assuming Defendants now have 53.8% of the 80% of business that goes through the DMV list (i.e., 43.04%) of all business), this would be sufficient for a monopolization claim, which generally requires a 65% market share. See Image Tech. Servs., 125 F.3d at 1206. Even for an attempted monopolization claim, this 43.04% share is less than the 44% share in Rebel Oil, which the Ninth Circuit found sufficient because there were high barriers of entry. 51 F.3d at 1438.
Because Plaintiff has not alleged facts demonstrating adequate market share, Plaintiff's § 2 claims must be dismissed.
iii. Barriers to Entry
Finally, Defendants argue that Plaintiff has not alleged any significant barriers to market entry. (Defs.' Mot. to Dismiss at 12.) "A § 2 plaintiff must show that new competitors face high market barriers to entry and that current competitors lack the ability to expand their output to challenge a monopolist's high prices." Image Tech. Servs., 125 F.3d at 1208. "Entry barriers are additional long-run costs that were not incurred by incumbent firms but must be incurred by new entrants, or factors in the market that deter entry while permitting incumbent firms to earn monopoly returns. Rebel Oil Co., 51 F.3d at 1439. Typical entry barriers include: "(1) legal license requirements; (2) control of an essential or superior resource; (3) entrenched buyer preferences for established brands; (4) capital market evaluations imposing higher capital costs on new entrants; and, in some situations, (5) economies of scale." Id.
The Court finds that Plaintiff has not alleged significant barriers to entry. As Plaintiff itself alleges, "the DMV allows any company to pay the $450 application fee, and set up a new traffic school[]," in addition to having a course curriculum, place of business, operator, instructor, and a bond. (FAC ¶ 32.) These are not significant barriers that prevent new competitors from entering the market.
Instead, Plaintiff essentially argue that in order to compete with Defendants, new entrants must pay $675,000 in DMV application fees in order to set up 1,500 traffic schools of their own. (Pl.'s Opp'n at 7, 21; FAC ¶ 59.) In United States v. Syufy Enterprises, however, the Ninth Circuit rejected the argument that "competition is itself a structural barrier to entry." 903 F.2d 659, 667 (9th Cir. 1990). There, Syufy operated a movie theater, eventually buying out most of his competitors. Id. at 662. The Ninth Circuit found that Syufy did not have the power to exclude competition, as there were "no structural barriers to entry into the market . . . . To the contrary, the record discloses a rough-and-tumble industry, marked by easy market access, fluid relationships with distributors, an ample and continuous supply of product, and a healthy and growing demand." Id. at 667. As to the government's argument that "competitors w[ould] be deterred from entering the market because they could not hope to turn a profit competing against Syufy," the Ninth Circuit "ma[de] clear . . . that an efficient, vigorous, aggressive competitor is not the villain antitrust laws are aimed at eliminating." Id. at 667-68.
Alternatively, Plaintiff argues that Defendants have been able to charge rates 40% greater than the industry average by overwhelming the DMV list, thus demonstrating an ability to control prices. (Pl.'s Opp'n at 19.) It is not clear how this is relevant to barriers to entry or barriers to expansion; the fact that Defendants charge a higher rate than the industry average does not necessarily mean Defendants are preventing new entrants to the market or that current competitors cannot expand their output to challenge Defendants' higher prices. See Image Tech. Servs., 125 F.3d at 1208.
Accordingly, the Court finds that Plaintiff has failed to allege the second and third market power factors. As amendment is not futile, Plaintiff's § 2 claims are DISMISSED without prejudice.
C. Cartwright Act
"The analysis under California's antitrust law mirrors the analysis under federal law because the Cartwright Act, Cal. Bus. & Professions Code § 16700 et seq., was modeled after the Sherman Act." Cty. of Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1160 (9th Cir. 2011). Thus, where the plaintiff's "claim under the Cartwright Act is predicated on the same conduct underlying the Sherman Act claims[,] the legal analysis of [the] Cartwright Act claim . . . should mirror the analysis under the Sherman Act claims." Stewart v. Gogo, Inc., Case No. 12-cv-5164-EMC, 2013 U.S. Dist. LEXIS 51895, at *15 (N.D. Cal. Apr. 10, 2013). Here, Plaintiff's Cartwright Act complains of the same actions as the Sherman Act claims, namely Defendants' alleged agreement to create duplicate traffic schools, using the same websites, business addresses, owners, and operators, in order to flood the marketplace. (See FAC ¶ 133.) Thus, Plaintiff's Cartwright Act claim is DISMISSED without prejudice.
D. Unfair Competition Law ("UCL")
"The UCL is a broad remedial statute that permits an individual to challenge wrongful business conduct 'in whatever context such activity might occur.'" Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 731 (9th Cir. 2007) (quoting Cel-Tech Commc'ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 181 (1999)). The UCL prohibits "unlawful competition," defined as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising . . . ." Cal. Bus. & Prof. Code § 17200. "Because the statute is written in the disjunctive, it is violated where a defendant's act or practice is (1) unlawful, (2) unfair, (3) fraudulent, or (4) in violation of section 17500 (false or misleading advertisements)." Lozano, 504 F.3d at 731 (internal citation omitted).
Here, Plaintiff brings UCL claims under the unlawful and unfair prongs. (See FAC ¶ 110-112.) As discussed above, Plaintiff has failed to allege violations of the Sherman Act or Cartwright Act, and therefore the UCL claim based on the unlawful prong fails.
The parties dispute, however, whether the UCL claim based on the unfair prong may survive independent of the Sherman Act or Cartwright Act claims. In general, "[e]ach prong of the UCL is a separate and distinct theory of liability; thus, the 'unfair' practices prong offers an independent basis for relief." Lozano, 504 F.3d at 731. Plaintiff argues that to determine whether the "unfair" UCL claim can survive, the Court should apply: "(1) the traditional balancing test; (2) the FTC Act section 5 test; or (3) the Cel-Tech tethering test." (Pl.'s Opp'n at 9.) The Court finds that the traditional balancing test and FTC Act section 5 test do not apply, and Plaintiff does not satisfy the Cel-Tech tethering test.
First, with respect to the Section 5 test, Plaintiff itself acknowledges that "it is not the appropriate standard in this case for the UCL claims." (Pl.'s Opp'n at 10.) It is therefore unclear how the Section 5 test is relevant to the instant case.
Second, with respect to the traditional balancing test, "the California Supreme Court rejected the balancing test . . . in suits involving unfairness to the defendant's competitors." Lozano, 504 F.3d at 735; see also Morris v. BMW of N. Am., LLC, Case No. 07-2827-WHA, 2007 U.S. Dist. LEXIS 85513, at *19 (N.D. Cal. Nov. 7, 2007) (same); Hadley v. Kellogg Sales Co., 243 F. Supp. 3d 1074, 1104 (N.D. Cal. 2017) ("[t]he California Supreme Court has rejected the traditional balancing test for UCL claims between business competitors and instead requires that claims under the unfair prong be 'tethered to some legislatively declared policy.'") (quoting Cel-Tech, 20 Cal. 4th at 186). While Plaintiff alleges damage to consumers because Defendants charge higher prices, Plaintiff cites no authority that the balancing test applies when the case is brought by a competitor, as is the case here. See Almasi v. Equilion Enters., LLC, Case No. 10-cv-3458-EJD, 2012 U.S. Dist. LEXIS 128623, at *26 (N.D. Cal. Sept. 10, 2012) ("Plaintiffs do not cite any authority indicating that the balancing test applies in cases where a plaintiff is not a consumer."). Ultimately, Plaintiff brings this case not on behalf of consumers, but on behalf of competitors such as itself. Accordingly, the traditional balancing test does not apply in this case.
Finally, the Court finds that Plaintiff does not satisfy the Cel-Tech tethering test. In Cel-Tech, the California Supreme Court explained that "a practice may be deemed unfair even if it is not specifically proscribed by some other law." 20 Cal. 4th at 180. The California Supreme Court acknowledged, however, that in "determin[ing] whether the challenged conduct is unfair within the meaning of the unfair competition law[,] courts may not apply purely subjective notions of fairness." Id. at 184. Thus, "[w]hen a plaintiff who claims to have suffered injury from a direct competitor's 'unfair' act or practice invokes section 17200, the word 'unfair' in that section means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition." Id. at 187.
Following Cel-Tech, courts have found that a UCL claim based on the "unfair" prong cannot survive when it is premised on the same actions as an alleged statutory antitrust claim. In Chavez v. Whirlpool Corp., the California Court of Appeal found:
If the same conduct is alleged to be both an antitrust violation and an 'unfair' business act or practice for the same reason -- because it unreasonably restrains competition and harms consumers -- the
determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not 'unfair' toward consumers. To permit a separate inquiry into essentially the same question under the unfair competition law would only invite conflict and uncertainty and could lead to the enjoining of procompetitive conduct.93 Cal. App. 4th 363, 375 (2001). Applying Chavez, the Ninth Circuit in an unpublished decision upheld the dismissal of a UCL claim based on the "unfair" prong, finding that "[w]here . . . the same conduct is alleged to support both a plaintiff's federal antitrust claims and state-law unfair competition claim, a finding that the conduct is not an antitrust violation precludes a finding of unfair competition." LiveUniverse, Inc. v. MySpace, Inc., 304 Fed. Appx. 554, 558 (9th Cir. 2008); see also GreenCycle Paint, Inc. v. PaintCare, Inc., Case No. 15-cv-4059-MEJ, 2016 U.S. Dist. LEXIS 47960, at *31 (N.D. Cal. Apr. 8, 2016) ("where the same conduct alleged to be unfair under the UCL is also alleged to be a violation of another law, the UCL claim rises or falls with the other claims") (internal quotation omitted); DocMagic, Inc. v. Ellie Mae, Inc., 745 F. Supp. 2d 1119, 1147 (N.D. Cal. 2010) ("DocMagic has not alleged facts showing that Ellie Mae's conduct violated the Sherman Act by posing a dangerous threat of monopoly in the DPS market. As a result, any claims DocMagic might be asserting under the UCL's unfair prong necessarily fail as well."); ChriMar Sys., 72 F. Supp. 3d at 1020 ("Courts have held that where the alleged conduct does not violate the antitrust laws, a claim based on unfair conduct under the UCL cannot survive."); Los Gatos Mercantile, Inc. v. E.I. Dupont de Nemours & Co., Case No. 13-cv-1180-BLF, 2014 U.S. Dist. LEXIS 133540, at *32 (N.D. Cal. Sept. 22, 2014) ("Because Plaintiffs have failed to state a claim for an antitrust violation, they have failed to state a claim under the UCL based upon the alleged anticompetitive conduct.").
In its supplemental brief, Plaintiff argues that Chavez was limited to cases involving safe harbors. (Pl.'s Supp. Br. at 3.) As discussed above, however, numerous courts have applied Chavez, focusing on whether the plaintiff is relying on the same factual allegations for both the statutory violation and a UCL claim based on the "unfair" prong. The above cases did not involve conduct which was condoned under antitrust laws.
Such is the case here, where Plaintiff's claims are based on the same actions that underlie the statutory violations, namely the creation of duplicate traffic schools in order to flood the marketplace. (FAC ¶ 112.) Because Plaintiff's factual allegations do not rise to a violation of the Sherman Act or the Cartwright Act, those same factual allegations cannot give rise to a UCL claim based on the "unfair" prong. Accordingly, Plaintiff's UCL claim is DISMISSED without prejudice.
In the alternative, Defendants argue that Plaintiff's UCL claim must be dismissed because it falls within the safe harbor of the DMV traffic school statutes, namely California Vehicle Code § 11200 et seq. Section 11202(7)(B) provides: "A person may be an operator for more than one traffic school if (i) the schools have a common owner or owners and (ii) the schools share a single established business address." Defendants thus contend that its ownership of multiple traffic schools is expressly permitted by statute, and cannot support a UCL claim. (Defs.' Mot. to Dismiss at 15.) The Court need not reach this issue because the Court finds that the UCL claim fails for separate reasons. The Court observes, however, that the Supreme Court in Cel-Tech found that "[i]f the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination." 20 Cal. 4th at 182. --------
E. Remedies
Defendants also challenge the remedies sought by Plaintiff, namely restitution under the UCL, injunctive relief, and punitive damages. (Defs.' Mot. to Dismiss at 18-20.) As the Court finds that the complaint must be dismissed for failure to state a claim, the Court need not address these arguments. The Court notes, however, that Plaintiff generally did not address the arguments made and legal authority cited by Defendants, particularly with respect to whether restitution is available for lost profits or if punitive damages are cognizable under any of Plaintiff's claims. In the future, Plaintiff must address the arguments made or the Court will presume that Plaintiff agrees with Defendants' position.
IV. CONCLUSION
For the reasons stated above, the Court GRANTS Defendants' motion to dismiss. Plaintiff may file an amended complaint within thirty days of the date of this complaint.
IT IS SO ORDERED. Dated: June 4, 2020
/s/_________
KANDIS A. WESTMORE
United States Magistrate Judge