Pro Search Plus LLC v. VFM Leonardo Inc

MEMORANDUM in Opposition to MOTION to Dismiss Case 64

C.D. Cal.October 21, 2013

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 BLECHER COLLINS PEPPERMAN & JOYE, P.C. Maxwell M. Blecher (State Bar No. 26202) mblecher@blechercollins.com Donald R. Pepperman (State Bar No. 109809) dpepperman@blechercollins.com Gary M. Joye (State Bar No. 117440) gjoye@blechercollins.com 515 South Figueroa Street, Suite 1750 Los Angeles, California 90071-3334 Telephone: (213) 622-4222 Facsimile: (213) 622-1656 Attorneys for Plaintiff Pro Search Plus, LLC UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SOUTHERN DIVISION PRO SEARCH PLUS, LLC, a California limited liability company, Plaintiff, vs. VFM LEONARDO, INC., a Canadian corporation, Defendant. Case No. SACV12-02102-JLS (ANx) PLAINTIFF PRO SEARCH PLUS, LLC’S OPPOSITION TO DEFENDANT VFM LEONARDO, INC.’S MOTION TO DISMISS SECOND AMENDED COMPLAINT Hon. Josephine L. Staton Date: November 22, 2013 Time: 2:30 PM Ctrm.: Courtroom 10A Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 1 of 29 Page ID #:3775 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - i - TABLE OF CONTENTS Page INTRODUCTION AND SUMMARY OF FACTS ................................................... 1 ARGUMENT .............................................................................................................. 4 I. Legal Standard ....................................................................................... 4 II. PSP Has Sufficiently Pled Sherman Act Claims ................................... 4 A. PSP Has Sufficiently Pled Unlawful Monopoly Maintenance Through Exclusionary Conduct Eliminating Competition ................................................................................. 5 1. Monopoly-Maintenance Standard ..................................... 5 2. VFML’s Monopoly-Maintenance Conduct....................... 7 a. VFML’s Exclusive Dealing Contracts are Neither of Short Duration, Nor Easily Terminable, But Are De Facto Perpetual Exclusive Dealing Arrangements Foreclosing Competition That Have Never Been Terminated .............................................................. 8 b. De Facto Exclusivity Exists Because Dealing with VFML Is an Economic Necessity and Switching Costs Are Prohibitive ........................... 13 c. VFML’s De Facto Exclusive Dealings Foreclose Competition and Constitute Unlawful Monopoly Maintenance ........................ 16 B. PSP Has Sufficiently Pled Tying Claims .................................. 22 C. PSP Has Sufficiently Pled Antitrust Injury ............................... 22 D. PSP Has Pled a Plausible Relevant Geographic Market ........... 23 III. This Court Has Already Ruled That Dismissal of PSP’s Lanham Act Claim is Inappropriate at This Stage ............................................. 24 IV. PSP Has Sufficiently Pled Intentional Interference Claims ................ 24 V. PSP Withdraws Its Copyright Infringement Claim Without Prejudice ............................................................................................... 25 CONCLUSION ......................................................................................................... 25 Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 2 of 29 Page ID #:3776 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - ii - TABLE OF AUTHORITIES Page(s) Cases Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP, 592 F.3d 991 (9th Cir. 2010) ................................................................................ 11 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) ............................................................................................... 5 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ............................................................................................... 4 City of Anaheim v. S. Cal. Edison Co., 955 F.2d 1373 (9th Cir. 1992) ................................................................................ 6 Cosmetic Ideas v. IAC/Interactive Corp., 606 F.3d 612 (9th Cir. 2010) ................................................................................ 25 Cost Mgmt. Servs., Inc. v. Wash. Natural Gas Co., 99 F.3d 937 (9th Cir. 1996) .................................................................................... 4 Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003)................................................................................................ 24 Datel Holdings Ltd. v. Microsoft Corp., 712 F. Supp. 2d 974 (N.D. Cal. 2010) .................................................................. 23 DocMagic, Inc. v. Ellie Mae, Inc., 745 F. Supp. 2d 1119 (N.D. Cal. 2010) ................................................................ 23 E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435 (4th Cir. 2011) ................................................................................ 23 E.W. French & Sons, Inc. v. Gen. Portland Inc., 885 F.2d 1392 (9th Cir. 1989) .............................................................................. 22 Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451 (1992) ............................................................................................... 5 Erickson v. Pardus, 551 U.S. 89 (2007).................................................................................................. 4 Gilligan v. Jamco Dev. Corp., 108 F.3d 246 (9th Cir. 1997) .................................................................................. 4 Gilstrap v. United Air Lines, Inc., 709 F.3d 995 (9th Cir. 2013) .................................................................................. 4 Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997) ................................................................................ 4 In re Ductile Iron Pipe Fittings Direct Purchaser Antitrust Litig., No. 12-711, 2013 WL 812143 (D.N.J. Mar. 5, 2013) ............................................ 8 Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003) ........................................................................................ 24 LePage's, Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) ......................................................................... 6, 7, 13 Masimo Corp. v. Tyco Health Care Group, L.P., 350 Fed. Appx. 95 (9th Cir. 2009) ................................................................... 1, 13 Masimo Corp. v. Tyco Health Care Group, L.P., No. 02-4770, 2004 WL 5907538 (C.D. Cal. June 10, 2004) ............................. 6, 8 Masimo Corp. v. Tyco Health Care Group, L.P., No. 02-7440, 2006 WL 1236666 (C.D. Cal. Mar. 22, 2006) ......................... 13, 19 Morongo Band of Mission Indians v. Rose, 893 F.2d 1074 (9th Cir. 1990) .............................................................................. 25 Movie 1 & 2 v. United Artists Commc'ns, Inc., 909 F.2d 1245 (9th Cir. 1990) ................................................................................ 5 Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 3 of 29 Page ID #:3777 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - iii - Newcal Indus., Inc. v. IKON Office Solution, 513 F.3d 1038 (9th Cir. 2008) .............................................................................. 23 NicSand, Inc. v. 3M Co., 507 F.3d 442 (6th Cir. 2007) .......................................................................... 10, 11 Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997) .................................................................. 10, 11, 12 Paddock Publ'ns, Inc. v. Chicago Tribune Co., 103 F.3d 42 (7th Cir. 1996) .................................................................................. 10 Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421 (9th Cir. 1995) ................................................................................ 22 SPX Corp. v. Mastercool U.S.A., Inc., No. 10-1266, 2011 WL 2532889 (N.D. Ohio June 24, 2011) ........................ 10, 11 Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346 (1922) ............................................................................................. 17 Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320 (1961) ...................................................................................... passim Tele Atlas N.V. v. Navteq Corp., No. 05-01673, 2008 WL 4911230 (N.D. Cal. Nov. 13, 2008) ........................... 6, 7 Todd v. Exxon Corp., 275 F.3d 191 (2d Cir. 2001) ................................................................................. 23 U.S. v. Dentsply Int'l Inc., 399 F.3d 181 (3d Cir. 2005) .......................................................................... passim U.S. v. Grinnell Corp., 384 U.S. 563 (1966) ............................................................................................... 7 U.S. v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) .............................................................................. 6, 7 United Shoe Mach. Corp. v. U.S., 258 U.S. 451 (1922) ............................................................................................. 17 W. Parcel Express v. United Parcel Serv., 65 F. Supp. 2d 1052 (N.D. Cal. 1998), ................................................................. 10 W. Parcel Express v. United Parcel Serv. of Am., Inc., 190 F.3d 974 (9th Cir. 1999) .......................................................................... 10, 11 ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012), ......................................................................... passim Statutes 15 U.S.C. § 1 ........................................................................................................... 5, 6 15 U.S.C. § 2 ...................................................................................................... passim Rules Fed. R. Civ. P. 8 .......................................................................................................... 4 Fed. R. Civ. P. 12 .................................................................................................. 4, 21 Local Rule 7-18 ........................................................................................................ 24 Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 4 of 29 Page ID #:3778 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -1- INTRODUCTION AND SUMMARY OF FACTS Plaintiff Pro Search Plus, LLC (“PSP”) submits this Memorandum in opposition to Defendant VFM Leonardo, Inc.’s (“VFML”) Motion to Dismiss Plaintiff’s Second Amended Complaint (“SAC”). Dkt. 64. This lawsuit centers around VFML’s deliberate and continuing monopolization of the relevant markets for the management and distribution of hotel digital photographs and rich media for online hotel listings distribution, in violation of Sections 1 and 2 of the Sherman Act. SAC ¶¶ 1-2. VFML has unlawfully maintained and indefinitely perpetuates these monopolies by means of a vast, industry-wide network of de facto exclusive dealing arrangements, produced as a result of coerced tying arrangements. Id. The exclusive dealing agreements here are of the same kind condemned in cases such as U.S. v. Dentsply Int’l Inc., 399 F.3d 181 (3d Cir. 2005), ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012), cert. denied __ U.S. __, 2013 WL 673880 (Apr. 29, 2013), and Masimo Corp. v. Tyco Health Care Group, L.P., 350 Fed. Appx. 95, 97 (9th Cir. 2009). The bulk of travel arrangements for airlines and lodging are arranged electronically, and hotels are very competitive in appealing to this potential group of travelers. SAC ¶¶ 9-10. All major hotels display still photographs and videos/virtual tours (known as rich media) on websites and, more importantly, on Pegasus and electronic reservation networks known as GDSs, and all major online travel agents portals such as Expedia, Priceline, TripAdvisor, Orbitz, Kayak, and others, known as “OTAs.” Id. OTAs are the traveling public’s link to this indispensable network. Pegasus maintains a collection of electronically bookable hotels and a distribution network that consists of many of the top travel websites and providers, which collectively use the key website accessed directly by consumers also to include the tens of thousands of affiliate websites and partners. Id. ¶ 12. Additionally, Pegasus hosts this content for over 600,000 travel agents worldwide. Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 5 of 29 Page ID #:3779 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -2- A GDS is an electronic reservation network that acts as a single point of access for online travel bookings by travel agents, booking sites, and large corporations. Id. The four GDSs used by such travel agents, booking sites, and large corporations are Amadeus, Galileo, Sabre, and Worldspan. Id. ¶¶ 10-11. Any hotels that want to advertise or distribute visual and rich content through an OTA must use the GDSs or Pegasus, which are the essential intermediaries for the distribution of hotel content to OTAs. Id. ¶¶ 10, 48, 70. PSP and VFML compete in the relevant markets for management and distribution of digital photographs and rich media content for online hotel listings. Id. ¶¶ 19-24. Within the last few years, PSP has developed and provided a highly efficient and cost-effective competing platform for collecting, processing, managing, and distributing visual content and rich media for online hotel listings distribution that was and is superior to what VFML provides. Id. VFML has executed a multifaceted anticompetitive scheme to exclude competitors from and to monopolize these lucrative markets. To thwart competition, in 2008, VFML first acquired its major competitor Leonardo Media, B.V., a Dutch corporation (id. at ¶¶45-47); it then entered into a network of de facto exclusive dealing and tying arrangements with: (a) Pegasus, the sole content and information aggregator in the travel industry; (b) all four of the GDSs for visual content and rich media for online hotel listings distribution: Sabre Holdings Group (owner of Sabre/Travelocity), Travelport Limited (owner of Worldspan and Galileo), and Amadeus; and (c) the major hotel groups. Id. ¶¶ 43-44, 48-59, 81-85. Under the arrangements with Pegasus and the GDSs, VFML provided free access to VFML-controlled hotel content, continued distribution of that content, and its Digital Asset Management technology platform, in exchange for the exclusive rights to distribute hotel content for those GDSs and Pegasus and their affiliated hotel clients and OTAs. Id. ¶¶ 48-49. VFML has, in effect, tied critical access to its massive collection and distribution of hotel content and its technology platform (the Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 6 of 29 Page ID #:3780 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -3- tying products), to its exclusive right to distribute hotel content for these GDSs and their affiliated network of OTAs and hotel clients (the tied product). Id. ¶¶ 48-49, 81-85. These tying-exclusive arrangements are practicably perpetual because the costs to the GDSs (and their OTAs) of moving their technology platform and content-distribution from VFML to another provider are prohibitive and switching is not a real option; and the GDSs and OTAs have confirmed they are precluded from dealing with competing distributors, such as PSP, due to their arrangements with VFML. Id. ¶¶ 69-72; see also Dkt. 55 at 8 (Court’s order referencing relevance of “switching costs”). As a result of these arrangements, VFML has been able to exclude rivals, including PSP, from access to partners and outlets that are essential to the provision of services in the relevant Photo Distribution Market and Rich Content Distribution Market; any hotels that want to advertise or distribute visual and rich content through an OTA must use an intermediary such as the GDSs or Pegasus, they must, by virtue of this network of exclusive dealing arrangements, use VFML instead of another competitor. Id. ¶¶ 10, 48, 70. Further, since 2008, VFML has used and continues to use its monopoly power in the Photo Distribution Market and the Rich Content Distribution Market to secure exclusive dealing arrangements, by means of illegal tying, with major hotel groups and OTAs, thereby foreclosing competition in the Rich Content Distribution Market. Id. ¶¶ 77-80. As a result of this network of exclusive dealing-tying arrangements, VFML dominates the relevant markets for management and distribution of digital photographs and rich media content for online hotel listings distribution, possessing a market share of 80%. Id. ¶¶ 1-2, 97-109. VFML has become the sole distributor of hotel photos and rich media content to Pegasus and all four major GDSs, their affiliated OTAs, and major hotel groups. Id. ¶¶ 97-105. PSP, VFML’s only real remaining competitor, is substantially foreclosed from the relevant market because it cannot access essential intermediaries, the GDSs, and their affiliated OTAs and hotel groups, and competition in the relevant markets has been suppressed and Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 7 of 29 Page ID #:3781 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -4- virtually eliminated, harming consumers. Id. ¶¶ 106-109. ARGUMENT I. Legal Standard Motions to dismiss brought under Fed. R. Civ. P. 12(b)(6) are generally disfavored and are to be granted in only extreme circumstances. See, e.g., Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997). In ruling on a motion to dismiss, the court must accept as true all factual allegations in the complaint and must draw all reasonable inferences, construing the complaint liberally, in the light most favorable to the plaintiff. Gilstrap v. United Air Lines, Inc., 709 F.3d 995, 1003 (9th Cir. 2013). Fed. R. Civ. P. 8(a)(2) does not require a specific quantity of facts but simply “‘a short and plain statement of the claim showing that the pleader is entitled to relief.’” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted). “Specific facts are not necessary,” and a complaint need only give the defendant fair notice of the claims and grounds upon which they rest. Erickson v. Pardus, 551 U.S. 89, 93 (2007); Twombly, 550 U.S. at 555 (noting “detailed factual allegations” are not required). A plaintiff must simply plead “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. II. PSP Has Sufficiently Pled Sherman Act Claims The antitrust laws seek “to promote and protect a competitive marketplace for the benefit of the public.” Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1214 (9th Cir. 1997). Section 2 of the Sherman Act (15 U.S.C. § 2) prohibits the “acquisition or maintenance of a monopoly by exclusionary conduct.” Id. A monopolization claim under Section 2 has three elements: “(1) the defendant possesses monopoly power in the relevant market[s]; (2) the defendant has willfully acquired or maintained that power; and (3) the defendant’s conduct has caused antitrust injury.” Cost Mgmt. Servs., Inc. v. Wash. Natural Gas Co., 99 F.3d 937, 949 (9th Cir. 1996). VFML asserts PSP has failed to plead the first and third elements; VFML does not contend PSP has failed to allege VFML’s monopoly Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 8 of 29 Page ID #:3782 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -5- power in the relevant markets for Technology Platform (70% share), Photo Distribution (90 % share), and Rich Content Distribution (80% share). SAC ¶¶ 31- 32, 35, 39. PSP has sufficiently pled monopolization under Section 2 of the Sherman Act and unlawful arrangements that unreasonably restrain trade in violation of Section 1 of the Sherman Act. A. PSP Has Sufficiently Pled Unlawful Monopoly Maintenance Through Exclusionary Conduct Eliminating Competition 1. Monopoly-Maintenance Standard A violation of Section 2 for unlawful monopoly maintenance consists of two elements: (1) possession of monopoly power (which VFML does not contest) and (2) “maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 480 (1992). Section 2 prohibits a monopolist from conduct seeking “to foreclose competition, to gain a competitive advantage, or to destroy a competitor” (id. at 482-83), or “‘attempting to exclude rivals on some basis other than efficiency.’” Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985) (citation omitted). It is unlawful for a monopolist to engage in “‘conduct which unnecessarily excludes or handicaps competitors’” in order to maintain a monopoly. Id. at 597 (citation omitted). Whether conduct is anticompetitive is a factual question for the jury. Movie 1 & 2 v. United Artists Commc’ns, Inc., 909 F.2d 1245, 1255 (9th Cir. 1990). VFML’s motion hinges on the misplaced assumption that the alleged anticompetitive (or exclusionary) conduct - here the network of de facto exclusive dealing arrangements - must independently constitute unlawful exclusive dealing (violating Section 1 of the Sherman Act) in order for that conduct to give rise to unlawful monopoly maintenance under Section 2. “Behavior that otherwise might comply with antitrust law may be impermissibly exclusionary when practiced by a monopolist.” Dentsply, 399 F.3d at 187. “‘[A] monopolist is not free to take certain Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 9 of 29 Page ID #:3783 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -6- actions that a company in a competitive (or even oligopolistic) market may take, because there is no market constraint on a monopolist’s behavior.’” Id. (quoting LePage’s, Inc. v. 3M, 324 F.3d 141, 151-52 (3d Cir. 2003)). So, “practices that harm rivals unnecessarily may be violations of §2 when committed by a dominant firm, even though they would not be violations of other provisions when no dominant firm is involved.” 3 Philip Areeda & Herbert Hovenkamp, Antitrust Law ¶ 651i, at 128 (3d ed. 2008). For example, a monopolist’s exclusive dealing arrangements may not violate § 1, but can still run afoul of § 2. 11 id. ¶ 1800, at 21- 22 (3d ed. 2011) (“The court [in Microsoft] rejected Microsoft’s contention that a finding of no liability under §1 ‘necessarily precludes holding it liable under § 2.’” (quoting U.S. v. Microsoft Corp., 253 F.3d 34, 70 (D.C. Cir. 2001))). “The point is that §2’s highly general proscription of ‘monopolistic’ practices is not cabined by any specific statutory formulation and thus can be both less than or more than the prohibitions of the other antitrust laws,” which “gives the courts more flexibility to fashion legal doctrine respecting dominant firms.” 3 id. ¶ 651i, at 128- 29. Therefore, “a finding in favor of the defendant [on an exclusive dealing claim] under Section 1 of the Sherman Act . . . [does] not ‘preclude the application of evidence of exclusive dealing to support the [Section] 2 claim.’” Dentsply, 399 F.3d at 197 (quoting LePage’s, 324 F.3d at 157 n.3); accord Tele Atlas N.V. v. Navteq Corp., No. 05-01673, 2008 WL 4911230, *1 (N.D. Cal. Nov. 13, 2008) (“[E]xclusive dealing arrangements that may not violate [§] 1 of the Sherman Act can still run afoul of [§] 2.”). Further, in considering § 2 violations, it is “improper ‘to focus on specific individual acts of an accused monopolist while refusing to consider the overall combined effect.’” Masimo Corp. v. Tyco Health Care Group, L.P., No. 02-4770, 2004 WL 5907538, *5 (C.D. Cal. June 10, 2004) (quoting City of Anaheim v. S. Cal. Edison Co., 955 F.2d 1373, 1378 (9th Cir. 1992)). “[C]ourts must consider all of an alleged monopolist’s related conduct in the aggregate” and “[w]hat matters is Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 10 of 29 Page ID #:3784 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -7- whether the ‘synergistic effect’ of the alleged conduct is to harm competition, and thus perpetuate a monopoly.” Tele Atlas, 2008 WL 4911230 at *1-2; id. at *1 (“anticompetitive conduct” in maintenance of monopoly, “may include otherwise legal conduct,” which is a “point [that] is clear from this past century’s jurisprudence”). Therefore, “[a]lthough not illegal in themselves, exclusive dealing arrangements can be an improper means of maintaining a monopoly.” Dentsply, 399 F.3d at 187 (citing U.S. v. Grinnell Corp., 384 U.S. 563 (1966)); LePage’s, 324 F.3d at 157. “A prerequisite for such a violation is a finding that monopoly power exists.” Dentsply, 399 F.3d at 187. “In addition, the exclusionary conduct must have an anti-competitive effect.” Id. “Unlawful maintenance of a monopoly is demonstrated by proof that a defendant has engaged in anti-competitive conduct that reasonably appears to be a significant contribution to maintaining monopoly power.” Id. (citing Microsoft, 253 F.3d at 79). “[A]s a general matter the exclusion of nascent threats is the type of conduct that is reasonably capable of contributing significantly to a defendant’s continued monopoly.” Microsoft, 253 F.3d at 79. “[I]t would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will. . . .” Id. In Microsoft, as here, the arrangements with purchasers had “significant effect in preserving its monopoly” by “keep[ing] usage of [rival’s product] below the critical level necessary to pose a real threat to [defendant’s] monopoly.” Id. at 71. 2. VFML’s Monopoly-Maintenance Conduct A monopolist violates Section 2 by entering into exclusive dealing arrangements, whether express or de facto, that unreasonably foreclose a substantial portion of the relevant market to existing or potential competitors. Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961); Dentsply, 399 F.3d at 191 (finding foreclosure in § 2 case when exclusionary practices “ensure[d] that the key dealers offer [supplier’s product] either as the only or dominant choice”; “it is not necessary Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 11 of 29 Page ID #:3785 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -8- that all competition be removed from the market”). “Exclusive dealing arrangements are of special concern when imposed by a monopolist.” ZF Meritor, 696 F.3d at 271. Whether an arrangement between parties is a de facto exclusive dealing arrangement is a question of fact. Masimo, 2004 WL 5907538 at *16. Further, “[t]he question of whether the alleged exclusive dealing arrangements foreclosed a substantial share of the line of commerce is a merits question not proper for the pleading stage.” In re Ductile Iron Pipe Fittings Direct Purchaser Antitrust Litig., No. 12-711, 2013 WL 812143, *19 (D.N.J. Mar. 5, 2013). Exclusionary dealing arrangements need not, as VFML suggests, expressly prescribe exclusivity to be deemed unlawful under the antitrust laws. Exclusionary contracts can be found illegal “even though [the] contract does ‘not contain specific agreements not to use the (goods) of a competitor,’ if ‘the practical effect . . . is to prevent such use.’” Tampa Elec., 365 U.S. at 326-27. “An express exclusivity requirement . . . is not necessary because we look past the terms of the contract to ascertain the relationship between the parties and the effect of the agreement ‘in the real world.’ Thus, de facto exclusive dealing claims are cognizable under the antitrust laws.” ZF Meritor, 696 F.3d at 270 (citations omitted). Whether a contract creates an exclusive dealing arrangement depends on the contract’s “practical effect” and its “practical application.” Tampa Elec., 365 U.S. at 327. a. VFML’s Exclusive Dealing Contracts are Neither of Short Duration, Nor Easily Terminable, But Are De Facto Perpetual Exclusive Dealing Arrangements Foreclosing Competition That Have Never Been Terminated VFML’s motion to dismiss PSP’s monopolization claims rests, and falls, on its flawed cabining of PSP’s exclusive dealing allegations into the narrow confines of VFML’s own self-serving conclusions about the meaning and effect of submitted written contracts with the GDSs-Pegasus and the OTAs and hotels, of which it requests judicial notice. It argues that those agreements, by their terms: (a) are of short duration and permit termination on short notice, (b) do not all expressly confer Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 12 of 29 Page ID #:3786 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -9- complete exclusivity in distribution of all content, and hence (c) do not foreclose competition.1 This is the pleadings stage of an antitrust case, not the merits stage of a breach of written contract case where the unambiguous terms of the contract takes precedence. VFML cannot invoke the terms of those agreements to excise PSP’s allegations of the de facto exclusive nature, and the practical exclusionary effect, of its network of arrangements. Specifically, as set forth in the SAC: (a) the VFML agreements conferring exclusivity are not of short duration, nor terminable on short notice (SAC ¶¶ 50-64); (b) VFML’s arrangements confer de facto perpetual exclusivity because switching costs are prohibitive and dealing with VFML is an economic necessity (SAC ¶¶ 69-76); and (c) competition has been substantially foreclosed - indeed eliminated. SAC ¶¶ 43-44, 97-109. (1) The Pegasus contract, entered June 2009, provides that Pegasus will accept distribution of digital photographs and rich media exclusively from VFML, is for five years and still in effect and subject to renewal, and can be terminated only upon 12 months’ notice (SAC ¶¶ 51-52); given Pegasus’s critical significance to the online travel industry - with its vast network of OTA-related channels and hotel groups - this lengthy arrangement conferring complete exclusivity over all content distribution, would, standing alone, foreclose a substantial share of the market. Id. (2) The Amadeus contract, entered into August 2009, provides that it will accept distribution of rich media exclusively from VFML, has a three-year initial 1 VFML has emphasized provisions in a few of the contracts that carve out an exception to VFML’s exclusivity to allow direct sourcing of photographs. But even accepting VFML's assertion that the exclusivity terms applied only to rich media distribution and not to photograph distribution (over which VFML already held a monopoly), the agreements indisputably foreclosed competition in most all of the relevant market for rich media distribution. In any event, where there is a dominant supplier, “the lack of complete exclusivity in each contract does not preclude [a] de facto exclusive dealing claim.” ZF Meritor, 696 F.3d at 284. Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 13 of 29 Page ID #:3787 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -10- term that has already been extended once, and is still capable of further extension. Id. ¶¶ 53-54. (3) The Sabre-Travelocity contract, entered into in October 2007, provides that it will accept all distribution of rich media exclusively from VFML, is for three-year initial term, and terminable only on paying a fee equal to the annual fee. Id. ¶¶ 55-56. (4) The Travelport (Galileo-Worldspan), entered October 2007, provides it agreed to accept distribution of all rich media exclusively from VFML, and for Galileo the initial term is for two years, has been extended for three years, and for Worldspan two years, and termination on 90-days’ notice. Id. ¶¶ 57-59. VFML’s exclusive dealing arrangements are factually distinguishable from cases upholding short-term, easily terminable exclusive dealing contracts. Here, the Pegasus contract was for five years and terminable on 12 months’ notice. Termination of the Sabre agreement provides for a substantial monetary penalty. All of the contracts are of a duration of two years and greater, are continually renewed and not open to rebidding, cover the entire United States, and collectively are industry-wide so as to foreclose - rather than promote - any competition. These anticompetitive exclusive dealing and tying arrangements are factually distinguishable from the contracts at issue in Paddock Publ’ns, Inc. v. Chicago Tribune Co., 103 F.3d 42 (7th Cir. 1996), NicSand, Inc. v. 3M Co., 507 F.3d 442 (6th Cir. 2007), SPX Corp. v. Mastercool U.S.A., Inc., No. 10-1266, 2011 WL 2532889 (N.D. Ohio June 24, 2011), W. Parcel Express v. United Parcel Serv., 65 F. Supp. 2d 1052 (N.D. Cal. 1998), aff’d, 190 F.3d 974 (9th Cir. 1999), and Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997). Paddock involved distribution of newspapers in a single city (as opposed to the markets here covering the entire United States). The court emphasized that the contracts were open to frequent rebidding, which helps decrease prices and benefits consumers. Paddock, 103 F.3d at 45. Here, there are no offers for bids or rebidding Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 14 of 29 Page ID #:3788 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -11- in this industry, and VFML is exerting monopoly power to steadily increase, not lower, prices and to require mandatory upgrades to utilize its services. PSP and former competitor ICE Portal have never been asked to bid by the GDSs or Pegasus. PSP has unsuccessfully tried numerous times to reach out and make offers but the GDSs and Pegasus have confirmed they cannot deal with other distributors and are precluded from doing so by their arrangements with VFML. SAC ¶¶ 61, 72. VFML’s exclusionary conduct is hindering - not encouraging - competition and has certainly not “enhance[d] . . . interbrand competition.” Omega, 127 F.3d at 1162. Here, the exclusive dealing arrangements “‘foreclose competition in a substantial share of the line of commerce affected.’” Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP, 592 F.3d 991, 996 (9th Cir. 2010) (citation omitted). NicSand involved the offer of lower prices for extended exclusivity to recoup costs. NicSand, 507 F.3d at 453. VFML never reduced its fees - only increased them. Likewise, it forces users to upgrade to its newest system at a higher cost and also includes a new mandatory extended contract with the hotel owners. SPX involved a one-year contract with a 30-day notice termination provision. SPX, 2011 WL 2532889 at *1. VFML’s contracts range from two to five times longer. Moreover, only the Amadeus contract provides as short as a 30-day termination provision; the Pegasus notice period is 12 times as long, the notice period in the Galileo and Worldspan contracts is three times in length, and the Sabre contract’s monetary penalty acts a deterrent for early termination. Western Parcel granted summary judgment on an exclusive dealing claim “based on uncontradicted evidence in the record” establishing that the contracts: (a) were terminable “for ‘virtually any reason at any time’”; (b) were not even exclusive dealing contracts, but rather were volume discount contracts; and (c) had lawful procompetitive effects in a highly competitive expanding market with no entry barriers and in which competitors “aggressively entered” and in which plaintiff had “seen significant increase in profits.” 190 F.3d at 975-77. Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 15 of 29 Page ID #:3789 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -12- In Omega, an undisputed and complete evidentiary record showed: (a) the agreements foreclosed 38% (less than half the foreclosure share alleged here); (b) there were hundreds of distributors available to manufacturers; (c) there were four other competing manufacturers that had significant “sales to end-users as an alternative channel of distribution”; (d) all of the distributor contracts were for one year only and were easily terminable; (e) there was actual entry and expansion of a competing manufacturer, while “industry output . . . expanded substantially”; and (f) the plaintiff had direct access to the end user retail market. 127 F.3d at 1162-65. Finally, none of these cases involved allegations of de facto perpetual exclusive dealing of the type involved here (and discussed below). VFML’s submitted hotel contracts and OTA contracts also do not qualify as short-term, easily terminable contracts. First, setting aside allegations of the de facto exclusive and perpetual nature of these arrangements (addressed below), most of the contracts with the hotel groups are for initial two-year terms but have been, or are being, extended to a duration of four to five years from their inception. Moreover, none have been terminated, they have early cancellation penalties, and they offer substantial discounts conditioned on endorsing VFML as the “exclusive” provider of the distribution of moving-media.2 Similarly, the OTA contracts are almost all for a term of two years or three years, have been extended and/or still in effect, and condition discounts on VFML’s being the “exclusive” provider of moving media and/or images.3 2 These contracts, included in the Declaration of David Han, Dkt. 65 (“Han Decl.”), are: Hilton (Ex. I at 68, 96); Marriott (Ex. L at 40, 49); Best Western (Ex. K at 39, 49); Wyndham (Ex. M at 6, 18, 31); IHG (Ex. O at 30, 40); La Quinta (Ex. N. at 1, 5, 20); and Vantage (Ex. G, at 1, 19). 3 These contracts, at Han Decl., are: Orbitz (Ex. U, at 16-17); Expedia (Ex. S, at 5, 20); Travelocity (Ex. V, at 24-25, 28); TripAdvisor (Ex. P, at 1, 9, 11); Kayak (Ex. T, at 1, 11, 15); Bookings.com (Ex. R, at 1, 9); Priceline (Ex. Q, at 1- 3). Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 16 of 29 Page ID #:3790 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -13- Although VFML glides over the significance of terms conferring discounts in exchange for (on the condition of) exclusivity, these terms are treated the same as exclusive dealing arrangements. Masimo, 350 Fed. Appx. at 97 (“[C]onditioning [a] discount on the requirement of near complete exclusivity . . . is the hallmark of exclusive dealing.”); accord 11 Areeda & Hovenkamp, supra, ¶ 1807b, at 133 (discounts conditioned on exclusivity should generally be treated the same as an “orthodox” exclusive dealing arrangement). Courts have held that discounts offered by a monopolist to major suppliers “were designed to and did operate as exclusive dealing arrangements, despite the lack of any express exclusivity requirements.” ZF Meritor, 696 F.3d at 282 (citing LePage’s, 324 F.3d at 157-58). Even where the discount agreements are “terminable on short notice on their face,” they may not be terminable “in practice” and be “de facto exclusive,” particularly where, as here, the customers are “locked into” purchases from the monopolist and deprived of an opportunity to switch to a competitor. Masimo Corp. v. Tyco Health Care Group, L.P., No. 02-7440, 2006 WL 1236666, *6 (C.D. Cal. Mar. 22, 2006); id. at *7 (noting “[t]he relevant inquiry is whether the [purchasers] could get out of the agreements on short notice” and the contracts, unlike those in Omega, “were not in practice terminable on short notice”). In sum, justiciable factual issues exist as to whether a network of industry- wide exclusive agreements by a monopolist of multi-year duration with lengthy notice periods for termination that are coupled with discounts for exclusivity, could properly be described as “short-term” contracts that are “readily” and “quickly” terminable on “short notice” as a matter of law. b. De Facto Exclusivity Exists Because Dealing with VFML Is an Economic Necessity and Switching Costs Are Prohibitive While purportedly executed for fixed terms with termination rights, VFML’s tying and exclusive arrangements are, in fact, practicably perpetual where the costs to the GDSs-Pegasus (and their affiliated OTAs) of moving their technology Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 17 of 29 Page ID #:3791 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -14- platform and content from VFML to another provider are prohibitive and switching is, therefore, not a real option. SAC ¶ 69. The costs of switching from VFML to another distributor, such as PSP, are prohibitive because the VFML-controlled installed base of critically needed content and platform for distribution would have to be completely replaced and replicated. Id. Switching would take too long (years), cost too much (millions of dollars), and be too risky even to attempt by placing the switching GDS (and its affiliated OTAs) at a grave competitive disadvantage in relation to other competitors that remained in the exclusive arrangements with VFML. Id. The GDSs (and their OTAs) must use VFML because it controls the dominant share of hotel content, is the monopoly provider of photo distribution, and provides the technology platform necessary for the GDSs (and the OTAs that use them) to operate competitively. Id. ¶ 72. VFML’s exclusive arrangements with the GDSs (and their OTAs) have essentially tied the critically necessary access to VFML- controlled hotel content and distribution platform to VFML’s exclusive distribution of hotel content. If a GDS terminated its exclusive arrangements with VFML - and, as a sure consequence of that, lost access to VFML-controlled hotel content and distribution platform - it would face prohibitively high “switching costs” in trying to replace or replicate the lost VFML content and distribution platform, putting it at a significant competitive disadvantage vis-à-vis other GDSs that still had access to the VFML-controlled content and distribution platform. Id. No single GDS would or could terminate its exclusive arrangements with VFML (and try to multi-source) because VFML would cut them off from access to the necessary VFML-controlled content and the distribution platform, seriously disabling if not destroying that GDS’s competitive presence. Id. Similarly, the hotels want but are precluded from the benefits of choice among alternative channels of distribution for their hotel content because they cannot afford to lose access to the VFML-controlled distribution platform Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 18 of 29 Page ID #:3792 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -15- exclusively used by the GDSs (and their OTAs), which would be the consequence of terminating their exclusive arrangements with VFML. Id. ¶ 70. The hotels are forced into dealing exclusively with VFML because, in order to have their content displayed through the GDSs (and, in turn, reach their network of OTA affiliates representing the vast bulk of online travel channels of distribution), they must use VFML’s monopoly distribution platform, the only one used by the GDSs and their OTAs; as a practical matter, each and every hotel that distributes content to more than one OTA must go through VFML. Id. ¶ 71. Accordingly, VFML is assured de facto exclusivity and market dominance whether or not required by contracts and despite terms of duration and terminability. The impracticability of terminating the exclusive dealing arrangements renders any written term allowing for termination on short notice “meaningless.” SAC ¶ 76 (quoting ZF Meritor, 696 F.3d at 287). Under the circumstances here, reliance on written terms ostensibly allowing for termination would: (a) impermissibly contradict the realities of impracticability of termination, and (b) essentially confer complete antitrust immunity for de facto exclusive dealing by the sheer fiat of the existence of such terms in the written contracts (thereby encouraging monopolists to insert such provisions to shield their monopoly-maintenance conduct from antitrust scrutiny). PSP’s SAC expressly alleges that GDSs, major OTAs, and hotel groups have confirmed that they cannot deal with any competing distributors (e.g., PSP) because they cannot afford the inexorable consequence of losing access to VFML’s content and distribution platform. SAC ¶ 72. In response to these allegations of impracticability of terminating and switching from VFML, VFML asserts that PSP is attempting to “penalize” it for having “superior” and “preferred” products. Dkt. 64 at 12-14. But this argument ignores PSP’s allegations of its superior products and services that were desired by, but deprived from, purchasers that wanted, but denied, choice (through multi-sourcing) as a result of VFML’s “all or nothing” basis Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 19 of 29 Page ID #:3793 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -16- for doing business. SAC ¶¶ 19-24, 72. Because PSP’s allegations must be accepted as true, VFML’s argument concerning the superiority of its products is premature. As a result of its de facto exclusionary dealing, monopolist VFML has foreclosed nascent competitors from the relevant markets, allowing it to maintain and perpetuate enduring monopolies and become, as VFML boasts, “the visual content switch” for the online travel industry. Id. ¶¶ 97-105. As previously discussed, the Sherman Act does not countenance such conduct directed at a nascent competitor. Supra at 7.4 c. VFML’s De Facto Exclusive Dealings Foreclose Competition and Constitute Unlawful Monopoly Maintenance Where the defendant has a dominant market share, as here, a de facto exclusive dealing monopolization claim may still be stated even where the written agreements provide that they are of short duration and easily terminable on short notice. Dentsply, 399 F.3d at 193-94; ZF Meritor, 696 F.3d at 282-83, 287. In such circumstances, courts require realistic assessment of the market (not just contract terms) to determine whether the contractual right to terminate has any real-world commercial significance. Courts must “look past the terms of the contract to ascertain the relationship between the parties and the effect of the agreement ‘in the real world.’” ZF Meritor, 696 F.3d at 270 (citation omitted). “The Supreme Court on more than one occasion has emphasized that economic realities rather than a formalistic approach must govern review of antitrust activity.” Dentsply, 399 F.3d at 189. Long-established Supreme Court precedent endorses monopoly-maintenance liability for de facto exclusive dealing arrangements, despite terms ostensibly 4 Even a flawed technology may provide competitive benefits: “the inquiry [into whether a given patent is superior or inferior] is rarely worthwhile, for even inferior technologies can provide some, if not perfect, competition to the patentee.” 3 Areeda & Hovenkamp, supra, ¶ 707e, at 287. Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 20 of 29 Page ID #:3794 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -17- allowing for short duration or termination on short notice, where switching is impracticable due to the indispensability and market dominance of the monopolist. As was discussed in Tampa Elec., 365 U.S. at 327 (emphasis added): United Shoe Machinery Corp. v. United States, 258 U.S. 451, 457 (1922) . . . held that even though a contract does ‘not contain specific agreements not to use the (goods) of a competitor,’ if ‘the practical effect . . . is to prevent such use,’ it comes within the condition of the section as to exclusivity. The Court also held, as it had in [Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346 (1922)], that a finding of domination of the relevant market by the lessor or seller was sufficient to support the inference that competition had or would be substantially lessened by the contracts involved there. As of that time it seemed clear that if ‘the practical effect’ of the contract was to prevent a lessee or buyer from using the products of a competitor of the lessor or seller and the contract would thereby probably substantially lessen competition in a line of commerce, it was proscribed. In United Shoe, the restrictive exclusive-dealing lease provisions were of short duration in the sense that USM had the right to cancel the leases if the lessee used the equipment of another shoe-machinery maker; yet despite that, the practical market realities made it apparent that they “tend[ed] to monopoly”: When it is considered that the United Company occupies a dominating position in supplying shoe machinery of the classes involved, these covenants, signed by the lessee and binding upon him, effectually prevent him from acquiring the machinery of a competitor of the lessor, except at the risk of forfeiting the right to use the machines furnished by the United Company, which may be absolutely essential to the prosecution and success of his business. United Shoe, 258 U.S. at 457-58 (emphasis added). The lease restrictions were therefore “quite as effective as express covenants could be, and practically compels the use of the machinery of the lessor, except upon risks which manufacturers will not willingly incur.” Id. at 458. As explained by the leading antitrust treatise: Although the [United Shoe] Court did not say so explicitly, it apparently realized that short duration alone does not alleviate competitive concerns when the firm made subject to exclusive dealing has a significant investment in existing equipment and methods. Theoretically, the lessee could have dropped USM’s machines and used the machines of rivals on very short notice; as a practical matter, dropping USM’s machines would undoubtedly have entailed significant expense. Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 21 of 29 Page ID #:3795 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -18- 11 Areeda & Hovenkamp, supra, ¶ 1801c, at 39 (emphasis added). Hence, in a situation of “de facto duration,” the “[d]urational requirements need not be explicit in the contract. More significantly, a short notice period may suggest unrealistically that terminating a contract is less costly than it is in fact.” Id. ¶ 1802g3, at 101. In Dentsply, “[a]lthough the parties to the sales transactions consider the exclusionary arrangements to be agreements, they are technically only a series of independent sales. Dentsply sells teeth to the dealers on an individual transaction basis and essentially the arrangement is ‘at-will.’” 399 F.3d at 193. “Nevertheless, the economic elements involved - the large share of the market held by Dentsply and its conduct excluding competing manufacturers - realistically make the arrangements here as effective as those in written contracts.” Id. (citation omitted). Hence, “in this case, in spite of the legal ease with which the relationship can be terminated, the dealers have a strong economic incentive to continue carrying Dentsply’s teeth.” Id. at 194. The Court “distinguish[ed]” other cases, including those relied on by VFML here, where “courts have indicated that exclusive dealing contracts of short duration are not violations of the antitrust laws.” Id. at 194 n.2. Dentsply was followed in ZF Meritor, 696 F.3d at 282-83, where the Court sustained a “de facto partial exclusive dealing” claim involving written contracts giving the defendant the right to terminate the agreements with OEMs (truck manufacturers) if the market share targets were not met. There, “despite the fact that Eaton did not actually terminate the agreements on the rare occasion when an OEM failed to meet its target, the OEMs believed that it might.” Id. “Critically, due to Eaton's position as the dominant supplier, no OEM could satisfy customer demand without at least some Eaton products, and therefore no OEM could afford to lose Eaton as a supplier.” Id. at 283. Accordingly, “under the circumstances, the market penetration targets were as effective as express purchase requirements ‘because no risk averse business would jeopardize its relationship with the largest manufacturer of transmissions in the market.’” Id. (footnote and citation omitted). Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 22 of 29 Page ID #:3796 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -19- In ZF Meritor, the agreements “permitted the OEM to purchase from another supplier or terminate the agreement if another supplier offered a better product or a lower price.” Id. at 287. Yet, “any language giving OEMs the right to terminate was essentially meaningless because Eaton assured that there would be no other supplier that could fulfill the OEMs’ needs or offer a lower price.” Id. So ‘“in spite of the legal ease with which the relationship c[ould] be terminated,’ the OEMs had a strong economic incentive to adhere to the terms of the [agreements], and therefore were not free to walk away from the agreements and purchase products from the supplier of their choice.” Id. at 287 (quoting Dentsply, 399 F.3d at 194).5 ZF Meritor dismissed the argument, raised by VFML here, that there could be no market foreclosure if a new competitor was free to compete with the monopolist by “offering a superior product at a lower price,” observing that, as is true here, “‘[t]he paltry penetration in the market over the years has been a refutation of’ [the] theory by tangible and measurable results in the real world.’” Id. (quoting Dentsply, 399 F.3d at 194). It added: “Although we generally ‘assume a customer will make [its] decision only on the merits,’ a monopolist may use its power to break the competitive mechanism and deprive customers of the ability to make a meaningful choice.” Id. (citations omitted). “A highly concentrated market, in which there is one (or a few) dominant supplier(s), creates the possibility for such coercion.” Id. Here, that coercion is borne out by: (a) the GDSs-OTA and hotels confirming they could not deal with PSP despite its superior product offerings (SAC ¶¶ 19-24, 72); and (b) the lack of market penetration by rivals (id. ¶¶ 97-109). 5 See also Masimo, 2006 WL 1236666 at *3, 6 (“The Supreme Court has explained that a contract need not include specific terms of exclusivity in order to qualify as exclusive dealing . . . as long as ‘the practical effect’ of the agreement is to exclude competitors”; and despite the monopolist’s agreements “appear[ing] to have been terminable on short notice on their face, the jury could have concluded that in practice they were not” because the purchasers were “financially locked into purchasing a fixed amount”). Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 23 of 29 Page ID #:3797 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -20- The Supreme Court’s seminal exclusive dealing decision in Standard Fashion held “that a finding of domination of the relevant market by the [] seller was sufficient to support the inference that competition had or would be substantially lessened by the [exclusive dealing] contracts involved.” Tampa Elec., 365 U.S. at 326. Seventh Circuit Judge - and renowned antitrust scholar - Richard A. Posner states that “Standard Fashion may have been a case that involved a unilateral action that increased defendant’s monopoly power.” Richard A. Posner, Antitrust Law 251 (2003). In Standard Fashion “[t]he defendant manufactured a very popular line of patterns that women could use to make their own dresses” and “[r]etailers thought it essential to be able to sell the line.” Id. at 251-52. Because defendant required retailers that carried it full line to agree not to carry competing lines, “[c]ompeting manufacturers would have to create a line as long and as popular as Standard Fashion’s line, and that would be difficult, maybe impossible, to do.” Id. at 252.6 “Restricting its retailers no doubt cost Standard Fashion something, but maybe less than the increase in its expected monopoly profits from forestalling new entry by compelling prospective entrants to enter on a full-line basis.” Id.7 A monopolist runs afoul of Section 2 by requiring customers to deal on an all- or-nothing basis. In Dentsply, the Third Circuit held that the monopolist defendant that imposed an “all-or-nothing” choice on dealers “created a strong incentive for dealers to reject competing lines” because “rivals simply could not provide dealers with a comparable economic incentive to switch.” 399 F.3d at 195; accord ZF Meritor, 696 F.3d at 283 (holding that purchasers could not operate with the 6 “Consumer’s didn’t want to traipse from store to store. They wanted a full line in each store, so anyone entering the dress-pattern business had to provide the full line.” Id. 7 Accord 11 Areeda & Hovenkamp, supra, ¶ 1802e3, at 92 (agreeing with reasoning underlying Standard Fashion and condemning a dominant manufacturer’s demand that only its products be purchased on an “all or nothing” basis even though stores may prefer to sell other manufacturers’ products). Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 24 of 29 Page ID #:3798 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -21- defendant’s product and could not “afford to lose [the defendant] as a supplier”). Similarly, here the GDSs (and their OTA affiliates that got their content solely through the GDSs) could not afford to lose access to VFML’s line of products/services - i.e., VFML monopoly controlled content, distribution of that content, and technology platform - that could not be replicated if they terminated the exclusives and tried to switch out. And so, even though they - similar to the downstream purchasers in Standard Fashion, United Shoe, Dentsply, ZF Meritor, and Masimo - wanted to multi-source (giving them more content and distribution capabilities), they could not realistically do so even though they had a contractual right to terminate their contracts. VFML makes factual assertions, contrary to the SAC, that there could be no foreclosure because the GDS-Pegasus agreements: (a) leave open there “alternative channels of distribution to the OTAs”; and (b) do not all provide exclusivity over all content distribution, and allow direct sourcing of images. It does not attempt to prove that the referenced terms of the agreements, in their “practical effect” and “practical application,” negated any possibility that the agreements will “foreclose competition in a substantial share” of the relevant market. Tampa Elec., 365 U.S. at 327. Moreover, as the Ice Portal court already held: “Given the vital role of the GDSs and Pegasus in the relevant markets, it is plausible that [VFML]’s exclusive contracts with 80% - and possibly 100% - of the essential intermediaries substantially forecloses competition.” ICE Portal Inc. v. VFM Leonardo, Inc., No. 09-61424, Dkt. 34, 12-13 (S.D. Fla. July 6, 2010). Either way, VFML’s arguments are geared towards the factual merits and are not ripe for consideration on a Rule 12 motion. In any event, the written agreements themselves cast serious doubt that VFML ever will be able to support its contention that the GDSs and Pegasus can or do source a substantial amount of hotel display images directly from hotels and independently of VFML. Indeed, all but one of those agreements confirm that Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 25 of 29 Page ID #:3799 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -22- VFML is to become the “exclusive provider” of hotel “rich media,” which is defined to include photos as well as rich content; and they state that “guiding intent” and “goal” or “key objective” is to make VFML the “single” provider or “de facto standard” of all hotel content. SAC ¶¶ 65-68. B. PSP Has Sufficiently Pled Tying Claims The SAC alleges that two separate product markets have been linked. Specifically, the SAC alleges that: “VFML obtained a monopoly in the Photo Distribution Market (90% share) and significant market power in the Technology Platform Market (approximately 70% share as of 2009). It has used that monopoly power to gain a complete monopoly in the Rich Content Distribution Market through coerced, and perpetual, interrelated exclusive dealing and tying arrangements forced on the GDSs, their OTAs, and hotels.” SAC ¶ 47 (emphasis added), ¶¶ 146-148 (tying technology platform (a tying product) to rich content distribution (tied product)). There are at least two tying product markets (technology platform and photo distribution) in which VFML had monopoly power that are distinct from at least one tied product (rich content distribution). That the tying products also included (as coercive leverage) VFML’s distribution of photo and rich content in order to force exclusive distribution of rich content (a tied product), does not undermine the existence of at least one tying product market (technology platform market) that is distinct from at least one tied product (rich content distribution). PSP’s tying allegations here are substantially similar to those previously found sufficient to state tying claims in ICE Portal, at 14-15. C. PSP Has Sufficiently Pled Antitrust Injury “[C]onduct that eliminates rivals reduces competition.” Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995). Indeed, “elimination of a single competitor may violate [the Sherman Act] if it harms competition.” E.W. French & Sons, Inc. v. Gen. Portland Inc., 885 F.2d 1392, 1401 (9th Cir. 1989). PSP has pled antitrust injury and harm to competition and consumers as a consequence of Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 26 of 29 Page ID #:3800 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -23- VFML’s anticompetitive conduct. SAC ¶¶ 71-73, 97-109, 129. VFML’s assertions that PSP did not try to compete and was not harmed by VFML’s conduct flatly contradicts the pled facts. The SAC alleges: PSP developed a competing and superior platform for management-distribution of hotel content, but was foreclosed in its efforts to compete for business because of VFML’s exclusionary arrangements, which injured competition and consumers and caused PSP to suffer financial injury, including loss of revenue and profits that it would otherwise have made. SAC ¶¶ 17-24, 48, 72-73, 97, 105, 129-32. D. PSP Has Pled a Plausible Relevant Geographic Market VFML contends the relevant geographic market for purposes of this antitrust case cannot be limited to the United States because it asserts VFML and the GDSs “operate internationally.” Dkt. 64 at 21. It is well-settled law that geographic market definition is an essential factual issue for the jury to decide. Newcal Indus., Inc. v. IKON Office Solution, 513 F.3d 1038, 1045 (9th Cir. 2008). “The relevant market need not be pled with specificity.” DocMagic, Inc. v. Ellie Mae, Inc., 745 F. Supp. 2d 1119, 1135 (N.D. Cal. 2010). Because of the fact-intensive inquiries involved, dismissal on relevant market grounds is generally disfavored. Datel Holdings Ltd. v. Microsoft Corp., 712 F. Supp. 2d 974, 997 (N.D. Cal. 2010); Todd v. Exxon Corp., 275 F.3d 191, 199-200 (2d Cir. 2001). VFML’s assertion that the geographic market cannot, as a matter of law, be the United States -- because VFML and GDSs purportedly have operations outside of the United States -- has been squarely rejected. E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 445 (4th Cir. 2011) (“No federal appellate court has held that supplier headquarter sites must, as a matter of law, be included in the relevant geographic market definition in Sherman Act cases” and “[w]hether [plaintiff’s] proffered relevant [U.S.] geographic market definition will hold up upon a fact-intensive inquiry remains to be seen.”). Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 27 of 29 Page ID #:3801 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -24- III. This Court Has Already Ruled That Dismissal of PSP’s Lanham Act Claim is Inappropriate at This Stage Despite this Court’s previous denial of VFML’s motion to dismiss PSP’s “reverse passing off” Lanham Act claim (Dkt. 55 at 10-13), VFML has renewed its motion with respect to this claim. See Local Rule 7-18 (governing motions for reconsideration). Nevertheless, VFML proceeds to reargue that its previously- relied-on authorities (principally Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003)), warrant dismissal. Dkt. 37 at 24-25; Dkt. 64 at 23-24. This Court previously ruled PSP’s Lanham Act allegations fell within the “exception” recognized in Dastar (Dkt. 55 at 12), but that it was “unclear” whether PSP could be characterized as the producer or publisher of the photographs as to which VFML was falsely attributed as the originator. Id at 13. To clear up that ambiguity, in the SAC, PSP amended its Lanham Act claim to state that the “misappropriated hotel photo images and rich media” was “produced” by PSP. SAC ¶¶ 168, 169, 171. PSP also attached copies to the SAC of examples of such hotel photo images to put VFML on further notice of the violation. SAC, Exs. 5, 6. Finally, VFML makes a disingenuous argument that the digital photos and rich media created and produced by PSP, and sold to hotels, are not “goods” protected by Lanham Act. This contention flies in the face of the SAC’s allegations, which unequivocally identify these material as “products” or “goods.” SAC ¶¶ 163, 166, 168, 172. IV. PSP Has Sufficiently Pled Intentional Interference Claims VFML argues PSP’s intentional interference claims concerning relationships with Best Western should be dismissed. First, VFML’s argument that PSP cannot satisfy the “independently wrongful” conduct element - because all of its antitrust claims should be dismissed at the pleading stage - is a classic bootstrap argument that should be rejected. This element is met if the act is “unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 28 of 29 Page ID #:3802 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -25- 4th 1134, 1159 (2003). Because the well pled facts in the SAC allege violations of antitrust law, it is premature for this Court to decide, absent a fully developed evidentiary record, whether this element has been met. Further, VFML concedes that PSP’s “claim rises and falls with its antitrust claims.” Dkt. 64 at 25. V. PSP Withdraws Its Copyright Infringement Claim Without Prejudice Recently, PSP submitted copyright registration applications and payment to the U.S. Copyright Office for the images depicted and encompassed in Exhibits 5-12 attached to the SAC. See Cosmetic Ideas v. IAC/Interactive Corp., 606 F.3d 612, 621 (9th Cir. 2010) (“[R]eceipt by the Copyright Office of a complete application satisfies the registration requirement” that allows copyright holder right to institute infringement action). Due to the extended federal government shutdown, however, it is unclear what the confirmation status of these applications is and whether they have been processed and accepted. Consequently, PSP withdraws, without prejudice, its copyright claim herein, at least in the interim. CONCLUSION VFML’s motion should be denied. If the Court finds that any of PSP’s claims are deficient in some manner, PSP requests leave of the Court to amend any such allegations or claims. The policy favoring amendment of complaints is to be applied with “extreme liberality” and dismissals should occur only in extraordinary cases. Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990). Dated: October 21, 2013 BLECHER COLLINS PEPPERMAN & JOYE, P.C. By: /s/ Maxwell M. Blecher MAXWELL M. BLECHER Attorneys for Plaintiff Pro Search Plus, LLC 57668.6 Case 8:12-cv-02102-JLS-AN Document 74 Filed 10/21/13 Page 29 of 29 Page ID #:3803