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District Court Allows Exclusive Dealing Claims to Proceed under De Facto Theory
Practical Law Legal Update 6-551-3266 (Approx. 4 pages)
District Court Allows Exclusive Dealing Claims to Proceed under De Facto Theory
by Practical Law Antitrust
| Published on 10 Dec 2013 • USA (National/Federal) |
Judge Josephine Staton of the US District Court for the Central District of California ruled on a motion to dismiss in Pro Search Plus, LLC v. VFM Leonardo, Inc., particularly holding that a de facto exclusive dealing claim could proceed despite lack of hallmark exclusive dealing factors.
On December 2, 2013, Judge Josephine Staton of the US District Court for the Central District of California ruled on a motion to dismiss brought by VFM Leonardo, Inc. (VFML) for charges filed by Pro Search Plus, LLC in Pro Search Plus, LLC v. VFM Leonardo, Inc., holding in part that a de facto exclusive dealing claim could proceed despite lack of hallmark exclusive dealing factors (No. 8:12-cv-02102, (C.D. Cal., Dec. 2, 2013)).
Background
Pro Search and VFML compete in markets for managing and distributing images and rich media for hotel and travel websites to online travel agencies. Pro Search alleged that VFML holds a market share between 70% and 90% in those markets and that Pro Search is VFML's only competitor.
Hotels use Pegasus (a content and information aggregator for the travel industry) or electronic reservation networks to advertise and distribute visual and rich content through online travel agencies. Pegasus and the reservation networks are called "intermediaries."
In its complaint, Pro Search alleged that, among other non-antitrust claims, VFML maintains exclusive agreements with the major hotels, travel websites, online travel agencies and intermediaries in violation of both Section 1 and Section 2 of the Sherman Act.
Pro Search also alleged that VFML maintains unlawful tying arrangements.
Outcome
The court held that Pro Search adequately pleaded its claims for de facto exclusive dealing under both Section 1 and Section 2 of the Sherman Act.
The court dismissed the tying claim because the tying and tied products at issue were not separate products.
De Facto Exclusive Dealing
The court explained that an exclusive dealing arrangement typically requires one party to deal exclusively with the other. However, citing ZF Meritor, LLC v. Eaton Corp., the court noted that de facto exclusive dealing arrangements could exist even where there was no express exclusivity (696 F.3d 254 (3d Cir. 2012)). This is because courts look beyond the terms of the contract to determine its effects on competition.
The court stated that an exclusive dealing arrangement (or a de facto one) required a plaintiff to show:
- The defendant had significant market power in the relevant market.
- The exclusive arrangement caused substantial foreclosure.
- Contract terms preventing competition by rivals, including a long contract duration.
- An analysis of the likely or actual anticompetitive effects and any procompetitive effects.
The court had previously held that Pro Search failed to allege exclusive dealing and monopolization claims because:
- The contracts at issue were:
- relatively short in duration; and
- could be terminated on short notice.
- Pro Search had failed to allege other facts to support its de facto exclusive arrangement theory.
After Pro Search amended its complaint, the court held that there were enough additional facts to support the argument that de facto exclusive arrangements exist between VFML and the intermediaries, hotels and online travel agencies despite the terms on the face of the exclusive contracts. Important to the court's ruling were Pro Search's allegations that VFML's monopoly power makes it economically necessary for market participants to deal with VFML and that, while Pro Search has the better product, switching costs make switching to Pro Search prohibitive. In particular, Pro Search alleged that:
- Although Pro Search has attempted to make bids and offers, the contracts that VFML has with industry participants are:
- continually renewed; and
- not open to rebidding.
- VFML would cut off certain intermediaries from other necessary VFML-controlled content and platforms.
- VFML forces hotels and online travel agencies to enter into exclusive arrangements.
- VFML has acquired or settled with its other competitors, causing them to leave the market.
- There has been substantial foreclosure of competition in the relevant markets.
To support its motion to dismiss, VFML argued that alternative distribution channels are available for customers that provide similar content and distribution platforms. However, the court held that the existence of alternative channels, alone, was not determinative. The court declined to analyze at the motion to dismiss stage whether VFML's exclusive agreements allow for the use of those alternative channels.
Attempt to Monopolize and Monopolization
The court held that Pro Search adequately alleged its claim for attempted and actual monopolization under Section 2 of the Sherman Act. VFML did not dispute its monopoly power in the relevant markets, and Pro Search adequately alleged its claim for de facto exclusive dealing, sufficiently alleging the necessary anticompetitive or exclusionary conduct.
Antitrust Injury
Unrelated to any specific claim, VFML argued that Pro Search failed to allege antitrust injury. The court held that Pro Search adequately alleged antitrust injury, specifically pointing to customers' confirmations that they cannot deal with VFML's competitors due to their exclusive arrangements with VFML.
Practical Implications
Judge Staton's decision shows that companies with large market shares may face Sherman Act claims involving exclusivity even when their contracts are both short in duration and easily terminated. A plaintiff may succeed on a motion to dismiss, making it to the discovery stage, if it alleges other facts that make a de facto exclusive dealing arrangement plausible.