Tuesday, February 28, 2012

Tactics to Win Cloud Computing Services Could Be Tying, Attempt to Monopolize, Exclusive Dealing

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A computer software company could have violated federal and California antitrust law by allegedly conditioning customers’ purchasing of licenses for its popular property management back office accounting software on their agreement not to use competitors’ cloud computing services, the federal district court in Los Angeles has ruled.

Cloud computing services enable customers with multiple software applications—such as back office accounting, maintenance, leasing, revenue management, payment processing, and background screening applications—to have those applications hosted and managed in an off-site data center.

The company’s conduct was sufficiently alleged to constitute a per se illegal negative tying arrangement, an attempt to monopolize the cloud market, or at least exclusive dealing, the court found. Dismissal of a rival cloud service’s claims, which were asserted as counterclaims to the software company’s suit alleging theft of certain proprietary information from its password-protected website, was therefore denied.


An argument by the software company that no tie existed because customers were not required to use any cloud computing service at all in conjunction with the accounting software was rejected under the precedent established in Eastman Kodak Co. v. Image Technical Services, Inc. (1992-1 Trade Cases ¶69,839). Close factual parallels existed between the two cases, the court observed. The theory that customers could self-maintain their own cluster of management applications was as unavailing to the court as the notion that "equipment owners could simply self-repair their equipment" was to the Kodak court.

In addition, the court found that the complaining competitor’s definition of the relevant tied product market as "the market for vertically-integrated cloud computing services specialized to the needs of real estate owners and property managers" was not facially unsustainable, even though that market included only two participants. The definition considered and rejected multiple interchangeable substitute products with reference to the rule of reasonable interchangeability.

The competitor also sufficiently demonstrated that the defendant could have had market power over the tying market for property management back office accounting software, in the court’s view, by alleging that it had successfully coerced its accounting software customer base into signing anticompetitive amendments to their licensing agreements by threatening to terminate the licenses of those who refused to accede to the amendments.

Attempted Monopolization

The complaining competitor adequately stated a claim for attempted monopolization as well, the court determined. The competitor’s definitions of the relevant geographic and product markets were acceptable, as were its allegations showing that the company had a dangerous probability of successful monopolization. The software company’s license amendments constituted anticompetitive conduct.

The competitor’s contention that the defendant’s market share in the back office accounting software market could be imputed to its market share in the vertical cloud market created only a tenuous, "flimsy" inference of market power in the cloud market. However, allegations that the two parties were the only competitors in the cloud market and that multiple barriers to entry precluded others from entering it were more significant. Given these assertions, the court said, the competitor’s specific intent contentions were "particularly compelling."

Exclusive Dealing

Finally, the software company’s alleged scheme could have amounted to unlawful exclusive dealing, the court also ruled. Assertions that the company and the defendant were the only two participants in the vertical cloud market and that several entry barriers inhibited entry into the cloud market rendered plausible its charge that the amended license agreements foreclosed competition in a substantial share of vertical cloud services commerce.

The decision is RealPage, Inc. v. Yardi Systems,Inc. 2012-1 Trade Cases ¶77,799.

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