Software Acquisition Could Have Amounted to Monopolization

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

A computer software company, Adobe Systems Inc., could have unlawfully monopolized the market for professional graphic illustration software by acquiring a popular software program (FreeHand), effectively removing it from the market by refusing to update it, significantly raising the price of a rival program it owned (Illustrator), and withholding FreeHand’s source code from the open source community, the federal district court in San Jose, California, has ruled. The alleged conduct would not have violated the California Cartwright Act, however.

Therefore, the company’s motion to dismiss putative class action claims asserted by a non-profit group of graphic design professionals and one of its members was granted in part and denied in part.

While each of the alleged manners of anticompetitive conduct may have been lawful on its own, taken together and in context they supported a monopolization claim when read in the light most favorable to the complaining group and its members. Adobe undisputedly possessed monopoly power in the relevant market, the court noted. The company’s ability to maintain its high market share—despite raising prices and ceasing development of FreeHand—undermined its claim that its decision to discontinue the product was "rational and normal business conduct" that increased competition, the court reasoned.

Professional designers allegedly had no choice other than Illustrator if they wanted to buy professional vector design software that was interoperable with the latest operating systems. Moreover, it was reasonable to infer that Adobe’s discontinuation of FreeHand and channeling of that program’s users to Illustrator made it more difficult for potential competitors who did not have a full array of graphics software to enter the market.

The plaintiffs’ allegations that the conduct allowed Adobe to charge supracompetitive prices for Illustrator, decreased innovation in the relevant market, and rendered the artwork they created on FreeHand obsolete were sufficient to assert antitrust injury, the court added.

California Cartwright Act Claim

The non-profit group and individual member could not maintain a California Cartwright Act claim based on the alleged conduct, the court also ruled. The plaintiffs alleged no agreement, conspiracy, or combination between two or more entities, and the Cartwright Act did not address unilateral conduct.

The law did not contain a provision parallel to the Sherman Act’s prohibition against monopolization. The plaintiffs’ contention that a valid Cartwright Act claim could exist despite unilateral conduct "if a single trader pressure[d] customers or dealers into pricing arrangements" was immaterial because no such coercion was alleged, the court said.

Statute of Limitations

An argument by Adobe that the plaintiffs’ Sherman and Clayton Act claims were time-barred was rejected by the court. The causes of action were tolled under the continuing violation doctrine and the "new use" exception, respectively. Though the plaintiffs’ Sherman Act monopolization claim initially accrued upon the date of the acquisition, more than four years prior to the filing of the suit, their allegations supported a reasonable inference that Adobe perpetuated its monopoly power and caused them new injury after the merger through new and independent acts inside of the limitations period, including the aforementioned cessation of FreeHand’s development, the channeling of existing FreeHand customers to Illustrator, and the bundling of Illustrator with other programs it offered.

These acts were not "mere reaffirmations of the merger such as holding or using assets in the same manner as at the time of acquisition" or "continuing indefinitely to receive some benefit as a result of an illegal act performed in the distant past," in the court’s view. Rather, they were more like an online auction provider’s changes to its electronic payment policy after acquiring an online payment service provider, which had been found to constitute overt acts inflicting new and accumulating harm.

In addition, the plaintiffs’ allegations that Adobe’s conduct with respect to the acquired FreeHand and its Illustrator amounted to a use of FreeHand in a different manner from the way it was used at the time of the merger, and that this new use injured them, were sufficient to allow them to avail themselves of the "new use" exception to the Clayton Act’s statute of limitations, the court concluded.

The decision is Free FreeHand Corp. v. Adobe Systems, Inc., 2012-1 Trade Cases ¶77,811.