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.

Cosmetics Company Settles California Vertical Price Fixing Charges

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Cosmetics company Bioelements, Inc. has agreed to settle a complaint brought by the State of California, alleging that the company engaged in vertical price fixing in per se violation of the California Cartwright Act.

The state alleged that Bioelements had entered into dozens of contracts with other companies that required them to sell Bioelements’ products online for at least as much as the retail prices prescribed by Bioelements.

Under a consent decree signed by a state court judge on January 12, Bioelements agreed to refrain from fixing resale prices for its merchandise, to inform distributors and retailers that it will not enforce the challenged contracts, and to pay a total of $51,000 in civil penalties and attorney fees.

State Ban of Vertical Price Fixing

In a January 14 statement, the California Attorney General’s office said that the settlement “is one of the first applications of California’s strict, pro-consumer antitrust law banning vertical price-fixing in the wake of a controversial 2007 U.S. Supreme Court decision that weakened federal law in this area.”

In 2007, the U.S. Supreme Court in Leegin Creative Leather Products v. PSKS, Inc. (2007-1 Trade Cases ¶75,753) overruled the long-standing per se prohibition on resale price maintenance under the Sherman Act and held that resale price maintenance was instead subject to a more lenient standard, the rule of reason.

Previous Settlement

Bioelements is not the first cosmetics company to face vertical price fixing allegations from the State of California in recent years. Last February, DermaQuest, Inc. agreed under the terms of a consent decree to settle charges that it entered into distribution agreements with distributors and retailers containing resale price maintenance components, including prohibitions on pricing below suggested retail prices (2010-1 Trade Cases ¶76,922).

Bioelement is an Illinois corporation with its physical headquarters in Colorado. The company’s founder and president is domiciled in California. In its complaint, California also alleged that the company regularly sells and delivers cosmetics in the state. The complaint points to dozens of contracts between Bioelements and third party sellers.

Further information regarding the settlement appears here on the California Attorney General’s website.

The final judgment in People of the State of California v. Bioelements, Inc., Case No. 10011659, will appear at 2011-1 Trade Cases ¶77,306.

Cosmetics Firm Resolves California Resale Price Fixing Suit

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A company that markets cosmetics and skin care products has agreed to settle a civil suit brought by the State of California, alleging that it engaged in vertical price fixing in per se violation of the California Cartwright Act and the California Unfair Competition Law.

The state alleged that the northern California-based company entered into distribution agreements with resale price maintenance components, including prohibitions on pricing below suggested retail prices.

Under the terms of a final judgment approved by a California trial court, the cosmetics company was prohibited from entering into agreements to fix resale prices.

In addition, the company was required to pay a $70,000 civil penalty under the Unfair Competition Law and $50,000 to cover investigation costs and expenses.

Further details regarding The People of the State of California v. DermaQuest, Inc. will appear at 2010-1 Trade Cases ¶76,922.

State v. Federal Antitrust Law

The case is a reminder that resale pricing practices can run afoul of state antitrust laws, even if such conduct is no longer considered per se illegal under federal antitrust law.

In 2007, the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753, reversed a 96-year-old precedent applying the per se rule to vertical price fixing.

And California is not the only state to challenge vertical price fixing. Following the Supreme Court’s decision in Leegin, furniture maker Herman Miller, Inc. entered into a consent decree resolving a multi-state complaint, alleging resale price fixing in violation of federal and state antitrust law.

Herman Miller was prohibited from agreeing with dealers to fix the resale price at which its furniture was advertised or sold to end-user consumers and from terminating a dealer or discriminating against a dealer to secure a commitment from the dealer to adhere to the manufacturer's suggested resale prices. The manufacturer was also required to pay a monetary payment of $750,000 under the consent decree.

The consent decree settled charges brought by the States of Illinois, Michigan, and New York that the manufacturer violated federal and state antitrust laws by entering into agreements with dealers to fix the prices at which its furniture was offered to consumers.

The case is State of New York, et al. v. Herman Miller, Inc., No. 08-civ-02977 , 2008-2 Trade Cases ¶76,454.