Adobe Systems Inc. has been hit with an antitrust class action in federal court by Free FreeHand Corp., a non-profit group, and graphic design professionals and consumer users of FreeHand, the vector-graphic illustration software product acquired by Adobe several years ago.

The complaint in Free FreeHand Corp. et al. v. Adobe Systems Inc., 5:11-cv-02174 (N.D. Cal.), alleges monopolization in violation of the Sherman Act § 2 as well as violations of California’s antitrust statute, the Cartwright Act, and the State’s broad-sweeping Unfair Competition Law.  The complaint also seeks relief under Washington’s antitrust and unfair competition statutes.

The complaint alleges that when Adobe bought Macromedia Inc. in 2005 and acquired the FreeHand software, it did so to monopolize the market for vector-graphic illustration software by eliminating competition for its own software product, Illustrator, the chief competition for FreeHand in the professional graphic software market.

Plaintiffs allege that Adobe has a 100% share of Mac users and an 80% share of Windows users in the relevant market.  The complaint excludes so-called “hobbyist” level vector-graphic illustration software from the alleged market, such as Serif DrawPlus, Xara X, Draw well, Photoline, Inkscape, Lineform, Sketsa SVG editor, Zeusdraw, Easy draw, and Intaglio.  The complaint also excludes computer-aided design programs, bitmap graphic illustration and page layout software from the alleged market.

Adobe likely will challenge the market definition vigorously as that threshold issue could determine whether Adobe is found to have market power. 

Free Freehand alleges that Adobe monopolized the market by acquiring the competing software, then raising the price of Illustrator and at the same time failing to update FreeHand.  It also alleges that Adobe tried to eliminate FreeHand from the market completely by announcing that it would stop developing FreeHand in 2007 and by publishing documents detailing how consumers can migrate from FreeHand to Illustrator.

The complaint, however, may be vulnerable to an argument by Adobe that the claims are barred by the applicable four-year statutes of limitations.  If the complaint survives a motion to dismiss, Adobe is also likely to argue that the plaintiffs’ claims encroach on its product design decisions which were undertaken for legitimate and procompetitive reasons. 

In addition to seeking damages for purported overcharges, the complaint seeks a divestiture of Freehand source code to turn it into an open-source competitor of Illustrator.

Adobe won antitrust clearance from U.S. regulators in 2005 for the acquisition of Macromedia Inc., the developers of FreeHand, which cleared the way for the $3 billion deal.  Approval came after U.S. Justice Department officials issued a second request to take a closer look at the design and vector-graphics illustration products at issue in the complaint.

U.S. Airways is seeking to ground high-flying Sabre Holdings Corp. – which runs the largest U.S. global distribution system linking travel agents with airline fares and other services – for allegedly engaging in monopolistic acts.

U.S. Airways has filed an antitrust lawsuit against Sabre in the U. S. District Court for the Southern District of New York.  The airline’s complaint in U.S. Airways, Inc., v. Sabre Holdings Corporation et al., No. 11 CV 2725 (SDNY), alleges that Sabre has suppressed the ability of travel agents to book tickets directly with airlines, and that it used anti-competitive practices to force the airline into an unfair agreement.

According to U.S. Airways, Sabre threatened to pull U.S. Airways’ listings from its services, which includes the reservations systems used by online travel agency Travelocity, potentially forcing U.S. Airways into bankruptcy because the Sabre Global Distribution System accounts for 35 percent, or about $3.5 billion, of U.S. Airways’ revenues.

Sabre responded to the suit by stating that the antitrust claim was a “misguided attempt by an airline” to undermine a distribution model that “has brought competition to the airline industry,” and that Sabre would “aggressively defend against US Airways’ lawsuit, pursue our own legal rights and take appropriate action to protect consumers’ right to a transparent marketplace.”

The case is just the latest development in a wave of antitrust suits against the global distribution system in the airline sector.  In January, American Airlines sued Sabre on similar grounds, saying that it could lose “countless sales” if Sabre were permitted to give preference to other airlines in flight listings.  American accused Sabre of anticompetitive behavior by slanting information viewed by travel agents before they book flights.  That action is on hold until June 1 as the parties try to reach an agreement.

And just last week, American sued online travel agency Orbitz Worldwide and its largest stakeholder, Travelport, over “anticompetitive business practices” for trying to control the distribution of airline tickets.  In that suit, American contends that Travelport and Orbitz violated Sections 1 and 2 of the Sherman Act by using their control over the distribution of air fare information to maintain their monopoly power and to hinder the development of alternative technologies that could help consumers find cheaper fares.  American pulled its listings from Orbitz and Expedia in December after those services declined to include American’s Direct Connect reservation system for its listings.

In contrast to American, U.S. Airways signed a multiyear content agreement with Expedia in January.  U.S. Airways touted this agreement in announcing its first quarter of 2011 financial results in a section entitled “Notable First Quarter Accomplishments.”  There is no mention among its notable first-quarter accomplishments of U.S. Airways’ agreements with Sabre and Travelocity in February.  Instead, although the action occurred in April, after the first quarter ended, U.S. Airways noted among its “accomplishments” that it filed an antitrust lawsuit against Sabre.

A federal court has decided that Digital Sun’s wireless sprinkler system may be innovative, but its claims of anticompetitive conduct by competitor Toro Company are all wet.

Judge Lucy Koh of the U. S. District Court for the Northern District of California has ruled that that Digital Sun’s antitrust complaint in Digital Sun v. The Toro Company falls well short of pleading standards, and dismissed all claims without oral argument.  Digital Sun, a small Silicon Valley startup that invented and markets a wireless sprinkler system, sued Toro, a worldwide manufacturer of outdoor maintenance equipment and associated products with 2010 net sales of $1.69 billion, for attempted monopolization of the wireless sprinkler market under Section 2 of the Sherman Act, unfair competition under California law, and fraud.

The grounds for this lawsuit can be traced to a proposed deal for Toro to take over Digital Sun.  During negotiations, Toro made a series of loans to Digital Sun and, in return, Digital Sun granted patent licenses (one exclusive license and one nonexclusive license) to its wireless sprinkler technologies to Toro.  When negotiations fell apart, Digital Sun filed this action after it realized that Toro now had patent rights to Digital Sun’s only product line.

In its complaint, Digital Sun alleged that Toro attempted to monopolize the wireless sprinkler market by engaging in bad faith negotiations to take over Digital Sun when all Toro really wanted was patent licenses for Digital Sun’s technologies.

Judge Koh found that Digital Sun failed to sufficiently allege its monopolization claim, including its allegations that Toro possessed market power and engaged in anticompetitive conduct.  The court observed that Digital Sun made no allegations of market share in its complaint other than ownership of patent rights in a particular type of wireless sprinkler technology.  In addition, Digital Sun acknowledged Toro did not hold Digital Sun’s patent rights in their entirety, and the license agreements actually created another competitor in most fields of use.  According to Judge Koh, these facts, as pled, could not give rise to findings of market power or anticompetitive conduct.

The court also found that Digital Sun did not sufficiently plead anticompetitive injury.  Despite the plaintiff’s allegations of bad faith negotiations by Toro, Judge Koh pointed out that Digital Sun was never forbidden from selling its product and was free to negotiate with other potential buyers.  Moreover, in the fields that Digital Sun cannot sell because of Toro’s exclusive license, Toro has simply replaced Digital Sun as the monopolist and, accordingly, the competitive landscape was unchanged.

The claims for unfair competition under California law and fraud likewise failed to pass muster.

This case showcases the challenges plaintiffs face when pleading patent-based antitrust claims, especially under the heightened pleading requirements of Twombly and its progeny.  Nevertheless, Judge Koh allowed Digital Sun to file an amended complaint to cure the pleading defects but cautioned the plaintiff that its “own arguments leave the Court with doubts as to whether these claims can be resurrected.”

In addition to antitrust, Constantine Cannon has an environmental and sustainability practice and represents green technology companies profiting from wise resource use.  These different disciplines that we work in are reflected in a recent filing we noticed in the federal district court for Connecticut, Environmental Products Corp. (“Envipco”). v. Tomra of North America, Inc. (D. Conn. filed Nov. 4, 2010).

In Envipco, both plaintiffs and defendants are in the business of manufacturing and operating Reverse Vending Machines (RVMs), which collect deposit bottles and cans and refund the deposit.  The RVM company must then sort the containers of each manufacturer and return each one’s bottles and cans to it.  The suit alleges that a good pick-up service for the cans to return them to their manufacturers requires that each firm have a concentrated customer base and collection route, requiring a contract with at least one major supermarket chain in which the RVM company operates.  Envipco says that Tomra has entered into exclusive RVM contracts with 12 of 20 major supermarket chains that account for the majority of RVM use, foreclosing Evipco from a substantial portion of business in the bottle bill states that constitute the relevant market or markets.  Moreover, Tomra is alleged to have entered into equity-based partnerships with beverage manufacturers, precluding Envipco from a substantial portion of the can and bottle pickup business, forcing Envipco to turn to Tomra for that function in those places, and causing Envipco to lose underlying RVM business.  Envipco also alleges that Tomra engaged in deceptive billing practices to lure in customers and forged joint ventures with key players in the market, “denying competitors the ability to compete on a level playing field.”

The complaint also claims that Tomra is negotiating to buy another reverse vending company, Can & Bottle Systems Inc., that has monopoly power in Oregon.  Tomra and Envipco are alleged to be the only significant competitors in the U.S. in this particular market, with Tomra enjoying a 70 percent market share — or 77 percent, if the company is successful in its plans to acquire Can & Bottle.

Asserting claims under the Clayton Act and the Sherman Act, the complaint, citing to Tomra’s alleged monopoly power and market manipulation, seeks compensatory, punitive and treble damages and an order blocking Tomra from entering into long-term exclusive contracts with customers.

Businesses such as these that promote the effective use of bottle bills that recycle cans and bottles are a positive in the environmental marketplace.  The suit raises important antitrust concerns and we will monitor its progress.

A class of more than 4,500 dairy farmers spread across 11 southeastern states in two geographic markets has been certified by Judge J. Ronnie Greer of the U. S. District Court for the Eastern District of Tennessee in a case alleging a conspiracy to monopolize the production, marketing and processing of milk.

The dairy farmers allege multiple claims of antitrust conspiracy against Dean Foods Company (the nation’s largest dairy processor), National Dairy Holdings, L.P., Dairy Farmers of America, Inc., and other defendants.

The class is divided into two subclasses.  One is comprised of roughly 3,000 farmers who are members of the Dairy Farmers of America and the other consists of independent and cooperative dairy farmers.  All class members sold grade A milk to the defendants from January 1, 2001, to the present.

In opposing class certification, the defendants argued that the two subclasses have a “fundamental and irremediable conflict of interest” because the Dairy Farmers Association subclass members benefited from the alleged unlawful behavior at the expense of the independent farmers.  While Judge Greer found this aspect of the case “troubling,” he granted certification because the defendants failed to provide any testimony supporting their argument, rendering it “somewhat hypothetical.”  Judge Greer noted, however, that he may decertify or modify the class if evidence supporting the defendants’ argument can be established.

Judge Greer rejected class certification for a breach of contract claim brought on behalf of farmer-members of the Dairy Farmers Association because the claim necessarily would require each class member to individually demonstrate membership in the association at the time of the alleged breach, making the contract claim “not susceptible to class action treatment.”

A federal judge has denied General Electric Company’s request to pull the plug on Mitsubishi Heavy Limited’s potential billion-dollar case alleging GE has tried to snuff out competition in the wind turbine market.

United States District Court Judge J. Leon Holmes in Fayetteville, Arkansas, has denied GE’s motion to dismiss an attempted monopolization case brought by Mitsubishi.  Mitsubishi alleges that GE seeks to monopolize the market for variable-speed wind turbines in the United States through a pattern of “sham” patent litigation and other methods. 

However, the Judge did grant GE’s request to stay discovery in the case until the GE patent infringement claims against Mitsubishi have been resolved.  As Judge Holmes explained, “If GE prevails in any of the infringement actions, then Mitsubishi’s claims in this action will be moot because GE will have the right to exclude Mitsubishi from the market” pursuant to GE’s patent claims. 

Mitsubishi is seeking damages that could exceed $1 billion.  Mitsubishi filed its attempted monopolization claim in this case against GE on May 10, 2010.

The case is the latest in a series of acrimonious episodes between the two heavyweights over the growing U.S. market for wind turbines.  Mitsubishi is on track to build a turbine assembly plant in Fort Smith, Arkansas.  Mitsubishi has been battling GE over patent claims since 2008.

Sonia Williams, a Mitsubishi Power Systems America spokesperson, observed that “[t]he judge did decide to stay discovery for the present.  Nevertheless, we are heartened by his suggestion that he may terminate the stay if he finds appropriate circumstances.”  GE had no comment on the ruling.

Judge Paul Crotty of the U.S. District Court for the Southern District of New York dismissed with prejudice an antitrust suit brought by bankrupt magazine wholesaler Anderson News LLC against a host of single-issue magazine publishers. 

Crotty ruled that Anderson’s allegations of a broad industry-wide conspiracy did not meet the plausibility standards set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), saying that it was implausible that magazine publishers would conspire to deny retailers access to their own products. 

Anderson had proposed a small surcharge on magazines in January 2009 with the goal of improving efficiency by giving suppliers a financial incentive to not ship extra copies, but Anderson claimed that in response the suppliers collectively pulled out of deals with Anderson, eliminating 80 percent of its business and its most popular titles, including People, Time and Sports Illustrated. 

Anderson ceased business operations in February 2009, and sued in March 2009 accusing the publishers of conspiring to monopolize the U.S. wholesale single-copy magazine distribution market.  The defendants included American Media Inc., Bauer Publishing, Curtis Circulation, Distribution Services, Hachette Filipacchi, Kable News, Rodale Publishing, Time Inc. and Time Warner Retail. 

This is yet another antitrust case felled by the new plausibility standard set forth in Twombly which requires plaintiffs to state a plausible (not merely possible or conceivable) claim for relief in order to survive a motion to dismiss. 

Update: On August 17, 2010, Anderson News asked Judge Crotty to reconsider his decision dismissing the lawsuit.

Anderson argues that Judge Crotty erred in concluding that the publishing companies had an economic self-interest in more wholesalers, not less.  Anderson claims that, to the contrary, the publishers had a powerful incentive to engage in their conspiracy, namely, to control the single-copy magazine distribution system so as to shift the increasing costs in the distribution system to retailers and consumers, and away from the defendant publishers and their national distributors.

The case is Anderson News LLC et al. v. American Media Inc. et al., case number 1:09-cv-02227 (S.D.N.Y.).

A federal court has denied Microsoft’s request to dismiss a claim of monopolizing a single-brand aftermarket, rejecting Microsoft’s attempt to use an argument that Apple used to dismiss a similar aftermarket claim.  We examined Microsoft’s motion in a previous post.

Judge Elizabeth D. Laporte of the Northern District of California has denied in part and granted in part Microsoft’s motion to dismiss the complaint in Datel Holdings Ltd. et al. v. Microsoft Corp., Case No. CV 09-5535 EDL (N.D. Cal.). The court distinguished Apple’s successful defense of an aftermarket claim based on Apple’s more explicit disclosure to its customers that they were being restricted to Apple products. 

Plaintiff Datel Holdings Ltd., alleges it is Microsoft’s sole competitor for Xbox 360 memory cards and other accessories.  Datel charges that Microsoft is monopolizing an aftermarket for Xbox 360 memory cards by requiring Xbox users who want to access online gaming to download Microsoft’s “dashboard” software – which “disables Datel’s memory cards,” thereby forcing Xboxers to buy Microsoft’s memory cards.      

Microsoft moved to dismiss Datel’s claim with an argument that was successful for Apple in Apple, Inc. v. Psystar Corp., 586 F. Supp. 2d 1190 (N.D. Cal. 2008) – that the single-brand aftermarket (here, Xbox memory cards) could not support an antitrust violation because Xbox users had agreed to use only Microsoft’s memory cards, making the Kodak exception for undisclosed aftermarket restrictions inapplicable.  Judge Laporte was not convinced, holding that the scope of Microsoft’s restriction was ambiguous, such that “customers may not have understood” it, which “counsels against granting a motion to dismiss.” 

Judge Laporte also denied Microsoft’s motion to dismiss Datel’s tying and unfair competition claims.  While she dismissed Datel’s second antitrust claim (concerning a Multiplayer Online Dedicated Gaming Systems Market), leave to replead was granted. 

For manufacturers, the moral of the story is this:  If you want customers of your primary products – Harley-Davidson motorcycles, for example, or Canon cameras – to buy only your brand of accessories – Harley-brand engine components, or Canon-brand zoom lenses, for instance – and not your competitors’, you should draft your customer restrictions very carefully and clearly in order to withstand antitrust challenges.

A small economics and software company is charging the Financial Accounting Standards Board (FASB) – the organization that sets accounting standards for every public company in the country – with attempting to misappropriate its intellectual property in the standard setting process.

Silicon Economics, Inc. (SEI) has filed a complaint in federal court in the Northern District of California that charges that FASB illegally claimed possession of SEI’s accounting patents, in violation of Sections 1 and 2 of the Sherman Act, as well as California contract and competition law.

SEI’s complaint states that in 2006, it offered advice to FASB on how to enhance its accounting methods.  SEI claims that FASB’s current methods fail to properly account for one-off spikes and losses in companies’ income, and therefore FASB’s method “has served as a significant contributor to the current economic crisis.”  SEI asserts that it discovered only after offering up its thoughts that FASB’s web site asserts that FASB has ownership rights to any of thoughts it received, which in this case include SEI’s patent.  SEI asserts that it did not know of the terms when it disclosed its ideas, and that FASB’s attempts to enforce them violate antitrust law.

Specifically, SEI claims that FASB controls over 90 percent of the market for “financial accounting standards in the United States,” and, as a result, that FASB is a “government-backed monopoly.”  By insisting on its right to appropriate the information given to it, according to SEI, FASB has abused its market power in violation of Section 2 of the Sherman Act.  FASB’s action also violates Section 1 of the Sherman Act, according to SEI, because the disclosure terms of FASB’s web site constitute an agreement in restraint of trade.  SEI has filed for a preliminary injunction against FASB, and additionally seeks a permanent injunction, treble-economic damages, punitive damages, and costs and attorneys fees.

FASB’s spokesperson declined to offer any substantive comment, stating that “It’s a legal matter, and our policy is not to comment on it.”

Health care giants Group Health Inc. (“GHI”) and HIP Foundation Inc. (“HIP”) have cleared the latest legal obstacle to their merger.

On May 12, 2010, U.S. Judge Richard J. Sullivan of the Southern District of New York dismissed the City of New York’s antitrust suit attempting to unravel the merger of GHI and HIP.  Judge Sullivan’s decision added a decisive, albeit not final, nail to the coffin of the City’s efforts to derail the health care companies’ merger since the merger was originally announced almost five years ago.

On September 25, 2005, GHI and HIP first disclosed their intention to merge, creating in their own words the “Largest Health Insurer in New York State.”  About 1.2 million current and former New York City government and city-related agency employees are covered under the City’s health plan. 

Federal and state antitrust authorities expressed concern over GHI and HIP’s merger before the City filed suit in November 2006.  Both the U.S. Department of Justice and New York’s Attorney General reviewed the merger.  Yet neither determined that the merged company, now operating as EmblemHealth, would violate U.S. or New York antitrust statutes.

The City’s action to undo the GHI/HIP died in summary judgment because Judge Sullivan rejected the City’s alleged market definition. click here for more »