ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS
Plaintiff Datel Holdings filed this action against Defendant Microsoft for violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and Section 3 of the Clayton Act, 15 U.S.C. § 14, alleging that Defendant unlawfully monopolized the relevant markets for the Xbox 360 online video
Facts
Plaintiff, a leading developer of video game enhancement products, develops and manufactures aftermarket products for the Xbox 360 video game system. Compl. ¶ 1. One of Plaintiffs leading products is a memory card for the Xbox known as the MAX Memory card. Id. Plaintiffs two gigabyte MAX Memory card retails for approximately $39.99. Id. Defendant is the only other supplier of memory cards for the Xbox 360. Id. Defendant’s memory card, which has only 512 megabytes of memory, also retails for approximately $39.99. Id.
Defendant released the Xbox in 2001, and launched the second generation console, Xbox 360, in 2005. Compl. ¶ 11. Various models of the Xbox 360 sell for $199.99 to $299.99. Id. In addition to the functionality of the Xbox 360, Defendant attracts customers with its Xbox Live program, which is a subscription-based online multiplayer gaming service. Id. ¶ 12. As of May 2009, Defendant reported more than 20 million active members of Xbox Live. Id.
The Xbox 360 reached the market one year before Sony, Defendant’s competitor, released its Playstation 3 in November 2006. Compl. ¶ 13. The Xbox 360 continues to control a larger share of the market that Sony’s Playstation 3. Id. In January 2009, Defendant reported that total sales of Xbox 360 had reached 28 million, as compared to 20 million for Playstation 3. Id. In May 2009, Defendant’s unit sales passed the 30 million mark for the Xbox 360, and analysts reported sales of 23 million for the Playstation 3. Id.
There is a considerable aftermarket for Xbox 360 accessories and add-ons, apart from Xbox 360 games. Compl. ¶ 14. Plaintiff, which has been developing and manufacturing electronics and video game console peripherals since the late 1980s, offers several aftermarket products for the Xbox 360: (1) the XSATA and Xport (for transferring data between an Xbox 360 and a personal computer, allowing users to store Xbox demos, game saves and other materials on personal computer); (2) MAX Memory card (memory cards compatible with the Xbox 360 available in 2GB and 4GB versions); (3) MAX Drive 160 (an external 160GB hard drive for use with the Xbox 360 console); and (4) other accessories designed for use with the Xbox 360 or Xbox Live such as game headsets and rechargers for wireless controllers. Compl. ¶ 15. Plaintiff has announced, but not yet released, a Joypad controller to compete with Defendant’s wireless controllers. Id. ¶ 16.
Plaintiff is the only source for Xbox 360-compatible memory cards other than Defendant itself. Compl. ¶ 17. Plaintiffs cards were first released in May 2009.
Id.
As of November 1, 2009, Plaintiffs 2 gigabyte MAX Memory card (“DMMC”) for the Xbox 360 console was available for
As of November 1, 2009, Defendant’s 512 MB memory card, the only size Defendant offers, retailed for approximately $39.99, and was described at xbox.com as follows: “Take your games everywhere you go with eight times the space of the original Xbox 360 Memory Unit. With 512 MB of memory and a keychain carrying case, it’s a snap to bring your game saves, Xbox Live gamer profiles, Arcade game downloads and even exclusive kiosk content.” Compl. ¶ 19.
On October 16, 2009, Defendant issued a notice to Xbox users through a blog entitled “Major Nelson.” Compl. ¶20. The notice stated that when users receive a software update in the following week, unauthorized memory cards (such as Plaintiffs) would no longer work with the Xbox 360. Id. The blog suggested moving information from an unauthorized memory card to an authorized one. Id.
Defendant informed Plaintiff that the disabling of third party memory cards was an unintentional effect of a software update. Compl. ¶ 21. Later, however, Defendant stated in an October 23, 2009 article that it goes to great lengths to protect the Xbox service from cheating that comes from use of unauthorized memory cards, and that use of those cards could cause compatibility and safety issues. Id. The move from unauthorized cards has created discussion online, and Plaintiff alleges that Defendant has not explained how a larger memory card promotes cheating, nor has it identified a compatibility or safety issue between a DMMC and an Xbox console. Id. Plaintiff alleges that Defendant’s justification for disabling unauthorized memory cards based on cheating is a pretext, and that the true purpose behind disablement of the DMMCs is to exclude competition from the Xbox 360 aftermarket for memory cards and to force consumers to buy Defendant’s memory cards. Id. ¶ 24. Plaintiff alleges that there is no benefit to consumers from Defendant’s decision to target Plaintiffs product that will leave approximately 50,000 consumers with useless memory cards, and will forestall innovation and deprive consumers of the benefits of competition. Id. at ¶ 3.
Plaintiff alleges that Defendant has modified the Xbox 360’s authorization protocols to prevent the interoperability of Plaintiffs other products, including the as-yet-unreleased Joypad. Compl. ¶ 25. Plaintiff alleges that Defendant’s intention is to block the use of Plaintiffs competitive devices. Id. Plaintiff alleges that Defendant’s update does not constitute an improvement of the product, but is instead an arbitrary contrivance intended to perpetuate Defendant’s market power. Id. at ¶ 4.
Relevant markets
Plaintiff alleges that Defendant’s anti-competitive conduct has affected two relevant product markets: (1) the aftermarket for accessories and add-ons specific to the Xbox brand; and (2) the primary market for video game systems that feature multiplayer online gaming in addition to personal gaming. Compl. ¶ 26.
Aftermarket for Xbox 360 Accessories and Add-ons (“Aftermarket”)
Plaintiff alleges that the Aftermarket is a relevant market that is wholly derivative of and dependent upon the primary market for the Xbox 360 gaming system.
Plaintiff alleges that the efficacy of Defendant’s techniques is indicated by the fact that Plaintiff is the only firm that has been able to overcome Defendant’s technical barriers and bring to market a competing memory card for the Xbox 360. Compl. ¶ 30. Plaintiff alleges that Defendant’s market power in the Aftermarket derives from Defendant’s control over the Xbox 360 hardware and software, and from its special access to purchasers of the gaming system, and does not derive from contractual rights that consumers knowingly and voluntarily gave Defendant at the time of purchase. Id. ¶ 31. Plaintiff alleges that market imperfections have prevented consumers from realizing the impact that their choice in the primary market would have on their freedom in the Aftermarket. Id. ¶ 32 (for example, the presence of a USB port in the Xbox 360 console suggests to consumers that third party accessories and add-ons would be compatible and permissible).
Plaintiff alleges that Defendant misled customers into a reasonable belief at the time of purchasing an Xbox 360 console that third party accessories and add-ons are available. Compl. ¶ 33 (for example, Defendant’s spokesperson stated that the Xbox 360 “also drives a ton of third-party spend,” and noted the availability of “a lot of third party alternatives.”). Plaintiff alleges that Defendant has touted its “accessories attach rate” as higher than any other manufacturer, including Sony. Id. ¶ 34. Defendant attributed this high rate to customer loyalty and trust. Id. However, Plaintiff alleges that the real reason is Defendant’s anticompetitive conduct, including tying and predatory design, that drives the accessories attach rate. Id.
Plaintiff alleges that Defendant has used its power in the Aftermarket to charge supra-competitive prices. Compl. ¶ 35' (for example, although prices for memory cards in general have decreased steadily since 2005, Defendant’s proprietary Xbox 360 memory card held steady at $59.99 across -a two-year period, until Plaintiff introduced its memory card, at which time Defendant reduced its price). Plaintiff alleges that even if there were meaningful competition in the primary market for multiplayer online dedicated gaming systems, that would not check Defendant’s monopoly power in the Aftermarket due to: (1) the high switching costs associated with switching gaming systems; (2) the high information costs; (3) the large ratio of installed customer base relative to potential new customers; and (4) the substantial ability to exploit customers. Id. ¶ 36.
Multiplayer Online Dedicated Gaming Systems Market (“Online Market”)
The Multiplayer Online Dedicated Gaming Systems Market is a specific market for dedicated gaming systems with a meaningful capacity for online multiplayer gaming. Compl. ¶ 37. Plaintiff alleges that only two systems, the Xbox 360 and
Plaintiff alleges that Nintendo’s Wii system has limited multiplayer gaming functionality, and that the reduced functionality and lower price point reflect a target market that is distinct from that of Xbox 360 and the Playstation 3. Id. at ¶ 38. Therefore, the Wii system should not be considered reasonably interchangeable with the Xbox 360 and the Playstation 3. Id.
Plaintiff alleges that personal computers may offer multiplayer online functionality, but at a higher price for a system that tends to lack other features usually included in dedicated gaming systems. Compl. ¶ 39. Therefore, personal computers should not be considered reasonably interchangeable with the Xbox 360 and the Playstation 3. Id.
Plaintiff alleges that Defendant has measured the success of the Xbox 360 against the Playstation 3, to the exclusion of other products or platforms. Compl. ¶ 40 (for example, on December 1, 2008, Defendant issued a press release comparing Xbox 360 sales against Playstation 3 sales, and did not address Wii sales or personal computer sales). Plaintiff also alleges that Defendant’s pricing of the Xbox 360 line has influenced Sony’s pricing of the Playstation 3 line, and vice versa, but such pricing has not tracked or influenced the pricing of the Wii or personal computers. Id. ¶ 41.
Plaintiff alleges that Defendant enjoys market power within the Online Market. Compl. ¶ 43. Specifically, sales statistics reported by Defendant establish that the Xbox 360 console has significantly more total unit sales than the Playstation 3 console. Id. Plaintiff alleges that Defendant’s share of the Online Market was approximately 66% as of July 2009, and that in June 2009, the Xbox 360 outsold the Playstation 3 by approximately 1.5 to 1. Id. Plaintiff alleges that this disparity shows that Defendant’s market dominance is continuing and stable. Id.
Plaintiff alleges that Defendant’s market power in the Online Market is unchecked by the potential for competition from new market entrants due to substantial barriers to market entry other than anticompetitive conduct, such as: (1) the extremely high costs of development and production of a competing video game system; (2) the established libraries of games and online gaming communities of Defendant and Sony, which tend to entrench consumers in a particular system; and (3) the massive monetary, technological and human resources at the disposal of Defendant and Sony and their ability to sell at below cost. Compl. ¶ 45.
Legal standard
A complaint will survive a motion to dismiss if it contains “sufficient factual matter ... to ‘state a claim to relief that is plausible on its face.’ ”
Ashcroft v.
Iqbal, — U.S. —,
A court need not, however, accept as true the complaint’s “legal conclusions.”
Iqbal,
Request for Judicial Notice
On a motion to dismiss, a court normally may not look to matters beyond the complaint without converting the motion into one for summary judgment.
See Mack v. South Bay Beer Distributors,
Defendant seeks judicial notice of three documents: (1) the Xbox 360 “Limited Warranty and Return Information,” which includes the Xbox 360 software license; (2) the Xbox Live Terms of Use; and (3) a portion of the Xbox 360 console packaging. The first two documents are publicly available online and the third is available in any Xbox 360 console packaging. Plaintiff has objected to judicial notice of these documents, and has filed a conditional request for judicial notice of other documents if the Court grants judicial notice of Defendant’s documents. Defendant has filed a response to Plaintiffs objections, but did not file objections to Plaintiffs conditional request for judicial notice.
Not reasonably in dispute
Defendant argues that its three documents are judicially noticeable because they are publicly available and not subject to reasonable dispute. The first two documents are available online and the third can be obtained from the purchase of any Xbox 360 system.
See, e.g., Mayfield v. Sara Lee Corp.,
Plaintiff argues that several issues relating to these documents are in dispute. Although Plaintiff argues that there has been no showing that the documents cover the entire relevant market, Defendant has submitted a follow-up declaration from Patrick King attaching additional packaging information since 2005, which resolves this issue. See King Deck Ex. 1-4.
Plaintiff also argues that the Terms of Use document is dated September 2008, so Defendant cannot argue that it was provided to all Xbox customers during the relevant period since 2005. Plaintiffs argument, however, goes to the weight of the evidence, not to whether the documents are judicially noticeable.
See In re NVIDIA GPU Litig.,
Necessarily relied on in complaint
Defendant also argues that judicial notice is appropriate because Plaintiffs claim depends on these documents.
See Knievel v. ESPN, Inc.,
Here, the complaint alleges that Defendant’s market power does not derive from a contractual right with its customers that was knowingly given at the time of purchase. Compl. ¶ 31. Therefore, judicial notice is appropriate because Plaintiffs complaint depends, at least in part, on the contents of the documents.
See In re Samsung Elecs. Am., Inc. Blu-Ray Class Action Litig.,
Plaintiff filed a conditional request for judicial notice, seeking judicial notice of ten documents. The documents are: (1) a screen shot from the game “Mass Effect 2” showing an Xbox update prompt (Exhibit A); (2) packaging for Horipad EX2 Turbo controller and a Wal-Mart printout for sale of the controller (Exhibit B); (3) webpages for the game Battlefield: Bad Company (Exhibit C); (4) printout of the website of IGN Entertainment (Exhibit D); (5) printout from Defendant’s website link to the IGN Entertainment webpage (Exhibit E); (6) game disc and screen shots from game disc in the March 2004 Official Xbox magazine (Exhibit F); (7) printout from website showing a third party cable for transferring data between Xbox 360 memory unit and a personal computer (Exhibit G); (8) printouts of tutorials on connecting third party accessories to the Xbox (Exhibit H); (9) copy of Xbox 360 console packaging purchased in November 2009 (Exhibit I); and (10) printout from website showing a news article entitled “Wii is for Babies” (Exhibit J).
Exhibits E and H are printouts from Defendant’s own website, which are judicially noticeable.
See Blue Lake Rancheria v. United States,
Exhibit A is a screen shot from a game showing the requirement that a user update the game. This document is judicially noticeable because it is capable of accurate and ready determination using sources whose accuracy cannot reasonably be questioned. See Fed.R.Evid. 201(b). Plaintiff notes that the fact of the update cannot be reasonably disputed because inserting the Mass Effect 2 disc in any Xbox game player will show the update.
Exhibit F contains copies of and screens shots from a game disc distributed in Defendant’s magazine as evidence of what was in the public domain at the time of the magazine in 2004. The Court takes judicial notice of the existence of these documents that were in the public realm at that time.
See Von Saher v. Norton Simon Museum of Art at Pasadena,
Exhibit I is the console packaging from an Xbox 360 console. This is the same document submitted for judicial notice by Defendant, except Exhibit I contains the full text of the packaging. The Court takes judicial notice of this document for the same reasons that it took notice of Defendant’s version of this packaging. Discussion
1. First claim for violation of Sherman Act based on Aftermarket for Xbox 360 Accessories and Add-ons
Plaintiff alleges that Defendant possesses substantial market power in the secondary Aftermarket, or that a dangerous probability exists that Defendant will gain such power, and that Defendant has deployed that power to charge customers supra-competitive prices in the Aftermarket. Compl. ¶ 48. Specifically, Plaintiff alleges that Defendant “controls access to the Aftermarket for Xbox 360 Accessories and Add-ons by way of technological barriers and by way of its special access to customers arising from their purchase of the Xbox 360. Microsoft can then leverage its control over the Xbox 360 console,
Defendant argues that Plaintiffs first claim should be dismissed on the ground that Plaintiff has failed to plead a legally cognizable Aftermarket because Plaintiff cannot pursue antitrust claims based on a single-brand market. In general, single brand markets do not constitute a relevant market.
See, e.g., Green Country Food Mkt., Inc. v. Bottling Group,
In
Kodak,
Eastman Kodak manufactured and sold photocopiers and micro-graphic equipment. Kodak also sold service and replacement parts for the equipment. The plaintiffs, a group of independent service organizations that serviced Kodak’s equipment, challenged Kodak’s policies that made it more difficult for them to compete with Kodak in servicing equipment, including Kodak’s practice of limiting the availability of Kodak parts. The plaintiffs alleged that Kodak unlawfully tied the sale of service for Kodak machines to the sale of Kodak-compatible parts, a market in which Kodak had a monopoly. Kodak parts were not compatible with competitors’ machines and vice versa. The Court held that in certain circumstances, a single brand can constitute a separate market: “because service and parts for Kodak equipment are not interchangeable with other manufacturers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines.”
Eastman Kodak,
Defendant argues that the
Kodak
exception does not apply because purchasers of the Xbox 360 knew and agreed at the time they purchased their systems that they could only use Defendant’s authorized accessories with their systems. Thus, Defendant argues that its power in the market derives from contract, not from exclusionary conduct, so
Eastman Kodak
does not apply.
See Newcal Indus. v. IKON Office Solution,
The critical distinction between Eastman Kodak and the two circuit court opinions [Queen City Pizza and Forsyth ] was that the Kodak customers didnot knowingly enter a contract that gave Kodak the exclusive right to provide parts and service for the life of the equipment. In other words, the simple purchase of Kodak-brand equipment (unlike the signing of a Domino’s franchise agreement or the purchase of a Humana insurance policy) did not constitute a binding contractual agreement to consume Kodak parts and services in the aftermarket. Equally critically, the Supreme Court found that market imperfections, including information and switching costs, prevented consumers from discovering, as they were shopping for equipment, that the Kodak brand would include a de facto commitment to consume only supracompetitively priced Kodak-brand sex-vice contracts.
Newcal,
In
Netucal,
the court permitted a single-brand aftermarket because the defendant, which leased office equipment, allegedly defrauded its customers by amending the lease agreements after the customers had already signed up for service without disclosing that the amendments would lengthen the service contract.
See id.
at 1043;
see also In re Apple and AT & TM Antitrust Litig.,
In
Queen City Pizza v. Domino’s Pizza, Inc.,
Defendant argues that this case is more like Queen City Pizza, Forsyth, and Psystar, than Kodak, Newcal, and In re Apple, because Xbox purchasers knowingly gave Defendant the right to prohibit the use of unauthorized accessories through the warranty and software license that is included in the Xbox 360 packaging, as well as through the Xbox Live Terms of Use. The shrinkwrap license in the packaging states: “The software included in the Xbox product [Xbox 360 Video Game System or Xbox 360-compatible hardware accessories manufactured by or for Defendant whether included or purchased separately] is licensed to you, not sold. You are licensed to use such software only in your Xbox product and you may not reverse engineer it, except as expressly permitted by applicable law notwithstanding this limitation.” Def.’s RJN Ex. A at 7. This language, however, is arguably ambiguous. Further, it may not be applicable to using external accessories to boost memory, which may not involve a prohibited use of the software and does not constitute reverse engineering. Defendant also points to the Xbox Live Terms of Use presented to consumers when they sign up for the service, which requires customers to “agree that you are using only authorized software and hardware to access the Service.” Def.’s RJN Ex. B at 10. But this language is also arguably ambiguous in that use of accessories such as a memory card is not necessarily “using ... software and hardware” to access the service. The Terms of Use also permit Defendant to, among other things, issue automatic software updates to prevent a customer from using unauthorized hardware peripheral devices. See id. at 10-11. However, this statement is somewhat ambiguous with respect to the meaning of peripheral device because the phrase is used earlier in the same paragraph to refer to devices used to log on to the Service, which may not include accessories such as memory cards. Further, the Terms of Use could not have informed a customer’s purchasing decision because the Xbox Live is a separate optional service that a user may join after purchasing the Xbox 360. See Def.’s RJN Ex. C.
Plaintiff argues that customers did not knowingly agree at the time of purchase that their use of aftermarket accessories would be restricted. Plaintiff alleges in the complaint that the monopolization of the Aftermarket “does not derive from contractual rights that consumers knowingly and voluntarily gave Microsoft at the time of purchase,” and that “market imperfections have prevented customers from realizing the impact that their choice in the primary market would have on their freedom in the aftermarket.” Compl. ¶¶ 31-32. In
Newcal,
the plaintiff made allegations to rebut a presumption that the equipment customers made a knowing choice to restrict their aftermarket options when they decided to purchase a product in the primary market. The
Newcal
court stated: “Competition in the initial market, therefore, does not necessarily suffice to discipline anticompetitive practices in the aftermarket.”
Newcal,
Plaintiff argues that the Warranty could not have been discovered by consumers until the box was opened, and that therefore, a consumer could not have knowingly and voluntarily accepted it prior to purchase.
See
Opp. at 7. The weight of authority, however, including in this district, is that shrinkwrap licenses are enforceable.
See, e.g., ProCD, Inc. v. Zeidenberg,
Plaintiff argues that Defendant’s interpretation of the definition of “Xbox Product” in the Warranty is not reasonable. Xbox Product is defined as:
either (1) the Microsoft Xbox 360 Video Game System console including the Microsoft software stored on the separate Xbox 360 hard disk and/or embedded in the microprocessors within the Xbox 360 console; or (2) Microsoft branded Xbox 360-compatible hardware accessories manufactured by or for Microsoft whether included with the console or purchased separately.
Def.’s RJN Ex. A at 5. According to Plaintiff, only by reading the definition in the conjunctive can Defendant support the argument that the Warranty language prohibits unauthorized third party accessories.
See
Pl.’s Opp. to Def.’s Mot. to Dismiss at 8-9. Defendant responds that the terms in the definition are not mutually exclusive
(see Federation of Fly Fishers v. Daley,
Defendant further argues that this case is like
Psystar
because there, the defendant argued that the plaintiff erected technical barriers to prevent Mac OS from operating on non-Apple computers
(Psystar,
In
Psystar,
however, unlike
Kodak
and its progeny, the plaintiff alleged “not a single-brand aftermarket dependent on and derivative of a specific company’s primary product but instead that a single brand of primary product (Apple’s operating system) constitutes an independent market.”
Psystar,
In the absence of a clearly binding contractual restriction on the market, Plaintiff points to the factors applied by the
Newcal
court to determine whether a consumer’s selection of a brand in the market is the functional equivalent of a contractual commitment, or instead allows the plaintiff to pursue a claim based on a single-product aftermarket as in
Kodak.
First, here, as in
Newcal
and
Kodak,
and unlike in
Queen City Pizza,
the Aftermarket is “wholly derivative and dependant on the primary market,”
(Newcal,
2. Second claim for violation of Sherman Act based on Multiplayer Online Dedicated Gaming Systems Market
Plaintiff argues that Defendant either has significant market power in the primary Online Market, or there is a dangerous probability that Defendant will obtain that market power. Compl. ¶ 63, 65. Plaintiff alleges that Defendant “has deployed this market power to control related and subsidiary markets,” and “to impede the development of a vibrant competitive Aftermarket....” Compl. ¶ 62. Plaintiff alleges that by using its power in the Online Market to curb com
Defendant argues that this claim must be dismissed because: (1) Plaintiff lacks antitrust injury and thus lacks standing to bring the claim because it is not a participant in the primary market; (2) Plaintiff has not pled a legally tenable market because it has excluded certain products; and (3) Plaintiff does- not plead any exclusionary acts by Defendant in the online gaming systems market. Because the Court concludes that Plaintiff has not adequately alleged standing, the Court need not reach the remaining bases for Defendant’s motion.
To establish standing under the federal antitrust laws, Plaintiff must have suffered an antitrust injury, that is, “an injury of the type the antitrust laws were intended to prevent and that flows from that which makes Defendant’s acts unlawful.” Bru
nswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
“Antitrust injury requires the plaintiff to have suffered an injury in the market where competition is being restrained. Parties whose injuries, though flowing from that which makes the defendant’s conduct unlawful, are experienced in another market do not suffer an antitrust injury.”
American Ad Mgmt., Inc. v. General Telephone Co. of Cal.,
Defendant argues that Plaintiff is not a market participant and so lacks standing. Plaintiff responds that even though it does not directly compete with Defendant, it participates in the Online Market by “offering aftermarket products that have the capacity to lower barriers of entry and switching costs in the relevant market.” PL’s Opp. to Def.’s Mot. to Dismiss at 22;
see Novell, Inc. v. Microsoft, Inc.,
Defendant points out that Plaintiff has not suffered any injury in the Online Market because Plaintiffs allegations of harm regarding disablement of its memory cards and the technical barriers to Plaintiffs other products occurred in the secondary Aftermarket, not in the primary market.
See Ticketmaster LLC v. Designer Tickets & Tours,
Plaintiff attempts to distinguish
Ticketmaster
on the grounds that there, the defendant advanced inconsistent claims, and conceded that the injury was in the secondary market. Here, by contrast, Plaintiff argues that it participates in the relevant market and was injured as a necessary step in Defendant’s monopolization of that market.
See
Pl.’s Opp. to Def.’s Mot. to Dismiss at n. 19. Specifically, Plaintiff argues that even if it is not a participant in the primary market, its injury was the “necessary step” and “means” by which the anticompetitive conduct was carried out, relying on
Blue Shield of Virginia v. McCready,
The Ninth Circuit explained the limited scope of the
Blue Shield
exception in
Exhibitors’ Service. See Exhibitors’ Serv.,
The allegations in the complaint do not support Plaintiffs argument that its injury was inextricably intertwined with Defendant’s anticompetitive conduct in the primary market such that it comes within the Blue Shield exception. Plaintiffs allegations center on its injury in the secondary market, even though Plaintiff attempts to convert spillover effects in the secondary market into an injury in the primary market. Plaintiff alleges that Defendant profited from blocking Plaintiffs accessories, and that the extension of Defendant’s proprietary interests in the secondary market served to “reinforce” Defendant’s power in the Online Market. Compl. ¶ 62. Plaintiff alleges that by using this power, Defendant curbed competition in the Aftermarket and thereby erected substantial barriers to potential entrants to the primary Online Market. Compl. ¶ 63. These allegations are not sufficient to come within the narrow Blue Shield exception. Further, it is questionable whether Plaintiff could allege in good faith that it was necessary for Defendant to exclude Plaintiffs unauthorized accessories from the Aftermarket in order to gain a monopoly in the Online Market, in light of other allegations in the complaint. Specifically, Plaintiff alleges that there are other barriers to the Online Market, such as cost, other established libraries of games, and the massive resources available to Defendant. Compl. ¶ 45. Further, Plaintiff introduced its memory cards in May 2009, but alleges that Defendant dominated the market since 2006 (Compl. ¶ 13). Thus, it does not appear that blocking Plaintiffs products in October 2009 (Compl. ¶ 20) was a necessary step in Defendant’s alleged market dominance, which is alleged to have started much earlier. Rather, Plaintiff alleges that Defendant possessed substantial power in the Online Market and then “deployed” that power to control subsidiary markets. Compl. ¶ 62. Therefore, Plaintiff has not adequately pled the narrow Blue Shield exception.
Accordingly, Defendant’s motion to dismiss Plaintiffs second claim is granted for lack of standing. Plaintiff has stated that if the Court determined that Plaintiff lacked standing, Plaintiff would seek to amend the complaint to allege a combined market consisting of the Online Market and the Aftermarket in the alternative. It is possible that if Plaintiff does so, it will undermine its other claims, but that is a choice for Plaintiff to make. The Court grants Plaintiff leave to amend the complaint no later than May 14, 2010.
3. Third claim for violation of Sherman Act based on tying
Plaintiff alleges that Defendant illegally “ties the sale of the Xbox 360 console to a
“A tying arrangement is ‘an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.’ ”
Kodak,
Defendant argues that Plaintiffs tying claim fails because Plaintiff has failed to plead a viable primary market and aftermarket. In order to state a claim under the Sherman Act, Plaintiff must allege that Defendant has market power in a “relevant market.”
Newcal,
In
Newcal,
the Ninth Circuit reversed the district court’s decision that
Defendant first argues that Plaintiff has not adequately pled power in the tying market, here, the Online Market, because Plaintiffs allegation of a primary market limited to Multiplayer Online Dedicated Gaming Systems is impermissibly narrow.
See, e.g., Rick-Mik Enters., Inc. v. Equilon Enters., LLC,
Defendant argues that the market must contain the product at issue and all economic substitutes, which can be determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product and substitutes for it.
Newcal,
Plaintiff responds that the market is not defined solely by price and quality. Instead, Plaintiff points to the allegations that other products, such as the Wii and personal computers, have a distinct core functionality (Compl. ¶ 38), distinct perceptions by consumers (Compl. ¶¶ 38, 39), distinct customer targeting by manufacturers (Compl. ¶ 38), distinct analyses by industry analysts (Compl. ¶ 39), and distinct pricing and pricing patterns (Compl. ¶ 39). At least some of these allegations do not relate to price and quality, and therefore, are appropriate differentiations at the pleading stage to demonstrate that there is no reasonable interchangeability between the Xbox 360 and the Playstation 3 on the one hand, and the Wii, Playstation 2 and personal computers on the other hand. Further, Plaintiff alleges that Defendant itself “has measured the success of the Xbox 360 against the Playstation 3, to the exclusion of other products or platforms.” Compl. ¶ 40. Finally, the question of whether the market should include other products is better resolved at the summary judgment stage, rather than on a motion to dismiss.
See
Pl.’s Opp. at 18, n. 15;
Image Tech. Servs. v. Eastman Kodak,
Viewing the allegations in the light most favorable to Plaintiff, the Court concludes that Plaintiff has not improperly ignored products that may be reasonably interchangeable ones, but instead has included two products in the alleged market and alleged differences regarding others that plausibly exclude them from the relevant market.
See Newcal,
... the law of both tying and exclusive dealing was intended to apply to firms falling short of the § 2 market share requirements for monopolization. Indeed, only recently have the courts put real teeth into the market power requirements for exclusive dealing and tying, and even today the minimum market share hovers in the range of 30-40%, which is roughly half of the amount needed for a § 2 violation.
Hoverkamp, Federal Antitrust Law, § 7.6c.
Here, Plaintiff alleges that Defendant’s share of the Online Market was approximately 66% as of July 2009. Compl. ¶ 44. Further, Plaintiff alleges that “in June 2009, the Xbox 360 outsold the Playstation
Plaintiff also argues that it has alleged a per se tying claim (Compl. ¶ 76), that affects a substantial volume of commerce (Compl. ¶¶ 73, 75), and therefore, it is not necessary to rigorously define a market for the product.
See Fortner Enters. v. United States Steel Corp.,
Viewing the allegations in the light most favorable to Plaintiff, Plaintiff has adequately pled a per se tying claim. For all of the reasons stated above, Defendant’s motion to dismiss Plaintiffs tying claim based on the viability of the primary market is denied.
Defendant also seeks dismissal of the tying claim on the ground that there is no legally plausible definition of the tied product because the Aftermarket claim is legally improper.
See Jefferson Parish Hosp.,
4. Fourth and Fifth claims for unfair competition
Defendant argues that these claims fail because the antitrust claims fail.
See Formula One Licensing v. Purple Interactive,
Conclusion
Defendant’s motion to dismiss is granted in part with leave to amend and denied in part. A further case management conference is set for June 2, 2010 at 10:00 a.m. As discussed at the motion hearing, the parties shall meet and confer and file a joint case management conference statement on later than May 25, 2010 with proposed agreed pretrial and trial dates.
IT IS SO ORDERED.
Notes
. Plaintiff's reliance on the Ninth Circuit’s interpretation of
Blue Shield
in
Ostrofe v. H.S. Crocker Co.,
As sales manager of one of the label manufacturers, Ostrofe was an essential participant in the scheme to eliminate competition in the marketing of labels by fixing prices and allocating customers. It could not succeed without his active cooperation. When Ostrofe sold labels to customers not allocated to his employer and at prices below those agreed upon, his discharge was a necessary means to achieve the conspirators' illegal end as well as an integral and inextricable part of the anticompetitive scheme.
Ostrofe,