Case Information
*1 1 UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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XINUOS, INC.,
Plaintiff, -against- 22-cv-09777 BENCH RULING INTERNATIONAL BUSINESS MACHINES CORPORATION et al.,
Defendant.
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United States Courthouse White Plains, New York January 22, 2024 B e f o r e:
HONORABLE JUDGE CATHY SEIBEL, United States District Judge A P P E A R A N C E S:
CROWELL & MORING LLP
Attorneys for Plaintiff
3 Embarcadero Center - 26th Floor San Francisco, CA 94111
BY: WARRINGTON PARKER
MARK MICHAEL SUPKO
CROWELL & MORING LLP
Attorneys for Plaintiff
1001 Pennsylvania Avenue, NW
Washington, DC 20004
BY: MARK ANDREW KLAPOW
CRAVATH, SWAINE & MOORE LLP
Attorney for Defendant
825 Eighth Avenue
New York NY 10019
BY: DAVID R. MARRIOTT
ALSO PRESENT: Thomas Kemmery
Franklin Li
Sean Snyder *2 2 PROCEEDINGS
THE DEPUTY CLERK: All rise. The Honorable Cathy Seibel presiding. Xinuos v. IBM.
THE COURT: Good morning, everyone. Let me figure out who is who. Mr. Supko.
MR. SUPKO: Yes, your Honor. Good morning.
THE COURT: Mr. Parker.
MR. PARKER: Yes, ma'am.
THE COURT: Mr. Klapow. Am I saying it right? MR. KLAPOW: You are.
THE COURT: And Mr. Snyder.
MR. SNYDER: Uh-huh.
THE COURT: And Mr. Marriott.
MR. MARRIOTT: (Nodding.)
THE COURT: And Mr. Kemmery and Mr. Li. Okay.
Great. Everyone can have a seat.
Anybody have anything to add on the pending motions that wasn't covered by the papers?
MR. SUPKO: Not for plaintiff, your Honor.
MR. MARRIOTT: Not for defendants, your Honor. Thank you.
THE COURT: Mr. Supko, what's the correct pronunciation of your client?
MR. SUPKO: Xinuos.
THE COURT: Xinuos. Never would have guessed. *3 3 MR. SNYDER: I have a habit of creating names you can't pronounce.
THE COURT: Well, let me tell you where we come out. You're going to want to order the transcript because I'm going to lead with the punch line. The motion is going to be granted in part and denied in part -- or motions I should say. So there's a partial motion for summary judgment and a motion to dismiss by defendants IBM and Red Hat. The motion for summary judgment relates to Xinuos's copyright infringement claim against IBM, and the motion to dismiss relates to Xinuos's claims against IBM and Red Hat for violation of Sections 1 and 2 of the Sherman Act, Section 7 of the Clayton Act and the Virgina Islands Antimonopoly Law and unfair competition and unjust enrichment under Virgin Islands' common law.
Let me start with the facts related to defendant's motion for summary judgment. I base these facts on defendant's Local Civil Rule 56.1 statement, which is ECF Number 123, the plaintiff's responsive statement, which is ECF Number 128, and the supporting materials.
Plaintiff's responsive 56.1 statement also includes a 126-paragraph additional statement of facts. That's at page 37 to 64, ECF128. Local Rule 56.1 allows for a counterstatement of, quote, additional material facts as to which it is contended that there exists a genuine issue to be tried, unquote. That's Rule 56.1(b), but there's no provision for a *4 4 responsive 56.1 statement to include additional facts that are not in dispute but that a party opposing summary judgment simply thinks are important. Any additional facts have to be confined to the material facts in dispute.
Because plaintiff's so-called additional statement consists of facts that plaintiff regards as undisputed and helpful, it is not authorized, and I do not consider it. I also do not consider defendant's response to it, which is ECF 131 at 68 to 119.
Defendants, for their part, filed a reply to
plaintiff's response to defendant's 56.1, and that was pages 1 through 67 of ECF 131, supporting anew their original 56.1 statement by addressing each of plaintiff's responses and opining on whether he created a genuine issue of fact. Local Rule 56.1 does not permit the filing of reply 56.1 statements. See, for example, Capital Records against Vimeo , 2018 Westlaw 4659475 at page 1, Southern District, September 10, 2018.
A reply 56.1 statement is, quote, a procedurally improper attempt to have the last word in a manner that is not contemplated by the local rules, unquote. Killis v. Cabela's , 2015 Westlaw 128098 at page 1, Northern District of Illinois, January 8, 2015. That's a district with rules substantively similar to ours. See also Pape v. Dirkson , 2019 Westlaw 1435882 at pages 2 to 3, Eastern District, February 1, 2019, report and recommendation adopted, 2019 Westlaw 1441125, *5 5 March 31, 2019.
So I don't consider the reply 56.1 statement either.
See Lincoln National v. TCF ,
So the following disputes -- the following facts are undisputed unless otherwise noted. IBM is a New York corporation that creates operating system software for servers and sells a Unix-based server operating system called AIX for Power among other products. Xinuos, formerly named -- I'm going to spell it. U-N, capital X, I-S, Inc. -- is a Virgin Islands corporation -- a U.S. Virgin Islands corporation formed in 2009.
Project Monterey, which I may abbreviate PM at times,
was a joint development project between IBM and The Santa Cruz
Operation, Inc. That's in defendant's 56.1, paragraph 3.
Plaintiff attempts to dispute it by saying it fails to include
relevant information and is misleading because Project Monterey
also included Sequent and Intel. This purported dispute and
many of plaintiff's others, quote, improperly interjects
argument and/or immaterial facts in response to facts asserted
*6
6
by defendants, often speaking past defendants' asserted facts
without specifically controverting those facts, unquote. Baity
v. Kralik ,
In these circumstance where the record supports defendants contentions, I deem defendant's facts admitted. See Warren v. Ewanciw , 2019 Westlaw 589488 at page 2, Note 4, Southern District, February 13, 2019.
So I accept that IBM and Santa Cruz worked together on Project Monterey. It was governed -- Project Monterey was joined -- sorry. Project Monterey was governed by a joint development agreement, which I'll call the JDA, into which IBM and Santa Cruz entered on October 23, 1998. Plaintiff points out that it was signed on October 26, although dated October 23. This dispute is immaterial.
The purpose of Project Monterey was to develop and market Unix-like operating system products, including a Monterey/64 version for the then forthcoming IA-64 Intel processor, a version to run on IBM's proprietary Power processor architecture and a version to run on the IA-32 *7 7 architecture. When Project Monterey began, the IA-64 architecture had not been commercialized but was under development in a separate collaboration between Intel and Hewlett-Packard. Under the JDA, Santa Cruz and IBM agreed to provide resources and technology to create a compatible family of products and agreed to grant each other licenses to use code supplied during the project. They also agreed under Section 22.3 of the JDA that any legal action related to a breach of the JDA had to be commenced no later than two years from the date of the breach.
The JDA also provided that if Project Monterey was terminated, quote, licenses and sublicenses to end users granted by either party prior to the effective date of termination are irrevocable and shall survive the termination or expiration of the agreement, unquote. See paragraph 9 of the 56.1.
The defendant contends that that provision means that any rights afforded to IBM during Project Monterey for use of UnixWare source code would not end after the termination of the project or the JDA. Plaintiff disputes this fact as false and misleading because IBM was not an end user. IBM incorporated code for Project Monterey into IBM products, which IBM contends it and Santa Cruz intended from the beginning. See paragraph 10. Plaintiff disputes this fact as false and misleading because Supplement B to the JDA limited the license such that *8 8 IBM was permitted to use Santa Cruz's code only for joint development of an IA-64 product, and if the JDA was terminated, the parties could only continue to use licensed materials for the development of the, quote, IA-64 product release run, unquote, which plaintiff contends never occurred.
Plaintiff also points to a related litigation in Utah
where the Tenth Circuit found a question of fact as to whether
the release entitled IBM to a royalty-free license of Santa
Cruz's code. See plaintiff's paragraph 10 citing SCO Group v.
IBM ,
Santa Cruz was aware that IBM used the code as early as August 2000 and no later than May of 2001 when IBM released software, and IBM and Santa Cruz jointly announced that the software incorporated Santa Cruz's technology. Paragraph 11. Plaintiff disputes this fact as misleading to the extent it suggests that the company was aware of any copyright infringement or that IBM was using the code outside the scope of Project Monterey.
Ultimately, Intel's IA-64 processor did not ship until mid-2001, and once it arrived, it performed poorly. And as a result, Intel and Hewlett-Packard repositioned it primarily as an evaluation and development platform. There was a substantial decrease in market interest and confidence in IA-64, and, therefore, in the Monterey 64 product under development in Project Monterey. *9 9
In 2000 Santa Cruz announced that it was selling its server software and professional services divisions and its Unix-related assets to Caldera Systems, Inc. As a result IBM exercised its right to terminate Project Monterey on June 19, 2001. In March 2003 Caldera sued IBM in the District of Utah for a breach of contract, copyright infringement, unfair competition, and tortious interference among other things. Shortly after filing the suit, Caldera changed its name to the SCO Group.
The initial complaint filed on March 6 by Caldera brought claims for misappropriation of trade secrets, unfair competition, interference of contract, and breach of contract. See ECF Number 124-15 at pages 27 to 34. The second amended complaint brought under the name SCO added more claims, including copyright infringement. See 124-16 at pages 32 to 61.
In the second amended complaint or SAC, SCO alleged that IBM had infringed copyrighted code that SCO's predecessor had obtained from Novell, Inc., in 1995. See 124-16 at pages 11 to 12 and 50 to 52. In a proposed third amended complaint dated October 14, 2004, SCO sought permission to add a copyright infringement claim arising from IBM's alleged misappropriation of different code to which IBM had been given access during Project Monterey, which code IBM allegedly incorporated into IBM's operating systems in breach of the JDA. *10 See paragraph 21. SCO claimed to have learned about this alleged theft by IBM only during discovery in the Utah case. IBM opposed the motion to amend as untimely, and the District Court denied the motion. See paragraphs 21 and 22.
In the same time frame SCO was litigating with Novell over which party owned the Unix and UnixWare copyrights that SCO's predecessor had allegedly purchased from Novell in 1995. Shortly after an adverse ruling on August 10, 2007, SCO filed for bankruptcy in the District of Delaware, and on September 20, 2007, the SCO v. IBM case in Utah was temporarily closed administratively. See paragraphs 26 through 28.
In connection with SCO's bankruptcy proceeding, SCO and Xinuos entered into an asset purchase agreement or APA on January 19, 2011. The APA granted Xinuos certain, quote, acquired assets, unquote, but carved out, quote, excluded assets, unquote, from the transfer. The APA clarified that the acquired assets did not include, quote, any rights, claims, or causes of action related to Novell, Inc., IBM, Red Hat, Inc., and SUSE Linux GmbH or other similar claims, unquote, belonging to SCO, and Section 2.1(c) reinforced that the excluded assets did not fall within the definition of acquired assets. See paragraphs 32 to 33.
The excluded assets included any of SCO's causes of action, rights, and remedies against IBM and Red Hat in relation to claims arising from the Unix or UnixWare *11 intellectual property, and, therefore, all of SCO's claims against IBM and Red Hat remained an asset of the bankruptcy estate. Paragraph 34. Plaintiff disputes this fact by asserting that the excluded assets solely excluded the assets that the bankruptcy estate would need to continue to pursue its existing litigation against IBM and any other litigations that were still active. That's in plaintiff's paragraph 34.
But the plain language of the APA excludes, quote, all rights and interests in all litigation claims pending or that may be associated in the future, unquote, against IBM by SCO and, quote, every claim of any nature whatsoever known or unknown that has been or may be asserted by SCO against Red Hat, Inc., unquote.
Xinuos paid 600,000 cash for the acquired assets. Defendants assert that these assets constituted almost the entirety of SCO's software business. Paragraph 35. Plaintiff asserts that the assets included all of SCO's software and copyrights but without citing to evidence to support this assertion. The only evidence cited in plaintiff's paragraph 35 supports the first statement of plaintiff's response, and there is no evidence cited to support the second part.
Federal Rules of Civil Procedure 56 requires a party asserting that a fact is genuinely disputed to support that assertion with citations to particular parts of materials in the record. That's Rule 56(c)(1)(A), and Local Rule 56(d) says *12 that each statement by the movant or opponent ... including each statement controverting any statement of material fact must be followed by citation to evidence which would be admissible.
So plaintiff has failed to properly address
defendant's assertion of fact in the second part of the
statement in paragraph 35, and that fact is considered
undisputed for purposes of the motion. See Cruz v. Wyckoff
Heights , 2016 Westlaw 4533568 at page 1, Southern District,
July 19, 2016. See also Amnesty America v. Town of West
Hartford ,
On March 7, 2011, the Delaware bankruptcy court approved the APA, finding that the terms and conditions constituted fair consideration for the acquired assets. The bankruptcy court's approval was based on the understanding that SCO was retaining SCO's Project Monterey claim, and indeed SCO pursued that claim in the Utah litigation for years thereafter. Plaintiff disputes this fact by asserting that the excluded assets included the then pending unfair competition claim but did not include any other claims, including copyright infringement claims that were yet to accrue because no other claims were pending at the time, and SCO was transferring all *13 assets, including the right to bring claims that accrued to Xinuos after the APA sale was completed. This is all in paragraphs 36 through 40. Plaintiff does not address copyright claims that had accrued but not yet been brought.
In November and December of 2011, SCO urged the District Court in the District of Utah to reopen SCO v. IBM . That occurred in June of 2013. SCO conceded that the rule obtained by Novell meant that SCO could no longer pursue in the Utah case the copyright claims it had originally brought which were based on code that the court in the SCO-Novell litigation found belonged to Novell. See ECF 127-15 at page 3.
While SCO's attempt to amend to include an infringement claim relating to the code IBM allegedly stole from Project Monterey had been denied -- paragraphs 21 and 22 -- SCO included the alleged misuse of the Project Monterey code as evidence for its unfair competition claim, and IBM and SCO thus litigated whether IBM stole the PM code or had a license to it. Paragraphs 23 and 24.
In August 2013 after the Utah District Court in July dismissed several of SCO's claims, SCO explained that the core of its remaining claims included that in connection with Project Monterey, IBM misappropriated UnixWare source code into its AIX for Power products in violation of the JDA.
Paragraphs 43 to 44. Plaintiff attempts to dispute this statement by asserting the copyright infringement related to *14 the post-1995 code was not being litigated at that time -- plaintiff's paragraph 44 -- but whether IBM had misappropriated Project Monterey code was at issue as part of the unfair competition claim. See ECF Number 124-30 at page 3.
On December 15, 2014, the Utah District Court entered summary judgment in favor of IBM on several counterclaims. One of the claims that remained was SCO's claim for unfair competition concerning Project Monterey. In March 2015 the parties agreed in a status report that SCO's claim against IBM was ripe for adjudication. The parties supplemented their previously filed motions for summary judgment, and SCO argued that it was undisputed that IBM obtained SCO's code through Project Monterey and used it in its AIX for Power product. See paragraphs 43 through 48.
In February 2016 the court granted summary judgment for IBM on SCO's remaining claims, and SCO appealed to the Tenth Circuit, challenging several of the District Court's rulings, including its order granting summary judgment against SCO on the unfair competition claim concerning Project Monterey and its order denying leave to amend to add a copyright infringement claim concerning Project Monterey.
In papers submitted to the Circuit Court, SCO argued that IBM exploited its relationship with SCO through Project Monterey by misappropriating SCO's code and using it for its own operating system. Paragraphs 49 through 52. In *15 January 2018 the Tenth Circuit affirmed the District Court's rulings except it remanded for trial the unfair competition claim based on misappropriation of SCO's code. IBM had argued that that claim was untimely under the JDA, and SCO argued that the two-year limitation in the JDA should not apply to the misappropriation claim because it was not a breach of contract claim.
The Tenth Circuit held that the misappropriation claim was related to a breach of the JDA and, therefore, applied the JDA's two-year limitation's period but found the claim timely. It found that there were fact issues as to whether, as SCO alleged, IBM misappropriated the code and did so in bad faith by pretending to support Project Monterey and issuing a sham IA-64 product to legitimize its theft.
The Tenth Circuit also noted that a claim for unfair competition required SCO to prove not just copyright infringement but also bad faith. So in that sense, the copyright infringement was a lesser included claim of the unfair competition claim. SCO sought hundreds of millions of dollars in damages from IBM through the unfair competition claim. See paragraphs 53 through 56 and 25 as well as the Tenth Circuit's SCO decision at 1078 -- sorry -- 1075 through 1081.
In February of 2018, SCO and IBM, in a joint status report, informed the Utah District Court that SCO's remaining *16 unfair competition claim concerned the allegation that IBM misappropriated into its AIX for Power operating system UnixWare source code that SCO provided to IBM through Project Monterey. Paragraph 57 and ECF Number 124-36 at pages 2 to 3. SCO v. IBM garnered media attention, including regarding the Project Monterey claim. Paragraphs 59 through 64.
Xinuos never raised any objection to SCO's continued assertion of its Project Monterey claim against IBM and did not lay claim to any relating to Project Monterey until after the Tenth Circuit affirmed the Utah District Court's decision that precluded SCO from asserting the copyright infringement claim as untimely. Paragraphs 65 to 67.
On March 26, 2019, Xinuos sent a letter to IBM
accusing IBM of unauthorized uses of Xinuos's copyrighted code in IBM's AIX and Linux-based operating systems and unauthorized contribution of Xinuos's copyrighted code to both the Red Hat Linux and SUSE Linux operating systems. On March 31, 2021, plaintiff filed its complaint in this action. Paragraphs 68 and 69.
On August 17, 2021, SCO and IBM settled the Utah litigation. Under the agreement SCO released any and all claims against IBM, including claims, quote, concerning, related to, arising out of, or arising from the Utah litigation, the proof of claim for IBM's relationship with (SCO or its predecessors), Project Monterey, or IBM's relationship *17 with SCO. That's in paragraph 80. The settlement further clarified that the release included any claims against IBM or Red Hat, belonging to SCO. See paragraphs 78 through 81.
Plaintiff disputes these statements by asserting that the terms of the settlement had nothing to do with its claims for copyrights it purchased a full decade before the settlement. Plaintiff's paragraphs 80 to 81. Plaintiff also objected to the settlement itself in the bankruptcy court, but on October 14, 2021, the bankruptcy court overruled that objection and approved the settlement. The bankruptcy court did not determine exactly what claims Xinuos might or might not be able to assert against IBM in this litigation, which was then pending in the U.S. Virgin Islands, but noted that, quote, Xinuos, Inc., reserves the right to argue that the release in the settlement agreement does not bar any claims it has asserted against IBM in Xinuos, Inc., v. IBM , 21-cv-31, DVI, and IBM reserves the right to argue that the settlement bars such claims, unquote.
The bankruptcy court expressly stated that it
approved of the settlement agreement, including the release of the bankruptcy estate's claims against IBM. The bankruptcy court also declined Xinuos's proposal to include language in its order that the settlement did not bar Xinuos from asserting that IBM infringed and continues to infringe copyrights that it had purchased. On November 5, 2021, the Utah District Court *18 dismissed SCO's remaining claims against IBM with prejudice. This is all in paragraphs 80 through 93.
On November 16, 2022, this case was transferred here to the Southern District of New York. Between December 21 and 23, 2022, Xinuos served 74 discovery requests on defendants that relate in large part to Project Monterey and the SCO v. IBM litigation, including all documents and communications referring or relating to Project Monterey, all discovery responses, and all deposition transcripts from SCO v. IBM , and the source code for a number of versions of IBM software dating back to 2000.
On January 10, 2022, Xinuos served its initial
disclosures under Rule 26, which identified more than 60 individuals identified with -- excuse me -- associated with IBM and SCO, who allegedly possessed knowledge relative to Xinuos's claims. On January 17, 2023, I granted defendant's request to file their dispositive motions, and I stayed discovery pending their resolution. See paragraphs 94 and 97.
Now I'll summarize the facts as they relate to the motion to dismiss the antitrust claims, and for purposes of that motion, I accept as true the facts, although not the conclusions, set forth in the plaintiff's complaint, which is ECF Number 1.
IBM and Xinuos's predecessor entered into a joint venture, Project Monterey, through which IBM gained *19 confidential access to code to which plaintiff says it has copyright rights. See paragraphs 43 and 55 through 56. According to the complaint, IBM then terminated Project Monterey without gaining any rights to the code under the applicable agreement but nevertheless used the code by incorporating it into several of AIX products. Paragraph 57 to 60. With the benefit of the code, IBM software became more competitive, but IBM still had competitors, including Xinuos and Red Hat. Paragraph 74 to 75.
IBM approached Red Hat, and they agreed to dominate the Unix and Linux paid server operating system market by dividing that market, promoting each other's products, and granting each other technical information that was not made widely available and from which Xinuos and others were excluded. Paragraphs 78 to 79. Red Hat and IBM agreed that Red Hat would take control of the low end of the relevant Unix/Linux paid server operating system market, and IBM would maintain the high end. Red Hat and IBM established a multiyear alliance to package each other's services and target clients based on their location in the market. They agreed to do joint marketing, jointly approach customers, and refrain from competing for the same customers.
Rather than competing with Red Hat, IBM drove its low-end customers to Red Hat's services, drove its high-end customers to IBM's services, and also integrated Red Hat *20 technology into IBM's software. IBM offered rebates of up to $10,000 to customers that bought IBM servers packaged with Red Hat's Linux-based operating system RHEL but refused to offer similar rebates for other competing operating systems. IBM also reimbursed server business partners as much as $3,000 to get certified to use Red Hat software and provided courses on RHEL applications. Xinuos submits that these actions excluded rivals from the low- and high-end markets, locked customers in, and deprived Xinuos of substantial benefits. See paragraphs 5, 7, 15, and 85 through 96.
IBM ultimately made RHEL the default operating system across its server products instead of making its own operating system the default and extended RHEL's capabilities on its servers, causing large enterprises to leave competing servers and move to IBM servers running RHEL. IBM enabled RHEL installations in larger enterprise data centers instead of installing its own operating systems. When IBM entered the cloud market, it made RHEL the default choice for the operating system in IBM's hybrid cloud and promoted RHEL instead of its own operating systems. Paragraphs 97 through 103.
Installation of IBM's operating systems have
decreased, but they are dominant in the high-end market. Paragraphs 105 and 107. Meanwhile, installations of RHEL have grown because of IBM's backing, and support for Xinuos's equally featured product has decreased. Paragraphs 108 through *21 112 and 118. To the extent that any of IBM's customers were moving to Linux, IBM transitioned that business to Red Hat. Paragraph 113. This prevented Xinuos and others from competing because in some of IBM's customers, RHEL would be installed as a matter of course. Paragraph 115.
IBM's arrangement with Red Hat caused consumers to migrate to RHEL to the detriment of other competitors, and defendants have become the world's two largest commercial Linux developers. Paragraphs 119 to 120. IBM did not offer to Xinuos the same technical advantages and opportunities that it provided to Red Hat and stopped supporting Xinuos's operating system on its cloud computing platform for no legitimate procompetitive reason. See paragraphs 123 to 126 and 132. In doing so, IBM has made extraordinary money from its collusion with Red Hat, denied consumers the benefit of Xinuos's program, and caused developers and manufacturers who would otherwise support Xinuos to believe that getting Xinuos's program is not worth it. Paragraphs 131 to 135.
Defendants control over 64 percent of the Unix/Linux server market and control the most lucrative licenses to the exclusion of any competitors. Paragraph 137. Xinuos alleges that this conduct has harmed market competition because defendants have extraordinary access to and control over the high- and low-end markets, causing rivals to compete at a disadvantage or making it impossible for them to compete at *22 all. This disadvantage is reinforced by the fact that existing customers are unlikely to migrate to new products due to time, switching cost, and risk and developers and manufacturers are disproportionally willing to work on products created by defendants given their controlling share of the market. This makes it difficult for competitors to lure customers away from IBM and Red Hat despite their high prices, and it's expensive for Xinuos and others to develop similar scale and network effects competitive with IBM and Red Hat. Paragraphs 140 through 146 and 149.
Xinuos also alleges that this conduct harms customers because those who would otherwise move to Xinuos's systems are locked in. The high-end customers face significant costs to migrate to other services, and the low-end customers are locked in because of their investment in RHEL and Red Hat's and IBM's inordinate scale and control. Paragraphs 151, 152 and 161. Xinuos is specifically damaged because the expansion of existing server operating system products like its own has been thwarted by IBM's and Red Hat's dominance, and application developers, hardware manufacturers, and partners only want to support IBM and Red Hat and do not support new entrants or the growth of competing systems. Paragraph 160.
IBM and Red Hat are now merged, and since the merger IBM has sought to control Linux and eliminated a free version of Red Hat Linux called CentOS. Paragraphs 163 to 164. Within *23 three months of the merger, IBM increased prices for its on-premises server software products and increased service and maintenance fees by around 10 percent. Paragraphs 166 to 67. Plaintiff alleges that all of defendant's bad acts were enabled by IBM infringing the copyrighted code -- paragraphs 171 to 74 -- and posed the threat that defendants can increase prices and provide low quality products due to high switching costs and customer lock-in while also reducing customer choice. Paragraph 168.
The procedural history is as follows. The initial complaint was filed by plaintiff against IBM and Red Hat in the Virgin Islands on March 31, 2021. On June 7 of that year, defendants filed a motion to dismiss and to transfer the case here. Plaintiff opposed both motions on August 11 of that year. On November 1 of that year, defendants moved to stay discovery pending resolution on the motion to transfer. Plaintiff opposed and defendants replied in November 2021.
The parties filed supplemental briefing on the motion to transfer on January 7 and 12, 2022. On April 26, 2022, the court granted defendant's motion to stay discovery pending resolution of the transfer motion, and on November 14, 2022, the court granted defendant's motion to transfer, and the case arrived here on November 16. On December 22 defendants filed before me a premotion letter in anticipation of its motions. At the pre-motion conference, I terminated defendant's *24 previously filed motion and authorized them to file a renewed motion, and the instant motions followed. The papers can be found at ECF Numbers 118 through 124.
I won't take the time to summarize the standards that
govern a motion to dismiss. We should all be familiar with
Bell Atlantic v. Twombly ,
But the plaintiff has to rely on the document. Mere
notice or possession is not enough, and even if a document is
integral, there must be no dispute regarding authenticity,
accuracy, or relevance. U.S. against AECOM ,
As part of its motion to dismiss, defendants filed
the declaration of Kathyrn E. Bolas, which is ECF Number 120,
to which they attached three exhibits. Exhibit A was a copy of
Red Hat's 2019 10-K, Exhibit B was a copy of IBM's May 3rd 219
8-K, and Exhibit C was a copy of the European commissions press
release titled "Mergers: Commission Approves Acquisition of
Red Hat by IBM" dated June 27, 2019. I can take judicial
notice of the 10-K and the 8-K as legally required public
disclosure documents filed with the SEC but only for the fact
that the matters in them were publicly asserted, not for their
truth. Sec. versus Fiore ,
I also take judicial notice of the EC press release,
but for the fact that the information exists, not for the truth
of the matters asserted. See Staehr v. Hartford ,
I'll start with the motion for summary judgment. IBM argues that the copyright cause of action in this case was *26 retained by SCO in the APA, that IBM litigated that issue with SCO and settled it, and that Xinuos has no basis to revive it now. Plaintiff argues that it is not bringing the same claim that SCO settled but rather is suing for new infringements that occurred when it, not SCO, was the owner of the code.
This dispute first requires me to determine what code is at issue. Plaintiff alleges that the code at issue was all created after September 19, 1995. That's in the complaint, paragraph 43. To make clear that it is not the same code that Novell actually owns, it also argues that it is suing on, quote, code developed outside of the JDA and Project Monterey, unquote. That's in plaintiff's opposition at page 2 and also pages 15 to 16. But there's no support cited for that proposition, perhaps not surprisingly as the complaint is clear that the code on which plaintiff is suing is the code to which defendant got confidential access during Project Monterey and which plaintiffs says defendant continued to use even though it had no rights to do so under the JDA. See paragraphs 56 and 57 of the complaint.
Plaintiff repeatedly notes that there are copyrights at issue in this dispute that were not previously asserted by SCO. See plaintiff's 56.1 response, paragraph 73 to 74. But this assertion is unsurprising as two of the copyrights on which it is suing were not registered until 2020 and likely in preparation for this lawsuit. The question is not when the *27 copyrights were registered but what code is at issue, and plaintiff has identified no code on which it is suing other than that which IBM allegedly stole during Project Monterey, which ended in 2001. The APA, into which plaintiff and SCO entered in 2011, excluded any claims SCO had against IBM or Red Hat. See the 56.1 paragraphs 30 through 34.
Defendant goes too far if it needs to argue that the APA carved out any conceivable claim SCO or its successor could ever have against IBM or Red Hat. Excluded claims are only those belonging to SCO at the time of the APA. The plaintiff goes too far if it means to argue that the APA carved out only claims SCO had already brought. The excluded claims include those that had accrued to SCO that it would have the right to assert in the future.
So the operative question here is when the claim at issue accrued. If it was before the APA was signed, the claim belongs to SCO, and SCO retained and eventually released it, and plaintiff cannot sue on it now. If it accrued after the APA, the plaintiff is free to sue on it. Quote, civil actions under the Copyright Act must be brought within three years after the claim has accrued, unquote. Kwan v. Schlein , 634 F.3d 224 at 228. Quote, an ownership claim accrues only once when a reasonably diligent plaintiff would have put on inquiry as to the existence of a right, unquote. Walker v. Carter , 210 F. Supp. 3d 487 at 504, Southern District, 2016.
*28
In other words, quote, copyright ownership claims
accrue when a plaintiff knows or has reason to know of the
injury upon which the claim is premised, unquote. Big E.
Entertainment v. Zomba Enterprises ,
Quote, a copyright infringement claim is an ownership
claim when it does not involve the nature, extent, or scope of
copying but instead focuses on competing assertions of
ownership or rights in the work at issue, unquote. Roberts
versus BroadwayHD ,
Quote, thus the question of how to classify a claim is of great consequence, unquote. Walker at 504. Quote, as the Second Circuit has explained, infringement claims requires a plaintiff to establish ownership of a valid copyright and copying of the constituent elements of the work, unquote. Walker at 50405. Quote, in many infringement cases, the first element (ownership) is not at issue, and the issue is instead whether the defendant impermissibly copied the work. In contrast, where a dispute does not involve the nature, extent, or scope of copying, ownership forms the backbone of the infringement claim at issue, and if an ownership claim would be time barred, any infringement claim is likewise time barred.
The question then is whether the plaintiff's claims are rooted in the contested assertion of ownership interest in the copyright, unquote. That's all Walker at 104 to 105, which goes on to say, quote, to answer that question, courts must examine the substance of the claim rather that how plaintiffs label the cause of action. Courts should consider such factors as whether the plaintiff concedes in any filings that questions of ownership and authorship are at the heart of the claim, whether the plaintiffs copyright ownership is conceded by the defendant, whether the plaintiff alleges anything specific about the means of infringement, and whether the lawsuit is *30 between two parties who claim ownership of the copyrights. Again, Walker at 504 to 05.
If this case presents an ownership claim, it occurred only once when the code's owner was on notice that defendant was exercising the right incompatible with its ownership, which would be when defendant started using the code it allegedly stole in 2001. In that event the claim belongs to SCO, which owned the copyright, then retained the claim by carving it out of the APA, and tried to assert the claim in 2004 in the Utah litigation. If this is an infringement claim, plaintiff can sue for any product defendant released going back three years from when it filed suit.
I conclude that plaintiff is asserting an ownership claim. As a preliminary matter, I recognize that, quote/unquote, ownership is not precisely what is at issue here, but rather the question is whether defendant obtained a license that gave it the right to use the code. But it seems to me that the analysis ought to be the same. Is the dispute about whether the defendant had the legal right to use the code, or is it about whether or not the defendant, in fact, used it?
Thus the first two factors ought to be reframed here as whether plaintiff concedes that the right to use is at the heart of the dispute and whether defendant concedes it lacks the right to use. On those two factors, the claim here as *31 framed by plaintiff is that defendant exploited the access it had to the code during Project Monterey by using the code after Project Monterey ended without having the right to do so under the JDA. The complaint squarely raises the issue of whether defendant got rights under the JDA to use the code -- see complaint paragraph 57 -- and the crux of the dispute as it has progressed is clearly whether defendant has had rights to the code. Defendant says yes because the JDA so provides, and plaintiff says no because the supplements limited defendants rights to an IA-64 product, which it never generally released.
Thus it seems to me the question is defendant's rights, if any, are at the heart of the copyright claims in this case. Plaintiff does not explicitly concede this, but there's really to other reasonable inference from its arguments that defendant did not gain a license because it never produced an IA-64 product with general availability. See plaintiff's 56 response, paragraphs 9 and 11, and plaintiff's opposition brief at 3, 4 and 16, Note 13. Defendant has not conceded that it lacked the right to use the code.
With respect to the third factor, not only does plaintiff not allege any specific about the means of infringement beyond saying defendant incorporated into its products code that it stole, but defendant does not seem to dispute that the code is, in fact, incorporated in its product. See defendants 56.1, paragraphs 10 and 11, and defendants *32 summary judgment brief at 15 and 23. Defendant does not claim it is not using the code. It is arguing that it had a right to do so and that in any event it settled the matter with SCO. See defendant's brief at 15 through 17.
Quote, a copyright infringement claim is an ownership claim when it does not involve the nature, extent, or scope of copying but instead focuses on competing assertions of ownership or rights in the work at issue, unquote. Roberts I at 730 to 31. See Kwan at 229, which found that ownership formed the backbone of the, quote/unquote, infringement claim at issue in that case because the dispute did not involve the nature, extent, or scope of copying. In the Robert's case, the court initially found the dispute to be an ownership claim but later found that an amended claimant stated an infringement claim. See Roberts v. BroadwayHD , 2022 Westlaw 976872 at page 9, Southern District, March 31, 2022, which I'm going to call Roberts II .
The initial complaint focused on allegations that one set of defendants reassigned rights to the work among themselves and granted another defendant a license to use the works, and the court found this suggested an assertion of ownership by those defendants. See Roberts I at 731 to 32. The amended complaint alleged that defendants, knowing that plaintiff was a copyright owner of the work at issue, received a limited license to use the work and exceeded the scope of the *33 license by sublicensing the work. See Roberts II at 9.
While the facts here bear superficial similarity to Roberts II , there the plaintiff acknowledged that the defendant had a legitimate license and alleged that defendant went beyond what the license allowed. Roberts II at 9. Here plaintiffs argue not only that any license defendant could have obtained under the JDA was limited to use in an IA-64 application but that because defendant never launched such an application it had and has no right to use the code at all. I thus find this case differs significantly from Roberts. Whether IBM had a right to use the code at all strikes me as an ownership claim, not an infringement claim.
On the fourth factor, the dispute is between two parties, who both claim the right to use the code. So I conclude that the claim here is, for accrual purposes, an ownership claim. Quote, accrual of such a claim can be triggered by another party's expressed assertion of sole authorship or ownership, by implicit repudiation by consciously exploiting the copyright without paying royalties, or when alleged co-owners learn they are entitled to royalties that they are not receiving, unquote. Roberts I at 731.
Here the claim accrued well before Xinuos acquired its interest in the code in 2011. Indeed, SCO attempted to assert the claim in the Utah litigation in 2004. Plaintiff alleges that it only became aware of the code's theft and *34 infringement in March 2019 in the complaint, paragraph 73, an allegation that is hard to believe given that plaintiff must have done its due diligence before entering into the APA and familiarized itself with the Utah litigation and because the dispute was the subject of coverage in industry publications. But even if it is true, it is irrelevant because the claim accrued only months when the code and the claim belonged to SCO, and SCO has released defendants from it. See paragraphs 78 through 81 of 56.1.
Defendants are therefore entitled to summary judgment on the copyright claim.
Before I move on antitrust, let's take a little break, and I'll come back in five minutes.
(Recess)
THE DEPUTY CLERK: All rise.
THE COURT: Everyone can have a seat. All right. Turning now to the motion to dismiss. The first issue is antitrust standing. Quote, to survive the pleading stage, an antitrust plaintiff must demonstrate that it has antitrust standing, unquote. IQ Dental Supply v. Henry Schein, Inc. , 924 F.3d 57 at 62. To demonstrate antitrust standing, a plaintiff must plausibly allege, quote, one, that it suffered a special kind of antitrust injury, and, two, that is a suitable plaintiff to pursue the alleged antitrust violations and thus is an efficient enforcer of the antitrust laws, unquote. IQ *35 Dental at 62. Defendants argue the plaintiff fails this test.
I will take each prong in turn. The Second Circuit
uses a three-part test established in Gatt Communications v.
PMC ,
For the first step, the plaintiff need only allege that the defendants have engaged in unlawful anticompetitive conduct, and the bar for such a showing is low. IQ Dental at 63. Here plaintiff alleges that defendants agreed to dominate the relevant market by dividing the market, not competing with each other, promoting each other's products, sharing technical information with each other, and excluding Xinuos and other competitors. That's in the complaint, paragraphs 83 to 103.
Plaintiff also alleges that as a result of defendant's market control, customers are locked into defendant's product and forced to pay supracompetitive prices -- paragraph 88 and 150 to 157 -- and the defendants *36 have foreclosed market opportunities from competitors.
Paragraph 136. Plaintiff has met its low burden because,
quote, it well-settled law that horizontal market allocation
agreements, concerted refusals to deal with price-fixing
agreements, or boycotts are per se violations of the antitrust
laws. Eon Labs v. Watson Pharmaceuticals ,
As to the second factor, plaintiff must allege an actual injury, showing that it's in a worse position because of defendant's conduct. Plaintiff claims that a result -- as a result of defendant's agreement and conduct, it was denied opportunities to compete for customers and squeezed out of the market and faced a decline in support of its competitive software due to defendant's control over the market.
Paragraphs 118, 138, and 143 to 48. These allegations satisfy
the second factor. In IQ Dental Supply , the court found that
the plaintiff adequately alleged an actual injury where the
plaintiff alleged that defendant's anticompetitive conduct
*37
affected the market, and plaintiff's sales suffered as a
result.
For the third factor, plaintiffs have to allege that defendant's antitrust competitive conduct caused its actual injury. Plaintiff alleges it has faced a decline in its software sales and that its growth has been thwarted because of defendant's antitrust competitive conduct. See paragraphs 154 to 60. Thus plaintiff has plausibly alleged that its injury, quote, flows from that which makes defendant's act unlawful, unquote, because it is, quote, the type of loss that the claimed violations would be likely to cause, unquote.
Brunswick v. Pueblo Bowl-O-Mat ,
So based on the three factors, I find that plaintiff has plausibly alleged an antitrust injury.
Defendants argue plaintiff has not done so because the complaint does not explain how competition has been harmed and simply states that defendants worked together to, quote, create better products and provide services, unquote. That's in defendant's brief. The argument is at pages 4 to 6. First, the complaint plainly alleges more than defendants improving their product. It alleges that because of defendant's collusion, plaintiff's, quote, equally featured, unquote, product has been excluded from the market, and defendants have unfairly gained market power because of consumer lock-in and *38 the disproportionate willingness of application developers and hardware manufacturers to work with defendants given their controlling share of the market. Paragraphs 138 to 49.
It may well turn out that all that is at work here is the defendant's products and service are superior, but that is not what the complaint alleges. And at this stage, I must accept the allegations in the complaint as true.
Second, the complaint alleges more than just harm to plaintiff. It explains how not just plaintiff but other competitors have been harmed in that they are locked out of the market even though their products are competitive, and they are forced to compete at a disadvantage. See paragraphs 20, 85, 140, and 145. Turning to the second factor of the Gatt test, the plaintiff that has suffered an antitrust injury must also demonstrate that it's a suitable plaintiff. In other words, an efficient enforcer of the antitrust laws. In re Aluminum Warehousing Antitrust Ligation 823, F.3d 151 at 157 to 58. See IQ Dental at 65.
Quote, the efficient enforcer criteria must be
established irrespective of whether the plaintiff is a consumer
or a competitor, unquote, because, quote, not every victim of
an antitrust violation needs to be compensated under the
antitrust laws in order for the antitrust laws to be officially
enforced, unquote. Gelboim v. Bank of America ,
Quote, to determine whether a plaintiff is an
efficient enforcer of the antitrust laws, the Second Circuit directs courts to the following factors: One, the directness or indirectness of the asserted injury; two, the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement; three, the speculativeness of the alleged injury; and, four, the difficulty of identifying damages and apportioning them among direct and indirect victims so as to avoid duplicative recoveries, unquote. In re Amazon.com, Inc., eBook Antitrust Litigation , 2023 Westlaw 6006525 at page 14, Southern District, July 31, 2023.
The weight given to each factor varies depending on
the case. See Daniel v. American Board of Emergency Medicine ,
The first factor, whether the violation was based --
was a direct or remote cause of the injury is based on
principles of approximate cause. In the context of antitrust
*40
standing, approximate cause generally follows the first step
rule, which requires some direct relation between the injury
asserted and the injurious conduct alleged. In re Platinum and
Palladium Antitrust Litigation ,
The second efficient enforcer factor considers
whether there are plaintiffs that are better situated to
vindicate the claims, which would, quote, diminish the
justification for allowing a more remote party to perform the
office of private attorney general, unquote. In re American
Express Anti-Steering Rules Antitrust Litigation ,
The third factor looks at whether plaintiff can produce a just and reasonable estimate of damages. In re Platinum at 262. Here plaintiff's damages could be its, quote, *41 potentially ascertainable business losses ... calculated based on its historical sales data without undue speculation, unquote. IQ Dental at 68. Even if that damages calculation were complicated, this factor carries less weight because the Supreme Court has warned that antitrust standing should not get the defendant out of court every time the damages calculation is contemplated. See Apple v. Pepper , 139 Supreme Court 1514 at 1524 and In re Platinum at 262.
The fourth factor considers the risk of duplicative
recoveries or complex reapportionment of damages such that the
damages to which the plaintiff lays claim are the same damages
that other parties could have claimed. See American Express
Anti-Steering ,
Further, quote, while there may be other parties property positioned to bring monopolization claims against defendants, their damages would be wholly distinct from those allegedly suffered by plaintiff, unquote, and quote, therefore, there's no risk that different groups of plaintiffs would be attempting to recover for the same exact injury, unquote. In re Amazon eBook at 16.
*42 So on balance the four factors favor a finding that plaintiff is an efficient enforcer, and having found antitrust injury and that plaintiff is a proper plaintiff, I find plaintiff has an antitrust standing, and now address whether the Sherman Act and claimant -- preenact claims state a claim on which relief could be granted.
Let's start with the Sherman Act, Section 2, which
alleges that defendants unlawfully maintained monopoly power.
Section 2 of the Sherman Act makes it unlawful for any person
to, quote, monopolize any part of the trade or commerce among
the federal states or with foreign nations. 15 U.S. Code
Section 2. Quote, to state a Section 2 claim of
monopolization, a plaintiff must allege, one, the possession of
monopoly power in the relevant market and, two, the willful
acquisition or maintenance of that power as distinguished from
growth or development as a consequence of a superior product,
business acumen, or historic accident, unquote. In re Keurig
Green Mountain Single-Serve Coffee Antitrust Litigation, 383 F.
Supp. 3d 187 at 219, Southern District, 2019. See In re Tether
& Bitfinex Crypto Asset Litigation ,
Turning to the first prong, quote, a plaintiff must
allege a relevant product market in which the anticompetitive
effects of the challenged activity can be assessed, unquote.
In re Keurig at 224 to 25. Quote, for purposes of Section 2,
*43
the relevant market is the area of effective competition within
which the defendant operates, unquote. LLM Bar Exam v. Barbri ,
The, quote, outer boundaries, unquote, of the
relevant market, quote, are determined by the reasonable
interchangeability of use or the cross-elasticity of demand
between the product itself and substitutes for it, unquote.
US Airways v. Sabre Holdings ,
Under this test, the market is, quote, any grouping of sales whose sellers, if unified by a hypothetical cartel or merger, could profitably raise prices significantly above the competitive level. American Express at 198 to 99. Quote, if the sales of other producers substantially constrain the price-increasing ability of the hypothetical cartel, those *44 others are part of the market. Same case at 199. While, quote, reasonable interchangeability sketches the boundaries of the market ... there may also be cognizable submarkets which themselves constitute the appropriate market for antitrust analysis, unquote. Geneva Pharmaceuticals v. Barr Labs , 386 F.3d 485 at 496.
Quote, the boundaries of such a submarket may be
determined by examining such practical indicia as industry or
public recognition of the submarket as a separate economic
entity, the product's peculiar characteristics and uses, unique
production facilities, distinct customers, distinct prices,
sensitivity to price changes, and specialized vendors, unquote.
Brown Shoe v. the United States ,
Quote, where the plaintiff fails to define its
proposed relevant market with reference to the rules of reasonable interchangeability and cross-elasticity of demand or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products even when all *45 factual inferences are granted in the plaintiff's favor, the relevant market is legally insufficient, and a motion to dismiss may be granted, unquote. LLM at 582. Quote, it is important to recognize that because market definition is a deeply fact intensive inquiry, courts hesitate to grant motions to dismiss for failure to plead a relevant product market, unquote. Keurig at 225.
Plaintiff alleges here that the relevant market is
the Unix/Linux paid server operating system market. Complaint,
paragraph 36. Defendants argue that this market fails under
the Brown Shoe factors because it does not include facts
supporting five of the six factors. See defendants motion to
dismiss brief at 6 through 9. Brown Shoe , however, is not a
checklist of required factors. Quote, the indicia in Brown
Shoe are instructive in determining the existence of a
submarket, but the presence of some and the absence of others
is not dispositive, unquote. Southeast Missouri Hospital v.
C.R. Bard ,
See C.E. Services v. Control Data ,
The ultimate test to define a relevant market is,
quote, the reasonable interchangeability of use or the
cross-elasticity of demand between the product itself and
substitutes for it, unquote. US Airways ,
I find that plaintiff has adequately alleged a
relevant market. First, plaintiff has adequately alleged that users of the Unix/Linux paid server operating system market *47 understand Unix/Linux products to be reasonable potential substitutes for each other -- paragraph 39 -- and that other dissimilar operating system environments are not part of the relevant market because they are not interchangeable with Unix/Linux systems, and customers, therefore, do not view other operating systems as substitutes. Paragraphs 40 through 41. It is reasonable for customers to view as distinct products that run only on their servers.
See Xerox v. Media ,
Lastly, defendants seem to suggest that because plaintiff limits the relevant market to enterprise or large customer accounts, plaintiff sales to the low end of the market cannot be in the relevant market. No such limitation appears in the complaint's description of the relevant market. Paragraphs 36 to 41. Defendants does not -- do not explain why low-end customers which consist of small- and medium-sized *48 companies -- see paragraph 83 -- cannot be considered part of the paid Linux operating system market. Discovery may reveal the plaintiff's factual allegations regarding the market are incorrect, but at this early stage, in taking them as true as I must, they suffice.
Plaintiff must also allege that defendants possessed monopoly power in this relevant market, meaning, quote, the power to control prices or exclude competition in a given market which, unquote -- which, quote, can be pled directly through allegations of control over prices or the exclusion of competition or may be inferred from a defendant's large share of the relevant market, unquote. In re Keurig at 225.
Plaintiff has directly pleaded that IBM excluded competition by giving up its low-end customers only to Red Hat -- paragraph 85 -- giving preferential support to RHEL installed on IBM's servers -- paragraph 93 -- and reimbursing its server business partners to get certified to use Linux through Red Hat. Paragraph 96. Plaintiff further alleges that IBM and Red Hat excluded plaintiff by agreeing that Red Hat would adopt RHEL for IBM systems in a way that competitors could not achieve -- paragraph 121 -- and by insuring that plaintiff's systems are supported on the IBM cloud. Paragraph 126. Plaintiff also alleges that customers are forced to pay higher prices because high-end customers face significant migration costs, and low-end customers are locked into their *49 investments in RHEL and that post-merger and even premerger to an extent defendants have significantly raised their prices. Paragraphs 151 to 52 and 165 to 67.
Defendants argue plaintiff has failed to allege direct evidence of market power because while plaintiff has alleged that IBM and Red Hat raised their prices, that is not evidence of market power and just evidence of how they priced their products in recent years. That's in their brief at page 10. That may turn out to be the case, but at this stage I find the plaintiff's direct allegations are sufficient to plausibly suggest that defendant possesses market power, and because I so find, I need not consider the parties' arguments regarding indirect allegations of market power.
Plaintiff must also allege the willful acquisition or maintenance of monopoly power as distinguished from just having a better product, business acumen, or luck. Keurig at 229. As I've already explained, plaintiff alleges that IBM willfully partnered with Red Hat to shield itself from established and growing competitors. Paragraphs 75. To this end, it forsook its own interests by giving Red Hat more access to its clients and supporting Red Hat's operating system over its own, even providing rebates to server customers that purchased servers packaged with RHEL while not permitting any other competitors to run their operating systems on IBM's servers.
Paragraphs 91, 95, 96, and 98. *50 Defendant argues in its reply at pages 5 to 6 that plaintiff fails to adequately allege this factor because each allegation of anticompetitive behavior alone is not actionable, and they cannot together make an antitrust claim. This argument fails because plaintiff has alleged at least one type of actionable conduct, a horizontal agreement to divide the market. Furthermore, antitrust cases are assessed by considering the conduct as a whole, and taking the alleged allegations together, I find that plaintiff has sufficiently alleged the willful acquisition or maintenance of market power at this stage.
See U.S. against Apple , 791, F.3d 290 at 319, which
said, quote, in antitrust cases, the character and effect of a
conspiracy are not to be judged by dismembering it and viewing
its separate parts but only by looking at it as a whole,
unquote. See also U.S. against AT&T ,
*51
Defendants also argue that to the extent the alleged
anticompetitive conduct centers on post-merger agreements, it
is not actionable because a parent and subsidiary cannot
conspire or make anticompetitive agreements, but the merger
does not absolve IBM and Red Hat from anticompetitive conduct
taken before the merger, and defendant's reliance on Copperweld
v. Independent Tube ,
Lastly, defendant's argument that plaintiff was not harmed by the alleged market allocation because supracompetitive pricing would make plaintiff more attractive fails because plaintiff has plausibly explained the lock-in effect of the products on customers, which hinder customers' ability to switch to other competitive operating systems like plaintiff's.
At this stage, taking all of plaintiff's well pled allegations as true, I find plaintiffs have alleged facts sufficient to state a claim under Section 2.
Defendants also move to dismiss plaintiff's
*52
allegations that defendants conspired to restrain trade in the
relevant market in violation of Section 1 of the Sherman Act.
As an initial matter, as with the Section 2 claim, a Section 1
claim must define the relevant market, which I've already -- a
requirement I've already found to be satisfied. See New York
Medscan v. NYU ,
Section 1 of the Sherman Act prohibits restraints on
trade effected by a contract combination or conspiracy. The
critical question is whether the challenged anticompetitive
conduct stems from independent decision or from agreement,
tacit or expressed. To state a claim under Section 1 of the
Sherman Act, the plaintiff must show a combination or some form
of concerted action between at least two legally distinct
economic entities that unreasonably restrains trade. In re
Tether and Bitfinex ,
With respect to the first element, to allege an unlawful agreement, plaintiff must assert either direct evidence of a conspiracy or circumstantial facts supporting an inference that a conspiracy existed. Conspiracies are rarely evidenced by explicit agreements and usually must be proven through inferences drawn from the behavior of the alleged conspirators. The line separating conspiracy from parallelism is indistinct but may be crossed with allegations of interdependent conduct accompanied by circumstantial evidence *53 and plus factors. Illustrative nonexhaustive plus factors include a common motive to conspire, evidence showing that the parallel acts were against the apparent individual economic self-interest of the alleged conspirators, and evidence of a high level of interfirm communications. At the motion to dismiss stage, a plaintiff must only provide sufficient factual matter to plausibly suggest an inference of conspiracy even if the facts are susceptible to an equally likely interpretation. All of that is from In re Tether at 101 through 102.
Quote, if a plaintiff establishes the existence of an illegal contract or combination, it must then proceed to demonstrate that the agreement constituted an unreasonable restraint of trade either per se or under the rule of reason, unquote. In re Keurig at 241. Conduct considered illegal per se is invoked where a defendant's actions are so plainly harmful to competition and so obviously lacking in any redeeming pro-competitive values that they are conclusively presumed illegal without further examination, but most antitrust claims are analyzed under rule of reason, according to which the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint's history, nature, and effect. Keurig at 241.
*54
Agreements within the scope of Section 1 may be
either horizontal, in other words, between competitors at the
same level of the market structure, or vertical, in other
words, combinations of persons at different levels of the
market structure such as manufacturers and distributors.
American Express ,
Plaintiff has alleged that before the merger, IBM and Red Hat established an, quote, alliance, unquote, to divide the relevant market and restrain trade by suppressing competing operating systems and preventing plaintiff from competing for customers. Paragraphs 90 and 154. There are plain allegations of a horizontal agreement to divide markets, which is per se unlawful. Further, plaintiff has adequately alleged at least two of the three plus factors distinguishing parallel conduct from a conspiracy, a common motive to conspire, and evidence that parallel acts were against the apparent individual self-interest of the alleged conspirators. See paragraphs 78 to 79 on the first and paragraphs 95, 97, 98, 100, and 110 on *55 the latter.
Defendant's arguments to the contrary are the same described within Section 2. Taking the acts separately, defendants argue that none of the conduct alleged is sufficient, but considering the conduct together, plaintiff has adequately alleged concerted action between IBM and Red Hat that unreasonably restrained trade and thus has stated a claim under Section 1.
Defendant also moves to dismiss plaintiff's claims
under Section 7 of the Clayton Act, which, quote, prohibits the
acquisition of a business's assets where the effect of such an
acquisition is to substantially lessen competition, unquote.
St. Francis Hospital v. Hartford Healthcare ,
Quote, this type of merger involves the acquisition of the stocks or assets of one competitor by another. When analyzing a horizontal merger under Section 7, the court must describe the companies involved, analyze the product in the geographic market in which they compete, and explore the structure of the industry affected by the merger to ... properly assess the probable effects of the merger on *56 competition. Remington at 42. Quoting Stanley v. FTC , 469 F.2d 498 at 499. When evaluating, quote, the likely competitive effects of a prospective business merger ... the court weighs what actions taken by the parties to the merger and other proponents could substantially influence consumer choices and thus affect competition and product pricing in the relevant markets, unquote. New York v. Deutsche Telekom, 439 F. Supp. 3d 179 at 188, Southern District, 2020.
In Fruehauf Corp. v. F.T.C. ,
Quote, as is the case with the claim brought under Section 2 of the Sherman Act, a Section 7 claim requires that the plaintiff allege a plausible relevant market in which competition will be impaired, unquote. Zinc at 22.
*57 I find that plaintiff has met this requirement for the reasons already discussed. As for the likely anticompetitive effects, I find that plaintiff's allegations are sufficient at this stage considering the relevant factors.
Regarding the nature and economic purpose of the
merger, plaintiff alleges that it was to continue the premerger
anticompetitive conduct, raised prices even more, and reduced
consumer choice. In U.S. v. E. I. du Pont ,
Specifically, plaintiff alleges that within three months of the merger, IBM announced increases in purchase prices up to 39 percent for the AIX for Power operating system. Paragraph 166. Plaintiff also alleges that since the merger, IBM has dramatically increased prices across the board on over 5,000 of its on-premise server software products, including the AIX operating system, by removing prior volume discounts on support and service fees for the millions of existing IBM customers that had discounts. Paragraph 167.
Plaintiffs further allege in the same paragraph that *58 IBM increased service and maintenance fees by around 10 percent, meaning that every year customers now pay approximately 20 percent of the list price. Plaintiffs further allege that since the merger, IBM eliminated a free version of Red Hat Linux called CentOS, reducing consumer choice.
Paragraph 164 and 168. And plaintiff further alleges that, quote, most recently, unquote, which -- construing the facts in the light most favorable to plaintiff I construe as referring to a time post-merger, quote, IBM and Red Hat have constructed the IBM cloud such that Xinuos's OpenServer 10 based on open source FreeBSD Unix is substantially excluded from working as efficiently or effectively, unquote. Paragraph 125.
Plaintiff also alleges that, quote, contrary to spurring more innovation after the merger, capital expenditure outlays declined by 25 percent, unquote, when companies usually report an increase in such expenditures following a major business combination. Paragraph 168. The complaint also describes a high degree of market power and high capital costs to enter the market, alleging that, quote, the agreements between Red Hat and IBM have caused the two companies to sufficiently scale and have sufficient control in the market and to make it economically unfeasible for new companies to enter the market, unquote, and that they are still benefiting from these anticompetitive acts post-merger. Paragraph 169.
Plaintiff further alleges that the merger has
*59 eliminated actual and potential competition in the market -- paragraph 206 -- and that there is an ongoing threat that IBM and Red Hat will be able to increase the prices of RHEL, AIX for Power, z/0S mainframe, and i midrange server operating systems and provide lower quality products through their combination and in view of very high switching costs and customer lock-in. Paragraph 168. At this stage, these allegations suffice to plausibly allege anticompetitive effects of the merger.
Plaintiff suggests -- excuse me. Defendants -- one more try. Defendants suggest that plaintiff's claim is weakened because the U.S. Department of Justice and the European Commission reviewed the transaction and did not take issue with it, but defendant presents no authority suggesting that regulatory approval per se precludes a viable Section 7 claim. It may well turn out that the reasons the regulators approved the merger will make it impossible for plaintiff to prove its case, but the approval itself is not a ground for dismissal of an otherwise plausible claim. So the Section 7 claim survives.
Defendants also move to dismiss plaintiff's claim that defendant violated the Virgin Islands Antimonopoly Law, which is found in the Virgin Islands Statutes Title 11 at Section 1501 et seq. For this claim, plaintiff alleges that defendants conspired to restrain trade and gain monopoly power. *60 See paragraphs 212 and 213. Defendants argue that insofar as the federal monopolization claim fails, the corresponding Virgin Islands claim fails as well.
The Virgin Islands Antimonopoly Law is generally
interpreted in accordance with federal antitrust law. See, for
example, Sea Air Shuttle Corp. v. Virgin Islands Port
Authority ,
Because I found the federal monopolization claim survives, so does the Virgin Islands claim.
Turning now to the Virgin Islands common law unfair competition claim. Quote, the antimonopoly law also covers ... unfair competition, unquote. Mamouzette v. Jerome , 2022 Westlaw 1026868 at page 5, D.V.I April 5, 2022. And the unfair competition claim should, quote, follow the construction given to similar federal antitrust law provisions. That's a quote from this case, Xinuos , 2022 Westlaw 16921760 from the Virgin Islands at page 12. Defendants argue only that if plaintiff's claim is insufficient under the Virgin Islands Antimonopoly Law, it cannot be restated as one for unfair competition and that that is the claim here because the federal claims are deficient. That's in defendant's brief at 24.
*61 Because I found neither the federal nor the Virgin Islands Antimonopoly claims to be deficient, this precise argument fails, but the larger point remains. The case defendants cite Gardiner versus Saint Croix , 2019 Westlaw 3814427 at page 7, Virgin Islands Superior Court, July 30, 2019. It seems to say that a claim for unfair competition should be dismissed where it merely restates an antitrust claim. That is the case here. Indeed, plaintiff concedes that the Virgin Islands have not developed a common law unfair competition claim. See plaintiff's opposition brief ECF 125 at page 22.
The district court in the Virgin Islands in this case indicated the same, that unfair competition claims fall under the antimonopoly statute in its decision transferring the case to this court. See ECF Number 75 at pages 20 to 21.
Because plaintiff attempts to bring the common law unfair competition claim and such a claim, if it exists at all, is duplicative of the Virgin Islands statutory claim, it is dismissed.
Turning now to Virgin Islands common law unjust
enrichment. First, because this is a diversity action, I apply
the choice-of-law principles of New York. See, for example,
AEI v. Lincoln Benefit ,
So I will apply New York law to the unjust enrichment claim. See Lomax v. Aegis Funding , 2010 Westlaw 1633440 at page 3, Eastern District, April 19, 2010. The basic elements of an unjust enrichment claim in New York would require proof that the defendant was enriched at the plaintiff's expense, and equity and good conscience militate against permitting defendant to retain that which the plaintiff is seeking to recover. Cooper at 115. But New York's highest court has made clear that unjust enrichment is not a catchall cause of action to be used when others fail, and an unjust enrichment claim is not available where it simply duplicates or replaces a conventional contract or tort claim. Cooper at 115.
Defendants argue plaintiff's claim must be dismissed because unjust enrichment is an equitable remedy that is unavailable, whereas here a legal remedy exists. Plaintiff does not dispute this but argues it's allowed to plead an *63 equitable claim in the alternative, but I disagree because even pleaded in the alternative, claims for unjust enrichment will not survive a motion to dismiss where plaintiffs fail to explain how their unjust enrichment claim is not merely duplicative of their other causes of action. Bermudez v. Colgate-Palmolive , 2022 Westlaw 2751044 at page 15, Southern District, March 31, 2023. Virgin Islands courts appear to apply the same rule. See Matthews v. R&M , 2020 Westlaw 1650825 at page 6, Virgin Islands Superior Court, 2020, and Pourzal v. Marriott , 2006 Westlaw 2471695 at page 3, D.V.I. August 17, 2006.
Plaintiffs unjust enrichment claims here rely on the same set of facts as its other claims, and accordingly the unjust enrichment claim is dismissed.
Finally, as to leave to amend, it should be freely
given when justice so requires under Rule 15, but it's within
the sound discretion of the Court to grant or deny leave to
amend. Kim v. Kim m,
At the end of its motion to dismiss the opposition brief, plaintiff says that if the Court concludes it's failed to plead any of the challenged claims in the complaint, it can *64 replead. Plaintiff has not suggested that it is in possession of facts that would cure the deficiencies in the unfair competition for unjust enrichment claims, and accordingly I decline to grant leave to amend. See TechnoMarine v.
Giftports ,
So to conclude, the motion for summary judgment on the copyright claim is granted. The motion to dismiss is denied as to the Sherman Act, Section 2, Sherman Act, Section 1, and the Clayton Act, Section 7, and the Virgin Islands Antimonopoly Law claim, and it's granted as to the Virgin Islands unfair competition and unjust enrichment claims.
I'm going to refer you folks to the magistrate judge for discovery. We also need to set a date for an answer.
Mr. Marriott, when will you be able to answer? MR. MARRIOTT: If we could have 30 days. I suppose that would be ideal, your Honor.
THE COURT: All right. That will take us to
February 21. Let's see. Who's your magistrate judge? It *65 looks like maybe they dropped the ball when they sent this case up here from Manhattan. It looks like it was originally assigned to District Judge Oetken and Magistrate Judge Aaron. One of them woke up and decided it should land on my lap, but I'm not seeing what magistrate judge was designated. So I'll have the clerk's office do that, and you can be in suspense unless I missed it.
THE DEPUTY CLERK: Judge, it was -- May 30. There was a notice of designation.
THE COURT: I missed it. Move on. May 30. Oh, there it was. May 30. Judge Reznik. You'll really like working with her. She's great. Let's go off the record a second.
(Discussion off record)
THE COURT: Back on the record. I can't remember if I said this on the record already or not, but I'm going to refer to Judge Reznik for general pretrial supervision. I've encouraged the parties -- I've encouraged the plaintiff to commence some conversations about a possible business solution at this juncture, and it is certainly my philosophy and I would be surprised if it wasn't Judge Reznik's that if you're really getting somewhere on a resolution, it makes more sense to put the resources into that than into discovery.
So I wouldn't say, oh, let's pause the discovery the first time you pick up the phone, but if you really think you *66 might be getting somewhere and you're making good progress and you want to pause the discovery, I'm amenable to that, and I imagine Judge Reznik would be as well.
Anything else we should do this morning?
MR. SUPKO: Not from plaintiffs perspective, your Honor.
MR. MARRIOTT: Not here either, your Honor. Thank you.
THE COURT: Thank you all. Everybody stay well. (Proceedings concluded)