Tech Start-Up’s Monopoly Suit Moves Forward Against Utilities Management Power Player
10/26/2021On September 30, 2021, Judge Amy Totenberg of the United States District Court for the Northern District of Georgia denied a utilities management company’s motion to dismiss state and federal antitrust and tortious interference claims. Lucasys Inc. v. Powerplan, Inc., No. 1:20-cv-02987 (N.D. Ga. Sept. 30, 2021). Plaintiff alleges five counts of antitrust violations by defendant under Sections 1 and 2 of the Sherman Act, for unlawful restraint of trade and monopoly maintenance via negative tying, the concerted refusal to deal with plaintiff and other market competitors by denying access to software and data needed to develop competing products, and de facto exclusive dealing provisions in contracts with utilities. The Court found that plaintiff had sufficiently pled its claims at the motion to dismiss stage and declined to grant defendant’s motion to dismiss.
Defendant is the leading provider of software and services for investor-owned, rate-regulated utilities nationwide. Plaintiff is a tax consulting and software development startup founded by defendant’s former employees. Defendant’s software was specially built to allow utilities to store and use data in connection with operational, accounting, regulatory, and tax needs in the industry. Built in 1994, it is the oldest and the only full-suite software in the market. Plaintiff alleges that, due to defendant’s software aging and the evolving needs of utilities customers, a supplemental market for products that integrate new services and code extensions of defendant’s existing software has formed. Plaintiff is one of about ten companies that compete in this supplemental management services market, in which defendant is also a competitor. Both plaintiff and defendant also compete in the separate but related market for utility deferred tax solutions (services and technology allowing calculations associated with changes in the tax code).
Plaintiff alleges that its innovations in deferred tax solutions allowed plaintiff to edge out defendant in its bid for a contract for tax solutions software for American Electric Power Service Corporation (AEP). After losing the bid, defendant allegedly threatened legal action against both AEP and plaintiff, claiming misappropriation of trade secrets. Defendant also allegedly proposed an informal market allocation with plaintiff as to consulting services if plaintiff agreed to discontinue the development of its tax software. In response, AEP narrowed the scope of its contract with plaintiff to include services only, not the development of new tax software, which would have competed with defendant’s product. Plaintiff alleges that defendant’s actions are part of a pattern to coerce customers to terminate contracts with plaintiff, one that defendant has used against other competitors besides plaintiff (such as a firm with custom code editing capabilities).
The Court first considered whether plaintiff had standing to seek recovery for the alleged antitrust injury. For claims that improper monopolization foreclosed expansion of business into a new market, plaintiff must show that (1) it intended to enter the business and (2) it was prepared to enter the business. Cable Holdings of Ga., Inc. v. Home Video, Inc., 825 F.2d 1559, 1651 (11th Cir. 1987). “Preparedness” does not require an actual operating business, and courts consider the ability to finance the business, the consummation of contracts, affirmative action to enter the business, and background and experience in the business when assessing preparedness. In this case, the Court rejected defendant’s argument that plaintiff needed to have a “complete” substitute product to have standing. Rather, standing was granted for plaintiff’s imperfect substitute because plaintiff had the relevant industry experience, a financing plan, and had already “taken affirmative action in developing various types of software and technology” that were shown to fill deficiencies in defendant’s software. Critical to the Court’s assessment was that plaintiff’s “inability to grow was the direct result of [defendant’s] anticompetitive actions, which the Court assume[d] to be true for the purpose of a standing analysis.”
The Court next assessed defendant’s argument that plaintiff failed to allege plausible injury to competition in the supplemental services market and the deferred tax market because plaintiff’s evidence focused on injury to itself (a competitor) and not to the state of competition generally in the supplemental markets. The Court noted that under its rule of reason analysis (where the Court weighs pro- versus anticompetitive effects of defendant’s conduct), plaintiff must show actual or potential harm to competition rather than to competitors through direct or indirect evidence. After a fact-intensive inquiry, the Court held that plaintiff’s allegations of harm to competition were adequately supported by specific examples demonstrating decreased product quality, stymied innovation, reduced consumer choices, and increased prices. The Court specifically highlighted the problem of stymied innovation, noting that a “dominant firm’s restraints on the innovations of others goes to the heart of antitrust policy.” Rejecting defendant’s argument that harm to a single competitor in the market could not establish competitive harm in general, the Court determined that damage to plaintiff—the only other competitor offering software solutions in the supplemental services market—could also damage competition in general and was sufficient in this case to permit it to proceed to discovery.
Moreover, the Court rejected defendant’s argument that plaintiff had improperly defined the deferred tax market as a distinct market. The Court held that plaintiff’s market definition showed that the deferred tax market featured unique characteristics, distinct services, and specialized vendors. The Court also commented on the high barriers to entry in this market, such that only three firms (including defendant and plaintiff) could compete in the tax market at the scale necessary to serve utilities customers. Finally, the Court also rejected defendant’s motion to dismiss plaintiff’s state law claims as to tortious interference.
The Court’s thorough analysis of the facts highlights the importance of well-pled details in antitrust cases, even at the motion to dismiss stage. In addition, this case reiterates what we have seen in other recent decisions regarding the technology sector and more broadly: that product quality and continued innovation are important hallmarks of competition that the antitrust laws protect. On October 14, defendant reiterated many of its arguments in affirmative defenses to the complaint, including lack of standing because there is no causal connection between defendant’s conduct and the alleged injuries, and that there is no injury to plaintiff or to competition. Defendant has further filed counterclaims against plaintiff as to misappropriation of trade secrets and an unfair competition claim under Georgia’s common law.