Northern District Of California Rejects Motion To Dismiss Sherman Act Claims Against Parties To A Joint Venture In The Vanity Mobile Dial Code Market
05/01/2018On April 19, 2018, Judge Beth L. Freeman of the United States District Court for the Northern District of California denied defendants’ motion to dismiss antitrust claims under Sections 1 and 2 of the Sherman Act, rejecting defense arguments that the complaint alleged no more than permissible unilateral conduct by a legitimate joint venture.
Plaintiff Sumotext Corporation (“Sumotext”) alleged that a group of its competitors for vanity mobile dial codes conspired to monopolize the market and drive Sumotext out of business. Defendants allegedly did so by creating a joint venture to acquire the exclusive administrator of the national mobile dial code registry in order to increase subleasing costs. Specifically, Sumotext and defendants lease double star numbers, such as **LAW, **MOVE, and other similar numbers, from the national administrator, sublease those numbers to local companies, and offer software and services to effectively use the double star numbers. Because Sumotext adequately alleged that defendants conspired to monopolize before forming the joint venture to acquire the administrator, constructively refused to deal with Sumotext, and continued to act as separate entities after the acquisition, the Court declined to dismiss the case. Sumotext alleged that defendants violated Section 1 by entering into a joint venture for the purpose of monopolizing the market. After closing the acquisition, defendants terminated the administrator’s contracts with Sumotext and increased the price of renewing such contracts by up to 10,000 percent.
Defendants moved to dismiss on grounds that the joint venture created a single enterprise that cannot conspire with itself, so it could not be liable of entering an agreement to restrain trade. The Court found that Sumotext plausibly alleged that defendants agreed to acquire the administrator and drive Sumotext from the market before the acquisition while they were still separate entities. The Court also held that defendants did not establish that they were a single entity after the acquisition because some defendants held only a minority stake in the post-acquisition entity and the question of whether the joint venture operated as an entity was a factual one that could not be decided on a motion to dismiss.
Sumotext further alleged that defendants’ post-acquisition acts—terminating licenses and raising license prices by approximately 10,000 percent—also constituted violations of Section 2 of the Sherman Act because access to the vanity mobile dial code numbers was an essential facility to allow Sumotext to compete. Defendants argued that double star numbers are not essential for Sumotext to compete and that defendants have the right to refuse to deal with any customer. The Court rejected both arguments. First, the Court found that Sumotext had properly pleaded that double star numbers may not have an adequate substitute and may not be interchangeable with similar numbers, such as 800 or toll-free numbers. Second, the Court found that Sumotext’s allegation that defendants only offered to deal at a 10,000 percent markup was sufficient to plead a constructive refusal to deal. In particular, the Court noted that another court in the circuit held that a 400 percent markup constituted a constructive refusal to deal. And the Court confirmed that even if defendants were found to be a single entity, they could still incur refusal to deal liability under Section Two, citing Aspen Skiing. Accordingly, the Court denied the motion to dismiss, and the case will proceed to discovery.