Antitrust Law Daily Wrap Up, ANTITRUST—NDCal: Software Support Provider Fails to State Claim That Oracle Unlawfully Tied Software Upgrades to Tax and Regulatory Support, (Apr 5, 2013)

By Tobias J. Gillett, J.D., LL.M.

A former provider of tax and regulatory software updates failed to adequately allege that Oracle America, Inc. and Oracle International Corporation unlawfully tied purchases of software upgrade licenses for certain of its software products to provision of tax and regulatory support services for those products, the federal district court in San Francisco has ruled. CedarCrestone, Inc., the software provider, did not allege sufficient facts to demonstrate that Oracle’s licensees had not voluntarily accepted the limitation at the time of their initial software purchase (Oracle America, Inc. v. CedarCrestone, Inc., April 3, 2013, Cousins, N.).

Oracle owns and licenses certain intellectual property and provides related services. CedarCrestone was a licensed Oracle partner providing information technology services to Oracle licensees, including consulting services for Oracle’s applications, hosting and management of those applications, and tax and regulatory support for certain licensees.

In September 2012, Oracle purported to terminate their relationship, and later filed suit against CedarCrestone alleging that it misappropriated Oracle intellectual property by selling unauthorized updates for Oracle’s Enterprise Resource Planning (ERP) software. CedarCrestone filed counterclaims, asserting, among other claims, tying claims under Section 1 of the Sherman Act and California’s Unfair Competition Law.

According to CedarCrestone, Oracle had tied software upgrade licenses for its ERP software (the tying market) to its tax and regulatory support services (the tied product and market) "by offering the two separate products exclusively to licensees as a Software Upgrade License and Support package." Oracle licensees must purchase an annual contract to receive software upgrades, and Oracle includes tax and regulatory support with this contract.

CedarCrestone alleged that the Software upgrades and tax and regulatory support were separate products with distinct functions and separate demand. The downstream market for tax and regulatory support is not proprietary, and more than 10% of Oracle licensees chose to purchase tax and regulatory updates from third parties. CedarCrestone alleged that Oracle’s bundling practice would force licensees who chose to use third party tax and regulatory support services to either pay Oracle for tax and regulatory support services it was not using, or to give up the right to software updates.

CedarCrestone alleged that Oracle had a 100% share of the market for upgrades of its own ERP software, and thus a monopoly in the tying market. Oracle has also historically had more than 80% of the market for tax and regulatory upgrades to its ERP software, and following the departure of CedarCrestone and another provider that market share increased to approximately 89.5%. CedarCrestone alleged that Oracle maintained this monopoly share by unlawfully tying purchase of tax and regulatory updates to purchase of ERP software and updates. Oracle’s monopoly had allegedly permitted it to charge higher prices for its tax and regulatory updates and raised barriers to entry for potential competitors.

The court concluded that CedarCrestone had failed to state a claim for unlawful tying. The court explained that "a plaintiff must allege that a defendant had market power within a relevant market." In its 2008 decision in Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 2008-1 Trade Cases ¶76,010, the Ninth Circuit held that, although a plaintiff could limit the market to a single brand of a product, the plaintiff could not base its claim "on market power that arises solely from contractual rights that consumers knowingly and voluntarily gave to the defendant." The issue was "whether a consumer’s selection of a particular brand in the competitive market is the functional equivalent of a contractual commitment, giving that brand an agreed-upon right to monopolize its consumers in an aftermarket."

The Newcal court identified four relevant considerations in determining whether a claim fell into the "contractual commitment" category, or into the category permitting a claim based on the use of economic power to monopolize the aftermarket. The first consideration required "look[ing] at whether plaintiff has alleged an aftermarket that is wholly derivative from and dependent on the primary market." The court concluded that CedarCrestone satisfied this consideration by alleging that Oracle was the sole provider of software upgrades, and that Oracle’s status allowed it "to condition the availability of software upgrade licenses on acceptance of the bundled contract," thus achieving monopoly power in an otherwise competitive market.

The second consideration addressed "whether the challenged restraint is part of the initial market, or whether it relates only to the aftermarket." Oracle contended that statements in the counterclaims that Oracle did not offer licensees software upgrades without tax and regulatory updates, and that CedarCrestone had been informed during the process of relicensing its software that it could only purchase a software upgrade license with tax and regulatory support, demonstrated that the bundle was presented to customers "right alongside the initial software license."

The court disagreed with Oracle, observing that nothing in the counterclaims’ allegations indicated that the bundle was part of the licensees’ initial software purchase, rather than disclosed later. However, CedarCrestone had not specifically alleged that the bundling of software upgrades and tax and regulatory support was not disclosed during the initial software purchase or negotiations toward it. Therefore, the court found the counterclaims were "ambiguous as to whether the challenged restraint is part of the initial market."

The third consideration involved "the alleged source of defendant’s market power." CedarCrestone alleged that Oracle’s position in the primary market permitted it to monopolize the aftermarket, while Oracle contended that publicly available information "plainly disclose[d] the terms on which support is available," including the bundle containing tax and regulatory updates. The court observed that no allegations in the counterclaims referred to provisions in the initial software contract that required licensees to purchase tax and regulatory support only from Oracle, but CedarCrestone did not allege that Oracle’s licenses and policies did not contain terms limiting a licensee’s ability to obtain tax and regulatory updates from sources other than Oracle.

The fourth consideration was the degree to which market imperfections and the defendant’s "fraud and deceit" limited the ability of consumers to realize "that their choice in the initial market will impact their freedom to shop in the aftermarket." Oracle contended that CedarCrestone’s allegations demonstrated that it could not allege a "policy change, information costs, or market imperfections" because CedarCrestone had alleged that that the bundle was fully disclosed. Again, however, the court concluded that nothing in the allegations showed that licensees had agreed to Oracle’s monopolization of the tax and regulatory support market "at the time of the initial contract."

However, the only evidence of "information and switching costs" that CedarCrestone had alleged was an article explaining that software maintenance fees "are typically spread out among enterprises’ financial ledgers and departments amid a sprawl of myriad vendor contracts, [and] can go unnoticed unless examined and calculated in their entirety." The court observed that this article did not address Oracle’s ERP software specifically, and that CedarCrestone had not "alleged that Oracle changed its policy in order to lock-in customers, that it misrepresented its tying practices, or that its tying policy was otherwise not generally known."

Therefore, the court concluded that CedarCrestone had not "alleged sufficient facts showing that the alleged aftermarket restraint is not accepted knowingly and voluntarily by Oracle’s licensees, as where the licensees are locked in due to high switching and information costs or a change in policy subsequent to the alleged lock-in."

Since CedarCrestone had failed to state a Sherman Act unlawful tying claim, the court concluded that it had also failed to state a claim under California’s Unfair Competition Law. The court therefore dismissed both claims with leave to amend.

The case is No. 12-cv-04626.

Attorneys: Geoffrey M. Howard (Bingham McCutchen LLP) for Oracle America, Inc. Daniel Edward Purcell (Keker & Van Nest LLP) for CedarCrestone, Inc.

Companies: Oracle America, Inc.; Oracle International Corp.; CedarCrestone, Inc.

Cases: Antitrust CaliforniaNews