On July 13, 2020, the United States Court of Appeals for the Federal Circuit affirmed the Central District of California’s dismissal of a suit brought by a power systems software company against three competitor corporations on grounds that plaintiff’s claims failed to adequately allege anticompetitive conduct under the Sherman Act and related state law claims. Power Analytics Corp. v. Operation Tech., Inc. et al., No. 19-1805 (Fed. Cir. July 13, 2020).
Plaintiff-appellant Power Analytics is a technology company that develops and sells software used to engineer, design, manage, and measure the performance of electrical power systems and grids. Defendant-appellees, ETAP, OSISoft, and Schneider Electric USA, are companies that sell competing software products also used in designing and operating power grids. Plaintiff claimed that defendant ETAP entered into unlawful agreements with its two co-defendants to stifle competition and restrain trade in the North American markets for Grid Design and Real Time analytics software servicing nuclear power facilities, and in the Energy Management System Platform market for bundled automation, monitoring, and control products.
Specifically, Plaintiff asserted that following its release of an innovative Real Time analytics product in 2013, ETAP senior management stated in an internal memo that it needed to “kill competition” from plaintiff. ETAP and OSISoft subsequently entered a strategic partnership to bundle interoperable software products, allegedly in order to “exclude existing and potential competitors from providing products which challenge each of their dominant monopoly positions in the market.” Referencing a term sheet and memorandum of understanding between these defendants, plaintiff claimed that the companies agreed to “exclusivity mechanisms” requiring them to recommend each other’s products and forcing customers to use certain ETAP products only in conjunction with related OSI products. Plaintiff also alleged an anticompetitive agreement between ETAP and Schneider, claiming they entered a similar exclusive arrangement for Schneider to “standardize” the use of its products in combination with ETAP software, and for the companies to sell their products as a bundled package while “offer[ing] no other choice of competing products” to consumers.
Following multiple dismissals in district court, plaintiff was granted the opportunity to file a Fourth Amended Complaint in order to cure defective claims and allege a new theory that defendants’ agreements were “refusals to deal” rather than “exclusive dealing arrangements” under Sherman Act § 1. Instead, plaintiff appealed the district court’s ruling on grounds that it had erred in its legal analysis and dismissal of the Third Amended Complaint. On appeal, the Federal Circuit concluded that plaintiff had waived its “refusal to deal” argument under Sherman Act § 1 because this legal theory was never briefed by the parties in the lower court, and none of plaintiff’s four complaints had raised this claim.
Turning to claims under Sherman Act § 2, though the Court found that plaintiff had plausibly alleged the existence of a relevant market for nuclear grid design and defendant’s possession of monopoly power in that market, the Federal Circuit agreed with the trial court that plaintiff failed to plead the requisite elements of anticompetitive conduct and antitrust injury flowing from that conduct. Citing Supreme Court precedent in Verizon Comm’ns. Inc. v. Law Offices of Curtis v. Trinko, LLP, Judge O’Malley emphasized that liability for anticompetitive conduct under § 2 requires a defendant monopolist’s actions to “make no economic sense other than for elimination of competition.” The Court ruled that ETAP’s partnership arrangement was not anticompetitive because it was not an exclusive agreement, and defendant had a legitimate business purpose to “advance the appeal of its own products” and maximize its sales.
Addressing the element of antitrust injury, the Federal Circuit ruled that plaintiff could not demonstrate a harmful impact on competition flowing from anticompetitive conduct because plaintiff did not plausibly allege any unlawful conduct. Upon review of relevant agreement documents between defendants, the Court highlighted that the arrangements were not anticompetitive because the documents explicitly stated they were “non-exclusive.” Additionally, the Court found that the potentially inflammatory language in defendant’s internal correspondence related to “kill[ing] [plaintiff’s] competition” merely demonstrated a legitimate business “interest in defeating its competitive rival.” And despite conclusory assertions that defendants’ arrangements reduced competition and stifled innovation and customer choice in the industry, plaintiff did not plead any facts sufficient to show actual anticompetitive effects or antitrust injury to the overall market.
This decision highlights the high burden that plaintiffs face in proving a § 2 violation under Trinko and the importance of distinguishing statements evidencing anticompetitive intent from those demonstrating a valid business interest in maintaining an upper hand over rivals.