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From Antitrust Law Daily, December 3, 2013

Allegations of exclusive dealing, monopolization in online travel photo and media industry survive motion to dismiss

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

A provider of digital photo and rich media services for online travel businesses sufficiently alleged exclusive dealing, monopolization, and attempted monopolization claims against a competitor based on its alleged leveraging of its dominant position in several markets to force online travel businesses to deal exclusively with it, the federal district court in Santa Ana, California has ruled (Pro Search Plus, LLC v. VFM Leonardo, Inc., December 2, 2013, Staton, J.). The provider’s tying arrangement claim, however, was dismissed.

Pro Search Plus, LLC alleged that VFM Leonardo, Inc. (VFML) “is the dominant provider of production, collection, management, and distribution of digital photos and rich media” for businesses in the online travel industry. Pro Search is VFML’s main competitor in the United States markets for (1) “provision of a digital asset management technology platform to process and manage digital photographs and rich content” (Technology Platform Market), (2) “management and distribution of digital photographs to online travel agencies” (Photo Distribution Market), and (3) “management and distribution of rich media content to online travel agencies” (Rich Content Distribution Market). VFML allegedly has market shares of 70 percent in the Technology Platform Market, 90 percent in the Photo Distribution Market, and 80 percent in the Rich Content Distribution Market, with Pro Search being its only “actual and potential” competitor. VFML allegedly reduced competition by acquiring its “only significant rival in the Photo Distribution Market,” and by settling with another competitor in the markets, resulting in its “market withdrawal.”

According to Pro Search, VFML monopolizes the markets through exclusive dealing and tying arrangements with Pegasus (“the sole content and information aggregator in the travel industry”), the four primary global distribution systems (electronic reservation networks acting as a single point of access for online travel bookings), online travel agencies, and the major hotel groups. The global distribution systems, travel agencies, and hotel groups are allegedly forced into the arrangements due to VFML’s ability to cut them off from access to necessary VFML-controlled content and distribution platforms. Pro Search alleged that, as a result, the agreements with VFML “are continually renewed and not open to rebidding,” and that VFML had forced Best Western International to switch from the Pro Search services that it preferred to VFML’s services through the threat of depriving Best Western of access to VFML’s distribution channels.

Pro Search asserted claims for monopolization and attempted monopolization in violation of Section 2 of the Sherman Act and unlawful exclusive dealing and tying arrangements in violation of Section 1 of the Sherman Act, among other claims. VFML filed a motion to dismiss.

Relevant markets. Pro Search adequately pleaded product and geographic markets for its Sherman Act claims, according to the court. Pro Search’s geographic market of the United States was not “facially unsustainable,” even though VFML is a Canadian company and the complaint alleged that customers outside the United States received services from a competitor in the United States. A “geographic market need not include supplier headquarter sites,” the court explained, and “buyers in the product markets might predictably turn to alternatives in the United States,” such as Pro Search. Moreover, the validity of the geographic market was “ultimately a factual issue,” and not a basis to dismiss Pro Search’s claims given the allegations in the complaint.

Exclusive dealing. The court found that Pro Search pleaded the existence of de facto exclusive dealing arrangements in the Photo Distribution Market and the Rich Content Distribution Market. Pro Search alleged that it had superior products, but that global distribution systems, Pegasus, hotels, and online travel agencies were prevented from considering them because VFML’s monopoly made dealing with it an economic necessity and made the cost of switching prohibitive. The complaint also alleged that Pro Search had “been seriously weakened and marginalized” as a result, and “now faces looming elimination.” The court noted that the renewal of at least some agreements beyond their initial term was consistent with Pro Search’s allegations, and that the presence of alternative distribution channels did not mean that VFML’s agreements did not foreclose the relevant markets because “a de facto exclusive dealing arrangement could prevent a potential alternative channel of distribution from actually being used.”

Tying. However, the court dismissed Pro Search’s tying claim. Pro Search had alleged that, for hotels, VFML tied “(a) its new or continued distribution of digital photographs and rich content and (b) access to its platform and vast network of channels for distribution … to the exclusive distribution of all content.” For online travel agencies, VFML allegedly tied “access to VFML’s hotel content and Digital Asset Management technology platform development … to acceptance of VFML as the exclusive provider of hotel content.” For global distribution systems and Pegasus, VFML allegedly gave “a royalty-free, paid-up license to distribute hotel content as consideration to secure exclusivity to those rights.” The court found “the distribution of content and exclusive distribution of that content” to be “not separate products,” and that Pro Search had merely “recharacterized its exclusive dealing claim as a tying claim.”

Monopolization and attempted monopolization. The court declined to dismiss Pro Search’s monopolization and attempted monopolization claims. VFML did not dispute that it had monopoly power, instead arguing that Pro Search had not alleged any anticompetitive conduct. Since the court had found that Pro Search had adequately alleged an exclusive dealing claim, Pro Search had alleged anticompetitive conduct.

Antitrust injury. Pro Search also adequately pleaded an antitrust injury from VFML’s conduct, according to the court. Pro Search alleged that global distribution systems, Pegasus, online travel agencies, and hotels had “confirmed to Pro Search that they cannot deal with competing distributors, such as Pro Search, due to their exclusive arrangements with VFML,” that it had been “seriously weakened and marginalized” despite having superior products, and that it had lost a major customer (Best Western) through VFML’s conduct.

The case is No. SACV 12-2102-JLS (ANx).

Attorneys: Courtney A. Palko (Blecher Collins Pepperman and Joye PC) for Pro Search Plus LLC. Richard Joseph Doren (Gibson Dunn and Crutcher LLP) for VFM Leonardo Inc.

Companies: Pro Search Plus, LLC; VFM Leonardo, Inc.

MainStory: TopStory Antitrust CaliforniaNews

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