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From Antitrust Law Daily, April 29, 2014

SanDisk's retailer agreements not enough to support attempted monopolization claims

By Jeffrey May, J.D.

Purported exclusivity arrangements between SanDisk Corporation—the dominant player in the flash memory industry—and its retailers would not amount to illegal exclusive dealing arrangements or anticompetitive conduct to support a complaining competitor/customer's claims against SanDisk for anticompetitive conduct in the market for Secure Digital (SD) flash memory cards, the federal district court in San Francisco has ruled. Plaintiff PNY Technologies, Inc.—a competitor of SanDisk in the systems and system products markets, and a customer of SanDisk in the chips and flash memory technology markets—was, however, granted one opportunity to amend its complaint to further support its claims of exclusive dealing and attempted monopolization in the SD market (PNY Technologies, Inc. v SanDisk Corp., April 25, 2014, Orrick, W.).

PNY initially brought suit, alleging that SanDisk, through its large share of the flash memory technology market, attempted to dominate three related downstream markets: (1) flash memory chips (chips); (2) Universal Serial Bus (USB) flash memory systems (a combination of a chip and a controller chip that manages the data stored on the flash memory chip and communicates with the attached computer or electronic device); and (3) USB flash memory system products. SanDisk later added claims that SanDisk attempted to monopolize the related flash memory systems product market for SD cards. According to PNY, SanDisk has entered into exclusive dealing arrangements with key retailers to “cut off” competitors from nearly half of the retail store distribution of SD cards. The current motion to dismiss only pertained to the market for SD cards.

At the outset, the court rejected SanDisk's assertion that its agreements with retailers were not exclusive dealing arrangements because they did not obligate retailers to purchase SD cards exclusively from SanDisk or prevent retailers from buying them from any other supplier. SanDisk contended that it was not enough that the contracts promised certain benefits to the retailers if they chose to be exclusive.

“Actual exclusivity is not a prerequisite to finding unlawful exclusive dealing under the rule of reason,” the court explained. “If the effect of the agreement is to suppress competition, the fact that the agreement does not explicitly mandate exclusivity is of no moment.”

Noting that there was “little Ninth Circuit authority concerning the sufficiency of pleading exclusive dealing,” the court identified two principles for determining whether foreclosure was sufficiently shown: (1) the duration and terminability of the agreements; and (2) the existence of current or potential alternative channels of distribution.

Duration, terminability. The court was persuaded by SanDisk's argument that its contracts, even if characterized as exclusive, were not anticompetitive because they were short-term agreements that could be easily terminated. The court noted that one-year contracts were acceptable; however, information regarding the specific duration of the SanDisk contracts and their notice requirements was redacted. Thus, PNY did not plead adequate facts showing that the agreements unlawfully foreclosed competition, in the court's view. PNY's contention that foreclosure was a fact issue inappropriate for resolution at the motion to dismiss stage also was rejected.

PNY suggested that its allegations of foreclosure went beyond the express terms of the contracts. This theory based on de facto exclusive dealing was unavailing, in the court's view. All of its allegations purporting to show the “practical effect” of foreclosure were conclusory and unaccompanied by supporting facts, according to the court.

Alternative channels of distribution. Furthermore, the court was unconvinced by PNY's contention that, due to SanDisk’s conduct, competitors could not employ existing or potential alternative channels of distribution to reach consumers. The court wanted more than “naked contentions.” It was not enough that PNY alleged that the existing channels were insufficient to provide “competitors with the opportunity to achieve economies of scale.” Similarly, PNY's allegation that “no manufacturer has been successful in building a direct sales presence that successfully competes with established retail distribution outlets” was not supported by facts.

Anticompetitive conduct. PNY’s attempted monopolization claim, which was principally based on SanDisk’s alleged exclusive dealing arrangements with retailers, was dismissed without prejudice. PNY failed to adequately allege actionable exclusive dealing. Additional allegations that SanDisk “leveraged” its putative monopoly power in the flash memory technology market to exert power in the SD card market similarly failed to plead any anticompetitive conduct. The court also concluded that PNY failed to plausibly allege that new rivals were barred from entering the market and that existing competitors lacked the capacity to expand their output due to high barriers to entry or expansion.

This is Case No. 11-cv-04689-WHO.

Attorneys: Daniel B. Asimow (Arnold & Porter LLP) and Michael S. Elkin (Winston & Strawn LLP) for PNY Technologies, Inc. David W. Hansen (Skadden Arps Slate Meagher & Flom, LLP) for SanDisk Corp.

Companies: PNY Technologies, Inc.; SanDisk Corp.

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