By Gregory Kane, J.D., M.B.A.
A mobile marketing software and service provider’s antitrust claims, which arose out of the acquisition by two competitors of the StarStar number leasing company which leased vanity mobile dial codes and the subsequent termination of the provider’s contract to lease the vanity mobile dial codes (StarStar numbers), moved forward against defendants Zoove, VHT, VHT StarStar, and StarSteve, following changes to the third amended complaint alleging violations of Sections 1 and 2 of the Sherman Act. Zoove’s acquisition and subsequent dealings with Sumotext allegedly were in furtherance of an unlawful conspiracy to monopolize the StarStar market. However, the seller of the StarStar number leasing company, Mblox, was successful in dismissing the complaint without leave to amend (Sumotext Corp. v. Zoove, Inc., April 19, 2018, Merritt).
Background. Zoove, Inc. has the exclusive rights to operate StarStar numbers—vanity mobile dial codes such as **LAW and **MOVE—for AT&T, Verizon Wireless, T-Mobile, and Sprint. Mobile marketing software provider Sumotext Corp. built a business around leasing StarStar numbers from Zoove and then subleasing them to clients along with other services related to the StarStar numbers. Mblox, Inc. acquired Zoove as a wholly owned subsidiary in 2014. A competitor of Star called StarSteve, LLC entered into a letter of intent with Mblox outlining a deal for StarSteve to acquire Mblox and divide the StarStar customers and territories between the two entities. Determining it lacked sufficient expertise and capital, StarSteve entered into a joint venture with Virtual Hold Technology LLC (VHT) to create a new limited liability company, VHT StarStar for the purpose of acquiring Zoove and allegedly to monopolize the StarStar market and eliminate Sumotext as a competitor.
During the pre-acquisition due diligence for VHT StarStar’s purchase of Zoove, Mblox disclosed its customer agreements which VHT, StarSteve and VHT StarStar allegedly used to approach Sumotext’s customers and represent that Sumotext would not be able to renew its StarStar leases, causing customers to abandon Sumotext and become customers of VHT StarStar and Zoove. After the acquisition, Zoove terminated all of Sumotext’s StarStar leases in breach of written contracts. Sumotext was offered new StarStar leases at an approximately 1000% markup of the prior prices. Sumotext filed an action against VHT and Zoove in 2016 for breach of contract and related state law claims, later adding StarSteve, VHT StarStar and Mblox and expanding its claims to include federal antitrust violations. After having its second amended complaint dismissed for failure to state a claim, Sumotext filed its third amended complaint (TAC) alleging claims for breach of contract against Zoove, breach of the implied covenant of good faith and fair dealing against Zoove, tortious interference with contract against VHT, StarSteve and VHT StarStar, restraint of trade in violations of Section 1 of the Sherman Act against VHT, StarSteve, VHT StarStar, Zoove and Mblox and conspiracy to monopolize and monopolization in violation of Section 2 of the Sherman Act against VHT, StarSteve, VHT StarStar, Zoove and Mblox.
Zoove, VHT, VHT StarStar and StarSteve moved to dismiss the Sherman Act claims. Mblox separately moved to dismiss the antitrust claims as well as moving for sanctions against Sumotext for continuing to assert claims against it.
Restraint of trade. Defendants claim the decisions to terminate Sumotext’s leases and increase pricing for new leases were consistent with unilateral business decisions by Zoove and therefore were not a plausible allegation of a Section 1 Sherman Act violation. The TAC contains additional allegations that plausibly suggest an agreement by VHT and StarSteve—two separate entities—to acquire Zoove specifically for the purpose of monopolizing the StarStar market and eliminating Sumotext as a competitor. According to the complaint, VHT and StarSteve immediately targeted Sumotext customers and interfered with Sumotext’s business relationships. The new leases offered to Sumotext were also so onerous as to prevent Sumotext from continuing its business. There were enough factual matters when taken as true to suggest an agreement was made by the parties so as to raise a reasonable expectation that discovery will reveal evidence of an illegal agreement. While defendants argue they are a single entity that cannot collude with itself, the allegations of the TAC allege that StarSteve and VHT initially formed the conspiracy at a time with the two companies were separate entities and horizontal competitors of Sumotext. That is sufficient at the pleading stage to survive the motion to dismiss. Defendants also argue that the TAC lacks factual particularity. The TAC distinguishes between the defendants, identifies the individuals who acted on behalf of the entity defendants and explains each defendant’s role in the alleged conspiracy as well as breaking down the antitrust claims element by element. This is sufficient to put each defendant on notice of the conduct upon which claims against it are based.
Monopolization. Defendants presented the same arguments previously rejected by the court in ruling on the second amended complaint for dismissing the monopolization claims in the TAC. The arguments were rejected again. Sumotext’s market definition was sufficient to bring the case within the narrow "essential facility" exception. The TAC sufficiently alleges conduct by StarSteve and VHT to acquire control of Zoove and eliminate Sumotext as a competitor. As such, Zoove, VHT, VHT StarStar and StarSteve’s motion to dismiss was denied.
Mblox. Mblox was granted its motion to dismiss because the TAC did not contain sufficient facts to show that Mblox had joined in the alleged conspiracy. Sumotext had alleged that Mblox failed to enforce its confidentiality agreement with VHT, Star Steve and VHT StarStar prior to the sale and that it proceeded with the sale of Zoove with the knowledge that Sumotext contracts would be terminated after the sale but this was insufficient to show the Mblox was part of the alleged conspiracy. In regards to the latter, Sumotext was unable to cite any authority imposing antitrust liability for proceeding with a sale knowing that the buyer’s intend to breach specific contracts. Having already been given multiple opportunities to amend its pleadings, Mblox’s motion to dismiss is granted without leave to amend. Mblox’s motion for sanctions against Sumotext for continuing to assert claims against Mblox was denied however. Sumotext’s counsel conducted a reasonable and competent inquiry before filing each of the pleadings, including the TAC. That the TAC claims were dismissed does not mean that those arguments were frivolous or that Sumotext acted in bad faith.
The case is No. 16-cv-01370-BLF.
Attorneys: David Wayne Kesselman (Kesselman Brantly Stockinger LLP) and Jeffrey M. Swann (PPGMR Law, PLLC) for Sumotext Corp. Noorossadat Torabi (Winston & Strawn LLP) for Zoove, Inc. d/b/a StarStar Mobile and Virtual Hold Technology, LLC. and mBlox, Inc.
Companies: Sumotext Corp.; Zoove, Inc. d/b/a StarStar Mobile; Virtual Hold Technology, LLC; mBlox, Inc.
MainStory: TopStory Antitrust CaliforniaNews
Interested in submitting an article?
Submit your information to us today!Learn More