Antitrust Law Daily Midstream attempt to reset exclusive dealing arguments as refusal to deal doomed
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Monday, July 13, 2020

Midstream attempt to reset exclusive dealing arguments as refusal to deal doomed

By Peter Reap, J.D., LL.M.

Power Analytics waived its refusal to deal argument by failing to argue it as such before a district court and it failed to allege anticompetitive conduct to support its monopoly claim.

Software maker Power Analytics Corp. could not argue on appeal that competitors conspired to refuse to deal when in the district court it based its Sherman Act, Section 1 claim on an exclusive dealing theory, the U.S. Court of Appeals for the Federal Circuit has determined. Further, Power Analytics failed to plausibly allege that the competitors violated Section 2 of the Sherman Act because it did not adequately allege that they engaged in actionable anticompetitive conduct and failed to plead antitrust injury. Thus, the district court’s decision dismissing Power Analytics’ Third Amended Complaint (TAC) was affirmed (Power Analytics Corp. v. Operation Technology, Inc., July 13, 2020, O'Malley, K.).

Along with defendants ETAP, OSISoft LLC (OSI), and Schneider Electric USA, Inc., Power Analytics develops and sells software products for use with power grids or microgrids. Relevant here, these include (1) Grid Design Products and Services (Grid Design products), (2) Real Time products, and (3) Historian Software products. Grid Design products are software programs used in the engineering, design, and subsequent management of power grids and microgrids and Real Time" products "analyz[e] trends and predict[] potentially damaging events." Historian Software products allow power facilities to systematically collect and retain time series information.

In 2013, Power Analytics released a new Real Time product. After learning of the release, ETAP allegedly embarked on a competition-killing strategy intended to insulate its Grid Design business from Power Analytics’ superior offerings. According to the TAC, this resulted in two anticompetitive agreements: one with OSI and one with Schneider. The OSI-ETAP Agreement allegedly placed "‘unreasonable impediments and conditions intended to preclude and/or deter’ existing customers from switching out OSI and ETAP’s products with those of [Power Analytics’] and certain other ‘actual and potential competitors.’" The TAC also contended that Schneider and ETAP agreed to an exclusive and sole-sourced arrangement (the Schneider-ETAP Agreement). The TAC alleged Sherman Act § 1 claims against ETAP, OSI, and Schneider, § 2 claims against ETAP, and state law claims against ETAP, OSI, and Schneider predicated on the same allegedly anti-competitive conduct.

After Schneider filed a motion to dismiss the TAC, Power Analytics did not object to the defendants’ characterization of its § 1 claims as "exclusive dealing" claims in its responsive briefing and relied on exclusive dealing cases and nomenclature to defend its claims. Despite this, Power Analytics attempted to change course during oral argument, contending for the first time that the alleged § 1 violations were actually "refusals to deal," not exclusive dealing arrangements, the appellate court noted. The defendants objected to Power Analytics’ attempted course correction. They explained that the TAC only provided allegations of "exclusive dealing arrangements."

The district court granted the defendants’ motions to dismiss the TAC, without prejudice. It declined to address Power Analytics’ "refusal to deal" arguments because it was a "new theory [that] ha[d] not been briefed by the parties." Turning to the substantive allegations, the lower court found the antitrust claims deficient and dismissed the state law claims. Rather than amend, Power Analytics appealed.

"Refusal to deal" argument waived. As a general matter, a federal appellate court does not consider an issue not passed upon below, the court noted. Power Analytics argued that the district court "incorrectly recast" its allegations under the rubric of "exclusive dealing arrangements" as opposed to "refusals to deal." But Power Analytics was complicit in inviting the district court to consider its claims as exclusive dealing ones, according to the Federal Circuit. Power Analytics’ original and amended complaints repeatedly characterized the accused agreements as "exclusive dealing arrangements." It was not until the hearing on the last motion to dismiss that Power Analytics sprang its new § 1 theory, governed by potentially different authority. Unsurprisingly, the district court declined to address Power Analytics’ "new basis," undeveloped by the parties.

Given the extensive history of this case, and the fact that this "refusal to deal" issue appeared only as a Hail Mary during argument, the district court’s treatment of the issue was proper, the appellate court ruled. A party may not ambush the court with new legal theories after briefing on a motion to dismiss is completed. To rule otherwise would obviate the purpose of briefing. Power Analytics’ new theory was waived.

Because Power Analytics conceded that the merits of the district court’s opinion under the "exclusive dealing arrangements" framework were "irrelevant" to the § 1 issues on appeal, the Federal Circuit did not need to address the detailed § 1 analysis actually undertaken by the district court. However, in a footnote, the appellate court noted that a § 1 violation requires concerted action, and the TAC did not allege that the defendants collectively agreed to boycott Power Analytics. Read generously, the allegations stated that OSI and Schneider each individually refused to deal with Power Analytics and that ETAP benefited from those actions. These single-firm actions were actionable, if at all, only under § 2. But Power Analytics did not assert § 2 claims against either Schneider or OSI.

Anticompetitive conduct. Power Analytics appealed the district court finding that the TAC failed to plausibly allege that ETAP engaged in the type of anticompetitive conduct that is actionable under § 2. Exclusionary conduct under § 2 must do more than reduce consumer welfare by raising prices or restricting output, the Federal Circuit observed. To constitute actionable predatory conduct, the defendant’s actions must make no economic sense other than for the elimination of competition.

Here, the TAC contained no plausible allegations of exclusionary conduct. It only alleged that ETAP violated § 2 by entering into an agreement with OSI, whereby OSI and ETAP agreed to sell their products in conjunction with the other’s. The TAC argued that this eliminated ETAP’s competitors from entering the NUPIC Grid Design Market because purchasers who wished to use OSI’s entrenched Historian Software had no choice but to also use ETAP’s products. But those allegations merely asserted that ETAP entered into a strategic partnership with another supplier. The Ninth Circuit has made clear that such efforts, by themselves, do not constitute exclusionary conduct. In addition, the OSI-ETAP Agreement, which the TAC characterized as "predatory conduct," was not even an exclusive agreement and contradicted the TAC’s allegations that OSI and ETAP software customers were precluded from selecting substitute competitor products.

Antitrust injury. As the district court also found Power Analytics failed to plead antitrust injury in support of its § 2 claims because the TAC did not plausibly allege that ETAP engaged in "unlawful conduct." As discussed above, ETAP’s prior conduct only demonstrated an interest in defeating its competitive rival and its agreement with OSI contained no anticompetitive elements. These allegations were not sufficient to demonstrate § 2 predatory conduct.

Even assuming the TAC sufficiently pleaded unlawful conduct, moreover, it still failed to allege injury that is of the type the antitrust laws were intended to prevent and that flowed from the defendants’ unlawful conduct. The TAC did not sufficiently plead that ETAP’s behavior was "competition-reducing." For example, the plain text of the incorporated documents explicitly characterized the OSI-ETAP Agreement as a "non-exclusive" agreement. While Power Analytics may have been aggrieved by ETAP’s unwillingness to cede some of its market share to it, there was no evidence that ETAP’s agreement with OSI caused injury to competition. There was no claim that product and service availability to consumers declined. Further, the TAC’s use of "stifled innovation" and "choice" only meant that Power Analytics lost customers to competition, and its use of "de facto elimination of price competition" meant that consumers continued to purchase the defendants’ products, despite Power Analytics’ alleged lower prices. Such allegations fell short of establishing antitrust injury, the court held.

State claims. The district court did not err when it dismissed Power Analytics’ state law antitrust claims as they were dependent upon the Sherman Act allegations. As for its tortious interference claim, it was correctly dismissed because the complaint offered no further explanation or detail as to what "information and belief" supported its allegation that Power Analytics lost four existing NUPIC Market customers due to the OSI-ETAP Agreement.

This case is No. 19-1805.

Attorneys: Robert F. Ruyak (RuyakCherian LLP) for Power Analytics Corp. Trevor V. Stockinger (Kesselman Brantly Stockinger LLP) for Operation Technology, Inc. d/b/a ETAP. Michael John Sacksteder (Fenwick & West, LLP) for OSIsoft, LLC. Reginald J. Hill (Jenner & Block LLP) for Schneider Electric USA, Inc.

Companies: Power Analytics Corp.; Operation Technology, Inc. d/b/a ETAP; OSIsoft, LLC; Schneider Electric USA, Inc.

MainStory: TopStory Antitrust FedCirNews GCNNews

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