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Oracle America, Inc. v. Terix Computer Co., Inc.

United States District Court, N.D. California, San Jose Division

November 7, 2014

ORACLE AMERICA, INC., et al. Plaintiffs,
v.
TERIX COMPUTER COMPANY, INC., et al., Defendants

For Oracle America, Inc., a Delaware corporation, Plaintiff, Counter-defendant: Christopher Benjamin Campbell, LEAD ATTORNEY, Latham Watkins, San Francisco, CA; Christopher S. Yates, Daniel Murray Wall, LEAD ATTORNEYS, LATHAM & WATKINS LLP, San Francisco, CA; Deborah Kay Miller, LEAD ATTORNEY, Oracle USA, Inc. Legal Department, Redwood Shores, CA; Dorian Estelle Daley, LEAD ATTORNEY, ORACLE CORPORATION, Redwood City, CA; Geoffrey M. Howard, Thomas S. Hixson, LEAD ATTORNEYS, Bingham McCutchen LLP, San Francisco, CA; Jeffrey Scott Ross, LEAD ATTORNEY, Oracle Corp, Burlington, MA; Kyle Matthew Zipes, LEAD ATTORNEY, Kevin M Papay, Bingham McCutchen, San Francisco, CA; Daryl M. Crone, David Solomon Harris, Crone Hawxhurst LLP, Los Angeles, CA.

For Oracle International Corporation, Plaintiff, Counter-defendant: Christopher Benjamin Campbell, LEAD ATTORNEY, Latham Watkins, San Francisco, CA; Christopher S. Yates, Daniel Murray Wall, LEAD ATTORNEYS, LATHAM & WATKINS LLP, San Francisco, CA; David Solomon Harris, Crone Hawxhurst LLP, Los Angeles, CA; Kevin M Papay, Kyle Matthew Zipes, Bingham McCutchen, San Francisco, CA; Thomas S. Hixson, Geoffrey M. Howard, Bingham McCutchen LLP, San Francisco, CA.

For Terix Computer Company, Inc., Defendant: Colin Geoffrey McCarthy, LEAD ATTORNEY, Andrew Winter Olsson, Gabriel G. Gregg, Jacquetta Bardacos, Robinson & Wood, Inc., San Jose, CA; Chad M Stonebrook, Christopher L Lardiere, Lardiere McNair LLC, Hilliard, Oh; Jennifer S. Coleman, John V. Picone, III, Hopkins & Carley, A Law Corporation, San Jose, CA; Richard James Mooney, Scott Robert Raber, Rimon, P.C., San Francisco, CA.

For Maintech Incorporated, a Delaware corporation, Defendant, Counter-claimant: Valerie Margo Wagner, LEAD ATTORNEY, James L. Jacobs, Sallie Kim, Theresa E. Norton, GCA LAW PARTNERS LLP, Mountain View, CA; Janella Kay Simpson, Volt Info Sci Inc, Orange, CA; Joseph Charles Gratz, Laura Elizabeth Miller, Ragesh K. Tangri, Durie Tangri LLP, San Francisco, CA.

For Volt Delta Resources LLC, Defendant, Counter-claimant: James L. Jacobs, Sallie Kim, Theresa E. Norton, Valerie Margo Wagner, GCA LAW PARTNERS LLP, Mountain View, CA; Joseph Charles Gratz, Laura Elizabeth Miller, Ragesh K. Tangri, Durie Tangri LLP, San Francisco, CA.

For Sevanna Financial, Inc., West Coast Computer Exchange, Inc., Defendants: John V. Picone, III, LEAD ATTORNEY, Jennifer S. Coleman, A Law Corporation, San Jose, CA; Andrew Winter Olsson, Robinson & Wood, Inc., San Jose, CA; Chad M Stonebrook, Christopher L Lardiere, Lardiere McNair LLC, Hilliard, Oh; Colin Geoffrey McCarthy, Gabriel G. Gregg, Jacquetta Bardacos, Robinson & Wood, Inc., San Jose, CA; Richard James Mooney, Rimon, P.C., San Francisco, CA.

For Terix Computer Company, Inc., Counter-claimant: Gabriel G. Gregg, LEAD ATTORNEY, Andrew Winter Olsson, Jacquetta Bardacos, Robinson & Wood, Inc., San Jose, CA; Chad M Stonebrook, Christopher L Lardiere, Lardiere McNair LLC, Hilliard, Oh; Jennifer S. Coleman, John V. Picone, III, Hopkins & Carley, A Law Corporation, San Jose, CA; Richard James Mooney, Scott Robert Raber, Rimon, P.C., San Francisco, CA.

For Terix Computer Company, Inc., Counter-defendant: Gabriel G. Gregg, LEAD ATTORNEY, Andrew Winter Olsson, Jacquetta Bardacos, Robinson & Wood, Inc., San Jose, CA; Chad M Stonebrook, Christopher L Lardiere, Lardiere McNair LLC, Hilliard, Oh; Jennifer S. Coleman, Hopkins & Carley, A Law Corporation, San Jose, CA; Richard James Mooney, Scott Robert Raber, Rimon, P.C., San Francisco, CA.

ORDER GRANTING-IN-PART MOTION TO DISMISS AND GRANTING MOTION TO STRIKE (Re: Docket Nos. 173 and 186)

PAUL S. GREWAL, United States Magistrate Judge.

In its heyday as a provider of the large computer servers that made the internet what it is, Sun Microsystems, Inc. had an understanding with its customers. No matter who the customer chose to support its servers running Sun's Solaris operating system, Sun would supply its copyrighted and proprietary Solaris updates and firmware for nothing--or near nothing. The result was a robust, competitive aftermarket in Solaris support services that included not only Sun but a range of third parties, including Defendants Terix Computer Company, Inc., Maintech, Inc. and Volt Delta Resources, LLC. But once Plaintiffs Oracle America, Inc. and Oracle International Corporation were in charge, customers had to make a choice--either buy their Solaris support services from Oracle, or find themselves cut off from any updates or firmware they might need to keep their servers up and running.

Or so say Defendants anyway. After being sued by Oracle for scheming to misappropriate the updates and firmware in violation of Oracle's licenses, Defendants countered with a variety of antitrust and competition law claims all focused on Oracle's allegedly new rules of the game. Oracle now seeks to dismiss these counterclaims pursuant to Fed.R.Civ.P. 12(b)(6). With respect to certain of Defendants' tying-related claims, as much as it might struggle to make sense of them under prevailing economic theory, the court nevertheless must defer to the Supreme Court's binding precedent and permit Defendants to proceed. Defendants' other claims are not so fortunate.

I.

In the aftermath of the Civil War, powerful trusts rose up in the United States to a degree never before seen. These trusts and their practices threatened consumer welfare by restricting output and raising prices. Congress responded by passing the Sherman Act, one of our nation's first major commercial regulatory schemes. The Act was envisaged as " a comprehensive charter of economic liberty . . . [that] rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress." [1]

To that end, Section 1 of the Act provides that " [e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce . . . is declared to be illegal." [2] To prevail on a Section 1 claim, a plaintiff must show " (1) that there was a contract, combination, or conspiracy; (2) that the agreement unreasonably restrained trade under either a per se rule of illegality or a rule of reason analysis; and (3) that the restraint affected interstate commerce." [3] " Certain types of contractual arrangements are deemed unreasonable as a matter of law. The character of the restraint produced by such an arrangement is considered a sufficient basis for presuming unreasonableness without the necessity of any analysis of the market context in which the arrangement may be found." [4] " A price fixing agreement between competitors is the classic example of such an arrangement." [5]

But " [o]rdinarily, whether particular concerted action violates § 1 of the Sherman Act is determined through case-by-case application of the so-called rule of reason--that is, 'the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.'" [6] An example of this latter category of activity can be the so-called tying arrangement, whereby a competitor with market power " agrees to sell one product (the tying product) but only on the condition that the buyer also purchase a different product (the tied product), or at least agrees that he will not purchase the tied product from any other supplier." [7]

Section 2 provides that " [e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony." [8] While its plain language provides for criminal liability, Section 2 has long been understood also to provide civil liability for actual or attempted " monopolization" --the use of monopoly power to restrain commerce in a manner detrimental to consumer welfare.[9]

California law also targets antitrust violations. Section 16727 of the Cartwright Act " expressly prohibits illegal tying arrangements." [10] " Allegations of illegal tying agreements can be brought under Section 16726 or the narrower Section 16727." [11]

In 1992, Sun Microsystems released its first version of Solaris.[12] Solaris is a UNIX-based operating system designed and used to operate server, blade, storage and related hardware systems.[13] These systems include hardware that is critical to the proper functioning of its owner for legal, regulatory or business reasons, and therefore require extremely high support levels including guarantees of virtually immediate attention to any problems associated.[14] They also include less critical systems for test, development and back-up that have less exacting support needs.[15] Like many hardware providers, Sun regularly made available updates and firmware for Solaris that enhanced performance or simply fixed bugs in the system.[16] Sun routinely permitted its customers, as well as third-party support providers servicing them, the ability to obtain Solaris updates and firmware promptly upon release for free or a reasonable and fair cost.[17]

Things changed in 2011 after Sun was acquired by Oracle. Now customers who want updates and firmware must sign an annual contract for technical support services to be performed by Oracle for those hardware systems.[18] No customer may purchase updates or firmware without software services. Oracle also prices the combination of updates, firmware and both services at less than Oracle's cost.[19] Customers that sign a support contract--either directly with Oracle or through a reseller authorized by Oracle--receive a Customer Support Identification number linked to the products covered by the support contract.[20] The CSI number allows customers to create login credentials to access Oracle's secure support website.[21] Using these credentials, the licensed customer may download Solaris updates and firmware for the hardware systems that are covered by the support agreement.[22] The customer may not share or use its CSI number for the benefit of others or for the benefit of unsupported Oracle hardware--only customers who pay for and maintain a technical support agreement with Oracle for the hardware at issue may download Solaris updates and firmware and only for their own internal business use on specified computers.[23]

Defendants offer their own support services for Solaris hardware.[24] Each either contracts directly with customers to provide this support or contracts indirectly as a subcontractor to another entity, such as its co-defendant.[25] In contrast to Sun's earlier policy, under the new Oracle policy, if the customer declines to pay for support from Oracle, neither Defendants nor the customer may access or use Oracle's support website.[26] In particular, neither Defendants nor the customer may download Solaris updates or firmware.[27]

After Oracle filed suit against Defendants for copyright infringement, fraud and other torts, [28] Defendants counterclaimed, alleging: (1) violations of the Sherman Act; (2) violations of the Lanham Act; (3) violation of the Cartwright Act; (4) interference with contract; (5) interference with prospective economic advantage; (6) unfair competition; (7) trade libel and (8) declaratory relief.[29] At the heart of Defendants' counterclaims lie four, distinct tying charges:

o Tie 1 (Maintech and Volt): " patches, bug fixes and updates" for Solaris and firmware to " support packages for hardware and software running on ...

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