United States District Court, N.D. California, San Jose Division
ORDER DENYING DEFENDANTS' MOTION FOR SUMMARY
JUDGMENT [RE: ECF 336, 338]
LABSON FREEMAN, UNITED STATES DISTRICT JUDGE.
antitrust action arises from alleged misconduct relating to
the leasing and servicing of “StarStar numbers, ”
also referred to by the parties as “** numbers.”
A StarStar number is a mobile dial code that lets a user call
a short code - e.g., “**CASH” or
“**LAW” - from a mobile telephone and be
connected to a ten-digit telephone number. Defendant Zoove,
Inc., now doing business as StarStar Mobile, has the
exclusive right to operate StarStar numbers for all major
Sumotext Corporation (“Sumotext”) built up a
successful business leasing StarStar numbers from Zoove and
re-leasing them to end users while also selling the users
related add-on services. After Sumotext built up its
business, Zoove was acquired by Defendant VHT StarStar, a
company then owned by Defendant Virtual Hold Technology LLC
(“VHT”). Defendant StarSteve, LLC
(“StarSteve”) subsequently became a shareholder
in VHT StarStar. Shortly after the acquisition, Zoove
terminated Sumotext's existing StarStar leases and
offered new leases on less advantageous terms. Sumotext
contends that the offered terms were so unreasonable as to
amount to a refusal to deal, with the result that Sumotext
was excluded from two distinct markets, one for leasing
StarStar numbers in the United States and the other for
servicing StarStar numbers in the United States.
filed suit against Sumotext for breach of contract and
related state law claims, but ultimately the case has morphed
into federal antitrust suit. Two claims remaining in the
operative third amended complaint (“TAC”): Claim
4 for restraint of trade in violation of Section 1 of the
Sherman Act, and Claim 5 for conspiracy to monopolize and
monopolization in violation of Section 2 of the Sherman Act.
Defendants seek summary judgment on both claims.
reasons discussed below, Defendants' motion is DENIED.
chronology of events set forth below is undisputed, although
there is substantial dispute whether those events give rise
to antitrust liability on the part of Defendants.
Creation of the StarStar Registry Zoove created and
launched the national registry of StarStar numbers, giving it
complete control over distribution of StarStar numbers in the
United States. Miller Dep. 123:11-124:12, Greathouse Decl.
Exh. 61. Sumotext began leasing StarStar numbers from Zoove
in 2012 and releasing them to users while providing add-on
services such as mobile messaging. Miller Dep. 79:6-19,
Greathouse Decl. Exh. 61.
was not successful in monetizing its StarStar registry
despite investments of tens of millions of dollars of venture
capital. Cotney Dep. 66:19, Bloch Decl. Exh. B. Zoove was on
the brink of bankruptcy when Mblox, Inc.
(“Mblox”) became interested in acquiring it.
Cotney Dep. 29:2-5, Bloch Decl. Exh. B. Mblox's CEO, Tom
Cotney, thought Zoove might be a good complement to
Mblox's text messaging business. Cotney Dep. 66:17-19,
Bloch Decl. Exh. B.
Acquisition of Zoove
acquired Zoove in 2014, thereby gaining control of the
StarStar registry. Caffey Dep. 13:23-14:4, Greathouse Decl.
Exh. 56. Mblox's business model “was to primarily
sell and service its products and services indirectly through
ASPs.” Bales Dep. 18:16-19, Greathouse Decl. Exh 52.
The term “ASPs” refers to “application
service providers, ” entities like Sumotext that
re-leased StarStar numbers while providing add-on services to
the end user. Bales Dep. 18:20-20:10, Greathouse Decl. Exh.
52. Entities that simply re-leased StarStar numbers without
adding any value were referred to as “resellers.”
Bales Dep. 19:1-14, Greathouse Decl. Exh. 52.
supported ASPs by providing them access to application
programming interfaces (“APIs”). Bales Dep.
25:10-22, Greathouse Decl. Exh.52. Mblox also created the
“StarStar Toolkit” in 2015, which was
specifically designed to help ASPs provide add-on services
when they re-leased StarStar numbers to downstream customers.
Bales Dep. 16:1-17:15. Mblox viewed ASPs as
“partners” that would “add value and create
a StarStar ecosystem.” Bales Dep. 17:25-18:5.
thrived during Mblox's ownership of Zoove. Sumotext
leased dozens of StarStar numbers under a master contract
that gave it a 25% discount on the list price of all StarStar
numbers. Miller Dep. 177:18-178:2, Bloch Decl. Exh. P. As a
result, Sumotext could release any StarStar number at
Zoove's list price but still “have a 25 percent
profit margin in that fee.” Id. 202:2-11. And
on certain StarStar numbers, Sumotext made a much greater
profit. For example, Sumotext made a profit of $8, 700 per
month on **BOSS, **CASH, **CRUISE, and **TRAVEL. Miller Dep.
177:3-6, Bloch Decl. Exh. P. On **MOVE, Sumotext incurred $3,
500 in monthly costs but charged $16, 200 per month. Miller
Dep. 178:8-16, Bloch Decl. Exh. P.
in contrast, was losing money on Zoove. Cotney Dep. 172:6-15,
Bloch Decl. Exh. B. Mblox also was having trouble with a
major carrier, Verizon. Id. Mblox's CEO, Cotney,
testified, “I wanted to move those risks out of my
portfolio.” Id. Mblox approached
StarSteve's president, Steve Doumar, to ask whether
StarSteve was interested in buying Zoove. Doumar Dep.
116:2-24, Bloch Decl. Exh. E.
StarStar's Acquisition of Zoove
was created in early 2015, when it leased some StarStar
numbers from Zoove and attempted to become a reseller. Doumar
Dep. 93:1-21, Greathouse Decl. Exh. 51. StarSteve was
unsuccessful - it never had any StarStar customers and never
generated any revenue from StarStar numbers. Doumar Dep.
51:6-21, Greathouse Decl. Exh. 53. StarSteve gave up trying
to re-lease StarStar numbers after approximately four months,
and instead it considered acquiring the StarStar registry
when approached by Mblox. Doumar Dep. 51:6-23, 116:2-24,
Greathouse Decl. Exh. 53; Garvey Dep. 30:10-12, Greathouse
President, Steve Doumar, approached VHT's Chairman, Greg
Garvey, about investing in an acquisition venture. Garvey
Dep. 30:2-21:12, Greathouse Exh. 20. At that time, VHT was a
successful company with a product that enabled companies to
monitor hold times and offer callers the option of hanging up
and being called back when they got to the top of the hold
queue. Garvey Dep. 16:3-17:4, Bloch Dep. Exh. F. Garvey
determined that StarSteve was not in a financial position to
lead the acquisition of Zoove, but Garvey became interested
in acquiring the StarStar registry on behalf of VHT. Garvey
Dep. 45:1-46:4, Bloch Dep. Exh. F. VHT formed VHT StarStar,
which acquired 100% of Zoove from Mblox in December 2015
without StarSteve's participation. Garvey Dep. 54:2-6,
56:6-13, 77:20-78:5. Bloch Decl. Exh. F.
VHT StarStar acquired Zoove, Garvey allowed StarSteve to
acquire a 49% share of VHT StarStar, with VHT retaining the
other 51% share. Garvey Dep. 49:1-6, Bloch Dep. Exh. F;
Garvey Dep.154:2-13, Greathouse Decl. Exh. 50. Since then,
StarSteve essentially has been a holding company for its
shares of VHT StarStar, and its president, Steve Doumar,
became the president of VHT StarStar. Doumar Dep. 50:1-24,
Greathouse Dep. Exh. 51.
of StarStar Business
at VHT StarStar, Zoove, and StarSteve began to discuss
restructuring the StarStar business which, as noted, had
never made money. Email, Greathouse Decl. Exh. 27. Email
exchanges from mid-December 2015 show that Wes Hayden and
Steve Garvey of VHT, Steve Doumar of StarSteve, and Mike
Caffey of Zoove decided to “take back” the
StarStar numbers that had been leased to Sumotext. Email,
Greathouse Decl. Exh. 27. They also planned to contact each
of Sumotext's customers to “onboard them.”
Email, Exh. 28 to Greathouse Decl. Steve Doumar met with
Sumotext's four largest customers and signed
non-disclosure agreements with some of them. Doumar Dep.
85:22-93:10, Greathouse Decl. Exh. 53.
Sumotext's customers learned about the restructuring of
the StarStar business, they began expressing concern that
Sumotext would not be able to renew their StarStar licenses.
Some felt that Sumotext's President and CEO, Tim Miller,
had lied regarding the longevity of the StarStar licenses,
and some threatened to sue Sumotext. Miller Dep. 227:7-25,
228:1-229:25; 255:14-256:20, Greathouse Decl. Exh. 60. On
February 29, 2016, Tim Keyes, the COO of Zoove, StarSteve,
and VHT StarStar, sent an email to Wes Hayden, the CEO of VHT
and acting CEO of VHT StarStar and Zoove. Email, Greathouse
Decl. Exh. 25. The email content read, “Audience D -
Strategy to Take Back Numbers, ” and indicated that an
attachment was “the letter to Sumotext.”
29, 2016 Notice to Sumotext re Termination of Existing
February 29, 2016, Tim Keyes informed Tim Miller of Sumotext
via email that Zoove had been acquired. Email, Bloch Decl.
Exh. N. The email stated that it served as a thirty-day
termination notice of all of Sumotext's StarStar leases,
and that Sumotext would be given an opportunity to enter into
new StarStar leases. Id. The email advised that
StarStar numbers no longer would be leased nationally but
only regionally, and that a new pricing model would “be
made available no later than March 15th, and we hope you will
want to participate in this new model.” Id.
Keyes recognized that Sumotext was a “long time
partner” and that Miller's “feedback and
knowledge is vital as we finalize a model that will work for
everyone.” Id. Keyes invited Miller to set up
a time to meet and go over the new plan. Id.
7, 2016 Notice to Sumotext of New Terms
March 7, 2016, Keyes sent Miller another email, stating that
the new pricing model was still being revised, but that the
plan was to price by county with prices dependent on county
population. Email, Bloch Decl. Exh. JJ. Keyes included a
chart showing a range of prices from $150 per month, for a
county with 0 to 99k residents, to $5, 000 per month, for a
county with 3m to 3.99m residents. Id. Keyes also
advised that StarStar numbers could be re-leased only to end
customers - not to entities who themselves wished to release
the numbers. Id. Any such releasing had to be
approved by StarStar Mobile. Id. Under the new plan,
resellers would receive a flat 15% commission. Id.
Correspondence March 8, 2016 - March 10, 2016
responded by email the following day, March 8, 2016, stating
that Sumotext previously had nationwide leases of StarStar
numbers, and asking that Sumotext's 54 existing StarStar
leases be “grand-fathered” in under the prior
terms. Email, Greathouse Decl. Exh. 20. Miller opined that
“nobody would or could” afford nationwide leases
under the new pricing plan, because “[s]ome quick math
shows your charges would be $200, 750 per month just to lease
a phone number in the top 100 counties of the 3, 144 counties
of the U.S., along with $150, 000 in setup fees.”
email communication ensued. See Email, Bloch Decl.
Exh. KK. In a March 10, 2016 email from Wes Hayden of VHT
StarStar to Tim Miller of Sumotext, Hayden stated that the
prior Zoove business model had failed; StarStar Mobile had
tried to engage with Sumotext regarding its new business
model; and Sumotext's only response “is apparently
focused on Sumotext continuing a failed business concept that
only benefits you.” Id. Hayden reiterated that
Sumotext's existing StarStar leases were terminated
effective April 1, 2016, and advised Miller that “[a]s
details of a new reseller program are developed, we will make
this program available to Sumotext for your consideration and
participation.” Id. Miller responded
immediately on behalf of Sumotext, asking for a
“standstill agreement” extending the lease
termination date from April 1, 2016 to May 1, 2016 to allow
negotiation of a resolution that would avoid the necessity
for Sumotext to file a lawsuit. Email, Bloch Decl. Exh. KK.
Correspondence on March 11
responded on March 11, 2016, indicating that Miller should
speak with Keyes immediately to try to negotiate a plan going
forward, and advising that “[a] standstill can be part
of that discussion if done in the framework of an overall
agreement to move forward.” Email, Bloch Decl. Exh. KK.
Miller wrote back the same day stating that there was no
point in negotiating without a 30-day extension of the
termination date for Sumotext's StarStar numbers.
Id. Miller indicated that if Sumotext were not
granted the 30-day extension, it would “spend the next
week solely dedicated to preparing the legal filings to
protect SUMOTEXT and its customers from the pending
deadline.” Id. Hayden declined to grant the
30-day extension, but indicated that he and Keyes would be
“available to ...