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Sumotext Corp. v Zoove, Inc.

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

December 20, 2019

SUMOTEXT CORP., Plaintiff,



         This 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 mobile carriers.[1]

         Plaintiff 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.

         Sumotext 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.

         For the reasons discussed below, Defendants' motion is DENIED.

         I. BACKGROUND

         The 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.

         Zoove's 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.

         Zoove 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.

         Mblox's Acquisition of Zoove

         Mblox 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.

         Mblox 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.

         Sumotext 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.

         Mblox, 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.

         VHT StarStar's Acquisition of Zoove

         StarSteve 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 Exh. 20.

         StarSteve's 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.

         After 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.

         Restructuring of StarStar Business

         Executives 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.

         As 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.” Id.

         February 29, 2016 Notice to Sumotext re Termination of Existing Leases

         On 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.

         March 7, 2016 Notice to Sumotext of New Terms

         On 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.

         Email Correspondence March 8, 2016 - March 10, 2016

         Miller 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.” Id.

         Further 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.

         Email Correspondence on March 11

         Hayden 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 ÔÇťavailable to ...

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