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Can Failing Antitrust Claims Be Repackaged as Unfair Methods of Competition? The North Carolina Business Court Answers No

Ellis Winters

Ellis & Winters

Although courts sometimes describe N.C. Gen. Stat. § 75-1.1 as an outgrowth of antitrust law, most 75-1.1 claims do not arise from antitrust fact patterns.

SiteLink Software, LLC v. Red Nova Labs, Inc. is an exception. That case involves overlapping antitrust claims and section 75-1.1 claims.

In this setting, the North Carolina Business Court recently held that the outcome of the 75-1.1 claims tracked the outcome of the antitrust claims.

From Collaborators to Competitors

SiteLink provides software to self-storage facilities (the kind you see on Storage Wars). This type of software, called facility-management software, performs management functions for self-storage facilities. Only a minority of storage facilities use facility-management software. Out of that subset, 35% to 40% use SiteLink’s  software.

SiteLink cooperates with companies that provide complementary services, such as online marketing services. Through license agreements, SiteLink allows these companies to tap into SiteLink’s network and data through SiteLink’s application-programming interface (API).

SiteLink, however, imposes licensing restrictions on its software and its API. SiteLink’s licensing agreements bar licensees from competing with SiteLink. The agreements also bar a licensee from buying any services from SiteLink’s competitors at the same time that the licensee uses SiteLink’s products.

Red Nova is an online marketing company. It had a license to use SiteLink’s API to provide services to SiteLink’s customers.

While Red Nova had this licensing relationship with SiteLink, it developed software that competed with SiteLink’s software. When SiteLink learned this, it terminated Red Nova’s API license. It also unilaterally amended its license agreements with its own customers, inserting a provision that barred those customers from dealing with any company that competes with SiteLink in any line of business.

Finally, SiteLink sent letters to its own customers, urging them to switch from Red Nova to another marketing company that did not compete with SiteLink in any sphere. SiteLink’s campaign allegedly included false statements about Red Nova. It also allegedly included coercive incentives for customers to switch away from Red Nova.

Red Nova’s Counterclaims

SiteLink sued Red Nova in North Carolina state court for violating the API license. Red Nova designated the lawsuit to the North Carolina Business Court. The case was assigned to Chief Judge Gale.

Red Nova then filed four counterclaims against SiteLink. One of the counterclaims had this heading: “Unfair and Deceptive Trade Practices; N.C. Gen. Stat. §§ 75-1, 75-1.1, 75-2, 75-2.1.”

As that heading suggests, this counterclaim mixed claims under section 75-1.1 with claims under North Carolina’s state antitrust statutes:

  • section 75-1, which bars certain anticompetitive agreements,
  • section 75-2, which extends section 75-1 to acts and agreements that violate “the principles of the common law,” and
  • section 75-2.1, which bars monopolization, attempts to monopolize, and conspiracies to monopolize.

Red Nova’s antitrust/75-1.1 counterclaim attacked the competition-limiting terms in SiteLink’s API licenses. However, it also attacked SiteLink’s alleged false statements and attempts to coerce Red Nova’s customers to stop using Red Nova.

Given this focus on anticompetitive tactics, Red Nova’s 75-1.1 claim seemed to apply a rarely used aspect of section 75-1.1: its ban on unfair methods of competition.

SiteLink moved to dismiss all of Red Nova’s antitrust claims. It also moved to dismiss Red Nova’s 75-1.1 claim, but only to the extent that the 75-1.1 claim was based on SiteLink’s API licensing practices.

Chief Judge Gale granted SiteLink’s partial motion to dismiss. His extensive opinion discusses several aspects of antitrust law—and the 75-1.1 “unfair methods” theory—that rarely come up in decisions of the North Carolina state courts. Because of this lack of state-court precedents, the opinion draws on federal antitrust decisions throughout.

The court analogized Red Nova’s antitrust theory to a theory of “negative tying.”  Negative tying occurs when a seller agrees to sell a product or service only on the condition that the customer agrees not to buy a different product or service from any other seller, or at least not from specified sellers. (In a conventional tying arrangement, in contrast, the seller imposes a different condition on the sale: he requires that the customer actually buy a second product or service from him.)

The court held that Red Nova’s tying claim omitted at least one element of such a claim: anticompetitive effects in the market for the “tied” services—that is, the market where the seller hopes to coerce or prevent sales. In this case, the allegedly tied market was the market for “other software services offered to self-storage-facility owners or operators.” The court saw no allegations of any effects on that market. For example, Red Nova did not even allege that SiteLink was trying to enter that market.

The court also rejected Red Nova’s claim that the licensing agreements between SiteLink and its customers were anticompetitive in a more general way. Red Nova alleged that these agreements pushed up prices to customers, but the court held that Red Nova’s counterclaim offered no specifics on those alleged price effects.

Red Nova’s claims of monopolization and attempted monopolization failed as well. Those claims required Red Nova to define the allegedly monopolized market, then allege (in non-conclusory terms) that SiteLink had monopoly power (for actual monopolization) or a dangerous probability of gaining monopoly power (for attempt to monopolize). Even if Red Nova’s proposed market definition could survive a motion to dismiss—a point on which the court expressed doubt—the court held that SiteLink’s 35% to 40% market share in this proposed market was not enough to show monopoly power or a dangerous probability of getting it.

Having dismissed all of Red Nova’s antitrust claims, the Business Court also dismissed the 75-1.1 claims to the extent that they were based on SiteLink’s API licensing practices. The court treated these 75-1.1 claims as just another expression of Red Nova’s failed antitrust theories.

In dismissing these 75-1.1 claims, the court held: “When a section 75-1.1 claim derives solely from an antitrust claim, the failure of the antitrust claim also defeats liability under section 75-1.1.” The court based this holding on a 2002 decision by the U.S. District Court for the Middle District of North Carolina.

This is a significant holding. In theory, it would be possible for courts to hold that section 75-1.1 allows parties to pursue antitrust claims that fail one or more standards under antitrust law. In recent years, however, courts have rejected that approach to section 75-1.1. The Business Court has now rejected it as well.

That rejection makes perfect sense. As John Graybeal has pointed out in a helpful article, using section 75-1.1 as an “antitrust lite” statute would pose serious problems. Most importantly, it would require the courts to devise a whole new set of standards to govern these claims. It has taken the federal and state courts 126 years—and considerable struggle—to work out one body of antitrust doctrine. It’s hard to imagine that the North Carolina courts would want to restart that process.

Finally, a word about Red Nova’s surviving 75-1.1 claims. As noted above, SiteLink moved to dismiss Red Nova’s 75-1.1 claim only to the extent that it was based on SiteLink’s API license. The motion to dismiss left the rest of Red Nova’s 75-1.1 claim unchallenged.

Thus, the court and the parties now face the challenge of untangling the strands of Red Nova’s single counterclaim—a counterclaim that (wisely or not) combined section 75-1.1 with state antitrust law. This untangling process might well offer more lessons for all of us.

Author: George Sanderson

June 28, 2016
Posted in  Other 75-1.1 Issues