SAN FRANCISCO (CN) – Adobe cannot dismiss an antitrust claims that the company stifled superior FreeHand software to boost its own Illustrator product, a federal judge ruled.
FreeHand is a professional vector graphic illustration software that Adobe Systems acquired in 2005. Before the MacroMedia acquisition, FreeHand competed with Adobe’s Illustrator software.
Thousands of graphic designers who were unhappy about the merger, claiming that FreeHand was superior to Illustrator, formed a nonprofit called Free FreeHand and filed suit.
“Since acquiring FreeHand, Adobe has significantly raised the price of Illustrator while, at the same time, effectively removing FreeHand from the market by failing to update the program,” according to Free FreeHand’s first amended complaint.
The group also claims that “Adobe has succeeded in ending competition” and “effectively acknowledged its intent to cripple innovation” in relevant markets.
“Adobe has used the asset of FreeHand in a different manner from the way FreeHand was used when and before FreeHand was acquired,” the complaint states.
“Before the acquisition, FreeHand was an actively developed and supported piece of software and a living, breathing product,” the group added. “After the acquisition, Adobe has effectively crippled and killed FreeHand while scavenging its bones for features to incorporate into Illustrator,” the plaintiffs said in their complaint.
Adobe had moved to dismiss, saying that the plaintiffs failed to adequately plead their unlawful monopolization claim under the Sherman Act.
Defending claims of supracompetitive pricing, the group showed that Illustrator cost $399 in 2005 and $599 by 2008.
U.S. District Judge Lucy Koh ruled Friday that the inflated prices appear unlawful because of anticompetitive conduct.
“Plaintiffs … claim that Adobe maintained its monopoly power through anticompetitive conduct such as discontinuing FreeHand and channeling FreeHand customers to Illustrator, which Adobe bundled with other Adobe products,” Koh wrote. “Thus, in the context of the facts as pled, and read in the light most favorable to plaintiffs, Adobe, as a monopolist engaging in other alleged anticompetitive conduct to maintain that monopoly, would not be lawfully entitled to raise prices.”
The judge also rejected Adobe’s claims that “integrating acquired assets from FreeHand and removing a product from the marketplace is ‘rational and normal business conduct’ that could only reduce a firm’s purported market power and give greater opportunities to its rivals.”
“That Adobe was able to maintain its high market share, despite increasing Illustrator’s price in 2008, after announcing that Adobe would essentially be discontinuing FreeHand in 2007, undermines Adobe’s assertion that discontinuing FreeHand has actually increased competition,” Koh wrote.
While the group cannot force Adobe to make FreeHand software open source, Koh said the plaintiffs had plausibly argued the aggregate effect of Adobe’s anticompetitive conduct.
“Plaintiffs have plausibly argued that Adobe willfully acquired monopoly power and maintained that power through anticompetitive conduct,” Koh wrote. “If, as alleged, Adobe ceased the development of FreeHand while steering existing FreeHand users to a bundled product, thereby further raising already high barriers to entry, it is plausible to infer that this conduct tended ‘to impair the opportunities of rivals’ and ‘did not further competition on the merits,'” citing a 9th Circuit decision in Cacade Health Solutions v. PeaceHealth.
“Plaintiffs have sufficiently alleged the second element of a monopolization claim: willful acquisition or maintenance of monopoly power,” Koh added.
Since Free FreeHand adequately pleaded antitrust injury, it has “alleged sufficient facts to state a monopoly maintenance claim under Section 2 of the Sherman Act.” The adequately stated federal antitrust claims also support claims under California statutes, but Free FreeHand cannot claim violations of the state’s Cartwright Act.
Koh nevertheless gave the group 21 days to amend its claim under the Cartwright Act, which “must allege that (1) there was an agreement, conspiracy, or combination between two or more entities; (2) the agreement was an unreasonable restraint of trade under either per se or rule of reason analysis; and (3) the restraint affected interstate commerce.”
Koh also dismissed Adobe’s statute-of-limitations claims regarding the 6-year-old merger.
“The exact date of Adobe’s alleged post-merger anticompetitive acts and when plaintiffs suffered injury as a result of these acts is unclear from the face [of the complaint],” Koh wrote. “However, it is reasonable to infer that Adobe did not discontinue its updates to FreeHand until after Adobe allegedly announced publicly its intent to do so on May 16, 2007. It is also reasonable to infer that plaintiff suffered antitrust injury as a result, in the form of supracompetitive prices, in 2008.”
“Taking the facts in the light most favorable to plaintiffs, plaintiffs’ [Sherman Act] monopolization claim therefore appears to be timely under the continuing violation doctrine,” in which each overt act of an antitrust violation starts the statutory period running again, the decision states.