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District Court Reluctantly Allows Tying Claims Against Oracle to Go Forward

Last Friday, Magistrate Judge Paul S. Grewal of the Northern District of California denied a motion by Oracle to dismiss three counterclaims based on a tying theory in Oracle America, Inc. v. Terix Computer Co. In doing so, the court followed (if begrudgingly) the Supreme Court’s decision in its seminal tying case, Eastman Kodak Co. v. Image Technical Services, Inc.

Oracle initiated its suit last year when it brought claims of copyright infringement, among other things, against a number of aftermarket service providers for Oracle’s Solaris operating system. The service providers responded with a raft of counterclaims, including restraint of trade and monopolization based on a tying theory. They claimed that before Oracle bought Sun Microsystems, Sun had issued free (or almost free) updates to Solaris whether or not customers used Sun to provide support services but that Oracle had created an illegal tying arrangement when it stopped distributing those updates free of charge and instead distributed them only to customers who bought support services from Oracle.

The court concluded that the counterclaims alleged a viable tying claim under the Ninth Circuit’s interpretation of Eastman. It held that defendants had sufficiently alleged a relevant aftermarket—“not the indisputably competitive market in which the consumers first shop for the primary product,” but the “aftermarket in which the consumers claim that that they thought they should be able to shop for a secondary product.”  The court also concluded that Oracle’s alleged market power in the aftermarket wasn’t voluntarily created by contract—at least for customers that purchased Solaris before Oracle’s acquisition of Sun. Further, the counterclaim’s allegations did not establish the defense that there was a functional equivalent of a voluntary contract.

The court made clear, however, that it did not agree with Kodak. Quoting antitrust commentator Herbert Hovenkamp, it suggested that restrictive aftermarket arrangements may be a key factor in differentiating products—which can foster competition instead of suppressing it. But because the court is “bound to apply” the reasoning of Kodak, it held that three of the tying claims in Oracle could go forward.

Check in tomorrow for a cartel update: Our summary of the DOJ’s anti-cartel efforts over the past six months.