Dreamstime.com, LLC v. Google, LLC, No. 3:2018cv01910 - Document 72 (N.D. Cal. 2019)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART 53 MOTION TO DISMISS. By Judge Alsup. (whalc3, COURT STAFF) (Filed on 1/28/2019)
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Dreamstime.com, LLC v. Google, LLC Doc. 72 1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 DREAMSTIME.COM, LLC, a Florida LLC, 11 For the Northern District of California United States District Court 10 12 13 14 No. C 18-01910 WHA Plaintiff, v. GOOGLE, LLC, a Delaware LLC; and DOES 1-10, ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS Defendants. 15 / 16 17 INTRODUCTION 18 In this antitrust action, plaintiff accuses defendant of using its monopoly power to 19 discriminate against plaintiff. Defendant now moves to dismiss all claims. For the reasons 20 stated below, the motion to dismiss is GRANTED IN PART AND DENIED IN PART. STATEMENT 21 22 1. THE PARTIES. 23 Defendant Google, LLC owns and operates the world’s largest internet search engine 24 using a number of proprietary algorithms that Google claims will help consumers find pages 25 with relevant information. When you type a word search into the Google search bar, Google’s 26 product responds by producing lines of results drawn from all over the internet. Google shows 27 approximately ten lines of results per page and provides as many pages as needed to show the 28 hits. As potential hits can run into the thousands, a website’s ranking on Google’s line of results has a direct, measurable impact on the amount of web traffic to that website. In a nearby Dockets.Justia.com 1 tab to the Google search bar, Google also operates a search engine for images (“Google 2 Images”). An essential driver of web traffic to Google, Google Images has become the biggest 3 repository of images in the world (Dkt. No. 50 at ¶¶ 2, 4, 18–20, 26). For the Northern District of California United States District Court 4 Google has partnered with two photography businesses, Shutterstock as of July 2016 5 and Getty Images as of February 2018, who together represent 70% of the stock photography 6 market. Google’s partnership agreement with Shutterstock in particular provides Google 7 license to integrate Shutterstock’s library of hundreds of millions of online images into its 8 search advertising network. Google then uses those images together with advertisements 9 running through Google’s advertising platforms, further driving web traffic through Google 10 while also providing Shutterstock with free advertising for their images. Nowhere does the 11 amended complaint allege that these agreements prohibit Shutterstock and Getty Images from 12 also dealing with Google’s rivals, Yahoo! and/or Bing — stating solely that “Yahoo! and Bing 13 are unable to obtain the same access to licensed stock photos for their competing ad networks.” 14 That inability may simply be due to the absence of any deal (as yet) between Shutterstock and 15 Getty Images on the one hand, and Yahoo! and Bing on the other (id. at ¶¶ 32–34, 50, 104). 16 Plaintiff Dreamstime is a heavyweight in image repositories in the stock photography 17 industry. A supplier of high-quality digital images since 2000, Dreamstime has a repository of 18 millions of high-quality stock images. As of March 2018, Dreamstime had 20 million 19 registered members (and counted clients in the Fortune 100 companies), more than 400 20 thousand contributing photographers, and over 75 million photos, illustrations, clip art images, 21 and vectors (id. at ¶ 28). 22 2. SPONSORED ADS. 23 Google does not charge its search engine users money. Rather, companies pay Google 24 to have advertisements for their websites prominently displayed in Google’s search results. 25 These are sponsored ads. The complaint estimates that this advertising program (called 26 AdWords by Google) accounts for over 80% of Google’s revenue. Google’s share of the 27 United States online search advertising market is approximately 80%. To use AdWords, 28 advertisers must agree to several adhesive agreements (id. at ¶¶ 23, 66–68). 2 For the Northern District of California United States District Court 1 The AdWords program uses an auction system to determine which advertisements are 2 shown and how much each advertisement costs. Advertisers bid for relevant search term 3 keywords such as “stock photo” or “digital image” and AdWords then allegedly assigns each 4 advertisement a “quality score” based on multiple factors such as: the quality of the 5 advertiser’s website, the click-through rate (the percentage of users who not only viewed the ad 6 but also clicked on it), and relevance to the search keywords. Each time a Google user enters 7 search terms that include relevant keywords, the AdWords program determines which of the 8 competing advertisements to display (id. at ¶¶ 67, 71–73). 9 In 2004, Dreamstime entered into the AdWords Agreement with Google, paying Google 10 to display its advertisements on Google, and engaging in several different marketing campaigns 11 to promote its advertisements with the best combination of quality score, bid amount, and 12 resulting customer acquisitions. Dreamstime paid Google daily to determine which of its 13 advertisements are the most effective and to increase its circulation accordingly. Dreamstime 14 subsequently saw a predictable and steady number of customers resulting from these campaigns 15 (id. at ¶¶ 74–77). 16 3. 17 Dreamstime relies heavily on online search engines and search engine advertising to DREAMSTIME PLUMMETS ON GOOGLE SEARCH. 18 build its name recognition and generate new customers. Indeed, roughly two-thirds of 19 Dreamstime’s customers come to Dreamstime’s website by way of a search-engine result. 20 Consistent with Dreamstime’s AdWords spending, from approximately 2005 to 2015, 21 Dreamstime consistently ranked in the top three in Google’s line of search results for searches 22 related to stock photography, never appearing lower than the first page. Dreamstime’s website 23 traffic during that time also reflected that many people who searched “online stock 24 photography” on Google used and purchased stock photographs from Dreamstime (id. at ¶¶ 29, 25 38–40). 26 In 2015, however, Dreamstime’s search ranking on Google plummeted (this order 27 pauses here to note that Google’s agreement with Shutterstock was announced in July 2016). 28 For example, Dreamstime’s rank on Google for the generic search term “stock photos” in June 3 1 2017 sank from what had been either the second or third overall result down to the fourth page. 2 Such a drop in Google search results can be catastrophic for businesses; falling from page one 3 to page two alone reduces website traffic by 95%, according to the amended complaint. In 4 April 2016, Dreamstime’s fall in Google’s search ranking had taken a quantifiable toll, as the 5 number of new Dreamstime customers who signed up and made a purchase within one month 6 fell by 30% from that point the prior year (id. at ¶¶ 40–44). 7 4. 8 In an effort to steer away from the impending iceberg, Dreamstime followed every For the Northern District of California United States District Court 9 DREAMSTIME’S ATTEMPTED SOLUTIONS. guideline and suggestion provided by Google’s documentation to boost Dreamstime’s rankings 10 on Google search. Specifically, Dreamstime switched to https and http2, disavowed links, 11 improved website quality, diversity, and quantity of content, invested in dedicated hardware for 12 a caching system, and dramatically increased the crawl rate and number of pages on the site. 13 When those efforts did not restore Dreamstime’s ranking, Dreamstime also invested numerous 14 development hours to rebuild its entire site to be mobile-friendly, diverted resources from other 15 projects in its business plan and doubled its hosting costs, engaged with and followed the advice 16 of external agencies, hired its own in-house Search Engine Optimization expert, spent millions 17 of dollars on website hosting to increase the content on its website by adding more images, and 18 launched a second website — Megapixl.com — to get more exposure. Dreamstime also spent 19 millions of dollars on new Google AdWords campaigns (increasing its budget by 50%) both for 20 itself and for Megapixl.com. Still, Dreamstime’s Google rank continued to decline through the 21 end of 2017 and Megapixl.com did not gain traction (id. at ¶¶ 63–64, 77–78, 105). 22 To date, no one, including “guru” search engine optimization companies, have identified 23 any issues with Dreamstime’s site that would explain how Dreamstime came to be marginalized 24 in Google’s search rankings. To its knowledge, Dreamstime improved every metric critical to 25 search ranking: Dreamstime’s user engagement improved over the relevant period, 26 Dreamstime’s bounce rate (a metric that indicates the percentage of people who land on a web 27 page and then leave without clicking anywhere else on the website) has declined, and the 28 4 For the Northern District of California United States District Court 1 average amount of time users spend on Dreamstime’s website has stayed constant. Yet, 2 Dreamstime’s growth has slowed by approximately 50% since its peak (id. at ¶¶ 60, 64, 105). 3 This drop in rankings, moreover, continues to be unique to Google’s search engine: a 4 recent search demonstrated Dreamstime’s search ranking for “stock images” was fifth on Bing’s 5 search engine, fourth on Yahoo!’s search engine, and third on Baidu’s search engine. On 6 Google’s search engine, by contrast, Dreamstime found itself ninety-first, behind websites such 7 as an obscure site with only 30,000 free images (compared with Dreamstime’s more than two 8 million free images), yet another site with only 140 images total, and a blog article that had not 9 been updated since 2014 entitled “Stock Photos That Don’t Suck.” Yet, when comparing 10 Dreamstime to Google’s partner Shutterstock by measure of accuracy, Dreamstime returned 11 completely accurate, if not more accurate results than companies like Shutterstock. Dreamstime 12 continues to maintain it has no internal answers for these vast discrepancies in search results (id. 13 at ¶¶ 41, 44, 55–58). 14 5. SUBVERSION BY GOOGLE IN DREAMSTIME’S ADVERTISING CAMPAIGNS. 15 Dreamstime contends that throughout this time, Dreamstime’s advertising campaigns 16 were actively subverted. Specifically, Google canceled Dreamstime’s most successful 17 advertising campaigns without notice or explanation and willy-nilly suspended Dreamstime’s 18 account based on accusations of policy violations. Google also prevented Dreamstime from 19 running its advertisements altogether (but simultaneously allowed the exact same 20 advertisements to be placed by Dreamstime’s competitors). Most subversively, Google caused 21 Dreamstime’s daily spending limits to be exceeded systemically and on a regular basis by over- 22 delivering on the advertisement campaigns (using more of the allocated advertising budget in a 23 shorter period of time) (id. at ¶¶ 8, 79–80, 86, 90–91, 172). 24 Moreover, Google selectively applied its policies to Dreamstime’s detriment. For 25 example, Google removed Dreamstime’s mobile application because it featured lingerie 26 photographs but allowed Google partner Shutterstock’s mobile application to remain active 27 despite featuring explicitly nude photographs. In another example of selective policy 28 enforcement, Google removed Dreamstime’s lowest cost per acquisition advertisements but 5 1 allowed Dreamstime’s high cost per acquisition display advertisements of the same type to 2 remain active (translating to more income for Google) (id. at ¶¶ 53, 81, 86, 93). For the Northern District of California United States District Court 3 The amended complaint is silent as to whether or not Dreamstime continued to win its 4 AdWords campaigns for search terms. Dreamstime eventually determined that the spending on 5 AdWords did not help Dreamstime’s search ranking, and so, “Dreamstime recently resolved to 6 significantly lower its advertising spending” (id. at ¶ 65 n.26). 7 6. THIS ACTION. 8 Dreamstime filed this lawsuit in March 2018 asserting four claims for relief: (1) 9 violation of Section 2 of the Sherman Act, 15 U.S.C. § 2; (2) breach of contract; (3) breach of 10 the implied covenant of good faith and fair dealing; and (4) violations of Section 17200 of the 11 California Business and Professions Code (Dkt. No. 1). Google moved to dismiss all claims 12 (Dkt. No. 25). At oral argument (following full briefing), the undersigned judge provided 13 Dreamstime an opportunity to amend the complaint before issuing an order on Google’s motion 14 to dismiss. Dreamstime elected to amend (Dkt. No. 44). 15 In September 2018, Dreamstime timely filed the amended complaint, asserting the same 16 four claims for relief (Dkt. No. 50). Google again moved to dismiss (Dkt. No. 53), and 17 following full briefing (Dkt. Nos. 60, 61), another hearing was held in December 2018. Orders 18 subsequently issued seeking clarification from both Dreamstime and Google (Dkt. Nos. 66, 70). 19 Having received clarifications from both sides, this order follows (Dkt. Nos. 68, 69, 71). 20 21 ANALYSIS “To survive a motion to dismiss, a complaint must contain sufficient factual matter, 22 accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 23 U.S. 662, 678 (2009) (quotations omitted). A claim is facially plausible “when the plaintiff 24 pleads factual content that allows the court to draw the reasonable inference that the defendant 25 is liable for the misconduct alleged.” Id. at 678. Plausibility requires pleading facts, as opposed 26 to conclusory allegations or the “formulaic recitation of the elements of a cause of action,” Bell 27 Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007), and must rise above the mere conceivability 28 or possibility of unlawful conduct that entitles the pleader to relief. Iqbal, 556 U.S. at 678–79. 6 1 “Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops 2 short of the line between possibility and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 3 678 (citation and quotation omitted). Nor is it enough that the complaint is “factually neutral”; 4 rather, it must be “factually suggestive.” Twombly, 550 U.S. at 557 n.5. 5 1. 6 Section 2 of the Sherman Act prohibits monopolization, attempted monopolization, and 7 conspiracies to monopolize. More specifically, Section 2 provides that “[e]very person who 8 shall monopolize, or attempt to monopolize, or combine or conspire with any other person or 9 persons, to monopolize any part of the trade or commerce among the several States, or with For the Northern District of California 10 United States District Court MONOPOLY MAINTENANCE UNDER SECTION 2 OF THE SHERMAN ACT. foreign nations, shall be deemed guilty of a felony.” 15 U.S.C. § 2. 11 The original complaint appeared to allege an unlawful monopoly leveraging theory 12 based on the market for online stock photography and its dependence on the online search 13 advertising market which Google purportedly monopolized. But both in Dreamstime’s briefing 14 and when directly asked during the first oral argument in September 2018, Dreamstime 15 explicitly disavowed any such leveraging theory stating: “we are not alleging a two-market 16 monopoly leveraging theory.” Instead, Dreamstime insisted “it’s a simple, straightforward 17 monopoly maintenance case in which Google, with a market share of 70 percent plus, has 18 maintained that monopoly power and abused it . . . ” (Dkt. No. 49 at 37, 38). 19 But even the maintenance theory had not been adequately alleged. The Court thus gave 20 Dreamstime another chance to revise the unwieldy complaint to set forth its antitrust theory, 21 observing that the best shot for Dreamstime appeared to be a leveraging claim. Dreamstime 22 accepted the opportunity to amend, but the amended complaint made clear: “Dreamstime is 23 advancing a traditional monopoly maintenance antitrust claim” (Dkt. No. 50 at ¶ 111). Later, 24 Dreamstime affirmatively disavowed any leveraging theory: “plaintiff Dreamstime is not 25 asserting a separate Section 2 of the Sherman Act two-market ‘monopoly leveraging’ claim” 26 (Dkt. No. 68 at 1). It is plain that plaintiff foreswears asserting a leveraging theory, attempting 27 instead (for whatever reason) to pigeonhole this claim under the guise of unlawful monopoly 28 maintenance. 7 For the Northern District of California United States District Court 1 The amended complaint alleges a relevant product market of online search advertising 2 (Dkt. No. 50 at ¶ 119). Dreamstime’s monopoly maintenance theory centers on an intertwined 3 relationship between stock photographs and the online search advertising market. That is, stock 4 photographs “are a critical component of search-based display ads (ads that include pictures 5 related to keyword searches). The use of stock photos in search-based display ads allows online 6 search advertisers to create high-quality, engaging display ads that pop up when users enter 7 certain keywords” (id. at ¶ 2b). Google purportedly therefore maintains its monopoly in the 8 online search advertising market by taking “control over online stock photo supply . . . to sell in 9 its advertising network, giving it a crucial competitive advantage over its competitors, such as 10 Yahoo! and Bing” (id. at ¶ 4). Moreover, “[n]ow that Google has access to all of Shutterstock 11 and Getty Images’ stock photos, it has instantly become one of the largest distributors of stock 12 photos to customers looking to use those photos in online ads” which “provide it with a key 13 advantage over its online search advertising competitors, by allowing it to integrate hundreds of 14 millions of licensed images into its search advertising network” (id. at ¶¶ 32, 34). Critically, 15 Google then targets Dreamstime and other stock photography companies “by removing an 16 important supplier of stock photos for search advertisers” (id. at ¶ 7). 17 As Google’s rivals in the online search advertising market have their own image 18 services that have failed to gain traction, Google’s monopoly in online search advertising is 19 further secured: 20 21 22 23 24 25 Competition in online search advertising is harmed by Google’s promotion of Google Images over Dreamstime and others. Google’s competitors, such as Bing and Yahoo!, offer competing search and image services. However, they have been unable to achieve the volume of traffic and associated historical data capable of allowing their image-based services to compete with Google Images. Google’s elimination of Dreamstime and other stock photography websites enhances and entrenches Google Images’ dominance and secures its competitive advantages over Bing and Yahoo!. 26 (id. at ¶ 102). As alleged in the amended complaint, therefore, Google’s mechanism for 27 restricting competition in the online search advertising market is to exclude Dreamstime and 28 8 1 other stock photography companies from engaging in both Google’s search function and 2 sponsored ads: 3 4 5 6 7 8 9 11 For the Northern District of California United States District Court 10 12 13 14 15 16 Google intends to restrict competition among itself, Yahoo! and Bing, and to extend its dominance over chief rivals. Its vehicle for doing so is the exclusion of Dreamstime and several other non-partner stock photography websites . . . As these tactics injure competition in Google’s market, they simultaneously cause material injuries to Dreamstime and other stock photo suppliers in the form of decreased or eliminated visibility in Google’s search and ad results, overcharges for AdWords, lost revenue, lost customers, potential search engine optimization (“SEO”) penalties, and loss of goodwill. (id. at ¶ 10). In other words, the importance of stock photographs to Google means vanquishing smaller rivals in the stock photography industry: Google has undertaken its . . . exclusionary conduct with the . . . purpose of maintaining and abusing its monopoly in the online search advertising market (by increasing Google Images’ dominance and increasing its own stock photo offerings within its ad network) and to vanquish . . . smaller rivals in the online stock photography industry . . . Google’s conduct discourages, prevents and/or precludes consumers from finding, accessing and/or buying services from Dreamstime and other online stock photo repositories directly, which in the long-run would erode Google’s standing as the first place to go via its Google Images feature to search for . . . stock photos on the Internet. 17 (id. at ¶¶ 125, 126). In sum, Dreamstime has most recently clarified the theory as follows: 18 19 20 21 22 23 24 25 26 27 28 [P]laintiff Dreamstime is alleging that defendant Google is a monopolist and has engaged in an overall scheme consisting of various predatory and exclusionary acts to maintain its monopoly position in the online search advertising relevant market. This conduct is directed at harming Dreamstime as a consumer/participant of services in the online search advertising market. This conduct simultaneously harms competition and consumers, and enhances Google’s monopoly in the online search advertising market . . . As Dreamstime has alleged, its exclusion harms competition and consumers and enhances Google’s monopoly in the online search advertising market notwithstanding that Dreamstime does not directly compete with Google in that market. While not a direct competitor in the online search advertising market, Dreamstime does compete for the same web traffic and offers similar functions to Google (in particular, Google Images) with respect to image-related searches, and its exclusion is a means by which Google increases its image-related search dominance and therefore its foothold in the online search advertising market. 9 1 (Dkt. No. 68 at 1–2). 2 Dreamstime’s theory, however, fails because it does not plausibly allege harm to 3 competition in the relevant market. As the Supreme Court has made clear: “the possession of 4 monopoly power will not be found unlawful unless it is accompanied by an element of 5 anticompetitive conduct.” Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 6 LLP, 540 U.S. 398, 407 (2004) (emphasis added). Our court of appeals defines anticompetitive 7 conduct as “behavior that tends to impair the opportunities of rivals and either does not further 8 competition on the merits or does so in an unnecessarily restrictive way.” Cascade Health 9 Solutions v. PeaceHealth, 515 F.3d 883, 894 (9th Cir. 2008) (citing Aspen Skiing Co. v. Aspen 10 Dreamstime alleges the following eight predatory acts committed by Google, which, For the Northern District of California United States District Court Highlands Skiing Corp., 472 U.S. 585, 605 n.32 (1985). 11 12 taken as a whole, purportedly combine to impose anticompetitive conduct: (1) rigging the 13 AdWords auction bidding process to control the purchase of Google’s AdWords advertising 14 services; (2) downgrading and distorting Dreamstime’s online search ranking (raising 15 Dreamstime’s costs of competing and threatening to drive it out of business); (3) favoring 16 contractual partners (Shutterstock and Getty Images) with opportunities not available to other 17 smaller stock photography suppliers; (4) selectively enforcing its rules and terms governing its 18 online AdWords advertising program to disadvantage Dreamstime, thereby further undermining 19 its ability to supply stock photos to its customers and Google’s rivals; (5) elevating 20 inconsequential websites ahead of Dreamstime and other online stock photography repositories; 21 (6) suspending Dreamstime’s mobile application purportedly for policy violations (that the 22 application did not violate), and later de-indexing Dreamstime’s mobile application for the most 23 common searches for stock photos within the Google Play Store; (7) allowing users to bypass 24 Dreamstime’s licensed images and obtain them directly on Google Images without paying for 25 them; and (8) engaging in unlawful activity to capture and use privacy protected data of its 26 consumers and advertisers (Dkt. No. 50 at ¶ 133). 27 But the pattern of conduct that appears to be predatory here, is not in and of itself 28 injurious to competition in the relevant market. The theory advanced by plaintiff is that 10 1 Dreamstime is a victim of a series of predatory acts — but the only harm to competition alleged 2 is that it hurt Dreamstime and Dreamstime’s ability to act as a consumer in that market. In the 3 auction process, it would be to the advantage of Google to have more bidders. Facially, it does 4 not make sense that Google would want to benefit from losing a customer. For the Northern District of California United States District Court 5 What would make sense, is that Dreamstime is a potential competitor to Google in the 6 online search advertising market with respect to images. Dreamstime could have its own search 7 engine for images and sell sponsored ads and thus compete with Google as a rival. But 8 Dreamstime has expressly disavowed that theory (Dkt. No. 68 at 1).* 9 Taking the synergistic effect of the alleged predatory acts together as an overall scheme, 10 this maintenance theory still does not succeed as a Section 2 monopolization claim as “there can 11 be no synergistic result” if none of the acts alleged is an antitrust violation. Cal. Computer 12 Prods. v. Int’l Bus. Machs., Corp., 613 F.2d 727, 746 (9th Cir. 1979). Although “a finding of 13 some slight wrongdoing in certain areas need not by itself add up to a violation,” Dreamstime 14 still needs to meet every element of the antitrust claim. City of Anaheim v. S. Cal. Edison Co., 15 955 F.2d 1373, 1376 (9th Cir. 1992). A showing of anticompetitive conduct is missing. 16 Much of the amended complaint focuses on the mistreatment of Dreamstime as a 17 customer of Google in the online search advertising market. But such mistreatment, even by a 18 monopolist, does not necessarily reduce competition in the relevant market. It is true that 19 “reduction of competition does not invoke the Sherman Act until it harms consumer welfare.” 20 Rebel Oil Co., Inc. v. Atlantic Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995) (citations 21 omitted). But showing harm to one customer does not on its own demonstrate anticompetitive 22 conduct. As one leading treatise states: “[t]he real intent of a consumer welfare test is to 23 identify practices that both exclude rivals from the market and harm consumers.” The treatise 24 further illustrates: 25 26 27 28 * This theory is suggested by language in the amended complaint (see, e.g., Dkt. No. 50 at ¶¶ 36, 126). At oral argument in December 2018, the district judge asked Dreamstime whether or not this was its theory. Dreamstime dodged the question at the time (Dkt. No. 65 at 4) (“Well, we think we should have been a stronger competitor in the image market, not taking Google head on in the search market”), but later affirmatively disavowed the theory: “plaintiff Dreamstime is not alleging it is a future potential or actual direct competitor to defendant Google (or Yahoo! or Bing) in the online search advertising market” (Dkt. No. 68 at 1). 11 1 Suppose that Microsoft, which has a monopoly in its Windows operating system, should develop a new version that was particularly buggy and prone to crashes. Clearly, consumers as a group would be harmed because they have a few good alternatives to Windows. But developing a bad version of Windows is not a monopolistic practice because no one is excluded. Microsoft’s mistake . . . might simply impose harm on consumers until Microsoft fixed the problems and restored the status quo, but the one thing that the practice would clearly not do is exclude rivals from the market. As a result, the practice is not ‘monopolistic,’ even though it causes consumer harm. 2 3 4 5 6 7 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 651 (4th ed. 2015) (emphasis added). 8 Although this example differs from the predatory acts alleged in the amended complaint in that 9 Google is purportedly acting nefariously here, the fatal flaw in both theories remains the same: 10 search advertising market, and therefore, no anticompetitive conduct has been adequately For the Northern District of California United States District Court by destroying Dreamstime, no rival and no competition has been excluded from the online 11 12 alleged. 13 To circumvent this problem, Dreamstime engages in some sleight of hand. Dreamstime 14 asserts itself in the amended complaint not only as a customer whose welfare has been harmed, 15 but also as a competitor to Google for web traffic and stock photographs. The relevant market 16 alleged, however, is sponsored ads, not stock photographs. Dreamstime has repeatedly made 17 clear, it is not, nor does it intend to be, a rival to Google in the relevant market: the online 18 search advertising market (see Dkt. No. 68). Although Google may have reduced competition 19 on the merits in the online stock photography market or “the online search advertising market 20 for photography for images” (as the district judge asked Dreamstime at the December 2018 21 hearing), Dreamstime disavowed any such relevant market, insisting that the relevant market is 22 “online search advertising, and we are in that market as a participant because we are a 23 contractual customer of Google” (Dkt. No. 65 at 23). 24 Scrutinizing the predatory actions alleged that are broader than mere harm to 25 Dreamstime results in the same conclusion and do not “exclude[] some potential,” or “limit[] 26 some actual, competition.” United States v. United Shoe Machinery Corp., 110 F. Supp. 295, 27 343 (D. Mass. 1953) (Judge Charles Wyzanski), aff’d per curiam, 347 U.S. 521 (1954). In fact, 28 some alleged conduct are more likely to have the opposite impact. The rigging of the AdWords 12 For the Northern District of California United States District Court 1 bidding process and the general selective enforcement of Google’s rules, for example, are more 2 likely to steer customers towards existing rivals or to foster competition by encouraging others 3 to enter the market. 4 Turning to the sole remaining alleged predatory act, Google’s capturing of data, 5 Dreamstime has not demonstrated that this data is captured through a means other than 6 Google’s “ability, economies of scale, research, natural advantages, and adaptation to inevitable 7 economic laws.” Ibid. Although the data collection likely gives Google an advantage in the 8 online search advertising market over its rivals, a monopolist utilizing its competitive advantage 9 does not equate to anticompetitive conduct. Trinko, 540 U.S. at 415–16. Other than couching 10 the data collection practice as “unlawful,” Dreamstime has not specified how or in what way 11 Google’s data collection practice is anticompetitive. 12 Despite not listed as part of the eight predatory acts alleged in the amended complaint, 13 this order pauses to explore the following possibility grounded in the facts alleged in the 14 amended complaint: if, as Dreamstime states, it is true that the pipeline of stock photographs is 15 the mechanism by which Google maintains its monopoly in the online search advertising 16 market, then agreements between Google and stock photography companies streamlining that 17 pipeline further allow Google to maintain its strength in the relevant market. This strength is 18 further aided by Google’s vast trove of data, including data shared between Shutterstock/Getty 19 Images and Google as part of their agreements (Dkt. No. 50 at 103–104). This conduct, 20 moreover, causes antitrust injury by increasing spending in the AdWords bidding campaigns for 21 stock photography sites such as Dreamstime. 22 Even this conduct, however, would not be anticompetitive. Returning to the Supreme 23 Court’s opinion in Trinko: “Firms may acquire monopoly power by establishing an 24 infrastructure that renders them uniquely suited to serve their customers.” Trinko, 540 U.S. at 25 407. A company providing a platform for businesses to sell advertisements must be expected to 26 efficiently produce the best possible product to its customers. Thus, if in the online search 27 advertising market, this means making stock photographs readily available to businesses 28 seeking to advertise, a company will likely attempt to enter into agreements to make those stock 13 1 photographs as available as possible. The use of data and the securing of these agreements here 2 are efficient business transactions that do not “attempt[] to exclude rivals on some basis other 3 than efficiency.” Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985) 4 (citations omitted) (emphasis added). The Sherman Act, moreover, “does not restrict the long 5 recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to 6 exercise his own independent discretion as to parties with whom he will deal.” United States v. 7 Colgate & Co., 250 U.S. 300, 307 (1919). For the Northern District of California United States District Court 8 Of course, Google could not enter into an agreement that violates Section 1 of the 9 Sherman Act (agreements in unreasonable restraint of trade). But a Section 1 violation is not 10 alleged here. Under Section 2, nothing Dreamstime has alleged demonstrates that Google has 11 maintained its monopoly by engaging in conduct to “chill[] vigorous competition” in the 12 relevant market. American Needle, Inc. v. National Football League, 560 U.S. 183, 190 (2010). 13 Google may position itself to leap ahead of its rivals in the relevant market on the merits. It is 14 telling that not a single fact in this 76-page first amended complaint (with 19 exhibits attached) 15 specifies how Google’s rivals or potential rivals are denied online search advertising market 16 share due to the agreements between Google and Shutterstock/Getty Images. Dreamstime has 17 not met its burden to show that the reason Google’s rivals are unable to obtain the same access 18 to licensed photos as Google is because of Google’s anticompetitive action. Again, for all the 19 amended complaint alleges, Shutterstock and Getty Images are perfectly free to enter into 20 licensing arrangements with Yahoo! and Bing. 21 Nor do the antitrust laws require Google to enter into those same agreements with every 22 stock photography company in the world. Or, as the Supreme Court stated: “The Sherman Act 23 is indeed the Magna Carta of free enterprise, but it does not give judges carte blanche to insist 24 that a monopolist alter its way of doing business whenever some other approach might yield 25 greater competition.” Trinko, 540 U.S. at 415–16 (emphasis in original) (quotations and 26 citations omitted). Dreamstime’s amended complaint misses a critical element in failing to 27 allege a plausible monopoly maintenance claim — namely, injury to competition in the online 28 search advertising market. The antitrust claim is dismissed without leave to amend. 14 1 2. 2 To allege a breach of written contract, a plaintiff must plead: (1) the existence of a 3 contract; (2) plaintiff’s performance or excuse of performance; (3) defendant’s breach; and (4) 4 damages. See Oasis West Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 (2011). Dreamstime 5 alleges Google breached two contracts: (1) the AdWords Agreement and (2) the Google Play 6 Agreement. For the Northern District of California 7 United States District Court BREACH OF CONTRACT. Under the AdWords Agreement, Dreamstime alleges that Google breached its contract 8 by providing Dreamstime advertising campaigns that did not work and did not meet 9 Dreamstime’s expectations, applied its policies and procedures unevenly towards Dreamstime, 10 cancelled some of Dreamstime’s ad campaigns for violating stated policies that the ad 11 campaigns did not violate, and overcharged and overdelivered the ad campaigns (Dkt. No. 50 at 12 ¶ 169). As to the Google Play Agreement, Dreamstime alleges that Google breached the 13 agreement both by removing Dreamstime’s mobile Buyer App from the Google Play app store 14 unfairly and by de-indexing Dreamstime’s Buyer App for common search terms (id. at ¶ 171). 15 Dreamstime’s requirement at this stage is solely to identify with specificity the 16 contractual obligations allegedly breached by Google sufficient to put Google on notice of the 17 claims and plausibly allege a right to relief. See Kaar v. Wells Fargo Bank, N.A, 2016 WL 18 3068396 (N.D. Cal. 2016) (Judge William Alsup). Dreamstime does so. In the amended 19 complaint, Dreamstime alleges that the AdWords Agreement incorporated by reference the 20 AdWords program policies, various FAQ answers, and support pages describing Google’s 21 policies. Taking the amended complaint as true, these policies provide in part that overdelivery 22 is a breach of contract, that Google “intended the policies and descriptions of the services 23 Google was to provide to apply equally to all who executed it,” and that the policies include a 24 specific list of prohibited conduct that would subject an advertisement to rejection or removal 25 (such as “ads that mislead or trick the user into interacting with them[,]” and that “an account 26 may be suspended if you have several violations or a serious violation”) (Dkt. No. 50 at ¶¶ 27 164–167). As to the policies incorporated by reference into the Google Play Agreement, the 28 15 1 amended complaint provides the specific policy section (Section 8.3) that Dreamstime is 2 alleging Google breached. 3 4 right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 5 (2007). The amended complaint accordingly puts Google on notice as to what provisions of the 6 AdWords and Google Play Agreements have been breached. For the Northern District of California 7 United States District Court Thus, the listings made by Dreamstime in the amended complaint are “enough to raise a Google contends provisions in the agreements undercut Dreamstime’s theories for 8 recovery, rendering the theories implausible. It is true that both the AdWords Agreement and 9 Google Play Agreement contain “catch-all” provisions that may undercut the viability of the 10 alleged claims (Dkt. No. 50 at Exh. F Section 1, 8, 12; Exh. O). But Google cites no authority 11 requiring resolution at this stage. At this juncture, Google has been adequately notified of the 12 provisions and facts at issue. The breach of contract claim may move forward. 13 3. BREACH OF IMPLIED GOOD FAITH AND FAIR DEALING. 14 “[I]n every contract there is an implied covenant that neither party shall do anything 15 which will have the effect of destroying or injuring the right of the other party to receive the 16 fruits of the contract.” Locke v. Warner Bros., Inc., 57 Cal. App. 4th 354, 363 (1997) (citations 17 and quotations omitted). The undersigned has previously held that “absent those limited cases 18 where a breach of a consensual contract term is not claimed or alleged, the only justification for 19 asserting a separate cause of action for breach of the implied covenant is to obtain a tort 20 recovery.” See, e.g., Total Recall Techs. v. Luckey, 2016 WL 199796, at *6 (N.D. Cal. Jan. 16, 21 2016) (citations omitted). 22 As alleged in the amended complaint, however, this action plausibly may be one of the 23 aforementioned limited cases. Enough has been shown to support the notion that Google took 24 affirmative steps to frustrate the purpose of the agreements. See Cobb v. Ironwood Country 25 Club, 233 Cal. App. 4th 960, 966 (2015). For example, Google pretended to work to resolve 26 purported “policy issues” with Dreamstime’s ads while actually subverting and frustrating the 27 ability of Dreamstime to realize the benefits of its contract. Google also is alleged to apply a 28 16 1 double standard to Dreamstime’s low cost and high cost advertising campaigns and a double 2 standard in Google’s treatment of Dreamstime compared to Dreamstime’s competitors. For the Northern District of California United States District Court 3 Further, the alleged conduct may go beyond the reach of a breach of contract claim. 4 After all, a possibility exists that in scrutinizing the AdWords and Google Play Agreements, the 5 “catch-all” provisions included therein would undercut any potential claim for breach of 6 contract (Dkt. No. 50 at Exh. F Section 1, 8, 12; Exh. O). Dreamstime’s cause of action of the 7 breach of implied good faith and fair dealing therefore may move forward. 8 4. VIOLATION OF SECTION 17200. 9 Section 17200 of the California Business and Professions Code provides a remedy for 10 unlawful, unfair, and fraudulent activity. The amended complaint alleges claims under all three 11 prongs. The claim under the unlawful prong is derivative of the breach of contract and breach 12 of the implied covenant of good faith and fair dealing and therefore may move forward. 13 Turning to the unfairness prong, California courts have applied unfairness under two 14 different tests: Cel-Tech and South Bay. Our court of appeals has applied both tests. See, e.g., 15 Hodsdon v. Mars, Inc., 891 F.3d 857, 865–67 (9th Cir. 2018). Cel-Tech held that to be unfair 16 under the unfairness prong, the alleged conduct must be “tethered to some legislatively declared 17 policy” or have some effect on competition. Cel-Tech Communications, Inc. v. Los Angeles 18 Cellular Telephone Co., 20 Cal.4th 163, 186–87 (1999). Under South Bay, a challenged 19 business practice qualifies as unfair when the practice is “immoral, unethical, oppressive, 20 unscrupulous or substantially injurious to consumers.” South Bay Chevrolet v. General Motors 21 Acceptance Corporation, 72 Cal. App. 4th 861, 886–87 (1999) (citation omitted). 22 Here, applying both tests, the unfairness prong is satisfied. Dreamstime plausibly 23 alleges that Google, for example, pretended to work in good faith to resolve purported “policy 24 issues” with Dreamstime’s ads while actually intending at all times to remove them arbitrarily. 25 Such action, taken as true, both plausibly breaches the contract through the breach of the 26 implied covenant of good faith and fair dealing thereby tethering the alleged conduct to a 27 legislatively declared policy and is a sufficiently alleged unscrupulous behavior substantially 28 injurious to Dreamstime. Allegations under the unfairness prong may therefore move forward. 17 1 2 various false assertions as to its ad campaigns. Indeed, the complaint documents numerous 3 times Google falsely told Dreamstime the ad campaigns were working as they were supposed to 4 (Dkt. No. 50 at ¶¶ 78, 90). For the Northern District of California 5 United States District Court Turning to the fraud prong, Dreamstime alleges that Google mislead Dreamstime with To determine if the elements of fraud have been pleaded to state a cause of action, the 6 court looks to state law. In California, the elements of a cause of action for fraud are: “(a) 7 misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of 8 falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and 9 (e) resulting damage.” Kearns v. Ford Motor Co., 567 F.3d 1120, 1126 (9th Cir. 2009) (citing 10 Engalla v. Permanente Med. Group, 15 Cal.4th 951, 974 (1997)) (emphasis in original). Rule 11 9(b)’s heightened pleading standards apply here. See Kearns, 567 F.3d at 1125. Under Rule 12 9(b), a pleading is sufficient if it identifies the circumstances constituting fraud so that a 13 defendant can prepare an adequate answer from the allegations. Moore v. Kayport Package 14 Exp., Inc., 885 F.2d 531, 540 (9th Cir. 1989). The false statements alleged in the amended 15 complaint that Dreamstime relied on to pour more money into its AdWords campaign, at the 16 very least, sufficiently put Google on notice of the circumstances constituting fraud. The claim 17 for fraud has therefore been pled with sufficient particularity and may move forward. 18 19 20 21 22 23 24 25 26 27 28 18 1 2 For the above-stated reasons, Google’s motion to dismiss is GRANTED IN PART AND 3 DENIED IN PART. The motion to dismiss is granted as to the antitrust claim without leave to 4 amend. The motion to dismiss is denied as to the breach of contract claim, the breach of the 5 implied covenant of good faith and fair dealing claim, and the Section 17200 claims. 6 The answer is due within 10 calendar days. Both sides should be taking discovery and 7 preparing themselves for summary judgment and/or trial. Reasonable discovery relevant to the 8 allowed claims shall be permitted even if it is also relevant to the Section 2 claim. Further leave 9 to amend will be allowed only if further investigation or discovery reveals facts not previously 10 known that would change the analysis. 11 For the Northern District of California United States District Court CONCLUSION 12 IT IS SO ORDERED. 13 14 Dated: January 28, 2019. WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19
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