Pillsbury Winthrop Shaw Pittman LLP
On January 28, 2019, Judge William H. Alsup of the Northern District of California dismissed a claim under Section 2 of the Sherman Act brought against Google by stock photography website Dreamstime. Dreamstime.com, LLC v. Google, LLC, No. C 18-01910 WHA, 2019 WL 341579, at *1 (N.D. Cal. Jan. 28, 2019). Dreamstime’s antitrust claim alleged that Google engaged in various predatory and exclusionary acts, directed at harming Dreamstime, in order to maintain Google’s monopoly position in the relevant market of online search advertising. Dreamstime conceded that it was not Google’s direct competitor in the online search advertising market, but contended that stock photographs and online search advertising were “intertwined,” and that harming Dreamstime in favor of other stock photography companies with whom Google had partnered increased Google’s dominance in online search advertising. Id. at *5-6. Judge Alsup agreed that Dreamstime had plausibly alleged that Google engaged in predatory behavior, allowing Dreamstime’s non-antitrust claims to move forward, including under all three prongs of California’s Unfair Competition Law. However, the Court rejected Dreamstime’s monopoly maintenance claim, finding that Google’s alleged mistreatment of Dreamstime did not constitute anticompetitive conduct in the relevant online search advertising market. Id. at *9-11.
In 2004, Dreamstime became a customer of AdWords by Google, paying to display advertisements in connection with relevant Google searches, and yielding steady customer growth from such advertising efforts. From 2005 to 2015, Dreamstime also consistently ranked in the top three organic results on Google for searches related to stock photography. In 2015, however, Dreamstime’s search ranking on Google plummeted, as did its customer growth. Dreamstime employed numerous strategies to regain its former search rankings, relying on Google’s guidelines, following the advice of external agencies, and hiring an in-house search engine optimization expert. Dreamstime also continued to spend millions on Google AdWords campaigns, increasing its budget by 50%. Notwithstanding these efforts, Dreamstime’s Google ranking has continued to decline without explanation (its ranking remains strong on the Bing, Yahoo!, and Baidu search engines), and its growth has continued to slow. Id. at *2-3.
In 2016 Google partnered with Shutterstock and in 2018 it partnered with Getty Images, companies that together represent 70% of the stock photography market. These mutually beneficial partnerships integrate hundreds of millions of online images into Google’s search advertising network, while also providing its partners with free advertising for their images. Id. at *1. In light of these relationships, and Dreamstime’s ongoing marginal rank in Google’s search results, Dreamstime accused Google of “downgrading and distorting Dreamstime’s online search ranking.” Id. at *6. In addition, Dreamstime alleged that Google actively subverted its AdWords advertising campaigns by, inter alia, canceling Dreamstime’s most successful campaigns without notice or explanation, randomly suspending Dreamstime’s AdWords account based on policy violations, and systemically exceeding Dreamstime’s daily spending limits to quickly use up its advertising budget. Dreamstime also contended that Google selectively enforced certain policies against it, for example by removing Dreamstime’s mobile application from the Google Play Store due to lingerie photographs while allowing Shutterstock’s mobile application to remain active despite explicitly nude photographs. Id. at *3.
Dreamstime first filed suit against Google in March 2018, alleging: (1) violation of Section 2 of the Sherman Act; (2) breach of its AdWords and Google Play contracts; (3) breach of those contracts’ implied covenant of good faith and fair dealing; and (4) violations of California’s Unfair Competition Law. Google moved to dismiss all claims. At oral argument following full briefing, Judge Alsup provided Dreamstime an opportunity to amend prior to a ruling on Google’s motion. In September 2018, Dreamstime filed an amended complaint asserting the same four claims. Google again moved to dismiss. Id. at *3-4.
The District Court’s Analysis
Judge Alsup began his analysis by reminding Dreamstime of his observation at oral argument on Google’s initial motion to dismiss that its “best shot” at a Section 2 claim was “an unlawful monopoly leveraging theory based on the market for online stock photography and its dependence on the online search advertising market which Google purportedly monopolized.” Id. at *4. Dreamstime, however, did not take this advice, disavowing any such leveraging theory and “attempting instead (for whatever reason) to pigeonhole this claim under the guise of unlawful monopoly maintenance.” Id. The Court also noted that Dreamstime had disavowed another theory that “would make sense,” that it was “a potential competitor to Google in the online search advertising market with respect to images” because it “could have its own search engine for images and sell sponsored ads and thus compete with Google as a rival.” Id. at *6.
Instead, Dreamstime elected to proceed with “a relevant product market of online search advertising” and to advance a “monopoly maintenance theory center[ed] on an intertwined relationship between stock photographs and the online search advertising market.” Id. at *5. More specifically, Dreamstime argued that stock photographs are critical to online search advertising because stock photographs allow advertisers to create high-quality, engaging ads that include pictures related to keyword searches. As such, Google’s control of online stock photography, including through its partnerships with Shutterstock and Getty Images, allows it to maintain its monopoly in the online search advertising market. Google seeks to harm Dreamstime and other non-partner stock photography companies because further limiting the supply of online stock photography gives Google further competitive advantage over its online search advertising competitors such as Yahoo! and Bing. Id.
The District Court rejected this theory, holding that it failed to “plausibly allege harm to competition in the relevant market.” Id. at *6. Rather, Google’s alleged predatory conduct toward Dreamstime only harmed “Dreamstime’s ability to act as a consumer in that market.” Id. Even assuming that Google was in fact “acting nefariously” and “destroying Dreamstime,” Dreamstime’s theory still had “the fatal flaw” that “no rival and no competition has been excluded from the online search advertising market, and therefore, no anticompetitive conduct has been adequately alleged.” Id. at *7. Nor could Dreamstime save its theory by identifying itself “not only as a customer whose welfare has been harmed, but also as a competitor to Google for web traffic and stock photographs.” Id. This “sleight of hand” simply ignored that the relevant market was not stock photographs, and that Dreamstime did not seek to compete with Google in the actual relevant market of online search advertising. Id.
Relatedly, Dreamstime also failed to “show that the reason Google’s rivals are unable to obtain the same access to licensed photos as Google is because of Google’s anticompetitive action.” Id. at *8. Indeed, the Court repeatedly pointed out that Dreamstime did not allege that Google’s agreements with Shutterstock and Getty Images precluded these stock photography companies from also dealing with Yahoo! and Bing. Id. at *1, *8. Rather, Dreamstime’s complaint only stated that “Yahoo! and Bing are unable to obtain the same access to licensed stock photos for their competing ad networks,” id. at *1, and failed to include “a single fact” explaining “how Google’s rivals or potential rivals are denied online search advertising market share due to the agreements between Google and Shutterstock/Getty Images,” id. at *8.
Although Judge Alsup dismissed the Section 2 claim without leave to amend, several factors significantly circumscribed Google’s victory. First, the District Court declined to dismiss any of Dreamstime’s other causes of action, finding that its allegations of predatory conduct by Google were sufficient to state claims for breach of the parties’ AdWords and Google Play agreements, breach of those agreements’ implied covenant of good faith and fair dealing, and violation of California’s Unfair Competition Law. Id. at *9-11. Second, the Court expressly noted that “discovery relevant to the allowed claims shall be permitted even if it is also relevant to the Section 2 claim.” Id. at *11. Finally, Judge Alsup suggested that he would even revisit the question of leave to amend if “discovery reveals facts not previously known that would change the analysis.” Id.
Ultimately, the District Court’s decision serves as a reminder that there is far more latitude under Section 2 of the Sherman Act to exclude one’s customers than one’s competitors. While mistreating a customer in this manner may well violate other statutes and agreements, “such mistreatment, even by a monopolist, does not necessarily reduce competition in the relevant market.” Id. at *7.