Realpage, Inc. v. Yardi Systems, Inc.

Citations: 852 F. Supp. 2d 1215; 2012 U.S. Dist. LEXIS 17281; 2012 WL 443730Docket: Case No. CV 11-00690-ODW (JEMx)

Court: District Court, C.D. California; February 12, 2012; Federal District Court

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The court partially granted and partially denied Yardi Systems, Inc.'s motion to dismiss RealPage, Inc.'s second amended counterclaims. RealPage and Yardi are competitors in the real property management sector, with Yardi's Voyager software being a key product tailored for property managers managing large portfolios. The high costs associated with switching from Voyager to alternative software create significant barriers for customers, reinforcing Yardi's market position. Both companies provide industry-specific vertically integrated cloud computing services, with RealPage being the first to do so. RealPage accuses Yardi of misappropriating its trade secrets to develop its competing cloud services and alleges that Yardi has engaged in anti-competitive practices. Specifically, RealPage claims Yardi coerced its Voyager clients into signing licensing agreements that prevent them from using other cloud service providers, including RealPage's offerings, under threat of license termination. This conduct has effectively locked customers into Yardi's software due to the prohibitive costs of switching, stifling competition in the vertical cloud market.

Misconduct involving five RealPage clients was highlighted, particularly focusing on Clients 1, 2, and 3. Client 1, a large property management firm using Voyager, entered into a Letter Agreement with RealPage for interim services. After Yardi learned of this agreement, it allegedly interfered by advising Client 1 against continuing with RealPage and amended Client 1’s Voyager license to restrict hosting in the RealPage Cloud, resulting in over $100,000 in annual losses for RealPage. 

Client 2, a top-ten property management firm, signed a five-year hosting agreement with RealPage, which involved transitioning employees to support the hosting process. Yardi initially assured Client 2 that it would respect their choice to host applications with RealPage, but later claimed that this hosting violated Client 2’s Voyager license, forcing Client 2 to recall employees and causing significant costs to RealPage.

Client 3, a real estate owner, was in the process of migrating its data center to the RealPage Cloud when Yardi intervened, demanding that Client 3 refrain from using or associating with RealPage, leading to Client 3 abandoning the hosting arrangement and resulting in lost revenue for RealPage. 

Yardi filed a Complaint against RealPage on January 24, 2011, prompting RealPage to counterclaim on March 28, 2011, followed by its First Amended Counterclaims on May 18, 2011. The court partially granted Yardi's motion to dismiss RealPage’s First Amended Counterclaims but allowed amendments, leading to the Second Amended Counterclaims (SACC) filed on September 2, 2011. The SACC includes six counterclaims: misappropriation of trade secrets, violations of the Sherman Antitrust Act, violations of the California Cartwright Act, intentional interference with contract, intentional interference with prospective economic advantage, and unfair competition under California law. Yardi subsequently filed a Motion to Dismiss on September 30, 2011.

To survive a motion to dismiss under Rule 12(b)(6), a complaint must meet the minimal notice pleading standards of Rule 8(a)(2), which requires a short and plain statement demonstrating entitlement to relief. A complaint must contain factual allegations sufficient to raise a right to relief above the speculative level, as established in Bell Atlantic Corp. v. Twombly. Dismissal can occur due to a lack of a cognizable legal theory or insufficient facts under a recognized theory. While specific facts are not mandatory, the complaint must provide fair notice to the defendant and include sufficient factual matter that, if accepted as true, states a plausible claim for relief, as articulated in Ashcroft v. Iqbal. The plausibility standard requires more than mere possibility; it necessitates facts that push beyond the boundary of mere consistency with liability. Courts assess plausibility contextually, using judicial experience and common sense, while generally accepting all factual allegations in the complaint as true. However, conclusory allegations or unreasonable inferences are not accepted as true.

Amendment of a dismissed complaint is typically permitted, but may be denied if the court finds that no additional facts could remedy the deficiencies. Yardi has moved to dismiss RealPage's antitrust counterclaims and claims for intentional interference with contract, prospective economic advantage, and violations of California's Unfair Competition Law (UCL). The Court will first address the antitrust counterclaims, which include allegations of illegal tying arrangements, attempted monopolization, and exclusive dealing, each in violation of relevant sections of the Sherman Antitrust Act and California's Cartwright Act. The Court will analyze these claims sequentially.

Illegal tying arrangements are prohibited under both Section 1 of the Sherman Act and the Cartwright Act, as established in relevant case law. A tying arrangement occurs when a seller conditions the sale of one product (the tying product) upon the buyer's purchase of another product (the tied product) or restricts the buyer from obtaining the tied product from other suppliers. Such arrangements are deemed illegal per se if three conditions are met: (1) a tie-in between two products or services in distinct markets, (2) sufficient market power in the tying product market, and (3) a substantial impact on commerce. 

Yardi argues that RealPage's tying counterclaims are insufficient, asserting that RealPage has not adequately alleged a tying arrangement, defined a relevant product market, or demonstrated Yardi's market power in the tying product market. Yardi contends that its Voyager software does not necessitate the use of any cloud computing services, which undermines the existence of a tying arrangement. The court previously dismissed RealPage’s tying counterclaim on similar grounds, stating that the sale of the Voyager software was not conditioned on the purchase or non-purchase of cloud computing services.

In response, RealPage cites the Ninth Circuit's ruling in Kodak, asserting that Yardi's argument is invalid. After reconsideration, the court determined that RealPage has sufficiently alleged the existence of an illegal tying arrangement, drawing parallels to the Kodak case.

Plaintiffs in the Kodak case accused Kodak of engaging in a per se illegal tying arrangement by refusing to sell spare parts to equipment owners unless they agreed not to use independent service operators (ISOs). The Ninth Circuit allowed the case to proceed to trial, rejecting Kodak's argument that a negative tie did not exist since equipment owners could self-service their machines. The Supreme Court affirmed this decision. In a similar vein, RealPage alleges that Yardi's amended software license agreements condition the use of Yardi's Voyager Back Office Accounting Software (the tying product) on an agreement not to use competing property management software (the tied product), which includes services offered by RealPage. Yardi contends that no negative tie exists because licensees could self-host the software. However, the Court finds this argument parallels Kodak's case and rejects it, affirming that the facts fit a negative tying arrangement. The Court then addresses whether RealPage has sufficiently defined a relevant market to survive a motion to dismiss. Yardi argues that RealPage’s definition of the Vertical Cloud Services market is legally insufficient because it excludes self-hosting options. RealPage counters that Yardi's assertion improperly seeks a factual resolution at the pleading stage. The Court agrees, noting that the definition of a relevant market is generally a factual inquiry but is guided by legal principles. A product market is defined by the reasonable interchangeability of products, and the relevant market must include sellers with the ability to significantly impact each other's business. A complaint can only be dismissed under Rule 12(b)(6) if the relevant market definition is facially unsustainable.

A 'facially unsustainable' market definition arises when a plaintiff fails to adequately define the relevant market based on reasonable interchangeability and cross-elasticity of demand, or proposes a market that excludes all interchangeable substitute products, even with favorable factual inferences. In the case of RealPage’s Second Amended Consolidated Complaint (SACC), the court finds that RealPage’s definition of the Vertical Cloud Market, which includes only RealPage and Yardi, is not facially unsustainable. Although the definition seems narrow, RealPage thoroughly analyzes and dismisses various potentially interchangeable substitutes. 

RealPage distinguishes generic cloud computing services, like those from Amazon and Rackspace, as insufficiently specialized for real estate needs. It also argues that single-application hosting services cannot be substitutes because they do not fit the definition of Vertical Cloud Services. Additionally, RealPage contends that self-hosting is not a reasonable substitute due to significantly higher costs associated with IT management and infrastructure, which would deter customers from switching even if prices for Vertical Cloud Services increased slightly.

The specificity of RealPage's market definition is contrasted with cases where courts found insufficient market definitions due to lack of supporting facts. In those cases, plaintiffs failed to demonstrate that their proposed markets were distinct from broader markets. In contrast, RealPage’s definition effectively considers and rejects multiple substitutes based on reasonable interchangeability criteria. Yardi's challenges to RealPage's exclusion of self-hosting are deemed factual disputes unsuitable for resolution at this stage. Therefore, the court concludes that RealPage's market definition meets the standards necessary to survive a motion to dismiss under Rule 12(b)(6).

Yardi argues that RealPage's tying counterclaim should be dismissed due to insufficient allegations of Yardi's market power in the Property Management Back Office Accounting Software Market. Yardi claims RealPage has not demonstrated that Yardi plays a "significant role" in this market. The Court clarifies that allegations of market power at the pleading stage do not require a stringent standard. In tying arrangement cases, the plaintiff must show that the defendant possesses market power in the tying product, defined as the ability to compel a buyer to act contrary to competitive market conditions. Market power does not need to constitute monopoly power, but must exceed mere possibilities of collusion or anti-competitive effects. The Court emphasizes that "sufficient economic power" does not necessitate a monopoly or dominant market position, and can exist even if it only affects a subset of buyers. RealPage defines the tying product market as the Property Management Back Office Accounting Software Market, claiming it is distinct and not adequately substituted by generic accounting software. Yardi does not dispute this market definition but contests RealPage's claims regarding its market power. The Court concurs with Yardi that promotional claims and industry analyses suggesting Yardi's leading position are insufficient to establish plausible market power. Additionally, RealPage's assertions of Yardi's market leadership and Voyager's customer penetration lack supporting data, resulting in generic conclusions that do not substantiate claims of market power.

RealPage alleges that Yardi has modified its software license agreements to counteract competition from RealPage by coercing customers of its Voyager Back Office Accounting Software into signing anticompetitive amendments. These customers face high switching costs and potential business disruptions if they leave the Yardi software, leading to claims that Yardi threatened to terminate licenses of those who refused the amendments. RealPage points to specific clients whose plans to migrate to the RealPage Cloud were obstructed by Yardi's actions. The court finds that RealPage's allegations demonstrate Yardi's market power and its capacity to restrain competition, thereby establishing a plausible illegal tying arrangement under Section 1 and the Cartwright Act. Consequently, Yardi's motion to dismiss these counterclaims is denied.

In a separate counterclaim, RealPage asserts that Yardi attempted to monopolize the Vertical Cloud Market in violation of Section 2. Yardi contends that RealPage's claim lacks sufficient allegations of a dangerous probability of successful monopolization. To prove attempted monopolization, RealPage must establish Yardi's predatory conduct, specific intent to monopolize, and a dangerous probability of achieving monopoly power. The Ninth Circuit emphasizes that these elements are interdependent and that assessing the relevant market and Yardi's capacity to diminish competition is crucial. Adequate pleading of Yardi's market power is necessary for this claim to proceed.

A plaintiff can demonstrate market power for Section 2 claims by either direct evidence of market power misuse or by circumstantial evidence, which involves (1) defining the relevant market, (2) showing the defendant's dominant market share, and (3) establishing significant entry barriers and the inability of current competitors to increase output in the short term. Market share is a critical factor, though not the sole determinant of monopoly power. In this case, RealPage asserts that Yardi is likely to achieve monopoly power in the Vertical Cloud Market, basing its claim on Yardi's alleged market power in the Software Market. RealPage argues that Yardi's influence over its Voyager customers, due to high switching costs, gives it substantial market power in the Vertical Cloud Market, and that these customers constitute a significant portion of potential Vertical Cloud Services clients. However, Yardi challenges this by noting RealPage's allegations do not adequately address market size, share, or power in either market and suggest only a weak connection between Yardi's Software Market share and its position in the Vertical Cloud Market. The assessment of monopoly likelihood is fact-sensitive, with market share being one of several factors considered. Despite RealPage's weak claims, the court finds merit in the assertion that Yardi and RealPage are the only competitors in the Vertical Cloud Market and acknowledges the entry barriers cited by RealPage, such as specialized software expertise and financial investments. These allegations, combined with the claim of Yardi's market share in the Software Market, provide sufficient grounds to suggest a dangerous probability of success for a monopolization claim. Additionally, the court notes that proving a "dangerous probability of success" is only one element of an attempted monopolization claim, and it has already concluded that Yardi's actions regarding Voyager licenses are anticompetitive, prompting further examination of RealPage's claim concerning Yardi's intent to monopolize.

RealPage asserts that Yardi is attempting to monopolize the Vertical Cloud Market through various aggressive tactics, including stealing trade secrets, manipulating stock prices, altering contract terms, threatening to terminate licenses, and coercing clients against using RealPage's services. The Court finds these allegations compelling, particularly given that RealPage and Yardi are currently the only competitors in this market, resulting in significant barriers for new entrants. Consequently, RealPage has presented enough evidence to support its claim of attempted monopolization, leading to the denial of Yardi's Motion to Dismiss this claim.

Regarding RealPage's exclusive dealing counterclaim under Section 1, Yardi argues that RealPage has not sufficiently demonstrated that Yardi's Voyager license agreements significantly hinder competition in the Vertical Cloud Market. Yardi contends that the control it exerts over its Voyager software customers does not equate to a substantial foreclosure of the market. Exclusive dealing arrangements, while potentially beneficial for competition, are evaluated under the rule of reason, which requires evidence that such arrangements significantly limit market entry for other providers. The Court finds that RealPage has adequately alleged that Yardi's license agreements could indeed restrict both RealPage's and other competitors' abilities to operate in the Vertical Cloud Market, thus supporting its claim for exclusive dealing.

RealPage's allegations regarding Yardi's market dominance in the Vertical Cloud Market, although insufficient on their own to support an exclusive dealing claim, are bolstered by claims that Yardi and RealPage are the sole market participants and that entry barriers exist. These assertions make it plausible that Yardi's Voyager license agreements hinder competition in a significant portion of vertical cloud services. Consequently, the Court denies Yardi’s motion concerning RealPage’s exclusive dealing claim under Section 1.

In RealPage's fifth counterclaim for intentional interference with contract, it must demonstrate five elements: (1) a valid contract with a third party, (2) Yardi's knowledge of this contract, (3) Yardi's intentional acts to induce a breach, (4) actual breach or disruption, and (5) damages to RealPage. Notably, proof of actual breach is not necessary; rather, evidence of interference suffices. 

For Client 1, RealPage claims to have an enforceable agreement that Yardi interfered with by advising Client 1 against continuing their relationship, leading to cancellation of services. This establishes a plausible claim for intentional interference. However, regarding Client 2, while RealPage asserts it had a five-year hosting agreement and that Yardi attempted to disrupt this by making threats, it lacks clear evidence of actual breach or disruption, merely stating that Client 2 employees may need to return to Client 2 at a financial loss to RealPage.

Yardi's motion to dismiss RealPage's Second Amended Counterclaims (SACC) has been partially granted and partially denied. The court found that RealPage failed to adequately allege intentional interference with its contractual relations with Client 2 and dismissed that counterclaim with prejudice. Additionally, RealPage did not sufficiently plead claims against unidentified third parties, leading to dismissal as well. However, the court denied Yardi's motion concerning RealPage's counterclaims related to Client 1, as well as claims for intentional interference with prospective economic advantage and violations of California's Unfair Competition Law, citing that RealPage sufficiently pleaded a tying claim under Section 1 of the Cartwright Act.

The court concluded that Yardi's motion to dismiss RealPage's counterclaims was granted concerning the fifth counterclaim for intentional interference with contract, specifically regarding clients other than Client 1. Conversely, the court denied the motion with respect to several other counterclaims, including those related to antitrust violations. The document also notes procedural aspects, indicating that RealPage's SACC was re-filed as per stipulation, and highlights the legal standards for evaluating claims under Section 1 of the Sherman Act and the Cartwright Act.

Tying arrangements are generally regarded as per se illegal under Section 1 of the Sherman Act and Section 3 of the Clayton Act, although the Supreme Court acknowledges that not all tying arrangements necessarily restrain competition. A proper analysis of tying arrangements requires examination of market conditions, particularly regarding a seller's ability to leverage their control over a tying product to compel buyers to purchase an unwanted tied product or to forego a desired one. RealPage provides data indicating that over 75% of fee-managed apartment units are managed with Yardi's Voyager software, and this figure rises to over 90% among the top 25 property managers. However, the argument is made that this data lacks context, as it does not clarify how many distinct property managers are using Yardi’s software, potentially misleadingly implying a broader usage than may exist. Yardi argues that RealPage's counterclaims related to misappropriation of trade secrets should be dismissed because the California Uniform Trade Secrets Act provides the exclusive remedy for such claims and preempts other claims based on trade secret misappropriation. The Court, however, concludes that RealPage's tying claims under Section 1 and the Cartwright Act can proceed, sidestepping the question of UTSA preemption.