ANTITRUST AND UNFAIR COMPETITION LAW SECTION: E-BRIEFS, NEWS AND NOTES-OCTOBER, 2021

Kerry C. Klein, Partner, Farmer Brownstein Jaeger Goldstein Klein & Siegel LLP

When E-briefs last addressed the litigation between Epic Games, Inc. (“Epic”) and Apple Inc. (“Apple”), we summarized Judge Yvonne Gonzalez Rogers’s decision on Epic’s motion for a temporary restraining order.  The court later granted Epic a preliminary injunction and set the case for trial on an expedited basis.  Following a 16-day bench trial, Judge Gonzales Rogers issued her Rule 52 Order After Trial on the Merits on September 10, 2021.  Epic Games, Inc. v. Apple Inc., Case No. 4:20-cv-05640-YGR (N.D. Cal. Sept. 10, 2021).  Summarizing the outcome as “Epic Games overreached,” the court found in favor of Apple on all counts except Epic’s alleged violation of California’s Unfair Competition Law (“UCL”) and only partially with respect to Apple’s claim for declaratory relief.  Given the length of the decision, this E-brief provides a high-level summary concerning Epic’s Sherman Act and Cartwright Act claims and Apple’s counterclaims, and a more detailed summary of the court’s decision on Epic’s UCL claims.  (The court provided a helpful Order Outline in the Appendix to the decision).

FACTUAL BACKGROUND

Apple created and maintains an App Store for its iOS platform that allows third-party developers to create and sell applications to Apple’s users.  Apple takes 30% of an application’s sales, including any in-app-purchases (“IAPs”).  Apple’s agreements with developers and the App Store guidelines do not permit third-party developers to circumvent the IAP system.  Games are an integral part of the App Store’s success, with gaming revenues accounting for 76% of App Store revenues in 2017.

Epic specializes in video games, and is best known for its massively popular multi-platform game, Fortnite.  Fortnite uses the “freemium” game model, under which a game is largely free to download, but certain additional features can be purchased.  At the end of 2019 Epic conceived a plan called “Project Liberty,” a highly coordinated attack on Apple and Google.  A key feature was the introduction of a “hotfix” to covertly introduce code that would enable additional payment methods for the iOS and Android version of Fortnite.  This option would allow iOS Fortnite users to choose a direct pay option that would circumvent Apple’s IAP system.  This optionality presented users IAPs that were 20% cheaper if purchased through Epic directly.  Epic released the hotfix in August 2020.

In response, Apple removed Fortnite from its App Store, and Epic filed a complaint alleging violations of the Sherman Act, the Cartwright Act, and the UCL.  Apple asserted various counterclaims, including its primary counterclaim for breach of contract.

SUMMARY OF ORDER CONCERNING NON-UCL CLAIMS AND COUNTERCLAIMS

EPIC’S SHERMAN ACT SECTIONS 1 AND 2 CLAIMS AND CARTWRIGHT ACT CLAIM

The court largely considered Epic’s Sherman Act sections 1 and 2 claims together due to overlaps in the analysis.  The court first determined that, while Apple exercises market power in the mobile gaming market (the relevant market determined by the court), the court could not conclude that Apple’s market power reached the status of monopoly power. 

The court ruled in favor of Apple on Epic’s section 1 claim, because there was insufficient evidence that the agreement Apple has with developers qualifies as an agreement for section 1 purposes, and because Apple’s procompetitive justifications were persuasive.  The court also ruled against Epic on its section 1 tying claim (declining to decide whether a per se or rule of reason analysis is appropriate), because Epic failed to show that there were two separate and distinct products at issue.

The court ruled in favor of Apple on the Section 2 monopolization claim, because it found that Apple lacked monopoly power in the relevant product market.  On Epic’s essential facility claim under Section 2, the court determined that Epic failed to prove that Apple is an illegal monopolist, or that the iOS platform is an essential facility.

Although the court acknowledged that interpretation of federal antitrust law is at most instructive, it ruled that, because Epic did not identify any material differences between the Sherman Act and Cartwright Act that would lead to differences in the result, it could not prevail under the Cartwright Act where its claims failed under the Sherman Act.

APPLE’S COUNTERCLAIMS

The court: (1) ruled that Epic breached its contract with Apple; (2) denied Apple relief on its alternative claims of breach of the implied covenant of good faith and fair dealing, and unjust enrichment, because the court concluded that Apple is entitled to relief on its breach of contract claim; (3) concluded that Apple was not entitled to indemnification by Epic because the indemnification provision applies only to claims brought by third parties against Apple; and (4) granted, in part, Apple’s request for declaratory judgment.  The court awarded damages to Apple in the amount of approximately $12 million, plus 30% of any revenues Epic collected from November 1, 2020 through the date of the judgment.

SUMMARY OF ORDER ON UNFAIR COMPETITION LAW CLAIM

Epic also asserted a claim under California’s UCL, which prohibits “any unlawful, unfair or fraudulent business act or practice.”  Epic challenged Apple’s conduct under the “unfair” and “unlawful” prongs. 

STANDING

The court first considered the threshold issue of standing.  The injury-in-fact requirement of the UCL incorporates standing under Article III of the U.S. Constitution.  Apple did not dispute Epic’s standing as a potential competitor (Epic wanted to open a competing iOS game store and could not), but did challenge Epic’s standing as a consumer.  Epic argued that it is a business customer of the App Store and was economically injured because it could not distribute games directly to consumers at a lower cost.  The court noted that the precise meaning of “consumer” under the UCL is undefined.  Both parties’ experts agreed that developers like Epic jointly consume Apple’s game transactions and distribution services together with iOS users.  Although the court called it a “close question,” it found that Epic has standing to bring a UCL claim as a “quasi-consumer,” not merely as a competitor.  This is important because the “unfair” prong of the UCL differs for consumer and competitor suits, which this E-brief discusses further below.

UNLAWFUL PRACTICES

Courts have long defined “unlawful” conduct as any conduct that violates any law.  Because Epic failed to show a violation of any other law, its UCL claim under the “unlawful” prong also failed.

UNFAIR PRACTICES

The court set forth the elements for making out a claim for unfair practices in violation of the UCL.  As a competitor who claims to have suffered injury from Apple’s unfair practices, Epic must show that Apple’s conduct (1) threatens an incipient violation of an antitrust law; (2) violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law; or (3) otherwise significantly threatens or harms competition.  These findings must be “tethered” to some legislatively declared policy or proof of some actual or threatened impact on competition.

As a quasi-consumer, Epic has two tests at its disposal for showing unfairness: (1) the “tethering” test discussed above; and (2) a “balancing” test.  The tests are not mutually exclusive, and the court considered both.

Tethering Test

Under the “tethering” test, there must be a close nexus between the challenged act and the legislative policy.  Apple argued that separate consideration under the UCL for the same conduct Epic challenged under the Sherman and Cartwright Acts is inappropriate.  The court disagreed.  Relying on Cel-Tech Commc’ns v. L.A. Cellular Tel. Co., 20 Cal. 4^th 163 (1999), the court found that the UCL prohibits “incipient” violations of the antitrust laws and violations of the “policy or spirt” of the antitrust laws.  Thus, the UCL has a broader reach than federal antitrust laws, and can prohibit conduct that is not unlawful under the Sherman Act.

Despite its broader reach, the court found that Epic’s claims based on app distribution and in-app processing restrictions fail for the same reasons as stated for the Sherman Act.  Apple’s proffered valid and non-pretextual procompetitive justifications rendered the conduct not just “not anticompetitive,” but potentially beneficial to consumers.  However, the proffered pro-competitive justifications were tethered only to certain restrictions, and therefore protect only those restrictions.  Noting that the UCL is equitable in nature and the court has broad discretion to fashion equitable remedies, the court determined that Epic was entitled to equitable relief from Apple’s anti-steering provisions.  The anti-steering provisions prohibit apps from including “buttons, external links, or other calls to action to direct customers to purchasing mechanisms other than in-app purchases,” and from “encourg[ing] users to use a purchasing method other than in-app purchase.”  The court found that the anti-steering provisions can be severed without any impact on the iOS ecosystem, and such a remedy is tethered to legislative policy protecting commercial speech.  Relying on Bates v. State Bar of Arizona, 433 U.S. 350, 364 (1977), and Areeda & Hovenkamp, the court reasoned that restrictions on price information serve to increase the difficulty for consumers to find the lowest cost seller, and reduce the incentive to price competitively.  The court quoted the following from Areeda & Hovenkamp: “The less information a consumer has about relative price and quality, the easier it is for market participants to charge supracompetitive prices or provide inferior quality.”

In short, the court found that, although Epic failed to prove a present violation of the antitrust laws, Apple’s anti-steering provisions threaten an incipient violation of the antitrust laws and violate the policy and spirt of antitrust laws by preventing informed choice among iOS users.

Balancing Test

Under the balancing test, the court weighs the utility of defendant’s conduct against the gravity of the harm to the alleged victim.  Under this test the focus is on injury to consumers.  The court found that, in this case, the harm to users and developers (who are quasi-consumers) is considerable.  The “numerous” anticompetitive effects demonstrated at trial outweighed Apple’s proffered justifications.  Apple analogized its anti-steering provisions to American Express’s anti-steering provisions prohibiting merchants from dissuading customers from using Amex cards as a way of avoiding its merchant fees (at issue in Ohio v. Am. Express Co., 138 S. Ct. 2274 (2018)).  The court distinguished Amex on the grounds that Amex’s anti-steering provisions do not prevent Visa, MasterCard or Discover from competing against Amex by offering lower merchant fees or promoting their broader merchant acceptance.  Amex, 138 S. Ct. at 2289-90.  The court found the difference between brick-and-mortar stores and technology platforms compelling.  With respect to the former, the court determined that consumers do not lack knowledge of options.  By contrast, the court found that Apple’s platform was a “black box.”  A closer analogy than Amex’s anti-steering provisions, according to the court, would be presented if Amex prohibited letting users know that these options exist in the first place.

REMEDIES

The court noted that the primary relief available under the UCL is an injunction, and found that a plaintiff seeking equitable relief under the UCL in federal court must demonstrate that: (1) it has suffered an irreparable injury; (2) remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) the public interest would not be disserved by a permanent injunction.  The court found these elements satisfied, because: (1) the injury has occurred, continues, and can best be remedied by invalidating the offending provisions; (2) Apple’s business justifications focus on other parts of the Apple ecosystem and will not be significantly impacted by the increase of information and choice to consumers; and (3) the public interest favors “uncloaking the veil” hiding pricing information on mobile devices and bringing transparency to the marketplace.

The court also determined that, while it has defined the relevant market for antitrust purposes as the market for mobile gaming transactions, UCL jurisprudence does not require that the court import that market limitation when crafting injunctive relief.  Thus, the court did not eliminate the anti-steering provisions for mobile gaming only, but extended it to all apps.  The court also rejected Apple’s argument that injunctive relief should be limited to California to avoid a violation of the Commerce Clause, and instead issued a nationwide injunction enjoining Apple from prohibiting developers from including in their “Apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to IAP.”  Apple was further enjoined from “communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.”

Best Carpet Values Inc. et al. v. Google LLC, Case Number 5:20-cv-04700 (Northern Dist. Cal.)

Christina Tusan and William Pletcher, Office of the City Attorney, Los Angeles [This e-brief was written in the authors’ personal capacity and does not necessarily represent the views of their office.]

On September 24, the United States District Court for the Northern District of California, considering Google’s motion to dismiss, allowed most of Plaintiffs’ class-action claims to proceed.  Best Carpet Values, Inc. v. Google LLC, No. 5:20-cv-04700-EJD, Order Granting in Part and Denying in Part Motion to Dismiss, Dkt. 41 (N.D. Cal. Sep. 24, 2021) (MTD Order).  Plaintiffs, an online carpet retailer and an attorney advertising online, have brought claims related to allegations that Google was unlawfully placing advertisements or otherwise altering plaintiffs’ websites when viewed through the Google search tool on an Android phone—misusing the putative class of websites to collect $2 billion in unauthorized advertising fees.  Best Carpet Values, Class Action Complaint, Dkt. 1 (N.D. Cal. July 14, 2020) (Complaint).

The court granted Google’s motion to the extent it relied on alleged violations of the unfair prong of California’s Unfair Competition Law (UCL), California Business and Profession Code § 17200, but otherwise denied Google’s request.  MTD Order at *28-29.  The court held that the plaintiffs’ website presentation represented a recognized property interest sufficient to support a trespass to chattels claim.  MTD Order at *9-19.  The court also found that Plaintiff’s implied contract and unjust enrichment claims were not preempted by the Copyright Act (MTD Order at *19-26, 31) and that Google’s advertising practices were not protected by the First Amendment.  (MTD Order at *29-31.)  Although the court dismissed claims that Google placed unauthorized advertisements in violation of the unfair prong of California’s Unfair Competition Law (UCL), it allowed the class of website owners to continue to pursue their UCL claim asserted under the unlawful prong of the UCL. (MTD Order at *31.)

Factual Background

Plaintiffs Best Carpet Values, Inc., and attorney Thomas D. Rutledge filed a class action lawsuit alleging that when Android-phone users utilized their phone’s Google search tool, Google placed advertising on Plaintiffs’ and millions of other businesses’ websites without their consent and without paying for the advertising space.  The plaintiffs maintain that Google accomplished this by reprogramming its “Search App” placed on every Android smartphone to induce Android users to use the Search App instead of a web browser when searching the internet and to superimpose two types of display ads on the copies of most websites that appeared on the Android users’ screens: (1) a “leaderboard” promoting Google’s logo that blocked out the bottom 7% of the webpages, and (2) pop-up half-page “banner” advertisements that obscured the webpages’ remaining content to display other ads.  MTD Order at *5-6.  The plaintiffs claim the banner ads linked to the advertised sites, so Android users who clicked the ads were redirected from Plaintiffs’ websites to the advertised sites, routinely profiting Google.  MTD Order at *7.  These leaderboards allegedly contained ads for competitors of the class members and “obscured and blocked” the owners’ websites.  MTD Order at *18.  Plaintiff also alleged that Googles’ ads could also be misperceived by Android users as endorsements of unaffiliated entities.

Plaintiffs alleged that Android users widely used Google search and that it substantially benefitted from its unlawful placement of ads on class-members’ websites, including ads for competitors, without paying for them and without consent.  Between March of 2018 and April of 2020 (the “Class Period”), it is alleged that virtually all of the approximately 50 million Android phone users in America used the Search App’s search bar to search the internet.  Complaint at ¶ 68; MTD Order at *5.  Plaintiffs contend that their website ownership grants them a right to be paid for the advertising space occupied by Google on their websites and estimate that Google obtained over $2 billion of non-consensual free advertising. (Complaint at ¶ 146; Order at 5.)

Procedural History

In July 2020, Plaintiffs Best Carpet Values, Inc. and Thomas D. Rutledge filed a putative calls action asserting claims against Google for implied-in-law contract and unjust enrichment; trespass to chattels; and unfair and unlawful conduct in violation of California Business and Profession Code § 17200.  Complaint ¶¶ 1-8; MTD Order at *1.  In September 2020, Google filed a Motion to Dismiss all claims brought by Plaintiff.  Best Carpet Values, Defendant’s Motion to Dismiss Complaint, Dkt. 19 (N.D. Cal. September 10, 2020) (Motion to Dismiss.)

On September 24, the court ruled that the Plaintiff’s trespass to chattels, implied contract and unjust enrichment, and UCL unlawful prong claims could go forward.  MTD Order at *31.

Motion to Dismiss

Google unsuccessfully attempted to get Plaintiff’s Complaint dismissed in its entirety based on claims of federal copyright preemption, a First Amendment defense, and claims that Plaintiff’s failed to establish violations of the UCL under the unlawful prong.  Motion to Dismiss at 5-14.  The court did dismiss Plaintiff’s claim based on an alleged violation of the unfair prong of the UCL.  MTD Order at *28-29.

The court denied Google’s attempt to get the action dismissed based on a claim that it was preempted by section 301 of the Copyright Act.  It held that Plaintiff’s claim that Google “unjustly enriched itself by saving substantial advertising costs and earning undue profits at Plaintiffs’ expense . . ., and it did so through the coercive act of superimposing advertisements on their websites’ homepages and other landing pages without obtaining their consent or paying them compensation” was not preempted.  MTD Order at *19-26. 

The court determined that plaintiff did not rely on copyright protection in their claim of Implied Contract/Unjust Enrichment but, instead, alleged that Google covered up or obscured a portion of Plaintiffs’ website.  Id.  The plaintiffs analogized Google’s actions to that of a company in the brick-and-mortar marketplace unlawfully planting its logo on Plaintiffs’ storefront windows without Plaintiffs’ consent, even if the company owned their buildings.  MTD Order at *25-26.  Finally, the court rejected Google’s claims that Plaintiff had not suffered any injury.  It noted that “California law recognizes a right to disgorgement of profits resulting from unjust enrichment, even where an individual has not suffered a corresponding loss.”  MTD Order at *26 (quoting In re Facebook, Inc. Internet Tracking Litig., 956 F.3d 589, 599 (9th Cir. 2020).)

The court further found that Google’s reliance on the First Amendment as a defense to the complaint was also misplaced.  Google unsuccessfully alleged that Plaintiffs’ attempts to control what information is displayed to users when they access Plaintiffs’ websites violates the First Amendment. The court, however, explained that the First Amendment defense is not absolute and that “the First Amendment does not immunize deceptive advertising.”  MTD Order at *30 (citing Downing v. Abercrombie & Fitch, 265 F.3d 994, 1004 (9th Cir. 2001)).  The court also noted that the cases Google relied upon were inapposite as they did not address advertising claims.  Id.

To establish a violation of the UCL, a plaintiff can show an “unlawful, unfair, or fraudulent business act or practice.”  Cal. Bus. & Prof. Code, § 17200.  The UCL’s “unlawful” prong borrows violations of other laws and makes them independently actionable as violations of the UCL.  Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999).  The court recognized that the Plaintiff’s UCL unlawful prong claim “survives because the trespass to chattels and the breach of implied contract/unjust enrichment may serve as the predicate for the claim.”  MTD Order at *27.

Plaintiffs’ claim under the unlawful prong was based on allegations that “Defendant plac[ed] nonconsensual advertisements on Plaintiffs’ . . . websites without compensation in violation of the common law doctrines of implied-in-law contract and unjust enrichment, and by trespassing on Plaintiffs’ . . . websites in violation of the common law prohibition against trespass to chattels.” (MTD Order at *27.)  The court recognized that “[a]t the pleading stage, the alleged decrease in functionality of Plaintiffs’ website is sufficient to plausibly state a cognizable injury for a trespass to chattels claim.”  MTD Order at *18. 

The court did, however, dismiss Plaintiff’s claims that Defendant violated of the UCL by violating the UCL’s “unfair” prong.  MTD Order at *28.  Plaintiff alleged a UCL unfair violation based on claims that Google’s conduct was “immoral, unethical, oppressive, unscrupulous, unconscionable and substantially injurious to Plaintiffs” and that it is “contrary to public policy as well as the common law, and the harm it caused (and threatens to continue to cause) outweighs its utility.”  (MTD Order at *27.)  The court, however, determined that Plaintiffs’ allegations constituted a dispute between competitors rather than a dispute brought by consumers of the product. As a result, the court applied the Cel-Tech standard, which required Plaintiff to allege that the conduct complained of threatens “an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” (Cel-Tech, 20 Cal.4th at 187; MTD Order at *28.)  The court noted that because Plaintiffs were not consumers of the product that caused the alleged injury, it would not apply the test that “involves balancing the harm to the consumer against the utility of the defendant’s practice.”  Lozano v. AT & T Wireless Servs., Inc., 504 F.3d 718, 735 (9th Cir. 2007).” (Order at *28.)  Because Plaintiffs effectively conceded that they could not meet the Cel Tech test, the UCL claim, as pled under the unfair prong, was dismissed.  MTD Order at *28-29.

Stromberg v. Qualcomm, No. 19-15159 (9^th Cir. September 29, 2021); District Court        No. 5:17-md-02773-LHK

Bob Connolly    Law Office of Robert Connolly

The Ninth Circuit panel vacated U.S. District Court Judge Lucy H. Koh’s[1] order certifying a nationwide indirect purchaser class in an antitrust MDL suit against Qualcomm seeking injunctive and monetary relief under §§ 1 and 2 of the Sherman Act and California law.  The principal error Judge Koh made, according to the panel, was in finding that California law [Cartwright Act] would apply across the class thereby satisfying the need to have “common questions of law and fact predominate” in order to certify a class.  The panel also remanded for reconsideration of the viability of plaintiffs’ claims given FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020), which held that that Qualcomm’s modem chip licensing practices did not violate the Sherman Act, and there was nothing to be enjoined because its exclusive dealing agreements with Apple did not substantially foreclose competition and were terminated years ago.

The putative class members are up to 250 million nationwide consumers who bought cellphones at allegedly inflated prices due to Qualcomm’s licensing practices. Plaintiffs alleged that Qualcomm maintained a monopoly in modem chips, harming consumers because the amount attributable to an allegedly excessive royalty was passed through the distribution chain to consumers in the form of higher prices or reduced quality in cellphones. When Qualcomm licenses its patents, it receives a royalty that is typically 5% of the device’s wholesale net selling price.  The district court certified a damages class under Fed. R. Civ. P. 23(b)(3) and an injunctive relief class under Rule 23(b)(2).

Background

In January 2017, the Federal Trade Commission sued Qualcomm, alleging that Qualcomm engaged in unfair methods of competition in violation of the Federal Trade Commission Act and the Sherman Act.  Many tag-along consumer antitrust class actions followed, generally alleging that Qualcomm’s conduct violated federal and state antitrust and consumer protection laws based on similar claims of anti-competitive conduct. These consumer class actions were consolidated as a class action in the United States District Court for the Northern District of California before Judge Koh who also presided over the separate FTC action.

No Common Question of Law Due to Variety of State Laws Relating to Indirect Purchasers

Plaintiffs sought certification under Federal Rule of Civil Procedure 23 (“Rule 23”) for an indirect purchaser class comprising “[a]ll natural persons and entities in the United States who purchased, paid for, and/or provided reimbursement for some or all of the purchase price for all UMTS, CDMA (including CDMAone and cdma2000) and/or LTE cellular phones . . . for their own use and not for resale from February 11, 2001 . . . .” This class would number between 232.8 and 250 million people, and the lower bound on damages to the consumer class was estimated as $4.84 billion.

In  Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), the Supreme Court held that federal antitrust claims could only be brought by direct purchasers of products impacted by anti-competitive activity.  The putative class here consisted of consumers in states where their claims were treated differently depending upon whether that State had passed any Illinois Brick repealer legislation (i.e. legislation allowing indirect consumers to sue for damages under state law). Non-repealer states do not allow indirect purchasers to bring antitrust damages suits, while repealer states—like California—do. The panel observed that some plaintiffs are “indirect purchasers who are two or more steps removed from [Qualcomm] in a distribution chain” and thus cannot seek damages for the alleged Sherman Act violations. See Apple Inc. v. Pepper, 139 S. Ct. 1514, 1520 (2019) (emphasis omitted). Other plaintiffs, however, live in states which, after the Supreme Court’s Illinois Brick decision, enacted Illinois Brick repealer laws, authorizing indirect purchasers to bring antitrust damages suits under state laws. 

Judge Koh ruled that California law, which allows indirect purchaser suits, would apply to the entire class, thus creating a common question of law. Holding that California’s Cartwright Act applied to the nationwide class, Judge Koh allowed the consumer class to sue for antitrust damages under Rule 23(b)(3).  The Ninth Circuit panel, however, held that the 23(b)(3) class was erroneously certified under a faulty choice of law analysis because differences in relevant state laws swamp predominance:

“[w]e hold that most fundamentally the district court failed to properly analyze California’s choice of law rules to determine the applicable state laws. When properly analyzed, California’s choice of  law rules preclude the district court’s certification of the 23(b)(3) class because the laws of other states—beyond California’s Cartwright Act— should  apply. As a result, common issues of law do not predominate in the class as currently certified.”

The panel set forth California’s three-step governmental interest test. “First, the court determines whether the relevant law of each of the potentially affected jurisdictions with regard to the particular issue in question is the same or different.” Chen v. Los Angeles Truck Ctrs., LLC, 444 P.3d 727, 730 (Cal. 2019) (citations omitted). “Second, if there is a difference, the court examines each jurisdiction’s interest in the application of its own law under the circumstances of the particular case to determine whether a true conflict exists.” Id. at 730–31 (citations omitted). Finally, “if the court finds that there is a true conflict, it carefully evaluates and compares the nature and strength of the interest of each jurisdiction in the application of its own law to determine which state’s interest would be more impaired if its policy were subordinated to the policy of the other state, and then ultimately applies the law of the state whose interest would be the more impaired if its law were not applied.” Id. at 731 (internal quotation marks and citations omitted).

Judge Koh had found that States that had not passed Illinois Brick repealer laws did not have an interest in not allowing their consumers to sue under California law against a California corporation.  The panel disagreed, finding that there was no basis for concluding that California law should apply to the entire class because only California has an interest. Non-repealer states’ also make a policy choice which the district court was not free to dismiss.  The panel noted that ‘[n]on-repealer states’ Illinois Brick laws are designed to regulate antitrust enforcement by allocating recoverable antitrust damages in a way those states think best promotes market competition.” These policy choices are as valid as those reflected in Illinois Brick repealer statutes which allow consumers to seek damages when not a direct purchaser.  The panel concluded that “[B]ecause non-repealer states have a clear interest in applying their laws to class members who purchased cellphones in their state, the district court erred in concluding that only California has an interest.”[2]

“While the district court may disagree with non-repealer states’ chosen priorities, federalism forbids a court from evaluating their underlying wisdom or inserting the court’s own preference into choice of law analysis,” the panel said. “Because non-repealer states have a clear interest in applying their laws to class members who purchased cellphones in their state, the district court erred in concluding that only California has an interest.”

Effect of Ninth Circuit Decision in FTC Case Finding Qualcomm’s Practices Lawful

            In a prior related case brought by the FTC,  FTC  v.  Qualcomm, 969 F. 3d 974 (9^th Cir. 2020), the Ninth Circuit concluded that Qualcomm’s SEP licensing practices, the same practices complained of by the plaintiffs here, are lawful and not anticompetitive.  Id. at 1005. The panel noted that upon remand the district court may need not address the class certification issue at all and first should decide whether the case survives:

            “Because Plaintiffs’ arguments in this case overlap with those brought in FTC v.   Qualcomm, there would have to be some extraordinary difference for Plaintiffs’ claims here to not fail as   a   matter   of   law—for   instance,   differences   between Sherman     Act  claims  brought  by  the  government  versus private  parties,  differences  between  Sherman  Act  analysis and  other  state  laws  that  might  apply,  or  difference  in Plaintiffs’ ability to   meet their burden of proof under the rule of reason.”

[1]  Judge Koh has been nominated by President Biden to sit on the Ninth Circuit Court of Appeals.

[2] The panel also noted that “even among the repealer states, the various state laws are hardly uniform. Thus, it is not clear that a single class of all repealer state Plaintiffs could be certified under Rule 23(b)(3).”

Real Estate Exch. Inc. v. Zillow Inc., 2021 U.S. Dist. LEXIS 167281  (W.D. Wash Sep. 2, 2021).

Lily L. Purqurian, JD Candidate, 2022, University of San Diego School of Law

The United States District Court for the Western District of Washington denied Zillow and the National Association of Realtors’ (NAR), motion to dismiss. Real Estate Exch. Inc. v. Zillow Inc., 2021 U.S. Dist. LEXIS 167281 (W.D. Wash Sep. 2, 2021). Plaintiff REX –– Real Estate Exchange, Inc. –– brought suit against the two for an unreasonable restraint of trade in violation of Section 1 of the Sherman Act, among other claims. Id. at 3.  REX alleged that the defendants placed REX’s listing in an unfavorable tab because REX’s commission rate was below the industry standard. The defendants argued lack of standing under Article III and, furthermore, a failure to sufficiently plead a Section 1 violation. Id. 21. Plaintiff prevailed despite both assertions. Id.

Plaintiff is a nationwide, licensed broker that employs licensed real estate agents. It is not a member of NAR or any MLS, so home sellers who elect to purchase a home through plaintiff have more power in negotiating agent fees. Id. at 3. Plaintiff’s clients pay an average commission of 3.3 percent of a home’s sale price, whereas NAR’s members have a “historically high” commission of 5.5 percent. Id.

The court specifically looked to the foundations of plaintiff’s complaint: the optional Segregation Rule, (also known as the No-Commingling Rule), and the mandatory Buyer Agent Commission Rule. As a trade association for real estate professionals, NAR promulgates rules for how members should operate their businesses. Id. at 2-3. The Segregation Rule requires a separation between listings obtained through multiple listing services’ (MLS) internet data exchange and those obtained from other sources. Id. The mandatory Buyer Agent Commission Rule requires any MLS listing to provide a predetermined offer of commission to a buyer’s agent that cannot be modified in the future. Id.

Zillow, a real estate aggregator site, partnered with NAR and several MLSs in late 2020. Id. at 4-5. As a result of this partnership, Zillow adopted NAR’s Buyer Agent Commission Rule and promised that “all Zillow-owned homes will be listed on the MLSs with commissions paid to agents representing buyers.” Id. As a result, plaintiff alleges, real estate commissions in the United States are “two to three times higher” than other markets. Id. at 5.

Zillow also adopted NAR’s Segregation Rule by creating an ‘Other Listings’ tab on its display page, which is secondary to the default ‘Agent Listings’ tab. Id. at 5-6. Plaintiff’s listing has been relegated to the ‘Other Listings’ tab, despite plaintiff’s customers’ homes all being listed by licensed real estate agents. Id. Plaintiff showed through graphs that views of its listings dropped dramatically because of this segregation, and sellers of the homes in the ‘Other Listings’ tab had to keep their home on the market for longer and accept lower prices. Id.

Plaintiff Showed Article III Standing

In order to satisfy standing under Article III, a plaintiff must prove (1) injury in fact that is (2) fairly traceable to the defendant’s actions and is (3) likely to be redressed by a favorable decision. Id. at 9. The court reminded that, when ruling on a motion to dismiss for lack of standing, “courts must accept as true all material allegations of the complaint and must construe the complaint in favor of the complaining party.” Id. (quoting Warth v. Seldin, 422 U.S. 490, 501 (1975)).

The court found plaintiff’s allegations sufficiently showed Article III standing. Id. at 11. NAR argued that the Segregation Rule was optional and it was Zillow’s prerogative to follow the rule, so there is no injury NAR can be traceable to. Id. at 9-10. The court rejected this interpretation, however, because NAR is a “direct participant” in the injury. Id. at 10. It is not just the optional Segregation Rule, but the mandatory Buyer Agent Commission Rule at issue. The latter led Zillow to change its website so that ‘Agent Listings’ and ‘Other Listings’ were segregated, thus allegedly harming plaintiff. Id. Further, plaintiff sought injunctive and statutory relief for this harm, so it is redressable. Id. at 11.

Rule 12(b)(6) Standard

In order to survive a motion to dismiss, a complaint must provide “more than labels and conclusions and contain more than a formulaic recitation of the elements of a cause of action.” Id. at 11 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). The question is whether the facts provide a plausible ground for relief. Id.

Plaintiff Showed Plausible Antitrust Violations under Section 1 of the Sherman Act

The court ruled that plaintiff could not succeed under a per se analysis of Section 1, so the court decided in favor of the plaintiff with a rule of reason analysis. Id. at 12.

Under a rule of reason claim for Section 1, the plaintiff must show (1) “a contract, combination or conspiracy among defendants; (2) by which the defendants intended to harm or restrain trade or commerce among several states …; (3) which actually injures competition; and (4) plaintiff is the proper party to bring the antitrust action because it was harmed by defendants’ contract, combination, or conspiracy.” Id. at 12-13 (quoting In Re Nat’l Football League’s Sunday Ticket Antitrust Litig., 933 F.3d 1136, 1150 (9th Cir. 2019)).

The court found plaintiff showed evidence of an anticompetitive agreement intended to restrain trade because Zillow changed its websites to abide by NAR’s rule. Id. at 16. Zillow argued otherwise that it was Zillow’s decision to segregate the listings. Id. at 13. The court referred to the Supreme Court in Allied Tube & Conduit Corp v. Indian Head, however, which held “[c]oncerted efforts to enforce (rather than just agree upon) private product standards face more rigorous antitrust scrutiny.” Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 501 n.6 (1988). Zillow redesigned the website on its own accord and enforced a “misleading labeling system,” which is plausible evidence of utilizing NAR’s rules to restrain trade. Real Estate Exch. Inc. v. Zillow Inc., 2021 U.S. Dist. LEXIS 167281, at *14 (W.D. Wash Sep. 2, 2021).

NAR could not escape the court’s judgment, either. Despite arguing that its rules are optional, the court reiterated the existence of the mandatory Buyer Agent Commission Rule. Id. at 15. Further, even with regard to voluntary rules, the court again referred to the Supreme Court’s finding that “so-called voluntary standards [could be deemed] repugnant to the antitrust laws.” Am. Soc’y of Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 561-62, 570 & 574 (1982). NAR does not only enforce the rules but has also rendered them “ubiquitous in the marketplace.” Real Estate Exch. Inc. v. Zillow Inc., 2021 U.S. Dist. LEXIS 167281, at *16 (W.D. Wash Sep. 2, 2021). So the complaint plausibly alleged Zillow and NAR’s involvement in anticompetitive agreements intended to restrain trade. Id.

The court then wrestled with the restraint’s actual effect on competition. Zillow argued that the only harm suffered by consumers is outside the relevant market. Id. at 17. The court disagreed. Id. The court deemed the Buyer Agent Commission Rule as raising antitrust concerns in and of itself because, as another court found, “the offer is the same regardless of the buyer-broker’s experience or the value of services provided by the buyer-broker” and the popularity of Zillow exacerbates the issue. Id. at 18-19 (quoting Moehrl v. Nat’l Assoc. of Realtors, 492 F. Supp. 3d 768, 784 (N.D. III. 2020). NAR was found to be similarly positioned, with substantial market power, in the relevant market for real estate brokerage services. Id. at 19-20.

Lastly, the court found the complaint sufficiently alleged actual harm because the segregated listings caused listings in the ‘Other Listings’ category to stay on the market longer and settle for lower prices. Id. at 20.

Conclusion

The court thus denied both NAR and Zillow’s motions to dismiss the antitrust claims under Section 1 of the Sherman Act and the CPA. If the plaintiff is successful as the case moves on, it likely will force  the NAR and Zillow to make changes in their tab placement rules.

Suzanne Somers v. QVC, Inc., Civ. No. 19-cv-04773 (E.D. Pa. September 23, 2021)

Bob Connolly    Law Office of Robert Connolly

The Court granted defendant’s Motion for Partial Summary Judgment as to alleged violations of Section 2 of the Sherman Act and  California Business and Professions Code § 17200 and IX.  Plaintiffs claimed that Defendant QVC has an illegal monopoly over the sale of nutritional supplements in the T.V. [television] market. 

Legal Framework

The Court noted that as an essential part of their case, Plaintiffs must articulate the relevant product and geographic market, show a cognizable antitrust injury, and explain QVC’s power within the market. See Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430, 436 (3d Cir. 1997).

“[Section] 2 makes the conduct of a single firm unlawful only when it actually monopolizes or dangerously threatens to do so.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459 (1993).  A plaintiff bringing an attempted monopolization claim must allege that: (1) the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power. Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 614 F.3d 57, 75 (3d Cir. 2010) (internal quotations omitted). 

Analysis

QVC claimed that the Plaintiffs’ antitrust allegations fail as a matter of law for four reasons: the lack of (1) antitrust injury; (2) support for Plaintiffs’ claimed relevant market; (3) market power by QVC and HSN; and (4) evidence for QVC’s specific monopolistic intent. ECF No. 63-1 at 4. Defendant states that Plaintiffs failed to create genuine issues of fact on these key points during fact discovery and exacerbated that problem by failing to engage an antitrust expert.

Product Market

The district court found that Plaintiffs did not present any evidence sufficient to raise a genuine dispute of material fact as to whether the T.V. Market has the “special characteristics” necessary to render it a relevant market for antitrust purposes. In addition, plaintiffs offered no evidence to show “that enough customers do not view other methods of distribution as viable substitutes to the distribution method in question.”

Plaintiffs cited to Brown Shoe Co. v. U.S., 370 U.S. 294 (1962), for their proposition that the T.V. market is a valid submarket for antitrust purposes. The court shot that theory down finding that the found that plaintiffs  did not make the showing outlined in that Brown Shoe. In Brown Shoe, the Court stated that well-defined submarkets can constitute product markets for antitrust purposes where such a submarket can be determined by “examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Id. at 325. In this case the court found that Somers had not established any evidence on any of these factors to show that the T.V. market meets this standard for a recognizable submarket.

There was no genuine issue of material fact because nowhere in the record did Plaintiffs make any kind of showing that consumers who purchase nutrition supplements on the T.V. market view other channels of distribution, such as e-commerce or brick-and-mortar stores, as nonviable substitutes if their preferred product is not offered on the T.V. market. Further the court found there was no evidence that other nutritional supplements were not reasonable substitutes for Plaintiffs’ products, even if certain consumers would prefer to purchase Plaintiffs’ products.  Accordingly, Plaintiffs did not establish a product market

Geographic Market

The geographic market is defined with reference to both “the market area in which the seller operates” and where “the purchaser can practicably turn for supplies.” Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327, 331–32 (1961).  Here too the Court found that because Plaintiffs cite no evidence on buyer behavior, they have not established a relevant geographic market.

Because the Plaintiffs’ failure to define a legally sufficient relevant market is fatal to their Section 2 claim (see Queen City Pizza, Inc., 124 F.3d at 436), the Court did not address the remaining elements (whether QVC has the requisite market power or anticompetitive intent). Novak v. Somerset Hosp., 2014 WL 4925200, at *16.

Antitrust Injury

Plaintiffs also failed to establish antitrust injury: “[proof] that the challenged conduct affected the prices, quantity or quality of goods and services, not just [their] own welfare.” Mathews v. Lancaster Gen. Hosp., 87 F.3d 624, 641 (3d Cir. 1996) (quotations omitted).  The court noted plaintiffs had not brought forward any evidence showing that a single customer paid a higher price for a supplement because of QVC’s alleged conduct or that consumers were deprived of the option to purchase Plaintiffs’ supplements. Plaintiffs’ claimed lost profits from a reduced ability to compete are not a cognizable antitrust injury.

California Unfair Competition Claim

Plaintiffs also brought a claim under the California Unfair Competition Law (“UCL”) which creates a cause of action for business practices that are unlawful, unfair, or fraudulent. Cal. Bus. & Prof. Code § 17200 (West).

Because the Court found that Defendant did not violate the Sherman Act, the only remaining predicate acts that could be the basis for the UCL claim are based on the parties’ Agreement and do not include allegations of harm to the general public or individual consumers. Plaintiffs’ UCL claim failed because a UCL action based on a contract is not appropriate where the public in general or consumers are not harmed by the defendant’s alleged unlawful practices. Rosenbluth Int’l, Inc. v. Superior Ct., 101 Cal. App. 4th 1073, 1077 (Cal. Ct. App. 2002); see also Linear Tech. Corp. v. Applied Materials, Inc., 152 Cal. App. 4th 115 (Cal. Ct. App. 2007) (“Where a UCL action is based on contracts not involving either the public in general or individual consumers who are parties to the contract, a corporate plaintiff may not rely on the UCL for the relief it seeks.”).

To settle FTC charges that its actions violated the antitrust laws, the Board of Dental Examiners of Alabama has agreed to stop requiring on-site supervision by licensed dentists of alignment scans of prospective patients’ mouths seeking to address misaligned teeth or gaps between teeth. These scans are routinely administered by dental hygienists and other non-dentist practitioners; the Dental Board’s decision limited consumer choice and excluded new providers in the state of Alabama.      

Compliant: In the Matter of: Board of Dental Examiners Alabama  (here)

Analysis of Consent Order: (here)