Antitrust and Unfair Competition Law

E-BRIEFS, NEWS AND NOTES: FEBRUARY 2024

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WELCOME to the FEBRUARY 2024 edition of E-Briefs, News and Notes.

This edition has a variety of content:

In SECTION NEWS, we feature:

  • MONTHLY SECTION MESSAGES:
    • Looking Back at the History of “Celebrating Women in Competition Law” and Ahead to a Great 2024 Event!
    • A Review in Photos of the 2024 UCL Institute held on Thursday, January 18 at the City Club Los Angeles!
  • Section Announcements:
    • Applications are due by March 1, 2024 to join our Executive Committee!
    • Register Now for the Seventh Annual “Celebrating Women in Competition Law in California” on March 7, 2024!
    • Job Postings
  • E-BRIEFS this month features an interesting mix of five significant recent decisions:
  • First, the Fifth Circuit took up the FTC’s reversal of an administrative law judge’s decision approving the merger of biotechnology companies Illumina and Grail in a case challenging the Commission’s authority to hold administrative proceedings at all, ultimately upholding the Commission’s authority but vacating its decision on the merits;
  • Second, the Western District of New York issued an order denying a motion for class certification brought by direct purchasers of caustic soda, more commonly known as lye, for failure to establish predominance under Rule 23(b)(3);  
  • Third, the Middle District of North Carolina denied motions to dismiss the FTC’s case challenging pesticide producers’ loyalty discount programs;
  • Fourth, the District of Massachusetts issued a landmark ruling enjoining a proposed merger between JetBlue and Spirit Airlines; and
  • Fifth, Judge Gonzalez-Rogers of the Northern District of California issued a ruling denying Daubert motions and certifying a class of consumers challenging the restrictions and billing practices Apple applies in operating the App Store.
  • ENFORCEMENT AGENCY PRESS RELEASES highlight the enforcement activities of the Antitrust Division, DOJ, FTC, and California AG’s office.  Reading the press release(s) is a quick way to keep on top of major developments.

Thanks to all the contributors to this edition.  If you have any suggestions for improvement, or an interest in contributing to E-Briefs, please contact Editors Betsy Manifold and James Dallal.

SECTION NEWS

Looking Back at the History of “Celebrating Women in Competition Law” and Ahead to Great 2024 Event!

The idea for “Celebrating Women” was born in 2016 in La Jolla, California. We were attending an Antitrust and Unfair Competition Law Section Executive Committee meeting and were grumbling about our shared opinion that most of the women’s events we attended focused on the negative aspects of the practice and left everyone feeling depressed about their careers. We knew women were (and are) doing amazing work in the antitrust bar and want to hear their stories and their tips and celebrate their achievements. And just like that, the conversation resulted in “Celebrating Women in Competition Law in California,” an annual panel presentation and networking event for women and men.

The first event was held on June 28, 2017, and featured a panel of female practitioners from the plaintiff side, defense side, in-house, Federal Trade Commission, United States Department of Justice, and California Department of Justice, and was moderated by Judge Susan Y. Illston. It was a modest success in terms of attendance but a huge success in every other respect. Feedback was uniformly positive that we need an event like this – an event that shines light on the amazing work women are doing in the field of competition law. The event is now in its seventh year and is still going strong. In addition to hearing each year from a group of outstanding practitioners who generously share advice and thoughts, the event connects attendees and helps them expand their own professional networks.

We love this event and are thrilled that it has grown in popularity and sells out every year. We are delighted that men come to the event to celebrate women and learn how to support them. We cannot wait to see you at the Seventh Annual event on March 7, 2024. Invite a friend and secure your space now!

Register HERE

Co-Founders Jill M. Manning, Pearson Warshaw, LLP, and Kate Patchen, Covington & Burling, LLP

Co-Founders Jill M. Manning, Pearson Warshaw, LLP, and Kate Patchen, Covington & Burling, LLP

Relive the 2024 UCL Institute

See a review in photos of the 2024 UCL Institute here.

MONTHLY SECTION MESSAGES

  • Applications are due by March 1, 2024 to join our Executive Committee!
    • The Executive Committee manages the Section and is charged with overseeing the Section’s current activities and developing new programs and initiatives to further the development of antitrust and competition law in California. A core component of the Executive Committee’s work is to provide opportunities to develop the next generation of California antitrust and unfair competition law practitioners. Click here for further information and to apply now: https://calawyers.org/section/antitrust-unfair-competition-law/committees/
  • The Seventh Annual “Celebrating Women in Competition Law in California,” will be held on March 7, 2024 from 5:30 pm to 8:00 pm in San Francisco.

Job Postings

E-Briefs

FTC’s Administrative Authority Upheld, But Decision on Illumina-Grail Merger Remanded for Further Consideration
Cheryl Lee Johnson and Dan Grushkevich

By Cheryl Lee Johnson and Dan Grushkevich

In Illumina Inc. et al. v. Federal Trade Commission, 88 F.4th 1036, (5th Cir. 2023), the Fifth Circuit rejected multiple Constitutional challenges to the Commission’s authority to hold administrative proceedings. But the decision then also vacated and remanded the Commission’s order to unwind the Illumina-Grail merger on the ground that it used the wrong legal standard during rebuttal.

Background

Illumina, a monopoly supplier of NGS platforms, a key component for multi-cancer early detection (MCED) tests, sought to acquire Grail, currently the only commercial seller of MCEDs. Illumina’s customers for NGS platforms, including potential future entrants in the MCED market, “expressed concern” about their ability to purchase Illumina’s NGS products “on the same terms and conditions” as Grail after the merger. Id. at 1044. To alleviate those concerns, Illumina created an irrevocable offer for a standard supply contract to guarantee competitors’ access to NGS products on terms equivalent to Grail’s until 2033 the (Open Offer). Id. at 1045. After the Commission overturned the ALJ’s approval of the merger, the Fifth Circuit remanded that decision, holding that the Commission improperly required Illumina to prove that its Open Offer to customers of its NGS platforms completely negated the anticompetitive effects of the proposed vertical merger. Id. at 1044.

Constitutional Challenges to FTC Authority

The Fifth Circuit found Illumina’s four constitutional challenges to the FTC’s authority all foreclosed by Supreme Court precedent. Id. at 1046. That precedent confirmed the FTC’s authority to file enforcement actions under both Section 5(b) and Section 13(b) of the FTC Act, to exercise executive powers, and to serve both as a prosecutor and adjudicator. Id. Finally, the Fifth Circuit affirmed that there was a rational basis for splitting enforcement between DOJ’s Antitrust Division and the FTC, so that split did not give rise to a violation of Illumina’s equal-protection rights. Id. at 1047.

The FTC’s Prima Facie Case on Product Market

The Fifth Circuit upheld the Commission’s finding of a broad product market that includes “research, development, and commercialization of MCED tests,” including those tests not yet on the market. Id. at 1048. The court’s product market recognized competition in research and development independent of the consumer market. Id. at 1048-49.

The court declined to decide whether courts can or must consider Brown Shoe standards for vertical mergers because the FTC satisfied both the Brown Shoe and the “ability and incentive” standards. Id. at 1051. For the ability and incentive test, the Fifth Circuit found that when one party already monopolizes the market for a key input, enforcers only need to show increased incentive to foreclose competitors’ access to sources of supply. Id. at 1052. Because Illumina is a monopolist in sales of NGS platforms, the merger could not have further increased its power to deny competitors access, so demonstrating increased incentive is sufficient. Id. The court found that Illumina’s internal projections predicted that it would be profitable to “suffer losses to its NGS-platform sales in order to accelerate the growth of its MCED-test sales.” Id. at 1053. Alternatively, the court found that the Brown Shoe standards supported a finding that the merger substantially lessened competition, even as only four of the seven factors were applied. Id. at 1055.

Illumina’s Open Offer

Rejecting both the Commission’s evaluation of the Open Offer as a remedy, and Illumina’s bid to treat it as a market reality, the court held that Illumina’s Open Offer should be evaluated in the company’s rebuttal to the FTC’s prima facie case. Id. at 1055-56 The court contrasted Illumina’s Open Offer, which was already effective, with divestiture offers by Aetna and Sysco at issue in earlier cases because those offers were conditional, whereas the Open Offer had no conditions related to the merger. Id.

Court Denies Motion for Class Certification In Caustic Soda Antitrust Litigation
Kari G. Ferver

By Kari G. Ferver, Associate at Crowell & Moring LLP

On December 23, 2023, a federal court in the Western District of New York denied direct purchaser plaintiffs’ motion for class certification, citing insufficient evidence of uniform classwide injury. In re Caustic Soda Antitrust Litig.,No. 19-cv-00385-EAW-MJR (W.D.N.Y.), ECF 724 (Dec. 28, 2023). This order highlights how critical expert opinion is at the class certification stage, particularly in an industry involving such complex transactions and business relationships. The court here devoted significant time and energy to understand the complicated economic modeling and opinions presented by the experts.

Background

This action relates to caustic soda, also known as sodium hydroxide or lye, a chemical sold in solid and liquid forms and used in dozens of industries. In May 2019, multiple class actions were filed in New York against a group of producers of caustic soda. The complaints alleged that these producers, who collectively controlled roughly 90% of the domestic supply, had engaged in a conspiracy to increase the price of caustic soda since October 2015. The classes were consolidated in 2019 and the court adjudicated motions to dismiss in 2020. The classes include both direct and indirect purchasers of caustic soda.

On April 29, 2022, the direct purchasers filed a motion to certify a class defined, subject to certain exceptions, as the following:

All persons and entities who purchased in the United States directly from one or more of the Defendants (or from any of Defendants’ predecessors, subsidiaries, or affiliates) liquid forms of membrane or diaphragm grade Caustic Soda at any time between October 1, 2015 and December 31, 2018 (the “class”).  Excluded from the class are Defendants, their predecessors, parents, subsidiaries, and affiliates, and all government entities, agencies, and instrumentalities. For purposes of this exclusion, “predecessors” includes The Dow Chemical Company, whose chlor-alkali business was acquired by Olin effective October 5, 2015, and Axiall Corporation, which was acquired by Westlake effective August 31, 2016. Also excluded are purchases under: (i) long-term fixed-price contracts that predate October 1, 2015, (ii) cost-based contracts (such as cost-plus contracts) with no component of price based on a Caustic Soda index, and (iii) contracts that are priced on an ECU (electrochemical unit) basis with no component of price based on a Caustic Soda index.

ECF 474 at 1. The motion relied heavily on the direct purchasers’ expert economist witness, Russell L. Lamb, Ph.D. ECF 724 at 3, 10. Defendants, in turn, relied on their own economist expert, John H. Johnson IV, Ph.D., to critique Dr. Lamb’s opinions. Id. at 3, 12. The court held a two-day evidentiary hearing in June 2023 and additional oral argument in August 2023.  Id. at 14-15.

Order on Direct Purchasers’ Motion for Class Certification

To be certified, classes must meet four threshold requirements: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.  Id. at 20 (quoting Fed. R. Civ. P. 23(a)). The class must also qualify for certification under one of the three paths outlined in Rule 23(b).Classes seeking certification under FRCP 23(b)(3) must also show that common questions of law or fact predominate over questions affecting only individual class members, often called the “predominance” requirement. The court held that the direct purchasers failed multiple parts of these tests, though the vast majority of the court’s opinion focused on the predominance requirement.

First, the court held that the direct purchasers had failed to demonstrate that common questions would predominate over individual questions in the proposed class, because the proof of classwide injury—Dr. Lamb’s economic modeling—was not methodologically sound.  For example, the direct purchasers had a “highly specific class definition” which, in turn, needed an equally specific methodology to make sure that only the purchases in the class definition were captured.  Id. at 24-25. Dr. Lamb and his staff had attempted to sort and categorize the transactions in Defendants’ data, but a portion of the transactions could not be categorized, and Dr. Johnson identified examples of purchases that should have been excluded from modeling but were not. Id. at 26. The court’s thorough analysis walks through both experts’ reports as well as testimony from Dr. Lamb and Dr. Johnson at the evidentiary hearing. Id. at 26-39. The complicated pricing mechanisms and nuances in the caustic soda industry meant that the case was “more complex” than a typical horizontal price-fixing conspiracy. The court held that Dr. Lamb’s model did not adequately account for these nuances, and therefore it could not serve as a means of showing classwide antitrust injury. The court also rejected direct purchasers’ attempts to present alternative common proof of injury via evidence such as U.S. market characteristics and coordinated price increase announcements, noting that this evidence was not sufficient on its own to be common proof.  Id. at 39-43. 

Second, direct purchasers failed to establish that the claims were typical of the proposed class because the three largest proposed members used negotiation strategies that did not involve paying the lowest possible price for caustic soda. Id. at 47-48. These putative class members, therefore, did not align with direct purchasers’ overall theory that the class was injured because “the members thereof universally sought to pay the lowest possible price for caustic soda” and that this “lowest possible price was artificially inflated” by Defendants. Id. at 48.

Finally, the court held that the class was not ascertainable because certain language in the class definition was vague. The court provided the example of the failure to define “long-term” in the exclusion for long-term, fixed-price contracts that predate October 1, 2015. Id. at 49-50.

To the extent the court’s decision rested on the opinion of Dr. Johnson, the court rejected the direct purchasers’ Daubert motion to exclude Dr. Johnson’s opinion. The court noted that, while Dr. Johnson and Dr. Lamb disagreed about their economic modeling, Dr. Johnson was able to articulate a reasonable and persuasive rationale for his methodology. Id. at 19-20. Therefore, there was no basis to strike Dr. Johnson’s opinion under Federal Rule of Evidence 702.

FTC’s Suit Targeting Pesticide Producers’ Loyalty Discounts Withstands Rule 12 Challenge
Cheryl Lee Johnson and Dan Grushkevich

By Cheryl Lee Johnson and Dan Grushkevich

In Federal Trade Commission v. Syngenta Crop Prot. AG, 1:22CV828, 2024 U.S. Dist. LEXIS 7083, 2024 WL 149552 (M.D.N.C. Jan. 12, 2024), the Middle District of North Carolina denied Syngenta and Corteva’s motions to dismiss the FTC’s case against them. The court found that Plaintiff plausibly alleged that Defendants’ loyalty programs foreclosed generic manufacturers from multiple pesticide markets and anti-competitively forced distributors to buy their products. 

Background

Syngenta Crop Protection AG and Corteva are, by revenue, the second and third-largest manufacturers of crop-protection products (pesticides) in the United States. Id. at 4 (Lex), at 1 (WL). All pesticides consist of at least one active ingredient (AI) that developers can obtain a temporarily exclusive right to manufacture through patents and the Federal Insecticide, Fungicide, and Rodenticide Act before generics are allowed to enter the market. Id. at 5-6 (Lex). at 5-6 (WL). Approximately 80% of all pesticide sales go through seven distributors. Id. Defendants offer loyalty programs that allegedly pay distributors millions of dollars in exchange for limiting the proportion of competing generic pesticides they sell. Id. at 7 (Lex), at 2 (WL).

Market Definition

The FTC alleged two product markets for each of the six AIs at issue, one for the AI and one for pesticides containing the AI. Id. at 12 (Lex), at 4 (WL). Defendants allegedly hold monopoly shares in the markets for five AIs and market power in the sixth. Id. The court accepted the hypothetical monopolist test, Defendant’s conduct, and Brown Shoe characteristics as acceptable methodologies for defining the product market. Id. at 34 (Lex), at 10 (WL). The court rejected Defendants’ argument that Plaintiffs must explain why they exclude products from their product market, holding that only an explanation of the plausibility of their proposed market was needed to survive a dismissal motion. Id. at 32 (Lex), at 10 (WL). Additionally, Defendants’ claim that broader market definitions in prior FTC and DOJ antitrust proceedings precluded the FTC from pleading a narrow market failed because “the court must consider each antitrust dispute on a case-by-case basis.” Id. at 33 (Lex), at 11 (WL). 

Loyalty Discount Agreements and Injury

Drawing on ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3rd Cir. 2012), the court held that loyalty discount cases should apply the rule of reason, rather than the price-cost test, when “mechanisms beyond price-cutting” are alleged to exclude competition. Id. at 48 (Lex), at 16 (WL). The court applied the rule of reason, as the FTC’s allegations included sufficient non-price exclusion mechanisms, including bundling across AIs, coercive audits, threats to restrict supply and/or cancel or retaliate against distributors and the existence of substantial barriers to market entry. Id.at 52-54 (Lex), at 17-18 (WL). Because defendants had not shown at this stage that “price clearly predominates over non-price mechanisms of exclusion,” the court could not apply the price-cost test of Brooke Group v. Brown, 509 U.S. 209 (1993) as a matter of law. Id. at 55, 59 (Lex), at 15, 18-19 (WL).

Despite the voluntary nature and the one-year terms of the loyalty programs, the court found the FTC plausibly alleged that the loyalty programs created “de facto exclusivity” with long-term anticompetitive effects. Id. at 66-67 (Lex), at 18-19, 21 (WL). The complexity of the payment structure, Defendants’ threats of retaliation, and the discounts themselves all incentivized distributors to “steer” consumers towards Defendants’ AIs “despite consumer demand for generics.” Id. Additionally, plaintiffs pleading that the programs foreclosed generics from 70% of the market and 80% of the distributors participated in the loyalty programs sufficed to allege foreclosure in a “substantial share” of the market and antitrust injury. Id.at 67 (Lex), at 21-22 (WL).

Defendants’ constitutional challenges to Congress’s enactment of the FTC Act forbidding removal of FTC commissioners except for cause and Section 13(b) of that Act authorizing the FTC to file suit were barred by Supreme Court authority. Id. at 83-84 (Lex), at 25-27 (WL).

Turbulence Ahead:  Court Rejects JetBlue/Spirit Merger
Lee Berger and Travis West

By Lee Berger and Travis West

On January 16, 2024, the District of Massachusetts District Court enjoined the proposed merger of JetBlue and Spirit Airlines, a merger that would have created an entity with 10.2% of the domestic market. The trial, which lasted 17 days, included a trip by the court to view the seat configurations for the defendants. The trial pitted two narratives against each other: a combined company that would be able to apply stronger pressure to the larger airlines versus harmed consumers who would lose an ultra-low-cost carrier. 

JetBlue is a low-cost carrier, in contrast to the Big Three legacy carriers: American Airlines, Delta, and United. Spirit is an ultra-low-cost carrier that removes many traditional amenities on flights or charges for them to provide the cheapest seat. Ultra-low-cost carriers are the fastest growing market in the airline industry and the low-cost and legacy carriers have all introduced new products to compete with them. The industry, though, is facing growth constraints ranging from slow plane production to lack of air traffic controllers. JetBlue, who had sought a merger partner for many years, targeted Spirit, who initially opposed due to antitrust concerns. To alleviate those concerns, JetBlue agreed to a series of divestitures in multiple markets to other ultra-low-cost carriers. 

The Department of Justice raised several concerns. First, the merger would lead to decreased airline seats as JetBlue would retrofit Spirit’s planes, which had more seats than average, to adopt configurations with fewer seats. Second, the increased concentration would trigger the “presumptively anticompetitive” threshold of merger guidelines in 183 passenger routes. Third, the government argued that the transaction could leader to higher prices for consumers due to both the elimination of Spirit’s low prices and the elimination of Spirit’s downward pressure on prices. As an example, for the second reason, JetBlue had found that when Spirit entered a market in which JetBlue operates, JetBlue’s fares and revenue decreased by more than 10%.

The court’s analysis began by focusing on the tripartite structure under a Clayton Act Section 7 challenge: 1) the plaintiff must establish a prima facie case that the transaction will significantly increase market concentration, thereby triggering a presumption that the transaction is likely to substantially lessen competition; 2) the defendant must rebut by producing evidence to counter the plaintiff’s evidence; and 3) if the prima facie case is rebutted, the burden of production shifts back to the plaintiff and merges with the ultimate burden of persuasion. The court decided that the relevant geographic market would be the “origin-and-destination” pairs, also known as the routes, on which the defendants currently compete.

Moving into the analysis, the court noted that there were 183 routes where the “highly-concentrated” presumption would be triggered post-transaction but did not find the presumption itself established a prima facie case. Instead, the court found that the direct evidence of head-to-head competition between Spirit and JetBlue, along with the elimination of Spirit’s competition with other airlines, coupled with the elimination of Spirit as a choice for consumers, established a prima facie case.

In considering the defendants’ rebuttal, the court noted that the burden is low for them in rebutting the prima facie case. The court agreed with the defendants that entry by other ultra-low-cost competitors was likely to be timely and likely but leaned toward finding it would not be sufficient to replace the competition, especially given Spirit’s disruptive nature. The court also disagreed with the DOJ’s market data, finding that it ignored potential entrants. For the pro-competitive arguments, the court rejected both the failing and flailing firm defenses, noting that Spirit had plans to turn around its financial performance and that it was not in a dire financial situation. It did, though, credit the efficiency defense, as it found reasonable that the expansion of routes, the fleet, and loyalty program would all enable better competition from JetBlue against the largest airlines. 

With the prima facie case rebutted, the court was faced with the final decision: did the DOJ carry both its burden of production and persuasion? It held that it had because the merger was likely to substantially lessen competition in at least some of the relevant markets. The court focused on the typical Spirit consumer: someone who must rely on Spirit. For that consumer, the Defendant Airlines could not demonstrate that she would avoid harm. It found that other ultra-low-cost carriers were unlikely to enter the market at a pace rapid enough to prevent the harm to those consumers. 

As a result, the court entered a permanent injunction prohibiting the merger between JetBlue and Spirit as it currently stands. 

While this decision is a real victory for the Department of Justice, there are a few points that may make governmental merger challenges a bit more difficult going forward. First, the Court refused to accept the presumptions of the Merger Guidelines (then, still the 2010 Horizontal Merger Guidelines). While the DOJ had argued that exceeding the thresholds in the Merger Guidelines was sufficient to create a presumption that met its initial prima facia burden, the court did not agree. With no analysis besides “presumptions are not self-executing,” the court rejected reliance on the Merger Guidelines’ presumption. 

Second, the court rejected most of the testimony of Dr. Chipty, an expert on whom the DOJ frequently relies, as not credible. The DOJ often faces a problem at trial about who will tell the government’s affirmative story. While defendants can rely on their well-prepared executives to explain defendants’ narrative on direct examination, the government has no in-house percipient witnesses of its own. Sometimes, the government can turn to especially cooperative third-party customers or competitors, but often the government must rely on an expert economist to lay out its version of the case. It is that narrative testimony that the court appears to have rejected as not credible. This decision gives defendants another weapon to strike at the government’s use of experts to tell its affirmative story.

Third, the court appears to credit out-of-market efficiencies, contrary to the DOJ’s typical position. The Merger Guidelines § 3.3 states that the Agencies will not “credit benefits outside the relevant market that would not prevent a lessening of competition in the relevant market.” Here, the court agreed with defendants’ assertion that the combined JetBlue-Spirit would be a more robust competitor to Big Four airlines, thereby putting more pressure on those airlines and benefiting consumers. But the court did not find that this effect would occur for all routes or any of the relevant markets. Therefore, it appears the court was not only considering in-market efficiencies, but out-of-market efficiencies as well.

For these reasons, defendants in future merger litigations may find some support for their positions in this win for the government.

Court Grants Class Certification and Denies Apple’s Daubert Motions in Consumer Suit Against Apple
Wesley Sweger

By Wesley Sweger

In re Apple iPhone Antitrust Litigation, Case No. 4:11-cv-6714-YGR (N.D. Cal. Feb. 2, 2024)

On February 2, 2024, Judge Gonzalez-Rogers (N.D. Cal.) granted Consumer Plaintiffs’ renewed motion for class certification and denied Apple’s Daubert motion to exclude expert testimony. This specific Apple litigation relates to Consumer Plaintiffs’ claim that Apple charges developers on the App Store supracompetitive commissions, which are then passed to consumers in the form of increased prices for app downloads or subscriptions. Consumer Plaintiffs allege that this conduct allows Apple to unlawfully monopolize the retail market for the sale of apps, including in-app purchases. Consumer Plaintiffs bring an unlawful monopolization claim and an attempted monopolization claim under Section 2 of the Sherman Act.

On March 29, 2022, this court previously denied without prejudice Consumer Plaintiffs’ motion for class certification and granted in part and denied in part Apple’s Daubert motion to exclude expert testimony from Professor McFadden. The court granted Consumer Plaintiffs leave to amend their expert’s report. For a full summary of that decision, please visit the May 2022 edition of E-Briefs, News and Notes: https://calawyers.org/antitrust-unfair-competition-law/class-certification-in-the-apple-iphone-antitrust-litigation-denied-due-to-economists-unjustifiable-assumptions/

Daubert Motions

After the court’s March 2022 order, Consumer Plaintiffs filed a revised supplemental expert report by Professor McFadden (“McFadden”) and a new expert report by Dr. Abrantes-Metz (“Abrantes-Metz”). McFadden offered a damages model, and Abrantes-Metz calculated Apple’s but-for commission rate which McFadden’s analysis depends upon. Apple moved to exclude both experts.

Professor McFadden

Apple moved to exclude McFadden on three grounds: (1) methodology, (2) sufficiency of data used, and (3) reliability.

With regard to methodology, Apple challenged McFadden’s model for failing to properly account for: (1) marginal costs, (2) in-app purchase prices, (3) Apple’s price tiers and focal prices, and (4) app competition.

First, Apple argued McFadden’s damages model overestimates developers’ marginal costs because digital goods have low or zero marginal costs. Apple supported this position by pointing to “natural experiments”—observed app prices when Apple lowered its commission rate in the past. The court found Apple misconstrued McFadden’s model—“when Professor McFadden posits that app developers have marginal costs, he is looking at how costs change not when producing one additional unit of a digital good but when operating at scale.” (p. 7.) Additionally, the court found that any findings from the “natural experiments” went to the weight, not admissibility, of McFadden’s testimony.

Apple next argued that McFadden’s damages model cannot predict what individual in-app purchase prices would be but for Apple’s allegedly anticompetitive conduct and therefore cannot reliably calculate damages. The court found the model was not meant to predict item level prices but to calculate how much Apple overcharged consumers as a percentage of its total revenue.

In its March 29, 2022, order, the Court excluded McFadden’s model because it ignored Apple’s price tiers and focal-point pricing. Apple argued that McFadden’s model still ignores the issue. The court found McFadden created two models, one without price tiers and one which incorporates tier and focal pricing, and the court found his tier and focal pricing simulation was sufficiently reliable. Additionally, Apple argued McFadden’s model “does not reflect the as-is world because he assumes that app developers set prices to maximize profits exactly rather than along one of Apple’s price tiers.” (p. 12.) The court found McFadden’s model incorporates actual transaction data from the App Store, which already reflects Apple’s pricing restrictions.

Apple’s final argument regarding McFadden’s methodology is that it does not consider competition between app developers. The court found this unconvincing and quoted McFadden’s report that his model captures “how readily consumers switch to other apps should an app increase its price.” (pp. 11–12.)

Apple challenged the sufficiency of McFadden’s data because, inter alia, he ran a regression using “profit margin bounds derived from a ‘tiny and unrepresentative’ sample of six app developers.” (p. 13.) The court was unconvinced this was insufficient and noted that McFadden had access to only six developers’ data at the time the report was drafted and will receive profit data from significantly more developers later. Additionally, the court noted McFadden used “these six developers’ data to estimate, not precisely quantify, the average profit margin for the sake of class certification.” (p. 14 (emphasis added).)

McFadden’s model took “seventy-five 0.1% samples, estimated consumer demand based on these samples, taken the average of the seventy-five coefficients obtained, and used the averaged coefficients to estimate damages across all transactions from the App Store at a 95% confidence level.” (p. 15.) Apple attacked the reliability of McFadden’s model, arguing the model had a “switcher” problem: the same Apple account could switch from “harmed” to “unharmed” by Apple’s conduct depending on which 0.1% sample of transactions from the App Store McFadden used to calculate damages. Instead of using seventy-five 0.1% samples and then averaging them, Apple’s own expert used a 7.5% sample and arrived at results consistent with McFadden’s. The court found “[t]his does not shake . . . McFadden’s 95% confidence interval but instead serves to confirm it.” (Id.)

For all the foregoing reasons, the court denied Apple’s motion to exclude McFadden.

Dr. Abrantes-Metz

Apple also moved to exclude Abrantes-Metz’s opinion that, in a but-for world, Apple would have charged a 13.63% commission rate in its App Store. Apple based its motion on four grounds: (1) failing to apply economic expertise, (2) untenable assumptions, (3) unreliable inputs, and (4) an arbitrary benchmark analysis.

Apple argued Abrantes-Metz failed to use her economic expertise because her opinion used a mathematical equation rather than an economic model. The court found this argument unconvincing, reasoning “economic models generally consist of mathematic equations that describe a theory of economic behavior. That . . . Abrantes-Metz’s economic model consists of one mathematical equation does not mean that she has ‘no theory of economic behavior underpinning her analysis,’ as Apple charges.” (p. 17.)

Apple next argued that Abrantes-Metz’s model relies on untenable assumptions about the but-for world: (1) that Apple would have only one other competing app store; (2) both app stores would charge identical commission rates; and (3) the hypothetical app store would provide identical terms and services to the App Store. To the first assumption, Abrantes-Metz explained she “conservatively chose to model a duopoly, rather than a market with multiple rivals, because of the unremarkable and well-supported proposition in economics that more competition equals lower prices.” (p. 18 (emphasis added).) To the second assumption, the court found Abrantes-Metz’s argument convincing that competing app stores charge identical commission rates in the “as-is world” (looking at Microsoft and Steam as examples), so it is safe to assume the same in the but-for world. To the third assumption that a hypothetical app store competitor would provide identical terms and services to Apple’s App Store, the court was convinced by Abrantes-Metz’s citation “to economic literature for the proposition that two competitors in a duopoly would provide the same services.” (p. 19.)

Apple next argued Abrantes-Metz’s inputs are unreliable. Apple attacked, inter alia, Abrantes-Metz’s use of only one platform—Microsoft—to determine the rival app store’s profit margin in the but-for world. Abrantes-Metz explained she chose Microsoft because “it had a similar functionality to the Apple app store; was an established, profitable rival to a larger competitor, Steam; and using its 2019 profile allows [her] to calculate what Microsoft’s profit margin was after a new competitor, Epic Games, entered the market but before Microsoft cut its commission rates in response.” (p. 20.) Additionally, Apple argued Abrantes-Metz’s input for the hypothetical rival store’s market share is unfounded. Abrantes-Metz explained that market share came from Apple’s own expert.

Finally, Apple argued Abrantes-Metz’s benchmark comparison, presented as a means to check her conclusion about what would have happened in the but-for world, is cherry-picked. It argued that Abrantes-Metz “excluded other benchmarks with 30% commission rates, like the Google Play Store and Steam, while including the 12% commission rates of Microsoft and Epic Games in her analysis.” (p. 22.) The court agreed with Abrantes-Metz that “including the way Microsoft changed its commission rate when faced with ‘stiff competition’ in her analysis was a useful predictor of what the range of commission rates would look like for Apple in the more competitive, but-for world.” (p. 23.)

For all the foregoing reasons, the court denied Apple’s motion to exclude Abrantes-Metz.

Class Certification

In its March 2022 order, the court found that Consumer Plaintiffs met the requirements of Rule 23(a) but failed to satisfy the predominance requirement. Therefore, the court this time analyzed only the predominance requirement of Rule 23(b)(3)—i.e., whether plaintiffs can prove antitrust injury on a classwide basis.

Core to the court’s predominance analysis is “whether plaintiffs’ class definition sweeps in a statistically significant number of uninjured class members.” (p. 24.) The court briefly discussed the importance of striking the right balance between avoiding overinclusion without being needlessly underinclusive. Compared to its March 2022 order, Consumer Plaintiffs now seek to narrow the class to only include Apple account holders who have spent $10 or more on app or in-app content. Under that narrowed definition, “McFadden estimates that the class includes only 7.9% uninjured members, compared to 14.6% estimated in the March 2022 decision.

Citing Olean Wholesale Grocery Cooperative, Inc. v. Bumble Bee Foods LLC, 31 F.4th 651, 669 (9th Cir. 2022), the court noted that “all that is necessary at the class certification stage is a finding that an expert’s model was ‘capable of showing’ that all class members suffered antitrust impact on a classwide basis, even those with ‘limited transactions.’” The court noted that “once Apple produces the rest of its app transactional data, McFadden will be able to calculate the exact extent of injury suffered by each class member.” (p. 26.) Although the court noted that it remained “concerned that the $10.00 cutoff results in an estimated 7.9% or 10,283,035 million uninjured accounts.” (Id.) However, it also noted that “it expects . . . that once [McFadden’s] model is fully run, that number will be reduced or the cutoff could be changed to reduce the impact of including unharmed accounts.” (Id.)

Agency Updates

This feature includes excerpts from selected press releases issued by the Antitrust Division, US DOJ, the Federal Trade Commission and the California Attorney General’s Office.  It does not include all press releases issued by those offices.  This appears to be a truly transitional time in antitrust enforcement and reading the press releases can be very helpful to stay on top of changes.

ANTITRUST DIVISION, US DEPARTMENT OF JUSTICE

https://www.justice.gov/atr/press-releases

Readout of Justice Department’s Procurement Collusion Strike Force’s Summit in Los Angeles

Thursday, February 8, 2024

Southern California Procurement Officials and Law Enforcement Officers Discussed Emerging Threats

Today, the Justice Department’s Antitrust Division, U.S. Attorney’s Office for the Central District of California and Procurement Collusion Strike Force (PCSF) hosted a summit where procurement officials and law enforcement partners from across Southern California convened to discuss emerging threats and raise awareness. U.S. Attorney (USA) Martin Estrada for the Central District of California, Deputy Assistant Attorney General (DAAG) Manish Kumar of the Justice Department’s Antitrust Division, PCSF Director Daniel Glad and law enforcement partners were joined by representatives from over a dozen state and local government agencies.

During the summit, USA Estrada and DAAG Kumar reflected on the PCSF’s growth and success since its inception in 2019. They also detailed additional resources the department has dedicated to combat procurement collusion, emphasized the importance of law enforcement partnerships and a whole-of-government response to persistent threats in government spending and sharpened the PCSF’s focus on the challenges, risks and opportunities posed by increased federal spending in Southern California.

Summit participants discussed the importance of defending critical programs under the Infrastructure Investment and Jobs Act, the Inflation Reduction Act of 2022 and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022 from procurement collusion risk. USA Estrada and DAAG Kumar also outlined the ways that state and local government agencies can partner with the PCSF to address these emerging threats. Summit participants included representatives from the FBI, Naval Criminal Investigative Service, Department of Commerce Office of Inspector General, Department of Veterans Affairs Office of Inspector General and the Defense Criminal Investigative Service.

The PCSF is the Justice Department’s coordinated, national law enforcement effort to combat antitrust crimes and related fraudulent schemes that impact procurement, grant and program funding at all levels of government — federal, state and local. The PCSF is comprised of the Antitrust Division, multiple U.S. Attorneys’ Offices around the country, the FBI and the Inspectors General for multiple federal agencies.

Since its inception in November 2019, the PCSF has opened more than 100 criminal investigations and trained more than 31,000 people. In that time, the PCSF and Antitrust Division have investigated and prosecuted over 65 companies and individuals involving over $500 million worth of government contracts. The summit marks the department’s continued support of the PCSF as it enters its fifth year. To learn more about the PCSF, or to report collusion affecting government contracts, please visit www.justice.gov/atr/procurement-collusion-strike-force.

Federal Trade Commission

FTC Action Leads to Permanent Ban for Scammers Who Charged Students Seeking Debt Relief with Junk Fees

Order requires defendants to turn over personal and business assets

February 6, 2024

A group of student loan debt relief scammers will be permanently banned from the debt relief industry and is required to turn over their assets as part of a settlement with the Federal Trade Commission.

According to the Press Release:

According to the FTC’s August 2023 complaint, since at least 2019, Express Enrollment LLC (also doing business as SLFD Processing), Intercontinental Solutions LLC (also doing business as Apex Doc Processing LLC), and their operators Marco Manzi, Ivan Esquivel, and Robert Kissinger falsely claimed to be affiliated with the U.S. Department of Education and used “Biden Loan Forgiveness” or some similar name, which consumers have understood to refer to the Biden-Harris Administration’s Student Loan Debt Relief Plan, to lure students into signing up for their phony student debt relief scheme. The FTC charged that the scheme’s operators collected approximately $8.8 million in junk fees in exchange for student loan debt relief services that did not exist. The defendants also used these misrepresentations to illegally obtain consumers’ bank account, debit card, or credit card information, and typically collect hundreds of dollars in unlawful advance fees—sometimes through remotely created checks in violation of the Telemarketing Sales Rule, according to the FTC’s complaint. 

*     *   *

The proposed stipulated orders, which must be approved by a federal judge before they can go into effect, will ban Express Enrollment LLC and Intercontinental Solutions LLC, Kissinger, and Esquivel from the debt relief industry. The orders will also prohibit them from making any misrepresentations about financial products or services and from using false statements to collect consumers’ financial information. The proposed orders also impose a monetary judgment of $7.4 million, which is largely suspended due to an inability to pay. The defendants are required to turn over personal and business assets. If any of the defendants are found to have materially misrepresented their finances, the full amount of the monetary judgment would become immediately due from that defendant.

FTC Obtains $195 Million Judgment, Permanent Ban on Telemarketing and Selling Healthcare Products Against Simple Health Over Charges It Sold Sham Health Insurance

FTC charged that Simple Health claimed to offer health care insurance with comprehensive coverage and instead effectively left most consumers uninsured

February 9, 2024

“The Federal Trade Commission has obtained a $195 million judgment against Simple Health Plans LLC and its CEO Steven J. Dorfman over charges they duped consumers into signing up for sham health care plans that did not deliver the coverage or benefits they promised and effectively left consumers uninsured and exposed to limitless medical expenses.”

According to the Press Release:

 “Simple Health preyed on consumers by selling them bogus health care insurance that cost them thousands of dollars for ‘benefits’ that in fact left consumers unprotected,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “We are pleased the court recognized this blatant bait and switch and ordered the company and its CEO to turn over the money they bilked from consumers.”

Court Enters $20.3 Million Judgment in FTC Case Against Merchant Cash Advance Operator Jonathan Braun for Deceiving Small Businesses and Unlawfully Seizing Assets

Court’s judgment follows the permanent injunction imposed against Braun issued in October 2023

February 14, 2024

“As a result of a Federal Trade Commission lawsuit, a federal court has entered a judgment requiring merchant cash advance operator Jonathan Braun to pay $20.3 million in monetary relief and civil penalties. This is the first trial by jury that the FTC has ever conducted.”

“The judgment follows a January trial in which a jury found that Braun, in his role with small-business funding company RCG Advances, which formerly did business as Richmond Capital Group, knowingly violated the Gramm-Leach-Bliley Act by deceiving small businesses about the amount of funding that Defendants would provide to and collect from them. The court entered a judgment of $3,421,067 to redress the harm that Braun’s misconduct caused to small businesses.  In addition, noting the utter disregard and contempt that Braun showed to consumers, including spewing vile threats and profanities to small business owners, the court imposed $16,956,000 in civil penalties for Braun’s violations of law.”

According to the Press Release:

“I agree with the Court’s assessment regarding the egregiousness and deliberateness of Braun’s extensive lawbreaking,” said Samuel Levine, the Director of the FTC’s Bureau of Consumer Protection. “The FTC is committed to protecting small businesses, and the $20.3 million judgment sends a powerful message that lies and deception will not be tolerated in the marketplace.”

FTC Order Will Ban California-based Company from COVID-19 Advertising Claims

Case was part of the Commission’s efforts to combat COVID-related health fraud February 15, 2024

“The Federal Trade Commission announced a proposed settlement that would ban California-based Precision Patient Outcomes, Inc. (PPO) and the company’s CEO Margrett Priest Lewis from claiming that dietary supplements can treat, prevent, or mitigate COVID-19.”

According to the Press Release:

“The order announced today bans PPO and its owner from making COVID-related health claims and unsubstantiated health claims generally” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “It is a reminder to the marketplace that competent and reliable scientific evidence is compulsory when advertising health-related claims.”

FTC, California DFPI Case Leads to Ban Against Operators of Mortgage Relief Scam Home Matters USA

Court finds defendants deceived thousands of consumers, requires payment of $19 million for consumer refunds and civil penalties

February 16, 2024

“A federal court has issued an order banning the operators of the Home Matters USA mortgage relief scam from the telemarketing and debt relief businesses and requiring them to turn over $19 million as a result of a lawsuit by the Federal Trade Commission and the California Department of Financial Protection and Innovation (DFPI).”

According to the Press Release:

“The court found that the defendants falsely promised to reduce homeowners’ mortgage payments and prevent foreclosures, defrauding distressed homeowners out of millions of dollars. The scheme harmed more than 3,000 people nationwide, particularly elders and veterans.”

 “Our win in this case sends a clear message to scammers who target consumers facing financial hardship: the FTC and our law enforcement partners are focused on fighting fraud and halting it,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “We look forward to more opportunities to partner with the California DFPI on behalf of consumers.”

“This case also demonstrates the value of the California Consumer Financial Protection Law as a tool to combat deceptive and predatory financial schemes. Fraudsters everywhere should take note – DFPI will find you, expose you, and hold you accountable. Victims of fraud should likewise take heart. The DFPI has your back,” said DFPI Commissioner Clothilde Hewlett.

CALIFORNIA DEPARTMENT OF JUSTICE

Attorney General Bonta Files Lawsuit Against Southern California Construction Company for Violating Labor Laws and Failing to Pay Wages Owed

Thursday February 1, 2024 Press Release

“California Attorney General Rob Bonta today announced a lawsuit against a Southern California-based construction subcontractor alleging ongoing wage and hour violations. The lawsuit alleges that West Coast Drywall & Company, Inc., (which conducts business as West Coast Drywall & Paint) failed to pay employees wages owed, overtime wages, provide accurate and complete itemized wage statements, reimburse for tools and equipment, and provide mandated breaks for its field employees since at least August of 2019.”

According to the Press Release:

“Attorney General Bonta is committed to defending workers’ rights, workplace safety, and California’s fair and competitive labor market. Through the Civil Rights Enforcement Section, the Worker Rights and Fair Labor Section, and the Antitrust Law Section, Attorney General Bonta enforces California’s laws to protect the welfare of California workers and legitimate businesses operating in California. In 2023, Attorney General Bonta took action to protect workers, launching an historic investigation into gender discrimination in the National Football League, joined 17 attorneys general in supporting the Federal Trade Commission’s proposed rule limiting noncompete agreements, fought for the rights of transportation workers, and immigrant children. In November 2022, Attorney General Bonta joined 21 attorneys general in filing an amicus brief opposing McDonald’s attempt to evade liability for past alleged efforts to stifle competition and undercut wages through the use of “no-poach” agreements. In October 2022, Attorney General Bonta filed an amicus brief in an effort to protect Californians from discrimination in the employment hiring process.”

Attorney General Bonta Announces $350 Million Settlement with Multinational Marketing Firm Publicis Health for its Role in Fueling the Opioid Crisis

Thursday, January 1, 2024 Press Release

“California Attorney General Rob Bonta today announced a $350 million national settlement with Publicis Health, LLC, to resolve investigations into the global marketing and communications firm’s role in the prescription opioid crisis. California will receive approximately $31 million from the settlement to help address this crisis. The settlement money is anticipated to be paid in the second quarter of 2024.”

According to the Press Release:

“No settlement can bring back the lives lost or reverse the devastating pain caused by the opioid crisis. At the California Department of Justice, we are committed to holding accountable those who fueled this crisis through their greed and willful misconduct,” said Attorney General Bonta.  “Today’s settlement with Publicis builds on that commitment in our continued fight for justice and relief for Californians. I am proud of the work put in by my team and by our partners across the nation in making this settlement possible.”

Attorney General Bonta Announces $150 Million Multistate Agreement with Hikma Pharmaceuticals for its Role in the Opioid Epidemic

Thursday, January 1, 2024 Press Release

“California Attorney General Rob Bonta today announced a multistate agreement in principle on monetary terms, requiring opioid manufacturer Hikma Pharmaceuticals to pay up to $150 million to address its role in the opioid epidemic. Hikma produces a range of generic opioid products and sells hundreds of millions of opioid doses every year. The Attorneys General allege that from 2006 to 2021, Hikma failed to monitor and report suspicious opioid orders from potentially illegal distributors, even while its personnel knew their systems to monitor suspicious orders were inadequate and prone to failure. The announcement will provide $115 million in cash and $35 million in opioid addiction treatment medication to resolve claims brought by states and local communities against Hikma. States that do not accept the medication will receive cash in lieu of product.”

Attorney General Bonta Supports the Federal Trade Commission’s Efforts to Ban Hidden Fees Nationwide

Tuesday, February 6, 2024 Press Release

“California Attorney General Rob Bonta today submitted a comment letter to the Federal Trade Commission (FTC) supporting the Commission’s new “Rule on Unfair or Deceptive Fees,” which would ban hidden fees nationwide. The FTC’s proposed rule would prohibit deception regarding the total costs of goods or services by banning the practices of omitting fees from advertised prices or misrepresenting the nature and purpose of fees. This proposed federal ban on hidden fees (also called “junk fees”) follows California’s nation-leading work to protect consumers from deceptive advertised prices. Last year, Attorney General Bonta and the California Low-Income Consumer Coalition co-sponsored Senate Bill 478 (SB 478), which bans hidden fees by prohibiting businesses from showing a price to California consumers that isn’t the upfront, all-in price. Under SB 478, all advertised, displayed, or offered prices must include all mandatory fees, other than tax and shipping. SB 478 was signed by Governor Newsom in October and will take effect on July 1, 2024.”

According to the Press Release:

“It is essential that families across the nation have price transparency when making purchases. As evidenced by California’s landmark legislation to ban hidden fees, California recognizes the importance of protecting consumers through price transparency,” said Attorney General Bonta. “We thank and commend the Federal Trade Commission in setting a national floor for consumer protections while preserving the ability of states to go further in protecting their consumers; we are proud to work alongside our federal partners to ensure a fair and transparent marketplace and to protect consumers from confusing and increasingly egregious hidden fees.”


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