Antitrust and Unfair Competition Law
E-BRIEFS, NEWS AND NOTES: JANUARY 2023
WELCOME to the JANUARY 2023 edition of E-Briefs, News and Notes.
This edition has a variety of content:
In SECTION NEWS, we feature the following:
- Message from Dominique Alepin, Section Chair
- View from the Floor: Review of the 2023 UCL Institute
- Call For Nominations: 2023 Antitrust Lawyer of the Year
E-BRIEFS will feature two cases and a summary of the new FTC Proposed Rules to ban noncompete clauses. These cases include the Qualcomm decision, a mixed result for both sides, and the Ninth Circuit’s affirmance of the dismissal of monopoly claims against Google.
IN CASE YOU MISSED IT re-posts numerous articles and other matters of interest to antitrust and unfair competition lawyers. Curated by Bob Connolly.
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 (Manifold@whafh.com) and James Dallal (JDallal@cpmlegal.com).
Message from the Section Chair
Dear Section Members:
Happy New Year to all members of the Antitrust & UCL Section of the California Lawyers Association! May 2023 bring you many opportunities for growth, success, and happiness in your personal and professional endeavors.
This past week, the Executive Committee and its advisors gathered in San Francisco to discuss the Section’s plans for 2023. We spent a good deal of time defining our strategic priorities. I wanted to take this opportunity to give our members a preview of what we are working on and give you a chance to think about how you can help us.
First, you may be familiar with our Mission “to engage, inform, and inspire generations of lawyers and further the practice of antitrust and unfair competition law in California.”
In furtherance of this Mission, the Executive Committee has defined its strategic priorities for 2023:
- The Section continues to be a platform for cutting edge topics, thought leaders and trailblazers.
- The Section offers an on-ramp for new lawyers and works to promote and increase the diversity of both the Section and the State Bar.
- The Section is a “big tent” with opportunities for members to engage in and drive its activities.
- The Section advances, promotes and honors leaders in the antitrust and UCL bar.
We have also developed focus areas for addressing these priorities; and this is where our efforts must now be the greatest. These focus areas include: re-vamping our website and LinkedIn, improving communication to members, growing our subcommittees, investing in our marquee events (GSI, Women in Competition, UCL Institute), launching the Summer New Lawyer Mixer, growing our diversity and inclusion fellowship program, debuting an award for new antitrust and UCL lawyers, forming closer relationships with law schools, educating our members about the California Law Review Commission’s antitrust study, developing education for new lawyers, continuing outreach to our law firm partners, optimizing resources and revenue, creating a sustainable foundation for Section activities, and thinking more strategically about partnering with our sponsors.
I am hopeful that the above resonates with what you expect of this Section. Carrying out these focus areas will require a tremendous amount of effort and hard work, and we need participation from all those who are willing. As you review the focus areas above, consider which one or more you may be inclined to contribute your time to addressing. Please feel free to reach out to me directly.
Help us be great. We can’t do it without you.
2022-2023 Chair, Antitrust & UCL Section
ANTITRUST & UNFAIR COMPETITION LAW INSTITUTE: A VIEW FROM THE FLOOR
OPENING REMARKS BY TOM DAHDOUH
Mr. Dahdouh has over 31 years of experience at the FTC and continues as an Advisor to the Section to this day. Mr. Dahdouh discussed the FTC’s November 2022 updated “Policy Statement Regarding the Scope of Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act.” He reviewed the 2015 Policy Statement and the background leading to the “back to basics” November 2022 update. Mr. Dahdouh briefly focused on the basic principles to be considered: the method of competition (the conduct); must negatively impact conditions (focus on the incipiency), and the cognizable justifications. Read More Here
Call for Nominations: 2023 Antitrust Lawyer of the Year!
To nominate a candidate for consideration, please submit this completed form [LINK TO FORM] together with any supporting materials by February 8, 2023, Considerations include: Stage of Career, Section of Practice; and Achievements in the Field of Antitrust. Please send both the form and supporting materials to: Dominique.Alepin@nike.com and email@example.com.
FTC Issues Proposed Rules to Ban Noncompete Clauses and Takes Unprecedented Enforcement Action
By Lee F. Berger and Sean Aasen, Steptoe & Johnson LLP
The FTC has taken its strongest actions yet to limit private contract terms constraining employees’ ability to work for competitors, both issuing a proposed rule barring most noncompete agreements and filing complaints against and consent decrees with three companies prohibiting their specific noncompete provisions.
The FTC is taking direct aim at ending noncompete clauses. And as the enforcement actions show, the agency will not simply wait for its rule to become final before it challenges noncompete clauses it deems violate the FTC Act.
The Proposed Rule
In a 3-1 vote, the FTC issued a proposed rule that would make it unlawful for an employer to:
- Enter into or attempt to enter into a noncompete with a worker;
- Maintain a noncompete with a worker; or
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The proposed rule’s application is not restricted to “employees,” but applies to the broader category of “workers”—which includes independent contractors, volunteers, interns, sole proprietors, and apprentices. There is an exception that permits a noncompete agreement when there is a sale of substantially all of a business, and the person the noncompete clause restricts is a substantial owner of the business. Significantly, the FTC also warns that “other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes,” including certain nondisclosure agreements.
The Enforcement Actions
On January 4, the FTC entered into unprecedented consent decrees prohibiting three companies from enforcing noncompete clauses. According to the FTC, the three companies each engaged in an “unfair method of competition” in violation of Section 5 of the FTC Act by imposing “noncompete restrictions on workers in positions ranging from low-wage security guards to manufacturing workers to engineers that barred them from seeking or accepting work with another employer or operating a competing business after they left the companies.” As the FTC noted, this represents the first time the agency has brought an enforcement action targeting noncompete clauses.
What This Means for Companies and Employees
The FTC’s proposed rule represents a sea change in how many courts and enforcers would analyze noncompete clauses. Previously, the legality of noncompetes generally has been assessed under the rule of reason (i.e., whether they are likely to have an anticompetitive effect outweighing any procompetitive justification), by looking at the scope, duration, and any other features of the clause that could bear on its reasonableness. Under the proposed rule, noncompete clauses would be per se illegal (i.e., a court will not examine any justification for the clause), with very few carve outs and exceptions.
It is important to remember that the FTC’s rule is far from final. Following the public comment period and the anticipated adoption of the rule in final form, companies should expect a flurry of litigation challenging the rule under principles of constitutional and administrative law. Commissioner Christine S. Wilson’s dissenting statement called the rule a “radical departure from hundreds of years of legal precedent” and identified several ways the rule is “vulnerable to meritorious challenges.”
The notice-and-comment rulemaking process can take many months to complete; all noncompete clauses will not become unlawful overnight, although the FTC has made its position quite clear. But the length of the rulemaking process should not lull employers into a false sense of security. It is no coincidence that the FTC announced its first-of-its-kind enforcement actions targeting noncompete clauses the day before announcing the proposed rule.
Mixed Result in Qualcomm Decision on Remand
By Katherine Van Horn, University of the Pacific, McGeorge School of Law
Qualcomm has standard essential patents (SEPs) in various telecommunication devices, particularly in modem chips that allow communication between cellphones. Qualcomm licenses these patents to manufacturers, done in fair, reasonable, and non-discriminatory (FRAND) terms. Qualcomm allegedly refused to license SEPs to competitors and engaged in exclusive dealing with one particular manufacturer, Apple. Plaintiff consumers allege that the price impacts of these alleged violations resulted in consumer mark-ups.
The District Court (NDCA) reviewed the plaintiffs’ allegations after the Ninth Circuit remanded a related FTC case, F.T.C. v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020) (dismissing federal antitrust claims and remanding to consider the applicability of the state antitrust laws). On remand, the Court considered whether the plaintiffs had viable claims under the Cartwright Act, and UCL. Given the action was a MDL in diversity, the Court used the standard of what the state’s highest court would decide or predict how the state’s highest court would resolve the particular issue if not previously decided. The California antitrust law claims survived in part and were dismissed in part.
The Cartwright Act
This Court held that Plaintiffs would need to find an “extraordinary difference” between the FTC case and the consumer’s factual or legal claims in order to meet their burden of proof and survive dismissal. The Court analyzed the following claims under the Cartwright Act.
Plaintiffs alleged that Qualcomm tied their SEPs by requiring Apple to purchase the license and refrain from litigation related to the SEPs. The district court found that, as in the FTC action, Qualcomm did not restrain competition to sell their SEPs because no competitor exists to sell their SEPs. The Court agreed with the FTC court finding that the problem was patent related not antitrust related. The Court disagreed with Plaintiffs’ reliance on Cipro, 61 Cal.4th 116 (2015) (agreements to avoid patent litigation can violate antitrust law) finding that Plaintiffs’ argument fell outside the state’s stare decisis and required the Court to create a novel tying theory that did not currently exist. The Plaintiff’s tying claim failed as a matter of law.
- Exclusive Dealing
Qualcomm allegedly engaged in exclusive dealing with Apple because Apple agreed to exclusively purchase Qualcomm modem chips and not purchase any competitor’s modem chips. The FTC claim failed because federal law required a showing that agreements substantially foreclosed competition, which the FTC failed to show. Here, Plaintiffs alleged that there were other component part suppliers and device makers that engaged in such exclusive deals, not just Apple. So when Intel tried to make deals with Apple to purchase their modem chips in 2015, the Apple-Qualcomm deals substantially foreclosed competition and delayed competition by two years, when Apple switched to Intel chips in 2017. Plaintiffs’ exclusive dealing claim survived.
Unfair Competition Law
The UCL prohibits any “unlawful, unfair, or fraudulent business act or practice” (Cal. Bus. & Prof. Code § 17200). Qualcomm moved to dismiss all UCL claims.
- Unlawful Prong
Plaintiffs successfully showed that Qualcomm’s conduct was “a business practice” and forbidden by law (exclusive dealings claim discussed above). Plaintiffs’ claim under the unlawful prong survives.
- Unfairness Prong
Plaintiffs’ unfairness claim survived only in part. In FTC,the Plaintiffs claimed Qualcomm violated FRAND when Qualcomm refused to license their SEPs to other competitors besides Apple. However, the Ninth Circuit categorized these violations as hypercompetitive, not anticompetitive. Therefore, the Court did not find this conduct was unfair but that the exclusive dealings conduct was unfair.
- Fraudulent Prong
Plaintiffs alleged that Qualcomm defrauded the patent community by obtaining their SEPs based on promises to license under FRAND and then disregarded those promises. Qualcomm argued that Plaintiffs failed to plead specific instances of reliance on Qualcomm’s statements. The Court agreed and found this failure to be dispositive.
Consumers’ allegations regarding exclusive dealings under the Cartwright Act and under the UCL’s unlawful and unfair prongs survive. Conversely, the Court dismisses the tying claim under the Cartwright Act, and fraudulent prong of the UCL.
Ninth Circuit Affirms Dismissal of Monopoly Claims Against Google
By Lillian Grinnell (Wolf Haldenstein)
In a ruling affirming the dismissal granted in Dreamstime.com, LLC v. Google LLC, the Ninth Circuit ruled that with respect to the relevant market of online search advertising, Dreamstime had not sufficiently alleged anticompetitive conduct on Google’s part. Indeed, it had failed to define the relevant market to include the online, organic search market in addition to the online search advertising market. It therefore waived any § 2 claim that would have arisen from the online search market as a whole, as allegations related to organic search results would not support a claim related to the paid online search advertising. In addition, the Ninth Circuit held that Dreamstime also failed to show that any mistreatment by Google to it as a customer – specifically, that it undermined Dreamstime’s performance in organic search results, and had unlawfully captured user and advertiser data – had extended to general harm to competition as a whole in the online search advertising market. Therefore, Dreamstime had failed to allege an antitrust injury or allege anticompetitive behavior.
Dreamstime, a Romanian stock image website, had originally sued Google under Section 2 of the Sherman Act, alleging that it had violated the statute by maintaining a monopoly within the online search advertising market. Because Dreamstime relies mostly on user traffic from search engines for its customer base, Google search results are an important element of Dreamstime’s business model, and to that end Dreamstime has been advertising on Google since 2004. In order to do so, it agreed to the Google Ads Agreement. That agreement allows Google to suspend or remove any advertisements from its network and cancel advertising accounts, all while critically making no guarantees about advertisement performance in either organic or paid search results. Google revised its search engine algorithm in 2015 to give more weight to “certain words based on how the webpage displayed them.” Soon after the revision, however, Dreamstime noticed a drop in its new customers, culminating in a fall of 30% by April 2016. Dreamstime reached out to Google as its search rankings declined, and Google’s Search Engine Optimization (“SEO”) support told Dreamstime that the latter site’s “weak content” was the issue. In response, Dreamstime poured millions of dollars into revamping the site to improve its ranking – but it still declined, in contrast to its ranking on other search engines. It is important to note that whether or not Google’s algorithm was in fact responsible for Dreamstime’s drop in rankings is still a disputed factual issue, with each side pointing to the same algorithmic experiments to support its contention.
Dreamstime’s First Amended Complaint (“FAC”) had alleged eight anticompetitive acts: “ (1) rigging the Google Ads bidding process; (2) demoting Dreamstime’s organic search results on Google; (3) favoring Google’s stock photo contractual partners, Shutterstock and Getty Images; (4) selectively enforcing the Google Ads rules and terms; (5) elevating inferior stock photo websites above Dreamstime in search results; (6) suspending Dreamstime’s mobile application; (7) misappropriating Dreamstime’s licensed photos and showing them on Google Images; and (8) unlawfully capturing data from users and advertisers.” Slip Op. at 19. These acts, individually and taken together, all were alleged to have harmed competition in the online search advertising market. The district court dismissed, finding that Dreamstime had failed to define a relevant market or antitrust injury.
In its opinion, the Ninth Circuit found that Dreamstime had not established either of the two elements required to make up a Section 2 claim. The first of these elements – that the defendant have monopoly power in the relevant market – would seem on the surface to be easily satisfied simply by virtue of Google’s gargantuan size, but Dreamstime, in its allegations, was found to have failed to extend its definition to include both the organic search results as well as the sponsored search market into the relevant market. Quoting Verizon Commcations Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004), the Circuit stated that “[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system.” And while the Circuit “recognized that market share is perhaps the ‘most important factor to consider’ when determining whether a defendant has monopoly power” (Slip Op. at 11, quoting Movie 1 & 2 v. United Artists Commc’ns, 909 F.2d 1245, 1254 (9th Cir. 1990)), simple size cannot equal monopoly power in the context of a Sherman Act Section 2 claim – the relevant market has to be suitably defined.
It stands to reason that Dreamstime may have plausibly been able to do so, but as the decision notes, the original complaint in this case created confusion as to whether or not Dreamstime was alleging a single market of search engine advertising, or two markets with an added market of organic online searches, or even the stock image market – wherein Dreamstime would have been a direct competitor to Google. But in response, Dreamstime retorted that it made its claim “a consumer of Google’s AdWords services in the search advertising market” and it was “not claiming there is a downstream stock photo market that Google is trying to monopolize.” Slip Op. at 15. To that end, the subsequently-filed FAC and Dreamstime in responding to the next motion to dismiss again asserted that the relevant market was the “online search advertising market” – even though its allegations concerned both the online search and online stock photo markets as well. Therefore, the Ninth Circuit, like the district court below, found that Dreamstime did not satisfy the first element of Section 2 as it failed to define a relevant market.
The decision also focused heavily on the second element of a Section 2 claim – namely, the “willfulness” of a defendant’s actions to acquire or maintain the monopoly in question in the relevant market – a prong which would seem much more difficult for Dreamstime to have satisfied. Here, plaintiffs are required to show that a defendant intentionality behind conduct, namely, “intent to control prices or exclude competition in the relevant market.” (Slip Op. at 12, quoting Cal. Comput. Prods., Inc. v. Int’l Bus. Machs. Corp., 613 F.2d 727, 736 (9th Cir. 1979)). Intent may be inferred not when an individual competitor is harmed but rather when the competitive process as a whole is. Google’s harm to one customer, and as pleaded, no competitors, did not harm or exclude competition, and therefore willfulness could not be inferred.
It is unclear why Dreamstime did not simply plead that Google was a monopolist in search engines as a whole – as of January 6, 2023, it holds a market share of 84% — instead of only carving out the sponsored segment of the market. It also stands to reason that it could have more plausibly alleged harm to competition itself as a competitor in the stock photo market by claiming that Google in altering its algorithm sought to lower the rankings of any nascent competition – that is to say, that it harnessed its power as a monopolist in the search engine market in order to gain market share in the stock photo market. Instead, Dreamstime argued that Google acted anticompetitively to harm the stock image business in order to maintain Google’s monopoly specifically in the online search advertising business. According to Dreamstime, the search engine’s allegedly rigged and selective enforcement of policies caused monopoly pricing in the search advertising market. The Ninth Circuit was unpersuaded.
In Case You Missed It
Curated by Bob Connolly
By David Shepardson, Reuters/Yahoo News, January 13, 2023
“The Justice Department’s top antitrust official recently won approval from the department to oversee investigations involving Google parent Alphabet Inc, a person briefed on the matter told Reuters.”
By Brian Fung, CNN, January 12, 2023
“President Joe Biden called on members of Congress Wednesday to set aside partisan differences and pass groundbreaking legislation to rein in Big Tech, focusing on digital privacy, antitrust and the industry’s liability shield, Section 230 of the Communications Decency Act.”
By Josh Sisco, January 10, 2023, Politico
“The FTC probe comes as the agency looks to dust off a decades old, but long dormant price-discrimination law. Beverage giants Coca-Cola and PepsiCo are under preliminary investigation at the Federal Trade Commission over potential price discrimination in the soft drink market as the agency looks to revive a decades-old, but largely dormant law banning the practice, according to four people with knowledge of the probe.”
Published: Jan 03, 2023. Publicly Released: Jan 03, 2023, GAO-23-105790
“We found that DOJ and FTC have an interagency clearance process to identify which agency will take on an antitrust case, and instances of conflict rarely occur. In addition, after an investigative agency is determined through the clearance process, the other agency rarely interferes or comments on that investigation.”
By David Thomas, Reuters, December 28, 2023
“Many U.S. law firms will spend part of 2023 fighting on their own behalf over millions of dollars in legal fees, squaring off in lawsuits against ex-clients or urging courts to reward them for their work. Here are some of the fee fights to watch in the new year.”
By Makenzie Holland, Tech Target, December 21, 2022
“Major antitrust cases are expected to play out in 2023 while federal regulators consider new interpretations of existing antitrust laws to broaden enforcement capabilities. Federal regulators will continue to go after big tech companies on antitrust grounds in 2023 — and experts say some trends and lawsuits could change the course of antitrust law interpretation in the U.S.”