E-BRIEFS, NEWS AND NOTES: MAY 2023

By Lee Berger and William Travis West

In a lengthy opinion, the Ninth Circuit largely affirmed the district court’s rejection of Epic’s claims against Apple for violating antitrust laws due to its in-app payment processor (“IAP”) and walled garden approach to apps on its iPhones and iPads.  Although largely affirming the district court, the Ninth Circuit did note several errors in its analysis and clarified some aspects of antitrust law in the Ninth Circuit regarding market definition and rule of reason analysis. 

For background, Epic, the maker of the popular video game Fortnite, brought antitrust claims under Sections 1 and 2 of the Sherman Act alleging restraint of trade and monopolization.  It alleged that Apple through the agreements it imposed on app developers required developers to agree to pay a mandatory 30% commission for any in-app purchase and refused to allow alternative app stores on iOS devices, and that these requirements violated the antitrust laws.  After a bench trial, the district court held that the Section 1 claim failed, as a contract of adhesion is not a contract for purposes of the Sherman Act.  In the alternative, the district court held that the Section 1 claim failed under the rule of reason as Apple had established non-pretextual, legally cognizable procompetitive rationales for its restrictions and that Epic’s proposed less restrictive alternatives were severely underdeveloped.  The district court also rejected the Section 2 monopolization claim as Epic failed to demonstrate anticompetitive effects.  But it did find for Epic on its California Unfair Competition Law (“UCL”) claim and entered an injunction against Apple’s anti-steering provision that bars developers from directing users to alternative ways to pay.  Apple also brought counterclaims for breach of contract. The district court agreed Epic had breached the parties’ contract but declined to award attorney’s fees to Apple. 

The Ninth Circuit largely affirmed the district court. Although it noted several instances where the district court was wrong, the Ninth Circuit held most of those to be harmless errors.

Market Definition

Before evaluating the specifics of the antitrust claims, the panel reviewed whether the district court properly defined the market.  Epic had proposed an aftermarket for iOS app distribution and iOS IAP solutions.  The district court instead defined the relevant market as mobile-game transactions.  Epic raised four challenges to this definition: 1) the district court erroneously held that an antitrust market can never relate to a product that is not licensed or sold; 2) the district court improperly required lack of consumer awareness to establish an aftermarket; 3) the district court incorrectly required a change in policy to establish an aftermarket; and 4) the district court wrongly required Epic to demonstrate the magnitude of switching costs.  The panel agreed with Epic on the first and third issues but held the district court’s errors to be harmless because Epic failed on the second and fourth issues.  On the harmless error point, though, Judge S.R. Thomas dissented, arguing that the errors in the market definition were systemic for the antitrust analysis in the district court opinion and also affected how Epic would have presented its arguments had it known how the market would be defined.

Sherman Act Section 1: Unreasonable Restraint

As a threshold matter, the panel rejected out of hand the district court’s holding that a contract of adhesion is not a contract under Section 1, holding that it violated the statute’s plain language and would exempt a variety of clearly anticompetitive agreements.  The panel held, though, that the district court’s rule of reason analysis rendered it a harmless error.  Agreeing with the district court that Apple’s conduct had anticompetitive effects, the panel also concurred with the district court that Apple’s rationales (compensation for its IP for its operating system and security/privacy for its users) were legitimate justifications.  Things fell apart for Epic, though, when it tried to propose less restrictive alternatives, as both the district court and panel found these underdeveloped and potentially unworkable. 

The panel also addressed an amicus brief from the United States which argued that when an antitrust plaintiff fails at step three (the less restrictive alternatives step), the court is required to conduct a fourth “totality of the circumstances” step where it balances the anticompetitive effects with the procompetitive benefits.  Recognizing that Ninth Circuit precedent had been unclear on this issue, the panel clarified that the fourth step is indeed required, which could be an important development for antitrust cases in the Ninth Circuit going forward.  Although the district court failed to conduct the fourth step explicitly, the panel held this omission harmless as language in the opinion indicated that district court had conducted the required balancing. 

Sherman Act Section 1: Tying

The panel also affirmed the district court’s holding rejecting Epic’s tying claim, although here it rejected the district court’s analysis in its entirety.  The district court had held that the IAP was not a separate product, that there was no demand for an IAP as a standalone product, that it would make no sense for a developer not to use Apple’s IAP because Apple would still be entitled to collect commissions, and that a product in a two-sided market can never be broken into multiple products.  The panel held every one of these of these rationales either wrong as a matter of law or fact.  But the panel held that although ties can be per se illegal, it would join the D.C. Circuit in holding that per se condemnation of ties is inappropriate for software that serves as a platform for third-party applications given that the market was highly innovative and the record did not support such a finding.  Applying the rule of reason instead, the panel said the analysis mirrors the more general Section 1 claim analysis, and rejected the tying claim for the same reason. 

Sherman Act Section 2: Monopoly Maintenance

The panel agreed with the district court’s holding that Epic had failed to establish monopoly power in the mobile-games market and that, similar to its rule of reason analysis, had failed to establish that Apple’s restrictions were anticompetitive.

Other Claims

The panel upheld the district court’s finding that Epic had breached its agreement with Apple, as Epic’s defenses about the contract’s illegality depended on the validity of its antitrust claims.  For the UCL claim, the panel affirmed the district court and rejected Apple’s argument that Epic’s failure to prevail on its antitrust claims entitled it to a safe harbor that would preclude UCL liability.  Instead, the panel drew a distinction between when a claim fails for lack of sufficient proof compared to conduct not subject to challenge under antitrust law due to a categorical legal bar.  It is only in the latter scenario that the safe harbor would apply.  As the panel noted, Apple’s favored interpretation would allow defendants who defeat an antitrust action to avoid the “unfair” prong of the UCL automatically in all circumstances.  The panel also upheld the injunction prohibiting the anti-steering provision.

Finally, the panel reversed and remanded the district court’s refusal to impose attorney fees on Epic. 

What stands out most about this opinion is the continued deference paid to Apple’s security and privacy assertions.  While the court required a balancing of the anticompetitive and procompetitive effects of Apple’s conduct under the rule of reason, it relied on a single conclusory assertion in the district court’s opinion that the procompetitive effects offset the anticompetitive effects.  In some cases, such as this one, it can be very difficult to balance unquantified effects – how does the unquantified increase in IAP fees caused by Apple’s walled garden rules compare to Apple’s unquantified security and privacy benefits?  But the panel sidestepped this issue, finding essentially that if there are procompetitive effects and a plaintiff cannot show less restrictive alternatives, then it is reasonable to find that the balancing favors the defendant.  If the panel (reluctantly) is going to require a balancing test, some actual balancing should be done.

By Cheryl Johnson

State of New York v. Meta Platforms, No.21-7078,—F. 4th—, 2023 WL 3102921

(D.C. Cir.  April 27, 2023)

The D.C. Circuit affirmed dismissal of 46 states’ complaint challenging Facebook’s acquisitions and restrictive platform policies under the Sherman and Clayton Acts. The complaint filed in December 2020 challenged Facebook’s string of acquisitions between 2012 and 2016, including that of Instagram in 2012 and WhatsApp in 2014, where Facebook either leveraged the technology of the acquired companies to grow its social networking market or shelved the companies’ or its own competing technology post-acquisition. 2023 WL 3102921, at *1-2. The panel said that the states’ complaint was “odd” because it concerned an industry which “has had rapid growth and innovation with no end in sight.” Id. at *3. Not only was the complaint “odd” but it was too “old” said the panel, confirming the lower court’s dismissal of the complaint on laches grounds. It found that the Clayton Act did not exempt the states’ parens patriae suit from the laches doctrine that applied to any “person” suing under the Act. Id. at *7. Using the four-year statutes of limitation for antitrust damages as a “guideline” to what amounted to unreasonable delay, the Court declared that the states’ delay in filing was “unreasonable and unjustified.” Id. Finally, it agreed with the lower court that the states’ own complaint confirmed the existence of economic prejudice to Facebook from the delay. Id. at *7-8.

Because Facebook’s original motion to dismiss did not assert laches as to the Facebook Platform policy claims, the panel assessed the substantive viability of those claims and found they failed to state a cause of action. Id. at *8. First, the court rejected the states’ challenge to Facebook’s “competitor integration policy” that allegedly forbid competing apps and apps linked with competing platforms from accessing Facebook APIs. According to the court, this policy was limited to the operation of canvas apps which left developers free to develop applications for Facebook competitors. Id. at *11. Thus, this policy was not a form of “conditional dealing” as claimed by the states, but instead was properly analyzed as exclusive dealing. As such, this claim was subject to dismissal because the states did not adequately allege substantial market foreclosure. Id. 

Additionally disputed was Facebook’s “core functionality policy” which prohibited “developers from using Facebook’s Platform to duplicate Facebook’s core products.” Id. at *12. The states claimed Facebook used this policy to “cut off” competitors from accessing Facebook’s valuable network and to degrade rivals’ content. Id. at *12-13. The court said this amounted to a claim that Facebook refused to cooperate with its competitors, a refusal it deemed lawful under Verizon v. Trinko. Id. Though recognizing that there are a “few exceptions” to Trinko, its analysis did not go beyond simply noting that here there had been no course of prior dealing to trigger the Aspen Skiing exception. Id. at *12. Because under Trinko a firm has no antitrust duty to deal with its rivals or any obligation to provide a certain level of service, all the company’s actions or inactions could be viewed as refusals to deal. Id. at *12-13. For this reason, the panel also rejected the argument of United States as amicus that Facebook’s platform policies had different effects from unilateral refusals to deal. Id. at *13.

By Amar S. Naik

On March 29, 2023, three sets of plaintiffs successfully obtained class certification over an alleged scheme by the nation’s largest pork producers to limit supply and inflate prices between 2014 and 2018.[1] The classes represent direct purchaser entities, thousands of commercial indirect purchasers, and millions of consumers, respectively. All three classes alleged a per se violation of the Sherman Act, and the consumer class also pleaded a rule of reason claim regarding certain information exchanges.

As a preliminary matter, the court rejected defendants’ motions to exclude expert testimony because it determined that plaintiffs’ experts satisfied the “less stringent Daubert standard” utilized at the class certification stage. The court emphasized that purported factual inaccuracies, benchmarking errors, and internal inconsistencies went to credibility rather than admissibility of expert testimony. The court further held that Daubert did not require experts to disaggregate fully any lawful and unlawful conduct in their models or to account for every variable that could impact prices. Despite defendants’ criticisms, the court concluded that plaintiffs’ experts used generally accepted principles and methods and reliably applied them to the facts.

On class certification, the court first focused on Rule 23(a)(2)’s commonality requirement. The court held that plaintiffs satisfied commonality on their per se claims because “[p]roof of and defenses to the defendants’ alleged conspiracy will be common to all class members, as is typical of all nationwide horizontal price-fixing conspiracy class actions.” Although the rule of reason claim required a more specialized analysis, the court concluded that the consumer class satisfied commonality for this claim because the class submitted extensive evidence regarding the relevant geographic and product markets.

The court then concluded that plaintiffs met Rule 23(b)(3)’s “demanding” predominance requirement. The court determined that plaintiffs’ experts identified and controlled for defendants’ criticisms of their models and benchmarking. Citing recent decisions from the Packaged Seafood and Broiler Chicken antitrust cases, the court explained that the “averaging methodology” used by plaintiffs’ experts did not mask individualized differences because of the “extensive evidence that market prices generally set the individual defendants’ prices” and the fact that “[i]ndividual differences between negotiations and transactions do not disrupt the fact that the Defendants’ conspiracy, if true, would cause all prices to increase.” The court further found that the small number of “uninjured class members” would not prevent a showing of predominance because they represented, at most, a de minimis amount of the class. Finally, the court held that it would be inappropriate at the class certification stage to resolve factual disputes regarding whether plaintiffs’ experts ignored economic realities or sufficiently isolated the effects of the alleged conspiracy.

The court also certified an injunctive relief class pursuant to Rule 23(b)(2) for the commercial indirect purchaser plaintiffs. Although Rule 23(b)(2) is less stringent than Rule 23(b)(3)—including because there is no need to show predominance—a Rule 23(b)(2) class “must still be cohesive because unnamed class members are bound to the outcome without the opportunity to opt out.” Here, the court certified the injunctive relief class because it determined that the claims were sufficiently cohesive.

Separately, although acknowledging that “it was a close call,” the court held that any differences identified by defendants among state antitrust, consumer protection, and unjust enrichment laws were not material within the context of an alleged price-fixing conspiracy and did not “swamp any common issues.” The court emphasized that none of the alleged differences raised by defendants related to liability. It further noted that the court may subdivide the classes in the future, if necessary, to account for variances of state law on damages.

[1] The case is captioned In re Pork Antitrust Litigation, Case No. 18-cv-01776, MDL No. 21-2998 (D. Minn.).

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

On April 5, 2023, a Central District of California federal court granted a motion to dismiss Pandora’s amended counterclaims without leave to amend.  In re Pandora Media, LLC Copyright Litigation, 2:22-cv-00809-MCS-MAR, ECF 164 (Apr. 5, 2023).  This order highlights the difficulties of defining the market or establishing an anticompetitive agreement in the media industry, particularly when the alleged product involves difficult-to-define “must have” content.

Background

This action consolidates several copyright lawsuits brought by comedians, including Lewis Black and Bill Engvall, against Pandora, an audio streaming service.  A stand-up comic’s recorded performance involves two separate copyrights: a copyright in the sound recording, and a separate copyright in the spoken word composition.  The comedians alleged that Pandora made their works available on its service without having valid licenses for both copyrights, and that Pandora had rebuffed efforts from agencies Spoken Giants and Word Collections to negotiate a blanket licensing agreement for these copyrights. 

Pandora responded on May 5, 2022 by filing counterclaims under both Sections 1 and 2 of the Sherman Act, claiming that Spoken Giant and Word Collections’ true business models are that of cartel leaders, consolidating the claims of the comedians in order to fix the price of their licenses and monopolize the market for literary works rights in comedy recordings. In other words, the agencies, in forcing Pandora to accept an “all or nothing” blanket license, eliminated direct price competition that otherwise would have existed between Pandora and individual comedians.  The court dismissed the counterclaims on October 26, 2022 for failure to demonstrate market power and for failure to state claims for a price fixing conspiracy or a tying conspiracy.  Pandora filed amended counterclaims on November 18, 2022, which the comedians moved to dismiss on December 19, 2022.  

Order on Motion to Dismiss the Amended Counterclaims

Many of the arguments in the new motion to dismiss, such as Article III standing and antitrust standing, are repeated from the prior round of motion to dismiss briefing, and the court denied them on the same grounds already rejected in the October 26, 2022 order.  Id. at 8-9. 

To support the Section 1 claims, Pandora alleged two forms of liability: (1) an agreement among Spoken Giants’ and Word Collections’ comedian members to fix prices and (2) bilateral agreements between Spoken Giants, Word Collections, and their comedian members to unreasonably restrain trade.  Id. at 10.  Under the classic Twombly framework, Pandora alleged parallel conduct as well as a number of “plus factors” to show indirect evidence of agreement. The court rejected Pandora’s assertion that no individual comedian would have demanded a supracompetitive royalty, noting that reliance on historical practice is insufficient, and that it is “not satisfied” that no reasonable comedian would demand an increased royalty absent agreement. In addition, this theory conflicted with Pandora’s Section 2 argument, which alleges that the Spoken Word and Word Collections members were “superstar” and “must-have” comedians necessary to run a comedy streaming service.  A superstar comedian would likely be in a position to unilaterally request higher royalties.  Id. at 12.  This also caused the court to reject Pandora’s claims that any attempt by a comedian to charge supracompetitive royalties would result in their recordings being removed by Pandora; again, if the comedian is a “must-have” superstar, then such removal is not necessarily a foregone conclusion. The court went on to reject plus factors based on motive, timing, and press releases that purportedly provided assurances to member comedians. Taken together, Pandora’s allegations are “entirely consistent with permissible conscious parallel conduct.” Id. at 14.  The court dismissed the second Section 1 liability theory under the Copperweld framework, noting that the affiliation agreements between Spoken Word, Word Collections, and their member comedians “established a principal-agent relationship that cannot form the basis of an agreement to restrain trade” in violation of Section 1.  Id. at 16.

The court also dismissed Pandora’s Section 2 claims for monopolization and attempted monopolization.  Pandora failed to plead direct evidence of market power, because Pandora still has not provided a reliable basis for determining who a “superstar” or “must-have” comedian is, and so it could not find that Spoken Giants and Word Collections control a critical mass of these superstars in the relevant market. Pandora cites lists of comedians from Rolling Stone and Billboard, but the court noted that Lewis Black is on neither list, and this mechanism ignores comedians who have risen to prominence more recently.  Id. at 20-21. The allegations of circumstantial market power fared no better; in addition to the problem with defining “superstar” comedians, Pandora “also fails to allege facts from which the Court could conclude that Spoken Giants or Word Collections controls a dominant share of the market or that there are significant barriers to entry.” Id. at 22.  Again, looking at Pandora’s media lists, roughly 44% of those comedians are not affiliated with Spoken Giants or Word Collections, so it “is unclear, then, why Pandora could not form its own ‘critical mass’” from these comedians.  Id. at 24.

The court concluded by dismissing the amended counterclaims without leave to amend, noting that it had expressed doubt when dismissing the original counterclaims that Pandora could adequately state a claim, and that the amended claims “confirmed this initial impression was correct.”  Id. at 26