Antitrust and Unfair Competition Law
Sidecar’s Monopolization Lawsuit Against Uber Allowed To Continue Down The Road
Elizabeth C. Pritzker
Pritzker Levine LLP
In a May 1, 2020 order, Chief Magistrate Judge Joseph Spero denied Uber’s motion to dismiss a monopolization complaint filed by Sidecar, a defunct ride-hailing company that claims it was driven out of business by Uber’s alleged anticompetitive practices in the ride-hailing market. The case is SC Innovations, Inc. v. Uber Technologies, Inc., No. 18-cv-07440-JCS, 2020 WL 2097611 (N.D. Cal., May 1, 2020).
The order is an important read for antitrust practitioners. It provides a useful analysis of the level of pleading required to allege market power in the context of an incomplete monopoly, where the defendant has less than full control of the market, particularly in what Uber describes as the two-sided market of rail hiding platforms.
This was Uber’s second effort to dismiss the action. In a prior order, Judge Spero dismissed Sidecar’s complaint for failure to provide sufficient allegations of market power, “particularly its failure to allege ‘that Uber has the power to raise market prices above competitive levels, simply be reducing its own output,’ or that Lyft — allegedly Uber’s only remaining competitor — “could not respond to such a reduction by increasing its own output.” SC Innovations, 2020 WL 2097611, at *1. Sidecar cured these pleading deficiencies in its amended complaint, leading to the Court’s denial of Uber’s second motion to dismiss.
The case describes the relatively recent history of the ride-hailing industry. As alleged in Sidecar’s complaint, in 2009, Uber launched its smartphone app, offering a service for passengers to arrange for transportation limousines driven by licensed chauffeurs. Id. at *2. SC Innovations (Sidecar) launched its own ride-hailing app in 2012, allowing passengers to hail drivers who used their own personal vehicles, and pioneering a number of features including estimated fares before booking and carpool rides for multiple passengers traveling in the same direction. Lyft—which is now Uber’s only remaining competitor in the ride-hailing market—introduced a similar service the same year. Id.
Sidecar further alleges that its app allowed drivers to set their own proposed fares and compete against one another. Over the course of its existence, Sidecar operated in San Francisco, Austin, Los Angeles, Chicago, Philadelphia, New York, Seattle, San Diego, San Jose, Boston, and Washington, DC, obtaining market share of between 10% and 15% in some of those cities. Uber, which at the time was rapidly growing, accumulating significant investment capital, and becoming the dominant ride-hailing platform in the United States, debuted its “UberX” product in 2013, following Sidecar’s lead in allowing drivers to use their personal, non-limousine vehicles, and directly competing with Sidecar and Lyft, which Uber allegedly recognized as threats to its business model. Uber operated in all of the same cities as Sidecar by mid-2014, and now has a market share of between 60% and 75% in each of those cities. Id at *2.
Ride-hailing apps allow participating passengers to request rides and drivers to accept those requests. The passenger pays a fare for the ride, of which a portion is retained by the ride-hailing company and the balance is paid to the driver. Id at *2. Sidecar alleges that Uber has, since its inception, consistently set its prices below cost in an effort to achieve a “winner takes all” outcome due to the ride-hailing market’s barriers to entry—in particular, network effects caused by passengers preferring a platform with a large supply of drivers and drivers preferring a platform with a large supply of passengers. Id at *2.
Sidecar alleges that Uber has engaged in predatory pricing on each of the two “sides” of the ride-hailing market, offering above-market incentive payments to drivers, and offering below-market fares to passengers. Allegedly, Uber has, in at least some circumstances, priced its rides below the costs that it pays drivers, and has lost billions of dollars in the process. According to Sidecar, Uber’s strategy is premised on the goal of establishing a monopoly and reaping the reward of supracompetitive monopolist pricing in order to recoup early losses. Uber would recoup the losses it has accrued, Sidecar alleges, by lowering payments to drivers and raising fares for passengers. Uber has also engaged in what Sidecar characterizes as price discrimination, initially by using “surge pricing” to set higher prices at times of high demand, and later by using “dynamic pricing” to set different prices for different users based on factors including the users’ perceived price sensitivity and ability to pay. Id. at *3.
In addition to Uber’s pricing strategies, Sidecar contends that Uber has sought to monopolize the ride-hailing market by interfering with its competitors Lyft and Sidecar, engaging in “clandestine campaigns”—with names like “Project Hell” and “SLOG”. The campaigns included submitting fraudulent requests for rides on competitors’ platforms and cancelling before the drivers arrived, or having Uber representatives request rides in order to start a conversation with Sidecar and Lyft drivers and convince them to work exclusively for Uber. Those tactics violated Sidecar’s terms of service and increased wait times for both drivers and passengers to obtain legitimate rides, causing them to become frustrated with Sidecar. As a result of network effects, reduced numbers of passengers and drivers created a vicious cycle of declining usage for Sidecar. Unable to compete with Uber’s predatory pricing, Sidecar exited the ride-hailing market in December of 2015. Id. *3.
Because of the network efforts resulting from Uber’s size and dominance, and because of Uber’s discriminatory pricing, Sidecar alleges that Lyft is unable to respond effectively or to increase its own share of rides as a restraint on Uber’s pricing. According to Sidecar, Lyft is not able to respond to Uber’s price discrimination strategy by expanding its output or seizing significant additional market share through price competition. Sidecar thus alleges that “Uber is able to impose its will on both passengers and drivers in the form of higher, supra-competitive prices” for riders, and reduced compensation for ride-hailing drivers. Id.at *3.
Sidecar alleges that Uber’s monopoly conduct (predatory pricing and tortious conduct) harm competition in the ride-hailing industry by eliminating an innovator (Sidecar) and by severely weakening Lyft’s ability to act as an effective competitor. Id. at *4. As relevant here, Sidecar asserts claims for monopolization and attempted monopolization, based both on predatory pricing and on exclusionary tortious conduct, in violation of section 2 of the Sherman Act. Id. at *5.
The Motion to Dismiss
Uber moved to dismiss the complaint, asserting several arguments. First, Uber argued that Sidecar had not alleged that Uber has unilateral power to raise market prices by reducing its own output, contending that allegations of price discrimination cannot substitute for the ability to restrict output. Second, relying on the Supreme Court’s holding in Ohio v. American Express Co., 138 S.Ct. 2274 (2018), Uber argued that Sidecar’s complaint had not sufficiently addressed both sides of the “two-sided transaction market” for ride-hailing platforms, focusing only on passengers and neglecting the effect of the symbiotic market for drivers. Third, Uber argued that Sidecar’s complaint relied on a noncognizable oligopoly theory of market power. Fourth, Uber argued claim for tortious interference failed because Sidecar had not alleged cognizable market power and also because Sidecar’s allegations that Uber’s purported tortious conduct harmed competition are speculative. Id.at *5-6.
Judge Spero addresses each argument in turn.
To succeed on its monopolization claim, Judge Spero reasoned, Sidecar must plausibly allege monopoly power, that is “power to ‘control prices or exclude competition.’” Id. at *8 (citing Cost Mgmt. Services, Inc. v. Wash. Nat. Gas Co., 99 F.3d 937, 950 (9th Cir.) (internal citation omitted). “The typical way in which an incomplete monopolist—a defendant with less than full control of the market—can nevertheless exert monopoly power is when the party controls enough of the market that ‘by restricting output, it can restrict marketwide output and, hence, increase marketwide price.’” Id. (citing Rebel Oil v. Atlantic Richfield Co., 51 F.3d 1421, 1424 (9th Cir. 1995)). Rebel Oil does not permit Sherman Act claims based on a theory that an alleged monopolist has market power through a “disciplined oligopoly” with a competitor. For that reason, Judge Spero previously dismissed Sidecar’s complaint based on assertions that Lyft will not constrain Uber’s ability to reduce market power and collect supracompetitive prices. Id (italics in original).
In contrast, however, Sidecar’s amended pleading alleges that Lyft is unable to respond effectively or to increase its own share of rides as a restraint on Uber’s pricing “in part due to the network effects of Uber’s dominance.” Id (italics in original). This pleading change—that alleged network effects prevent a smaller competitor from increasing output, much in the same way as they would prevent a new entrant from gaining a foothold—was deemed sufficiently plausible to adequately plead a monopoly claim under Rebel Oil, Judge Spero held. Id at *8-9.
Uber also argued that dismissal was warranted because, it asserted, Sidecar’s amended pleading does not sufficiently plead both “sides” of the two-sided market for ride hailing, which Uber argued was required by American Express. Id. at *9. Judge Spero contrasted American Express, which was decided after a lengthy trial, not on the pleadings, “and certainly did not hold that market power cannot be established in a two-sided market,” finding that American Express does not foreclose Sidecar’s pleading here. Id. Judge Spero then held, here: “’Sidecar has addressed both sides of the market, as opposed to only one side of the platform in isolation,’…and has plausibly suggested a mechanism—the same network effects addressed in American Express—by which Uber can leverage its dominate market share to raise both passenger fares and commissions withheld from drivers without a rival increasing output to restore competitive equilibrium.” Id.
This is sufficient at the pleading stage. “The fact that drivers would also benefit from increased passenger fares, at least absent further increases in Uber’s commissions, does not render fare increases inherently procompetitive, but instead presents a fact-intensive issue to be resolved on an evidentiary record,” Judge Spero held. “At this stage, the Court finds Sidecar’s allegations of market power to be sufficiently plausible to avoid dismissal.” Id. at *9.
Probability of Recoupment
Judge Spero rejected Uber’s argument that Sidecar had not sufficiently alleged a dangerous probability of recoupment – because, in Uber’s view, Sidecar had alleged market power only through a “disciplined oligopoly” with Lyft – for similar reasons. As discussed above, Judge Spero found “Sidecar had plausibly alleged that Uber could unilaterally raise the ‘price’ that it keeps for itself from ride-hailing transactions to supracompetitive levels—through fare increases not fully passed on to drivers, commission increases reducing drivers’ pay not offset by discounts for passengers, or a combination of the two—while insulated by network effects from Lyft or a new market entrant usurping Uber’s market share.” Id. at *10. “In addition to showing market power, that provide a plausible means for Uber to recoup its losses from alleged predatory pricing” the Court held. Id.
As to Sidecar’s tortious interference claim, Uber argued that Sidecar “must overcome a presumption that such alleged [tortious] conduct has a de minimis effect on competition.” Id. at *10-11. Judge Spero was unconvinced that Uber’s claimed presumptive standard was applicable, since the cases Uber cited for this proposition were specific to claims based on false and misleading advertising. Finding that Sidecar must show injury to competition, not just to itself, to support its monopoly allegations, Judge Spero found Sidecar’s allegations “that the campaigns continued from mid-2014 through Sidecar exiting the market in 2015, that Uber conduct the campaigns specifically to harm its only two significant competitors, that both drivers and passengers were harmed by Uber’s ‘fraudulent’ ride requests, that network effects amplified the harm to Sidecar and caused a ‘downward spiral’ ending with one of only three participants exiting the market, and that Uber used those campaigns to obtain and consolidate monopoly power are sufficient at the pleading stage—in conjunction with the allegations of market power discussed above—to plausibly allege harm to competition.” Id. at *11.