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Author: Jarod Bona

Have you ever considered the idea that your business would be much more profitable if you didn’t have to compete so hard with that pesky competitor or group of competitors?

Unless you lack competition—which is great for profits, read Peter Thiel’s book—this notion has probably crossed your mind. And that’s okay—the government doesn’t indict and prosecute the antitrust laws for what is solely in your mind, at least not yet.

But, except in limited instances, you should definitely not divide markets or customers with your competitors. Indeed, you shouldn’t even discuss the idea with your competitors, or, really, anyone (many antitrust cases are made on inconveniently worded internal emails and texts).

The reason that you shouldn’t discuss it is that market-allocation agreements are one of the few types of conduct that the antitrust laws consider so bad, courts label them “per se antitrust violations.” The other per se antitrust offenses are price-fixing, bid-rigging, maybe tying, and sometimes group boycotts.

What is a Market-Allocation Agreement?

When competitors divide a market in which they can compete into sections in which one or more competitors decline to compete in favor of others, they have entered into a market-allocation agreement.

The antitrust problem with a market-allocation agreement is that a group of customers experience a reduction in the number of suppliers that serve them. The companies dividing the markets benefit, of course, because they have less competition for at least some of the market, which means that it is easier to raise prices or reduce quality.

It doesn’t matter, from an antitrust perspective, how the competitors divide the markets or even whether they both end up competing for that product or service after the agreement.

For an obvious example, ponder a small town with two large real-estate brokerage businesses—Northern Real Estate Brokers and Southern Real Estate Brokers. A river flows through the town, roughly dividing it into northern and southern regions. The Northern Real Estate Brokers mostly attract clients north of the river and the Southern Real Estate Brokers usually service clients south of the river. But the river is passable; there is a bridge and it isn’t that big of a river anyway. So sometimes agents of each brokerage will participate in transactions on the other side of the river from their normal client base.

Late one evening, in the middle of the bridge, the leaders of the two companies meet and agree that from that point on, each company would only represent sellers for properties on their side of the river.

This is a market-allocation agreement and the leaders could find themselves in antitrust litigation, or even jail (the Department of Justice will often prosecute per se antitrust violations as criminal law violations).

While the geographic boundary created an obvious method for the two companies to divide markets, they also could have agreed not to steal each other’s existing customers (market allocation based upon incumbency, which is common). So if a real estate agent from the northern brokerage firm won a customer, no agent from the southern brokerage firm would compete for that customer’s business in the future.

This customer allocation agreement is also a per se antitrust violation. To see how this type of antitrust offense can develop in a seemingly innocent way, read our article on the anatomy of a per se antitrust violation.

In this way, the antitrust laws actually encourage stealing customers.

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Author: Luis Blanquez

Two of the main pillars from the Biden Administration Antitrust Policy in 2023 have been an aggressive merger enforcement agenda and its crusade against Big Tech and vertical integration.

On the merger side, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have published new Merger Guidelines (see also here) and proposed new changes to Hart-Scott-Rodino Act (HSR) notification requirements (see also here.) In addition, both antitrust agencies have challenged more mergers in 2022 and 2023 than ever before. In a letter from November 2023 responding to questions from Rep. Tom Tiffany, R-Wis., FTC Chair Lina Khan stressed the fact that:

“a complete assessment of the FTC’s success in stopping harmful mergers reveals that of the 38 mergers challenged during my tenure as Chair, 19 were abandoned, another 14 were settled with divestitures, and two are pending a final outcome.”

This includes key acquisitions such as the Nvidia/Arm Ltd or Meta/Within, among many others. And the FTC is showing no signs of slowing down this aggressive approach. Another recent example of a merger challenge by the DOJ is the Live Nation/Ticketmaster’s complaint.

But despite the FTC’s Chair confidence and the recent new challenge by the DOJ, this hasn’t been an easy path for the antitrust enforcers. Courts in the US have pushed back several of the agencies’ extreme challenges and new theories, such as in the Microsoft/Activision, (see also here, here, and here.)

On the Big Tech front things do not look much better. Both agencies have filed major illegal monopolization cases, sometimes together with State AGs, against Apple (Smartphones), Google (Google Search and Google Ad Technology), Amazon (Online Retail), and Meta (Instagram/WhatsApp––see also here––, and Within acquisitions.)

In other words, if you work in Big Tech, forget about acquiring an AI startup, unless you want to go through a long and hostile review process. This is having a serious impact on the most disruptive and growing industry we’ve seen in years.

The “Magnificent Seven” Tech Companies

The ascendency of Apple, Microsoft, Nvidia, Tesla, Meta, Alphabet and Amazon, the so-called “Magnificent Seven” tech stocks––is indicative of “a fundamental shift”, primarily propelled by advancements in AI. Currently, the top seven tech stocks have not only accounted for about half of the gains in the entire S&P 500, but also contributed to over a quarter of the index’s total market capitalization. These companies are not merely riding the wave of current technologies but actively shaping the future of AI. They collectively gather most of the market cap in the industry.

But until we see a shift on the current enforcers’ antitrust policy against acquisitions involving Big Tech, it doesn’t matter how well these companies perform. Why? Because as a startup in the tech industry (and really in any industry), your main goal is to either try to eventually go public through an IPO––if you become big enough––, or rather look for one of the Big Tech companies to acquire you. But with the antitrust agencies’ current appetite to block such transactions, Venture Capital companies and investors in the AI industry are thinking twice before risking their money on a startup, unless they specifically know that company is going public. Otherwise, the risk that VCs and investors see to get the deal blocked by either the FTC or DOJ is just too high, regardless of the potential these startups might have. And let’s be honest, the number of companies that make it to that level is already extremely low.

First, this is clear evidence of how such an aggressive and disproportionate approach to acquisitions involving Big Tech is currently hindering innovation in the most relevant and disruptive industry we’ve seen in years. But this is a topic for another article.

Second, what I want to discuss in this article is how because of such an extreme approach from the Biden Administration, Big Tech are starting to develop new and creative strategies to get involved in the AI industry, without having to acquire any startups and face the antitrust agencies. At least not until now, because this has already raised some eyebrows at both the DOJ and FTC.

Microsoft/Inflection

The first of these deals involves Microsoft and Inflection.

Backed by Microsoft, Nvidia and billionaires Reid Hoffman, Bill Gates and Eric Schmidt; ex-DeepMind leader Mustafa Suleyman––now Google’s main AI lab, and Reid Hoffman, who co-founded LinkedIn, started Inflection in 2022, claiming to have the world’s best AI hardware setup.

Inflection thesis was based on AI systems that can engage in open-ended dialogue, answer questions and assist with a variety of tasks. Named Pi for “personal intelligence,” Inflection’s first release helped users talk through questions or problems over back-and-forth dialog it then remembers, seemingly getting to know its user over time. While it can give fact-based answers, it’s more personal and “human” than any other chatbot.

In March of this year, Microsoft announced the payment of $650 million to inflection. $620 million for non-exclusive licensing fees for the technology (meaning Inflection is free to license it elsewhere) and $30 million for Inflection to agree not to sue over Microsoft’s poaching, which includes co-founders Mustafa Suleyman and Karén Simonyan. Suleyman will run Microsoft’s newly formed consumer AI unit, called Microsoft AI–– a new division at Microsoft that will bring together their consumer AI efforts, as well as Copilot, Bing and Edge––, whereas Simonyan is joining the company as a chief scientist in the same new group. Inflection will host Inflection-2.5 on Microsoft Azure. It will be also pivoting away from building the personalized AI chatbot Pi to become an AI studio helping other companies work with large language model AI.

So here is where it gets interesting. Microsoft didn’t formally need to make an offer to acquire Inflection. In other words, technically Inflection remains an independent company. But the antitrust agencies seem to disagree and have started asking themselves the following questions.

First, if the key people, money and technology have all left the company to go to Microsoft, what’s really left in Inflection to still be considered as a competitor in the market?

Second, could this qualify as a change in control according to 16 C.F.R. §801.1(b)? What about a file-able acquisition of just “assets”––a term currently undefined by the HSR statute and regulations?

And third, does this move create a “reverse acqui-hire” transaction, a practice which is becoming very popular in the AI industry? The so-called “acqui-hires,” are transactions in which one company acquires another with the main purpose to absorb key talent. But what’s going on in the AI industry is not quite the same. Big Tech are acquiring key employees––such as Suleyman and Simonyan with their core teams in this case––, while licensing technology, leaving the targeted company still functioning independently––so no HSR filing requirement is apparently triggered. This is not the first time we’ve seen this scenario in the AI industry. Last month, Amazon poached Adept’s CEO and key employees, while getting a license to Adept’s AI systems and datasets.

But the antitrust enforcers have started to ask themselves whether Inflection and Adept are still real competitors in the AI market. The FTC has already sent subpoenas to both parties in the Microsoft/Inflection transaction, asking for information about a potential gun-jumping scenario: whether the $650 million deal may qualify as an informal acquisition requiring previous government approval. In the case of Amazon/Adept, the FTC has also decided to start an investigation and asked for more information.

OpenAI, Nvidia and Microsoft

The FTC and DOJ are finalizing an agreement to split duties to investigate potential antitrust violations of Microsoft, OpenAI, and Nvidia.

According to Politico, the DOJ will lead the Nvidia investigation, and its leading position in supplying the high-end semiconductors underpinning AI computing, while the FTC is set to probe whether Microsoft, and its partner OpenAI, have unfair advantages with the rapidly evolving technology, particularly around the technology used for large language models. At issue is the so-called AI stack, which includes high-performance semiconductors, massive cloud computing resources, data for training large language models, the software needed to integrate those components and consumer-facing applications like ChatGPT.

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Author: Luis Blanquez

We recently wrote about the Federal Trade Commission’s blog post explaining how relying on a common algorithm to determine your pricing decisions might violate Section 1 of the Sherman Act.

The FTC has Algorithmic Price-Fixing in its Antitrust Crosshairs

It was just a matter of time until the first cases would hit the courts. That’s why during the last couple of years, we’ve seen four main federal antitrust cases alleging that algorithmic pricing might violate the antitrust laws. In three of them, the antitrust agencies also filed Statements of Interest (SOI), outlining the agencies’ opinion about what the legal principles applicable to claims of algorithmic price fixing should be.

Realpage, Inc. Software Antitrust Litigation

This multidistrict litigation in the Middle District of Tennessee involves unlawful price-fixing schemes against multifamily housing developers and managers, and student housing developers and managers, both organized by RealPage––a software algorithm company. RealPage developed software to collect property owners’ and managers’ data, used for pricing and inventory strategies, that later shared with its clients.

In January 2024, the Court: (i) denied the motion to dismiss the multifamily housing cases––the renters plausibly alleged an antitrust violation, but (ii) rejected claims alleging a horizontal price-fixing conspiracy among landlords, which would have been per se illegal. The Court, however, concluded that those same landlords vertically conspired with RealPage. The Court also dismissed the student housing plaintiffs’ complaint.

In parallel, the DOJ opened an investigation and filed a SOI. Among other things, the DOJ highlighted:

  • The fact that today software algorithms process more information more rapidly than humans and can be employed to fix prices. The technical capabilities of software can enhance competitors’ ability to optimize cartel gains, monitor real-time deviations, and minimize incentives to cheat.
  • Section 1 prohibits competitors from fixing prices by knowingly sharing their competitive information with, and then relying on pricing decisions from, a common human pricing agent who competitors know analyzes information from multiple competitors. The same prohibition applies where the common pricing agent is a common software algorithm.
  • Factual allegations in both complaints point to evidence of an invitation to act in concert followed by acceptance—evidence that is sufficient to plead concerted action. Among other things, RealPage required each user to submit real-time pricing and supply data to it, and RealPage’s marketing materials allegedly “touted” its use of “non-public data from other RealPage clients,” enabling them to “raise rents in concert”; as well as the algorithms’ ability to “facilitate collaboration among operations” and “track your competition’s rent with precision.”
  • The complaints then allege that the landlords “gave their adherence to the scheme and participated in it.” In particular, the landlords allegedly sent RealPage the non-public and competitively sensitive data (as RealPage proposed), and overwhelmingly priced their units in line with RealPage’s suggested prices (80-90%). Indeed, the complaints also contain ample allegations on how RealPage directly constrained the “deviations” from its suggested prices, including by enforcing and monitoring compliance with those prices, so the landlords effectively delegated aspects of their pricing decisions.
  • Relatedly, the multifamily plaintiffs allege that the landlords jointly delegated aspects of decision making on prices to RealPage. They allege that, by using RealPage’s pricing algorithms, each client defendant “agreed” to a common plan that involved “delegat[ing] their rental price and supply decisions to a common decision maker, RealPage.” Indeed, RealPage allegedly touted this feature—stating in a press release that it gives clients “the ability to ‘outsource daily pricing and ongoing revenue oversight,’” such that RealPage could “set prices” as though it “own[ed]” the clients’ properties “ourselves.’”
  • Jointly delegating any part of the decision-making process reflects concerted action. That the delegation is to a software algorithm, rather than a human, makes no difference to the legal analysis. Just as “surrender[ing] freedom of action. . . and agree[ing] to abide by the will of the association” can be enough for concerted action, so can be relying on a joint algorithm that generates prices based on shared competitively sensitive data.
  • The “per se” rule prohibiting price fixing applies to price fixing using algorithms. And the analysis is no different simply because a software algorithm is involved. The alleged scheme meets the legal criteria for “per se” unlawful price fixing. Although not every use of an algorithm to set price qualifies as a per se violation of Section 1 of the Sherman Act, it is per se unlawful when, as alleged here, competitors knowingly combine their sensitive, nonpublic pricing and supply information in an algorithm that they rely upon in making pricing decisions, with the knowledge and expectation that other competitors will do the same.

The District of Columbia Attorney General has also filed a similar action in the Superior Court of D.C., alleging violations of the D.C. Antitrust Act.

Duffy v. Yardi Systems, Inc.

In this case from the US District Court for the Western District of Washington, plaintiffs allege that competing landlords violated Section 1 of the Sherman Act, by unlawfully agreeing “to use Yardi’s pricing algorithms to artificially inflate” multifamily rental prices.

The Agencies also filed a SOI to explain the two legal principles applicable to claims of algorithmic price fixing. First, a competitors’ agreement to use an algorithm software with knowledge that other competitors are doing the same thing constitutes evidence of a contract, combination or conspiracy that may violate Section 1. Second, the fact that defendants deviate from the pricing algorithm’s recommendations––for instance, by just setting initial starting prices or by starting with prices lower than the ones the algorithm recommends—is not enough to get them “off the hook” for illegal price fixing (even if no information is directly shared between the parties).

The Agencies SOI’s focus was on the second point: Defendants retaining pricing discretion. The Agencies stress in the SOI that it is “per se” illegal for competing landlords to jointly delegate key aspects of their pricing to a common algorithm, even if the landlords retain some authority to deviate from the algorithm’s recommendations. Although full adherence to a price-fixing scheme may render it more effective, the effectiveness of the scheme is not a requirement for “per se” illegality. Consistent with black letter conspiracy law, the violation is the agreement, and unsuccessful price-fixing agreements are also per se illegal.

Casino-Hotel Operators Cases

Two new algorithmic pricing antitrust cases are also ongoing against casino hotel operators in Las Vegas and Atlantic City.

In Cornish-Adebiyi v. Caesar’s Entertainment, Inc., a case pending in the U.S. District Court for the District of New Jersey, plaintiffs allege a conspiracy against eight Atlantic City casino-hotel operators, and the Cendyn Group LLC, which is a provider of the algorithmic software platform, called “Rainmaker,” used to fix, raise, and stabilize the prices of casino-hotel guest rooms in Atlantic City. Rainmaker allegedly gathers real-time pricing and occupancy data to generate “optimal” room rates for each participating casino hotel, which the software then recommends to each casino hotel.

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Author: Steven Cernak

Some of us have been asserting for years that Robinson Patman, the federal price-discrimination antitrust law, is merely “forgotten but not gone.”  That is, while there has been no FTC enforcement in decades, a few private lawsuits are filed every year and careful potential defendants still follow Robison Patman compliance programs. Recent statements suggesting a potential FTC revival seemed to jog the memories of practitioners that Robinson Patman remains on the books. Now, a lower court judgment by a dedicated group of plaintiffs and their lawyer provides more evidence that the law is anything but gone.

Clear Eyed Look at Robinson Patman

Very generally, Robinson Patman prohibits a seller of goods from offering lower prices or greater promotional allowances to one purchaser than to another competing purchaser. As we explain in other posts, there are many elements and defenses that make is difficult for a plaintiff to win. Court interpretations of those elements and defenses for the last few decades have only increased that difficulty. Still, one recent case shows that victory at the trial court level is possible.

In L.A. International Corp. v. Prestige Consumer Healthcare, Inc., Defendants manufacture and distribute Clear Eyes eye drops. The suit alleged that Defendants sold Clear Eyes at a lower price and with greater promotional allowances to Costco (specifically, Costco Business Centers that resell to retailers) than to Plaintiffs. Plaintiffs are several distributors that also buy and resell such products to retailers like local convenience stores. Interestingly, some of these same plaintiffs, and their counsel, have been involved in a long-running series of Robinson Patman cases alleging that the manufacturer of 5-Hour Energy also discriminated in favor of Costco.

Here, the case was filed in August 2018 and went to trial in December 2023. A jury found that Defendants had violated Section 2(a) (and a California unfair competition law) by offering a lower net price to Costco than to most of the Plaintiffs. The jury allocated about $700,000 in actual damages among several of the Plaintiffs. In May 2024, the judge found that Defendants also had violated Section 2(d) by offering greater promotional allowances to Costco and issued an injunction requiring Defendants to offer identical prices and proportionally equal promotional allowances to Plaintiffs going forward.

At the same time as his injunction ruling, the judge rejected Defendants’ arguments about several problems with the jury instructions. Specifically, the judge refused to reconsider the instructions laying out the overall standard that Plaintiffs had to meet as well as how a potential “functional discount” claim was to be evaluated. Unlike the lower court and Ninth Circuit in the 5-Hour Energy case, this judge seemed to have no problem supporting the jury’s verdict that most of the Plaintiffs actually competed with the Costco Business Centers.

So, in many ways, this case is unremarkable. A plaintiff presented evidence to a jury that, following a judge’s instructions mostly copied from ABA Model Instructions, found a Robinson Patman violation and set damages. The judge then followed that verdict and found another violation and provided injunctive relief. Yet, such cases and certainly such plaintiff verdicts are rare today. So, what are the takeaways for other potential plaintiffs or defendants?

Takeaways

First, maybe even more than all antitrust litigation, Robinson Patman litigation is time-consuming and fact intensive. The case took over 5 years to get to trial and the possibility of appeals still exists. The Plaintiffs are located in different parts of California plus Texas and New York. Each Plaintiff had to show at the local level that it competed with a specific Costco Business Center and that such competition was harmed by Defendants’ practices. Given the various elements and defenses and courts’ interpretations of Robinson Patman, no short cuts were possible.

Second, as we explained in prior posts and elsewhere, few courts have seen such a case in the last thirty years. Going back a couple decades further, the courts that did face such cases attempted to interpret Robinson Patman consistently with the rest of the antitrust laws under the then-new Chicago-School focus on competition and consumer welfare. As a result, there are plenty of defendant-friendly Robinson-Patman rulings, opinions, and dicta available.

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Author: Luis Blanquez

Are you delegating your pricing decisions to a common algorithm software platform? If so, you might violate the antitrust laws. It may not even matter whether you actually communicated with your competitors. All it might take is for the antitrust agencies—The Department of Justice or the Federal Trade Commission—to allege illegal collusion is the use by your company of an algorithm-software tool trained using competitively sensitive data, with knowledge that some of your competitors are doing the same thing. Even deviation from the algorithm’s recommended pricing might not save you from antitrust liability.

The FTC’s Blog Post: Price Fixing by Algorithm is Still Price Fixing

On March 1, 2024, the Federal Trade Commission (FTC) published a blog post explaining how relying on a common algorithm to determine your pricing decisions might violate Section 1 of the Sherman Act.

In the blog post, the FTC includes a previous Statement of Interest (“SOI”) filed in the Duffy v. Yardi Systems, Inc. case to explain the legal principles applicable to claims of algorithmic price fixing. First, price fixing through an algorithm is still price fixing. Second: (1) you can’t use an algorithm to evade the law banning price-fixing agreements, and (2) an agreement to use shared pricing recommendations, lists, calculations, or algorithms can still be unlawful even where co-conspirators retain some pricing discretion or cheat on the agreement.

The blog concludes with two important remarks:

  • “Agreeing to use an algorithm is an agreement. In algorithmic collusion, a pricing algorithm combines competitor data and spits out the suggested “maximized” rent for a unit given local conditions. Such software can allow landlords to collude on pricing by using an algorithm—something the law doesn’t allow IRL. When you replace once-independent pricing decisions with a shared algorithm, expect trouble. Competitors using a shared human agent to fix prices? Illegal. Doing the same thing but with an agreed upon, shared algorithm? Still illegal. It’s also irrelevant that the algorithm maker isn’t a direct competitor if you and your competitors each agree to use their product knowing the others are doing the same in concert.
  • Price deviations don’t immunize conspirators. Some things in life might require perfection, but price-fixing arrangements aren’t one of them. Just because a software recommends rather than determines a price doesn’t mean it’s legal. Setting initial starting prices or recommending initial starting prices can be illegal, even if conspirators deviate from recommended prices. And even if some of the conspirators cheat by starting with lower prices than those the algorithm recommended, that doesn’t necessarily change things. Being bad at breaking the law isn’t a defense.”

This is a bold statement from the FTC. Algorithmic collusion is not only on the agency’s radar now, but it is also one of its priorities.

Final Conclusions

Algorithm collusion is on the crosshairs of the FTC and DOJ, so expect more cases soon. And not only in the real-estate industry, as highlighted from existing investigations on the online retailing and meat processing industries. Indeed, it is becoming common practice for more industries and businesses to implement and rely on algorithms to set their pricing strategies.

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Author: Jarod Bona

Do you or your competitor have a monopoly in a particular market? If so, your conduct or their conduct might enter Sherman Act, Section 2 territory, which we call monopolization.

If you are in Europe or other jurisdictions outside of the United States, instead of monopoly, people might label the company with extreme market power as “dominant.”

Of course, it isn’t illegal itself to be a monopolist or dominant (and monopoly is profitable). But if you utilize your monopoly power or obtain or enhance your market power improperly, you might breach US, EU, or other antitrust and competition laws.

In the United States, Section 2 of the Sherman Act makes it illegal for anyone (person or entity) to “monopolize any part of the trade or commerce among the several states, or with foreign nations.” But monopoly, by itself, is not illegal. Nor is it illegal for a monopolist to engage in competition on the merits.

If you are interested in learning more about abuse of dominance in the EU, read this article.

In the United States, monopolists have more flexibility than in the EU, but they are still under significant pressure and could face lawsuits or government investigations at any time, even when they don’t intend to violate the antitrust laws. There can be a fine line between strong competition on the merits and exclusionary conduct by a monopolist.

Here are the elements of a claim for monopolization under Section 2 of the Sherman Act:

  • The possession of monopoly power in the relevant market.
  • The willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

These two basic elements look simple, but you could write books about them.

The Possession of Monopoly Power in the Relevant Market

To determine whether an entity has monopoly power, courts and agencies usually first define the relevant market, then analyze whether the firm has “monopoly” power within that market.

But because the purpose of that analysis is to figure out whether certain conduct or an arrangement harms competition or has the potential to do so, evidence of the actual detrimental effects on competition might obviate the need for a full market analysis. If you want to learn more about this point, read FTC v. Indiana Federation of Dentists (and subsequent case law and commentary). You can show monopoly power directly.

Sometimes this element leads to difficult questions about the line between monopoly power in a relevant market and something slightly less than that. Other times, the monopoly-power element comes down to how the court will define the relevant market. A broader market definition may create a finding of no monopoly power, while a more narrow definition means the powerful company has monopoly power.

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Author: Luis Blanquez

Apple is currently feeling the heat from antitrust authorities all over the world. Probably more than ever. Below is an article we recently published in the Daily Journal discussing in some detail the last developments in the Epic Games saga, both in the EU and the US.

Epic Games Has Returned to the Apple Store. Will Apple Throw a Hail Mary?

If you are a developer in the Web3 space trying to access the Apple Store, you should also review this article:

Antitrust, Web3 and Blockchain Technology: A Quick Look into the Refusal to Deal Theory as Exclusionary Conduct

So, what’s on Apple’s plate in the antitrust world on both sides of the pond?

In the European Union, the European Commission has fined Apple over €1.8 billion for abusing its dominant position on the market for the distribution of music streaming apps to iPhone and iPad users (‘iOS users’) through its App Store. The Commission found that Apple applied restrictions on app developers preventing them from informing iOS users about alternative and cheaper music subscription services available outside of the app. Such anti-steering provisions ban app developers from the following:

  • Informing iOS users within their apps about the prices of subscription offers available on the internet outside of the app.
  • Informing iOS users within their apps about the price differences between in-app subscriptions sold through Apple’s in-app purchase mechanism and those available elsewhere.
  • Including links in their apps leading iOS users to the app developer’s website on which alternative subscriptions can be bought. App developers were also prevented from contacting their own newly acquired users, for instance by email, to inform them about alternative pricing options after they set up an account.

At the same time, the European Commission has just opened a non-compliance investigation under the new Digital Markets Act about Apple’s rules on (i) steering in the App Store; (ii) its new fee structure for alternative app stores; and (iii) Apple’s compliance with user choice obligations––to easily uninstall any software applications on iOS, change default settings on iOS and prompt users with choice screens which must effectively and easily allow them to select an alternative default service.

Meanwhile, antitrust enforcement is also heating up for the Cupertino company in the United States.

Besides several private litigation actions, Epic Games recently filed a motion accusing Apple of violating an order issued last year under California law barring anti-steering rules in the App Store.

And just few days ago, the Justice Department, joined by 16 other state and district attorneys general, filed a civil antitrust lawsuit against Apple for monopolization or attempted monopolization of smartphone markets in violation of Section 2 of the Sherman Act. According to the complaint, Apple has monopoly power in the smartphone and performance smartphones markets, and it uses its control over the iPhone to engage in a broad, sustained, and illegal course of conduct. The complaint alleges that Apple’s anticompetitive course of conduct has taken several forms, many of which continue to evolve today, including:

  • Blocking Innovative Super Apps.Apple has disrupted the growth of apps with broad functionality that would make it easier for consumers to switch between competing smartphone platforms.
  • Suppressing Mobile Cloud Streaming Services. Apple has blocked the development of cloud-streaming apps and services that would allow consumers to enjoy high-quality video games and other cloud-based applications without having to pay for expensive smartphone hardware.
  • Excluding Cross-Platform Messaging Apps. Apple has made the quality of cross-platform messaging worse, less innovative, and less secure for users so that its customers have to keep buying iPhones.
  • Diminishing the Functionality of Non-Apple Smartwatches. Apple has limited the functionality of third-party smartwatches so that users who purchase the Apple Watch face substantial out-of-pocket costs if they do not keep buying iPhones.
  • Limiting Third Party Digital Wallets. Apple has prevented third-party apps from offering tap-to-pay functionality, inhibiting the creation of cross-platform third-party digital wallets.

The complaint also alleges that Apple’s conduct extends beyond these examples, affecting web browsers, video communication, news subscriptions, entertainment, automotive services, advertising, location services, and more.

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Author: Molly Donovan & Aaron Gott

This Episode Is About: Residential Real Estate and Antitrust

Why:  A settlement has been reached between the National Association of Realtors (or NAR) and the class action plaintiffs that would resolve the $1.8 billion verdict out of Missouri finding illegal collusion in the residential real estate industry. But the settlement raises its own antitrust concerns and this podcast provides actionable guidance for avoiding them. You can listen to this podcast here.

Some Background: The Missouri case focused on the NAR’s mandatory commission rule requiring the home seller to pay a non-negotiable commission to the broker representing the buyer. Plaintiffs alleged this resulted in a complete lack of competition for buy-side rates—which were artificially inflated. Before this lawsuit and copycat suits, virtually all brokerages in the industry operated under the rule and were aware that everybody else was operating in the same way.

But under the settlement, the NAR has agreed to implement a new rule prohibiting offers of buy-side compensation to be posted on the MLS (or multiple listing service, where most homes are listed for sale). Individual brokers can pursue buy-side commissions, but only off the MLS through negotiations. Assuming the settlement is approved, this change will go into effect in mid-July 2024.

Here’s what brokerages and local real estate associations need to know:

Bullet #1: Collusion often takes place after major industry disruptions like this one. Competitors panic and seek comfort in knowing how others in the industry plan to cope – we could call them “crisis cartels.” In this case, brokerages who are supposed to be competing should not discuss with one another how they plan to react to the eradication of the mandatory commission rule. Each brokerage should determine by itself how it will compete, what commissions it will seek, and from whom.

Bullet #2: Brokerages need to ensure that there isn’t a reversion back to a de facto mandatory commission rule. While some commentary suggests that disclosing to sellers and buyers that commissions are negotiable may be enough, we think that, in addition to disclosures, there must be an accessible process that prompts and facilitates bona fide arms-length negotiations over commissions. Commission negotiations should not be discouraged in any way. Disclosures to home sellers and buyers that commissions are negotiable should be understandable, easy to find and accompanied by an explanation of the actual process for negotiating.

Bullet #3: Buy-side commissions should be commensurate with the “value add” brought by the buy-side broker. This may require detaching the buy-side commission from the sale price of the home and documenting the rationale behind the final rate chosen. This shows that the rate is competitive and not an “industry-standard” or “fixed” commission.

Bullet #4: No steering. Buy-side brokers should present to clients, equally and fairly, all homes that fall within their specifications. And conversely, sale-side brokers should treat all offers equally notwithstanding commissions. Brokerages must be careful not to steer clients towards dealing with other brokerages that are known to “cooperate” with respect to commission sharing, and must not steer clients away from dealing with brokerages that are “uncooperative,” i.e., taking a unique approach to competition for clients.

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Authors: Steve Cernak, Kristen Harris, Pat Pascarella, Ruth Glaeser, Luis Blanquez

The American Bar Association Antitrust Law Section’s annual Spring Meeting in Washington DC is April 10-12 this year. Each year, the Spring Meeting has dozens of panels and events and generates numerous receptions — formal and informal — as about 4000 antitrust practitioners and enforcers flock to Washington. It is the place to be for antitrust and consumer protection lawyers and economists — so, of course, Bona Law professionals will play a leading role.

Steve Cernak will be moderating a panel of the Deputy Assistant Attorneys General of the US Department of Justice Antitrust Division on Wednesday morning. As Chair-Elect of the Section, Cernak has helped organize this Spring Meeting and is already hard at work on all the Section’s programming for the Section year starting in August.

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Author: Aaron Gott

There are a lot of lessons you can learn from Wonka. It’s a story about how ingenuity, determination, selflessness, and teamwork can overcome the oppressive adversity of a system that serves entrenched interests.

But it’s also a story about a chocolate cartel. And that offers its own lessons, too. Just ask my four kids, who now understand what I do all day (though I may have overplayed the chocolate-related aspect).

In fact, the whole plot of Wonka revolves around the machinations of this market-dominating chocolate cartel. It’s almost as if the folks over at Warner Bros. Pictures took inspiration from our Antitrust for Kids series and (surely inadvertently) left us out of the credits.

For those who haven’t seen it: Wonka is essentially the origin story of the Willy Wonka from 1971’s Willy Wonka & the Chocolate Factory. Wonka, played by Timothée Chalamet, comes to town with the intent to realize his dream of owning a chocolate shop in a ritzy plaza called the Galeries Gourmet. With little money to his name—twelve silver sovereigns that are all spent by the end of the first tune—he sets out to sell his chocolate on the street the following day. A crowd gathers, and the owners of three preeminent chocolate shops, led by Paterson Joseph’s Slugworth, at the Galeries Gourmet notice.

Spoiler Alert!: in this post, I’m talking about Wonka and there may be some spoilers. So if you haven’t seen it, go watch it, and then come back and read this post.

We learn that these three chocolatiers are, despite identifying themselves as three “fierce rivals,” in fact, the members of a chocolate cartel that has the entire market locked down. And just as soon as upstart Wonka begins trying to sell his chocolate, the cartel goes to work to prevent this competitive threat from upending its lucrative arrangement. Or as the cartel puts it, “If we don’t / get on top of this / we’ll go bust / chocopocalypse! / we’ll cease to exist.

What follows in Wonka is not only a lot of catchy numbers, but also a step-by-step guide into the workings of a successful price-fixing cartel.

  1. Control Price by Controlling Supply

Soon after the members of the chocolate cartel are introduced, we learn the strategy to which they owe their cushy, profitable position: while ostensibly fierce rivals to the outside world, each with their own shops, the chocolatiers actually pool their chocolate in a secret underground vault and strictly control the output so as to artificially depress supply, which ultimately raises prices in a market with pent-up demand.

This is a classic mechanism for a cartel to increase prices without explicitly fixing prices. Rather than attempt to set and discipline cartel members’ prices directly, which can be difficult to administer and is more easily detected by authorities, controlling supply (or production) lets the market do the work of raising prices through the hydraulic action of supply and demand. Output restrictions and price fixing are two sides of the same coin.

A classic example of output controls is the open-and-notorious oil conspiracy known as OPEC.

  1. Conceal Your Meetings and Communications

The chocolatiers’ secret underground vault isn’t just where they store their chocolate reserves; it’s also where they meet to discuss their nefarious business. The lair is underneath a Catholic church run by a frocked, chocoholic Mr. Bean on the take, and to get there, they simply go to a confessional booth, which has a secret elevator to the vault below.

Conspirators often take measures to conceal their communications and meetings, and while real-life cases do not usually involve such ostentatious means, they can still be elaborate. Some use code names and secret email addresses, while others might enlist a supplier to collect and distribute draft pricing announcements while she makes her sales rounds. Conspirators might even have a seemingly coincidental meeting at a charity golf tournament.

And while this cartel was meeting directly in its secret lair, it could have accomplished a similar scheme by integrating Father Bean as the hub of a hub-and-spoke conspiracy. Some notable recent cases have featured accusations of conspiracies facilitated through third-party data aggregators and technology service providers. That kind of conspiracy, though, isn’t quite as conducive to show-tune choreography.

  1. Keep Your Numbers Small

Another reason the chocolate cartel was so successful: it comprises only three competitors who dominate a market. It’s easier to form a cartel in a concentrated, oligopic market. And it’s easier to sustain one, too, for a few different reasons.

The more people who are in on a secret, the more likely that secret is going to get out. It’s important your cartel stays a secret, given that it’s a felony punishable by prison and often means civil liability far beyond what was made from the scheme. This is especially true because the U.S. Department of Justice Leniency Program provides incentives for cartel members to tell on their co-conspirators and cooperate with its investigations. So even if you trust your co-conspirators now, wait until one of them is acquired by a larger company with a strong antitrust compliance program or one of their employees decides to become a whistleblower if for no other reason than to protect their job.

Keeping your numbers small also means that it is less work to detect and punish “cheating” by cartel members, which is inevitable—if they’re willing to cheat the market, you can be sure they’ll cheat each other at every opportunity.

  1. Use the Law to Stop Upstart Competitors

In Wonka, local law forbids the sale of chocolate without a chocolate shop. As one of Wonka’s friends puts it, “You can’t get a shop without selling chocolate, and you can’t sell chocolate without a shop.”

This catch-22 is surely by design. The cartel instinctively calls the police on Wonka the very moment it recognizes him as a competitive threat. The cartel members even make friends with the chief of police—played by Keegan Michael Key—and bribe him with chocolate (and the promise of more) so that he dedicates himself to enforcing the law against Wonka.

Cartels often try to create and use legal barriers to prevent new competitors from gaining a foothold. In the United States, it’s a tale as old as interest group politics: lobby to create barriers to entry through either complex regulatory regimes or licensing schemes that make it harder for others to enter the market and compete against you. And then put your friends in government to enforce those laws with enthusiasm.

Something like this is what happened in North Carolina State Board of Dental Examiners v. FTC: as teeth whitening technology took off, dentists found it extraordinarily profitable. And when non-dentists started offering teeth whitening, the dentists used the state board (conveniently controlled by dentists) to reinterpret the dental scope of practice under state law and start going after non-dentists for the unlicensed practice of dentistry, even though teeth whitening is not actually dentistry.

  1. Scare Consumers Away From Non-Conspirator Rivals

The chocolate cartel also attempts to turn the market against Wonka. First, in front of a crowd comprising Wonka’s intrigued prospective customers, Slugworth declares his expert opinion: “Mr. Wonka, I have been in this business a very long time, and I can safely say, that of all the chocolate I have ever tasted, this is without doubt, the absolute 100% worst.”

Consumers still went wild for Wonka’s “hover chocolates” when Slugworth and his confederates started to float. But that victory was short-lived because of the already-in-motion cartel strategy of using the law against Wonka, which goes to show a successful cartel doesn’t usually rely on just one type of anticompetitive act to achieve its goals.

Later, after a montage of Wonka and his troupe turning to a pop-up retail strategy that allows him to both compete and successfully evade the police, Wonka finally has the financial resources to open a shop. And when he does, the chocolate cartel sabotages him by surreptitiously poisoning his confections with Yeti Sweat, which leads to rapid and uncontrollable vividly colored hair growth. With this, the cartel successfully turned the market against Wonka, and Wonka’s shop was literally destroyed.

Food tampering aside, this is classic group boycott behavior: a concerted effort by firms to persuade customers, suppliers, and other parties in the market not to do business with a rival firm whose competition imposes downward price pressure in the market.

  1. Reach an Illegal Noncompete Agreement

The chocolate cartel at one point convinces Wonka to agree not to compete in exchange for buying his and his friends’ freedom from their indentured servitude to Mrs. Scrubbit.

Paying competitors not to compete is illegal, but the important thing to note here is that it is illegal even if it is just one competitor paying off another. In fact, there is a whole class of “pay-for-delay” antitrust cases, which typically allege brand-name pharmaceutical companies suing generic makers for patent infringement, with the purpose of inducing a settlement whereby the generic makers agree not to introduce their competing products to the market for some period of time.

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