The Antitrust Attorney Blog
Author: Luis Blanquez
A company using a blockchain––or perhaps even the blockchain itself––, with a sizeable share of a market, could be a monopolist subject to U.S. antitrust laws. But monopoly by itself isn’t illegal. Rather, a company must use its monopoly power to willfully maintain that power through anticompetitive exclusionary conduct.
Thus, a monopolization claim requires: (i) the possession of monopoly power in the relevant market––i.e. the ability to control output or raise prices profitability above those that would be charged in a competitive market; and (ii) the willful acquisition or maintenance of that power as distinguished from attaining it by having a superior product, business acumen, or even an accident of history. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
The monopolist may also have a legitimate business justification for behaving in a way that prevents other firms from succeeding in the marketplace. For instance, the monopolist may be competing on the merits in a way that benefits consumers through greater efficiency or a unique set of products or services.
There are many ways a company may willfully acquire or maintain such monopoly power through anticompetitive exclusionary conduct. Some of them include exclusive supply or purchase agreements, tying, bundling, predatory pricing, or refusal to deal.
In this article we briefly discuss the refusal to deal theory of harm in the context of web3.
What is Web3?
The internet is an evolving creature. Thirty years ago, web 1.0 was all about browsing and reading information. As a consumer you had access to information, but few were able to publish online.
In the early 2000s the current web 2.0. arrived, and everyone started publishing their own web content and building communities. The problem today is that we have a centralized internet. Very few companies––big online platforms such as Google, Facebook or Amazon––control and own everyone’s online content and data. And they even use all that data to make money through, for instance, targeted advertising.
That’s why web3 is a necessary step in the right direction. As a consumer you can now access the internet without having to provide your personal data to these online gatekeepers. And you don’t need to give up ownership of the content you provide. Plus, you own your digital content and can execute digital agreements using crypto currencies. If wonder how is all that possible, the answer is through a new infrastructure called blockchain.
Refusal to Deal with Competitors or Customers
Competitors and Rivals
First, an illegal refusal to deal may occur when the monopolist refuses to deal with a competitor or rival. Under US antitrust laws such claims are challenging and rarely successful.
Although a company generally has no duty to deal with its rivals, courts have found antitrust liability in some limited scenarios when a monopolist (i) unilaterally outright refuses to sell a product to a rival that it made available to others (Verizon Commc’ns, Inc. v. Law Offs. of Curtis V. Trinko, LLP, 540 U.S. 398, 407–09 (2004), see also Aspen Skiing, 472 U.S. at 601; Otter Tail Power Co. v. United States, 410 U.S. 366, 377-78 (1973); OR (ii) had a prior voluntary and presumably profitable course of dealing with a competitor, but then terminated the relationship, giving up short-term profit from it in order to achieve an anticompetitive end. See Pac. Bell Tel. Co. v. linkLine Commc’ns, 555 U.S. 438, 442, 451 (2009), Novell, Inc. v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013), cert. denied, 572 U.S. 1096 (2014).
Applied to the web3 world, this means that the validators of a blockchain could face antitrust scrutiny only if they had monopoly power, and (i) they previously allowed a competitor access to its blockchain but later agreed to exclude that rival, or (ii) sacrifice short-term profits without a reasonable business justification. This is, of course, unlikely considering the decentralized structure of blockchains and their need for gas fees to keep validators’ business profitable and the chain secured. When the validators are decentralized, they are not a single economic entity for purposes of the antitrust laws. But the risk would still differ depending on the blockchain and the level of decentralization.
What we might eventually see, however, is a company with monopoly power using a blockchain to exclude its rivals from the market through different anticompetitive conduct. For instance, we might see restrictions to only use one blockchain, to use smart contracts to impose loyalty rebates and other barriers to switch between blockchains, conditioning the use of one blockchain for a specific application or product by restricting the use of other blockchain or non-blockchain rivals’ infrastructure, or to require suppliers upstream or end customers downstream, to use the same blockchain for different products or applications.
Customers
Second, a refusal to deal may also take place when a monopolist refuses to deal with its customers downstream or suppliers upstream. A monopolist’s refusal to deal with customers or suppliers is lawful so long as the refusal is not the product of an anticompetitive agreement with other firms or part of a predatory or exclusionary strategy. Note, however, that a monopolist cannot decline to deal with customers as retaliation for those customers’ dealings with a competitor. That is often called a refusal to supply and is in a different doctrinal category than a refusal to deal. But, beyond these anticompetitive exceptions, private companies are typically free to exercise their own independent discretion to determine with whom they want to do business.
This test is broader than the one for competitors and requires a case-by-case legal and economic analysis to determine whether anticompetitive conduct exists. And web3 is not any different in this respect.
The Apple App Store and web3
Let’s take the Apple App Store as an example.
In the web2 world, Apple has created a “walled garden” in which Apple plays a significant curating role. Developers can distribute their apps to iOS devices only through Apple’s App Store and after Apple has reviewed an app to ensure that it meets certain security, privacy, content, and reliability requirements. Developers are also required to use Apple’s in-app payment processor (IAP) for any purchases that occur within their apps. Subject to some exceptions, Apple collects a 30% commission on initial app purchases and subsequent in-app purchases.
There are currently several related ongoing antitrust investigations and litigations worldwide about Apple’s conduct with its App Store. In the U.S., the Court of Appeals from the Ninth Circuit on the Epic Games saga held that Apple should not be considered a monopolist in the distribution of iOS apps. But this ruling also came with a string attached. The judge concluded that Apple did violate California’s unfair competition law and could not maintain anti-steering rules preventing users from learning about alternate payment options. If you want to learn more (see here). Both companies have recently asked the Ninth Circuit for a rehearing and the stakes are high.
Companies in web3 are now starting to deal with similar potentially anticompetitive behavior from web2 big tech companies. Uniswap, StepN and Damus are just three of many recent examples.
Uniswap
Uniswap is an open-source decentralized cryptocurrency exchange that runs on the Ethereum blockchain and uses smart contracts to facilitate trades. If you want to know more about it see (here).
In March 2023, Uniswap released its new self-custodial mobile wallet. In web3 you need a digital wallet to purchase or stake crypto, buy non-fungible tokens (“NFTs”), connect with decentralized applications (“dApps”), or interact with web3 communities. Early this year, when Uniswap tried to release its digital wallet on the App Store, it was initially rejected. Uniswap was only able to provide early access to its customers. Eventually, Uniswap managed to have their wallet in the App Store…but not without several strings attached.
After Apple updated its Guidelines in 2022, apps now use in-app purchases to distribute NFT’s and sell services related to NFTs, such as minting. The guidelines also allow users to view their own NFTs, provided that NFT ownership does not unlock features or functionality within the app. So NFTs that are purchased via Apple’s in-app purchases can now be at least used for token-gated utility. But those are still subject to Apple’s 30% fees and developers aren’t allowed to create “buttons, external links, or other calls to action” that might tell users how to circumvent the App Store to buy NFTs through other platforms. Instead, the App Store requires customers to make in-app purchases, and to do it without using cryptocurrencies.
In addition, following Senator Sherrod Brown letters from July 2022 to Google and Apple to police crypto-related fraud in mobile applications hosted on their app stores, both platforms . All related transactions must be denominated in USD, not digital assets. In the case of Apple and Uniswap, that means you need to transfer fiat currency from your credit card (or Apple Pay) to use the app. And if you try to use the app to transfer your own money directly to Uniswap, Apple forces you to pay a 30% commission.
Thus, the only way for Uniswap to comply with the App Store Guidelines and overcome these hurdles was to send their customers using their digital wallet to MoonPay—a fiat integration rolled out on the exchange last December––to complete the transactions off-platform, without technically trading within the app.
Does this mean Uniswap customers are freely able to use their new digital wallet on the App Store to trade crypto and mint NFTs on their iPhones? Absolutely not.
StepN
Another example of a web3 company having to deal with Apple’s monopoly power is StepN.
StepN is a mobile “move-to-earn” game that rewards players with crypto tokens for walking and running with specialized NFTs. Early this year StepN launched an in-app marketplace for NFT sales within its iOS app for Apple’s iPhone.
In this case, StepN allows users to purchase NFT sneakers—which enable users to earn token rewards—through the app via a new in-app currency called Sparks––not a cryptocurrency. Users buy Sparks through the StepN app (via Apple Pay). 10 tokens cost $1 with Apple Pay. As is the case of Uniswap above, they transact off-platform, so technically they do not trade within the App Store app. But there is a problem. Prices in Sparks through the app are almost 50% higher than when purchasing the exact same items via the web marketplace using StepN’s own GMT crypto token.
So even after creating a new in-app currency––which is not a crypto currency––, and having to transact off platform, StepN customers are overcharged by almost 50% more of what they pay via the web marketplace if they want to transact on the App’s Store. This is the result of StepN having to comply with Apple’s guidelines and being charged a 30% commission on in-app purchases, together with other fees.
Does this sound like a fair deal for StepN and its customers? Absolutely not.
Damus
Decentralized social media Damus is another web3 company currently suffering Apple’s bullying. Apple recently threatened to delist Damus from their App Store because of its Bitcoin tipping feature––Zaps––integrated from the Lighting Network. Why? Simply because Apple wants Damus to use its in-app purchase, as stated in the guidelines. Otherwise, it would be considered selling digital content, which is prohibited in the Apple App Store. And in case you wondered, yes, to also collect its 30% abusive commission.
Currently, users can tip others through a lightning button at the bottom of their notes (Damus’ equivalent to tweets). For Damus to stay in the Apple App Store, it will have to remove that feature and users will be only allowed to tip one another on their profiles. Damus’ creator William Casarin has already indicated that such a change “cripples” the platform. Again, does this sound like a fair deal for Damus? We let you answer this one.
Final remarks
Apple has recently started to allow the sale of NFTs in its App Store. But make no mistake––only those sold through its own IAP make it to the Store. DApps continue to suffer Apple’s 30% cut in its app purchases. And to cover such fees, they have no other choice but to increase their in-app NFT prices. Plus, these dApps are just the very few who rarely end up being able to release their NFTs in the Apple Store.
This is not how web3 is intended to work. For instance, web3 marketplaces such as OpenSea or Blur charge no fees at all. Developers and creators––not platforms––should be the ones mainly benefiting from a decentralized, open, and interoperable Internet. Meanwhile, digital gatekeepers from web2, such as Apple and Google, keep taking advantage of their monopoly in their respective App Stores. Remember, a company who is deprived of the opportunity to compete for business in web3, due to an illegal exercise of market power in web2, possesses antitrust standing. Why? Because there is a connection between dApps’ injury (lost business and profits) and Apple’s anticompetitive conduct, which means higher prices and fewer choices for consumers. This is precisely the type of harm that antitrust laws vindicate.
Meanwhile, NFTs developers may soon be able to use NFTs purchased across web3 to unlock features in iOS apps within the App Store, while having at the same time the freedom to ask their users to purchase NFTs from other platforms not charging such abusive commissions and fees. And they might start doing all that while using BTC or ETH, which are still currently banned in the Apple Store.
The question, for now, is how much longer Apple will still try to justify that its app-distribution and IAP restrictions seek to enhance consumer appeal and differentiate Apple products by improving iOS security and privacy. None of them seem to be compatible with a decentralized and interoperable web3.
Image by Reimund Bertrams from Pixabay