Articles Posted in Monopoly and Dominance

Articles that discuss antitrust and competition issues involving monopolists, dominant companies, monopoly power, and dominance.

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Authors:  Steven J. Cernak and Luis Blanquez

In late 2020, the Federal Trade Commission (FTC) and the attorneys-general (AGs) from 48 states filed nearly identical antitrust lawsuits against Facebook for stifling competition by acquiring potential competitors, mainly Instagram in 2012 and WhatsApp in 2014, and for enforcing policies that blocked rival apps from interconnecting their product with Facebook. The alleged effect of this conduct was to (i) blunt the growth of potential competitors that might have used that interoperability to attract new users, and (ii) deter other developers from building new apps or features or functionalities that might compete with Facebook.

This week, the judge hearing the cases agreed to dismiss the claims from the FTC––without prejudice––stating that the lawsuit failed to plead enough facts to plausibly establish that Facebook has monopoly power in the personal social networking services market. Likewise, the Court also dismissed ––with prejudice––a similar case pursued by a group of 48 states on the basis that any alleged violations took place too long ago.

While by no means the final decision on these matters, the motion to dismiss opinion will significantly narrow the FTC case for now. It also highlights some of the difficulties that enforcers will face using the current antitrust laws against Big Tech companies.

Online platforms have been––and continue to be––scrutinized by antitrust enforcers around the world. In the U.S. the Antitrust Subcommittee of the House Judiciary Committee issued last year its long-anticipated Majority Report of its Investigation of Competition in Digital Markets. The Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms. In addition, the Report included recommendations for some general legislative changes to the antitrust laws. Since then, online platforms have been involved in high-profile antitrust litigation in the U.S. So even though Facebook has won the first round of this litigation, the war is far from over.

Chinese Translation: Thank you to our friends at the Beijing Fairsky Law Firm for preparing a translation in Chinese of this article.

The FTC and State AGs Parallel Antitrust Complaints against Facebook

Both suits focused on the same Facebook categories of conduct. First were the acquisitions of Instagram and WhatsApp, both of which occurred more than five years ago. These deals allegedly increased Facebook’s power over social media networks, facilitating data integration and its sharing among some of the largest social media platforms. Next was Facebook’s requirement that any applications connecting to Facebook may not compete with Facebook or promote any of Facebook’s competitors. The complaint alleged that Facebook enforced these policies by cutting off access to the Application Programming Interface (“API”), the software that allows applications to talk to one another to allow communication with rival personal social networking services, mobile messaging apps, and any other apps with social functionalities.

Both the FTC and AG suits claimed that Facebook’s actions amounted to illegal monopolization in violation of Sherman Act Section 2. The states’ suit also claimed that the two acquisitions violated Clayton Act Section 7, the statutory prohibition of anticompetitive mergers.

  1. In March Facebook Fired Back in its Motion to Dismiss

In March 2021, Facebook moved to dismiss the suits on several grounds.

First, the company claimed that the complaints did not properly allege a relevant market or that Facebook had monopoly power in any market.

Second, Facebook asserted that the FTC could not claim that the two acquisitions were illegal monopolization because the agency had cleared both transactions earlier under the Hart-Scott-Rodino premerger notification system. Even if the agency could make such a claim, the company claimed that the FTC failed to properly allege that such acquisitions were anticompetitive.  (We discussed the concept of post-HSR review both prior to and immediately after the FTC complaint was filed.)

Finally, Facebook claimed that the complaint did not properly allege that the company’s decision not to deal with all potential app developers who were potential competitors was subject  to an exception to antitrust law’s usual rule that even monopolists can choose their own partners. Basically, under U.S. antitrust laws if you are a monopolist, you can still refuse to deal with your competitors, unless: (i) you have already been doing business with them, and (ii) by stopping you are giving up short-term profits for the long-term end of knocking them out of the market.

  1. The District Court’s Opinions Dismissing Both Cases

The judge hearing both cases granted Facebook’s motions to dismiss. The Court dismissed the FTC complaint without prejudice. This means that the FTC is allowed to amend its complaint and refile the case, and now has 30 days to do so. The AGs were not that lucky, and the judge dismissed their complaint with prejudice. The Court applied the doctrine of laches to conclude that AGs waited too long to challenge Facebook’s purchases of Instagram in 2012 and WhatsApp in 2014.

The Opinion against the FTC

In the decision re the FTC, the Court found that the complaint fails plausibly to allege how Facebook has a monopoly over personal social networking (“PSN”) services.

As with all monopolization plaintiffs, the FTC must plausibly allege that Facebook has monopoly power in some properly defined market. As do most plaintiffs, the FTC chose to allege this power indirectly by alleging that Facebook has a high share of the market, here for PSN services.  Despite some misgivings, the court found that the complaint’s allegations make out a plausible market for PSN services.

But that hardly ends the analysis. The FTC must also explain why Facebook enjoys a high share of that market and, therefore, monopoly power.  Here, the court found that the FTC’s allegations were inadequate for two reasons.

First because that “PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear.” In other words, the FTC must further explain whether and why other, non-PSN services available to the public either are or are not reasonably interchangeable substitutes with PSN services.

Second, even if the FTC better defines the market(s) of social networking, it must better explain how it developed the allegation that Facebook enjoys a market share of at least 60%: “[T]he FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague ‘60%-plus’ assertion too speculative and conclusory to go forward.” Thus, the FTC has also fallen short to plausibly establish the existence of monopoly power by Facebook in the relevant market.

That finding alone was enough to support the court’s granting the motion to dismiss; however, it helpfully went on to discuss Facebook’s other grounds for dismissal.

The court explained that even if the FTC had sufficiently pleaded market power, its challenge to Facebook’s policy of refusing interoperability permissions with competing apps also failed to state a claim for injunctive relief. The Court held in both decisions that there is nothing unlawful about having such a policy in general. While implementation of such a policy can be illegal monopolization in certain limited circumstances, the FTC did not allege such facts.  Finally, all such denials of access occurred in 2013, seven years ago. Thus, the FTC lacks statutory authority to seek an injunction from a court for such past conduct.

On the other hand, the court did find that the FTC might be able to seek injunctive relief relating to Facebook’s past acquisitions of Instagram and WhatsApp. While those acquisitions took place years ago, the court found that Facebook’s continued ownership of the companies could be considered a continuing violation of Section 2. While the doctrine of laches does not apply to the US government, including the FTC, the court did note but did not decide several issues, including remedial ones, with such a long-delayed allegation.

The Opinion Against State Enforcers (AGs)

The judge also dismissed the parallel case brought by the AGs. The court explained that unlike the federal government, the states are bound by the doctrine of laches, in which those who “sleep on their rights” and wait too long to file a case cannot seek court relief. As a result, the allegations regarding the Instagram and WhatsApp acquisitions were insufficient to state a claim under either Sherman Act Section 2 or Clayton Act Section 7.

Using an analysis identical to the one used with the FTC complaint, the judge further rejected the AG’s claims that Facebook’s refusal to allow interoperability with competing apps constituted illegal monopolization. Because all of the claims of the AG’s were rejected in ways that cannot be rectified by the AG’s, the judge dismissed the complaint without any chance for the AG’s to modify the complaint and refile.

  1. Final Remarks

At the time of this writing, the FTC is considering possible next steps. It could beef up its allegations regarding the market definition and Facebook’s share of that market and file an amended complaint regarding Facebook’s prior acquisitions. It could also appeal the dismissal of its current complaint.

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Author: Luke Hasskamp

Any time a dominant market player takes aggressive steps in the face of competition, that can catch people’s eye, especially those attuned to antitrust issues. That reality is true for the PGA Tour and its response to reports of efforts to launch a competitor golf league—the Premier Golf League.

For professional golfers and their fans, a pretty significant story broke this week about an upstart golf league seeking to get off the ground. The long-rumored Premier Golf League, or PGL, resurfaced, with the promise of upending professional golf across the globe. The PGL looks to attract some stars of the game with substantial, guaranteed contracts worth tens of millions of dollars, and massive payouts for each event, with a reported season-long payout total of one billion dollars.

In response to news about the PGL, the PGA Tour has taken several steps. The Tour started by introducing a so-called “Player Impact Fund,” which would award $40 million in annual bonuses to the top 10 players considered to drive fan and sponsor engagement, even if they’re not consistently winning. Unlike most earnings on Tour, these bonus payments would not be directly tied to a player’s performance during tournaments. This response seems like a legitimate and pro-competitive way to respond to market competition.

Perhaps more interestingly, the PGA Tour has also taken other, more aggressive steps in response to this potential competition. Specifically, PGA Tour commissioner Jay Monahan threatened the game’s top players with suspension or even permanent expulsion from the Tour if they sign on with a proposed Premier Golf League. The Tour has long required players to limit their participation in non-Tour events; indeed, it has required the Tour’s express permission. But this latest action has taken things to the next level.

Our antitrust ears perk up any time a company tells those associated with it that they’ll be permanently banned if they do business with a competitor. And it reminds us of parallels in the sports world, particularly with professional baseball. Indeed, baseball has a long history with antitrust and labor issues stemming from would-be competitors, such as bare-knuckle tactics, player suspensions, and extensive litigation, including multiple cases to reach the Supreme Court. We have detailed that saga in several articles:

Part 1: Baseball and the Reserve Clause.

Part 2: The Owners Strike Back (And Strike Out).

Part 3: Baseball Reaches the Supreme Court.

Part 4: Baseball’s Antitrust Exemption.

Part 5: Touch ’em all, Curt Flood.

In short, for decades, professional baseball thwarted competition and suppressed salaries in the face of direct antitrust challenges by preventing player free agency and punishing (i.e., banning) players who opted to play for other leagues. Baseball, of course, at least for now, has an exemption from antitrust liability.

Moreover, not only is it easy to argue that the PGA Tour is a monopoly whose conduct might implicate Section 2 of the Sherman Antitrust Act, but the PGA Tour also has relationships with other entities that could implicate Section 1 of the Sherman Act, which bars anticompetitive agreements.

To begin, the PGA Tour recently launched a “Strategic Alliance” with the European Tour, meant to enhance “collaboration on global scheduling, prize money and playing privileges for both tours’ memberships.” There are many pro-competitive reasons for such as alliance, but there is also no question that the potential competition from the Premier Golf League was a significant factor.

Moreover, the PGA Tour has relationships with many key market actors, including sponsors, media companies, and other interests that could further complicate these issues. For example, what if sponsors withdraw from endorsement deals with a player because of his decision to join the PGL? Does this suggest an unlawful group boycott?

Relatedly, there are key golf events—such as golf’s four annual majors and the Ryder Cup—that are not explicitly run by the PGA Tour but are tied to performance in Tour events. Indeed, success on the PGA and European Tours is the primary way players qualify for major events. What if those events agree not to allow PGL players to qualify? Or even more blatantly, what if those events revoke invitations to players who have already qualified (for example, winners of the Masters, Open Championship, and PGA Championship receive lifetime invitations)?

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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 will refer to 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 run afoul of 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.

As an aside, I have heard, informally, from companies that are considered “dominant” in Europe that the label of “dominant” effectively diminishes their ability to engage in typical competitive behavior because they are under such heavy scrutiny by EU Competition authorities.

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, 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 is often 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.

This looks simple, only two basic elements, but it isn’t.

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).

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

Interesting times to be an attorney; especially an antitrust attorney. If you work in private practice, you are likely witnessing the most significant transformation in the legal sector in the past 20 years. If you are an in-house lawyer, you are probably dealing with a new set of legal and commercial issues you couldn’t even imagine a few years ago. And if you are an in-house antitrust attorney in one of the Big Tech companies, then you are currently involved in the perfect storm.

During the past years, competition authorities all over the world have been closely monitoring the steady acquisition of power by Big Tech companies in the new digital economy. That’s the main reason why they have recently initiated antitrust investigations on both sides of the Atlantic. As Senator Mike Lee (R., Utah), recently mentioned: “antitrust enforcers were asleep at the wheel while Silicon Valley transformed from a center of innovation into a center of acquisition. Instead of competing to be the next Google, Apple, Facebook, or Amazon, today’s tech startups are pushed by their private-equity backers to sell out to Google, Apple, Facebook, or Amazon.”

At the same time, in the U.S. the Antitrust Subcommittee of the House Judiciary Committee issued last year its long-anticipated Majority Report of its Investigation of Competition in Digital Markets. The Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms. In addition, the Report included recommendations for some general legislative changes to the antitrust laws.

You can read more about it in our previous article: Classic Antitrust Cases: Trinko, linkLine and the House Report on Big Tech. Now, Senator Klobuchar, who chairs the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, in a keynote addressed at the annual State of the Net Conference, announced her antitrust reform legislation, the Competition and Antitrust Law Enforcement Act.

Meanwhile, in the European Union the European Commission is proposing new “ex ante” regulation to increase contestability and fairness in the digital markets, which includes: (i) The Digital Services Act (DSA)––addressed to protect end users and their fundamental rights online; and (ii) the Digital Markets Act (DMA)––which prohibits unfair conditions imposed by online platforms that have become or are expected to become what is called “gatekeepers” to foster innovation, growth and competitiveness.

So yes, Big Tech companies have too many irons in the fire. Let’s try to briefly summarize them here.

The New Proposed Competition and Antitrust Law Enforcement Act from Sen. Amy Klobuchar (D-MN) in the U.S.

In January 2021, Sen. Klobuchar, released her antitrust reform legislation, the Competition and Antitrust Law Enforcement Act, highlighting that “with a new administration, new leadership at the antitrust agencies, and Democratic majorities in the Senate and the House, we’re well positioned to make competition policy a priority for the first time in decades.” She also mentioned that current antitrust laws are inadequate for regulating companies like Amazon, Apple, Facebook and Google.

In a nutshell, the new proposed Act includes the following changes:

New Legal Standards To Determine Whether a Merger is Anticompetitive

The is the first attempt to change the existing standard relating to mergers that substantially lessen competition, to a new one that prohibits mergers that create an appreciable risk of materially lessening competition. The exact meaning of this new standard remains unclear, to say the least.

The new rules would also shift, in certain scenarios, the burden of proof of certain mergers from the government to private parties. These include (i) the acquisition of a competitor or nascent competitor by a company with market power or a market share of 50% or more; (ii) the acquisition of what is called a “disruptor”, (iii) and transactions valued at more than $5 billion, or the buyer is worth at least $100 billion.

Broader Scope To Prohibit Exclusionary Conduct

The proposed Act expands the concept of exclusionary conduct and defines it as any conduct that materially disadvantages competitors or limits their opportunity to compete. It creates a presumption of illegality in those scenarios where exclusionary conduct presents an appreciable risk of harming competition.

This is when a firm with market power, or a market share higher than 50%, engages in conduct that materially disadvantages actual or potential competitors or tends to foreclose or limit the ability or incentive of actual or potential competitors to compete.

Private parties will be still able to rebut such presumption by showing pro-competitive effects that eliminate the risk of harming competition.

Increase of Resources for Antitrust Authorities, More Civil Penalties and New Whistleblower Protections

The proposed Act includes an important funding increase of $300 million for both the FTC and DOJ.

It also increases civil monetary penalties, by imposing on private parties fines the greater of either: (i) 15% of the undertaking’s U.S. revenues in the prior calendar year, or (ii) 30% of the undertaking’s U.S. revenues in any business line affected or targeted by the unlawful conduct during the period of such conduct.

The new rules also provide further incentives to report potential antitrust violations. For instance, they extend anti-retaliation protections to civil whistleblowers, and in certain cases, even include an award up to 30% of the criminal fines.

In the meantime, Representative David Cicilline (Democrat – Rhode Island), who led the House’s investigation into Big Tech, and Senator Mike Lee, Senator (R., Utah), have also agreed to keep this momentum and discuss future changes to the antitrust laws, although with significant differences on their approach.

The Digital Services Act and the Digital Markets Act: A proposal to upgrade the rules governing digital services in the European Union

In the European Union things have not been quiet either.

As part of the European Digital Strategy, last December the European Commission finally published its proposals to regulate the digital sector. These include (i) Digital Services Act (DSA)––addressed to protect end users and their fundamental rights online; and (ii) the Digital Markets Act (DMA)––which imposes new ex-ante rules and prohibits unfair conditions imposed by online platforms that have become or are expected to become what are called “gatekeepers” to foster innovation, growth and competitiveness.

These proposals will now go to the European Parliament and European Parliament for discussion, to be adopted into law and enter into force at some point during 2022.

The DSA

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By:  Steven J. Cernak

As we described in a prior post, the U.S. House Judiciary Committee Majority Report of its Investigation into Digital Markets included a number of recommendations that went beyond digital markets, including overriding several classic antitrust cases.  One of the Report’s recommendations is to make it easier for plaintiffs to bring predatory pricing and buying monopolization cases by overriding the “recoupment prong” in Brooke Group, Matsushita, and Weyerhaeuser.  While such action would drastically alter monopolization law, it also might inadvertently (?) revive another classic antitrust case, Utah Pie, and certain Robinson-Patman price discrimination claims long considered dead.

Predatory Pricing Under Brooke Group and Matsushita

We covered Brooke Group and predatory pricing in a prior post and so just summarize it here.  Sherman Act Section 2 claims for monopolization can be lodged only against “monopolists” that are “monopolizing,” that is, acting in a way to maintain that monopoly.  There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.

Predatory pricing is pricing below some level of cost so as to eliminate competitors in the short run and reduce competition in the long run.  The Brooke Group Court established a two-part test for such claims:  ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.”

While the Report did not express any concerns about the “below an appropriate measure of costs” prong, its one example (Amazon’s pricing of diapers) just described the pricing as “below cost.”  Lower courts have developed a standard that finds prices “below an appropriate measure of costs” only if they are below some measure of the monopolist’s incremental costs, like average variable costs. It is not clear if the Report’s authors want to modify this prong as well.

Under the recoupment prong, a plaintiff must show that the monopolist has the capability to drive out the plaintiff and other competitors plus keep them (and other potential competitors) out so it can later raise prices and “recoup” its losses.  Such a showing requires an analysis of the relative strengths of the competitors and the attributes of the market, such as high entry barriers.

The Brooke Group test has been difficult for predatory pricing plaintiffs to meet — as the Supreme Court intended, for two reasons.  First, the Court thought it would be difficult for courts to distinguish between competitive low prices and predatorily low ones.  Because “cutting prices in order to increase business is often the very essence of competition,” the Court was concerned that an easier test would deter low prices that benefit consumers.

Second, the Court had earlier in Matsushita expressed skepticism that such competitively harmful predatory pricing schemes occurred often:  “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”  As we covered in different prior posts, while Matsushita does concern predatory pricing, its holding is more concerned with the appropriate standard for summary judgment in any antitrust case; because the “consensus” quote has been repeated in nearly every predatory pricing case since Matsushita, however, the Report’s recommendation to override it makes sense.

Weyerhaeuser Extends Recoupment to Predatory Buying and Monopsony

More than a decade after Brooke Group, the Supreme Court in Weyerhaeuser extended its two-part test for predatory pricing by a sell-side monopolist to predatory buying (or overbidding) by a buy-side monopsonist.  There, the defendant allegedly purchased 65% of the logs in the region that were a necessary input for lumber.  Such alleged overbuying drove up the cost of the input while the price of lumber was going down.  These trends led plaintiff, a competing lumber mill, to shut down operations and sue.

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Author: Jarod Bona

Let’s pretend that you sell three different types of protein powder: Whey Protein, Casein Protein, and Pea Protein. You sell them each for $10 per container. But for someone—like myself—that likes to include several types of protein in their morning smoothie, you offer a special deal of $25 total for purchasing all three types of protein at once (compared to $30 at the regular price).

Congratulations, you just offered a bundled discount, the subject of this article.

Should you worry that your bundled discount breached the antitrust laws?

Let’s dig in.

You probably recognized the maneuver above because bundled discounts are pervasive in a market system. Companies like it when customers purchase several products and may thus offer a discount—a reduction in margin—when customers do so. At the same time, customers like discounts, so they may purchase a second, third, or fourth product from the same company to obtain the discount.

So what is the problem?

Well, like many pricing policies, there exist a set of conditions such that certain bundled discounts create anticompetitive harm that exceeds their procompetitive benefits.

That sounds too formal, so let’s try this: Sometimes a big company that sells lots of different products can eliminate its competitors that sell fewer types of products by manipulating the prices of their bundles.

How does that work?

If your company has market or monopoly power, your profits are at least a little extra. This is sometimes called supra-competitive pricing or monopoly profits (or monopoly rents if you prefer economist-speak). If that is your world, you worry about not just competing, but also about maintaining your extra level of profits that only exist with market or monopoly power.

Because these extra profits can be so significant, those that have market or monopoly power will burn extraordinary resources to hold onto that power. This, of course, is one of the wasteful aspects of monopoly—the resources that go into maintaining it.

You must keep feeding the monopoly beast or it may grow weak and competition will kill it.

Anyway, monopolists are brilliant at manipulating pricing to exclude their competitors. And even though bundled discounts are usually pro-competitive, a monopolist in certain situations can employ them to exclude competition and protect their market power and, thus, their outsized profits.

In what situation can a monopolist manipulate bundled discounting to maintain or extend their monopoly?

Let’s turn to an actual case that made it to the Third Circuit a couple years after I graduated from law school: LePage’s, Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003).

You’ve probably heard of 3M—Minnesota Mining and Manufacturing Company. They are based in Saint Paul, Minnesota and they are important to the community. I am from Minnesota, originally, and as a local, you hear a lot of good about this innovative company. (Bona Law also has a Minnesota office).

3M makes many products, but relevant to this Third Circuit case, they manufacturer transparent tape (under the Scotch brand)—just like their upstart competitor, LePage’s. I am speaking, of course, from the time perspective of the lawsuit. I am certain that 3M still makes transparent tape, but I haven’t kept up with LePage’s.

Anyway, unlike LePage’s, 3M also made many other products that they sold to major customers that purchased their Scotch tape. Importantly, 3M had monopoly power in the market for transparent tape.

So, according to the lawsuit, here is what 3M did: They offered discounts to major customers (retailers, etc.) conditioned on those customers purchasing products from each of six of 3M’s product lines. 3M linked the size of the rebate to the number of product lines in which the customer met purchasing targets. And the number of targets (i.e. minimum purchases in separate product lines) would determine the rebate that the customer would receive on all of its purchases. So each customer had a substantial incentive to meet targets across all product lines, to maximize the discounts/rebates.

LePage’s sold transparent tape, but not all of the other products. So they didn’t stand a chance to compete because the customers for transparent tape would purchase from 3M because by doing so, they receive substantial discounts on a bunch of other products too.

The Third Circuit explained that “[t]he principal anticompetitive effect of bundled rebates as offered by 3M is that when offered by a monopolist, they may foreclose portions of the market to a potential competitor who does not manufacture an equally diverse group of products and who therefore cannot make a comparable offer.” (155).

Of course, if there were a competitor of 3M, even separate from LePage’s, that could offer these product lines, the Court may have held that there wasn’t anticompetitive harm or antitrust injury.

If you are inclined toward numbers, you might spit out your drink and say—“Gosh darn it! Hold on a Second! How do we know whether the discount forecloses the market or is even anticompetitive without getting into the actual prices and discounts? If LePage’s is super inefficient or insists on crazy-high prices, should they really be able to utilize the machinery of the federal government to stop a benevolent monopolist from reducing their prices?”

Good instincts!

LePage’s was a controversial decision for that reason. While 3M’s bundling could have been anticompetitive, the Court didn’t go deep enough into the analysis to really understand if they were.

For some number crunching, let’s travel west to the Ninth Circuit and see what they did a few years later in Cascade Health Solutions v. PeaceHealth, 515 F.3d 973 (updated Feb. 1, 2008).

The Discount-Attribution Test for Bundled Discounts

In PeaceHealth, the Ninth Circuit overturned a jury verdict against defendant for violating Section 2 of the Sherman Act by bundling (among other conduct). The trial court erred in providing the jury with a LePage’s instruction on bundling that didn’t include specific price-cost requirements.

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Author:  Steven J. Cernak

On October 6, 2020, the Antitrust Subcommittee of the U.S. House Judiciary Committee issued its long-anticipated Majority Report of its Investigation of Competition in Digital Markets.  As expected, the Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms.

In addition, the Report included recommendations for some general legislative changes to the antitrust laws.  Included in those recommendations were proposals for Congress to overrule several classic antitrust opinions.  Because this blog has summarized several classic antitrust cases over the years (see here and here, for example), we thought we would summarize some of the opinions that now might be on the chopping block.  This post concerns two classic Supreme Court opinions on refusal to deal or essential facility monopolization claims, Trinko and linkLine.

House Report on Refusal to Deal and Essential Facilities

The Report’s recommendations for general changes in the antitrust laws included several aimed at increasing enforcement of Sherman Act Section 2’s prohibition of monopolization.  In particular, the Report recommended that:

Congress consider revitalizing the “essential facilities” doctrine, or the legal requirement that dominant firms provide access to their infrastructural services or facilities on a nondiscriminatory basis.  To clarify the law, Congress should consider overriding judicial decisions that have treated unfavorably essential facilities- and refusal to deal-based theories of harm.  (Report, pp. 396-7)

The two judicial opinions listed were Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) and Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009).

Trinko

Justice Scalia wrote the Court’s opinion dismissing the plaintiff’s refusal to deal claim.  There were no dissents although Justice Stevens, joined by Justices Souter and Thomas, wrote separately to concur in the result but would have dismissed based on lack of standing.

Since the Supreme Court’s 1919 U.S. v. Colgate (250 U.S. 300) decision, courts have found that “in the absence of any purpose to create or maintain a monopoly,” the antitrust laws allow any actor, including a monopolist, “freely to exercise his own independent discretion as to parties with whom he will deal.”  Trinko narrowly interpreted the Court’s earlier exceptions to the rule that even a monopolist can choose its own trading partners.

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Author: Steven Cernak

The U.S. House Antitrust Subcommittee of the Judiciary Committee’s recent hearings into “big tech” and antitrust were “must see TV” for antitrust attorneys.

Over the five hours of testimony, many interesting questions were asked of the leaders of Apple, Google, Facebook, and Amazon; unfortunately, the format often left little time for answers.  Because so many of our clients—manufacturers, retailers, and others—are active in the online retail space, we thought we would focus on Amazon and Jeff Bezos’s statement and answers.

These hearing are not the only antitrust scrutiny that Amazon is receiving.  The FTC and the states of California and Washington appear to be investigating the company and its actions.  Given all the publicly available information, what did the hearings teach us about the kinds of antitrust claims that might be made against Amazon in any antitrust suit?

Competing with Private Label Goods

Several of the questions involved allegations that Amazon had somehow “stolen” or misused data from some of its manufacturers or third-party sellers to determine which products it would begin to produce as private label goods.  Many of these questions grew out of a long Wall Street Journal report in April.  Bezos explained that Amazon’s policy is not to use data of an individual seller to make such decisions, although the company continued to investigate possible violations.  Also, Bezos clarified that aggregate data, which he defined as data relating to at least two sellers, could be used by Amazon under its policy.

As commentators have pointed out, retailers deciding to sell private label goods along with, or instead of, branded goods is not inherently an antitrust violation; in fact, many retailers like Kroger’s and Costco obtain significant revenue from the practice.  Bezos himself pointed out that Amazon’s policy limiting its use of data from the other sellers was “voluntary” and not required by any current law.  One of the questions at the hearings hinted at an allegation that Amazon might be in a different position than other retailers, either because of its size or greater access to seller data; unfortunately, inadequate time was given for a response.  Any antitrust actions here would need to be able to take on all private label goods sold by large retailers or explain why Amazon’s actions are uniquely anti-competitive.

Predatory Pricing

At least two sets of questions focused on potential “predatory pricing” by Amazon, that is, pricing products so low that competitors are forced out of the market.  The first set involved allegations from many years ago that Amazon had drastically lowered prices on diapers to weaken Diapers.com, later renamed Quidsi before Amazon purchased it.  In response to questioning, Bezos claimed to be unfamiliar with the details of pricing of one product nearly ten years ago.  In the second set, Bezos was asked if Amazon ever priced Echo or Ring or other in-home assistants below cost.  He claimed that the price of those products usually was above cost, although sometimes their prices might be below cost during periodic promotions.

As readers of this blog know, current law makes predatory pricing illegal only if a monopolist’s prices are very low, usually defined as below variable costs, and there is a chance that the monopolist can later raise prices to recoup its losses.  Certainly, not enough time was spent on the topic during the hearings to address those details in these Amazon examples.  Also, other commentators have already disputed the implications from the Quidsi story, describing it as another example of a retailer using a pro-competitive “loss leader” strategy to build customer loyalty to the store.  (In fact, it appears that Quidsi was trying to follow that exact strategy itself.)  While the questions did not directly lead to evidence of a violation under today’s law, it is possible that these hearings will lead to legislation to alter antitrust law’s current view of such aggressive pricing.

“Bullying” Competitors and Suppliers

Finally, Bezos was asked several times in several ways about Amazon’s treatment of its “partners,” both the manufacturers and third-party retailers who sell to consumers on its marketplace as well as manufacturers who sell directly to Amazon.  Many of the questions included quotes from anonymous third parties who felt a need to be on Amazon:  “have to work with them,” “we’re stuck,” “nowhere else to go.”

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Author: Jarod Bona

The US Supreme Court said in 1986 that “[T]here is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”

This was the famous Matsushita Elec. Indus. Co. v. Zenith Radio Corp. case that is known mostly for stating that to survive summary judgment on antitrust conspiracy, a plaintiff must present evidence that tends to exclude the possibility of independent (rather than conspiratorial) activity. 475 U.S. 574 (1986). Unfortunately, many federal trial judges have misunderstood this standard to apply to the motion-to-dismiss level.

If you don’t know what predatory pricing is, you should first read Steven Cernak’s outstanding article detailing the doctrine’s history and requirements (and rarity).

The purpose of this article is much more modest—to ask whether the quote above from the 1986 Supreme Court decision is out-of-touch with current scenarios that may or may not be reality (you decide).

As you learned from reading Steve Cernak’s article, a predatory pricing claim is one that asserts that defendants (with monopoly power) harmed competition by pricing below cost to run competitors out of the market in the short run, so they could raise prices later, after the pesky competitors are out of their way (that is called recoupment).

To prevail, besides antitrust injury, a predatory-pricing plaintiff must show that defendant has monopoly power, priced below some appropriate measure of cost, and had the ability to recoup the costs of taking a loss after they vanquished competition and could again raise prices. This is one form of a monopolization claim.

Let’s look at that 1986 Matsushita Supreme Court quote again: “[T]here is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”

If you are an antitrust attorney or have studied antitrust, this quote is familiar to you and shows up in the defense briefing of just about every predatory-pricing case. And judges like to cite it too. Indeed, it represents the dismissiveness with which courts and, frankly, the entire antitrust world view predatory-pricing claims. And there is some good reason for that.

But is the statement correct and will it continue to be correct?

Let’s reminisce for a moment to the “olden days.” It used to be, I think, that companies sought to make a profit from the start to the finish. And if they didn’t make a profit, they failed, and whoever ran them would face scandal, scorn, and certain involuntary succession. Each company rise and stood alone, so each would try to be profitable. And if the business wasn’t profitable and didn’t survive, the equity of its shareholders or owners would perish, along with hopes and dreams.

Of course, like most general descriptions of a time or the past, this statement has holes and exceptions and could, in many instances, be plain wrong. But it is the narrative that was told (purposeful passive voice here) and that informed statements like that in the 1986-Matsushita-Supreme-Court decision, which is all that really matters for my point.

So, to price below cost, a company risked bankruptcy because pricing below cost, even for part of the company’s offerings, threatens profits, which threatens survival. And it may take a long time to vanquish competition to be able to later increase prices at monopoly-profit levels. And most companies weren’t willing or able to do that. So “predatory-pricing schemes were rarely tried,” as the quote goes. And, I suppose, those that did try them probably did mostly fail. But I haven’t reviewed the empirical evidence on that.

With that narrative, which is part of the history of predatory-pricing doctrine, we can see why the dismissive quote makes sense.

But what if this is the true world?

But what happens if you have a culture in which financial resources are aggregated into individual entities and you have smart people that place bets on large numbers of companies with the knowledge that most of them are going to fail? The financial entities, however, know and accept that and, instead, make their money from the extremely small percentage of companies that blow up (in a good way) and turn into unicorns or otherwise take over an entire market or industry.

And, at the same time, let’s say that a substantial percentage of these companies that are the subject of these financial bets are the type that succeed only if they reach the scale of monopoly. Maybe these are the sort of companies that create two-sided markets or exchanges, in which network effects are necessary to succeed?

And, what if, to obtain sufficient participants on both sides of the market (and the scale necessary to dominate the market), each of the companies (subject to the bets by the smart-financial entities) priced their products or services at zero or some extremely low amount in a race to get everyone on their website or app or system?

If that were to happen, I wonder if most of these companies would fail—they are pricing below cost, after all—and not everyone is going to be able to pull of a victory in these circumstances. But I bet a handful or more of them would survive and end up dominating their market. And I imagine that some of them would continue pricing below cost between the points of market penetration and complete market domination.

After all, profitability isn’t necessary because the money funding these companies—in this scenario—is not incented by mediocre or even strong profits. What makes these smart financial entities rich are the big winners—the companies with monopoly profits that dominate their markets.

If that were to happen, how would that change the accuracy of the 1986-Matsushita-Supreme Court quote: “[T]here is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”

In the scenario I just described—you can decide for yourself whether it sounds familiar or is true—I think that predatory pricing schemes would be commonly tried and periodically successful.

Here is another possible scenario:

Let’s say there is a foreign country that owns or controls a substantial number of companies. It is possible, I suppose, that the bureaucrats in the government are calculating profits and forcing decisions based entirely or mostly on profit-maximization. It is possible that control, power, and influence have nothing to do with their decisions. And that the funding acts just like any other market funding.

But let’s pretend for a second that this isn’t true. Maybe the government money (and control and incentives usually follow the money) is less concerned about profit-maximization and more concerned about other goals. In that case, I wonder if this government money would have the same reluctance to risk profits as companies in the narrative we told earlier. If that is the case, I probably wouldn’t be dismissive of the idea that a predatory-pricing scheme could be tried or successful. Money seeking power or control likes monopoly and may be willing to fund it.

What about this?

This is a little outlandish, but let’s pretend that the people in the government making decisions about bailouts haven’t heard of the term “moral hazard” and are willing to send taxpayer dollars to giant companies whenever the companies have trouble making a profit. For the sake of the story, let’s call them, I don’t know, maybe “too big to fail.”

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Author: Steven Cernak

Your much larger competitor sells the same products as you do but at a much lower price, so low you think that it must be losing money on each sale. Can such “predatory pricing” ever violate the antitrust laws? It is a very difficult monopolization case to make but, as Uber recently discovered, not all such claims are quickly dismissed.

Monopolization is illegal under Sherman Act Section 2 of the antitrust laws. Such claims can only be lodged against a “monopolist,” a competitor with monopoly power. Finding “monopoly power” is a difficult question this blog covered here. But even a monopolist is only liable for “monopolization,” actions that help it acquire or maintain that monopoly. There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.

Predatory pricing has been defined by the U.S. Supreme Court as “pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run”.¹ The Court expressed skepticism toward such claims several times for two reasons. First, it noted that “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful”.² Second, it can be difficult to distinguish pro-competitive low prices from predatorily low ones; after all, “cutting prices in order to increase business often is the very essence of competition”.³

Because of that skepticism, the Court has established a test that is difficult for plaintiffs to meet. In Brooke Group, the Court evaluated claims that a cigarette producer was using low prices to discipline a competitor.⁴ The Court held that predatory pricing allegations will be upheld only if ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.⁵

On the “below cost” element, the Court has declined to specifically define the “appropriate measure” of costs.⁶ While commentators have developed several potential measures, the most popular are variations on prices below a manufacturer’s reasonably anticipated marginal costs,⁷ such as average variable costs.⁸ The rationale is that no competitor would knowingly spend the incremental costs to make one more product if it did not plan to sell it for a price that covered at least those incremental costs unless such pricing was part of an anti-competitive scheme.

The “recoupment” element itself has two parts. First, the low prices must be capable of driving competitors from the market: “This requires an understanding of the extent and duration of the alleged predation, the relative financial strength of the predator and its intended victim, and their respective incentives and will.”⁹ Second, those expelled competitors and any other new entrants must stay out of the market and the market must have other attributes, such as high entry barriers, necessary to sustain high monopoly pricing so that the costs of the low prices can be recouped.¹⁰

The Brooke Group test has proven difficult for plaintiffs to meet. Despite those difficulties, plaintiffs continue to make predatory pricing claims, as illustrated by two 2019 opinions. But a May 2020 case involving Uber shows that some predatory pricing claims can survive a motion to dismiss.

In Clean Water Opportunities, Inc. v. Willamette Valley Co., plaintiff claimed that defendant put it out of business through various tactics, including predatory pricing.¹¹ In an unpublished opinion, the Fifth Circuit affirmed dismissal of this claim because plaintiff’s claims were both conclusory and implausible.¹² Plaintiff only alleged that defendant’s discounts to plaintiff’s customers “were substantial and represented a benefit below [defendant’s] cost to produce [product].” The court affirmed the lower court’s ruling that this allegation required “further factual enhancement” to rise above mere conclusory allegations that the court was not bound to accept as true under the motion.¹³

The remainder of the allegations in the complaint made the possibility of such “factual enhancement” unlikely. Plaintiff alleged that its and defendant’s original undiscounted price both were well above the alleged competitive price. The court found that this allegation left plenty of room for defendant to undercut plaintiff’s price while staying above the competitive price, let alone any potential measure of defendant’s average variable costs.¹⁴

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