Articles Posted in Monopoly and Dominance

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

June 17, 2023

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

by Bona Law PC

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.

You can read a broader discussion of antitrust guidelines for companies using blockchain technology here.

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.

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March 2, 2023

“It’s Complicated”: A Review of Barry Hawk’s Monopoly in America

by Bona Law PC

Author: Steven Cernak

Most antitrust practitioners, even members of the general public, have a good intuitive sense of what Sherman Act Section 1 is aimed at. Whether you follow the common law’s ancient voiding of “combinations in restraint of trade,” as does Greg Werden for example, or your kindergarten teacher’s instruction to avoid “ganging up,” as explained by Dick Steuer, even beginning antitrust students understand that certain agreements are bad for competition and, so, should be illegal.

But what about Sherman Act Section 2’s prohibition of monopolization? Is there anything in America’s history that might illuminate what legislators were thinking in 1890 or how courts should approach the issue today?

Those are the questions tackled by long-time practitioner and academic Barry Hawk in his 2022 book Monopoly in America. In just under 200 pages, Hawk covers over 400 years of American usage of “monopoly” to find, well, it’s complicated. Americans have hated monopolies for centuries, except for the ones that at least some of them liked, and their understanding of the term has varied over the years. Hawk succinctly explains the twists and turns and draws helpful lessons for today’s practitioners and policymakers.

Anti-Monopoly Tradition? Yes, but…

Hawk divides his survey into chapters covering four distinct American periods: colonial era; Revolution and founding; antebellum; and modern, that is, post-Civil War. In each chapter, Hawk walks through the laws, court opinions, and public statements of the period to illustrate America’s thinking about monopolies at that time. Like other authors, Hawk finds that America does have an anti-monopoly tradition; however, Hawk’s survey shows that that tradition does not take a consistent, linear path. Below, I summarize some of the inconsistencies highlighted by Hawk.

Yes, Americans were against monopolies but what they mean by the term “monopoly” has changed over the centuries. In colonial and early America, “engrossing” and “forestalling” were two of the major concerns captured by the “monopoly” term. Engrossing is roughly “cornering the market,” buying up all the goods so as to increase prices or otherwise control distribution. Forestalling is usually defined as buying goods from the producer or importer before the goods arrived at the designated public market. Concern about both issues waned after the Civil War, especially as American markets grew and demonized forestallers gradually became helpful facilitators or middlemen.

Similarly, pre-Civil War monopoly concerns included government grants of exclusivity to particular private actors. Famous examples include the British East India Company and the Second Bank of the United States. Again, concerns about these “monopolists” faded after the Civil War as worries about large private companies that we now know as “monopolists” grew.

Yes, Americans and their English predecessors were against “monopolies” but sometimes a monopoly was in the eye of the beholder. As Hawk describes, the English principle outlawed monopolies but made exceptions for local grants of exclusive privileges. Sometimes, laws and public opinion only condemned monopolies that served no public purpose, which was determined under a shifting reasonableness standard. In Colonial times, laws and constitutions sometimes made exceptions for local exclusive licenses, patents, and copyrights. Engrossing was a monopoly when it was “hoarding” but not when it was merely “storage,” and the dividing line was far from clear. Now, antitrust law allows state “monopolies” if expressly granted by the legislature and actively supervised. So, Americans definitely have been against monopolies except when they have been for them.

Yes, Americans are against monopolies, but the strength of that opposition has varied over time. Hawk focuses on the cycles since the 1890 Sherman Act: success in the early period with breakups in Northern Securities and Standard Oil; hibernation in the Roaring “20’s and Franklin D. Roosevelt’s first term; then more successes, like Alcoa and AT&T, into the “70’s; followed by more hibernation, with a Microsoft exception, until the 2020 election. So, while the anti-monopoly orientation never goes away, sometimes it remains dormant for quite some time.

Why the Cyclicality?

While Hawk’s fact reporting is interesting, the book probably is at its best when this long-time antitrust guru then offers up his explanation for why some of those facts occurred. At the end of the book, Hawk discusses some factors that he thinks best explain the cycles of monopoly challenges since 1890: political support; popular demand for action; changes in facts and economic conditions; changes in economic theory; legal process concerns; and the predominance of the consumer welfare standard. I will comment on three of them.

Interestingly, Hawk found that “popular support less clearly correlates with aggressive enforcement” than do some of the other elements. He sees no large anti-monopoly groundswell post World War II to accompany aggressive Section 2 enforcement. Today, despite the anti-monopoly push, “the general population appears happy to get ‘free’ platforms and relatively low-cost apps.” I would add the anecdote that at least one ranking of the most admired companies in 2022 was headed by Apple, Amazon, and Microsoft, three companies often accused of being monopolists. As Hawk puts it, popular support is helpful but not necessary to generate aggressive enforcement by the “politicians, academics, and antitrust industry generally.” As another long-time antitrust practitioner described it more than fifteen years ago, it is the true believers in the antitrust religion who often drive enforcement trends.

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November 14, 2022

Antitrust for Kids: Attempted Monopolization and Meatballs

by Bona Law PC

Author: Molly Donovan

Nathan is nine. His grandmother makes excellent meatballs using an age-old family recipe. Together, Nathan and grandma decide to can the meatballs and sell them to their neighbors on the north side of town—just in time for the holidays as a turkey side dish.

Things went great until Nathan’s friend from school, Nicole, also started selling meatballs with help from her grandma. What are the chances? Fortunately, Nicole targeted sales on her side of town (the south side), so that the two meatball-preneurs didn’t directly butt heads.

Wanting to keep things that way, Nathan asked Nicole to make the arrangement official by forming a “strategic partnership”—the gist of it being that Nicole keep her meatballs out of the north side and Nathan keep his out of the south. Nathan even offered to compensate Nicole for any lost business she suffered from the arrangement, and to keep up appearances, Nathan would arrange a few sham transactions to make it look as though each meatball maker had a few sales in the other’s territory.

The glitch, unforeseeable to Nathan, was that Nicole’s dad works for the DOJ’s Antitrust Division. Well versed on the Division’s leniency program since birth, Nicole naturally reported the conduct to the government promptly—before agreeing to Nathan’s proposed deal.

And that was all it took. Although there was no meeting of the minds, so that Nathan couldn’t get nabbed for a Sherman Act Section 1 violation (criminal conspiracy), he did get tagged for a Section 2 violation—attempted monopolization. Poor Nathan was the youngest defendant ever to plead guilty to an antitrust felony. His sentence remains pending.

Moral of the Story: This is based on a true story! Nathan Zito, president of a paving and asphalt business pled guilty in October to attempted monopolization of the highway crack-sealing services in Montana and Wyoming based on his proposal to a competitor that they allocate markets by geography. Although the competitor was already cooperating with the DOJ, precluding a prosecution for Section 1, Nathan did plead guilty to attempted monopolization and will be subject to fines and imprisonment at his sentencing in February.

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August 4, 2022

Antitrust for Kids: No Traitors Allowed: Golf and Monopolization

by Bona Law PC

Authors: Molly Donovan & Luke Hasskamp

Liv is 8. She just moved to town from out of state and has 3 new neighbor friends Paul, Greg and Adam (“PGA”). The PGA kids seem very nice and well mannered. They wear pastels. And the coolest thing about them: they have a mini-golf course they built in their backyard years ago. It is touted as the best and most exclusive place for kids to play golf and rightly so. All the best mini golfers play there and only there. Frankly, there is no real competition for mini golf in the county.

Even though Liv is new to town, she thinks she has the chops to build a mini-golf course that rivals her neighbors’. Her house is bigger, her backyard is bigger, her parents will buy better equipment, and Liv is going to award the winner of each round a very fancy prize. Kids are thrilled—and one by one, even the best mini golfers start trying Liv’s course.

PGA is not happy. Stunned that Liv would challenge their longstanding position as the best and only course in town, they unilaterally announce that any kid who chooses to play in Liv’s yard will be banned from their original and still most popular and reputable course. Players must choose: one course or the other, but not both.

(The antitrust lawyer is growing concerned. This sounds like a monopolist trying to bully an emerging competitor by cutting off access to customers. What’s worse, Paul and Greg might be depriving kids of meaningful choice when it comes to mini golf.)

And for sure, the kids are upset, but they’re also a bit confused. On the one hand, any business owner has the right to choose with whom they will deal, right? On the other hand, PGA’s decision to punish kids who want to play at Liv’s every once in a while seems wrong.

The kids call their antitrust lawyer, and here’s what she says: you all should file a class action on behalf of every kid in town who wants to play at both courses and have a real choice when it comes to mini golf competition. The PGA contingent is not competing on the merits, that is, they are not getting mini golfers to come to their course by making it better. Instead, they are monopolists who are using their dominance unfairly to box out a nascent competitor. I’ll represent you, although I’m not sure what your monetary damages are. We could try to get an injunction but I’ll need a retainer for that.

Unable to raise enough funds for the retainer, the kids simply call up PGA demanding that their ban be ceased or else nobody will sit with them at lunch or play with them at recess. That did the trick and the ban was called off immediately. Now kids can play at both mini golf courses!

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June 16, 2022

Is the PGA’s Suspension of 17 Players Out of Bounds Under the Federal Antitrust Laws?

by Bona Law PC

Authors: Luke Hasskamp and Molly Donovan

We often write about sports and antitrust and have previously written about professional golf, and, specifically, the legal implications of a competitor golf league trying to break onto the scene:

The new league, LIV Golf, seeks to compete with the PGA Tour, as well as the European tour (known as the DP World Tour). Indeed, LIV Golf held its first event this past weekend in London, which included 48 participants. Of those, 17 players were members of the PGA Tour. Charl Schwartzel emerged as the winner of the “richest tournament in golf history,” taking home $4.75 million in prize money, which was more than he won during the last four years combined.

In response, the PGA Tour handed down harsh discipline to those 17 players who joined LIV Golf, suspending them indefinitely. The PGA Tour also promised to suspend any other players that participate in future LIV Golf events. It’s a dramatic step, and surely not the last word on the matter.

Now, let’s say you’re one of those 17 players who has been suspended, or you’re a member of the PGA Tour considering playing for LIV Golf but you’re facing such a ban. There are many things to consider, of course. But let’s focus on your legal options. Would the PGA Tour’s ban of a player that chooses to participate in a competitor’s event be lawful? Do the federal antitrust laws in the United States provide you any remedies? Potentially. Let’s take a closer look.

Section 2 of the Sherman Act – Monopolization

Federal antitrust laws make it illegal for a monopolist to preserve its dominant market position through anticompetitive conduct. Here, the PGA Tour sure looks like a monopoly. It’s the dominant actor in the professional golf market in the United States, with revenues well exceeding $1 billion per year. If you are an elite professional golfer in the United States, it’s pretty much the only place to play. (Actually, the PGA Tour, in this context, looks more like a monopsony, as it’s the dominant purchaser of labor in the professional golf market.)

But being a monopoly is not illegal by itself. Instead, there must be some anticompetitive or exclusionary conduct that harms competition in the market.

Typical examples of procompetitive conduct include lowering prices, improving quality, enhancing services, or, in the labor market, raising wages and improving benefits. Antitrust laws like these types of behavior because they enhance competition and are good for consumers. A monopoly that holds onto its dominant market position by offering the lowest prices and the best product is generally a good thing and something antitrust laws seek to encourage. Similarly, a monopsony employer that attracts and retains the best employees by paying the highest wages, offering the best benefits, and otherwise creating the most attractive work environment is the type of outcome that is perfectly acceptable from an antitrust perspective.

Anticompetitive conduct can be harder to define, but can include things like threatening customers or employees, an exclusionary boycott, bundling, tying, exclusive dealing, disparagement, sham litigation, tortious misconduct, and fraud. We’re looking for improper attempts by a monopolist to box out a competitor.

When we look at the current PGA Tour dispute and its decision to suspend players who play for LIV Golf, it seems at least arguable that the PGA Tour’s conduct is anticompetitive. They are not attempting to retain the best golfers by raising compensation, creating more opportunities, or otherwise enhancing the work environment for its players. Instead, the PGA Tour is punishing players who choose to participate in a rival’s events. The conduct appears designed to stifle a would-be competitor.

Section 1 of the Sherman Act – Agreements

Federal antitrust laws also analyze agreements by two or more parties that restrain trade in the market. And agreements between horizontal competitors are closely scrutinized under the per se standard.

Consider professional baseball’s long and storied antitrust history. Those antitrust disputes started (more than 100 years ago) because teams had collectively agreed not to sign each other’s players. Back then, baseball contracts included a “reserve clause,” which reserved a team’s right to a player in perpetuity. Thus, once a player signed with that team, he was only able to re-sign in following years with that same team (unless the team released him). All teams agreed to honor each other’s reserve clauses by agreeing to not sign another team’s players, even if his contract had expired. The reserve clause intentionally suppressed competition by, in essence, preventing free agency. It suppressed players’ salaries. With only one team competing for a player’s services, rather than a full league, teams avoided bidding wars and players had little recourse but to accept the amount offered by their team.

Here, we’d ask whether the PGA Tour has entered into any agreements (formal or otherwise) with another party that restrain trade in the market for professional golf services. There is at least some indicia of such agreements. The European tour (the DP World Tour) has hinted that it may follow the PGA Tour’s approach to dealing with members would participate in LIV Golf. This may stem from the PGA Tour’s “strategic alliance” with the DP World Tour. This sure looks like it could be a horizontal agreement between competitors. Other entities may also be considering similar agreements with the PGA Tour, including the PGA of America, which runs the PGA Championship, one of golf’s four majors, as well as the Ryder Cup, a wildly popular team competition between players from the United States and Europe. The PGA of America, a separate entity from the PGA Tour, has suggested that it is likely to not permit LIV Golf players to participate in the PGA Championship or Ryder Cup.

Of course, sometimes competitors will follow each other’s policies, prices, or practices without an agreement of any sort. That is called conscious parallelism and is not an agreement in restraint of trade because there is no agreement. We don’t know whether there is an agreement here or the European Tour is merely following the PGA Tour in a round of conscious parallelism.

Remedies

A plaintiff prevailing on an antitrust claim has a right to treble damages, which is three times their actual damages, as well as attorney fees.

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June 5, 2022

Is Antitrust Litigation the Next Stop in the PGA Tour’s Battle with the Upstart LIV Golf League?

by Bona Law PC

Author: Luke Hasskamp

Hello, friends. Let’s talk about some of the latest developments in the world of professional golf, at least from an antitrust perspective.

Last spring I wrote about the PGA Tour’s response to a potential competitor golf league. The new league promised to shake up professional golf, guaranteeing massive payouts to attract some of the top players in the game and offering unique competitions and tournament formats different from the standard PGA Tour event.

As with many upstart competitors, the new league generated a great deal of controversy. By far, the most controversial aspect is the league’s association with Saudi Arabia. Indeed, the league is mostly funded by the Saudi Arabia government not a golf hotbed. Saudi Arabia’s investments have been criticized as “sportswashing,”—“the practice of investing or hosting sporting events in a bid to obscure the Kingdom’s poor human rights record, and tout itself as a new leading global venue for tourism and events.”

This upstart league has gone through a few iterations and, with it, a few different names. Last spring it was referred to the Premier Golf League, and it has also been called the Super Golf League. The current moniker appears to be LIV Golf. (We’re excited to see what name they come up with next!)

Reports suggested that individual players were being offered substantial sums of money, upwards of nine-figure deals, simply to join the LIV league—including a reported $125 million offered to Dustin Johnson, the most prominent player to announce his intention to play in the LIV league. To put that in perspective, Tiger Woods is the all-time career money leader with $120 million (and only one other player has ever won more than $75 million all time (Phil Mickelson, $92 million).

My last article speculated on whether other actors would join the PGA Tour’s efforts to squelch the upstart league. Well, at least one partner said it would enforce the PGA Tour’s ban. The PGA of America (a separate entity from the PGA Tour) announced that anyone banned from the PGA Tour would also be barred from competing in the PGA Championship (one of golf’s four majors), as well as the biennial Ryder Cup. “If someone wants to play on a Ryder Cup for the U.S., they’re going to need to be a member of the PGA of America, and they get that membership through being a member of the Tour,” PGA of America CEO Seth Waugh said last May.

Waugh added that “the Europeans feel the same way,” suggesting the European tour would also enforce the PGA Tour’s ban at its events. And, indeed, the European tour (the DP World Tour) later issued a “warning memo” to its members against participating in LIV events. And, just recently, the United States Golf Association—the organization that hosts the U.S. Open, one of golf’s four majors—announced that “although the USGA ‘prides themselves on the openness of their tournament,’ they will also make their own decision about the eligibility of players at the upcoming U.S. Open . . . on a case-by-case basis.” This appears to be another not so subtle attempt at dissuading golfers from jumping to the Saudi league.

Along those lines, Phil Mickelson was not a participant at this year’s Masters tournament. Mickelson, as a past champion, has a standing invitation to play in the Masters, part of the tournament’s storied tradition. There was speculation that Masters officials instructed Mickelson not to attend the tournament due to the controversy. But Masters officials denied the report, stating that Mickelson decided not to participate in this year’s event. (Mickelson has not commented publicly on the specifics.) Mickelson also did not participate in this year’s PGA Championship, another major and one where Mickelson was the defending champion.

Sponsors also appear to be siding with the PGA Tour (or, perhaps, simply do not wish to align themselves with LIV and its Saudi connections). RBC announced that it was dropping its sponsorship deals with Dustin Johnson and Graeme McDowell after both golfers were linked to the Saudi league. Similarly, UPS dropped its deals with Lee Westwood and Louis Oosthuizen.

This all comes on the heels of the latest development: the LIV league’s first event is coming to fruition. It is scheduled for June 9-11 in London, at the same time as the PGA Tour’s RBC Canadian Open event. Because these are conflicting events, PGA Tour members needed to obtain express permission from the PGA Tour to participate. But the Tour rejected all requests for an exemption (as did the European tour). But several dozen players announced that they were in the field for the LIV event, a surprising number for an league that seemed on more than one occasion as if it would never get off the ground. (Interestingly, Phil Mickelson has not announced whether he will participate, and he was not listed as one of the 48 participants, although six spots were unannounced so it’s possible he’ll still be in the field.)

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May 13, 2022

If I Were You…I’d Listen to this Antitrust Podcast

by Bona Law PC

Author: Molly Donovan

If I Were You is a new Bona Law podcast that gives in-house lawyers the essential 5 bullets they need to explain real-world antitrust and competition risks to their business teams. This podcast is a quick 10 minutes or less, easily digestible during a commute or errand, and we hope it becomes a practical resource for in-house lawyers.

I’ll be the regular host of the podcast, which was inspired by one of my favorite in-house friends who said, “A good way to talk to the business side is to say something like, ‘I’m not saying don’t do it, but if I were you, I would do x, y, and z to mitigate the risk.’” And—tah dah—this podcast was born.

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March 10, 2022

DOJ Antitrust Division “Absolutely” Prepared to Criminally Charge Illegal Monopolization Conduct

by Bona Law PC

Author: Jon Cieslak

The U.S. Department of Justice Antitrust Division made waves recently by indicating that it is prepared to bring criminal charges for illegal monopolization, something it has not done in over 40 years.

Speaking at the American Bar Association’s National Institute on White Collar Crime on March 2, Deputy Assistant Attorney General Richard Powers said that, while he was not “making any announcements,” the Antitrust Division was “absolutely” prepared to bring Sherman Act, Section 2 criminal charges. He noted that Congress made violations of both Section 1 (which addresses anticompetitive agreements) and Section 2 a crime, and that the Antitrust Division has previously brought Section 2 charges alongside Section 1 charges “when companies and executives committed flagrant offenses intended to monopolize markets.”

If the Division does bring Section 2 charges, it will not lack for statutory authority. Section 2 of the Sherman Act expressly makes it a felony to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.” 15 U.S.C. § 2.

But with a dearth of previous Section 2 prosecutions—which were usually brought with Section 1 claims in any case—it is hard to know what monopolization conduct the Division might prosecute. After all, the Division does not prosecute all violations of Section 1; it only prosecutes per se violations such as price fixing, bid rigging, and some market allocation agreements, not other anticompetitive agreements that are judged under the rule of reason. Section 2 violations, however, are not so neatly compartmentalized into per se and rule of reason violations.

This could lead defendants to challenge any forthcoming Section 2 charges on Due Process grounds because the statute is unconstitutionally vague about what conduct is illegal. Indeed, some have argued that Section 1 is vulnerable to this same attack—even though courts have substantial experience with Section 1 criminal cases.

The Antitrust Division previously dealt with this potential problem in a different context. When the Division announced that it would begin prosecuting wage fixing and no poaching agreements, which it previously had not prosecuted, it issued guidance to HR professionals about what conduct the Division would prosecute. This approach has been successful so far, as the only court to consider the issue has ruled against a constitutional challenge to the Antitrust Division’s prosecution of a wage fixing agreement.

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January 24, 2022

Observations on the Court’s Rejection of Facebook’s Motion to Dismiss the FTC’s Amended Antitrust Complaint

by Bona Law PC

Author: Jarod Bona

The FTC filed an antitrust lawsuit against Facebook (now Meta Platforms Inc.). Judge James E. Boasberg dismissed it. The FTC then filed an amended complaint. And the same judge just denied Facebook’s motion to dismiss that complaint.

The FTC alleges that Facebook has a longstanding monopoly in the market for personal social networking (PSN) services and that it unlawfully maintained that monopoly through (1) acquiring competitors and potential competitors; and (2) preventing apps that Facebook viewed as potential competitive threats from working with Facebook’s platform.

The FTC’s first claim asserts that Facebook monopolized the market through (1), above—acquiring companies (especially Instagram and WhatsApp) instead of competing. The FTC’s second claim includes both (1) and (2), the interoperability allegations, and invokes Section 13(b) of the FTC Act, which allows the agency to seek an injunction against an entity that “is violating” or “is about to violate” the antitrust laws.

The Court permitted the FTC to go forward with both claims, but also concluded that the facts from the interoperability allegations happened too long ago to fit into Section 13(b)’s “is violating” or “is about to violate” temporal requirement.

You can read the play-by-play of the opinion elsewhere or, even better, read the actual decision. My purpose with this article is instead to offer some observations about the opinion and broader antitrust litigation issues.

Direct and Indirect Evidence of Monopoly Power

The FTC argues that it has alleged both indirect and direct evidence of Facebook’s monopoly power. But because the Court concluded that the FTC had adequately alleged indirect evidence of Facebook’s monopoly power, it didn’t need to analyze the direct evidence of monopoly power.

The only reason I am bringing this up is because most monopolization cases focus on indirect evidence of monopoly power—i.e. relevant market definitions, market share, barriers to entry, etc.— so many people don’t consider that a plaintiff can also satisfy this element through direct evidence of monopoly power. For example, if a plaintiff can prove that a defendant is engaged in supracompetitive pricing, it is showing direct evidence of monopoly power. And in an antitrust claim against a government entity, the plaintiff may be able to show directly that the public entity is a monopolist as a result of government coercion.

Notably, the Court dismissed the last FTC Complaint against Facebook for failure to allege monopoly power. Here, the Court concludes that “the Amended Complaint alleges far more detailed facts to support its claim that Facebook” has a dominant share of the relevant market for US personal social networking services.

In reaching this conclusion, the Court agreed with the FTC that Facebook’s dominance is durable because of entry barriers, particularly network effects and high switching costs.

Anticompetitive Conduct

The alleged anticompetitive conduct consists of a series of mergers and acquisitions. Within antitrust and competition law, you typically hear about antitrust M&A in the context of Hart-Scott-Rodino filings and direct merger challenges by the FTC or DOJ.

Courts will sometimes conclude that mergers and acquisitions are a means of exclusionary conduct by a monopolist. As in the present case, that can come up when a company that dominates a market confronts a potential competitor and must decide how to respond. Sometimes the monopolist will compete better—reduce prices, improve quality, etc. That’s the way competition works. But in other situations, the monopolist might solve its problem by dipping into its cash or stock and remove the threat to its monopoly profits by buying the nascent competitive threat.

You could also imagine a scenario in which a monopolist engages in exclusionary conduct by going vertical and purchasing either a supplier or customer in a context in which such doing so makes it difficult for the monopolist’s competitors to achieve economies of scale. This can be similar in effect to an exclusive-dealing arrangement.

Harm to Competition

The FTC, of course, must allege harm to competition. The standard harm to competition is an increase in prices or a decrease in quality—which are two sides of the same coin. But these aren’t the only harms to competition that a plaintiff can allege.

Here, of course, the FTC is asserting an antitrust claim centered on purchase of Instagram and WhatsApp, which were free before and after the acquisitions. And the Facebook social network site is, of course, also free.

But the Court concluded that the FTC did, in fact, allege harm to competition. The FTC alleged “a decrease in service quality, lack of innovation, decreased privacy and data protection, excessive advertisements and decreased choice and control with regard ads, and a general lack of consumer choice in the market for such services.” And the FTC emphasized the lower levels of service quality on privacy and data protection resulting from lack of meaningful competition.

The Court accepted these allegations as sufficient harm to competition: “In short, the FTC alleges that even though Facebook’s acquisitions of Instagram and WhatsApp did not lead to higher prices, they did lead to poorer services and less choice for consumers.”

The question of whether less choice is sufficient harm-to-competition to support an antitrust claim has been controversial over the years, but Courts are increasingly permitting it.

Previously Cleared Transactions

Facebook understandably grumbles that the FTC previously cleared through the HSR process the two transactions that it now complains about. But the Court rejects this argument because it says the “HSR Act does not require the FTC to reach a formal determination as to whether the acquisition under review violates the antitrust laws.” And, in fact, an HSR approval expressly reserves the antitrust enforcers the right to take further action. It doesn’t seem fair, but that’s the way it is.

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January 5, 2022

2021 Antitrust Developments Affecting Distribution That Flew Under the Radar

by Bona Law PC

Author: Steven J. Cernak

Recently, I was researching 2021 antitrust developments to update my Antitrust in Distribution and Franchising book and draft a long article for another publication. That research confirmed that new government antitrust enforcers and their actions gathered the most attention last year — but this blog covered those issues already, such as here and here and here. This post discusses the private antitrust litigation developments affecting distribution that I uncovered but that might have flown under your radar.

Refusal to Deal and Predatory Pricing

Despite the impression left by the mainstream media, not all antitrust cases involving claims of monopolization involved Amazon or Facebook. Other defendants faced claims of gaining or maintaining a monopoly through refusals to deal or predatory pricing schemes.

Careful readers will recall the anticipation last year that Viamedia Inc. v. Comcast Corp. might generate a Supreme Court opinion on refusal to deal issues. Here, the defendant monopolist had stopped dealing with the plaintiff after years of doing so and, allegedly, caused competitive harm. The district court had dismissed the refusal to deal claim by explicitly following the Tenth Circuit’s opinion in Novell, Inc. v. Microsoft Corp., authored by then-Judge Gorsuch, because it found that the defendant’s conduct was not “irrational but for its anticompetitive effect.” The Seventh Circuit reversed, finding the court’s application of the Novell standard inappropriate at the motion to dismiss stage when a plaintiff need only plausibly allege anticompetitive conduct even if the defendant might later try to prove a procompetitive rationale.

The defendant sought Supreme Court review and the Justices asked for the views of the Solicitor General. The Solicitor General did not recommend that the Court hear the appeal. In June, the Court denied the writ of certiorari. After remand, the plaintiff chose to drop its refusal to deal theory of the case and proceed only on a claim of illegal tying. Therefore, the opinion will stand and future monopolist defendants, at least in the Seventh Circuit, will have more difficulty dismissing refusal-to-deal claims. Instead of simply asserting that some rational potential procompetitive purpose or effect is self-evident from the complaint, the defendant will have to show that the allegations do not raise any plausible anticompetitive purpose or effect, a much more difficult burden.

In another refusal to deal case, OJ Commerce LLC v. KidKraft, LP, the defendant won summary judgment on plaintiff’s refusal-to-deal claim. Plaintiff was a discounting online retailer that had sold defendant’s products, including children’s wooden play kitchens, for years. An affiliate of plaintiff then began making wooden play kitchens that plaintiff also sold on its website. Defendant objected, claiming that the affiliates’ kitchens were knock-offs of defendant’s products and that plaintiff’s sales of defendant’s products were plummeting. Eventually, defendant terminated its relationship with plaintiff, who then sued alleging illegal monopolization through a refusal to deal.

The court began with the proposition that even a monopolist is not required to do business with a rival. The court recognized that the Supreme Court had found an exception to that proposition in Aspen Skiing Co. but only if defendant’s termination of prior conduct was irrational but for its anticompetitive effect. The court found “this is hardly the case here” as the defendant had shown several other potential explanations for its termination of plaintiff. As a result, the court granted defendant’s summary judgment motion.

Predatory pricing remains a popular claim by plaintiffs against alleged monopolists, despite the difficult standard for such claims imposed by the Supreme Court. In such claims, the plaintiff alleges that the defendant’s extraordinarily low prices will drive out competitors, which in turn will allow the defendant to later raise prices and harm consumers. In Brooke Group, the Court set a difficult standard to meet because “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.” Also, it can be difficult to distinguish low pro-competitive prices from predatorily low ones. Subsequent plaintiffs have found it difficult to successfully allege, let alone win, such claims.

Last year, we described an exception where a defunct ride-hailing company’s predatory pricing claims against Uber survived a motion to dismiss. In 2021, a taxi company was not as successful and its similar claims were dismissed (although other non-antitrust claims survived). In Desoto Cab Co. v. Uber Technologies, Inc., the court dismissed the claim because the plaintiff did not allege barriers to entry or expansion for new or existing competitors sufficient to allow defendant to recoup its losses. Plaintiff’s mere invocation of network effects without any allegations regarding how they might create entry barriers in this market also was not enough. Finally, unlike the plaintiff in last year’s case, this plaintiff failed to allege why Lyft no longer could prevent defendant’s recoupment through higher prices.

Tying and Agreement

2021 also brought opinions on some of the basic elements of a tying claim and what facts amounted to an agreement.

One element of a successful tying claim is that the defendant is selling two separate products, the tying and the tied product. To make that determination, courts must find that “there is a sufficient demand for the purchase of [the tied product] separate from [the tying product] to identify a distinct product market in which it is efficient to offer [the former] separately from [the latter].” In AngioDynamics, Inc. v. C.R. Bard, Inc., the court denied competing summary judgment motions from the parties on this question. The defendant had sought and received regulatory approval to sell the tied product separately; however, it had actually made only a few such sales and then just to a single customer. The only other competitor that sold both products did sell them separately; however, it was not clear that its conditions were identical to defendant’s. The court, therefore, could not determine as a matter of law that the consumer demand was sufficient to make it efficient for defendant to offer the tied product separately.

For every Sherman Act Section 1 case, a successful plaintiff must show an agreement between defendant and some other entity. To meet that burden at summary judgment or trial, plaintiff must present “evidence that tends to exclude the possibility that the [the defendants] were acting independently.” In a typical distribution case, a terminated distributor claims an anticompetitive agreement between its supplier and some other distributor, usually based on some complaints about the terminated distributor to the supplier from the other distributor.

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