Distribution, Competition, and Antitrust / IP Law

Archives for September 2013

Allegations of Harm to Competition Caused by Multiple Defendants Can’t be Aggregated

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Earlier this year, I covered the case of Orchard Supply Hardware LLC v. Home Depot USA, Inc. See this post.

On September 19, 2013, the court (the Northern District of California) issued its decision on defendants’ motion to dismiss the plaintiff’s second amended complaint. The court dismissed plaintiff’s antitrust claims against the tool manufacturers (Makita and Milwaukee Electric Tool Corp. (“METCo”)), this time with prejudice.

On its second go-round, the court found that Orchard had alleged harm to competition, because it alleged a distinct product submarket: the market for certain specific professional power tools, as purchased by professional customers. “The market Orchard alleges . . . is defined by a distinct set of products, and within that market Orchard alleges that there is a distinct submarket as indicated by a distinct set of purchasers, sensitive to a distinct price point. Within this submarket, Orchard alleges that the challenged agreements have the effective of totally foreclosing competition. These allegations suffice to outline a defined submarket in which Orchard has pled harm to competition.”

The court rejected defendants’ argument that Orchard had failed to allege harm to competition because it had alleged neither a reduction in the output or quality of goods, and had not demonstrated an increase in price caused by Orchard’s foreclosure from the market. “An antitrust plaintiff need not demonstrate that prices have actually been raised to plead a rule-of-reason claim.”

Nevertheless, the court dismissed the claims against Makita and METCo. Plaintiff alleged that each tool manufacturer had entered into a separate vertical, exclusive agreement with Home Depot. “[I]t is inappropriate to aggregate the two vertical agreements in evaluating whether METCo and Makita’s conduct was anti-competitive. METCo and Makita each separately made an agreement with Home Depot. Orchard does not contend that, taken individually, these contracts have an anticompetitive effect . . . . If an individual supplier could be held liable for the cumulative impact of all suppliers’ conduct, a company would have to investigate what other businesses were doing before it acted in order to make sure its own conduct wasn’t anticompetitive, a burden the antitrust law does not impose.”

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If Your Allegations Don’t Establish a Price Effect, You May Lack Antitrust Standing

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ipod shuffle (Photo credit: sucelloleiloes)

In Somers v. Apple, Inc., Case No. 11-16896 (9th Cir. Sept. 3, 2013), the Ninth Circuit affirmed the district court’s dismissal of a putative class action against Apple, Inc., alleging antitrust violations in connection with Apple’s iPod and its Tunes Music Store.  The case illustrates the dangers of failing to adequately allege a price effect caused by a defendant’s purportedly anticompetitive conduct.

On behalf of a putative class, Somers alleges that she suffered injury in the form of inflated music prices. The premise of her overcharge theory is that Apple used software updates to thwart competitors (e.g., Real Networks) and gain a monopoly in the music download market, which permitted Apple to charge higher prices for its music than it could have in a competitive market. Specifically, Somers alleges that if Apple had not engaged in anti-competitive conduct to exclude Real Networks from the market, “it would have had to price Audio Downloads to compete on price with Real Networks.”

(Slip Opinion at 19-20.)

But, unfortunately for Somers, her allegations did not square with her overcharge theory.  Apple’s price for music downloads remained stable before the time it allegedly acquired a monopoly and afterwards.

Moreover,

if Somers’ overcharge theory were correct, then Apple’s music prices from 2004 to 2008 were supracompetitive as a result of software updates that excluded competition, and the emergence of a large seller such as Amazon would have caused iTS [iTunes] music prices to fall. But Somers alleges no such price reduction. Somers’ overcharge theory is thus implausible in the face of contradictory market facts alleged in her complaint. As Somers herself acknowledges, under basic economic principles, increased competition—as Apple encountered in 2008 with the entrance of Amazon—generally lowers prices.

(Id. at 20.)  “The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers’ conclusory assertion that Apple’s software updates affected music prices.”  (Id. at 21.)

The Ninth Circuit agreed that price “is only one possible indicator in assessing competitive markets.  Monopoly power may be evaluated by other factors, such as barriers to entry or structural evidence of a monopolized market.”  (Id. at 21.)  “But if Apple did not charge inflated prices for its music, then this fact contradicts Somers’ overcharge theory, and there would be no basis for damages in the first place.”  (Id.)

While Somers suggested that it was conceivable that Apple’s music was not priced higher because of some other factor, such as superior product or greater efficiency, the court found that to state a plausible antitrust injury, a plaintiff must allege facts that rise beyond mere conceivability or possibility.  “We are only left to speculate on what factors could have permitted Apple to charge 99 cents continuously.”  (Id. at 22.)  Somers therefore failed to plead a plausible, non-speculative claim.

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