Distribution, Competition, and Antitrust / IP Law

Northern District of California Reiterates That You Can Monopolize a Technology Market

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

Court Refuses to Dismiss Antitrust Claims in Apple E-Book Case

I previously covered the allegations in the Apple E-Book case here.

Today (May 15), the Southern District of New York (Cote, J.) refused to dismiss the class plaintiffs’ antitrust claims against Apple and the e-book sellers.  See In re: Electronic Books Antitrust Litigation, Case No. 11-MD-2293 (DLC).  In doing so, the court indicated that the plaintiffs’ claims are subject to a per se analysis and not a Rule of Reason treatment. 

The court viewed the alleged conspiracy as fundamentally horizontal in nature, with Apple sitting at the “hub” of a hub and spoke conspiracy. 

Other notable aspects of the decision include:

  1. The court’s determination that the plaintiffs had sufficiently alleged direct evidence of a conspiracy.
  2. The court’s refusal to weigh competing evidence as to whether alternative, non-conspiratorial explanations account for the defendants’ conduct.  If the conspiracy claim is plausible, the court held, it cannot be dismissed.
  3. The court’s relative uninterest in the specific “motivations” of the various defendants.  The complaint plausibly alleged that each defendant (including Apple) shared the basic “twin purposes of raising the price of eBooks and eliminating retail competition even though their motives for joining the conspiracy were different.”
  4. The court’s ruling that even though the alleged agreements did not render all eBook pricing uniform, they were subject to antitrust challenge because the plaintiffs had alleged that the defendants “conspired to eliminate retail price competition and to raise the price of eBooks above the $9.99 price set by Amazon.” (emphasis in original).

Here’s the Skinny on the Apple E-Book Case

The Apple e-book case has been front-and-center in the media this last week. For those not following it carefully, here is a quick sketch of the allegations and what’s at stake. (I hasten to emphasize that the government’s allegations are only allegations at this point in time.)

What’s at stake? The pricing of electronic books, or “e-books.” The government (the DOJ antitrust division) alleges that several years ago Amazon lowered e-book pricing dramatically (often to $9.99 per e-book) in connection with its Kindle e-book readers, a move which dissatisfied the book publishers.(*) Other e-book retailers began to match or approach Amazon’s pricing (which the government alleges was profitable).

Who is alleged to have done what? The government alleges that the book publishers and Apple agreed to raise retail e-book prices and to otherwise limit competition in the sale of e-books. The allegations of agreement or conspiracy are important, because absent proof of such, it’s not at all clear that anything unlawful occurred.

What is the nature of the alleged conspiracy? The government alleges that the book publishers agreed to move away from a “wholesale” pricing model, whereby the book or e-book retailer retains retail pricing authority, towards an “agency” model, where the book publishers retain retail pricing authority and the online bookstores are mere “agents.” (According to the government, the wholesale model has prevailed in the book publishing industry for over 100 years.)

What would be the rationale for such an agreement? Again, according to the government, the book publishers wanted to raise e-book pricing. The publishers also allegedly feared Amazon’s e-book pricing spilling over into the hardcopy market. And – again, according to the government – the publishers feared that Amazon’s distribution system would enable it to become a strong rival publisher that could and would deal with authors directly, ultimately threatening the publisher’s business model.

Apple allegedly went along with the plan because under it, Apple would receive a guaranteed and significant 30% commission on books, each of which would presumably be sold at a higher price than otherwise absent the agreement. Apple allegedly communicated with each publisher to coordinate common agreement terms. Relatedly, the government alleges that the book publishers indicated that they would impose the agency model on other retailers and raise e-book prices at all other e-book outlets, too. (Without such a commitment, one presumes that higher pricing only at the Apple online store would not be very effective.)

How did the e-book pricing work? The government alleges that “Apple Agency Agreements” entered into by the book publishers specified price tiers for books tied to hardcopy pricing ranges. Apple also received an “unusual” Most-Favored Nations (“MFN”) clause requiring each publisher to guarantee that it would lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control the other retailer’s ultimate consumer price. The government alleges this MFN meant Apple did not have to compete on price at all, while still maintaining its 30% margin.

What is the nature of the government’s evidence? The government alleges, among other things, regular meetings and communications among the publisher defendants; direct discussions and agreements among those defendants; the publisher defendants’ attempts to conceal the “illicit nature” of their communications; parallel pricing or price increases following the April 3, 2010 effective date of the Apple Agency Agreements between each publisher and Apple; and various acts contrary to economic interests (i.e., it would have been contrary to the interests of any single publisher to attempt to impose agency pricing on all of its retailers and then raise its retail e-book prices). The government’s complaint recites many details about alleged communications between the book publishers at high levels, including at the CEO level.

What was the alleged result of the parties’ cooperation? The government contends that e-book pricing went up substantially, from $9.99 per e-book under the Amazon approach to $12.99 or $14.99.

What is the government suing for? Injunctive relief, under Section 1 of the Sherman Act.

What is notable about the relief sought? Although the Complaint reads like a classic conspiracy case, the government is not seeking monetary fines, nor is it exercising its criminal price-fixing authority. Instead, it is seeking only injunctive relief.

Who is left in the suit? Apple, Penguin, and MacMillan. On Wednesday of last week, Hachette, HarperCollins, and Simon & Schuster settled the charges by agreeing to a proposed consent decree. Those publishers have agreed, among other things, not to use the sort of MFN arrangements present in the Apple Agency Agreements.

Are those settling admitting liability? No, and the publishers have also said that the approach with Apple was pro-competitive because it counter-balanced Amazon’s stranglehold on the market.

Are the remaining defendants going to fight the allegations? Presumably. Penguin’s CEO in particular has denied any wrongdoing.  Because the government is seeking only injunctive relief, it’s not clear that a loss-after-litigation would be any worse for the remaining companies than a settlement.

Where is the case pending? In the Southern District of New York, presumably because New York is where the publishers are located.

Is there other related litigation? Yes. Sixteen State Attorneys General have filed suit seeking damages on behalf of consumers. Private class action litigation is also pending.

(*) Hachette Book Group, HarperCollins, Holtzbrinck Publishers (MacMillan), Penguin Group (USA), and Simon & Schuster. The government alleges that these defendants are five of the six largest publishers of trade books in the United States. (Trade books are alleged not to include specialty books such as children’s picture books, academic textbooks, and reference materials.)

N.D. Cal. Certifies Antitrust / Arbitration Estoppel Question to Ninth Circuit

In re Apple & AT&TM Antitrust Litigation, No. C 07-05152 JW (Feb. 1, 2012) (Ware, J.)

Judge Ware certified for interlocutory appeal the question of whether a non-signatory may assert equitable arbitration estoppel against a signatory plaintiff.

The case involves a Sherman Act Section 2 / aftermarket claim against Apple. The case arose from the plaintiff’s service contract with defendant ATTM. As part of that service contract, the plaintiff signed an arbitration agreement with defendant ATTM which precluded class arbitrations and class actions.

The district court initially followed Mundi v. Union Security Life Ins. Co., 555 F.3d 1042 (9th Cir. 2009), in finding that equitable estoppel required plaintiff to arbitrate with non-signatory Apple as well. The Mundi court had found a dearth of prior Ninth Circuit precedent, and had looked to other circuits for guidance — in particular, the Second Circuit in Sokol Holdings, Inc. v. BMB Munai, Inc., 542 F.3d 354 (2d Cir. 2008). The Ninth Circuit allowed the assertion of equitable estoppel where the dispute is “intertwined” with the contract and there is a sufficient “relationship” between the parties.

Plaintiff filed a motion for reconsideration. Because the Apple Court’s prior order “was premised on an interpretation of Mundi which required the Court to undertake an extensive analysis of both that opinion itself and the Second Circuit caselaw to which the Mundi court looked for guidance, and given the language in Mundi which indicates that the Ninth Circuit did not mean to extend the ‘concept of equitable estoppel of third parties’ beyond the ‘very narrow confines’ delineated in previous cases,” the Apple Court found reason to certify the issue of arbitration by equitable estoppel for interlocutory review.

 

WestlawNext for iPad

It’s on the iTunes store.  As of the time of this writing, it has 151 ratings, but only 3 out of 5 stars.  Worthwhile?  Good implementation?  Or clunky?  Can’t quite tell.  Hard to get this sort of implementation right.  Interesting idea, though.

 

 

What’s better in technology markets: market volume, revenue, or profit share?

You decide.

OmniFocus for iPad 1.3

Amazingly great.  Need to plan to dos, manage projects, juggle schedules?  Almost perfect.  No you can see your iPad calendar right along side your to dos timeline.  Very useful for attorneys or anyone with a number of projects or issues to track.

See this brief review on MacSparky.

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