Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

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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Does Amazon Engage in “Razor and Blade” Pricing?

Third generation Amazon Kindle, showing text f...

(Photo credit: Wikipedia)

Some people have suggested that Amazon’s pricing of products such as the Kindle e-reader is similar to the pricing strategies of razor manufacturers: sell the primary product cheaply (and maybe even at a loss), and make it up on the back end through the sale of complementary products (in the case of razors, razor blades; in the case of Kindles, e-books).

The courts have not uniformly settled on an approach to this pricing strategy. When the products are actually bundled together for sale, some courts have concluded that bundled pricing is lawful so long as the price of the entire bundle exceeds some appropriate measure of its cost. See, e.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 383 (9th Cir. 2008).  But compare LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc).  State law is often even less clear in this area.  (California, for example, has a specific loss leader statute.)  And of course, Kindles aren’t actually bundled with e-books; you can buy a Kindle and never buy an e-book (you could use the Kindle to read your own PDF files, for example), so bundled pricing may not technically be involved.  (Razors are almost always sold with some blades, by contrast.)

Given the somewhat unsettled nature of the law, I was interested to see a Wall Street Journal / AllThingsD interview last week with Amazon’s founder and CEO Jeff Bezos.

Mr. Bezos stated that Amazon does not like the razor and razor blade model, but also does not like the “other” model, “where you make a lot of money on the device.” As to the Kindle specifically, Amazon does not want to “lose a lot of money on the device.” Mr. Bezos wouldn’t disclose specifics, though.

So for whatever reason, even though Amazon perhaps arguably could do so, it apparently isn’t losing money on Kindles and making it up on e-books. (If it were doing that, it’s hard to see how Amazon could be engaged in e-book price predation, as some have alleged.)

The Kindle price points are impressive, though. I have no actual information, but I would guess that, given Mr. Bezos’ comments, Amazon is probably just about breaking even on the Kindle hardware (in total – maybe not on each device, especially the newer, more sophisticated ones). Amazon seems happy to sell you a Kindle, but they are equally happy to sell you books that you read on a tablet or a PC. In the very long run, selling Kindles helps create and maintain demand for e-books, and Amazon still hopes to be king of e-book distribution.

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You Can’t Try to Monopolize a Market In Which You Don’t Compete

That message was delivered, again, by the court in Infostream Group, Inc. v. PayPal, Inc., 2012 U.S. Dist. LEXIS 122255 (N.D. Cal. Aug. 28, 2012) (Illston, J), which dismissed antitrust claims against PayPal.

In Infostream, adult, “nontraditional” online dating services objected to PayPal’s refusal to deal with them, and alleged that PayPal’s contractual excuse was pretextual because PayPal was dealing with competitors such as Ashley Madison.com and ArrangementFinders.com. Plaintiffs alleged that PayPal has a monopoly in the “Confidential Payment Services” market and exercised its monopoly power in that market to injure competition in downstream markets, including the “Specialty Online Dating Services” market in which plaintiffs compete.

The problem for plaintiffs is that PayPal does not compete in the plaintiffs’ market. In Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991), the Ninth Circuit rejected monopoly leveraging doctrine as an independent theory of liability under the Sherman Act.

Although plaintiffs alleged that they had a “belief” that PayPal has an ownership interest in plaintiffs’ competitors, that allegation raised plausibility concerns under Iqbal and Twombly. Moreover, plaintiffs did not allege a dangerous probability of success in the downstream market, and in fact “wholly failed to allege any specific facts with respect to market power of their competitors . . . .”

The court gave plaintiffs leave to amend.

Are Minimum Advertised Price Programs Good or Bad? (Continued)

Sorry for the delay in posting.

Returning to the article linked below, I’ll briefly address some more criticisms of Minimum Advertised Price (MAP) programs.

6. MAP pricing hurts customers, because it makes it harder for an end user to compare prices among a variety of dealers.  There may be a cost to consumers from MAP programs, but it has to be weighed against the manufacturer’s avoided costs.  MAP programs can, at least in theory, address the problem of free-riding.  For example, an Internet-only dealer might be able to offer slightly lower pricing because it has no brick-and-mortar costs.  But it might also be able to do so because it is not making an investment in the brand or product and is relying upon the investment of other dealers, who might not make such investments if they fear low advertised prices.  In that case, the manufacturer’s business may be hurt.

7. MAP pricing makes purchasing more time-consuming for end users.  The idea here is that MAP programs prohibit prominently displayed website pricing, but allow “shopping cart” pricing.  To see the true price, a consumer has to jump through a few hoops.  This is generally true, but how much effort does it really take to click the mouse a few times?

8. MAP pricing may hurt a manufacturer’s sales.  Here, Mr. Pierce mentions implementation costs and enforcement costs, but these are likely to be small.  He also  argues that MAP programs can tip competitors off and allow them to undercut pricing.  But if MAP programs truly were not in the economic interests of manufacturers, why would manufacturers ever want to use them?  Additionally, whether MAP programs really make pricing more transparent to competitors is not entirely clear.  In any event, lower pricing is generally good for consumers.

9. Browsing in a store is no different than advertising online.  In a brick-and-mortar store, consumers can just browse various competing items and see their prices.  Why shouldn’t they be allowed to do that online?  The answer is that a properly structured MAP program does not interfere with actual online “shopping cart” pricing.  It may impose certain restrictions on site-wide price advertising.  It is not clear whether or not this restraint is more significant than a restraint prohibiting brick-and-mortar stores from advertising prices below $X on street signs or in a newspaper but allowing independent store pricing inside the store.

10. MAP pricing can be circumvented.  Dealers can use instant rebates, coupons, and other incentives to offer special deals that may avoid the precise terms of a MAP program.  This is also true — and is a factor to be weighed by a manufacturer when considering whether it is worthwhile to institute a MAP program.  However, it is not an indictment of MAP programs per se.

Wal-Mart is Trying Online Delivery of Groceries

According to yesterday’s Wall Street Journal.  Amazon and others are seen as a competitive threat.

The Vast Online Distribution Market

The Wall Street Journal reported today that Web ad revenue in the U.S. rose 15% to $26 billion last year, more than the $22.8 billion spent on newspaper advertising, the $22.5 billion for cable TV advertising, the $17.6 billion for broadcast television, and the $15.3 billion for radio advertising.

$26 billion is a huge number.  It illustrates how important online sales are today, and how important it is for both manufacturers and distributors to be aware of the rules regarding pricing through different channels and regarding channel restrictions.

European Union Court of Justice Examines Restrictions on Online Distribution

Can a manufacturer stop its distributors from selling products online to end consumers? It may want to do so to prevent online resellers from free-riding on the efforts of its brick-and-mortar merchants.

The EU’s Court of Justice will soon decide in the case of Pierre Fabre Dermo-Cosmetique SAS v. President de l’Autorite de le Concurrence & Ministre de l’Economie (C-439/09). An advocate general to the Court, Jan Mazak, recommended on March 3 that the Court hold that an absolute ban on selling goods online has as its “very object” the restriction of competition and so violates Article 101(1) TEFU. (This does not mean that such a ban would be per se unlawful, as that concept is understood in U.S. antitrust law, but it does mean that such a ban would be quite unlikely to satisfy EU competition law.) Under guidelines recently released in connection with the European Commission’s Vertical Block Exemption Regulation, at least in principle, every distributor must be allowed to use the Internet to sell products. If the Court adopts the recommendation, it will highlight yet one more difference between European and U.S. competition/distribution law – for decades in the U.S., non-price vertical restraints have been evaluated under a relaxed Rule of Reason analysis that takes into account all competitive and anti-competitive effects of a restriction. See United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967).

Enforcing Online Resale Prices Can Be Problematic

Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), held that resale price maintenance – even minimum resale price maintenance – is not per se illegal under federal antitrust laws. However, resale price maintenance, or RPM, remains vulnerable to attack under various state laws. In California v. Bioelements, Inc., Cal. Superior Ct. (Riverside County, Jan. 11, 2011), the California Attorney General reached an agreement with a cosmetics company to resolve charges brought under the Cartwright Act and California’s Unfair Competition Law that the company had engaged in price-fixing by prohibiting retailers from selling products online at a discount from suggested retail prices. The Attorney General did not charge that products sold in brick-and-mortar stores were subject to any similar agreement. The settlement agreement contemplates injunctive relief and civil penalties. Bioelements cautions that RPM remains problematic, and illustrates the limits of what manufacturers can do to address tensions between online and brick-and-mortar distribution – e.g., tensions caused by the perception that online retailers may “free ride” on the efforts of brick-and-mortar distributors.

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