DC Circuit

DC Circuit

Sherman Act claims against Google, Facebook, Twitter and Apple rejected

The US Court of Appeals for the DC Circuit recently upheld the US District Court for the District of Columbia’s decision to dismiss Freedom Watch’s and Laura Loomer’s (collectively, Freedom Watch) lawsuit against Google, Facebook, Twitter, and Apple.[1] The plaintiffs alleged that the companies conspired to suppress conservative political views in violation of the First Amendment, the Sherman Antitrust Act, and the District of Columbia Human Rights Act.[2] The district court granted the defendants’ motion to dismiss, holding that ‘Freedom Watch had standing to sue but failed to allege colorable legal claims.’ [3]

The defendants appealed the court’s decision on standing and the plaintiffs appealed the dismissal. The defendants argued that Freedom Watch did not have standing because the plaintiffs were unable to point to any actions taken by the defendants that had caused the alleged injury.[4] The DC Circuit, however, affirmed the lower court’s decision stating, ‘at the pleading stage, general factual allegations of injury resulting from the defendant’s conduct may suffice.’ [5] Thus, the DC Circuit held that the general allegations that the defendants had conspired to reduce Freedom Watch’s audience and revenue, combined with Freedom Watch’s representation that its audience and revenue had indeed declined, established standing at the pleading stage.[6]

In a victory for the defendants, the DC Circuit affirmed the district court’s dismissal for failure to state a claim, including claims under the Sherman Antitrust Act.[7] With respect to the plaintiffs’ section 1 claim, the DC Circuit held that Freedom Watch failed to plead facts sufficient to show an agreement among the defendants. Instead, the plaintiffs alleged merely parallel conduct, denying services to Freedom Watch, which the court found insufficient to support a claim under section 1 of the Sherman Act.[8] The plaintiffs also argued that the defendants’ pursuit of a revenue-losing strategy and their political motivations evidenced an agreement.[9] The court, however, held that Freedom Watch failed to show how either factor, even if true, demonstrated anything more than lawful independent action.[10]

The DC Circuit also held that the plaintiffs’ allegations were insufficient to support a Sherman Act section 2 claim of collective or individual monopolization.[11] The court reasoned that Freedom Watch’s claims failed because section 2 claims require allegations that the defendants, through exclusionary conduct, conspired to acquire or maintain monopoly power.[12] Freedom Watch merely alleged that the defendants conspired to suppress conservative content.[13]

DC District Court

Claims government failed to state Sherman Act section 2 claim are rejected

The US District Court for the District of Columbia considered exclusive loyalty-based priced contracts and whether such agreements could have an anticompetitive effect. The government alleged that Surescripts, a health information technology company operating in the electronic prescription routing and eligibility business, illegally maintained a monopoly in both.[14] Specifically, the Federal Trade Commission (FTC) took issue with the pharmaceutical company’s exclusive loyalty-based pricing policy.[15] The government argued that although the policy provided lower prices for loyal members, it excluded 70 percent of competition in alleged e-prescribing markets and allowed Surescripts to increase prices, stifle innovation, and reduce the quality of goods.[16] Surescripts moved to dismiss the government’s complaint for lack of subject-matter jurisdiction and failure to state a claim under section 2 of the Sherman Act. It argued that its exclusive loyalty contracts were ‘entirely optional’ and, thus, because the government failed to allege predatory conduct, could not constitute anticompetitive behavior.[17] The company further argued that even if its contracts were deemed exclusionary, its conduct was not illegal under the rule of reason.[18] The court ultimately rejected Surescripts’ motion on both grounds.

The court first considered whether Surescripts’ loyalty contracts were impermissibly exclusionary.[19] The court reasoned that a contract ‘need “not contain specific agreements not to use the [services] of a competitor” as long as “the practical effect . . . is to prevent such use.” ’ [20] Assuming the facts alleged in the FTC’s complaint were true for the purposes of the motion to dismiss, the court found that although Surescripts’ contracts were ‘entirely optional,’ the FTC had adequately pleaded that the company’s loyalty program could have had the practical effect of preventing the entry of competitors because customers may have feared increased prices from Surescripts in retaliation for not opting into its loyalty contracts.[21]

Surescripts countered that some loyalty customers were in fact able to work with other prescribers.[22] The court, however, ruled that the FTC did not need to show ‘total foreclosure’ but rather had to sufficiently allege a ‘substantial number of rivals’ were barred from the market or the market was ‘severely restrict[ed].’ [23] The court found that the government had met its burden, given the FTC’s allegation that the loyalty contracts foreclosed at least 70 percent of competitors.[24]

Next, the court considered, and then rejected, Surescripts’ argument that the government failed to allege anticompetitive effects under the rule of reason. Surescripts claimed that the FTC had to show foreclosed competition ‘in a substantial share of the line of commerce affected’ that resulted in anticompetitive effects, but that it failed to establish either foreclosure or anticompetitive results.[25] The court disagreed. It concluded that other cases evaluating exclusive dealing arrangements that foreclosed only 40 to 50 percent of a relevant market found that the arrangements had illegally foreclosed a sufficient amount of competition.[26] Surescripts’ exclusive contracts allegedly foreclosed about 70 to 80 percent of the relevant markets, which was sufficient in comparison to precedent. Although Surescripts additionally contended that any foreclosure was not to a ‘substantial’ degree and denied anticompetitive effects of decreased innovation, output, and quality, the court declined to consider Surescripts’ arguments, deeming them a ‘factual dispute ill suited for the pleadings stage.’ [27]

Thus, overall, the court found the government had met its pleading-stage burden of alleging anticompetitive conduct through the use of exclusive loyalty contracts and denied Surescripts’ motion to dismiss.

Government motion to block Evonik and PeroxyChem merger denied

The US District Court of the District of Columbia recently denied the government’s motion to block Evonik’s proposed $625 million acquisition of PeroxyChem. Both entities are producers of various grades of hydrogen peroxide, including standard, specialty, and pre-electronics grade, some of which have multiple uses and others have specific end uses.[28]

In deciding whether the government met its prima facie burden of justifying a preliminary injunction of the transaction, the court first addressed whether the FTC had adequately alleged a properly defined relevant product market.[29] The government attempted to group various grades of hydrogen peroxide, including standard, specialty, and pre-electronics grades, all deemed ‘non-electronics,’ into a single relevant market under a supply-side substitution theory.[30] This supply-side substitution theory, referred to as ‘swing capacity’ in the Horizontal Merger Guidelines, focuses on suppliers’ ability to swing back and forth between what they produce in response to price changes in the relevant and adjacent markets.[31] A supplier may ‘swing’ when such conduct is (1) ‘nearly universal among the firms selling one or more of a group of products,’ (2) ‘easy,’ and (3) ‘profitable.’ [32]

The court first concluded that swinging among different grades of hydrogen peroxide was not ‘nearly universal’ among producers.[33] That is, three of the five North American suppliers of hydrogen peroxide did not swing back and forth between higher and lower-grade production.[34] Additionally, although some suppliers produced hydrogen peroxide for multiple end uses, not all suppliers produced specialty grade hydrogen peroxide for specific end uses.[35] The court also noted that the FTC’s characterization of swing capacity did not constitute the behavior intended under the guidelines. In the FTC’s alleged hydrogen peroxide market, the record suggested that producers were unilaterally moving toward higher grades of production, whereas the swinging intended by the guidelines was meant to ‘move back and forth’ between different grades.[36]

Next, the court found that swing capacity across grades was not ‘easy.’ [37] The court considered the Merger Guidelines’ description of ‘easy’ as entry into a market that is ‘timely, likely, and sufficient in its magnitude, character, and scope to deter or counter­act the competitive effects of concern.’ [38] Although the record was clear that swinging among grades of production was easy for some suppliers, it also was clear that swinging was not easy for others.[39] Although suppliers could downgrade all production, the manufacturing process to swing to upgraded production required additional equipment and testing, specially trained personnel, and special facilities. Thus, the court concluded that even if producers were able to swing to higher-grade hydrogen peroxide, the nature of producing a high-grade product was complex and not ‘easy.’ [40]

Third, the court determined that swinging was likely not ‘profitable.’ [41] Based on average profits, the court found producing higher grades of hydrogen peroxide was profitable, but producing lower grades did not reap the same financial benefits.[42] That is, on average, profits from producing higher grades of hydrogen peroxide so far outweighed the profits from producing lower grades that suppliers were unlikely to swing to downgraded production.[43] The FTC objected to the use of average profits, arguing that some lower-grade products sold at higher profit margins than higher-grade products.[44] The court rejected this argument, finding that the FTC had provided no specific data of such products.[45] Even if the court accepted the government’s argument, the court’s consideration of such products would only mask stark differences in profitability.[46] Overall, profitability of higher-grade goods would incentivize producers to convert existing materials to higher-grade products, but there would be no similar movement to downgrade.[47]

Though the FTC had failed to meet its burden, the court found it had a duty to consider the ‘appropriate market on an appraisal of the relevant economic considerations.’ [48] In applying the swing capacity theory, the court first found that standard grade hydrogen peroxide also could not constitute a relevant product market because there was insufficient evidence as to the profitability of swinging production among standard grade formulations.[49] However, the court found that hydrogen peroxide formulated for specific end uses constituted a relevant product market based on traditional demand substitution theory.[50] That is, hydrogen peroxide suppliers’ product offerings for given end uses were largely undifferentiated, and, therefore, consumers would likely switch in response to a price increase for a given end-use hydrogen peroxide product.[51] The court thus found that hydrogen peroxide produced for the same end uses could constitute a relevant product market.[52]

The court then briefly addressed the two distinct geographic markets proposed by the FTC: one covering the Pacific Northwest and the other comprised of southern and central states.[53] PeroxyChem had proposed a divestiture of one of its plants in the Pacific Northwest that the court deemed would resolve any issues in that geographic market.[54] With respect to the alleged Southern and Central US market, the court underscored that the FTC’s failure to define a product market made consideration of a geographic market ‘useless.’ [55]

Although the FTC failed in its burden on market definition, the court nevertheless addressed the FTC’s claims of undue market concentration despite considering the claim to be ‘anticlimactic.’ [56] A lack of specific data to calculate the market concentration (a Herfindahl-Hirschman Index) compounded the FTC’s failure to define a relevant product and geographic market.[57] The court thus found that it could not conclude there was a ‘reasonable probability’ that Evonik and PeroxyChem’s merger would result in undue concentration in a relevant market.[58]

The government also submitted additional evidence that it believed showed anticompetitive harm from coordination, but the court found that the current hydrogen peroxide industry was not particularly susceptible to coordination.[59] The industry was governed by blind bidding processes that ‘frustrate[d]’ coordination and produced heterogeneous prices.[60] The business also was based on high-stakes large and long-term contracts that disincentivized such conduct.[61] The court also found the industry’s highly sophisticated consumers and physical limitations on output further quelled anticompetitive concerns.[62] Overall, the court found that although market conditions ‘permit[ted]’ coordination, those conditions did not make coordination likely and that there was ‘no reason to suspect’ that the merger would enhance any existing vulnerability.[63]

Finally, the court considered whether the proposed merger could result in unilateral anticompetitive effects. Although the court recognized that the merger could lead to a price increase in hydrogen peroxide for some customers, it held that the government failed to show ‘substantial unilateral effects.’ [64] Specifically, the government failed to adequately show that the parties would have the ability to raise prices or reduce quality after the acquisition.[65] The court opined that increased prices and reduced quality were more likely when the parties were close competitors, but in this case Evonik and PeroxyChem were not close competitors within product or geographic markets.[66] Further, blind bidding and other characteristics of the hydrogen peroxide market that discouraged coordination would similarly defend against any substantial unilateral effects.[67]

In all, the court found that the FTC had failed to show that the proposed merger would substantially lessen competition in a defined product market in a geographic location and, thus, failed to meet its prima facie burden for a preliminary injunction to stop the merger.[68] The FTC did not appeal the ruling and withdrew its challenge to the deal in the FTC’s administrative court. The parties closed the deal in February 2020.

*  The views expressed here are the authors’ own and do not necessarily reflect the views of the law firm with which they are associated.


Notes

[1] Freedom Watch, Inc. v. Google Inc., 816 F. App’x 497, 499 (D.C. Cir. 2020), cert. denied, No. 20-969, 2021 WL 1240927 (U.S. Apr. 5, 2021)

[2] Id.

[3] Id. (citation omitted).

[4] Id.

[5] Id. (citation omitted) (internal quotations omitted).

[6] Id.

[7] Id. at 497.

[8] Id. at 500.

[9] Id.

[10] Id. (citation omitted).

[11] Id.

[12] Id.

[13] Id.

[14] Fed. Trade Comm’n v. Surescripts, LLC, 424 F. Supp. 3d 92, 94 (D.D.C. 2020), cert. denied, No. CV 19-1080 (JDB), 2020 WL 2571627 (D.D.C. May 21, 2020).

[15] Id.

[16] Id. at 95–6.

[17] Id. at 100.

[18] Id. at 102.

[19] Id. at 100.

[20] Id. at 101 (citing Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 326, 81 S.Ct. 623, 5 L.Ed.2d 580 (1961) (quoting United Shoe Mach. Corp. v. United States, 258 U.S. 451, 457, 42 S. Ct. 363, 66 L.Ed. 708 (1922))).

[21] Surescripts at 101.

[22] Id.

[23] Id.

[24] Id.

[25] Id. at 102 (citing United States v. Microsoft Corp., 253 F.3d 34, 69 (D.C. Cir. 2001) (en banc) (per curiam)).

[26] Surescripts at 102.

[27] Id. at 103–04.

[28] Fed. Trade Comm’n v. RAG-Stiftung, 436 F. Supp. 3d 278, 287–88 (D.D.C. 2020).

[29] Id. at 291.

[30] Id. at 292.

[31] Id. at 293.

[32] Id. at 293 (citing Merger Guidelines § 5.1 & n.8 (cleaned up); PPFFCL at 84–5 ¶ 24).

[33] RAG-Stiftung at 294.

[34] Id.

[35] Id. at 295.

[36] Id.

[37] Id. at 296.

[38] Id. (citing Merger Guidelines § 9).

[39] RAG-Stiftung at 296.

[40] Id. at 296–97.

[41] Id. at 298.

[42] Id.

[43] Id.

[44] Id.

[45] Id. at 298–99.

[46] RAG-Stiftung at 299.

[47] Id.

[48] Id. at 300.

[49] Id. at 302.

[50] Id. at 303.

[51] Id.

[52] Id.

[53] RAG-Stiftung at 304.

[54] Id.

[55] Id.

[56] Id. at 310.

[57] Id. at 311.

[58] Id.

[59] Id. at 314.

[60] Id.

[61] RAG-Stiftung at 314.

[62] Id. at 314–15.

[63] Id. at 317 (citing FTC v. Arch Coal Inc., 329 F. Supp. 2d 109, 140 (D.D.C. 2004)).

[64] RAG-Stiftung at 318.

[65] Id.

[66] Id. at 319–20.

[67] See id. at 320

[68] Id. at 322.

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