Ninth Circuit: Apple Case Leads to Additional Clarity on Section 1 Claims

Epic Games v Apple

Epic Games, the video game company best known for its highly popular game Fortnite, challenged three of Apple’s App Store policies included in its developer program licensing agreement:

• Apple’s restriction of app distribution on iOS devices exclusively to the App Store (the distribution restriction);
• Apple’s requirement that in-app purchases on iOS devices use Apple’s in-app payment processor and no other (the IAP requirement); and
• Apple’s limitation on the ability of app developers to communicate the availability of alternative payment options to iOS device users (the anti-steering provision).^[2]

Among other legal claims against Apple, Epic brought a Section 1 claim alleging that Apple’s developer program licensing agreement was an unreasonable restraint of trade; a tying claim involving the distribution restriction and IAP requirement; and an ‘unfair prong’ claim under California’s Unfair Competition Law (UCL). After a bench trial, Judge Yvonne Gonzalez Rogers of the Northern District of California issued an order rejecting Epic’s antitrust claims but granting its UCL claim. Both parties appealed on multiple grounds. The Ninth Circuit affirmed, although it identified multiple errors in the district court’s analysis and, in doing so, clarified several important issues.

Market definition

Citing the Supreme Court’s Kodak^[3] and the Ninth Circuit’s Newcal^[4] decisions, Epic proposed single-brand markets – aftermarkets for iOS app distribution and iOS in-app payment solutions, derived from a foremarket for smartphone operating systems. The panel determined that Epic and the district court had applied the wrong test for establishing single-brand aftermarkets and clarified that establishing a single-brand aftermarket requires showing:

• the challenged aftermarket restrictions are ‘not generally known’ when consumers make their foremarket purchase;
• ‘significant’ information costs prevent accurate life cycle pricing;
• ‘significant’ monetary or non-monetary switching costs exist; and
• general market-definition principles regarding cross-elasticity of demand do not undermine the proposed single-brand market.^[5]

The district court had rejected Epic’s market definitions based on a categorical rule that an antitrust market can never relate to a product that is not licensed or sold. In this case, iOS, the operating system for Apple’s iPhone and iPad, was not sold separately from those devices. The Ninth Circuit concluded that this was a legal error because that rule is inconsistent with the Supreme Court’s instruction in Amex,^[6] which provides that courts should conduct market-definition inquiries based not on ‘formalistic distinctions’ but on ‘actual market realities,’ and with decisions defining product markets to include vertically integrated firms that self-provision the relevant products but make no outside sales, citing US v Microsoft.^[7] The panel’s majority, however, deemed the district court’s market definition error to be harmless owing to Epic’s separate failure of proof to support its proposed markets. In his partial dissent, Judge Thomas criticized the majority for engaging in ‘appellate court fact-finding’ in this regard and remarked that such an error cannot be harmless because a trial court cannot properly perform a rule of reason analysis ‘[u]nless the correct relevant market is identified.’^[8]

Section 1 – unreasonable restraint

The Ninth Circuit clarified two key issues related to Epic’s Section 1 claim. First, it held that the district court erred when it ruled that Apple’s developer program licensing agreement fell outside the scope of Section 1 because it was a non-negotiated, adhesive contract. The panel determined that the exemption for adhesive contracts ‘plainly contradicts’ Section 1’s text, which reaches ‘[e]very contract, combination . . . or conspiracy’ that unreasonably restrains trade, and also is contrary to the many antitrust cases involving agreements in which one party sets terms to which the other reluctantly acquiesces.^[9]

Second, the panel clarified the burden shifting framework for Section 1 rule of reason cases where plaintiffs fail to carry their step-three burden of establishing less restrictive alternatives. Acknowledging that the Ninth Circuit’s case law on this issue was inconsistent, the panel held that in those cases, trial courts must engage in a fourth step of balancing anticompetitive effects against procompetitive justifications. The panel was ‘skeptical of the wisdom of superimposing a totality-of-the-circumstances balancing step onto a three-part test that is already intended to assess a restraint’s overall effect.’^[10]

However, given the trial court’s preceding analysis, often it will need only to ‘briefly confirm[] the result suggested by a step-three failure: that a business practice without a less restrictive alternative is not, on balance, anticompetitive.’^[11] As proof of this point, the panel held that while the district court had failed to explicitly reach the required fourth balancing step, its one sentence conclusion that the restraints at issue ‘have procompetitive effects that offset their anticompetitive effects’ was sufficient.^[12]

Tying

The Ninth Circuit rejected the district court’s legal conclusion that a product in a two-sided market (in this case, the market for mobile gaming transactions) can never be broken into multiple products (in this case, app distribution and in-app payment processing), stating that such a rule was not required by the Supreme Court’s Amex decision regarding two-sided markets.^[13]

Nevertheless, while recognizing that Apple’s tying of app distribution and in-app payment processing met the requirements for per se unlawfulness, the panel held that per se condemnation was inappropriate for ties ‘involv[ing] software that serves as a platform for third-party applications’ and upheld Apple’s tie as clearly lawful under the rule of reason.^[14] The panel stated that it lacked sufficient experience with tying arrangements in software markets, which it described as ‘highly innovative’ and featuring ‘short product lifetimes,’ to have the level of confidence necessary to universally condemn ties related to app-transaction platforms that combine multiple functionalities.^[15]

UCL

The Ninth Circuit affirmed the trial court’s conclusion that Apple’s anti-steering provision violates the ‘unfair prong’ of California’s UCL, despite the same conduct failing to constitute an antitrust violation. The panel rejected Apple’s argument that failure to prove an antitrust claim (i.e., that Apple’s anti-steering provision violated the Sherman Act or California’s antitrust statute, the Cartwright Act) necessarily means that an ‘unfair prong’ UCL claim based on the same conduct also must fail. The panel distinguished Ninth Circuit and California case law applying the UCL’s ‘safe harbor doctrine,’ which bars a UCL action where the law clearly permits certain conduct or imposes a ‘categorical legal bar’ precluding a cause of action, holding that Apple’s proposed rule would ‘collapse the [UCL’s otherwise separate] “unfair” and “unlawful” prongs into each other.’^[16]

Olean Wholesale Grocery Coop v Bumble Bee Foods

Several classes of tuna purchasers brought a lawsuit against the largest suppliers of canned tuna, alleging that tuna suppliers violated state and federal antitrust laws by engaging in a price-fixing conspiracy.^[17] Plaintiffs moved for certification of three putative subclasses: (1) direct purchasers, such as nationwide retailers and regional grocery stores; (2) indirect bulk purchasers; and (3) individual end purchasers.^[18]

During class certification, both parties put forth expert testimony regarding antitrust impact. The plaintiffs’ theory was that the defendants’ conduct allegedly raised all canned tuna prices so antitrust injury was common, whereas the defendants’ expert put forth evidence that approximately 28 percent of the proposed classes suffered no overcharge and no antitrust injury. In July 2019, the district court certified all three subclasses.^[19]

On appeal, a panel of the Ninth Circuit vacated the district court’s order, holding that the plaintiffs failed to show that common questions predominate over individualized ones in relation to antitrust impact when there is a non–de minimis number of uninjured class members in the proposed classes and that when a class contains more than a de minimis number of uninjured persons, a Rule 23(b)(3) class cannot be certified.^[20]

Following en banc review, the Ninth Circuit affirmed the district court’s ruling certifying all three classes. The majority highlighted that the tuna purchasers put forth an expert’s model that estimated that the conspiracy resulted in a 10.28 percent overcharge on tuna for the entire class^[21] and that the tuna suppliers’ expert’s assertion that the model did not show a statistically significant price difference for 28 percent of the class was not sufficient to threaten certification.^[22]

The court’s opinion focused on how to determine whether plaintiffs have satisfied two Rule 23 prerequisites: whether a common question exists under Rule 23(a)(2) and whether any such questions predominate over individualized issues under Rule 23(b)(3). First, the court held that Rule 23(b)(3) predominance requirements must be demonstrated by a preponderance of the evidence.^[23] Second, the court emphasized that in determining whether plaintiffs have shown that a common question exists, a district court ‘is limited to resolving whether the evidence establishes that a common question is capable of class-wide resolution, not whether the evidence in fact establishes the plaintiffs would win at trial.’^[24]

The court explained that ‘a district court cannot decline certification merely because it considers plaintiffs’ evidence relating to the common question to be unpersuasive and unlikely to succeed in carrying the plaintiffs’ burden of proof on that issue.’^[25] In making this determination, a district court may have to resolve disputes between the parties’ experts, in which case the test is whether ‘if the class members had pursued individual lawsuits, each could have relied on the expert evidence’ on the merits, not whether the expert evidence ‘in fact establishes that plaintiffs would win at trial.’^[26]

The en banc panel also considered whether Rule 23(b)(3) can be satisfied when a putative class contains more than a de minimis number of uninjured class members. Because Rule 23(b)(3) requires only ‘that the court determine whether individualized inquiries about such matters would predominate over common questions,’ the court rejected the bright line rule of the de minimis formulation articulated by the original Ninth Circuit panel; however, the majority opinion notably contains several footnotes limiting its own opinion.^[27] For example, the court noted that ‘[w]hen a class is defined so broadly as to include a great number of members who for some reason could not have been harmed by the defendant’s allegedly unlawful conduct, the class is defined too broadly to permit certification,’ but also explained that in those circumstances, the district court may redefine the class rather than denying certification. The court, however, cautioned that a district court may not create a ‘fail safe’ class that is defined to include only individuals who were injured by the allegedly unlawful conduct; doing so, would be improper.

The court also briefly touched on the question of Article III standing, declining to expressly address whether ‘the presence of a large number of uninjured class members raises an Article III issue.’ Instead, it held that it need not consider the Article III issue because the tuna purchasers have demonstrated that all class members have standing.^[28] The court relied on the general principle that a plaintiff must prove standing ‘with the manner and degree of evidence required’ at each stage of the litigation and held that evidence capable of showing class-wide antitrust impact satisfies Article III standing at the class certification stage.^[29] It did, however, overrule its prior statement that ‘no class may be certified that contains members lacking Article III standing’ because, at least in cases involving only injunctive or equitable relief, ‘only one plaintiff need demonstrate standing to satisfy Article III.’^[30]

Two judges dissented from the majority opinion. The dissent argued that classes with more than a de minimis number of uninjured members ‘cannot present a predominance of common issues because they have nothing in common with the remaining sliver of injured members.’ The dissent disagreed that an oversized class with unharmed class members does not pose a practical problem even if a method can separate the uninjured from the injured at trial. Judge Lee would have held that such classes therefore fail to satisfy Rule 23(b)(3).

The dissent also noted that Rule 23 imposes a requirement on the trial court, where the trial court can only certify a class after engaging in a rigorous analysis and determining that the plaintiffs have satisfied Rule 23.^[31] The dissent explained Rule 23’s rigorous analysis requires a court to do more than just consider one side’s expert opinion as ‘reliable and then kick the can down the road until trial’ and instead ‘must dig into the weeds and decide the battle of dueling experts if their disputes implicates Rule 23 requirements.’^[32] The dissent also explained that the Ninth Circuit’s rejection of the de minimis test creates a circuit split with the DC Circuit and the First Circuit.^[33] The dissent noted that while a plaintiff is not required to show that every putative class member was injured or suffered antitrust impact, the number of uninjured class members must still be small based on Rule 23’s language, common sense, and precedent from other circuits.^[34]

Flaa v Hollywood Foreign Press Association

In August 2020, Kjersti Flaa – an entertainment journalist from Norway but based in Los Angeles – filed suit in the Central District of California against the Hollywood Foreign Press Association (HFPA), alleging that the HFPA’s refusal to admit her and other qualified journalists violated federal and state antitrust law and California’s common-law right to fair procedure.^[35] After the district court dismissed the complaint without prejudice, Flaa then joined Rosa Gamazo as a co-plaintiff and filed an amended complaint.

In the amended complaint, the journalists asserted that the HFPA had committed per se antitrust violations by engaging in a group boycott and agreeing on a horizontal market division. The district court dismissed the amended complaint and denied further leave to amend. The court rejected the group boycott theory because the journalists did not ‘offer non-conclusory allegations that the HFPA or its members have market power’ or ‘plead facts establishing a joint effort among horizontal competitors.’^[36] The court rejected the market division theory because, as it understood the complaint, ‘HFPA members are generally not able to compete with one another because of the peculiar characteristics of each geographic submarket,’ and ‘[i]f HFPA members cannot compete, then they cannot agree to divide a market.’ The court also rejected the antitrust claims under the rule of reason because ‘the allegations in the amended complaint remain “hopelessly muddled as to what product market (or markets) are at issue here”’ and the complaint did not plausibly allege that the HFPA has market power.

The journalists appealed. On de novo review, the Ninth Circuit noted the following:

The journalists assert two theories of per se liability. First, they allege that the HFPA’s membership practices have produced an anti-competitive group boycott of all non-member foreign entertainment journalists. Second, they allege that HFPA members have unlawfully agreed to divide the foreign entertainment news market among themselves. Alternatively, the journalists argue that the HFPA’s practices are unlawful under the rule of reason.^[37]

The panel found that the journalists failed to state a claim under any of those theories.

First, the Ninth Circuit found there was no group boycott because ‘HFPA’s admissions practices possess none of the characteristics that the Supreme Court has identified as calling for per se condemnation’; in other words, HFPA has not ‘cut off access to a supply . . . necessary to enable the boycotted firm to compete,’ and the ‘HFPA lacks market power.’^[38] Ultimately, the panel came to the following conclusion:

Because the membership decisions of a small, private professional organization like the HFPA are not so likely to prove ‘harmful to competition and so rarely prove justified’ to warrant condemnation as a per se unreasonable group boycott, we conclude that the HFPA’s admissions practices should instead be analyzed under the rule of reason.^[39]

Second, the Ninth Circuit found the following:

The complaint . . . describes not one global market for entertainment news, but separate geographic submarkets. As the district court observed, those allegations mean that HFPA members from different countries cannot compete with each other. If the members are unable to compete in the same market, they are unable to agree to divide the market.^[40]

Accordingly, the panel found that the complaint itself ‘defeats its own market-division theory.’^[41]

The court then applied the rule of reason to the plaintiffs’ antitrust claims, finding that the complaint ‘does not plausibly allege market power.’^[42] Specifically, the panel came to the following conclusion:

The HFPA lacks market power in the journalists’ proposed market – or any other reasonably defined market. The HFPA has 85 members, and according to the complaint, only half of those 85 members are ‘active’ journalists, and only ‘[t]wo or three dozen’ members ‘are legitimate, respected media figures.’ The rest are ‘intermittent freelancers at best.’ The complaint contains no quantitative allegations suggesting that this small group of journalists possesses market power in the global market for news about American movies or entertainment, and while that omission is not fatal by itself, the journalists have not pleaded any other facts that would move the hypothesis of market power ‘across the line from conceivable to plausible.’^[43]

Accordingly, the Ninth Circuit affirmed dismissal of the journalists’ complaint for failure to state an antitrust claim.

PLS.com v National Association of Realtors

In one of several lawsuits alleging that the practices of the National Association of Realtors (NAR) and various of its associated multiple listing services (MLSs) violate antitrust laws, a private real estate listing service challenged the NAR’s policy of requiring member brokers to post a property on an NAR-affiliated MLS within a day of marketing that property through another brokerage service. The plaintiff, PLS.com (PLS), a service launched in 2017 that catered to real estate listings not shared on an NAR-affiliated MLS, alleged that NAR’s newly adopted clear cooperation policy, when implemented by NAR-affiliated MLSs, caused agent participation in its platform to drop and constituted an illegal group boycott. The district court granted the defendants’ motions to dismiss because it concluded that PLS did not allege antirust injury.^[44]

The Ninth Circuit reversed.^[45] Following the adoption of NAR’s clear cooperation policy, PLS alleged that listings were removed from its service and moved to NAR-affiliated MLSs and that agent participation in PLS declined, thereby harming PLS and consumers.^[46] The district court had held that to allege antitrust injury, PLS was required to allege that NAR’s policy directly harmed ‘ultimate consumers,’ which the court identified as ‘home buyers and sellers.’^[47]

The Ninth Circuit rejected the district court’s holding that only an allegation of harm to the ultimate consumer could constitute antitrust injury. Businesses that use a product or service as an input to provide another product or service can also be consumers for the purposes of assessing antitrust injury. PLS was, therefore, not required to allege harm to home buyers and sellers; its allegation that NAR’s policy harmed real estate agents – the consumers of PLS’s and the MLSs’ listing services – may suffice to allege antitrust injury.^[48]

After finding sufficient allegations of antitrust injury, the court then assessed whether PLS had alleged the other elements of a Sherman Act violation. Noting allegations that PLS’s competitors (i.e., NAR-affiliated MLSs) coerced its suppliers (i.e., realtors) not to supply PLS with the listings necessary to effectively compete in the market, the court held that PLS had adequately alleged a per se group boycott but left it to the district court to determine whether it should apply a per se or rule or reason analysis at later stages of the litigation.^[49]

The Ninth Circuit discussed the extent to which the Supreme Court’s Amex^[50] holding applied. The district court had held that an MLS constitutes a two-sided market and that Amex required PLS to allege a plausible injury to both sides of the market: home sellers and home buyers.^[51] On appeal, PLS argued that Amex did not apply at the motion to dismiss stage or to networks not involving simultaneous transactions, while defendants argued that the value of the listing service to buyers (or sellers) depended on how many sellers (or buyers) participated (the indirect network effects) and thereby triggered Amex’s requirements. The Ninth Circuit held that, regardless of the test applied, PLS satisfied Amex’s requirements because it had alleged harm to both buyers and sellers, and it was therefore unnecessary to decide ‘the more difficult questions the parties raise about how broadly the Amex decision applies.’^[52] As further guidance, it noted the following:

Amex does not require a plaintiff to allege harm to participants on both sides of the market. All Amex held is that to establish that a practice is anticompetitive in certain two-sided markets, the plaintiff must establish an anticompetitive impact on the ‘market as a whole.’^[53]

In January 2023, the Supreme Court denied NAR’s petition for certiorari.^[54]

A similar case that likewise challenged NAR’s clear cooperation policy was dismissed with prejudice by the Northern District of California District Court in 2021 and is on appeal before the Ninth Circuit as at the time of writing.^[55] In March 2023 the US Department of Justice filed an amicus brief in that case, arguing that NAR’s rules on buyer’s agent commissions violate antitrust laws and harm competition in the real estate industry. Coupled with other lawsuits currently challenging various, allegedly anticompetitive aspects of NAR’s practices in various jurisdictions,^[56] the resolutions of these cases have the potential to significantly impact how real estate is bought and sold in the United States.

Mickelson v PGA Tour

In August 2022, numerous golf professionals who had been participating in the Saudi-financed LIV Golf series (LIV) filed a lawsuit in the US District Court for the Northern District of California against the Professional Golf Association (PGA), alleging that the PGA Tour’s regulations are anticompetitive and have harmed the careers of various professional golfers by imposing unlawful parti­cipation restrictions across tours.^[57] Specifically, the golfers asserted claims under:

• Section 1 of the Sherman Act, based on the PGA Tour’s alleged group boycott alongside the DP Tour (the European Tour) of LIV Golf and its players;
• Section 2 of the Sherman Act, based on the PGA Tour’s unlawful maintenance of a monopsony over elite professional golf; and
• California’s Cartwright Act.^[58]

The plaintiffs further asserted a breach of contract claim, arguing that the PGA Tour violated its own regulations by suspending the plaintiffs and declining to stay their suspensions pending their appeal through the PGA Tour’s internal disciplinary process.

Concurrent with the filing of their complaint, three of the 11 plaintiff golfers (the TRO plaintiffs) moved for a temporary restraining order (TRO) against the PGA that would’ve lifted their suspensions from the PGA Tour and allowed them to play in the FedEx Cup Playoffs, for which they had qualified. Only a week after the filing of the complaint and the TRO motion, the court denied the latter without prejudice to filing a motion for preliminary injunction. District Judge Beth Labson Freeman found that the TRO plaintiffs had not adequately shown irreparable harm because:

• they ‘are not barred from playing professional golf against the world’s top players, from earning lucrative prizes in some of golf’s highest-profile events, from earning sponsorships, or from building a reputation, brand, and fan following in elite golf’;^[59] and
• they ‘each knew, going into negotiations with LIV Golf, that they were virtually certain to be cut off from TOUR play’ and, therefore, negotiated contracts that ‘were based on the players’ calculation of what they would be leaving behind and the amount of money they would need to compensate for those losses.’ In other words, the players ‘signed contracts that richly reward them for their talent and compensate for lost opportunity through’ PGA Tour play; therefore, they ‘have not even shown that they have been harmed – let alone irreparably.’^[60]

Because the court found that the TRO plaintiffs could not show irreparable harm, it declined to reach the issue of whether they have shown likelihood of success on the merits but nevertheless provided a ‘brief summary of its impressions’ of the merits of the plaintiffs’ claims at the early stage of the case:

• The court found that ‘at this early stage of the case,’ the TRO plaintiffs had failed to make the necessary showing that the facts clearly favor their success on the merits of their breach of contract claim, given the language of the PGA Tour regulations that vested power in the commissioner to suspend a member’s playing privileges upon violation of the regulations.
• The court found that the TRO plaintiffs’ failed to show that the facts clearly favored their success on a per se Section 1 claim that the PGA Tour and the European Tour engaged in a group boycott.
• The court found that the TRO Plaintiffs ‘raise[d] significant antitrust issues that are facially appealing with respect to their Section 2 claim that the PGA Tour engaged in an unlawful maintenance of a monopoly’ but noted that these were ‘complex issues [that were] best resolved on a more developed record.’^[61]

Finally, the court dismissed the consumers’ unjust enrichment claim with leave to amend.

Notes