Ninth Circuit Affirms Dismissal Of Sherman §1 And §2 Claims Against Technology Company, Determining Plaintiffs’ “Scattershot” Market Definition Was Inadequate
11/14/2023On November 3, 2023, a panel of the United States Court of Appeal for the Ninth Circuit affirmed the dismissal with prejudice of claims brought by app developers (“Plaintiffs”) against a technology company (the “Company”) for alleged violations of Sections 1 and 2 of the Sherman Act.1 Coronavirus Reporter et. al., v. Apple, Inc. No. 22-15166 (9th Cir. 2023). The District Court initially dismissed the claims because plaintiffs had failed to allege a relevant market to justify its claims under Sections 1 and 2, which stemmed from the Company’s refusal to host plaintiffs’ apps on its App Store. The Ninth Circuit, reviewing de novo, agreed, determining plaintiffs’ market was not adequately defined, undercutting both their claims. Furthermore, the dismissal was with prejudice, as it was the seventh time plaintiffs had filed across jurisdictions.
To distribute apps on the Company’s App Store, all developers must abide by the “App Store Review Guidelines” and enter into two agreements: a “Developer Agreement” and a “Developer Program License Agreement.” By signing these agreements, developers, including plaintiffs, “understand and agree” that the Company has “sole discretion” to reject apps.
Plaintiffs developed a group of apps that they sought to distribute on the Company’s App Store, two of which—“Coronavirus Reporter” and “Bitcoin Lottery”—were not approved for distribution because of policies in the “App Store Review Guidelines.” Following rejection of the apps, plaintiffs brought suit claiming the Company committed violations of Sections 1 and 2 by rejecting the apps, alleging that the Company ran a “monopolist operation” through the “curation” and “censor[ship]” of apps in its App Store.
The district court initially dismissed the claims with prejudice, mainly because plaintiffs failed to allege a properly defined, relevant economic market. The district court noted that in the First Amended Complaint (“FAC”),2 Plaintiffs referenced at least “fifteen different markets” and did “not always define the boundaries or differences between those markets.” For example, they alleged a “national market of apps for smartphone enhanced internet access devices” but did not make clear if this was distinct or overlapping with another referenced “US consumer-facing market for smartphone apps.” On a subsequent motion to strike after filing the FAC, plaintiffs attempted to argue that there were only two foremarkets3—US Smartphones or “US iOS Smartphones”—and four downstream markets which the Company allegedly had “100% control over.” The court noted that these newly created “foremarkets” still failed to provide “sufficient clarity to pass muster” when facing the Company’s motion to dismiss. Accordingly, the district court dismissed with prejudice, noting this was plaintiffs’ seventh attempt to file claims across jurisdictions.
Focusing on issues around market definition, the Ninth Circuit affirmed. Initially, the Court noted that a “threshold step in any antitrust case is to accurately define the relevant market” for both Section 1 and Section 2 claims. Indeed, “[m]arket definition is essential to any antitrust case because ‘without a definition of the market there is no way to measure the defendant‘s ability to lessen or destroy competition.’” In that same vein, a properly defined relevant market includes an analysis of both product and geographic components.
Furthermore, the Court explained that “[a] relevant market can be an aftermarket in which demand depends entirely upon prior purchases in a foremarket… [h]owever, such a market generally shows that the defendant exploited consumers’ unawareness of the restrictions on the aftermarket and must still show the cross-elasticity required to define a market.” It further explained that a “relevant market can also be a two-sided market with consumers on both sides of a platform.”
After establishing these legal standards for market definition, the Court rejected plaintiffs’ arguments. First, it noted that there were at least fifteen “relevant markets” alleged in “scattergun fashion” in the operative complaint, in which plaintiffs made “no effort at all to define the markets or to distinguish them from one another.” Furthermore, the Court held that even if it reviewed the narrower markets posited in the motion to strike, the allegations would still fail. Notably, the Court held the FAC did “not attempt to demonstrate the cross-elasticity of iOS end users’ demand” either for the “rejected apps as compared to other apps, or for apps in general, as it must.” Furthermore, plaintiffs failed to “draw the market boundaries to ‘encompass the product at issue as well as all economic substitutes for the product.’”
The Court also rejected plaintiffs’ downstream market theory—which implied the Company’s App Store constituted its own market—because plaintiffs failed to properly allege a single-brand market. To do that, the Court noted that plaintiffs did not, for example, “demonstrate that iOS end consumers lacked awareness that buying an iPhone constrains which apps would be available to them.” It further rejected plaintiffs attempt to define a two-sided platform market by making a general allegation of a broader market for smartphones and the corresponding ability to access apps outside of the Company’s App Store’s two-sided platform.
Ultimately, the Court held that because plaintiffs failed to allege a properly defined, relevant economic market, they could not establish that the Company created an agreement that unreasonably restrained trade in violation of Section 1, nor did it establish that the Company possessed a market share in a relevant market to constitute monopoly power, or that there were existing barriers to entry to the market, in violation of Section 2.
This decision serves as useful guidance as to the importance courts place on properly defining relevant markets for Section 1 and 2 cases at the pleading stage. While the challenged conduct is often central to a court’s analysis, it is not enough unless plaintiffs also can properly allege a relevant market in which harm is claimed. This is especially important in non-conspiracy cases when it is not disputed that the challenged conduct has taken place.
On a more granular level, this decision provides some further clarity as to what the Ninth Circuit requires to adequately allege a single-brand aftermarket. While the court states that a “relevant market can be an aftermarket in which demand depends entirely upon prior purchases in a foremarket,” it reasoned that finding such a market is plausibly alleged, “generally shows that the defendant exploited consumers’ unawareness of the restrictions on the aftermarket and must still show the cross-elasticity required to define a market.” In this case, the Court held that a “prerequisite” for alleging a single-brand aftermarket is that consumers “lack awareness” of the restrictions they face by entering into an alleged single-brand aftermarket—i.e., plaintiffs must allege that consumers were unaware that buying an iPhone constrains which apps would be available to them through the App Store. Additionally, a plaintiff would also need to plead the requisite cross-elasticity of an alleged single-brand aftermarket, such as by showing that “iOS end users would, if they could do so more readily, obtain apps through means other than Apple’s App Store due to cost sensitivity or for other reasons.”
1 The panel also affirmed dismissal of claims for breach of contract, racketeering, and fraud, because Plaintiffs failed to plead required elements for each.
2 The FAC was the operative complaint.
3 The term “foremarket” refers to an upstream market, which, in this case, is a market a consumer must enter before accessing a downstream “aftermarket.” In this case, Plaintiffs attempted to allege that the market for smartphones was the “foremarket” while the App Store platform was a downstream “aftermarket,” because to access the App Store, consumers would have needed to purchase a smartphone first. In other words, demand in a downstream “aftermarket” depends entirely upon a prior purchase in the upstream “foremarket.”