Northern District Of California Dismisses Sherman Act Complaint Against Platform Operator Based On Implausible Single-Brand Market Definitions And Failure To Allege Harm To Competition
12/08/2021On November 30, 2021, Judge Edward M. Chen of the United States District Court for the Northern District of California dismissed a putative class action alleging that the defendant smartphone supplier’s contracts with mobile application (“apps”) developers and related guidelines violate Sections 1 and 2 of the Sherman Act based on plaintiffs’ failure to allege a plausible relevant market or that they suffered antitrust harm. Judge Chen also dismissed plaintiffs’ breach of contract, RICO, and fraud claims. Coronavirus Reporter v. Apple Inc., No. 21-cv-05567-EMC (N.D. Cal. 2021).
Plaintiffs are developers who submitted apps to be distributed through defendant’s app store. Under the terms of its agreements with app developers, defendant has sole discretion to reject apps submitted for distribution in its app store. Defendant rejected two of plaintiffs’ apps and approved three for distribution on its app store. In response, plaintiffs filed a purported class action lawsuit, seeking to represent all U.S. developers of any app that was excluded from defendant’s app store or whose app’s visibility was suppressed on the app store, and any developer who paid a $99 annual subscription fee to defendant for access to defendant’s developer portal and certain other benefits. Plaintiffs alleged that defendant’s exercise of its “unilateral control over the ability of developers to access and provide apps to iOS users,” as well as its alleged practice of “suppressing the visibility of apps” in its app store, violates the Sherman Act.
Defendant moved to dismiss, arguing that plaintiffs failed to allege a plausible relevant market or any antitrust injury. The Court agreed with defendant on both points.
With regard to market definition, the Court found that plaintiffs’ alleged relevant markets for their antitrust claims were fatally deficient in a number of respects. Plaintiffs initially included 15 proposed markets in their complaint. In their response to the motion to dismiss, plaintiffs narrowed this list to two “foremarkets” (U.S. Smartphones and U.S. iOS Smartphones) and four “downstream” markets. First, the Court noted that it was improper to effectively amend a complaint through motion practice. Second, the Court ruled that plaintiffs did not adequately define the boundaries or differences between the alleged markets, particularly in failing to plead facts showing that products outside the defined markets were not reasonably substitutable for products in the defined markets. For example, the Court questioned whether the market of “U.S. Smartphones” included all brands of smartphones, tablets, or internet-enabled devices—details that were not pled in the complaint. Next, the Court addressed plaintiffs’ alleged downstream (or “aftermarket”) “single-brand” markets, i.e., markets that were limited to products or services associated with defendant’s smartphones. Noting that such single-brand markets were “extremely rare,” regardless of brand loyalty, and that “it is an understatement to say that single brand markets are disfavored,” the Court pointed out that plaintiffs’ theory was dependent on a single-brand foremarket market limited to iOS smartphones but that plaintiffs had not pled facts demonstrating that the foremarket was so limited, and had failed to allege facts showing that plausible single-brand markets were appropriate. Further, the Court ruled that the alleged downstream markets, which included the iOS application loaders and the iOS userbase, were not markets at all because they were based not on separate products or services, but rather on integrated features of defendant’s app approval process. The Court also noted that even if the market of “U.S. Smartphones” could be sustained, none of plaintiffs’ allegations about defendant’s conduct were shown to impact that market. Finally, citing the decision in Epic Games, Inc. v. Apple Inc., No. 4:20-cv-05640-YGR (N.D. Cal. 2021) (discussed here), the Court pointed out that plaintiffs failed to grapple with the fact that the provision of apps through an app store is a two-sided transaction market (developers on one side and consumers on the other), and their claims addressed only the developer side of the market, not the consumer side.
The Court similarly concluded that plaintiffs failed to allege a plausible antitrust injury because at most they showed only harm to themselves, not harm to competition. The Court first noted that many of the allegations in the complaint were specific to plaintiffs and did not show harm to other app developers. Further, the purported factual basis for plaintiffs’ theory of harm—that the app review process necessarily injures competition by excluding developers from launching apps on the app store—was not sufficient to plead antitrust injury for two reasons. First, as noted, the app store is a two-sided transaction market and plaintiffs’ theory only considered the developers’ side of the market. Second, even if defendant exercised monopsonist market power in the apps’ transaction market, the decision as to which apps can be distributed through the app store does not in itself cause antitrust harm, as there is no allegation that defendant benefits from its rejection or suppression of apps. Similarly, the claim of preferencing did not demonstrate any reduction in output because plaintiffs had not shown how suppressing one app in relation to another app (to the benefit of the latter app) resulted in overall competitive harm to the marketplace. The Court dismissed plaintiffs’ other claims of competitive harm as mere conclusory and threadbare recitals of the elements of a claim and insufficient to plausibly allege competitive harm.
The Court’s rejection of the alleged “single brand” aftermarkets in this case is consistent with both well-established case law and Judge Gonzalez-Rogers’ recent findings in Epic v. Apple. Similarly, Judge Chen’s recognition of two-sided market principles in evaluating these kinds of claims is consistent with the important developing case law in this area. Finally, the Court’s rejection of conclusory claims of competitive harm is also consistent with well-established case law and is an important reminder that the possession of allegedly substantial market power is not sufficient to establish a Sherman Act claim.