Shearman & Sterling LLP | Antitrust Blog | <p >Third Circuit Upholds Dismissal Of Attempted Monopolization Claims For Failure To Allege An Antitrust Violation Or Antitrust Injury<br >  </p >
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  • Third Circuit Upholds Dismissal Of Attempted Monopolization Claims For Failure To Allege An Antitrust Violation Or Antitrust Injury

    On March 27, 2018, the United States Court of Appeals for the Third Circuit upheld a March 2017 order by Judge Sanchez of the Eastern District of Pennsylvania dismissing an attempted monopolization claim asserted by the Philadelphia Taxi Association (“PTA”) and 80 individual taxicab companies against a leading ride-hailing company.  Phila. Taxi Ass’n v. Uber Tech., Inc., No. 17-1871 (3d Cir. Mar. 27, 2018).  The Court held that plaintiffs had failed to state a claim under Section 2 of the Sherman Act and had failed to allege antitrust injury. 

    Plaintiffs alleged that between March 2005 and October 2014, taxicabs wishing to operate in Philadelphia were required to have a medallion and certificate of public convenience issued by the Philadelphia Parking Authority (“PPA”).  Medallion holders can obtain a certificate of public convenience by complying with certain standards regulating the safety and uniformity of taxicabs.  Defendant began operating in Philadelphia in October 2014.  It did not acquire medallions or certificates of public certification from the PPA for its vehicles, nor did it comply with regulations issued by or pay fines to the PPA.  During Defendant’s first two years of operation in Philadelphia, nearly 1,200 medallion taxicab drivers left their companies to drive for Defendant, medallion taxi rides dropped by 30%, and the value of taxicab medallions dropped precipitously.

    The PTA—a trade association incorporated to advance the legal interests of its members—and 75 (later 80) individual taxicab companies filed suit, alleging claims for attempted monopolization under Section 2 of the Sherman Act, as well as state-law tort claims.  After an initial dismissal, plaintiffs filed a Second Amended Complaint alleging a single claim of attempted monopolization.  The district court again dismissed, finding that plaintiffs had not pled antitrust injury sufficient to establish antitrust standing and plaintiffs appealed.

    The Third Circuit affirmed, finding that the Second Amended Complaint failed to allege either an antitrust violation or antitrust injury.  To state a claim for attempted monopolization under Section 2 of the Sherman Act, the plaintiff must plead facts showing (1) that the defendant engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.  In evaluating allegations of anticompetitive conduct, liability “hinges on whether valid business reasons, as part of the ordinary competitive process, can explain the defendant’s actions that resulted in a dangerous probability of achieving monopoly power.”  The Court found that plaintiffs had not properly pled any of the three elements.

    First, the Court found that plaintiffs had not alleged defendant engaged in any anticompetitive conduct by “flooding” the Philadelphia taxicab market with lower-cost vehicles.  This conduct, the Court found, bolstered, rather than restrained, competition because it offered customers lower prices, more available cars, and a high-tech alternative to traditional taxi-hailing methods, even if it had the effect of eliminating competitors.  Because lower prices benefit consumers as long as they are not predatory, the Court found that plaintiffs’ lost business was not the result of any anticompetitive conduct.  The Court also rejected plaintiffs’ argument that defendant engaged in anticompetitive conduct by violating PPA regulations, reasoning that defendant’s alleged unlawful conduct did not constitute an antitrust violation unless it also produced an anticompetitive effect. Finally, the Court rejected plaintiffs’ argument that an inference of anticompetitive or exclusionary conduct could be drawn from allegations that defendant hired drivers from rival medallion companies, finding that these allegations instead suggested that defendant’s ability to attract drivers from rivals was due to cost efficiency and its competitive advantages.

    Next, the Court rejected plaintiffs’ argument that a specific intent to monopolize could be inferred from defendant’s knowledge that it allegedly was operating in violation of PPA regulations.  The Court reasoned that even if defendant’s conduct may have formed the basis for a regulatory violation, its knowledge of those violations alone was not sufficient to demonstrate an intent to monopolize. Instead, the Court went on, defendant’s choice to eschew the traditional medallion model and distinguish itself by using independent drivers who operate their cars at will could reasonably be viewed as “predominantly motivated by legitimate business aims.”  Because plaintiffs’ Second Amended Complaint did not allege any other improper motive for Uber’s conduct, it failed to allege a specific intent to monopolize.

    Finally, the Court rejected plaintiffs’ argument that Uber had a dangerous probability of achieving monopoly power because numerous competitors had exited the market, finding the complaint failed to allege defendant’s share in the Philadelphia taxicab market in the context of all of the market competitors, including other Transportation Network Companies (“TNCs”) operating outside the traditional medallion model.  Further, the Second Amended Complaint did not allege current barriers to entry of the Philadelphia taxicab market or weak competition from other market participants.  Finally the Court rejected the Complaint’s vague claims that defendant might be able to drive out competition, raise entry barriers, and increase prices once it became the dominant market player as lacking in factual support.

    The Court then turned to the question of whether plaintiffs alleged antitrust injury sufficient to establish antitrust standing.  Antitrust injury cannot be established merely by alleging that the plaintiffs would have been better off in the absence of the defendant’s alleged misconduct. Instead, the plaintiffs must allege the existence of an injury that bears a causal link to an antitrust violation’s anticompetitive effects.  The Court rejected plaintiffs’ allegations that they suffered antitrust injury in the form of financial hardship and a reduced market share because these effects were not the result of a reduction in competition, but of an increase in competition.  Indeed, the Court pointed out that the complaint failed to allege any negative impact on customers or competition in general as a result of defendant’s conduct.  To the contrary, the complaint alleged that defendant’s entry into the market increased the number of vehicles-for-hire available in the Philadelphia market and therefore increased competition.  Thus, the Court reasoned, plaintiffs were attempting to apply the antitrust laws for the opposite of their purpose:  to compensate them for their lost profits due to increased competition.

    This case is a fairly straightforward application of the well-established principle that regulatory violations, especially those that increase output in the relevant market, do not without more constitute anticompetitive conduct or establish antitrust injury.  Unless the plaintiff can allege a coherent factual basis for concluding that the defendant’s disruption of the existing marketplace is both anticompetitive and likely to create barriers to competition that will enable it to exercise meaningful market power, such cases are unlikely to survive a motion to dismiss.