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Amicus Brief INTEREST OF THE AMICUS CURIAE The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building . . .
The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies to inform policy debates and has longstanding expertise evaluating antitrust law and policy.
ICLE has an interest in ensuring that antitrust law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. That includes ensuring consistency between antitrust law and other laws that proscribe unfair methods of competition, such as California’s Unfair Competition Law.[1]
The panel’s holdings that (1) Apple’s conduct with respect to its close control over the App Store and restrictions on in-app payments (“IAP”) do not give rise to an antitrust violation, but that (2) its anti-steering provisions nevertheless violate California’s Unfair Competition Law (“UCL”), are incongruent. The anti-steering provisions violate the UCL only if they constitute an “incipient violation of an antitrust law, or . . . [cause harm] comparable to or the same as a violation of the law.” Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 186-87 (1999). But provisions limiting app developers’ ability to steer consumers to alternative payment options exist merely to further the goals of the lawful IAP restrictions, and thus the anti-steering provisions cannot constitute incipient antitrust violations or cause harm comparable to such violations.
Having affirmed the District Court’s finding that Apple’s IAP policies are procompetitive, the panel should have ruled that Apple’s anti-steering provisions—which constitute a less restrictive means of pursuing the same procompetitive objective—are not unfair under the UCL. The panel’s decision, if it stands, risks chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s “walled-garden” iOS. See Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (“[F]alse condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’”) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)). More egregiously, it risks creating a fundamental contradiction by enjoining conduct under the UCL that is benign—and even beneficial—under antitrust law.
Antitrust and other laws aimed at proscribing unfair methods of competition (“UMC”) share the same overarching rationale, and thus “we can classify unfair competition and antitrust as blood brothers or, at least, as brothers-in-law.” Rudolf Callmann, Unfair Competition and Antitrust: Coexistence Within Complementary Goals, 13 Antitrust Bull. 1335, 1335 (1968). Both types of laws were enacted to protect consumers by protecting “competition, not competitors.” Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (emphasis in original); accord Cel-Tech, 20 Cal. 4th at 186-87 (citing this language and defining “unfair” in the UCL to include incipient antitrust violations and other conduct that “significantly threatens or harms competition”) (emphasis added).
Thus, while harm to a competitor may provide an evidentiary basis for demonstrating harm to competition under both antitrust and UMC laws, it is not sufficient for a viable claim under either. Indeed, just as conduct that constitutes vigorous competition in one context can cause anticompetitive harm in another, so too may conduct that harms a competitor promote competition overall. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458-59 (1993) (“The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself . . . . It is sometimes difficult to distinguish robust competition from conduct with long-term anticompetitive effects . . . .”); New York v. Microsoft Corp., 224 F. Supp. 2d 76 (D.D.C. 2002) (“conduct that is in some respect adverse to competitors is almost implicit in the concept of competition”). In order to avoid condemning beneficial conduct, only a few forms of conduct are per se antitrust violations, and the vast majority are assessed based on their economic effects.
UMC law is nominally more focused on the nature of the conduct at issue—whether it is “unfair.” As in antitrust, a few forms of conduct are facially problematic under UMC law. Most notably, conduct that violates some other law or policy may also violate UMC law.[2] But where the basis for an unfairness claim under UMC law is inchoate harm to competition, decades of scholarship and judicial decisions have made clear that the conduct should be assessed using the same principles and effects-based logic of antitrust. “[A] rigid separation of the antitrust laws and the law of unfair competition is neither legally realistic nor economically desirable.” Callmann, supra, at 1345.
The same is true under the UCL: “[T]he determination of whether a particular business practice is unfair necessarily involves an examination of its impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer. In brief, the court must weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.” Motors, Inc. v. Times Mirror Co., 102 Cal. App. 3d 735, 740 (Cal. Ct. App. 1980).
The logic is simple. Because consumers benefit from vigorous competition, antitrust law does not punish companies for competing on the merits, even if rivals are harmed or eliminated as a result. See Spectrum Sports, 506 U.S. at 458; Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 758, 767 (1984); NYNEX v. Discon, 525 U.S. 128, 135-36, 139 (1998). Using UMC laws to ban conduct merely because it harms competitors would risk undermining the very rationale of competition and, by extension, the UMC laws that seek to protect it. See Cel-Tech, 20 Cal. 4th at 185 (an improper definition of unfair “may even lead to the enjoining of procompetitive conduct and thereby undermine consumer protection, the primary purpose of the antitrust laws”) (emphasis in original). Under UMC law as under antitrust law, “[c]ourts must be careful not to . . . prevent rigorous, but fair, competitive strategies that all companies are free to meet or counter with their own strategies. Companies that cannot compete with others that are more capable or efficient may lawfully fail.” Id.
As the California Supreme Court has held, in order to establish the meaning of “unfair” under the UCL, “we may turn for guidance to the jurisprudence arising under the ‘parallel’ Section 5 of the Federal Trade Commission Act. ‘In view of the similarity of language and obvious identity of purpose of the two statutes, decisions of the federal court on the subject are more than ordinarily persuasive.’” Cel-Tech, 20 Cal. 4th at 185 (citations omitted).
“As with the Sherman Act, conduct challenged under Section 5 ‘must have an “anticompetitive effect.’” That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.’” Statement of FTC Commissioner Joshua D. Wright on the Proposed Policy Statement Regarding Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act, at 7 (June 19, 2013) (quoting United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc)).
Indeed, in the more than 100 years of history interpreting the FTC Act, “[a]n understanding emerged that the FTC’s UMC authority reached somewhat beyond the Sherman Act, but was still tethered to the central antitrust concepts of the consumer welfare standard and the ‘rule of reason,’ both of which offer courts a means to evaluate the legality of market behavior in terms of its likely harms and benefits.” Geoffrey A. Manne & Daniel Gilman, FTC UMC Authority: Uncertain Scope, Int’l Ctr. for L. & Econ. (Jan. 19, 2023), https://laweconcenter.org/resources/ftc-umc-authority-uncertain-scope/.
The legislative history of the FTC Act makes clear its alignment with the principle of “harm to competition, not competitors” undergirding antitrust law: “The unfairness must be tinctured with unfairness to the public; not merely with unfairness to the rival or competitor . . . . We are not simply trying to protect one man against another; we are trying to protect the people of the United States, and of course, there must be in the imposture or in the vicious practice or method something that has a tendency to affect the people of the country or be injurious to their welfare.” 51 Cong. Rec. 11,105 (1914) (Remarks of Senator Cummins).
Scholars have developed a robust body of work confirming that the FTC Act was meant to supplement the Sherman Act. See, e.g., Gregory J. Werden, Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act: What Is the Intelligible Principle?, Mercatus Center Working Paper 4, 19-22 (2023). And even former FTC Chairman William Kovacic has written that the FTC “should not . . . rely on the assertion . . . that the Commission could use its UMC authority to reach practices outside both the letter and spirit of the antitrust laws.” William E. Kovacic & Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 Antitrust L.J. 929, 945 (2010).
While these statements relate to federal statutes, the more general point on the shared rationale between antitrust and unfair competition laws extends beyond the specific relationship between the Sherman and Clayton Acts on the one hand, and the FTC Act on the other. In fact, the California Court of Appeals has explicitly endorsed this view, finding that, where the same conduct is “alleged to be both an antitrust violation and an ‘unfair’ business act or practice for the same reason—because it unreasonably restrains competition and harms consumers—the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not ‘unfair’ toward consumers.” Chavez v. Whirlpool Corp., 93 Cal. App. 4th 363, 375 (Cal. Ct. App. 2001).
True, in Cel-Tech an “unfair” claim was allowed to proceed despite the plaintiff failing to make out an antitrust violation. Cel-Tech, 20 Cal. 4th 163. But Cel-Tech is the rare case where anticompetitive conduct—below cost sales—may be actionable under the UCL but not under antitrust law because of the idiosyncratic structure of the industry and the regulatory context. See id. at 189 (“This case has an unusual circumstance that might bring it within the unfair competition law’s coverage. . . . ‘[F]air and honest competition’ in equipment sales might not be possible when a legally privileged company sells equipment below cost as a strategy to increase profits on service sales that are prohibited to its equipment competitors.”). Ultimately, however, the underlying logic of the UCL and antitrust claims in Cel-Tech was rooted in the same unified goal: protecting competition.
The case at hand, however, is fundamentally different. Here, Epic is essentially asking that Apple be forced to aid its competitors, a position that is contrary to the ethos of both antitrust law and the UCL.
The UCL contains three distinct bases for establishing a violation, two of which are relevant here: “unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice . . . .” Cal. Bus. & Prof. Code § 17200 (emphasis added).[3] But the panel erred when it declared that requiring a violation of antitrust law would collapse the unlawful and unfair prongs of this disjunctive standard. While there is inevitably overlap between the assessment of antitrust law under the two prongs (because “unfairness” inherently imports antitrust concepts and standards), the “unlawful” prong is not rendered a nullity by the role of antitrust standards in assessing the unfairness prong because that prong relates to laws other than antitrust. Actual violations of antitrust law may also constitute violations of the UCL. See, e.g., In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., 383 F. Supp. 3d 187, 267 (S.D.N.Y. 2019) (“Because I have concluded that the IPPs have adequately pleaded that Keurig’s conduct was an unfair restraint of trade, I also conclude that they have adequately pleaded that it was unfair under the California Unfair Competition Law.”).
Thus, the court in Cel-Tech first addressed potential non-antitrust sources of harm and then considered the role of antitrust law only in its exegesis of the “unfair” prong of the UCL. That is why the decision considered whether (1) any provision of the California Unfair Practices Act offers a basis for liability or provides a “safe harbor” from liability, or (2) stated policies of the California Public Utilities Commission could be undermined by the conduct in question. Cel-Tech, 20 Cal. 4th at 182-91.
The California Supreme Court then separately considered whether antitrust law might serve as a basis for liability, and did so under the “unfair” prong of the UCL. There, it established that “the word ‘unfair’ in [the UCL] . . . means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Cel-Tech, 20 Cal. 4th at 187. It is impossible to read this as holding that a violation of the “unfair” prong of the UCL can arise from conduct other than conduct that would violate the antitrust laws.
Most relevant here, the court strongly cautioned against imposing liability for conduct that would not otherwise be an antitrust violation because “[c]ourts must not prohibit ‘vigorous competition’ nor ‘render illegal any decision by a firm to cut prices in order to increase market share.” Id. at 189 (quoting Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 116 (1986)). Doing so would lead to a harmful and improper incongruity between the UCL and the antitrust laws.
By the same token, in Chavez a California Court of Appeals held:
If the same conduct is alleged to be both an antitrust violation and an “unfair” business act or practice for the same reason—because it unreasonably restrains competition and harms consumer—the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not “unfair” toward consumers. To permit a separate inquiry into essentially the same question under the unfair competition law would only invite conflict and uncertainty and could lead to the enjoining of procompetitive conduct.
113 Cal. Rptr. 2d at 184. The panel asserts that this admonition is limited only to “categorical antitrust rule[s].” Epic Games, Inc. v. Apple, Inc., 67 F.4th 946, 1001 (9th Cir. 2023). But California’s Second District Court of Appeals clarified that:
[w]e do not hold that in all circumstances an “unfair” business act or practice must violate an antitrust law to be actionable under the unfair competition law. Instead we hold that conduct alleged to be “unfair” because it unreasonably restrains competition and harms consumers, such as the resale price maintenance agreement alleged here, is not “unfair” if the conduct is deemed reasonable and condoned under the antitrust laws.
Chavez, 113 Cal. Rptr. 2d at 184.
The litigation at hand is a case-study on why conduct that is procompetitive should not be enjoined under the UCL.
Apple’s Guidelines included two types of anti-steering provisions that were aimed at preventing third-party apps from directing customers to purchasing mechanisms other than Apple’s IAP: (1) a prohibition on links or buttons within third-party apps; and (2) a prohibition on targeted communications outside of the apps.
Apple has deleted (2) as part of the Cameron v. Apple Inc. settlement, meaning that developers are now free to communicate outside of the apps about external purchasing options (or anything else). See Order: Granting Mot. for Final Approval of Class Action Settlement; Granting in Part and Denying in Part Mot. for Attorney’s Fees, Costs, and Service Award; and Judgment at 12, No. 19-cv-03074 (N.D. Cal. June 10, 2022). What remains is the prohibition on links and buttons within apps. The question is therefore whether such a prohibition is unfair within the meaning of the UCL.
The panel claims that the California Supreme Court has identified two tests to assess liability under the UCL’s “unfair” prong: “First, to support ‘any finding of unfairness to competitors,’ a court uses the ‘tethering’ test . . . . Second, to support a finding of unfairness to consumers, a court uses the balancing test . . . .” Epic Games, 67 F.4th at 1000 (citations omitted).
But it is incorrect that the California Supreme Court has identified these two tests; rather, the California Supreme Court identified only the tethering test and left unsettled whether there should be a separate test for claims brought by consumers. Cel-Tech, 20 Cal. 4th at 187 n.12 (“This case involves an action by a competitor alleging anticompetitive practices. Our discussion and this test are limited to that context. Nothing we say relates to actions by consumers . . . .”).
Despite the confusion generated by the Cel-Tech court’s failure to provide a test for consumer-initiated claims under the UCL, ultimately it should not matter whether the case is resolved under the tethering test or the balancing test. As discussed above, the aim of both the antitrust laws and UMC laws is to promote consumer welfare by protecting competition—regardless of whether the underlying conduct is in the first instance “unfair” to consumers or competitors. See Cel-Tech, 20 Cal. 4th at 186 (noting the aim of the test it enumerates to identify unfairness to competitors is “to promote consumer protection”); see also id. at 206 (Kennard, J. concurring and dissenting) (“The purpose of competition is to drive prices down. Although the unfair competition law protects competitors, even under the majority’s definition it does not protect competitors at the expense of competition.”).
Thus, while the evidentiary basis for claims brought by different parties may be distinct, the ultimate test of harm is not: finding injury to consumers. But even on this point, the supposed differences between the two tests are largely formalistic. The so-called “balancing test,” which the panel asserts should apply to unfairness claims brought by consumers, is effectively the same as the burden-shifting, rule-of-reason assessment under antitrust law—which is similarly reflected in the “tethering test” applied to claims brought by competitors.
The anti-steering provisions therefore cannot be considered substantially injurious to consumers because it has already been established that consumers on the whole benefit from Apple requiring the use of its IAP.
Unfairness to competitors is explicitly resolved through the “tethering test,” which asks whether the defendant’s conduct “threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Cel-Tech, 20 Cal. 4th at 186-87.
Any of these three bases for liability implicates harm to consumers, which antitrust law generally defines in terms of reduced output or increased prices for consumers. The first basis for finding unfairness—an incipient violation of an antitrust law—concerns conduct that has not yet harmed consumers but is almost certain to do so in the future.
The second basis—the “policy or spirit” of antitrust law provision—is violated when conduct results in “effects [that] are comparable to or the same as a violation of” antitrust law. Id. at 187. Under this provision, whether anyone labels the challenged conduct an antitrust violation is irrelevant; instead, what matters is whether the conduct results in the same anticompetitive effects as an antitrust violation, and courts should pursue this inquiry as they would any other inquiry into the competitive effects of challenged conduct.
The third basis—conduct that “otherwise significantly threatens or harms competition”—is a catch-all meant to capture conduct that is permitted under the antitrust laws but nevertheless results in harm to competition. The most obvious such circumstance is the very one assessed in Cel-Tech where the defendant was given a privileged legal status in the market at issue, and the threat was to a specifically defined form of competition under other laws or regulatory policies.
Accordingly, to resolve the question of whether Apple’s anti-steering provision is unfair, an inquiry must be made into whether the conduct has anticompetitive effects—i.e., whether it harms consumers by reducing output without concomitant procompetitive benefits—or whether it would, if left unchecked, likely develop into such an infringement.
In rejecting Epic’s claims under federal antitrust law, the district court and the panel have effectively foreclosed an unfairness claim under the UCL.
The panel found that Apple’s walled-garden iOS, which prohibits third-party IAPs and app stores, did not violate federal antitrust laws because of its pro-competitive benefits: i.e., increased user privacy and security that could not be achieved through less restrictive means and that ultimately increased inter-brand competition between Apple’s iOS and its closest competitor, Android. In parallel, however, the panel concluded that Apple’s anti-steering provisions, which prohibit apps from informing users about payment possibilities other than IAP, were unfair under the UCL.
In other words, Apple remains free to prohibit third-party IAPs based on the findings of procompetitive benefits, yet, at the same time, Apple is enjoined from prohibiting links or buttons to third-party payment mechanisms—a less-restrictive means of furthering the same objective. The two holdings cannot be reconciled.
The prohibition of links and buttons within the app is an enforcement mechanism for the prohibition of third-party IAPs. If Apple is allowed to require its own IAP on security and privacy grounds, then surely prohibiting apps from encouraging users to bypass Apple’s IAP—by directing consumers to alternative payment methods which may be less secure or private—supports those same procompetitive benefits that the courts recognized. Other courts have correctly concluded that the same conduct cannot be both procompetitive and unfair. See Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1124 (9th Cir. 2018); City of San Jose v. Off. of the Comm’r of Baseball, 776 F.3d 686, 691-92 (9th Cir. 2015).
While the anti-steering provision and the requirement that Apple’s IAP be used are not technically identical, they are both instrumental to achieving the same objective. Thus, even if the Ninth Circuit’s conclusions under federal antitrust law on the IAP were not sufficient to automatically preclude a UMC claim related to the anti-steering provisions, an independent analysis under the UCL should—if done properly—reach the same conclusion: Apple’s anti-steering provisions, like its IAP exclusivity requirement, are procompetitive, do not harm competition, and therefore cannot be considered unfair.
Furthermore, despite the panel’s assertion that its finding of legality under the Sherman Act did not mean that Apple’s conduct was “categorically” permitted under Cel-Tech, Epic Games, 2023 U.S. App. LEXIS 9775, at *96-97, it is settled case-law that, in the absence of any purpose to create or maintain a monopoly, Apple has a “categorical” right to choose with whom it does business. See, e.g., Trinko, 540 U.S. at 408; Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 448 (2009); Chavez, 113 Cal. Rptr. 2d at 182-83. “The antitrust laws [do] not impose a duty on [firms] . . . to assist [competitors] . . . to ‘survive or expand.’” Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 545 (9th Cir. 1983) (citations omitted). Apple is under no obligation to facilitate third-party payment options—much less if this jeopardizes the integrity of its iOS.
For the foregoing reasons, this Court should grant Apple’s rehearing request to clarify that Apple’s conduct violated neither the antitrust laws nor the UCL.
[1] ICLE represents that no party’s counsel authored this brief in whole or in part, no party or party’s counsel contributed money that was intended to fund preparing or submitting the brief, and no person—other than ICLE and its counsel—contributed money that was intended to fund preparing or submitting the brief. ICLE files this brief pursuant with consent of all parties.
[2] This is reflected in the UCL’s language prohibiting “unlawful” conduct. See Cel-Tech, 20 Cal. 4th at 180 (“By proscribing ‘any unlawful’ business practice, ‘[the UCL] “borrows” violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable.”) (citations omitted).
[3] It is worth noting that the dissenting opinion in Cel-Tech takes issue with the majority’s decision that the “unfair” prong of the UCL means anything other than “deceptive.” Under this reading of the UCL, of course, there would be no basis for the district court or the panel’s finding that Apple’s conduct violated the UCL. See Cel-Tech, 20 Cal. 4th at 192 (Kennard J. dissenting) (“The purpose of the legal prohibitions against unfair business acts and practices, by contrast, is to prevent deceptive conduct that injures a particular competitor.”).
Popular Media After nearly two years of litigation and intense competition for the world’s top golfers, the PGA Tour and LIV Golf have agreed to create a . . .
After nearly two years of litigation and intense competition for the world’s top golfers, the PGA Tour and LIV Golf have agreed to create a new, as-yet-unnamed, for-profit joint entity. Most headlines about the deal have focused on the ethical and geopolitical problems that accompany the PGA’s joining forces with LIV’s sponsor, the Saudi Arabian Public Investment Fund. Within policy circles, the pseudo-merger has also stirred concerns regarding potential antitrust violations and harm to competition should the major golf leagues join forces as planned. The Justice Department (DOJ) has announced an investigation into the merger.
Read the full piece here.
Amicus Brief INTEREST OF AMICUS CURIAE The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center committed to developing the . . .
The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center committed to developing the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies, and economic findings, to inform public policy, and has longstanding expertise in antitrust law.
ICLE has an interest in ensuring that antitrust law promotes the public interest and consumer welfare by remaining grounded in sensible rules informed by sound economic analysis. This includes ensuring that courts and agencies correctly apply the standards for class certification in antitrust cases involving two-sided transaction platforms.[1]
Amicus is authorized to file this brief by Fed. R. App. P. 29(a)(2) because all parties have consented to its filing.
Amicus hereby states that no party’s counsel authored this brief in whole or in part; that no party or party’s counsel contributed money that was intended to fund the preparation or submission of the brief; and that no person other than amicus or its counsel contributed money that was intended to fund the preparation or submission of the brief.
The aim of the federal antitrust laws is to protect competition and the innovation and value-creation that it fosters. To that end, a wide range of entities are authorized to prosecute antitrust claims provided they meet the standards that the legislature and courts have articulated to prevent over-enforcement, which itself can mute competitive incentives and dampen innovation. Those standards include the prerequisites of standing and, in the case of class actions, commonality and predominance.
In this case, plaintiffs have asked to pursue antitrust claims against Google, a 26-year-old company—younger than the average PhD student—that has transformed the way consumers interact with the internet, increased efficiency, and created immeasurable value. Plaintiffs assert that “Google illegally monopolized the Android app distribution market”—which the District Court characterized as a two-sided platform—“with anticompetitive practices in the Google Play Store.” 1-ER-3, 10. They have further asked to proceed as a class, representing 21 million consumers who entered into distinct transactions with various developers related to (in aggregate) 300,000 apps. Defs.-Appellants’ Br. (“Br.”) at 20.
The value of a two-sided platform to both consumers and sellers depends on the platform successfully balancing their relative interests, demands, and capacity. That distinctive aspect of two-sided platforms makes questions about standing (such as injury) and the predominance of common issues particularly complex.
On November 28, 2022, the District Court granted class certification, relying on Illinois Brick v. Illinois, 431 US. 720 (1977), and Apple v. Pepper, 139 S. Ct. 1514 (2019), for the proposition that all 21 million consumers were “direct purchasers” and therefore a purported overcharge to the developer must necessarily also injure them. 1-ER-18–19. It further found a “pass-through” formula was sufficient “class-wide proof of antitrust impact and injury.” 1-ER-19. In reaching this conclusion, the District Court failed to engage meaningfully and rigorously with the economic realities of two-sided platforms.
In its landmark Apple v. Pepper decision, the Supreme Court held that consumers could be considered “direct purchasers” of a two-sided platform even though developers set the retail prices for apps. 139 S. Ct. at 1520 (“It is undisputed that the iPhone owners bought the apps directly from Apple. Therefore, under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization.”). In other words, such consumers were not so remote from the platform as to be barred from bringing suit for lack of standing. But status as a “direct purchaser” does not categorically mean that plaintiffs have met the requirements of Article III standing. “Direct purchasers” from two-sided platforms must still show that, as compared to a but-for-world platform using a different price structure, they have been adversely affected.
The Supreme Court in Ohio v. American Express emphasized this point. Noting first that “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities,” are “generally disfavored in antitrust law” (Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285 (2018) (quoting Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 466–67 (1992)), it found that “[P]rice increases on one side of the platform . . . do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.”
Id. at 2287. In other words, given the unique dynamics of two-sided platforms, the existence and quanta of injury to consumers cannot be assessed without considering whether a “price” change—including quality parameters such as convenience and security—feeds through the indirect network effects[2] running from one side of the platform to another to alter the relative value of the platform to users and then, assuming that it does, determining which (if any) users are adversely affected.
Plaintiffs skipped over this complexity, instead relying on inapplicable supply-and-demand assumptions and focusing on the pass-through of a single price term. A suit by consumers against a platform based on products priced by developers necessarily invokes a much more complicated interaction:
Apple’s overall pricing structure includes a component whereby Apple allows app developers to set app prices, but it also includes relevant prices and terms set by Apple, including: the price of iOS devices; the commission charged to app developers; the price of its own iOS apps; the (unavoidable) ability for app developers to charge for services outside of the iOS ecosystem (without paying the thirty percent commission); and the structure, price, and availability of app marketing in the App Store.[3]
It is not enough to show that developers are charged higher fees; or even that developers could charge higher prices to app consumers. Instead, Plaintiffs must assess both the price effects and non-price quality dimensions.
As things stand, however, plaintiffs focus solely on the costs of Google’s behavior—i.e., the purportedly higher Play Store fees—ignoring how it contributes to making the Android ecosystem safer and of higher quality (both of which boost participation on both sides of the market). Put differently, plaintiffs’ mistake is to narrowly focus on the effect that Google’s behavior has on Play Store fees, while ignoring how it benefits the broader Android ecosystem and how it may affect individual participants.
In short, plaintiffs have not met their burden of showing that common issues of injury will predominate over individualized inquiries; among other things, they have not offered an analysis rigorous enough to determine whether any members of the putative class were injured, let alone the majority of them. Accordingly, the District Court’s class certification order should be reversed.
A plaintiff must establish standing to bring a lawsuit in federal court. Spokeo, Inc. v. Robins, 578 U.S. 330 (2016). The minimum of Article III standing requires that the plaintiff has “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Id. The standing requirement applies just as equally to a “direct purchaser” plaintiff as it does to any other plaintiff. Where the “direct purchaser” is engaging with a two-sided platform—which is how the District Court treated plaintiffs and the purported Android App Distribution market in this matter[4]—questions about injury and the traceability of such can be particularly complex.
Here, however, the District Court failed to rigorously engage with that complexity, suggesting instead that because it had classified consumers as “direct purchasers”, they per force suffered an injury from the service fees that Google charged to developers:
Google’s monopolistic practices inflated the “headline rate” that was used as the basis for all developers’ negotiations with Google, which affected all of the prices set by the developers and paid by consumers to Google.
1-ER-23. Reasoning that “[t]he overcharge has not been passed on by anyone to anyone” and “consumer plaintiffs paid the alleged overcharge directly to Google,” the District Court concluded that “there is no barrier to certification on this score.” 1-ER-18–19.
But, as discussed further in Section II below, just because a consumer is a “direct purchaser” on one side of a two-sided platform does not mean that the consumer paid any share of a purported overcharge. Rather, the relevant question is whether the retail prices that plaintiffs paid for the apps and associated services—prices that are set by the developers—were higher than they would have been in the but-for world, accounting for quality parameters such as safety and convenience. The Supreme Court’s decision in Apple v. Pepper is instructive on this point. There, the Supreme Court found that the absence of an intermediary between Apple’s app store and its consumers was sufficient to find the latter to be “direct purchasers” in the “retail market for the sale of apps.” 139 S. Ct. at 1521. In other words, under the framework articulated by the Supreme Court in Illinois Brick Co. v. Illinois, 431 US. 720 (1977), such consumers were not so remote from the purported antitrust violation as to be barred from suit. In reaching this decision, the Court rejected the notion that the directness of the purchasing relationship should be defined by who sets the price, i.e., consumers can be the “direct purchasers” of a firm that does not set the retail price of a good or service. Id. at 1522.
However, the Court was also crystal clear that the directness of the payment relationship did not mean that the consumer had in fact paid an overcharge, explicitly distinguishing between app store commissions (or fees) and the app prices paid by consumers:
To be sure, if the monopolistic retailer’s conduct has not caused the consumer to pay a higher-than-competitive price, then the plaintiff’s damages will be zero. Here, for example, if the competitive commission rate were 10 percent rather than 30 percent but Apple could prove that app developers in a 10 percent commission system would always set a higher price such that consumers would pay the same retail price regardless of whether Apple’s commission was 10 percent or 30 percent, then the consumers’ damages would presumably be zero.
139 S. Ct. at 1523.[5] That is, the Court declined to assume that higher fees charged to app developers necessarily were passed on to consumers through the retail price set by the developer. The Court in Apple v. Pepper understood that the effects of a hypothetical anticompetitive fee increase may be shared between developers and consumers, with each group needing to show how it was affected to prove their claims. In the case of consumers, this means showing that the increased fees charged to developers resulted in a worse outcome for consumers.
Apple v. Pepper thus invites a “pass on” inquiry (though fee incidence may actually be the more appropriate terminology), including whether a fee increase has negatively affected a plaintiff, which in turn depends on whether developers have passed on the increased fees to users and whether consumer benefits derived from platform fees (e.g., increased security) outweigh those costs. Indeed, that is the direct and anticipated consequence of the Court’s decision in Apple v. Pepper. In its ruling, the Court intentionally opened the door to such allocation questions:
It is true that Apple’s alleged anticompetitive conduct may leave Apple subject to multiple suits by different plaintiffs. . . .The consumers seek damages based on the difference between the price they paid and the competitive price. The app developers would seek lost profits that they could have earned in a competitive retail market.
139 S. Ct. at 1525. See also id. at 1526 (Gorsuch, J. dissenting) (“Illinois Brick held that these convoluted ‘pass on’ theories of damages violate traditional principles of proximate causation and that the right plaintiff to bring suit is the one on whom the overcharge immediately and surely fell. Yet today the Court lets a pass-on case proceed.”).
In short, Apple v. Pepper does not create a presumption that potentially anticompetitive fee increases always injure direct purchasers in the platform context. Consequently, it was incumbent on the District Court to analyze rigorously whether plaintiffs could demonstrate that purported supracompetitive fees charged to developers caused changes to the value of the platform that injured consumers and that common questions regarding such injury predominate over individualized inquiries. See Bowerman v. Field Asset Services, Inc., 60 F.4th 459, 469 (9th Cir. 2023) (explaining that “class certification is inappropriate ‘when individualized questions . . . will overwhelm common ones,” and decertifying class based on predominance of individual questions over common ones.). As discussed below, the District Court erred by failing to grapple with the economic reality of two-sided platforms.
It is well recognized that “antitrust law should look at the ‘the economic reality of the relevant transactions’ rather than ‘formal conceptions of contract law.’” ((Apple, Inc. v. Pepper, 139 S. Ct. at 1529–30 (Gorsuch, J. dissenting) (cleaned up)). [6] Here, that means that plaintiffs cannot demonstrate injury without accounting for the dynamics of a two-sided platform, i.e., how altering the fees charged to developers may trigger feedback effects between the two sides of the platform to change the balance of features and ultimately affect consumers:
[T]here is no meaningful economic relationship between benefits and costs on each side of the market considered alone . . ., any analysis of social welfare must account for the pricing level, the pricing structure, and the feasible alternatives for getting all sides on board.[7]
Plaintiffs’ narrow focus on pass-through of a single price term (or as the District Court termed it, “share of the overcharge,” 1-ER-19) fell short of this analysis, particularly under the standard required by Rule 23.
A two-sided platform is a business model that creates value by reducing the transaction costs of direct interactions between two or more types of users in ways that mere resellers cannot replicate.[8] A critical feature of multi-sided platforms is that the demand of platform participants is interdependent—the extent of participation by one set of users on a platform depends on the participation of one or more other sets of users.[9] A multi-sided platform uses both pricing and design choices to achieve critical mass. Without critical mass on all sides, the positive feedback effect, which enables the platform’s unique matching abilities, cannot be achieved. Further, interdependent demand on platforms often leads to situations where efficient pricing may involve below marginal cost pricing on one side and above marginal cost pricing on another.[10] As a result, inferences drawn from the traditional indicia of competition—price and output effects—may be inapposite, particularly when they are assessed on only one side of a multi-sided market or without consideration of the effects on the design of the platform itself.
It is a well-accepted proposition in the literature that vertical restraints on multi-sided platforms can be procompetitive, anticompetitive, or competitively neutral depending on a host of complicated interactions among the various groups of platform users and between users and the platform itself. Procompetitive vertical restraints on multi-sided platforms may fall into one or more of at least three broad categories: (1) achieving economies of scale that provide benefits to consumers overall; (2) helping platforms deal with coordination and expectation problems to the benefit of platform users; and (3) providing benefits to one side of the platform that increase consumer welfare overall.[11] These procompetitive effects are a function of the particular structure of such two-sided markets and necessitate adjustments to antitrust doctrine to ensure that presumptions and evidentiary burdens properly reflect the more complicated economic relationships among the parties involved.
Plaintiffs and their experts failed to fully account for these dynamics in their analysis. For example, Dr. Singer mistakenly surmises that lower fees would result in more consumer demand because:
A foundational principle in economics is that “demand curves” are downward sloping—meaning that, all else equal, consumers will demand more of a product or service the lower its price. How much more will be demanded depends on the consumer elasticity of the demand response to lower prices for Apps and In-App Content.
Dkt. 252-3 at 125.[12] Similarly, he concludes that the supply of apps and in-app content would increase if Google’s service fees were reduced and the developers received more revenue: “Absent the Challenged Conduct, developers would realize larger proceeds, which would bring forward more App and In-App Content development, commensurate with a shifting out of the supply curve.” Id. And he makes these claims while explicitly excluding considerations of quality effects. Dkt. 252-3 at 74 n. 368 (“Although my primary impact focuses on price effects (over the take rate) it is possible that competition would occur on non-price quality dimensions as well.”). Moreover, when he does acknowledge that competition can occur on the quality dimension, he neglects entirely the possibility of quality (design) changes in the platform itself. Id. at 108.
This approach is wrong for two important reasons. The first is that lower service fees to the developer do not necessarily translate into lower retail prices to the consumer, as the real-world evidence demonstrated. Br. at 39–41. More fundamentally, the intuition that lower prices result in higher demand does not always hold in two-sided markets. For example, if the fee structure encourages participation from developers on the other side of the market, then that may lead to higher user demand. Likewise, if higher developer fees or a particular fee structure facilitate platform design choices that improve quality for users (and/or developers), that, too, may stimulate user demand. In short, the simple reallocation of costs and benefits across the sides of a two-sided market can be output increasing, output reducing, or output neutral. Looking solely at price effects simply cannot distinguish between these scenarios.
This is why the Supreme Court in Ohio v. American Express emphasized that the legal analysis of injury in a two-sided market requires consideration of both sides of the platform: “Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.” 138 S. Ct. at 2286 (internal citation omitted). “Competition,” it declared, “cannot be accurately assessed by looking at only one side of the platform in isolation.” Id. at 2287.
The notion that prices charged on one side have an ambiguous effect on demand on the other is one of the central findings of the economic literature regarding two-sided markets, because the “quality” of the final product is intrinsically connected to the other side of the market. In their highly influential work, Jean-Charles Rochet and Nobel prize winner Jean Tirole observed that:
We define a two-sided market as one in which the volume of transactions between end-users depends on the structure and not only on the overall level of the fees charged by the platform.[13]
They also highlight that the basic, “canonical” model they develop is an important starting place to understand the relationships between sides of a two-sided market, but it is not a description of reality, and a proper analysis must go beyond narrow price considerations.[14] As a result, “policy interventions to alter the price structure (as opposed to the price level)” are not likely to be “solidly grounded.”[15] Indeed, as Andre Hagiu has shown:
[I]n all of these articles, the volume of transactions . . . is not directly affected by platforms’ prices: Rochet and Tirole and Armstrong essentially assume that each member of one side interacts with an exogenously given proportion of members on the other side. . . . In my model the variable fees charged by the platform (royalties) play a central role, because they affect the prices and volumes of trade between sellers and buyers and therefore social welfare. On the other hand, the allocation of the royalties among the two sides is largely inconsequential in my model.[16]
The “canonical” assumption of a fixed quantity and ratio of users is inapt where, as here, users decide whether to join the platform at different times and consume its services in varying amounts. Any assessment of the effects of a revised price structure would require a complete analysis across relevant metrics of the optimal balancing of demand on both sides of the market under the new structure.[17]
But here, Plaintiffs and the District Court discounted non-fee metrics: Google says that class members may be worse off in plaintiffs’ but-for world because Google may have to change its current practices to stay competitive by cutting back on services it currently offers for free. In Google’s view, ‘in a world without existing Android security standards, security-conscious consumers would be worse off because they would face costs to keep their data and devices secure.’ Concerns like these are far too speculative and conditional to be a serious barrier to certification.
But here, Plaintiffs and the District Court discounted non-fee metrics:
Google says that class members may be worse off in plaintiffs’ but-for world because Google may have to change its current practices to stay competitive by cutting back on services it currently offers for free. In Google’s view, ‘in a world without existing Android security standards, security-conscious consumers would be worse off because they would face costs to keep their data and devices secure.’ Concerns like these are far too speculative and conditional to be a serious barrier to certification.
1-ER-25 (internal citations omitted). This conclusion ignores the fact that, in two-sided platforms, what might superficially appear to be a fee increase on one side may in fact be a crucial component of the underlying ecosystem:
Where a single, two-sided product is at issue, the price may be spread across users on both sides of the market. Moreover, non-price product characteristics will necessarily differ between different sets of users. . . Given the differential incidence of price and quality across a platform, it is impossible to capture the competitive dynamics and to measure the competitive effects by viewing only the partial price on one side.[18]
It is thus impossible to assess whether a particular participant on the platform has been injured without considering how the change affects the platform as a whole and, to the extent that there is an anticompetitive effect, which side (or sides) and which participants within that side (or sides) are worse off.
In sum, the District Court was wrong to conclude plaintiffs could assert injury based on a purported overcharge in service fees to one side of the platform without fully analyzing the price and non-price feedback between the two sides of the platform.
Plaintiffs, and ultimately the District Court, further err by assuming that the complicated effects of a change to the platform is directionally the same for all consumers.
The first problem is (as discussed above) that antitrust injury cannot be inferred from consideration of only a partial price change, particularly in the context of a platform relationship. Because users are heterogenous across many dimensions, the assumption of anticompetitive effect (let alone commonality across users) from a price change for a subset of consumers is particularly hard to maintain.
This is not just a consequence of the two-sided nature of the market at issue. Consider, for example, the basic principle that harm to a particular competitor—even the loss of a particular competitor—is not the same thing as harm to competition. See Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962). One necessary implication of this principle is that it is not enough to show harm to “inframarginal” consumers or to a particularly sensitive subset of consumers, because, for some of these consumers—say, those with strong brand loyalty to a particular firm—the loss of their preferred competitor would also harm them, even if competition itself were not affected. Holding otherwise would undermine this fundamental limitation on the scope of antitrust injury. Because this distinction between harm to some consumers and anticompetitive harm is so crucial to ferreting out conduct that creates or maintains monopoly power, antitrust law requires a demonstration that the conduct at issue has an actual anticompetitive effect—not merely that it results in some harm—before a case may be brought.
This is a fundamental tenet of antitrust law and economics, but it is particularly magnified in the platform setting. There, because operators are optimizing the platform for the benefit of multiple groups of users on multiple sides of a multi-sided market, superficial harm to one group may well be part of an overall optimization strategy, and injury cannot be assumed on the basis of harm to a subset of users. Most obviously, apps and app prices are embedded in a broader ecosystem and are instrumental to its value—as Plaintiffs’ expert even understands (without acknowledging its significance):
The functionality and user enjoyment derived from a mobile device is highly dependent upon the range and quality of apps available on it. In addition to producing a mobile operating system, Google has created a distribution channel for delivery of Android-compatible apps developed by third parties, and developed its own universe of Apps, for Google Android. Google itself has developed some of the most popular Android- and iOS-compatible apps, including Google Search, Google Maps, Chrome, YouTube, and Gmail.
Dkt. 252-3, at 10.
Indeed, restrictions in one dimension may not even constitute “harm” to that subset of consumers where it is accompanied by corresponding benefits, for instance where the restrictions serve to protect consumers’ privacy and data or to assure adequate monetization and distribution. Platform users can benefit from features that contribute to the overall success of the ecosystem.[19] In other words, higher prices may reflect higher quality—stemming directly from the very conduct that Plaintiffs claim is the source of injury.
Second, even if one ignores the concept of virtuous feedback loops, Plaintiffs’ claim that all class members are negatively affected still falls flat. Consumers are not similarly situated, and it is inappropriate to assume a simple pro rata effect from a change in app store prices. Game apps account for an enormous percentage of app store purchases, and “spending on the consumer side is also primarily concentrated on a narrow subset of consumers: namely, exorbitantly high spending gamers. . . . 81.4% of all Apple accounts spent nothing and account for zero percent of the App Store billings for the quarter. . . , [and] 6% of App Store gaming customers in 2017 accounted for 88% of all App Store game billings. . . .” Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d 898, 953–54 (N.D. Cal. 2021).[20] Without analyzing whether and how the reduction in fees charged to developers affects other costs associated with the platform—either direct costs or indirect costs through reduced quality—it cannot be assumed that even those consumers who make purchases in the Play Store are worse off. Moreover, because user groups vary along other dimensions that are likely to correlate with price—most notably in terms of their sensitivity to privacy and security risks and their tolerance of user-interface impediments like ads or “choice screens”—the effects of price reductions or increases accompanied by other qualitative changes are not captured by price, vary considerably across users, and are not likely to correlate with pro rata app usage. Any inquiry into injury will turn on these individualized questions.
For the reasons stated above, the District Court’s class certification order should be reversed.
[1] In a two-sided market a firm sells two different products or services to two different groups of consumers. See Filistrucchi et al., Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293 (2014) (“In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets….”).
[2] Bruno Jullien, Alessandro Pavan, & Mark Rysman, Two-sided Markets, Pricing, and Network Effects, 4 Handbook of Industrial Organization 488 (2021) (“[I]ndirect network effects . . . emerge when the adoption and use of a product leads to increased provision of complementary products and services, with the value of adopting the original product increasing with the provision of such complementary goods . . . Indirect network effects thus lead to a feedback loop as more participants on each side of the platform find it more valuable to adopt and use the platform when they expect the other side to attract more users.”)
[3] Geoffrey A. Manne and Kristian Stout, The Evolution of Antitrust Doctrine After Ohio v. Amex and the Apple v. Pepper Decision That Should Have Been, 98 Neb. L. Rev. 425, 458 (2019).
[4] We understand that there are summary judgment motions pending regarding whether plaintiffs have properly defined a market involving the sale of in-app purchases (IAPs) and subscriptions to consumers because: (1) “Plaintiffs’ experts have conceded that their alleged Android app distribution market does not involve IAPs or subscriptions at all”; and (2) “according to plaintiffs’ experts,” the other putative relevant market involves Google selling in-app billing services to developers. No. 3:21-md-02981-JD, Dkt. 480, at 18. We do not take any position on these issues.
[5] To draw an analogy with physical retail, the harm to consumers that buy from a retail cartel is the difference between the competitive and cartel price of the goods they purchase, not the increase to those retailers’ margins under monopoly. This distinction has important ramifications for two-sided markets and the case at hand.
[6] Manne & Stout, supra note 3, at 458 (referencing both Ohio v. Amex and Apple v. Pepper and emphasizing “the need for the plaintiffs . . . to allege injury and present their prima facie case consistently with the economic realities of the two-sided market at issue”).
[7] David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. Reg. 325, 355–56 (2003).
[8] For a more thorough discussion of the nature of two-sided platforms, see generally David S. Evans & Richard Schmalensee, The Antitrust Analysis of Multisided Platform Businesses, Oxford Handbook On International Antitrust Economics (Roger Blair & Daniel Sokol eds., 2013).
[9] See, e.g., David S. Evans, Economics of Vertical Restraints for Multi-Sided Platforms (Univ. of Chi. Inst. for Law & Econ. Olin Res. Paper No. 626, Jan. 2, 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2195778 [https://perma.unl.edu/T5CP-QECW], at 4.
[10] See Evans & Schmalensee, supra note 8, at 6.
[11] See Evans, supra note 9, at 8–10.
[12] Unless otherwise noted, references to “Dkt” refer to No. 3:21-md-02981-JD.
[13] Jean-Charles Rochet & Jean Tirole, Two-sided Markets: A Progress Report, 37 The RAND J. of Econ. 646 (2010).
[14] Id. at 663.
[15] Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. of the Eur. Econ. Ass’n 1009 (2003).
[16] Andre Hagiu, Pricing and Commitment by Two-Sided Platforms, 37 RAND J. of Econ. 720, 722 (2006)
[17] See, e.g., Benjamin Klein, et al., Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73 Antitrust L.J. 571, 598 (2006) (“The economic theory of two-sided markets indicates that relative prices on the two sides of the market are independent of the degree of competition faced by a supplier in such a market. While total prices will be influenced by competition, relative prices are determined by optimal balancing of demand on the two sides of the market.”).
[18] Geoffrey A. Manne, In Defence of the Supreme Court’s “Single Market” Definition in Ohio v. American Express, 7 J. Antitrust Enf. 104, 109 (2019).
[19] See Dirk Auer, Appropriability and the European Commission’s Android Investigation, 23 Colum. J. Eur. L. 647 (2017).
[20] As the court in Epic v. Apple notes, the Google Play Store appears to have similar characteristics. Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d at 954 n. 243.
Popular Media Bad competition cases are a dime a dozen these days. The UK Competition and Markets Authority’s (CMA) recent unfortunate decisions to block both Microsoft’s acquisition of . . .
Bad competition cases are a dime a dozen these days. The UK Competition and Markets Authority’s (CMA) recent unfortunate decisions to block both Microsoft’s acquisition of Activision Blizzard and Meta’s takeover of Giphy spring to mind as examples of a competition enforcer prioritising populist “big is bad” concerns.
And yet, in the race to bring the most reckless competition case, the European Commission takes the crown, most recently accusing Google of abusing its dominant position in the online-advertising market. According to the competition watchdog, the issue is that Google favours its own ad exchange (i.e. a platform that matches advertisers with publisher websites) over rivals, thereby harming competition and consumers.
Scholarship Abstract In the first quarter of 2023, the Stanford Computational Antitrust project team invited the partnering antitrust agencies to share their advances in implementing computational . . .
In the first quarter of 2023, the Stanford Computational Antitrust project team invited the partnering antitrust agencies to share their advances in implementing computational tools. Here are the 26 contributions we received.
TOTM Jennifer Abruzzo, general counsel of the National Labor Relations Board (NLRB), recently issued a memo claiming that certain noncompete clauses in labor contracts are illegal, on grounds . . .
Jennifer Abruzzo, general counsel of the National Labor Relations Board (NLRB), recently issued a memo claiming that certain noncompete clauses in labor contracts are illegal, on grounds that they violate employees’ right to organize and negotiate better working conditions under Section 7 of the National Labor Relations Act (NLRA).
Amicus Brief IDENTITY AND INTEREST OF AMICUS CURIAE AND SOURCE OF AUTHORITY TO FILE BRIEF The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, . . .
The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies, and economic findings, to inform public policy, and has longstanding expertise in antitrust law.
Amici also include 28 scholars of antitrust, law, and economics at leading universities and research institutions across the United States. Their names, titles, and academic affiliations are listed in Appendix A. All amici have extensive expertise in antitrust law and economics, and several served in senior positions at the Federal Trade Commission or the Antitrust Division of the Department of Justice.
Amici have an interest in ensuring that courts and agencies correctly apply the standards for evaluating horizontal and vertical mergers, and take into account the benefits commonly associated with vertical mergers.
Amici are authorized to file this brief by Fed. R. App. P. 29(a)(2) because all parties have consented to its filing.
Amici hereby state that no party’s counsel authored this brief in whole or in part; that no party or party’s counsel contributed money that was intended to fund the preparation or submission of the brief; and that no person other than amicus or its counsel contributed money that was intended to fund the preparation or submission of the brief.
The FTC’s decision to require Illumina to divest Grail rests on at least two misguided premises. The first is that the same scrutiny applies to both horizontal and vertical mergers. The second is that benefits typically associated with vertical mergers do not apply here.
A horizontal merger combines firms that compete in the same relevant market, which necessarily reduces the number of firms engaged in head-to-head competition and may eliminate substitutes. That reduction inherently tends to increase prices, but the price effect may be trivial. In addition, market responses (competitive repositioning or new entry) or other benefits of the merger (savings in transaction and other costs, enhanced investment incentives) may neutralize or offset the impetus to higher prices. But because those benefits are not automatic (and the reduction of direct competition is), they must be proven rather than assumed if the merger otherwise poses a significant risk of anticompetitive effects.
A vertical merger, in contrast, combines firms with an upstream-downstream (e.g., seller-buyer) relationship—that is, “firms or assets at different stages of the same supply chain.” Dep’t of Justice, Antitrust Division and FTC, Vertical Merger Guidelines 1 (2020). Examples include a manufacturer’s acquiring a distributor or a firm providing a manufacturing input.
The economic consequences of combining complements rather than substitutes are fundamentally different. Whereas the first-order effect of a horizontal merger is upward pricing pressure, the first-order effect of a vertical merger is downward pricing pressure. Vertical mergers typically entail the elimination of double marginalization (“EDM”), which is akin to downward pricing pressure (and often considered alongside efficiencies). David Reiffen & Michael Vita, Comment: Is There New Thinking on Vertical Mergers? 63 Antitrust L.J. 917, 920 (1995). Vertical integration also typically internalizes externalities in research and development, resulting in greater investment. Henry Ogden Armour & David J. Teece, Vertical Integration and Technological Innovation, 62 Rev. Econ. & Stat. 470 (1980). Like horizontal mergers, vertical mergers often confer other benefits such as operational and transactional efficiencies. Dennis W. Carlton, Transaction Costs and Competition Policy, 73 Int’l J. Indus. Org. 1 (2019); Oliver Williamson, The Economic Institutions of Capitalism 86 (1985).
Thus, while both types of mergers can create benefits from cost savings, their intrinsic effects move in opposite directions: higher prices and less investment with horizontal mergers, and lower prices and more investment with vertical mergers.
The Commission did not simply presume that this vertical merger would be anticompetitive, however. It also discounted both the likelihood of efficiencies in vertical mergers and specific evidence of efficiencies associated with the already-consummated merger. As a result, the Commission did not properly assess the likely competitive effects of the merger.
Courts have long recognized that horizontal and vertical mergers are categorically different. “As horizontal agreements are generally more suspect than vertical agreements,” courts are “cautious about importing relaxed standards of proof into vertical agreement cases.” Republic Tobacco v. North Atlantic Trading Co., 381 F. 3d 717, 737 (7th Cir. 2004). Thus, for vertical mergers, “unlike horizontal mergers, the government cannot use a shortcut to establish a presumption of anticompetitive effect.…” United States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019) (“AT&T II”). In a vertical merger case, “the government must make a fact-specific showing that the proposed merger is likely to be anticompetitive,” and the “ultimate burden of persuasion… remains with the government at all times.” Id. (emphasis added; cleaned up).
As the ALJ’s Initial Decision (ID) recognized (at 132), the burden-shifting approach is not bound by any specific, sequential form. Then-Judge Thomas stressed in United States v. Baker Hughes, 908 F.2d 981, 984 (D.C. Cir. 1990), that “[t]he Supreme Court has adopted a totality-of-the-circumstances approach…, weighing a variety of factors to determine the effects of particular transactions on competition.” As the ALJ aptly put it, the Baker Hughes “‘burden-shifting language’” provides “‘a flexible framework rather than an air-tight rule’”; “in practice, evidence is often considered all at once and the burdens are often analyzed together.” ID 132 (quoting Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 424-24 (5th Cir. 2008)).
The differential treatment of vertical and horizontal mergers parallels the Supreme Court’s vertical restraints jurisprudence. The potential anticompetitive effects of vertical restraints are similar to those posed by vertical mergers, as both obtain between firms at different levels of the supply chain.
Over time, the Supreme Court has eliminated per se condemnation for vertical restraints. In 1977, the Court rejected per se illegality for vertical non-price restraints, Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 52 n.19, 58 (1977) (overruling United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967)), later confirming that “a vertical restraint is not illegal per se unless it includes some agreement on price or price levels.” Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 735-36 (1988). Eventually, the Court repudiated the last vertical per se prohibition—of vertical minimum price restraints. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overruling Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)). In these decisions, the Court emphasized that any departure from the evidence-specific rule of reason “must be based on demonstrable economic effect, rather than . . . upon formalistic line drawing.” Bus. Elecs., 485 U.S. at 724.
These decisions reflect a nearly categorical repudiation of presumptions of illegality in dealings involving entities at different levels of the supply chain. Here, however, the Commission took the opposite approach, presuming anticompetitive effect while rejecting the significance of rigorously established benefits in a way that approaches a per se standard. This Court should reject that departure from sound law and economics.
The FTC had to show that Illumina has a greater incentive to foreclose rivals following—and because of—the merger. Instead, the Commission adopted a standard of review that elides the requirement that, in a vertical merger case where there is “no presumption of harm in play,” “the government must make a fact-specific showing that the proposed merger is likely to be anticompetitive” both at the prima facie stage and in the final analysis. United States v. AT&T Inc., 310 F. Supp. 3d 161, 192 (D.D.C. 2018) (“AT&T I”), aff’d, 916 F.3d 1029 (D.C. Cir. 2019); see AT&T II, 916 F.3d at 1032.
To be sure, there is little recent case law regarding the standard of review for vertical mergers because the federal antitrust agencies have rarely challenged, let alone litigated, vertical acquisitions. The Department of Justice challenge to the AT&T/Time Warner merger marked “the first time in 40 years that a court has heard a fully-litigated challenge to a vertical merger.” Joshua D. Wright & Jan M. Rybnicek, US v. AT&T Time Warner: A Triumph of Economic Analysis, 6 J. Antitrust Enforcement 3 (2018).
Nevertheless, up to now, the agencies have considered likely structural benefits, transactional efficiencies, and potential remedies, along with potential harms, in toto and on net, in assessing a merger’s likely competitive impact. Hence, the Vertical Merger Guidelines—jointly adopted by the FTC and the Antitrust Division of the Department of Justice in June 2020 (although withdrawn by the FTC while this case was pending)—state that “[t]he Agencies do not challenge a merger if cognizable efficiencies are of a character and magnitude such that the merger is unlikely to be anticompetitive in any relevant market.” Vertical Merger Guidelines at 11. Even under the Horizontal Merger Guidelines, “[t]he Agency will not challenge a merger if cognizable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive.” Dep’t of Justice, Antitrust Division & FTC, Horizontal Merger Guidelines § 10 (Aug. 19, 2010).
But here the Commission did not seriously account for likely efficiencies or other benefits that may be derived from practices inconsistent with foreclosure. Put simply, Illumina’s ability to profit from the merger without foreclosing rivals reduces its incentive to foreclose. Although the foreclosure incentive may remain on some margins, the question of the greater incentive cannot be resolved without assessing the incentives against foreclosure as well as those for it.
Illumina’s post-merger incentive to foreclose rivals may be constrained by:
But the FTC presumed away these and other factors that could mitigate the risk of harm.
The Commission maintains that the same scrutiny applies to efficiencies claims in vertical and horizontal transactions. To justify this conclusion, the Commission declined to “simply take managers’ word for efficiencies without independent verification, because then the efficiency defense ‘might well swallow the whole of Section 7,’ as managers could present large unsubstantiated efficiencies claims and courts would be hard pressed to find otherwise.” Opinion 75-76 (quoting United States v. H&R Block, Inc., 833 F. Supp. 2d 36, 91 (D.D.C. 2011). But this is a non sequitur, and wrong for three reasons.
First, the Commission need not (and the ID did not) “simply take managers’ word for efficiencies.” As the Initial Decision noted, courts and academic authorities both recognize procompetitive effects, including efficiencies, generally observed with vertical integration. ID 133-35, 196. See also ID 135 (noting case-specific evidence regarding research and development efficiencies, EDM, and the acceleration of access).
Second, to support its rejection of competitive benefits, the FTC continued to conflate the legal standards for horizontal and vertical mergers, relying only on serial string citations to horizontal merger cases. Opinion 75-76. Because a vertical merger puts direct, downward pressure on prices and upward pressure on complementary investments—the inverse of horizontal merger effects—the reliance on horizontal cases highlights the Commission’s failure to recognize the fundamental difference between horizontal and vertical integration. See AT&T II, 916 F.3d at 1032.
Third, ignoring that distinction, and the resulting need for a “fact-specific showing” of the likely anticompetitive effects of a vertical merger, id. at 1032, the Commission repeatedly relied upon H&R Block, which says nothing about standards of review for vertical mergers. H&R Block involved a horizontal merger that allegedly would have produced “an effective duopoly.” 833 F. Supp. 2d at 44.
The FTC’s Opinion also cites a horizontal merger decision, FTC v. H.J. Heinz Co., 246 F.3d 708, 713 (D.C. Cir. 2001), and AT&T II—a vertical merger case—for the proposition that the Baker Hughes framework applies to both horizontal and vertical mergers. That is misleading. Again, AT&T emphasizes that the distinction between horizontal and vertical mergers precludes similar presumptions of anticompetitive effects, and makes it easier to establish certain recognized efficiency and other benefits of vertical integration. See AT&T II, 916 F.3d at 1032; Vertical Merger Guidelines at 5. Not incidentally, the Government lost its merger challenge in AT&T, both at trial and on appeal.
The Commission also discounted—or ignored—various efficiencies and other benefits on the ground that “efficiencies are ‘inherently difficult to verify and quantify.’” Opinion 75 (citing H&R Block, 833 F. Supp. 2d at 89). To justify this approach, the Commission cites five horizontal merger matters: H&R Block; H.J. Heinz; Otto Bock HealthCare N. Am., Inc., 168 F.T.C. 324 (2019); FTC v. Wilh. Wilhelmsen Holding ASA, 341 F. Supp. 3d 27 (D.D.C. 2018); and FTC v Penn State Hershey Medical Center, 838 F.3d 327 (3d Cir. 2016).
Although some claimed efficiencies from horizontal mergers can be hard to verify, many efficiencies from vertical mergers are inherent. Specifically, if upstream and downstream margins are positive, basic economic theory predicts that the merger will mitigate double marginalization. Empirical research confirms this. See, e.g., Gregory S. Crawford, et al., The Welfare Effects of Vertical Integration in Multichannel Television Markets, 86 Econometrica 891 (2018). Similarly, when vertically related firms make complementary investments, theory predicts—and empirical research confirms—that vertical mergers will internalize investment spillovers in a way that tends to expand investment. See, e.g., Chenyu Yang, Vertical Structure and Innovation: A Study of the SoC and Smartphone Industries, 51 Rand J. Econ. 739 (2020). Meanwhile, operational and transactional efficiencies can be supported by both theoretical and empirical evidence, as well as case-specific evidence about the merging firms.
Here, the ALJ’s findings of fact detail ongoing innovation by Illumina, including improvements to its next generation sequencing (NGS) technologies ranging from the release of new reagents to software updates expected to result from the merger. ID 88-89. The Initial Decision also describes a complex process of integration between Illumina’s NGS technology and the requirements of different MCED testing programs. ID 89-91.
Given the Commission’s disregard of efficiencies, it is unclear when or how procompetitive benefits could ever offset the harm alleged to result if the consummated merger were left undisturbed—harm that the Commission did not quantify in either magnitude or likelihood.
The efficiencies and competitive benefits here seem substantially easier to verify and quantify than the magnitude or likelihood of the supposed harm that the Commission neither quantified nor estimated. The Commission did not seriously try to quantify the effects of the merger on the timing and competitive significance of entry of complex clinical products, such as MCED tests, in early stages of development. Rather, the Commission simply asserted that “likely substantial harms to current, ongoing innovation competition in nascent markets are sufficiently probable and imminent to violate Section 7” of the Clayton Act, Opinion 60-61 (cleaned up). But the Commission identified no evidence to support this assertion, or to refute the ALJ’s determinations that MCED tests in development were not poised to enter into competition with Grail’s Galleri test, ID 143-144, that most of the research on possible MCED tests was relatively preliminary, ID 144-145, and that most of the tests being investigated appeared to be far from close substitutes for Galleri. ID 145-153; see also ID 27-28, 44-61.
Instead, the Commission disputed the legal relevance of those findings, stating that its analysis “rests on harm to current, ongoing R&D efforts, rather than the precise timing or nature of any firm’s commercialization of an MCED test.” Opinion 56 n. 38. But that harm, too, is assumed rather than observed, and is neither verified nor quantified.
Thus, the Commission’s prima facie case rests both on a peremptory dismissal of competitive benefits and efficiencies and an uncritical acceptance of speculative theories of harm. Pre-merger, Illumina maintained a substantial ownership interest in Grail of no less than 12%, ID 7-11, yet the Commission did not identify any attempts by Illumina or Grail to interfere with research and development of any MCED test that might enter to compete with Galleri. The only head-to-head R&D competition noted was between Grail and one firm with a pipeline MCED test (Exact/Thrive), on two dimensions: first, various “prelaunch” activities, such as “competing for mindshare with physicians, with health systems, with payers,” ID 34; second, competition for research scientists capable of contributing to the development of MCED tests, id. But there was neither allegation nor evidence that Illumina or Grail engaged in anticompetitive conduct in these areas, and no obvious way in which Illumina could exploit whatever market power it enjoys in NGS markets to foreclose access to “mindshare” or research scientists.
Given no past, present, or ongoing harm to third-party R&D efforts, there is no basis to ignore the likelihood of entry into the MCED test product market, the likely timing of entry, or the likely competitive significance of entry by particular MCED tests that might be relatively close or poor substitutes for Galleri.
Each of those factors is directly relevant to the present risk of potential harm to future competition. They determine whatever risk ongoing R&D into MCED tests would pose to Grail, and hence affect the merged firm’s foreclosure incentives. Equally relevant is the risk to Illumina’s core income stream from NGS sales and services should it prove unreliable or capricious in fulfilling its contracts. That core business includes diverse clinical testing well beyond the potential rivals at issue, ID 92-93, with clients including “leading genomic research centers, academic institutions, government laboratories and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.” ID 6.
Finally, the Commission contends that “[c]ourts have never held that efficiencies alone immunized an otherwise unlawful transaction.” Opinion 75. That puts the cart before the horse, as benefits from aligning incentives between producers of complements (what the Commission terms “efficiencies”) often determine whether a transaction—especially a vertical transaction—is “unlawful” in the first place.
Most important, the courts have never held that these benefits are irrelevant generally (as the FTC would have it), or to the question whether a transaction is unlawful in the first instance. To the contrary, analysis of a vertical merger must account for the procompetitive benefits and efficiencies it is likely to achieve. See AT&T I, 310 F. Supp. at 198 (noting need “to ‘balance’ whether the Government’s asserted harms outweigh the merger’s conceded consumer benefits.”). Even in horizontal mergers, sufficiently large efficiency benefits may prevent a merger from being illegal. New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179, 207 (S.D.N.Y. 2020).
Because AT&T II made clear that no presumption of illegality applies to vertical mergers, the Commission properly faces a rigorous burden to prove on case-specific evidence that the proposed merger is likely to cause substantial, actual harm to competition and consumers—not a possibility of some degree of harm to competition that in theory could harm consumers. The Commission has not carried that burden.
The Commission’s legal error went beyond its application of a misplaced presumption of illegality that is impervious to evidence of the benefits from combining complements. The Commission also failed to recognize key structural differences between horizontal and vertical mergers.
The primary source of potential anticompetitive harm from vertical integration is foreclosure. While foreclosure is not consistently defined, one passable definition is:
[A] dominant firm’s denial of proper access to an essential good it produces, with the intent of extending monopoly power from that segment of the market (the bottleneck segment) to an adjacent segment (the potentially competitive segment).
Patrick Rey & Jean Tirole, A Primer on Foreclosure, in 3 Handbook of Industrial Organization 2145, 2148 (Mark Armstrong & Robert H. Porter, eds.) (2007). Because denial of access is a crucial aspect of foreclosure, agreements (or remedies) granting access to essential goods or services can mitigate the risk of foreclosure.
Illumina’s “Open Offer” appears to grant such access, yet the Commission failed to give proper weight to its effect on the risk of anticompetitive conduct. In contrast, the ALJ examined the Open Offer in detail, see, e.g., ID 98-125, 182-189, finding that it “provides a comprehensive set of protections for Illumina’s customers for all aspects of conduct and competition.” ID 120. The Commission rejected those findings, relying in part on a mischaracterization of the Open Offer as only a proposed remedy, and in part on an overbroad repudiation of behavioral remedies.
First, the record indicates that the Open Offer is binding under New York law, at least with respect to several firms engaged in MCED research, and that it will remain so through August 2033. ID 103-04. Firms that have accepted (or will accept) the Open Offer can enforce it whether or not the merger is blocked; and they would have every incentive to do so if Illumina interfered with their R&D efforts. That is not just a proposed remedy, but a fully operative constraint. If accepted, the Open Offer will become part of the institutional framework within which Illumina operates, further reducing or eliminating the firm’s incentives and ability to raise its rivals’ costs. ID 103-04, 179. Cf. United States v. General Dynamics Corp., 415 U.S. 486, 501-02 (1974) (noting importance of existing contracts in assessing competitive landscape).
That constraint seems especially significant given how few firms might someday enter to compete with Grail’s MCED test, and the difficulty inherent in trying to forecast R&D competition so far in advance.
Second, the Commission strains credulity in disregarding the Open Offer on the grounds that behavioral remedies can be hard to monitor and tend to be disfavored. If the Open Offer were incorporated into a consent order, the FTC would have to monitor only a very few agreements. The affected parties would assist in monitoring compliance, well-funded would-be entrants would have every incentive to report any difficulty gaining access to Illumina’s sequencing technology, and the FTC could modify the order as needed. Illumina, for its part, would face both the risk of damages imposed under state law and the risk of statutory penalties, among other remedies, for violations of FTC consent orders.
Under the flexible Baker Hughes approach, the Commission should have accorded substantial weight to the Open Offer in assessing whether the Illumina-Grail transaction is truly likely to cause harm. This behavioral remedy is neither cumbersome nor ineffective. Given the Open Offer, the Commission does not appear to have established that harm to R&D competition is likely or imminent.
Economic and empirical research confirm that the Commission was wrong to conclude that vertical and horizontal mergers should be analyzed identically. Horizontal mergers, by definition, remove a competitor from a relevant market; vertical mergers do not. As the economics literature makes clear, that structural distinction is central to antitrust analysis.
The Supreme Court’s modern vertical restraints decisions underscore the importance of developments in the economic literature for assessing how to evaluate any type of integration under the antitrust laws. The Court removed per se prohibitions on vertical restraints in part because “economics literature is replete with procompetitive justifications for” them. Leegin, 551 U.S. at 889.
The economics literature is equally “replete with procompetitive justifications” for vertical integration. Vertical integration typically confers benefits, such as eliminating double marginalization, Reiffen & Vita, supra, 63 Antitrust L.J. 917; increasing R&D investment, Armour & Teece, supra, 62 Rev. Econ. & Stat. 470; and creating operational and transactional efficiencies, Carlton, supra, 73 Int’l J. Indus. Org. 1.
The logic behind EDM is simple: Vertical mergers can increase welfare, even if the upstream or downstream firm has market power. When firms “markup” their products over their marginal cost of production, that reduces output and increases the (input or distribution) costs of their (downstream or upstream) rivals. In other words, independent upstream and downstream firms can exert negative externalities on each other that ultimately push prices upwards. When firms have no incentive to consider the effect of their price (and output) determinations on downstream firms’ profits, see, e.g., Michael A. Salinger, Vertical Mergers and Market Foreclosure, 103 Q.J. Econ. 345 (1988), there is an additional markup over the downstream firm’s marginal cost of production, or “double marginalization.” Vertical mergers enable firms to coordinate their pricing behavior, eliminating this externality without the negative effects that coordination would entail in horizontal merger cases. See Reiffen & Vita, supra, 63 Antitrust L. J. at 920.
In a vertical merger, EDM is likely automatic. Id. That is “precisely opposite of the outcome that arises under the frequently used Cournot oligopoly model of horizontal competition with substitute products. Under Cournot oligopoly, joint pricing raises price; under Cournot complements [as in a vertical merger], it lowers price.” Daniel O’Brien, The Antitrust Treatment of Vertical Restraint: Beyond the Possibility Theorems, in Konkurrensverket, Swedish Competition Authority, Report: The Pros and Cons of Vertical Restraints 22, 36 (2008).[1]
To be clear, vertical mergers are not necessarily procompetitive. An integrated firm may have an incentive to exclude rivals, see Steven C. Salop & David T. Scheffman, Cost-Raising Strategies, 36 J. Indus. Econ. 19 (1985), and a vertical merger can have an anticompetitive effect if the upstream firm has market power and the ability, post-acquisition, to foreclose its competitors’ access to a key input. See Janusz A. Ordover, Garth Saloner & Steven C. Salop, Equilibrium Vertical Foreclosure, 80 Am. Econ. Rev. 127 (1990). In that regard, raising rivals’ costs can “represent[] a credible theory of economic harm” if other conditions of exclusionary conduct are met. Malcom B. Coate & Andrew N. Kleit, Exclusion, Collusion, and Confusion: The Limits of Raising Rivals’ Costs, FTC Bureau of Economics Working Paper No. 179 (1990). But this is merely a possibility, not a likely conclusion without solid empirical evidence: “The circumstances… in which [raising rivals’ costs] can occur are usually so limited that [it] almost always represents a minimal threat to competition.” Id. at 3.
The implications of vertical mergers are thus theoretically ambiguous, not typically anticompetitive. But while the Commission now seeks to equate horizontal and vertical mergers,
[a] major difficulty in relying principally on theory to guide vertical enforcement policy is that the conditions necessary for vertical restraints to harm welfare generally are the same conditions under which the practices increase consumer welfare.
James C. Cooper, et al., Vertical Antitrust Policy as a Problem of Inference, 23 Int’l. J. Indus. Org. 639, 643 (2005).
This structural ambiguity weighs against any presumption against vertical mergers, and suggests the importance of empirical research in formulating standards to evaluate vertical transactions.
Empirical evidence supports the established legal distinctions between horizontal mergers and vertical mergers (as well as other forms of vertical integration), indicating that vertical integration tends to be procompetitive or benign.
A meta-analysis of more than seventy studies of vertical transactions analyzed groups of studies for their implications for various theories or models of vertical integration, and for the effects of vertical integration. From that analysis
a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong.
Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 629, 677 (2007).
On the contrary, “under most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view.” Id. And “[a]lthough there are isolated studies that contradict this claim, the vast majority support it….” Id. Lafontaine and Slade accordingly concluded that “faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.” Id.
Another study of vertical restraints finds that, “[e]mpirically, vertical restraints appear to reduce price and/or increase output. Thus, absent a good natural experiment to evaluate a particular restraint’s effect, an optimal policy places a heavy burden on plaintiffs to show that a restraint is anticompetitive.” Cooper, et al., supra, 23 J. Indus. Org. at 639.
Subsequent research has reinforced these findings. Reviewing the more recent literature from 2009-18, John Yun concluded “the weight of the empirical evidence continues to support the proposition that vertical mergers are less likely to generate competitive concerns than horizontal ones.” John M. Yun, Vertical Mergers and Integration in Digital Markets, in The GAI Report on the Digital Economy (Joshua D. Wright & Douglas H. Ginsburg, eds., 2020) at 245.
Leading contributors to the empirical literature, reviewing both new studies and critiques of the established view of vertical mergers, maintain a consistent view. For example, testifying at a 2018 FTC hearing, Francine Lafontaine, a former Director of the FTC’s Bureau of Economics, acknowledged that some of the early empirical evidence is less than ideal, in terms of data and methods, but reinforced the overall conclusions of her earlier research “that the empirical literature reveals consistent evidence of efficiencies associated with the use of vertical restraints (when chosen by market participants) and, similarly, with vertical integration decisions.” Francine Lafontaine, Vertical Mergers (Presentation Slides), in FTC, Competition and Consumer Protection in the 21st Century; FTC Hearing #5: Vertical Merger Analysis and the Role of the Consumer Welfare Standard in U.S. Antitrust Law, Presentation Slides 93 (Nov. 1, 2018) (“FTC Hearing #5”), available at https://www.ftc.gov/system/files/documents/public_events/1415284/ftc_hearings_5_georgetown_slides.pdf. See also Francine Lafontaine & Margaret E. Slade, Presumptions in Vertical Mergers: The Role of Evidence, 59 Rev. Indus. Org. 255 (2021).
In short, empirical research confirms that the law properly does not presume that vertical mergers have anticompetitive effects, but requires specific evidence of both harms and efficiencies.
Critics of prevailing legal standards and agency practice have pointed to a few studies that might cast doubt on the ubiquity of benefits associated with vertical mergers. We briefly review several of those studies, including those discussed at the FTC’s 2018 “Competition and Consumer Protection in the 21st Century” hearings that purported to suggest that the “econometric evidence does not support a stronger procompetitive presumption [for vertical mergers].” Steven C. Salop, Revising the Vertical Merger Guidelines (Presentation Slides), in FTC Hearing #5, supra, Presentation Slides 25. In fact, these studies do not undermine the longstanding economic literature. See Geoffrey A. Manne, Kristian Stout & Eric Fruits, The Fatal Economic Flaws of the Contemporary Campaign Against Vertical Integration, 69 Kansas L. Rev. 923 (2020). “[T]he newer literature is no different than the old in finding widely procompetitive results overall, intermixed with relatively few seemingly harmful results.” Id. at 951.
One oft-cited study examined Coca-Cola and PepsiCo’s acquisitions of some of their downstream bottlers. Fernando Luco & Guillermo Marshall, The Competitive Impact of Vertical Integration by Multiproduct Firms, 110 Am. Econ. Rev. 2041 (2020). The authors presented their results as finding that “vertical integration in the US carbonated-beverage industry caused anticompetitive price increases in products for which double margins were not eliminated.” Id. at 2062. But the authors actually found that, while such acquisitions were associated with price increases for independent Dr Pepper Snapple Group products, they were associated with price decreases for both Coca-Cola and PepsiCo products bottled by vertically integrated bottlers. Because the products associated with increased prices accounted for such a small market share, “vertical integration did not have a significant effect on the price index when considering the full set of products.” Id. at 2056. Overall, the consumer impact was either an efficiency gain or no significant change. As Francine Lafontaine characterized the study, “in total, consumers were better off given who was consuming how much of what.” FTC Hearing #5, supra, Transcript 88 (statement of Francine Lafontaine), available at https://www.ftc.gov/system/files/documents/public_events/1415284/ftc_hearings_session_5_transcript_11-1-18.pdf.
In another study often cited by skeptics of vertical integration, Justine Hastings and Richard Gilbert examined wholesale price changes charged by a vertically integrated refiner/retailer using data from 1996-98. Justine S. Hastings & Richard J. Gilbert, Market Power, Vertical Integration, and the Wholesale Price of Gasoline, 33 J. Indus. Econ. 469 (2005). They observed that the firm charged higher wholesale prices in cities where its retail outlets competed more with independent gas stations, and concluded that their observations were consistent with the theory of raising rivals’ costs. Id. at 471.
In subsequent research, however, three FTC economists publishing in the American Economic Review examined retail gasoline prices following the 1997 acquisition of an independent gasoline retailer by a vertically integrated refiner/retailer. Their estimates suggested that the merger was associated with minuscule—and economically insignificant—price increases. Christopher T. Taylor, et al., Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California: Comment, 100 Am. Econ. Rev. 1269 (2010).
Hastings explains the discrepancy with Taylor et al., by noting the challenges of evaluating vertical mergers with incomplete data or, simply, different data sets, as seemingly similar data can yield very different results. Justine Hastings, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California: Reply, 100 Am. Econ. Rev. 1227 (2010). But that observation does not undercut Taylor et al.’s findings. Rather, it suggests caution in drawing general conclusions from this line of research, even with regard to gasoline/refiner integration, much less to vertical integration generally.
Other commonly cited studies are no more persuasive. For example, one study examined vertical mergers between cable-programming distributors and regional sports networks using counterfactual simulations that enforced program access rules. Crawford, et al., supra, 86 Econometrica 891. While some have characterized their findings as “mixed” (FTC Hearing #5, supra, Transcript 54 (statement of Margaret Slade))—suggesting that vertical integration could have some negative as well as positive effects—their overall results indicated “that vertical integration leads to significant gains in both consumer and aggregate welfare.” Crawford, et al., supra, 86 Econometrica at 893-894.
Harvard economist Robin Lee, a co-author of the study, concluded that the findings demonstrated that the consumer benefits of efficiency gains outweighed any harms from foreclosure. As he testified at the FTC’s 2018 hearings,
our key findings are that, on average, across channels and simulations, there is a net consumer welfare gain from integration. Don’t get me wrong, there are significant foreclosure effects, and rival distributors are harmed, but these negative effects are oftentimes offset by sizeable efficiency gains. Of course, this is an average. It masks considerable heterogeneity.
FTC, Competition and Consumer Protection in the 21st Century: FTC Hearing #3: Multi-Sided Platforms, Labor Markets, and Potential Competition, Transcript 101 (Oct. 17, 2018), available at https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_3_10-17-18_0.pdf.
While these studies indicate that vertical mergers can sometimes lead to harm, that point was never disputed. What is important is that the studies do not support any general presumption against vertical mergers or, indeed, any revision to either the legal distinction between horizontal and vertical mergers or to what was, up to now, established agency practice in merger review. The weight of the empirical evidence plainly indicates that vertical integration tends to be procompetitive; hence, no presumption of anticompetitive effects or of illegality should apply, and none should have been applied here.
There is much at stake here. The potential for harm from the merger seems speculative, but the benefits seem conspicuous and substantial, not only reducing the risk of net competitive harm but promising significant enhancement to consumer welfare. As the Commission observed, “better screening methods to detect more cancers at an earlier stage … have the potential to extend and improve many human lives.” Opinion 3. Those benefits should not be forestalled by speculation about possible harms that ignores the differences between vertical and horizontal mergers.
The FTC’s decision should be reversed.
[1] Many discussions of the competitive effects of vertical mergers, including the Vertical Merger Guidelines, conflate EDM, investment benefits, and transactional efficiencies.
TOTM The Federal Trade Commission (FTC) recently announced that it would sue to block Amgen’s proposed $27.8 billion acquisition of Horizon Therapeutics. The challenge represents a . . .
The Federal Trade Commission (FTC) recently announced that it would sue to block Amgen’s proposed $27.8 billion acquisition of Horizon Therapeutics. The challenge represents a landmark in the history of pharmaceutical-industry antitrust enforcement, as the industry has largely been given license to engage in permissive mergers and acquisitions of smaller companies without challenge.
In Part One, I reviewed the basic structure and function of the pharmaceutical industry, as well as the theory of harm that the FTC is bringing. In this part, I take a much deeper dive into the economic literature to determine whether the FTC’s theory of harm is likely to hold up in court and whether the commission has picked the right forum in which to bring its claims.
TOTM In a world in which so-called “Big Tech” has dominated antitrust discussions for a decade or more, who would’ve guessed that golf would grab the . . .
In a world in which so-called “Big Tech” has dominated antitrust discussions for a decade or more, who would’ve guessed that golf would grab the biggest headlines? The proposed merger of the PGA Tour and LIV Golf has some major headline-grabbing potential: sports, big money, big names, 9/11, human-rights abuses, and cringeworthy public-relations attempts.
Aside from those issues, the PGA-LIV link-up also presents some important issues for antitrust enforcers.
