Brief of Former Antitrust Officials and Scholars to the 9th Circuit in CoStar v CREXi
INTEREST OF AMICI CURIAE[1]
Amici Curiae are former antitrust officials and scholars who have spent decades enforcing and studying the Nation’s antitrust laws. Amici believe the decision reached by the panel, if upheld, would upend foundational antitrust principles and open the floodgates to baseless antitrust suits.
Amici are the following:[2]
Timothy J. Muris, J.D., is a George Mason University Foundation Professor of Law at Antonin Scalia Law School, George Mason University, and a Senior Counsel at Sidley Austin LLP. He served as Chairman of the FTC from 2000-2004. Before being elevated to Chairman, Tim served as Director of the Bureau of Consumer Protection and Director of the Bureau of Competition. He is the only person ever to head both of the agency’s enforcement bureaus.
Alden Abbott, J.D., is a Senior Research Fellow focusing on antitrust issues at the Mercatus Center at George Mason University. He served as General Counsel of the FTC from 2018-2021, where he represented the Commission in court and provided legal advice to its representatives.
Daniel J. Gilman, J.D., Ph.D., is a Senior Scholar of Competition Policy at the International Center for Law & Economics. He previously served as an attorney advisor in the FTC’s Office of Policy Planning and as the Victor H. Kramer Foundation Fellow in antitrust law and economics at Harvard Law School.
Justin (Gus) Hurwitz, J.D., is the Director of Law & Economics Programs at the International Center for Law & Economics and a Senior Fellow and Academic Director of the Center for Technology, Innovation, and Competition at the University of Pennsylvania Carey Law School. He previously served as a trial attorney with the U.S. Justice Department Antitrust Division in the Telecommunications and Media Enforcement section.
Geoffrey A. Manne, J.D., is the President and Founder of the International Center for Law & Economics and serves as distinguished fellow at Northwestern University’s Center on Law, Business, and Economics, and as visiting professor of law at IE University (Madrid). Before founding ICLE in 2009, he served as a law professor at Lewis & Clark Law School and as a Bigelow Fellow and Lecturer in Law at the University of Chicago Law School.
INTRODUCTION AND SUMMARY OF ARGUMENT
The Sherman Act is the “Magna Carta of free enterprise.” Verizon Commc’ns Inc. v. Law Offs. of Curtis v. Trinko, LLP, 540 U.S. 398, 415 (2004). It directs itself “not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993). And it does so not to protect corporate or private interests, but from concern for consumer welfare and the public interest. Id. The antitrust laws are thus “not designed to equip [a] competitor with [its rival’s] legitimate competitive advantage.” Omega Env’t, Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1163 (9th Cir. 1997).
For almost four decades, CoStar Group, Inc. and CoStar Realty Information, Inc. (“CoStar”) have provided commercial real estate (“CRE”) services. Commercial Real Estate Exchange Inc. (“CREXi”), launched roughly a decade ago, is attempting to build its own CRE platform. CoStar filed suit against CREXi in September 2020, alleging that CREXi “harvests content … from CoStar’s subscription database without authorization by using passwords issued to other companies.” SER-12; 124–34. In response, CREXi filed eight counterclaims for violations of the Sherman Act and the Cartwright Act. The district court twice dismissed them all. 1-ER-2–44.
A panel of this court reversed. In doing so, it made two critical errors warranting en banc review. First, the panel created an intra-circuit conflict and put this Court on the wrong side of a circuit split by concluding that CREXi plausibly alleged that CoStar’s contractual provisions with brokers are “de facto” exclusivity provisions that violate the Sherman Act. Op. 24–26. This Court had never before “explicitly recognized a ‘de facto’ exclusive dealing theory.” Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., 836 F.3d 1171, 1182 (9th Cir. 2016). And for good reason: A careful examination of this theory reveals that it lacks a sound doctrinal foundation, and that precedent, historical context, and administrability concerns all counsel strongly against recognizing this theory.
Second, the panel misapplied out-of-circuit precedent and created another intra-circuit conflict on an issue of exceptional importance in concluding that CoStar “substantially foreclosed” brokers from dealing with CREXi. Op. 12–20. Despite the fact that no party briefed the issue, the panel held sua sponte that “even though monopoly power is not a necessary element of a Section 1 claim, it is sufficient to allege the substantial foreclosure element of exclusive dealing.” Id. at 13. But this Court has rejected exclusive dealing claims brought against monopolists for lack of substantial foreclosure. See, e.g., FTC v. Qualcomm, Inc., 969 F.3d 974, 1004 (9th Cir. 2020). Further, although substantial foreclosure applies with equal force to Section 1 and Section 2 claims, the panel analyzed substantial foreclosure only with respect to CREXi’s claims under Section 1 of the Sherman Act. Op. 12–13.
The panel’s opinion contravenes binding authority and bedrock antitrust principles. This Court should grant en banc review to secure uniformity of this Court’s decisions and get the Court back on the right side of a circuit split.
ARGUMENT
I. The De Facto Exclusive Dealing Theory Cannot Be Used To Transform Non-Exclusive Contractual Provisions Into Exclusivity Provisions.
Despite acknowledging that this Court had “yet to recognize a de facto exclusive dealing theory,” Op. 23, the panel did so here. That was error. Several circuits have declined to apply this theory, and a close examination of its underpinnings reveals that it lacks any sound doctrinal foundation. The Court should not recognize it.
A. The De Facto Exclusive Dealing Theory Lacks Any Doctrinal Foundation.
The notion of de facto exclusive dealing can be traced back to a century-old case involving Section 3 of the Clayton Act, United Shoe Mach. Corp. v. United States, 258 U.S. 451 (1922). In United Shoe, the Supreme Court held that a contract falls within the Clayton Act’s section as to exclusivity, even though the contract does “not contain specific agreements not to use the [goods] of a competitor,” if “the practical effect … is to prevent such use.” Id. at 457. The Court noted that the provisions at issue there amounted to “tying agreements” and that, due to the “dominating position in supply shoe machinery” occupied by United Shoe, they “effectually prevent[ed] [the lessee] from acquiring the machinery of a competitor,” except “at the risk of forfeiting the right to use the machines furnished by” United Shoe. Id. at 457–58.
Though this theory first emerged in United Shoe, the few modern cases recognizing de facto exclusive dealing as a valid theory have relied on language from yet another case involving Section 3 of the Clayton Act—Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320 (1961). In Tampa Electric, the Court surveyed its cases “pass[ing] upon questions arising under [Section] 3” of the Clayton Act, including its holding in United Shoe, and concluded that a contract “found to be an exclusive dealing arrangement” does not violate “[S]ection [3] unless the court believes it probable that performance of the contract will foreclose competition in a substantial share of the line of commerce affected.” Id. at 325, 327. Notably, the Court “assume[d], but d[id] not decide” that the requirements contract at issue in fact was “an exclusive-dealing arrangement within the compass of [Section] 3,” and ultimately held that the contract did not violate Section 3. Id. at 330, 335. So too, because the contract did not “fall within the broader proscription” of the Clayton Act, the court concluded that “it is not forbidden by” Section 1 and 2 of the Sherman Act. Id. at 335.
As the panel recognized, from these humble beginnings in Section 3 cases, two of this court’s sister circuits have recognized a de facto exclusive dealing theory. See Op. 24 (citing ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 282 n.14 (3d Cir. 2012) & McWane, Inc. v. FTC, 783 F.3d 814, 819–20, 833–35 (11th Cir. 2015)).[3] Under this theory, though a contract does not contain an agreement to deal exclusively, courts will “look ‘past the terms of’” the non-exclusive contract “to ascertain the relationship between the parties and the effect of the agreement in the real world.” Aerotec, 836 F.3d at 1182 (quoting ZF Meritor, LLC, 696 F.3d at 270). But the Third Circuit and Eleventh Circuit’s precedent is a slender reed. It should not guide this Court.
The Third Circuit became the first circuit since the turn of the century to bless this theory in LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc). Though the court did not mention the theory by name, the court rejected 3M’s argument that an arrangement “that contained no express exclusivity requirement” could not support an exclusive dealing claim under Section 2, and held that the arrangement—bundled rebates and discounts offered to major suppliers—were designed to and did operate as exclusive dealing arrangements. Id. at 157. Not long after, in another Section 2 case, the court similarly reasoned that “a series of independent sales” could be an “exclusive dealing arrangement” if accompanied by certain “economic elements”—i.e., sufficiently large market share and exclusionary conduct. United States v. Dentsply Int’l, Inc., 399 F.3d 181, 193–94 (3d Cir. 2005).
In ZF Meritor, the Third Circuit offered its most thorough discussion of this theory. There, the court held that “an exclusive dealing claim does not require a contract that imposes an express exclusivity obligation” or “a contract that covers 100% of the buyer’s needs” because “de facto exclusive dealing may be unlawful.” ZF Meritor, 696 F.3d at 282 & n.14. The legality of such a contract, the court reasoned, turns on “whether the agreement foreclosed a substantial share of the relevant market such that competition was harmed.” Id. at 283. But even in crediting such a claim, the court acknowledged that “‘partial’ exclusive dealing is rarely a valid antitrust theory” because contracts that are not “100% exclusive” are “generally lawful because market foreclosure is only partial, and competing sellers are not prevented from selling to the buyer.” Id. at 283 (collecting cases rejecting such claims).
Finally, in McWane, the Eleventh Circuit became only the second circuit court to recognize this theory. McWane—a major player in the iron pipe fittings market—announced that, with limited exceptions, “unless [their distributors] bought all of their domestic fittings from McWane, they would lose their rebates and be cut off from purchases for 12 weeks.” McWane, 783 F.3d at 819. The FTC brought an enforcement action under Section 5 of the FTC Act and ultimately found that McWane’s actions “constituted an illegal exclusive dealing policy.” Id. Critically, the Commission and the ALJ found that distributors were “essential to the domestic fittings market” because there were no “viable alternate distribution channels, including direct sales to end users.” Id. at 834.
Before the Eleventh Circuit, McWane argued that its exclusivity program was “presumptively legal” because it was “short-term and voluntary.” Id. at 833. The Court noted that neither its precedent nor precedent from the Supreme Court spoke “specifically to this issue,” but it ultimately agreed with the FTC that the de facto exclusive dealing approach from Dentsply and ZF Meritor was “consistent with the Supreme Court’s instruction to look at the ‘practical effect’ of exclusive dealing arrangements.” Id. at 834 (citing Tampa Elec., 365 U.S. at 326–28). Grafting this framework from the Section 3 context onto its analysis, the court considered “market realities” rather than “formalistic distinctions” and rejected “McWane’s argument that the specific form of its exclusivity mandate” made it “presumptively legal” and thus “insulated … from antitrust scrutiny.” Id. at 835.
Though this Court in Aerotec described McWane as a de facto exclusive dealing case akin to the Third Circuit’s decision in ZF Meritor, McWane did not involve the sort of de facto exclusive dealing theory that CREXi pressed below. Like in ZF Meritor, CREXi urged the district court to “look past the terms of the contract” to its “effect … ‘in the real world,’” and conclude that—even though CoStar’s agreements lack an ‘express exclusivity requirement—they amount to de facto exclusive dealing. 2-ER-51. In McWane, however, everyone agreed that McWane’s exclusivity program constituted exclusive dealing. 783 F.3d at 834–35. The Eleventh Circuit’s analysis of the “practical effect” of the program thus concerned only whether the program substantially foreclosed competition. McWane, 783 F.3d at 833–35.
As all this makes clear, the theoretical underpinnings of the de facto exclusive dealing theory are threadbare. Prior to the panel’s ruling, the Third Circuit was the only circuit court that has imported this doctrine into Section 2 cases. Only one opinion—ZF Meritor—had ever extended this doctrine to an exclusive dealing claim under Section 1, and it offered nothing more than ipse dixit and its own Section 3 Clayton Act precedent to do so. As noted, Tampa Electric declined to consider whether such a contract could violate Section 1 or Section 2, see 365 U.S. at 335, so its analysis offers no support for this doctrinal move.
B. This Court’s Cases, Historical Context, and Administrability Concerns Counsel Strongly Against Recognizing The De Facto Exclusive Dealing Theory.
1. This Court’s prior cases cut sharply against the de facto exclusive dealing theory. As this Court held in Aerotec, “[a] prerequisite to any exclusive dealing claim is an agreement to deal exclusively.” 836 F.3d at 1181. And in evaluating these claims, this Court has made clear that courts must focus on “the actual terms of the agreements,” including “whether there are requirements terms” or “volume of market share targets.” Id. The de facto exclusive dealing theory the panel adopted is incompatible with this approach. Indeed, this Court has already recognized as much. In Aerotec, this Court canvassed the aforementioned de facto exclusive dealing cases. Id. at 1182–83. In doing so, the Court explained, that in “any exclusive dealing claim”—actual or de facto—“the court first [must] be satisfied that specific features of the agreement required exclusivity.” Id. at 1183.
Here, however, the panel strained to find de facto exclusivity in the relevant agreements. See Op. 24–26. To start, the panel conceded that the contracts at issue did not “contain [the] rebate or discount terms that create[d] de facto exclusivity” in ZF Meritor and McWane. Id. at 24. Without a sufficient textual basis in the agreements, the panel instead credited CREXi’s threadbare allegation that three brokers had supposedly “declined to work with CREXi” based on CoStar’s terms. See Op. 26; 4-ER-578–79 (¶¶ 66-68); Pet. for Reh’g En Banc at 4. The panel overstepped its bounds. Notwithstanding CREXi’s meager allegations concerning CoStar’s exclusionary practices, CREXi conceded that it has hundreds of customers who use CoStar’s web tools. 4-ER-633 (¶ 257); see 2-ER-182–183; 4-ER-634 (¶ 260). And given that the Supreme Court has held that courts are “ill suited” to identify proper “terms of dealing,” they are even more inadequately stationed to police “terms of dealing” based on third parties’ reactions to non-exclusive contract terms. See Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc, 555 U.S. 438, 452 (2009). Indeed, no court has entertained such a broad conception of de facto exclusive dealing divorced from express contractual terms.
Tellingly, no court that has adopted the de facto exclusive dealing theory has offered any rationale—let alone a convincing one—for uncritically grafting United Shoe’s and Tampa Electric’s “practical effect” test for Clayton Act Section 3 cases onto Sherman Act cases. And the panel here did not try to either. While this test arguably flows from the Clayton Act, United Shoe, 258 U.S. at 457, it is not clear that the same can be said for the Sherman Act. See Aerotec, 836 F.3d at 1181. Indeed, given that both United Shoe and Tampa Electric employ an ”approach [that] is a relic from a bygone era of statutory construction,” Food Mktg. Inst. v. Argus Leader Media, 588 U.S. 427, 437 (2019), courts should be skeptical that such an approach accords with the Sherman Act.
To that end, the panel made little effort to ground the de facto exclusive dealing theory in foundational antitrust principles. Rather, it simply reasoned that not recognizing the theory would produce an “overly formalistic rule.” Op. 24. Far from rote formalism, however, tethering de facto exclusive dealing claims to the contractual text provides guardrails against limitless antitrust liability for parties’ ordinary, procompetitive practices. If this Court breaks from Aerotec and recognizes a de facto exclusive dealing theory for the first time, it should—as a full court— explain how the theory accords with traditional antitrust principles, including the core principle that courts are “ill suited” to determine terms of dealing for parties. Linkline, 555 U.S. at 452.
2. Historical context likewise cautions against jettisoning the bright-line rule applied by other circuits. As the leading treatise has noted, the historical record shows that before the Clayton Act, exclusive dealing arrangements were analyzed under the Sherman Act and the vast majority were found lawful, “just as they had always been at common law.” Areeda & Hovenkamp, Antitrust Law ¶ 1800c (Aug. 2023).
Moreover, institutional and administrability concerns counsel restraint. The Supreme Court has “repeatedly emphasized the importance of clear rules in antitrust law.” Linkline, 555 U.S. at 452. Aerotec provided a clear rule: “A prerequisite to any exclusive dealing claim is an agreement to deal exclusively.” 836 F.3d at 1181. And in evaluating exclusive dealing claims, courts must look only to the agreement’s text. Id. The panel broke sharply with this rule, rejecting it as “overly formalistic.” Op. 24. This Court must choose between Aerotec’s rule and the panel’s ill-defined approach. It should grant en banc review to do so.
* * *
In sum, the panel discarded Aerotec’s clear, administrable rule—that “[a] prerequisite to any exclusive dealing claim is an agreement to deal exclusively,” 836 F.3d at 1181—in favor of the amorphous de facto exclusive dealing theory. While amici urge the Court to resolve this intra- circuit conflict by making clear that any exclusive dealing claim must fail unless the terms and features of the agreement require exclusivity, the Court could instead do here what it did in Aerotec and “not reach the issue” of whether to “explicitly recogniz[e]” the de facto exclusive dealing theory as a viable theory, 836 F.3d at 1182, and instead grant en banc review and reverse the panel’s error on substantial foreclosure.
II. Monopoly Power Alone Is Insufficient To Allege The Substantial Foreclosure Element of Sherman Act Claims.
Relying on a misreading of out-of-circuit precedent rather than the record, the panel separately erred by finding that CoStar’s allegedly exclusive dealing substantially foreclosed the market. This error was premised on the panel’s conclusion that “monopoly power … is [alone] sufficient to allege the substantial foreclosure element of exclusive dealing.” Op. 13. That is wrong. Two flaws undermine the panel’s substantial foreclosure holding. First, as both parties agreed, substantial foreclosure is an independent element of every exclusive dealing claim. Second, without any justification, the panel’s ruling addressed the substantial foreclosure requirement only for claims arising under Section 1 of the Sherman Act. This requirement, however, applies with equal force to Section 2 monopolization claims.
A. Substantial Foreclosure Is An Independent Element of Exclusive Dealing Claims.
Without the benefit of briefing on the issue, the panel crafted its substantial-foreclosure rule from dicta in ZF Meritor. Op. 12–13. There, the Third Circuit noted that “[i]f the defendant occupies a dominant position in the market, its exclusive dealing arrangements invariably have the power to exclude rivals.” 696 F.3d at 284. Reasoning from this statement, the panel concluded that “even though monopoly power is not a necessary element of a § 1 claim, it is sufficient to allege the substantial foreclosure element of exclusive dealing.” Op. 13. That misreading creates an intra-circuit conflict with this Court’s holding in Qualcomm that exclusive dealing claims require an independent finding of substantial foreclosure. The panel’s sua sponte distortion is precisely the sort of error that merits rehearing en banc. Cf. Alvarez v. Tracy, 773 F.3d 1011, 1024 (9th Cir. 2014) (Kozinski, J., dissenting) (criticizing panel majority for “[r]elying on a ground not raised by either party [] or in the district court”), superseded sub nom. by Alvarez v. Lopez, 835 F.3d 1024 (9th Cir. 2016) (opinion of Kozinski, J.).
In Qualcomm, this Court made clear that even monopolists must substantially foreclose competition to be subject to exclusive dealing claims. There, unlike here, Qualcomm indisputably enjoyed a dominant position in the cellular modem chip markets. Throughout an extended period prior to the litigation, for example, it controlled “over 90% of market share” in one of the relevant markets. See Qualcomm, 969 F.3d at 983 (emphasis added). Despite Qualcomm “possess[ing] monopoly power,” however, the Court held that the contracts at issue did not substantially foreclose competition. Id. at 1004. Accordingly, it reversed the district court’s finding of exclusive dealing, which constituted “an improper excursion beyond the outer limits of the Sherman Act.” Id. at 982.
Other circuits are in accord. See Pet. for Reh’g En Banc at 12–13 (collecting cases). These cases, many of which the panel relies upon, have long followed the Supreme Court’s directive in Tampa Electric: To prevail on an exclusive dealing claim, “the competition foreclosed . . . must be found to constitute a substantial share of the relevant market.” 365 U.S. at 326–28. This requirement is not perfunctory. As the panel’s citation to United States v. Microsoft made clear, a court must find actual anticompetitive effect; it may not simply assert it: “[I]t is clear that in all cases the plaintiff must . . . prove the degree of foreclosure.” 253 F.3d 34, 69 (D.C. Cir. 2001) (emphasis added).
Likewise, the Third Circuit’s opinion in ZF Meritor plainly stated that “modern antitrust law generally requires a showing of [both] significant market power by the defendant [and] substantial foreclosure.” 696 F.3d at 271. The panel brushed past this, instead focusing on the ZF Meritor court’s assertion that monopolists’ “exclusive dealing arrangements invariably have the power to exclude rivals.” Id. at 284; Op. 12–13. Reasoning from this assertion, the panel correctly observed that a monopolist’s agreements “can substantially foreclose competition,” Op. 12. But it did not meaningfully analyze whether CoStar’s agreements actually do so. Because the panel failed to credit any allegations that the agreements truly “foreclosed competition in a substantial share of the market,” it could not find that CREXi plausibly alleged an exclusive dealing claim. Allied Orthopedic Appliances Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 998 (9th Cir. 2010).
At bottom, courts have consistently required parties to provide evidence demonstrating that the challenged conduct has actually foreclosed a substantial share of the relevant market. And CREXi has plainly failed to do so. By allowing monopoly power to stand in for this evidentiary showing, the panel departs from precedent and undermines the rigor of the substantial foreclosure inquiry.
C. The Substantial Foreclosure Element Likewise Applies to Sherman Act Section 2 Claims.
The panel likewise misconstrued the Sherman Act by concluding that, because “exclusive agreements are an example of anticompetitive conduct[,] if CREXi plausibly alleges that CoStar entered into exclusive agreements that foreclose competition under § 1, it has also plausibly alleged that CoStar engaged in anticompetitive conduct under § 2.” Op. 13. That is wrong. The panel ignored that substantial foreclosure is an independent requirement for both Section 1 and Section 2 claims. Although the panel opinion is technically correct insofar as it can be read to say that a plausible allegation of substantial foreclosure under Section 1 would translate to a plausible allegation of substantial foreclosure under Section 2, its holding risks allowing future litigants to bypass the Section 2 requirement entirely. And by brushing past the Section 2 requirement, the panel again ignored this Court’s precedent. In Qualcomm, for instance,
this Court reversed the district court’s “specific finding” that “Qualcomm violated both sections of the Sherman Act” by signing exclusive deals that foreclosed a substantial share of the chip market. 969 F.3d at 1003.
In short, the panel’s treatment of substantial foreclosure risks opening the floodgates to all manner of meritless Sherman Act claims.
CONCLUSION
The Court should grant en banc review and reverse the panel’s decision.
[1] No party’s counsel authored the brief in whole or part. No party or party’s counsel contributed money intended to fund preparing or submitting the brief. No person other than amici or their counsel contributed money intended to fund preparing or submitting the brief.
[2] Amici submit this brief in their personal capacities and, accordingly, speak only for themselves personally and not for any entity or other person.
[3] At least two of this Court’s sister circuits have briefly examined this theory before rejecting such claims outright. See United Air Lines, Inc. v. Austin Travel Corp., 867 F.2d 737, 742 (2d Cir. 1989); Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1058–60 (8th Cir. 2000); Se. Mo. Hosp. v. C.R. Bard, Inc., 642 F.3d 608, 612–13 (8th Cir. 2011).