Articles Posted in Antitrust News

Unpacking the Implications of the FTC’s Antitrust Case Against Amazon for Online Marketplace Competition

October 22, 2024 | Bona Law PC

The Federal Trade Commission has survived a motion to dismiss in a high-stakes lawsuit against Amazon, igniting critical discussions about competition in the online marketplace. As a dominant player in global e-commerce, Amazon’s practices have long affected both consumers and competitors. Will this case change those practices or otherwise have implications for online marketplaces?

Important Note

Bona Law is currently representing Zulily in a similar lawsuit against Amazon in federal district court. You can read the complaint here.

About the Case

The FTC’s lawsuit, filed in Washington State federal court, stems from allegations that Amazon engages in anticompetitive practices that inhibit competition and violate the Sherman Act, the FTC Act, and consumer protection laws. The FTC alleges Amazon pricing practices harm competition by limiting consumer choices, and that Amazon engages in coercive tactics that disadvantage third-party sellers, creates barriers for new entrants, overcharges sellers, and makes it more expensive for sellers to offer their products on other platforms. Numerous states have joined the FTC’s lawsuit.

Amazon denies the allegations and asserts that its practices benefit consumers and competition. The court dismissed some state law claims but has otherwise allowed the lawsuit to proceed, with trial scheduled for October 2026.

Will the Case Affect Amazon’s Competitors?

For Amazon’s existing competitors, the FTC’s actions could provide both opportunities and challenges. If the lawsuit successfully restricts Amazon’s anti-competitive practices, it may level the playing field for other marketplaces like Walmart, eBay, and Shopify. These companies have often struggled to compete with Amazon’s extensive resources, alleged anticompetitive conduct, and customer loyalty programs. A more dynamic marketplace could enable them to attract more sellers and consumers, driving innovation and diversity in e-commerce offerings.

Moreover, if Amazon’s pricing strategies are curtailed, consumers could benefit through lower prices and improved service from competitors. This could encourage a competitive environment where companies strive to enhance their offerings, benefiting consumers.

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Mergers & Acquisitions, AI and Antitrust: The New Creative Ways for Big Tech to Enter the AI Market and Avoid HSR Rules

July 21, 2024 | Bona Law PC

Author: Luis Blanquez

Two of the main pillars from the Biden Administration Antitrust Policy in 2023 have been an aggressive merger enforcement agenda and its crusade against Big Tech and vertical integration.

On the merger side, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have published new Merger Guidelines (see also here) and proposed new changes to Hart-Scott-Rodino Act (HSR) notification requirements (see also here.) In addition, both antitrust agencies have challenged more mergers in 2022 and 2023 than ever before. In a letter from November 2023 responding to questions from Rep. Tom Tiffany, R-Wis., FTC Chair Lina Khan stressed the fact that:

“a complete assessment of the FTC’s success in stopping harmful mergers reveals that of the 38 mergers challenged during my tenure as Chair, 19 were abandoned, another 14 were settled with divestitures, and two are pending a final outcome.”

This includes key acquisitions such as the Nvidia/Arm Ltd or Meta/Within, among many others. And the FTC is showing no signs of slowing down this aggressive approach. Another recent example of a merger challenge by the DOJ is the Live Nation/Ticketmaster’s complaint.

But despite the FTC’s Chair confidence and the recent new challenge by the DOJ, this hasn’t been an easy path for the antitrust enforcers. Courts in the US have pushed back several of the agencies’ extreme challenges and new theories, such as in the Microsoft/Activision, (see also here, here, and here.)

On the Big Tech front things do not look much better. Both agencies have filed major illegal monopolization cases, sometimes together with State AGs, against Apple (Smartphones), Google (Google Search and Google Ad Technology), Amazon (Online Retail), and Meta (Instagram/WhatsApp––see also here––, and Within acquisitions.)

In other words, if you work in Big Tech, forget about acquiring an AI startup, unless you want to go through a long and hostile review process. This is having a serious impact on the most disruptive and growing industry we’ve seen in years.

The “Magnificent Seven” Tech Companies

The ascendency of Apple, Microsoft, Nvidia, Tesla, Meta, Alphabet and Amazon, the so-called “Magnificent Seven” tech stocks––is indicative of “a fundamental shift”, primarily propelled by advancements in AI. Currently, the top seven tech stocks have not only accounted for about half of the gains in the entire S&P 500, but also contributed to over a quarter of the index’s total market capitalization. These companies are not merely riding the wave of current technologies but actively shaping the future of AI. They collectively gather most of the market cap in the industry.

But until we see a shift on the current enforcers’ antitrust policy against acquisitions involving Big Tech, it doesn’t matter how well these companies perform. Why? Because as a startup in the tech industry (and really in any industry), your main goal is to either try to eventually go public through an IPO––if you become big enough––, or rather look for one of the Big Tech companies to acquire you. But with the antitrust agencies’ current appetite to block such transactions, Venture Capital companies and investors in the AI industry are thinking twice before risking their money on a startup, unless they specifically know that company is going public. Otherwise, the risk that VCs and investors see to get the deal blocked by either the FTC or DOJ is just too high, regardless of the potential these startups might have. And let’s be honest, the number of companies that make it to that level is already extremely low.

First, this is clear evidence of how such an aggressive and disproportionate approach to acquisitions involving Big Tech is currently hindering innovation in the most relevant and disruptive industry we’ve seen in years. But this is a topic for another article.

Second, what I want to discuss in this article is how because of such an extreme approach from the Biden Administration, Big Tech are starting to develop new and creative strategies to get involved in the AI industry, without having to acquire any startups and face the antitrust agencies. At least not until now, because this has already raised some eyebrows at both the DOJ and FTC.

Microsoft/Inflection

The first of these deals involves Microsoft and Inflection.

Backed by Microsoft, Nvidia and billionaires Reid Hoffman, Bill Gates and Eric Schmidt; ex-DeepMind leader Mustafa Suleyman––now Google’s main AI lab, and Reid Hoffman, who co-founded LinkedIn, started Inflection in 2022, claiming to have the world’s best AI hardware setup.

Inflection thesis was based on AI systems that can engage in open-ended dialogue, answer questions and assist with a variety of tasks. Named Pi for “personal intelligence,” Inflection’s first release helped users talk through questions or problems over back-and-forth dialog it then remembers, seemingly getting to know its user over time. While it can give fact-based answers, it’s more personal and “human” than any other chatbot.

In March of this year, Microsoft announced the payment of $650 million to inflection. $620 million for non-exclusive licensing fees for the technology (meaning Inflection is free to license it elsewhere) and $30 million for Inflection to agree not to sue over Microsoft’s poaching, which includes co-founders Mustafa Suleyman and Karén Simonyan. Suleyman will run Microsoft’s newly formed consumer AI unit, called Microsoft AI–– a new division at Microsoft that will bring together their consumer AI efforts, as well as Copilot, Bing and Edge––, whereas Simonyan is joining the company as a chief scientist in the same new group. Inflection will host Inflection-2.5 on Microsoft Azure. It will be also pivoting away from building the personalized AI chatbot Pi to become an AI studio helping other companies work with large language model AI.

So here is where it gets interesting. Microsoft didn’t formally need to make an offer to acquire Inflection. In other words, technically Inflection remains an independent company. But the antitrust agencies seem to disagree and have started asking themselves the following questions.

First, if the key people, money and technology have all left the company to go to Microsoft, what’s really left in Inflection to still be considered as a competitor in the market?

Second, could this qualify as a change in control according to 16 C.F.R. §801.1(b)? What about a file-able acquisition of just “assets”––a term currently undefined by the HSR statute and regulations?

And third, does this move create a “reverse acqui-hire” transaction, a practice which is becoming very popular in the AI industry? The so-called “acqui-hires,” are transactions in which one company acquires another with the main purpose to absorb key talent. But what’s going on in the AI industry is not quite the same. Big Tech are acquiring key employees––such as Suleyman and Simonyan with their core teams in this case––, while licensing technology, leaving the targeted company still functioning independently––so no HSR filing requirement is apparently triggered. This is not the first time we’ve seen this scenario in the AI industry. Last month, Amazon poached Adept’s CEO and key employees, while getting a license to Adept’s AI systems and datasets.

But the antitrust enforcers have started to ask themselves whether Inflection and Adept are still real competitors in the AI market. The FTC has already sent subpoenas to both parties in the Microsoft/Inflection transaction, asking for information about a potential gun-jumping scenario: whether the $650 million deal may qualify as an informal acquisition requiring previous government approval. In the case of Amazon/Adept, the FTC has also decided to start an investigation and asked for more information.

OpenAI, Nvidia and Microsoft

The FTC and DOJ are finalizing an agreement to split duties to investigate potential antitrust violations of Microsoft, OpenAI, and Nvidia.

According to Politico, the DOJ will lead the Nvidia investigation, and its leading position in supplying the high-end semiconductors underpinning AI computing, while the FTC is set to probe whether Microsoft, and its partner OpenAI, have unfair advantages with the rapidly evolving technology, particularly around the technology used for large language models. At issue is the so-called AI stack, which includes high-performance semiconductors, massive cloud computing resources, data for training large language models, the software needed to integrate those components and consumer-facing applications like ChatGPT.

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New Antitrust Cases and Statements of Interests About Algorithmic Collusion

June 9, 2024 | Bona Law PC

Author: Luis Blanquez

We recently wrote about the Federal Trade Commission’s blog post explaining how relying on a common algorithm to determine your pricing decisions might violate Section 1 of the Sherman Act.

The FTC has Algorithmic Price-Fixing in its Antitrust Crosshairs

It was just a matter of time until the first cases would hit the courts. That’s why during the last couple of years, we’ve seen four main federal antitrust cases alleging that algorithmic pricing might violate the antitrust laws. In three of them, the antitrust agencies also filed Statements of Interest (SOI), outlining the agencies’ opinion about what the legal principles applicable to claims of algorithmic price fixing should be.

Realpage, Inc. Software Antitrust Litigation

This multidistrict litigation in the Middle District of Tennessee involves unlawful price-fixing schemes against multifamily housing developers and managers, and student housing developers and managers, both organized by RealPage––a software algorithm company. RealPage developed software to collect property owners’ and managers’ data, used for pricing and inventory strategies, that later shared with its clients.

In January 2024, the Court: (i) denied the motion to dismiss the multifamily housing cases––the renters plausibly alleged an antitrust violation, but (ii) rejected claims alleging a horizontal price-fixing conspiracy among landlords, which would have been per se illegal. The Court, however, concluded that those same landlords vertically conspired with RealPage. The Court also dismissed the student housing plaintiffs’ complaint.

In parallel, the DOJ opened an investigation and filed a SOI. Among other things, the DOJ highlighted:

The fact that today software algorithms process more information more rapidly than humans and can be employed to fix prices. The technical capabilities of software can enhance competitors’ ability to optimize cartel gains, monitor real-time deviations, and minimize incentives to cheat.
Section 1 prohibits competitors from fixing prices by knowingly sharing their competitive information with, and then relying on pricing decisions from, a common human pricing agent who competitors know analyzes information from multiple competitors. The same prohibition applies where the common pricing agent is a common software algorithm.
Factual allegations in both complaints point to evidence of an invitation to act in concert followed by acceptance—evidence that is sufficient to plead concerted action. Among other things, RealPage required each user to submit real-time pricing and supply data to it, and RealPage’s marketing materials allegedly “touted” its use of “non-public data from other RealPage clients,” enabling them to “raise rents in concert”; as well as the algorithms’ ability to “facilitate collaboration among operations” and “track your competition’s rent with precision.”
The complaints then allege that the landlords “gave their adherence to the scheme and participated in it.” In particular, the landlords allegedly sent RealPage the non-public and competitively sensitive data (as RealPage proposed), and overwhelmingly priced their units in line with RealPage’s suggested prices (80-90%). Indeed, the complaints also contain ample allegations on how RealPage directly constrained the “deviations” from its suggested prices, including by enforcing and monitoring compliance with those prices, so the landlords effectively delegated aspects of their pricing decisions.
Relatedly, the multifamily plaintiffs allege that the landlords jointly delegated aspects of decision making on prices to RealPage. They allege that, by using RealPage’s pricing algorithms, each client defendant “agreed” to a common plan that involved “delegat[ing] their rental price and supply decisions to a common decision maker, RealPage.” Indeed, RealPage allegedly touted this feature—stating in a press release that it gives clients “the ability to ‘outsource daily pricing and ongoing revenue oversight,’” such that RealPage could “set prices” as though it “own[ed]” the clients’ properties “ourselves.’”
Jointly delegating any part of the decision-making process reflects concerted action. That the delegation is to a software algorithm, rather than a human, makes no difference to the legal analysis. Just as “surrender[ing] freedom of action. . . and agree[ing] to abide by the will of the association” can be enough for concerted action, so can be relying on a joint algorithm that generates prices based on shared competitively sensitive data.
The “per se” rule prohibiting price fixing applies to price fixing using algorithms. And the analysis is no different simply because a software algorithm is involved. The alleged scheme meets the legal criteria for “per se” unlawful price fixing. Although not every use of an algorithm to set price qualifies as a per se violation of Section 1 of the Sherman Act, it is per se unlawful when, as alleged here, competitors knowingly combine their sensitive, nonpublic pricing and supply information in an algorithm that they rely upon in making pricing decisions, with the knowledge and expectation that other competitors will do the same.

The District of Columbia Attorney General has also filed a similar action in the Superior Court of D.C., alleging violations of the D.C. Antitrust Act.

Duffy v. Yardi Systems, Inc.

In this case from the US District Court for the Western District of Washington, plaintiffs allege that competing landlords violated Section 1 of the Sherman Act, by unlawfully agreeing “to use Yardi’s pricing algorithms to artificially inflate” multifamily rental prices.

The Agencies also filed a SOI to explain the two legal principles applicable to claims of algorithmic price fixing. First, a competitors’ agreement to use an algorithm software with knowledge that other competitors are doing the same thing constitutes evidence of a contract, combination or conspiracy that may violate Section 1. Second, the fact that defendants deviate from the pricing algorithm’s recommendations––for instance, by just setting initial starting prices or by starting with prices lower than the ones the algorithm recommends—is not enough to get them “off the hook” for illegal price fixing (even if no information is directly shared between the parties).

The Agencies SOI’s focus was on the second point: Defendants retaining pricing discretion. The Agencies stress in the SOI that it is “per se” illegal for competing landlords to jointly delegate key aspects of their pricing to a common algorithm, even if the landlords retain some authority to deviate from the algorithm’s recommendations. Although full adherence to a price-fixing scheme may render it more effective, the effectiveness of the scheme is not a requirement for “per se” illegality. Consistent with black letter conspiracy law, the violation is the agreement, and unsuccessful price-fixing agreements are also per se illegal.

Casino-Hotel Operators Cases

Two new algorithmic pricing antitrust cases are also ongoing against casino hotel operators in Las Vegas and Atlantic City.

In Cornish-Adebiyi v. Caesar’s Entertainment, Inc., a case pending in the U.S. District Court for the District of New Jersey, plaintiffs allege a conspiracy against eight Atlantic City casino-hotel operators, and the Cendyn Group LLC, which is a provider of the algorithmic software platform, called “Rainmaker,” used to fix, raise, and stabilize the prices of casino-hotel guest rooms in Atlantic City. Rainmaker allegedly gathers real-time pricing and occupancy data to generate “optimal” room rates for each participating casino hotel, which the software then recommends to each casino hotel.

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The Apple Store is in the Crosshairs of US and EU Antitrust and Competition Enforcers

April 9, 2024 | Bona Law PC

Author: Luis Blanquez

Apple is currently feeling the heat from antitrust authorities all over the world. Probably more than ever. Below is an article we recently published in the Daily Journal discussing in some detail the last developments in the Epic Games saga, both in the EU and the US.

Epic Games Has Returned to the Apple Store. Will Apple Throw a Hail Mary?

If you are a developer in the Web3 space trying to access the Apple Store, you should also review this article:

Antitrust, Web3 and Blockchain Technology: A Quick Look into the Refusal to Deal Theory as Exclusionary Conduct

So, what’s on Apple’s plate in the antitrust world on both sides of the pond?

In the European Union, the European Commission has fined Apple over €1.8 billion for abusing its dominant position on the market for the distribution of music streaming apps to iPhone and iPad users (‘iOS users’) through its App Store. The Commission found that Apple applied restrictions on app developers preventing them from informing iOS users about alternative and cheaper music subscription services available outside of the app. Such anti-steering provisions ban app developers from the following:

Informing iOS users within their apps about the prices of subscription offers available on the internet outside of the app.
Informing iOS users within their apps about the price differences between in-app subscriptions sold through Apple’s in-app purchase mechanism and those available elsewhere.
Including links in their apps leading iOS users to the app developer’s website on which alternative subscriptions can be bought. App developers were also prevented from contacting their own newly acquired users, for instance by email, to inform them about alternative pricing options after they set up an account.

At the same time, the European Commission has just opened a non-compliance investigation under the new Digital Markets Act about Apple’s rules on (i) steering in the App Store; (ii) its new fee structure for alternative app stores; and (iii) Apple’s compliance with user choice obligations––to easily uninstall any software applications on iOS, change default settings on iOS and prompt users with choice screens which must effectively and easily allow them to select an alternative default service.

Meanwhile, antitrust enforcement is also heating up for the Cupertino company in the United States.

Besides several private litigation actions, Epic Games recently filed a motion accusing Apple of violating an order issued last year under California law barring anti-steering rules in the App Store.

And just few days ago, the Justice Department, joined by 16 other state and district attorneys general, filed a civil antitrust lawsuit against Apple for monopolization or attempted monopolization of smartphone markets in violation of Section 2 of the Sherman Act. According to the complaint, Apple has monopoly power in the smartphone and performance smartphones markets, and it uses its control over the iPhone to engage in a broad, sustained, and illegal course of conduct. The complaint alleges that Apple’s anticompetitive course of conduct has taken several forms, many of which continue to evolve today, including:

Blocking Innovative Super Apps.Apple has disrupted the growth of apps with broad functionality that would make it easier for consumers to switch between competing smartphone platforms.
Suppressing Mobile Cloud Streaming Services. Apple has blocked the development of cloud-streaming apps and services that would allow consumers to enjoy high-quality video games and other cloud-based applications without having to pay for expensive smartphone hardware.
Excluding Cross-Platform Messaging Apps. Apple has made the quality of cross-platform messaging worse, less innovative, and less secure for users so that its customers have to keep buying iPhones.
Diminishing the Functionality of Non-Apple Smartwatches. Apple has limited the functionality of third-party smartwatches so that users who purchase the Apple Watch face substantial out-of-pocket costs if they do not keep buying iPhones.
Limiting Third Party Digital Wallets. Apple has prevented third-party apps from offering tap-to-pay functionality, inhibiting the creation of cross-platform third-party digital wallets.

The complaint also alleges that Apple’s conduct extends beyond these examples, affecting web browsers, video communication, news subscriptions, entertainment, automotive services, advertising, location services, and more.

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Antitrust Agency Publishes Revised HSR Notification Thresholds and Filing Fees For 2024

January 23, 2024 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

On January 22, 2024, the Federal Trade Commission (FTC) issued its usual annual announcement to increase the Hart-Scott-Rodino (HSR) Act thresholds. The 2024 thresholds will take effect 30 days after publication in the Federal Register, which is expected soon, so the thresholds likely will be effective in late February.

HSR requires the parties to submit certain information and documents and then wait for approval before closing a transaction. The FTC and DOJ then have 30 days to determine if they will allow the merger to proceed or seek much more detail through a “second request” for information. The parties may also ask for “Early Termination” to shorten the 30-day waiting period, although for nearly two-years this option has been––and continues to be––suspended.

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Five Key Takeaways from Fifth Circuit’s Illumina Merger Review Opinion

December 26, 2023 | Bona Law PC

Author: Steven Cernak

On December 15, 2023, the Fifth Circuit remanded to the FTC its order requiring Illumina to divest its re-acquired subsidiary, Grail. Despite the remand, the opinion is a big win for the FTC. Below, we offer five takeaways for future merging parties and their counsel.

[Disclosure: Bona Law filed an amicus brief for 34 Members of Congress arguing that the FTC’s action violated the “major questions” doctrine and misinterpreted Clayton Act Section 7 in several ways.]

Here is a quick summary of the twists and turns of this case from our earlier writings. Illumina is a dominant provider of a certain type of DNA sequencing. Grail is one of several companies developing a multi-cancer early detection (MCED) test. An MCED promises to be able to detect biomarkers associated with up to fifty types of cancer by extracting the DNA from a simple blood sample. To work, the MCED needs DNA sequencing supply. According to the complaint, the type of DNA sequencing that works best — and with which Grail and all other MCED developers have been working — is the type supplied by Illumina.

The parties announced Illumina’s proposed acquisition of Grail in September 2020 and said that it would speed global adoption of Grail’s MCED and enhance patient access to the tool. In late March 2021, the FTC challenged this transaction by filing an administrative complaint before its own administrative law judge (ALJ). Shortly thereafter, the European Commission announced that it too would investigate the transaction, even though the transaction did not meet its usual thresholds.

During these investigations, the parties closed the transaction. The European Commission decided to block the transaction and the parties appealed. Just before the European decision, the FTC ALJ dismissed the complaint in an unexpected decision ruling for the first time against the FTC in a merger case. In a nutshell, the ALJ concluded that the FTC failed to prove that Illumina’s post-acquisition ability and incentive to advantage Grail to the disadvantage of Grail’s alleged rivals would likely result in a substantial lessening of competition in the relevant market for the research, development, and commercialization of MCED tests. FTC Complaint Counsel appealed the ALJ decision. The four Commissioners unanimously agreed to overturn it. Now, the Fifth Circuit has largely upheld that decision of the Commission, though with a remand for reconsideration of one aspect of the decision, as described below.

Takeaway 1: This Development is Largely an FTC Win

Some of the initial tweets and headlines, perhaps after reading only the opinion’s opening paragraph vacating the FTC’s order and remanding for further consideration, seemed to characterize the Fifth Circuit opinion as another loss for the FTC. But make no mistake, this development is a big win for the FTC for several reasons. First, the FTC challenged this transaction to block, then later, unwind, the acquisition of Grail. About a day after the opinion was filed, Illumina announced it would divest Grail. Mission accomplished.

Second, the court found “substantial evidence” for the Commission’s conclusions, despite arguments by the parties (and amici) to the contrary. As detailed below, the court did not question the Commission’s use of older cases and theories to review mergers.

Third, even the court’s rationale for the remand was not that strong a rebuke of the FTC. During the investigation, Illumina made an Open Offer to other customers of its sequencing, promising to treat them as well as Grail. The ALJ found this a useful additional fact in concluding that Illumina did not have the incentive to harm Grail competitors. The FTC majority opinion disagreed with the ALJ and only considered the Open Offer in the remedy phase of the merger review. Commissioner Wilson also disagreed with the ALJ but considered the Open Offer in Illumina’s rebuttal portion of the liability phase of the review. The parties argued that the Open Offer should be addressed by the FTC Complaint Counsel in its prima facie case for liability. The Fifth Circuit agreed with Commissioner Wilson. It seems certain that the other three Commissioners would have reached the same ultimate conclusion on remand when considering the Open Offer earlier in the process.

Takeaway 2: The Court Quickly Punted Constitutional Concerns

As with several other recent challenges to the FTC and other administrative agencies, the parties raised serious, difficult constitutional questions about the structure and processes of the FTC and its review of mergers. The court wrestled with none of them. Instead, the court took only two pages to explain that the four questions were answered by precedent, either from the Fifth Circuit or the Supreme Court, and saw no reason to explore whether any court should change. While this opinion is not the final word on these and similar issues, the FTC at least avoided a number of thorny issues for now.

Takeaway 3: Vertical Might be the New Horizontal

We hear sometimes that a proposed transaction should sail through the Hart-Scott-Rodino merger review process because “the parties don’t compete.” While that focus on current horizontal competition might have been a sufficient screen for antitrust issues a few years ago, it no longer is. Whether the Trump Administration’s challenge of the AT&T/TimeWarner transaction or the Biden Administration’s challenge of this transaction, Microsoft/Activision, or others, vertical (and potential competition) mergers have been ripe for challenge for a few years. Illumina’s abandonment of this vertical deal after this ruling will only encourage further challenges by federal and state antitrust enforcement agencies.

Takeaway 4: Courts Sometimes Agree with New/Renewed Antitrust Theories

As the Biden Administration DOJ and FTC have issued new merger guidelines or unilaterally taken other actions, one popular response from parts of the antitrust commentariat has been “but just wait until the courts consider them.” It is true that a long-lasting change in antitrust interpretation (like, say, the Chicago School) can only start with law review articles and enforcer speeches but eventually will require supportive court opinions; however, the “wait for the courts” sentiment seems built on two faulty premises.

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Does the NBA have an antitrust problem? A rival basketball league may think so.

November 13, 2023 | Bona Law PC

Authors: Luke Hasskamp & Molly Donovan

NBA action is FAN-TASTIC! Unless, of course, the action is one brought by the Department of Justice in a different kind of court. But that may be exactly where the NBA finds itself: the DOJ is reportedly investigating the professional basketball association for alleged antitrust violations. The NBA’s alleged anticompetitive conduct targeted Big3, a competitive basketball league founded by Ice Cube and entertainment executive Jeff Kwatinetz (with Clyde Drexler serving as commissioner!). That conduct included allegedly pressuring team owners, current NBA players, and advertisers and partner television networks not to do business with Big3.

Big3 is an aptly named 12-team, 3-on-3 league mostly comprised of retired NBA players. Teams play an eight-week season, followed by a two-week, four-team playoff, all during the NBA’s off-season. In 2023, the Big3’s regular season was held once a week in Chicago, Dallas, Brooklyn, Memphis, Miami, Boston, Charlotte, and Detroit, and the finals were held in London, England.

We’ve previously written about antitrust laws in the sports arena, including the infamous antitrust exemption in professional baseball. But baseball is an anomaly in that regard, as all other professional sports in the United States are subject to federal antitrust laws. (Professional football, baseball, basketball, and hockey are statutorily exempted from antitrust laws for negotiating television broadcast rights. See 15 U.S.C. § 1291.) Thus, antitrust liability is fair game for the NBA.

And, as this story broke, another recent antitrust case jumped to mind: that involving the PGA Tour and LIV Golf, when the PGA Tour faced antitrust scrutiny for its decision to suspend players who played for a would-be competitor league. The NBA dispute has many parallels to the PGA Tour case, though with some notable differences too, even though most details are not public.

To consider the legal nuts and bolts a bit, let’s look at what a Section 1 and Section 2 claim against the NBA might look like.

Section 1 of the Sherman Act – Unlawful Agreements

Federal antitrust laws (Section 1 of the Sherman Act) make it unlawful for two or more actors to enter agreements (conspiracies) to restrain trade or competition in the market. Classic examples include price fixing and group boycotts.

Here, the leading legal theory may be the group boycott. Under that theory, the NBA would have entered into one or more agreements with other entities to thwart Big3’s emergence and growth in the market.

One of the improper agreements reported here is between the NBA and the owners of each of its 30 teams, with the NBA allegedly instructing owners to not invest in the fledgling competitor. (An agreement between a sports league and its individual teams can implicate Section 1 of the Sherman Act, as was the theory in the recently-settled litigation against MLB involving the contraction of minor league teams.) The reports also suggest that the NBA may have persuaded sponsors and other business partners to agree to avoid doing business with Big3.

Section 2 of the Sherman Act – Monopolization

Federal antitrust laws also make it illegal for a monopolist to preserve its dominant market position through anticompetitive conduct. And this section of the Sherman Act does not require collusion with another party—a single actor can incur liability.

Here, the NBA sure looks like a monopoly (or monopsony). It’s the dominant actor in the professional basketball market in the United States, with revenues exceeding $10 billion per year. (While we generally assume that the relevant geographic market is the United States, even if we were to consider the entire world, the NBA may still be a monopolist.) In professional basketball, there is no rival to the NBA. If you are an elite basketball player in the United States, the NBA is pretty much the only place to play (even if you include the Big3).

But the NBA’s status as a monopoly is not unlawful on its own. It’s fine for a business to emerge as a dominant market player through lawful means, such as through “a superior product, business acumen, or historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 57071 (1966).

Instead, to implicate Section 2 of the Sherman Act, the NBA must have engaged in some “exclusionary” or “anticompetitive” conduct to protect its monopoly and harm competition—that is something other than superior product, business acumen, or historic accident. Examples of exclusionary conduct include tying, exclusive dealing, predatory pricing, defrauding regulators or consumers, or engaging in coercive conduct, such as threatening customers with retaliation if they choose to do business with the would-be competitor in order to stifle the competitor’s growth in the market.

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$1.8 Billion Antitrust Verdict Against Realtor Groups Provides Lessons for Brokerages, Realtor Associations, and Multiple Listing Services Nationwide

November 7, 2023 | Bona Law PC

Authors: Molly Donovan & Aaron Gott

A Missouri jury awarded a class of home sellers $1.8 billion dollars in finding that the National Association of Realtors (“NAR”) and some of the nation’s largest real estate brokerages “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.”

At the center of the case was NAR’s rule requiring sellers to pay a non-negotiable commission awarded to the buyer’s broker at a transaction’s closing (“Mandatory Payment Rule”). The brokerages then compelled their agents to belong to the NAR and adhere to the NAR’s rules. The resulting lack of competition for buy-side commissions caused inflated prices that were forced upon home sellers. Every brokerage in the industry understood that every other brokerage was behaving in this same way.

In addition to inflated buy-side rates, the scheme was reinforced by other anticompetitive practices, including “steering”—where buyer brokers “steer” their clients toward homes attached to a non-negotiable buy-side commission—as opposed to homes for-sale-by owner where an automatic buy-side commission may not be offered.

Another resulting problem is that small brokerages looking to attract buyers have a tough time competing. Most importantly, there’s no opportunity to compete on price because the local NAR groups have locked prices in with the following of the major brokerages. Because of that rule—and other NAR rules—innovations with respect to process or pricing have been very difficult to achieve.

So, why has the scheme worked if it’s so bad for consumers and innovators? Because the NAR has near-exclusive control over the MLS or multiple-listing service.

The MLS is an essential database for listing homes because most homes sold in the United States are found there. If a broker does not belong to NAR and/or does not follow the NAR’s rules, it cannot access the MLS and, therefore, cannot effectively compete for selling or buying clients.

This is of antitrust concern in its own right. And certainly, the Mandatory Payment Rule is not the only rule in the industry that has—or could—draw antitrust scrutiny. Rules against buying/selling homes that are “coming soon,” for example, are also restraints of trade that could be a problem. So are rules that fix any of the terms or conditions of selling or buying a home.

Many predict the entire industry will change as a result of the Missouri verdict, the ongoing competition-law litigations and investigations, and the reality that today, home buyers can do their own legwork to find homes without needing a broker’s access or market knowledge. A buyer broker’s role can sometimes be relegated to accessing lock boxes, providing fill-and-sign access to standard forms, and collecting the check.

So what can a brokerage do now to anticipate the changes and guard against future antitrust concerns? Here is some high-level guidance that brokerages ought to consider:

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MMA & Monopsony: MMA Fighters Win Class Certification Bout in Employment Monopolization Case

September 27, 2023 | Bona Law PC

Authors: Luke Hasskamp & Molly Donovan

In yet another important labor-monopsony case, a federal court in Nevada has declared a win for MMA athletes fighting against their promoter’s alleged misuse of monopsony power in the market for acquiring fighters’ services. Class certification has been granted to MMA fighters accusing their promoter of locking them into exclusive contracts that deterred fighters’ mobility and suppressed their wages for fighting bouts. Cung Le v. Zuffa, LLC, No. 2:15-cv-01045-RFB-BNW, 2023 WL 5085064, 2023 U.S. Dist. LEXIS 138702 (D. Nev. Aug. 9, 2023).

The Facts. MMA is a combat sport—a mix of boxing, wrestling, karate and other forms of martial arts. A bout is a competition between MMA fighters in a timed round where a fighter can win by acquiring the most points or by a knockout or submission (the other fighter gives up due to “extreme pain”).

During the at-issue period (2010-2017), Zuffa (defendant) promoted MMA bouts—under the trade name Ultimate Fighting Championship.

During that time, Zuffa treated fighters as independent contractors and compensated them on a bout-by-bout basis: one payment to “show” (participate in a bout) and then another payment (typically in the same amount) to win. This method of compensation was common across all MMA fighters promoted by Zuffa except for a “very small” number of the best fighters who also may have received additional payments at times (e.g., a percentage of the revenues generated by a particular event). Fighters bore their own expenses for training and skills maintenance.

The contracts between Zuffa and fighters contained “exclusion clauses” that required athletes to fight only for Zuffa. These contracts also imposed additional clauses that gave Zuffa significant control over fighters, including (i) the exclusive ability to extend certain contracts automatically; (ii) the exclusive right to cut fighters; and (iii) the right to match a competing promoter’s offer at the expiration of a contract, essentially requiring the fighter to remain with Zuffa whenever Zuffa matched the competing offer.

The Proposed Bout Class. All persons who competed in live UFC-promoted MMA bouts in the United States from 2010 to 2017.

Predominance. Predominance has become the “main event” in antitrust class certification inquiries—the round where a plaintiff can win it or lose it all. To establish predominance, plaintiffs must show (i) conduct that violates the antitrust laws; (ii) that the conduct was commonly applied to the class; (iii) it led to common injury in the class; and (iv) measurable damages provable with evidence common to the class.

Illegal conduct. The class alleges a violation of Section 2 of the Sherman Act, i.e., that Zuffa sought to maintain its monopsony power in the relevant market through exclusionary conduct. In a lengthy analysis, the court held that plaintiffs showed that Zuffa enjoyed monopsony power in a relevant antitrust market—the market for elite professional MMA fighter services. An expert testified that, during the relevant time, Zuffa’s share was between 70 and 90% in the labor-input market. And this market also had significant barriers to entry, including Zuffa’s own “coercive” contracts that “artificially restricted” competitors’ access to fighter talent. As for exclusionary conduct, the court ruled that the required exclusivity and other oppressive contractual provisions (along with related “coercive” conduct by Zuffa) “locked up” fighters, restricting their mobility and suppressing their wages. The court also pointed to Zuffa’s history of horizontal acquisitions as further evidence of a willful intent to maintain market dominance.
Common application to the class. The court found that the relevant contractual provisions applied to all class members, as did Zuffa’s coercive conduct used “consistently” “to induce fighters into re-signing contracts or risk punishment.”
Common injury. Plaintiffs’ expert submitted a regression analysis to show that class members’ wages were artificially suppressed by Zuffa’s conduct. The court ruled that analysis was sufficiently reliable at the class certification stage to establish common injury—rejecting defendant’s “small” criticisms of specific variables and particular data decisions.
Finally, the court held that plaintiff’s expert presented a “coherent methodology for establishing class-wide damages that predominates over any individual damages analysis.”

Total Knockout? No. While the court certified that “bout class,” it declined to certify a separate “identity class” consisting of every fighter whose identity was “expropriated or exploited by the UFC” from 2010 to 2017. The court held that, unlike the bout class, plaintiffs had not presented sufficient expert analysis supporting a connection between the relevant exploitative conduct and suppressed compensation. The court also found it important that the merchandising rights were voluntary and non-exclusive and that fighters in the class varied in notoriety—a difference difficult to capture in an objectively-defined variable. Finally, the court said there was no evidence of an “internal pay structure” for identity rights that was consistently applied across the proposed class.

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McDonald’s & Monopsony: The Seventh Circuit Vacates District Court’s Dismissal of a Per Se No-Poach Theory

September 14, 2023 | Bona Law PC

Author: Molly Donovan

In an opinion written by Judge Easterbrook, and a major win for per se no-poach claims, the Seventh Circuit has vacated a district court’s dismissal of a Sherman Act, Section 1 no-poach claim against McDonald’s. The case involves clauses that McDonald’s formerly included, as standard language, in its franchise agreements that “barred one franchise from soliciting another’s employee.” The plaintiff claims that she was unreasonably restrained from switching franchises to take a higher-paid job because of the anticompetitive provisions.

The at-issue contract language was broad, covering solicitation and hiring and not ending until six-months after employment ended: “During the term of this Franchise, Franchisee shall not employ or seek to employ any person who is at the time employed by McDonald’s, any of its subsidiaries, or by any person who is at the time operating a McDonald’s restaurant or otherwise induce, directly or indirectly, such person to leave such employment. This paragraph [] shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six (6) months.”

The restraint had teeth: an initial violation gave McDonald’s the right not to consent to a transfer of the franchise. Additional breaches gave McDonald’s the right to terminate the franchise.

And plaintiffs also alleged that the restraint “promote[d] collusion among franchisees, because each knew the other had signed an agreement with the same provision” – so long as everybody at least tacitly cooperated by not poaching, franchisees could keep wages below-market.

Plaintiff alleged only per se and quick look theories of liability—not rule of reason.

In the district court, the defendants argued that, because the restraint originated with McDonald’s corporate (the parent company), the restraint was merely vertical—and thus, not per se illegal. The district court disagreed: the provisions restrain competition for employees among horizontal competitors notwithstanding that the company at the top of the chain originated the agreement.

But the district court dismissed the per se theory because it found that the alleged restraint was ancillary to the franchise agreements. The analysis was curious because, although the court said that a restraint is ancillary only if it promotes enterprise and productivity, the court found it sufficient that the franchise agreements, taken as a whole, promoted enterprise because each franchise agreement increased output (more customers served). The district court did not examine whether the restraint itself promoted competition.

The Seventh Circuit held that was an error. While an “agreement among competitors is not naked if it is ancillary to the success of a cooperative venture,” increased output does not “justif[y] detriments to workers.” The antitrust laws are concerned with monopsonies (in this case, the cartelized cost of labor).

And simply because a franchise agreement increases output, the no-poach agreement itself may not promote output or any another pro-competitive goal. The question is: “what was the no-poach clause doing?” To be deemed ancillary, the no-poach itself must serve a procompetitive objective (such as preventing freeriding on a franchisee’s investment in worker training). The court suggested that an agreement’s duration and scope also may be relevant to resolving that question.

In any event, the Seventh Circuit ruled the answer to that inquiry could not be resolved on the pleadings because economic analysis is required. And “[m]ore than that: the classification of a restraint as ancillary is a defense, and the complaint need not anticipate and plead around defenses.”

In the end, the Seventh Circuit vacated the district court’s decision and remanded for its further consideration in light of the appellate review.

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