Floyd v. Amazon.com Inc

• Court: District Court, W.D. Washington
• Decided: June 8, 2023
• Docket: 2:22-cv-01599
• Status: Unknown

Opinion

THE HONORABLE JOHN C. COUGHENOUR 1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 WESTERN DISTRICT OF WASHINGTON 8 AT SEATTLE 9 STEVEN FLOYD, individually and on behalf CASE NO. C22-1599-JCC of all others similarly situated, 10 ORDER 11 Plaintiff, v. 12 AMAZON.COM, INC. and APPLE INC., 13 Defendants. 14 15 This matter comes before the Court on Defendants’ respective motions to dismiss (Dkt. 16 Nos. 42, 43). Having thoroughly considered the parties’ briefing and the relevant record, the 17 Court finds oral argument unnecessary and hereby DENIED in part and GRANTS in part the 18 motions for the reasons explained herein. 19 I. BACKGROUND1 20 Defendant Amazon, Inc. operates the world’s largest online retail marketplace. (Dkt. No. 21 37 at 4, 12.) Defendant Apple Inc. is the world’s largest technology company responsible for 22 designing, manufacturing, and selling iPhones and iPads, among other products. (Id. at 4, 12.) In 23 addition to selling products directly to consumers, it also sells products through third-party 24 25 1 Unless otherwise indicated, the facts below are based on allegations contained in the 26 First Amended Complaint (“FAC”) (Dkt. No. 37). 1 distributors, like Amazon. (Id.) In 2018, Apple and Amazon (hereinafter, “Defendants”) signed 2 an agreement, effective January 1, 2019, known as the “Global Tenets Agreement” (“GTA”). (Id. 3 at 6.) The GTA required Amazon to allow only Apple-authorized sellers to sell Apple products 4 on Amazon’s marketplace. (Id.) In exchange, Apple would provide a steady supply of Apple 5 products to Amazon at a discounted rate. (Id.) On February 26, 2021, Plaintiff Steven Floyd 6 purchased an Apple iPad from the Amazon Marketplace for $319.99. (Id. at 12.) The price of this 7 iPad was inflated due to the GTA, which “eliminate[d] or at least substantially reduce[d] the 8 competitive threat posed by third-party merchants.” (Id. at 5.) Prior to the GTA, there were 9 hundreds of third-party Apple resellers active on Amazon. (Id. at 4.) Following the GTA, the 10 number of sellers narrowed to just seven. (Id. at 6.) Plaintiff filed this putative class action on 11 November 9, 2022. (Dkt. No. 1.) After Defendants moved to dismiss, (Dkt. No. 30, 32), Plaintiff 12 amended his complaint. (Dkt. No. 37.) 13 Plaintiff brings a single claim for relief, an alleged violation of Section 1 of the Sherman 14 Act which prohibits “[e]very contract, combination in the form of trust or otherwise, or 15 conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” 16 15 U.S.C. § 1. (Id. at 56.) Plaintiff contends the GTA is “a naked restraint and per se unlawful 17 under the Sherman Act.” (Id. at 5, 58.) In the alternate, Plaintiff argues it violates the “rule of 18 reason.” (Id. at 59.) On March 27, 2023, Defendants filed motions to dismiss. (Dkt. Nos. 42, 43.) 19 II. DISCUSSION 20 A. Legal Standard 21 A defendant may move for dismissal when a plaintiff “fails to state a claim upon which 22 relief can be granted.” Fed. R. Civ. P. 12(b)(6). To survive, the complaint must contain sufficient 23 factual matter, accepted as true, to state a claim for relief that is plausible on its face. Ashcroft v. 24 Iqbal, 556 U.S. 662, 677–78 (2009). A claim has facial plausibility when the plaintiff pleads 25 factual content that allows the court to draw the reasonable inference that the defendant is liable 26 for the misconduct alleged. Id. at 678. The plaintiff is obligated to provide grounds for 1 entitlement to relief that amount to more than labels and conclusions of the elements of a cause 2 of action. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007). Although the Court must accept 3 as true a complaint’s well-pleaded facts, conclusory allegations of law and unwarranted 4 inferences will not be accepted. Vasquez v. L.A. Cnty., 487 F.3d 1246, 1249 (9th Cir. 2007). 5 Along with the complaint, the Court may consider documents mentioned in the complaint that 6 are central to the claims and of undisputed authenticity, Marder v. Lopez, 450 F.3d 445, 448 (9th 7 Cir. 2006), and matters of judicial notice, such as public records and court documents, see Lee v. 8 City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001). 9 B. Discussion 10 To plead an antitrust violation under Section 1 of the Sherman Act, a plaintiff must allege 11 facts supporting the notion that (1) an agreement exists, (2) the agreement imposed an 12 unreasonable restraint of trade through either a per se or rule of reason analysis, and (3) the 13 restraint affected interstate commerce. Am. Ad Mgmt., Inc. v. GTE Corp., 92 F.3d 781, 784 (9th 14 Cir. 1996). That plaintiff must also plead a relevant market. See Hicks v. PGA Tour, Inc., 897 15 F.3d 1109, 1120 (9th Cir. 2018). Here, the parties do not dispute the existence of a contract2 or 16 the effect on interstate commerce. (Dkt. No. 51 at 16.) The only issue is whether the GTA 17 imposes an unreasonable restraint of trade through either a per se or rule of reason analysis. 18 The rule of reason is the default standard for Section 1 claims, and it requires the antitrust 19 plaintiff to “demonstrate that a particular contract or combination is in fact unreasonable and 20 anticompetitive.” Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006). The rule “weighs legitimate 21 justifications for a restraint against any anticompetitive effects.” Paladin Assocs., Inc. v. Mont. 22 Power Co., 328 F.3d 1145, 1156 (9th Cir. 2003). In applying the rule of reason, the Court 23 “reviews all the facts, including the precise harms alleged to the competitive markets, and the 24 legitimate justifications provided for the challenged practice, and [] determine[s] whether the 25 2 The Court incorporates by reference the GTA which was attached as an exhibit to 26 Defendant Apple’s sealed motion to dismiss. (Dkt. No. 45.) 1 anticompetitive aspects of the challenged practice outweigh its procompetitive effects.” Id. 2 Some types of restraints, however, have such “predictable and pernicious anticompetitive 3 effect, and such limited potential for procompetitive benefit, that they are deemed unlawful per 4 se.” State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). Per se treatment is proper only once 5 “experience with a particular kind of restraint enables the Court to predict with confidence that 6 the rule of reason will condemn it.” Arizona v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332, 344 7 (1982). To justify per se condemnation, a challenged practice must have “manifestly 8 anticompetitive” effects and lack “any redeeming virtue.” Leegin Creative Leather Prod., Inc. v. 9 PSKS, Inc., 551 U.S. 877, 886 (2007). The Supreme Court has “expressed reluctance to adopt per 10 se rules where the economic impact of certain practices is not immediately obvious.” Dagher, 11 547 U.S. at 5 (internal citations omitted). Plaintiff contends the GTA amounts to a “per se 12 violation” of antitrust laws, or in the alternative, a violation under the less demanding “rule of 13 reason” standard. (Dkt. No. 37 at 58–59.) The Defendants move to dismiss under either standard. 14 (Dkt. Nos. 42, 43). The Court addresses each standard in turn. 15 1. Application of Per Se Rule is Inapt as Pleaded 16 The Supreme Court has distinguished between “agreements made between competitors 17 (horizontal agreements) and agreements made up and down a supply chain, such as between a 18 retailer and a manufacturer (vertical agreements).” Frame-Wilson v. Amazon.com, Inc., 591 F. 19 Supp. 3d 975, 986 (W.D. Wash. 2022). Nearly every “vertical restraint” is “assessed under the 20 rule of reason.” Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018). Whereas “[t]ypically 21 only ‘horizontal’ restraints . . . qualify as unreasonable per se.” Id. at 2283–84; see also Arizona, 22 457 U.S. at 348 n.18 (“horizontal restraints are generally less defensible than vertical restraints.”) 23 Here, the parties dispute whether Defendants entered a “horizontal” agreement, as 24 Plaintiff argues, or a “vertical” agreement, as Defendants argue. This issue turns on whether 25 Defendants entered the agreement as “competitors” or “firms at different levels of 26 distribution.” Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988). Plaintiff 1 contends this case is “not about Apple independently selecting its trading partners or Amazon 2 independently enforcing its own platform rules. It is about two horizontal competitors agreeing 3 to eliminate the competitive threat posed by hundreds of other horizontal competitors.” (Dkt. No. 4 37 at 9.) The Court cannot agree with this characterization. See Vasquez, 487 F.3d at 1249. 5 According to the facts as pled, “Apple designs, manufactures, and sells iPhones and iPads,” (Dkt. 6 No. 37 at 12), and Apple “distributes its products through two channels” otherwise known as a 7 “dual distribution” strategy. (Id.) In the first level, “Apple maintains its own retails stores, 8 including an online store and physical outlets. This is Apple’s direct distribution channel.” (Id. at 9 12.) At this level, Apple competes horizontally with other retailers of its products. (Dkt. No. 51 10 at 21.) In the second level, “Apple distributes its products through a network of third-party 11 distributors[.]” (Dkt. No. 37 at 12.) In addition to supplying Amazon with products, “Apple 12 reportedly has Authorized Reseller Agreements with Best Buy, Target, Staples, AT&T, and 13 others.” (Id. at 13.) At this level, Apple “stands in a vertical relationship with the retailers it 14 supplies.” (Dkt. No. 51 at 21.) 15 Given these allegations, the Court finds that, although the Defendants may compete for 16 the sale of products at a horizontal level, they are vertically situated as manufacturer and reseller 17 under the agreement at issue here. (Dkt. No. 45 at 30.) The GTA provides the conditions for 18 the sale of Apple products on Amazon’s Marketplace by imposing restrictions on who may sell 19 Apple products on Amazon’s platform and under what specific circumstances. (Id. at 31.) The 20 plain text of this agreement strongly suggests that Apple stands as a manufacturer and Amazon 21 as a distributer in this particular relationship. While the Defendants may be horizontally situated 22 in other circumstances, this does not automatically place all their dealings—particularly, their 23 vertical ones—into a per se context. 24 This conclusion is consistent with Ninth Circuit precedent, which holds that the rule of 25 reason—not the per se standard—typically applies in the context of “dual distribution” 26 arrangements. See Dimidowich v. Bell & Howell, 803 F.2d 1473, 1481 (9th Cir. 1986) (The 1 Ninth Circuit has “categorized restrictions imposed in the context of dual distributorships as 2 vertical and analyzed them under the rule of reason.”); Frame-Wilson, 591 F. Supp. 3d at 986 3 (rejecting application of per se standard because relationship at issue was “a vertical arrangement 4 because it involves different levels of the supply chain.”) To rule otherwise would cut against 5 well-established precedent protecting the rights and autonomies of manufactures. See, e.g., Krehl 6 v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1356-57 (9th Cir. 1982) (“Competition is 7 promoted when manufacturers are given wide latitude in establishing their method of distribution 8 and in choosing particular distributors.”) 9 However, the analysis does not end here. Application of the per se rule “must be based 10 upon demonstrable economic effect rather than . . . upon formalistic line drawing” between the 11 different types of restraints. Leegin, 551 U.S. at 887. Plaintiff characterizes the GTA as a “naked 12 restraint” and urges that prior judicial experience with these categories of restraints requires per 13 se condemnation of the GTA. (Dkt. No. 37 at 5, 58.) Beyond this conclusory statement, though, 14 Plaintiff has not made a showing that the restraint at issue is one that “courts have had 15 considerable experience with,” permitting this Court to “predict with confidence that [the 16 restraint] would be invalidated in all or almost all instances.” Leegin, 551 U.S. at 886. 17 In fact, Plaintiff acknowledges that third-party sellers have not been altogether expelled 18 from Amazon’s Marketplace—akin to a traditional boycott. (Dkt. No. 51 at 23.) And the fact that 19 “Apple and Amazon also compete at the retail level is a defining feature of the dual distribution 20 system, not a fact supporting a pure horizontal agreement requiring the per se rule.” (Dkt. No. 55 21 at 7.) See Laurence J. Gordon, Inc. v. Brandt, Inc., 554 F. Supp. 1144, 1152 (W.D. Wash. 1983). 22 (explaining that a “finding of [horizontal] competition would not be significant” in light of dual 23 distribution precedent and rejecting argument that restraint was a “group boycott.”) 24 Therefore, given the complex nature of the business relationships between the parties and 25 the challenged restraint at issue—a classic dual-distribution arrangement where a manufacturer 26 provides its products to a reseller and also competes with that reseller for sales to customers — 1 the Court finds the per se rules to be inapplicable in this case, at least as pleaded. See Leegin, 551 2 U.S. at 887 (“It should come as no surprise ... that [courts] have ‘expressed reluctance to 3 adopt per se rules with regard to restraints imposed in the context of business relationships where 4 the economic impact of certain practices is not immediately obvious.’”) 5 2. Rule of Reason 6 Defendants argue the Claim fails to satisfy the rule of reason because the FAC failed (1) 7 to identify a relevant market; and (2) failed to show anticompetitive effect (injury) in that market. 8 (Dkt. Nos. 42 at 18–33, 43 at 15–30.) The Court disagrees for the reasons explained below. 9 a. Alleged Marketplace 10 Under the rule of reason Plaintiff must “allege that the defendant has market power 11 within a ‘relevant market.’” Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 1044 12 (9th Cir. 2008). This, by definition, requires sufficient market control that the anticompetitive 13 conduct actually injures a competitor or consumer. Id. But, at least in an antitrust case, this need 14 not be pled with specificity. Id. An antitrust complaint survives a Rule 12(b)(6) motion unless it 15 is apparent from the face of the complaint that the alleged market suffers a fatal legal defect. Id. 16 at 1045. And since the validity of the “relevant market” is typically a factual element rather than 17 a legal element, alleged markets may survive scrutiny under Rule 12(b)(6), subject to factual 18 testing by summary judgment or trial. Id.; see also High Tech. Careers v. San Jose Mercury 19 News, 996 F.2d 987, 990 (9th Cir. 1993) (holding that “[t]he process of defining the relevant 20 market is a factual inquiry for the jury.”) 21 However, a complaint may be dismissed under Rule 12(b)(6) if the complaint's “relevant 22 market” definition is facially unsustainable. Newcal, 513 F.3d at 1045. To avoid dismissal, the 23 relevant market must be a product market and include the products at issue as well as all 24 economic substitutes for the products. Id. It must include “the group or groups of sellers or 25 producers who have actual or potential ability to deprive each other of significant levels of 26 business.” Id. (quoting Thurman Industries, Inc. v. Pay ‘N Pak Stores, Inc., 875 F.2d 1369, 1374 1 (9th Cir. 1989)). 2 Here, Plaintiffs identify the market at issue as the two-sided “U.S. Online Marketplace”, 3 in which Amazon is one player among many. (Dkt. No. 37 at 32, 43.) Within that market, 4 Plaintiff identifies a submarket for “smartphone transactions.” (Id.) Plaintiff pleads facts to 5 demonstrate that companies treat smartphones as a “distinct product line.” (Id.) Using similar 6 logic and facts, Plaintiff also identifies a submarket for “tablet transactions.” (Id.) The Supreme 7 Court has held that submarkets, “which, in themselves, constitute product markets for antitrust 8 purposes,” may exist within the broader product market. Brown Shoe Co. v. U.S., 370 U.S. 294, 9 325 (1962.) Submarkets may be determined by “examining such practical indicia as industry or 10 public recognition of the submarket as a separate economic entity, the product’s peculiar 11 characteristics and uses, unique production facilities, distinct customers, distinct prices, 12 sensitivity to price changes, and specialized vendors.” Id. These indicia were not intended “as a 13 litmus test, and subsequent decisions have made clear that submarkets can exist where only some 14 of these factors are present.” Bon-Ton Stores, Inc. v. May Dep’t Stores Co., 881 F. Supp. 860, 15 868 (W.D.N.Y. 1994). 16 Plaintiffs have provided sufficient “practical indicia” to allege, at a minimum, that the 17 supposed submarkets here are not necessarily facially unsustainable. Plaintiffs allege that the 18 smartphone and tablet submarkets are publicly recognized as distinct markets within the online 19 marketplace by consumers and retailers, (Dkt. No. 37 at 34–39), that brick-and-mortar stores are 20 not a reasonable substitute, (id. at 39), and that Amazon’s marketplace has substantial market 21 power that reverberates across all online marketplaces, (id. at 46). 22 Defendant Apple, for its part, argues that Plaintiff’s alleged market is both over-and- 23 under-inclusive. (Dkt. No. 43 at 18–19.) It contends that the alleged market is over-inclusive 24 because it purports to include “all retail goods” which are neither “reasonably interchangeable 25 nor have ‘cross-elasticity of demand’ with the iPhones and iPads at issue.” (Id. at 18.) And that it 26 is under-inclusive because it “fails to capture many other avenues for a customer to purchase 1 smartphones and tablets.” (Id. at 19.) The Court is unpersuaded. 2 Plaintiff has alleged sufficient facts to (1) demonstrate why the proffered submarkets do 3 not exclude any reasonable substitutes, (Dkt. No. 37 at 18), and (2) to support a distinction 4 between the submarkets for iPhones and iPads and the rest of the goods sold on online 5 marketplaces, (id.), even though the same products may be available in both. See F.T.C. v. Whole 6 Foods Mkt., Inc., 548 F.3d 1028, 1040 (D.C. Cir. 2008) (holding that premium natural and 7 organic supermarkets may constitute a submarket distinct from conventional supermarkets even 8 if some of the products were available in both markets). As the court in Whole Foods explained, 9 “[t]he fact that a customer might buy a stick of gum at a supermarket or at a convenience store 10 does not mean there is no definable groceries market.” Id. 11 Finding no “fatal legal defect,” the Court cannot conclude, as Defendants argue, that the 12 “relevant market” here is facially unsustainable. Hicks, 897 F.3d at 1120. Both Defendants 13 dispute the facts as pled in the FAC, but the validity of the relevant market is a question reserved 14 for a jury, and the Court makes no such determination here. Newcal, 513 F.3d at 1045; see also 15 GTE Corp., 692 F.3d at 790 (holding that “[d]efining the relevant market is a factual inquiry 16 ordinarily reserved for the jury.”). 17 b. Alleged Injury 18 Defendants further argue that Plaintiff failed to show injury to self and/or anticompetitive 19 effect. (Dkt. Nos. 42 at 26, 43 at 24.) “A plaintiff may only pursue an antitrust action if it can 20 show antitrust injury, which is to say injury of the type the antitrust laws were intended to 21 prevent and that flows from that which makes defendants’ acts unlawful.” Am. Ad Mgmt., Inc. v. 22 Gen. Tel. Co. of California, 190 F.3d 1051, 1055 (9th Cir. 1999) (internal citations omitted). 23 According to the FAC, Plaintiff purchased an Apple iPad on the Amazon Marketplace, 24 and, but for the GTA, he would have “paid a lower price.” (Dkt. No. 37 at 12.) Plaintiff claims 25 the GTA “eliminated competitive resellers of Apple products” and “those eliminated sellers 26 would have would have caused prices for these products, including the Apple iPad purchased by 1 Plaintiff, to be lower.” (Id.) Plaintiff has also pled facts to show the GTA had anticompetitive 2 effects on the merchant side of the market, (id. at 24); on the consumer side of the market, (id. at 3 25); and that it reduced output, (id. at 28). This combined to benefit Defendants, (id. at 29), and 4 harm consumers, (id. at 30). While Defendants assert the GTA, and its subsequent effects, are the 5 result of pro-competitive and anti-counterfeit motivations, (Dkt. No. 42 at 26, 43 at 24), the 6 Court will cannot address that countervailing fact at this time. See SmileCare Dental Group v. 7 Delta Dental Plan of California, 88 F.3d 780, 783 (9th Cir. 1996) (holding that “[d]ismissal for 8 failure to state a claim is appropriate where the complaint states no set of facts which, if true, 9 would constitute an antitrust offense, notwithstanding its conclusory language regarding the 10 elimination of competition and improper purpose.”) 11 Accordingly, the Court finds that, based on an application of the rule of reason, the facts 12 as alleged would constitute an offense—regardless of how Defendants would prefer to frame 13 them—and that they are sufficient to survive a motion to dismiss. 14 III. CONCLUSION 15 For the foregoing reasons, Defendants’ motions to dismiss (Dkt. Nos. 42, 43) are 16 DENIED in part and GRANTED in part. The Court DENIES Defendants’ motions to dismiss 17 under a rule of reason analysis. The Court GRANTS Defendant’s motions to dismiss Plaintiff’s 18 claim under a per se analysis with prejudice. 19 20 DATED this 8th day of June, 2023. A 21 22 23 John C. Coughenour 24 UNITED STATES DISTRICT JUDGE

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