1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 SC INNOVATIONS, INC., Case No. 18-cv-07440-JCS
8 Plaintiff, ORDER GRANTING MOTION TO 9 v. DISMISS AMENDED COMPLAINT
10 UBER TECHNOLOGIES, INC., et al., Re: Dkt. No. 64 Defendants. 11
12 I. INTRODUCTION 13 Plaintiff SC Innovations, Inc. (“Sidecar”) is a defunct “transportation network company” 14 that offered services matching passengers with drivers for on-demand transportation, also known 15 as “ride-hailing,” through a smartphone app. Sidecar claims that it was driven out of business by 16 Defendants Uber Technologies, Inc. and a number of its subsidiaries (collectively, “Uber”).1 The 17 Court held a hearing on January 17, 2020. For the reasons discussed below, Uber’s motion is 18 GRANTED. Sidecar’s Sherman Act claims are DISMISSED with leave to amend, and its claim 19 under California’s Unfair Practices Act is DISMISSED with prejudice.2 20 II. BACKGROUND 21 A. Procedural History 22 Sidecar filed this action on December 11, 2018. On May 2, 2019, the Court granted a 23
24 1 The remaining defendants are Raiser, LLC; Rasier-CA, LLC; Rasier-PA, LLC; Rasier-DC, LLC; Rasier-NY, LLC; and Uber USA, LLC. The parties do not suggest that there is any distinction 25 between the various defendants relevant to the present motion, except perhaps with respect to the scope of California’s Unfair Practices Act. The Court does not reach that issue, because to the 26 extent that some or all of the defendants fall within the geographic scope of that statute, they are nevertheless exempt from its requirements as utility corporations regulated by the California 27 Public Utilities Commission. 1 motion by Uber to disqualify Sidecar’s then-attorneys, the law firm of Quinn Emanuel Urquhart & 2 Sullivan, LLP. See Order Re Mot. to Disqualify Counsel (dkt. 41).3 Uber moved to dismiss 3 Sidecar’s initial complain on July 10, 2019 (dkt. 57), Sidecar elected to file its operative first 4 amended complaint (dkt. 60) rather than oppose the motion, and the Court denied that first motion 5 to dismiss as moot on September 25, 2019 (dkt. 63). Uber now moves to dismiss the amended 6 complaint. See generally Mot. (dkt. 64). 7 B. Allegations of the First Amended Complaint 8 Because the allegations of a complaint are generally taken as true in resolving a motion to 9 dismiss under Rule 12(b)(6), this section summarizes the allegations of Sidecar’s complaint as if 10 true. Nothing in this order should be construed as resolving any issue of fact that might be 11 disputed at a later stage of the case. 12 Ride-hailing apps allow passengers to request a ride to a particular destination, match them 13 with nearby drivers who will pick up the passengers, and then charge the passengers a fare for the 14 ride. 1st Am. Compl. (“FAC,” dkt. 60) ¶¶ 28–30, 35. The company operating the ride-hailing app 15 typically retains a percentage of the fare and transmits the remainder to the driver. Id. ¶ 35. 16 Uber launched the first version of its ride-hailing app in 2009, which “allowed consumers 17 to use smartphones to arrange on-demand transportation in ‘black cars’ and limousines driven by 18 licensed chauffeurs,” and “focused on airport trips and traditional business car service customers.” 19 Id. ¶¶ 2, 38. Sidecar introduced its own app in 2012, which allowed passengers to arrange for 20 transportation with drivers who used their own personal vehicles,4 and which introduced features 21 including allowing passengers to input destinations before booking trips, providing estimated fares 22 and trip durations before booking, allowing unaffiliated passengers heading in the same direction 23 to share rides, and allowing drivers to set their own prices. Id. ¶¶ 3–4, 41–44. Another company, 24 Lyft, launched a somewhat similar product the same year. Id. ¶ 40. According to Sidecar, Uber 25
26 3 SC Innovations, Inc. v. Uber Techs., Inc., No. 18-cv-07440-JCS, 2019 WL 1959493 (N.D. Cal. May 2, 2019). 27 4 Sidecar’s complaint refers to this concept as “ridesharing.” FAC ¶ 3. In the interest of clarity, 1 recognized Sidecar’s product as a competitive threat to its business as a result of Sidecar offering 2 lower prices and more flexibility. Id. ¶¶ 49–50. In 2013, Uber launched its “UberX” service, 3 which—like Sidecar’s product—allows passengers to arrange for transportation in drivers’ private 4 cars. Id. ¶¶ 5, 50–51. As of that year, “Uber was the dominant ridesharing platform in the United 5 States,” having become “enormously capitalized” and experiencing significant growth. Id. ¶ 5. 6 Lyft and Uber have since implemented many features pioneered by Sidecar. Id. ¶ 45. 7 During Sidecar’s years of operation from 2012 through 2015, its service was available in 8 San Francisco, Austin, Los Angeles, Chicago, Philadelphia, New York, Seattle, San Diego, San 9 Jose, and Washington, DC. Id. ¶ 46. Sidecar asserts that each of those cities constitutes a relevant 10 geographic market for the purpose of its antitrust claims. Id. ¶¶ 63–64. It had “a meaningful share 11 of the market in several U.S. cities,” including at one time an estimated share of between ten and 12 fifteen percent of the market in San Francisco, Los Angeles, and Chicago. Id. ¶ 47. 13 By mid-2014, Uber operated in all of Sidecar’s geographic markets. Id. ¶ 48. “Uber’s 14 CEO has publicly admitted in security filings that Uber intentionally prices its rides in certain 15 markets below the costs paid to drivers for the ride.” Id. ¶ 6; see also id. ¶¶ 85–92. In the time 16 period and geographic markets where Uber competed against Sidecar, the prices that Uber charged 17 passengers were lower than its variable costs. Id. ¶ 90. Uber cannot achieve profitability while 18 paying its drivers more than it receives for rides, and has in fact lost billions of dollars, but 19 continues to attract financing because “network effects” inherent in the ride-hailing industry “will 20 eventually financially reward the successful platform for its elimination of competition.” Id. ¶ 6; 21 see also id. ¶¶ 87, 89. According to Sidecar, Uber’s leadership “specifically planned for this 22 subsidized pricing strategy to foreclose competition,” sustaining losses in the short term “designed 23 to drive Sidecar and other competing ride-hailing apps out of the market” in the expectation that 24 Uber could later recoup those losses by charging higher prices. Id. ¶ 7. Sidecar alleges that 25 network effects would serve as a barrier to entry protecting Uber from meaningful competition 26 after it consolidated the market, id., analogizing Uber’s approach to that of Amazon.com, Inc., 27 which weathered significant losses for many years before dominating its market and reaping large 1 In 2015, Sidecar left the ride-hailing market, driven out of business by Uber’s purportedly 2 anticompetitive conduct. Id. ¶¶ 8, 12. Sidecar’s exit reduced competition to just Uber and Lyft in 3 the markets where Sidecar previously operated. Id. ¶¶ 112–13. Uber continued to price below 4 costs, targeting the only significant competitor left in the market, Lyft. Id. ¶¶ 8, 93. Sidecar 5 alleges that more recently, however, Uber and Lyft have “transitioned toward classic duopoly 6 behavior with Uber holding the dominant position in the market and Lyft holding on to a position 7 as a weakened competitor,” and Uber has started to increase the prices it charges passengers while 8 decreasing the amounts that it pays drivers. Id. ¶ 8; see also id. ¶¶ 93–98. According to Sidecar, 9 Lyft—weakened by competition with Uber at prices below costs—will defer to Uber’s pricing to 10 recover its own losses as well, and Uber has signaled its price increases to Lyft by announcing a 11 shift to no longer focusing on “incentives.” Id. ¶¶ 8, 99–100. 12 Sidecar alleges that in addition to engaging in predatory pricing, Uber also launched 13 “clandestine campaigns” to interfere with its competitors’ operations, submitting “fraudulent ride 14 requests” by Uber personnel intended “to undermine its competition and raise their costs, 15 including by (a) inundating competitors with fraudulent ride requests that were cancelled before 16 the driver arrived; or (b) using fraudulently requested trips as an opportunity to convince drivers to 17 work exclusively with Uber instead of competitors.” Id. ¶ 9; see also id. ¶¶ 101–10. Such tactics 18 increased the waiting time for drivers and passengers using the competing apps to be matched with 19 legitimate rides, causing them to abandon those apps. Id. ¶¶ 10, 106. The fraudulent requests also 20 violated Sidecar’s terms of service. Id. ¶¶ 108–09. 21 According to Sidecar, ride-hailing apps are “a relevant antitrust product market” in which a 22 hypothetical monopolist could impose a “small but significant non-transitory increase in price,” or 23 “SSNIP,” both by raising prices for passengers and by reducing the payments made to drivers, 24 without enough passengers or drivers switching to other methods of transportation to render such a 25 pricing strategy unprofitable. Id. ¶¶ 52–53. Sidecar cites conveniences including the ability to 26 split fares with friends, book carpool rides with strangers, automatically pay and tip drivers, select 27 the origin and destination of a ride on a map, determine estimated cost and travel time in advance, 1 why passengers would not respond to a price increase by switching to other forms of 2 transportation like taxis. Id. ¶¶ 53–54. Sidecar also alleges that walking, driving a passenger’s 3 own vehicle, and public transit are not reasonable substitutes. Id. ¶¶ 59–60. The flexibility of 4 ride-hailing and lack of need for special licensing or up-front investment are reasons why drivers 5 would not switch to the taxi or limousine industry if payouts from ride-hailing companies 6 decreased. Id. ¶¶ 55–56. Sidecar notes that ride-hailing is subject to different government 7 regulation than taxi companies, including often a prohibition against picking up “street hails,” and 8 that Uber has in the past asserted that it does not compete with taxis. Id. ¶¶ 57–58. 9 Sidecar alleges that “network effects” serve as a significant barrier to entry to a 10 consolidated ride-hailing market. Id. ¶¶ 65–79. As a particular ride-hailing network becomes 11 more established with more drivers and passengers using it, the waiting time for passengers and 12 drivers to be matched with one another decreases, as does the typical distance that drivers need to 13 travel to pick up the passengers they are matched with. Id. ¶¶ 67–68. That reduces the 14 inconvenience to passengers of waiting for rides, and increases the value to drivers as a result of 15 being able to spend more of their time with paying customers in their cars. Id. A new entrant to 16 the market would not be desirable to passengers while the number of participating drivers was 17 smaller than more established rivals, nor would it be desirable to drivers without a large user base 18 of passengers. Id. ¶ 71. Uber itself and market observers have recognized these market dynamics. 19 Id. ¶¶ 69–70, 75, 79. No significant competitors have entered the market since Sidecar ceased 20 operations, and Sidecar asserts that it would be “difficult, if not impossible, for a new entrant or 21 smaller firm to overcome” Uber’s entrenched advantages. Id. ¶¶ 72–73. 22 Uber now has more than forty million passengers using its service. Id. ¶ 74. At all times 23 since 2014, it has controlled at least 60% of the market in San Francisco and Los Angeles; 65% of 24 the market in Chicago, Seattle, San Diego, and San Jose; 70% of the market in Philadelphia, 25 Boston, and Washington, DC; and 75% of the market in New York. Id. ¶ 82. Sidecar asserts that 26 these market shares are sufficient for Uber to “ha[ve] monopoly power” in each of those cities. Id. 27 Uber’s national market share is around 70% and Lyft’s national market share is around 30%, with 1 Hailing Apps in the United States.” Id. ¶ 81. 2 Sidecar asserts claims for monopolization in violation of section 2 of the Sherman Act, id. 3 ¶¶ 118–47, attempted monopolization in violation of section 2 of the Sherman Act, id. ¶¶ 148–56, 4 and below cost pricing intended to harm competition in violation of California’s Unfair Practices 5 Act, id. ¶¶ 157–63. 6 C. Parties’ Arguments 7 1. Uber’s Motion 8 Uber moves to dismiss Sidecar’s Sharman Act claim, arguing that it is implausible that 9 Uber engaged in predatory pricing when it entered the non-limousine ride-hailing market a year 10 after Lyft and Sidecar, and also competing, in Uber’s view, against the long-established taxi 11 industry. Mot. at 5–6. Uber argues that Sidecar’s market definition, which excludes taxis, is 12 facially implausible. Id. at 10–12. Uber also contends that its low prices served the legitimate 13 purpose of gaining business in a new market and had the procompetitive effect of lowering prices 14 for consumers, id. at 6–7, and that Sidecar has not plausibly alleged a dangerous probability of 15 Uber recouping its losses, id. at 13–15. According to Uber, the plausibility of Sidecar’s claim is 16 undercut by Sidecar’s amendment of its complaint to replace allegations that Uber is now 17 recouping earlier losses with allegations that it continues to price below cost in competition with 18 Lyft. Id. at 7–8. Uber also argues that Sidecar does not allege monopolization because Lyft and 19 taxi companies continue to compete against Uber, id. at 8–13, and that Sidecar cannot base an 20 antitrust claim on allegations of mere tortious interference that would not have harmed 21 competition more broadly than merely harming Sidecar—allegations that Uber contends are too 22 conclusory to be credited, even if they could support an antitrust claim, id. at 16–19. 23 Uber argues that Sidecar’s claim under California’s Unfair Practices Act (the “UPA”) 24 should be dismissed with prejudice because Uber is exempt from the UPA as a “transportation 25 network company” subject to regulation by the California Public Utilities Commission (“CPUC”). 26 Id. at 19–20. Uber also moves to dismiss Sidecar’s UPA claim as barred by the statute of 27 limitations, id. at 19–22, inapplicable to conduct outside California, id. at 22–23, and unsupported 1 2. Sidecar’s Opposition 2 Sidecar argues that its proposed market definition is plausibly supported by allegations that 3 consumers and drivers differentiate between taxis and ride-hailing companies, and that the Court 4 must therefore accept that market definition at the pleading stage. Opp’n (dkt. 67) at 4–7. Sidecar 5 also contends that its allegations of predatory pricing are plausible, using the standard that the 6 Ninth Circuit and other courts have accepted of circumstantial evidence based on market 7 definition, the defendant controlling a dominant share of the market, significant barriers to entry, 8 and the inability of existing competitors to increase their output quickly. Id. at 7 (citing, e.g., 9 Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995)). Sidecar argues that 10 Uber’s late entry to the non-limousine ride-hailing market does not negate a claim for 11 monopolization, particularly given Uber’s established business as a platform for hailing 12 limousines, and that the legitimate competitive reasons that Uber asserts for its low prices are 13 matters for a jury to consider, not grounds for dismissal under Rule 12(b)(6). Id. at 8–10. 14 According to Sidecar, its allegations of predatory pricing and harm to competition are also 15 sufficient at this stage. Id. at 10–15. Sidecar further contends that allegations of tortious conduct 16 support a conclusion that Uber’s course of conduct as a whole was anticompetitive and had the 17 purpose and effect of harming competitors. Id. at 15–18. 18 Sidecar argues that Uber is not exempt from the UPA because the CPUC has not actually 19 regulated Uber’s prices, and asks the Court to depart from past decisions holding actual regulation 20 unnecessary (so long as the CPUC would have authority to regulate prices) and instead rely on the 21 plain language of the statute. Id. at 18. Sidecar contends that its UPA claim is timely because the 22 statute of limitations should run from when Sidecar was actually driven out of the market, and that 23 even if that were not the case, the continuing violations doctrine would allow Sidecar to base its 24 claim on the full course of Uber’s alleged conduct. Id. at 19. Sidecar also argues that it may bring 25 a UPA claim for all of the geographic markets at issue because Uber does business in California, 26 but at the very least may base its claim on the markets at issue within California, and that its 27 allegations of the intent and effects of Uber’s conduct are sufficient. Id. at 19–21. 1 3. Uber’s Reply 2 Uber argues in its reply that Sidecar wrongfully seeks to minimize the standard for 3 showing a dangerous probability of recoupment, and that Sidecar’s failure to meet that standard 4 warrants dismissal of its Sherman Act claim. Reply (dkt. 68) at 2–7. Uber also argues that 5 Sidecar’s claim defies “basic economic logic” in that Lyft was not driven from the market, in that 6 Uber was a new entrant to the non-limousine ride-hailing market when it began its alleged 7 predatory pricing, and in Sidecar’s exclusion of taxis from the alleged market definition. Id. at 7– 8 11. Uber argues again that alleged tortious interference does not support a Sherman Act claim, 9 and contends that Sidecar’s allegation that Uber representatives hailed rides on other platforms 10 (including Sidecar) in order to recruit drivers for Uber demonstrates a legitimate business purpose. 11 Id. at 11–13. 12 Uber briefly renews each of its arguments for dismissing Sidecar’s UPA claim. Id. at 13– 13 15. With respect to the geographic scope of that statute, Uber contends that applying it to conduct 14 outside of California would conflict with legislative intent and California’s presumption against 15 extraterritorial application of its laws. Id. at 14–15. 16 III. ANALYSIS 17 A. Legal Standard 18 A complaint may be dismissed for failure to state a claim on which relief can be granted 19 under Rule 12(b)(6) of the Federal Rules of Civil Procedure. “The purpose of a motion to dismiss 20 under Rule 12(b)(6) is to test the legal sufficiency of the complaint.” N. Star Int’l v. Ariz. Corp. 21 Comm’n, 720 F.2d 578, 581 (9th Cir. 1983). Generally, a claimant’s burden at the pleading stage 22 is relatively light. Rule 8(a) of the Federal Rules of Civil Procedure states that a “pleading which 23 sets forth a claim for relief . . . shall contain . . . a short and plain statement of the claim showing 24 that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a). 25 In ruling on a motion to dismiss under Rule 12(b)(6), the court takes “all allegations of 26 material fact as true and construe[s] them in the light most favorable to the non-moving party.” 27 Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal may be based on a 1 Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). A pleading must “contain 2 either direct or inferential allegations respecting all the material elements necessary to sustain 3 recovery under some viable legal theory.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 562 (2007) 4 (citing Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984)). “A pleading 5 that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action 6 will not do.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). 7 “[C]ourts ‘are not bound to accept as true a legal conclusion couched as a factual allegation.’” 8 Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). “Nor does a 9 complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal, 10 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). Rather, the claim must be “‘plausible on its 11 face,’” meaning that the claimant must plead sufficient factual allegations to “allow the court to 12 draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting 13 Twombly, 550 U.S. at 570). 14 B. Sherman Act 15 Section 2 of the Sherman Act prohibits “monopoliz[ing], or attempt[ing] to monopolize . . . 16 any part of the trade or commerce among the several States.” 15 U.S.C. § 2. Under the Clayton 17 Act, “any person who shall be injured in his business or property by reason of anything forbidden 18 in the antitrust laws may sue therefor,” and may recover treble damages. 15 U.S.C. § 15(a). 19 “Simply possessing monopoly power and charging monopoly prices does not violate § 2; rather, 20 the statute targets ‘the willful acquisition or maintenance of that power as distinguished from 21 growth or development as a consequence of a superior product, business acumen, or historic 22 accident.’” Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 447–48 (2009) (quoting 23 United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966)).
24 In order to state a claim for monopolization under [section 2 of the Sherman Act], a plaintiff must prove that: (1) the defendant possesses 25 monopoly power in the relevant market; (2) the defendant has willfully acquired or maintained that power; and (3) the defendant’s 26 conduct has caused antitrust injury. SmileCare Dental Group v. Delta Dental Plan of California, Inc., 88 F.3d 780, 783 (9th Cir. 1996) 27 (citations omitted). prove: (1) specific intent to control prices or destroy competition; (2) 1 predatory or anticompetitive conduct to accomplish the monopolization; (3) dangerous probability of success; and (4) causal 2 antitrust injury. Id. (citations omitted). 3 Cost Mgmt. Servs., Inc. v. Wash. Nat. Gas Co., 99 F.3d 937, 949–50 (9th Cir. 1996) (footnote 4 omitted; line break added). 5 One means of monopolization recognized by the courts—albeit with skepticism—is 6 predatory pricing, in which an aspiring monopolist sets “below-cost prices that drive rivals out of 7 the market and allow the monopolist to raise its prices later and recoup its losses.” Pac. Bell, 555 8 U.S. at 448; see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589 (1986) 9 (“[T]here is a consensus among commentators that predatory pricing schemes are rarely tried, and 10 even more rarely successful.”). Such a claim requires the plaintiff to show both pricing below 11 costs and a probability of recoupment:
12 “[C]utting prices in order to increase business often is the very essence of competition.” Matsushita Elec. Industrial Co. v. Zenith 13 Radio Corp., 475 U.S. 574, 594 (1986). In cases seeking to impose antitrust liability for prices that are too low, mistaken inferences are 14 “especially costly, because they chill the very conduct the antitrust laws are designed to protect.” Ibid.; see also Brooke Group [Ltd. v. 15 Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (1993)]; Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 121–122, n. 17 16 (1986). To avoid chilling aggressive price competition, we have carefully limited the circumstances under which plaintiffs can state a 17 Sherman Act claim by alleging that prices are too low. Specifically, to prevail on a predatory pricing claim, a plaintiff must demonstrate 18 that: (1) “the prices complained of are below an appropriate measure of its rival's costs”; and (2) there is a “dangerous probability” that the 19 defendant will be able to recoup its “investment” in below-cost prices. Brooke Group, supra, at 222–224. “Low prices benefit consumers 20 regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition.” Atlantic Richfield 21 Co. v. USA Petroleum Co., 495 U.S. 328, 340 (1990). 22 Pac. Bell, 555 U.S. at 451. “That below-cost pricing may impose painful losses on its target is of 23 no moment to the antitrust laws if competition is not injured: It is axiomatic that the antitrust laws 24 were passed for ‘the protection of competition, not competitors.’” Brooke Grp., 509 U.S. at 224 25 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)). 26 1. Sidecar Alleges a Plausible Market 27 “In order to state a valid claim under the Sherman Act, a plaintiff must allege that the 1 513 F.3d 1038, 1044 (9th Cir. 2008). “The outer boundaries of a product market are determined 2 by the reasonable interchangeability of use or the cross-elasticity of demand between the product 3 itself and substitutes for it.” Brown Shoe, 370 U.S. at 325. A common test for such 4 interchangeability “is to find whether a hypothetical monopolist could impose a ‘small but 5 significant nontransitory increase in price’ (‘SSNIP’) in the proposed market” without causing 6 enough consumers to switch to products outside the market definition to render the price increase 7 unprofitable. See St. Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 8 775, 784 (9th Cir. 2015) (considering geographic market definition). 9 Uber argues that Sidecar’s alleged market of app-based ride-hailing services, excluding 10 taxis, defies common sense. It is certainly possible that ride-hailing companies like Uber compete 11 against taxi companies—as a number of taxi companies have argued in lawsuits against Uber. 12 See, e.g., Phila. Taxi Ass’n Inc. v. Uber Techs., Inc., 886 F.3d 332 (3d Cir. 2018); Desoto Cab Co. 13 v. Uber Techs, Inc., No. 16-cv-06385-JSW, 2018 WL 10247483 (N.D. Cal. Sept. 24, 2018); 14 Malden Transp., Inc. v. Uber Techs., Inc., 321 F. Supp. 3d 174 (D. Mass. 2018). At this stage of 15 the case, however, the Court takes Sidecar’s factual allegations as true. 16 Sidecar alleges that consumers distinguish between ride-hailing companies and taxi 17 companies such that a price increase for ride-hailing services meeting the “SSNIP” standard would 18 not cause consumers to switch to taxis. To the extent such an assertion might, alone, be a 19 conclusion not entitled to be taken as true, Sidecar supports it with allegations that consumers base 20 that decision on conveniences that taxis do not share, such as the ability to rate and review drivers, 21 arrange for shared rides with strangers, and receive fare quotes in advance. FAC ¶¶ 53–54. 22 Taking those allegations of consumer preferences as true, it is plausible that ride-hailing services 23 constitute a distinct market. While Uber of course remains free to attack this premise of Sidecar’s 24 case on its factual merits at summary judgment or trial if the case advances beyond the pleading 25 stage, the Court accepts Sidecar’s market definition for the purpose of the present motion.5 26 27 1 2. Sidecar Alleges Below-Cost Pricing 2 Uber suggests in a footnote, and in passing in other parts of its motion, that Sidecar has not 3 sufficiently alleged below-cost pricing. See Mot. at 7 n.7 (faulting Sidecar for relying on financial 4 statements and on allegations that do not identify particular geographic markets); id. at 9 (“Even 5 assuming (wrongly) that [Sidecar] has properly alleged below-cost pricing for UberX . . . .”). 6 Among other relevant allegations, Sidecar alleges that “[b]etween 2013 and 2016, in the markets 7 where Uber was competing with Sidecar, the average prices Uber charged Passengers were lower 8 than Uber’s average variable cost per transaction.” FAC ¶ 20. Uber has presented no reason why 9 the Court should not take that factual allegation as true in resolving the present motion under Rule 10 12(b)(6). The Court concludes that Sidecar has sufficiently alleged below-cost pricing. 11 3. Sidecar Does Not Allege Market Power 12 In order to state a claim for monopolization, Sidecar must plausibly allege monopoly 13 power, which “the Supreme Court has defined . . . as the power to ‘control prices or exclude 14 competition.’” Cost Mgmt. Servs., 99 F.3d at 950 (quoting Grinnell Corp., 384 U.S. at 571). 15 “Whether monopoly power exists depends on a variety of factors,” with market share relevant to 16 that analysis but not the only factor; depending on market conditions, courts have found both 17 market power and a lack of market power when a defendant’s market share is in the sixty to 18 seventy percent range. Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 19 1980). The typical way in which an incomplete monopolist—a defendant with less than full 20 control of the market—can nevertheless exert monopoly power is when that party controls enough 21 of the market that “by restricting its own output, it can restrict marketwide output and, hence, 22 increase marketwide prices.” Rebel Oil, 51 F.3d at 1434. “Prices increase marketwide in response 23 to the reduced output because consumers bid more in competing against one another to obtain the 24 smaller quantity available.” Id. 25 Uber is correct that, in asserting a Sherman Act claim, Sidecar cannot rely on allegations 26 that an oligopoly made up of Uber and Lyft has the power to control prices. Although the 27 Supreme Court held in Brooke Group that a defendant might recoup losses not only by “driving 1 within a disciplined oligopoly,” that case considered claims under the Robinson-Patman Act, 2 which the Court noted was broader than “the provisions of the Sherman Act, which speak only of 3 various forms of express agreement and monopoly.” Brooke Grp., 509 U.S. at 225. The Ninth 4 Circuit addressed the viability of “disciplined oligopoly” claims under the Sherman Act in detail 5 in Rebel Oil:
6 Although oligopoly pricing cannot be ruled out as a plausible means to recoup predatory losses, oligopoly pricing standing alone does not 7 prove that [defendant] ARCO has market power, at least not the degree of market power to raise the concerns of the Sherman Act. 8 “The fact that competitors may see proper, in the exercise of their own judgment, to follow the prices of another manufacturer, does not 9 establish any suppression of competition or any sinister domination,” and does not violate the Sherman Act. The reason for this rule is clear. 10 To pose a threat of monopolization, one firm alone must have the power to control market output and exclude competition. An 11 oligopolist lacks this unilateral power. By definition, oligopolists are interdependent. An oligopolist can increase market price, but only if 12 the others go along.
13 In Indiana Grocery, the Seventh Circuit rejected an argument similar to [plaintiff] Rebel’s. The plaintiff, Indiana Grocery, claimed that the 14 defendant’s predatory pricing “disciplined” rivals to the extent that the defendant and his rivals had engaged in oligopoly pricing. The 15 court rejected the plaintiff’s argument that oligopoly pricing indicated market power, stating 16 Indiana Grocery’s theory does not implicate section 2 of the 17 Sherman Act. At best, it poses the danger that [the defendant’s] anticompetitive conduct could result in 18 diminished price competition in an oligopolistic . . . market. Section 2, however, does not govern single-firm 19 anticompetitive conduct aimed only at creating an oligopoly . . . . [“]Congress authorized scrutiny of single firms only 20 when they pose a danger of monopolization.”
21 Indiana Grocery [Inc. v. Super Valu Stores, Inc., 864 F.2d 1409, 1416 (7th Cir. 1989)] (quoting Copperweld Corp. v. Independence Tube 22 Corp., 467 U.S. 752, 768 (1984)) (citations omitted). We recognize that a gap in the Sherman Act allows oligopolies to slip past its 23 prohibitions, but filling that gap is the concern of Congress, not the judiciary. 24 25 Rebel Oil, 51 F.3d at 1442–43 (some alterations in original; some citations omitted without 26 ellipses). 27 Sidecar does not allege that Uber has the power to raise market prices above competitive 1 increasing its own output. Instead, Sidecar alleges that Uber has disciplined Lyft to the point that 2 Lyft chooses not to compete against Uber in price, and that Lyft will respond to Uber’s signals 3 regarding increased prices in order to recoup its own losses. See FAC ¶¶ 8, 99–100. Such 4 allegations are indistinguishable from the “disciplined oligopoly” that Brooke Group addressed 5 under the Robinson-Patman Act, and that the Ninth Circuit held insufficient to support a claim 6 under the Sherman Act in Rebel Oil. 7 Even if the Court accepts Sidecar’s allegations that Uber can raise prices above 8 competitive levels by disciplining Lyft, this Court is not free to depart from the Ninth Circuit’s 9 holding that, without action by Congress, such oligopoly power must “slip past” the Sherman 10 Act’s prohibitions. See Rebel Oil, 51 F.3d at 1443. Uber’s motion to dismiss Sidecar’s 11 monopolization claim is GRANTED. Because it is conceivable that Sidecar could allege that 12 Uber can unilaterally raise market prices by restricting its output, however, the Court grants 13 Sidecar leave to amend.6 14 4. Sidecar Does Not Allege a Cognizable Probability of Recoupment 15 Uber contends that Sidecar has not sufficiently alleged a dangerous probability of 16 recoupment, but errs in conflating an evidentiary standard—and, for that matter, a standard as 17 described by a commentator rather than by any court—for the pleading standard applicable to 18 Sidecar’s allegations. See Mot. at 13 (quoting a treatise for the rule that “‘[t]he recoupment 19 requirement as the Supreme Court has articulated it requires something close to dollars-and-cents 20 proof that the predatory strategy could reasonably be predicted to have a positive payoff’” 21 (emphasis added)). 22 Regardless, however, the same flaw discussed above in the context of Sidecar’s 23 monopolization claim also warrants dismissal of its attempted monopolization claim. Rebel Oil, in 24 which the Ninth Circuit held that a theory of oligopoly rather than true monopoly power to control 25 prices was not sufficient, concerned a claim for attempted monopolization. See Rebel Oil, 51 F.3d 26
27 6 The Court further notes, but does not rely on, Sidecar’s failure to allege that Uber has in fact set 1 at 1442 (“Rebel’s evidence cannot, as a matter of law, be the basis for inferring market power in 2 its attempted monopolization claim.”). 3 In Rebel Oil, the Ninth Circuit required a showing of market power not only for an actual 4 monopolization claim, but also an attempted monopolization claim, albeit with a somewhat lower 5 standard for showing such power. See id. at 1438 (“We agree with Rebel that the minimum 6 showing of market share required in an attempt case is a lower quantum than the minimum 7 showing required in an actual monopolization case.”). Even in the context of attempted 8 monopolization, “[m]arket power cannot be inferred solely from the existence of entry barriers and 9 a dominant market share. The ability to control output and prices—the essence of market power— 10 depends largely on the ability of existing firms to quickly increase their own output in response to 11 a contraction by the defendant.” Id. at 1441.7 As noted above, Sidecar does not allege that Lyft 12 lacks the ability to increase output. Instead, Sidecar alleges that Lyft will follow Uber in setting 13 supracompetitive prices because Lyft, like Uber, has sustained massive losses from below-cost 14 pricing that it must now recoup. Such coordinated action by an oligopoly of two dominant firms 15 does not meet the standard set by the Ninth Circuit for attempted monopolization through 16 predatory pricing under the Sherman Act. See id. at 1443 (“To pose a threat of monopolization, 17 one firm alone must have the power to control market output and exclude competition.”). 18 Sidecar’s attempted monopolization claim is therefore DISMISSED. 19 As discussed above in the context of the monopolization claim, it is possible Sidecar might 20 be able to amend its complaint to allege that Uber has market power because it can raise prices by 21 restricting output and that Lyft could not respond by increasing its own output. Sidecar conceded 22 at oral argument, however, that Lyft could increase output “in theory,” and instead argued 23 primarily that Sidecar could amend to allege that Lyft cannot increase output without facing 24 7 Rebel Oil does not clearly address whether an attempted monopolization claim might lie where a 25 defendant lacks market power in the traditional sense of rivals having limited ability to increase output in response to the defendant’s efforts to recoup, but poses a real threat of driving all 26 competitors out of the market through predatory pricing, and could at that point recoup losses, protected from new competition by significant structural barriers to entry. In this case, however, 27 Sidecar has not alleged that Uber seeks to or is likely to drive Lyft out of the ride-hailing market, 1 devastating retaliation from Uber, which would presumably take the form of renewed predatory 2 pricing. It is not clear that such a theory would meet the standard of Rebel Oil. The Ninth Circuit 3 in that case rejected an argument that ARCO had market power “because Las Vegas marketers had 4 been ‘disciplined’ by ARCO’s previous predation and refused to challenge ARCO’s 5 supracompetitive prices,” or in other words, that the market at issue was “a ‘disciplined’ oligopoly 6 in which each oligopolist shares in the supracompetitive profits.” Id. at 1432; see also id. at 1443. 7 At the hearing, however, Uber’s counsel declined the Court’s invitation to argue that Sidecar’s 8 theory is not viable as a matter of law, instead focusing on questions of plausibility more 9 appropriate for resolution on an evidentiary record. The Court therefore reserves a final ruling on 10 the viability of Sidecar’s theory and grants Sidecar leave to amend. 11 * * * 12 Although Sidecar’s failure to allege cognizable market power, or a dangerous probability 13 of obtaining such power, is enough to warrant dismissal of its Sherman Act claims, the Court also 14 addresses some of the parties’ other arguments regarding those claims below, in order to ensure 15 that leave to amend would not be futile and to avoid duplicative briefing in the event that Sidecar 16 amends its complaint. 17 5. UberX’s 2013 Debut Does Not Negate Sidecar’s Claims 18 Uber contends that Sidecar’s allegations are implausible because they rely on Uber’s 19 purported intent “‘to destroy companies larger and better established than [it]sel[f].’” See Mot. at 20 6 (quoting Matsushita, 475 U.S. at 597). According to Uber, the most “entrenched and dominant 21 incumbents” were taxi companies. Id. Given that, as discussed above, the Court accepts at this 22 stage Sidecar’s proposed ride-hailing market excluding taxis, the entrenchment of preexisting taxi 23 companies has no bearing on the viability of Sidecar’s claims. 24 Uber also suggests that it started from a disadvantage as compared to Sidecar and Lyft, 25 which introduced their non-limousine ride-hailing apps in 2012, the year before Uber debuted its 26 similar UberX service in 2013. See id. at 5. It is not clear whether that timing is particularly 27 significant—Sidecar alleges a market of ride-hailing generally, not limited to those using drivers’ 1 Regardless, even if the Court looked only to non-limousine services, Sidecar and Lyft’s one-year 2 head start is not comparable the facts in Matsushita. There, the collective market share held by the 3 defendants—“a large number of firms”—reached only fifty percent two decades after the 4 commencement of an alleged conspiracy, and the two largest market participants, who were not 5 part of the alleged conspiracy but rather targets of it, maintained their approximately forty percent 6 market share throughout that period with no appreciable change. Matsushita, 475 U.S. at 590–92. 7 Here, in contrast, Sidecar alleges that Uber sought to monopolize a newly emerging product 8 market—not one with long-established incumbents—and that rather than failing to dislodge 9 dominant incumbents as in Matsushita, Uber quickly became “the dominant ridesharing platform 10 in the United States.” See FAC ¶ 5. 11 While a finder of fact could perhaps conclude that Sidecar and Lyft’s earlier start in non- 12 limousine ride-hailing weighs against an intent to monopolize or a likelihood of recoupment, Uber 13 cites no authority holding that a defendant’s late entry into a particular segment of the alleged 14 relevant market bars a monopolization claim as a matter of law, and the Court declines to so hold. 15 6. Asserted Pro-Competitive Purposes Do Not Warrant Dismissal 16 Uber argues that Sidecar’s Sherman Act claims should be dismissed because the 17 allegations of the complaint allow for an inference that Uber’s goal was simply to enter a new 18 market rather than to monopolize it. See Mot. at 7 (citing, e.g., Malden Transp., 321 F. Supp. 3d 19 at 180 (citing U.S. Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610, 612 n.1 (1977))). In the 20 Ninth Circuit, however, if “the plaintiff proves that the defendant’s prices were below average 21 variable cost, the plaintiff has established a prima facie case of predatory pricing and the burden 22 shifts to the defendant to prove that the prices were justified without regard to any anticipated 23 destructive effect they might have on competitors.” William Inglis & Sons Baking Co. v. ITT 24 Cont’l Baking Co., 668 F.2d 1014, 1036 (9th Cir. 1981). Having alleged that Uber set prices 25 below its variable costs, FAC ¶ 90, Sidecar’s complaint need not negate the possibility that Uber 26 could show that it had a permissible purpose in doing so—particularly where Sidecar has alleged 27 actual harm to competition in that one of only three competitors in the market exited as a result of 1 Uber is of course correct that—if Sidecar amends its complaint to resolve the defects 2 above—Uber “may be allowed to prove ‘nonpredatory and acceptable business reasons’ for prices 3 that are below even marginal or average variable cost,” see William Inglis, 668 F.2d at 1033 4 (emphasis added; citation omitted); Mot. at 6 n.5, and the allegations on which Uber relies—for 5 example, that network effects drive down costs as Uber expands, Mot. at 7 (citing FAC ¶ 70)— 6 may be relevant to such a showing. But those allegations do not in themselves establish that Uber 7 was motivated primarily by realizing such efficiencies rather than by eliminating competition, or 8 that consumers are on balance better off in a monopolized market benefiting from network effects 9 than in a competitive market benefiting from competition. Taking Sidecar’s allegation of below- 10 variable-cost pricing as true, it is Uber’s burden to prove acceptable business reasons for its 11 pricing. Sidecar’s failure to preclude such a defense is not grounds for dismissal. 12 * * * 13 Although not all of Uber’s arguments present grounds for dismissal, Sidecar fails to allege 14 to allege cognizable market power or a dangerous probability of Uber obtaining such power. 15 Sidecar’s Sherman Act claims are therefore DISMISSED with leave to amend. 16 C. California’s Unfair Practices Act 17 California’s Unfair Practices Act prohibits, among other things, “for any person engaged in 18 business within this State to sell any article or product at less than the cost thereof to such vendor, 19 or to give away any article or product, for the purpose of injuring competitors or destroying 20 competition.” Cal. Bus. & Prof. Code § 17043. By its terms, however, the UPA does not apply 21 “[t]o any service, article or product for which rates are established under the jurisdiction of the 22 [CPUC] and sold or furnished by any public utility corporation.” Id. § 17024(1). The statute uses 23 the term “public utility corporation” to refer to a privately-owned corporation that provides public 24 utility services. See Actions v. Uber Techs., No. CJC-17-004925, 2018 Cal. Super. LEXIS 1913, 25 at *5 (Jan. 30, 2018).8 26
27 8 The version of this January 30, 2018 order sustaining a demurrer with leave to amend that is 1 Sidecar concedes that “Uber is subject to the jurisdiction of the California Public Utilities 2 Commission,” Opp’n at 18, but alleges that the CPUC “has established no rates for any service, 3 article, or product sold by Uber,” Compl. ¶ 163. The parties dispute whether that exception 4 applies only where the CPUC has itself actually set rates, or more broadly where the CPUC has 5 jurisdiction to set rates. Two decisions from this district, and one decision by a California trial 6 court, have previously sided with Uber, holding that it is exempt from the Unfair Practices Act 7 because it is subject to regulation by the CPUC. Diva Limousine, Ltd. v. Uber Techs., Inc., 392 F. 8 Supp. 3d 1074, 1085–89 (N.D. Cal. 2019); Desoto Cab Co., Inc. v. Uber Techs., Inc., No. 16-cv- 9 06385-JSW, 2018 WL 10247483 (N.D. Cal. Sept. 24, 2018); Actions, 2018 Cal. Super. LEXIS 10 1913, at *4–8. 11 All three of those cases rely on the California appellate decision Hladek v. City of Merced, 12 69 Cal. App. 3d 585 (1977), where a court interpreted the second subpart of section 17024, which 13 governs exceptions for “publicly owned public utilities” rather than privately-owned “public 14 utility corporations.” That exception encompasses “any service, article or product sold or 15 furnished by a publicly owned public utility and upon which the rates would have been established 16 under the jurisdiction of the Public Utilities Commission of this State if such service, article or 17 product had been sold or furnished by a public utility corporation.” Cal. Bus. & Prof. Code 18 § 17024(2). In Hladek, the owner of a private transportation company sued the city of Merced 19 under the UPA for establishing a competing public transportation service and operating it at a loss. 20 69 Cal. App. 3d at 588. The Court of Appeal affirmed the trial court’s decision to sustain a 21 demurrer, holding it “obvious that the allegations in appellants’ complaint concerning unfair 22 competition [were] inadequate to state a cause of action against respondent” where they failed to 23 show “that the Public Utilities Commission would not have had jurisdiction to set rates for 24 respondent’s transportation service if the service were provided by privately owned public utility 25 corporation,” which, according to the court, “in turn determines whether respondent’s business 26 activity is outside the exemption.” Id. at 591. As the more recent UPA cases involving Uber have 27 noted, the Hladek court did not look to whether the CPUC would in fact have set rates for the 1 had jurisdiction to do so. See Diva Limousine, 392 F. Supp. 3d at 1088; Actions, 2018 Cal. Super. 2 LEXIS 1913, at *6–7. 3 Judge Chen’s decision in Diva Limousine not only examined Hladek, but also considered 4 the language and context of the statutory exception. According to Judge Chen, the use of the 5 passive voice without explicitly specifying an actor to establish the rates—addressing products 6 “for which rates are established under the jurisdiction of the Public Utilities Commission,” rather 7 than, perhaps, “rates established by the Public Utilities Commission”—permits a reading in which 8 “the rates established by a public utility which are merely subject to the CPUC’s jurisdiction 9 are ‘rates are established under the jurisdiction of’ [the] CPUC irrespective of whether the CPUC 10 actually exercises its rate setting authority.” Diva Limousine, 392 F. Supp. 3d at 1085–86. Judge 11 Chen held that the CPUC’s discretion to decline to set rates for public utility corporations within 12 its jurisdiction, as well as “the fact that the statutory scheme allows the CPUC to consider 13 anticompetitive concerns when regulating public utility corporations like Uber,” support the 14 broader reading in which the exemption turns on the scope of CPUC jurisdiction rather than the 15 exercise of that jurisdiction. Id. at 1086–87 (“That the CPUC retains authority to address 16 anticompetitive behavior in regulating charter-party carriers suggests that the legislature intended 17 to leave to the CPUC the field of regulating and monitoring prices of utilities under its 18 jurisdiction.”). 19 Sidecar’s opposition brief does not address the reasoning of any of the decisions holding 20 that Uber falls within the exception of section 17024(1), asserting only that they “conflict with the 21 plain language and purpose of the statute” and are not binding on this Court. Opp’n at 18. As 22 Judge Chen explained in Diva Limousine, however, neither the statutory language nor any 23 presumption of a logical statutory purpose compels the narrower reading that Sidecar proposes. 24 Prices set by Uber may be considered “rates . . . established under the jurisdiction of the Public 25 Utilities Commission” to the extent that the CPUC would have authority to regulate those rates, 26 and exempting such prices from the UPA does not insulate them from antitrust scrutiny so long as 27 1 the CPUC could step in if it sees fit to do so.” The broader reading is also more consistent with 2 || Hladek, which—as a decision by a state intermediate court addressing an issue not yet resolved by 3 || the California Supreme Court—this Court is bound to follow “‘unless there is convincing evidence 4 || that the highest court of the state would decide differently.’” Owen ex rel. Owen v. United States, 5 || 713 F.2d 1461, 1464 (9th Cir. 1983) (quoting Andrade v. City of Phoenix, 692 F.2d 557, 559 (9th 6 Cir. 1982) (per curiam)). Sidecar has offered no such evidence. 7 This Court follows the unanimous consensus of decisions addressing the issue, and holds 8 || that Uber is exempt from the UPA because it falls within the jurisdiction of the CPUC. Sidecar’s 9 UPA claim is DISMISSED with prejudice. 10 || IV. CONCLUSION ll For the reasons discussed above, Sidecar’s Sherman Act claims are DISMISSED with || leave to amend, and its UPA claim is DISMISSED with prejudice. If Sidecar believes that it can
13 cure the defects in its Sherman Act claims, it may file a second amended complaint no later than
14 || February 4, 2020. 15 IT IS SO ORDERED. 16 || Dated: January 21, 2020 & = 17 J PH C. SPERO 2 18 ief Magistrate Judge 19 20 21 22 23 24 25 26 |I 9 If the CPUC were primarily concerned with shielding consumers from excessive utility pricing, 07 its decision not to interfere with Uber setting low prices might be a rational approach to that goal: consumers at least arguably benefited from those prices, and if Uber attempted to use the dominant 28 market position that it obtained as a result to set supracompetitive prices in the future, the CPUC could exercise its regulatory authority at that time to prevent Uber from doing so.