Antitrust

Reining in Big Tech

Shawn Zhang, MJLST Staffer

Introduction

On Tuesday January 24, 2023, the United States Department of Justice, along with the Attorneys General of eight states, have jointly filed a civil antitrust lawsuit against Google for monopolizing multiple digital advertising technology products in violation of Sections 1 and 2 of the Sherman Act.

Background

The Sherman Act (the Act) is the first antitrust statute of the U.S., passed in 1890 as a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” The alleged violations are for Sections 1 and 2 of the Act.

Section 1 is broad and sweeping in scope. Section 1 declares restraint of trade involving “contract, combination, or conspiracy” to be illegal. A key feature of Section 1 is that the words “contract, combination, or conspiracy” are all concerted actions that require more than one party to engage. Therefore, Section 1 cannot apply to unilateral actions. An example of such concerted action would be horizontal price fixing; multiple competitors in the same market agree with each other to set the same price for a given product. The statute then describes the penalty for violating the Act of being a maximum fine of $100 million for corporations, and/or maximum imprisonment of 10 years.

Section 2, unlike Section 1, prohibits monopolization and the language “every person” indicates that it does not require concerted action. A single entity even attempting to monopolize will be penalized. Concerted actions for monopolization or attempts to monopolize are covered as well by the language “or combine or conspire with any other person or persons.” The penalties for violations of either section can be severe, resulting in massive fines and/or imprisonment. Most enforcement actions are civil, but individuals and businesses may be prosecuted by the Department of Justice. However, criminal prosecutions are typically limited in practice.

Analysis

Google’s business model is driven primarily from their search engine services. The purpose is to deliver users the answers they are seeking. Through this search engine function, Google gains the opportunity to sell advertisements, in which Google earns huge amounts of its revenue from. With its dominance in the search engine industry, Google has obtained dominance in selling advertisements as well.

The complaint alleges that Google monopolizes key digital advertising technologies, collectively referred to as the “ad tech stack,” that website publishers depend on to sell ads. Advertisers rely on this ad tech stack to buy ads and reach potential customers. The complaint also alleges that Google has engaged in a course of anticompetitive and exclusionary conduct over the past 15 years that consists of neutralizing or eliminating ad tech competitors through acquisitions. By doing this, Google has maintained dominance in tools relied on by website publishers and online advertisers. “The Department’s landmark action against Google underscores our commitment to fighting the abuse of market power,” said Associate Attorney General Vanita Gupta. The lawsuit seeks to hold Google accountable for its “longstanding monopolies” in digital advertising technologies that content creators use to sell ads and advertisers use to buy ads on the open internet.

The key contentions to be fought over in this lawsuit includes acquiring competitors, forcing adoption of Google’s tools, distorting auction competition, and auction manipulation. The Act seeks to maintain competition in the markets and eliminate monopolies; the Department of Justice attempts to enforce the spirit of the Act by eliminating the alleged monopolistic behaviors by Google and restoring competition. The agency ultimately seeks both equitable relief on behalf of the American public as well as treble damages for losses sustained by federal government agencies that overpaid for web display advertising.

In light of the developments in antitrust laws, a company must only be found to have violated the statute when it has “engaged in practices that extend beyond competition on the merits.” The plaintiffs must prove that Google’s conduct harms competition, restrains trade, or amounts to monopolization or attempts of monopolization. It is difficult to determine whether Google has engaged in those aforementioned practices, as they could be seen as efficient business conduct. But if the Department of Justice wins the case, it could have huge implications for Google and the rest of the tech industry.

Implications for the Tech Industry

If the Department of Justice succeeds in their lawsuit, Google may face several consequences including divestiture. Microsoft was found to have violated antitrust laws in the late 1990s, and was forced to break up its company into separate companies. Another possible relief would be to force Google to allow other search engines to be the default program for devices including phones and tablets  – which the DOJ has attempted to do in the past. “Alphabet Inc.’s Google pays billions of dollars each year to Apple Inc., Samsung Electronics Co. and other telecom giants to illegally maintain its spot as the No. 1 search engine … Google’s contracts form the basis of the DOJ’s landmark antitrust lawsuit, which alleges the company has sought to maintain its online search monopoly in violation of antitrust laws.”

This case could renew the scrutiny against other tech giants such as Meta and Amazon. If the Department of Justice succeeds, it’s highly likely that they will go after other tech giants as well. The victory of the government may begin an era of tech reform, making it easier for competitors to enter the market and thus offering more options for consumers. Tech giants may be forced to reduce their prices if there are more competitors in the market, which may lead to better consumer welfare.

On the other hand, the government’s victory may harm the tech industry. Google and other tech giants are highly efficient businesses that can provide services for lower costs through economies of scale. By forcing them to split up their companies and preventing them from reaching their efficiencies, their services may become more expensive. However, efficiency is not a justification for monopolies, as monopolies largely bring more harm than benefits to consumers  by being able to impose unreasonably high prices. An example of price gouging due to monopolistic practice was when Martin Shkreli thwarted competition for the drug Daraprim (used to treat HIV patients) and increased prices from $13.50 per pill to $750.00 per pill.

Conclusion

This lawsuit will be watched closely by regulators and tech giants as it could embolden regulators to go after other companies if this attempt is successful.  Regulators are actively looking to rein in big tech companies, as evident by all the antitrust investigations in the past decades, as well as the bill targeting big tech companies currently moving through Congress. The fight between regulators and the tech industry continues, and we look forward to seeing the courts determine a fair ruling that may pave the road for a better economy with greater consumer welfare.

 


Call of Regulation: How Microsoft and Regulators Are Battling for the Future of the Gaming Industry

Caroline Moriarty, MJLST Staffer

In January of 2022 Microsoft announced its proposed acquisition of Activision Blizzard, a video game company, promising to “bring the joy and community of gaming to everyone, across every device.” However, regulators in the United States, the EU, and the United Kingdom have recently indicated that they may block this acquisition due to its antitrust implications. In this post I’ll discuss the proposed acquisition, its antitrust concerns, recent actions from regulators, and prospects for the deal’s success.

Background

Microsoft, along with making the Windows platform, Microsoft Office suite, Surface computers, cloud computing software, and of new relevance, Bing, is a major player in the video game space. Microsoft owns Xbox, which along with Nintendo and Sony (PlayStation) is one of the three most popular gaming consoles. One of the main ways these consoles distinguish themselves from their competitors is by categorizing certain games as “exclusives,” where certain games can only be played on a single console. For example, Spiderman can only be played on PlayStation, the Mario games are exclusive to Nintendo, and Halo can only be played on Xbox. Other games, like Grand Theft Auto, Fortnite, and FIFA are offered on multiple platforms, allowing consumers to play the game on whatever console they already own.

Activision Blizzard is a video game holding company, which means the company owns games developed by game development studios. They then make decisions about marketing, creative direction, and console availability for individual games. Some of their most popular games include World of Warcraft, Candy Crush, Overwatch, and one of the most successful game franchises ever, Call of Duty. Readers outside of the gaming space may recognize Activision Blizzard’s name from recent news stories about its toxic workplace culture.

In January 2022, Microsoft announced its intention to purchase Activision Blizzard for $68.7 billion dollars, which would be the largest acquisition in the company’s history. The company stated that its goals were to expand into mobile gaming, as well as make more titles available, especially through Xbox Game Pass, a streaming service for games. After the announcement, critics pointed out two main issues. First, if Microsoft owned Activision Blizzard, it would be able to make the company’s titles exclusive to Xbox. This is especially problematic in relation to the Call of Duty franchise. Not only does the Call of Duty franchise include the top three most popular games of 2022, but it’s estimated that 400 million people play at least one of the games, 42% of whom play on Playstation. Second, if Microsoft owned Activision Blizzard, it could also make its titles exclusive to Xbox Game Pass, which would change the structure of the relatively new cloud streaming market.

The Regulators

Microsoft’s proposed acquisition has drawn scrutiny from the FTC, the European Commission, and the UK Competition and Markets Authority. In what the New York Times has dubbed “a global alignment on antitrust,” the three regulators have pursued a connected strategy. First, the European Commission announced an investigation of the deal in November, signaling that the deal would take time to close. Then, a month later, the FTC sued in its own administrative court, which is more favorable to antitrust claims. In February 2023, the Competition and Markets Authority released provisional findings on the effect of the acquisition on UK markets, writing that the merger may be expected to result in a substantial lessening of competition. Finally, the EU commission also completed its investigation, concluding that the possibility of Microsoft making Activision Blizzard titles exclusives “could reduce competition in the markets for the distribution of console and PC video games, leading to higher prices, lower quality and less innovation for console game distributors, which may, in turn, be passed on to consumers.” Together, the agencies are indicating a new era in antitrust – one that is much tougher on deals than in the recent past.

Specifically, the FTC called out Microsoft on its past acquisitions in its complaint. When Microsoft acquired Bethesda (another video game company, known for games like The Elder Scrolls: Skyrim) in 2021, the company told the European Commission that they would keep titles available on other consoles. After the deal cleared, Microsoft announced that many Bethesda titles, including highly anticipated games like Starfield and Redfall, would be Microsoft exclusives. The FTC used this in its complaint to show that any promises by Microsoft to keep games like Call of Duty available to all consumers could be broken at any time. Microsoft has disputed this characterization, arguing that the company made decisions to make titles exclusive on a “case-by-case basis,” which was in line with what it told the European Commission.

For the current deal, Microsoft has agreed to make Call of Duty available on the Nintendo Switch, and it claims to have made an offer to Sony, guaranteeing the franchise would remain available on PlayStation for ten years. This type of guarantee is known as conduct remedy, which preserves competition through requirements that the merged firm commits to take certain business actions or refrain from certain business conduct going forward. In contrast, structural remedies usually require a company to divest certain assets by selling parts of the business. One example of conduct remedies was in the Live Nation – Ticketmaster merger. The companies agreed not to retaliate against concert venue customers that switched to a different service nor tie sales of ticketing services to concerts it promoted. However, as the recent Taylor Swift ticketing dilemma proves, conduct remedies may not be effective in eliminating anticompetitive behavior.

Conclusion

Microsoft faces an uphill battle with its proposed acquisition. Despite its claims that Xbox does not exercise outsize influence in the gaming industry, the sheer size and potential effects of this acquisition make Microsoft’s claims much weaker. Further, the company faces stricter scrutiny from new regulators in the United States. Assistant Attorney General Jonathan Kanter, who leads the DOJ’s antitrust division, has already indicated that he prefers structural remedies to conduct ones, and Lina Khan, FTC commissioner, is well known for her opposition to big tech companies. If Microsoft wants this deal to succeed, it may have to provide more convincing evidence that it will act differently than its anticompetitive conduct in the past.


Breaking the Tech Chain To Slow the Growth of Single-Family Rentals

Sarah Bauer, MJLST Staffer

For many of us looking to buy our first homes during the pandemic, the process has ranged from downright comical to disheartening. Here in Minnesota, the Twin Cities have the worst housing shortage in the nation, a problem that has both Republican and Democratic lawmakers searching for solutions to help both renters and buyers access affordable housing. People of color are particularly impacted by this shortage because the Twin Cities are also home to the largest racial homeownership gap in the nation

Although these issues have complex roots, tech companies and investors aren’t helping. The number of single-family rentals (SFR) units — single-family homes purchased by investors and rented out for profit — have risen since the great Recession and exploded over the course of the pandemic. In the Twin Cities, black neighborhoods have been particularly targeted by investors for this purpose. In 2021, 8% of the homes sold in the Twin Cities metro were purchased by investors, but investors purchased homes in BIPOC-majority zip codes at nearly double the rate of white-majority neighborhoods. Because property ownership is a vehicle for wealth-building, removing housing stock from the available pool essentially transfers the opportunity to build wealth from individual homeowners to investors who can both profit from rents as well as the increased value of the property at sale. 

It’s not illegal for tech companies and investors to purchase and rent out single-family homes. In certain circumstances, it may actually be desirable for them to be involved in the market. If you are a seller that needs to sell your home before buying a new one, house-flipping tech companies can get you out of your home faster by purchasing the home without a showing, an inspection, or contingencies. And investors purchasing single-family homes can provide a floor to the market during slowdowns like the Great Recession, a service which benefits homeowners as well as the investors themselves. But right now we have the opposite problem: not enough homes available for first-time owner-occupants. Assuming investor-ownership is becoming increasingly undesirable, what can we do about it? To address the problem, we need to understand how technology and investors are working in tandem to increase the number of single-family rentals.

 

The Role of House-Flipping Technology and iBuyers

The increase in SFRs is fueled by investors of all kinds: corporations, local companies, and wealthy individuals. For smaller players, recent developments in tech have made it easier for them to flip their properties. For example, a recent CityLab article discussed FlipOS, “a platform that helps investors prioritize repairs, access low-interest loans, and speed the selling process.” Real estate is a decentralized industry, and such platforms make the process of buying single-family homes and renting them out faster. Investors see this as a benefit to the community because rental units come onto the market faster than they otherwise would. But this technology also gives such investors a competitive advantage over would-be owner-occupiers.

The explosion of iBuying during the pandemic also hasn’t helped. iBuyers — short for “instant buyers” — use AI to generate automated valuation models to give the seller an all-cash, no contingency offer. This enables the seller to offload their property quickly, while the iBuyer repairs, markets, and re-sells the home. iBuyers are not the long-term investors that own SFRs, but the house-flippers that facilitate the transfer of property between long-term owners.

iBuyers like Redfin, Offerpad, Opendoor (and formerly Zillow) have increasingly purchased properties in this way over the course of the pandemic. This is true particularly in Sunbelt states, which have a lot of new construction of single-family homes that are easier to accurately price. As was apparent from the demise of Zillow’s iBuying program, these companies have struggled with profitability because home values can be difficult to predict. The aspects of real estate transactions that slow down traditional homebuyers (title check, inspections, etc…) also slow down iBuyers. So they can buy houses fast by offering all-cash offers with no inspection, but they can’t really offload them faster than another seller.

To the degree that iBuyers in the market are a problem, that problem is two-fold. First, they make it harder for first-time homeowners to purchase homes by offering cash and waiving inspections, something few first-time homebuyers can afford to offer. The second problem is a bigger one: iBuyers are buying and selling a lot of starter homes to large, non-local investors rather than back to owner-occupants or local landlords.

 

Transfer from Flippers to Corporate Investors

iBuyers as a group sell a lot of homes to corporate landlords, but it varies by company. After Zillow discontinued its iBuying program, Bloomberg reported that the company planned to offload 7,000 homes to real estate investment trusts (REITs). Offerpad sells 10-20% of its properties to institutional investors. Opendoor claims that it sells “the vast majority” of its properties to owner-occupiers. RedfinNow doesn’t sell to REITs at all. Despite the variation between companies, iBuyers on the whole sold one-fifth of their flips to institutional investors in 2021, with those sales more highly concentrated in neighborhoods of color. 

REITs allow firms to pool funds, buy bundles of properties, and convert them to SFRs. In addition to shrinking the pool of homes available for would-be owner-occupiers, REITs hire or own corporate entities to manage the properties. Management companies for REITs have increasingly come under fire for poor management, aggressively raising rent, and evictions. This is as true in the Twin Cities as elsewhere. Local and state governments do not always appear to be on the same page regarding enforcement of consumer and tenant protection laws. For example, while the Minnesota AG’s office filed a lawsuit against HavenBrook Homes, the city of Columbia Heights renewed rental occupancy licenses for the company. 

 

Discouraging iBuyers and REITs

If we agree as a policy matter that single-family homes should be owner-occupied, what are some ways to slowdown the transfer of properties and give traditional owner-occupants a fighting chance? The most obvious place to start is by considering a ban on iBuyers and investment firms from acquiring homes. The Los Angeles city council voted late last year to explore such a ban. Canada has voted to ban most foreigners from buying homes for two years to temper its hot real estate market, a move which will affect iBuyers and investors.

  Another option is to make flipping single-family homes less attractive for iBuyers. A state lawmaker from San Diego recently proposed Assembly Bill 1771, which would impose an additional 25% tax on the gain from a sale occurring within three years of a previous sale. This is a spin on the housing affordability wing of Bernie Sanders’s 2020 presidential campaign, which would have placed a 25% house-flipping tax on sellers of non-owner-occupied property, and a 2% empty homes tax on property of vacant, owned homes. But If iBuyers arguably provide a valuable service to sellers, then it may not make sense to attack iBuyers across the board. Instead, it may make more sense to limit or heavily tax sales from iBuyers to investment firms, or the opposite, reward iBuyers with a tax break for reselling homes to owner-occupants rather than to investment firms.

It is also possible to make investment in single-family homes less attractive to REITs. In addition to banning sales to foreign investors, the Liberal Party of Canada pitched an “excessive rent surplus” tax on post-renovation rent surges imposed by landlords. In addition to taxes, heavier regulation might be in order. Management companies for REITs can be regulated more heavily by local governments if the government can show a compelling interest reasonably related to accomplishing its housing goals. Whether REIT management companies are worse landlords than mom-and-pop operations is debatable, but the scale at which REITs operate should on its own make local governments think twice about whether it is a good idea to allow so much property to transfer to investors. 

Governments, neighborhood associations, and advocacy groups can also engage in homeowner education regarding the downsides of selling to an iBuyer or investor. Many sellers are hamstrung by needing to sell quickly or to the highest bidder, but others may have more options. Sellers know who they are selling their homes to, but they have no control over to whom that buyer ultimately resells. If they know that an iBuyer is likely to resell to an investor, or that an investor is going to turn their home into a rental property, they may elect not to sell their home to the iBuyer or investor. Education could go a long way for these homeowners. 

Lastly, governments themselves could do more. If they have the resources, they could create a variation on Edina’s Housing Preservation program, where homeowners sell their house to the City to preserve it as an affordable starter home. In a tech-oriented spin of that program, the local government could purchase the house to make sure it ends up in the hands of another owner-occupant, rather than an investor. Governments could decline to sell to iBuyers or investors single-family homes seized through tax forfeitures. Governments can also encourage more home-building by loosening zoning restrictions. More homes means a less competitive housing market, which REIT defenders say will make the single-family market less of an attractive investment vehicle. Given the competitive advantage of such entities, it seems unlikely that first-time homebuyers could be on equal footing with investors absent such disincentives.


Robinhood Changed the Game(Stop) of Modern Day Investing but Did They Go Too Far?

Amanda Erickson, MJLST Staffer

It is likely that you have heard the video game chain, GameStop, in the news more frequently than normal. GameStop is a publicly traded company that is known for selling, trading, and purchasing gaming devices and accessories. Along with many other retailers during the COVID-19 pandemic, GameStop has been struggling. Not only did COVID-19 affect its operations, but the Internet beat the company’s outdated business model. Prior to January 2021, GameStop’s stock prices reflected the apparent new reality of gaming. In March 2015, GameStop’s closing price was around $40 a share, but at the beginning of January 2021, it was at $20 a share. With a downward trend like this, it might come as a shock to learn that on January 27, 2021, GameStop’s closing price was at $347.51 a share, with the stock briefly peaking at $483 on the following day.

This dramatic surge can be accredited to a large group of amateur traders on the Reddit forum, r/WallStreetBets, who promoted investments in the stock. This sudden surge forced large scale institutional investors, who originally bet against the stock through short positions, to buy the stock in order to hedge their positions. Short selling involves “borrowing” shares of a company, and quickly selling the borrowed shares into the market. The short seller hopes that these shares will fall in price, so that they can buy the shares back at a potentially lower price. If this happens, they can return the shares back that they “borrowed” and keep the difference as profit. The practice of short selling is controversial. Short selling can lead to stock price manipulation and can generate misinformation about a company, but it can also serve to check and balance the markets. The group on Reddit knew that short sellers had positions betting against GameStop and wanted to take advantage of these positions. This caused the stock price to soar when these short sellers had to repurchase their borrowed shares.

This historic scene intrigued many day traders to participate and place bets on GameStop, and other stocks that this Reddit group was promoting. Many chose to use Robinhood, a free online trading app, to make these trades. Robinhood introduced a radical business model in 2014 by offering consumers a platform that allowed them to trade with zero commissions, and ultimately changed the way the industry operated. That is until Robinhood issued a statement on January 28, 2021 announcing that “in light of recent volatility, we restricted transactions for certain securities,” including GameStop. Later that day, Robinhood issued another statement saying it would allow limited buying of those securities starting the next day. This came as a shock to many Robinhood users, because Robinhood’s mission is to “democratize finance for all.” These events exacerbated previous questions about the profitability model of Robinhood and ultimately left many users questioning Robinhood’s mission.

The first lawsuit was filed by a Robinhood user on January 28, 2021, alleging that Robinhood blocked its users from purchasing any of GameStop’s stock “in the midst of an unprecedented stock rise thereby depriv[ing] retail investors of the ability to invest in the open-market and manipulating the open market.” Robinhood is now facing over 30 lawsuits, with that number only rising. The chaos surrounding GameStop stock has caught lawmakers’ attention, and they are now calling for congressional action. On January 29, 2021, the Securities and Exchange Commission issued a statement informing that it is “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices” and expressed that it will “closely review actions taken by regulated entities that may disadvantage investors.” Robinhood issued another statement on January 29, 2021, stating they did not want to stop people from buying these stocks, but that they had to take these steps to conform with their regulatory capital requirements.

The frenzy has since calmed down but left many Americans with questions surrounding the legality of Robinhood’s actions. While it may seem like Robinhood went against everything the free market has to offer, legal experts disagree, and it all boils down to the contract. The Robinhood contract states “I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.” Just how broad is that discretion, though? The issue now is if Robinhood treated some users differently than others. Columbia Law School professor, Joshua Mitts, said, “when hedge funds are going to lose from a trading suspension, they don’t face any lockup like this, any suspension, any halt at the retail level, but when retail investors find themselves locked in, they find themselves unable to exit the trade.” This protective action by Robinhood directly contradicts the language in the Robinhood contract that states that the user agrees Robinhood does not “provide investment advice in connection with this Account.” The language in this contract may seem clear separately, but when examining Robinhood’s restrictions, it leaves room to question what constitutes advice when restricting retail investors’ trades.

Robinhood’s practices are now under scrutiny by retail investors who question the priority of the company. The current lawsuits against Robinhood could potentially impact how fintech companies are able to generate profits and what federal oversight they might have moving forward. This instance of confusion between retail investors and their platform choice points to the potential weaknesses in this new form of trading. While GameStop’s stock price may have declined since January 28, the events that unfolded will likely change the guidelines of retail investing in the future.

 


Google it: Justice Department files Antitrust Case Against Google

Amanda Erickson, MJLST Staffer

Technology giants, such as Google, have the ability to influence the data and information that flows through our day to day lives by tailoring what each user sees on its platform. Big Tech companies have been under scrutiny for years, but they continue to become more powerful and have access to more user data even as the global economy tanks. As Google’s influence broadens, the concern over monopolization of the market grows. This concern peaked on October 20, 2020 when the Justice Department filed an antitrust lawsuit against Google for abusing its dominance in general search services, search advertising, and general search text advertising markets through anticompetitive and exclusionary practices.

The Department of Justice, along with eleven state attorney generals, raised three claims in their lawsuit, all of which are under Section 2 of the Sherman Antitrust Act. The Department of Justice claims that, because of Google’s contracts with companies like Apple and Samsung, and its multiple products and services, such as search, video, photo, map, and email, competitors in search will not stand a chance. The complaint is rather broad, but it details the cause of action well, even including several graphs and figures for additional support. For instance, the complaint states Google has a market value of $1 trillion and annual revenue that exceeds $160 billion. This allows Google to pay “billions of dollars each year to distributors . . . to secure default status for its general search engine.” Actions like these have the potential to curb competitive action and harm consumers according to the government.

The complaint states that “between its exclusionary contracts and owned-and-operated properties, Google effectively owns or controls search distribution channels accounting for roughly 80 percent of the general search queries in the United States.” It further mentions that “Google” is not only a noun meaning the company, but a verb that is now used when talking about general searches on the internet. It has become a common practice for people to say, “Google it,” even if they complete an internet search with a different search engine. If Google is considered to be a monopoly, who is harmed by Google’s market power? The complaint addresses the harm to both advertisers and consumers. Advertisers have very little choice but to pay the fee to Google’s search advertising and general search text monopolies and consumers are forced to accept all of Google’s policies, including privacy, security and use of personal data policies. This is also a barrier to entry for new companies emerging into the market that are struggling to gain market share.

Google claims that it is not dominant in the industry, but rather just the preferred platform by users. Google argues that its competitors are simply a click away and Google users are free to switch to other search engines if they prefer. Google points out that its deals with companies such as Apple and Microsoft are completely legal deals and these deals only violate antitrust law if they exclude competition. Since switching to another search engine is only a few clicks away, Google claims it is not excluding competition. As for Google’s next steps, it is “confident that a court will conclude that this suit doesn’t square with either the facts or the law” and it will “remain focused on delivering the free services that help Americans every day.”

Antitrust laws are in place to protect the free market economy and to allow competitive practices. Attorney General William Barr stated “[t]oday, millions of Americans rely on the Internet and online platforms for their daily lives.  Competition in this industry is vitally important, which is why today’s challenge against Google—the gatekeeper of the Internet—for violating antitrust laws is a monumental case.” This is just the beginning of a potentially historic case as it aims to protect competition and innovation in the technology markets. Consumers should consider the impacts of their daily searches and the implications a monopoly could have on the future structure of internet searching.

 


Reviewing Interchange Fees: How Fifteen Years of Litigation Partially Explains the Grimace on Your Local Business Owner’s Face When You Pay for a $2.00 Product with a Credit Card

Jesse Smith, MJLST Staffer

Credit and debit cards have become a fundamental part of commerce. It’s hard to beat the perceived simplicity, convenience, and security of using a small piece of plastic or your phone to purchase goods and services. But many forget that when you swipe your card at any business that accepts cards, the merchant does not receive the full amount of the price it charges for the good or service purchased. “Interchange fees” are costs levied against a merchant by the bank that issued the card being used for payment. Until 2010, interchange fees comprised between 1%-3% of the cost of the purchase. Their described purpose is to “cover handling costs, fraud and bad debt costs, and the risk involved in approving the payment.” In recent decades, card issuers have also used interchange fees to fund popular “rewards programs” offered in the form of cashback and points to cardholders.

Interchange fees have been the subject of intense legislative and litigation controversies for the last two decades. They highlight numerous salient issues at the intersection of law, economics, and technology. In 2004, a group of merchants filed a lawsuit against Visa,  Mastercard, and their card issuing banks (In Re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation 827 F.3d 223 (2d Cir. 2016)), alleging anticompetitive practices in how they set interchange fees and the contractual rules required of merchants who accepted their credit cards. The issues addressed in the case span multiple areas of law including corporate structure, antitrust, freedom of speech, and legislative process.

Over a decade later, the lawsuit culminated in one of the largest antitrust class action settlements in the history of the United States. To understand the history and progression of this lawsuit is to understand interchange fees more generally. I spoke to K. Craig Wildfang, a partner at Robins Kaplan LLP, and co-lead counsel for the merchants in the case. Mr. Wildfang’s explanation of the litigation and payment card industry overall provided unparalleled insight into this important aspect of how we conduct transactions in an increasingly tech driven society.

In 2004, Plaintiffs filed claims against Visa and Mastercard (who previously set interchange fee schedules), and the banks that collectively owned these card networks at the time. The lawsuit challenged the “collective setting of interchange fees” by the defendants as antitrust violations, more specifically, as price fixing conspiracies under Sections 1 and 2 of the Sherman Antitrust Act. It also challenged anti-steering rules written into the card networks’ contracts with merchants, which prevented businesses from using discounts, surcharges, or signage to “steer” customers towards use of cheaper methods of payment, including cash or checks.

Soon after the commencement of the lawsuit, Visa and Mastercard restructured their businesses by divesting the banks from their ownership interests and offering IPOs in their companies’ stock. Doing so would cause interchange fee rate setting to resemble the actions of single entities, rather than joint conduct propagated by the banks as owners of the credit card companies. Such restructuring posed a challenge to the merchants suing, as courts historically look at single conduct less skeptically than joint conduct in an antitrust context. Undeterred, Wildfang and the merchants’ counsel leveraged this action into an additional antitrust claim under § 7 of the Clayton Act (which utilizes a lower standard of proof for anti-competitive behavior). Thus, they were able to obtain discovery that, in Wildfang’s estimation, made it “100% clear that the only reason they [restructured] was to try to minimize their antitrust liability.”

After years of litigation, mediation, and even a DOJ investigation into the defendants, in 2012, the parties finally reached a historic multibillion-dollar settlement that also saw Visa and Mastercard lift their contractual bans on steering policies. The 2nd Circuit struck down the settlement on appeal based on a conflict from the same class counsel representing the plaintiffs for both monetary and injunctive relief. Consequently, Wildfang and Robins Kaplan were appointed as counsel for 23(b)(3) plaintiffs seeking monetary relief. Undeterred by this setback, after further amended complaints, discovery, and mediation, Wildfang and class counsel achieved another victory in 2019, securing a $6.25 billion settlement for over 10 million merchants, before reductions for opt outs. Additionally, Visa and Mastercard did not reinstate any anti-steering provisions into their contracts.

While litigation was a necessary element of relief, the merchants’ counsel understood this was only part of the solution. Wildfang noted that “when we started the litigation, we knew there would be these ancillary battles, and we decided as the leadership of the litigation, that it was in the interest of our clients . . . to play a productive role in these other . . .  fora.”

In 2010, as part of the Dodd-Frank Wall Street Reform Act, Senator Richard Durbin, assisted by Plaintiffs’ counsel and other merchant trade groups, introduced an amendment granting the Federal Reserve the power to regulate debit card interchange fees. The Fed subsequently capped them at approximately 22 to 24 cents per transaction for banks with assets of $10 billion or more. In Wildfang’s assessment, limiting regulation to debit card fees was a logical starting point for legislative reform:

[I]t was much easier for the merchants to argue . . . that a debit card transaction was just an electronic check . . . it made it more appealing to the congressional people we were talking to, to think . . . “well we’re just going to recognize that these are like electronic checks, and checks don’t have interchange fees. So, let’s get rid of these, or at least cap them.” That’s something more reasonable. If you get into trying to cap or regulate credit card interchange fees, that gets a lot more complicated, because the economics of a credit card transaction are a lot more complicated. Some of the interchange revenue ends up going as rewards to cardholders, which of course, the banks always claim is a wonderful good for the consumer, but in fact, those reward dollars are coming out of pockets of other consumers who may not have a credit card.

Senator Durbin espoused this reasoning in discussing the Durbin Amendment in the Senate Congressional Record. Debit card fees are fundamentally like electronic checks, in that they deduct payment for a transaction from a customer’s checking account. The nature of these transactions largely eliminates the need for high interchange fees, as banks need not entice consumers to spend their own money with rewards programs, nor does it require the same costs incurred to mitigate the risk of a consumer refusing to pay what they owe at the end of a month, as with a credit card.

Capping debit card fees was a monumental victory for merchants. Wildfang noted:

It had been true . . . by the early two thousand teens, that debit card transactions were increasing at a much faster rate than credit card transactions, and that was true whether you were talking about numbers of transactions or transaction volume. And there were a lot of reasons for that . . . [which] made capping debit fees particularly appealing, because we knew that that was a growing piece of the pie, and it was going to continue to grow, and it has continued to grow.

The number of non-prepaid debit card transactions has increased every year from 8.3 billion in 2000, to 72.7 billion in 2018, now constituting over half of all card based transactions, as compared to a little over a quarter in 2000. With the average value of debit card sales hovering consistently in the $38-$39 range, merchants were undoubtedly spared the cost of billions of dollars in interchange fees, having to pay a max of 24 cents, rather than 1%-3% of every transaction conducted. Additionally, the effects of the Durbin Amendment went far beyond relief of the financial burden from debit card fees, igniting tangential legislative and judicial fights throughout the U.S.

Armed with an affordable card payment alternative, it became paramount for merchants to make debit card, check, and cash payment options more appealing by offering discounts for use of these payments, or imposing surcharges on more expensive types of payments. Multiple states, often lobbied by Visa and Mastercard, had either passed or were considering passing laws banning these steering practices. Repealing or preventing these laws was key, as removal of anti-steering provisions from card issuer contracts would be useless if steering were illegal in the first place. Wildfang and merchants’ counsel worked behind the scenes with counsel for plaintiffs in Expressions Hair Design v. Schneiderman, 137 S. Ct. 1144 (2017), where the Supreme Court ruled a New York state law banning merchants from imposing surcharges regulated speech, not conduct. While the holding did not rule on the law’s constitutionality, some believe the case may percolate back to the Court soon to reexamine a key rational basis review standard in free speech cases.

When the litigation first began, consumers paid primarily by cash, check, and magnetic stripe credit or debit cards. Since then, the menu for consumers has increased exponentially, with EMV chip cards, various digital wallets, and cryptocurrencies now permeating payment methods both online and at a physical point of sale. The increasing diversity of payment methods further served to complicate the factual and narrative landscape of the litigation, primarily by challenging the standing Plaintiffs had in the antitrust realm. Wildfang explained:

Let’s take, for example, a transaction like Apple Pay. The economics of that are facially somewhat similar to a credit card, but there are more players in the payment chain, and the impact on the merchant of those transactions is not as clear as in a simple credit . . . or debit card transaction. And you had these intermediate players, one more layer between the banks and the merchant, and as you probably know, under federal antitrust law, only the direct purchaser has standing to bring an action for damages, and the defendants had always argued from the very beginning, that merchants were indirect purchasers, because, as sort of a technical matter, the way the electronics work, the acquiring bank—the merchant’s bank, is in some sense “first in line” as the money goes through them back to the merchant.

This potential dilution of a merchant’s ability to sue as a direct purchaser underscored the need to reach a monetary settlement rather than risk losing at trial. Wildfang believes these developments will play a key role in future electronic payment litigation:

[I]t’s going to be complicated, and the release that we gave to the defendants in the second settlement is almost certain to prompt litigation. There are going to be cases brought in the future where the defendants are going to argue the release applies and protects them against those claims and so there[] [is]going to be a lot of litigation along the edges of the original case, and whether or not a particular future claim has been released or not. And I think that the technological changes are going to be probably right in among all of those cases and kind of test the boundaries of the release.

Digital wallet platforms function and release payment information differently. Google utilizes an actual account for its wallet users to “store” money in, while Apple “facilitat[es] the ordering of fund transfers,” by creating and providing secure payment tokens to the merchant, rather than actual user account information. Apple also levies a 0.15% fee on card issuers who accept Apple Pay for integration with their cards. It remains to be seen how legislatures and courts will classify these roles of differing platforms in the payment chain between consumer and merchant.

But as both merchants and card issuers deal with another party and the costs it brings to the table, numerous issues will emerge once. Will the use of a certain payment method/platform render merchants as indirect purchasers? Will card issuers use additional or new fees to offset the costs of digital wallet providers’ fees? If so, are these fees precluded from litigation by this settlement? These are just a few of countless questions that may arise “around the edges of the original case.” Regardless of if or how these specific battles arise, the dynamic nature of the payment card industry is the one constant in a sea of changing technological variables. As Wildfang summed it up, “for the first forty years or so of the payment card industry, not much changed. But in the last ten years, a lot has changed, and I think that the next five or ten years is going to bring even more change.”


Nineteen Eighty Fortnite

Valerie Eliasen, MJLST Staffer

The Sixth and Seventh Amendments affords people the right to a trial by jury. Impartiality is an essential element of a jury in both criminal and civil cases. That impartiality is lost if a juror’s decision is “likely to be influenced by self-interest, prejudice, or information obtained extrajudicially.” There are many ways by which a juror’s impartiality may become questionable. Media attention, for example, has influenced the jury’s impartiality in high-profile criminal cases.

In cases involving large companies, advertising is another way to appeal to jurors. It is easy to understand why: humans are emotional. Because both advertisement perception and jury decisions are influenced by emotions, it comes as no surprise that some parties have been “accused of launching image advertising campaigns just before jury selection began.” Others have been accused of advertising heavily in litigation “hot spots,” where many cases of a certain type, like patent law, are brought and heard.

A recent example of advertising launched by a party to a lawsuit comes from the emerging dispute between Apple Inc. and Epic Games Inc. Epic is responsible for the game Fortnite, an online “Battle-Royale” game, which some call the “biggest game in the world.” Epic sued Apple in August for violation of the Sherman Antitrust Act of 1980 and several other laws in reference to Apple’s practice of collecting 30 percent of every App and in-App purchase made on Apple products. When Epic began allowing Fortnite users to pay Epic directly on Apple products, Apple responded by removing Fortnite from the App Store. The App Store is the only platform where users can purchase and download applications, such as Fortnite, for their Apple products. In conjunction with the lawsuit, Epic released a video titled Nineteen Eighty Fortnite – #FreeFortnite. The video portrays Apple as the all-knowing, all-controlling “Big Brother” figure from George Orwell’s 1984. The ad was a play on Apple’s nearly identical commercial introducing the Macintosh computer in 1984. This was an interesting tactic given the majority of Fortnite users were born after 1994.

Most companies that have been accused of using advertisements to influence jurors have used advertisements to help improve the company image. With Epic, the advertisement blatantly points a finger at Apple, the defendant. Should an issue arise, a court will have an easy time finding that the purpose of the ad was to bolster support for Epic’s claims. But, opponents will most likely not raise a case regarding jury impartiality because this advertisement was released so far in advance of jury selection and the trial. Problems could arise, however, if Epic Games continues its public assault on Apple.

Epic’s ad also reminds us of large tech companies’ power to influence users. The explosion of social media and the development of machine learning over the past 10 years have yielded a powerful creature: personalization. Social media and web platforms are constantly adjusting content and advertisements to account for the location and the behavior of users. These tech giants have the means to control and tailor the content that every user sees. Many of these tech giants, like Google and Facebook, have often been and currently are involved in major litigation.

The impartial jury essential to our legal system cannot exist when their decisions are influenced by outside sources. Advertisements exist for the purpose of influencing decisions. For this reason, Courts should be wary the advertising abilities and propensities of parties and must take action to prevent and control advertisements that specifically relate to or may influence a jury. A threat to the impartial jury is a threat we must take seriously.

 

 

 

 

 


Antitrust Violations Against Apple: Is the Tech Giant Operating an Illegal Monopoly?

Joe Hallman, MJLST Staffer

Apple Inc. is again under legal fire as allegations of antitrust violations against the tech giant have made it to the Supreme Court. The Court recently heard oral arguments in November of 2018 in Apple Inc. v. Pepper. Plaintiffs in the case are a class of iPhone users, and allege that Apple’s App Store, the only forum for iPhone users to download apps, creates an illegal monopoly. Apple collects 30% of all sales of apps made via its App Store; Plaintiffs argue that this is an overcharge made possible only by the unlawful monopoly. Apple claims in response that its App Store is not an illegal monopoly and that, even if it was, Apple is not a seller of goods but simply facilitates a marketplace.

The question before the Supreme Court is not whether Apple actually did violate antitrust laws, but whether iPhone users would even be able to recover damages from Apple if it did. The Court seeks to answer this question in light of Supreme Court precedent stemming from a 1977 decision in Illinois Brick Co. v. Illinois, in which the Court held that only direct, rather than indirect, purchasers can recover damages for antitrust violations. Here, plaintiffs argue that they directly purchase apps from Apple through its App Store, whereas Apple maintains that iPhone users are actually purchasing apps from the app developers. If the Court were to side with Apple, iPhone users would not be able to recover damages from them. Only app developers, as purchasers of the distribution service the App Store provides, could sue Apple for antitrust violations.

The Supreme Court is expected to decide the case by June of 2019. If the Court decides in favor of the plaintiffs, holding that iPhone users can recover damages from Apple, the case would be remanded to a lower court to determine whether antitrust violations actually occurred. In the future, if Apple is found to be operating an illegal monopoly it could have enormous implications. Large amounts of money are potentially at stake. It is estimated that Apple brought in $11 billion in revenue from its App Store in 2017 alone and antitrust laws permit plaintiffs to potentially recover triple damages. Beyond the dollars at stake, a decision that Apple is operating an illegal monopoly could completely change the industry. A decision of that nature could give rise to many different marketplaces that make apps available for iPhone users to download potentially lowering the price for the end users. The first step, however, is the decision to be handed down by the Supreme Court in Apple Inc. v. Pepper to determine whether iPhone users are able to sue Apple for damages.


Delay of Game: How the MLB’s Baseball Exemption has Stood the Test of Time

Alex Karnopp, MJLST Staffer 

Rushing home after a long day at law school, I eagerly anticipated tuning in to the Milwaukee Brewers match-up with their division rivals, the St. Louis Cardinals. With the two teams vying for a spot in the upcoming playoffs, the game’s broadcast was, expectedly, upgraded to a national broadcast on ESPN. But as I tuned in, I couldn’t find the broadcast. I checked online, and sure enough, my Minneapolis cable provider had blocked the broadcast. They incorrectly determined I was within viewing territory of the local Fox Sports Wisconsin broadcast of the game. On top of that, my MLB.tv internet streaming subscription was blocked because of their policy of not airing national broadcasts. Despite my numerous subscriptions to ensure I could view all Milwaukee Brewers game throughout the season, I was prevented from watching one of their biggest games of the year.

To MLB fans, my situation comes to no surprise – the “black-box” broadcasting policies of the league leaves many viewers without choices, since MLB-determined blackout territories usually outreach local broadcasting territories. Cities like Cedar Rapids, Iowa, or Las Vegas, Nevada, fall outside any local viewing broadcast territories, yet sit between six overlapping MLB blackout areas. Complaining fans have caught the attention of the legal system. A couple recent class action lawsuits seek to challenge the MLB’s policy of entering these lucrative contracts with local broadcasting networks. However, they face difficult legal hurdles, specifically the established Baseball Exemption.  

The Baseball Exemption has been the cornerstone of the MLB’s antitrust defense since its establishment in 1922 by the Supreme Court in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs. Courts have routinely upheld the exemption, most recently in Flood v. Kuhn. They noted in this opinion, however, this exemption should be modified by “congressional, and no judicial, action.”

The two lawsuits, Laumann v. NHL and Garber v. Office of the Comm’r of Baseball, were consolidated, and sought to singlehandedly dismantle these television contracts as violations of the Sherman Act. Legal scholars expressed optimism this would end the Baseball Exemption defense as applied to broadcasting. As these scholars expected, the United States District Court for the Southern District of New York, on denying MLB’s motion for Summary Judgment, rejected their argument that the Baseball Exemption applied to televised broadcasting. Sensing danger, the MLB settled with the class minutes before the trial began. While conceding marginally better access to their MLB.tv proprietary internet streaming service, they preserved their blackout policy.

With their deep pockets, the MLB will continue this pattern of deferring judicial adjudication of the blackout policy by settling these class action lawsuits. If classes want to dismantle the MLB’s suspect blackout policies, they need to take the Supreme Court’s advice in Kuhn and resolve the problem via legislation. In 2015, Congress introduced the FANS Act to ensure antitrust laws applied equally among all American professional sports teams. There has been no movement since. Perhaps the lawsuit signals to Congress of the social and legal momentum to end the MLB’s blackout policies. However, these class action lawsuits will likely have no more effect than that. It will be interesting to see if Congress does anything with the introduced bill, as it appears the best route to fix this current problem.


Acquisitions of Our Lives

Zachary Currie, MJLST Staffer

 

Growing up, my mother was an avid consumer of soap operas, which aired during the daily drought of day-time television. I never watched any soap opera closely, but I occasionally stopped in the living room while one was on and caught a glimpse of the whirling melodrama—after all, the characters were beautiful, handsome, and belonged to a realm of luxury far removed from my paltry existence. The story was always the same; it was always about banal, dynastic feuding, resulting in predictable and outrageous tragedies. But never once did I think that the content of a soap opera was accurate, not in the sense of being based on a true story, but in the sense of being as realistic as a story written by Ernest Hemingway about fishing for marlin in the Gulf Stream. My perception of the quality of soap opera writing changed when I was introduced to the melodramatic world of telecommunication corporations, their acquisitions, and anti-trust law, through its latest garish episode: AT&T’s bid for Time Warner.

 

The latest episode of this soap opera involves players as glamorous, foolish, rich, and powerful as any soap opera cast. A takeover of Time Warner by AT&T would create America’s sixth largest firm by pre-tax profits; the Department of Justice has expressed its disapproval of the star-crossed lovers’ plans to elope. Some important socialites in ermine fur have hinted, with winks, that DoJ is motivated by the Donald’s hatred for CNN, a channel owned by Time Warner. Others belonging to the grapevine scoff at the match, deriding it as unsophisticated and gauche; after all, the marriage will cost over a $100 billion, return on capital is egregiously low, and attempting to increase returns by forcing Time Warner content on AT&T consumers would irritate the ever-watchful and puritanical anti-trust regulators.

So, the plot thickens: is the corporate tryst motivated by an intent to commit some dirty illegality? Well, the DoJ was suspicious and nosy enough to file a suit seeking to block the acquisition. The suit claims that after the acquisition, AT&T would be situated to force rivals to pay hundreds of millions of dollars more per year for Time Warner content, and the new formidable couple would dampen technological innovation. But is the DoJ being disingenuous? Perhaps it is motivated more by priggishness, or, maybe, political vengeance, than a concern to foster competition. Remember, this acquisition is vertical integration rather than horizontal integration; there can be good, healthy reasons for vertical integration. One way in which vertical integration can be efficient is through gaining economies of scale, when average total cost decreases with increasing output; surplus from gaining economies of scale may outweigh social costs caused by imperfect competition. Another advantage of vertical integration is the correction of market governance failures: integration allows firms to internalize the costs that arise from strategic and opportunistic behavior. Has the DoJ seriously considered all the consequences of acquisition? One anonymous attorney general claimed that the DoJ has not been forthcoming with any economic analysis helpful to decide whether to sue. Stay tuned to see the end of this Great American Corporate Love Story. Other juicy details include AT&T’s use of one of Trump’s former lawyers and Trump’s tweets about CNN (including an edited wrestling video showing Trump punching a man whose head is replaced by the CNN logo) for litigation.