Hard 2 Find Accessories, Inc., a third party vendor on Amazon’s marketplace, has sued Amazon and Apple for violating the Sherman Act, among other laws. H2F alleges that Amazon and Apple conspired to drive H2F off Amazon’s marketplace for purposes of stabilizing the price of iPad covers. The complaint makes some interesting allegations that stand a chance of surviving a motion to dismiss. There are problems with the complaint, however. And some of these problems may be sufficient for Amazon and Apple to have the complaint dismissed. Given the heart of the complaint is how Amazon polices its marketplace, I suspect a hard fight.
H2F makes iPad covers and sells them on Amazon’s marketplace. Amazon allows certain third-party vendors to sell their products on Amazon.com. At some point, Apple identified H2F as an infringer of Apple’s intellectual property and informed Amazon. Amazon subsequently warned H2F. H2F vigorously denied the allegations. Ultimately, Amazon terminated H2F entirely, refusing to allow H2F to sell products on Amazon’s marketplace. According to the complaint, Apple admitted to H2F and Amazon that H2F’s products did not infringe Apple’s intellectual property. Notwithstanding that admission, Amazon refused to reinstate H2F. H2F alleges that Apple targeted H2F because of H2F’s “aggressive price point” on the iPad covers, and that Amazon terminated H2F pursuant to an illegal agreement between Amazon and Apple to stabilize the price of iPad covers.
I initially thought the antitrust claims would be based on a denial of access to an essential facility. Since that particular theory of antitrust liability is near death, I concluded it would eventually be dismissed with prejudice. The plaintiff doesn’t make that claim, though. The plaintiff claims that Amazon and Apple have agreed to target aggressive discounters for the purpose of stabilizing price, and so have engaged in a horizontal price fixing conspiracy.
Price fixing can be either horizontal or vertical. Horizontal price fixing is where competitors agree on a price to charge their customers. Horizontal price fixing is per se illegal. Per se illegal means that the activity is illegal irrespective of the reason for which the parties are doing it, or, indeed, whether they can, in fact, effect the conspiracy. Vertical price fixing is where two parties at different levels of the supply chain agree on the prices the one that is lower will charge its customers. In vertical price fixing, a party can set a ceiling (maximum resale price maintenance) or a floor (minimum resale price maintenance). Up until recently, both maximum and minimum resale price maintenance were per se violations of the Sherman Act. Now, both are evaluated under the rule of reason. The rule of reason is a complicated balancing test that asks, among other things, whether the parties have market power. If they don’t, the activities rarely, if ever, violate the Sherman Act. Washington State has its own antitrust laws, independent of the federal laws. Washington’s laws substantially track the federal laws. It therefore does not appear that Washington recognizes minimum resale price maintenance as a per se violation. Some states other than Washington do hold minimum resale price maintenance as a per se violation, notwithstanding the federal position.
The Alleged Conspiracy.
Both Amazon and Apple sell iPad covers. According to H2F, Apple actively searches for aggressive discounters. When they find one, they complain to Amazon. Amazon, in turn, kicks the aggressive discounter off Amazon’s marketplace. The aggressive discounters are usually small, maverick businesses that need the scope of Amazon’s marketplace to sell their products effectively. According to H2F, the alleged intellectual property violations are a subterfuge designed to shield Amazon and Apple from antitrust scrutiny. According to H2F, by cutting off H2F, Amazon and Apple are able to sell more of their branded iPad covers at higher prices, and so harm consumers. In short, H2F alleges that Amazon is using its control over the marketplace in which H2F must operate to effect a horizontal price fixing scheme between Amazon and Apple.
Amazon’s and Apple’s Likely Response.
Amazon and Apple have a fairly good counternarrative. Apple is besieged with counterfeit goods that cheapen its brand. It has to police its brand; otherwise, it will lose valuable goodwill. Amazon has created an e-marketplace. Amazon needs to attract both customers and vendors to its marketplace. If it cannot offer consumers comfort that the products available in its store are genuine, it will lose those consumers. As the consumers flee, so too will the vendors which will follow the customers. Vendors will also leave if they think consumers will begin to question their brand’s value. The concern over discounting is therefore a concern over brand management–making sure the premium products retain their aura of quality and distinction. In light of the foregoing, Amazon and Apple would likely argue that the case cannot be per se. It has to be evaluated under the rule of reason because of the legitimate vertical relationships as well as the legitimate intellectual property concerns of both companies. Treating the case as per se would improperly chill both Amazon’s right to police its marketplace as well as Apple’s intellectual property rights. Within this context, Amazon and Apple would likely cast H2F as a free-riding counterfeiter that seeks to profit off of Apple’s brand investment. What H2F really hopes to achieve with the complaint is to induce the court to compel Amazon and Apple to continue to allow it to free ride.
Amazon will also argue that it competes vigorously with other online retailers as well as bricks-and-mortar stores, and that H2F has plenty of opportunity to sell their products beyond just Amazon. Because there is so much competition, H2F has plenty of choice with regard to where it can sell its products. And, lastly, Amazon and Apple will likely observe that the percentage of income associated with iPad cover sales is miniscule and there are many vendors of generic iPad covers. Protecting their brands is far more important than the cents they could make through what would likely be an entirely ineffectual conspiracy on iPad covers. Moreover, a Sherman Act conviction carries far greater risk and cost to the companies than what they could possibly make on an iPad cover conspiracy that involves a single aftermarket provider out of dozens. The conspiracy, therefore, is not plausible. As such, the complaint should be dismissed with prejudice.
There are other problems Amazon and Apple can attack. The complaint also alleges a vertical price fixing conspiracy. Among other things, to prove vertical price fixing under federal law, a complainant must show that the parties had market power in a relevant antitrust market. H2F does not appear to define a plausible relevant antitrust product and geographic market. Is it just iPad covers? There are a lot of cases that say a relevant market cannot be a single product. Is the “geographic market” just Amazon’s website or does it include other websites or even bricks-and-mortar stores? It seems relatively easy for consumers to go to different websites. Consumers use search engines other than Amazon, like Google, to locate products. It also seems easy for vendors to open their own website. There are, of course, some advantages to being on Amazon’s site that are difficult to replicate. Those advantages do not necessarily mean that not having access to Amazon’s marketplace forecloses H2F from selling on the web. Ultimately, these problems suggest H2F might have some difficulty in sustaining a claim predicated on Amazon’s market power, like vertical price fixing.
How H2F Wins.
To prevail, H2F would have to show that Amazon and Apple agreed to target H2F for purposes of stabilizing price of the iPad covers. If H2F could show that Amazon and Apple had, in fact, agreed to target maverick discounters in the iPad cover space for the purpose of eliminating price competition, then I think the case may be properly viewed as horizontal price fixing, a per se violation. If so, they would not need to allege or prove market power. H2F may also be able to argue that Amazon and Apple engaged in a concerted refusal to deal, if H2F could show that Amazon and Apple agreed that Amazon would not deal with H2F because of H2F’s aggressive discounting. Under certain circumstances a concerted refusal to deal can also be a per se violation of the Sherman Act.
There Will Have To Be a Smoking Gun.
At the end of the day, though, if H2F cannot demonstrate the “horizontality” of the agreement between Amazon and Apple–because, perhaps there is, in fact, no smoking gun–then Amazon and Apple would likely be entitled to summary judgment. I assume that H2F would find it difficult to muster the facts needed to demonstrate an online-only market for iPad covers in which Amazon’s marketplace was the relevant “geographic” market.
If I were Amazon and Apple, I’d file a motion to dismiss. I would stress the vertical aspects of the arrangement and argue the horizontal price fixing conspiracy is implausible on its face. In fact, I would argue that H2F has pleaded nothing but a perfectly legal unilateral refusal to deal. There were more complaints about H2F than just from Apple. And H2F has affirmatively pleaded that Apple told Amazon that Apple did not believe H2F infringed Apple’s intellectual property. Apple, one might argue, actually encouraged Amazon to keep dealing with H2F. Add to this the variety of alternative means by which H2F could find customers, and one has a compelling legal argument in support of a motion to dismiss.
Discovery will be expensive and time consuming, particularly for H2F which may not be that well-funded. H2F is one of thousands of small vendors. If Amazon or Apple caves on this case, they would open themselves up to litigation on many different fronts from many small vendors. I anticipate a hard slog that starts with an aggressive motion to dismiss. If that fails, Amazon and Apple will pursue aggressive discovery into H2F’s business and practices to support the free-riding, counterfeiter counternarrative.