In the May 17, 2024 edition of The Legal Intelligencer, Edward T. Kang wrote, “FTC Ban on Noncompetes: Antitrust Implications of Agreements.”

Massachusetts’s Route 128 high-tech corridor was supposed to be America’s high-tech capital. In the 1970s, armed with talents from Harvard and MIT and home to computer companies like Digital Equipment Corp. and Wang Laboratories, the Boston metro area was leading the charge for minicomputer innovation. Back then, the total technology employment in the area was roughly triple that of Silicon Valley, and the notion of Silicon Valley outshining Boston as the high-tech capital seemed implausible. Fast forward to 1995. Silicon Valley saw the highest increase in export sales among U.S. metro areas, while Boston did not make the top five. What explains Silicon Valley’s rise and Boston’s decline? Legal scholars have identified one key reason: while most states, including Massachusetts, enforce noncompete agreements, California does not. The result was a strikingly open culture in Silicon Valley where employees are free to go from one company to another or start their own, enabling and sustaining more successful regional development. In the last decade, there has been a surge in public initiatives including new legislations and regulatory initiatives aiming to reign in employers’ use of noncompetes, with the most recent example being the FTC’s issuance of its final rule banning nearly all noncompete agreements. The final rule has yet to take effect, however, and legal challenges are already looming. Rather than just describing the new FTC rule, we should examine noncompetes’ anticompetitive effects, a critical aspect of the rule’s underlying rationale. As a growing body of academic literature asserts, noncompetes are restraints against competition, and they are harmful to both employees and the economy. As one of the major levers that the federal government has over the economy, antitrust laws can provide significant deterrence to abuse of noncompetes by employers.

The Spectrum of State Laws on Noncompetes

The legal system has historically addressed noncompetes almost entirely under state common law. Nowadays, the treatment of noncompete provisions varies significantly from state to state. On one end of the spectrum, five states completely prohibit almost all noncompete agreements. These states include California, Colorado, Minnesota, North Dakota and Oklahoma. On the opposite end of the spectrum regarding enforceability, numerous states rely on common-law development to assess non-compete agreements and generally uphold noncompete agreements. However, all states subject such agreements to closer scrutiny than typical contracts by applying a balancing test that requires employers to show a “protectable interest,” or requires more than minimal consideration. Generally, under the balancing test, a court must consider whether the restraint is greater than is needed to protect the employer’s legitimate interest; the hardship to the employee; and (3) the likely injury to the public. See Modern Environments v. Stinnett, 561 S.E.2d 694 (Va. 2002).

On the enforceability of noncompete agreements containing unenforceable provisions, courts in these jurisdictions are split among three approaches: the “all or nothing” approach, which voids the agreement entirely if any part is unenforceable, the “blue pencil” approach, which enables the court to enforce the reasonable terms provided the agreement remains grammatically coherent once its unreasonable provisions are excised, and the “partial enforcement” approach, which reforms and enforces the restrictive covenant to the extent it is reasonable, unless the “circumstances indicate bad faith or deliberate overreaching” on the part of the employer. See Ferrofluidics v. Advanced Vacuum Components, 968 F.2d 1463 (1st Cir. 1992).

The Anticompetitive Effects of Noncompetes

By imposing outright limits on employees’ ability to engage in competitive work, noncompetes can deter employees from leaving their employers and impede their access to economic opportunities. Moreover, noncompetes, in the aggregate, can cause broader harm to society when they impede free trade and open competition.

An example is helpful to illustrate the threat to competition posed by noncompetes. Imagine a hospital in a rural area with a fixed number of trained nurses. Suppose the hospital owner is worried that another hospital might be established in the area and bring in competition, both in the product market for medical services and the labor market for skilled medical professionals. In that case, the hospital can hire additional unneeded nurses out of the pool of trained nurses and subject all nurses to noncompetes of three years. The noncompetes would be a significant entry barrier for any new hospital that wants to enter the market. Even if a new hospital is willing to pay a significant wage premium to hire the nurses employed by the incumbent hospital, the new hospital will have to wait three years while the nurses remain unemployed. Furthermore, this entry barrier will harm not only the labor market for nurses, but also all the other labor markets, such as the markets for doctors and hospital administrators, from which the new hospital would have drawn, and the product market for medical services because there are fewer consumer choices. In summary, in addition to employees subject to the noncompete, a non-compete can harm the labor markets from which the employer draws, and the product market in which the employer operates.

Empirical studies have highlighted the harmful effects of noncompetes in the aggregate on competition and entrepreneurial activities. Enforcing noncompetes reduces the formation of “spinout” firms, which are new firms founded by employees leaving their previous employer. A one standard deviation increases in state law enforceability of noncompetes leads to a 28.7% decrease in new spinout firm formation. Venture capital is more effective at generating firms and jobs in states without noncompete enforcement than states that enforce noncompetes.

The prevalence of noncompetes and the labor markets being highly concentrated exacerbate the anticompetitive effects caused by noncompetes, creating a vicious cycle. If a labor market is competitive and many employers exist, the employers are more likely to free ride on each other rather than to pay the wage premiums for employees to sign noncompetes. However, most labor markets are highly concentrated. One study found that 60% of labor markets have a Herfindahl-Hirschman Index (HHI) exceeding 2,500, a threshold considered “highly concentrated” by the Justice Department and FTC. If employers use noncompetes infrequently, their adverse effect of deterring entry and causing market concentration might only be seen in the long term. Noncompetes are common, however. Approximately one in five American workers, which amounts to approximately 30 million people, are restricted by non-compete clauses. As a result, non-competes in aggregate are harmful to labor markets.

Using the Sherman Act to Challenge Noncompetes

As agreements in restraint of trade, noncompetes fall within the ambit of the Sherman Act. But, lawsuits challenging noncompetes under antitrust law are almost nonexistent. In earlier cases, courts dismissed plaintiffs’ challenges because they found that noncompetes involved de minimis effects on competitions and did not harm the public interest, as shown by the plaintiffs’ failure to show non-competes effects on the market. See e.g., Bradford v. New York Times, 501 F.2d 51 (2d Cir. 1974). Courts also evaluated noncompetes under the deferential rule of reason standard rather than the per se illegal or quick look standard. Under the rule of reason standard, a plaintiff cannot prevail unless she can prove that the defendant has market power, that is, the power to force the employee to do something that she would not do in a competitive market; and that the noncompete measurably reduces competition. See United States v. Topco Associates, 405 U.S. 596 (1972). Proving that a single noncompete can harm an entire labor market is difficult. Given that such challenges usually involve a single plaintiff defending against the enforcement of one non-compete, the effect of the noncompete on wages and the employee’s mobility in the labor market is likely to be lost in statistical noise. Moreover, while various versions of the rule of reason require considerations of the agreements’ potential impact on the public interest, most courts do not engage in this inquiry, and the process for making such factual determinations remains unclear. As a result, a restraint deemed reasonable in scope typically will not be invalidated due to public interest alone.

Scholars have long critiqued the application of the rule of reason to noncompetes. In the late 1970s, Prof. Charles Sullivan published “Revisiting the ‘Neglected Stepchild’: Antitrust Treatment of Postemployment Restraints of Trade,” where he argued that otherwise “reasonable” noncompetes could violate Section 1 of the Sherman Act. To remedy this problem, he asserted, “courts should look to the general use of noncompetes in the industry to determine whether the collective effect of such practices is to lock-in classes of key employees so as to create a general barrier to competition.” In reaching this conclusion, Sullivan made two factual assumptions: first, that the prevalence of non-competes is much broader than could be surmised from reported caselaw; and second, that as a consequence, non-competes were likely to have broader effects in aggregate beyond what courts would typically discern when examining the specific circumstances of individual cases.

The new empirical literature on noncompetes supports both assumptions and has revealed non-competes’ pernicious effects on labor markets. Antitrust law applies equally to labor markets as to markets for other services and products. The Supreme Court has made clear that antitrust law does “not confine its protection to consumers, or to purchasers, or to competitors, or to sellers” but that the law is instead “comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated.” See Mandeville Island Farms v. American Crystal Sugar, 334 U.S. 219 (1948). The antitrust regime should incorporate these findings and treat noncompetes as presumptively anticompetitive. Under this approach, courts will not demand proof of market power, and an employee subject to a noncompete would nearly always have a prima facie Section 1 claim. The burden will shift to the employer to rebut the presumption. Suppose the common law standard is imported into the antitrust law. In that case, the plaintiff will only have a prima facie claim when a noncompete is excessive under the common law, and the employer will have the burden of providing a business justification.

The Takeaways

There are limited situations where noncompetes are used to protect legitimate business interest. No one would buy a business, for instance, unless the seller agrees to refrain from competing with the business from the relevant market for a limited period. Most noncompetes are not designed to protect legitimate business interest, however (e.g., an employer requiring a noncompete from every employee). In the latter category, emerging evidence suggests that noncompetes create barriers to competition. Treating noncompetes as presumptively illegal under the Sherman Act will allow the courts to hold employers accountable under antitrust laws if noncompetes undermine market competition.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the May 17, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In the January 23, 2024 edition of The Legal Intelligencer, Edward Kang wrote, “Collective David Against Corporate Goliaths: Named Plaintiffs’ Standing in Antitrust Class Actions.”

Class action cases make it possible for consumers to band together and defend their interests collectively in cases where it might be impractical to defend them individually. Recently, many legal scholars claimed that the cascade of legislative and judicial reforms has hobbled antitrust class actions, making them harder to plead, certify and litigate. However, class actions continue to be the mainstay of antitrust enforcement, exceeding government actions by more than 25 to one. Between 2005 and 2020, the number of judicial approvals of settlements grew, on average, 10.31% every year; the number of approved settlements exceeding $100 million increased three-fold between 2012 and 2020.

Antitrust claims can successfully navigate last decade’s reforms. As market concentration intensifies, especially in the technology sector, it is crucial for class counsel to adequately represent plaintiffs and bring antitrust class actions to safeguard their rights. Practitioners should be aware of what legal claims are more likely to successfully clear the main procedural hurdles, one such being the issue of standing.

Article III Standing and Class Certification

Often perceived as one of the rising barricades at the procedural gates for an antitrust class action lawsuit, the issue of standing is receiving increasing focus. It is common for a small group of named plaintiffs to start antitrust class actions, alleging that a widespread monopoly has raised prices for a particular product, affecting downstream purchasers throughout the country. An interesting issue arises in class action cases asserting claims under a variety of similar state laws, of whether standing principles—which govern who gets to sue, and for what causes—require that there be a named plaintiff with a purchase or transaction in each of the states whose laws are at issue. The threshold question of standing in such cases typically comes to the forefront during motions to dismiss when defendants seek dismissal of claims in states where no named plaintiff has made a purchase or conducted a transaction.

The standing doctrine arises from the Article III limitation that federal courts may only decide cases and controversies. To meet the constitutional requirements, a plaintiff must show that he suffered an injury-in-fact; that there is a causal connection between the injury and the challenged action of the defendant; and that the injury may be redressed by a favorable decision. In class action cases, the standing inquiry focuses on the class representatives. To bring a class action claim, plaintiffs must certify the class by satisfying the requirements of Federal Rule of Civil Procedure 23. This includes the requirements outlined in Rule 23(a), such as numerosity, typicality, commonality, and adequacy, in addition to fulfilling at least one of the subsections under Rule 23(b). A majority of antitrust class actions are initiated under Rule 23(b)(3), which introduces two additional requirements: superiority and predominance. Between 2005 and 2020, courts granted the largest number of class certifications in the U.S. Courts of Appeal for the Second, Third and Ninth Circuits. In other jurisdictions, the odds of class certification drop from 49.9% to an average of 37.5%.

The Circuit Split on the Issue

Courts have split on the question of whether named plaintiffs have Article III standing to represent a class asserting claims in states where they had no transaction and thus suffered no injury-in-fact. The First, Second, Fourth, and Sixth Circuits have addressed this precise issue. Among them, the majority found that if the named plaintiffs can establish Article III standing for their state law claims, the issue of their ability to represent absent class members, whose claims are based on other states’ laws, becomes a matter of adhering to the criteria outlined in Rule 23.

In In re Asacol, 907 F.3d 42 (1st Cir. 2018), the First Circuit considered the issue as one of representative standing: “Courts generally focus not on whether the putative representative independently satisfies Article III standing, but rather on whether that party qualifies under the applicable law as a representative of the one who does have standing.” Thus, the court held that there was no requirement that the named plaintiff’s claims be identical to the claims of each class member, and that the “Article III focus in class actions” is on the named plaintiffs’ incentives to adequately litigate the class members’ claims, which is a question to be decided under Rule 23.

Similarly, in Langan, the Second Circuit found that class actions brought under Rule 23 result in efficiencies of cost, time, and judicial resources. Further, the court reasoned that “it rarely happens that the circumstances surrounding one plaintiff’s claim end up being identical to the claims of another putative class member let alone all of the others.” See Langan v. Johnson & Johnson Consumer, 897 F.3d 88 (2d Cir. 2018). Thus, the court held that “as long as the named plaintiffs have standing to sue the named defendants, any concern about whether it is proper to include out-of-state, nonparty class members with claims subject to different state laws is a question of predominance under Rule 23(b)(3), not a question of ‘adjudicatory competence’ under Article III.”

In Mayor, the Fourth Circuit similarly held that the ability of a named plaintiff to bring claims on behalf of a class implicated statutory standing, not constitutional standing. See Mayor & City Council of Balt. v. Actelion Pharmaceuticals, 995 F.3d 123 (4th Cir. 2021). The court found that the claims that plaintiffs made on behalf of the class members in states where the plaintiffs did not make a purchase should not be stricken. Rather, those claims should be analyzed in the context of Rule 23: whether the named plaintiffs’ claims raise “questions of law or fact common to the class,” are typical, or raise predominance problems. See Mayor & City Council of Balt. v. Actelion Pharmaceuticals, 995 F.3d 123 (4th Cir. 2021).

The Sixth Circuit disagrees. In Fox, the Sixth Circuit rejected the lower court’s class certification, reasoning that because the named plaintiff lacked standing to file an individual lawsuit against all defendants, he could not gain standing to bring claims against all defendants by invoking Rule 23 and filing a class action. See Fox v. Saginaw County, Michigan, 67 F.4th 284, 296 (6th Cir. 2023).

While the issue may be settled in the above-mentioned circuits, district courts’ views vary widely. How the courts frame the issue might predict the outcome. Courts that permit plaintiffs to pursue state law claims from jurisdictions where they did not allege injury-in-fact view the named plaintiffs as asserting claims solely under their own state laws. Simultaneously, they seek to represent absent class members whose claims arise under similar state laws. As the court articulated in In re Bayer, whether the named plaintiffs have standing to bring suit under each of the state laws alleged was “immaterial” because they were not bringing those claims on their own behalf but are solely seeking to represent other similarly situated consumers in those states. See In re Bayer Combination Aspirin Products Marketing & Sales Practices Litigation, 701 F. Supp. 2d 356 (E.D.N.Y. 2010). In contrast, when courts view the named plaintiffs themselves as asserting claims under multiple state laws, they tend to find that named plaintiffs are mandated to have facially valid claims in all the states.

The Takeaways

Despite the challenges associated with litigating the issue of standing, practitioners can successfully navigate through this obstacle by employing sound legal strategies. In light of the decisions in Asacol, Langan, and Mayor, class counsel’s arguments against the necessity of named plaintiffs’ constitutional standing in each state are likely to be taken more seriously. Plaintiffs are more likely to succeed in their arguments if they present the issue as one where the named plaintiffs are solely seeking to represent other similarly situated consumers in states where the named plaintiffs did not suffer an injury. This strategic framing may enhance the viability of their claims and influence the court’s interpretation of the standing requirements in the context of class actions.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the January 23, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In the January 2, 2024 edition of The Legal Intelligencer, Edward Kang wrote, “An Antitrust Storm Brewing in the Walled Gardens: Dissecting the Antitrust Claims in ‘Epic v. Google’.”

On Dec. 11, Epic Games notched a historic victory against Google after a federal court jury found that the internet search giant illegally maintained monopolies over the distribution of apps on Android devices and for Android in-app billing services. The decision was announced at the end of a month-long trial, and the trial itself was a part of a three-and-a-half year-long legal battle between Google and Epic Games. Back in 2020, the video game juggernaut simultaneously filed lawsuits against Apple and Google, alleging that both companies operated their app stores like monopolies, exercised undue control over the distribution of mobile apps like Epic’s Fortnite, and unfairly penalized the creation and use of app markets and payment tools not owned by either Google or Apple. Epic alleged that these illegal practices allowed the corporations to tack a surcharge of up to 30% onto all purchases made through downloaded mobile apps. Considering the difficulties for private plaintiffs to pursue and prevail on antitrust claims under the Sherman Act, Section 2, Epic’s win against Google carries significant consequences for platform operators’ liability under antitrust laws.

The Goals of Antitrust Law

The Sherman Antitrust Act of 1890 is the primary legal framework regulating competition and preventing anti-competitive practices in the United States. The Supreme Court described its goal as a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” See Northern Pacific Railway v. United States, 365 U.S. 1 (1958). The court further explained that the Sherman Act rests on the premise that unrestricted competitive forces will result in the optimal allocation of economic resources, leading to the lowest prices, highest quality, and significant material progress.

Antitrust laws protect competition from being exploited by market participants. The primary focus of antitrust is not isolated transactions but rather the preservation or restoration of competitive markets. While it is often stated that antitrust law protects competition and not competitors, this perspective may not capture the complete picture. There comes a point where safeguarding competitors becomes necessary to ensure the continuation of competition. Thus, the essential question revolves around determining the quantitative threshold at which the protection of competitors is required to maintain the overall competitiveness of markets, making it a matter of degree rather than a binary qualitative distinction.

Sections 1 and 2 of the Sherman Act address different types of anticompetitive behaviors. Section 1 pertains to concerted or coordinated conduct among multiple entities, while Section 2 focuses on unilateral conduct by a single firm that holds “monopoly power.” The elements of each Section 2 offense vary. Besides the conspiracy to monopolize and the attempt to monopolize, a violation of Section 2 requires monopoly power, some form of exclusionary conduct, and a causal connection between the two. Monopoly means significant but not absolute market power—e.g., a market share of 60% or more. Thus, a firm must not only possess monopoly power (be “big”) but also engage in anticompetitive conduct (be “bad”) to incur liability under Section 2. As the Supreme Court held, “the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.” See Verizon Communications v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004).

It is not surprising that defining what qualifies as exclusionary conduct has been a matter of intense debate since the enactment of the Sherman Act. Generally, most courts agree that for conduct to be deemed exclusionary, the conduct must harm a competitor without providing any corresponding benefit to consumers. Additionally, this conduct should establish or help maintain a monopoly position, which creates a causal link or feedback relationship between the behavior and the monopolistic element. In practical terms, proving a Section 2 violation poses a substantial challenge, and rightly so. This high evidentiary bar is sensible because most business conduct is unilateral, and much of such conduct is not anticompetitive.

Defining the relevant antitrust market and evaluating the degree of actual or likely power within that market are often the most critical issues for establishing the existence of monopoly power under Section 2. Courts generally describe the existence of monopoly power as “the ability to control prices and exclude competition in a given market.” See Broadcom v. Qualcomm, 501 F.3d 297 (3d Cir. 2007). This showing requires a plaintiff to first “establish the relevant market” in which the defendant allegedly has monopoly power. See Sky Angel U.S. v. National Cable Satellite, 947 F. Supp. 2d 88 (D.D.C. 2013). For antitrust purposes, the relevant market has two components: the relevant product market and the relevant geographic market. The relevant product market is defined as that set of products for which a hypothetical monopolist could profitably raise prices for a nontrivial period. This analysis requires a study of the candidate market and the interaction of the various products in that space. The algorithm for determining the product market is similarly applied to determine the geographic boundaries of the relevant geographic market. Because the antitrust market definition is an evidence-driven legal concept, defining the market is typically a complex factual inquiry that is established through experts and economists.

Given the challenges of obtaining direct evidence of anticompetitive effects, antitrust plaintiffs often rely on a double inference approach by first inferring market power from measures of market concentration and later inferring anticompetitive effects from the demonstrated market power. Presenting a scenario with few competitors and high market shares allows for the rebuttable inference of anticompetitive effects resulting from exclusionary conduct.

Google’s Wrongful Conduct During Discovery

During the month-long trial, Google was repeatedly questioned about its evidence preservation practices. At one point, the judge said that the evidence presented at trial had him questioning whether Google had an “ingrained systemic culture of suppression of relevant evidence.” The judge’s remark was directed at Google’s failure to preserve internal chat evidence. Google’s chat system includes a setting of turning off “history,” which causes internal chats to be deleted automatically after one day. After Google CEO Sundar Pichai testified Google employees regularly used chat for substantive business discussion, Epic pointed out that Google employees were turning off “history” in chat even after a legal hold was put on the company following the lawsuit. Instead of changing the functionality and forcing the chat to be saved, Google issued an internal document reminding employees that “anything you write can become subject to review in legal discovery.”

In addition to the deleted chatlogs, Epic alleged that Google intentionally hid documents from discovery by assigning “fake privilege” to them. It is not the first time that Google has been accused of such conduct during the discovery process. In United States v. Google, an ongoing antitrust case brought by the DOJ this year against Google for its alleged monopolizing the advertising technology market in violation of the Sherman Act, the DOJ moved to sanction Google and compel disclosure of documents with “fake privilege.” The DOJ claimed that Google had intentionally misused the attorney-client privilege to shield ordinary court business communications from discovery by directing employees to create the appearance of privilege on all written communications relating to agreements on the search function. Specifically, Google employees would mark the emails as privileged, carbon-copy in-house counsel, and request generic “legal advice.” The in-house counsel included in these emails would not respond, and no actual legal advice was given. Epic claimed that Google employed the same tactics in its litigation with Epic.

In its complaint, Epic pleaded Google’s monopoly power and anticompetitive conduct within the mobile app distribution market for Android users and the market for Android in-app payment processing. For both markets, Epic defined the relevant geographic markets as “worldwide excluding China.” Alongside the counts under Section 1 of the Sherman Act and state claims, Epic asserted two counts under Section 2 of the Sherman Act for the respective markets. The jury ruled in favor of Epic on all counts, including both counts under Section 2 of the Sherman Act. Notably, on the verdict sheet, the jury adopted, in their entirety, the product and geographic market definitions outlined by Epic in its complaint. While it is possible that the adverse jury instruction tainted the jury’s view of Google, the jury verdict sheet evidenced that the jury found Epic’s definition of relevant markets compelling.

Epic’s win against Google bears substantial implications. As recognized by the jury, the proprietary environment of the mobile app market on the Android operating system has become so ubiquitous for Android users that it might have become an antitrust market. For tech companies like Amazon, Apple, and Google, building the infrastructure for digital goods and services allowed them to achieve astronomical growth by leveraging the network effect to increase the value of their products and services with every new user. As the digital market matures and more market participants appear on the scene, the question becomes when the platform operators would have “antitrust duties” to allow others into their “walled gardens” and make the markets competitive. Since defining the relevant antitrust market is often the most critical issue for establishing claims under Section 2, the line of thought that makes Epic’s market definitions recognizable to the jury will implicate many other antitrust cases. Bringing successful Section 2 claims has been difficult in recent years due to, among others, the court’s attitude towards monopoly. With the Epic ruling, practitioners can take heart in that private plaintiffs can still prevail when armed with robust, albeit novel, claims under Section 2.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the January 2, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Whether you bring a suit over a complicated product like a social media network or a simple tangible product, like an apple, a relevant product and geographic market must be defined properly to succeed.

In the March 17, 2022 edition of The Legal Intelligencer, Edward T. Kang wrote “What Makes a Market, a Market, Anyway? A Look at Social Media.”

Picture an antitrust action against an apple farmer who supplies almost all the apples in America. If you were bringing the suit for antitrust violation, how would you define the market for an apple? Is it the market for a snack? For healthy snacks? For healthy handheld snacks? For fruits? The list could go on and on. Defining the market for an antitrust analysis becomes far more complicated for products or services that are newer, such as the market for social media networks. When it comes to the Sherman Act one may think that because it has been combatting monopolies for over a century, there can be no room for interpretation about what constitutes a monopoly, much less a market for one. In the past 100 years, however, new markets and questions about those markets have risen. Social media networks probably did not come across the minds of the Sherman Act’s drafters in 1890.

Section 2 of the Sherman Act explains that “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony.” The U.S. Supreme Court has defined two elements of a monopoly under Section 2: “the possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” See United States v. Grinnell, 384 U.S. 563, 570–71 (1966). Monopoly power is defined as the ability to control prices and exclude competition in a given market.

Recently, after granting the motion to dismiss the original antitrust complaint, the U.S. District Court for District of Columbia denied Facebook’s (now Meta’s) motion to dismiss the FTC’s amended antitrust complaint against Facebook. The court determined that the amended complaint stated a plausible claim for relief under Section 2 of the Sherman Act. The court noted that the FTC adequately defined the relevant in the amended complaint and, therefore, refused to grant the motion to dismiss.

This decision serves as both a guiding light and a cautionary tale for plaintiffs bringing an antitrust suit involving the contemporary and unique market for social media networks. It illustrates how difficult it is for a plaintiff to define the relevant market for a modern “good” like social media and how complicated it is to address monopoly power in that modern relevant market. Defining the relevant market is intertwined with determining whether a defendant has monopoly power since that power is often inferred when the defendant’s share exceeds a certain threshold in the defined relevant market (usually at least a 60% market share). It is important for practitioners to understand how to properly define both requirements for the latest goods like social media networks as the future holds countless possible actions involving similar markets.

Before alleging that Facebook had monopoly power, the FTC had to sufficiently define the relevant market for social media networks and did so by applying the following traditional relevant market principles to modern times. The relevant market encompasses both the relevant product market and geographic market. When determining whether a plaintiff properly defined the relevant product market, courts look to see what products are reasonably interchangeable to the product at issue. Reasonable interchangeability relates to a product’s price, use and quality. See United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 400 (1956). The outer boundaries of a product market are determined by the cross-elasticity of demand between the product itself and substitutes for it. See Brown Shoe v. United States, 370 U.S. 294, 325 (1962) (emphasis added). Cross elasticity of demand means when the price of one good within a relevant product market rises, it causes a greater demand for similar goods in that same product market. See Tunis Bros. v. Ford Motor, 952 F.2d 715, 722 (3d Cir. 1991).

Courts look to see whether the product at issue has interchangeable substitutes or whether it is distinct from other products. For example, the Supreme Court found that the relevant market for cellophane was the market for flexible packaging goods, rather than the market for cellophane alone as the products were not distinct from one another. Similarly, the U.S. Court of Appeals for the Third Circuit decided that Cadillac cars were not so distinct from other luxury cars so as to constitute their own relevant market. See Mogul v. General Motors, 391 F.Supp. 1305, 1313 (E.D.Pa.1975), aff’d without opinion, 527 F.2d 645 (3d Cir.1976). Only in certain unique situations, courts have found a distinct relevant product market. For example, in Eastman Kodak v. Image Technical Services, 504 U.S. 451, 482 (1992), the Supreme Court held that the relevant product market for repair parts and services for Kodak photo copiers was the market for repair parts and services for Kodak machines only as Kodak machines were not interchangeable with parts for other brand copiers.

Regarding the second aspect of the relevant market, courts have found the following factors dispositive in defining the relevant geographic market: the area where the potential customer will look for a product versus the area in which the seller attempts to sell their products; the price of the product; the durability of the product; and the size of the product. For example, as one can imagine, the relevant geographic market for an expensive item like a boat is larger than that of an inexpensive item like an apple.

In the recent Facebook case, the FTC successfully defined the market for Facebook as the market for personal social network (PSN) services consisting of “online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space.” See Federal Trade Commission v. Facebook, (D.D.C. Jan. 11, 2022). The FTC explained three elements that distinguish PSN services from other services including: how PSN services map connections between users and their friends, family, and others; how PSN services have features that allow users to interact with their connections and share their personal experiences; and how PSN services have features that make it easy for users to expand their networks by finding and connecting with other users. The FTC explicitly distinguished how some “types of internet services” are not “adequate substitutes” for Facebook. The FTC plead that “specialized social networking services’ that ‘focus on professional … connections’ (e.g., LinkedIn) are not substitutes because they are designed for and used primarily by professionals for sharing professional content,” as opposed to PSN’s design and primary use of “maintaining personal relationships and sharing experiences with friends, family, and other personal connections.”

This decision also serves as a cautionary tale for plaintiffs alleging a defendant’s monopoly power in a social media market. The specificity of detail of FTC’s allegations of monopoly power was the reason the court granted Facebook’s first motion to dismiss and denied its second as to the FTC’s amended complaint. Originally the FTC alleged solely (and conclusively) that Facebook maintained a “dominant share of the U.S. personal social networking market (in excess of 60%)”, and that “no other social network of comparable scale exists in the United States.” The court found this assertion to be bare, conclusory and that the FTC did not specify what the 60% was measuring. But, for the FTC’s second go around, it included more detailed facts to support its allegations. The FTC’s amended complaint included allegations regarding data about Facebook’s market share of daily average users, monthly average users, and its share of users’ average time spent on PSN services. The FTC even included specific data breaking down the type of device that daily and monthly average users interacted with Facebook on. The FTC alleged that Facebook’s share of daily average users of PSN services exceeded 70% while its competitors never exceeded 30% on any device type during any month. The FTC also incorporated data that Facebook’s share of users’ time spent on PSN services exceeded 80%. The FTC bolstered their allegations by alleging that Facebook itself used these metrics to assess their performance and their competitors’ performance. The FTC’s allegations were enough to show that Facebook maintained a dominant market share for PSNs of at least 60-65%.

Practically speaking, when bringing an antitrust suit, it is critical to identify the proper relevant product market. To properly do so, and plead sufficiently, practitioners should acknowledge reasonable interchangeability and cross-elasticity of demand when defining their relevant product market. Like how the FTC referenced interchangeable goods in their explanation of the relevant market for Facebook by noting that they are not interchangeable substitutes, practitioners should either compare or distinguish the product at issue with reference to interchangeability and cross-elasticity of demand. To successfully allege the defendant’s monopoly power of the relevant market, practitioners should learn from the FTC’s mistakes and avoid making conclusory assertions. For new markets like that of social media networks, practitioners should incorporate specific data about the defendant’s product that illustrates the level of market power the defendant holds, such as daily/monthly average users and time spent on the product by users. Practitioners should gather this data for all competitors’ products and include competitors’ data in allegations to paint a picture of monopoly power like the FTC did.

It is also critical for practitioners to define the relevant geographic market through the market that comprises where the product’s customers would go to purchase. It is important to distinguish that from the market where the seller sells their product as that is not the proper geographic market. It is only a matter of time until the next antitrust action against a social network company is underway. Whether you bring a suit over a complicated product like a social media network or a simple tangible product, like an apple, a relevant product and geographic market must be defined properly to succeed.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the March 17, 2022 edition of “The Legal Intelligencer” © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In reading the spate of recent antitrust actions taken against all-powerful search behemoth Google, you do not have to go very far to see damage done to businesses in our own backyard. A locally based (Paoli, Pennsylvania) search engine upstart DuckDuckGo, best known for protecting the privacy of its end-users, is one such business affected by Google’s monopoly.

Toward the end of 2020, Google was hit with three separate antitrust lawsuits brought by U.S. regulators. The first, filed in October by the Department of Justice, focused on Google’s dominance in general internet searches (the utility for which Google is most widely known). The second case, which alleges that Google used anti-competitive practices related to its advertising technology, was brought by a group of Republican state attorneys general. The third, filed in December by nearly 40 states, accuses Google of monopolistic practices in general search and search ad markets. And, as I write this column, news arrived that another antitrust investigation, this time launched by a U.K. competition watchdog, the Competition and Markets Authority, had been launched into Google’s “Privacy Sandbox” project, which the regulator said “will potentially have a very significant impact on publishers like newspapers, and the digital advertising market.”

On this side of the Atlantic, it is likely that the court will consolidate two or more of the lawsuits into one of the largest and most historically significant antitrust suits in U.S. history, as two of the cases have already been consolidated for discovery and pretrial purposes. Whatever its ultimate shape, the flurry of actions here in the United States and abroad promises to be a potential reckoning that some citizens, lawmakers, and perhaps most impacted—competing search technology companies—believe is long overdue. As the opening of the DOJ’s complaint put it, “Two decades ago, Google became the darling of Silicon Valley as a scrappy startup with an innovative way to search the emerging internet. That Google is long gone. The Google of today is a monopoly gatekeeper for the internet … with a market value of $1 trillion and annual revenue exceeding $160 billion.” See United States v. Google, No. 1:20-cv-3010 (D.D.C. Oct. 20, 2020).

Antitrust lawsuits brought by the government are certainly not new.  When large companies achieve monopoly control over their market, they deplete consumer choice, block competition from rivals, stifle innovation and inflate prices. When this happens, it is incumbent upon the government to re-establish fair market competition on behalf of American consumers and businesses. Thus, antitrust is as much about the market as it is about the monopolist. Big Tech antitrust lawsuits are also nothing new. It’s been more than 20 years since the  government took aim at another tech behemoth, Microsoft, for intermingling its hardware and software units in a way that enabled them to crush then-industry threats like Apple, Java, Netscape and Linux. That trial concluded with a court order to break up Microsoft into two separate units. Upon appeal, Microsoft was instead required to share its application programming interfaces (APIs) with third-party companies, and to appoint a compliance panel. See United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001). Many analysts (and competitors) believe that Microsoft escaped the antitrust action virtually unrestrained, and is still very much a monopolist power.

What is new about the antitrust assault on Google is that this one just feels different. Maybe more than Microsoft or Facebook, Google still enjoys much goodwill among users and Americans generally. That goodwill may emanate from Google’s famous motto, “Don’t be evil” (which morphed into “Do the right thing” during corporate restructuring under Alphabet Inc. in 2015), but more likely it flows from our near-absolute reliance on Google’s technology in our daily lives. Technology that, at least in terms of Google’s general search engine (Google it) and Gmail, is—or at least appears to be—completely free. Indeed, it is hard to think of the internet itself without also thinking of Google.

Behind the coy motto, whimsical logo, and “free” services Google offers, lurks one of the most perfect monopolies ever created. Perfect not because the company controls nearly 90% of all general-search-engine queries in the United States, almost 95% of mobile queries, and decisive dominance of the programmatic ad market. Rather, Google’s monopoly approaches perfection because its harmful effects are undetectable to the average consumer. If antitrust protects against price inflation and lack of innovation, it does not compute that Google has done “evil.” Google continues to innovate at a pace that is dizzying, and it offers most of this innovation—not at an inflated price—but seemingly at no price whatsoever.

This is an illusion. As the DOJ’s complaint against Google states, “When a consumer uses Google, the consumer provides personal information and attention in exchange for search results. Google then monetizes the consumer’s information and attention by selling ads.” If most consumers are only vaguely aware of (and mostly OK with) participating in this exchange, very few have awakened to its ramifications. That is rapidly changing. One issue that has already garnered a lot of attention is privacy. What Google does with all that personal information, and how secure it may be, has many concerned. Indeed, an upstart competitor in general search, DuckDuckGo, has built its business on the pledge never to collect or share personal information. But DuckDuckGo (and any other competitor in search) finds itself blocked from challenging Google’s supremacy. Google’s vast web of exclusionary agreements with the world’s preeminent computer and cellphone manufacturers and web browser developers denies “the tools to become true rivals: effective paths to market and access, at scale, to consumers, advertisers, or data.” Without access and scale, rivals stagnate, wither, or die. Given that Google has done search better than anyone else for years, lack of competition in this arena may not necessarily bother consumers, except perhaps in principle. But it is the other side of Google’s business model that really hurts them—and many, many others we might not expect.

Google collects unfathomable amounts of personal information and attention that it can turn into billions of dollars of ad revenue. The Google that launched only two decades ago as an ingenious search engine that helped tame the internet has mutated into an advertising empire of staggering proportion and complexity. As Dina Srinivasan reveals in her groundbreaking work on Google’s domination of the ad markets, “approximately 86% of online display advertising space in the United States is bought and sold in real-time electronic trading venues, which the industry calls ‘advertising exchanges.’” (https://law.stanford.edu/publications/why-google-dominates-advertising-markets/). More than 10 billion targeted ad spaces are processed every day, an order of magnitude greater than the number of shares traded on the New York Stock Exchange. Currently, Google simultaneously operates the leading electronic ad exchange and the leading buy- and sell-side intermediaries that publishers and advertisers must use to trade. As Srinivasan has suggested, structurally this is analogous to permitting the New York Stock Exchange to operate the largest broker-dealers in the financial sector. Such an arrangement, and the conflicts of interest it necessarily engenders, are unthinkable in modern finance. Yet this is precisely how the world of online advertising functions.

In addition to operating the largest ad exchange and largest intermediaries, “Google has another conflict of interest,” Srinivasan continues. “Google not only sells ad space belonging to third-party websites, it sells ad space appearing on its own sites, Google Search, and YouTube.” The effect is that small businesses that use Google’s intermediary tool, Google Ads, get steered by Google toward Google properties instead of non-Google properties, like, for example, The New York Times or The Guardian. The conflicts and distortions do not end there. According to Srinivasan’s analysis, Google has been mobilizing all its business and technological power continually to squeeze competitors out of the ad space, and to cram customers into its increasingly narrow and expensive funnel. For all her analytical virtuosity, Srinivasan’s solution to breaking Google’s stranglehold on programmatic advertising is as plain as her analogy:  protect the integrity of the ad market using the same fair competition principles that protect the financial markets.

While we can look ahead and anticipate that the antitrust enforcement actions against Google will go some way toward reducing its dominance in search and advertising, much harm has already been done by the same company that adopted “Don’t be evil” as its motto. There is the threat to privacy presented by a company whose business model depends on the tracking of individual behavior and the sale of personal information for targeted ads. There is denial of access to scale in search and search advertising to existing competitors like DuckDuckGo. The crushing of rival ad exchanges and upstart buy- and sell-side advertising platforms and technologies, which would promote competition and drive down costs. This depresses the very ad revenue publishers need to reinvest in their own businesses.

According to Srinivasan, “by suppressing competition from non-Google exchanges, Google costs publishers real revenue, sometimes significant sums.” This was no small development for publishers large and small reeling from the demise of print advertising and migrating to sophisticated electronic trading.” In the U.K., the CMA’s report on “Online platforms and digital advertising” similarly suggests that Google’s privacy measures may further deprive newspapers and other publishers of revenue. Facing reduced ad revenues due to Google’s anticompetitive practices, publishers shed jobs, narrow content, underfund investigative journalism, put up paywalls, and raise subscription prices.

We may now circle back to the consumer who still may believe Google provides many of these services “free of charge.” If Srinivasan, the U.K.’s CMA, and a group of leading economists are all correct in their assessments, citizens the world over have already paid. We have paid in the form of privacy violated, increased paywalls and subscriptions, lost jobs, diminished knowledge, stifled discourse.

Given that Google may have harmed so many, in so many different ways, it is unlikely that the recent government brought antitrust actions against it will be the last of the antitrust litigation it faces; indeed, they are probably only the beginning.

Edward T. Kang is the managing member of Kang Haggerty.  He devotes the majority of his practice to business litigation and other litigation involving business entities.

Reprinted with permission from the January 21, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Moreover, under 69 P.S. § 529, every corporation, joint-stock association, limited partnership or company organized under the Commonwealth of Pennsylvania or any other state that engages in business in the Commonwealth of Pennsylvania which sells in bulk fifty-one percent or more of any stock of goods, wares or merchandise of any kind, fixtures, machinery, equipment, buildings, or real estate, shall give the Department of Revenue ten days’ notice of the sale, prior to the completion of the transfer of such property.

To provide proper notice and comport with Pennsylvania law, the seller must file form REV-181, the Application for Tax Clearance Certificate, with the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor and Industry ten days before the closing of the sale. A copy of the agreement of sale and preliminary settlement statement should be included with the Application for Tax Clearance Certificate.  (Note, however, that the Department of Revenue often requests re-submission post-closing so that all closing information and interim tax returns through the date of closing may be submitted).  In addition, all such entities must file all state tax reports with the Department of Revenue to the date of the proposed closing on the transfer of property and pay all taxes and unemployment compensation contributions due to the Commonwealth of Pennsylvania through the date of closing. If all state tax reports have been filed and if all state taxes and unemployment compensation contributions are paid up to the date of the proposed transfer, the State issues a clearance certificate to the seller, which is then provided to the buyer.

The Sherman Antitrust Act of 1890 has long stood as a benchmark in antitrust law, aimed at the prevention and dismantling of business enterprises which have knowingly set out to gain monopolistic power over a given market.  While the Sherman Act…

The Sherman Act

The Sherman Antitrust Act of 1890 has long stood as a benchmark in antitrust law, aimed at the prevention and dismantling of business enterprises which have knowingly set out to gain monopolistic power over a given market.  While the Sherman Act has been used throughout history in many landmark instances such as against Standard Oil, Kodak, and AT&T, its potential judicial reach still begs some question.  Specifically, the Foreign Trade Antitrust Improvements Act (“FTAIA”) minimizes the reach of the Sherman Act as it seeks to limit the reach of the law by excluding most foreign conduct.  Exceptions to these exclusions are stated as those “involving import commerce and commerce with a direct, substantial, and reasonably foreseeable effect on domestic commerce, import commerce, or certain export commerce.”  The FTAIA has led many legal experts to question what does and does not fall under the Sherman Act when dealing with foreign businesses.

TI Investment Services v. Microsoft Corp. Background

While some litigation nationwide stalls as judicial experts wrestle with questions regarding the reach of the Sherman Act, one recent case in New Jersey highlights the very issue of the Sherman Act’s reach in connection with the FTAIA.  In TI Investment Services v. Microsoft Corp., 13 cv-4823, pending in the United States District Court for the District of New Jersey, World Phone Services PVT Ltd. Of New Delhi, India (a company owned by TI Investment Services, operating out of Colt’s Neck) filed its claim against Microsoft Corp. on August 12, 2013, alleging numerous claims, including that Microsoft’s Skype in India is currently operating without proper licensing required under Indian law, which has allowed them to gain an advantage over competition, including World Phone Internet Services PVT Ltd.  Since 2002, all Voice over the Internet Protocol (VoIP) companies in India were required to file for a license which requires a fee of 6% of gross revenues.  According to the suit, Microsoft has no such license, while World Phone got its license in 2002 as was required under the law.

TI Investment Services makes further allegations of the Sherman Act, such as Microsoft intends to extend Skype in its Xbox gaming consoles in the future, continuing its reach over the VoIP market.  The suit alleges this inclusion serves as another manner in which Microsoft is intentionally attempting to establish a monopoly in the realm of VoIPs.  To complicate issues further, the suit alleges that all clients of Microsoft are subject to potential fines by the Indian government due to Microsoft’s lack of a license, subjecting Microsoft to penalties under New Jersey’s deceptive business practices law.  Auditors hired by TI Investment Services pointed to Skype’s “illegal activity” as a reason for TI’s decline in revenue from 2008 to 2012.

The Case in the Context of the Sherman Act

This case highlights the conflict between the Sherman Antitrust Act and the FTAIA, as the alleged illegal activity without a license falls under Indian law.  The business done by Microsoft exists as international business transactions, thus, some would argue, barring it from penalty under the Sherman Act.  The plaintiff claims, however, that Microsoft’s illegal activity affected domestic commerce in New Jersey through the company’s marketing of its services to over 300,000 in New Jersey.  If the court agrees with the plaintiff, then Microsoft’s activity could subject it Microsoft to over $9 million in compensatory damages, along with punitive damages, legal fees, and other relief based upon that claims that Microsoft had violated the Sherman Act.

Conclusion

All in all, the conflict between the Sherman Act and the FTAIA leaves some confusion as to the international reach of the Sherman Act moving forward.  Some experts worry that the FTAIA created loopholes that allow for monopolistic companies to avoid being held accountable for their unlawful activities.  The case above stands as an example in which allegations seem to pin a very serious offense against Microsoft for which a competitor may not obtain relief it such conduct is excluded from Sherman Act liability based on the FTAIA.    This lawsuit against Microsoft could be one that many legal experts, legal practitioners, and companies operating internationally will look to in interpreting the impact of the Foreign Trade Antitrust Improvements Act and providing business guidance and solutions.