By David Golden

For antitrust practitioners, illegal unilateral refusals to deal are like four-leaf clovers: they exist but are rarely found. After all, Justice Scalia famously (or infamously, depending on your perspective) declared in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko that refusals to deal lie “at or near the outer boundary of § 2 liability.”

It should come as no surprise then that Chief District Judge Richard Seeborg of the U.S. District Court for the Northern District of California recently dismissed the complaint in Caccuri v. Sony Interactive Entertainment LLC, a consumer class action against Sony, which manufactures and sells the popular PlayStation video game console and operates the PlayStation Store. That complaint alleged that Sony violated Section 2 of the Sherman Act when it eliminated the ability of third-party stores to sell digital versions of PlayStation video games.

The facts of Caccuri are relatively straight-forward. PlayStation owners can purchase games in two forms:  physical media and via digital downloads. PlayStation physical media is sold in stores and over the Internet by many different retailers. The same was true for digital games until Sony announced that its previous course of dealing—allowing third parties to sell codes to download video games to the PlayStation via the PlayStation Network—would be eliminated, leaving the PlayStation Store as the only digital option. According to the complaint, PlayStation Store prices for digital games are higher than third party prices. Therefore, the plaintiffs allege that Sony excluded competition for digital games, with the result that consumers are forced to pay higher, supracompetitive prices.

Under U.S. law, a firm with monopoly power runs afoul of the Sherman Act if it engages in anticompetitive conduct that excludes competition in a product market. That conduct can take many forms, but a monopolist’s refusal to deal with its competitors by itself is not considered unlawful.  However, refusals to deal by a monopolist that control products or services that are essential for competition in the market may be unlawful if such refusals help maintain its monopoly.  U.S. courts are reluctant to force monopolists to share with their competitors because, according to the Trinko Court, “it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” Right or wrong, judicial reluctance to condemn unilateral refusal to deals is well established in U.S. antitrust jurisprudence.

But there is an exception. When a dominant firm has voluntarily engaged in a prior, profitable course of dealing with a competitor and then refuses to deal with that competitor and that refusal excludes competition from the relevant market—in Caccuri, digital video game sales for the PlayStation console—antitrust liability can apply.

Whether explicitly stated by courts or not, the case law shows that a plaintiff must plead, among other things, sufficient factual allegations to plausibly show that a defendant intended to exclude competition. Again in Justice Scalia’s words, the conduct must be “prompted not by competitive zeal but by anticompetitive malice.”  In refusal to deal cases, allegations that show the dominant firm forgoes a profitable course of dealing—that is, losing money in the short term to eliminate competition in the long term—can suffice.

The Caccuri court gave the plaintiffs leave to amend to add those allegations. Judge Seeborg made clear that the court would not assume Sony’s prior course of allowing download codes to be sold by third parties was profitable, and that the plaintiffs must at least “describe the process through which Sony earned money from the practice.”  Put another way, the court wants facts that indicate Sony’s refusal to deal was not just “sharp elbow” competition, but that Sony plausibly intended to exclude competition.

Of note, the court flatly rejected Sony’s explanation that it was simply changing distribution methods by cutting off third-party digital sales; Judge Seeborg found Sony was a competitor in video game sales, not just a distributor.

Even though the Caccuri complaint has been dismissed for now, the decision demonstrates that unilateral refusal-to-deal cases remain viable. That may be especially true in cases involving dominant digital distribution platforms and walled gardens like the PlayStation game console. The requisite fact patten is specific, challenging to plead, and yet entirely possible.

 

Written by David Golden

Edited by Gary J. Malone

Read Anticompetitive Malice, Competitive Zeal, and the PlayStation Store at constantinecannon.com