Tuesday, July 19, 2022

Lawyers tried to avoid Epic v. Apple judge for banks' class action against Apple over Apple Pay monopoly abuse--but jury is out on ultimate assignment

The class action-specialized law firm of Hagens Berman yesterday announced an antitrust class action on behalf of payment card issuers against Apple. The complaint (PDF) alleges monopoly abuse in the form of the "manifestly supracompetitive" fees Apple charges payment card issuers for transactions made on Apple Pay. Apple has very high shares in the smartphone, tablet, or smart watch markets in the United States, the geography the lawsuit focuses on, and does not allow other payment apps (particularly "wallet" apps) to use the iPhone's NFC chip. Developers can use NFC for some purposes, but Apple prohibits third-party apps to facilitate payments via NFC. Apple charges transaction fees despite other companies doing almost all of the work--and those amounted to $1 billion last year and are projected to soon reach $4 billion, in the U.S. alone.

I'm going to be following this litigation as it unfolds, so this here is not my "definitive" analysis but merely a few observations to begin with.

Explanatory complaint: One key strength of this complaint is that it does a great job explaining the issues and their effects. It's definitely one of the best U.S. complaints I've ever seen in explanatory terms.

Plaintiffs: The caption is Affinity v. Apple as Affinity Credit Union of Canada (which also does some business in the U.S.) is the initial plaintiff. Hagens Berman now wants payment card issuers to sign up so they will get a share of what could be a multi-billion dollar payout. Depending on who will join the plaintiff class (of the thousands of entities that would meet the eligibility criteria), this case here could get a lot more serious than some consumer or "small developer" class actions that typically end in settlements that benefit the lawyers to a far greater extent than anybody else.

Sherman Act claims: There's a tying claim (Sherman Act Section 1) that is described as a "requirements tie." It's not a general tie that would require anyone purchasing an iPhone, iPad, or Apple Watch to use Appel Pay. But if the users of those devices want to do "tap and pay" transactions, "Apple has made Appe Pay the only option for fulfilling that requirement." In that sense, Apple ties the "tap and pay iOS mobile wallet market" to the "iOS mobile device markets." An additional section 2 claim accuses Apple of monopolization by excluding competition, "including by way of its unlawful practices in restraint of trade." As a fallback, the complaint also alleges "attempted monopolization."

Geographic market: I've already mentioned the geographic focus on the U.S., which in this case doesn't seem arbitrary at all. The complaint contains a chart according to which Apple imposes particularly high transaction fees in the U.S. as compared to the UK and the EU:

Market definition: Given Apple's very high market share in the U.S., the case--unlike cases with a global market definition such as Epic Games v. Apple--doesn't hinge on a single-brand market definition. However, the term "aftermarket" is mentioned once.

Relationship with EU investigations: The complaint makes reference to the European Commission's recent Statement of Objections (a preliminary finding of an antitrust violation) in an Apple Pay case. While there are jurisdictional differences, one can reasonably argue that the Apple Pay situation is worse in the U.S., as evidenced by the fact that fees in the U.S. are several times higher. Besides the investigation in which the EU issued the aforementioned SO, there's a second investigation into Apple Pay (with a slightly different focus) that was announced about two years ago.

Google: This here is not a "Goopple" case where both duopolists--Google and Apple--behave in similar ways. The complaint mentions how much more freedom and, as a result, innovation there is in the market for Android wallets.

Security: The complaint attributes (at least in part) to Apple's exclusionary practices that there have been serious security issues involving Apple Pay. This is going to be a very interesting part of the case to watch, as Apple uses security (alongside privacy) as its favorite pretext for anticompetitive, innovation-stifling terms and policies.

Negative judge-shopping: The Northern District of California, where this complaint was brought, has multiple divisions. Hagens Berman specifically requested "[i]ntra-district assignment to the San Jose division." That's the closest one to Apple's Cupertino HQ, and normally parties prefer not to be in an area where a high percentage of potential jurors may have friends or relatives working for the other party. I'm almost 100% sure that the real reason is not that they want to litigate in the backyard of Apple Park. The presumptive motivation here was to keep the case out of Judge Yvonne Gonzalez Rogers' hands. She's based in Oakland and presiding over the Pepper v. Apple consumer class action (that went all the way up to the Supreme Court) as well as Epic Games v. Apple, which is currently before the Ninth Circuit.

But there is a possibility of her getting the case despite the plaintiff's efforts to sidestep her division. The first thing that happened was that the court assigned the case to Magistrate Judge Thomas Hixson, who has a strong antitrust background but (a) is based in San Francisco and (b) handled discovery-related matters for Judge YGR in Epic Games v. Apple. In this case it's a given that the parties will decline to proceed before a magistrate judge, and then the case might be assigned to that Epic v. Apple judge on the other side of the Bay Bridge...

While she decided Pepper for Apple (only to be overruled by the Ninth Circuit and then the Supreme Court) and then granted Epic only a pointless consolation prize, it would be utterly unfair to suggest that Judge Gonzalez Rogers intends to be protective of Apple. The way she "grilled" Tim Cook at the end of last year's trial was definitely the opposite of what a judge would do if there wasn't a sincere intent to find out the truth even if it might be bad for Apple. She also made a very correct remark during the trial about competition having the potential to leading to security improvements. But there are indeed some issues.

The question of whether consumers had standing in Pepper was tricky, and narrowly decided. If Justice Kavanaugh hadn't joined the liberal minority, Judge YGR's dismissal of the case would probably have been affirmed.

But (at least) the part of the Epic Games v. Apple judgment dealing with Epic's single-brand market definition was a total disaster: wrong on the law, wrong on the economics, wrong on the technology. The sheer absurdity of saying that Epic's foremarket definition of smartphone operating systems was meant to suggest a higher market share for Apple than it actually has in the smartphone market is unbelievable, given that no iPhone gets sold without iOS and vice versa: same market share either way. In January I wrote that "[t]here is a one-to-one relationship (as programmers like me would say) between iPhones and iOS installations." Epic used the same term in its reply brief several months later.

Given that history, I can see why antitrust plaintiffs suing Apple over its death grip on its mobile ecosystem would rather have their case assigned to the San Jose division, which still doesn't mean that anyone accuses an honest judge of being biased. It's just that she has made mistakes that benefit Apple big-time, and no one wants to be on the receiving end of the next such mistake.