Saturday, October 15, 2022

Credit card issuers oppose Apple's motion to stay discovery in Apple Pay antitrust case, cite recent decision by same federal judge in AliveCor v. Apple

In July, the class action law firm of Hagens Berman filed a lawsuit--by far not its first--against Apple in the Northern District of California, this time accusing Apple's anticompetitive conduct in connection with Apple Pay and the restrictions on access to the iPhone's NFC chip by third-party digital wallet apps.

The complaint contained an interesting chart that compares the fees Apple commands in the U.S., where its market share is high (and growing), as compared to other markets:

A week ago, Apple responded to the complaint with a motion to dismiss, accompanied by a motion to stay discovery. While I want the credit card issuers to prevail (because Apple is indeed abusing its monopoly power), they have to do their homework and properly address Apple's motion to dismiss, potentially with an amended complaint.

A couple of hours ago, the parties filed a joint status report, shortly after which the class action lawyers filed their opposition to Apple's motion to stay discovery:

Affinity's opposition to Apple's motion to stay discovery

As their opposition filing notes, discovery normally goes forward in the Northern District of California, so a motion to dismiss must be very strong at first sight in order to convince the court to grant a discovery stay. That's why the opposition brief is, in part, a preview of the forthcoming opposition to the motion to dismiss.

There is one sentence in the opposition brief that I'm struggling hard to make sense of:

"The alleged product market—Tap and Pay iOS Mobile Wallets—is brand neutral."

Well, iOS is a brand (as is Apple Pay, the only product fitting that category).

But the class action lawyers' argument then becomes fundamentally stronger:

"Regardless, Apple’s 'single brand' argument was rejected by this Court in AliveCor, 2022 WL 833628, at *7 (White, J.). There, the Court held that parties can “plausibly assert a single-brand aftermarket at the pleading stage."

AliveCor v. Apple is a case pending before the very same judge (Senior District Judge Jeffrey S. White) over the Apple Watch, with a focus on heart rate analysis and other functionalities. Indeed, in a March 31, 2022 order (PDF), Judge White held that "AliveCor has plausibly alleged an aftermarket for watchOS apps":

"AliveCor’s allegations establish a plausible aftermarket for watchOS apps that is derivative from and dependent on the primary device market. AliveCor has also plausibly alleged that Apple achieved its market power in the aftermarket only after the initial device purchase, which satisfies the second Newcal consideration. The third Newcal factor considers the source of the defendant’s market power. AliveCor alleges that users face high switching costs after the initial device purchase that are unknown at the time of the purchase. Such allegations are sufficient to establish that the challenged aftermarket restraint is not knowingly accepted by users before the device purchase. Finally, AliveCor alleges that high switching costs prevent users and developers from switching to a different operating system after the initial device commitment. These allegations suffice to plausibly establish that competition in the initial market does not necessarily discipline anticompetitive practices in the aftermarket.

"At this stage, AliveCor’s allegations are sufficient to pursue a claim based on the alleged aftermarket. The Court DENIES Apple’s motion to dismiss on this basis."

In footnote 7, Judge White distinguished AliveCor from Pistacchio, an Apple Arcade case before Judge Yvonne Gonzalez Rogers (the judge who also presided over last year's Epic Games v. Apple trial in the same district) that Apple got thrown out a year before that AliveCor decision:

"In Pistacchio, the court concluded that the plaintiff had not adequately pled that the relevant market should be limited to the iOS platform. 4:20-cv-07034-YGR, 2021 WL 949422, at *2 (N.D. Cal. Mar. 11, 2021). However, the plaintiff in Pistacchio did not allege an aftermarket theory, and the complaint contained far fewer allegations supporting the alleged relevant market."

Apple also claims that Affinity failed to allege an aftermarket theory. And as I noted in my commentary on the motion to dismiss, the term "aftermarket" only appears once in Affinity's complaint. Last night's opposition brief, however, argues that all the Kodak/Newcal factors (Newcal is a post-Kodak Ninth Circuit precedent) were properly alleged:

Factor #1

"Tracking these factors, Affinity alleges that the market for Tap-and-Pay iOS Mobile Wallets derives from the primary smartphone and mobile device markets in which Apple operates."

pointing to para. 52 of the complaint:

"Tap and Pay iOS Mobile Wallets are a distinct product for which there is distinct demand. More than 1 billion people use Apple’s mobile iOS devices, and about half of them have enabled the Apple Pay Mobile Wallet to make tap and pay payments."

Factor #2

"The challenged restraint (foreclosure of rival wallets) relates only to the aftermarket."

pointing to para. 48 of the complaint:

"But Apple has taken a distinctly exclusionary approach with NFC technology. Apple currently allows developers to use the NFC interface, but only to provide functionality that does not compete with Apple Pay. For example, developers can utilize the NFC interface to allow users to 'scan a toy to connect it with a video game,' or 'an in-store sign to access coupons,' among other things. Apple also recently announced technology that will “empower millions of merchants' to accept Apple Pay payments from an iPhone. But what developers cannot do is use NFC to create apps that, like Apple Pay, allow users to make tap and pay payments. Only Apple Pay can use NFC for that function."

Factor #3

"Apple’s market power in the aftermarket was not secured contractually in the primary market."

pointing to para. 46 of the complaint:

"But iOS consumers never agree that they will exclusively use Apple Pay as their tap and pay mobile wallet. Instead, as discussed herein, Apple coerces consumers to use Apple Pay by barring all would-be Apple Pay rivals from accessing the NFC interface installed on the mobile devices Apple already sold to the iOS consumers."

Factor #4

"And competition in the primary market does not discipline Apple’s practices in the aftermarket."

pointing to paras. 57-63 of the complaint:

"a. Android Wallets Are Not Reasonable Substitutes For Apple Pay.

"57. There are no tap and pay Android mobile wallets available on Apple’s iOS devices because Apple has barred those wallets from accessing the NFC interface on iOS devices. Thus, while an iOS user can download an iOS version of Google Pay from Apple’s App Store, the iOS Google Pay app cannot be used to make tap and pay payments. The app cannot even be used at the point-of-sale at all. Lacking Apple Pay’s core functionality on an iOS device, Google Pay and other Android wallets are not a substitute for Apple Pay.

"58. Android mobile wallets are also not in the same relevant market as Tap and Pay iOS Mobile Wallets because a Tap and Pay iOS Mobile Wallet is not constrained by substitution in the market for smartphones. To be more precise, a small but significant and non-transitory increase in the price of a Tap and Pay iOS Mobile Wallet transaction would not trigger switching by users to mobile wallets on Android-based devices.

"59. Switching costs from iOS to Android mobile devices are high. As one Apple executive stated internally, 'Who’s going to buy a Samsung phone if they have apps, movies, etc already purchased? They now need to spend hundreds more to get where they are today.' Even if consumers might be induced to switch to Android mobile devices in response to a change in Apple Pay fees, Apple has assured this will not happen. As addressed further below, Apple bars issuers from charging their cardholders additional fees for their participation in Apple Pay. In other words, issuers cannot pass through the cost of Apple Pay. Shielded from Apple Pay’s fees, consumers have no reason to switch in response to a change in the level at which Apple Pay’s fees are set. Apple can (and has) set those fees above the competitive level knowing that, from consumers’ perspective, Apple Pay is, and has always been, available free of charge.

"60. It is also apparent that at the time a mobile device purchaser makes a decision as to whether to purchase an Apple device or an Android device or another brand of device, the purchaser has no ability to take into consideration the additional cost imposed on the market by Apple’s anticompetitive conduct. In fact, the added cost is unseen by the purchaser, who is not even aware of the fees that Apple imposes on card issuers. As a result, the consumer has no incentive when purchasing a mobile device to switch to a competing device that does not charge anticompetitive fees. Apple’s pricing power in the Tap and Pay iOS Mobile Wallet Market is thus not constrained by consumer decisions at the time of purchasing a mobile device.

"61. The only party with the incentive to substitute, or encourage substitution to Android wallets, is therefore the card issuer. Apple has, however, barred issuers from encouraging consumers to switch through surcharges, and so issuers can encourage switching only by ceasing to participate in Apple Pay. This is demonstrably not a viable option for nearly all issuers.

"62. As of September 2020, approximately 51% of iPhone users had activated Apple Pay. Given the substantial population of Apple Pay users, issuers cannot profitably (and generally have not) disabled Apple Pay in an effort to shift demand to Android wallets. Indeed, the number of Apple Pay issuers has increased steadily since Apple Pay’s launch, reaching a reported 5,480 banks worldwide by 2020 (20% increase over 2019). This reveals that issuers do not expect that removing Apple Pay would result in consumers switching to Android wallets, rather they fear consumers would switch to cards issued by other banks instead.

"It is also apparent from historic pricing that Android tap and pay mobile wallets do not impose any constraint on the price of Tap and Pay iOS Mobile Wallets. For years, Apple Pay has found it profitable to impose a significant issuer fee above the $0.0 fee imposed by Android apps providing virtually the same service on Android devices—namely, Google Pay and Samsung Pay. If these Android products were in fact substitutes for Apple Pay, demand would have shifted to Google Pay and Samsung Pay. But this has not happened, as just noted. That issuers have absorbed Apple Pay fees demonstrates issuers’ inability to drive consumers to Android wallets. Imposing no restraint on Apple Pay’s pricing, and hence on the ability of a hypothetical monopolist’s ability to profitably impose a small but significant and non-transitory increase in price (SSNIP), those Android wallets cannot be in the same antitrust market as Apple Pay."

It's obviously no coincidence that the fourth part (aftermarket actions not disciplined by foremarket competition, i.e., the foremarket and the aftermarket are dissociated) is the most elaborate one. That was also the key one in last year's Epic Games v. Apple decision, apart from Judge YGR getting the foremarket part completely wrong.

Apple would presumably have brought a motion to dismiss even if Affinity's complaint had been twice as specific. But it would have been good if the complaint had referenced the Kodak/Newcal factors more clearly. I suspect the class action lawyers didn't do that because they don't want to depend on just a single-brand market definition. Unlike the credit card issuers, I believe Apple has a point that "Tap and Pay iOS Mobile Wallets" is a single-brand market. Otherwise iOS wouldn't be part of that definition. However, Apple may already have so much power in the foremarket that a single-brand aftermarket isn't required.

Affinity's opposition to a motion to dismiss won't be able to cure factual deficiencies. But what they can do in the briefing process is map the factual allegations in their complaint to legal theories that support them, even if the complaint itself didn't do it quite as clearly as it could have.

While I think Affinity's case faces additional hurdles to, or higher hurdles than, the ones that Epic has to overcome (see my preview of the Ninth Circuit hearing in the Fortnite case that will take place on Friday), I do believe it's more similar to AliveCor, where Judge White granted in part and denied in part Apple's motion to dismiss, than Pistacchio (the Apple Arcade that Judge Rogers dismissed).