Caccuri v. Sony Interactive Entertainment LLC

— 1 — — 2 — — 3 — — 4 — — 5 — — 6 — 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA — 9 — — 10 — AGUSTIN CACCURI, 11 Case No. 21-cv-03361-RS Plaintiff, — 12 — v. ORDER GRANTING MOTION TO 13 DISMISS SONY INTERACTIVE 14 ENTERTAINMENT LLC, 15 Defendant. 16 Case No. 21-cv-03447-RS ADRIAN CENDEJAS, — 17 — Plaintiff, — 18 — v. — 19 — SONY INTERACTIVE 20 ENTERTAINMENT LLC, et al., 21 Defendant. — 22 — ALLEN NEUMARK, 23 Case No. 21-cv-05031-RS Plaintiff, — 24 — v. — 25 — SONY INTERACTIVE 26 ENTERTAINMENT LLC, et al., 27 Defendant. 1 I. Introduction 2 Defendant Sony Interactive Entertainment LLC (“Sony”) moves to dismiss the 3 Consolidated Class Action Complaint for these three related antitrust putative class actions 4 pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiffs Agustin Caccuri, Adrian Cendejas, 5 and Allen Neumark aver that Sony engaged in monopolistic and anticompetitive conduct in the sale of digital PlayStation games on its PlayStation Store, averring violations of Section 2 of the — 6 — Sherman Antitrust Act, 15 U.S.C. § 2 , and California’s Unfair Competition Law (“UCL”), Cal. — 7 — Bus. & Prof. Code § 17200. The motion to dismiss is granted because Plaintiffs have failed to — 8 — allege adequately anticompetitive conduct under the Sherman Act, and the other claims are — 9 — derivative of the Sherman Act claims. — 10 — II. Factual Background1 — 11 — In May and June 2021, these three putative class actions were filed in the Northern District — 12 — of California. On June 4, 2021 the Cendejas action was related to the Caccuri action, and on July — 13 — 27, 2021, the Neumark action was also related to the Caccuri action. On December 3, 2021, — 14 — Michael M. Buchman of Motley Rice LLC was appointed Interim Lead Counsel for all three — 15 — related actions. Plaintiffs filed a Consolidated Class Action Complaint on December 20, 2021. In — 16 — the Consolidated Class Action Complaint, Plaintiffs aver five claims for relief: (1) monopolization — 17 — under Section 2 of the Sherman Act, 15 U.S.C. § 2 and Section 4 of the Clayton Act, 15 U.S.C. 4; — 18 — (2) attempted monopolization under Section 2 of the Sherman Act, 15 U.S.C. § 2 and Section 4 of — 19 — the Clayton Act, 15 U.S.C. 4; (3) declaratory and injunctive relief under Section 2 of the Sherman — 20 — Act, 15 U.S.C. § 2 and Sections 2 and 16 of the Clayton Act, 15 U.S.C. § 26 ; (4) damages under 21 the California Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 , et seq.; and (5) unjust 22 enrichment. 23 Sony manufactures, markets, and sells the PlayStation, one of the most popular home 24 video game systems. Sony launched its most recent model, the PlayStation 5, in November 2020, — 25 — 26 1 As facts in a complaint are taken as true when evaluating a Rule 12(b)(6) motion to dismiss, Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005), the facts recited in this background section 27 are from the Complaint unless otherwise noted. 1 and by September 2021 it had sold over 13 million units. In addition to producing the physical 2 game console, the PlayStation franchise has many other arms: the PlayStation Store (an online 3 digital video game store), the PlayStation Network (an online multiplayer gaming service), 4 PlayStation Now (a subscription-based video game streaming service), and PlayStation Studios 5 (the video game development arm). Most relevant for this litigation is the PlayStation Store, which 6 launched in 2006 and allows users to purchase digital copies of PlayStation games and download 7 them directly onto the console, rather than having to buy physical disks and insert them into the 8 console’s disk drive. Sony sells two versions of the PlayStation 5: the $499 Base Model allows 9 users to purchase either physical disks or digital versions of games and the $399 Digital Edition is 10 only compatible with digital games downloaded from the PlayStation Store. 11 On the PlayStation Store, game developers cannot set prices; instead, the prices are set by 12 Sony. Further, the prices for a digital version of a game on the PlayStation Store may vary from 13 the prices for a physical copy of the game available through any number of retailers. Until April 14 2019, game developers could sell download codes for digital PlayStation games through the same 15 online and brick-and-mortar retailers of the physical games. When this practice was active, the 16 prices for download codes could vary from the prices in the PlayStation Store. When Sony 17 eliminated the download code option, that meant the price in the PlayStation Store was the only 18 possible price for acquiring a digital copy of a PlayStation-compatible game. 19 Although Sony’s PlayStation is highly popular, it is not the only video game console on 20 the market. Major competitors include the Xbox from Microsoft and the Switch from Nintendo. 21 While some major video games have versions produced for each of the three consoles, a purchased 22 video game is only compatible with one specific console. For example, a consumer who owns 23 both a PlayStation and Xbox and wants to play the “NBA 2K22” game would need to purchase 24 two versions of the game, one compatible with PlayStation and one compatible with Xbox. The 25 different console manufacturers have different practices concerning the production and sale of 26 games for their consoles. While 85% of game sales for the Switch console are for games 27 developed by Nintendo that are exclusive to its console, only 17% of game sales for PlayStation 1 are games developed by Sony. Microsoft and Nintendo also operate their own virtual stores to 2 download games directly to consoles. The Microsoft and Nintendo online stores, however, allow 3 developers to set the retail price for the game. 4 III. Legal Background 5 A. Federal Rule of Civil Procedure 12(b)(6) 6 Rule 12(b)(6) governs motions to dismiss for failure to state a claim. A complaint must 7 contain a short and plain statement of the claim showing the pleader is entitled to relief. Fed. R. 8 Civ. P. 8(a). While “detailed factual allegations” are not required, a complaint must have sufficient 9 factual allegations to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 10 U.S. 662 , 678 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007)). A Rule 11 12(b)(6) motion tests the legal sufficiency of the claims alleged in the complaint. See Parks Sch. of 12 Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). When evaluating such a motion, 13 courts generally “accept all factual allegations in the complaint as true and construe the pleadings 14 in the light most favorable to the nonmoving party.” Knievel v. ESPN, 393 F.3d 1068, 1072 (9th 15 Cir. 2005). However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere 16 conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. 17 B. Federal Antitrust Law 18 “To establish liability under [section 2 of the Sherman Act], a plaintiff must show: ‘(a) the 19 possession of monopoly power in the relevant market; (b) the willful acquisition or maintenance 20 of that power; and (c) causal antitrust injury.’” Fed. Trade Comm’n v. Qualcomm Inc., 969 F.3d 21 974, 990 (9th Cir. 2020) (quoting Somers v. Apple, Inc., 729 F.3d 953, 963 (9th Cir. 2013)). “[T]o demonstrate attempted monopolization a plaintiff must prove (1) that the defendant has engaged in — 22 — predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous — 23 — probability of achieving monopoly power.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 , 456 — 24 — (1993). — 25 — IV. Discussion — 26 — Sony argues that the Complaint should be dismissed because (1) Plaintiffs have failed to — 27 — 1 allege monopoly power or a dangerous probability of achieving monopoly power in a properly2 defined relevant antitrust market; (2) Plaintiffs have failed to allege anticompetitive conduct; (3) 3 Plaintiffs have failed to allege anticompetitive effects or antitrust injury; and (4) Plaintiffs have 4 failed to allege facts supporting its derivative claims. As explained below, Plaintiffs have failed to 5 plead one of the elements required to establish anticompetitive conduct. Each of Sony’s 6 arguments, however, are addressed in turn. 7 A. Monopoly Power 8 “A threshold step in any antitrust case is to accurately define the relevant market, which 9 refers to the area of effective competition.” Qualcomm, 969 F.3d at 992. The relevant market 10 “must encompass the product at issue as well as all economic substitutes for the product.” Hicks v. 11 PGA Tour, Inc., 897 F.3d 1109, 1120 (9th Cir. 2018) (quoting Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 1045 (9th Cir. 2008)). “Economic substitutes have a ‘reasonable — 12 — interchangeability of use’ or sufficient ‘cross-elasticity of demand’ with the relevant product. — 13 — Including economic substitutes ensures that the relevant product market encompasses ‘the group — 14 — or groups of sellers or producers who have actual or potential ability to deprive each other of — 15 — significant levels of business.’” Id. (citations omitted). — 16 — Plaintiffs define the relevant product market in this case as “the market for downloadable, — 17 — digitally-delivered video game content that is compatible with a PlayStation console (“digital — 18 — PlayStation games”).” Complaint ¶ 49. The Complaint also avers that “[d]ue to the high cost of — 19 — consoles, the differentiation among them, and the lack of cross-compatibility, each console creates — 20 — a separate aftermarket for games that can be played on it.” Id. at ¶ 51. Defendant argues that — 21 — Plaintiff’s single-brand market is implausible, because competition occurs at the platform level, — 22 — such as between Sony and Nintendo, “with manufacturers innovating and pricing their products — 23 — aggressively to attract users to the platform.” Motion to Dismiss, p.9. Defendant also argues — 24 — Plaintiffs fail to satisfy the requirements for pleading an aftermarket. — 25 — Addressing first the single-brand market issue, limiting a market definition to a single 26 brand is disfavored. See Reilly v. Apple Inc., No. 21-CV-04601-EMC, 2022 WL 74162 , at *5 27 (N.D. Cal. Jan. 7, 2022) (“It is an understatement to say that single-brand markets are disfavored. 1 From nearly the inception of modern antitrust law, the Supreme Court has expressed skepticism of 2 single-brand markets[.]” (internal quotation marks and citation omitted)); Herbert J. Hovenkamp, 3 Markets in IP & Antitrust, 100 Geo. L.J. 2133 , 2137 (2012) (“[A]ntitrust law has found that a 4 single firm's brand constitutes a relevant market in only a few situations.”). This general disfavoring, however, does not mean single-brand market theories are never viable. For example, — 5 — in Eastman Kodak v. Image Technical Services, 504 U.S. 451 (1992), which concerned service — 6 — and parts for Kodak equipment, the Supreme Court noted that “[t]he proper market definition in — 7 — this case can be determined only after a factual inquiry into the ‘commercial realities’ faced by — 8 — consumers[,]” and allowed the lawsuit to proceed on its single-market theory. Id. at 482 (citation — 9 — omitted). Similarly here, the market definition does not fail at the pleading stage for only — 10 — concerning a single brand. — 11 — Next, Plaintiff’s single brand aftermarket theory is viable at this stage in the proceedings. — 12 — The Ninth Circuit has identified four considerations when assessing whether a Plaintiff has pled a — 13 — cognizable aftermarket: (1) whether “the aftermarket here is wholly derivative from and dependent — 14 — on the primary market”; (2) that “allegations of illegal restraints of trade and illegal — 15 — monopolization relate only to the aftermarket, not to the initial market”; (3) if the defendant “does — 16 — not achieve market power in the aftermarket through contractual provisions that it obtains in the — 17 — initial market” but rather “market power [which] allegedly flows from its relationship with its — 18 — consumers”; and (4) “market imperfections . . . prevent consumers from realizing that their choice 19 in the initial market will impact their freedom to shop in the aftermarket” such that “[c]ompetition 20 in the initial market [] does not necessarily suffice to discipline anticompetitive practices in the 21 aftermarket.” Newcal Indus., Inc. v. Ikon Off. Sol., 513 F.3d 1038, 1049-51 (9th Cir. 2008). When 22 assessing the Complaint through the lens of these considerations, Plaintiffs have adequately 23 alleged a cognizable aftermarket. 24 Sony only challenges the second and fourth Newcal factors. Addressing the second Newcal 25 factor, Plaintiffs have adequately pled that the allegations of illegal restraints and monopolization 26 relate only to the aftermarket for Playstation-compatible digital games, not the initial market for 27 video game consoles. As stated by Plaintiffs, “the initial purchase of a PlayStation gaming console 1 is a condition precedent to playing a PlayStation game[,]” and thus purchasing a digital game. 2 Opposition to Motion to Dismiss, p.8. Unlike the Steam gaming platform and Steam Store at issue 3 in Wolfire Games, LLC v. Valve Corp., 2021 WL 5415305 (W.D. Wash. Nov. 19, 2021), upon 4 which Sony heavily relies, the cost of the game is not the only cost to start playing. Wolfire concerned a personal computer (“PC”) gaming platform and online digital game store. In Wolfire, — 5 — the Steam platform was free to users and only the games cost money. Here, the platform and the — 6 — games are separate purchases. Unlike for PlayStation users, a Steam user could switch to a game — 7 — on a different platform upon seeing a price differential between the Steam Store and another — 8 — online digital game store. Here, a PlayStation user wishing to find a lower price for a digital game — 9 — would have to look at the games for an entirely different console, necessitating another console — 10 — purchase in the hundreds of dollars. Thus in this case, “allegations of illegal restraints of trade and — 11 — illegal monopolization relate only to the aftermarket, not to the initial market.” Newcal, 513 F.3d 12 at 1050. — 13 — Next, competition in the console market does not “suffice to discipline anticompetitive — 14 — practices in the aftermarket.” Id. at 1051. Switching to another console to gain a cheaper price for — 15 — a single game would require purchasing a separate console, negating any lower price. Further, — 16 — switching from one console to another requires more than just an expenditure in price; it requires — 17 — the user to acclimate itself to a new system, and to rebuild the skills a user had developed for use — 18 — on a different platform. Plaintiffs also allege that consumers were unaware of the restricted nature 19 of the aftermarket, as Sony discontinued the practice of allowing the sale of download codes 20 through other retailers. Although the policy change happened well before the Plaintiffs in this case 21 purchased their PlayStation 5s, it is a factual question whether the disclosure of this change was 22 done in a public manner known to users. Further, consumers may not have known that Sony set 23 the price for each game—and thus users were subjecting themselves to whatever prices Sony set— 24 rather than allowing game developers to set their own prices. In short, Plaintiffs have offered 25 “factual allegations to rebut the economic presumption that [PlayStation] consumers make a 26 knowing choice to restrict their aftermarket options when they decide in the initial (competitive) 27 market” to purchase a PlayStation console rather than another console. Id. 1 B. Anticompetitive Conduct 2 “[A]s a general matter, the Sherman Act ‘does not restrict the long recognized right of [a] 3 trader or manufacturer engaged in an entirely private business, freely to exercise his own 4 independent discretion as to parties with whom he will deal.’” Verizon Commc’ns Inc. v. L. Offs. 5 of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004). That right, however, is not absolute, and “[u]nder certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive — 6 — conduct and violate § 2.” Id. The Supreme Court articulated this exception in Aspen Skiing Co. v. — 7 — Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). The Supreme Court identified three relevant — 8 — circumstances for creating antitrust liability: (1) “the unilateral termination of a voluntary and — 9 — profitable course of dealing”; (2) “a willingness to sacrifice short-term benefits in order to obtain — 10 — higher profits in the long run from the exclusion of competition”; and (3) that the refusal to deal — 11 — involves “products that were already sold in a retail market to other customers.” MetroNet Servs. — 12 — Corp. v. Qwest Corp., 383 F.3d 1124, 1132-33 (9th Cir. 2004). Sony challenges the existence of — 13 — each of these circumstances. For the reasons explained below, Plaintiffs have failed to satisfy the — 14 — requirements for the Aspen Skiing exception. — 15 — First, Plaintiffs provide conclusory statements that Sony voluntarily terminated a profitable — 16 — practice, but do not provide sufficient factual detail. See Iqbal, 556 U.S. at 678 (“Threadbare — 17 — recitals of the elements of a cause of action, supported by mere conclusory statements, do not — 18 — suffice.”). From the Complaint, it is unclear how Sony generated a revenue stream from the sale of — 19 — download codes by third party retailers. The Complaint avers that “Sony [] charges a Platform 20 Royalty Fee on each game sold by retailers for use on its gaming consoles, including PlayStation 21 5” and that “Sony’s Platform Royalty Fee for physical games sold at external retailers is 11.5%[,]” 22 but does not state whether a royalty fee also applied to download code sales. Complaint ¶ 44. For 23 games sold on the PlayStation Store, the Complaint avers that Sony takes a 30% cut of the price. 24 Id. at ¶ 37. Although it seems almost certain that Sony gained some revenue through download 25 codes, and Plaintiffs need not at this stage prove that the practice was profitable, Plaintiffs must at 26 a minimum describe the process through which Sony earned money from the practice. The Court 27 cannot assume the practice was profitable when Plaintiffs have failed to plead how Sony received 1 any money through the practice.2 2 Sony’s arguments that it merely made a change in distribution methods, however, is 3 rejected at this stage. Although “[i]t is well settled that a manufacturer may discontinue dealing 4 with a particular distributor for business reasons which are sufficient to the manufacturer[,] Bushie v. Stenocord Corp., 460 F.2d 116, 119 (9th Cir. 1972) (internal quotation marks and citation — 5 — omitted), Sony acted as both a distributor and a retailer. For the purposes of reviewing a motion to — 6 — dismiss, it is proper to view Sony in both roles, including their role as a competitor in the sale of — 7 — games. — 8 — The second and third elements fail due to Plaintiffs’ shortcomings as to the first element. — 9 — As for the second element, pleading “a willingness to sacrifice short-term benefits in order to — 10 — obtain higher profits in the long run from the exclusion of competition,” MetroNet, 383 F.3d at 11 1132, requires pleading that Sony received revenue—and thus benefits—from the scheme. As for — 12 — the third element, the structure is also relevant for assessing whether Sony “refused to provide to — 13 — their competitors products that were already sold in a retail market to other customers.” Id. at — 14 — 1133. If Sony was selling download codes to third-party retailers, which those retailers then sold — 15 — to consumers, it appears that practice could be analogous to the situation in Aspen Skiing, where — 16 — the ski resort refused to sell ski passes to a competitor that the ski resort was selling directly to — 17 — consumers. 472 U.S. at 593 . Without knowing how Sony earned revenue through the practice, — 18 — however, it is difficult to analogize to Aspen Skiing. In short, Plaintiffs have failed to plead 19 anticompetitive conduct necessary for their Sherman Act claims. 20 C. Anticompetitive Effects or Antitrust Injury 21 “[T]o be condemned as exclusionary, a monopolist’s act must have an anticompetitive 22 effect —that is, it must harm the competitive process and thereby harm consumers.” Qualcomm, — 23 — — 24 — 2 Plaintiffs argue they are entitled to a presumption under Trinko that Sony’s business practice was 25 profitable. See Trinko, 540 U.S. at 409 (“The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to 26 achieve an anticompetitive end.”). Plaintiff cites no case or other authority supporting their argument that the mere use of the word “presumably” in this opinion creates a burden-shifting 27 presumption of profitability. No presumption, therefore, is applied in ruling on this motion. 1 969 F.3d at 990 (internal quotation marks and citation omitted). Direct evidence of anticompetitive 2 effects may include “reduced output, increased prices, or decreased quality in the relevant 3 market[.]” Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018). Plaintiffs must also plead 4 antitrust injury, defined as “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Brunswick Corp. v. Pueblo Bowl-O-Mat, — 5 — Inc., 429 U.S. 477, 489 (1977). — 6 — Plaintiffs have pled an anticompetitive effect because, at a minimum, they have pled — 7 — increased prices. Plaintiffs plead that numerous games are more expensive in digital versions than — 8 — in physical versions, despite additional costs present for physical versions like the production of — 9 — the materials and shipping. Although as Defendant points out there may be other reasons for the — 10 — increased prices, and physical versions of the game may not be the appropriate benchmark, — 11 — Plaintiffs have at this stage pled increased prices. Plaintiffs have also pled an “injury of the type — 12 — the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts — 13 — unlawful.” Brunswick, 429 U.S. at 489 . “[M]aintain[ing] supracompetitive prices” is a cognizable — 14 — antitrust injury, and Plaintiffs argue that Sony’s actions were designed to maintain — 15 — supracompetitive prices. See F.T.C. v. Actavis, Inc., 570 U.S. 136, 157 (2013), — 16 — D. California UCL Claim and Unjust Enrichment — 17 — Plaintiffs’ UCL claim is derivative of their Sherman Act claims, and because the Sherman — 18 — Act claims are not adequately pled, the UCL claim must be dismissed. See City of San Jose v. Off. — 19 — of the Comm’r of Baseball, 776 F.3d 686, 692 (9th Cir. 2015) (“An independent claim under 20 California’s UCL is therefore barred so long as [the defendant’s] activities are lawful under the 21 antitrust laws.”). The claim for unjust enrichment fails for the same reason. 22 V. Conclusion 23 For all the foregoing reasons, the motion to dismiss is granted because Plaintiffs have 24 failed to allege adequately anticompetitive conduct under the Sherman Act, and the other claims 25 are derivative of the Sherman Act claims. Although it is unclear at this time if the deficiencies may 26 be cured, Plaintiff is granted leave to amend. Any amended Complaint must be filed within 30 27 days of the filing of this Order. — 1 — 2 IT IS SO ORDERED. — 3 — 4 || Dated: July 15, 2022 — 5 — RICHARD SEEBORG 6 Chief United States District Judge — 4 — — 8 — — 9 — — 10 — — 11 — a 12 — 13 — — 14 — — 15 — — 16 — = 17 Z 18 — 19 — — 20 — — 21 — — 22 — — 23 — — 24 — — 25 — — 26 — — 27 — ORDER GRANTING MOTION TO DISMISS CASE No. 21-cv-03361-RS