Electronic store

Anticompetitive Malice, Competitive Zeal, and the PlayStation Store

For antitrust practitioners, unlawful 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) said in Verizon Communications, Inc. v The Law Firms of Curtis V. Trinko that refusals to deal fall “at or near the outer limit of liability of § 2”.

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 suit in Cacuri v Sony Interactive Entertainment LLC, a class action lawsuit against Sony, which manufactures and sells the popular PlayStation video game console and operates the PlayStation Store. This complaint alleged that Sony violated Section 2 of the Sherman Act by eliminating the ability of third-party stores to sell digital versions of PlayStation video games.

The facts of Accuri are relatively simple. PlayStation owners can purchase games in two forms: on physical media and through digital downloads. PlayStation physical media are sold in stores and on the Internet by many different retailers. The same was true for digital games until Sony announced that its previous mode of transaction, 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 has excluded competition for digital games, with the result that consumers are forced to pay higher and supra-competitive prices.

Under US law, a company with monopoly power violates the Sherman Act if it engages in anticompetitive behavior that excludes competition in a product market. This behavior can take many forms, but a monopolist’s refusal to deal with competitors on its own is not considered illegal. However, refusals to sell by a monopoly that controls products or services essential to market competition may be illegal if such refusals contribute to maintaining its monopoly. US courts are reluctant to force monopolists to share with their competitors because, according to the Trinko Court, “this may reduce the incentive of the monopolist, the rival or both to invest in these economically advantageous facilities”. Rightly or wrongly, judicial reluctance to condemn unilateral refusal to enter into agreements is well established in American antitrust jurisprudence.

But there is an exception. Where a dominant firm has voluntarily engaged in a prior and profitable approach to dealing with a competitor and then refuses to deal with that competitor and that refusal excludes competition from the relevant market — by Accurisales of digital video games for the PlayStation console; antitrust liability may apply.

Whether explicitly stated by the courts or not, the case law shows that a plaintiff must, among other things, plead enough factual allegations to plausibly demonstrate that a defendant intended to exclude competition. Again, in Justice Scalia’s words, the conduct must be “incited not by competitive zeal but by anti-competitive malice.” In refusal to deal cases, allegations that show that the dominant firm is foregoing a profitable mode of transaction, i.e. it is losing money in the short term to eliminate competition in the long term , may suffice.

The Accuri The court allowed plaintiffs to amend to add these allegations. Judge Seeborg clarified that the court would not assume that Sony’s earlier decision to allow third-party sales of download codes was profitable and that plaintiffs should at least “describe the process by which Sony gained money thanks to this practice”. In other words, the court wants facts that indicate Sony’s refusal to deal was not just “sharp elbow” competition, but that Sony had plausible intent to exclude the competition.

It should be noted that the court flatly rejected Sony’s explanation that it was simply changing distribution methods by cutting off digital sales to third parties; Judge Seeborg found that Sony was a competitor in video game sales, not just a distributor.

Even if the Accuri Complaint has been dismissed for the time being, the decision demonstrates that cases of unilateral refusal to sell remain viable. This may be especially true in cases involving dominant digital distribution platforms and walled gardens like the PlayStation game console. The factual model required is specific, difficult to argue and yet entirely possible.