Case Information
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SC INNOVATIONS, INC., Case No. 18-cv-07440-JCS Plaintiff, ORDER REGARDING MOTION TO v. DISMISS SECOND AMENDED COMPLAINT UBER TECHNOLOGIES, INC., et al., Re: Dkt. No. 76 Defendants.
I.
that offered services matching passengers with drivers for on-demand transportation, also known Defendants, Uber Technologies, Inc. and a number of its subsidiaries (collectively, “Uber”). as “ride-hailing,” through a smartphone app. Sidecar claims that it was driven out of business by [1] The Act claim, and with prejudice as to its claim under California’ Unfair Practices Act. Sidecar filed Court previously dismissed Sidecar’s first amended complaint with leave to amend its Sherman INTRODUCTION Plaintiff SC Innovations, Inc. (“Sidecar”) is a defunct “transportation network company”
a second amended complaint, and Uber now moves once again to dismiss. The Court held a public hearing by videoconference on April 24, 2020. For the reasons discussed below, Uber’s motion is DENIED, except as to the Unfair Practices Act claim previously dismissed with prejudice, which is STRICKEN from the second amended complaint. [2]
A case management conference will occur on July 31, 2020 at 2:00 PM. The parties shall file a joint case management statement no later than July 24, 2020.
II. BACKGROUND
A. Procedural History and Previous Order
Sidecar filed this action on December 11, 2018. On May 2, 2019, the Court granted a motion to disqualify Sidecar’s previous counsel based on a conflict of interest. See Order Re Mot. to Disqualify Counsel (dkt. 41). [3] Uber moved to dismiss Sidecar’s initial complaint on July 10, 2019 (dkt. 57), Sidecar elected to file its first amended complaint (dkt. 60) rather than oppose the motion, and the Court denied that first motion to dismiss as moot on September 25, 2019 (dkt. 63). On January 21, 2020, the Court granted Uber’s motion to dismiss the first amended complaint, dismissing Sidecar’s Sherman Act claims with leave to amend and its Unfair Practices Act claim with prejudice. See generally Order Granting Mot. to Dismiss Am. Compl. (“Order re FAC,” dkt. 71). [4] The Court held that Sidecar’s allegation of a relevant market—app-based ride-hailing
services, excluding taxis—was sufficiently plausible to survive a motion to dismiss. at 10–11. The Court also rejected suggestions by Uber that Sidecar had not alleged below-cost pricing, id. at 12, as well as arguments that Uber’s delayed entry to the non-limousine ride-hailing market and asserted pro-competitive purposes were sufficient for dismissal at the pleading stage, at 16–18. The Court nevertheless dismissed Sidecar’s Sherman Act claims for failure to provide sufficient allegations of market power, particularly its failure to allege “that Uber has the power to raise market prices above competitive levels simply by reducing its own output, or that Lyft”— allegedly Uber’s only remaining competitor—“could not respond to such a reduction by increasing its own output.” at 12–14. Absent such allegations, the Court held that Sidecar alleged no more than a “disciplined oligopoly,” which the Ninth Circuit has held insufficient to state a claim for either monopolization or attempted monopolization, due to “a gap in the Sherman Act that allows oligopolies to slip past its prohibitions,” in Rebel Oil v. Atlantic Richfield Co. , 51 F.3d 1421 (9th Cir. 1995). See Order re FAC at 12–16.
The Court dismissed Sidecar’s Unfair Practices Act claim with prejudice, holding that Uber fell within an exemption from that statute for products and services for which rates are set under the jurisdiction of the California Public Utilities Commission (“CPUC”), following a line of cases construing that exemption as based on the scope of the CPUC’s authority, not based on whether the CPUC had in fact acted to set rates for a particular product or service. Id. at 18–21.
B. Allegations of the Second Amended Complaint Because a plaintiff’s factual allegations are generally taken as true in resolving a motion under Rule 12(b)(6), this section summarizes the allegations of Sidecar’s second amended complaint as if true. Nothing in this order should be construed as resolving any issue of fact that might be disputed at a later stage of the case. Moreover, this summary is intended only as background to the issues in dispute in the present motion, and is not a comprehensive recitation of Sidecar’s allegations. Uber launched its smartphone app in 2009, offering a service for passengers to arrange for transportation in limousines driven by licensed chauffeurs. 2d Am. Compl. (“SAC,” dkt. 73) ¶¶ 5, 42. Sidecar launched its own ride-hailing app in 2012, allowing passengers to hail drivers who used their own personal vehicles, and pioneering a number of features including estimated fares before booking and carpool rides for multiple passengers traveling in the same direction. Id. ¶¶ 6– 7, 43, 45–47. Lyft—which is now Uber’s only remaining competitor in the ride-hailing market— introduced a similar service the same year. Id. ¶ 44. Sidecar’s app also allowed drivers to set their own proposed fares and compete against one another. Id. ¶ 7. Over the course of its existence, Sidecar operated in San Francisco, Austin, Los Angeles, Chicago, Philadelphia, New York, Seattle, San Diego, San Jose, Boston, and Washington, DC, obtaining market share of between 10% and 15% in some of those cities. ¶¶ 50–51. Uber, which at the time was rapidly growing, accumulating significant investment capital, and becoming the dominant ride-hailing platform in the United States, debuted its “UberX” product in 2013, following Sidecar’s lead in allowing drivers to use their personal, non-limousine vehicles, and directly competing with Sidecar and Lyft, which Uber recognized as threats to its business model. ¶¶ 8, 53–55. Uber operated in all of the same cities as Sidecar by mid-2014, id. ¶ 113, and now has a market share of between 60% and 75% in each of those cities, id. ¶¶ 133–43.
Ride-hailing apps allow participating passengers to request rides and drivers to accept those requests. See id. ¶¶ 32–34. The passenger pays a fare for the ride, of which a portion is retained by the ride-hailing company and the balance is paid to the driver. Id. ¶ 39. Sidecar alleges that Uber has, since its inception, consistently set its prices below cost in an effort to achieve a “winner takes all” outcome due to the ride-hailing market’s barriers to entry—in particular, network effects caused by passengers preferring a platform with a large supply of drivers and drivers preferring a platform with a large supply of passengers, because a larger supply of both means drivers will make more money by spending less time waiting for passengers and passengers will obtain a more convenient service if they do not need to wait as long for rides. See ¶¶ 2–3, 69–74. The market also includes other barriers and economies of scale, including the benefits to customers of knowing they will be able to use the same app in multiple cities, and the benefits to the ride-sharing company of collecting data on how large numbers of customers and drivers use the service. Id. ¶¶ 78–80. Uber has engaged in predatory pricing on each of the two “sides” of the ride-hailing market, offering above-market incentive payments to drivers, and offering below-market fares to passengers. Id. ¶¶ 11, 96. Uber has in at least some circumstances priced its rides below the costs that it pays drivers, and has lost billions of dollars in the process. Id. ¶¶ 9, 102. According to Sidecar, Uber’s strategy is premised on the goal of establishing a monopoly and reaping the reward of supracompetitive monopolist pricing in order to recoup early losses. Id. ¶ 4. Uber would recoup the losses it has accrued by lowering payments to drivers and raising fares for passengers. ¶ 11.
Uber has also engaged in what Sidecar characterizes as price discrimination, initially by using “surge pricing” to set higher prices at times of high demand, and later by using “dynamic pricing” to set different prices for different users based on factors including the users’ perceived price sensitivity and ability to pay. ¶¶ 84–85.
In addition to Uber’s pricing strategies, Sidecar contends that Uber has sought to monopolize the ride-hailing market by interfering with its competitors Lyft and Sidecar, engaging in “clandestine campaigns”—with names like “Project Hell” and “SLOG”—to either submit fraudulent requests for rides on competitors’ platforms and cancel before the drivers arrived, or have Uber representative request rides in order to start a conversation with Sidecar and Lyft drivers and convince them to work exclusively for Uber. Id. ¶ 13. Those tactics violated Sidecar’s terms of service and increased wait times for both drivers and passengers to obtain legitimate rides, causing them to become frustrated with Sidecar. Id. ¶¶ 14, 116–17. As a result of network effects, reduced numbers of passengers and drivers created a vicious cycle of declining usage. Id. ¶ 118. Unable to compete with Uber’s predatory pricing, Sidecar exited the ride- hailing market in December of 2015. Id. ¶¶ 8, 123.
Uber has begun to increase its prices since Sidecar ceased operations, including in the particular geographic markets where Sidecar formerly competed. Id. ¶¶ 103–04. Uber has also reduced payments to drivers by increasing the “commission” percentage of each fare that it keeps for itself in cities including San Francisco, San Diego, and New York, and “effective” commissions have risen in other cities due to booking fees and other charges. ¶¶ 105–07, 109. Uber’s ride-hailing business became profitable by at least one measure (“positive EBITDA”) in 2018. ¶ 109. Lyft’s ability to act as a check on unilateral supply constriction and price increases by Uber is of particular importance to the parties’ arguments on the present motion. Sidecar’s allegations relevant to that issue include the following:
. . . In addition, because of the network effects resulting from Uber’s size and dominance on both the customer and driver side, and because of and because of [sic] Uber’s discriminatory pricing, Lyft is unable to respond effectively or to increase its own share of rides as a restraint on Uber’s pricing. Further, Lyft’s current status as a public company requires it to recoup its own massive losses through higher prices. Thus, Lyft has not been willing, even if it were able to do so, to respond to Uber’s price discrimination strategy by expanding its output or seizing significant additional market share through price competition. Uber now is able to impose its will on both passengers and drivers in the form of higher, supra-competitive prices. Indeed, drivers are now receiving reduced compensation; and passengers must endure discriminatory pricing tactics, such as surge pricing, and more recently, “dynamic pricing.” Uber has begun to reap supra- competitive profits in ways that have become increasingly difficult for any competitor or customer to address or constrain Uber’s 1 monopoly power. Id. ¶ 12.
2 3 . . . Uber’s only remaining significant competitor, Lyft, is unable to expand its ride offerings in the face of price discrimination because 4 the network effects of Uber’s vast driver pool render that impossible or ineffective. Further, the financial pressures on Lyft and its status as 5 a public company with a need to recoup its own enormous financial losses, means that Lyft has no incentive to undercut Uber. In fact, in 6 response to Uber’s conduct, Lyft is itself implementing a similar dynamic pricing model, substantially reducing Lyft as a competitive 7 constraint on Uber’s unilateral ability to exercise monopoly power through recoupment and supra-competitive pricing. Lyft has a strong 8 incentive to adopt such a dynamic pricing model because in order for Lyft to attract Drivers to Lyft’s platform, Lyft cannot undercut the 9 higher prices that the Drivers would otherwise obtain from customers if they were to drive for Uber instead of Lyft 10
Id. ¶ 85.
As a result of Uber’s monopoly conduct (predatory pricing and tortious conduct), Lyft has become a less effective competitor. Lyft has incurred enormous losses and faces significant pressure to achieve profitability and recoup prior losses now that it is a public company with more of a need to focus on short term results. Given these factors, and because of (a) Uber’s monopoly power arising from network and brand effects and economies of scale, and (b) Uber’s use of its monopoly power to engage in price discrimination, Lyft has no ability to respond to Uber’s imposition of monopoly pricing and no incentive to do so given its own urgent need for short term profits. Lyft also has been limited in its ability to capture market share with regard to the more profitable segments of the ride-hailing market (e.g., business users and the higher end rides designated as “premium” in Uber’s platform, i.e., Uber Black and Uber Black SUV). ¶ 90. Uber’s actions have harmed competition in the ride-hailing applications market by eliminating an innovative maverick in Sidecar and severely weakening Lyft. Given the enormous losses suffered by Lyft, it remains to be seen whether Lyft will remain a viable competitor in the market over the long term. Even if it remains, however, Lyft will not, and cannot, act as a check on the ability of Uber to charge supra-competitive prices, above the level that would have prevailed if Sidecar had been able to remain in the market, as a result of network effects, the two-sided nature of the market, Lyft’s own financial losses which it must recoup, and Lyft’s own adoption of dynamic pricing ¶ 92; see also id. ¶ 76 (“Significant new rivals have not emerged to challenge Uber’s market
dominance, which it has maintained, with a weakened Lyft as its only significant competitor in the relevant geographic markets.”); ¶ 83 (“Lyft is subject to the same constraints as other market entrants in trying to compete with Uber’s vast network and the strong network effects created by Uber’s dominance of drivers and riders.”).
Sidecar asserts the following claims for relief: (1) monopolization in violation section 2 of the Sherman Act, based both on predatory pricing and on exclusionary tortious conduct, id. ¶¶ 130–59; (2) attempted monopolization in violation of section 2 of the Sherman Act, id. ¶¶ 160– 68; and (3) violation of the California Unfair Practices Act, ¶¶ 169–75, despite the Court having previously dismissed that claim with prejudice, see Order re FAC at 18–21.
C. The Parties’ Arguments
Uber argues that Sidecar has not cured its previous failure to allege market power because
Sidecar still does not allege that Uber has the unilateral power to raise market prices by reducing
its own output. Mot. (dkt. 76) at 3–4. According to Uber, Sidecar’s new allegations of price
discrimination cannot substitute for the ability to restrict output.
Id.
at 4–5. Uber also argues that
Sidecar has not sufficiently addressed both parts of the “two-sided transaction market” for ride-
hailing platforms, instead focusing on passengers and neglecting the effect of the symbiotic market
for drivers.
Id.
at 5–8. Uber relies on the Supreme Court’s decision in
Ohio v. American Express
Co.
,
Sidecar acknowledges that to make a circumstantial showing of monopoly power, it must
“‘(1) define the relevant market, (2) show that the defendant owns a dominant share of that
market, and (3) show that there are significant barriers to entry and show that existing competitors
lack the capacity to increase their output in the short run.’” Opp’n (dkt. 77) at 4 (quoting
Rebel
Oil
,
Uber argues again in its reply that Sidecar has neither alleged that Uber can raise prices by restricting its own output nor sufficiently addressed the two-sided nature of the ride-hailing market, and that other allegations, such as purported price discrimination in the passenger market, cannot substitute for either of those requirements. Reply (dkt. 78) at 1–9. Uber also argues that Sidecar’s own allegations indicate that its theory of recoupment is premised on an oligopoly between Uber and Lyft, which the Ninth Circuit has held is not sufficient to support a claim for actual or attempted monopolization. at 10–11. Uber argues that Sidecar’s tortious interference claims are subject to dismissal because Uber had a legitimate business purpose of recruiting drivers, and because Sidecar has not alleged that Uber’s conduct was sufficiently pervasive to have more than a de minimis effect on competition. at 11–13.
III. ANALYSIS
A. Legal Standard
A complaint may be dismissed for failure to state a claim on which relief can be granted
under Rule 12(b)(6) of the Federal Rules of Civil Procedure. “The purpose of a motion to dismiss
under Rule 12(b)(6) is to test the legal sufficiency of the complaint.”
N. Star Int’l v. Ariz. Corp.
Comm’n
,
B. Sherman Act Claims
Section 2 of the Sherman Act prohibits “monopoliz[ing], or attempt[ing] to monopolize . . .
any part of the trade or commerce among the several States.” 15 U.S.C. § 2. Under the Clayton
Act, “any person who shall be injured in his business or property by reason of anything forbidden
in the antitrust laws may sue therefor,” and may recover treble damages. 15 U.S.C. § 15(a).
“Simply possessing monopoly power and charging monopoly prices does not violate § 2; rather,
the statute targets ‘the willful acquisition or maintenance of that power as distinguished from
growth or development as a consequence of a superior product, business acumen, or historic
accident.’”
Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc.
,
Dental Plan of California, Inc.
, 88 F.3d 780, 783 (9th Cir. 1996)
(citations omitted).
In order to state a claim for attempted monopolization, a plaintiff must
prove: (1) specific intent to control prices or destroy competition; (2)
predatory or anticompetitive conduct
monopolization; (3) dangerous probability of success; and (4) causal
antitrust injury. (citations omitted).
to accomplish
the
Cost Mgmt. Servs., Inc. v. Wash. Nat. Gas Co.
,
One means of monopolization recognized by the courts—albeit with skepticism—is
predatory pricing, in which an aspiring monopolist sets “below-cost prices that drive rivals out of
the market and allow the monopolist to raise its prices later and recoup its losses.”
Pac. Bell
, 555
U.S. at 448;
see Matsushita Elec. Indus. Co. v. Zenith Radio Corp.
,
“[C]utting prices in order to increase business often is the very
essence of competition.”
Matsushita Elec. Industrial Co. v. Zenith
Radio Corp.
,
1. Market Power
In order to state a claim for monopolization, Sidecar must plausibly allege monopoly
power, which “the Supreme Court has defined . . . as the power to ‘control prices or exclude
competition.’”
Cost Mgmt. Servs.
,
As this Court previously held, Sidecar cannot base its Sherman Act claims on a theory that
Uber has market power through a “disciplined oligopoly” with Lyft. Order re FAC at 12–16. The
Ninth Circuit has held that any anticompetitive effects of oligopolies constitute a “gap in the
Sherman Act” that must “slip past its prohibitions” unless Congress alters the scope of the statute.
Rebel Oil
,
Along the same lines, Uber’s argument that the prospect of reducing its own benefit from
network effects would dissuade it from reducing output,
see
Mot. at 6, Reply at 9, is a factor that
must be balanced on the merits,
see Am. Express
,
Uber argues that Sidecar’s claim must be dismissed for failure to address sufficiently both
“sides” of the two-sided market for ride-hailing, as required by
American Express
. Mot. at 6–7.
That case was decided after a lengthy trial, not on the pleadings, and certainly did not hold that
market power cannot be established in a two-sided market.
See Am. Express
,
regulatory authority over ride-hailing prices precludes a finding of market power.
See
Mot. at 4
n.3 (citing
Metro Mobile CTS, Inc. v. NewVector Commc’ns, Inc.
,
showing market power—which it is not—Uber has not suggested that the CPUC has such jurisdiction with respect to most of the geographic markets at issue, which are outside of California.
At this stage, the Court finds Sidecar’s allegations of market power to be sufficiently
plausible to avoid dismissal. The Court need not reach the parties’ arguments regarding price
discrimination, including whether allegations of price discrimination can in themselves support a
plausible inference of market power. The Court notes, however, that if the “‘reason price
discrimination implies market power is that assuming the lower of the discriminatory prices covers
cost, the higher must exceed cost,’” Opp’n at 4 (quoting
In re Brand Name Prescription Drugs
Antitrust Litig.,
Uber’s arguments that Sidecar has not sufficiently alleged a dangerous probability of recoupment, as required by the Supreme Court’s decision in Matsushita , boils down to the same issues—because, in Uber’s view, Sidecar has alleged market power only through a “disciplined oligopoly” with Lyft, Uber contends that any risk of recoupment is not cognizable in light of Rebel Oil and this Court’s previous order. See Mot. at 10–12; Reply at 10–11. As discussed above, the Court concludes that Sidecar has plausibly alleged that Uber could unilaterally raise the “price” that it keeps for itself from ride-hailing transactions to supracompetitive levels—through fare increases not fully passed on to drivers, commission increases reducing drivers’ pay not offset by discounts for passengers, or a combination of two—while insulated by network effects from Lyft or a new market entrant usurping Uber’s market share. In addition to showing market power, that provides a plausible means for Uber to recoup its losses from alleged predatory pricing. The fact that Sidecar still also alleges that Lyft has no incentive to compete on price against Uber does not negate Sidecar’s new allegations that Lyft could not do so even if it wanted to. See, e.g. , SAC ¶¶ 12, 85, 90, 92.
3. Tortious Interference
While the antitrust laws “do not create a federal law of unfair competition or ‘purport to
afford remedies for all torts committed by or against persons engaged in interstate commerce,’”
Brooke Grp.
,
While Sidecar must of course show injury to competition and not just to itself, its
allegations that the campaigns continued from mid-2014 through Sidecar exiting the market in
2015, that Uber conducted the campaigns specifically to harm its only two significant competitors,
that both drivers and passengers were harmed by Uber’s “fraudulent” ride requests, that network
effects amplified the harm to Sidecar and caused a “downward spiral” ending with one of only
three participants exiting the market, and that Uber used those campaigns to obtain and
consolidate monopoly power are sufficient at the pleading stage—in conjunction with the
allegations of market power discussed above—to plausibly allege harm to competition.
See
SAC
¶¶ 114–22. The Court declines to resolve Uber’s argument that the requests through which it
sought to recruit competitors’ drivers are “‘redeemed by a legitimate business purpose,’”
see
Reply at 13 (quoting
Universal Analytics, Inc. v. MacNeal-Schwendler Corp.
,
C. Unfair Practices Act Claim
Uber asks the Court to strike Sidecar’s complaint under the Unfair Practices Act, which the
Court previously dismissed with prejudice. Although the Court understands that Sidecar realleged
that claim solely to preserve its right to appeal its dismissal, the Ninth Circuit no longer requires a
plaintiff to do so.
Lacey v. Maricopa Cty.
,
IV. CONCLUSION
For the reasons discussed above, Uber’s motion to dismiss is DENIED, except as to the previously-dismissed Unfair Practices Act claim, which is STRICKEN from the second amended complaint.
IT IS SO ORDERED. Dated: May 1, 2020 ______________________________________
JOSEPH C. SPERO Chief Magistrate Judge
Notes
[1] The remaining defendants are Rasier, LLC; Rasier-CA, LLC; Rasier-PA, LLC; Rasier-DC, LLC; Rasier-NY, LLC; and Uber USA, LLC. The parties do not suggest that there is any distinction among the various defendants relevant to the present motion. 27
[2] The parties have consented to the jurisdiction of the undersigned magistrate judge for all purposes pursuant to 28 U.S.C. § 636(c).
[3]
SC Innovations, Inc. v. Uber Techs., Inc.
, No. 18-cv-07440-JCS,
[4] SC Innovations, Inc. v. Uber Techs., Inc. , No. 18-cv-07440-JCS, __ F. Supp. 3d __, 2020 WL 353543 (N.D. Cal. Jan. 21, 2020). Citations herein to the Court’s previous order refer to page 28 numbers of the version filed in the Court’s ECF docket.
[5] Uber’s argument that no ride-sharing company could curtail market output because such
25
companies do not control “the underlying productive assets in the business”—drivers and cars—
wholly neglects the barriers to entry and expansion allegedly caused by network effects.
See
Mot.
26
at 7–8 (citing
Rebel Oil
,
[6] Sidecar does not specifically allege, word for word, that Uber can restrict market output by
23
restricting its own output. At the hearing, Sidecar’s counsel argued that a news article cited in the
complaint describes a reduction of output in Chicago, but the article in fact describes only a
reduction in the percentage of all ride-hailing rides that are shared rides, which is merely a
24
distinction of types of rides within the relevant market alleged here.
See
Tina Bellon (Reuters),
A
25
New Chicago Ride-Hailing Law Reveals for the First Time What Uber and Lyft Really Charge
,
Business Insider, Nov. 26, 2019, https://www.businessinsider.com/ubers-carpool-pricing-strategy-
26
revealed-by-chicago-fare-data-2019-11; SAC ¶ 108 n.2 (citing that article). Even so, it is
reasonable to infer from Sidecar’s allegations that Uber can raise both passenger fares and driver
commissions, and that Lyft cannot respond effectively by increasing its market share, that some
27
reduction in market output would result from that unanswered increase in price.
See Parks Sch. of
28
Bus.
,