Antitrust Law Daily Wrap Up, ANTITRUST—W.D. Wash.: Fortnite facilitator’s Sherman Act claims against Amazon Web Services dismissed with leave to amend, (Jan 2, 2025)

By Justin Marcus Smith, J.D.

Plaintiff Subspace omega did not appear to address elements required of a single-brand aftermarket, like consumer knowledge of restrictions or information costs, but the court nonetheless granted Subspace leave to amend these and other antitrust pleading deficiencies.

Claims brought by Subspace omega, LLC that Amazon Web Services Inc. violated the Sherman Act by denying network peering in connection with Epic Games’ Fortnite gaming service suffered from various pleading deficiencies, calling for dismissal, held the federal district court in Seattle. However, the court was explicit that the deficiencies appeared to curable by amendment (Subspace omega, LLC v. Amazon Web Services, Inc., No. 2:23-cv-01772-TL (W.D. Wash. Dec. 23, 2024)).

Background. Plaintiff Subspace omega LLC (Subspace), founded in 2017, was a provider of network optimization services focused on reducing latency (delay or “lag”). Subspace said its largest customer was Epic Games (Epic), the publisher of the “Fortnite” video game. Fortnite required low-latency connections because gamers depend on the speed of their network connections. Subspace said Epic operated Fortnite on the Amazon Web Services, Inc. (AWS) network since at least 2018, but in anticipation of especially heavy use of Fortnite during a period in 2019, Subspace said it entered into a Platform Access Agreement with Epic for network optimization. Pursuant to that access agreement, Subspace allegedly asked AWS for peering at certain locations in India, Dubai, and Bahrain. AWS initially agreed but later allegedly declined additional peering in Germany. Subspace said AWS offered its “Direct Connect” service instead. Subspace said it found the AWS Direct Connect service inadequate to its needs and that it also experienced overbilling problems.

After the parties discussed their disagreements and AWS allegedly delayed additional peering requests, Subspace said it served AWS with a Notice of Anticompetitive Behavior. After additional negotiations for peering, Subspace said the performance issues that AWS allegedly caused, by refusing to peer with Subspace, ultimately forced Subspace to terminate its contract with Epic. Subspace said that effectively ended its business, and AWS then allegedly took the place of Subspace in providing network optimization services to Epic.

Based on these allegations, in November 2023, Subspace brought this action asserting four federal antitrust claims against AWS: 1) monopolization of the AWS network market; 2) attempted monopolization of the cloud computing market; 3) monopolization of the market for low latency network optimization services on AWS; 4) attempted monopolization of the market for low latency network optimization services on the AWS network. AWS moved for dismissal under Fed. R. Civ. P. 12(b)(6). The court dismissed the Sherman Act claims, without prejudice, appearing to anticipate that Subspace might cure its pleading deficiencies. The court had previously granted AWS’ motion for a protective order and to stay discovery.

Monopoly power. The court found, first, that the AWS network was not a properly defined relevant market. AWS argued the AWS-based markets were improper single-product or single-brand markets. Subspace countered that courts do recognize single-product markets. AWS responded that the AWS network is not an aftermarket but rather a primary market that competes with other clouds. AWS also said its network optimization services were not limited to a single primary market making the aftermarket case law inapplicable here.

The court noted that although the Ninth Circuit has not foreclosed single-brand markets other than aftermarkets, such markets are “extremely rare,” and here, Subspace did not show that the AWS network was so unique or dominant such that there were no economic substitutes. Moreover, Subspace did not supply any cases where courts have recognized a single brand of primary product as a relevant market, while the cases it did provide were distinguishable.

The court held the mere fact that Epic chose AWS to host its Fortnite game did not transform the AWS network into its own market; however, it conversely held that a low latency network optimization on AWS might be a relevant single-brand aftermarket derivative of the AWS network. The court observed that demand in this market was dependent on the prior purchase of AWS services, and Subspace alleged AWS had at least 60% share of a distinct market for low latency network optimization for companies like Epic Games. According to Subspace, AWS allegedly imposes penalties for switching and tries to use its power to lock-in customers. The court saw that Subspace did not appear to address other elements required of a single-brand aftermarket, like consumer knowledge of restrictions or information costs, but the court nonetheless explicitly granted Subspace leave to amend its allegations as to this proposed market.

Turning to cloud computing, the court found Subspace did not sufficiently allege a “dangerous probability” that AWS will achieve monopoly power in cloud computing, but again, the court held Subspace might be able to cure this by amendment. Subspace alleged that AWS had acquired 40% market share and doubled its revenue to over $90 billion. AWS said this only showed it “invests in itself,” but the court agreed with Subspace that AWS was making a fact-based argument inappropriate to the dismissal stage. The court saw that Subspace might cure the weakness of its pleading here by adding allegations about entry barriers and competitor inability to expand output in response to supracompetitive pricing.

Refusal to deal. The court found Subspace sufficiently alleged that AWS unilaterally terminated a voluntary and profitable course of dealing. Subspace said peering was standard industry practice and AWS had objective peering standards that permitted Subspace and others to peer with AWS network on a settlement-free basis. Subspace said AWS initially agreed to peering, but later offered only Direct Connect, not a viable alternative, and that under the new Direct Connect arrangement, Subspace could not continue its business. The court found the allegations sufficient to establish that AWS substitution of Direct Connect was unreasonable. AWS contended that it never terminated peering in the Middle East countries, hence Subspace was talking about expansion of prior dealing, but the court found this AWS argument defined the “status quo” too narrowly. The court agreed with AWS, up to a point, that AWS receives thousands of peering requests annually, but even so, Subspace alleged a pertinent preexisting course of dealing.

In contrast, the court found Subspace did not sufficiently allege that the only conceivable rationale for the AWS Direct Connect decision was to sacrifice short-term profits. Then again, Subspace might cure this problem by amendment. Contrary to AWS’ assertion, the relevant product for the Subspace claim was peering, not Direct Connect.

Antitrust injury. AWS questioned whether Subspace alleged harm to competition, but the court found Subspace sufficiently alleged that AWS decreased quality in the relevant market. AWS called the Subspace argument puffery, but the court said it must accept the decreased quality allegation on a motion to dismiss.

FTAIA. Finally, with respect to the Sherman Act claims, AWS argued that they failed for the independent reason that they were based on alleged foreign conduct without required effect on U.S. commerce under the Foreign Trade Antitrust Improvements Act (FTAIA). Subspace argued that FTAIA did not apply because its claims pertained to domestic conduct, by a U.S. company, directed at a U.S. firm operating in the U.S. market, or else that it had alleged the required effect on U.S. commerce.

The court found Subspace sufficiently alleged domestic conduct as well as foreign conduct with a direct, substantial, and reasonably foreseeable effect on domestic commerce. The alleged refusal to peer included exclusion form U.S. based peering locations, where Subspace had allegedly invested in 30 U.S. data centers, with the effect of eliminating Subspace as a competitor leading to market-wide decrease in quality in the relevant markets. AWS authorities were distinguishable, but, in any event, the court acknowledged that the Subspace claim of antitrust injury might not survive summary judgment or trial.

WCPA. Subspace also brought three claims under the Washington Consumer Protection Act, but the court found counts five and six, for respective monopolization and attempted monopolization of the market for low latency network optimization on the AWS network, failed to the same extent as the federal antitrust claims failed. Here again, the court granted leave to amend.

However, count nine, the WCPA unfair competition claim, failed for futility because Subspace did not allege that AWS alleged conduct affected the public interest and Subspace was also a sophisticated party. The court declined leave to amend here.

FCA. The court granted AWS’ motion to dismiss count eight, the Subspace claim that AWS violated the Federal Communications Act (FCA). The court agreed with AWS that a 2018 FCC rule squarely foreclosed this claim. The court dismissed this claim with prejudice citing futility of amendment.

Tortious interference. Lastly, inasmuch as the court found that the Sherman Act, WCPA, and FCA claims failed, the court agreed with AWS that Subspace had not alleged the use of “improper means” and therefore did not allege a wrongful act to support a tortious interference with contractual relations claim. However, the court again saw that amendment might cure the problem. Whether Subspace alleged interference with an improper purpose was more complicated, but here, too, the court granted leave to amend.

The Case is No. 2:23-cv-01772-TL.

Judge: Lin, T.

Attorneys: James Urquhart Troup (Fletcher Heald & Hildreth PLC) for Subspace Omega LLC. Alan B. Freedman (Cleary Gottlieb Steen & Hamilton LLP) for Amazon Web Services Inc.

Companies: Subspace Omega LLC; Amazon Web Services Inc.

Cases: Antitrust StateUnfairTradePractices WashingtonNews