Antitrust Law Daily Wrap Up, ANTITRUST—W.D. Wash.: Hub and spoke conspiracy to retrain trade claims against Amazon dismissed, (Jan 2, 2025)

By Martin A. Steinberg, J.D.

Amazon allegedly used its anti-discounting algorithm against Zulily to foreclose future price competition by quickly copying Zulily’s prices.

In an antitrust action where an online retailer sued Amazon.com for using its monopoly power to stifle competition, the federal court in Seattle partially granted Amazon’s motion to dismiss. Plaintiff Zulily, LLC, an online retail marketplace, claimed that one of the ways Amazon has gained monopoly power is through price-fixing agreements with third-party retailers and wholesale suppliers. Amazon moved to dismiss the complaint. The court (1) denied Amazon’s request for dismissal on antitrust standing grounds; (2) dismissed the hub and spoke conspiracy to restrain trade claims under federal and state law (3) dismissed the deceptive-acts-or-practices claim under Washington’s Consumer Protection Act (CPA); and (4) denied the remainer of Amazon’s motion. The dismissals were without prejudice and Zulily was given leave until January 31, 2025, to file an amended complaint as to the hub and spoke conspiracy to restrain trade claims under federal and state law and the claim for deceptive acts or practices under Washington’s CPA (Zulily, LLC v. Amazon.com, Inc., No. 2:23-cv-01900-JHC (W.D. Wash. Dec. 31, 2024)).

Background. Zulily alleges that Amazon has monopoly power in the Online Superstore Market. Online superstores compete for online consumer sales across multiple categories of new retail goods through a unique set of features that increase efficiencies for shoppers, including custom delivery. While Zulily does not host third-party sellers on its site, Amazon and Zulily compete for relationships with many of the same merchants. Also, some third-party retailers sell their products on Amazon or sell their products wholesale to Amazon also sell their products wholesale to Zulily. They also compete for third-party retailers and wholesalers. The products available on Zulily span multiple categories, including clothes, beauty, toys, home decor, and electronics. Zulily alleges that Amazon engages in illegal conduct that bars entry and forecloses competition, making it very difficult for would-be competitors to enter and/or expand in the Online Superstore Market.

Zulily filed its Complaint on December 11, 2023, with eight causes of action: (1) a hub and spoke conspiracy to restrain trade claim under Section One of the Sherman Act; (2) a third-party retailer conspiracy to restrain trade claim under Section One of the Sherman Act; (3) a wholesale supplier conspiracy to restrain trade claim under Section One of the Sherman Act; (4) a monopolization of the online superstore market claim under Section Two of the Sherman Act; (5) an attempted monopolization of the online superstore market claim under Section Two of the Sherman Act; (6) – (7) claims for alleged violations of Washington state antitrust law under the state’s Consumer Protection Act (CPA), Revised Code of Washington (RCW) §§ 19.86.030, 19.86.040; and (8) a claim for a separate violation of the CPA (RCW § 19.86.020).

Zulily asserted that Amazon’s price-fixing agreements and exclusionary conduct requires Zulily merchants not to discount or otherwise offer low prices on Zulily, causing Zulily to lose profits, a substantial volume of consumer sales, and web traffic. Zulily contended that it has lost suppliers “who had no choice but to pull products and/or stop dealing with Zulily entirely in response to Amazon’s punishments and threats even though it is not Zulily’s standard business model to charge merchants fees and merchants generally prefer working with Zulily over Amazon.”

Zulily contended that nearly half of Amazon’s third-party retailers generate 81% to 100% of their revenues from sales on Amazon. Amazon’s platform is also crucial to wholesalers; according to Zulily, Amazon sales account for 20% to 30% of all sales of third-party retailers and wholesalers. Amazon allegedly charges third-party retailers and wholesale suppliers supracompetitive fees to sell their goods on Amazon’s platform and that Amazon’s fees are “inflated and higher than the fees charged by most or all of Amazon’s online competitors.”

One of the ways Amazon has supposedly gained monopoly power is through price-fixing agreements with third-party retailers and wholesale suppliers that requires each of its third-party retailers to agree to set off-Amazon prices equal to or higher than Amazon prices. On the wholesale side, Amazon requires its suppliers to agree to minimum-margin agreements (MMAs). These agreements state that if Amazon lowers the price of a product on its platform to “price-match an off-Amazon price” for the same product, then the wholesaler must make “true-up payments” to Amazon so that Amazon will still make a “Guaranteed Minimum Margin.” Amazon monitors market prices and punishes any third-party retailers and/or wholesale suppliers who are perceived to violate its price-parity or minimum-margin agreements by discounting below Amazon’s prices. One common punishment is removing a third-party retailer’s access to Amazon’s “Buy Box.”

Antitrust standing. Because Zulily plausibly alleged that it competes with Amazon in the Online Superstore Market, Zulily has standing to pursue its antitrust claims, the court held. The Supreme Court identified five factors to analyze when determining whether a plaintiff has antitrust standing. See Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519 (1983). These factors include (1) whether the alleged injury was the type of injury the antitrust laws were intended to forestall; (2) the directness of the injury; (3) the speculative measure of the harm; (4) the risk of duplicative recovery; and (5) the complexity in apportioning damages. To properly plead antitrust injury, Plaintiff must allege: (1) unlawful conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct unlawful, and (4) that is of the type the antitrust laws were intended to prevent.

Amazon did not contest the first three requirements. As to the fourth, Zulily alleged that it competes in the Online Superstore Market “as an online retailer offering a ‘breadth and depth’ of product selection that cannot be replicated in a physical store and that limited-selection online stores lack. It also stated that the FTC and Amazon recognized Zulily as an “emerging competitor” in this market. Consumers and competitors are most likely to suffer antitrust injury.

Sherman Act Section One & RCW Section 19.86.030 - hub-and-spoke conspiracy to restrain trade. The court concluded that Zulily failed to plausibly allege a hub-and-spoke group boycott. While the Complaint plausibly alleged that vertical agreements existed between Amazon and its third-party retailers and wholesale suppliers, the Complaint failed to plausibly allege that Amazon pressured its retailers and wholesale suppliers, who in turn entered into a horizontal conspiracy among themselves, to boycott Amazon’s competitors. Even though Zulily alleged that the retailers and wholesalers “tacitly agreed” with each other to “eliminate horizontal retail price competition” and “communicated with one another” through ecommerce consultants about compliance with the price-parity agreements, Zulily must plead further circumstances pointing toward a meeting of the minds of the alleged conspirators. Plaintiff must allege sufficient facts to provide a plausible basis for a court to infer the alleged agreements’ existence. Zulily, however, did not plead some further factual enhancement to plausibly show a conspiracy among third-party retailers and wholesale suppliers to act against Amazon’s competitors.

In the alternative, Zulily alleged that it had plausibly alleged a “capital-A agreement... at the rim” to support its hub-and-spoke conspiracy claim. The Complaint alleged that the third-party retailers and wholesalers acted against their individual interests in agreeing with Amazon to price parity and in complying with the agreement. Zulily, however, did not plausibly allege that Amazon’s third-party retailers or wholesalers would not have entered into price-parity or minimum-margin agreements with Amazon absent “assurances” that other retailers and wholesalers were also doing so. Nor did the Complaint state that “individual action” among the third-party retailers or wholesalers would be “so perilous” without some kind of advanced agreement among them.

Zulily further contended that the FTC’s investigation showed that Amazon created the price-fixing agreements and enforced them and the California Attorney General’s (AG) investigation also demonstrates that Amazon orchestrated illegal price collusion. The court, however, noted that neither the FTC’s investigation nor the California AG’s investigation into Amazon’s conduct supported Zulily’s allegations that a horizontal agreement existed among Amazon’s third-party retailers and wholesalers. Moreover, Zulily’s alleged “plus factors” did not plausibly suggest that Amazon’s third-party retailers and wholesale suppliers entered into an illegal horizontal agreement. Thus, Zulily failed to allege a plausible hub-and-spoke conspiracy claim.

Unreasonable restraints of trade under the rule of reason. The rule of reason requires a plaintiff to show that a particular contract or combination is in fact unreasonable and anticompetitive. Viewed in the light most favorable to Zulily, the Complaint sufficiently alleged that Amazon’s conduct increased the prices that consumers paid for products and otherwise reduced competition in the Online Superstore Market. Thus, Zulily alleged plausible anticompetitive effects sufficient to survive the motion to dismiss.

Sherman Act Section Two & RCW Section 19.86.040. Taking Zulily’s well-pleaded facts as true, and drawing all reasonable inferences in its favor, the court concluded that the Complaint adequately alleged that the challenged discounting practices are anticompetitive for purposes of Zulily’s Section Two Sherman Act claim. Section Two of the Sherman Act prohibits the monopolization, or attempted monopolization, or combination or conspiracy to monopolize, of any part of trade or commerce among the states. Washington law likewise prohibits any person to monopolize, or attempt to monopolize or combine or conspire with any other person or persons to monopolize any part of trade or commerce. Thus, a plaintiff must show anticompetitive abuse or leverage of monopoly power, or a predatory or exclusionary means of attempting to monopolize the relevant market.

Zulily plausibly alleged that Amazon’s anti-discounting practices are anticompetitive. Zulily contended that Amazon manipulates prices through “anti-discounting algorithms” and by imposing “oppressive contractual conditions on merchants that make it difficult, if not impossible, for them to do business with online retailers besides Amazon. The Complaint stated that “Amazon’s price-fixing agreements with its retailers broadly prohibit any products that are being sold on Amazon from being sold off Amazon at prices that Amazon thinks are too low—even if, off Amazon, the seller is playing the role of a wholesaler and not setting retail prices.” Amazon coerced third-party retailers and wholesale suppliers to agree to price parity, which artificially raised Zulily prices at or above Amazon’s, and to punish any sellers who cheated. If a retailer or supplier failed to comply, punishments ranged from disqualifying a seller from Buy Box up to total banishment from Amazon’s Marketplace. The Complaint also claimed that Amazon “used its anti-discounting algorithm against Zulily to foreclose future price competition by quickly copying Zulily’s prices.

The Washington Consumer Protection Act. The court agreed with Amazon that the Complaint failed to adequately allege a deceptive act or practice. For a Washington CPA claim, a deceptive act is “a representation, omission or practice that is likely to mislead a reasonable consumer.” While the CPA does not define the term ‘deceptive,’ the implicit understanding is that the actor misrepresented something of material importance.

Zulily’s allegation that Amazon engaged in acts that deceived the public by “by falsely representing to consumers that its prices are the lowest and/or competitive” was conclusory. Outside of alleging that Amazon engaged in acts and practices that deceived a substantial portion of the public, the Complaint lacked factual content to draw a reasonable inference that Amazon is liable for the misconduct alleged. For example, Zulily did not identify any representation Amazon made to consumers about its prices or the competitiveness of its prices.

The Case is No. 2:23-cv-01900-JHC.

Judge: Chun, J.

Attorneys: James Lerner (Bona Law PC) for Zulily LLC. Carl R. Metz (Williams & Connolly LLP) for Amazon.com Inc.

Companies: Zulily LLC; Amazon.com Inc.

Cases: Antitrust WashingtonNews StateUnfairTradePractices GCNNews