Feitelson v. Google Inc.

• Decision Date: 20 February 2015
• Docket Number: Case No. 14–cv–02007–BLF
• Citation: 80 F.Supp.3d 1019
• Parties: Gary Feitelson, et al., Plaintiffs, v. Google Inc., Defendant.
• Court: U.S. District Court — Northern District of California

80 F.Supp.3d 1019

Gary Feitelson, et al., Plaintiffs

v.Google Inc., Defendant.

Case No. 14–cv–02007–BLF

United States District Court, N.D. California, San Jose Division .

Signed February 20, 2015

Jeff D. Friedman, Hagens Berman Sobol Shapiro LLP, Berkeley, CA, George W. Sampson, Robert F. Lopez, Steve W. Berman, Hagens Berman Sobol Shapiro LLP, Seattle, WA, Patrick Howard, Simon Bahne Paris, Saltz Mongeluzzi Barrett and Bendesky, Philadelphia, PA, for Plaintiffs.

Benjamin Michael Stoll, James Harris Weingarten, John Edward Schmidtlein, Jonathan Bradley Pitt, Williams and Connolly

LLP, Gregory Forrest Wells, Hill B. Wellford, III, Jon R. Roellke, Morgan, Lewis & Bockius LLP, Washington, DC, Brian C. Rocca, Sujal Shah, Susan J. Welch, Morgan, Lewis & Bockius LLP, San Francisco, CA, for Defendant.

ORDER GRANTING MOTION TO DISMISS FIRST AMENDED COMPLAINT WITH LEAVE TO AMEND

[Re: ECF 38]

BETH LABSON FREEMAN, District Judge

In this putative class action antitrust case, plaintiffs Gary Feitelson and Daniel McKee (collectively, “Plaintiffs”) allege that defendant Google, Inc. (“Defendant”) restrains trade in the market for Internet search through confidential agreements with cell phone manufacturers. Before the Court is Defendant's Motion to Dismiss First Amended Complaint. Def.'s Mot., ECF 38. The Court heard oral argument on the matter on December 18, 2014, after which it deemed the matter submitted. After careful consideration of the parties' respective written submissions and oral argument, the Court hereby GRANTS Defendant's Motion to Dismiss with leave to amend certain claims.

I. BACKGROUND

The following facts are taken from the First Amended Class Action Complaint (“FAC”) and are assumed to be true.

A. Parties

Plaintiffs are consumers who purchased mobile phones connected to Defendant's alleged anticompetitive conduct. Mr. Feitelson owns an HTC EVO 3D mobile phone purchased in Louisville, Kentucky. FAC ¶ 15, ECF 31. Mr. McKee owns a Samsung Galaxy S III mobile phone purchased in Des Moines, Iowa.¹ Id. ¶ 16. Both the HTC EVO 3D and Samsung Galaxy S III are devices that use the Android Operating System (“Android OS”).

Defendant is a Delaware corporation with its headquarters and principal place of business in Mountain View, CA. Defendant is perhaps best known for Internet search, with which its name has become nearly synonymous. Id. ¶ 4. Defendant also owns the Android OS, which it licenses to phone manufacturers for free, as well as a bevy of popular mobile applications including YouTube, Google Maps, Gmail, and the “Google Play (formerly Android Market) client,” through which mobile phone users are able to purchase applications, music, movies, and books from the Google Play store. Id. ¶¶ 6–8, 17, 35.

B. Relevant Markets

Internet search occurs “when a user goes to a search engine website—Google.com, for example—and executes a query there, or when he enters a query into his browser's search bar and a pre-designated search engine operating in the background executes it.” Id. ¶ 19. Defendant and its rivals—such as Microsoft's Bing and DuckDuckGo—offer rival search engines, free of charge, for use by the general public. These search engines compete for users, as increased user queries help improve the search engine's effectiveness and also increases advertising revenue from paid search advertising. See id. ¶¶ 60–61.

Plaintiffs allege that the Internet search market has a number of barriers to entry. Search engines improve with use, and successful search products must attract a critical mass of users to input queries that, in turn, aid in improving the algorithm underlying the search product. Id. ¶¶ 5960. Improved search capabilities attract more users, thus iteratively enhancing the search product's capability and appeal.Id. This cycle tends to favor the established products over new entrants. Moreover, search engines also require significant infrastructure in the form of physical plants backed by significant financial and computational resources, as well as continuous programming support for the algorithms and software that support the search engine, and the ability to manage search on a global scale, thus also barring new entrants. Id. ¶¶ 59, 60 n.22, 63.

Plaintiff defines two relevant markets affected by Defendant's alleged anticompetitive conduct: (1) the “United States market for general search,” which is “general Internet search conducted on desktop computers, laptops, and handheld devices via the Google search engine or one of its general search engine rivals, such as Bing,” and (2) the submarket for “handheld general search” in the United States, which is “general Internet search conducted on smartphones and tablets. Id. ¶¶ 27, 75. Defendant's Google search engine, as of March 2014, accounted for 81.87% of all Internet searches conducted across all devices. Id. ¶¶ 20–21. In that same month Defendant's share of Internet searches conducted on mobile phone and table devices was 86.82%. Id. ¶ 26.

C. Mobile Application Distribution Agreements and Anticompetitive Conduct

As previously stated, Defendant owns the Android OS, as well as a suite of mobile applications (“Google Apps”) that includes YouTube, Google Play, Google Phone-top search, Google Maps, Google Calendar, Gmail, Google Talk, etc. Id. ¶¶ 6–8, 35. While Defendant licenses the Android OS to mobile device manufacturers (or, original equipment manufacturers, or “OEMs”) for free, it places restrictions on the OEMs' installation of Google Apps on the Android OS devices that they produce.

Specifically, OEMs frequently “pre-load” applications onto their devices because consumers demand access at startup to popular Google Apps such as YouTube and the Google Play store. Id. ¶ 36 n.6, n.7. If an OEM wishes to pre-load any of the Google Apps on an Android OS phone, for example, they must enter into a confidential licensing agreement with Defendant called a “Mobile Application Distribution Agreement” (“MADA”). Id. ¶¶ 7–8, 35. Through public filings in an unrelated case, Plaintiffs have obtained two such MADAs between Defendant and OEMs HTC and Samsung. Id. Exhs. A–B; see also id. ¶ 36 n.8 (suggesting that Defendant has entered into MADAs with a panoply of Android OEMs). Among other terms in the representative MADAs, an OEM that wishes to pre-load apps like YouTube and the Play client on an Android OS phone must also agree to make Google the default search engine for all “search access points” on the device. Id. ¶ 36, Exh. A at 5; Exh. B at 4. The OEM must also pre-load all of a suite of Google Apps and must give those apps “prime screen real estate.”² Id. at ¶ 36. The MADAs terminate after two years and cover specific device models, which must be approved by Defendant and are identified by addenda to the agreements. See id. Exhs. A–B.

Prime placement on device screens and default setting status are important avenues by which search engines obtain access to users. Handheld device users will generally use the prominently placed search engine app or widget that comes pre-loaded on their phone. Id. ¶ 40. Moreover, handheld device users are “unaware of the interaction between their browser ... and the search engine which happens to be powering it,” and will generally simply execute searches by typing queries into a browser's omnibox (the search/address box at the top of each browser) without realizing that the search is being powered by Google, the default search engine on their device.Id. Searches improve a search engine's algorithm and can also translate to greater advertising revenue. See id. ¶¶ 41, 60–61. Thus, because device users are generally unaware of the default settings, or are not strongly incentivized to change the default setting, Defendant benefits from consumer preference for the status quo. Id. ¶¶ 42, 55.

In January 2014, the Android OS's share of the United States smartphone market was estimated to be 51.7%. Id. ¶ 24. Additionally, over the years, Defendant has paid Apple—which accounts for the other substantial portion of the smartphone and handheld device market—substantial amounts of money (estimated to reach $1 billion dollars in 2014) to act as the default search engine on Apple iPhones, iPads, and iPods. Id. ¶ 49.

D. Harm to Plaintiffs and Claims for Relief

Plaintiffs use their phones for, among other things, Internet searches. At the time they purchased their respective phones, neither Plaintiff was aware that Google search was set as the default search engine on those phones. Further, neither Feitelson nor McKee know if there is a way to change the default search engine setting, nor how to change the default search engine if there is indeed a way to change it. Id. ¶¶ 15–16. Both of Plaintiffs' Android-based phones are alleged to be covered by MADAs between HTC and Samsung—the respective phone manufacturers—and Defendant. Id. But for Defendant's anticompetitive MADAs, Plaintiffs assert that their phones “would have cost less and had better search capabilities as the result of the competition that would have ensued.” Id. ; see also id. ¶¶ 70–73.

Plaintiffs allege that the MADAs “quash competition for default search engine status before it even can begin.” Id. ¶ 42. This, in turn, forecloses competition in the market for general and handheld Internet search because default search engine status is the most effective and cost-effective distribution channel for search engines. Id. ¶¶ 51–58. Search engines improve in quality with greater usage, so the diversion of search users to the Google search engine also permits Defendant to improve its search algorithm, thereby shutting out competition on the merits. Id. ¶¶ 50, 59–60, 66–67. Plaintiffs allege that this cycle, if allowed to persist, would have the effect of stifling innovation and diminishing consumer choice in the market for Internet search by forcing Defendant's competitors out of business. Id. ¶ 70. Furthermore, the MADAs prevent Defendant's search competitors from competing for default search engine status on...