AI Antitrust Rulings in 2024

[1] AliveCor, Inc. v. Apple Inc.

In AliveCor, Inc. v. Apple Inc., No. 21-cv-03958 (N.D. Cal. filed May 25, 2021), the court held that AliveCor could not succeed on its Section 2 Sherman Act claims as a matter of law. The dispute centered on the Apple Watch’s watchOS 5 Workout Mode software, which processes data collected from photoplethysmography (PPG) sensors, including average heart rate information. The Workout Mode API reported data from only one heart rate interpretation algorithm at a time. From the product’s launch until the release of the version at issue, Apple used the HRPO algorithm. Apple later replaced HRPO with a different algorithm, the Heart Rate Neural Network (HRNN), after determining that HRPO had limitations.

Relying on Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP, 592 F.3d 991 (9th Cir. 2010), the court emphasized that a design change that improves a product by providing new benefits to consumers does not violate Section 2 absent accompanying anticompetitive conduct. AliveCor argued that Allied Orthopedic did not bar its claims because, first, removing HRPO did not amount to a product improvement, and second, even if it did, there was sufficient evidence of associated anticompetitive conduct for the issue to go to a jury. Apple responded that AliveCor’s analysis improperly isolated the removal of HRPO without accounting for the introduction of HRNN, and that the undisputed evidence showed HRNN was an improvement.

The court agreed with Apple, finding no genuine dispute that replacing HRPO with HRNN constituted a product improvement. Because that issue was resolved in Apple’s favor, AliveCor had to identify associated anticompetitive conduct to avoid summary judgment on its Section 2 claims. The only such conduct AliveCor identified was Apple’s decision to remove third-party developer access to HRPO in Workout Mode. The court concluded, however, that Apple had no antitrust duty to ensure that its product improvements remained compatible with AliveCor’s application. On that basis, the court granted Apple’s motion for summary judgment.

[2] Gibson v. Cendyn Group, LLC

In Gibson v. Cendyn Group, LLC, Richard Gibson and Roberto Manzo, on behalf of themselves and a proposed class, alleged that Cendyn Group, LLC and several Las Vegas Strip hotel operators violated Section 1 of the Sherman Act by using Cendyn’s AI-driven pricing software to artificially inflate hotel room prices. The defendants jointly moved to dismiss the First Amended Complaint.

The plaintiffs advanced a hub-and-spoke conspiracy theory, alleging that Cendyn acted as the hub and the hotel defendants were the spokes, with tacit agreements among the hotels forming the rim of the conspiracy. The court found that the complaint failed to plausibly allege any tacit agreement among the hotel defendants to fix prices. In particular, the court noted that the plaintiffs did not allege that the hotels were required to follow Cendyn’s pricing recommendations and, in fact, acknowledged that they often did not.

The court also agreed with the defendants that the plaintiffs failed to plausibly allege any exchange of confidential information among the hotel defendants through Cendyn’s algorithms. That omission was fatal to the hub-and-spoke theory because it undermined any inference that a “rim” connected the alleged spokes. The court further reasoned that reliance on publicly available information and the commonplace practice of reviewing competitors’ prices did not support an inference of unlawful agreement or collusion.

The plaintiffs also argued that the hotel defendants effectively delegated their pricing authority to Cendyn. The court rejected that position, explaining that the software merely generated recommendations that the hotels were free to accept or reject. That level of discretion reflected independent decision-making, not coordinated price fixing.

The court likewise dismissed the plaintiffs’ second claim, which alleged that vertical agreements between Cendyn and the hotels artificially inflated room rates and harmed consumers. Because the hotels were not obligated to adopt the software’s recommendations, the complaint did not plausibly allege any agreement restraining the hotels’ pricing freedom.

Having already given the plaintiffs an opportunity to amend and finding that they had failed to cure the deficiencies in their pleading, the court dismissed the complaint with prejudice, concluding that further amendment would be futile.