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Supreme Court Rules That Purchasers of Apps Can Bring an Antitrust Suit Against Apple For Overcharges

Related Lawyers: Irving Scher
Related Practice Areas: Antitrust / Competition, Competition Disputes
Authors: Irving Scher*

On May 13th, the U.S. Supreme Court, in a 5-4 decision, affirmed the Ninth Circuit’s decision denying a motion to dismiss a consumer class action claiming that Apple monopolized the after-market in its sales of iPhone software applications (hereinafter “apps”) by charging app developers a 30% fee that resulted in allegedly higher-than-competitive prices to consumers on Apple’s sales through its App Store.[1]

In a decision written by Justice Kavanaugh, and joined, in an unusual alliance with a conservative Justice, by the four liberal Justices Ginsburg, Breyer, Sotomayor, and Kagan, the majority rejected Apple’s contention that the consumer plaintiffs were “indirect purchasers” from the app developers who determine app selling prices, and thereby were barred from suing Apple by the Supreme Court’s 1977 ruling in Illinois Brick Co. v. Illinois.[2] Under that decision, only “direct purchasers” from an alleged antitrust wrongdoer generally are authorized to obtain damages under the federal Sherman Act. The majority determined to the contrary that buyers of apps from Apple’s App Store are direct purchasers from Apple, the alleged wrongdoer, thereby permitting the suit to go forward. Apple had contended that its fees lawfully are intended to cover the cost of its services allowing app developers to sell their apps through the App Store, and that the plaintiffs lacked standing because the prices they paid for the apps were determined by the developers, not by Apple.

Background.

The consumer suits against Apple commenced in 2011, with allegations that Apple had monopolized the “iPhone apps aftermarket” by locking iPhone owners into buying apps only from Apple. The plaintiffs claimed that in a competitive environment with other retailers they would have been able to choose between Apple’s high priced apps and less costly alternatives.[3] The district court dismissed the suit on the ground that iPhone owners were direct purchasers from the app creators who set the prices for their apps, not from Apple, which merely had charged the creators for its distribution services.

The Ninth Circuit reversed, concluding that iPhone owners were direct purchasers under Illinois Brick because they purchased apps directly from Apple, and that Illinois Brick only prevents consumers from suing a monopolist two or more steps removed from the consumers in a vertical distribution chain.[4]

The Supreme Court Decision.

Affirming the Ninth Circuit decision denying Apple’s motion to dismiss, Justice Kavanaugh, on behalf of the five Justice majority, declared at the outset:

"The plaintiffs purchased apps directly from Apple and therefore are direct purchasers under Illinois Brick. At this early pleadings stage of the litigation, we do not assess the merits of plaintiffs’ antitrust claims against Apple . . . . We merely hold that the Illinois Brick direct-purchaser rule does not bar these plaintiffs from suing Apple under the antitrust laws."[5]

The majority added a footnote indicating: “In light of our ruling in favor of the plaintiffs in this case, we have no occasion to consider [the] argument for overruling Illinois Brick” that had been raised by the DOJ and 30 state attorneys general who had filed amici briefs.

Justice Kavanaugh stressed—more than once—that Illinois Brick was not applicable because there is no intermediary between Apple and the consumer in the distribution chain, and that fact was “dispositive.”[6] According to Justice Kavanaugh, Illinois Brick established a “bright-line rule” generally barring indirect purchaser suits not based on an economic theory about who sets a price, but “to achieve an effective and efficient litigation scheme in antitrust cases.”[7]

The majority opinion went on to note that Apple’s line-drawing between purchases from an agent and from a reseller “does not make sense, other than as a way to gerrymander Apple out of this and similar lawsuits.” Citing Areeda & Hovenkamp, the Court explained: “Denying standing because ‘title’ never passes to a broker is an overly lawyered approach that ignores the reality that a distribution system that relies on brokerage is economically indistinguishable from one that relies on purchaser-resellers.”[8] The Court added: “Apple’s theory would provide a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so as to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement.”[9] It concluded this aspect of the opinion by emphasizing that Apple improperly was seeking “an unprincipled and economically senseless distinction among monopolistic retailers” that furnishes them “with a how-to-guide for evasion of the antitrust laws.”[10]

Finally, addressing the concerns expressed in Illinois Brick about the difficulties in dealing with damages calculations and possible duplicative damage awards if indirect purchasers were allowed to bring antitrust suits, Justice Kavanaugh pointed out that the suit against Apple did not involve multiple parties at different distribution levels trying to recover for the same passed-through overcharge.[11] Instead, the Court recognized that if app developers also sued Apple on a monopsony theory, their damage claims would differ from the consumers’ claims.[12] App developers would seek lost profits they could have earned in a competitive market for the distribution of apps while the consumer plaintiffs were seeking to recover for overcharges that they paid directly to Apple: there would be no concern about sharing from a “common fund.”[13] Relying again on Areeda & Hovenkamp, the Court noted that the fact that there may be two different classes of victims does not necessarily mean that their injuries are duplicative of one another.[14]

The Dissenting Opinion.

Justice Gorsuch authored a dissent joined by Chief Justice Roberts and Justices Thomas and Alito. He declared that the plaintiff iPhone purchasers clearly are indirect purchasers because they purchased developer apps at prices set by the developers.[15] Thus, Apple’s 30% commission “falls initially on the developers.”[16] However, according to Justice Gorsuch, the majority decision allows “exactly the kind of ‘pass-on theory ’ Illinois Brick rejected”: an antitrust suit against a defendant “for overcharging someone else who might (or might not) have passed on all (or some) of the overcharge” to the plaintiff.[17]

Justice Gorsuch explained that the “revisionist version” of Illinois Brick adopted by the majority exalted form over substance, and “[i]nstead of focusing on the traditional proximate cause question where the alleged overcharge is first (and thus surely) felt, the Court’s test turns on who happens to be in privity with whom.”[18] He added: “if the proximate cause line is no longer to be drawn at the first injured party, how far down the causal line can a plaintiff be and still recoup damages?”[19]

Finally, turning around the very “roadmap” analogy employed by Justice Kavanaugh, Justice Gorsuch warned that the majority’s “direct purchaser” test provides “a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so as to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement.”[20] Specifically, the retailer could amend its contracts to have consumer payments flow directly to app developers in the first instance, with the developer then required to remit the retailer its fee.[21]

Analysis.

There are a number of noteworthy aspects to the Pepper decision in addition to the fact that the two conservative Trump Supreme Court appointees wrote the majority and dissenting opinions, with Justice Kavanaugh siding with the four liberal Justices to form the majority.

Perhaps of most significance, Justice Kavanaugh concluded the majority decision with strong endorsements of private—actually consumer—enforcement of the antitrust laws, declaring, first, that the plaintiffs are seeking to hold retailers to account for engaging in unlawful anticompetitive conduct that harms consumers who purchase from those retailers, which Justice Kavanaugh stressed, “is why we have antitrust law.”[22] He then added that since the passage of the Sherman Act in 1890, “protecting consumers from monopoly prices has been the central concern of antitrust.”[23]

Also of interest, Justice Kavanaugh failed to refer for support to the Court’s decision in Associated General Contractors v. California State Council of Carpenters(“AGC”),[24] written six years after Illinois Brick. Relying in part on Illinois BrickAGC established the Court’s current view of five factors to be considered in determining antitrust standing, each of which was met by the Pepper plaintiffs.[25] AGC demonstrates that despite Justice Kavanaugh’s reference to Illinois Brick as a “bright-line” rule seven times in his opinion, Illinois Brick is not by itself the “bright-line” rule, but an important factor, in establishing antitrust standing.

Additionally, the Pepper decision is the second time that the Supreme Court has recognized the possibility that a single brand can constitute a separate product market in an after-market, the first time being its 1992 decision in Eastman-Kodak Co. v. Image Technical Services, Inc.[26] While not adopting that market definition, the Court recognized that the market had been defined by the plaintiffs as the after-market for the distribution of iOS apps purchased at Apple’s App store, as to which Apple had a 100% share. In fact, while Justice Kavanaugh improperly seemed to consider monopolistic supracompetitive prices to be a possible violation of Section 2 of the Sherman Act, he did comprehend that the plaintiffs had claimed that Apple had entered into monopolistic exclusive distributor arrangements with app developers, a recognized violation of the statute.[27]

It is also of interest that despite the requirement the Court established last year in the Amex decision that the competitive effects of conduct on both sides of  a two-sided platform must be separately evaluated in an antitrust case, the  fact that Apple’s App Store is a two-sided platform with app developers on one side and consumers on the other played no role in the decision, and was not even mentioned. The Court did recognize, however, that both developers and consumers could have filed damage claims.

Finally, the majority opinion noted that Illinois Brick did not address whether the direct-purchaser rule for damages also applied to claims for injunctive relief, so the issue would not be addressed in the case before it.[28] The dissent, on the other hand, declared that “it’s hard to make sense of the suggestion that Illinois Brick may not apply to claims for injunctive relief,” adding that the “normal” rule is that “a plaintiff who’s not proximately harmed by a defendant’s unlawful conduct has no cause of action to sue the defendant for any type of relief.[29] However, two of the AGC factors supporting standing may be present in indirect purchaser suits seeking injunctive relief: there is no potential for duplicative recovery or complex apportionment of damages, and more direct victims of the alleged conspiracy—usually existing customers or suppliers of the alleged wrongdoers, as in the Pepper case—may not be motivated to bring suit.

This article was published as part of Hausfeld’s Spring Competition Bulletin and in Lexology in May 2019.

Footnotes

[1] Apple Inc. v. Pepper, No. 17-204 (May 13, 2019). References will be to the Slip Opinion.

[2] 431 U.S. 720 (1977).

[3] Slip Op. at 3.

[4] In re Apple iPhone Antitrust Litig., 846 F. 3d 313, 323 (9th Cir. 2017).

[5] Apple Inc. v. Pepper, Slip Op. at 2.

[6] Slip Op. at 6.

[7] Id. at 8.

[8] Id. at 9.

[9] Id. at 10.

[10] Id. at 11.

[11] Id. at 12.

[12] Id. at 13.

[13] Id.

[14] Id. at 12-13. Strangely, Justice Kavanaugh relied on a treatise for this view rather than the Court’s prior decision in Blue Shield of Virginia v. McCready, 459 U.S. 465 (1982), which provided direct support.

[15] Slip. Op. Dissent at 4.

[16] Id. at 5.

[17] Id. at 1 (emphasis in original).

[18] Id. at 8.

[19] Id. at 11.

[20] Id. at 10.

[21] Id.

[22] Id. at 14.

[23] Id. (quoting 2A Areeda & Hovenkamp ¶345, at 179) (internal quotations omitted)

[24] 459 U.S. 519 (1983).

[25] The factors are as follows: (i) whether the alleged injury is the type that the antitrust statute was intended to forestall. Id. at 537; (ii) the directness or indirectness of the asserted injury (an Illinois Brick factor). Id. at 540; (iii) the extent to which the plaintiff’s asserted damages are speculative. Id. at 542; (iv) the potential for duplicative recovery or complex apportionment of damages (another Illinois Brick factor). Id. at 545; and (v) the existence of more direct victims of the alleged conspiracy. Id.

[26] 504 U.S. 451 (1992).

[27] See, e.g., State of Connecticut v. Mylan Labs, Inc., 2001 WL 765486 (D.D.C. 2001); In he Matter of Pool Corp., 2012 WL 765466 (D.D.C. 2012) (decision & consent order). See also Toys “R” Us v. FTC, 221 F.3d 928 (7th Cir. 2000) (distributor with market power).

[28] Apple, Inc. v. Pepper, Slip Op. at 5 n. 1.

[29] Slip. Op. Dissent at 4 n. 1.

*Irving Scher is senior counsel in the New York office.

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