Skip to main content

To Be or Not to Be: That is the Question for Illinois Brick in Apple v. Pepper

Related Practice Areas: Antitrust / Competition
Authors: By Michaela Spero*

On June 18, 2018, the U.S. Supreme Court accepted Apple’s petition for certiorari in Apple Inc. v. Pepper,[1] appealing the Ninth Circuit’s decision that Apple is, by contract, the exclusive distributor of iPhone applications (“apps”) through the online Apple App Store platform, from which consumers purchase app distribution services directly and therefore have standing to challenge Apple’s mandatory 30% commission on all iPhone apps.[2] The case presents a unique opportunity for the Supreme Court to revisit its holding in Illinois Brick[3] prohibiting antitrust claims by indirect purchasers and clarify the specific application of the doctrine to distribution markets—or, as the Department of Justice hinted in its amicus brief, issue a historic decision overturning the doctrine.

The Factual Background

In In re Apple iPhone Antitrust Litigation, the plaintiffs sought to recover damages on behalf of a class of consumers that had purchased an iPhone application (“app”) from Apple for use on iPhones’ iOS operating system.[4] In their second amended complaint, Plaintiffs alleged that Apple implemented a closed operating system that allowed it to force all apps for use on iPhones to be sold and purchased through the Apple App Store.[5] Apple requires developers wishing to sell their apps for use on iPhones to agree to distribute the apps exclusively through Apple over its App Store, to pay Apple an annual fee and to allow Apple to take a 30% commission.[6] A consumer purchasing an iPhone app from Apple is billed by Apple and pays Apple directly. Apple then deducts its 30% commission and remits the balance to the app developer.[7] The plaintiffs alleged that, but for Apple’s monopoly in the distribution of iPhone apps, other distributors could compete with Apple at a smaller fee, or developers could distribute their apps directly to the consumer at a lower price.[8]

The Lower Court Decisions

Apple moved to dismiss Plaintiffs’ Second Amended Complaint on the ground that, under Illinois Brick, Plaintiffs are indirect purchasers without standing to bring a Sherman Act suit, arguing that the 30% fee is a distribution cost that Apple charges to the app developers in the first instance, which is thereafter passed on to consumers.[9] In a 2013 order, the District Court for the Northern District of California granted Apple’s motion to dismiss, endorsing Apple’s indirect purchaser argument.[10]

On appeal, the Ninth Circuit rejected Apple’s argument that developers are the only direct purchasers of Apple’s distribution services and reversed the District Court, holding that in its sales to consumers, “Apple is a distributor of the iPhone apps”—a separate market from iPhone app development.[11] The Ninth Circuit held, therefore, that consumers have direct purchaser standing to challenge Apple’s alleged abuse of its monopoly control over the iPhone app distribution market by prohibiting app developers from distributing their apps except through the App Store.[12]

The Eighth Circuit’s Contrary Ticketmaster Decision

The Ninth Circuit’s Apple decision diverges from the Eighth Circuit’s 1998 decision in Campos v. Ticketmaster,[13] which considered a similar market—the distribution of concert tickets through online platform Ticketmaster. In an almost identical factual scenario, the plaintiffs in Ticketmaster alleged that Ticketmaster abused its contracts with concert venues, which granted it nearly exclusive rights to distribute large-scale concert tickets, to “extract from the plaintiffs supracompetitive fees for ticket distribution services.”[14] A majority of the Eighth Circuit affirmed the District Court for the Eastern District of Missouri’s decision granting Ticketmaster’s motion for dismissal of the action on the ground that the plaintiffs lack direct purchaser standing under Illinois Brick.[15] In so holding, the Eighth Circuit panel majority reasoned that an “indirect purchaser is one who bears some portion of a monopoly overcharge only by virtue of an antecedent transaction between the monopolist and another, independent purchaser.”[16] In a dissent, however, Judge Arnold explained that the majority’s analysis diverged from the Supreme Court’s holding in Illinois Brick, which requires that “the antecedent transaction must have been one in a direct vertical chain of transactions and it must have resulted in the ‘passing on’ of monopoly costs from the direct purchaser to the indirect purchaser.”[17]

In Apple, the Ninth Circuit rejected the Eighth Circuit majority’s holding, agreeing instead with Judge Arnold that, “‘the monopoly product at issue is ticket [or App] distribution services, not tickets [or Apps],’” and therefore, “the distributor who ‘supplies the product directly to’ plaintiffs, rather than the producer of the product, is the appropriate defendant in an antitrust suit.”[18]

Apple’s Certiorari Petition

Highlighting this circuit split, Apple filed a petition for certiorari which, as noted above, the Supreme Court has accepted.[19] The question presented to the Supreme Court is whether the consumer plaintiffs in Apple have direct purchaser standing to seek damages arising from Apple’s alleged monopolization of the distribution of iPhone apps. Apple contends that the Eighth Circuit correctly ruled in Ticketmaster that consumers are indirect purchasers of distribution services due to the presence of an antecedent contract—which the Eighth Circuit deemed a “transaction”—between the concert venue and the distribution platform.[20] Thus, Apple argues, as in Ticketmaster, app developers are the only direct purchasers of Apple’s distribution services and, therefore, the only potential plaintiffs. According to Apple, the consumer plaintiffs only purchase the app—not the distribution service—and Apple merely acts as an agent for the app developer in the sale of the app to consumers.[21]

But Apple goes on to explain that its online App Store is a “two-sided marketplace for connecting developers and consumers,”[22] and points to several analogous online platforms providing intermediary services—including Ticketmaster, eBay and Google’s Play marketplace.[23] As the Supreme Court recently explained in Ohio v. American Express Co., two-sided platforms like the App Store offer its services “to two different groups who both depend on the platform to intermediate between them.”[24] Thus, while Apple may act as an agent of the developer in the sale of the app, the 30% commission is charged in relation to the connection of the developer and the consumer through the App Store—a separate distribution service. And while, unlike American Express, the distribution service Apple offers is not an instantaneous transaction, the two-sided nature of the platform produces the possibility there may be two different groups of direct purchasers. This is exactly the possibility the Ninth Circuit alluded to in explaining that “whether app developers are direct purchasers of distribution services from Apple in the sense of Illinois Brick makes no difference to our analysis in the case now before us.”[25]

Yet Apple argues that the Ninth Circuit’s acknowledgement that there may be two categories of direct purchasers implicates the exact allocation concerns that the Illinois Brick doctrine is designed to avoid, because it would be impossible to determine how much of the 30% commission is paid by app developers versus consumers.[26] Of course, if Apple charged a flat fee to consumers before remitting the app price to the developer, there would be no question that consumers have standing to challenge Apple’s ability to charge this service fee as a result of its monopoly over iPhone app distribution services.[27] As the Ninth Circuit explained, however, “the distinction between a markup and a commission is immaterial,” and consumers do not lose direct purchaser standing simply because Apple has implemented a percentage based fee for its distribution services.[28]

Analysis

Significantly, the Supreme Court held in Blue Shield of Virginia v. McCready that a consumer plaintiff has direct purchaser standing when “the injury she suffered was inextricably intertwined” with the alleged anticompetitive conduct at issue.[29] In Apple, the 30% commission the consumer pays to Apple would seem to be “inextricably intertwined” with Apple’s monopoly over the market for the distribution of apps for the iOS operating system. Of interest, the app developers Apple claims are the direct victims of its exclusivity agreements have not brought claims against Apple challenging this exclusivity.[30] Perhaps this is because, as Apple asserts, the developers “benefit enormously from Apple’s iPhone ecosystem” and therefore prefer to sell through the App Store instead of selling through potentially cheaper distribution platforms or directly—allowing the developer to pocket larger profits.[31] Or perhaps it is because the developers can readily add Apple’s full 30% fee to the price of the app charged to consumers, and therefore suffer no damages.

In sum, although the two-sided nature of the iPhone app distribution market may raise questions of damages allocation between two possible sets of direct purchasers, these questions arise only after the determination of whether the two categories of potential plaintiffs have direct purchaser standing. Thus, any allocation of damages between the two purchaser groups would be entirely different from the allocation arising from the passing on of damages from a direct purchaser to an indirect purchaser that Illinois Brick and its progeny address.[32]

It is also possible that the rise of distribution platforms like the App Store and Ticketmaster counsels for reconsideration of the allocation challenges the Supreme Court considered fundamental in ruling that only direct purchasers may enforce the antitrust laws through damages claims.[33] As the U.S. Department of Justice (“DOJ”) noted in its amicus brief in support of Apple’s petition for certiorari, “in the decades since Illinois Brick was decided, more than two-thirds of the States have allowed the use of pass-on analysis to apportion damages under their own antitrust laws, which otherwise generally parallel federal law.”[34] In Apple v. Pepper, therefore, the Supreme Court may clarify the application of Illinois Brick to distribution markets in which there are potentially multiple direct purchasers,[35] or it may revisit the necessity of the direct purchaser doctrine and—as urged by the DOJ—determine that “based on the courts’ experience with state-law indirect-purchaser claims, [] the evidentiary complexities associated with pass-on analysis are not as great as this Court believed them to be when it decided Hanover Shoe and Illinois Brick.”[36]

Footnotes

[1] Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018).

[2] In re Apple Iphone Antitrust Litigation, 846 F.3d 313 (9th Cir. 2017) (“Apple”).

[3] Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).

[4] 2013 WL 6253147, at *1 (N.D. Cal. Dec. 2, 2013).

[5] Id.

[6] Id. at *2.

[7] Id.

[8] Id. at *1.

[9] Id. at *5.

[10] Id. at *6.

[11] Apple, 846 F.3d at 324.

[12] Id.

[13] 140 F.3d 1166 (8th Cir. 1998).

[14] Id. at 1168-69.

[15] Id. at 1169.

[16] Id.

[17] Id. at 1174 (M. Arnold, J., dissenting).

[18] 846 F.3d at 323 (quoting 140 F.3d at 1175 (M. Arnold, J., dissenting)).

[19] See supra n.1.

[20] Brief of Petitioner at 38-39, Apple, Inc. v. Pepper, Case No. 17-204 (Aug. 10, 2018) (“Opening Brief”).

[21] Id. at 7.

[22] Id. at 7-8.

[23] Aside from Ticketmaster, many of these intermediaries also compete with other online platforms, brick-and-mortar retail, as well as direct sales and resale—none of which are options for consumer purchasers of iPhone apps, which are exclusively available through Apple’s online App Store platform. The European Commission recently fined Google more than $5 billion for bundling certain apps with its operating system—an abuse of dominant position that commentators have argued counsels for fining Apple for abusing its monopoly over the iOS operating system. See, e.g., Leonid Bershidsky, Apple Deserves an EU Fine, Too, Bloomberg, June 19, 2018, https://www.bloomberg.com/view/articles/2018-07-19/eu-should-fine-apple-for-same-antitrust-violations-as-google.

[24] 138 S. Ct. 2274, 2280 (2018).

[25] Apple, 846 F.3d at 324.

[26] Opening Brief at 6.

[27] Id. at 14 (“Apple filed a renewed motion to dismiss, based largely on . . . Respondents’ failure to allege that Apple adds a fee—any fee—to the price set by developers for their apps.”)

[28] Apple, 846 F.3d at 324.

[29] 457 U.S. 465, 484 (1982).

[30] Reply Brief of Petitioner at 9 n.2, Apple, Inc. v. Pepper (Sept. 19, 2017) (“[A]pp developers benefit enormously from Apple’s iPhone ecosystem, which may explain why no developer has brought a claim like this one.”).

[31] Id.

[32] Apple, 846 F.3d at 320-21 (“‘[T]he overcharged direct purchaser, and not others in the chain of manufacture or distribution,’ has standing to sue.” (quoting Illinois Brick, 431 U.S. 720, 729 (1977)).

[33] Brief for the United States as Amicus Curiae at 8, Apple, Inc. v. Pepper, Case No. 17-204 (May 2018) (“DOJ Amicus”) (explaining that “the Court believed that establishing the extent to which a plaintiff had passed on the defendant’s overcharge would entail ‘insurmountable’ problems of proof” (quoting Hanover Shoe, 392 U.S. at 493)).

[34] Id. at 12.

[35] Should the Supreme Court affirm the Ninth Circuit’s decision holding that Apple provides distribution services directly to consumers, the case will return to the District Court for a Rule of Reason analysis of the plaintiffs’ claims. In step two of this analysis, Apple may raise procompetitive justifications for its monopoly over app distribution, including quality control, to which the plaintiffs would likely respond by arguing that there are less restrictive alternatives that would allow Apple to continue to review and approve all iPhone apps without monopolizing the distribution market.

[36] DOJ Amicus at 13.

*Michaela Spero is an associate in the Washington, D.C. office.