Photo Credit: https://www.telegraph.co.uk/technology/2018/11/29/apple-removes-700-apps-chinese-app-store/.
By: O. Cobb Bostick
Executive Editor, American Journal of Trial Advocacy
On May 13, 2019, the United States Supreme Court, in a 5-4 decision, delivered a huge blow to the American multinational technology company, Apple, and changed the future of antitrust litigation. The case at issue was that of Apple, Inc. v. Pepper, in which newly appointed Justice Brett Kavanaugh delivered the opinion of the Court and was joined by the Court’s four more liberal Justices.[1] In the case, the plaintiffs contended “that Apple exercise[ed] monopoly power in the retail market for the sale of apps and . . . unlawfully used its monopoly power to force iPhone owners to pay Apple higher-than-competitive prices for apps.”[2]
Apple offers countless apps through its App Store ranging from games and entertainment to transportation and delivery food.[3] The basic function of the App Store is to provide a market for apps made by application developers to the consumers.[4] Application developers pay Apple $99 a year plus a 30% commission on all sales.[5] Apple says that the app developers set the price of their apps.[6] In general, these apps are the only ones available for iPhone users.[7] Thus, the plaintiffs argued that because of Apple’s policies, the developers raise the prices of their apps to account for Apple’s 30% commission, and with no other alternative for purchasing apps, the consumers are subjected to anticompetitive prices.[8]
Apple argued that the consumers lacked standing to sue under the Supreme Court’s precedent in Illinois Brick Co. v. Illinois.[9] There, Defendant-Illinois Brick Company manufactured concrete bricks and then sold those bricks to masonry contractors, who in turn submitted bids to general contractors to provide the bricks for larger construction projects.[10]The general contractors were awarded construction projects from the State of Illinois and used bricks manufactured by Illinois Brick Company.[11] The Court in Illinois Brick stated that this transaction resulted in the State of Illinois being “indirect purchasers” of the bricks because it “pass[ed] through two separate levels in the chain of distribution before reaching [the State].”[12] The State suspected an unlawful price-fixing conspiracy on the part of Illinois Brick Company, which it claimed led to the State paying a higher price for the bricks than it would have without the price-fixing.[13] The Court held that “direct purchasers” may sue antitrust violators but that “indirect purchasers” do not have standing to sue; thus, the State of Illinois, as an “indirect purchaser,” did not having standing to sue.[14]
Apple contended that just as the State of Illinois was an “indirect purchaser” in Illinois Brick, so too were the consumers in the case at hand.[15] Thus, the issue before the Court was whether the consumers had standing for this type of antitrust suit or, more specifically, whether the consumers should be considered “direct purchasers.”[16] Relying on the undisputed fact that the apps were directly purchased from Apple, the Court held that “the iPhone owners were direct purchasers who may sue Apple for alleged monopolization” in what the Court called a “straightforward conclusion.”[17] The Court stated that this conclusion was supported by 1) the text of the antitrust laws, and 2) the Court’s precedent.[18]
As for the antitrust laws, the Sherman Act effectively made monopolies illegal.[19] Furthermore, the Clayton Antitrust Act provided that any person injured by an antitrust violator may sue.[20] The Court stated that “consumers who purchase goods or services at higher-than-competitive prices from an allegedly monopolistic retailer” are covered under the “any person injured” language of the Clayton Act.[21]
In addition, the Court relied on the precedent established in Illinois Brick and reiterated in Kansas v. UtiliCorp United, Inc.[22] that “direct purchasers” or “immediate buyers” have standing to sue the alleged antitrust violators.[23] The Court stated that:
[t]here is no intermediary in the distribution chain between Apple and the consumer. The iPhone owners purchase apps directly from the retailer Apple, who is the alleged antitrust violator. The iPhone owners pay the alleged overcharge directly to Apple. The absence of an intermediary is dispositive. Under Illinois Brick, the iPhone owners are direct purchasers from Apple and are proper plaintiffs to maintain this antitrust suit.[24]
The majority seemed to think that this conclusion was pretty cut and dry, but Apple did not agree.
Apple’s main counterargument to the majority’s stance was that the precedent in Illinois Brick meant a plaintiff was only allowed to sue the party that set the retail price.[25] Thus, because Apple allows the application developers to set the price, the consumers would not be able to bring suit against Apple.[26] The Court rejected this argument, stating 1) that it contradicted the text of the antitrust laws and antitrust precedent, 2) that it was “not persuasive economically or legally,” and 3) that if Apple’s “who sets the price” theory were to be accepted, it would “furnish monopolistic retailers with a how-to guide for evasion of the antitrust laws.”[27]
With the Court holding that the consumers were indeed “direct purchasers,” the other arguments brought by Apple were quickly dispensed.[28] The Court’s decision was based purely on procedural issues in antitrust litigation, but it has opened the door for plaintiffs to proceed against Apple in the lower courts.
While the decision was a victory for the plaintiffs, they still have a long way to go for the case to succeed on its merits. There is no guarantee that they will win either, but they now have the chance to prove their allegations. Even though this was not ideal for Apple, it released a statement saying that “[w]e’re confident we will prevail when the facts are presented and that the App Store is not a monopoly by any metric.”[29]
The Court’s decision is likely to have broad implications on other tech companies throughout Silicon Valley. Companies like Amazon, Google, and Facebook who operate online marketplaces will no doubt be faced with lawsuits in the future.[30] John Roberti, of the antitrust lawyers at Allen & Overy LLP, suggested that all tech companies should be asking themselves: “Is there anything we are doing that is excluding competitors?”[31] We are likely to see how this question unfolds with Apple as the present case moves forward.
[1] Apple, Inc. v. Pepper, 139 S. Ct. 1514 (2019).
[2] Id. at 1520.
[3] Id. at 1518.
[4] Id. at 1519.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.; Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
[10] Illinois Brick Co. v. Illinois, 431 U.S. 720, 726 (1977).
[11] Id.
[12] Id.
[13] Id. at 727.
[14] Id. at 728.
[15] Apple, Inc. v. Pepper, 139 S. Ct. 1514, 1519-20 (2019).
[16] Id. at 1520.
[17] Id.
[18] Id.
[19] Id.; 15 U.S.C.A. § 2 (West 2019).
[20] Id.; 15 U.S.C.A. § 15 (West 2019).
[21] Id.
[22] 497 U.S. 199 (1990).
[23] Apple, Inc., 139 S. Ct. at 1521.
[24] Id.
[25] Id.
[26] Id. at 1521-22.
[27] Id. at 1522-24.
[28] Id. at 1524 (noting that “[t]he Illinois Brick Court listed three reasons for barring indirect-purchaser suits: (1) facilitating more effective enforcement of antitrust laws; (2) avoiding complicated damages calculations; and (3) eliminating duplicative damages against antitrust defendants . . . .” and concluding that “the three Illinois Brick rationales . . . cut strongly in the plaintiffs’ favor here, not Apple’s”).
[29] Kif Leswing, Apple Failed to Close Off a Big Antitrust Threat, but It Probably Won’t Feel the Harm for Years, CNBC (last update May 13, 2019, 4:57 PM), https://www.cnbc.com/2019/05/13/apple-v-pepper-supreme-court-loss-little-harm-now-long-term-threat.html.
[30] Tony Romm & Reed Albergotti, Analysis: What Apple’s Supreme Court Loss Could Mean for Silicon Valley, Daily Herald (May 18, 2019, 6:09 AM), https://www.dailyherald.com/business/20190518/analysis-what-apples-supreme-court-loss-could-mean-for-silicon-valley.
[31] Tucker Higgins, Here’s How the Supreme Court’s Apple App Store Decision Could Affect Companies Like Amazon and Google, CNBC (last updated May 13, 2019, 4:29 PM), https://www.cnbc.com/2019/05/13/why-amazon-and-google-will-care-about-the-scotus-app-store-decision.html.
American Journal of Trial Advocacy 