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INSIGHT: SCOTUS Apple App Decision Opens Door to Consumer Antitrust Actions

June 7, 2019, 8:00 AM

The Supreme Court’s May 13 decision against Apple concerning its app store could bolster consumers’ ability to bring antitrust actions against dominant digital platforms, thus affecting how large technology companies operate in the marketplace.

The court’s highly anticipated ruling in Apple v. Pepper permitted a group of iPhone users to proceed with their antitrust claims against Apple.

The case generated intense speculation among the antitrust bar because many suspected the Supreme Court might disrupt the framework that has governed private antitrust litigation since 1977 by overturning its decision Illinois Brick Co. v. Illinois. Ultimately, the Supreme Court left Illinois Brick intact, but Pepper remains significant.

Users Allege Monopoly

In Pepper, iPhone users alleged that Apple used its monopoly over iPhone app sales to charge consumers inflated prices for apps purchased on the App Store. Third-party developers create iPhone apps, which they then sell to iPhone users through the App Store. Among other alleged anticompetitive practices, Apple takes a 30% cut of every app sold on the App Store and does not permit apps to be sold on any other platform. The iPhone users alleged that Apple’s 30% commission forced developers to raise app prices above competitive levels.

In 2012, Apple moved to dismiss plaintiffs’ claims, arguing that iPhone users lacked standing under Illinois Brick because they did not purchase apps directly from Apple. Illinois Brick bars so-called “indirect purchasers” from suing for antitrust damages under federal law. According to Apple, iPhone users are indirect purchasers because developers (not Apple) set app prices and developers (not consumers) pay Apple’s commission. The district court agreed and dismissed plaintiffs’ claims. The Ninth Circuit reversed.

The Supreme Court affirmed the Ninth Circuit. The majority held it was “undisputed that the iPhone owners bought the apps directly from Apple.”

Unlike the facts of Illinois Brick and other similar cases, the majority noted there is no intermediary between Apple and iPhone users that could make it difficult to track damages passed through multiple levels of a distribution chain. “That straightforward conclusion,” the court held, is supported by Section 2 of the Sherman Act, Section 4 of the Clayton Act, and antitrust precedent.

The dissent, led by Justice Neil Gorsuch, disagreed, viewing iPhone users as indirect purchasers. Gorsuch explained that iPhone users are only harmed if the developers pass Apple’s commission to customers by raising app prices. Calculating damages in this context, Justice Gorsuch wrote, is exactly the type of complicated pass-on analysis that Illinois Brick sought to prevent.

Notably absent from the majority’s opinion is any discussion of whether Illinois Brick should be overturned. This is not surprising. The question of whether to overturn Illinois Brick was not before the court, and the plaintiffs carefully avoided making such arguments.

Different Market Structures

Moreover, it is not clear whether Pepper was ever an appropriate vehicle for overturning Illinois Brick because the two cases involve different market structures. The App Store’s multi-sided digital platform bears little resemblance to the physical distribution chain in Illinois Brick, where manufacturers sold concrete blocks to contractors, who then sold them to consumers.

As Apple explained, it “structured the App Store as an agency based, two-sided marketplace for connecting developers and consumers[.]” This type of market, where third-party developers sell their apps through an entirely digital store, and Apple takes a commission along the way, did not exist—and would have been difficult to imagine—at the time Illinois Brick was decided.

Pepper’s significance therefore lies not in the Supreme Court’s preservation of Illinois Brick, but rather in how the Court applied traditional conceptions of “direct” and “indirect” standing to a non-traditional but increasingly prevalent type of digital marketplace. If Apple had prevailed, consumers might have been left without redress not just against Apple, but against many other dominant online platforms with a similar business model: connecting consumers to third-party suppliers.

Amazon, for example, connects consumers to sellers of products; Ticketmaster connects concert goers with ticket sellers; Seamless connects diners with restaurants; Uber connects riders to drivers. Because suppliers often have little incentive to sue the dominant platforms on which they rely, if consumers lacked standing to sue, there was a real risk that platforms could insulate themselves from antitrust liability.

The majority recognized this risk. Justice Brett Kavanaugh wrote, “Leaving consumers at the mercy of monopolistic retailers simply because upstream suppliers could also sue the retailers makes little sense and would directly contradict the longstanding goal of effective private enforcement and consumer protection in antitrust cases.”

Pepper thus bolsters consumers’ ability to hold large tech platforms like Apple accountable for alleged antitrust violations and could lead to an uptick in antitrust suits by consumers.

Ultimate Impact Undetermined

But Pepper’s ultimate impact remains to be seen. Pepper only concerned consumers’ standing to sue and did not address the merits of their claims. And Apple and other dominant platforms could still potentially restructure their sales models to try to deprive consumers of direct purchaser standing.

The dissent warned of this, writing “To evade the Court’s test, all Apple must do is amend its contracts. Instead of collecting payments for apps sold in the App Store and remitting the balance (less its commission) to developers, Apple can simply specify that consumers’ payments will flow the other way: directly to the developers, who will then remit commissions to Apple.”

Thus, while many questions remain, including a decision on the merits, Pepper was an important early win for consumers in what is likely become a much larger antitrust fight between consumers and the dominant online platforms transforming the American economy.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Hollis Salzman is co-chair of Robins Kaplan LLP’s Antitrust and Trade Regulation Group and managing partner of the firm’s New York office.

Noelle Feigenbaum is an associate in Robins Kaplan LLP’s Antitrust and Trade Regulation Group, where her practice focuses on complex antitrust litigation on behalf of consumers and individual businesses.