May 28, 2019 Practice Points

Supreme Court Rejects “Who Sets the Price” Alternative to Illinois Brick

The Court holds app purchasers can pursue antitrust damages claims against Apple.

By Adam Polk

In Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), the Supreme Court held that only those who purchase goods or services directly from an alleged violator of the antitrust laws can maintain a Clayton Act claim for damages. Ever since, this “direct purchaser” rule has prevailed: Those who purchase directly from monopolists, or firms engaged in price fixing or other antitrust violations, can recover damages under the Clayton Act; those who purchase indirectly, from an intermediary in the distribution chain, can obtain injunctive relief under the Clayton Act and damages under state law only. In Apple Inc. v. Pepper, a 5–4 decision delivered by Justice Kavanaugh, the Supreme Court reaffirmed Illinois Brick and held that people who buy apps from the App Store can seek Clayton Act damages as direct purchasers, notwithstanding Apple’s argument that the developers—not Apple—set the app prices.

Apple v. Pepper arises from four iPhone owners’ claims that Apple wrongfully monopolized the aftermarket for iPhone apps. According to the plaintiffs, Apple requires that iPhone owners purchase apps only from the App Store; Apple keeps 30 percent of the sale price of any app as a commission; and under competitive market conditions, with the same apps available from other sources, Apple would need to lower that commission. The consumers allege they would have paid less for their apps absent Apple’s conduct. Apple moved to dismiss, invoking the Illinois Brick direct-purchaser rule, and arguing that the consumers were indirect purchasers because the app developers, not Apple, set the apps’ prices. The district court accepted Apple’s argument and dismissed the complaint. The Ninth Circuit reversed, finding that the consumers were direct purchasers because—regardless of who set the price—they purchased the apps directly from Apple, the alleged monopolist.

The Supreme Court affirmed, reasoning that this result is compelled both by: (1) the text of Section 4 of the Clayton Act, which broadly permits “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws” to sue for “threefold the damages by him sustained”; and (2) precedent, which has consistently upheld the right of direct purchasers to maintain a suit for damages against alleged antitrust violators. The Court held that because the consumers bought directly from Apple—the alleged monopolist—they are entitled to seek damages under Illinois Brick.

Apple had advocated, as an alternative to Illinois Brick, that in retailer cases, where the defendant seller buys from a supplier or developer, the purchase must be from the person or entity that sets the price to be direct. But the Court rejected this argument as contrary to the text of the Clayton Act and the Court’s prior precedent (summarized above). The Court also concluded that a “who sets the price” approach to antitrust standing would make little sense economically. As an example, the Court noted that under a markup pricing model—where the seller pays $6 for a product from a supplier and marks it up $4, selling to the consumer at $10—the seller would have antitrust exposure. But with a functionally equivalent commission model, as in Apple, the seller would not. The Court reasoned that “Apple’s line drawing does not make a lot of sense, other than as a way to gerrymander Apple out of this and similar lawsuits.” The Court further expressed concern that a “who sets the price” theory to antitrust 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.”

A dissent by Justice Gorsuch, joined by three other Justices, argued that it was the opinion of the Court that succumbed to legal formalism, in the form of a strict antitrust “privity” rule. The dissent argues that, by emphasizing direct contractual privity instead of proximate causation, the majority opinion elevates form over substance in a manner that will ultimately lead to the type of complex pass-on damages theories Illinois Brick was intended to prevent. As the dissent points out, it was the app developers who chose to pass on the alleged overcharge from Apple’s commissions to consumers. The dissent maintains that antitrust analysis should not adhere to the rigid formalism associated with contractual privity, but should instead look to “where the alleged overcharge is first (and thus surely felt).” The dissent also predicts that the majority decision will enable Apple to evade liability by amending its contracts to provide for direct payment to developers, who will then remit payments directly to Apple.

The Supreme Court’s decision in Pepper to reject a “who sets the price” approach in favor of Illinois Brick is notable for another reason as well. Thirty states and the District of Columbia filed amicus briefs supporting the plaintiffs and arguing that Illinois Brick should be overruled to allow indirect purchasers to sue for Clayton Act damages. The Court did not reach that issue: Because it ruled for the Pepper plaintiffs, there was “no occasion to consider that argument for overruling Illinois Brick.”

Adam E. Polk is a partner at Girard Sharp LLP in San Francisco, California.


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