November 12, 2019 Articles

Apple v. Pepper—A Straightforward Decision Raising Complicated Issues

The decision removes an important barrier to redress through the courts.

By Matthew Hans and Phillip Zeeck

Since the Supreme Court’s decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), only “direct purchasers,” those who purchase goods directly from alleged monopolizers, have standing to bring an antitrust claim. For proximate cause reasons, indirect purchasers could not sue antitrust violators who were more than one step away in the chain of distribution. The distinction between direct and indirect purchasers is clear when the product is a physical commodity, whose movement from manufacturer to distributors to retailers to consumers is easily traced. But that distinction is less sharp when the product is not physically distributed, but rather is just downloaded code from an online platform.

In Apple Inc. v. Pepper, 139 S. Ct. 1514 (2019), the Supreme Court was asked to update Illinois Brick to be compatible with the e-commerce of smartphone applications. But the five-justice majority opinion, written by Justice Kavanagh, declined to make any changes to the bright-line direct purchaser rule and applied it in a straightforward fashion. The dissenting opinion, written by Justice Gorsuch, however, questioned whether the rule’s straightforward application complicated the calculation of damages, and hinted that the direct purchaser rule may need to be reconsidered.

Background

Apple requires its iPhone customers to buy all apps through its own App Store. Most of the apps sold there, though, are developed by third-party developers, not Apple. Customers pay Apple directly for the apps. Apple allows developers to set their own apps’ prices, but it charges developers a $99 annual fee and a 30 percent commission on every app sale.

The plaintiffs sued Apple under the Clayton Act, claiming Apple monopolized the retail market for the sale of apps and used its monopolistic power to charge customers higher than competitive prices. A federal district court dismissed the plaintiffs’ claims, but the Ninth Circuit reversed, allowing the suit to proceed.

Apple appealed to the Supreme Court, arguing that Illinois Brick barred the plaintiffs’ claims. Leaning heavily on its policy allowing software developers to price their own apps, Apple tried to position itself as a mere conduit between developers and customers. Apple argued its direct customers were the app developers, not iPhone users, and any consumer-oriented suit was barred under Illinois Brick.

The Supreme Court Says No

But the Supreme Court rejected that view. Relying on the undisputed fact that iPhone owners bought the apps directly from Apple, the “straightforward conclusion” was that Illinois Brick permitted the plaintiffs to pursue their antitrust claims. The Court noted that section 4 of the Clayton Act permits “any person” who has been “injured” by an antitrust violator to sue. The Court cited Illinois Brick and other cases that “consistently stated that the immediate buyers from the alleged antitrust violators” are proper plaintiffs. Plaintiffs were allowed “to hold retailers to account if the retailers engage in anticompetitive conduct that harms consumers who purchase from those retailers,” the Court wrote. “That is why we have antitrust law.”

To reinforce its point, the Court also outlined the facts of Illinois Brick. In that case, the defendant brick company manufactured concrete blocks and distributed them to masonry contractors. The masonry contractors sold masonry structures to general contractors, who in turn sold their services for larger construction projects to the plaintiff end user of the building. The plaintiff sued the brick company for conspiring to fix the prices of concrete blocks, claiming that the brick company’s price-fixing overcharge flowed through all the intermediaries to the plaintiff. The Court observed that, unlike the plaintiff in Illinois Brick, iPhone owners are not “consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain.” The plaintiffs pay the alleged overcharge directly to Apple, and the “absence of an intermediary is dispositive.”

Justice Gorsuch, writing for four dissenting justices, accused the majority of exalting “form over substance.” The direct purchaser requirement is a “traditional proximate cause question [about] where the alleged overcharge is first (and thus surely) felt,” not a concern over who contracted with whom.

Justice Gorsuch also identified problems the majority’s analysis might create around causation, damages, and how to apportion them among defendants. The majority conceded that additional expert testimony on these issues “will often be necessary.” But, it pointed out, “that is hardly unusual in antitrust cases.”

Justice Gorsuch viewed the problem more gravely. “As with most any rule of proximate cause, reasonable people can debate whether Illinois Brick drew exactly the right line in cutting off claims where it did,” he wrote. “But the line it drew is intelligible, principled, administrable, and far more principled than the Court’s artificial rule of contractual privity.” Courts will be left to sort out these issues case by case.

Mixed Conclusions

Regulators and analysts are still struggling to understand Apple v. Pepper’s legal and commercial impact. In a statement issued after the Supreme Court published its opinion, Apple insisted that “the App Store is not a monopoly by any metric,” and it promised to litigate the case to trial. But Apple’s incentives to settle will only increase, which may mean refunds for customers or looser controls on developers and competing markets.

Even these reforms may not placate a growing number of emboldened platform users ready to challenge concentrating market power among technology companies through litigation. Apple v. Pepper removes an important barrier to redress through the courts. Writing in the Atlantic Monthly, antitrust professor Eric Posner called the case a sign that, even if “the Supreme Court seems unlikely to lead” an anti-monopoly backlash against Big Tech, “then the Court may, at least, not perform its usual function of standing in the way.”

Other observers see Apple v. Pepper as auguring bigger changes to come. In a speech to a business lobbying group last month, Deputy Assistant Attorney General Michael Murray said the case affirmed Illinois Brick in name, “but the foundation has been laid for a subsequent case overturning” it. Indeed, a bipartisan group of 31 state attorneys general filed an amicus brief in Apple v. Pepper asking the Supreme Court to reverse Illinois Brick entirely. They argued that Illinois Brick “adopted the legal fiction that illegal overcharges are never passed on to end users by intermediary parties who bought from an antitrust violator.” These and other policy concerns and predictions, they concluded, “have been undermined by subsequent experience and events,” requiring a new model for antitrust analysis.

The Supreme Court was unwilling to go that far, and Illinois Brick stands for now. So does the App Store’s pricing regime. But Apple v. Pepper suggests that both face uncertain futures.

Matthew Hans is a shareholder and vice-chair of the Antitrust Group at Polsinelli PC.  He provides antitrust guidance to health care providers in transactions, in investigations, and in litigation. Phillip Zeeck is an associate at Polsinelli PC. He represents health care, finance, and telecommunications clients in resolving commercial and antitrust disputes.  

Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).