Antitrust Litigation & Investigations

Supreme Court Greenlights iPhone App Antitrust Case by ‘Direct Purchasers’

Majority says Apple's theory would be a roadmap for aspiring monopolies.

The Supreme Court held today that iPhone users are “direct purchasers” of apps from Apple’s wildly popular multi-billion-dollar App Store and have standing to sue, despite Apple’s arguments to the contrary. In Apple v. Pepper, the court held in a 5-4 decision that the users meet the definition of “direct purchasers” as required by Supreme Court precedent (Apple Inc. v. Pepper, et al., Sup. Ct., No 17-204).

Apple’s store is the only legal place iPhone users can purchase iPhone apps, most of which are created by independent contractors. These developers pay Apple a $99 annual membership fee. The developers set their own prices (provided they end in $.99). Apple gets a 30% commission on initial sales and 15% on renewals. The plaintiffs, four iPhone owners, say the company has monopolized the app aftermarket and is using that power to the detriment of consumers.

Apple argued that the iPhone owners are not direct purchasers therefore they lack standing to sue, citing Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). A District Court agreed with Apple, but the Ninth Circuit did not, holding that the 42-year-old Illinois Brick decision means that a consumer may not sue an alleged monopolist “who is two or more steps removed from the consumer in a vertical distribution chain.” Since the iPhone users bought from Apple’s App Store directly, they have the right to pursue antitrust claims, the appellate panel held.

The relevant statutes in the case are the Sherman Act, Section 2, barring monopolies, and Clayton Act, Section 4, which says “any person who shall be injured in his business or property by reason of anything forbidden” in the antitrust laws may sue and recover triple damages, costs and attorney fees.

Writing the majority opinion, Associate Justice Brett M. Kavanaugh, said the law “readily covers consumers who purchase goods or services at higher-than-competitive prices from an allegedly monopolistic retailer.”

In addition to the statutes, legal precedent also favors iPhone users, Justice Kavanaugh wrote. Applying Section 4 of the Clayton Act “we have consistently stated that ‘the immediate buyers from the alleged antitrust violators’ may maintain a suit against the antitrust violators. Kansas v. UtiliCorp United Inc., 497 U. S. 199, 207 (1990); see also Illinois Brick, 431 U.S., at 745–746. At the same time, incorporating principles of proximate cause into Section 4, we have ruled that indirect purchasers who are two or more steps removed from the violator in a distribution chain may not sue. Our decision in Illinois Brick established a bright-line rule that authorizes suits by direct purchasers but bars suits by indirect purchasers. Id., at 746.1.”

Apple argued that consumers may only sue the party which sets the retail price, and since the developers set the price, they can’t sue Apple.

No way, Justice Kavanaugh concluded. “First, Illinois Brick established a bright-line rule where direct purchasers such as the consumers here may sue antitrust violators from whom they purchased a good or service. When there is no intermediary between the purchaser and the antitrust violator, the purchaser may sue.”

Justice Kavanaugh said Apple would have the court rewrite Illinois Brick and “gut the longstanding bright-line rule.” He said that if there is any ambiguity about whether a direct purchaser can sue, the court should resolve the ambiguity “in the direction of the statutory text.”

Statutes and precedent aside, the justice wrote, Apple’s argument is not persuasive economically or legally. “Apple’s effort to transform Illinois Brick from a direct-purchaser rule to a ‘who sets the price’ rule would draw an arbitrary and unprincipled line among retailers based on retailers’ financial arrangements with their manufacturers or suppliers.”

He went on to say Apple’s theory “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.”

Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotamayor and Elena Kagan joined Associate Justice Kavanaugh in the majority opinion.

Associate Justice Neil M. Gorsuch, joined by Chief Justice Roberts, and Associate Justices Clarence Thomas, and Samuel A. Alito, dissented, saying the majority has misinterpreted Illinois Brick.

In that case, Justice Gorsuch wrote, the court held that an antitrust plaintiff may not sue a defendant for overcharging someone who may or may not have passed some or all overcharges: "Illinois Brick held that these convoluted ‘pass on’ theories of damages violate traditional principles of proximate causation and that the right plaintiff to bring suit is the one on whom the overcharge immediately and surely fell. Yet today the Court lets a pass-on case proceed. It does so by recasting Illinois Brick as a rule forbidding only suits where the plaintiff does not contract directly with the defendant. This replaces a rule of proximate cause and economic reality with an easily manipulated and formalistic rule of contractual privity. That’s not how antitrust law is supposed to work, and it’s an uncharitable way of treating a precedent which— whatever its flaws — is far more sensible than the rule the Court installs in its place."

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