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The Apple Logo May Have Another Bite Out of It Soon

May 15, 2019 | Daniel J. Donnellon

On May 13, 2019, the Supreme Court of the United States issued a potentially game-changing decision for antitrust law that allows claims against Apple, Inc. to proceed for alleged monopolization of the apps market. Apple Inc. v. Pepper, 587 U.S. __ (2019). Justice Brett Kavanaugh sided with the four “liberal justices,” Ginsburg, Breyer, Sotomayor, and Kagan, and authored the opinion.

The question presented was whether Apple was abusing monopoly powers by charging inflated prices for apps because consumers may only lawfully purchase such apps through the App Store on a consumer’s iPhone. Apple claimed immunity from claims under the Sherman Act, which bars anti-competitive activity. Under Supreme Court authority established in 1977 (Illinois Brick v. Illinois, 431 U.S. 720), Apple asserted that Plaintiffs were not “direct purchasers;” rather, because the apps were developed by others, who set the prices, Apple was only an intermediary. Apple charges independent developers a $99 annual membership fee, allows them to set the retail price of the apps, and charges them a 30% commission on every app sale. The Plaintiffs, four iPhone owners who purchased apps for their phones, claimed Apple artificially inflated the prices through this scheme and the apps could be cheaper if available through another competitive source.

The Supreme Court has consistently held that “the immediate buyers from the alleged antitrust violators” may maintain a suit against the violator. Kansas v. Utilicorp United, Inc. 497 U.S. 199, 207 (1990). But, the Court ruled in Illinois Brick that indirect purchasers who are two or more steps removed from the violator in the distribution chain may not sue. In this 5-4 decision, the Court found that these Plaintiffs “are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain.” Syll. (a). The absence of an intermediary between Apple and the consumers rendered the Plaintiffs “direct purchasers.”

Apple argued that the U.S. antitrust laws protect consumers only from the party who sets the retail price and not a party who is a mere pass-through. Justice Kavanaugh was exceedingly careful not to reach the actual merits of the Plaintiffs’ monopoly claims, but opined under the broad language of the antitrust laws, iPhone owners were direct purchasers who may sue Apple for alleged monopolization. Despite what the Court called the “bright line” exemption of Illinois Brick, the broad language of the Clayton Act provides that “any person who shall be injured in his business or property by anything forbidden in the antitrust laws may sue.” 15. U.S.C. § 15(a). Exempting Apple under these circumstances would “draw an arbitrary and unprincipled line among retailers based upon their financial arrangements with their manufacturers.” Syll. (b). It would be an arbitrary line because it would allow a consumer to sue a retailer operating a monopoly when the retailer marked up the price it had paid the developer or supplier, but not when the monopolistic retailer simply took a standard commission. This would essentially provide a roadmap for monopolistic retailers to evade protections provided to consumers.

Apple further argued that determining how much it allegedly overcharged due to its monopolistic structure of making apps only available through its own “Store” would be overly complicated and difficult to calculate the exact damages to an individual consumer. But, as noted, Justice Kavanaugh specifically noted that the case was only at the early pleading stage and the Court would not assess the merits of the Plaintiffs’ monopoly claims or consider any defenses Apple may have.

Justice Gorsuch, President Trump’s other SCOTUS appointee, authored an insightful dissent. Justice Gorsuch argued that the antitrust laws were not intended to protect a consumer from by being overcharged by Apple who may, or may not, have been overcharged by the original app developer. Rather than allowing suit by these plaintiffs to proceed, Justice Gorsuch claimed the Supreme Court should have ruled that only the developers were forced by the monopoly environment to pay potential overcharges in order to sell their apps and would have standing to sue. Justice Kavanaugh did not entirely disagree; if Apple is operating as both a “monopolist and a monopsonist” (a sole buyer of goods or services concentrating all market power), then it could be liable to different classes of plaintiffs. 587 U.S. __ at page 13.

Of course, it remains to be seen whether, in fact, this suit will take a “bite out of the apple.” The suit will return to the trial court to evaluate what everyone expects to be a litany of defenses and complicated litigation by Apple. But, putative class actions are likely being drafted as one reads this piece.

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Daniel J. DonnellonOf Counsel