Apple, Inc. v. Pepper: Apple’s Supreme Court Loss & Implications for Tech Companies Hosting Digital Marketplaces

Written by Samuel M. Cohn

Introduction

If there is a problem to be solved in 2019, there is likely an app for it. Apps, or applications, are a technological necessity in our modern world of mobile computing. Apple, Inc. and the revolutionary iPhone is largely responsible for the mainstream use of the digital marketplace, or App Store, through which we download apps. A consequence of purchasing Apple’s iconic phone is the adoption of the company’s closed application delivery system, the App Store. Not all consumers are enjoying the app-purchasing experience, however. On May 13, 2019, the Supreme Court of the United States issued an opinion rejecting Apple’s legal theory aimed at preventing a class of iPhone owners from proceeding in a class action antitrust suit against the world’s most profitable company. While the Court did not issue a holding on the merits, the decision has far-reaching implications from a procedural standpoint.

The Claim: An Unlawful Exercise of Monopoly Power

Apple, Inc. v. Pepper is a class action suit brought forth by a group of Apple consumers claiming that the company exercises unlawful, monopolistic power over its App Store. The crux of the claim is this: Apple’s near-absolute control over the App Store forces consumers to purchase their applications for “higher-than-competitive prices.” The class members argue that Apple locked down the application retail space for Apple consumers and app developers. By doing so, the class members contend that app developers are forced to raise their prices to account for the thirty percent fee taken by Apple in each transaction and consumers have no choice but to pay the higher price, or alternatively forgo buying the app, because they are unable to purchase apps elsewhere. The class members argue that this is a violation of Section 2 of the Sherman Act, which makes it illegal for any person to monopolize or attempt to monopolize “any part of the trade or commerce among the several States, or with foreign nations.”

The plaintiffs seek recovery under an antitrust provision which allows any person injured by illegal antitrust activity to sue and recover three times their damages, including attorney’s fees. The question decided at this juncture of the suit is one of standing, or whether the class of plaintiffs have legally recognizable grounds to sue Apple, Inc., the defendant. A challenge of standing is a common defensive strategy at the early stages of litigation. In this case, however, standing hinged upon the interpretation of a bright-line rule, or a clearly defined legal standard characterized by objective factors which leave little or no room for variation in interpretation, set forth in Illinois brick Co. v. Illinois. That rule potentially precludes the class members from having standing as a proper plaintiff. Illinois Brick tackles the any person factor of the antitrust provision that the class members stake their claim upon, precluding individuals that are twice or more steps removed in the chain of purchase from filing suit against the alleged violator. Apple contends that the members of the class are twice removed, or “indirect purchasers,” arguing the class purchased from the app developers, not directly from Apple. The Ninth Circuit disagreed and held that the class members were direct purchasers from Apple, and thus not barred by Illinois Brick’s bright-line rule.

Apple’s Legal Theory: No “Direct Purchaser,” No Standing

On appeal from the Ninth Circuit, Apple attempted to characterize the App Store as a digital marketplace connecting developers and consumers, rather than an Apple store selling Apple products directly to the consumer. Had the Court been convinced by this argument, the rule in Illinois Brick would have stopped the class action lawsuit dead in its tracks. The Supreme Court, however, agreed with the Ninth Circuit, distinguishing the facts in Illinois Brick from the facts of Pepper. Justice Kavanaugh, writing for a 5-4 majority, provided the following explanation:

In this case, unlike in Illinois Brick, the 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. There is no intermediary in the distribution chain between Apple and the consumer. The iPhone owners purchase apps directly from the retailer Apple, who is the alleged antitrust violator. The iPhone owners pay the alleged overcharge directly to Apple. The absence of an intermediary is dispositive. Under Illinois Brick, the iPhone owners are direct purchasers from Apple and are proper plaintiffs to maintain this antitrust suit.

The majority further dissected Apple’s argument, covering three main points of disagreement. First, Apple’s argument ignored statutory interpretation and precedent. Apple’s “who set the price” theory was based on the idea that it was developers, not Apple, who set the allegedly above-market prices for apps. In other words, Apple believes the class members should be suing developers, not the host of the marketplace. However, because such logic was absent under the Illinois Brick analysis, the Court was not persuaded by Apple. In fact, the Court believed that following Apple’s logic would render Illinois Brick meaningless. The Court noted that Illinois Brick was grounded in an effort to promote “effective and efficient litigation” in antitrust lawsuits. A holding utilizing Illinois Brick’s bright-line rule to prevent the class members from continuing forth would effectively “rewrite the rationale of Illinois Brick and . . . gut the longstanding bright-line rule.”

Second, the Court concluded that Apple’s theory was neither “legally” nor “economically” persuasive. Through an analysis of various pricing models, including that of the App Store, the Court found Apple’s focus on who set the price to be arbitrary “gerrymandering.” While the Court considered the long-term implications in its third and final point (discussed below), the Court likely recognized the immediate implications of a decision to allow such “gerrymandering.” Namely, there are over 90 million iPhone users worldwide, so many consumers stand to be affected by this case. Had Apple prevailed, the decision would effectively obliterate standing for all 90 million iPhone users with, as the Court put it, no basis in economic logic or legal precedent, thus circumventing consideration of a novel issue relating to digital marketplaces. Furthermore, anti-trust law exists to protect consumers. To eliminate even a single plaintiff’s opportunity to recover, let alone 90 million, based on an unpersuasive pricing model argument and incorrectly interpreted precedent goes against public policy.

Finally, the Court concluded that acceptance of this legal argument from Apple would provide a roadmap for monopolistic retailers to structure their business in such a manner as to avoid liability. In other words, if Apple is able to avoid liability through the structure of its pricing model, Google and other Tech Giants would be sure to emulate Apple’s structure as it would prevent similar anti-trust claims from ever getting beyond the earliest stages of litigation.

Conclusion: The Court Allows Case to Proceed – Implications for Tech Giants

Although Apple Inc. v. Pepper is merely moving a step forward in litigation, the impact of this decision could be dramatic. Namely, the operators of digital marketplaces like the Google Play Store, eBay, and Ticketmaster should be on notice that the Supreme Court of the United States will likely treat them as retailers. What solution is there for the Tech Giants hosting digital marketplaces? The solution is likely found in the burden of proof placed upon potential plaintiffs in antitrust cases. In other words, if a plaintiff must establish that a company is using its monopoly power to the detriment of consumers, Tech Giants should go the extra mile to ensure that they are taking steps to mitigate the exercise of any potentially monopolistic business models or acts. It is very possible that several years from now, we will understand that certain business models, such as Amazon’s subscription model, are free from monopolistic elements, while others, for instance Apple’s fee model, are simply unable to exist without raising antitrust concerns.

Sources

Apple Inc. v. Pepper, 139 S. Ct. 1514 (2019).

Craig LaChance, The Supreme Court Rules That iPhone Users May Sue Apple for Antitrust Violations, fool.com (May 17, 2019 at 7:49AM).

Photo courtesy of PC Mag

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