Apple Inc. v. Pepper

Issues 

Are App Store customers “direct purchasers” of Apple who have standing to bring a suit alleging antitrust violations?

Oral argument: 
November 26, 2018

In this case, the Supreme Court will determine whether customers of the iPhone’s App Store are considered direct purchasers of Apple. The question of direct purchaser status under the Illinois Brick doctrine is necessary to grant standing and proceed with an antitrust class action accusing Apple of monopolizing the market for iPhone apps. The Ninth Circuit held, and the class action representatives now argue, that customers of the App Store are direct purchasers because Apple functions as a distributor for app developers. Apple disagrees, arguing that it sells its distribution services to app developers, who are its direct purchasers; moreover, Apple asserts that it does not possess key price-setting power. The Court’s decision in this case will have implications for who may bring antitrust actions, potentially opening the door to duplicative damages and excessive private litigation.

Questions as Framed for the Court by the Parties 

Whether consumers may sue for antitrust damages anyone who delivers goods to them, even where they seek damages based on prices set by third parties who would be the immediate victims of the alleged offense.

Facts 

In 2007, Apple released the original iPhone. In re Apple iPhone Antitrust Litig., 846 F.3d 313, 315–16 (9th Cir. 2017). One year later, Apple launched the “App Store,” through which iPhone users may purchase and download applications (“apps”). Id. Although Apple develops some of the apps in the App Store, most of the apps are developed by third-party developers. Id. Every time a user purchases one of these third-party apps, Apple keeps 30% of the purchase price while the remaining 70% goes to the app’s developer. Id. Apple works hard to preserve the “closed system” of the App Store—that is, it prohibits developers from selling iPhone apps outside of the App Store and threatens to void iPhone warranties of users who download unapproved apps. Id.

On December 29, 2011, Robert Pepper and three others brought a putative antitrust class action in the United States District Court for the Northern District of California on behalf of everyone in the United States who had purchased an iPhone app. In re Apple iPhone Antitrust Litig., No. 06714-YGR, 2013 WL 6253147, at *1 (N.D. Cal. Dec. 2, 2013). Pepper alleged that Apple had monopolized the market for iPhone apps through its App Store and closed system policy by controlling which apps iPhone customers can purchase, effectively preventing iPhone owners from purchasing software from any other source. Id. By controlling 100% of the distribution market for apps, and taking 30% of the sales price, Pepper alleged that Apple had overcharged customers, forcing Pepper and other iPhone customers to pay more for their apps than they would have in a competitive market. Id. at *2.

Apple moved to dismiss the case for lack of antitrust injury under Illinois Brick Co. v. Illinois. Id. at *3. In Illinois Brick, the Supreme Court held that only direct purchasers of goods or services have standing to bring suit, meaning that the plaintiff must be the first link in the defendant’s distribution chain. Id. Pepper’s theory of antitrust injury alleges that Apple is imposing a 30% overcharge, which it adds to the developer’s competitive price when it sells an app directly to consumers through the App Store. Id. at *4. Apple construed its collection of the 30% as a fee imposed on developers rather than on consumers, and therefore only app developers had a claim to antitrust injury. Id. at *4–5. The district court found that the 30% was a fee passed on to consumers by developers, and therefore Pepper was an indirect consumer without standing. Id. at *6–7.

Pepper appealed the dismissal to the Ninth Circuit. In re Apple iPhone Antitrust Litig.http://www.scotusblog.com/wp-content/uploads/2017/10/17-204-Opinion-Below.pdf, 846 F.3d 313. Examining the Illinois Brick doctrine, the Ninth Circuit reversed the district court and found that Pepper was a direct purchaser with antitrust injury and standing. Id. at 322. The Ninth Circuit phrased the question before it as “whether Plaintiffs purchased their iPhone apps directly from the app developers, or directly from Apple.” Id. Ignoring formalistic differentiators such as the order of payments, commission versus markup, or who sets the price, the Ninth Circuit decided that Apple was a distributor of apps selling directly to consumers by relying on “the fundamental distinction between a manufacturer . . . and a producer.” Id. at 324.

The Ninth Circuit reversed and remanded the case to proceed on the merits. Id. at 325. Apple petitioned for a writ of certiorari, which the United States Supreme Court granted on June 18, 2018.

Analysis 

Apple argues that the Court should interpret app store purchasers to be indirect consumers that cannot bring an antitrust claim against them.

Pepper disagrees, arguing that the Ninth Circuit was correct in holding that app store purchasers are direct consumers of Apple’s services.

DIRECT OR INDIRECT PURCHASERS

Apple argues that the Ninth Circuit’s finding that Apple is a distributor of iPhone apps, and therefore that Pepper is a direct purchaser, incorrectly relies on a formalistic analysis. Brief for Petitioner, Apple Inc. at 34. Apple contends that precedent requires courts to focus on “actual market realities.” Id. at 34–35. The market reality here, according to Apple, is that the App Store is merely a two-sided platform which connects and provides a service to both app developers and iPhone owners. Id. at 35–36. But Apple asserts that the 30% commission is a charge for providing a distribution service. Id. at 36. Apple maintains that developers, not consumers, purchase its distribution service, as shown by contracts between Apple and developers establishing exclusive worldwide distribution rights.  Id. at 36. Apple also claims that app developers set the price of apps on the App Store; Apple only takes its commission from whatever price the developer sets. Id. at 37. According to Apple, this means that Apple, through the App Store, is an agent for the developer and not a reseller—an important distinction for the application of precedent. Id. at 38. Apple argues that these market realities demonstrate that app developers, not consumers, are the direct purchasers of its distribution services. Id. at 39–41. At the same time, Apple contends that the Ninth Circuit was incorrect to disregard these realities in favor of asking who functioned as a distributor. Id. at 41. Functional concerns about distribution are misplaced, Apple maintains, because the real concern is the identity of the pricing decision makers. Id. at 41–43. Apple argues that the test is particularly misleading when, as here, the distributor functions as an agent rather than a reseller.  Id. at 43–45.

Pepper, on the other hand, argues that the Ninth Circuit correctly found that app consumers are direct purchasers from Apple. Brief for Respondents, Robert Pepper et al. at 18. Pepper contends that Apple’s focus on “distribution services” is misplaced because the relevant market is the “aftermarket” for iPhone apps.  Id. at 29–30. Pepper claims that the App Store is merely a “retail operation selling apps.” Id. at 32.  Pepper maintains that Apple not only delivers apps directly to consumers, it also influences the price of the apps and controls the terms that regulate the sale of the apps. Id. Pepper asserts that Apple limits the pricing of apps to one-dollar increments, which greatly constrains the app developer’s flexibility to set prices. Id. at 33. Additionally, according to Pepper, Apple asserts strong control over the sale of apps in its store because app developers must accept terms and conditions that shift control to Apple. Id. at 33-34. Furthermore, Pepper argues the interpretation that app purchasers are the direct consumers of Apple’s services is consistent with the Eighth Circuit’s holding in Campos. Id. at 35-37. Pepper asserts, according to Campos, the initial transaction here is the purchase of the Apple phone by the app purchaser. Id. at 37. Pepper adds that the app developers purchase access to Apple’s store because Apple phone users can only purchase apps from Apple’s store. Id. Accordingly, Pepper contends that app purchasers are the first to suffer harm from Apple’s alleged monopoly and are, therefore, the direct consumers of Apple’s services. Id.

PASS-THROUGH THEORY OF HARM

Apple argues that the Court’s holdings in Hanover Shoe, Inc. v. United Shoe Machinery Corp. and Illinois Brick Co. v. Illinois limit antitrust litigation to an alleged monopolist and its direct consumers. Brief for Petitioner, at 20–22. Apple contends that the earlier case, Hanover Shoe, prevents defendants in antitrust cases from avoiding damages by claiming that the plaintiff passed the overcharge onto indirect purchasers, thereby cancelling out any negative effects. Id. at 20–21. Apple then maintains that Illinois Brick worked in the opposite direction to prevent indirect purchasers from bringing suits against monopolists because it would be too difficult to calculate damages. Id. at 21–22. According to Apple, the effect of these cases is to prohibit a pass-through theory of harm and limit antitrust standing to direct purchasers only, while also allowing them to collect all damages, even if they did pass on the overcharges. Id. at 22–24. Apple claims, however, that Pepper’s theory of harm necessarily relies on this prohibited pass-through theory because Pepper is an indirect purchaser. Id. at 24. If Pepper could bring an antitrust claim despite its indirect purchaser status, Apple asserts, it will be subject to duplicative damages claims from both direct purchasers who experienced overcharges and indirect purchasers who had those same overcharges passed on to them. Id. at 29–31. According to Apple, the Ninth Circuit inexplicably ignored this likelihood where instead it should have seen that because app developers are direct purchasers, it was necessary to find that Pepper is an indirect purchaser to avoid duplicative recovery. Id. at 30–32. Apple argues that the pass-through theory of harm and threat of duplicative recovery requires dismissal of Pepper’s claims.  Id. at 33–34.

Pepper argues that the theory of harm here does not depend on a price being passed on to them. Brief for Respondents, at 19–24. Pepper contends that the app purchasers are the first consumers here to bear the cost of the alleged monopoly because the app developers do not sell their apps to Apple. Id. at 24–29. Furthermore, Pepper asserts that the Ninth Circuit’s decision does not allow for duplicative damages liability. Id. at 39–45. Pepper then claims that if the app developers had a damage claim, it would only be a claim on the same 30% commission that the app customers have a damage claim. Id. at 41. Therefore, Pepper maintains, both the app purchaser and app developers would have to share the 30% commission fee as damages. Id. Nonetheless, according to Pepper, the app developers likely would not have a basis to bring an antitrust suit against Apple because knowingly consenting to antitrust conduct, as the app developers did here, bars them from bringing an antitrust suit. Id. at 40.

Discussion 

DUPLICATIVE DAMAGES AND EXCESSIVE LITIGATION

The Computer & Communications Industry Association (“CCIA”) argues that because app developers clearly have standing to sue, allowing purchasers to sue would expose Apple and companies in similar positions to duplicative damages. Brief of Amicus Curiae The Computer & Communications Industry Association, in Support of Petitioner at 11–12. CCIA contends that if the Supreme Court sides with Pepper, the Court would effectively transform the App Store from a platform that “foster[s] an efficient market for buyers and sellers to interact” into an antitrust liability that would outweigh its potential benefits. Id. at 22–23. BSA, the Software Alliance (“BSA”) asserts that this threat of excessive lawsuits would deter companies from providing platforms like the App Store, threatening the viability of many innovations in the information sector. Brief of BSA | The Software Alliance, as Amicus Curiae Supporting Petitioner at 8. BSA also points out that current antitrust laws allow for plaintiffs to recover three times the amount of their damages. Id. at 9. According to BSA, permitting both developers and purchasers to sue Apple would expose the company to sextupled damages—allowing for outrageous recoveries that far exceed what Congress mandated. Id.

The American Antitrust Institute (“Institute”) argues that there cannot be any duplicative damages because iPhone customers and app developers would be suing for different things: while Pepper would sue for Apple’s excessive markup on app prices, app developers would sue for how much more profit they would earn if not for Apple’s monopolization of the market. Brief for the American Antitrust Institute as Amicus Curiae, in Support of Respondents at 25. Thirty-one states also contend that Apple’s fears of duplicative recovery are unwarranted because most state antitrust laws already allow indirect purchasers to sue for the same conduct as direct purchasers, yet there has not been even a single instance of duplicative recovery since the Supreme Court decided Illinois Brick. See Brief for Texas, Iowa, and 29 Other States as Amici Curiae, in Support of Respondents at 12, 18. The Institute adds that developers are almost certain not to sue anyway out of fear that Apple would retaliate and remove their access to the App Store. Open Markets Institute, in Support of Respondents at 12.

DEPARTMENT OF JUSTICE’S ANTITRUST ENFORCEMENT VERSUS PRIVATE ENFORCEMENT

The Antitrust Scholars (“Scholars”) argue that the Department of Justice’s Antitrust Division (“Antitrust Division”) cannot handle all of the antitrust work on its own and that private enforcement of antitrust laws—as Pepper attempts here—is actually necessary to deter monopolies and monopolistic practices. Brief of Antitrust Scholars as Amici Curiae, in Support of Respondents at 10–11.  Private parties, the Scholars maintain, are more like than the government to have information on antitrust violations, so any constraint on their abilities to bring such lawsuits would go against the goal of a competitive marketplace. Id. In agreement, the Institute contends that when private citizens bring antitrust claims on their own, they help offset the Antitrust Division’s limited resources for doing so. See Brief for the American Antitrust Institute as Amicus Curiae, in Support of Respondents at 22.

The R Street Institute (“R Street”) counters by arguing that the DOJ is perfectly capable of handling antitrust violations. See Brief for the R Street Institute as Amicus Curiae, in Support of Petitioner at 10–11. R Street claims that the plaintiffs’ complaints would have been answered if they had simply gone to the DOJ with their claims. Id. R Street asserts that a case from 2013 shows that the DOJ can successfully bring antitrust claims against Apple and win millions of dollars for purchasers like the plaintiffs here. Id. at 10. Were the DOJ ever to need any help, R Street contends, the Federal Trade Commission and state attorneys general could provide it. Id. at 11–15.

Edited by 

Acknowledgments 

Additional Resources 

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