Monopoly... "There's an App for That!"

Monopoly! This time we are not talking about the boardgame, we are discussing antitrust law. Last May the US Supreme Court indicated that iPhone consumers have standing to sue Apple for its monopolization of apps compatible with their phones. Apple v. Pepper et al., Case No.: 17-204 (May 13, 2019). Almost all of us can relate to the facts of this case since so many of us have owned an iPhone and downloaded an app themed upon e.g., the US Constitution, the Bible, games, e-magazines or our other hobbies and interests. These dangerously intelligent phones have become an extension of ourselves. Yet, rarely do we think about the terms and conditions of the accessories we purchase.

For instance, have you realized that you can only purchase apps for Apple’s “iDevices” from Apple? Had you noticed that the pricing for every app you buy ends in $0.99? Well, Robert Pepper, and a small class of others, somehow took notice and because of this alleged that Apple was unlawfully monopolizing the iPhone apps aftermarket. Apple’s iStore is structured such that independent app developers set their own retail price in exchange for paying an annual membership fee of $99, allowing Apple to keep a 30% commission on all sales and offering the app for a price ending in $0.99, e.g., $1.99 or $10.99. Claimants argue that as the sole distributor of iPhone-compatible apps, Apple does not have to compete with other e-stores and Apple is taking advantage of this at least by inflating its commissions and requiring that developers compensate for costs in denominations of $0.99, instead of e.g., $0.15 or $0.75.

Section 2 of the Sherman Act makes it unlawful to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.” Recovery for violations of the Sherman Act extend to “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws…” 15 USC §15(a). Though the Code reads that “any person” so injured can bring suit for damages, antitrust precedent has limited standing for suits against indirect purchasers of the goods or services so claimed to be monopolized. Illinois Brick. In Illinois Brick, the State of Illinois sought recovery for the exaggerated price of bricks sold by the company, Illinois Brick, for their construction project. The bricks, however, were not sold directly to the State of Illinois but to masons who were then contracted by contractors who were hired by the State. In that case, the Supreme Court indicated that the State of Illinois lacked standing to sue the brick manufacturer. Apple argued that this precedent precludes its consumers from seeking antitrust recovery for its app sales because Apple is merely a broker of the apps and does not set the ultimate price.

The District Court ruled in favor of Apple, finding that Illinois Brick barred suit by consumers against Apple but the Court of Appeals for the Ninth Circuit reversed, finding iPhone consumers to be direct purchasers of the apps from Apple since the apps were purchased from Apple’s website.

In a 5:4 opinion, the US Supreme Court affirmed the Court of Appeals, also ruling that Apple’s iPhone consumers were direct purchasers of the apps from Apple and that Illinois Brick was distinguishable. The primary difference between the majority opinion, authored by Justice Kavanaugh, and the dissent, authored by Justice Gorsuch, is that each fraction took a different reading of Illinois Brick’s guiding policy.

The majority ruminated that “[t]he Illinois Brick Court listed three reasons for barring indirect-purchaser suits: (1) facilitating more effective enforcement of antitrust laws; (2) avoiding complicated damages calculations; and (3) eliminating duplicative damages against antitrust defendants.” at 11-13. Of course, none of these reasons were persuasive enough for the majority to apply Illinois Brick to these facts. As to effective enforcement of antitrust laws, the fact that both consumers and app developers might have separate causes of action against Apple for its price-setting did not necessarily make either suit ineffective or inefficient, each entity was harmed and independently entitled to protection and enforcement. As to the complexity of damages, the damages calculations were reasonable as this retailer-commission case was not seen as any more complicated than a retailer-markup case, something Apple conceded was actionable. As to duplicative damages, this case involved a simple value chain where the developers manufacture a product that Apple sells directly to its existing consumer pool: “[u]nlike in Illinois Brick, there will be no need to ‘trace the effect of the overcharge through each step in [a lengthy] distribution chain.’” Apple is relatively close to the consumers in this distribution stream. Therefore, the majority found Illinois Brick distinguishable from Apple’s app store.

The dissent took a different reading of Illinois Brick and its policy, stating that the Court found standing lacking in that case because it did not find that the overcharging masons were the proximate cause of the State of Illinois’ harm: “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.” at 1. The dissent reasoned that one could only speculate as to whether the developers – seen as those truly harmed by Apple’s alleged conduct – actually “pass[ed] on” the overcharge to consumers, making damages more complex and having the potential to cause conflicting claims or multiple recoveries against Apple for the same overcharge. at 3-5. Ironically, it is plausible that the excessive-charging harm incurred by consumers was a foreseeable result of Apple’s price manipulation and thus Apple was the proximate cause of its consumers’ losses. The same might be said for the brick manufactures in Illinois Brick as well.

Narrowly but resultingly, we all might be closer to a class action than we thought since apps and “iDevices” are as ubiquitous as cable and televisions. Remember however that with Apple v. Pepper, the Court has simply allowed consumer standing to sue, Apple may not ultimately be found liable.

Will Apple v. Pepper forever change the way we purchase apps? Might Apple make changes to their developer terms like letting other developers sell the apps directly to consumers, letting other third-party websites sell iPhone compatible apps, setting their commissions at market rate and/or eliminating their $X.99 price requirement? What effect would this ruling have on songs and other accessories purchased for iPhones? I guess we will just have to stay tuned to find out…