On May 13, 2019, the Supreme Court ruled in favor of iPhone owners who are suing Apple. The iPhone owners claim that Apple, through its App Store, has established a monopoly and uses that power to charge consumers more for iPhone apps. Apple v. Pepper et al., 587 U.S. __ (2019). Justice Kavanaugh penned the Court's 5-4 decision, in which Justices Ginsberg, Breyer, Sotomayor, and Kagan joined.
In 2008, Apple launched its App Store. The App Store is an electronic platform through which iPhone owners must purchase any app they wish to download. Unlike its competitor Android (developed by Google), the iPhone operating system does not allow its users to download apps from alternative platforms.
Most apps are created by independent developers and distributed through the App Store pursuant to contracts with Apple. If a developer wishes to make its app available to iPhone consumers, it must pay Apple a $99 annual membership fee. In addition, though the developer independently sets the price of its app, Apple keeps 30 percent of the sale price and requires all prices to end in $0.99. Consumers purchase apps by paying Apple directly, and Apple then remits the purchase price, less its 30 percent commission, to the developer.
Four iPhone owners sued Apple in 2011. These consumers allege that Apple unlawfully monopolized the aftermarket for iPhone apps and that, in the absence of such a monopoly, market pressure would force Apple to lower its commission and allow developers to reduce their prices to consumers. Thus, the iPhone owners allege that Apple is overcharging for apps using the App Store.
The crux of the Court's decision centers on precedent set in 1977 with the Supreme Court decision Illinois Brick Co. v. Illinois, 431 U.S. 720. In Illinois Brick, the State of Illinois paid a masonry contractor to construct buildings. To construct the buildings, the masonry contractor purchased concrete blocks from Illinois Brick Company. The State sued the brick company, alleging that it had engaged in price-fixing in violation of the Sherman Act. The Court ruled that an "indirect purchaser" may not sue an alleged antitrust violator using a "pass-on" theory. That is, a consumer (the State) who ultimately suffers an unlawful overcharge when the overcharge is passed through a third party (the contractor), may not sue the antitrust violator (the concrete block manufacturer) that originated the overcharge.
In the district court, Apple moved to dismiss and argued that Illinois Brick allows consumers to bring antitrust suits only against the party who sets the retail price. Thus, Apple claimed, because developers set the price of apps, Apple cannot be sued for any alleged monopoly based on the App Store. The district court agreed and dismissed the case, but the Ninth Circuit overturned that dismissal, finding that because consumers purchase apps from Apple, through the App Store, rather than directly from developers, they are direct purchasers able under Illinois Brick to maintain suit against Apple.
The Supreme Court sided with the Ninth Circuit and ruled that the iPhone owners are not barred from suing Apple. The Court found that Illinois Brick stands for the bright-line rule that in a distribution chain, "[w]hen there is no intermediary between the purchaser and the antitrust violator, the purchaser may sue." Apple, 587 U.S. __, at *7. Otherwise, the Court found, a traditional retailer operating a monopoly might evade antitrust claims by setting up contracts with manufacturers wherein the retailer does not purchase products but instead simply sells the manufacturer's products to consumers on a commission basis.
Thirty States and the District of Columbia filed an amici curiae brief asking the Court to overturn Illinois Brick. Because the Court was able to decide the case for the plaintiffs without disturbing Illinois Brick, it declined to address this argument. But the position of the state amici that the Illinois Brick rule should be revisited (largely because a number of states have adopted so-called Illinois Brick-repealer statutes, allowing suits under state law by indirect purchasers) is receiving growing support, including from Makan Delrahim, the current head of the DOJ's Antitrust Division.
Because the Apple case, though filed eight years ago, is still in the early stages of development, only time will tell whether Apple will be held liable for overcharging consumers who have purchased apps through the App Store. However, in light of this ruling, purchasing platforms, particularly digital platforms, should exercise caution. If consumers pay the platform directly for goods or services, it may be liable to those consumers for antitrust violations.
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