Apple v Pepper: Significant Jurisprudence Narrows Regulatory Gap Between Antitrust Laws And Technology Advances
Updating interpretation of laws to better apply to how products and services are now delivered
- iPhone owners are direct purchasers from Apple viz. Apple’s App Store, and are proper plaintiffs to maintain this antitrust suit.
- It is difficult for laws to keep up with emerging technology. This holding at least narrows the regulatory gap between antitrust, contract laws and technology advances by updating the interpretation of these laws to better apply to how products and services are now delivered.
- Practitioners should not elevate form over substance. The antitrust question presented should be “is the consumer paying a higher price because of the monopolistic retailer’s actions?” And not “what is the precise arrangement between manufacturers or suppliers and retailers?”
On May 13, 2019, the Supreme Court decided Apple v Pepper, 587 U. S. ____ (2019), a consumer antitrust class action lawsuit involving Apple’s App Store. The lawsuit was filed by iPhone owners who complained that Apple exercises monopoly power in the retail market for the sale of apps and has unlawfully used its monopoly power to force iPhone owners to pay Apple higher-than-competitive prices for apps. More specifically, when iPhone owners want to purchase an app, they have only two options: (1) buy the app from Apple’s App Store at a higher-than-competitive price or (2) do not buy the app at all.
The question before the Supreme Court was whether the iPhone owners had standing to sue Apple for damages under Section 4 of the Clayton Act which provides that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue . . . the defendant . . . and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee.” 38 Stat. 731, 15 U. S. C. §15(a).
The District Court held that the iPhone owners had no standing to sue Apple under the Supreme Court precedent of Illinois Brick which bars § 4 damages claims where a plaintiff sues a defendant two or more steps removed in a distribution chain (rule bars claims where goods flow “from direct purchasers to middlemen to ultimate consumers”). 431 U. S. 720 (1977)
The Ninth Circuit reversed; concluding that the iPhone owners were direct purchasers under Illinois Brick because the iPhone owners purchased apps directly from Apple. Therefore, the iPhone owners could sue Apple for allegedly monopolizing the sale of iPhone apps and charging higher-than-competitive prices.
In affirming the Ninth Circuit, Justice Cavanaugh, writing for the Majority found that “[i]n 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.”
In a Dissent, authored by Justice Gorsuch, the decision was criticized for “recasting Illinois Brick as a rule forbidding only suits where the plaintiff does not contract directly with the defendant. This replaces a rule of proximate cause and economic reality with an easily manipulated and formalistic rule of contractual privity.” (emphasis added)
Apple v Pepper appears to be a sound decision for several reasons. First, it does not elevate form (i.e., “what is the precise arrangement between manufacturers or suppliers and retailers?”) over substance (i.e., “is the consumer paying a higher price because of the monopolistic retailer’s actions?”). As the Court explained “If the retailer’s unlawful monopolistic conduct caused a consumer to pay the retailer a higher-than-competitive price, the consumer is entitled to sue the retailer under the antitrust laws.”
Second, contrary to the concerns of the Dissent, the Court explained that this case presents no risk of duplicative damages. “[S]ome downstream iPhone consumers have sued Apple on a monopoly theory. And it could be that some upstream app developers will also sue Apple on a monopsony theory. In this instance, the two suits would rely on fundamentally different theories of harm and would not assert dueling claims to a “common fund,” as that term was used in Illinois Brick. The consumers seek damages based on the difference between the price they paid and the competitive price. The app developers would seek lost profits that they could have earned in a competitive retail market. Illinois Brick does not bar either category of suit.”
Third, and most importantly, for the Supreme Court to hold otherwise would allow the “commission pricing” model employed by Apple to skirt the antitrust rules; rules that clearly apply to a traditional “markup pricing” model, which is fundamentally no different. As the Court explained, to allow a consumer to sue the monopolistic retailer “when the retailer set the retail price by marking up the price it had paid the manufacturer or supplier for the good or service” but “not sue a monopolistic retailer when the manufacturer or supplier set the retail price and the retailer took a commission on each sale” would “provide a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so as to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement.” Apple v Pepper closes this loophole and hence has evolved the jurisprudence on antitrust law to keep pace with the evolution of modern economy including online sales and commission pricing modeling.
At the same time, the Apple v Pepper case may stand as only a small step forward for the little guy. While the iPhone consumer now has standing to bring the antitrust suit he must still prove injury in his business or property by the purchase of his apps by reason of anything forbidden in the antitrust laws. This proof may necessarily involve a complex inquiry into how Apple’s conduct affected third-party pricing decisions. And given the many factors bearing upon what may be forbidden in the antitrust laws as applied to the App store, including the complementary innovation of Apple that enhances the value of the services an iPhone customer receives from the App store, the apps, the iPhone, and so on, that may support the commission pricing model, absent bad faith it may be debatable whether Apple’s conduct amounts to conduct punishable under the antitrust laws.
It is difficult for law to keep up with emerging technology. The Apple v Pepper case at least narrows the regulatory gap between antitrust, contract laws and technology advances by updating the interpretation of these laws to better apply to how products and services are now delivered.
Good legal practice mandates that every practitioner avoid elevating form over substance in structuring contracts with customers so as to not violate antitrust laws. The antitrust question presented should be “is the consumer paying a higher price because of the monopolistic retailer’s actions?” And not “what is the precise arrangement between manufacturers or suppliers and retailers?”