Apple v. Pepper
Can iPhone App Store purchasers sue Apple for commission fees charged to app developers?
A group of iPhone app purchasers sued Apple, alleging that Apple created an illegal monopoly over the worldwide distribution of iPhone apps. They argued that even though Apple did not create most of the iPhone applications available on its App Store, Apple approves and distributes all available apps on its store. Apple charges a 30% commission for all apps sold through its App Store, and the consumers claim this fee is being illegally passed to them.
However, the plaintiffs may have a problem in getting Apple into court. The developer of the app—not Apple—is responsible for setting the price of the app and collects the money from the purchase. Therefore, the class of consumers suing Apple did not directly purchase apps on its App Store from Apple, but rather, through a developer offering the app for sale on Apple’s App Store. The potential class sought damages against Apple (for its allegedly illegal commission fee) that are available under the Clayton Act. However, past U.S. Supreme Court precedent (Illinois Brick Co. v. Illinois (1977)) bars indirect consumers from bringing Clayton Act violations from suppliers.
Will the Supreme Court apply the doctrine in this case?
The Illinois Brick doctrine
Under Section 4 of the Clayton Act, 15 U.S.C. § 15(a), antitrust damages are typically only available in cases of alleged overcharging to the first party who suffers the overcharge and not extended to pass through parties from the first purchaser. The United States Supreme Court in Illinois Brick Co. v. Illinois, established its doctrine that indirect purchasers of goods and services cannot recover antitrust damages from violators. More simply, the Court held that indirect purchasers do not have standing to sue the alleged infringer if they were not direct purchasers of the product.
Exception to Illinois Brick
The Supreme Court has recognized an exception where the middle-man (the direct purchaser) directly passes on the overcharge of the supplier to the consumer (the indirect purchaser). The Court calls it a “cost-plus” contract. In this circumstance, the indirect purchaser agrees in advance to accept the exact costs of the middle-man. It removes the middle-man’s role in price-setting (Kansas v. Utilicorp United, Inc. (1990)). The rationale for the exception was stated by the Court:
“[T]he effect of the overcharge is essentially determined in advance, without reference to the interaction of supply and demand that contemplates the determination in the general case.”
Id. at 217.
Applying the doctrine to this case
In this case, the Court will have to decide whether the Illinois Brick doctrine applies. If it does, the consumers’ case against Apple must be dismissed. On the other hand, if Pepper, et al. can get the Court to agree that Apple is a direct distributor to the consumers, or if they can meet an exception to Illinois Brick—like the “cost-plus” contract exception of Kansas v. Utilicorp United—the consumers will be able to continue with the case.
The rulings below
John Pesek is an Arkansas licensed attorney who works in-house for a multi-state residential multi-family management company. Mr. Pesek’s practice includes intellectual property, federal and state Fair Housing laws, commercial litigation, and consumer protection actions.
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The district court used the Illinois Brick doctrine to dismiss the lawsuit. It considered the purchasers of Apple’s App Store were indirect purchasers and no exception applied. The Ninth Circuit Court of Appeals reversed the district court’s decision. The Ninth Circuit said that the class can sue for the alleged illegal commissions Apple charges because it performs a marketplace “function” of a “distributor” which would allow them to avoid the bar set by the Illinois Brick doctrine. The Ninth Circuit focused primarily on whether Apple was a “distributor” and less on whether or not the class was seeking damages on a “pass-through” theory that is not allowed under the Court’s Illinois Brick doctrine.
The federal government’s view
The United States, through the Solicitor General’s office, sided with Apple and is against the ruling of the Ninth Circuit. It filed a brief arguing that the Ninth Circuit misapplied the holding in Illinois Brick and the putative class’ action is barred by that doctrine.