Apple v. Pepper (Decision May 13, 2019)

Consumer Law.png

Argument: November 26, 2018

Decision: May 13, 2019

Petitioners’ Briefs: Apple Inc.

Respondents’ Briefs: Robert Pepper, et al.

Court below: 9th Circuit Court of Appeals

Court below: 9th Circuit Court of Appeals

Your iPhone App Store purchases could become cheaper as a result of this case. 

The Supreme Court issued a preliminary win Monday morning for consumers who challenged Apple in an antitrust case. Apple argued to the Supreme Court that the litigants weren’t entitled to suit because they weren’t Apple’s direct consumers. But a narrow majority sided with the plaintiffs, ruling the case can continue.

Apple v Pepper Decision@300x-20.jpg

The case

A class of iPhone App Store purchasers alleged 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 claimed the fee was being illegally passed on to them.

The potential class sought damages against Apple (for its allegedly illegal commission fee) that are available under the Clayton Act. However, Apple argued the plaintiffs were not entitled to file suit.

The developer of the app—not Apple—is responsible for setting the price of the app and collects the money from the purchase. Past U.S. Supreme Court precedent  (Illinois Brick Co. v. Illinois (1977)) bars indirect consumers from bringing Clayton Act violations from suppliers.

In Apple’s view, the consumers are not purchasing the apps directly from Apple but from the developers. Thus, Apple asked the Supreme Court to apply Illinois Brick in this case and to bar the plaintiffs’ 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 the rule 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.

Applying the doctrine to this case

Are plaintiff App Store purchasers indirect consumers that should be barred from suit by Illinois Brick? In Apple’s view, the consumers are buying apps from the developers, and it’s not clear whether Apple’s commission charge affects consumers. Illinois Brick is meant to disallow precisely this situation: in which the harm to the plaintiff is causally uncertain.

The plaintiffs disagree. Apple runs the App Store, sets the pricing scheme, and the plaintiffs buy directly from the App Store. Thus, the plaintiffs are direct purchasers, and the effect of Apple’s commission charge on them is clear.

Supreme Court ruling

The Supreme Court sided with the plaintiffs. Kavanaugh sided with the liberal wing for the necessary fifth vote and also wrote the opinion.

The majority ruled that the Illinois Brick doctrine looks to whether the consumers are direct purchasers from the party sued for anticompetitive behavior. In this case, the consumers bought directly from Apple on the App Store. It doesn’t matter who set the price. The case is valid against Apple.

The dissent

Justice Gorsuch wrote the dissent, with Roberts, Thomas and Alito in support. The dissenters wrote that the majority’s focus on direct purchasing missed the larger economic point of the Illinois Brick rule. The rule was meant to block suits if causation isn’t clear, like when pricing is determined through more than one party. The opinion looked back at the early Supreme Court case precursor to Illinois Brick (Hanover Shoe) to argue its point.

See additional discussion of the case in our earlier Argument Explainer below.


Argument Explainer (November 23, 2019)

Can iPhone App Store purchasers sue Apple for commission fees charged to app developers?

Apple v Pepper

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

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.

 
John Pesek

Contributor

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.

You can find John on LinkedIn here.

 

 

Recent Reports: