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Antitrust UCL and Privacy

Apple Inc. v. Pepper: Revisiting the Indirect Purchaser Rule

David W. Kesselman
Trevor V. Stockinger
Kesselman Brantly Stockinger LLP

The United States Supreme Court held that consumers have standing to pursue a putative antitrust class action against Apple for monopolization.  In Apple Inc. v. Pepper, et al., Case No. 17-204 (May 13, 2019), the Court ruled 5-4 that the consumer plaintiffs were not barred by the “indirect purchaser rule” that generally limits standing in federal antitrust cases for damages to direct purchaser plaintiffs only. 

Plainitiffs alleged that Apple has violated Section 2 of the Sherman Act by monopolizing the market for the sale of apps. The Plaintiff’s alleged that, as owners of Apple iPhones, they could only purchase apps from Apple’s App Store. Apple does not create most of the apps in the App Store. Instead, independent developers create the apps and contract with Apple to sell them.  Apple sets certain pricing criteria (all app prices must end in $0.99) but the developers can set the prices within those parameters. Nonetheless, Apple mandates that it will keep 30% of the sales price in all circumstances. Plaintiffs alleged that Apple’s requirement that iPhone owners purchase apps only through Apple’s App Store and pay a 30% markup on all apps constitutes an unlawful exercise of monopoly power.  Plaintiffs alleged that in a competitive market, free from these restrictions, they would be able to purchase apps elsewhere and there would be increased price competition and, therefore, lower prices.

Apple filed a motion to dismiss and asserted that the plaintiffs were indirect purchasers and so lacked standing to maintain the lawsuit under the Supreme Court’s Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), decision. In Illinois Brick, the Court held that only the direct purchasers, i.e. “the immediate buyers,” had standing to sue.

The district court in the Northern District of California agreed with Apple’s argument that the plaintiffs should not be deemed direct purchasers because the independent developers set the final retail price, and therefore any claim for monopolization against Apple could only be filed by the independent app developers.

The Ninth Circuit reversed the district court’s ruling.  The Ninth Circuit found that the consumer plaintiffs are direct purchasers because, regardless of who sets the price, the iPhone owners purchase the apps directly from Apple. The Supreme Court granted Apple’s petition for certiorari. 

The Majority Opinion

The Court affirmed the Ninth Circuit’s decision and held that the plaintiff consumers have standing to sue. The majority, written by Justice Kavanaugh and joined by Justices Breyer, Ginsburg, Kagan, and Sotomayor, explained, “It is undisputed that the iPhone owners bought the apps directly from Apple.  Therefore, under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization.”  (Id. at 4.)

The Court reasoned that this holding was simply a “straightforward” application of the statutory text and the case law.  The Court noted that Section 4 of the Clayton Act provides that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue….” (Id. at 4-5) (original emphasis).  Further, the Court explained that “unlike in Illinois Brick, the iPhone owners are not consumers at the bottom of a vertical distribution chain… there is no intermediary… iPhone owners purchase apps directly from the retailer Apple… [and] the absence of an intermediary is dispositive.”  (Id. at 6.)

The majority rejected Apple’s various arguments for finding that Illinois Brick should preclude standing in this case.  Among other things, the Court rejected Apple’s contention that plaintiffs should only be allowed to sue “the party that sets the retail price, whether or not that party sells the good or service directly to the complaining party.”  (Id. at 7.)  The Court found that “Apple’s theory contradicts statutory text and precedent.”  The Court reiterated that Section 4 of the Clayton Act “broadly affords injured parties a right to sue under the antitrust laws,” and that Illinois Brick’s “bright-line rule… was not based on an economic theory about who set price.”  (Id. at 7.)  The Court pragmatically noted that “Apple’s line-drawing does not make a lot of sense other than as a way to gerrymander Apple out of this and similar lawsuits.”  (Id. at 9.)

In finding in favor of the plaintiffs, the Court rejected the request of the 30 States and the District of Columbia to overturn the indirect purchaser rule.  The Court explained: “In light of our ruling in favor of plaintiffs in this case we have no occasion to consider [the] argument for overruling Illinois Brick.”  (Id. at 6.) 

The Court acknowledged Apple’s contention that calculating damages in this circumstance might be complicated: “It is true that it may be hard to determine what the retailer would have charged in a competitive market.  Expert testimony will often be necessary.  But that is hardly unusual in antitrust cases.  Illinois Brick is not a get-out-of-court free card for monopolistic retailers to play any time that a damage calculation is complicated.”

Similarly, the Court acknowledged that, in addition to the iPhone owners, “it could be that some upstream app developers will also sue Apple on a [purchasing or buyer side] monopsony theory.”  (Id. at 13.)  Yet, the majority was unpersuaded that this would create concerns about overlapping damage claims because even if there were two antitrust lawsuits (one from consumers and one from app developers), they would rely on “fundamentally different theories of harm.”  (Id.)   

The Dissent

The dissent, written by Justice Gorsuch and joined by Justices Alito, Roberts, and Thomas, asserted that Plaintiffs lacked standing. In Justice Gorsuch’s view, Illinois Brick clearly barred the plaintiffs from suing Apple for monopolization. The dissent argued that the majority was effectively disregarding the underlying rationale for Illinois Brick.  The dissent claimed Illinois Brick was premised primarily on proximate causation concerns (taken from traditional tort law).  Citing the Supreme Court’s decision in Hanover Shoe, Justice Gorsuch explained that Illinois Brick was “just the other side of the coin”: “With Hanover Shoe having held that an antitrust defendant could not rely on a pass-on theory to avoid damages, Illinois Brick addressed whether an antitrust plaintiff could rely on a pass-on theory to recover damages.”  (Id. Dissent at 3.)  The answer was no in Illinois Brick, and so, in Justice Gorsuch’s view, the same rationale should have applied in this case. 

Of note, Justice Gorsuch rejected the States’ suggestion that the Court should consider expressly overturning the Illinois Brick rule.  While acknowledging that “[m]aybe there is something to these arguments; maybe not,” Justice Gorsuch conclude “there is plenty of reason to decline any invitation to take even a small step away from Illinois Brick today.”  (Id. Dissent at 11.)

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