App Store Monopoly Claims Pushed Ahead by Supreme Court

Customers enter an Apple store on May 31, 2018, in New York. (AP Photo/Mark Lennihan)

WASHINGTON (CN) – The Supreme Court cleared the way Monday for a group of iPhone owners to advance antitrust claims over the tech giant’s App Store.

With the court’s four liberal justices joining Trump appointee Justice Brett Kavanaugh in the majority Monday, the court found that the iPhone users who sued Apple had bought the apps directly from the company, making the case different from a key antitrust holding known as Illinois Brick.

In that 1977 case, the Supreme Court said that alleged monopolists can be sued only by people who are directly impacted by the companies’ conduct.

Led by Robert Pepper, the iPhones users filed suit in 2011, claiming the App Store gave Apple a monopoly. Apple users who want to run applications on their devices can do so only through App Store downloads.

Developers pay a $99 membership fee every year for access to the App Store, and Apple keeps 30 percent of every sale on the marketplace. The developers are also free to set their own prices on apps, so long as the price ends in 99 cents.

Pepper and the other owners say this arrangement makes them pay more for the apps than they would if they could download them elsewhere.

A federal judge cited Illinois Brick in dismissing the case, but the Ninth Circuit reversed in 2017 — an outcome the high court backed today.

In a 14-page opinion, Kavanaugh called the conclusion that the iPhone owners can sue Apple “seemingly simple,” citing both the text of antitrust laws and the court’s precedent in Illinois Brick. Under Apple’s reasoning, Kavanaugh wrote, consumers could sue retailers that sell their merchandise at a markup, but not those that sell it on a commission model.

This would give retailers a way to shield themselves from antitrust suits without having any real impact on their bottom lines.

“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,” Kavanaugh wrote. “In particular, we fail to see why the form of the upstream arrangement between the manufacturer or supplier and the retailer should determine whether a monopolistic retailer can be sued by a downstream consumer who has purchased a good or service directly from the retailer and has paid a higher-than-competitive price because of the retailer’s unlawful monopolistic conduct.”

Justice Neil Gorsuch penned the dissenting opinion the case, joined by Chief Justice John Roberts and Justices Clarence Thomas and Samuel Alito. A fellow Trump appointee, Gorsuch slammed Kavanaugh’s opinion as putting in place an “easily manipulated and formalistic rule” that goes against how antitrust laws are meant to function.

To Gorsuch and his fellow dissenters, it is the developers, not the iPhone owners, that must directly pay the commission to Apple. The commission impacts the iPhone users only if the developers decide to pass on the cost of the commission in the price they set.

This means courts hearing cases involving business arrangements like Apple’s will have to dive into the murky question of whether the developers actually passed on the price of the commission to the iPhone users and, if so, how much. This will make courts go through a complicated and fact-specific process that Illinois Brick was meant to prevent, Gorsuch argued.

“Will the court hear testimony to determine the market power of each app developer, how each set its prices and what it might have charged consumers for apps if Apple’s commission had been lower?” Gorsuch wrote. “Will the court also consider expert testimony analyzing how market factors might have influenced developers’ capacity and willingness to pass on Apple’s alleged monopoly overcharge? And will the court then somehow extrapolate its finding to all of the tens of thousands of developers who sold apps through the App Store at different prices and times over the courts of years?”

Pepper is represented by David Frederick with Kellogg Hansen. In an interview Monday, Frederick noted Kavanaugh came to the Supreme Court with significant experience in antitrust law. He said this led him to anticipate that the newest justice might be receptive to their arguments.

Frederick praised Kavanaugh’s opinion, saying the case “vindicates the rights of consumers” to sue monopolist retailers.

Daniel Wall, with the San Francisco firm Latham & Watkins, argued for Apple in the case. A spokesman for Apple said it can still win the war. 

“Today’s decision means plaintiffs can proceed with their case in district court,” an Apple spokesman said in a statement. “We’re confident we will prevail when the facts are presented and that the App Store is not a monopoly by any metric.”

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