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App Buyers’ Claim of Apple Monopolization Has Supreme Court Questioning Longstanding Antitrust Doctrine

December 4, 2018

App Buyers’ Claim of Apple Monopolization Has Supreme Court Questioning Longstanding Antitrust Doctrine

December 4, 2018

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There is a vigorous debate in antitrust circles these days about the relevance of U.S. antitrust laws to the current economy, dominated as it is by large tech companies like Apple.

In oral argument before the United States Supreme Court on November 26, 2018, Apple Inc. faced tough questions from the Court in its attempt to defeat a monopolization complaint filed by iPhone app purchasers in Apple Inc. v. Pepper. The argument in the case centers on the application—or continued viability—of the “Illinois Brick” doctrine in antitrust law, which holds that only the direct purchaser of goods may bring an antitrust claim against a producer or manufacturer of the goods. “Indirect purchasers”—those further down the distribution chain—have no standing to bring a federal antitrust claim for damages. Apple argues that the app buyers are indirect purchasers and thus barred from bringing federal antitrust claims under the doctrine; the plaintiffs claim that they are entitled to sue as direct purchasers. The argument before the justices suggests that Apple has an uphill battle getting the case dismissed. And at least two justices wondered out loud whether the Illinois Brick doctrine should be overruled.

The Illinois Brick doctrine stems from a 1977 Supreme Court decision, Illinois Brick v. Illinois. The state of Illinois had brought a price-fixing suit against concrete block manufacturers over the costs the state incurred in contracts for building construction. The state did not buy the concrete block directly from the manufacturers, but rather from general contractors, who in turn had purchased the block from masonry contractors. The Supreme Court ruled that only the direct purchasers of the concrete block, the masonry contractors, could sue for the overcharge caused by the price fixing, and indirect purchasers had no standing to sue. The Court reasoned that allowing claims by purchasers further down the distribution chain would lead to multiple recoveries and damages claims that would be difficult to ascertain. The Illinois Brick doctrine has prevented indirect purchasers from bringing federal antitrust claims for more than 40 years. But the doctrine has had its detractors—in the intervening years since the decision, many states have passed “Illinois Brick repealer” statutes allowing indirect purchasers to sue in state court.

In Apple Inc. v. Pepper, a class of app purchasers sued Apple in 2011 for monopolization, claiming that the price of iPhone apps was inflated because Apple monopolized the market for sales of apps through its “App Store.” Although the app developers set the price of the apps, Apple takes a 30 percent commission on the sale of every app. App purchasers pay Apple directly for the apps through the App Store. The district court held that the app purchasers were barred from suing Apple, reasoning that they were “indirect” purchasers who bought the apps only after Apple had imposed the 30 percent commission, an “overcharge” which the app developers passed on to the app purchasers. But the Ninth Circuit Court of Appeals reversed, holding that the app purchasers were actually direct purchasers and therefore entitled to sue under Illinois Brick. The issue before the Supreme Court is whether the Illinois Brick doctrine applies to these facts and precludes the suit.

The questions from the justices suggest that the Court is troubled by the doctrine’s application to this set of facts—i.e., not a vertical supply chain as in Illinois Brick, but rather a “closed loop” where one party sets the price and is charged a commission but another party actually sells the product. Justices Kagan, Breyer and Sotomayor questioned whether the sale of apps through the App Store is close enough to the Illinois Brick scenario. Agreeing with the plaintiffs’ lawyer, Justice Kagan stated that when buying an app from the App Store, “I pay Apple directly with the credit card information that I’ve supplied to Apple. From my perspective, I’ve just engaged in a one-step transaction with Apple.” But Apple’s lawyer argued that the important issue is not the proximity between the parties to the transaction but rather that the app developers set the price and pass on the 30 percent commission to the app purchasers, calling it “a classic overcharge case” under the Illinois Brick doctrine.

Thirty-one states filed a joint “friend of the court” brief urging the Court to overrule Illinois Brick, which they argued “is grounded in predictions and policy concerns that have been undermined by subsequent experience and events.” In the oral argument, Justices Alito and Gorsuch both raised the continued viability of Illinois Brick. Justice Alito wondered “whether, in light of what has happened since then, the court’s evaluation [in Illinois Brick] stands up.” Justice Gorsuch asked, “Shouldn’t we question Illinois Brick, perhaps, given the fact that so many states have done so? They’ve repealed it.” When Apple’s lawyer suggested that the repeal question was better suited to Congress, which has considered a repeal at least 17 times, Justice Ginsburg asked, “Why is that so if the Court created the doctrine in the first place?”

There is a vigorous debate in antitrust circles these days about the relevance of U.S. antitrust laws to the current economy, dominated as it is by large tech companies like Apple. Unlike the European antitrust regime, in which the EU has used the “abuse of dominance” standard to impose large fines against tech companies, U.S. antitrust laws impose a higher bar for monopolization cases. Some argue that U.S. antitrust laws are outdated and not suited to constrain such companies from acting in anti-competitive ways. The outcome of the Apple case could have a significant effect on the continued viability of the Illinois Brick doctrine. More broadly, the case may signal a shift in how courts will apply longstanding antitrust rules to today’s economy.

The Supreme Court will rule on the case by June 2019, the end of the current term.

For Further Information

If you have any questions about this Alert, please contact Christopher H. Casey, one of the attorneys in our Antitrust and Competition Group, or the attorney in the firm with whom you are regularly in contact.

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