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Supreme Court Holds App Store Buyers Are Direct Purchasers Under Long-Standing Antitrust Doctrine

May 15, 2019

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In federal antitrust law, the Illinois Brick doctrine holds that only the direct purchaser of goods may bring an antitrust claim for damages against a producer or manufacturer of the goods.

On May 13, 2019, a divided U.S. Supreme Court reaffirmed the application of the Illinois Brick doctrine in Apple Inc. v. Pepper. The case involves claims that Apple monopolizes the market for iPhone apps via its App Store under the federal antitrust laws. The majority, delivered by Justice Kavanaugh and joined by Justices Ginsburg, Breyer, Sotomayor and Kagan, held that iPhone owners were direct purchasers who may sue Apple for alleged monopolization under a straightforward application of Illinois Brick v. Illinois. Justice Gorsuch, joined by Chief Justice Roberts and Justices Thomas and Alito, dissented by arguing that iPhone owners are indirect purchasers. Read together, the majority and the dissent suggest that Illinois Brick is alive and well, despite recent skepticism and vigorous debate over its continued viability.

In federal antitrust law, the Illinois Brick doctrine holds that only the direct purchaser of goods may bring an antitrust claim for damages 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 under the doctrine. Plaintiffs, iPhone owners, argued that they were direct purchasers of apps from Apple, while Apple argued that iPhone owners were indirect purchasers because the app developers—not Apple—set the prices for the apps. The divided Court sided with the plaintiffs.

In Illinois Brick, 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, because indirect purchasers (such as the state) had no standing to sue.

According to the allegations in the underlying complaint, Apple monopolizes the market for the sale of apps to iPhone owners through its App Store. Apple allegedly charges app developers an annual membership fee, requires that developers set a retail price of at least $0.99 (and always ending in 99 cents) for an app sold through the App Store, and charges a 30 percent commission on every app sale. The plaintiffs claim that the prices they pay Apple for apps is inflated because of Apple’s monopoly of this market. The Court’s rationale for determining that iPhone owners are direct purchasers of apps via Apple’s App Store was threefold.

First, the Court concluded that a plain reading of Section 4 of the Clayton Act, Section 2 of the Sherman Act and Illinois Brick suggests that iPhone owners are not consumers at the bottom of a vertical distribution chain because there is no intermediary in between them and Apple in the distribution chain. Second, the Court rejected Apple’s argument that the app developer was an intermediary simply because it set the prices for the apps because application of Illinois Brick should not depend on retailers’ financial arrangements with their manufacturers or suppliers. Third, the Court found that Apple’s argument would undermine the long-standing goal of Illinois Brick—effective private enforcement and consumer protection in antitrust cases.

The dissent argued that the majority opinion was not a straightforward application of Illinois Brick but rather an effort to “begin whittling away” Illinois Brick “to a bare formalism.” Justice Gorsuch criticized the majority’s so-called straightforward application of Illinois Brick and claimed that iPhone owners rely “on just the sort of pass-on theory that Illinois Brick forbids.”

Apple v. Pepper highlights the difficulties of applying well-aged antitrust doctrines to the electronic markets where it is sometimes unclear whether consumers purchase goods directly from a retailer or from a manufacturer. These markets are more often not a traditional vertical chain but a “closed loop” where one party sets the price and is charged a commission but another party actually sells the product. The decision in Apple v. Pepper may not signal a shift in how courts apply long-standing antitrust rules to today’s economy, but rather an assurance from the Court that that the U.S. antitrust laws can adequately regulate the current economy.

For Further Information

If you have any questions about this Alert, please contact Sean P. McConnell, William Shotzbarger, any 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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