Apple v. Pepper
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Introduction
In 1914, the Clayton Antitrust Act was passed to strengthen earlier antitrust laws such as the Sherman Anti-Trust Act of 1890, and to prohibit anticompetitive mergers, predatory and discriminatory pricing, and other forms of unethical corporate behavior. Similar to predecessor antitrust laws, the Clayton Antitrust Act was meant to protect consumers and reduce anti-competitive practices by US firms, which could lead to higher prices and harm the overall economic welfare. Though the Clayton Antitrust Act was passed more than one hundred years ago, it is still heavily used today in court cases involving companies that are considered monopolies. In 2019, the Supreme Court enforced certain provisions of the Clayton Antitrust Act in Apple Inc. v. Pepper. After two earlier, unsuccessful attempts, the plaintiffs, including Pepper, succeeded in convincing the Supreme Court that consumers could bring a class-action suit against Apple, alleging that, under Section 4 of the Clayton Antitrust Act, Apple was a direct distributor of services to consumers. This granted consumers the right to sue Apple for allegedly violating antitrust laws and creating a monopoly over apps sold through the Apple App Store.
Facts
On June 29, 2007, Apple Inc. released its first-ever mobile phone, the iPhone. Almost a year later, Apple Inc. introduced the App Store, a system where users may download applications onto their phones. The App Store is the only location in which iPhone users can legally purchase applications for their phones, per technological limitations and as specified by contract. Most apps on the App Store are produced by third-party developers, who contract with Apple to make them publicly available. To sell their apps, third-party developers must pay an annual subscription fee of $99 as well as 30% of all their sales to Apple.
Legal Background
In 2011, four plaintiffs filed suit against Apple, alleging that the company was a monopoly. In 2011, the United States District Court for the Northern District of California dismissed the case on technicalities. Two years later, Robert Pepper and other plaintiffs filed another antitrust case which, again, got dismissed, this time per the outcome of Illinois Brick Co. v. Illinois. Illinois Brick held that only direct purchasers – in this case, consumers who purchased their apps directly from Apple – could sue Apple for practicing anticompetitive behavior. The district court ruled that consumers were purchasing their apps directly from app developers, not from Apple, and therefore dismissed the case. On appeal, the Ninth Circuit overturned the district court’s decision and found instead that consumers were purchasing apps in the App Store directly from Apple. Since Apple took all profits and paid developers later, the Ninth Circuit reasoned, this made the consumers direct purchasers with legal standing to sue. Apple appealed and the Supreme Court granted cert.
Holding & Reasoning
In a 5-4 opinion, the Supreme Court affirmed that consumers who purchase iPhone applications through the App Store were direct consumers, under Illinois Brick Co. v. Illinois, with standing to sue Apple for non-competitive (monopolistic) pricing in the App Store. iPhone users purchase applications directly from Apple, and since there is no intermediary between the consumer and Apple in the distribution chain, users are direct purchasers from Apple. Thus, under Illinois Brick, which classifies direct purchasers as immediate buyers, iPhone owners have grounds for a lawsuit.
Apple had taken the position that only the party who sets the price – in this case, the application developer – can be sued. Apple argued that since they did not set the price, they could not be sued. However, the Court pointed out that Illinois Brick sought to allow for more efficient legal action in antitrust cases; it was not based on economic reasoning about who sets the price. Furthermore, if Apple’s interpretation were feasible, the Court cautioned, it would enable prospective monopolists to evade antitrust laws with ease. Apple’s interpretation of Illinois Brick was disregarded along with Apple’s claim that the three reasons behind the direct-purchaser rule, identified in Illinois Brick, applied to them.
Analysis
Apple’s website provides that “Apps on the App Store are made available by third party providers.” The foregoing suggests that third-party developers are the ultimate providers of the applications and that Apple only supplies the software and payment platform used by consumers to purchase apps. This implies that Apple only facilitates the apps and that they are an intermediary between the third-party app developers and the consumer. Consumers were purchasing apps directly from third-party developers, not from Apple, and consumers therefore should lack the grounds to sue Apple following the logic of the Illinois Brick decision. Illinois Brick provides that, in a supply chain, if A sells to B and B sells to C, C cannot pursue legal action against A, but C can pursue legal action against B just like B can pursue legal action against A. In this case, Apple would be the supplier, A, third-party developers would be B, and consumers would be C. Since the consumers are purchasing apps from third-party developers, they should not be able to sue Apple, since there is an intermediary between them. Furthermore, the plaintiffs – consumers in this case – claimed that Apple’s App Store charged higher-than-competitive prices, which forced consumers to either pay higher prices or not be able to buy their preferred applications at all. However, the third-party developers are setting app prices, and Apple has no say in how much third-party app developers charge consumers.
Licensors play an important role in the supply chain argument that is at the center of this case. Both Apple and third-party developers are deemed licensors, primarily third-party developers. Apple’s website provides that licensors shall not be held liable for consequential damages. The supply chain reasoning supports the argument that licensors would be the intermediary between Apple and the consumers. Apple would be the direct supplier of apps to licensors, who would grant access to the apps to consumers. Thus, the licensors, and not the consumers, would be the direct purchasers of applications, thus invalidating the right of consumers to pursue legal action under Illinois Brick.