Illinois Brick Simplified: U.S. Supreme Court Rules That Purchasers from iPhone App Store Can Sue Apple Despite the Fact that Apple Does Not Set App Prices

Troutman Pepper

Pepper Hamilton LLP

On May 13, 2019, in a 5-4 decision, the U.S. Supreme Court rejected the views of the U.S. Solicitor General, the Department of Justice’s Antitrust Division, and the Federal Trade Commission when it kept alive a putative class action brought by iPhone owners against Apple for its alleged monopoly of the retail market for iPhone applications (apps).  The issue before the Court was whether Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), barred iPhone owners from claiming that Apple’s app store monopoly harmed them, despite the fact that developers, not Apple, set the prices for apps.  The Court held that, under Illinois Brick, iPhone owners purchase their apps directly from Apple, and, therefore, are permitted to sue it for damages based on any anticompetitive prices they paid because of Apple’s alleged monopolistic 30 percent commission on all apps it sells.

By contract and through other limitations, Apple’s App Store is the only place where plaintiff iPhone owners can legally purchase apps.  The majority of apps on the App Store are created by independent developers who must pay Apple a $99annual membership fee.  Although app developers determine the price of their own apps, Apple requires that all app prices must end in $0.99.  Apple also retains 30 percent of the app sales price.  Plaintiffs allege that Apple’s monopoly allows it to command the anticompetitive 30 percent commission, and prevents consumers from buying apps through other channels without inflated prices.

At the district court level, Apple moved to dismiss the complaint, arguing that plaintiffs were not direct purchasers and therefore could not sue under Illinois Brick.  The Illinois Brick decision held that direct purchasers may sue under federal antitrust laws, but that indirect purchasers could not.  The district court agreed with Apple that iPhone owners were not direct purchasers because the app developers and not Apple ultimately set the prices paid by the consumers.  The Ninth Circuit reversed and concluded that plaintiffs are direct consumers under Illinois Brick because the plaintiffs purchased the apps directly from Apple. 

The Supreme Court’s majority began its analysis quoting the language of Section 4 of the Clayton Act, which provides, in pertinent part: “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue . . . the defendant . . . .”  The Court focused on Section 4’s use of the words “any person” to conclude that the statute’s text readily covers consumers who purchase goods or services at supracompetitive prices from an allegedly monopolist retailer.  Next, the Court turned its attention to Illinois Brick, which it described as having established a “bright-line rule” that indirect purchasers “two or more steps removed from the antitrust violator in a distribution chain may not sue.  By contrast, direct purchasers – that is, those who are the immediate buyers from the alleged violators may sue.”  Op. at 4 citing Kansas v. UtiliCorp., 497 U.S. 199, 207 (1990).  Based on this simplistic reading of Illinois Brick, the Court held that because the consumers purchased the apps directly from Apple, consumers are the proper plaintiffs to sue.

Apple, however, argued that Illinois Brick only allows consumers to sue the party that set the retail price, and because the app developers determine the price, consumers could not sue Apple.  Under Apple’s logic, the developers would be the proper plaintiffs to complain about the controversial 30 percent commission.  The Court rejected this argument, stating that Illinois Brick was “not based on an economic theory about who set the price,” but instead was intended to ensure an efficient litigation scheme because “simplified administration improves antitrust enforcement.”  Op. at 7.  

The Court also rejected Apple’s argument because it would draw an arbitrary line among retailers based on their financial arrangements with their suppliers.  Under Apple’s argument, results would differ based on whether the retailer used traditional markup pricing versus a commission model.  The consumer could sue the retailer in the former situation but not the latter.  The Court explained that this theory “does not make a lot of sense, other than as a way to gerrymander Apple out of this and similar lawsuits.”  Op. at 9.  The Court similarly expressed its concern that buying into Apple’s arguments would provide a roadmap for similar companies to avoid antitrust exposure (while still engaging in conduct that violates the antitrust laws) just by how they structure their market with consumers and suppliers. 

Apple also based its arguments on efficient antitrust enforcement, simplification of damages calculations, and elimination of duplicative damages.  The Court addressed and rejected each of Apple’s stated concerns.  First, the Court did not agree that it was inefficient to allow both consumers and app developers to sue Apple over its 30 percent commission and similar practices.  Second, the Court noted that complex damages calculations were not unusual in antitrust cases, and that experts were used to resolve such matters routinely. Op. at 12.  Finally, the Court rejected Apple’s argument that this case would present problems of “conflicting claims to a common fund – the amount of the alleged overcharge.”  Id.  Although Apple could face suits from both consumers and app developers, the Court explained that Illinois Brick was only intended to bar “trac[ing] the effect of the overcharge or multiple liability that arises from an overcharge that is passed down the distribution chain.  Op. at 13.

The Dissent harshly criticized the reasoning of the Majority.  First, it noted that the Court’s decision recast Illinois Brick as a rule prohibiting suits only when plaintiffs are not in privity with the defendant, and the Dissent reasoned that Apple’s 30 percent commission falls first on the developers, and as a result, it is the developers who are directly injured and that “Plaintiffs can be injured only if the developers are able and choose to pass on the overcharge to them in the form of higher app prices that the developers alone control.”  Dissent at 5.  Next, the Dissent explained that the Court’s decision will require the trial court to determine the extent to which each app developer was able to and in fact passed on the 30 percent commission.  Unraveling this issue triggers concerns identified by Illinois Brick, such as dealing with “complicated theories” about “how the relevant market variables would have behaved had there been no overcharge.”  Dissent at 5.  Similarly, courts will need to divvy up the commissions that Apple collected among the consumers and the app developers, a step that prior Supreme Court precedent sought to avoid. 

This decision is noteworthy for several reasons.  First, Justice Kavanaugh, who many speculated would be a reliable “conservative” vote on antitrust issues, authored the opinion and was joined by the four “liberal” Justices.  Second, other companies that operate “electronic marketplaces” could also be targeted in similar lawsuits, and the tone of the opinion suggests that large tech companies should not be permitted to avoid suits by consumers, particularly when those tech companies have defined the manner in which the consumers can interact with them and the other parties operating in the their carefully designed environment.  Third, retailers with high market shares, receiving a commission on each sale and selling products at the price set by the manufacturer, will likely face the same arguments by consumers alleging monopolization claims.  Fourth, even though 31 state attorneys general filed amicus briefs urging the Court to overturn Illinois Brick, the Majority declined to consider their argument.  Fourth, the Majority did not acknowledge the involvement or views of the Antitrust Division or the FTC despite their subject matter expertise.  Fifth, it is likely that the plaintiffs’ class action bar will attempt to expand the group of plaintiffs qualifying as direct purchasers based on the Majority opinion.   

At a minimum, large tech companies operating similar platforms and large commissioned-retailers should document the benefits that they offer to consumers and those developing products for sale on their platform, particularly if their model arguably restricts the purchasing venues available to consumers. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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