SCOTUS Blows Down Apple’s House Made of Illinois Brick

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In a 5-4 split decision, the U.S. Supreme Court appears to have reworked a longstanding precedent that has been a foundation of antitrust litigation for more than 40 years—the “direct purchaser” rule of Illinois Brick, which generally forecloses “downstream” purchasers from suing for alleged violations of the Sherman Act. Apple Inc. v. Pepper addressed a “market” that almost certainly is familiar to the reader: Apple’s iPhone “App Store.” The Supreme Court allowed a putative class action of iPhone application consumers to proceed against Apple, even though the “sting” of Apple’s allegedly monopolistic 30% commission on each app sale first was felt by app developers, not the consumers.

Apple invoked the so-called Illinois Brick defense, which is derived from a 1977 Supreme Court case by the same name. There, the defendant (the Illinois Brick Company) manufactured concrete blocks and sold those blocks to masonry contractors; those masonry contractors sold masonry structures to general contractors; those general contractors sold their services for construction projects to the State of Illinois. The state sued Illinois Brick, alleging that Illinois Brick had engaged in a conspiracy to fix the price of concrete blocks, and that the state consequently paid more for the concrete blocks than it otherwise would have. According to the state, that alleged “overcharge” was “passed on” through the distribution chain from Illinois Brick (the manufacturer), to the masonry contractors, to the general contractors, and finally to the state (as the ultimate consumer).

In Illinois Brick, the Supreme Court ruled that because the state was an “indirect purchaser,” which did not purchase concrete blocks directly from Illinois Brick, the state was not a proper antitrust plaintiff. According to the Supreme Court, it was not clear that all or even some of the alleged overcharge was “passed on” to the state, and allowing the state to bring suit would result in unnecessarily complicated damages calculations about the extent to which the overcharge was “passed on” through the distribution chain, or even duplicative damages. The proper plaintiff, the Supreme Court surmised, would be an entity that had purchased concrete blocks directly from Illinois Brick; any such “direct purchaser” necessarily would have paid the alleged overcharge.

For more than 40 years, Illinois Brick has operated as a bright-line, prudential “standing” rule in antitrust class actions, barring indirect-purchaser plaintiffs from bringing antitrust claims because any alleged overcharge may not have been “passed on” through the distribution chain. Under Illinois Brick, only direct purchasers could sue. But the Supreme Court’s new decision in Apple arguably has disrupted the long-settled understanding of what it means to be a “direct purchaser.”

In Apple, four iPhone owners alleged that Apple unlawfully monopolized the market for iPhone apps and took an anticompetitive 30% commission on each app sale. Consequently, according to the plaintiffs, app consumers have paid higher prices for apps in the App Store. Apple argued that Illinois Brick barred the app consumers’ antitrust claims, even though—in the App Store—consumers pay Apple directly in return for Apple’s granting them access to download the desired apps. According to Apple, even though it transacted directly with the app consumers, it was merely serving as “agent” for the app developers, who set the price of each app, and who, according to Apple, should be considered the real “sellers” of the apps. Plus, the alleged anticompetitive overcharge—Apple’s 30% commission—was levied directly on the developers (who received only 70% of each app sale), not the consumers. It was not clear that any of the 30% commission was passed on to consumers in the form of higher app prices.

The district court agreed with Apple, dismissing the case, but the Ninth Circuit reversed. A divided Supreme Court affirmed the Ninth Circuit, disagreeing with Apple’s characterization of the transaction. Writing for the majority, Justice Kavanaugh (joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan) focused literally on the concept of a “direct purchaser,” not the “pass on” of any alleged overcharge. The Supreme Court’s reasoning was simple: Because app consumers transact directly with Apple, and there is no “intermediary” between them and Apple, the plaintiff-consumers in the case are “direct purchasers,” so Illinois Brick does not bar the antitrust claim. Based on the fact that Apple transacted directly with the consumers, the Supreme Court rejected Apple’s attempt to characterize itself as “agent” for the developers. The Supreme Court also was unmoved by the fact that app developers, not consumers, feel the brunt of the alleged overcharge, and completely dismissed concerns about the difficulty of allocating damages between consumers and developers, and the possibility of duplicative recoveries. Instead, the majority reasoned that, because there was no distribution chain, the alleged overcharge—i.e., the 30% commission—“has not been passed on by anyone to anyone.”

Justice Gorsuch (joined by Chief Justice Roberts and Justices Alito and Thomas) wrote a blistering dissent. He accused the majority of reducing Illinois Brick to a “blind formalism” by focusing exclusively on the fact that app consumers purchase “directly” from Apple, while ignoring the economic relationship among the parties and the fact that app developers, not the consumers, “first felt the sting of the alleged overcharge.” As Justice Gorsuch explained, by allowing app consumers to sue, the majority had opened the door to “unduly complicated” damages computations and “conflicting” claims about allocating the alleged overcharge between consumers and developers—precisely what the Illinois Brick rule was intended to prevent.

The majority’s decision to allow consumers to sue even though they did not “first feel the sting of the alleged overcharge”—and may never have felt that sting—arguably does amount to a formalistic reworking of the Illinois Brick doctrine. But questions remain. For example, the majority, at least implicitly, conceptualized the App Store as a two-sided market, where developers pay for the ability to distribute apps and where consumers buy apps. The majority seemed to bless the possibility that both consumers and developers could recover from Apple. Yet the majority (and the dissent) failed even to mention the Supreme Court’s decision last year in Ohio v. American Express Co. [insert link], where the Supreme Court rejected an antitrust challenge to a different two-sided market: Amex’s credit card platform, which connects cardholder-buyers to merchant-sellers. In Amex, the Supreme Court held that plaintiffs challenging anticompetitive conduct in a two-sided market must establish that the overall effect of the challenged conduct on both sides of the market is anticompetitive, and affirmed judgment for the defendant credit card companies because the plaintiffs’ analysis of anticompetitive effects focused only on the merchant side of the relevant market. Perhaps the Supreme Court’s failure to mention Amex in the Apple opinion was simply a product of the majority’s express refusal to “assess the merits of the plaintiffs’ antitrust claims” or “any other defenses Apple might have.” Or perhaps it indicates a desire by the Apple majority, which included all four Justices who dissented in Amex, to limit Amex’s holding to the specific two-sided market at issue in that case.

More broadly, what will be Apple’s long-term impact on antitrust jurisprudence? At a minimum, we would expect consumer plaintiffs to attempt to use Apple to bring class actions against other  internet platform companies—e.g., Amazon, Alibaba, eBay—as well as any other retailer who operates on a commission basis but allows a given manufacturer or distributor to set the sale price.  Because of the Supreme Court’s formalistic focus on the identity of the “direct purchaser,” we would not be surprised to see Apple and other tech companies restructure their distribution models in response to this decision.

Finally, does Apple mean the Illinois Brick doctrine is on solid ground for the foreseeable future?  Many commentators, and several amici (including 31 state attorneys general), had argued that the Supreme Court in Apple should reverse Illinois Brick. None of the parties argued for that change in the law, and the Supreme Court did not take up that issue. But in a sense, the Supreme Court did just the opposite, reaffirming Illinois Brick as a bright-line rule that permits only “direct purchasers” to bring antitrust claims. Nevertheless, Justice Kavanaugh’s majority opinion notably downplayed the core rationale of the Illinois Brick doctrine—to avoid the complications, expense, and uncertainty associated with calculating and allocating overcharge damages among participants at different levels of a distribution chain. That could signal the majority’s willingness to revisit, and possibly even to overrule, Illinois Brick down the road.

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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