In Case Against Major Technology Corporation, United States Supreme Court Holds Mobile Phone Owners Have Antitrust Standing To Bring Claims Against Operator Of Application Store
On May 13, 2019, the Supreme Court of the United States affirmed a Ninth Circuit decision reversing a California District Court’s dismissal of plaintiffs’ antitrust claims on grounds that plaintiffs could not sue defendant because they were not direct purchasers from defendant. The 5-4 majority opinion written by Justice Kavanaugh held that plaintiffs—owners of mobile phones produced and sold by defendant—were direct purchasers because they bought applications directly from defendant’s application store. Thus, as injured buyers under Section 4 of the Clayton Act, plaintiffs were not barred from suing defendant on claims that defendant monopolized the retail market for the sale of its phone applications and exploited this position to overcharge consumers. Apple Inc. v. Pepper, No. 17-204 (U.S. May 13, 2019).
Defendant, Apple Inc. (“Apple”), is among the world’s largest technology companies and sells the iPhone, an enormously popular smartphone device that is one of its flagship consumer electronics products. iPhone users are able to install software applications (iPhone “apps”) on their devices, which are various programs available for purchase exclusively from a retail marketplace owned and operated by Apple called the “App Store.” Apple contracts with third-party developers to market and sell their apps in the App Store, allowing these independent developers to set their apps’ retail price and charging a thirty percent commission on each sale. Plaintiffs are iPhone owners and consumers who purchased applications in Apple’s App Store. In 2011, plaintiffs sued defendant, alleging that defendant had monopolized the market for the sale of iPhone apps with contractual and technological restrictions that essentially force any iPhone owners who purchase apps to do so from the App Store. Plaintiffs claim that defendant illegally used its monopoly power to charge an artificially high commission fee to third-party app developers, and that charge is passed on to end-user consumers who pay higher prices to purchase apps than they would in a competitive market.
In December 2013, the District Court for the Northern District of California granted defendant’s motion to dismiss, holding that plaintiffs did not meet antitrust standing requirements established by the Supreme Court in Illinois Brick Co. v. Illinois because they were not direct purchasers from the alleged monopolist defendant. 431 U.S. 720 (1977). The District Court reasoned that App Store consumers lacked standing as indirect purchasers because independent app developers—as opposed to defendant—set the purchase price for their apps. In January 2017, the Ninth Circuit reversed, finding that plaintiffs did have antitrust standing as direct purchasers from defendant because apps in the App Store are sold directly to consumers by Apple, regardless of whether a third party initially determines an app’s price. The Supreme Court granted certiorari on the question of “whether consumers may sue anyone who delivers goods to them for antitrust damages, even when they seek damages based on prices set by third parties who would be the immediate victims of the alleged offense.”
The Court’s opinion begins with an analysis and application of Illinois Brick. Plaintiff in that case was a purchaser far down the distribution chain from the defendant manufacturer that allegedly engaged in a price-fixing conspiracy in its sale of concrete blocks to contractors. These initial purchasers subsequently sold the blocks to other intermediaries, and so on, until they were ultimately used by the plaintiff in a construction project. Despite plaintiff’s claim that the overcharge was passed down the distribution chain and eventually caused injury to it as the end-buyer, the Court in Illinois Brick held the proper party to bring an action against an antitrust violator was the immediate or direct purchaser, and not any entity farther removed in the chain of commerce. Applying Illinois Brick to the present case and distinguishing its facts, the Court concluded that “the absence of an intermediary is dispositive” in Apple. In particular, the Court found it was significant that plaintiff-consumers purchase apps directly from defendant as the owner and operator of the App store. Not only were plaintiffs injured if they had paid higher-than-competitive prices as a result of defendant’s misconduct, but, importantly, these payments were made directly to defendant for products sold by defendant-retailer. Even though these costs were initially borne by third party developers who passed them on to App Store consumers by setting higher app prices, the iPhone owners were proper plaintiffs here because they directly transacted with the alleged antitrust violator.
The Court then rejected defendant’s argument that, pursuant to Illinois Brick, plaintiffs may sue only the independent app developers because consumers can only be direct purchasers from parties who set the retail price. First, the Court found that defendant’s attempts to transform a bright line “direct-purchaser rule” to a “who sets the price rule” cut against legal precedent and the statutory text of Section 4 of the Clayton Act. Second, defendant’s theory would draw an arbitrary line by affording standing to plaintiffs suing monopolistic retailers that set and mark up their own prices after purchasing products from third parties, while denying standing where an essentially identical injury to consumers results from third parties setting artificially high prices due to the monopolistic retailer’s commission price structure. Third, the Court opined that such a theory would incentivize further misconduct by providing monopolistic retailers a clear way to structure transactions with suppliers so as to avoid antitrust enforcement.