Argument preview: Justices to consider whether antitrust lawsuit by iPhone users can go forward

When the justices return from their Thanksgiving vacation next week, they will hear oral argument in a would-be class action filed against the technology giant Apple by iPhone users. The iPhone users argue that Apple is violating federal antitrust laws by requiring them to buy apps only from Apple’s App Store, at inflated prices. But Apple counters that under the Supreme Court’s cases the iPhone users don’t have a case at all, because Apple is simply selling the apps to iPhone users at the prices that the app developers set. The implications of the case could be significant not only for Apple, which could face millions of dollars’ worth of damages if the case is allowed to go forward and the company is found liable, but also for other companies that operate similar “electronic marketplaces.”

The iPhone users filed their lawsuit in a federal trial court in California, but that court threw the case out. It pointed to a 1977 case called Illinois Brick Co. v. Illinois, in which the Supreme Court ruled that only consumers who are direct purchasers of a product can bring a lawsuit seeking the triple damages available for violations of federal antitrust laws. To put it another way, courts cannot award triple damages to plaintiffs who allege, not that they were overcharged, but that the defendant overcharged someone else, who then passed that charge on to the plaintiffs. In the trial court’s view, Apple’s case fit the scenario described in Illinois Brick to a T: App developers were paying Apple a 30 percent commission and then passing on the 30 percent mark-up to the iPhone users, which meant that the iPhone users didn’t have a case.

The iPhone users appealed to the U.S. Court of Appeals for the 9th Circuit, which reversed and allowed the lawsuit to go forward. It reasoned that Apple is a distributor that sells the apps to iPhone users directly through its App Store. Apple then went to the Supreme Court, which agreed to hear the case last spring.

In its brief on the merits, Apple contends that Illinois Brick and the decision that preceded it rest on two related ideas, both of which require a decision in Apple’s favor: The purchaser who pays an overcharge can bring a lawsuit to recover it, but someone to whom that purchaser passes on the overcharge cannot. Those ideas, Apple continues, are grounded in several different principles, including a desire to prevent duplicative recoveries and to avoid the complications that would result from having to allocate damages among a variety of plaintiffs.

In this case, Apple argues, it is running what is known as a “two-sided” marketplace: On one side, it sells distribution services to app developers, and on the other side it sells apps to consumers, at prices set by the developers. On the consumer side, Apple collects the purchase price from iPhone users and then forwards the proceeds to developers, minus its 30 percent commission. The iPhone users have claimed that Apple is overcharging the app developers for their use of Apple’s distribution services, driving up the prices that iPhone users pay for their apps. But because Apple is selling the apps at the prices that the app developers have set, Apple continues, the supposedly higher prices are simply being passed on by the developers – which is exactly the scenario in which the Supreme Court has said that consumers like the iPhone users cannot bring an antitrust lawsuit.

It becomes even more clear, Apple contends, that the iPhone users’ lawsuit should not be allowed to go forward when you look at how a court would determine whether the iPhone users have been injured and, if so, what damages they should receive. Any injury to iPhone users would depend on whether app developers increased prices as a result of Apple’s policies, and the court would also have to determine whether the developers would have charged lower prices in the absence of Apple’s policies – “precisely the sort of pass-on analysis that the Court in Illinois Brick rejected.” In this case, the analysis would involve “unusual complexity,” Apple suggests, because Apple has sold millions of apps, created and priced by tens of thousands of developers and serving thousands of functions. Moreover, Apple adds, different apps may experience different levels of supply and demand, causing developers to adopt different pricing strategies.

Allowing the iPhone users’ case to go forward would also expose Apple to claims for triple damages from both iPhone users and app developers – which, Apple again contends, is exactly the kind of thing that the Supreme Court in Illinois Brick wanted to prevent. The 9th Circuit itself acknowledged that app developers, who pay the “allegedly monopolistic” 30 percent commission to Apple, would also have a right to sue, Apple stressed, but the 9th Circuit simply concluded that the possibility of duplicative recoveries “did not matter.”

The federal government filed a “friend of the court” brief supporting Apple, as did a group of small app developers and technology firms. The developers tell the justices that Apple does not have any ownership rights in the apps that it sells and that they can (contrary to the iPhone users’ assertion) offer their apps elsewhere. Moreover, the developers continue, they benefit from their arrangement with Apple, which spares them from having to handle each individual transaction; instead, Apple deals with billing, taxes and credit card fees, allowing developers to focus on the apps themselves. Moreover, they add, platforms like the App Store give developers “ubiquitous access to a broader swath of consumers” – over 3.4 billion app users worldwide.

The iPhone users read the Supreme Court’s decision in Illinois Brick differently from Apple, arguing that it points toward allowing their case to go forward. In their view, the Supreme Court has made clear that only direct purchasers – consumers who buy directly from a seller who is violating antitrust laws – can sue that seller under the federal law at issue here, Section 4 of the Clayton Act. Indirect purchasers, buyers who are at least two steps removed from the seller who is violating antitrust laws, cannot bring a lawsuit.

In this case, the iPhone users contend, they are direct purchasers who can sue: They buy apps directly from Apple through the App Store, they are arguing that Apple has violated federal antitrust laws by monopolizing the market for apps and they contend that Apple is responsible for the high prices that they are paying for apps as a result of Apple’s conduct.

Apple can’t head off their lawsuit, the iPhone users emphasize, by characterizing itself as a sales agent for the developers, because Apple does so much more than simply act as an agent: Apple, the iPhone users allege, “controls all aspects of the sale of apps through the App Store, including the prices at and terms on which apps are sold” – in particular by requiring that all app prices end in 0.99. Nor can Apple use its significant market power to force developers to sign an agreement describing Apple as an agent and then use that agreement to avoid liability.

The iPhone users also push back against Apple’s suggestion that allowing their lawsuit to go forward would run the risk of duplicative damages. If app developers were to file an antitrust lawsuit against Apple, the iPhone users maintain, they would be challenging different conduct by Apple and their damages would be measured differently.

In recent years, the justices have sometimes struggled with issues relating to new technologies, especially in criminal cases. But here, although there’s no way to know for sure, many (if not all) of the justices likely have iPhones and are familiar with Apple’s App Store. Whether that familiarity will make them more comfortable with the technology, and whether the technology will make a difference at all in their views on the antitrust issues presented by the case, may become clearer after next week’s oral argument.

This post was originally published at Howe on the Court.