Apple Inc. Inc. v. Pepper

In the Supreme Court of U.S.A
Case NameApple Inc. Inc. v. Pepper
Citation139 S. Ct. 1514 (2019)
Date of JudgementMay 13, 2019
AppellantApple Inc.
DefendantRobert Pepper, Stephen H. Schwartz, Edward W. Hayter, and Eric Terrell
Bench9 (Justice., Kavanaugh, Ginsburg, Breyer, Sotomayor, Kagan Roberts, Thomas, and Alito)  
Important ProvisionSection 2 of the Sherman Act.; Section 4 of the Clayton Act.

The doctrine of the Illinois Black case is a landmark doctrine for the antitrust cases, in which the indirect party purchasers cannot sue or recover the damages from the antitrust violators. More simply, the Court held that indirect purchasers do not have the standing to sue the alleged infringer if they were not direct purchasers of the product. Recently, in the 2019 U.S Supreme Court in the judgment of Apple v. Pepper, has contributed a new interpretation to the doctrine of Illinois Black.

Introduction

Apple v. Pepper is a recent landmark case on the antitrust laws in the U.S.A. A group of iPhone users asserted Apple unjustifiably determined up application costs through App Store. Apple contended that the users had no right to sue since they were buying apps from developers instead of Apple. But the court rejected Apple’s contention Yet, the court dismissed Apple’s contention The new decision sets up that application purchasers are Apple’s immediate customers, giving them the right to continue with their antitrust case.

Facts of the Case

  • In 2011, four plaintiffs filed a putative antitrust class action complaint case against Apple Inc. Inc. wherein it was said contended by the plaintiffs that, Apple Inc. through it its App Store sells iPhone applications, or apps, directly to iPhone owners lawfully, but the majority of these apps are created by third-party developers.
  • For accession to these apps, the third-party developers have to pay a $99 annual membership fee, allows them to set the retail price of the apps, and charges a 30% commission on every app sale through their store.
  • The offended parties in this lawful activity asserted that Apple Inc.’s 30% commission fee was “super-competitive,” possible only because Apple Inc. had hoarded the “market for distributing software applications that can be downloaded on the iPhone,” with the outcome that consumers “paid more for their iPhone apps than they would have paid in a competitive market.”
  • The District Court granted the motion of dismissing in favor of Apple Inc. Inc. & the court reasoned that under   Illinois Brick Co. v. Illinois[1], the plaintiffs’ status as direct or indirect purchasers is generally dispositive: direct purchasers, the first purchasers in the distribution chain, may sue, whereas indirect purchasers, who bear any overcharges direct purchasers passed on through higher prices, may not.
  • Applying the ratio decidendi of the doctrine, the court held that plaintiffs lacked the legal standing to sue Apple Inc. Inc. arguing that the iPhone users don’t qualify as the direct purchasers. Generally, it is the developers who fix the price of the apps for which the consumers pay, not Apple Inc.
  • An Appeal was filed against the decision of the District Court in the United States Court of Appeals for the Ninth Circuit reversed, concluding that the iPhone owners were direct purchasers because they purchased apps directly from Apple Inc.
  • Apple Inc. further filed the writ of Certiorari in the U.S Supreme court by the Defendant Apple Inc. Inc. against the Ninth Circuit decision.

Issue Raised

  • Whether consumers may sue for antitrust damages anyone who delivers goods to them, even where they seek damages based on prices set by third parties who would be the immediate victims of the alleged offense?

Important Provision

  • Under Section 4 of the Clayton Act, 15 U.S.C. § 15(a), antitrust damages are typically only available in cases of alleged overcharging to the first party who suffers the overcharge and not extended to pass through parties from the first purchaser.
  • Under Section 2 of the Sherman Act, makes it unlawful for any person to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations . . . .”

Arguments of the Parties

Plaintiffs:

  1. Apple Inc. puts its argument based on Kansas v. Utili Corp United Inc.[2] but has ruled that indirect purchasers who are two or more steps removed from the violator in a distribution chain may not sue. As they are the indirect purchaser, who purchased their apps from the app developers not from directly Apple Inc. Inc.
  2. Apple Inc. argues based on Illinois Brick allows consumers to sue only the party who sets the retail price, whether or not the party sells the goods or services directly to the complaining party.
  3. Apple Inc. moved to dismiss the complaint, arguing that developers, not iPhone users, pay the 30% distribution fee charged by Apple Inc., which is reflected in the fact that app developers, not Apple Inc., set the retail price for the app.
  4. Apple Inc. further contended that the purchasers lacked statutory standing to sue under the US Supreme Court’s precedent in Illinois Brick Co. v. Illinois. Under Illinois Brick, “only the overcharged direct purchaser, and not others in the chain of manufacture or distribution” may bring a lawsuit for antitrust violations. They can only sue Apple Inc. Inc. only if they have directly paid consideration to Apple Inc. for the apps which are developed by Apple Inc.

Defendant (Pepper)

  1. Defendant claims that Apple Inc. Inc. held the absolute monopolistic power over the Apple Inc. store with no other competitor to compete, due to which consumer is forced to pays a higher price than the competitive price.
  2. Being the owner of the retail space channel for Apple Inc. consumers and app developers, Apple Inc. tries to influence through their 30% commission on each sale transaction which in turn forces the app developers to their prices and leave no choice for the consumer but to pay the higher prices for the app., because they are unable to purchase apps elsewhere.
  3. The class members argue that this is a violation of Section 2 of the Sherman Act, which makes “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.”
  4. The defendant seeks recovery under an antitrust provision which allows any person injured by illegal antitrust activity to sue and recover three times their damages, including attorney’s fees. 

Judgment

The 9 bench decision was in the ratio of 5:4, 5 judges in favor of the Defendant (Pepper), and 4 have a dissenting opinion towards the defendant. With this 5:4 majority, the Supreme Court affirmed with U. S. Court of Appeals for the Ninth Circuit judges.

Writing for the majority court, Justice Kavanaugh: “At this early pleadings stage of the litigation, we do not assess the merits of the plaintiffs’ antitrust claims against Apple Inc., nor do we consider any other defenses Apple Inc. might have. We merely hold that the Illinois Brick direct-purchaser rule does not bar these plaintiffs from suing Apple Inc. under the antitrust laws. We affirm the judgment of the U. S. Court of Appeals for the Ninth Circuit.”

The court disagrees with Apple Inc. Inc.’s argument of price-setting rule and held that The plaintiffs purchased apps directly from Apple Inc. and therefore are direct purchasers under Illinois Brick.

Further in their findings, court The Court noted: “Section 4 of the Clayton Act provides that ‘any person who shall be injured in his business or property because of anything forbidden in the antitrust laws may sue the defendant.’”

Emphasizing the following wording of ‘any person’ & ‘injured person’ of the section court indirectly the Court found the statutory language expansive enough to “readily covers consumers” in the plaintiffs’ position.

The Court rejected Apple Inc.’s price-setting rule as an elevation of form over substance that would “gerrymander” Apple Inc. out of this and similar lawsuits.” The Court found a major underlying problem beneath the under a price-setting rule given by Apple Inc.:

  1. Firstly, Apple Inc.’s theory contradicts statutory text and precedent Apple Inc.’s theory would require to rewrite the rationale of Illinois Brick and to gut the longstanding bright-line rule.
  2. Secondly, Apple Inc.’s proposed rule is not persuasive economically or legally. Apple Inc.’s effort to transform Illinois Brick from a direct-purchaser rule to a “who sets the price” rule would draw an arbitrary and unprincipled line among retailers based on retailers’ financial arrangements with their manufacturers or suppliers.
  3. Thirdly, Apple Inc.’s theory would provide a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement.

The Court concluded that it did so by establishing a “bright line that allowed direct purchasers to sue but barred indirect purchasers from suing,” and was “not based on an economic theory about who set the price.”

The majority concluded that Apple’s theory “would draw an arbitrary and unprincipled line among retailers based on retailers’ financial arrangements with their manufacturers or suppliers.”Apple Inc. would escape liability for conduct economically indistinguishable from what in the mark-up context is presently recognized as paradigmatically anticompetitive behavior.

Concept Highlighted

  1. Favoring Opinion of Judges:

KAVANAUGH, J., penned the opinion of the Court, in which GINSBURG, BREYER, SOTOMAYOR, and KAGAN, JJ., joined.

“As for precedent, the Court interpreted Illinois Brick as “establishing a bright-line  “if manufacturer A sells to retailer B, and retailer B sells to consumer C, then C may not sue A. But B may sue A if A is an antitrust violator.” That is the straightforward rule of Illinois Brick.

In this case, unlike in Illinois Brick, the iPhone owners are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain. There is no intermediary in the distribution chain between Apple Inc. and the consumer. The iPhone owners purchase apps directly from the retailer Apple Inc., who is the alleged antitrust violator. The iPhone owners pay the alleged overcharge directly to Apple Inc. The absence of an intermediary is dispositive. Under Illinois Brick, the iPhone owners are direct purchasers from Apple Inc. and are proper plaintiffs to maintain this antitrust suit.”

  • Dissenting Opinion of Judges:

JUSTICE GORSUCH, with whom THE CHIEF JUSTICE, JUSTICE THOMAS, and JUSTICE ALITO penned, dissenting opinion.

“More than 40 years ago, in Illinois Brick Co. v. Illinois read with the reference from the case Hanover Shoe v. United Shoe Machinery Corp.[3], this Court held that an antitrust plaintiff can’t sue a defendant for overcharging someone else who might (or might not) have passed on all (or some) of the overcharge to him. Illinois Brick held that these convoluted “pass on” theories of damages violate traditional principles of proximate causation and that the right plaintiff to bring suit is the one on whom the overcharge immediately and surely fell. Yet today the Court lets a pass-on case proceed. It does so by recasting Illinois Brick as a rule forbidding only suits where the plaintiff does not contract directly with the defendant.

This replaces a rule of proximate cause and economic reality with an easily manipulated and formalistic rule of contractual privity. That’s not how antitrust law is supposed to work, and it’s an uncharitable way of treating a precedent which— whatever its flaws—is far more sensible than the rule the Court installs in its place.”

Justice Gorsuch suggested in the dissent, the decision raises questions about the meaning of Illinois Brick. In the dissent’s view, the plaintiffs’ claims in this case present “even more starkly than did the claims at issue in Illinois Brick” the complications and inefficiencies of determining causation, avoiding duplicative damages, and addressing potential apportionment. The dissent also noted that Hanover Shoe’s status is not entirely clear: “Before today, Hanover Shoe would have prevented Apple from reducing its liability [in a hypothetical antitrust suit brought by app developers by arguing that they had passed on any overcharge to consumers. But the Court’s holding that Illinois Brick doesn’t govern this situation surely must mean Hanover Shoe doesn’t either.”

Conclusion

The Court’s decision interprets Illinois Brick as setting forth a bright-line rule that consumers may bring antitrust claims against any allegedly monopolistic retailer from whom they directly purchase goods or services–regardless of whether that retailer sets the price of the goods or services.

But with this decision court has left many questions unanswered. One of them being what about particularly for companies that operate multi-sided platforms–about potential strategies for managing antitrust risk. Going forward, businesses may give further consideration to the structure of their transactions.

In dissent, Justice Gorsuch suggested one possible means of restructuring as an illustration of his form-over-substance critique of the Court’s opinion: “Instead of collecting payments for apps sold in the App Store and remitting the balance (less its commission) to developers, Apple can simply specify that consumers’ payments will flow the other way: directly to the developers, who will then remit commissions to Apple.”

References

  1. https://harvardlawreview.org/2019/11/apple-inc-v-pepper/
  2. https://www.supremecourt.gov/opinions/18pdf/17-204_bq7d.pdf
  3. https://lawreview.syr.edu/apple-inc-v-pepper-apples-supreme-court-loss-implications-for-tech-companies-hosting-digital-marketplaces/
  4. https://www.law.cornell.edu/supremecourt/text/17-204
  5. https://www.lexology.com/library/detail.aspx?g=b1225017-262c-486d-a3ac-a859e84fa13a

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