The United States Supreme Court's single antitrust case of the 2019 term, Apple, Inc v Pepper, 1 considered and upheld the long-standing and often criticized direct purchaser rule established by Hanover Shoe v United Shoe Machinery Co 2 and Illinois Brick Co v Illinois, which limited standing under Clayton Act section 4 to 'the overcharged direct purchaser, and not others in the chain of manufacture or distribution.'3

Background of the case

On 29 December 2011, several iPhone owners sued Apple, Inc (Apple) in federal court on behalf of a class consisting of 'all persons in the United States . . . who purchased an iPhone application or application license from Apple for use on an iPhone at any time from December 29, 2007 through the present.'4 The plaintiffs alleged that Apple illegally monopolized the iPhone application (app) aftermarket, comprising 'the market for distributing software applications that can be downloaded on the iPhone for managing such functions as ringtones, instant messaging, photographic and video capability, gaming and other entertainment, Internet applications, and any other downloadable software-driven functions.'5 According to the plaintiffs, Apple's monopoly, which the company maintained by contract with app developers and data restrictions built into its iPhones, enabled Apple to funnel all iPhone apps sales through the App Store it established in 2008. Developers marketing apps via the App Store paid an annual fee to Apple and also agreed that Apple would retain a certain percentage of the app's retail price on each sale. Developers independently set the retail prices of the apps they marketed via the App Store, subject to Apple's requirement that retail sales prices end with '.99.'

The plaintiffs cast themselves as direct purchasers with standing to sue Apple by arguing that 'the thirty-percent portion obtained by Apple is a direct, fixed cost to consumers who are "first" in the chain to purchase the Apps,' and that plaintiffs are, in fact, the only purchasers of iPhone apps.6 Apple moved to dismiss the complaint, arguing that Apple charges the 30 per cent fee to the developers, and that any distribution cost or commission imposed on the consumers is passed through, making them indirect purchasers without standing to proceed under Illinois Brick. 7

The district court rejected the plaintiffs' arguments and dismissed the complaint with prejudice on 20 September 2013. The district court found that Apple's 30 per cent fee sprang from its agreement with the developers to pay a portion of their sales proceeds to Apple, which was passed on to the consumers as part of the purchase price, making them indirect purchasers.8 As the court noted:

Plaintiffs' attempt to recast themselves as the sole purchasers of the apps because Apple collects the entire purchase price is unavailing. To find otherwise would require the Court to ignore the other allegations in the [complaint], which identify the developers' obligation to pay or share the thirty percent with Apple.9

The plaintiffs appealed to the Ninth Circuit Court of Appeals, which reversed the lower court's decision and remanded for further proceedings. The Ninth Circuit concluded that Apple stood in the role of a distributor from which the iPhone users had purchased the apps at allegedly supracompetitive prices. Because the plaintiffs purchased the apps directly from Apple, the Court of Appeals held that the plaintiffs had standing as direct purchasers to sue under Illinois Brick. 10 The Court of Appeals viewed Apple's role in collecting payment from the purchasers as irrelevant. Similarly, the Court of Appeals rejected the idea that characterizing Apple's 30 per cent fee as a mark-up on the purchase price or a commission would impact its conclusion. Rather, the Court rested its analysis 'on the fundamental distinction between a manufacturer or producer, on the one hand, and a distributor, on the other. Apple is a distributor of the iPhone apps, selling them directly to purchasers through its App Store. Because Apple is a distributor, Plaintiffs have standing under Illinois Brick to sue Apple for allegedly monopolizing and attempting to monopolize the sale of iPhone apps.'11

The Ninth Circuit acknowledged that its holding created a split with the Court of Appeals for the Eighth Circuit, which had reached the opposite conclusion in a case based on a substantially similar transaction.12 In Campos v Ticketmaster, the Eighth Circuit found that buyers of concert tickets via Ticketmaster's distribution service lacked standing because 'an antecedent transaction between the monopolist and another, independent purchaser' of the distribution services absorbed or passed on all or part of the monopoly overcharge.13

Footnotes

1 139 S. Ct. 1514 (2019).

2 392 U.S. 481 (1968).

3 431 U.S. 720 (1977).

4 In re Apple iPhone Litigation, 2013–2 Trade Cases P 78,603, 2013 WL 6253147, *1 (N.D. Cal. 2013).

5 Id.

6 Id. at *5.

7 Id.

8 Id.

9 Id. at *6.

10 In re Apple iPhone Litigation, 846 F.3d 313, 324 (9th Cir. 2017).

11 Id.

12 See Campos v Ticketmaster Corp., 140 F.3d 1166 (8th Cir. 1998).

13 Id. at 1169.

Originally published by Global Competition Review, 06 August 2020

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