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Supreme Court's Apple v. Pepper Opinion Increases Antitrust Risk for Online Marketplace Platform Operators

Firm Thought Leadership

On May 13, 2019, the U.S. Supreme Court issued a major antitrust decision in Apple v. Pepper, which could have far-reaching implications for retailers and platforms accused of monopolistic conduct.  For example, the case increases the risk that any online marketplace with exclusive rights to carry products made and owned by others will not have a defense under the Illinois Brick “indirect purchaser” doctrine—particularly where the marketplace collects payment from buyers and then charges the product owners a fee or commission.  The risks are even higher if the marketplace is alleged to have high market share or monopoly power.

The plaintiffs in Apple are iPhone owners who purchased, through Apple’s App Store, iPhone applications (“apps”) made by third-party developers. The plaintiffs allege that Apple unlawfully monopolized the market for iPhone apps (in violation of Sherman Antitrust Act §2) by forcing iPhone owners to purchase apps exclusively through Apple’s App Store and then taking a supra-competitive 30% commission from each purchase.  This, plaintiffs allege, made iPhone app prices higher than they would be in a competitive marketplace where consumers could purchase apps outside Apple’s App Store.

Apple moved to dismiss plaintiffs’ complaint at the pleading stage, arguing that the third-party app developers set the final price for the apps—not Apple.  Apple argued that it simply provided a marketplace in its App Store and charged the developers a 30% commission.  The app developers could choose to absorb or pass on Apple’s 30% commission to consumers.  The developers, and not Apple, could therefore determine whether consumers paid supra-competitive prices for apps.  As a result, Apple contended that as to the 30% commission that Apple charged to the app developers, the iPhone owners were merely indirect purchasers from Apple, who were barred from suit under the “indirect purchaser” rule set by the Supreme Court in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).  Illinois Brick held that only direct purchasers could file suit for damages under the Sherman Act.

The district court agreed with Apple and dismissed the complaint.  On appeal, however, the U.S. Court of Appeals for the Ninth Circuit reversed.  The Ninth Circuit reasoned that, regardless of the fact that the 30% commission was charged to the app developers, because consumers purchased apps directly from Apple’s App Store, they were direct purchasers from Apple, the alleged monopolist, and thus not subject to Illinois Brick.

The U.S. Supreme Court affirmed the Ninth Circuit’s ruling in a 5-4 opinion written by Justice Kavanaugh—and joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan.  The Court held that Illinois Brick did not apply because “iPhone owners purchase apps directly from the retailer Apple, who is the alleged antitrust violator.”  Because iPhone owners “pay the alleged overcharge directly to Apple,” the Supreme Court held that the iPhone owners are direct purchasers who may properly sue Apple under the Sherman Act.  The majority found that Apple’s argument—that iPhone owners are merely indirect Apple purchasers who paid app prices set by the developers—was an effort to “transform Illinois Brick” from a bright-line rule about indirect purchasers into a “‘who sets the price’ rule [that] would draw an arbitrary and unprincipled line among retailers based on retailers’ financial arrangements with their manufacturers or suppliers.”

In reaching this conclusion, the majority compared two hypothetical sales chain structures:  one where the retailer purchases a product from a manufacturer and then resells it to consumers at a “marked-up” price, and one where the retailer sells the product at a price set by the manufacturer and keeps a portion as a commission.  Under Apple’s argument, even if the ultimate price to the consumer was the same in both situations, a consumer could sue a retailer that “marked-up” the price, but not a retailer that sold the product at a price set by the manufacturer and merely kept a commission.  The majority rejected this distinction, holding that a retailer may be sued under the Sherman Act regardless of how it structures its relationship with an upstream manufacturer or supplier if it has “engaged in unlawful monopolistic conduct that has caused consumers to pay higher-than-competitive prices.”

The majority also rejected Apple’s arguments that the app developers that paid the 30% commission were the only proper antitrust enforcers, and that permitting consumers to sue Apple would require a complicated assessment of the value of the alleged overcharge passed through the developers to consumers.  The Court instead found that both developers and consumers could sue Apple under different theories: Developers could sue for “lost profits” as a result of the supra-competitive commission, and consumers could sue for the value of the overcharge paid relative to the would-be price of apps in a competitive market.

Justice Gorsuch dissented—along with the Chief Justice and Justices Thomas and Alito—contending that the district court correctly dismissed the complaint under Illinois Brick.  The dissent agreed with Apple that the plaintiffs could only be injured if the app developers chose to pass on the commission that Apple allegedly was able to obtain through its monopoly position, and that this “pass-on” theory of liability is precisely what Illinois Brick prohibited. Unlike the majority, the dissent saw a clear distinction between a monopolist retailer that marks up a price to consumers and one that takes a supra-competitive commission:  the “marked-up” cost directly harms consumers, while supra-competitive commissions directly harms developers. 

Litigation in Apple v. Pepper will now resume in the district court.  Beyond this case, however, the Supreme Court’s opinion raises a number of questions regarding potential liability for retailers that sell products to consumers through exclusive channels (for example, officially-licensed apparel and merchandise sold only through approved vendors).  The Apple opinion raises the specter that retailers could be sued directly for charges set by a product’s manufacturer, regardless of whether the retailer is responsible for the ultimate price charged to the consumer.  Consumer class action plaintiffs also may try to use the reasoning of Apple v. Pepper to target other two-sided electronic platforms or high-market share retailers operating on a commission basis.  Consequently, lower courts may soon be confronted with implementing the reasoning and distinctions raised by the Supreme Court’s Apple v. Pepper opinion.

 

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