Apple Gets Government Backing to Squelch Monopoly Decision

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By Eleanor Tyler

The U.S. Supreme Court could decide soon whether it will take up Apple Inc.'s attempt to stop a monopolization suit after the Justice Department recommended squashing the case.

Apple is appealing a U.S. Court of Appeals for the Ninth Circuit decision that consumers who bought apps from Apple’s “App Store” can sue for overcharges. Apple’s petition for court review has been pending since August.

The Justices were waiting for input from the U.S. solicitor general, which was finally filed on May 8. The high court asked for the DOJ’s views on the case in October.

Solicitor General Noel Francisco said in his filing that the Supreme Court should accept review of the case and then reverse the Ninth Circuit’s decision that the plaintiffs have standing to sue for competitive harm in the app market. Francisco said the Ninth Circuit got the analysis wrong, and the Supreme Court should step in and fix the lower court’s misunderstanding. He said the plaintiffs aren’t “direct purchasers” because they alleged that Apple passed on inflated prices from app developers. If they aren’t direct buyers, they can’t sue, the government said.

At issue is a 1977 Supreme Court ruling in Illinois Brick Co. v. Illinois that only “direct purchasers” — those that hand money directly to an antitrust defendant — can sue for damages under federal antitrust law. The “Illinois Brick rule” bars consumers from suing if they bought a marked-up product through an intermediary, like a retailer, that in turn bought from the defendant. There is some call among antitrust lawyers to reexamine the Illinois Brick rule because it sometimes leads to perverse results.

The suit, filed by Robert Pepper on behalf of a putative class of all app buyers, accuses Apple of forbidding apps on its platform unless the developer agrees to distribute them exclusively through Apple’s App Store. This means Apple holds an absolute monopoly on selling compatible apps for its system, which allows Apple to charge consumers a 30 percent markup over what they would have to pay in a competitive environment, Pepper alleges.

Nothing is standing in the way now for the justices to place the case on a conference calendar to decide among themselves whether to accept it and schedule an oral argument. To date, there are no other pending oral arguments on the court’s calendar for the remainder of the term.

Who Can Sue?

The plaintiffs say that if consumers can’t sue Apple for its monopoly pricing, no one will be able to do so. App developers don’t pay Apple anything but a 99-cent registration fee, and the plaintiffs bought apps directly from Apple’s “App Store.” There is no other layer in the distribution chain that could sue, they argue, insulating Apple entirely from its allegedly illegal conduct.

The Ninth Circuit agreed. If consumers paid Apple directly, and Apple runs the App Store, they are direct purchasers. The app developers are more like manufacturers up the supply chain that the plaintiffs can’t touch. By controlling the retailer, Apple made itself a direct seller to consumers, a unanimous Ninth Circuit panel reasoned.

Apple petitioned the Supreme Court, arguing that the plaintiffs were unavoidably seeking “pass through” damages from Apple, which acts as an agent on behalf of app developers. The developers price the apps, which means they are the immediate victims of any alleged overpricing in commissions, Apple argued. Just because Apple happens to run the platform that delivers the goods doesn’t provide consumers a cause of action as “direct” purchasers.

The government’s brief said Apple is right because the plaintiffs’ overcharge theory is about passed-through costs. Since the plaintiffs allege that Apple’s monopoly fee is passed on to them in inflated app prices, the government contends, the plaintiffs can’t sue Apple regardless of whether they paid Apple directly for apps on their iPhones. The Ninth Circuit’s reasoning that Apple’s relationship as a “distributor” is a direct one elevates form over function, the government said.

The case is Apple Inc. v. Robert Pepper et al. , U.S., No. 17-204, cert. requested 8/10/17 .

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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