Oral Argument in Apple v. Pepper: An Antitrust Challenge to the App Store

The oral argument in Apple, Inc. v. Pepper, included analogies of cell phone apps to fruits and vegetables.

The case presents the question of whether consumers may sue Apple for antitrust damages for the prices they pay for apps. Those prices are set by third parties — the app developers — but the consumers allege that it is Apple’s conduct that causes the prices to be as high as they are.

Multiple iPhone users filed their lawsuit in a federal trial court in California. That court dismissed the case, citing Illinois Brick Co. v. Illinois, a 1977 case in which the Supreme Court ruled that only direct purchasers of a product can bring a lawsuit for violations of federal antitrust laws. To put it another way, courts generally cannot award antitrust damages (which are treble damages) to plaintiffs who allege that the defendant overcharged someone else, who then passed that charge on to the plaintiffs. In the trial court’s view, Illinois Brick was perfectly spot on. App developers were paying Apple a 30 percent commission and then charging iPhone users more because of the commission, so the iPhone users had no case.

The iPhone users appealed to the Ninth Circuit, which reversed the dismissal. The court reasoned that Apple sells the apps to users directly through its App Store.

During the oral argument on November 26, Daniel Wall argued for the tech giant that the app developers are the direct buyers of distribution services from Apple in what Wall has called a “two-sided market.” (The argument transcript is here.) The other side of the market was the sale of apps by Apple to customers. Justice Breyer expressed frustration with some of the jargon of the case, saying, “You, know, there are an awful lot of words in this case that I tend to have trouble understanding. One is ‘two-sided market.’ Another is a lot that you used.” Justice Breyer went on to analogize Apple’s two-sided market to advising United Fruit Company to buy fruit from farmers at low prices, plus 30 percent commission, selling the fruit worldwide, charging customers for the 30 percent commission, then giving the same advice to John Rockefeller and United Shoe.

Solicitor General Noel Francisco argued on behalf of the federal government as amicus curiae, supporting Apple. Francisco argued that app makers’ increase of prices, not Apple’s commission, is the proximate cause of the injury to customers. Justice Kagan challenged his arguments as “not intuitive.” “I mean I pick up my phone,” she said, “I go to Apple’s app store. I pay Apple directly with the credit card information that I’ve supplied to Apple. From – from my perspective, I’ve just engaged in a one-step transaction with Apple.”

David Frederick argued on behalf of the iPhone users. Fredercik argued that the Illinois Brick rule is a bright-line rule that the iPhone users easily satisfy; that Apple directed its monopolistic abuses at iPhone users, so those users should be allowed to sue Apple; and that Apple wanted to expand the Illinois Brick rule to deny direct purchasers an antitrust remedy, a change that would render the rule “a standardless inquiry that will be hard to apply at the pleadings stage.”  Frederick assured the court that developers might have different claims against Apple based on lost profits, but Apple, as a monopoly, has the power to control prices of the apps. Frederick compared the apps to vegetables: “It’s no different that if there was a grocery store chain that monopolized the sale of all vegetables. If they—if that is the only place you could buy vegetables, we would say that that monopoly store outlet was able to control prices and affect output.”

More commentary on the argument is available from the Washington Post, The Verge, and CNBC.

This post was Written by ISCOTUS Fellow Bridget Flynn, Chicago-Kent Class of 2019, edited by Matthew Webber ISCOTUS Editorial Coordinator, Chicago-Kent Class of 2019, and overseen by ISCOTUS Co-Director Carolyn Shapiro.

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