Yahoo Finance Apple defends App Store monopoly claim before Supreme Court
Apple attorneys argued before the Supreme Court on Monday in a case that will decide whether iPhone consumers can bring an antitrust claim against Apple based on allegations that its App Store is an illegal monopoly.
The case, Apple Inc. v. Robert Pepper, stems from an action first filed by iPhone consumers in 2011 claiming that commissions charged to app developers inflate prices beyond what would exist in a non-monopolized, competitive market. The case made its way to the high court after a 9th Circuit Court of Appeals decision that overturned a lower court’s ruling in Apple’s favor.
“The only damages theory in this monopolization action is rooted in a 30% commission that Apple charges app developers and which allegedly causes those developers to increase app prices to consumers,” Daniel Wall, a lawyer for Apple, told the justices Monday.
The consumers theorize that apps are inherently overpriced because developers pass on commission costs to app purchasers, who have no alternative market in which to purchase iPhone apps.
Justice Neil Gorsuch tested the theory, raising the possibility that app developers may absorb commissions rather than passing them along to consumers.
“Antitrust doesn’t usually depend upon such contractual formalities,” Gorsuch said. “It usually depends upon the underlying economics.”
A right to bring the case?
Regardless of whether the app store is or is not an illegal monopoly, the justices are faced with a more preliminary question: Whether iPhone users have a right, or “standing” to bring the particular antitrust claim against Apple, in the first place.
In 1977, the Supreme Court ruled in Illinois Brick v. Illinois that only direct purchasers, or those who suffer immediate harm from allegedly monopolistic conduct, have standing to bring a claim for damages under anti-competitive laws.
According to Apple, iPhone consumers suffer no direct harm and therefore lack standing because app developers, and not iPhone users, pay the 30% commission based on pricing set as developers see fit. If any party has the right to bring an antitrust case based on the commission structure, Apple argues, it’s developers.
“Without a doubt, the developers are the ones who, in the first instance, pay the 30% commission,” Wall argued.
“This is not quite like that,” Justice Sonia Sotomayor said in distinguishing the Illinois Brick decision from the Apple case. Sotomayor also said app purchasers appear to be first purchasers with respect to Apple’s 30% markup. “This is dramatically different. This is a closed loop.”
Justice Elena Kagan emphasized the position.
“I mean, I pick up my iPhone. I go to Apple’s App Store. I pay Apple directly with the credit card information that I’ve supplied to Apple. From my perspective, I’ve just engaged in a one-step transaction with Apple,” Kagan said, adding that app buyers are different from a vertical transaction because they transact directly with the alleged monopolist.
Apple’s attorney argued that neither the closed-loop nature of the transaction nor the appearance of first purchaser status should guide the court’s decision.
“Whenever the price setter, the ultimate price setter, is somebody other than the monopolist, it’s never the monopolist’s over-charge that is the direct cause of the injury,” Wall argued.
The App store consumers disagreed
“It’s irrelevant who sets the price so long as what the violation is, here, the monopoly App Store, leads to higher prices that the consumers have to pay,” said David Frederick, an attorney for the consumers wanting to file the lawsuit.
“We think we are direct purchasers,” Frederick said.
“Our assertion is that, with multiple sellers, multiple suppliers of the apps, we would be able to buy them at a lower price.”
Justice Stephen Breyer questioned whether app purchasers would be able to prove that theory, if given standing to go forward with the case.
“I would have thought it’s a matter for proof at the damages stage whether, in fact, Apple, assuming they prove it is a monopoly, has extracted higher than competitive prices from those particular people, the plaintiffs, or whether they’ve just had the easy life.”
‘There can only be one monopoly rent’
The federal government and a group of app developers have sided with Apple, filing supporting amicus briefs, while 31 states have backed iPhone consumers.
“Shouldn’t we question Illinois Brick, perhaps, given the fact that so many states have done so?” Gorsuch asked. Gorsuch went on to summarize the complexity of applying 1977 court precedent to Apple’s integrated market participation, potentially as both seller and distributor.
“I think you’d agree that there can only be one monopoly rent. And then the question becomes, who’s paying it?” he asked. “And it might be spread partially between direct purchasers and indirect purchasers. It might be partially spread between the app makers and the purchasers of apps. And disaggregating that is the question that we’ve been wrestling with here.”
While respondents contend that Apple cannot identify other e-commerce distributors that offer no alternatives to buying app products, the court’s decision will impact the scope of responsibility that online marketplaces have towards purchases of their products.
Alexis Keenan is a New York-based reporter for Yahoo Finance. She previously produced live news for CNN and MSNBC and is a former litigation attorney. Follow her on Twitter at @alexiskweed
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