| Jay L. Himes, Richard Brunell, Randy Stutz, Matthew Perez, Jonathan Crevier, Tianran Song, Stacy Redman
Digital Technology, Monopolies, Retail & Distribution
The American Antitrust Institute (AAI) has filed an amicus brief asking the U.S. Supreme Court to reject an expansive application of the Illinois Brick indirect-purchaser rule that would bar consumers that purchase products from online platforms like Apple’s App Store from suing the platform for damages if it engages in monopolistic conduct.
In Apple Inc. v. Pepper, a class of consumers alleged that Apple monopolized the aftermarket for iPhone apps through a combination of iOS design features, exclusivity provisions in developer license agreements, and threats against iPhone consumers who purchase apps outside the Apple ecosystem.
A district court dismissed the plaintiffs’ claim on grounds that the consumer class members were only indirect purchasers of apps under Illinois Brick. Because Apple operates under an “agency” business model, whereby it charges app developers a 30% “sales commission” in exchange for making apps available through the iOS App Store, the court reasoned that the price of apps was not set by Apple. Therefore, the allegedly inflated costs of app distribution were in fact “passed-on” to consumers, through Apple, by the software developers themselves, rendering consumers “indirect.”
On appeal, the Ninth Circuit reversed. The court held that payment and price-setting formalities do not overcome straightforward application of the Illinois Brick rule, whereby the first person in a supply chain injured by an alleged overcharge – in this case consumers who purchased apps directly from Apple – has standing to recover all of the alleged overcharge damages. Apple appealed, and the Supreme Court granted certiorari.
Without taking a position on the merits of the underlying antitrust claim, AAI’s amicus brief explains why it is essential that injured customers have standing to recover for overcharge damages caused by monopolization of the distribution tier of a supply chain. The brief argues that an agency distribution model should not be favored in the marketplace by insulating Apple or other distribution monopolists from claims by immediate buyers. Monopolization of distribution is equally harmful regardless of whether the distributor uses an agency or traditional “wholesale” business model, and market forces, not antitrust rules, should inform the commercial decision of which business model to choose.
Moreover, Apple’s attempt to style itself as a seller of upstream “distribution services,” rather than downstream “apps,” is an economically artificial distinction. The effect of a monopolized distribution tier on customers is the same, regardless of how the developers are labeled. And the mere fact that an antitrust violation produces multiple classes of victims – in this case developers who lose profits because of inflated distribution costs and consumers who pay overcharges – does not trigger Illinois Brick’s concern with “pass on.” Among other things, the injuries are not duplicative.
The brief also explains that Apple cannot avoid the operation of Illinois Brick by anointing itself an “agent” of app developers where it imposes the relationship through a non-negotiable license agreement. The essential element of “control” under agency law is missing, but even if it were not, Apple’s relationship with the respondent consumers does not turn on the law of agency.
Finally, AAI explains that denying a cause of action to the immediate buyers who suffer overcharge damages is contrary to longstanding antitrust policy and would undermine private antitrust enforcement, without serving the underlying policy goals of Illinois Brick. The brief concludes by noting that any reform of the indirect-purchaser rule is appropriately left to Congress, including to ensure adequate deterrence.
The brief was written by AAI Advisory Board Member Jay Himes and AAI General Counsel Rick Brunell, with assistance from Matthew Perez, Jonathan Crevier, Tianran Song, and Stacy Redman of the Labaton Sucharow law firm, and AAI Associate General Counsel Randy Stutz. The other briefs filed in the case are available here.
