AAI has published a commentary on the appropriate antitrust analysis of Apple’s security-related justifications for its App Store restrictions. In Protection or Pretext? Structuring an Appropriate Antitrust Analysis of Apple’s Security Justifications for App Store Restrictions, AAI sets forth the proper allocation of evidentiary burdens and the role of less restrictive alternatives (LRAs) to assist Congress, the Biden Administration, and the federal courts, all of which are currently grappling with Apple’s restrictions and justifications in proposed legislation, investigations, or pending cases.
The commentary begins by explaining the competitive consequences of Apple’s decision to open its otherwise closed ecosystem to third-party app developers, with two key consequences for Apple. First, Apple created market competition that it must meet in order to prevent its own proprietary products and services from being displaced. Second, because Apple imposes numerous restrictions on app sales and distribution, Apple oversees this competition in the course of meeting it. By setting and policing the privacy, security, and other terms on which independent third-party developers may sell and distribute products through the App Store, Apple serves as a quasi-regulator of the app market, and its “regulatory” policies often have important implications for competition.
The commentary then discusses the challenges that arise when private market participants possess regulatory powers in the markets where they actively compete. Drawing a limited analogy to Supreme Court state-action cases involving state governmental delegations of regulatory authority to active market participants, the commentary observes that the Court applies heightened scrutiny when there is a structural risk that a private market participant will conflate the goal of a regulatory policy with the market participant’s own self-interest in earning monopoly profits. The Supreme Court’s analysis suggests policymakers are right to be carefully scrutinizing the security justifications for app store restrictions claimed by both Apple and Alphabet.
The commentary then discusses the nuances of allocating evidentiary burdens and analyzing LRAs in evaluating Apple’s restrictions and justifications under the rule of reason’s three-step burden-shifting approach. At step one, the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect. At step two, if the plaintiff carries its initial burden, the burden then shifts to the defendant to show a procompetitive justification. At step three, if the defendant carries its burden, the burden then shifts back to the plaintiff to show that the procompetitive benefits could be reasonably achieved through less anticompetitive means.
Pretext first enters the equation at step two. Federal courts define a procompetitive justification as “a nonpretextual claim that [the defendant’s] conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal.” The commentary explains that the defendant, at step two, must produce evidence of a procompetitive justification that would allow a reasonable factfinder to rule out a pretextual explanation. If the defendant’s evidence of a procompetitive justification admits as easily of a pretextual explanation as not, then the defendant has not made the requisite evidentiary showing and has not carried its burden.
Placing this burden on the defendant makes sense because the evidence of efficiencies is almost always in the defendant’s control, and the defendant is therefore in the best position to come forward with the evidence. Moreover, because the plaintiff will have already established prima facie illegality at step one, the chances of a false positive are greatly diminished. Misallocating the burden by requiring the plaintiff to produce evidence of pretext, rather than requiring the defendant to show evidence that its restrictions are reasonably necessary to achieve a legitimate objective, raises a significant risk of false negatives.
The commentary also considers the role of LRAs at step two of the rule of reason. In the Epic Games v. Apple case, the district court wrongly assumed that LRAs only have relevance at step three, after the burden has shifted back to the plaintiff to counter the defendant’s rebuttal evidence. However, when an obvious LRA is unaccounted for the defendant’s showing at step two, before the plaintiff has had to introduce any rebuttal evidence, it prevents the defendant from carrying its burden of establishing a nonpretextual procompetitive justification. In that case, the burden should not shift back to the plaintiff; the case should end. Failing to consider the potential role of LRAs at step two can similarly manifest in the misallocation of burdens, leading to evidence being misconstrued.
In sum, if Apple’s App Store and other similar iOS restrictions harm competition, Apple should have the burden to establish that its security justifications are nonpretextual. The burden should be to produce evidence, likely to be within Apple’s control, from which a reasonable factfinder would rule out an illicit anticompetitive strategy masquerading as a legitimate, procompetitive regulatory policy. If the evidence suggests a pretextual explanation is as likely as a nonpretextual explanation, including because it fails to account for an obvious LRA before the plaintiff has had to adduce any rebuttal evidence of an LRA at step three of the rule of reason, the restrictions should be condemned.
The commentary was written by AAI Vice President of Legal Advocacy Randy Stutz.