What Did We Learn From the Supreme Court Oral Argument in Apple v. Pepper?

supreme courtWe’ve blogged previously about the Supreme Court’s biggest antitrust case of the October Term 2018, Apple v. Pepper. The case asks the Court to decide whether iPhone users who buy apps from Apple’s App Store may sue Apple for alleged antitrust violations, or whether only third-party app developers may bring such claims. The answer turns on whether and how the Court applies the rule announced in Illinois Brick Co. v. Illinois, which holds that only the direct purchaser of a good or service may sue an allegedly abusive monopolist for damages.

The Court heard oral argument in the case on Monday morning. Apple is represented by Daniel Wall of Latham & Watkins. He argues that the Illinois Brick rule is dispositive here for Apple because the plaintiffs’ antitrust claim hinges on precisely the sort of “pass through” theory of harm that Illinois Brick prohibits.

The plaintiffs, ably represented by Kellogg Hansen’s David Frederick, agree that Illinois Brick governs this case. But they argue that iPhone users purchase apps directly from Apple, so they have standing to sue Apple. They reject the notion that Apple merely acts as an agent for the developer.

The United States also participated in oral argument. The Solicitor General filed both petition and merits briefs in support of Apple that largely track Apple’s theory of the case. Noel Francisco argued the case himself, doing his usual excellent job.

One of the key points of contention at argument was whether the case now before the Supreme Court bears any resemblance to the case as it was litigated below for 7 years. Somewhere on the way from the Ninth Circuit to the Supreme Court, the plaintiffs’ theory of monopolization went from the claim that Apple monopolized the distribution market for apps by charging app developers a supracompetitive 30% commission to the claim that Apple’s App Store is itself a monopoly because consumers can’t buy an app from anywhere else.

Certainly Apple’s attorney, Mr. Wall, felt that he was being sandbagged, and some Justices appeared to agree with him. For his part, Mr. Frederick insisted that the same antitrust theory of harm has been present in the case from the very beginning. And each side cited the record to support its respective position.

Justices Breyer, Ginsburg, Sotomayor, and Kagan all gave varying indications that they are inclined to find for the plaintiffs.

As is so often the case, Justice Breyer views the answer here as very simple. iPhone users buy apps directly from Apple, the alleged monopolist, and direct buyers can always sue the alleged monopolist for an overcharge, even under Illinois Brick. So that is the end of the matter for him.

And Justice Sotomayor and Justice Kagan both seem open to the possibility that Illinois Brick doesn’t even apply here, because that case involved an alleged monopoly in a traditional vertical distribution chain, whereas this case is more of a “closed loop” where the App Store is the only place to buy iPhone apps.

But it isn’t just the Court’s “liberal” bloc that appears at least open to ruling against Apple. Justices Alito and Gorsuch both expressed a belief that Illinois Brick was either wrongly decided or no longer relevant in the modern economy. A bipartisan group of 31 states filed an amicus brief to that effect. And while that issue isn’t really joined in this case—even the plaintiffs do not ask the Court to revisit Illinois Brick—I wouldn’t be surprised to see a separate concurrence or dissent inviting the opportunity to revisit Illinois Brick in the future.

That said, both Justices Gorsuch and Alito were clearly troubled by the possibility that the plaintiffs have changed their antitrust theory of the case at the eleventh hour. And their questions of the plaintiffs’ counsel suggest that they are more inclined to look to the economic realities behind the transactions, rather than to the optics of the transactions themselves, in resolving the case.

Justice Kavanaugh seems very much in play for the plaintiffs.  Since it isn’t entirely clear to him how Illinois Brick should apply to these facts, he suggested looking to the very broad language of the Clayton Act, which says that “any person injured” by an antitrust violation can sue. That approach would almost certainly result in an affirmance for the plaintiffs.

Chief Justice Roberts is most likely the most reliable vote for Apple. He asked no questions of Apple’s counsel but asked some very pointed questions of the plaintiffs. He seemed especially troubled by the possibility that Apple could be sued by both iPhone users and by app developers for the same antitrust violation. And he also pointed out that the plaintiffs are saying things now that they never said in their complaint.

In many ways the argument seems to boil down to the old dichotomy of form over substance. If the Court decides to look at the economics behind the transactions—who pays the commission, who sets the price—Apple should come out with a win here.

But if the Court instead chooses to look solely at transactional privity—that is, the App Store sure seems like a retail store where consumers buy apps directly from Apple—then it will likely view this case as satisfying Illinois Brick.

The larger takeaway is to remember that, so far, this is strictly a case about who is entitled to sue. Even if the Court affirms the Ninth Circuit, whether the plaintiffs will ultimately be able to prove that Apple is abusing a monopoly is another question entirely. And then there is the hurdle of class certification, which may prove difficult because damages cannot be measured in one stroke, but app by app. And there are millions of apps sold and priced by tens of thousands of app developers.

Also published by Forbes.com on WLF’s contributor page.

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