Argument analysis: Justices poised to allow antitrust dispute against Apple over apps to go forward

The Supreme Court heard oral argument this morning in a dispute between technology giant Apple and a group of iPhone users over the sale of apps from Apple’s App Store. The iPhone users are seeking massive damages from Apple, complaining that the company is violating federal antitrust laws by requiring the users to buy apps exclusively from the App Store. But as it comes to the justices, the case is about whether the iPhone users can bring their lawsuit at all: Apple contends that they cannot, because it is only selling the apps at the prices set by app developers. After 60 minutes of debate, there seemed to be at least five votes to allow the case to move forward, with only Chief Justice John Roberts appearing to be a clear vote for Apple.

Arguing for Apple, lawyer Daniel Wall told the justices that the iPhone users’ claim is exactly the kind of claim that is prohibited under the Supreme Court’s 1977 decision in Illinois Brick Co. v. Illinois, which held that only consumers who are direct purchasers of a product can bring a lawsuit seeking the triple damages available for violations of federal antitrust laws: Here, Wall said, the only theory of damages in the case is that Apple charges app developers a 30-percent commission, which in turn causes the developers to increase the prices that consumers pay for apps. Therefore, Wall argued, it is the app developers, not the iPhone users, who are direct purchasers under Illinois Brick.

But several justices were skeptical that the question was as simple as Wall portrayed it, particularly because the iPhone users buy apps directly from Apple. Justice Sonia Sotomayor suggested that this case was “dramatically different” from Illinois Brick, in which a manufacturer sold concrete blocks to contractors, who used them in buildings that the plaintiffs then purchased. The iPhone users are, Sotomayor posited, “first purchasers.”

Justice Stephen Breyer echoed Sotomayor’s concerns. In his view, there would be no conflict between Illinois Brick and the basic principle of antitrust law that someone who pays a higher price to a monopolist can collect damages. If “Joe Smith” buys something from a monopolist, Breyer continued, he is a direct purchaser.

The court’s newest justice, Brett Kavanaugh, also seemed to side with the iPhone users. If it isn’t clear whether or how Illinois Brick applies to this case, Kavanaugh asked U.S. solicitor general Noel Francisco, who argued on behalf of the United States as a “friend of the court” supporting Apple, why shouldn’t the court resolve the dispute by looking at the text of the statute, which provides that “any person injured” by a violation of federal antitrust laws can bring a lawsuit? “That’s broad,” Kavanaugh told Francisco.

Justice Elena Kagan also chimed in, framing the question before the court as whether Illinois Brick was, at its core, about a vertical supply chain or about the idea that plaintiffs can’t recover damages for costs that are passed on to them. Other cases, Kagan noted, had both of those elements, but should Illinois Brick apply at all to this case if there is no vertical supply chain?

Wall insisted in response to Kagan’s question that Illinois Brick was “100 percent about” not wanting antitrust plaintiffs to recover damages that are passed to them. But he was soon interrupted by Justice Samuel Alito, who proposed that the court’s ruling in Illinois Brick rested less on economic theory than on wanting to achieve an “effective and efficient litigation scheme” – for example, by limiting lawsuits to direct purchasers because the court believed that they would be in the best position to sue to enforce antitrust laws. Alito questioned whether that was true in this case, pointing to what Wall conceded were “tens of thousands” of app developers – the direct purchasers, under Wall’s theory — who had never filed a lawsuit against Apple.

Following up on Alito’s suggestion, Justice Neil Gorsuch hinted that the Supreme Court should overrule Illinois Brick altogether. He noted that many states have allowed indirect purchasers to file lawsuits similar to the one in this case without experiencing the problems that Illinois Brick sought to guard against, such as duplicative recoveries.

Wall resisted any suggestion that Illinois Brick should be overturned, telling Gorsuch that 17 efforts by Congress to change the Illinois Brick rule had failed. This is a “quintessentially controversial political issue” that should be left to Congress, not the Supreme Court, Wall argued.

Arguing for the iPhone users, lawyer David Frederick also pushed back against the idea that Illinois Brick should be overruled, stressing that the case establishes a bright-line rule that allows direct purchasers to bring antitrust lawsuits. The iPhone users pay Apple, he argued, making them direct purchasers, and Apple never shared that money with anyone. “Illinois Brick is a case about a middleman,” Frederick emphasized. “There’s no middleman here.”

Roberts was perhaps Frederick’s toughest questioner. He expressed concern that, under the iPhone users’ theory, both the iPhone users and the app developers could sue Apple to recover damages arising from the company’s 30-percent mark-up of the apps.

Frederick insisted that the iPhone users and the app developers would have different claims against Apple: The iPhone users would be suing to recover the difference between the price that they paid and the price that they would have paid in a competitive market for apps, while the developers would be seeking lost profits.

Toward the end of the oral argument, Alito asked Frederick whether every iPhone user who purchased an app would be able to seek damages that are three times the 30-percent commission, or whether damages would instead vary from app to app.

Frederick acknowledged that he wasn’t certain, but he used his answer to make two more points that may help to seal a win in his favor. First, Congress created the triple-damages remedy to deter antitrust violations “just like this one.” Second, he added, Apple cannot point to another e-commerce distributor that operates this way, which may give the justices some comfort that their ruling will not open the floodgates to similar e-commerce lawsuits.

A decision is expected sometime next year.

This post was originally published at Howe on the Court.