Apple Inc. v. Pepper

Apple argues that the Court should interpret app store purchasers to be indirect consumers that cannot bring an antitrust claim against them.

Pepper disagrees, arguing that the Ninth Circuit was correct in holding that app store purchasers are direct consumers of Apple’s services.

DIRECT OR INDIRECT PURCHASERS

Apple argues that the Ninth Circuit’s finding that Apple is a distributor of iPhone apps, and therefore that Pepper is a direct purchaser, incorrectly relies on a formalistic analysis. Apple contends that precedent requires courts to focus on “actual market realities.” The market reality here, according to Apple, is that the App Store is merely a two-sided platform which connects and provides a service to both app developers and iPhone owners. But Apple asserts that the 30% commission is a charge for providing a distribution service. Apple maintains that developers, not consumers, purchase its distribution service, as shown by contracts between Apple and developers establishing exclusive worldwide distribution rights. Apple also claims that app developers set the price of apps on the App Store; Apple only takes its commission from whatever price the developer sets. According to Apple, this means that Apple, through the App Store, is an agent for the developer and not a reseller—an important distinction for the application of precedent. Apple argues that these market realities demonstrate that app developers, not consumers, are the direct purchasers of its distribution services. At the same time, Apple contends that the Ninth Circuit was incorrect to disregard these realities in favor of asking who functioned as a distributor. Functional concerns about distribution are misplaced, Apple maintains, because the real concern is the identity of the pricing decision makers. Apple argues that the test is particularly misleading when, as here, the distributor functions as an agent rather than a reseller.

Pepper, on the other hand, argues that the Ninth Circuit correctly found that app consumers are direct purchasers from Apple. Pepper contends that Apple’s focus on “distribution services” is misplaced because the relevant market is the “aftermarket” for iPhone apps. Pepper claims that the App Store is merely a “retail operation selling apps.” Pepper maintains that Apple not only delivers apps directly to consumers, it also influences the price of the apps and controls the terms that regulate the sale of the apps.Pepper asserts that Apple limits the pricing of apps to one-dollar increments, which greatly constrains the app developer’s flexibility to set prices. Additionally, according to Pepper, Apple asserts strong control over the sale of apps in its store because app developers must accept terms and conditions that shift control to Apple. Furthermore, Pepper argues the interpretation that app purchasers are the direct consumers of Apple’s services is consistent with the Eighth Circuit’s holding in Campos. Pepper asserts, according to Campos, the initial transaction here is the purchase of the Apple phone by the app purchaser. Pepper adds that the app developers purchase access to Apple’s store because Apple phone users can only purchase apps from Apple’s store. Accordingly, Pepper contends that app purchasers are the first to suffer harm from Apple’s alleged monopoly and are, therefore, the direct consumers of Apple’s services.

PASS-THROUGH THEORY OF HARM

Apple argues that the Court’s holdings in Hanover Shoe, Inc. v. United Shoe Machinery Corp. and Illinois Brick Co. v. Illinois limit antitrust litigation to an alleged monopolist and its direct consumers. Apple contends that the earlier case, Hanover Shoe, prevents defendants in antitrust cases from avoiding damages by claiming that the plaintiff passed the overcharge onto indirect purchasers, thereby cancelling out any negative effects. Apple then maintains that Illinois Brick worked in the opposite direction to prevent indirect purchasers from bringing suits against monopolists because it would be too difficult to calculate damages. According to Apple, the effect of these cases is to prohibit a pass-through theory of harm and limit antitrust standing to direct purchasers only, while also allowing them to collect all damages, even if they did pass on the overcharges. Apple claims, however, that Pepper’s theory of harm necessarily relies on this prohibited pass-through theory because Pepper is an indirect purchaser. If Pepper could bring an antitrust claim despite its indirect purchaser status, Apple asserts, it will be subject to duplicative damages claims from both direct purchasers who experienced overcharges and indirect purchasers who had those same overcharges passed on to them. According to Apple, the Ninth Circuit inexplicably ignored this likelihood where instead it should have seen that because app developers are direct purchasers, it was necessary to find that Pepper is an indirect purchaser to avoid duplicative recovery. Apple argues that the pass-through theory of harm and threat of duplicative recovery requires dismissal of Pepper’s claims.

Pepper argues that the theory of harm here does not depend on a price being passed on to them. Pepper contends that the app purchasers are the first consumers here to bear the cost of the alleged monopoly because the app developers do not sell their apps to Apple. Furthermore, Pepper asserts that the Ninth Circuit’s decision does not allow for duplicative damages liability. Pepper then claims that if the app developers had a damage claim, it would only be a claim on the same 30% commission that the app customers have a damage claim. Therefore, Pepper maintains, both the app purchaser and app developers would have to share the 30% commission fee as damages. Nonetheless, according to Pepper, the app developers likely would not have a basis to bring an antitrust suit against Apple because knowingly consenting to antitrust conduct, as the app developers did here, bars them from bringing an antitrust suit.