TR Daily First-Purchaser Rule Called Into Question in App Store Case
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Monday, November 26, 2018

First-Purchaser Rule Called Into Question in App Store Case

During oral argument today in a dispute over the ability of iPhone app purchasers to seek treble damages for alleged antitrust violations by Apple, Inc., Supreme Court justices from both the conservative and liberal wings of the court showed interest in distinguishing the case from, or even reversing, a 1977 decision that limited such claims to the “first buyer” or direct purchaser, despite the fact that the app purchasers say they are the direct purchasers and don’t need the earlier decision to be reversed.

“Apple, Inc., v. Robert Pepper et al.” (case 17-204) stems from a decision by the U.S. Court of Appeals for the Ninth Circuit (San Francisco) to reverse a federal district court’s dismissal of the class action lawsuit. The trial court held that the consumers lacked standing for their claims under the direct purchaser rule.

Justice Samuel A. Alito Jr. raised the possibility of overturning the approach in the 1977 “Illinois v. Illinois Brick” case.

He said that is was based not on economic theory but on the court’s assessment of what would be an efficient litigation framework, such as the idea that the direct purchasers are in the best position to sue. However, as Apple attorney Daniel Wall acknowledged, none of the many app developers whose apps are sold in the App Store has ever sued Apple, Justice Alito pointed out.

“We do not take the absence of litigation as evidence of an oppressed developer community that cannot speak for itself,” Mr. Wall said.

Justice Neil M. Gorsuch also suggested the need to reconsider “Illinois Brick.”

Speaking to Mr. Wall, he said, “You’re asking us to extend Illinois Brick, admittedly, only because of a contractual formality and the economic realities are the same. I'll spot you all of that for purposes of this question. But why should we build on ‘Illinois Brick’? Shouldn't we question ‘Illinois Brick,’ perhaps, given the fact that so many states have done so. They’ve repealed it.”

Many states have passed laws or interpreted existing state law to allow indirect purchasers to seek antitrust damages. An amicus brief filed by 30 state attorneys general in “Apple v. Pepper” urged the court to reverse “Illinois Brick.”

“Indirect purchasers may be better suited to enforce the antitrust laws,” Justice Gorsuch said.

Mr. Wall said that changing the antitrust rule on direct purchasers is a political question that should be left to Congress.

Justice Ruth Bader Ginsburg asked, “Why is that so if the court created the doctrine in the first place?”

Mr. Wall said that the court was just applying “the foundational principle of all section 4 jurisprudence, which is the proximate cause principle of damages not going past the first step.”

Justices Sonia Sotomayor and Elena Kagan both expressed the view that consumers are direct purchasers when they go to the App Store and issue a payment to Apple, which then forwards the payment, less its 30% commission, to the app developer.

Consumers are “the first purchasers of that 30% markup,” Justice Sotomayor.

“Illinois Brick” was “a case of vertical monopoly,” Justice Sotomayor said, and the current case “is not quite like that. This is dramatically different. This is a closed loop.”

She also said that consumers would still have to prove the extent of their damages: “They are not seeking 30% of their sales.”

Justice Kagan also distinguished the current case from the “vertical supply chain” present in “Illinois Brick.” In the App Store, “the person is transacting with the monopolist itself.”

Justice Stephen Breyer said, “I don’t see anything in ‘Illinois Brick’ that conflicts” with the idea that one is entitled to damages if a monopolist used its market power to force a buyer to pay more than a competitive market price.”

He also said, “I go by simple analogy. If Bill buys from the monopolist, he is a direct purchaser. If Bill buys from Sam, who buys from the monopolist, he is an indirect purchaser. Anyone can understand that.”

Solicitor General Noel Francisco, representing the Justice Department as amicus curiae in the case, argued that regardless of the nature of the transactional relationship between consumers and Apple, the harm to consumers was indirect.

Justice Brett M. Kavanaugh asked, “How do we know that the 30% change is not affecting the final price?”

Justice Kavanaugh also suggested that “Illinois Brick” is “ambiguous” and that ambiguity should be resolved in favor of the antitrust statute’s reference to “any person injured.”

Mr. Francisco said the court should “interpret background principles of proximate cause to be built into the statute, including the rule that damages stop at the first step.”

Justice Kagan asked whether it made a difference that Apple is influencing consumer prices more directly than through the 30% commission, by preventing developers from charging prices between free and 99 cents, and that it has the ability as a monopolist to dictate the terms of sales.

David Frederick, the attorney for the consumer class respondents, argued that the app purchasers are the direct purchasers under “Illinois Brick.”

Chief Justice John G. Roberts Jr. asked whether the developers’ claim is the same as the app purchasers’ claim. Mr. Frederick said it is not, and that developers could argue that without the constraints imposed by Apple, they might be able to sell their apps for a lower price to a broader market and increase their revenues.

Justice Alito said, “I thought this case was all about the 30%.”

Mr. Frederick said that the other side in the case has tried to make that argument.

Justice Gorsuch said that there can only be one monopoly rent, and asked who is paying it, although he said it could be split between app purchasers and developers.

He also said he was “curious” why “the plaintiffs’ bar” isn’t making the argument to overturn “Illinois Brick.”

Justice Gorsuch asked about the possibility that an app developer might choose to absorb the monopoly rent.

Mr. Frederick said that the 99-cent pricing increments that Apple imposes mean that the size of the commission might only harm or benefit the developer, and leave the consumer’s price unchanged.

Justice Gorsuch asked whether ruling for the respondents might just create an incentive for Apple and others to structure the transactions so that consumers pay developers directly.

Chief Justice Roberts asked why, if the 99-cent issue was so significant, the respondents hadn’t included it in their brief. Mr. Frederick said it wasn’t significant “in that way,” but that the petitioner had raised the 99-cent issue in its brief as proof that developers get to set the price, and the respondents were just taking issue with that.

Justice Alito asked whether, if the case went to trial, every app purchaser would be entitled to treble damages on the 30% commission. Mr. Frederick said he hadn’t thought about how the damages would be awarded and divvied up.

On rebuttal, Mr. Wall argued that the respondents had made the 30% commission the “root of the damages theory in their complaint.” —Lynn Stanton, [email protected]

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