Supreme Court weighs whether consumers can sue Apple over cost of apps

The U.S. Supreme Court heard arguments Monday in a case consumers brought against Apple Inc., alleging the company holds a monopoly on apps sold via its online store, which passes its costs to customers.

The key question the Supreme Court weighed was whether consumers can claim damages at all against Apple since the alleged monopoly most directly affects developers who must accept Apple's terms when listing products on the store for any access to the market.

Apple takes 30 percent of the sale price for third-party apps sold in its store and prohibits developers from selling software designed for its phones in any other marketplace. It also threatens to void iPhone warranties if users download unauthorized apps from stores beside its own.

The case was dismissed by U.S. District Judge Yvonne Gonzalez Rogers of Oakland, based on a 1977 case, Illinois Brick Co. v. Illinois, which states indirect purchasers of goods cannot seek damages from a monopolistic manufacturer or service provider.

Apple argued the developers have standing to sue, but not consumers, as the intermediate party in the transaction. The case was revived by a 9th U.S. Circuit Court of Appeals panel in a decision hinging on the fact consumers buy the apps from Apple, not developers, once they are listed on the store, making Apple an ostensible distributor.

"The only damages theory in this monopolization action is rooted in a 30 percent commission that Apple charges app developers and which allegedly causes those developers to increase app prices to consumers," argued Daniel M. Wall of Latham & Watkins for Apple. "The case is barred by the court's Illinois Brick doctrine because the developers' pricing decisions are necessarily in the causal chain that links the commission to any consumer damages."

Several justices pressed Wall on his client's theory of consumers as indirect sufferers of the alleged monopoly, zeroing in on the same point as the 9th Circuit: that buyers pay Apple for the apps.

Justice Ruth Bader Ginsburg asked Wall who the "first buyer" would be as to Apple, and Wall responded the developers are since the 30 percent commission is paid by them and they set the apps' prices. The plaintiffs argue, though, that Apple's monopoly means developers are forced to pass that cost to customers. Apple Inc., v. Robert Pepper et al., 17-204.

Justice Elena Kagan said: "As long as it's not that vertical supply chain where the person is not buying from the monopolist itself, here, the person is transacting with the monopolist itself, that that's what separates this case from Illinois Brick."

Justices Samuel Alito and Neil Gorsuch pointed out Illinois Brick was intended largely for litigation reasons, such as preventing double-recovery for antitrust violations, a problem that has seldom risen since.

"Direct purchasers don't always sue because there's a threat that monopolists will share the rents with the direct purchasers," said Gorsuch, "and indirect purchasers may be better suited to enforce the antitrust laws."

David C. Frederick of Kellogg, Hansen, Todd, Figel & Frederick PLLC made a threefold argument for the plaintiffs that they satisfy the Illinois Brick standard, that Apple can be sued because its abuses are aimed at the parties suing, and that Apple is attempting to improperly expand Illinois Brick to direct purchasers.

While Wall set forth the theory that the claimed violation is rooted in the commission charged to developers, Frederick framed it around the alleged monopoly of the Apple app store and its throttling of consumer choice. The commission number that Apple's attorneys have seized on, he says, is just an example of the company's monopoly.

"By having a wholly-owned monopoly App Store, Apple is able to distort the market at the supply chain and at the retail chain for consumers," he said. "We, representing consumer iPhone owners, are suing only for the damages that we incur. That is higher than what a competitive market price would be for apps."

Gorsuch and other justices questioned Frederick on the commission's role in his clients' claims and its role as a "monopoly rent."

"Mr. Frederick, I think you'd agree that there can only be one monopoly rent. And then the question becomes, who's paying it?" Gorsuch asked.

"We're paying the money. They're keeping it," Frederick said. "And we think we're paying more than ... we would have to if the market was a competitive market."The justices also questioned Frederick on whether they were in danger of rendering Illinois Brick irrelevant should they rule for his side.

"I represent the consumers in this case, and the consumers in this case have no brief and no beef with Illinois Brick," he responded. "We think we are direct purchasers. We satisfy the rule. We come within the bright line."

Solicitor General Noel J. Francisco argued as amici in favor of Apple, saying that should the lawsuit be permitted, it would set a precedent allowing pass-through damages and double suits.

Daniel M. Wall of Latham & Watkins

David C. Frederick of Kellogg, Hansen, Todd, Figel & Frederick PLLC