Consumers Have Standing under Illinois Brick to Sue Apple for Antitrust-Violating App Store Practices

By Mark Westwood and James Carlson 

繁體中文

Consumers Have Standing under Illinois Brick to Sue Apple for Antitrust-Violating App Store Practices

In Apple Inc. v. Pepper et al., No. 17–204, 587 U.S. ___ (2019), the Supreme Court of the United States affirms that consumers have legal standing under Illinois Brick Co. v Illinois, 431 U.S. 720 (1977), to sue Apple for alleged antitrust practices regarding the company’s App Store.  The Supreme Court found that, despite the price of iPhone applications being set by developers, consumers are “direct purchasers” of iPhone applications from Apple.  Therefore, consumers are also directly affected by Apple’s alleged monopolistic practices, and, thus, have legal standing to sue under Illinois Brick.

Consumers Have Standing under Illinois Brick to Sue Apple for Antitrust-Violating App Store Practices

In Illinois Brick Co. v Illinois, 431 U.S. 720 (1977) (hereinafter “Illinois Brick”), the Supreme Court of the United States (hereinafter “Supreme Court”) established that only direct customers of goods or services have legal standing to seek antitrust remedies against an antitrust-violating purveyor of goods or services.  Turning to the facts in Illinois Brick, Illinois Brick Company manufactured and sold concrete blocks using several intermediaries in a vertical distribution chain where the State of Illinois (hereinafter “Illinois”) was the ultimate consumer.  Illinois sued Illinois Brick, alleging that Illinois Brick had engaged in a conspiracy to fix the price of concrete blocks and that the monopoly overcharge allegedly flowed through the distribution chain to the consumer, i.e., Illinois.  The Supreme Court ruled that Illinois could not bring an antitrust action against Illinois Brick because Illinois had not purchased concrete blocks directly from Illinois Brick.  This case established a judge-made rule that indirect purchasers, i.e., those purchasers who are two or more steps removed from the antitrust violator, do not have legal standing to sue.  By contrast, direct purchasers—those who are “the immediate buyers from the alleged antitrust violators”—may sue.  See Kansas v UtiliCorp United Inc., 497 U. S. 299, 207 (1990).

Turning to Apple Inc. v. Pepper et al., No. 17–204, 587 U.S. ___ (2019) (hereinafter “Apple Inc. decision”), four iPhone owners sued Apple for having an antitrust-violating relationship with iPhone application developers. Generally, iPhone applications are developed by application developers, who contract with Apple to make applications available to iPhone owners through the App Store. The price of an iPhone application is set by the developer, but Apple receives a “commission” of 30 percent of every sale.  The plaintiffs alleged that iPhone owners are forced into “buying [applications] only from Apple and paying Apple’s 30% fee” and that, they have “paid more for their iPhone [applications] than they would have paid in a competitive market.”  The district court dismissed the suit with prejudice, agreeing with Apple that, under Illinois Brick, the iPhone owners do not have legal standing to bring a lawsuit as they are not direct purchasers from Apple because the application developers set the consumers’ purchase price.

On appeal, the district court was reversed by the United States Court of Appeals for the Ninth Circuit (hereinafter “Ninth Circuit”). See Schwartz v. Apple Inc., 846 F. 3d 313 (9th Cir. 2017).  The Ninth Circuit considered whether the consumers purchased their iPhone applications directly from the application developers, or directly from Apple (i.e. whether Apple is a manufacturer or producer, or whether it is a distributor).  The Ninth Circuit ruled that Apple is a distributor from whom iPhone owners purchased directly and that, therefore, the iPhone owners have legal standing under Illinois Brick.  Therefore, the Ninth Circuit held that the iPhone owners could sue Apple for allegedly monopolizing the sale of iPhone applications and charging higher than-competitive prices.

In the Apple Inc. decision, the Supreme Court determined that “[u]nlike the consumer in Illinois Brick, the iPhone owners here are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain.”  As such, the Supreme Court holds that any ambiguity in Illinois Brick should be resolved in the direction of the statutory text, which states that “any person” injured by an antitrust violation may sue to recover damages.  Accordingly, the Supreme Court found that the iPhone owners are “immediate buyers from the alleged antitrust violators.”  Therefore, the Supreme Court found that, despite the price of iPhone applications being set by their developers, consumers are “direct purchasers” of the applications from Apple, and therefore have legal standing to sue under Illinois Brick.

The Apple Inc. decision means that the plaintiffs can proceed in presenting their case against Apple at the district court level.  Depending how the lawsuit progresses, this may represent a threat to closed content “ecosystems” and how technology companies are able to bottleneck software distribution on their platforms.

For intellectual property owners, this is a very important Supreme Court case that may open the door for antitrust litigation of many kinds of intellectual property agreements.  In particular, courts may interpret this decision as giving some plaintiffs the ability to bring lawsuits that previously lacked an actionable antitrust injury.  Where anticompetitive licensing agreements were primarily the subject of patent misuse defenses to infringement lawsuits, some consumer plaintiffs may now file a lawsuit independent of a patent infringement suit.