Courthouse Steps Oral Argument: Apple, Inc. v. Pepper

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Corporations, Securities, & Antitrust Practice Group, was recorded on Tuesday, November 27, 2018, during a live teleforum conference call held exclusively for Federalist Society members.  

Micah Wallen:  Welcome to The Federalist Society’s teleforum conference call. This afternoon’s topic is a Courthouse Steps Oral Argument teleforum for Apple v. Pepper. My name is Micah Wallen, and I’m the Assistant Director of Practice Groups at The Federalist Society.

As always, please note that all expressions of opinion are those of the expert on today’s call.

Today, we are fortunate to have with us Cory Andrews who is a senior litigation counsel for the Washington Legal Foundation. After our speaker gives his remarks, we will then go to audience Q&A. Thank you for sharing with us today. Cory, the floor is yours.

Cory Andrews:  Thank you very much, Micah, and thanks to The Federalist Society for inviting me. On the assumption that "past is prologue", I thought I would begin just by sort of setting the table with what the direct purchaser rule is and from where it comes. 41 years ago in Illinois Brick v. Illinois, the Supreme Court announced the Brightline Rule, barring indirect purchasers from ever suing to recover the alleged overcharges passed on to them through a distribution chain. This is under Section 4 of the Clayton Act seeking treble damages for antitrust violations. So ever since then, only a direct purchaser can sue to recover federal antitrust damages, even if that purchaser passed all the alleged overcharge to its customers. So the idea was, by concentrating the potential recovery and, thus, the incentive to sue solely in the direct purchaser, the rule optimizes the deterrent effect of the treble damages remedy.

The Court was concerned with avoiding a firm’s exposure to duplicative recoveries and suits, especially when treble damages are at issue. But the rule also springs from concerns that attempting to calculate pass-through antitrust damages—that is damages some portion of which may or may not have been passed through to downstream buyers in a distribution chain—that calculation is inherently difficult and will unduly complicate a federal antitrust litigation.

The rule in Illinois Brick really followed logically from the rule in Hanover Shoe, which was a case decided in 1968. In that case, it’s sort of the reverse end. Someone is defensively saying, in this case a monopolist, is saying, “Hey, you can’t collect all of those damages from me, direct purchaser, because you passed those damages on to your buyers.” And in that case, the Court said, “No, we’re not going to get into that game. We’re just going to cut off damages at the first step.”

So taken together, Hanover Shoe and Illinois Brick established that it’s the overcharged direct purchaser and not others in the chain of manufacture or distribution that is the person injured in his business or property under Section 4 of the Clayton Act.

So with that background in mind, we’ll talk about this case. I assume everyone on the call is familiar with Apple and is familiar with the iPhone. Shortly after Apple launched the iPhone in 2007, it launched the App Store in 2008. The App Store is a digital marketplace that allows iPhone users to download software applications, or apps, for use on the iPhone. And Apple’s patented iPhone operating system, iOS, allows users to download apps only from the App Store. Now, it’s third-party software developers who create most of the App Store’s apps. These developers have actually released more than two million apps for the iPhone so far. And it’s the app developer who sets the app’s price, if any. As you know, many apps are free.

Besides hosting the App Store, Apple also reviews the apps for security and compatibility, and then as the app developer’s agent, collects the purchase price from the buyer and delivers the app. Now, Apple charges the developer a 30 percent commission on each app sold. Free apps yield no commission. When a user buys an app from the App Store, Apple retains its 30 percent commission from the sale price and remits the balance to the app developer.

So the plaintiffs in this case are iPhone users who bought apps through the App Store. They filed a class action alleging that Apple violated Section 2 of the Sherman Act by abusing a monopoly on the aftermarket distribution of iPhone apps. They also allege that Apple’s super competitive 30 percent commission caused them to pay more for their iPhone apps then they should have paid. And so under Section 4 of the Clayton Act, they’re seeking to recover treble the amount of every alleged overcharge.

At trial, the district court dismissed the complaint due to the plaintiffs’ lack of direct purchaser standing under Illinois Brick. The Court read the complaint as challenging the fee created by the agreement between Apple and the app developers and born by the app developers to pay 30 percent from their own proceeds. That amount, the complaint alleged, is passed on to the consumers as part of their purchase price. The Court found that the plaintiff’s Section 4 claim rested on the very passed-on theory of antitrust liability that Illinois Brick forecloses. The Ninth Circuit reversed. The appeals court found that it was immaterial that Apple, acting as an agent, forwards the payment from iPhone users to the app developers. Equally irrelevant was that the app developer sets the price for its apps. The Ninth Circuit even conceded that, as direct purchasers of the App Store’s distribution services, tens of thousands of third-party app developers would have standing to bring their own Section 4 claims against Apple for the same alleged violation.

But according to the panel, whether app developers are direct purchasers of distribution services from Apple makes no difference because in the panel’s view it’s the function that Apple serves rather than the manner in which it receives its compensation for performing that function. And so that was the key for the Ninth Circuit in deciding the case. And so according to the panel, since Apple distributes iPhone apps directly to the app store’s customers, iPhone users are, quote, "direct purchasers of iPhone apps from Apple." And as direct purchasers, the plaintiffs can bring their claim under Illinois Brick. The Supreme Court granted cert that case. Apple filed its petition saying that case conflicts with a case from the Eighth Circuit involving Ticketmaster, which held otherwise. Apple was represented in the high court by Daniel Wall of Latham & Watkins. He argued that the Illinois Brick rule here is dispositive for Apple because the plaintiffs’ claim hinges on precisely this sort of pass-through theory of harm that Illinois Brick prohibits.

In fact, he says it depends on conducting a prohibitive pass-through analysis millions of times because the required economic analysis must be undertaken app by app. And respondents here have styled their claim as a class action covering all U.S. purchasers of all iPhone apps. And so because a direct purchaser is shorthand for the party who bears the antitrust violator’s overcharge in the first instance, he argues that person here is the app developer and not the iPhone user.

The plaintiffs are represented by Kellogg Hansen’s David Frederick. They agree that Illinois Brick governs this case, but they argue that iPhone users purchase apps directly from Apple. So they have standing to sue Apple. And they reject the notion that Apple acts as an agent for the developer. They point out, for example, that Apple has at least some say in the pricing of apps because it requires that any app that is not free must be sold at a price ending in $0.99.

He also argues, and more on this in a moment, that the antitrust violation isn’t the commission itself, but it’s the fact that the App Store is the only place to buy apps. The United States also filed a brief in this case and participated in oral argument. It supported Apple, and its brief  and arguments largely tracked Apple’s theory of the case. The SG decided that when Congress enacted the Clayton Act, it did so against the backdrop of basic principles of proximate cause, including the common law rule that damages stop at the first step. The government also argues that who sets the price for the apps is very important, and, here, the app developers set the final prices. Noel Francisco argued the case himself, doing his usual excellent job.

Oral argument was certainly interesting, and I think it’s safe to say that some votes are still in play here. So it’s harder than usual to predict exactly how this one might turn out. The oral argument took some unusual twists and turns, at least from my perspective. This is definitely one of those arguments where the parties, and sometimes even the Justices, seem to be talking passed each other at times. And one of the reasons for that, and one of the key points of contention at argument, was whether the case now before the Supreme Court bears any resemblance to the case as it was litigated for seven years now. Somewhere on the way from the Ninth Circuit to the Supreme Court, the plaintiffs’ theory of monopolization went from the claim that Apple monopolized the distribution market for apps by charging app developers a super competitive 30 percent commission to the claim that Apple’s App Store is itself a monopoly because consumers can’t buy an app from anywhere else.

Certainly Apple’s attorney, Mr. Wall, made it clear that he felt he was being sandbagged, and some Justices appeared to agree with him. For his part, Mr. Frederick insisted that these claims were there all along, and he made his own case along those lines. Justices Breyer, Ginsburg, Sotomayor, and Kagan all gave varying indications that they are inclined to find for the plaintiffs’ here. As is often the case lately it seems, for Justice Breyer the answer here is very simple and easy. iPhone users by apps from Apple. The alleged monopolist is Apple, and so those direct buyers can always sue the alleged monopolist for an overcharge, even under Illinois Brick. So that is the end of the matter for him.

Justice Sotomayor and Justice Kagan both seemed open to the possibility that Illinois Brick doesn’t even apply here because, after all, that case involved an alleged monopoly in a traditional, vertical distribution chain. Whereas, this case is more of a closed loop where the App Store is the only place to buy iPhone apps.

But it wasn’t just the Court’s liberal block that appeared at least opened to ruling against Apple. Justices Alito and Gorsuch both expressed a belief that Illinois Brick was either wrongly decided or no longer relevant in the modern economy. A bipartisan group of 31 states had filed an amicus brief to that effect. And while that issues isn’t really joined in the case, even the plaintiffs haven’t asked the Court to revisit Illinois Brick, I wouldn’t be surprised to see a separate concurrence or descent inviting the opportunity to revisit Illinois Brick in the future.

That said, both Justices Gorsuch and Alito were clearly troubled by the possibility that the plaintiffs have changed their antitrust theory of the case at the eleventh hour. And their questions of the plaintiffs’ counsel suggested that they are more inclined to look the economic realities behind the transactions, rather than to the optics of the transactions themselves in resolving this case. Justice Kavanaugh seems very much in play for the plaintiffs. Since it isn’t entirely clear how Illinois Brick should apply to these facts, he suggested looking to the very broad language of the Clayton Act, which says that any person injured by any antitrust violation can sue. That would certainly, I think, weigh in the plaintiffs’ favor if he decided to go that route.

Chief Justice Roberts strikes me as, perhaps, the most reliable vote for Apple. He asked no questions of Apple’s counsel but asked some very pointed questions of the plaintiffs. He, too, seemed especially troubled by the possibility that Apple could be sued by both iPhone users and by app developers for the same antitrust violation. And he also pointed out that, at times, the plaintiffs seemed to be saying things now that they never said in their complaint. So with that recap, I think I’ll stop there and invite any questions.

Micah Wallen:  We will now go to our first question.

John Shoe (sp):  Hello, Mr. Andrews. This is John Shoe in Newport Beach. Thank you very much for your presentation. My question is about the potential broader effect of any Supreme Court ruling in favor of the plaintiffs, Mr. Pepper and his group. How would that further effect Apple and its App Store in the future and other companies that have a similar store, like Google?

Cory Andrews:  That’s a good question. First of all, as far as Apple, I think one of the things that’s obvious is this was a class of iPhone users. If this is allowed to go forward, you can bet there will be a class of iPad users as well. Affirmance here will certainly, I think, invite a flood of lawsuits by the antitrust plaintiffs’ bar to test the bounds of the Court’s decision. As with most things in the law these days, the Court’s reasoning will be taken to its logical conclusion and then to its illogical conclusion. So, as you suggest, similar platforms, such as Google Play, StubHub, eBay, may find themselves in the crosshairs. On that point, though, that’s why it’s important -- one of the things that’s important about the case is whether this is a case about a commission on a distribution service or whether this is a case about a closed App Store.

On the later point, at least, the plaintiffs’ counsel, David Frederick, insists Apple is the only such closed store. So he points out, for example, that even Google’s Google Play store, while it may dominate the market for Android apps, it still allows users to purchase apps from sources other than Google Play. And consumers can access Google Play and other sources from which apps can be purchased from a wide range of devices, not just devices that are manufactured or owned by Google. But I think if the case is what a lot of us thought the case was about, and certainly what it seemed the Ninth Circuit and the district court thought the case was about, which is about this super competitive 30 percent commission, then I think the possible exposure for these other platforms is more significant.

Micah Wallen:  We will now go to our next question.

Laura Peterson:  Hello, Mr. Andrews. Thank you for your presentation. It’s Laura Peterson in Washington, D.C. Would you kindly comment more on two points you made? First, you had said that Justices Alito and Gorsuch suggested that Illinois Brick was no longer relevant in a modern economy, if you could say more about that. And second, please, you noted that Justice Kavanaugh had suggested looking to the broad language of Section 4, which states, of course, that any person can sue. How did Justice Kavanaugh seem to reconcile that with Illinois Brick in the first place? Thanks so much.

Cory Andrews:  The first question about the possible obsolescence of Illinois Brick in the modern economy is really the result of -- as they would say, Illinois Brick is a 20th century rule being used in a 21st century economy. So the Illinois Brick case itself is sort of a classic instance. The State of Illinois sued a brick manufacturer that had fixed prices for bricks that went into Illinois construction projects. So there you’ve got, again, a straight vertical line of distribution. You’ve got the manufacturer of the product. You’ve got the middle man, and you’ve got the end user. Now, in this economy, we have a scheme where Apple is the agent for the app developers. It’s clear the app developers are the creators of the app and the owners of the app. Apple doesn’t own the apps.

And they have enlisted Apple as their agent, first of all, to provide some sort of vetting of the apps and to improve overall compatibility of the app with Apple devices because no one knows better than Apple how to scale that benefit for the consumer. But they also -- Apple sells the product to the consumer, gives the amount back to the app developer, and then withholds its 30 percent commission. And so that doesn’t seem to fit in with our sort of vertical way of thinking about distribution systems. There are hub types of distributions. There are agencies. There are two-sided platforms, and there’s a whole group of people that think Illinois Brick no longer belongs in that sort of an economy. One of the more interesting things about Illinois Brick is its longevity, however. And the more arguments that I see against Illinois Brick, I see just as many on the other side that Illinois Brick has survived the test of time and that there are inherent difficulties in calculating the damages that result where you have different steps in the chain of purchasing.

And I don’t know that that problem is going to be avoided. It’s certainly not going to be avoided, and I don’t know that any other rule is going to be any better. The question about the statute, well I think what -- yeah. So basically why wasn’t Justice Kavanaugh persuaded by the stare decisis value of Illinois Brick? Well, I think his point was that Illinois Brick isn’t giving me a clear answer here, so he wasn’t necessarily saying let’s do away with Illinois Brick. Some other people suggested doing that. But he was saying, “Since I can’t figure out how Illinois Brick should apply here, why don’t I just turn to the statute?” which is obviously a respectable position. The problem is that antitrust statutes are notoriously broad, and it’s been the role of the courts forever to narrow those broad terms, such as, for example, defining what a restraint of trade is. I think that Illinois Brick, in Justice Kavanaugh’s world -- he can leave Illinois Brick alone while still using the statutory language as a tie-breaker for how this case should come out, if that answers your question.

Laura Peterson:  Thank you.

Micah Wallen:  And to build off a little bit from that last question, Cory, what do you think the chance is that the Court just outright overrules Illinois Brick?

Cory Andrews:  I think that would be an extraordinary step, not the least of which because no one has asked it to do so. The Court didn’t grant the question “Should Illinois Brick be overturned?” It granted the question “How does Illinois Brick apply to the facts of this case?” More importantly, the only brief that called on the Court to do so was an amicus brief by 31 states. In general, amice are not permitted to introduce or join new issues into the litigation that haven’t been joined by the parties. That said, certainly anything is possible. This is the Supreme Court. But I took Justice Gorsuch’s and Justice Alito’s almost -- and particularly Justice Gorsuch. He almost lamented that the plaintiffs here hadn’t invited them to overturn Illinois Brick. But I took that to mean that he sure wished they had because he might have liked to have written that opinion. But since they hadn’t, it’s not before the Court.

And, in fact, I think, since it’s not before the Court, Justice Gorsuch might just be inclined to apply Illinois Brick to the facts of this case in a way that may reverse the Ninth Circuit. So I think there was some of the early media reaction to Justice Gorsuch and Justice Alito’s questions that maybe went a little too far because I think their votes are very much not clear. And I think, if anything, the kinds of questions, apart from this whole "should we have overturned Illinois Brick, or is Illinois Brick right?", apart from those kinds of questions, which again, I don’t think are joined in the case, all of the other questions that Justice Gorsuch and Justice Alito asked were very sensible, hard-hitting questions that suggest that they are looking at this from an economic perspective and not merely as a sort of transactional perspective, which is the way that the Ninth Circuit viewed it.

Micah Wallen:  And going off that, do you think then, since overturning it isn’t before the Court, do you think we'll see, depending on how the case goes, whether it’s a concurrence or a dissent from Gorsuch and Alito, kind of limiting Illinois Brick with the language mentioned of how it’s not really applicable in a modern economy? Limiting it in such a way to where it’s not really overturned, but going forward, it’s essentially overturned? Or do you think they won’t go that far?

Cory Andrews:  Yeah. I don’t think they would go that far, but I think I wouldn’t be surprised that they would write a separate concurrence or dissent in which they say “Although it’s not before us, I think Illinois Brick was wrongly decided. I think some of the assumptions underlying it no longer make sense,” or whatever their particular case is. “And therefore, we invite, or we welcome, an appropriate vehicle to revisit Illinois Brick and to possibly reverse it.” I think that would not surprise me. Again, that opinion could very well be attached to an opinion -- could just as easily be attached -- that separate opinion could just as easily be attached to an opinion suggesting the Ninth Circuit got it wrong, as it would the Ninth Circuit got it right. There’s nothing about that position that necessarily should dictate the outcome in this case, especially since they’re both believers in stare decisis. And this is a rule that has a long, long pedigree and has become kind of a part of the fabric of antitrust law for half a century.

Micah Wallen:  Thank you. We will now go to the next audience question.

Jason Ensen (sp):  Hi, Mr. Andrews. Thank you very much for your presentation. I’m Jason Ensen, Los Angles. I just wanted to ask are there potentially any federalism concerns here with respect to the Illinois Brick doctrine given many states have adopted repealer statutes that do not overturn the case but allow plaintiffs to bring state law claims where federal law would otherwise preclude standing in a case like this? Do you see any potential for the plaintiffs to proceed in an alternate fashion beyond the federal court?

Cory Andrews:  Well, sure. So the majority of the states didn’t like the Illinois Brick rule, so they all passed many Illinois Brick repealers, which allows the states to, under its own antitrust laws, permit recovery all the way down to the end user. A majority of the states do this. There’s certainly no danger of preemption. There’s nothing about the Clayton Act or the Sherman Act that preempts the states from doing this. And in fact, I want to say the Court actually considers that question and rejected it out of hand. So in that sense, it’s really a kind of complimentary system, which is what the federal system is. The states are able to protect their citizens the way they see fit, and the federal government is able to protect its federal interests the way it sees fit. So I don’t know that those two are necessarily in tension.

It is certainly interesting, and I think because so many of the states have abrogated Illinois Brick by their own state suites, it kind of begs the question why did 31 states here file an amicus brief asking to have Illinois Brick overturned? I don’t have a good answer for that. The brief doesn’t explicitly answer that question: why their current remedies aren’t sufficient? One thing that they don’t take part in is nationwide class actions, right, because each states’ antitrust laws are limited and exist only for the citizens of that state. So if you wanted to get in on a nationwide class action or, in this case, a class action for every U.S. app purchaser of every app ever, you would be out on the sidelines while you watched something like take place.

But apart from that, I really don’t see any serious federalism concerns because the states have the remedy they’re happy with. The federal system has the remedy it’s happy with. And I guess this would be a good place for me to sort of add a point about Congress and Congress’ role in all of this.

Congress has effectively ratified the Illinois Brick rule many, many times over the last 40 years, and it’s done this in two ways. First of all, it has considered and rejected more than 17 bills to directly overturn Illinois Brick. This is over a span of many, many years. But more importantly than that, it has amended the Clayton Act many times. And iIn point of fact, it’s amended the very language in the Clayton Act that is the basis for the Illinois Brick rule. It’s amended that language twice. It did that in the wake of the Illinois Brick ruling. It did it within just a couple of years of the ruling and then just a couple of years later.

And that period of time, as any search of the law review databases will show, was a repeal Illinois Brick frenzy. Everybody wanted to repeal Illinois Brick and get rid of it. And so the fact that Congress has changed that language twice while it’s clearly aware of what Illinois Brick says, and the fact that it has consistently refused to alter that language, both of those things along with the fact that no bill can ever make it out of committee that seeks to repeal Illinois Brick, that gives extra stare decisis value to the decision. The Court has said this in many, many cases when it talks about Congress essentially ratifying a decision. And if there is such a thing as ratification by Congress of a Supreme Court decision, I can’t imagine a stronger case than Illinois Brick.

Micah Wallen:  I’m not seeing any further questions lined up. Cory, in the meantime, if you had any closing remarks?

Cory Andrews:  In many ways, the argument seems to boil down to the old dichotomy of form over substance. If the Court decides to look at the economics behind the transactions, who pays the commission, who sets the prices, I think Apple comes out with a win here. But if the Court chooses to look solely at transactional privity, if it walks like a dog, quacks like a duck, so it seems like a retail store where consumers are buying apps directly from Apple, then I think it will view this case as satisfying Illinois Brick. I think the other thing is the larger takeaway here is to remember that, so far, this is only a case about who is entitled to sue.

So even if the Supreme Court affirms the Ninth Circuit, whether these plaintiffs will ultimately be able to prove that Apple is a monopoly on the merits is another question entirely. Not only that, but I think class certification is going to be an uphill battle because damages surely cannot be measured in one stroke. They have to be measured app by app. And again, there are millions and millions of apps sold and priced by tens of millions of app developers. So good luck figuring out how to get those damages into a class action.

Micah Wallen:  Thank you so much, Cory, and on behalf of The Federalist Society, I want to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

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