The U.S. Supreme Court has ruled that an antitrust lawsuit brought by iPhone users against Apple (NASDAQ:AAPL) can move forward. The suit alleges that Apple violated federal antitrust laws by overcharging iPhone users for apps purchased from its App Store. Apple argued that those, like the plaintiffs, who merely purchase apps from a platform like the App Store do no have the right to bring an antitrust claim. But, in a rebuff to Apple (and perhaps other tech companies), the Supreme Court held that iPhone users can maintain an antitrust suit against the company. The decision clarifies the nature of the relationship between tech platforms, like the App store, and consumers, potentially opening the door to a torrent of new litigation.
The issue before the Court
In 2011 (which gives you an idea how long it takes a case to reach the Supreme Court), four iPhone users filed a potential antitrust class action against Apple in a California federal district court. The suit alleges that, through its App Store, Apple has a monopoly over the the market for iPhone apps and that it is using its monopoly to charge excessive prices for apps.
The specific problem, the plaintiffs argue, is Apple's arrangement with app developers. Apple allows developers to sell apps to iPhone users through the App Store. Developers set the prices for their apps, but in exchange for access to the App Store, Apple retains a 30% commission on each app sold. The plaintiffs allege that app developers pass this allegedly excessive commission to iPhone users, which then drives up the retail price for apps.
Apple asked the district court to dismiss the case, contending that the suit was barred by a 1970s Supreme Court case, Illinois Brick v. Illinois, which holds that only those who buy directly from a monopolist can bring an antitrust claim. Essentially, the company argued, iPhone users do not buy apps directly from Apple. Rather, when an iPhone user buys an app from the App Store, they are purchasing it from a developer. The App Store is simply a forum -- like a shopping mall -- that connects buyers and sellers. Instead of selling apps directly to users, Apple really sells app distribution services to developers. Thus, Apple reasoned, regardless of whether the App Store is a monopoly or the 30% commission is excessive, iPhone users are indirect purchasers who cannot sue Apple for an antitrust violation.
After conflicting decisions in the trial court and 9th Circuit Court of Appeals, the US Supreme Court then agreed to hear the case to decide a narrow question: whether iPhone users are direct purchasers from Apple and thus the "proper plaintiffs for this kind of antitrust suit."
The Court rejected Apple's legal argument
The Supreme Court heard oral argument in November 2018 and issued a 5-4 ruling against Apple on May 13, 2019. Writing for the majority, Justice Kavanaugh (breaking with the Court's conservatives) opined that iPhone users are direct purchasers of apps and thus can maintain an antitrust suit. While indirect purchasers cannot bring an antitrust claim, that rule only applies to purchasers at the bottom of a distribution chain trying to sue someone at the top -- e.g., a consumer suing a manufacturer while skipping over the retailer and distributor. Here, the Court found, iPhone users are not skipping over a retailer and going after some distant party up the distribution chain. Rather, they are suing the party -- Apple -- that sold the apps and took their money.
Moreover, the Court found that Apple's theory draws a meaningless distinction between retail pricing models. The Court reasoned that there are multiple ways a retailer can set prices. For instance, a retailer may use a traditional markup model where the retailer buys a product from a manufacturer then sells it at markup to a consumer. As an example, the Court noted, a retailer could pay a manufacturer $6 for product, sell it for $10, and pocket a $4 profit. On the other hand, the retailer instead could choose a commission model, like the App Store, where the retailer simply sells a product for the manufacturer and keeps a commission. Continuing with the Court's example, suppose a retailer sells a product for $10 and keeps a 40% commission. The manufacturer still gets $6 and the retailer keeps $4. Under this scenario, the two models are functionally equivalent. Under Apple's theory, however, consumers could only bring an antitrust suit under the former model but not the latter. The Court opined that a consumer's right to bring an antitrust claim should not hinge on the retailer's pricing arrangement. Indeed, the Court concluded that if Apple's theory was correct, it would provide a means -- i.e., commission pricing -- for retailers to avoid antitrust liability.
Impact of the decision
It's too soon to assess the impact of the court's decision on Apple. The company's stock dropped over 5% on the day of the decision, but the decision coincided with news of China's plan to impose $60 billion in tariffs on US goods, which has a more immediate impact on Apple's fortunes. In any event, the Court only ruled that iPhone users can sue Apple. The case will now go back to the district court to determine whether Apple violated the antitrust laws. With discovery and trial, a decision on Apple's liability could take years. If a court ultimately finds that Apple violated the antitrust laws, the company, which has collected as much as $50 billion in app commissions, could be on the line for hundreds of millions. Nevertheless, Apple earned over $59 billion in income last year. It can absorb a big hit.
Aside from the impact on Apple, the decision may affect other online marketplaces like Alphabet's (NASDAQ:GOOG) Google Play Store, eBay (NASDAQ:EBAY), and LiveNation's (NYSE:LYV) Ticketmaster. In holding that purchasers can file an antitrust suit to challenge fees charged on a tech platform, the Court has more clearly defined the role of tech companies in online marketplaces. While tech companies may consider themselves intermediaries that simply connect buyers and sellers, the Court has now ruled that they are effectively retailers who must deal fairly with consumers.
That said, even though consumers can now bring an antitrust claim against companies that operate online marketplaces, consumers will still have to prove that a company has engaged in anticompetitive conduct, which is not easy. Consumers will have to establish that a tech company has a monopoly over some portion of the online market, and that it is using its monopoly power to drive out competition and bilk consumers. This will require high-priced experts and a lot of abstract microeconomics theory. Despite these obstacles, the prospect of a triple damages award against a massive, very liquid tech company will be very enticing to plaintiffs' attorneys. We may be on the cusp of a new era of antitrust litigation. The threat of litigation may cause tech platforms to alter their arrangements with consumers by, for instance, switching from a fee model like Apple's, to a subscription model like Amazon's (NASDAQ:AMZN). Regardless, under increasing antitrust scrutiny, tech companies must now be more mindful of how they structure their relationships with the public.