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How Apple’s Supreme Court loss could change the way you buy apps

Yesterday, the Supreme Court handed Apple a major defeat in an antitrust case. A group of iOS users claimed Apple had unfairly driven up app prices with its locked-down App Store. Apple argued that the users had no right to sue since they were actually buying apps from developers instead of Apple. Justice Brett Kavanaugh, speaking for a majority of the court, disagreed.

The new ruling establishes that app buyers are Apple’s direct customers, giving them the right to proceed with their antitrust case. This doesn’t have any immediate consequences for Apple because there’s still a long legal fight ahead. But if the plaintiffs’ case holds up, it could change the relationship between digital platforms and their users, giving customers the basic right to sue tech platforms for violating antitrust law.

What is Apple v. Pepper?

As we’ve mentioned before, Apple v. Pepper is an antitrust lawsuit filed by Robert Pepper in 2011. The plaintiffs in Apple v. Pepper argue that Apple’s basic App Store model is an unlawful monopoly. Apple only provides access to iOS apps through the App Store, and it requires developers to pay a 30 percent commission. The plaintiffs claim this fee gets passed on to users, who have nowhere else to buy their apps.

For the past eight years, Apple has argued that app buyers don’t have the legal right to sue at all. The company invoked a 1970s case called Illinois Brick Co. v. Illinois, which prevents “indirect purchasers” from filing antitrust suits. Then it claimed that Apple’s direct customers were developers, not users, so they’re the only ones with legal standing to file a complaint.

A lower court agreed with Apple’s interpretation, but the Ninth Circuit Court of Appeals ruled in favor of the plaintiffs, and Apple took its case to the Supreme Court. Yesterday, the Supreme Court ruled on that early question involving Illinois Brick, upholding the Ninth Circuit’s decision. So we still don’t know whether Apple is a monopoly, but we know that customers can sue to settle that question.

Why did the Supreme Court rule against Apple?

The court (in a 5-4 majority) decided that using an app store was fundamentally different from passing a product down a traditional supply chain. In Kavanaugh’s words:

iPhone owners are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain. There is no intermediary in the distribution chain between Apple and the consumer. The iPhone owners purchase apps directly from the retailer Apple, who is the alleged antitrust violator. The iPhone owners pay the alleged overcharge directly to Apple.

Illinois Brick was about traditional commercial supply chains. The state of Illinois sued a brick company for price-fixing. It argued that the company had sold its product to a general contractor at an inflated price, the general contractor had sold the bricks to another contractor, and that contractor had been hired for a government construction project, thus costing the government more money. The court rejected this long chain of causality and threw out the claim.

By contrast, iPhone users have a clear and direct relationship with Apple. As Justice Elena Kagan said during earlier oral arguments, consumers get the experience of “a one-step transaction with Apple” when they buy an app. Apple argued that its commission system still distinguished it from a direct seller, but the court said this was just splitting hairs. “Apple’s line-drawing does not make a lot of sense,” wrote Kavanaugh, “other than as a way to gerrymander Apple out of this and similar lawsuits.”

What’s happening now?

According to Mark Rifkin, who represents the plaintiffs in Apple v. Pepper, the case is getting very briefly kicked back to the Ninth Circuit. Then it goes back to a lower district court where both parties will start discovery. In other words, they’ll look for evidence to argue the actual monopoly question.

After that, Apple will have to actually defend itself against the charge that it’s running a monopoly. The company detailed some arguments in a statement yesterday, asserting that “the App Store is not a monopoly by any metric.” It insists that locking down the App Store helps Apple protect users’ privacy and security and that developers can sell the same apps on lots of different devices — including Android phones, TVs, and gaming consoles.

The plaintiffs, meanwhile, will argue that these alternatives don’t matter. “The fact that they have a [less than] 50 percent market share of smartphones doesn’t mean they don’t have a 100 percent share of the distribution of iPhone apps — which they absolutely do,” says Rifkin.

It’s also worth mentioning what’s not happening right now: any concrete changes from Apple. Again, Apple hasn’t been found guilty of running a monopoly, and it will probably take years to answer that question. The Supreme Court might even take up the case again. A court could issue an injunction while the trial proceeds, requiring Apple to change its policies in some way. But we’re not to that point yet, either.

What happens if Apple loses the overall case?

The plaintiffs want Apple to offer partial refunds on all paid iPhone apps, as Rifkin puts it, to compensate “all the purchasers, wherever they may be, who bought iPhone apps for their iPhones at any time since the phone was introduced in 2007.” They also want Apple to allow some alternative method of buying apps.

Apple could still take these steps in a settlement without losing in court. “If Apple is prepared to provide meaningful relief to consumers that ends the unlawful practice and compensate consumers for their injury, then we would be foolish not to listen to that kind of an approach,” says Rifkin. However, this would leave huge legal questions unanswered.

If Apple does lose, the ruling could set a precedent that would make it easier to sue other platforms for antitrust violations. But it’s not clear how broad that precedent would be. iPads and iPhones are uniquely locked-down devices, so the biggest arguments against Apple might not apply elsewhere. Rifkin uses Google’s Play Store as an example of a healthy and non-monopolistic marketplace. Even on a locked-down gaming console with one online store, there’s typically a separate market for physical media. “I think in the real world right now at least, the only company that does business the way Apple does business is Apple,” says Rifkin.

But as physical media grows rare and app stores more important, Apple v. Pepper could be more broadly relevant. Microsoft just announced an Xbox without a disc drive, for instance, and if its owners can only purchase games through one digital store, they could claim Microsoft is running an unfair monopoly.

If Apple wins, does this ruling still matter?

Definitely. The Supreme Court just removed a huge hurdle to filing an antitrust lawsuit as a digital platform user, as opposed to a seller or developer. In turn, that could mean more antitrust prosecutions.

“The person that bears the brunt of antitrust violations tends to be the consumer,” explains John Bergmayer, senior counsel at digital rights nonprofit Public Knowledge. “Those very often are going to be the people who have the strongest incentives to bring cases.” By contrast, developers would risk damaging an important relationship if they sue a platform, and they can raise prices to cover inflated costs.

Of course, once that hurdle is cleared, this ruling doesn’t make consumers more likely to win a lawsuit. “This doesn’t say anything about whether or not Apple did violate antitrust law,” says John Bergmayer, senior counsel at digital rights nonprofit Public Knowledge. “It just says you can bring more lawsuits.”

So will more people start suing platforms?

It’s plausible, and not everyone thinks that’s a good thing.

Morgan Reed, president of industry group The App Association, argues that yesterday’s ruling could result in onerous lawsuits that won’t ultimately help consumers. Reed points to the Supreme Court’s dissenting opinion, where Justice Neil Gorsuch claimed platforms might try to avoid the “direct seller” label with inefficient workarounds, like making developers handle their own payments and then write a check to Apple.

The point of Illinois Brick was to make sure that companies wouldn’t face multiple unexpected antitrust suits from different parties. So today’s decision “may unintentionally expose businesses offering digital platform services to unintended liability,” says Ed Black, president and CEO of the Computer & Communications Industry Association.

On the other hand, if Apple loses Apple v. Pepper, then maybe some platforms should be facing more lawsuits. “If all of a sudden there are a bunch of victories for plaintiffs against platforms … then that shows that this doctrine was basically allowing violations of antitrust law,” says Bergman. “Because this legal doctrine prevented the only party who was really harmed from bringing the suit.”

Is this part of the larger backlash against tech?

Apple v. Pepper was filed nearly a decade ago, long before the recent calls for antitrust reform and regulation. The Supreme Court was upholding a decision from early 2017, which also predates much of the controversy. As we discussed above, this isn’t a sweeping rewrite of antitrust law or a call to break up Apple. And the ruling also won’t make it easier to sue tech companies for other reasons. It’s narrowly tailored to establish whether someone has standing to file an antitrust complaint — not whether they can sue a platform for kicking them out or facilitating harassment.

Kavanaugh’s choice to side with four liberal justices could theoretically reflect a growing Republican push to regulate tech companies: he’s the newest justice, appointed just last year while the tech backlash was in full swing. But Rifkin insists that this ruling was based on a question of interpretation, not party politics. “I don’t think this is a liberal or a conservative kind of issue,” he says.

But even if there’s not a direct link to other issues, Apple vs. Pepper is certainly part of an attempt to limit the massive power of a few big tech companies. “We’ve seen explosive growth in the App Store, and that doesn’t just reflect the growth and popularity of iPhone apps. It also reflects Apple’s iron-fisted control of the distribution,” says Rifkin. “The concentration of control in the hands of a single company, whether it’s Apple or any other company, is going to help us not just prove our case — but I think also be able to demonstrate that this is the wrong sort of thing for e-commerce and the economy generally.”

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