On May 13, the Supreme Court held in Apple v. Pepper,1 that anyone with a direct relationship with the alleged violator can sue for damages under the federal antitrust laws. While this decision maintains existing standing requirements for claims against traditional manufacturing and distribution companies, the decision may be seen as expanding who can bring antitrust claims relating to online platforms and other multi-sided markets. Going forward, all direct participants in a platform are potential plaintiffs in antitrust cases challenging the conduct of the platform operator. Claims by platform participants may still be subject to dismissal, however, if the plaintiff alleges it was injured by a transaction in which the plaintiff did not directly participate.
What This Means for You
Any company that operates an online platform or other multi-sided market should consider how Apple v. Pepper will impact its liability under the federal antitrust laws, and may expand the number of parties who can bring claims. This should be both good news and bad news for firms that are targets of such suits. The bad news is that it may mean more lawsuits, and those lawsuits will be more complex and more costly. The good news for defendants is that the complexity of damages analysis and necessary-party analysis required in multi-sided platform cases may make such lawsuits at least somewhat harder for plaintiffs to assemble and win.
A defendant facing potentially conflicting damages claims should consider whether to join any missing parties that might have a competing claim to some portion of an alleged overcharge. Joinder should reduce the risk of duplicative recovery, and could help a defendant defeat class certification by exposing potential conflicts among class members’ claims and making it harder for any individual plaintiff to demonstrate how it was impacted with proof that is common to a proposed class. This may be further complicated by the Court’s 2018 AmEx2 decision, which held that a rule of reason analysis of a multi-sided market must include the competitive effects across all sides of the market. Inconsistent claims of the participants on different sides of the platform could raise significant doubts about whether the effects on all sides, taken together as required by AmEx, are anti-competitive.
A defendant should consider whether it can still move to dismiss because the direct purchaser’s claimed injury did not occur “by reason of” the alleged anticompetitive conduct. This could occur if the alleged violation took place in a different part of the platform than where the plaintiff has its direct relationship with the defendant.
More About This Case
The plaintiffs in Pepper allege that Apple illegally monopolized app distribution by prohibiting competing app stores in the iOS ecosystem. They further allege that this monopoly allowed Apple to charge app developers a supracompetitive 30% commission, and that the plaintiffs were injured as a result by overpaying for apps that they purchased through the Apple App Store.
The district court granted Apple’s motion to dismiss.3 It held that any overcharge was first borne by the developers — who independently set the price of apps sold through the App Store — and who then passed on some or all of that overcharge to the plaintiffs. Thus, the district court concluded that any injury that the consumer plaintiffs suffered was a classic case of “pass-on” damages that are not available under federal law under Illinois Brick and its progeny.4 The Ninth Circuit reversed the dismissal, holding that Apple effectively was a distributor of apps, selling them directly to the consumer plaintiffs, and therefore plaintiffs had a direct purchaser relationship with Apple which gave them standing to sue.
In a 5-4 decision authored by Justice Kavanaugh and joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, the Court affirmed the Ninth Circuit’s decision, holding that because it was “undisputed that iPhone owners bought the apps directly from Apple,”6 the consumer plaintiffs were direct purchasers who had standing to sue for federal antitrust damages. The Court continued, “[i]f the retailer’s unlawful monopolistic conduct caused a consumer to pay the retailer a higher-than-competitive price, the consumer is entitled to sue the retailer under the antitrust laws.”7 Thus, “[w]hen there is no intermediary between the purchaser and the antitrust violator, the purchaser may sue.”8 “The absence of an intermediary is dispositive” of the standing question, according to the Court.
The Court applied what it considered a “seemingly simple conclusion” — that consumers purchased apps at the App Store directly from Apple.9 It considered and rejected Apple’s arguments that reality was more complicated, instead emphasizing seven times the clarity of a “bright-line rule.” It also rejected potential concerns about the risk of multiple lawsuits and duplicative recovery. Such suits, the Court noted, “are not atypical” when an intermediary may be a monopolist, monopsonist, or both.10 The Court noted that in Apple’s case, were the upstream app developers to sue in addition to the app purchasers, they would pursue a different damages theory — “lost profits that they could have earned in a competitive retail market.”11 Of course, those “lost profits” would be closely related to, if not the exact amount of, the alleged overcharge to the consumers — since the app developer would naturally argue that if it had paid a lower commission to Apple (i.e., less of an overcharge), it would have made a greater margin by capturing all or part of the commission Apple received in the transaction.
This decision suggests that a variety of participants may have standing to assert antitrust claims against firms that operate online platforms and other multi-sided markets. Unlike a traditional linear distribution chain — manufacturer, distributor, retailer, and consumer — where the manufacturer only has a direct relationship with one firm, those in multi-sided markets, by definition, have direct relationships with many firms. The Court’s decision in Apple v. Pepper suggests that both consumers and “upstream suppliers [i.e., app developers] could also sue” the platform.12 In other words, the Court was comfortable with the prospect that all of the participants in a multi-sided platform would be proper plaintiffs in a federal antitrust damages case. And they might be able to simultaneously pursue different damages theories – overcharges for some, lost profits for others — even though their claims are based on the same alleged misconduct.
Justice Gorsuch dissented, joined by Chief Justice Roberts and Justices Thomas and Alito. In the dissent’s view, by focusing exclusively on the question of contractual privity between the plaintiff and the defendant, the majority opinion favored a formalistic rule over economic reality.13 The dissent noted that the majority’s rule is likely to lead to conflicting damages claims and the risk of duplicative recovery, which were among the concerns that animated Illinois Brick.14 Given those potential claims, the dissent notes that the app developers may be necessary parties who must be joined in the consumers’ lawsuit, under Fed. R. Civ. P. 19(a)(1)(b).15 This question of whether joinder of all market participants is (a) allowed and (b) required will be significant to future claims involving multi-sided markets.
Neither the majority nor the dissent addressed how its holding could affect other aspects of litigation, most notably class certification. If defendants take Justice Gorsuch’s suggestion of joining multiple types of direct purchasers, certifying a class could become more difficult, particularly if different plaintiffs are simultaneously pursuing both overcharge and lost profits theories.16 The complexity of proving impact and damages to each type of direct purchaser in the same case using proof that is common to the class, while also avoiding duplicative recovery, is likely to prove challenging for plaintiffs. Different types of plaintiffs will likely proffer competing and conflicting methodologies for showing that they were impacted, rather than others in the distribution chain. At the class certification stage, courts will now be faced with not just a plaintiff expert competing with a defense expert, but now two or more plaintiff experts competing against, and criticizing, each other. These conflicting theories could lead to courts being more likely to find no adequate method of proving impact, and denying certification on that basis.
These complications may be exacerbated by the application of the Court’s prior decision in AmEx. An impact and damages theory that only focuses on harm to one side of the market (i.e., consumers) would be inconsistent with AmEx’s teaching that a proper rule of reason analysis of a two-sided market requires assessing the competitive effects on both sides of the market.
Another issue left unaddressed by the Apple v. Pepper decision is the extent to which the alleged injury must arise from the direct relationship between the antitrust plaintiff and defendant. Section 4 of the Clayton Act, which governs federal antitrust damages claims, requires that the plaintiffs injury occur “by reason of” the antitrust violation.17 The Supreme Court was persuaded that a consumer who pays an overcharge to an alleged monopolist has been injured “by reason of” the antitrust violation alleged.
In multi-sided markets, the question of whether a direct purchaser’s claimed injury occurs “by reason of” the alleged antitrust violation can be complicated. Consider a distribution chain by which firm A sells a product or service to B, which incorporates that into a new product which it sells to C, who then sells it to D. An antitrust claim by D against A would be barred under Illinois Brick. That distribution chain describes the facts of Apple v. Pepper, but what complicates the case is that A and C are the same company — Apple. That is, Apple sells both the right to distribute apps through the App Store to app developers (level A) but then also sells the apps to consumers (level C).
By repeatedly describing Apple as a “monopolistic retailer,”18 the Pepper v. Apple majority seems to assume that Apple’s alleged antitrust violation had effects at level C, which is also where the direct purchaser relationship with the plaintiffs occurred. As a matter of transactional privity, that is very likely correct: Apple’s alleged policy to restrict competing app stores applied both to app developers and to consumers. But whether it is correct as a matter of economic impact is a separate question. One can easily imagine situations where the app developer absorbs all of the allegedly excess commission, leaving consumer prices unaffected, or vice versa, meaning that from an economic impact perspective, the alleged antitrust violation may have its effects only at a different level from that where the direct relationship between plaintiff and defendant occurs. In such situations, the plaintiff’s claim may still be barred because, even though it may have a direct relationship with the defendant, it suffered no injury “by reason of” that relationship. The manner in which courts will scrutinize the economic impact issue — and how searchingly they will do so at the pleadings stage, the class certification stage, the Daubert stage, and so on — remains to be seen.
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1 Apple Inc. v. Pepper, No 17-204 (S. Ct. May 13, 2019), available at https://www.supremecourt.gov/opinions/18pdf/17-204_bq7d.pdf [hereafter Apple v. Pepper].
2 Ohio v. Am. Express Co., 138 S. Ct. 2274 (2018).
3 In re Apple iPhone Antitrust Litig., No. 11–cv–06714–YGR, 2013 WL 6253147 (N.D. Cal. Dec. 2, 2013).
4 In Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), the Court held that a plaintiff who indirectly purchased a price-fixed commodity lacked standing for a claim that it was injured when those above it in the distribution chain passed on an overcharge. Focusing on the complexity of proving such a claim, the Court noted that any “attempt to trace the complex economic adjustments to a change in the cost of a particular factor of production would greatly complicate and reduce the effectiveness of already protracted treble damages proceedings.” Id. at 732.
5 In re Apple iPhone Antitrust Litig., 846 F.3d 313 (9th Cir. 2017).
6 Apple v. Pepper, slip op. at 4.
7 Id. at 10.
8 Id. at 7.
9 Id. at 7.
10 Id. at 13.
11 Id. at 13.
12 Id. at 12 (emphasis in original).
13 Apple Inc. v. Pepper, No. 17-204 (Gorsuch, J. dissenting), slip op. at 1.
14 Id. at 5-7.
15 Id. at 7, 11.
16 See, e.g., Bradburn Parent/Teacher Store, Inc. v. 3M Inc., No. Civ.A 02-7676, 2004 WL 414047, at **21-32 (discussing, in context of class certification, potential conflicts between lost profits and overcharge theories of recovery).
17 15 U.S.C. §15(a).
18 Apple v. Pepper, slip op. at 1, 5, 8.