This essay, available here, examines the recent Apple v Pepper decision with a focus on two issues: its seeming rehabilitation of compensation principles and its approach to evaluating antitrust damages. Together, these two aspects of the Court’s reasoning may undermine the continued vitality of Illinois Brick’s decision not to allow indirect purchasers to claim for damages.
The author argues that, although the Supreme Court formally retained Illinois Brick, the Court’s logic in explaining the nature of damages that flow from antitrust violations will prove hard to contain and difficult to reconcile with Illinois Brick’s simplistic conception of ‘pass-on’. That, in turn, will likely alter how parties litigate antitrust damage claims in ways likely to invite future challenges to Illinois Brick.
Apple v Pepper also may have reopened long-simmering debates in the USA about how best to balance the twin remedial goals of deterrence and compensation. Given the evolution over four decades of a fairly intricate federal-state, public–private enforcement ecosystem in the USA, resolving this balance may be too difficult a task for the courts to accomplish in any one case. Any significant reform of the US private right of action will require a systemic rebalancing that, institutionally, can only be performed by Congress.
The paper begins by arguing that Apple v Pepper is a return to compensation principles.
In June 1979, the Supreme Court memorably declared that ‘Congress designed the Sherman Act as a “consumer welfare prescription”. While this was not a case concerning standing to claim damages, the Supreme Court noted that antitrust laws protect victims of practices forbidden by antitrust rules by whomever they may be perpetrated. It was also noted that the legislative history of the Sherman Act demonstrates that Congress used the phrase ‘any person’ intending it to have its naturally broad and inclusive meaning. In short, this judgment associated the private right of action with compensation.
However, only two years earlier, the Court in Illinois Brick had reached a result widely perceived as anti-consumer: prohibiting suits for damages by indirect purchasers, who are often consumers at the end of a distribution chain. In doing so, the Court was largely animated by its concerns for administrability of antitrust rules and maximising deterrence.
Forty years later, Apple v Pepper seems to have come full circle — at least thematically — by returning to the text-based, compensation-promoting reasoning. The decision, when noting that ‘Illinois Brick is not a get-out-of court-free card for monopolistic retailers to play time that a damages calculation becomes complicated’ also resonates with recent dissents of decisions further expanding the scope of Illinois Brick – for example, Justice Byron White (who wrote the majority decision in Illinois Brick) dissented in Kansas v UtiliCorp United, cautioning that Illinois Brick does not mean that indirect purchasers should, in all circumstances, lack standing.
Section III discusses how Apply v Pepper changes the calculation of damages in antitrust cases.
Antitrust damages are associated with the exercise of market power, which in turn leads to ‘overcharges’: the difference between the price that was facilitated by anticompetitive conduct and the market price that would have otherwise prevailed. The question of whether passing on by claimants could be invoked as a defence was answered in the negative in Hannover Shoe, on the grounds that this could impair the deterrent effect of the private right of action. Nearly a decade later, the Supreme Court in Illinois Brick made the important assumption that the rules on ‘pass-on’ should be symmetrical. If a defendant could not argue that damages to the direct purchaser were passed on, then an indirect purchaser-plaintiff should not be allowed to argue that the direct purchaser passed on all or part of the overcharge to it. The Court also expressed its concern that allowing indirect purchasers to sue would commit the courts to complex damage inquiries and could allow for multiple and duplicative recoveries, and hence over-deterrence. Critically, the court also made the assumption that concentrating the private right of action in the hands of direct purchasers, who were in the best position to detect violations and would have the incentive to sue, would best promote deterrence.
In Apple v Pepper, the majority concluded that both app developers and consumers may have been injured by Apple’s conduct in requiring that all app sales be made through its App Store while charging an allegedly supra-competitive commission rate—but that their respective damages were distinct and not duplicative. In the majority’s view, the app developers’ damage, if any, resulted not from ‘the overcharge’, but from any lost profits occasioned by the overcharge, which they experienced as an increased cost, while the customers who purchased the apps were the victims of the overcharge.
This line of argument runs against concerns about duplicative recovery expressed by the dissent (and in Hannover Shoe): in this circumstance, it is argued, such a risk does not exist because the damages suffered by each type of customer are different and autonomous. In doing so, Apple v Pepper identifies a longstanding error in how US law has understood antitrust damages, arising from the way Illinois Brick interpreted Hannover Shoe.
While the case law focuses on the ‘overcharge’ paid by ‘direct customers’, most often direct customers are intermediaries who suffer no loss directly from the overcharge, unlike final customers. Since the price is paid by direct purchasers for an input to a product to be sold to further customers, intermediaries can effectively suffer loss only as a result of two mechanisms, both of which concern lost profits: (i) if a direct purchaser raises its price, it could lose profitable sales; (ii) if, it cannot raise prices e.g. owing to greater price sensitivity on the part of its customers, its margins may shrink. In both instances, the injury to the direct purchaser is not the overcharge, but the lost profits occasioned by the overcharge. Only the ultimate consumer pays an ‘overcharge’, and calculating it should not depend on ‘pass on’.
Section IV concludes with some observations about the potential implications of Apple v Pepper in future legal developments.
The nature of antitrust damages and its relationship to ‘pass-on’ has long been misinterpreted in the USA. This is made clear by looking at the ways in which app developers and final consumers can claim damages from Apple. App developers will focus on proving lost profits owing to the elevated cost of Apple-provided distribution services, whereas consumers will have to show that Apple’s practices have resulted in supra-competitive app prices, or perhaps other competitive harms. Neither class will, if they follow the Court’s roadmap, be hiring economists to prove ‘pass-on’.
Although the Apple majority suggests that its holding is limited to the facts of Apple, its reasoning may prove difficult to contain. Whether a victim of an antitrust violation is a ‘direct’ or ‘indirect’ purchaser may matter less after Apple v Pepper than the nature of their damages. As this judgment notes, antitrust infringements may simultaneously harm intermediaries by raising their input costs and diminishing their profits, and consumers who pay whatever higher price eventually results from that market distortion, which can be conceptualised and measured without reference to pass-on. Apple v Pepper may therefore trigger a debate about the continued reliance on the label ‘pass-on’, and whether it is appropriate to restrict the right to sue to the most proximate plaintiff of only one type of injury and no other.
This is a typically insightful analysis from the author. In a way, it follows along the lines of the Hovenkamp piece discussed above, with two important differences. First, while Hovenkamp’s criticism seemed to be purely doctrinal, this paper seems to argue that the ideal approach outlined by Hovenkamp can find support in Apple v Pepper, and that this line of reasoning is likely to be advanced by plaintiffs in the future. Secondly, it takes into consideration the institutional framework in which future developments will take place, and thinks about how they may affect deterrence in the future. Both are important considerations that undoubtedly deserve of greater attention.