Since Illinois Brick, standing to sue for violation of US federal antitrust law has been reserved exclusively to those parties who purchased directly from price-setting monopolists or cartelists. Indirect purchasers, who transacted with these direct purchasers rather than with the monopolist itself, had no standing, even if the direct purchaser “passed on” the full cost of the monopolistic overcharge to them in the form of higher prices.
The Court prohibited these pass-through arguments because it judged itself ill suited to efficiently determine what parts of an overcharge are passed on at any given stage in the chain of distribution. The Court also worried that allowing pass-through arguments would undermine deterrence, as indirect purchasers, who could not sue as effectively as direct purchasers, would be able to claim a portion of what would previously have gone to direct purchasers in a successful suit.
Last year, however, the Supreme Court in Apple v Pepper held that app purchasers could sue Apple for an allegedly anticompetitive commission it charged to app developers, who set the prices that app purchasers paid. This note, available here, reviews this case and its implications.
The note begins by describing the case.
Every year, iPhones owners collectively download billions of apps worldwide, the overwhelming majority of which is created by third-party developers. These apps are available exclusively through Apple’s App Store. In exchange for access to the App Store, third-party developers pay Apple a $99 annual membership fee and agree to allow Apple to keep a 30% commission on all sales of their apps through the Store. App developers determine the sale price, the only constraint being that the price must end in -.99 cents.
The plaintiffs in this legal action were a class of app purchasers, claiming that Apple’s 30% commission fee was “supra-competitive,” possible only because Apple had monopolised the “market for distributing software applications that can be downloaded on the iPhone”, with the result that consumers “paid more for their iPhone apps than they would have paid in a competitive market.” Apple filed a motion to dismiss, arguing that the plaintiffs lacked standing because they did not qualify as direct purchasers, which the district court granted. The court found that the plaintiffs failed to qualify as direct purchasers because Apple’s 30% commission fee was “borne by the developers” and paid to Apple “from their own proceeds.” The Ninth Circuit Court of Appeals reversed, and held that that the plaintiffs were, in fact, direct purchasers with standing to sue under Illinois Brick. Having found that Apple is a distributor who sold apps directly to the plaintiffs through the App Store, the court concluded that the plaintiffs did have standing.
The Supreme Court affirmed this judgment, and held that plaintiffs had standing because they purchased their apps directly from Apple. The majority adopted an expansive interpretation of Section 4 of the Clayton Act which provides that ‘any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue . . . the defendant.’” Illinois Brick establishes a bright-line rule – “if manufacturer A sells to retailer B, and retailer B sells to consumer C, then C may not sue A. But B may sue A if A is an antitrust violator” –, and since iPhone owners pay the alleged overcharge directly to Apple, no intermediaries intervene between monopolist and consumer, removing any obstacle to consumer standing. The Court also defended its holding in terms of the three primary goals underlying Illinois Brick: “(1) facilitating more effective enforcement of antitrust laws; (2) avoiding complicated damages calculations; and (3) eliminating duplicative damages.
Justice Gorsuch dissented, and was joined by Chief Justice Roberts and Justices Thomas and Alito. He balked at the majority’s “bright-line rule” interpretation of Illinois Brick, on the grounds that it “replace[d] a rule of proximate cause and economic reality with an easily manipulated and formalistic rule of contractual privity. Passing on considerations have been held not to be relevant to avoid “the sort of problems traditional principles of proximate cause were designed to avoid”: the “nearly insuperable” questions about an intermediate entity’s capacity to pass on overcharges. Because “[p]laintiffs can be injured only if the developers are able and choose to pass on the overcharge to them in the form of higher app prices that the developers alone control,” their theory of harm relied upon “exactly the kind of ‘pass-on theory’ Illinois Brick rejected. By treating formal relationships as fundamental, the majority courted the exact problems that Illinois Brick had solved. Further, reducing Illinois Brick to a bright-line rule counterproductively privileges form over substance: Apple could simply restructure its business so that consumers are in privity with app developers instead. The dissent, therefore, chastised the Court for trading an “intelligible, principled, [and] administrable” rule for one that was “artificial,” less administrable, and, ultimately, less capable of restraining anticompetitive conduct.
The note then discusses the implications of this judgment.
In deciding antitrust standing cases, the Court has shown itself cognisant of three goals: deterrence, judicial economy, and corrective justice. Earlier case law signalled a strong policy preference for judicial efficiency and deterrence over corrective justice. The Apple majority, however, overturned this paradigm by reweighting the aforementioned policy values in favour of victim compensation. In so doing, the Court affirmed the letter of past precedent while striking at its spirit, priming antitrust jurisprudence for an eventual overruling of Illinois Brick and its progeny.
The Court’s initial holding in Hanover Shoe, where the Court stated that the need to deter efficiently barred monopolist defendants from asserting pass-through defences, compromised corrective justice (by inflating the damages successful plaintiffs receive) to promote judicial efficiency and deterrence. Illinois Brick, which precluded indirect purchasers from relying on passing on to claim damages, and thus effectively prevented them from being able to claim damages, reinforced this balance. This case law further sacrificed corrective justice by providing the ultimate consumers with too little –– in fact, with nothing. While the balance under Hanover Shoe alone tipped too far against wrongdoers, which would be liable for losses not effectively suffered by plaintiffs, the balance under Hanover Shoe cum Illinois Brick tipped too far against victims, which were often left with nothing if they were final consumers.
Justice Brennan’s Illinois Brick dissent represented an alternative vision of antitrust values, according to which corrective justice, and specifically victim compensation, dominates judicial efficiency and deterrence. It is a vision reproduced –– at times with uncanny accuracy –– by the majority opinion in Apple v Pepper. As in this latter case, Justice Brennan in Illinois Brick started from a wide reading of the statutory text. The similarities include denials that indirect-purchaser standing would directly contradict the longstanding goal of effective private enforcement and consumer protection, and dismissals of concerns that such an approach may have detrimental effects on effective deterrence and of objections related to passing on making damages calculations impossibly complex and allowing duplicative liability.
In this way, Apple signals a reweighting of the policy goals of antitrust law while claiming to still follow the law as set out in Illinois Brick. Given the prevalence of state-level Illinois Brick repealers (Note: many states allow indirect purchasers to claim damages under local state law), the advent of parens patriae claims (whereby state attorneys are entitled to sue private companies in federal court for monetary damages under federal antitrust law on behalf of their citizens who are “natural persons) and the increasing sophistication of economic methods suitable for pass-through calculations, this reorientation of fundamental values signals the unravelling of Illinois Brick. The ascendancy of a pro-compensation framing of antitrust standing inclines toward the express allowance of offensive pass-through claims on the part of final (indirect) consumers.
This article provides a very good introduction to debates on who should have standing to claim antitrust damages in the US, and contains a solid description of the Apple v Pepper case, combined with an insightful analysis of its potential implications.
While I agree that the trend in the US is probably towards allowing indirect purchasers to claim damages in the future – and I think a number of justices were hoping to use this case to adopt such a holding now – I would not be as sure as the author(s) that Apple v Pepper marks the end of Illinois Brick. After all, the case explicitly states that it is within the confines of existing law and that it follows the Illinois Brick doctrine. In doing this, it leaves the doctrine largely untouched, as seems to be accepted by the next paper I will review. In my reading, the case merely signals an increased appetite for allowing indirect purchasers to be able to claim antitrust damages in federal courts, which is apparent in all the pieces reviewed today. This is nothing to be sniffed at, of course, but also not something to be confused with the achievement of such a goal.