Pepper v. Apple Inc. The Decision That Could Change Apple Forever

On Monday, June 18th, 2018, the United States Supreme Court agreed to hear an appeal of Pepper v. Apple Incorporated, an intricate case questioning Apple’s monopolization of its App Store. Although this case may initially seem straightforward, legal principles and precedents make a compelling defense for Apple. If Pepper does reign victorious, the structure of the App Store will be radically altered to allow for increased consumer protection.

What began as Robert Pepper’s attack on Apple’s SIM card partnership with AT&T quickly evolved into a class-action lawsuit against Apple’s monopolization of iPhone applications. Pepper found that the technology giant inflated the pricing of applications by taking 30% of application developers’ revenue. Not only does the plaintiff wish to force Apple into allowing third-party applications, but also wishes to seek treble damages. If granted, Apple must repay overcharged App Store users three times the amount they were injured. With profits of around $11.5 billion each year from the App Store,[1] Apple would lose significant revenue and the way its virtual marketplace functions if treble damages are awarded.

Under the ruling made by the District Court, a decision was made that some believe disregarded previous Supreme Court verdicts, specifically Illinois Brick Co. v. Illinois. [2] In this landmark antitrust decision, the Court found that treble damages cannot be granted to a complainant who asserts the antitrust violator overcharged a third party, which then passed on that injury to the consumer;[3] also known as the pass-on theory of injury. [4] Although it is tempting to conclude Apple is simply a distributor of applications in the App Store—not a producer, seller, or agency of developers—the court magnified the corporation’s role in the virtual marketplace. In fact, the court ruled that Illinois Brick did not bar Pepper’s suit mainly because of Apple’s 30% commission on all applications sold. Instead, the court found that Apple is not just a distributor, but a direct seller as well. Additionally, the district court ruled that Section Two of the Sherman Act had been blatantly infringed. This act declares any "monopoliz[ation], … of the trade or commerce among the several States, or with foreign nations”[5] unlawful. According to the court, Apple’s withholding of a commission is monopolistic behavior because consumers pay more for applications than they would without such commission.

With Apple Inc. furious after this ruling, the suit was brought to the 9th Circuit Court. Here, the court fundamentally disagreed with the district court’s interpretation of Illinois Brick, arguing that Apple is not a direct seller to the consumer by means of the App Store, but simply a distributor.[6] Interestingly, the court found that under this Supreme Court ruling, the application developers themselves could be charged since they dealt directly with the consumer.[7] This has upset many application developers, as they were required to accept Apple’s 30% commission in order to sell their products. Furthermore, the 9th Circuit Court urged the Supreme Court to grant Apple Inc.’s petition for a writ of certiorari (a request for the Court to order a lower court to have its decision reviewed and possibly changed[8]). The 9th Circuit referenced to Hanover Shoe, a Supreme Court case in which a shoe manufacturer brought a treble damagesuit against United Shoe Machinery Corp because its business had suffered due to the leasing of machines necessarily driving up the price paid by consumers for shoes.[9] Just as Pepper asserted the App Store was the only means of iPhone application distribution, Hanover asserted that its shoes could not be produced or distributed without United’s machinery. The Court decided Hanover was entitled to damages as a result of the pass-on theory of injury. While these two cases shed light on Pepper’s situation, it is difficult to relate bricks and shoes to iPhone applications; after all, technology has evolved rapidly since Hanover Shoe and Illinois Brick’s days. It is thus critical that the Court makes a ruling regarding the pass-on theory of injury in the digital age to set a firmer precedent for future antitrust suits.

Seeing that the Supreme Court has agreed to hear Pepper v. Apple Inc. sometime next term, many consumers of Apple and other similar products are wondering how the impending decision might affect them. Although the Court is unlikely to rule explicitly on how technology businesses can or cannot safeguard their virtual marketplaces, the decision still could threaten how consumers buy digital products online today. As the bench leans pro-business, an Apple win may be likely. If, however, Apple is found to have an unlawful monopoly, it could be forced to pay billions of dollars to App Store consumers and modify how applications are bought and sold. This immensely complicated case could result in many different rulings and interpretations of Illinois Brick, Hanover Shoe, and antitrust law with the possibility to set strong precedents for technology monopolies suits in the future.

While some wonder why this case merits Supreme Court intervention, many believe this monopolization of applications deserves a hearing so that a modern-day take on monopolization, treble damages, and the pass-on theory of injury might serve as precedent for future antitrust suits. Furthermore, if Apple is permitted to escape the consequences of its actions on a smaller scale through applications, the crimes this innovative empire might get away with in years to come will be unimaginable. Consumer protection is endangered by corporations like Apple that wield enormous market power, so it is up to the Court to safeguard its citizens’ rights. For these reasons, a Pepper victory is both paramount and urgently needed.

Sources:

[1] Jones, Chuck. "Apple's App Store Generated Over $11 Billion In Revenue For The Company Last Year." Forbes. January 08, 2018. Accessed July 31, 2018. https://www.forbes.com/sites/chuckjones/2018/01/06/apples-app-store-generated-over-11-billion-in-revenue-for-the-company-last-year/#5e5cae586613.

[2] “On the Petition for a Writ of Certiorari to the Unites States Court of Appeals for the Ninth Circuit.” Department of Justice. https://www.supremecourt.gov/DocketPDF/17/17-204/46060/20180508135603183_17-204%20Apple%20v.%20Pepper%20%20-%20AC%20Pet.pdf (Accessed July 5th, 2018).

[3] “Illinois Brick Co. v Illinois, 431 U.S. 720 (1977). Justia Law. Accessed July 5th, 2018.   supreme.justia.com/cases/federal/us/431/720/.html.

[4] “On the Petition for a Writ of Certiorari to the Unites States Court of Appeals for the Ninth Circuit.” Department of Justice. https://www.supremecourt.gov/DocketPDF/17/17-204/46060/20180508135603183_17-204%20Apple%20v.%20Pepper%20%20-%20AC%20Pet.pdf (Accessed July 5th, 2018).

[5] “Competition And Monopoly: Single-Firm Conduct Under Section 2 Of The Sherman Act: Chapter 1.” The United States Department of Justice. www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-1 (Accessed July 6th, 2018).

[6] “On the Petition for a Writ of Certiorari to the Unites States Court of Appeals for the Ninth Circuit.” Department of Justice. https://www.supremecourt.gov/DocketPDF/17/17-204/46060/20180508135603183_17-204%20Apple%20v.%20Pepper%20%20-%20AC%20Pet.pdf (Accessed July 5th, 2018).

[7] “On the Petition for a Writ of Certiorari to the Unites States Court of Appeals for the Ninth Circuit.” Department of Justice. https://www.supremecourt.gov/DocketPDF/17/17-204/46060/20180508135603183_17-204%20Apple%20v.%20Pepper%20%20-%20AC%20Pet.pdf (Accessed July 5th, 2018).

[8] “Supreme Court Procedures.” United States Courts, www.uscourts.gov/about-federal-courts/educational-resources/about-educational-outreach/activity-resources/supreme-1 (Accessed July 6th, 2018).

[9] "Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968)." Justia Law. Accessed July 29, 2018. https://supreme.justia.com/cases/federal/us/392/481/.