On Nov. 26, 2018, the U.S. Supreme Court heard oral argument in a potentially landmark antitrust case: Apple v. Pepper, 846 F.3d 313 (9th Cir. 2017), cert. granted, 138 S. Ct. 2647 (2018) (No. 17-204). Respondents Pepper and a putative class of similarly situated iPhone owners are suing Apple for monopolizing, or attempting to monopolize, the market for iPhone applications (“apps”). Respondents seek treble damages under §4 of the Clayton Act. In 2013, the Northern District of California granted Apple's motion to dismiss the case, concluding that “any injury to plaintiffs is an indirect effect resulting from the software developers' own costs,” and thus the plaintiffs were barred from bringing suit under the Illinois Brick doctrine. In 2017, the Ninth Circuit reversed and remanded, holding that plaintiffs are direct purchasers and therefore have standing to sue. In June 2018, the Supreme Court granted Apple's petition for writ of certiorari.

Indirect Purchaser Precedent

While §4 provides treble damages for any party “injured in his business or property by reason of anything forbidden in the antitrust laws,” 15 U.S.C. §15(a), the Supreme Court has narrowed the interpretation of the statute in a trilogy of cases. First, in Hanover Shoe v. United Shoe Machinery, 392 U.S. 481 (1968), the defendant argued that the plaintiff passed on the defendant's allegedly illegal overcharge to its customers and thus suffered no injury. The court rejected this defense, holding that generally, antitrust violators may not use a pass-on defense to limit a plaintiff's recovery.

The court expanded upon its interpretation of §4 in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). There, the state of Illinois sued Illinois Brick and 10 other concrete block manufacturers, arguing that they fixed the prices of concrete blocks, in violation of the Sherman Act. The state of Illinois alleged that it was injured because it paid more for construction projects than it would have with competitive concrete block prices. The concrete block manufacturers argued that any injury was indirect because they sold concrete blocks to masonry contractors, who submitted bids to general contractors, who then submitted bids to customers for construction projects. Expanding upon Hanover Shoe's prohibition of the “defensive” pass on-theory, the court held that the State of Illinois, as an indirect purchaser, could not use an “offensive” pass-on theory to sue the concrete block manufacturers under §4. The overcharged direct purchaser (here, the masonry contractors) is the only party “injured in his business or property” within the meaning of §4.

Lastly, in Kansas v. Utilicorp United, 497 U.S. 199 (1990), the court held that when suppliers overcharge a public utility, which then passes the overcharge to its customers, only the utility company has a cause of action as the sole party who “suffered injury” within the meaning of §4. The court analogized the factual scenario to Illinois Brick, such that the consumers have the status of indirect purchasers and are not “the immediate buyers from the alleged antitrust violators.” Id. at 207.

Arguments in 'Apple v. Pepper'

In Apple v. Pepper, respondents are purchasers of Apple's iPhones and iPhone apps through Apple's App Store. They argue that Apple monopolized and attempted to monopolize the iPhone app market by prohibiting app developers from selling iPhone apps anywhere other than through the App Store and by discouraging iPhone users from downloading unapproved apps. Respondents claim that they purchase apps directly from Apple's App Store, and that Apple gives 70 percent of the price to the app developers while retaining the remaining 30 percent of the price as a commission. They further assert that Apple's ability to demand a 30 percent commission from app developers demonstrates that Apple is charging a monopoly rent and that consumers would be charged lower prices for iPhone apps in a competitive market. Respondents also assert that their antitrust claim is not derivative of the app developers' potential claims against Apple, which are entirely different: “As suppliers of apps—not purchasers—they would be suing Apple as a monopsonist rather than as a monopolist, and their claims presumably would rest on the allegation that Apple's restraints cause them to earn lower profits.”