In re Apple iPhone Antitrust Litigation, 1/12/17, 9C
Apple controls what apps can run on iPhone software. Apple sells apps to owners of iPhones through its App Store, at a price set by the developers, and transfers 70% of the sale proceeds to the developer. App developers must sell their apps through the App Store; iPhone owners are discouraged from buying apps except through the App Store under threat of losing their warranties. Plaintiffs filed a putative class action against Apple under the Clayton Act. The trial court granted Apple’s motion to dismiss based on lack of antitrust injury under the Illinois Brick direct/indirect purchaser paradigm. Held: Reversed.
On its face, the Clayton Act broadly grants standing to “any person” injured by anything forbidden by antitrust laws. The Supreme Court has rewritten the statute to limit antitrust standing. In the classic antitrust hypothetical, a monopolist sells a product to an intermediary at a supracompetitive price; and the intermediary passes the higher cost onto consumers when it sells the product, which has possibly been transformed by manufacturing work done by the intermediary.
In 1968, in a case called Hanover Shoe, an intermediary sued a monopolist for an illegal overcharge. The Supreme Court rejected the manufacturer’s defense that the intermediary “passed on” the higher prices to consumers. This is the defensive use of the “pass-on” theory. Whether the intermediary avoided antitrust injury by passing on the additional costs would be virtually unascertainable; and allowing the monopolist to use this defense would tend to insulate monopolists from lawsuits for antitrust violations.
The Court has also held that the pass-on theory can’t be used offensively. Illinois Brick v. Illinois, 431 U.S. 720 (1977). In other words, consumers who purchase from the intermediary can’t sue the monopolist manufacturer on the theory that the illegal overcharges were “passed on” to the consumer. The reasoning is similar to that in Hanover Shoe: The challenges of tracing the effects of an overcharge at each stage can be insurmountable – consider the variables where there is additional manufacturing at the intermediate level, or multiple intermediate levels. Still, regardless of the complexity or simplicity of a particular manufacturer-intermediary-consumer scenario, Illinois Brick provides a bright line test.
9C had no trouble finding that customers were direct purchasers from Apple, and therefore had antitrust standing. The court did not rest its holding on the fact that consumer paid the App Store, the nature of payment received by Apple (i.e., mark-up versus commission), or on who determined the price that was paid (viz., the developer). The court relied on a bright line test between manufacturer and distributor — Apple is a distributor who sold apps directly to its customer, and it can therefore be sued by those customers for antitrust injury.
Procedural footnote: Apple filed four 12(b)(6) motions. Its later motions raised arguments that had been omitted from its earlier motions, to which the plaintiffs objected. Acknowledging a Circuit split, 9C sided with those Circuits who say the trial court has the discretion to consider successive 12(b)(6) motions for the sake of judicial economy.
Procedural footnote: Apple filed four 12(b)(6) motions. Its later motions raised arguments that had been omitted from its earlier motions, to which the plaintiffs objected. Acknowledging a Circuit split, 9C sided with those Circuits who say the trial court has the discretion to consider successive 12(b)(6) motions for the sake of judicial economy.