A Practitioner's Perspective: Why the Supreme Court Should Not Overturn Illinois Brick in Apple v. Pepper

• Publication year: 2019
• Author: By Steven N. Williams

A PRACTITIONER'S PERSPECTIVE: WHY THE SUPREME COURT SHOULD NOT OVERTURN ILLINOIS BRICK IN APPLE V. PEPPER1

By Steven N. Williams²

I. INTRODUCTION

During the course of oral argument in Apple v. Pepper, counsel for plaintiff was asked several times why the plaintiffs' bar did not support calls for the Supreme Court to overrule Illinois Brick Co. v. Illinois.³ This article reviews the issues raised in Pepper, and provides this lawyer's response to the question of why Illinois Brick should not be disturbed.

The plaintiffs in Pepper purchased apps for their iPhones, iPads and other Apple devices from Apple's App Store. These apps can only be sold and purchased through Apple's App Store.⁴ This model is unique to Apple. The transactions in which the plaintiffs purchase apps are solely between the plaintiffs and Apple. Apple does not mandate the prices that app developers may charge for their products when sold through the App Store. Many are free. If they are not free, their price must end in .99. iPhone users pay Apple when they buy an app from the App Store. Apple retains 30% of the purchase price paid for an app, and remits the remaining 70% to the app developer.

No one has pointed to any other sales model that operates like Apple's App Store. Apps which operate on different devices and operating systems other than Apple's iOS are widely available through Google Play, the Microsoft Store, the Amazon App Store and other places. Apple's total control over the means of distribution for both the developers who sell apps and the customers who purchase apps is unique. These features led to the characterization of the App Store as a "closed loop" during oral argument before the Supreme Court.

Plaintiffs alleged that Apple had created and exploited a monopoly over the retail aftermarket for iPhone apps and sued under the Sherman and Clayton Act for antitrust damages. After a series of motions directed at the adequacy of the complaint and amendments by the plaintiffs, the district court dismissed the fourth amended complaint with prejudice on the ground that the plaintiffs' claims necessarily implicated the pricing decisions of non-party app developers and thus were barred by Illinois Brick.

[Page 127]

II. BACKGROUND

A. Antitrust Principles

These antitrust principles frame the analysis of Pepper and Illinois Brick:

Antitrust laws are essential to the well-being of our country, and the well-being of consumers.

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic and social institutions. But even were that premise open to question, the policy unequivocally laid down by the Act is competition.⁵

Private enforcement of antitrust laws is an essential element of the antitrust laws.

When Congress enacted the Clayton Act in 1914, it "extend[ed] the remedy under Section 7 of the Sherman Act" to persons injured by virtue of any antitrust violation. H.R. Rep. No. 627, 63d Cong., 2d Sess., 14 (1914). The initial House debates concerning provisions relating to private damage actions reveal that these actions were conceived primarily as "open[ing] the door of justice to every man, whenever he may be injured by those who violate the antitrust laws, and giv[ing] the injured party ample damages for the wrong suffered." 51 Cong. Rec. 9073 (1914) (remarks of Rep. Webb); see, e.g., id., at 9079 (Rep. Volstead), 9270 (Rep. Carlin), 9414-9417, 9466-9467, 9487-9495. The House debates following the conference committee report, however, indicate that the sponsors of the bill also saw treble-damages suits as an important means of enforcing the law. Id., at 16274-16275 (Rep. Webb), 16317-16319 (Rep. Floyd).⁶

[Page 128]

State antitrust laws existed before federal antitrust laws, have provided a parallel enforcement system, and have developed meaningful differences from federal law.⁷

From the beginning, judicial interpretation provided important interpretations of the antitrust laws. The Sherman Act was written in extraordinarily broad terms which required judicial construction.⁸ Milestone judicial interpretations have addressed issues of standing and antitrust injury. These include Hanover Shoe, Inc. v. United Shoe Machinery Corp.⁹ and Illinois Brick, as well as Associated General Contractors v. Cal. State Council of Carpenters.¹⁰

Hanover Shoe held that an antitrust defendant could not assert as a defense that the plaintiff passed on overcharges to its customers. Illinois Brick held that because Hanover Shoe prevented a defendant from asserting a "pass on" defense, a plaintiff who did not purchase directly from a defendant could not sue that defendant for damages under federal law. AGC established a multi-part test to evaluate antitrust standing.

Since Illinois Brick, 34 states and the District of Columbia have provided remedies to victims of antitrust violations who did not deal directly with a defendant, either through statutory changes or through judicial interpretation. These states are typically referred to as "Repealer" states. The substantive laws of these states developed in parallel to federal law but have not been identical. By way of example, in contrast to Hanover Shoe, the California Supreme Court, in Clayworth, supra, refused to permit a pass on defense to a claim under the Cartwright Act, the California state antitrust law, unless necessary to avoid duplicative damages because multiple levels in the same chain of distribution were present in the same action.¹¹ ARC America held that these state laws were not preempted even if they imposed penalties on antitrust violators that were cumulative of remedies provided to direct purchasers under federal law.

[Page 129]

The Class Action Fairness Act of 2005¹² ("CAFA") was the product of "tort reformers" seeking to curb what they called class action lawsuit abuse. At the signing ceremony for CAFA, President Bush referenced a newspaper editorial referring to "the class action system as an extortion racket"¹³ and stated that he hoped CAFA would begin to remedy that situation.

Nothing about the signing remarks for CAFA indicate that any proponent of CAFA was thinking of antitrust cases. As a (perhaps unintended) consequence of CAFA, antitrust actions on behalf of all plaintiffs, whether asserting claims under federal law or under state law, are now typically presided over by a single federal judge appointed by the Judicial Panel on Multidistrict Litigation ("JPML"). Frequently this includes (1) class claims under federal law by direct purchasers, (2) class claims under state law by indirect purchasers, (3) individual "direct actions" by non-class plaintiffs, and (4) actions by state attorneys general. Cases like these are often coordinated with parallel federal criminal or civil actions.

Centralization of these actions before a single federal judge has mitigated costs of discovery by eliminating duplication, led to consistency in rulings, and provided predictability to all parties. While the task of managing such complex litigation may seem daunting, in this author's experience, federal judges have shown great skill in managing such actions successfully. Since 2006, common procedures have been established and implemented to manage private civil antitrust litigation throughout the United States. Among the mechanisms used by courts and litigants are the early appointment of lead and liaison counsel for various plaintiff and defense groups, protective orders, protocols on the production and use of electronically stored information, protocols governing expert discovery, protocols governing the taking and coordination of depositions, protocols providing for the coordination of discovery among actions, and orders governing the conduct of trials involving multiple levels of claimants.¹⁴

B. Pepper v. Apple—the District Court Proceedings

The Pepper plaintiffs sued Apple for damages under federal antitrust law, alleging that:

1. Apple had monopolized and attempted to monopolize the market for iPhone apps;
2. the apps were manufactured by app developers and were only sold through Apple's App Store;
3. for every third-party app sold through the App Store, Apple received 30% of the revenue and the developer received the remaining 70%;
4. payment was made directly to the App Store;
5. ...