On Cyber Monday, things at the Supreme Court did not go particularly well for Apple.
During arguments in a case that could have enormous consequences for the tech giant, justices across the ideological spectrum seemed to think consumers had the right to move forward with a fledgling class-action lawsuit claiming Apple’s App Store has an unfair monopoly that is raising the price of iPhone apps.
If the justices permit the suit to go forward, a decision against Apple would almost certainly be a blow to its business. Analysts estimate that the company made more than $22 billion from the App Store worldwide in the first half of 2018.
Apple has a hand in dictating the price software developers can charge for their apps — the price must end in 99 cents — and it charges the developers a 30 percent commission on their products, which must be sold exclusively through the App Store.
Apple lawyer Daniel M. Wall of San Francisco described the company as a “pipeline” that connects consumers with app developers and that it is app makers, not Apple, making the sale. That’s an important distinction, as Supreme Court precedent says charges of unfair monopoly pricing must be brought by the “first buyers” in a chain of transactions.
But it didn’t seem to satisfy liberal members of the court.
“The first sale is from Apple to the customer,” said Justice Sonia Sotomayor, describing Apple’s system as a “closed loop.”
Wall countered that the first sale was between the app creator and Apple, when making pricing decisions.
Justice Elena Kagan was also unconvinced.
“When you’re looking at the relationship between the consumer and Apple . . . there is only one step,” she said. “I mean, I pick up my iPhone. I go to Apple’s App Store. I pay Apple directly with the credit card information that I’ve supplied to Apple. From my perspective, I’ve just engaged in a one-step transaction with Apple.”
Justice Stephen G. Breyer, who taught antitrust law, said it was a simple and long-standing principle that those with a complaint sued the monopoly. But it was not just the court’s liberals who seemed skeptical of Apple’s argument.
Two conservatives, Justices Samuel A. Alito Jr. and Neil M. Gorsuch, questioned whether the court’s 1977 ruling that established that only direct purchasers of a product can bring federal antitrust suits for overpricing has been superseded by the changing economy.
“I really wonder whether, in light of what has happened since then, the court’s evaluation stands up,” Alito said.
Justice Brett M. Kavanaugh said any ambiguity on the question of who should be able to sue should be settled by the broad language of the statute, which refers to “any person injured.”
“That’s broad,” he said.
The Justice Department is supporting Apple, although Solicitor General Noel J. Francisco acknowledged that Apple exploits its powerful position in the market by imposing the 30 percent commission.
But, he said, “the only reason consumers are harmed here in the form of paying higher prices is because the app makers decide to increase their prices in order to recoup that commission.”
A ruling against Apple could add to pressure the company already is feeling because of disappointing iPhone sales. The company is emphasizing services, so apps are critical for its future. The company was briefly overtaken recently by Microsoft as the nation’s most valuable company, something referred to by Washington lawyer David C. Frederick, who represented the consumers who want to sue.
“They happen to be the largest company in the world, or at least they were some weeks ago, and they are able to extract monopoly pricing by virtue of a unique e-commerce monopoly on their App Store,” said Frederick.
He is representing a group of consumers, led by Chicagoan Robert Pepper, that wants to show app prices would be lower if not for Apple’s actions. Under federal law, proving such an allegation could be worth millions of dollars, because awards are tripled for antitrust violations.
“Apple directed anticompetitive restraints at iPhone owners to prevent them from buying apps anywhere other than Apple’s monopoly App Store,” Frederick said. “As a result, iPhone owners paid Apple more for apps than they would have paid in a competitive retail market.”
Chief Justice John G. Roberts Jr. was the most supportive of Apple in his questioning. Under Frederick’s theory, he said, consumers are hurt by higher prices and app developers are hurt by having to agree to Apple’s 30 percent commissions.
In other words, “they’re subject to suit on both sides of the market for a single antitrust price increase that they’re alleged to have imposed,” Roberts said.
Frederick agreed that “Apple is able to distort the market at the supply chain and at the retail chain for consumers.”
But consumers, he said, “are suing only for the damages that we incur. That is the higher than what a competitive market price would be for apps.”
When Alito asked if damages would be triple the 30 percent commission Apple charges for each app sale, Frederick said he did not know and that a trial would be necessary to establish how consumers were harmed.
“What we know is what the price is in a noncompetitive market, and we will have to have experts that will assess what the damages would be in a competitive market,” he said.
The case is Apple Inc. v. Pepper, and it will be decided sometime in the new year.
Brian Fung contributed to this report.