The Supreme Court is hearing oral arguments Monday in a lawsuit against Apple that could have far-reaching consequences for the tech industry and beyond.
At stake is whether iPhone users can sue Apple over “monopolistic” prices in the iOS App Store, prices that a group of consumers allege are driven higher by the commissions Apple charges independent appmakers. Apple says that prices are set by the third-party software developers, not the company, and that there isn’t a case.
A ruling by the high court against Apple allowing the suit to proceed could hold sweeping implications for platforms across the digital economy. Here’s what you need to know about this potentially pivotal lawsuit.
Apple’s iOS App Store
The crux of the 2011 class-action lawsuit, known as Apple Inc. v. Pepper, concerns paid iOS apps for which Apple took a 30 percent commission.
The fees initially came out of the software makers' pockets, but iPhone users ultimately bore that cost in the form of higher app prices, according to the suit, filed by a class that includes a group of iPhone users led by a man named Robert Pepper.
In legal briefs, Pepper and other members of the group claimed that they “paid the full price for the apps directly to the monopolist, which kept all the monopoly profits for itself.”
Apple’s commission structure works slightly differently today, but this is a serious allegation. Under the Clayton Antitrust Act, a company that is found to have violated antitrust laws could have to pay as much as three times the estimated damages to the complaining party.
A decision against Apple would almost certainly be a blow to its business and raise risks for other platform companies, but how exactly it would play out is too soon to say, especially since Apple has introduced new commission models that, for example, charge subscription-based apps a 15 percent fee instead of 30 percent. Analysts estimate that Apple made over $22 billion from the App Store worldwide in the first half of the year alone.
A ruling against Apple could also set a dramatic precedent for antitrust policy more broadly, which is being discussed in Washington as a possible tool for reining in tech platforms such as Google and Facebook.
The two-sided marketplace problem
A key complicating factor in the case is Apple’s relationship to both app developers and individual consumers. The app store is a “two-sided marketplace,” Apple has said, one that connects different groups of people to facilitate an economic transaction.
Under a previous Supreme Court ruling, only the “direct purchasers” of a product can sue a company for triple damages on violations of anti-monopoly law. But who is the direct purchaser in this case — the consumers who paid Apple for the app, or the appmakers who paid Apple the 30 percent commission?
To allow individual consumers to sue a company for charges that get passed along to them, even if those charges are monopolistic, could be extremely disruptive to the digital economy, according to tech industry groups. Companies such as Redfin, OpenTable and Etsy all operate on the same model as Apple’s App Store and could be put in jeopardy by a Supreme Court ruling that cuts against Apple, the Computer and Communications Industry Association said in a legal brief.
Even supposing that consumers were the direct purchasers and eligible to sue, the U.S. government said in a filing, it would be hard to determine whether app developers' prices would be lower without the commission.
But antitrust experts and supporters of the class-action suit say that Apple’s control over the iOS ecosystem makes it a “distribution monopolist.” It isn’t appropriate to think of Apple merely as a disinterested outsider working for app developers, the American Antitrust Institute said in its own brief.
The bigger picture
The case against Apple highlights a key theme in the U.S. economy that policymakers are increasingly grappling with: How should antitrust law treat two-sided platforms?
Last year, the court took one of its first major stabs at the issue in the digital age. It issued a significant decision involving American Express that gave the company the benefit of the doubt, despite claims that American Express was anti-competitively barring retailers from steering customers toward Visa or Mastercard, which are cheaper to use.
Because there wasn’t enough evidence that American Express’s practices were leading to higher prices for shoppers, the company’s behavior was legal, the court ruled in a 5-to-4 decision, even if merchants were complaining that the tactic was hurtful to businesses.
The decision was a victory for platform companies, legal analysts said. By requiring plaintiffs to show harm to both sides of a two-sided market, the American Express case effectively raised the bar for antitrust lawsuits against two-sided platforms. And, they predicted, the ruling would soon be cited in other cases involving platform companies.
Sure enough, in August, Verizon wrote a brief outlining how American Express could apply to Apple v. Pepper. Though the telecom company took no side in the fight over the iOS App Store, it said the app marketplace appears to have “direct purchasers on both sides” — iPhone users and third-party app developers.
“That is really the beginning — not the end — of the analysis,” Verizon wrote.
Apple said in a statement Monday that it hoped the Court would “recognize Apple’s critical role as a marketplace for apps,” adding that the app store has “unleashed a wave of innovation in software development, providing consumers with unrivaled choice and access to services that did not previously exist.”