What the Apple antitrust case is all about

It hasn’t been the greatest month for Apple.

In addition to the news that another round of proposed tariff increases could hike iPhone prices, the Supreme Court recently handed Apple a massive defeat in an antitrust case.

In a 5-4 decision, the US Supreme Court voted to allow a longstanding antitrust case against Apple to move forward. Apple v. Pepper was brought forward by a group of iPhone users who accused Apple of driving up app prices through its tight control over the App Store.

Apple had argued that individuals who purchase apps aren’t their direct customers and therefore had no right to sue the company. The Supreme Court didn’t agree with Apple’s argument and ruled that the users “were direct purchasers who may sue Apple for alleged monopolization.”

The decision doesn’t have any immediate repercussions for the company. However, the case has the potential to change the relationship between customers and digital platforms.

What is Apple v. Pepper?

Apple v. Pepper is an antitrust lawsuit that was first filed by a group of iPhone users, including lead plaintiff Robert Pepper, in 2011. They claim that Apple’s App Store is an unlawful monopoly that overcharges users.

The main argument revolves around the fact that Apple only allows iOS users to install apps through its App Store. To use its platform, Apple requires developers to pay an annual membership fee. And though the company lets developers set the price of their apps, it takes a 30% commission on every app sold. The plaintiffs argue this fee is passed on to users, who have no other means for purchasing apps.

Apple has long maintained that its close control over iOS apps ensures software is safe for users.

In Apple v. Pepper, the company claimed that app purchasers don’t have the right to sue it. According to Apple, App Store customers are actually buying apps from developers, not from Apple. As such, Apple argued that its direct customers are developers, and they would be the only ones with a legal basis to file a complaint.

A district court agreed with Apple and the case was dismissed. But the Ninth Circuit Court of Appeals reversed that decision in 2017, which led to the Supreme Court taking up the case.

How did the Supreme Court reach its decision?

The Supreme Court’s decision hinged on the interpretation of a case from 1977, Illinois Brick Co. v. Illinois. In that case, the state of Illinois accused several brick manufacturers of price fixing. The manufacturers argued that because their direct customers were contractors, not the government, the state couldn’t sue them.

The Supreme Court sided with the brick manufacturers, ruling that indirect purchasers can’t seek antitrust damages. That decision is now known as the Illinois Brick doctrine.

Apple used that principle to argue that the plaintiffs in Apple v. Pepper lacked standing to sue the company.

But while the Illinois Brick case was about traditional supply chains, the Supreme Court ruled that using an app store is an entirely different situation.

According to Justice Brett Kavanaugh, who wrote the court’s majority opinion: “In this case, unlike in Illinois Brick, iPhone owners are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain. There is no intermediary in the distribution chain between Apple and the consumer.”

He added that Apple “argues strenuously against that seemingly simple conclusion.”

It’s important to note that the decision isn’t a ruling on whether Apple did violate antitrust law. Instead, the ruling means the lawsuit brought forward by users can proceed.

What could happen if Apple loses?

If Apple loses the overall case, it could be required to repay individuals who have been overcharged for an app purchase. And if that means repaying anyone who has ever purchased an iPhone app, the total payment amount could be substantial.

Apple may also be forced to change its App Store business model. That could mean lowering the 30% commission or changing the iOS platform to allow alternative ways to purchase apps.

A ruling against Apple could also have far-reaching implications by setting a precedent that would make it easier to sue digital platforms for antitrust violations. Even if Apple wins, the Supreme Court’s recent decision removed a major barrier for digital users to file an antitrust complaint, which could lead to more lawsuits.

And regardless of who wins, the case will likely give more weight to the argument that big tech companies are monopolies that need to be broken up.

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What happens next?

For the plaintiffs in Apple v. Pepper, proving that they have the right to sue Apple is very different from proving that the company violated antitrust legislation. And that’s not an easy feat. In fact, European regulators are dealing with that same question after Spotify filed a complaint against Apple earlier this year.

“Apple has introduced rules to the App Store that purposely limit choice and stifle innovation at the expense of the user experience – essentially acting as both a player and referee to deliberately disadvantage other app developers,” said Daniel Ek, founder and CEO of Spotify, in a statement.

As for Apple v. Pepper, it will now head to a district court to determine whether Apple’s App Store business practices constitute a monopoly. But don’t expect an answer on that anytime soon. The case has a lengthy legal battle ahead that many expect will take several years.

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