Apple Case Could Affect How Antitrust Cases Are Viewed in the Future

A pending U.S. Supreme Court ruling could force a radical change in the way manufacturers distribute their products to consumers via third parties. In Apple V. Pepper, a lower court ruled the popular manufacturer of iPhones and iPads is shielded against federal class action lawsuits accusing it of price-gouging.

The class says Apple forces it to pay inflated prices for apps by requiring developers to pay a 30 percent surcharge to sell apps via the App Store.

Apple uses its proprietary iOS operating system in its iPhones and iPads. The only place to obtain apps for the iOS system is the App Store, which is an Apple subsidiary. The surcharge and limited distribution amount to price-gouging by Apple, the class claims.

Thus far, Apple has successfully used the Illinois Brick defense to prevail in the case. But the Supreme Court might overturn the decades-old ruling that essentially bans consumers from seeking damages for price-gouging and price-fixing from makers of products distributed internally. Apple Inc. initially prevailed in a price-fixing class action lawsuit against it by arguing a 1977 SCOTUS ruling bans class actions in such instances.

In the 1977 Illinois Brick v. Illinois ruling, the Supreme Court essentially banned consumers from filing class actions against manufacturers of products sold through proprietary distribution channels. Because distribution channels often are complicated, the court ruled only the first buyer can claim damages via federal antitrust laws, even if an overcharge is proven.

The Illinois Brick ruling determined manufacturers with at least one intermediary between them and their final product’s distribution points are shielded against federal lawsuits. If Apple successfully argues its App Store is an intermediary between it and consumers, the court might affirm Illinois Brick protects Apple from the class action. The current court, though, might reverse that ruling.

A class action comprised of iPhone users say they had to pay a 30 percent surcharge on their apps due to Apple’s charging the developers a 30 percent fee. The developers simply passed the surcharge onto consumers. The class argues it would have paid less for Apple apps if they were distributed through other channels. Instead, Apple makes them available only via its proprietary App Store. App developers must pay a 30 percent fee to sell their apps through the App Store, and there is no alternative market.

Apple initially prevailed in the anti-trust class action by arguing a 30 percent markup on mobile apps developed by third parties and sold through Apple’s proprietary app store is simply a cost of doing business. Apple argues the app developers set the prices of the apps sold via Apple’s App Store. Apple says it only acts as the distributor of the apps for smartphones and mobile devices.

Apple also argues the app developer is the only entity that pays the 30 percent commission. Consumers only pay the final price as determined by app developers, Apple says. Some justices, though, question Apple’s argument and suggest Apple is a monopoly directly selling apps to consumers via its App Store.

Plaintiffs claim Apple prevents app developers from distributing their apps for Apple mobile products through other channels. More distributions channels would reduce the price of the apps and likely eliminate the 30 percent charge of many apps, the plaintiffs contend.

Because Apple prevents app makers from using other distribution channels, owners of iPhones and other Apple mobile products are forced to pay more than they should, the plaintiffs argue. They say the 30 percent fee Apple charges to app developers simply gets passed on to consumers via higher prices.

The pending decision on the case could have wide-ranging impacts in several consumer markets. If the court reverses the Illinois Brick decision, manufacturers no longer could rely upon intermediaries to shield them from federal class actions. That decision could also trigger a flood of similar class actions in virtually all industries. How that might impact consumers remains to be seen, but many manufacturers certainly would need to change how they get their products to market to prevent class actions.