The U.S. Supreme Court’s decision in Apple v. Pepperhas robbed developers of their autonomy and independence by categorizing them as mere suppliers or manufacturers to platforms. While the headline of this case has been a question of who can sue whom for purposes of antitrust harms, this case is actually about maintaining the integrity of developers’ relationship with their customers and their partnership with platforms. This is precisely why we filed an amicusin this case to warn the Court against what we always expected they would do: use antiquated concepts to sideline developers to reach a convenient, yet totally wrong, result.
This case might be over, and, quite frankly, Apple is a big company that can fight its own legal battles, but the real concern here is what this means for other legal actions moving forward. It is clear that courts have a real appetite for increasing platforms’ liability by forcing them into a gatekeeper position. Increased liability will, in turn, make those companies more closed off to new, innovative apps because of the increased risk they face by merely hosting them on their respective platforms. We hope that this ruling does not engender lower courts to pick away at other aspects of the platform-developer relationship that make the app economy competitive and thrive. If so, developers could face a tough time in this post-Pepper world, while attorneys filing class actions can let the good times roll.
On May 13, 2019, the Supreme Court affirmed the Ninth Circuit’s opinion that held that consumers purchasing apps on Apple’s App Store have antitrust standing to sue Apple directly for the price of an app. Apple v. Pepper essentially asks whether buyers of third-party apps are Apple’s customers or the third-party developers’ under the Court’s 42-year-old precedent, Illinois Brick v. Illinois. However, through contorted reasoning, the Supreme Court believes that consumers are direct purchasers of Apple when purchasing third-party apps on its App Store.
Instead of actually appreciating the distinction that exists between what occurs on an app store (e.g., Google’s Play store or Apple’s App Store) and other business models, Justice Kavanaugh attempts to stick a square peg into a round hole by lumping app stores into a distinct business model: a traditional retailer (e.g, Nordstrom or Macy’s). In the context of a traditional retailer, a Macy’s or Nordstrom bears all of the risk when holding inventory because they actually purchase the items they sell upfront from a manufacturer, which is an important distinction from that of an app developer selling their app on an app store. In the context of an app store, the developer bears all of the risk, and platforms, like Steam or the App Store, have neither a true responsibly to sell the product to recoup deficits nor any ownership of the products (e.g., apps or games) they host.
But why would Justice Kavanaugh ignore such a distinction?
Although Justice Kavanaugh toes a careful line by not directly saying that his opinion in this case overturns Illinois Brick, that is, in effect, what he did. He’s a self-proclaimed and noted textualistwho has fervent qualms with courts reading text into statutes, like what happened in Illinois Brick. In Apple v. Pepper, Justice Kavanaugh attempts to flex his textualist analytical muscle by harping on the phrase “any person” in section 4 of the Clayton Act as opposed to focusing on to whom Apple charges its fee (i.e., the developer); the latter analysis being more consistent to that of the Court’s in Illinois Brick. Now, there’s nothing wrong with a court consulting the statute for guidance regarding congressional intent—in fact, it should be encouraged. However, as is rightly pointed out by Justice Gorsuch in his dissent and the Attorney General in his oral argument, courts, including the Supreme Court, should observe the basic tenets of statutory interpretation.
This is really where the Supreme Court missed the mark in Apple v. Pepper. Section 4 of the Clayton Act intended—according to the Supreme Court in Illinois Brick—to ensure that direct purchasers of monopolists were protected from unlawful overcharges so as to ensure the right party gets compensated; not to provide a windfall to law firms. Thus, the causation element (who really caused harm to whom) is a necessary condition for antitrust standing. In Apple v. Pepper, our member companies are the direct purchasers of Apple’s and other mobile platforms’ distribution services so as to provide their innovative products to their customers. Justice Kavanaugh’s opinion takes our members right out of the discussion almost entirely by categorizing app developers as merely manufacturers or suppliers for Apple, which is completely detached from how the app economy operates.
How Does This Decision Impact Developers?
The practical results of this decision may discourage independent app companies from developing apps for these major platforms. As a result, this has the potential effect of inevitably yielding fewer choices of apps from which consumers can choose. Additionally, depending on how lower courts interpret this ruling, plaintiff’s attorneys could have a lower burden to establish antitrust standing; thus, augmenting the plaintiff pool to anyone who has ever purchased an app, meaning big bucks for them.
The App Association has written extensively on the value platforms, like app stores, have for the growth and success of the app economy and software distribution more generally. There are three key features that have helped developers lead the charge in the modern economy. Platforms provide: 1) instantaneous consumer trust; 2) lowered overhead; and 3) immediate access to international markets. This decision directly and adversely impacts these essential features (namely, the lowering of overhead), which could completely transform the nature of our members’ symbiotic relationship with app stores and platforms at large.
In his dissent, Justice Gorsuch noted that this could actually add overhead costs to developers and doesn’t even do what the opinion purports. Justice Gorsuch notes, “[t]o evade the Court’s test, all Apple must do is amend its contracts. Instead of collecting payments for apps sold in the App Store and remitting the balance to developers…Apple can simply specify that consumers’ payments…[go] directly to the developers, who will then remit commissions to Apple.” By handling such services, Apple provides an extraordinary cost-saving mechanism, both financially and temporally, particularly for small and mid-size app makers. If Apple follows Gorsuch’s guidance, developers would be on the hook for handling all transaction costs associated with selling their licenses on app stores—a function that is not within a developers’ core competency. Developers would also be liable to platforms for remitting to them their commission after each purchase. That’s expensive, especially for small businesses. The most feasible way around this is for smaller developers to sell the rights to their app directly to platforms. This puts developers in a Catch-22 where they either lose all control over the pricing of their app or not sell their app on app stores at all. Thereby, smaller developers are at the behest of large platforms in at least that regard.
This puts developers in a Catch-22 where they either lose all control over the pricing of their app or not sell their app on app stores at all. Thereby, smaller developers are at the behest of large platforms in at least that regard.
What’s more is that this case feeds into a growing trend in today’s legal environment: the insistence in empowering platforms to become gatekeepers by trying to impose more liability onto them for apps they host. Rulings, like the one at bar, are adding fuel to the proverbial fire to make the case that courts should rein in these platforms, which is their prerogative; but courts have to know that it cuts at the core of our members’ relationship with platforms to serve their customers. We hope that this ruling is strictly limited to antitrust proceedings and does not encumber our members any further in engaging with other platforms.