Apple v. Pepper and Why It Matters to App Developers

By pairing small business developers and curated platforms (e.g., Apple’s App Store or Google Play for mobile, and Steam for games), the app economy has experienced unrivaled growth and success. This unique relationship creates a trustworthy conduit for reliable and cost-effective access to end users across consumer and enterprise contexts. Our market data and research identify three key attributes that led to this revolution in software distribution:

  1. Reduction in overhead costs imposed by traditional publishers;
  2. Instantaneous and cost-effective consumer trust mechanisms; and
  3. Cost-effective access to a global market.[1]

Today every successful platform for mobile, desktop, gaming, and even cloud computing must provide these features, or they risk failing to provide incentives for developers to use their services. The pro-competitive arrangements between app stores and developers have not only lowered the cost for software development, but also the overall price of software to consumers by allowing developers to provide their innovative apps at either a nominal rate or, in the majority of cases, for free. But what would happen if new legal interpretations unexpectedly alter the business relationships of this hypercompetitive app ecosystem?

At present, Apple is appealing a Ninth Circuit decision in the United States Supreme Court asserting that the appellate court misapplied the “direct-purchaser” rule—a rule that determines who can sue whom in an antitrust case.[2] In this case, the Ninth Circuit held that consumers had the ability to sue Apple directly to challenge the 30 percent fee that Apple contracted with app developers for selling their apps on the App Store. Unfortunately, the effect of the Ninth Circuit’s decision is to legally categorize our members as wholly owned and controlled entities of Apple, rather than the independent entrepreneurs they are. The Ninth Circuit’s decision also foundationally jeopardizes the business case of the app economy through, for example, ceding app developers’ intellectual property to app platforms. Without correction by the Supreme Court, our members’ symbiotic relationship with app platforms remains at risk.

ACT | The App Association filed an amicus curiae brief in support of Apple in this case that goes into more detail regarding the damaging approach taken in the Ninth Circuit’s decision,[3] but we thought a TL;DR may help:

How Did We Get Here?

This case spans over five years, but to distill it down to its essence, five consumers (at one point seven) filed two section 2 claims under the Sherman Act alleging that Apple both: (1) unlawfully monopolized an aftermarket of third-party apps on its App Store; and (2) attempted to monopolize that same market.[4] Basically, the consumer argued that Apple runs a monopoly of the App Store for a variety of peculiar reasons, but mainly the consumers took issue with the 30 percent charge Apple contracted with third-party app developers for the purchase of $0.99 subscription-based apps. Interestingly, the consumers in this case only purchased apps after they filed the action. Judge Yvonne Gonzalez Rogers of the U.S. District Court of California presided over the case and granted Apple’s motion to dismiss because the consumers’ claims did not pass muster under Illinois Brick v. Illinois. The District Court determined (and we agree) that “any injury to [these consumers] is an indirect effect resulting from the [influence of Apple’s commission on] software developers’ own costs,” which could not be litigated without “speculat[ing] into developers’ pricing structure, their costs, ability to find a distribution chain, and/or desired profits or rates of return.”[5] The consumers then appealed this decision to the Ninth Circuit, and the Circuit Court overturned the District Court’s decision by holding that these consumers did have standing under Illinois Brick because they were direct purchasers of Apple when buying apps on the App Store.[6] Apple subsequently appealed that decision to the highest court in the land.

What is the Direct Purchaser Rule?

Under Section 4 of the Clayton Act, “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue…and shall recover threefold the damages by him sustained.” By virtue of the clause “any person,” courts may interpret the statute broadly to apply to all people who have suffered a harm prohibited by the Sherman Act or Clayton Act. However, Illinois Brick limited that definition by only permitting courts to grant antitrust standing under Rule 12(b)(6) if the plaintiff is the direct purchaser of the company that overcharged as opposed to “others in the chain of manufacture or distribution.”[7] Thus, the issue of who can sue a monopolist for antitrust violations boils down to who is buying from whom. In this case, the Supreme Court must determine whether a customer purchasing a third-party app is buying from the creator of that app or from Apple, which is merely providing the distribution platform for the app. In our view, the customer is unequivocally buying from the app developer, not the platform the developer sold their app through. The developer and the platform are distinct and different parties in this exchange.

The Stark Implications of Ninth Circuit’s Holding and Why We Need the Supreme Court to Right this Wrong

In supporting its conclusion, the Ninth Circuit explicitly discussed, and then chose to ignore from its decision-making process without rationale, that Apple does not possess ownership rights to the third-party apps it hosts nor does it set the price of those apps. Under the Ninth Circuit’s rationale, if consumers are direct purchasers of app platform companies when buying apps, then, in effect, app platform companies serve as resellers of third-party apps. This makes little sense because platforms neither have control over the app company’s business practices nor do they possess any ownership rights to the app at the time the consumer buys the app.

Within the context of app platform companies and app developers, app platforms are only entitled to the agreed upon percentage of the app developers’ fee that the developer offers to consumers. Platforms have no ownership rights to that app. All creative rights solely belong to the app developer and are uninhibited by the platform. Additionally, when a consumer accepts a “terms of service” for each app they purchase, the app’s developer maintains sole responsibility for any breach of those terms. Thus, by handing our members’ customers over to Apple or other app platform companies generally, the Ninth Circuit inadvertently treats platform companies as resellers of the apps they host, giving them an undeserved property right, which is categorically absurd for all the reasons stated above.

 

Moreover, if the Supreme Court accepts the Ninth Circuit’s interpretation, then it is endorsing the idea that consumers can object to terms from upstream negotiations, having some possible effects for our member companies: (1) to mitigate the threat of consumers suing platform companies for prices of apps, platform companies will engage in setting the price for our member companies’ products or at least want more control over that aspect of their business models; or (2) platforms will not impose their fees (e.g., 30 percent fee) and, by extension, all of the benefits described above that are supported by such fees. Option (1) would force app developers to release control over how they price their products. However, option (2) produces losers at each stage because app developers would have to absorb the exorbitant overhead costs they experienced before the advent of mobile platforms.[8] In either scenario, these results could yield fewer choices and higher prices for consumers buying apps on mobile platforms, Apple’s included.

If Illinois Brick has any meaning, courts must respect the roles of market participants to ensure that our members’ customers remain theirs. Thus, we call on the Supreme Court to overturn the Ninth Circuit’s mistake here.

[1] Deloitte, The App Economy in the United States: A Review of the Mobile App Market and Its Contribution to the United States Economy, Report (2018). Available at: https://actonline.org/wp-content/uploads/Deloitte-The-App-Economy-in-US.pdf.

[2] Apple v. Pepper, Docket No. 17-204 (cert. granted Jun. 18, 2018). Available at: https://www.supremecourt.gov/docket/docketfiles/html/public/17-204.html.

[3] ACT’s amicus brief: https://actonline.org/wp-content/uploads/ACT_Apple_v_Pepper_Amicus_Brief.pdf.

[4] In re Apple iPhone Antitrust Litigation, 2013 WL 6253147 (N.D. Cal. Dec. 2, 2013).

[5] See id. at p. 6.

[6] See In re Apple iPhone Antitrust Litig., 846 F.3d 313, 329 (9th Cir. 2017).

[7] Illinois Brick v. Illinois, 431 U.S. 720 (1977).

[8] ACT | The App Association, The Symbiotic Relationship Between App Developers and Platforms: A Ten-Year Retrospective: https://actonline.org/wp-content/uploads/2018_ACT-App-Store-Ten-Year-Retro-Doc.pdf.

By |2018-09-04T09:27:10+00:00September 1st, 2018|Blog|