In what could be a landmark decision for the future of Appleโs App Store, the US Supreme Court has ruled against Apple in an antitrust case. The case, Apple Inc. v. Pepper, argues that Apple is unfairly using its monopoly power to add a 30% commission to App Store sales which then inflates the price for consumers. The Supreme Courtโs decision means that the case can now move on to the next stage and could leave Apple liable for millions of dollars in penalties.
The Apple Inc. v. Pepper case was launched in 2011 and dismissed by a California court in 2013. However, it was successfully appealed and allowed to return through the Ninth Circuit court of appeals in 2017. This then brought the case to the Supreme Court to decide whether the case can continue.
The case centers around the โIllinois Brick doctrineโ and whether people who purchase iOS apps are โdirect purchasers.โ This doctrine applies to a 1977 ruling in the case Illinois Brick Co. v Illinois where Illinois Brick Co. was accused of colluding to fix the prices of concrete blocks and causing higher prices to be passed on to the State of Illinois during construction projects. The Supreme Court ruled that the State of Illinois did not have grounds to sue because it was not a โdirect purchaserโ of the concrete blocks from Illinois Brick Co. Instead, the State was working with general contractors who accepted bids from masonry contractors and these masonry contractors were the โdirect purchasersโ of the concrete blocks from Illinois Brick Co. The Supreme Court held that only โdirect purchasersโ of illegally priced goods had the grounds to sue.
The plaintiffs, Robert Pepper and three other Apple customers, argue that Appleโs monopolistic control of the App Store allows it to add a 30% commission to sales which results in consumers being overcharged for iOS apps. They say that iOS app consumers are โdirect purchasersโ because:
- Purchasing iOS apps is a direct transaction between Apple and iOS consumers where developers donโt collect any payment information
- The price paid by iOS app customers is a combination of the price set by app developers and Appleโs 30% commission
Apple argues that app developers are the โdirect purchasersโ in this case and that they set the price of anything sold through the App Store which then determines Appleโs 30% commission. Additionally, Apple claims to be acting as an agent for app developers and says that it facilitates the direct sale between app developers and iOS app consumers. According to Apple, this makes iOS app consumers โindirect purchasersโ who do not have the grounds to sue Apple.
In todayโs ruling, the Supreme Court voted 5 to 4 to allow the Apple Inc. v. Pepper case to proceed which means that iOS app consumers are โdirect purchasersโ and can sue Apple for alleged monopolization.
Supreme Court Justice Brett Kavanaugh authored the majority opinion which said that: โAppleโs line-drawing does not make a lot of sense, other than as a way to gerrymander Apple out of this and similar lawsuits.โ
He added that the Supreme Court disagrees with Appleโs argument that consumers are not โdirect purchasersโ of iOS apps but said no ruling is being made on the plaintiffsโ other claims against Apple:
โWe disagree. The plaintiffs purchased apps directly from Apple and therefore are direct purchasers under Illinois Brick. At this early pleadings stage of the litigation, we do not assess the merits of the plaintiffsโ antitrust claims against Apple, nor do we consider any other defenses Apple might have. We merely hold that the Illinois Brick direct-purchaser rule does not bar these plaintiffs from suing Apple under the antitrust laws. We affirm the judgment of the U. S. Court of Appeals for the Ninth Circuit.โ
Analysts from Macquarie Research believe that the case will take at least another year to be resolved and that if Apple is forced to reduce its App Store commission rates, its earnings could fall by as much as 15%:
โWe believe that if AAPL were to lower its 30% rate to 12%-20%, AAPLโs total 2020 EBIT [earnings before interest and taxes] (NOT just App Store or Services, but total EBIT) would fall 7%-15%.โ
The decision could pave the way for Apple being forced to allow third-party app stores on iOS and also lead to Apple having to pay millions of dollars in penalties.
Apple responded to the decision by saying it believes the App Store is not a monopoly and that developers can choose other non-iOS platforms for the distribution of their software:
โTodayโs decision means plaintiffs can proceed with their case in District court. Weโre confident we will prevail when the facts are presented and that the App Store is not a monopoly by any metric.
Weโre proud to have created the safest, most secure and trusted platform for customers and a great business opportunity for all developers around the world. Developers set the price they want to charge for their app and Apple has no role in that. The vast majority of apps on the App Store are free and Apple gets nothing from them. The only instance where Apple shares in revenue is if the developer chooses to sell digital services through the App Store.
Developers have a number of platforms to choose from to deliver their software โ from other apps stores, to Smart TVs to gaming consoles โ and we work hard every day to make our store is the best, safest and most competitive in the world.โ
This decision comes in the wake of reports that the European Union (EU) will be investigating Spotifyโs complaint against Appleโs anti-competitive App Store practices in the near future. It also follows the revelation that even companies as large as the social media giant Facebook have shown that theyโre concerned about the mobile internet duopoly Apple and Google hold through their app stores.