Future path of Apple's App Stores at stake in Monday's Supreme Court arguments

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A contentious class action suit accusing Apple of holding and maintaining a monopoly on app distribution for the iPhone plus overcharging hits the Supreme Court on Monday, with the suit seeking millions of dollars — and it could potentially have wide-ranging implications industry-wide.

The US Supreme Court will today hear arguments in the case of Apple v Pepper, which maintains that the company has deliberately created a monopoly with the App Store. The claim is that Apple has then also used this monopoly to increase app prices.

The case was originally filed in 2011 with claimants originally suing both Apple and AT&T, which had initially been the exclusive iPhone distributor. The arguments against AT&T were later dropped from the case and later a lower court ruled that plaintiffs were not eligible to sue.

However, in January 2017, the Ninth Court reversed that ruling and allowed the class action to now proceed to the Supreme Court.

What it's about

The case stands or falls on who you are actually buying an app from when you download one to your iOS device. If the courts decide that you're buying from Apple itself, then that company can be accused of antitrust behavior, and penalized accordingly. If this is the ruling, Apple can be argued to have created a monopoly and to be benefiting from it by artificially raising app prices above and beyond what the apps could be sold for without a central app store.

However, if the court agrees with Apple that the company is instead a distributor, everything changes. In that position, Apple connects users with app developers and takes a fee for doing so.

The Ninth Court didn't agree that there's any difference in whether Apple directly sells apps or acts as a distributor.

"The distinction between a markup and a commission is immaterial," ruled the Ninth Court. "The key to the analysis is the function Apple serves rather than the manner in which it receives compensation for performing that function."

That opinion is why the case has now gone to the Supreme Court, which should ultimately rule on it by June 2019.

Pass on

Even if Apple is seen to be a distributor and so not itself charging customers, there is still an argument that Apple may allegedly have been overcharging app developers. Those app developers may then have passed on or passed through these increased fees to customers.

Apple's lawyers refer to this as pass-through but they are citing a 1977 legal case where it was termed pass-on. In that Illinois Brick Co v Illinois case, the Supreme Court decided that only direct purchasers could seek damages.

It did so in part because of what the court then feared would be far-reaching and complex consequences. It would "create a serious risk of multiple liability for defendants," ruled the court. In this current situation, it could have meant that the class would have been able to sue both Apple and the app developers. "Overlapping recoveries would certainly result from the two lawsuits," said the court.

Illinois Bric Co headquarters in 2011 (Credit: Google Maps)

Apple maintains that its case is essentially the same as that 1977 one and in its legal filings even heads its argument "A straightforward application of Illinois Brick bars respondents' damages claim".

Plaintiffs disagree

Consumers headed by Robert Pepper have been joined by 31 States which are urging the Supreme Court both to allow this particular lawsuit and to overturn the Illinois Brick ruling.

In their supporting legal filings, these States argue: "Illinois Brick's predictions [of overlapping lawsuits] have not withstood the test of time Illinois Brick's rule is increasingly difficult to apply in the modern world, with its growing commerce in intangible rights through new platforms."

Lawyer Mark Rifkin, working for the plaintiffs, told Bloomberg that it's a unique situation "Apple has put itself in the distribution chain," he said, "and it makes us deal with Apple in a way no one else does."

Apple has support, too, significantly including the Department of Justice which in May 2018 filed a brief backing the company.

What happens next

If Apple wins, it does so by convincing the court that it can't be the subject of this particular type of damages, only the app developers can. In theory, then, the app developers could be open to being sued. In practice, it's unlikely that anyone will attempt to sue hundreds or thousands of individual app companies, but those developers could sue Apple if they believe they've been overcharged.

A ruling against Apple will likely see unspecified damages levied if Apple loses the resultant case, but more significantly the likelihood of other cases being brought against online and technology companies in similar positions. Plus, it would change the nature of application distribution should Apple, Google, Facebook, and others decide to not be faced with this kind of liability. This will set off probably a decade or more of suits, counter-suits, and appeals.

Either way, the ruling at some point in 2019 isn't the end of the story.

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