The U.S. Court of Appeals for the Ninth Circuit recently addressed again when plaintiffs have standing to pursue federal antitrust claims under the U.S. Supreme Court’s landmark decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). In In re Apple iPhone Antitrust Litigation, the Ninth Circuit reversed the U.S. District Court for the Northern District of California and held that purchasers of iPhone apps through Apple’s App Store were “direct” purchasers and thus had standing to pursue federal claims that Apple monopolized or attempted to monopolize the distribution market for iPhone apps. Case No. 14-15000, 2017 WL 117153 (9th Cir. Jan. 12, 2007). Central to the court’s decision was its view that Apple is a “distributor” of apps, not a “manufacturer or producer” that sells apps to plaintiffs indirectly. The Ninth Circuit acknowledged that its holding conflicts with the decision by the U.S. Court of Appeals for the Eighth Circuit in Campos v. Ticketmaster Corp., 140 F.3d 1166 (8th Cir. 1998).
District Court Dismissal
In re Apple iPhone Antitrust Litigation involves allegations by a putative class of plaintiffs who purchased iPhone applications (apps) from Apple from late 2007 through the present. They allege that Apple monopolized the iPhone app market by requiring independent software developers who create apps to sell them exclusively through Apple’s “App Store” and pay Apple a 30% “mark-up” or “fee” on top of the price of the app itself, in violation of Section Two of the Sherman Antitrust Act. This has enabled Apple, plaintiffs allege, to “corner 100% of the distribution market for iPhone applications,” “foreclose iPhone customers from buying software from any other source other than Apple,” and charge customers “supracompetitive” prices for apps that exceed the prices customers would otherwise have paid. In re Apple iPhone Antitrust Litig., No. 11-cv-06714, 2013 WL 6253147 at *1 (N.D. Cal. Dec. 2, 2013) (quoting Second Amended Complaint).
At issue in the fourth motion to dismiss was whether the plaintiffs have standing to sue Apple under Illinois Brick as direct purchasers of the allegedly price-inflated apps. In opposing the motion, the plaintiffs noted that they purchased apps from Apple and paid the entire price to Apple, making them the only “direct” purchasers of the apps.
The District Court read the allegations in the complaint differently, however. In siding with Apple, and in relying on the Ninth Circuit’s earlier decision in In re ATM Fee, 686 F.3d 741 (9th Cir. 2012), the District Court characterized the 30% commission as a fee imposed on the app developers by agreement with Apple that is passed on to customers, like the price-fixed “interchange fee” at issue in ATM Fee: “the SAC is fairly read to complain about a fee created by agreement and borne by the developers to pay Apple 30% from their own proceeds—an amount which is passed-on to the consumers as part of the purchase price.” Id. at *6. As such, and noting the absence of any conspiracy allegations against the app developers, the District Court concluded that app customers like the plaintiffs are “indirect” purchasers of the challenged 30% fee to which the app developers and Apple agreed, and thus their claims are barred by Illinois Brick. Id.
Ninth Circuit Reversal
In a decision authored by Judge William Fletcher, the Ninth Circuit reversed, holding that the plaintiffs are direct purchasers within the meaning of Illinois Brick and therefore have standing to pursue their federal monopolization claims against Apple.
In so holding, the court looked to the Supreme Court’s trio of antitrust standing decisions in Hanover Shoe, Inc. v. United Shoe Machinery Co., 392 U.S. 481 (1968), Illinois Brick and Kansas v. UtiliCorp United, Inc., 497 U.S. 199 (1990), noting that the “basic structure” of the transactions and the outcomes in each of those cases was the same: that “the consumer was an indirect purchaser from the manufacturer or producer who sold or leased the product through the intermediary,” which was either an intermediate manufacturer (as in Hanover Shoe and Illinois Brick) or a distributor (as in UtiliCorp), and thus lacked standing to sue the manufacturer. See 2017 WL 117153 at *7. Likewise, in Delaware Valley Surgical Supply, Inc. v. Johnson & Johnson, 523 F.3d 1116 (9th Cir. 2008), the plaintiff, as an indirect purchaser from the manufacturer (Johnson & Johnson) and a direct purchaser from the distributor (O&M), lacked standing to sue Johnson & Johnson. See id. at *8.
In this case, the Ninth Circuit concluded that Apple is a distributor of iPhone apps that sells them directly to consumers and, as such, the plaintiffs—as direct purchasers of apps—have standing to sue Apple for allegedly monopolizing and attempting to monopolize those transactions. Id. at *9. The court made clear that its decision did not rest on the fact that the plaintiffs paid the App Store (“[w]hether a purchase is direct or indirect does not turn on the formalities of payment or bookkeeping arrangements.”), or the form of payment (“[t]he key to the analysis is the function Apple serves rather than the manner in which it receives compensation for performing that function[.]”), or who determined the price paid. Id. Rather, the court based its analysis on “the fundamental distinction between a manufacturer or producer, on the one hand, and a distributor on the other[,]” as Hanover Shoe, Illinois Brick, UtiliCorp and Delaware Valley instruct. Id.
Implications of Decision
The Ninth Circuit’s decision is notable in several respects. The Ninth Circuit did not rely on—or even cite—ATM Fee, even though ATM Fee was the basis for the District Court’s decision and at oral argument the Ninth Circuit focused heavily on ATM Fee’s application to the facts. The Ninth Circuit’s ruling—including its lack of discussion of ATM Fee—signals that its direct purchaser inquiry focuses on whether the plaintiff dealt directly with the monopolist, and not on the mechanics by which the monopolist imposed the allegedly anticompetitive charge.
The Ninth Circuit’s decision also departs from an Eighth Circuit case involving a similar transaction. In Campos v. Ticketmaster Corp., 140 F.3d 1166 (8th Cir. 1998), a majority of the panel held that the plaintiffs were indirect purchasers of concert tickets from Ticketmaster, reasoning that indirect purchasers are those who bear “some portion of the monopoly overcharge only by virtue of an antecedent transaction between the monopolist and another, independent producer.” Id. at 1169. In his dissent, Judge Arnold rejected the “antecedent transaction” test as unsupported by prior case law. Id. at 1174. Instead—and in language the Ninth Circuit found persuasive—he concluded that the plaintiffs were “direct” purchasers because they bought the monopolized product directly from Ticketmaster. Id. The decision creates a split between the Eighth and Ninth Circuits on how antitrust standing principles are applied to alleged antitrust violations involving transactions that arguably do not squarely fit with the traditional manufacturing chain of distribution reflected in Illinois Brick and its progeny.
The Ninth Circuit panel’s decision may not be the last word on this issue. On January 26, 2017, Apple petitioned for rehearing en banc, arguing that the panel misconstrued Illinois Brick and its progeny by employing a “simplistic” functional approach that focuses on “who delivers the goods the consumer purchased.” Defendant-Appellee’s Petition for Rehearing or Rehearing En Banc at 6-7, No. 14-15000 (9th Cir. Jan. 26, 2017). Apple argues that Illinois Brick requires courts to analyze the underlying commercial arrangement to determine “who first bore the brunt of the anticompetitive conduct.” Id. at 7. Under Apple’s reading, because Apple charges developers a 30% commission, the developers would be the ones bearing the brunt of the allegedly anticompetitive conduct, making consumers indirect purchasers. Id. at 15-18.
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