On Monday, the Supreme Court heard oral arguments for the long-running antitrust case Apple v. Pepper. The court will decide whether iPhone users can sue Apple for locking down the iOS ecosystem, something the suit’s plaintiffs say is creating an anti-competitive monopoly. And so far, the Supreme Court seems sympathetic to the argument.
Apple v. Pepper could theoretically affect how tech companies can build walled gardens around their products. The Supreme Court isn’t going to make a call on that specific issue, but its decision could affect people’s relationship with all kinds of digital platforms. Here’s what’s at stake in the case, which the Supreme Court agreed to consider earlier this year.
What is Apple v. Pepper?
Apple Inc. v. Robert Pepper is the latest salvo in a legal fight over Apple’s iOS App Store. A group of iPhone buyers are claiming that Apple’s locked-down ecosystem artificially inflates the prices of apps because all developers must go through a single store that takes a cut of their revenue. The buyers argue that Apple has established an unlawful monopoly over iOS apps, and they’re asking the courts to make Apple allow third-party iOS apps, in addition to repaying every iOS user it’s overcharged in the past.
How did we get here?
Apple v. Pepper began as a broader antitrust complaint in 2011. Robert Pepper and three other iPhone owners claimed that Apple had stifled competition and driven up prices on its iPhone — partly by locking out third-party apps and partly by signing a five-year exclusivity deal with AT&T. A court struck the latter claim in 2013. Since then, the class action case has focused purely on the App Store.
In 2014, Apple won a judgment against Pepper, and the complaint was dismissed. But the Ninth Circuit Court of Appeals reversed that decision in early 2017, allowing the case to move forward. Now, Apple is petitioning the Supreme Court to throw it out again.
What’s the actual argument?
The central dispute is relatively simple: Apple only allows iOS users to install apps through its App Store. Any third-party stores require jailbreaking your phone and voiding the warranty. Apple also takes a 30 percent commission on apps that are sold through the App Store. Pepper’s complaint concludes that developers are logically passing that cost along to consumers.
The complaint says that iPhone users have paid “hundreds of millions of dollars more” for apps “than they would have paid in a competitive market.” That’s a claim that could be challenged in court, but there are real-world examples of apps passing costs to customers. Spotify, for instance, charged iTunes subscribers a higher fee before simply disabling that payment option.
Apple argues that it’s not a monopoly, and that if it were, it wouldn’t matter
Apple denies the claim that its closed ecosystem is an unlawful monopoly. It says users can buy apps on other platforms, and that by definition, opening the App Store in 2008 created new competitive opportunities.
But courts haven’t made a call on this argument yet. Instead, they’ve focused on whether iPhone users can sue Apple at all — which is what lawyers spent today arguing about in front of the Supreme Court.
In 1977, the Supreme Court established what’s known as the Illinois Brick doctrine, which says that “indirect purchasers” can’t sue a company for antitrust damages. Pepper’s lawsuit portrays Apple as directly selling iOS apps to users at a markup. But Apple claims that iOS users are essentially buying apps from developers, who are buying Apple’s software distribution services, which would make developers the only direct purchasers with the right to sue Apple.
If Apple convinces the Supreme Court that this is correct, it doesn’t even have to worry about the monopoly question. Sure, a developer could sue the company later, but developers have a strong incentive to stay friendly with Apple — and they actually benefit from iOS’s locked-down, piracy-unfriendly system.
Is Apple technically selling apps to users?
Yes, according to the 2017 ruling that Apple is appealing. The Ninth Circuit appeals court disregarded Apple’s arguments — like the fact that it’s taking a commission from developers rather than adding a fee to user transactions — as hair-splitting. It determined that regardless of who’s making the apps or setting the exact prices, Apple is acting as a distributor, which gives it a direct relationship with its customers.
But a lower court didn’t agree with that interpretation, and there’s no guarantee the Supreme Court will either.
Does the Supreme Court think Apple can be sued?
Based on today’s transcripts, some of the justices seem sympathetic to that claim. Justice Elena Kagan said Apple’s attempts to distance itself from app sales were “not intuitive,” saying that if she picked up an iPhone and bought an app, “from my perspective, I’ve just engaged in a one-step transaction with Apple.”
On the other hand, Justice Neil Gorsuch said he wasn’t convinced that the underlying economic issues had changed. And the court seemed less responsive to an argument that Apple was acting unfairly by requiring apps to be priced in increments of $0.99 — although the plaintiffs’ laywers said it wasn’t vital to the larger case.
But the oral arguments suggest that the judges recognize Apple’s level of power and control over its platform, and acknowledge that this might not be directly comparable to the 40-year-old Illinois Brick case.
So... what does happen if Apple loses?
Nothing — yet. If a court rules that Apple has an unlawful monopoly, it could require Apple to pay out hundreds of millions of dollars or even change its App Store model. If the Supreme Court upholds the Ninth Circuit’s decision, though, it will just send the case back to a lower court, where the fight will keep going.
But the decision will also affect how much power consumers have over digital platforms. In 1998, a major appeals court ruling shot down concertgoers who sued Ticketmaster for driving up ticket prices, saying that Ticketmaster was actually selling distribution services to concert venues. The Ninth Circuit’s opinion explicitly says that decision was wrong. So a favorable Supreme Court ruling wouldn’t just keep this particular lawsuit alive. It could make other powerful online stores — or, in Reuters’ less-charitable estimation, “toll-keepers” — more accountable toward their users.
Update November 26th, 4:00PM ET: Updated to mention oral arguments.