Supreme Court Appears To Lean Heavily Against Apple’s Defence Of Its Walled Garden

Supreme Court Appears To Lean Heavily Against Apple’s Defence Of Its Walled Garden

On Monday, Apple finally had its highly anticipated hearing before the United States Supreme Court. Since 2011, the tech giant has been fighting antitrust litigation that claims its App Store policies amount to an unfair monopoly. Those who were present at today’s hearing say the case’s outcome isn’t looking great for Apple.

The case of Pepper v Apple Inc has taken a complex path to the highest court in the land (which we’ve previously covered), but the most important thing to know is that lower courts have disagreed over whether Robert Pepper and three other Apple users who joined him in a class-action suit even had the right to sue the iPhone maker. Pepper argues that by forcing iOS users to get apps from the Apple App Store and charging developers a 30-per cent cut of their revenue, the company is creating a system in which no one can compete and higher prices are absorbed by the consumer.

Apple cites precedents like Illinois Brick and Hanover Shoe to argue that it is simply acting as a middleman between app developers and users and, therefore, cannot be legally blamed for any “passed on” charges. The company argues that if consumers have a problem with the prices of apps, they should have to take it up with individual developers.

The case will not, no matter which way it swings, take down Apple’s iOS walled garden – but it could compel the company to at least install a door.

After seven years of being stalled in the system, the Supreme Court will now decide if Pepper has the right to sue Apple… or at least it will issue a decision sometime in the next few months. For now, all we have is a transcript of the hearing and impressions from those who were able to attend the hearing in person. Let’s take a look at those impressions first:

Los Angeles Times:

Lawyers for the Trump administration joined with Apple in urging the high court to throw out the case, but they ran into sceptical questions from most of the justices…

The four liberal justices suggested they were inclined to permit the suit to go forward.

Associated Press:

Chief Justice John Roberts was alone among the nine justices who seemed prepared to agree with Apple.

USA Today:

All four liberal justices clearly were sceptical of Apple’s monopoly and were joined at points by three conservatives: Associate Justices Samuel Alito, Neil Gorsuch and Brett Kavanaugh.

The reports coming out of the courtroom almost universally agree that the justices did not appear to be buying Apple’s arguments, and almost all used the term “sceptical.” But sceptical questioning could simply be the product of holding a thorough hearing.

After reviewing the transcript, it seems clear that Justice Sonia Sotomayor was leaning heavily against Apple. She explained to Apple’s attorney, Daniel Wall, that the precedent set by Illinois Brick doesn’t appear to apply the way that he thinks it does.

That case found that customers couldn’t sue a brick monopoly because they weren’t the direct purchasers of the bricks. The customers were purchasing the bricks from masons who acted as an intermediary. As the direct purchaser of the bricks, the masons were the only ones who had legal standing to sue the brick monopoly. Establishing the direct purchaser as the one who has legal standing to sue in an antitrust case was intended to prevent multiple groups from suing a company for the same offence. “This is not quite like that,” Sotomayor told Wall. “This is dramatically different. This is a closed loop.”

In Apple’s view, it gets paid a commission to provide the tools for developers to create an app that is then directly sold by the developers to users through the App Store. Sotomayor and others rejected the idea that iOS users are directly purchasing from the developer. “Apple took 30 per cent from the customer, not from the developer,” Sotomayor said. Wall pushed back, saying that even the Ninth Circuit Court of Appeals, which previously ruled against Apple’s overall case, agreed that “the payment flow is immaterial to the Illinois Brick issue.” Justice Stephen Breyer interjected at that point to say, “I wouldn’t think that’s true, even if they concluded it.”

Breyer laid out his point of view on the arrangement with an analogy:

If Joe Smith buys from Bill, who bought from the monopolist, then we have something indirect. But, if Joe Smith bought from the monopolist, it is direct. That’s a simple theory.

Now I can’t find in reason, or in case law or in anything I’ve ever learned in antitrust, anything that would conflict with that. And what I want you is to tell me what?

The exchange went on like this with Wall complicating matters and Breyer insisting on bringing it back to simply illustrations of who is and is not the “direct purchaser.”

If all this sounds confusing, do not worry, it is confusing. Simply put, the justices that gave Wall the hardest time didn’t appear to buy the argument that Apple is not directly selling its apps to users. At one point, Sotomayor bluntly said, “I’m sorry, the — the first sale is from Apple to the customer.”

But what might be the most intriguing part of the hearing was that this argument may have given us a preview of the antitrust case itself if the Supreme Court allows it to move forward. When Wall tried to say that the case is arguing the 30-per cent commission constitutes the official “injury” against consumers, Sotomayor insisted that the alleged injury is actually the suppression of a cheaper price. “They have to go out and prove at the next step how, without this monopoly, they would have paid less,” she said. “It could be as little as a — a penny or nothing or it could be something more.”

Chief Justice John Roberts seemed to be the only one on the court who was convinced that Apple’s case was sound, saying, “to the extent it might be said that Apple is a two-sided market, they’re — they’re subject to suit on both sides of the market for a single antitrust price increase that they’re alleged to have imposed.” In other words, Roberts was saying that Apple was vulnerable to the very outcome that Illinois Brick was designed to prevent—two distinct parties suing over the same offence. Justice Elena Kagan said that argument is wrong because the damages in each situation are entirely different. Kagan insisted that users would be able to sue because they’re paying too much and developers would be able to sue on the grounds of lost profits.

Today’s hearing isn’t going to resolve anything about walled gardens in tech aside from consumers’ right to sue, but it did give us some hints that an argument could be made that developers and users have different complaints that they could potentially take to court. However you feel this case should shake out, the argument that Apple can be sued for its iOS monopoly seems relatively strong.

[Supreme Court of the United States]