Supreme Court Allows Antitrust Lawsuit Against Apple to Proceed

WASHINGTON — The Supreme Court on Monday allowed an enormous antitrust class action against Apple to move forward, saying consumers should be allowed to try to prove that the technology giant had used monopoly power to raise the prices of iPhone apps.

The lawsuit is in its early stages, and it must overcome other legal hurdles. But the case brings the most direct legal challenge in the United States to the clout that Apple has built up through its App Store. And it raises questions about how the company has wielded that power, amid a wave of anti-tech sentiment that has also prompted concerns about the dominance of other tech behemoths such as Facebook and Amazon.

The court’s 5-to-4 vote featured an unusual alignment of justices, with President Trump’s two appointees on opposite sides. Justice Brett M. Kavanaugh, who joined the court in October, wrote the majority opinion, which was also signed by the court’s four more liberal justices. Justice Neil M. Gorsuch, who joined the court in 2017, wrote the dissent.

The class-action lawsuit focuses on the fees that Apple takes on sales in its App Store, which millions of people use every day to download games, messaging apps and other programs. The company charges up to a 30 percent commission to developers who sell their products through its store, bars them from selling their apps elsewhere and plays a role in setting prices. App makers have long complained that the fee and other practices are unfair.

Over the years, people and app makers have come to rely on the App Store almost as if it were a utility. The store features more than two million apps, Apple has told the court, and generated more than $26 billion in payments to developers in 2017. More important, the availability of apps transformed the iPhone from merely a phone to the center of our digital lives. Without the App Store, there would be no Uber or Lyft for calling cars, Instagram for sharing pictures and videos, or Postmates for ordering food.

Competitors have accused Apple of using the App Store to harm rivals. Spotify, Netflix, Amazon and others have sought to avoid the Apple fee by directing their customers to subscribe to their services directly. But smaller app makers would struggle to make such a move.

Apple has appeared to use its power over the App Store to its advantage in other instances, including a move to restrict or block apps that provide parental controls or monitor time spent on a phone. Apple’s competitors complained that the company had targeted them after it created its own tool for those tasks. Apple said it removed some of the apps for privacy reasons.

Apple said in a statement that it was “confident we will prevail when the facts are presented and that the App Store is not a monopoly by any metric.”

How the case unfolds is likely to be closely watched as lawmakers and regulators around the world debate how to rein in the power of tech companies. In the United States, legal scholars have questioned whether antitrust arguments focused on price are enough to deal with the tech giants and whether antitrust law should take competitive process into account.

This year, the music streaming service Spotify filed a complaint with European regulators that accused Apple of using its power over the App Store to harm rivals.

Other tech powers like Google, Facebook and Amazon have faced antitrust scrutiny for their outsize market shares in areas like internet search, social media and online commerce, but Apple escaped it for years because iPhones make up less than half of the American smartphone market, according to some estimates, and far less in other countries. Instead, Google’s Android software backs most of the world’s smartphones.

Still, iPhone users spend far more than owners of smartphones running Android, meaning the App Store, which was opened in 2008, has become the dominant marketplace for app makers to reach customers.

Successful antitrust plaintiffs are entitled to triple damages, so the damages could be large if Apple loses the lawsuit. Still, Apple has deep pockets — it generated $266 billion in sales and $59.5 billion in profit in its last fiscal year.

A ruling that forces Apple to reduce its share of app sales is likely to have an even longer-term effect on the company. Apple, which makes most of its sales from iPhones, has tried to shift its business to rely more on revenue from sales of apps and other services. In January, it said it had paid out $120 billion to app makers since 2008, putting its own take from App Store revenue at around $50 billion.

Apple has tried to address some developer concerns about its App Store. In 2016, it announced that it would reduce its take from subscription accounts to 15 percent after the first year.

The App Store has also become a major talking point for Apple’s lobbying efforts. The company has called itself “one of the biggest job creators in the U.S.,” citing the number of jobs generated by companies writing software for the App Store. As of 2017, it said, the app industry had generated more than 1.5 million American jobs in software design and development.

Sandeep Vaheesan, legal director at the Open Markets Institute, a Washington think tank that advocates for stronger antitrust enforcement, said the App Store gave Apple too much power over pricing and allowed it to censor content.

“What Apple has done since the launch of the iPhone is tell all iPhone owners and iPhone app developers that if they want to buy and sell apps, they have to go through the App Store,” Mr. Vaheesan said. “So Apple has set up this app store as a bottleneck where everyone in the iPhone ecosystem must transact.”

Apple shares fell more than 5 percent on Monday, with some investors selling on news of the Supreme Court ruling, as well as the renewed trade war between China and the United States, which poses a risk to the company’s business. Apple relies on China for much of its manufacturing and roughly a fifth of its iPhone sales.

The legal question in the case, Apple v. Pepper, was whether the lawsuit was barred by a 1977 decision in Illinois Brick Company v. Illinois, a case that allowed only direct purchasers of products to bring federal antitrust lawsuits. Apple argued that it was an intermediary and so not subject to a lawsuit.

The majority rejected that argument. “The plaintiffs’ allegations boil down to one straightforward claim: that Apple exercises monopoly power in the retail market for the sale of apps and has unlawfully used its monopoly power to force iPhone owners to pay Apple higher-than-competitive prices for apps,” Justice Kavanaugh wrote.

Apple argued that app developers set their own prices, meaning that consumers should not be able to sue the company. Justice Kavanaugh responded that the argument missed the economic reality of the relationship between Apple and app developers.

“A ‘who sets the price’ rule,” he wrote, “would draw an arbitrary and unprincipled line among retailers based on retailers’ financial arrangements with their manufacturers or suppliers.”

“Under Apple’s rule a consumer could sue a monopolistic retailer when the retailer set the retail price by marking up the price it had paid the manufacturer or supplier for the good or service,” he wrote. “But a consumer could not sue a monopolistic retailer when the manufacturer or supplier set the retail price and the retailer took a commission on each sale.”

“In sum,” Justice Kavanaugh wrote, “Apple’s theory would disregard statutory text and precedent, create an unprincipled and economically senseless distinction among monopolistic retailers and furnish monopolistic retailers with a how-to guide for evasion of the antitrust laws.”

Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan joined Justice Kavanaugh’s majority opinion.

In dissent, Justice Gorsuch said the 1977 decision meant Apple should prevail, and he suggested that the majority had undermined the precedent by questioning all of its basic rationales.

“Without any invitation or reason to revisit our precedent, and with so many grounds for caution, I would have thought the proper course today would have been to afford Illinois Brick full effect,” Justice Gorsuch wrote, “not to begin whittling it away to a bare formalism.”

Chief Justice John G Roberts Jr. and Justices Clarence Thomas and Samuel A. Alito Jr. joined Justice Gorsuch’s dissent.

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