This article originally appeared in the Washington Legal Foundation Legal Pulse, February 7, 2017
In a departure from well-settled case law, the US Court of Appeals for the Ninth Circuit recently handed down a decision that may undermine the longstanding Illinois Brick doctrine. The policy implications of the decision bear further watching, as courts grapple with the rationale underlying the doctrine in an ever-evolving technological landscape.
The Illinois Brick doctrine has long been a tool to limit attenuated antitrust lawsuits, and ensure that those directly harmed by an antitrust violation are the ones who can recover damages caused by the violation. Simply put, the doctrine so-called because it flows from the Supreme Court's holding in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) holds that the only parties who may recover damages for an antitrust violation are those who purchased directly from the offending firm. Indirect purchasers i.e., the customers of the direct purchasers are barred from recovery.
Many policy rationales underlie the Illinois Brick doctrine, including the risk of double recovery and the difficulty of calculating and apportioning damages as one moves further down the chain of distribution. Among the key policy objectives advanced by the doctrine is deterrence. The doctrine concentrates the potential recovery, and therefore the incentive to sue, in the direct purchaser to promote "the effectiveness of the antitrust treble-damages action." Illinois Brick, 431 U.S. at 729.
The case in which the Ninth Circuit took up the Illinois Brick doctrine is In re Apple iPhone Antitrust Litigation, No.14-15000, slip op. (9th Cir. Jan. 12, 2017). The plaintiffs, individual purchasers of iPhone apps from Apple's "App Store," alleged harm from Apple's monopolization of iPhone app sales. Apple does not buy or resell apps. The direct sellers are the thousands of app developers who create apps for use on iPhones, and sell them through Apple's electronic marketplace. Through its App Store platform, Apple is in effect the exclusive distributor of iPhone apps. Apple charges app developers a 30% commission on each app purchased in the App Store. Plaintiffs alleged that as a result of Apple's monopolization, Apple charged app developers supra-competitive commissions, and that the plaintiffs consequently paid more for apps than they otherwise would. Pls. Opening Brief, at 56-59 (ECF No. 7-1).
The district court dismissed the suit, holding that plaintiffs were indirect purchasers under Illinois Brick. Although the plaintiffs purchased apps through the App Store, the district court found that Apple merely provided a platform through which the app developers could sell their products. To the extent the app developers may have been overcharged on commissions as a result of Apple's alleged monopolization, the parties directly harmed would be the app developers themselves, not their customers who would stand in only an indirect relationship to Apple.
The Ninth Circuit overturned the district court. Despite the fact that Apple never buys or resells apps, the court purported to apply a "functional" analysis of Illinois Brick to find that plaintiffs had standing to sue. The court based its analysis "on the fundamental distinction between a manufacturer or producer, on the one hand, and a distributor, on the other." The court found that Apple operates as a distributor of iPhone apps, "selling them directly to purchasers through its App Store." Slip op. at 22. As a result, the court found the plaintiffs to be "functionally" direct purchasers with standing to sue under Illinois Brick.
Through creation of its "functional" standard for antitrust standing, the Ninth Circuit created a conflict with the Eighth Circuit's holding in Campos v. Ticketmaster, 140 F.3d 1166 (8th Cir. 1998). In Campos, class-action plaintiffs alleged that Ticketmaster monopolized the market for ticket distribution services. As in the Apple litigation, Ticketmaster served as an exclusive distributor. Ticketmaster had exclusive ticket-distribution relationships with a variety of concert promoters at venues throughout the United States. Similar to Apple, plaintiffs alleged that Ticketmaster charged supra-competitive service and convenience fees as a result of its alleged monopolization of ticket distribution services. Unlike Apple, however, the Eighth Circuit found the plaintiffs to be indirect purchasers who lacked standing to sue under Illinois Brick. The court found that "ticket buyers only buy Ticketmaster's services because concert venues have been required to buy those services first. ... [S] uch derivative dealing is the essence of indirect purchaser status." Id. at 1171.
The Ninth Circuit's Apple decision has a number of significant implications. First, given the prevalence of electronic marketplaces in the digital age, the decision has the potential to substantially cut back on the Illinois Brick indirect purchaser rule. As the defendants noted in their petition for rehearing, electronic marketplaces sponsored by companies such as Facebook, Google, and eBay are ubiquitous. This is not some narrow ruling that will not extend far beyond the specific facts presented. The scope of the Ninth Circuit's decision has the potential to be vast.
Second, it is interesting that the Ninth Circuit reached out to create a conflict with the Eighth Circuit on facts that appear even more favorable to defendants than did those in Ticketmaster. Unlike in Ticketmaster, Apple does not impose service charges or convenience fees directly to purchasers of apps on its App Store. Rather, the app developers set the prices for their apps, and Apple charges the app developer a 30% commission. Thus, the argument for a direct pricesetting relationship between Apple and the purchaser appears even more attenuated than did the relationship in Ticketmaster. Yet, the Ninth Circuit came to the opposite conclusion on less favorable facts.
Third, Apple's rehearing request merits continued monitoring. As Apple noted, the appeals court appeared to ignore a recent defendant-favorable decision that was the focus of the district court's decision dismissing the case. In Crayton v. Concord EFS, Inc. (In re ATM Fee Antitrust Litigation), 686 F.3d 741 (9th Cir. 2012), the Ninth Circuit rejected antitrust standing for a group of plaintiffs whose claims were based on a "pass-through" theory similar to the theory relied on by the plaintiffs in Apple. Apple has argued that the court's failure even to address the ATM Fee case, along with the circuit split noted above and the decision's potential for significant impact on the world of digital commerce, warrants an en banc review by the full court.
Finally, regulated entities should be considering the impact the Ninth Circuit's decision might have on a chief policy reason for the indirect purchaser rule: deterrence. A key goal of antitrust enforcement whether government or private is deterrence of anticompetitive conduct. The goal of the indirect-purchaser rule is to ensure that "a treble-damages plaintiff is available to deprive antitrust violators of `the fruits of their illegality.'" Illinois Brick, 431 U.S. at 733.
Many influential antitrust thinkers have noted the importance of the indirect purchaser rule in promoting antitrust deterrence. For example, in a seminal article, Professor Landes and Judge Posner noted in 1979 that "the direct purchaser is a more efficient enforcer of the antitrust laws than the indirect purchaser and should therefore be given maximum incentive to bring antitrust suits." By concentrating the incentive to sue in the direct purchasers, the Illinois Brick rule maximizes this desirable deterrence effect. "[E]ven if direct and indirect purchasers were equally efficient antitrust enforcers, and even if allocation problems could be solved without seriously depleting the recovery pool, deterrence would be weakened if the right to sue were divided among more parties, so that each claim was relatively small." Landes & Posner, Should Indirect Purchasers Have Standing to Sue Under the Antitrust Laws? An Economic Analysis of the Rule of Illinois Brick.
By dividing the right to sue and diluting the potential recovery available to the app developers for any alleged anticompetitive conduct engaged in by Apple, the Ninth Circuit may be undermining the very deterrent effect the antitrust laws are designed to promote.
The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations, nor should they be considered a substitute for taking legal advice. Squire Patton Boggs. All Rights Reserved 2017