Textualism and Uncertainty in Antitrust After Apple v. Pepper

The Business Suit, DRI Commercial Litigation Committee Newsletter

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The U.S. Supreme Court’s newest Justices are both known as textualists and conservatives, but their conflicting opinions in Apple v. Pepper, 139 S. Ct. 1514 (2019), flag antitrust as a potential area of doctrinal turbulence in the coming terms. They also amplify uncertainty over new applications of century-old statutes and decades-old precedent. One of the conservative textualists authored a majority opinion joined by all four liberal Justices. The other authored a policy-driven dissent for the remaining conservative Justices that largely ignored the statutory text. As Apple demonstrates, the conservative Court majority—and even its committed textualists—have competing visions of the statutes and doctrines at the heart of antitrust law.

Apple presented the question of whether consumers have standing to sue an alleged antitrust-violating retailer who sold them a product at an inflated price set by third parties. Writing for the Court with the support of the four liberal Justices, Justice Kavanaugh held that the third parties’ pricing decisions should not prevent consumers in privity with an alleged antitrust violator from filing suit. Justice Gorsuch, joined by the remaining conservative Justices, dissented.

The case turned on a “pass-through” doctrine the Court read into the Clayton Act of 1914 in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), to “simplif[y] administration” and “improve[] antitrust enforcement.” That doctrine prevents plaintiffs from seeking damages against antitrust violators more than one step removed in the stream of commerce. Traditional applications of the doctrine prevent consumers from reaching over a retailer whose suppliers engage in anticompetitive practices to seek damages from the alleged antitrust violators upstream. Anyone injured has standing to seek injunctive relief, but antitrust violators are only liable for damages suffered by “direct purchasers.”

Apple asked the Court to extend that doctrine to block Pepper from seeking damages over purchases of smartphone software applications (“apps”) purchased in Apple’s App Store, the only marketplace for apps compatible with Apple’s devices. Problematically for Apple, Pepper and every other App Store customer purchased these apps directly from Apple. Apple charged third-party developers an annual membership fee, decided which apps could appear for sale in the App Store, and collected customers’ payments. Beyond that, however, Apple allowed developers to set the prices for their apps (as long as those prices ended in 99 cents) and remitted 70 percent of each transaction to the developers. Apple argued that the pass-through doctrine should apply because app developers ultimately set the prices the consumers paid, and any impact of Apple’s policies on the developers’ pricing decisions was more than one step removed from the consumers’ purchases.

Kavanaugh was not persuaded. Instead, he began with “the broad text of §4” of the Clayton Act and found authority that “‘any person’ who has been ‘injured’ by an antitrust violator” may sue for damages. He confirmed that reading with precedent “consistently stat[ing] that ‘the immediate buyers from the alleged antitrust violators’ may maintain suit against the antitrust violators.” Consumers were allegedly harmed by anticompetitive practices, and the Court was not willing to read any limitations into the broad statutory text to withhold standing from consumers who purchased a product directly from the retailer who allegedly influenced the market through anti-competitive practices.

By contrast, Gorsuch accepted Apple’s pass-through characterization by emphasizing precedent and policy preferences grounded in proximate cause. He viewed the App Store as a marketplace where “plaintiffs bought apps from third-party developers (or manufacturers) in Apple’s retail Internet App Store, at prices set by the developers.” The dissent acknowledged that “the plaintiff app purchasers happen to have purchased directly from Apple,” but argued that focusing on privity “exalts form over substance.” Gorsuch found “[n]o antitrust reason” to treat transactions differently based on whether Apple or the developers stand in privity with the purchasers. Neither, however, did the dissent offer any detailed analysis to support the argument that the plaintiffs’ alleged damages were not proximately caused by Apple’s policies.

Kavanaugh’s majority agreed with the dissent that standing should not turn on formalism, but reached the opposite conclusion. The dissent reasoned that Illinois Brick would have protected Apple if it had influenced the market without standing between the developers and the consumers and would have extended the doctrine to protect Apple. The majority, however, seemed prepared to abandon the privity requirement entirely rather than “allow a monopolistic retailer to insulate itself from antitrust suits by consumers” through formalistic restructuring. Absent a textual hook for the limitation on standing, the majority was unwilling to “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.”

The lack of a firm textualist foundation is not surprising in an antitrust decision, given that a literal reading of the statutory bans on all contracts in restraint of trade would prohibit virtually all contracts and business relationships. It raises questions, however, particularly in combination with state and federal authorities’ renewed scrutiny of Big Tech’s impact on innovation and pricing and the Court’s uncertain commitment to stare decisis. Innovators in this area need to consider not only whether their plans conform to precedent distinguishing pro-competitive and anti-competitive restraints, but also how to persuade the courts and the executive branch that those distinctions are more than “unprincipled and economically senseless” formalism.

Beyond the precise holding and the reasoning of the conflicting opinions, Apple expands a set of 5-4 majorities in which one textualist Justice’s interpretation leads to the same judgment as the interpretive approaches of the four liberal Justices. These majorities have emerged in cases interpreting criminal statutes, United States v. Davis, 139 S. Ct. 2319 (2019) (Gorsuch, J.), and statutory provisions governing federal jurisdiction to remove class actions from state courts, Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743 (2019) (Thomas, J.). Add antitrust to the list. Given the breadth of the literal statutory prohibitions and the common-law development of pragmatic doctrines distinguishing pro-competitive restraints from anti-competitive ones, this one bears watching.

The original article, "Textualism and Uncertainty in Antitrust After Apple v. Pepper," was published in The Business Suit, the newsletter of the DRI Commercial Litigation Committee, on December 5, 2019.

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