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Justice Kavanaugh's Apple decision has 'shaken up' antitrust law

Erin Fuchs
Deputy Managing Editor

President Donald Trump’s latest appointee to the Supreme Court joined with liberal justices on Monday to green light a consumer class action accusing Apple (AAPL) of monpolizing the market for iPhone apps.

That appointee, Justice Brett Kavanaugh, wrote the majority opinion holding that iPhone owners qualified as “direct purchasers” with the right to sue Apple for allegedly monopolizing the market for apps through its App Store.

Apple’s stock fell 6% on Monday.

“We got an unexpected boost to antitrust enforcement from Justice Kavanaugh,” says John Kirkwood, a professor of law at Seattle University School of Law and an adviser to the American Antitrust Institute.

Kirkwood noted that Kavanaugh has in the past been pro-defendant in antitrust cases, as are many conservative judges.

“He’s shaken things up here. He’s not a reliable vote with the other four conservatives,” Kirkwood said. “There’s more chance of future antitrust enforcement victories.”

Supreme Court Associate Justice Brett Kavanaugh, arrives to hear President Donald Trump deliver his State of the Union address to a joint session of Congress on Capitol Hill in Washington, Tuesday, Feb. 5, 2019. (AP Photo/Carolyn Kaster)

The dispute stems from Apple’s policy of charging a 30% commission fee on every single app sale and barring developers from selling their apps elsewhere. The iPhone consumers who sued claimed that Apple effectively passed that 30% fee onto consumers, who had no choice but to buy those apps on the App Store.

‘A win for common sense’

For its part, Apple contended that the iPhone consumers couldn’t file an antitrust lawsuit because they were not “direct purchasers” of the apps. Rather than buying apps from Apple, they purchased them from developers because it was those developers that set the prices for the apps. Apple tried to dismiss the suit, claiming it was merely the “sales and delivery agent” through the App Store.

Justice Kavanaugh’s majority opinion takes down that argument, contending, “The iPhone owners pay the alleged overcharge directly to Apple.”

It doesn’t matter that the Apple lets developers set the prices, the justice said, noting such a rule “would draw an arbitrary and unprincipled line among retailers based on retailers’ financial arrangements with their manufacturers or suppliers.” The opinion affirms an appellate court’s decision and paves the way for consumers to band together in a class action to continue their lawsuit against Apple.

The court’s reasoning “got it right this time,” according to Randy Stutz, vice president of legal advocacy for the American Antitrust Institute.

Apple Chief Executive Officer Tim Cook poses for a picture with a customer at the grand opening of the new Apple Carnegie Library store in Washington, U.S., May 11, 2019. REUTERS/Joshua Roberts

“The important takeaway is that a retail monopolist cannot escape antitrust liability for overcharging its customers by choosing to adopt an agency business model rather than a wholesale model,” Stutz added, in an email message. “Particularly in an era of powerful internet platforms, this is a win for common sense.”

The App Store has ‘changed our daily lives’

While a lower court still has to decide the merits of the case, the stakes for Apple here are high since its App Store represents a major part of the services business that it’s increasingly relying on as iPhone sales slow down. In its latest earnings report last month, Apple reported that iPhone sales were down while its services segment had grown 16% year-over-year to $11.5 billion.

In a court filing, Apple acknowledged the importance of the store that now offers more than 2 million apps. “The App Store has been so successful in facilitating app development that some commentators argue it was as much or more important than the iPhone itself to the way that smartphones changed our daily lives,” Apple said.

If Apple loses in the lower court, it may have to pay damages to iPhone users and may also not be able to charge its full 30% commission anymore. Considering that App Store revenue is expected to top $46 billion in 2019, Apple has a lot to lose if a court finds it has an illegal monopoly on that service.

Apple released the following statement after the Supreme Court’s decision: “Today's decision means plaintiffs can proceed with their case in District court. We’re confident we will prevail when the facts are presented and that the App Store is not a monopoly by any metric. We’re proud to have created the safest, most secure and trusted platform for customers and a great business opportunity for all developers around the world. Developers set the price they want to charge for their app and Apple has no role in that. The vast majority of apps on the App Store are free and Apple gets nothing from them. The only instance where Apple shares in revenue is if the developer chooses to sell digital services through the App Store.

Developers have a number of platforms to choose from to deliver their software — from other apps stores, to Smart TVs to gaming consoles — and we work hard every day to make our store the best, safest and most competitive in the world.”

A lawyer for the consumers, David Frederick, released this statement: “We’re gratified the Supreme Court today recognized the right of consumers to sue Apple for the damages they sustain from Apple’s monopoly control over the distribution of applications on iPhones. The decision is important for upholding consumer protections against the dangers of monopoly retailers like Apple. Apple’s monopoly control has distorted the prices for apps and it’s time for that abuse of monopoly power to end.”

Erin Fuchs is deputy managing editor at Yahoo Finance.