It was 35 years ago when an electrifying commercial showed bald prisoners in drab gray uniforms watching a televised Big Brother extol the “glorious anniversary” of the “garden of pure ideology, where each worker may bloom, secure from the pests of purveying contradictory truths.” Suddenly a young woman ran up and heaved a sledgehammer into the giant screen, shattering the myth of the single truth and the “unification of thoughts.”
It was December 1984, and the launch of the Apple Macintosh computer. Over the years, many came to wonder if Apple had not simply created its own “garden of pure ideology” by coercing customers to buy Apple products and slavishly following their “geniuses” in antiseptically white showrooms. Now a figure has emerged and shattered the unchallenged domination of Apple.
What was a bit surprising is that this time, the runner throwing the sledgehammer in the red shorts was Supreme Court Associate Justice Brett Kavanaugh, who sided with the four liberal justices to rule that customers could sue Apple over allegedly monopolizing conduct. The case, Apple versus Pepper, could have far reaching consequences for colossal technology companies.
The decision hits the company where it is most dominant and seemingly impenetrable in the “Death Star” also known as the App Store. Entry into the App Store promises access to a largely captive audience of Apple users. Apple claims to feature more than two million apps and generated $26 billion for developers in 2017. The plaintiffs showed how app developers must pay Apple a 30 percent commission, which is then passed on as a 30 percent markup for Apple users.
Apple argued that the arrangement meant Apple customers are not actually direct purchasers from Apple and instead buy from the app developers. It is a legal sleight of hand in that by grabbing the 30 percent commission from app developers, Apple could argue that it was not subject to antitrust laws under a 1977 case, Illinois Brick Company versus Illinois, in which the Supreme Court blocked antitrust damages for “indirect purchasers.”
That was until the figurative sledgehammer hit the screen this week. Not only did Kavanaugh deliver a majority with the left wing of the Supreme Court, but he actually upheld the liberal Ninth Circuit. Apple will now be viewed as a distributor which sells apps to iPhone users directly. That is closer to reality for Apple consumers, who buy what Apple allows in its App Store.
Indeed, Kavanaugh portrayed Apple as that imposing and manipulative Big Brother in antitrust terms, writing that its 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.”
What is equally fascinating is that the dissent to the decision was written by Associate Justice Neil Gorsuch, who of course is the other Supreme Court nominee of President Trump. He suggested that Kavanaugh was revising or ignoring Illinois Brick Company, which is a reasonable view given the similarity of the “pass on” techniques in the two cases. Moreover, Gorsuch warned that Apple could easily evade the ruling by restructuring to have Apple users pay app developers directly, and then have those developers pay a commission to Apple.
That could be true, but the decision clearly shows that antitrust rules are flexible enough to apply to new practices by technology companies to control prices and access to products. The most chilling line of the ruling for those companies may be, “If a retailer has engaged in unlawful monopolistic conduct that has caused consumers to pay higher than competitive prices, it does not matter how the retailer structured its relationship with an upstream manufacturer or supplier.” For consumer advocates, it is the shattering of a myth that will encourage others to sue these companies for predatory practices.
Apple itself previously was found to have engaged in antitrust violations by manipulating the price of eBooks and later settled for $450 million. It has been accused of heavy-handed efforts on music streaming services, and is being targeted by European regulators. It also has been accused of removing or restricting third-party screen-time and parental-control appsto favor its own products. Thus far, Apple largely has been able to engage in monopolizing conduct and, to quote its 1984 commercial, allow “our enemies (to) talk themselves to death, and we will bury them with their own confusion.” They are less confused and more empowered this week.