Apple's Supreme Court Loss Sends Antitrust Shockwaves Through Silicon Valley

The ruling could open the door for similar actions against a wide array of other companies such as Amazon, Google and Microsoft.

By Tony Romm, Reed Albergotti, The Washington Post | Updated: 14 May 2019 13:52 IST

Apple's Supreme Court Loss Sends Antitrust Shockwaves Through Silicon Valley

Apple's loss in a high-stakes Supreme Court case on Monday unsettled Silicon Valley, threatening a wave of new consumer lawsuits and other legal salvos that could challenge the size and power of the tech industry.

For Apple, the 5-4 decision means that iPhone owners can proceed with a class-action case targeting the company's App Store. The suit accuses Apple of engaging in monopolistic practices by forcing Apple device owners to buy developers' games and other software only through the App Store, while Apple takes a cut of some of the sales made there.

The ruling didn't address whether Apple's practices actually violate the nation's antitrust laws. But it nevertheless could have serious repercussions for one of Apple's most lucrative lines of business, while subjecting the company to a protracted legal proceeding that could put its internal decisions and deliberations on full display.

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The ruling, in which conservative Justice Brett Kavanaugh joined the court's four liberal justices, also could open the door for similar actions against a wide array of other companies such as Amazon, Google, and Microsoft, all of which had urged the Supreme Court to side with the iPhone-maker in legal briefs submitted by their top Washington advocates last year.

The justices' decision comes at a moment when prominent academics, tech executives and even US presidential candidates have called for the federal government to probe - and potentially sanction - Apple and other tech companies out of concern that they harm competitors and consumers. Former Vice President Joe Biden, who is running for the Democratic nomination for president, joined that chorus Monday, telling The Associated Press that government should take a closer look at the size of top tech companies.

"The broader feeling in Washington is that tech has to be held accountable," said Rep. Ro Khanna, a Democrat whose district includes a slice of Silicon Valley. He said the court reached the right conclusion in ruling against Apple.

Apple has long argued that it heavily curates its App Store in part to protect consumers from predatory, insecure or harmful software. Reacting to the decision, the company on Monday stressed that it will "prevail when the facts are presented and that the App Store is not a monopoly by any metric."

At the heart of the case is the way Apple handles iPhone and iPad apps created by third-party developers. Apple allows the developer to set the price of an app, but it takes up to a 30% commission for every app sold, rankling some software-makers that essentially see it as a tax. Last quarter, Apple posted nearly $11.5 billion in services revenue, which includes App Store sales. According to market research firm Kantar, Apple has a 45.5% share of the US market for smartphones. The Pew Research Center estimates that 77% of adult Americans owned a smartphone last year.

The 2011 lawsuit was led by plaintiff Robert Pepper, who argued that consumers ultimately felt the brunt of Apple's policies because developers raised the prices of their apps to cover Apple's commission. In response, Apple pointed to a decades-old Supreme Court precedent that held that only the "direct purchasers" of a service were eligible to bring such an antitrust lawsuit. The iPhone giant said it acted only as the intermediary in the transaction, providing a storefront where consumers found and purchased the apps they later installed.

But the Supreme Court on Monday rejected Apple's interpretation. The ruling found that the iPhone giant's legal arguments sought only to "gerrymander Apple out of this and similar lawsuits," wrote Kavanaugh, who was appointed by President Donald Trump, on behalf of a majority of the justices. Speaking from the bench, he said Apple's theory of the case "contradicts the text of the antitrust statute, which broadly affords any injured party a right to sue."

In doing so, the justices stressed that their decision was narrow, leaving a key element of the lawsuit - whether Apple acted anti-competitively - unresolved. That matter is left for a lower federal district court to determine, a process that could take years and result in Apple paying monetary damages, and making changes to its business practices, if it loses.

The district court initially had ruled in Apple's favour, finding that the plaintiffs did not have the legal standing to sue. But that decision was reversed by the 9th Circuit Court of Appeals. Before the Supreme Court's decision, 30 states and the District of Columbia asked the justices to rule in a way that could make it easier for consumers to bring such antitrust lawsuits.

In a statement, Apple on Monday defended its practices. "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," said spokesman Josh Rosenstock. "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 Supreme Court's decision still could have broader implications the tech industry. "For anybody who's got a platform, this is one less thing to hide behind," said a partner at one prominent Silicon Valley law firm who was not authorized to speak publicly.

"I would expect a bunch more cases to be filed against a bunch more companies," said Avery Gardiner, a top competition expert at the Center for Democracy and Technology, a Washington-based think tank. "There are other people who have app stores. Google has an app store. Somebody is going to be looking hard for practices that might have had effects on the prices in the Google app store."

Theoretically, a company such as Amazon could also be a target, said Valarie Williams, an antitrust lawyer at the firm Alston & Bird who has represented companies including Microsoft and Nokia. "For some online marketplaces like Amazon, where consumers go online and pay Amazon but a seller is actually a third party, this seems to be (saying) those are direct purchases," she added. Any case would hinge on whether Amazon actually acted anti-competitively, she said.

Google declined comment. Amazon did not respond to requests for comment. (Jeff Bezos, the CEO of Amazon, owns The Washington Post.)

Anticipating such a threat, Amazon, Google and other tech giants had urged the nine justices to rule in favour of Apple ahead of oral arguments last year. Speaking through trade organizations, such as the Computer & Communications Industry Association, they argued that allowing the lawsuit to proceed would result in "significant adverse effects on competition by deterring the development of innovative platform business services."

The CCIA reiterated that fear Monday, saying in a statement that the decision "may unintentionally expose businesses offering digital platform services to unintended liability." Another group - ACT, The App Association, which counts Apple and Microsoft as sponsors - also expressed fears of a deluge of new lawsuits.

"Under this decision, only trial lawyers will benefit from the simplification of platforms as a retailer and vendor model," Morgan Reed, the group's leader, said in a statement.

The Supreme Court's decision against Apple marks only the latest antitrust headache for the tech industry. Last week, one of Facebook's co-founders, Chris Hughes, called for the U.S. government to dismantle the social media company. Federal regulators recently have launched a special task force to examine whether the industry poses threats to competition and consumers. And 2020 presidential candidates, especially Sen. Elizabeth Warren, D-Mass., have threatened even tougher regulation of tech. Warren previously has criticised Apple for its handling of the App Store.

The lawsuit also adds to Apple's antitrust woes globally: In Europe, the tech giant faces a potential investigation for its practice of collecting a commission from developers who sell through its App Store. The music-streaming service Spotify officially complained about the practice to regulators in Brussels, who historically have been more aggressive than their American counterparts. Apple previously has contested Spotify's claims, arguing that it has never sought to limit access to its rival's offerings.

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