AAPL Apple Inc

By Brent Kendall 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 27, 2018).

WASHINGTON -- Apple Inc.'s exclusive market for selling iPhone apps came under fire at the Supreme Court Monday, as justices considered whether consumers should be allowed to proceed with a lawsuit alleging the company has an illegal monopoly that produces higher prices.

The plaintiffs are a group of consumers challenging Apple's requirement that all software for its phones be sold and purchased through its App Store. Their class action lawsuit seeks damages on behalf of people who have purchased iPhone apps.

App developers can only reach iPhone users through Apple's store, and the company charges the developers a 30% commission.

"Apple directed anti-competitive restraints at iPhone owners to prevent them from buying apps anywhere other than Apple's monopoly App Store," plaintiffs' lawyer David Frederick told the court during an hour-long oral argument. "As a result, iPhone owners paid Apple more for apps than they would have paid in a competitive retail market."

The case comes to the court on the preliminary but critical question of who has the legal right to sue over Apple's alleged monopoly. If the justices allow the lawsuit to proceed, the case has the potential to force changes to how apps are sold, and it could expose Apple to a significant monetary judgment if the company is found to have violated antitrust laws.

The iPhone maker argues that consumers can't sue because the company doesn't directly set app prices, a responsibility that lies with the app developers. Apple says it only serves as a conduit, and consumers aren't really buying apps from the company.

If anyone can sue over the alleged monopoly, Apple says, it would be the app developers themselves, since they're the ones paying to feature their software in its App Store. The developers "are buying a package of services, which include distribution and software and intellectual property and testing," lawyer Daniel M. Wall, representing Apple, told the court.

Apple in a statement said it provides "a safe, secure and trusted storefront for customers" that has fueled app growth, "leading to millions of jobs in the new app economy and facilitating more than $100 billion in payments to developers worldwide."

None of the justices grew up with smartphones or the internet, as they sometimes point out themselves in court, but in this case it was clear they had familiarity -- and personal experience -- with the issue.

"I pick up my iPhone. I go to Apple's App Store. I pay Apple directly with the credit card information that I've supplied to Apple. From my perspective, I've just engaged in a one-step transaction with Apple," said Justice Elena Kagan. She suggested that kind of direct commercial relationship with the company was enough to give consumers a right to sue.

The court's other three liberal justices voiced similar views.

Some conservative justices also questioned Apple's position, although at times for different reasons. Justices Samuel Alito and Neil Gorsuch questioned the propriety of a Supreme Court precedent from 1977 -- relied upon heavily by Apple -- that under federal law limits claims for antitrust damages to immediate victims of the anticompetitive conduct.

That case prohibits a purchaser from suing someone a few links earlier in the supply chain simply because higher prices were eventually passed on to them. Justices Alito and Gorsuch, however, suggested that 40 years of economic evidence has undermined the logic of the court's earlier ruling.

"I really wonder whether, in light of what has happened since then, the court's evaluation stands up," Justice Alito said. He asked whether any of the tens of thousand of app developers had ever sued Apple.

No, said Mr. Wall. He noted that "no state or federal antitrust agency has ever sued either," suggesting the lack of legal action could reflect the absence of any anticompetitive behavior on Apple's part.

The Supreme Court hasn't explicitly said it would consider overruling past precedent in the case -- which it generally does when that is a possibility -- so it's not clear how Monday's discussion will factor into the outcome. A federal appeals court previously allowed the lawsuit against Apple to proceed, and the Supreme Court is considering that ruling.

Chief Justice John Roberts spoke most sympathetically of Apple's position, echoing the concern behind the 1977 ruling that companies could face dueling lawsuits and duplicative financial damages from different groups of plaintiffs over the same behavior.

Apple's app distribution system for iPhones is different from what consumers use for phones issued by an array of companies that operate on the Android system developed by Alphabet Inc.'s Google.

In addition to Google Play, the leading Android app store in the U.S., there are a number of smaller stores, including those provided by Amazon.com Inc. and Samsung Electronics Co. Developers such as Epic Games Inc., the maker of Fortnite, also have gone direct to consumers using Android.

Apple's iOS operating system has a 40% market share in the U.S. compared with Android's 60% share, according to Kantar Worldpanel, a market research firm.

The Supreme Court's decision is expected by the end of June.

--Tripp Mickle contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

November 27, 2018 02:47 ET (07:47 GMT)

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