Consumers can sue the tech giant over its pricing practices,
Supreme Court says
By Brent Kendall and Tripp Mickle
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 (May 14, 2019).
WASHINGTON -- Consumers can sue Apple Inc. for forcing them to
buy apps exclusively from the tech giant, the Supreme Court ruled
Monday, threatening billions of dollars in revenue that the company
is counting on to make up for slowing iPhone sales.
The antitrust suit alleges consumers pay inflated prices because
Apple requires that all phone software be sold and purchased
through the company's App Store. Apps would be cheaper if software
developers could sell them directly and bypass Apple as a
middleman, the lawsuit alleges.
Apple typically takes a 30% cut of every app it sells, and a 15%
cut of subscriptions sold through the app store after subscribers'
first year. The consumer lawsuit also complains about other App
Store rules that affect pricing, such as Apple's requirement that
every app price point end in "99 cents," meaning developers can
only set prices in one-dollar increments like $1.99, $2.99 and so
forth.
The Supreme Court's decision focused on a preliminary issue in
the case: whether consumers had a right to sue Apple over these
practices. The court, in a 5-4 opinion by Justice Brett Kavanaugh,
said they did.
The court rejected Apple's arguments that consumers can't sue
because it is the app developers, not the company, that set app
prices.
"If accepted, Apple's theory would provide a road map for
monopolistic retailers to structure transactions with manufacturers
or suppliers so as to evade antitrust claims by consumers and
thereby thwart effective antitrust enforcement," Justice Kavanaugh
wrote in a 14-page opinion.
The case marked the first 5-4 decision written by Justice
Kavanaugh, a Trump appointee who joined the court in October after
a bitter confirmation battle. It also came with a twist.
During the confirmation process, liberal critics accused Justice
Kavanaugh of holding a cramped view of antitrust law, but Monday's
opinion was joined by four liberal justices -- Ruth Bader Ginsburg,
Stephen Breyer, Sonia Sotomayor and Elena Kagan -- and articulated
a view of the law that was more expansive than what Justice
Kavanaugh's four other conservative colleagues could accept.
Justice Neil Gorsuch, President Trump's other appointee, led the
dissenters, saying the decision created a "senseless" rule that
would be complicated to apply in practice, including in the Apple
case, where lower courts would now have to probe how the iPhone
maker's rules might have affected the pricing decisions of app
developers.
Joining him in dissent were Chief Justice John Roberts and
Justices Clarence Thomas and Samuel Alito.
The high court didn't address the merits of the plaintiffs'
claims. If they ultimately win, the case could change the way apps
are sold and make Apple liable for significant monetary damages.
The case could take one to two years, if not longer, to resolve,
and several important legal issues must still be settled.
An Apple spokeswoman said the company is confident it will
prevail in the lawsuit. "The App Store is not a monopoly by any
metric," the spokeswoman said, adding that the company marketplace
was "the safest, most secure and trusted platform for
customers."
Mark Rifkin, a lawyer for the plaintiffs, said his clients were
gratified the Supreme Court affirmed consumers could sue alleged
monopolists. "No doubt the anticompetitive profit is a significant
part of the price for iPhone apps," he said. "The injury will
surely be in the billions of dollars."
The court's decision came on a day when Apple shares already
were trading sharply lower because of rising U.S.-China trade
tensions. Apple assembles most of its devices in China and counts
on China for about one-fifth of its sales. Apple's stock fell 5.8%
Monday to $185.72, while the broader market declined 2.4%.
Monday's ruling is the latest headache in Washington for Big
Tech. President Trump and some lawmakers, including some who are
running for the Democratic presidential nomination, have been vocal
in criticizing dominant Silicon Valley firms, while the Federal
Trade Commission recently launched a task force to take a closer
look at potential anticompetitive behavior in the tech sector.
The decision also signaled that online platforms can't
necessarily escape legal liability by arguing they are neutral
middlemen between buyers and sellers.
"The court is not just taking as dogma the traditional notion
that these platforms have no direct sales relationship with
consumers," said Gene Kimmelman, president of Public Knowledge, a
consumer advocacy group.
App-store sales account for about 35% of Apple's ballooning
services business. Apple has pointed to that business as a bright
spot in the face of declines in the number of iPhones sold. The
services business grew by about 30% during the last fiscal year, to
$39.75 billion.
"Apple doesn't have to all of a sudden change, but it's another
pressure point," said Ben Schachter, an analyst with Macquarie
Group. A final consumer victory in the lawsuit against Apple could
force the company to reduce its commission on app sales and
decrease its pretax earnings by as much as 15%, he said.
The App Store offers developers access to 900 million iPhones
world-wide and generally reaches a more affluent audience than
rivals. Users of iPhones and iPads spent an estimated $46.6 billion
on apps in 2018, almost double what was spent for apps from rival
service Google Play, according to Sensor Tower, a market research
firm.
Apple has said it is entitled to take a share of app sales
because it built the store and employs staff who review 100,000
submissions weekly for compliance with its rules around privacy and
content.
Apple's rules differ somewhat from those of Alphabet Inc.'s
Google, which developed the Android phone operating system. Google
also takes a 30% cut of apps sold in its Google Play store, but
Android phone users can buy apps elsewhere, including directly from
the software maker in some cases.
Apple's practice of vetting apps and developers, as well as its
prohibition of third-party app stores, has resulted in it having
about one-tenth the amount of malware on its iOS operating system
as Google does on the Android operating system, said JT Keating,
vice president of product strategy at Zimperium, a mobile security
company.
Dow Jones & Co., publisher of The Wall Street Journal, has a
commercial agreement to supply news through Apple services.
Write to Brent Kendall at brent.kendall@wsj.com and Tripp Mickle
at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
May 14, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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