The Recorder: “Pepper” as a Back Door to “Illinois Brick” (and “ARC America”)?

(The Recorder)  Partner Steven Williams and Senior Associate Jiamie Chen of the Joseph Saveri Law Firm today authored the following article for The Recorder entitled, “‘Pepper’ as a Back Door to ‘Illinois Brick’ (and ‘ARC America’)?”

No “Illinois Brick” Issue in “Pepper”

The plaintiffs’ allegations in Pepper, accepted as true for the motion to dismiss order at issue in the appeal, do not require application of the Illinois Brick v. Illinois, 431 U.S. 720 (1977), rule to bar the plaintiffs’ damage claims.  In Illinois Brick, the alleged antitrust violators, concrete block companies, sold the blocks to masonry contractors, who submitted masonry bids to general contractors, who in turn submitted project bids to the customer plaintiffs.  By contrast, the Pepper plaintiffs transacted directly with the alleged antitrust violator, Apple.  The plaintiffs made purchases directly with Apple.  They dealt with Apple and paid Apple.  Apple created the market for iPhone apps, and exercises and maintains exclusive monopolistic control over that market through a slew of alleged anti-competitive conduct, including prohibitions against developers selling iPhone apps through channels other than the App Store, threats to cut off sales by any developer who violates the prohibition, and threats to void the warranties of any iPhone owner who downloads apps from a source other than the App Store.  The only members of the distribution chain here are the plaintiffs, Apple, and the app developers, and no one alleges that the developers have done anything wrong.

Nonetheless, Apple has reframed the inquiry by making fact-based arguments about how the App Store operates and by arguing that Illinois Brick issues are presented because of questions as to how damages might be ascertained.  The 30 percent commission Apple charges app developers is not necessarily the measure of damages to the plaintiffs.  The assertion that damages calculations might require discovery into the conduct of the app developers—an assertion that is in no way certain—is not a basis to dismiss the plaintiffs’ claims.  Perhaps because it tried to deal with Apple’s arguments on their face, the U.S. Court of Appeals for the Ninth Circuit’s opinion strains to carve out an exception to Illinois Brick by characterizing Apple as a distributor, even though there are no intermediaries in the chain of distribution between the alleged antitrust violator, Apple, and the plaintiffs.  The entire Illinois Brick issue can be avoided by recognizing that it is only Apple that is alleged to have violated the antitrust laws, and that the plaintiffs who dealt directly with Apple may assert damage claims against Apple.

Creating a Back Door to Revisit or Overrule the Existing Framework

To date, no party and no amicus brief has explicitly asked the Supreme Court to reconsider or overrule Illinois Brick.  In its amicus brief in support of Apple, the government repeated, nearly verbatim, the same argument from its amicus brief in support of certiorari, that the “regime of parallel federal and state antitrust litigation has proved to be complex and inefficient,” citing to the same Antitrust Modernization Committee (AMC) report.  However, the cited portion of the AMC report lacked any empirical basis for its claim, and the substance of its conclusions has been largely mooted by the enactment of the Class Action Fairness Act (CAFA).  Private antitrust enforcement now tends to take place with multiple claimants before a single federal district judge appointed by the Judicial Panel on Multidistrict Litigation, and the fears of duplication, waste, burden and inconsistent rulings have diminished.  Moreover, while the government muses that “forcing developers and consumers to fight for a piece of the same 30 percent pie” would mitigate the risk of duplicative recovery if both the consumer plaintiffs and the developers were allowed to sue Apple, the “pie” has yet to be defined, and the developers have made no claim for a piece of it.  Ultimately, the government recognizes that “the parties have not asked the court to revisit Illinois Brick or Hanover Shoe, however, and the only question presented is how to apply those precedents.”

No legitimate rationale has yet been expressed in support of overruling Illinois Brick. In the post-CAFA system, almost all related cases alleging violations of the antitrust laws will be centralized before a single U.S. district judge for pretrial proceedings.  This includes class actions on behalf of federal direct purchasers and state law indirect purchasers as well as opt-out plaintiffs, state attorneys general, and the United States.  Discovery will be coordinated among all civil actions, reducing cost and burden and providing efficiency.  Pretrial rulings will be consistent among the cases.  And, in almost all circumstances where the issue has been presented, a single trial of all plaintiffs against all defendants has been scheduled.  On the other hand, overruling the established framework around which modern practice has developed for over 40 years would throw private civil enforcement into uncertainty and turmoil.

However, one amicus brief attempts to wedge open that backdoor even further—to invite the Supreme Court to reconsider an established precedent that has absolutely nothing to do with the Pepper case.  While its amicus brief ostensibly argues for an application of existing precedent to Pepper, the U.S. Chamber of Commerce dedicated a full six pages of its brief to bemoaning the very fact of indirect purchaser class actions and the Supreme Court’s opinion in California v. ARC America, 490 U.S. 93 (1989), that principles of federalism support dual civil antitrust regimes even if antitrust violators might be exposed to liability under both regimes.  The Chamber of Commerce raises the alarm that indirect purchaser actions have found their way into federal court—which, of course, is part of the litigation coordination and efficiency that the Chamber of Commerce and others used to justify their support for CAFA.  The Chamber of Commerce further decries that federal courts are actually certifying these indirect claims as class actions, setting aside the Supreme Court’s longstanding policy, stated in both Illinois Brick and Hanover Shoe, of encouraging and relying on a vigorous system of private antitrust enforcement.  (See, e.g., Hawaii v. Standard Oil, 405 U.S. 251, 262 (1972) (“By offering potential litigants the prospect of a recovery in three times the amount of their damages, Congress encouraged these persons to serve as ‘private attorneys general.’”).)  In other words, the Chamber of Commerce takes issue with the reasonably foreseeable results, after nearly 30 years of establishment and development, of the Supreme Court’s 1989 ARC America opinion.  The Chamber of Commerce fails to mention the billions, if not trillions, of dollars of commerce affected by demonstrated cartel activity in industries ranging from banking, automobiles and automotive parts, electronics, computer components, air passenger and air cargo transportation, to name just a few.  Needless to say, the Supreme Court need not and should not take up the Chamber of Commerce’s invitation for many reasons, including the fact that Pepper does not present any state law claims.

Use the Front Door Instead

The practicalities of legal practice continuously change, and those changes are evident in private antitrust enforcement.  Modern advances in econometric analyses, claim administration, and the processing of voluminous evidence have made once “insurmountable” obstacles now merely difficult.  If the Illinois Brick/Hanover Shoe (and ARC America) framework is to be reconsidered, it should be the product of a planned, well-considered process where all the relevant stakeholders—the plaintiffs bar, the defense bar, economists, academics, consumer welfare groups, industry groups, and interested government agencies—come together and have a say.

Such a measured approach is particularly appropriate here, as Verizon points out in its amicus brief, given the potential interplay of the Supreme Court’s recent opinion in Ohio v. American Express, 138 S. Ct. 974 (2018), with e-commerce cases like Pepper.  After all, Apple in its opening brief specifically argued that its App Store is a two-sided platform, like in Amex, and, presumably, there are direct purchasers on both sides.

Steve and Jiamie’s preceding article for The Recorder on this topic discussed the Illinois Brick/Hanover Shoe framework that governs modern private antitrust enforcement, and whether the Pepper v. Apple, 846 F.3d 313 (9th Cir. 2017), case provides an opportunity for the U.S. Supreme Court to revisit or overrule that framework.  The article evaluates how the Supreme Court should resolve the issues in Pepper.