Apple v. Pepper: Can Illinois Brick Survive Ohio v. Amex, or Is Antitrust On Two Sided-Platforms Possible or Effectively Dead?

Last term the Supreme Court decided Ohio v. American Express, an antitrust case in which the Supreme Court held that when analyzing whether conduct harmed consumers (and is thus a cognizable injury under the antitrust laws based on the current “consumer welfare standard“), if the object of the case is a two-sided market, the Court must analyze both sides of the market, i.e., the consumer facing side and the merchant facing side, to determine if the conduct causes harm. If vertical restraints on the merchant side of the platform produce benefits to consumers on the other side, then the restraints do not violate the antitrust law — even if they prevent new competitors from successfully emerging. In†Ohio v. Amex, the court reasoned that an “anti-steering provision” that prevented merchants from directing consumers to other credit cards with lower swipe fees (the amount a merchant pays the card) was offset by Amex providing benefits such as travel services (at least to platinum members) and various discount and loyalty reward programs. The court found this consumer benefit offset the cost to merchants of the higher swipe fees (as the dissent observed, the majority did not address the finding of the district court that these higher swipe fees were passed on to consumers in the form of overall higher prices).

 

While†Ohio v. Amex†dealt with credit cards, folks like Lena Kahn have argued that because digital platforms such as Facebook are also “two-sided markets,” this decision will make it extremely difficult to go after digital platforms. As long as the company justifies its conduct by pointing to a consumer benefit, such as giving the product away for free (or selling at a reduced cost in the case of companies like Amazon), it is hard to understand what harm to the folks on the other side of the market will satisfy the consumer welfare standard. Or, in other words, it would appear under†Ohio v. Amex†that even if a firm like Amazon or Facebook does things to prevent a competitor or extract monopoly rents from the non-consumer side, as long as consumers benefit in some way everything is cool.

Others have argued, however, that we should not read†Ohio v. Amex†as bleakly as this. Since the majority did not address the findings of the district court, the majority did not rule out that exercise of market power over the merchant side could never cause harm to consumers and thus violate the consumer welfare standard. Rather, taking the decision at face value, those more optimistic about the future of antitrust and two-sided markets maintain that the district court erred in†Amex by focusing on the harm to competition, rather than how that harm directly impacted consumers (again, the dissent points out the district court did focus on the harm to consumers, but the majority makes no comment on these findings, so there is no negative case law about whether a merchant voluntarily passing on the higher swipe fees in overall higher prices is a cognizable harm).

 

Recently, the Supreme Court heard argument in Apple v. Pepper.† As I explain below, although†Apple v. Pepper†addresses standing rather than a finding of a violation of the antitrust law itself, it should provide further guidance on whether antitrust law remains relevant in the era of two-sided markets. More below . . . .

Some Background On Apple v. Pepper.

 

As just about everyone in the universe knows, Apple makes the iPhone and controls what applications (apps) can be loaded on the iPhone through control of the Apple “App Store.” Apple controls a substantial share of the smart phone market generally and, of importance here, Apple controls virtually the entire iPhone app market through access to its app store and control over the operating system, IOS. Critically, Apple takes a 30% commission for every app sold through its app store.†

Plaintiffs here are Apple customers, rather than app developers, so they represent the customer side of the platform. They claim to suffer harm because Apple, which exercises monopoly power over compatible applications through its control of the platform, imposes conditions that jack up the price of the applications. Assuming one can prove harm in a two-sided market, and assuming the court either accepts that iPhones are their own market or that they have sufficient market share to exercise market power over application developers, this would seem to satisfy the analysis in†Amex. Consumers pay more than they would in a competitive market, consumers are bringing the action, and if the other elements of the antitrust law are satisfied, then it is an antitrust violation. So while antitrust actions may be harder to bring against two-sided platforms in a post-Amex†world, it is not actually dead yet.

Hitting the†Illinois Brick†Wall.

The problem with this theory, as the district court found, is the 1977 Supreme Court Case†Illinois Brick Co. v. Illinois. In that case, purchasers of buildings tried to sue the company that sold bricks to local area construction companies for violating the antitrust law and driving up the price of bricks. The Supreme Court ruled that those indirectly harmed by a violation of the antitrust laws did not have standing to sue, even if they suffered from the higher prices as a result. (“Standing” is a legal concept about who can bring a case. I won’t try to explain it here. Suffice it to say that no standing means you can’t bring the lawsuit.) Although the construction companies had standing because they had a direct relation with the company allegedly violating the antitrust law, the customers of the construction companies did not. Even though the construction companies passed through the higher prices to consumers (thus satisfying harm to consumers under the “consumer welfare” standard), the†Illinois Brick†Court ruled that Congress did not intend to allow antitrust law suits to proceed on a theory of “pass through” harm. Accordingly, an indirect purchaser, such as the purchasers of buildings made with the more expensive bricks, have no standing and cannot bring the antitrust case.

Apple argues that the iPhone customers are indirect customers of Apple and direct customers of the application developers. Because Apple operates a “two-sided market,” it allows app developers to set the price of the applications. Under this theory, Apple negotiates with the app developer for access to the Apple platform. The app developer then sells the application directly to the iPhone customer — with the App Store merely acting as an agent of the application developers. Apple collects the total fee, deducts its commission, and passes the rest back to the developer. The iPhone customers therefore lack standing to bring the case against Apple, since Apple is merely passing through the price set by the app developers the same way the construction companies passed through the price of the bricks.

The iPhone customers argue that Apple has a direct relationship with the iPhone customers, not merely with the application developers. Under their theory, Apple is much to involved in actually setting the terms under which the app developers will set the price and sell their goods. As an initial matter, these customers buy their applications via the Apple app store (unlike the purchasers of buildings in Illinois Brick, who had no direct contact with the brick manufacturer). Given that Apple controls so many aspects of the pricing and sale of the apps, the iPhone customers argue that they have a direct relationship with Apple as well as with the app developers, and therefore have standing to sue under the antitrust statute.

Implications For Future Antitrust Action In An Increasingly Two-Sided World.

Although no one directly mentioned†Ohio v. Amex, this case has significant implications for the future of antitrust law and whether the Supreme Court is serious about looking at “both sides” of the two-sided platform. As the iPhone customers noted, this does not require the Court to overrule†Illinois Brick.†It requires the Court to recognize that — at least under the correct set of circumstances — the operator of the two-sided platform has a direct relationship with both the customer side and the merchant side of the two-sided platform, and can be held accountable for imposing conditions on the merchant side that make the platform a true middleman and not merely a pass through agent of the merchant. If the Court agrees with the iPhone customers, it provides a road map for antitrust lawsuits in the wake of†Ohio v. Amex.†Instead of focusing exclusively on the limitations imposed by the platform on the merchant side, antitrust lawsuits against two-sided markets such as Google or Facebook must focus on the level of control the two-sided platform exercises the relationship with the customer. If the platform exercises a sufficient level of control over the customer purchase of the product or service, then it is subject to an antitrust claim. While complicated, such an approach would at least be workable. True, the case before the Court merely permits the action to go forward. But if the Court sides with the Ninth Circuit Court of Appeals (and observers say that that is how the Court appeared to be leaning at oral argument) and allows the case to continue, we will at least know what kind of case antitrust plaintiffs need to show in order to mount a successful challenge to conduct by dominant two-sided market platforms.

On the other hand, if the Court sides with Apple and the district court (and the government, which filed an†amicus†brief in support of Apple; Thanks guys!) and determines that two-sided markets such as Apple are merely agents passing through the price set by the app developers on the other side of the platform, then it becomes extremely difficult to imagine what set of circumstances under existing antitrust law supports an action. On the one hand, consumers most show they are harmed by the platform’s control over merchants. On the other hand, if such harm is simply “pass through” from which Congress did not intend to allow a recovery, then what sort of harm satisfies the twin conditions of (a) impacting consumers; but, (b) subject to remedy under the antitrust laws as direct harm rather than merely pass through harm?

Conclusion

The good news is that, based on most press reports, oral argument went well for the iPhone customers. While one should always be wary of trying to read too much into oral argument, the majority of justices who asked questions seemed to favor allowing the case to go forward. On the other hand, even if the case does go forward, we still don’t know what evidence will satisfy the Court’s two-sided market examination. The fact that antitrust law would recognize a harm to consumers by a platform based on its control over merchants does not tell us the elements of the analysis, and how plaintiffs must account for the arguably pro-consumer impacts of the restraints on the merchant side.

Still, it is better to have some way forward than no way forward. Whatever happens, those interested in antitrust in the digital age will want to look very carefully at the outcome of†Apple v. Pepper.†It would be a shame for antitrust to hit an†IllinoisBrick†wall just when we need it most.

Stay tuned . . . .

 

Comments are closed.