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tv   Apple Inc. v. Pepper Oral Argument  CSPAN  May 14, 2019 1:16am-2:19am EDT

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. >> the argument first 17204 apple versus pepper. >> mister chief justice of it may please the court. the only damages of the monopolization action is a 30 percent commission apple charges voters - - developers that causes them to increase prices to consumers the
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developers pricing decisions are in the chain that links the commission to any consumer damages if the commission increases beyond the competitive level the developers do not change the prices consumers suffer no damages but if they do to pass on some or all of the overcharge, then that is precisely the kind of theory the that they prohibit. >> is there any first buyer? . >> there are two different buyers in the picture there are the developers by contract with apple have a package of services with intellectual property and testing but the plaintiff in this case are buyers of the apps themselves that are made with that package. >> but my question is is there
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anyone that would qualify standing to sue apple? . >> the developers. yes. without a doubt those are in the first instance pay the 30 percent commission it is important to root that analysis in the common ground that has been conceded the only damages based on that 30 percent commission that is charged by contract by apple in the developers and deducted from whatever price the developer chooses to set. >> i'm sorry it is the customer that pays the 30 percent. >> but there has always been a transaction between apple and the developer before that
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which has the pricing of what the developer will do on account of a 30 percent commission. >> that was the case of monopoly to monopolize the next market that sells to a customer. okay this is not quite like that but this is dramatically different. this is a closed-loop. >> it is but what is at issue. they are claiming it is a suppression. they are not seeking 30 percent of their sales they have to prove that the next step without this monopoly they would have paid thus a
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penny or nothing but something more. but the point is the closed-loop with apple as the spoke they are the first purchaser. >> no. they are not the first purchaser is the developer who by contrast agrees every time they put a positive price on the app it will allow apple to take 30 percent of it. >> by 30 percent from the customer. >> apple collects the fund even the ninth circuit agreed the payment flow is immaterial. >> even if they think that is true there is a very simple theory i would thought it would be antitrust for at least 100 years.
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so if that is true they can raise prices for some people are lower than for others and then the monopolist you can collect images one - - damages. i don't see anything that conflicts with that. >> everything in illinois brick does. the emphasis of all three court decisions that is what the doctor and disallowed. >> i don't mean to interrupt you but i don't want you to miss the point that i am making. if joe smith buys from bill who bought from the monopolist but if joe smith bought from the monopolist.
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that is a simple theory. i cannot find a reason or case law or anything from antitrust that would conflict with that and i want you to tell me. >> what conflicts with that is the alleged monopolization with the distribution function allegedly first manifest in a 30 percent commission consumers do not pay the 30 percent commission there was an effort in the district court to argue that apple added that but that was abandoned. so instead we have a damage theory running through the decision. >> is your answer to justice breyer depend on the alleged monopolization is in the distribution function? because i understood to say that is wrong that alleged
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monopolization that the consumer says you have a monopoly on apps you might also have a monopoly on the distribution function that the app developers have to live with but then what the consumers have to live with so responding to justice breyer you said because of the distribution function but i don't think that is correct. >> two points justice kagan it is correct the complaint repeatedly alleges in paragraph three and eight and 53 that this is the case about the distribution market. it is always the case about the distribution market and it is because there is no good-faith allocation that apple monopolizes the apps as software it is simply the pipeline the sale of the app that is described as distribution or as the
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aftermarket which is simply limiting that to the ios apps. >> there's a lot of words in this case that i tend to have trouble understanding one is the two-sided market so i go by simple analogy if bill buys from the monopolist he is a direct purchaser if bill buys from sam who is a monopolist he is the indirect purchaser anyone can understand that. so i think of this as jargon so suppose is united fruit company i have a great idea. here is what you do. so you buy from the farmers and pay what you pay the banana farmers is a very low price plus a 30 percent commission then you sell to
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banana consumers throughout the world charge that 30 percent commission which they say is a higher price then you do not become a monopolist now i am advising jay rockefeller and giving the same advice to the distribution company so now you see the point. >> but the difference is there is no third-party intermediary setting the price to exercise the independent determination as to whether any or all of the overcharge will manifest itself and that's where i started to say the hypothetical to imagine the price today at the competitive price and it goes up by ten points tomorrow.
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no consumer is injured unless the apps prices change. the prices have to change. and they only change by virtue of a decision that implicates everything this court talks about in hanover, illinois bric brick. >> i thank you are avoiding the question a bit because the questions put to you by my colleagues are really what was illinois brick about? was it a vertical supply chain or instead a pass-through hearing? in defense of illinois brick and all those illinois brick cases we have discussed, you had both so you do not have to separate the two but here you don't because it is not a vertical supply chain but still a pass-through mechanism so does illinois brick apply to that? so i think what justice breyer was suggesting that it isn't
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that vertical supply chain with a person is not buying from that monopolistic but here they are transacting and that is what separates the case from illinois brick to make an entirely different notwithstanding that there is another mechanism involved. >> i completely agree with you the key is deciding what illinois brick was about. was a formal case about vertical change on - - chains or pass-through? i would begin first of all, with hanover shoe that is a passover defense and the difficulties and the potential complication of antitrust litigation and the framing of the question of illinois brick by this court which says having already found we will not allow a path on defense
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now confronted with the question to pass on offensively it was 100 percent about the vertical chain that was the factual setting of the case and indeed the argument would have the court believe the factual setting is the sum and substance of the reason. >> what troubles me about your position is this illinois brick was not about economic theory but the courts the basis of the decision was not economic theory the court's calculation for what is effective and efficient litigation scheme so maybe the answer to your question is the validity of illinois brick is not before us but i really wonder in light of what has happened the court's evaluation stands up to take that third point that the
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so-called direct purchasers are the most efficient and in the best position. >> if we look at this case how many app developers are there who's apps are sold in apple quick. >> is any one of them ever sued there have been plenty of disputes but none have gone to litigation. >> so no antitrust agency has ever sued. >> we do not take the absence of litigation of evidence of the oppressed developer community that cannot speak for itself the fact of the matter is nowadays major companies this happens all the time that the idea that it doesn't implied before is fanciful because it literally happens all of the time.
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>> along those lines i take your point that hanover could re-read about the economic realities and that mechanism being important rather than the contractual formality whether a sales agent or formal purchase between the manufacturer and the distributor. accounting for economics. i take your point. that with what justice alito had in mind illinois brick was questioned 31 states before this court you are asking us to extend illinois brick because of the contractual formality. and i will spot you that for purposes of this question but why should we build on illinois brick? should we ?-question-mark perhaps that so many states have done so it repealed that there haven't been problems
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with direct purchasers receiving double recovery but on the other which justice alito referred to is they only sue because there is a threat they will share the rent with the direct purchasers and they could be better suited to enforce antitrust laws prickle that is a long windup. i'm sorry but there is the pitch. >> first of all, it it is an enormously controversial issue you can see this in the briefing in this case so yes states said to the american antitrust institute don't repeal it on the order of 17 efforts in congress to have a change it is controversial political issue that belongs
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across the street and not here but i would disagree. >> why is that for you think it's fair to say it was created but what the court did was apply the foundational principle which is the proximate cause principle damages not going past the first step than it dealt with that in the context of the potential for overcharge so a unique problem of antitrust it isn't all damage theories but if you have overcharge cases with that duplicative recovery it is automatic the first purchaser gets 100 percent of the overcharge because of hanover than anything else we covered added onto that is duplicative and that is what happens in the district court. you get the direct purchasers
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suing on whatever theory optimizes their level of recovery so now i will turn my time over to the solicitor general at this point. >> thank you cancel. >> - - counsel. >> mister chief justice may please the court i would like to begin wet he left out and it addresses many of the questions that have been asked. at bottom illinois brick and hanover understood the pass-through theory and they reflect the application of the background principles of proximate cause and in particular the rule of the first step here it is the pricing decision because the respondents are injured only if the app makers decide to increase their prices to recoup. >> i find that not intuitive
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argument. because it just seems to me when you look at the relationship i go to the app store ip directly with the credit card information so for my perspective i have a one-step transaction with apple. so when i say it is a monopolist charging a super competitive price by extracting a commission that could only extract because of the market power that is a one-step. >> i understand that but with proximate cause the issue is not transactional proximity but between the illegal conduct on the one hand as the overcharge and injury to consumers on the other hand,
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through the higher prices and that monopolistic overcharge is not the direct cause of higher prices the direct cause is the app makers decision to increase their prices. >> how do we know that? that apple operates as a retailer in many respects as pointed out and how do we know that 30 percent is not affecting price in the same way any retailer adding 30 percent. >> you don't know for sure but that's the whole point. the app makers set the final price they have a choice to make eve are - - either they absorb that overcharge in which the consumer is not harmed at all or they increase the prices to recoup the overcharge in which case they are also harmed because now they face a drop in sales with increased sales within the consumer is harmed. >> yes your owner on - - honor so you part of the arm going
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to that initial party bearing the full brunt of the first instance because of the pricing decision. >> that we have ambiguity what illinois brick means and if there is we look at the statute. any person injured. >> yes, your honor. i think that reflects that type of statutory interpretation the court is engaged in including the rico case where you interpret the book proximate cause built into the statute including the rule that damages spirit does it make a difference apple is influencing the prices you are suggesting the app developers set the prices independently but i will give you two ways that is not true the first is the 99-cent charge you may say
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that does not matter it could be 99 cents or $100.99 but these are all low cost products for the most part so if it has to end with a number 99 that says a lot about the fact you cannot charge 77 or 55 or 32 cents. the other is the entire allegation that apple is truly a monopolist on both sides of the market to dictate to developers whatever price structure at once and can also dictate to consumers the nature of the sale and what that will be. in that event it sure seems as though apple happen to set up a commission that is similar to illinois brick but could've done 1000 other things that are essentially the same that would have taken it out of the illinois brick rule.
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>> sure. i will take those in turn so first the 99-cent pricing policy that is not in the complaint so we will put that to the side and assume it is. i don't think it changes the fact the app makers still control the overall price to the extent respondents are harmed is based on the pass-through. if i go to an auction house bidding in ten dollars increments nobody thinks the auction houses setting the price the bidders are. >> but if you have to bid in ten-dollar increments the true alternative prices are three and five and seven then you are setting the price. >> that is my second point any injury is a pass-through because the app makers will round up or wound down if they round down they are not injured at all if you round up to the next price point they are injured as a result of the pass-through theory and that pricing decision that we think under the principles of
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proximate cause. >> but they are not measuring damages by that so if i understand it's not the 30 percent it is what the price would be if we could buy apps outside of the closed-loop. it could be theoretically a lot higher than the markup it could be within it but the point is that that 30 percent or whatever that figure is is not the measure of our damages that is how i understand that the developers may have their own claim they are damages likely have to stay within the 30 percent but we don't measure the damages by that. >> respectfully i will disagree to explain that justice kagan i could also
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answer the second part of the question. the harm to the consumers as they have to pay higher prices for apps and the reason i have to pay higher prices on this post your question justice kagan because apple controls the pipeline that connects app makers on the one hand and iphone users on the other and the way they exploit that pipeline through that alleges monopoly is charging that 30 percent commission the only reason consumers are harmed to pay higher prices because the app makers decide to increase their prices in order to recoup that commission into your question justice breyer the reason it is different than your hypothetical bill buying from sam with transactional proximity is because the question is not proximity between the parties transacting with one another but proximity between the antitrust violation of that 30 percent commission and the harm to consumers in the form of higher prices.
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>> that was the antitrust violation having the enormous market power achieved but rather anti- competitive and more restricted and necessary practices. alcoa for sure did not charge higher than competitive prices not necessarily higher prices of the monopoly i would have thought it is a matter for proof whether in fact, apple, assuming they prove it is a monopoly has extracted higher than competitive prices they just have the easy life. that is where we are at in this case if you say right right right.
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>> what i want to say is for sure the illinois brick theory does not apply across the board but it does apply when somebody brings that overcharge theory as in hanover and illinois brick and here. >> haven't we had trial on that quick. >> when you have that overcharge theory what illinois brick says under proximate cause is there some party other than a monopoly standing in between plaintiff injury in the form of higher prices and the monopolist violation form of commission when the price setter is somebody other than the monopolist it is not the overcharge direct cause of injury. >> if apple bought those apps then added 30 percent and sold it to the consumer you would agree that a claim could lie there quick.
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>> and went to understand that hypothetical if you buy that for a price apple adds 30 percent to that price and selling it to the consumer the consumer alleges that apple does that as a result of monopolistic behavior. does that claim lie quick. >> you could sue them directly but you cannot sue them if they are not the price setting party but the app maker is and that's why the key is who sets the price it is hard to manipulate our rules. and that fundamental change is the transaction itself. >> thank you counsel. >> thank you mister chief
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justice of it may please the court apple directed anti- competitive restraint at iphone owners to protect them from buying apps anywhere other than the app store as a result iphone owners pay apple more for apps than they would have in a competitive retail market to this court's precedent iphone owners have a cause of action for those overcharges against apple the court of appeals for three reasons first illinois brick is a rule that can be easily satisfied and second, apple directed the monopoly abuses at respondents. it is appropriate respondents can sue apple for damages as a resume - - a result of those violations. third, apple seeks to expand and modify the byline rule of illinois brick to deny
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indisputably direct purchasers and to change the rule where it is hard to apply at the pleading stage. now if i can return to the first point the direct purchaser rule the court said so in illinois brick in in a case that has not yet been discussed today in which the court said illinois brick is for direct purchasers notwithstanding the economics that go into that that was a case that protected the defendant but this case is the flipside of that to protect the plaintiffs who directly purchased from the antitrust violator claiming damages as a result of the antitrust
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violation. >> there is one antitrust violation increase that apple imposes when it sells the apps quick. >> wrong and this is important for the court to understand the antitrust violation is the monopoly app store consumers cannot buy an app anywhere other than apple's 100 percent owned monopoly app store. >> coming to the 30 percent increase you obviously say the purchaser is again they are harmed by that and to recover damages for that and also the developers are harmed and they can recover damages as well so to the extent that apple is a two-sided market subject to sue on both sides of the market for a single antitrust price increase that they are
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alleged to have imposed. >> mister chief justice i thank you get to the core of a lot of the confusion because having a wholly owned monopoly app store apple can distort the market of the supply chain at retail chain for consumers. we represent consumer iphone owners are only the damages we occur that is higher than what a competitive market price would be for the apps forgot the level of damages is not necessarily in the 30 percent that is simply proof that apple is acting as a monopolist. >> i understand your claim on your side of the market. but you do think developers have a claim as well? . >> it is not the same.
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it is a different claim. >> no. i disagree with that mister chief justice. apple is a supplier of the apps if they have a claim it is that apple has distorted the market for the supply of apps that hurts apps developers profits their argument would be if we were not suffering under the one store constraint we could charge a different price lower than 99 cents and get a direct purchase. >> so you are saying the level of damages would be different between both sides. >>. >> so you say consumers says a higher price for the product it could be the entire 30 percent or some portion that is super competitive but i pay a higher price but the app developer says and then what is relevant to me fewer people by my apps and that
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represents some amount of lost profits. but it is true that two people can sue is a contraction with each of these people but the damages are entirely different which is lost profits and the other is i am paying too much. >> correct. >> is that your claim? i thought this is all about 30 percent. >> and to make the case. >> it has nothing to do with this. >> this is the allegation with the sale of apps we know that 30 percent on every single sale that only a monopolist can do if that is not a
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measure of damages i'm not aware of any case that says plead antitrust images and because of that ability to expand we can say in good faith. >> we agree there can only be one monopoly rent so who pays that? may be partially between direct and indirect purchasers. and disaggregating that and here's where i am stuck and need your help. you say illinois brick is premised on the contractual relationship between the ultimate purchaser and the intermediate seller and there has to be that relationship
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but antitrust is not depend on that contractual formality but the underlying economics. the case from illinois brick with that economic pass-through and the possibility the intermediate purchaser may absorb and not pass so i will wind up quickly but illinois brick is correct. you have the amicus brief that says it is not so i am curious why. >> because it is a bunch of things. >> because we have that byline will be pay apple. >> from that formalistic contractual in the law of
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contract versus antitrust. >> economics we pay money and apple never shared that with any middleman. there is no middleman here. we pay the money. apple takes 30 percent. >> that is on the form of the relationship. the problem that they might have sold. >> to try to answer your question with a hypothetical if the court will indulge me suppose a competitive market the price was nine cents not 99 cents. if it is 90 since we would all agree i think the consumer can sue for that nine-cent differential. >> i understand that argument put that aside. >> now that is a side. look at it from the developer perspective.
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if they have a claim, i'm not saying they do but if they d do, they would need to show the difference between the profits they would have achieved in the monopoly app store versus the profits achieved at a competitive market price. that is based on three factors. the difference of sales between 99 cents is that revenue and third if that commission was in a competitive market. so take my hypothetical there are three possibilities. at the commission was at 22 percent then they take on 70 cents just as with apple 30 percent at the 22 percent
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commission has zero damages. the developer would have positive damages if the commission was zero because now they have damages of 20 cents they would make the 90 cents in the competitive market instead of the 70 cents that now apple passes along by virtue of the monopoly. the damages would be negative if that state at 30 percent because their benefits would achieve by the monopoly of price is the eight cents per transaction so in that way based on the law of profits and that is irrespective if the buyer of the app were the
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consumer sustains damage in my hypothetical if you can get your law clerks to run the different scenarios it always works the same way. >> unless you are prepared to overrule of alcoa to show monopoly power and through less restrictive than necessary practices and in your case there is only one profit to be earned so you have a different question when you get to the damages stage how did they divide that profit? but that is where they are proceeding and you are adding one thing that they do have
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monopoly power or the power to raise price significantly at a competitive level. this is just a piece of evidence and we will worry later agreeing as opposed to what god what? . >> correct but the basic problem is who gets to complain about the monopoly app store. as the buyers of the apps there is no contract issues we pay the money and they keep it they would pay more than if it was competitive. >> they say it would be different if apple purchased the apps and then acted 30 percent on the sale.
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how is that not different? . >> and from the solicitor general it is irrelevant who sets the price so long as the violation leads to higher prices that is the violation and how we are proximately harmed so with a very hypothetical that you posed you can see the direct purchasers where they set the price and the attack on 30 percent by virtue of the monopoly. suppose apple dropped the commission from 30 percent down at 20 percent that maintained the price restriction of 99 cents app and from the consumer perspective we still pay for the app but that does not
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affect the consumer where welfare. >> the general said that if in fact, they brought the despot these from suppliers that is a classic antitrust violation. but let's take the reverse and then to pay all of that over to the developer and give us 30 percent of that word you then still we a direct purchaser. >> if you're hypothetical was buying it from apple then as justice gorsuch said form over function situation of how the money is moved around it what
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we are directly purchasing with the apple violation and that to monopoly app store if there was a grocery store chain to monopolize the sale of vegetables. that the only place you can buy vegetables we would say that could control prices and output. >> but i think the question requires further explanation are we in danger of incentivizing a restructuring of contracts so all that apple does and then returns to the profit later and if that is all we are doing than what is the point of illinois brick?
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and 31 states so help me on both of those. >> i will take the second one first. i represent the consumers in this case and the consumers have no grief or no beef with illinois brick. we think we are direct purchasers. we come within the guidelines and that is okay with us.
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2.5 hours and. >> good afternoon. welcome. i apologize that our voting is delayed another thing about being in the senate. you do have to vote. it's not optional. i want to begin by thanking each of our witnesses for being with us today. we know how difficult your jobs are and they are even more challenging with recent developments on the border and i want to thank you for being willing to take not only t

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