iPhone owners can sue Apple over App Store, Supreme Court rules

The court's decision deals a blow to Apple, which is leaning more on its services-related revenue.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
8 min read

Apple lost its Supreme Court case against Pepper. 

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iPhone users can sue Apple for allegedly operating a monopoly through its App Store, the Supreme Court ruled Monday.

A majority of justices disagreed with Apple's argument that app buyers aren't direct customers of Apple. Instead, the court ruled in a 5-4 decision in Apple v. Pepper that the "iPhone owners were direct purchasers who may sue Apple for alleged monopolization." The plaintiffs in the original case have accused Apple of overcharging for apps through its tight control over the App Store. 

"The iPhone owners here are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain," Justice Brett Kavanaugh wrote in the court's majority opinion. He called the Supreme Court's conclusion "straightforward." 

Watch this: The Supreme Court's call on Apple and what it means for the App Store

The court's decision doesn't mean that Apple is a monopoly or that it has to change how the App Store operates. Instead, it means the plaintiffs can sue Apple. The case now will go to a lower court to determine if Apple's business practices are legal and will take at least a year to make its way through the court process. 

Apple said in a statement that it's "confident" it'll win the case and noted "the App Store is not a monopoly by any metric."

The case stems from complaints that Apple's App Store -- the only way to purchase apps for iPhones, iPads and Apple Watches -- is effectively a monopoly that overcharges people for software. Under Apple's model, Apple charges developers a $99 annual membership fee, lets them set the retail price of their apps and then takes a 30% cut for each sale. For subscriptions, Apple charges a 15% commission after the first year.

Apple prohibits developers from selling iPhone apps outside the App Store, and Apple device users can't download software to their phones unless it comes from the App Store. Google's Android phones, by contrast, make apps available in a variety of places. Along with Google's official Play Store, people can download apps from stores operated by Samsung and Amazon . Some developers have also offered apps directly to consumers. 

A handful of consumers, including Robert Pepper, originally filed an antitrust class action complaint against Apple in 2011. They argued that Apple's practices meant apps cost more than they should. In their litigation against Apple, they asked for damages on behalf of people who've bought software in the App Store. Apple has long said that closely controlling the apps in its store ensures that they're safe, and it's touted the number of jobs and industries created because of the existence of the App Store. 

In Apple v. Pepper, Apple said iPhone owners didn't have the right to sue Apple because Apple didn't directly set app prices. Those are determined by developers. Apple also said it only acts as a conduit between consumers and the actual sellers -- the app developers. The Supreme Court disagreed. 

"We're gratified the Supreme Court today recognized the right of consumers to sue Apple for the damages they sustain from Apple's monopoly control over the distribution of applications on iPhones," said David Frederick, a partner at the Kellogg, Hanse, Todd, Figel & Frederick law firm. He represented iPhone users in the case against Apple.

"The decision is important for upholding consumer protections against the dangers of monopoly retailers like Apple," Frederick said in a statement. "Apple's monopoly control has distorted the prices for apps and it's time for that abuse of monopoly power to end."

Apple's shares closed Monday at $185.69, down 5.9%.

Apple's full statement said:

"Today's decision means plaintiffs can proceed with their case in District court. We're confident we will prevail when the facts are presented and that the App Store is not a monopoly by any metric.

We're proud to have created the safest, most secure and trusted platform for customers and a great business opportunity for all developers around the world. Developers set the price they want to charge for their app and Apple has no role in that. The vast majority of apps on the App Store are free and Apple gets nothing from them. The only instance where Apple shares in revenue is if the developer chooses to sell digital services through the App Store.

Developers have a number of platforms to choose from to deliver their software -- from other apps stores, to Smart TVs to gaming consoles -- and we work hard every day to make sure our store is the best, safest, and most competitive in the world."

Services at risk?

Apple last year became the first trillion-dollar company in the US but in recent months it's been struggling. The company makes about two-thirds of its revenue from the iPhone, but people just aren't buying as many smartphones. They're holding onto their devices longer, and in places like China, they're increasingly opting for phones from Apple's rivals like Huawei and Oppo . This means Apple must expand its operations beyond the iPhone, and it's counting on its services to become an even bigger part of its business.

During a call last month to discuss its earnings with analysts, Apple executives repeatedly touted its growing services business, saying the company overall had 390 million paid subscribers at the end of March, though it didn't specify which services had the most subscribers. Finance chief Luca Maestri said these paid subscriptions should surpass 500 million by 2020. Services revenue in the quarter that ended in March reached an all-time high of $11.5 billion, up 16% year over year.

The App Store is a major part of that business. Anything that threatens the App Store could hurt Apple's push to become a services powerhouse. Apple has faced scrutiny over its App Store nearly since it launched in 2008.

The Supreme Court's decision, and the subsequent lawsuits that will likely emerge, could change the way apps are sold. Apple also could be on the hook for a large monetary hit if suits alleging it's a monopoly are successful. 

The App Store has "really been the heart of their services revenue," Creative Strategies analyst Ben Bajarin said. He noted that the company has been building its services revenue in other areas, like Apple Music and iCloud, but nothing is as big as the App Store. 

Kavanaugh wrote in the court's opinion that "if the iPhone owners prevail, they will be entitled to the full amount of the unlawful overcharge that they paid to Apple. The overcharge has not been passed on by anyone to anyone."

Along with threatening Apple's business model, the Supreme Court decision could give more weight to calls by some politicians that big tech companies need to be broken up. Sen. Elizabeth Warren of Massachusetts, a Democrat who's running for president, in March said tech companies such as Apple, Amazon, Google and Facebook have too much influence over our lives. In Apple's case, Warren said the App Store gives the company too much of a competitive advantage.

"Apple, you've got to break it apart from their App Store. It's got to be one or the other," Warren said. "Either they run the platform or they play in the store."

Apple CEO Tim Cook has fought being lumped in with other big tech companies, saying they're not all the same.

"I don't think anybody would call us a monopoly," Cook said last week on CNBC. "We're geographically in the same location as a lot of tech companies, and that is about the extent of the commonality."

Pepper's push

The Pepper lawsuit against Apple was initially dismissed because the sales commission is imposed on developers, not on the purchasers who were suing. But the consumers appealed and the Ninth Circuit Court of Appeals ruled in 2017 that they had standing to sue Apple.

Apple told the court in an appeal that the outcome of this lawsuit could affect e-commerce venues such as Google Shopping, Amazon and Facebook's marketplace. Those online marketplaces act as middlemen between consumers and third-party businesses. The companies take commissions on sales but don't set retail prices for the products that are sold.

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"This is a critical question for antitrust law in the era of electronic commerce," Apple said in its 2017 petition. "The threshold issue is who may seek damages based on allegedly anticompetitive conduct by Apple that allows it to charge excessive commissions on apps distribution: the app developers, the plaintiff consumers, or both?"

Kavanaugh acknowledged the court's decision "may leave Apple subject to multiple suits by different plaintiffs." But he said the fact anticompetitive conduct may create two different classes of victims doesn't mean their injuries are the same or that they'd be making dueling claims to a common fund. 

"The consumers seek damages based on the difference between the price they paid and the competitive price," Kavanaugh wrote. "The app developers would seek lost profits that they could have earned in a competitive retail market."

Justice Neil Gorsuch, in the Supreme Court's dissenting opinion, argued that Apple's 30% commission falls initially on developers, and consumers shouldn't be able to sue Apple.  

"So if the commission is in fact a monopolistic overcharge, the developers are the parties who are directly injured by it," he wrote. "Plaintiffs can be injured only if the developers are able and choose to pass on the overcharge to them in the form of higher app prices that the developers alone control."

William Lavery, a partner specializing in antitrust law at the Baker Botts law firm in Washington, DC, said the decision could eventually affect how some online marketplaces run their businesses, but it's too early to tell. 

"There are certainly going to be plaintiff firms looking at online marketplace platforms and looking at exactly who can sue," he said. 

App Store impact

If Apple ultimately loses any lawsuits, it could be forced to lower the 30% commission it charges app developers. Macquarie analyst Ben Schachter noted that he's believed three things could force Apple to reduce its fees: competition, legal action or regulatory scrutiny.

"We believe pressure is building across all three factors," he said. 

Creative Strategies' Bajarin said that if Apple is forced to change its App Store model, one track it could take is letting developers have a more direct payment relationship with users.

Today, people who use Amazon's Kindle app on an iPhone or iPad can't buy books in the app, and new users can't subscribe to Netflix or Spotify using in-app purchases via the App Store. Instead, they have to go to a web browser to make the purchase and pay for the subscription. That's so the companies can avoid paying a commission to Apple.

Spotify, for its part, filed a complaint with European regulators in March, alleging that Apple wields its powerful App Store as a cudgel to stifle innovation, weaken competition and unfairly tax its rivals. Apple called Spotify's complaint "misleading" and accused the music-streaming giant of wanting a free ride to the disadvantage of smaller developers now that it's grown into a powerhouse.

"If a developer has a payment processing system, Apple could allow an alternate payment mechanism so users can pay the developer directly," Bajarin said. "You'd still go through the App Store so you have privacy, but they could give you a payment option."

That wouldn't mean people could download apps from anywhere they want, Bajarin said. That would go against Apple's push to have secure apps on its devices. But it would allow more pricing alternatives in the App Store.

"The point of this case is there's no option," Bajarin said. "Apple can charge whatever it wants. But if it gives a payment option ... at least it might have some balance there."

Bloomberg earlier reported the court decision. 

CNET's Shelby Brown contributed to this report.

Originally published May 13 at 7:40 a.m. PT
Updates, 8:04 a.m., 8:44 a.m., 9:21 a.m. and 10:25 a.m.: Adds background information and analyst comments. Updates, 1 p.m. PT: Adds Apple comment; 1:41 p.m. PT: Adds lawyer comment, remarks from dissent; 2:07 p.m. PT: Adds comment from lawyer representing iPhone users.