What’s Next in Apple Inc. v. Pepper? The Indirect Purchaser Rule and the Economics of Pass-Through

Abstract

In Apple v. Pepper, the Supreme Court issued a narrow 5-4 decision holding that iPhone users who purchased apps from the Apple App Store were direct purchasers. Justice Brett Kavanaugh, writing for the majority, held that the iPhone users had standing under Illinois Brick to sue Apple for alleged monopolization under Section 2 of the Sherman Act. The dissent, written by Justice Gorsuch, concluded that the iPhone users were direct purchasers of distribution services provided by Apple, and thus relied on a "pass-on" theory to recover damages from Apple. On remand, the plaintiffs will have to show that they were harmed by Apple's ad valorem royalty rate. Our analysis demonstrates that the plaintiffs are unlikely to prevail because they have not been harmed by Apple's ad valorem rate. We also explain that the Supreme Court correctly accepted the plaintiff's alleged market definition at the motion to dismiss stage, and therefore did not abandon its ruling in American Express.

Keywords: Apple v. Pepper, Pass-Through, Kavanaugh, Gorsuch, Ad Valorem, Antitrust, Illinois Brick, American Express, Indirect Purchaser, Sherman Act, Direct Purchaser, Monopolization

JEL Classification: K21, L4, L41