On The Case

9th Circuit Apple antitrust ruling splits with 8th, is boon to consumers

(Reuters) - If music fans want to see a show at a major concert venue, they have just about no choice but to buy tickets through Ticketmaster, which has exclusive ticket distribution contracts with virtually every concert promoter in the country. Similarly, if iPhone owners want to purchase an app, they must buy through Apple’s App Store. Apple doesn’t allow app developers to sell iPhone apps through any other platform. Ticketmaster and Apple are the toll-keepers of their markets.

Consumers don’t much like paying tolls. Both Ticketmaster and Apple were sued in antitrust class actions accusing them of taking advantage of their distribution strangleholds, Ticketmaster back in the 1990s and Apple in 2011. In 1998, the 8th U.S. Circuit Court of Appeals dismissed concertgoers’ antitrust claims in Campos v. Ticketmaster. But on Thursday, the 9th U.S. Circuit Court of Appeals ruled that iPhone app buyers can proceed - despite the 8th Circuit’s Ticketmaster decision and parallels in consumer claims against the two companies.

The 9th Circuit split with the 8th on the dispositive question of whether consumers are direct or indirect purchasers of the distribution services Ticketmaster and Apple provide. As you probably know, that’s a critical difference in antitrust cases. The U.S. Supreme Court has held - first in 1968’s Hanover Shoe v. United Shoe and then, more famously, in 1977’s Illinois Brick v. State of Illinois - that purchasers at the end of a tainted supply chain can’t bring antitrust claims against a monopolist because it’s too hard for courts to figure out what portion of the product’s ultimate cost is attributable to illegal conduct. Under the court’s so-called Illinois Brick precedent, only direct purchasers have standing to sue monopolists.

In the sort of classic manufacturing supply chains at issue in Hanover Shoe, which involved allegedly inflated lease prices for shoemaking equipment, and Illinois Brick, in which the state claimed masonry contractors passed along inflated charges for concrete blocks, it’s easy to discern a bright line between direct and indirect purchasers. The split between the 8th and 9th Circuits in the Ticketmaster and Apple cases shows how the line blurs when the alleged monopolist is selling a service instead of a tangible product.

The 8th Circuit majority in Ticketmaster found concertgoers to be indirect purchasers who were forced to use the company’s services only because Ticketmaster first pushed concert venues into exclusive ticket distribution contracts. “Such derivative dealing is the essence of indirect purchaser status,” the majority said. “The plaintiffs’ inability to obtain ticket delivery services in a competitive market is simply the consequence of the antecedent inability of venues to do so.”

In a dissent, Judge Morris Arnold suggested his colleagues weren’t paying attention to Ticketmaster’s real product: not tickets but ticket distribution services. “Ticketmaster supplies the product directly to concert-goers; it does not supply it first to venue operators who in turn supply it to concertgoers,” Arnold wrote. “It is immaterial that Ticketmaster would not be supplying the service but for its antecedent agreement with the venues. But it is quite relevant that the antecedent agreement was not one in which the venues bought some product from Ticketmaster in order to resell it to concertgoers.”

The 9th Circuit’s Apple opinion, written by Judge William Fletcher for a panel that also included Judge Wallace Tashima and U.S. District Judge Robert Gettleman of Chicago, sitting by designation, said the Ticketmaster dissent was right. In selling iPhone apps, Apple is not an ordinary manufacturer or producer, the opinion said. It is a distributor, selling apps directly to consumers through the App Store.

The 9th Circuit insisted on figuring out the essential relationship between Apple and app purchasers instead of taking the easy way out by basing its ruling on the mere fact that consumers pay the App Store for purchases. “Whether a purchase is direct or indirect does not turn on the formalities of payment or bookkeeping arrangements,” the opinion said. “The key to the analysis is the function Apple serves rather than the manner in which it receives compensation for performing that function.”

Apple’s lawyers at Latham & Watkins had argued that the company is indeed a distributor, but that its customers are app developers, not the consumers who buy apps. It compared itself to a shopping mall owner that leases space to stores, but the 9th Circuit disputed Apple’s brick-and-mortar analogy. “Third-party developers of iPhone apps do not have their own ‘stores,’” the opinion said “Indeed, part of the anti-competitive behavior alleged by plaintiffs is that, far from allowing iPhone app developers to sell through their own ‘stores,’ Apple specifically forbids them to do so, instead requiring them to sell iPhone apps only through Apple’s App Store.”

It seems to me the 9th Circuit’s reasoning could be problematic for other tech companies that could be defined as distributors. I expect amici to weigh in if Apple asks for en banc reconsideration.

Wolf Haldenstein Adler Freeman & Herz represented plaintiffs in the iPhone case. Apple declined a Reuters request for comment on the 9th Circuit opinion.