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McNees Litigation News

July 11, 2019

SCOTUS Class Action Update: Consumers Get Another Bite at Apple Profits for Alleged Antitrust Violations

By Rachel R. Hadrick

On May 14th, in an opinion authored by Justice Kavanaugh, the Supreme Court of the United States gave consumers the opportunity to proceed with their antitrust class action against Apple based on the commissions assessed to app developers for iOS apps purchased through the App Store. The Court solidified the bright-line test, which Justice Gorsuch (writing the dissent) deemed a test of “privity” between the direct purchaser and the alleged antitrust violator.

Anyone who has an iPhone or iPad has interacted with its App Store. Apple offers the App Store as the exclusive platform through which iOS users can purchase applications from Apple and third-party developers. Apple charges third-party developers a set percentage of the cost of each app as a commission for providing the platform for customers to purchase both the applications offered in the App store and any features, services, or digital content purchased within the apps. Apple takes payment from the customer through the App Store, then remits the balance to the developer after it deducts the commission.

In 2011, multiple consumers filed class actions alleging that Apple’s practices violate federal antitrust laws. The key to the claims of the consumers in Pepper v. Apple: Apple’s practice of limiting purchases of iOS apps to its own platform allows Apple to charge a commission higher than what it could charge in a competitive market, which violates the Sherman Act.

Apple argued on all levels of appeal that the consumers did not have standing as a direct purchaser required by Section 4 of the Clayton Act, which provides for a civil action for damages for those injured by violations of the Sherman Act, and as interpreted by Illinois Brick Co. v. Illinois (U.S. 1977). Apple relied on the fact that it charged the commission to the developer and left the developer in control of the ultimate price to be paid by the customer. Per the standard set forth in Illinois Brick, only direct purchasers have standing against an alleged antitrust violator, and participants downstream in the vertical chain of commerce were not entitled to pursue claims based on pass-on costs for indirect harms. Apple claimed that, because the developer set the final cost to the customer, and Apple charged the commission to the developer, there was no guarantee that the customer bore the total cost of the commission, and thus was not a direct purchaser. In Illinois Brick, the state of Illinois, who claimed that it was harmed when it received higher bids for construction from general contractors, could not sue the brick manufacturer for price manipulation because it was downstream in the chain of commerce and not a “direct purchaser.” The Supreme Court rejected the state’s argument that higher bids from contractors gave the state standing to challenge the alleged price manipulation of the bricks. Only the entity who bought the product from the alleged antitrust violator was a direct purchaser who bore the entire cost of the price manipulation. As the product moved down the chain of commerce, it would become less certain as to which purchaser suffered the entire portion of the price attributable to the violative conduct.

The district court which originally considered the motion to dismiss the consumers’ action claimed to apply the Illinois Brick standard when it dismissed the action on the grounds that the consumer plaintiffs were not direct purchasers under the Clayton Act. The district court reasoned that since the price paid by the plaintiffs was set by the individual developers rather than Apple, the customer was not a direct purchaser under the Clayton Act. The district court further justified its decision on the grounds that the plaintiffs would need to prove that each developer would lower the price of its app sufficiently to account for the entirety of the commission in a competitive market to prove that the customer suffered an injury as a result of Apple’s allegedly anticompetitive conduct. The Ninth Circuit reversed, finding the consumers were direct purchasers with Apple.

The Supreme Court affirmed the Ninth Circuit, finding that both the plain language of the Clayton Act and prior precedent permits consumers to sue a monopolist retailer as “any person” injured by an antitrust violator. Justice Kavanaugh criticized Apple’s argument that the party who sets the price is the only party whose conduct directly affects the consumer.  Whether the retailer makes a profit through a price markup after purchasing product from the supplier or charges a commission to the supplier, the injury suffered by the consumer as a result of the monopolistic behavior of the retailer is the same. Yet under Apple’s theory, if a developer agreed with Apple to sell an app for a certain amount, Apple would have been shielded from liability from the consumer, even where the consumer may not have knowledge of the profit arrangement. The Court chose to ignore any distinction between systems controlled by “brokerage . . . and purchaser-resellers.” That distinction would allow retailers to avoid antitrust liability by structuring the transaction such that, what was once the wholesale price remitted to the supplier, would now be crafted as the retail price (minus the commission) remitted to the supplier.

Justice Kavanaugh also rejected the notion that Apple’s “who sets the price” approach better promoted the policies underlying the Illinois Brick direct-purchaser rule: 1) more effective enforcement of antitrust laws; 2) avoiding complicated damages calculations; and 3) eliminating duplicative damages. Denying consumers who are immediate purchasers the opportunity to sue a retailer would not promote effective enforcement of antitrust laws. Secondly, Justice Kavanaugh claimed that assessing damages in retail markup cases could be just as complicated as in retail commission claims (although not providing any examples).

With respect to the third policy of avoiding duplicative damages, Justice Kavanaugh distinguished the factual scenario in Illinois Brick, where the manufacturer at the beginning of the stream of commerce marked up its price for products sold to various buyers, who then sold the product down the chain to contractors, who then may have passed on all or part of the markup to end customers. In that instance, without the direct-purchaser rule, the distributors, general contractors, and the end customer could all have claimed they incurred all or part of the cost of the same markup, when in reality, it was only the initial purchaser who could account for the markup in entirety. Here, we know that Apple is getting the entire price of the app, including the entire amount of the commission, directly from the customer. Thus, the same concern of duplicative damages would not inhibit the Court’s use of the bright-line test.

The Apple opinion rectifies inconsistent application of the direct-purchaser rule by the Eighth Circuit. In Campos v. Ticketmaster Corp. (8th Cir. 1997), the court dismissed a consumer antitrust class action for price fixing related to service and handling fees for ticket distribution services based on the direct-purchaser rule. The Eighth Circuit ignored the fact that the defendant charged the service fees directly to the consumer, separate and apart from the price of the ticket set by the venue. The Campos court focused on the fact that the original agreement to use the defendant’s services as the exclusive means of selling tickets is between the distributor and the event venue. Thus, the Campos court posited that the venue, not the customer, suffered the true injury, in that but for the defendant’s anticompetitive conduct, the venue would be able to charge the same total price to the customer and collect its own service fees. The Campos court claimed that the Third Circuit similarly reasoned against rejecting “billing arrangements” as the test for direct-purchaser status by citing the Third Circuit’s statement that a separate charge for a service does not make the consumer a direct purchaser of the service. The Third Circuit, however, merely noted that a separate charge to a consumer collected by a third-party as a pass-through for costs paid by the third-party for the defendant’s services did not make the consumer a direct purchaser of the defendant’s services. In Campos, however, the consumer paid the delivery fee directly to the alleged antitrust violator. Under Apple, the consumers in Campos would now likely be able to pursue their antitrust claims.

As Apple noted in its petition for certiorari, the Court’s position on this matter has important implications for consignment and agency platforms—even for the developers whose apps can be purchased in the App Store, but which provide goods and services under a similar business model. The Apple decision may cause new and old developers to act with caution when creating platforms to connect consumers with third parties for the provision of goods and services for compensation. There are many examples of platforms which have enjoyed much success by providing consignment/agency services in apps, and many small developers attempt to pierce the market each week.  For some, the delivery fees are expressly separate from the goods or services provided. For others, the consumer does not see the commission charged to those entities which utilize the platform to market their goods and services. In both scenarios, there are many platforms that collect the total from the customer and remit the balance after commission to the business. In both cases, these platforms are now susceptible to antitrust claims brought by consumers.

The Apple decision could also offer indirect benefit to those business who utilize consignment and agency platforms to obtain business from consumers, in that they can rely on consumer litigation to break the hold of domineering platforms without having to participate as a party in the litigation. Moreover, the Court implied in Apple that its ruling did not necessarily prohibit a developer from also asserting an antitrust claim for its lost profits against Apple on the basis that it acts as a monopsony by limiting the market through which it can distribute its apps to one buyer (Apple). That is to say, the Court left opportunity to bite the Apple from both ends.

Jury “Grills” Walmart: Five Takeaways from the $95.5 Million BACKYARD Trademark Verdict

By Emily Doan

In 2019, a California jury found Walmart liable for $95.5 million in damages for infringing the BACKYARD trademark of a smaller retailer, Variety, Inc. Variety operates over 300 discount stores and sued Walmart for adopting a BACKYARD GRILL brand. Variety claims it had been using BACKYARD for lawn, garden, and barbecue equipment since 1993.

In October of 2018, a jury found Walmart willfully infringed Variety’s BACKYARD GRILL trademark, but the determination of damages was left to a second jury trial that concluded on February 12.  The second jury found Walmart liable for $45.5 million in royalties and $50 million in Walmart’s profits from sales of Walmart’s BACKYARD-branded products. On February 19, the judge overseeing the case approved the jury’s $95.5 million verdict.

While most trademark infringement cases settle, this monumental verdict illustrates important points about brand protection and risk avoidance. Here are our top five takeaways from the case:

  1. Trademark screening is essential and inexpensive for long-term success. Before using or applying to register a trademark, it is crucial to engage trademark counsel to screen proposed trademarks and identify risks to your use and/or registration of the proposed trademarks. When you compare a couple thousand dollars to $95.5 million in damages, common sense demands you clear your mark and invest in the long-term security of your brand.
  2. Do not ignore the advice of your trademark counsel. The evidence presented in the Variety v. Walmart case suggested that Walmart blatantly ignored “repeated warnings from its own legal counsel” to not use the BACKYARD GRILL trademark. This fact contributed to a district court judge’s finding in 2016 that Walmart willfully infringed Variety’s trademark. (That ruling was overturned on appeal and sent to a jury, but the jury also concluded that Walmart had willfully infringed.) Involve trademark counsel at the beginning of the marketing team’s creative process. If you disagree with trademark counsel, get a second opinion, but do not deliberately ignore your attorneys’ advice when serious risks are identified.
  3. Do not ignore third party claims of intellectual property infringement. If you receive a cease and desist letter or other correspondence from an intellectual property owner or counsel that alleges you are infringing someone’s rights, do not ignore it. Even though Walmart is a retail behemoth, it ignored Variety’s claims to priority over the BACKYARD trademark. If you are accused of infringing a third party’s intellectual property rights, engage intellectual property counsel to discuss strategy and determine an appropriate response to the allegations.
  4. Stronger trademarks are easier to enforce. More distinctive trademarks receive broader protection. Plenty of third parties use the word BACKYARD alone or in combination with other elements as a trademark for barbecue related goods or services. For example, BACKYARD LIVING is registered for use with barbecue, charcoal, and gas and electric grills, and BACKYARD PRO is registered for use with barbecue smokers, charcoal grills, and gas grills. Walmart may have justified its use of BACKYARD GRILL by arguing rampant third party use of BACKYARD in connection with similar goods and the addition of GRILL to avoid likelihood of confusion with BACKYARD alone. We can only imagine whether this case would have settled if Variety were using a stronger (i.e., arbitrary or fanciful) trademark for its lawn, garden, and barbecue equipment with Walmart adopting that stronger trademark for related goods. Trademark counsel can advise you on the strength of your proposed trademark in the marketplace and whether third parties are already using the trademark or using common elements of the trademark.
  5. A plaintiff may recover an infringer’s profits. In determining defendant’s profits, the plaintiff only needs to show defendant’s sales. The burden then shifts to the defendant to offset costs and deductions. Here, the jury determined Variety was entitled to $50 million from Walmart’s profits on BACKYARD GRILL products. The takeaway here is that exposure can be significant if an infringing mark is used liberally on goods sold. Other remedies for trademark infringement include injunctive relief, damages, costs, and attorneys’ fees. Damage awards may be enhanced upon a finding of willful infringement.

The McNees Intellectual Property team includes experienced trademark attorneys and paralegals who are available to counsel brand owners on trademark clearance and risk avoidance. We are available at every step to advise you on a wide variety of intellectual property matters, including brand protection.

© 2019 McNees Wallace & Nurick LLC
McNees Litigation News is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.


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