Economic Reality at the Core of Apple

I. Introduction

The Supreme Court’s split decision in Apple, Inc. v. Pepper ¹ has created a good deal of confusion and concern for the continuing vitality of Illinois Brick ² in defining antitrust standing. ³ The problem began with Pepper’s mischaracterization of how apps are sold to iPhone owners. In his class action complaint, Pepper alleged that Apple monopolized the sale of apps to iPhone owners in violation of Section 2 of the Sherman Act. ⁴ In order to avoid Illinois Brick’s exclusion of indirect purchasers from antitrust standing, ⁵ Pepper alleged that it bought apps directly from Apple. For this to have been correct, Apple would have had to have purchased the apps from the app developers and resold them to iPhone owners. But this is not what happened.

Apple offered a markedly different interpretation of the transaction. According to Apple, it charged a commission for providing distribution services to the app developer. If the commission influenced the app developer’s price, then the commission, or part of it, was passed on to the iPhone owner, who bought directly from the app developer. In that event, the iPhone owner would be an indirect victim and would lack standing under Illinois Brick. But Apple’s characterization is not what happened. Both Pepper and Apple have mischaracterized the transaction and created considerable confusion.

The economic reality is that Apple used contracts, threats to iPhone owners and app developers, and its proprietary technology to create a bottleneck that forced the sale of apps through its App Store. ⁶ This made it possible for Apple to impose a 30% commission on each transaction. Apple’s commission is the functional equivalent of an ad valorem tax. In this article, we explain how the issue should have been framed by Pepper and discuss the implications for antitrust standing. We will show that effective enforcement of the antitrust laws requires granting standing to both the iPhone owners and the app developers. We will also show that there is no need for complex apportioning of any damage award, which was a major concern in Illinois Brick. As will become apparent, the correct characterization greatly simplifies the antitrust analysis. Additionally, our analysis applies more broadly to cases involving unlawful commissions or fees imposed on transactions. ⁷

In Section II, we present the essential facts surrounding the Apple litigation and illustrate the economic reality of the commission that the Apple court misinterpreted. In doing so, we identify the confusion occasioned by Illinois Brick. In Section III, we present our economic analysis of Apple’s commission as an ad valorem tax, which affects both iPhone owners and app developers. In Section IV, we discuss how one identifies the damages and some practical difficulties in doing so. We show that there is no need for complex apportioning and no threat of duplicative damages. The results of this section are consistent with Supreme Court precedents. In Section V, we discuss generalizations of the Apple case to competitive markets and apply the same reasoning to per unit commissions, which further inform the reader on the irrelevance of Illinois Brick. Section VI includes caveats specific to the Apple case, which highlight the practical difficulties of litigation. Finally, in Section VII, we close with some concluding remarks.

II. The Apple Litigation

Apple, Inc., a multinational company that sells consumer electronics, computer software, and online services, developed and launched the iPhone in 2007. In the following year, Apple opened its App Store to provide iPhone owners a central location to find, purchase, and download mobile applications (apps), which can provide services such as email, calendar, entertainment, health, GPS, and myriad other functions. ⁸ Since then, hundreds of millions of iPhones have been sold and app developers have created millions of apps for those consumers to purchase. In the 2020 fiscal year, approximately US$53.8 billion was spent on Apple Services, which encompasses revenue from the App Store. ⁹ Although the App Store facilitates the transactions between the app developers and the iPhone owners, they also function as a bottleneck since they ensure that there are no alternatives for connecting app developers to iPhone owners.

Since the opening of its App Store, Apple has compelled developers and iPhone owners to conduct transactions through the App Store via exclusionary conduct and the use of proprietary technology. For example, Apple prohibits app developers from steering consumers to buy subscription services outside the App Store in order to avoid Apple’s commission. ¹⁰ If an app developer attempted to circumvent the App Store to sell its application directly to iPhone owners, Apple threatened to deny them total access to the App Store and millions of iPhone owners. The app developers had two choices: either sell through the App Store or forgo sales to iPhone owners. ¹¹ On the demand side, Apple threatened to invalidate the iPhone warranty of any iPhone owner who purchased an app outside the App Store. ¹² Hence, iPhone owners had two choices when it came to apps: either they could buy the app in the App Store if they did not want to lose their warranty or they could forgo owning the app. By forcing transactions through the App Store, Apple created monopoly power that allowed it to act as a taxing authority. Apple exercised this power by charging a 30% commission on all transactions. ¹³

To clear away the confusion in Apple, it is necessary to keep in mind the essential features of the transactions. First, iPhone owners buy directly from the app developers—not from Apple. At no point does Apple take title to an app. Apple cannot sell what it does not own—at least not legally. ¹⁴ Additionally, Apple does not face any business risk in selling apps. The risk falls on the app developer whose app may not have sold as well as the app developer had expected. Supreme Court precedent would indicate that the one with the business risk is the true owner of the product. Although Apple does collect the money on behalf of the app developer, it does not sell the app. As we will explain in more detail below, Apple’s 30% commission on each transaction is an ad valorem tax on the transaction that is borne in varying degrees by both the app developer and the iPhone owner. Pepper’s failure to plead this economic reality resulted in considerable confusion in the courts.

In Pepper v. Apple, Inc., ¹⁵ a putative class of iPhone owners sued Apple for allegedly violating §2 of the Sherman Act. The central allegation was that Apple’s 30% commission was a monopoly overcharge on Apple’s sale of apps. Accordingly, Pepper claimed damages under §4 of the Clayton Act. Apple offered a different characterization of the transaction. It argued that the iPhone owners bought the apps directly from the app developers and the 30% commission was paid by the app developer for distribution services. ¹⁶ If the commission injured the iPhone owners, it would be a passed-on overcharge since the iPhone owners did not buy directly from Apple. The District Court described Pepper’s claim as follows:

…Plaintiffs attempt to plead that they are aggrieved direct purchasers by arguing that the thirty-percent portion obtained by Apple is a direct, fixed cost to consumers who are “first” in the chain to purchase the Apps. In so arguing, Plaintiffs attempt to avoid being categorized as indirect purchasers who pay Apple a fee via a pass-through because in such a situation, they would lack standing to allege antitrust claims under Illinois Brick Co. v. Illinois. ¹⁷

The Ninth Circuit Court of Appeals reversed and reinstated Pepper’s claim. ¹⁹ At issue was whether the consumers were direct purchasers of apps from Apple or whether, as Apple argued, they bought apps directly from the app developers who bought distribution services from Apple. Contrary to the District Court’s findings, the Ninth Circuit held that Pepper was a direct purchaser from Apple: “Apple is a distributor of the iPhone apps, selling them directly to purchasers through its App Store.” ²⁰ In response, Apple appealed to the Supreme Court.

The only issue before the Supreme Court was whether Pepper had standing to sue under §4 of the Clayton Act. As Pepper’s Complaint had been framed, the critical issue was whether Pepper and other iPhone owners purchased their apps from Apple or from the app developers. Under the Supreme Court’s Illinois Brick precedent, direct purchasers from antitrust offenders have standing, while indirect purchasers do not. Writing for the majority, Justice Kavanaugh held that “[i]t is undisputed that the iPhone owners bought the apps directly from Apple.” ²¹ Since Pepper and other iPhone owners bought directly from Apple, they are direct purchasers under Illinois Brick. The Court cautioned that its holding was limited to the question of Pepper’s standing: “[a]t this early pleadings stage,…we merely hold that the Illinois Brick direct purchaser rule does not bar these plaintiffs from suing Apple under the antitrust laws.” ²²

The assertion that iPhone owners buy directly from Apple is inconsistent with the facts. It is true that an iPhone owner’s purchase of an app takes place in Apple’s App Store. It is similarly true that an app developer’s sale of an app takes place in the App Store. It does not follow, however, that Apple has purchased and resold the app. In fact, Apple never owns the app and one cannot sell what one does not own—at least not legally. Clearly, with this interpretation of the transaction, there is no intermediary and consequently there can be no pass-on which would invoke Illinois Brick.

Apple used contracts, threats, and its proprietary technology to force iPhone owners and app developers to transact all their business in its App Store. By doing so, Apple could impose an ad valorem tax, or commission, on each sale. As a factual matter, iPhone owners bought apps directly from the app developers. Confusion over this fact arose because of Apple’s conduct and policies that forced the sale into the App Store thereby creating the impression that iPhone owners bought their apps from Apple. If there is an antitrust violation, it resides in this conduct. Assuming at an early pleadings stage that this conduct amounts to a §2 violation, the question then becomes, who has standing to pursue antitrust damages. Since the monopolistic commission was imposed on the transaction, both the iPhone owners and the app developers should have standing to sue.

Even though the majority failed to appreciate the economic reality of Apple’s conduct, they seemed to understand that Apple’s conduct warranted reproach. Justice Kavanaugh found that Pepper had standing and suggested in dictum that app developers might have standing as well. Justice Kavanaugh also observed that the damages sought by Pepper and those sought by the app developers would be disjoint and, therefore, would not be duplicative nor lead to complex apportioning. As we will show below, Justice Kavanaugh was correct. Finally, he observed that by using a commission-based payment structure, Apple functioned as a bottleneck. Thus, even though the Court analyzed the case through a mischaracterization of the economic reality, it still came to the correct decision and hinted at the correct solution.

The majority’s resolution of Apple Inc. v. Pepper may ultimately have led to the correct outcome. This approach, however, is based at least in part on a misconception. We argue that analyzing the case through the lens of the economic reality greatly simplifies the decision and damage calculations, which we show in what follows.

III. The Economic Reality of Apple's Commission

As we have seen, much of the confusion created by Apple is due to Pepper’s mischaracterization of Apple’s role in the app market. A good deal of the fog surrounding Apple can be swept away with a careful analysis of the economic realities.

Through its proprietary technology embedded in the iPhone and threats to both iPhone owners and app developers, Apple forces all app sales to pass through its App Store. Apple does not buy apps from app developers and resell them to iPhone owners. Instead, it creates a bottleneck through which all app sales must pass. Apple accepts full payment from the iPhone owner, takes a 30% commission, and transmits the remaining 70% to the app developer. ²³

Apple’s commission can be analyzed for what it is—an ad valorem tax on each transaction, the economic effects of which are well known. In most circumstances, an ad valorem tax is not imposed on the seller nor is it imposed on the buyer. Instead, it is imposed on the transaction and the tax is shared by the two parties. Suppose an item has a nominal posted price of US$10.00. If there is an ad valorem tax of 6.0%, the consumers will pay US$10.60 for the item. Thus, the consumer appears to pay the sales tax. But there is another way to look at this transaction. The consumer paid US$10.60 for the item, but the supplier receives only US$10.00. Consequently, the seller appears to pay the tax. Both of these images of the economic reality are optical illusions. In the absence of the sales tax, the consumer would usually pay a bit less than US$10.60 while the seller would usually receive a bit more than US$10.00. ²⁴ Thus, the tax is shared between the two parties. In the Apple case, the buyer is an iPhone owner, the seller is an app developer, and the taxing authority is Apple.

There are millions of apps for iPhone owners. To one extent or another, these apps are all unique. Even apps intended for the same purpose differ to some degree. Given the existence of some product differentiation, we assume that the consumer demand for a specific iPhone app has a negative slope, which implies that the app developer has some degree of monopoly power. ²⁵ In Figure 1, we display the demand for a specific app as D ₁ and the associated marginal revenue as MR. The demand curve shows the maximum prices that iPhone owners are willing to pay for various quantities of apps. In effect, it shows how much consumers pay.

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Figure 1.

The effect of an ad valorem commission (constant marginal cost > 0).

The net demand, or postcommission demand, is shown as D ₂ in Figure 1 along with the corresponding marginal revenue curve (mr). ²⁶ For any given quantity, the height of D ₂ is 70% of the height of D ₁. For example, if the height of D ₁ is US$2.00, the height of D ₂ will be US$1.40. ²⁷ For the app developer, marginal cost is represented as MC. ²⁸

In the absence of Apple’s commission, market equilibrium will result in an output of Q ₁ where marginal cost (MC) is equal to marginal revenue (MR). The corresponding price would be P ₁. Consumer surplus would be equal to the triangular area abP ₁. Producer surplus would be equal to area P ₁ bcd. Due to the developer’s lawful monopoly, the social welfare loss would be captured by area bec in the absence of the commission. Given Apple’s 30% commission, the new equilibrium results in an output of Q ₂ where the net marginal revenue (mr) is equal to marginal cost. At that quantity, the price paid by iPhone owners would be P ₂ while the price received by the app developer would be P ₃.

As a result, consumer surplus falls from abP ₁ to afP ₂. Producer, that is, app developer, surplus falls from P ₁ bcd to P ₃ ghd. Apple’s commission revenue would be equal to P ₂ fgP ₃. Apple’s commission exacerbates the social welfare loss which expands to area feh. In this case, the iPhone owners absorb part of Apple’s tax, which is captured by P ₂ fiP ₁ while the app developer bears the rest of the “tax,” which is area P ₁ igP ₃. In order to identify how much of the tax each party bears, it is necessary to identify the but for price, which is P ₁ in this example. This may be an econometric challenge, but it is necessary no matter who has standing. This is not the “complex apportioning” that concerned the Illinois Brick Court. ²⁹ As we will explain in the next section, estimating the but for price is essential for calculating antitrust damages irrespective of who has standing.

There has been a suggestion that the app developer’s marginal cost is zero. ³⁰ This, of course, is a special case and the final results are a bit different. We have displayed the analysis in Figure 2. The iPhone owner’s demand (D ₁) and the net demand (D ₂) along with their associated marginal revenue curves, MR and mr, respectively, are the same as those in Figure 1. If the marginal cost of the app developers is zero, it coincides with the quantity axis. Thus, profit maximization requires producing where marginal revenue is zero. The quantity will be Q* and the price will be P ₁. Apple’s commission does not alter the output since both MR and mr equal zero at Q*. Consequently, the price paid by the iPhone owner does not change. The price received by the app developer falls to P ₂. The 30% commission is borne entirely by the app developer.

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Figure 2.

The effect of an ad valorem commission (marginal cost = 0).

In this special case, the iPhone owners do not experience any reduction in consumer surplus and, therefore, are not injured by Apple’s commission. The app developer, in contrast, experiences a reduction in producer surplus equal to the commission. ³¹

IV. Identification and Measurement of Antitrust Damages

We have argued that both iPhone owners and app developers should have standing to sue for damages under §4 of the Clayton Act. ³⁴ Although Apple’s allegedly impermissible commission does not involve a pass-on issue, Illinois Brick raised general concerns of duplicative damages and complex apportioning that we address here. ³⁵ Since the Clayton Act does not specify how a plaintiff should identify and measure antitrust damages, it was left to the Supreme Court to provide guidance, which it did in its opinion in Bigelow v. RKO Radio Pictures. ³⁶ In Bigelow, the Supreme Court explained that antitrust damages are found “by comparison of profits, prices and values as affected by the [antitrust violation], with what they would have been in its absence under freely competitive conditions.” ³⁷

It is straightforward to apply this prescription to Apple. For the iPhone owners, the price as affected by Apple’s presumably unlawful commission is P ₂ in Figure 1. For the app developers, the price as affected by Apple’s commission is P ₃. For both the iPhone owners and the app developers, the price in the absence of the antitrust violation would be P ₁. Consequently, the antitrust damages suffered by the iPhone owners (Δ _o ) would be Δ o = P 2 − P 1 Q 2 and the antitrust damages incurred by the app developers (Δ _d ) would be Δ d = P 1 − P 3 Q 2 . The total damages for the iPhone owners and the app developers (Δ _T ) would be Δ T = P 2 − P 1 Q 2 + P 1 − P 3 Q 2 = P 2 − P 3 Q 2 , which is precisely equal to the total commission collected by Apple as shown in Figure 1.

In the case of M C = A C = 0 , the tax will not alter the quantity sold or the price to the iPhone owner, as discussed above. ³⁸ Standing for the iPhone owner is moot since there is no injury to them. In this event, all of the impermissible commission falls on the app developer. This makes damage estimation easier because the app developer’s antitrust damage equals the commission. Consequently, there is no need to estimate any but for price. ³⁹

There are two important lessons here. First, it is clear that there is no duplication of damages and no need for complex apportioning. The damage claims of both parties do not overlap. They add up to the total damages. Second, it should be obvious from the analysis in Section III that there is no need for complex apportioning of the antitrust damages. The Apple commission is an ad valorem tax on each app sale. Identifying the incidence of this tax is well understood.

As a practical matter, the successful plaintiff must estimate the but for price. Apple’s records can be used to prove the price that an iPhone owner paid (P ₂), the net price received by the app developer (P ₃), and the number of apps sold (Q ₂). To divide the tax appropriately, the plaintiff must estimate the but for price (P ₁). This estimate may be difficult, but it is not complex. Moreover, it is no more difficult than estimating the but for price in any price enhancement case.

The Illinois Brick Court was also concerned with effective antitrust enforcement, that is, ensuring efficient litigation that will punish wrongdoers. Some commentators have pointed out that Illinois Brick promoted deterrence of anticompetitive behavior at the expense of compensation. In Apple, the Court appeared to shift its focus to compensation. ⁴⁰ This may well be correct, but such a trade-off was unnecessary. Granting antitrust standing to both app developers and iPhone owners ensures effective enforcement. If only consumers (or app developers) have standing to sue, their recovery will ordinarily be less than the total commission. The precise share of the commission that will be borne by the app developer and the iPhone owner will be determined by elasticities of supply and demand. If only iPhone owners (or app developers) have standing, the part falling on the developers (or iPhone owners) will be retained by Apple. Thus, allowing both parties to sue ensures that Apple will not retain any ill-gotten gains.

This solution is consistent with Bigelow. For buyers, the antitrust damage is the difference between the actual price paid and the price but for the antitrust violation. For sellers, the damage is the difference between the but for price and the price received. Additionally, to distribute damages otherwise would be incorrect on economic grounds. As emphasized previously, the iPhone owners and app developers share the ad valorem tax according to the relative elasticities of supply and demand.

V. Bottlenecks with Competitive Markets and Unit Taxes

The analysis presented above can be further clarified by examining two generalizations of our model. First, our analysis readily extends to instances where there is competition on both sides of the bottleneck. In other words, the good in question is produced by a large number of relatively small firms. In addition, the good is purchased by a large number of relatively small buyers. In this case, no one has any control over price and, therefore, there can be no question of passing on the commission. Second, in instances where the commission is levied on a per unit basis, the same conclusions will be reached as with ad valorem taxes. Both consumers and suppliers are injured and their injuries do not overlap. These generalizations clearly show that Illinois Brick is not relevant to the case at hand.

A. Competition on Both Sides of the Bottleneck

The hallmark of a competitive market is the absence of power over price. The competitive equilibrium price and output are determined by an iterative adjustment process, but no one “sets” the price. In this scenario, pass-on is irrelevant since neither buyer nor seller can “pass on” any of the overcharge.

Suppose that a firm can create a bottleneck through which all transactions must flow. Suppose further that both supply and demand are competitively structured. The owner of the bottleneck imposes a commission of, say, 30% on all transactions. In this environment, there is no Illinois Brick issue. In the absence of the presumably unlawful commission, the price and quantity would be determined by the equality of supply and demand, as shown in Figure 3. The competitive price and output are P₁ and Q₁ , respectively.

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Figure 3.

The effect of an ad valorem commission (increasing supply).

We can examine the net demand, that is, the price received for each quantity, which is shown as D ₂ in Figure 3. In this approach, D ₂ rotates around the intercept at D ₁ and the quantity axis. Its height is 70% of the height of D ₁ at each quantity. ⁴¹ The intersection of D ₂ and S determines the quantity transacted, which is Q ₂. ⁴² The price paid by consumers rises to P ₂, which is greater than P ₁. The price received by the suppliers is P ₃, which is less than P ₁. The portion of the unlawful commission, which is equal to (P ₂ − P ₃)Q ₂, is divided between the consumers and the supplier. Consumers pay (P ₂ − P ₁)Q ₂ of the commission, while suppliers pay (P ₁ − P ₃)Q ₂.

The welfare and distributional effects of the unlawful commission are also identified in Figure 3. The competitive solution yields consumer surplus equal to the area of the triangle abP ₁ and producer surplus equal to the area of triangle P ₁ bc. With unlawful commissions, consumer surplus falls to area adP ₂ while producer surplus falls to area P ₃ ec. The triangular area dbe is the familiar deadweight social welfare loss. The commission is the rectangular area P ₂ deP ₃. Part of this rectangle is a transfer from consumers and part of it is a transfer from suppliers.

According to the Supreme Court’s opinion in Bigelow v. RKO Radio Pictures, ⁴³ consumers have suffered antitrust damages of

Δ c = ( P 2 − P 1 ) Q 2 ,

while producers have suffered antitrust damages of

Δ p = P 1 − P 3 Q 2 .

It is clear that there is no duplication since the damages are disjoint. Moreover, no complex allocation is necessary. Thus, the major concerns of Illinois Brick are not relevant in this general case.

B. Per Unit Commission

In Apple, the Supreme Court reviewed a unit tax commission to inform their analysis. We do the same here. On some platforms, a per unit “handling fee” is added to the nominal price. For example, when a concert goer purchases a ticket through Ticketmaster, he or she pays for the ticket and pays an additional sum to Ticketmaster for its services. The consequences of per unit commissions can be seen in Figure 4.

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Figure 4.

The effect of a unit tax commission.

The demand by iPhone owners for the app in question is shown as D ₁ and the corresponding marginal revenue is shown as MR. The net demand D ₂ is parallel to D ₁ and the vertical distance between D ₁ and D ₂ is the per unit commission. The net marginal revenue, mr, is parallel to MR and the vertical distance between the two is equal to the commission. Once again, we depict marginal cost as MC.

The market equilibrium results in a quantity of Q ₁ at a price of P ₁ in the absence of the commission. When the commission is charged, however, the new equilibrium requires operating where the net marginal revenue, mr, is equal to marginal cost, MC. The result is a reduction in quantity from Q ₁ to Q ₂. The price paid by the iPhone owner rises from P ₁ to P ₂ while the price received by the app developer falls from P ₁ to P ₃. The difference between P ₂ and P ₃ is equal to the unit commission. Qualitatively, the balance of the analysis is the same as the analysis of ad valorem commissions when marginal cost is positive. If the marginal cost is 0, the results differ from those associated with an ad valorem commission. In this case, the unit tax will decrease the quantity sold and thereby increase the price paid by the iPhone owner and reduce the price received by the app developer.

VI. Caveats

We have shown that an unlawful commission—either ad valorem or unit—imposes antitrust damages on both app developers and iPhone owners in most cases. Effective antitrust enforcement, therefore, requires both iPhone owners and app developers to have standing to sue under §4 of the Clayton Act. In practice, however, complications may arise. If Apple’s conduct is found to be unlawful under §2 of the Sherman Act, it will create some significant problems for private enforcement under §4 of the Clayton Act.

First, it would seem sensible for the iPhone owners and the app developer to file a joint suit. The but for price will be the same, and the estimation of damages for the iPhone owners and the app developer will be resolved without any duplication or dispute among the plaintiffs. Whether this is feasible procedurally is another matter. ⁴⁴

Second, for any given app, there may be millions of iPhone owners who have been unlawfully taxed by Apple. In the aggregate, the adverse effect on the iPhone owners may well be huge, but the individual harm will be trivial. ⁴⁵ Consequently, distributing any recovery will be more costly than it is worth. Suppose, for example, that 1 million apps were sold and the unlawful commission amounted to US$300,000. The portion borne by the iPhone owners might amount to US$10,000. Each iPhone owner would recover a penny trebled, so US$0.03. Consequently, even though the iPhone owners have antitrust standing, a class action on their behalf may well be abandoned. This will weaken the deterrent effect of Section 4, but not by much. In this example, the app developer would be entitled to receive US$290,000 trebled to US$870,000 plus fees and expenses. This suit is worth pursuing.

Third, since the apps are distinct, the demands and marginal costs for those apps are bound to be distinct and, therefore, the claim by a weather app purchaser and that of a photo editor app cannot be combined in a single suit. Some apps may fall into a group of apps that are somewhat differentiated but serve the same purpose and may be combined. ⁴⁶ In principle, however, there could be hundreds of thousands of separate suits for both iPhone owners and app developers. Apple’s conduct, therefore, could swamp the federal courts.

There may not be a feasible remedy for iPhone owners and app developers under §4 of the Clayton Act. There is, however, a way to make Apple’s conduct unprofitable with public enforcement. Under the Criminal Fine Improvements Act of 1987, ⁴⁷ an antitrust violator may be required to disgorge twice its illicit profits or twice the harm to its victims. In Apple’s case, the calculation of illicit profit can be determined from Apple’s business records. As long as the probability of detecting Apple’s wrongdoing and convicting them of a Section 2 Sherman Act violation exceeds one half, its conduct will be unprofitable and, therefore, should be deterred.

VII. Concluding Remarks

The Supreme Court’s decision in Apple, Inc. v. Pepper brought into question the continuing vitality of the Illinois Brick rule regarding pass-on damages. The Apple decision, however, resulted from Pepper’s original mischaracterization of the economic reality surrounding the sale of apps to iPhone owners. The economic realities are that (1) iPhone owners bought directly from app developers, (2) Apple forced the transaction to take place in its App Store through coercion and its use of proprietary technology, and (3) Apple imposed a 30% ad valorem tax on each transaction. If the act of forcing the transactions through the App Store violates §2 of the Sherman Act, then the tax would constitute antitrust injury.

In most circumstances, the impact of the presumptively unlawful commission is felt in varying degrees by both iPhone owners and app developers. Consequently, both iPhone owners and app developers should have standing to sue Apple for antitrust damages. In this way, Apple will be left with no ill-gotten gains, which would render its conduct unprofitable. In addition, iPhone owners and app developers would be fully compensated without the risk of duplicative recoveries.

Our analysis applies to any case in which a third party creates a bottleneck in order to impose taxes that may be termed commissions or fees. It applies irrespective of the market structure on either side of the bottleneck or the form of the commission, that is, either ad valorem or unit taxes. The misconception in Apple that antitrust standing should be determined by the Illinois Brick rule, unnecessarily complicated the Court’s decision and eliminated the opportunity to create useful precedent for unlawful bottlenecks.