U.S. class action lawyers argue Apple's App Store commission would be cut in half if Apple had to face competing iOS app stores, apparently want Apple to dole out tens of billions of dollars to iPhone users

The Pepper v. Apple consumer class action over supracompetitive App Store commissions, which was brought more than a decade ago, has already been a trailblazer: the Supreme Court's affirmance of a Ninth Circuit decision according to which consumers had standing to seek antitrust damages from Apple over App Store commissions did not resolve the merits of the case, but defibrillated it after Judge Yvonne Gonzalez Rogers had dismissed it. And the fact that even a Trump appointee--Justice Brett Kavanaugh--sided with liberal judges on this issue clearly emboldened other plaintiffs. Then Epic Games brought its case against Apple--just yesterday I explained, with half a dozen charts, why Epic should prevail on market definition--and eclipsed Pepper. But in the end that may even have been a good thing for the consumer class action, as its lawyers now get to optimize their strategy based on the outcome of Epic's case (including the appeal).

Late on Monday, the class action lawyers (from the firms of Wolf Haldenstein, Kellogg Hansen, and Calcaterra Pollack) filed their renewed motion for class certification with the United States District Court for the Northern District of California:

https://www.documentcloud.org/documents/22927236-22-09-26-consumer-plaintiffs-renewed-motion-for-class-cert

Judge YGR had dismissed their previous motion without prejudice. She wanted to see some improvements, but apparently didn't doubt too strongly that certification would ultimately happen.

The part I wish to look at here discusses the plaintiffs' position on what a competitive App Store commission rate would be (and would have been all along). While the exact percentage is hidden, the public redacted version of the document states that it "is similar to the results reached by Dr. Economides" (the economic expert in a developer class action that got settled). And the motion summarizes Dr. Economides' findings as follows:

"Prof. Economides relied upon the same fundamental economic relationship between app store profit margin, costs, and prices but relied on different data and documents for the model’s inputs to conclude that the prevailing commission rate would have been approximately 13.0 percent in a BFW [but-for world] where Apple faces two rivals, and 14.8 percent in a BFW where Apple faces one rival."

The consumer plaintiffs go on to claim that their own expert "used (i) more conservative assumptions (a single-rival world rather than the two-rival world analyzed by Prof. Economides), and (ii) better data (including data from Apple’s own survey expert, Prof. Itmar Simonson, Ph.D.)."

Given that the developers' expert arrived 14.8% in a one-rival scenario and that the consumers say their own number is similar, we can assume they roughly believe a competitive rate would be 15%.

The consumer class will likely argue that the entire differential between what Apple actually charged (which is practically 30% as the 15% exception applies to many developers but only to a minuscule percentage of total App Store revenues) and a hypothetical rate of about 15%. Now, that's a simplistic way to look at it:

First, it's not just about a headline rate but also about whether in a competitive landscape there would be more loopholes. There are app stores (such as Epic's) that offer their own in-app purchasing (IAP) system to developers, but don't make it mandatory. And one could easily imagine app stores that are more permissive when it comes to, for instance, crypto transactions, which Apple taxes as well. That could have further reduced the effective rate.

Second, there certainly were many developers who would have charged end users the same: those developers would simply have been more profitable. And there must have been even more developers who might have priced their IAP offerings a bit lower, so consumers would have saved money while the developers would have made more.

Consumers would arguably have had a greater benefit from developers being able to invest more in their development efforts (as Apple was and is profitable enough), but that's hard to quantify.

But for a very rough estimate, we can assume that the class action lawyers want Apple to pay out tens of billions of dollars to their proposed class, which they define as follows:

"All persons in the United States, exclusive of Apple and its employees, agents and affiliates, and the Court and its employees, who purchased one or more iOS applications or application licenses from Defendant Apple Inc. (“Apple”), or who paid Apple for one or more in-app purchases, including, but not limited to, any subscription purchase, for use on an iOS Device at any time since July 10, 2008 (the 'Class Period'). The Class is limited to those persons who paid more than $10.00 in total to Apple during the Class Period for iOS applications and in-app purchases from any one Apple ID account;"

In June 2017, Apple announced that developers had earned more than $70 billion on the App Store, which means Apple collected $30 billion in commissions. For the years 2017-2021, Statista provides numbers that show an explosive growth in worldwide gross app revenue on the App Store: approximately $300 billion during that period, meaning Apple collected approximately $90 billion.

All those numbers are worldwide, and the class action is U.S.-specific. But the U.S. is a huge market for Apple--the only major market in which it is the market leader even by unit share.

Under the class action's theory, the global overcharge would have amounted to approximately $60 billion (half of $120 billion, which is the sume of the $30 billion inferred from Apple's 2017 announcement and the $90 billion calculated based on Statista's 2017-2021 numbers), and my guess is that the U.S. share of this is a third or more.

This class action can get really costly, not only in a monetary sense: it would be terrible for Apple if tens of millions of U.S. iPhone users (there are more than 100 million of them, but only those who spent at least $10 on the App Store with a single account would get a payout) received letters notifying them of their entitlement to a payout because of Apple having unlawfully overcharged them.

There are consumer class actions in multiple jurisdictions over the app tax enabled by the App Store monopoly. I mentioned some in a recent post on a Mexican regulatory complaint.

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One thing Apple's and Epic's lawyers agree on: Supreme Court's Pepper v. Apple opinion and 5-4 vote are unrelated to Epic's App Store case

There are no signs of a détente between Fortnite maker Epic Games and Apple. While Apple apparently keeps the door open to whatever version of Fortnite that would bring the battle royale game back into compliance with the App Store terms, Epic is not only being very vocal in public and running an anti-Apple tournament but also pursuing a litigation strategy that appears to be all about escalation, trying to take the merits of a huge antitrust case to the United States Court of Appeals for the Ninth Circuit in the coming months.

Notwithstanding the extremely acrimonious nature of this litigation, there's one remark that Judge Yvonne Gonzalez Rogers made in last month's hearing on Epic's motion for a temporary restraining order (TRO) that neither party is comfortable with. When counsel for Epic insisted on their likelihood to prevail on the merits (while the court placed the emphasis at the TRO stage on irreparable harm), Judge Gonzalez Rogers said this case was not going to be a "slam dunk" for either Epic or Apple, and reminded everyone that the Supreme Court's Pepper v. Apple vote--which ultimately allowed a consumer class action (seeking damages for allegedly having overpaid for app downloads and in-app purhcases) to go forward before her court--was very close: 5-4.

Representing Epic, Cravath's Gary Bornstein distinguished Pepper from Epic a few minutes later. He noted that Epic is an app developer bringing antitrust claims against Apple over its App Store terms, while the Pepper class action complaint is about harm to consumers from what Apple withholds from app developers, and the Supreme Court ruled on whether or not that consumer class could sue for damages (with Epic not even seeking damages for now).

After the reply brief Epic filed on Friday, it's beyond doubt that Epic's lawyers are not going to accept the notion that the outcome of their case would be hard to predict. If the district court doesn't agree, they'll try the same before the Ninth Circuit. Even though the Pepper decision on standing went against Apple, the closeness of the Pepper v. Apple vote appeared to dissuade Judge Gonzalez Rogers from considering Epic v. Apple a case over a clear antitrust violation.

Interestingly, Apple's lawyers made pretty much the same points in footnote 15 of their opposition (filed on Tuesday) to Epic's motion for a preliminary injunction, undoubtedly in light of Judge Gonzalez Roger's mentioning of that decision in the late-August TRO hearing:

"The 5-4 decision in Apple Inc. v. Pepper [...] addressed the 'sole question presented at th[at] early stage of the case,' namely, whether iPhone users who purchased apps from the App Store were 'direct' purchasers with standing to sue. The Court expressly did 'not assess the merits of the plaintiffs' antitrust claims against Apple' or 'consider any other defenses Apple might have.'"

At the preliminary injunction stage, the closeness of that vote wouldn't be a problem for Apple, which has a strong argument that the removal of Fortnite from the App Store is simply Epic's self-inflicted harm, that there's just one Epic corporate group and not two independent Epics, and that Apple isn't engaging in retaliation against Epic but simply acting consistently with what it did in thousands of other cases. Ppresumably, Apple's concern is that in light of what Judge Gonzalez Rogers said in the TRO hearing, she might be influenced in her thinking by the notion that the Supreme Court decided, albeit with a 5-4 vote, against Apple.

What Apple and Epic agree upon here is simply correct. Pepper has no bearing on Epic, not by any stretch of the imagination. If the Supreme Court's Pepper decision had addressed at least one of the key questions concerning the underlying merits, then the closeness of the vote might be an indication. But the Pepper standing question was about the nature of the business relationship betweeen iPhone users and Apple when they pay for downloads from the App Store or for in-app purchases.

Only at a stratospheric level of abstraction could one see a parallel here: the standing issue in Pepper was a question of first impression, attributable to the fact that app stores are a rather young phenomenon, and--though counsel for Epic as well as for Apple would almost certainly disagree for reasons that couldn't be more disparate--there may be close questions of first impression in Epic v. Apple, too.

By the way, the late Justice Ruth Bader Ginsburg was among the 5-judge majority that ruled in favor of the Pepper consumer class.

Epic v. Apple, too, has the potential to go all the way up to the Supreme Court, but not over the question of standing.

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