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Media Alerts - Pepper v. Apple Inc. - Ninth Circuit
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March 3, 2017
  Pepper v. Apple Inc. - Ninth Circuit
Headline: The Ninth Circuit Panel held that reviewing courts should be "forgiving" of a district court's failure to follow Rule 12(g)(2), when granting late-filed Rule 12(b)(6) motions and held customers who buy iPhone applications are "direct purchasers" for purposes of standing in an antitrust suit against Apple, Inc.

Areas of Law: Federal Rules of Civil Procedure, Antitrust, Statutory Standing

Issues Presented: The panel's opinion focused on two questions. First, whether the district court erred in granting Apple's fourth motion to dismiss asserting the defense of lack of standing, when Rule 12(g)(2) by its terms may have barred Apple's motion because that defense was omitted from Apple's previous Rule 12 motion. Second, whether the plaintiffs were direct purchasers of Apple's iPhone applications within the meaning of Illinois Brick.

Brief Summary: Plaintiffs brought a putative antitrust class action against Apple alleging monopolization, attempted monopolization, and conspiracy between Apple and AT&T Mobility LLC to monopolize the voice and data services market for iPhones. Plaintiffs that Apple has monopolized and attempted to monopolize the market for iPhone apps and further alleged that they were direct purchasers . Plaintiffs allege that claimed that were "direct purchasers" of Apple's iPhone applications and thus suffered financial injury sufficient to satisfy Article III standing, as well as satisfying the statutory standing per Illinois Brick.

Plaintiffs claim Rule 12(g)(2) should have barred Apple's late-filed 12(b)(6) motion because Apple omitted its lack-of-standing defense from an earlier Rule 12 motion; therefore, the district court erred when ruling on Apple's 12(b)(6) motion. Noting a disagreement among the Circuits on the proper interpretation and application of Rule 12(g)(2), the panel sided with the Third and Tenth Circuits in concluding that the district court may have failed to apply Rule 12(g)(2), but the error was harmless and should be forgiven since the intent and policy of the Federal Rules are to ensure "just, speedy, and inexpensive determination of every action and proceeding." By ruling on the merits of Apple's Rule 12(b)(6) motion, the district court "materially expedited the district court's disposition of the case, which was a benefit to both parties." The panel found that Rule 12(g)(2) was designed to punish parties who unduly delay trial by strategically not filing motions, and Apple was found to have filed the motions in a timely manner. Therefore, any procedural error was harmless, and the panel then focused on the merits of the decision.

The United States Supreme Court case Illinois Brick stated, "the overcharged direct purchaser, and not others in the chain of manufacturer or distribution," has standing to sue. The panel held Apple, and not the third-party developers, were the direct distributors of iPhone apps, so that the plaintiffs were direct purchasers of iPhone apps from Apple under Illinois Brick and, therefore, have standing to sue. The panel reversed the district court's decision on the merits, and remanded the case for further proceedings.

Significance: Owners of iPhones who purchase iPhone applications are now considered direct purchasers from Apple's "App Store." Purchasers now have standing to sue since Apple has the exclusive authority to sell the product at a price Apple sets, making the argument for antitrust violation sustainable in court. If plaintiffs prevail on remand this may allow third-party developers to sell the applications they created at a more competitive price outside the "App Store."

Extended Summary: In 2007, Apple Inc. released the iPhone. Apple allowed its customers to search, purchase, and download applications (apps) from Apple's "App Store." Some apps were created by Apple, but most were produced by third-party developers. Of the apps sold, Apple earned 30% commission and the other 70% of the sale price went to the developers. Apple strictly prohibited developers from going outside of Apple's App Store to sell their apps and threatened the developers who violated this prohibition by cutting off their sales. In addition, Apple discouraged iPhone users from downloading unapproved apps from other sources, and disciplined them by voiding their warranties.

On December 29, 2011, four named plaintiffs filed a putative antitrust class action complaint ("Complaint 1") against Apple alleging monopolization and attempted monopolization of the app market. Because the plaintiffs did not join AT&T Mobility, LLC ("ATTM") as a party, for the conspiracy count of the complaint, Apple moved to dismiss the entire complaint under Rule 12(b)(7). Apple's motion was deemed moot when the district court consolidated the action with another action.

On March 21, 2012, seven named plaintiffs filed another putative class action complaint ("Complaint 2") against Apple, alleging the same counts as those in Complaint 1. Complaint 2 also failed to join ATTM as a defendant. On April 16, 2012, Apple moved to dismiss the entire complaint under Rule 12(b)(7) and in the alternative under Rule 12(b)(6). The district court granted the motion to dismiss without prejudice, but ordered the plaintiffs either to add ATTM as a defendant or to drop the conspiracy count of the complaint. The district court deemed Apple's Rule 12(b)(6) motion premature.

The plaintiffs third complaint ("Complaint 3") was the same as Complaint 2, except it was labeled "Preserved for Appeal." At this point in the proceedings, none of the named plaintiffs alleged that they had ever purchased or sought to purchase, iPhone apps and ATTM was still not a named defendant. Apple moved under Rule 12(f) to strike the conspiracy claim, and the district court granted the motion. For the first time, Apple moved under Rule 12(b)(1) for lack of Article III standing and under Rule 12(b)(6) stating plaintiffs lacked statutory standing under Illinois Brick. Plaintiffs relying on Rule 12(g)(2) opposed Apple's motion to dismiss.

In the Fourth and final complaint ("Complaint 4"), plaintiffs alleged they had purchased iPhone apps giving them Article III standing to sustain their monopolization claims. In addition, they responded to Apple's defense of lack of statutory standing under Illinois Brick by alleging their status as "direct purchasers" from Apple. Apple filed a motion under Rule 12(b)(6) contending the plaintiffs lacked statutory standing. The district court granted the motion and dismissed the entire complaint with prejudice. Plaintiffs timely appealed.

Plaintiffs argue that Rule 12(g)(2) should have barred Apple from raising the Illinois Brick statutory standing defense when Apple raised four different Rule 12 motions to dismiss and that the district court erred in deciding the motion on the merits.. Rule 12(g)(2) provides "that a party that makes a motion under this rule must not make another motion under this rule raising a defense or objection that was available to the party but omitted from its earlier motion." The Ninth Circuit panel recognized a split among the circuits regarding proper interpretation and application of Rule 12(g)(2). The panel disagreed with the Seventh Circuit's holding that Rule 12(g)(2) does not foreclose a motion to dismiss under Rule 12(b)(6) when there has been a previous motion to dismiss under Rule 12. Agreeing with the Third and Tenth Circuits, the panel held that, strictly applied, Rule 12(h)(2) required Apple to answer the complaint and then make a Rule 12(c) motion for judgment on the pleadings. However, where there is no evidence of a defendant's intent to delay proceedings, the court of appeals, should be forgiving of a district courts failure to strictly follow Rule 12(g)(2)..

The panel applied Rule 12(g)(2) in light the general policy expressed in Rule 1 that federal courts should construe the Federal Rules in a way that ensures a "just, speedy, and inexpensive determination of every action and proceeding." Though Rule 12(g) "technically prohibits successive motions," its purpose was to punish parties whose intent is to delay court proceedings, practice ambush tactics, and extend costly litigation. In the present litigation, the panel held that Apple's motions did not appear to be filed for any "strategically abusive purpose" and that Apple made their motions in timely manners. Further, if the district court properly followed Rule 12(g)(2), the alternative avenues for Apple would have "substantially delayed" resolutions of the issues. Therefore, the panel held the late filed 12(b)(6) motion, which was granted by the district court, was harmless, despite the failure to follow Rule 12(g)(2).

The district court ruled on the merits stating that the plaintiffs were not "direct purchasers" under Illinois Brick. Illinois Brick held that only "the direct purchaser, and not others in the chain of manufacture or distribution," has standing to sue. The direct purchaser rule originated in Hanover Shoe v. United Shoe Machinery Co., 392 U.S. 481 (1968) in which the Supreme Court held that, for purposes of antitrust damages, the direct purchaser is injured by the full amount of the overcharge irrespective of who ultimately bears the cost of that injury. Hanover Shoe and Illinois Brick, the consumer was an indirect purchaser from the manufacturer because the intermediary was the party who actually sold to the consumer. In distinguishing these cases, the panel held that Apple was a distributor who sold directly to plaintiffs. The panel analogized this case to Ticketmaster, an Eighth Circuit case in which purchasers bought concert tickets directly from Ticketmaster. Though the Eighth Circuit held plaintiffs were indirect purchasers the panel believed that ruling to be in error. Instead the panel, focused on the rule in Illinois Brick, which stated, "the distributor who supplies the product directly to the plaintiffs, rather than the producer of the product, is the appropriate defendant in an antitrust suit." In Ticketmaster, the plaintiffs directly purchased the ticket distribution service from Ticketmaster, just like the plaintiffs here, bought iPhone apps directly from Apple. Plaintiffs have no say in price, nor do the developers have any control over Apple's commission. The panel deemed Apple the distributor of the iPhone apps that sold directly to the plaintiffs thorough their app store. Therefore, the plaintiffs are direct purchasers under Illinois Brick and have standing to sue Apple for the alleged monopolization and attempted monopolization of the sale of iPhone apps.

To read the full opinion, please visit:

Panel: A. Wallace Tashima and William A. Fletcher, Circuit Judges, and Robert W. Gettleman, District Judge

Argument Date: February 10, 2016

Date of Issued Opinion: January 12, 2017

Docket Number: 14-15000

Decided: Reversed and Remanded

Case Alert Author: David T. Griego

Counsel: Mark C. Rifkin (argued), Alexander H. Schmidt, and Michael Liskow, Wolf Haldenstein Alder Freeman & Herz LLP, New York, New York; Francis M. Gregorek and Rachele R. Rickert, Wolf Haldenstein Adler Freeman & Herz LLP, San Diego, California; for Plaintiffs-Appellants

Daniel M. Wall (argued), Christopher S. Yates, and Sadik Huseny, Latham & Watkins LLP, San Francisco, California; J. Scott Ballenger, Latham & Watkins LLP, Washington, D.C.; for Defendant-Appellee

Author of Opinion: Judge W. Fletcher

Circuit: Ninth

Case Alert Supervisor: Professor Glenn Koppel

    Posted By: Glenn Koppel @ 03/03/2017 06:44 PM     9th Circuit  

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