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In Apple v. Pepper the Supreme Court held that consumers who allegedly paid too much for apps sold on Apple’s iStore could sue Apple for antitrust damages because they were “direct purchasers.” The decision reflects some bizarre complexities that have resulted from the Supreme Court’s 1977 decision in Illinois Brick, which held that only direct purchasers could sue for overcharge injuries under the federal antitrust laws. The indirect purchaser rule was problematic from the beginning. First, it was plainly inconsistent with the antitrust damages statute, which gives an action to “any person who shall be injured in his business or property” by an antitrust violation.  Second, the Court exaggerated the difficulty of “tracing” indirect purchaser damages. By using the most common “yardstick” methods of estimating damages, an expert can compute indirect purchaser damages by engaging in two relatively simple horizontal comparisons.  Third, if we were going to give the overcharge to a single set of buyers it should be the end users, not the direct purchasers. End users bear most of the brunt of an unlawful overcharge. Further, they are the only persons in the distribution chain who are unable to pass anything on. In fact, intermediaries, including direct purchasers, typically are not injured by the “overcharge” at all. Their injury results from loss of sales volume that the cartel imposes. Thus the correct damages rule in indirect purchaser cases is lost profit damages for intermediaries, including the direct purchaser, and overcharge damages for the end user.  The Supreme Court’s Daubert decision, which came fifteen years after Illinois Brick, should be the controlling mechanism for evaluating expert models rather than anything as blunt, categorical, and frankly wrong as the indirect purchaser rule. Daubert rulings, which are generally not subject to jury control, should provide judges with an adequate mechanism for ensuring that expert damages reports are based on reliable and relevant assumptions, methodologies, and data. Antitrust damage formulations, even for indirect purchasers, need be no more complex or speculative than damages for a large number of business violations, including such things as patent infringement and breach of contract.  The Apple dissenters adopted a distinctively noneconomic approach that dispensed entirely with analysis of pass-on. They reasoned that only the direct purchaser had an injury that was “proximately caused” by the defendant’s antitrust violation. This view harkens back to a nineteenth century tort law concept that was widely used by courts to limit tort liability, particularly in railroad cases. Under this rule only a single entity could be said to have an injury that was proximately caused by the defendant’s conduct. That rule was properly abandoned in tort cases and should be laid to rest. It makes even less sense in antitrust cases. In an effort to identify some conception of “proximity” it typically awards damages to those who were injured the least, or in some cases not at all.

Apple v. Pepper: Rationalizing Antitrust's Indirect Purchaser Rule