DOJ’s Watershed Case Against Apple
The Department of Justice’s antitrust complaint against Apple represents a potential watershed in antitrust enforcement, or a potential Waterloo. It bases its antitrust claim on Apple’s effort to protect its iPhone monopoly in an alleged product market of “performance smartphones”—that is, iPhones and phones that run Google Android, basically Samsung. The case focuses on four areas: Apple’s control of its App Store, its refusal to provide full functionality in iMessage with Android users, Apple’s refusal to license the technology behind Apple wallet, and Apple’s refusal to allow a smart watch other than the Apple Watch to work with iPhones. Apple’s conduct in these areas is frustrating for many consumers, developers, and makers of devices like smart watches. Apple’s dominance makes it a gatekeeper for applications and devices. But that is all a consequence of Apple’s market power. Acquiring such power legitimately, as Apple did, does not become unlawful based on its consequences. That is the longstanding premise of antitrust law that the DOJ complaint challenges.
Arrayed against the DOJ case is the idea that the antitrust laws are not an open-ended charter for economic regulation of large firms through litigation and judicial oversight. That kind of regulation requires separate laws. Unless the Department seeks to mold U.S. antitrust enforcement in the image of the big-is-bad enforcement regime in Europe, unlawful monopolization requires conduct that unlawfully preserves a firm’s monopoly power. The key is what “unlawfully” means, since dominant firms are able to engage in lots of lawful conduct that consumers and competitors may not like. In a case called Trinko, the Justice Department in the Bush administration advocated a test that would require a monopolist’s conduct to be economically irrational but for its exclusionary effect on rivals. The Court’s decision did not adopt that stringent standard, and can be distinguished in DOJ’s case against Apple. How to apply the antitrust laws to firms that have lawfully acquired monopoly power remains unclear.
While some of Apple’s conduct may have helped shore up its iPhone monopoly, by limiting the ability to switch to other devices, no precedent supports affirmatively requiring a firm, even a monopolist, to aid its rivals. And Apple will surely offer numerous legitimate reasons for its decisions, even if the decisions make life harder for smartphone competitors. The difficult question in these sorts of cases is whether a monopolist, one that may have obtained a dominant position based on market-defining innovation and development, must at some point take affirmative steps to aid firms that cannot compete without access to the resources that the dominant firm controls. If the legal test favors the monopolist’s competitors, it may undermine the competitive incentives to innovate and vigorously compete for market dominance. That competition benefits consumers. But if the legal test favors the monopolist, it may lock in the market dominance of large firms.
U.S. antitrust enforcement has historically favored the large firms. DOJ attorneys and economists are trained to be skeptical, for valid economic reasons, of competitors who allege that an innovative and efficient dominant firm is excluding them from the market. Unless there is evidence of harm to consumers, the inability of rival firms to compete effectively against a large firm like Apple is irrelevant to antitrust analysis. No one would want to favor inefficient firms at the expense of a firm like Apple.
If DOJ can establish that Apple has taken steps to exclude rivals and services that could chip away at its iPhone monopoly, and that Apple would not have taken those steps but for their exclusionary effects on rivals, the complaint would rest on longstanding doctrine. But that does not appear to be the complaint. The Department’s real focus is on the consequences of Apple’s monopoly power, not unlawful preservation of that power. Mimicking European enforcers, the Department wants to force Apple to do things like open up the App Store. But Apple isn’t a competitor in the App Store. Nor does the complaint allege that Apple imposes policies on developers to discourage them from using Google Play to harm rivals using Android. Proposed federal legislation, supported by the Department, would force Apple to open the App Store. But that legislation has gone nowhere in Congress. The legislation includes numerous provisions that would authorize Apple to impose security measures on firms that seek access to the App Store. Where Congress is considering this very issue, it would seem inappropriate for the courts to come up with the judiciary’s own view of how the issues should be resolved.
For DOJ’s case against Apple to succeed, courts will need to lower significantly the standard for establishing monopolization. The freewheeling approach in Europe where regulators give themselves broad discretion to protect rival firms—discretion that can be wielded in suspiciously protectionist ways—has not applied here. Indeed, for decades U.S. enforcers have criticized the European approach as insufficiently rigorous, arbitrary, and overly focused on protecting competitors rather than competition. Those types of concerns have long motivated the much more rigorous U.S. approach. But that approach leads to a legal standard that gives monopolists wide latitude in dealing with firms that could help challenge the monopolist’s market position. At what point does the transformational innovation of a firm like Apple give way to an obligation to go easy on rival firms? Does the monopolist’s conduct need to be solely motivated by an intent to exclude rivals, or should courts look more broadly at the effects on consumers and competition? Those are the fundamental questions presented in DOJ’s case against Apple.