Will the FTC Sue Apple?

Josh Wright —  18 June 2010

I don’t know.  But apparently, industry analysts preliminarily think not.   I tend to disagree.  At least, I think its far too early to be confident in either direction. Press reports, such as this one,  are primarily relying on the report of an analyst who correctly points out that Apple’s market share would be an obstacle for a case against Apple:

This week, Google (GOOG) complained that Apple’s new rules on sharing iPhone and iPad user data with advertisers unfairly advantages the company’s own iAd service over rivals like Google’s AdMob – and the government is reportedly looking into the issue. There’s also continued grumbling over the company’s decision not to support the Adobe (ADBE) Flash standard on the iPhone/iPad platform, and the Feds are apparently looking at that issue, as well.

Stifel Nicloas analyst Rebecca Arbogast reviewed the situation in a research note this morning, and finds that Apple has justifications in both cases that support its policies. The Washington-based analyst, who focuses on regulatory issues, said she finds it unlikely the FTC or the Justice Department will sue Apple over either issue, asserting that market share and industry practices are changing so rapidly that the government is unlikely to step in here without a smoking gun.

The conventional wisdom in the press appears to be that a suit is unlikely because Apple probably does not have monopoly power.  For example, in this article, Stanford Law professor Alan Sykes distinguishes Apple from monopolization cases like Microsoft on the grounds that Apple doesn’t have the same quantum of market power, as does Howard University’s Andy Gavil here.

Professors Sykes and Gavil are correct.  Proving that Apple to possess monopoly power in a relevant market is certainly an obstacle to a classic Sherman Act monopolization case.  But I wouldn’t be so sure that the FTC is limiting itself to Section 2 here.  In fact, I’d bet against it.  The FTC’s attempts to breathe some life into Section 5 have been focused on high-tech firms, and involved claims that would be difficult under Section 2.  The contractual restrictions here would bar the use of Google and AdMob advertising software on applications for use on Apple’s iPhone.  I do not think it would be wise to rule out the possibility that the FTC challenges those restrictions under Section 5 of the FTC Ac as an unfair method of competition, continuing its aggressive use of that statute against firms in high-tech industries and in the standard setting context, e.g. Intel, N-Data, and Rambus.  An attack on restrictions such as Apple’s would also be consistent with the Commission’s attempt to use vague and more manipulable “consumer choice” standard as the touchstone of antitrust harm — the restrictions obviously reduce the choice set available to a developer — under Section 5 rather than the conventional “consumer welfare” standard.

In some ways, a case against Apple is an easier sell than the Intel case because the latter turns on exclusivity conditioned on discounts offered to purchasers and passed on to consumers.  In other words, the case against Intel involves a practice with intuitively obvious pro-competitive justifications and the real question is whether the FTC can document concrete evidence of consumer harm to that dominates those benefits.  While Apple’s restrictions also likely have pro-competitive justifications (though I won’t speculate about them here), and are probably but not certainly protected under conventional monopolization doctrine under Section 2 even if Apple were a monopolist, the pro-competitive justifications for the restrictions are not as intuitively obvious as the discounts involved in Intel.

For most if not all of the reasons I discuss in my paper on the Commission’s complaint against Intel, I’d view a Section 5 suit against Apple as a bad development for consumers.  It would also be an interesting test case to examine whether developers would sue under Little FTC Acts in state court follow-on actions for multiple damages.  Nonetheless, Apple’s market share is not an obstacle to a Section 5 claim where there is no monopoly power requirement.  And of course, the FTC was well aware of the burdens it faces under both statutes and the publicly available market share data when it decided to announce the investigation.  While it is quite possible that the FTC does not bring suit at all, or even brings a pure Section 2 claim, my point is that the availability of a Section 5 claim changes the analysis.  Indeed, such a claim would be consistent with Commission’s current views on the appropriate role of Section 5.

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