Forbidden Fruit: DOJ Bites Apple in the Walled Garden

In his epic Paradise Lost, the great poet John Milton warned of the tendency to “make a heaven of hell, and a hell of heaven.” This rings true with the Justice Department’s (DOJ’s) antitrust lawsuit against Apple, which constitutes a clear misuse of the antitrust laws to attack one of the world’s most valuable and admired companies, with nearly 140 million American iPhone users and approximately 10 times that number globally. Indeed, there are several things DOJ needs to prove to show that Apple has acted anticompetitively, and in one way or another each of its five central allegations appears to fall flat. As such, the DOJ’s case reflects a fall from grace that not only threatens Apple’s “walled garden” business model and the many benefits it has brought to consumers in terms of privacy, security, and a seamless user experience, but also effectively threatens to turn antitrust enforcement into de facto regulation.

One element for DOJ’s monopolization claims is that Apple has monopoly power in a relevant market, which the DOJ defines as the “smartphone market,” or alternatively the narrower “performance smartphone market”—as only for the latter does it allege the minimum 70 percent market share typically required for monopoly power. But as every consumer knows, and the DOJ’s complaint even admits, Apple is not the only game in town. It competes vigorously with Samsung and Google: Android phones not only have, by some estimates, nearly a 40 percent share in the United States, but more than a 70 percent share globally. Moreover, while the market shares alleged by the DOJ could be consistent with Apple having a dangerous probability of monopoly power, making the difficult showing of anticompetitive intent is also required for attempted monopolization claims, which were rejected even in cases like the D.C. Circuit’s decision in U.S. v. Microsoft, where liability was found for monopolization.

Even if the DOJ can show that Apple had a smartphone monopoly or the anticompetitive intent and ability to achieve one, it still would need to demonstrate that Apple has engaged in some prima facieexclusion or foreclosure of competitors. However, concerning DOJ’s theory that Apple has prevented developers from offering cloud streaming apps on its platform, this basic criterion seems unmet. To be sure, even if DOJ is correct about the threat that cloud streaming apps could pose to Apple’s platform, Apple’s alleged refusal to deal with these apps does not foreclose its smartphone rivals from using cloud streaming services and offering cheaper smartphones that better compete with Apple. In other words, even if Apple may be making a poor business decision or exploiting market power it already has, this is not the foreclosure or prima facie exclusion to which the monopolization offenses apply.

Furthermore, Apple’s conduct of foreclosing is not enough. Under Section 2 of the Sherman Act, the prima facieexclusionary behavior must facilitate Apple’s smartphone monopoly rather than benefit the company in some other market. And yet, DOJ’s allegation that Apple has restricted the use of cross-platform digital wallets on the iPhone seems not to have satisfied this core legal requirement. Specifically, by allegedly foreclosing rival digital wallets from the iPhone, Apple may have very well engaged in behavior that benefited its own proprietary Apple Wallet. But strengthening its position in digital wallets is not the same as protecting or trying to achieve a monopoly in smartphones more generally, and it strains credulity to suggest that consumers purchase iPhones because they want to use Apple Wallet specifically, or that the latter creates a substantial switching cost for consumers.

However, even if the DOJ was able to articulate a theory of how Apple used its power in a way that could harm smartphone rivals, this is still not enough to make out an antitrust violation. There must also be causation or a finding that Apple’s alleged anticompetitive conduct helped to maintain or achieve a smartphone monopoly. And here, yet another of the DOJ’s claims runs into headwinds. DOJ charges Apple of buttressing its smartphone monopoly by tying the iPhone to use of its Apple Watch, which it argues “is only compatible with the iPhone.” However, for such a tying claim to hold water, Apple Watch must have sufficient market power to coerce consumers into using the iPhone. But the complaint does not appear to allege that Apple has such market power in smartwatches. Indeed, Google, Samsung, Huawei, Garmin, Amazfit, and others all offer competitive smartwatch products.

Next, establishing that Apple engaged in behavior that actually harmed its smartphone rivals only becomes unlawful exclusionary conduct if there is some harm to consumers. But this is a highly tenuous conclusion when it comes to DOJ’s already infamous “green bubble” theory of anticompetitive harm—namely, that Apple designed its messaging service to have reduced interoperability with non-Apple devices (and separately third-party apps) in a way that induced consumers to use iPhones. DOJ’s description of consumer harm in the form of “social stigma, exclusion, and blame for ‘breaking chats’” is at best de minimisand untethered to the types of real economic harms that the antitrust laws address: higher prices, reduced quantity, or diminished innovation—not “social pressure.”

Moreover, even a sound prima facie case of exclusionary conduct is sometimes insufficient to satisfy a plaintiff’s burden. For certain behavior, like refusals to deal, the Supreme Court in Verizon v. Trinko placed the additional requirement of the existence of a prior course of dealing as a way of ensuring that procompetitive and innovation-enhancing behavior is not chilled. This is particularly relevant to DOJ’s Microsoft-esque claim that Apple denied users access to super apps, which it characterizes as “a kind of middleware” that could ultimately challenge Apple’s smartphone position in a way analogous to how Netscape was an application-level potential competitor to Microsoft’s underlying operating system monopoly. But, unfortunately for DOJ, it does not look like it will be able to point to any suitable prior course of dealing between Apple and super apps to satisfy the applicable law in this area.

In sum, none of DOJ’s five core theories of harm appear to embody a cognizable theory of exclusionary conduct that will pass muster in court. Furthermore, even assuming that the DOJ could make out a prima faciecase for any of its claims, Apple will almost certainly be able to present strong procompetitive justifications for its behavior that go to the very essence of its highly successful “walled garden” business model, which differentiates Apple from Android’s open platform. As Apple has long explained, curating the iOS ecosystem to ensure high levels of privacy, content quality, security, and reliability requires placing the sort of contractual and technical restrictions on third-party apps that are the subject of DOJ’s complaint. At bottom, by putting forward flawed theories of exclusionary conduct, DOJ v. Apple risks committing the sin of turning antitrust enforcement into de facto regulation. Courts should ensure that American consumers remain able to enjoy the mobile Eden that Apple has created.