Dr Rachael Kent v Apple: Competition Appeal Tribunal allows £1.5bn standalone opt-out claim to proceed

The Competition Appeal Tribunal (the “CAT”) has unanimously granted an opt-out Collective Proceedings Order (“CPO”) application brought by proposed class representative Dr Rachael Kent against Apple, whilst dismissing Apple’s application for strike out and reverse summary judgment in relation to an aspect of Ms Kent’s claim. As we previously reported, the CAT granted the CPO “on the spot” on 5 May 2022, but reserved judgment on Apple’s application. Its full reasoning was published on 29 June 2022.

Background

Apple is well known as the creator of devices such as the iPhone and the iPad, as well as its proprietary mobile operating software, the “iOS”, and its proprietary store, the “App Store”. It operates a “closed system”, with iOS pre-installed on all Apple devices and developers who wish to distribute apps on the App Store needing to sign up to Apple’s contractual terms.

Ms Kent alleges that Apple has, by virtue of operating this closed system for iOS devices, obtained a dominant (and monopoly) position in the markets for iOS app distribution and payment processing. She claims Apple has abused that position by:

1. restricting the distribution of apps solely through the App Store and by forcing developers to use Apple’s payment processing services (the “Exclusive Dealing Abuse”);
2. requiring payments on the App Store from iOS device users to developers to be transacted through Apple’s payment processing services (the “Tying Abuse”);
3. directly or indirectly imposing unfair purchase or selling prices, in the form of a roughly 30% commission (the “Unfair Pricing Abuse”).

Ms Kent alleges that these abuses caused developers to pay inflated fees to Apple, a significant part of which have been passed on to iOS device users who have made purchases through the UK App Store. Ms Kent’s claims are brought on behalf of an estimated 19.6 million such consumers, with the estimated loss in the range of £535 million to £1.46 billion.

The CPO application

While Apple denies the claim in its entirety, it did not oppose the CPO application. However, consistent with the Supreme Court’s 2020 decision in Merricks v Mastercard, the CAT still had to satisfy itself that the relevant legal tests for certification were met before an order could be made.

The CAT satisfied itself that the requirements for certification were met:

• It was just and reasonable for Ms Kent to act as the class representative. The CAT found that Ms Kent’s experience as a lecturer in Digital Economy and Society Education demonstrated a clear commitment to supporting and protecting consumer rights and suggested she had the ability to manage the litigation on behalf of the proposed class. The CAT also sought additional information from her and the litigation funder as to the ability to pay Apple’s costs and considered this at length in the judgment.

• The class members were identifiable. The CAT found that Apple’s user identification would allow Apple to identify each device user of the UK App Store without difficulty.

• The claims raised common issues. The CAT found that it was clear from the claim that the issues would be the same or substantially the same for all proposed class members.

• The claims were suitable to be brought in collective proceedings. Among other things, the CAT found that this was “a paradigm case” for collective proceedings and that there would be a large number of claimants in the class, each with a relatively small claim, which would be uneconomic to litigate on an individual basis.

It was not suggested by either party that opt-in was a preferable approach and the CAT agreed, having regard to the factors making the case suitable for collective proceedings, the strength of the claims and the practicality of bringing the proceedings as opt-out.

Apple’s Application for Strike Out /Summary Judgment

Having granted the CPO application, the CAT then turned to consider Apple’s application to strike out/obtain reverse summary judgment on the Unfair Pricing Abuse.

The main point of contention related to the methodology Ms Kent’s expert, Mr Holt, had adopted in concluding that Apple had engaged in unfair pricing by charging app developers a 30% commission:

• Amongst other things, this methodology compared Apple’s costs of running the App Store to the revenues it derives from it; it compared Apple’s return on capital employed with its weighted average cost of capital; and considered other factors, such as the persistency of the commission since 2008; Apple’s increasing profit margin within that same period; Apple’s decision to lower the commission to 15% for small app developers (said to have arisen following regulatory scrutiny); and concerns expressed by app developers about the level of commission.

• Apple argued that Mr Holt adopted a “cost-plus” approach and, in doing so, had (i) failed to take account of the real economic value which developers and consumers derive from fifteen years of innovation in the iOS ecosystem; and (ii) ignored the demand side benefits, which included certain innovations Apple had produced. Apple contended that Mr Holt’s approach was therefore fundamentally flawed and bound to fail.

• Ms Kent argued (amongst other things) that (i) “economic value” was not a separate test to determine if there had been unfair pricing; (ii) the choice of method is flexible and will depend on the facts of the case; and (iii) Mr Holt’s method was not cost-plus and took into account the demand side.

The Tribunal reviewed the relevant authorities regarding unfair pricing and concluded that:

• The legal test is one of unfairness, which arises where the dominant undertaking has reaped trading benefits that it could not have obtained under ordinary market conditions.

• To succeed, it must be proven that the price charged was (i) excessive and, if so, (ii) unfair.

• The concept of economic value is part of the overall descriptor of the abuse but is not the test itself nor a separate element of the test.

• There is no prescribed method to establish the abuse and it is important to avoid rigid rules. The choice of method should be sensitive to the facts of the case, which will include making sure factors relevant to assessing economic value are taken into account. Demand side factors need to be taken into account but there is no prescribed way of doing this.

The CAT then considered the strike out and summary judgment applications in turn.

Strike Out

Apple argued that the claim should be struck out as there had been legal error or defective approach, either in relation to the correct legal test or the consideration of economic value.

The CAT disagreed that there had been an error of law, noting that the authorities prescribed no method in proving the abuse. It found that Ms Kent had pleaded facts which could found a methodology that takes into account demand side factors. To the extent a method was pleaded, it was expressed to be preliminary and, to the extent it was contested by Apple, it should be challenged at trial and not through a strike out.

Summary Judgment

Apple similarly argued that Ms Kent’s claim had no reasonable prospect of success and that summary judgment should be awarded.

The CAT disagreed. While it (i) noted Mr Holt was likely to refine his approach and (ii) agreed with Apple that he was “somewhat abrupt” in his explanation of his assessment of demand side factors, this did not mean that Ms Kent’s Unfair Pricing Abuse claim had no prospect of success. The CAT held that it was not correct that Mr Holt had ignored demand side factors and, while it noted that there were difficulties around the appropriate comparators and disputes about this between the parties, it was not appropriate to determine these issues in a summary judgment. Ms Kent’s pleaded case disclosed no legal error or defective approach and any issues with the methodology would need to be ventilated at trial.

A sign of what’s to come?

While the proceedings will be of interest to a large number of UK consumers given the widespread use of iOS devices in the UK market, the judgment further evidences the lenient approach the CAT has taken to certification following the decision in Merricks v Mastercard and the trend in favour of certification of consumer claims on an opt-out basis. It will be interesting to see whether future defendants adopt Apple’s strategy of not opposing a CPO application where certification is highly likely and instead allow the CPO to advance to trial. The judgment also demonstrates the CAT’s reluctance to determine complex matters best dealt with at trial through early applications for strike out or summary judgment at the certification stage. Defendants need to carefully consider if these types of applications are worth the time and cost or if they might be better served with some early preliminary issue applications, a favourite case management mechanism of the CAT.

The CAT’s page with links to the formal documents in the case is accessible here.