California, Antitrust, and the Apple Store
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California prides itself on its exceptionalism. It leads the nation in being the social laboratory for trying out new products, fashions, political movements, entertainment, and fads of all kinds.  As long as other states are free to follow or not, California can be a beneficial laboratory. 

However, when California passes a law for its own residents, a law that conflicts with national law, the analogy to a successful laboratory experiment is flawed. 

That flawed experiment has now been exposed with a decision issued by the U.S. Court of Appeals for the Ninth Circuit, sitting in California. The law is antitrust, and the context is the Apple app store.

Federal antitrust law applies to all the states. There is good reason for there to be uniformity in the application of antitrust. If states could each apply a different rule for how companies must behave with regard to their suppliers, competitors, and customers, conflicts would inevitably result, interfering with the national market that has been such a strength of our economy.

California, a bastion of political disposition to the left of center, may well choose to impose rules more hostile to business than rules other states prefer. For instance, California can (and does) have more warnings on products consumed in California, and feels justified in imposing those additional costs on businesses and consumers.  

To apply California’s law across the nation, however, imposes California’s decision on all the other states, driving down the ability of businesses to offer products, employ workers, and attract investments nationally for a purpose other states’ residents may not share.

When it comes to the sale of apps on the Apple app store, there is no logic for a court to apply a California statute to condemn behavior, which the same court explicitly found was allowed under federal antitrust law. 

This is exactly what the country’s most reversed federal court of appeals, the 9th Circuit, has done, in affirming a decision by a US District Court in San Francisco,  regarding how Apple allows developers of apps to sell on Apple’s own app store.

Epic makes video games that play on iPhones and tablets. Epic sells them on Apple’s app store.   As a condition of being allowed to do so, Apple insists that Epic, and other app sellers, not steer customers toward other platforms that compete with Apple, including methods of payment outside the Apple network. 

The federal district court in San Francisco held these were reasonable restrictions, under federal antirust law. They helped guarantee the cybersecurity of customers and app creators. But Epic had also sued under California’s own “Unfair Competition Law.” The federal judge applied this California state law to hold that, although all these provisions were not violations of federal law, they were nonetheless “unfair” to consumers who might have benefited from learning about a different platform on which to buy the app they had found in Apple’s app store. 

That argument was fully considered in the context of the federal antitrust law, and the judge found it wanting. The court ruled that Apple was entitled to market its store as higher quality because it was more secure, and it had no obligation to advertise, or allow its contractors to advertise, other payment platforms Apple considered less secure. California, the court ruled, could nevertheless weigh the competing interests differently, disfavoring Apple’s right to market its products with a secure, high quality image and favoring instead consumers’ possible interest in getting a lower price elsewhere.

If the effect of California’s law could be kept to California, this might be tolerable. But the court went further, and issued an injunction against Apple’s rules as applied to all app designers that wanted to make use of Apple’s app store, even if they had no contact with California. The reason, the court said, was that Epic had a competing app store, and if Apple forbade other app developers from steering customers outside the Apple network, some of those developers might have gone to the Epic Games Store. There was no proof that any wanted to steer their purchasers that way; simply the speculation they might was enough to enter a nation-wide injunction.

All this was affirmed by the 9th Circuit Court of Appeals. In doing so, the Ninth Circuit admitted that there were limits to what California laws could apply to matters otherwise under federal antitrust purview.  

For instance, the court noted that California could not apply its own laws regarding baseball’s exemption from antitrust, and the US Supreme Court’s ruling that manufacturers could choose their own retailers, even if some lower-price retailers were not chosen. There needed to be uniformity in those aspects of federal antitrust law. The court was clueless regarding why the same need for uniformity did not apply to an internet-based app store for the most widely used cell phone and tablet system in America.

The federal courts should have stopped when they ruled Apple’s practices did not violate federal law. Instead, California has succeeded, through the federal courts, in exporting its amorphous law against “unfairness” to all fifty states. The US Supreme Court still has time to reverse this latest example of California exporting its “exceptionalism.”

Tom Campbell was the director of the Federal Trade Commission’s antitrust arm during the Reagan Administration. He was a tenured professor at Stanford Law School (teaching antitrust law and economics), the dean of the Haas School of Business at UC Berkeley, and the dean of the Fowler School of Law at Chapman, in Orange, California, where he is now a professor of law and of economics. He served five terms in the US Congress (including as a member of the Antitrust Subcommittee of the Judiciary Committee), two years as a California State Senator, and was Finance Director of California under Governor Schwarzenegger. Campbell has been retained to offer antitrust advice in Washington, D.C, to NetChoice, a consortium of high-tech firms.

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