April 10, 2010
Tread Lightly Apple, Sherman is Watching
Apple recently modified the iPhone Developer License Agreement to effectively prohibit cross-compilation. In particular, it forbade the use of a cross-compiler to allow apps written for use in Adobe’ Flash player to run natively on the iPhone OS.
Many pundits have focused on this as being a problem for Adobe, and it is given the new Flash-to-iPhone compiler functionality in CS5. However, there is another much larger issue here: The Sherman Act.
Monopoly under the Sherman Act
In general, the Sherman Act is the basis of the anti-trust and monopoly laws in the United States. The U.S. Supreme Court has interpreted the Sherman Act in various different ways through the years, however, they have been fairly consistent with regard to the basics.
In U.S. v. Grinnell (384 U.S. 563), the U.S. Supreme Court announced the following two-part rule from the Sherman Act, specifically in regard to monopolies:
The offense of monopoly under the Sherman Act, 15 U.S.C.S. § 2, has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.
(1) Monopoly power in the relevant market
In regard to the first element, monopoly power, the court continued in Grinnell:
[W]e defined monopoly power as “the power to control prices or exclude competition.” The existence of such power ordinarily may be inferred from the predominant share of the market. In American Tobacco Co. v. United States, 328 U.S. 781, 797, we said that “over two-thirds of the entire domestic field of cigarettes, and . . . over 80% of the field of comparable cigarettes’ constituted ‘a substantial monopoly.” In United States v. Aluminum Co. of America, 148 F.2d 416, 429, 90% of the market constituted monopoly power.
But what is the relevant market? In Grinnell, the court said:
In case of a product it may be of such a character that substitute products must also be considered, as customers may turn to them if there is a slight increase in the price of the main product. That is the teaching of the du Pont case, that commodities reasonably interchangeable make up that “part” of trade or commerce which § 2 protects against monopoly power.
Although the definition of market above seems fairly broad, the court specifically held that the “market” in Grinnell was substantially smaller than the entire market for the services provided: alarm monitoring. In particular, the court reasoned that because the level of service provided was substantially higher, the market only included those services that were provided at the same high level.
As far as the Apple is concerned, it can be argued that the market for iPhone apps is comprised only of apps from the App Store and apps from Cydia, the app store for jail-broken iPhones. Because the App Store accounts for at least 90% of all iPhone App sales, Apple likely has monopoly power in the relevant market for iPhone apps. Although it can be argued that the relevant market isn’t just in regard to apps for the iPhone; rather, all apps for mobile devices, but this is not likely persuasive. In particular, iPhone owners have no viable substitute for apps from the App Store because of the small amount of applications available on Cydia, despite of questions regarding the legality of Cydia and jail-breaking.
(2) Willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident
In Grinnell, the court quickly dispensed with analysis regarding the second element via stating: “this monopoly was achieved in large part by unlawful and exclusionary practices.”
As applied to Apple, this element is also likely fulfilled without substantial analysis because §3.3.1 effectively excludes all competition from Adobe Flash-developed Apps. It doesn’t matter that the Adobe-Flash-developed apps don’t constitute a substantial percentage of App Store apps; rather, it only matters that there is some intended exclusion given Apple’s monopoly power regarding iPhone apps.
Conclusion
Because the Grinnell court applied a fairly liberal interpretation ‘relevant market’ with regard to the facts in that case, there is no certainty that the court would find as such today. In particular, the Grinnell court was substantially more liberal, on the whole, than the current court. However, the composition of today’s court, four liberals, four conservatives, and one moderate, can often lead to surprising decisions. Further, because of the current administration’s apparent willingness to regulate businesses, Apple should be somewhat wary of drawing too much attention to itself by implementing exclusionary policies in regard to the App Store.
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