Mixed Ruling on Epic’s Antitrust Challenge to Apple’s App Store

On September 10, 2021, a federal judge in the U.S. District Court for the Northern District of California ruled that Fortnite developer Epic Games (Epic) failed to adequately prove its antitrust allegations relating to Apple’s App Store practices. The decision allows Apple to maintain its App Store as the exclusive marketplace for iOS apps. However, in her lengthy ruling, Judge Yvonne Gonzalez Rogers also issued a permanent injunction against Apple’s “anti-steering” provisions, which, if it survives, would clear the way for mobile gaming and other app developers to point users in their apps toward other payment platforms outside the app to complete transactions, sidestepping Apple’s upfront ability to collect a 30% App Store commission.

Epic quickly moved to elevate the dispute, filing a notice of an appeal to the U.S. Court of Appeals for the Ninth Circuit on September 12, 2021. Unless stayed before then, the order will become effective on December 9, 2021.

Background of the Dispute

According to the district court’s findings of fact, Epic launched its suit in August of 2020 after it had been repeatedly unsuccessful in persuading Apple to, among other things, lower its App Store commission and also allow a competing app distribution mechanism to reach iOS customers. The proximate trigger for the litigation, however, was Apple’s removal of Fortnite from the App Store after Epic had published software updates enabling users to select a lower-priced Epic option for processing in-app purchases. This violated the terms of Epic’s agreement with Apple, which Epic conceded. Fortnite was similarly removed from Google Play at roughly the same time. Epic responded by immediately filing antitrust suits against both Apple and Google. The Google matter remains pending.

Epic and Apple argued their cases in a 16-day trial in May 2021.

Market Definition is Central to the District Court’s Ruling

Epic’s suit alleged that Apple was a monopolist in the markets for distribution of iOS apps and for the processing of iOS app payments. Epic argued that the impact and costs (financial and otherwise) for iOS users to switch to competing mobile platforms for purchasing and payment options was significant, and that the corresponding infrequency of such switching means that the App Store essentially faces no competition. Epic argued that Apple’s conduct in excluding would-be competitors from offering iOS users other app platforms or the use of other payment methods for in-app purchases was designed to protect and enhance Apple’s alleged monopoly power.

By contrast, Apple proposed a more broadly defined market for all digital video gaming, which would include not just mobile games from Apple’s App Store, but also those used on other device types and purchased through other platforms.

Ultimately, Judge Gonzalez Rogers rejected both parties’ proffered market definitions in favor of a definition of her own creation: the market for mobile digital gaming transactions. In doing so, she criticized each sides’ expert witnesses, setting aside their respective analyses in favor of her own interpretation of the facts in evidence. The judge’s analysis led her to reject Epic’s contentions that Apple’s restrictions on App Store content—namely the restrictions on apps Apple will accept and the bar on alternative app distribution methods for iOS devices—were methods by which Apple maintained and extended an unlawful monopoly. Instead, Judge Gonzalez Rogers was persuaded by Apple’s counterarguments that a sealed ecosystem was reasonably necessary to achieve the pro-consumer benefits of security, privacy and a curated user experience.

Although the district court did find that Apple had market power, and that “Apple’s app distribution restrictions do have some anticompetitive effects”—specifically the durability of what the district court appeared to regard as an artificially high 30% commission—it ultimately held that, under the district court’s revised market definition, the evidence presented by Epic was insufficient to carry its antitrust claims under both California’s Cartwright Act and the federal Sherman Act. The district court left the door open for future plaintiffs to bring similar claims, suggesting that different evidence might lead to a different outcome on the same questions.

The District Court’s Injunction

Although the district court did not find any antitrust violation by Apple, it was persuaded that Epic’s claim under California’s Unfair Competition Law merited relief from “an incipient violation of an antitrust law.” Specifically, it held that Apple’s “anti-steering” practices violate the “’policy [and] spirit’ of [the antitrust] laws because anti-steering has the effect of preventing substitution among platforms for transactions.” These practices include preventing any practical way for app developers to facilitate lower-cost user alternatives to the App Store and Apple’s 30% commission for in-app purchases. The relief sought by Epic included the right to provide an alternative payment method directly within the app. The district court instead chose to craft a different remedy, and issued a permanent injunction pursuant to which Apple is

permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

In explaining its decision, the district court held that this remedy would not undermine the benefits to maintaining a sealed ecosystem that were cited by Apple, but would allow increased transparency and competition, both of which it indicated would benefit consumers.

Cameron v. Apple, an unrelated class action suit brought by app developers against Apple in 2019, involved similar antitrust claims around App Store practices and reached a settlement in late August. The settlement of the case—also before Judge Gonzalez Rogers—requires lessening of restrictions around how app developers can communicate with users, which will be a moot point for all developers if the injunction in the Epic case is allowed to stand. Moreover, additional erosion of Apple’s restrictions is possible as a result of legal actions in other countries with significant iOS-based gaming and app markets, as already seen in Japan and South Korea.

Key Takeaways

It will be some time before appeals are exhausted and the dust fully settles on this dispute. In the meantime, some preliminary conclusions may be drawn, including:

• The ruling does not open Apple’s App Store to competing in-app purchasing methods, though it does allow all app developers to steer users to making relevant purchases outside the app for in-game or in-app use.
  
• The ruling does not explicitly bar Apple from continuing to charge a commission for in-app purchases, nor does it limit the amount to be charged. Apple may therefore continue to assert a right to be paid for the use of its intellectual property in this regard. This aspect of the dispute will likely be a key issue in future proceedings.
• The potential for disintermediation of the platform owner in in-app payment transactions may provide future opportunities for innovation, e.g., the use of tokens or cryptocurrencies, or the development of new types of gaming wallets.
  
• While ultimately ruling that Epic failed to show that Apple had violated the antitrust laws, the court did find that Apple has market power in the market for mobile gaming transactions and noted that a suit taking a different tack might be successful. Therefore, this may not be Apple’s last challenge in this space.
  
• Given that the order does not take effect for 90 days, and the chance of its alteration or reversal upon appeal, it may be prudent for app developers and others to wait before committing to any permanent course of action predicated on the ruling or its injunction. Litigation of any appeals to the Ninth Circuit could take a year or longer to resolve.