Epic Games v. Apple: Does the House Always Win? - Ethan Teo

This case was a civil action brought by Epic against Apple, regarding Epic’s provision of an alternative payment option for In-App Purchases (‘IAPs’) made in the mobile iteration of Epic’s application, Fortnite. The provisions of the contract between Apple and Epic expressly prohibited the above; in a letter to Epic’s CEO in 2020 regarding a request that Apple allow Epic to offer alternative modes of payment, Apple Vice President Douglas G. Vetter unequivocally denied the request, stating that ‘[they had] never allowed this. Not when [they] launched the App Store in 2008. Not now. […] Apple strongly believes these rules are vital to the health of the Apple platform and carry enormous benefits for both consumers and developers’. Under the terms of Apple’s Developer Licencing Agreement, Apple charges developers a 30 percent commission on revenue from IAPs made on the App Store. Indeed, it was this commission that Epic wished to circumvent in introducing payment options directly on the Epic marketplace.

Subsequently, Epic covertly introduced the aforementioned feature as part of an update to the application. This gave consumers the choice to make IAPs on the Epic marketplace at a cheaper price than that of the App Store. Upon discovery the same day, Apple removed Fortnite from the App Store. In response, Epic filed an action against Apple, seeking an injunction against the removal of Fortnite and against Apple’s anti-steering provisions preventing developers from offering third-party IAPs. Epic claimed, inter alia, that Apple’s provisions had violated federal antitrust laws via the Sherman and Cartwright Acts, as well as California’s Unfair Competition Law.



Decision of the Court


On the 10th of September 2021, Rogers J delivered the judgment of the court. Her Honour ruled in favour of Apple on all but one count, finding it guilty only of violating California’s Unfair Competition Law. We break down the major claims against Apple and the corresponding judgment of the court below.


(i) Apple was not in violation of federal and state antitrust law.


Before establishing if Apple was acting as an monopolist and thus violating antitrust law, the relevant market in which Apple was competing remained to be determined. This was the basis of a significant argument at trial. Rejecting both Epic and Apple’s conceptions of the relevant market, Rogers J found that the market was to be defined as that of ‘digital mobile game transactions’.

With this in mind, the court considered the nature of the market for digital mobile game transactions. The court found that Apple enjoyed a duopoly alongside Google. ‘While the court [found] that Apple enjoys considerable market share of over 55 [percent] and extraordinarily high profit margins, these factors alone do not show antitrust conduct. Success is not illegal.’ (at p.1 of Decision). Antitrust jurisprudence evaluates both market structure and behaviour to determine if an actor is using its place in the market to artificially restrain competition. The court’s analysis, however, failed to find evidence of monopolistic behaviour required for a violation of antitrust laws, such as the imposition of barriers to entry or artificial repression of output and innovation. Apple was simply enjoying the natural benefits which came with a substantial market share. Interestingly, the court concluded that Apple may yet be guilty of monopolistic behaviour; only that Epic had failed to prove it in the case at hand.


The market for digital game transactions existed as a duopoly and by nature was not particularly competitive. However, Apple was not found to have fulfilled the criteria of an illegal monopolist and thus no action could be taken against it on those claims.


(ii) Apple was in violation of California’s Unfair Competition Act.


Though the court did not find Apple guilty of illegal monopolistic behaviour, it still found the company guilty of violating California’s Unfair Competition Act through its anti-steering provisions, which had previously mandated that developers not include links to external providers of in-app content. By concealing alternative modes of payment from consumers, Apple was found to have ‘[hidden] critical information from consumers and illegally stifled consumer choice’. Unlike the claims for establishing illegal monopolistic behaviour, Apple was found guilty of anticompetitive conduct.

As such, the court issued an injunction against Apple, compelling it not to prevent developers from introducing alternative modes of payment for IAPs within their own games, or from notifying consumers of alternative modes of payment.

In all other respects, the court ruled against Epic. Its allegations of antitrust behaviour failed, and they were forced to pay Apple $3.6 million, 30 percent of the revenue Epic made off IAPs in the period they attempted to circumvent the App Store. Epic has filed a notice to appeal to the Ninth Circuit.



Implications of the Ruling


This ruling has many interesting implications for consumers and stakeholders in the technology industry alike.


Firstly, consumers may look forward to alternative modes of payment for IAPs within their favourite applications. The injunction will allow developers to direct their customers to what are likely to be cheaper alternatives. However, the specific terms of the injunction restrain Apple from prohibiting developers from:


  1. 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

  2. Communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.


On a narrow reading of clause (i), Apple may argue that it reserves the right to continue being the sole provider of IAPs within the application itself. In other words, the developer would have to redirect users to a platform outside the application to make the purchase. From the perspective of convenience and security, the consumer may prefer to stay within the application. Apple may also make it difficult for developers to inform consumers of alternative payment options; possibly by locating the relevant calls to action in obscure areas of the application.


Assuming the objective of the injunction is achieved, the saved proportion of the revenue which would otherwise have gone to Apple can be reinvested by developers into game development and innovation, improving the product for consumers. However, this is by no means certain. Rogers J found that even if payment options were entirely outsourced to the developer, Apple would still be entitled to impose a tax upon the developers in lieu of the commission on IAPs.


When discussing the impact of the ruling on the technology industry, we look to the obiter of the judgment. In particular, Rogers J did not fully accept Apple’s argument that the utilisation of Apple’s IAPs were critical to preventing malware and other security issues. Her Honour also found issue with Apple setting of the 30 percent commission on IAPs; this in spite of the fact Apple had brought in a consultant to testify to its justification. These comments potentially present grounds of opportunity for other firms to bring actions against Apple in the future.



In Conclusion


At this time, Apple has filed an appeal against the injunction, claiming that it is no longer necessary following the settlement in Cameron v Apple. It appears that Apple intends to do away with their anti-steering provisions, though the extent to which they will do so remains unclear. Firms like Apple are fully entitled to their high profits – though Rogers J was distrustful of Apple’s setting of a 30 percent commission, she repeatedly held that Apple was entitled to a commission.

Finally, it bears remembering that antitrust and unfair competition laws are meant to protect consumers rather than competitors. Though claims are often brought by private entities for reasons of damages or lost revenue, courts should continue to consider consumer choice and welfare as

guiding principles of their decisions.




 

Epic Games Inc v Apple Inc 493 F. Supp. 3d 817, N.D. Cal. 2020


Permanent Injunction, Epic Games, Inc. v. Apple Inc., Case No. 4:20-cv-05640-YGR, N.D. Cal. Sept. 10, 2021.


A Robertson, ‘A Comprehensive Breakdown Of The Epic V Apple Ruling’, September 12 2021,

The Verge.


Takeaways From The Trial Court’s Decision In Epic v Apple’, September 13 2021, Sullivan & Cromwell LLP


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