By Jonathan Rubin, Partner, MoginRubin LLP
A San Francisco jury has found that Google monopolized the “Android app distribution” market and “Android in-app billing services” market, and that its Developer Distribution Agreements (“DDAs”) with application developers and its Mobile Application Distribution Agreements and Revenue Sharing Agreements with mobile device manufacturers, were unreasonable restraints of trade in violation of U.S. antitrust laws. The jurors deliberated for just over three hours before returning their verdict on Monday (Dec. 11, 2023).
The jury also found Google’s side-deals with app developers to keep them from challenging the Google Play Store monopoly were unreasonable restraints of trade and that Google unlawfully tied the use of Google Play Store to Google Play's billing. The trial on liability lasted for a month in the courtroom of U.S. District Judge James Donato, who will determine the appropriate remedy for the violations found by the jury in a subsequent phase of the trial.
Epic sued Google for preventing it from establishing its own store and payment processing for the sale of its Android applications, such as the blockbuster videogame, Fortnight, actions prohibited under the terms of the DDA. Epic didn’t fare as well when it brought a similar case alleging that Apple Inc. monopolized the markets for sales and payment processing for iOS applications by requiring all iOS app sales and payments to be transacted through Apple’s App Store (see our previous post on the Ninth Circuit opinion in that case by MoginRubin's Tim LaComb). Epic knowingly broke Google's DDA restrictions in 2020 by updating Fortnite to allow players to buy software directly from Epic, thereby bypassing Google’s fees on in-app purchases. This prompted Google to ban Fortnite from the platform, setting up the court battle. Epic sued for an injunction requiring Google to remove the restrictions, but other developers and proposed classes also sued, so the matter was tried to a jury.
The jury found that Epic had proven the existence of the alleged relevant antitrust markets, that Google willfully acquired or maintained a monopoly in those markets by engaging in anticompetitive conduct in violation of Section 2 of the Sherman Act, and that Google’s DDA and other agreements restrained trade in those markets in violation of Section 1. Moreover, having found the Google Play Store to be a monopolist in the sale of Android apps, the jury determined that Google had unlawfully tied the use of the Play Store to the use of Google Play's billing, effectively refusing to distribute applications through the Play Store if the developer refused to allow Google to restrict payments to its own payment platform. The jury found that Epic was injured by each of these violations.
Google plans to challenge the verdict, and any judgment based on the verdict cannot be considered final until that appeal is decided. The case would go to the Ninth Circuit, which affirmed the dismissal of Epic’s antitrust claims against Apple. However, three-judge appellate panels can differ in how they interpret the law.
Google had argued that its store could not be considered a monopoly because of the strength Apple’s competing iOS and the Apple App Store. A company official said, “The trial made clear that we compete fiercely with Apple and its App Store, as well as app stores on Android devices and gaming consoles. We will continue to defend the Android business model. ...” For its part, Epic released a statement that the evidence “demonstrates the urgent need for legislation and regulations that address Apple and Google strangleholds over smartphones.” It called “promising” proposed legislation in the UK and EU.
Both sides are wrong. If the verdict is upheld, it will mean that a platform created and operated by a private party can qualify as a relevant antitrust market. Allowing for this has been an obstacle to applying U.S. antitrust law to dominant digital platforms. A rare exception is the famous Kodak case in which the Supreme Court allowed antitrust markets for repairs and parts for Kodak copiers, and found Kodak liable for restraints on competition in those markets created by Kodak's unanticipated change in its previous policy of supporting independent service and parts suppliers and locked-in customers who had already acquired a Kodak copier.
The Kodak decision was severely criticized by Chicago School antitrust economists citing the “one monopoly rent” theorem, a theorem that only holds under highly restrictive conditions. A cornerstone of Chicago School reasoning, the theorem teaches that only one monopoly rent can be extracted from a chain of distribution, thus, a manufacturer and a distributor of a product cannot both earn monopoly profits. In the more general paradigm of a platform operator capable of hosting value-adding complements, the theorem teaches that the operator cannot monopolize the markets for its own complements. Since the platform operator is already a monopolist, any rivalry in the complement would be “illusionary.”
An important insight of the post-Chicago movement in antitrust is the recognition that the conditions under which the one-monopoly rent theorem does not hold are far more common than conditions under which it does. If the jury’s determination of the relevant markets is allowed to stand on appeal, Google’s defense based on its rivalry with Apple will fail because it is irrelevant. The jury has determined that Google’s Android platform is large and commercially important enough that the rules of public markets must apply to it. Thus, contrary to the one-monopoly-rent theorem, not only can there be competition in markets that are complementary to Google’s Android platform (e.g., Android app sales and payments), but courts can apply the rules of antitrust to those markets, even though they reside on a monopolist’s platform. Google’s competition with Apple has no bearing on competition in the markets for Android app purchases and payments, where Apple does not participate.
Epic is also wrong, because the jury’s verdict does not necessarily suggest the need for regulation or a regulatory agency. The threat of prosecution is a powerful deterrent to behavior recognized by the courts to violate the antitrust laws. One of the principal advantages of antitrust intervention—public or private—is its “one-off” character in response to specific violations. A permanent regulatory body and a set of ex ante rules are unnecessary if the exposure to potential antitrust liability is enough to constrain bad business behavior.
The challenge for antitrust will be to design the appropriate legal test for when competition in complements deserves the protection of the antitrust courts, and when it does not, as, for example, when consumers can easily switch platforms to avoid the problem altogether. Having a sunk investment in an Android device, the option to switch to an iPhone in order to use the Apple App Store is no more practicable than switching copiers after independent repair shops could no longer obtain Kodak parts or support. But there are many more examples where the switching costs are not necessarily prohibitive, and the courts will have to decide on a case-by-case basis whether conditions warrant that a private platform should be subject to the antitrust rules applicable to public markets. It is notable how this process contrasts with the approach of the Europeans, who have predetermined that the companies deserving of such scrutiny are Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft, i.e., the “gateway” companies under the EU’s Digital Markets Act (DMA).
As we wrote in 2020 when the Epic v. Google case was filed, “The question for antitrust is: At what point do ... 'marketplace platforms' deserve to be treated as markets under the control of the platform operator? What the Epic Games litigation suggests is that even private marketplaces organized within the confines of a private company should be subject to antitrust oversight.” At least one court agrees.