The case involves questions "on the frontier edges" of U.S. antitrust law, according to the judge overseeing it. It is a legal battle between a $4 billion company (Epic Games, Inc.) and a $260 billion company (Apple, Inc.) in a market that's valued at $160 billion globally. At the center of the legal battle is the distribution of a digital one: a mobile application played by hundreds of millions of gamers on billions of devices around the world.
It's no small matter, and Apple has scored a temporary victory in the suit, which raises Sherman Antitrust Section 1 and Section 2 claims.
On Oct. 9, 2020, U.S. Judge Yvonne Gonzalez Rogers of California's Northern District held that Apple may continue to ban from its store Epic’s wildly popular Fortnite app. The judge conceded that Epic had some "strong arguments" regarding the exclusivity of the store, but determined they weren't enough to support a preliminary injunction. The judge rejected as seemingly "retaliatory," however, Apple's effort to also block the products of companies affiliated with Epic. Those companies operate independently and have separate agreements with Apple.
In other words, the court held that Epic had not yet shown sufficient likelihood of success of prevailing on its legal claim that Apple has abused its market power, then went on to block Apple from conduct that is potentially just that with regard to Epic's affiliates.
(For additional background on the case, please read our previous post.)
After it was barred from Apple’s App Store, Epic asked the court to force Apple to reinstate Fortnite, despite acknowledging that it breached licensing agreements and operating guidelines in which Apple bars developers from circumventing the iPhone and iPad system (IAP) or distributing iOS apps outside the Apple Store. However, Epic launched the Epic Games Store and would like to create an iOS store independent of the Apple store, as well. "Apple maintains the iOS platform as a walled garden or closed platform model, whereby Apple has strict and exclusive control over the hardware, the operating system, the digital distribution, and the IAP system," Judge Rogers wrote.
Epic also urged the court to stop Apple from terminating its affiliates’ access to developer tools for other applications, including Unreal Engine, while Epic litigates its claims. Epic Games International of Sweden hosts Unreal Engine, a widely used by third-party developers to create graphics for video games, as well as for Epic Inc. and Fortnite. Unreal Engine remains compatible with iOS. But rival graphics engine, Unity, is used by more iOS applications, including Fortnite rival PlayerUnknown's Battlegrounds.
"Given the novelty and the magnitude of the issues, as well as the debate in both the academic community and society at large," Judge Rogers wrote, "the Court is unwilling to tilt the playing field in favor of one party or the other with an early ruling of likelihood of success on the merits."
Judge Rogers also noted the absence of guiding authority on the questions raised. One case cited by the court, however, was the Ninth Circuit's ruling in FTC v. Qualcomm, which held that "novel business practices -- especially in technology markets -- should not be 'conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.'"
Judge Rogers carefully recited some of the basic tenants of antitrust law, explaining that courts will not condemn monopoly power, if it exists, without proof of anticompetitive conduct. And to answer that question, a plaintiff must define the relevant market, something Epic failed to do, the judge held.
"The relevant market must include both a geographic market and a product market," the court said. Epic maintained that the market is the marketing for distributing apps operating on the iOS platform – which only considers, the judge noted, "how iOS apps are distributed on the iOS platform." Apple countered that the relevant market is much broader, including all competing platforms that distribute Fortnite, everything from Xbox to PlayStation to all makes of computers and tablets.
"The multiplatform nature of Fortnite suggests that these other platforms and their digital distributions may be economic substitutes that should be considered in any 'relevant market' definition because they are 'reasonably interchangeable' when used 'for the same purposes,'" Judge Rogers wrote.
Epic argued that some of console platforms are different from the iOS platform because they are not mobile -- players need to plug them in and they require separate screens. The judge dismissed this argument, saying Epic failed to include all the devices, like tablets and Nintendo Switch, which are mobile.
Epic argued, however, that whether these other platforms are economic substitutes has yet to been proven. To that, the judge said Apple's definition also faces hurdles. "Antitrust law is not concerned with individual consumers or producers, like Epic Games; it is concerned with market aggregates. Substitutes may not deprive a monopolist of market power if they fail to affect enough consumers to make a price increase unprofitable ... Alternatively, constraints among some consumers may not render the market as a whole narrow ... Here both parties cite factors impacting the elasticity of their proposed markets. A final determination may depend on the magnitude of those effects." The judge added not enough is known about the iOS market, such as how many iOS users own multiple devices or how many would switch to another device if the price goes up, or how many developers can afford to ignore iOS customers completely.
Turning to the allegations of illegal tying, the court again found the record wanting.
Apple claimed that it does not “tie” IAP to iOS app distribution, because developers may choose other business models. It does not dispute, however, that its App Store Review Guidelines require the IAP system’s use for IAPs as a condition of distribution.
"This requirement manifests the coercion, that is, developers who offer IAP must do so on Apple’s terms," wrote Judge Rogers. "Apple also does not dispute that it holds market power in the iOS app distribution market and that the alleged tie affects a substantial volume of commerce in in-app payment processing. Accordingly, Epic Games raises serious questions with regard to per se tying, but fails to demonstrate the likelihood of success due to lack of evidence of 'purchaser demand' for IAP processing service separate from the 'integrated service' of app distribution."
While competitors could provide equal or better services, Apple has established that its security features -- which is a key selling point -- is superior to competing platforms, the judge found, but still concluded the record isn't sufficient to grant a preliminary injunction.
As for Epic's claim of irreparable harm, the judge said Epic made the decision to breach its agreements with Apple and "self-inflicted wounds are not irreparable injury." Epic argued the court shouldn't enforce anticompetitive contracts, to which the court responded that Epic "cannot simply exclaim 'monopoly' to rewrite agreements giving itself unilateral benefit."
With regard to Epic's affiliated companies, namely Epic Games International, maker of the Unreal Engine, there would be irreparable harm if the Unreal Engine was removed from the Apple Store, the judge determined, noting Apple's actions are already having a negative impact. While removing affiliates is consistent with Apple's practice, Judge Rogers said this is an exception. She said Apple made good arguments, including the at-will nature of the agreements. But Epic argued persuasively, the judge found, that it and its affiliates have separate agreements that have not been breached. Further, the judge said Apple's elimination of Unreal Engine and other affiliate agreements "appears to be retaliatory."
Apple had also argued that Epic Games could use the Unreal Engine to carry malicious code designed to damage the iOS platform. The judge rejected this concern as exaggerated and not supported by any evidence.
The court entered a ruling against Epic's request to force Apple to return Fortnite to the Apple Store, and in favor of the preliminary injunction stopping Apple from removing developer tools provided by Epic affiliates, notably Unreal Engine.
Subscribe to the MoginRubin Blog Digest to receive a monthly curated list of top blog posts and a brief overview of some of the month’s antitrust headlines.
Edited by Tom Hagy for MoginRubin LLP.