Apple: A monopolist under Federal or State Law? A win for Epic or Apple? Read to know

United States District Court, North District of California: While issuing a permanent injunction, stating Apple could no longer prohibit developers linking to their own purchasing mechanisms, Yvonne Gonzalez Rogers, J., held that Epic Games failed to show how Apple Inc. was operating an illegal monopoly.

Violation of Federal and Anti-Trust Laws

Plaintiff Epic Game Inc. sued Apple Inc. alleging violations of federal and state antitrust laws and California’s unfair competition laws based upon Apple’s operation of its App Store.

Epic Games claimed that Apple is an antitrust monopolist over:

  • Apple’s own system of distributing apps on Apple’s own devices in the App Store and
  • Apple’s own system of collecting payments and commissions of purchases made on Apple’s own devices in the App Store.

Antitrust jurisprudence also evaluates both market structure and behavior to determine whether an actor is using its place in the market to artificially restrain competition.

Apple argued that it does not enjoy monopoly power, and therefore does not violate federal and state law.

Trial did show that Apple was engaging in anti-competitive conduct under California’s competition laws. Further, the Court concluded that Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice.

Since Apple has created an ecosystem with interlocking rules and regulations, it is difficult to evaluate any specific restriction in isolation or in a vacuum. Thus, looking at the combination of the challenged restrictions and Apple’s justifications, and lack thereof, the Court found that common threads run through Apple’s practices which unreasonably restrains competition and harm consumers, namely the lack of information and transparency about policies that effect consumers’ ability to find cheaper prices, increased customer service, and options regarding their purchases.

Apple employs these policies so that it can extract supracompetitive commissions from this highly lucrative gaming industry.

Background

In 2010, Epic Games agreed to and signed a Developer Product Licensing Agreement (“DPLA”) with Apple. Epic International subsequently signed a Developer Agreement and DPLA (for the account associated with Unreal Engine). At the time of the signing of these contracts, Mr. Sweeney understood and agreed to key contractual terms including, that Epic Games (i) was required to pay a commission on in-app purchases; (ii) was prohibited from putting a store within the App Store; (iii) was prohibited from sideloading apps on to iOS devices; and (iv) was required to use Apple’s commerce technology for any payments. Knowing the terms, Epic Games chose to enter into those contracts.

Analysis

Apples’ product Market Theory

Court considered whether the App Store provides two-sided transaction services or as Epic Games argued “distribution services”.

The Supreme Court has seemingly resolved the question: two-sided transaction platforms sell transactions. In two-sided markets, a seller “offers different products or services to two different groups who both depend on the platform to intermediate between them.”

Court found that the relevant App store product is transactions, not services, but that providing transactions may include facilitating services.

Apps or Digital Game Transactions?

Whether to narrow the scope of the transactions in terms of defining the product market.

Court concluded that the appropriate submarket to consider is digital game transactions as compared to general non-gaming apps.

Further, the Court stated that there were nine indicia indicating a submarket for gaming apps as opposed to non-gaming apps:

  • the App Store’s business model is fundamentally built upon lucrative gaming transactions;
  • gaming apps constitute a significant majority of the App Store’s revenues;
  • both the gaming, mobile, and software industry, as well as the general public, recognize a distinction between gaming apps and non-gaming apps;
  • gaming apps and their transactions exhibit peculiar characteristics and users;
  • game app developers often employ specialized technology inherent and unique to that industry in the development of their product;
  • game apps further have distinct producers—game developers—that generally specialize in the production of only gaming apps;
  • game apps are subject to distinct pricing structures as compared to other categories of apps;
  • games and gaming transactions are sold by specialized vendors; and
  • game apps are subject to unique and emerging competitive pressures, that differs in both kind and degree from the competition in the market for non-gaming apps.

Between digital game transactions and all app transactions, the relevant product is game transactions.

All Gaming Transactions or Mobile Gaming Transactions?

Court observed that the appropriate submarket to consider is the mobile gaming transactions market.

On a careful consideration of the evidence, Court found that Apples’ app distribution restrictions do have some anti-competitive effects. Unlike the increased merchant fees in Amex, Apple’s maintenance of its commission rate stems from market power, not competition in changing markets

Apple has shown procompetitive justifications based on security and the corollary interbrand competition, as well as generally with respect to intellectual property rights.

Epic Games has not met its burden to show that its proposed alternatives are “virtually as effective” as the current distribution model and can be implemented “without significantly increased cost.

California’s Unfair Competition Law

Epic Games challenges Apple’s conduct under the “unlawful” and “unfair” provisions of the UCL.

Court found that Epic Games has the standing to bring a UCL claim as a quasi-consumer, not merely as a competitor.

Since Epic could not show a violation of law, the claim under the “unlawful” standard failed.

Remedies

While Apple’s conduct did not fall within the confines of traditional antitrust law, the conduct fell within the purview of an incipient antitrust violation with particular anti-competitive practices which have not been justified.

Apple contractually enforces silence, in the form of anti-steering provisions, and gains a competitive advantage. Moreover, it hides information for consumer choice which is not easily remedied with money damages.

 Apple’s business justifications focus on other parts of the Apple ecosystem and will not be significantly impacted by the increase of information to and choice for consumers.

 A nationwide injunction shall issue enjoining Apple from prohibiting developers to include in their:

Apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to IAP.

Nor may Apple prohibit developers from:

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

The Court concluded that Epic Games has not shown that the DPLA is unconscionable. A contractual term is not unconscionable unless it is found to be both procedurally and substantively unconscionable. Here, the absence of substantive unconscionability is dispositive. A contractual term is not substantively unconscionable unless it so “one-sided so as to ‘shock the conscience”

Epic Games pointed to no other evidence or authority based upon which the Court could find that the provisions at issue “shock the conscience.”

These are billion and trillion dollar companies with a business dispute.  

Breach of Contract

 Under California law, “the elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff.” Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 (2011)

Further, it was contended that, Epic Games’ actions violated the DPLA provisions

(1) requiring developers not to “hide, misrepresent or obscure any features, content, services or functionality” in their apps and not to “provide, unlock or enable additional features or functionality through distribution mechanisms other than the App Store,”; and

(2) requiring Epic Games to pay Apple “a commission equal to thirty percent (30%) of all prices payable by each end-user” through the App Store.

For the above argument, Court concluded that Epic games breached the provisions of DPLA and that Apple was entitled to relief for the violations.

Breach of the Implied Covenant of Good Faith and Fair Dealing

Since Court had concluded that Apple was entitled to relief on its breach of contract claim, the Court denied relief to Apple as to its alternative claim for the breach of the implied covenant of good faith and fair dealing.

Unjust Enrichment

 Apple asserts a counterclaim for unjust enrichment against plaintiff based on its alleged failure to pay Apple the agreed-upon 30% commission under the DPLA, but it asserts this counterclaim only “[i]n the alternative” to its claim for breach of contract.

The above stated alternative claim was denied.

Indemnification

Under California law, “[a]n indemnity agreement is to be interpreted according to the language and contents of the contract as well as the intention of the parties as indicated by the contract.” Myers Bldg. Indus., Ltd. v. Interface Tech., Inc., 13 Cal. App. 4th 949, 968 (1993)

Apple contended that it is entitled to indemnification from Epic Games under the indemnification provision because plaintiff’s lawsuit involved claims arising from or related to its breaches of its certifications, covenants, obligations, representations, or warranties under the DPLA, and its use of the Apple Software or services, its licensed application information, its covered products, and its development and distribution of the foregoing.

No such express language was included in the indemnification provision at issue.

In light of the absence of such express language, and in light of the terms used in the indemnification provision that suggested that it covers only third-party claims, the Court found and concluded that Apple has not shown that it is entitled to recover attorneys’ fees and costs from Epic Games pursuant to Section 10 of the DPLA.

Conclusion

Apple sought a declaratory judgment that:

  • DPLA is valid, lawful, and enforceable contracts
  • Apple’s termination of the DPLA with Epic Games was valid, lawful and enforceable
  • Apple has the contractual right to terminate the DPLA with any or all of the Epic games’ wholly owned subsidiaries, affiliates, and/or other entities under its control; and
  • Apple has the contractual right to terminate the DPLA with any or all of the Epic Affiliates for any reason or no reason upon 30 days written notice, or effective immediately for any “misleading fraudulent, improper, unlawful or dishonest act relating to” the DPLA.

Epic Games had contended that Apple was not entitled to the above-stated judgment and Apple’s termination of the DPLA as to Epic Games was “unlawful” retaliation.

Bench stated that the present matter does not involve retaliation.

Epic Games never showed why it had to breach its agreements to challenge the conduct litigated.

In Court’s opinion, plaintiff’s challenges to Apple’s claim for declaratory relief failed as to the remaining requests.

Relief to which Apple was entitled is that to which Epic Games stipulated in the event that the Court found it liable for breach of contract, namely:

  • damages in an amount equal to (i) 30% of the $12,167,719 in revenue Epic Games collected from users in the Fortnite app on iOS through Epic Direct Payment between August and October 2020, plus (ii) 30% of any such revenue Epic Games collected from November 1, 2020, through the date of judgment; and
  • a declaration that (i) Apple’s termination of the DPLA and the related agreements between Epic Games and Apple was valid, lawful, and enforceable, and (ii) Apple has the contractual right to terminate its DPLA with any or all of Epic Games’ wholly owned subsidiaries, affiliates, and/or other entities under Epic Games’ control at any time and at Apple’s sole discretion.

Final Words

As a major player in the wider video gaming industry, Epic Games brought this lawsuit to challenge Apple’s control over access to a considerable portion of this submarket for mobile gaming transactions. Ultimately, Epic Games overreached.

Court did not find Apple as an antitrust monopolist in the submarket for mobile gaming transactions. Though, the Court did find Apple’s conduct in enforcing anti-steering restrictions to be anti-competitive.

In view of the above discussion, Court gave the verdict in favour of Apple except with respect to violation of California’s Unfair Competition Law and only partially with respect to its claim for declaratory relief.

Apple Inc. and its officers, agents, servants, employees, and any person in active concert or participation with them were hereby permanently restrained and enjoined from prohibiting developers from

  • 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
  • communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

Injunction which was previously ordered was terminated.[Epic Games Inc. v. Apple Inc., Case No. 4:20-cv-05640-YGR, decided on 10-09-2021]

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