A Closer Look at the Epic Battle with Apple and Google
In August, Epic filed a pair of antitrust lawsuits against Apple and Google in a move that is poised to intensify and develop the landscape around allegedly anticompetitive business practices of Apple and Google, and specifically around their app stores.
Epic’s “Hotfix” Payment Processing Feature and Lawsuits Against Apple and Google
In mid-August 2020, Epic Games enabled a feature in the iOS and Android versions of Fortnite that allowed players to pay for in-app purchases through a direct payment processing option. Epic offered its direct payment option as an alternative to Apple’s and Google’s in-app purchase option, effectively circumventing both platforms’ standard 30% fee for in-app purchases. Epic also offered the items for direct purchase at a discounted price. In response to Epic’s introduction of the direct payment option, both Apple and Google removed Fortnite from their respective app stores.
Later that day, Epic filed lawsuits against both Apple and Google in the Northern District of California. While the complaints are fairly similar, the Apple case has seen a flurry of activity in recent weeks and is the primary focus of this post, as illustrative of the issues at play in both cases. The 60-plus-page complaint against Apple asserts 10 antitrust claims under Sections 1 and 2 of the Sherman Act and similar provisions of California Cartwright Act, all based on alleged anticompetitive and monopolistic practices of Apple with respect to its App Store and in-app payment processing.
A Closer Look at Epic’s Antitrust Claims
Epic’s allegations focus on Apple’s alleged monopolist practices and anticompetitive restraints in two relevant markets: (1) the iOS App Distribution Market, defined as a market for the distribution of apps compatible with iOS to users of iOS devices,” Compl. ¶ 58; and (2) the iOS In-App Payment Processing Market, defined as a market “for the processing of payments for the purchase of digital content, including in-game content, that is consumed within iOS apps.” Compl. ¶ 109.
Epic’s claims against Apple center primarily on allegations that its operation of these markets constitutes (1) anticompetitive conduct by Apple, in violation of Section 1 of the Sherman Act and (2) unlawful maintenance of monopoly power through its anti-competitive conduct, in violation of Section 2 of the Sherman Act.
At a high level, Epic’s Section 1 claims allege that Apple’s technical and contractual restrictions (i.e. its developer agreements) are unreasonable restraints on trade because they impose restrictions on app developers that prevent competition for app distribution in the iOS App Distribution Market, banning use of third-party app stores to distribute or access iOS apps and prohibiting the use of third-party payment processors for in-app purchases. According to Epic, even though it entered into such an agreement with Apple, these restrictions limit competition and harm developers and consumers, namely over an alleged one billion users of iOS devices.
Epic’s Section 2 claims generally allege that Apple deploys its anti-competitive conduct to maintain absolute monopoly power in both the iOS App Distribution and iOS In-App Purchase markets.
The heart of Epic’s claims rest on its allegations of Apple’s “tying” in per se violation of Section 1 of the Sherman Act and in aid of its unlawful monopoly maintenance in violation of Section 2. The thrust of the argument is that Apple conditions access to its App Store on a promise by developers to use Apple’s in-app purchase system for all in-app purchases of in-app content, for which Apple receives a 30% commission. Apple has thus allegedly “tied” sale of one product, use of the App Store (the “tying” product”, to use of the second product, Apple’s in-app purchase system (the “tied” product). According to Epic, developers are thus coerced into using both products, playing by Apple’s rules, and tolerating the 30% commission, which Epic alleges is a far higher price than would exist in competitive conditions.
Epic’s Motion for a TRO Against Apple and the Court’s Order
After Epic filed suit, Apple hit back, notifying Epic that it would boot Epic from the Apple Developer Program by August 28, 2020, which would effectively cut Epic off from the development tools needed to create software for Apple’s platforms. The ban would include iOS and macOS and would affect all of Epic’s games and software, as well as games and apps that use Unreal Engine, Epic’s game engine that is widely used (for a royalty) by third-party developers for their games and apps.
In response, on August 17, 2020, Epic filed for a temporary restraining order against Apple to stop the ban and reinstate Fortnite on the App Store with Epic’s payment processing tool in place. Epic argued that Apple is using its alleged monopoly power to improperly retaliate against Epic. Epic therefore sought to stop Apple from taking adverse action based on Epic’s enabling of direct in-app payment in Fortnite, including barring Apple from keeping Fortnite off of the App Store or blocking Epic’s access to Apple’s Developer Program.
On August 24, 2020, the court issued an order granting in part and denying in part Epic’s motion, awarding Epic relief by restraining Apple from taking adverse action against Epic with respect to “restricting, suspending or terminating any affiliate of Epic Games . . . from Apple’s Developer Program, including as to Unreal Engine.” Order at 8. The court’s order weighs the four factors used to assess requests for a temporary restraining order: (1) likelihood of success on the merits; (2) likelihood of irreparable harm absent preliminary relief; (3) the balance of equities; and (4) whether relief is in the public interest.
Regarding the first factor, the court concluded, “[b]ased on a review of the current limited record before the Court, the Court cannot conclude that Epic has met the high burden of demonstrating a likelihood of success on the merits, especially in the antitrust context.” Order at 4. But the court went on in the next sentence to note that “serious questions do exist,” noting its decision to relate the case to another pending case against Apple brought by a class plaintiff and another app developer, Pure Sweat Basketball, Donald Cameron, et. al. v. Apple Inc., 4:19-cv- 03074-YGR. The court noted that the cases concern “overlapping questions of facts and law, including substantively similar claims based on the same Apple App Store policies: namely, the 30% fee that Apple takes from developers through each application sale and IAP in the application.” Id.
The court’s TRO order turned primarily on the remaining factors, particularly whether Epic will suffer irreparable harm due to Apple’s conduct. The court held that Epic had not yet demonstrated irreparable harm with respect to the Fortnite ban, viewing its “current predicament” as one “of its own making” and observing that Epic could deactivate its Fortnite in-app purchase option during pendency of the case, and that its preference not to make the fix did not constitute irreparable harm. On the other hand, the court held that Epic did make a preliminary showing of irreparable harm as to Apple’s proposed revocation of access to the Apple Developer Program and developer tools. The court reasoned that the relevant agreement was between Apple and an affiliate of Epic, and that Apple’s suggestion that as a “historical practice” it removes all affiliated developer accounts in similar situations would be better addressed after further briefing. The court also acknowledged the potential nature and extent of the harm at issue: “Apple is hard-pressed to dispute that even if Epic Games succeeded on the merits, it could be too late to save all the projects by third-party developers relying on the engine that were shelved while support was unavailable. Indeed, such a scenario would likely lead to nebulous, hard-to-quantify questions, such as, how successful these other projects might have been, and how much in royalties would have been generated, much less the collateral damage to the third-party developers themselves.” Order at 6.
In addressing the final TRO factor, the court again raised questions about the urgency of Epic’s claims, observing Epic “strategically chose” to breach its agreements with Apple “which changed the status quo.” Id. The court therefore concluded that no equities warranted imposing “a new status quo in favor of Epic.” Id. But the court did note that the equities weighed against Apple with respect to Unreal Engine and blocking Epic from access to Apple’s developer tools. The court’s assessment of the public interest factor followed similar lines.
Epic has now filed a motion for preliminary injunction in the Apple case, seeking to further develop a record establishing entitlement to preliminary relief while the parties litigate their dispute. The motion is fully briefed and set for hearing on September 28,2020.
What’s at Stake
Epic’s cases against Apple and Google will first turn on how the relevant markets are defined—which in turn generally contemplates the market that contains the substitute products that would provide a significant competitive constraint. Epic seeks to define the relevant markets narrowly, as the app distribution markets for the particular platforms and, separately, their respective in-app payment processing systems. Under Epic’s theory, looking to Apple, apps on other platforms do not provide a reasonable substitute because acquiring and using those apps would require users to purchase a new, non-iOS device. It is likely that Apple (and Google) will advocate for broader definitions of the relevant markets that include all game platforms. If the court accepts Epic’s market definition, however, it would likely lead to a finding, looking at Apple as an example, that Apple has an absolute monopoly in the iOS App Distribution and iOS In-App Payment Processing markets.
Epic’s TRO presented the first significant opportunity for the court to assess whether and to what extent Epic’s antitrust claims are likely to succeed. The court, however, largely bypassed any discussion of the potential merits of Epic’s claims, focusing instead on the what the court seemed to view as manufactured urgency with which Epic brought them. But the court noted “serious questions” about Apple’s practices. And further exploration by the court of the merits of these claims on a motion for preliminary injunction or later briefing will shed further light on whether Epic’s claims can succeed. If so, Epic’s success could signal significant hurdles to come for Apple in maintaining the status quo of its App Store operations. That said, antitrust claims are typically very difficult to prove, and Apple (and Google) will undoubtedly make a host of persuasive arguments against Epic’s allegations. Indeed, Apple previewed some of these arguments in its opposition to Epic’s TRO motion, challenging Epic’s definitions of the relevant markets at issue and arguing, among other things, that Apple’s removal of Epic from the App Store as a result of Epic’s breach of an agreement it willingly entered was lawful, and that its App Store has many procompetitive benefits, as it “has exponentially increased output (including hosts of free apps), has never raised prices, enhanced innovation, and dramatically improved developer and consumer welfare.” Opp. at 17.
In addition, while it is temporarily restrained from taking further action, Apple’s alleged intention to remove Epic and its affiliates from the Apple Developer Program could throw into question the viability of the Unreal Engine on Apple platforms going forward, placing in a precarious position the games and apps that run on it. Currently, the Unreal Engine is used by many third-party developers. If Epic or its affiliates are later blocked from the Apple Developer Program and therefore unable to update or distribute the Unreal Engine on Apple platforms, many third-party developers who use it may face significant issues in updating existing apps or creating new ones.
Finally, just recently, another Northern District of California court filed a sua sponte order seeking determination of whether Epic’s cases against Apple and Google should be related to two other cases brought against Apple and Google by another app developer and raising similar antitrust issues, including the Cameron case cited in the order on Epic’s TRO motion, which has been pending since 2019. The potential relation of these cases could further signal a growing cohesion and momentum of antitrust scrutiny into Apple’s and Google’s app store and payment processing practices.
While both Epic cases remain in early stages, they will undoubtedly be closely watched over the coming weeks and months. Stay tuned for future updates as this Epic battle continues.