Epic Cracks the Door to Apple’s Walled Garden: Takeaways for iOS Developers and What Comes Next

The Northern District of California issued its judgment in the bellwether antitrust case Epic Games, Inc. v. Apple Inc. on September 10, 2021, after a 3‑week bench trial. Epic had brought antitrust and unfair competition claims, seeking to invalidate provisions of Apple’s developer agreement that promise Apple a 30% commission rate on in in-app purchases on iOS platforms. Apple brought claims to recover monies owed by Epic under the same agreement.

The decision was mixed.  Epic’s antitrust claims failed, and the Court granted Apple millions in damages for Epic’s breach of the developer agreement—Apple’s 30% share of the revenue Epic earned by bypassing App Store fees with its own direct in‑app payment system.  Still, the court issued a nationwide permanent injunction prohibiting Apple from enforcing anti‑steering policies that prevent App Store developers from directing users away from Apple’s in‑app purchasing system. While the case has sent tremors through the gaming world, it remains to be seen if this decision will monumentally shift the business of other App Store developers.

Background

Since the birth of the App Store in 2008, Apple has required developers who make their apps available through the store agree to certain terms.  Apple charges most developers a flat commission fee of 30% on any purchases their customers make in apps on the App Store. And Apple requires developers to agree to an “anti-steering provision” that prevents them from directing customers away from the App Store to make purchases, by using messages, buttons, or the like. While Epic originally agreed to these terms, in 2020 it developed a plan to ignore Apple’s anti-steering provision and enable direct in-game payments to Epic in its hit game Fortnite on iOS, effectively dodging Apple’s 30% commission. Apple removed Fortnite from the App Store a few weeks later in response, and Epic launched this litigation.

Epic’s lawsuit alleged that Apple used anticompetitive restraints and monopolistic practices in its application distribution and in-app purchase practices. It brought claims under Sections 1 and 2 of the Sherman Act and California’s analogous laws, and claims of anticompetitive practices under the California Unfair Competition Law (UCL).

Apple brought counterclaims based on Epic’s breach of the developer agreement, including breach of contract and implied covenant of good faith, unjust enrichment, indemnification.

Summary of the Decision

Apple’s Wins:  First, the court found for Apple on Epic’s antitrust claims, including on Epic’s arguments about Apple’s 30% commission rate and its prohibition against third-party marketplaces on the iOS environment, but only due to failure of proof on Epic’s part. Second, Apple will get its 30% cut of Fortnite revenue from Epic’s direct in‑app payment option—at least $3.6 million for the period between August and October 2020 alone—as a result of Epic’s breach of contract. Third, the court held that Apple may terminate its developer license with Epic and its affiliated companies as permitted under their contract, which would prevent Epic from accessing the tools needed to continue to develop its Unreal Engine for iOS. Apple has so far refused to reinstate Epic’s developer license agreement and has threatened to maintain this ban until the court has issued a final, non-appealable decision.

Epic’s Wins:  The court held that Apple’s anti-steering provision violated the UCL and issued a permanent injunction to prevent its enforcement within the United States, effective December 9, 2021. If the injunction goes into effect, Apple will be unable to prohibit developers from (1) using in‑app calls‑to‑action directing users to make purchases outside Apple’s in‑app purchase system or (2) communicating with customers through points of contact obtained voluntarily from customers through in‑app account registration.

Practical Takeaways

Currently App Store developers are in somewhat of a holding pattern because it is uncertain if the injunction will go into effect.

Although the injunction is set to go into effect on December 9, 2021, it is not clear yet whether it will. Epic has already appealed the court’s decision and if Apple appeals, it may request a stay on enforcement of the injunction pending appeal. It’s difficult to predict the outcome of such a request. To delay the injunction’s enforcement, Apple would have to show that (1) it is likely to win on appeal, (2) it will be irreparably harmed if the injunction goes into effect, and (3) that the other side and (4) the public will not be harmed by a stay. It is worth noting that the Court justified the injunction in part based on a view that Apple’s anti-steering provisions unfairly limit information available to consumers, and harm consumers by keeping them in the dark about payment options that may feature lower prices.  If this view prevails, the injunction may be allowed to go into effect under the fourth prong of the stay analysis (public harm).  If Apple is concerned about such a result, it might choose to relax or change its anti-steering policy rather than seek to appeal or stay the ruling.  If the injunction is stayed, it could be some time before the matter is resolved and the injunction order goes into effect.

If the injunction does go into effect, it is limited to Apple’s App Store in United States only. This case also has no current effect on other major mobile markets, such as the Google Play store, or on Apple’s App Store outside the United States.

Further Thoughts: Why this Decision is Precarious for Apple

This clash was positioned as and should prove to be a bellwether case for antitrust claims against Apple and similar platforms. The Court has narrowed the issues, first by determining the relevant market definition and second by clearly stating that Apple at minimum exercises significant power in that market. While Epic failed to establish antitrust violations in this case because they argued for the wrong market, Apple now faces a significant risk of lawsuits at the hands of a future plaintiff with a better-tailored argument.

The Relevant Market Debate.  First, the court’s definition of the relevant market narrowed the scope of the analysis to a specific range of apps and transactions, which is the first step in addressing the question of whether Apple simply holds market share power or if it is a true monopoly. Epic was unsuccessful in this case in part because the Court disagreed with both parties’ definitions of the proper market.

Specifically, unlawful monopolization under the Sherman Act requires showing monopoly power in the “relevant market,” which was a source of major disagreement between the parties in this case. Apple argued that the relevant market was all gaming platforms—including mobile, consoles, and PC, as well as more novel gaming platforms like the Nintendo Switch and streaming services—which would minimize its own footprint. Epic argued that the relevant market was the distribution of Apps on the App Store, which would make Apple the only player in the market.

The court rejected both proposed definitions of the relevant market and instead determined that the relevant market here was something between these two extremes: “digital mobile gaming transactions” globally, sans China. Just mobile (phones and tablets), and just purchases made for and in games (no dating apps or ride shares). Notably, the court’s definition includes the Google Play Store on the Android OS and a few smaller app stores like Samsung’s Galaxy Store. While this may at first blush seem like a significant reduction from what Epic was pursuing, a huge amount of Apple revenue was on the line even with this focused market. While only about 30% of apps on the App Store are games, over 98% of in-app purchases come from games, and game transactions account for roughly 70% of App Store revenues overall. This market definition could encompass billions of dollars of Apple revenue annually.

With this question of market definition potentially settled (either now or post appeals), future plaintiffs are likely to address this market as a basis to pursue antitrust claims against Apple. That said, this is likely not the end of the case on relevant market given Epic’s appeal, and there is the possibility that the Ninth Circuit and possibly the Supreme Court will take a different view.

Shares, Powers, and Monopolies.  Second, the court determined that Apple exercises market power in the mobile gaming market, but there was not adequate evidence provided to find Apple to be a monopoly in this case. It should be made clear that this was not the court holding that Apple is not a monopoly, only that given the facts presented the court could not reach that conclusion here. The Court’s order suggests that, had Epic focused more on the topic, the Court might have reached a different outcome.

Specifically, the Court had to determine as part of its analysis whether Apple acted as a monopoly or if it simply had market power. Most ill-gotten/maintained monopolies are illegal under federal law, but a company can have market power so long as it is not used to unreasonably restrain competition. The Sherman Act has two relevant sections here: § 1 (unreasonable restraints on competition) and § 2 (monopolies). The important distinction is degree; market power permits a company to raise prices above what it would normally charge in a competitive market, while monopoly power can allow direct control over prices or outright exclusion of competition.

Determining market share is the first step to determining market power. There are no bright-line rules for what the threshold is for a prima facie monopoly, but usually it’s not lower than 65% and often closer to 70%. The threshold is much lower for market power, with some parties being determined to have market power with as little as 24% market share. The court determined that Apple had a fluctuating share typically between 52–57% in recent years.

Market share alone is not always enough to determine true market power, so the court examined various other factors to help determine just what market power Apple held in the global digital mobile gaming market. The anti-steering provisions, which were non-negotiable “take-it-or-leave-it” contracts of adhesion for developers that wanted to put their products on the App Store, did provide evidence of artificially increased market power. The “extraordinarily high” operating margins Apple enjoyed also suggested strong market power. Hurdles to entry such as the small number of available platforms and steep informational barriers for new entrants into the relevant market also increased Apple’s market power, but the Court found these barriers were potentially lowering over time because of the evolving nature of the gaming marketplace, evidenced by recent entrants to related cloud‑based gaming and portable console markets, such as Google, Nvidia, Microsoft, and Nintendo. Additionally, Epic did not present arguments of the overall capabilities of the other big player in the mobile games market, Google.

While the ability to set and maintain supra-competitive prices (i.e., artificially higher than they would be in a competitive market) evidenced market power and has granted Apple historic operating margins, the Court refused to find that Apple was a monopoly on this basis without evidence of a decreased output for mobile game transactions.

These findings (if they survive appeal) could provide a blueprint for future plaintiffs seeking to bring antitrust claims and/or brand Apple as a monopolist.

What Comes Next

Epic has already appealed the Court’s rulings. It should be expected that Epic will enter the Ninth Circuit prepared to argue that the court’s decision incorrectly defined the relevant market and that, even if the court’s definition were correct, it should have found Apple violated antitrust law based on the evidence provided. While the appeal is pending and especially if the court’s opinion is upheld, Apple can expect to see future plaintiffs use the court’s order as a blueprint for anti-trust arguments tailored to gain more traction with the Court. Stay tuned.