Epic v. Apple: So… What Now?

The Court of Appeals for the 9th Circuit recently affirmed the 2021 district court ruling in Epic Games v. Apple. We discussed that ruling in detail in a previous blog, but in summary: Epic alleged that Apple violated antitrust law by requiring all app developers on iOS to process payments for paid apps and in-app purchases through Apple’s “IAP” system, which gives Apple a mandatory 30% commission. Epic also alleged that Apple’s “anti-steering provisions” in its Developer Program Licensing Agreement (DPLA), which prohibit developers from using their apps to advertise, link to, or even mention external payment options, violated California’s Unfair Competition Law (UCL).

The 9th Circuit Opinion

The 9th Circuit agreed with the lower court that Epic had failed to prove its antitrust allegations, while delivering Epic a win by also affirming that Apple’s anti-steering provisions violated the UCL. The only point the 9th Circuit reversed was the district court’s holding that Apple was not entitled to attorney’s fees related to the lawsuit; the 9th Circuit granted Apple’s attorneys’ fees, citing a provision in the indemnification section of the DPLA.

The antitrust affirmance is complicated, highly technical, and not likely to impact most app developers. Like the district court, the 9th Circuit held that the “relevant market” for the purposes of the antitrust analysis was “digital mobile gaming transactions” – importantly, this includes gaming transactions on Google’s Android platform, which still makes up around half of the US market. Since consumers can, in theory, switch between iOS and Android at any time, this dampens Epic’s arguments that Apple operates an illegal monopoly.

Nevertheless, even if Epic did not prove an antitrust violation, it still prevailed in showing Apple’s anti-steering provisions are “unfair” and therefore actionable under California’s UCL. The 9th Circuit agreed with the district court that the restrictions robbed consumers of the ability to make an informed decision about where to make their in-app purchases (i.e., developers couldn’t even tell users about cheaper prices on other platforms).

To address the steering issue, the district court issued a 1-page injunction: this injunction states that Apple must now allow developers to communicate with their users both externally and “in their apps and their metadata buttons, external links, or other calls to action” about purchasing platforms other than Apple’s IAP system. The 9th Circuit affirmed the content and scope of this injunction.

What Happens Next?

Since both Apple and Google have publicly indicated that they might be working on a further appeal to the US Supreme Court, this case is not over yet. Despite the injunction and a separate settlement finalized in June 2022 that also dealt with anti-steering language, Sections 3.1.1 and 3.1.3 of the App Store Review Guidelines still prohibits game makers from using or communicating with users in-app about the existence of external purchasing methods. So where does that leave the over 34 million iOS developers who are trying to run and monetize their apps?

We don’t have a crystal ball, but we think it’s likely Apple will continue to appeal the injunction to the Supreme Court, arguing that the anti-steering provisions are actually fair or legally excused. If nothing else, doing this would buy them more time before they have to comply with the injunction.

In the meantime, mobile developers face a real conundrum. Many developers would certainly love to create and promote their own web-based stores to bypass Apple’s 30% take, but doing so risks violating the DPLA as written. The injunction may still be overturned, and given that the 9th Circuit ruled that Apple’s DPLA requires developers to pay Apple’s legal fees, Apple now has a powerful tool to threaten developers who break their rules.

Looking even further into an uncertain future, assuming the injunction stands, then what? Here are a few ways Apple might respond:

Demand a cut of off-platform sales

We note that Apple has previously made public promises that “developers will not pay Apple a commission on any purchases taking place outside of their app or the App Store.” If Apple were to reverse course and contractually demand a cut for transactions that happen outside their “walled garden,” this would likely anger developers and reignite all the same antitrust claims as before. After all, taking a cut for payments they don’t actually process is arguably just rent-seeking.

Putting aside legal challenges, it would likely also be difficult for Apple to enforce such a policy at scale. Apple would have to rely on developers to self-report and pay a commission back to Apple, rather than Apple simply taking a cut directly out of the payments made through their IAP system. Apple might create technological solutions to track user’s purchasing activities off-platform, but doing so risks compromising user privacy (which Apple is typically adamant about protecting).

Of course, if a developer falsified their revenues or otherwise failed to pay up, Apple could simply remove the app from the app store or sue the developer directly, seeking their attorneys’ fees under the DPLA. Still, this would still be a difficult and costly enforcement process.

Impose other restrictions on developers who use external payment processors

Apple might instead try to find other ways to alter the DPLA short of flat-out demanding a royalty. For instance, Apple might require off-platform stores that serve iOS customers to register with Apple in advance, require some degree of parity between the in-app offerings and web offerings, or impose onerous security requirements on the web stores themselves in the name of protecting consumers’ security. While these restrictions might also be challenged, they nonetheless could serve to slow the rollout of external web stores without prohibiting them completely.

Something completely different

If enough players stop using Apple’s IAP system, Apple could pivot to other forms of monetization entirely. For example, Apple could require in-game links to off-platform stores to trigger a “referral fee” every time a user clicked them. Or Apple could require game developers to pay a fixed “hosting fee” subscription based on total revenues across all storefronts, similar to how Epic itself operates with licenses for its Unreal Engine. Given that Apple launched a “Small Business Program” with a reduced commission for companies making less than $1m USD annually, it may already be moving in the direction of a tiered monetization approach.

The Bottom Line

Ultimately, both the district court and 9th Circuit recognized the fundamental tension at play here. Apple may have exercised too much control over its walled garden in implementing its anti-steering provisions, but at the same time, if developers could move all IAP sales off of iOS, then Apple could get cut out of its current monetization stream entirely. It’s clear that there will be a shift here, but it’s still unclear how or when the new equilibrium will be reached. While we wait, we expect at least a few mobile app developers will start to cautiously test the waters with web stores and external payment systems. If they prove to be financially successful, Apple will likely be forced to respond.