Epic Games lost again, but the door remains ajar
The Ninth Circuit upheld the ruling that Apple was not engaging in anticompetitive behaviour with the App Store, but left the door open for future attempts to argue monopolistic behaviour.
On just about every smartphone there is a designated “store” to get apps. It is the gateway to every social media platform, game, food tracker, and purported productivity tool that users install on their devices. The question raised by Epic Games, the company responsible for the popular video game Fortnite, in a case decided first in 2021 and then upheld on appeal in a judgment released this past week, was whether the Apple’s App Store, and particularly its payment system, is engaging in an illegal monopoly in violation of federal antitrust legislation.
Epic Games argued that Apple is engaging in monopolistic behaviour by requiring that apps only be distributed through the App Store and that all payments, and commissions, which are generally 15-30%, of purchases made on and in apps be done through Apple’s payment system. The basis on which Epic Games argued this was that Apple has no competition on its devices, and that this is the relevant market by which to assess whether there was monopolistic conduct in violation of federal law. Apple, by contrast, argued that the source of competition for Epic Games is the market for digital video games generally, and therefore they were not doing anything wrong. The District Court disagreed with both parties. They held that the relevant market is digital mobile gaming transactions - essentially ruling that Epic Games’ market was too narrow while Apple’s was too broad.
Games, according to the evidence put forward, account for 70% of total App Store revenue, but is interestingly generated by only 10% of consumers, while more than 80% of App Store accounts generate little or no revenue as over 80% of apps on the App Store are free. Games, are what we are concerned about for the purposes of this lawsuit and while easily shrugged off as a small thing to be quibbling over, are a substantial part of money earned through the App Store.
Antitrust lawsuits, like this one, need to find a balance between successful business activity and problematic anticompetitive behaviour. Apple has been incredibly successful, and enjoy a more than 55% market share in the US. The District Court at the trial level found that Epic Games had simply failed to bring sufficient evidence to establish that Apple was engaging in antitrust conduct such as creating barriers to entry or actions that decrease output and innovation in the relevant market. This ruling, that it was not impossible only not demonstrated at trial, that Apple was an illegal monopolist, left the door open for future litigation. The District Court did find that Apple’s anti-steering provisions were anticompetitive under California’s state competition laws and recommended a nationwide remedy to eliminate those provisions.
Epic Games used the opening left by the trial judge to appeal the findings on the federal antitrust legislation to the Ninth Circuit Court of Appeal. On appeal, the Ninth Circuit held that the District Court had erred as a matter of law in defining the relevant market and holding that the non-negotiated contracts (contracts of adhesion) that app developers sign with Apple in order to have their products appear on the App Store fall outside the scope of federal antitrust legislation. Despite this, the Ninth Circuit found that Epic Games had failed to establish, as a factual matter, its proposed definition of the relevant market and the existence of any substantially less restrictive means for Apple to accomplish the pro-competitive justifications for supporting what they referred to as the “walled-garden ecosystem” that exists on devices running the iOS operating system. If the market for mobile games and purchases associated with mobile games is so lucrative, what could Apple be doing instead that would both maintain competitive fairness while allowing them to control what happens in the iOS environment?
In a very high-level nutshell, that is where we are at the end of this past week with what seems to be the end of the Epic Games/Apple litigation.
Epic Games’ attempt to sue Apple brought forward a lot of points of discussion about how we engage with our devices, and particularly how device and operating system manufacturers are able to act as gate-keepers for what we can do on our devices. In order to access games like Fortnite on an iPhone, it is necessary to download them through the the App Store, and any in-app purchases, which are common on Fortnite and other games, are run through Apple’s payment system. Without access to the App Store, Epic Games would be entirely cut off from increasing the reach of the mobile version of their games to iPhone users in the US where Apple holds the majority share of the phone market (Android has a majority globally). They derive significant benefit from being able to distribute their game to these users, and earn revenue doing so.
Because of the benefits that app developers attract from access to the App Store, is Apple within its rights to guard the way that apps can be downloaded and paid for on devices running the iOS system? Does Apple have an obligation to open themselves up to third party app downloading platforms? Is it anticompetitive to create a device that is entirely proprietary and incompatible with third party software and hardware? A number of years ago, there was a decision by the European Parliament that all smartphones, tablets, and e-readers would be required to use type-C chargers by the fall of 2024. Apple attempted to fight this law on the basis that it would stifle competition to require them to use the same charging port as other devices. This argument was unsuccessful because proprietary charging ports were deemed to not be an essential feature of innovation.
The Ninth Court decision, like that of the District Court, was again based on a lack of evidence to establish the arguments Epic Games was seeking to put forward about the relevant market for assessing anticompetitive and monopolistic behaviour. This decision indicates that the court is not ready to close the door on debate as to whether the App Store and its payment system are anticompetitive, only that the evidence used to make that argument needs to be solid.