Epic Games v. Apple: How the Case Evolved and Where It Is Heading

video games lawyer
1000 648 David Hoppe

In a lawsuit filed on August 13, Fortnite maker Epic Games accused Apple of anticompetitive behavior after Apple pulled Fortnite, the popular battle royale-style game, from its App Store. As of the time of writing, current players can still access Fortnite on their iPhones but can’t receive updates for the game. New users won’t be able to download the game at all.

Apple pulled the game after Epic offered players a 20% discount on V-bucks if they purchased the Fortnite currency via Epic’s direct payment system through a PC or console. In other words, Epic incentivized Fortnite players avoid making these in-app, where Apple collects a 30% commission.

Dubbed “Fortnite Mega Drop,” this promotion would be a boon not only to Fortnite players but also to Epic – players would receive the discount (and perhaps purchase more V-bucks than they would have at full price) and Epic would reap an additional 10% in revenue by avoiding what it has called Apple’s “oppressive cut of all in-app purchases.

This 30% commission is a policy shared by Google, which also is a target of a lawsuit filed by Epic that same day. Google also removed Fortnite from Google Play in the wake of the Mega Drop. Fortnite is a free-to-play game that makes all its money through in-app purchases. Epic had reportedly asked Google for an exception, which Google refused. Epic stated, “We believe this form of tying of a mandatory payment service with a 30% fee is illegal in the case of a distribution platform with over 50% market share.”

Other apps have avoided Apple and Google’s commissions by not offering content or subscriptions for purchase in-app. In these cases, users use the app only to access content purchased outside of the app. For example, the Netflix app does not offer subscription sign-ups; users cannot purchase ebooks in the Kindle app or video content in the Amazon Prime Video app. 

In the Mega Drop FAQs posted on Epic’s website, Epic accuses Apple of “intentionally sabotag[ing] consumer iOS devices to prevent users from installing software directly from developers.” The argument – posited by Epic and other apps, including Spotify – is that Apple uses its monopoly position to force consumers to download software only via the App Store. Epic also argues that Apple’s requirement that apps its App Store use Apple’s payment processing service is anticompetitive because it forces developers to charge higher prices for in-app goods such as skins and in-game currency.

In contrast to the 30% fee Apple and Google charge, Mastercard, Visa, and Paypal charge fees ranging from 2.5% to 3.5%. Epic’s argument is that the app stores’ blocking of direct payments prevents it and other developers from passing these potential cost savings on to consumers.

Epic further points out in its FAQ that thousands of apps available on the App Store – Amazon, DoorDash, and McDonald’s to name just a few – are allowed to accept direct payments. Apple claims its rules ensure the safety of App Store users. However, this belies its position in pulling Fortnite: “Clearly Apple acknowledges that third-party payment services are safe and acceptable for goods and services,” the FAQ states. ”Epic direct payment simply offers players the same kinds of payment options as these other apps.”

In its Mega Drop FAQ, Epic states they “have chosen to fight Apple’s policies on behalf of all consumers and their right to have access to more efficient payment methods and to receive the best prices available.”

It appears that Epic was ready for the fight. Piers Harding-Rolls, games research director with Ampere Analysis, believes Fortnite’s rule-defying payment method was implemented to deliberately force Apple to retaliate. This is likely true, as mere hours after Apple removed Fortnite from the App Store, Epic filed the 65-page lawsuit against Apple and a 60-page action against Google. Epic also released a short film entitled “Nineteen Eighty-Fortnite”, a play on the dystopian novel 1984 and a parody of Apple’s own 1984 commercial. At the end of the video, Epic implores viewers to “Join the fight to stop 2020 from becoming ‘1984’”. Epic shared the video on Twitter along with a link to its #FreeFortnite website. That same day, the #FreeFortnite hashtag trended on Twitter while Fortnite streamed the video loop on its YouTube and Twitch channels. Consistent with its messaging, Epic claims in the lawsuit that “Apple has become what it once railed against: the behemoth seeking to control markets, block competition, and stifle innovation.” Epic has ostensibly taken it upon itself to battle this so-called behemoth.

Epic is not alone in its desire to put an end to Apple’s “anticompetitive” behavior. Last year, the CEO of Spotify stated that the App Store rules “purposely limit choice and stifle innovation at the expense of the user experience.” This comment was related to Spotify’s complaint against Apple with the European Commission, claiming that Apple has engaged in unfair competition practices, especially in relation to Apple Music. Wired Magazine explained, “Spotify says that by charging a 30 percent tax on in-app purchases, Apple forces app developers to make an impossible choice: Either pass those costs on to consumers or refuse to pay the commission and face a litany of technical hurdles imposed by Apple. Spotify, which competes directly with Apple Music, argues that this constitutes an unfair advantage for Apple.”

In October 2019, the email app developer Blix filed a lawsuit charging Apple with suppressing the App Store rankings of apps that compete with Apple’s own products. The suit alleges patent infringement and antitrust violations based on the fact that its email app, BlueMail, was ranked highly in Android app stores but low in Apple’s. Specifically, Apple placed its own apps above other apps in search results, sometimes even placing apps unrelated to the search term ahead of previously highly-ranked apps. Blue mail unexpectedly soared from 143rd to 13th in Apple’s ranking of email apps two weeks after a New York Times article uncovered Apple’s practices. Apple stated that the search results and rankings were done via algorithm and the company had done nothing intentional to drive downloads of Apple’s apps over others. This lawsuit is pending, and while it alleges different antitrust practices than Epic’s case, it is relevant to the full picture of Apple’s alleged anticompetitive practices.

In 2018, the Supreme Court allowed Apple v. Pepper to proceed. The consumer class action alleges that Apple used its monopoly power to increase the prices of iPhone apps. It claims that smaller developers are disadvantaged by Apple’s commission policy. The plaintiffs pointed out that large companies such as Amazon can direct consumers to subscribe directly through their websites, instead of through the App Store, but smaller developers might not be able to support this. The district court initially dismissed the lawsuit on the grounds that Apple had not engaged in illegal price-fixing because developers – not Apple – set the app prices. The Court of Appeals and the Supreme Court, however, disagreed and ruled that the case could move forward.

Google is no stranger to antitrust lawsuits either; however, the majority of these lawsuits have been filed by regulators, both in the United States and abroad, and generally focus on other areas of Google’s business, especially its advertising practices.

Earlier this year, the House Antitrust Subcommittee heard concerns that Big Tech, Amazon, Facebook, Google, and Apple in particular, have been and continue engaging in practices harmful to small businesses. The usual criticism – that Apple wields too much power and has too much say about which apps can and cannot be distributed through the App Store – was addressed. Bloomberg explained, “Apple doesn’t allow other app stores on its platform. Google does, but the internet giant has complex agreements with Android phone manufacturers that require these partners to preinstall its Play store. European antitrust regulators recently forced Google to end this practice, but the deals are still in effect in the U.S.”

With this backdrop, it is no real surprise that Apple is facing yet another antitrust lawsuit, albeit from Epic Games this time. The lawsuit asks the Northern District of California to issue an injunction prohibiting Apple’s anticompetitive conduct and to declare that Apple’s contractual and policy restraints are unlawful and unenforceable.

Following the filing of the lawsuit, Apple threatened to terminate Epic’s developer accounts and access to iOS and Mac development tools, but Epic successfully filed a temporary restraining order (TRO) that prevents Apple from “taking any adverse action against Epic, including but not limited to restricting, suspending or terminating any Epic entity from Apple’s Developer Program, on the basis that Epic enabled in-app payment processing in Fortnite through means other than IAP or on the basis of the steps Epic took to do so.” The TRO, however, did not require Apple to reinstate Fortnite.

Epic’s TRO states, “If the Unreal Engine can no longer support Apple platforms, the software developers that use it will be forced to use alternatives. The damage to Epic’s ongoing business and to its reputation and trust with its customers will be unquantifiable and irreparable.” Regardless of whether the court grants or denies Epic’s TRO, the main lawsuit will proceed.

Epic faces a potentially hard road ahead as it will need to provide evidence supporting its claims, including a definition of what the market actually is for purposes of its antitrust allegations. Epic’s complaint asserts that the market is all iOS mobile devices. However, Epic awkwardly separates the market into two pieces: 1) the app distribution market and 2) the app “payment-processing” market.

Epic supports its characterization of the market by arguing that it is not easy for consumers to switch between iOS and another operating system (Android, for example) and that iOS consumers spend considerably more on in-game purchases than Android consumers. There is some truth to these arguments.

For example, in June 2019, Bloomberg reported that consumers spent over $100 billion on purchases through app stores, with Apple’s App Store accounting for 45% of that amount and the Google Play store accounting for about 25%. In the US, Apple and Google together control over 95% of all consumer mobile app spending. Additionally, in October 2019, Motley Fool reported that “Apple again beat out Google Play in terms of monetization, even as [Google] enjoyed far greater smartphone market share.”

If the court decides that iOS mobile devices constitute the market, Epic will have a much easier time establishing that Apple engages in “anticompetitive conduct” and “monopolizes” the market for the following reasons: 1) Apple prevents other companies from setting up their own app stores; 2) Apple prevents other companies from providing their own “payment processing” services in the market; and, of course, 3) Apple extracts an arguably unreasonably high price from sales into the market (30%), to the detriment of consumers.

But if the market is comprised of all mobile devices, Epic may be unable to prove that Apple has a monopoly. According to the Federal Trade Commission, in antitrust cases, “Courts look at the firm’s market share, but typically do not find monopoly power if the firm (or a group of firms acting in concert) has less than 50 percent of the sales of a particular product or service within a certain geographic area. Some courts have required much higher percentages.” Apple owns about half of the market share of smartphones in the US and a much lower market share globally. There are approximately 2.5 billion active Android users compared to Apple’s 1.4 billion users.

In the 1992 case Eastman Kodak Co. v. Image Technical Servs. Inc., the Supreme Court discussed the issue of defining the market: “Because service and parts for Kodak equipment are not interchangeable with other manufacturers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines.” The Court further explained that this was an issue of fact, meaning that it is case-specific. Applying this precedent to Epic Games, it’s possible that a court would apply a narrow definition to the market. Because the Court viewed the market narrowly in the case of Kodak, it found that Kodak controlled nearly 100% of the parts market and 80% to 95% of the service market. So, if the court agrees with Epic Games that the market is all iOS mobile devices, then it will be fairly easy for Epic to show that Apple has a near (or complete) monopoly in that market.

But if the market includes non-iOS mobile devices, Epic may not prevail. As stated above, while Apple’s market share in the US is around 50%, its global market share is only around 35%. In United States v. Aluminum Co. of America, the 2nd Circuit Court of Appeals stated, “it is doubtful whether sixty or sixty-four percent [of the market] would be enough; and certainly thirty-three percent is not.”

An interesting parallel can be made to the Department of Justice’s antitrust suit against Microsoft for its anticompetitive practices. The court defined the market as “operating systems software for IBM-compatible personal computers.” Based on that definition, Microsoft’s market share was above 90% and, at times, even more than 95%. The court therefore determined that Microsoft had a monopoly.

Further, Microsoft used its dominant position in the operating systems market to “exclude other software developers and prevent computer makers from installing non-Microsoft browser software to run with Microsoft’s operating system software.” More specifically, the court determined that Microsoft illegally maintained its operating systems monopoly by including Microsoft’s Internet browser, Internet Explorer with each and every copy of its Windows operating system sold to computer manufacturers, thereby “making it technically difficult not to use its browser or to use a non-Microsoft browser.”

Microsoft also granted rebates and sometimes even free licenses to use its software. This practice discouraged other software developers from promoting non-Microsoft browsers. The court acknowledged that Microsoft did not “tie up” all ways of competing with it. However, Microsoft’s actions did have the effect of preventing rivals from using the lowest-cost means of winning market share away from Microsoft.

The Department of Justice, along with the individual states that joined the lawsuit, demanded that Microsoft be broken up. The case turned into a legal saga with many appeals and other twists, including the revelation that the trial judge gave personal interviews to the media while the case was ongoing. After many years of litigation, Microsoft agreed to stop certain anticompetitive conduct that prevented the development of competing browsers.

Epic’s allegations of Apple’s anticompetitive practices closely parallel those outlined against Microsoft. As described in Epic’s motion for TRO:

“Apple has for years used its complete monopoly over the distribution of apps to the billion users of iOS, the Apple operating system (“OS”) running on all iPhones and iPads, to coerce app developers into using Apple’s payment platform, In-App Purchase (“IAP”) for all in-app purchases of digital content used in their apps. By tying IAP to app distribution, Apple eliminates all competition in the market for in-app payment processing, allowing it to impose an exorbitant 30% “app tax” on all in-app purchases of in-app content.”

Epic also explains that Apple’s tying of IAP to app distribution violates Section 1 of the Sherman Act – the main antitrust law. To be successful in bringing a tying claim under the Sherman Act, “…a plaintiff must prove: (1) that the defendant tied together the sale of two distinct products or services; (2) that the defendant possesses enough economic power in the tying product market to coerce its customers into purchasing the tied product; and (3) that the tying arrangement affects a not insubstantial volume of commerce in the tied product market.” Cascade Health, 515 F.3d at 913 (internal quotation and citation omitted).

Once again, the definition of the relevant market is critical. Epic points out in its TRO that the European Commission, in finding that Google violated European anti-competition law, decided that “app stores for other licensable smart mobile OSs” and “for non-licensable smart mobile OSs such as Apple’s AppStore . . . do not belong to the same product market as Android app stores.” Of course, in this situation 100% of iOS mobile app distribution takes place via the App Store. So if Epic gets its way, Apple clearly holds a monopoly in this narrowly defined market.

Epic Games v. Apple presents an interesting conundrum: what happens when the defendant in an antitrust lawsuit created the very market it is accused of monopolizing? There is no legal precedent to assist in predicting how the court may feel about this unique situation. However, Wired Magazine reported that Senator Elizabeth Warren wants to prohibit tech companies like Facebook, Google, and Amazon from participating on the platforms they own. “Her plan, which was applauded by anti-monopoly groups like the Open Markets Institute, would prevent Amazon, for instance, from selling Amazon-branded products on its own marketplace, and would require Google’s ad exchange and Google Search to be split apart.” Warren explained that this plan would also necessitate separating Apple and the App Store: “Either they run the platform or they play in the store. They don’t get to do both at the same time.”

However, Senator Warren’s stance ignores that Apple, as a market operator, builds and maintains its own technology platform, which consumers voluntarily choose over alternative offerings, and part of the value being offered is the so-called “walled garden,” whereby third-party apps are carefully vetted, fraud is actively policed and shut down, and the technology is continually maintained and improved. This is precisely Apple’s position on the matter.

The definition of the market will be critical to Epic’s success or failure. There are three viable options, each with factual support: 1) all iOS mobile devices; 2) all mobile devices in the US; and 3) all mobile devices globally. It remains to be seen which way the court will decide, but one thing is clear: any decisions stemming from the Epic Games v. Apple lawsuit – no matter which side the decisions favor – will have profound effects on the future of apps and in-app purchases.

Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, to push the boundaries of innovation, and to achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs. 

Author

David Hoppe

All stories by: David Hoppe

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