A comprehensive breakdown of the Epic v. Apple ruling

A comprehensive breakdown of the Epic v. Apple ruling

Craig Federighi addresses the court

Image courtesy of Vicki Behringer

On Friday, a California judge ruled on the influential Epic v. Apple lawsuit, and both sides lost. Judge Yvonne Gonzalez Rogers concluded that Apple wasn’t unfairly monopolizing the mobile app space with iOS or its in-app purchasing system, and she ordered Epic to pay damages for violating its developer agreement with Fortnite. At the same time, she ordered Apple to remove its anti-steering rules — policies banning developers from telling users about alternatives to Apple’s in-app purchase system.

For readers outside those two companies, though, Judge Rogers’ opinion has a lot to offer. Rogers clearly considers much of Epic and Apple’s behavior silly and many of both companies’ arguments bad. But she seriously examines all these arguments and lays out a blueprint for further legal arguments about mobile platforms, app monopolies, and modern antitrust law.

So we’re going to take a close look into the ruling’s biggest conclusions — and what they mean for both companies.

The Fortnite suit is about mobile game payments, not iOS apps or the bigger game market

During the trial, both sides argued over which market Fortnite’s iOS app belonged to. Epic claimed Apple had abused a monopoly on the iOS app ecosystem; Apple claimed Fortnite was playing in the more competitive overall digital game market. (This is why the trial’s lawyers kept asking whether Fortnite is a game.)

Judge Rogers says both these definitions are wrong, although Apple’s is somewhat less wrong. Instead, the question is whether Apple has an unlawful monopoly in “digital mobile gaming transactions.” Rogers notes that mobile games often have a different user base than PC or console games, and they rely hugely on the “freemium” model of in-game item sales, which are less important to both mobile apps and console or PC games.

Epic made 10 claims against Apple. Most of them depended significantly on Apple having an unfair monopoly under either the federal Sherman Antitrust Act or California’s antitrust-focused Cartwright Act. And although the ruling is sympathetic toward several of Epic’s underlying arguments, nearly all its claims were dismissed.

Apple doesn’t have a monopoly in mobile gaming — yet

Mobile games are a huge part of Apple’s App Store revenue — approximately 70 percent, according to the ruling — and Apple has outsized power in mobile gaming. Rogers concludes iOS and Android hold a near-duopoly, although she considers the Nintendo Switch and cloud gaming services potential near-future competitors. The ruling estimates that Apple has a share of around 55 percent in the mobile game transactions market, alongside “extraordinarily high profit margins,” which can be a sign of monopoly power.

But despite Apple’s “considerable” power and profit margins, “these factors alone do not show antitrust conduct. Success is not illegal,” Rogers concludes. While Epic argued that iMessage and other factors deliberately lock users into iOS, Rogers wasn’t convinced by this line of reasoning.

The ruling leaves the door open for future antitrust complaints. “The evidence does suggest that Apple is near the precipice of substantial market power, or monopoly power, with its considerable market share,” Rogers writes. “Apple is only saved by the fact that its share is not higher, that competitors from related submarkets are making inroads into the mobile gaming submarket, and, perhaps, because [Epic] did not focus on this topic.”

For now, though, this judgment undercut Epic’s allegation that Apple maintained a monopoly or unlawfully restrained trade under the Sherman Act, helping taking down four of its claims against Apple. The ruling says that by extension, it means Apple didn’t violate California’s Cartwright Act, taking down two more of the claims.

A seventh claim said iOS was an “essential facility” that Apple had unfairly denied access to. But Epic didn’t seriously argue this claim, and for mobile app developers, Rogers says web apps and other digital platforms provide a reasonable (if not ideal) distribution alternative.

The App Store has a troubling lack of competition

The Epic v. Apple ruling has some harsh words for the App Store. At one point, Rogers notes that “nothing other than legal action seems to motivate Apple to reconsider pricing and reduce rates.” At other points, she says Apple “does a poor job of mediating disputes between a developer and its customer,” and it’s been “slow either to adopt automated tools that could improve speed and accuracy or to hire more reviewers” for its app review process. “Apple’s slow innovation stems in part from its low investment in the App Store,” the ruling elaborates.

Meanwhile, although Rogers takes a dim view of Epic’s economic analysis, she accepts that “Apple’s operating margins tied to the App Store are extraordinarily high.” And she specifically calls out a lack of competition as an issue. “The point is not that … Apple provides bad services. It does not,” she writes. “The point is that a third-party app store could put pressure on Apple to innovate by providing features that Apple has neglected.”

Apple has valid security fears about opening up iOS

Apple’s trial witnesses promoted iOS as an unusually safe and secure ecosystem because of its walled-garden model, saying no other option would be appropriate for the sensitive data on people’s phones. Epic called that claim a pretext for shutting down competition.

The ruling deflates some of Apple’s protestations. Judge Rogers is particularly dubious of Apple software engineering VP Craig Federighi, who delivered a dramatic but suspiciously new denunciation of macOS malware. She’s generally receptive to Epic’s suggestion that Apple could review and notarize iOS apps for security but allow distribution through other sources, similar to macOS. “Even though unrestricted app distribution likely decreases security, alternative models are readily achievable to attain the same ends even if not currently employed,” she concludes.

Rogers doesn’t think that makes Apple’s claims pretextual, though. She agrees with Apple that comprehensive human review — which isn’t part of macOS notarization — can offer a “safe and trusted user experience” that’s actually pro-consumer. By contrast, she says Epic’s proposed solutions “principally appear to eliminate app review.”

The ruling dashes Epic’s hope that Apple would legally have to allow sideloaded apps and third-party app stores on iOS — which was Apple’s worst-case scenario going into the trial.

Apple has a right to require its in-app payment options

As you might remember if you’ve been following Epic v. Apple, this whole dispute started with in-app purchase (or IAP) payment processing. Epic tweaked Fortnite on iOS so that players could buy in-game V-Bucks via two methods: the Apple App Store or an “Epic direct payment” with a 20 percent discount.

Screenshot of Epic’s “Direct Pay” option on Fortnite for iOS

Epic’s “Direct Pay” option on Fortnite for iOS, August 2020

Epic described Apple’s IAP system as a glorified payment processor with outsized fees, and it argued that Apple was illegally tying IAP to the overall App Store. In Epic’s view, developers should be able to offer multiple payment processing options or reject Apple’s payment system altogether.

This is a big point of dissatisfaction among major app developers, and Friday’s ruling isn’t terribly promising for them.

Rogers is skeptical of some Apple arguments for its current locked-down system and the attendant 30 percent — for big companies like Epic — commission. (Dunking on both sides’ expert witness analysis is a running theme in her ruling.) She also notes there’s “no evidence that IAP provides developers with any unique features” compared to standard payment processing. But she’s fairly straightforwardly opposed to making Apple unbundle the system, calling Epic’s request for it “deficient.”

Throughout the trial, Apple has said that it’s not simply charging for payment processing on IAP. It’s using it to collect a commission — the 15 or 30 percent so-called “Apple Tax” — on the larger value of the App Store. Epic disputed that Apple meaningfully earned that commission, saying that although the App Store connects (in its words, “matches”) users with developers, Apple doesn’t deserve a cut of every transaction that happens after that.

The ruling says the matching description is “partially true,” but that Apple has “never argued that it levies a commission merely because it matches the developers with the customers.” Instead, “IAP is the method by which Apple collects its licensing fee from developers for the use of Apple’s intellectual property.”

Rogers admittedly finds “no basis” for the specific 30 percent rate, despite Apple hiring a consultant to testify about the value of its patents. (As mentioned previously, the ruling is full of dunks on the expert witnesses.) But she says Apple is still entitled to license that intellectual property for a fee of some sort, and requiring developers to use Apple’s payment system “accomplishes this goal in the easiest and most direct manner.”

Epic’s unbundling alternative, meanwhile, would “severely undermine” the system, says the ruling. “Indeed, to the extent Epic Games suggests that Apple receive nothing from in-app purchases made on its platform, such a remedy is inconsistent with prevailing intellectual property law.”

Rogers’ conclusion is another reason Epic didn’t prevail on the monopoly maintenance or restraint of trade claims discussed above, since two of them specifically dealt with IAP. She also says IAP isn’t a standalone product, so Apple isn’t illegally tying it to the App Store, which nixes two more Sherman and Cartwright Act claims.

For those keeping score, that’s nine claims down for Epic. But there’s one final claim that makes this ruling a significant thorn in Apple’s side. Let’s talk about it.

iOS developers have a right to talk about alternatives

Rogers concludes that Apple doesn’t monopolize mobile gaming. But the company does violate California’s Unfair Competition Law (UCL) through its anti-steering rules: policies that restrict developers from telling users they can buy digital goods outside Apple’s ecosystem. The ruling focuses on this portion of Apple’s developer agreement:

“Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.”

Rogers has almost unreserved scorn for this policy. “By employing anti-steering provisions, consumers do not know what developers may be offering on their websites, including lower prices,” she writes. Developers are allowed to email customers to advertise, but only through addresses they’ve collected outside the iOS signup process, which consumers also don’t necessarily know.

Users don’t necessarily even know about the cut Apple is taking — that “if they subscribe to their favorite newspaper on the web,” for instance, “all the proceeds go to the newspaper, rather than the reduced amount by subscribing on the iOS device.” Some people appreciate that Apple offers a unified place to manage subscriptions. But others might not, and “Apple actively denies them the choice” to find alternatives.

“Apple created a new and innovative platform which was also a black box. It enforced silence to control information and actively impede users from obtaining the knowledge to obtain digital goods on other platforms,” Rogers concludes. “Apple has used this lack of knowledge to exploit its position.”

The ruling says Apple’s situation is “distinctly different” from another case that let American Express use anti-steering rules for brick-and-mortar merchants, because even in that scenario, merchants can still say they also accept Visa and MasterCard.

Accordingly, a new injunction will soon prevent Apple from banning “buttons, external links, or other calls to action” that direct users to other payment mechanisms. That’s potentially a big deal for Apple… although it’s not yet clear just how big a deal.

Apple could collect an ‘Apple Tax’ even without in-app payment charges

As my colleague Nilay Patel discusses, Judge Rogers’ injunction leaves some weird ambiguity about what developers can do. In theory, a developer could add a button that directs users to Safari or another app for payment, but looks indistinguishable from the option to pay with Apple’s system. (It’s worth noting the injunction doesn’t say Apple has to let developers build complete alternate payment methods into their apps, and based on the statements quoted earlier, Rogers seems fairly down on that prospect.)

But developers like Epic don’t just care about controlling payment methods out of principle — although it offers some unique benefits like getting to handle refunds. They care about ditching Apple’s 30 percent commission. And Rogers says bluntly that it’s not that simple.

Even if developers could entirely stop using the IAP system, “Apple could still charge a commission on developers. It would simply be more difficult for Apple to collect that commission,” Rogers writes. The ruling elaborates on this scenario — in which Apple is outright banned from making developers use its payment option — in a footnote:

“In such a hypothetical world, developers could potentially avoid the commission while benefitting from Apple’s innovation and intellectual property free of charge. The Court presumes that in such circumstances that Apple may rely on imposing and utilizing a contractual right to audit developers annual accounting to ensure compliance with its commissions, among other methods. Of course, any alternatives to IAP (including the foregoing) would seemingly impose both increased monetary and time costs to both Apple and the developers.”

The law now says that Apple can’t stop developers from offering cheaper prices outside their iOS apps and telling users about it. But if big developers successfully route a lot of money away from the App Store this way, Rogers seemingly leaves the door open to collecting the “Apple Tax” some other way.

Epic and Apple’s contract was valid, and Epic knowingly broke it

The Epic v. Apple ruling declares that part of Apple’s developer agreement (called the DPLA) is unlawful… but Epic still has to pay for breaking it with the Fortnite payment system change. By the same token, Apple doesn’t have to restore Fortnite or keep Epic’s other apps on iOS if it doesn’t agree to follow Apple’s rules. Why?

The first reason is basically that Apple’s agreement didn’t break the law enough. Epic claimed the contract was “illegal and unenforceable” because it violated the Sherman Act, the Cartwright Act, and the UCL. Rogers concludes that the single UCL offense wasn’t sufficiently related or severe to justify Epic’s rulebreaking. She also dismisses the claim that Apple’s contract was “unconscionable” — in other words, one-sided enough to “shock the conscience.” (“These are billion and trillion dollar companies with a business dispute,” the ruling notes dryly.)

The second reason is that Epic broke another rule in the process. It hid the alternate payment system inside a remote “hotfix” when Apple’s policies said it couldn’t “provide, unlock, or enable additional features or functionality through distribution mechanisms other than the App Store.” That specific provision wasn’t related to antitrust claims, and the ruling concludes Epic “never showed why it had to breach its agreements” to challenge Apple’s alleged anti-competitive actions.

We still don’t know what a game is

Sure, all the questions above are legally relevant and important for consumers and set a detailed precedent for future antitrust legislation and lawsuits. But let’s end with the fun part: after all the time witnesses spent arguing about what a video game is, does the ruling give us a definition?

The short answer is no, because it doesn’t have to. “The court need not reach a conclusive definition of a video game or game because by all accounts, Fortnite itself is both externally and internally considered a video game.” Fortnite markets itself as a game, and even if CEO Tim Sweeney considers it the basis for a larger metaverse (in case you were wondering, “the court generally finds Mr. Sweeney’s personal beliefs about the future of the metaverse are sincerely held”), the metaverse as a product “remains in its infancy.”

As for the definitions introduced by witnesses, “unfortunately, no one agrees and neither side introduced evidence of any commonly accepted industry definition.” That includes Sweeney’s claim that a game “involves some sort of win or loss or a score progression,” as well as Apple app review head Trystan Kosmynka’s claim that “games have a beginning, [and] an end,” and “there’s challenges in place.”

Rogers does, however, spend a surprising amount of time breaking down the core elements of a video game. Here’s a brief definition:

“The court concludes that video games include a diverse and eclectic genre of games, that are tied together at minimum through varying degrees of interactivity and involvement from a game player.”

There’s also a more elaborate one:

“At a bare minimum, video games appear to require some level of interactivity or involvement between the player and the medium. In other words, a game requires that a player be able to input some level of a command or choice which is then reflected in the game itself. This gaming definition contrasts to other forms of entertainment, which are often passive forms enjoyed by consumers (e.g., films, television, music). Video games are also generally graphically rendered or animated, as opposed to being recorded live or via motion capture as in films and television.”

You could certainly quibble with elements of this, and Rogers admits she’s not clarifying the “outer boundaries of the definition of video games.” She declines to say whether specific non-Epic titles, like Roblox and Netflix’s Black Mirror: Bandersnatch, are games. She also says she can’t conclude whether certain games on the Itch.io storefront were sexually explicit or problematic, given that “the corresponding materials … were not submitted to the court” — although she does offer a ruling on naked banana man decorum.

Ultimately, “the court leaves the thornier further questions of what is properly included and excluded in the definition of a video game to the academics and commentators,” Rogers determines. And fortunately plenty of both seem ready to take up the challenge.

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