Epic Games Inc. v Apple Inc.
Introduction
Epic Games, the creator of Fortnite, has been locked in a legal battle with Apple since 13 August 2020. The conflict began when Epic introduced a new direct payment system in Fortnite for iOS. The new system offered users a 20% discount on their purchase of Fortnite’s in-game currency, while the existing in-app purchasing system’s (IAP) price remained unchanged.[1] This addition to Fortnite was a deliberate circumvention by Epic of Apple’s mandated 30% commission on all in-app purchases and constituted a breach of App Store guidelines and the developer license agreement between the parties.
Apple’s standard agreement with developers states that a) developers must provide Apple with a 30% commission on all in-app purchases, b) those purchases must be processed using Apple’s IAP, and c) developers must not offer users a lower price elsewhere than they charge on iOS, nor direct users to alternative methods of payment.[2] Developers who fail to meet these requirements are subject to removal from the App Store and risk termination of their developer accounts.
On the same day that Epic’s direct payment system was introduced, Apple removed Fortnite from the App Store, declaring that reinstatement would only occur if Epic remedied the breach by 28 August.[3] In response, Epic began a lawsuit and negative PR campaign against Apple, alleging that Apple’s monopolistic control of its marketplace has inflated prices for consumers and set unreasonable and anticompetitive restrictions on developers.[4] Whether Epic is likely to succeed in its claim requires careful analysis.
The Anti-Trust Claim
There are ten counts to Epic’s claim, with the main six counts being brought under sections 1 and 2 of the Sherman Antitrust Act.[5] The difficulty of deciding this case lies largely in the first step of determining whether a monopoly exists at all – defining the relevant market.[6]
Determining the Market
Under section 2, the court can only evaluate monopoly power once it has determined the geographic market and the product market where the alleged monopolist has control. In this case, both Apple and Epic agree that the geographic market is global, however, there is significant disagreement over the product market.
Epic claims that Apple has an unlawful monopoly in both the ‘iOS App-Distribution Market’ and the ‘iOS In-App Payment Processing Market’ and further claims that Apple is unlawfully ‘tying’ these two markets together to the detriment of consumers.[7] This comes as a result of Apple’s ‘walled garden’ style marketplace, in which only those apps which Apple reviews and approves (subject to the already mentioned App Store guidelines and license agreement), are allowed to sell to iOS users. Apps cannot be installed on iPhones or iPads through ‘sideloading’ an app’s file, and there is no access to an alternative marketplace. Epic claims that this lack of alternatives in the ‘iOS App-Distribution Market’ forces consumers and developers to acquiesce to Apple’s anti-competitive terms.
Whether the final court will find this argument compelling is unclear given the legal arguments put forward at the preliminary injunction hearing on 21 August 2020. Case law has established that even in the case of extreme brand loyalty, a single company’s products would rarely constitute a monopolistic market.[8] A more compelling argument could be that the App Store and its IAP constitute an ‘aftermarket’, where the purchase of one product, in this case, Apple’s phones and tablets, locks consumers into a downstream market due to the high switching cost of moving to an alternative product or service.[9] However, proving this ‘aftermarket’ would require establishing the App Store as a distinct entity apart from the primary market of Apple hardware, and then establishing Apple’s IAP as its own distinct submarket.[10]
The fact that other mobile phone manufacturers decouple their hardware, operating system and marketplace from one another could prove the existence of the aftermarket for both the App Store and IAP. After all, Android is not restricted to an individual mobile manufacturer, and while the Google Play Store acts as the default app marketplace on Android, users can download other marketplaces or avoid the market altogether. However, this is not definitive proof of an aftermarket in the case of Apple, and it is generally unlikely that a manufacturer’s monopoly over its own products constitutes a relevant market for antitrust purposes.[11]
Epic’s definition is likely overly narrow. As it currently stands, the market would exclude all other possible economic substitutes to app or game distribution, including the Google Play Store or any of the many platforms on which Fortnite can be downloaded.[12] Under this definition, Apple would have a 100% market share and unarguably be found to have monopoly power. Expanding the market to Apple’s share of mobile app distribution globally would limit its market share to only 27%, its proportion of mobile operating systems globally, and likely fail to show sufficient market control.[13]
In contrast, Apple contends that it makes up only a very small portion of the market for the distribution of Fortnite, as the game can be played cross-platform.[14] Despite Epic’s assertions that it must provide Fortnite on iOS, revenue from the App Store only amounted to 12% of Fortnite’s total revenue in 2019.[15] However, differences in how mobile phones and gaming platforms are treated by consumers and the validity of treating them as substitutes, both in the case of Fortnite and otherwise, would need to be carefully considered. As the determination of the ‘relevant market’ is based on factual inquiry, it will ultimately come down to the information disclosed by the parties and the opinions of experts on both sides.[16] These facts should tease out the nature of the iOS market to the end consumer, provide data on whether consumers have alternative devices on which to access Fortnite, how responsive these consumers are to price changes, and whether Epic is truly ‘forced’ to have a presence on the App Store at the risk of economic ruin.[17] At its most basic, the relevant market will come down to either the market for app distribution generally or the market for app distribution of individual games, with the assessment of the IAP as a market of its own changing drastically depending on which of the two markets is found to be the relevant one.
Tying
Tying is the act of conditioning the sale of one service over which a company has market power on the sale of a different service. Epic alleges that Apple has unlawfully tied the App Store to its IAP by requiring developers to exclusively sell on the App Store on iOS and to process all in-app purchases through Apple’s IAP. Tying can be established under section 1 through the use of either of two different tests – a per se analysis or a ‘rule of reason’ analysis.
For the former analysis, Epic would need to satisfy four elements:[18]
1. that the tied services are two distinctentities;
2. that there is consumer demand for an alternative payment method in the App Store;
3. that Apple had the requisite market power to coerce its users into using its IAP; and,
4. that the tying of the IAP to the App Store effects a non-negligible amount of trade in the market.
If Epic’s definition of the relevant market(s) is proven, the third and fourth elements are automatically satisfied by the nature of the agreements Apple has with developers. The second has limited evidence at present but could be proven through the use of consumer and developer surveys. However, the first element is likely to go unsatisfied, as the App Store and IAP have always been used together, and their combined use is an essential ingredient to the overall method of business between Apple and its users.[19]
Regardless of the above, the case of Microsoftestablished that the rule of reason evaluation is more appropriate for tying claims concerning complementary software for platforms hosting third-party applications.[20] To satisfy a rule of reason analysis, Epic would need to show that the tying of the two alleged marketplaces has anticompetitive effects which are not outweighed by procompetitive justifications.[21] This mirrors the test used to established the acquisition or maintenance of monopoly power under section 2 and will be considered below.[22]
Abuse of Monopoly Power
Determining if a company is abusing its market power requires a balancing of its anticompetitive and procompetitive behaviours. This balancing act creates three burdens of proof.[23]
The first burden is on Epic to show that Apple’s market power harms competition and consumers in the market. The second is for Apple to show that its anticompetitive behaviour has procompetitive justifications. And the last is for Epic to show that said procompetitive justifications could be met in a less anti-competitive way.
Even if Apple is found to have harmed developers, it would still likely be able to show that its business model has a procompetitive justification. 30% commission notwithstanding, the convenience, security, and privacy of the App Store and IAP are undoubtedly pro-consumer and likely reasonable.[24] The issue would then be if they are procompetitive enough, and whether the service provided by Apple at present could be achieved through less anticompetitive means. At this point, several complex considerations make analysis difficult without further data.
Complexities of the Case
Apple’s unique model has many overlapping qualities which, while innocent in isolation are likely anticompetitive when taken together.
First, there is the issue of Apple’s ‘walled garden’. By disallowing other app marketplaces on its phones or tablets, Apple maintains total control of the App Store and has the discretion to approve apps and set terms as it pleases. This model is both anticompetitive and yet ubiquitous among certain manufacturers, particularly in gaming. Microsoft, Nintendo, and Sony all maintain thoroughly vetted walled garden marketplaces for third-party games and have total control over hardware, software, and third-party distribution. Is Apple different by virtue of it making a profit from its hardware while these companies typically do not? Is Apple different because it distributes many different types of media rather than only digital or physical games?
Second, and connected to the above issue, is Apple’s mandated IAP. The App Store and IAP have never been separated. This alone is likely to defeat any claim of tying, but the fact that Apple allows different payment options for the sale of non-digital goods in third-party apps calls into question the validity of the continued link between the two ‘markets’. Should Epic manage to prove that there is sufficient purchaser demand for a separate payment system, the court may forcibly sever the App Store and IAP, with possible knock-on effects to other marketplaces with integrated payment systems.
Third is the claim that Apple’s 30% commission is harmful to consumers. Apple is not alone in taking this high a cut, with Google, Amazon, and Samsung charging similarly for in-app purchases on their app marketplaces.[25] One could argue that Apple is underchargingfor the service it provides, as it offers the safest and most heavily vetted marketplace for its users at the standard market rate.[26] However, class-action suits currently brought against Apple by both consumers, in the case of Pepper,and developers, in the case of Cameron, claim that the rate is supra-competitive, and both cases are likely to show that despite the service Apple provides, the commission is too high, causing ripple effects through the rest of the sector.
Finally, there is Apple’s ban on developers directing users to cheaper payment methods, such as through the developer’s website or an alternative marketplace. Though anticompetitive on its face, even this behaviour is not so by default. The recent Supreme Court decision of Ohio v. American Express (Amex) established a new framework for certain service provides. Amexestablished that companies facilitating a transaction between a consumer on one side and supplier on the other would only be considered anticompetitive if its actions harmed both sides of the ‘two-sided market’. By facilitating transactions between users and developers, Apple is arguably analogous to the credit card companies in the Amexcase, and Apple’s restrictions on the promotion of other payment methods would only be anticompetitive if Apple is acting negatively to both sides of the market. Whether the court decides in favour of the claimants in Cameron andPepperwill likely form the basis of whether Apple has caused two-sided harm.
Taken together, these behaviours likely create a context which is undoubtedly anticompetitive, but any judicial decision on each individual issue must be carefully considered due to the implications it could have on companies which share a characteristic with Apple without having an anticompetitive effect. Further, an injunction against Apple on any of the above risks dismantling much of what makes Apple’s App Store appealing to consumers. The ‘walled garden’ structure is key to why Apple’s user base is so profitable for developers, and the great irony could be that in fighting to make a place for itself on iOS on different terms, Epic could lose the unique profitability that makes iOS worth the fight.
Epic’s Actions
A final matter which cannot go unaddressed is Epic’s behaviour both before and during its legal battle with Apple.
Epic seems to be continuing its self-appointed crusade of competing with other digital marketplaces. The introduction of the Epic Game Store in 2019 caused a significant uproar in the PC gaming world. The store charged only 12% commission on game sales, a significantly lower cut than the market standard of Steam’s 30%,[27] however, it also introduced the anticompetitive tactic of ‘exclusive’ releases to ensure that those interested in the game had no other place to purchase it. Steam, by contrast, has no exclusives aside from its own occasional Valve releases, a characteristic of PC gaming that makes it attractive over the lock-in caused by consoles.
Epic has already failed in its attempts to secure a temporary restraining order and a preliminary injunction, both of which attempted to return Fortnite to the App Store with the new direct payment system intact. This remedy was largely rejected because the courts saw Epic’s losses as self-inflicted injuries and for Epic’s lack of ‘clean hands’ in pursuing the injunction - a pre-prepared claim and mocking PR campaign do not tend to ingratiate one with the judge.
Epic also filed suit against Google shortly after filing against Apple,[28] despite the iOS and Android marketplaces operating under very different business models. This points to Epic’s ire coming largely as a result of its distaste at paying a 30% commission, rather than a noble pro-consumer campaign. It is difficult to reconcile Epic’s behaviour with its pro-consumer claims. The removal of Fortnite from the App Store has had a negligible impact on revenue; however, iOS users have been denied the ability to play the game on their preferred or possibly only device due to Epic’s actions. Epic had the choice to pursue its claim against Apple without breaching its contract and without depriving its users of Fortnite. Epic also had the choice to join itself to the existing Cameroncase, but chose not to despite both Cameron and Peppernow being considered alongside Epic Games v. Apple.These actions make Epic’s valiant crusade seem like little more than a publicity stunt.
Finally, Epic’s actions could muddy the waters when it comes to other aspects of Apple’s anti-competitive business model. The ongoing Spotify investigation with the EU Commission points to far more damming anticompetitive behaviour by Apple, yet Epic’s insistence on playing corporate Robin Hood risks a conflation of the issues between the cases and risks Apple not being adequately charged in either jurisdiction.
Conclusion
With this case being on the outer edges of anti-trust legislation, the nature of tech companies necessitates a re-examination of what this legislation is meant to do and how best to do it without causing further harm.
Dara is a recent LPC graduate from BPP University. She has an interest in legal tech and the regulation of the technology sector.
[1]Andrew Webster, ‘Epic offers new direct payment in Fortnite on iOS and Android to get around app store fees’ The Verge (13 August 2020) <https://www.theverge.com/2020/8/13/21366259/epic-fortnite-vbucks-mega-drop-discount-iphone-android>
[2]Apple, ‘App Store Review Guidelines’ (Apple Developer,11 September 2020) <https://developer.apple.com/app-store/review/guidelines/#introduction>
[3]Jacob Kastrenakes, ‘Epic says Apple threatens ‘catastrophic’ response in two weeks if Fortnite doesn’t comply with rules’ The Verge (17 August 2020) <https://www.theverge.com/2020/8/17/21372480/apple-epic-threat-developer-tools-agreement-unreal-engine-fortnite>
[4]Andrew (n 1)
[5]Other claims are brought under California’s Cartwright Act and California Unfair Competition Law.
[6]FTC v. Qualcomm Inc. - 411 F. Supp. 3d 658 (2019)
[7] Epic Games, Inc. v. Apple Inc. (4:20-cv-05640), ‘Complaint for Injunctive Relief’ (13 August 2020) <https://www.courtlistener.com/recap/gov.uscourts.cand.364265/gov.uscourts.cand.364265.1.0_1.pdf>
[8]Apple Inc. v. Psystar Corp., 586 F.Supp.2d 1190 (2008)
[9]Ikon Office Solutions, Inc. v. Newcal Industries Inc., 557 US 903 (2009)
[10]Brown Shoe Co. v. United States, 370 U.S. 294 (1962)
[11](n 7)
[12]Epic Games, Inc. v. Apple Inc. (4:20-cv-05640), ‘Defendant Apple inc.’s opposition to Epic Games, Inc.’s motion for a temporary restraining order and order to show cause why a preliminary injunction should not issue’ (21 August 2020) <https://www.courtlistener.com/recap/gov.uscourts.cand.364265/gov.uscourts.cand.364265.36.0_2.pdf>
[13]T4, ‘Apple Market Share’ (T4, 30 April 2020)<https://www.t4.ai/company/apple-market-share>
[14]Epic Games, Inc. v. Apple Inc. (n 12)
[15]Epic Games, Inc. v. Apple Inc. (n 12)
[16]Image Tech. Services, Inc. v. Eastman Kodak Co., 125 F. 3d 1195 (1997)
[17]This amounts to a claim that the App Store is a monopsony, but the market has yet to be described as such. Epic Games, Inc. v. Apple Inc. (n 12)
[18]Cascade Health Solutions v. PeaceHealth 515 F.3d 883 (2008)
[19]Rick-Mik Enters., Inc. v. Equilon Enters. LLC, 532 F.3d. 963 (2008)
[20]United States v. Microsoft Corp., 253 F.3d 34 (2001)
[21]Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984)
[22]FTC v. Qualcomm Inc. - 411 F. Supp. 3d 658 (2019)
[23]Ohio v. American Express Co., 138 S. Ct. 2274 (2018)
[24]Epic Games, Inc. v. Apple Inc. (n 12)
[25]Analysis Group, ‘Apple’s App Store and Other Digital Marketplaces’ (Analysis Group, 22 July 2020) <https://www.analysisgroup.com/globalassets/insights/publishing/apples_app_store_and_other_digital_marketplaces_a_comparison_of_commission_rates.pdf>
[26]The fact that Apple was largely responsible for that rate’s popularity does not remove its ubiquity in the market. Jack Nicas, ‘How Apple’s 30% App Store Cut Became a Boon and a Headache’ The New York Times(14 August 2020) <https://www.nytimes.com/2020/08/14/technology/apple-app-store-epic-games-fortnite.html>
[27]Not to mention the additional cost-savings for developers who use unity, which comes bundled with the Epic Game Store at no extra charge. Jack Nicas, ‘How Apple’s 30% App Store Cut Became a Boon and a Headache’ The New York Times(14 August 2020) <https://www.nytimes.com/2020/08/14/technology/apple-app-store-epic-games-fortnite.html>
[28]Epic Games, Inc. v. Google LLC (3:20-cv-05671)