How Epic V. Apple Ruling Might Play Out For Big Tech

October 26, 2021

The U.S. antitrust laws are slow to keep up with technical innovation and changing marketplaces. Nowhere is that more evident than in the tech sector, where companies and other players in the market do not fit neatly into traditional principles of market definitions and market actors.

The convergence between the tech sector and the antitrust laws is coming under an increasingly bright spotlight both in the halls of Congress and the nation's courts.

The Sept. 10 decision in Apple Inc. v. Epic Games Inc. was a long-awaited one in the showdown between two titans in the tech sector.

Epic is the developer of Fortnite, a widely popular online video game; Apple is one of the largest companies in the world. The 185-page decision followed a 16-day trial in the U.S. District Court for the Northern District of California.

While Apple was successful in convincing the court that it is not a monopolist, U.S. District Judge Yvonne Gonzalez Rogers determined that certain of Apple's App Store practices are illegal. The decision will have ramifications across the multitrillion-dollar U.S. tech industry.

Most significantly, Judge Gonzalez Rogers addressed the key issue of the relevant market for purposes of the dispute. Epic argued that the relevant market was Apple's own internal operating systems related to the App Store — essentially a monopoly in a market of one. Apple's proposed definition of the market included all video game platforms.

The court rejected both parties' definitions. Instead, the court found that the relevant market was digital mobile gaming transactions.

The court's determination largely rested on the fact that more than 80% of apps in Apple's App Store are essentially free — the user pays nothing, and the developer only pays a minimal an upfront $99 fee. By contrast, gaming apps account for approximately 70% of all App Store revenues, and those revenues are generated by fewer than 10% of all App Store consumers.

The court evaluated Apple's conduct in the digital gaming mobile transaction market. Apple derives profits from the App Store by way of its mandatory 30% commission on purchases of apps and in-app purchases within the Apple ecosystem.

In a ruling that largely preserves Apple's way of doing business, the court determined that Apple was not an illegal monopolist.

The court found that while "Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct." Indeed, Judge Gonzalez Rogers said, "Success is not illegal."

However, Apple did not secure a complete victory. Epic Games also challenged Apple's practice of prohibiting developers from offering app users the option of making in-app purchases outside of Apple's App Store. This policy is known as an anti-steering provision, because it forbids app developers from steering customers to less expensive alternatives.

Apple's anti-steering policy prohibited Epic from offering its Fortnite app products at a discount through its own store. Instead, Epic and other app developers were required to use Apple's App Store and give Apple a 30% commission fee for each purchase made.

Epic argued that Apple's use of anti-steering provisions was illegal because it forced developers to use the App Store and prohibited them from telling app users about alternative ways to pay.

Judge Gonzalez Rogers held that:

"When coupled with Apple's incipient antitrust violations, [Apple's] anti-steering provisions are anti-competitive and a nationwide remedy to eliminate those provisions is warranted."

The court issued an injunction prohibiting Apple from employing its anti-steering policy.

At first blush, allowing app users to pay for subscriptions outside of Apple's App Store may seem like it will have a small impact on Apple's business.

Even if users have the option to click out of the App Store to make in-app purchases, they are unlikely to do so given the convenience of staying within the Apple network.

However, it is a fairly significant development. Apple's business model, like many other Big Tech companies, thrives on controlling its ecosystem, and Judge Gonzalez Rogers' ruling forces Apple to give up some of its control.

Apple and Epic Games have each filed notices of appeal with the U.S. Court of Appeals for the Ninth Circuit.

Beyond the apparent impact on Apple's business practices, Judge Gonzalez Rodgers' ruling is likely to provide a road map for future litigation and legislation related to other tech giants such as Inc., Google LLC and Facebook Inc.

Google has its own app store, and both Google and Facebook exert tremendous control over advertising (and associated software and apps) on their platforms. There are currently class actions throughout the country challenging both companies' practices.

For example, Google is currently facing a lawsuit filed by 36 states and Washington, D.C., in the Northern District of California that challenges Google's policy requiring Google Play app developers to pay a 30% commission fee on sales made through the app.

The case is still in its early stages, but it is hard to see how Google will distinguish its ecosystem and anti-steering provisions from Apple's and avoid an outcome similar to the Epic decision.

Similarly, in August, the Federal Trade Commission filed an amended complaint alleging that Facebook violated antitrust laws by buying Instagram and WhatsApp in order to eliminate them as competitors, with the acting director of the FTC's competition bureau saying:

After failing to compete with new innovators, Facebook illegally bought or buried them when their popularity became an existential threat. ... This conduct is no less anti-competitive than if Facebook had bribed emerging app competitors not to compete.

In that case, the FTC has argued that the relevant market is the U.S. personal social-networking space, and Facebook Inc. is a monopoly in that arena. Facebook's motion to dismiss is presently pending and it has released the following statement:

The FTC's fictional market ignores the competitive reality: Facebook competes vigorously with TikTok, iMessage, Twitter, Snapchat, LinkedIn, YouTube, and countless others to help people share, connect, communicate or simply be entertained. The FTC cannot credibly claim Facebook has monopoly power because no such power exists.

Ultimately, the Epic case posed the question: What is the ecosystem — or in antitrust jargon, the relevant market — of a tech giant? This issue is expected to persist and evolve over time.

And more and more private plaintiffs and regulators are advancing the position that a Google or an Apple or an Amazon in and of itself can be a relevant market. If one of the tech giants is defined as a monopolist in a market of one, it will likely lead to significant restrictions on that company's business practices.

Ultimately, new measures to regulate and ensure competition in the tech sector may not be developed through the courts. Congress has taken an intense interest in Big Tech companies and the role they play in the economy and society at large.

In just the most recent example, a bipartisan group of senators introduced the American Innovation and Choice Online Act on October 18.

Under the proposed legislation, companies like Amazon, Apple, Google and Facebook would be barred from biasing search results in favor of their products.

Tech firms would not be allowed to use competitors' data to compete against them and would be prohibited from requiring a business to buy their goods or services to secure preferred placement.

The bill would also make it illegal to prevent a third party from interoperating with the dominant platform in a way that's unequal to that party's products — which takes aim at companies, who have been accused of using their market power to stifle competition.

The U.S. House of Representatives introduced a similar bill earlier this year.

Sen. Amy Klobuchar, D-Minn., described the antitrust rules as a way for America to deal with its "monopoly problem" and restore open markets and fair competition in a sector dominated by a small handful of companies.

Sen. Dick Durbin, D-Ill., said the regulations would "fight strong arm tactics used by Big Tech to disadvantage their consumers and exclude competitors from the marketplace."

On the other hand, critics argue that these proposals would prohibit convenient integrations across digital platforms, like Google Maps results in Google Search, and iMessage, FaceTime and the Apple App Store automatically installed on the iPhone, and easy access to same-day delivery for Amazon Prime.

One thing seems certain, the rules governing how the tech giants operate will change. Whether they change to significantly curtail the way the businesses currently operate remains to be seen.

Nevertheless, the U.S. antitrust laws are sure to play a central role in the oversight of Big Tech companies and the role that these companies play in the economy.

*This article was republished with permission from Law360

Scott N. Wagner
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