Apple, Epic, and federal judge spar over restraining order in antitrust case

A federal judge in Oakland heard arguments today over a temporary restraining order in an antitrust case between Apple and Epic Games. In doing so, she shed light on some important arguments in the case.

The judge didn’t offer a ruling on the TRO, in which Epic is asking a judge to reinstate its Fortnite battle royale game in Apple’s App Store. Apple banned it in August because Epic Games offered its own direct payments to circumvent Apple collecting its full 30% fee on purchases in the game. Epic then filed an antitrust lawsuit. The case could go on for years, but the ruling on the TRO would be an early indication of what a federal judge thinks about the merits of the case.

But while Judge Yvonne Gonzales Rogers of the Oakland division of the U.S. District Court in Northern California hasn’t ruled yet on the TRO, she offered plenty of opinions. In a Monday hearing, she grilled lawyers on both sides of the case, which is being closely watched by the entire Apple and gaming ecosystems. Overall, it seemed to me that the judge was very skeptical of Epic’s capability to prove its case against Apple. But she didn’t completely tip her hand by saying how she would rule.

The antitrust lawsuit began August 13 when Epic announced a discount policy and direct payment mechanism for Fortnite that Apple and Google said violated their respective terms of service. Epic CEO Tim Sweeney has long argued that the 30% commissions the big companies take of every game transaction is unfair and that Epic should be able to directly sell its in-app goods to players for lower prices. Epic only charges 12%, or at least much lower prices, as a fee for developers in its own store.

Epic Games hasn’t asked the court for any damages. It is only requesting that Apple be prohibited from punishing Epic Games for its actions related to the direct payments in Fortnite. Apple has asked for compensatory damages, punitive damages, attorney’s fees, and interest, as well as restitution and disgorgement of all earnings, profits, compensation, benefits, and other allegedly ill-gotten gains Epic obtained as a result of the conduct in violation of Apple’s terms of service.

Apple and Google banned Fortnite, and Apple said it built the App Store on top of the iOS mobile platform at great financial risk and that Epic was trying to get a free ride now that it felt it had paid enough fees. Apple said Epic’s campaign, which included a video mocking Apple, was all very calculated, but Epic’s outside counsel said that it had to plan carefully because it knew Apple would retaliate.

“We took on the biggest company in the world that is fighting us hard, and we knew that,” said Katherine Forrester, Epic’s outside attorney at Cravath, Swaine, & Moore.

Apple, for its part, has said that Epic’s actions are self-inflicted wounds and that it is trying to portray itself as a “modern corporate Robin Hood” but is just another big company that doesn’t want to pay for the value it gets from the App Store.

The judge said that others are taking on Apple as well. She expects a trial could happen around July 2021 or later.

Epic argued that app distribution and payment could be as open on Apple’s iOS platform as it is on personal computers. Instead, Epic said that Apple has a monopoly on app distribution for a billion users on its iPhone platform and that Apple also has a monopoly on payments on iOS, via its In-App Purchase system. And Epic said Apple is using those monopolies to unfairly exclude Epic from competing.

After Epic sued, Apple then tried to withdraw developer tool support from Epic’s Unreal game engine, which 11 million developers use. The judge granted Epic a temporary restraining order to prevent Apple from withholding support from Unreal. Microsoft, an Unreal user, supported Epic in the Unreal Engine TRO matter. Epic argued that the relevant market for judging competition and anti-competitive actions is the aftermarket of the App Store, which can be separated as the app distribution product that should have competition from the likes of Epic and its Epic Games Store.

Today’s dispute was about why the court should grant a restraining order allowing Epic to return Fortnite to Apple’s App Store over Apple’s objections. On September 8, Apple argued that shouldn’t happen, and it alleged Epic could easily put Fortnite back in the store without the unauthorized payment system. Apple said this harm to Epic over not being in the App Store is a “self-inflicted wound.”

Apple has asserted its store isn’t a separate product, but Epic argues app distribution is an “aftermarket” derived from the primary market of the smartphone platform. Epic says the courts should view the relevant antitrust market as the aftermarket, which has a unique brand and a unique market and is not part of a larger single product. Epic isn’t challenging Apple’s rights on the smartphone platform, only in the aftermarket, where Epic alleges Apple is behaving in a monopolistic manner. It argues that Apple cuts off choices (such as downloading apps from websites) that are available to consumers in other markets.

Epic Games is launching the Free Fortnite Cup. Guess who the villain is?

Above: Epic Games is launching the Free Fortnite Cup. Guess who the villain is?

Image Credit: Epic Games

While Apple doesn’t have a monopoly in the presence of Google’s Android, Epic argued the duopoly has negative effects on the market and that Apple, rather than Google, has the most valuable users. Epic noted that two-thirds of the profits are on Apple’s platform and that Apple has a virtual lock on a billion highly desirable users who spend more than those on Android. In his testimony, economist David Evans argued on Epic’s behalf that the cost of switching is very high for anyone thinking about moving from iOS to Android. It’s basically like starting over.

Since Apple cut off Epic’s access to the App Store, Epic has seen a 60% drop in its daily active users on iOS. But the judge grilled Epic’s lawyers on why they thought that Apple’s market was so unique, when there are plenty of other places where Fortnite appears and it has to pay a 30% fee.

“If we look at the video game industry, of which your client is a part, the 30% seems to be the industry rate,” Gonzales Rogers said. “Steam charges 30%. GOG. Microsoft charges 30%. In the consoles, PlayStation, Xbox, Nintendo, GameStop, Amazon, Best Buy charge 30%. Your client doesn’t. Where is the lack of competition?”

Gary Bornstein, external lawyer for Epic Games at Cravath, Swaine, & Moore, said in the hearing that 63% of Fortnite players on iOS play only on iOS. He said Apple has prohibited Epic from having its own store on Apple’s platform.

Epic takes a swing at Apple.

Above: Epic takes a swing at Apple.

Image Credit: Epic Games

Epic has argued that iOS users are valuable, as they spend money and they aren’t necessarily going to play a game like Fortnite on other platforms.

Richard Doren is the external attorney for Apple at Gibson, Dunn & Crutcher. He argued that Epic provided no evidence that it’s hard for Epic’s players to play Fortnite on other devices, like the Nintendo Switch or other video game platforms where Fortnite is available. Doren said only about 10% of Apple’s Fortnite players play the game on a regular basis.

“They only need reasonable alternatives available, and they have that in spades,” said Doren in response to questioning from the judge.

“I think this is going to be a fascinating trial,” said Gonzales Rogers. “Walled gardens have existed for decades. Nintendo has had a walled garden. Sony has had a walled garden. Microsoft has had a walled garden. In this particular industry, what Apple is doing is not much different.”

She said that plaintiffs always want her to define relevant antitrust markets as narrow as possible, while defendants want her to define it as broadly as possible.

On the alleged payment monopoly, Epic pointed out that in the case of app developers who provide physical services, like ridesharing, app makers can use other payment processing systems. Stripe provides in-app payment processing for Lyft. And Braintree handles payments for Uber, among other things. These app developers typically rely on payment processors that are not from Apple or Google because the developer must enable the user to complete a transaction while using the app. But with digital content apps, Apple requires developers to use Apple’s in-app purchase payment processing for in-app transactions. At the same time, Apple allows alternative digital payments when people are using premium video entertainment apps, such as Prime Video, Altice One, and Canal+.

Epic said this is proof that developers have material demand to use third-party payment processing services for in-app transactions in the absence of restrictions Apple has imposed. Epic said users could use alternative payments with much lower transaction fees, such as Amazon Pay, Authorize.net, Braintree, Chase Merchant Services, PayPal, Square, Stripe, and Xsolla.

Apple argues that payments aren’t a separate business; they’re part of a larger business. The company said, “Even setting aside the dispositive law on two-sided platforms, Epic’s factual allegations provide no support for defining IAP as a separate single-sided product market. Where the alleged tied product is an essential ingredient of the overall ‘method of business’ that is sold to customers, courts view them as one product.”

Apple contends that its App Store was built on numerous innovations and that it should be rewarded by being allowed to charge what it wants. It notes that if the innovations were not valuable, it wouldn’t be getting paid so much money by so many developers. Apple also notes that its payment system is the way it ensures it gets paid.

Apple argued it has made big investments in security for the App Store and iOS over the years. If it allowed Epic to enable direct payments inside Fortnite, circumventing Apple’s own payment system, the company said it would run the risk of exposing users to security breaches.

Fortnite is getting updated to take advantage of Nvidia's latest graphics cards.

Above: Fortnite is key to Epic’s arguments.

Image Credit: Nvidia

Doren disagreed that Apple’s IAP, or its payment system, is a separate product or should be treated as a separate product, as Apple has never marketed it that way. He said Apple uses IAP’s integration to deliver safety, security, and other benefits to Apple’s users. The judge agreed that she did not see IAP as a separate and distinct product.

“IAP has never been offered as a separate product,” Doren said.

Bornstein said that there is separate demand shown in the evidence that shows that IAP is artificially integrated as part of a different product, and could very well be treated as a separate product. He said there is extensive evidence of separate demand, such as with Uber and other physical apps.

Epic argued that it has evidence users want an alternative app store with direct payments. It said 54% of iOS Fortnite users had used Epic’s direct payments from August 13 to August 27. Epic’s lawyer, Forrester, argued that Epic had to do the hotfix — which Apple claimed was sabotage — to prove there was separate demand for Epic’s own direct payment system.

“We eliminated Apple’s ability to say there is no separate product,” Forrester said. “We showed that there is.”

The judge said, “It’s good evidence. It doesn’t mean you can’t go back into compliance. You can. That brings up another point. I think personally this case should be tried to a jury. I want everyone to think about that. I don’t think individual judges have the be-all and end-all here.”

Doren said Epic was a cheater and Epic’s action in turning on its direct payments, known as a hotfix, was an act of sabotage. Apple’s attorney, Theodore Boutrous, said Epic wasn’t honest when it did the hotfix.

The judge agreed with Apple’s view, saying, “You were not forthright. You were told you couldn’t do it, and you did.”

Gonzales Rogers also asked pointedly when, in Epic’s view, did Apple become a monopoly? She noted it was considered an innovator in 2007 with the launch of the iPhone and it innovated with the app store. But Epic’s other attorney, Katherine Forrest (of Cravath Swaine & Moore), said it was after Epic entered the market in 2018 and after Epic’s negotiations failed this summer. Gonzalez Rogers asked why the case was so urgent that Epic Games had to resort to the hotfix.

Forrester said Epic had exhausted its negotiations.

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