Epic sued Apple in the U.S. District Court for the Northern
District of California alleging that Apple’s iOS walled garden,
and, specifically, that its refusal to allow app makers to use a
payment system other than the Apple store, the privilege of which
cost app makers 30 percent of the fee collected, violated the
Sherman Act and the California Unfair Competition Law
(“UCL”).
On September 10, 2021, in a 185-page opinion, Judge Yvonne
Gonzales Rogers held that Apple was not a monopoly and, therefore,
that all of the Sherman Act causes of action failed. Judge Rogers
did, however, hold that the restrictions on apps using alternative
payment systems were anti-steering provisions that violated the
UCL. Epic has vowed to appeal. Apple has refused to let Fortnite,
the Epic app that was the subject of the case, back into its
eco-system.
The fact that the court did not find an antitrust violation was
not shocking. The law of unilateral refusals to deal and product
innovation is fairly clear. If you offer to deal with someone, it
is not a refusal to deal if the counterparty does not like the
terms. The law on product innovation is also fairly clear. So long
as there was a plausible efficiency-enhancing argument for a
particular innovation, the Sherman Act will not condemn the
innovation even if it excludes a competitor from the platform.
Indeed, it was shocking the case was not disposed of at the
12(b)(6) stage. The perplexing aspects of the decision were how the
court arrived at these conclusions – market definition and the
characterization of the requirement to use the Apple store as an
“anti-steering” provision.
MARKET DEFINITION
The plaintiffs alleged the relevant market was “(i)
Apple’s own system of distributing apps on Apple’s own
devices in the App Store and (ii) Apple’s own system of
collecting payments and commissions of purchases made on
Apple’s own devices in the App Store.”
Basically, Apple’s environment was a relevant market and it
had leveraged that monopoly to prefer its own app store over
alternative app stores that could be on the environment. Apple
alleged that Fortnite participated in a digital game market.
Basically, Apple’s argument was that platforms competed and
that it was wrong to consider just the Apple environment as a
relevant market. The court disagreed with both and found a relevant
market consisting of digital mobile gaming transactions.
That is not the relevant market. Apple was correct. It is gaming
platforms.
What is Epic selling, who are its customers and how can Epic
reach those customers? Epic makes games and makes money off selling
the games as well as how folks interact with the games. It can
distribute its games on iOS, PlayStation, xBox, Android, PC and
websites, among others. It can and has made its games interoperable
across platforms so that gamers can play against or with anyone
else in the universe. That means also that gamers can go to other
platforms, log in and play its same characters. Whatever
advancements and enhancements they make or purchase on the other
platform will carry over to the iOS platform. That includes ingame
purchases.
If Epic wanted to discourage users from using the Apple store,
it could raise iOS fees by 30 percent and make the same profit as a
platform that does not charge. The price sensitive gamers would
switch to other platforms to buy whatever enhancements they wanted.
It is simply incorrect to state that the switching costs are
“high” and few would “buy a new phone” to get
access to Epic’s alternative purchasing.
If folks enjoyed gaming and wanted to play Fortnite with a
different enhancement purchasing mechanism, they could switch to
any other platform to get that, and still keep their iPhones. The
app store requirement has not foreclosed Epic from reaching
anyone.
In essence, Epic wants access on its terms to the highly
valuable inframarginal customers on the Apple platform who are
happy to pay Apple’s premium for the convenience of purchasing
on that platform and will not switch to other platforms to do so.
Epic wants access to Apple’s customer list so Epic can sell
things to those customers and cut Apple out of the deal. This is
free-riding. The antitrust laws simply do not afford Epic this
privilege.
“ANTI-STEERING”
Requiring all purchases to be run through the Apple store is not
analogous to the anti-steering provisions American Express imposed
on merchants, moreover. American Express charges a higher
transaction fee to merchants. Some merchants would suggest to
customers that they use Visa or Mastercard instead of American
Express to save on the fee. American Express banned that practice.
The U.S. Department of Justice and several states sued with the
ultimate result that the U.S. Supreme Court found the practice
perfectly legal and reversed the lower courts and halted further
litigation.
Apple is not requiring users to use its credit card. A user can
use whatever card it wants in iOS. The app store is more
appropriately conceived of as a payment terminal one would swipe
one’s credit card through at any retail establishment. What
Epic is saying, in effect, then, is that customers are entitled to
bring Epic’s payment terminal into a retail store, plug it into
the cash register and that store has to use it. The Apple store is
a technical innovation on the platform.
Apple’s decision to require users to use the app store to
make purchases is no different than a merchant choosing a
particular payment terminal to integrate with its cash register and
inventory control system. This argument is the same as arguing an
automotive manufacturer must give equal access to its dash boards
to all radio manufacturers because it has a monopoly over the cars
it makes. Again, not an antitrust issue, even an incipient one. No
more harm to consumers than a merchant picking one payment terminal
over another.
THE 30 PERCENT CHARGE SEEMS HIGH
The court also felt the 30 percent fee was “high,” and
suggested that it could represent market power. It could also
represent the fact that the iOS platform is a premium platform that
users are more than happy to pay a premium to access. It is
Apple’s business acumen that has driven those customers to that
platform. And app makers are happy to pay the 30 percent because it
gives them access to the highly valuable customers Apple has
amassed with its premium platform.
Think of the early days of the PC and the MacIntosh
environments. Microsoft made PC-DOS and later Windows open to
anyone, and it won the platform battle. Apple kept its environment
closed and remained a small niche player. It is still doing that
with iOS and just happens to have won this battle.
CALIFORNIA
First, the most obvious. The California UCL applies to
California. If the app store requirement for in app purchases truly
violated the UCL, only Californians would have been harmed because
the UCL only protects them. The national injunction is
ridiculous.
Second, for the reasons stated previously, it is not entirely
correct to analogize the app store requirement to American
Express’ anti-steering provisions. The antitrust laws do not
compel merchants to use a processing terminal a customer brings
in.
It does not compel Apple to allow users to create their own
payment systems within the Apple environment. To hold the UCL
applies in this fashion would pry open any multi-function
system.
CONCLUSION
Apple’s win is not surprising. But the case does not enhance
our understanding of how antitrust applies to unilateral refusals
to deal or product design. It only muddies that and does so by
confusing the technology and its real world analogues.
The appeals court should correct the lower court’s product
market definition, the inapplicability of the American Express
anti-steering concepts to in app purchases, and reverse the
injunction.
Previously published in the Intellectual Property & Law
Journal.
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