ANALYSIS: Apple Won Antitrust Battle, but the Game Isn’t Over

Apple Inc. prevailed in the Ninth Circuit April 24, and held onto its antitrust win against Epic Games Inc. in a case that sought to break down the tech company’s “walled garden” and force Apple to allow competing app stores and payment methods on its system.

I keep seeing articles calling this case a huge victory for Apple. That seems like an incomplete review. Apple wins this battle, for sure, but its business model is still under attack, and Epic’s successful state-law unfair competition claim provides a potential line of advancement that others can pursue.

In fact, this suit provides some guidance for the next group of plaintiffs. And fundamentally the decision leaves open the possibility that a better market definition, and a better explanation of damage from the conduct at issue, could make for a successful antitrust claim against Apple’s model.

First Level

Epic Games allowed its blockbuster game, Fortnite, to take in-app payments that didn’t route through Apple’s payment system. That violated Apple’s developer agreement, so Apple kicked Fortnite out of the App Store and threatened to end access for all apps built with Epic’s game engine, Unreal.

Epic sued, alleging that Apple monopolizes the iOS app distribution market and the in-app payment processing market by refusing to allow alternative app stores to access iOS and forbidding any app in its ecosystem from using an alternative payment method — or pointing consumers to one.

Apple countersued for breach of its developer program license agreement, including an indemnification clause that would force Epic to pay Apple’s costs for defending the lawsuit.

In a California federal trial court in Sept. 2021, Judge Yvonne Gonzalez Rogers dismissed Epic’s antitrust claims and held for Apple on its contract claim. As a result, Epic owes Apple 30% of all revenue it made from in-app payments it routed through its own payments processing.

Gonzalez Rogers held that Epic didn’t owe Apple its attorneys’ fees under the contract. She also held that Apple’s anti-steering provision on payments violated California’s unfair competition law. Gonzalez Rogers entered an injunction against enforcement of that provision.

Level Up

Both companies appealed, and the Ninth Circuit largely affirmed Gonzalez Rogers’ holdings. The panel reversed her on two points: First, they held that the developer agreement does require Epic to pay Apple’s counsel fees, and second, the panel reversed an odd holding by Gonzalez Rogers that “contracts of adhesion"—contracts that are entirely one-sided, like more or less all consumer contracts are—can’t be “agreements” for the purpose of a Sherman Act claim.

Frankly, that holding was a headscratcher, and potentially a disaster for private antitrust enforcement.

Epic Has to Respawn

Epic lost a lot here. It bet big on taking on Apple’s business model and has little to show for that. In particular, Epic owes damages on Apple’s breach of contract claims as well as Apple’s attorneys’ fees. The Ninth Circuit’s ruling will likely be chilling for other potential plaintiffs who, like Epic, signed on to provide product through the App Store.

Furthermore, Epic didn’t get the relief they needed from the case. Epic wanted the ability to provide alternative payment methods in-app through iOS, and it wanted the ability to run its own store through iOS. The lawsuit didn’t pay off for them, generally speaking. That’s unlikely to change: Even if Epic seeks rehearing or appeal, it’s unlikely this ruling will be overturned.

What Epic did get out of the suit is an injunction permitting apps to offer gamers the option to pay outside of Apple’s system—which could be huge for developers if they can persuade consumers to play along. It won’t benefit Epic directly, of course, because the company’s been kicked out of Apple’s systems. But as the operators of a competing payment system, Epic could still wind up with a share of the payment system market they couldn’t get before.

Apple Still Faces the End Boss

The injunction that Epic won could permit stiff payment systems competition on Apple’s turf and blow a hole in Apple’s revenue model. It all depends on how willing customers are to go out into the web for payment when using an app: Provided they get a lower price for doing so, consumers might be quite game. If a game bundle through ApplePay costs $1 in-app, but $.75 outside the app through a link, players might see a reason to form new habits.

That hole in the wall could also provide hard data about how competitive payments through Apple products would function. Future plaintiffs could harness that data on competitive digital submarkets to make a much stronger case for the anticompetitive impact from Apple’s practices.

The other parallel worth seeing here is to the fight over anti-steering provisions enforced in other digital markets. The US Supreme Court has made it very difficult to get past the “start screen” on claims involving two-sided markets (like the App Store) in Sherman Act claims. But apparently, plaintiffs can successfully fight anti-steering provisions using California’s unfair competition law—even where they can’t make out a Sherman Act claim. Potential applications abound, particularly considering that so many digital companies are probably amenable to suit in California.

So while this case may be touted as a “big victory for Apple,” the bigger picture isn’t entirely rosy. In the short run, Apple’s walled garden continues inviolate. And even in the long run, any plaintiffs seeking to open competition in digital commerce through the federal antitrust laws face an uphill battle. But this case points to alternative routes through the maze, and provides beta for the next antitrust run.

Are Other Players Watching?

Are more plaintiffs lined up to push on that weak spot in the wall? Probably. Gonzalez Rogers mentioned in her opinion that mobile gaming transactions are a $100 billion market. While the Sherman Act claims here didn’t hold up, Gonzalez Rogers said that Epic overreached in this case, and admitted that, as a result, “the trial record was not as fulsome with respect to antitrust conduct in the relevant market as it could have been.”

The next plaintiff may not make that mistake.

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