Apple May Have Upset the Applecart

In August of 2020, Apple removed Fortnite, a popular game created by Epic Games (“Epic”), from the Apple App Store. (Perez, Techcrunch). Apple removed Fortnite the same day Epic began offering discounts to Fortnite users who made in-game purchases directly through Epic. (Browning, N.Y. Times). Apple has an “anti-steering” policy, which prohibits companies from directing app users to transact directly with the app developers and cutting out Apple as the middleman. Id. Epic’s practice violated the anti-steering policy and another Apple policy requiring that all “in-app” purchases be made through the Apple App Store where Apple collects a 30% fee. (Gilbert, Businessinsider). This policy has paid major dividends for Apple as the Apple App Store provides a significant portion of the company’s $78.1 billion in services revenue in 2022. (Leswing, CNBC).

As a result, on August 13, 2020, Epic sued Apple in federal court in the Northern District of California bringing a variety of claims including federal antitrust claims under the Sherman Act, California antitrust claims, and claims under California’s Unfair Competition Law. Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d 898, 1014 (N.D. Cal. 2021), aff'd in part, rev'd in part and remanded, 67 F.4th 946 (9th Cir. 2023). In all, Epic brought a total of ten claims against Apple, nine of which were antitrust claims essentially alleging Apple holds a monopoly over the distribution of apps on Apple devices. Id at 921. Rather than seeking monetary damages, Epic sought an injunction to stop Apple from collecting 30% of every in- app purchase on Apple products. (Scarcella, Reuters). The District Court found that Apple was not a monopoly and did not violate any anti-trust laws ruling in Apples favor on nine out of ten claims. Epic Games, Inc., 559 F. Supp. 3d at 1068-69.  But the District Court ruled in Epic’s favor on one claim, holding that Apple’s anti-steering policy violated the California Unfair Competition law and granted a nationwide injunction against policy. Id.

In an antitrust case, courts must first define the relevant “market,” which is determined by both the geographic market and the product market. Epic Games, Inc., 559 F. Supp. 3d at 1014. The product market includes both the product or service at issue as well as all economic substitutes for the product or service. Id at 1016. Here, Apple argued the relevant market was the gaming industry generally, while Epic essentially argued that the relevant market was the Apple App Store. (Higgins & Kendall, WSJ). After hearing expert testimony on the similarities and differences of mobile gaming and the gaming industry generally, the court disagreed with both companies and determined the relevant product market was mobile gaming transactions. Epic Games, Inc., 559 F. Supp. 3d at 973-987.

To succeed on its antitrust claims, Epic must prove that Apple possesses monopoly power and that it has acquired or maintained such monopoly power through anticompetitive conduct. Epic Games, Inc. v. Apple, Inc., 67 F.4th 946, 998 (9th Cir. 2023). Monopoly power is more than simple influence in the market; it requires the power to control prices or exclude competition. Epic Games, Inc., 559 F. Supp. 3d at 1028. While market share in the relevant market is a strong indication of monopoly power, courts generally consider additional evidence such as injurious exercise of market power or a predatory scheme. Id. The District Court reasoned, and the 9th Circuit affirmed, that while Apple does have a significant share of the market for the mobile game transactions market, such power is not durable enough to constitute a monopoly. Epic Games, Inc., 67 F.4th at 999. Further, the 9th Circuit affirmed the District Court’s determination that Apple’s restrictions were not anticompetitive; the Court gave substantial weight to the fact that Apple’s alternatives would impair the protection against privacy violations and fraud. Id at 991-992; Epic Games Inc., 559 F. Supp. 3d at 1041. While the Court’s holding that Apple did not violate any antitrust laws was a major win for Apple, the issue remains unresolved, and the case has brought many a critical eye to Apple’s practice.       

Over the course of the litigation, regulators across the globe have taken issue with Apple’s anti-steering practice including the European Union (“EU”), Japan, and the United States Justice Department. In response to pressure from Japanese regulators, Apple changed its policy to permit apps that provide subscription-based or previously purchased content to transact directly with consumers. (Apple). In June of 2023, Japan announced that it was drafting legislation that would require smartphone operating systems to offer alternative ways to obtain apps other than through their own app stores. (Takenaka, Reuters). Additionally, the EU is in the process of drafting the Digital Markets Act which could potentially require Apple to provide alternatives to the App Store. (Mackrael, WSJ). Further, The United States Justice Department has publicly criticized the District Court’s holding as a narrow and incorrect interpretation of the Sherman Act, warning that the ruling potentially sets a precedent for anticompetitive agreements and practices that fall outside the law’s protection. (Higgins, Kendall, WSJ).

While both the District Court and the Appellate Court have faced criticism for their application of the antitrust laws in this case, their application makes a lot of sense. The case largely turned on the Court’s determination of the relevant market and the Court settled the issue by finding a happy medium between each Company’s rather extreme contentions as to the relevant market. To determine that the relevant market was the Apple App Store could set dangerous precedent arguably resulting in every business, including your local corner store that controls its own prices, being a monopoly in violation of the antitrust laws.

While Apple escaped liability from the antitrust claims, the 9th Circuit affirmed the District Court’s holding that Apple’s “anti-steering” policy violated California’s Unfair Competition law. (Tilley, WSJ). The California Unfair Competition Law prohibits any unlawful, unfair, or fraudulent business act or practice. Epic Games, Inc., 559 F. Supp. 3d at 1051. The 9th Circuit agreed with the District Court’s reasoning that Apple’s anti-steering policy is unfair as it limits consumer access to information enabling Apple to set prices above those that could be sustained in a competitive market. Epic Games, Inc., 67 F.4th at 1001. Epic appears to have gotten the outcome it hoped for in the form of a nationwide injunction prohibiting Apple’s “anti-steering” policy based on a violation of the California statute. (Higgins, Kendall,  WSJ). But at Apple’s request, the 9th Circuit instituted a stay on the injunction awaiting final adjudication of the California Unfair Competition claim by the Supreme Court, which Epic has since challenged. (Papscun, Bloomberglaw). Apple’s anti-steering policy faces many challenges moving forward, whether it be from the Supreme Court’s adjudication of Epic’s claim or from one of the numerous regulatory agencies that want to see its end.