Epic Games, Inc. v. Apple Inc. - 493 F. Supp. 3d 817 (N.D. Cal. 2020)

Rule:

Antitrust law is not concerned with individual consumers or producers, it is concerned with market aggregates. Substitutes may not deprive a monopolist of market power if they fail to affect enough customers to make a price increase unprofitable. Relevant market is defined by whether a price increase would cause a significant number of customers to substitute to make the price increase unprofitable. Alternatively, constraints among some consumers may not render the market as a whole narrow. It is possible for only a few customers who switch to alternatives to make the price increase unprofitable, thereby protecting a larger number of customers who would have acquiesced in higher prices. 

Facts:

On June 30, 2020, the developer program licensing agreements for the Epic Games account, the Epic International account, KA-RA S.a.r.l. account, and the Epic Games enterprise account were renewed by the payment of separate consideration. That same day, Epic Games founder and Chief Executive Officer ("CEO") Tim Sweeney sent an email to Apple executives, including Apple CEO Tim Cook, requesting the ability to offer iOS consumers: (1) competing payment processing options, "other than Apple payments, without Apple's fees, in Fortnite and other Epic Games software distributed through the iOS App Store"; and (2) a competing Epic Games Store app "available through the iOS App Store and through direct installation that has equal access to underlying operating system features for software installation and update as the iOS App Store itself has, including the ability to install and update software as seamlessly as the iOS App Store experience." Mr. Sweeney highlights that these two offerings would allow consumers to pay less for digital products, and allow developers to earn more money. Mr. Sweeney also wrote that he "hope[d] that Apple w[ould] also make these options equally available to all iOS developers in order to make software sales and distribution on the iOS platform as open and competitive as it is on personal computers." On July 10, 2020, Apple Vice President and Associate General Counsel Douglas G. Vetter responded to Mr. Sweeney's email with a formal letter. In sum, Apple's response to Epic Games' requests was no. Both requests were unequivocally refused. Mr. Vetter also reiterated that Epic Games' request to establish a separate payment processor would interfere with Apple's own IAP system, the business model of which has been used in the App Store since its inception. On July 17, 2020 Mr. Sweeney responded to what he described as a "self-righteous and self-serving screed," writing that he hoped "Apple someday chooses to return to its roots building open platforms in which consumers have freedom to install software from sources of their choosing, and developers can reach consumers and do business directly without intermediation." 

In fulfilling Mr. Sweeney's promise to "pursue this" perceived "injustice" in the industry, Epic Games covertly introduced a "hotfix" into the Fortnite version 13.40 update on August 3, 2020. Epic Games did not disclose the full extent of this hotfix to Apple, namely that this hotfix would enable a significant and substantive feature to Fortnite permitting a direct pay option to Epic Games that would be activated when signaled by Epic Games' servers. Until this signal was sent out, this direct pay option would remain dormant. When activated, however, this direct pay option would allow iOS Fortnite players to choose a direct pay option that would circumvent Apple's IAP system. Relying on the representations, that intentionally omitted the full extent and disclosure of this hotfix, Apple approved of the Fortnite version 13.40 to the App Store. The hotfix remained inactive until the early morning of August 13, 2020, when Epic Games made the calculated decision to breach its allegedly illegal agreements with Apple by activating the undisclosed code in Fortnite, allowing Epic Games to collect IAPs directly. Fortnite remained on the App Store until later that morning, when Apple removed Fortnite from the App Store, where it remains unavailable. Later that same day, Epic Games filed this action and began a pre-planned, and blistering, marketing campaign against Apple. The following day, Apple responded sternly. It informed Epic Games that, based on its breaches of the App Store guidelines, and the developer program license agreement, it would be revoking all developer tools, which would preclude updates for its programs and software. Apple gave two weeks to comply with the App Store guidelines and the agreements. Apple also identified general consequences for any failure to comply, but specifically cited Unreal Engine as potentially being subject to harm should Epic Games fail to comply within the two-week period. Thereafter on August 17, 2020, Epic Games filed the request for a temporary restraining order, requesting the reinstatement of Fortnite with its activated hotfix onto the App Store, and to enjoin Apple from revoking the developer tools belonging to the Epic Affiliates. The Court declined to reinstate Fortnite onto the App Store, but temporarily restrained Apple from taking any action with respect to the Epic Affiliates' developer tools and accounts. 

On August 27, 2020, as planned by Epic Games, an updated version containing season four of Fortnite was released on all platforms except for the iOS platform, which Epic Games could no longer update due to its breaches of the Apple agreements and guidelines. By design, Fortnite users can only play amongst other users currently operating the same version. Because of this release, iOS Fortnite players no longer had the ability to play cross-platform with other players (unless these players chose not to update their version, forgoing playing the new season). On August 28, 2020, on the expiration of the two-week deadline, Apple terminated Epic Games' developer program account, referenced as Team ID '84, stating "Apple is exercising its right in Apple's sole discretion to terminate your status as a registered Apple Developer pursuant to the Apple Developer Agreement and is terminating the Developer Agreement and the Program License Agreement pursuant to their terms. . . . [W]e will deny your reapplication to the Apple Developer Program for at least a year."

Issue:

Has Epic Games sufficiently established likelihood as to monopoly maintenance?

Answer:

No.

Conclusion:

Epic Games' relevant market definition that iOS App Distribution is an "aftermarket" of the smartphone OS market is plausible. However, in some ways, Epic Games offers a failsafe definition by restricting the market so narrowly. By definition, Epic Games' proposed market definition excludes other smartphone systems, including the Google Android system, as well as video game platforms and their digital distribution markets. Courts have expressly cautioned against such a narrowing of the relevant market definition.  Moreover, Apple avers that an "aftermarket" requires user lock-in in the primary market. Given the lack of legal citation, the Court surmises that this theory has not been adopted by any court, even if embraced by economists. The term "lock-in" appears to derive from the Supreme Court mention that "[i]f the cost of switching is high, consumers who already have purchased the equipment, and are thus 'locked in,' will tolerate some level of service-price increases before changing equipment brands." In evaluating Epic Games' response, resolution of the issue is focused on timing: Apple argues that consumers are not locked-in to the purchase of iPhones, while Epic Games assumes the purchase and argues that after the purchases occurs, a consumer is locked-in and unlikely to switch to a different smartphone in response to slightly more expensive IAPs. Under the latter perspective, app developers who wish to reach iOS users have no choice but to tolerate Apple's 30% rate. Thus, at this stage of the litigation, and with the record before the Court, Apple's relevant market definition is also plausible. As Apple correctly points out, alternative means exist to distribute Fortnite. Indeed, Epic Games expressly advertised the multiplatform nature of its product following its breach of the Apple terms and service. The multiplatform nature of Fortnite suggests that these other platforms and their digital distributions may be economic substitutes that should be considered in any "relevant market" definition because they are "reasonably interchangeable" when used "for the same purposes.” "If competitors can reach the ultimate consumers of the product by employing existing or potential alternative channels of distribution, it is unclear whether such restrictions foreclose from competition any part of the relevant market." 

Here, both parties cite factors impacting the elasticity of their proposed markets. A final determination may depend on the magnitude of those effects. For instance, focusing on Fortnite alone, the record shows that (i) more than 116 million (out of 350 million) Fortnite players have accessed Fortnite through the iOS platform; (ii) iOS players constitute roughly 10% of the daily active Fortnite users since its iOS launch in April 2018; and (iii) 63% of Fortnite players on iOS only play on the iOS platform. Notably, the record is silent on how often these 116 million individuals play Fortnite and devoid of information on the characteristics of 10% of daily active users or whether these users access Fortnite through other platforms. More broadly, there is no evidence regarding the size of the game app market compared to other apps and whether they constitute a separate submarket with unique characteristics that do not apply to other app developers. Thus, the market definition rests on factual questions regarding the nature of the iOS market as a whole: how many iOS users own multiple devices; how many iOS users would switch to another device in response to a price increase; and how many producers can afford to forego iOS customers altogether. Neither party adequately addresses these factual questions. Epic Games assumes all iOS customers are the same, and Apple assumes that only Epic Games customers are relevant. Moreover, underlying these questions is a significant and unresolved dispute over clustering. Apple focuses narrowly on game distribution channels because of the nature of Epic Games' business. But courts have often combined different services together when "the product package is significantly different from, and appeals to buyers on a different basis from, the individual products considered separately." For example, in United States v. Phillipsburg National Bank and Trust Company, the Supreme Court grouped multiple financial services together into a relevant market of "commercial banking"—even though they differed in their availability of substitutes—because customers generally obtain all banking services from one place. Here, Epic Games may establish that app distribution generally should be considered separately from app distribution of individual games, which could have a significant impact on how alternative distribution channels are evaluated. Finally, underlying each of these issues is the question of perspective. Interchangeability for purposes of the relevant market may vary depending on perspective. Here, there are at least three possible perspectives on the relevant market: (1) the customer who purchases the apps or games, (2) the developer who makes the apps or games, and (3) the competing app store or digital marketplace that distributes the apps or games. The parties adopt different perspectives, but neither justifies its choice. And as the parties' briefing demonstrates, the resolution of this question could lead to radically different analysis. In short, without the record to define the relevant antitrust market, Epic Games has not established likelihood of success as to monopoly maintenance, only serious questions.