I.INTRODUCTION:

The rise of Big Tech has transformed the business landscape and has caused a similar swing in the legislative and regulatory strategies to thwart their unchecked proliferation. Antitrust investigations into the operations and activities of Big Tech corporations like Apple, Microsoft, Google, Facebook have been instrumental in the preservation of consumer welfare.

The European Commission first investigated Apple’s rules for application developers on the distribution of apps via the App store, in suspected violation of the European Union competition rules . The investigation concerned itself with the mandatory use of Apple’s own proprietary in-app purchase (IAP) system and the restrictions imposed by Apple on the ability of developers to relate to the iPhone and iPad users of about any cheaper, alternative purchasing options from outside of the app ecosystem per se.

I.Background:

Apple, Inc. which owns the iOS ecosystem, and is also the proud manufacturer of the Apple products, namely, the iMac, MacBook, iPhone, iPad mandates the developers to enter into an Apple’s Developer Agreement (ADA) in order to allow the entities to host their apps on the App Store. The Agreement, generally, requires the developers to distribute their applications solely through the App Store for the iOS interface, and further imposes a 30% revenue sharing fee, for any in-app purchase/s made by the consumer. The Agreement further stipulates that any in-app purchase sought to be made by the consumer, shall solely be facilitated by Apple’s proprietary IAP system, to the exclusion of any other payment system provider. This creates a very closed ecosystem, which not only facilitates the hosting of the apps on their platform, but also provides a related payment mechanism for the purposes of closing transactions, which is directly linked to the preferred payment details of the end users, as registered with Apple. It is to be noted that in the event where the settlement of funds is managed as a post-facto consideration, and where Apple remits the 70% to the developers, and retains the 30% commission, there is very little that a developer can actually do when relying upon the Apple IAP system.

Epic Games is one of the prominent video game developers, and one of their popular games, “Fortnite”, implemented a ‘hotfix’[1] which offered the consumer an alternate mode of payment from the IAP system, at a cheaper rate, in violation of the ADA. Upon cognizance of this action from Epic Games, Apple removed the application from its App Store, which was termed by Epic Games as anticompetitive and an abuse of Apple’s dominance in the market. In the matter of Epic Games, Inc. v. Apple Inc.[2], Epic Games submitted that the:

  • Restrictions imposed by Apple prohibiting distribution of iOS applications for Apple’s iPhone and iPad devices outside the App Store;
  • requirement to allow In-app transactions for digital content to be made exclusively using Apple’s IAP system, on which Apple levied a 30% commission on all transactions; and,
  • Anti-steering provisions that restrict app developers from informing users of alternate payment mechanisms outside of the App Store.

amounts to a violation of Section- 1[3] and 2[4] of the Sherman Act[5] and is further violative of the California Cartwright Act[6] and the California Unfair Competition Law[7].

In response to this action brought by Epic Games, Apple filed a counter suit alleging that Epic Games has breached the ADA, which encompassed the terms of their engagement, and sought monetary damages to recover funds that Epic had made on the version of Fortnite with the ‘hotfix’ functionality.

Relevant Market

The determination of the ‘relevant market’ for competition is a vital aspect of every antitrust/ competition law litigation, and so the definition was deliberated upon in this regard, basis the representations made by either party. While Epic Games defined the relevant market as the iOS operating system, due to the unilateral control exhibited by Apple over its own system App Store, which are only usable on Apple devices, Apple proposed definition of the market included all video game platforms (mobile games, PC games, console games).

Epic, in the alternative, further sought to move away from the linear definition of a videogame, and described Fortnite as a metaverse, which mimics the real world by providing virtual social possibilities, while simultaneously incorporating some gaming or simulation type of experiences for players to enjoy. While the court recognized the value of these observations by Epic Games, it chose to define Fortnite as a video game, due to the relevant infancy of the metaverse ideology, and corresponding references being made about Fortnite as a ‘videogame’. It is also important to note that as users are more conversant with this terminology, so it could be presumed that the court favored the common parlance over the submissions made by the contesting party.

The court determined the relevant market as digital mobile gaming transactions, as the majority of non-gaming applications on the App Store are free to users, and developers are not required to pay any commissions to Apple for such applications. The court further declined to include PC and console gaming transactions within the ambit of the relevant market (despite Fortnite’s availability on these platforms) due to the lack of substitutability between the two platforms, and testimonial evidence which depicted that mobile gaming transactions are not per se competitors for transactions on console systems.

Lastly, the court concluded that the geographic scope of the relevant market must be global- to the exclusion of China (wherein applications are not distributed likewise)- due to the global availability of these applications on the App Store.

Sherman Act – Section 1 – Rule of Reason Analysis

The rule of reason requires courts to conduct a fact-specific assessment of ‘market power and market structure to assess the restraint’s actual effect’ on competition. The Court opined that the requirement of an “agreement” for its inclusion under Section 1 is not met, as the ADA is a unilateral contract offered to the developers for offering their games on the App Store, without any room for consensus ad idem, in relation to anti-competitive terms.

To demonstrate anti-competitive effects on the mobile gaming market, Epic Games was required to prove that the App Store distribution provisions increased the cost of mobile gaming transactions “above a competitive level”, reduced the number of mobile gaming transactions, and stifled competition in the mobile gaming market.

While the court was of the opinion that the 30% commission charged stemmed from the market power enjoyed by Apple, rather than any competition in the open market, it chose to agree with Apple’s procompetitive justifications[8] to charge such commission on the use of their App Store facilities. The court opined that Apple has a legitimate right to secure monetary benefits from the utilization of its intellectual property (App Store, which has been further refurbished over the years) and its “walled garden” approach to the iOS technology, is justified to provide a safe and trusted user experience on iOS, which encourages both users and developers to transact freely on its operating system.

While the court did find 30% commission rate to be excessive and unjustified on merits, the court believed Apple deserved a certain rate of commission for licensing its intellectual property and chose not to interfere with the rate set by Apple, basis the procompetitive justifications provided by Apple.

Sherman Act Section 1 – Tying

The court was of the view that the current scenario is not fit to be considered for a claim of “tying”, as the IAP system and the operating system, iOS, cannot be treated as separate products, and IAP is but one component of the full suite of services offered by iOS and the App Store that is “integrated within the iOS devices”.

Section 2 – Monopoly Maintenance

An action under Section 2 of the Sherman Act is based on the assumption that the defendant is a monopoly, who has the power to control prices or exclude competition. Since Epic Games was unable to prove that Apple exercised monopoly and the restrictions imposed by Apple are anticompetitive in nature, the claims made under these specific provisions were found to be unsustainable.

California Unfair Competition Law

The terms of California Unfair Competition law (UCL)[9] expects that a determination of violation of the unfair competition law is to be made on the basis of the court’s weighing of “the utility of the defendant’s conduct against the gravity of the harm to the alleged victim”, and only where is indicated that the acts of the business qualify to be “immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers”. The court has opined that Apple’s actions to block developers from using push notifications and email outreach to users regarding lower prices on other platforms is detrimental towards the consumers, and such actions threaten a violation of antitrust law.

Apple’s Counterclaims

While Apple alleged that Epic Games has violated the ADA that was signed prior to the onboarding of Fortnite (and other separate games, applications), Epic Games claimed that the ADA was illegal and unenforceable, on the basis that the ADA is violative of the Sherman Act, the Cartwright Act and the UCL. The court had already found that the ADA did not violate any antitrust provision and is solely violative of the anti-steering provisions under the UCL. Furthermore, the court did not agree with the argument that the ADA was against public policy, and consequently decided that Apple is entitled to monetary relief from Epic Games due to the violation of the ADA signed between the parties.

ORDER

The court therefore issued a nationwide injunction permanently restraining Apple from prohibiting developers from: (i) including in their apps and their metadata buttons any external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing; and, (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.[10]

RAMIFICATIONS ON GAMING INDUSTRY

The court’s order pertinently does not enable developers to integrate third party payment providers to the payment processing system within their applications. The order, however, can now enable developers to place hyperlinks/ metadata buttons to their payment processing systems on the application, which can process outside the ecosystem of the application, thereby sidestepping the requirement to deposit a 30% commission on the payment via the IAP system.

Developers could potentially rake in a larger portion of revenue, through the commercialization of their intellectual property (without the requirement for the IAP commission deposit), thereby ensuring better funding for the R&D and reducing advertising costs for these applications. However, it is pertinent to remember that the court had justified Apple’s entitlement to a commission for the usage of its intellectual property (while noting that 30% is not a product of prevailing market standards). Therefore, while Apple may fail to collect a commission through the IAP system, they may still be entitled to audit the revenues accrued by these developers, to collect their rightful commission.

Epic Games has already filed an appeal against the order of the trial court and will be presenting the formal grounds of their appeal in the following months. It is likely that any appellate litigation may focus heavily on the reduction of the commission rate, rather than the removal of any commission rate altogether. The definition of a videogame may prove to be of paramount importance to determine the relevant market in any subsequent litigation, as Epic Games has been consistently seeking to define Fortnite as a metaverse experience, instead of a videogame.

Organizations may further seek for integration of the developer payment processing system into the ecosystem of the iOS application itself, to ensure that the developer does not lose out on revenue at the cost of user experience, if they have to open up a separate browser, enter their credit card information and make the ensuing payment.

Siddhant Gupta, Associate

Siddhant Gupta is an Associate with TMT Law Practice. He is a graduate of the 2015-2020 batch from Symbiosis Law School, Pune and his core areas of interest lies in the areas of Intellectual Property Laws, Media and Entertainment Laws. Siddhant has previous internship experience in intellectual property and litigation fields and interned with TMT Law Practice in 2020. During his time with TMT Law Practice, Siddhant gained valuable experience in the sectors of Telemedicine, Data Privacy, Gaming Laws and Corporate Laws.

[1] Hotflixes refer to software patches that are applied to systems, which are currently running; typically used to implement a fix for a critical business scenario.

[2] Case No.  4:20-cv-05640-YGR; available at: https://cand.uscourts.gov/wp-content/uploads/cases-of-interest/epic-games-v-apple/Epic-v.-Apple-20-cv-05640-YGR-Dkt-814-Judgment.pdf.

[3] Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.

[4] Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.

[5] An Act to Protect Trade and Commerce Against Unlawful Restraints and Monopolies, 15 U.S.C. §§ 1–7.

[6] The Cartwright Act is the primary California state antitrust law prohibiting anti-competitive activity. The Cartwright Act prohibits any agreements among competitors to restrain trade, fix prices or production, or reduce competition. Private parties can sue for violations of the Cartwright Act. The plaintiffs in Cartwright Act lawsuits are generally competitors who allege unfair competition, or consumers who allege that price fixing or restraints on trade have increased the prices they paid. Business and Professions Code § 16720 et seq.

[7] The Unfair Competition Law of California prohibits false advertising and illegal business practices. The law describes “unfair competition” as any unlawful, unfair, or fraudulent business act or practice, or false, deceptive, or misleading advertising.

[8] A procompetitive rationale is a “non-pretextual claim that defendant’s conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal.”

[9] Business and Professions Code §§ 17200 et seq.

[10]  Permanent Injunction, Epic Games, Inc. v. Apple Inc., Case No. 4:20-cv-05640-YGR (N.D. Cal.Sept. 10, 2021).

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