Saturday, September 19, 2020

Epic Games denies Apple's claim of Fortnite losing popularity, says usage "actually increased by more than 39%" during chosen period: court filing

If you're more interested in what Epic Games CEO Tim Sweeney said in a sworn declaration about the popularity of Fortnite, please click here to skip the part that addresses the legally more relevant questions surrounding Epic's push for a preliminary injunction against Apple.

Shortly before midnight Pacific Time on Friday, Epic Games filed its reply brief in support of its motion for a preliminary injunction (PI) against Apple over Fortnite and other Epic games as well as Epic's Unreal Engine (this post continues below the document):

20-09-18 Epic Reply ISO Mot... by Florian Mueller

Short of a hypothetical sur-reply (for which Apple would firstly have to seek permission from the court), this concludes the PI briefing process, giving the court a week and a half to form an opinion ahead of the September 28 PI hearing. This blog published and commented on the previous filings:

Epic is seeking a PI over the same two questions--whether Apple rightfully removed Fortnite from the App Store after Epic introduced an alternative payment system, and whether Apple may now terminate all of Epic's developer accounts including the one used for the further development and maintenance of Unreal Engine--that it raised in its motion for a temporary restraining order (TRO). TROs are preliminary to PIs: they're in force for a short period, after which a PI is needed as a replacement or the defendant isn't enjoined until the final judgment. The court granted Epic a TRO over Unreal Engine, expressing concern over what the court at that stage thought might have been retaliatory overreach by Apple, but not over Fortnite, with respect to which Apple prevailed on its argument that Epic was complaining of "self-inflicted harm."

It's interesting to observe the priorities Epic's lawyers set in their reply briefs. The one that reinforced the TRO request practically gave up on Fortnite by prioritizing Unreal Engine. Apparently Epic realized that the "self-inflicted harm" argument was pretty much insurmountable. After all, Epic could have simply continued to comply with Apple's App Store terms while nonetheless challenging them vigorously in court. But this time around, Epic's reply brief lumps the Fortnite and Unreal Engine issues together.

As a seasoned smartphone litigation watcher, I can't help but conclude that just like Apple's "self-inflicted harm" argument was too powerful last time (which led Epic to focus on Unreal Engine instead), Apple has apparently succeeded in making its case that

  • the existence of two Epics, one in the U.S. and one in Switzerland, is irrelevant to the question of contract termination because the decisions and the payments are made by the very same people, and

  • that Apple routinely and consistently does terminate accounts under such circumstances ("Apple has terminated over 75,000 unique accounts for introducing new features without going through App Review; over 2,000 accounts for introducing a non-IAP payment method; and over 60,000 accounts for introducing hidden features or obfuscating code {...]."

    The latter is very important because Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California said in her TRO order that Apple's reliance on its 'historical practice' of removing all 'affiliated' developer accounts in similar situations or on broad language in the operative contract at issue here can be better evaluated with full briefing."

    In the reply brief, Epic is not even arguing anymore that the Unreal Engine business is run by a separate company. Instead, the emphasis is placed on antitrust theories.

Epic is now going for broke.

Epic's lawyers--who are among the very best antitrust attorneys in the United States--have embarked on what is a "Mission Impossible" with respect to the district court by making the fate of the entire motion (its Fortnite and Unreal Engine parts) dependent on whether the court will conclude at this early stage of proceeding that Apple's App Store Terms, with respect to in-app payments, are illegal and unenforceable. Judge Gonzalez Rogers had made it clear in the late-August TRO hearing that she didn't consider this case to be a "slam dunk" for either Epic or Apple, and said that the case wasn't going to be won or lost at this stage. Epic's legal strategy, however, is to persuade her to say now, with hardly a record (apart from a few declarations and their attachments) having been built, that Epic is likely to prevail on the merits of the case.

Seriously, Epic must be desperate, trying a Hail Mary to overcome the combination of Apple's self-inflicted-harm, practically-just-one-Epic, and consistency-in-account-termination arguments. Obviously, Judge Gonzalez Rogers could say that Epic is going to win this handily. But she's very unlikely to do so, given that she told the parties this was a complex case. I didn't interpret her TRO order as encouraging Epic to sell her on the merits of the complaint--instead, the TRO order showed Apple a way to get rid of what was Epic's consolation prize: the Unreal Engine-related part of the decision, where even Epic can't argue anymore that its Swiss legal entity is not an independent business by any standard.

Even though Epic lumps the two issues together, the court could still find that the account used for Unreal Engine warrants different treatment from the one used for Fortnite. But that wouldn't be easy to do, given what Judge Gonzalez Rogers wrote in her TRO order. So Epic is now facing a significant risk of its motion being denied in its entirety.

Epic can appeal any partial or complete denial to the United States Court of Appeals for the Ninth Circuit. Contrary to what I wrote in August, when I expected Epic to comply with Apple's terms again after a denial of a PI, it now looks like Epic is going to continue for a few more months to decline to walk through the door Apple opened. Instead of putting back a complaint version of the iOS version of Fortnite (one that doesn't bypass Apple's in-app payment system), Epic now appears more likely prepared to take this matter to the Ninth Circuit, and won't moot the issue by complying until the West Coast appeals court has spoken. Epic may hope that whatever Ninth Circuit panel would hear the motion would actually side with Epic on antitrust questions that are extremely hard to resolve on the fast track.

Fortnite still gaining popularity: Epic Games CEO Tim Sweeney

In its opposition brief (filed a few days back), Apple voiced the suspicion that Epic's very publicity-oriented approach to this litigation was driven by a marketing communications desire to reignite interest in Fortnite. That is one of various factual questions--which also include the accusation of Epic having bullied Sony into modifying its PlayStation terms--Epic CEO Tim Sweeney seeks to counter in his second declaration in this briefing process (this post continues below the document):

20-09-18 Tim Sweeney Declar... by Florian Mueller

Before I talk about some of what Mr. Sweeney said in this declaration, I'd like to mention something that is surprisingly missing: an update to his earlier declaration (in support of the PI motion). On the same day, September 18, Mr. Sweeney retweeted a tweet to which one of Epic's own tweets is attached, and which complains about Apple preventing Epic from distributing Mac games (this post continues below the tweet):

In Mr. Sweeney's earlier declaration, the claim was made--and it's still mentioned in Epic's reply brief--that Windows and the Mac are examples of platforms where anybody can publish anything. Apparently, Mr. Sweeney's tweets and his corporate website ("Apple ending Fortnite Save The World updates for Mac") are more up-to-date than his company's court filings.

In connection with Fortnite's popularity, Mr. Sweeney's declaration--after noting that Google Trends is just about search, not game usage--says "Apple cherry-picked an unusual single-week peak in October 2019 with the average number of searches in July 2020," and explains that the October 2019 peak was due to a special event called "The End" (where the world of Fortnite was sallowed by a black hole).

Mr. Sweeney says "the number of daily active users on Fortnite actually increased by more than 39%" during that same period (October 2019-July 2020).

While Mr. Sweeney has a point here about some selectivity by Apple, I don't think his declaration paints a complete picture either:

  • He does not dispute another source than Google Trends that Apple cited: the Bloomberg article "Fortnite's Slowdown Has Epic Games Battling to Spark New Growth" (which relies on different data than Google Trends).

  • Mr. Sweeney's declaration misses the most important part of the Google Trends chart Apple referenced (this post continues below the chart), which is that Fortnite once overtook Minecraft and Pokemon, but then fell behind them again toward the end of the period selected by Apple:

  • If you move your mouse pointer to any particular location on the above chart, you get a popup that displays some numbers, of which 100 is the absolute peak that Fortnite had. You can see that the week of January 21-27, 2018 was the first one when Fortnite leapt ahead of Minecraft and Pokemon for the fist time, and stayed at the top of the chart until the week of May 26-June 1, 2019, when Pokemon reclaimed the top spot. By the end of the entire period (week of July 26-August 1, 2020, which was not an arbitrary choice by Apple considering the timeline of this dispute), Pokemon left Fortnite behind by more than a third, and Minecraft did so by more than 40%.

  • Mr. Sweeney's declaration shows an alternative chart just for Fortnite, and limited to the period from August 4, 2019 to August 1, 2020. But that's similarly selective as Apple's focus on the October-2019-to-August-2020 decline: the full chart (which you can see further above) shows that Fortnite had multiple peaks at 86% of the level of the October 2019 peak, such as for the week of March 11-17, 2018, and September 23-29, 2018. In fact, the red line for Fortnite oscillates around the 75 level for most of 2018.

Therefore, the 39% increase is clearly also the result of selectivity on Epic's part. They're not claiming there wasn't any decline during the entire period Apple's chart covered, which was from Fortnite's launch until this dispute broke out (July 2017-July 2020). Fortnite is clearly not at the all-time peak of its popularity as we speak.

That said, Mr. Sweeney's declaration is an interesting contribution to the public debate, though it changes nothing about the fact that Epic is now undertaking the long shot of preliminarily winning a huge antitrust case on the fast track.

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Wednesday, September 16, 2020

Apple attempts to debunk tale of two Epic companies in order to avoid preliminary injunction concerning Unreal Engine

This is already my third post on Apple's opposition to Epic Games' motion for a preliminary injunction. In the previous ones I discussed certain factual representations and commented on some of the rhetoric:

As I explained before, it's hard to imagine that the court would not continue to consider Fortnite's removal from the App Store to be self-inflicted harm. Apple reinforces that point nevertheless, describing Epic as "a saboteur, not a martyr," and noting that "Epic started a fire, and poured gasoline on it, and now asks this Court for emergency assistance in putting it out, even though Epic can do so itself in an instant by simply adhering to the contractual terms that have profitably governed its relationship with Apple for years." But the interesting question in the September 28 hearing is not going to be Fortnite--it's Unreal Engine. Apple wouldn't ban the engine and all apps that incorporate it, but Epic would lose access to the developer tools, which sooner or later would hurt its customers (according to Apple's filing, Epic holds Fortnite gamers as well as Unreal Engine licensees hostage).

What applies to both Fortnite and Unreal Engine is that Epic could just continue to do business with Apple, and on iOS, the way it used to do, by complying with the App Store terms while still being able to challenge them in court. The question for the court to decide is whether the fact that Epic holds the key to the kingdom in its hands applies only to Fortnite--the corpus delicti in a contractual sense--or also to Unreal Engine. The reason Epic obtained a temporary restraining order (TRO) was just that the judge was concerned about what might be overreaching retaliation: the termination of a developer account held and used by a separate legal entity for the purpose of developing Unreal Engine.

When the court granted the TRO, the court also made it clear what Apple would have to improve on at the next stage (the decision on whether or not to convert the TRO into a preliminary injunction). For example, the TRO order stated that "Apple's reliance on its 'historical practice' of removing all 'affiliated' developer accounts in similar situations or on broad language in the operative contract at issue here can be better evaluated with full briefing." In this context, "full briefing" referred to the preliminary injunction stage.

The numbers that Apple's opposition brief provides speak a clear language:

"Apple has taken this approach thousands of times with other developers and their affiliates."

[...]

"Apple has terminated over 75,000 unique accounts for introducing new features without going through App Review; over 2,000 accounts for introducing a non-IAP payment method; and over 60,000 accounts for introducing hidden features or obfuscating code (for example, by installing executable code)."

[...]

"Apple does not wait to be fooled a second time before terminating an affiliate for the bad deeds of its principals."

So it's not just that the language of Apple's contracts allow such termination; it's routinely done. As to whether it's necessary, Apple explains that this is needed to protect customers (as well as other developers, who would otherwise end up paying for the likes of Epic). In this context, Apple stresses security and provides a detailed declaration by Mark Graff, the former head of Lawrence Livermore National Laboratory (where the nuclear secrets of the United States must be protected) and former Chief Information Security Officer of the NASDAQ stock exchange (this post continues below the document):

20-09-15 Mark Graff Declara... by Florian Mueller

Apple particularly relies on Mr. Graff's declaration when explaining to the court that what Epic calls a "hotfix" was just as bad as any other "cheating": what matters is that Fortnite came with code that Apple's App Store team didn't get to review. What ultimately triggered the execution of that code is pretty much irrelevant according to Mr. Graff. In this case, Epic's servers told the app to do so. But the code was there at any rate.

Those of you with a particular interest in cybersecurity will find many interesting statements in Mr. Graff's declaration, such as his views on what a huge task it is for Apple to keep the App Store secure.

Even if the court believed that Apple consistently terminates all accounts held by an entity when a comparable breach occurs and agreed that there were legitimate reasons (such as in the interest of cybersecurity), Epic would still hope to prevail with respect to Unreal Engine just on the basis that a Swiss Epic subsidiary is the related account holder.

Some of what Apple's opposition brief says about the question of whether there really are two separate Epic entities involved was already stated in the TRO hearing. It's interesting nevertheless, especially since I believe Apple would appeal a PI over Unreal Engine to the Ninth Circuit. Such a potential appeal would be likely anyway, but is even more probable when one of the nation's top appellate attorneys, Orrick Herrington Sutcliffe's Joshua Rosenkranz, joined Apple's legal team. His appearance was filed a few days ago, and he's listed on thein the header section of Apple's latest set of filings, in addition to the Gibson Dunn team led by Theodore "Ted" Boutrous. Whether Epic would appeal is another question, given that they would probably give up with respect to Fortnite and then bring it back to the App Store in a compliant form--in which case the Unreal Engine issue would be moot.

Judge Gonzalez Rogers in the next step, and possibly the Ninth Circuit thereafter, will find various facts in the record that suggest there really aren't two Epics except in a purely formal sense:

"Epic administers the two accounts 'as if they are one.' [...] 'The accounts share a single tax ID number, a single individual as the registered account holder, and a single credit [card] number that is used to pay the annual program fee.' [...] 'The two accounts share the same test devices, and their [agreements] were renewed within a minute of each other on June 30, 2020.'"

Apple argues that "Unreal Engine posed a potential threat" because it could serve as "a second potential 'trojan horse' that would enable Epic to carry through on its threats to undermine the App Store and insert further unauthorized features."

Going back to the question of whether the two Epics must be treated as one, Apple provides some additional information that makes Epic's representation of the Unreal Engine business being all that separate ever less credible. A sworn declaration by Apple Fellow Phil Schiller mentions "[p]ublic reporting by Reuters" according to which "circumvented payments from U.S. users go to Epic Games, Inc., and those from users outside the U.S. go to Epic SARL [the Swiss entity whose account the court didn't let Apple terminate, for now, because of Unreal Engine]."

Unless Epic and/or its own lawyers got confused, it appears that Unreal Engine actually uses the same developer account as Fortnite with respect to the Sign in With Apple ("SIWA") feature. One of Apple's lawyers signed a declaration to which he attached a letter he had sent to Epic's counsel on September 10 (this post continues below the document):

20-09-15 Jay Srinivasan Dec... by Florian Mueller

In that letter, Gibson Dunn's Richard Doren explains that Apple, without any obligation under the current court order, gave Epic more time before terminating the SIWA feature. Without SIWA, Fortnite users who installed the game on their phones before it was removed from the App Store (and haven't deleted it since) wouldn't be able to sign in to the game with their Apple accounts. But in this context, counsel for Epic allegedly said that a termination of the SIWA authentication feature for the main Epic account would also affect users of the Unreal Engine. This is how Apple's lawyer comments on an apparent contradiction in Epic's representations:

"It should also be noted that we are surprised and puzzled by your assertion that terminating SIWA for the Epic Games, Inc. account will affect users of the Unreal Engine. Your client has repeatedly and consistently represented to the Court that the Unreal Engine is run by 'a different company. It’s in Switzerland. It’s a totally different set of circumstances.' (Aug. 19, 2020 Hearing [...]) Your client's briefs have assured the Court that the game production business of Epic Games, Inc. is distinct from 'the separate Unreal Engine business' [...], and that 'the developer tools' that are 'necessary to support . . . Unreal Engine . . . are covered by separate integrated agreements.' [...] (emphasis in original).) It is indeed true that the Developer Program account of Epic Games International, S.à.r.l. gives it the ability to use SIWA. If Epic has set up its Unreal Engine business to use this functionality through the Epic Games, Inc. account, that is Epic's own doing. Further, it would again reflect the spuriousness of your client's claim that Unreal Engine is a separate business from Epic Games, Inc. and an innocent, collateral victim of the crisis that Epic Games, Inc. has created."

Epic has until Friday to reply. Apple's opposition brief and the attached factual declarations (including two that are basically short versions of economic expert reports) suggest that the September 28 hearing will be extremely interesting with respect to Unreal Engine.

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Apple suspects Epic Games seeks "to reinvigorate [waning] interest in Fortnite" and notes Unity is far more popular than Unreal Engine

This is a follow-up to my post on Apple's opposition to Epic Games' motion for a preliminary injunction. Like the previous one, this is about Apple highlighting facts that don't make Epic look good. And Apple appears to have stepped up its rhetoric after weeks of Epic running an aggressive #FreeFortnite campaign and Epic CEO Tim Sweeney's Twitter presence increasingly looking like an "I hate Apple's App Store terms" type of campaign account. Interestingly, even though Epic is suing Google as well (for an update on that case, San Jose-based Judge Beth Freeman has declined Google's invitation to take over the Google Play Store antitrust cases), Mr. Sweeney almost exclusively lashes out at Apple in his tweets, and actually promotes Android over iOS at times. On Twitter I read that Epic is "giving away Android devices in #FreeFortnite tournament."

There will be opportunities in the build-up to, and after, the September 28 preliminary injunction hearing to talk a bit more about the parties' legal theories. However, Judge Yvonne Gonzalez Rogers said in the recent TRO (temporary restraining order) hearing that the case would not be decided at this early stage. For now, it's about Epic seeking relief before the court has had the chance to fully analyze the merits. At this point it's just about what the parties are allowed to do while the litigation is ongoing. Epic wants to be allowed to circumvent Apple's in-app payment system, and Apple argues (as I'll discuss later) that Epic's "cheating" (by not disclosing at the time of app review the existence of an alternative payment system) justifies a termination of all of Epic's developer accounts, including the one used for Epic's work on Unreal Engine.

As I reported before, Apple's opposition brief accuses Epic of bullying platform operators: "Epic's strategy of coercing platforms for its own gain, under the guise of being 'pro-gamer,' is something Epic continues to do." At the same time, Apple attributes Epic's behavior at least potentially to Fortnite's waning popularity:

"For reasons having nothing to do with Epic's claims against Apple, Fortnite's popularity is on the wane. By July 2020, interest in Fortnite had decreased by nearly 70% as compared to October 2019. This lawsuit (and the front-page headlines it has generated) appears to be part of a marketing campaign designed to reinvigorate interest in Fortnite."

That passage points to an August 2019 Bloomberg article ("Fortnite's Slowdown Has Epic Games Battling to Spark New Growth"), according to which "[r]evenue has been sliding for the battle-royale juggernaut," and a Google Trends analysis of how popular three game-related search terms were bbetween mid-July 2017 and late July 2020, shortly before Epic's litigation against Apple started. The Google Trends chart shows that Fortnite surpassed Minecraft and Pokemon a few months after its launch, and stayed on top until about the middle of last year, but as of this summer both Minecraft and Pokemon are more popular search terms on Google:

You can find Apple's brief in my previous post, and the links are in footnotes 11 and 12. There is a clerical error in the abbreviated URL ("tinyurl") contained in footnote 12. When I clicked on that one, I immediately saw that something had gone wrong because the yellowish curve for Pokemon was just on the base line of the chart. That's because the search term was "Pokemon." (right, with a period). I manually deleted that one from the URL text field of my browser and got the correct chart (which you can see above). Then the whole thing made more sense.

The following quote from Apple's filing also suggests that Epic is seeking to commercially benefit from its #FreeFortnite campaign:

"Finally, a word about Epic’s claimed reputational harm. Epic has engaged in a full-scale, pre-planned media blitz surrounding its decision to breach its agreement with Apple, creating ad campaigns around the effort that continue to this day. If Epic were truly concerned that it would suffer reputational injury from this dispute, it would not be engaging in these elaborate efforts to publicize it. From all appearances (including the #freefortnite campaign), Epic thinks its conduct here will engender goodwill, boost its reputation, and drive users to Fortnite, not the opposite. That is not harm."

Apple's filing furthermore explains that Unreal Engine is not the market leader--Unity is. While Unreal Engine is, according to Apple, "used by a minuscule fraction of iPhone apps," Unity (which my app development company uses as well) "characterizes itself as 'the world's leading platform for creating and operating interactive, real-time 3D content,' and is available for 'more than 20 platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual reality platforms, among others.'" Apple goes on to say that "Unity is used by the overwhelming majority of Apple developers that use a graphics engine."

As I already wrote earlier today, the #1 question in the preliminary injunction context is not going to be Fortnite (I can't see how Epic could dissuade the court from its assessment that Fortnite's removal from the App Store is simply self-inflicted harm) but whether Apple will or (as per the TRO) will not be allowed to terminate all of Epic's developer accounts, including the one Epic uses for its work on Unreal Engine. Microsoft has already twice (1, 2) supported Epic in this litigation through declarations that stress the importance of Unreal Engine to other companies, such as Microsoft. But that doesn't change the fact that Unity is the undisputed market leader. It does, however, look a bit like Mr. Sweeney, in the tweet I already linked to further above, reciprocated the favor by celebrating the launch of Microsoft xCloud...

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Apple accuses Epic Games of "coercing platforms for its own gain, under the guise of being 'pro-gamer'": PlayStation/Xbox example

If you're already familiar with the procedural history of this matter (scope of temporary restraining order etc.) and the concept of converting a TRO into a PI, you can just click here to skip the recap.

On Friday, September 4, Epic Games brought its motion for a preliminary injunction against Apple, once again asking Oakland-based Judge Yvonne Gonzalez Rogers of the United States District for the Northern District of California to obligate Apple

  • to tolerate on its App Store an iOS version of the Fortnite action shooter game that would bypass Apple's in-app payment system (in this regard, a motion for a temporary restraining order (TRO) was denied), and

  • to refrain from terminating Epic's other developer accounts, particularly the one that ensures Epic's access to Apple's development tools for the purpose of maintaining and improving the Unreal Engine (that part of the TRO motion succeeded because Judge Gonzalez Rogers was concerned about overreach and the potential impact).

TROs are in effect for only a fortnight (whichever way one may spell it) unless the enjoined party consents to an extension. After that period, a preliminary injunction (PI) can and often does replace it, which is commonly referred to as "converting a TRO into a PI." What makes a PI preliminary is that it's in effect until a final judgment grants or denies a permament injunction; a TRO is even more preliminary than a PI. In this case, the court discussed a PI briefing schedule with the parties, which will culminate in a PI hearing on Monday, September 28--ten days after a deadline for Epic's second filing in that context, its reply brief in support of its motion. Until the court's decision on the PI motion, Apple must comply with the TRO.

Typically, a TRO gets converted into a PI, but there are cases in which judges change mind on the basis of more elaborate briefing and in-depth analysis. With respect to the merit of the underlying case, there's not enough time at the TRO stage to fully consider all outcome-determinative aspects of complex matters, so if a judge believes that irreparable harm is imminent, a TRO might come down just to prevent a tragedy, even though a PI might subsequently be denied. Epic is still trying to persuade the court to #FreeFortnite, but that part is again doomed to fail, given that Epic could simply publish an iOS version of the game that wouldn't offer alternative payment mechanisms. Epic itself accepted and complied with those terms for years, and all that Apple says it wants is compliance with its longstanding standard terms. For Apple it's certainly going to be a challenge to defeat the Unreal Engine part of Epic's motion this time around, but such an outcome is nowhere near as inconceivable as a free pass for Epic to violate Apple's App Store terms while litigation over whether or not those terms violate the antitrust laws is still in progress.

Apple filed its opposition brief late on Wednesday, September 15 (this post continues below the document):

20-09-15 Apple's Opposi... by Florian Mueller

Apple attached multiple declarations (including two that are basically economic expert reports) to its opposition brief. Before I discuss Apple's brief as a whole, and the other declarations, I'd like to highlight what is nothing short of a bombshell accusation of bullying that I just found in a sworn declaration by Mike Schmid, Apple's Head of Games Business Development for the App Store (click on the image to enlarge; this post continues below the image):

Here's the same paragraph as plain text, making it easier to read on some devices:

"19. Epic has repeatedly leveraged the global phenomenon that was Fortnite to coerce platforms to change their rules. For example, in September 2018, Epic quietly updated Fortnite to enable cross-platform play between PlayStation and Xbox. This was explicitly against PlayStation's rules and Epic pushed PlayStation into a difficult situation with its own user base, where it was forced to make a significant change on Epic's terms, not its own. Epic's strategy of coercing platforms for its own gain, under the guise of being 'pro-gamer,' is something Epic continues to do." (emphasis added)

What Apple just told the court is that the "hotfix" (which Apple said became Epic's "hot mess"), which activated an alternative payment mechanism in Fortnite by simply having a server tell the client to do so, was not the first case of Epic being sneaky in its dealings with a major games platform. According to Mr. Schmid's declaration, "Epic quietly updated Fortnite to enable cross-platform play" between the PlayStation and Xbox versions of its flagship game. Then PlayStation (a Sony subsidiary) modified its rules to bless Epic's breach, as opposed to taking the measures that it could have for breach of contract. Apparently, Sony determined that it was better to soften than to enforce its rules. There was probably more, relatively speaking, at stake for Sony than for Apple, which is part of the reason why the latter is still unwilling to make an exception for Epic or to change its rules for everyone. But it's also about philosophies, and Apple is Apple while Sony is Sony.

Mr. Schmid's declaration also provides some information on the economic relevance of iOS to Epic's business. In this legal dispute, Epic obviously wants the court to believe that its economic viability is under threat if the App Store doesn't carry Fortnite. There's no question that Epic has made a ton of money on iOS in absolute terms, "enjoying nearly 130 million iOS downloads globally—and earning Epic more than $550 million through iOS alone." But apparently Epic told Apple the opposite of being irreparably harmed if it couldn't publish iOS apps:

"18. On a variety of occasions, Epic personnel have told me [Mr. Schmid] that if Apple did not comply with its demands, Epic would simply terminate its relationship with Apple and remove its games off of the iOS platform. Epic has repeatedly told me that it could do this because Apple is the 'smallest piece of the pie' when it came to Fortnite revenue. On several occasions, Epic personnel have told me that Apple represents just seven percent of Epic’s revenue. The data available to Apple largely bears this out. With respect to Fortnite, all of the App Store's competing platforms besides Google's Android have a higher Average Revenue Per Daily Active User (ARPDAU) than does Apple iOS, with some platforms—like Xbox and PlayStation—a full 70% or 40% higher than iOS, respectively."

The above is perfectly plausible. Per-user revenue is typically lower on Android than on iOS, with a large part of the installed base of Android being in relatively poor economies (which is why some Android game makers pursue more advertising-centric revenue strategies in parts of the world than in the United States and Europe). But volume makes up for some of this, so for Epic, Android might still be a greater revenue opportunity than iOS. It comes as no surprise that game console users would spend more money playing Fortnite, given that those who are very much into games in general and a shooter game like Fortnite in particular will want to play it on a large screen and with game-specific input devices rather than a touch screen.

Those numbers are going to create a serious credibility problem for Epic with the court.

Again, I'm going to comment on Apple's brief and the other declarations later, but thought many of you would find Mr. Schmid's revelatory declaration extraordinarily interesting. Finally, here's the document:

20-09-15 Mike Schmid Declar... by Florian Mueller

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Tuesday, September 15, 2020

Epic Games prefers Play Store antitrust trial to take place in San Francisco, Google in San Jose

Epic Games v. Google is still in the very early stages. Three of the Google entities sued by the Fortnite maker are based overseas. As a result, service of process took longer: Google Asia Pacific Pte. Limited was served on September 4, 2020; Google Ireland Limited on September 6, 2020; and what procedurally matters is the latest date, September 7, 2020 (when Google Ireland Limited was served).

By contrast, there's already been a fair amount of activity in Epic Games v. Apple, with a temporary restraining order (TRO) in place, Epic having brought a motion for a preliminary injunction (consistent with its TRO motion), to which Apple will respond later today. Apple meanwhile filed its answer to Epic's complaint. It may take quite a while before Google does so, especially since it appears to intend to firstly bring a motion to dismiss.

Other than service, all that has happened so far in Epic v. Google is about the assignment of the case to one judge or another, and about whether or not Epic's case is related to some other antitrust actions against Google in the same district. That's obviously less exciting than motions for injunctive relief, but those little things can make all the difference to the outcome of a litigation. For example, if Oracle's Android-Java copyright case against Google had not been assigned to Judge William H. Alsup back in 2010, it's highly likely Google would already have lost it a long time ago, and a jury would merely have had to determine damages for past infringement while the merits were crystal clear (except to that one judge).

What Google didn't want--and what it's been able to avoid--was for Epic's Android case to be related to (i.e., procedurally combined with) Epic's case against Apple. In that case, the existence of earlier-filed cases against Apple (especially the 2011 Pepper case) would have resulted in a very ambitious schedule. It's preferable for Google to slow things down (whether those efforts will be tantamount to "stalling" remains to be seen), and to firstly await the outcome of the Apple cases (should Apple prevail, Google will argue it should be let off the hook; otherwise Google will place even greater emphasis on differences between its Play Store terms and Apple's App Store terms).

Judge James Donato in San Francisco did, however, procedurally combine Epic v. Google with a couple of class actions over the Play Store (Carr v. Google and Pure Sweat Basketball v. Google). Those other cases were filed in mid-August, and the overlap of issues was strong and clear.

On Wednesday, Google brought a motion asking the court to consider whether those Play Store cases should be related to Feitelson v. Google, a consumer antitrust case that was dismissed by Judge Beth Freeman in San Jose back in 2015 (this post continues below the document):

20-09-09 Google Motion to C... by Florian Mueller

Given that Feitelson v. Google is a case that went nowhere and was closed a long time ago, the only practical effect that it would have to consider those cases "related" is that it would be a vehicle for Google to get the case transferred, within the same federal district, from San Francisco to San Jose--and from Judge Donato (who based on what some lawyers practicing in that district say is not the most popular judge in the Bay Area) to Judge Freeman.

When reading Google's motion, I got the impression that Google's lawyers know there isn't an extremely pressing reason for combining those cases. It's more like Google would have a preference--and asking is free (apart from legal fees in this case). Logistics formally play a role, but with so much at stake, all that Google cares about is the chances of one outcome over another. With so many San-Francisco-to-Silicon-Valley commuters, it's hard to tell where the pool of potential jurors would be more likely to be sympathetic to Google; and Epic doesn't even want a jury to be involved, though Google could potentially bring counterclaims that would involve damages and request a jury trial. So Google's preference is all about the judge in the end.

The fact that Judge Freeman granted a motion by Google to dismiss an Android antitrust case more than half a decade ago is presumably the reason why Google would like to bring the next motion of this kind in her court, too. Also, both Judge Donato and Judge Freeman are among the numerous Obama appointees in that district, so there's probably not much of an ideological difference.

But there really are fundamental differences between those cases. The theory of harm in Feitelson was that consumers paid more for their Android phones than they'd have had to if Google had allowed Android device makers to take money from other search engines and if those OEMs had in turn lowered their prices. Google's Mobile App Distribution Agreements (MADAs) with device makers are at issue either way, but as we all know, Epic isn't seeking to compete with Google on search, nor does Epic want to pay less for an Android phone. Epic just wants more than 70% of the in-app purchasing (IAP) revenues it generates, and believes that the way to bring down Google's cut is to allow alternative in-app payment services.

Given those major differences between the current Play Store cases and the defunct mobile search case (even though "Android" and "antitrust" are common buzzwords), Google may overestimate the likelihood of Judge Freeman granting another motion to dismiss. Who knows, maybe Judge Donato would actualy be more inclined to do in this case. Not only Google but also Epic apparently feels that the Feitelson past may be an indication of Judge Freeman being less willing than the average other district judge to consider the Android business model anticompetitive. That's why Epic is opposing Google's motion (this post continues below the document):

20-09-14 Epic Opposition to... by Florian Mueller

What's going to happen now depends on Judge Freeman. If she wants those three new Android antitrust cases, even the thin connection--which Google overstates to a greater extent than Epic downplays it--would be more than sufficient for her to take over. Judge Donato simply assigned one of those newer cases (Carr) to himself, taking it away from Judge Freeman (which doesn't necessarily mean she was disappointed, much less that he was being rude). But the fact that the Feitelson case is so old means Judge Freeman has the choice. We'll see how interested she is in this stuff.

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Saturday, September 12, 2020

Dallas-based federal judge dismisses Continental's antitrust complaint against Avanci, Nokia, Sharp, and some patent trolls

After Judge Lucy H. Koh of the United States District Court for the Northern District of California granted a motion by the Avanci patent pool to transfer Continental's antitrust case over component-level licensing to the Northern District of Texas, I stopped following the case. Meanwhile, the complaint was amended once, but on Thursday, Chief United States District Judge Barbara Lynn dismissed the entirety of the first amended complaintwith prejudice (this post continues below the document):

20-09-10 Order Dismissing C... by Florian Mueller

The first hurdle for Conti's complaint was Article III standing and ripeness. Judge Lynn did not consider the mere possibility of car makers like Daimler seeking indemnification from Continental to satisfy the ripeness requirement:

"Plaintiff does not allege in the FAC that any OEMs with which it has entered into indemnity agreements have been or will likely be forced to take a non-FRAND license from Defendants. Plaintiff also does not allege that those OEMs will, or even can, pass the costs of those licenses onto Plaintiff through indemnity obligations."

As a litigation watcher I'm in a position to say that Nokia and Sharp (who are among Avanci's co-defendants) are definitely trying hard, through the pursuit of standard-essential patent (SEP) injunctions in Gemany, to coerce Daimler into a license agreement. But I can also understand that the district court would have wanted to see something more than a merely hypothetical possibility of indemnification claims arising from certain Avanci members' unwillingness to license component makers.

What isn't even mentioned in the decision is the fact that Sharp has meanwhile licensed Huawei, which in turn also benefits Continental, but in and of itself shows that

  • Sharp, unlike Nokia, is willing to extend exhaustive component-level licenses, and

  • the existence of the Avanci pool indeed doesn't prevent such license deals from being concluded.

The Dallas-based court nevertheless found that Continental had Article III standing on the basis of its allegation that the defendants refused to grant Conti a license. But with indemnification no longer being part of the consideration in the further analysis, the next problem Conti's complaint faced (after easily overcoming the Foreign Trade Antitrust Improvement Act hurdle with respect to foreign patents) was that, in Judge Lynn's opinion, "[t]he anticompetitive conduct allegedly directed at the downstream OEMs does not create an antitrust injury for the upstream TCU suppliers, like Plaintiff." Instead, the court held that OEMs (i.e., car makers in this context) would be the correct parties to complain.

I understand the court's rationale, but I struggle with the result as I find it hard to imagine how a car maker like Daimler could bring an antitrust complaint to the effect of requiring a SEP holder like Nokia to license its suppliers. Daimler could, as it does in Germany, raise an antitrust affirmative defense to infringement cases on that basis. But it's hard to understand how and why the would-be willing licensee (here, Conti) "is not the best entity to bring this antitrust action to vindicate the injury alleged" (which alleged injury, as explained before, was recognized by the court with respect to the refusal to license Conti).

The court's dismissal with prejudice (meaning that Conti can appeal this to the Fifth Circuit, which as the decision notes has limited case law on SEPs, but it's game over in district court now, short of successful defibrillation) is additionally based on a complete disagreement with Conti's federal antitrust theories under the Sherman Act. I'm a frequent critic of Antitrust Assistant Attorney General Makan "Macomm" Delrahim's amicus brief and business review letter campaign favoring SEP abusers and even foreign patent trolls like the Softbank-owned Fortress group, but there's no denying that his activities are impactful. Between the lines of Judge Lynn's decision it's clear that the Justice Department's Antitrust Division strongly influenced the court's thinking and particularly persuaded the judge of the idea that SEP issues aren't really antitrust problems but should be resolved under other laws (contract law, patent law).

The DOJ's statement wouldn't have been needed, however, for the dismissal of Conti's theory that Avanci's members--contrary to what Avanci's contributor agreement actually says--engaged in parallel conduct to the effect of either not licensing component makers or doing so only at the same prices at which the Avanci pool licenses car makers. In this regard, Conti simply had no facts to allege. They wanted a fishing expedition, but by failing at this early stage of proceeding, Conti never got (and probably never will get) the chance to prove that the Avanci group is an anti-component-maker conspiracy.

After dismissing the federal antitrust claims, the court also exercised its discretion not to deal with state claims (contract or state competition law).

Assuming that Conti won't appeal or, more likely, the Fifth Circuit will affirm this dismissal in the event of an appeal by Conti, what does this mean for the automotive patent wars, and for the Avanci pool?

It merely means that a rather ambitious--almost long-shot--attempt by Conti to succeed with a novel attack vector failed.

Neither does this mean that anyone is now going to take an Avanci license as a result of that decision nor that key Avanci members such as Nokia couldn't still face antitrust liability--or simply lose patent infringement actions--over their conduct further down the road.

If Conti's complaint had succeeded, it would have been--depending on what analogy you prefer-- a hole in one or a lucky punch for the automotive industry at large against Avanci. But the automotive industry still has another option: simply to starve Avanci unless and until that pool agrees to grant exhaustive component-level licenses on FRAND terms.

In its current configuration, Avanci must be treated as troll. Don't feed the troll.

Avanci itself can't bring infringement actions. Only its members can--and some are already litigating against Daimler and Tesla. Car makers should just let those Avanci contributors sue, and then defeat them in court. Most of the time, the patents will be invalid or not actually standard-essential. When a patent is held valid and infringed at all, courts will have to adjudicate any FRAND defenses, be they based in contract law (which is how U.S. courts prefer to address the problem) or antitrust law (which is the European way, and the Dusseldorf Regional Court's upcoming referral of key component-licensing questions to the Court of Justice of the EU spells doom for Avanci's current business model). And sometimes the solution will come from negotiation rather than litigation, as Huawei's exhaustive component-level license to Avanci member Sharp's SEPs shows.

Avanci has been around for years, and it only has small-scale license agreements in place. From what I hear, the seemingly largest Avanci deal ever doesn't even include 4G patents. Avanci will be relieved to see the dismissal of Conti's U.S. antitrust action, but that decision doesn't solve a single one of Avanci's fundamental problems.

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Friday, September 11, 2020

Macomm Delrahim makes strides toward antitrust action against IEEE over its standard-essential patent policy: updated Business Review Letter

Emboldened by a Ninth Circuit panel's decision to overturn a district court's FTC v. Qualcomm antitrust ruling, Antitrust Assistant Attorney General Makan Delrahim--whom I call "Macomm" because he's a former and presumably future Qualcomm lawyer who has been unabatedly promoting Qualcomm's SEP enforcement agenda in his current office--updated (DOJ press release; supplemental letter (PDF)) the Justice Department's 2015 Business Review Letter to the Institute of Electrical and Electronics Engineers (IEEE) with respect to the DOJ's take on the IEEE's patent policy.

For ten years this blog has tried to provide original content, so rather than provide duplicative commentary, let me just point you to Professor Thomas Cotter's analysis (note the four items he specifically criticizes, "all of which are (in [Professor Cotter's] view) much more of an overstatement than the overstatement [AAAG Delrahim] claims to be correcting") and a 2018 paper by Professor Jorge Contreras on the way Mr. Delrahim changed the DOJ's focus in this context.

I'd just like to add a few thoughts and my opinion to the last two sentences of Professor Cotter's Comparative Patent Remedies blog post

"I would have thought that someone who believes in free markets would conclude that, if a private entity [here, the IEEE] adopts a policy that turns out badly [here, the IEEE patent policy that AAAG Delrahim claims unfairly disadvantages patent holders], that entity should have to suffer the consequences [here, the effects of discouraging innvotators from contributing to industry standards], rather than needing the guiding hand of the Antitrust Division to save it from itself."

The above sentence--to which I added various explanations as I didn't quote the passages leading to it--is a diplomatic way of telling Mr. Delrahim that he--a Republican president's appointee--isn't being a good Republican in the IEEE context...

Unfortunately, conservative talk radio hosts wouldn't ever discuss a topic as esoteric as SEP enforcement. At least a few academics and bloggers do.

"Or could this be a not-to[o]-subtle hint that, if Donald Trump wins re-election, IEEE could find itself in the agency's cross-hairs?"

I'll answer this question, which looks like a rhetorical one anyway: YES, that's what it is all about, in two ways:

  • When reading the supplemental letter, I noticed multiple suggestions that the IEEE revise its patent policy to the effect of giving SEP holders more leverage in an enforcement situation and, as a result, in negotiations.

    I doubt that the IEEE will do so in the coming months. We're not even two months away from Election Day, after which Mr. Delrahim's days in office may be numbered.

    Mr. Delrahim presumably doesn't even expect its letter to persuade the IEEE. He just wants to be able to say, at the time of taking enforcement action, that he gave the IEEE one last chance to avoid an investigation. PR and politics are particularly important when doing something very controversial--and even more so, when doing something highly controversial against an extremely well-respected organization. Mr. Delrahim knows that when he announces the investigation he's preparing for, many of America's most innovative companies will side with the IEEE.

  • The only outcome of an IEEE investigation led by Mr. Delrahim would be a holding that the IEEE's patent policy is "anticompetitive" in the sense of limiting SEP holders' ability to aggressively enforce their rights. The DOJ would have to sue the IEEE, and the previous Business Review Letter would have complicated any litigation. In court, the DOJ could have made the same argument as in its supplemental letter: the IEEE allegedly misrepresented the 2015 BRL as an "endorsement" of its patent policy. Regardless of whether an agency's decision not to take action against something is accurately called an "endorsement" (a question on which even reasonable people could fail to agree), the retraction of the 2015 letter is simply a necessary step with a view to what Mr. Delrahim undoubtedly has in mind.

If President Trump does it again, Mr. Delrahim will likely stay on, and then the IEEE knows what's going to happen, but fortunately the courts will decide.

In the other scenario, Mr. Delrahim could theoretically do what the outgoing Democratic majority of the Federal Trade Commission did in the last days of the Obama Administration by filing an action against Qualcomm. However, the difference is that an FTC action may continue (as one could see in the Qualcomm case) even after a presidential transition, while the DOJ would be 100% under the control of the new party in power. That's why such an investigation or litigation might be short-lived.

The updated BRL is disconcerting at any rate.

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