Wednesday, September 28, 2022

In Senate testimony, U.S. antitrust chief Jonathan Kanter urged adoption of Open App Markets Act as end of legislative term is approaching fast

Yesterday, President Biden tweeted the following, which is spot-on:

The following is not news in a strict sense, considering that a week has passed since Antitrust Assistant Attorney General Jonathan Kanter testified before the Senate Judiciary Committee. But one passage of his testimony clearly deserves more attention and is very much related to President Biden's tweet:

"I would also note the importance of the Open App Markets Act, which seeks to ensure that independent app developers are able to compete on fair and equal terms and to prohibit the worst types of anticompetitive conduct by the gatekeeper firms that own and operate the largest app stores and mobile platforms. While the growth of the mobile app ecosystem over the past fifteen years has brought enormous benefits to American consumers, the continued viability of this ecosystem is threatened by the increasing power held by a handful of dominant digital gatekeepers, who are able to use their control over app stores and mobile operating systems to pick winners and losers, extract above-market fees, and favor their own apps in ways that harm competition and sap incentives to innovate. The Act identifies and prohibits some of the most egregious anticompetitive practices which are currently prevalent in the mobile app ecosystem." (emphases added)

The end of the Congressional term is approaching fast. Some other antitrust topics may be more controversial (such as the American Innovation and Choice Online Act (AICO)). But the Open App Markets Act (OAMA) should finally be adopted.

It's a valid question to ask why Mr. Kanter urges the enactment of a new law while the Antitrust Division of the Department of Justice--the very division he's heading--is simultaneous advocating the application of existing antitrust law (particularly the Sherman Act) to mobile app stores. At the Epic Games v. Apple appellate hearing in San Francisco on October 21, a DOJ attorney (whose name has meanwhile become known: Nickolai Gilford Levin) will deliver oral argument and while the DOJ formally supports neither party, every single one of its arguments strengthens Epic's case. A similar question came up at a Senate committee hearing shortly before the Epic v. Apple trial, but was directed to the member companies of the Coalition for App Fairness as opposed to the DOJ.

I wholeheartedly believe that Epic's proposed market definition (a single-brand market with a smartphone operating systems foremarket and an app distribution aftermarket) is the correct one. And that would also pour fuel on the fire of a U.S. consumer class action against Apple. But as I explained in the post I just linked to, there is a risk of the appeals court having qualms over a single-brand market definition (though the Kodak standard is not just met here, but the case is even stronger than Kodak was). Even if the Ninth Circuit agrees with Epic, I consider a remand for further proceedings more likely than a definitive decision on liability--and in any event, Apple will try to appeal an adverse decision to the Supreme Court.

All of that takes time and comes with considerable uncertainty while Apple's abusive conduct affects the economy at large as well as various segments of the technology industry--even NFT startups.

The European Union's Digital Markets Act (DMA) has been passed into law, but implementation takes time and will invite legal challenges that Apple and Google appear to have prepared already. Also, Apple and Google could (and most likely will) choose to comply with the DMA only in the EU, in which case the situation in the United States won't improve.

The OAMA isn't a panacea either, but it would be a major breakthrough, and there is at least a chance that if both the United States and the European Union promulgate similar rules, Apple and Google will think hard about whether it's worth fighting policy makers and regulators in such places as South Korea, which also raises fragmentation concerns.

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Tuesday, September 27, 2022

U.S. class action lawyers argue Apple's App Store commission would be cut in half if Apple had to face competing iOS app stores, apparently want Apple to dole out tens of billions of dollars to iPhone users

The Pepper v. Apple consumer class action over supracompetitive App Store commissions, which was brought more than a decade ago, has already been a trailblazer: the Supreme Court's affirmance of a Ninth Circuit decision according to which consumers had standing to seek antitrust damages from Apple over App Store commissions did not resolve the merits of the case, but defibrillated it after Judge Yvonne Gonzalez Rogers had dismissed it. And the fact that even a Trump appointee--Justice Brett Kavanaugh--sided with liberal judges on this issue clearly emboldened other plaintiffs. Then Epic Games brought its case against Apple--just yesterday I explained, with half a dozen charts, why Epic should prevail on market definition--and eclipsed Pepper. But in the end that may even have been a good thing for the consumer class action, as its lawyers now get to optimize their strategy based on the outcome of Epic's case (including the appeal).

Late on Monday, the class action lawyers (from the firms of Wolf Haldenstein, Kellogg Hansen, and Calcaterra Pollack) filed their renewed motion for class certification with the United States District Court for the Northern District of California:

https://www.documentcloud.org/documents/22927236-22-09-26-consumer-plaintiffs-renewed-motion-for-class-cert

Judge YGR had dismissed their previous motion without prejudice. She wanted to see some improvements, but apparently didn't doubt too strongly that certification would ultimately happen.

The part I wish to look at here discusses the plaintiffs' position on what a competitive App Store commission rate would be (and would have been all along). While the exact percentage is hidden, the public redacted version of the document states that it "is similar to the results reached by Dr. Economides" (the economic expert in a developer class action that got settled). And the motion summarizes Dr. Economides' findings as follows:

"Prof. Economides relied upon the same fundamental economic relationship between app store profit margin, costs, and prices but relied on different data and documents for the model’s inputs to conclude that the prevailing commission rate would have been approximately 13.0 percent in a BFW [but-for world] where Apple faces two rivals, and 14.8 percent in a BFW where Apple faces one rival."

The consumer plaintiffs go on to claim that their own expert "used (i) more conservative assumptions (a single-rival world rather than the two-rival world analyzed by Prof. Economides), and (ii) better data (including data from Apple’s own survey expert, Prof. Itmar Simonson, Ph.D.)."

Given that the developers' expert arrived 14.8% in a one-rival scenario and that the consumers say their own number is similar, we can assume they roughly believe a competitive rate would be 15%.

The consumer class will likely argue that the entire differential between what Apple actually charged (which is practically 30% as the 15% exception applies to many developers but only to a minuscule percentage of total App Store revenues) and a hypothetical rate of about 15%. Now, that's a simplistic way to look at it:

First, it's not just about a headline rate but also about whether in a competitive landscape there would be more loopholes. There are app stores (such as Epic's) that offer their own in-app purchasing (IAP) system to developers, but don't make it mandatory. And one could easily imagine app stores that are more permissive when it comes to, for instance, crypto transactions, which Apple taxes as well. That could have further reduced the effective rate.

Second, there certainly were many developers who would have charged end users the same: those developers would simply have been more profitable. And there must have been even more developers who might have priced their IAP offerings a bit lower, so consumers would have saved money while the developers would have made more.

Consumers would arguably have had a greater benefit from developers being able to invest more in their development efforts (as Apple was and is profitable enough), but that's hard to quantify.

But for a very rough estimate, we can assume that the class action lawyers want Apple to pay out tens of billions of dollars to their proposed class, which they define as follows:

"All persons in the United States, exclusive of Apple and its employees, agents and affiliates, and the Court and its employees, who purchased one or more iOS applications or application licenses from Defendant Apple Inc. (“Apple”), or who paid Apple for one or more in-app purchases, including, but not limited to, any subscription purchase, for use on an iOS Device at any time since July 10, 2008 (the 'Class Period'). The Class is limited to those persons who paid more than $10.00 in total to Apple during the Class Period for iOS applications and in-app purchases from any one Apple ID account;"

In June 2017, Apple announced that developers had earned more than $70 billion on the App Store, which means Apple collected $30 billion in commissions. For the years 2017-2021, Statista provides numbers that show an explosive growth in worldwide gross app revenue on the App Store: approximately $300 billion during that period, meaning Apple collected approximately $90 billion.

All those numbers are worldwide, and the class action is U.S.-specific. But the U.S. is a huge market for Apple--the only major market in which it is the market leader even by unit share.

Under the class action's theory, the global overcharge would have amounted to approximately $60 billion (half of $120 billion, which is the sume of the $30 billion inferred from Apple's 2017 announcement and the $90 billion calculated based on Statista's 2017-2021 numbers), and my guess is that the U.S. share of this is a third or more.

This class action can get really costly, not only in a monetary sense: it would be terrible for Apple if tens of millions of U.S. iPhone users (there are more than 100 million of them, but only those who spent at least $10 on the App Store with a single account would get a payout) received letters notifying them of their entitlement to a payout because of Apple having unlawfully overcharged them.

There are consumer class actions in multiple jurisdictions over the app tax enabled by the App Store monopoly. I mentioned some in a recent post on a Mexican regulatory complaint.

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With additional favorable claim constructions, Ericsson inches closer to U.S. import ban on Apple gadgets

Settlement pressure is clearly mounting on Apple in its dispute with Ericsson. Meanwhile, it looks like Apple's patent license agreement with Nokia expired a few months ago and hasn't been renewed yet--and the one with InterDigital will expire this week, with no renewal having been announced either.

Ericsson continues to enforce a preliminary injunction in Colombia that bars Apple from selling 5G devices--including, but notl limited to, the new iPhone 14--in the Latin American country. The week before last, the Munich I Regional Court held its first hearings in two Ericsson v. Apple cases, and in both cases it looks like only a strong invalidity defense could help Apple. The court's 21st Civil Chamber under Presiding Judge Dr. Georg Werner rejected Apple's attempts to narrow a non-standard-essential patent Ericsson is asserting against Apple's distribution of WhatsApp's iOS app and a 4G/5G SEP. In three weeks today, the Mannheim Regional Court's Second Civil Chamber (Presiding Judge: Dr. Holger Kircher) will conduct a trial of an Apple v. Ericsson countersuit.

Yesterday, Ericsson made further headway at the United States International Trade Commission (USITC, or just ITC). Administrative Law Judge (ALJ) MaryJoan McNamara, who presides over one of three pending ITC investigations of Ericsson complaints against Apple (the larger one of the two non-SEP cases), entered a claim construction order:

https://www.documentcloud.org/documents/22927237-22-09-26-itc-1300-cc-order

The net result is that

  • Ericsson prevailed on

    • all three disputed claim terms of U-S. Patent No. 7,151,430 on a "method of and inductor layout for reduced VCO [voltage-controlled oscillator] coupling" (Apple sought narrower interpretations of all three terms, and in two of those cases argued indefiniteness in the alternative) and

    • both disputed claim terms of a pair of patents from the same family--U.S. Patent No. 9,509,273 and U.S. Patent No. 9,853,621 on a "transformer filter arrangement"--against Apple's attempts to narrow the terms or, in the alternative, have one of them held indefinite;

  • while Apple prevailed on

    • the sole disputed claim term ("vibrator"--expressly defined by the specification in ALJ McNamara's opinion as meaning a "vibration motor and vibration element" while Ericsson argued the plain and ordinary meaning was "a module that provides tactile information in response to a control signal") of U.S. Patent No. 7,957,770 on a "mobile communication terminal for providing tactile interface" and

    • the sole disputed claim term of U.S. Patent No. 9,705,400 on a "reconfigurable output stage".

      What's interesting about the EP'400 situation is that in purely linguistic terms, Ericsson seemingly sought a narrower construction than Apple: Ericsson's proposed construction was identical except for multiple insertions of "electrical" before the word "arrangement." Normally, an additional qualifying attribute narrows the meaning. Here, however, the judge basically said that Ericsson's proposed construction would be effectively broader by merely requiring "first and second operating states of the output stage" and blurring the distinction between two claim terms.

      I've seen countless claim construction disputes over time, but this is the first time that a proposal containing an additional qualifier was deemed broader than the same text without that qualifier. Again, it's linguistically counterintuitive.

What does this Markman outcome mean for the further process, especially in the build-up to, and with a view to, the January trial (called evidentiary hearing)?

Ericsson is now in great shape with respect to three patents from two families. The situation with respect to those patents may be similar to those Munich cases in which Apple practically depends on its invalidity defenses.

For the '770 patent, Ericsson now likely depends on an infringement theory under the doctrine of equivalents (unless it has waived that one, which I doubt). Paragraph 77 of the complaint stated this:

"On information and belief, the Accused Products that are sold for importation, imported, and/or sold within the United States after importation by Apple infringe claims 1, 2, 4, 7-10, 12, 15, and 16 of the ’770 patent, either literally or under the doctrine of equivalents."

It's not hard to imagine that a DOE infringement theory could work even if Apple's accused devices don't come with a "vibration motor and vibration element" in a strictly literal sense.

Given that the ITC favors the streamlining of cases (i.e., complainants dropping patents ahead of trial), and that the ALJ and Ericsson don't seem to see eye-to-eye on what to make of the '400 patent, it may be tactically opportune for Ericsson to just withdraw that one. Maybe the Commission (the top-level decision-making body) would agree with Ericsson, or the Federal Circuit might reverse the ITC--but there's probably more to be gained by just focusing on other patents.

All in all, claim construction has gone quite well for Ericsson in its offensive cases (and nothing has happened in Apple's offensive case yet):

All in all, it doesn't look--at this stage--like Apple can realistically expect to fend off all three ITC complaints by Ericsson. Taken together with the situation Apple faces in Colombia and increasingly in Germany, I really wonder whether the FRAND trial in the Eastern District of Texas will take place in December or whether there'll be a renewal of the parties' cross-license agreement before then. But for now they're fighting hard, including that Ericsson accuses Apple of having acted in bad faith when the license agreement that expired prior to the current wave of infringement cases was negotiated.

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Monday, September 26, 2022

Epic Games' aftermarket arguments and case citations are substantially stronger than Apple's: reversal by Ninth Circuit is realistically achievable

The Epic Games v. Apple appellate hearing in San Francisco--with the DOJ supporting Epic's appeal--is less than four weeks away. With all that's going on (including my own new app project) I don't know yet how much time I will find in the coming weeks to elaborate on additional aspects of the case, but at minimum I'm now going to complete my analysis of the market definition dispute. I've done a lot of reading in recent days on the subject of single-brand markets, and I've drawn up a half-dozen charts that will make it easier to follow.

In order for Epic to convince the United States Court of Appeals for the Nith Circuit of its single-brand market definition under the Supreme Court's Kodak precedent, it has to proffer a (competitive) foremarket and a (monopolized) aftermarket. Then the focus is on whether Apple abuse its aftermarket monopoly.

I've previously explained in detail why Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California got the law, the economics, and the technology wrong with respect to the foremarket part. I realized the full extent of the judge's fundamental misconceptions only after identifying outrageous absurdities such as the judge

  • saying that Epic chose the smartphone operating system market because Apple has a greater market share in that one than in the smartphone market (when there is no iPhone without iOS, and the iPhone is the only smartphone running iOS, i.e., a one-to-one relationship), and

  • referring to multiple App Store operating systems, when there is just one (iOS).

It was Apple's own admission that iOS does compete with Android (which reduces to absurdity its denial of the existence of a smartphone OS market) that pointed me to this in the first place.

What the Supreme Court held in Kodak 30 years ago is that if certain criteria are fulfilled, there are exceptions to the general rule that a market is characterized by more than one vendor offering products (which includes services) that have the potential to substitute each other. The most important one of those requirements is also the only one that matters here (as Judge YGR didn't see any issues with the other three): that competition in the foremarket fails to discipline a defendant's conduct in the aftermarket.

The Supreme Court didn't resolve the case after a full trial: it merely held that the complaint should survive a motion to dismiss in light of plausible factual allegations according to which Kodak enjoyed market power in the aftermarket of spare parts for its high-volume photocopiers despite having to compete with other makers of photocopiers in the foremarket. In other words, if the allegations were taken as true, Kodak could--with impunity--act anticompetitively in the aftermarket without customers defecting in the foremarket or competitors seizing an opportunity to undercut Kodak on the total cost of ownership (TCO), such as by adopting a similar razor-and-blades type of business model and slashing photocopier prices, which would serve as a competitive constraint on Kodak.

That is merely consistent with what characterizes market power: it's a state of affairs in which a monopolist can make certain decisions (such as price increases or degradations of quality) without having to worry too much about competitive constraints. That's what the SSNIP test (Small but Significant Non-transitory Increase in Price)--as in Epic v. Apple--and its SSNDQ equivalent (Small but Significant Non-transitory Decrease in Quality)--as in the EU's Google Android case--are all about. So Kodak says that the question of whether an aftermarket is a relevant antitrust market hinges on whether there are competitive constraints by virtue of competition in the foremarket. If there are, that's good. If not, then the markets are dissociated, and there may be an issue in the monopolized aftermarket. Here's my first chart (click on the image to enlarge):

As simple as it may seem, this chart visualizes something that is easily misunderstood. The notion of competition in the foremarket disciplining an actor in the aftermarket presupposes a feedback mechanism. There must be a price for the actor to pay in the foremarket if it raises prices (such as by driving out competitors in order to command higher service prices) in the aftermarket. That price may be paid as a result of reduced demand (TCO-savvy customers buying from competitors) or pressures on the pricing of the original equipment (as other vendors give them away below marginal cost as they look at lifecycle revenues that include the aftermarket). All that matters in the end is that there is such a feedback mechanism. In that case, some customers may still feel they are treated unfairly, but the damage (also called deadweight loss) is limited, and therefore not worthy of antitrust intervention.

So, whoever says that competition the foremarket disciplines decisions in the aftermarket implicitly means that installed-base opportunism in the aftermarket will be a boomerang that hits--and really hurts--the actor in the foremarket.

Here's a chart that shows Epic's proposed market definition--one foremarket, two aftermarkets (click on the image to enlarge):

In this chart and in a few others, the dotted line is labeled "singularity"--a key point in evolution--because I want to stress how important that point is: it's the transition from a competitive market to a world of monopolies. Once you're past that threshold, there may also be a second-degree aftermarket (here, IAP) or even nth-degree aftermarkets. But the critical point is where actions to the right don't have consequences to the left of the dotted line anymore. Thereafter, it's game over for competition.

Epic said that iOS does compete with Android, as Apple has meanwhile admitted, but it can abuse its App Store monopoly in really bad ways without losing market share in smartphone operating systems (or at least not to an extent that would discourage Apple).

Unfortunately, Judge Rogers misunderstood Epic and thought that Epic chose the smartphone OS rather than smartphone (device) market in order to describe iOS as a monpoly, i.e., that the antitrust theory begins with Apple not allowing other operating systems on the iPhone than iOS (click on the image to enlarge):

As a result of that misconception, she moved the singularity to the left.

She then rejected the foremarket. As iOS isn't sold or licensed separately, she said there could not be a market for something that isn't sold. The DOJ disagrees sharply, as do other amici. This plays a role in this case in a second way: Apple's in-app payment service is not offered outside the App Store (though other payment services, like Paypal or Stripe, obviously are).

I can't imagine that anyone reviewing that fundamentally flawed part of the judgment would not be inclined to reverse Judge YGR with respect to the foremarket. But Epic also needs to prevail on the aftermarket.

As I said further above, the focus must be on the singularity: the line between the foremarket and the first derivative aftermarket. So let's simplify the chart accordingly as things will get a bit more complex in a moment (click on the image to enlarge):

Building on the previous chart, let's now look at why this is a Kodak case, i.e., why Apple can get away with terrible actions in the aftermarket without paying a dissuasive price in the foremarket (click on the image) to enlarge):

First, on the left side of the above chart you can see that the foremarket is a duopoly (which I sometimes call "Goopple"). This is not like the photocopier market where you have dozens of vendors, and there are plenty of companies who could enter the market if they so elected. It's a network effects-driven market where even Microsoft's Windows Phone didn't stand a chance at some point as developers were writing their apps only for iOS and Android.

If Google wasn't only marginally more open than Apple ("fauxpen"), but decided to turn true openness into a competitive advantage, smartphone buyers as well as developers would really have a choice, and then the feedback mechanism might work after a while. But at this point--and presumably (unfortunately) for much longer--Google is going to continue to impose a similar app tax and restrictions on app developers as Apple.

At any rate, there is a substantial problem here with switching costs (the double arrow on the left side), which also go beyond the photocopier situation because photocopier customers will replace a device, but smartphone OS users mostly buy their next phone with the same OS.

On the right side of the above chart, a thick black line indicates that either mobile app store (Apple's App Store and Google's Play Store) are walled gardens. There is no meaningful level of substitutability. You may be able to buy a digital item or content on one platform and use or consume it on another, but the App Store doesn't sell Android apps and the Google Play Store doesn't offer iOS apps.

Epic told the Ninth Circuit that its Kodak case is stronger than Kodak itself, and I agree. But Apple obviously tries to muddy the water, and certainly succeeded in confusing the district judge. Also, the judge imposed hard requirements for the aftermarket that simply aren't indispensable under the law, and which Epic now has to convince the Ninth Circuit to consider legally erroneous. I'll discuss them all further below. One of the implicit requirements she wrongly established is that the aftermarket cannot be a two-sided market (like the Amex market).

But in the mobile app store context, the aftermarket simply is a two-sided market with app stores matching developers and users (click on the image to enlarge):

If we (re)focus on what the Supreme Court really cared about it in Kodak, the fact that the aftermarket is two-sided is not irreconcilable with a single-brand market definition. If anything, it even strengthens the case. As Judge Rogers heard when she quizzed Tim Cook, Apple's CEO doesn't even get reports on developer satisfaction. So Apple's abusive behavior vis-à-vis developers only affects end users (who in turn might buy Android smartphones) if developers reduce their commitment to developing iOS apps. with a billion-plus people (which are presumably part of the 1.2 billion richest people on the planet) using iOS, that's not an option for developers. That's why Apple gets away with its conduct, with ever more restrictions, with doing damage to nascent product categories like NFT apps, with ads on individual app pages (another way of taxing developers), and so forth.

The fact that the app distribution business is a two-sided market even further insulates Apple from a potential backlash in the foremarket.

Before we discuss the wrongly imposed requirements on Epic in the aftermarket context, let me show you just one more chart. Android as a whole is actually even a three-sided market as Google intermediates between device makers, developers, and end users (click on the image to enlarge):

Google makes direct dealings between developers and device makers unattractive by limiting the appeal of device makers' own app stores. But developers wouldn't make Android devices if there weren't all those Android apps made by third-party developers. (Oherwise Windows Phone would have succeeded.)

The European Commission's Google Android decision and the affirmance of its largest part by the EU General Court correctly analyzed all three sides of that market and the choices they had (no alternative to device makers in the licensable mobile OS market; end users are locked in; developers have no choice but to develop for Android).

Unreasonable explicit and implicit aftermarket requirements

The district judge took extreme positions on what Epic would have to prove with respect to the proposed aftermarket being dissociated from the foremarket because she saw some other cases in which other courts (no matter if out of circuit anyway) applied Kodak to particular fact patterns and discussed ways in which an antitrust plaintiff could prove foremarket-aftermarket dissociation--but didn't say (and especially the Supreme Court and the Ninth Circuit never said) that those were absolute requirements.

Explicit requirement of customers' total unawareness: While it's obvious that end users weren't even aware of the app tax until Fortnite was ejected from the App Store in the summer of 2020, the district judge essentially criticized Epic for not having shown that iOS users are unaware of the App Store being the exclusive way to download iOS apps. But as Epic rightly notes in its reply brief, "Kodak does not require that consumers lack all knowledge of an alleged aftermarket monopolist’s conduct, just that they lack sufficient knowledge to adequately assess the full consequences of their actions when making purchasing decisions in the foremarket."

Explicit requirement of policy change: Total unawareness is obviously the case when a company changes its aftermarket terms after a cohort of customers made their purchasing decisions. But that doesn't make it a minimum requirement. Even one of the cases referenced by the district court's judgment, the Third Circuit opinion in Avaya v. Telecom Labs et al., doesn't establish a hard requirement of a policy change having occurred:

"In evaluating the evidence in Harrison Aire, we cautioned that, although '[o]ne important consideration is whether a unilateral change in aftermarket policy exploits locked-in customers,' [...] “an ‘aftermarket policy change’ is not the sine qua non of a Kodak claim,” [...] Other factors to consider include [...]"

In fact, Judge YGR herself correctly focused on competition in the primary market being dissociated from conditions in the aftermarket when she denied in part a motion to dismiss in Ward v. Apple. I've read that entire decision, and in that case there were no misconceptions. Maybe some people would disagree with parts of it, but it was all perfectly logical and also very well-written (as opposed to the sloppy Epic v. Apple Rule 52 order with almost 300 typos, similar errors, and serious stylistic issues).

Implicit requirement of alleviating concerns over potential future cases involving other defendants: At the emergency-relief stage as well as in the Rule 52 order, Judge YGR faulted Epic for not explaining how a certain outcome of Epic v. Apple wouldn't also affect other walled gardens such as Sony's PlayStation. I've previously criticized the judge for that because this is too much of a good thing: yes, a sense of responsibility is an important trait in a judge; no, it's not a good idea to decide a case before a court based on facts and issues that are external to that case. It's utterly unreasonable to expect Epic--under the time constraints of its own case--to litigate hypothetical Epic v. Sony (with Sony being an Epic shareholder anyway) or Epic v. Microsoft (a company that is all for opening up app distribution and whose executives' testimony supported Epic) cases. The result was a wrong outcome in Epic v. Apple. The alternative would have been to decide Epic v. Apple without regard to those other cases, knowing that the likes of Sony and Microsoft could still defend themselves if they were sued by Epic or anybody else.

Concerns over spillover effects on other walled gardens could still have been raised at the appellate stage (where, again, Sony--as an Epic shareholder--is silent and Microsoft filed an amicus brief in support of Epic). It was always clear that the losing party would appeal.

Similarly, I believe it simply wasn't appropriate for the district court to rely on (partly misinterpreted) out-of-circuit precedent to argue that Kodak should be narrowed. Actually, today's digital markets come with network effects and switching costs that counsel in favor of identifying more--not fewer--single-brand markets. The Ninth Circuit found a single-brand market in Kodak, which the Supreme Court affirmed, and it then applied Kodak in Newcal.

Implicit requirement of aftermarket not being two-sided: As I already addressed further above, the two-sided nature of the mobile app distribution market doesn't make it ineligible for a Kodak aftermarket. The Supreme Court certainly didn't say anything like that in Amex--and while credit cards are used for the same transactions (for example, paying at a given restaurant), the Google Play Store doesn't offer iOS apps. Epic did recognize and address the two-sided nature of the App Store.

Unreasonably high hurdle for proving lock-in: Epic did present evidence that proves switching costs. Lock-in doesn't mean that no customer will switch: I remigrated from iOS to Android last year. The question is whether there's enough switching.

In this regard, the European Commission and the EU General Court took a pragmatic approach that makes a lot of sense. In Google Android, there was no question that users could theoretically change their default search engine, but the Commission and the EUGC focused on the fact that it doesn't happen sufficiently frequently to really make a difference.

Epic has pretty good chances of prevailing on market definition

I don't know the composition of the Ninth Circuit panel yet, but even if there were two or three "antitrust minimalists" on the panel, I believe Epic is more likely than not to prevail on market definition. I am 100% convinced--as an app developer and a smartphone user who has switched from Android to iOS and back--that Epic has a Kodak case. As a litigation watcher, I can see that Epic has very strong arguments for reversal. The district court got the law and some of the key facts wrong. It's telling that Apple even cites to a case decided by Justice Sotomayor back in 1997 when she was a district judge: Glob. Disc. Travel Servs., LLC v. Trans World Airlines, a case in which foremarket/aftermarket criteria played no role because there were alternative airlines selling tickets for certain routes (thus the proposed single-brand market definition in that case was just arbitrary; that case is closer to the ones in which U.S. courts rejected single-brand market definitions based on contracts, such as a claim brought by Domino's Pizza franchisees who complained after signing an agreement under which they had to buy all their ingredients from the defendant). Apple's brief mentioned Justice Sotomayor, but once the Ninth Circuit looks at the actual decision, it won't consider that citation relevant in the slightest.

If there's one part that I'm not totally sure whether it will work out in Epic's favor, that's the evidence of lock-in. There is a risk of the appeals court affirming the district judge's determination of a failure of proof. I'm not saying that it should. I's just the potentially weakest link of the chain. There's a risk of too much deference in that regard. What alleviates my concern is that virtually everyone knows what it's like to buy and use a smartphone. In a case involving products in a vertical market (like software for the administration of hospitals), an appeals court would find it harder to just overrule the district judge than when something as common and familiar as in Epic v. Apple is at stake.

Furthermore, the most impressive part of how the district judge handled the case was her deposition of Tim Cook, which made it so clear that any concessions Apple made (such as the 15% small business program) were not motivated by competition. That is, by the way, what I find so frustrating: Judge YGR actually had the situation all figured out in a certain way, but then didn't draw the necessary legal conclusions. She blamed Epic, its lawyers, and its experts for having overshot and for not having presented all of the evidence that might have been helpful. But she should nevertheless have ruled in Epic's favor, and the appeals court can easily overrule her now.

I would normally say Epic has an 80% chance of prevailing on the single-brand market definition (which would at minimum result in a remand), also because I believe the district court's judgment has so many flaws (even linguistic ones) that an appeals court can easily see there's something to be fixed there. But I do understand that courts are extra cautious about single-brand markets, and that's why my prediction is just that Epic is "more likely than not" to prevail on this one. If I had to give a number, I'd say 60%, but may adjust it once the panel is known.

Epic can win even under the "mobile gaming transactions" market definition, but I'm much less optimistic about its chances in that case, while I think Epic practically can't lose the case once the market has been defined correctly as a single-brand market.

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Saturday, September 24, 2022

Apple's imposition of its app tax on NFT sales is abusive but consistent: NFT startups must trade outside App Store or pay Apple's commission

Early on Friday, The Information published an article by Aidan Ryan on How Apple's App Store Politicies Squeeze NFT Startups. On Twitter, he summed it up as follows:

It's actually an understatement to say that Apple collects "up to 30% of the transaction": the app tax even exceeds 30% under certain circumstances, plus developers are increasingly forced to pay for Search Ads as Apple places ads even on individual app pages.

Jessica Lessin, The Information's founder, asks a spot-on question: "Are there whole segments of the new economy that aren[']t going through the App Store?"

The founder and CEO of Epic Games, Tim Sweeney, describes this as Apple "killing all NFT app businesses it can't tax, crushing another nascent technology that could rival its grotesquely overpriced in-app payment service."

I'm not going to take a position right here and now on web3 and blockchain business models. Let's leave that for another day. All that matters here is that as long as NFT businesses are legal, the companies pursuing those business models have the same rights as other app makers (such as yours truly) under the world's competition laws.

Apple's impact on wide swaths of the economy becomes clearer every day. In the summer, venture investor Alex Gurevich said Apple's App Tracking Transparency might deserve as much blame for a recession as inflation as all sorts of businesses now face much higher customer acquisition costs. On Tuesday, I criticized Apple's dictate of currency conversion rates because it contributes to eurozone inflation. Compared to those macroeconomic issues, the impact of Apple's App Store tax on NFT startups is of limited--but definitely non-negligible--relevance.

Also, Apple has done other really outrageous things, such as astroturfing (ACT | The App Association is mostly funded by Apple, but claims to represent small app developers). If the world's richest corporation managed to benefit from the U.S. government's Paycheck Protection Program at the start of the COVID-19 pandemic, it comes as no surprise that it also figured out a way to tax NFT startups.

Far be it from me to defend the app tax. Hopefully, the Biden Administration's appearance at next month's Epic Games v. Apple appellate hearing in San Francisco will make an impact and help to bring about change. Also, the European Commission will hopefully be able to defend all reasonable gatekeeper designations in court. But let's look at it rationally and accept as a fact (which will hopefully be history soon) that Apple levies its tax on digital goods. It's an arbitrary, discriminatory distinction: while Judge Yvonne Gonzalez Rogers had some serious misconceptions that will hopefully give rise to a reversal and remand, there are issues she figured out pretty well, one of which is that she told Tim Cook Apple was charging the gamers to subsidize Wells Fargo. You could even substitute Amazon for Wells Fargo.

If Apple didn't tax NFT sales, even if platforms are merely intermediaries, developers could circumvent the app tax. And while I totally agree with Mr. Sweeney that Apple must be stopped, it's simply true that plaintiffs like his company would otherwise be likely to hold this against Apple by pointing courts to an inconsistency that they could characterize as discrimination.

In a nutshell, Apple taxing NFT startups is a bad thing, but they're being consistently bad in this regard. There are enough inconsistencies in the App Store context already, such as what I heard Apple's counsel in a patent infringement case say last week about App Store security...

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Friday, September 23, 2022

Senator Mike Lee is the lone voice of antitrust reason: allowing cartels (through the Journalism Competition and Preservation Act) is the wrong way to tackle a market-failure problem

Here's a perfect example of conflicting goals. There are three alternative ways to look at the Journalism Competition Preservation Act (JCPA) that just passed a vote in the Senate Judiciary Committee with overwhelming support (15-7), but still has miles to go before it will become enacted by both houses of Congress. Each of those alternative takes on the current version of the bill aims at a laudable goal, and is espoused by a different one of my favorite three United States Senators:

  • Sen. Amy Klobuchar (D-Minn.), to whom the app developer community (of which I am a member) is indebted for her tireless efforts to combat app store abuse, says the bill will "save local journalism" by "allow[ing] news organizations to jointly negotiate fair terms for access to their content by Google, Facebook, and other dominant platforms."

    Her concerns over "dominant online platforms’ power over news organizations" are well-founded.

  • Sen. Ted Cruz (R-Tex.) celebrates his personal achievement: he secured "secured significant protections against Big Tech censorship with an amendment to the [JCPA]." That safeguard "not only protects the content of the journalists whose outlets may be negotiating with Big Tech but it critically protects the speech of journalists and smaller media outlets who don’t have a seat at the table." It is indeed "a major win for free speech and it strikes a blow against the virtual monopoly that Big Tech has to limit the information that Americans see online." This is the Section 230-centric perspective. For app developers and others interested in fair competition in technology markets, some Republicans' focus on free speech actually paves the way for legislative as well as judicial decisions that will have very positive effects and that the GOP's antitrust skeptics of yore would have been sure to fight tooth and nail.

  • But there is an undeniable structural issue here that anyone with a principled perspective on competition enforcement must be worried about: cartels are a serious antitrust violation, not an appropriate remedy. Senator Mike Lee (R-Utah) states it very well in a video (excerpts from his Senate speech) he embedded into the following tweet:

As Senator Lee reminds us, there are--except when you pass legislation like the JCPA in its current form--even criminal consequences for creating cartels. About a year ago, Qualcomm's Fabian Gonnell remarked at an automotive patent licensing conference that everyone involved in a joint licensing negotiation group (over standard-essential patent royalties) should go to jail. This blog has consistently opposed licensee negotiation groups for well over a year, and was referenced in Acer's patent infringement against Volkswagen in the Eastern District of Virginia.

That's why I find it disconcerting to read in Senator Klobuchar's press release that the JCPA in its current form would "[e]mpower eligible digital journalism providers—that is, news publishers with fewer than 1,500 exclusive full-time employees and non-network news broadcasters that engage in standard newsgathering practices—to form joint negotiation entities to collectively negotiate with a covered platform over the terms and conditions of the covered platform’s access to digital news content."

There is, of course, at least one fundamental difference between automotive licensing negotiation groups (LNGs) and what the current JCPA envisions: in the car industry, they want the big guys to form cartels, like Volkswagen, Toyota, or Ford. With the JCPA, there is at least a limitation to smaller publishers ("fewer than 1,500 exclusive full-time employees"). I've previously said that I might view a joint licensing effort by a few small IoT startups differently than a VW-Toyota-Ford cartel--but only because of the threshold (market share of 15%) that already exists under EU competition law.

To allow cartels in order to redress an alleged or actual market imbalance sets a terrible precedent. Two wrongs don't make a right--and the second wrong that you condone in order to deal with the first will haunt you in other fields.

Getting Google to pay for links is quite a challenge. After the EU's 2019 copyright reform bill, Google initially just stopped displaying snippets and linking to publishers unless they waived their rights--but they need the traffic that Google generates. The French antitrust authority then fined Google, and Google quietly gave up on its appeal.

There must be a better solution, but this is is not the place to discuss alternative approaches. Legalizing cartels is not the answer, as a matter of principle. One can have more sympathy for a small local newspaper than for Google--frankly, that's easy--but still warn against an ill-conceived approach that legalizes cartels. As does Senator Lee. Thankfully so.

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Thursday, September 22, 2022

Plot is thickening that Apple, Google, and possibly other gatekeepers will seek to derail, defang, or delay Digital Markets Act and Digital Services Act in court

Yesterday, Handelsblatt (Germany's leading financial newspaper) reported on something that Politico already covered on August 10: law firms are preparing what could be an avalanche of lawsuits challenging the European Union's Digital Markets Act (DMA) and Digital Services Act (DSA) in court.

Six weeks apart, the two media reports corroborate each other. A common element is that both articles quote Gerard de Graaf, who runs the EU's liaison office in San Francisco and told reporters that the European Commission sometimes faces 15, 20 or 25 lawyers when it meets the major digital gatekeepers that the new legislation is intended to keep in check.

Handelsblatt quotes an unnamed Big Tech lawyer--it is not 100% clear but sounds like the source is outside counsel to Apple or Google--as saying that "everything's ready to go, we just need board approval."

The designation of what platforms confer gatekeeper power upon their operators is going to be the first obvious opportunity for Big Tech to challenge the law. Companies can't sue over the mere fact that the law is passed. In some countries it would be possible to have courts review the constitutionality of new legislation (and I wouldn't rule out that some companies may challenge the DMA and DSA in the constitutional courts of key EU member states, or that they would challenge national implementation rules, which could be draconian in some places). At the EU level, companies can only challenge specific Commission decisions affecting them. The initial designation decisions will be critical. Andreas Schwab MEP, the European Parliament's rapporteur on the DMA, told this blog that map services should be treated like other search engines, and I agree, but Google presumably won't. That's just one example of a Commission decision that might be appealed.

The term ex ante regulation is often used to set the DMA's approach to gatekeepers apart from traditional antitrust enforcement. This should not be misunderstood as meaning that the new legislation would prevent gatekeepers from emerging in the first place. It's just about a streamlined process. Traditional antitrust law is slow, and the burden on enforcers weighs heavy. If it takes years to make and defend a decision against a certain form of abusive conduct, but the defendant can then modify its business model and implement a new approach within a matter of weeks or months, the whole process may have to start all over again, while market realities (such as competitors being driven out of a market) are created and may become irreversible.

Compared to its U.S. counterparts (FTC and DOJ-ATR), the European Commission's Directorate-General for Competition (DG COMP) already has two major advantages even prior to the DMA and DSA entering into force:

  • EU antitrust law tends to be stricter.

  • While the FTC and the DOJ have to sue an infringer and prove everything in court (almost) like a private plaintiff, European Commission decisions are like a first-instance decision and do get some degree of deference. The standard of review is more like whether the Commission followed proper procedures (due-process rights were particularly important in the Qualcomm case, and the Commission didn't appeal further, which I also felt wouldn't have been a good use of resources) and had a reasonable basis for reaching its findings of fact. One could have a lengthy debate over what standard of review in the U.S. would be comparable to that applied in an EU General Court review of a DG COMP ruling, but it's probably somewhere between the "arbitrary and capricious" and "substantial evidence" standards. And once the EUGC has spoken, there is no more opportunity to challenge factual findings--which is going to complicate a Google appeal of last week's Google Android judgment.

    One problem I see in the U.S. is that extremely complex, high-stakes antitrust cases are decided at the district court level by a single judge (with or without a jury). Those judges are extremely busy as they preside over a wide range of cases (even criminal cases)--so busy that, for example, there are almost 300 typos and similar errors in the Epic Games v. Apple judgment. They sometimes make mistakes that I believe would be much less likely to happen if big cases were put before panels of three judges, simply because six eyes see more than two. Again, Epic v. Apple serves as an example. It may be a bit of an outlier because that judge, despite understanding some of the issues (such as Appel not caring about developers and Apple's currency conversion dictate being too inflexible) very well, got other parts terribly wrong, even saying absurd things such as that Apple would have a different market share in smartphone operating systems than in smartphones, and unfairly accused Epic of wanting a free ride when the opposite is demonstrably true. In that case, it benefited an antitrust defendant, though I expect at least a partial reversal and remand. In other cases, it resulted in district court judgments holding defendants liable for something that wasn't go to withstand review.

The Commission is bracing for those court challenges, and we may all have to live with the delays they may cause. Of course, we all want the rule of law, and that's why we have to await and see what issues those lawsuits raise. The Commission is, of course, confident that despite its lawyers being outnumbered, they can win. And indeed, government lawyers are virtually always at a resource disadvantage when going after large enterprises. It's the same in the U.S., and nevertheless governments win very often.

For the avoidance of doubt, I want the DMA to open up certain markets such as iOS and Android app distribution as soon as possible. And when Apple's and Google's lawsuits over DMA-related decisions are finally filed and their legal theories become known, they may very well be meritless, which would raise the question of whether all they want to achieve is delay. But for now we don't know, and that's why we have to wait.

The Handelsblatt article I linked to at the start of this post also mentions that Apple and Google are scaling up their EU lobbying efforts, with Apple almost doubling its spend last year over the year before. Apple deservedly got bad press this week for its astroturfing in Washington and Brussels.

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