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.

Share with other professionals via LinkedIn: