Monday, September 28, 2020

Epic Games struggling to persuade court of likelihood of winning its case against Apple: preliminary injunction over Fortnite not too likely

The Epic Games v. Apple preliminary injunction hearing took place this morning (Pacific Time) before Judge Yvonne Gonzalez Rogers in the Northern District of California. The first and longest part--during which the court discussed with counsel for both parties the likelihood of success on the merits--was particularly key. In fact, Cravath's Katherine Forrest, one of two attorneys who argued for Epic, acknowledged that an injunction would not issue in this case unless the court agrees with Epic on its likelihood of prevailing on the merits.

Judge Gonzalez Rogers, who asked counsel for both parties tough questions, appeared at least hesitant--if not very reluctant--to conclude at this early stage of proceeding that Epic was on the road to victory. That doesn't mean she thinks Epic is likely to lose. It's just that under the current circumstances the court would have to reach a conclusion based on a limited amount of briefing. What's in the record now is almost nothing compared to what will be available at trial time (i.e., in July 2021).

Toward the end of the hearing, Judge Gonzalez Rogers strongly recommended putting the factual questions here (and she categorized market definition as a question of fact as well) before a jury, given that appeals courts--in her observation--don't afford district court judges much deference for their factual determinations. She mentioned that sometimes district judges write hundreds and hundreds of pages, but the appeals court just does what it wants. That may have been an allusion to what happened in FTC v. Qualcomm, where a three-judge panel overruled the district court on everything, though there is a possibility of a rehearing en banc leading to a more nuanced ruling. But that's another case. For Epic Games v. Apple, it means the judge would really prefer not to have to decide any factual dispute if it can possibly be avoided--which isn't great news for Epic.

At the PI stage, Epic focuses on a monopoly abuse argument and a tying theory. Judge Gonzalez Rogers started the "tying" part (with Epic arguing that the App Store and in-app payments are separate products and Apple allegedly "ties" IAP to the App Store) by saying she was "not particularly persuaded" with that one--and she also sounded unconvinced of monopoly abuse. Obviously, one cannot know for sure what she will decide after giving this more thought, but if what she said today is any indication, Epic is unlikely to obtain a preliminary injunction with respect to Fortnite, with the realistic best case for Epic being that the court would convert last month's temporary restraining order (TRO) over Unreal Engine (but not the Fortnite game) into a preliminary injunction.

Just like I wrote after reading Epic's reply brief, it's now most likely that the court won't obligate Apple to tolerate an undisputed breach of Apple's App Store terms by Epic and that Epic will keep the iOS version of Fortnite out of the App Store for a few more months and appeal this to the Ninth Circuit. If the appeals court affirms a hypothetical denial of a PI over Fortnite, I don't think it will take long before Epic puts the iOS version of Fortnite back.

The likelihood of success on the merits is just one of the four PI factors, but as Judge Gonzalez Rogers noted, there wasn't "all that much new [in the PI briefing] with respect to the remaining elements." The judge noted that there was "a calculated decision here" and "self-help" in terms of Epic having known full well that Apple would remove Fortnite from the App Store after a "hotfix" that activated a payment system in contravention of the App Store terms.

The possibility of an escrow account (where, for instance, Epic could put the 30% cut it contractually owes Apple) was discussed. It's hard to see that this would solve any particular problem for either party.

The judge is aware of the fact that some other companies besides Epic also complain about Apple's App Store terms. Interestingly, Judge Gonzalez Rogers was wondering whether Epic was the best plaintiff to bring this challenge, given that iOS is just one of several platforms for games, while there may be other types of apps that are more dependent on access to Apple's customer base. What must have made that remark particularly discouraging for Epic is that it suggests the court isn't--at least for now--inclined to agree with Epic on market definition (treating the iOS app distribution market as the relevant market for antitrust purposes, as opposed to a wider games distribution market).

A written order will come down soon, but probably not as fast as last time, when it just took a few hours. The least likely outcome is that Fortnite will be "free" to bypass Apple's in-app payment system, but one thing Epic cannot complain about is the amount of time the court gave its lawyers today.

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