Saturday, September 5, 2020

Fortnite usage on iOS has declined by over 60% since removal from App Store, Epic Games says in motion for preliminary injunction against Apple

Early last week, Epic Games lost the first round of its #FreeFortnite battle against Apple when Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California denied the Fortnite maker's motion for a temporary restraining order (TRO) with respect to the company's flagship game. But Epic won a consolation prize: the court held, on a highly preliminary basis (TROs are only in effect for a couple of weeks and then go away unless replaced by a preliminary injunction), that Apple's termination of an Epic developer account needed to improve and maintain the Unreal Engine was an overreaching form of retaliation and, therefore, not allowed in the short term.

The outcome was consistent not only with the inclination Judge Gonzalez Rogers indicated throughout the TRO hearing, but also with Epic's reply brief shortly before the hearing, which prioritized Unreal Engine over Fortnite.

The preliminary injunction hearing on the same two issues--can Epic force Apple to tolerate a version of Fortnite that bypasses its in-app purchasing (IAP) system in contravention of App Store business terms, and can Apple terminate all of Epic's accounts for distrusting the company after what happened--will take place on September 28. The briefing process kicked off Friday night Pacific Time with Epic filing its motion for a preliminary injunction (this post continues below the document):

61 Epic Motion for PI Again... by Florian Mueller

In a tweet, Epic's PR department announced the motion and described it as a "necessary step to free consumers and developers from Apple's costly, anti-competitive control [over its App Store]" (this post continues below the tweet):

From time to time, this blog provides in-depth analysis and goes into more detail than most--and sometimes all--of the other coverage of the same issues. Yesterday I discussed Google's argument against "relating" Epic's cases over Android and the Play Store on the one hand and iOS and the App Store on the other hand, and this blog's most popular post so far on the Epic v. Apple and Google crusade provided an overview of the similitaries and differences between the two complaints.

But at this particular juncture the greatest favor I can do everyone is to distill just a few key aspects of Epic's motion into a relatively short post, and to point you to just a few of the dozens of documents attached to the motion. Like an executive summary.

In commercial terms, the following passages are interesting:

  • "Daily active users on iOS have declined by over 60% since Fortnite's removal from the App Store."

  • "63% of Fortnite users on iOS access Fortnite only on iOS."

  • "Over 116 million registered users have accessed Fortnite through iOS—more than any other platform. [...] They have spent more than 2.86 billion hours in the app."

With a view to the prelimininary injunction standard, Epic's motion argues that the court should not force Epic to comply with terms the game maker describes as anticompetitive and, therefore, illegal, given that Apple could always get its 30% App Store cut later. The problem I (still) see here is that Epic's claim of irreparable harm is spuriously asymmetrical: the fact of the matter is that this works both ways. If Epic prevailed, it could also seek damages from Apple. It elected not to do so in its currently operative complaint, but that's just Epic's choice. Preliminary injunctions are not really for cases in which the problem can easily be solved later by means of a payment. Irreparable harm is something else, and in a way, Apple has a bit more of an irreparable harm argument when saying (as they did in the TRO context and probably will again) that other developers might do the same as Epic. The problem there would be that other developers might not be as deep-pocketed as Epic, and then Apple might actually face problems with recovering any damages.

The scope of the requested injunctive relief (I've uploaded the proposed order to Scribd) is consistent with what Epic sought before. Ssome of the terms may be deemed overbroad (such as enjoining Apple from terminating accounts on any "pretextual" basis, given that even the TRO Epic secured exclusively referred to whatever Apple might do on the basis of Epic's non-compliance with the App Store terms) by the court.

Microsoft keeps supporting Epic. Kevin Gammill, Microsoft's General Manager of Gaming Developer Experiences signed a second declaration (which I've uploaded to Scribd) in further support of Epic's push for injunctive relief against Apple. His first declaration was attached to Epic's motion for a TRO. It's possible that Epic's TRO motion would have failed in its entiretly if not for the psychological impact of Microsoft's first statement.

Antitrust cases are arguably the most complex and fact-intensive type of commercial litigation. That's a real problem when someone like Epic--in its push for being allowed to offer an alternative IAP method in Fortnite--wants a court to make some fast-track decisions such as a PI. The hurdle is now higher than for the TRO. The very short term during which a TRO is in force makes it more of an irreparable-harm argument. But even if this case really went to trial in less than a year (that's the current plan), that would be relatively long period. Therefore, the likelihood of a party prevailing on the merits plays a greater role now than it did last week.

Judge Gonzalez Rogers already said at the TRO hearing that this was not going to be a "slam dunk" for either Epic or Apple--and the case wouldn't be won or lost at the TRO or PI stages. That, of course, didn't dissuade Epic from making such an attempt anyway. "Apple is a monopoly" is the first sentence of the motion. But that's easier said than proved.

There are two key aspects of Epic's "quick win" strategy that I'd like to highlight. First, Epic's lawyers set a clear priority at this stage. They believe there's one antitrust theory (of several that Epic's complaint outlines) that the court can resolve even without any need for discovery: tying. Epic accuses Apple of tying its IAP system (which retains the 30% cut) to the App Store (and in parallel litigation they say Google is tying its IAP system to the Android Play Store). As for the legal standard for tying, Epic refers to the Ninth Circuit's 2008 Cascade Health Sols. v. PeaceHealth decision:

"For a tying claim to suffer per se condemnation, a plaintiff must prove: (1) that the defendant tied together the sale of two distinct products or services; (2) that the defendant possesses enough economic power in the tying product market to coerce its customers into purchasing the tied product; and (3) that the tying arrangement affects a not insubstantial volume of commerce in the tied product market."

The second key aspect of Epic's efforts to convince the court within a few weeks of something that most of the time takes years to sort out is that they attached a "declaration" (which actually reads more like an economic expert report, except that the author talks about what he believes he is likely to find as opposed to simply telling the truth, which is that he's made up his mind already) by Dr. David S. Evans, who runs an economic consulting firm named Global Economist Group out of Boston and is also the Co-Executive Director of the Jevons Institute for Competition Law and Economics at University College London (this post continues below the document):

62 David S. Evans Declaration by Florian Mueller

Dr. Evans is not new to the subject, and it's not like he's just beginning to form an opinion. Epic's motion cites to the award-winning book Matchmakers: The New Economics of Multisided Platforms, which he co-authored with MIT Sloan Professor Richard Schmalensee, and which (according to a footnote of Epic's motion) says, among other things, that Apple "invested great effort in stoking the supply of third-party apps, touting how many they had, and making it easy for users to get them", leading to "explosive growth."

The deadline for Apple's response is Tuesday, September 15. Three days later, Epic may reply, and another ten days later the hearing will take place.

I may have to update my assessment after those additional filings. For now I still believe Epic can't prevail at the preliminary injunction stage with respect to Fortnite. In that case, Epic will either put it back right away (by complying with Apple's terms), or maybe appeal that denial to the Ninth Circuit, where things would probably take a couple of months. As for Unreal Engine, it's going to be an uphill battle for Apple to make the judge change mind. A mixed ruling is most likely, and relatively speaking it's easier to imagine that both parts of Epic's motion would fail than that both would succeed.

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