Saturday, October 10, 2020

Judge converts Epic Games v. Apple TRO into preliminary injunction, says Epic lost credibility with court, and disagrees with Microsoft on Xbox

A few hours after I wrote that this Friday (October 9) and Monday (October 12) were the days on which the United States District Court for the Northern District of California was particularly likely to rule on Epic Games' motion for a preliminary injunction (PI) against Apple, and consistent with what I had told a major newspaper after Epic's temporary restraining order (TRO; blog post), Judge Yvonne Gonzalez Rogers has effectively converted the TRO into a PI (this post continues below the document):

20-10-09 Order on Epic Game... by Florian Mueller

The outcome is the same as at the TRO stage in terms of Epic not being allowed to bypass Apple's in-app payment rules with Fortnite, Apple not being allowed to terminate the developer account for Unreal Engine that formally belongs to an Epic entity in Switzerland, and the court once again declines to hold that one party or the other is likely to prevail on the merits. My report on the PI hearing already stated in its headline that Epic was struggling to persuade the court of its likelihood to win.

While the TRO was a pre-PI decision, the PI is preliminary to a hypothetical permanent injunction that may or may not come down after the bench trial to be held in Oakland in May 2021. Whoever loses will likely appeal, and then it's another question whether a permanent injunction coming down at that point will or will not continue to be enforced.

Judge Gonzalez Rogers acknowledges arguments made by either party with respect to the merits, but the issues are too complex and important to be pre-decided at this point. In particular, the judge notes the highly factual nature of market definition. Here, there are even two market definition disputes (while most antitrust cases involve just one): the question of whether the iOS app distribution market (better for Epic) or the wider games distribution market (better for Apple) must be looked at, and with respect to Epic's "tying" claim the question of whether in-app payments can be separated from the app distribution market. Judge Gonzalez Rogers is not prepared to decide on market definition, even on a preliminary basis, at this early stage--and she also notes that Epic focuses on harm to competitors so far, while any bottom-line impact on consumers under the rule of reason (where Apple could prevail by showing that what it does is ultimately good for consumers) would also need to be considered. Ultimately, the antitrust laws are meant to benefit consumers.

The PI order gives both parties some guidance as to where they bear the burden of proof and on what aspects of the case they must do more going forward. For instance, Apple will later have to convince the court that what its app distribution terms are designed to achieve cannot be achieved with softer rules. Only Epic, however, is told that "adamant[ly]" taking unreasonable, "baffling" positions has already made it lose some of its credibility with Judge Gonzalez Rogers. Footnote 7 says:

"Epic Games disputes that its use of the hotfix was deceptive where it is common practice in the gaming and software industry. The deceptive conduct does not derive from Epic Games’ use of the hotfix specifically, but from using a hotfix to clandestinely add features in violation of the guidelines and its agreements with Apple, and then failing to disclose such code. Moreover, Epic Games did this despite receiving an unambiguous refusal from Apple only a few weeks prior to the introduction of its hotfix. The record further reflects that while hotfixes are commonly used in the industry, their uses are generally to fix or patch critical bugs or defects—not to enact substantive and significant new features. Epic Games’ adamant refusal to understand this basic distinction is not only baffling, but undermines its credibility with this Court." (emphasis added)

Regardless of the party to be reproached (here, Epic, but in other contexts it would also apply to Apple), I think courts should do this more often and tell parties very clearly when their lawyers persistently engage in framing to the extent that it is an insult to human intelligence. It happens in all sorts of contexts all the time. As a litigation watcher, I find it annoying, and I think it must be even worse for judges.

Microsoft is not formally a party here, though it practically intervened (through sworn declarations) as an Epic supporter. Given all the attention that Microsoft's public statement on app distribution terms (blog post) got this week, it's interesting to see that this judge--at least for now--disagrees with Microsoft's view that video game consoles like the Xbox can still have the kind of business model that Epic and Microsoft believe Apple and Google should not have:

"First, Epic Games avers that the iOS market is distinct from other video game platforms because Sony, Nintendo, and Microsoft do not make much profit, if any, on the sale of the hardware or console—unlike Apple, which allegedly makes significant profits from the sale of each iPhone. This distinction is without legal precedent under section 2 of the Sherman Act. Indeed, Sony, Nintendo and Microsoft all operate similar walled gardens or closed platform models as Apple, whereby the hardware, operating system, digital marketplace, and IAPs are all exclusive to the platform owner. As such, a final decision should be better informed regarding the impact of the walled garden model given the potential for significant and serious ramifications for Sony, Nintendo and Microsoft and their video game platforms."(emphases added)

The Windows and Xbox company tried to distinguish the Xbox from the iPhone making the very same distinction that a judge has now, in diplomatic terms, held to make no sense whatsoever. So far, Microsoft appears to have hoped it could have its cake and eat it: keep imposing similar terms as Apple and Google on XBox game makers while forcing Apple and Google to give Microsoft and others more favorable terms. Microsoft would be well advised to make up its mind on the appropriate Xbox game distribution terms sooner rather than later.

It's worth noting that the order makes reference to the COVID-19 pandemic in a couple of contexts:

  • "these continued difficult times that is the COVID-19 pandemic era, where gaming and virtual worlds are both social and safe" (by launching a game very soon, I'm going to make a contribution in this regard, too)

  • "the continued ongoing pandemic has demonstrated the imperative for substantial digital and virtual innovation"

Epic can now appeal the denial of the Fortnite-related main part of its motion to the Ninth Circuit, while Apple can appeal the consolation prize Epic got with respect to Unreal Engine.

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