Saturday, October 15, 2022

Epic Games has a strong tying theory against Apple, but a remand is more likely than direct entry of liability by the Ninth Circuit

There are constantly new developments around Apple's antitrust woes, such as in the Apple Pay and access-to-NFC-chip class action in the Northern District of California (see the previous post, Credit card issuers oppose Apple's motion to stay discovery in Apple Pay antitrust case, cite recent decision by same federal judge in AliveCor v. Apple). Still I've finally also found the time to analyze in more detail the tying argument. I've re-read the related sections of the district court's opinion and the appellate briefs), and can share my observations six days prior to the Friday (October 21) hearing in San Francisco (see We now know the three judges who will decide Epic Games' appeal against Apple--and the composition of the Ninth Circuit panel, two of whose members ruled against the NCAA, likely favors Epic).

I remember from the TRO/PI stage (more than two years ago) how Epic's counsel--Cravath Swaine & Moore's Gary Bornstein--told Judge Yvonne Gonzalez Rogers that tying was best-suited to a quick decision by the court just based on the parties' pleadings. Epic's emergency-relief strategy was very much about being right on the merits (and being allowed to put back Fortnite on the App Store for that reason). Judge YGR, however, didn't want to take a position on the merits at that stage, so she said the case was not a slam dunk for either Epic or Apple--and even though she understood some issue very well at a later stage (during the spring 2021 trial, especially when she examined Tim Cook), she got other aspects of the case terribly wrong.

The (only) basis on which Judge YGR threw out Epic's tying claim in her final judgment was that IAP (Apple's in-app payment system) could--in her opinion--not be separated from the App Store as a whole. She didn't want to "create artificially two products" out of a single platform. And you can't anticompetitively tie together what is already inseparable.

On appeal Epic now argues (with broadbased and awe-inspiring amicus brief support) that this part is reversible error. Ideally, Epic would like the appeals court to then conclude that Apple is engaging in per se tying, meaning that its conduct is illegal and no rule-of-reason balancing is needed. There are two more criteria to satisfy for a finding of per se tying, which Epic claims to have proved already: "Apple has enough economic power to coerce developers into using the tied product, since it can (and does) deny developers access to iOS users if they do not use IAP. [...] And Apple’s tie affects billions of dollars of commerce."

Epic's fallback position is then that even if the rule of reason applied, "the analysis tracks Epic’s Section 1 claim challenging Apple’s prohibition against competing in-app payment solutions, and thus the result is the same."

In multiple previous posts on this appeal, I've expressed the view that a partial reversal and remand (hopefully with clear instructions) is much more likely than direct entry of liability. As an app developer, I want Epic to win, and I wholeheartedly believe that Epic should win, but as a commentator on such cases, I want my predictions to be realistic.

Microsoft's amicus brief in support of Epic's appeal is interesting for at least two reasons. One is that Microsoft itself faced a tying claim in one of the most famous U.S. antitrust cases, which is precedent that both parties are citing now in Epic v. Apple. The other is that Microsoft points to the holding in its own case according to which the rule of reason should normally apply to complex tying cases in the fast-paced technology industry to avoid the innovation-chilling effect of "preventing firms from integrating into their products new functionality."

The simplistic perspective here is that if it looks like a duck, swims like a duck, and quacks like a duck, it probably is a duck. Apple forces app developers to use its overpriced IAP if they want to distribute iOS apps. The fact that developers can also make free apps (with or without ads, though Apple deliberately kneecapped everyone else's ad business on iOS) or sell physical goods (no IAP tie then) changes nothing about the fact that some developers are subjected to the tie. This is about tying, not a bundle: a bundle is not a bundle if you can get something separately; a tie may still be a tie if it affects you under certain circumstances.

Apple's strategy is to make things look more complex than they are:

  • While Epic's and its amici make the clear and simple argument that Judge YGR made the mistake of taking a functional approach (IAP being integrated into the App Store), Apple's primary anti-tying argument is that IAP is not just a payment system but does more. Epic says that doesn't matter: all that matters is that app developers would rather have the choice of using alternative IAP systems--and not just to pay more competitive fees, but also for other reasons such as direct handling of refunds or cross-platform features that Apple wouldn't allow, without Apple injecting itself into those app maker-user relationships.

    A point that--as far as I can see--didn't come up in that case, but which I've experienced as an app developer, is that Apple imposes some restrictions on marketing. For instance, there are promotions they do not allow such as voucher codes except for the limited quantity of such codes that Apple is prepared to generate (it's basically just good enough for testing). That is yet another reason for which app developers would rather enjoy greater freedom.

  • In response to Apple's focus on integration, which is a functional argument, Epic and its amici rightly note that the focus must be on whether there is separate demand. If there is separate demand, then two parts of something that a defendant has chosen to offer only as an integrated package can still be separate for the purposes of the tying analysis.

  • Like Judge YGR, Apple says IAP is also a means of getting compensated for its IP (Apple: "IAP provides Apple an efficient means to collect its lawful commission for the use of its intellectual property"). About a year ago I already wrote that Apple would definitely not get a 30% rate (or even more in some places such as South Korea)--if anything--through IP enforcement. In any event, Apple being compensated is not relevant here. Also, wherever lawmakers or regulators require Apple to allow alternative payment systems, Apple collects its commission, too--maybe less efficiently, but it can be done.

  • Apple aso argues that "IAP provides a suite of user-friendly services in the form of a centralized payment solution." Actually, Epic wouldn't have a problem with also offering Apple's IAP as a payment option to users, though at Apple's current commission rate, other payment options would then be much cheaper and most users would presumably bypass Apple's IAP for that reason alone.

  • Epic and its amici have a strong point that procompetitive justifications simply cannot influence the initial analysis of whether there is a tie. And Apple's justifications are noncompetitive, such as its "security" pretext. But even if they were procompetitive, they'd have to be analyzed under the rule of reason, if that step is reached at all.

Microsoft's brief also mentions that regulators in other jurisdictions have found that Apple engages in tying, based on the same facts: the United Kingdom's Competition & Markets Authority (CMA) and the Netherlands' Autoriteit Consument & Markt (Authority for Consumers & Markets, ACM). I have no doubt we will learn about similar findings by the European Commission in the not too distant future.

I've given this quite some thought, and the warning from that old Microsoft case that companies could be prevented from adding features to their products definitely must be heeded. But Apple didn't merely add a feature. It imposed a requirement that it vigorously enforces--in fact, in my experience as an app maker, IAP offerings get far more attention from Apple than anything else. I had an app on the app store to which we did various feature updates, and they were approved quickly (so fast sometimes that there couldn't possibly have been a manual review), but the smallest change we made to anything IAP-related resulted in slower response times and often drew questions from Apple's app reviewers.

There's just one more passage from Epic's filings I'd like to comment on. In differentiating its own case from Rick-Mik (a 2008 Ninth Circuit decision), Epic wrote that "the relevant tying market in Rick-Mik was 'gasoline franchises,' and this Court recognized that franchises consist 'almost by definition' of ''bundled' and related products and services' particular to that form of business relationship. [...] There is no franchise here." (emphasis added)

I thought to myself that actually Apple treats developers even worse (and imposes more painful restrictions) than franchisors typically treat their franchisees, and its approach to developers is (as I wrote in a Korea Times opinion piece last year) the modern-day variant of medieval European feudalism or similar systems in 18th- and 19th-century Russia.

The difference is that someone who wants to open a gas station in a town can choose between different franchises or set up an independent one. Whatever one chooses, one can then reach all customers. But unless developers accept Apple's terms, they cannot reach a billion users (with far greater purchasing power on average than Android users).

We need the Ninth Circuit's help.