Monday, November 14, 2022

Apple on losing track against Epic Games: reversal of market definition and remand for further consideration most likely outcome of Ninth Circuit antitrust appeal

Today is "November Fortnite." The United States Court of Appeals for the Ninth Circuit just held its Epic Games v. Apple appellate hearing. It was incredible. Historic. Awesome.

If what the judge who was talking most of the time--Circuit Judge Milan D. Smith Jr.--said throughout the course of the hearing is any indication for what the per curiam opinion will say, the decision will be materially consistent with what I've been writing about this appeal all year long. Yes, I feel vindicated because even if the decision surprisingly deviated from how the hearing went, what Judge Smith just said shows that those were positions one reasonably can take.

The most senior judge on the panel, former Chief Judge Sidney R. Thomas, was mostly listening--like Justice Thomas until Justice Scalia's passing. But if he had fundamentally disagreed with Judge Smith, most likely he'd have made it clear. District Judge Michael McShane (Oregon) said more than Circuit Judge Thomas, but very little compared to Circuit Judge Smith. A couple of things that he said sounded a bit more deferential to Judge Yvonne Gonzalez Rogers, but that's a pattern I've seen in other cases, too: district judges sitting on an appeals court by designation are rather sympathetic to their peers. That typically doesn't affect the outcome. So my operating assumption is that Circuit Judge Smith will write the per curiam and it will most likely be a unanimous decision.

In theory, I could just refer you to my previous writings, such as this post which summed up the reasons for which I believed Epic was likely to win and links to my related writings, particularly the ones on the merits of the case. And--what's very important--my writings did not echo Epic's briefs. There are some notable differences.

Market definition

Epic's counsel, Tom Goldstein, stated his client's preference for the appeals court to resolve the matter on the basis of the rule of reason, without a remand. That's why even though Epic believes it is right on market definition, it would actually like the Ninth Circuit not even to resolve that question--or at least not to focus on it. Epic would like to take a shortcut--or, if one wants to disagree with Epic, one could criticize their proposal for shortcircuiting the whole analysis--to the rule of reason, where the focus is on whether Apple's procompetitive justifications (privacy and security) are in fact procompetitive justifications or, in other words, pretexts.

Circuit Judge Smith has a more systematic approach (as do I) and stressed that antitrust analysis begins with market definition, and everything depends on it. And just like me, he feels that if the appeals court reverses Judge Yvonne Gonzalez Rogers on that part, there should be a remand, though it appears that the Ninth Circuit is perfectly prepared to do more than the bare minimum and to provide further clarity and instructions. I, frankly, think Epic should be grateful for that. It's nothing to be taken for granted; quite often, appellate judges are minimalists and just kick the ball back into the lower court. I understand why Epic's counsel said that in this event, things would just take longer and they'd be meeting again in the same appeals court in two years from now. They don't want it; they want a solution as quickly as possible, and maybe they're uneasy about what the Supreme Court might do in the next step. But it would be incredibly beneficial if the appeals court resolved market definition, especially if one looks beyond just Epic's case: there are so many App Store issues.

Any plaintiff-appellant would prefer direct entry of liability over a remand. Epic is no different. But this is a complex case and various factual findings--as Apple's counsel, Weil's Mark Perry stressed (though he may have overstated it in part)--were against Epic, and Epic is not appealing any factual findings here as clearly erroneous. It's purely an appeal of legal determinations.

When Circuit Judge Smith asked asked Mr. Perry about how key market definition is, he also said so as he'd otherwise have had to contradict Apple's position that the rejection of Epic's market definition by the district judge is an independent reason for which Epic would lose the case.

Rule of reason

Regarding rule-of-reason balancing (the final part to which Epic would just like to skip), Circuit Judge Smith asked the DOJ--which supported Epic--just the right question: "When the district court makes factual findings, what does it say? It feels this way? Or [...] numbers?"

The problem with the district court's rule-of-reason analysis is that it doesn't really balance the anticompetitive effects of Apple's App Store monopoly against the attempted procompetitive justifications.

Circuit Judge Smith asked how the court of appeal could analyze a rule-of-reason decision without any quantitative amounts. In my opinion, this also counsels for a remand.

There are only two outcomes I cannot imagine based on how the hearing went: wholesale affirmance--and direct entry of liability.

In the rule-of-reason context, a key question is whether Apple's privacy and security arguments are indeed procompetitive justification in the first place. This was the context in which I felt Mr. Perry's made his weakest arguments, and Mr. Goldstein (also in his rebuttal) very effectively countered Apple's argument by saying that they can still offer a walled garden to consumers, but don't get to restrict competition from (for instance) an iOS version of the Epic Games Store. Apple can always tell consumers to use only Apple's App Store and only Apple's in-app purchasing system (the latter, of course, wouldn only apply to digital transactions, not when they buy physical goods from the likes of Amazon). But then it has to compete with--an example Mr. Goldstein mentioned repeatedly--a hypothetical Disney app store, the Epic Games Store, and others. He didn't mention Microsoft's plans for a competing app store, though he could have. Mr. Goldstein said: "you don't get to squash competition ... in order to differentiate your product." At the outset, Mr. Goldstein had already described as "the most significant" issue in this case that Apple cannot legitimately and procompetitively create a walled garden.

What Apple said about the differences between iOS and Android didn't convince me at all. Epic wouldn't be suing Google if Android gave developers all that they want (as Apple claimed). It's not like Android is a cesspool of malware and fraudulent apps and iOS is totally safe. It's not like only Apple does manual reviews: last time the headcounts were discussed in public, Google employed about four times as many app reviewers as Apple did. And while there are different Android app stores, there are reaons for which only the Google Play Store really matters.

Section 1 or 2 applicability

Epic would like the case to be decided under Sherman Act Section 1 (concerted action) as opposed to Section 2 (unilateral conduct) and made this one of its two key points at the beginning (the other was rule-of-reason balancing). Tellingly, Circuit Judge Smith instead wanted to discuss market definition first. Anyway, it seems that Epic's Section 1 argument may succeed, but there were also some skeptical questions and statements. I've said on previous occasions that I wouldn't mind if Epic prevailed on that one, but I view those unilaterally-imposed contracts of adhesion as unilateral conduct, though I recognize that Section 1 is also applied to tying.

California UCL (anti-anti-steering)

It seems to me that the appeals court isn't too interested in the California Unfair Competition Law part, but with the State of California participating in the hearing only for that part, the court inevitably had to spend some time on this, too. While I largely agree with Apple on that one, Mr. Perry said something that really makes zero sense to me. He said that the only anti-steering restriction that remains (after Apple allowed developers to communicate with users outside the app, such as by sending them emails about alternative options to purchase content) is that "Apple does not allow links and buttons because [Apple] cannot review them, track them, and protect users from malware, fraud, porn, hackers. It would be a breach in the wall that bad actors could exploit." The highlighted part makes no technical sense as long as there is an App Store monopoly, including that sideloading isn't possible. There is no way that iPhone users would end up installing malware or that hackers would take control of the iPhone unless there's a massive security issue that any website (regardless of whether people get there from inside an app or just with Apple's Safari browser) could exploit--and there's never been a security problem that allowed websites to practically enable sideloading.

It will take the appeals court some time to decide this huge case. Apple will most likely lose this appeal. If the Ninth Circuit reverses--as it rightly appears inclined to do--on market definition and--which would be really generous and beyond the call of duty, but appears to be the plan--resolves additional questions and provides valuable instructions, the first question is whether Apple will try an interlocutory appeal to the Supreme Court or content itself with an en banc petition. Anyway, just like Circuit Judge Smith, I believe this case should be remanded. Whoever loses on remand will appeal to the Ninth Circuit. And ultimately this case will presumably end up in the Supreme Court.

Words cannot express how much I'm looking forward to the Ninth Circuit opinion. I believe it will be worth the wait.