Court throws out tort-based part of Apple's counterclaims against Epic Games

Epic Games just reduced the potential risk it incurs from its antitrust dispute with Apple over its App Store business terms: Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California granted an Epic motion for judgment on the pleadings on some of Apple's counterclaims. As a result, Apple's counterclaims (unless an appeals court revives the ones the judge just threw out) are limited to breach of contract, which Epic already acknowledged in October it would be liable for should it lose its antitrust case against Apple. Punitive damages, which Apple was seeking, are not available on this basis, so they won't have to be discussed at next year's trial.

The court viewed the tort-based ones of Apple's counterclaims skeptically from the beginning. Nevertheless, Apple defended them, presumably in an effort to preserve them for an appeal.

What Judge Gonzalez Rogers told Apple today was that the iPhone maker had not shown any independently wrongful act on Epic's part beyond a breach of contract. Apple had stressed that "independently wrongful" doesn't mean it's an independent act, but that it would be wrongful even if it happened without a contractual framework being present. And in this regard, Apple pointed out that Epic's generation of in-app purchasing revenue on iOS continues even though the related contract was terminated in the summer. But that didn't persuade the judge. At the end of the Zoom hearing (Tuesday afternoon by Pacific Time) she announced her decision to grant the motion.

This decision is unrelated to the heart of the dispute, which is that Epic disputes the legality and enforceability of Apple's App Store terms under the antitrust laws. Judge Gonzalez Rogers said in August that the case could go either way, and the order on Epic's motion for judgment on the pleadings doesn't increase the likelihood of any particular outcome on the core issues in the case.

[Update]

A couple of hours after the hearing, Apple provided the following public statement:

"We respectfully disagree with the Court’s decision and believe Epic's conduct should be actionable under California tort law. It is clear, however, that Epic breached its contract with Apple. For twelve years, the App Store has helped developers turn their brightest ideas into apps that change the world. Our priorities have always been to provide customers with a safe and trusted place to download software and to apply the rules equally to all developers. In ways the Court described as deceptive and clandestine, Epic enabled a feature in its app which was not reviewed or approved by Apple, and they did so with the express intent of violating the App Store guidelines that apply equally to every developer who sells digital goods and services. Their reckless behavior made pawns of customers, and we look forward to making it right for them in court next May.

"Apple also thanks the Court for providing next generation attorneys the opportunity to argue a motion. We fully support this important policy that gives newer lawyers and those from underrepresented groups meaningful experience in court."

The young attorneys who delivered oral argument were Cravath's John I. Karin and Gibson Dunn's Anna Casey. Given the court's preconceived notion on this subject, I don't think oral argument made a difference. What was very clever on Mr. Karin's part was that at some point he preferred not to add anything to the court's preliminary opinion, which was already favorable to his client's position. So instead of trying to get the most out of this opportunity to practice, he opted for the safest and smartest path.

Apple's statement suggests to me between the lines that they will appeal yesterday's judgment on the pleadings after next year's trial.

[/Update]

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Epic Games acknowledges liability toward Apple for breach of contract with recent Fortnite version if Epic loses its antitrust case

As it had already announced a few days before, Epic Games brought its motion for judgment on the pleadings targeting some of Apple's counterclaims late on Friday by Pacific Time (this post continues below the document):

20-10-02 Epic Games Motion ... by Florian Mueller

The objective of this motion can be summed up as follows:

Epic Games wants this dispute to be only about what percentage of Fortnite in-app purchasing (IAP) revenues the app developer--Epic--and what complementary (100% minus the former) percentage the platform maker and operator--Apple--will get. Now, they're not actually asking the court to lower Apple's 30% cut, but they say they want to be permitted to offer alternative in-app payment methods and they want alternative iOS app stores to be allowed to compete with Apple's App Store, with the ultimative objective of bringing down that percentage. They furthermore claim that customers will get better service, but that's just because they want to show that consumers are harmed (a key issue in antitrust cases) in the sense of being deprived of certain benefits they could have if only Apple was less heavy-handed.

If, say, Epic served 50% of its customers directly, Apple would get its 30% only on the remaining 50%, resulting in an effective rate of 15%, which would already be pretty close to the 12% Epic is charging developers who offer their products via Epic's PC and Mac app store. In reality, Epic would presumably hope for Apple to simply reduce its 30% under such competitive pressure, thereby reducing or entirely eliminating any incentives for developers like Epic to deal with payment processing themselves.

The risk-opportunity picture would be quite appealing to Epic if the best case was a (potentially drastic) reduction of Apple's 30%, and the worst case would just be for Epic having to pay Apple what it owes under the current Apple developer contracts anyway, plus legal fees on top, which will quickly be in the tens of millions in this case, but that's just a rounding error on the balance sheet of the multi-billion-dollar business that is Epic.

Looking at it the other way, it would be an attractive gamble to spend tens of millions in hopes of saving billions in App Store commissions over the years. I mean, with such economics you might even attempt a long shot, especially if you believe (right or not) that you also benefit from it in terms of publicity for your products. (I actually see strong indications of both Epic and Apple believing they'll win this case as a matter of law when all is said and done; but I also get the impression of Epic founder, majority shareholder, and CEO Tim Sweeney being on a crusade and potentially hoping to immortalize himself as a digital freedom fighter in a way he never could by making and selling even extremely popular games and game engines.)

But Apple's counterclaims represent a Damocles sword over Epic's head that could make the worst-case scenario quite a bit more costly.

What Apple did was to accuse Epic of malicious and fraudulent conduct. On the one hand, Apple doesn't deny that Epic is in its right to challenge the legality of Apple's business terms (that, by the way, sets Apple apart from monopolists that impose "gag order" clauses on customers preventing them from bringing complaints with antitrust authorities, a tactic that Qualcomm has been accused of, or sports bodies like the International Olympic Committee and FIFA/UEFA as well as their national member associations, which leverage their monopoly power to force others to submit to binding arbitration over questions before arbitration tribunals staffed, stacked and controlled by the very same associations). On the other hand, what Apple does not accept--and that's the reason for its counterclaims--is for someone to sneak a hidden, undoubtedly contract-breaching functionality through Apple's app review.

Some of Apple's counterclaims are about Epic's conceded breach of contract. Even in Friday's motion, Epic makes an unequivocal admission:

"Epic does not prevail on its antitrust claims, then Epic would be liable for breach."

Epic wouldn't lose much money if the court held it liable for breach. But Epic might lose a lot more if liable for tort.

There are two reasons why the tort part of Apple's counterclaims poses a greater and not easily calculable risk to Epic:

• Apple is seeking punitive damages (a claim that Epic is trying to get rid of with Friday's motion). The idea of punitive damages is that they should deter certain conduct, even if it means that the defendant (here, Epic is the defendant to the counterclaims) ends up paying much more than the actual damage it caused.

• If at some point--possibly after multiple rounds of litigation--the focus was on what damage Epic caused Apple, the numbers wouldn't be limited to some percentage of Fortnite's iOS revenues but the starting point for that further discussion would be the ginormous value of the App Store and of Apple's customer relationships. (Obviously, it's not like Epic destroyed the App Store as a whole, but Apple can argue that the lost goodwill etc. far exceeds the revenues Epic might have generated by breaking the rules; it's like if a compact car has an accident with a Ferrari, the damage to the latter can get costly with no regard to the value of the former.)

One of Apple's tort claims, called conversion (interference with someone else's property), will be hard to defend as Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California already indicated in Monday's hearing. That's why it's not worth analyzing in more detail, unless Apple's efforts to keep that claim alive unexpectedly get traction.

But Epic is also tackling another tort counterclaim: intentational interference with prospective economic advantage. The short form would be "tortious interference."

In order to persuade the court to dispose of the tortious-interference counterclaim, Epic makes some points, which aren't all equally persuasive:

• Epic says that what it did, by offering an alternative payment system, was just a breach of contract, and tortious interference is not meant to deal with a breach of a contractual duty. This one looks weak. It's not like the existence of a contract between parties constitutes a safe harbor, just like fraud can happen even if there's a contract in place. Epic points to case law where the "breach" was actually just a termination or non-performance of a contract--but nothing like what happened here, starting with Epic sneaking some hidden functionality past Apple's App Store review team.

• Epic also argues that it didn't prevent any users of the iOS version of Fortnite from doing business with Apple, as Apple's IAP option was still offered, with just an option to bypass it, which roughly half of those users elected to do.

• Epic insists that Fortnite users aren't "third-party strangers" to the Apple-Epic relationship as they're Epic's customers, too, and not just Apple's.

  How the court views this one could also have implications for the antitrust claims.

The court will presumably decide next month. If the tortious-interference counterclaims survives this motion, Epic will continue to face the risk of punitive damages I outlined above.

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