The federal judge overseeing the antitrust suit brought by Epic Games against Apple mostly sided with the iPhone maker, including ruling that Apple's App Store isn't an illegal monopoly for mobile gaming transactions. Cadwalader antitrust partner Joel Mitnick and counsel Ngoc Pham Hulbig discuss the decision and its impact on future antitrust litigation, including Google Play store practices.
When Judge Yvonne Gonzalez Rogers issued her decision in the high-profile Epic Games Inc. v. Apple Inc. trial, neither party seemed a clear winner, with Apple's stock sliding and mobile video game company shares jumping following the judge's mixed decision.
In terms of federal antitrust litigation under the Sherman Act, however, Apple achieved a resounding victory. In addition to bolstering Apple's defense in similar cases, the court's decision sustains or raises the hurdles for plaintiffs in monopolization cases. Epic Games has filed a notice of appeal.
Some Key Takeaways
Apple Achieved a Resounding Victory
In terms of Epic's antitrust case, Apple achieved almost complete victory, winning nine out of 10 counts. The court's finding that Apple is not a monopolist with respect to the App Store, and therefore that it is incapable of an act of monopolization in the context of the App Store, is a tremendous weapon in Apple's arsenal as it defends against a plethora of monopolization lawsuits in and outside the U.S., monopolization enforcement investigations brought by federal or state agencies, and legislative bids to restrict Apple's business practices on the basis of monopolization.
No Monopoly in a Market of One
Courts remain skeptical of monopolization cases that allege markets that are limited to the product(s) of a single manufacturer. As Rogers explained, "[b]roadly speaking, Epic Games claimed that Apple is a monopolist over (i) Apple's own system of distributing apps on Apple's own devices in the App Store and (ii) Apple's own system of collecting payments and commissions of purchases made on Apple's own devices in the App Store. Said differently, plaintiff alleged an antitrust market of one, that is, Apple's 'monopolistic' control over its own systems relative to the Apple Store." The court ruled, however, that a product market limited to the App Store is untenable.
Apple Is Not a Monopolist, Yet
The court's ruling leaves open the door for future Section 2 claims. Noting that the trial record suggests that Apple is "near the precipice of substantial market power, or monopoly power, with its considerable market share," Rogers stated that "Apple is only saved by the fact that its share is not higher, that competitors from related submarkets are making inroads into the mobile gaming submarket, and, perhaps because plaintiff did not focus on this topic."
Monopoly Claims Are an Uphill Battle for Plaintiffs, Particularly in Two-Sided Markets
The court rejected Epic's argument that the App Store provides distribution services, and instead found that the App Store provides two-sided transaction services, with app developers on one side and consumers on the other. Accordingly, after the U.S. Supreme Court's decision in Ohio v. Am. Express Co., Epic's burden was doubled, requiring it to prove that the App Store's activity harmed both the app developers and the consumers on the two sides of the transaction.
Marketplace owners are allowed unilaterally to set their own marketplace terms. Section 1 applies to contracts and conspiracies that restrain trade; i.e., a necessary predicate fact is an action of at least two parties acting in concert. The court found that Apple issued its terms of access to the App Store unilaterally and that "a business may set conditions for dealing unilaterally and refuse to deal with anyone who does not meet those conditions." Accordingly, Rogers dismissed the Section 1 claim for want of the required concerted action.
Strategies for Recasting Distribution Relationships as Unilateral Actions
The court's Section 1 analysis may suggest a strategy to many firms of restructuring distribution relationships by means of issuing unilateral terms rather than entering into agreements with distributors or suppliers in order to insulate the relationship from a Section 1 claim.
Of course, such a strategy would have to be balanced against the specificity and obligation assignment that is afforded by entering into detailed written agreements. In addition, conduct that "extends beyond announcing a policy and refusing to deal with non-compliant partners to coercing an agreement" still would fall under Section 1.
App Store Changes on the Horizon
The court found the App Store's lack of competition troubling. Criticizing Apple's "slow innovation [which] stems in part from its low investment in the App Store," Rogers stated that the "point is that a third-party app store could put pressure on Apple to innovate by providing features that Apple has neglected."
Indeed, in recent weeks, Apple announced small changes to the rules in its App Store in a bid to mollify critics of its alleged restrictive practices. The court's Unfair Competition Law (UCL) ruling in this case may accelerate Apple's strategy of trying to change the rules itself rather than wait for more restrictive relief to be imposed upon it.
What the Future Holds
Epic Opened Up Cracks in Apple's Walled Garden
Although Epic lost on almost all of its claims, Epic achieved a powerful back-door victory against an importantly profitable aspect of Apple's App Store rules that may pave the way for additional chinks in Apple's litigation armor. In addition, many of the court's findings may support legislative efforts to curb certain Apple and Google app store practices.
Decision May Bolster Google's Defense in Similar Litigation
Epic and other Android app makers suing Google with regard to its Google Play store practices may face even more of an uphill battle now that the court allowed Apple's fee to stand. The Google Play store's rules, similar to the ones enjoined in the Apple case, may be at risk, however. Google also is being sued by a coalition of 37 U.S. state and district attorneys general that are alleging that Google is unlawfully maintaining a monopoly for its Google Play store on Android phones.
Broader Liability Under California State Law With National Repercussions
Even though Apple's challenged conduct did not meet all of the requirements of traditional antitrust claims under the Sherman Act, the court entered a permanent, nationwide injunction to remedy a violation of California's UCL. Although imposition of a nationwide injunction based on state law is rare, large tech companies and others doing business in the state should be aware of potential liability under the California UCL.
Originally Published by Bloomberg Law.
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