In the Epic v. Apple App Store antitrust case, Epic Games filed its opening brief with the United States Court of Appeals for the Ninth Circuit yesterday.
I already shared some thoughts on the Epic Games v. Apple appeal earlier this month and it's really only going to get interesting when Apple responds, but I'd like to share a few observations now.
MacRumors thankfully uploaded the brief to Scribd (this post continues below the document):Epic's Opening Brief in... by MacRumors
Here's my first impression of Epic's different attack vectors (quoting from the Statement of the Issues):
"Whether the district court erred in holding that a contract of adhesion is not a 'contract' under Section 1 of the Sherman Act."
The hurdle for a plaintiff is lower when companies (which in many cases would otherwise compete with each other) enter into agreements that are restrictive of competition (Section 1 of the Sherman Act) than when one has to prove unilateral misconduct by a monopolist (Section 2). Here, Epic would like to benefit from the lower hurdle even though app developers have no choice but to accede to Apple's unilaterally-imposed terms.
Epic's brief shows that Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California relied on two cases in which there was no contract in a narrow sense and a third in which the one who imposed the terms was not acquitted by the Ninth Circuit (a district court held it potentially liable in a related case)--the Ninth Circuit merely acquitted those who were forced to accept those terms were acquitted (a non-issue here as Epic is not suing app developers who signed Apple's agreements--it's only suing Apple itself). Epic cites to other precedent according to which contracts (including involuntarily-accepted terms) are contracts, and Section 1 broadly applies to all contracts. Epic also points to Ninth Circuit cases involving tying and exclusive dealing, and in which the defendants unilaterally set the terms of the relevant agreements, but that part is less persuasive because there are specific requirements for tying and exclusive dealing (Epic's tying claim was dismissed because the district court did not see how in-app payment processing was a separate product from the App Store, and exclusive dealing is not an issue in Epic v. Apple).
On this basis, Epic warns against "disastrous consequences" because "Section 1 would not reach firms with the market power to coerce non-negotiable terms," which would "incentivize anticompetitive behavior." One way to respond to this is: "So what? You still have Section 2. Higher hurdle, but still."
I'm surprised that Epic puts this part front and center. Should Epic believe that this is its strongest point, then I wouldn't be too optimistic about the prospects of its appeal. I am in favor of reasonably strong antitrust enforcement, but I don't think unilateral conduct should just be imported into Sec. 1. Epic emphasizes the word "[e]very"--the first word of the statute and right before "contract"--but in my view ignores that "contract" is part of an enumeration that continues with "combination in the form of trust or otherwise, or conspiracy." In my view, that context clearly favors Apple's position that Section 1 does not have scope for unilaterally-imposed terms, which are a Section 2 question (i.e., even Apple's position is not one of lawlessness--just a higher standard to meet). I'd be surprised if a conservative Supreme Court majority took such an expansive view on antitrust law--with ramifications far beyond Big Tech--as the one espoused by Epic.
Even if the lower Section 1 standard applied, let's not forget that under the district court's reasoning, Epic failed to meet that one, too...
"Whether the court erred in holding Apple Inc.'s ('Apple') prohibitions on competing software application ('app') distribution channels and competing in-app payment solutions for the iPhone operating system ('iOS') survive rule of reason scrutiny."
Epic does manage to demonstrate some inconsistencies in the district court's reasoning that have implications for the rule-of-reason analysis. I've said before that one can find errors in that judgment (just like there are typos), but the question is whether anything changes the outcome. The rule-of-reason context is exactly the one in which Judge YGR's fear--which she expressed at a hearing where she urged the parties to agree to a jury trial (which would have been Apple's original preference)--may come true and the appeals court might not afford much deference to her factual findings. However, I have some doubts about whether Epic can prevail on "balancing" when the judge actually made some factual findings that were potentially fatal to Epic's case. That said, the balancing of Apple's justifications (which I've consistently criticized as being essentially pretextual) really depends on the attitude of the appellate panel. And the appeals court may very well see that the App Store situation is fundamentally unfair to developers. Epic's silver bullet in this regard is that Apple does allow alternative payment systems for the purchase of non-digital goods and services--which should (and hopefully will) make it easy for the appellate panel to see that Apple's security and other arguments are pretextual.
"Whether the court erred in finding Apple is not a monopolist in markets for iOS app distribution and payment solutions for the sale of digital content within iOS apps."
The key Supreme Court precedent for a single-brand aftermarket is Kodak, the key Ninth Circuit precedent is Newcal. Epic makes a bold claim in its brief:
"The information barriers and switching costs here [for consumers] are more substantial, and the Kodak claim stronger, than in Kodak itself."
While bold, Epic's argument in that regard is very compelling, and pretty easy to understand. Judge YGR decided the singe-brand market question against Epic based on an unreasonably high standard with elements that other (higher) courts had rejected.
I think the reason for which the district judge made it impossible for Epic (or realistically anybody ever) to prove the existence of a single-brand market is that she was worried about making a decision that would have unintended consequences for other platforms: Android, Xbox, PlayStation, what have you. It's key that judges think about the implications of the precedent they set, but they should do so within reason. If Judge YGR had found a single-brand market, there very well might have been some immediate class actions against Sony and Microsoft (against Google, they are already pending)--but then those companies could still potentially have defended their app distribution terms. In order to give those companies the chance to defend their model, it takes new cases, however, and it would be wholly unreasonable to expect Epic to address fact patterns beyond its own case. The judge saw that Epic generates more revenue on other platforms, and faces partly tougher restrictions there, but it was not her responsibility here to prophylactically protect Sony and Microsoft by making an incorrect decision against Epic's single-brand market theory.
Apple could argue that even if one agreed with Epic's single-brand market theory, Apple does allow web apps, and the district court considered web apps and some other ways of reaching customers sufficient.
"Whether the court erred in rejecting Epic’s tying claim on the ground that app distribution and in-app payment solutions are not separate products."
Epic argues that Apple ties its payment processing to its app distribution services: Apple won't distribute your app unless you use its payment services (which in turn enables Apple to collect is app tax). Apple essentially argued there's just one App Store, and you can't separate app distribution from payment processing any more than you could treat the checkout area as a separate business from the rest of a supermarket.
The Dutch competition authority (ACM) and the South Korean legislature have just shown Apple that app distribution and in-app payment systems can indeed be separated--and apps selling non-digital goods (such as the Amazon app) showed it before.
From a policy point of view, I can't see--and apparently various lawmakers and regulators can't see either--why the in-app payment system for non-digital goods and services must be viewed as inextricably linked to app distribution. There would be a huge policy problem, however, if companies like Apple could just defend themselves by saying "we decided to combine the two, so it's not tying."
Apple's in-app payment system is not exactly the equivalent of a supermarket's checkout area. In-app purchases are made later.
While I agree with Epic on its tying claim, I'm afraid that both the Ninth Circuit and later on the Supreme Court (where this case is surely headed) can easily be misled by Apple into believing that Epic's take on tying is irresponsibly expansive. It looks to me like the kind of question appeals courts prefer to sidestep. I'm more optimistic about the single-brand market, though I do recognize that that one is an uphill battle, too.
Epic argues that it's entitled to judgment on the merits, but as a fallback proposes a remand for a new rule-of-reason analysis. In the latter case the outcome would probably be the same unless the appeals court provides some game-changing instructions to the court below.
While Epic and Apple continue to litigate for probably a few more years or possibly anoher decade (especially remands delay the resolution of such a case a lot), U.S. lawmakers may simply open up mobile app store with the Open App Markets Act. But the outcome of that legislative process isn't certain (the American Innovation and Choice Online Act is moving ahead faster than the Open App Markets Act)--and in any event Epic and others would want to seek damages from Apple for its exclusionary conduct.
Apple's two biggest challenges on the litigation front in 2022 can be described in one word: "Epicsson."
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