The class-action antitrust lawsuit in the Northern District of California over Apple Pay was amended in October (which I also considered advisable, if not necessary, based on Apple's first motion to dismiss). Then Apple brought another motion to dismiss, and a few hours ago filed its reply in support of that motion:
The hearing will be held in two weeks, and given the current situation in the Northern District of California, there is a fairly high probability of Apple's motion succeeding. A dismissal by Judge White is fairly possible, even with prejudice, but if it happened, it wouldn't necessarily be the final outcome.
If we look at the issue in practical terms, there obviously are many and--as compared to the average citizen--rather affluent people who want to use their iPhones for convenient and contactless mobile payments. They could pay cash, but that wouldn't be contactless. If they use contactless cards that come with NFC or RFID chips, they will sometimes be prompted to enter a PIN for security reasons, such as when payments exceed a certain amount. Also, it's easier to lose (and not notice the loss of) a credit card than of one's phone. Customers could buy a second smartphone--an Android phone--and use it for payments, but they're not going to spend that money, much less will they want to carry a second phone with them just to have more choice among contactless mobile payment systems. Therefore, the best practical choice they have is Apple Pay, but it is not because Apple did a better job: it's because Apple makes Apple Pay the only game in town by not allowing other apps to make use of the iPhone's NFC chip for mobile payment purposes. An aftermarket monopoly: Apple's iOS competes with Android, but once customers have chosen one system or the other, competition between Apple and Google (and their respective ecosystems) ends.
It is a reality that not every iPhone user actually uses Apple Pay: only about half of them do, but the other half also has to make payments. Apple points to that indisputable fact as evidence that the area of effective competition is necessarily wider than "Tap-and-Pay iOS Mobile Wallets"--the market proposed by the credit card issuers.
Apple argues that one must focus on the "basic task": to make payments. At least "physical tap-and-pay cards are alternatives" and "the most obvious substitute to Apple Pay" according to Apple.
Apple essentially argues that a market cannot be delineated based on characteristics (such as more/less security or convenience) as long as products are "by definition interchangeable." In the alternative, "single-brand markets would be the rule rather than the exception, as one could always point to differences between products used for the same function to claim that they somehow do not compete."
That is a reductio ad absurdum, but then one could also argue that Apple's proposed focus on just the basic function of making payments would always lead to ridiculously overbroad market definitions.
That's why it's a highly case-specific determination: some characteristics are considered to be part of the definition of the relevant function, while others are just typical of a differentiated product market in which competition may actually be healthy.
In FTC v. Meta (a case in the same district over Meta's Within acquisition), Judge Davila rejected Meta's overbroad market definition that came down to all workout options being interchangeable and adopted the FTC's proposed market definition of "VR dedicated fitness apps" in terms of VR apps that are "designed so users can exercise through a structured physical workout in a virtual setting anywhere they choose to use their highly portable VR headset." But in Pistacchio v. Apple, a market for iOS subscription-based game services was rejected, and I had my doubts about that one, too, just like I now disagree with the FTC's market definitions in the Microsoft-ActivisionBlizzard context.
The class-action lawyers want to have it both ways. They make a Kodak/Newcal single-brand market argument, but they also argue that their market definition is "brand-neutral." There would be multiple market actors if Apple was forced to allow third-party digital wallet apps to use the iPhone's NFC chip in the same ways as Apple Pay uses it (just like Google allows alternative payment apps on Android; I recently configured Google Pay, but there are alternatives). But that doesn't make it brand-neutral. A market definition that includes iOS is a single-brand market, plain and simple. Replace "iOS" with "mobile" and it's truly brand-neutral.
Without a doubt, the plaintiffs' lawyers are aware of the case law in the Northern District. Apple's argument for dismissal points to Judge Chen's January 2022 dismissal of Reilly v. Apple, a case that an app developer brought over the removal of his app (named Konverti) from the App Store. What's really crazy about that case is that the developer says he spent about $150K developing his app (and he couldn't afford a major law firm), but Apple was represented by Gibson Dunn and even Mark Perry (now with Weil), the same lawyer who is Apple's lead counsel on appeal in the Epic case. It almost certainly cost more to just have Gibson Dunn read the complaint and form an initial opinion on it than the plaintiff had spent developing his app. But I can see that Apple did not want to take any chances when there was a risk of a single-brand market definition being adopted.
One aspect of the Affinity Apple Pay case that I haven't formed a definitive opinion on is whether the proper approach would be to argue that Android and iOS compete in the foremarket, and the first-degree aftermarket is then app distribution, given that Apple relies on its App Store monopoly to maintain its Apple Pay monopoly. The "Tap-and-Pay iOS Mobile Wallets" market would then be a second-degree aftermarket, which is comparable to in-app payment services in Epic's case.
I have previously stated my belief that the key to solving all those Apple problems (even App Tracking Transparency) is to tackle the App Store (including app review) monopoly. Epic's lead counsel on appeal argued at the mid-November Ninth Circuit hearing that his client should win even under the district court's market definition because the justifications offered by Apple aren't procompetitive justifications. That's understandable, but I'm philosophically much closer to what Circuit Judge Milan D. Smith said at the hearing about the first step being to get the market definition right. I consider it the more logical approach, but I also believe that it would solve more problems (when looking beyond just Epic's case). I remain hopeful that Judge Smith and at least one other member of the panel will overcome concerns over a failure of proof, and that he can then win over at least (former Chief) Circuit Judge Sidley Thoams. The district court's decision not to believe Epic's expert on lock-in need not be dispositive. There's enough in the record, including in the district court's opinion. And if all else fails, the appeals court can just focus on those justifications, a topic the two circuit judges on the panel already dealt with in the case that became known as NCAA v. Alston when it was ultimately decided by the Supreme Court.
This month's hearing is going to be an uphill battle for the credit card issuers in light of the Epic and Reilly decisions in the same district. In Epic, the judge got market definition wrong. In Reilly, another judge relied on Epic, and one of the very best litigators in the entire United States--Mark Perry--squared off with a "no name" attorney. But those decisions are now precedent in that district, and the credit card issuers' best hope is probably that the Ninth Circuit decision in Epic v. Apple will come down and strengthen the case for a single-brand market, either before Judge White adjudicates Apple's motion to dismiss the Affinity complaint or after a dismissal, in which case an appeal might succeed.
I certainly agree with Apple is that there is no "tying" argument here with respect to end users: they don't have to use Apple Pay. But there is monopoly abuse, provided that a single-brand market definition is adopted, and it may take more than one aftermarket to get there.
