Epic v. Apple Can California Federal Court Really Issue a Nationwide Injunction on a State Court Violation? – – Is It Time To Revisit Antitrust Laws Respecting Duopolies That Today Control Entire Ecosystems?
Key Takeaways
- No Sherman Act Section 1 violation since Apple unilateral agreement not a contract, combination, or conspiracy under Sherman Act Section 1.
- Even if a Section 1 contract, combination, or conspiracy, Epic’s alternative models are not “virtually as effective” and “without significantly increased cost” and so fail to carry the burden shifted to them because Apple demonstrated procompetitive rationale for the restraint based on enhanced security and inter-brand competition.
- No Sherman Act Section 2 violation since Apple has only 55% of relevant market (less than the 65% market share required to trigger a prima facie case of monopoly) which the court defined to be digital mobile gaming transactions.
- While not a violation, the anti-steering provisions “threaten an incipient violation” of the antitrust law by preventing informed choice under California Unfair Competition Law.
- California court’s nationwide injunction based on a California law is in tension with Federal Commerce Clause and raises the question of whether issuing a nationwide injunction exceeds the power of the court.
On September 10, 2021, the U.S. District Court for the Northern District of California decided Epic Games, Inc. v. Apple Inc. Case No. 4:20-cv-05640-YGR. The California court found Apple’s conduct did not violate Sections 1, 2 of the Federal Sherman Act, or the California Cartright Act; but found the anti-steering provision in Apple’s Developer Product Licensing Agreement (“DPLA”) to violate the California Unfair Competition Law. The Court also found Epic to have breached its DPLA contract with Apple. The Court issued a nationwide injunction preventing Apple from continued use of the anti-steering provision and awarded Apple damages on its counterclaim for breach of contract.
The Epic Games decision raises questions about the power of a California court to issue a nationwide injunction on a state court violation and whether now is the time to revisit antitrust laws respecting duopolies that today control entire ecosystems.
The Counts
The counts lodged by Epic against Apple fall into four categories – namely, violation of: Section 1 of the Sherman Act, Section 2 of the Sherman Act, the California Cartwright Act, and the California Unfair Competition Law.
Section 1 of the Sherman Act
Epic lodged four counts under Section 1, Sherman Act against Apple – namely: (1,2) Apple “require[s] iOS developers distribute their apps through the App Store” in violation of Section 1 of the Sherman Act (Counts 3, 5); (3) Apple iOS app distribution market is an essential facility not capable of being replicated by competitors and serves as a conduit for the distribution of another product and so Apple’s conduct therewith violates Section 1 of the Sherman Act (Count 2); (4) Apple’s app distribution and in-app purchases or in-app payments (“IAP”) system were tied together in violation of Section 1 of the Sherman Act (Count 6).
Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” 15 U.S.C. § 1. “To establish liability under § 1, a plaintiff must prove (1) the existence of an agreement, and (2) that the agreement was in unreasonable restraint of trade.” Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., 836 F.3d 1171, 1178 (9th Cir. 2016).
As to Counts 3, 5, and 6, the court found no Section 1 violation because the DPLA was found to be a unilateral agreement which under guiding precedence is not an agreement actionable under Section 1 of the Sherman Act. Op. 142. More specifically, while Section 1 speaks to “contract, combination, or conspiracy”, the Court appears to be saying that the unilateral nature of the agreement means that there was no “contract, combination, or conspiracy” since Epic was neither “coerced” by Apple into adherence nor “communicated acceptance” to such terms citing Jeanery, Inc. v. James Jeans, Inc., 849 F.2d 1148, 1150 (9th Cir. 1988) (a jeans manufacturer who had set suggested prices for retailers and made clear that those who set prices below the suggested price would be terminated or receive less favorable treatment amounts to nothing more than informing the retailers of its policy).
In short, Epic had no obligation to distribute their apps through the App Store but if they did, Epic would be rewarded. The reward is the receipt of payments through the App payment system for purchases of that app from within the Apple ecosystem. Under this arrangement there can be no contract, combination, or conspiracy, the court seems to be saying.
Even if there was a “contract, combination, or conspiracy”, the court went on to explain that it did not unreasonably restrain trade since Epic failed to meet its burden under the three-part burden-shifting test under the rule of reason. To wit, responsive to Epic’s prima facie showing of an unreasonable restraint of trade, Apple showed a procompetitive rationale for the restraint in both enhanced security and inter-brand competition (Op. 145) that Epic did not persuasively rebut by showing of a less restrictive means for achieving the same procompetitive results. Op. 147. Thus, the court found that the distribution restrictions do not violate Section 1 of the Sherman Act. Op. 149.
The Court dismissed Count 2 since Epic failed to prove key elements of the claim including that the iOS platform is an essential facility and that Apple is an illegal monopolist in control of the iOS platform. Op. 158.
Section 2 of the Sherman Act
Epic lodged two counts under Section 2, Sherman Act against Apple – namely: (1) Apple has a monopoly in the “iOS App Distribution Market” and has unlawfully maintained the monopoly by prohibiting iOS app developers from distributing their apps through alternative channels in violation of Section 2 of the Sherman Act (Count 1); and (2) Apple has a monopoly in the “iOS In-App Payment Processing Market” and has unlawfully maintained the monopoly by requiring “iOS app developers that sell in-app content to exclusively use Apple’s In-App Purchase” in violation of Section 2 of the Sherman Act (Count 4),
Section 2 of the Sherman Act provides that “[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”
The court found these two counts failed for two significant reasons: (1) Epic Games failed to prove the first element, that Apple has monopoly power in the relevant product and geographic market; and (2) Epic Games alternatively failed to satisfy the rule of reason analysis under Section 1. Op. 151
More specifically, the court found that the relevant market here is digital mobile gaming transactions. It is not gaming generally regardless of device (e.g., mobile, PCs, etc.) as proposed by Apple and not Apple’s own internal operating systems related to the App Store as proposed by Epic. Op. 1, 2, 52. The court also found that Apple did not have monopoly power in the relevant market. While Apple enjoys a considerable market share of over 55% in that market it is less than the 65% market share that is the threshold for finding a prima facie case of monopoly according to the case precedent. Op. at 135
Because “the three-part burden-shifting test under the rule of reason is essentially the same” under Sections 1 and 2, and “proving an antitrust violation under § 2 of the Sherman Act is more exacting than proving a § 1 violation,” the rule of reason analysis under § 2 here fails for the same reasons they failed as explained under § 1 above. Op. 152
California Cartwright Act
Epic lodged three counts against Apple under the California Cartwright Act – namely: (6) Apple’s conduct amounted to unreasonable restraint of trade in the iOS app distribution market under the California Cartwright Act (Count 7); (2) Apple’s conduct amounted to unreasonable restraint of trade in the iOS in-app payment solutions market under the California Cartwright Act (Count 8); and (3) Apple’s tying of app distribution and payment processing was a violation of the California Cartwright Act (Count 9).
Epic Games argued that its Cartwright Act claims are based on the same conduct as the analogous Sherman Act claims. Specifically, Count 7 is based on the same conduct as Count 3; Count 8 is based on the same conduct as Count 5; and Count 9 is based on the same conduct as Count 6. The basic legal framework is the same for all three claims.
The court said the findings that defeat the Sherman Act Counts 3 and 5 also defeat Counts 7 and 8 under the California Cartwright Act, and the findings that defeat Count 6 under the Sherman Act also defeat Count 9 under the California Cartwright Act.
California Unfair Competition Law
Epic lodged one count under the California Unfair Competition Law against Apple – namely: Apple’s conduct amounted to unfair competition under California’s Unfair Competition Law (Count 10).
California’s Unfair Competition Law (“UCL”) prohibits business practices that constitute “unfair competition,” which is defined, in relevant part, as “any unlawful, unfair or fraudulent business act or practice.” Epic Games challenged Apple’s conduct under the “unlawful” and “unfair” provisions of the UCL. Op. 159, 160.
Here, while Epic’s challenge and litigation of the anti-steering provisions failed to prove an antitrust violation, the court nonetheless found that the anti-steering provisions “threaten an incipient violation of an antitrust law” by preventing informed choice among users of the iOS platform. Op. 164. Accordingly, the court found that the anti-steering provisions violate the UCL unfair prong under the tethering test. Id.
Likely Next Steps
The California court’s decision on the federal antitrust counts is a big win for Apple. At the same time, the court’s striking down the anti-steering provision in Apple’s contract is a win for Epic.
Both parties have filed a notice of appeal. So what might be the likely basis for those appeals?
Likely Basis for Epic Appeal
Apple is not likely to disturb the analysis of the court as to the Sherman Act and Cartwright Act counts. After all, despite enjoying a considerable market share of over 55% in the relevant market, Apple’s share is less than the 65% threshold required for Apple to be deemed to be a prima facie monopoly according to the case precedent relied on by the court.
On the other hand, the court’s finding that Apple is not a monopoly is exactly what Epic is likely to appeal since it keeps Apple from being more critically scrutinized under the antitrust microscope.
To succeed though, Epic is going to need to persuade the appeals court to either adopt a definition of the market that is broader than the one adopted by the court. Or Epic is going to have to persuade the appeal court that the current case law establishing 65% as the threshold for finding an entity to be a prima facie monopoly is no longer good law.
If the market is more broadly defined, that could bring more Apple activities into the antitrust calculus. If those combined activities give Apple more than a 65% market share, it could trigger the prima facie threshold for finding Apple to be a monopoly. If the current case law on the 65% prima facie monopoly rule is to be set aside, Epic would need to argue that the existing antitrust laws applicable to duopolies like Coke/Pepsi and Visa/MasterCard of the past are ill-equipped to address the behavior of duopolies like Apple/Google(Android) today. This is because today’s duopolies like Apple/Google(Android) control more than just their market. They control the entire ecosystem surrounding their market including upstream industries like the chip makers and downstream industries like on-line streaming and social media. That could be Epic’s argument.
In addition, Epic could challenge the finding of the court that a unilateral agreement is not an agreement actionable under Section 1 of the Sherman Act notwithstanding the guiding precedence cited by the court. The challenge could be made on several basis. First, a unilateral contract is after all a contract even if it involves neither “coercion into adherence” by Apple nor “communicated acceptance” by Epic as the court found. Second, and as previously explained, Section 1, Sherman Act speaks to a “contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce”. The analysis of the court addresses the contractual nature of the DPLA. But the court never really explains why the DPLA also fails as a “combination in the form of trust or otherwise, or conspiracy”.
Likely Basis for Apple Appeal
Apple’s appeal may be based on the California court issuing a nationwide injunction on a state court violation. Such a broad sweeping injunction not only appears to have exceeded the power of the court, but it also creates tension with the Federal Commerce Clause.
In staying the injunction, if successful, Apple could buy itself years of time to continue using the anti-steering provision while it exhausts all appeals. Apple would undoubtedly use those years to try to architect an alternative mechanism to its current anti-steering provision that would meet the letter and spirit sought to be served by the injunction and yet continue to give Apple the advantage that the anti-steering provision provides its app payment system.
Likelihood of Success on Appeal
The odds may be long for Epic to prevail on appeal on the factual decisions of the trial court since questions of fact are reviewed under a clearly erroneous standard. That means that the likelihood of success will be low unless the circumstances are egregious; which they do not appear to be here.
The odds may be better for Epic as to challenges to the prevailing body of law respecting the 65% prima facie threshold for finding an entity to be a monopoly since these are questions of law which would be reviewed on appeal de novo.
The best odds may lie with Apple as to challenges based on an arguably overly broad injunction issued by the California Court. The court arguably has no power to enjoin activities outside of the state that are not governed by and so can not violate California law. In addition, an injunction which proscribes activities outside of California under a California law conflicts with the Federal Commerce Clause.
The Likely Way of the Future
Limiting the scope of the injunction to the State of California may serve Apple well in the near term. But doing so may amount to no more than a pyrrhic victory given the winds of change both nationally and around the world. Already, the U.S. Congress has been endeavoring to promulgate laws to reign in the control that Apple wields in the market. Congress may do that by enacting tighter antitrust laws. For example, Congress could overwrite the current laws respecting the 65% prima facie threshold for finding an entity to be a monopoly given the control that duopolists like Apple/Google(Android) wield beyond their market over entire ecosystems. Congress could also prohibit the use of anti-steering provisions in commercial transactions.
South Korea has already stepped in with national laws to ban major app store operators — like Google and Apple — from requiring developers to only use their payment systems to process the sale of digital products and services.