Epic vs. Apple: How Judge Rogers split the baby

The case from the start hung on how the relevant market was defined. The judge disagreed with both parties’ definition.

Judge Yvonne Gonzalez Rogers laid out her reasoning in a 161-page order after trial on the merits. The crux of it:

Plaintiff Epic Games, Inc. sued Apple, Inc. alleging violations of federal and state antitrust laws and California’s unfair competition law based upon Apple’s operation of its App Store. Broadly speaking, Epic Games claimed that Apple is an antitrust 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 App Store. Apple obviously disputed the allegations.

Antitrust law protects competition and not competitors. Competition results in innovation and consumer satisfaction and is essential to the effective operation of a free market system. Antitrust jurisprudence also evaluates both market structure and behavior to determine whether an actor is using its place in the market to artificially restrain competition.

Central to antitrust cases is the appropriate determination of the “relevant market.” Epic Games structured its lawsuit to argue that Apple does not compete with anyone; it is a monopoly of one. Apple, by contrast, argues that the effective area of competition is the market for all digital video games in which it and Epic Games compete heavily. In the digital video game market, Apple argues that it does not enjoy monopoly power, and therefore does not violate federal and state law.

The Court disagrees with both parties’ definition of the relevant market.

Ultimately, after evaluating the trial evidence, the Court finds that the relevant market here is digital mobile gaming transactions, not gaming generally and not Apple’s own internal operating systems related to the App Store. The mobile gaming market itself is a $100 billion industry. The size of this market explains Epic Games’ motive in bringing this action. Having penetrated all other video game markets, the mobile gaming market was Epic Games’ next target and it views Apple as an impediment.

Further, the evidence demonstrates that most App Store revenue is generated by mobile gaming apps, not all apps. Thus, defining the market to focus on gaming apps is appropriate. Generally speaking, on a revenue basis, gaming apps account for approximately 70% of all App Store revenues. This 70% of revenue is generated by less than 10% of all App Store consumers. These gaming-app consumers are primarily making in-app purchases which is the focus of Epic Games’ claims. By contrast, over 80% of all consumer accounts generate virtually no revenue, as 80% of all apps on the App Store are free.

Having defined the relevant market as digital mobile gaming transactions, the Court next evaluated Apple’s conduct in that market. Given the trial record, the Court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws. While the Court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct. Success is not illegal. The final trial record did not include evidence of other critical factors, such as barriers to entry and conduct decreasing output or decreasing innovation in the relevant market. The Court does not find that it is impossible; only that Epic Games failed in its burden to demonstrate Apple is an illegal monopolist.

Nonetheless, the trial did show that Apple is engaging in anticompetitive conduct under California’s competition laws. The Court concludes that Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice. When coupled with Apple’s incipient antitrust violations, these anti-steering provisions are anticompetitive and a nationwide remedy to eliminate those provisions is warranted…

For the reasons set forth herein, the Court finds in favor of Apple on all counts except with respect to violation of California’s Unfair Competition law (Count Ten) and only partially with respect to its claim for Declaratory Relief. The preliminary injunction previously ordered is terminated.

Each party shall bear its own costs. No party shall file any post-trial motions based on previously-made arguments.

IT IS SO ORDERED.

Date: September 10, 2021
____________________________________

YVONNE GONZALEZ ROGERS UNITED STATES DISTRICT COURT JUDGE

My take: Less of a loss for Apple than most headlines would suggest. The best thing that can be said is that another major uncertainty has been moved off the runway before next week’s launch.

22 Comments

  1. Fred Stein said:
    Apple won.

    This may serve as a lesson to law makers on the left and right who wish create new anti-trust legislation. Judges, not self-serving hacks and politicians, have the final say.

    4
    September 10, 2021
  2. David Emery said:
    I ‘deeply skimmed/read’ the decision. This is a good summary: https://www.techdirt.com/articles/20210910/09445547538/apple-mostly-not-entirely-wins-against-epic-no-antitrust-violation-must-tweak-practices-to-comply-with-ca-law.shtml Epic lost on 8 of 9 counts, prevailing on part of one count under California (not Federal) law. Apple also won the breach-of-contract counter-suit, but judge ruled Apple wasn’t entitled to attorney fees, because of some ambiguity in the App Store contract language. (Wonder if Apple would challenge that on appeal?)

    2
    September 10, 2021
  3. Michael Goldfeder said:
    What Epic earned was a Pyrrhic victory given that the decision rendered by the Federal Judge was essentially what Apple just agreed to in a settlement with numerous other App Developers.

    Epic failed to establish that Apple is a monopoly or engages in monopolistic behavior. Epic has to pay damages to Apple for breaching their contract. 30% of the $12 million they earned before getting booted off the App Store.

    4
    September 10, 2021
  4. Knowing a huge shadow & deep pockets sat behind this case, I searched the decision for any many mention of Microsoft, Sony, Nintendo and Tencent. Microsoft is written all over the decision, after all, it is a convicted monopolist.
    “…Tencent Holdings, Ltd., a Chinese video game company and one of the largest gaming companies in the world, which owns about thirty-seven percent of Epic Games, with two board seats; and Sony Corporation, a major player in the console gaming market…” p. 5
    “The success of Fortnite has been profitable for both Epic Games and its partners. For instance, the Epic Games-Microsoft partnership generates hundreds of millions of dollars for both parties.” p. 9
    “…Generally, plaintiff must pay 30% across most platforms. Indeed, for example, Epic Games has agreed to such a rate on all Fortnite transactions via the Microsoft (Xbox) Store, the PlayStation Store, the Nintendo eShop, and Google Play. Epic Games has also agreed to extra payments for certain platform holders above and beyond the standard 30% commission rate…” p. 14
    ” Had Microsoft wanted to weigh in; it could have.” p. 35
    “Moreover, Microsoft and Nvidia’s efforts into mobile game streaming are further evidence that these entry barriers are not so substantial to prevent new market entrants.” p. 140

    4
    September 10, 2021
  5. Fred Stein said:
    Request:

    Would someone in our cohort explain; “No party shall file any post-trial motions based on previously-made arguments.”

    May we assume that severely constraints Epic’s options on appeal?

    1
    September 10, 2021
    • Bart Yee said:
      @Fred I believe you are right, the court will not entertain any additional motions based on already listened to and used arguments from this trial. No rehash of the same old same old. Any appeal will have to be based on different and new legal arguments, not someone’s feelings or wants (Sweeney).

      IMO, Apple may decide to NOT appeal since it already has begun to concede payment systems and has a firm ruling here that it is not in violation “nationwide” of antitrust laws, at least US laws. Epic OTOH, will likely risk again, at their peril, on the third party app issue, but have to find a novel approach. I hope Sweeney chokes on that case too. For him, it’s still all about the money.

      2
      September 10, 2021
      • Robert Stack said:
        According to CNBC:

        “Apple did not say if it would appeal the injunction. Epic Games will appeal the decision, a spokeswoman told CNBC.

        Epic Games CEO Tim Sweeney criticized the ruling in a statement on Twitter.” In fact, he admits he lost!

        ““Today’s ruling isn’t a win for developers or for consumers,” Sweeney tweeted.”

        I’m not including a link, to avoid a delay in posting…

        3
        September 10, 2021
        • Gregg Thurman said:
          Epic Games CEO Tim Sweeney criticized the ruling in a statement on Twitter.”

          There’s all you need to know about who “won” this suit.

          2
          September 10, 2021
        • Fred Stein said:
          Thanks Robert, Bart, Gregg.

          Sweeney’s tweet, “not a win for consumer or developers” only makes sense for his desire to set up his store inside iOS for 3rd parties. Even so, his idea is lame. A 3rd party would have to offer consumers 10% and Sweeney 12% in order to save 8% while creating friction for consumers and possible loss of customer relationship to Epic. It would a win for Epic, not for developers.

          All this is about a niche in a niche – only avid gamers, only on mobile devices.

          0
          September 10, 2021
          • David Emery said:
            If Sweeney told me today (Sept 10) was Friday, I’d still check my iPhone’s calendar… Whenever he talks about “not good for developers or customers”, it’s his own pocket he’s talking about, and nothing more.

            But the court records show how big that ‘niche’ is.

            1
            September 10, 2021
      • Gregg Thurman said:
        I hope Sweeney chokes on that case too. For him, it’s still all about the money.

        Without the Store, that Apple created, and established rules for 13 years ago, Epic wouldn’t exist.

        In the absence of “Fortnight” on Apple’s App Store and Android Play, viable, strong competitors to Fortnight have emerged.

        Considering how little Sweeney got out of this suit, I think the effort has been a monumental failure, and will negatively impact Epic for a very long time.

        2
        September 10, 2021
    • Gregg Thurman said:
      Epic didn’t have any arguments to begin with. The only argument it “won” was based on a market definition the Court rejected. Had the Court not established its own market definition Epic would have lost the suit in its entirety.

      The key element in this decision, is that Epic will have to pay Apple’s 30% fee on purchases made via Apple’s payment system. I do not think Apple is required to allow vendors pricing that is lower on their venue, than they offer on Apple’s venue. That is a matter of how the distribution agreement is written. Apple will insist on best price treatment.

      Pricing being equal, I see no benefit to buying directly from a developer’s site.

      2
      September 10, 2021
    • David Emery said:
      Gregg, I think this applies not to appeal, but to arguments around for instance how much Epic will have to pay Apple and the execution of -this court’s- order. A court cannot constrain what gets sent to higher courts! That being said, Appeals Courts are constrained by law, precedent and procedure to be narrowly focused, and generally they address ‘matters of law’ rather than ‘matters of fact’. (That being said, the decision by Judge Gonzales on what constitutes “the market” is not really a ‘determination of fact’ but a judgement, so I suspect that is definitely appeal-able with an assertion that the Judge mis-applied the legal standard for ‘market definition’.) It’s likely the time spent preparing this lengthy decision was in part an attempt by Judge Gonzales to prevail on appeal. I’m sure she knew no matter how she ruled, this would get appealed. No judge likes to be overturned on appeal!!

      3
      September 10, 2021
      • Gregg Thurman said:
        Thanks David for your expansion (and improvement) of my understanding.

        1
        September 10, 2021
        • David Emery said:
          Just remember, IANAL, nor do I play one on the Internet 🙂

          (An employee-owned company I worked for was involved in several lawsuits over control of the company. That got me interest in and experience with reading legal documents.)

          0
          September 10, 2021
  6. Gregg Thurman said:
    Today’s announcement virtually destroyed this weeks trade. Oh well, I expect Black Swans.

    On the bright side, feeling that the market was typically over reacting, I watched AAPL’s trading Closely and bought SEPT 10 (today) $148/$149 Call Spreads at 70c. At the time I bought these AAPL had bottomed and was up almost $1. With less than an hour to go to the Close they are trading for 98c. Max value is $1.00.

    I am still going to lose money this week, just not nearly as much as it appeared with the news.

    I also took advantage of the Market’s over reaction and bought Sept 17 $149/$150 Call Spreads at 57c. My feeling is that after reading Judge Rogers’ decision, the Market will accept Katy Huberty’s analysis, and see that the financial impact to Apple isn’t material to its long term success.

    As an aside, I think the Korean law, and today’s “EPIC” (pun intended) decision will establish a global blueprint for the operation of the App Store going forward. The “free radicals” in that reality distortion field known as Wash DC have been defanged.

    2
    September 10, 2021
    • Bart Yee said:
      @Gregg Single black swan, yes. A flock of black swans, no. I think Apple will recover just fine, and this ~3% drop takes a lot of steam away from any post-Apple event decline (buy rumor, sell news) that might have occurred on Tuesday or Wednesday. Besides, Apple just got a nice discount for share buybacks today and Monday’s open and astute investors can add shares to dollar cost average their positions if they purchased recently.

      A small dip in a very long profitable road.

      2
      September 10, 2021
    • Joe Carducci said:
      as a new entrant, I would first like to say how grateful I am for such a well curated thoughtful and serious discussion of Apple. Congrats to what you guys have built here. 🙂 With regard to the stock price movement, The main stream financial media CNBC etc, Have been pining for a correction for months now. Nominally negative news about the largest company in the world, sounds like the best excuse they’re going to get in a while. And Apple’s volume was twice the rolling ten day average on Friday. What do you all think of the possibility that it goes down a few percentage points before it bounces? Along with maybe the market especially since there are Republican lawmakers in the Capitol who would like any distraction to thrawt the new spending bills that are proposed?

      0
      September 11, 2021
  7. Michael Goldfeder said:
    What Epic earned was a Pyrrhic victory given that the decision rendered by the Federal Judge was essentially what Apple just agreed to in a settlement with numerous other App Developers.

    Epic failed to establish that Apple is a monopoly or engages on monopolistic behavior. Epic has to pay damages to Apple for breaching their contract. 30% of the $12 million they earned before getting booted off the App Store.

    4
    September 10, 2021
    • David Emery said:
      And the market reaction creates a nice short-term buying opportunity…

      3
      September 10, 2021

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