IP Law Daily, TECHNOLOGY/INTERNET—9th Cir.: Ninth Circuit upholds district court in Epic-Apple case, (Apr 26, 2023)

By Kenneth H. Ryesky, M.B.A., J.D.

In reviewing district court ruling, the appellate court "faithfully applied existing precedent" while declining to address the "lively and important debate" over market power ramifications of online sales platforms.

The U.S. Court of Appeals in San Francisco has largely affirmed a district court's judgment in litigation brought by multi-billion-dollar video game giant Epic against multi-trillion-dollar technology giant Apple. Epic had sued Apple over its restrictions imposed upon third-party app developers who cooperate with Apple through its standard licensing agreement. The district court ruled against Epic on its Sherman Act claims and on Apple's breach of contract counterclaim, and for Epic on its California competition law claim and on Apple's attorney fee claim. The circuit court affirmed all the district court's rulings except the one denying Apple's attorney fees claim, which it remanded to the district court for fee calculation. The court's preliminary injunction grant against Apple pending litigation was also found to have been within the district court's discretion (Epic Games, Inc. v. Apple, Inc., April 24, 2023, Smith, M.).

Apple's highly successful business model had previously been to avail the purchasers and users of its Mac computers, iPhones, and iPad devices the use of its own application programs (apps) on those devices. These apps all use Apple's iPhone operating system (iOS). Apple subsequently modified its business model to one in which the apps of other developers were made available to the users of Apple's devices. This was accomplished by Apple giving access to its iOS to third-party developers through a Developer Program Licensing Agreement (DPLA), which, in return for such access, imposed restrictions upon the developer's use of the iOS and routed all sales of such developed apps through Apple's App Store and in-app payment processor (IAP), thereby giving Apple a sales override on the user payments. This symbiotic relationship gives third-party developers access to Apple's customer base while reeling in additional customers for Apple.

Epic is a video game company whose primary business lines are (1) video game development; (2) a gaming software development through its Swiss-based subsidiary; and (3) video game publication and distribution. One of the video games developed by Epic is Fortnite, the basic version of which is freely downloaded by users, who then can purchase upgrades. In purveying Fortnite, Epic broke new ground in providing for its play on diverse devices (e.g., iPhone users can play along with Mac computer users, a user who had played on an iPhone during the day can continue playing the same game on a different device that evening, etc.). Epic also has its own online games store, which competes with Apple’s App Store.

Epic signed on to Apple's DPLA in 2010, and renewed in 2020. Immediately following the 2020 renewal, Epic proposed a modification of the DPLA terms, whereby Epic could offer iOS users distribution and payment alternatives to going through those of Apple. This proposal was rejected. Epic then undertook measures to bolster its own alternatives to Apple as a marketing and payment channel. These included an update to Epic's Fortnite game, which contained an undisclosed code that enabled Fortnite users to circumvent Apple's IAP payment system. Apple, unaware of the embedded code, approved the Fortnite update. Epic shortly thereafter activated the embedded code, and Apple, upon learning of it, gave Epic a two-week cure notice. After Apple removed Fortnite from its App Store, Epic sued Apple in federal district court for violations of the Sherman Act and California laws. Apple countersued Epic for breach of contract.

The district court preliminarily enjoined Apple from terminating the accounts of Epic's subsidiaries pending trial; this preliminary injunction was partially relaxed on appeal. After a bench trial, the district court ruled (1) against Epic on its Sherman Act claims [15 U.S.C. §§ 1–2]; (2) for Epic on its California’s Unfair Competition Law (UCL) claim [Cal. Bus. & Prof. Code § 17200 et seq.]; (3) for Apple on its breach of contract counterclaim; and (4) against Apple on its prayer for attorney fees. Epic and Apple each respectively appealed the district court ruling to the extent that it was against them.

Sherman Act-unreasonable restraint. The appellate court upheld the district court's finding against Epic's claim of an unreasonable restraint. Here, Apple's rationale that its privacy and security measures aimed to distinguish its products from those of its competitors, and accordingly was pro-competitive. Epic failed to adequately show that Apple had substantially less restrictive alternatives to attain its pro-competitive goals, and the district court's failure to do a totality-of-circumstances balancing of the procompetitive against the anticompetitive effects of Apple’s conduct was harmless error.

Sherman Act-monopoly maintenance. The appellate court upheld the district court's rejection of Epic's Sherman Act Section 2 monopoly maintenance claim. Here, the appellate court noted that Apple's market power demonstrated by Epic, while on the same continuum as monopoly power, is not in and of itself a contravention of the monopoly power prohibited by the Sherman Act. Moreover, Epic did not show that, given the expanding and fluid nature of the relevant games and apps markets. Even if Apple's power had constituted a monopoly, such a monopoly was not durable and Apple took no deliberate steps to maintain that monopoly.

Breach of contract-Sherman Act. The appellate court affirmed the district court's rejection of Epic's illegality defense to Apple's breach of contract counterclaim. Here, the illegality alleged by Epic was based upon a violation of the Sherman Act, and accordingly, the illegality defense collapsed with the district court's finding that Epic had not shown a Sherman Act violation by Apple.

Injunctive relief. The appellate court found no abuse of discretion in the district court's injunction against Apple's DPLA anti-steering provision that prohibited third-party developers from steering customers to other distribution and payment channels. Here, the dollar value of Epic's economic harm from the anti-steering provision was not easily calculable in light of the millions of customers and hundreds of thousands of apps involved. Furthermore, extending the injunction to cover all of Apple's DPLA accounts was warranted because merely limiting the injunction to Epic's subsidiaries would prevent Apple Store customers from using Epic's Game Store.

The case is No. 21-16506.

Attorneys: Thomas C. Goldstein (Goldstein & Russell PC) for Epic Games, Inc. Mark A. Perry (Weil Gotshal & Manges LLP) for Apple, Inc.

Companies: Epic Games, Inc.; Apple, Inc.

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