Apple not a monopoly but must allow alternate payment methods for apps, judge rules

While the injunction by Judge Yvonne Gonzalez Rogers did not demand that Apple make alternative App Stores mandatory, the ruling is not what one would call a complete win for Apple.

As part of a larger ruling, Friday's injunction issued at the same time is clear about disallowing Apple's "anti-steering" provisions in the App Store. In the ruling, Judge Gonzalez Rogers is specific about what Apple is disallowed from doing.

"[Apple is] restrained and enjoined from prohibiting developers from including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app," the judge wrote.

It isn't quite clear what the limitations are of the injunction. Speculation abounds that this could be as simple as a Square link in-app with Face ID authentication. Also unclear is how Apple will decide to interpret the ruling, and how any follow-up complaint about it will be adjudicated.

The injunction also explicitly allows developer communication with customers through volunteered account registration information, contrary to Apple's policies. This does not mean that Apple has to share information it has, but rather, it allows developers to use information that they gather by a sign-up or registration process.

Apple has 90 days to comply with the order. The injunction is limited to just the anti-steering rules in the App Store.

Epic vs. Apple - the ruling as a whole

Epic won one aspect of the case, as it pertains to California's Unfair Competition Law. Apple prevailed in breach of contract clauses.

Specifically, Epic needs to pay damages equal to "30% of the $12,167,719 in revenue Epic games collected" through Epic Direct Payment, plus any revenue collected through November 1 to date of judgement, plus interest.

Part of the ruling was the definition of the market at stake, which was a contentious point of the trial.

"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 judge wrote. "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."

The judge was clear that Apple is not a monopoly, however. Saying that "success is not illegal" the judge ruled that Epic could not demonstrate that Apple was engaging in monopolistic behavior.

"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," said the Judge. "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."

The judge agreed with Apple's termination of the Epic Games developer account, and Apple has the "contractual right" to terminate its agreement with any or all of Epic's "wholly owned subsidiaries, affiliates, and/or other entities under Epic Games' control at any time and at Apple's sole discretion."

It isn't yet clear if Apple will terminate the rest of Epic's developer accounts, which control things like the Unreal Engine and the like.

Ultimately, the judge decided that not only was Apple not unfairly retaliating against Epic when it cut off Epic's account, she also said that Epic's claims were a play to control more of the gaming market, which it saw Apple controlling.

"This trial highlighted that 'big tech' encompasses many markets, including as relevant here, the submarket for mobile gaming transactions. This lucrative, $100 billion, market has not been fully tapped and is ripe for economic exploitation," the judge concluded. "As a major player in the wider video gaming industry, Epic Games brought this lawsuit to challenge Apple's control over access to a considerable portion of this submarket for mobile gaming transactions. Ultimately, Epic Games overreached."

Highlighting the judge's words, Apple has issued a statement about the ruling.

"Today the Court has affirmed what we've known all along: the App Store is not in violation of antitrust law. As the Court recognized 'success is not illegal.' Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world," Apple said in a statement. "We remain committed to ensuring the App Store is a safe and trusted marketplace that supports a thriving developer community and more than 2.1 million U.S. jobs, and where the rules apply equally to everyone."

In a series of Tweets, Epic CEO Tim Sweeney thanked the court and vowed to "fight on."

"Today's ruling isn't a win for developers or for consumers. Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers," Sweeney wrote. "Fortnite will return to the iOS App Store when and where Epic can offer in-app payment in fair competition with Apple in-app payment, passing along the savings to consumers."

It isn't yet clear if Apple will allow discounts externally as Sweeney proposes, versus what is offered as in-app purchases.

Epic has said that it will appeal the decision. Apple is calling it a "resounding victory."

"We are very pleased with the court's ruling and we consider this a huge win for Apple," said Apple General Counsel Katherine Adams.

Earlier in September, Apple made similar concessions to the ruling in response to a Japan Fair Trade Commission investigation. The changes would allow "reader" apps to include links to their own websites. However, this move was much narrower in scope, since it only applied to apps that show outside content on iOS, and not to games — the largest App Store sector by far.

Previously in court

The ruling follows months after a heated three-week trial between Apple and Epic, which occurred in May. The trial, which was held in person with COVID-19 social distancing measures in place, had Epic attempting to convince to the judge that Apple should change how it operates the App Store, or even to allow sidestepping of it entirely.

Epic had a number of aims it was trying to push for, with each potentially reducing Apple's revenue, and in some cases, Apple's security.

The historic 30% cut of in-app purchases and App Store purchases was repeatedly attacked, with Epic's evidence of internal Apple communications showing the iPhone maker mulled over changing the percentage cut as early as 2011. However, outside of situations such as the App Store Small Business Program, Apple has kept the base rate fee the same.

Epic also wanted the possibility to add its own alternate payment system for in-app purchases, just as it did with "Fortnite" before the game was pulled from the App Store. A policy that prevented developers from saying other external payment systems existed within apps themselves was a third item Epic wanted to change.

Lastly, and arguably the biggest prize for Epic, was demanding Apple allow apps to be side-loaded onto the iPhone and iPad, and effectively enabling alternative app marketplaces to exist on Apple's hardware. By allowing the Epic Games Store onto Apple devices, that would not only enrich Epic far beyond the high revenues of game sales, but it would cut Apple almost entirely out of the app sales equation.

Apple insisted that its path was the right one, with the fee being a return on its investment, according to Apple CEO Tim Cook on the last day of questioning. "We have 150,000 APIs to create and maintain, numerous developer tools, and processing fees," said Cook to Judge Gonzalez Rogers.

Security was also a major point of Apple's defense, with both sides pointing to iOS as being secure in different ways.

On Epic's side, its expert witness proposed that iOS could become more like macOS in terms of app distribution and third-party access without losing security. Security features like malware scanning and notarization were concepts that could be ported to iOS and implemented in a macOS way, Epic's witness testified.

Apple's Craig Federighi took the unusual step of blasting Mac security in praising the iOS platform. App stores were "regularly exploited on the Mac," Federighi said, and that there was "a level of malware on the Mac that we don't find acceptable."

The executive also warned that moving from the walled garden approach, "it would become commonplace for users to be directed to download misrepresented software from untrusted sources where they'd be subject to malware." Mac users were also apparently more wary of downloading software with iOS users theoretically an easier audience to exploit.

Apple wasn't the only company under the spotlight during the trial, as Epic Games received its own set of attacks. During one exchange about whether Epic bans "Fortnite" players from the game for breaking rules, Apple used the opportunity to draw a comparison against Epic's breaking of Apple's policies that led to the removal of "Fortnite" in the first place.

Epic Games CEO Tim Sweeney's testimony had the gaming veteran claim the 30% fee wasn't at all like the 30% commission paid to console companies like Sony and Microsoft, despite having similar restrictions such as a first-party payment system and preventing app sideloading. According to Sweeney, there was a "general bargain" in the gaming industry where consoles were sold at a loss to be recouped, while Apple makes a profit on hardware sales.

Some hypocrisy was also on display, with Sweeney confirming on the stand that Epic charged developer a hefty 60% fee when the company distributed other games on its platform in the 1990s.

At one point, Sweeney admitted that he would have taken a special deal with Apple for reduced app and in-app purchase commissions from Apple, if it were offered. Sweeney had previously attempted to negotiate special treatment for "Fortnite" from Apple, but the company refused.

The court was also shown evidence that Apple was willing to make deals with major service providers, as it attempted to make Netflix reconsider in-app subscription signups in 2018.

Though the trial concluded in May, both sides have continued to fight in public over the matter, to mixed results.

In June, Sweeney complained on Twitter about Apple's business practices and that a "corporate propaganda campaign" wasn't a solution. Companies should "just fix it and bear the costs," he tweeted, ignoring the hypocrisy of Epic running a multi-week "Free Fortnite" campaign against Apple before the trial.

Toward the end of June, Apple's legal team submitted a copy of the NCAA v Alston Supreme Court decision to the judge, as it "provides guidance" on issues that surfaced during the lawsuit. It was believed Apple's submission was to remind the court to be careful about "rule of reason findings."

Other lawsuits between the two companies continued to roll on. In July, Australia's Federal Court decided to allow Epic Games' antitrust case against Apple to move forward, after being put on hold while the U.S. lawsuit took place.

Epic vs. Apple - Judgement by Mike Wuerthele on Scribd