Beverage v. Apple, Inc.

• Docket Number: H050526
• Decision Date: 25 April 2024
• Citation: Beverage v. Apple, Inc., 320 Cal.Rptr.3d 427 (Cal. App. 2024)
• Parties: Michelle BEVERAGE et al., Plaintiffs and Appellants, v. APPLE, INC., Defendant and Respondent.
• Court: California Court of Appeals

320 Cal.Rptr.3d 427

Michelle BEVERAGE et al., Plaintiffs and Appellants,

v.APPLE, INC., Defendant and Respondent.

H050526

Court of Appeal, Sixth District.

Filed April 25, 2024

Trial Court: Santa Clara County, Trial Judge: The Honorable Sunil Kulkarni(Santa ClaraCounty Super. Ct.No. 20CV370535)

Kurt Kessler, William Audet, Ling Kuang, San Francisco, Myron Moskovitz, for Plaintiffs and Appellants.

Julian Kleinbrodt, Ethan Dettmer, San Francisco, Anna Mathieson, for Defendant and Respondent.

ADAMS, J.^*

I.Introduction

This case requires us to explore the intersection of laws regulating antitrust activities and unfair competition.Plaintiffs Michelle Beverage and Joseph Mejia(Plaintiffs) appeal after the trial court sustained without leave to amend a demurrer brought by DefendantApple, Inc.(Apple) to their class action complaint.They alleged that Apple’s restrictive contractual terms and its coercive conduct toward portable software developers who seek to do business on Apple’s App Store constituted unlawful and unfair practices that violated both the Cartwright Act(Bus. & Prof. Code, § 16700 et seq.) and the Unfair Competition Law (Id.§ 17200 et seq.(UCL).).Applying the Colgate doctrine, U. S. v. Colgate & Co.(1919)250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992(Colgate) and the holding of Chavez v. Whirlpool Corporation(2001)93 Cal.App.4th 363, 113 Cal. Rptr.2d 175(Chavez),the trial court determined that Plaintiffs did not and could not state causes of action under either legal regime as a matter of law.

On appeal, Plaintiffs challenge only one aspect of the trial court’s ruling.They argue the court erred by relying on Chavezto sustain the demurrer to their UCL cause of action alleging unfair practices by Apple toward one developer, Epic Games, Inc.(Epic), and its gaming application known as Fortnite.Plaintiffs claim that Chavez is inconsistent with the California Supreme Court’s decision in Cel-Tech Communications, Inc. v. Los Angeles Cel lular Telephone Company(1999)20 Cal.4th 163, 83 Cal.Rptr.2d 548, 973 P.2d 527(Cel-Tech).

As we will explain, we disagree that Chavez reflects a misapplication of Cel Tech.Since the trial court properly relied on Chavez to sustain the demurrer without leave to amend, we affirm the judgment.

II.Factualand Procedural Background

We summarize the facts underlying this action assuming, as we must, the truth of all properly pleaded allegations in Plain tiffs’ operative complaint.(Heckart v. A-1 Self Storage, Inc.(2018)4 Cal.5th 749, 753, 231 Cal.Rptr.3d 459, 415 P.3d 286.)

A. Appleand the App Store

Apple "designs, manufactures, markets, and sells to consumers" portable electronic devices that can connect to the internet via Wi-Fi or cellular data, such as iPhones and iPads (iOS devices).Apple released the first iPhone in 2007 and the iPad in 2010."Since then, Apple has sold billions of devices—setting a record for 1.5 billion active devices in 2020." iOS devices have a market share of roughly 50 percent in the United States.

iOS devices operate software programs called "apps" that are specifically designed to run on portable electronics.Apps are also operating system specific, such that they must be specifically configured to function on iOS devices.In 2008, Apple launched the App Store, which "makes apps and updates available for purchase, download, and update."The App Store is the only legal means by which developers can market and sell their apps to users of iOS devices, and the only legal means for those users to purchase and download apps to their devices.On that point, Plaintiffs allege that "[c]onsumers are unable to legally load apps onto their iOS Devices in any other way—they are required to purchase and download applications on their iOS Devices through the App Store and make In-App Purchases through Apple’s payment system."Additionally, "Apple has complete control over the content found on the App Store—the approval or removal of applications or updates rests entirely with them."The App Store features 1.96 million apps available for download, the vast majority of which are developed and programmed by third-party developers.

Developers who wish to do business on the App Store must agree to a non-negotiable contract that requires them to use Apple’s in-app purchase system.Developers are also prohibited from "steering" users to alternative payment methods outside of the app.When it first launched the App Store, Apple collected 30 percent of the price paid for each app and the developer received the remaining 70 percent.A year later, Apple also began collecting 30 percent of all sales of digital goods and currency made within apps.Aside from a handful of developers who have negotiated with Apple to receive a larger percentage of purchases made on the App Store, "[d]evelopers and firms had no way to avoid or minimize Apple’s 30% cut for purchases of digital content."

B. Fortnite

Epic created Fortnite, which is a social and gaming app "where dozens of participants, either individually or in teams, are dropped into a landscape" to engage in a "King of the Hill" style match where "the last one standing at the end wins."Within Fortnite, users can pay for digital currency, known as V-Bucks, which can then be used to "buy" digital goods for use in the application, such as costumes or specialized dances for the playable characters, When users on iOS devices purchase V-Bucks or digital goods in Fortnite, "the transaction goes through Apple," who takes a 30 percent cut of the user’s payment and sends the remaining 70 percent to Epic "as is the custom for in-app pur chases on iOS devices."

Fortnite was released for iOS devices in April 2018 and, by July 2018, reached $1 billion in revenue for in-app purchases of digital currency and goods.By May 2020, Fortnite had a cumulative total of 350 million users, and the mobile application reached $1 billion in revenue, with the vast majority coming from iOS devices and the App Store.

In August 2020, Epic contacted Apple about the company’s plans to launch a direct payment system via Fortnite on iOS devices where users could purchase digital currency and goods at a discounted price.Apple responded by removing Fortnite from the App Store, which prevented users from downloading or updating Fortnite.This led Epic to initiate legal action against Apple in federal court.¹

After Apple removed Fortnite from the App Store, it began promoting Fortnite’s biggest competitor on both the App Store and on Twitter.Apple also "threatened" to remove the apps of other companies who contracted with Epic from the App Store, and "considered punitive measures against Netflix when Netflix was considering the removal of in-app purchases."

C.The Pleadings and Demurrers

Plaintiffs are two individuals who made purchases through the App Store in Fortnite for use on iOS devices.They initiated this action in September 2020 on behalf of themselves and a putative class of iOS device users who downloaded Fortnite onto their device and made purchases of digital goods or currency within the app using Apple’s purchase system.

After the trial court sustained a demurrer to Plaintiffs’ first amended complaint, they filed a second amended complaint (SAC) in April 2022.Plaintiffs alleged that Apple’s restrictions on app distribution increased the prices developers charge iOS device users, and that Apple’s anti-steering restrictions "artificially increase" Apple’s power within the market for mobile gaming transactions.²

Plaintiffs asserted three causes of action in the SAC.The first was under the Cartwright Act, which Plaintiffs alleged Apple violated by leveraging "its market power to make developers and consumers accept unreasonable and anticompetitive terms in order to access the iOS marketplace."The second, for violation of the "unlawful" prong of the UCL, was based on the same conduct.

In the third cause of action, Plaintiffs asserted that Apple violated the "unfair" prong of the UCL by "threatening an incipient violation of an antitrust law by preventing an informed choice among users of the iOS platform by limited information regarding pricing and purchase option[s]."Plaintiffs further alleged that Apple’s conduct "violates the policy and spirit of antitrust laws because anti-steering has the effect of preventing substitution among platforms for transactions."

Apple filed a demurrer to the SAC, which the trial court sustained without leave to amend.The court found that Plaintiffs did not state claims under the Cartwright Act or the "unlawful" prong of the UCL as a matter of law because they alleged only unilateral conduct by Apple that was immunized from antitrust liability by the Colgate doctrine.Analyzing the UCL cause of action under the "unfair" prong separately, the trial court determined it was barred by Chavez.

Plaintiffs timely appealed.

III.Discussion

Plaintiffs contend that the trial court wrongly relied on Chavez and misapplied Cel-Tech to sustain Apple’s demurrer to their cause of action under the "unfair" prong of the UCL.The central premise of Plaintiffs’ argument is that Chavez was wrongly decided to the extent it held that a failed antitrust claim cannot be replead as an unfair business practice under the UCL.Our review of Cel-Tech, Chavez, and related antitrust principles shows otherwise.

A.Standard of Review

[1–7]" ‘The purpose of a demurrer is to test the sufficiency of a complaint by raising questions of law.’"(Candelore v. Tinder, Inc.(2018)19 Cal.App.5th 1138, 1143, 228 Cal.Rptr.3d 336(Candelore).)"We review an order sustaining a demurrer de novo, exercising our independent judgment as to whether a cause of action has been stated as a matter of law."(Thompson v. loane(2017)11 Cal.App.5th 1180, 1190, 218 Cal.Rptr.3d 501.)In doing so, " ‘[w]e assume the truth of the properly pleaded factual allegations, [and] facts that reasonably can be inferred from those expressly pleaded.’[Citation.]But we...