Epic Games, Inc. v. Apple Inc.

• Decision Date: 10 September 2021
• Docket Number: Case No. 4:20-cv-05640-YGR
• Parties: EPIC GAMES, INC., Plaintiff, v. APPLE INC., Defendant. Apple Inc., Counterclaimant, v. Epic Games, Inc., Counter-Defendant.
• Court: U.S. District Court — Northern District of California

559 F.Supp.3d 898

EPIC GAMES, INC., Plaintiff,

v.APPLE INC., Defendant.

Apple Inc., Counterclaimant,

v.Epic Games, Inc., Counter-Defendant.

Case No. 4:20-cv-05640-YGR

United States District Court, N.D. California.

Signed September 10, 2021

Benjamin Hans Diessel, Pro Hac Vice, Wiggin and Dana LLP, New Haven, CT, Christine A. Varney, Pro Hac Vice, Katherine B. Forrest, Pro Hac Vice, Michael Brent Byars, Pro Hac Vice, Yonatan Even, Pro Hac Vice, Christina Norma Barreiro, Pro Hac Vice, Darin P. McAtee, Pro Hac Vice, Hector J. Valdes, Pro Hac Vice, Joe Wesley Earnhardt, Pro Hac Vice, John I. Karin, Pro Hac Vice, Justin C. Clarke, Pro Hac Vice, Lauren Ann Moskowitz, Pro Hac Vice, Omid H. Nasab, Pro Hac Vice, Samuel Adams Stuckey, Pro Hac Vice, Vanessa A. Lavely, Pro Hac Vice, Gary Andrew Bornstein, Pro Hac Vice, Cravath, Swaine and Moore LLP, Nathan E. Denning, Pro Hac Vice, Wiggin and Dana LLP, New York, NY, Robert Seth Hoff, Pro Hac Vice, Wiggin and Dana LLP, Stamford, CT, Paul Jeffrey Riehle, Faegre Drinker Biddle & Reath LLP, San Francisco, CA, for Plaintiff/Counter-Defendant.

Arpine Lawyer, Jessica E. Phillips, Pro Hac Vice, Karen Leah Dunn, Pro Hac Vice, William A. Isaacson, Pro Hac Vice, Paul Weiss Rifkind Wharton Garrison LLP, Harry Phillips, Pro Hac Vice, Mark A. Perry, Cynthia Richman, Pro Hac Vice, Anna L. Casey, Pro Hac Vice, Gibson Dunn and Crutcher LLP, Elena Zarabozo, Evan N. Schlom, Katrina Marie Robson, O'Melveny and Myers LLP, William F. Stute, Pro Hac Vice, Orrick, Herrington and Sutcliffe LLP, Washington, DC, Meredith Richardson Dearborn, Paul Weiss Rifkind Wharton & Garrison LLP, Anna Tryon Pletcher, David R. Eberhart, O'Melveny & Myers LLP, Ethan D. Dettmer, Julian Wolfe Kleinbrodt, Lauren Dansey, Rachel S. Brass, Anthony Doc Bedel, Henry H. Cornillie, Gibson, Dunn & Crutcher LLP, San Francisco, CA, Peter John Sacripanti, John J. Calandra, Michael R. Huttenlocher, Nicole Lauren Castle, McDermott Will and Emery LLP, E. Joshua Rosenkranz, Pro Hac Vice, Orrick Herrington Sutcliffe LLP, Evan R. Kreiner, Pro Hac Vice, Karen Hoffman Lent, Pro Hac Vice, Skadden Arps Slate Meagher Flom LLP, Zainab Ahmad, Pro Hac Vice, Gibson, Dunn and Crutcher, New York, NY, Bethany Marvin Stevens, Hannah Cannom, Walker Stevens Cannom LLP, Daniel Glen Swanson, Jason C. Lo, Theodore J. Boutrous, Jr., Jennifer J. Rho, Jagannathan P. Srinivasan, Richard Joseph Doren, Gibson, Dunn & Crutcher LLP, Michelle S. Lowery, McDermott Will and Emery, Los Angeles, CA, Betty X. Yang, Pro Hac Vice, Veronica Smith Moye, Gibson Dunn and Crutcher LLP, Dallas, TX, Elizabeth Andrea Rodd, Pro Hac Vice, McDermott Will and Emery, Boston, MA, Scott A. Schaeffer, O'Melveny and Myers LLP, Shanghai, China, Dana Li, Soolean Choy, Gibson Dunn Crutcher LLP, Palo Alto, CA, Jennifer Bracht, Pro Hac Vice, Gibson Dunn, Denver, CO, for Defendant/Counterclaimant.

RULE 52 ORDER AFTER TRIAL ON THE MERITS

Yvonne Gonzalez Rogers, United States District Court Judge 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.

The Court provides its findings of facts and conclusions of law below.¹

PART I

FINDINGS OF FACT

To determine the relevant market, the Court must first understand the industry and the markets in that industry. This is a heavily factual inquiry. Thus, in this Order, the Court explains in detail, the facts underpinning each parties’ theory and other relevant facts uncovered during the trial. These details include the background of the parties, their products, the industry, and the markets in which they compete.² To assist the reader, given the length of this Order, an outline is included in an Appendix hereto.

I. THE PARTIES

A. Overview

Some basic background information may be helpful. Epic Games is a multi-billion dollar video game company. It defines the relevant market by way of Apple's own internal operating system. Apple has maintained control of its own operating system for mobile devices, called iOS, since its inception in 2007. Apple's creation and cultivation of the iOS device (and its ecosystem) has been described as a walled garden. Said differently, it is a closed platform whereby Apple controls and supervises access to any software which accesses the iOS devices (defined as iPhones and iPads; also referred to collectively as iOS devices). Apple justifies this control primarily in the name of consumer privacy, security, as well as monetization of its intellectual property. Evidence supports the argument that consumers value these attributes. Due in part to this business model, Apple has been enormously successful and its devices are now ubiquitous.

Both Apple and third-party developers like Epic Games have symbiotically benefited from the ever-increasing innovation and growth in the iOS ecosystem. There is no dispute in the record that developers like Epic Games have benefited from Apple's development and cultivation of the iOS ecosystem, including its devices and underlying software. Nor is there any dispute that developers like Epic Games have enhanced the experience for iOS devices and their consumers by offering a diverse assortment of applications beyond that which Apple can or has provided.

Until this lawsuit, Epic Games’ flagship video game product, Fortnite , could be played on iOS devices. The product generated an immensely profitable revenue stream for Epic Games. However, Epic Games was also required by contract to pay Apple a 30% commission on every purchase made through the App Store, whether an initial download or an in-app purchase. Consequently, Fortnite generated a profitable revenue stream for Apple as well. Epic Games tried to use Fortnite as leverage to force Apple to reduce its commission fee and to open its closed platform. When Apple refused, Epic Games breached its contract, which it concedes, and filed this lawsuit. Apple countersued for breach of contract.

Plaintiff focuses its challenge on Apple's control over the distribution of apps to its users and the requirement that developers of apps use Apple's in-app purchases or in-app payments ("IAP") system³ if purchases are offered in the app. Under this IAP system and under its agreements with app...