U.S. states and Justice Department pile in on Epic’s side in Apple lawsuit

A total of 35 U.S. states joined in an antitrust lawsuit to back up Epic Games’ lawsuit against Apple over alleged monopolistic practices.

Those states met the deadline for filing amicus briefs in Epic’s appeal to a federal court ruling that largely favored Apple, which banned Fortnite from the App Store in 2020 after Epic added a link to cheaper off-store item purchases to its iOS game.

The states said Apple’s conduct has harmed mobile app developers as well as users as it monopolized mobile app distribution and in-app payment solutions for iPhones. On Thursday, Apple said it had more than 1.8 billion active mobile devices in the market. Epic argued that this lucrative market is captive to Apple and constitutes a monopoly.

The case is an important conflict between a platform owner and a powerful game company that could set the rules of engagement and competition in an era that will be filled with giant tech and game companies. A lot of money is at stake here.

But federal judge Yvonne Gonzalez Rogers ruled in September that the market share in question was bigger, amounting to mobile game in-app purchases on both iOS and Android. Apple had a larger share of revenues, but not an overwhelming share in this market.

When Apple set up the App Store in 2008, it instituted a 30% commission on every in-app purchase transaction. While Apple may have earned that commission with the investments it made in the App Store and the iPhone, Epic argued that it effectively became a tax that sucked billions of dollars out of the game industry and should have been reduced. Apple said it could not calculate the actual profits. The court did not find that to be credible.

Epic’s expert, Ned Barnes, calculated that Apple’s operating margins on the App Store are above 75%. Epic argued that Apple’s commission would be like a car dealer taking a fee on the sale of a car and then taking more fees every time someone put gas in the car.

Apple won its case on nine counts. There were a couple of points where the judge ruled in Epic’s favor. Apple had put in place “anti-steering” policies that directed developers to use its payment system — which generates the 30% commission — in part because it reduced security and privacy risks for players. The judge pointed out this enables Apple to monetize its intellectual property, and she noted evidence supports the argument that consumers value these attributes of privacy and security and trustworthiness.

Apple had argued that Nordstrom does not advertise prices inside Macy’s stores for its goods. But the judge said Apple created a “black box” where it enforced silence around competitive pricing elsewhere. Developers could not use their app to advertise lower prices on their websites. That was harmful to consumers, she found.

Under the injunction, Apple is permanently stopped from prohibiting developers from including external links or other calls to action that direct players to alternative payments. Apple is appealing that part of the ruling, and it won a delay in the enforcement of that order.

The U.S. Justice Department also said that the original ruling in the trial was “flawed” as provisions from the Sherman Act were incorrectly applied by the judge and that could imperil antitrust enforcement in the digital economy. Apple told Reuters that it was optimistic it would prevail. The Justice Department said the court never addressed pricing evidence when ruling that Apple lacked monopoly power but was “near the precipice.”

The states also said they had a problem with Apple’s unilateral contracts that every developer has to accept, but the lower court found this was not proof of market power, which the states found to be a “paralyzing paradox.” Academics who filed briefs also said that the court overlooked less-restrictive alternatives to Apple’s rules that would be easy to implement. It also noted that Apple’s tying of products together could also hurt competition and consumers.

The Electronic Frontier Foundation said that Apple’s approach to security is itself anticompetitive. Even after accepting Apple’s security rationale as a procompetitive justification, the district court should have finished the rule-of-reason analysis by weighing the procompetitive and anticompetitive effects of Apple’s policies, the foundation said. And it said Apple’s policies deny users choice on security, privacy, and content.

I think the court should have ordered Apple to make its own calculations about the profits related solely to the App Store, even if this would have required the company to change its accounting practices.