The Apple-Epic Grudge Match, Round Two

Apple C.E.O. Tim Cook.
Apple C.E.O. Tim Cook. Photo: Kevin Winter/Getty Images
Eriq Gardner
November 7, 2022

Everyone’s talking about Elon Musk’s plan to charge Twitter users $8 per month for those coveted blue check-mark badges, but there’s a crucial detail that always seems to get left out of the discussion: the 30 percent fee that will end up in Apple’s pocket. That’s because Apple insists that developers, like Twitter, use its payment system for any transactions that go through its app store—a global “tax on the Internet,” as Elon once put it, that amounts to tens of billions of dollars in fees every year. Last Monday, Apple updated its rules to take a cut of ad campaigns that are managed through its platform, too, in yet another strike against Meta. There’s no reason to think Elon’s blue check business won’t have to pay the toll.

Well, perhaps one reason. Next Monday, at the James R. Browning Courthouse in San Francisco, the Ninth Circuit Court of Appeals will hear oral arguments in Epic Games v. Apple, Inc., a dispute that first arose in 2020 when the Fortnite game developer attempted to bypass Apple’s 30 percent commission. That cut, of course, is a foundation of the multi-trillion dollar company’s business model: Ned Barnes of Berkeley Research, a key witness for Epic, estimated that Apple generated $22 billion in commissions from in-app purchases in 2020 alone—and that almost 80 percent of that money was pure profit. (Apple disputes those figures, but it’s certainly in the billions.) Apple responded by booting Fortnite from its App Store and alleging a contract breach; Epic, in turn, accused Apple of monopolistic misbehavior with antitrust claims. 

After a trial last year, U.S. District Court Judge Yvonne Gonzalez Rogers handed down a Solomon-like decision that left no one particularly satisfied. In September 2021, Judge Rogers ruled that none of Apple’s behavior violated federal antitrust laws. The judge shrugged off a challenge to how the Developer Product License Agreement—the one that developers like Epic sign to distribute apps in the iOS ecosystem—supposedly acted as a restraint of trade under Section 1 of the Sherman Act. In a fatal blow to Epic’s lawsuit, the judge saw no “concerted action” when one party dictates terms, essentially imposing its will on another party in a unilateral manner. 

Rogers did acknowledge that a 30 percent commission is high, and that it would presumably be much lower if there were real competition. (Sure, Apple’s iOS technically has a competitor in Google’s Android, which is facing a separate suit from Epic, but few people switch between these ecosystems once they’re locked in.) She also ruled that Apple couldn’t prevent app companies from steering subscribers to sign up over a web browser where Apple can’t take its fee (more on that later). Still, the judge was swayed by Apple’s argument that its walled-garden system provides a safe and trusted user experience, and Epic couldn’t persuade her that this explanation was just a pretext.

Now comes this all-important appeal, which could reverberate through the entire digital universe: payments, music, messaging, video, audio, games, cloud storage, and on and on. Next week in San Francisco, the Biden administration will argue that this aspect of Rogers’ ruling leaves marketplace competition and supply chains vulnerable to coercion. (Apple, for its part, says it has no duty to deal with Epic on its preferred terms.)

Microsoft, itself no stranger to industry-defining antitrust cases, perhaps best sums up the significance in its amicus brief: “Few companies, perhaps none since AT&T at the height of its telephone monopoly, have controlled the pipe through which such an enormous range of economic activity flows. And fewer still (not even AT&T) have held such gatekeeper power while simultaneously competing in so many adjacent markets.”

The Epic Battlefield 

Epic, whose appeal is now being led by Goldstein & Russell partner Tom Goldstein (most famous for founding SCOTUSblog), isn’t particularly satisfied with how Rogers handled what’s known as the “rule of reason” analysis, and neither are its many supporters in Silicon Valley—among them, Agrin Health, and Tinder. With next week’s appeal, they’re hoping that the three-judge panel finds a better balance between the anticompetitive harms and procompetitive justifications, and perhaps most crucially, takes a more nuanced look at less restrictive alternatives. Another crucial element is whether the Ninth Circuit review focuses on all iOS apps or just digital mobile game transactions.

Apple, represented in the appeal by Mark Perry at Weil Gotshal, has plenty to challenge, too. While Rogers ruled that Apple hadn’t violated any antitrust laws, she did side with Epic under California’s Unfair Competition Law over Apple’s anti-steering restrictions. Until the 2021 trial, Apple prevented apps from redirecting users to another platform, like a web browser, for certain kinds of payments. But this rule, Rogers concluded, robs users of the ability to make informed choices. She issued an injunction, effectively allowing companies to side-step Apple’s fee by directing users to a payment link outside the app, with certain exceptions. (In its appeal, Apple is arguing that Epic doesn’t have standing to pursue this particular legal claim.)

Although this isn’t necessarily a sign of the ultimate outcome, a panel of Ninth Circuit judges has already suspended the injunction that Rogers had issued on the anti-steering restrictions. Apple, they wrote in a short order last December, raised “serious questions” about how its conduct could survive antitrust scrutiny but be out of bounds under California’s competition rulebook. If anything, this quick intervention—along with the great number of interested parties—presages a truly consequential and unpredictable decision. 

The TikTok Problem

This week, F.C.C. commissioner Brendan Carr made some noise by calling on the U.S. government to ban China-owned TikTok over concerns that the video app could be used to spy on American users. Carr wants the Council on Foreign Investment in the U.S. (CFIUS) to take bold action, which, ironically, highlights the slipping jurisdiction for Carr’s own agency in policing foreign intrusions on massively popular communications channels. Back in the old days, if China wanted to buy NBC, the F.C.C. could put a stop to that, but the digital sphere has become a largely unregulated beast. 

So who provides security in the app-based economy? Apple has certainly cracked down on app tracking to the everlasting frustration of Mark Zuckerberg. Of course, taking on a big market like China represents a whole other calculation. There may also be pressures to weigh in with a heavy hand elsewhere. For instance, after the mob violence in the U.S. Capitol building early last year, Apple banned the conservative-leaning social media platform Parler from its app store over its failure to stem threatening content. The service has now returned after Parler made changes, but this probably won’t be the last time Apple cracks down on objectionable speech. 

National security experts are closely watching and weighing in on this case, lest app-based networks without strong oversight become more vulnerable to malware, ransomware, and other cyber-intrusions. If Epic prevails, some warn, the consequences could be devastating. As they tell the appeals court: “Mobile device security like that built into Apple’s App Store currently serves as a frontline of our nation’s defense.”

But does that put too much faith in the world’s largest company? And what will stop Apple from going too far? Certainly, part of the answer may be antitrust law. If, for instance, Apple changes its rules on “reader” apps (those that are primarily meant to provide access to content), and Netflix has to fork over a portion of its new advertising income—absolutely a possibility—that could certainly trigger a courtroom brawl. 

Or if Apple decides that Elon Musk has gone too far into turning Twitter into a free speech “hellscape” and boots his $44 billion acquisition, that too could raise a challenge. If so, Elon will likely be turning to the results from Epic Games v. Apple, Inc., whatever they may be, for guidance on what comes next.