Shaken to the Core

By: James Trusty

This month in San Francisco, U.S. District Court Judge Yvonne Gonzalez Rogers ruled that Apple must stop forcing game developers to exclusively use its payment system in their app purchases. With the ruling, app developers can include a link or other advertisement to facilitate alternative ways of paying for each app. The suit was brought by Epic Games, the maker of the wildly popular game Fortnite, and the ruling is a legal earthquake for Apple, which had been earning as much as a 30% commission on some of the app sales from its platform.

The buildup to this litigation, which may have left both sides a bit sour, was contentious and expensive. In 2015, Epic launched “Project Liberty,” in which they discounted costs for Fortnite by 20% for purchasers who avoided using Apple’s payment processing for the transactions. Apple followed up by dropping Fortnite from its App Store, a move that not only curtailed new purchases but doomed prior App Store purchases of Fortnite to obsolescence because of the disconnect to important iPhone updates. Enter the lawyers and the litigation between these tech titans.

The trial included cameos from each company’s CEO, and the results were a decidedly mixed bag for the parties. Project Liberty effectively has been renamed Project Breach of Contract, with Judge Rogers finding that Epic owes Apple the 30% commission from re-routed (direct) sales, as it violated the contract between Epic and Apple that got Fortnite in the App Store. The Court concluded that Apple’s anti-steering contractual provisions “hide critical information from consumers and illegally stifle consumer choice. “When coupled with Apple’s incipient antitrust violations,” Judge Rogers opined, “these anti-steering provisions are anticompetitive and a nationwide remedy to eliminate those provisions is warranted.”[1] But Judge Rogers also ruled against Epic in nine of the ten counts, concluding that “success is not illegal” in brushing off the antitrust claims of monopolistic behavior. Perhaps ironically, the first party to note an appeal to the 9^th Circuit Court of Appeals was Epic, filing it over the weekend.

But do not fall for the happy talk emanating from Apple’s lawyers and CEO. Celebrating the antitrust win does not change the core reality, so to speak, that the in-app purchase exclusivity, which grossed Apple roughly $64 billion in 2020, is about to be pruned from the app sales in December, when the injunction is set to kick in.

Epic, meanwhile, has a case pending against Google on the same premises, just relating to the Android operating system rather than iPhones. Joining the legal gala more recently, 36 states and the District of Columbia filed similar suit against Google, whose public response to date has been to basically say, “Well, Apple does it, too.”

Aside from Apple standing to lose a sizeable amount of profit, the ruling could make the already expansive world of app developing even more profitable and alluring than ever. The lingering questions include whether Apple will note an appeal, whether a federal ruling premised on California state law will fundamentally change the contractual relations between Apple and the app developer community, and whether the Google litigation will have a similar result. For the moment, however, a big source of Apple’s profit may be frittering away.

[1] Epic Games, Inc. v. Apple, Inc., Case 4:20-cv-05640-YGR, Document 812 (N.D.Ca. 09/10/21) Page 3.