Game over for Apple and Epic Games

Answer

Fortnite, one of the most popular games globally, is available for computers, mobile devices and games consoles. On 13 August a game update allowed players to circumvent the Apple and Google’s digital payment systems and pay Epic Games directly through selecting the 'Epic direct payment' option for the first time.

By intentionally circumventing paying Apple and Google their 30% cut of goods sold through their digital stores, consumers were given the option of purchasing the same product at a 20% discount for the first time.

In response, Apple and Google removed Fortnite from their digital stores, citing the update as a terms-of-service violation. Apple also moved to revoke Epic's developer access to Apple software.

Epic Games has sued both companies as a result and launched a huge public relations campaign with the tagline #FreeFortnite.

The ultimate question is: whose side is the law on?

Why did Epic Games take such provocative action?

In the months leading up to the controversial update, Epic Games' Chief Executive Tim Sweeney proposed publishing an iOS version of its Epic Games Store app which already exists on Mac and PC, and the addition of competing payment processing options other than Apple payments in an attempt to make Apple's iOS devices "as open and competitive as it is on personal computers". Both proposals were declined on the basis that approving third-party stores would damage "the health of Apple's ecosystem", provoking Epic Games into violating their agreement.

What does this mean for consumers and developers?

The highly anticipated Fortnite season 4 premiered on 27 August, but millions of its players are not able to enjoy it; the removal of the game from both Apple and Google's storefronts means that it cannot be downloaded or updated through the Apple App Store or Android.

Apple's revocation of Epic's access to its software development kit is also set to have a huge impact on the company’s Unreal Engine and by extension, the wider video game industry. As Unreal Engine is a set of software maintained by Epic that is used to create games, including the smartphone versions of PlayerUnknown's Battlegrounds, Epic claims its inability to issue updates to the Unreal Engine on iOS or Mac would prevent developers using the software from being able to update their own games to support the updated iOS and MacOS.

Epic Games' claim

Epic's lawsuit against Apple, filed on the same date as the removal of the game from the iOS platform, alleges that Apple's control over app distribution and payment processing imposes unreasonable restraints which amount to anti-competitive practices that maintain a monopoly in the market.

Aim of the claim

Apple's rules currently forbid developers from even mentioning external payment options.

If a developer wants to release an app available on iOS devices, they must do it through the App Store, which requires acceptance of Apple’s terms, including Apple having final approval over the app and the content within it.

This means that access to the millions of iOS users has an extremely high toll. This issue has been raised previously by Spotify, which filed an antitrust complaint against Apple with the European Commission in March 2019 on the basis that since Apple operated its own music streaming service, the App Store’s 30% commission effectively functions as an anti-competitive policy.

The removal of the high toll would allow Epic Games and other service providers to keep a higher revenue from in-app purchases. However, as expressed by Tim Sweeney, the aim of the claim extends beyond financial gain to fundamental freedom of choice: “At the most basic level, we’re fighting for the freedom of people who bought smartphones to install apps from sources of their choosing, the freedom for creators of apps to distribute them as they choose, and the freedom of both groups to do business directly.”

Extent of the claim

Epic Games' claim is two pronged, based on what it alleges is Apple's monopolistic position and a breach of Section 1 of the Sherman Antitrust Act, the primary antitrust law in the US.

For both aspects of the claim, Epic Games will need to provide evidence in support, to which market definition will be key.

What does Epic Games have to prove?

If the market is defined as iOS mobile devices instead of mobile devices more generally, Epic Games is more likely to be able to establish that Apple engages in anticompetitive conduct and monopolises the market. Such evidence is likely to focus on Apple's restriction on other companies from setting up their own app stores and payment processing services, along with the unreasonably high fee of 30% on sales in the market, to the detriment of consumers.

However, as highlighted by the Federal Trade Commission: “Courts look at the firm's market share, but do not typically find monopoly power if the firm has less than 50 percent of the sales of a particular product or service within a certain geographic area.”

Although Apple accounts for around half of the smartphone market in the US, the fact that there are 2.5 billion active Android users compared to Apple's 1.4 billion means that Apple has a much lower global market share of around 35%.

If a similarly narrow interpretation of market definition is adopted by the court as that taken in the US Supreme Court case of Eastman Kodak Co v Imagine Technical Services Ltd, Epic Games may be successful in demonstrating that Apple holds a monopoly over the iOS mobile device market.

However, if the market is extended to non-iOS mobile devices, it is doubtful that Apple's global market share of 35% will be sufficient to constitute a monopoly, particularly in light of the definitive statement made by the Second Circuit Court of Appeals in United States v Aluminium Co regarding market share: “It is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three percent is not.”

In addition to the sufficient market share, the antitrust allegation requires additional elements to be proven. This includes the following:

1. Apple ties together the sale of two distinct products/services;
2. Apple possesses enough economic power in the tying product market to coerce its customers into purchasing the tied product; and
3. the tying arrangement affects a not insubstantial volume of commerce in the tied product market.

Considering the above, it is no wonder that California District Judge Yvonne Gonzalez Rodgers commented: “This is not something that is a slam dunk for Apple or Epic Games.”

What's next?

On 17 August, Epic filed for a temporary restraining order (TRO) order against Apple that would put it back on the App Store and allow it to be updated, but the judge ruled partially in favour of Apple. Judge Rogers denied Epic Games' request that would have returned Fortnite to the App Store but approved the request that allows Epic Games to continue updating Unreal Engine for iOS.

A hearing for a preliminary injunction on 28 September will determine whether this TRO will continue until the case's completion.

The Apple v Epic Games dispute certainly raises interesting and unprecedented questions, not only about the extent of monopolies but about situations where the defendant in an antitrust lawsuit, such as Apple, created the market it is accused of monopolising. Most definitely watch this space!

Radhika Morally is a trainee solicitor at Taylor Wessing.