Written by Genevieve Javidzad
On April 24, 2023, the Ninth Circuit issued its much anticipated decision in Epic Games, Inc. v. Apple, Inc., in which Epic alleged that Apple violated the Sherman Antitrust Act and California Unfair Competition laws. The Ninth Circuit affirmed the District Court’s ruling on the merits but reversed and remanded for further consideration as to whether Apple was entitled to its fees.
Epic is the developer of the hugely popular game Fortnite, the parent company of a gaming-software developer, and a video game publisher and distributor. Apple, among other things, makes apps available on its App Store. Pursuant to the terms of its Developer Program Licensing Agreement (“DPLA”), Apple imposed various restrictions on app developers like Epic, including restrictions on app distribution on certain devices, requiring “in app” purchases to go through Apple’s payment processor, and preventing developers from communicating to iOS device users the existence of available—and sometimes less expensive—payment options. (This last restriction was referred to as the “anti-steering” provision.)
After a dispute arose among the parties regarding these provisions, Epic sued Apple, contending that Apple’s restrictions violated the Sherman Antitrust Act and California’s UCL. Claiming that Epic had breached the DPLA by not adhering to certain restrictions, Apple cross-claimed for breach of the DPLA and sought attorneys’ fees under the agreement’s indemnification provision.
After a bench trial, the District Court held that Apple had not violated the Sherman Act by restricting distribution to Apple’s App Store or requiring that in-app purchases on iOS devices go through Apple’s in-app payment processor. However, the court held that the anti-steering provision violated California’s UCL and enjoined Apple from enforcing it against any developer, not just Epic. The court also found Epic liable for breach of contract, but did not award Apple attorney’s fees, finding that the indemnification clause in the agreement applied only to third-party claims. The parties each appealed the rulings adverse to them.
Analysis on Appeal
The Ninth Circuit affirmed in part and reversed in part.
Sherman Act Antitrust Claim
On the Sherman Act claims, the Court first turned to Section 1, regarding whether Apple engaged in a restraint of trade. The Rule of Reason test requires that (1) the plaintiff make a showing that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market; (2) the defendant making the restraint offer non-pretextual, legally cognizable procompetitive rationales for its restrictions; (3) the plaintiff show a less-restrictive alternative calibrated to achieving that general goal; and (4) the court then conduct a balancing test. Finding certain District Court errors to be harmless, the Ninth Circuit held that Epic failed to establish, as a factual matter, that its proposed market definition was correct and that any substantially less restrictive alternative means for Apple to accomplish the procompetitive justifications supporting iOS’s walled-garden ecosystem existed.
In addition, Epic claimed that Apple unlawfully tied together app distribution (via the App Store) and in-app payment processing, but the District Court found no tying (i.e., the App Store and the in-app payment processing system are not two separate products). The Ninth Circuit held that such finding was erroneous—that is, the Court found that the App Store and the processing system are two separate products—but also held that the trial court’s finding was harmless.
Finally, Epic claimed that Apple unlawfully maintained a monopoly with its restrictive practices. The Ninth Circuit found that, because the conduct in question was not anti-competitive under Section 1 of the Sherman Act, there was no need to analyze separately the same conduct under Section 2. Thus, it affirmed the District Court’s rejection of Section 2 liability for Apple.
Breach of Contract Claim
Since the parties had already stipulated that Epic had breached the DPLA, the only dispute was whether Epic had any affirmative defenses (e.g., whether the DPLA was illegal, void as against public policy, or unconscionable). The District Court rejected Epic’s affirmative defense of illegality. Because that affirmative defense depended entirely on the Sherman Act claims, which were rejected, the Ninth Circuit affirmed the District Court’s decision.
Unfair Competition Law (UCL) Claim
The District Court found that Epic suffered an injury sufficient to confer Article III standing, concluding that Apple’s anti-steering provision violates the UCL’s unfairness prong, and entered an injunction prohibiting Apple from enforcing the anti-steering provision against any developer. The Ninth Circuit affirmed, reasoning that Epic has subsidiaries on the App Store, and thus, that the anti-steering provision affects the subsidiaries’ earnings. Moreover, Epic is a competing game distributor through the Epic Games Store, and if consumers can learn about lower app prices on a different platform, and have the ability to use that alternative platform to obtain those lower prices, they will do so, increasing the revenue that the Epic Games Store generates.
Apple argued that the District Court abused its discretion when applying the injunction tot all developers, not just Epic’s subsidiaries in the App Store. However, the Ninth Circuit affirmed the injunction because the illegality of the anti-steering provision is not easily remedied with money damages, and the scope of the injunctive relief was appropriate because the illegality affected Epic’s subsidiaries’ apps on the App Store and prevented other apps’ users from becoming Epic Games Store consumers. The Ninth Circuit, however, reversed and remanded the District Court’s holding that the DPLA’s indemnification provision does not require Epic to pay Apple’s attorneys’ fees.
Based on the Ninth Circuit’s holding, Apple will be prohibited from enforcing its anti-steering provision against app developers, but app developers should be aware of the risks of violating Apple’s DPLA.