Epic Games files lawsuits against Apple and Google

On 13 August 2020, Epic Games filed lawsuits against Apple and Google in the U.S. District Court Northern District of California alleging their use of a series of anti-competitive restraints and monopolistic practices in the markets for (i) the distribution of apps to users of mobile computing devices like smartphones and tablets, and (ii) the processing of consumers’ payments for digital content used within mobile apps.

As I indicated on Friday in an interview in the Wall Street Journal, Epic’s lawsuits could have serious consequences for Apple and Google. First, with iPhone sales slowing down, Apple needs to complement its hardware-based business model with services monetizing its large user base. Second, U.S. lawsuits are always dangerous with Apple and Google having to disclose confidential emails and other information as part of the discovery process. Finally, this lawsuit might incentivize other app developers to come out of the wood and talk to regulators in the U.S. and other parts of the world. Apple’s App Store rules are also investigated by the European Commission following complaints from Spotify and Kobo.

The Commission is looking at two restrictions imposed by Apple in its agreements with companies that wish to distribute apps to users of Apple devices: (i) The mandatory use of Apple’s own proprietary in-app purchase system “IAP” for the distribution of paid digital content – Apple charges app developers a 30% commission on all subscription fees through IAP; and (ii) Restrictions on the ability of developers to inform users of alternative purchasing possibilities outside of apps.

I focus hereafter on Epic Games’ complaint against Apple, in which it makes two main claims:

• Apple monopolizes the market for iOS app distribution (on which Epic Games claims that, but for Apple’s restrictions, it would compete because it distributes games). According to Epic Games, this market comprises all the channels through which apps may be distributed to iOS device users. Epic Games argues Apple imposes unreasonable restraints and unlawfully maintains a monopoly in the iOS App Distribution Market through several anti-competitive actions, including technical restrictions and contractual restrictions.
  • According to Epic Games, this breaches US law on three counts:
    • COUNT 1: Sherman Act § 2 (Unlawful Monopoly Maintenance in the iOS App Distribution Market)
    • COUNT 2: Sherman Act § 2 (Denial of Essential Facility in the iOS App Distribution Market)
    • COUNT 3: Sherman Act § 1 (Unreasonable Restraints of Trade in the iOS App Distribution Market)

• Apple Monopolizes the iOS In-App Payment Processing Market (on which Epic Games also claims it competes). According to Epic Games, this market comprises the payment processing solutions that, but for Apple’s conduct, iOS developers could turn to and integrate into their iOS-compatible apps to process in-app purchases of in-app content. Epic Games argues that through its unlawful policies and restrictions, Apple unlawfully ties IAP to the use of its App Store and forecloses any potential competition in the iOS App Payment Processing Market.
  • According to Epic Games, this breaches US law on five counts:
    • COUNT 4: Sherman Act § 2 (Unlawful Monopoly Maintenance in the iOS In-App Payment Processing Market)
    • COUNT 5: Sherman Act § 1 (Unreasonable Restraints of Trade in the iOS In-App Payment Processing Market)
    • COUNT 6: Sherman Act § 1 (Tying the App Store in the iOS App Distribution Market to In-App Purchase in the iOS In-App Payment Processing Market)
    • COUNT 7: California Cartwright Act (Unreasonable Restraints of Trade in the iOS App Distribution Market)
    • COUNT 8: California Cartwright Act (Unreasonable Restraints of Trade in the iOS In-App Payment Processing Market)

As pointed out by The Verge, Epic Games’s case “is more difficult to level against Google, which controls Android software less strictly than Apple does for iOS. Android has long allowed for the installation of third party app stores, including Epic’s own Epic Games App. Apps can also be sideloaded through direct links, without the involvement of an app store.”

In any event, it is hard to determine the chance of success of these lawsuits, but they are not frivolous. Although the angle taken by Epic Games is a bit different, the issues at stake in these lawsuits are conceptually close to those investigated by the European Commission and there is every reason to believe that DG COMP will pay close attention to the Epic Games lawsuits.

The Epic Games lawsuit against Apple goes, however, one step further than the European Commission, in that Epic Games would like other app stores to be able to compete on iOS devices. As the founder and CEO of Epic Games said in a tweet: “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.” This an aggressive posture as it directly challenges Apple’s vertical integration model.

Even if other app stores were to be allowed in iOS devices the App Store would likely remain popular, but this would nevertheless put competitive pressure on Apple and perhaps force it to lower the 30% commission it takes on the revenues generated by apps selling digital goods and services that are consumed “inside the app“. The obligations for these apps to use Apple’s IAP rather than the in-app payment method of their choice could also go away under competitive pressure.

I commend Epic Games for having the guts to file these lawsuits as I have criticized Apple for a long time for its App Store rules, including in a paper co-authored with my colleague D. Katsifis showing these rules are a source of both exclusionary and exploitative abuses. The pressure is certainly rising on Apple and Google for allowing more competition for the distribution of apps on iOS and Android devices, as well as for allowing app developers to use their own payment methods.