Epic Games, Inc. v. Apple, Inc.
To be published in Federal Reporter 3d (2023)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A court applying the Sherman Act's Rule of Reason must consider non-negotiated contracts of adhesion within Section 1's scope and perform a final balancing of harms and benefits, even if a plaintiff fails to propose less restrictive alternatives. Federal antitrust claims that fail due to proof deficiencies do not automatically preclude liability under state unfair competition laws for similar conduct.
Facts:
- In 2007, Apple revolutionized the smartphone market with the iPhone, offering a multi-touch interface and preinstalled "native" apps.
- Shortly after the iPhone's debut, Apple opened the iOS operating system to third-party app developers but created a "walled garden" where app distribution and in-app purchases were mediated by Apple.
- Apple's Developer Program Licensing Agreement (DPLA) required developers to distribute iOS apps only through Apple’s App Store, use Apple’s in-app payment processor (IAP) for purchases within apps, and limited developers' ability to communicate alternative payment options to users (anti-steering provision).
- Apple collected a 30% commission on initial app purchases and subsequent in-app purchases through the IAP.
- Epic Games agreed to the DPLA in 2010 and later released Fortnite on iOS, attracting approximately 115 million iOS users by 2018.
- In 2020, Epic renewed the DPLA but unsuccessfully sought modifications to allow its own Epic Games Store and Epic Direct Pay alternatives on iOS.
- Epic launched "Project Liberty," a two-part plan combining a media campaign against Apple and a Fortnite software update containing undisclosed code designed to circumvent Apple’s IAP restriction.
- Apple approved Epic's Fortnite software update, unaware of the undisclosed code, but removed Fortnite from the App Store and threatened to terminate Epic Games' developer account after Epic activated the IAP circumvention.
- Apple subsequently terminated Epic Games’ developer account, although Epic’s subsidiaries continued to have apps on the App Store.
Procedural Posture:
- Epic Games, Inc. filed a complaint against Apple, Inc. in the United States District Court for the Northern District of California, alleging violations of the Sherman Act and California's Unfair Competition Law (UCL).
- Apple counter-sued Epic for breach of contract and indemnification for attorney fees.
- The district court granted Epic's request for a temporary restraining order (TRO) in part, preventing Apple from terminating Epic's iOS developer account but leaving Fortnite off the App Store.
- After the TRO expired, Apple terminated Epic's developer account.
- The district court issued a preliminary injunction preventing Apple from terminating the developer accounts of Epic's subsidiaries (including Epic International).
- Following a sixteen-day bench trial, the district court issued a 180-page order with findings of facts and conclusions of law.
- The district court rejected Epic's Sherman Act claims (restraint of trade, tying, and monopoly maintenance).
- The district court found in favor of Epic on its California UCL claim regarding the anti-steering provision, enjoining Apple from enforcing it against any developer.
- The district court held that Epic breached its contract with Apple.
- The district court held that Apple was not obligated to pay Apple's attorney fees.
- Epic Games, Inc. appealed the district court's Sherman Act and breach of contract rulings (Appellant on these issues).
- Apple, Inc. cross-appealed the district court's UCL and attorney fees rulings (Appellant on these issues).
- Apple moved to stay the UCL injunction pending appeal, which the district court denied.
- A panel of the Ninth Circuit granted Apple's motion to stay the UCL injunction in part.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
1. Does a non-negotiated contract of adhesion fall outside the scope of Section 1 of the Sherman Act, and must a court applying the Rule of Reason conduct a balancing of anticompetitive effects and procompetitive justifications even when a plaintiff fails to prove substantially less restrictive alternatives? 2. Is per se condemnation appropriate for tying claims involving software that serves as a platform for third-party applications where the tied good is technologically integrated with the tying good? 3. Did Apple's anti-steering provisions violate California's Unfair Competition Law, and is an indemnification clause for 'breach of any . . . obligation' applicable to intra-party disputes for attorney fees?
Opinions:
Majority - Milan D. Smith, Jr.
Yes, the Sherman Act's Section 1 encompasses non-negotiated contracts of adhesion, and a court applying the Rule of Reason must proceed to a fourth balancing step; no, per se condemnation is not appropriate for tying claims involving software platforms. The Ninth Circuit affirmed in part and reversed in part the district court's judgment. The district court erred as a matter of law in defining the relevant antitrust market by imposing a categorical rule that a market cannot relate to an unlicensed or unsold product, and by applying a functional rather than a consumer-demand test for separate products in a tying claim. However, these errors were harmless because Epic failed to establish the factual prerequisites for its proposed single-brand aftermarkets, particularly the lack of general consumer awareness of Apple's restrictions at the time of purchase as required by Kodak and Newcal. The district court also erred by holding that a non-negotiated contract of adhesion like the DPLA falls outside the scope of Sherman Act Section 1, but this was harmless because the court properly applied the Rule of Reason in the alternative. The district court did not clearly err in finding that Epic proved substantial anticompetitive effects (supracompetitive commissions) and that Apple presented valid procompetitive rationales (security, privacy, IP compensation). Epic failed to prove the existence of "substantially less restrictive alternatives" to achieve Apple's procompetitive goals, as its proposed notarization model for app distribution was not shown to be "virtually as effective" in achieving security/privacy, nor was it clear how Apple would be compensated for IP. Although the district court failed to explicitly conduct a fourth "balancing" step of the Rule of Reason as required by County of Tuolumne v. Sonora Cmty. Hosp., this omission was harmless as its findings implicitly satisfied this obligation. Per se condemnation for tying claims is inappropriate for ties involving software platforms due to their innovative and evolving nature, and applying the Rule of Reason leads to the same outcome as the general Section 1 claim. The district court's rejection of Section 2 monopoly maintenance claims was affirmed due to Epic's failure to challenge the finding that Apple lacked monopoly power in the mobile-games market and the lack of anticompetitive conduct. The district court's rejection of Epic's illegality defense to Apple's breach of contract claim was affirmed. The Ninth Circuit affirmed the district court's ruling that Apple's anti-steering provision violated California's Unfair Competition Law ("unfair" prong) due to injury to Epic (standing) and harm to competition and consumers (merits), and that the injunctive relief was appropriate. However, the district court erred in holding that the DPLA's indemnification provision did not require Epic to pay Apple’s attorney fees for its breach of contract. Clause (i) of Section 10 expressly referred to Epic's "breach" of DPLA obligations, rebutting the California presumption that such clauses apply only to third-party claims.
Partial_concurrence_partial_dissent - S.R. Thomas
No, the district court's errors in defining the relevant market and holding that a non-negotiated contract of adhesion falls outside Sherman Act Section 1 were not harmless because they related to threshold analytical steps and affected Epic's substantial rights. Justice Thomas concurred with the majority on the California UCL claims and the attorney fees ruling. However, he dissented from the majority's conclusion that the district court's errors in market definition (e.g., categorical rejection of unlicensed products, functional test for separate products) and the scope of Sherman Act Section 1 (excluding contracts of adhesion) were harmless. He argued that these errors affected "substantial rights" because an accurate market definition is a "threshold step in any antitrust case" and is crucial for properly assessing anticompetitive effects, procompetitive justifications, and less restrictive alternatives. Without a correct market definition, the Rule of Reason analysis cannot be properly applied, and any subsequent balancing is skewed. He would remand the case for the district court to re-analyze the claims using the proper legal standards for market definition and contract scope under the Sherman Act.
Analysis:
This case provides critical clarifications on several complex antitrust issues in the context of digital platform ecosystems. It reinforces that while a trial court may make legal errors in applying antitrust tests (e.g., market definition, Section 1 scope), these errors can be deemed harmless if the plaintiff fails to satisfy other required factual showings, such as demonstrating lack of consumer awareness or proposing viable less restrictive alternatives. The decision also signals judicial reluctance to apply per se rules to novel tying arrangements in innovative software markets, preferring the more flexible and fact-intensive Rule of Reason. Crucially, it affirms the broad applicability of California's Unfair Competition Law to address anti-competitive practices, highlighting that state-level consumer protection statutes can provide relief even when federal antitrust claims may fail on technical or evidentiary grounds.
