Epic v. Apple ruling blocks Apple from banning links to alternative payments

But the company's anti-steering provisions are deemed illegal, judge says.

An image of the Fortnite app icon on iOS.

Apple may have to change its rules around controlling how developers communicate with customers.

Photo: Getty Images

The Epic v. Apple lawsuit has concluded. The verdict sees Apple come out largely unscathed — but with one of its central App Store policies deemed illegal.

In a decision filed Friday morning, Judge Yvonne Gonzalez Rogers ruled Epic Games failed to prove Apple holds an illegal monopoly over its app ecosystem, but that its so-called anti-steering provisions — its rules preventing developers from directing customers outside the App Store — are anticompetitive and must be changed. The ruling marks an end to a high-profile legal battle that started more than a year ago and has become one of the most explosive and consequential technology antitrust cases in recent memory.

Gonzalez Rogers, of the U.S. District Court for the Northern District of California, issued her verdict after more than three months of deliberation following a month-long trial that took place in Oakland this past May.

"Apple Inc. and its officers, agents, servants, employees, and any person in active concert or participation with them ("Apple"), are hereby permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app," the ruling reads.

Gonzalez Rogers said in her decision that both Epic and Apple had failed to determine the relevant market — a key first step in competition cases. The case should be focused on the market for transactions in mobile games, she reasoned, a $100 billion industry that accounts for the majority of the App Store revenue.

Because neither side offered enough evidence about that specific market, such as barriers to entry or the alleged effect of Apple's "considerable market share," Gonzalez Rogers said she couldn't actually make a call whether the company's control of the App Store made it an illegal monopolist. "Given the trial record, the Court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws," she wrote.

Nonetheless, Gonzalez Rogers concluded, Apple's steering rules — which she repeatedly criticized during the trial — were a problem and should be blocked. "Apple's anti-steering provisions hide critical information from consumers and illegally stifle consumer choice," she wrote. "When coupled with Apple's incipient antitrust violations, these anti-steering provisions are anticompetitive and a nationwide remedy to eliminate those provisions is warranted."

Apple issued a statement expressing overall satisfaction with the ruling, though the company has not yet said if it will appeal.

"Today the Court has affirmed what we've known all along: the App Store is not in violation of antitrust law. As the Court recognized 'success is not illegal.' Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world," the company told Protocol. "We remain committed to ensuring the App Store is a safe and trusted marketplace that supports a thriving developer community and more than 2.1 million U.S. jobs, and where the rules apply equally to everyone."

Epic CEO Tim Sweeney was less satisfied. "Today's ruling isn't a win for developers or for consumers," he said in a series of tweets. "Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers."

Fortnite is staying off iOS for now, Sweeney added, saying the game "will return to the iOS App Store when and where Epic can offer in-app payment in fair competition with Apple in-app payment, passing along the savings to consumers. ... We will fight on."

"Primarily a game store"

Knocking down Apple's anti-steering provisions could have a large effect on the overall App Store economy. Gonzalez Rogers noted that a majority of the App Store's revenue comes from games: in 2016, 81% of all billings were for mobile game transactions, while in 2017, 76% of all App Store revenue came from gaming. Nor is the spending evenly spread: Just 6% of people who spent any money on games in 2017 accounted for a massive 88% of all game billings that year.

"Indeed, in strategizing on the development of the App Store and Apple's gaming business, Apple noted that it 'need[s] to primarily consider how [its] service[s] would impact engagement and spend of this 6%,'" the judge wrote. "Thus, in most economic ways, and in particular with respect to the challenged conduct, the App Store is primarily a game store and secondarily an 'every other' app store."

It was never likely that all of Epic's demands, which included the option to install its own app store on the iOS platform in addition to bypassing Apple's 30% commission on digital purchases, would be granted. The final verdict does, however, offer a compromise that should open the door for Epic to direct Fortnite players from inside the app to cheaper in-game currency options on the web. In a broader sense, the ruling also threatens the lucrative mobile game market from which Apple profits handsomely: If every game maker begins directing users to alternative payment options, it could significantly affect the App Store's bottom line.

Epic kicked off the dispute when it updated the Fortnite iOS app in August of last year to include its own in-app payment system, bypassing Apple's and skirting the 30% commission requirement of all digital purchases on iOS. After Apple removed the app for violating its policies around in-app payments, Epic retaliated with a prepared antitrust lawsuit. Epic also updated the Android version of Fortnite to include its own payment option, and the company sued Google on similar grounds when the Android version was removed. The Google lawsuit has yet to go to trial.

The trial was notable for including testimony from some of the most powerful and longest-serving executives at Apple, including former marketing chief Phil Schiller and CEO Tim Cook. It involved exhaustive histories of the iPhone's creation and the rise of the mobile app economy, while also delving deep into the decision making that went into creating the App Store and Apple's many strategic decisions designed to protect it over the years as it grew into the massive and lucrative backbone of Apple's services business.

On Epic's side, the trial brought out CEO Tim Sweeney to testify and also inadvertently revealed some of the game industry's most closely held secrets through discovery and messy document dumps. Those included the financial terms of fiercely guarded exclusivity deals, the profitability of the console business and Microsoft's Xbox division in particular, just how successful Fortnite has been and to what degree Sony's PlayStation platform reaped the benefits of its leading market position. Scores of sensitive emails and documents also revealed the extent to which Epic carefully calculated its plan to subvert Apple and Google's mobile app store policies with legal challenges and a coordinated public relations assault.

Beyond Epic

In the months since the trial concluded, Apple has faced intensifying antitrust pressure worldwide that has resulted in stunning reversals of longtime App Store policies. In August, the company settled a class action lawsuit with U.S.-based developers, which was also before Gonzalez Rogers, by pledging to set up a $100 million fund for small app-makers. As part of the settlement, the company also agreed to clarify its anti-steering policies around advertising alternative payment options that bypass its App Store commission.

The concessions only applied to communications outside the app and modified policies that already had loopholes, and as such were relatively minor. Apple came out largely unscathed and without having to make major changes to its business model.

Just a week after that settlement was announced, however, South Korea passed a landmark law forbidding Apple and Google from requiring the use of their respective payment systems on iOS and Android, opening the door for alternative options not only to be advertised within mobile apps, but also fully integrated into them. Days later, Apple agreed as part of a settlement with Japanese regulators to further loosen its anti-steering developer rules and allow "reader" apps, such as those developed by Netflix and Spotify, to include links to outside websites so users can sign up online. The App Store model has also been under attack in several state legislatures, and in a bipartisan bill in the Senate.

The anti-steering provisions built into the App Store became one of the central contentions in the Epic v. Apple trial, with Gonzalez Rogers grilling Apple executives over the restrictions around advertising cheaper products and services and what logic the company used to justify forbidding the practice. "It would be akin to Apple down at Best Buy saying, 'Best Buy, put in a sign there where we are advertising that you can go across the street and get an iPhone,'" Apple CEO Tim Cook said on the stand.

Cook and other Apple witnesses portrayed the App Store as a secure, well curated environment that attracts the customers who build digital businesses — and said the store requires the money it extracts from fees for upkeep. However, Gonzalez Rogers routinely expressed skepticism of Apple's defenses of anti-steering, indicating her eventual verdict would involve a narrow ruling striking a compromise for both sides.

"What is the problem with allowing users to have choice, especially in a gaming context, to find a cheaper option for content?" Gonzalez Rogers asked Cook on the final day of testimony in May. "I understand this notion that somehow Apple's bringing the customers to the users. But after that first time, after that first interaction, the [developers] are keeping the customer with the games. Apple's just profiting off that, it seems to me."

Gonzalez Rogers' line of questioning struck at the heart of the Fortnite dispute, revealing how Cook and Apple at large view the company's relationship with developers and underscoring how much control Apple feels it is justified in exerting over commerce on the iOS platform.

"It doesn't seem to me you feel any pressure or competition to actually change the manner in which you act to address the concerns of the developers," she concluded at the time, noting that Apple has only improved its treatment of developers when under legal or regulatory pressure.

Ultimately, Gonzalez Rogers found, "Epic Games overreached, as the Court does not find that Apple is an antitrust monopolist in the submarket for mobile gaming transactions." Still, Apple's "anticompetitive" enforcement of anti-steering restrictions does have to go, she ruled, trying to thread the needle without drastically shaping up the status quo. "This measured remedy will increase competition, increase transparency, increase consumer choice and information while preserving Apple's iOS ecosystem," she concluded.

It's what happens now — whether game developers en masse direct customers outside the App Store, and whether Apple fights on appeal to prevent that — that will determine just how far-reaching the ruling is.

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