By Chloe Sykes, GW Law, 2LE
Fortnite, developed by Epic Games (“Epic”), is one of the most popular games available on iOS devices. However, in August, the game disappeared from the App Store, making it no longer accessible by iOS users.
What happened to Fortnite? Since 2011, Epic has complied with their licensing agreement with Apple, which allows Apple to charge 30 percent of the transaction price of in-app purchases (IAPs) and prohibits developers from sidestepping the Apple-created IAP system or distributing apps compatible with Apple devices outside of the App Store. However, in August of 2019, that all changed. Tim Sweeney, CEO of Epic, approved and enabled a “hotflix,” an update customarily used to fix or patch bugs in code, which included a direct pay option that allowed Fortnite players to avoid Apple’s IAP system when making purchases. Further, Epic intentionally excluded a description of this functionality in their disclosure to Apple. Thus, Apple promptly removed the game from the App Store, banned Epic’s access to developer tools used for updating their apps on iOS, and “terminated Epic’s developer program account.” In sum, Apple believed Epic had directly violated the express terms of their existing licensing agreement.
Epic then filed a motion for preliminary injunction to reinstate Fortnite in the App Store and preclude Apple from terminating access to their developer tools for other applications distributed by Epic. To succeed in this matter, Epic must show the court that (1) they are likely to succeed on the merits, (2) they will suffer irreparable harm without such relief, (3) the balance of equities is in their favor, and (4) this relief is in the public interest.
How to reinstate Fortnite? Epic relies on Sections 1 and 2 of the Sherman Antitrust Act to argue that Apple’s actions are unlawful, and thus, their Preliminary Injunction Motion should be granted. Let us start with Section 2 of the Sherman Act: To succeed, Epic must show that Apple possesses monopolistic powers in the relevant market, they maintain such power, and an injury resulted. Here, the court is faced with a highly contested question of what exactly the relevant market is.
Epic claimed the relevant market is narrow since the iOS platform is distinct from the other platforms and devices by which the game is distributed. Specifically, Apple monetizes off the hardware and software, as well as the fundamentally mobile nature of their devices.
In defense, Apple claimed the relevant market is larger, due to the existence of additional markets that distribute the game. For instance, Fortnite is specifically designed for cross-platform play, which creates a larger relevant market than Epic attempts to put forth. Since the game is also played on laptops, tablets, and the Nintendo Switch, all of which are mobile and differ from an iOS device, these additional platforms expand the relevant market and thus, should be considered for the purposes of the Sherman Act analysis.
The court determined that there were multiple possibilities for the definition of relevant market, and thus, Epic failed to succeed on the merits when applying Section 2 of the Sherman Act.
In applying Section 1 of the Sherman Act, Epic needed to prove that under either test, per se or rule of reason, Apple’s practice of ‘tying’ (selling one product or service as a mandatory addition to the purchase of another product or service), violated at least one these applicable tests:
Per Se Analysis. Epic failed under a per se analysis because they did not show “(1) that the defendant tied together the sale of two distinct products or services.” Apple’s IAP system is integrated into the App Store and has never been offered as a separate product. Furthermore, Epic failed to prove that the defendant possessed enough economic power in the tying product market to coerce its customers into purchasing the tied product because they failed to consider how the price differences affected consumer behavior. It is more likely that consumers are using the platform because of the lower prices, not out of independent demand for an alternative to IAP.
Finally, Epic failed to prove that the ‘tying’ arrangement affected a substantial volume of commerce in the tied product market. Though Epic raised serious questions of whether Apple’s platform constituted ‘tying’, the court did not accept that Epic had sufficiently proven an independent demand for a separate payment service.
Rule of Reason Analysis. Apple claimed that because the App Store is free to access, the fee that developers incur is simply the mechanism by which Apple is paid for the development and maintenance of the App Store and supplemental services. However, there is no question that competitors can, and many do, offer similar or even superior services to their customers on their own platforms.
Thus, regarding Epic’s claim of ‘tying’, the record failed to sufficiently convince the court that Epic was likely to succeed on the merits. Thus, in regard to reinstating Fortnite, they failed to obtain an injunctive relief.
Did Apple go too far? Apple’s decision to ban Epic’s access to developer tools utilized by Epic’s affiliates and third-party developers, each of which have independent licensing agreements with Apple, was, perhaps, a step too far. After all, these adjacent accounts were not in breach of their own licensing agreements with Apple, but where nevertheless punished just the same.
Apple did not challenge Epic’s arguments that the harm in cancelling the developer account was extensive. In fact, the court agreed in concluding that such harm would be hard to quantify and, thus, irreparable at trial. Though Apple contended that Epic may once again insert a similar “hotflix” in their other games, the court was not persuaded. The court determined that such action is presumptive; these accounts are not in breach, and no such action has taken place, to date. Apple reserved the right, via the licensing agreement, to take such action upon the breach and that was sufficient for the court. In conclusion, it was determined that by allowing the developers to stay would not harm Apple measurably.
Finally, the court emphasized that, in general, the economy should not place undue limitations on creativity and innovation and that such undue punishment upon third parties could be disastrous to developers and gamers alike. Thus, it is in the public interest to allow these developers to have access to their accounts.
For now, Fortnite remains a memory for iOS gamers. But how this case impacts the current rumblings in the US Congress on the Apple “monopoly” hearings are yet to be seen.
Epic Games v. Apple, Inc., 2020 U.S. Dist. LEXIS 188668