Apple countersues Epic, seeks punitive damages
Note: I am not a lawyer but I have been doing a deep dive into the legal background behind this case. Ultimately I believe the outcome of this case will depend on two questions:<p>1. Can Epic establish that iOS app distribution is in fact a valid antitrust market that Apple has monopoly control over?<p>Epic argues that Apple is abusing its &quot;monopoly&quot; over the iOS app distribution market. However, in an antitrust case you cannot simply declare an arbitrarily narrow market where the defendant is the only participant and expect the court to accept it. iOS app distribution is an &quot;aftermarket&quot; of the smartphone market, and as a general rule, US courts do not permit antitrust markets to be based on a single brand&#x27;s product unless specific exceptions are met.<p><i>&gt; &quot;In general, a manufacturer&#x27;s own products do not themselves comprise a relevant product market..... [A] company does not violate the Sherman Act by virtue of the natural monopoly it holds over its own product.&quot; Apple Inc. v. Psystar Corp.</i><p>The circumstances in which the courts have allowed a single brand&#x27;s product to be treated as a valid antitrust market have usually involved situations where the customer purchased a product <i>not knowing</i> they would be locked into some aftermarket restriction, for example due to a change in contract or company policy. If, on the other hand, customers knew about the restriction ahead of time, could have purchased an alternative product without restrictions, and went ahead and purchased anyway, the market power deriving from that restriction is generally not considered a valid basis for an antitrust claim.<p>Of particular note is that courts routinely reject market definitions based on restrictions stipulated in EULAs that customers voluntarily agreed to when purchasing the original product. For example, in <i>Blizzard Entertainment Inc. v. Ceiling Fan Software LLC</i>, the court rejected the defendant&#x27;s claim that Blizzard held monopoly power in the &quot;WoW add-on software&quot; aftermarket, because WoW customers explicitly agreed to WoW&#x27;s EULA stipulating they would only used Blizzard authorized WoW add-ons when they purchased the game. Similarly, in <i>Apple Inc. v. Psystar Corp.</i>, the court rejected Psystar&#x27;s claim that Apple held monopoly power in the &quot;hardware that runs Mac OS&quot; aftermarket because customers <i>&quot;knowingly agreed to the challenged restraint&quot;</i> when they purchaed Mac OS.<p>Interestingly enough, I double checked and surprisingly the iPhone EULA does not appear to have language restricting app installation to the &quot;App Store and other authorized sources only&quot;. If it did, I believe Epic would have trouble getting past here. However, even in absence of an explicit contractual restriction, the court permits an analysis of <i>&quot;whether a consumer&#x27;s selection of a particular brand in the competitive market is the functional equivalent of a contractual commitment&quot;</i>. This analysis is explained in <i>Newcal Industries, Inc. v. IKON Office Solution</i> which describes four relevant aspects to consider:<p>a) The existence of two separate but related markets. Epic alleges these are &quot;smartphone OSes&quot; and &quot;app distribution&quot;. It&#x27;s not clear to me whether these two markets need to be economically distinct (more on the meaning of this below), but it could be problematic for Epic if they do.<p>b) The allegations of illegal monopolization relate only to the aftermarket. (This is a given.)<p>c) Whether the source of the company&#x27;s market power is based on contractual provisions obtained in the initial market or based on the company&#x27;s relationship with its customers. Epic argues that in the absence of a EULA there is no contractual relationship, while Apple will presumably argue that there is a quasi-contractual agreement in place because they made the app installation policy very clear at the launch of the App Store and it has never changed.<p>d) Whether market imperfections prevent customers from realizing their choice in the initial market will impact their freedom to shop in the aftermarket. In other words, did customers <i>&quot;make a knowing choice to restrict their aftermarket options&quot;</i> when they decided to buy an iPhone instead of a different phone that allowed side-loading?<p>I think Epic is going to have a particularly tough time establishing (c) and (d). If the court concludes that customers purchased iPhones knowing that they would be restricted to installing apps from the App Store, then Apple&#x27;s &quot;monopoly&quot; over iOS app distribution is based on the customer&#x27;s knowing consent, and therefore will not be a valid basis for an antitrust claim.<p>We&#x27;ll see what the court decides. But in any event, even if Epic succeeds in proving that Apple has a monopoly over iOS app distribution, the job is not done. They then need to prove that Apple used that monopoly to illegally restrain competition in another market, which brings us to question 2.<p>2. Can Epic establish that iOS app payment processing is a separate and distinct product from iOS app distribution?<p>In order to prove Apple illegally tied app distribution and payment processing together, Epic will need to show that the two are actually economically distinct products.<p><i>&gt; &quot;[T]here must be a coherent economic basis for treating the tying and tied products as distinct. All but the simplest products can be broken down into two or more components that are &quot;tied together&quot; in the final sale. Unless it is to be illegal to sell cars with engines or cameras with lenses, this analysis must be guided by some limiting principle. For products to be treated as distinct, the tied product must, at a minimum, be one that some consumers might wish to purchase separately without also purchasing the tying product. When the tied product has no use other than in conjunction with the tying product, a seller of the tying product can acquire no additional market power by selling the two products together.&quot; Jefferson Parish Hospital Dist. No. 2 v. Hyde</i><p>In <i>Jefferson Parish</i>, the Supreme Court ruled anesthesiological services were <i>not</i> economically distinct from hospital services because anesthesiological services were always sold in conjunction with other hospital services, and therefore tying the two together was not illegal. In <i>Rick-Mik Enterprises, Inc. v. Equilon Enterprises, LLC</i>, credit card processing was considered an essential component of a gas station franchise and therefore was not economically distinct from the sale of the franchise itself. The legal test for whether two tied products are economically distinct has historically depended on whether consumer demand exists for the tied product separate from the tying product, but it&#x27;s not clear whether that test is appropriate here.<p>For the case of paid apps, there clearly <i>aren&#x27;t</i> economically distinct products. If Apple distributes a paid app on behalf of a developer and collects a fee in exchange, the fee is the cost of using Apple&#x27;s distribution service. Distribution and payment happen simultaneously, they are not separate services, therefore there is no tie between them.<p>Now, what happens if Apple initially distributes the app without a fee and (later) takes a fee when an in-app purchase is made? Does the act of deferring the payment from the download create two economically distinct products when before there was only one? Apple argues that it does not, and similar to <i>Rick-Mik</i>, in-app payment processing is simply a component of its app distribution service.<p>I don&#x27;t know if this argument will hold up in court but it&#x27;s certainly very interesting and probably venturing into uncharted territory as far as existing precedent is concerned. But if the court does decide that in-app payment processing services are not economically distinct from app distribution services, then Epic is going to have difficulties with their tying claim.<p>Overall these are very tough questions and as the judge said, it&#x27;s not a slam dunk for either side. I tend to think Epic is fighting the uphill battle here, as existing US antitrust law seems like it favors the defendant in cases like this. If Epic does win, it&#x27;s certainly going to open up a lot of similar questions for other companies that sell tightly controlled hardware and software. (Particularly on the console side, but also stuff like smart TVs and even cars.)