What Does It All Mean?: A Look at Judge Gonzalez Rogers’ Decision in the Epic Versus Apple Trial

Yesterday, US District Judge Yvonne Gonzalez Rogers decided Epic Games’ antitrust lawsuit against Apple, delivering a ruling in favor of Apple that comes with significant caveats. Although the Judge found that Apple‘s operation of the App Store isn’t an exercise of monopolistic power, she concluded that App Review Guidelines and related provisions of its agreements with developers foster a lack of pricing transparency store-wide that undermines competition under California law. So, while the decision is undeniably a win for Apple in many respects, it’s also a decidedly mixed bag. I’ve taken the time to read Judge Gonzalez Rogers’ 185-page decision and having written an in-depth look at the issues going into the trial, I thought I’d follow up with what the Court’s ruling is likely to mean for Epic and Apple as well as all developers and consumers.

The Court Concludes That Apple is Not a Monopolist

There’s a good reason for Judge Gonzalez Rogers’ lengthy opinion. Antitrust cases are inherently fact-intensive inquiries that require a careful examination of the relevant business market and the actions of the alleged monopolist. The Court carefully examined the factual underpinning of each element of Epic’s claims, but as I anticipated in my story in May, the decision primarily revolved around the definition of the relevant market.

Epic argued for an extraordinarily narrow market definition that would make it easier to argue Apple was exercising monopoly power. But as I explained in my earlier story, Epic’s argument was undercut by the fact that the app at issue was a videogame:

I think most people intuitively understand that games are different creatures from other apps. Games typically use custom UI that looks similar wherever the game is played, making competing platforms more approachable and better substitutes for an iOS game than a typical iOS app. The business models that work with games are also different than what works with other apps. For example, games rely heavily on advertising and rarely employ subscriptions compared to other apps.

Apple argued for a market definition that was almost as broad as Epic’s was narrow: all videogames on all platforms. Ultimately, the Judge decided the relevant market is mobile videogames, which isn’t as expansive as Apple argued but was broad enough to deny Epic’s antitrust claims.

Before getting to the injunction issued against Apple, it’s worth pausing to consider what this first part of the Court’s decision means and what’s likely to happen as a result of the decision. With respect to payment processing and fees charged to developers, nothing will change. Building alternative storefronts or offering separate payment schemes are no more possible today than they were a week ago. In fact, the Court specifically concluded about the App Store and In-App Purchases, that Apple’s approach is valid:

Apple has shown procompetitive justifications based on security and the corollary interbrand competition, as well as generally with respect to intellectual property rights.

Nor does the Court’s decision affect the 30% commission that Apple charges for most paid apps, which is reinforced by the fact that the Court also ruled that Epic has to pay Apple for the App Store fees it avoided by offering its in-app currency outside Apple’s system because doing so violated Epic’s developer agreement.

The Court’s decision is also a blow for those who hoped Epic’s lawsuit would result in Apple being forced to permit the sideloading of apps, a topic we recently discussed on AppStories. Epic argued that users should be able to install apps from other storefronts and the web just like Mac users can. Epic also pointed to the enterprise app program and app signing as infrastructure already in place that could support sideloading. The Court disagreed:

Although Epic Games presents some alternative methods that could be used to prevent malicious direct distribution (which are discussed below), there is little dispute that completely unrestricted sideloading would increase malware infections.

Thus, the Court finds that centralized distribution through the App Store increases security in the “narrow” sense, primarily by thwarting social engineering attacks.

So what’s next? Epic’s Tim Sweeney has suggested Epic will appeal, so this dispute is far from over, although I doubt Epic will prevail on appeal. Antitrust cases turn first and foremost on the trial court’s determination of the facts, and in an appeal, the trial judge’s findings of fact are given more deference than their legal conclusions. That’s because the trial judge was in the room with witnesses and, therefore, is assumed to be the best arbiter of what the evidence at trial demonstrated.

That explains Judge Gonzalez Rogers’ lengthy decision. No judge wants to be reversed on appeal, so yesterday’s decision is designed to be as unassailable as possible. Legal conclusions that apply those facts to the law are easier to overturn, but having read through the entire decision, I have a hard time seeing how an Epic appeal would prevail without a fundamental change in how courts interpret US antitrust law. That’s not out of the question given the conservative shift in the US Supreme Court, but it’s still a very long shot. Before the US Supreme Court is even an option, though, Epic needs to appeal to the US Court of Appeals for the Ninth Circuit, which handles appeals from US District Courts in California and other western states.

This dispute is far from over, but at least for now, Apple is correct in characterizing this part of the Court’s ruling as a broad vindication of its App Store business model.

Snatching Defeat from the Jaws of Victory

If you’re Apple’s lawyers, you get to the bottom of page 158 of Judge Gonzalez Rogers’ decision, and you’re probably feeling pretty good about how things are going. You might even imperiously summon an intern to put some expensive champagne on ice. That is until you turn the page.

Most of Epic’s antitrust trial against Apple was spent focused on federal US antitrust law, but Epic sued Apple under California state law, too, for anti-competitive practices. Most states have laws on the books that parallel aspects of federal law, and while state law is usually the purview of state courts, federal courts can decide state law issues in connection with federal cases.

Epic’s state law claim against Apple was made under California’s Unfair Competition Law that as Judge Gonzalez Rogers explains:

prohibits business practices that constitute “unfair competition,” which is defined, in relevant part, as “any unlawful, unfair or fraudulent business act or practice.

If that definition of unfair competition sounds broad, that’s because it is. Here’s the chaser to that shot:

Thus, “a practice may be deemed unfair even if not specially proscribed by some other law” and even if not violating an antitrust statute.

Translation: “Not so fast, Apple. You may not be a monopolist, but I don’t like the way you run the App Store, and California has handed me a hammer that I’m not afraid to use.”

California’s law is equitable in nature, meaning it gives judges broad latitude to fashion remedy for violations. So, even though Epic sought a different remedy that the Court ruled was unavailable under federal law, the Judge went out of her way to punish Apple under state law for what she concluded was anti-competitive behavior. To top it off, Judge Gonzalez Rogers issued a nationwide injunction for a violation of a single state’s law. It’s a ruling that’s as aggressive an application of state law as the ruling on federal antitrust is careful to avoid being overturned on appeal.

The behavior that led the Court to conclude that Apple has violated California state law is what it refers to as anti-steering provisions codified in Section 3.1.1 of the App Review Guidelines, which says:

If you want to unlock features or functionality within your app, (by way of example: subscriptions, in-game currencies, game levels, access to premium content, or unlocking a full version), you must use in-app purchase. Apps may not use their own mechanisms to unlock content or functionality, such as license keys, augmented reality markers, QR codes, etc. Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.

This is the same behavior that was at the center of an investigation by the Japan Fair Trade Commission, which was settled when Apple said it would allow developers of ‘reader’ apps to ‘share a single link to their website to help users set up and manage their account.’ Instead of a single link in a narrow category of apps, Judge Gonzalez Rogers’ decision goes further. She concluded that the:

…evidence shows Apple’s anti-steering restrictions artificially increase Apple’s market power by preventing developers from communicating about lower prices on other platforms.

The order entered by the Court provides that effective in 90 days, Apple is:

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 Court also says of the remedy that:

This measured remedy will increase competition, increase transparency, increase consumer choice and information while preserving Apple’s iOS ecosystem which has procompetitive justifications. Moreover, it does not require the Court to micromanage business operations which courts are not well-suited to do as the Supreme Court has appropriately recognized.

The last part about the remedy not requiring micromanagement by the Court strikes me as a little naive. The devil is in the details, and it’s far from clear from the Court’s order how far Apple will have to go with links, buttons, and calls to action to satisfy the order’s edict, which will undoubtedly result in further litigation.

I also expect a cross-appeal from Apple of the injunction. Equitable relief of this sort is also hard to overturn on appeal because, like the antitrust decision, the ruling is heavily fact-based. However, an appeal means that, in all likelihood, the injunction won’t take effect in 90 days. That’s not a certainty, but it’s not unusual for orders of this sort to be stayed pending the outcome of an appeal.

If the injunction ultimately stands after all appeals are exhausted, some stories I’ve seen suggest it could open the App Store to alternative payment processors, which I doubt will come to pass. The Court seems focused on simply opening up lines of communications between developers and users about pricing on other platforms, not creating parallel app stores or offering new payment schemes inside Apple’s App Store. Still, unlike the settlement with the Japan Fair Trade Commission, which is very narrow in its application, Judge Gonzalez Rogers’ injunction has the potential to make something like an in-app Kindle bookstore that links to Amazon’s website for purchases of thousands of books possible.

I don’t have a lot of sympathy for Epic or Apple in this case. As I said in May, I find Epic’s legal tactics distasteful. However, I also think Apple’s restraints on communications between developers and app users are an example of overreaching that unduly stifles competition in the name of protecting users.

Still, on balance, I’m pleased with the Court’s decision. You can argue about whether Judge Gonzalez Rogers overstepped the bounds of her authority by imposing a nationwide injunction based on state law. That’s the sort of remedy that I think is more appropriately the purview of federal legislators. However, I’m also glad to see additional pressure brought to bear that I hope will result in meaningful changes to the App Store for all developers, and that doesn’t reward Epic’s questionable legal tactics.

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