Judge in antitrust trial asks if Apple has 'duty to deal' with developers

The federal judge hearing the Epic Games antitrust challenge against Apple asked Wednesday whether she should consider the case under a theory in which Apple has an obligation to permit developers to market apps to more than 1 billion iPhone owners because of its dominance in the mobile operating systems market.

U.S. District Judge Yvonne Gonzalez Rogers said Apple might have a "duty to deal" with developers because "all of these competitors can't succeed without access" to the App Store.

The judge posed the question to counsel on both sides, and Apple's expert economist Richard Schmalensee, professor of economics at the Massachusetts Institute of Technology, during the second week of a bench trial over Apple's 30% commission on in-app purchases and payment processing restrictions.

The theory the judge referred to considers whether a monopolist should be required to provide use of its facilities because they are essential to participation in the market.

"I've heard quite a bit of evidence throughout the trial regarding how big Apple is and how anticompetitive it is," Rogers said, wearing a black mask. "It sounds to me like what Epic is saying is, 'We want Apple to allow us to deal on their platform for iOS.'"

Schmalensee responded that the argument would fail because Epic already has access to the App Store.

"They're in the store business, "he said. "Other people are in the store business."

It could be that Apple's terms are so unfavorable that businesses cannot compete, Schmalensee said, but that would be difficult to prove because Epic has made "a lot of money going through the store."

Rogers invited further briefing and evidence on the issue. She noted the theory in her preliminary injunction blocking Apple from banning Unreal Engine, a developer tool that Epic also owns, from the App Store. She wrote in the ruling whether Apple "possesses essential facilities which may require compensated access" is a potential hurdle to the company in the case.

Epic attorney Gary A. Bornstein, a partner at Cravath, Swaine & Moore LLP, said "We have not abandoned that theory." Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

Testimony from Schmalensee, who testified as an expert for Microsoft in its antitrust trial, dominated most of Wednesday's proceedings. He and Epic's expert economist, David Evans, chairman of the Global Economics Group, offered clashing opinions on the relevant market at issue in this case.

In-app payment processing, Schmalensee testified, is not a separate market in which Apple allegedly has a monopoly but rather a method for Apple to collect its commission "in an automatic and seamless fashion."

"Developers would really rather not pay the 30% and would like to find another solution, so they don't have to pay Apple," he said. "I don't view that as a separate demand for a service. I view that as a desire not to pay a commission."

Schmalensee compared the restrictions on Apple's payment processing restrictions to those at issue in an antitrust case against American Express. Both cases deal with rules prohibiting merchants from avoiding higher commissions by encouraging patrons to use another payment service.

"But American Express wasn't a duopoly," Rogers interjected. In that case, she said there were visual indications informing customers of alternative payment services, such as Visa, MasterCard and Discover, that "don't exist in this circumstance."

"What's so bad about it anyway, for consumers to have choice," she asked.

"The reason is if consumers have choice, if the app vendor can say if you press this button you can buy this for less, that means the App Store can't collect its commission," Schmalensee responded. "You're undermining its revenue stream."

Rogers replied, "I don't think it's factually the same."

In addition to coauthoring three books and half a dozen articles, Evans and Schmalensee submitted a joint friend-of-the-court brief in the case in support of American Express.

Francine LaFointaine, professor of economics at the University of Michigan and former Director of the Bureau of Economics at the Federal Trade Commission, also took the stand Wednesday to contest Evan's testimony on the relevant market. She concluded that economists generally do not "consider single brands to constitute their own antitrust markets."

Epic's market definition, which focuses solely on the App Store, is "too narrow because it focuses on the one platform and consumers can transact on other platforms," including on gaming consoles, she said.

Asked by Bornstein about the effect Apple's commission has on app prices, LaFointaine acknowledged some developers pass on the costs of Apple's cut to consumers.

On direct testimony, Lorin Hitt, professor of operations, information and decisions at the University of Pennsylvania Wharton School of Business, said Apple has reduced its commission since it first launched the App Store in 2008. Small businesses that earn less than $1 million and subscription services, for example, only pay 15%, he testified.

Hitt said he does not know whether the change on commission rates, which was implemented this year, was considered before Epic filed its lawsuit.

Following up on extensive testimony that console manufacturers have to charge a 30% commission because they sell their consoles at cost, Hitt testified that Apple's cut is industry standard. He listed others that have the same rate, including Microsoft, Sony, Nintendo, Amazon and Google, among others.

Hitt will resume his testimony on Thursday. Epic is expected to rest its case by Friday, said Epic attorney Katherine Forrest, another partner at Cravath and former federal judge.