Apple not monopolistic but some rules illegal, judge rules

Apple is not a monopolist, but its rules barring developers from directing users to avenues that allow them to bypass a commission on sales are illegal, a federal judge ruled Friday.

U.S. District Judge Yvonne Gonzalez Rogers ordered Apple to loosen its control over the App Store, presenting companies a way to avoid giving it a cut of up to 30% on all transactions.

The decision is a major blow to one of Apple's core businesses in a $100 billion market. It comes amid an escalating tide of antitrust scrutiny from politicians, regulators and courts around the world challenging the iPhone maker's management of the marketplace for apps.

Several states have presented legislation that would prohibit Apple from forcing developers to use its payment system from which it exacts a commission, and have proposed allowing users to download apps from third party app stores. The U.S, Department of Justice is similarly investigating whether Apple is in violation of antitrust law.

Legislators in South Korea approved a bill last week banning major app stores from requiring companies to use their payment systems, significantly curbing their ability to collect a commission. This was preceded by Japanese regulators mandating that Apple permit developers to direct users to alternative payment options. The European Union and India are looking at identical steps.

The regulation combined with legal setbacks could signal that Apple might have no choice but to surrender total control of the App Store. Although Gonzalez Rogers' ruling in the lawsuit only affects one part of Apple's business, it impacts billions of dollars in digital commerce.

"What we're seeing today is Apple having to make the smallest possible incremental changes to address the antitrust concerns without changing the ecosystem structurally," said Eric Goldman, a professor at Santa Clara School of Law and director of the High Tech Law Institute. "It's an open question whether incremental changes will be enough to satisfy regulatory pressure or if pressure will force Apple to make structural changes."

The order draws to a close a high profile legal battle waged by Epic Games, creator of the online game Fortnite, to permit an alternative payment system on the App Store and allow companies to offer their own app marketplaces. It argued that Apple is an illegal monopolist because it's the lone distributor of apps and imposes a toll to reach more than 1.5 billion iPhone users.

Gonzalez Rogers rejected both of Epic's requests in a mixed ruling that says Apple is not a monopolist but might give way to more concessions in the future. Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

Apple general counsel Katherine Adams called the order a "huge win."

"Today the court has affirmed what we've known all along: The App Store is not in violation of antitrust law," the company said in a statement. "As the court recognized, 'success is not illegal.'"

Epic chief executive Tim Sweeney said on Twitter the ruling does not go far enough and that Fortnite will only return to the 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."

"Today's ruling isn't a win for developers or for consumers," he said. "Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers."

Although she stopped short of finding an illegal monopoly, Gonzalez Rogers found that Apple engaged in anticompetitive conduct under California's unfair competition law. She concluded that its provisions prohibiting developers from pointing users to pay for services outside of the App Store "hide critical information" and "illegally stifle consumer choice.'

Apple representatives were noncommittal on whether the company will appeal this portion of the ruling and how the changes will be applied.

Chris Hoofnagle, a professor at UC Berkeley School of Law and director of the Berkeley Center for Law & Technology, called the ruling a "great victory for consumers."

"Platforms are charging outrageous overhead for enabling transactions and we need similar interventions against other walled garden services," he said. "Service providers, categorically, should never charge 30% for transaction fees."

The judge decided that the relevant market in this case was for mobile gaming transactions, rebuffing the favored definitions of the market by both Apple and Epic.

In this market, she indicated that Apple is "near the precipice" of monopoly power.

"Apple is only saved by the fact that its share is not higher, that competitors from related submarkets are making inroads into the mobile gaming submarket, and perhaps because plaintiff did not focus on this topic," she wrote.

Apple in 2017 had a market share of roughly 57% in the global mobile gaming industry, according to the judge's analysis using internal company documents. This accounted for 76% of the company's revenue from the App Store.

Goldman questioned whether Apple will get to continue imposing a toll on transactions in the App Store while being the sole gatekeeper to all of the world's iPhones.

"I can't wrap my head around how that can be the right outcome," he said.