Epic Games faces uphill battle in Apple fight after latest hearing, economist says

Epic Games, the Cary-based maker of the popular video game Fortnite, was back in a California courthouse Monday to continue its high-profile anti-trust case against Apple.

The 75-minute hearing before the Ninth Circuit Court of Appeals in San Francisco was a condensed version of an initial three-week trial in May 2021, which resulted in a split decision favoring Apple.

This time, the United States Department of Justice joined Epic in arguing Apple maintains an unlawful monopoly by requiring iPhone owners to use its App Store and in-app purchasing system, through which Apple takes a 30% revenue cut from major developers.

Both Epic and the government argued U.S. District Court Judge Yvonne Gonzalez Rogers had erred last year when she stopped short of saying Apple operates a monopoly.

“While the Court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct,” Gonzalez Rogers wrote in her September 2021 ruling. “Success is not illegal.”

However, Gonzalez Rogers did charge Apple with violating California’s Unfair Competition Law by banning app developers from mentioning or linking to alternative payment options outside its App Store.

Both sides appealed the decision.

Legal experts say the final outcome of Epic vs. Apple could affect how apps are downloaded — and how much they cost — for both iPhone and non-iPhone users. And though the Ninth Circuit will likely take many months to release its decision, some of the comments made by the three-judge panel Monday hint at where they may land.

What sparked this legal battle?

In short, Epic CEO Tim Sweeney wanted to take on the world’s largest tech company. And he used his company’s most prized possession to do so.

Fortnite is one of the most popular of all time, with several million people playing it at any given time.

On Aug. 13, 2020, Epic introduced an alternative way for iPhone and Android users to purchase “v-bucks,” the in-game currency for Fortnite. Fortnite is free, but players buy v-bucks to purchase cosmetic upgrades, including new outfits and dance moves.

By circumventing Apple’s and Google’s respective payment systems, and thus the companies’ 30% fees, Epic sought to pass on savings to customers. Epic sold v-bucks at a discount, and an internal company document later showed this was part of a strategy called “Project Liberty” targeting Apple and Google app policies.

Apple and Google quickly booted Fortnite from their app stores, stating Epic had violated their developer agreement policies. Apple said permitting users to access outside apps or payment systems could jeopardize the safety of its iOS operating system.

The App Store is hugely profitable for Apple, and its 30% fees are a big reason why. In 2021, iPhone users spent more than $85 billion on App Store purchases and subscriptions.

Sweeney, a known firebrand who is reportedly North Carolina’s wealthiest person, had both the passion and the resources to escalate the fight.

Epic immediately sued the two companies, launching a #FreeFortnite campaign with a video parodying Apple’s famous “1984” commercial. “Epic Games has defied the App Store monopoly,” read text at the end of the video. “In retaliation, Apple is blocking Fortnite from a billion devices. Join the fight to stop 2020 from becoming ‘1984.’”

How did Epic do in the appeal hearing?

Not great, said Florian Ederer, an associate professor of economics at the Yale School of Management. Ederer commented on the case after watching Monday’s proceedings.

“I think it’s probably safe to say that this went not as well as Epic had hoped,” Ederer told The News & Observer. “There were a lot of comments by the judge saying that there was a ‘failure of proof’ in demonstrating that there is truly monopolization happening here in a violation of antitrust law.”

A monopoly must be proven, and once again, Epic may have failed to convince a court that Apple sustains one.

Near the end of the appellate hearing, Judge Milan Smith, who did most of the questioning, addressed Epic’s lawyer, Tom Goldstein.

“The one thing that really troubles me is this failure of proof,” Smith said. “At least looking at the record, it seems that (Apple has) made a pretty good case for failure of proof.”

In response, Goldstein said many of the facts cited in the district court ruling appeared to be supporting Epic’s anti-trust argument — that Apple does not face adequate price competition in its App Store or in-app payment system — before the decision “whipsaws” away from labeling Apple a monopoly.

To this, Smith agreed, acknowledging Gonzalez Rogers’s decision was “inconsistent.”

Goldstein then laid out the crux of why Epic feels it is facing an anti-competitive monopoly. “We want to have an app store,” he said. “Apple says you are not allowed to have your own app store. We want to offer in-app payments to iPhone users. We are not allowed to do it.”

Apple lawyer Mark Perry used his time to both criticize Epic’s “Project Liberty” as an unfair targeted attack and to defend Apple’s so-called “walled garden” approach to its iOS operating system, a closed-system that Perry argued must be closed off to outside competitors to protect its safety.

What happens now?

Both companies will soon share space in the Triangle, as Apple is in the process of moving into a $1 billion campus in Wake County.

After watching the hearing, Ederer said he’d “be tremendously surprised” if the district court’s monopolization decision was reversed. In fact, he said the anti-steering charge against Apple is the part of Judge Gonzalez Rogers’s ruling that the appellate court may most likely overturn.

Ederer added that the case may likely be appealed to the United States Supreme Court, but that with the court’s current composition of justices, Epic would likely be unsuccessful in winning a reversal monopoly argument.

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work.

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