Epic sues Apple over monopoly of iOS distribution, Apple says feel free to distribute game elsewhere

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III. ANALYSIS

2. Monopoly Maintenance under Section 2 of the Sherman Act [11]

a. Legal Framework

In order to prevail on its theory that Apple engaged in unlawful monopolization under section 2 of the Sherman Act, Epic Games must show:

(a) the possession of monopoly power in the relevant market;

(b) the willful acquisition or maintenance of that power; and

(c) causal antitrust injury."

Section 2 claim requires:

(1) the possession of monopoly power in the relevant market and

(2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

A threshold step in any antitrust case is to accurately define the relevant market, which refers to ‘the area of effective competition”.

Monopoly power under the first element can be defined as "the power to control prices or exclude competition"[12] and may be inferred from defendant's predominant market share in the relevant market.  In addition, "courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market." Without a relevant market definition, "there is no way to measure the defendant's ability to lessen or destroy competition."

The relevant market must include both a geographic market and a product market." Hicks v. PGA Tour, Inc. The latter "must encompass the product at issue as well as all economic substitutes for the product." Newcal Indus., Inc. v. Ikon Office Sol. "The consumers do not define the boundaries of the market; the products or producers do [and] the market must encompass the product at issue as well as all economic substitutes for the product."

Nevertheless, "it is legally permissible to premise antitrust allegations on a submarket" or an aftermarket. Newcal , 513 F.3d at 1045. A submarket "is economically distinct from the general product market." Id. at 1045. There are "several ‘practical indicia’ of an economically distinct submarket," including:

industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.

[13] An aftermarket is "wholly derivative from and dependent on the primary market."  An aftermarket may constitute the relevant market where market imperfections, such as information and switching costs, "prevent consumers from realizing that their choice in the initial market will impact their freedom to shop in the aftermarket." Id. at 1050. Thus, [d]etermining the relevant market can involve a complicated economic analysis, including concepts like cross-elasticity of demand, and ‘small but significant nontransitory increase in price’ (‘SSNIP’) analysis." Theme Promotions, Inc. v. News America Marketing FSI , 546 F.3d 991, 1002 (9th Cir. 2008) ; see also Psystar , 586. F. Supp. 2d at 1198.

The determination of a "relevant market" is a highly factual question.  [14] Even if a plaintiff establishes monopoly power in the relevant market under the first element, courts will not condemn it unless "it is accompanied by an element of anticompetitive conduct " under the second element. Qualcomm , 969 F.3d at 990 (emphasis in original) (quoting Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP , 540 U.S. 398, 407, 124 S.Ct. 872, 157 L.Ed.2d 823 (2004) ). "The mere possession of monopoly power, and the concomitant charging of monopoly prices, is ... an important element of the free market system." Verizon Commc'ns , 540 U.S. at 407, 124 S.Ct. 872. Thus, courts distinguish between "the willful acquisition or maintenance of [monopoly] power" from "growth or development as a consequence of a superior product, business acumen, or historic accident." See Grinnell , 384 U.S. at 571, 86 S.Ct. 1698. To demonstrate the former, plaintiff must show "anticompetitive abuse or leverage of monopoly power, or a predatory or exclusionary means of attempting to monopolize the relevant market." Qualcomm , 969 F.3d at 990. "To be condemned as exclusionary, a monopolist's act must have an ‘anticompetitive effect’—that is, it must harm the competitive process and thereby harm consumers[, i]n contrast [to] harm to one or more competitors[, which] will not suffice." Id. (emphasis in original) (internal quotation marks and alternations omitted) (quoting Microsoft , 253 F.3d at 58 ).

Anticompetitive conduct is evaluated under the "rule of reason." Id. at 991. First, plaintiff must show "diminished consumer choices and increased prices" as "the result of a less competitive market due to either artificial restrains or predatory or exclusionary conduct" by the defendant. Id. Then, "if a plaintiff successfully establishes a prima facie case ... by demonstrating anticompetitive effect, then the monopolist may offer a ‘procompetitive justification’ for its conduct." Id. (internal quotation marks omitted) (quoting Microsoft , 253 F.3d at 59 ). For example, the monopolist may show "that its conduct is ... a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal." Id.(internal quotation marks omitted) (quoting Microsoft , 253 F.3d at 59 ). Finally, if defendant offers a non-pretextual procompetitive justification, the burden shifts back to the plaintiff to rebut defendant's claim or "demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit." Id. (internal quotation marks omitted) (quoting Microsoft , 253 F.3d at 59 ).

Last, if plaintiff satisfies the first and second elements of monopoly power and willful maintenance or acquisition of that power in the relevant market, the last element of causation may be inferred "when exclusionary conduct is aimed at producers of nascent competitive technologies as well as when it is aimed at producers of established substitutes." Microsoft , 253 F.3d at 79(cited with approval by Qualcomm , 969 F.3d at 992 ).

b. Relevant Market Analysis

In summary, the record does not yet establish how the "relevant market" should be defined. Without a definition of the relevant market, the existence of market power—the foundation of a monopolization claim—cannot be assessed. Accordingly, Epic Games has not yet shown that it will likely succeed on the merits of the monopolization claim.

The relevant market must include both a geographic market and a product market. Unsurprisingly, the parties disagree on the product market.[15] Epic Games avers that the relevant product market is the market for distribution of apps on the iOS software platform, which it refers to as the "iOS App Distribution Market." Thus, Epic Games narrows the relevant market to consider only how iOS apps are distributed on the iOS platform. Apple meanwhile asserts that the relevant market must include competing platforms on which Fortnite is distributed and monetized. In other words, Apple argues that the Court must consider the wider video game market and distribution on other platforms, including the Microsoft Xbox One, the Sony PlayStation 4, the Nintendo Switch, computer platforms (Microsoft Windows PCs, macOS computers), and tablets (Google Android and Microsoft Surface). Thus, Apple seeks a broader market definition that includes the digital distribution of video games across all video game platforms. Ultimately, the Court must discern where competition exists and whether such competition is sufficient to impact price and discipline market players.

Epic Games’ relevant market definition that iOS App Distribution is an "aftermarket" of the smartphone OS market is plausible.[16] See Newcal , 513 F.3d at 1050. However, in some ways, Epic Games offers a failsafe definition by restricting the market so narrowly. By definition, Epic Games’ proposed market definition excludes other smartphone systems, including the Google Android system, as well as video game platforms and their digital distribution markets. Courts have expressly cautioned against such a narrowing of the relevant market definition. See du Pont , 351 U.S. at 392-93, 76 S.Ct. 994 ("A retail seller may have in one sense a monopoly on certain trade because of location ... or because no one else makes a product of just the quality or attractiveness of his product .... Thus one can theorize that we have monopolistic competition in every nonstandardized commodity with each manufacturer having power over the price and production of his own product. [However, i]llegal power must be appraised in terms of the competitive market for the product."); Psystar , 586 F. Supp. 2d at 1198 ("[M]anufacturer's own products do not themselves comprise a relevant product market.").[17]

Moreover, Apple avers that an "aftermarket" requires user lock-in in the primary market. Given the lack of legal citation, the Court surmises that this theory has not been adopted by any court, even if embraced by economists. The term "lock-in" appears to derive from the Supreme Court mention that "[i]f the cost of switching is high, consumers who already have purchased the equipment, and are thus ‘locked in,’ will tolerate some level of service-price increases before changing equipment brands." Eastman Kodak , 504 U.S. at 476, 112 S.Ct. 2072. In evaluating Epic Games’ response, resolution of the issue is focused on timing: Apple argues that consumers are not locked-in to the purchase of iPhones, while Epic Games assumes the purchase and argues that after the purchases occurs, a consumer is locked-in and unlikely to switch to a different smartphone in response to slightly more expensive IAPs. Under the latter perspective, app developers who wish to reach iOS users have no choice but to tolerate Apple's 30% rate.[18]

Thus, at this stage of the litigation, and with the record before the Court, Apple's relevant market definition is also plausible. As Apple correctly points out, alternative means exist to distribute Fortnite.[19]  Indeed, Epic Games expressly advertised the multiplatform nature of its product following its breach of the Apple terms and service. (See Hitt Decl. ¶ 39 (Dkt. No. 77) ("[The] party continues on PlayStation 4, Xbox One, Nintendo Switch, PC, Mac, GeForce Now, and through both the Epic Games app at epicgames.com and the Samsung Galaxy Store.").) The multiplatform nature of Fortnitesuggests that these other platforms and their digital distributions may be economic substitutes that should be considered in any "relevant market" definition because they are "reasonably interchangeable" when used "for the same purposes." du Pont , 351 U.S. at 395, 76 S.Ct. 994 ; see also Hicks , 897 F.3d at 1120-21 (dismissing antitrust claim when alleged relevant market ignored multiple ways of reaching consumers). "If competitors can reach the ultimate consumers of the product by employing existing or potential alternative channels of distribution, it is unclear whether such restrictions foreclose from competition any part of the relevant market." Omega Envtl., Inc. v. Gilbarco, Inc. , 127 F.3d 1157, 1163 (9th Cir. 1997).

Epic Games’ arguments distinguishing these other platforms as potential economic substitutes have not been sufficiently tested. First, Epic Games avers that the iOS market is distinct from other video game platforms because Sony, Nintendo, and Microsoft do not make much profit, if any, on the sale of the hardware or console—unlike Apple, which allegedly makes significant profits from the sale of each iPhone. This distinction is without legal precedent under section 2 of the Sherman Act. Indeed, Sony, Nintendo and Microsoft all operate similar walled gardens or closed platform models as Apple, whereby the hardware, operating system, digital marketplace, and IAPs are all exclusive to the platform owner. As such, a final decision should be better informed regarding the impact of the walled garden model given the potential for significant and serious  ramifications for Sony, Nintendo and Microsoft and their video game platforms.

Second, Epic Games’ avers that the iOS platform is unique from other gaming devices. Specifically, Epic Games argues that gaming consoles and computers require electrical outlets and separate screens and thus lack capacity for mobile play, which demands portable, battery operated, and cellularly connected devices with built-in screens. (See Sweeney Reply Decl. ¶ 14 (Dkt. No. 86).) Yet, Epic Games repeatedly ignored discussion of gaming laptops, tablets, and the Nintendo Switch, all of which can be played in a mobile fashion. These devices could have significant overlap with the iOS platform in terms of the ultimate consumer. Again, however, at this stage, the record does not contain sufficient information to determine whether such other devices are economic substitutes or are merely complimentary to iOS devices.

Thus, and for other reasons, Apple's market definition also faces hurdles. Antitrust law is not concerned with individual consumers or producers, like Epic Games; it is concerned with market aggregates. Substitutes may not deprive a monopolist of market power if they fail to affect enough customers to make a price increase unprofitable. See Theme Promotions , 546 F.3d at 1002 (defining relevant market by whether a price increase would cause a "significant number" of customers to substitute to make the price increase unprofitable). Alternatively, constraints among some consumers may not render the market as a whole narrow. See Telecor Commc'ns, Inc. v. Southwestern Bell Telephone Co. , 305 F.3d 1124, 1131-32 (10th Cir. 2002) (rejecting relevant market definition based on a finding that "some" consumers could not substitute products because the record did not show they were "significant enough to render the market as a whole non-cross-elastic"). But see Engelhard , 126 F.3d at 1306 (noting that "it is possible for only a few customers who switch to alternatives to make the price increase unprofitable, thereby protecting a larger number of customers who would have acquiesced in higher ... prices.").

Here, both parties cite factors impacting the elasticity of their proposed markets. A final determination may depend on the magnitude of those effects. For instance, focusing on Fortnite alone, the record shows that (i) more than 116 million (out of 350 million) Fortnite players have accessed Fortnite through the iOS platform; (ii) iOS players constitute roughly 10% of the daily active Fortnite users since its iOS launch in April 2018; and (iii) 63% of Fortnite players on iOS only play on the iOS platform. (Sweeney Decl. ¶ 3 (Dkt. No. 65).) Notably, the record is silent on how often these 116 million individuals play Fortnite and devoid of information on the characteristics of 10% of daily active users or whether these users access Fortnite through other platforms. More broadly, there is no evidence regarding the size of the game app market compared to other apps and whether they constitute a separate submarket with unique characteristics that do not apply to other app developers.

Thus, the market definition rests on factual questions regarding the nature of the iOS market as a whole: how many iOS users own multiple devices; how many iOS users would switch to another device in response to a price increase; and how many producers can afford to forego iOS customers altogether. Neither party adequately addresses these factual questions. Epic Games assumes all iOS customers are the same, and Apple assumes that only Epic Games customers are relevant.

Moreover, underlying these questions is a significant and unresolved dispute over clustering. Apple focuses narrowly on game distribution channels because of the  nature of Epic Games’ business. But courts have often combined different services together when "the product package is significantly different from, and appeals to buyers on a different basis from, the individual products considered separately." Image Tech. , 125 F.3d at 1204-05. For example, in United States v. Phillipsburg National Bank and Trust Company , the Supreme Court grouped multiple financial services together into a relevant market of "commercial banking"—even though they differed in their availability of substitutes—because customers generally obtain all banking services from one place. 399 U.S. 350, 360-61 & n.4, 90 S.Ct. 2035, 26 L.Ed.2d 658 (1970). Here, Epic Games may establish that app distribution generally should be considered separately from app distribution of individual games, which could have a significant impact on how alternative distribution channels are evaluated.

Finally, underlying each of these issues is the question of perspective. Interchangeability for purposes of the relevant market may vary depending on perspective. See, e.g. , Little Rock Cardiology Clinic PA v. Baptist Health , 591 F.3d 591, 597 (8th Cir. 2009) (reversing relevant market definition based on improper perspective); Flovac, Inc. v. Airvac, Inc. , 817 F.3d 849, 854-55 (1st Cir. 2016) (same); Telecor , 305 F.3d at 1132-33 (same). Here, there are at least three possible perspectives on the relevant market: (1) the customer who purchases the apps or games, (2) the developer who makes the apps or games, and (3) the competing app store or digital marketplace that distributes the apps or games. The parties adopt different perspectives, but neither justifies its choice. And as the parties’ briefing demonstrates, the resolution of this question could lead to radically different analysis.

In short, without the record to define the relevant antitrust market, Epic Games has not established likelihood of success as to monopoly maintenance, only serious questions. Further, without such definition, the Court need not evaluate the second or third elements of the section 2 claim. Additionally, even under a section 2 claim, plaintiff must show anticompetitive conduct. One way to do so includes a rule a reason analysis. Given the overlap of this issue with a section 1 claim, the Court addresses it below. See, Qualcomm , 969 F.3d at 991 ("The similarity of the burden-shifting tests under [sections] 1 and 2 means that courts often review claims under each section simultaneously.").

[11] The Court's discussion of the section 2 claim before the section 1 claim mirrors the parties’ briefing.

[12] More precisely, "a firm is a monopolist if it can profitably raise prices substantially above the competitive level." Microsoft , 25

Part 3 of 11 of Epic Games v. Apple Lawsuit.

3 F.3d at 51.

[13] Epic Games’ economic expert does not address these factors; instead, he principally relies on the those that follow.

[14] The parties are reminded that Newcal was decided on a motion to dismiss and has limited reach. The Ninth Circuit explicitly indicated that the case is not "guarantee[d]" to survive a motion for summary judgment because the "actual existence of a separate economic entity (i.e. a submarket) that includes only IKON's customers is a factual question." 513 F.3d at 1051. The same is true of Teradata and Psystar . The Court relies on each for those limited propositions.

[15] Both Epic Games and Apple agree, however, that the "geographic market" is likely global. (But see Evans Decl. at 10 n.37 (Dkt. No. 62 at 12) (reserving future opinion on whether the Chinese mobile market should be included in the geographic market).)

[16] Apple fails to respond adequately to the "aftermarket" theory, devoting a single paragraph to it and stating, in a conclusory fashion, that "this is not an aftermarket case." Should Epic Games continue to assert this theory, Apple should explain why switching and information costs do not render the IOS app distribution market distinct. Silence can be interpreted as an admission.

[17] Apple further avers that as intellectual property owner, even if it is a monopolist, Apple is not required to allow unfettered and uncompensated use of its own technology. See Herbert Hovenkamp et al., IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law § 13.03 (3rd ed., 2016 & Supp. 2019) (citing Microsoft Corp. , 253 F.3d at 63-64 ). That said, "intellectual property rights do not confer a privilege to violate the antitrust laws." Microsoft , 253 F.3d at 64. Moreover, the parties fail to brief whether Apple possesses "essential facilities," which may require (compensated) access. The Court makes no express finding on these issues, but notes these as other potential hurdles.

[18] The Court also leaves for another day the proper classification of the 30% at issue, that is, whether it is a commission, a licensing fee, a "tax", or a "price." Each may have legal ramifications which have not been fully briefed, and therefore carry with them unintended consequences of choosing a term too quickly.

[19] However, the Court notes that Apple's argument assumes a user who owns multiple devices, pays attention to prices for in-app purchases, and switches devices in response to price increases. There is little evidence that the ordinary iOS consumer carries such characteristics. Cf. U.S. v. Engelhard Corp. , 126 F.3d 1302, 1306 (11th Cir. 1997) (rejecting relevant market analysis based on customer interviews where proponent failed to show that the customers were representative).

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