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Epic v. Apple ruling: Judge finds Apple’s App Store restrictions violate antitrust law

“Fortnite” developer Epic Game’s antitrust lawsuit against Apple (AAPL) has upended the mobile device maker’s tightly protected ecosystem over its booming App Store. In a decision issued Friday, a federal California judge largely sided with Epic by issuing a permanent injunction against Apple’s App Store policies, and opening the door for developers to offer customers third-party payment options in apps.

“Epic Games failed in its burden to demonstrate Apple is an illegal monopolist,” Judge Yvonne Gonzalez Rogers wrote in an order. “Nonetheless, the trial did show that Apple is engaging in anticompetitive conduct under California’s competition laws.”

Apple’s so-called anti-steering policy limits the ability of Apps to inform customers of payment options outside of the App Store. This is problematic for Apps because Apple’s App Store charges a 30% commission.

“A remedy to eliminate those provisions is appropriate,” Judge Gonzalez Rogers ruled. 

The judge issued a permanent injunction prohibiting Apple from stopping developers from directing customers to in-app purchasing methods. It also forbids Apple from barring apps from communicating directly with customers who have voluntarily given the app their contact information.

The ruling doesn’t end the fight between the two companies, as Apple is expected to appeal the decision. However, the case moves forward a hotly contentious issue over how much control dominant mobile device makers can exert over third party developers that design software to sell on their platforms.

Prior to the judge’s ruling, late last month, Apple had already begun to make some changes to its App Store policies to settle a separate class action by smaller developers who argued that Apple’s anti-steering provision and 30% commission were anti-competitive. As part of that settlement, Apple agreed to let developers communicate directly with customers about ways to pay for the app other than the App Store.

“Now developers can tell customers about the possibility of buying somewhere else,” Cardozo School of Law professor and former attorney with the U.S. Department of Justice’s antitrust division Sam Weinstein told Yahoo Finance. “It’s something Epic wanted to have happen.” Legally, Weinstein said, Judge Gonzalez Rogers was not permitted to take Apple’s concession into account in making her decision. However, it could impact arguments on appeal.

The dispute is also playing out in a similar case that Epic filed against Google (GOOG, GOOGL) over its own app store Google Play. Both companies dropped Epic from their platforms and banned it from their respective operating systems when “Fortnite,” with about 350 million registered players, circumvented the stores, offering direct, in-game purchases at a 20% discount.

Epic has filed a similar suit against Google, which could impact its Play Store sales

In the Apple trial, which ran about three weeks, Epic argued that the App Store amounted to an illegal monopoly because developers must exclusively distribute and process their customers’ payments through the App Store, which requires developers to pay the iPhone maker a 30% commission on in-app sales.

Apple CEO Tim Cook is questioned by Judge Yvonne Gonzalez Rogers as he testifies on the stand during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021 in this courtroom sketch. Cook on Friday told a court that threats to iPhone security and privacy required tight control of the App Store, which

Apple CEO Tim Cook is questioned by Judge Yvonne Gonzalez Rogers as he testifies on the stand during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021 in this courtroom sketch. REUTERS/Vicki Behringer

Apple and Google both said Epic’s move to circumvent commissions violated their respective terms of service, justifying removal from the stores.

One of the most difficult hurdles that regulators have faced asserting antitrust claims against Big Tech firms is defining a relevant market in which the alleged anticompetitive behavior took place.

At trial, Epic’s lawyers argued that the market central to Apple’s alleged anticompetitive conduct should be defined narrowly as app distribution, or in other words, how apps get onto the iPhone.

Apple’s lawyer disagreed, saying no separate market for app distribution exists because it has never separately licensed iOS or its App Store. Instead, they said, the relevant market is the broader mobile device market, where it faces fierce competition from dozens of manufacturers of Android-based mobile phones and tablets, and gaming consoles like Microsoft’s Xbox and Nintendo’s Switch.

“Apple’s business model was developed long before it had anything that anyone claimed was market power,” Apple’s lawyer argued, saying that its model more effectively protects users from malware and other security and privacy breaches than Android-based devices.

The tech giant’s lawyers also positioned Apple’s less malware-ridden ecosystem as a market alternative to Android’s mobile operating system — an option that it said would be squashed, and would lessen competition for mobile devices, if it were forced to open its software to outside players.

“The iOS environment would be turned into the equivalent or perhaps even a poor annotation of Android. And that eliminates consumer choice,” Apple’s lawyer told Gonzalez Rogers.

App Store revenues remain undisclosed

Apple doesn’t break out revenue for the App Store, instead bundling the marketplace with its Services business alongside Apple Music+, Apple TV+, iCloud, and other sources. Still, the Services segment totaled $53.7 billion in 2020, or roughly 20% of Apple’s $274 billion in total revenue for the year, with in-app purchases on gaming apps representing the App Store’s dominant revenue source.

Apple CEO Tim Cook waves from the elevator as he leaves after speaking during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021. REUTERS/Brittany Hosea-Small

Apple CEO Tim Cook waves from the elevator as he leaves after speaking during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021. REUTERS/Brittany Hosea-Small

Since the filing of Epic’s suit, Apple has already conceded some of that App Store revenue.

In November, Apple restructured its App Store fees by dropping commissions from 30% to 15% for companies that make less than $1 million in revenue per year. Subscription services remained unchanged, with developers paying 30% for the first year of a subscription, and 15% for each subsequent year. Free apps remained free, with Apple taking no commission from developers for downloads.

And in August, in a settlement reached with a group of developers that brought a class action lawsuit against Apple, claiming that it monopolized distribution for iOS apps and in-app purchases, Apple agreed to let developers share purchase options with users outside of the iOS app. Apple also agreed to expand the price points that developers could offer for subscriptions, in-app purchases, and paid apps.

Yahoo Finance reached out to Apple and Epic and will update this article with any response we receive.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

Got a tip? Email Daniel Howley at dhowley@yahoofinance.com over via encrypted mail at danielphowley@protonmail.com, and follow him on Twitter at @DanielHowley.

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