The Washington Post

Federal judge orders change in Apple App Store practices

Landmark ruling allowing rival payment options may spread antitrust ripples


A federal judge fundamenta­lly altered Apple’s App Store business model on Friday in a landmark ruling that accused the iphone maker of illegal anticompet­itive behavior and is likely to have ripple effects across the U.S. antitrust landscape.

In a decision on an antitrust lawsuit brought by Fortnite maker Epic Games, U.S. District Judge Yvonne Gonzalez Rogers ruled that Apple must allow app developers to “steer” customers to alternativ­es to the tech giant’s payment processing service, which collects a 30 percent fee on most digital transactio­ns. That was previously not allowed by the company, and marks a major victory for developers, which have long complained of the tight grip the tech giant maintains on its App Store in the roughly one billion iphones currently in use.

Gonzalez Rogers also found that Apple was in violation of California state competitio­n laws because of the way it forces developers into using Apple’s payment processing service without allowing them to tell customers there are alternativ­es, which are often cheaper.

She stopped short of ruling in favor of Epic’s claims that Apple is a monopolist, although she left the door open by suggesting more evidence could have changed her decision.

“The court does not find that it is impossible; only that Epic Games

failed in its burden to demonstrat­e Apple is an illegal monopolist,” she wrote.

Epic spokeswoma­n Elka Looks said the company plans to appeal the ruling. Tim Sweeney, chief executive of Epic, said in a tweet that, “Today’s ruling isn’t a win for developers or for consumers.”

Apple did not respond to requests for comment.

The ruling, one of the first major legal actions taken against a tech giant in a new era of antitrust scrutiny, is sure to echo loudly both in Washington, where a legislativ­e effort to rein in the power of Big Tech is underway, and in the courts, which are facing the biggest test of antitrust laws in decades. Tech giants have come under the microscope in recent years as it became clear that current antitrust law does not effectivel­y address their power, and regulators and lawmakers have been pushing to change that.

Last October, the Justice Department sued Google over allegation­s that it violated federal antitrust law. Just two months later, the Federal Trade Commission sued Facebook for allegedly behaving as an unlawful monopoly. Congress has also held several hearings about antitrust concerns, including demanding last year that the chief executives of Amazon, Facebook, Google and Apple testify to their companies’ power. (Amazon founder Jeff Bezos owns The Washington Post.)

During the hearing, Apple CEO Tim Cook defended Apple’s relationsh­ip with app developers.

“We do not retaliate or bully people,” he said. “It is strongly against our company culture.”

Apple’s developers in recent years have begun speaking out against the company for policies they view as anticompet­itive and unfair. While companies like Epic, Spotify, Match Group and others have publicly locked horns with Apple, some smaller developers have also spoken out. Some have joined the Coalition for App Fairness, which was set up by Epic and other large companies.

Spotify’s head of global affairs and chief legal officer Horacio Gutierrez said in an emailed statement that it was pleased with the findings of anti-competitiv­e practices, as well as the move to allow app developers to steer customers to other ways to pay.

“This and other developmen­ts around the world show that there is strong need and momentum for legislatio­n to address these and many other unfair practices, which are designed to hurt competitio­n and consumers,” he added. “This task has never been more urgent.”

Vidhya Murugesan, spokeswoma­n for dating app developer Match Group, echoed those concerns.

“The Court got it right that Apple has abused their power and engaged in unfair behavior, but what today’s ruling also makes clear is that antiquated antitrust laws cannot solely be fixed by the courts,” she said in an emailed statement, adding that laws need to be changed.

Last week, South Korean lawmakers passed legislatio­n that forces Apple to allow alternativ­e payment processing systems.

Others said the court’s decision didn’t go far enough. Evan Greer, director of digital rights group Fight for the Future, said the decision didn’t do enough to address the harm caused by Apple’s policies.

“As long as Apple maintains an authoritar­ian strangleho­ld over what software millions of people can and can’t run on their phones,

the company will be actively helping repressive government­s undermine human rights and censor apps used by journalist­s, dissidents, and vulnerable communitie­s,” Greer added.

The victory for App Store developers could allow them to circumvent some of the fees Apple charges. Under the changes, which take effect in 90 days barring any legal challenges, developers can collect money for digital goods outside of the App Store, but Apple’s current App Store policies prohibit developers from telling customers inside their apps about alternativ­e payment options or providing links to outside websites where customers can sign up for subscripti­ons or purchase digital goods and circumvent Apple’s fees.

Netflix, for instance, does not allow customers to subscribe within its mobile app. Customers must find their way to Netflix’s website and subscribe there.

Gonzalez Rogers said the way Apple treats developers resulted in the company violating California competitio­n laws. The App Store is the only way software developers can distribute apps, and Apple’s payment processing service is the only way they can collect money for digital goods sold within apps.

“The Court concludes that Apple’s anti-steering provisions hide critical informatio­n from consumers and illegally stifle consumer choice,” Gonzalez Rogers wrote.

Epic lost, though, on the foundation­al allegation of its lawsuit. Epic tried to convince Gonzalez Rogers that Apple’s App Store was in itself a “market,” over which Apple is a monopolist, and wanted the judge to force Apple to allow alternativ­e app stores and payment processing systems on its phones.

Apple argued that it has competitio­n, not just from Google’s Android Play Store, but from video game consoles and other forms of media and entertainm­ent.

Gonzalez Rogers partially sided with Apple on that argument, defining the relevant market in the lawsuit as “mobile gaming transactio­ns.” She pointed out that the majority of Apple’s App Store revenue comes from games, and not all apps. And in that market, Apple is not a monopolist either, she ruled.

“Given the trial record, the Court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws,” according to the 185-page decision. “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. Success is not illegal.”

In losing that key argument, Epic also was unable to get the court to order the changes it really wanted: A way to install software on iphones outside the App Store and alternativ­e payment options built into apps.

Fortnite, Epic’s popular video game, remains off the App Store for now. Apple removed it last summer after Epic added an alternativ­e payment method, prompting the lawsuit.

“Fortnite will return to the IOS 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,” Sweeney added in a tweet.

In recent weeks, Apple had already begun to make changes to its App Store policies. In a settlement in another lawsuit with app developers, Apple agreed to relax its policies slightly, allowing developers to provide alternativ­e payment informatio­n to customers, but not in the apps themselves. In another legal settlement in Japan, Apple agreed to allow “reader” apps, which includes services such as Netflix, to provide some informatio­n within their apps, but that ruling only applied to Japan.

The App Store has increased in importance for Apple in recent years as the tech giant focuses more heavily on “services,” transition­ing from a pure hardware company to one that earns revenue from things like online streaming and other subscripti­ons.

How the new rules, if they’re upheld by higher courts, will affect Apple’s business is unclear. Apple earns about $70 billion a year from the App Store, part of a total revenue of about $270 billion annually. It’s unclear what types of apps will benefit more from the changes — games, which Gonzalez Rogers said account for 70% of App Store revenue — or other apps that may offer subscripti­ons and other services.

Apple’s stock dropped about 3.3 percent Friday after the news of the ruling broke.

The legal battle between the two companies is not over, experts said.

“There is almost certainly going to be a cross appeal — Apple will likely appeal the judgment, and the findings on California competitio­n law, while Epic might want to appeal the holding that Apple’s conduct did not violate federal law,” said John Bergmayer, legal director for the nonprofit Public Knowledge.

The ruling will also draw more attention to the California Unfair Competitio­n law, which Gonzalez Rogers applied to force Apple to change its policies nationally, legal experts said.

It’s common for plaintiffs who bring antitrust claims in California federal court to include an allegation under the state law, but it’s historical­ly been an afterthoug­ht, said Valarie Williams, a partner at Alston & Bird’s San Francisco office. “Both plaintiffs and defendants will pay more attention” to the state law, she said. “It will be more of a focus.”

Apple argued in its legal briefs that Epic would need to win on its claims relating to federal antitrust law in order to win its state law claims, but Gonzalez Rogers disagreed, citing the broad language of the California statute.

Epic’s lawsuit began in August 2020, when it gave IOS users of its “Fortnite” game an alternativ­e payment option without Apple’s permission. By using Epic’s payment processing service, customers got a discount. When Apple discovered this, it kicked “Fortnite” off the App Store and Epic immediatel­y sued.

The move by Epic was premeditat­ed. Epic was ready with a media campaign, including an ad titled “Nineteen Eighty-fortnite,” comparing Apple to Big Brother in George Orwell’s “1984.”

During the three-week trial earlier this year, Gonzalez Rogers offered few clues about which way she would rule. But when Apple’s CEO Cook took the stand, Gonzalez Rogers zeroed in on the company’s business model for the App Store, grilling him on the fact that a disproport­ionate amount of that revenue comes from the gaming industry.

“You’re charging the gamers to subsidize Wells Fargo,” she said at the time.

 ?? CHRIS DELMAS/AFP/GETTY IMAGES ?? A U.S. judge ordered Apple to change App Store practices in a long-awaited ruling in the antitrust case brought by Epic Games. The order said Apple can no longer force app developers to use its payment system, allowing developers to point consumers to alternativ­e options.
CHRIS DELMAS/AFP/GETTY IMAGES A U.S. judge ordered Apple to change App Store practices in a long-awaited ruling in the antitrust case brought by Epic Games. The order said Apple can no longer force app developers to use its payment system, allowing developers to point consumers to alternativ­e options.

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