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The Epic Games Vs. Apple Trial Has Begun. Here's What You Need To Know

May 4, 2021
Originally published on May 4, 2021 1:16 pm

Epic Games, the maker of the hit video game Fortnite, brought Apple to federal court Monday for the start of what is expected to be a weeks-long blockbuster trial centered on Apple's iron grip of a major slice of the mobile economy.

The lawsuit that prompted the trial is about one app developer, Epic, a $29 billion company based in Cary, N.C., but the outcome could have far-reaching consequences for companies in Silicon Valley and the future of how money moves on smartphones and other devices.

If Epic wins, Apple, a $2 trillion company, could be forced to reshape the policies of its highly lucrative app store, which has been the target of growing pressure from Washington and the European Union.

The court battle represents the most high-profile antitrust trial in the technology world in decades and also marks the most threatening legal case against Apple in years.

What exactly is the case about?

Epic accuses Apple of running its App Store as an illegal monopoly because it only allows in-app purchases on iPhones to be processed by Apple's own payment system on its more than 1 billion iPhones around the world — and it typically tacks on a 30% commission on every purchase.

Epic says that fee, which critics call "the Apple tax," is applied unfairly and falls heavily on smaller app developers, who then are at a disadvantage trying to compete with Apple's own apps that avoid the fee.

The money made from the commission is an important and growing revenue stream for Apple, part of the fees and subscriptions that generated $54 billion in the last fiscal year. Analysts say sales in this segment are especially important, considering how iPhone sales peaked years ago.

The 30% cut is necessary, according to Apple, to safeguard the privacy and safety of apps on Apple devices.

Epic estimates Apple's profit from its App Store's fees is nearly 80% — a stunning figure that Apple calls "simply wrong."

Where is the trial happening?

The trial is taking place in a mostly empty federal courthouse in Oakland, Calif. An audio livestream of the proceedings is publicly available, but there are strict limitations on who is allowed into the trial because of pandemic-related health concerns. The judge addressed lawyers on Monday from a bench surrounded by plexiglass.

Where else has Apple's App Store come under fire?

Lawmakers in Washington held a hearing last month focused on the power of tech giant app stores.

Justice Department investigators are reportedly probing Apple's App Store rules.

And last week, European Union regulators brought charges against Apple for allegedly breaking European antitrust laws by abusing its dominant position for the distribution of music streaming apps. The decision follows a complaint against Apple made by Sweden-based Spotify.

How strong is Epic's case, and who will decide who wins?

Epic was able to clear enough procedural hurdles to advance this far, so federal Judge Yvonne Gonzalez Rogers believes Epic's case at least warrants a full trial.

Under U.S. law, however, plaintiffs face an uphill battle in winning antitrust cases, since courts have long interpreted the country's century-old competition laws in ways that tend to favor large corporations.

In a pretrial decision, the judge hinted that she was skeptical about Epic's argument that Apple is violating the Sherman Antitrust Act of 1890 by acting like an illegal monopoly.

Even still, proving that Apple is a monopoly will not be enough, since that alone is not illegal under U.S. law. Instead, Epic must show that Apple abuses that alleged monopoly power to hurt competitors and distort an entire market in its favor. Experts say that is a high bar to clear.

Both sides waived their right to a jury trial, meaning that it is a bench trial decided by Gonzalez Rogers.

Whatever her ruling, a drawn-out appeals process is all but guaranteed.

Epic Games CEO Tim Sweeney enters the Ronald v. Dellums building in Oakland, Calif., to attend his company's federal court case against Apple.
Noah Berger / AP

What happened in court on Monday?

Lawyers for Epic tried to convince Gonzalez Rogers that Apple designed its App Store in a way that gives it a leg up over other developers: There are no other payment processing choices. Either use Apple's payment system, or don't pay for an app or an item in an app. That, Epic's lawyers argued, is illegal.

"When they pick up their iPhones, users enter a different world. Each and every time they make an in-app purchase, a 30% tax is imposed," said Epic lawyer Katherine Forrest. "The most prevalent flower in the walled garden is the Venus flytrap."

In its own opening statement, lawyers for Apple said the 30% fee helps ensure the company's privacy and security standards. It is not an abuse of power, Apple attorneys argued, but a quality check on Apple's operating system, known as iOS.

"Epic demands that this court force Apple to allow in any and all third-party app stores so that they can distribute unreviewed and untested apps on all iOS devices," said Apple lawyer Karen Dunn.

Dunn said Apple did not create the 30% out of thin air. Rather, she argued that at the time the App Store was introduced, in 2008, it had become an industry standard for digital transactions on things like gaming platforms.

Epic CEO Tim Sweeney took the stand on Monday. Wearing a blue suit and tie instead of his usual T-shirt and cargo pants, Sweeney told the judge that when it comes to Apple's mobile ecosystem, he "loved it in the early days," but over time its policies have become increasingly restrictive.

And that has made it more costly to support apps on Apple devices. For its popular game Fortnite, for instance, Epic could have more than 100 developers working on the mobile version of the game.

By taking a 30% cut of every in-app purchase, Sweeney estimated Apple made more money from some apps than the developers who created them.

But the goal of Epic's suit, Sweeney said, was not monetary damages, but to convince a judge to order Apple to change its behavior in the marketplace for iPhone apps.

"Epic is solely seeking changes to Apple's future behavior," Sweeney said.

In Apple's line of questioning, Apple attorney Richard Doren pointed to Sweeney's decision last year to allow Fortnite players to pay for the game's currency using Epic's own payment processing system at a rate lower than Apple's, a violation of Apple's terms of service.

"In August 2020, you as the shot caller at Epic chose to intentionally breach your contract with Apple?" Doren asked Sweeney.

"Yes," Sweeney replied, noting that he knew Apple kicking Fortnite out of the app store was a possibility, yet he hoped it would make Apple "seriously reconsider its policy."

When Apple refused, Sweeney sued Apple, published a video parodying an old Apple advertisement and urged Fortnite gamers to rally around the #FreeFortnite hashtag.

Epic officials dubbed the campaign "Project Liberty."

On Monday, Apple lawyer Doren asked Sweeney if the whole thing was a public relations stunt with the real aim of cutting costs for Epic at the expense of Apple's reputation.

"Our goal was to demonstrate to smartphone owners that removing the platform fees would result in savings for them," Sweeney said.

Cross-examination of Sweeney will continue Tuesday.

What happens next?

The trial is set to stretch on for three weeks.

The most anticipated testimony is expected to be from Apple CEO Tim Cook, but an exact date for Cook's testimony has not yet been set.

In addition to company executives, dueling economists will be called by each side to testify about market issues related to the case.

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