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Apple, Epic Games face off before Ninth Circuit on legality of App Store ‘walled garden’

Apple's closed App Store system is again challenged on the grounds it could stifle competition by game developers.

SAN FRANCISCO (CN) — An appeals court panel could rule on the future of how tech giants regulate developer activity on digital product store platforms by determining if a federal judge’s siding with Apple in a competition lawsuit versus Epic Games will hold up.

The Ninth Circuit Court of Appeals panel on Monday heard from Epic Games, a large games developer seeking to overturn a bench trial outcome in its antitrust action against Apple. Epic’s CEO Tim Sweeney alleged in federal court last year that Apple is running a monopoly through its App Store function in its operating system, and called the company’s rules charging game developers for access to the App Store a “walled garden.”

Apple attorneys argued Sweeney is using the lawsuit as a scheme to increase Epic's profits while taking advantage of a sophisticated ecosystem invented and built by Apple to disseminate its popular video game Fortnite to consumers. They pointed to internal documents at Epic Games and a strategy called “Project Liberty” to challenge the fees Apple charges game developers for access to the App Store. 

The two companies also clashed over security and privacy on their respective platforms. Apple claims its processing solution is the most secure and reliable, and that its review team rejected 40% of app submissions in 2020. But Epic Games attorneys worked to wear down the argument on cross-examination with examples of scam, copycat and malware apps that make it through the App Review process.

U.S. District Judge Yvonne Gonzalez Rogers ruled last September in Apple’s favor, but said Apple can no longer stop app developers from telling users how to sidestep its App Store and pay developers directly for subscriptions and other services. That decision came three months after the bench trial, and Rogers rejected Epic’s definition of the market as one exclusively for iPhone games.

The judge issued an injunction barring Apple from restricting developers’ ability to add external links and buttons in their apps that steer users to pay developers directly, and from prohibiting developers from communicating with users on how to make direct purchases without going through the App Store.

Epic Games had sought broader relief, arguing that consumers should be allowed to download iOS apps outside the App Store and developers should get to include their own payment systems in iOS apps to let users pay them directly. The judge found Apple’s controls over app distribution and payments were not illegal, partly based on its argument that such control is necessary to protect users from malicious apps.

Apple’s decision to appeal Rogers’ ruling is a turnaround from September, when lawyers called the decision “a huge win” for its App Store business model now challenged by tech rivals.

Before the three-judge panel Monday, Epic Games attorney Tom Goldstein argued that Rogers made significant legal errors. The panel was comprised of Circuit Judges Sidney Thomas, a Clinton appointee, Bush appointee Milan Smith, and a district judge, Michael McShane, an Obama appointee.

Goldstein said Rogers inaccurately calculated whether Apple’s system has enough pro-competitive benefits to both developers and consumers to outweigh any anti-competitive benefits, “that weighs very heavily in sustaining what Apple is doing here.”

“Consumers are stopped by Apple from knowing what costs are," he said. "Apple lets them buy goods off the web, but has anti-steering rules preventing developers from telling customers there are cheaper alternatives.”

When Smith asked if they should send the case back to Rogers to redo applying the rule of reason, Goldstein said he thinks “we’re just going to end up back here.” He said Apple can tell consumers to opt for the App Store's benefits and a closed system, but their stance is still that Apple cannot restrain competitors from offering their own payment systems to consumers. 

“It’s not intrinsic in your product definition to keep us from competing against you,” he said.

The panel also heard from federal and state attorneys who said they thought the district court erred in not accounting for how Apple may or may not be a monopoly power, including by being able to keep their prices consistent no matter what competitors do. 

But Apple attorney Mark Perry said Epic Games failed to bring actual proof in this case, and the tech giant continues to argue that its model's benefits to consumers and developers — offering what they claim is the most secure platform in the business on the App Store — outweigh restrictions on developers that were argued as stifling competition. 

Perry argued Epic Games did not survey customers for evidence to prove their claim and could not provide other evidence that Apple is exercising an unlawful monopoly power. He said the App Store model is a "lawful vertical restraint," designed to create a secure system that benefits users with the app review process to prevent malware, hacks, porn and other breaches. Consumers are offered the choice between an open system on Android with many competing app stores, or Apple’s closed integrated system.

“What is kept out by walled gardens is fraudsters, pornsters and hackers," Perry said.

In his rebuttal, Goldstein said Apple does not have the right to “lock out” horizontal competition and prevent developers like Epic Games from offering their own app store. 

“You don’t get to squash competition between competitors and IAP providers,” he said. 

When Smith asked how Epic Games responded to the claim of a failure of proof, Goldstein said the panel must assess if the district court made legal errors and consider that Epic Games is a “would be competitor” prevented by Apple from fully competing.

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