Introduction
As promised, we are back with the second part of the series. In Part I, after going through the facts of the case, we understood the "Rule of Reason" framework that applies in such anti-trust cases. To briefly recap, this involves a three-step burden-shifting framework: [1]
i) The plaintiff initially proves that the restraint has an anti-competitive effect in the relevant market.
ii) The burden shifts to the defendant to show a pro-competitive rationale for the restraint.
iii) It shifts back to the plaintiff to show that the pro-competitive efficiencies are achievable through less competitive means.
In the first part, we undertook an analysis of the first step where the heart of the debate lay at what would be the “relevant market”. This part will pick up from there and analyze the second and third steps of the framework, which involves Apple demonstrating a pro-competitive rationale for their restraints and Epic Games countering it. We will further explore the possible consequences of these arguments and get into what this means for jurisprudence in tech's anti-trust battles and the economics of the application store market.
Do Apple’s restraints make the App Store more efficient?
Anti-trust law, as understood by the common law jurisprudence, fundamentally exists to protect the consumer. Therefore, the Courts have often adopted approaches that rely on the consumer’s benefit. For this reason, when a restraint brings efficiency to the consumer, the Court’s have understood it to be pro-competitive and fulfill the defendants’ burden under the second step of the Rule of Reason framework. [2]
Consequently, Apple’s arguments in the trial for its non-inter-operability were highly focused on delivering a superior consumer experience. Apple’s Senior Executive, Craig Federighi, testified that the inoperability of third-party app stores or payment processing mechanisms was at the crux of what sustained the cyber-security of Apple devices. He referred to the multiple viruses, trojans, frauds being present in the test version of applications which were filtered out through malware scans, certification requirements, “sandboxing” [3] through the automatic as well as human review mechanisms of the Apple App Store (hereinafter, ‘App Store’). Further, as per the Apple team, the commission charged through in-app purchases gave the App Store a revenue stream for maintaining this security standard and investing in research and development to promote further application development and on-boarding on the App Store. They submitted that this revenue supported 1.8 million apps, of which 84 percent are free, to 1.5 billion Apple devices and 900 million iPhone users.
On the other hand, the expert witnesses on behalf of Epic Games tried to counter these claims through their testimony that the operating system was the most significant line of defense in a mobile device. Hence, as long as an operating system handled the cyber-security aspects well, a third-party application store would not cause problems. They also submitted that the human-review process of applications did not have many advantages. On the in-application purchases commission, Epic Games provided evidence to the United States District Court of Northern District of California Court (hereinafter, ‘Court’) that the App Store operated on a 79% operating margin. This, as per them, was proof of Apple’s unjust enrichment from anti-competitiveness. Giving the example of Android’s model in China, where it supported a rival application store, they submitted to the Court that the typical deal of an app store should be on a break-even model.
In response, Apple cited a study that found that iOS had 1.7% infections compared to 26.6% on Android. They also mentioned that “anti-steering” [4] steps are the standard business practice also used by eBay, Spotify, Amazon App Store, Airbnb, etc., and Epic’s figure of the operating margin does not include the significant investment that goes into research and development for improving the App Store. Apple also claimed that In-App Purchases also provides: “(1) a “centralized, convenient way” to transact online, (2) security and fraud protection, (3) refunds and customer support from Apple, (4) parental controls, and (5) comprehensive list of purchases.”
All in all, both the parties tried to fulfil their burdens under the Rule of Reason framework. Apple provided facts to the Court pertaining to the increased efficiency of the App Store after placing restrains. On the other hand, Epic Games attempted to nullify the Apple’s arguments by providing that the restraints were not in fact useful for that efficiency. Now, it comes to the Court to use the existing jurisprudence on the matter and interpret them in light of the arguments both the parties have presented.
Where do the scales tilt?
The three-step framework of the Rule of Reason proceeds step by step; hence, only 2% of the cases since 1999 reached the last stage. This creates a minimal number of precedents before the Court to judge many aspects of the case. Even Judge Rogers also noted on the final day of the trial that while the test exists as a part of the framework, there are not enough case laws to guide how to apply it. Interestingly, this makes two precedents with similar issues of “tying”(IAP tied to the App Store) and “anti-steering” (not allowing developers to direct consumers to alternate payment options) weigh down a lot more in the outcome of this case. Both of these cases suggest one clear winner – Apple Inc.
The first of the two precedents is the recent Ohio v. American Express. [5] The anti-steering clauses in American Express’ (hereinafter, ‘AmEx’) contracts with the merchants were challenged since they prevented the merchants from encouraging the use of other credit cards. The Supreme Court of the United States (hereinafter, 'Supreme Court') in the case observed that anti-steering provisions are not inherently anti-competitive. Since AmEx relied on charging higher fees from the merchants to provide their consumers greater rewards, this was a business model that varied from the prevalent business model by other card companies. The Supreme Court therefore concluded that the anti-steering provisions were necessary to AmEx’s business model and hence not anti-competitive. Similarly, in the present case, Apple has provided evidence that the revenue from the in-application purchases is essential to increase the repertoire of applications on the store and make them fool-proof. If this stands up in the eyes of Judge Rogers, there is little reason as to why it would not be considered intrinsic to the App Store’s business model and hence, not anti-competitive.
The second relevant precedent is United States vs. Microsoft. [6] The case dealt with similar facts of “technological tying” wherein Microsoft tied their browser Internet Explorer (hereinafter, ‘IE’) with their Windows 95 OS. It also made it requisite for the licensees of the OS to pre-install the IE browser. The practice was challenged to be anti-competitive. Microsoft argued that the browser being an integral part of the OS made it an “integrated product” with the OS. The [9] United States Court of Appeals for the District of Columbia Circuit broke down what an “integrated product” is and analyzed past jurisprudence to sum up a test: “The question is whether there is a plausible claim that the integration brings some advantage”. [7] Therefore, as per the requirements of this test, if the tying of two products brings “some advantage” technologically to the consumers, it qualifies as pro-competitive. The minimal requirements of this test to show “some advantage” are primarily likely to highly benefit Apple, which has produced evidence before the Court on how the inoperability of other App Stores and purchase mechanisms improve the cyber security and user experience of Apple devices. The scales, therefore, clearly tilt in Apple’s favour.
The Achilles’ Heel of anti-trust law for Big Tech
Big Tech companies, be it Apple, Amazon, or Facebook, have constantly expanded using their large user-bases, which they leverage to provide varying services. This has been understood as the “Aggregation Model,” which makes these companies expand rapidly. On the other hand, the anti-trust law requirements when these companies integrate more features on their platforms is governed by the US v Microsoft [8] Rule, i.e., providing “some advantage” to the consumer. However, according to the author, this Rule can cause negative repercussions as it might give a lot of leeway to tech companies. Judge Wald also expressed this in his minority opinion in the Microsoft case. [9] The problem essentially lies in the minimal requirements of the test, which demands only “some plausible advantage.” It is easier than ever for tech companies to synergize the code of different products to make it more efficient for the user to navigate through this window. J Wald’s minority opinion also included an example that hits the nail at its head - if Microsoft was to tweak its software code in a manner where the cursor responded well to only a specifically manufactured mouse, that would still be allowed under this rule since it gives “some advantage” to the user. While intuitively, this practice seems anti-competitive, the majority’s test, in this case, gives it the stamp of legal validity. He went on to explain that “software code by it’s nature is susceptible to division and combination in a way physical products are not.” [10]
His remarks make a valid point in light of the constant expansion of Big Tech and prompt the anti-trust law to rethink what is considered “efficient” since its definition is being constantly shaped by innovation. In the present case, Judge Rogers hinted at understanding this difference in response to Apple using the AmEx precedent. [11] She acknowledged the similarity of the issues but at the same time quizzed Apple attorneys on the stark difference of anti-steering in a physical and virtual space. Therefore, at this juncture, it is pertinent to note that while the current anti-trust regime has well-settled legal frameworks through years of jurisprudence, they are being turned at their head through innovation. Hence, the current administration might be too outdated to deal with the issues of these Big Tech empires.
So, where does that leave the applications store economy?
It is a pertinent question to ask at this point that if this super-bowl of tech anti-trust battle would have a significant impact on the economic practices of other application stores. On a legal basis, specific to the application store market, even if Epic Games somehow manages to get a favourable decision, other application store companies might not face its wrath. To understand the reason for the same, we have to recall the debate on “relevant market” from Part I of the series. The reason that Epic Games argued the "relevant market" in this case to be the "iOS App market" was because, due to Apple locking in users to its OS, it could be considered a relevant “aftermarket” (more on this in Part 1). Google, Sony, or other console companies which have their application store or game store do not have their OS in a walled garden as high as Apple’s. There is no high switching cost or any lock-in of users into the ecosystem. This makes the “relevant market” broader for them where competition from other players does exist.
However, this does not mean that the trial might not change how these companies do their business. The media attention that the case and the practice of application stores garnered has prompted Google Play Store to stay in safe waters as they reduced their commission charges from 30% to 15%. Even Apple introduced a new program wherein the commission for small business developers has been reduced from 30% to 15%. Moreover, if Epic Games manages to win the lawsuit, the aforementioned test for “tying” will change, making the waters murky for Big Tech to some extent. So, there is indeed a lot that depends on the verdict of this trial. However, as Judge Rogers has indicated, the judgment is not coming any time soon with a lot to go over for the Court, so we might as well play some Fortnite (not on our Apple Devices, of course) and keep ourselves informed in the meanwhile!
The views expressed above are solely of the author's.
Sources:
[1] Continental T.V. v. GTE Sylvania 433 U.S. 36 (1977)
[2] United States v. Microsoft Corp., 147 F.3d 935
[3] Through this Apple Inc. provides developers the ability to restrict access to system resources and user data in macOS apps to contain damage if an app becomes compromised
[4] Use of contracts to prevent consumers from using alternate services/products
[5] Ohio v. American Express 138 S. Ct. 2274 (2018)
[6] Supra 2
[7] P|| 45, United States v. Microsoft Corp., 147 F.3d 935
[8] Supra 2
[9] Ibid.
[10] Ibid.
[11] Supra 3
