AAI Offers Guidance to Ninth Circuit on Defining Digital Markets (Epic v. Apple)

AAI filed an amicus brief urging the Ninth Circuit Court of Appeals to focus on antitrust first principles when defining technology product markets.

Epic Games, Inc., producer of the popular Fortnite video game franchise, sued Apple Inc., alleging that Apple monopolized markets for mobile app distribution and in-app payments on iPhones through a combination of contractual restraints on developers, technological barriers imposed on consumers, and anti-steering measures.  Epic alleged Apple’s conduct violated Sections 1 and 2 of the Sherman Act, as well as California’s Cartwright Act and Unfair Competition Law (“UCL”).  After a three-week bench trial, the district court found Apple had not violated the Sherman Act, but that its anti-steering measures violated California’s UCL.

Market definition was central to the district court’s resolution of Epic’s Sherman Act claims.  Epic alleged that relevant markets limited to app-distribution services and in-app payments for iPhone exist because users are locked in to iPhone-specific services once they purchase an iPhone.  Apple prevents developers from distributing apps to iPhone users, except through its App Store, and prevents most apps in its App Store from using any in-app payment system except Apple’s.    The district court held that no such relevant markets exist, and that the relevant market applicable to Epic’s claims is the mobile gaming market, where Apple lacks market power.  The court found for Epic on its UCL claims, however, holding that Apple’s restrictions on app developer communications with iPhone users amounted to unfair competition, because they deprived consumers of critical information.  Apple and Epic cross-appealed.

The AAI brief argued that the district court’s approach to market definition was inconsistent with its findings that iPhone users face switching and information costs and that Apple’s conduct had anticompetitive effects on iPhone users’ and developers’ app-distribution and in-app payment choices.  The district court’s fundamental error was a failure to adhere to first principles and confront market realities when applying old precedents to new markets.  In its brief, AAI explained how the district court misunderstood the significance of its own findings of switching and information costs and market power in its holding that iPhone app-distribution and in-app payments are not relevant aftermarkets.  Instead, AAI urged, the district court should have realized that the presence of switching and information costs, and direct evidence of Apple’s ability to exercise market power over these products, necessarily suggests these are relevant antitrust aftermarkets.

The AAI brief also argued that the district court  fell into an analytical trap when held that mobile handsets and operating systems form a single product and thus a single market and its holding that app-distribution and in-app payments are part of a single product and thus a single market; it mistook Apple’s decision to limit consumer choices for an accurate reflection of what consumers would choose in a free market.  Instead, AAI urged, the district court should have focused on what consumers would choose if Apple did not artificially constrain those choices.

Finally, the AAI brief argued that the district court  applied Ohio v. American Express, 138 S.Ct. 2274 (2018) (“Amex”), without sufficient attention to whether the economic conditions underlying that decision applied to the markets at hand.  The AAI brief argued that Amex is rooted in a particular set of economic circumstances that are not satisfied by app-distribution services.  In addition, the AAI brief argued that the district court applied Amex too broadly, ignoring clear evidence of competition in a one-sided market because it wrongly found an expansive two-sided market under Amex.

The brief was written by AAI Vice President of Policy Laura Alexander and AAI Vice President of Advocacy Randy Stutz.