Case 4:20-cv-05640-YGR Document 778-3 Filed 05/28/21 Page 1 of 377
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`Epic Games, Inc. v. Apple Inc.,
`Case No. 4:20-cv-05640-YGR
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`Apple Inc.’s
`Proposed Findings of Fact
`and
`Conclusions of Law
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`TABLE OF CONTENTS
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`PRELIMINARY STATEMENT ................................................................................................. 1
`PROPOSED FINDINGS OF FACT ............................................................................................ 8
`I.
`Introduction ................................................................................................................... 8
`II. Apple’s Values: Cutting-Edge Technology, World-Class Design, And
`Brand-Level Commitment To Privacy ...................................................................... 10
`III. Apple Launches Two Revolutionary Innovations: The iPhone and The App
`Store .............................................................................................................................. 11
`A. Apple revolutionizes mobile communication with the introduction of
`the iPhone ............................................................................................................. 11
`B. Apple did not originally allow third-party developers to build native
`apps for iOS ......................................................................................................... 11
`C. Apple decides to open the iOS ecosystem to third-party developers .............. 13
`D. Apple spends months creating an SDK for developers that permits
`access to Apple’s valuable intellectual property .............................................. 14
`E. Apple describes the mechanics and business terms of the App Store ............ 15
`F.
`In 2009, Apple launches the integrated IAP option for developers to
`monetize their apps ............................................................................................. 19
`IV. Privacy, Security, Device Integrity, and Overall Customer Experience ................ 21
`A.
`In opening up the iPhone to third-party applications, Apple sought to
`protect consumers and prioritize their experience .......................................... 21
`B. To achieve these goals, iOS architecture intentionally diverged from
`the macOS architecture in material ways ......................................................... 22
`C. Apple built IAP on principles of efficiency, reliability, security, and
`privacy .................................................................................................................. 27
`V. Apple’s Valuable Intellectual Property Is At the Heart of iOS App
`Development and Distribution ................................................................................... 28
`VI. In Exchange For Using Apple’s Intellectual Property To Develop And
`Distribute Apps Through The App Store, Developers Must Abide By The
`Terms Of Apple’s License Agreements ..................................................................... 30
`A. To develop apps for iOS, developers agree to abide by the terms of the
`Developer Agreement .......................................................................................... 30
`B. To distribute native iOS apps developed using Apple’s intellectual
`property, developers must sign the Developer Program License
`Agreement ............................................................................................................ 32
`C. To qualify for distribution through the App Store, iOS apps must
`comply with the App Store Review Guidelines ................................................ 37
`D. Apple conducts a robust app review before apps are published .................... 44
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`E. Apple continues to protect consumer privacy and security after apps
`are published........................................................................................................ 54
`F. Over time, Google has been tightening its app screening process and
`moving to a system that is more similar to Apple’s ......................................... 56
`VII. The App Store Resulted In Significant Improvements In App Distribution,
`Including Game App Distribution ............................................................................. 56
`A. Before the App Store, distributing video games and other software
`was expensive and difficult, particularly for small developers ....................... 56
`B. The App Store upended the status quo ............................................................. 57
`C. Apple has reduced its commission and the scope of transactions to
`which it applies .................................................................................................... 58
`Consumers And Developers Have Benefitted From Apple’s
`VIII.
`Continuous Investment And Innovation ................................................................... 60
`A. Apple has relentlessly invested in software, hardware, and integration
`innovations ........................................................................................................... 61
`B. Apple has relentlessly invested in new developer tools, and
`improvements to existing tools ........................................................................... 64
`C. Apple fiercely protects consumer privacy ......................................................... 67
`D. Apple also continually improves the App Store storefront ............................. 68
`IX. The App Store’s Business Model Has Contributed To The Rapid
`Proliferation Of Apps, Including Game Apps .......................................................... 70
`A. The number of game app developers and users has dramatically
`increased............................................................................................................... 70
`B. The number of game apps available on the App Store has
`dramatically increased ........................................................................................ 71
`C. The number of game app transactions on the App Store, and amount
`of revenue generated from those transactions, have dramatically
`increased............................................................................................................... 72
`D. The quality of apps and game apps available on the App Store has
`improved .............................................................................................................. 74
`X. The App Store Competes With Other Platforms For Game App
`Transactions ................................................................................................................ 75
`A. The App Store launched in a marketplace that already contained
`numerous rivals ................................................................................................... 75
`B. Competition for game app transactions has become more intense since
`the App Store’s launch........................................................................................ 76
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`XI. After Many Years Profiting From Its Relationship With Apple, Epic
`Flagrantly Breaches Its Agreements ......................................................................... 79
`A. Epic’s business model ......................................................................................... 79
`B. Epic has been an Apple developer for over a decade ....................................... 85
`C. Epic has benefitted from Apple’s support over the years ............................... 87
`D. Epic has achieved success with Fortnite by using free distribution (and
`in-game purchasing functionality) to earn more than $700 million
`across over 100 million iOS accounts ................................................................ 90
`E. Epic Games Store is unprofitable and not comparable to the App
`Store ...................................................................................................................... 91
`F. Epic lays the groundwork for Project Liberty in order to revive and
`reinvigorate its business ...................................................................................... 92
`G. Epic renews its agreement with Apple, then seeks a side deal ........................ 95
`H. Epic carefully prepares to launch a media campaign against Apple ............. 96
`I. Epic briefs its board of directors and puts into place the final pieces of
`Project Liberty .................................................................................................... 99
`J. Epic knew its calculated breach would result in the removal of
`Fortnite from the App Store ............................................................................... 99
`K. In August 2020, Epic committed an intentional act of sabotage against
`the App Store ..................................................................................................... 100
`L. As Epic anticipated, Apple removes Fortnite from the App Store ............... 101
`M. Epic sues and declares war on Apple .............................................................. 101
`N. Apple terminated Epic’s Developer Program account, as well as its
`Developer Agreement and DPLA with Apple ................................................ 102
`O. Epic’s disregard for its own customers is apparent ....................................... 102
`P. Nevertheless, Project Liberty remains ongoing .............................................. 103
`Q. Epic owes Apple at least $3.6 million in unpaid commissions....................... 103
`XII. The Evidence Demonstrates That The App Store Is A Two-Sided Game
`Transaction Platform ................................................................................................ 103
`A. The App Store facilitates digital transactions ................................................ 104
`B. The App Store derives substantial value from strong bilateral indirect
`network effects ................................................................................................... 105
`C. Apple has adopted pricing strategies, service provision strategies, and
`rules of behavior to attract both consumers as well as developers and
`to facilitate productive interactions between them ........................................ 106
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`The App Store Supplies One Relevant Product: Game App
`XIII.
`Transactions .............................................................................................................. 107
`XIV.
`The App Store and Other Game Transaction Platforms are
`Substitutes .................................................................................................................. 110
`A. For developers, game transactions on other transaction platforms are
`substitutes for game transactions on the App Store ...................................... 110
`B. For consumers, game transactions on other transaction platforms are
`substitutes for game transactions on the App Store ...................................... 113
`C. Apple competes with other game transaction platforms ............................... 118
`XV. The Evidence Does Not Support A Single Market In“iOS App
`Distribution” .............................................................................................................. 120
`XVI.
`The Evidence Does Not Support Epic’s Effort To Narrow The
`Relevant Market To An iOS Aftermarket .............................................................. 122
`A. Apple does not sell a smartphone operating system ...................................... 123
`B. Game consumers are not locked into any relevant foremarket,
`whether the device, as Epic alleges, or the operating system, as Dr.
`Evans argues ...................................................................................................... 124
`C. There is no reliable evidence that Apple’s conduct has increased user
`switching costs and mixing and matching costs, as described by Dr.
`Athey................................................................................................................... 128
`D. Game developers are not locked into any relevant foremarket,
`whether the device, as Epic alleges, or the operating system, as Dr.
`Evans argues ...................................................................................................... 130
`E. Dr. Evans’s hypothetical monopolist tests fail to properly account for
`indirect network effects, invalidating his conclusions about the
`relevant antitrust product markets ................................................................. 132
`XVII. The Relevant Geographic Market Is Domestic .............................................. 140
`A. From the perspective of U.S. consumers, the relevant geographic
`market is the United States............................................................................... 140
`B. From the perspective of developers, the U.S. is a separate market for
`game app transactions ...................................................................................... 141
`C. Competitive conditions differ significantly across countries ........................ 141
`XVIII. Apple Lacks Monopoly Or Market Power In A Properly Defined
`Game App Transaction Market ............................................................................... 141
`A. Apple’s effective and actual commission rate on in-app purchases has
`decreased, not increased, since the App Store was launched ........................ 142
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`B. Dr. Evans’s and Dr. Cragg’s effective commission calculations ignore
`the vast number of free transactions, which, when included, yield an
`effective commission for game app transactions of 8.1% in 2018-2019 ....... 144
`C. Over the same time, output has dramatically increased ............................... 145
`D. Apple’s commission is consistent with that charged by other game app
`transaction platforms ........................................................................................ 147
`E. Epic’s attempts to calculate an artificial profit margin for the App
`Store is flawed .................................................................................................... 148
`F. Apple’s profit margins are not evidence of market power ............................ 151
`G. Apple’s market share belies market power .................................................... 153
`H. The relevant game app transaction market is not highly concentrated ....... 155
`I. Existing transaction platform rivals have the ability to expand output ...... 156
`J. Apple is constrained by indirect network effects, which limit a
`platform’s ability to raise overall prices ......................................................... 157
`K. Apple is constrained by alternative options for monetization ...................... 158
`L. Developers’ countervailing power, including Epic’s leverage over
`platforms, constrains Apple ............................................................................. 159
`The Conduct Challenged by Epic Is Not Anticompetitive ............................ 160
`XIX.
`A. The “technical restrictions” that Epic complains about are genuine
`product improvements ...................................................................................... 160
`B. The “contractual restrictions” challenged by Epic do not constitute
`anticompetitive conduct .................................................................................... 162
`C. Like Apple, other games transaction platforms, including Nintendo,
`Sony, and Microsoft, have “walled gardens”.................................................. 164
`D. Apple has not refused to deal with Epic .......................................................... 166
`E. Epic has abandoned its essential facility claim, which is factually
`unsupported in any event ................................................................................. 167
`XX. Apple’s Conduct Did Not Have An Anticompetitive Effect .................................. 168
`A. The opening of the iPhone platform to third-party developers was
`procompetitive ................................................................................................... 168
`B. The success of the App Store business model has benefitted consumers ..... 169
`C. The success of the App Store business model has benefitted developers ..... 170
`D. Prices are decreasing, not increasing .............................................................. 171
`E. Output is increasing, not decreasing ............................................................... 173
`F. The App Store provides a trusted platform for transactions ........................ 174
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`The App Store Business Model Is Butressed By Overwhelming
`XXI.
`Procompetitive Justifications ................................................................................... 175
`A. Apple’s conduct is grounded in its legitimate interest in prioritizing
`user experience .................................................................................................. 175
`B. The challenged contractual provisions prevent free-riding on Apple’s
`procompetitive investments and intellectual property .................................. 177
`C. The licensing terms in Apple’s DPLA are an integral part of a
`procompetitive intellectual property licensing arrangement ........................ 178
`XXII. Epic’s Proferred Alternatives For iOS App Distribution Would
`Undermine Apple’s Business Model ........................................................................ 178
`A. Epic’s proffered “solutions” are premised on the counterfactual that
`Apple will provide free access to its intellectual property ............................. 179
`B. Epic’s proposed relief would compromise the security of the iOS
`platform .............................................................................................................. 179
`C. Epic’s proposed relief would undermine the reliability and quality of
`the iOS ecosystem and increase Apple’s costs ................................................ 183
`D. Epic’s proposed relief would undermine Apple’s ability to maintain
`and enforce consumer privacy protections ..................................................... 184
`E. Apple would have to redesign iOS to permit the “solutions” Epic seeks ..... 184
`XXIII. Dr. Athey’s “Economic Middleware” Approach Does Not Make Sense ..... 185
`XXIV.
`IAP Is Not A Separate Product But Rather An Integral Part Of The
`App Store ................................................................................................................... 186
`A.
`IAP is an integrated feature of iOS app distribution ..................................... 187
`B. No demand exists for IAP that is separate from distribution via the
`App Store ........................................................................................................... 188
`Even If IAP Were A Separate Product, It Has Not Been Tied ..................... 189
`XXV.
`A. There is no “iOS in-app payment processing” market .................................. 189
`B. Apple has no market power in a market that includes all reasonably
`interchangeable payment processing providers ............................................. 190
`C. There is no contractual “tie” ............................................................................ 191
`D. Apple’s conduct did not foreclose any significant share of the relevant
`market ................................................................................................................ 192
`XXVI. The App Store’s IAP requirement Is Supported By Procompetitive
`Justifications .............................................................................................................. 193
`A. Apple’s IAP is integral to Apple’s ability to efficiently collect its
`commission ......................................................................................................... 193
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`B. Apple’s IAP provides a safe, secure, efficient, and familiar experience
`for consumers .................................................................................................... 193
`C. Apple’s IAP also benefits developers............................................................... 194
`D.
`In light of these many benefits, digital transaction platforms
`commonly require use of their payment solution for digital
`transactions ........................................................................................................ 195
`XXVII. There Is No Equally Efficient Alternative To IAP ........................................ 196
`PROPOSED CONCLUSIONS OF LAW ............................................................................... 198
`I.
`Introduction ............................................................................................................... 198
`II. Market Definition (All Epic Counts) ....................................................................... 200
`A. General Principles ............................................................................................. 200
`B. Product Market ................................................................................................. 202
`i. The App Store Is a Two-Sided Transaction Platform ........................... 202
`ii. The Relevant Product Market Is Digital Game Transactions .............. 204
`a. The Relevant Market Includes All Digital Transaction Platforms,
`Not Just iOS ......................................................................................... 205
`b. The Relevant Market Is Limited to Digital Transactions for
`Games ................................................................................................... 211
`c. Epic Has Failed to Prove a Single Market for “iOS App
`Distribution” ........................................................................................ 213
`iii. The App Store Does Not Constitute a Single-Brand Aftermarket ....... 214
`a. There Is No Relevant or Cognizable Foremarket ............................ 216
`b. iOS App Distribution Does Not Constitute a Single-Brand
`Aftermarket ......................................................................................... 217
`iv. The Hypothetical Monopolist Test Does Not Support Epic’s
`Market Definition ...................................................................................... 220
`a. The Hypothetical Monopolist Test Cannot Apply Here as a
`Matter of Law ...................................................................................... 220
`b. Even If the Hypothetical Monopolist Test Could Apply, It Is Not
`Dispositive ............................................................................................ 225
`C. Geographic Market ........................................................................................... 227
`III. Epic’s SHERMAN ACT Claims .............................................................................. 229
`A. General Principles ............................................................................................. 229
`i. Epic’s Theories of Liability ...................................................................... 229
`ii. Business Justifications and Procompetitive Effects ............................... 231
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`iii. Causal Antitrust Injury ............................................................................ 234
`iv. Foreign Trade Antitrust Improvements Act .......................................... 235
`B. Sherman Act Section 2 (Epic Counts 1, 2, and 4) ........................................... 237
`i.
`Sherman Act Section 2 – Monopoly Maintenance in the “iOS App
`Distribution Market” (Epic Count 1) ...................................................... 240
`a. Apple Lacks Monopoly Power ........................................................... 241
`b. Apple Has Not Engaged in Exclusionary Conduct with Respect
`to App Distribution ............................................................................. 246
`c. Apple’s Conduct with Respect to App Distribution Does Not
`Have Anticompetitive Effects ............................................................. 255
`d. Any Allegedly Anticompetitive Conduct Is “Redeemed” by a
`Multitude of Procompetitive Business Justifications ....................... 258
`e. Apple’s Procompetitive Justifications Are Not Pretextual ............. 262
`f. There Is No Least Restrictive Alternative Requirement ................. 264
`ii. Sherman Act Section 2 – Monopoly Maintenance in the “iOS
`In-App Payment Processing Market” (Epic Count 4) ........................... 265
`a. Apple Lacks Monopoly Power in the Relevant Market .................. 265
`b. Apple Has Not Engaged in Exclusionary Conduct with Respect
`to IAP ................................................................................................... 266
`c. Apple’s Conduct with Respect to IAP Does Not Have
`Anticompetitive Effects ...................................................................... 267
`d. Any Allegedly Anticompetitive Conduct Is “Redeemed” by a
`Multitude of Procompetitive Business Justifications ....................... 269
`e. Apple’s Procompetitive Justifications Are Not Pretextual ............. 273
`iii. Sherman Act Section 2 – Essential Facility (Epic Count 2) .................. 274
`a. iOS Is Not an Essential Facility Under Any Market Definition ..... 276
`b. Epic Has “Access” to iOS ................................................................... 279
`c. Epic Has Not Shown That It Is Feasible for Apple to Alter the
`App Store’s Design in the Way Epic Demands ................................ 280
`d. Epic Lacks Standing to Bring an Essential Facility Claim Based
`on Its Alleged Market Definition ....................................................... 282
`C. Sherman Act Section 1 (Epic Counts 3, 5, and 6) ........................................... 283
`i.
`Sherman Act Section 1 – Tying (Epic Count 6) ..................................... 283
`a. Legal Principles ................................................................................... 284
`b. The Per Se Rule Is Inapplicable to This Case ................................... 285
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`iOS App Distribution and IAP Are Not Separate Products ........... 287
`c.
`d. The Two “Products” Are Not Tied .................................................... 292
`e. Epic Is Not Coerced into Using IAP .................................................. 294
`f. There Is No Foreclosure of Any Significant Share of the Relevant
`Market .................................................................................................. 295
`g. The App Store and IAP Are Procompetitive .................................... 296
`ii. Sherman Act Section 1 – Unreasonable Restraint of Trade in the
`“iOS App Distribution Market” (Epic Count 3) .................................... 297
`a. There Is No Concerted Action ........................................................... 297
`b. Epic’s Claim Fails Under the Rule of Reason .................................. 300
`iii. Sherman Act Section 1 – Unreasonable Restraint of Trade in the
`“iOS In-App Payment Processing Market” (Epic Count 5) ................. 305
`D. Sherman Act Claims – Defenses ...................................................................... 307
`i.
`Failure to Join an Indispensable Party (All Epic Counts) .................... 309
`ii. Waiver and Estoppel (Epic Counts 1–6) ................................................. 311
`iii. Limitations on Actions (Epic Counts 1–6) .............................................. 312
`a. Four-Year Limitations Period ........................................................... 312
`b. Exceptions to the Four-Year Limitations Period ............................. 313
`c. Equitable Bar ...................................................................................... 314
`iv. Noerr-Pennington Doctrine (All Epic Counts) ....................................... 315
`IV. Epic’s State-Law Claims .......................................................................................... 316
`A. Cartwright Act (Epic Counts 7–9) ................................................................... 316
`i. Epic’s Cartwright Act Claims Fail for Lack of Concerted Action ....... 317
`ii. Epic’s Cartwright Act Tying Claim Must Be Analyzed Under
`Section 16720 (Epic Count 9) ................................................................... 318
`B. California Unfair Competition Law (Epic Count 10) .................................... 319
`i. Apple’s Conduct Is Not Unlawful ............................................................ 320
`ii. Apple’s Conduct Is Not Unfair ................................................................ 321
`C. State-Law Claims – Affirmative Defenses ...................................................... 324
`i. Waiver and Estoppel (Epic Counts 7–10) ............................................... 324
`ii. Limitations on Actions (Epic Counts 7–10) ............................................ 325
`V. Epic’s Remedies ......................................................................................................... 325
`A. Declaratory Judgment (All Epic Counts) ....................................................... 325
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`B. Sherman Act / Clayton Act Remedies (Epic Counts 1–6) ............................. 325
`i.
`Injunctive Relief Sought by Epic ............................................................. 326
`ii. Antitrust Standing and Injury ................................................................. 331
`iii. Standards for Equitable Relief ................................................................ 332
`a. Epic Has Not Established Irreparable Harm ................................... 333
`b. Epic Has Adequate Remedies at Law ............................................... 335
`c. The Balance of Hardships Favors Apple .......................................... 336
`d. Epic’s Proposed Relief Would Not Further the Public Interest ..... 337
`e. Epic’s Proposed Equitable Relief Is Barred by the Doctrine of
`Unclean Hands .................................................................................... 338
`iv. Epic’s Proposed Injunction Is Overbroad .............................................. 340
`C. State-Law Remedies (Epic Counts 7–10) ........................................................ 345
`VI. Apple’s Claims ........................................................................................................... 346
`A. Breach of Contract (Apple Count I) ................................................................ 346
`B. Breach of Implied Covenant of Good Faith and Fair Dealing (Apple
`Count II) ............................................................................................................. 348
`C. Quasi-Contract / Unjust Enrichment (Apple Count III) ............................... 348
`D.
`Indemnification (Apple Count VII) ................................................................. 351
`E. Epic’s Affirmative Defenses ............................................................................. 353
`i.
`Illegality (Apple Counts I, II, and VII) .........................