FOR PUBLICATION
`
`UNITED STATES COURT OF APPEALS
`FOR THE NINTH CIRCUIT
`
`
`
` No. 21-16506
`
`D.C. No.
`4:20-cv-05640-
`YGR
`
`
`OPINION
`
`
` No. 21-16695
`
`D.C. No.
`4:20-cv-05640-
`YGR
`
`
`
`
`EPIC GAMES, INC.,
`
`
`Plaintiff-counter-
`defendant-Appellant,
`
`
`
` v.
`
`
`APPLE, INC.,
`
` Defendant-counter-
`claimant- Appellee.
`
`
`
`EPIC GAMES, INC.,
`
`
`Plaintiff-counter-
`defendant-Appellee,
`
`
`
` v.
`
`
`APPLE, INC.,
`
` Defendant-counter-
`claimant-Appellant.
`
`
`
`
`Appeal from the United States District Court
`for the Northern District of California
`Yvonne Gonzalez Rogers, District Judge, Presiding
`
`Argued and Submitted November 14, 2022
`San Francisco, California
`
`
`
`UNITED STATES COURT OF APPEALS
`FOR THE NINTH CIRCUIT
`
`
`
` No. 21-16506
`
`D.C. No.
`4:20-cv-05640-
`YGR
`
`
`OPINION
`
`
` No. 21-16695
`
`D.C. No.
`4:20-cv-05640-
`YGR
`
`
`
`
`EPIC GAMES, INC.,
`
`
`Plaintiff-counter-
`defendant-Appellant,
`
`
`
` v.
`
`
`APPLE, INC.,
`
` Defendant-counter-
`claimant- Appellee.
`
`
`
`EPIC GAMES, INC.,
`
`
`Plaintiff-counter-
`defendant-Appellee,
`
`
`
` v.
`
`
`APPLE, INC.,
`
` Defendant-counter-
`claimant-Appellant.
`
`
`
`
`Appeal from the United States District Court
`for the Northern District of California
`Yvonne Gonzalez Rogers, District Judge, Presiding
`
`Argued and Submitted November 14, 2022
`San Francisco, California
`
`
`
`2
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`Filed April 24, 2023
`
`Before: SIDNEY R. THOMAS and MILAN D. SMITH,
`JR., Circuit Judges, and MICHAEL J. MCSHANE,*
`District Judge.
`
`Opinion by Judge Milan D. Smith, Jr.;
`Partial Concurrence and Partial Dissent by Judge S.R.
`Thomas
`
`SUMMARY**
`
`Antitrust
`
`
`
`
`
`
`
`
`
`
`The panel affirmed in part and reversed in part the
`district court’s judgment, after a bench trial, against Epic
`Games, Inc., on its Sherman Act claims for restraint of trade,
`tying, and monopoly maintenance against Apple, Inc.; in
`favor of Epic on its claim under California’s Unfair
`Competition Law; against Epic on Apple’s claim for breach
`of contract; and against Apple on its claim for attorney
`fees. The panel affirmed except for the district court’s ruling
`respecting attorney fees, where it reversed and remanded for
`further proceedings.
`
`
`* The Honorable Michael J. McShane, United States District Judge for
`the District of Oregon, sitting by designation.
`** This summary constitutes no part of the opinion of the court. It has
`been prepared by court staff for the convenience of the reader.
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`3
`
`The panel explained that, when Apple opened the iPhone
`to third-party app developers, it created a “walled garden,”
`rather than an open ecosystem in which developers and users
`could transact freely without mediation from Apple. Epic
`alleged that Apple acted unlawfully by restricting app
`distribution on iOS devices to Apple’s App Store, requiring
`in-app purchases on iOS devices to use Apple’s in-app
`payment processor, and
`limiting
`the ability of app
`developers to communicate the availability of alternative
`payment options to iOS device users. These restrictions
`were imposed under the Developer Program Licensing
`Agreement (“DPLA”), which developers were required to
`sign in order to distribute apps to iOS users. The district
`court rejected Epic’s Sherman Act §§ 1 and 2 claims
`challenging the first and second restrictions, principally on
`the factual grounds that Epic failed to propose viable less
`restrictive alternatives to Apple’s restrictions. The district
`court concluded that the third restriction was unfair pursuant
`to the California UCL and enjoined Apple from enforcing it
`against any developer. The district court held that Epic
`breached its contract with Apple but was not obligated to pay
`Apple’s attorney fees.
`On Epic’s appeal, the panel affirmed the district court’s
`denial of antitrust liability and its corresponding rejection of
`Epic’s illegality defense to Apple’s breach of contract
`counter-claim. The panel held that the district court erred as
`a matter of law in defining the relevant antitrust market and
`in holding that a non-negotiated contract of adhesion, such
`as the DPLA, falls outside the scope of Sherman Act § 1, but
`those errors were harmless. The panel held
`that,
`independent of the district court’s errors, Epic failed to
`establish, as a factual matter, its proposed market definition
`and the existence of any substantially less restrictive
`
`
`
`4
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`the
`accomplish
`to
`for Apple
`alternative means
`procompetitive
`justifications supporting iOS’s walled-
`garden ecosystem.
`On Apple’s cross-appeal, the panel affirmed as to the
`district court’s UCL ruling in favor of Epic, holding that the
`district court did not clearly err in finding that Epic was
`injured, err as a matter of law when applying California’s
`flexible liability standards, or abuse its discretion when
`fashioning equitable relief. Reversing in part, the panel held
`that the district court erred when it ruled that Apple was not
`entitled
`to attorney
`fees pursuant
`to
`the DPLA’s
`indemnification provision.
`Concurring in part and dissenting in part, Judge S.R.
`Thomas wrote that he fully agreed with the majority that the
`district court properly granted Epic injunctive relief on its
`California UCL claims. Judge S.R. Thomas also fully
`agreed that the district court properly rejected Epic’s
`illegality defenses to the DPLA but that, contrary to the
`district court’s decision, the DPLA did require Epic to pay
`attorney fees for its breach. On the federal claims, Judge
`S.R. Thomas also agreed that the district court erred in
`defining the relevant market and erred when it held that a
`non-negotiated contract of adhesion falls outside the scope
`of Sherman Act § 1. Unlike the majority, however, Judge
`S.R. Thomas would not conclude that these errors were
`harmless because they related to threshold analytical steps
`and affected Epic’s substantial rights. He would remand for
`the district court to re-analyze the case using the proper
`threshold determination of the relevant market.
`
`
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`5
`
`COUNSEL
`
`Thomas C. Goldstein (argued), Goldstein & Russell P.C.,
`Bethesda, Maryland; Christine A. Varney, Katherine B.
`Forrest, Gary A. Bornstein, Peter T. Barbur, Antony L.
`Ryan, Yonatan Even, Omid H. Nasab, M. Brent Byars, and
`Wes Earnhardt, Cravath Swaine & Moore LLP, New York,
`New York; Paul J. Riehle, Faegre Drinker Biddle & Reath,
`San Francisco, California; for Plaintiff-counter-defendant-
`Appellant.
`Mark A. Perry (argued), Weil Gotshal & Manges LLP,
`Washington, D.C.; Cynthia Richman, Joshua M. Wesneski,
`Anna Casey, and Zachary B. Copeland, Gibson Dunn &
`Crutcher LLP, Washington, D.C.; Theodore J. Boutrous Jr.,
`Daniel G. Swanson, Richard J. Doren, Samuel Eckman,
`Jason C. Lo, and Jagannathan Srinivasan, Gibson Dunn &
`Crutcher LLP, Los Angeles, California; Rachel S. Brass and
`Julian W. Kleinbrodt, Gibson Dunn & Crutcher LLP, San
`Francisco, California; Karen L. Dunn, Paul Weiss Rifkind
`Wharton & Garrison LLP, Washington, D.C.;
`for
`Defendant-counter-claimant-Appellee.
`Nickolai G. Levin (argued), Daniel E. Haar, Patrick M.
`Kuhlmann, and Matthew C. Mandelberg, Attorneys; David
`B. Lawrence, Policy Director; Doha G. Mekki, Principal
`Deputy Assistant Attorney General; Antitrust Division,
`United States Department of Justice; Washington, D.C.; for
`Amicus Curiae United States of America.
`Joshua Patashnik (argued), Deputy Solicitor General; Shira
`Hoffman, Robert B. McNary, and Brian D. Wang, Deputy
`Attorneys General; Paula Blizzard, Supervising Deputy
`Attorney General; Kathleen Foote, Senior Assistant
`Attorney General; Rob Bonta, Attorney General of
`
`
`
`6
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`California; Office of the California Attorney General; San
`Francisco, California; for Amicus Curiae the State of
`California.
`Michael A. Carrier, Rutgers Law School, Camden, New
`Jersey, for Amici Curiae 38 Law, Economics, and Business
`Professors.
`Geoffrey H. Kozen, Stacey P. Slaughter, Stephen P.
`Safranski, and Kaitlin M. Ek, Robins Kaplan LLP,
`Minneapolis, Minnesota; Lin Y. Chan, Lieff Cabraser
`Heimann & Bernstein LLP, San Francisco, California;
`Michelle J. Looby and Kaitlyn L. Dennis, Gustafson Gluek
`PPLC, Minneapolis, Minnesota; Kristen G. Marttila,
`Lockridge Grindal Nauen PLLP, Minneapolis, Minnesota;
`for Amicus Curiae the Committee to Support the Antitrust
`Laws.
`Wendy Liu, Scott Nelson, and Allison M. Zieve, Public
`Citizen Litigation Group, Washington, D.C., for Amicus
`Curiae Public Citizen.
`Peter D. St. Phillip Jr. and Margaret MacLean, Lowey
`Dannenberg P.C., White Plains, New York, for Amici
`Curiae
`the Consumer Federation of America and
`Developers.
`Christopher M. Wyant, K&L Gates LLP, Seattle,
`Washington; Andrew Mann, K&L Gates, Washington, D.C.;
`for Amici Curiae 14 Law, Economics, and Business
`Professors.
`Mitchell L. Stoltz, Electronic Frontier Foundation, San
`Francisco, California, for Amicus Curiae the Electronic
`Frontier Foundation.
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`7
`
`Aaron M. Panner and Julius P. Taranto, Kellog Hansen Todd
`Figel & Frederick P.L.L.C., Washington, D.C., for Amicus
`Curiae Microsoft Corporation.
`David W. Kesselman and Eda Harotounian, Kesselman
`Brantly Stockinger LLP, Manhattan Beach, California, for
`Amici Curiae Unfair Competition Law Practitioners and
`Scholars.
`Stanford E. Purser, Deputy Solicitor General; Melissa A.
`Holyoak, Solicitor General; Sean D. Reyes, Attorney
`General of Utah; Office of the Utah Attorney General; Salt
`Lake City, Utah; for Amici Curiae the State of Utah and 34
`Other States.
`Laura M. Alexander and Randy M. Stutz, American
`Antitrust Institute, Washington, D.C., for Amicus Curiae the
`American Antitrust Institute.
`Michael Pepson and Jeffrey A. Ogar, Americans for
`Prosperity Foundation, Arlington, Virginia, for Amicus
`Curiae Americans for Prosperity Foundation.
`Robert E. Dunn and Collin J. Vierra, Eimer Stahl LLP, San
`Jose, California; James B. Speta, Eimer Stahl LLP, Chicago,
`Illinois; for Amicus Curiae Act/The App Association.
`Roy T. Englert Jr., Kramer Levin Naftalis & Frankel LLP,
`Washington, D.C.; Leslie C. Esbrook, Robbins Russell
`Englert Orseck & Untereiner LLP, Washington, D.C., for
`Amici Curiae Former National Security Officials and
`Scholars.
`Fred J. Hiestand, Fred J. Hiestand APC, Sacramento,
`California; William L. Stern, Law Offices of William L.
`Stern, Berkeley, California; for Amicus Curiae the Civil
`Justice Association.
`
`
`
`8
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`John M. Masslon II and Cory L. Andrews, Washington
`Legal Foundation, Washington, D.C., for Amicus Curiae
`Washington Legal Foundation.
`Stephanie A. Joyce, Potomac Law Group, Washington,
`D.C.; Krisztian Katona, Computer & Communications
`Industry Association, Washington, D.C., for Amicus Curiae
`Computer & Communications Industry Association.
`Steve A. Hirsch and Benjamin Berkowitz, Keker Van Nest
`& Peters LLP, San Francisco, California, for Amicus Curiae
`Chamber of Progress.
`Jack E. Pace III and Gina M. Chiappetta, White & Case LLP,
`New York, New York; George L. Paul and Nicholas J.
`McGuire, Washington, D.C.; for Amici Curiae International
`Center for Law & Economics and Scholars of Law and
`Economics.
`Donald M. Falk, Schaerr Jaffe LLP, San Francisco,
`California, for Amici Curiae Law and Economics Scholars
`Alden Abbott, Henry N. Butler, Thomas A. Lambert, Alan
`J. Messe, Aurilien Portuese, and John M. Yun.
`Lori Alvino McGill, Washington, D.C.; Ryan J. Walsh,
`Eimer Stahl LLP, Madison, Wisconsin; for Amicus Curiae
`Information Technology & Innovation Foundation.
`Douglas M. Tween, James R. Warnot Jr., and John W.
`Eichlin, Linklaters LLP, New York, New York, for Amici
`Curiae Law Professors.
`James Orenstein, ZwillGen PLLC, New York, New York;
`Marc J. Zwilinger, ZwillGen PLLC, Washington, D.C.; for
`Amicus Curiae the Center for Cybersecurity Policy and Law.
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`9
`
`Paul T. Llewellyn and Marc R. Lewis, Lewis & Llewellyn
`LLP, San Francisco, California, Amicus Curiae Roblox
`Corporation.
`Gregory G. Garre and Charles S. Dameron, Latham &
`Watkins LLP, Washington, D.C.; Aaron T. Chiu, Latham &
`Watkins LLP, San Francisco, California; for Amici Curiae
`Former Federal Antitrust Enforcers Ethan Glass, Abbot B.
`Lipsky Jr., Leslie Overton, Bilal Sayyed, James Tierney, and
`Joshua Wright.
`Kathleen R. Hartnett, Cooley LLP, San Francisco,
`California; Heidi L. Keefer and Lowell D. Mead, Cooley
`LLP, Palo Alto, California; for Amici Curiae Law and
`Business Professors.
`Peter D. St. Phillip Jr. and Margaret MacLean, Lowey
`Dannenberg P.C., White Plains, New York, for Amici
`Curiae Tile, Match Group Inc., Basecamp, Knitrino, and the
`Coalition for App Fairness.
`
`
`
`
`
`
`
`
`
`10
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`OPINION
`
`
`M. SMITH, Circuit Judge:
`
`Epic Games, Inc. sued Apple, Inc. pursuant to the
`Sherman Act, 15 U.S.C. §§ 1–2, and California’s Unfair
`Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 et
`seq. Epic contends that Apple acted unlawfully by
`restricting app distribution on iOS devices to Apple’s App
`Store, requiring in-app purchases on iOS devices to use
`Apple’s in-app payment processor, and limiting the ability
`of app developers to communicate the availability of
`alternative payment options to iOS device users. Apple
`counter-sued for breach of contract and indemnification for
`its attorney fees arising from this litigation.
`After a sixteen-day bench trial involving dozens of
`witnesses and nine hundred exhibits, the district court
`rejected Epic’s Sherman Act claims challenging the first and
`second of the above restrictions—principally on the factual
`grounds that Epic failed to propose viable less restrictive
`alternatives to Apple’s restrictions.
` The court then
`concluded that the third restriction is unfair pursuant to the
`UCL and enjoined Apple from enforcing it against any
`developer. Finally, it held that Epic breached a contract with
`Apple but was not obligated to pay Apple’s attorney fees.
`Epic appeals the district court’s Sherman Act and breach of
`contract rulings; Apple cross-appeals the district court’s
`UCL and attorney fees rulings. We affirm the district court,
`except for its ruling respecting attorney fees, where we
`reverse and remand for further proceedings.
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`11
`
`FACTUAL AND PROCEDURAL HISTORY
`I. The Parties
`Apple is a multi-trillion-dollar technology company that,
`of particular relevance here, sells desktop and laptop
`computers (Macs), smartphones (iPhones), and tablets
`(iPads). In 2007, Apple entered, and revolutionized, the
`smartphone market with the iPhone—offering consumers,
`through a then-novel multi-touch interface, access to email,
`the internet, and several preinstalled “native” apps that
`Apple had developed itself. Shortly after the iPhone’s debut,
`Apple decided to move on from its native-apps-only
`approach and open the iPhone’s (and later, the iPad’s)
`operating system (iOS) to third-party apps.1
`This approach created a “symbiotic” relationship: Apple
`provides app developers with a substantial consumer base,
`and Apple benefits from increased consumer appeal given
`the ever-expanding pool of iOS apps. Apple now has about
`a 15% market share in the global smartphone market with
`over 1 billion iPhone users, and there are over 30 million iOS
`app developers. Considering only video game apps, the
`number of iOS games has grown from 131 in the early days
`of the iPhone to over 300,000 by the time this case was
`brought to trial. These gaming apps generate an estimated
`$100 billion in annual revenue.
`Despite this general symbiosis, there is periodic friction
`between Apple and app developers. That is because Apple,
`when it opened the iPhone to third-party developers, did not
`
`1 The iPad has its own operating system (iPadOS) that is derived from
`iOS. For convenience, we use “iOS” to refer to both the iPhone and
`iPad’s operating systems and collectively refer to iPhones and iPads as
`“iOS devices.”
`
`
`
`12
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`create an entirely open ecosystem in which developers and
`users could transact freely without any mediation. Instead,
`Apple created a “walled garden” in which Apple plays a
`significant curating role.2 Developers can distribute their
`apps to iOS devices only through Apple’s App Store and
`after Apple has reviewed an app to ensure that it meets
`certain
`security, privacy,
`content,
`and
`reliability
`requirements. Developers are also required to use Apple’s
`in-app payment processor (IAP) for any purchases that occur
`within their apps. Subject to some exceptions, Apple
`collects a 30% commission on initial app purchases
`(downloading an app from the App Store) and subsequent
`in-app purchases (purchasing add-on content within an app).
`Epic is a multi-billion-dollar video game company with
`three primary lines of business, each of which figures into
`various aspects of the parties’ appeals. First, Epic is a video
`game developer—best known for the immensely popular
`Fortnite, which has over 400 million users worldwide across
`gaming consoles, computers, smartphones, and tablets. Epic
`monetizes Fortnite using a “freemium” model: The game is
`free to download, but a user can purchase certain content
`within the game, ranging from game modes to cosmetic
`upgrades for the user’s character. Fortnite is also notable as
`one of the first major video games to feature “cross-play,”
`“cross-progression,” and “cross-wallet.” Cross-play permits
`users on different platforms to play with one another.
`Smartphone users, for example, can play against friends on
`gaming consoles. Cross-progression allows users to retain
`their in-game progress across every device they own. Users
`
`2 Many game consoles—including the Microsoft Xbox, Nintendo
`Switch, and Sony PlayStation—provide ecosystems that can similarly be
`labeled “walled gardens.”
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`13
`
`can, for example, play Fortnite in the morning on their
`smartphones and then pick up with their progress saved on
`their gaming consoles in the evening. Cross-wallet allows
`users to spend Fortnite’s in-game currency on one device
`even if they purchased it on another. This cross-
`functionality gives the estimated 32 to 52% of Fortnite users
`who own multiple gaming devices flexibility regarding
`where and how they play as well as on which devices they
`make in-game purchases.
`Second, Epic is the parent company of a gaming-
`software developer. Epic International (a Swiss subsidiary)
`licenses Unreal Engine to game developers. Unreal Engine
`offers developers a suite of tools to create three-dimensional
`content; in return, Epic International receives 5% of a
`licensee’s gross revenue from a product developed using
`Unreal Engine after that product generates $1,000,000 in
`revenue. Although Unreal Engine is not on Apple’s App
`Store, Epic International does offer several complementary
`apps there. Unreal Remote and Live Link Face, for example,
`allow users to capture live-action footage and then view it on
`Unreal Engine. Thus, Epic—through its subsidiary—
`continues to be affected by the policies that govern the App
`Store.
`Third, Epic is a video game publisher and distributor. It
`offers the Epic Games Store as a game-transaction platform
`on PC computers and Macs and seeks to do the same for iOS
`devices. As a distributor, Epic makes a game available for
`download on the Epic Games Store and covers the direct
`costs of distribution; in exchange, Epic receives a 12%
`commission—a below-cost commission
`that sacrifices
`short-term profitability to build market share. The Epic
`Games Store has over 180 million registered accounts and
`over 50 million monthly active users. Through the Epic
`
`
`
`14
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`Games Store, Epic is a would-be competitor of Apple for
`iOS game distribution and a direct competitor when it comes
`to games that feature cross-platform functionality like
`Fortnite.
`II. The Developer Program Licensing Agreement
`Apple creates its walled-garden ecosystem through both
`technical and contractual means. To distribute apps to iOS
`users, a developer must pay a flat $99 fee and execute the
`Developer Program Licensing Agreement (DPLA). The
`DPLA is a contract of adhesion; out of the millions of
`registered iOS developers, only a handful have convinced
`Apple to modify its terms.
`By agreeing to the DPLA, developers unlock access to
`Apple’s vast consumer base—the over 1 billion users that
`make up about 15% of global smartphone users. They also
`receive tools that facilitate the development of iOS aps,
`including advanced application-programming interfaces,
`beta software, and an app-testing software. In essence,
`Apple uses the DPLA to license its IP to developers in
`exchange for a $99 fee and an ongoing 30% commission on
`developers’ iOS revenue.
`The DPLA contains the three provisions that give rise to
`this lawsuit and were mentioned in the introduction. First,
`developers can distribute iOS apps only through the App
`Store (the distribution restriction). Epic Games, for
`example, cannot make the Epic Games Store available as an
`iOS app and then offer Fortnite for download through that
`app. Second, developers must use Apple’s IAP to process
`in-app payments (the IAP requirement). Both initial
`downloads (where an app is not free) and in-app payments
`are subject to a 30% commission. Third, developers cannot
`communicate out-of-app payment methods through certain
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`15
`
`links (the anti-steering
`in-app
`mechanisms such as
`provision). “Apps and their metadata may not include
`buttons, external links, or other calls to action that direct
`customers to purchasing mechanisms other than [IAP].” Nor
`can developers use “points of contact obtained from account
`registration within the app (like email or text) [to] encourage
`users to use a purchasing method other than [IAP].”
`III. Apple and Epic’s Business Relationship
`In 2010, Epic agreed to the DPLA. Over the next few
`years, Epic released three games for iOS, each of which
`Apple promoted at major events. In 2015, however, Epic
`began objecting to Apple’s walled-garden approach. Epic’s
`CEO Tim Sweeney argued, in an email seeking a meeting
`with Apple senior leadership, that it “doesn’t seem tenable
`for Apple to be the sole arbiter of expression and commerce”
`for iOS users, and explained that Epic runs a competing
`game-transaction platform that it “would love to eventually”
`offer on iOS. Nothing came of this email, and Epic
`continued to offer games on iOS while complying with the
`DPLA’s terms. In 2018, Epic released Fortnite on iOS—
`amassing about 115 million iOS users.
`In 2020, Epic renewed the DPLA with Apple but sought
`a “side letter” modifying its terms. In particular, Epic
`desired to offer iOS users alternatives for distribution (the
`Epic Games Store) and in-app payment processing (Epic
`Direct Pay). Apple flatly rejected this offer, stating: “We
`understand this might be in Epic’s financial interests, but
`Apple strongly believes these rules are vital to the health of
`the Apple platform and carry enormous benefits for both
`consumers and developers. The guiding principle of the App
`Store is to prove a safe, secure, and reliable experience for
`users . . . .”
`
`
`
`16
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`Once Apple rejected its offer, Epic kicked into full gear
`an initiative called “Project Liberty”: a two-part plan it had
`been developing since 2019 to undermine Apple’s control
`over software distribution and payment processing on iOS
`devices, as well as Google’s influence over Android devices.
`Project Liberty coupled a media campaign against Apple and
`Google with a software update expressly designed to
`circumvent Apple’s IAP restriction. On the media-campaign
`side, Epic lowered the price of Fortnite’s in-app purchases
`on all platforms but Apple’s App Store and Google’s Google
`Play Store; it formed an advocacy group (the Coalition for
`App Fairness), tasking it with “generating continuous media
`. . . pressure” on Apple and Google; and
`it
`ran
`advertisements portraying Apple and Google as the “bad
`guys” standing in the way of Epic’s attempt to pass cost-
`savings onto consumers.
`On the IAP-circumvention side, Epic submitted a
`Fortnite software update (which Epic calls a “hotfix”) to
`Apple for review containing undisclosed code that, once
`activated, would enable Fortnite users to make in-game
`purchases without using Apple’s IAP. Unaware of this
`undisclosed code, Apple approved the update and it was
`made available to iOS users. Shortly thereafter Epic
`activated
`the undisclosed code and opened
`its IAP
`alternative to users. That same day, Apple became aware of
`the hotfix and removed Fortnite from the App Store. Apple
`informed Epic that it had two weeks to cure its breaches of
`the DPLA, or otherwise Apple would terminate Epic Games’
`developer account.
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`17
`
`IV. Procedural History
`A. Pre-Trial Proceedings
`Only three days after Apple removed Fortnite from the
`App Store, Epic filed a 62-page complaint against Apple in
`the Northern District of California seeking a temporary
`restraining order (TRO) reinstating Fortnite and enjoining
`Apple from terminating Epic’s iOS developer account.3 The
`district court granted Epic’s prayer in part and denied in
`part—leaving Fortnite off the App Store but temporarily
`preventing Apple from taking any adverse action regarding
`Epic’s developer account. After the TRO expired, Apple
`terminated Epic’s developer account. The court then issued
`a preliminary injunction preventing Apple from terminating
`the developer accounts of Epic’s subsidiaries (including
`Epic International) and scheduled a bench trial on an
`expedited basis, with trial beginning just about eight months
`after Epic filed its complaint.
`Epic brought claims for permanent injunctive relief
`pursuant to the Sherman Act and the UCL. Epic’s requested
`relief, though somewhat vague, would essentially convert
`iOS into an entirely open platform: Developers would be
`free to distribute apps through any means they wish and use
`any in-app payment processor they choose. Taken together,
`this relief would create a pathway for developers to bypass
`Apple’s 30% commission altogether, though Epic made
`open-ended assurances at trial that its relief would allow
`
`3 The same day, Epic filed a 60-page complaint against Google,
`challenging its policies regarding the Google Play Store on Android
`devices—i.e., smartphones and tablets that use the main operating-
`system alternative to iOS. See Complaint for Injunctive Relief, Epic
`Games, Inc. v. Google LLC, No. 3:20-cv-05671 (filed Aug. 13, 2020
`N.D. Cal.).
`
`
`
`18
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`Apple to collect a commission—just not in the manner that
`the DPLA establishes. Apple brought counter-claims for
`breach of contract and indemnification for its attorney fees
`related to this litigation.4
`B. The District Court’s Rule 52 Order
`After a sixteen-day bench trial, the district court issued a
`180-page order pursuant to Federal Rule 52 detailing its
`findings of facts and conclusions of law.
`1. Market Definition
`The district court began its analysis by defining the
`relevant market for Epic’s Sherman Act claims. Epic
`proposed two single-brand markets: the aftermarkets for
`iOS app distribution and iOS in-app payment solutions,
`derived from a foremarket for smartphone operating
`systems. Apple, by contrast, proposed the market for all
`video game transactions, whether those transactions occur
`on a smartphone, a gaming console, or elsewhere. The
`district court ultimately found a market between those the
`parties proposed: mobile-game transactions—i.e., game
`transactions on iOS and Android smartphones and tablets.
`Compared to Epic’s proposed aftermarkets, the district
`court’s relevant market was both broader and narrower—
`broader in that it declined to focus exclusively on iOS, but
`narrower in that it considered only video game transactions
`instead of all app transactions. Compared to Apple’s
`proposed market, the district court’s relevant market was
`
`4 We omit any discussion of the following claims that the parties asserted
`below but do not address before our court: (1) Epic’s Cartwright Act
`claims; (2) Apple’s counter-claim for breach of the implied covenant of
`good faith and fair dealing; and (3) Apple’s counter-claim for unjust
`enrichment.
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`19
`
`narrower—excluding game-console and streaming-service
`transactions.
`The district court rejected Epic’s proposed single-brand
`markets on several grounds. It held that there was no
`foremarket for smartphone and tablet operating systems
`because Apple does not license or sell iOS. More critically,
`it analyzed Epic’s aftermarkets in the alternative and found
`a failure of proof. Epic presented no evidence regarding
`whether consumers unknowingly lock themselves into
`Apple’s app-distribution and IAP restrictions when they buy
`iOS devices. A natural experiment facilitated by Apple’s
`removal of Fortnite from the App Store showed that iOS
`Fortnite users switched about 87% of their pre-removal iOS
`spending to other platforms—suggesting substitutionality
`between
`the App Store and other game-transaction
`platforms. The district court also rejected Apple’s relevant
`market-definition expert as “weakly probative” and “more
`interested in a result [that] would assist his client than in
`providing any objective ground to assist the court in its
`decision-making” (cleaned up). Among other flaws, the
`expert’s analysis contradicted his own academic articles on
`how to analyze two-sided markets; used consumer-survey
`wording
`that departed from well-established market-
`definition principles; failed to account for holiday-season
`idiosyncrasies; and excluded minors (who are an important
`segment of mobile-game purchasers). The district court then
`turned to Apple’s proposed relevant market definition and
`refined it from all game transactions to mobile game
`transactions by relying extensively on the “practical indicia”
`of markets enumerated in the Supreme Court’s decision in
`Brown Shoe v. United States, 370 U.S. 294, 325 (1962).
`
`
`
`20
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`2. Sherman Act Section 1: Restraint of Trade
`The district court then rejected Epic’s Sherman Act
`Section 1 restraint-of-trade-claim. As a threshold matter, the
`court held that the DPLA was not a “contract[]” that fell
`within the scope of Section 1 because it was a “contract of
`adhesion,” not a truly bargained-for agreement. It then, in
`the alternative, applied the Rule of Reason—the antitrust
`liability standard applicable to most cases.
`At step one of the Rule of Reason, the district court found
`that Epic proved substantial anticompetitive harms through
`both direct and indirect evidence. Apple has for years
`charged a supracompetitive commission on App Store
`transactions that it set “without regard” for competition.
`That commission, in turn, creates an “extraordinary high”
`operating margin of 75% for App Store transactions.
`Moreover, Apple has market power in the mobile-games-
`transactions market, evidenced by its 52 to 57% market share
`and barriers to entry in the form of network effects. Apple
`uses that market power to prevent would-be competitors like
`Epic from offering app-distribution and payment-processing
`alternatives,
`reducing
`innovation and Apple’s own
`investment in the App Store in the process.
`At step two of the Rule of Reason, the district court
`found
`that Apple established non-pretextual,
`legally
`cognizable procompetitive rationales for its app-distribution
`and IAP restrictions. The district court credited Apple’s
`rationale that its restrictions seek to enhance consumer
`appeal and differentiate Apple products by improving iOS
`security and privacy. It also partially accepted Apple’s
`rationale that the restrictions are a means of being
`compensated
`for
`third-party developers’ use of
`its
`intellectual property—crediting it generally but rejecting it
`
`
`
`
`
`EPIC GAMES, INC. V. APPLE, INC.
`
`
`
`21
`
`“with respect to the [App Store’s] 30% commission rate
`specifically.”
`At step three of the Rule of Reason, the district court
`rejected Epic’s proposed less restrictive alternatives (LRAs)
`as severely underdeveloped. As a purported LRA to Apple’s
`app-distribution restriction, Epic primarily advanced a
`“notarization model” based on Apple’s approach to security
`on the Mac operating system (macOS). On macOS, Apple
`does not mandate an exclusive distribution channel, as it
`does on iOS; nor does Apple condition distribution of an app
`on first submitting that app to Apple for review. But when
`a developer chooses to forego submitting an app to Apple,
`that app—regardless of how it is distributed to Mac users—
`will carry a w
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