Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 1 of 39
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`Nos. 21-16506 & 21-16695
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`IN THE UNITED STATES COURT OF APPEALS
`FOR THE NINTH CIRCUIT
`____________________
`EPIC GAMES, INC.,
`Plaintiff, Counter-Defendant–Appellant, Cross-Appellee
`v.
`APPLE, INC.,
`Defendant, Counterclaimant–Appellee, Cross-Appellant
`____________________
`On Appeal from the United States District Court
`for the Northern District of California
`No. 4:20-cv-05640-YGR-TSH
`The Honorable Yvonne Gonzalez Rogers
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` ____________________
`BRIEF OF THE AMERICAN ANTITRUST INSTITUTE AS AMICUS
`CURIAE IN SUPPORT OF PLAINTIFF, COUNTER-DEFENDANT–
`APPELLANT
`____________________
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`LAURA M. ALEXANDER
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` Counsel of Record
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`RANDY M. STUTZ
`AMERICAN ANTITRUST INSTITUTE
`1025 Connecticut Avenue, NW
`Suite 1000
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`Washington, DC 20036
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`(202) 276-4050
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`lalexander@antitrustinstitute.org
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`January 27, 2022
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`Counsel for Amicus Curiae
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`Nos. 21-16506 & 21-16695
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`IN THE UNITED STATES COURT OF APPEALS
`FOR THE NINTH CIRCUIT
`____________________
`EPIC GAMES, INC.,
`Plaintiff, Counter-Defendant–Appellant, Cross-Appellee
`v.
`APPLE, INC.,
`Defendant, Counterclaimant–Appellee, Cross-Appellant
`____________________
`On Appeal from the United States District Court
`for the Northern District of California
`No. 4:20-cv-05640-YGR-TSH
`The Honorable Yvonne Gonzalez Rogers
`
` ____________________
`BRIEF OF THE AMERICAN ANTITRUST INSTITUTE AS AMICUS
`CURIAE IN SUPPORT OF PLAINTIFF, COUNTER-DEFENDANT–
`APPELLANT
`____________________
`
`
`LAURA M. ALEXANDER
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`
` Counsel of Record
`
`
`RANDY M. STUTZ
`AMERICAN ANTITRUST INSTITUTE
`1025 Connecticut Avenue, NW
`Suite 1000
`
`Washington, DC 20036
`
`
`(202) 276-4050
`
`lalexander@antitrustinstitute.org
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`January 27, 2022
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`Counsel for Amicus Curiae
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`Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 2 of 39
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`CORPORATE DISCLOSURE STATEMENT
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`Pursuant to Appellate Rule 26.1(a), the American Antitrust Institute states
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`that it is a nonprofit, non-stock corporation. It has no parent corporations, and no
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`publicly traded corporations have an ownership interest in it.
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`CORPORATE DISCLOSURE STATEMENT ..................................................... i
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`TABLE OF CONTENTS
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`TABLE OF AUTHORITIES ................................................................................ iii
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`INTEREST OF AMICUS CURIAE ...................................................................... 1
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`INTRODUCTION AND SUMMARY OF ARGUMENT ................................... 2
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`ARGUMENT ........................................................................................................... 5
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`I. COURTS MUST DEFINE MARKETS CONSISTENT
`WITH FIRST PRINCIPLES OF ANTITRUST LAW ............................. 5
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`A. The District Court’s Opinion Cannot be Squared with
`First Principles of Antitrust Law Reflected in Kodak .......................... 5
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`B. The District Court Did Not Properly Assess Apple’s Conduct
`as It Relates to the Source of Apple’s Market Power ........................ 10
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`C. A Common Error Underlies the District Court’s Failure to
`Recognize Distinct Markets in at Least Two Instances ..................... 14
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`D. AmEx Applies Only to the Narrow Economic Circumstances
`that Underly Its Departure from Well-established Market
`Definition Principles .............................................................................. 21
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`II. UPHOLDING THE DECISION BELOW WOULD PROVIDE
`A ROADMAP FOR PLATFORMS TO EVADE FEDERAL
`ANTITRUST LAWS WITH ENORMOUS IMPLICATIONS
`FOR CONSUMERS, DEVELOPERS, AND MARKETS ...................... 29
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`CONCLUSION ..................................................................................................... 31
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`CASES
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`TABLE OF AUTHORITIES
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`American Needle, Inc. v. National Football League,
`560 U.S. 183 (2010) .............................................................................................. 3
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`Apple, Inc. v. Pepper,
`139 S.Ct. 1514 (2019) ......................................................................................... 29
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`Digidyne Corp. v. Data Gen. Corp.,
`734 F.2d 1336 (9th Cir. 1984) ............................................................................. 19
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`Eastman Kodak Co. v. Image Tech. Servs.,
`540 U.S. 451 (1992) ..................................................................................... passim
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`Eastman Kodak Co. v. Image Tech. Servs.,
`903 F.2d 612 (9th Cir. 1990) ............................................................................... 19
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`Image Tech. Servs. v. Eastman Kodak Co.,
`125 F.3d 1195 (9th Cir. 1997) ............................................................................. 11
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`Jefferson Parish Hosp. Dist. No. 2 v. Hyde,
`466 U.S. 2 (1984) ...................................................................................... 2, 17, 19
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`Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,
`551 U.S. 877 (2007) ............................................................................................ 23
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`Nat’l Soc’y of Prof’l Eng’rs v. United States,
`435 U.S. 679 (1978) .............................................................................................. 2
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`Newcal Industries, Inc. v. IKON Office Solutions,
`513 F.3d 1038 (9th Cir. 2008) ............................................................................... 8
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`Ohio v. American Express,
`138 S. Ct. 2274 (2018) ................................................................................. passim
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`Rick-Mik Enters., Inc. v. Equilon Enters. LLC,
`532 F.3d 963 (9th Cir. 2008) ......................................................................... 17, 18
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`Times-Picayune Publishing Co. v. United States,
`345 U.S. 594 (1953) ...................................................................................... 11, 25
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`United States v. Microsoft Corp.,
`253 F.3d 34 (D.C. Cir. 2001) (en banc) .............................................................. 19
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`United States v. Sabre Corp.,
`452 F. Supp. 3d 97 (D. Del. 2020) ...................................................................... 24
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`OTHER AUTHORITIES
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`Brief for Petitioner Apple, Apple, Inc. v. Pepper, No. 17-204,
`139 S. Ct. 1514 (filed Aug. 10, 2018) ..................................................... 26, 27, 28
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`Daniel J. Solove, The Myth of the Privacy Paradox,
`89 GEO. WASH. L. REV. 1 (Jan. 2021) ................................................................. 30
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`Dennis W. Carlton, The Anticompetitive Effects of Vertical
`Most-Favored-Nation Restraints and the Error of Amex,
`2019 Columbia Bus. L. Rev. 93 (2019) ........................................................ 22, 24
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`Donald Turner, Antitrust Policy and the Cellophane Case,
`70 Harv. L. Rev. 281 (1956) ............................................................................... 16
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`Fed. Trade Comm’n & U.S. Dep’t of Just.,
`Antitrust Div., Horizontal Merger Guidelines (2010) ................................... 16, 28
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`Federal Trade Comm’n & U.S. Dep’t of Justice,
`Commentary on the Horizontal Merger Guidelines (2006) ................................ 28
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`Herbert Hovenkamp, Platforms and the Rule of Reason:
`The American Express Case, 2019 COLUMBIA BUS. L. REV. 35 (2019) ............. 22
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`Jack Kirkwood, Antitrust and Two-Sided Platforms:
`The Failure of American Express, 41 CARDOZO L. REV. 1805 (2020) ............... 22
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`Jeffrey Harrison, Ohio v. American Express: Misunderstanding
`Two-Sided Platforms; the Charge Card “Market;” and the Need for
`Procompetitive Justifications, 70 MERCER L. REV. 437 (2019) .......................... 22
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`Lapo Filistrucchi et al., Market Definition in Two-Sided Markets:
`Theory and Practice, 10 J. Comp. L. & Econ. 293 (2014) ................................. 28
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`Michael Katz & Jonathan Sallet, Multisided Platforms
`and Antitrust Enforcement, 127 YALE L.J. 2142 (2018) ......................... 22, 24, 25
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`Michael L. Katz & A. Douglas Melamed, Competition Law
`as Common Law: American Express and the Evolution of Antitrust,
`168 U. PENN. L. REV. 2061 (2000) ................................................................ 22, 23
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`Steven C. Salop et al., Rebuilding Platform Antitrust: Moving on from
`Ohio v. American Express (forthcoming), .................................................... 22, 24
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`Steven C. Salop, The First Principles Approach to Antitrust, Kodak,
`and Antitrust at the Millennium, 68 ANTITRUST L.J. 187 (2000) .......... 2, 3, 13, 16
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`TREATISES
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`Carl Shapiro & Hal R. Varian, Information Rules: A Strategic Guide to the
`Network Economy (1999) ................................................................................... 29
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`Phillip Areeda & Herbert Hovenkamp,
`Antitrust Law (4th and 5th eds. 2013-2020) ..................................... 14, 17, 19, 20
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`INTEREST OF AMICUS CURIAE1
`The American Antitrust Institute (“AAI”) is an independent nonprofit organ-
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`ization devoted to promoting competition that protects consumers, businesses, and
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`society. It serves the public through research, education, and advocacy on the ben-
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`efits of competition and the use of antitrust enforcement as a vital component of
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`national and international competition policy. AAI enjoys the input of an Advisory
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`Board that consists of over 130 prominent antitrust lawyers, law professors, econo-
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`mists, and business leaders. See http://www.antitrustinstitute.org.2
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`1 The parties have lodged blanket consents with the clerk. No counsel for a party
`has authored this brief in whole or in part, and no party, party’s counsel, or any
`other person—other than amicus curiae or its counsel—has contributed money that
`was intended to fund preparing or submitting this brief.
`2 Individual views of members of AAI’s Board of Directors or Advisory Board
`may differ from AAI’s positions.
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`1
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`INTRODUCTION AND SUMMARY OF ARGUMENT
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`Despite radical technological and business innovation over the last century,
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`the Sherman Act remains as relevant to markets today as ever. Moreover, while
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`the Act’s application has evolved with these developments, the core legal and eco-
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`nomic principles underlying the Sherman Act have remained remarkably constant.
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`For good reason: faithful adherence to these first principles of antitrust law means
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`“courts can maintain logic and consistency while avoiding analytic traps and fac-
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`tual errors.” Steven C. Salop, The First Principles Approach to Antitrust, Kodak,
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`and Antitrust at the Millennium, 68 Antitrust L.J. 187, 3 (2000) (hereinafter
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`“Salop”).
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`Central among them are the legislative judgment that consumers and society
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`are best served by competitive markets and that the ultimate test under any antitrust
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`analysis should be the effect of the defendant’s conduct on competition. Nat’l
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`Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 695 (1978); see also Jeffer-
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`son Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984).
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`Antitrust law has also steadfastly emphasized the need to confront markets
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`as they are and to eschew formalism in favor of market realities. Eastman Kodak
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`Co. v. Image Tech. Servs., 540 U.S. 451, 462 (1992) (“Legal presumptions that rest
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`on formalistic distinctions rather than actual market realities are generally disfa-
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`vored in antitrust law.”); see also American Needle, Inc. v. Nat’l Football League,
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`2
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`560 U.S. 183, 191 (2010) (modern antitrust law “eschew[s]…formalistic distinc-
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`tions…in favor of a functional consideration of how the parties involved in the al-
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`leged anticompetitive conduct actually operate”). Where the anticompetitive
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`impact of conduct is readily apparent, tests and proxies must yield to the directly
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`observable market realities. Salop at 4 (“Market definition and market power
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`should be evaluated in the context of the alleged anticompetitive conduct and ef-
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`fect, not as a flawed filter carried out in a vacuum divorced from these factors.”).
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`This case provides a prime example of the pitfalls that come with applying
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`multi-pronged tests and proxies without tying them back to first principles or tak-
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`ing account of “the context of the alleged anticompetitive conduct and effect.”
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`Salop at 191. The district court found direct anticompetitive effects from Apple’s
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`conduct yet held that Apple lacks market power. Its legal conclusion cannot fol-
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`low from its finding of fact. The analysis is economically incoherent.
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` The district court failed to appreciate the significance of its finding of direct
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`anticompetitive effects. Fundamentally, courts must define markets “in reference
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`to the economic analysis of the alleged anticompetitive conduct and its market ef-
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`fect.” Id. Here, the court failed to do that in at least three ways:
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`First, despite factual findings that directly evidence iPhone purchasers are
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`locked-in by both information costs that prevent accurate lifecycle pricing and
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`switching costs that weigh against switching from iOS to Android to access
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`alternative app-distribution services and in-app payment processors, the district
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`court held there could be no relevant aftermarkets in Apple app-distribution and in-
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`app payment processing. Had the district court properly understood the economic
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`and legal significance of its factual findings in the context of Apple’s alleged anti-
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`competitive conduct and its effects, it could not have arrived at this result.
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`Second, in defining markets, the district court at least twice fell into the ana-
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`lytical trap of assuming that current, competitively-constrained market conditions
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`reflect the contours of consumer demand. In at least two instances, it found a sin-
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`gle product where, had it properly focused on consumer demand in the context of
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`Epic’s claims, it would have found two. As a result, it failed to credit plaintiffs’
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`foremarket in mobile operating systems and mistook the results of Apple’s leverag-
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`ing as evidence that no leveraging was possible.
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`Third, the district court applied the Amex decision without attention to the
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`economic justifications for that decision’s limited application and narrow scope.
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`As a result, the district court treated one-sided app distribution and in-app payment
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`markets as transaction services markets, despite the fact that, by Apple’s own
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`4
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`admission, it does not sell app-distribution services and in-app payment services to
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`consumers and these services are not jointly consumed.
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`ARGUMENT
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`I.
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`COURTS MUST DEFINE MARKETS CONSISTENT WITH FIRST
`PRINCIPLES OF ANTITRUST LAW
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`Legal tests and frameworks developed in the context of tangible goods can
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`be difficult to apply in new and evolving digital markets. But such tests are only a
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`proxy for the ultimate goal of any antitrust inquiry: to determine the impact of
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`conduct on competition. Courts can correctly apply old tests to new contexts only
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`by adhering to the first principles underlying this ultimate goal.
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`A.
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`The District Court’s Opinion Cannot be Squared with First Prin-
`ciples of Antitrust Law Reflected in Kodak
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`The district court correctly identified the issue at the heart of Epic’s after-
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`market monopolization argument: “whether competition in the initial market [for
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`operating systems] suffices to discipline anticompetitive practices in the aftermar-
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`kets” for iOS in-app payments and iOS app distribution. Slip op. at 130; see Ko-
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`dak, 504 U.S. at 469 n.15 (“Whether considered in the conceptual category of
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`‘market definition’ or ‘market power,’ the ultimate inquiry is the same—whether
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`competition in the equipment market will significantly restrain power in the service
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`and parts markets.”). And, the court rightly recognized that “[i]ssues of lock-in or
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`switching costs, and notice or consumer knowledge fall under th[is] analysis.” Id.
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`5
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`But the district court abandoned first principles by failing to connect its assessment
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`of switching and information costs to the ultimate competition issue Epic has
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`raised.
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`In Kodak, the plaintiffs alleged that Kodak had market power in replacement
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`parts for Kodak copiers and used that market power to unlawfully tie Kodak parts
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`to Kodak repair services. Id. at 459. Kodak’s near-100% market share in replace-
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`ment parts for Kodak copiers was undisputed; the question was whether Kodak ac-
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`tually possessed market power over parts purchases. Kodak argued, as Apple did
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`here, that it had no meaningful market power in the Kodak parts market, because if
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`it tried to charge supracompetitive prices or impose anticompetitive terms on parts
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`purchases, customers would either switch to a different brand of copier or would
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`avoid buying Kodak copiers in the first place. On summary judgment, the Su-
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`preme Court disagreed, explaining that the theory was “perhaps intuitively appeal-
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`ing [but] may not accurately explain the behavior of the primary and derivative
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`markets for complex durable goods.” Id. at 473.
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`“The extent to which one market prevents exploitation of another market,”
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`the Court reasoned, “depends on the extent to which consumers will change their
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`consumption of one product in response to a price change in another, i.e., the
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`cross-elasticity of demand.” Id. at 469 (internal quotations omitted). Where con-
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`sumers in the aftermarket can readily change their consumption in the foremarket
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`6
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`in response to exploitation in the aftermarket, there is no market power. Where
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`consumers subject to exploitation in the aftermarket cannot readily avoid or change
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`their consumption in the foremarket in response, they are “locked-in.”
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`The Court recognized that this lock-in is a source of the market power in the
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`aftermarket, even if the lock-in is not complete. Id. at 471 (“The fact that the
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`[fore]market imposes a restraint on prices in the after-markets by no means dis-
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`proves the existence of power in those markets.”). Consequently, a finding of
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`lock-in and market power in this context necessarily suggests that the aftermarket
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`is a relevant antitrust market. Id. at 469 n.15 (“Whether considered in the concep-
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`tual category of ‘market definition’ or ‘market power,’ the ultimate inquiry is the
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`same—whether competition in the equipment market will significantly restrain
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`power in the service and parts markets.”) (emphasis added).
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`The Supreme Court identified two causal factors that can generate lock-in:
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`information costs and switching costs. Id. at 473. Information costs prevent
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`“lifecycle pricing.” Id. High information costs matter because consumers who
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`cannot readily assess the full lifecycle costs when they purchase a product cannot
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`account for those costs when making their initial purchasing decision. Id. Switch-
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`ing costs prevent switching to a different product after the initial purchasing deci-
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`sion. High switching costs matter because consumers who cannot easily switch
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`7
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`products in the foremarket cannot escape the exercise of market power in the after-
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`market.
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`Information costs lead consumers into a vulnerable position, and switching
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`costs keeps them there. Together, they generate a relevant antitrust market: an af-
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`termarket where consumers are locked-in. Absent competition in the aftermarket,
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`market power can be exercised in the aftermarket with anticompetitive effect.
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`Here, the district court found that both switching costs and information costs
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`were present,3 yet found no aftermarket for iOS app distribution or in-app payment.
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`Again, the legal conclusion does not coherently follow from the fact-finding. To
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`find such switching and information costs without finding an aftermarket is funda-
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`mentally incompatible with the market definition principles underlying Kodak and
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`Newcal Industries, Inc. v. IKON Office Solutions, 513 F.3d 1038 (9th Cir. 2008).
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`The presence of these information and switching costs necessarily suggests that
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`competition in the foremarket will not “significantly restrain” market power in the
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`aftermarket. Kodak, 504 U.S. at 469 n.15.
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`3 The district court found switching costs when it held: “The Court can agree that it
`takes time to find and reinstall apps or find substitute apps; to learn a new operat-
`ing system; and to reconfigure app settings. It is further apparent that one may
`need to repurchase phone accessories.” Slip op. at 50. It found information costs
`when it held: “Apple’s anti-steering provisions hid critical information from con-
`sumers,” Slip op. at 2, and that “Apple used other provisions to hide information
`on those commission rates from the consumers…. Without information, consum-
`ers cannot have a full understanding of the costs.” Slip op. at 50-51.
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`8
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`Moreover, the district court is wrong to assert that the popularity of Apple’s
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`products reduces the magnitude of switching costs. Slip op. at 51 (“evidence
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`strongly suggests that low switching between operating systems stems from overall
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`satisfaction with existing devices, rather any [sic] ‘lock-in’”). To be sure, demand
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`for Apple’s devices and operating system has significant implications for competi-
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`tion in the markets for devices and operating systems. But the only relevant ques-
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`tion here is whether that foremarket competition disciplines the aftermarkets. If it
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`does not, the foremarket competition says nothing about market power in the after-
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`markets.
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`Similarly, the district court is wrong to assert that consumer knowledge that
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`the iPhone is a walled garden reduces the magnitude of information costs. Slip op.
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`at 131 (“In short, there is no evidence in the record demonstrating that consumers
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`are unaware that the App Store is the sole means of digital distribution on the iOS
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`platform.”). The only relevant question is whether customers have a way to assess
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`the costs of Apple’s walled-garden approach at the time they purchase an iPhone.
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`It is consumers’ inability to assess Apple’s aftermarket pricing constraints at the
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`time of purchase that generates the information costs and prevents foremarket com-
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`petition from disciplining aftermarket conduct.
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`The district court held that streaming services and cross-platform gaming
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`have also reduced switching costs, Slip op. at 131, but again the court cannot
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`connect its dots. This holding is fundamentally incompatible with its holding that
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`these services are not included in the mobile gaming market. Slip op. at 85. When
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`the district court found that streaming services and cross-platform gaming are not
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`part of the relevant market in this case, it necessarily found that switching between
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`mobile gaming and these products is not sufficient to constrain prices in mobile
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`gaming. To simultaneously hold that these products are outside the relevant mar-
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`ket yet meaningfully reduce switching costs is pure nonsense. The holdings cannot
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`coexist as a matter of law and economics.
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`B.
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`The District Court Did Not Properly Assess Apple’s Conduct as It
`Relates to the Source of Apple’s Market Power
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`Where high information and switching costs lock consumers into an after-
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`market, the lock-in can be illegally exploited in the aftermarket in at least two key
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`ways that Epic raises: (1) leveraging and (2) raising entry barriers. First, where
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`lock-in creates market power in an aftermarket, a firm can use its power in the af-
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`termarket as a means to secure market power in a second aftermarket. That is lev-
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`eraging. Epic alleges that Apple did so by exploiting customers locked into an
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`app-distribution aftermarket to force them to use Apple’s IAP services.
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`Second, a company can monopolize by taking steps to strengthen or deepen
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`the existing lock-in of its customers in any or all of its aftermarkets. Anticompeti-
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`tive acts that increase lock-in raise entry barriers. Epic alleges that Apple
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`Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 17 of 39
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`increased lock-in of aftermarket App Store and IAP customers by anticompeti-
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`tively increasing or maintaining information and switching costs.
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`These two methods of exploiting lock-in can be analyzed differently depend-
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`ing on the source of market power in the aftermarket. In a tying or monopoly lever-
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`aging case like Kodak, the source of market power in the market being leveraged
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`(e.g., the tying market) is irrelevant. The anticompetitive conduct is the leveraging
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`of that monopoly in one (after)market into monopoly power in another (after)mar-
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`ket (e.g., leveraging parts to get power in service). Monopoly leveraging is illegal
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`and anticompetitive even if the monopoly power being leveraged is completely
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`lawful.
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`Accordingly, the fact that the original power comes from producing a supe-
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`rior product that customers love, Slip op. at 50-51 (customer satisfaction), or from
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`some other legal conduct, Slip op. at 48 (“not necessarily nefarious”), does not ex-
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`cuse leveraging that market power into another market where competition would
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`otherwise exist. Kodak, 504 U.S. at 479 n.29 (“The Court has held many times
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`that power gained through some natural and legal advantage such as a patent, cop-
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`yright, or business acumen can give rise to liability if ‘a seller exploits his domi-
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`nant position in one market to expand his empire into the next.’”) (quoting Times-
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`Picayune Publishing Co. v. United States, 345 U.S. 594, 611 (1953)); Image Tech.
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`Servs. v. Eastman Kodak Co., 125 F.3d 1195, 1216 (9th Cir. 1997) (“Section 2 of
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`11
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`Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 18 of 39
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`the Sherman Act condemns exclusionary conduct that extends natural monopolies
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`into separate markets.”).
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`On the other hand, when it comes to increasing lock-in to raise entry barri-
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`ers, the source of the information and switching costs that create lock-in does mat-
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`ter. When lock-in is increased, the allegation in a monopolization case is that the
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`defendant took actions with the purpose and design to acquire, enhance or maintain
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`monopoly power. Merely possessing market or monopoly power is not illegal, and
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`firms with monopoly power are permitted and encouraged to compete like any oth-
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`ers, including in an aftermarket. Only the acquisition or maintenance of monopoly
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`power (or attempts) by means other than competition on the merits is illegal. Thus,
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`where the source of market power is lock-in created by switching and information
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`costs, the question of whether those costs have been raised or maintained by un-
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`lawful actions of the defendant, or instead by competition on the merits, is at the
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`heart of the inquiry.
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`In undertaking that inquiry, though, courts must bear in mind that market
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`power arising from sources other than defendants allegedly anticompetitive actions
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`is irrelevant. Monopolistic conduct that raises entry barriers almost always arises
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`in a context where the defendant has some degree of legitimate and legal market
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`power, be it from a first-mover advantage, a high-quality product, or for structural
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`reasons. The source of that market power is generally not relevant, because
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`12
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`Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 19 of 39
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`monopolization is concerned not with the background market power of the defend-
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`ant, but with the defendant’s allegedly illegal actions to increase or maintain that
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`market power. Salop, at 4 (“Market definition and market power should be evalu-
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`ated in the context of the alleged anticompetitive conduct and effect….”).
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`So too here. Apple has a certain degree of lawfully earned market power
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`from the fact that the iPhone is a unique product that consumers like and is pro-
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`tected from competition by intellectual property rights. As discussed above, that
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`market power relates to the foremarket. Likewise, aftermarkets for the App Store
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`and in-app payment systems exist because of switching and information costs that
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`prevent foremarket competition from effectively cabining the exercise of market
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`power in these aftermarkets.
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`All of this is immaterial to Epic’s monopolization claims. It is not the exist-
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`ence of aftermarkets where Apple has market power that Epic alleges constitutes
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`illegal monopolization. It is that Apple took steps to increase or maintain the in-
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`formation and switching costs, and thus its power in these aftermarkets, that Epic
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`alleges is illegal.
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`Properly understood against the context of Epic’s allegations, it is clear that
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`the district court misunderstood the significance of its finding that people are reluc-
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`tant to switch away from the iPhone in response to Apple’s conduct in the app dis-
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`tribution and in-app payment markets because of “overall satisfaction with existing
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`13
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`Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 20 of 39
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`devices.” Slip op. at 51. It is because consumers are overall satisfied with Apple’s
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`iPhone and iOS that Apple’s monopolization scheme was effective. For consum-
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`ers who are “overall happy with their devices,” switching is a high cost, indeed.
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`At its core, Epic’s monopolization claim is that Apple engaged in conduct to
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`maintain or increase its market power in app distribution and in-app payment mar-
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`kets by increasing or maintaining the high switching and information costs that
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`create lock-in. How? By imposing contractual restrictions on developers that (a)
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`prevented them from reducing information costs by the use of links and other
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`forms of communication through their apps and (b) prevented them from reducing
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`the costs of switching away from Apple’s App Store or iOS IAP by allowing cus-
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`tomers to keep the iPhone and iOS they like while blocking them from accessing
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`rival app stores or in-app payment methods. That consumers genuinely like the
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`overall iPhone product is exactly what makes the second restriction so effective; it
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`means the cost of switching away from the App Store or iOS IAP is the cost of giv-
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`ing up the iPhone altogether. See Phillip Areeda & Herbert Hovenkamp, Antitrust
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`Law ¶ 564 (4th and 5th eds. 2013-2020) (markups in aftermarkets are particularly
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`effective when small relative to the overall cost of the product).
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`C. A Common Error Underlies the District Court’s Failure to Recog-
`nize Distinct Markets in at Least Two Instances
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`Proceeding from first principles rooted in economics also helps identify a
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`common error behind the district court’s failure to recognize distinct markets in at
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`Case: 21-16506, 01/27/2022, ID: 12353961, DktEntry: 57, Page 21 of 39
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`least two instances. The district court rejected plaintiffs’ claim that a foremarket
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`for mobile operating systems exists that is distinct from the market for
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`smartphones. Slip op. at 45 (“[I]t is illogical to argue that there is a market for
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`something that is not licensed or sold to anyone. Competition exists for
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`smartphones which are more than just operating systems.”). Accordingly, it con-
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`cluded there could be no aftermarkets for the App Store and iOS IAP.4 Slip op. at
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`45–46 (“Given the Court’s rejection of the foremarket theory, the aftermarket the-
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`ory fails as it is tethered to the foremarket.”). The district court also rejected
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`Epic’s claim that in-app payment processing and app-distribution are distinct prod-
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`uct markets. Slip op. at 65–67 (finding “[t]he [IAP] system is not something that is
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`bought or sold” and, therefore, not “a separate and distinct product” from the App
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`Store). As a result, it held the App Store and IAP could not be anticompetitively
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`tied together. Both of these holdings are rooted in a common and fundamental er-
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`ror: assuming that the way markets currently operate reflects the way competitive
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`markets would operate. This same fundamental error underlies the infamous “cel-
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`lophane fallacy” and many other intellectual traps for the unwary in antitrust law.
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`4 There is no logical reason why the conclusion that there can be no aftermarket
`must follow from the district court’s conclusion that no separate market for mobile
`operating systems exists. If the district court concluded that mobile operat
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