Epic CEO Rips Apple's Fees As App Store Antitrust Trial Starts

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"href =" https://www.law360.com/trials/articles/1380881/# "> Dorothy Atkins Law360 (May 3, 2021, 10:09 p.m. EDT) - Apple and Epic Games met on Monday in front of a California Federal judge passes high-stakes antitrust litigation opening day. Epic CEO Tim Sweeney testified that the Apple App Store's anti-competitive policies and fees have cost Fortnite maker millions in revenue that it could have reinvested in its business.

A bank attempt between Epic Games Inc. and Apple Inc. was initiated in California federal court on Monday over alleged anti-competitive policies and fees from the App Store. (AP Photo / Patrick Semansky)

After the statements opened, Epic Games Inc. called Sweeney to testify before US District Judge Yvonne Gonzalez Rogers, who is leading the roughly three-week antitrust process over Apple Inc.'s 30% commission for in-app purchases on the iOS operating system.

During his direct exam, Sweeney recalled starting his North Carolina-based gaming company in 1991 and growing it into the company it is today. More than 8,000 employees worldwide work on its gaming and developer software products, including the popular free online software game Fortnite, the video conferencing app Houseparty, an app developer tool called Unreal Engine, and the Epic Games Store that allows users to download apps .

According to Sweeney, Epic began developing apps that could run on Apple's iOS system in 2010. However, over the past decade, Apple's guidelines have become more restrictive. All payments on the iOS system must be made through Apple, and Epic must ask the tech giant to file an antitrust lawsuit filed in August.

"Apple made more money selling developer apps on the App Store than it did developers," he said.

Sweeney said Apple's policies and commissions cost Epic millions of dollars, forcing the company to charge more for its products. He said Epic has also been unable to refund customers directly or resolve customer service issues related to payments because Apple manages all payments on iOS.

Although Epic has its own game store that charges a 12% commission for payment processing costs, Sweeney found that users can choose different payment methods and are not required to use Epic's payment processing service. He also said that Epic's payment system has not faced the security issues that Apple says justifies the strict restrictions imposed on app developers.

During his cross-examination, Sweeney admitted that in August 2020, as the company's CEO, he made the decision to litigate Apple and break his contract with Apple by installing a so-called hotfix in his software to fix Apple's payment system To work around it led Apple to remove Fortnite from Apple's App Store hours later.

Apple's attorney Richard J. Doren of Gibson Dunn & Crutcher LLP repeatedly pointed out that Epic pays Sony, Nintendo and Microsoft 30% commissions totaling billions of dollars for using their app stores, and Sweeney conceded That game consoles were made by these companies charge commissions regardless of whether users use other devices such as the iPhone to play Epic's games.

During the exam, Judge Gonzalez Rogers questioned whether Sweeney knew a proposed class of developers had already sued Apple alleged antitrust violations when Epic installed the hotfix in August. Sweeney replied that he was aware of the litigation.

"And you just ignored that and went alone?" asked the judge.

"Yes," replied Sweeney.

Sweeney's statement followed opening statements in which Epic's attorney criticized Apple's allegedly monopoly "Take-it or Leave it" App Store policies, while Apple accused the game maker of deliberately violating its intellectual property licensing agreements by adding the hotfix in its Coding on allegedly illegally installed ones will increase their profits.

Katherine B. Forrest of Cravath Swaine & Moore LLP told the judge that evidence in the trial will show that Apple's policies on app fees have nothing to do with its security efforts, which Forrest said "falls far short of" what Apple claims . She said Apple's App Store had huge profit margins that range from 75% in 2018 to 77.8% in 2019, well above the margins that its alleged competitors are making.

Forrest said once developers commit to making an app for iOS, they will be bound by Apple's supposedly monopoly terms that allow Apple to terminate their contract at any time. She said evidence will show that there is insufficient replacement for Apple's iOS and "Apple's theory of interchangeable game transactions is contrary to common sense" because gamers do not use their phones and game consoles interchangeably.

Forrest compared Apple's alleged iOS market power to the market power the US Supreme Court found that the device maker had a stake in Eastman Kodak Co. versus Image Technical Services Inc.

"IOS is much bigger and more firmly anchored in every major way," said Forrest.

Forrest said Apple's in-app payment system is similar to a car dealership that charges a 30% commission on the transaction every time a car buyer purchases gas. She also noted that Epic is not suing for damages, but "Epic is suing for change ... not just for itself, but for all developers."

At Apple's openings, lawyer for tech giant Karen L. Dunn of Paul Weiss Rifkind Wharton & Garrison LLP said Epic's proposed market definition is too narrow and there are indications that commissions Apple charges meet current industry standards. Dunn noted that users can choose to play Epic's games on game consoles like Nintendo's Switch, Xbox, and Android phones, which she said competes directly with Apple and is a sufficient replacement.

"Epic's market is ignoring all of that, just focusing on the iPhone and the App Store," she said.

Dunn said the evidence presented in court will show that Epic is a $ 28 billion company that has deliberately violated its contractual and IP licensing agreements with Apple to benefit from app sales that violate antitrust laws and violate precedents.

Dunn emphasized that Apple is reviewing millions of applications for iOS for security and compatibility reasons. If Epic's legal challenge to its payment system is successful, it would open millions of iOS devices to potential vulnerabilities and cyberattacks.

"Apple's commitment to safety and security doesn't allow that, and antitrust laws don't allow it," she said.

Dunn cited the Ohio Supreme Court ruling against American Express Co. to support Apple's market definition, she quoted the decision of the ninth circle Reversing the Federal Trade Commission's antitrust win against chipmaker Qualcomm in support of Apple's position that it has no "duty to deal with competitors" and no duty to license its intellectual property to Epic if Epic fails to pay its fees or terms accepted.

"This is the hallmark of the competition," said Dunn.

The trial continues with Sweeney's cross-examination on Tuesday.

Epic Games is represented by Paul J. Riehle from Faegre Drinker Biddle & Reath LLP and Christine A. Varney, Katherine B. Forrest, Gary A. Bornstein, Yonatan Even, Lauren Moskowitz and M. Brent Byars from Cravath Swaine & Moore LLP.

Apple is represented by Richard J. Doren of Gibson Dunn & Crutcher LLP and Karen Leah Dunn of Paul Weiss Rifkind Wharton & Garrison LLP.

The case is Epic Games Inc. v Apple Inc., Case Number 4: 20-cv-05640, in the US District Court for the Northern District of California.

- Adaptation by Jay Jackson Jr.

To have this article reprinted, please contact reprints@law360.com.

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