Antitrust Law: Epic Games v. Google—A Victory for Developers

Update

In an Antitrust Deal with States Google will pay $700 million and allow app makers to collect payments directly from consumers in a settlement it hopes will help resolve other legal challenges. Google deal is the result of an antitrust suit brought by state attorneys general, in the company’s latest move to navigate increased regulatory scrutiny of its power.

The suit, brought in July 2021, alleged Google’s app store of abusing its market power and forcing aggressive terms on software developers. The tech giant is facing several antitrust challenges in the United States, including a trial in which the federal government claims Google has abused its dominance in online search.

In its announcement on Dec. 18, Google said it would now allow apps to charge consumers directly rather than having to charge through Google. The company will pay $630 million to create a settlement fund for consumers, as well as pay $70 million into a fund to be used by the states. To highlight the choice that users have in how they download apps, Google reaffirmed that phone makers, like Samsung, that use the Android mobile operating system can continue installing multiple app stores on their devices in addition to Google’s Play Store.

Case Summary

After a three-year legal battle, a California jury today found that Google violated antitrust laws when it removed Fortnite maker Epic Games and other publishers from its app store. The jurors in San Francisco found in favor of Epic on all of the 11 claims.

A federal court jury has decided that Google’s Android app store has been protected by anticompetitive barriers that have damaged smartphone consumers and software developers, dealing a blow to a major pillar of a technology empire.

The unanimous verdict reached Monday came after just three hours of deliberation following a four-week trial revolving around a lucrative payment system within Google’s Play Store. The store is the main place where hundreds of millions of people around the world download and install apps that work on smartphones powered by Google’s Android software.

Epic Games, the maker of the popular Fortnite video game, filed a lawsuit against Google alleging that the internet search giant has been abusing its power to shield its Play Store from competition in order to protect a gold mine that makes billions of dollars annually. Just as Apple does for its iPhone app store, Google collects a commission ranging from 15% to 30% on digital transactions completed within apps.

Apple prevailed in a similar case that Epic brought against the iPhone app store. But that 2021 trial was decided by a federal judge in a ruling that is under appeal at the U.S. Supreme Court. Over the course of the trial Epic produced evidence that Google was willing to pay billions of dollars to suppress alternative app stores by paying developers to abandon their own store efforts and direct distribution plans and offering highly lucrative agreements with device manufacturers in exchange for excluding competing app stores.

These deals were meant to solidify Google’s dominance as the dominate app store - and it worked. More than 95% of apps are distributed through the Play Store on Android.

Google imposes a 30% tax on developers simply because they have prevented any viable competitors from emerging to offer better deals. And Google executives acknowledged in Court that their offer of a 26% rate on third party payment options is a fake choice for developers.

This is, of course, what we know. From the CEO down, Google employees willfully re-directed sensitive conversations to chat, knowing that their contents would be deleted forever.

"I am not surprised by this verdict. Google effectively has a 30 percent app store tax on small businesses and innovators that bring new products and services to our smartphones. Our fight for fairer competition and rules of the road for mobile app stores and other online marketplaces is gaining momentum. Now, we must take the next step in Congress to finally update our consumer laws for the digital age," stated Senator Amy Klobuchar (D-MN), Chairwoman of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights of this groundbreaking case.

Klobuchar is a co-sponsor of the Open App Markets Act alongside Senators Richard Blumenthal (D-CT) and Marsha Blackburn (R-TN). This bill will protect developers' rights to tell consumers about lower prices and offer competitive pricing; open up competitive avenues for startup apps, third party app stores, and payment services; make it possible for developers to offer new experiences that take advantage of consumer device features; give consumers more control over their devices; and prevent app stores from disadvantaging developers who compete with them, all while enabling companies to continue to protect privacy, security, and safety of consumers.

Klobuchar and Senator Grassley also introduced the American Innovation and Choice Online Act to set commonsense rules of the road for major digital platforms to ensure they cannot unfairly preference their own products and services.

Case Information

U.S. District Court, California Northern District

Epic Games, Inc. v. Google LLC et al.

Judge: James Donato, presiding
Date filed: August 13, 2020
Date of last filing: December 12, 2023
Case #: 3:20-cv-05671-JDe

Ronald V. Dellums Federal Building

United States Courthouse

1301 Clay Street

Oakland, CA 94612

Plaintiff: Epic Games represented by Cravath, Swaine & Moore LLP and Wiggin and Dana LLP

Defendant: Google represented by O’Melveny and Morgan, Lewis & Bockius LLP

Disposition: Judgment - Jury Verdict for Plaintiff on all 11 counts

Charges

Google violated sections 1 and 2 of the Sherman Act of the Android application distribution market and Android in application billing services for distribution market for the worldwide marketplace excluding China.

Google willfully monopolized by engaging in anticompetitive conduct.

Google violated antitrust laws.

Google engaged in unlawful restraint of trade, or section 1 of the Sherman Act and California state law by using:

• Developer Distribution Agreements DDA
• Agreements with potential competitors using Project Hug or Games Velocity programs.
• Agreements with Original Equipment Manufacturer or OEMs using MADA or Mobile Application Distribution Agreement which is a deal that applies to phone and tablet makers that want to use Android applications such as YouTube or Gmail. Among other things, the MADA requires phone makers that want one of the Google apps to install all of them. And Radio frequency (spectrum) licenses that were granted to wireless (cell phone) carriers in the 1980s or RSA agreements.

Google unlawfully tied billing with the Play Store application.

Epic proved that Google's behavior caused Epic Games injury.

What started it all?

Epic's decision to directly offer v-bucks was part of an intentional plan, dubbed Project Liberty, to lure Apple and Google into antitrust litigation. Sure enough, the tech apps removed Fortnite from the App Store and Google Play Store the same day, stating Epic violated their developer agreement policies.
Epic promptly sued Apple and Google which then sued Epic in response.

What is Project Hug?
In his opening statement, Epic Games attorney Gary Bornstein accused Google of paying app developers to not create their own platforms for Androids. The program was titled "Project Hug," and Epic categories its payments as bribes. Epic has argued Google paid the game developer Activision Blizzard around $360 million to launch on the Google Play Store. "Google pays potential and actual competitors not to compete, literally gives them money and other things of value," Bornstein said.

The Law

Overview of federal antitrust laws, 15 USCA § 1-7

The Sherman Act prohibits "every contract, combination, or conspiracy in restraint of trade," and any "monopolization, attempted monopolization, or conspiracy or combination to monopolize." Long ago, the Supreme Court decided that the Sherman Act does not prohibit every restraint of trade, only those that are unreasonable. For instance, in some sense, an agreement between two individuals to form a partnership restrains trade, but may not do so unreasonably, and thus may be lawful under the antitrust laws. On the other hand, certain acts are considered so harmful to competition that they are almost always illegal. These include plain arrangements among competing individuals or businesses to fix prices, divide markets, or rig bids. These acts are "per se" violations of the Sherman Act; in other words, no defense or justification is allowed.

The penalties for violating the Sherman Act can be severe. Although most enforcement actions are civil, the Sherman Act is also a criminal law, and individuals and businesses that violate it may be prosecuted by the Department of Justice. Criminal prosecutions are typically limited to intentional and clear violations such as when competitors fix prices or rig bids. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.

The Federal Trade Commission Act prohibits "unfair methods of competition" and "unfair or deceptive acts or practices." The Supreme Court has said that all violations of the Sherman Act also violate the FTC Act. Thus, although the FTC does not technically enforce the Sherman Act, it can bring cases under the FTC Act against the same kinds of activities that violate the Sherman Act. The FTC Act also reaches other practices that harm competition, but that may not fit neatly into categories of conduct formally prohibited by the Sherman Act. Only the FTC brings cases under the FTC Act.

The Clayton Act addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates (that is, the same person making business decisions for competing companies). Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly." As amended by the Robinson-Patman Act of 1936, the Clayton Act also bans certain discriminatory prices, services, and allowances in dealings between merchants.

California Business and Professions Code
Division 7. GENERAL BUSINESS REGULATIONS [16000 - 18001] 

Part 2. PRESERVATION AND REGULATION OF COMPETITION [16600 - 17365] 
Combinations in Restraint of Trade [16700 - 16770] 

Article 3. Enforcement [16750 - 16761]

Cases of Note

Epic Games brought action against manufacturer of smartphone devices and operating system (OS) for claims under Sherman Act and California's Unfair Competition Law (UCL), alleging that manufacturer unlawfully restricted app distribution on its devices to its own store, required in-app purchases on its devices to use its own in-app payment processor (IAP), and limited developers' ability to communicate availability of alternative payment options to device users. Manufacturer counterclaimed for, among other things, breach of developer program licensing agreement (DPLA) and indemnification of attorney fees. Following bench trial, the United States District Court for the Northern District of California, Yvonne Gonzalez Rogers, J., 559 F.Supp.3d 898, entered judgment in favor of manufacturer on Sherman Act claims and counterclaim for breach of contract but in favor of developer on claims under UCL and for attorney fees. Developer appealed and manufacturer cross-appealed. Epic Games, Inc. v. Apple, Inc., 67 F.4th 946, 967(9th Cir. 2023)

The Court of Appeals, Smith, Circuit Judge, held that:

• developer failed to establish single-brand aftermarkets for app distribution and in-app payment processing (IAP) solutions.
• developer made adequate showing that exclusivity restraints had anticompetitive effects on market for mobile game transactions.
• manufacturer generally proffered adequate procompetitive rationales for restraints.
• developer failed to establish less restrictive means to achieve procompetitive purposes.
• developer made adequate showing that store and IAP were separate products.
• Rule of Reason governed lawfulness of tying arrangement involving software platforms for third-party applications or with multiple functionalities and
• failure of proof on developer's antitrust claims did not foreclose claim of unfairness under Unfair Competition Law.

Affirmed in part, reversed in part, and remanded.