Epic Games ignores Apple's property rights and technical contributions as it reinforces motion for judgment on pleadings against counterclaims

Before I talk about Epic Games' latest filing in the antitrust dispute with Apple in the Northern District of California, here's a follow-up to what I posted one month ago when I wrote that the political clout of the newly-founded Coalition for App Fairness (Epic Games, Spotify, the Tinder company, and others) would depend on its ability to attract more members. This week, the CAF announced the addition of 20 members, and claimed that more than 400 other app developers have applied for membership. The names of the would-be members awaiting approval of their request to join aren't known, so I can't tell how credible and significant they are.

There are at least a couple of shady ones among those who have been allowed to join. It appears that Prepear's real issue with Apple is a trademark dispute, and I think Apple made a reasonable and responsible decision when it disallowed Eristica's "challenge" system as such challenges can indeed be quite dangerous.

But at least the majority of the CAF's members appear legit. Should this group continue to grow at a similar pace, it may at some point be in a position to claim that there's widespread disagreement with Apple's App Store and Google's Google Play business terms. A few dozen companies can't claim to speak for those who make millions of apps--but Apple will have to keep an eye on the CAF's momentum going forward because at some point it could become an influential organization and lend credence to Epic's and Spotify's narrative.

Now, on to Epic's latest court filing (this post continues below the document):

20-10-23 Epic Games' Re... by Florian Mueller

In order to eliminate the risk of punitive damages, Epic seeks to limit the dispute with Apple to an antitrust case if Epic wins and a contract dispute in case Epic's antitrust claims don't succeed. For that purpose, Epic brought a motion for judgment on the pleadings (somewhere between a motion to dismiss and a motion for summary judgment) against Apple's non-contract counterclaims, which Apple opposes. Late on Friday, Epic filed the above reply brief in support of that motion.

Philosophically, Epic Games v. Apple is in no small part about the relative value of the contribution each party makes to, for instance, Fortnite's commercial success on iOS. While it's obvious that there wouldn't be a Fortnite on iOS without Epic or without Apple, either party's counsel is now trying to convince the court that their respective client is the more important contributor. And that leads them to paint a self-centric picture.

Last month I agreed with famous and vocal iOS app developer Marco Arment that Apple shouldn't reduce to its 30% commission the value that we developers (my next title is slightly delayed, but we'll apply for TestFlight beta distribution in a matter of days) add to iOS. But the introductory part of Epic's latest filing makes a very one-sided statement: "Consumers who choose to make in-app purchases in Fortnite pay for Epic's creativity,innovation and effort—to enjoy an experience that Epic has designed." The fact of the matter is that Epic is standing on the shoulders of giants; Fortnite does not exist in a vacuum; and without the mobile revolution (which the iPhone sparked), app developers would today have fewer viable platform options.

The question of what actually belongs to Apple is relevant to certain counterclaims Apple brought against Epic. Apple wants to hold Epic responsible for having defrauded its app reviewers by sneaking a prohibited alternative payment system past the review process, and Epic argues that Apple isn't entitled to anything other than what Epic owes on a contractual basis. Apple, however, argues that only because it's protected itself against fraudulent acts through contractual provisions doesn't mean it doesn't have claims against Epic under tort law. Epic acknowledges that a breach and a tort can co-exist, but insists that the tortious act must be "independently wrongful." And that is, in my opinion, ultimately a question of whether one takes Epic's perspective, which is that they have every right to provide apps to iOS users and it's just Apple that restricts this right by uniterally imposing contract terms, or whether one primarily views Apple's App Store and the iOS platform as Apple's property, giving Apple the right to decide which apps become available via the App Store (and, therefore, to review those apps).

The "property" question is even more central to Apple's "conversion" claim (the civil law equivalent of theft). Epic argues that it's not theft to take money from Fortnite users on iOS, as opposed to "stealing cash from a vault in Apple Park, or raiding Apple's bank account."

My feeling is that the part about defrauding the app review process is not ripe for decision at this point; some of what Epic says may be valid, but not sufficient to defeat the counterclaims at this early stage. Conversion, which requires a possessory interest, may be ripe for judgment.

As for the question of whether Epic's offering an alternative payment mechanism (which Epic did in order "to illustrate that competition could exist on iOS, and that consumers would welcome and benefit from it") constitutes interference with Apple's customer relationships, Epic points to a passage in Apple's agreement with end users (Apple Media Services Terms and Conditions) that says "Apple acts as an agent for App Providers in providing the App Store and is not a party to the sales contract or user agreement between you and the App Provider." On that basis, Epic describes itself as the "principal" in the relationship with end users, and Apple as an "agent" at best and "an outright non-party" at worst. However, iOS users have a relationship with Apple that goes beyond Fortnite.

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Fortnite users continue to make in-app purchases on iOS that bypass Apple's payment system: court filing says "Epic is stealing money from Apple"

Two weeks after Fortnite maker Epic Games brought a motion for judgment on the pleadings against some of Apple's counterclaims (particularly the ones that might give rise to punitive damages), Apple filed its opposition brief on Friday evening Pacific Time (this post continues below the document):

20-10-16 Apple's Opposi... by Florian Mueller

One of the disputed theories is called conversion, which Apple describes as follows:

"Stated simply, Epic is stealing money from Apple. Theft is a crime, and 'conversion' is its civil-law analogue. The victim of theft has always had the right to sue for conversion to get its property back from the thief—irrespective of the technical means by which the conversion is accomplished. If, for example, Epic sent an agent into Apple Park and stole cash from a vault, a conversion claim could properly be pleaded. If Epic hacked an Apple bank account and stole cash electronically, a conversion claim could properly be pleaded. And if Epic bypassed IAP to funnel funds that include Apple's revenues and commissions into Epic's coffers, a conversion claim can be—and has been—properly pleaded." (emphases added)

In yesterday's filing, Apple says it has the right to sue Epic not only for breach of contract but also for tort, given that Epic would face tort liability "if [t]c had never executed the contracts with Apple and had instead found another way to smuggle Fortnite and its 'hotfix' payment mechanism into the App Store." Apple argues that a company protecting itself against such behavior through contracts must not be in a weaker legal position than one that doesn't. What Apple does clarify is that it won't seek "multiplicative recovery" if the same conduct on Epic's part constituted both a breach of an agreement and fraud. In other words, Apple would then content itself with only the greater of the two alternative amounts.

It appears that the "hotfix" was just a simple data point on Epic's servers--not program code, but merely a trigger. When the iOS version of Fortnite checked on that data point, it offered an alternative payment mechanism to end users in circumvention of Apple's in-app payment rules.

After the "hotfix" that Apple says became Epic's hot mess, Fortnite was removed from the App Store. That means it cannot be downloaded to iOS devices right now, and Epic has already failed twice (with a motion for a temporary restraining order as well as a motion for a preliminary injunction) to get a court to force Apple to tolerate an iOS version of Fortnite that bypasses Apple's in-app payment system.

At least so far, Apple has not removed Fortnite from the devices of iOS users who downloaded it prior to its removal from the App Store. Those users can't get updates, and they wouldn't be able to reinstall Fortnite if they (the users) deleted it. But so far the battle royale game has remained on tens of millions of devices.

What I didn't know (because I didn't have Fortnite on any of my iOS devices when it was removed from the App Store) is that Epic continues to offer in-app purchases that bypass Apple's system. Yesterday's filing says the following:

"{...] Epic's refusal to deactivate its hotfix makes this a continuing tort, as Epic's bank accounts continue to grow daily with additional stolen amounts. While Epic has repudiated its contractual obligations through its lawsuit, and its claims will be tested in time, Epic's continued siphoning of sales from IAP is just theft, plain and simple."

"[...] Epic's acts of conversion continue to this day [...]"

"[...] Epic to this day is stealing definite, ascertainable sums of money from Apple, and the tort of conversion provides a civil remedy for such conduct."

"The amount stolen by Epic from Apple can be fixed with certainty; the fact that this amount increases with every day that Epic continues its wrongdoing does not relieve Epic of tort liability."

Epic had various reasons for sneaking that alternative payment system past Apple's review process. From an antitrust angle, Epic appears to believe that any purchase made by a user of Fortnite on iOS that bypasses Apple's payment system can later serve as proof that there is "demand" for such alternatives. Epic also wants to make the case for how such alternatives save end users money.

After Fortnite was removed from the App Store, Epic could simply have deactivated that trigger it calls a "hotfix" and resubmitted a version of Fortnite to Apple's app review that would have complied with Apple's rules. But Epic doesn't want to de-escalate. Instead, it takes the position that it's simply allowed to breach an agreement with Apple that Epic claims to be a violation of the antitrust laws and, therefore, illegal and unenforceable.

From the get-go, Epic has viewed its dispute with Apple as a combination of litigation and public relations. When Epic CEO Tim Sweeney declared war on Apple by way of a 2 AM email, he announced that the two companies would be in conflict "on a multitude of fronts – creative, technical, business, and legal" (and possibly "for many years"). By continuing to generate in-app purchasing revenues on iOS without Apple getting its contractual share, Epic demonstrates its determination to fight. But it can't necessarily count on support from the courts.

On Monday, Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California will hold a case management conference relating to multiple App Store antitrust cases pending before her.

Epic Games v. Apple is the highest-profile battle in the App Store Antitrust Wars, but far from the only one as my App Store Antitrust Battlemap shows (click on the image to enlarge):

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Epic Games acknowledges liability toward Apple for breach of contract with recent Fortnite version if Epic loses its antitrust case

As it had already announced a few days before, Epic Games brought its motion for judgment on the pleadings targeting some of Apple's counterclaims late on Friday by Pacific Time (this post continues below the document):

20-10-02 Epic Games Motion ... by Florian Mueller

The objective of this motion can be summed up as follows:

Epic Games wants this dispute to be only about what percentage of Fortnite in-app purchasing (IAP) revenues the app developer--Epic--and what complementary (100% minus the former) percentage the platform maker and operator--Apple--will get. Now, they're not actually asking the court to lower Apple's 30% cut, but they say they want to be permitted to offer alternative in-app payment methods and they want alternative iOS app stores to be allowed to compete with Apple's App Store, with the ultimative objective of bringing down that percentage. They furthermore claim that customers will get better service, but that's just because they want to show that consumers are harmed (a key issue in antitrust cases) in the sense of being deprived of certain benefits they could have if only Apple was less heavy-handed.

If, say, Epic served 50% of its customers directly, Apple would get its 30% only on the remaining 50%, resulting in an effective rate of 15%, which would already be pretty close to the 12% Epic is charging developers who offer their products via Epic's PC and Mac app store. In reality, Epic would presumably hope for Apple to simply reduce its 30% under such competitive pressure, thereby reducing or entirely eliminating any incentives for developers like Epic to deal with payment processing themselves.

The risk-opportunity picture would be quite appealing to Epic if the best case was a (potentially drastic) reduction of Apple's 30%, and the worst case would just be for Epic having to pay Apple what it owes under the current Apple developer contracts anyway, plus legal fees on top, which will quickly be in the tens of millions in this case, but that's just a rounding error on the balance sheet of the multi-billion-dollar business that is Epic.

Looking at it the other way, it would be an attractive gamble to spend tens of millions in hopes of saving billions in App Store commissions over the years. I mean, with such economics you might even attempt a long shot, especially if you believe (right or not) that you also benefit from it in terms of publicity for your products. (I actually see strong indications of both Epic and Apple believing they'll win this case as a matter of law when all is said and done; but I also get the impression of Epic founder, majority shareholder, and CEO Tim Sweeney being on a crusade and potentially hoping to immortalize himself as a digital freedom fighter in a way he never could by making and selling even extremely popular games and game engines.)

But Apple's counterclaims represent a Damocles sword over Epic's head that could make the worst-case scenario quite a bit more costly.

What Apple did was to accuse Epic of malicious and fraudulent conduct. On the one hand, Apple doesn't deny that Epic is in its right to challenge the legality of Apple's business terms (that, by the way, sets Apple apart from monopolists that impose "gag order" clauses on customers preventing them from bringing complaints with antitrust authorities, a tactic that Qualcomm has been accused of, or sports bodies like the International Olympic Committee and FIFA/UEFA as well as their national member associations, which leverage their monopoly power to force others to submit to binding arbitration over questions before arbitration tribunals staffed, stacked and controlled by the very same associations). On the other hand, what Apple does not accept--and that's the reason for its counterclaims--is for someone to sneak a hidden, undoubtedly contract-breaching functionality through Apple's app review.

Some of Apple's counterclaims are about Epic's conceded breach of contract. Even in Friday's motion, Epic makes an unequivocal admission:

"Epic does not prevail on its antitrust claims, then Epic would be liable for breach."

Epic wouldn't lose much money if the court held it liable for breach. But Epic might lose a lot more if liable for tort.

There are two reasons why the tort part of Apple's counterclaims poses a greater and not easily calculable risk to Epic:

• Apple is seeking punitive damages (a claim that Epic is trying to get rid of with Friday's motion). The idea of punitive damages is that they should deter certain conduct, even if it means that the defendant (here, Epic is the defendant to the counterclaims) ends up paying much more than the actual damage it caused.

• If at some point--possibly after multiple rounds of litigation--the focus was on what damage Epic caused Apple, the numbers wouldn't be limited to some percentage of Fortnite's iOS revenues but the starting point for that further discussion would be the ginormous value of the App Store and of Apple's customer relationships. (Obviously, it's not like Epic destroyed the App Store as a whole, but Apple can argue that the lost goodwill etc. far exceeds the revenues Epic might have generated by breaking the rules; it's like if a compact car has an accident with a Ferrari, the damage to the latter can get costly with no regard to the value of the former.)

One of Apple's tort claims, called conversion (interference with someone else's property), will be hard to defend as Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California already indicated in Monday's hearing. That's why it's not worth analyzing in more detail, unless Apple's efforts to keep that claim alive unexpectedly get traction.

But Epic is also tackling another tort counterclaim: intentational interference with prospective economic advantage. The short form would be "tortious interference."

In order to persuade the court to dispose of the tortious-interference counterclaim, Epic makes some points, which aren't all equally persuasive:

• Epic says that what it did, by offering an alternative payment system, was just a breach of contract, and tortious interference is not meant to deal with a breach of a contractual duty. This one looks weak. It's not like the existence of a contract between parties constitutes a safe harbor, just like fraud can happen even if there's a contract in place. Epic points to case law where the "breach" was actually just a termination or non-performance of a contract--but nothing like what happened here, starting with Epic sneaking some hidden functionality past Apple's App Store review team.

• Epic also argues that it didn't prevent any users of the iOS version of Fortnite from doing business with Apple, as Apple's IAP option was still offered, with just an option to bypass it, which roughly half of those users elected to do.

• Epic insists that Fortnite users aren't "third-party strangers" to the Apple-Epic relationship as they're Epic's customers, too, and not just Apple's.

  How the court views this one could also have implications for the antitrust claims.

The court will presumably decide next month. If the tortious-interference counterclaims survives this motion, Epic will continue to face the risk of punitive damages I outlined above.

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