Court throws out tort-based part of Apple's counterclaims against Epic Games

Epic Games just reduced the potential risk it incurs from its antitrust dispute with Apple over its App Store business terms: Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California granted an Epic motion for judgment on the pleadings on some of Apple's counterclaims. As a result, Apple's counterclaims (unless an appeals court revives the ones the judge just threw out) are limited to breach of contract, which Epic already acknowledged in October it would be liable for should it lose its antitrust case against Apple. Punitive damages, which Apple was seeking, are not available on this basis, so they won't have to be discussed at next year's trial.

The court viewed the tort-based ones of Apple's counterclaims skeptically from the beginning. Nevertheless, Apple defended them, presumably in an effort to preserve them for an appeal.

What Judge Gonzalez Rogers told Apple today was that the iPhone maker had not shown any independently wrongful act on Epic's part beyond a breach of contract. Apple had stressed that "independently wrongful" doesn't mean it's an independent act, but that it would be wrongful even if it happened without a contractual framework being present. And in this regard, Apple pointed out that Epic's generation of in-app purchasing revenue on iOS continues even though the related contract was terminated in the summer. But that didn't persuade the judge. At the end of the Zoom hearing (Tuesday afternoon by Pacific Time) she announced her decision to grant the motion.

This decision is unrelated to the heart of the dispute, which is that Epic disputes the legality and enforceability of Apple's App Store terms under the antitrust laws. Judge Gonzalez Rogers said in August that the case could go either way, and the order on Epic's motion for judgment on the pleadings doesn't increase the likelihood of any particular outcome on the core issues in the case.

[Update]

A couple of hours after the hearing, Apple provided the following public statement:

"We respectfully disagree with the Court’s decision and believe Epic's conduct should be actionable under California tort law. It is clear, however, that Epic breached its contract with Apple. For twelve years, the App Store has helped developers turn their brightest ideas into apps that change the world. Our priorities have always been to provide customers with a safe and trusted place to download software and to apply the rules equally to all developers. In ways the Court described as deceptive and clandestine, Epic enabled a feature in its app which was not reviewed or approved by Apple, and they did so with the express intent of violating the App Store guidelines that apply equally to every developer who sells digital goods and services. Their reckless behavior made pawns of customers, and we look forward to making it right for them in court next May.

"Apple also thanks the Court for providing next generation attorneys the opportunity to argue a motion. We fully support this important policy that gives newer lawyers and those from underrepresented groups meaningful experience in court."

The young attorneys who delivered oral argument were Cravath's John I. Karin and Gibson Dunn's Anna Casey. Given the court's preconceived notion on this subject, I don't think oral argument made a difference. What was very clever on Mr. Karin's part was that at some point he preferred not to add anything to the court's preliminary opinion, which was already favorable to his client's position. So instead of trying to get the most out of this opportunity to practice, he opted for the safest and smartest path.

Apple's statement suggests to me between the lines that they will appeal yesterday's judgment on the pleadings after next year's trial.

[/Update]

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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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Epic Games announces motion for judgment on the pleadings to dispose of some of Apple's counterclaims, and both parties prefer bench trial

There have been further filings since the Epic Games v. Apple preliminary injunction on Monday (which didn't go too well for Epic), and two of them are worth reporting and commenting on.

Let's start with the shorter and simpler one. Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California had said on Monday (part of the hearing was about case management) that she didn't like the idea of having to try two cases between these parties only because one requested a jury trial on its claims (which Apple did with respect to its counterclaims) while the other (Epic) did not. The federal judge would actually have preferred a jury trial as I explained in my report on the PI hearing.

There were three possibilities: the parties could have agreed on a jury trial (which appeared most likely because it would have been the judge's preference); the parties could have disagreed (which would have entailed some bidirectional fingerpointing); but what appeared least likely actually happened, and the parties now both want a bench--not jury--trial (this post continues below the document):

20-09-29 Epic Games & A... by Florian Mueller

In order to enable this, Apple has to withdraw its request for a jury trial, which it does with Epic's consent.

It's highly speculative why this surprising choice was made. While Apple's in-house litigation department has hugely more experience with high-stakes commercial disputes than Epic, outside counsel for both parties is well-matched. It's just a gut feeling, but this looks like one of the cases in which both parties believe very strongly they're going to win--not the kind of case where a plaintiff has that strong belief but the defendant is trying a long shot and stalling, or where a plaintiff attempts a crapshoot (which often happens in patent cases).

The way the Monday hearing went might have made Apple reasonably comfortable with leaving such determinations as market definition to Judge Gonzalez Rogers (whose reference to a wider games distribution market and whose skepticism regarding Epic's tying claim suggest she may, at least for now, be more inclined to side with Apple on market definition)--and Epic never wanted a jury involved, probably because Apple has more fans, especially in the Bay Area, than the Fortnite maker.

The other filing to discuss here is Epic's answer to Apple's counterclaims (this post continues below the document):

20-09-29 Epic Games' An... by Florian Mueller

That answer is reasonably focused and not an outright attempt to capitalize on the sequence of events (first the PI hearing, then the deadline for the answer to the counterclaims) in order to file a de facto post-hearing PI brief.

The most interesting procedural information is that Epic "will soon move the Court (pursuant to Federal Rule of Civil Procedure 12(c)) for judgment on Apple's tort claims and on Apple's claim based on the implied covenant of good faith and fair dealing, which fail as a matter of law." If that motion succeeded, there would still be some contractual and competition counterclaims.

An FRCP 12(c) motion is a motion for judgment on the pleadings. It can be brought when pleadings are complete, but before discovery, and without delaying a trial. It's easily confused for a motion to dismiss for failure to state a claim upon which relief can be granted (FRCP 12(b)(6)), but is actually closer to a summary judgment motion. Judgment on the pleadings is possibly only if no material fact is in dispute. Apart from conversion, a theory Judge Gonzalez Rogers said she'd throw out anyway, Apple will presumably defend the counterclaims to be challenged by Epic and will argue that there are material facts in dispute. Epic will then have to convince the court that there is no real dispute, or that the disputed facts aren't material.

In Epic's parallel litigation against Google over the Google Play Store, Epic will soon have to defend its claims against a motion.

Epic's preliminary statement to its defenses against Apple's counterclaims contains a passage that accuses Apple of inconsistent treatment of app developers:

"Epic does not dispute that this competing payment solution was prohibited by contractual provisions that Apple has unlawfully forced on developers like Epic who sell in-app digital content, even though Apple allows numerous other app developers to use competing solutions. Epic also does not dispute that, if Apple's contracts were lawful, all in-app purchases made by Fortnite users on iOS would be subject to Apple's 30% tax, even though Apple has exempted numerous other developers from this tax." (emphases added, except for "Fortnite")

It's key to understand that discriminatory treatment under antitrust law does not mean that there can'be any differences. Treating two parties differently is only discriminatory if there's no justification for doing so, and it can, in fact, even be an antitrust violation to treat two parties the same if different treatment would be warranted. If Apple collected a 30% commission on an Amazon sale of physical goods, it would appear at first sight to treat Amazon the same way as Epic, but structural economic differences between the two types of transactions would raise serious questions.

As for Epic's 28 defenses (throwing in the kitchen sink just like Apple did before), Epic obviously argues once again that Apple's App Store terms are anticompetitive, illegal, and unenforceable. There's one defense, however, that I really find absurd: Epic's 9th defense says that Apple ratified, agreed to, acquiesced in, or consented to (all of which comes down to saying that Apple appeared OK with something) "Epic's alleged conduct, including based on, without limitation, [...] Apple's longstanding acceptance of the hotfix process [...]"

Epic can't be serious about Apple's acceptance of unharmful hotfixes precluding Apple in any way from taking action against an outright breach of its in-app payment provision. Epic's "hotfix" here was just that the server told the client (the Fortnite app) to activate a certain feature that had been hidden from Apple. It wasn't a "fix" or a simple addition of content such as another island on which to have a battle royale. It was simply the remote activation of something that Epic itself says, in the document shown above, "was prohibited by contractual provisions."

Finally, the 28th defense indicates Epic will hold positions taken by Apple "in prior court actions" against Apple in this one, as it "cannot take contrary positions in this litigation." I'm curious at to what this means. Potentially Epic's lawyers, some of whom previously represented Qualcomm against Apple (and the Federal Trade Commission), believe Apple said something in the dispute with Qualcomm that runs counter to what it's saying now when defending itself against Epic.

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