Epic Games, Inc. v. Apple, Inc.Epic Games, Inc. v. Apple, Inc.
- Reporters:
- Before:
- Sidney R. Thomas, Milan D. Smith Jr., Michael J. Mcshane
Antitrust
The panel affirmed in part and reversed in part the district court‘s judgment, after a bench trial, against Epic Games, Inc., on its Sherman Act claims for restraint of trade, tying, and monopoly maintenance against Apple, Inc.; in favor of Epic on its claim under California‘s Unfair Competition Law; against Epic on Apple‘s claim for breach of contract; and against Apple on its claim for attorney fees. The panel affirmed except for the district court‘s ruling respecting attorney fees, where it reversed and remanded for further proceedings.
On Epic‘s appeal, the panel affirmed the district court‘s denial of antitrust liability and its corresponding rejection of Epic‘s illegality defense to Apple‘s breach of contract counter-claim. The panel held that the district court erred as a matter of law in defining the relevant antitrust market and in holding that a non-negotiated contract of adhesion, such as the DPLA, falls outside the scope of
On Apple‘s cross-appeal, the panel affirmed as to the district court‘s UCL ruling in favor of Epic, holding that the district court did not clearly err in finding that Epic was injured, err as a matter of law when applying California‘s flexible liability standards, or abuse its discretion when fashioning equitable relief. Reversing in part, the panel held that the district court erred when it ruled that Apple was not entitled to attorney fees pursuant to the DPLA‘s indemnification provision.
Concurring in part and dissenting in part, Judge S.R. Thomas wrote that he fully agreed with the majority that the district court properly granted Epic injunctive relief on its California UCL claims. Judge S.R. Thomas also fully agreed that the district court properly rejected Epic‘s illegality defenses to the DPLA but that, contrary to the district court‘s decision, the DPLA did require Epic to pay attorney fees for its breach. On the federal claims, Judge S.R. Thomas also agreed that the district court erred in defining the relevant market and erred when it held that a non-negotiated contract of adhesion falls outside the scope of
M. SMITH, Circuit Judge:
Epic Games, Inc. sued Apple, Inc. pursuant to the Sherman Act,
After a sixteen-day bench trial involving dozens of witnesses and nine hundred exhibits, the district court rejected Epic‘s Sherman Act claims challenging the first and second of the above restrictions—principally on the factual grounds that Epic failed to propose viable less restrictive alternatives to Apple‘s restrictions. The court then concluded that the third restriction is unfair pursuant to the UCL and enjoined Apple from enforcing it against any developer. Finally, it held that Epic breached a contract with Apple but was not obligated to pay Apple‘s attorney fees. Epic appeals the district court‘s Sherman Act and breach of contract rulings; Apple cross-appeals the district court‘s UCL and attorney fees rulings. We affirm the district court, except for its ruling respecting attorney fees, where we reverse and remand for further proceedings.
I. The Parties
Apple is a multi-trillion-dollar technology company that, of particular relevance here, sells desktop and laptop computers (Macs), smartphones (iPhones), and tablets (iPads). In 2007, Apple entered, and revolutionized, the smartphone market with the iPhone—offering consumers, through a then-novel multi-touch interface, access to email, the internet, and several preinstalled “native” apps that Apple had developed itself. Shortly after the iPhone‘s debut, Apple decided to move on from its native-apps-only approach and open the iPhone‘s (and later, the iPad‘s) operating system (iOS) to third-party apps.1
This approach created a “symbiotic” relationship: Apple provides app developers with a substantial consumer base, and Apple benefits from increased consumer appeal given the ever-expanding pool of iOS apps. Apple now has about a 15% market share in the global smartphone market with over 1 billion iPhone users, and there are over 30 million iOS app developers. Considering only video game apps, the number of iOS games has grown from 131 in the early days of the iPhone to over 300,000 by the time this case was brought to trial. These gaming apps generate an estimated $100 billion in annual revenue.
Despite this general symbiosis, there is periodic friction between Apple and app developers. That is because Apple, when it opened the iPhone to third-party developers, did not
Epic is a multi-billion-dollar video game company with three primary lines of business, each of which figures into various aspects of the parties’ appeals. First, Epic is a video game developer—best known for the immensely popular Fortnite, which has over 400 million users worldwide across gaming consoles, computers, smartphones, and tablets. Epic monetizes Fortnite using a “freemium” model: The game is free to download, but a user can purchase certain content within the game, ranging from game modes to cosmetic upgrades for the user‘s character. Fortnite is also notable as one of the first major video games to feature “cross-play,” “cross-progression,” and “cross-wallet.” Cross-play permits users on different platforms to play with one another. Smartphone users, for example, can play against friends on gaming consoles. Cross-progression allows users to retain their in-game progress across every device they own. Users
Second, Epic is the parent company of a gaming-software developer. Epic International (a Swiss subsidiary) licenses Unreal Engine to game developers. Unreal Engine offers developers a suite of tools to create three-dimensional content; in return, Epic International receives 5% of a licensee‘s gross revenue from a product developed using Unreal Engine after that product generates $1,000,000 in revenue. Although Unreal Engine is not on Apple‘s App Store, Epic International does offer several complementary apps there. Unreal Remote and Live Link Face, for example, allow users to capture live-action footage and then view it on Unreal Engine. Thus, Epic—through its subsidiary—continues to be affected by the policies that govern the App Store.
Third, Epic is a video game publisher and distributor. It offers the Epic Games Store as a game-transaction platform on PC computers and Macs and seeks to do the same for iOS devices. As a distributor, Epic makes a game available for download on the Epic Games Store and covers the direct costs of distribution; in exchange, Epic receives a 12% commission—a below-cost commission that sacrifices short-term profitability to build market share. The Epic Games Store has over 180 million registered accounts and over 50 million monthly active users. Through the Epic
II. The Developer Program Licensing Agreement
Apple creates its walled-garden ecosystem through both technical and contractual means. To distribute apps to iOS users, a developer must pay a flat $99 fee and execute the Developer Program Licensing Agreement (DPLA). The DPLA is a contract of adhesion; out of the millions of registered iOS developers, only a handful have convinced Apple to modify its terms.
By agreeing to the DPLA, developers unlock access to Apple‘s vast consumer base—the over 1 billion users that make up about 15% of global smartphone users. They also receive tools that facilitate the development of iOS aps, including advanced application-programming interfaces, beta software, and an app-testing software. In essence, Apple uses the DPLA to license its IP to developers in exchange for a $99 fee and an ongoing 30% commission on developers’ iOS revenue.
The DPLA contains the three provisions that give rise to this lawsuit and were mentioned in the introduction. First, developers can distribute iOS apps only through the App Store (the distribution restriction). Epic Games, for example, cannot make the Epic Games Store available as an iOS app and then offer Fortnite for download through that app. Second, developers must use Apple‘s IAP to process in-app payments (the IAP requirement). Both initial downloads (where an app is not free) and in-app payments are subject to a 30% commission. Third, developers cannot communicate out-of-app payment methods through certain
III. Apple and Epic‘s Business Relationship
In 2010, Epic agreed to the DPLA. Over the next few years, Epic released three games for iOS, each of which Apple promoted at major events. In 2015, however, Epic began objecting to Apple‘s walled-garden approach. Epic‘s CEO Tim Sweeney argued, in an email seeking a meeting with Apple senior leadership, that it “doesn‘t seem tenable for Apple to be the sole arbiter of expression and commerce” for iOS users, and explained that Epic runs a competing game-transaction platform that it “would love to eventually” offer on iOS. Nothing came of this email, and Epic continued to offer games on iOS while complying with the DPLA‘s terms. In 2018, Epic released Fortnite on iOS—amassing about 115 million iOS users.
In 2020, Epic renewed the DPLA with Apple but sought a “side letter” modifying its terms. In particular, Epic desired to offer iOS users alternatives for distribution (the Epic Games Store) and in-app payment processing (Epic Direct Pay). Apple flatly rejected this offer, stating: “We understand this might be in Epic‘s financial interests, but Apple strongly believes these rules are vital to the health of the Apple platform and carry enormous benefits for both consumers and developers. The guiding principle of the App Store is to prove a safe, secure, and reliable experience for users . . . .”
On the IAP-circumvention side, Epic submitted a Fortnite software update (which Epic calls a “hotfix“) to Apple for review containing undisclosed code that, once activated, would enable Fortnite users to make in-game purchases without using Apple‘s IAP. Unaware of this undisclosed code, Apple approved the update and it was made available to iOS users. Shortly thereafter Epic activated the undisclosed code and opened its IAP alternative to users. That same day, Apple became aware of the hotfix and removed Fortnite from the App Store. Apple informed Epic that it had two weeks to cure its breaches of the DPLA, or otherwise Apple would terminate Epic Games’ developer account.
A. Pre-Trial Proceedings
Only three days after Apple removed Fortnite from the App Store, Epic filed a 62-page complaint against Apple in the Northern District of California seeking a temporary restraining order (TRO) reinstating Fortnite and enjoining Apple from terminating Epic‘s iOS developer account.3 The district court granted Epic‘s prayer in part and denied in part—leaving Fortnite off the App Store but temporarily preventing Apple from taking any adverse action regarding Epic‘s developer account. After the TRO expired, Apple terminated Epic‘s developer account. The court then issued a preliminary injunction preventing Apple from terminating the developer accounts of Epic‘s subsidiaries (including Epic International) and scheduled a bench trial on an expedited basis, with trial beginning just about eight months after Epic filed its complaint.
Epic brought claims for permanent injunctive relief pursuant to the Sherman Act and the UCL. Epic‘s requested relief, though somewhat vague, would essentially convert iOS into an entirely open platform: Developers would be free to distribute apps through any means they wish and use any in-app payment processor they choose. Taken together, this relief would create a pathway for developers to bypass Apple‘s 30% commission altogether, though Epic made open-ended assurances at trial that its relief would allow
B. The District Court‘s Rule 52 Order
After a sixteen-day bench trial, the district court issued a 180-page order pursuant to Federal Rule 52 detailing its findings of facts and conclusions of law.
1. Market Definition
The district court began its analysis by defining the relevant market for Epic‘s Sherman Act claims. Epic proposed two single-brand markets: the aftermarkets for iOS app distribution and iOS in-app payment solutions, derived from a foremarket for smartphone operating systems. Apple, by contrast, proposed the market for all video game transactions, whether those transactions occur on a smartphone, a gaming console, or elsewhere. The district court ultimately found a market between those the parties proposed: mobile-game transactions—i.e., game transactions on iOS and Android smartphones and tablets. Compared to Epic‘s proposed aftermarkets, the district court‘s relevant market was both broader and narrower—broader in that it declined to focus exclusively on iOS, but narrower in that it considered only video game transactions instead of all app transactions. Compared to Apple‘s proposed market, the district court‘s relevant market was
The district court rejected Epic‘s proposed single-brand markets on several grounds. It held that there was no foremarket for smartphone and tablet operating systems because Apple does not license or sell iOS. More critically, it analyzed Epic‘s aftermarkets in the alternative and found a failure of proof. Epic presented no evidence regarding whether consumers unknowingly lock themselves into Apple‘s app-distribution and IAP restrictions when they buy iOS devices. A natural experiment facilitated by Apple‘s removal of Fortnite from the App Store showed that iOS Fortnite users switched about 87% of their pre-removal iOS spending to other platforms—suggesting substitutionality between the App Store and other game-transaction platforms. The district court also rejected Apple‘s relevant market-definition expert as “weakly probative” and “more interested in a result [that] would assist his client than in providing any objective ground to assist the court in its decision-making” (cleaned up). Among other flaws, the expert‘s analysis contradicted his own academic articles on how to analyze two-sided markets; used consumer-survey wording that departed from well-established market-definition principles; failed to account for holiday-season idiosyncrasies; and excluded minors (who are an important segment of mobile-game purchasers). The district court then turned to Apple‘s proposed relevant market definition and refined it from all game transactions to mobile game transactions by relying extensively on the “practical indicia” of markets enumerated in the Supreme Court‘s decision in Brown Shoe v. United States, 370 U.S. 294, 325 (1962).
The district court then rejected Epic‘s Sherman Act Section 1 restraint-of-trade-claim. As a threshold matter, the court held that the DPLA was not a “contract[]” that fell within the scope of Section 1 because it was a “contract of adhesion,” not a truly bargained-for agreement. It then, in the alternative, applied the Rule of Reason—the antitrust liability standard applicable to most cases.
At step one of the Rule of Reason, the district court found that Epic proved substantial anticompetitive harms through both direct and indirect evidence. Apple has for years charged a supracompetitive commission on App Store transactions that it set “without regard” for competition. That commission, in turn, creates an “extraordinary high” operating margin of 75% for App Store transactions. Moreover, Apple has market power in the mobile-games-transactions market, evidenced by its 52 to 57% market share and barriers to entry in the form of network effects. Apple uses that market power to prevent would-be competitors like Epic from offering app-distribution and payment-processing alternatives, reducing innovation and Apple‘s own investment in the App Store in the process.
At step two of the Rule of Reason, the district court found that Apple established non-pretextual, legally cognizable procompetitive rationales for its app-distribution and IAP restrictions. The district court credited Apple‘s rationale that its restrictions seek to enhance consumer appeal and differentiate Apple products by improving iOS security and privacy. It also partially accepted Apple‘s rationale that the restrictions are a means of being compensated for third-party developers’ use of its intellectual property—crediting it generally but rejecting it
At step three of the Rule of Reason, the district court rejected Epic‘s proposed less restrictive alternatives (LRAs) as severely underdeveloped. As a purported LRA to Apple‘s app-distribution restriction, Epic primarily advanced a “notarization model” based on Apple‘s approach to security on the Mac operating system (macOS). On macOS, Apple does not mandate an exclusive distribution channel, as it does on iOS; nor does Apple condition distribution of an app on first submitting that app to Apple for review. But when a developer chooses to forego submitting an app to Apple, that app—regardless of how it is distributed to Mac users—will carry a warning that Apple has not scanned it for malware. Critically, the macOS notarization model does not contain a layer of human review as iOS app review does. Given this discrepancy, the district court found that such a model would not be as effective as Apple‘s current model in achieving Apple‘s security and privacy goals. It briefly considered whether Apple could close the gap by imposing a security and privacy floor on third-party app stores, but then noted that it is unclear whether doing so would comport with Epic‘s requested injunctive relief. In any event, the court found that Epic failed to prove the notarization model would accomplish Apple‘s IP-compensation rationale because Epic‘s requested relief “leave[s] unclear whether Apple can collect licensing fee royalties and, if so, how it would do so.”
As a purported LRA for the IAP requirement, Epic proposed opening in-app payment processing to competing vendors. The district court again rejected the proposed LRA as not being as effective as Apple‘s current model in accomplishing its security and privacy goals. More
3. Sherman Act Section 1: Tying
The district court rejected Epic‘s Sherman Act claim that Apple ties in-app payment processing (IAP) to app distribution (the App Store). It did so on the grounds that neither of the purported separate products were actually separate. As a result, it did not decide which liability standard—per se condemnation or the Rule of Reason—would govern the arrangement‘s lawfulness.
4. Sherman Act Section 2: Monopoly Maintenance
The district court also rejected Epic‘s claim that Apple monopolized the market for mobile-games transactions. Though Apple has significant market power, the court found it to be insufficiently durable given the rapidly changing nature of the market. In any event, the court reiterated its Rule of Reason analysis to hold that Apple did not maintain its power through anticompetitive conduct.
The court then applied the UCL to Apple‘s anti-steering provision. The court found that Epic is sufficiently injured to seek injunctive relief because Epic is a competing games distributor and would earn additional revenue but for Apple‘s restrictions. On the merits, the court applied the competitor-suit “tethering test” and consumer-suit “balancing test” and found the anti-steering provision to be “unfair” pursuant to both. The court concluded that Epic satisfied all the requirements for injunctive relief and the nature of Epic‘s injury warranted an injunction preventing Apple from enforcing the provision against any developer.
6. Breach of Contract
Turning to Apple‘s counter-claims, the district found Epic liable for breach of the DPLA. Epic had stipulated that the Project Liberty hotfix breached the DPLA‘s IAP requirement, so the only dispute was whether Epic could prove that the contract was illegal, void as against public policy, or unconscionable. The district court rejected each of these affirmative defenses.
7. Attorney Fees
Finally, the district court rejected Apple‘s indemnification claim, which asserted Epic was obligated to pay its attorney fees incurred in this litigation. The DPLA provides that Epic “agree[s] to indemnify and hold harmless [Apple] . . . from any and all claims, losses, liabilities, damages, taxes, expenses and costs, including without limitation, attorneys’ fees and court costs . . . , incurred by [Apple] and arising from or related to” Epic‘s “breach of any certification, covenant, obligation, representation or warranty in [the DPLA].” Applying a principle of California
C. Post-Trial Proceedings
Following the handing down of the district court‘s order, the parties timely appealed and cross-appealed. Apple also moved to stay the UCL injunction pending appeal—arguing that Epic lacked standing in light of its developer account termination and that injunctive relief was inappropriate. The district court denied the motion and a panel of our court granted it in part.
JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction pursuant to
ANALYSIS
On appeal, Epic challenges the district court‘s Sherman Act and breach of contract rulings. We affirm the district court‘s denial of antitrust liability and its corresponding rejection of Epic‘s illegality defense to Apple‘s breach of contract counter-claim. Though the district court erred as a matter of law on several issues, those errors were harmless. Independent of the district court‘s errors, Epic failed to establish—as a factual matter—its proposed market definition and the existence of any substantially less restrictive alternative means for Apple to accomplish the
On cross-appeal, Apple challenges the district court‘s UCL and attorney fees rulings. We affirm in part and reverse and remand in part. The district court did not clearly err in finding that Epic was injured, err as a matter of law when applying California‘s flexible liability standards, or abuse its discretion when fashioning equitable relief. The district court did, however, err when it held that Apple was not entitled to attorney fees pursuant to the DPLA‘s indemnification provision.
I. Market Definition
We begin with Epic‘s appeal. Epic argues that the district court incorrectly defined the relevant market for its antitrust claims to be mobile-game transactions instead of Epic‘s proposed aftermarkets of iOS app distribution and iOS in-app payment solutions. Epic contends both that the district court erred as a matter of law by requiring several threshold showings before finding a single-brand market and that, once those errors are corrected, the record compels the conclusion that Epic established its single-brand markets. We agree that the district court erred in certain aspects of its market-definition analysis but conclude that those errors were harmless. Despite some threshold errors, the district court proceeded to analyze Epic‘s evidence pursuant to the proper legal framework and did not clearly err in rejecting Epic‘s proposed relevant markets. In particular, Epic failed to produce any evidence showing—as our precedent requires—that consumers are generally unaware of Apple‘s app-distribution and IAP restrictions when they purchase iOS devices.
The Sherman Act contains two principal prohibitions. Section 1 targets concerted action, rendering unlawful “every contract, combination . . . , or conspiracy, in restraint of trade.”
There are two general categories of liability standards for Sherman Act claims. Flaa v. Hollywood Foreign Press Ass‘n, 55 F.4th 680, 685 (9th Cir. 2022). “A small group of restraints are unreasonable per se because they ‘always or almost always tend to restrict competition and decrease output.‘” Id. (quoting Ohio v. Am. Express Co. (”Amex“), 138 S. Ct. 2274, 2283 (2018)). When a per se prohibition applies, we deem a restraint unlawful without any “elaborate study of the industry” in which it occurs. Id. (quoting Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006)). Most
The Rule of Reason applies “essentially the same” regardless of “whether the alleged antitrust violation involves concerted anticompetitive conduct under § 1 or independent anticompetitive conduct under § 2.” FTC v. Qualcomm Inc., 969 F.3d 974, 991 (9th Cir. 2020); see also Flaa, 55 F.4th at 685 (“Because the legal tests for sections 1 and 2 of the Sherman Act similar, we can ‘review claims under each section simultaneously.‘” (quoting Qualcomm, 969 F.3d at 991)).
In most, though not all, Rule of Reason cases, a “threshold step” is defining the relevant market in which the alleged restraint occurs. Qualcomm, 969 F.3d at 992; see also Amex, 138 S. Ct. at 2285 (“[C]ourts usually cannot properly apply the rule of reason without an accurate definition of the relevant market.“).6 Because Epic asserts
The relevant market for antitrust purposes is “the area of effective competition“—i.e., “the arena within which significant substitution in consumption or production occurs.” Amex, 138 S. Ct. at 2285 (quoting Phillip E. Areeda & Herbert Hovenkamp, Fundamentals of Antitrust Law § 5.02 (4th ed. 2017)); see also Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997) (“The relevant market is the field in which meaningful competition is said to exist.“). A relevant market contains both a geographic component and a product or service component. Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1120 (9th Cir. 2018).
A market comprises “any grouping of sales whose sellers, if unified by a monopolist or a hypothetical cartel” could profitably raise prices above a competitive level. Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995). If the “sales of other producers [could] substantially constrain the price-increasing ability of the monopolist or hypothetical cartel, these other producers must be included in the market.” Id. To conduct this inquiry, courts must determine which products have a “‘reasonable interchangeability of use’ or sufficient ‘cross-elasticity of demand‘” with each other. Hicks, 897 F.3d at 1120 (quoting Brown Shoe, 370 U.S. at 325); see also United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 400 (1956) (emphasizing “the responsiveness of the sales of one product to price changes of [another]“).
Often, this inquiry involves empirical evidence in the form of a “SSNIP” analysis. That analysis echoes Rebel Oil and uses past consumer-demand data and/or consumer-survey responses to determine whether a hypothetical monopolist could profitably impose a Small, Significant, Non-transitory Increase in Price above a competitive level. As we have previously summarized this analysis:
[A]n economist proposes a narrow geographic and product market definition and then iteratively expands that definition until a hypothetical monopolist in the proposed market would be able to profitably make a small but significant non-transitory increase in price (“SSNIP“). At each step, if consumers would respond to a SSNIP by making purchases outside the proposed market definition, thereby rendering the SSNIP unprofitable, then the proposed market definition is too narrow. At the next step, the economist expands the proposed geographic or product market definition to include the substituted products or area. This process is repeated until a SSNIP in the proposed market is predicted to be profitable for the hypothetical monopolist.
Optronic Techs., Inc. v. Ningbo Sunny Elec. Co., 20 F.4th 466, 482 n.1 (9th Cir. 2021). SSNIP analyses are relevant to
Courts also consider several “practical indicia” that the Supreme Court highlighted in Brown Shoe: “[1] industry or public recognition of the [market] as a separate economic entity, [2] the product‘s peculiar characteristics and uses, [3] unique production facilities, [4] distinct customers, [5] distinct prices, [6] sensitivity to price changes, and [7] specialized vendors.” Brown Shoe, 370 U.S. at 325; Olin Corp. v. FTC, 986 F.2d 1295, 1299 (9th Cir. 1993) (invoking Brown Shoe indicia); see also Areeda & Hovenkamp, Antitrust Law, supra, ¶ 533 (describing these indicia as having “evidentiary usefulness” in determining cross-elasticity of demand).
B. Single-Brand Aftermarkets
“[I]n some instances one brand of a product can constitute a separate market.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 482 (1992); see also Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1048 (9th Cir. 2008) (“[T]he law permits an antitrust claimant to restrict the relevant market to a single brand of the product at issue[.]“). More specifically, the relevant market for antitrust purposes can be an aftermarket—where demand for a good is entirely dependent on the prior purchase of a durable good in a foremarket.
In Kodak, the Supreme Court considered the question of whether a lack of market power in the foremarket (photocopier machines, generally) categorically precludes a finding of market power in the aftermarket (replacement parts for and servicing of Kodak-brand photocopiers), which Kodak had allegedly achieved by contractually limiting customers to Kodak-provided parts and services. 504 U.S. at 455, 466. The Supreme Court rejected Kodak‘s invitation to impose an across-the-board rule because it was not convinced that the rule—which “rest[ed] on a factual assumption about the cross-elasticity of demand” in aftermarkets—would always hold true. Id. at 470. The Supreme Court thus folded aftermarkets into the framework for assessing markets generally, evaluating cross-elasticity of demand to determine whether a hypothetical monopolist could profitably charge a supracompetitive price. See id. at 469 (“The extent to which one market prevents exploitation of another market depends on the extent to which consumers will change their consumption of one product to a price change in another, i.e., the ‘cross-elasticity of demand.‘” (quoting Du Pont, 351 U.S. at 400)).
Explaining its skepticism of the factual assumption underlying Kodak‘s proposed categorical rule, the Court reasoned that “significant” (1) information costs and (2) switching costs “could create a less responsive connection between aftermarket prices and [foremarket] sales,” particularly where the percentage of “sophisticated
In Newcal, we considered how to square Kodak with our prior holding in Forsyth that contractual obligations are generally “not a cognizable source of market power.” Newcal, 513 F.3d at 1047 (citing Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 2017)). We reasoned that the “critical distinction” between Kodak, on the one hand, and Forsyth, on the other, is that “the Kodak customers did not knowingly enter a contract that gave Kodak the exclusive right to prove parts and services for the life of the equipment.” Id. at 1048. Put otherwise, the “simple purchase of a Kodak-brand equipment” was not “functionally equivalent to the signing of a contractual agreement” limiting aftermarket choices. Id.; see also id. at 1049 (“[T]he law permits an inquiry into whether a consumer‘s selection of a particular brand in the competitive
Our knowledge-based distinction in Newcal flowed directly from the Supreme Court‘s emphasis in Kodak on a defendant‘s ability to use not “generally known” aftermarket restrictions to exploit unsophisticated consumers. Kodak, 504 U.S. at 477 n.24. And, as in Kodak, we made sure to emphasize that the aftermarkets inquiry does not end as soon as a plaintiff checks the Kodak-based boxes related to consumer knowledge, information costs, and switching costs. “Even when a submarket is an Eastman Kodak market, though, it must bear the ‘practical indicia’ of an independent economic entity in order to qualify as a cognizable submarket under Brown Shoe.” Newcal, 513 F.3d at 1051.
In sum, to establish a single-brand aftermarket, a plaintiff must show: (1) the challenged aftermarket restrictions are “not generally known” when consumers make their foremarket purchase; (2) “significant” information costs prevent accurate life-cycle pricing; (3) “significant” monetary or non-monetary switching costs exist; and (4) general market-definition principles regarding cross-
C. Standard of Review
“We review relevant market definitions as fact findings reversible only if the evidence compels a conclusion contrary to the [factfinder‘s] verdict.” Optronic, 20 F.4th at 482; see also Saint Alphonsus, 778 F.3d at 784 (finding “no clear error” in the district court‘s market definition). Where a plaintiff asserts a Kodak-style single-brand aftermarket, it bears the burden of “rebut[ting] the economic presumption that . . . consumers make a knowing choice to restrict their aftermarket options when they decide in the initial (competitive) market to enter a[] . . . contract.” Newcal, 513 F.3d at 1050.
D. Epic‘s Legal Challenges
With these principles in mind, we now turn to Epic‘s arguments that the district court committed legal error when it (1) held a market can never be defined around a product that the defendant does not license or sell, (2) required lack of consumer awareness to establish a Kodak-style market, (3) purportedly required a change in policy to establish a Kodak-style market, and (4) required Epic to establish the “magnitude” of switching costs. We agree with Epic on its first argument and, to the extent the district court did impose
1. Unlicensed or Unsold Product Markets
First, the district court erred by imposing a categorical rule that an antitrust market can never relate to a product that is not licensed or sold—here smartphone operating systems. To begin, this categorical rule flouts the Supreme Court‘s instruction that courts should conduct market-definition inquiries based not on “formalistic distinctions” but on “actual market realities.” Amex, 138 S. Ct. at 2285 (quoting Kodak, 504 U.S. at 466–67).
Moreover, the district court‘s rule is difficult to square with decisions defining a product market to include vertically integrated firms that self-provision the relevant product but make no outside sales. For example, the D.C. Circuit in Microsoft noted that “Apple had a not insignificant share of worldwide sales of operating systems,” even though Apple did not sell or license macOS but instead only included it in its own Mac computers. United States v. Microsoft Corp., 253 F.3d 34, 73 (D.C. Cir. 2001). While the Microsoft court ultimately excluded macOS from its market, it did so on fact-bound substitutability grounds, not the categorical grounds that the district court used here. Id. at 52.
Finally, the district court‘s rule overlooks that there may be markets where companies offer a product to one side of the market for free but profit in other ways, such as by collecting consumer data or generating ad revenue. See, e.g., FTC v. Facebook, Inc., 581 F. Supp. 3d 34, 44–45, 55 (D.D.C. 2022) (finding FTC plausibly alleged a market of personal social networks even though “all [are] provided free of charge” to users). It puts form over substance to say that such products cannot form a market because they are not directly licensed or sold.
2. Lack of Consumer Knowledge
Second, the district court did not err when it required Epic to produce evidence regarding a lack of consumer knowledge of Apple‘s app-distribution and IAP restrictions. Such a requirement comes directly from Kodak and Newcal. The former stated that it is “crucial” that aftermarket restrictions are not “generally known.” Kodak, 504 U.S. at 477 n.24. The latter placed the burden on a plaintiff to “rebut the economic presumption that . . . consumers make a knowing choice to restrict their aftermarket options” when they make a foremarket purchase. Newcal, 513 F.3d at 1050.10
3. Change in Policy
Third, Epic argues that the district court erred by holding that a plaintiff can establish a Kodak-style aftermarket only if it shows that the defendant adopted its aftermarket restrictions after some portion of consumers purchased their foremarket durable goods. Had the district court actually imposed such an absolute change-in-policy requirement, it would have erred. As explained above, Kodak and Newcal require a showing of a lack of consumer awareness regarding aftermarket restrictions. Newcal, 513 F.3d at 1050. A change in policy is of course one way of doing so; a consumer cannot knowingly agree to a restriction that did not exist at the time of the foremarket transaction. But it is not the exclusive means of doing so. Indeed, Kodak itself contemplated that some sophisticated, high-volume consumers would be able to accurately life-cycle price goods in the foremarket. Kodak, 504 U.S. at 476. Such life-cycle pricing would be impossible if those consumers were unaware that they would be restricted to certain vendors in the aftermarket.
But contrary to Epic‘s assertion, we do not read the district court‘s order as running counter to these principles. The district court explained that “other circuits have aligned with the contours of Newcal . . . regarding knowledge and/or post-purchase policy changes” and that the “breadth of antitrust law” requires that a restriction “must not have been sufficiently disclosed to consumers.” It then quoted the operative language from Newcal that focuses on lack of
4. Significant Switching Costs
Fourth, the district court did not err when it required Epic to produce evidence about the magnitude of switching costs. Kodak explicitly requires that switching costs—whether monetary or non-monetary—be “significant.” Kodak, 504 U.S at 473. This showing need not be extensive; among other things, a plaintiff can point to the “heavy initial outlay” of the foremarket good and brand-specific purchases. Id. at 477. By requiring such a showing, the district court was simply fulfilling its Kodak obligation of ensuring that switching costs are “significant.”11
E. Epic‘s Clear-Error Challenge
We now turn to the main thrust of Epic‘s market-definition argument: that it is entitled, as a factual matter, to a finding in favor of its proposed aftermarkets. Though Epic attempts to avoid the clear-error label, its argument requires it to carry the heavy of burden on appeal of showing that the district court clearly erred in finding that (1) Epic failed to show a lack of general consumer awareness regarding Apple‘s restrictions on iOS distribution and payment processing, (2) Epic failed to show significant switching
Beginning with the first prong, Epic had the burden of showing a lack of consumer awareness—whether through a change in policy or otherwise. Epic identified a purported change in policy, contrasting the App Store‘s now-immense profitability with a pre-launch statement from Steve Jobs that Apple did not “intend to make money off the App Store[‘s]” 30% commission. The district court reasonably found this statement to simply reflect Jobs‘s “initial expectation” about the App Store‘s performance, not an announcement of Apple policy. Especially in light of the district court‘s finding that Apple has “maintained the same general rules” for distribution and payment processing since the App Store‘s early days, it did not clearly err in concluding that Epic failed to prove a lack of consumer awareness through a change of policy.
Nor did the district court clearly err in finding that Epic otherwise failed to establish a lack of awareness. Indeed, the district court squarely found: “[T]here is no evidence in the record demonstrating that consumers are unaware that the App Store is the sole means of digital distribution on the iOS platform” (emphasis added). And on appeal, Epic fails to cite any evidence that would undermine the district court‘s characterization of the record.
Because of this failure of proof on the first prong of Epic‘s Kodak/Newcal showing, we need not reach—and do
Moreover, the district court‘s finding on Kodak/Newcal‘s consumer-unawareness requirement renders harmless its rejection of Epic‘s proposed aftermarkets on the legally erroneous basis that Apple does not license or sell iOS as a standalone product. See supra section I.D.1. To establish its single-brand aftermarkets, Epic bore the burden of “rebut[ting] the economic presumption that . . . consumers make a knowing choice to restrict their aftermarket options when they decide in the initial (competitive) market to enter a[] . . . contract.” Newcal, 513 F.3d at 1050. Yet the district court found that there was “no evidence in the record” that could support such a showing. As a result, Epic cannot establish its proposed aftermarkets on the record before our court—even after the district court‘s erroneous reasoning is corrected.
In his partial dissent, our colleague, Judge Thomas, disagrees with our conclusion that the error discussed in section I.D.1 is harmless. First, Judge Thomas contends that we lack any “direct authority for [this] proposition.” While we do not have a Kodak-specific case to cite, treating an error as harmless in light of an independent and sufficient alternative finding is standard fare in appellate courts. See, e.g., United States v. Wright, 46 F.4th 938, 944 (9th Cir. 2022) (“[The district court‘s . . . error was harmless in light of its alternative holding . . . .” (capitalization standardized)); Tommasetti v. Astrue, 533 F.3d 1035, 1042 (9th Cir. 2008) (“Although the ALJ‘s step four determination constitutes error, it is harmless error in light
II. Sherman Act Section 1: Unreasonable Restraint
With the relevant market for Epic‘s antitrust claims established (mobile-game transactions), we turn to the district court‘s rejection of Epic‘s Sherman Act Section 1 restraint-of-trade claim. Section 1 prohibits “[e]very contract, combination . . . , or conspiracy, in restraint of trade.”
Epic contends that the district court (1) incorrectly found that the DPLA was not a “contract[]” within the scope of Section 1, (2) misapplied steps two and three of the Rule of Reason, and (3) omitted a fourth balancing step after it found that Epic failed to satisfy its step-three burden. Apple asserts—as an alternative basis for affirming the district court‘s denial of Sherman Act liability—that the court erred at step one of the Rule of Reason. We agree with Epic on its first and third arguments but find the errors to be harmless; we reject Epic‘s and Apple‘s remaining arguments.
A. Existence of a Contract
The district court erred when it held that a non-negotiated contract of adhesion like the DPLA falls outside of the scope of Section 1. That holding plainly contradicts Section 1‘s text, which reaches “[e]very contract, combination . . . , or conspiracy” that unreasonably restrains trade.
Moreover, the district court‘s contract-of-adhesion exemption is difficult to square with numerous antitrust cases involving agreements in which one party set terms and
Additionally, as the district court itself recognized, its holding is “not particularly consistent” with ties being cognizable pursuant to Section 1. In a classic tie, the defendant “exploit[s] . . . its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Jefferson Par. Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984), overruled on other grounds by Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006). “If such conduct were to be labelled ‘independent,’ virtually all tying arrangements would be beyond the reach of Section 1.” Image Tech. Serv., Inc. v. Eastman Kodak Co., 903 F.2d 612, 619 (9th Cir. 1990).
Moreover, Section 1 is primarily concerned with firms that exercise market power—i.e., the “special ability . . . to force a [a contracting partner] to do something that he would not do in a competitive market.” Jefferson Parish, 466 U.S. at 13–14. The district court‘s rule would preclude Section 1 suits and illegality defenses to breach of contract claims where they are most needed: when dealing with restraints
Thus, the district court erred on this threshold issue. But because the court, in the alternative, properly applied the Rule of Reason, its error was harmless.
B. Rule of Reason Step One: Anticompetitive Effects
The district court did not err when it found that Epic made the Rule of Reason‘s required step-one showing. At step one, “the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market.” Amex, 138 S. Ct. at 2284. Antitrust plaintiffs can make their step-one showing either ”directly or indirectly.” Id.; accord PLS.Com, LLC v. Nat‘l Ass‘n of Realtors, 32 F.4th 824, 834 (9th Cir. 2022); Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102, 1112 (9th Cir. 2021); Rebel Oil., 51 F.3d at 1434.
To prove substantial anticompetitive effects indirectly, the plaintiff must prove that the defendant has market power and present “some evidence that the challenged restraint harms competition.” Amex, 138 S. Ct. at 2284. Market power is the ability for a defendant to profitably raise prices by restricting output. Id. at 2288; see also Jefferson Parish, 466 U.S. at 13–14 (market power is the ability “to force a purchaser to do something that he would not do in a competitive market“). In other words, a firm with market power is a price-maker, not the price-takers that economic theory expects in a competitive market. Pursuant to this indirect-evidence route, “[t]he existence of market power is a significant finding that casts an anticompetitive shadow over a party‘s practices in a rule-of-reason case.” Hahn v. Or. Physicians’ Serv., 868 F.2d 1022, 1026 (9th Cir. 1988).
Market power is generally inferred from the defendant‘s possession of a high market share and the existence of “significant barriers to entry.” Rebel Oil, 51 F.3d at 1434. Whether a defendant possesses market power is a factual question that we review for clear error. Cf. L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1425 (9th Cir. 1993) (possession of monopoly power is a fact question).
Here, the district concluded that Epic produced both sufficient direct and indirect evidence to show that Apple‘s distribution and IAP restrictions impose substantial anticompetitive effects. In terms of direct evidence, the court found that Apple has for years extracted a supracompetitive commission that was set “almost by accident” and “without regard” to its own costs and has produced “extraordinarily high” operating margins that “have exceeded 75% for years.” The court found that “the economic factors driving” other platforms’ rates “do not apply equally to Apple,” with “nothing other than legal action seem[ing] to motivate Apple to reconsider pricing and reduce rates.” With respect to indirect evidence, the district court found that Apple has market power: Apple had a mobile-games market share of 52 to 57% for the three years in evidence, and network effects and information restrictions create barriers to entry. The court found that Apple wielded that market power to foreclose would-be competitors like Epic from offering app-distribution and payment-processing
1. Direct Evidence
Apple challenges both the district court‘s direct- and indirect-evidence conclusions on several grounds—some legal, some factual. We are not persuaded that the district court erred at step one of the Rule of Reason.14
First, Apple argues that the district court‘s direct-evidence conclusion cannot stand because Epic did not show that Apple‘s restrictions reduced output. We squarely rejected this argument in O‘Bannon. There, the NCAA similarly argued that liability was foreclosed because output in the relevant market “increased steadily over time.” 802 F.3d at 1070. “Although output reductions are one common kind of anticompetitive effect in antitrust cases, a ‘reduction in output is not the only measure of anticompetitive effect.‘” Id. (citation omitted). Nor does Amex displace our holding in O‘Bannon. A showing of decreased output was essential in that case because the plaintiff “failed to offer any reliable measure of Amex‘s transaction price or profit margins” and “the evidence about whether Amex charges more than its competitors was ultimately inconclusive.” Amex, 138 S. Ct. at 2288.
Third, Apple attacks the supracompetitive-pricing finding on factual grounds by asserting that Apple charges a substantially similar commission as its competitors. That assertion is true as far as headline rates go, but the district court reasonably based its supracompetitive-price finding on effective commission rates instead of headline rates. The district court found Apple‘s reliance on headline rates to be “suspect” because, unlike the App Store, other platforms “frequently negotiate[] down” the rates they charge developers. The court noted that Amazon has a headline rate of 30% but an effective commission rate of 18%. And it credited testimony that game-console transaction platforms often “negotiate special deals for large developers.” While the district court‘s finding that the Google Play Store (the App Store‘s “main competitor“) charges a 30% rate seemingly undermines the characterization of Apple‘s commission as supracompetitive, we cannot say that the district court clearly erred absent evidence about the Google Play Store‘s effective commission—the metric that the district court at trial found to be the key to determining the competitiveness of a price in this market.
Fourth, Apple argues that the district court‘s direct-evidence finding fails as a matter of law because Amex requires Epic to establish anticompetitive effects on both sides of the two-sided market for mobile-game transactions
2. Indirect Evidence
We are not persuaded by Apple‘s argument that the district court erred in concluding that Epic established indirect evidence of anticompetitive effects. Apple does not take issue with the district court‘s finding of a 52 to 55% market share (other than noting it was the court‘s “own . . . calculation“); nor does Apple challenge the court‘s barriers-to-entry finding. It instead argues that the finding that Apple wields its market power in an anticompetitive manner is speculative. But, supported by basic economic presumptions, the district court reasonably found that, without Apple‘s restrictions, would-be competitors could offer iOS users alternatives that would differentiate themselves from the App Store on price as well as consumer-appeal features like searchability, security, privacy, and payment processing. Indeed, it found competition in the PC-gaming market to be a “vivid illustration“: Steam had long charged a 30% commission, but upon Epic‘s entry into the market, it lowered its commission to 20%. Epic‘s indirect-evidence showing was sufficient. See N. Am. Soccer League, 883 F.3d at 42 (market power combined with a
C. Step Two: Procompetitive Rationales
The district court correctly held that Apple offered non-pretextual, legally cognizable procompetitive rationales for its app-distribution and IAP restrictions. If a plaintiff establishes at step one that the defendant‘s restraints impose substantial anticompetitive effects, then the burden shifts back to the defendant to “show a procompetitive rationale for the restraint[s].” NCAA v. Alston, 141 S. Ct. 2141, 2160 (2021) (quoting Amex, 138 S. C.t at 2284). A procompetitive rationale is “a [1] nonpretextual claim that [the defendant‘s] conduct is [2] indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal.” Qualcomm, 969 F.3d at 991.
Here, the district court accepted two sets of rationales as non-pretextual and legally cognizable. First, it found that Apple implemented the restrictions to improve device security and user privacy—thereby enhancing consumer appeal and differentiating iOS devices and the App Store from those products’ respective competitors. Second, the court partially accepted Apple‘s argument that it implemented the restrictions to be compensated for its IP investment. While the court credited the IP-compensation rationale generally, it rejected the rationale “with respect to the 30% commission rate specifically.” On appeal, Epic raises three arguments challenging Apple‘s rationales as legally non-cognizable.
1. Partial Acceptance of Apple‘s IP-Compensation Rationale
Epic argues that the district court may not credit Apple‘s IP-compensation rationale while finding that the rationale was pretextual “with respect to the 30% commission rate specifically” (emphasis added). We have held that IP-compensation is a cognizable procompetitive rationale, Kodak, 125 F.3d at 1219 (“desire to profit from . . . intellectual property” is presumptively procompetitive), and we find no error in the district court‘s partial crediting of that rationale here.
The district court‘s acceptance of the rationale generally, while rejecting a specific application of it, resembles the district court‘s analysis in the NCAA litigation that culminated in Alston, 141 S. Ct. 2141. There, the district court credited the NCAA‘s amateurism-as-consumer-appeal rationale but found that the NCAA‘s “rules and restrictions on [amateurism] ha[d] shifted markedly over time,” that the NCAA adopted some restrictions “without any reference to considerations of consumer demand,” and that some were “not necessary to consumer demand.” Id. at 2163. The court did not, as Epic requests here, resolve the case at step two and hold that the NCAA‘s shaky proof meant it lacked any procompetitive rationale. Instead, the “deficiencies in the NCAA‘s proof of procompetitive benefits at the second step influenced the analysis at the third [step].” Id. at 2162. Because the NCAA‘s amateurism-as-consumer-appeal rationale was nebulously defined and weakly substantiated, the plaintiffs had more flexibility at step three to fashion less restrictive alternatives.
The same is true here. Because the district court accepted only a general version of Apple‘s IP-compensation
2. Cognizability of Apple‘s Privacy/Security Rationales
Epic and its amici next argue that Apple‘s security and privacy rationales are social, not procompetitive, rationales and therefore fall outside the purview of antitrust law. We reject this argument.
To begin, Epic waived this argument by failing to raise it below. See Friedman v. AARP, Inc., 855 F.3d 1047, 1057 (9th Cir. 2017) (“Our general rule is that we do not consider an issue not passed upon below.“). In the parties’ pre-trial joint submission on elements and remedies, Epic agreed that “enhancing consumer appeal“—the goal of Apple‘s security and privacy efforts—is a cognizable procompetitive justification. At trial, one of Epic‘s experts conceded that “[p]rotecting iPhone users from security threats is a procompetitive benefit.” And Epic made no reference to cognizability in its proposed findings of fact and conclusions of law.
Even setting aside Epic‘s failure to raise this argument below, we are not persuaded by it. See Carrillo v. County of Los Angeles, 798 F.3d 1210, 1223 (9th Cir. 2015) (courts of appeal have discretion to address pure questions of law if doing so will not prejudice the opposing party). Epic‘s
With Apple‘s restrictions in place, users are free to decide which kind of app-transaction platform to use. Users who value security and privacy can select (by purchasing an iPhone) Apple‘s closed platform and pay a marginally higher price for apps. Users who place a premium on low prices can (by purchasing an Android device) select one of the several open app-transaction platforms, which provide marginally less security and privacy. Apple‘s restrictions create a heterogenous market for app-transaction platforms which, as a result, increases interbrand competition—the primary goal of antitrust law. See, e.g., Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 895 (2007);
To avoid this conclusion, Epic and its amici rely on a line of cases stemming from National Society of Professional Engineers. But neither that case nor its progeny support their argument that improved quality is a social, rather than procompetitive, rationale. Instead, the Professional Engineers line of cases holds that a defendant cannot severely limit interbrand competition on the theory that competition itself is ill-suited to a certain market or industry. See id. at 694–96. Epic‘s selection of quotes from Professional Engineers and other cases—without acknowledging the distinct context in which they occurred—is unconvincing.
In Professional Engineers, a professional association with about 12,000 engineers adopted a rule prohibiting its members from engaging in competitive bidding on
Indiana Federation of Dentists likewise involved a request for an exemption from the Rule of Reason. There, an association of dentists, which had a nearly 100% market share in one area and a nearly 70% market share in another, adopted a rule prohibiting its members from submitting x-rays to dental insurers. Ind. Fed. of Dentists, 476 U.S. at 448–49. The rule made it prohibitively expensive for insurers to impose cost-containment measures and thus eliminated interbrand competition regarding cooperation with patients’ insurers. Id. at 449. The Federation argued that competition would undermine “quality of care“—that, without the rule, consumers would make “unwise and even dangerous choices” regarding dental procedures. Id. at 463. The Supreme Court rejected this argument—that competition was ill-suited for the dental industry—as squarely foreclosed by Professional Engineers. Id.
Trial Lawyers Association followed a similar track, but with respect to a requested exemption from a per se rule. A professional association comprising about 90% of “regulars” appointed for indigent criminal defense in the Superior Court
The Supreme Court followed suit last term in Alston when it rejected the NCAA‘s sweeping plea for leniency. The NCAA argued that something more deferential than the Rule of Reason should apply to its restrictions on student-athlete compensation because the NCAA‘s amateurism restrictions advance the “societally important non-commercial objective of higher education.” Alston, 141 S. Ct. at 2158. The Supreme Court held that this argument—that the NCAA “should be exempt from the usual operation of the antitrust laws“—should be directed to Congress, not a court. Id. at 2160.
Apple‘s rationales categorically differ from those asserted in the above cases. Apple did not agree with other app-transaction platforms (e.g., the Google Play Store) to eliminate interbrand competition and then invoke security and privacy to avoid the “normal operation” of the Rule of Reason. Id. at 2147. Rather, Apple imposed intrabrand limitations (that iOS devices use Apple distribution and payment-processing channels) and contends that these restrictions tap into consumer demand for a private and
3. Cognizability of Cross-Market Rationales
Epic finally argues that, even if Apple‘s security and privacy restrictions are procompetitive, they increase competition in a different market than the district court defined and in which Epic showed step-one anticompetitive effects, and thus are not legally cognizable at step two. In Epic‘s view, Apple‘s rationales relate to the market for smartphone operating systems (or the market for smartphones), while the anticompetitive effects of Apple‘s restrictions impact the market for mobile-game transactions.
The Supreme Court‘s precedent on this issue is not clear. While amici argued in Alston that cross-market justifications fail as a matter of law, the Supreme Court “express[ed] no view[]” on the argument. 141 S. Ct. at 2155. Dicta from one per se decision provides some support for Epic‘s position. See United States v. Topco Assocs., Inc., 405 U.S. 596, 609–10 (1972) (courts are unable “to weigh, in any meaningful sense, destruction of competition in one sector of the economy against promotion of competition in another sector“). But the Supreme Court has considered cross-market rationales in Rule of Reason and monopolization cases. See Kodak, 504 U.S. at 482–84 (relevant market of Kodak-brand service and parts; procompetitive rationale in market for photocopiers); NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 104–08, 115–17 (1984) (relevant market of college football television; procompetitive rationale of protecting the market for college football tickets). Our court‘s precedent is similar. While we have never expressly confronted this issue, we have previously considered cross-market rationales when applying the Rule
We decline to decide this issue here. Like Epic‘s general cognizability argument, Epic did not raise this argument below. Nor did it raise this argument in its opening brief before our court, denying Apple an opportunity to respond. See Miller v. Fairchild Indus., Inc., 797 F.2d 727, 738 (9th Cir. 1986).
More importantly, we need not decide this issue because Epic‘s argument rests on an incorrect reading of the record. Contrary to Epic‘s contention, Apple‘s procompetitive justifications do relate to the app-transactions market. Because use of the App Store requires an iOS device, there are two ways of increasing App Store output: (1) increasing the total number of iOS device users, and (2) increasing the average number of downloads and in-app purchases made by iOS device users. Below, the district court found that a large portion of consumers factored security and privacy into their decision to purchase an iOS device—increasing total iOS device users. It also found that Apple‘s security- and privacy-related restrictions “provide[] a safe and trusted user experience on iOS, which encourages both users and developers to transact freely“—increasing the per-user average number of app transactions.
D. Step Three: Substantially Less Restrictive Means
The district court did not clearly err when it held that Epic failed to prove the existence of substantially less restrictive alternatives (LRAs) to achieve Apple‘s procompetitive rationales. At step three of the Rule of Reason, “the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could be
Because LRAs inform the injunctive relief that a district court may enter if a plaintiff prevails, courts must also keep in mind “a healthy respect for the practical limits of judicial administration” when evaluating proposed LRAs. Alston, 141 S. Ct. at 2163. Courts should not “impose a duty . . . that it cannot explain or adequately and reasonably supervise.” Id. (quoting Verizon Commc‘ns Inc. v. L. Offs. Of Curtis V. Trinko, LLP, 540 U.S. 398, 415 (2004)).
We review a district court‘s findings on the existence of substantially less restrictive means for clear error. See, e.g., NCAA Antitrust Litig., 958 F.3d at 1260; O‘Bannon, 802 F.3d at 1074. This includes both the “virtually as effective” and “significantly increased cost” components encompassed in that finding. See NCAA Antitrust Litig., 958 F.3d. at 1260.
1. Proposed LRA to the Distribution Restriction
Epic argues that Apple already has an LRA at its disposal for the distribution restriction: the “notarization model” that Apple uses for app distribution on its desktop and laptop operating system (macOS).16 The notarization model sits somewhere between iOS‘s “walled garden” and the open-platform model that characterizes some app-transaction platforms. Unlike on iOS, the Mac Store (the Apple-run equivalent of the iOS App Store for Mac computers) is not the exclusive means for macOS users to download apps; instead, users can download apps from the Mac Store or anywhere else on the internet. Also unlike on iOS, a developer can distribute a macOS app to users without first submitting it to Apple. But, regardless of how the developer distributes that app, it will carry a warning that Apple has not scanned it for malware. The developer, however, can choose to submit the app to Apple. If the app passes Apple‘s malware scan, then the developer can distribute the app to users—again, through the Mac Store or otherwise—without the warning that accompanies unscanned apps.
The malware scanning that Apple performs in the notarization model is not the same as the full app review that it conducts on iOS apps. Importantly, the notarization model does not include human review—a contextual review that, as found by the district court, cannot currently be automated. As part of iOS human review, a reviewer confirms that an app corresponds to its marketing description to weed out “Trojan Horse” apps or “social engineering” attacks that
First, to the extent Epic argues that Apple could jot-for-jot adopt macOS’s notarization model without adding human review, Epic failed to establish that this model would be “virtually as effective” in accomplishing Apple’s procompetitive rationales of enhancing consumer appeal and distinguishing the App Store from competitor app-transaction platforms by improving user security and privacy. See O’Bannon, 802 F.3d at 1073. The district court
Second, to the extent Epic proposes a notarization model that incorporates human app review, Epic failed to develop how Apple could be compensated in such a model for third-party developers’ use of its IP. Epic argues that “app review can be relatively independent on app distribution” and envisions a model in which a developer would submit an app, Apple would review it, and then “send it back to the developer to be distributed directly or in another store.” For example, Epic could submit a gaming app to Apple; Apple would scan it for malware and subject it to human review; and then Epic could choose to distribute it through the App Store, the Epic Games Store, or both.
On appeal, Epic attempts to transfigure into an LRA the district court’s off-hand statement noting the absence of “evidence that Apple could not create a tiered licensing scheme[,] which would better correlate the value of its intellectual property to the various levels of use by developers.” It is, however, Epic’s burden at step three to prove that a tiered licensing scheme (or some other payment mechanism) could achieve Apple’s IP-compensation rationale. Without any evidence in the record of what this tiered licensing scheme would look like, we cannot say that it would be “virtually as effective” without “significantly increased cost.” O’Bannon, 802 F.3d at 1074. Nor can we even “explain” it, let alone direct the district court to craft an
2. Proposed LRA to the IAP Requirement
Epic proposes access to competing payment processors as an LRA to Apple’s IAP requirement. Like the distribution requirement LRA, this LRA suffers from a failure of proof on how it would achieve Apple’s IP-compensation rationale.18 As the district court noted, in a world where Apple maintains its distribution restriction but payment processing is opened up, Apple would still be contractually entitled to its 30% commission on in-app purchasers. Apart from any argument by Epic, the district court “presume[d]” that Apple could “utilize[e] a contractual right to audit developers . . . to ensure compliance with its commissions.” But the court then rejected such audits as an LRA because they “would seemingly impose both increased monetary and time costs.”
E. Step Four: Balancing
Epic—along with several amici, including the United States and thirty-four state attorneys general—argue that the district court erred by not proceeding to a fourth, totality-of-the-circumstances step in the Rule of Reason and balancing
We have been inconsistent in how we describe the Rule of Reason. Some decisions, when describing the Rule of Reason, contemplate a fourth step. See, e.g., Qualcomm, 969 F.3d at 991; County of Tuolumne, 236 F.3d at 1160. Others do not. See, e.g., NCAA Antitrust Litig., 958 F.3d at 1263; Tanaka, 252 F.3d at 1063. Because of the paucity of cases that survive step one (let alone require a court to exhaust the three agreed-upon steps), most of our decisions have not required us to actually proceed to the portion of the analysis where Epic and its amici argue balancing would occur.19
The exception is County of Tuolumne, which provides the most on-point guidance regarding the existence of a fourth step. There, we held: “Because plaintiffs have failed to meet their burden of advancing viable less restrictive alternatives, we reach the balancing stage. We must balance the harms and benefits of the [challenged restrictions] to determine whether they are reasonable.” 236 F.3d at 1160 (citation omitted). We then concluded, with just one sentence of analysis, that “any anticompetitive harm is offset
Supreme Court precedent neither requires a fourth step nor disavows it. In the Court’s two most recent Rule of Reason decisions, it discussed only the three agreed-upon steps. See Alston, 141 S. Ct. at 2160; Amex, 138 S. Ct. at 2284. But the Court did not characterize that test as the exclusive expression of the Rule of Reason. Alston stated that the Court “has sometimes spoken of ‘a three-step, burden-shifting framework,” emphasized that those “steps do not represent a rote checklist” or “an inflexible substitute for careful analysis,” and approvingly cited one of the Areeda and Hovenkamp treatises as using a “slightly different ‘decisional model.’” 141 S. Ct. at 2160 (emphasis added).
We are skeptical of the wisdom of superimposing a totality-of-the-circumstances balancing step onto a three-part test that is already intended to assess a restraint’s overall effect. Neither Epic nor any amicus has articulated what this balancing really entails in a given case. Epic argues only that the district court must “weigh[]” anticompetitive harms against procompetitive benefits, and the United States describes step four as a “qualitative assessment of whether the harms or benefits predominate.” Nor is it evident what value a balancing step adds. Several amici suggest that balancing is needed to pick out restrictions that have significant anticompetitive effects but only minimal procompetitive benefits. But the three-step framework is already designed to identify such an imbalance: A court is likely to find the purported benefits pretextual at step two, or step-three review will likely reveal the existence of viable LRAs. We are thus “wary about [this] invitation[] to ‘set sail on a sea of doubt.’” Alston, 141 S. Ct. at 2166 (quoting
Nonetheless, we are bound by County of Tuolumne and mindful of Alston’s warning that the first three steps of the Rule of Reason are not a “rote checklist.” Therefore, where a plaintiff’s case comes up short at step three, the district court must proceed to step four and balance the restriction’s anticompetitive harms against its procompetitive benefits. In most instances, this will require nothing more than—as in County of Tuolumne—briefly confirming the result suggested by a step-three failure: that a business practice without a less restrictive alternative is not, on balance, anticompetitive. But the Sherman Act is a flexible statute that has and will continue to evolve to meet our country’s changing economy, so we will not “embarrass the future” by suggesting that will always be the case. Nw. Airlines, Inc. v. Minnesota, 322 U.S. 292, 300 (1944).
Turning to the record here, the district court’s failure to explicitly reach the fourth step was harmless. Even though it did not expressly reference step four, it stated that it “carefully considered the evidence in the record and . . . determined, based on the rule of reason,” that the distribution and IAP restrictions “have procompetitive effects that offset their anticompetitive effects” (emphasis added). This analysis satisfied the court’s obligation pursuant to County of Tuolumne, and the court’s failure to expressly give this analysis a step-four label was harmless.
III. Sherman Act Section 1: Tying
In addition to its general restraint-of-trade claim, Epic brought a Section 1 claim asserting that Apple unlawfully tied together app distribution (the App Store) and in-app payment processing (IAP). On appeal, Epic argues that (1)
A. Existence of a Tie
“A tying arrangement is ‘an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.’” Kodak, 504 U.S. at 461 (quoting N. Pac. R. Co. v. United States, 356 U.S. 1, 5–6 (1958)). To prove the existence of a tie, a party must make two showings.
First, the arrangement must, of course, involve two (or more) separate products. Pursuant to Jefferson Parish and Kodak, we apply a consumer-demand test when conducting this inquiry: To constitute two separate products, “[t]here must be sufficient consumer demand so that it is efficient for a firm to provide” the products separately. Kodak, 504 U.S. at 462 (citing Jefferson Parish, 466 U.S. at 21–22). Importantly, the separate-products inquiry “turns not on the functional relation between them, but rather on the character of the demand for the two items.” Jefferson Parish, 466 U.S. at 19 & n.30. This consumer-demand test, in turn, has two parts: (1) that it is possible to separate the products, and (2) that it is efficient to do so, as inferred from circumstantial
The efficiency showing does not require a full-blown economic analysis. Because the showing is just a threshold step to reaching the merits of a tie (including, sometimes, the application of a per se rule), it would be incongruous to require a resource-intensive showing. See N. Pac. R. Co., 356 U.S. at 5 (per se rules are meant to “avoid[] the necessity for an incredibly complicated and prolonged economic investigation”). Accordingly, the existence of separate products is inferred from “more readily observed facts.” Areeda & Hovenkamp, Antitrust Law, supra, ⁋ 1745c. These include consumer requests to offer the products separately, disentangling of the products by competitors, analogous practices in related markets, and the defendant’s historical practice. See Jefferson Parish, 466 U.S. at 22 (noting that patients and surgeons “often request specific anesthesiologists [the tied service] to come to a hospital [the tying service]” and “other hospitals often permit anesthesiologic services to be purchased separately”); Kodak, 504 U.S. at 463 (finding sufficient at the 12(b)(6) stage allegations that “consumers would purchase service without parts” and that the defendant had sold them “separately in the past”).
Second, even where a transaction involves separate products, it is not necessarily a tie; the seller must also “force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Jefferson Parish, 466 U.S. at 12. Were a buyer merely to agree “to buy [a] second product on its own merits” absent any coercion, there would be no tie. Areeda & Hovenkamp, Antitrust Law, supra, ⁋ 1752.
Here, the district court found that there was no tie because app distribution and IAP are not separate products. It based this finding on four rationales—each of which is either clearly erroneous or incorrect as a matter of law.
To begin, the district court erred as a matter of law when it concluded that IAP was not separate from app distribution because IAP is “integrated into . . . iOS devices.” Jefferson Parish expressly rejects an approach to the separate-products inquiry based on the “functional relation” between two purported products. 466 U.S. at 19.
Next, the district court clearly erred when it found that “Epic Games presented no evidence showing that demand exists for IAP as a standalone product.” Here, the App Store and IAP clearly can be separated because Apple already does so in certain contexts, namely that IAP is not required for in-app purchases of physical goods. The efficiency showing is also met. Epic produced evidence that it, Facebook, Microsoft, Spotify, Match, and Netflix, have all tried to convince Apple to let them develop their own in-app payment solutions. The Epic Games Store—a direct competitor of Apple in the mobile-games submarket—delinks distribution from payment processing. And prior to IAP’s development in 2009, Apple distributed apps through the App Store but permitted developers to use their own in-app payment systems.
Finally, the district court erred as a matter of law when it concluded that a product in a two-sided market can never be broken into multiple products. Despite Apple’s strained effort to portray this as a factual finding, the district court imposed a bright-line legal rule. But Amex simply does not stand for the proposition that any two-sided platform will necessarily relate only to one market. Instead, it emphasized that market definition must “reflect[] commercial realities.” 138 S. Ct. at 2285. Indeed, if Amex truly required a one-platform, one-market rule, then the district court’s market definition—mobile gaming transactions, instead of all app transactions—would be erroneous, despite the court’s extensive findings that game and non-game apps are characterized by significantly different demand.20
A tie can be unlawful pursuant to either a modified per se rule or the Rule of Reason. A tie is per se unlawful if (1) the defendant has market power in the tying product market, and (2) the “tying arrangement affects a ‘not insubstantial volume of commerce’ in the tied product market.” Blough v. Holland Realty, Inc, 574 F.3d 1084, 1089 (9th Cir. 2009) (quoting Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 912–13 (9th Cir. 2008)). The first prong requires the market-power inquiry standard throughout antitrust law. The second prong requires only that the tie affect an amount of commerce in the tied product market that is not “de minimis.” Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d 1421, 1426 (9th Cir. 1995). These requirements are met here: Apple has market power in the app-distribution market. And the tie affects a non “de minimis” amount of commerce in the in-app-payment-processing market: Apple requires IAP to be used for more than half of the transactions that comprise a $100 billion market.
Nonetheless, we join the D.C. Circuit in holding that per se condemnation is inappropriate for ties “involv[ing] software that serves as a platform for third-party applications.” Microsoft, 253 F.3d at 89. “It is only after considerable experience with certain business relationships that courts classify them as per se violations.” Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 9 (1979) (quoting Topco Assocs., 405 U.S. at 606). That is
The tie in this case differs markedly from those the Supreme Court considered in Jefferson Parish and prior tying cases. Particularly, “[i]n none of these cases was the tied good . . . technologically integrated with the tying good.” Microsoft, 253 F.3d at 90. Moreover, none of the ties presented any purported procompetitive benefits that could not be achieved by adopting quality standards for third-party suppliers of the tied good, as Apple does here. Id.; see also Int’l Salt Co. v. United States, 332 U.S. 392, 398 (1947) (noting purported benefit can be achieved by
Moreover, while Jefferson Parish’s separate-products test filters out procompetitive bundles from per se scrutiny in traditional markets, we are skeptical that it does so in the market involved here. Software markets are highly innovative and feature short product lifetimes—with a constant process of bundling, unbundling, and rebundling of various functions. In such a market, any first-mover product risks being labeled a tie pursuant to the separate-products test. See Microsoft, 253 F.3d at 92. If per se condemnation were to follow, we could remove would-be popular products from the market—dampening innovation and undermining the very competitive process that antitrust law is meant to protect. The Rule of Reason guards against that risk by “afford[ing] the first mover an opportunity to demonstrate that an efficiency gain from its ‘tie’ adequately offsets any distortion of consumer choice.” Id.
Applying the Rule of Reason to the tie involved here, it is clearly lawful. Epic’s tying claim (that app distribution and payment processing are tied together) is simply a repackaging of its generic Section 1 claim (that the conditions under which Apple offers its app-transactions product are unreasonable). For the reasons we explained above, Epic failed to carry its burden of proving that Apple’s structure of the iOS ecosystem is unreasonable. See supra section II.
IV. Sherman Act Section 2: Monopoly Maintenance
We now consider Epic’s Sherman Act Section 2 claim that Apple unlawfully maintained a monopoly. Section 2
At step one, the plaintiff must establish that the defendant possesses monopoly power, which is the substantial ability “to control prices or exclude competition.” Grinnell, 384 U.S. at 571; accord United States v. Syufy Enters., 903 F.2d 659, 664 (9th Cir. 1990). Monopoly power differs in degree from market power, requiring “something greater.” Kodak, 504 U.S. at 481; see also Areeda & Hovenkamp, Antitrust Law, supra, ⁋ 600b (market power and monopoly power exist along a spectrum). Like market power, monopoly power can be established either directly or indirectly. Rebel Oil, 51 F.3d at 1434; see Microsoft, 253 F.3d at 51.
At step two, the plaintiff must show that the defendant acquired or maintained its monopoly through “anticompetitive conduct.” Trinko, 540 U.S. at 407. This anticompetitive-conduct requirement is “essentially the same” as the Rule of Reason inquiry applicable to Section 1 claims. Qualcomm, 969 F.3d at 991; see also Microsoft, 253 F.3d at 59 (“[I]t is clear . . . that the analysis under section 2 is similar to that under section 1 regardless whether the rule of reason label is applied.” (citation omitted)). Where, like here, the plaintiff challenges the same conduct pursuant to Sections 1 and 2, we can “review claims under each section
At step one in this case, the district court found that although Apple possesses “considerable” market power in the market for mobile-game transactions, that power is not durable enough to constitute monopoly power given the influx nature of the market. It then, at step two, echoed its Rule of Reason conclusion that Epic failed to establish Apple’s restrictions were anticompetitive.
We affirm the district court’s rejection of Section 2 liability. Epic does not argue on appeal that the district court clearly erred in finding that Apple lacks monopoly power in the mobile-games market. It argues only that the district court erred in rejecting its single-brand markets in which Apple would have a 100% market share—an argument we reject above. See supra section I. Moreover, even assuming Apple has monopoly power, Epic failed to prove Apple’s conduct was anticompetitive. See supra sections II–III.
V. Breach of Contract
Apple counter-sued Epic for breach of contract. Epic stipulated that it breached the DPLA when it implemented the Fortnite hotfix, which allowed it to process in-game transactions in violation of Apple’s IAP restriction. Epic raised several affirmative defenses, however, and argued that the DPLA is illegal, void as against public policy, and
The parties agree that Epic’s illegality defense rises and falls with its Sherman Act claims. Because we affirm the district court’s holding that Epic failed to prove Apple’s liability pursuant to the Sherman Act, we also affirm its rejection of Epic’s illegality defenses.
VI. California’s Unfair Competition Law
We now turn to Apple’s cross-appeal, beginning with its arguments concerning the UCL. The district court found that Epic suffered an injury sufficient to confer Article III standing, concluded that Apple’s anti-steering provision violates the UCL’s unfair prong, and entered an injunction prohibiting Apple from enforcing the anti-steering provision against any developer. Apple challenges each aspect on appeal. We affirm.
A. Standing
Article III limits federal courts’ jurisdiction to “[c]ases” and “[c]ontroversies.”
Apple terminated Epic’s iOS developer account in August 2020. Then in September 2021 after the district court issued its order holding that Epic breached the DPLA, Apple informed Epic that it had no intention of reinstating Epic’s developer account. As a result, Epic has no apps remaining on the App Store. Apple therefore argues that Epic is no longer injured by the anti-steering provision. Apple’s argument, however, overlooks two critical aspects of the record. First, while Epic itself has no apps on the App Store, its subsidiaries do—causing Epic to be injured through the anti-steering provision’s effects on its subsidiaries’ earnings. Second, Epic is a competing game distributor through the Epic Games Store and offers a 12% commission compared to Apple’s 30% commission. If consumers can learn about lower app prices, which are made possible by developers’ lower costs, and have the ability to substitute to the platform with those lower prices, they will do so—increasing the revenue that the Epic Games Store generates. As such, the district court did not clearly err in finding that Apple’s anti-steering provision injures Epic.
As relevant here, the UCL prohibits “any [1] unlawful, [2] unfair or [3] fraudulent business act or practice.”
The California Supreme Court has refined this “wide standard,” Cel-Tech, 20 Cal. 4th at 181, into two tests relevant to this litigation. First, to support “any finding of unfairness to competitors,” a court uses the “tethering” test, which asks whether the defendant’s conduct “threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Id. at 186–87 (emphasis added). Second, to support a finding of unfairness to consumers, a court uses the balancing test, which “weigh[s] the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.” Progressive W. Ins. Co. v. Super. Ct., 135 Cal. App. 4th 263, 285 (2005) (citation omitted). These tests “are not mutually exclusive.” Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 736 (9th Cir. 2007) (citing Schnall v. Hertz Corp., 78 Cal. App. 4th 1144 (2000)).
Here, the district court applied both tests. Through the Epic Games Store, Epic is a games-distribution competitor of Apple—triggering the competitor test. Through its subsidiaries that have apps on the App Store, Epic consumes the app transactions that Apple offers in a two-sided market—triggering the consumer test. Cf. Amex, 138 S. Ct. at 2286 (each side of two-sided market “jointly consume[s] a single product” (citation omitted)). Applying the tethering test, the court found that the anti-steering provisions “decrease [consumer] information,” enabling supracompetitive profits and resulting in decreased innovation. It relied on Apple’s own internal communications for the proposition that the anti-steering provision prevents developers from using two of the three “most effective marketing activities,” push notifications and email outreach. It then reiterated these factual findings to conclude that the provision also violates the balancing test.
Apple does not directly challenge the district court’s application of the UCL’s tethering and balancing tests to the facts of this case. Instead, Apple makes two arguments attacking UCL liability as a matter of law. Neither is supported by California law.
1. Safe-Harbor Doctrine
Apple argues that Epic’s failure to establish Sherman Act liability forecloses UCL liability pursuant to the UCL’s “safe harbor” doctrine, which bars a UCL action where California or federal statutory law “absolutely preclude[s] private causes of action or clearly permit[s] the defendant’s conduct.” Zhang v. Sup. Ct., 57 Cal. 4th 364, 379–80 (2013). The safe-harbor doctrine emphasizes that there is a
Neither Apple nor any of its amici cite a single case in which a court has held that, when a federal antitrust claim suffers from a proof deficiency, rather than a categorical legal bar, the conduct underlying the antitrust claim cannot be deemed unfair pursuant to the UCL. Indeed, in a leading case on the safe-harbor exception, the California Supreme Court permitted a UCL claim against a predatory-price scheme to proceed even though the plaintiff failed to prove—as state antitrust law requires—that the defendant intended to harm competition through the scheme. Cel-Tech, 20 Cal. 4th at 183. Apple‘s rule would convert any Rule of Reason shortcoming into a UCL defense and undermine the UCL‘s three-prong structure by collapsing the “unfair” and “unlawful” prongs into each other. We
2. Importation of Sherman Act Principles
Apple next argues that two principles from Sherman Act case law preclude UCL liability here. We find neither argument persuasive. First, Apple contends that the Supreme Court‘s decision in Amex—finding in favor of American Express in a suit challenging its anti-steering provision—bars UCL liability stemming from Apple‘s anti-steering provision. Apple does not explain how Amex‘s fact- and market-specific application of the first prong of the Rule of Reason establishes a categorical rule approving anti-steering provisions, much less one that sweeps beyond the Sherman Act to reach the UCL. Amex was based on the plaintiff‘s failure to establish direct evidence of anticompetitive effects through a reduction in output, supracompetitive pricing, or excessively high profit margins; it was not a blanket approval of anti-steering provisions. See Amex, 138 S. Ct. at 2288.
Second, Apple argues that the UCL mandates trial courts to define a relevant market and then conduct the balancing test within that market (similar to the Rule of Reason). Again, Apple does not cite any California authority for this proposition. Moreover, such a rule runs contrary to California courts’ repeated instruction that “[n]o inflexible rule can be laid down as to what conduct will constitute unfair competition.” E.g., Pohl v. Anderson, 13 Cal. App. 2d 241, 242 (1936) (citation omitted). It also contradicts a California Supreme Court decision that conducted something akin to quick-look review (in which a precise market-definition is not needed) when confronted with significant restrictions on the free flow of price information. See Oakland-Alameda Cnty. Builders’ Exch. v. F. P. Lathrop Constr. Co., 4 Cal. 3d 354, 363–64 (1971) (invalidating a prohibition on unsealing competitor bids after bidding had culminated on the grounds that it “restrain[ed] open price competition and unlawfully tamper[ed] with the pricing structure“).
C. Injunctive Relief
Apple also argues that (1) the district clearly erred when it found that Epic‘s injuries were irreparable, and (2) it abused its discretion when applying the injunction against all developers, not just Epic‘s subsidiaries that have apps on the App Store. We disagree.
Even where the UCL authorizes injunctive relief pursuant to state law, a federal court must also ensure that the relief comports with “the traditional principles governing equitable remedies in federal courts.” Sonner v. Premier Nutrition Corp., 971 F.3d 834, 844 (9th Cir. 2020). To issue an injunction, the court must find: “(1) that [the plaintiff] has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” Galvez v. Jaddou, 52 F.4th 821, 831 (9th Cir. 2022) (quoting eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006)). Moreover, injunctive relief must be no “more burdensome to
1. Issuance of the Injunction
First, the district court did not clearly err in finding that Epic suffered an injury for which monetary damages would be inadequate. While economic injury is generally not considered irreparable, it is where the underlying injury does not readily lend itself to calculable money damages. See Rent-A-Ctr., Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991). Here, the district court found that the anti-steering provision “is not easily remedied with money damages,” a finding that has ample support in the record. In 2019, there were over 300,000 games on the App Store. Calculating the damages caused by the anti-steering provision would require a protracted and speculative inquiry into: the availability of each of those 300,000 games on the Epic Games Store, the percentage of revenue on each game that comes from users who multi-home and can therefore substitute, and how high the substitution rate would be among those multi-home users.23
Second, the district court did not abuse its discretion when setting the scope of the injunctive relief because the scope is tied to Epic‘s injuries. The district court found that the anti-steering provision harmed Epic by (1) increasing the costs of Epics’ subsidiaries’ apps that are still on the App Store, and (2) preventing other apps’ users from becoming would-be Epic Games Store consumers. Because Epic benefits in this second way from consumers of other developers’ apps making purchases through the Epic Games Store, an injunction limited to Epic‘s subsidiaries would fail to address the full harm caused by the anti-steering provision.
VII. Attorney Fees
We reverse the district court‘s holding that the DPLA‘s indemnification provision does not require Epic to pay Apple‘s attorney fees related to this litigation. Based on the DPLA‘s choice-of-law provision, we interpret its indemnification provision pursuant to California contact-interpretation principles. We review the district court‘s interpretation of a contract de novo. Shivkov v. Artex Risk Sols., Inc., 974 F.3d 1051, 1058 (9th Cir. 2020).
California courts presume that “[a] clause that contains the words ‘indemnify’ and ‘hold harmless’ generally obligates the indemnitor to reimburse the indemnitee for any damages the indemnitee becomes obligated to pay third persons—that is, it relates to third party claims, not attorney fees incurred in a breach of contract action between the parties to the indemnity agreement itself.” Alki Partners, LP v. DB Fund Servs., LLC, 4 Cal. App. 5th 574, 600 (2016) (emphasis added). However, courts also look to “the context in which the language appears.” Id. A contract, therefore,
Turning to the facts here, section 10 of the DPLA provides that Epic “agree[s] to indemnify and hold harmless, and upon Apple‘s request, defend, Apple[] . . . from any and all claims, losses, liabilities, damages, taxes, expenses and costs, including without limitation, attorneys’ fees and court costs . . . , incurred by [Apple] and arising from or related to” several enumerated grounds. One grounds, clause (i), applies to Epic‘s “breach of any certification, covenant, obligation, representation or warranty in [the DPLA].”
Clause (i) rebuts the Alki Partners presumption by “specifically provid[ing] for attorney‘s fees in an action on the contract.” 4 Cal. App. 5th at 600–01. It expressly refers to Epic‘s “breach” of its obligations pursuant to the DPLA—contemplating an intra-party action for breach of contract, not claims by third parties. The surrounding context of section 10 buttresses this conclusion. Section 14.3 of the DPLA disclaims that the agreement “is not for the benefit of any third parties.” Indeed, Epic has not identified a single
CONCLUSION
To echo our observation from the NCAA student-athlete litigation: There is a lively and important debate about the role played in our economy and democracy by online transaction platforms with market power. Our job as a federal Court of Appeals, however, is not to resolve that debate—nor could we even attempt to do so. Instead, in this decision, we faithfully applied existing precedent to the facts as the parties developed them below. For the foregoing reasons, we AFFIRM IN PART AND REVERSE AND REMAND IN PART.
S.R. THOMAS, Circuit Judge, concurring in part and dissenting in part:
I agree with much of the majority opinion. I fully agree that the district court properly granted Epic injunctive relief on its California Unfair Competition Law claims. I also fully agree that the district court properly rejected Epic‘s illegality defenses to the Developer Program Licensing Agreement (“DPLA“) but that, contrary to the district court‘s decision, the DPLA does require Epic to pay attorney fees for its breach. On the federal claims, I also agree that the district
“A threshold step in any antitrust case is to accurately define the relevant market . . . .” Fed. Trade Comm‘n v. Qualcomm Inc., 969 F.3d 974, 992 (9th Cir. 2020). “Without a definition of [the] market there is no way to measure [the defendant‘s] ability to lessen or destroy competition.” Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285 (2018) (alterations in original) (quoting Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965)).
I agree with the majority that the district court erred in rejecting Epic‘s proffered foremarket. The district court rejected the foremarket of mobile operating systems because Apple does not sell or license its operating system separately from its smartphones. But we have previously recognized that such a market can exist. See Digidyne Corp. v. Data Gen. Corp., 734 F.2d 1336, 1338–39 (9th Cir. 1984), implicitly overruled on other grounds by Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 31 (2006) (holding that separate markets existed for software and hardware even when they were always bundled together).
The district court then rejected Epic‘s proposed aftermarket of solutions for iOS app payment processing
I also agree with the majority that the district court erred in holding that a non-negotiated contract of adhesion falls outside of the scope of § 1 of the Sherman Act and, therefore, the Developer Program License Agreement was not a contract covered under § 1. “‘[E]very commercial agreement‘. . . among two or more entities” qualifies as a § 1 agreement. Paladin Assocs., Inc. v. Mont. Power Co., 328 F.3d 1145, 1154 n.7 (9th Cir. 2003) (emphasis in original) (quoting Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 289 (1985)). This includes a contract of adhesion. See Perma Life Mufflers, Inc. v. Int‘l Parts Corp., 392 U.S. 134, 141–142 (1968), overruled on other grounds by Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 777 (1984).
The majority holds that the errors were harmless given the district court‘s analysis of the remaining steps in the Rule of Reason analysis. However, there is no direct authority for that proposition, and it amounts to appellate court fact-finding. Indeed, the Supreme Court has instructed that “courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market.” Am. Express, 138 S. Ct. at 2285.
Correction of these errors would have changed the substance of the district court‘s Rule of Reason analysis. See
Relying on the district court‘s market does not solve this problem. The parties formulated arguments around their own markets—not the district court‘s market. Remand would have given the parties an opportunity to argue whether the DPLA worked unfair competition in the district court‘s market.
The effect on substantial rights in this case is magnified by the majority‘s holding that, under County of Tuolumne v. Sonora Community Hospital, when the plaintiff shows anticompetitive effects but fails to show a less restrictive alternative to the defendant‘s procompetitive justification, the court must balance the anticompetitive harms against the procompetitive benefits. 236 F.3d 1148, 1160 (9th Cir. 2001). The district court did not undertake a formal Tuolumne balancing analysis as such, although the majority concludes that the district court‘s analysis was sufficient. Remand for a formal balancing should be required. Regardless, the effect of the legal errors on any balancing is obvious. The district court analyzed anticompetitive effects in terms of increases in the cost of mobile gaming transactions—the court‘s relevant market. But the court could have found greater increases in costs if its analysis concerned Epic‘s markets, and this would change a properly conducted balancing analysis. In essence, any balancing done out of the context of a relevant market necessarily involves putting a thumb on the balancing scale.
Therefore, I respectfully concur in part and dissent in part.