Apple May Lose Its Epic Trial

ads end with the words privacy. That's iPhone, and that's been one of Apple's arguments in its high stakes legal battle with Epic Games, saying it's control of the app store is the only way to ensure security and privacy on iPhones, with Epic claiming that the app stores anti competitor is joining me is anti drust expert Harry First, a professor at m y U Law School. So, Harry, there's been no jury at this three week trial and it will now be up to Judge von Gonzalis Rogers

to make the decision in the case. What are some of the issues she'll be considering. Well, there's sort of a set of legal issues which involves the technical issues for antitrust. What's the market, how do you define it? What's the conduct, what are the competitive justifications and what's the harm? So you know, those are the legal issues

that the parties have to deal with. And then there's the you know, what's it all about part of the case, sort of the texture of what the party's business complaints really are and why they're doing what they're doing, and that in the end informs the facts that she finds and her conclusion. So that part is, you know, well, how do you justify this price gouging, Mr? Cook? And how did you decide to name fortnite fortnite? You know,

and as a banana banana? I mean, that's sort of what their business is, what gaming is, and what Apple's businesses and how they can continue to charge so much money and justify And there you're referring to some of the more bizarre moments in the trial with the discussion of a banana action figure in Fortnite and the judges

questions about how the game was named. Now, Apple has been saying that iPhone security and privacy drives what they do, and Tim Cook on the stand repeatedly said that the rules and restrictions on the App Store are aimed at ensuring a safe and secure platform for consumers, But the

judge seems skeptical about that argument. I think anyone is always a little skeptical when the head of a company that has the highest value of any company in the country says, Oh, no, we're really just in it to protect our you is privacy, So you know, is it a smoke screen? I think epics representatives of pushing on that and is there some reality to it? Sure, there's some reality to it. That's what Apple has been pushing as its brand that it's safer. So is it really.

They've had expert witnesses who testified not really. It's no more or less safe than Google Play in the Android marketplace. So you can say it all you want, but still stuff gets by. And I don't think anyone's going to ever believe that that's all that they're doing. They may be doing that, but this is about making a whole lot of money, and they are making a ton of money.

And as far as money goes, Apple claims that it doesn't break out the app stores profits separate from the other units in the company, and Cook denied repeatedly that he knew how much money Apple makes in profits on the app store. Is that believable. You know, this strikes me as amazing. This is a this is a company with a market cap over two trillion dollars and they don't know where they're you know, Oh, really, we get paid so many billions of dollars by Google. I have

no idea how much? How much that is? Oh do we make money off the app store? G I don't know. We just keep investing hundreds of millions of dollars what for the fun of it? I mean, this is whacko. I'm not sure it's a great strategy to walk away from the idea that this is very profitable. And I think their legal strategy in the end will be to say, yes, it is profitable and that's what incentivizes innovation. Now, you can't say it's an incentive for innovation if you don't

know that it's profitable. I mean, it's just wacko. And I don't think anybody's going to believe that. It's just I'm not sure why his lawyers sent him in to say that. Maybe they didn't. Maybe that's how what he really believes. But it seems unbelievable yet, maybe it's an accounting matter, Maybe they don't break it out exactly, but that doesn't mean they don't know what's going on. The judge also seemed a little skeptical about Apple's intellectual property argument.

You know, they're protecting their i P. They're spending so much money on their i P. She said that they're making a disproportionate amount of money relative to the i

P you've given them. Tech companies have often this, This started with Microsoft probably went back before, said oh, you know, we've got to protect our intellectual property rights, and we've been given these rights and these are really important to us, and they never are put to the test whether any of these rights are enforceable, and you know, it's sort of a smoke screen about right, but it's really about

protecting their business. As for the relative value of putting together the i P. And there's a lot of on paper, a lot of copyright and patent protection for what they do, but the relative value of doing at and what value is added by the gamers and the implementers. This is always an issue as well, you know, because both parties need each other. So one party says I'm the most important one, I should get the biggest amount, and the other says no, without me no one would have a phone.

So one of the interesting things is this issue was raised in another piece of litigation in California involving Qualcom and their patents on phone technology. And the handset makers say, you know, we pay you a lot of money for this, and this technology is all about making voice calls, and you know most people don't use phones for that anymore, but we still have to pay you these huge royalties

based on the sale price of the handset. So in that litigation, Qualcom was defending it's very high royalties, while the handset makers, including Apple, we're upset with it. So a historic a constant eight in intellectual property where sort of both sides need each other and one side says we're paying you way more than what you contribute to the deal, which is what the programmers are saying. And

I think the judges picking up on that. So a lot of legal experts gave Apple the advantage going into the trial, but there was a shift after hearing the judge questioning Tim Cook. If the judge finds in favor

of Epic, what kind of remedies might you order? Well, she could enjoin Apple from keeping Epic from providing consumers information about a different way to process their charges for payments they make for things in the application, Epic apparently had a screen that they wanted to show consumers, say which would you like to do? Pay more to Apple or less to us, So she could enjoin Apple from

stopping Epic from doing that. Whatever she orders, my guess is either she will stay her order or the Court of Appeals will stay her order. So actually nothing may happen immediately no matter how she rules, and it will await a decision by the Court of Appeals. Epic, interestingly, is not asking for money. They're not asking for damages from the high charges. I think it's a clever tactical

move on Epics lawyer's part. So just saying, give us a chance to compete for consumers, give consumers a choice, and makes a very clean ask in a way. Could the judge ever rule, Okay, you're taking from developers, now that's too much you have to take or whatever. So one of the interesting aspects of this is, as a legal matter, there is no any trust restriction on Apple charges even as a monopolis. They can charge whatever heck

they want and it doesn't violate any trust law. So judges are very low to start monkeying with saying your prices are too high. And in the qualcom case of the District Court, judge did get into that issue and the corn appeals to everyone sort of sidestepped back. So it's not a violation of the any trust laws to charge a high fee, even an exorbitancy. So it's hard for a judge. So now say, okay, I'm going to price regulate you, and you know you can only charge

x per cent. I don't see her doing that, and I don't see Epic asking for that because I think they will get reversed so fast in the court of appeals, So I think they're being careful to stay away from that, but to try to achieve a similar result in a different way. What's your take on this case is Apple of Monopolis. Here is Apple violating antitrust laws. So I will tell you June that this basically was my exam question this year. So I've been reading papers all about this.

So there's a real question how we want to think of these markets. And I think the courts are gonna have a little trouble with this. But my view is in the end, they do have monopoly power over the distribution of Apple apps to the iPhone, And I think that the hard question really is, well, what's the anti competitive effect? Who's harmed in terms of competition, and how do we think about it? Pretty clear that the harm is that they're being charged a high fee. At one point,

Epic calls that attacks on their business. But since we can't say that that's the harm, exactly, where's the competitive harm. They don't compete with Epic, they don't have their own games that compete. There are other Fellers who complain about Apple and are competing with them, so it's not that so exactly, how is competition, you know, which we tend to think of as rivalry among different sellers of products. How is it that effected? Is an Epics being forced

at all? Developers being forced to pay a lot of money? How a court is going to deal with that? Now? I would like to see courts deal with that a little more, but I think that's gonna be a difficult issue. It may end up going to the Supreme Court. Thanks Harry. That's Professor Harry First of n y U Law School. Billions of dollars are at stake, and at the end of the three week trial, the judge will decide the Apple Epic case has signaled that neither Apple nor Epic

Games will get what they want from her ruling. Joining me is molefy Nayak, Bloomberg Legal reporter. The judge made some telling remarks at the end of the trial. Tell us a little bit about what she said to the jetting this case. You know, towards the end of this trial had some really tough questions for both sides, and it was sort of selling because I think that you know, to the trial and some of these questions team up.

But toward the end she talked about how Apple but then she need does face any real competition in the market for app distribution. And on the other side, she also questioned um epics motives and asked, you know where the Epic was suing because they were doing it to become richer than they are as a gaming company currently. What are her options here? So the joet has a few options. Obviously she's very powerful here, and this is

an ant attract case that is extremely complex. She can either grant Epics request for a ruling that would block the apps Florence policies in their current form. She could perhaps go step further and even ask Apple to change the percent commission rates that its currently charges developers. On the other hand, she could maybe decide not to go that far and take a step back, because sometimes judges are reluctant to really rule in a way that would

disrupt a market. So it's possible that she it's not to go that far and says that Apple's app store as it is is fine and isn't a monopoly, And she could also choose something in the middle, which is something she inted that during the course of the trial. You know, one of the the issues that Ethics had, and this came up in the case two during the trial, was that currently Apple's app store policies don't let users go outside an app to buy a virtual good to

the cheaper rate. So, for instance, what Ethic wanted to do was have some sort of an alternative payment system where users could go, you know, outside the app store and you know, on the on the fortnighte app and buy virtually good directly to sort of circumvent the thirty

percent commission. And one of the appture policies currently doesn't let um developers include a link some sort of a button that maybe users can click on that would take the user to the web where online they could for just the same virtual goods like in Apparency, at a cheaper rate. So that was an issue that came up. This is sort of called um an anti steering rule that Apple has where developers can't hear a customer outside the realm of the iOS ecosystem to make cheaper purchases outside,

for instance, on a web browser. So the judge kept asking during a child you know, why can't Apple this allow? She exactually asked apples see you can cook this, why can't Apple just give consumers this choice either through some sort of a link or a button that a development can place within an app so that the consumer has a choice to go outside the app store and make a purchase potentially on the web, you know, at a

discounted price. So it's possible that she chooses some sort of a compromise where maybe she asked for some sort of tweaks to some of these actual policies that Epic has an issue with. So she could also sort of find something the middle ground here. Instead of giving Epic or Apple an entire wind, she could give them a parction. She could give Epic a partial wing. So legal experts going into the trial gave Apple the advantage until Tim Cook,

the CEO of Apple, testified. Was it the judges questions were harsh? Was it that he didn't have the right answers? Yeah, it was very interesting to see. Didn't could seek the Britness stand for the first time ever, and the judge

definitely had some very very touch questions for him. And I think, you know, again this whole question of consumer choice, that why can't Apple just let developers provide users alternative options to to buy virtually good outside the app store was one of the questions she had, and Tim Cook said that, you know, but we have all this intellectual property that we've invested millions on and we've helped these developers create these businesses on top of our ecosystem, so

we need to return on investment. And that was his response in terms of having a return on investment for

all the i P that they've been providing developers. And I think one of the the arguments that Apple also need was that Epic was basically just getting a free ride on the App Store and building out this big business making use of its i P. And she also asked him Cook another question, which was decently Apples introduced this to the small business program where they reduced the submission from fifteen percent for small businesses and UM, this

happened sometime around the pandemic, and at that time there was a lot of scrutiny from U S lawmakers, regulators in Europe, this whole discussion around the app store and how Apple controls the app So the debt asked him Cook whether it was, you know, all the regulatory scrutiny that was pushing the company to to to sort of introduce this new program where they were giving small businesses

this smaller commission fifteen percent commission. And she asked him what the motive behind that was, and you know, sim Cook said, oh, no, you know, of course, the law that Epics filed and all the regulatory strupany was at the back of my mind. But you know, it was a pandemic and we wanted to do something for the developers. Tell us a little about Apple's argument that this is all about security on their platform. So yeah, I think this whole argument that Apple has been making that you

know that what they're doing here in terms of restrictings. UM, the app store or like, you know, having these these sustringent rules and regulations around the app store. Um. You know, they keep arguing that it is for the benefit of developers or it's for the benefits of customers, that they need to have these restrictions in place so that consumers have a safe and trusted experience when they have UM

when they're playing games or using their iPhones. And I'm not entirely sure the judge was convinced because you know, she was questioning whether Apple or um Epic me have some sort of you know, monetary motives or sort of monetary must be thinking of Monday benefits. Uh, you know at this point, So did you sense tension between them or was it just tough questioning? There was definitely, you know,

some attention. I mean when when we had Tim Cook being questioned Apples lawyer, it was definitely a lot a friendlier and you know, typically, uh, you see a lot of these executives when they, uh, when they're questioned by their own lawyers, they're definitely more relaxed. Um. But the judge, you know, he definitely was a bit if he did have justifications, but they just didn't seem convincing enough. Um,

I think so at feel like he was. Um. He definitely had justifications, but this whole um argument about how the Act restrictions are necessary because the health developers and customers, I'm not sure it was. I'm not sure the judge was entirely persuaded. Bada. Did she question all the witnesses or just Tim Cook? She questions, you know a number of witnesses. There were other executives from Apple as well.

There was Phil Schiller, who is um now an Apple fellow, but you know, has been a Apple's marketing chief for a very long time. She even quest in simce Me, who was at the stand whose Epics CEO as well. So this was in the first week of the trial, so she definitely had a lot of questions. But towards the end of the trial as it wrapped up, this exchange which Tim Cook was definitely an interesting one, and though I was listening to the audio field, the pension

in the room was definitely possible. I have know much about gaming or Epic, but it's not some new upstart fighting to keep its company going. Fortnite generated five billion dollars for Epic and the app store for Apple possibly about twenty billion a year. So oh no, definitely not this This um game business is well and Fortnite is a very very popular game. So and and I think the big question is if Epic didn't have to pay that Apple, it'd probably be richer than they are today.

So um, although in this fight, interestingly enough, Epic isn't speaking any damages. You know, it's more a fight on principle in terms of we want this app store to be the one where developers have the feeding in terms of deciding what what sort of famous systems need to be in place, and also, um, you know, how customers should sort of experience and apps. So let's say the judge does take the compromise fruit and says that Apple has to allow the gamers to put a link in

so that people can buy from them directly. Has there been an estimate about how much Apple would lose and revenue from that? So, you know, it's very interesting because Apple so far has not shared its app store revenues. So it says that, you know, as for the accounting rules, that they doesn't have to separate the app store out

is a separate business unit. So so this there is a sort of mystery around what then when there is a supposed to we have estimates in place UM and you know it is supposed to be somewhere to the

tune of twenty billions. But they will definitely lose a lot of money because we're talking about you know, UM houses and thousands of developers and millions of apps, and if they don't get this thirty percent commission UM, then you know it is going to definitely um be a big financial sort of set back because they're not going to make those UM fees that they have been collecting

in permissions. And it's interesting too, is that this business with the app store that Apple has created is a high margin business, so you know, they're getting a lot in return, we're not really investing as much. So for instance, they do have this I T in place and everything, but this uh, but the commissions that are coming in are are coming in it at high margins. And so how long did the judge say how long before she

gives her decisions? So she didn't specify a specific date, but she did say that she would rule as soon as possible, you know, while all of the arguments and um testimony and evidence to fresh in her memory. Um, she is going into trial the first week of June, so we'll expect think something perhaps later this summer. But she didn't specify a lead, but we should. We should probably have a ruling incoming months. And um, you know, everyone is definitely going to set in nyaut for that,

and she's anticipating already. I mean, everyone assumes that whoever loses is going to appeal. In front of the judge herself actually said that, you know, she wanted to build out a very clear record of the evidence because she expects an appeal in this case. And um, you know, legally put to expect, you know, the losing side to file an appeal. If there is just sort of compromise or middle grounds situation that we end up with, then

it's possible that both sides to feel as well. So we'd have to see how it bangs out once we have the ruling. Now, that would be an interesting appeal. Thanks so much for being on the Bloomberg Law Show. That's Mollothy Niac, Bloomberg Legal Reporter. And that's it for this edition of the Bloomberg Law Show. I'm June Grosso and you're listening to Bloomberg