Epic v. Apple ruling: Judge finds Apple has to let developers offer third-party payments

“Fortnite” developer Epic Game’s antitrust lawsuit against Apple (AAPL) has upended the mobile device maker’s tightly protected and booming App Store. In a decision issued Friday, a federal California judge largely sided with Epic by issuing a permanent injunction against Apple’s App Store policies, and opening the door for developers to offer customers third-party payment options in apps.

The company's stock was down more than 2% following the ruling.

“Epic Games failed in its burden to demonstrate Apple is an illegal monopolist,” Judge Yvonne Gonzalez Rogers wrote in an order. “Nonetheless, the trial did show that Apple is engaging in anticompetitive conduct under California’s competition laws.”

Apple’s so-called anti-steering policy limits the ability of Apps to inform customers of payment options outside of the App Store. This is problematic for apps, Epic argued, because Apple’s App Store charges a 30% commission. “A remedy to eliminate those provisions is appropriate,” Judge Gonzalez Rogers ruled.

The judge issued a permanent injunction prohibiting Apple from stopping developers from directing customers to in-app purchasing methods. It also forbids Apple from barring apps from communicating directly with customers who have voluntarily given the app their contact information.

According to Sensor Tower estimates, consumers spent an estimated $72.3 billion via the App Store in 2020. A blow to the amount the store is able to pull in would be a major issue for Apple.

In response to the ruling, Apple issued a statement saying, "Today the court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law. As the court recognized ‘success is not illegal.’ We remain committed to ensuring the App Store is a safe and trusted marketplace that supports a thriving developer community and more than 2.1 million U.S. jobs, and where the rules apply equally to everyone."

Epic Games CEO Tim Sweeney issued his own response:

For its part, Epic Games was ordered to pay Apple's 30% fee on the roughly $12 million in revenue it earned from "Fortnite" between August 2020 and October 2020 when the game maker circumvented Apple's anti-steering policy. The damages stem from the judge's ruling in favor of Apple on its counterclaim that Epic had breached its contract with Apple by offering payment outside of the App Store.

The ruling doesn’t end the fight between the two companies, as Apple is expected to appeal the decision. However, the case moves forward a hotly contentious issue over how much control dominant mobile device makers can exert over third party developers that design software to sell on their platforms.

Prior to the judge's ruling, late last month, Apple had already begun to make some changes to its App Store policies to settle a separate class action by smaller developers who argued that Apple's anti-steering provision and 30% commission were anti-competitive. As part of that settlement, Apple agreed to let developers communicate directly with customers about ways to pay for apps other than the App Store.

"Now developers can tell customers about the possibility of buying somewhere else," Cardozo School of Law professor and former attorney with the U.S. Department of Justice's antitrust division Sam Weinstein told Yahoo Finance. "It's something Epic wanted to have happen." Legally, Weinstein said, Judge Gonzalez Rogers was not permitted to take Apple's concession into account in making her decision. However, it could impact arguments on appeal.

One of the most difficult hurdles regulators have had to face

The dispute is also playing out in a similar case that Epic filed against Google (GOOG, GOOGL) over its own app store Google Play. Both companies dropped Epic from their platforms and banned it from their respective operating systems when “Fortnite,” with about 350 million registered players, circumvented the stores, offering direct, in-game purchases at a 20% discount.

In the Apple trial, which ran about three weeks, Epic argued that the App Store amounted to an illegal monopoly because developers must exclusively distribute and process their customers' payments through the App Store.

Apple CEO Tim Cook is questioned by Judge Yvonne Gonzalez Rogers as he testifies on the stand during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021 in this courtroom sketch. Cook on Friday told a court that threats to iPhone security and privacy required tight control of the App Store, which
Apple CEO Tim Cook is questioned by Judge Yvonne Gonzalez Rogers as he testifies on the stand during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021 in this courtroom sketch. REUTERS/Vicki Behringer (Vicki Behringer / reuters)

Apple and Google have both said Epic's move to circumvent commissions violated their respective terms of service, and justified removal from the stores.

One of the most difficult hurdles that regulators have faced asserting antitrust claims against Big Tech firms is defining a relevant market in which the alleged anticompetitive behavior took place. Judge Gonzalez Roger's ruling showed that in Epic's case it was no exception.

At trial, Epic’s lawyers argued that the market central to Apple’s alleged anticompetitive conduct should be defined narrowly as app distribution, or in other words, how apps get onto the iPhone.

Apple’s lawyer disagreed, saying no separate market for app distribution exists because it has never separately licensed iOS or its App Store. Instead, the company said, the relevant market is the broader mobile device market, where it faces fierce competition from dozens of manufacturers of Android-based mobile phones and tablets, and gaming consoles like Microsoft’s Xbox and Nintendo’s Switch.

“Apple's business model was developed long before it had anything that anyone claimed was market power,” Apple’s lawyer argued, saying that its model more effectively protects users from malware and other security and privacy breaches than Android-based devices.

The tech giant’s lawyers also positioned Apple’s less malware-ridden ecosystem as a market alternative to Android’s mobile operating system — an option that it said would be squashed, and would lessen competition for mobile devices, if it were forced to open its software to outside players.

“The iOS environment would be turned into the equivalent or perhaps even a poor annotation of Android. And that eliminates consumer choice,” Apple’s lawyer told Gonzalez Rogers.

Gonzalez Rogers came to an entirely different conclusion, writing in her order that the relevant market was incorrectly defined by both parties. Instead, she said, the market is the $100 billion market comprised of "digital mobile gaming transactions."

Still, even under that newly defined market, the judge said she could not ultimately conclude Apple is a monopolist under either federal or state antitrust laws.

"While the Court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct," the judge wrote. "Success is not illegal."

App Store revenues remain undisclosed

Apple doesn’t break out revenue for the App Store, instead bundling the marketplace with its Services business alongside Apple Music+, Apple TV+, iCloud, and other sources. Still, the Services segment totaled $53.7 billion in 2020, or roughly 20% of Apple’s $274 billion in total revenue for the year, with in-app purchases on gaming apps representing the App Store’s dominant revenue source.

Apple CEO Tim Cook waves from the elevator as he leaves after speaking during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021.  REUTERS/Brittany Hosea-Small
Apple CEO Tim Cook waves from the elevator as he leaves after speaking during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021. REUTERS/Brittany Hosea-Small (Brittany Hosea-Small / reuters)

Since the filing of Epic's suit, Apple has already conceded some of that App Store revenue.

In November, Apple restructured its App Store fees by dropping commissions from 30% to 15% for companies that make less than $1 million in revenue per year. Subscription services remained unchanged, with developers paying 30% for the first year of a subscription, and 15% for each subsequent year. Free apps remained free, with Apple taking no commission from developers for downloads.

And in August, in a settlement reached with a group of developers that brought a class action lawsuit against Apple, claiming that it monopolized distribution for iOS apps and in-app purchases, Apple agreed to let developers share purchase options with users outside of the iOS app. Apple also agreed to expand the price points that developers could offer for subscriptions, in-app purchases, and paid apps.

Correction: An earlier headline incorrectly stated the judge found that Apple violated antitrust law. In fact, the judge found it violated California’s unfair completion law. The error has been corrected.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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