Context: While Epic Games’ lawsuit against Apple (games fray article list) has drawn far more attention since the shocking ejection of Fortnite Mobile from the App Store, a different case tackling Apple’s standard 30% commission rate goes back to the early years of the iPhone and even reached the Supreme Court a few years ago: Pepper v. Apple, meanwhile captioned In re Apple iPhone Antitrust Litigation. Pepper’s Supreme Court win did not resolve the merits, but resulted in a holding that consumers are the ones who pay the app fees, including Apple’s commission, and can therefore seek antitrust damages from the iPhone maker. Technically that was not an issue in Epic v. Apple, but Epic may have been encouraged by the Supreme Court’s ruling against Apple when it launched its Project Liberty shortly thereafter. The consumer class-action was on a slower track and got delayed by issues concerning the certification of the class, a prerequisite to a trial.
What’s new: On Friday, Judge Yvonne Gonzalez Rogers (“YGR”) of the United States District Court for the Northern District of California granted the motion for class certification and threw out Apple’s Daubert motion to deem the plaintiffs’ economic experts’ testimony unreliable. That testimony includes a claim that a competitive App Store commission rate would be 13.69%, based on an analogy with Microsoft’s app store for Windows. The expert made the assumption that Steam is not a good point of comparison due to anticompetitive behavior, but the numbers were ultimately going to be consistent. The court will hold a case management conference on February 26, 2024 and wants the parties to state their position on certain case management questions 10 days before. Class certifications are appealable.
Direct impact: Should Apple not appeal, the case would probably still go to trial in 2024. While the cases are (and the juries would be) different, the outcome in Epic Games v. Google (where Google is now fighting against the jury verdict (yesterday’s games fray article)) is a warning to Apple. The class certification order mentions that result in a footnote.
Wider ramifications: Normally, class actions like this are settled, especially with the lawyers being in the driver’s seat. In this case, the class-action lawyers who took the entire financial risk have been working on the case for more than a decade without getting paid. But with a view to the global landscape (including, but not limited to, a foreseeable rate-setting dispute in the EU (January 26, 2024 games fray article) and even the political situation in the U.S., Apple may not be interested in a settlement: a trial could go either way and there could still be years of appellate proceedings, but if Apple agreed to make a payout to consumers, millions of U.S. iPhone users would get a letter telling them that Apple illegally overcharged them. The impact of such a mass mailing on its reputation and its customer relationships would hurt Apple far more than the financial impact. Also, any concession or final ruling that a competitive App Store commission rate would be far lower would make it at least very risks for Apple to sustain its terms. While Epic didn’t prove a single-brand aftermarket for iOS app distribution, the consumer class-action is pursuing and may prevail on that theory, which would open the floodgates to various other challenges to Apple’s rules as Apple would then have been held to have a 100% monopoly.
The Pepper case is not Epic‘s case, but it is even more epic:
The complaint that started this litigation was filed in December 2011 (and there was some other attempt even prior to that). It seeks redress on many U.S. consumers’ behalf going back to 2008, the year Apple launched the App Store. During the pendency of that litigation, the world changed in many ways,. The App Store is now huge, and the problems are even worse. The fact that Apple halved its commission rate for small businesses is of practically no relevance in this case, not only because it covers a long period that preceded that rate change but also because the bulk of iOS in-app consumer spend is on apps made by companies to which the lower rate doesn’t apply anyway.
Presumably the class-action lawyers thought that at some point a company as rich as Apple would pay them something just to go away. But there is too much at stake for Apple, and Apple already appeared to have fended off this class action when Judge Gonzalez Rogers initially threw out the case because she argued that only developers paid the commission rate to Apple and consumers couldn’t recover damages under the Illinois Brick doctrine. The Ninth Circuit disagreed. That made sense, given that Apple charges consumers and then passes on to developers whatever it charges minus taxes, including the tax Apple itself imposes (the monopoly App Store commission). The matter then reached the United States Supreme Court. At the time, there was a 5-4 conservative majority, but Justice Brett Kavanaugh sided with Democrats on this one (May 13, 2019 Supreme Court ruling (PDF)).
The Supreme Court did not say that Apple acted anticompetitively as that was not the question. It was a matter of standing (the right to sue). If only developers had been deemed to have standing, the consumers would have lost for that reason, regardless of Apple’s potential wrongdoing. It was just a holding that consumers would have been harmed if Apple actually overcharged for app distribution. There is, of course, a rule that there can’t be double recovery: if, for instance, a major game maker sued Apple and got a large part of past app commissions back, consumers couldn’t get the same money as well. But the courts will have to cross that bridge if and when they get there. The economic experts working for the consumer class make an argument that there is competition between app makers that would result in a substantial part of the savings (from a lower App Store commission rate) being passed on to end users in the form of price reductions.
Select observations on class certification order
Apple argues that its previous reductions of the commission rate (such as the 15% small business rate) didn’t have such an effect, but that was not enough of a reason for Judge Gonzalez Rogers to deny class certification. The argument is still going to be made to the jury, or it may already come up if Apple appeals this order, which in games fray‘s opinion is more likely than not to happen. Apple would presumably want to have that chance to avoid a trial, and it would benefit even from a mere delay (as its worldwide behavior in the wider context demonstrates). It’s just that a “frivolous” appeal wouldn’t do Apple any favors with the courts involved. While Judge Gonzalez Rogers’ decision to certify the class appears very well-reasoned, an appeal by Apple wouldn’t be wholly unreasonable.
Epic’s loss over its antitrust claims wouldn’t deprive the class-action lawyers of actually proving their case, including a single-brand market, but Apple would hope that the outcome of Epic’s case could psychologically influence the appeals court.
There was an intellectually dishonest argument that Apple made: Apple argued that the plaintiffs’ economic expert testimony relies on a model where one major rival would put competitive pressure on the App Store, as opposed to multiple ones. Judge Gonzalez Rogers easily saw that more app stores might mean more competition, and a model based on a two-horse race was good enough.
One of the key challenges here is that there are many iPhone customers and even many who made in-app payments that were not harmed. Over the course of the litigation, the class-action lawyers have refined their class definitiion and their economists have also done further homework. For instance, a sample of 0.1% of U.S. App Store customers has been analyzed by now, and that sample is large enough to provide a pretty good indication. At this point it apears that only a single-digit percentage of the consumers who fall under the class definition are unharmed, and there is no hard rule that a certain percentage of unharmed class members renders a class uncertifiable as long as the class members are predominantly harmed by the alleged conduct.
Huge risks to Apple
The hypothetical payout here could amount to tens of billions of dollars to consumers. As discussed in the fray4 summary further above, the stakes for Apple are high as a final judgment against it or a concession under a class-action settlement would have implications going far beyond the direct financial impact (and even that one could be very significant, even for the richest company in the world).
Apple’s latest financial report and the information provided in that context shows why this class action is more than just a pain in the neck for Apple that it could wipe away with a bunch of cash:
Apple’s iPhone is still going strong, but not so much in China now. With more than 2 billion Apple devices being in active use, Apple’s growth is increasingly a question of milking the installed base. What Apple calls “Services” revenue is in fact largely the app tax, but also involves services like Apple Music that benefit from Apple’s ability to self-preference and to tax its competition.
The U.S. market is the most lucrative one for Apple. It has a high market share there, and a large customer base that spends money on and in apps. Apple’s CFO stated this week that the EU accounts for only 7% of global App Store revenue. Still, Apple is going to fight hard to prevent the emergence of rival app stores in the EU, not only because even 7% of global App Store revenue is still a lot but also because rival iOS app stores in the EU would foreseeably prove that users’ privacy and security are not compromised, debunking Apple’s favorite set of pretexts. And the competitive effects, including lower prices for consumers, would become visible, which could then also affect legislative proceedings, regulatory actions and private lawsuits in various jurisdictions.
The global app store battlefield is complex and comes with many interdependencies that games fray strives to keep track of and explain. Finally, here’s the class certification and Daubert order: