Context: Apple has made its first huge mistake in the war over iOS app distribution terms as EU internal market commissioner Thierry Breton accuses the iPhone maker of trying to silence critics through bullying (previous games fray article). EU competition chief Margrethe Vestager also stated a clear priority on mobile app stores in connection with enforcement of the Digital Markets Act (DMA) (March 6, 2024 games fray article). But Apple has strong incentives to defend its app distribution terms (March 5, 2024 games fray article). The end game is the FRAND game (March 4, 2024 games fray article): achieving fair, reasonable and non-discriminatory terms. High fees have rendered app store regulations in several jurisdictions useless and threaten to minimize the impact of Epic Games’ U.S. court injunction against Apple (January 19, 2024 games fray article).
What’s new: In this article, games fray explains one of the measures Apple’s adversaries should take in order to combat Apple’s excessive charges. The movement for open app markets must understand that Apple’s end game is centered around intellectual property (IP) valuation. Just like privacy and security are Apple’s favorite pretexts in the middle game, IP is Apple’s shield in the end game.
Direct impact & wider ramifications: If all that Apple’s critics propose is that Apple should get nothing because there are platforms such as Windows where everyone is free to distribute apps without paying commissions, they’re unlikely to win as there is no shortage of other examples. Apple’s IP valuation-centric arguments are spurious, but until they are debunked, they will stand in the way of a workable solution. Once regulators, courts and lawmakers see that Apple is not just seeking some reasonable compensation for its IP, Apple will have a far harder time defending its terms. But IP valuation is a specialized field, and not all App Store critics have engaged in it before.
The value of its IP, the right to control its IP and the claim that only certain business models allow for efficient royalty collection are all part of Apple’s last line of defense. Intellectual property is a buzzword. “Intellectual” is awe-inspiring as it suggests inventorship, creativity, hard work. “Property” means an absolute right to control and commercialize something. That’s what makes IP such a powerful term in debate.
But IP isn’t always valuable. Sometimes it’s not enforceable. Sometimes it won’t withstand a serious challenge, in which case it’s simply eliminated.
In a recent tweet, Epic Games CEO Tim Sweeney referenced the problem that Apple (and Google) impose effectively the same app store commission (just reduced by 3% or 4%, depending on jurisdiction, to account for external payment processing such as by credit card companies) if app makers offer an alternative payment system as if they were going through those companies’ default app stores:
The problem is real: it means that alternative payment systems are a counterproductive choice. There are no savings that app makers could pass on to consumers in whole or in part. It means that Epic and its allies survived the opening, won the middle game to at least some extent, but lost the end game, which they have to win or there won’t be a reward.
Whenever and wherever they engage in lobbying, Apple and Google will hire as many lobbyists as they can find on the market, and they’ll pay enough to get some of the most skilled ones. So the answer is not to do even more lobbying, or to lament someone else’s lobbying efforts. It’s to improve their strategy.
From the Epic Games v. Apple litigation to its DMA compliance plan, Apple has consistently argued that it owns IP and doesn’t have to let app makers use it for free. And Apple claims that it should then be free to define some rules that make royalty collection efficient.
What have Apple’s adversaries done to counter those arguments? Almost nothing in the Epic v. Apple litigation, where the court would probably have been unwilling to spend too much time on IP (and IP valuation) questions, and absolutely nothing in the public debate.
This article now explains the three key steps for Apple’s foes to take.
1. Understand the inevitability of the task
That must change now. IP valuation is a specialized field, and Apple has been dealing with it for some time. But you can’t avoid dealing with it. Apple’s EU app rules involve an IP license in the form of a 50-cent per-install per-year Core Technology Fee (CTF). That’s the only variable fee Apple imposes on alternative app stores and the apps distributed through them. Its impact is far greater than one might think (January 28, 2024 games fray article). For instance, if a game gets 4% of its users to pay (a pretty good conversion rate; it’s where Candy Crush was in 2013), it means you pay € 12.50 per installation per year, and actually more because there will be many users who still have it on their phone and get automatic updates, but don’t play it anymore.
If App Store critics think they can duck the IP valuation question forever, they’re mistaken. The longer they wait to finally tackle it, the further they’ll be from a commercially viable solution.
The closest thing to an IP valuation argument that Apple’s critics have made so far was when Epic CEO Tim Sweeney complained about “new Junk Fees on downloads”:
It’s important to push back on the CTF, but Apple’s critics must answer the question of what Apple may demand for the use of its IP and how it may ensure it gets paid. The question also came up in the remedies part of the 2021 Epic v. Apple closing argument. Gibson Dunn lawyer Richard Doren said that even if others (which he didn’t mention, but that would also include Microsoft with Windows, and even Apple itself with the Mac) don’t charge app makers for the use of their IP, Apple is entitled to something. Cravath’s Gary Bornstein, who delivered closing argument for Epic, acknowledged that Apple may charge something, “provided that it is reasonable and non-discriminatory.”
The EU DMA says that App Store terms must be FRAND. It doesn’t explicitly say that IP license fees imposed on app developers must be FRAND, too, but let’s assume for the sake of the argument that Apple will either not dispute that or, as a matter of principle, dispute it but sooner or later (with an amended DMA if it comes to worst) a FRAND licensing obligation will be established.
2. Force Apple (directly or with regulators’ help) to specify its IP
If we want to talk about what amount (and what charging mechanism) would be FRAND, we must first identify what IP Apple actually wants to get paid for. As obvious as that may sound, no one has actually demanded it yet (at least not in the public debate).
What types of IP? A mix of copyrights (in the expressive elements of program code, which is controversial for application programming interfaces), patents, and patent-like rights such as utility models (which are low-cost patent-like IP rights in certain jurisdictions).
It wouldn’t be FRAND for Apple to double-dip and charge app makers for program code that is on an end-user device: the customer has already paid for that.
In order for an app to run on iOS, however, some program code must be copied into the app itself so it can access operating system functions. If you write your app using Apple’s Swift programming language, there will be a significant amount of runtime code within your app that is not already on the end-user device before the download. If you use Apple C++, you still need Apple’s Xcode development environment to build your app and each app includes a runtime library called libc++. That’s where IP not already licensed to the end user comes into play. In the IP context, Apple would likely point to its Software Development Kit (SDK).
Apple has not published a list of relevant patents, much less claim charts (documents that explain why a particular patent is actually used by something). In its proposed findings of fact and conclusions of law in the U.S. Epic litigation, Apple said this about patents relevant to app development:
“The iOS ecosystem, including the App Store, is made possible by, and comprised of, Apple’s intellectual property, and without the use of that intellectual property, it would not be possible to build an app for iOS. Cook TT; Schiller TT.
“Apple has invested substantially in protecting its intellectual property rights in its iOS ecosystem. Malackowski TT. Apple holds approximately 1,237 U.S. patents, and an additional 559 patent applications, related to iOS. Malackowski TT. Apple also holds 165 U.S. patents and 91 U.S. patent applications related to the App Store. Malackowski TT. Apple holds hundreds of U.S. patents and patent applications related to app distribution and development, including comprehensive app developer tools, frameworks and related services directed towards the infrastructure of iOS apps and their use of data and web content, advanced user interactions and features, in-app purchase functionality, and security and privacy innovations that are designed into iOS and iPhone hardware and software. Malackowski TT.”
That’s just some numbers and keywords, but not very specific.
So how can you get Apple to come clean on what particular IPRs (such as what patents) it claims app developers must license, even up to the point where Apple has to provide patent claim charts?
The EU Commission could ask for such documentation, though Apple could argue that the DMA doesn’t regulate IP licenses per se. Also, if Apple provided the information to the EC, it wouldn’t become public.
If the EU institutions conclude that licenses to IP that is essential to the access to such platforms as iOS should be explicitly regulated by an amended DMA, then they could require the publication of lists of, and patent claim charts for, essential IP, just like gatekeepers have to provide transparency on other terms.
In the meantime, companies could sue Apple over that license and try to create a situation in which Apple has to “put up or shut up.” But in order to get there, they’d have to convince a court of law in an EU member state that for DMA or antitrust reasons, Apple’s IP license fee can be subjected to court review and potential court-ordered adjustments.
3. Then show that Apple’s IP isn’t worth what Apple charges
There are two scenarios to consider: one in which Apple has been forced to disclose its IP with claim charts, one in which they have to publish a list of patents but don’t have to provide claim charts, and one in which they provide nothing.
3.1 Attack Apple’s patent list and claim charts
An IP law firm could be commissioned to analyze the declared-essential patents. One would select a sample of the claim charts based on some objective criteria (which can also be a random pick, provided that there is a well-documented process for it that rules out manipulation) and then examine those. This is not only a technical task but begins with claim construction (determining what the relevant terms mean). On that basis, one would see how many are actually used.
But it’s not enough for patents to be actually essential: they must also be valid. Most patents in that field don’t survive a professional challenge. The cost of a prior art search is significant for each patent, but that’s what Apple’s rivals would have to do in order to show Apple wants to overcharge. It’s possible that out of every 10 patents Apple claims to be essential, 7 or 8 will be destroyed in their entirety if challenged and the rest will be narrowed, with only a few patents surviving in their granted form.
The way to prove those patents invalid is to challenge them. In the EU, those patents will largely have been granted by the European Patent Office. Unless they’re very young, they can’t be challenged in the EPO, but still in court. And it’s possible to get opinions from certain patent offices, such as in Sweden, where you can submit prior art to the patent office and ask them to take a look at whether a certain patent would have been granted if the submitted prior art had been known to the examiner.
The Unified Patent Court’s Central Divisions and national courts provide different options. The Federal Patent Court of Germany is a patent graveyard, but it’s also very slow. Despite Brexit, one might also bring invalidation actions against the UK parts of certain Apple EPO patents. That has been done quite often, in fact, to influence court proceedings in Germany through persuasive authority. What you need is independent decisions according to which certain Apple patents are invalid.
All of that costs time and money. But if you have a high hit rate, you completely undermine Apple’s IP argument. You call into question, in the eyes of lawmakers, regulators and courts of law, that Apple is entitled to anything near what it’s charging.
If you attack a sample of allegedly essential Apple patents on both essentiality (infringement) and validity grounds, it’s possible that Apple will in the end not hold a single patent in the EU that developers really need to license. It’s harder in Europe to obtain software patents, which is why companies like Apple typically hold a far lower number of patents in Europe than in the United States.
3.2 Attack Apple’s patent list without claim charts
If Apple has to provide a list, but not claim charts, you can still attack those patents on validity grounds as described in the previous subsection. On the essentiality side, you may then want to apply a coarse filter and rule out patents that based on the nature of the invention (without going into details) don’t have to be licensed by app developers. You then perform an analysis based on a sample of patents that made it through the coarse filter. You wouldn’t know why Apple believes those patents are essential, so the analysis will be more costly. But it’s still worth it.
3.3 Attack Apple’s claim even if they don’t even provide a list
If Apple provides nothing, not even a list of patents, you need help from patent experts who will identify a good coarse filter to identify patents that are sufficiently likely to be relevant to app developers that further analysis will be performed manually. The tricky part is that keywords are not necessarily reliable, as a patent could cover “objects” and “digital assets” but actually be a patent on a mechanism for updating an app.
One could identify a range of potentially relevant patents and at least show that a number of those are invalid. Even if one had some false positives (patents deemed potentially irrelevant though they aren’t) on that list, it’s a reasonable assumption that if Apple patents on certain types of technologies have a high invalidation rate, the rate is similarly high for actually essential patents.
Shooting down a significant number of Apple patents will help to make the case that Apple way overstates the commercial value of the license it forces app developers to take in the form of the Core Technology Fee.
If Apple refuses to provide even the most basic information, which is a patent list, those taking aim at Apple’s patents have more work to do, but in that case it won’t be a random sample and Apple’s adversaries can specifically target weak patents to make Apple look really bad.
4. Realize that Apple plays the same game
When Apple wants to bring down the cost of licensing standard-essential patents (SEPs), it plays the very same game. In 2022, there was a dispute between Ericsson and Apple. Apple attacked dozens of patents (through petitions for inter partes review by the United States Patent & Trademark Office), many of which Ericsson wasn’t even asserting against Apple. In that situation, Apple capitalized on a similar effort by Samsung the year before.
The whole purpose Apple challenged a huge number of patents, besides driving up litigaiton costs, was to get some results that it could use as an argument to bring down Ericsson’s royalties.
This article describes just one of the measures to take so that Apple’s adversaries have a more solid basis for discussions with lawmakers and regulators as well as for judicial proceedings to prove that Apple’s €0.50 fee per install per year is unjustified. If hardly any Apple patent proves to be valid and essential, then the term “Junk Fee” would be perfectly appropriate and based in fact. That may very well be the outcome, but you first have to get there.
The assumption that Apple will be forced by anybody to lower the €0.50 fee without some kind of IP valuation taking place somewhere is not realistic.
Anyone who wants to embark on this effort can reach out to games fray for recommendations of European patent attorneys and patent litigation firms that are in a strong position to help.