Special Edition: Understanding Antitrust - Part 2 - A Very Short Minute History Lesson

A gaming juggernaut, the most valuable company in history, & a cheeky 1984 ad with livestream in a video game - all the makings of an Epic tech lawsuit. Part 2 of multi-part series on Antitrust.

Essay X Part 2 - A Very Short Minute History Lesson on Antitrust

Quick Catch Up on the Apple v Epic Lawsuit

Since my last essay, Apple has now counter-sued Epic seeking monetary damages. The brief filed by Apple calls out the following issues:

• Apple sees Epic’s lawsuit as nothing more than disagreement over money and calls Epic’s stunt as robbery.

• Apple states that Epic has taken advantage of the innovative model of the App Store to make billions and now wants a free ride using those billions as leverage.

• Apple has gone out of their way to provide support to get Epic to this billion dollar point even prior to Fortnite (anyone remember Infinity Blade).

• Apple has created the tools to allow Epic to generate this innovative games on it’s platform and it’s not anti-competitive to charge for these tools and services.

• Apple claims that this could’ve been easily addressed with private negotiations but Epic chose to violate the App Store and Apple Developer Program Terms of Services and Agreement with their in-app transaction stunt.

• Apple humblebrags about not being a monopolist leader in any market and subject to market competition from other phone and technology manufacturers.

  For starters, Apple is not a monopolist of any relevant market. - Apple Counter Lawsuit - Page 3 Line 23.

• Apple calls the need to review each app as an absolute privacy and security mitigation strategy. Apple cites how Tim Sweeney himself called out this need for reviewing of games on Epic’s Game Store. To through some proper shade, Apple cites how Epic has done this job with mixed results exposing Android users to malware via their Game Store.

• The way Apple describes the series of events that happened leading up to Epic launching the lawsuit and PR campaign as if it’s something straight out of Money Heist concocted by The Professor. It’s totally worth the read.

  APPLE’S ANSWER AND COUNTERCLAIMS TO EPIC’S COMPLAINT FOR INJUNCTIVE RELIEF Case No. 3:20-cv-05640-YGR (Link)

  As recently as April 2020, Epic executives recognized and thanked Apple for its support and promotion of Fortnite events.

  But sometime before June 2020, things changed. Epic decided that it would like to reap the benefits of the App Store without paying anything for them. Armed with the apparent view that Epic is too successful to play by the same rules as everyone else—and notwithstanding a public proclamation that Epic “w[ould] not accept special revenue sharing or payment terms just for ourselves”1—Epic CEO Tim Sweeney emailed Apple executives on June 30, 2020, requesting a “side letter” that would exempt Epic from its existing contractual obligations, including the App Store Review Guidelines (the “Guidelines”) that apply equally to all Apple developers. Among other things, Mr. Sweeney demanded a complete end-run around “Apple’s fees”—specifically, Epic wished to continue taking full advantage of the App Store while allowing consumers to pay Epic instead, leaving Apple to receive no payment whatsoever for the many services it provides developers and consumers. Mr. Sweeney also demanded the right to coopt the App Store to deliver “[a] competing Epic Games Store app,” in another bid to line Epic’s pockets at Apple’s expense and fundamentally change the way Apple has run its App Store business for over a decade on the iOS operating system for iPhones and iPads. Mr. Sweeney expressly acknowledged that his proposed changes would be in direct breach of multiple terms of the agreements between Epic and Apple.

  When Apple rejected Epic’s request for a special deal, rather than abide by its long-running contractual agreements pursuant to which it has earned over $600 million, Epic resorted to self-help and subterfuge. On August 3, 2020, Epic sent a Trojan horse to the App Store—a new version of Fortnite that included what Epic has euphemistically described as a “hotfix” that allows Epic to bypass Apple’s app review process and ability to collect commissions by directing app users to pay Epic instead, cutting Apple out entirely.

  Unbeknownst to Apple, Epic had been busy enlisting a legion of lawyers, publicists, and technicians to orchestrate a sneak assault on the App Store. Shortly after 2:00 a.m. on August 13, 2020, the morning on which Epic would activate its hidden commission-theft functionality, Mr. Sweeney again emailed Apple executives, declaring that “Epic will no longer adhere to Apple’s payment processing restrictions.” According to Mr. Sweeney, Epic would continue to use Apple’s

  App Store but would “offer[] customers the choice” to pay Epic instead of Apple, effectively depriving Apple of any return on its innovation and investment in the App Store and placing Epic in open breach of years-long contractual obligations to which Epic and all other Apple developers have agreed.

  Hours after Mr. Sweeney’s 2:00 a.m. email, Epic triggered the “hotfix” it previously planted in Fortnite to push through a new external payment runaround—which Epic had deliberately concealed from Apple’s app review process—that usurped Apple’s commission and brazenly flouted its rules. This was little more than theft. Epic sought to enjoy all of the benefits of Apple’s iOS platform and related services while its “hotfix” lined Epic’s pockets at Apple’s expense.

  Following Epic’s open, admitted, and deliberate breach of its contractual obligations and the cold-blooded launch of its “hotfix,” Apple rightfully enforced its rights under the contractual agreements and the Guidelines by removing the non-compliant Fortnite app from the App Store. In keeping with its self-serving narrative, Epic attempts to recast Apple’s conduct as “retaliation.” But the exercise of a contractual right in response to an open and admitted breach is not “retaliation”; it is the very thing to which the parties agreed ex ante.

  Epic proceeded to launch a calculated and pre-packaged campaign against Apple “on a multitude of fronts – creative, technical, business, and legal,” as Mr. Sweeney had previously threatened. Epic filed its pre-drafted 56-page Complaint in this case mere hours after the removal of Fortnite from the App Store. Epic then publicized its willful contractual breaches through an animated Fortnite short film that mimicked Apple’s seminal 1984 Macintosh campaign and villainized Apple for enforcing its contractual right to remove the non-compliant Fortnite from the App Store. Epic’s wrongheaded Complaint is fatally flawed on the facts and law.

  So, things are heating up. Everyone will be watching this lawsuit very closely because this will have wide ranging impact to the entire tech industry and how antitrust is handled.

A Very Short History of Antitrust in the United States

There are 3 main laws that govern Antitrust in the United States.

1. The Sherman Act of 1890 which makes it illegal for companies to either work together to suppress or form monopolies to crush competition.

2. The Clayton Act of 1914 which regulates mergers and acquisitions to prevent monopolistic behaviour.

3. The Federal Trade Commission Act of 1914 which establish a governing body to regulate and ensure healthy competition and enforce the Sherman and Clayton Acts.

Although these laws are at the Federal level, each State has its own set of antitrust legal framework to enforce and govern companies operating within said States.

If you read the above and thought “Hmmm, these laws are pretty old”. Exactly. These laws were passed as a way to fight against trust owners and champions of industry (Rockefellers) from an age very Oil and Steel companies stood in the place of Big Tech. Can we really be using laws meant to curb monopolies from the Industrial Age to regulate competition in the Information Age? The short answer is, we have no choice.

Until Congress can breakthrough the gridlock and focus on passing comprehensive modernization of the antitrust laws, the FTC and DOJ have no choice but to lean on these outdated laws to enforce anti-competitive and monopolistic behaviour by the Big Tech companies. The laws are vague enough to allow legal review but the concept of market domination, anti-competitive behaviour, and monopolies in the age of Amazon, Facebook, Google, and Apple is not woefully misaligned. Big tech has adopted the language of competition and market forces by paying close attention to the weakness of antitrust laws to find way to create monopolies or at least monopolistic behaviour (prime example, Facebook/Instagram/WhatsApp and Amazon/Retailer/Prime/Video).

In the next essay, let’s talk about what anti-trust case gives us the best idea of how this lawsuit could go. Thanks for reading.

Reference: Apple Countersuit filed Sept 8, 2020.

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