International Tax Panorama

On friday morning, a U.S Federal judge put some new restrictions on Apple’s App Store rules in the Apple vs Epic case, that will impact all the developers, along with the game developers who are the biggest cash generators for Apple’s App Store.

How the dispute began?

Apple and Epic Games have been fighting for years over the transaction fee system in the iOS App Store. Under the system Apple charges 30% revenue cut on each purchase made in the App Store. Apple justifies it as a necessary operating cost but Epic challenged it as a monopolistic tax. 

The fight came to a full swing in August 2020 when Epic installed an alternative payment system in Fortnite to bypass the App Store’s transaction fees. Apple retaliated by removing Fortnite from the App Store, which caused an immediate legal complaint from Epic.

Epic Games’ legal complaint alleged that Apple has been running an illegal monopoly that stifles competition.

The Ruling:

After a 3 week trial in May the ruling finally came before Gonzalez Rogers of the U.S. District Court for the Northern District of California.

The U.S. federal judge provided partial relief to Epic games. It struck down some of Apple Inc’s App Store rules, compelling the company to let developers send their users to other payment systems.

The judge ruled that Apple can no longer stop developers from providing links or buttons in their apps that direct customers to alternative paymnet system outside of Apple’s own in-app purchase system. The ruling also said Apple cannot ban developers from communicating with customers via contact information obtained by the developers when customers signed up within the app.

However Epic games suffered a setback in the seperate judgement. Here the court ruled that Epic Games breached its contract with Apple when it implemented the alternative payment system in the Fortnite app. As a result, Epic must pay Apple 30 percent of all revenue collected through the system since it was implemented — a sum of more than $3.5 million.

Hence the judge allowed Apple to continue to charge commissions of 15% to 30% for its own in-app payment system.

Is Apple monopolistic? 

To discuss where Apple is a monopolistic the judge interpreted the definition of marketplace. Here, the judge rejected both parties’ definition of the marketplace at issue in the case. “The relevant market here is digital mobile gaming transactions, not gaming generally and not Apple’s own internal operating systems related to the App Store,” Gonzalez Rogers wrote.

Under that market definition, “the court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws,” she continued. “Nonetheless, the trial did show that Apple is engaging in anti-competitive conduct under California’s competition laws”, that required a nationwide remedy.

Impact of the Ruling:

The decision will have repercussions for all the developers, including the game developers who are the biggest cash generators for Apple’s App Store, which itself is the foundation of its $53.8 billion services segment.

The US Federal judge described the ruling as a “measured” change to Apple’s rules. However Analysts said the impact may depend heavily on how the iPhone maker chooses to implement the decision.

Apple officials said the company is still dicussing how it will implement the requirements of the ruling and whether it will appeal.

On the other hand Epic said it would appeal the ruling, as the ruling “isn’t a win for developers or for consumers.”

Changes to Antitrust laws require Parliamentary action

U.S. Congress Lawmakers said the ruling showed that courts are not sufficient to address the issue. Thus the ruling makes it clear is that antiquated antitrust laws cannot solely be fixed by the courts. Apple and Google’s monopolistic practices will only diminish when lawmakers will consider bills that would force Apple to allow third-party in-app payment systems.