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Epic Games, Apple Close Out Final Day of Courtroom Battle Over Monopoly Claims -- 2nd Update

05/24/2021 | 03:30pm EDT

By Tim Higgins

Apple Inc. spent the final moments of its high-profile courtroom fight against Epic Games Inc. arguing the videogame maker's antitrust lawsuit was simply a way for it to get out of paying for access to iPhone users.

The "Fortnite" creator argued the appropriate solutions to its claim that Apple abuses its market power include allowing developers to operate their own app stores on the iPhone and to use their own payment systems within apps.

"Nothing would be paid to Apple for use of its intellectual property for the use of the platform," Richard Doren, a lawyer for Apple, told the court. He warned of "mayhem" if Apple's review process isn't required.

U.S. District Judge Yvonne Gonzalez Rogers will rule in the coming months on Epic's claim that Apple has improperly prohibited third-party app stores on the iPhone and required app developers to use its in-app payment system that takes a commission of as much as 30%.

Apple has denied it is a monopoly, pointing to other ways Epic's game "Fortnite" can be distributed. The company has said its rules around the app store ensure the safety and reliability of apps for users. Apple has argued its fees are similar to others and that Epic is merely trying to get out of paying its fair share.

Instead of traditional closing arguments held before a jury, the judge had asked the two sides to prepare for a debate-style end to the trial that has lasted more than three weeks in Oakland, Calif.

Toward the end of the almost four-hour hearing, Judge Gonzalez Rogers, too, questioned how Epic's proposed solutions would compensate Apple.

"One of the issues that has concerned me throughout the course of this trial is that your client doesn't seem to be interested in paying for the access to customers who use iOS," she told Epic's lawyer, saying that Epic is "attacking the fundamental way in which Apple is generating revenue."

Gary Bornstein, the Epic lawyer, defended Epic's proposal, saying he expected Apple could find ways to profit from its intellectual property and noted it already has a model for how its business could look: the Mac computer lineup.

"Apple can still have an app store on your phone and encourage people to use it," Mr. Bornstein said. "If people value what Apple is providing, and I'm sure there are some who do on the developer side and the consumer side, those people can continue to shop at the App Store."

Since the trial began May 3, Epic attorneys have attacked a core part of Apple Chief Executive Tim Cook's growth plans for the future: the digital services offered by the company. Apple's services business generated about $54 billion in the past fiscal year. He faced withering questions on the topic from the judge on Friday.

Nick Rodelli, head of CFRA's legal edge research, estimates that app store commissions, along with money made from making Google the default search engine on its devices, account for 40% of Apple's pretax income. On Monday, Mr. Rodelli said in a note to investors that Epic now holds "a slight edge in winning."

The two sides began the morning debating a familiar topic: how to define the market at the center of the case. Epic would like Judge Gonzalez Rogers to consider the distribution of apps on iPhones as the market while Apple emphasized that there are many competing devices.

"The issue here is the monopoly that they have on the distribution of apps onto that platform," Mr. Bornstein, the Epic lawyer, said. "There is no path onto that platform, other than the one that they control that has led to decreased innovation and higher prices."

Judge Gonzalez Rogers began immediately probing their arguments, suggesting that Epic's view of the market and its substitutes could hurt consumers because they pick a particular digital ecosystem, such as Apple's iOS operating system, knowing they are walled gardens. "Your economic substitutes destroy that consumer choice," she said. Furthermore, she questioned why the market shouldn't be defined as mobile games.

Before Monday, the judge gave each side a list of topics she wanted to hear more about and instructed them to be prepared to talk about potential remedies. She has already raised the idea of letting app developers provide a link or inform users in the app that they could leave to find cheaper ways to pay for purchases outside of the Apple system -- something currently prohibited under the company's App Store rules.

Her sharp questions to Mr. Cook on Friday surprised some close observers along with her statements that suggested she finds parts of Apple's business uncompetitive, such as its in-app payment system.

On Monday, Apple defended its 30% commission. "That commission rate wasn't created by Steve Jobs," Dan Swanson, an Apple lawyer, said of the company's late co-founder. The price came from what was found on a digital videogame distribution platform called Steam and was cheaper than what was found in physical stores at the time, Mr. Swanson said.

Mr. Bornstein, Epic's lawyer, responded that there was no evidence that Apple felt pressure on pricing from competition. The judge has raised several times the suggestion of finding a way to allow app developers to notify users of an alternative payment system inside the app that circumvents Apple's system.

The judge has said it would take her several weeks to render a verdict, joking that she hoped it could be done before Aug. 13 -- the first anniversary of Epic launching a sophisticated campaign to challenge Apple's power that landed both sides in her courtroom this month.

On that date a year ago, Epic introduced an in-app payment system in "Fortnite" aimed at circumventing Apple's system and violating its rules. The game was quickly kicked out of the app store and, in turn, Epic filed its lawsuit against Apple. The case centers around themes of online platforms and digital commerce that are being hotly debated by lawmakers and regulators around the world.

A loss by Apple threatens a key part of Mr. Cook's strategy for diversifying the company's business after seeing the stagnation of iPhone sales in recent years.

But winning an antitrust case in the U.S. has traditionally proven hard for plaintiffs; courts in recent years have given more latitude to company practices through a more narrow reading of antitrust laws.

Epic has to convince the judge its market definition is correct. It also has to show that Apple's policies cause antitrust harm and that the practices don't benefit the consumer.

Apple has spent a lot of time justifying its prohibition of third-party stores by arguing it protects users and pointing to its app review process as helping ensure security and reliability.

Epic has countered that the security concerns are overblown, arguing a third-party store could provide equal protection and that the safety of the iPhone is rooted in its operating system. Both sides have presented conflicting testimony on the security of the iPhone.

During Friday's proceedings, the judge turned to Mr. Cook and asked him about it directly. "Mr. Cook, what do you think the third-party data shows?" she asked. "You personally, the difference."

He told the judge that the data shows 1% to 2% of malware is on iPhones. "It's quite a difference," he said.

Write to Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

05-24-21 1730ET

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