Antitrust UCL and Privacy

Northern District of California’s Bifurcated Decision on Injunctive Relief Between Games and Graphics Engines in Epic Games, Inc. v Apple

Diana Yen
UCLA 2022 J.D. Candidate

The recent decision out of the Northern District of California in Epic Games, Inc. v. Apple Inc., Case No. 20-cv-5640, 2020 U.S. Dist. LEXIS 154321 (N.D. Cal. Aug. 24, 2020), sheds light on the standard for granting preliminary injunctive relief in antitrust cases. In an August 24, 2020 order, Judge Yvonne Gonzalez Rogers granted in part and denied in part Epic Games, Inc.’s (“Epic”) motion for a temporary restraining order against Apple Inc. (“Apple”). Although the court found that Epic failed to establish the elements required to restrain Apple’s actions against the games business of Epic (namely Apple’s delisting of Fortnite, described further below), the court granted Epic’s request to temporarily restrain Apple from restricting, suspending, or terminating Epic’s Unreal Engine, a graphics engine used to develop video graphics. The facts that led to the court’s bifurcated decision between the games business and Unreal Engine provide insight into the circumstances that justify the extraordinary remedy of injunctive relief. This decision is just the beginning: the court set a schedule for the motion for preliminary injunction, including a hearing set for September 28 via the Zoom platform and has indicated it wishes to hold trial in July 2021.

BACKGROUND

As described in the decision, Apple created and maintains an App Store for its iOS platform that allows third-party developers to create and sell applications to Apple’s users, namely iPhone users. Apple generally takes 30% of an application’s sales, including the sale of the application itself and any in-app-purchases (“IAPs”) made within an application. Apple’s agreements with developers and the App Store guidelines do not generally permit third-party developers to circumvent the IAP system. Epic Games, 2020 U.S. Dist. LEXIS 154321, at *4.

Epic specializes in video games. The company is probably best known for its massively popular multi-platform game, Fortnite. Fortnite is structured around “seasons,” in which the game introduces new narratives, themes, and events for a limited time. Fortnite’s latest season requires an update of the game to play. Users who do not update their game to the latest season will lose some functionality, like playing across platforms with other users who have updated their game, but largely retain the ability to play their version of the game. Id. at *2-3.

Epic Games International, S.a.r.l (“Epic International”) is a Swiss company related to Epic that hosts the Unreal Engine. The Unreal Engine is a graphics engine that assists in video game and video development. Epic International licenses the Unreal Engine to other developers, including third parties in industries ranging from architecture projects, entertainment production, and medical training. Id. at *3.

THE LITIGATION

In August 2020, Epic updated Fortnite on mobile devices to allow users to make IAPs either via the App Store or directly from Epic, an alleged breach of its agreements with Apple. Id. at *4. This optionality presented users IAPs that were 20% cheaper if purchased through Epic directly, which Epic characterized on its user interface as a discount. This was part of a larger update that made Fortnite’s relevant IAPs cheaper across all platforms including PS4, Xbox One, Nintendo Switch, PC, and Mac.

In response, Apple removed Fortnite from its App Store, where it remains unavailable. Epic, in apparent anticipation of Apple’s response, filed this action the same day of Fortnite’s removal, alleging violations of the Sherman Act, California’s Cartwright Act, and California’s Unfair Competition Law. It also began a blistering marketing campaign against Apple, including a remake of Apple’s 1984 Super Bowl ad poking fun at then-behemoth IBM. The next day, Apple informed Epic that, based on Epic’s alleged breaches of the App Store guidelines and the developer program license agreement, it would be revoking all developer tools, which would preclude updates for other programs, including the Unreal Engine. Epic then filed the instant motion. Id. at *4-5.

THE COURT’S DECISION ON THE MOTION FOR TEMPORARY RESTRAINING ORDER

In adjudicating Epic’s motion for temporary restraining order, the court applied the familiar standard for injunctive relief: plaintiffs must establish four factors: (1) they are likely to succeed on the merits; (2) they are likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in their favor; and (4) an injunction is in the public interest. Winter v. Natural Resources Defense Council. Inc., 555 U.S. 7, 20 (2008). The court addressed each of the factors in turn, noting a clear delineation in applying the factors between the games business and Unreal Engine. Id. at *6-7.

LIKELIHOOD OF SUCCESS ON THE MERITS

Epic brought ten claims for violations of Sherman Act, the California Cartwright Act, and California’s Unfair Competition Law. Based on the current limited record before it, the court found that Epic failed to meet the “high” burden of demonstrating a likelihood of success on the merits, but noted “serious questions do exist” with regard to Apple’s App Store policies. Id. at *7.

IRREPERABLE HARM

The court recognized that the issue of irreparable harm focuses on the harm caused by not maintaining the status quo. At its core, irreparable harm is harm or injury that cannot be repaired by money damages. Here, the court seemed to be guided by the notion that self-inflicted wounds do not result in irreparable harm to find that Epic had not demonstrated irreparable harm with respect to its games. The court noted that Epic intentionally and apparently strategically breached its agreements with Apple, when it could have simply continued to comply with the agreements until a determination on the merits. Id. at *8-9.

In contrast, the court found that Epic made a preliminary showing of irreparable harm with respect to Apple’s revocation of Epic’s developer tools. It also found that Epic did not breach its developer agreements with Apple. The court reasoned that even if Epic succeeded on the merits, the damage already been done to third-party projects, and that damage cannot be undone or compensated by damages. The court also found that not granting the injunction with regard to the Unreal Engine would bring about nebulous, hard-to-quantify questions, such as how successful these other projects might have been, and how much in royalties would have been generated. Id. at *9-10.

BALANCE OF EQUITIES

In evaluating the balance of equities prong, the court referred to the related case of Donald Cameron, et. al. v. Apple Inc., 4:19-cv-03074-YGR (“Cameron”), noting Cameron addresses the same allegedly anticompetitive issues, and finding it significant that both Apple and Epic remain successful market players despite Cameron pending for over a year. Id. at *10.

In focusing on the status quo, the court again found it significant that Epic intentionally and apparently strategically breached its contract. The court reasoned that Epic thereby changed the status quo, and that balancing equities did not require that a new status quo be established in favor of Epic. Id. at *11.

The court reached the opposite conclusion with regard to the Unreal Engine, noting that Epic did not breach the contracts with respect to the Unreal Engine. Ultimately, the court was unconvinced that Apple suffers harm through an inability to remove developer tools. The court characterized Apple’s actions in this respect as severe, and noted the harmful impact on the third-party developer ecosystem. Id.

PUBLIC INTEREST

Lastly, the court found Epic’s showing insufficient to conclude that the public interest would benefit from a restraining order with respect to Epic’s game business. The court recognized the existence of numerous Internet postings and comments submitted in the record from passionate Fortnite players and acknowledged that during this coronavirus pandemic, virtual escapes may assist in connecting people and providing a social space that is otherwise unavailable. Nonetheless, the court concluded that these interests do not outweigh the general public interest in requiring private parties to adhere to their contractual agreements. In contrast, with respect to the Unreal Engine and associated developer tools, the court found significant damage to both the Unreal Engine platform itself, and to the gaming industry generally, that tipped the balance towards Epic in terms of the public interest. Id. at *12-13.

READING BETWEEN THE LINES TO UNDERSTAND THE COURT’S BIFURCATED DECISION

The likely survival of Epic’s game business and unlikely survival of the businesses dependent on the Unreal Engine if injunctive relief were not granted, as well as their concomitant ability to have their respective days in court, appear to drive the court’s bifurcated decision. Whereas the Unreal Engine is licensed to and therefore directly affects third parties, Epic’s circumvention of Apple’s IAP payment system implicates only the parties at hand. Moreover, Epic has the resources to litigate this case fully on the merits; smaller companies dependent on the Unreal Engine, by contrast, might not have the resources to litigate to conclusion.

In addition, the court noted while granting injunctive relief with respect to the Unreal Engine that the public interest is served by increasing avenues for creativity and innovation to drive the economy. In the absence of injunctive relief, smaller developers that rely on the Unreal Engine may not have been able to innovate and see their projects to fruition.  In essence, smaller third parties without the established business of a major market player like Epic may struggle to adhere to Apple’s terms, namely, its 30% take. Those third-party developers were therefore dependent on their use of Unreal Engine to develop their projects. In contrast, Epic’s ability to continue to deliver Fortnite to enthusiastic players did not depend on the extraordinary remedy of injunctive relief.

These themes also are evident in another recent high-profile preliminary injunction case—HiQ Labs, Inc. v. LinkedIn Corp., 938 F.3d 985 (9th Cir. 2019). There, the court found the plaintiff’s business model fundamentally depended on access to defendant’s publicly available data. The court found the plaintiff established the irreparable harm prong, guided by the principle that showing a threat of being driven out of business is sufficient to establish irreparable harm. Am. Passage Media Corp. v. Cass Commc’ns, Inc., 750 F.2d 1470, 1474 (9th Cir. 1985). The Ninth Circuit in HiQ echoed the Second Circuit in explaining, “[T]he loss of . . . an ongoing business representing many years of effort and the livelihood of its . . . owners, constitutes irreparable harm.” Roso Lino Beverage Distributors, Inc. v. Coca Cola Bottling Co. of New York, Inc., 749 F.2d 124, 125-26 (2d Cir. 1984) (per curiam). 

This is a case for antitrust practitioners to watch.

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