GOOGL Alphabet Inc

By Sarah E. Needleman 

A California federal judge heard arguments Monday in a case led by "Fortnite" maker Epic Games Inc. that legal analysts say could serve as an early test of whether Apple Inc.'s App Store practices run afoul of antitrust law.

Epic sued Apple and Alphabet Inc.'s Google last month after they yanked its shooter-survival game from the App Store and Google Play. The tech giants said Epic broke their rules by adding an unauthorized payment system to "Fortnite" that skirted their 30% commission on in-app purchases of digital goods.

The lawsuits are significant because Apple and Google operate the world's two largest app stores, which are critical gateways for how consumers access everything from entertainment to education and help drive billions of dollars in annual economic activity.

Epic claims that Apple's App Store commission is excessive, that Apple unfairly prohibits developers from processing customer transactions themselves and that the tech giant abuses its control of the marketplace to stifle competition. Epic's lawsuit says the tech giant's practices violate the Sherman Antitrust Act of 1890, a law that bars monopolistic conduct.

Apple disputes Epic's characterizations, saying that the developer can distribute its software through multiple channels and that charging a commission isn't illegal and covers expenses such as maintaining user privacy. Apple has also denied hurting rivals and said it wants apps that compete with its services to thrive.

During Monday's hearing, which lasted more than two hours, U.S. District Judge Yvonne Gonzalez Rogers said the case is extraordinary and that both sides offered compelling arguments. "I think this is going to be a fascinating trial," she said, without indicating how she would rule on Epic's request for Apple to restore "Fortnite" in the App Store with the developer's own payment system intact.

"If Epic would just come into compliance, it can free 'Fortnite,'" Apple attorney Theodore Boutrous said during Monday's hearing, meaning Epic would need to remove its payment system from the game.

The judge asked whether both parties would be amenable to the game being returned to the App Store without Epic's payment system but with the 30% commission being placed in escrow until the litigation is resolved. Epic lawyer Katherine Forrest panned the idea while Mr. Boutrous said he would need to check with his client on the matter.

A trial is slated to take place next year.

Some legal observers say Epic might have difficulty prevailing, in part, because Epic and Apple don't compete principally in the same markets. Epic could also struggle to prove it has suffered irreparable harm from "Fortnite" being taken out of the App Store because it knowingly broke Apple's rules and could avoid that harm by complying pending trial.

"Apple has chosen to impose a 30% commission at the app-use level rather than extracting those revenues from the iPhone purchase," said Paul Swanson, a Denver-based antitrust lawyer at Holland & Hart LLP who isn't involved in the lawsuits. "I don't think antitrust [law] prohibits that choice any more than it would prohibit a club from imposing whatever cover charge it chooses and then charging whatever it wants for drinks within the club."

Should a judge rule in Epic's favor after Monday's hearing, Apple would suffer a "significant blow" and the case would likely be settled within the next six months, said David Hoppe, a tech and media attorney at Gamma Law in San Francisco. Such a settlement would likely result in substantial concessions to Epic, he added. If instead the judge decides to maintain the status quo through trial, said Mr. Hoppe, the case could stretch on for years.

Judge Gonzalez Rogers last month allowed Apple to keep "Fortnite" out of the App Store, for now, but blocked the company from pulling all of Epic's developer credentials needed to distribute software on Apple devices.

Hearings have yet to be scheduled in the Google case. Separately Google said Monday that it tweaked its rules for Google Play to clarify that developers must use the company's billing system to process in-app purchases. The system is what enables Google to take its 30% commission on such transactions. The company said 97% of apps available in Google Play use its billing system. Google said 97% of apps available in Google Play already use its billing system, which is what enables Google to collect its 30% commission on digital transactions.

Google also said the version of its mobile operating system, Android 12, launching next year would make it easier for users to install other app stores on their devices. In contrast Apple only allows users to download apps from the App Store on its mobile devices.

In the six weeks since Epic filed suit against Apple and Google, the closely held developer has led a bitter, public campaign against the app-marketplace operators to rally supporters for its cause. Epic is among roughly a dozen companies and trade groups that recently formed a coalition to advocate for changes across app ecosystems through legal and regulatory means. Apple and Google have defended their business practices, saying the fees they collect from developers are in line with other app marketplaces.

On Monday, Ms. Forrest, Epic's attorney, asserted that her client's efforts to rally supporters are justified because of Apple's size. "When you are taking on the biggest company in the world, and you're taking it on where you know it's going to retaliate, you don't lie down in the street and die," she said.

Developers have historically been reticent to publicly challenge app stores' rules at the risk of losing access to users and drawing the ire of companies with abundant financial resources, such as Apple.

But the increased importance of app stores has raised the stakes for developers and generated more scrutiny over how those marketplaces operate. People own more than 900 million iPhones world-wide, according to Apple, and the only way to access apps on them is through the company's store.

Scrutiny on Apple's operations isn't just coming from Epic and the coalition. Companies such as Microsoft Corp. and Facebook Inc. have sparred with Apple over its App Store policies. Apple is also among large U.S. tech companies facing inquiries from Congress and a range of regulators world-wide over how they operate and the influence they wield.

The judge's August ruling was a split decision for Epic and Apple. In a trial, Apple's attempt to terminate all of Epic's developer credentials could be interpreted by a jury as an act of punishment, said European competition attorney Damien Geradin. "Apple may come across as vindictive by trying to crush a company that dared challenging the App Store rules," he said.

Apple recently demonstrated some willingness to alter its App Store policies. On Friday it said it is giving some businesses a reprieve from paying its 30% commission on paid events and experiences through mobile apps until the end of the year. The arrangement applies to businesses that want to sell access to such offerings because the coronavirus pandemic has hampered their ability to host in-person gatherings.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

(END) Dow Jones Newswires

September 28, 2020 17:10 ET (21:10 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.