Epic Games, Inc. v. Apple, Inc. ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
EPIC GAMES, INC., No. 21-16506
Plaintiff-counter-
defendant-Appellant, D.C. No.
4:20-cv-05640-
v. YGR
APPLE, INC.,
Defendant-counter- OPINION
claimant- Appellee.
EPIC GAMES, INC., No. 21-16695
Plaintiff-counter-
defendant-Appellee, D.C. No.
4:20-cv-05640-
v. YGR
APPLE, INC.,
Defendant-counter-
claimant-Appellant.
Appeal from the United States District Court
for the Northern District of California
Yvonne Gonzalez Rogers, District Judge, Presiding
Argued and Submitted November 14, 2022
San Francisco, California
2 EPIC GAMES, INC. V. APPLE, INC.
Filed April 24, 2023
Before: SIDNEY R. THOMAS and MILAN D. SMITH,
JR., Circuit Judges, and MICHAEL J. MCSHANE, *
District Judge.
Opinion by Judge Milan D. Smith, Jr.;
Partial Concurrence and Partial Dissent by Judge S.R.
Thomas
SUMMARY **
Antitrust
The panel affirmed in part and reversed in part the
district court’s judgment, after a bench trial, against Epic
Games, Inc., on its Sherman Act claims for restraint of trade,
tying, and monopoly maintenance against Apple, Inc.; in
favor of Epic on its claim under California’s Unfair
Competition Law; against Epic on Apple’s claim for breach
of contract; and against Apple on its claim for attorney
fees. The panel affirmed except for the district court’s ruling
respecting attorney fees, where it reversed and remanded for
further proceedings.
*
The Honorable Michael J. McShane, United States District Judge for
the District of Oregon, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
EPIC GAMES, INC. V. APPLE, INC. 3
The panel explained that, when Apple opened the iPhone
to third-party app developers, it created a “walled garden,”
rather than an open ecosystem in which developers and users
could transact freely without mediation from Apple. Epic
alleged that Apple acted unlawfully by restricting app
distribution on iOS devices to Apple’s App Store, requiring
in-app purchases on iOS devices to use Apple’s in-app
payment processor, and limiting the ability of app
developers to communicate the availability of alternative
payment options to iOS device users. These restrictions
were imposed under the Developer Program Licensing
Agreement (“DPLA”), which developers were required to
sign in order to distribute apps to iOS users. The district
court rejected Epic’s Sherman Act §§ 1 and 2 claims
challenging the first and second restrictions, principally on
the factual grounds that Epic failed to propose viable less
restrictive alternatives to Apple’s restrictions. The district
court concluded that the third restriction was unfair pursuant
to the California UCL and enjoined Apple from enforcing it
against any developer. The district court held that Epic
breached its contract with Apple but was not obligated to pay
Apple’s attorney fees.
On Epic’s appeal, the panel affirmed the district court’s
denial of antitrust liability and its corresponding rejection of
Epic’s illegality defense to Apple’s breach of contract
counter-claim. The panel held that the district court erred as
a matter of law in defining the relevant antitrust market and
in holding that a non-negotiated contract of adhesion, such
as the DPLA, falls outside the scope of Sherman Act § 1, but
those errors were harmless. The panel held that,
independent of the district court’s errors, Epic failed to
establish, as a factual matter, its proposed market definition
and the existence of any substantially less restrictive
4 EPIC GAMES, INC. V. APPLE, INC.
alternative means for Apple to accomplish the
procompetitive justifications supporting iOS’s walled-
garden ecosystem.
On Apple’s cross-appeal, the panel affirmed as to the
district court’s UCL ruling in favor of Epic, holding that the
district court did not clearly err in finding that Epic was
injured, err as a matter of law when applying California’s
flexible liability standards, or abuse its discretion when
fashioning equitable relief. Reversing in part, the panel held
that the district court erred when it ruled that Apple was not
entitled to attorney fees pursuant to the DPLA’s
indemnification provision.
Concurring in part and dissenting in part, Judge S.R.
Thomas wrote that he fully agreed with the majority that the
district court properly granted Epic injunctive relief on its
California UCL claims. Judge S.R. Thomas also fully
agreed that the district court properly rejected Epic’s
illegality defenses to the DPLA but that, contrary to the
district court’s decision, the DPLA did require Epic to pay
attorney fees for its breach. On the federal claims, Judge
S.R. Thomas also agreed that the district court erred in
defining the relevant market and erred when it held that a
non-negotiated contract of adhesion falls outside the scope
of Sherman Act § 1. Unlike the majority, however, Judge
S.R. Thomas would not conclude that these errors were
harmless because they related to threshold analytical steps
and affected Epic’s substantial rights. He would remand for
the district court to re-analyze the case using the proper
threshold determination of the relevant market.
EPIC GAMES, INC. V. APPLE, INC. 5
COUNSEL
Thomas C. Goldstein (argued), Goldstein & Russell P.C.,
Bethesda, Maryland; Christine A. Varney, Katherine B.
Forrest, Gary A. Bornstein, Peter T. Barbur, Antony L.
Ryan, Yonatan Even, Omid H. Nasab, M. Brent Byars, and
Wes Earnhardt, Cravath Swaine & Moore LLP, New York,
New York; Paul J. Riehle, Faegre Drinker Biddle & Reath,
San Francisco, California; for Plaintiff-counter-defendant-
Appellant.
Mark A. Perry (argued), Weil Gotshal & Manges LLP,
Washington, D.C.; Cynthia Richman, Joshua M. Wesneski,
Anna Casey, and Zachary B. Copeland, Gibson Dunn &
Crutcher LLP, Washington, D.C.; Theodore J. Boutrous Jr.,
Daniel G. Swanson, Richard J. Doren, Samuel Eckman,
Jason C. Lo, and Jagannathan Srinivasan, Gibson Dunn &
Crutcher LLP, Los Angeles, California; Rachel S. Brass and
Julian W. Kleinbrodt, Gibson Dunn & Crutcher LLP, San
Francisco, California; Karen L. Dunn, Paul Weiss Rifkind
Wharton & Garrison LLP, Washington, D.C.; for
Defendant-counter-claimant-Appellee.
Nickolai G. Levin (argued), Daniel E. Haar, Patrick M.
Kuhlmann, and Matthew C. Mandelberg, Attorneys; David
B. Lawrence, Policy Director; Doha G. Mekki, Principal
Deputy Assistant Attorney General; Antitrust Division,
United States Department of Justice; Washington, D.C.; for
Amicus Curiae United States of America.
Joshua Patashnik (argued), Deputy Solicitor General; Shira
Hoffman, Robert B. McNary, and Brian D. Wang, Deputy
Attorneys General; Paula Blizzard, Supervising Deputy
Attorney General; Kathleen Foote, Senior Assistant
Attorney General; Rob Bonta, Attorney General of
6 EPIC GAMES, INC. V. APPLE, INC.
California; Office of the California Attorney General; San
Francisco, California; for Amicus Curiae the State of
California.
Michael A. Carrier, Rutgers Law School, Camden, New
Jersey, for Amici Curiae 38 Law, Economics, and Business
Professors.
Geoffrey H. Kozen, Stacey P. Slaughter, Stephen P.
Safranski, and Kaitlin M. Ek, Robins Kaplan LLP,
Minneapolis, Minnesota; Lin Y. Chan, Lieff Cabraser
Heimann & Bernstein LLP, San Francisco, California;
Michelle J. Looby and Kaitlyn L. Dennis, Gustafson Gluek
PPLC, Minneapolis, Minnesota; Kristen G. Marttila,
Lockridge Grindal Nauen PLLP, Minneapolis, Minnesota;
for Amicus Curiae the Committee to Support the Antitrust
Laws.
Wendy Liu, Scott Nelson, and Allison M. Zieve, Public
Citizen Litigation Group, Washington, D.C., for Amicus
Curiae Public Citizen.
Peter D. St. Phillip Jr. and Margaret MacLean, Lowey
Dannenberg P.C., White Plains, New York, for Amici
Curiae the Consumer Federation of America and
Developers.
Christopher M. Wyant, K&L Gates LLP, Seattle,
Washington; Andrew Mann, K&L Gates, Washington, D.C.;
for Amici Curiae 14 Law, Economics, and Business
Professors.
Mitchell L. Stoltz, Electronic Frontier Foundation, San
Francisco, California, for Amicus Curiae the Electronic
Frontier Foundation.
EPIC GAMES, INC. V. APPLE, INC. 7
Aaron M. Panner and Julius P. Taranto, Kellog Hansen Todd
Figel & Frederick P.L.L.C., Washington, D.C., for Amicus
Curiae Microsoft Corporation.
David W. Kesselman and Eda Harotounian, Kesselman
Brantly Stockinger LLP, Manhattan Beach, California, for
Amici Curiae Unfair Competition Law Practitioners and
Scholars.
Stanford E. Purser, Deputy Solicitor General; Melissa A.
Holyoak, Solicitor General; Sean D. Reyes, Attorney
General of Utah; Office of the Utah Attorney General; Salt
Lake City, Utah; for Amici Curiae the State of Utah and 34
Other States.
Laura M. Alexander and Randy M. Stutz, American
Antitrust Institute, Washington, D.C., for Amicus Curiae the
American Antitrust Institute.
Michael Pepson and Jeffrey A. Ogar, Americans for
Prosperity Foundation, Arlington, Virginia, for Amicus
Curiae Americans for Prosperity Foundation.
Robert E. Dunn and Collin J. Vierra, Eimer Stahl LLP, San
Jose, California; James B. Speta, Eimer Stahl LLP, Chicago,
Illinois; for Amicus Curiae Act/The App Association.
Roy T. Englert Jr., Kramer Levin Naftalis & Frankel LLP,
Washington, D.C.; Leslie C. Esbrook, Robbins Russell
Englert Orseck & Untereiner LLP, Washington, D.C., for
Amici Curiae Former National Security Officials and
Scholars.
Fred J. Hiestand, Fred J. Hiestand APC, Sacramento,
California; William L. Stern, Law Offices of William L.
Stern, Berkeley, California; for Amicus Curiae the Civil
Justice Association.
8 EPIC GAMES, INC. V. APPLE, INC.
John M. Masslon II and Cory L. Andrews, Washington
Legal Foundation, Washington, D.C., for Amicus Curiae
Washington Legal Foundation.
Stephanie A. Joyce, Potomac Law Group, Washington,
D.C.; Krisztian Katona, Computer & Communications
Industry Association, Washington, D.C., for Amicus Curiae
Computer & Communications Industry Association.
Steve A. Hirsch and Benjamin Berkowitz, Keker Van Nest
& Peters LLP, San Francisco, California, for Amicus Curiae
Chamber of Progress.
Jack E. Pace III and Gina M. Chiappetta, White & Case LLP,
New York, New York; George L. Paul and Nicholas J.
McGuire, Washington, D.C.; for Amici Curiae International
Center for Law & Economics and Scholars of Law and
Economics.
Donald M. Falk, Schaerr Jaffe LLP, San Francisco,
California, for Amici Curiae Law and Economics Scholars
Alden Abbott, Henry N. Butler, Thomas A. Lambert, Alan
J. Messe, Aurilien Portuese, and John M. Yun.
Lori Alvino McGill, Washington, D.C.; Ryan J. Walsh,
Eimer Stahl LLP, Madison, Wisconsin; for Amicus Curiae
Information Technology & Innovation Foundation.
Douglas M. Tween, James R. Warnot Jr., and John W.
Eichlin, Linklaters LLP, New York, New York, for Amici
Curiae Law Professors.
James Orenstein, ZwillGen PLLC, New York, New York;
Marc J. Zwilinger, ZwillGen PLLC, Washington, D.C.; for
Amicus Curiae the Center for Cybersecurity Policy and Law.
EPIC GAMES, INC. V. APPLE, INC. 9
Paul T. Llewellyn and Marc R. Lewis, Lewis & Llewellyn
LLP, San Francisco, California, Amicus Curiae Roblox
Corporation.
Gregory G. Garre and Charles S. Dameron, Latham &
Watkins LLP, Washington, D.C.; Aaron T. Chiu, Latham &
Watkins LLP, San Francisco, California; for Amici Curiae
Former Federal Antitrust Enforcers Ethan Glass, Abbot B.
Lipsky Jr., Leslie Overton, Bilal Sayyed, James Tierney, and
Joshua Wright.
Kathleen R. Hartnett, Cooley LLP, San Francisco,
California; Heidi L. Keefer and Lowell D. Mead, Cooley
LLP, Palo Alto, California; for Amici Curiae Law and
Business Professors.
Peter D. St. Phillip Jr. and Margaret MacLean, Lowey
Dannenberg P.C., White Plains, New York, for Amici
Curiae Tile, Match Group Inc., Basecamp, Knitrino, and the
Coalition for App Fairness.
10 EPIC GAMES, INC. V. APPLE, INC.
OPINION
M. SMITH, Circuit Judge:
Epic Games, Inc. sued Apple, Inc. pursuant to the
Sherman Act, 15 U.S.C. §§ 1–2, and California’s Unfair
Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 et
seq. Epic contends that Apple acted unlawfully by
restricting app distribution on iOS devices to Apple’s App
Store, requiring in-app purchases on iOS devices to use
Apple’s in-app payment processor, and limiting the ability
of app developers to communicate the availability of
alternative payment options to iOS device users. Apple
counter-sued for breach of contract and indemnification for
its attorney fees arising from this litigation.
After a sixteen-day bench trial involving dozens of
witnesses and nine hundred exhibits, the district court
rejected Epic’s Sherman Act claims challenging the first and
second of the above restrictions—principally on the factual
grounds that Epic failed to propose viable less restrictive
alternatives to Apple’s restrictions. The court then
concluded that the third restriction is unfair pursuant to the
UCL and enjoined Apple from enforcing it against any
developer. Finally, it held that Epic breached a contract with
Apple but was not obligated to pay Apple’s attorney fees.
Epic appeals the district court’s Sherman Act and breach of
contract rulings; Apple cross-appeals the district court’s
UCL and attorney fees rulings. We affirm the district court,
except for its ruling respecting attorney fees, where we
reverse and remand for further proceedings.
EPIC GAMES, INC. V. APPLE, INC. 11
FACTUAL AND PROCEDURAL HISTORY
I. The Parties
Apple is a multi-trillion-dollar technology company that,
of particular relevance here, sells desktop and laptop
computers (Macs), smartphones (iPhones), and tablets
(iPads). In 2007, Apple entered, and revolutionized, the
smartphone market with the iPhone—offering consumers,
through a then-novel multi-touch interface, access to email,
the internet, and several preinstalled “native” apps that
Apple had developed itself. Shortly after the iPhone’s debut,
Apple decided to move on from its native-apps-only
approach and open the iPhone’s (and later, the iPad’s)
operating system (iOS) to third-party apps. 1
This approach created a “symbiotic” relationship: Apple
provides app developers with a substantial consumer base,
and Apple benefits from increased consumer appeal given
the ever-expanding pool of iOS apps. Apple now has about
a 15% market share in the global smartphone market with
over 1 billion iPhone users, and there are over 30 million iOS
app developers. Considering only video game apps, the
number of iOS games has grown from 131 in the early days
of the iPhone to over 300,000 by the time this case was
brought to trial. These gaming apps generate an estimated
$100 billion in annual revenue.
Despite this general symbiosis, there is periodic friction
between Apple and app developers. That is because Apple,
when it opened the iPhone to third-party developers, did not
1
The iPad has its own operating system (iPadOS) that is derived from
iOS. For convenience, we use “iOS” to refer to both the iPhone and
iPad’s operating systems and collectively refer to iPhones and iPads as
“iOS devices.”
12 EPIC GAMES, INC. V. APPLE, INC.
create an entirely open ecosystem in which developers and
users could transact freely without any mediation. Instead,
Apple created a “walled garden” in which Apple plays a
significant curating role. 2 Developers can distribute their
apps to iOS devices only through Apple’s App Store and
after Apple has reviewed an app to ensure that it meets
certain security, privacy, content, and reliability
requirements. Developers are also required to use Apple’s
in-app payment processor (IAP) for any purchases that occur
within their apps. Subject to some exceptions, Apple
collects a 30% commission on initial app purchases
(downloading an app from the App Store) and subsequent
in-app purchases (purchasing add-on content within an app).
Epic is a multi-billion-dollar video game company with
three primary lines of business, each of which figures into
various aspects of the parties’ appeals. First, Epic is a video
game developer—best known for the immensely popular
Fortnite, which has over 400 million users worldwide across
gaming consoles, computers, smartphones, and tablets. Epic
monetizes Fortnite using a “freemium” model: The game is
free to download, but a user can purchase certain content
within the game, ranging from game modes to cosmetic
upgrades for the user’s character. Fortnite is also notable as
one of the first major video games to feature “cross-play,”
“cross-progression,” and “cross-wallet.” Cross-play permits
users on different platforms to play with one another.
Smartphone users, for example, can play against friends on
gaming consoles. Cross-progression allows users to retain
their in-game progress across every device they own. Users
2
Many game consoles—including the Microsoft Xbox, Nintendo
Switch, and Sony PlayStation—provide ecosystems that can similarly be
labeled “walled gardens.”
EPIC GAMES, INC. V. APPLE, INC. 13
can, for example, play Fortnite in the morning on their
smartphones and then pick up with their progress saved on
their gaming consoles in the evening. Cross-wallet allows
users to spend Fortnite’s in-game currency on one device
even if they purchased it on another. This cross-
functionality gives the estimated 32 to 52% of Fortnite users
who own multiple gaming devices flexibility regarding
where and how they play as well as on which devices they
make in-game purchases.
Second, Epic is the parent company of a gaming-
software developer. Epic International (a Swiss subsidiary)
licenses Unreal Engine to game developers. Unreal Engine
offers developers a suite of tools to create three-dimensional
content; in return, Epic International receives 5% of a
licensee’s gross revenue from a product developed using
Unreal Engine after that product generates $1,000,000 in
revenue. Although Unreal Engine is not on Apple’s App
Store, Epic International does offer several complementary
apps there. Unreal Remote and Live Link Face, for example,
allow users to capture live-action footage and then view it on
Unreal Engine. Thus, Epic—through its subsidiary—
continues to be affected by the policies that govern the App
Store.
Third, Epic is a video game publisher and distributor. It
offers the Epic Games Store as a game-transaction platform
on PC computers and Macs and seeks to do the same for iOS
devices. As a distributor, Epic makes a game available for
download on the Epic Games Store and covers the direct
costs of distribution; in exchange, Epic receives a 12%
commission—a below-cost commission that sacrifices
short-term profitability to build market share. The Epic
Games Store has over 180 million registered accounts and
over 50 million monthly active users. Through the Epic
14 EPIC GAMES, INC. V. APPLE, INC.
Games Store, Epic is a would-be competitor of Apple for
iOS game distribution and a direct competitor when it comes
to games that feature cross-platform functionality like
Fortnite.
II. The Developer Program Licensing Agreement
Apple creates its walled-garden ecosystem through both
technical and contractual means. To distribute apps to iOS
users, a developer must pay a flat $99 fee and execute the
Developer Program Licensing Agreement (DPLA). The
DPLA is a contract of adhesion; out of the millions of
registered iOS developers, only a handful have convinced
Apple to modify its terms.
By agreeing to the DPLA, developers unlock access to
Apple’s vast consumer base—the over 1 billion users that
make up about 15% of global smartphone users. They also
receive tools that facilitate the development of iOS aps,
including advanced application-programming interfaces,
beta software, and an app-testing software. In essence,
Apple uses the DPLA to license its IP to developers in
exchange for a $99 fee and an ongoing 30% commission on
developers’ iOS revenue.
The DPLA contains the three provisions that give rise to
this lawsuit and were mentioned in the introduction. First,
developers can distribute iOS apps only through the App
Store (the distribution restriction). Epic Games, for
example, cannot make the Epic Games Store available as an
iOS app and then offer Fortnite for download through that
app. Second, developers must use Apple’s IAP to process
in-app payments (the IAP requirement). Both initial
downloads (where an app is not free) and in-app payments
are subject to a 30% commission. Third, developers cannot
communicate out-of-app payment methods through certain
EPIC GAMES, INC. V. APPLE, INC. 15
mechanisms such as in-app links (the anti-steering
provision). “Apps and their metadata may not include
buttons, external links, or other calls to action that direct
customers to purchasing mechanisms other than [IAP].” Nor
can developers use “points of contact obtained from account
registration within the app (like email or text) [to] encourage
users to use a purchasing method other than [IAP].”
III. Apple and Epic’s Business Relationship
In 2010, Epic agreed to the DPLA. Over the next few
years, Epic released three games for iOS, each of which
Apple promoted at major events. In 2015, however, Epic
began objecting to Apple’s walled-garden approach. Epic’s
CEO Tim Sweeney argued, in an email seeking a meeting
with Apple senior leadership, that it “doesn’t seem tenable
for Apple to be the sole arbiter of expression and commerce”
for iOS users, and explained that Epic runs a competing
game-transaction platform that it “would love to eventually”
offer on iOS. Nothing came of this email, and Epic
continued to offer games on iOS while complying with the
DPLA’s terms. In 2018, Epic released Fortnite on iOS—
amassing about 115 million iOS users.
In 2020, Epic renewed the DPLA with Apple but sought
a “side letter” modifying its terms. In particular, Epic
desired to offer iOS users alternatives for distribution (the
Epic Games Store) and in-app payment processing (Epic
Direct Pay). Apple flatly rejected this offer, stating: “We
understand this might be in Epic’s financial interests, but
Apple strongly believes these rules are vital to the health of
the Apple platform and carry enormous benefits for both
consumers and developers. The guiding principle of the App
Store is to prove a safe, secure, and reliable experience for
users . . . .”
16 EPIC GAMES, INC. V. APPLE, INC.
Once Apple rejected its offer, Epic kicked into full gear
an initiative called “Project Liberty”: a two-part plan it had
been developing since 2019 to undermine Apple’s control
over software distribution and payment processing on iOS
devices, as well as Google’s influence over Android devices.
Project Liberty coupled a media campaign against Apple and
Google with a software update expressly designed to
circumvent Apple’s IAP restriction. On the media-campaign
side, Epic lowered the price of Fortnite’s in-app purchases
on all platforms but Apple’s App Store and Google’s Google
Play Store; it formed an advocacy group (the Coalition for
App Fairness), tasking it with “generating continuous media
. . . pressure” on Apple and Google; and it ran
advertisements portraying Apple and Google as the “bad
guys” standing in the way of Epic’s attempt to pass cost-
savings onto consumers.
On the IAP-circumvention side, Epic submitted a
Fortnite software update (which Epic calls a “hotfix”) to
Apple for review containing undisclosed code that, once
activated, would enable Fortnite users to make in-game
purchases without using Apple’s IAP. Unaware of this
undisclosed code, Apple approved the update and it was
made available to iOS users. Shortly thereafter Epic
activated the undisclosed code and opened its IAP
alternative to users. That same day, Apple became aware of
the hotfix and removed Fortnite from the App Store. Apple
informed Epic that it had two weeks to cure its breaches of
the DPLA, or otherwise Apple would terminate Epic Games’
developer account.
EPIC GAMES, INC. V. APPLE, INC. 17
IV. Procedural History
A. Pre-Trial Proceedings
Only three days after Apple removed Fortnite from the
App Store, Epic filed a 62-page complaint against Apple in
the Northern District of California seeking a temporary
restraining order (TRO) reinstating Fortnite and enjoining
Apple from terminating Epic’s iOS developer account. 3 The
district court granted Epic’s prayer in part and denied in
part—leaving Fortnite off the App Store but temporarily
preventing Apple from taking any adverse action regarding
Epic’s developer account. After the TRO expired, Apple
terminated Epic’s developer account. The court then issued
a preliminary injunction preventing Apple from terminating
the developer accounts of Epic’s subsidiaries (including
Epic International) and scheduled a bench trial on an
expedited basis, with trial beginning just about eight months
after Epic filed its complaint.
Epic brought claims for permanent injunctive relief
pursuant to the Sherman Act and the UCL. Epic’s requested
relief, though somewhat vague, would essentially convert
iOS into an entirely open platform: Developers would be
free to distribute apps through any means they wish and use
any in-app payment processor they choose. Taken together,
this relief would create a pathway for developers to bypass
Apple’s 30% commission altogether, though Epic made
open-ended assurances at trial that its relief would allow
3
The same day, Epic filed a 60-page complaint against Google,
challenging its policies regarding the Google Play Store on Android
devices—i.e., smartphones and tablets that use the main operating-
system alternative to iOS. See Complaint for Injunctive Relief, Epic
Games, Inc. v. Google LLC, No. 3:20-cv-05671 (filed Aug. 13, 2020
N.D. Cal.).
18 EPIC GAMES, INC. V. APPLE, INC.
Apple to collect a commission—just not in the manner that
the DPLA establishes. Apple brought counter-claims for
breach of contract and indemnification for its attorney fees
related to this litigation. 4
B. The District Court’s Rule 52 Order
After a sixteen-day bench trial, the district court issued a
180-page order pursuant to Federal Rule 52 detailing its
findings of facts and conclusions of law.
1. Market Definition
The district court began its analysis by defining the
relevant market for Epic’s Sherman Act claims. Epic
proposed two single-brand markets: the aftermarkets for
iOS app distribution and iOS in-app payment solutions,
derived from a foremarket for smartphone operating
systems. Apple, by contrast, proposed the market for all
video game transactions, whether those transactions occur
on a smartphone, a gaming console, or elsewhere. The
district court ultimately found a market between those the
parties proposed: mobile-game transactions—i.e., game
transactions on iOS and Android smartphones and tablets.
Compared to Epic’s proposed aftermarkets, the district
court’s relevant market was both broader and narrower—
broader in that it declined to focus exclusively on iOS, but
narrower in that it considered only video game transactions
instead of all app transactions. Compared to Apple’s
proposed market, the district court’s relevant market was
4
We omit any discussion of the following claims that the parties asserted
below but do not address before our court: (1) Epic’s Cartwright Act
claims; (2) Apple’s counter-claim for breach of the implied covenant of
good faith and fair dealing; and (3) Apple’s counter-claim for unjust
enrichment.
EPIC GAMES, INC. V. APPLE, INC. 19
narrower—excluding game-console and streaming-service
transactions.
The district court rejected Epic’s proposed single-brand
markets on several grounds. It held that there was no
foremarket for smartphone and tablet operating systems
because Apple does not license or sell iOS. More critically,
it analyzed Epic’s aftermarkets in the alternative and found
a failure of proof. Epic presented no evidence regarding
whether consumers unknowingly lock themselves into
Apple’s app-distribution and IAP restrictions when they buy
iOS devices. A natural experiment facilitated by Apple’s
removal of Fortnite from the App Store showed that iOS
Fortnite users switched about 87% of their pre-removal iOS
spending to other platforms—suggesting substitutionality
between the App Store and other game-transaction
platforms. The district court also rejected Apple’s relevant
market-definition expert as “weakly probative” and “more
interested in a result [that] would assist his client than in
providing any objective ground to assist the court in its
decision-making” (cleaned up). Among other flaws, the
expert’s analysis contradicted his own academic articles on
how to analyze two-sided markets; used consumer-survey
wording that departed from well-established market-
definition principles; failed to account for holiday-season
idiosyncrasies; and excluded minors (who are an important
segment of mobile-game purchasers). The district court then
turned to Apple’s proposed relevant market definition and
refined it from all game transactions to mobile game
transactions by relying extensively on the “practical indicia”
of markets enumerated in the Supreme Court’s decision in
Brown Shoe v. United States, 370 U.S. 294, 325 (1962).
20 EPIC GAMES, INC. V. APPLE, INC.
2. Sherman Act Section 1: Restraint of Trade
The district court then rejected Epic’s Sherman Act
Section 1 restraint-of-trade-claim. As a threshold matter, the
court held that the DPLA was not a “contract[]” that fell
within the scope of Section 1 because it was a “contract of
adhesion,” not a truly bargained-for agreement. It then, in
the alternative, applied the Rule of Reason—the antitrust
liability standard applicable to most cases.
At step one of the Rule of Reason, the district court found
that Epic proved substantial anticompetitive harms through
both direct and indirect evidence. Apple has for years
charged a supracompetitive commission on App Store
transactions that it set “without regard” for competition.
That commission, in turn, creates an “extraordinary high”
operating margin of 75% for App Store transactions.
Moreover, Apple has market power in the mobile-games-
transactions market, evidenced by its 52 to 57% market share
and barriers to entry in the form of network effects. Apple
uses that market power to prevent would-be competitors like
Epic from offering app-distribution and payment-processing
alternatives, reducing innovation and Apple’s own
investment in the App Store in the process.
At step two of the Rule of Reason, the district court
found that Apple established non-pretextual, legally
cognizable procompetitive rationales for its app-distribution
and IAP restrictions. The district court credited Apple’s
rationale that its restrictions seek to enhance consumer
appeal and differentiate Apple products by improving iOS
security and privacy. It also partially accepted Apple’s
rationale that the restrictions are a means of being
compensated for third-party developers’ use of its
intellectual property—crediting it generally but rejecting it
EPIC GAMES, INC. V. APPLE, INC. 21
“with respect to the [App Store’s] 30% commission rate
specifically.”
At step three of the Rule of Reason, the district court
rejected Epic’s proposed less restrictive alternatives (LRAs)
as severely underdeveloped. As a purported LRA to Apple’s
app-distribution restriction, Epic primarily advanced a
“notarization model” based on Apple’s approach to security
on the Mac operating system (macOS). On macOS, Apple
does not mandate an exclusive distribution channel, as it
does on iOS; nor does Apple condition distribution of an app
on first submitting that app to Apple for review. But when
a developer chooses to forego submitting an app to Apple,
that app—regardless of how it is distributed to Mac users—
will carry a warning that Apple has not scanned it for
malware. Critically, the macOS notarization model does not
contain a layer of human review as iOS app review does.
Given this discrepancy, the district court found that such a
model would not be as effective as Apple’s current model in
achieving Apple’s security and privacy goals. It briefly
considered whether Apple could close the gap by imposing
a security and privacy floor on third-party app stores, but
then noted that it is unclear whether doing so would comport
with Epic’s requested injunctive relief. In any event, the
court found that Epic failed to prove the notarization model
would accomplish Apple’s IP-compensation rationale
because Epic’s requested relief “leave[s] unclear whether
Apple can collect licensing fee royalties and, if so, how it
would do so.”
As a purported LRA for the IAP requirement, Epic
proposed opening in-app payment processing to competing
vendors. The district court again rejected the proposed LRA
as not being as effective as Apple’s current model in
accomplishing its security and privacy goals. More
22 EPIC GAMES, INC. V. APPLE, INC.
fundamentally, there was little in the record showing how
Epic envisioned Apple accomplishing its IP-compensation
goal through the proposed LRA. Because the court upheld
the app-distribution restriction, Apple would still be entitled
to its 30% commission on in-app purchases within apps
downloaded from the App Store. On its own initiative, the
district court floated the idea of Apple permitting multiple
in-app payment processors while reserving a right to audit
developers to ensure compliance with the 30% commission.
But it quickly rejected that as an alternative because it
“would seemingly impose both increased monetary and time
costs.”
3. Sherman Act Section 1: Tying
The district court rejected Epic’s Sherman Act claim that
Apple ties in-app payment processing (IAP) to app
distribution (the App Store). It did so on the grounds that
neither of the purported separate products were actually
separate. As a result, it did not decide which liability
standard—per se condemnation or the Rule of Reason—
would govern the arrangement’s lawfulness.
4. Sherman Act Section 2: Monopoly
Maintenance
The district court also rejected Epic’s claim that Apple
monopolized the market for mobile-games transactions.
Though Apple has significant market power, the court found
it to be insufficiently durable given the rapidly changing
nature of the market. In any event, the court reiterated its
Rule of Reason analysis to hold that Apple did not maintain
its power through anticompetitive conduct.
EPIC GAMES, INC. V. APPLE, INC. 23
5. Unfair Competition Law
The court then applied the UCL to Apple’s anti-steering
provision. The court found that Epic is sufficiently injured
to seek injunctive relief because Epic is a competing games
distributor and would earn additional revenue but for
Apple’s restrictions. On the merits, the court applied the
competitor-suit “tethering test” and consumer-suit
“balancing test” and found the anti-steering provision to be
“unfair” pursuant to both. The court concluded that Epic
satisfied all the requirements for injunctive relief and the
nature of Epic’s injury warranted an injunction preventing
Apple from enforcing the provision against any developer.
6. Breach of Contract
Turning to Apple’s counter-claims, the district found
Epic liable for breach of the DPLA. Epic had stipulated that
the Project Liberty hotfix breached the DPLA’s IAP
requirement, so the only dispute was whether Epic could
prove that the contract was illegal, void as against public
policy, or unconscionable. The district court rejected each
of these affirmative defenses.
7. Attorney Fees
Finally, the district court rejected Apple’s
indemnification claim, which asserted Epic was obligated to
pay its attorney fees incurred in this litigation. The DPLA
provides that Epic “agree[s] to indemnify and hold harmless
[Apple] . . . from any and all claims, losses, liabilities,
damages, taxes, expenses and costs, including without
limitation, attorneys’ fees and court costs . . . , incurred by
[Apple] and arising from or related to” Epic’s “breach of any
certification, covenant, obligation, representation or
warranty in [the DPLA].” Applying a principle of California
24 EPIC GAMES, INC. V. APPLE, INC.
contract law requiring a clear statement before finding an
indemnification clause to apply to disputes between the
parties themselves, the district court construed the provision
as applicable only to third-party claims.
C. Post-Trial Proceedings
Following the handing down of the district court’s order,
the parties timely appealed and cross-appealed. Apple also
moved to stay the UCL injunction pending appeal—arguing
that Epic lacked standing in light of its developer account
termination and that injunctive relief was inappropriate. The
district court denied the motion and a panel of our court
granted it in part.
JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction pursuant to 28 U.S.C. § 1291. In
an appeal following a bench trial, we review the district
court’s factual findings for clear error and its conclusions of
law de novo. Oakland Bulk & Oversized Terminal, LLC v.
City of Oakland, 960 F.3d 603, 612 (9th Cir. 2020). We
specify the applicable standards of review throughout our
opinion.
ANALYSIS
On appeal, Epic challenges the district court’s Sherman
Act and breach of contract rulings. We affirm the district
court’s denial of antitrust liability and its corresponding
rejection of Epic’s illegality defense to Apple’s breach of
contract counter-claim. Though the district court erred as a
matter of law on several issues, those errors were harmless.
Independent of the district court’s errors, Epic failed to
establish—as a factual matter—its proposed market
definition and the existence of any substantially less
restrictive alternative means for Apple to accomplish the
EPIC GAMES, INC. V. APPLE, INC. 25
procompetitive justifications supporting iOS’s walled-
garden ecosystem.
On cross-appeal, Apple challenges the district court’s
UCL and attorney fees rulings. We affirm in part and reverse
and remand in part. The district court did not clearly err in
finding that Epic was injured, err as a matter of law when
applying California’s flexible liability standards, or abuse its
discretion when fashioning equitable relief. The district
court did, however, err when it held that Apple was not
entitled to attorney fees pursuant to the DPLA’s
indemnification provision.
I. Market Definition
We begin with Epic’s appeal. Epic argues that the
district court incorrectly defined the relevant market for its
antitrust claims to be mobile-game transactions instead of
Epic’s proposed aftermarkets of iOS app distribution and
iOS in-app payment solutions. Epic contends both that the
district court erred as a matter of law by requiring several
threshold showings before finding a single-brand market and
that, once those errors are corrected, the record compels the
conclusion that Epic established its single-brand markets.
We agree that the district court erred in certain aspects of its
market-definition analysis but conclude that those errors
were harmless. Despite some threshold errors, the district
court proceeded to analyze Epic’s evidence pursuant to the
proper legal framework and did not clearly err in rejecting
Epic’s proposed relevant markets. In particular, Epic failed
to produce any evidence showing—as our precedent
requires—that consumers are generally unaware of Apple’s
app-distribution and IAP restrictions when they purchase
iOS devices.
26 EPIC GAMES, INC. V. APPLE, INC.
A. General Market-Definition Principles
The Sherman Act contains two principal prohibitions.
Section 1 targets concerted action, rendering unlawful
“every contract, combination . . . , or conspiracy, in restraint
of trade.” 15 U.S.C. § 1. Section 2 targets independent
action, making it unlawful to “monopolize, or attempt to
monopolize, or combine or conspire with any other person
or persons, to monopolize any part of the trade or commerce
among the several States.” Id. § 2; see Copperweld Corp. v.
Indep. Tube Corp., 467 U.S. 752, 767 (1984) (“The Sherman
Act contains a ‘basic distinction between concerted and
independent action.’” (quoting Monsanto Co. v. Spray-Rite
Serv. Corp., 465 U.S. 752, 761 (1984))). 5
There are two general categories of liability standards for
Sherman Act claims. Flaa v. Hollywood Foreign Press
Ass’n, 55 F.4th 680, 685 (9th Cir. 2022). “A small group of
restraints are unreasonable per se because they ‘always or
almost always tend to restrict competition and decrease
output.’” Id. (quoting Ohio v. Am. Express Co. (“Amex”),
138 S. Ct. 2274, 2283 (2018)). When a per se prohibition
applies, we deem a restraint unlawful without any “elaborate
study of the industry” in which it occurs. Id. (quoting
Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006)). Most
5
This concerted/independent distinction is somewhat imprecise because
Section 2 also encompasses certain concerted action—i.e., “conspiring
with any other person or persons” to monopolize a market. See
Dreamstime.com, LLC v. Google LLC, 54 F.4th 1130, 1137 (9th Cir.
2022) (“Section 2 of the Sherman Act prohibits concerted and
independent action that ‘monopolize[s] or attempt[s] to monopolize.’”).
However, because the distinction is a useful shorthand that is accurate in
the mine-run of cases and used throughout the Supreme Court’s and our
court’s decisions, we adopt it here as well.
EPIC GAMES, INC. V. APPLE, INC. 27
restraints, however, are subject to the Rule of Reason: a
multi-step, burden-shifting framework that “requires courts
to conduct a fact-specific assessment” to determine a
restraint’s “actual effect” on competition. Amex, 138 S. Ct.
at 2284 (quoting Copperweld, 467 U.S. at 768).
The Rule of Reason applies “essentially the same”
regardless of “whether the alleged antitrust violation
involves concerted anticompetitive conduct under § 1 or
independent anticompetitive conduct under § 2.” FTC v.
Qualcomm Inc., 969 F.3d 974, 991 (9th Cir. 2020); see also
Flaa, 55 F.4th at 685 (“Because the legal tests for sections 1
and 2 of the Sherman Act similar, we can ‘review claims
under each section simultaneously.’” (quoting Qualcomm,
969 F.3d at 991)).
In most, though not all, Rule of Reason cases, a
“threshold step” is defining the relevant market in which the
alleged restraint occurs. Qualcomm, 969 F.3d at 992; see
also Amex, 138 S. Ct. at 2285 (“[C]ourts usually cannot
properly apply the rule of reason without an accurate
definition of the relevant market.”). 6 Because Epic asserts
6
Despite dicta in Qualcomm suggesting the contrary, we have never held
that a precise market definition is an absolute requirement “in any
antitrust case.” Qualcomm, 969 F.3d at 992. We apply per se rules (e.g.,
the prohibition against price-fixing) without inquiring into market
power. See, e.g., Dagher, 547 U.S. at 5 (per se rules require “no
elaborate study of the industry”). Moreover, as the Supreme Court noted
in Amex, it has previously applied the Rule of Reason—in its so-called
“quick look” cases—without first defining the exact contours of the
relevant market. 138 S. Ct. at 2285 n.7 (citing FTC v. Ind. Fed’n of
Dentists, 476 U.S. 447 (1986), and Catalano, Inc. v. Target Sales, Inc.,
446 U.S. 643 (1980)); see also 1 Julian Von Kalinowski, Peter Sullivan
& Maureen, Antitrust Laws and Trade Regulation § 12.01[3] (2022)
28 EPIC GAMES, INC. V. APPLE, INC.
Rule of Reason claims and presented both direct and indirect
evidence of Apple’s market power, we begin our analysis
with market definition.
The relevant market for antitrust purposes is “the area of
effective competition”—i.e., “the arena within which
significant substitution in consumption or production
occurs.” Amex, 138 S. Ct. at 2285 (quoting Phillip E. Areeda
& Herbert Hovenkamp, Fundamentals of Antitrust Law §
5.02 (4th ed. 2017)); see also Image Tech. Servs., Inc. v.
Eastman Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997)
(“The relevant market is the field in which meaningful
competition is said to exist.”). A relevant market contains
both a geographic component and a product or service
component. Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1120
(9th Cir. 2018).
A market comprises “any grouping of sales whose
sellers, if unified by a monopolist or a hypothetical cartel”
could profitably raise prices above a competitive level.
Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1434
(9th Cir. 1995). If the “sales of other producers [could]
substantially constrain the price-increasing ability of the
monopolist or hypothetical cartel, these other producers
must be included in the market.” Id. To conduct this inquiry,
courts must determine which products have a “‘reasonable
interchangeability of use’ or sufficient ‘cross-elasticity of
demand’” with each other. Hicks, 897 F.3d at 1120 (quoting
Brown Shoe, 370 U.S. at 325); see also United States v. E. I.
(“Usually, the ‘quick look’ does not require a detailed analysis of the
relevant market and market power.”); Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law ⁋ 1911a (4th ed. 2022) (“[D]ifferent
applications of the rule of reason require different types and levels of
inquiry.”).
EPIC GAMES, INC. V. APPLE, INC. 29
du Pont de Nemours & Co., 351 U.S. 377, 400 (1956)
(emphasizing “the responsiveness of the sales of one product
to price changes of [another]”).
Often, this inquiry involves empirical evidence in the
form of a “SSNIP” analysis. That analysis echoes Rebel Oil
and uses past consumer-demand data and/or consumer-
survey responses to determine whether a hypothetical
monopolist could profitably impose a Small, Significant,
Non-transitory Increase in Price above a competitive level.
As we have previously summarized this analysis:
[A]n economist proposes a narrow
geographic and product market definition
and then iteratively expands that
definition until a hypothetical monopolist
in the proposed market would be able to
profitably make a small but significant
non-transitory increase in price
(“SSNIP”). At each step, if consumers
would respond to a SSNIP by making
purchases outside the proposed market
definition, thereby rendering the SSNIP
unprofitable, then the proposed market
definition is too narrow. At the next step,
the economist expands the proposed
geographic or product market definition to
include the substituted products or area.
This process is repeated until a SSNIP in
the proposed market is predicted to be
profitable for the hypothetical monopolist.
Optronic Techs., Inc. v. Ningbo Sunny Elec. Co., 20 F.4th
466, 482 n.1 (9th Cir. 2021). SSNIP analyses are relevant to
30 EPIC GAMES, INC. V. APPLE, INC.
both Clayton Act merger challenges and Sherman Act
restraint-of-trade or monopolization cases. See id. (Sherman
Act section 2 monopolization claim); Saint Alphonsus Med.
Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d
775, 783 (9th Cir. 2015) (Clayton Act section 7 merger
challenge). 7
Courts also consider several “practical indicia” that the
Supreme Court highlighted in Brown Shoe: “[1] industry or
public recognition of the [market] as a separate economic
entity, [2] the product’s peculiar characteristics and uses, [3]
unique production facilities, [4] distinct customers, [5]
distinct prices, [6] sensitivity to price changes, and [7]
specialized vendors.” Brown Shoe, 370 U.S. at 325; Olin
Corp. v. FTC, 986 F.2d 1295, 1299 (9th Cir. 1993) (invoking
Brown Shoe indicia); see also Areeda & Hovenkamp,
Antitrust Law, supra, ⁋ 533 (describing these indicia as
having “evidentiary usefulness” in determining cross-
elasticity of demand).
B. Single-Brand Aftermarkets
“[I]n some instances one brand of a product can
constitute a separate market.” Eastman Kodak Co. v. Image
Tech. Servs., Inc., 504 U.S. 451, 482 (1992); see also Newcal
Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1048 (9th Cir.
7
Thus, to the extent the district court held that a SSNIP analysis applies
only to merger challenges, it erred. However, because Sherman Act
cases may involve markets in which a defendant has substantial market
power or monopoly power (and has already exercised that power to
charge a supracompetitive price), a SSNIP analysis in such cases “must
not be used uncritically, and alternative indicia of market power should
be explored.” Areeda & Hovenkamp, Antitrust Law, supra, ⁋ 539.
Otherwise, a court may risk a false negative: over-defining a market and
finding no market power where, in fact, it does exist.
EPIC GAMES, INC. V. APPLE, INC. 31
2008) (“[T]he law permits an antitrust claimant to restrict the
relevant market to a single brand of the product at issue[.]”).
More specifically, the relevant market for antitrust purposes
can be an aftermarket—where demand for a good is entirely
dependent on the prior purchase of a durable good in a
foremarket.
In Kodak, the Supreme Court considered the question of
whether a lack of market power in the foremarket
(photocopier machines, generally) categorically precludes a
finding of market power in the aftermarket (replacement
parts for and servicing of Kodak-brand photocopiers), which
Kodak had allegedly achieved by contractually limiting
customers to Kodak-provided parts and services. 504 U.S.
at 455, 466. The Supreme Court rejected Kodak’s invitation
to impose an across-the-board rule because it was not
convinced that the rule—which “rest[ed] on a factual
assumption about the cross-elasticity of demand” in
aftermarkets—would always hold true. Id. at 470. The
Supreme Court thus folded aftermarkets into the framework
for assessing markets generally, evaluating cross-elasticity
of demand to determine whether a hypothetical monopolist
could profitably charge a supracompetitive price. See id. at
469 (“The extent to which one market prevents exploitation
of another market depends on the extent to which consumers
will change their consumption of one product to a price
change in another, i.e., the ‘cross-elasticity of demand.’”
(quoting Du Pont, 351 U.S. at 400)).
Explaining its skepticism of the factual assumption
underlying Kodak’s proposed categorical rule, the Court
reasoned that “significant” (1) information costs and (2)
switching costs “could create a less responsive connection
between aftermarket prices and [foremarket] sales,”
particularly where the percentage of “sophisticated
32 EPIC GAMES, INC. V. APPLE, INC.
purchasers” able to accurately life-cycle price is low. Id. at
473, 475; see also id. 477 n.24 (a “crucial” element is that
the aftermarket restrictions were not “generally known” by
foremarket consumers). That is, these conditions might
“lock-in” unknowing customers such that competition in the
foremarket cannot “discipline [competition in] the
aftermarkets,” meaning a hypothetical monopolist could
price its aftermarket products at a supracompetitive level
without a substantial number of customers substituting to
other products. Id. at 486; see also Von Kalinowski et al.,
supra, § 24.02[5] (Kodak single-brand aftermarket requires
“high switching costs,” “high information costs,” and
“substantial” ability to “exploit ‘ignorant’ consumers”).
Whether a plaintiff has proven such a lock-in must be
resolved “on a case-by-case basis, focusing on the ‘particular
facts disclosed by the record.’” Kodak, 504 U.S. at 467(quoting Maple Flooring Mfrs. Ass’n v. United States, 268
U.S. 563, 579 (1925)).
In Newcal, we considered how to square Kodak with our
prior holding in Forsyth that contractual obligations are
generally “not a cognizable source of market power.”
Newcal, 513 F.3d at 1047 (citing Forsyth v. Humana, Inc.,
114 F.3d 1467 (9th Cir. 2017)). We reasoned that the
“critical distinction” between Kodak, on the one hand, and
Forsyth, on the other, is that “the Kodak customers did not
knowingly enter a contract that gave Kodak the exclusive
right to prove parts and services for the life of the
equipment.” Id. at 1048. Put otherwise, the “simple
purchase of a Kodak-brand equipment” was not
“functionally equivalent to the signing of a contractual
agreement” limiting aftermarket choices. Id.; see also id. at
1049 (“[T]he law permits an inquiry into whether a
consumer’s selection of a particular brand in the competitive
EPIC GAMES, INC. V. APPLE, INC. 33
market is the functional equivalent of a contractual
commitment, giving that brand an agreed-upon right to
monopolize its consumers in an aftermarket.”). Kodak thus
differed markedly from Forsyth, which involved medical-
insurance policyholders who entered into insurance
contracts with Humana knowing that certain hospitals would
carry higher deductibles and co-payments than others. See
id. at 1048–49.
Our knowledge-based distinction in Newcal flowed
directly from the Supreme Court’s emphasis in Kodak on a
defendant’s ability to use not “generally known” aftermarket
restrictions to exploit unsophisticated consumers. Kodak,
504 U.S. at 477 n.24. And, as in Kodak, we made sure to
emphasize that the aftermarkets inquiry does not end as soon
as a plaintiff checks the Kodak-based boxes related to
consumer knowledge, information costs, and switching
costs. “Even when a submarket is an Eastman Kodak
market, though, it must bear the ‘practical indicia’ of an
independent economic entity in order to qualify as a
cognizable submarket under Brown Shoe.” Newcal, 513
F.3d at 1051.
In sum, to establish a single-brand aftermarket, a plaintiff
must show: (1) the challenged aftermarket restrictions are
“not generally known” when consumers make their
foremarket purchase; (2) “significant” information costs
prevent accurate life-cycle pricing; (3) “significant”
monetary or non-monetary switching costs exist; and (4)
general market-definition principles regarding cross-
34 EPIC GAMES, INC. V. APPLE, INC.
elasticity of demand do not undermine the proposed single-
brand market. 8
C. Standard of Review
“We review relevant market definitions as fact findings
reversible only if the evidence compels a conclusion
contrary to the [factfinder’s] verdict.” Optronic, 20 F.4th at
482; see also Saint Alphonsus, 778 F.3d at 784 (finding “no
clear error” in the district court’s market definition). Where
a plaintiff asserts a Kodak-style single-brand aftermarket, it
bears the burden of “rebut[ting] the economic presumption
that . . . consumers make a knowing choice to restrict their
aftermarket options when they decide in the initial
(competitive) market to enter a[] . . . contract.” Newcal, 513
F.3d at 1050.
D. Epic’s Legal Challenges
With these principles in mind, we now turn to Epic’s
arguments that the district court committed legal error when
it (1) held a market can never be defined around a product
that the defendant does not license or sell, (2) required lack
of consumer awareness to establish a Kodak-style market,
(3) purportedly required a change in policy to establish a
Kodak-style market, and (4) required Epic to establish the
“magnitude” of switching costs. We agree with Epic on its
first argument and, to the extent the district court did impose
8
Epic and the district court interpret Newcal to impose a different four-
part test. In doing so, they mistakenly rely on a portion of Newcal where
we determined that the specific complaint before us plausibly alleged
lack of consumer awareness such that it fell on the Kodak side of the
Kodak/Forsyth divide. See Newcal, 513 F.3d at 1049 (“In determining
whether this case is more like . . . Forsyth or more like Eastman Kodak,
there are four relevant aspects of the complaint.”).
EPIC GAMES, INC. V. APPLE, INC. 35
a change-in-policy requirement, Epic’s third argument. But
we reject Epic’s second and fourth arguments as squarely
foreclosed by Kodak and Newcal. 9
1. Unlicensed or Unsold Product Markets
First, the district court erred by imposing a categorical
rule that an antitrust market can never relate to a product that
is not licensed or sold—here smartphone operating systems.
To begin, this categorical rule flouts the Supreme Court’s
instruction that courts should conduct market-definition
inquiries based not on “formalistic distinctions” but on
“actual market realities.” Amex, 138 S. Ct. at 2285 (quoting
Kodak, 504 U.S. at 466–67).
Moreover, the district court’s rule is difficult to square
with decisions defining a product market to include
vertically integrated firms that self-provision the relevant
product but make no outside sales. For example, the D.C.
Circuit in Microsoft noted that “Apple had a not insignificant
share of worldwide sales of operating systems,” even though
Apple did not sell or license macOS but instead only
included it in its own Mac computers. United States v.
9
We also reject Apple’s suggestion that Epic’s antitrust claims should
have automatically failed as soon as the district court adopted a market
of mobile-game transactions, instead of Epic’s proposed aftermarkets.
None of the authorities Apple cites comes anywhere close to supporting
its radical argument that, where parties offer dueling market definitions,
the case immediately ends if the district court finds the record supports
the defendant’s proposed market (or a third in-between market, as was
the case here) rather than the plaintiff’s market. Instead, our precedent
squarely forecloses such an argument. See Rebel Oil, 51 F.3d at 1421
(rejecting the plaintiff’s proposed market but stating that such a rejection
was “not fatal” to its claim, and remanding to determine whether the
defendant possessed market power in the defendant-proposed market
that the court adopted).
36 EPIC GAMES, INC. V. APPLE, INC.
Microsoft Corp., 253 F.3d 34, 73 (D.C. Cir. 2001). While
the Microsoft court ultimately excluded macOS from its
market, it did so on fact-bound substitutability grounds, not
the categorical grounds that the district court used here. Id.
at 52.
Finally, the district court’s rule overlooks that there may
be markets where companies offer a product to one side of
the market for free but profit in other ways, such as by
collecting consumer data or generating ad revenue. See, e.g.,
FTC v. Facebook, Inc., 581 F. Supp. 3d 34, 44–45, 55
(D.D.C. 2022) (finding FTC plausibly alleged a market of
personal social networks even though “all [are] provided free
of charge” to users). It puts form over substance to say that
such products cannot form a market because they are not
directly licensed or sold.
2. Lack of Consumer Knowledge
Second, the district court did not err when it required
Epic to produce evidence regarding a lack of consumer
knowledge of Apple’s app-distribution and IAP restrictions.
Such a requirement comes directly from Kodak and Newcal.
The former stated that it is “crucial” that aftermarket
restrictions are not “generally known.” Kodak, 504 U.S. at477 n.24. The latter placed the burden on a plaintiff to “rebut
the economic presumption that . . . consumers make a
knowing choice to restrict their aftermarket options” when
they make a foremarket purchase. Newcal, 513 F.3d at
1050. 10
10
As Epic correctly notes in its opening brief, Kodak does not impose a
requirement that a plaintiff show “complete ignorance” of a defendant’s
aftermarket restrictions; it need only show that the restrictions are not
EPIC GAMES, INC. V. APPLE, INC. 37
3. Change in Policy
Third, Epic argues that the district court erred by holding
that a plaintiff can establish a Kodak-style aftermarket only
if it shows that the defendant adopted its aftermarket
restrictions after some portion of consumers purchased their
foremarket durable goods. Had the district court actually
imposed such an absolute change-in-policy requirement, it
would have erred. As explained above, Kodak and Newcal
require a showing of a lack of consumer awareness regarding
aftermarket restrictions. Newcal, 513 F.3d at 1050. A
change in policy is of course one way of doing so; a
consumer cannot knowingly agree to a restriction that did
not exist at the time of the foremarket transaction. But it is
not the exclusive means of doing so. Indeed, Kodak itself
contemplated that some sophisticated, high-volume
consumers would be able to accurately life-cycle price goods
in the foremarket. Kodak, 504 U.S. at 476. Such life-cycle
pricing would be impossible if those consumers were
unaware that they would be restricted to certain vendors in
the aftermarket.
But contrary to Epic’s assertion, we do not read the
district court’s order as running counter to these principles.
The district court explained that “other circuits have aligned
with the contours of Newcal . . . regarding knowledge and/or
post-purchase policy changes” and that the “breadth of
antitrust law” requires that a restriction “must not have been
sufficiently disclosed to consumers.” It then quoted the
operative language from Newcal that focuses on lack of
“generally known.” Kodak, 504 U.S. at 477 n.24. We need not decide
what amounts to “general[]” unawareness because Epic presented no
evidence of consumer unawareness. See infra section I.E.
38 EPIC GAMES, INC. V. APPLE, INC.
knowledge, not the necessity of a policy change. Finally, it
examined the record to find neither a change in policy nor
proof that iOS device purchasers are unaware of the
distribution and IAP restrictions. See infra section I.E. The
district court appropriately treated a change in policy as one,
but not the exclusive, way of establishing Kodak and
Newcal’s general-lack-of-knowledge requirement.
4. Significant Switching Costs
Fourth, the district court did not err when it required Epic
to produce evidence about the magnitude of switching costs.
Kodak explicitly requires that switching costs—whether
monetary or non-monetary—be “significant.” Kodak, 504
U.S at 473. This showing need not be extensive; among
other things, a plaintiff can point to the “heavy initial outlay”
of the foremarket good and brand-specific purchases. Id. at
477. By requiring such a showing, the district court was
simply fulfilling its Kodak obligation of ensuring that
switching costs are “significant.” 11
E. Epic’s Clear-Error Challenge
We now turn to the main thrust of Epic’s market-
definition argument: that it is entitled, as a factual matter, to
a finding in favor of its proposed aftermarkets. Though Epic
attempts to avoid the clear-error label, its argument requires
it to carry the heavy of burden on appeal of showing that the
district court clearly erred in finding that (1) Epic failed to
show a lack of general consumer awareness regarding
Apple’s restrictions on iOS distribution and payment
processing, (2) Epic failed to show significant switching
11
As explained in the following section, we express no view on whether
the district court erred when applying this significance requirement to
Epic’s proffered evidence regarding switching costs.
EPIC GAMES, INC. V. APPLE, INC. 39
costs, and (3) the empirical evidence in the record and the
Brown Shoe practical indicia support a market of mobile-
game transactions, not Epic’s iOS-specific aftermarkets. 12
Beginning with the first prong, Epic had the burden of
showing a lack of consumer awareness—whether through a
change in policy or otherwise. Epic identified a purported
change in policy, contrasting the App Store’s now-immense
profitability with a pre-launch statement from Steve Jobs
that Apple did not “intend to make money off the App
Store[’s]” 30% commission. The district court reasonably
found this statement to simply reflect Jobs’s “initial
expectation” about the App Store’s performance, not an
announcement of Apple policy. Especially in light of the
district court’s finding that Apple has “maintained the same
general rules” for distribution and payment processing since
the App Store’s early days, it did not clearly err in
concluding that Epic failed to prove a lack of consumer
awareness through a change of policy.
Nor did the district court clearly err in finding that Epic
otherwise failed to establish a lack of awareness. Indeed, the
district court squarely found: “[T]here is no evidence in the
record demonstrating that consumers are unaware that the
App Store is the sole means of digital distribution on the iOS
platform” (emphasis added). And on appeal, Epic fails to
cite any evidence that would undermine the district court’s
characterization of the record.
Because of this failure of proof on the first prong of
Epic’s Kodak/Newcal showing, we need not reach—and do
12
The district court did not rule against Epic on the remaining prong of
the Kodak/Newcal test: the presence of significant information costs that
make accurate life-cycle pricing difficult.
40 EPIC GAMES, INC. V. APPLE, INC.
not express any view regarding—the other factual grounds
on which the district court rejected Epic’s single-brand
markets: (1) that Epic did not show significant switching
costs, and (2) that empirical evidence and the Brown Shoe
factors rebut Epic’s proposed aftermarkets.
Moreover, the district court’s finding on
Kodak/Newcal’s consumer-unawareness requirement
renders harmless its rejection of Epic’s proposed
aftermarkets on the legally erroneous basis that Apple does
not license or sell iOS as a standalone product. See supra
section I.D.1. To establish its single-brand aftermarkets,
Epic bore the burden of “rebut[ting] the economic
presumption that . . . consumers make a knowing choice to
restrict their aftermarket options when they decide in the
initial (competitive) market to enter a[] . . . contract.”
Newcal, 513 F.3d at 1050. Yet the district court found that
there was “no evidence in the record” that could support such
a showing. As a result, Epic cannot establish its proposed
aftermarkets on the record before our court—even after the
district court’s erroneous reasoning is corrected.
In his partial dissent, our colleague, Judge Thomas,
disagrees with our conclusion that the error discussed in
section I.D.1 is harmless. First, Judge Thomas contends that
we lack any “direct authority for [this] proposition.” While
we do not have a Kodak-specific case to cite, treating an
error as harmless in light of an independent and sufficient
alternative finding is standard fare in appellate courts. See,
e.g., United States v. Wright, 46 F.4th 938, 944 (9th Cir.
2022) (“[The district court’s . . . error was harmless in light
of its alternative holding . . . .” (capitalization
standardized)); Tommasetti v. Astrue, 533 F.3d 1035, 1042
(9th Cir. 2008) (“Although the ALJ’s step four
determination constitutes error, it is harmless error in light
EPIC GAMES, INC. V. APPLE, INC. 41
of the ALJ’s alternative finding at step five.”); United States
v. Koenig, 912 F.2d 1190, 1190 (9th Cir. 1990) (“We agree
[with the appellant’s assertion of error], but conclude that the
district court made alternative rulings that render any
error harmless.”). Second, and relatedly, Judge Thomas
argues that our harmless-error conclusion runs counter to
precedent instructing that, outside of certain exceptions,
“courts usually cannot apply the rule of reason without an
accurate definition of the relevant market.” Amex, 138 S. Ct.
at 2285. But that argument misconstrues the effect of the
district court’s finding on the consumer-unawareness prong.
If, as Judge Thomas requests, we were to just correct the
district court’s erroneous reasoning and then remand, the
district court’s market definition on remand would be
foreordained. Given the total lack of evidence on consumer-
unawareness, Epic cannot establish its proposed
aftermarkets. So, contrary to the partial dissent’s assertion,
we do not proceed to apply the Sherman Act’s liability
standards without first defining a relevant market. Epic’s
proposed aftermarkets fail, and Apple did not cross-appeal
the district court’s rejection of its proposed market. The
district court’s middle-ground market of mobile-games
transaction thus stands on appeal, and it is that market in
which we assess whether Apple’s conduct is unlawful
pursuant to the Sherman Act.
II. Sherman Act Section 1: Unreasonable Restraint
With the relevant market for Epic’s antitrust claims
established (mobile-game transactions), we turn to the
district court’s rejection of Epic’s Sherman Act Section 1
restraint-of-trade claim. Section 1 prohibits “[e]very
contract, combination . . . , or conspiracy, in restraint of
trade.” 15 U.S.C. § 1. Courts have long read Section 1 to
“outlaw only unreasonable restraints.” Amex, 138 S. Ct. at42 EPIC GAMES, INC. V. APPLE, INC.
2283 (quoting State Oil v. Khan, 522 U.S. 3, 10 (1997)).
Thus, a Section 1 inquiry has both a threshold component
(whether there is a contract, combination, or conspiracy) and
a merits component (whether it is unreasonable).
Qualcomm, 969 F.3d at 988–89. While a restraint can be
unreasonable per se or pursuant to the Rule of Reason, the
parties agree that the latter standard applies here.
Epic contends that the district court (1) incorrectly found
that the DPLA was not a “contract[]” within the scope of
Section 1, (2) misapplied steps two and three of the Rule of
Reason, and (3) omitted a fourth balancing step after it found
that Epic failed to satisfy its step-three burden. Apple
asserts—as an alternative basis for affirming the district
court’s denial of Sherman Act liability—that the court erred
at step one of the Rule of Reason. We agree with Epic on its
first and third arguments but find the errors to be harmless;
we reject Epic’s and Apple’s remaining arguments.
A. Existence of a Contract
The district court erred when it held that a non-
negotiated contract of adhesion like the DPLA falls outside
of the scope of Section 1. That holding plainly contradicts
Section 1’s text, which reaches “[e]very contract,
combination . . . , or conspiracy” that unreasonably restrains
trade. 15 U.S.C. § 1 (emphasis added). To hold that a
contract is exempt from antitrust scrutiny simply because
one party “reluctant[ly]” accepted its terms “would be to
read the word[] ‘contract’” out of the statute. Systemcare,
Inc. v. Wang Lab’ys Corp., 117 F.3d 1137, 1143 (10th Cir.
1997).
Moreover, the district court’s contract-of-adhesion
exemption is difficult to square with numerous antitrust
cases involving agreements in which one party set terms and
EPIC GAMES, INC. V. APPLE, INC. 43
the other party reluctantly acquiesced. See, e.g., Amex, 138
S. ct. at 2282 (“Amex’s business model sometimes causes
friction with merchants”); Perma Life Mufflers, Inc. v. Int’l
Parts Corp., 392 U.S. 134, 142 (1968) (the plaintiff
“unwillingly complied with the restrictive . . . agreements”),
overruled on other grounds by Copperweld, 467 U.S. 752;
Barry v. Blue Cross of Cal., 805 F.2d 866, 869 (9th Cir.
1986) (contract “terms and structure were made by” the
defendant). Given the number of cases in which the district
court’s exemption would have been decisive, it is telling that
the dog never barked.
Additionally, as the district court itself recognized, its
holding is “not particularly consistent” with ties being
cognizable pursuant to Section 1. In a classic tie, the
defendant “exploit[s] . . . its control over the tying product
to force the buyer into the purchase of a tied product that the
buyer either did not want at all, or might have preferred to
purchase elsewhere on different terms.” Jefferson Par.
Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984), overruled
on other grounds by Ill. Tool Works Inc. v. Indep. Ink, Inc.,
547 U.S. 28 (2006). “If such conduct were to be labelled
‘independent,’ virtually all tying arrangements would be
beyond the reach of Section 1.” Image Tech. Serv., Inc. v.
Eastman Kodak Co., 903 F.2d 612, 619 (9th Cir. 1990).
Moreover, Section 1 is primarily concerned with firms
that exercise market power—i.e., the “special ability . . . to
force a [a contracting partner] to do something that he would
not do in a competitive market.” Jefferson Parish, 466 U.S.
at 13–14. The district court’s rule would preclude Section 1
suits and illegality defenses to breach of contract claims
where they are most needed: when dealing with restraints
44 EPIC GAMES, INC. V. APPLE, INC.
imposed by firms that have market power but lack the
monopoly power that triggers Section 2 scrutiny. 13
Thus, the district court erred on this threshold issue. But
because the court, in the alternative, properly applied the
Rule of Reason, its error was harmless.
B. Rule of Reason Step One: Anticompetitive Effects
The district court did not err when it found that Epic
made the Rule of Reason’s required step-one showing. At
step one, “the plaintiff has the initial burden to prove that the
challenged restraint has a substantial anticompetitive effect
that harms consumers in the relevant market.” Amex, 138 S.
Ct. at 2284. Antitrust plaintiffs can make their step-one
showing either “directly or indirectly.” Id.; accord
PLS.Com, LLC v. Nat’l Ass’n of Realtors, 32 F.4th 824, 834
(9th Cir. 2022); Aya Healthcare Servs., Inc. v. AMN
Healthcare, Inc., 9 F.4th 1102, 1112 (9th Cir. 2021); Rebel
Oil., 51 F.3d at 1434.
13
The decisions that the district court relied on are readily
distinguishable. An express agreement is “direct evidence of ‘concerted
activity.’” Paladin Assocs., Inc. v. Mont. Power Co., 328 F.3d 1145,
1153 (9th Cir. 2003). But the district court relied exclusively on cases
in which there was no direct evidence of concerted activity and a plaintiff
instead produced circumstantial evidence to show that the defendants
were acting in concert. See, e.g., Monsanto Co. v. Spray-Rite Serv.
Corp., 465 U.S. 752 (1984). Where a plaintiff puts forward only
circumstantial evidence, courts must conduct a searching inquiry, lest
they mistake parallel conduct (which is legal) for concerted activity
(which is subject to Section 1 scrutiny). Id. at 768; see In re Musical
Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1193–94 (9th Cir.
2015). Where there is an express contract, that concern is simply not
present.
EPIC GAMES, INC. V. APPLE, INC. 45
“To prove a substantial anticompetitive effect directly,
the plaintiff must provide ‘proof of actual detrimental effects
[on competition],’ such as reduced output, increased prices,
or decreased quality in the relevant market.” PLS.Com, 32
F.4th at 834 (emphasis added) (quoting Amex, 138 S. Ct. at
2284). Importantly, showing a reduction in output is one
form of direct evidence, but it “is not the only measure.”
O’Bannon v. NCAA, 802 F.3d 1049, 1070 (2015) (emphasis
removed) (quoting Areeda & Hovenkamp, Antitrust Law,
supra, ⁋ 1503b(1)).
To prove substantial anticompetitive effects indirectly,
the plaintiff must prove that the defendant has market power
and present “some evidence that the challenged restraint
harms competition.” Amex, 138 S. Ct. at 2284. Market
power is the ability for a defendant to profitably raise prices
by restricting output. Id. at 2288; see also Jefferson Parish,
466 U.S. at 13–14 (market power is the ability “to force a
purchaser to do something that he would not do in a
competitive market”). In other words, a firm with market
power is a price-maker, not the price-takers that economic
theory expects in a competitive market. Pursuant to this
indirect-evidence route, “[t]he existence of market power is
a significant finding that casts an anticompetitive shadow
over a party’s practices in a rule-of-reason case.” Hahn v.
Or. Physicians’ Serv., 868 F.2d 1022, 1026 (9th Cir. 1988).
Market power is generally inferred from the defendant’s
possession of a high market share and the existence of
“significant barriers to entry.” Rebel Oil, 51 F.3d at 1434.
Whether a defendant possesses market power is a factual
question that we review for clear error. Cf. L.A. Land Co. v.
Brunswick Corp., 6 F.3d 1422, 1425 (9th Cir. 1993)
(possession of monopoly power is a fact question).
46 EPIC GAMES, INC. V. APPLE, INC.
A plaintiff must also present “some evidence” that the
defendant uses that market power to harm competition.
Amex, 138 S. Ct. at 2284; see also Aya Healthcare, 9 F.4th
at 1113 (citing Tops Mkts., Inc. v. Quality Mkts., Inc., 142
F.3d 90, 97 (2d Cir. 1998), for the proposition that “market
power alone does not suffice as indirect evidence for a rule-
of-reason analysis”). This inquiry need not always be
extensive or highly technical. It is sufficient that the plaintiff
prove the defendant’s conduct, as matter of economic theory,
harms competition—for example that it increases barriers to
entry or reduces consumer choice by excluding would-be
competitors that would offer differentiated products. See N.
Am. Soccer League, LLC v. U.S. Soccer Fed’n Inc., 883 F.3d
32, 42 (2d Cir. 2018).
Here, the district concluded that Epic produced both
sufficient direct and indirect evidence to show that Apple’s
distribution and IAP restrictions impose substantial
anticompetitive effects. In terms of direct evidence, the
court found that Apple has for years extracted a
supracompetitive commission that was set “almost by
accident” and “without regard” to its own costs and has
produced “extraordinarily high” operating margins that
“have exceeded 75% for years.” The court found that “the
economic factors driving” other platforms’ rates “do not
apply equally to Apple,” with “nothing other than legal
action seem[ing] to motivate Apple to reconsider pricing and
reduce rates.” With respect to indirect evidence, the district
court found that Apple has market power: Apple had a
mobile-games market share of 52 to 57% for the three years
in evidence, and network effects and information restrictions
create barriers to entry. The court found that Apple wielded
that market power to foreclose would-be competitors like
Epic from offering app-distribution and payment-processing
EPIC GAMES, INC. V. APPLE, INC. 47
alternatives—reducing innovation and Apple’s own
investment in the App Store in the process.
1. Direct Evidence
Apple challenges both the district court’s direct- and
indirect-evidence conclusions on several grounds—some
legal, some factual. We are not persuaded that the district
court erred at step one of the Rule of Reason. 14
First, Apple argues that the district court’s direct-
evidence conclusion cannot stand because Epic did not show
that Apple’s restrictions reduced output. We squarely
rejected this argument in O’Bannon. There, the NCAA
similarly argued that liability was foreclosed because output
in the relevant market “increased steadily over time.” 802
F.3d at 1070. “Although output reductions are one common
kind of anticompetitive effect in antitrust cases, a ‘reduction
in output is not the only measure of anticompetitive effect.’”
Id. (citation omitted). Nor does Amex displace our holding
in O’Bannon. A showing of decreased output was essential
in that case because the plaintiff “failed to offer any reliable
measure of Amex’s transaction price or profit margins” and
“the evidence about whether Amex charges more than its
competitors was ultimately inconclusive.” Amex, 138 S. Ct.
at 2288.
14
We also reject Apple’s threshold argument that the district court erred
by not isolating the effects of Apple’s unilateral product-design decisions
from the effects of the contractual restrictions that are properly within
the scope of Section 1. This argument runs counter to the record. When
conducting its Rule of Reason analysis, the district court noted that Epic
“appear[ed] to disclaim any challenge to Apple’s code signing
restrictions,” so the court “consider[ed] only the DPLA restrictions.”
48 EPIC GAMES, INC. V. APPLE, INC.
Second, Apple argues that Epic’s evidence of
supracompetitive pricing fails as a matter of law because
Apple never raised its commission. A supracompetitive
price is simply a “price[] above competitive levels.” Rebel
Oil, 51 F.3d at 1434. Apple cites no binding precedent in
support of its proposition that the charging of a
supracompetitive price must always entail a price increase,
though we recognize that it ordinarily does.
Third, Apple attacks the supracompetitive-pricing
finding on factual grounds by asserting that Apple charges a
substantially similar commission as its competitors. That
assertion is true as far as headline rates go, but the district
court reasonably based its supracompetitive-price finding on
effective commission rates instead of headline rates. The
district court found Apple’s reliance on headline rates to be
“suspect” because, unlike the App Store, other platforms
“frequently negotiate[] down” the rates they charge
developers. The court noted that Amazon has a headline rate
of 30% but an effective commission rate of 18%. And it
credited testimony that game-console transaction platforms
often “negotiate special deals for large developers.” While
the district court’s finding that the Google Play Store (the
App Store’s “main competitor”) charges a 30% rate
seemingly undermines the characterization of Apple’s
commission as supracompetitive, we cannot say that the
district court clearly erred absent evidence about the Google
Play Store’s effective commission—the metric that the
district court at trial found to be the key to determining the
competitiveness of a price in this market.
Fourth, Apple argues that the district court’s direct-
evidence finding fails as a matter of law because Amex
requires Epic to establish anticompetitive effects on both
sides of the two-sided market for mobile-game transactions
EPIC GAMES, INC. V. APPLE, INC. 49
(developers and users). Apple’s argument falls short both
legally and factually. We have previously held: “Amex does
not require a plaintiff to [show] harm to participants on both
sides of the market. All Amex held is that to establish that a
practice is anticompetitive in certain two-sided markets, the
plaintiff must establish an anticompetitive impact on the
‘market as a whole.’” PLS.com, 32 F.4th at 839 (quoting
Amex, 138 S. Ct. at 2287). In any event, the district court
found that, while Apple’s restrictions “certainly impact
developers,” there was “some evidence” that the restrictions
also “impact[] consumers when those costs are passed on.”
2. Indirect Evidence
We are not persuaded by Apple’s argument that the
district court erred in concluding that Epic failed to establish
indirect evidence of anticompetitive effects. Apple does not
take issue with the district court’s finding of a 52 to 55%
market share (other than noting it was the court’s “own
. . . calculation”); nor does Apple challenge the court’s
barriers-to-entry finding. It instead argues that the finding
that Apple wields its market power in an anticompetitive
manner is speculative. But, supported by basic economic
presumptions, the district court reasonably found that,
without Apple’s restrictions, would-be competitors could
offer iOS users alternatives that would differentiate
themselves from the App Store on price as well as consumer-
appeal features like searchability, security, privacy, and
payment processing. Indeed, it found competition in the PC-
gaming market to be a “vivid illustration”: Steam had long
charged a 30% commission, but upon Epic’s entry into the
market, it lowered its commission to 20%. Epic’s indirect-
evidence showing was sufficient. See N. Am. Soccer
League, 883 F.3d at 42 (market power combined with a
50 EPIC GAMES, INC. V. APPLE, INC.
restriction that “reduce[s] consumer choice” satisfies step
one).
C. Step Two: Procompetitive Rationales
The district court correctly held that Apple offered non-
pretextual, legally cognizable procompetitive rationales for
its app-distribution and IAP restrictions. If a plaintiff
establishes at step one that the defendant’s restraints impose
substantial anticompetitive effects, then the burden shifts
back to the defendant to “show a procompetitive rationale
for the restraint[s].” NCAA v. Alston, 141 S. Ct. 2141, 2160
(2021) (quoting Amex, 138 S. C.t at 2284). A procompetitive
rationale is “a [1] nonpretextual claim that [the defendant’s]
conduct is [2] indeed a form of competition on the merits
because it involves, for example, greater efficiency or
enhanced consumer appeal.” Qualcomm, 969 F.3d at 991.
Here, the district court accepted two sets of rationales as
non-pretextual and legally cognizable. First, it found that
Apple implemented the restrictions to improve device
security and user privacy—thereby enhancing consumer
appeal and differentiating iOS devices and the App Store
from those products’ respective competitors. Second, the
court partially accepted Apple’s argument that it
implemented the restrictions to be compensated for its IP
investment. While the court credited the IP-compensation
rationale generally, it rejected the rationale “with respect to
the 30% commission rate specifically.” On appeal, Epic
raises three arguments challenging Apple’s rationales as
legally non-cognizable.
EPIC GAMES, INC. V. APPLE, INC. 51
1. Partial Acceptance of Apple’s IP-
Compensation Rationale
Epic argues that the district court may not credit Apple’s
IP-compensation rationale while finding that the rationale
was pretextual “with respect to the 30% commission rate
specifically” (emphasis added). We have held that IP-
compensation is a cognizable procompetitive rationale,
Kodak, 125 F.3d at 1219 (“desire to profit from
. . . intellectual property” is presumptively procompetitive),
and we find no error in the district court’s partial crediting
of that rationale here.
The district court’s acceptance of the rationale generally,
while rejecting a specific application of it, resembles the
district court’s analysis in the NCAA litigation that
culminated in Alston, 141 S. Ct. 2141. There, the district
court credited the NCAA’s amateurism-as-consumer-appeal
rationale but found that the NCAA’s “rules and restrictions
on [amateurism] ha[d] shifted markedly over time,” that the
NCAA adopted some restrictions “without any reference to
considerations of consumer demand,” and that some were
“not necessary to consumer demand.” Id. at 2163. The court
did not, as Epic requests here, resolve the case at step two
and hold that the NCAA’s shaky proof meant it lacked any
procompetitive rationale. Instead, the “deficiencies in the
NCAA’s proof of procompetitive benefits at the second step
influenced the analysis at the third [step].” Id. at 2162.
Because the NCAA’s amateurism-as-consumer-appeal
rationale was nebulously defined and weakly substantiated,
the plaintiffs had more flexibility at step three to fashion less
restrictive alternatives.
The same is true here. Because the district court
accepted only a general version of Apple’s IP-compensation
52 EPIC GAMES, INC. V. APPLE, INC.
rationale (that Apple was entitled to “some compensation”),
Epic at step three needed only to fashion a less-restrictive
alternative calibrated to achieving that general goal, instead
of one achieving the level of compensation that Apple
currently achieves through its 30% commission. There is no
legal requirement—as Epic suggests—that district courts
make pretext findings on an all-or-nothing basis. When
district courts at step two partially credit a rationale, step
three will necessarily take that partial finding into account.
2. Cognizability of Apple’s Privacy/Security
Rationales
Epic and its amici next argue that Apple’s security and
privacy rationales are social, not procompetitive, rationales
and therefore fall outside the purview of antitrust law. We
reject this argument.
To begin, Epic waived this argument by failing to raise
it below. See Friedman v. AARP, Inc., 855 F.3d 1047, 1057
(9th Cir. 2017) (“Our general rule is that we do not consider
an issue not passed upon below.”). In the parties’ pre-trial
joint submission on elements and remedies, Epic agreed that
“enhancing consumer appeal”—the goal of Apple’s security
and privacy efforts—is a cognizable procompetitive
justification. At trial, one of Epic’s experts conceded that
“[p]rotecting iPhone users from security threats is a
procompetitive benefit.” And Epic made no reference to
cognizability in its proposed findings of fact and conclusions
of law.
Even setting aside Epic’s failure to raise this argument
below, we are not persuaded by it. See Carrillo v. County of
Los Angeles, 798 F.3d 1210, 1223 (9th Cir. 2015) (courts of
appeal have discretion to address pure questions of law if
doing so will not prejudice the opposing party). Epic’s
EPIC GAMES, INC. V. APPLE, INC. 53
argument characterizes Apple as asserting security and
privacy as independent justifications in and of themselves.
But, throughout the record, Apple makes clear that by
improving security and privacy features, it is tapping into
consumer demand and differentiating its products from those
of its competitors—goals that are plainly procompetitive
rationales. See, e.g., Qualcomm, 969 F.3d at 991 (listing
enhanced “consumer appeal” as a legitimate procompetitive
rationale); O’Bannon, 802 F.3d at 1072–73 (considering the
NCAA’s amateurism rationale that “plays a role in
increasing consumer demand”). Consumer surveys in the
record show that security and privacy is an important aspect
of a device purchase for 50% to 62% of iPhone users and
76% to 89% of iPad users worldwide. Even Epic’s CEO
testified that he purchased an iPhone over an Android
smartphone in part because it offers “better security and
privacy.” And the district court found that, because Apple
creates a “trusted app environment, users make greater use
of their devices.”
With Apple’s restrictions in place, users are free to
decide which kind of app-transaction platform to use. Users
who value security and privacy can select (by purchasing an
iPhone) Apple’s closed platform and pay a marginally higher
price for apps. Users who place a premium on low prices
can (by purchasing an Android device) select one of the
several open app-transaction platforms, which provide
marginally less security and privacy. Apple’s restrictions
create a heterogenous market for app-transaction platforms
which, as a result, increases interbrand competition—the
primary goal of antitrust law. See, e.g., Leegin Creative
Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 895 (2007);
54 EPIC GAMES, INC. V. APPLE, INC.
State Oil, 522 U.S. at 15. 15 Antitrust law assumes that
competition best allocates resources by allowing firms to
compete on “all elements of a bargain—quality, service,
safety, and durability—and not just the immediate cost.”
Nat’l Soc’y of Pro. Eng’rs v. United States, 435 U.S. 679,
695 (1978). If we were to accept Epic and its amici’s
argument, then no defendant could cite competing on non-
price features as a procompetitive rationale.
To avoid this conclusion, Epic and its amici rely on a line
of cases stemming from National Society of Professional
Engineers. But neither that case nor its progeny support
their argument that improved quality is a social, rather than
procompetitive, rationale. Instead, the Professional
Engineers line of cases holds that a defendant cannot
severely limit interbrand competition on the theory that
competition itself is ill-suited to a certain market or industry.
See id. at 694–96. Epic’s selection of quotes from
Professional Engineers and other cases—without
acknowledging the distinct context in which they occurred—
is unconvincing.
In Professional Engineers, a professional association
with about 12,000 engineers adopted a rule prohibiting its
members from engaging in competitive bidding on
15
Epic argues that interbrand competition in the smartphone market is
irrelevant because in the app-transactions market Epic is Apple’s would-
be competitor—i.e., the DPLA prevents interbrand competition between
the App Store and the Epic Games Store in the game-transactions
market. But this was also true in Kodak: The independent service
operators were would-be competitors of Kodak in the service market.
Still, the Court entertained (while ultimately rejecting on factual
grounds) Kodak’s procompetitive rationale that its service restrictions
ensured high-quality products and thus promoted interbrand competition
in the foremarket for photocopiers. Kodak, 504 U.S. at 482–84.
EPIC GAMES, INC. V. APPLE, INC. 55
construction projects. Id. at 681. This “absolute ban” on
competitive bidding imposed substantial anticompetitive
effects, and the Society’s sole justification was that
competition in the construction-engineering market would
lead engineers to perform “inferior work with consequent
risk to safety and health.” Id. at 692–94. In other words,
competition in the construction engineering industry was not
in the “public benefit.” Id. The Supreme Court rejected this
request for a judge-made exemption from the Rule of
Reason, which “does not support a defense based on the
assumption that competition itself is unreasonable,” and
stated that the Society’s argument should be “addressed to
Congress.” Id. at 696.
Indiana Federation of Dentists likewise involved a
request for an exemption from the Rule of Reason. There,
an association of dentists, which had a nearly 100% market
share in one area and a nearly 70% market share in another,
adopted a rule prohibiting its members from submitting x-
rays to dental insurers. Ind. Fed. of Dentists, 476 U.S. at448–49. The rule made it prohibitively expensive for
insurers to impose cost-containment measures and thus
eliminated interbrand competition regarding cooperation
with patients’ insurers. Id. at 449. The Federation argued
that competition would undermine “quality of care”—that,
without the rule, consumers would make “unwise and even
dangerous choices” regarding dental procedures. Id. at 463.
The Supreme Court rejected this argument—that
competition was ill-suited for the dental industry—as
squarely foreclosed by Professional Engineers. Id.Trial Lawyers Association followed a similar track, but
with respect to a requested exemption from a per se rule. A
professional association comprising about 90% of “regulars”
appointed for indigent criminal defense in the Superior Court
56 EPIC GAMES, INC. V. APPLE, INC.
of the District of Columbia entered into a group boycott
against the District until it “substantially increase[d]” hourly
rates. FTC v. Sup. Ct. Trial Lawyers’ Ass’n, 493 U.S. 411,
416 (1990). The Association argued that its actions were not
unlawful because the District had a “constitutional duty” to
provide adequate representation to indigent defendants,
which required it to provide meaningful compensation to
their attorneys. Id. at 423. The Court refused to exempt the
Association’s conduct from the normal application of
antitrust’s per se prohibition on group boycotts, concluding
that “[t]he social justifications proffered for respondents’
restraint of trade . . . do not make it any less unlawful.” Id.
at 424.
The Supreme Court followed suit last term in Alston
when it rejected the NCAA’s sweeping plea for leniency.
The NCAA argued that something more deferential than the
Rule of Reason should apply to its restrictions on student-
athlete compensation because the NCAA’s amateurism
restrictions advance the “societally important non-
commercial objective of higher education.” Alston, 141 S.
Ct. at 2158. The Supreme Court held that this argument—
that the NCAA “should be exempt from the usual operation
of the antitrust laws”—should be directed to Congress, not a
court. Id. at 2160.
Apple’s rationales categorically differ from those
asserted in the above cases. Apple did not agree with other
app-transaction platforms (e.g., the Google Play Store) to
eliminate interbrand competition and then invoke security
and privacy to avoid the “normal operation” of the Rule of
Reason. Id. at 2147. Rather, Apple imposed intrabrand
limitations (that iOS devices use Apple distribution and
payment-processing channels) and contends that these
restrictions tap into consumer demand for a private and
EPIC GAMES, INC. V. APPLE, INC. 57
secure user experience and distinguish the App Store from
its open-platform competitors.
3. Cognizability of Cross-Market Rationales
Epic finally argues that, even if Apple’s security and
privacy restrictions are procompetitive, they increase
competition in a different market than the district court
defined and in which Epic showed step-one anticompetitive
effects, and thus are not legally cognizable at step two. In
Epic’s view, Apple’s rationales relate to the market for
smartphone operating systems (or the market for
smartphones), while the anticompetitive effects of Apple’s
restrictions impact the market for mobile-game transactions.
The Supreme Court’s precedent on this issue is not clear.
While amici argued in Alston that cross-market justifications
fail as a matter of law, the Supreme Court “express[ed] no
view[]” on the argument. 141 S. Ct. at 2155. Dicta from one
per se decision provides some support for Epic’s position.
See United States v. Topco Assocs., Inc., 405 U.S. 596, 609–
10 (1972) (courts are unable “to weigh, in any meaningful
sense, destruction of competition in one sector of the
economy against promotion of competition in another
sector”). But the Supreme Court has considered cross-
market rationales in Rule of Reason and monopolization
cases. See Kodak, 504 U.S. at 482–84 (relevant market of
Kodak-brand service and parts; procompetitive rationale in
market for photocopiers); NCAA v. Bd. of Regents of Univ.
of Okla., 468 U.S. 85, 104–08, 115–17 (1984) (relevant
market of college football television; procompetitive
rationale of protecting the market for college football
tickets). Our court’s precedent is similar. While we have
never expressly confronted this issue, we have previously
considered cross-market rationales when applying the Rule
58 EPIC GAMES, INC. V. APPLE, INC.
of Reason. See O’Bannon, 802 F.3d at 1069–73; In re NCAA
Athletic Grant-in-Aid Cap Antitrust Litig., 958 F.3d 1239,
1266–71 (9th Cir. 2020) (M. Smith, J., concurring).
We decline to decide this issue here. Like Epic’s general
cognizability argument, Epic did not raise this argument
below. Nor did it raise this argument in its opening brief
before our court, denying Apple an opportunity to respond.
See Miller v. Fairchild Indus., Inc., 797 F.2d 727, 738 (9th
Cir. 1986).
More importantly, we need not decide this issue because
Epic’s argument rests on an incorrect reading of the record.
Contrary to Epic’s contention, Apple’s procompetitive
justifications do relate to the app-transactions market.
Because use of the App Store requires an iOS device, there
are two ways of increasing App Store output: (1) increasing
the total number of iOS device users, and (2) increasing the
average number of downloads and in-app purchases made
by iOS device users. Below, the district court found that a
large portion of consumers factored security and privacy into
their decision to purchase an iOS device—increasing total
iOS device users. It also found that Apple’s security- and
privacy-related restrictions “provide[] a safe and trusted user
experience on iOS, which encourages both users and
developers to transact freely”—increasing the per-user
average number of app transactions.
D. Step Three: Substantially Less Restrictive Means
The district court did not clearly err when it held that
Epic failed to prove the existence of substantially less
restrictive alternatives (LRAs) to achieve Apple’s
procompetitive rationales. At step three of the Rule of
Reason, “the burden shifts back to the plaintiff to
demonstrate that the procompetitive efficiencies could be
EPIC GAMES, INC. V. APPLE, INC. 59
reasonably achieved through less anticompetitive means.”
Alston, 141 S Ct. at 2160 (quoting Amex, 138 S. Ct. at 2284).
When evaluating proposed alternative means, courts “must
give wide berth to [defendants’] business judgments” and
“must resist the temptation to require that enterprises employ
the least restrictive means of achieving their legitimate
business objectives.” Id. at 2163, 2166; see also id. at 2161
(“[A]ntitrust law does not require businesses to use anything
like the least restrictive means of achieving legitimate
business purposes.”). As such, this circuit’s test—which the
Supreme Court approved in Alston—requires a
“substantially less restrictive” alternative. O’Bannon, 802
F.3d at 1070 (emphasis added) (quoting Tanaka v. Univ. of
S. Cal., 252 F.3d 1059, 1063 (9th Cir. 2001)). To qualify as
“substantially less restrictive,” an alternative means “must
be ‘virtually as effective’ in serving the [defendant’s]
procompetitive purposes . . . without significantly increased
cost.” Id. at 1074 (quoting County of Tuolumne v. Sonora
Cmty. Hosp., 236 F.3d 1148, 1159 (9th Cir. 2001)).
Because LRAs inform the injunctive relief that a district
court may enter if a plaintiff prevails, courts must also keep
in mind “a healthy respect for the practical limits of judicial
administration” when evaluating proposed LRAs. Alston,
141 S. Ct. at 2163. Courts should not “impose a duty . . . that
it cannot explain or adequately and reasonably supervise.”
Id. (quoting Verizon Commc’ns Inc. v. L. Offs. Of Curtis V.
Trinko, LLP, 540 U.S. 398, 415 (2004)).
We review a district court’s findings on the existence of
substantially less restrictive means for clear error. See, e.g.,
NCAA Antitrust Litig., 958 F.3d at 1260; O’Bannon, 802
F.3d at 1074. This includes both the “virtually as effective”
and “significantly increased cost” components encompassed
in that finding. See NCAA Antitrust Litig., 958 F.3d. at 1260.
60 EPIC GAMES, INC. V. APPLE, INC.
1. Proposed LRA to the Distribution Restriction
Epic argues that Apple already has an LRA at its disposal
for the distribution restriction: the “notarization model” that
Apple uses for app distribution on its desktop and laptop
operating system (macOS). 16 The notarization model sits
somewhere between iOS’s “walled garden” and the open-
platform model that characterizes some app-transaction
platforms. Unlike on iOS, the Mac Store (the Apple-run
equivalent of the iOS App Store for Mac computers) is not
the exclusive means for macOS users to download apps;
instead, users can download apps from the Mac Store or
anywhere else on the internet. Also unlike on iOS, a
developer can distribute a macOS app to users without first
submitting it to Apple. But, regardless of how the developer
distributes that app, it will carry a warning that Apple has
not scanned it for malware. The developer, however, can
choose to submit the app to Apple. If the app passes Apple’s
malware scan, then the developer can distribute the app to
users—again, through the Mac Store or otherwise—without
the warning that accompanies unscanned apps.
The malware scanning that Apple performs in the
notarization model is not the same as the full app review that
it conducts on iOS apps. Importantly, the notarization model
does not include human review—a contextual review that,
as found by the district court, cannot currently be automated.
As part of iOS human review, a reviewer confirms that an
app corresponds to its marketing description to weed out
“Trojan Horse” apps or “social engineering” attacks that
16
In the district court, Epic also proposed the “enterprise model” (which
Apple already implements for some iOS apps), but Epic does not
advance that model on appeal as a proposed LRA.
EPIC GAMES, INC. V. APPLE, INC. 61
trick users into downloading by posing as something they are
not. The reviewer also checks that the app’s entitlements are
reasonable for its purpose—rejecting, for example, a Tic-
Tac-Toe game that asks for camera access and health data,
while approving camera access for a social media app. On
occasion, human review also detects novel, well-disguised
malware attacks. Despite Epic carrying the burden at step
three of the Rule of Reason, it was not clear before the
district court—and still is not entirely clear—how Epic
proposes that the notarization model translates from macOS
to iOS. In particular, it is unclear whether the proposed
model would incorporate human review and what type (if
any) of licensing scheme Apple could implement to
complement the notarization model. 17 Whatever the precise
form of Epic’s proposed notarization model, the district
court did not err in rejecting it.
First, to the extent Epic argues that Apple could jot-for-
jot adopt macOS’s notarization model without adding
human review, Epic failed to establish that this model would
be “virtually as effective” in accomplishing Apple’s
procompetitive rationales of enhancing consumer appeal and
distinguishing the App Store from competitor app-
transaction platforms by improving user security and
privacy. See O’Bannon, 802 F.3d at1073. The district court
17
There is even some discrepancy between the injunctive relief Epic
requests and the basic mechanics of the notarization system. As
explained, the notarization model labels unscanned apps with a warning.
Yet Epic requested an injunction that would prohibit Apple from in any
way “impeding or deterring the distribution of iOS apps” through non-
App Store “distribution channel[s].” A malware warning would
seemingly steer some consumers back to the App Store—raising some
question of whether it would violate the “impeding or deterring”
prohibition.
62 EPIC GAMES, INC. V. APPLE, INC.
ultimately found that the record contained “some evidence”
that macOS computers experience higher malware rates than
iOS devices. It also noted a third-party report that Android
devices have higher malware rates than iOS ones due to
Trojan Horse apps being distributed through open app-
transaction platforms. And it credited Apple’s anecdotal
evidence that human review sometimes detects novel
malware attacks that slip through malware scans. Moreover,
the district court found “compelling” Apple’s explanation of
why human review is necessary “against certain types of
attacks.” And it found that “Epic Games did not explain
how, if at all” a purely automated process could screen for
such threats. It also noted that Epic’s security expert
testified that he did not consider fraud-prevention in his
security analysis, that his opinion on the value-added of
human app review “may change” if he did, and that
automated protections “do not protect users against” social-
engineering threats. Based on this record, the district court
did not clearly err in finding that a process without human
app review would not be “virtually as effective” as Apple’s
current model.
Second, to the extent Epic proposes a notarization model
that incorporates human app review, Epic failed to develop
how Apple could be compensated in such a model for third-
party developers’ use of its IP. Epic argues that “app review
can be relatively independent on app distribution” and
envisions a model in which a developer would submit an
app, Apple would review it, and then “send it back to the
developer to be distributed directly or in another store.” For
example, Epic could submit a gaming app to Apple; Apple
would scan it for malware and subject it to human review;
and then Epic could choose to distribute it through the App
Store, the Epic Games Store, or both.
EPIC GAMES, INC. V. APPLE, INC. 63
While such a model would clearly be “virtually as
effective” in achieving Apple’s security and privacy
rationales (it contains all elements of Apple’s current
model), Epic simply failed to develop how such a model
would allow Apple to be compensated for developers’ use of
its IP. At closing argument, the district court asked Epic
whether its requested injunctive relief would allow Apple to
impose some sort of licensing fee. Epic responded that
“Apple can charge,” but it offered no concrete guidance on
how to do so. Instead, Epic stated only that Apple “could
charge certain developers more than others based on the
advantage that they take of the platform” and that it
“expect[s], given the innovation in Cupertino, that [Apple]
would find ways to profit from their intellectual property and
other contributions.” The district court accordingly found
that Epic’s proposed distribution LRAs “leave unclear
whether Apple can collect licensing royalties and, if so, how
it would do so” and thus declined to consider them as “not
sufficiently developed.”
On appeal, Epic attempts to transfigure into an LRA the
district court’s off-hand statement noting the absence of
“evidence that Apple could not create a tiered licensing
scheme[,] which would better correlate the value of its
intellectual property to the various levels of use by
developers.” It is, however, Epic’s burden at step three to
prove that a tiered licensing scheme (or some other payment
mechanism) could achieve Apple’s IP-compensation
rationale. Without any evidence in the record of what this
tiered licensing scheme would look like, we cannot say that
it would be “virtually as effective” without “significantly
increased cost.” O’Bannon, 802 F.3d at 1074. Nor can we
even “explain” it, let alone direct the district court to craft an
64 EPIC GAMES, INC. V. APPLE, INC.
injunction that it could “adequately and reasonably
supervise.” Alston, 141 S. Ct. at 2163.
2. Proposed LRA to the IAP Requirement
Epic proposes access to competing payment processors
as an LRA to Apple’s IAP requirement. Like the distribution
requirement LRA, this LRA suffers from a failure of proof
on how it would achieve Apple’s IP-compensation
rationale. 18 As the district court noted, in a world where
Apple maintains its distribution restriction but payment
processing is opened up, Apple would still be contractually
entitled to its 30% commission on in-app purchasers. Apart
from any argument by Epic, the district court “presume[d]”
that Apple could “utilize[e] a contractual right to audit
developers . . . to ensure compliance with its commissions.”
But the court then rejected such audits as an LRA because
they “would seemingly impose both increased monetary and
time costs.”
E. Step Four: Balancing
Epic—along with several amici, including the United
States and thirty-four state attorneys general—argue that the
district court erred by not proceeding to a fourth, totality-of-
the-circumstances step in the Rule of Reason and balancing
18
As Epic argues, the district court’s ultimate conclusion on the security
rationale (that opening up payment processing would undermine Apple’s
“competitive advantage on security issues”) seems difficult to square
with several of the court’s antecedent factual findings (e.g., that “Apple
has not show how its [IAP] process is any different” and that “any
potential for fraud prevention [through IAP] is not put into practice”).
Because Epic’s LRA fails on the IP-compensation aspect, we need not
decide whether the district court clearly erred when it also rejected the
LRA for not being virtually as effective in accomplishing Apple’s
security and privacy rationales.
EPIC GAMES, INC. V. APPLE, INC. 65
the anticompetitive effects of Apple’s conduct against its
procompetitive benefits. We hold that our precedent
requires a court to proceed to this fourth step where, like
here, the plaintiff fails to carry its step-three burden of
establishing viable less restrictive alternatives. However,
the district court’s failure to expressly do so was harmless in
this case.
We have been inconsistent in how we describe the Rule
of Reason. Some decisions, when describing the Rule of
Reason, contemplate a fourth step. See, e.g., Qualcomm, 969
F.3d at 991; County of Tuolumne, 236 F.3d at 1160. Others
do not. See, e.g., NCAA Antitrust Litig., 958 F.3d at 1263;
Tanaka, 252 F.3d at 1063. Because of the paucity of cases
that survive step one (let alone require a court to exhaust the
three agreed-upon steps), most of our decisions have not
required us to actually proceed to the portion of the analysis
where Epic and its amici argue balancing would occur. 19
The exception is County of Tuolumne, which provides
the most on-point guidance regarding the existence of a
fourth step. There, we held: “Because plaintiffs have failed
to meet their burden of advancing viable less restrictive
alternatives, we reach the balancing stage. We must balance
the harms and benefits of the [challenged restrictions] to
determine whether they are reasonable.” 236 F.3d at 1160(citation omitted). We then concluded, with just one
sentence of analysis, that “any anticompetitive harm is offset
19
In Alston, the Supreme Court cited an amicus brief reporting that
courts have decided 90% of Rule of Reason cases since 1977 at step one.
141 S. Ct. at 2160–61. A similar amicus brief filed in this case echoes
this statistic and reports that the figure rises to 97% when considering
only post-1999 cases.
66 EPIC GAMES, INC. V. APPLE, INC.
by the procompetitive effects of [defendant’s] effort to
maintain the quality of patient care that it provides.” Id.
Supreme Court precedent neither requires a fourth step
nor disavows it. In the Court’s two most recent Rule of
Reason decisions, it discussed only the three agreed-upon
steps. See Alston, 141 S. Ct. at 2160; Amex, 138 S. Ct. at
2284. But the Court did not characterize that test as the
exclusive expression of the Rule of Reason. Alston stated
that the Court “has sometimes spoken of ‘a three-step,
burden-shifting framework,” emphasized that those “steps
do not represent a rote checklist” or “an inflexible substitute
for careful analysis,” and approvingly cited one of the
Areeda and Hovenkamp treatises as using a “slightly
different ‘decisional model.’” 141 S. Ct. at 2160 (emphasis
added).
We are skeptical of the wisdom of superimposing a
totality-of-the-circumstances balancing step onto a three-
part test that is already intended to assess a restraint’s overall
effect. Neither Epic nor any amicus has articulated what this
balancing really entails in a given case. Epic argues only
that the district court must “weigh[]” anticompetitive harms
against procompetitive benefits, and the United States
describes step four as a “qualitative assessment of whether
the harms or benefits predominate.” Nor is it evident what
value a balancing step adds. Several amici suggest that
balancing is needed to pick out restrictions that have
significant anticompetitive effects but only minimal
procompetitive benefits. But the three-step framework is
already designed to identify such an imbalance: A court is
likely to find the purported benefits pretextual at step two, or
step-three review will likely reveal the existence of viable
LRAs. We are thus “wary about [this] invitation[] to ‘set sail
on a sea of doubt.’” Alston, 141 S. Ct. at 2166 (quoting
EPIC GAMES, INC. V. APPLE, INC. 67
United States v. Addyston Pipe & Steel Co., 85 F. 271, 284
(6th Cir. 1898) (Taft, J.)).
Nonetheless, we are bound by County of Tuolumne and
mindful of Alston’s warning that the first three steps of the
Rule of Reason are not a “rote checklist.” Therefore, where
a plaintiff’s case comes up short at step three, the district
court must proceed to step four and balance the restriction’s
anticompetitive harms against its procompetitive benefits.
In most instances, this will require nothing more than—as in
County of Tuolumne—briefly confirming the result
suggested by a step-three failure: that a business practice
without a less restrictive alternative is not, on balance,
anticompetitive. But the Sherman Act is a flexible statute
that has and will continue to evolve to meet our country’s
changing economy, so we will not “embarrass the future” by
suggesting that will always be the case. Nw. Airlines, Inc. v.
Minnesota, 322 U.S. 292, 300 (1944).
Turning to the record here, the district court’s failure to
explicitly reach the fourth step was harmless. Even though
it did not expressly reference step four, it stated that it
“carefully considered the evidence in the record and
. . . determined, based on the rule of reason,” that the
distribution and IAP restrictions “have procompetitive
effects that offset their anticompetitive effects” (emphasis
added). This analysis satisfied the court’s obligation
pursuant to County of Tuolumne, and the court’s failure to
expressly give this analysis a step-four label was harmless.
III. Sherman Act Section 1: Tying
In addition to its general restraint-of-trade claim, Epic
brought a Section 1 claim asserting that Apple unlawfully
tied together app distribution (the App Store) and in-app
payment processing (IAP). On appeal, Epic argues that (1)
68 EPIC GAMES, INC. V. APPLE, INC.
the district court clearly erred when it found that Epic did not
identify separate products, and (2) we can enter judgment in
its favor because the tie is unlawful, either per se or pursuant
to the Rule of Reason. We agree with Epic that the district
court clearly erred in its separate-products finding, but we
find that error to be harmless. The Rule of Reason applies
to the tie involved here, and, for the reasons already
explained, Epic failed to establish that Apple’s design of the
iOS ecosystem—which ties the App Store and IAP
together—is anticompetitive.
A. Existence of a Tie
“A tying arrangement is ‘an agreement by a party to sell
one product but only on the condition that the buyer also
purchases a different (or tied) product, or at least agrees that
he will not purchase that product from any other supplier.’”
Kodak, 504 U.S. at 461 (quoting N. Pac. R. Co. v. United
States, 356 U.S. 1, 5–6 (1958)). To prove the existence of a
tie, a party must make two showings.
First, the arrangement must, of course, involve two (or
more) separate products. Pursuant to Jefferson Parish and
Kodak, we apply a consumer-demand test when conducting
this inquiry: To constitute two separate products, “[t]here
must be sufficient consumer demand so that it is efficient for
a firm to provide” the products separately. Kodak, 504 U.S.
at 462 (citing Jefferson Parish, 466 U.S. at 21–22).
Importantly, the separate-products inquiry “turns not on the
functional relation between them, but rather on the character
of the demand for the two items.” Jefferson Parish, 466 U.S.
at 19 & n.30. This consumer-demand test, in turn, has two
parts: (1) that it is possible to separate the products, and (2)
that it is efficient to do so, as inferred from circumstantial
EPIC GAMES, INC. V. APPLE, INC. 69
evidence. See Areeda & Hovenkamp, Antitrust Law, supra,
⁋⁋ 1743–45.
The efficiency showing does not require a full-blown
economic analysis. Because the showing is just a threshold
step to reaching the merits of a tie (including, sometimes, the
application of a per se rule), it would be incongruous to
require a resource-intensive showing. See N. Pac. R. Co.,
356 U.S. at 5 (per se rules are meant to “avoid[] the necessity
for an incredibly complicated and prolonged economic
investigation”). Accordingly, the existence of separate
products is inferred from “more readily observed facts.”
Areeda & Hovenkamp, Antitrust Law, supra, ⁋ 1745c.
These include consumer requests to offer the products
separately, disentangling of the products by competitors,
analogous practices in related markets, and the defendant’s
historical practice. See Jefferson Parish, 466 U.S. at 22(noting that patients and surgeons “often request specific
anesthesiologists [the tied service] to come to a hospital [the
tying service]” and “other hospitals often permit
anesthesiologic services to be purchased separately”);
Kodak, 504 U.S. at 463 (finding sufficient at the 12(b)(6)
stage allegations that “consumers would purchase service
without parts” and that the defendant had sold them
“separately in the past”).
Second, even where a transaction involves separate
products, it is not necessarily a tie; the seller must also “force
the buyer into the purchase of a tied product that the buyer
either did not want at all, or might have preferred to purchase
elsewhere on different terms.” Jefferson Parish, 466 U.S. at
12. Were a buyer merely to agree “to buy [a] second product
on its own merits” absent any coercion, there would be no
tie. Areeda & Hovenkamp, Antirust Law, supra, ⁋ 1752.
70 EPIC GAMES, INC. V. APPLE, INC.
We review a finding that no tie occurred for clear error.
Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348,
1354 (9th Cir. 1982) (reviewing separate-products finding
for clear error); Mozart Co. v. Mercedes-Benz of N. Am.,
Inc., 833 F.2d 1342, 1346 (9th Cir. 1987) (treating coercion
as a fact question).
Here, the district court found that there was no tie
because app distribution and IAP are not separate products.
It based this finding on four rationales—each of which is
either clearly erroneous or incorrect as a matter of law.
To begin, the district court erred as a matter of law when
it concluded that IAP was not separate from app distribution
because IAP is “integrated into . . . iOS devices.” Jefferson
Parish expressly rejects an approach to the separate-
products inquiry based on the “functional relation” between
two purported products. 466 U.S. at 19.
Next, the district court clearly erred when it found that
“Epic Games presented no evidence showing that demand
exists for IAP as a standalone product.” Here, the App Store
and IAP clearly can be separated because Apple already
does so in certain contexts, namely that IAP is not required
for in-app purchases of physical goods. The efficiency
showing is also met. Epic produced evidence that it,
Facebook, Microsoft, Spotify, Match, and Netflix, have all
tried to convince Apple to let them develop their own in-app
payment solutions. The Epic Games Store—a direct
competitor of Apple in the mobile-games submarket—
delinks distribution from payment processing. And prior to
IAP’s development in 2009, Apple distributed apps through
the App Store but permitted developers to use their own in-
app payment systems.
EPIC GAMES, INC. V. APPLE, INC. 71
Relatedly, the district court clearly erred when it
reasoned that, even if Apple did not require IAP, Apple
would still be entitled to collect a commission on payments
made and, therefore, “no economically rational developer
would choose to use the alternative [payment] processor.”
The district court itself found that “Epic Games raises
legitimate concerns” about the non-price features of IAP,
including that: “Apple does a poor job of mediating disputes
between a developer and its customers”; that Apple’s one-
size-fits-all refund approach “leads to poor [customer]
experiences”; and that IAP’s exclusion of developers from
transactions “can also increase fraud.”
Finally, the district court erred as a matter of law when it
concluded that a product in a two-sided market can never be
broken into multiple products. Despite Apple’s strained
effort to portray this as a factual finding, the district court
imposed a bright-line legal rule. But Amex simply does not
stand for the proposition that any two-sided platform will
necessarily relate only to one market. Instead, it emphasized
that market definition must “reflect[] commercial realities.”
138 S. Ct. at 2285. Indeed, if Amex truly required a one-
platform, one-market rule, then the district court’s market
definition—mobile gaming transactions, instead of all app
transactions—would be erroneous, despite the court’s
extensive findings that game and non-game apps are
characterized by significantly different demand. 20
20
We also reject Apple’s argument that that there is no tie because
“thousands of developers . . . offer no in-app purchase[s].” True, a
classic tie is: “I will sell you X widgets only if you buy Y bolts from
me.” Here, the DPLA essentially provides: “Apple will sell you app-
distribution transactions only if you buy your in-app-purchase-
72 EPIC GAMES, INC. V. APPLE, INC.
B. Lawfulness of the Tie
A tie can be unlawful pursuant to either a modified per
se rule or the Rule of Reason. A tie is per se unlawful if (1)
the defendant has market power in the tying product market,
and (2) the “tying arrangement affects a ‘not insubstantial
volume of commerce’ in the tied product market.” Blough
v. Holland Realty, Inc, 574 F.3d 1084, 1089 (9th Cir. 2009)
(quoting Cascade Health Solutions v. PeaceHealth, 515
F.3d 883, 912–13 (9th Cir. 2008)). The first prong requires
the market-power inquiry standard throughout antitrust law.
The second prong requires only that the tie affect an amount
of commerce in the tied product market that is not “de
minimis.” Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d
1421, 1426 (9th Cir. 1995). These requirements are met
here: Apple has market power in the app-distribution market.
And the tie affects a non “de minimis” amount of commerce
in the in-app-payment-processing market: Apple requires
IAP to be used for more than half of the transactions that
comprise a $100 billion market.
Nonetheless, we join the D.C. Circuit in holding that per
se condemnation is inappropriate for ties “involv[ing]
software that serves as a platform for third-party
applications.” Microsoft, 253 F.3d at 89. “It is only after
considerable experience with certain business relationships
that courts classify them as per se violations.” Broad.
Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 9
(1979) (quoting Topco Assocs., 405 U.S. at 606). That is
processing requirements from Apple.” Substituting a requirements term
for a quantity term does not change the nature of the agreement. See
Kodak, 504 U.S. at 461 (ties include agreement[s] “to sell one product
but only on the condition that the buyer . . . not purchase that product
from any other supplier” (citation omitted)).
EPIC GAMES, INC. V. APPLE, INC. 73
because per se condemnation embodies a judicial
assessment that a category of restraints is “plainly
anticompetitive” and “lack[ing] . . . [in] any redeeming
virtue” such that it can be “conclusively presumed illegal.”
Id. at 7–8 (citations omitted). Given the costs of improperly
condemning a practice across the board, extending a per se
rule requires caution and judicial humility. See White Motor
Co. v. United States, 372 U.S. 253, 263 (1963) (“We need to
know more than we do about the actual impact of these
arrangements on competition to decide whether they
. . . should be classified as per se violations of the Sherman
Act.”); Microsoft, 253 F.3d at 94 (“We do not have enough
empirical evidence regarding the effect of [the] practice
. . . to exercise sensible judgment regarding that entire class
of behavior.”). Based on the record, we do not have the level
of confidence needed to universally condemn ties related to
app-transaction platforms that combine multiple
functionalities. See Microsoft, 253 F.3d at 93 (“[B]ecause of
the pervasively innovative character of platform software
markets, tying in such markets may produce efficiencies that
courts have not previously encountered and thus the
Supreme Court had not factored into the per se rule as
originally conceived.”).
The tie in this case differs markedly from those the
Supreme Court considered in Jefferson Parish and prior
tying cases. Particularly, “[i]n none of these cases was the
tied good . . . technologically integrated with the tying
good.” Microsoft, 253 F.3d at 90. Moreover, none of the
ties presented any purported procompetitive benefits that
could not be achieved by adopting quality standards for
third-party suppliers of the tied good, as Apple does here.
Id.; see also Int’l Salt Co. v. United States, 332 U.S. 392, 398
(1947) (noting purported benefit can be achieved by
74 EPIC GAMES, INC. V. APPLE, INC.
implementing quality control for machine consumables),
abrogated on other grounds by Ill. Tool, 547 U.S. 28; Int’l
Bus. Machs. Corp. v. United States, 298 U.S. 131, 139
(1936) (same).
Moreover, while Jefferson Parish’s separate-products
test filters out procompetitive bundles from per se scrutiny
in traditional markets, we are skeptical that it does so in the
market involved here. Software markets are highly
innovative and feature short product lifetimes—with a
constant process of bundling, unbundling, and rebundling of
various functions. In such a market, any first-mover product
risks being labeled a tie pursuant to the separate-products
test. See Microsoft, 253 F.3d at 92. If per se condemnation
were to follow, we could remove would-be popular products
from the market—dampening innovation and undermining
the very competitive process that antitrust law is meant to
protect. The Rule of Reason guards against that risk by
“afford[ing] the first mover an opportunity to demonstrate
that an efficiency gain from its ‘tie’ adequately offsets any
distortion of consumer choice.” Id.Applying the Rule of Reason to the tie involved here, it
is clearly lawful. Epic’s tying claim (that app distribution
and payment processing are tied together) is simply a
repackaging of its generic Section 1 claim (that the
conditions under which Apple offers its app-transactions
product are unreasonable). For the reasons we explained
above, Epic failed to carry its burden of proving that Apple’s
structure of the iOS ecosystem is unreasonable. See supra
section II.
IV. Sherman Act Section 2: Monopoly Maintenance
We now consider Epic’s Sherman Act Section 2 claim
that Apple unlawfully maintained a monopoly. Section 2
EPIC GAMES, INC. V. APPLE, INC. 75
makes it unlawful to “monopolize, or attempt to monopolize,
or combine or conspire . . . to monopolize” a market. 15
U.S.C. § 2. A Section 2 monopolization claim “has two
elements: (1) the possession of monopoly power in the
relevant market and (2) the willful acquisition or
maintenance of that power as distinguished from growth or
development as a consequence of a superior product,
business acumen, or historic accident.” United States v.
Grinnell Corp., 384 U.S. 563, 570–71 (1966); accord
Qualcomm, 969 F.3d at 990; Microsoft, 253 F.3d at 50.
At step one, the plaintiff must establish that the
defendant possesses monopoly power, which is the
substantial ability “to control prices or exclude competition.”
Grinnell, 384 U.S. at 571; accord United States v. Syufy
Enters., 903 F.2d 659, 664 (9th Cir. 1990). Monopoly power
differs in degree from market power, requiring “something
greater.” Kodak, 504 U.S. at 481; see also Areeda &
Hovenkamp, Antitrust Law, supra, ⁋ 600b (market power
and monopoly power exist along a spectrum). Like market
power, monopoly power can be established either directly or
indirectly. Rebel Oil, 51 F.3d at 1434; see Microsoft, 253
F.3d at 51.
At step two, the plaintiff must show that the defendant
acquired or maintained its monopoly through
“anticompetitive conduct.” Trinko, 540 U.S. at 407. This
anticompetitive-conduct requirement is “essentially the
same” as the Rule of Reason inquiry applicable to Section 1
claims. Qualcomm, 969 F.3d at 991; see also Microsoft, 253
F.3d at 59 (“[I]t is clear . . . that the analysis under section 2
is similar to that under section 1 regardless whether the rule
of reason label is applied.” (citation omitted)). Where, like
here, the plaintiff challenges the same conduct pursuant to
Sections 1 and 2, we can “review claims under each section
76 EPIC GAMES, INC. V. APPLE, INC.
simultaneously.” Qualcomm, 969 F.3d at 991. And if “a
court finds that the conduct in question is not anticompetitive
under § 1, the court need not separately analyze the conduct
under § 2.” Id.
At step one in this case, the district court found that
although Apple possesses “considerable” market power in
the market for mobile-game transactions, that power is not
durable enough to constitute monopoly power given the
influx nature of the market. It then, at step two, echoed its
Rule of Reason conclusion that Epic failed to establish
Apple’s restrictions were anticompetitive.
We affirm the district court’s rejection of Section 2
liability. Epic does not argue on appeal that the district court
clearly erred in finding that Apple lacks monopoly power in
the mobile-games market. It argues only that the district
court erred in rejecting its single-brand markets in which
Apple would have a 100% market share—an argument we
reject above. See supra section I. Moreover, even assuming
Apple has monopoly power, Epic failed to prove Apple’s
conduct was anticompetitive. See supra sections II–III.
V. Breach of Contract
Apple counter-sued Epic for breach of contract. Epic
stipulated that it breached the DPLA when it implemented
the Fortnite hotfix, which allowed it to process in-game
transactions in violation of Apple’s IAP restriction. Epic
raised several affirmative defenses, however, and argued
that the DPLA is illegal, void as against public policy, and
EPIC GAMES, INC. V. APPLE, INC. 77
unconscionable. The district court rejected each defense,
and Epic now challenges the illegality holding on appeal. 21
The parties agree that Epic’s illegality defense rises and
falls with its Sherman Act claims. Because we affirm the
district court’s holding that Epic failed to prove Apple’s
liability pursuant to the Sherman Act, we also affirm its
rejection of Epic’s illegality defenses.
VI. California’s Unfair Competition Law
We now turn to Apple’s cross-appeal, beginning with its
arguments concerning the UCL. The district court found that
Epic suffered an injury sufficient to confer Article III
standing, concluded that Apple’s anti-steering provision
violates the UCL’s unfair prong, and entered an injunction
prohibiting Apple from enforcing the anti-steering provision
against any developer. Apple challenges each aspect on
appeal. We affirm.
A. Standing
Article III limits federal courts’ jurisdiction to “[c]ases”
and “[c]ontroversies.” U.S. Const. art. III, § 2. “One
21
In its briefs, Epic also asserts that the district court erred in ruling that
the DPLA was neither void-against-public-policy nor unconscionable,
but the only substantive argument it makes is that the DPLA violates the
Sherman Act. These doctrines, however, do not sound in express
illegality. See Cal. Civ. Code § 1667(2) (a contract is void if it is
“contrary to the policy of express law, though not expressly prohibited”);
Lhotka v. Geographic Expeditions, Inc., 181 Cal. App. 4th 816, 821, 824
(2010) (a contract is unconscionable if there is a disparity in bargaining
power and the contract “reallocates risks in an objectively unreasonable
or unexpected manner”). As such, Epic’s invocation of these doctrines
without any relevant argument is insufficient to raise them on appeal.
See Singh v. Am. Honda Fin. Corp., 925 F.3d 1053, 1075 n.22 (9th Cir.
2019).
78 EPIC GAMES, INC. V. APPLE, INC.
essential aspect of this [limitation] is that any person
invoking the power of a federal court must demonstrate
standing to do so.” Va. House of Delegates v. Bethune-Hill,
139 S. Ct. 1945, 1950 (2019) (quoting Hollingsworth v.
Perry, 570 U.S. 693, 704 (2013)). Constitutional standing
requires a showing of: “(1) a concrete and particularized
injury, that (2) is fairly traceable to the challenged conduct,
and (3) is likely to be redressed by a favorable decision.” Id.Article III requires “that an ‘actual controversy’ persist
throughout all stages of litigation.” Id. at 1951 (quoting
Hollingsworth, 570 U.S. at 705).
Apple terminated Epic’s iOS developer account in
August 2020. Then in September 2021 after the district
court issued its order holding that Epic breached the DPLA,
Apple informed Epic that it had no intention of reinstating
Epic’s developer account. As a result, Epic has no apps
remaining on the App Store. Apple therefore argues that
Epic is no longer injured by the anti-steering provision.
Apple’s argument, however, overlooks two critical aspects
of the record. First, while Epic itself has no apps on the App
Store, its subsidiaries do—causing Epic to be injured
through the anti-steering provision’s effects on its
subsidiaries’ earnings. Second, Epic is a competing game
distributor through the Epic Games Store and offers a 12%
commission compared to Apple’s 30% commission. If
consumers can learn about lower app prices, which are made
possible by developers’ lower costs, and have the ability to
substitute to the platform with those lower prices, they will
do so—increasing the revenue that the Epic Games Store
generates. As such, the district court did not clearly err in
finding that Apple’s anti-steering provision injures Epic.
EPIC GAMES, INC. V. APPLE, INC. 79
B. Merits
As relevant here, the UCL prohibits “any [1] unlawful,
[2] unfair or [3] fraudulent business act or practice.” Cal.
Bus. & Prof. Code § 17200. As the UCL’s three-prong
structure makes clear, a business practice may be “unfair,”
and therefore illegal under the UCL, “even if not specifically
proscribed by some other law.” Cel-Tech Commc’ns, Inc. v.
L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999). The
unfair prong is “intentionally framed in its broad, sweeping
language, precisely to enable judicial tribunals to deal with
the innumerable ‘new schemes which the fertility of man’s
invention would contrive.’” Id. (quoting Am. Philatelic Soc.
v. Claibourne, 3 Cal. 2d 689, 698 (1935)); see also People
ex rel. Mosk v. Nat’l Research Co. of Cal., 201 Cal. App. 2d
765, 772 (1962) (the UCL covers unfair practices that “may
run the gamut of human ingenuity and chicanery”).
The California Supreme Court has refined this “wide
standard,” Cel-Tech, 20 Cal. 4th at 181, into two tests
relevant to this litigation. First, to support “any finding of
unfairness to competitors,” a court uses the “tethering” test,
which asks whether the defendant’s conduct “threatens an
incipient violation of an antitrust law, or violates the policy
or spirit of one of those laws because its effects are
comparable to or the same as a violation of the law, or
otherwise significantly threatens or harms competition.” Id.at 186–87 (emphasis added). Second, to support a finding of
unfairness to consumers, a court uses the balancing test,
which “weigh[s] the utility of the defendant’s conduct
against the gravity of the harm to the alleged victim.”
Progressive W. Ins. Co. v. Super. Ct., 135 Cal. App. 4th 263,
285 (2005) (citation omitted). These tests “are not mutually
exclusive.” Lozano v. AT&T Wireless Servs., Inc., 504 F.3d
80 EPIC GAMES, INC. V. APPLE, INC.
718, 736 (9th Cir. 2007) (citing Schnall v. Hertz Corp., 78
Cal. App. 4th 1144 (2000)).
Here, the district court applied both tests. Through the
Epic Games Store, Epic is a games-distribution competitor
of Apple—triggering the competitor test. Through its
subsidiaries that have apps on the App Store, Epic consumes
the app transactions that Apple offers in a two-sided
market—triggering the consumer test. Cf. Amex, 138 S. Ct.
at 2286 (each side of two-sided market “jointly consume[s]
a single product” (citation omitted)). Applying the tethering
test, the court found that the anti-steering provisions
“decrease [consumer] information,” enabling
supracompetitive profits and resulting in decreased
innovation. It relied on Apple’s own internal
communications for the proposition that the anti-steering
provision prevents developers from using two of the three
“most effective marketing activities,” push notifications and
email outreach. It then reiterated these factual findings to
conclude that the provision also violates the balancing test.
Apple does not directly challenge the district court’s
application of the UCL’s tethering and balancing tests to the
facts of this case. Instead, Apple makes two arguments
attacking UCL liability as a matter of law. Neither is
supported by California law.
1. Safe-Harbor Doctrine
Apple argues that Epic’s failure to establish Sherman Act
liability forecloses UCL liability pursuant to the UCL’s “safe
harbor” doctrine, which bars a UCL action where California
or federal statutory law “absolutely preclude[s] private
causes of action or clearly permit[s] the defendant’s
conduct.” Zhang v. Sup. Ct., 57 Cal. 4th 364, 379–80 (2013).
The safe-harbor doctrine emphasizes that there is a
EPIC GAMES, INC. V. APPLE, INC. 81
“difference between (1) not making an activity unlawful, and
(2) making that activity lawful.” Cel-Tech, 20 Cal. 4th at
183; accord Zhang, 57 Cal. 4th at 379. Accordingly, in
every instance where a court found the Sherman Act to
preclude a UCL action, a categorical antitrust rule formed
the basis of the decision. We held that the judge-made
baseball exemption—that “the business of providing public
baseball games for profit . . . [is] not within the scope of the
federal antitrust laws”—precluded a UCL action. City of
San Jose v. Off. of the Com’r of Baseball, 776 F.3d 686, 689
(9th Cir. 2015) (quoting Toolson v. N.Y Yankees, Inc., 346
U.S. 356, 357 (1953)). A California Court of Appeal
similarly held that the Colgate doctrine—that it is lawful for
a company to unilaterally announce the terms on which it
will deal—precluded a UCL action. Chavez v. Whirlpool
Corp., 93 Cal. App. 4th 363, 367, 373, 375 (2001).
Neither Apple nor any of its amici cite a single case in
which a court has held that, when a federal antitrust claim
suffers from a proof deficiency, rather than a categorical
legal bar, the conduct underlying the antitrust claim cannot
be deemed unfair pursuant to the UCL. Indeed, in a leading
case on the safe-harbor exception, the California Supreme
Court permitted a UCL claim against a predatory-price
scheme to proceed even though the plaintiff failed to
prove—as state antitrust law requires—that the defendant
intended to harm competition through the scheme. Cel-
Tech, 20 Cal. 4th at 183. Apple’s rule would convert any
Rule of Reason shortcoming into a UCL defense and
undermine the UCL’s three-prong structure by collapsing
the “unfair” and “unlawful” prongs into each other. We
82 EPIC GAMES, INC. V. APPLE, INC.
reject Apple’s proposed rule as foreclosed by California
law. 22
2. Importation of Sherman Act Principles
Apple next argues that two principles from Sherman Act
case law preclude UCL liability here. We find neither
argument persuasive. First, Apple contends that the
Supreme Court’s decision in Amex—finding in favor of
American Express in a suit challenging its anti-steering
provision—bars UCL liability stemming from Apple’s anti-
steering provision. Apple does not explain how Amex’s fact-
and market-specific application of the first prong of the Rule
of Reason establishes a categorical rule approving anti-
steering provisions, much less one that sweeps beyond the
Sherman Act to reach the UCL. Amex was based on the
plaintiff’s failure to establish direct evidence of
anticompetitive effects through a reduction in output,
supracompetitive pricing, or excessively high profit
margins; it was not a blanket approval of anti-steering
provisions. See Amex, 138 S. Ct. at 2288.
Second, Apple argues that the UCL mandates trial courts
to define a relevant market and then conduct the balancing
test within that market (similar to the Rule of Reason).
Again, Apple does not cite any California authority for this
proposition. Moreover, such a rule runs contrary to
California courts’ repeated instruction that “[n]o inflexible
rule can be laid down as to what conduct will constitute
unfair competition.” E.g., Pohl v. Anderson, 13 Cal. App.
22Several amici contend that, under current California case law, the UCL
provides insufficient guidance to businesses. That argument, however,
fundamentally misunderstands our role when we interpret and apply state
law while exercising diversity or supplemental jurisdiction.
EPIC GAMES, INC. V. APPLE, INC. 83
2d 241, 242 (1936) (citation omitted). It also contradicts a
California Supreme Court decision that conducted
something akin to quick-look review (in which a precise
market-definition is not needed) when confronted with
significant restrictions on the free flow of price information.
See Oakland-Alameda Cnty. Builders’ Exch. v. F. P. Lathrop
Constr. Co., 4 Cal. 3d 354, 363–64 (1971) (invalidating a
prohibition on unsealing competitor bids after bidding had
culminated on the grounds that it “restrain[ed] open price
competition and unlawfully tamper[ed] with the pricing
structure”).
C. Injunctive Relief
Apple also argues that (1) the district clearly erred when
it found that Epic’s injuries were irreparable, and (2) it
abused its discretion when applying the injunction against all
developers, not just Epic’s subsidiaries that have apps on the
App Store. We disagree.
Even where the UCL authorizes injunctive relief
pursuant to state law, a federal court must also ensure that
the relief comports with “the traditional principles governing
equitable remedies in federal courts.” Sonner v. Premier
Nutrition Corp., 971 F.3d 834, 844 (9th Cir. 2020). To issue
an injunction, the court must find: “(1) that [the plaintiff] has
suffered an irreparable injury; (2) that remedies available at
law, such as monetary damages, are inadequate to
compensate for that injury; (3) that, considering the balance
of hardships between the plaintiff and defendant, a remedy
in equity is warranted; and (4) that the public interest would
not be disserved by a permanent injunction.” Galvez v.
Jaddou, 52 F.4th 821, 831 (9th Cir. 2022) (quoting eBay Inc.
v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006)).
Moreover, injunctive relief must be no “more burdensome to
84 EPIC GAMES, INC. V. APPLE, INC.
the defendant than necessary to provide complete relief to
the plaintiff[].” L.A. Haven Hospice, Inc. v. Sebelius, 638
F.3d 644, 664 (9th Cir. 2011) (quoting Califano v. Yamasaki,
442 U.S. 682, 702 (1979)). We review a district court’s
decision to grant a permanent injunction, and the scope of
that injunction, for an abuse of discretion and review the
factual findings underlying the injunction
for clear error. NCAA Antitrust Litig., 958 F.3d at 1253.
1. Issuance of the Injunction
First, the district court did not clearly err in finding that
Epic suffered an injury for which monetary damages would
be inadequate. While economic injury is generally not
considered irreparable, it is where the underlying injury does
not readily lend itself to calculable money damages. See
Rent-A-Ctr., Inc. v. Canyon Television & Appliance Rental,
Inc., 944 F.2d 597, 603 (9th Cir. 1991). Here, the district
court found that the anti-steering provision “is not easily
remedied with money damages,” a finding that has ample
support in the record. In 2019, there were over 300,000
games on the App Store. Calculating the damages caused by
the anti-steering provision would require a protracted and
speculative inquiry into: the availability of each of those
300,000 games on the Epic Games Store, the percentage of
revenue on each game that comes from users who multi-
home and can therefore substitute, and how high the
substitution rate would be among those multi-home users. 23
23
Apple also asserts—in one sentence and without any authority—that
the district court abused its discretion in failing to hold that Apple’s
unclean-hands argument precluded injunctive relief. This passing
statement was insufficient to raise this issue on appeal. See Singh, 925
F.3d at 1075 n.22.
EPIC GAMES, INC. V. APPLE, INC. 85
2. Scope of the Injunction
Second, the district court did not abuse its discretion
when setting the scope of the injunctive relief because the
scope is tied to Epic’s injuries. The district court found that
the anti-steering provision harmed Epic by (1) increasing the
costs of Epics’ subsidiaries’ apps that are still on the App
Store, and (2) preventing other apps’ users from becoming
would-be Epic Games Store consumers. Because Epic
benefits in this second way from consumers of other
developers’ apps making purchases through the Epic Games
Store, an injunction limited to Epic’s subsidiaries would fail
to address the full harm caused by the anti-steering
provision.
VII. Attorney Fees
We reverse the district court’s holding that the DPLA’s
indemnification provision does not require Epic to pay
Apple’s attorney fees related to this litigation. Based on the
DPLA’s choice-of-law provision, we interpret its
indemnification provision pursuant to California contact-
interpretation principles. We review the district court’s
interpretation of a contract de novo. Shivkov v. Artex Risk
Sols., Inc., 974 F.3d 1051, 1058 (9th Cir. 2020).
California courts presume that “[a] clause that contains
the words ‘indemnify’ and ‘hold harmless’ generally
obligates the indemnitor to reimburse the indemnitee for any
damages the indemnitee becomes obligated to pay third
persons—that is, it relates to third party claims, not attorney
fees incurred in a breach of contract action between the
parties to the indemnity agreement itself.” Alki Partners, LP
v. DB Fund Servs., LLC, 4 Cal. App. 5th 574, 600 (2016)
(emphasis added). However, courts also look to “the context
in which the language appears.” Id. A contract, therefore,
86 EPIC GAMES, INC. V. APPLE, INC.
can rebut this presumption with language that “specifically
provide[s] for attorney’s fees in an action on the contract.”
Id. at 600–01 (emphasis omitted) (citation omitted). For
example, the California Court of Appeal read an
indemnification clause to cover intra-party disputes when
the clause covered all losses “whether or not arising out of
third party [c]laims.” Dream Theater, Inc. v. Dream
Theater, 124 Cal. App. 4th 547, 556–57 (2004). And it did
the same where an indemnification clause was accompanied
by a clause clarifying that, in addition to the remedies listed
in the indemnification clause, each party could also seek
specific performance for certain breaches of the contract—a
provision that “would be unnecessary if indemnification
only referred to third party claims.” Zalkind v. Ceradyne,
Inc., 194 Cal. App. 4th 1010, 1028 (2011).
Turning to the facts here, section 10 of the DPLA
provides that Epic “agree[s] to indemnify and hold harmless,
and upon Apple’s request, defend, Apple[] . . . from any and
all claims, losses, liabilities, damages, taxes, expenses and
costs, including without limitation, attorneys’ fees and court
costs . . . , incurred by [Apple] and arising from or related
to” several enumerated grounds. One grounds, clause (i),
applies to Epic’s “breach of any certification, covenant,
obligation, representation or warranty in [the DPLA].”
Clause (i) rebuts the Alki Partners presumption by
“specifically provid[ing] for attorney’s fees in an action on
the contract.” 4 Cal. App. 5th at 600–01. It expressly refers
to Epic’s “breach” of its obligations pursuant to the DPLA—
contemplating an intra-party action for breach of contract,
not claims by third parties. The surrounding context of
section 10 buttresses this conclusion. Section 14.3 of the
DPLA disclaims that the agreement “is not for the benefit of
any third parties.” Indeed, Epic has not identified a single
EPIC GAMES, INC. V. APPLE, INC. 87
situation in which a third-party could possibly sue Apple
pursuant to clause (i). Therefore, we hold that clause (i)
contemplates intra-party disputes and Apple is entitled to
attorney fees pursuant to it. 24
CONCLUSION
To echo our observation from the NCAA student-athlete
litigation: There is a lively and important debate about the
role played in our economy and democracy by online
transaction platforms with market power. Our job as a
federal Court of Appeals, however, is not to resolve that
debate—nor could we even attempt to do so. Instead, in this
decision, we faithfully applied existing precedent to the facts
as the parties developed them below. For the foregoing
reasons, we AFFIRM IN PART AND REVERSE AND
REMAND IN PART.
S.R. THOMAS, Circuit Judge, concurring in part and
dissenting in part:
I agree with much of the majority opinion. I fully agree
that the district court properly granted Epic injunctive relief
on its California Unfair Competition Law claims. I also fully
agree that the district court properly rejected Epic’s illegality
defenses to the Developer Program Licensing Agreement
(“DPLA”) but that, contrary to the district court’s decision,
the DPLA does require Epic to pay attorney fees for its
breach. On the federal claims, I also agree that the district
24
We express no opinion on what portion of Apple’s attorney fees
incurred in this litigation can be fairly attributed to Epic’s breach of the
DPLA, such that they fall within the scope of clause (i).
88 EPIC GAMES, INC. V. APPLE, INC.
court erred in defining the relevant market and erred when it
held that a non-negotiated contract of adhesion falls outside
of the scope of Section 1 of the Sherman Act. However,
unlike the majority, I would not conclude that these errors
were harmless. An error is harmless if it “do[es] not affect
the substantial rights of the parties.” 28 U.S.C. § 2111. The
district court’s errors relate to threshold analytical steps, and
the errors affected Epic’s substantial rights. Thus, I would
reverse the district court and remand to evaluate the claims
under the correct legal standard.
“A threshold step in any antitrust case is to accurately
define the relevant market . . . .” Fed. Trade Comm’n v.
Qualcomm Inc., 969 F.3d 974, 992 (9th Cir. 2020).
“Without a definition of [the] market there is no way to
measure [the defendant’s] ability to lessen or destroy
competition.” Ohio v. Am. Express Co., 138 S. Ct. 2274,
2285 (2018) (alterations in original) (quoting Walker
Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S.
172, 177 (1965)).
I agree with the majority that the district court erred in
rejecting Epic’s proffered foremarket. The district court
rejected the foremarket of mobile operating systems because
Apple does not sell or license its operating system separately
from its smartphones. But we have previously recognized
that such a market can exist. See Digidyne Corp. v. Data
Gen. Corp., 734 F.2d 1336, 1338–39 (9th Cir. 1984),
implicitly overruled on other grounds by Ill. Tool Works Inc.
v. Indep. Ink, Inc., 547 U.S. 28, 31 (2006) (holding that
separate markets existed for software and hardware even
when they were always bundled together).
The district court then rejected Epic’s proposed
aftermarket of solutions for iOS app payment processing
EPIC GAMES, INC. V. APPLE, INC. 89
(“IAP”) because IAP is integrated into the operations
system. This conclusion was not only legally erroneous, but
in contradiction to the district court’s factual finding of
separate demand. See Jefferson Parish Hosp. Dist. No. 2 v.
Hyde, 466 U.S. 2, 19 (1984) (“[W]hether one or two
products are involved turns . . . on the character of the
demand for the two items . . . . not on the functional relation
between them . . . .”).
I also agree with the majority that the district court erred
in holding that a non-negotiated contract of adhesion falls
outside of the scope of § 1 of the Sherman Act and, therefore,
the Developer Program License Agreement was not a
contract covered under § 1. “‘[E]very commercial
agreement’. . . among two or more entities” qualifies as a §
1 agreement. Paladin Assocs., Inc. v. Mont. Power Co., 328
F.3d 1145, 1154 n.7 (9th Cir. 2003) (emphasis in original)
(quoting Nw. Wholesale Stationers, Inc. v. Pac. Stationery
& Printing Co., 472 U.S. 284, 289 (1985)). This includes a
contract of adhesion. See Perma Life Mufflers, Inc. v. Int’l
Parts Corp., 392 U.S. 134, 141–142 (1968), overruled on
other grounds by Copperweld Corp. v. Indep. Tube Corp.,
467 U.S. 752, 777 (1984).
The majority holds that the errors were harmless given
the district court’s analysis of the remaining steps in the Rule
of Reason analysis. However, there is no direct authority for
that proposition, and it amounts to appellate court fact-
finding. Indeed, the Supreme Court has instructed that
“courts usually cannot properly apply the rule of reason
without an accurate definition of the relevant market.” Am.
Express, 138 S. Ct. at 2285.
Correction of these errors would have changed the
substance of the district court’s Rule of Reason analysis. See
90 EPIC GAMES, INC. V. APPLE, INC.
Qualcomm, 969 F.3d at 992. Unless the correct relevant
market is identified, one cannot properly assess
anticompetitive effects, procompetitive justifications, and
the satisfaction of procompetitive justifications through less
anticompetitive means. The analysis is different; therefore,
the errors affected substantial rights and cannot be
considered harmless.
Relying on the district court’s market does not solve this
problem. The parties formulated arguments around their
own markets—not the district court’s market. Remand
would have given the parties an opportunity to argue
whether the DPLA worked unfair competition in the district
court’s market.
The effect on substantial rights in this case is magnified
by the majority’s holding that, under County of Tuolumne v.
Sonora Community Hospital, when the plaintiff shows
anticompetitive effects but fails to show a less restrictive
alternative to the defendant’s procompetitive justification,
the court must balance the anticompetitive harms against the
procompetitive benefits. 236 F.3d 1148, 1160 (9th Cir.
2001). The district court did not undertake a formal
Tuolumne balancing analysis as such, although the majority
concludes that the district court’s analysis was sufficient.
Remand for a formal balancing should be required.
Regardless, the effect of the legal errors on any balancing is
obvious. The district court analyzed anticompetitive effects
in terms of increases in the cost of mobile gaming
transactions—the court’s relevant market. But the court
could have found greater increases in costs if its analysis
concerned Epic’s markets, and this would change a properly
conducted balancing analysis. In essence, any balancing
done out of the context of a relevant market necessarily
involves putting a thumb on the balancing scale.
EPIC GAMES, INC. V. APPLE, INC. 91
Accordingly, the district court’s legal errors “affect[ed
Epic’s] substantial rights” and therefore were not harmless.
See 28 U.S.C. § 2111. I would remand for the district court
to re-analyze the case using the proper threshold
determination of the relevant market.
Therefore, I respectfully concur in part and dissent in
part.