Context: Apple is anathema to many in the intellectual property (IP) community, particularly to large parts of the standard-essential patent (SEP) ecosystem, because it has for a long time advocated the devaluation of SEPs (a strategy that its litigation with Qualcomm exposed) and generally favors policies that complicate patent enforcement against deep-pocketed defendants. ip fray strives to look at this behemoth in a nuanced way and on a case-by-case basis. While disagreeing with its positions on the EU SEP Regulation and sharply criticizing its use of astroturfing operation ACT | The App Association, ip fray believes Apple has a point that the ITC should not have sided with Masimo in granting a U.S. import ban (March 12, 2024 ip fray article).
What’s new: Yesterday (April 30, 2024), Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California entered a contempt order in Epic Games v. Apple, scolding the iPhone maker for allegedly having violated an injunction she entered in September 2021 under California Unfair Competition Law (UCL) as a consolation prize in what was primarily supposed to be an antitrust case, and which injunction finally entered into force in January 2024 after the Supreme Court denied Apple’s petition for writ of certiorari. At issue are a commission and various technical and commercial rules Apple imposes on iOS app makers generating digital sales (such as of digital subscriptions or in-game items) outside the App Store, but promote within their apps.
Direct impact: Apple has already said it will comply with Judge YGR’s interpretation of her injunction, but has also announced an appeal to the United States Court of Appeals for the Ninth Circuit. Apple could try to file an emergency motion with the appeals court so it might not have to comply with the district court’s ruling during the appeal. But what complicates the overall situation is the court’s referral of the matter to the U.S. District Attorney (public prosecutor) for the Northern District of California to decide on a potential investigation of criminal contempt. In the criminal context, immediate compliance is a mitigating factor.
Wider ramifications: Apple will raise various issues on appeal, but what is already foreseeable is that the most fundamental question is one of IP policy and the constitutional status of intellectual property rights. Effectively, the court says that it’s Apple’s fault that it never performed a specific valuation of the IP that iPhone app makers use, and therefore believes it can force Apple to grant a royalty-free license. In this context, the vast majority of the members of the IP ecosystem will support Apple, which could lead to “strange bedfellows” submitting amicus curiae briefs. ip fray strongly doubts that a compulsory royalty-free IP license, which is probably unprecedented in the civilized world, will be deemed constitutional when all is said and done. Some sort of FRAND (fair, reasonable and non-discriminatory licensing terms) valuation appears inevitable.
Apple polarizes. It has a huge “fanboi” community, but it also has its critics (as mentioned further above). The practical reality, however, is that such a large company has diverse interests. Apple is the world’s largest net licensee of SEPs and has to defend against non-SEP litigation all the time, but the company points to its own IP when its App Store terms are criticized.
In the competition dispute with Epic Games, Apple had to defend its App Store commission (which is usually 30%, though there are exceptions, such as for small companies, and arguably there are other costs on top, such as in connection with app discovery). It managed to fend off Epic’s claims under federal (Sherman Act) and state antitrust laws, and in that context, Judge YGR voiced doubts during the trial that Epic could (and Epic’s counsel denied his client actually sought to) prevent Apple from charging something for the use of its IP and access to its customer base. But there was also an afterthought in the case: a claim under California UCL. Judge YGR ordered an anti-anti-steering injunction (which Epic never specifically requested), meaning that Apple had to lift an anti-steering rule that prohibited app makers from promoting out-of-app purchasing options within their apps:
“… permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.”
Part (ii) was practically mooted at around the same time by a settlement between Apple and a developer class action, where Apple made precisely that concession. But part (i) about promoting the circumvention of the App Store purchasing system and commission through buttons, external links or “other calls to action” remained disputed. Both parties appealed the unfavorable parts of the district court ruling. Epic had won only a consolation prize. What it actually wanted went way beyond anti-anti-steering. Temporarily it even looked like Apple could live with this outcome, but it sought and obtained an enforcement stay and exhausted all appeals. When the Supreme Court of the United States declined in January 2024 to hear the case (both parties had petitioned), the September 2021 injunction finally entered into force.
It was controversial whether Epic, which itself had been kicked out of the App Store because of the way it provoked the dispute in 2020, had standing to seek an injunction to the potential benefit of the entire developer community, and whether a ruling under California state could have nationwide effect. But when the Supreme Court was disinclined to look into this, the decision entered into effect. It is worth noting, however, that later, with contempt proceedings already ongoing, Apple brought a motion to set aside the judgment, which was denied yesterday as part of the order (shown further below) that also ruled on Epic’s contempt motion.
Apple had already prepared a voluntary court filing explaining how it intended to comply (January 18, 2024 games fray article). The short version is that Apple departed from the anti-steering rule, but (a) still wanted to be compensated for the use of its IP and access to its customer base and (b) imposed other rules in the name of security and privacy. In this IP context, we will focus exclusively on aspect (a).
For those owing a 30% commission (which is the rate that applies to the bulk of App Store revenues by third-party app makers like Epic), it came down to still having to pay, with a certain capture window, a 27% commission. The 3% difference is, in practice, absorbed by the fees of payment systems like Stripe. So at least within the capture window, there was nothing for developers to gain financially. That, however, also applies to Google’s so-called User Choice Billing system.
Epic immediately responded to Apple’s January 2024 compliance filing with criticism and the announcement to go back to the district court. Similarly, Epic criticized Apple’s proposed compliance with the EU Digital Markets Act (DMA), with Epic’s CEO famously saying on Twitter (now named X) that Apple had come up with “new junk fees.”
It took a coujple of months until Epic actually filed its contempt motion (March 13, 2024). The related proceedings took the district court about a year and required two evidentiary hearings, one in April 2024 (where Judge YGR was clearly not amused by Apple’s take on her injunction) and another one in February 2025, with huge discovery disputes all the time over what evidence particularly regarding Apple’s internal decision-making processes Epic was allowed to use.
Yesterday, the 80-page decision came down, and it’s the worst-case outcome for Apple:
Royalty-free compulsory license
True to its editorial focus, ip fray looks only at one aspect of the contempt order: the net effect of Apple being compelled to grant a royalty-free license to its IP (along with uncompensated access to its customer base) to all app makers with respect to the U.S. market, to the extent that purchases are made outside the App Store.
All references to “intellectual property” in the contempt ruling will be quoted and discussed now.
One, after trial, the Court found that Apple’s 30 percent commission “allowed it to reap supracompetitive operating margins” and was not tied to the value of its intellectual property, and thus, was anticompetitive. Apple’s response: charge a 27 percent commission [emphasis in original] (again tied to nothing) on off-app purchases, where it had previously charged nothing, and extend the commission for a period of seven days after the consumer linked-out of the app. Apple’s goal: maintain its anticompetitive revenue stream.
. . .
The Court explicitly found that “Apple’s initial [commission] rate of 30% . . . has apparently allowed it to reap supracompetitive operating margins.” […] The rate was a historic relic not tied to intellectual property.
. . .
Apple cannot hide behind its lack of clarity on the value of its intellectual property. Not all functionality benefits all developers. Further, . . . Apple has actually never correlated the value of its intellectual property to the commission it charges. [emphasis in original] Apple is responsible for the lack of transparency and whole-cloth arguments untethered to its rates do not ultimately persuade.”
. . .
Apple has chosen not to value its intellectual property (the opening
allowed by the Court in its Order) . . .
The wording that the commission was “tied to nothing” is very broad. Even if Apple did not perform a FRAND valuation of the kind it would expect of SEP holders, it simply charged a commission that many other platforms collect as well. It is, in fact, the most common commission rate for digital app platforms, be it for mobile device apps or console games. Practically speaking, the most prevalent rate in a market is presumably within the FRAND range.
The mentioning of the fact that Apple previously didn’t impose charges on off-app purchases must be put into context. Apple has consistently argued that its idea was to charge a commission on certain transactions (in-app purchases of digital goods and services), but not on everything (for example, app makers can keep advertising revenue). It was always about a mix: full commission, no commission, and at some point reduced commissions in specific contexts or for particular developer categories. The question is not whether one agrees with the specific terms. It’s that Apple simply responded to the California UCL injunction, which interfered with a complex set of terms, by coming up with a new commission structure.
Furthermore, the absence of a FRAND analysis of Apple’s terms (which, again, may not be necessary because the most prevalent rate in a market is by definition within the FRAND range) does not prove that the terms are “supracompetitive.”
Merely contending that its commission pays for the developer’s use of the App Store platform, license to Apple’s intellectual property, and access to Apple’s user base only justifies a commission, not the rate itself.
That sentence is correct. What does not follow from it, however, is a royalty-free compulsory license. How does the contempt ruling arrive there?
Apple was tasked with valuing its intellectual property, not with reverse engineering a number right under 30% that would allow it to maintain its anticompetitive revenue stream.
. . .
Apple also argues that the question of whether Apple’s commission appropriately reflects the value of its intellectual property is not an issue for injunction compliance, and that it is legitimate for a business to promote the value of its corporation for stockholders. {…] Apple misses the point. The issue is that Apple flouted the Court’s order by designing a top-down anticompetitive system, in which its commission played a fundamental role.
. . .
Apple does not have an absolute right to the intellectual property that it wields as a shield to competition without adequate justification of its value. Apple was provided with an opportunity to value that intellectual property and chose not to do so.
. . .
The [Analysis Group] report only appears in a public-facing presentation for the July 5, 2023 meeting where Apple decided to impose a 27% commission. Thus, the Court does not credit the AG report as support for a bottoms-up [sic] analysis of the value of Apple’s intellectual property.
So one of the key questions on appeal is going to be whether Apple essentially forfeited its right to seek FRAND compensation for the use of its IP and access to its customer base only by not turning its internal decision-making process (on how to comply with the injunction) into a full-blown FRAND exercise. But there is also that fundamental question of whether there can ever be any circumstances allowing a court of law to order royalty-free compulsory IP license.
I have personally criticized and even formally complained about some of Apple’s terms, particularly with respect to app review. And separately from my publishing and IP dealmaking business I have a productivity app in the works that will take off-app payments, and I’d very much like to avoid paying Apple anything. But in this context here, I strive to compartmentalize my thinking and distinguish between those policy positions and the dangerous precedent that it would mean if a court-ordered royalty-free IP license was deemed constitutional.
Florian Mueller
This is plainly consistent with my concerns over certain tendencies by UK courts and the UK’s antitrust regulator (April 27, 2024 ip fray article).
Founder & Publisher of ip fray
Even an app that does not use the App Store’s payment system in any way makes use of Apple’s IP and gets access to Apple’s customer base. That same access is free on systems like Windows (where using the payment system of Microsoft’s own store is optional). But Apple never intended it to be free. It decided that for practical reasons it would impose a commission on some transactions and no commission on some others. That was not held to be an antitrust violation.
All that came out of the original Epic v. Apple litigation was the anti-anti-steering injunction under state UCL. The contempt ruling reveals that there where different schools of thought within Apple, with Phil Schiller (Apple’s App Store chief and former head of marketing) advocating a developer-friendlier implementation of the injunction and the finance department opposing (as it must) the notion of leaving money on the table.
The outcome could be that contempt proceedings are the wrong vehicle for IP valuation and that Epic would have had to bring a new case to seek court review of Apple’s terms and conditions governing off-app payments. It is arguably ultra vires for a court to impose a royalty-free compulsory license (even if the relevant IP had a value of zero, which is not even alleged here, the answer would then be that no one needs to license it anyway).
In the meantime, Apple is also fighting with the EU over its DMA implementation concerning off-app payments (April 23, 2025 press release by the European Commission), and the U.S. situation doesn’t make it easier, though the legal framework could hardly be more different. The DMA is a detailed framework that also contains a section on app stores, and it has its flaws. By contrast, UCL is open-ended, but that does not mean a royalty-free compulsory license will ever be constitutional. The EU also recognizes IP as a fundamental right and can’t impose a royalty-free compulsory license. In that regard, the issues on both sides of the Atlantic overlap.