Commercial

In a landmark ruling and a major win for Epic Games, the Federal Court of Australia has found that Apple and Google misused their market power in running app stores and in-app purchase systems.

While much of the media ferment has fixated on the ramifications for consumers and developers, it is equally important to elucidate the judgment within its broader legal and regulatory context.

As the Australian competition and consumer law continually finds itself at odds with the insidious exploits of ‘Big Tech’ and the flexibility of evolving digital marketplaces, consideration should be given to the ruling’s impact on future applications of the law and its effect on the regulation of dominant market players.

What led to the proceedings?

Tech Giants Apple and Google both prohibit the installation of other app stores on its devices and only permit payments to be processed for purchases in their app stores via their own respective payment systems. To process payments, each company also charges the app developer’s commission of up to 30%.

Epic Games, developer of the popular game Fortnite, introduced its own payment processing system in 2020. Apple and Google consequently removed Epic from their app stores, claiming that they had breached their terms and conditions. In response, Epic commenced proceedings against Apple and Google around the world.

Epic’s claim

Misuse of market power

Epic alleged that Apple and Google each have enacted monopolies over app distribution and in-app processing on their respective platforms, by effectively creating “walled gardens” that exclude rival payment processors and app marketplaces. Their claim was statutorily predicated on section 46 of the Competition and Consumer Act 2010 (Cth), which prohibits corporations with substantial market power from engaging in conduct that has the purpose or effect of substantially lessening competition in a market.

According to Epic, both companies misused their market power by:

• Requiring all apps to be distributed solely through their own app stores (App Store and Google Play).
• Mandating exclusive use of their proprietary in-app payment systems for digital content, typically charging a 30% commission.
• Blocking alternative app stores and payment processors, thereby eliminating competition and enabling the extraction of exorbitant fees from developers.

Unconscionable conduct

Epic also alleged that Apple and Google’s conduct was unconscionable under the ACL, referencing the imposition of non-negotiable agreements, lack of developer bargaining power and the enforcement of terms not reasonably necessary to protect legitimate business interests.

Relief sought

Epic sought declarations of contravention, injunctions to remove anti-competitive restrictions, orders permitting third-party app stores and alternative payment processors, and damages for losses suffered due to the alleged conduct.

Apple’s response

In response to these claims, Apple and Google had argued that they do not have a monopoly and that their app store restrictions are a necessity for the purposes of privacy and security.

The court’s findings

Delivering his judgment, Justice Beach held that prohibitions on payment processors imposed by Apple and Google had the effect of substantially lessening competition in contravention of section 46. While his Honour recognised that each company maintained legitimate privacy and security interests by deploying the disputed prohibitions, the security benefits did not sufficiently outweigh the anti-competitive effects.

Other claims Epic made against Apple and Google concerning unconscionable conduct, exclusive dealings and anti-competitive contracts were not accepted.

Significance for Australian competition law

Section 46

In 2017, the Australian competition law underwent a significant statutory transformation with the passage of the Competition and Consumer Amendment (Misuse of Market Power) Act 2017. Amending the Competition and Consumer Act 2010, the legislation strengthens the prohibition on the misuse of market power by corporations by broadening the scope of section 46.

The replacement of the ‘purpose test’ with the ‘purpose or effects test’ removed the need to provide a specific intent to eliminate or damage a competitor. For section 46 to be invoked, it is now sufficient that the prohibited conduct merely has the purpose, effect, or likely effect of substantially lessening competition. These changes establish a lower evidentiary threshold, allowing challenges to anti-competitive conduct even in circumstances where the conduct might be justified by legitimate business reasons.

As one of the first major applications of the amended section 46, Justice Beach’s decision provides valuable judicial clarity on what constitutes a ‘substantial lessening of competition’. More importantly, it demonstrates the expansive nature of section 46 when applied in the context of digital marketplaces, where privacy and security interests are used to justify monopolistic and predatory conduct. The court’s willingness to recognise the direct and indirect anti-competitive conduct of digital platforms establishes important precedent for future enforcement.

Acceptance of digital markets

The willingness of the court to characterise the relevant app distribution and in-app payment platforms of Google and Apple as markets elucidates the flexibility of the law in the context of digital ecosystems. While Apple and Google do not monopolise the broader market of mobile devices, they exercise monopolistic control over their respective app stores, and by extension, over app developers and consumers. The decision demonstrates the broad scope of the law to respond to digital gatekeeping, even where anti-competitive conduct is situated within an integrated, proprietary platform.

Overcoming jurisdictional obstacles

A significant challenge facing Epic’s litigation was potential limits to the court’s jurisdiction. Apple argued that its developer agreement with Epic contained an exclusive jurisdiction clause stipulating that disputes must be resolved in the United States. However, the court held that the matter was justiciable in Australia due to overriding public policy considerations and the local effect of the alleged conduct. This finding reaffirms the principle that public interest and consumer protection can prevail over foreign jurisdiction clauses, particularly in the context of regulating digital markets.

Ex ante vs ex post enforcement

The Epic decision does not exist in a vacuum and carries particular significance given the attempts by the Australian government to facilitate reform around the regulation of concentrated digital markets.

Following its multi-year Digital Platforms Service Inquiry, the ACCC has ramped up its advocacy for an ex ante regulatory framework, including specific codes of conduct for individual platforms. Introducing service-specific mandatory codes would signal a shift away from ex post enforcement by placing obligations on large digital platforms to structure their businesses in a way that minimises the initial occurrence of anti-competitive conduct.

The ACCC considers mandatory codes a necessity to address competitive harms, given the flexibility of digital markets and the rapid rate at which specific concerns arise from new products entering the market. If they are implemented, then Australia would align itself with a list of other jurisdictions that have implemented similar ex ante regimes, such as the EU’s Digital Markets Act and the UK’s Digital Markets Unit framework.

Whilst the general consensus is that ex ante measures are needed to address the anti-competitive conduct of digital platforms, the success of Epic Games’ litigation demonstrates that ex post enforcement and case-by-case litigation can still be a valuable tool.

Class actions

Despite beginning as separate cases, Epic’s cases against Apple and Google were heard at trial in conjunction with a parallel class action lawsuit brought by small Australian app developers. On this matter, the court also ruled against Apple and Google, finding that they had caused developers to pay materially higher commissions than they would have in an alternate market. With liability now established, these claims will likely proceed to a compensation hearing, which could lead to one of the largest class action payouts in Australian history.

Broader implications

For Australian developers, the ruling also carries significant weight, as it ameliorates the potential for legal recourse against dominant platforms engaging in monopolistic practices. By extension, consumers will also benefit as new entrants enter the market and bolster its diversity.

Unresolved issues

While the decision is undoubtedly a significant milestone, the litigation is far from over, with the court’s full judgement yet to be published and several key issues still awaiting resolution.

Apple and Google have both signalled their intent to review the judgment, and may pursue appeals. If so, the matter could progress to the Full Federal Court or even the High Court of Australia.

If no appeals are pursued, then the court will need to consider what remedies should be imposed and how they should be structured. Their practical implementation may, however, come with logistical and technical challenges considering the globalised nature of digital platforms.

It will also be interesting to ascertain to what extent legislative reform will complement or subsume the place of judicial enforcement, especially in light of the recommendations made by the ACCC in its Digital Platform Services Inquiry.

In summary

Evidently, in the era of ‘Big Tech‘, the court’s decision is a transformative moment for Australia’s competition law, serving as an essential judicial benchmark and providing momentum for broader regulatory reform. As Australia prepares to legislate the next phase of the digital economy, it sends a clear message that digital markets are not immune to legal regulation, and the dominance of monopolistic market players may be drawing to a close.

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