Court Splits the TRO Baby (Epic v. Apple IV)

BIG PICTURE

We’ve written about this dispute three times now:

• Part I: Lawsuit filed

• Part II: TRO filed

• Part III: Opposition

In this post, we’ll briefly discuss the court’s ruling on the TRO. Epic got half of what it wanted. The court denied the request to force Apple to reinstate Fortnite with Epic’s special, direct payment option, but granted the request to restrain Apple from terminating Epic’s access to the Apple Developer Program, thereby preserving Epic’s ability to continue developing the Unreal Engine for iOS application use.

BACKGROUND FACTS

You can often glean a lot about what direction a case is going by reviewing how the court recites the facts.

The first important point in the facts section — which was also apparent during the hearing — was that the court distinguishes between Epic Games, Inc., a U.S. company, and Epic Games International, S.a.r.l., a related company based in Switzerland. The court recognized that “Apple maintains separate developer agreements and developer program licensing agreements between Epic Games, Epic International, and four other affiliated entities” and that Apple “also maintains a separate agreement, ‘Xcode and Apple SDKs Agreement’ regarding its developer tools.” This point helps Epic, which successfully argued that the companies are separate and should be treated separately. At the hearing, Apple’s counsel argued that Epic Games, Inc. and Epic Games International are really the same company and should be treated the same. He pointed out that Epic International did not make any separate appearance, that the same employees and officers work for both companies, that the same company credit card was used to pay for the same fees, and so on. The court disagreed. At the hearing, the court stated that there wasn’t any showing by Apple that the corporate veil had been pierced such that the two entities should be treated as one. In the order, the court reiterated its view that the corporate entities are separate.

The second important point in the facts section was the court’s framing of Epic’s breach. The court observes that Epic made a “calculated decision to breach” by activating “allegedly hidden code in Fortnite allowing Epic Games to collect IAPs directly.” (Epic strongly disagreed at the hearing that the code was “hidden.”) The court refers to Epic’s lawsuit as “pre-planned” and its marketing campaign against Apple as “blistering.” Doling out adverbs equally, though, the court also chides Apple for responding “sternly,” and at the hearing, said that Apple overreached by threatening to terminate the Apple Developer Agreement with Epic Games International.

LEGAL STANDARD

As we previously discussed, the parties argued strenuously about whether Epic was seeking a “prohibitory” injunction or a “mandatory” injunction. The court did not address the distinction in the order, but did put the parties back to what it considered the status quo: i.e., that Epic can still develop the Unreal Engine for iOS, and even put Fortnite back on the App Store if it chooses — just without the direct-to-Epic payment option (as Apple has continuously offered).

ANALYSIS

The court evaluates the four-factor test for injunctive relief through the lens of Apple’s actions with respect to: (1) Apple’s removal of Fortnite from the App Store; and (2) Apple’s notice of breach and intent to terminate to Epic International.

On the likelihood of success on the merits, the court concluded that “[b]ased on a review of the current limited record before the court” it could not conclude “that Epic has not met the high burden of demonstrating a likelihood of success on the merits.” The court added, however, that “serious questions do exist” (without elaborating very much on what those might be, beyond the Apple App Store policy of charging 30% on IAPs). There is very little here for us to dissect.

On irreparable harm, the court agreed with Apple that “self-inflicted wounds are not irreparable injury,” found that Epic’s “current predicament appears of its own making,” and thus found no irreparable harm with respect to Apple’s removal of Fortnite. However, the court reached the opposite conclusion with respect to Epic International. Specifically, the court concludes that “even if Epic Games succeeded on the merits, it could be too late to save all the projects by third-party developer relying on the engine that were shelved while support was unavailable” creating a scenario with “nebulous, hard-to-quantify questions, such as, how successful these other projects might have been, and how much in royalties would have been generated, much less the collateral damage to the third-party developers themselves.” While most of this makes sense, I find this last part a bit puzzling because the court made a big deal during the hearing that irreparable harm was only about harm to the plaintiff — not “collateral damage” to third parties — and yet here the court is talking about harm to third parties in the irreparable harm section.

On the balance of equities, the court again “observes that Epic Games strategically chose to breach its agreements with Apple which changed the status quo” and thus finds no equities suggesting that the court should “impose a new status quo in favor of Epic Games.” By contrast, however, the court concludes that the Unreal Engine situation is different and that Apple acted wrongly. The court viewed the contracts related to Unreal Engine development as not breached and that the antitrust dispute about IAPs could have been dealt with without Apple terminating the Unreal Engine access. This lead the court to conclude that “Apple has chosen to act severely, and by doing so, has impacted non-parties, and a third-party developer ecosystem.”

Finally, on the public interest, the court found that harm to Fortnite gamers was outweighed by “the general public interest in requiring private parties to adhere to their contractual agreements or in resolving business disputes through normal, albeit expedited proceedings.” As for the Unreal Engine, though, the court again pointed to the harm to third-party developers. The court observes that “Epic Games and Apple are at liberty to litigate against each other, but their dispute should not create havoc to bystanders.” This part is good news, at least preliminarily, for all the developers out there who rely on the Unreal Engine for app development.

THE ORDER

The order restrains Apple from taking adverse action against Epic’s access to the Apple Developer Program, preserving Epic’s ability to continue development for the Unreal Engine on iOS platforms. The order will remain in force until the court issues an order on the motion for the preliminary injunction. The hearing on that motion is set for September 28, 2020.