Epic v Apple Day 7 - Daily Pool Report


Leah Nylen
 

 

From: 'Dorothy Atkins
Sent: Tuesday, May 11, 2021 6:21 PM

 

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Hi everybody,

 

Here's my summary of the day's notes in chronological order. Athey's cross will continue tomorrow morning at 8:15. Tomorrow's pool reporter is  Sebastian Herrera of the WSJ who'll be sitting alongside somebody from NYTimes. Let me know if you have any questions! 

 

 

Good morning from Oakland federal courthouse! It's Dorothy Atkins again from Law360, and I'll be your pool reporter today. Bobby Allyn should be here as well from NPR, but he hasn't arrived yet. As always, if you have specific q's for me feel free to email

 

Today, the parties plan to continue examining economics professor David Evans of Global Economics Group today, followed by Dr. Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business.

Epic's counsel Gary Bornstein of Cravath Swaine & Moore LLP will continue Evans' examination and Yonatan Even, also from Cravath, will examine Athey. TBD on the names of Apple's counsel doing cross.

 

Judge Gonzalez Rogers is on the bench wearing a maroon mask. At counsel table are the usual suspects:

 

Epic

 

Katherine Forrest, Cravath

Gary Bornstein, Cravath  

Tim Sweeney, Epic

Lauren Clause

Jill Greenfield

Jason Run (operating exhibits)

 

Apple

 

Richard Doren, Gibson Dunn

Dan Swanson,

Cynthia Richman, 

Julian Kleinbrodt

Lauren Dansy, 

Scott Murray 

Tim Schiller

 

Housekeeping matters:

 

The judge tells counsel: "We are collecting a huge number of binders over here if somebody would please send somebody to [take them].  There’s a whole stack... Maybe two of you can come up and grab [them?]

 

Epic's counsel Katherine Forrest walked up to get the binders, the judge told her "You don’t have to ms. forrest."

 

Forrest replied: "I’m as good as anyone."

 

The judge asked if the parties are on track with witnesses and when Apple CEO Tim Cook plans to take the stand (because press is asking). Epic agreed that they are on track with their experts, who'll wrap this week. 

 

In regards to Cook testifying, Apple's attorney, Richard Doren, said "let us do some math and get back to you." "It'll be the last day of our case, we believe," he said.

 

  Evans is back on the stand being examined by Epic's Gary Bornstein. Just wrapped direct, moving on to cross now by Apple's Daniel G. Swanson of Gibson Dunn.

 

On direct:

 

Evans begins by walking the court through opinions he's formed on in-app solutions. He says there are two products: ios app distribution and ios in-app payment solutions and the relevant market ios in-app payment solutions for digital content.

 

He said "Apple has monopoly in the market. I've determined there are anticompetitive effects in that market and there is a tie."


He says there are dramatic functional differences between the two products, and compared them to shoes and socks which have different demands. "Consumers usually buy them separately and often do."

 

He says until recently Google did not require to use google play billing for

Tinder, Hulu, Netflix and Spotify and "In each of these cases [the companies] chose to use their own payment solutions instead of Google Play billing."

 

Evans says developers like Facebook, Microsoft Epic, Spotify, “and so forth” which are subject to Apple's IAP requirement, have asked Apple to use their own payment solution. 

 

Evans says "I reached this market definition by thinking about a hypothetical monopolist," who "says to digital content developers that 'you must use my payment solutions.'" he says "In this case, the hypothetical monopolist is Apple, and i’ve gone further [and made] the determination that apple as a monopolist has been able to increase price of payment solutions by a significant amount."

 

Evans "Saying that you 'could have done another thing,' isn’t a realistic thing to say to a developer."

 

As Evans was talking about Apple controlling digital content app payment, the judge stopped him and said, "well not all digital content apps," digital content apps for Apple's own products

Evans replied "Correct."

 

On alleged anti-competitive effects

 

-Evans says he conducted a "conservative" counterfactual scenario in which 20% of app developers chose to use their own payment solutions and the remaining 80% use apple’s IAP to inform his opinion.

 

-Evans: "My conclusion is that it has harmed consumers by raising prices for developers, developers pass on typically some portion of their fees… consumers end up paying higher prices as a result of that even though it may not be visible."

 

Apple's Daniel G. Swanson of Gibson Dunn cross examined Evans. Taking a 20 minute break now and cross will continue when we get back...

 

On cross

 

Apple's attorney begins by asking Evans if he's been retained in the Google Play litigation


Evans replies: "I don’t know if we've been retained. We haven’t done any substantive work on that. I guess we’ve been retained.


Atty: So the answer is you’ve been retained.

 

Evans: Yes we’ve been retained.


Attorney says Evans has never testified as an antitrust expert in state or federal court. He agrees.

 

Swanson pressed Evans on whether he considers in-app purchase transactions in his relevant market. When Evans didn't reply 'yes' or 'no,' the attorney pushed him on the point, Evans explained that he didn't understand the term "transactions" as he was using it, since payment services could be a transaction. There was some back and forth, and the judge asked him repeatedly if the transactions were considered in his proposed markets, but she then stopped herself saying "I’ll stop talking," so as not to eat into Apple's time.

 

Swanson asked Evans if he recalls that Apple had to subpoena and move to compel him to hand over a presentation that he prepared in 2016 on Apple's alleged monopoly power to the FTC. He agrees that he does, but explained that the subpoena "implicated a set of documents that were ultimately given over."

 

Swanson got Evans to concede that Samsung smartphone devices are not in his market definitions, and "You don’t deny that almost all game consoles own smartphones." Evans replied, "No not at all, they do."


Evans also conceded that he's not claiming that game console owners only play on game consoles.

 

Apple's counsel asked if Evans 'agrees' that all apps are substitutable. Evans replies "no," just like a restaurant payment card transaction wouldn't be substitutable for a clothing store transaction. "There’s no assumption that they’re substitutes." He also said game apps and other apps aren't substitutable and an app bought on an iPhone versus an iPad aren't substitutable. "When we talk about substitution in the antitrust context we’re talking about significant substitution in market definition so my opinion is no."
 

Swanson points out that Uber, Lyft, Amazon and eBay use their own payment systems and gets Evans to acknowledge they're 'two-sided platforms'


Swanson asks if Evans would characterize it is a tie when Apple charges for an initial download. Evans says that mixes "apples and oranges," "Those are just very different. The payment solution for apple as a distributor... That payment solution is standing in a different way, when Apple is using it as an app distributor than when apple is telling developers that they need to use it for transactions with their customers. Those are different things."


Evans goes on to say "It’s no different than walmart having its own payment method" charging for transactions in a walmart store.

 

Some colorful observations:

 

Apple's attorney is talland has to hunch/lean over a podium as he asks Evans questions. The atty is relatively soft spoken, but at times seems to be getting frustrated by Evans' long-winded, academic responses to his qs.

 

Evans also keeps asking to pause his examination so he can have a drink of water, which involves removing his face shield. The judge allows for it, but the task eats into Apple's time (each side has 45 hrs to present its case) and I'm sure the attys are aware of that.

 

  We're back from the break! Apple's Daniel G. Swanson of Gibson Dunn is continuing cross-examining Evans.  

 

The courtroom is sealed for q's on Apple's profitability, but after this Evans should be done testifying. Next up will be Dr. Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business, but it's unclear if a lunch break will happen before she's sworn in. I'll send an email when the court's unsealed.

 

Daniel G. Swanson of Gibson Dunn continues cross-examining Evans:

 

Samson asks Evans if he thinks apple's App Store's fees were "benign" when first adopted by Apple.


Evans: They were benign in an anticompetitive sense.

 

Atty: In an antitrust sense?

Evans: Correct.

Atty: You agree Apple wasn’t a monopoly in 2009 when it adopted 30% commission?

Evans: That’s correct.

 

Apple's counsel got Evans to acknowledge that developers must use Apple’s IP to develop in the 'ecosystem' and that compulsory licensing occurs when a license holder is forced to license its IP. 

 

Atty: Do you agree with the principle that the owner of intellectual property should not be required to create competition within its own IP? Evans replied that he does. 

 

(This line of q goes to Apple's defense argument that it has no duty to license its intellectual property to Epic, if Epic won't pay its fees or accept its terms.)

 

Apple's counsel asks Evans if he agrees with "the principle that the owner of intellectual property should not be required to create competition within its own IP." 

 

Evans agrees and he acknowledges that Apple is a "very valuable brand," that has a 'high-quality' app ecosystem and that profit margin alone isn't sufficient to establish market power.

 

They sealed the courtroom for questions on profitability.

 

On recross, Apple's counsel asked Evans why Epic didn't "convey the message" that Epic users could buy v-bucks through PCs/game consoles in newspapers or online. Evans acknowledges Epic could have taken out those ads, but doesn't know why it hasn't. Epic objects to the q's for being speculative, but the judge didn't acknowledge the objections.

 

On redirect by Gary Bornstein/judge's comments:

 

Evans says whether apps are substitutable is "completely irrelevant, because ... the product that is the central focus is not the apps. The product being supplied is app store distribution services to any app that’s interested in using those distribution services and on the other side consumers looking to use the app."

 

Judge:  "I’m trying to envision this. you have all of these developers developing the apps and on the other side billions of customers,  so what we really have is a distribution channel that connects these two groups.  What you’re saying is it should have many distribution channels and not just one... and in this platform apple has put a ‘toll booth.'... " But she says the only channel and platform developed is by Apple and Apple is the owner of the technology, which is proprietary. 


Judge: "When we look at all these various channels.. The objection is that on one of these many channels is the toll boto, which doesn’t exist on all of them, but exists on some of them, you’re saying either we want it to be free or we want to build our own channel on your platform." The judge also noted that Apple invested in its software, so "what so bad about that?"

 

Evans replies that the "problem" is that Apple's anti-steering provisions make it difficult for users to know that there are alternatives, and those alternatives like PCs and game consoles aren't "really realistic" substitutions in light of the accessibility and portability of smartphones.

 

  And the judge let us back in and said she asked Evans some questions when the court was sealed that should be public, and the transcripts will reflect that. Now we're going to take a 40 minute lunch break until 1:15 p.m. PST. I'll send out an email when we're back. 

 

We're back! Epic's expert Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business, is being sworn in and will be examined by Epic's counsel Yonatan Even of Cravath.

 

  Epic's expert Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business, is examined by Epic's counsel Yonatan Even of Cravath. Switching to cross now by Apple's Karen Leah Dunn  of Paul Weiss Rifkind Wharton & Garrison LLP.. 

 

On direct:

 

She says high switching costs lock consumers into using Apple iOS and Apple blocks consumers and developers from using "middleware," which could reduce those costs.

 

She says to switch devices, users have to purchase apps again even though they already bought it on iOS.


Judge: I thought you could just go to -- i guess, i don’t know android?

 

Athey says it depends on the app, and for some app subscriptions like for the New York Times app, users need to cancel their Apple subscription if they purchased through Apple and then buy it on Android. 

Athey says transferring data on iPhones data from all installed apps "passed over in almost every case," but that's not the case for Android. She says it's common for families to accumulate set of games or apps that they use on multiple devices. 


"Developers have strong incentive to solve this problem for consumers. The more the users can consume their services, the more value they can get."

She said there's a "chicken and egg problem" in which a developer doesn’t want to "port" its app to a new platform, but users doesn’t want to go to new platform without apps.


"That app barrier entry supports the high profits that we would otherwise expect invite entry," she said. 

 

Judge asks if she thinks "we’re in a chicken and egg environment." She replies "between iphone and android absolutely not," but the concern is regarding a third firm, "the third firm would have to overcome chicken and egg problem"

 

"In my opinion they stifle competition for ios and android. We’re talking about a scenario where we have a stable duopoly where most users are already locked in and even the few new arriving users are already going to be influenced by the platform purchase of their parents."

 

On Apple's objection

 

Apple's counsel Dunn objects to testimony on consumer opinions. "There’s no basis for what consumers do or think."

 

The judge initially sustains the objection and strikes her testimony on consumers except "to the extent that it’s in the report." The judge adds that "I had lots of questions for the factual basis for [Athey's] opinions... If there’s not a factual basis i will not consider it and it will ultimately be stricken."

 

2013 email discussed: 

 

Epic's counsel points to a 2013 Email from Eddy Cue, Apple's senior vp internet software and services, to Philip Schiller and Tim cook. Athey says it talks about switching costs and "it articulates the precise logic i was discussing, and it articulates the choices were important both quantitatively and qualitatively."


Email from 2013 says “Getting customers using our stores (iTUnes,App and iBookstore) is one of the best things we can do to get people hooked to the ecosystem. The more people use our stores the more likely they are to buy additional apple products and upgrade to the latest versions. Who’s going to buy a samsung phone if they have apps, movies, etc already purchased? They now need to spend hundreds more to get to where they are today."

 

Apple's Karen Leah Dunn of Paul Weiss Rifkind Wharton & Garrison LLP cross examined professor Athey.

 

On cross

 

Dunn gets Athey to acknowledge that she's never testified in antitrust litigation and she hasn't reviewed Apple's confidential documents because since 2007, she worked for Microsoft or done consulting work "on and off" and was at one point "consulting chief economist" at Microsoft. 

 

She says her CV was "a bit generous" on her relationship with Microsoft. 

 

Judge overruled Epic’s potential objection to the line of questioning (the attorney was about to stand up but didn’t actually state the objection). The judge said the questions: “it goes to bias.”

 

Dunn asks if Athey has read the injective relief requested in the case, Athey didn't answer the question directly. 

 

Atty: Surely this is a yes or no question, read is read.

 

Athey she's "read parts of it."

 

Atty: You're imagining a world in which Apple can license its world to third parties. What’s the plan? They should just sue everyone who comes on to the platform for patent infringement?


Athey:  I’m fairly certain I didn’t say Apple [should] sue everyone on the platform system.

 

Dunn points out the word "security" doesn't appear in her written testimony and even though she's written about privacy is that it doesn't appear. Dunn says Athey "focused on certain things but not others" even though security and privacy are important.

 

Athey "I don't believe that's a completely fair characterization because the reason we're here, the reason competition is important is because we need competition to ensure that companies.. continue to innovate."

 

Athey's cross will continue tomorrow morning at 8:15.

 

 

 

 

--

Dorothy M. Atkins

Senior Courts Reporter

Legal News & Data


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