Monopoly case pits Justice Department against Apple’s antitrust winning streak

EMIL LENDOF/THE WALL STREET JOURNAL
EMIL LENDOF/THE WALL STREET JOURNAL

Summary

The iPhone maker has fended off numerous legal challenges with a defense that its closed ecosystem is safer and better for users.

Apple has faced complaints for years about the tight control it maintains around its popular devices—exactly what the Justice Department is challenging in its landmark lawsuit.

So far, the courts have mostly sided with the iPhone maker over critics of its fees and scrutiny of how apps and outside hardware interact with its ecosystem.

The Justice Department, which sued Apple on Thursday, took a broad swipe at the iPhone maker by alleging that it has protected its monopoly in smartphones by thwarting innovative apps and accessories that would make people less dependent on Apple’s pricey technology.

In the lawsuit, antitrust officials avoided theories previously rebuffed by federal courts. Still, the government has an uphill climb to convince a court that Apple’s policies result in higher prices and hurt consumers—rather than protecting them, as Apple says.

“The whole notion here is that things that make Apple distinctive are also things we should be attacking under the antitrust laws," said Herb Hovenkamp, an antitrust expert and a professor at the University of Pennsylvania law school. “It strikes me as a fairly weak complaint."

The department will have to contend with the defense strategy that has worked well for Apple in the past—chiefly its claim that tightly controlling how apps are distributed and sold makes the iPhone safer and more appealing for its more than 100 million U.S. users.

Apple dodged a major antitrust bullet three years ago when it mostly prevailed in a lawsuit filed by Epic Games, which makes the videogame “Fortnite." U.S. District Judge Yvonne Gonzalez Rogers found evidence of Apple’s market power and ruled that some of its restrictions weren’t justified. But she ruled that Apple didn’t have a monopoly over mobile games, which was the focus of Epic’s case.

The Justice Department’s case labels Apple a monopolist in the entire smartphone market, not just games. And the government is typically a more formidable plaintiff than private companies or class-action attorneys. “The United States normally wins the cases that it brings," Attorney General Merrick Garland said Thursday.

To defend its alleged monopoly, Apple has walled off what the lawsuit calls “super apps," software that serves several purposes such as messaging, digital payments and social networking. It has also allegedly degraded how the iPhone works with Android text messaging and smartwatches that compete with Apple’s own product. Those restrictions inhibit innovation and make consumers dependent on Apple, the department alleged.

The government’s case basically alleges that Apple has a duty to deal with rival software and hardware providers to make those products work more seamlessly with the iPhone, said Daniel Francis, a professor at NYU School of Law. That argument usually faces long odds in court.

The Supreme Court said in 2004 that businesses can’t be sued under antitrust law for not helping rival companies better compete against them.

Justice Department officials say their lawsuit isn’t a “refusal to deal" case. They are challenging instead how Apple exploits its existing alleged monopoly to block anyone who could challenge it.

“We have focused on a pattern of conduct that goes back over a decade," Assistant Attorney General Jonathan Kanter said Thursday. Apple has “excluded technologies and stifled innovations that would threaten Apple’s stranglehold on its monopoly power," he said.

The Justice Department compared the case to its mostly successful effort to stop Microsoft from monopolizing the market for internet browsing software two decades ago. Apple was a beneficiary of that case, Kanter said.

“They are essentially telling the court that they don’t have to create a whole new theory," said Jeane Thomas, a partner at Crowell & Moring’s antitrust group. “There is precedent for finding monopoly conduct in this kind of situation."

Apple officials contested the comparison, pointing out that Microsoft had 95% market share at the time of the lawsuit, while the Justice Department contends that Apple has a 65% share of the smartphone market and a 70% share of premium smartphones. Apple also said it has never created restrictions to fend off competitive threats.

Apple has a strong record in court fending off antitrust lawsuits. In 2014, it beat a claim that it had unlawfully tied the use of iPod music devices to its iTunes music store. Apple had made it impossible for iPods to play music from competing music stores.

Apple won with a classic defense against such “tying" cases. It argued that it needed to restrict what iPods could download to protect consumers from hackers and other threats.

That defense worked as well in the lawsuit that Epic filed in 2020. Apple had blocked Epic from putting its own game store on iPhones. Under Apple’s policies, Epic could only distribute its games through the iPhone’s App Store. Apple said that restriction was necessary to ensure that apps were safe from fraud, privacy intrusions and malware.

The judge, Gonzalez Rogers, found that Apple’s security argument was a valid reason to restrict how apps can be loaded.

Apple has been able to rely on the argument because it has consistently hewed to its “walled garden" strategy. Alphabet’s Google lost a similar lawsuit against Epic partly because it had cut special deals with app developers such as Spotify, meaning it couldn’t claim that its policies were evenly applied to everyone, said Ian Tang, an analyst at the research provider Capstone.

Another challenge for the government: proving Apple is a monopolist, said Sam Weinstein, a professor at the Cardozo Law School at Yeshiva University. Apple is likely to argue that the government has zoomed out too far, to capture a market definition that serves its own purposes.

Courts often narrow their views of which product market matters for antitrust purposes. Epic said Apple had a monopoly in the operating system for the iPhone, but Gonzalez Rogers instead focused on the global market for mobile games, which has many more competitors.

“There may be lots of bad conduct by Apple, but proving a monopoly may be difficult," said Weinstein. “Case law is pretty favorable to Apple."

The case was assigned to Judge Michael Farbiarz, a former federal prosecutor who was confirmed to the bench last year. He handled national-security cases when he worked in government and later worked as general counsel for the Port Authority of New York and New Jersey.

The number of legal actions against Apple has been growing steadily over the years. Most of the cases center on Apple’s market power over outside software developers.

The Justice Department has already challenged a lucrative agreement that pays Apple to make Google the default search engine on Apple’s Safari browser. Apple is paid around $20 billion a year by Google for that deal. A judge will likely decide later this year whether Google’s exclusive agreement with Apple violates antitrust law.

The App Store and the default Google partnership are together estimated to account for a third of Apple’s overall profit.

The legal attacks could serve to undermine what it calls its services business, which includes revenue from the App Store, payments stemming from the Google partnership and revenue from Apple TV+ and other subscription products. Chief Executive Tim Cook has touted the importance of growth in the services unit as iPhone sales have drastically slowed in recent years.

Some analysts believe the risk to Apple isn’t reflected in its share price. That stems from the fact that antitrust lawsuits take a long time to resolve—and it is unclear what a court would require Apple to change if it is found liable for anticompetitive behavior. The company faces more pressing and tangible regulatory threats from Europe in the near term, where it is facing a developer backlash over its compliance with new regulations.

Write to Dave Michaels at dave.michaels@wsj.com and Aaron Tilley at aaron.tilley@wsj.com

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