What is the Meaning of “Unfair Competition”? Reflections in Light of Epic Games v. Apple

By Caio Nunes, LL.M. 2022

What does “unfair competition” mean from an American legal standpoint? The answer should be simple, but it most definitely is not. The first usage of this term in Anglo-Saxon common law referred to “attempts by one merchant to palm off inferior goods as those of another more reputable merchant by making deceptive use of the other merchant’s trademark.”¹ Unfair competition, thus, first came into the legal world as the foundation to what we now know as “trademark law.”² As the years went by, trademark regulation became more sophisticated in the United States, and unfair competition continued to exist, but as a mere supplement to trademark protection under § 43(a) of the Lanham Act, primarily used to support infringement lawsuits of unregistered trademarks.³

Hence, within the realm of the Lanham Act, “unfair competition” is normally understood as actions by a competitor which might mislead or deceive consumers into purchasing certain products or services instead of others. This definition clearly deviates from the American concept of antitrust law, whose main goal is to “ensure that private agreements and actions do not interfere with free competition.”⁴ In this sense, Thomas McCarthy draws the following comparison between the two subjects: “while antitrust law prohibits ‘not enough’ competition, unfair competition law forbids ‘too much’ competition.”⁵

One should note, however, that the Federal Trade Commission Act (FTC Act) bans any “unfair methods of competition,”⁶ and, according to Supreme Court precedent, any infringement of the Sherman Act, the heart of American antitrust law, violates the FTC Act as well.⁷ Consequently, we see here a second definition of “unfair competition,” understood as a practice that violates either the Sherman Act or the FTC Act. Thus, two different concepts of “unfair competition” (one in the Lanham Act, and another in the FTC Act) currently coexist, with each one bearing its own meaning.

But our tale does not end here. There is at least one more species of “unfair competition,” which can be found in the California Unfair Competition Law (UCL).⁸ A good way of deciphering this third variety is by analyzing the recent decision of the U.S. District Court for the Northern District of California in Epic Games, Inc. v. Apple Inc.⁹ Epic, the developer of the world-famous video game Fortnite, challenged Apple’s App Store terms which, among other things, required all purchases of digital content to use Apple’s payment system, through which Apple collected a 30% commission.¹⁰ The trial court rejected Epic’s antitrust allegations but accepted its claims under the UCL.¹¹ As a remedy, the court issued a nationwide injunction against Apple, restraining it from standing in the way of app developers (such as Epic) who wish to provide App Store customers with alternative, non-Apple purchasing mechanisms.¹²

The UCL prohibits “any unlawful, unfair or fraudulent business act or practice.”¹³ One of the prongs within this provision is the “unfair” prong, which the court found Apple to be violating in Epic Games v. Apple.¹⁴ The court used the test crafted by the California Supreme Court in Cel-Tech Communications, Inc. v. L.A. Cellular Telephone Co.,¹⁵ which defined an “unfair” act as conduct that (1) “threatens an incipient violation of an antitrust law,” (2) “violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law,” or (3) “otherwise significantly threatens or harms competition.”¹⁶

As we can see, such a definition of “unfair competition” not only differs significantly from the one found in the Lanham Act (consumer confusion) but also exceeds the scope of “traditional” antitrust law (Sherman Act and FTC Act), taking the form of a sui generis, “super-antitrust” rule. Indeed, the court held that “although Epic Games has not proven a present antitrust violation, the anti-steering provisions ‘threaten[] an incipient violation of an antitrust law’ by preventing informed choice among users of the iOS platform. . . . Accordingly, . . . the anti-steering provisions violate the UCL’s unfair prong . . . .”¹⁷

Although this decision could still be reversed on appeal, the severe price currently being paid by Apple shows that companies wishing to avoid any claims of “unfair competition” under California law need to be careful. Players not only need to keep an eye on the Lanham Act and another on the Sherman and FTC Acts but also circumvent the UCL’s “super-antitrust” tentacles, which gave birth to an amorphous, broad, and rather unpredictable species of unfair competition.