Litigation – Dickinson Law's Inside Entrepreneurship Law Blog

By: Eric Le

App stores have become a robust place of commerce. In 2021, consumers spent $133 billion dollars on in-app purchases. Apple and Google launched the iOS App Store and the Google Play Store in 2008, respectively. Since then, many coding wizards have become millionaires before they hit the legal drinking age.

Samantha John is a classic example of an entrepreneur who created a successful career through app development. In 2012, she launched HopScotch, an educational app that teaches children to develop games, stories, and art. Initially, John did not monetize the app in order to build a customer base. The strategy worked. Hopscotch gained 20,000 downloads within the first week. In 2015, John monetized the app by introducing a subscription for $7.99 per month, or $79.99 per year.

The subscription model turned an app into an investable business. And it wasn’t just any investable business; it was a business that drew Shark Tank’s Mark Cuban in as an investor. Cuban and John agreed on a deal of $550,000 for 11% equity, putting the valuation of the company at $5,000,000.

App developers who want to list their app on the iOS App Store must sign a Developer Product Licensing Agreement (“DPLA”) with Apple. Pursuant to the DPLA, app developers (1) must pay a commission on in-app purchases; (2) are prohibited from putting a store within the App Store; (3) are prohibited from sideloading apps onto iOS devices; and (4) are required to use Apple’s commerce technology for any payments.

Apple takes a 30% commission fee out of every transaction made through the App Store. There are over 30 million registered iOS developers, all of whom, with very few exceptions, must agree to the contractual terms. Consequently, the 30% commission fee that Apple takes from its developers can quickly add up. In 2020, Apple collected an enormous $64 billion dollars from its 30% commission fee.

Small developers benefit from the DPLA and working with Apple, too. They enjoy the developer tools provided by Apple, such as promotional support and a massive customer base of iOS users. These perks draw smaller developers to Apple and Apple’s in-app purchasing system, but not the bigger players like Google or Facebook.

In 2020, Epic Games, a multi-million-dollar game developer took Apple to court to challenge, among other things, Apple’s 30% mandatory commission fee. Epic largely lost at the District Court level because the court rejected most of its antitrust claims, including technological tying or willful maintenance of monopoly. Epic and Apple are appealing different parts of the decision to the Ninth Circuit Court of Appeals and arguments are scheduled for Oct. 21. (see below)

Epic’s one victory came in the form of an injunction against the anti-steering provision within the DPLA. The provision read, in pertinent part, “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.” Simply put, the court held that Apple’s anti-steering provision that prohibited developers from directing customers to a website to make payments or completing the transaction outside of the in-app purchasing system, was anticompetitive.

This major win for Epic will also affect smaller developers, as it applies to all iOS app developers. 30% of revenue for a small business trying to get off the ground is a large chunk. Take, for example, HopScotch. If the app gained 20,000 downloads in one week and converted a quarter of downloads into subscribers. Let’s say the subscribers pay $7.99 per month. That would compute to a gross revenue of $31,960 (4,000 x $7.99) per month. Of that $31,960 monthly revenue, Apple would take 30%—roughly $10,000 every month. For a small business, $10,000 is a significant sum. Epic’s victory here should be a huge boon to all entrepreneurial app developers on the iOS App Store.

Smaller app developers certainly have a stake in the fight between the two tech giants. These developers banded together and created the Coalition for App Fairness (CAF). The group celebrated the injunction for lifting Apple’s “stranglehold on the app market as a whole.” In its amicus brief, CAF gave the example of an app called Knitrino, “a Washington state-based company that hosts online interactive knitting communities.” Developers of Knitrino “had to scratch its plans to offer both digital and physical goods through its app after being told by Apple that digital goods had to be purchased through Apple’s own payment systems while physical goods could only be bought through an external system.”

Apple, in response, cited security concerns and asked the Ninth Circuit to stay the injunction. The app store operator asserted that external payment systems “do not necessarily include the anti-fraud, parental control and other protections provided by Apple’s in-app system.” In a last-minute decision, the Ninth Circuit stayed the injunction pending the outcome of the Court of Appeals ruling. At least for now, Apple can delay “making major changes to the App Store to allow developers to include links or advertisements directing users to outside websites where they can make purchases.” But the issue will certainly be litigated extensively before the Ninth Circuit.

As of September 2022, the U.S. Department of Justice and the state of California have joined the fray. Both the DOJ and California received approval from the Ninth Circuit to participate in oral argument. The DOJ plans to use the opportunity to “address the proper legal framework governing [antitrust] claims under . . . the Sherman Act.” California plans to address the District Court’s application of California’s Unfair Competition Law (“UCL”). Neither the DOJ nor California will be advocating for Epic or Apple.

The stakes are high. Oral argument is scheduled for October 21, 2022. App developers, big or small, will have to wait with bated breath to find out if the world’s most valuable company will, pun intended, continue to get a bite of the apples.

This post has been reproduced and updated with the author’s permission. It was originally authored on February 10, 2022 and can be found here.

Minh “Eric” Le, at the time of this post, is a third-year law student at Penn State Dickinson Law. He has interned for the Federal Public Defenders, and the Pennsylvania Office of the Attorney General, in the Financial Enforcement Section. Eric also worked as a Summer Associate with Buchanan Ingersoll & Rooney. Eric is a first-generation college and law student. He was born in Vietnam and raised in Ho Chi Minh City, before moving to Brooklyn, New York, in 2002. Eric enjoys playing competitive badminton, skiing, traveling, and ice skating.

Sources:

Taylor Locke, ‘Shark Tank’: Mark Cuban ‘Looks Up To’ the Founder of Hopscotch–So He Invested $550,000 in Her App That Teaches Kids to Code, CNBC (Mar. 1, 2021, 10:44 AM), https://www.cnbc.com/2021/03/01/shark-tank-why-mark-cuban-did-6-figure-deal-with-hopscotch-app.html.

Shadab Rabbani, Users Spend $133 Billion on Apps as Apple’s App Store Continues to Lead Revenue Shares, BUSINESS INSIDER (Dec. 8, 2021, 10:33 AM), https://www.businessinsider.in/tech/apps/news/users-spend-133-billion-on-apps-as-apples-app-store-continues-to-lead-revenue-shares/articleshow/88157952.cms.

Sarah Perez, App Stores to See Record Consumer Spend of $133 Billion in 2021, 143.6 Billion New App Installs, TECHCRUNCH, (Dec. 7, 2021, 2:48 PM), https://tcrn.ch/3B1U3tD.

Bryan Koenig, App Makers Backing Epic ‘Controlled By Epic,’ Apple Says, LAW360 (Dec. 1, 2021, 8:19 PM), https://www.law360.com/articles/1444721.

Matthew Perlman, Apple Asks 9th Circ. To Pause Epic App Store Order, LAW360 (Nov. 17, 2021, 6:44 PM), https://www.law360.com/articles/1441407/apple-asks-9th-circ-to-pause-epic-app-store-order.

Hailey Konnath, Apple Gets Epic App Store Order Paused Pending Appeal, LAW360 (Dec. 8, 2021, 10:46 PM), https://www.law360.com/articles/1447084/apple-gets-epic-app-store-order-paused-pending-appeal.

Hailey Konnath, DOJ, Calif. Get OK to Join Arguments in Apple, Epic Appeals, LAW360 (Sept. 16, 2022, 9:37 PM), https://www.law360.com/articles/1531427/doj-calif-get-ok-to-join-arguments-in-apple-epic-appeals.

By Robert E. Heary*

Limited Liability Companies (LLCs) provide many legal benefits, but these benefits come with one significant trade-off. This trade-off is that non- attorney members may not represent the LLC in court. Members may not represent LLCs in court because the law considers an LLC to be a separate legal entity from the member or members who own the LLC. An LLC’s status as a separate legal entity is what provides limited liability protection to members of LLCs. This status as a separate legal entity also means only an attorney may represent an LLC in court, subject to a few exceptions. This means that a member may not file a lawsuit, answer a complaint or appear in court on behalf of an LLC unless an exception applies. This article explains when a member may be able to represent an LLC in a state court of New York, Delaware, or Pennsylvania.

TAKE NOTE: A member may never represent an LLC in Federal Court.

New York

One important exception to the attorney requirement in New York is that an LLC may defend or bring a claim in one of the Commercial Small Claims Courts of New York. A Commercial Small Claims Court allows legal entities such as corporations, partnerships, associations, and LLCs to bring claims of up to $5,000. However, these courts only allow for cash damages. Thus, a lawsuit may not be brought to compel action such as requiring a contractor to repair damage or requiring a party to perform a promised act. Any authorized member, manager, or employee of a LLC may represent an LLC in Commercial Small Claims Court. This means the LLC must make an affirmative action to designate and authorize the person who will be appearing in court on behalf of the LLC prior to appearing in court, preferably in writing. The court may inquire as to the authority a person has to appear on behalf of the LLC in commercial small claims court. If the court finds the person to not have authority, it may enter a default judgment against the LLC for failure to appear in court.

Delaware

Similar to New York, Delaware has an exception allowing an authorized member, manager, or employee to represent the LLC in a Justice of the Peace Court. However, unlike in New York’s Commercial Claims Courts, a member, manager, or employee of an LLC must complete a notarized Certificate of Representation to be able to represent the LLC before a Justice of the Peace Court in Delaware. This certificate is more formal than the requirement in New York and, once approved, allows for representation for up to one year after which one must renew it. Additionally, a Justice of the Peace Court allows for some other actions such as debt collection actions, landlord/tenant summary possession actions, and replevin actions that involve compelling the return of property. Finally, the claim limit in a Justice of the Peace Court is $15,000, higher than in New York.

Pennsylvania

Pennsylvania also has an exception for claims brought in a Pennsylvania Magisterial District Court. In Pennsylvania, similar to Delaware, the authorized member, manager, or employee must submit written authorization to the court prior to appearing. Pennsylvania also requires verification that the authorized representative has personal knowledge of the subject matter of the litigation. Once a member, manager, or employee becomes an authorized representative, they may only represent the LLC for that individual case before the Magisterial District Court. This means that for the authorized representative to appear on behalf of the LLC in a separate case, they would need to submit a separate written authorization and verification of personal knowledge to the court. Finally, the claim limit in Magisterial District Courts is $12,000.

Conclusion

New York, Delaware, and Pennsylvania all provide avenues for LLCs to pursue or defend smaller claims without the need to hire an attorney. A member representing a LLC in court is viable option and provides LLCs with the opportunity to save money on attorney costs. An LLC should still carefully consider whether or not to hire attorney though, as an attorney’s training and expertise increase the likelihood of successful recovery or defense of claims. Even if you do decide to represent your LLC or authorize another to, consider consulting an attorney. The attorney will be able to provide advice on what needs to be proved or disproved to the court, as well as how to present evidence. At the very least, have an attorney look over an answer or compliant you file. These documents are the bedrock of any lawsuit and may win or lose the case for you before you can even make it into court.

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* This post was checked for currency on July 23, 2018 and reproduced with permission by author Robert E. Heary. Original post can be found here.

Robert Heary, at the time of this post, is a third year law student at Penn State’s Dickinson Law. He is from Buffalo, New York and has interests in business transactional law. He is currently serving as the Vice President of the Student Bar Association and the Executive Chair of the Moot Court Board. A more complete bio can be found here.