Justice Department sues Apple over smartphones

WASHINGTON — The Justice Department on Thursday announced a sweeping antitrust lawsuit against Apple, accusing the tech giant of engineering an illegal monopoly in smartphones that boxes out competitors and stifles innovation.

The lawsuit, filed in federal court in New Jersey, alleges that Apple has monopoly power in the smartphone market and uses its control over the iPhone to “engage in a broad, sustained, and illegal course of conduct.”

It specifically seeks to stop Apple from undermining technologies that compete with its own apps — in areas including streaming, messaging and digital payments — and prevent it from building language into its contracts with developers, accessory makers and consumers that lets it “obtain, maintain, extend or entrench a monopoly.”

The lawsuit — which was also filed with 16 state attorneys general — is the latest example of the Justice Department’s approach to aggressive enforcement of federal antitrust law that officials say is aimed at ensuring a fair and competitive market, even as it has lost some significant anticompetition cases.

“The Department of Justice has an enduring legacy taking on the biggest and toughest monopolies in history,” said Assistant Attorney General Jonathan Kanter, head of the antitrust division, at a press conference announcing the lawsuit. “Today we stand here once again to promote competition and innovation for next generation of technology.”

Apple called the lawsuit “wrong on the facts and the law” and said it “will vigorously defend against it.”

President Joe Biden has called for the Justice Department and the Federal Trade Commission to vigorously enforce antitrust statutes. The increased policing of corporate mergers and business deals has been met with resistance from some business leaders who have said the Democratic administration is overreaching, but it’s been lauded by others as long overdue.

The case is taking direct aim at the digital fortress that Apple Inc., based in Cupertino, California, has assiduously built around the iPhone and other popular products such as the iPad, Mac and Apple Watch to create what is often referred to as a “walled garden” so its meticulously designed hardware and software can seamlessly flourish together while requiring consumers to do little more than turn the devices on.

The strategy has helped make Apple the world’s most prosperous company, with annual revenue of nearly $400 billion and, until recently, a market value of more than $3 trillion. But Apple’s shares have fallen by 7% this year even as most of the stock market has climbed to new highs, resulting in long-time rival Microsoft — a target of a major Justice Department antitrust case a quarter-century ago — to seize the mantle as the world’s most valuable company.

Apple said the lawsuit, if successful, would “hinder our ability to create the kind of technology people expect from Apple — where hardware, software, and services intersect” and would “set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology.”

“At Apple, we innovate every day to make technology people love — designing products that work seamlessly together, protect people’s privacy and security, and create a magical experience for our users,” the company said in a statement. “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets.

Apple has defended the walled garden as an indispensable feature prized by consumers who want the best protection available for their personal information. It has described the barrier as a way for the iPhone to distinguish itself from devices running on Google’s Android software, which isn’t as restrictive and is licensed to a wide range of manufacturers.

“Apple claims to be a champion of protecting user data, but its app store fee structure and partnership with Google search erode privacy,” Consumer Reports senior researcher Sumit Sharma said in a statement.

The lawsuit complains that Apple charges as much as $1,599 for an iPhone and that the high margins it earns on each is more than double what others in the industry get. And when users run an internet search, Google gives Apple a “significant cut” of the advertising revenue those searches generate.

The company’s app store also charges developers up to 30 percent of the app’s price for consumers.

Critics of Apple’s anticompetitive practices have long complained that it’s claim to prioritize user privacy is hypocritical when profits are at stake. While its iMessage services is sheathed from prying eyes by end-to-end encryption, that protection evaporates the moment someone texts a non-Apple device.

Prominent critic Cory Doctorow has complained that while Apple has blocked Facebook from spying on its users it runs its “own surveillance advertising empire” that gathers the same kinds of personal data but for its own use.

Fears about an antitrust crackdown on Apple’s business model have contributed to the drop in the company’s stock price, along with concerns that it is lagging Microsoft and Google in the push to develop products powered by artificial intelligence technology.

But antitrust regulators made it clear in their complaint that they see Apple’s walled garden most as a weapon to ward off competition, creating market conditions that enable it to charge higher prices that have propelled its lofty profit margins while stifling innovation.

“Consumers should not have to pay higher prices because companies violate the antitrust laws,” Attorney General Merrick Garland said in a statement. “We allege that Apple has maintained monopoly power in the smartphone market, not simply by staying ahead of the competition on the merits, but by violating federal antitrust law. If left unchallenged, Apple will only continue to strengthen its smartphone monopoly.”

With the attempt to rein in Apple’s dominance, the Biden administration is escalating an antitrust siege that has already triggered lawsuits against Google and Amazon accusing them in engaging in illegal tactics to thwart competition, as well as unsuccessful attempts to block acquisitions by Microsoft and Facebook parent Meta Platforms.

Apple’s business interests are also entangled in the Justice Department’s case against Google, which went to trial last fall and is headed toward final arguments scheduled to begin May 1 in Washington, D.C. In that case, regulators are alleging Google has stymied competition by paying for the rights for its already dominant online search engine to be the automatic place to handle queries on the iPhone and a variety of web browsers in an arrangement that generates an estimated $15 billion to $20 billion annually.

Now that the Justice Department is mounting a direct attack across its business, Apple stands to lose even more.

The Justice Department is following up an other recent attempts to force Apple to change the way it runs the iPhone and other parts of its business.

Epic Games, the maker of the popular Fortnite video game, filed an antitrust lawsuit against Apple in 2020 in an effort break down the barriers protecting the iPhone App Store and a lucrative payment system operating within it. Apple has long collected commissions ranging from 15% to 30% on digital transactions completed within apps, a setup that Epic alleged was enabled by an illegal monopoly that drives up prices for consumers.

After a monthlong trial in 2021, a federal judge ruled mostly in favor of Apple with the exception of deciding that links to competing payment options should be permitted inside of iPhone apps. Apple unsuccessfully resisted that portion of the ruling until the U.S. Supreme Court refused to hear an appeal in January, forcing the company to relent. But the concessions that Apple made to comply with the ruling are still facing a “bad faith” challenge from Epic, which is seeking an April 30 hearing to ask U.S. District Judge Yvonne Gonzalez Rogers to order more changes.

Apple also had to open up the iPhone to allow apps to be downloaded and installed from competing stores in Europe to comply with a new set of regulators called the Digital Markets Act, or DMA, earlier this month but its approach is being pilloried by critics as little more than an end-around the rules that will enable it to continue to muscle out real competition. European Union regulators already have vowed to crack down on Apple if it finds the company’s tactics continue to thwart true consumer choice.

All of this comes on top of a $2 billion (1.8 billion euro) fine that European regulators slapped on Apple earlier this month after concluding that the company had undermined competition in the music streaming through the iPhone, despite Spotify being the leader in that market.

Liedtke reported from San Francisco.