Justice Dept. takes aim at Apple’s digital fortress with antitrust suit

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.”

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.

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.

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 of 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 on 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 to 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 music streaming through the iPhone, despite Spotify being the leader in that market.

The story was reported by The Associated Press. Michael Liedtke reported from San Francisco.