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The SEC and the DOJ just charged this startup founder with fraud, saying he lied to Tiger and others
Today, both the U.S. Department of Justice and the Securities and Exchange Commission charged Manish Lachwani, co-founder of mobile app testing company HeadSpin, with fraud. The SEC says he violated antifraud provisions, and the civil penalties it’s seeking include a permanent injunction, a conduct-based injunction, and to bar him for serving as a corporate executive or board member.
The DOJ, which arrested Lachwani earlier, has accused him of one count of wire fraud and one count of securities fraud, and the associated penalties if he’s found guilty are more harsh, including, for wire fraud, a maximum sentence of 20 years in prison and a fine of $250,000. If he’s found guilty of securities fraud, he faces a maximum sentence of 20 years in prison and a fine of $5,000,000.
Both the the SEC and the DOJ say Lachwani — who led the six-year-old company as CEO until May of last year — defrauded investors out of $80 million by falsely claiming that HeadSpin had “achieved strong and consistent growth in acquiring customers and generating revenue” when he was pitching its Series C round to potential backers.
By the SEC’s telling, his fabrications were designed to help secure the round at a so-called unicorn valuation. That apparent plan worked, too, with Palo Alto-based HeadSpin attracting coverage in Forbes in February of last year after Dell Technologies Capital, Iconiq Capital and Tiger Global provided the company with $60 million in Series C funding at a $1.16 billion valuation. Forbes reported at the time that the valuation was double the valuation investors assigned HeadSpin when it closed its Series B round in October 2018.
The SEC also says that Lachwani was looking to enrich himself, saying he did so “by selling $2.5 million of his HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpin investor.” (It isn’t clear from its complaint whether the SEC is referring to the Series C or an earlier round.)
The two federal complaints suggest that Lachwani’s alleged scheming to inflate HeadSpin’s valuation dates back to “at least 2018,” and the DOJ says it picked up momentum when the company was fundraising in late 2019.
More specifically, the DOJ complaint alleges that “in materials and presentations to potential investors, Lachwani reported false revenue and overstated key financial metrics of the company … he maintained control over operations, sales, and record-keeping, including invoicing, and he was the final decision-maker on what revenue was booked and included in the company’s financial records.”
In the investigation that led to the DOJ’s charges, the FBI discovered “multiple examples” of Lachwani “instructing employees to include revenue from potential customers that inquired but did not engage HeadSpin, from past customers who no longer did business with HeadSpin, and from existing customers whose business was far less than the reported revenue,” says the department.
How far off were these collective calculations? The complaint says that ultimately, Lachwani “provided investors false information that overstated HeadSpin’s annual recurring revenue … by approximately $51 million to $55 million.”
According to the complaint, Lachwani’s fraud unraveled after the company’s board of directors conducted an internal investigation and revised HeadSpin’s valuation down from $1.1 billion to $300 million. Indeed, in August of last year, The Information reported that the company was planning to lower the value of its Series C stock by nearly 80%.
The outlet reported at the time that Lachwani had already been replaced by another executive. That person, according to LinkedIn, is Rajeev Butani, who joined HeadSpin as its chief sales officer early last year.
Nikesh Arora, a former SoftBank president and the current CEO and chairman of Palo Alto Networks, helped lead the internal review as a then-director on the board of HeadSpin, said The Information.
The SEC says its investigation is continuing. The DOJ similarly notes in its announcement that “a complaint merely alleges that crimes have been committed, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt.”
Either way, the outlook doesn’t look very promising right now for Lachwani, who, according to Forbes, previously sold a mobile cloud business to Google and wound up co-founding HeadSpin after Yahoo co-founder Jerry Yang introduced him to Brien Colwell, a former Palantir and Quora engineer who was working at the time on a different startup.
Colwell remains with HeadSpin as its CTO. He has not been named in either the SEC or the DOJ’s complaints relating to HeadSpin.
The company itself, which says it has been cooperating with the government’s investigation, was also not charged.
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Freelancer marketplace Toptal sues Andela and ex-employees, alleging theft of trade secrets
The war for talent in the tech world can be brutal — and so, it turns out, can the war between platforms that help companies source it. In the latest developement, Toptal — a marketplace for filling engineering and other tech roles with freelance, remote workers — has filed a lawsuit against direct competitor Andela and several of its employees, alleging the theft of trade secrets in pursuit of “a perfect clone of its business”, according to the complaint. All of the Andela employees previously worked at Toptal.
Toptal’s lawsuit, filed in the Supreme Court of the State of New York and embedded below, alleges that the employees reneged on confidentiality, non-solicitation and non-compete agreements with Toptal. Toptal also alleges interference with contract, unfair competition and misappropriation of trade secrets.
While both Toptal and Andela have built businesses around the idea of remote freelancers filling tech jobs — a concept that has increased in profile and acceptance as people shifted to remote work during the pandemic — the pair only emerged as very direct competitors in the last year or so.
Toptal was co-founded by CEO Taso Du Val in 2010, and since then it has grown to become one of the world’s most popular on-demand talent networks. The company matches skilled tech personnel like engineers, software developers, designers, finance experts and product managers to clients across the globe. According to company data, it currently serves over 1,000 clients in more than 10 countries.
Andela, on the other hand, only recently turned to using a similar approach. Founded in 2014 in Lagos, Andela’s original business model was based on building physical hubs to source, vet, train and house talent across the continent. It did this in Kenya, Nigeria, Rwanda and Uganda.
However, Andela struggled with scaling and operating that business model, and in 2019 it laid off 400 developers. Early last year as the pandemic took hold, it laid off a further 135 employees. However this time around it did so with a strategy pivot in mind: after testing satellite models in Egypt and Ghana, the talent company decided to go forego physical hubs completely and go remote, first across Africa in 2020 and globally this year.
“We thought, ‘What if we accelerated [the African remote network] and just enabled applicants from anywhere?’ Because it was always the plan to become a global company. That was clear, but the timing was the question,” Andela CEO Jeremy Johnson told TechCrunch in April.
Yet Toptal believes Andela’s choice to scrap its hubs and source remote talent from everywhere was specifically to replicate Toptal’s business model — and success.
“Until recently, Andela operated an outsourcing operation focused on in-person, on-site hubs in Africa,” Toptal notes in the complaint. “Over the course of the past year, Andela has moved away from its prior focus on in-person hubs situated in Africa and is engaging in a barely disguised attempt to become a clone of Toptal.”
Toptal claims that for Andela to pull off a “perfect clone of its business,” it poached key Toptal employees to exploit their knowledge, and that the ex-employees knowingly breached their confidentiality and non-solicitation obligations to Toptal.
Companies often try to uncover each other’s trade secrets by poaching, and many blatantly copy a competitor and do so without repercussions. On top of this, these two are hardly the only two places to for tech talent to connect with remote freelance job opportunities. Others include Fiverr, Malt, Freelancer.com, LinkedIn, Turing, Upwork and many more.
In a global economy with an estimated 1 billion so-called knowledge workers, and with freelancers accounting for some 35% of the world’s workforce, it’s a pretty gigantic market, which you could alternately look at as a major opportunity, but also a ripe field for many players with multiple permutations of the marketplace concept.
So why is Toptal crying foul play? The company says its ex-employees have not only revealed Toptal’s trade secrets and confidential information to compete unfairly but are also poaching additional Toptal personnel, clients and the talent that Toptal matches and sources to clients.
The ex-employees cited by Toptal include Sachin Bhagwata, vice president of enterprise; Martin Chikilian, head of talent operations; Courtney Machi, vice president of product; and Alvaro Oliveira, executive vice president of talent operations. Toptal says three additional former employees in non-executive roles breached express covenants not to compete in their agreements with Toptal.
While some of the allegations focus on the expertise of the employees, one of the trade secret allegations more directly references Toptal’s technology.
Toptal claims Machi tapped into her extensive knowledge of Toptal’s “proprietary software platform” and used that to help transform Andela “from a group of outsourcing hubs situated in various African locations into a fully remote, global company like Toptal.”
Asked to comment on the suit, Johnson at Andela said he believes Toptal is suing Andela for being competitive.
“With regards to the situation overall, I can say that frivolous lawsuits are the price of doing anything that matters,” he told TechCrunch in an email. “And this is the kind of baseless bullying and fear tactics that make employees want to leave in the first place. We will defend ourselves and our colleagues vigorously.”
Toptal has an unconventional story for a company that started only a decade ago. It is one of the few companies in the Valley that doesn’t issue stock options to its investors or employees. Even Du Val’s co-founder, Breanden Beneschott, was ousted from the company without any shares, according to an article from The Information.
How did it pull this off? In 2012, Toptal raised a $1.4 million seed via convertible notes and investors were entitled to 15% of the company, according to The Information article.
But there was one condition: Toptal had to raise more money.
However, the company hasn’t needed to secure additional capital because of its profitability and growing revenue ($200 million annually as of 2018, per The Information). So investors are stuck in limbo — as are employees who joined hoping that the company would raise money down the line so their stock options would convert.
The Information story strikes a distinct note of resentment, noting that some employees felt “tricked out of stock in a company that Du Val has said publicly is worth more than $1 billion.”
Given that situation, TechCrunch asked Du Val if he thought it played any role in employee departures, and ex-employee relations.
“The issuance of stock options does not excuse theft of trade secrets,” he replied. “Also, there are more than 800 full-time people at Toptal [but] the complaint names seven individual defendants.”
The full complaint is embedded below.
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Fleksy co-founder is suing Apple over lost revenue resulting from App Store scammers
Kosta Eleftheriou, a co-founder of the Fleksy keyboard app later sold to Pinterest in an acqui-hire deal, has been calling attention to Apple App Store issues like fake reviews, ratings and subscription scams, as well as malicious clone apps, after his own app, FlickType, was targeted by scammers. Now, the developer is taking the next step in his App Store crusade: he’s filing a lawsuit against Apple.
The suit, which the developer claims was filed Wednesday in California Superior Court in Santa Clara county, alleges that Apple enticed developers to build applications for its App Store — the only place iOS applications can be legally sold — by claiming it’s a safe and trustworthy place, but doesn’t protect legitimate app developers against scammers profiting from their hard work.
What’s more, the suit says, Apple is disincentivized to do so because scammers are generating revenue for Apple via their use of subscriptions, which involve a revenue share with Apple.
Eleftheriou has been personally impacted by App Store scammers. He left a well-paying job at Pinterest to develop his FlickType app, an alternative swipe keyboard for Apple Watch. After its launch, the app was targeted by copycat app makers who claim their apps offer the same feature set as FlickType but instead lock users into high-priced subscriptions for their poorly designed software. They also flood their apps with fake ratings and reviews to make them appear to be a much better option when users are looking for an app in this space.
Meanwhile, FlickType sports a 3.5-star rating, as it’s often dinged for Apple Watch platform issues that are outside the developer’s control or missing features users want to call attention to. Eleftheriou engages with his app’s users, however — responding to complaints and letting users know when features they’ve requested were added or bugs have been fixed. Scammers simply buy enough 5-star reviews to keep their apps’ overall ratings higher.
In other words, Eleftheriou is doing the hard work of being an App Store developer carving out a category for swipe keyboards for the Watch, but his potential income is being shifted over to scam apps who have a falsified App Store presence.
In years past, Apple took seriously issues of app quality. It worked to clean up shady subscription apps and remove clones and spam from the App Store through regular sweeps. It even once went so far as to ban apps built using templates in an effort to raise the bar on app quality, which angered small businesses that didn’t have the resources or funds to build more professional apps. (Apple later revised its policy to be more equitable.)
But the new lawsuit alleges that Apple is now doing little to police scammers’ apps because it profits from developer misconduct. Eleftheriou also notes he has raised these issues to Apple via his company KPAW, LLC, but Apple did “next to nothing” to resolve the problem.
Eleftheriou’s story is even more complicated, though, because his app was rejected from the App Store numerous times after meeting with Apple special projects manager Randy Marsden over a possible acquisition. He tells TechCrunch numbers were discussed with Apple and his meetings had included a director and a VP, among others. Apple was considering turning FlickType into an Apple Watch feature, the lawsuit notes.
Shortly thereafter, FlickType was pulled from the App Store over App Store Review Guidelines violations, even as a competitor’s app was approved. Eleftheriou appealed for his app through Developer Relations but was given no guidance on how to prevent the same problem in the future, he said.
Over the months that followed, FlickType continued to face rejections from App Store Review. Apple’s App Store Review said that the app offered a “poor user experience,” even though tech journalists at numerous outlets had praised it, and Apple had once considering buying it. App Review also told the developer that “full keyboard apps are not appropriate for Apple Watch,” while it continued to allow competitors to publish their own keyboard apps.
Apple’s App Review team also allowed third-party apps that were running FlickType’s integratable version of the keyboard to be approved without issues. These included Watch apps like Nano for Reddit, Chirp for Twitter, WatchChat for WhatsApp and Lens for Instagram.
The App Store has a big problem
You: an honest developer, working hard to improve your IAP conversions.
Your competitor: a $2M/year scam running rampant.1/
— Kosta Eleftheriou (@keleftheriou) January 31, 2021
After Apple approved FlickType in January 2020, the company claims it had already lost over a year of revenue to competitor keyboards that were not constantly being rejected. Nevertheless, FlickType reached the App Store’s Top 10 Paid app list and generated $130,000 in its first month. As a result of its success, it was quickly targeted by scammers who launched watered-down, barely usable competitors to the app, cutting into FlickType’s revenue. FlickType’s revenue dropped to just $20,000 per month. The competitors were also using fake ratings to get their app boosted and installed by unsuspecting users.
Eleftheriou’s story was not unique, as it turned out. In recent months, he has been documenting the App Store’s multimillion-dollar scams, including those he was facing as well as others brought to his attention by developers with similar struggles. Apple, in some cases, would take action against the scammers he highlighted on social media. In other cases, it would not. And it would sometimes only take down one of the developer’s scam apps, but allow others under the same developer account to continue to operate.
The new lawsuit aims to hold Apple accountable for the issues Eleftheriou faced by asking Apple to restore his lost revenue and pay out any other damages awarded by the court.
Apple has not responded for a request for comment at this time.
A copy of the lawsuit is below. It is not yet appearing in public record searches for verification purposes. We’ll follow up to confirm when the case appears online and update accordingly.
Kpaw, LLC v. Apple, Inc by TechCrunch on Scribd
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Apple hit with another European class action over throttled iPhones
A third class action lawsuit has been filed in Europe against Apple seeking compensation — for what Italy’s Altroconsumo consumer protection agency dubs “planned obsolescence” of a number of iPhone 6 models.
The action relates to performance throttling Apple applied several years ago to affected iPhones when the health of the device’s battery had deteriorated — doing so without clearly informing users. It later apologized.
The class action suit in Italy is seeking €60 million in compensation — based on at least €60 in average compensation per iPhone owner. Affected devices named in the suit are the iPhone 6, 6s, 6 Plus and 6s Plus, per a press release put out by the umbrella consumer organization Euroconsumers, which counts Altroconsumo as a member.
The suit is the third to be filed in the region over the issue — following suits filed in Belgium and Spain last month.
A fourth — in Portugal — is slated to be filed shortly.
The tech giant settled similar charges in the U.S. last year — where it was accused of intentionally slowing down the performance of older iPhones to encourage customers to buy newer models or fresh batteries — shelling out $500 million, or around $25 per phone, to settle that case (while denying any wrongdoing).
“When consumers buy Apple iPhones, they expect sustainable quality products. Unfortunately, that is not what happened with the iPhone 6 series. Not only were consumers defrauded, and did they have to face frustration and financial harm, from an environmental point of view it is also utterly irresponsible,” said Els Bruggeman, Euroconsumers’ head of policy and enforcement, in a statement.
“This new lawsuit is the latest front in our fight against planned obsolescence in Europe. Our ask is simple: American consumers received compensation, European consumers want to be treated with the same fairness and respect.”
Euroconsumers has produced a video (embedded below) to drum up wider support for the class actions in which it satirizes Apple’s “genius” in coming up with clever ways to accelerate its products’ end of life…
Apple has been contacted for comment on the European class actions.
Almost a year ago the company was fined €25 million by France’s competition watchdog over an iOS update that capped performance of aging devices. It was also made to display a statement regarding the action on its website for a month.
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P&G terminates plan to acquire razor startup Billie following FTC lawsuit
Procter & Gamble will not acquire women’s beauty products startup Billie, as previously planned, following action taken by the U.S. Federal Trade Commission to stop the deal from proceeding. In December, the FTC sued to block P&G’s acquisition of the New York-based startup Billie, a maker of women’s razors and other beauty products, on the grounds that the merger would eliminate competition in the wet shave razor market.
Today, P&G and Billie issued a joint statement, expressing their regret over the FTC’s decision to attempt to block their merger, which led to the deal’s termination:
We were disappointed by the FTC’s decision and maintain there was exciting potential in combining Billie with P&G to better serve more consumers around the world. However, after due consideration, we have mutually agreed that it is in both companies’ best interests not to engage in a prolonged legal challenge, but instead to terminate our agreement and refocus our resources on other business priorities.
Billie had made a name for itself in the women’s razor market by offering to eliminate the so-called “pink tax,” which refers to how women’s products are often marked up at higher price points compared with similar products aimed at men. It later expanded into the broader beauty market with a focus on more natural products that are free of additives and chemicals, including sulfates, parabens, formaldehydes, GMOs, drying alcohols, synthetic dyes, fragrances, cheap foaming agents, unstable silicones and BHT.
The startup was also particularly successful in capturing the interest of a younger, Gen Z to millennial-aged consumer, who responded to its mission as well as its modern, and often even progressive, marketing across social media and the web. In its advertisements, Billie would show women with body hair — a message that went against the grain of traditional societal expectations, where women are often shown in marketing messages — including razor ads — as already hairless and smooth.
Billie’s message was that women should feel free to do what they want about their body hair — but for those who prefer to shave, it would be happy to sell them an affordably priced razor.
What also made Billie interesting was its business model. The company offers to ship replacement blades on a subscription basis to its customers, which helped it grow revenues and customer loyalty.
Ahead of the P&G acquisition, Billie was planning to expand into physical retail stores, which would have made the brand a more direct competitor to P&G products, the FTC had said.
“As its sales grew, Billie was likely to expand into brick-and-mortar stores, posing a serious threat to P&G,” noted Ian Conner, director of the FTC’s Bureau of Competition, in a statement issued last month. “If P&G can snuff out Billie’s rapid competitive growth, consumers will likely face higher prices,” he added.
As a result of the FTC’s actions, the companies chose to put an end to their plans to merge as opposed to pursuing further legal action.
The FTC praised this decision in a release issued today. Reuters also reported on the companies’ decision to terminate.
“Procter & Gamble’s abandonment of the acquisition of Billie is good news for consumers who value low prices, quality, and innovation,” the FTC statement reads. “Billie is a direct-to-consumer company whose advertising targets customers who are tired of paying more for comparable razors. The FTC voted to challenge this merger because it would have eliminated dynamic competition from Billie.”
The FTC lawsuit was the second antitrust suit the agency filed in 2020 after it previously sued to block Edgewell Personal Care’s (maker of Schick razors) $1.37 billion deal to acquire the razor startup Harry’s, Inc., another direct-to-consumer brand. As a result, that deal fell through, too.
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VMware files suit against former exec for moving to rival company
Earlier this month, when Nutanix announced it was hiring former VMware COO Rajiv Ramaswami as CEO, it looked like a good match. What’s more, it pulled a key player from a market rival. Well, it seems VMware took exception to losing the executive, and filed a lawsuit against him yesterday for breach of contract.
The company is claiming that Ramaswami had inside knowledge of the key plans of his former company and that he should have told them that he was interviewing for a job at a rival organization.
“Rajiv Ramaswami failed to honor his fiduciary and contractual obligations to VMware. For at least two months before resigning from the company, at the same time he was working with senior leadership to shape VMware’s key strategic vision and direction, Mr. Ramaswami also was secretly meeting with at least the CEO, CFO, and apparently the entire Board of Directors of Nutanix, Inc. to become Nutanix’s Chief Executive Officer. He joined Nutanix as its CEO only two days after leaving VMware,” the company wrote in a statement.
As you can imagine, Nutanix didn’t agree, countering in a statement of its own that, “VMware’s lawsuit seeks to make interviewing for a new job wrongful. We view VMware’s misguided action as a response to losing a deeply valued and respected member of its leadership team. Mr. Ramaswami and Nutanix have gone above and beyond to be proactive and cooperative with VMware throughout the transition.”
At the time of the hiring, analyst Holger Mueller from Constellation Research noted that the two companies were primary competitors and hiring Ramawami was was a big win for Nutanix. “So hiring Ramaswami brings both an expert for multicloud to the Nutanix helm, as well as weakening a key competitor from a talent perspective,” he told me earlier this month.
Mueller doesn’t see much chance of the suit succeeding. “It’s been a long time since the last lawsuit happened in Silicon Valley [involving] a tech exec jumping ship. Being an ’employment at will’ state, these suits are typically unsuccessful,” he told me this morning.
He added, “The interesting part of the VMware v. Nutanix lawsuit is, does a high-ranking executive interviewing with a competitor equal a break of confidentiality by itself, or does material information have to be breached to reach the point. Traditionally the right to (confidentially) interview has been protected by the courts,” he said.
It’s unclear what the end game would be in this type of legal action, but it does complicate matters for Nutanix as it transitions to a new chief executive. Ramaswami took over from co-founder Dheeraj Pandey, who announced plans to leave the post last summer.
The lawsuit was filed Monday in Superior Court of the State of California, County of Santa Clara.
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Charge, please: Apple will pay $113M to settle 34-state ‘batterygate’ lawsuit
Apple has agreed to pay $113 million to 34 states and the District of Columbia to settle allegations that it broke consumer protection laws when it systematically downplayed widespread iPhone battery problems in 2016. This is in addition to the half billion the company already paid to consumers over the issue earlier this year and numerous other fines around the world.
The issue, as we’ve reported over the years, was that a new version of iOS was causing older (but not that old) iPhones to shut down unexpectedly, and that an update “fixing” this issue surreptitiously throttled the performance of those devices.
Conspiracy-minded people, which we now know are quite numerous, suspected this was a deliberate degradation of performance in order to spur the purchase of a new phone. This was not the case, but Arizona Attorney General Mark Brnovich, who led the multistate investigation, showed that Apple was quite aware of the scale of the issue and the shortcomings of its solution.
Brnovich and his fellow AGs alleged that Apple violated various consumer protection laws, such as Arizona’s Consumer Fraud Act, by “misrepresenting and concealing information” regarding the iPhone battery problems and the irreversible negative consequences of the update it issued to fix them.
Apple agreed to a $113 million settlement that admits no wrongdoing, to be split among the states however they choose. This is not a fine, like the €25 million one from French authorities; if Apple had been liable for statutory penalties those might have reached much, much higher than the amount agreed to today. Arizona’s CFA provides for up to $10,000 per willful violation, and even a fraction of that would have added up very quickly given the amount of people affected.
In addition to the cash settlement, Apple must “provide truthful information to consumers about iPhone battery health, performance and power management” in various ways. The company already made changes to this effect years ago, but in settlements like this such requirements are included so they can’t just turn around and do it again, though some companies, like Facebook, do it anyway.
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Epic Games founder Tim Sweeney likens fight against Apple to fight for civil rights
Earlier today, Apple announced it will reduce the App Store commissions for smaller businesses so that developers earning less than $1 million per year pay a 15% commission on in-app purchases, rather than the standard 30% commission.
Tim Sweeney, founder of Epic Games, says the move — an apparent reaction to current investigations into Apple by Congress, the European Union, the Justice Department and the Federal Trade Commission on antitrust grounds — doesn’t go nearly far enough. He told the Wall Street Journal that Apple is merely “hoping to remove enough critics that they can get away with their blockade on competition and 30% tax on most in-app purchases. But consumers will still pay inflated prices marked up by the Apple tax.”
Sweeney — whose company has been embroiled in a battle since launched a direct-payment system in its popular “Fortnite” game to bypass Apple’s fees — went even further today in conversation with Dealbook during a two-day event.
Asked about Epic’s fight with the tech giant — which began in August with its payment system, which led to Apple kicking Fortnite off the App Store, which led to Epic filing a civil lawsuit against Apple in the U.S. and more newly to begin legal proceedings against Apple in Australia using the same argument that Apple is acting monopolistically — Sweeney didn’t mince words. He even likened Epic’s ongoing campaign to the fight for civil rights in the U.S.
Epic vs. Apple
- Apple files breach-of-contract countersuit against Epic
- Apple terminates Epic Games’ App Store account
- Apple ordered to not block Epic Games’ Unreal Engine, but Fortnite to stay off App Store
- Epic files motion for injunction against Apple
- Epic Games launches a campaign (and lawsuit) against Apple
- Apple boots Fortnite from the App Store
Said Sweeney: “It’s everybody’s duty to fight. It’s not just an option that somebody’s lawyers might decide, but it’s actually our duty to fight that. If we had adhered to all of Apple’s terms and, you know, taken their 30% payment processing fees and passed the cost along to our customers, then that would be Epic colluding with Apple to restrain competition on iOS and to inflate prices for consumers. So going along with Apple’s agreement is what is wrong. And that’s why Epic mounted a challenge to this, and you know you can hear of any, and [inaudible] to civil rights fights, where there were actual laws on the books, and the laws were wrong. And people disobeyed them, and it was not wrong to disobey them because to go along with them would be collusion to make them status quo.”
While the analogy undoubtedly prompted some eye rolls by attendees, Apple’s announcement today suggests that Epic, which has itself evolving into a powerful and lucrative platform — one valued at $17.3 billion during in August following a $1.78 billion funding deal — is moving the needle, if slightly.
Consider that per a New York TImes report citing Sensor Tower data, Apple’s fee change will affect roughly 98% of the companies that pay Apple a commission — but those same developers account for less than 5% of App Store revenue. Apple reportedly derives the vast majority of its revenue from 2% of developers who will continue to pay it a 30% take.
The question is where it all ends. Interviewer Andrew Ross Sorkin noted that Epic has a price in its own app store, asking if there is any “fair price” in Sweeney’s mind that Apple could charge.
Sweeney noted that Epic itself pays 2% to 3% in transaction costs in developing countries, another 1% for payments support and “maybe 1%” of revenue to cover its bandwidth costs and suggested that an 8% Apple tax, as it has come to be called, might be acceptable in exchange for the service it provides to developers.
In fairness to Apple, Sorkin also observed that similar to Apple, Sweeney talks about “Fortnite” as a platform, one that is “right now not open; there’s not a competitive marketplace where others can effectively develop on top of [the] platform [to] create their own in-app purchases right now.” Sorkin asked if that might be changing.
Sweeney said the company is “moving in that direction.” Pointing to Fortnite Creative, a mode in Fortnite allows users to freely create content, he said that “tens of millions of creators are sharing their content with their friends and with the general public, and there’s a little bit of a business model there. But it’s in the very early stages of development.”
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Apple’s IDFA gets targeted in strategic EU privacy complaints
A unique device identifier that Apple assigns to each iPhone for third parties to track users for ad targeting — aka the IDFA (Identifier for Advertisers) — is itself now the target of two new complaints filed by European privacy campaign not-for-profit, noyb.
The complaints, lodged with German and Spanish data protection authorities, contend that Apple’s setting of the IDFA breaches regional privacy laws on digital tracking because iOS users are not asked for their consent for the initial storage of the identifier.
Noyb is also objecting to others’ being able to access the IDFA without prior consent — with one of its complainants writing that they were never asked for consent for third-party access yet found several apps had shared their IDFA with Facebook (per their off-Facebook activity page).
We’ve reached out to the data protection agencies in question for comment. Update: Spain’s AEPD confirmed it has received noyb’s complaint and said it will investigate — making no further comment at this stage.
While Apple isn’t the typical target for digital privacy campaigners, given it makes most of its money selling hardware and software instead of profiling users for ad targeting, as adtech giants like Facebook and Google do, its marketing rhetoric around taking special care over user privacy can look awkward when set against the existence of an Identifier for Advertisers baked into its hardware.
In the European Union there’s a specific legal dimension to this awkwardness — as existing laws require explicit consent from users to (non-essential) tracking. Noyb’s complaints cite Article 5(3) of the EU’s ePrivacy Directive, which mandates that users must be asked for consent to the storage of ad-tracking technologies such as cookies. (And noyb argues the IDFA is just like a tracking cookie but for iPhones.)
Europe’s top court further strengthened the requirement last year when it made it clear that consent for non-essential tracking must be obtained prior to storing or accessing the trackers. The CJEU also ruled that such consent cannot be implied or assumed — such as by the use of pre-checked “consent” boxes.
In a press release about the complaints, noyb’s Stefano Rossetti, a privacy lawyer, writes: “EU law protects our devices from external tracking. Tracking is only allowed if users explicitly consent to it. This very simple rule applies regardless of the tracking technology used. While Apple introduced functions in their browser to block cookies, it places similar codes in its phones, without any consent by the user. This is a clear breach of EU privacy laws.”
Apple has long controlled how third parties serving apps on its iOS platform can use the IDFA, wielding the stick of ejection from its App Store to drive their compliance with its rules.
Recently, though, it has gone further — telling advertisers this summer they will soon have to offer users an opt-out from ad tracking in a move billed as increasing privacy controls for iOS users — although Apple delayed implementation of the policy until early next year after facing anger from advertisers over the plan. But the idea is there will be a toggle in iOS 14 that users need to flip on before a third-party app gets to access the IDFA to track iPhone users’ in-app activity for ad targeting.
However, noyb’s complaint focuses on Apple’s setting of the IDFA in the first place — arguing that since the pseudonymised identifier constitutes private (personal) data under EU law they need to get permission before creating and storing it on their device.
“The IDFA is like a ‘digital license plate’. Every action of the user can be linked to the ‘license plate’ and used to build a rich profile about the user. Such profile can later be used to target personalised advertisements, in-app purchases, promotions etc. When compared to traditional internet tracking IDs, the IDFA is simply a ‘tracking ID in a mobile phone’ instead of a tracking ID in a browser cookie,” noyb writes in one complaint, noting that Apple’s privacy policy does not specify the legal basis it uses to “place and process” the IDFA.
Noyb also argues that Apple’s planned changes to how the IDFA gets accessed — trailed as incoming in early 2021 — don’t go far enough.
“These changes seem to restrict the use of the IDFA for third parties (but not for Apple itself),” it writes. “Just like when an app requests access to the camera or microphone, the plans foresee a new dialog that asks the user if an app should be able to access the IDFA. However, the initial storage of the IDFA and Apple’s use of it will still be done without the users’ consent and therefore in breach of EU law. It is unclear when and if these changes will be implemented by the company.”
We reached out to Apple for comment on noyb’s complaints but at the time of writing an Apple spokesman said it did not have an on-the-record statement. The spokesman did tell us that Apple itself does not use unique customer identifiers for advertising. Update: The company has now sent us this statement:
The claims made against Apple in this complaint are factually inaccurate and we look forward to making that clear to privacy regulators should they examine the complaint. Apple does not access or use the IDFA on a user’s device for any purpose. Our aim is always to protect the privacy of our users and our latest software release, iOS 14, is giving users even greater control over whether or not they want to allow apps to track them by linking their information with data from third parties for the purpose of advertising, or sharing their information with data brokers. Our practices comply with European law and support and advance the aims of the GDPR and the ePrivacy Directive, which is to give people full control over their data.
In a separate but related recent development, last month publishers and advertisers in France filed an antitrust complaint against the iPhone maker over its plan to require opt-in consent for accessing the IDFA — with the coalition contending the move amounts to an abuse of market power.
Apple responded to the antitrust complaint in a statement that said: “With iOS 14, we’re giving users the choice whether or not they want to allow apps to track them by linking their information with data from third parties for the purpose of advertising, or sharing their information with data brokers.”
“We believe privacy is a fundamental human right and support the European Union’s leadership in protecting privacy with strong laws such as the GDPR (General Data Protection Regulation),” Apple added then.
That antitrust complaint may explain why noyb has decided to file its own strategic complaints against Apple’s IDFA. Simply put, if no tracker ID can be created — because an iOS user refuses to give consent — there’s less surface area for advertisers to try to litigate against privacy by claiming tracking is a competitive right.
“We believe that Apple violated the law before, now and after these changes,” said Rossetti in another statement. “With our complaints we want to enforce a simple principle: trackers are illegal, unless a user freely consents. The IDFA should not only be restricted, but permanently deleted. Smartphones are the most intimate device for most people and they must be tracker-free by default.”
Another interesting component of the noyb complaints is they’re being filed under the ePrivacy Directive, rather than under Europe’s (newer) General Data Protection Regulation. This means noyb is able to target them to specific EU data protection agencies, rather than having complaints funnelled back to Ireland’s DPC — under the GDPR’s one-stop-shop mechanism for handling cross-border cases.
Its hope is this route will result in swifter regulatory action. “These cases are based on the ‘old’ cookie law and do not trigger the cooperation mechanism of the GDPR. In other words, we are trying to avoid endless procedures like the ones we are facing in Ireland,” added Rossetti.
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Europe’s top court says net neutrality rules bar ‘zero rating’
The European Union’s top court has handed down its first decision on the bloc’s net neutrality rules — interpreting the law as precluding the use of commercial ‘zero rating’ by Internet services providers.
‘Zero rating’ refers to the practice of ISPs offering certain apps/services ‘tariff free’ by excluding their data consumption. It’s controversial because it can have the effect of penalizing and/or blocking the use of non-zero-rated apps/services, which may be inaccessible while the zero rated apps/services are not — which in turn undermines the principal of net neutrality with its promise of fair competition via an equal and level playing field for all things digital.
The pan-EU net neutrality regulation came into force in 2016 amid much controversy over concerns it would undermine rather than bolster a level playing field online. So the Court of Justice of the EU (CJEU)’s first ruling interpreting the regulation is an important moment for regional digital rights watchers.
The #ECJ interprets, for the first time, the #EU regulation enshrining #InternetNeutrality with regards to the #Internet users’ rightshttps://t.co/ATb3CgbPxg
— EU Court of Justice (@EUCourtPress) September 15, 2020
Despite the existence of a net neutrality regulation, European carriers have continued offering packages that ‘zero rate’ certain apps, such as Facebook-owned WhatsApp, for example — raising questions over whether such offers comply with the rules. Today’s ruling suggests they do not.
In another example from Hungary, one of carrier Telenor’s 1GB data tariffs (screengrabbed below) touts unlimited domestic data consumption for a number of social apps, including Facebook, WhatsApp, Messenger, Instagram and Twitter — meaning all other apps/services are at a disadvantage as usage is throttled by the user’s 1GB allowance.
A Budapest court hearing two actions against Telenor, related to two of its ‘zero rating’ packages, made a reference to the CJEU for a preliminary ruling on how to interpret and apply Article 3(1) and (2) of the regulation — which safeguards a number of rights for end users of Internet access services and prohibits service providers from putting in place agreements or commercial practices limiting the exercise of those rights — and Article 3(3), which lays down a general obligation of “equal and non-discriminatory treatment of traffic”.
The court found that ‘zero rating’ agreements that combine a ‘zero tariff’ with measures blocking or slowing down traffic linked to the use of ‘non-zero tariff’ services and applications are indeed liable to limit the exercise of end users’ rights within the meaning of the regulation and on a significant part of the market.
“Such packages are liable to increase the use of the favoured applications and services and, accordingly, to reduce the use of the other applications and services available, having regard to the measures by which the provider of the internet access services makes that use technically more difficult, if not impossible. Furthermore, the greater the number of customers concluding such agreements, the more likely it is that, given its scale, the cumulative effect of those agreements will result in a significant limitation of the exercise of end users’ rights, or even undermine the very essence of those rights,” the court writes in a press release.
It also found that no assessment of the effect of measures blocking or slowing down traffic on the exercise of end users’ rights is required by the regulation, while measures applied for commercial (rather than technical) reasons must be regarded as automatically incompatible.
The full CJEU judgement is available here in French and Hungarian. (Update: And in English here.)
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