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From Antitrust Law Daily, September 29, 2014

Apple denied summary judgment in iPod iTunes antitrust litigation

By Peter Reap, J.D., LL.M.

Apple, Inc. was not entitled to summary judgment on the claim brought by a certified class that Apple unlawfully maintained its monopoly power in the market for portable digital music players in violation of Section 2 of the Sherman Antitrust Act, the federal district court in Oakland has decided (The Apple iPod iTunes Antitrust Litigation, September 26, 2014, Rogers, Y.). In addition, the court denied motions by both parties to exclude certain expert testimony.


The class of plaintiffs alleged that, after lawfully acquiring monopoly power in the market for portable digital music players with the introduction of the iPod, Apple violated Section 2 of the Sherman Act by unlawfully maintaining that power. The plaintiffs are a certified class of direct purchasers, specifically, individuals and businesses who purchased certain enumerated models of iPods directly from Apple between September 12, 2006 and March 31, 2009.

During the class period, Apple provided to iPod owners a software program for loading and managing digital song files on their iPods, as well as for purchasing digital song downloads from Apple. That program is "iTunes" and Apple's online music store is the "iTS." One feature of both iTunes and iPods during the class period was their use of a digital rights management ("DRM") system unique to Apple, called "FairPlay." FairPlay made certain iPods distributed during the class period incapable of playing digital songs downloaded from an online music store unless they had been downloaded from the iTS.

In July 2004, an Apple competitor in the online music market, third party Real Networks ("Real"), introduced a new version of its own digital-song manager, RealPlayer. RealPlayer included a feature called Harmony. Harmony made songs downloaded from Real's online music store mimic FairPlay, and thus made music purchased from Real playable on iPods.

Apple responded to Harmony by taking technological countermeasures to stop Harmony from mimicking FairPlay. First, in October 2004, Apple issued an iTunes update denominated "4.7." The 4.7 update, among other things, thwarted Harmony's ability to mimic FairPlay. The court previously held 4.7 to be a genuine product improvement and therefore lawful, and entered summary judgment in favor of Apple to the extent plaintiff's Section 2 claim rested on Apple's introduction of 4.7.

It is Apple's second instance of disabling Harmony that forms the basis of plaintiff's present Section 2 claim. Following Apple's release of 4.7, Real modified Harmony such that it could again mimic FairPlay and make any new songs purchased from Real's online music store playable on iPods. Thereafter, in September 2006, Apple released another iTunes update that introduced a variety of features while also disabling Harmony—namely, "7.0." In an earlier summary judgment order, the court found a triable issue of fact as to whether 7.0 was a genuine product improvement so as to not be anticompetitive. Apple's present motion seeks summary judgment on two different bases: (1) a lack of admissible evidence of antitrust impact, and (2) a lack of admissible evidence as to the definition of the relevant market, the court noted.

The plaintiffs charged that Apple's release of 7.0 unlawfully maintained Apple's monopoly in the market for portable digital media players by making demand for iPods less elastic. Specifically, the plaintiffs claimed that 7.0 resulted in an increased "lock-in" effect for iPod owners who purchased songs online. Lock-in, according to the plaintiffs' principal economics expert, "is a form of foreclosure that arises from actions that increase the cost to consumers of switching to a product that has better quality and/or a lower price." The plaintiffs offered expert opinion that Apple, by counteracting Harmony, "raised the cost of switching from iPods to competing portable digital media players by eliminating the ability of consumers to collect a library of downloads that could be played on all players."

These increased "switching costs," the plaintiffs argued, locked iPod owners into continuing to purchase iPods, notwithstanding the allegedly similar or better quality of and lower prices of competing products. They also locked out owners of non-iPod portable digital media players who had downloaded songs from the Real store. The effect of both lock-in and lock-out, the plaintiffs said, was to reduce competition in the market for digital portable music players and to reduce the price elasticity of iPods, which permitted Apple to charge a supracompetitive price therefor. According to the plaintiffs' expert, "[t]he damages in this case are the overcharge on iPods during the class period due to the incompatibility that was created by iTunes 7.0." The plaintiffs' expert estimated damages to the class of $351,631,153, "consisting of $148,947,126 for resellers, $194,655,141 for direct purchasers, and $8,028,886 for additional iPod sales from the additional transactions."

Apple contended that it is entitled to summary judgment because the plaintiffs lack admissible evidence of either antitrust impact or the relevant product market, both of which are required elements of the plaintiffs' Section 2 claim. Apple disputed the admissibility of the opinions of plaintiffs' principal economics expert, Professor Roger G. Noll. Noll conducted both (i) a complex statistical analysis that plaintiffs offered as proof of both the fact and the amount of antitrust damages suffered by the class, and (ii) an analysis of the relevant market. In response, Apple offered its own experts, Professors Kevin M. Murphy and Robert H. Topel, who criticized the design and execution of Noll's statistical analyses and fault his relevant market findings. The plaintiffs countered with rebuttal opinion from Noll, as well as opinion testimony from a second expert with special expertise in statistics, Professor Jeffrey M. Woodridge, whose opinions corroborated those of Noll.

Expert Opinions

The principal focus of Apple's motion to exclude expert testimony was a set of opinions offered by Noll as to both the fact and amount of antitrust damages suffered by the class, the court observed. These opinions have as their bases econometric analyses Noll performed on a dataset supplied by Apple. Noll's regressions purport to isolate the effect on iPod pricing attributable to Apple's release of 7.0 and the security feature embedded therein. According to the plaintiffs and Noll, that pricing effect is the illegal overcharge in this case, and constituted proof of both the fact of damages and their amount.

Apple submitted reports from Murphy and Topel, who purported to identify flaws in Noll's damages analysis that render it so unreliable as to be inadmissible under the familiar standard of Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993). Their three main criticisms were: Noll (i) failed to account for "clustering" problems in his regression analysis, (ii) omitted from his hedonic model certain variables that measure product attributes affecting iPod prices, and (iii) used the wrong "but-for" world to calculate damages by turning off the variable for 4.7 on the date that 7.0 was introduced. Apple also objected to Noll’s market definition.

Apple’s motion to exclude the opinions of Noll—regression model. The plaintiffs sought to demonstrate the required antitrust injury with Noll's regression model. As a threshold matter, the dataset relied upon by Noll, as the complete record of sales transactions for covered models of iPods during the class period, constituted sufficient data upon which to base expert testimony, the court held. The court also found that hedonic multiple-regression analysis is a sound and, indeed, commonplace method for isolating the pricing effects of alleged anticompetitive conduct.

Apple contended that Noll's regression model is inadmissible because: (i) it lacked a sufficient "fit" with the facts of the case, (ii) it did not account for all the relevant factors that affect iPod pricing, and (iii) it did not supply statistically significant results (once one modifies the model in the manner suggested by Apple's experts). After weighing Apple's objections carefully, none establish such a level of unreliability or unhelpfulness that would justify wholesale exclusion of Noll's opinions, the court determined. Rather, they went to the weight of Noll's opinions.

Apple's second proffered basis for excluding Noll's opinions centered on his supposed failure to account properly for relevant pricing factors. Here, Apple faulted Noll for leaving "on" throughout the entire class period a variable representing Apple's introduction of 4.7, for purportedly failing to account for the impact on price of aspects of 7.0 besides the allegedly anticompetitive security feature that disabled Harmony, and for failing to account for certain, though by no means all, of the product characteristics of iPods used in Noll's hedonic model. These criticisms did not persuade that Noll's regression analysis was so fundamentally unreliable as to warrant exclusion, according to the court. Noll supplied cogent reasons for his inclusions and exclusions. Apple's criticisms reflected mere disagreement with those reasons and, as such, they went to the weight that should be afforded Noll's opinions, not their admissibility.

Apple's third main reason for excluding Noll's opinions was that his regression, once "corrected" in the manner urged by Apple's experts, did not supply statistically significant results. However, the court was not persuaded, in light of Noll's rebuttal opinions and Wooldridge's opinions, that the battle between the economists of the University of Chicago school, on the one hand, and those from Stanford and Michigan State University, on the other, was properly resolved here. These issues were the province of experts to debate and a jury to resolve, the court said.

The question presented here was not whether Noll's analyses are correct, but whether they are the product of a generally accepted method for demonstrating both the fact and the amount of antitrust damages. In light of the opinions of Noll and Wooldridge, the results of Noll's regression analyses did meet the threshold of reliability necessary for admissibility, even if the proffered claim of accuracy strained credulity, the court held. Under these circumstances, the issue was more appropriately one of weight and credibility. Accordingly, the court denied Apple's Daubert motion insofar as it challenged the admissibility of Noll's regression analyses.

Apple’s motion to exclude the opinions of Noll—relevant market. The plaintiffs' Section 2 claim required them to prove the contours of the "relevant market" in which Apple allegedly used unlawful means to maintain its monopoly power. To prove their relevant market, the plaintiffs relied exclusively on the opinions of Noll, who undertook a lengthy analysis of both relevant markets asserted by the plaintiffs, respectively, portable digital media players and digital audio files.

Apple argued that Noll's opinion on these matters was inadmissible because he failed to conduct either a formal econometric analysis of cross-elasticity of demand or a "hypothetical monopolist" test. While such analyses could be possible or even desirable, Apple’s assertion that such formal tests were required lacked legal support, the court explained. Apple failed to persuade that Noll's opinion as to the relevant market must be excluded for lack of an accepted methodology. Accordingly, Apple's Daubert motion was denied on this ground.

Plaintiffs’ motion to exclude the opinions of Murphy and Topel. The plaintiffs sought to exclude only those opinions of Murphy and Topel bearing on clustering problems. As was the case with Murphy and Topel's criticisms of Noll's regression analysis, the plaintiffs' criticisms of Murphy and Topel's clustering opinions also went to weight, not admissibility, the court explained. Thus, the plaintiffs' Daubert motion to exclude the opinions of Murphy and Topel was denied.

Apple’s objections to the opinions of Wooldridge. Apple argued in its opposition that Wooldridge's opinions must be excluded as having been untimely disclosed and inadmissible under Daubert. The Court disagreed on both counts and Apple’s objections to the opinions of Wooldridge were overruled.

Plaintiff’s motion to strike. The plaintiffs moved to strike the Joint Report, that is, the supplemental report submitted jointly by Murphy and Topel in response to the Noll Merits Rebuttal. Permitting the Joint Report to stand, along with the Noll Supplemental Rebuttal, was harmless, given that Noll has responded to the Joint Report and the plaintiffs deposed both Murphy and Topel after they issued the Joint Report. Therefore, the motion to strike was denied.

Apple’s Motion for Summary Judgment

Apple contended that: (1) Real's "insignificant" share of less than 3 percent of the online music market in 2006, when Apple released 7.0, makes it "implausible" that Harmony could have the effect ascribed to it by plaintiffs; (2) "plaintiffs have no evidence regarding what portion of Real's small sales was to iPod owners or potential iPod purchasers;" (3) "plaintiffs have no proof of the number of people who became locked in or locked out" after 7.0; (4) plaintiffs have not identified evidence showing that Apple's pricing committee "took into account the amount of sales from [Real] or any other online store in setting iPod prices;" and (5) Apple always abides by an "aesthetic" pricing policy, by which Apple appears to mean a policy of setting prices in fifty-dollar increments, less one dollar (e.g., $199, $249, $399).

The court rejected these arguments because the admission of Noll's opinions alone supplied a triable issue of fact regarding the fact and amount of antitrust damages, as well as the definition of the relevant market. Apple's five grounds for entering summary judgment were insufficient bases upon which to enter summary judgment in the face of Noll's opinions, the court explained. Those opinions constituted relevant circumstantial evidence of both the fact and amount of damages upon which a jury applying a preponderance standard reasonably could find for the plaintiffs. Noll's opinions also supplied non-trivial evidence of the relevant market. Thus, Apple’s motion for summary judgment was denied.

Attorneys: Alexandra Senya Bernay (Robbins Geller Rudman and Dowd LLP) for Melanie Tucker. Amir Q. Amiri (Jones Day) for Apple Inc.

Companies: Apple Inc.

MainStory: TopStory Antitrust CaliforniaNews

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