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From Antitrust Law Daily, December 10, 2014

Apple seeks judgment as a matter of law in iPod iTunes antitrust trial

By Linda O’Brien, J.D., LL.M.

In a class action suit by consumers, alleging that Apple unlawfully maintained its monopoly power in the market for portable digital music players, the consumers’ claims are effectively duty-to-deal claims that must fail, since Apple never engaged in a voluntary and profitable course of dealing, Apple argued in a motion for judgment as a matter of law filed in the federal district court in Oakland (The Apple iPod iTunes Antitrust Litigation, Case No. 4:05-cv-00037, December 10, 2014).

The consumers were individuals and businesses that purchased certain models of iPods from Apple. Apple provided to iPod owners the iTunes software program for loading and managing digital song files on their iPods, as well as for purchasing digital song downloads from Apple. One feature of iTunes and iPods was their use of a digital rights management ("DRM") system unique to Apple, called "FairPlay." FairPlay made certain iPods incapable of playing digital songs downloaded from online music stores other than Apple’s iTunes store.

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. Songs downloaded from Real's online music store mimic FairPlay, and thus made music purchased from Real playable on iPods. Apple issued an iTunes update that stopped Real’s ability to mimic FairPlay.

Duty to deal. Apple contends that its decision to design the iPod to work exclusively with iTunes, instead of interoperating with other software, was lawful and that it had no duty to deal with others in enabling or maintaining interoperability with the iPod. The U.S. Supreme Court has clearly stated that Apple, like all firms, has a long-recognized right to engage in a private business and exercise its own independent discretion as to parties with whom it will deal. The core of the plaintiffs’ case was that Apple was required to permit competitors to interoperate with its iPods, and it was improper for Apple to bring to market new products that were incompatible with a third-party application that put material on an iPod through reverse engineering. The plaintiffs’ theory has unfairly asked a jury to oversee innovation by technology companies and determine whether interoperability should have been permitted, Apple argues.

Causation and damages. The plaintiffs have failed to provide an evidentiary basis for causation and damages, according to Apple’s motion. The plaintiffs’ expert regression does not measure injury or damages from the challenged conduct, and there was no evidence Apple considered Real’s digital-song manager a competitive threat when making pricing decisions. The only feature challenged in the iTunes update was the keybag integrity check and it is undisputed that the keybag integrity was only part of a total redesign of Fairplay’s security architecture.

Business justification. Apple also contends that the iTunes updates were genuine product improvements. It noted that the courts have recognized a wide range of cognizable product improvements that immunize product designs from antitrust scrutiny. At trial, Apple presented evidence that the iTunes updates were product improvements that enhanced the security and reliability of iTunes.

Apple alleged that it had legitimate business justifications for its design changes. Apple’s integration of iTunes and iPod into a system incompatible with competing products was central to Apple’s business strategy of offering distinctive, high quality products to consumers, the company maintained. Apple asserted a legitimate interest in protecting its reputation of its DRM technology FairPlay so it can obtain additional content rights to movies, television shows, and books. Finally, Apple is subject to contractual obligation to secure record labels’ content and a secure DRM is critical for Apple to obtain additional content, Apple argued.

Attorneys: William A. Isaacson and John F. Cove, Jr. (Boies, Schiller & Flexner LLP) and David C. Kierman (Jones Day) for Apple Inc.

Companies: Apple Inc.

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