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From Antitrust Law Daily, September 3, 2013

Dismissal of consumer’s antitrust action against Apple over iPod, iTunes practices upheld

By Jeffrey May, J.D.

The U.S. Court of Appeals in San Francisco today upheld dismissal of an antitrust action against Apple Inc., brought by a consumer who purchased an iPod at a retailer, seeking damages and injunctive relief (Somers v. Apple, Inc., September 3, 2013, Smith, M.).

The plaintiff had sought to represent a class of indirect purchasers of the iPod, Apple’s portable digital media player (PDMP), and a class of direct purchasers of music downloaded from Apple’s iTunes Music Store (iTS). She attempted to allege that Apple encoded iTS music files with its proprietary Digital Rights Management (DRM), called FairPlay, which rendered iTS music and the iPod compatible only with each other. Through certain software updates, Apple allegedly excluded competitors and obtained a monopoly in the PDMP and music download markets, which inflated Apple’s music prices and deflated the value of the iPod, according to the plaintiff.

Class certification. At the outset, the court refused to consider the named plaintiff’s challenge to the district court’s 2009 order denying her motion to certify a class of indirect purchasers of the iPod. Apple successfully argued that the decision was not properly before the court.

The plaintiff’s class claim was predicated on her individual claim for damages under section 2 of the Sherman Act based on inflated iPod prices. However, the plaintiff voluntarily abandoned her overcharge iPod claim when she asserted new theories based on diminution in iPod value and inflation of prices for music downloads. Because the plaintiff abandoned the individual claim for which she sought class certification, the issue of whether the district court erred in denying her motion to certify that claim for class treatment was waived.

Damages based on diminution in iPod value, overcharged music downloads. The appellate court also upheld dismissal of the plaintiff’s claims for damages based on theories that Apple’s restrictive updates diminished the iPod’s value and that Apple’s use of software updates inflated iTS music prices. The damages claims based on the deflated the value of the iPod were barred by Illinois Brick indirect purchaser rule, which bars suits for antitrust damages by customers who do not buy directly from a defendant. Direct purchasers were already seeking damages on the theory that the software upgrades inflated iPod prices, the court noted. Even if the Illinois Brick doctrine did not apply, the plaintiff’s claim failed because Apple’s purported anti-competitive conduct (use of software updates) predated her iPod purchase. Thus, Apple’s software updates after 2004 served to maintain the status quo—i.e., music downloaded from iTS can only be played on the iPod, and could not plausibly be the basis for diminishing the value of the iPod.

With respect to the plaintiff’s overcharge theory, it was alleged that Apple used software updates to thwart competitors and gain a monopoly in the music download market, which permitted Apple to charge higher prices for its music than it could have in a competitive market. However, the overcharge theory was implausible in the face of contradictory market facts alleged in the complaint, according to the court.

“The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers’ conclusory assertion that Apple’s software updates affected music prices,” the court noted. The plaintiff did not explain why, for instance, the 2008 entrance of large seller Amazon did not cause music prices to fall.

Injunctive claim for DRM-free music. Lastly, the plaintiff was not entitled to injunctive relief, requiring Apple to provide DRM-free versions for prior audio downloads. Apple charged 30 cents to “upgrade” previously purchased DRM-encoded music to FairPlay-free format.

The plaintiff had to allege facts showing that the remedy she sought was needed to prevent a threatened “antitrust injury.” An alleged inability to play her music freely was not an “antitrust injury” that affected competition, and could not serve as a basis for injunctive relief, the court concluded.

The case is No. 11-16896.

Attorneys: Craig Briskin (Mehri & Skalet, PLLC) for Stacie Somers. Craig E. Stewart (Jones Day) for Apple, Inc.

Companies: Apple, Inc.

MainStory: TopStory Antitrust CaliforniaNews

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