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From Antitrust Law Daily, March 23, 2017

Significant portion of iPhone purchasers’ antitrust case against Apple is dismissed

By Robert B. Barnett Jr., J.D.

Purchasers of iPhones between 2008 and 2011 could sue Apple for a possible antitrust violation but only on a much narrower theory than the one they originally sought, the federal district court in Oakland has ruled. The purchasers could not pursue their primary claim that their purchase of the iPhones in the primary market locked them into purchasing voice and data services from AT&T in the secondary or aftermarket in violation of the antitrust laws because the purchase of the phone and the exclusive two-year commitment to AT&T—which they knew about when they bought the phone—was a single transaction that constituted the primary market. In this transaction, therefore, no secondary or aftermarket existed. The court did permit the iPhone purchasers, however, to pursue a possible antitrust claim that Apple may have manipulated a market for service plans by failing or refusing to unlock the phones for domestic or international use after the two-year commitment ended (Ward v. Apple Inc., March 22, 2017, Rogers, Y.).

Background. A putative class of purchasers of the iPhone between 2008 and 2011 sued Apple in the U.S. District Court for the Northern District of California, alleging that Apple violated Section 2 of the Sherman Act by conspiring to monopolize trade in the market for iPhone voice and data services. At the time, Apple had entered into an agreement with AT&T to sell iPhones exclusively through AT&T. Apple filed a motion to dismiss, which the court denied but said it would entertain as a motion for summary judgment on the sole issue of the existence of a relevant market for antitrust purposes. Two months later, Apple filed its motion for summary judgment, arguing that no such relevant market existed.

Antitrust market. To prove its antitrust claim, the iPhone purchasers had to prove that a "relevant market exists and that the defendant has power within that market" (Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1044 (9th Cir. 2008)). The iPhone purchasers contended that the relevant market was the secondary or aftermarket for iPhone voice and data services, which, they argued, Apple illegally monopolized by entering into its exclusivity arrangement with AT&T. In pursuing this theory, the purchasers were relying on the Supreme Court’s decision in Kodak v. Image Technical Services, Inc., 504 U.S. 451 (1992), which extended antitrust reach to derivative aftermarkets, under certain conditions. The iPhone purchasers, furthermore, were contending that their case fell within the "surprise" theory of antitrust aftermarkets, which holds that an antitrust violation could occur where buyers anticipated or relied on a competitive aftermarket but some act by the manufacturer blocked the competition.

The court, however, rejected those arguments. First, for a secondary or aftermarket to exist, the purchase of the phone and the purchase of voice and data services had to be separate transactions. In this case, that was not true. Those who purchased iPhones at that time knew that AT&T was the exclusive service provider for iPhones and that they would have to purchase a two-year commitment from AT&T to operate the phone. As a result, no secondary or aftermarket existed and no "surprise" occurred.

The iPhone purchasers also tried to argue that a "surprise" existed because Apple and AT&T had secretly reached a five-year exclusivity agreement, which meant that some purchasers would be forced when their two-year commitment ended to either give up their phones or extend the AT&T commitment beyond the original two years. Additional discovery in the case, however, revealed that the five-year exclusivity agreement never materialized.

Phone unlocking. In the discovery process, one of the iPhone purchaser’s expert witnesses offered a theory that an aftermarket may have existed after the two-year contract expired, which the court seized upon. The iPhone purchasers, the court said, have offered sufficient evidence to establish a possible claim that Apple may have engaged in antitrust behavior by failing or refusing to unlock its phones after the two-year commitment ended. If those who purchased iPhones wanted to continue using the phones after the two years expired, they needed the unlock codes from Apple. If Apple refused to supply those codes, Apple may have manipulated the aftermarket because those purchasers, without the codes, were faced with a choice of either continuing with AT&T or abandoning their phones.

As a result, the court granted Apple’s motion for summary judgment as it applied to the purchasers’ main claim that Apple committed antitrust violations in forcing purchasers into exclusive agreements with AT&T. The court also, however, denied Apple’s motion for summary judgment as it applied to a claim that Apple may have engaged in antitrust behavior involving the unlock codes after the two-year commitment ended.

The case is No. 12-cv-05404-YGR.

Attorneys: Alexander H. Schmidt (Wolf Haldenstein Adler Freeman & Herz LLP) for Zack Ward. Christopher S. Yates (Latham & Watkins LLP) for Apple Inc. Raymond Paul Bolanos (AT&T Services, Inc.) for AT&T Mobility.

Companies: Apple Inc.; AT&T Mobility

MainStory: TopStory Antitrust CaliforniaNews

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