"The Apple iPod iTunes Anti-Trust Litigation"

Filing 345

REDACTION to Memorandum in Opposition to Apple's Motion to Dismiss or, Alternatively, for Summary Judgment by Melanie Tucker. (Sweeney, Bonny) (Filed on 3/22/2010) Modified on 3/23/2010 (cv, COURT STAFF).

Case5:05-cv-00037-JW Document345 Filed03/22/10 Page1 of 36 13 (Additional counsel appear on signature page.) 14 UNITED STATES DISTRICT COURT 15 NORTHERN DISTRICT OF CALIFORNIA 16 SAN JOSE DIVISION 17 20 ) OPPOSITION TO APPLE'S MOTIONY, FOR TO A TIVEL This Document Relates To: ) PLAINTIFFS' MEMORANDUM IN 19 ) ALL ACTIONS. ) DISMISS OR, AL TERN 18 LITIGATION ) THE APPLE IPOD ITUNES ANTI-TRUST ) Lead Case No. C-05-00037-JW(HRL) ) CLASS ACTION 21 ) SUMMARY JUDGMENT 22 23 Judge: Date: Time: Location: Hon. James Ware April 26, 2010 9:00 am 8, 4th Floor 24 REDACTED 25 26 27 28 SI128U Case5:05-cv-00037-JW Document345 Filed03/22/10 Page2 of 36 1 TABLE OF CONTENTS Page i. 2 3 INTRODUCTION ............................................................................................................... 1 4 5 II. STATEMENT OF FACTS ..................................................................................................2 A. Court's Prior Rulings...............................................................................................2 B. Plaintiffs' Amended Complaint Addresses the Court's Previous Concerns............3 III. APPLE'S MOTION TO DISMISS SHOULD BE DENIED ..............................................4 6 7 8 A. Motion to Dismiss Standards...................................................................................4 9 10 11 B. Plaintiffs Have Sufficiently Alleged the Elements of Monopolization ...................4 C. Plaintiffs Sufficiently Allege Apple Willfully Maintained Its Monopoly Power Through the Use of Software Updates..........................................................5 iv. 12 13 APPLE'S ALTERNATIVE MOTION FOR SUMMARY JUDGMENT SHOULD ALSO BE DENIED .................... ...................... .... .... .... ........... ....... ... ........ ... ..... ............. .....8 A. Summary Judgment Standards.................................................................................8 B. A Genuine Issue of 14 15 Material Fact Exists as to Whether Apple Used Software Updates to Willfully Maintain Its Monopoly Power ................................9 1. Apple Took Affirmative Steps to Prevent RealNetworks and 16 17 18 Others from Competing............................................................................... 9 a. Apple's SO~'Yare Updates Directed at RealNetworks Were Anticompetitive........... .... ... .......... ... .... ............... ...... ........ ................9 b. A Genuine Dispute Exists that Apple Acted 19 Anticompetitively Towards RealNetworks Even if Apple's Conduct Is Solely Analyzed as a Refusal to Deal.. ...................... ..13 2. Software Programs Intended to Create Interoperability ....... ..................... 1 6 20 21 V. FOR THE SAME REASONS, PLAINTIFFS ' STATE LAW CLAIMS SURVIVE..... ...19 22 A. Cartwright Act....................................................................................................... 1 9 23 B. Unfair Competition Law........................................ .................. ........................... ...20 24 C. California Consumers Legal Remedies Act...........................................................20 25 D. Common Law Monopolization ..............................................................................21 26 E. Should the Court Find that Plaintiffs' Federal Law Claims Do Not Raise 27 28 511281 I Material Fact, Plaintiffs Request the Court Decline to Exercise Jurisdiction Over the State Law Claims.................................................................2 1 Issues of PLTFS' MEMO IN OPPO TO APPLE'S MTD OR, ALTERNATIVELY, FOR SUMMARY JUDGMENT- -1C-05-00037-JW(HRL) Case5:05-cv-00037-JW Document345 Filed03/22/10 Page3 of 36 1 2 3 VI. Page SHOULD THE COURT REQUIRE ADDITIONAL FACTS, PLAINTIFFS REQUEST FURTHER DISCOVERY UNDER FED. R. CIV. P. 56(f) ...........................21 CONCLUSION ..................................................................................................................25 4 VII. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5I128U PL TFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- - II C-05-0003 7 -JW(HRL) Case5:05-cv-00037-JW Document345 Filed03/22/10 Page4 of 36 1 TABLE OF AUTHORITIES Page 2 3 CASES 4 5 Abbott Labs. v. Teva Pharms. USA. Inc.. 432 F. Supp. 2d 408 (D. DeL. 2006)...................................................................................1 0 6 7 8 Allied OrthoDedic Alliance Inc. v. Tvco Health Care GrouD LP. 592 F.3d 991 (9th Cir. 2010) .....................................................................................passim Anderson v. Libertv Lobbv. Inc.. 477 U.S. 242 (1986).......................................................................................................8,22 ASDen Skiinz Co. v. ASDen Hizhlands Skiinz Corv.. 9 10 11 472 U.S. 585 (1985).....................................................................................................14,15 Barovich Assocs.. Inc. v. Aura Svs.. Inc.. No. 96-55778.1998 WL 10747 (9th Cir. Jan. 9, 1998) ........................................................................................................22 12 13 Berkev Photo. Inc. v. Eastman Kodak Co.. 603 F.2d 263 (2d Cir. 1979).................................................................................................6 Bondi v. Jewels bv Edwar. Ltd. 267 CaL. App. 2d 672 (1968) ........................................................................................... ..19 CaL. ComDuter Prods.. Inc v. Intl Bus. Mach. Corv.. 14 15 613 F.2d 727 (9th Cir. 1979) .............................................................................................10 16 Celotex Corvo V. Catrett. 17 18 477 U.S. 317 (1986).............................................................................................................8 Cervantes v. United States. 330 F.3d 1186 (9th Cir. 1995) .............................................................................................4 19 20 21 Chamberlain GrouD. Inc. v. Skvlink Techs. Inc.. 381 F.3d 1178 (Fed. Cir. 2004)..........................................................................................16 Chavez V. WhirlDool Corv.. 93 CaL. App. 4th 363 (2001) ..............................................................................................20 22 23 Clark v. CaD. Credit & Collection Srvs.. Inc.. 460 F.3d 1162 (9th Cir. 2006) ...........................................................................................22 Clement v. Kaiser Found. Health Plan. Inc.. No. CV04-704 WJR (MCx) 2004 WL 3049753 (C.D. CaL. Dec. 17,2004) ...................................................................22 24 25 26 27 28 511281 I Cost Mzmt. Servs. v. Wash. Natural Gas. 99 F.3d 937 (9th Cir. 1996) .................................................................................................4 Crowe v. San Diezo. 593 F.3d 841 (9th Cir. 2010) ...............................................................................................8 PL TFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNATIVEL Y, FOR SUMMARY JUDGMENT- - III C-05-00037-JW(HRL) Case5:05-cv-00037-JW Document345 Filed03/22/10 Page5 of 36 1 2 3 Page Eastman Kodak Co. v. Imaze Tech. Srvs.. Inc.. 504 U.S. 451 (1992).............................................................................................................7 4 5 Foremost Pro Color Inc. v. Eastman Kodak Co.. 703 F.2d 534 (9th Cir. 1983) ...............................................................................5, 6, 10, 15 6 7 Hall v. Santa Barbara. 833 F.2d 1270 (9th Cir. 1986) .............................................................................................4 Harrell v. 20th Centurv Ins. Co.. 8 934 F.2d 203 (1991)...........................................................................................................21 Imaze Tech. Servs.. Inc. v. Eastman Kodak Co.. 9 10 903 F.2d 612 (9th Cir. 1990) .............................................................................................19 Imaze Tech. Srvs.. Inc. v. Eastman Kodak Co.. 11 125 F.3d 1195 (9th Cir. 1997) ...................................................................................6, 7,15 In re CiDro Cases I & II. 12 13 121 CaL. App. 4th 402 (CaL. Ct. App. 2004) ......................................................................21 14 15 Lexmark Int 'i. Inc. v. Static Control ComDonents. Inc.. 387 F.3d 522 (6th Cir. 2004) ............................................................................................. 1 7 Lowell v. Mother's Cake Cookie's Co. 79 CaL. App. 3d 13,23 (1978) ...........................................................................................20 16 Lukens v. Whitemarsh Vallev Countrv Club. 17 18 No. Civ.A. 02-1279. 2003 WL 22597529 (E.D. Pa. Nov. 5, 2003)........................................................................................................8 MetroNet Servs. Corvo v. Owest Corv.. 383 F.3d 1124 (9th Cir. 2004) ...........................................................................................15 19 20 Moore V. Jas. H Mathews & Co.. 473 F.2d 328 (9th Cir. 1972) ...............................................................................................5 21 22 23 Natural Gas Anti-Trust Cases I. II. III. & IV. Nos. 422 L 4224. 4226. 4228 2002 WL 31570296 (CaL. Sup. Ct. Oct. 16,2002) ............................................................21 Saxer v. PhiliD Morris. Inc.. 54 CaL. App. 3d 7 (CaL. Ct. App. 1975) .............................................................................19 24 25 Stearns Airvort EauiD. Co. v. FMC Corv.. 170 F.3d 518 (5th Cir. 1999) .............................................................................................22 Tele Atlas N V v. Navtea Corv.. No. C-05-01673 RS. 2008 \VL 4911230 (N.D. CaL. Nov. 13, 2008)....................................................................................................7 26 27 28 511281 I PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- - iVC-05-00037-JW(HRL) Case5:05-cv-00037-JW Document345 Filed03/22/10 Page6 of 36 1 2 3 Tucker v. ADDle ComDuter. Inc.. Page 493 F. Supp. 2d 1090 (N.D. CaL. 2007) ............................................................................ .15 4 United States v. Grinnell Corv.. 5 384 U.S. 563 (1966).............................................................................................................5 6 United States v. Microsofi Corvo . 253 F.3d 34 (D.C. Cir. 2001)...................................................................................7, 10, 12 7 United States v. Redwood Otv. 8 640 F .2d 963 (9th Cir. 1981) ...............................................................................................4 9 Verizon Commc 'ns Inc. V. Law Offices of Curtis V Trinko. LLP. 540 U.S. 398 (2004).................................................................................................7, 14, 15 10 Vinci v. Waste Mzmt.. Inc.. 11 36 CaL. App. 4th 1811 (1995) ............................... ................. .......................................... ..20 12 William 0. Gillev Enters.. Inc. v. Atlantic Richfield Co.. 588 F.3d 659 (9th Cir. 2009) ...............................................................................................4 13 STATUTES, RULES AND REGULATIONS 14 17 U.S.c. 15 & 120l(a)(2)(A) & 1201 (b )(1 )(A)................................................................................................................... 1 6 16 &1201(f)(1).........................................................................................................................17 1201 (f)( 4) ......................................................................................................................... 1 7 17 Federal Rules of Appellate Procedure 18 Rule 36-3 ............................................................................................................................22 19 Federal Rule of Civil Procedure Rule 12( c ).............................................................................................................................2 20 Rule 12(b)(6)....................................................................................................................5,8 Rule 23(b)(2)....................................................................................................................2,3 21 Rule 23(b)(3)....................................................................................................................2,3 Rule 30(b)(6)......................................................................................................................23 22 Rule 56(c)(2)........................................................................................................................8 Rule 56(f) ................................................................................................................... passim 23 Rule 56( e )(2) ............. ..... .......................... ......... ............................. ......................................8 24 California Business & Professions Code & 16700 ...............................................................................................................................19 25 17200 ............................................................................................................................... 1 9 26 27 28 511281 i PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- - vC-05-0003 7 -JW(HRL) Case5:05-cv-00037-JW Document345 Filed03/22/10 Page7 of 36 1 2 3 California Civil Code Page &1750 .................................................................................................................................19 4 & 1760..................................................................................................................................20 l 770..................................................................................................................................20 5 SECONDARY AUTHORITIES 6 7 1357 5 Charles Alan Wright & Arthur R. Miller. Federal Practice and Procedure .......................................4 2004)...................................................................... (3ded. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 511281 I PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- - vi C-05-00037-JW(HRL) Case5:05-cv-00037-JW Document345 Filed03/22/10 Page8 of 36 1 Plaintiffs Somtai Charoensak, Mariana Rosen, and Melanie Tucker (collectively "Plaintiffs") 2 submit this memorandum oflaw in opposition to Apple, Inc.'s Motion to Dismiss or, Alternatively, 3 For Summary Judgment ("Apple's Motion"). 4 I. INTRODUCTION 5 Apple misconstrues Plaintiffs' allegations in an attempt to dismiss the action and 6 alternatively brings a premature and unsupported motion for summary judgment. Apple's only 7 argument in support of its motion to dismiss is that Plaintiffs' Section 2 monopoly claims are no 8 different than the Section 1 claims previously dismissed. According to Apple, Plaintiffs' current 9 complaint only contests the lack ofinteroperability between Apple's products and its competitors. 10 However, Plaintiffs clearly allege Apple abused its monopoly power by issuing unnecessary, non- 11 improving software updates that provided no benefit to consumers but were solely intended to 12 exclude competition from the markets and more fully entrench Apple's monopolies. Ninth Circuit 13 precedent plainly supports upholding these allegations as violations of Section 2. Accordingly, 14 Apple's motion to dismiss must be denied. 15 Apple's alternative motion for summary judgment similarly fails because it is unsupported by 16 law and facts. The evidence adduced so far contradicts Apple's claims that the software updates it 17 used to exclude competition in the relevant markets were required by the record labels or necessary 18 to ensure the security of Apple's products. Instead, the evidence shows that Apple issued those 19 updates on its own accord, for the purpose of excluding competition, and not because it was 20 compelled to do so by the record labels or security concerns. Moreover, Apple completely overlooks 21 Ninth Circuit and Supreme Court precedent supporting Plaintiffs' claims. For the reasons set forth 22 below, Apple's alternative motion for summary judgment should be denied. 23 Moreover, an adequate factual record has yet to be developed through discovery. Indeed, as 24 odd as it sounds, Apple has filed a motion that requires Plaintiffs to show evidence of genuine issues 25 of material fact concerning Apple's use of software updates, yet Apple has failed to complete its 26 discovery response on this issue. Apple cannot have its cake and eat it too. Apple cannot refuse to 27 produce material evidence directly related to the issues in its motion and also hope to succeed on the 28 motion. While Plaintiffs believe the current record supports a denial of Apple's alternative motion 511281 I C-05-00037-JW(HRL) - 1 PL TFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNATIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page9 of 36 1 for summary judgment in its entirety, should the Court be inclined to rule in favor of Apple on this 2 motion, Plaintiffs' seek additional discovery under Rule 56(f) of the Federal Rules of Civil 3 Procedure. 4 II. 5 STATEMENT OF FACTS A. Court's Prior Rulings 6 On December 22, 2008, the Court certified Plaintiffs' monopolization, attempted 7 monopolization, and related state law claims. Dkt. NO.1 96 at 1 -2. The Court however, declined 8 certification of Plaintiffs' Section 1 tying claim. Dkt. NO.2 1 3 at 2. Instead, the Court invited a 9 dispositive motion by Apple with regard to Plaintiffs' tying claim on two discrete issues: 10 (1) Can coercion sufficient to support a Section 1 tying claim exist where there is no requirement that the tying product and tied product be purchased together? 11 12 individual consumer of the tied product must prove that he or she was forced to purchase the tied product? 13 (2) Must such coercion be proved on an individual basis, such that each Dkt. No. 196 at 7. 14 On May 15, 2009, the Court granted in part Defendant's Motion for Judgment on the 15 Pleadings, dismissed Plaintiffs' per se tying claim under the Sherman Act and related state law 16 claims, and invited Defendant to file an additional Rule i 2( c) motion regarding the viability of 17 Plaintiffs' tying claim under a rule of reason analysis. Dkt. No. 213 at 10. On October 30, 2009, the 18 Court dismissed Plaintiffs' remaining tying claims and held that technological interoperability 19 between iPods and Apple's iTS files was not by itself anticompetitive and thus, did not constitute 20 tying. Dkt. No. 274 at 10. 21 The Court also requested additional briefing concerning the definition of the certified Class. 22 On December 21,2009, the Court sua sponte decertified the Rule 23(b )(2) and Rule 23(b )(3) classes 23 in order to provide Plaintiffs the opportunity to reallege their monopolization claims to more 24 specifically define the putative classes. Dkt. No. 303 at 2-3. 25 The Court made clear that decertification was not dependent on the grounds raised by Apple 26 in its motions, but rather "only to ensure that a proper class would be defined in light of (its) Order." 27 Id. at 2 n.6. In so doing, the Court requested that Plaintiffs draw a distinction between the 28 511281 I C-05-00037-JW(HRL) - 2 PL TFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page10 of 36 1 anticompetitive acts identified in Plaintiffs' consolidated complaint ("CC") and the dismissed tying 2 allegations. Dkt. No. 303 at 10. Specifically, the Court sought clarification as to whether Plaintiffs 3 were basing their monopoly claims solely on technological decisions made by Apple before the 4 products were introduced to the market or whether Plaintiffs allege that Apple gained or maintained 5 monopoly power through subsequent additional anticompetitive conduct. Id. Accordingly, Plaintiffs 6 addressed the Court's concerns and amended their allegations to demonstrate that Apple acted 7 anticompetitively to maintain its monopoly power after the iPod and iTS files were introduced. 8 B. Plaintiffs' Amended Complaint Addresses the Court's Previous Concerns 9 Plaintiffs have addressed this Court's primary concern regarding the interweaving of 10 allegations related to "technology decisions.. . made before the products were first introduced" with made to maintain a monopoly." Dkt. 11 those allegations related exclusively to "technology changes.. . 12 No. 303 at 10. Plaintiffs' Amended Consolidated Complaint ("Amended Complaint") clearly states 13 that Apple used its proprietary DRM "FairPlay" to achieve monopolies in the Portable Digital Media 14 Player Market and the Audio Download Market. i ~~38-51. Thereafter, Plaintiffs sufficiently allege 15 that Apple issued software updates to thwart compatibility with competitors' products, thereby 16 shutting out the competition and further entrenching the monopolies it had achieved through the 17 use of FairPlay. ~~3-4, 52-67. The Amended Complaint describes several courses of conduct and anti 18 competitive actions 19 taken by Apple to maintain the monopolies it had achieved, including: 20 21 . In October of 2004, Apple updated its iPod and iTunes software to prevent songs downloaded from RealNetworks' music store from being played on iPods. Apple 22 23 implemented these updates even though RealNetworks sold its Audio Downloads with DRM protection that ensured the files could not be improperly copied but also allowed for increased compatibility with other Portable Digital Media Players, including the iPod. ~~53-61. 24 25 . Beginning in 2005, Apple issued software updates to prevent iTS files that were made interoperable through the use of the JHymn software program from being played on other competing Portable Digital Media Players. Specifically, the October, 2005 issuance of "iTunes 6.0" and the September 2006 issuance of "iTunes 7.0" 26 27 i 28 5I128U All references to "~" and "~~" are to the Amended Complaint, unless otherwise noted. C-05-00037-JW(HRL) - 3 PL TFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNATIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page11 of 36 1 which were specifically designed to render JHymn and other similar programs ineffective. ~~63-67. 2 3 . 4 5 These software updates, which were intended to and had the effect of thwarting interoperability, did not provide any new benefit to consumers. Instead, these updates harmed consumers by foreclosing competition. Even Apple concedes that the updates did not further their alleged purpose, which purportedly was to prevent piracy. ~~60, 67. Additionally, Plaintiffs' Amended Complaint aptly demonstrates the anti competitive intent of 6 Apple's actions, and the resulting harm to competition and innovation. ~~81-88. Plaintiffs allege 7 that Apple's anti competitive conduct deterred iPod owners from doing business with any of its 8 competitors and allowed Apple to charge supracompetitive prices. ~~82, 83. 9 III. APPLE'S MOTION TO DISMISS SHOULD BE DENIED 10 A. Motion to Dismiss Standards 11 "It is axiomatic that 'the motion to dismiss for failure to state a claim is viewed with disfavor 12 and is rarely granted.'" Hall v. Santa Barbara, 833 F.2d 1270, 1274 (9th Cir. 1986). Thus, "it is 13 only the extraordinary case in which dismissal is proper." United States v. Redwood City, 640 F.2d 14 963, 966 (9th Cir. 1981); 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and 15 Procedure i 357 (3d ed. 2004). When considering a motion to dismiss, a court must accept as true 16 the complaint's allegations and reasonable inferences to be drawn from them. Cervantes v. United 17 States, 330 F.3d 1186, 1187 (9th Cir. 1995). A court may not dismiss an antitrust complaint for 18 failure to state a claim if plaintiff has stated a claim that is "'plausible' in light of basic economic 19 principles." William 0. Gilley Enters., Inc. v. Atlantic Richfield Co., 588 F.3d 659, 662 (9th Cir. 20 2009). Here, Apple fails to demonstrate that Plaintiffs' claims are not plausible under the antitrust 21 laws. 22 B. Plaintiffs Have Sufficiently Alleged the Elements of Monopolization 23 Plaintiffs sufficiently allege all three elements of their monopolization claim: (1) defendant 24 possesses monopoly power in the relevant markets; (2) defendant has willfully acquired or 25 maintained that power; and (3) defendant's conduct has caused antitrust injury. See Cst Mgmt. 26 Servs. v. Wash. Natural Gas, 99 F.3d 937,949 (9th Cir. 1996). 27 28 5I128U C-05-00037-JW(HRL) - 4 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- Case5:05-cv-00037-JW Document345 Filed03/22/10 Page12 of 36 1 Apple concedes that Plaintiffs have alleged the first and third elements. See Apple's Motion 2 at 8. Importantly, Apple does not dispute the sufficiency of Plaintiffs' claims that Apple possessed 3 monopoly power in the relevant markets, or that Apple used that monopoly power to cause antitrust 4 injury by charging supracompetitive prices and excludirig competition. ~~l 7, 18, 27, 28, 81-88. 5 Apple only contends that Plaintiffs have not sufficiently alleged that Apple willfully maintained that 6 monopoly power. See United States v. Grinnell Corp., 384 U.S. 563,570-71 (1966); Moore v. las. 7 H Mathews & Co., 473 F.2d 328, 332 (9th Cir. 1972). As discussed below, Plaintiffs have 8 sufficiently alleged such conduct and thus, Apple's Rule 12(b)(6) motion should be denied. 9 10 c. Plaintiffs Sufficiently Allege Apple Willfully Maintained Its Monopoly Power Through the Use of Software Updates Apple's only argument for dismissal under Rule 12(b)(6) is that Plaintiffs' claims in their 11 Amended Complaint are the same as those previously dismissed. Apple couches Plaintiffs' 12 Amended Complaint as contesting the lack of interoperability between Apple's products and its 13 competitors' products. Apple's Motion at 8. This is not what Plaintiffs allege. Plaintiffs contend 14 that Apple used FairPlay to obtain its monopoly power in the relevant markets, and then unlawfully 15 maintained that power by issuing unnecessary software updates that did not improve the product in 16 any way but rather served solely to further entrench Apple's monopoly power and exclude 17 competition. ~~ 52-63. It is not "(t)he increased convenience of using the two products together" its monopoly power 18 (Apple's Motion at 8-9) that Plaintiffs complain of, but rather, Apple's abuse of 19 and subsequent anti competitive conduct that prevented competition on the merits and restricted 20 consumer choice. ~~82-88. 21 Foremost Pro does not offer Apple support. As Apple correctly points out (but ignores), 22 Foremost Pro addressed "the introduction of technologically related products," not subsequent 23 anticompetitive changes to those products as alleged here. Foremost Pro Color Inc. v. Eastman 24 Kodak Co., 703 F.2d 534, 544 (9th Cir. 1983).2 In Foremost Pro, the court found that defendant's 25. introduction of a new camera, film and processing system that was inoperable with film and 26 27 2 Unless otherwise noted, emphasis is added and citations are omitted. 28 5I128U C-05-00037-JW(HRL) - 5 PL TFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNATIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page13 of 36 1 processing materials sold by competitors was not anticompetitive in and of itself. Id. at 544-45. 2 Because plaintiff challenged the mere introduction of the products, the court never had the 3 opportunity to consider the legality of subsequent, non-improving product changes intended to 4 exclude competition once monopoly power was achieved. Id. at 542 n.4 (noting that when defendant 5 introduced the camera system there were no interoperable competing products on the market because 6 the new technology was unknown to competitors). 7 Here, Plaintiffs do not allege that Apple's mere introduction of the technologically related 8 iPod and iTS files was anticompetitive in and of itself. Rather, Plaintiffs contend that Apple used the 9 technological relationship created by FairPlay to obtain overwhelming monopoly power in the 10 relevant markets and then took additional steps to further entrench its monopolies through the use of 11 unnecessary, non-improving software updates intended to exclude competition and further restrict 12 consumer choice. ~~38-67. Apple did not compete on the merits. Instead, Apple abused its 13 monopoly power and intentionally excluded competition when it was achieved. ~~82-88. 14 Plaintiffs' claims are thus directly analogous to the Section 2 violations recognized by the 15 Ninth Circuit in Image Tech. Srvs., Inc. v. Eastman Kodak Co., 125 F .3d 1 195, 1217 (9th Cir. 1997), 16 and, more recently, in Allied Orthopedic Alliance Inc. v. Tyco Health Care Group LP, 592 F.3d 991 17 (9th Cir. 2010). In Eastman Kodak, the Ninth Circuit affirmed the jury's finding that Kodak violated 18 Section 2 by taking steps to exclude independent service organizations ("IS Os") from competition in 19 the market for servicing Kodak copying machines. "Section 2 of the Sherman Act prohibits a 20 monopolist's unilateral action. . . if that conduct harms the competitive process in the absence of a 21 legitimate business justification." Eastman Kodak, 125 F .3d at 1209. Just as Apple does here, 22 Kodak argued that it was entitled to exclude competitors from the service market in order to protect 23 its intellectual property rights. Id. at 1214-20. However, the jury rejected Kodak's purported 24 business justification as pretextual. Id. at 1218-19. Similarly, as Plaintiffs allege in their Amended 25 Complaint, and as the evidence adduced so far demonstrates (see below), Apple's software updates- 26 which did not improve the product - were motivated by a desire to exclude competition, not to 27 protect intellectual property rights or prevent piracy. ~~60, 67. Apple's alleged procompetitive 28 justification is pretextual and cannot support a motion to dismiss. See Berkey Photo. Inc. v. Eastman 5I128U C-05-00037-JW(HRL) - 6 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNA TIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page14 of 36 1 Kodak Co., 603 F.2d 263, 286 n.30 (2d Cir. 1979) (product introductions are not immune from 2 antirust scrutiny); Verizon Commc 'ns Inc. v. Law Offices of Curtis V Trinko, LLP, 540 U.S. 398, 3 408 (2004) ("Under certain circumstances, a refusal to cooperate with rivals can constitute 4 anti competitive conduct and violate Section 2."). 5 The Ninth Circuit recently affirmed these principles in Tyco. There, the court distinguished 6 between a monopolist's design change that "improves a product by providing a new benefit to 7 consumers" from one that serves no purpose "other than protecting (the defendant's) monopoly." 8 Tyco, 592 F .3d at 998-99. While the former does not violate Section 2 unless the product innovation 9 is accompanied by additional anti competitive conduct, the latter "may constitute an unlawful means 10 of maintaining a monopoly under Section 2." Id. at 998 (citing United States v. Microso.fi Corp., 253 11 F.3d 34,65-67 (D.C. Cir. 2001)). Plaintiffs allege just that - Apple's software updates served no 12 purpose other than to protect Apple's monopolies by excluding competition, and therefore violate 13 Section 2. ~~38-67. 14 Finally, even assuming Apple's initial introduction of FairPlay was legal, its subsequent use 15 of software updates intended to exclude competition on the merits is not a fortiori permitted under 16 the antitrust laws as Apple would like this Court to find. Apple's Motion at 10. Under Section 2, 17 "'behavior that might otherwise not be of concern to the antitrust laws - or that might even be 18 viewed as pro competitive - can take on exclusionary connotations when practiced by a 19 monopolist.'" Eastman Kodak, 125 F.3d at 1217 (quoting Eastman Kodak Co. v. Image Tech. Srvs., 20 Inc., 504 U.S. 451,488 (1992)); see also Tele Atlas N V v. Navteq Corp., No. C-05-01673 RS, 2008 21 WL 4911230, at *2 (N.D. CaL. Nov. 13,2008) ("What matters is whether the 'synergistic effect' of 22 the alleged conduct is to harm competition, and thus perpetuate a monopoly."). Moreover, Apple is 23 not immune from antitrust scrutiny because FairPlay was proprietary or was used in part to protect 24 intellectual property interests. Eastman Kodak, 125 F .3d at 1219 ("Neither the aims of intellectual 25 property law, nor the antitrust laws justify allowing a monopolist to rely upon pretextual business 26 justification to mask anticompetitive conduct."). 27 For these reasons, Apple's motion to dismiss should be denied. 28 5I128U PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- C-05-00037-JW(HRL) - 7 - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page15 of 36 1 iv. 2 3 APPLE'S ALTERNATIVE MOTION FOR SUMMARY JUDGMENT SHOULD ALSO BE DENIED Recognizing the weakness of its Rule 1 2(b)( 6) argument, Apple prematurely moves for summary judgment on all of Plaintiffs' claims. This motion should also be denied. 4 A. Summary Judgment Standards 5 A court cannot grant summary judgment unless the moving party shows there is "no genuine 6 issue as to any material fact and that the movant is entitled to judgment as a matter oflaw." Fed. R. 7 Civ. P. 56(c)(2). To properly oppose a motion for summary judgment, the non-moving party must 8 simply "set out specific facts showing a genuine issue for triaL." Fed. R. Civ. P. 56(e)(2); see also 9 Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Because of the dispositive nature of the 10 summary judgment remedy, "(t)he evidence ofthe nonmovant is to be believed, and all justifiable 11 inferences are to be drawn in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); 12 see also Crowe v. San Diego, 593 F .3d 841, 862 (9th Cir. 2010) (same). "If reasonable minds could 13 differ as to the import of the evidence," summary judgment must be denied. Anderson, 477 U.S. at 14 250-51. 15 The Court's "function is not (itself) to weigh evidence and determine the truth of the matter 16 but to determine whether there is a genuine issue for triaL." Id. at 249. "The standard for summary 17 judgment is not whether a plaintiff would win should a case proceed to trial, but whether the 18 Defendant has proved that no issues of material dispute exist." Lukens v. Whitemarsh Valley 19 Country Club, No. Civ.A. 02-1279, 2003 WL 22597529, at *3 (E.D. Pa. Nov. 5,2003). Thus, while 20 Plaintiffs may ultimately bear the burden of proving every element of their monopolization claims at 21 trial, they do not have to prove monopolization at summary judgment. Instead, Plaintiffs need only 22 show there is a genuine issue of material fact concerning whether Apple unlawfully monopolized the 23 relevant markets. 24 Here, Apple failed to demonstrate that no material dispute exists with regard to whether 25 Apple willfully maintained its monopoly power of the relevant markets and thus, its alternative 26 motion for summary judgment should be denied. 27 28 5I128U C-05-00037-JW(HRL) - 8 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNATIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page16 of 36 1 B. A Genuine Issue of Material Fact Exists as to Whether Apple Used Software Updates to Willfully Maintain Its Monopoly Power 1. 2 3 Apple Took Affirmative Steps to Prevent RealNetworks and Others from Competing 4 Apple argues that its software updates intended to disable RealNetworks were not 5 anti competitive because they were an improved product design permitted under Section 2. Apple 6 further contends that it was not required to "accommodate" RealNetworks when it updated its 7 software. Apple's Motion at 12-13. As discussed below, both arguments fail under Ninth Circuit 8 and Supreme Court legal precedent and Plaintiffs have established that a material dispute exists. 9 10 a. Apple's Software Updates Directed at RealNetworks Were Anticompetitive Apple argues that the software updates that disabled RealNetworks' Harmony were really an 11 improved design of FairPlay and thus under Ninth Circuit case law, did not violate Section 2. 12 Apple's Motion at 13. This legal theory fails because Ninth Circuit law is clear that modified 13 product designs are only afforded deference when they provide an added benefit to consumers or are 14 otherwise supported by procompetitive justifications. See Tyco, 592 F.3d at 998-99. Plaintiffs here 15 have presented material evidence sufficient to demonstrate that a material dispute exists concerning 16 whether Apple's software updates provided any added benefit to consumers or were otherwise 17 justified. 18 In Tyco, the Ninth Circuit held that "a design change that improves a product by providing a 19 new benefit to consumers does not violate Section 2 absent some associated anticompetitive 20 conduct." Tyco, 592 F.3d at 998-99. There, plaintiffs alleged that defendant's introduction of 21 redesigned pulse oximetry monitor and compatible sensors violated Section 2 because only 22 defendant's new sensors were compatible with defendant's new monitors. Id. at 994. Defendant 23 redesigned its old monitor and sensor products so that the digital memory chip would be located in 24 the monitor as opposed to the sensors. Id. This new design allowed defendant to add features to the 25 sensors, such as the ability to store patient information and inform physicians of possible causes of 26 signal interruption, and also reduced the cost to customers. Id. Although defendant discontinued the 27 28 511281 I C-05-00037-JW(HRL) - 9 PL TFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page17 of 36 1 old design, prior purchasers of the old design were still able to use these products because generic 2 compatible sensors and monitors were available from competitors. Id. at 1001. 3 The Ninth Circuit found that because defendant's new products "provided some new benefit 4 to consumers and thus constituted an improvement" and defendant did not otherwise act 5 anticompetitively by forcing customers to purchase the new products, defendant did not violate 6 Section 2. Id. at 1000-02; see also CaL. Computer Prods., Inc v. Intl Bus. Mach. Corp., 613 F.2d 7 727, 744 (9th Cir. 1979) (holding that IBM did not violate Section 2 because it "had the right to 8 redesign its products to make them more attractive to buyers whether by reason of lower 9 manufacturing cost and price or improved performance"); Foremost Pro, 703 F.2d at 545 (finding 10 defendant's introduction of a redesigned camera and film system did not violate Section 2 because it 11 was a new and improved design); cf Microso.fi, 253 F .3d at 65-67 (integration of browser excluded 12 competition but did not improve product and so violated Section 2); Abbott Labs. v. Teva Ph arms. 13 USA, Inc., 432 F. Supp. 2d 408, 423 (D. DeL. 2006) (upholding Section 2 claims alleging defendant's 14 introduction of new drug and discontinuation of old drug was motivated by anti competitive 15 intentions and did not provide any added medical benefit to consumers).3 16 By contrast here, Apple does not contend - because it cannot - that the relevant software 17 updates provided any "new benefit to consumers." This is because Apple would be forced to argue both iTS files 18 that updating the FairPlay technology to make it more rigorous benefited purchasers of 19 and iPods. 20 21 22 ; id. at 12 ("Apple was entitled to agree to the labels' demand. . . ."). Even 23 more telling is that Apple now sells all of its iTS files without any DRM and has marketed this as a 24 product improvement. See Declaration of Thomas R. Merrick in Support of Plaintiffs' Opposition to 25 26 3 Plaintiffs do not contend that the Court should engage in a weighing ofthe anti-competitive 27 effectssof Apple's softwaresoftwarewith its could hardly be considered an "improved product design." update update benefits. See Apple's Motion at 15. This is because, as discu sed above, Apple's 28 5I128U C-05-00037-JW(HRL) - 10PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- Case5:05-cv-00037-JW Document345 Filed03/22/10 Page18 of 36 1 Apple's Motion to Dismiss or, Alternatively, for Summary Judgment, filed concurrently ("Merrick 2 Decl."), Ex. 1. . 3 Instead of arguing that the software updates provided a new benefit to consumers, Apple 4 merely contends, without support, that 5 6 7 8 9 10 11 12 13 14 15 16 issue a software update directed at music purchased through an online store other than iTS for Any decision to 17 download on an iPod was Apple's alone. 18 19 20 21 Moreover, Apple does not provide any evidence that the non-major record labels Paula M. Roach Pursuant to Rule 22 ever required Apple to issue any software updates. Declaration of 23 56(f) of the Federal Rules of Civil Procedure in Support of Plaintiffs' Opposition to Apple's Motion 24 to Dismiss or, Alternatively, for Summary Judgment ("Roach Decl."), ~l 9. Contrary evidence 25 suggests that these record labels also encouraged interoperability and competition in the markets and 26 were not interested in any DRM system. Merrick Decl., Ex. 6. 27 Apple falls back on the argument that had it not issued the software updates to shut out 28 Harmony, FairPlay would have been less secure and vulnerable to future hackers. Apple's Motion at 5I128U C-05-00037-JW(HRL) - 11 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page19 of 36 1 14. This argument similarly fails. Apple provides no evidence that Harmony made FairPlay "less 2 3 4 5 6 7 8 Apple's asserted justifications for the software updates that disabled RealNetworks' 9 Harmony simply do not provide any legitimate procompetitivejustification for Apple's conduct. As 10 the Ninth Circuit recognized in Tyco, "changes in product design are not immune from antitrust 11 scrutiny and in certain cases may constitute an unlawful means of maintaining a monopoly under 12 Section 2." Tyco, 592 F.3d at 998. The Tyco court noted that in United States v. Microso.fi, 253 F.3d 13 34 (D.C. Cir. 2001), plaintiffs were able to prove that Microsoft's integration ofInternet Explorer 14 into the Windows 98 operating system was anticompetitive under Section 2 because "Microsoft 15 provided no 'procompetitive justification' (and) failed to show 'that its conduct serve(d) a purpose 16 other than protecting its operating system monopoly. . .." Tyco, 592 F.3d at 998. 17 In Microso.fi, plaintiffs alleged that Microsoft violated Section 2 when it integrated Internet 18 Explorer into Windows 98 by, inter alia, excluding Internet Explorer from the Add/Remove 19 Programs so that Internet Explorer could not be readily deleted and commingling the browser and 20 operating system code so that if Internet Explorer were removed it would affect the operating 21 system's functions. Id. 253 F.3d at 65. To justify this conduct, Microsoft claimed that integration of 22 the browser and operating system provided "substantial benefits to customers and developers." Id. at 23 66. The court found that these "general claims regarding the benefits of integrating the browser and 24 operating system" were unsubstantiated and failed to explain how exclusion of Internet Explorer 25 from the Add/Remove menu or commingling the code achieved "any integrative benefit." Id. at 6626 67. Accordingly, because Plaintiffs demonstrated that Microsoft's conduct had harmed competition 27 and Microsoft failed to demonstrate that its conduct served "a purpose other than protecting its 28 operating system monopoly," the Court found Microsoft violated Section 2. Id. at 67. 511281 I C-05-00037-JW(HRL) - 12PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- Case5:05-cv-00037-JW Document345 Filed03/22/10 Page20 of 36 1 Similarly, here, Apple does not and cannot provide a "pro competitive justification" for its use 2 of the software updates that prevented the download of files purchased from RealNetworks onto an 3 iPod and has failed to demonstrate that the software updates served a purpose other than to exclude 4 competition and protect Apple's monopolies of the relevant markets. Apple was not required by any 5 record label to issue the software updates that disabled RealNetworks' Harmony and fails to provide 6 any evidence that had it not disabled Harmony, its own products would be less secure. For these 7 reasons, Apple has failed to demonstrate that no material fact exists as to whether it willfully 8 maintained its monopoly power by issuing these software updates. 9 10 b. A Genuine Dispute Exists that Apple Acted Anticompetitively Towards RealNetworks Even if Apple's Conduct Is Solely Analyzed as a Refusal to Deal 11 Alternatively, Apple contends that it would have been required to deal with RealNetworks in 12 order to prevent its updates from disabling Harmony. Apple asserts that in order for Harmony to 13 continue to permit downloads of music purchased from RealNetworks onto an iPod, Apple and 14 RealNetworks would have had to exchange highly sensitive information regarding their technologies 15 which would have made FairPlay less secure. Apple's Motion at 16. Apple contends that the 16 antitrust laws do not require such cooperation. 17 Apple, however, has provided no evidence to demonstrate that such cooperation would be 18 required or that cooperation between the companies would make FairPlay less secure. Without the 19 opportunity to complete discovery on these issues, the record is insufficient for the Court to grant a 20 summary judgment motion. Roach Decl., ~~20, 26. However, Apple's own relationships with 21 competitors suggests that such cooperation is possible and would not have placed Apple's 22 technology at risk. 23 24 25 26 27 28 5I128U C-05-00037-JW(HRL) - 13 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page21 of 36 1 2 3 4 5 Apple also entered into an agreement with Motorola in September 2005 that permitted Motorola to sell certain cellular phones with iTunes so that purchasers could directly download and 6 7 8 play music purchased from iTS on their cell phone. Merrick Decl., Ex. 8. This presumably required cooperation between the companies including exchange of sensitive technological information. As 9 10 11 Apple stated in its press release, "We've worked closely with Motorola to deliver the world's best music experience on a mobile phone." Id. Apple has never contended that either cooperation agreement with Motorola or HP has resulted in Apple's products being less secure. In addition to failing to demonstrate the lack of a genuine dispute as to whether cooperation 12 13 with RealNetworks would be required or that cooperation would have been detrimental to the security of Apple's products, Apple also misstates the holding in Trinko to argue that it is never required to cooperate with competitors. Apple's Motion at 16. To the contrary, the Trinko Court 14 15 16 17 18 reaffirmed that requiring cooperation among rivals is sometimes necessary to promote the goals of antitrust laws, and that some refusals to deal violate Section 2: However, "(t)he high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified." Under certain 19 circumstances, a refusal to cooperate with rivals can constitute anti competitive conduct and violate (Section) 2. 20 Trinko, 540 U.S. at 408 (quoting Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 21 601 (1985)). In its earlier decision in Aspen Skiing, the Court held that "(t)he absence of an 22 unqualified duty to cooperate does not mean that every time a firm declines to participate in a 23 particular cooperative venture, that decision may not have evidentiary significance, or that it may not 24 give rise to liability in certain circumstances." Aspen Skiing, 472 US. at 601; Trinko, 540 U.S. at 25 408. Rather, if a refusal to deal "impair( s) competition in an unnecessarily restrictive way" and the 26 defendant is "'attempting to exclude rivals on some basis other than efficiency,' it is fair to 27 28 5I128U C-05-00037-JW(HRL) - 14 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNA TIVELY, FOR SUMMARY JUDGMENT- Case5:05-cv-00037-JW Document345 Filed03/22/10 Page22 of 36 1 characterize its behavior as predatory" and "appropriate to examine the effect of the challenged pattern of 2 3 conduct on consumers." Aspen Skiing, 472 US. at 605. Similarly, refusals to deal in the intellectual property context are not granted carte blanche 4 5 status. See Eastman Kodak, 125 F.3d at 1219-20 (finding defendant's refusal to deal defense based on patent protection was rebutted by pretextual evidence). Where, as here, defendant refuses to 6 7 8 license its proprietary information, not because it wishes to protect that interest, but for other anti competitive reasons, the antitrust laws apply. Id.; ~~48, 49. Apple has not provided sufficient evidence to support its contention that such protection was necessary, and Plaintiffs have yet to obtain any discovery on the issue. Roach Decl., ~~4, 20, 21. Accordingly, even if the Court 9 10 indulges Apple's contention concerning its refusal to license FairPlay, Plaintiffs should still be afforded the opportunity to provide rebuttal evidence. See Eastman Kodak, 125 F .2d at 1219. Additionally, as previously recognized by this Court (Tucker v. Apple Computer, Inc., 493 F. 11 12 13 Supp. 2d 1090, 1100 (N.D. CaL. 2007)), a refusal to deal under Trinko is not limited to cases where 14 15 "a company has voluntarily entered into - and then unilaterally terminated - a prior course of dealing with competitors." See Apple's Motion at 18. While the Trinko court "found significance" 16 17 18 in the defendant's decision to cease participation in a prior cooperative venture in Aspen Skiing, it did not confine refusal to deal to cases only where a prior course of dealing exists. Rather, the Court focused on the defendant's prior conduct to "(shed) light upon the motivation of its refusal to deal- 19 upon whether its regulatory lapses were prompted not by competitive zeal but by anti competitive 20 21 malice." Trinko, 540 U.S. at 409. Accordingly, a refusal to deal is anti competitive under the Sherman Act if defendant has forsaken "short-term profits to achieve an anticompetitive end," (id.), 22 23 or "impaired competition in an unnecessarily restrictive way" or acted to '''exclude rivals on some basis other than efficiency.'" Aspen Skiing, 472 U.S. at 605. 24 25 Courts after Trinko have used these criteria to analyze such claims. For example, in MetroNetServs. Corp. v. Qwest Corp., 383 F.3d 1124, 1133 (9th Cir. 2004), cited by Apple (Apple's 26 27 28 511281 I Motion at 19), the court granted summary judgment for the defendant because it had not "set its retail price at an unprofitable level in the short run merely to exclude competition in the long run." C-05-00037-JW(HRL) - 15 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT- Case5:05-cv-00037-JW Document345 Filed03/22/10 Page23 of 36 1 Here, Plaintiffs have alleged that Apple deliberately issued software updates in order to 2 prevent music purchased from competitors' online music stores from being played on an iPod and to 3 prevent iTS music from being played on competing portable players. Apple's prior dealings with 4 Motorola and HP reveal that Apple was willing to engage with competitors so that music purchased 5 from Apple could be played on Apple's iPods or products that were not in competition with Apple 6 because this reinforced Apple's monopolies in the online music and portable player markets. 7 However, Apple was not interested in engaging with RealNetworks for the sale of non-iTS files on 8 iPods because this would open Apple's monopoly of the online music market and in turn the 9 portable player market. 10 The inference is that Apple deliberately forewent iPod sales to prospective customers who 11 had purchased digital music from other stores so that it could charge supracompetitive prices and 12 deter iPod purchasers from even considering doing business with its music competitors. Apple 13 would rather keep all profits to itself in the long run than get short term profits from RealNetworks' 14 customers who wish to put their music on an iPod, and risk the possibility that permitting iPod 15 purchasers to do business with other online stores may result in those purchasers not doing business 16 with Apple. Merrick Decl., Ex. 4. 17 2. Software Programs Intended to Create Interoperability 18 Relying on the Digital Millennium Copyright Act ("DMCA"), 1 7 US.c. 1 201 (a)(2)(A) 19 and (b)(1)(A), Apple contends, with virtually no analysis, that some companies' attempts to create 20 interoperability were illegal, and therefore Apple's software updates were not exclusionary acts and 21 that Apple had a "legitimate justification for them." Apple's Motion at 1 O. Apple contends that the 22 QTFairUse, JHymn, and PlayFair software programs "and similar hacks" violated the DMCA and 23 thus, Apple "was simply exercising rights" to protect the copyright holders. Apple, however, 24 overstates the scope of the DMCA and any possible protection that it provides to Apple's monopoly. 25 First, the DMCA itself "does not limit the scope of the antitrust laws, either explicitly or 26 implicitly." Chamberlain Group, Inc. v. Skylink Techs, Inc., 381 F.3d 1178, 1201 (Fed. Cir. 2004). 27 What the DMCA is designed to protect is not Apple's, or any other company's, monopoly gained 28 through a digital rights management or similar "lock-out" program, but rather the underlying 511281_1 C-05-00037-JW(HRL) - 16 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNA TIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page24 of 36 1 copyright-protected artistic expression. See Lexmark Int 'I, Inc. v. Static Control Components, Inc., 2 387 F.3d 522,536 (6th Cir. 2004) (a "lock-out" code, i.e., one the "requires that a particular code 3 sequence be included in the component device to permit its use," is generally precluded from 4 copyright protection); see also id. at 553 ("Giving authors monopolies over manufactured goods as 5 well as over their creative expressions will clearly not 'promote the Progress of Science and the 6 Useful Arts,' but rather would stifle progress by stamping out competition from manufacturers who 7 may be able to design better or less expensive (products).") (Merritt, C,J. concurring). Apple does 8 not argue, as it cannot, that its FairPlay DRM is protected by the DMCA. 9 While, as Apple notes, Plaintiffs acknowledge the record labels' legitimate copyright 10 interests, that is not the end of the DMCA analysis: 11 The statute also contains three "reverse engineering" defenses. A person may 12 analyzing those elements of the program that are necessary to achieve circumvent an access control measure "for the sole purpose of identifying and interoperability of an independently created computer program with other programs, 13 and that have not previously been readily available to (that person)." 17 U.S.c. 1201(f)(1). A person "may develop and employ technological means" that are 14 "necessary" to enable interoperability. Id. 1201(f)(2). And these technological means may be made available to others "solely for the purpose of enabling 15 interoperability of an independently created computer program with other programs." Id. 1201(f)(3). . . . 16 Id. at 545-46. The statute defines "interoperability" as "the ability of computer programs to 17 exchange information, and of such programs mutually to use the information which has been 18 exchanged." 17 U.S.C. 1201(f)(4). 19 "Congress added the interoperability provision in part to ensure that the DMCA would not 20 diminish the benefit to consumers of interoperable devices 'in the consumer electronics 21 environment.'" Lexmark, 387 F.3d at 549 (citing 144 Congo Rec. E2136 (daily ed. Oct. 13, 1998) 22 (remarks of Rep. Bliley)). This case is about "interoperability.,,4 23 24 4 Apple's quote from the former head of the U.S. Dept. of Justice Antitrust Division 25 supporting its interpretation on interoperability (Apple's Motion at 12), besides being of no precedential value, is further undermined by much more recent statements by the current head, competitive where it 27 former Section 2 Report which stated that "conduct is only considered anti 26 Christine A. Varney. Merrick Decl., Ex. 10. The DOJ has repudiated and formally withdrawn the results in harm to competition that is disproportionate to consumer benefits and to the economic 28 benefits to the defendant." Id. at 8. This led to an "overly lenient approach to enforcement." Id. 5I128U PL TFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT - C-05-00037-JW(HRL) - 17- Case5:05-cv-00037-JW Document345 Filed03/22/10 Page25 of 36 1 Beyond conclusory statements, Apple's Summary Judgment motion does not even attempt to 2 analyze any of the so-called "hacks," how they mayor may not have violated the DMCA, or fallen 3 within its agreements with the labels. 4 Further, without an 5 opportunity to conduct discovery on these issues and on the potential "interoperability" defenses, the 6 record is insufficient for the Court to consider a summary judgment motion. Roach Decl., ~4, 26. 7 Finally, it is especially notable that Apple does not contend that RealNetworks' use of 8 Harmony violated the DMCA. See Apple's Motion at 10-12. As the Complaint points out, 9 Harmony "was met with approval from the major record labels" and "allowed for compatibility with 10 over 100 Portable Digital Media Players." ~56; Merrick Decl., Ex. 11. Even if Apple's contentions 11 about other products turn out to be correct, there is no dispute that Harmony did not violate the 12 DMCA. 13 Apple also persists in asking the Court to conclusively accept its factual defense that the 14 music labels, not Apple, were the reason that Apple encrypted its iTS music files to render them 15 inoperable with any make of portable player other than Apple's iPod.5 Apple's Motion at 11. 16 Specifically, Apple claims that "the labels also required that Apple promptly repair any beaches (sic) 17 of that security." Id. 6 However, as previously argued, DRM and interoperability are not mutually 18 exclusive concepts. See Dkt No. 277 at 6-7; Dkt. No. 165 at 14. The music labels in fact supported 19 both DRM and interoperability. 20 21 ; see also Dkt. No. 166, Ex. 15, Warner Music Group 22 23 "The Report and its conclusions should not be used as guidance by courts, antitrust practitioners, and "conclusions. " 24 the business community." Id. Mr. Barnett's comments, relied on by Apple, are based on such 25 5 Apple's citation to the economic expert of a different plaintiff in a different case (the indirect 26 purchaser action filed by Somers) is irrelevant here. See Apple's Motion at 12. 27 28 5I128U C-05-00037-JW(HRL) - 18 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR ALTERNATIVELY, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page26 of 36 1 F 1 Q07 Earnings Call Feb. 8,2007 available at http://seekingalpha.com/article/26496-warner-music- 2 group-flg07-gtr-end-12-31-06-earnings-call-transcript (Warner Music Group Chairman and CEO 3 advocating label support for interoperability while preserving DRM). 4 Ultimately, it will be for the fact-finder to decide whether Apple used the labels' copyright 5 concerns as a pretext to limit the buyer's choice in portable digital media player through FairPlay 6 with the real goal of precluding interoperability and protecting its own monopoly. See Image Tech. 7 Servs., Inc. v. Eastman Kodak Co., 903 F.2d 612,620 (9th Cir. 1990) (legitimacy of business 8 justifications proffered for anti competitive conduct presented triable issues of fact). 9 V. 10 FOR THE SAME REASONS, PLAINTIFFS' STATE LAW CLAIMS SURVIVE For the same reasons as stated above, Plaintiffs' state law claims under the Cartwright Act 11 (CaL. Bus & Prof. Code 16700 et seq.), California Unfair Competition Law ("UCL") (CaL. Bus. & 12 Prof. Code 17200 et seq.), California Civil Legal Remedies Act ("CLRA") (CaL. Civ. Code 1 750 13 et seq.), and Common Law Monopolization Business Practices should survive. Plaintiffs' state law 14 claims are based on the same allegations supporting their monopolization and attempted 15 monopolization claims under the Sherman Act and consequently similarly raise genuine issues of 16 material fact. Moreover, should the Court find that Plaintiffs' federal law claims to do not raise 17 issues of material fact, Plaintiffs state law claims are premised on additional allegations that raise 18 genuine issues of material fact and must still survive. 19 A. Cartwright Act 20 Apple contends the Cartwright Act does not include any counterpart to Section 2 of the 21 Sherman Act and therefore Plaintiffs' Cartwright Act claim fails. Apple's Motion at 20. The 22 Cartwright Act is patterned upon the federal Sherman Antitrust Act and both derive their basic 23 provisions from the common law policy against restraint oftrade; however, the Cartwright Act is not 24 limited by, or coextensive with, the Sherman Act. Saxer v. Philip Morris, Inc., 54 CaL. App. 3d 7,19 25 26 27 (CaL. Ct. App. 1975). Furthermore, the California Supreme Court has yet to resolve whether the Cartwright Act reaches monopolistic practices by individual firms. See Bondi v. Jewels by Edwar. Ltd. ,267 CaL. App. 2d 672, 677-78 (1968). "Because the Cartwright Act has objectives identical to 28 5I128U C-05-00037-JW(HRL) - 19 PLTFS' MEMO IN OPPO TO APPLE'S MTD OR AL TERNATIVEL Y, FOR SUMMARY JUDGMENT - Case5:05-cv-00037-JW Document345 Filed03/22/10 Page27 of 36 1 the federal antitrust acts, the California courts looks to cases construing the federal antitrust laws for 2 guidance in interpreting the Cartwright Act." Vinci v. Waste Mgmt., Inc., 36 CaL. App. 4th 1 811 , 3 1814 n.l (1995). As demonstrated above, Apple's conduct is unlawful under federal antitrust laws 4 and similarly Apple's unreasonable restraint of trade or commerce throughout California and the rest 5 of the United States violates the Cartwright Act. See Lowell v. Mother's Cake Cookie Co., 79 CaL. 6 App. 3d 13,23 (1978) ("(t)hough not specifically listed, monopoly is a prohibited restraint of trade" 7 under the Cartwright Act). 8 B. Unfair Competition Law 9 For the same reasons as stated herein, Apple's actions are "unlawful" under the UCL because 10 they violate the Sherman Antitrust Act, the Cartwright Act, the Consumer Legal Remedies Act and 11 because Apple has monopolized the markets for Audio Downloads and Portable Digital Media 12 Players in violation of California common law. 13 Additionally, California courts have recognized that an unfair business act or practice need 14 not violate an antirust law to be actionable under the UCL. Chavez v. Whirlpool Corp., 93 CaL. App. 15 4th 363,375 (2001). Where the conduct unreasonably restrains competition and harms consumers, 16 the conduct is deemed unfair. Id. Apple undertook specific aggressive actions to entrench its 17 monopolies and subsequently overcharged consumers for the costs of iPods (or, at a minimum, 18 denied the opportunity to purchase a competitive product at a lower price). This unreasonable 19 restraint on competition and harm to consumers is sufficient unfair conduct within the meaning of 20 the UCL. 21 c. California Consumers Legal Remedies Act 22 According to the CLRA, inserting an unconscionable provision in a contract which results in 23 the sale or lease of goods or services to any consumer is unlawfuL. CaL. Civil Code 1 770. Apple's 24 usage rules and upgrade requirements are unconscionable contract provisions that violate the CLRA. 25 Merrick Decl., Ex. 12. Furthermore, Apple's persistent efforts to shut out competitors while 26 providing no additional benefits to consumers through the issuance of unnecessary and non27 improving software updates are violations of the CLRA. This conduct by Apple is the exact type of 28 conduct the CLRA was de