Holman et al v. Apple, Inc. et al

Filing 122

MOTION to Dismiss Plaintiffs' Revised Consolidated Amended Class Action Complaint; Supporting Memorandum of Points and Authorities filed by Apple, Inc.. Motion Hearing set for 9/12/2008 01:00 PM in Courtroom 8, 4th Floor, San Jose. (Wall, Daniel) (Filed on 6/27/2008)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O LATHAM & WATKINS LLP Daniel M. Wall (Bar No. 102580) Alfred C. Pfeiffer, Jr. (Bar No. 120965) Christopher S. Yates (Bar No. 161273) Sadik Huseny (Bar No. 224659) Sarah M. Ray (Bar No. 229670) 505 Montgomery Street, Suite 2000 San Francisco, California 94111-6538 Telephone: (415) 391-0600 Facsimile: (415) 395-8095 Email: Dan.Wall@lw.com Email: Al.Pfeiffer@lw.com Email: Chris.Yates@lw.com Email: Sadik.Huseny@lw.com Email: Sarah.Ray@lw.com Attorneys for Defendant APPLE INC. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION IN RE APPLE & AT&TM ANTI-TRUST LITIGATION CASE NO. C 07-5152 JW DEFENDANT APPLE'S NOTICE OF MOTION AND MOTION TO DISMISS REVISED CONSOLIDATED AMENDED CLASS ACTION COMPLAINT; SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES Date: Time: Place: Judge: September 12, 2008 1:00 p.m. Courtroom 8, 4th Floor Honorable James Ware DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O TABLE OF CONTENTS PAGE I. II. III. IV. INTRODUCTION .........................................................................................................1 STATEMENT OF ISSUES TO BE DECIDED ............................................................3 LEGAL STANDARD....................................................................................................3 PLAINTIFFS' ANTITRUST ALLEGATIONS FAIL TO STATE A CLAIM.............4 A. THE MATERIAL ALLEGATIONS............................................................................4 1. 2. B. Apple's Exclusive Agreement With ATTM. .........................................4 Apple's Add-on Applications Policy. ....................................................6 ANALYSIS: MARKET DEFINITION AND "AFTERMARKETS" .................................6 1. 2. Single-Product Markets Are Rarely Viable. ..........................................7 The Kodak Aftermarket Exception. .......................................................8 C. THE "IPHONE VOICE AND DATA SERVICES AFTERMARKET" FAILS ..................11 1. 2. Plaintiffs Accepted ATTM Service When they Purchased iPhones, i.e., as Part of the Initial Foremarket Transaction. ................11 ATTM Cell Phone Service Existed Long Before the iPhone and is Not "Unique" To It....................................................................12 D. THE "IPHONE APPLICATIONS AFTERMARKET" FAILS........................................12 1. 2. Apple's Third Party Applications Policy Was Public At The Time Plaintiffs Purchased iPhones. .....................................................12 Plaintiffs Do Not Plead A Cognizable Product Market. ......................13 V. PLAINTIFFS FAIL TO STATE A CAUSE OF ACTION FOR COMMON LAW COMPUTER TRESPASS OR STATUTORY COMPUTER FRAUD.............14 A. B. C. THE MATERIAL ALLEGATIONS..........................................................................14 APPLE DID NOT COMMIT ANY "COMPUTER TRESPASS" ...................................15 PLAINTIFFS FAIL TO STATE A COMPUTER FRAUD CLAIM..................................16 1. 2. Plaintiffs Fail To State A CFAA Claim...............................................16 Plaintiffs Fail to State a Claim Under Penal Code 502.....................18 i DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O VI. THE STATE CONSUMER PROTECTION CLAIMS SHOULD BE DISMISSED..19 A. B. PLAINTIFFS' CONSUMER PROTECTION ALLEGATIONS.......................................19 PLAINTIFFS LACK STANDING TO MAINTAIN STATE CONSUMER PROTECTION CLAIMS UNDER THE LAWS OF FORTY STATES WHERE NONE OF THEM RESIDES .....................................................................20 PLAINTIFFS FAIL TO PLEAD FRAUDULENT OMISSION WITH SUFFICIENT PARTICULARITY UNDER FEDERAL RULE OF CIVIL PROCEDURE 9(B) ................20 PLAINTIFFS FAIL TO ALLEGE THE NECESSARY ELEMENTS OF A CLAIM UNDER THE STATE CONSUMER PROTECTION STATUTES ......................21 1. 2. 3. California UCL and CLRA..................................................................21 Washington Consumer Protection Act.................................................23 New York Consumer Protection Act. ..................................................24 C. D. VII. VIII. PLAINTIFFS FAIL TO PLEAD A VIABLE CLAIM UNDER THE MAGNUSON-MOSS WARRANTY ACT .................................................................24 CONCLUSION............................................................................................................25 ii DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O TABLE OF AUTHORITIES CASES Alcatel USA, Inc. v. DGI Tech., Inc., 166 F.3d 772 (5th Cir. 1999) .................................................................................................. 9 Bardin v. DaimlerChrysler Corp., 136 Cal. App. 4th 1255 (Cal. Ct. App. 2006) ....................................................................... 22 Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007)................................................................................................... 3, 4, 14 Big Bear Lodging Assoc. v. Snow Summit, Inc., 182 F. 3d 1096 (9th Cir. 1999) ............................................................................................... 7 Brown Shoe Co. v. United States, 370 U.S. 294 (1962)................................................................................................................ 7 Buller v. Sutter Health, 160 Cal. App. 4th 981 (2008) ............................................................................................... 22 Busey v. P.W. Supermarkets, Inc., 368 F. Supp. 2d 1045 (N.D. Cal. 2005) .................................................................................. 4 Butera & Andrews v. IBM Corp., 456 F. Supp. 2d 104 (D.D.C. 2006) ...................................................................................... 17 Chipanno v. Champion International Corp., 1980 WL 1995 (D. Or. 1980)................................................................................................ 21 Civic Western Corp. v. Zila Indus., Inc., 66 Cal. App. 3d 1 (1977) ................................................................................................ 15, 16 Conley v. Gibson, 355 U. S. 41 (1957)................................................................................................................ 4 Daugherty v. American Honda Motor Co., Inc., 144 Cal. App. 4th 824 (2006) ......................................................................................... 22, 23 Digital Equip. Corp. v. Uniq Digital Tech., Inc., 73 F.3d 756 (7th Cir. 1996) .................................................................................................. 10 Eastman Kodak Co. v. Image Tech. Serv., 504 U.S. 451 (1992).................................................................................................. 1, 8, 9, 10 eBay, Inc. v. Bidder's Edge, Inc., 100 F. Supp. 2d 1058 (N.D. Cal. 2000) ............................................................................... 15 Falk v. Gen. Motors Corp., 496 F. Supp. 2d 1088 (N.D. Cal. 2007) .......................................................................... 22, 23 Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 1997) .............................................................................................. 11 iii DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O Gall v. Home Box Office, 1992-2 Trade Cas. (CCH) 69 (S.D.N.Y. 1992).................................................................... 8 Golan v. Pingel Enter., Inc., 310 F.3d 1360 (Fed. Cir. 2002)............................................................................................... 7 Green Country Food Mkt., Inc. v. Bottling Group LLC, 371 F.3d 1275 (10th Cir. 2004) .............................................................................................. 8 Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wash. 2d 778 (Wash. 1986)........................................................................................... 23 Hayes v. Packard Bell NEC, Inc., 193 F. Supp. 2d 910 (E.D. Tex. 2001).................................................................................. 18 In re Ditropan XL Antitrust Litig., 529 F. Supp. 2d 1098 (N.D. Cal. 2007) ................................................................................ 20 In re Doubleclick Inc. Privacy Litigation, 154 F. Supp. 2d 497 (S.D.N.Y. 2001)................................................................................... 18 In re Elevator Antitrust Litig., 502 F.3d 47 (2d Cir. 2007)...................................................................................................... 4 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) ................................................................................................ 21 In re Graphics Processing Units Antitrust Litig., 527 F. Supp. 2d 1011 (N.D. Cal. 2007) ................................................................................ 20 In re Terazosin Hydrochloride Antitrust Litig., 160 F. Supp. 2d 1365 (S.D. Fla. 2001) ................................................................................. 20 Indoor Billboard/Washington, Inc. v. Integra Telecom of Washington, Inc., 162 Wash. 2d 59 (Wash. 2007)............................................................................................. 24 Intel Corp. v. Hamidi, 30 Cal. 4th 1342 (2003) ........................................................................................................ 15 Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008) ................................................................................................ 4 Kerby v. Parsons Corp., 2007 WL 2572334 (W.D. Wash. 2007)................................................................................ 21 Knievel v. ESPN, 393 F.3d 1068 (9th Cir. 2005) ................................................................................................ 4 M.D. Rutledge v. Boston Woven Hose and Rubber Co., 576 F.2d 248 (9th Cir. 1978) ................................................................................................ 21 McCabe Hamilton & Renny, Co. v. Matson Terminals, Inc., 2008 U.S. Dist. LEXIS 47428 (D. Haw. 2008) ...................................................................... 4 Mich. Div. - Monument Builders of N. Am. v. Mich. Cemetery Ass'n, 524 F.3d 726 (6th Cir. 2008) .................................................................................................. 4 iv DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O NewCal Industries, Inc. v. IKON Office Solution, 513 F.3d 1038 (9th Cir. 2008) .......................................................................... 2, 9, 10, 11, 12 Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, N.A, 85 N.Y.2d 20 (N.Y. 1995). .................................................................................................. 24 Parrish v. NFL Players Ass'n, 534 F. Supp. 2d 1081 (N.D. Cal. 2007) ................................................................................ 21 Person v. Google, Inc., 2007 U.S. Dist. LEXIS 47920 (N.D. Cal. 2007) .................................................................... 4 PSI Repair Services v. Honeywell Inc., 104 F. 3d 811 (6th Cir. 1997) ..................................................................................... 9, 10, 12 Queen City Pizza v. Domino's Pizza, 124 F.3d 430 (3d Cir. 1997).................................................................................. 7, 10, 11, 12 Rambus, Inc. v. Samsung Elecs. Co. Ltd., 2007 WL 39374 (N.D. Cal. 2007) ........................................................................................ 20 Rebel Oil v. Atlantic Richfield Co., 51 F.3d 1421 (9th Cir. 1995) .............................................................................................. 7, 8 Schor v. Abbott Labs., 457 F.3d 608 (7th Cir. 2006)................................................................................................. 10 Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43 (N.Y. 1999) ................................................................................................... 24 SMS Systems v. Digital Equip. Corp., 188 F.3d 11 (1st Cir. 1999)............................................................................................. 10, 12 Snyder v. Ford Motor Co., 2006 U.S. Dist. LEXIS 63646 (N.D. Cal. 2006) .................................................................. 20 Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993)................................................................................................................ 7 Staples v. Hoefke, 189 Cal. App. 3d 1397 (1987) .............................................................................................. 15 Stutz Motor Car of Am., Inc. v. Reebok Int'l, Ltd., 909 F. Supp 1353 (C.D. Cal. 1995) ...................................................................................... 21 Tanaka v. Univ. of S. Cal., 252 F. 3d 1059 (9th Cir. 2001) ........................................................................................... 7, 8 Thurman Indus., Inc. v. Pay `N Pak Stores, Inc., 875 F.2d 1369 (9th Cir. 1989) ................................................................................................ 7 Thurmond v. Compaq Comp. Corp., 171 F. Supp. 2d 667 (E.D. Tex. 2001).................................................................................. 18 Ticketmaster L.L.C. v. RMG Techs., Inc., 2008 U.S. Dist. LEXIS 33678 (C.D. Cal. 2008)..................................................................... 4 v DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O United States v. Grinnell Corp., 384 U.S. 563 (1966)............................................................................................................... 7 Vess v. Ciba-Geigy Corp. U.S.A., 317 F.3d 1097 (9th Cir. 2003) ........................................................................................ 20, 21 Volunteer Fireman's Ins. Servs. v. McNeil & Co., 221 F.R.D. 388 (W.D.N.Y. 2004)......................................................................................... 21 Wilens v. TD Waterhouse Group, Inc., 120 Cal. App. 4th 746 (2003) ............................................................................................... 22 Yang v. Dar Al-Handash Consultants, 250 Fed. Appx. 771 (9th Cir. 2007)........................................................................................ 4 STATUTES California Business & Professions Code 17200 ................................................................ 21, 22 California Business & Professions Code 17204 ...................................................................... 22 California Business & Professions Code 17500 ...................................................................... 21 California Civil Code 3515...................................................................................................... 16 California Code of Civil Procedure 1770 ................................................................................ 21 California Penal Code 502 ........................................................................................... 16, 18, 19 15 U.S.C. 2302......................................................................................................................... 25 15 U.S.C. 2304......................................................................................................................... 25 18 U.S.C. 1030................................................................................................................... 17, 18 OTHER AUTHORITIES 1 ABA Section of Antitrust Law, Antitrust Law Developments (6th ed. 2007) ...................... 8, 9 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, 126................................................... 16 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, 564b ............................................................................... 8 Restatement (Second) of Torts 158.......................................................................................... 15 Restatement (Second) of Torts 252.......................................................................................... 16 Wash. Rev. Code 19.86.020..................................................................................................... 23 vi DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ATTO R N E Y S AT LAW SA N F R A N C I S C O NOTICE OF MOTION AND MOTION PLEASE TAKE NOTICE THAT on September 12, 2008 at 1:00 p.m., or as soon thereafter as the matter may be heard, in the United States District Court, Northern District of California, San Jose Division, located at San Jose, CA, Courtroom 8, before the Hon. James Ware, Defendant Apple Inc. will, and hereby does, move to dismiss each claim for relief asserted in plaintiffs' Revised Consolidated Amended Class Action Complaint ("RCAC") on the grounds that they fail to state a claim upon which relief can be granted. This motion is based on this Notice of Motion and Motion, the accompanying Memorandum of Points and Authorities, the pleadings on file in this action, and upon such other matters presented to the Court at the time of the hearing. RELIEF SOUGHT Defendant Apple Inc. ("Apple") seeks dismissal of each claim asserted in plaintiffs' Complaint with prejudice, pursuant to Fed. R. Civ. P. 12(b)(6). Dated: June 27, 2008 Respectfully submitted, LATHAM & WATKINS LLP By /s/ Daniel M. Wall Daniel M. Wall Attorneys for Defendant APPLE INC. 1 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION One year ago, Apple released its first cellular telephone product, the iPhone. See Revised Consolidated Amended Complaint ("RCAC") 2, 27, 28. Plaintiffs concede the iPhone was a boon to competition: despite a crowded cell phone market, RCAC 61-62, 70, "consumers waited in line to get their hands on" the iPhone. RCAC 28. It is common knowledge that Apple's cell phone competitors have been forced to improve and expand their products in order to respond to Apple's entry, which indisputably has increased consumer choice. Nevertheless, plaintiffs' basic theory in this case is that Apple's iPhone entry strategies were anticompetitive and otherwise unlawful. That makes no sense. Entry is the epitome of procompetitive behavior. It makes markets more, not less, competitive. A company's initial entry strategies into a highly competitive market cannot be anticompetitive let alone monopolistic, as is the claim here. Plaintiffs' monopolization claims are contrived. The contrivance is the claim that upon product launch Apple instantly monopolized two iPhone-specific "aftermarkets." An aftermarket is a special kind of antitrust market consisting of unique replacement parts, postwarranty service or other "consumables" specific to some primary product. See, e.g., Eastman Kodak Co. v. Image Tech. Serv., 504 U.S. 451 (1992) ("Kodak"). Here, plaintiffs claim there are two relevant aftermarkets: (1) for iPhone-compatible cellular telephone service, which Apple monopolized at the moment of entry by selecting AT&T Mobility LLC ("ATTM") as its exclusive cellular service partner; and (2) for iPhone-compatible software applications, i.e., programs that run on the iPhone, which Apple monopolized because at the time of its entry it restricted the ability of consumers to download third-party applications. (Plaintiffs concede this second claim is at least partially moot, since Apple is now allowing third-party developers access to the platform.) These are not legally cognizable "aftermarkets" under antitrust law. With respect to the alleged iPhone "Voice and Data Services Aftermarket," the "aftermarket" service ATTM cellular service is not unique to the iPhone. To the contrary, it has for many years supported cell phones made by Samsung, RIM, Motorola, Nokia and many others. Further, as the Ninth Circuit ATTO R N E Y S AT LAW SA N F R A N C I S C O 1 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 made clear in its recent decision NewCal Industries, Inc. v. IKON Office Solution, 513 F.3d 1038, 1048 (9th Cir. 2008) ("Ikon"), a claim of aftermarket monopolization cannot be based on obligations a consumer knowingly and voluntarily assumed at the time of its initial purchase of the primary product. The RCAC makes clear that Apple's exclusive agreement with ATTM was announced and widely known, and that consumers were informed at the time they purchased their iPhones of the necessity of ATTM cellular service. As a matter of law, these allegations preclude any claim that the ATTM exclusivity agreement was an act of aftermarket monopolization. The alleged iPhone "Applications Aftermarket" is equally specious. Plaintiffs do not even allege that Apple participates in this alleged market as a software vendor, but only that it has a kind of "gatekeeper" status in allowing third party developers access to the iPhone operating system. A seller cannot monopolize a market in which it does not participate. Moreover, Apple has already taken action to open the iPhone to third party applications. Thus, there is not and cannot be a claim that Apple exploited its control of the iPhone platform to extract monopoly profits in this supposed aftermarket. That omission is fatal to any Kodak-type aftermarket claim. Plaintiffs also advance a number of non-antitrust theories. Foremost among them is that Apple engaged in "computer trespass" and "computer fraud" by releasing its first operating system upgrade for the iPhone, Version 1.1.1. Plaintiffs claim this was unlawful because Apple knew Version 1.1.1 would not interoperate with some iPhones whose owners had used third party hacking solutions to "unlock" their iPhones. But (1) there is no claim that Apple purposefully tried to disable "unlocked" iPhones; (2) Apple did not "invade" anyone's iPhone; rather, owners had to choose to download Version 1.1.1 themselves; and (3) plaintiffs admit Apple warned of the risk before any owner voluntarily downloaded Version 1.1.1. Each of these points precludes any claim for trespass, much less fraud. In reality, plaintiffs are claiming that Apple is legally required to maintain interoperability with iPhones whose software had been altered in violation of the software license agreement. There simply is no such legal duty. Finally, plaintiffs mix in some inherently inconsistent claims about disclosures Apple made, or did not make, in the course of selling iPhones. On one hand, plaintiffs complain that Apple violated various consumer protection statutes by failing to warn customers about some ATTO R N E Y S AT LAW SA N F R A N C I S C O 2 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 of its policies and practices, as well as the potential risks of downloading Version 1.1.1. On the other hand, plaintiffs complain that Apple violated the Magnuson Moss Warranty Act ("MMWA") because it actually did warn consumers about, among other things, the potential risks of downloading Version 1.1.1. Plaintiffs' claims fail on both theories. Plaintiffs lack standing to pursue most of their state law claims, and Apple fully disclosed all that was required under the laws that plaintiffs have standing to assert. Apple had no duty to provide the type of warranty coverage plaintiffs desire, namely, a guarantee that Apple would support hacked, unlocked iPhones. All of plaintiffs' claims are deficient as a matter of law, and plaintiffs have no prospect of amending them to cure the defects. The Court should dismiss the RCAC. II. STATEMENT OF ISSUES TO BE DECIDED 1. Whether plaintiffs have pleaded a plausible, legally cognizable "iPhone Voice and Data Services Aftermarket" and whether Apple has market power in any such market; 2. Whether plaintiffs have pleaded a plausible, legally cognizable "iPhone Applications Aftermarket" and whether Apple has market power in any such market; 3. Whether a claim for trespass to chattels, violation of the Computer Fraud and Abuse Act or violation of California Penal Code 502 lies where a plaintiff authorizes and downloads software, after receiving notice that doing so may cause damage to plaintiff's product if plaintiff has altered the preexisting software in violation of the software license agreement. 4. Whether plaintiffs have standing to claim violations of 43 state consumer protection/unfair business practice statutes; whether plaintiffs have pleaded such claims with the requisite specificity; and whether plaintiffs have stated a claim under any such statutes; and 5. Whether plaintiffs have stated a claim under the Magnuson Moss Warranty Act. III. LEGAL STANDARD The Supreme Court recently addressed pleading standards in general (and antitrust pleading standards in particular) in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007). Stressing the dangers of permitting costly antitrust litigation to proceed based on speculation and conclusory allegations, the Court held that a complaint must contain "enough facts to state a claim to relief that is plausible on its face," id. at 1974, and that "raise a right to relief above the ATTO R N E Y S AT LAW SA N F R A N C I S C O 3 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 speculative level." Id. at 1965. In other words, the Court required plaintiffs to plead facts sufficient to "nudge[] their claims across the line from conceivable to plausible," or suffer dismissal. Id. at 1974. The Court "retired" the oft-quoted statement from Conley v. Gibson, 355 U. S. 41, 45-46 (1957), that a complaint cannot be dismissed on the pleadings "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Twombly, 127 S.Ct. at 1968 ("after puzzling the profession for 50 years, this famous observation has earned its retirement"). In the single year since Twombly was decided, courts have become noticeably less tolerant of improperly pleaded complaints, including antitrust complaints that contain conclusory or implausible market definitions. 1 As already noted, the RCAC makes numerous allegations that Apple failed to disclose various facts about its business model and warranty policies. In part--and primarily with respect to the consumer protection and MMWA claims--this motion attacks those claims because documents incorporated by reference into the RCAC contradict the conclusory allegations of nondisclosure, for example by showing that the allegedly undisclosed fact was disclosed. As set forth in greater detail in Apple's accompanying Request for Judicial Notice, the Court may take judicial notice of these materials, and need not "blindly accept the allegations in the pleadings as true" when contradicted by incorporated materials. Yang v. Dar Al-Handash Consultants, 250 Fed. Appx. 771, 772 (9th Cir. 2007); see also Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005); Busey v. P.W. Supermarkets, Inc., 368 F. Supp. 2d 1045, 1049 (N.D. Cal. 2005) (J. Ware). IV. PLAINTIFFS' ANTITRUST ALLEGATIONS FAIL TO STATE A CLAIM A. THE MATERIAL ALLEGATIONS 1. Apple's Exclusive Agreement With ATTM. Apple introduced the iPhone in June 2007. The iPhone is a "GSM" (Global System for Mobile Communications standard) device which could function on the ATTM and 1 See, e.g., Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008); Ticketmaster L.L.C. v. RMG Techs., Inc., 2008 U.S. Dist. LEXIS 33678 (C.D. Cal. 2008); McCabe Hamilton & Renny, Co. v. Matson Terminals, Inc., 2008 U.S. Dist. LEXIS 47428 (D. Haw. 2008); Person v. Google, Inc., 2007 U.S. Dist. LEXIS 47920 (N.D. Cal. 2007); see also Mich. Div. - Monument Builders of N. Am. v. Mich. Cemetery Ass'n, 524 F.3d 726 (6th Cir. 2008); In re Elevator Antitrust Litig., 502 F.3d 47 (2d Cir. 2007). ATTO R N E Y S AT LAW SA N F R A N C I S C O 4 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 T-Mobile USA, Inc. GSM networks, but not on the distinct "CDMA" (Code Division Multiple Access standard) cellular telephone networks operated by Sprint Corporation and Verizon Wireless. RCAC at 59-61, 85. Apple could have offered the iPhone to both ATTM and T-Mobile, but it chose to enter into an exclusive carrier arrangement with ATTM. The RCAC does not allege there was anything secret about this exclusivity, nor its binding effect throughout the term of the mandatory two-year ATTM service contract. The RCAC acknowledges that on January 9, 2007 the day Apple announced the iPhone and five months before the iPhone was released for purchase Apple also "announced that it had entered into an exclusive agreement making AT&TM the only authorized provider of wireless voice and data services for iPhones in the United States." RCAC 77; RJN Exs. G, H. In fact, the iPhone box itself, which every purchaser necessarily received on purchase, stated clearly on its outside label the following "requirements": (1) "Minimum new two-year wireless service plan with AT&T required to activate all iPhone features, including iPod features" and (2) "Service plan with AT&T required for cellular network capabilities on expiration of initial new two year agreement," among other things. RJN Ex. A. The RCAC also admits that when each of the named plaintiffs purchased one or more iPhones, they "executed a two-year contract with AT&TM for provision of iPhone wireless voice and data services." RCAC 13-21, 31. This agreement states, in relevant part, that "*All plans require a 2-year AT&T service agreement, an activation fee, and are subject to AT&T credit approval." RJN Ex. C (iPhone Terms and Conditions). The duration of the exclusive Apple-ATTM agreement was not "secret" either. The RCAC quotes a May 21, 2007 USA Today article published over a month before the iPhone's release stating, "AT&T has exclusive U.S. distribution rights for five years--an eternity in the go-go cellphone world." RCAC 86, RJN Ex. E: L. Cauley, AT&T Eager to Wield its iWeapon, USA Today, May 21, 2007. The tremendous pre-release publicity that accompanied the iPhone also reminded consumers that iPhones were locked to only work with ATTM and would not be unlocked. The RCAC quotes a Wall Street Journal article noting the ATTM exclusivity and stating that Apple "has locked and relocked the phone to make sure ATTO R N E Y S AT LAW SA N F R A N C I S C O 5 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 consumers can't override that restriction." RCAC 62, RJN Ex. F: W. Mossberg, Free My Phone, Wall Street Journal, October 22, 2007. 2 There is no allegation that Apple or ATTM ever told consumers they could or would at any point be able to use the iPhone with another carrier. In short, there is no claim, and there could be no claim, that ATTM service was an undisclosed term of an iPhone contract. It was openly, obviously, part of the deal. 2. Apple's Add-on Applications Policy. Plaintiffs admit that, because Apple is in the process of permitting third party software applications for the iPhone, this portion of plaintiffs' claim is largely moot. RCAC 126 n. 6. 3 Plaintiffs nevertheless allege that Apple monopolized a supposed iPhone "Applications Aftermarket" by not supporting third party applications immediately and by demanding a share of any revenues generated by third party applications. RCAC 4. The RCAC does not claim that plaintiffs or the general public were unaware of Apple's initial policy toward third party applications. Nor do plaintiffs claim it was "secret," much less that Apple ever represented its initial policy was different than it was. To the contrary, the RCAC quotes a Wall Street Journal article from October 2007, which among other things stated: Apple has also, so far, barred users from installing third-party programs on the iPhone, though the company announced last week it will open the phone to such programs early next year. (Web-based iPhone programs those that run inside the Web browser have been available from day one.) RCAC 62, RJN Ex. F, W. Mossberg, Free My Phone. Here, too, Apple's position regarding add-on applications was never concealed. More importantly, now that the initial hurdle of a successful introduction of the iPhone has been achieved, Apple has quickly moved towards an ever-increasing third-party application presence. B. ANALYSIS: MARKET DEFINITION AND "AFTERMARKETS" Plaintiffs' antitrust claims are brought under Section 2 of the Sherman Act, which 2 3 The extensive press on these issues is evident with a simple web search, e.g., "Apple iPhone exclusive AT&T" on Google News (2007 date range). Apple released a "software development kit" (SDK) in March 2008 in order to enable "independent software developers to design third party applications" (RCAC 4 n. 2) and will shortly release the "updated version of the iPhone operating software, to be called Version 2.0, that will permit iPhone owners to safely download third party applications." Id. ATTO R N E Y S AT LAW SA N F R A N C I S C O 6 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 prohibits monopolization, attempted monopolization and conspiracy to monopolize. It is therefore incumbent on plaintiffs to plead and ultimately prove that Apple has monopoly power or at least a dangerous probability of achieving it in one or more relevant markets. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966) ("The offense of monopoly under 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power."); see also Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 455 (1993); Rebel Oil v. Atlantic Richfield Co., 51 F.3d 1421, 1432-33 (9th Cir. 1995). Plaintiffs must plead the contours of the relevant product and geographic markets. Golan v. Pingel Enter., Inc., 310 F.3d 1360, 1369 (Fed. Cir. 2002) ("Defining the relevant market is indispensable to a monopolization claim under 2 of the Sherman Act.") (quoting Thurman Indus., Inc. v. Pay `N Pak Stores, Inc., 875 F.2d 1369, 1373 (9th Cir. 1989)). As the Ninth Circuit has stated: "Market definition is crucial. Without a definition of the relevant market, it is impossible to determine market share," from which market power is often inferred. Rebel Oil, 51 F.3d at 1434. "Failure to identify a relevant product market is a proper ground for dismissing a Sherman Act claim." Tanaka v. Univ. of S. Cal., 252 F. 3d 1059, 1063 (9th Cir. 2001) (affirming dismissal where plaintiff sought to restrict relevant market to single athletic program in Los Angeles where she had preference to stay in Los Angeles); see also Big Bear Lodging Assoc. v. Snow Summit, Inc., 182 F. 3d 1096, 1104-05 (9th Cir. 1999) (affirming dismissal where plaintiffs failed to allege that no other goods or services were reasonably interchangeable with product offered by defendant ); Queen City Pizza v. Domino's Pizza, 124 F.3d 430, 436 (3d Cir. 1997). As noted, courts post-Twombly are even less tolerant of improperly pleaded complaints containing conclusory or implausible market definitions. See III, n.1, supra. 1. Single-Product Markets Are Rarely Viable. Markets are typically defined in terms of product interchangeability that is, a market is the group of products that consumers would view as substitutes for each other. Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962) ("The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.") Thus, the law in this Circuit, as elsewhere, is that "[i]f ATTO R N E Y S AT LAW SA N F R A N C I S C O 7 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 consumers view the products as substitutes, the products are part of the same market." Rebel Oil, 51 F. 3d at 1435. That general rule ends the case: there is no chance the iPhone would monopolize any market defined in this manner. Plaintiffs effectively concede as much; they never argue Apple has market power in any equipment market because they cannot: as plaintiffs acknowledged in the earlier Smith complaint, ATTM service is used by over 63 million of the 235+ million (estimated) cellular customers in the U.S. RJN Ex. D, 63; see also RCAC 86, L. Cauley, AT&T Eager to Wield its iWeapon, (RJN Ex. E). By contrast, the RCAC alleges 1.4 million iPhone customers as of October 2007 (with a forecast of 10 million more by 2008). RCAC 111. Instead, plaintiffs try to make the case that the iPhone defines its own separate aftermarkets, involving (1) iPhone-compatible cellular service and (2) iPhone-compatible software applications. Such single-brand markets are rarely tenable. As a leading treatise puts it: Relevant markets generally cannot be limited to a single manufacturer's products. As the Supreme Court recognized in the United States v. E.I. duPont de Nemours & Co. [351 U.S. 377 (1956)] . . . the "power that, let us say, automobile or soft-drink manufacturers have over their trademarked products is not the power that makes an illegal monopoly. Illegal power must be appraised in terms of the competitive market for the product." 1 ABA Section of Antitrust Law, Antitrust Law Developments (6th ed. 2007) 588-89; see also Green Country Food Mkt., Inc. v. Bottling Group LLC, 371 F.3d 1275, 1283 (10th Cir. 2004) (Pepsi products not a relevant market); Tanaka, 252 F.3d at 1063-64 (9th Cir. 2001) ("UCLA women's soccer program" not a relevant market); Gall v. Home Box Office, 1992-2 Trade Cas. (CCH) 69,949 at 68,594 (S.D.N.Y. 1992) ("the natural monopoly every manufacturer has in its own product simply cannot serve as the basis for antitrust liability"). 2. The Kodak Aftermarket Exception. Plaintiffs attempt to fit within the narrow exception to the rule against single-brand markets created in Kodak. The effort fails badly. Some products, especially durable goods like automobiles and many types of business equipment, require the customer to purchase additional items after the initial purchase, for example repair parts, service and supplies. It is sometimes said that these additional purchases take place in "aftermarkets." Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis ATTO R N E Y S AT LAW SA N F R A N C I S C O 8 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 of Antitrust Principles and Their Application, 564b ("An aftermarket is a type of derivative market consisting of consumable goods or replacement components that must be used for the proper functioning of some primary good."). Certain durable goods manufacturers that face intense competition in the market for the initial sale of the primary product have nevertheless been charged with monopolizing the derivative aftermarkets for the post-sale products and services their customers consume. Id.; see also 1 ABA Section of Antitrust Law at 238-39. Kodak and its progeny address whether and when that is possible. Kodak was a significant manufacturer of photocopiers but faced intense interbrand competition. Kodak, 504 U.S. at 455-58. At one time it sold replacement parts openly, both to independent service organizations (ISOs) and to end-users who patronized ISOs, then ceased to do so, prompting monopolization claims. Id. at 458. Kodak obtained summary judgment on the ground that the equipment "foremarket" was the relevant market, and thus Kodak lacked market or monopoly power. Id. at 456. The Ninth Circuit reversed, and the Supreme Court agreed. While accepting that foremarket competition would ordinarily be expected to constrain aftermarket behavior, id. at 469-70 nn.15, 17, the Supreme Court declined to adopt "a substantive legal rule that `equipment competition precludes any finding of monopoly power in derivative aftermarkets.'" Id. at 466 (quotations omitted). The Court found that parts and service for Kodak copiers could be relevant product markets under specialized circumstances, in particular where "locked-in" consumers were vulnerable to exploitation from undisclosed business practices. See Ikon, 513 F.3d at 1048 ("[C]onsumers could not, at the time of purchase, reasonably discover that Kodak monopolized the service market and charged supracompetitive prices for its service."). Kodak and it progeny make clear that a claim of aftermarket monopolization cannot exist where the manufacturer's allegedly anticompetitive policies were known and agreed to at the time of purchase. See, e.g., PSI Repair Services v. Honeywell Inc., 104 F. 3d 811, 820-21 (6th Cir. 1997) (Kodak inapplicable where Honeywell informed customers at time of initial purchase that it would supply basic control equipment as well as replacement components and service as single product); Alcatel USA, Inc. v. DGI Tech., Inc., 166 F.3d 772 (5th Cir. 1999) (no aftermarket where software license disclosed that it could be used only on manufacturer-provided ATTO R N E Y S AT LAW SA N F R A N C I S C O 9 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 equipment); Queen City Pizza, 124 F.3d at 440-41 (Kodak inapplicable where franchise contract disclosed that defendant would control access to certain ingredients and supplies); SMS Systems v. Digital Equip. Corp., 188 F.3d 11, 19 (1st Cir. 1999) (distinguishing "prospective nature of the warranty" at issue as compared to Kodak's "retroactive change in the rules"); Digital Equip. Corp. v. Uniq Digital Tech., Inc., 73 F.3d 756, 763 (7th Cir. 1996) ("[I]f spare parts had been bundled with Kodak's copiers from the outset, or Kodak had informed customers about its policies before they bought its machines, purchasers could have shopped around for competitive lifecycle prices. The material dispute that called for a trial was whether the change in policy enabled Kodak to extract supra-competitive prices from customers who had already purchased its machines."). 4 The Ninth Circuit's Ikon decision emphasizes this point, and more specifically holds that where the defendant's alleged market power "arises solely from contractual rights that consumers knowingly and voluntarily gave to the defendant" at the time of their foremarket purchase, the foremarket not any aftermarket is the relevant market. Ikon, 513 F. 3d at 1048. Of course, the alleged aftermarket must also be an aftermarket. That is, for this exception to the normal rules of market definition to apply, the alleged market must be for those "unique" and non-interchangeable products or services that are "wholly derivative from and dependent on the primary market." Id. at 1049. Thus, the typical aftermarket case involves a unique "consumable" product or service that is useful only with respect to the foremarket product. A replacement part that works only in a Kodak copier, and is therefore worthless to owners of Xerox copiers, is the typical example. This is crucial, for as the Ninth Circuit explained in Ikon, "one of the primary considerations" in Kodak was that: Kodak held a natural monopoly in the submarket for Kodak-brand replacement parts, which gave it a unique position in the wholly derivative aftermarket for service contracts. Kodak was then able to exploit that unique position to gain monopoly power in the derivative services market as well, even though its monopoly power in services was neither naturally nor contractually created. 4 See also Schor v. Abbott Labs., 457 F.3d 608, 614 (7th Cir. 2006) (holding Kodak's change in policy "had the potential to raise the total cost of copier-plus-service above the competitive level and . . . above the price that Kodak could have charged had it followed a closed-service model from the outset."); PSI Repair Servs., 104 F.3d at 820 ("the change in policy in Kodak was the crucial factor in the Court's decision.") ATTO R N E Y S AT LAW SA N F R A N C I S C O 10 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Id.; see also Queen City Pizza, 124 F.3d at 439 (aftermarket product "may constitute a relevant market ... where the commodity is unique, and therefore not interchangeable with other products"). Analyzed in light of these principles, plaintiffs' two "aftermarkets" cannot stand. C. THE "IPHONE VOICE AND DATA SERVICES AFTERMARKET" FAILS 1. Plaintiffs Accepted ATTM Service When they Purchased iPhones, i.e., as Part of the Initial Foremarket Transaction. Plaintiffs' real complaint is with their contractual agreement limiting them to ATTM service an agreement that on its face restricts their ability to use interchangeable cellular services. As noted, however, Ninth Circuit law "prohibits an antitrust claimant from resting on market power that arises solely from contractual rights that consumers knowingly and voluntarily gave to the defendant." Ikon 513 F.3d at 1048 (emphasis in original); see also Forsyth v. Humana, Inc., 114 F.3d 1467, 1476 (9th Cir. 1997) (explicit contractual provisions could not form boundaries of an antitrust aftermarket; rejecting proposed market definition limited to include only hospital customers who held defendant's insurance policies); Queen City, 124 F.3d at 439-41. Because all plaintiffs agreed to use ATTM service when they bought their iPhones, RCAC 31, there cannot be a relevant iPhone service aftermarket under Kodak and Ikon, and plaintiffs cannot claim that mandatory ATTM service was an act of monopolization. 5 Plaintiffs understand this problem, which the Court may recall was a point of contention among the various candidates for Lead Interim Class Counsel. Plaintiffs thus try to plead around Ikon by alleging that defendants kept "secret" their five-year exclusivity deal. RCAC 2. The idea apparently is that plaintiffs became unwittingly "locked-in" to ATTM service for three years beyond their agreed two-year service contract. This new twist cannot save plaintiffs' claim. First, to the extent it matters, there was widespread disclosure of ATTM's five-year exclusivity and no suggestion by Apple or anyone else that iPhones would become unlocked after two years. In fact, the iPhone box itself disclosed to the 5 Plaintiffs also do not adequately plead defendants' market power in this alleged aftermarket. While this is itself an independent basis for dismissing these claims, the fact that plaintiffs' contract-based "iPhone Voice and Data Services Aftermarket" can never be a cognizable aftermarket under Ikon means that plaintiffs will never be able to cure these deficiencies. ATTO R N E Y S AT LAW SA N F R A N C I S C O 11 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 prospective purchaser that a "[s]ervice plan with AT&T [would be] required for cellular network capabilities on expiration of initial new two-year agreement." IV.A.1, supra. This at-purchase information was more than enough disclosure to put consumers on notice that they might never have a choice of cellular service for their iPhone, and to thus preclude a Kodak-type aftermarket theory. See, e.g., PSI Repair Services, 104 F.3d at 820-21; Queen City Pizza, 124 F.3d at 440-41. Moreover, it is sheer speculation and illogical that failing to disclose the fiveyear exclusivity term would produce monopoly power, i.e., would allow Apple, a brand new entrant in cell phones, to "exert raw power in the aftermarket without regard for commercial consequences in the foremarket." SMS Systems, 188 F.3d at 17. That is the ultimate inquiry. This "imperfect disclosure" theory is neither logically nor legally a substitute for the kind of change-inpolicy or post-contract exploitation scenarios at issue in Kodak. Nor, since all iPhone consumers still fall under their initial ATTM contracts, 6 could nondisclosure possibly have resulted in the kind of unanticipated price increase that was fundamental to Kodak. The theory just makes no sense. 2. ATTM Cell Phone Service Existed Long Before the iPhone and is Not "Unique" To It. There is not, nor could there be, any claim that ATTM cell service is unique to the iPhone. Furthermore, ATTM cell service is not an aftermarket, it is a beforemarket that predates the iPhone, and is interchangeable with and in constant competition with all other cell service providers (including T-Mobile, the cell service provider that some plaintiffs switched from). RCAC 54-55. The notion that cellphone service is the aftermarket borders on the absurd it simply cannot be the case that as soon as a manufacturer introduces a new product, it makes an "aftermarket" of a preexisting service that works not only with that product but with an undisputed host of others. D. THE "IPHONE APPLICATIONS AFTERMARKET" FAILS The same problems, and more, plague plaintiffs' "iPhone Applications Aftermarket." 1. Apple's Third Party Applications Policy Was Public At The Time Plaintiffs Purchased iPhones. First, plaintiffs do not plead facts establishing that the general public was unaware 6 The earliest ATTM iPhone contracts will expire on June 29, 2009, two years after the iPhone was released. RCAC 31. ATTO R N E Y S AT LAW SA N F R A N C I S C O 12 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 of Apple's third party application policy. They never even allege that Apple tried to keep the policy secret from consumers, much less that any plaintiff was unaware of the policy at the time they purchased their iPhones. And they cite to evidence showing that the policy was known. Section IVA(2), supra. So the "undisclosed policy" rationale of Kodak is absent. Of course, plaintiffs have also failed to allege that there was any actual exploitation of "ignorance" about Apple's third party applications policy. To the contrary, plaintiffs concede that Apple has changed its policy to permit third party applications and issued an SDK to facilitate interoperability. RCAC 126 n. 6. Here, it's not just an absence of the post-purchase opportunistic behavior at issue in Kodak; Apple opened up the allegedly locked-down "market." 2. Plaintiffs Do Not Plead A Cognizable Product Market. Second, plaintiffs' allegations about the purported "iPhone Applications Aftermarket" are hopelessly vague and do not plead any kind of relevant market, or monopoly power in it. The RCAC merely describes an "aftermarket for software applications that can be downloaded on the iPhone for managing such functions as ring tones, instant messaging, photographic capability and Internet applications" and alleges that Apple has acquired monopoly power in this purported aftermarket by "approving" some applications and "discouraging" the use of others. RCAC 121, 123. But plaintiffs do not even allege that Apple makes or sells any addon applications, much less that it has a monopoly share of such applications. Obviously Apple makes and sells (technically, licenses) software that comes with the iPhone, but there is no claim that Apple makes or sells aftermarket applications, as would be required for Apple to monopolize this alleged market. A seller cannot monopolize a market in which it does not compete. Nor do plaintiffs explain how all software applications compatible with the iPhone would make up any kind of market, e.g., how it could possibly be that an instant messaging program could compete with a ring-tone maker, or that a photo application like Flickr could compete with a game program. By the same logic, all software compatible with Microsoft Windows would likewise constitute a market. But these are not even arguably interchangeable products of the kind that meet antitrust market definition requirements. Antitrust law does not recognize a market of products that do not compete with each other, are not substitutes for each ATTO R N E Y S AT LAW SA N F R A N C I S C O 13 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 other, and whose only unifying feature is that they are compatible with a given software platform. Even for the pleadings stage, this is an illogical mess that fails to meet Twombly's mandate that plaintiffs plead "enough facts to state a claim to relief that is plausible on its face" and "above the speculative level." Twombly, 127 S. Ct at 1965, 1974. On these allegations, plaintiffs' claims about monopolization of the "Applications Aftermarket" fail as a matter of law. V. PLAINTIFFS FAIL TO STATE A CAUSE OF ACTION FOR COMMON LAW COMPUTER TRESPASS OR STATUTORY COMPUTER FRAUD A. THE MATERIAL ALLEGATIONS Plaintiffs claim that Apple "knowingly issued and caused transmission of a purported update to the iPhone operating software, known as Version 1.1.1, which `bricked' (that is, rendered completely inoperable) or otherwise damaged some iPhones that were unlocked or had downloaded competing software applications." RCAC 5. The RCAC acknowledges that iPhone users had to affirmatively download Version 1.1.1 and that Apple warned them (and the broad "computer community") that the software update could cause irreparable damage to iPhones if the user had modified the embedded iPhone software. See RCAC 37, 98-103; id. 94-95 (Apple "repeatedly announced that any attempt to unlock the iPhone SIM or to install Third Party Apps would void the Apple warranty."). Apple released Version 1.1.1 on September 27, 2007. RCAC 102. iPhone owners had the choice to download it or not. 7 Prior to installing Version 1.1.1, iPhone owners had to view a bold, capitalized warning stating: "IF YOU HAVE MODIFIED YOUR IPHONE'S SOFTWARE, APPLYING THIS SOFTWARE UPDATE MAY RESULT IN YOUR IPHONE BECOMING PERMANENTLY INOPERABLE." A screenshot of the warning, as included in the initial Smith complaint at 42 and contained in Altered iPhones Freeze Up, Katie Hafner, New York Times, September 29, 2007, (RJN Ex. I), follows: 7 Indeed, plaintiff Kliegerman chose to download Version 1.1.1 on only two of his three iPhones (RCAC 13, 45), and plaintiff Holman chose not to download Version 1.1.1 because of his knowledge of the risks associated with his modified iPhone. RCAC 36-37. ATTO R N E Y S AT LAW SA N F R A N C I S C O 14 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 B. APPLE DID NOT COMMIT ANY "COMPUTER TRESPASS" Plaintiffs assert that Apple's release of Version 1.1.1 was an "unwanted and uninvited intermeddling" (RCAC 165) that constitutes common law trespass. Trespass requires (1) an interference with another's possession of property that is both (2) unlawful and (3) nonconsensual. See Staples v. Hoefke, 189 Cal. App. 3d 1397, 1406 (1987); Civic Western Corp. v. Zila Indus., Inc., 66 Cal. App. 3d 1, 16-17 (1977). The application of this doctrine to modern-day electronic "intrusions" is controversial, but has received some acceptance in two settings: "spamming" computer systems, e.g., Intel Corp. v. Hamidi, 30 Cal. 4th 1342 (2003), and using "bots" to harvest information from another's computer system, e.g., eBay, Inc. v. Bidder's Edge, Inc., 100 F. Supp. 2d 1058 (N.D. Cal. 2000). The sine qua non of these cases is a defendant initiating an unwanted electronic intrusion into the plaintiff's computer, for that is the "trespass" that underlies the tort. Plaintiffs' concessions that they consented to the installation of Version 1.1.1, and that Apple warned them about possible consequences, doom their claim in two ways. First, there simply was not a trespass by Apple. This case is nothing like Intel or eBay, in which strangers intruded uninvited into the plaintiffs' computer systems. An uninvited "intrusion" is fundamental to any trespass, see, e.g., Rest.2d Torts, 158, cmt. c, and without it there is no basis for invoking this common law doctrine. Furthermore, it would send shockwaves throughout the software industry if the courts were to find that downloading a software update one of the most common software delivery models satisfies the intrusion element of a trespass ATTO R N E Y S AT LAW SA N F R A N C I S C O 15 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 claim, such that any harm that is claimed to result from the download, intended or not, would be redressable in tort. That is plainly not the law today; nor should it be. Second, to the extent Apple "entered" plaintiffs' iPhones at all, plaintiffs' consensual choice to download and install Version 1.1.1 precludes any finding of trespass, particularly in light of Apple's multiple warnings. See Civic Western Corp., 66 Cal. App. 3d at 16-17 ("Where there is a consensual entry, there is no tort, because lack of consent is an element of the wrong."); Cal. Civ. Code 3515 ("He who consents to an act is not wronged by it."); see also Restatement (Second) of Torts 252 ("One who would otherwise be liable to another for trespass to chattel or for conversion is not liable to the extent that the other has effectively consented to the interference with his rights."); 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, 126, p. 235. There can be no trespass where the owners of the property at issue the iPhones not only consented to the supposed "trespass," but themselves (not Apple) installed the allegedly "trespassing" upgrade. In the end, plaintiffs do not really complain about any "intrusion," much less "trespass;" they try to stretch the doctrine well beyond any reasonable bounds. Their claim is that Apple acted tortiously by releasing an updated version of its iPhone operating system without guaranteeing that the updated operating system would be compatible with all iPhones whose software had been altered to unlock the phones, in violation of the software license agreement. Plaintiffs claim, in other words, that Apple has a duty to maintain software compatibility with all "hacked" iPhones whose software has thereby been altered. There is no legal authority whatsoever for such a duty, even under the most radical concepts of computer trespass. C. PLAINTIFFS FAIL TO STATE A COMPUTER FRAUD CLAIM Plaintiffs also allege that Apple's release of Version 1.1.1 supports a claim of computer fraud under two criminal statutes allowing corollary civil rights of action the federal Computer Fraud and Abuse Act ("CFAA") and California Penal Code 502(c)(8). 1. Plaintiffs Fail To State A CFAA Claim. Plaintiffs' claim under the CFAA fails for three reasons. First, plaintiffs fail to and cannot allege the requisite intent required under this ATTO R N E Y S AT LAW SA N F R A N C I S C O 16 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 criminal statute. The CFAA penalizes only those parties who knowingly transmit a program with the specific and conscious intent of causing damage: "Whoever knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct, intentionally causes damage without authorization, to a protected computer..." 18 U.S.C. 1030(a)(5)(A)(i) (emphasis added). The "intent" threshold is high the "conduct or the causing of the result must have been the person's conscious objective." Butera & Andrews v. IBM Corp., 456 F. Supp. 2d 104, 109 (D.D.C. 2006), quoting S. Rep. No. 99-541, at 23 (1986) (emphasis supplied). Plaintiffs' RCAC does not come close to meeting this stringent requirement. Plaintiffs liberally sprinkle about the conclusory word "intent" but they do not allege what they must: that it was Apple's "conscious objective" in releasing Version 1.1.1 to damage or destroy unlocked iPhones. Plaintiffs' allegations, instead, make clear that their claim rests on knowledge of a potential but unintended result: that Version 1.1.1 "would damage or destroy unlocked iPhones." RCAC 6. These allegations are insufficient under the CFAA, which requires that a defendant "intentionally causes damage without authorization, to a protected computer..." 18 U.S.C. 1030(a)(5)(A)(i) (emphasis supplied). Plaintiffs' reading of "intent" would effectively mean that (1) manufacturers have a perpetual duty of care to ensure that any software update they issue will not damage or affect any consumer product, regardless of the consumers' own actions in altering the product, and (2) manufacturers are criminally liable for failure to sustain that duty. This is not the law and never should be. The CFAA's requirement of the strictest standard of "intent" forecloses such expansive assertions of criminal liability. As plaintiffs do not and cannot allege, in good faith, that Apple issued Version 1.1.1 with the conscious objective to damage iPhones, this claim fails. Second, there can be no violation of the CFAA because every iPhone owner had to authorize the installation of Version 1.1.1 and download the actual update. See VI.A, supra. The CFAA statute only reaches situations where the defendant "knowingly causes [a] transmission ... and as a result of such conduct, intentionally causes damage without authorization, to a protected computer." 18 U.S.C. 1030(a)(5)(A)(i) (emphasis added). Here, plaintiffs chose whether or not to install Version 1.1.1 after being forewarned. ATTO R N E Y S AT LAW SA N F R A N C I S C O 17 DEFENDANT APPLE'S MOTION TO DISMISS CASE NUMBER: C 07-05152 JW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Third, plaintiffs' allegations regarding the value of their iPhones ($399, $499, $599 (RCAC 28 n.3) preclude a finding that they meet the requisite minimum of $5,000 in damages per iPhone needed to make out a CFAA claim. See Thurmond v. Compaq Comp. Corp., 171 F. Supp. 2d 667, 681 (E.D. Tex. 2001) (granting motion for summary judgment based on plaintiffs' failure to establish the requisite $5,000 in losses; explicitly rejecting argument that plaintiffs are permitted to aggregate damages across multiple computers for CFAA claims); Hayes v. Packard Bell NEC, Inc., 193 F. Supp. 2d 910, 912-13 (E.D. Tex. 2001) (granting motion to dismiss in light of plaintiff's concession that she could not establish $5,000 in damages per computer); In re Doubleclick Inc. Privacy Litigation, 154 F. Supp. 2d 497, 524 (S.D.N.Y. 2001) ($5,000 damage threshold must be attributable to single act). Amendments to the CFAA subsequent to these decisions further clarify that only claims brought by the United States government may aggregate losses attributable to more than one protected computer for purposes of the $5,000 threshold. See 18 U.S.C. 1030(a)(5)(A)(i), (B)(i). Plaintiffs do not, and cannot, allege $5,000 in damages per iPhone in the aggregate per year to state a claim. 2. Plaintiffs Fail to State a Claim Under Penal Code 502. Section 502(c)(8) of the California Penal Code punishes an individual who "[k]nowingly introduces any computer contaminant into any computer, computer system, or computer network," Id. Section 502(b)(10) defines "computer contaminant" as "computer instructions that are designed to modify, damage, destroy, record, or transmit information within a computer ... without the