"The Apple iPod iTunes Anti-Trust Litigation"

Filing 230

Memorandum in Opposition re 229 MOTION for Judgment on the Pleadings as to plaintiffs' rule of reason tying claim filed byMelanie Tucker. (Merrick, Thomas) (Filed on 8/27/2009)

"The Apple iPod iTunes Anti-Trust Litigation"

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1 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 JOHN J. STOIA, JR. (141757) BONNY E. SWEENEY (176174) 3 THOMAS R. MERRICK (177987) 655 West Broadway, Suite 1900 4 San Diego, CA 92101 Telephone: [phone] (fax) [e-mail] 6 [e-mail] [e-mail] 7 THE KATRIEL LAW FIRM 8 ROY A. KATRIEL (pro hac vice) 1101 30th Street, N.W., Suite 500 9 Washington, DC 20007 Telephone: [phone] (fax) [e-mail] 11 Co-Lead Counsel for Plaintiffs 12 [Additional counsel appear on signature page.] 13 UNITED STATES DISTRICT COURT 14 NORTHERN DISTRICT OF CALIFORNIA 15 SAN JOSE DIVISION 16 THE APPLE IPOD ITUNES ANTI-TRUST ) Lead Case No. C-05-00037-JW(RS) ) 17 LITIGATION ) CLASS ACTION ) 18 ) PLAINTIFFS' OPPOSITION TO This Document Relates To: ) DEFENDANT'S MOTION FOR 19 ) JUDGMENT ON THE PLEADINGS AS TO ALL ACTIONS. 20 ) PLAINTIFFS' RULE OF REASON TYING CLAIM 21 Judge: Hon. James Ware 22 Date: October 5, 2009 Time: 9:00 a.m. 23 Ctrm: 8 ­ 4th Floor 24 25 26 27 28

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Plaintiffs Somtai Troy Charoensak, Mariana Rosen, and Melanie Tucker (collectively

2 "Plaintiffs") respectfully submit this memorandum in opposition to Defendant Apple, Inc.'s 3 ("Apple" or "Defendant") Motion for Judgment on the Pleadings as to Plaintiffs' Rule of Reason 4 Tying Claim ("Def's Motion"). 5 I. 6 INTRODUCTION While Apple would like to rely on the Court's dismissal of Plaintiffs' per se tying claim, it

7 glosses over the critical distinctions between the standards and policies underlying per se 8 prohibitions of anticompetitive conduct and those evaluated under the rule of reason. Per se 9 illegality is limited to those situations where the anticompetitive conduct is so obvious and 10 pernicious that the court is not required to undertake a specific analysis of the nature of the industry, 11 the markets and the pro- and anti competitive effects of the defendant's conduct. The rule of reason, 12 by contrast, allows for, and in fact requires, this type of fact-specific analysis. It is therefore 13 appropriately applicable to situations, such as this, where Plaintiffs allege a "technological tie," and a 14 more extensive analysis of the relevant markets and effects of the tie is necessary to determine 15 whether Defendant has acted anticompetitively to unreasonably restrain trade. The fact-specific 16 analysis required by the rule of reason can only be conducted after sufficient discovery and is thus 17 particularly inappropriate for a motion for judgment on the pleadings. 18 Plaintiffs have adequately pleaded a technological tie between Apple's iPod and iTMS audio

19 and video files that is well-suited for the rule of reason analysis. Plaintiffs have also sufficiently 20 pleaded both concerted action under settled Section 1 jurisprudence and the level of coercion 21 necessary to sustain a rule of reason tying claim. Despite Apple's attempt to immunize itself from 22 the antitrust laws, Plaintiffs have demonstrated that antitrust enforcement is crucially important in 23 cases such as this, to ensure that dominant companies do not abuse their market power to squelch 24 competition and innovation and ultimately harm consumers. 25 26 27 28
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1 II. 2

SUMMARY OF PLAINTIFFS' TYING CLAIMS Plaintiffs allege that Apple, through its iTunes Music Store ("iTMS"), holds market power in

3 the sale of digital audio and video files (collectively, "iTMS files"), which it exploited by tying the 4 sale of iTMS files and the sale of iPods. Complaint, ¶21.1 Apple achieved this technological tie by 5 encrypting the iTMS files with digital rights management ("DRM") technology called "FairPlay," so 6 that the iTMS files could be directly played only on the portable digital media players manufactured 7 by Apple (collectively, "iPod"). Id., ¶¶41-44. Plaintiffs contend that Apple thereby necessarily 8 constrained the iTMS customer's choice of portable digital media players.2 Id. For the same reason, 9 the only replacement for a broken iPod that can play an existing library of iTMS files is another 10 iPod. Id., ¶44. Apple acted to maintain the tie by issuing software updates designed specifically to 11 destroy any possibility that competing manufacturers could sell a portable digital media player that 12 was interoperable with iTMS files. Id., ¶¶51-55. Plaintiffs allege that Apple's conduct deterred 13 competition in the portable player market and allowed it to charge supracompetitive prices to all 14 purchasers of iPods, including those who never purchased any iTMS files. Id., ¶¶22, 72, 73. 15 III. 16 LEGAL STANDARD Motions for judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil

17 Procedure "are functionally identical" to motions to dismiss under Rule 12(b)(6) and the standard for 18 deciding them is the same. Dworkin v. Hustler Magazine Inc., 867 F.2d 1188, 1192 (9th Cir. 1989). 19 Judgment under Rule 12(c) "may only be granted when the pleadings show that it is `beyond doubt 20 that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" 21 22 See Consolidated Complaint for Violations of the Sherman Antitrust Act, Clayton Act, Cartwright Act, California Unfair Competition Law, Consumer Legal Remedies Act, and California 23 Common Law of Monopolization, filed April 19, 2007 ("Complaint"). 24 2 Despite the fact that Apple now offers FairPlay DRM free music files for sale on iTMS, 25 purchasers with existing libraries of iTMS music files remain locked in. The previously purchased music files remain encrypted with Apple's FairPlay unless the purchaser pays an additional $0.30 existing file. See Press Release, Changes 26 per music file to remove theiTunes DRM and "unlock" the6, Coming to the Store (Jan. 2009), available at www.apple.com/pr/library/2009/01/06itunes.html (explaining that Apple charges $0.30 per audio 27 file or 30% of the album price to remove its FairPlay DRM from previously purchased files). 28
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1 Enron Oil Trading & Transp. v. Walbrook Ins. Co., 132 F.3d 526, 529 (9th Cir. 1997) (quoting B.F. 2 Goodrich v. Betkoski, 99 F.3d 505, 529 (2d Cir. 1996)). All allegations of material fact are taken as 3 true and construed in the light most favorable to the plaintiff. U.S. Philips Corp. v. Infodisc Tech. 4 USA, Inc., No. CV 04-10017 SVW (JTLx), 2005 WL 6141291, at *3 (C.D. Cal. June 28, 2005). 5 IV. 6 A. 7 8 Plaintiffs' Tying Allegations Are Appropriately Evaluated Under the Rule of Reason PLAINTIFFS' TYING CLAIM CONSTITUTES A VIOLATION OF SECTION 1 UNDER THE RULE OF REASON ANALYSIS

Apple argues that the Court's order dismissing Plaintiffs' per se tying claim and the holding

9 of Foremost Pro require dismissal of Plaintiffs' rule of reason tying claim. See Def's Motion at 4. 10 Both decisions were expressly limited to per se liability, and neither dealt with whether the type of 11 conduct alleged here could be addressed under a Section 1 rule of reason analysis. Dkt. No. 213 at 12 9-10; Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 541 (9th Cir. 1983). 13 Tying arrangements that are not suitable for per se prohibition may still be addressed under a

14 rule of reason test. See Phonetele, Inc. v. Am. Tel. & Tel. Co., 664 F.2d 716, 738 (9th Cir. 1981) 15 ("Conduct that does not meet the requirements of [the] per se rule . . . may still constitute a violation 16 of the section 1 rule of reason."). The per se analysis is applied only to a subset of antitrust claims. 17 The Supreme Court has cautioned that "`[it] is only after considerable experience with certain 18 business relationships that courts classify them as per se violations . . . .'" Broad. Music, Inc. v. 19 Columbia Broad. Sys., Inc., 441 U.S. 1, 9, 99 S. Ct. 1551 (1979); see also White Motor Co. v. United 20 States, 372 U.S. 253, 263, 83 S. Ct. 696 (1963) ("We need to know more than we do about the actual 21 impact of these arrangements on competition to decide whether they have such a `pernicious effect 22 on competition and lack . . . any redeeming virtue' and therefore should be classified as per se 23 violations of the Sherman Act.") (internal citations omitted). Per se treatment is appropriate in those 24 situations where the anticompetitive conduct is so obvious that analysis of market conditions is not 25 justified. See, e.g., Arizona v. Maricopa Cty Med. Soc'y, 457 U.S. 332, 350-51, 102 S. Ct. 2466 26 (1982) (elaborate market analysis not necessary in price fixing case); Catalano, Inc. v. Target Sales, 27 Inc., 446 U.S. 643, 647, 100 S. Ct. 1925 (1980) (agreement among competitors to fix prices is per se 28 unlawful).
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However, where judicial expertise in a particular industry is missing, or the nature of the

2 anticompetitive conduct is not of the kind that has historically been subject to per se condemnation, 3 the rule of reason analysis is proper because it allows "consider[ation] [of] facts peculiar to the 4 industry, the nature of the restraint and its effect to determine whether that restraint promotes or 5 restrains competition." Los Angeles Mem'l Coliseum Comm'n v. Nat'l Football League, 726 F.2d 6 1381, 1387 (9th Cir. 1984); see also In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 202 n.13 7 (2d Cir. 2006) (holding assessment of several factors is necessary including, "specific information 8 about the relevant business, its condition before and after the restraint was imposed, and the 9 restraint's history, nature and effect"). 10 To state a claim for tying under the rule of reason, Plaintiffs must allege that the tying

11 arrangement was intended to harm competition and in fact caused injury to competition. See Oltz v. 12 St. Peter's Cmty. Hosp., 861 F.2d 1440, 1445 (9th Cir. 1988); Datagate, Inc. v. Hewlett-Packard 13 Co., 941 F.2d 864, 870 (9th Cir. 1991) ("must allege an injury to competition"). Once this is shown, 14 "the factfinder must analyze the anti-competitive effects along with any pro-competitive effects to 15 determine whether the [arrangement] is unreasonable on balance." Bahn v. NME Hosps., Inc., 929 16 F.2d 1404, 1413 (9th Cir. 1991); see also Maricopa Cty Med. Soc'y, 457 U.S. at 343 ("[T]he rule of 17 reason requires the factfinder to decide whether under all the circumstances of the case the restrictive 18 practice imposes an unreasonable restraint on competition."). This requires inquiry into all the 19 relevant facts. Oltz, 861 F.2d at 1445. Such an inquiry is, however, not appropriate for a Rule 12 20 motion. See Xerox Corp. v. Media Scis. Int'l, Inc., 511 F. Supp. 2d 372, 389 (S.D.N.Y. 2007). 21 Here, Plaintiffs' tying claim is appropriately pleaded under Section 1 rule of reason,

22 permitting the factfinder to more fully understand and evaluate the actual impact of the technological 23 tie on competition in the relevant markets by considering and balancing the tie's benefits against the 24 costs to consumer choice and competition. United States v. Microsoft, 253 F.3d 34, 94 (D.C. Cir. 25 2001); see also Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 25 n.41, 104 S. Ct. 1551 26 (1984) (noting that the per se rule does not permit consideration of procompetitive justifications). 27 Plaintiffs allege that Apple's use of FairPlay and software updates to block interoperability created 28 technological impediments that were intended to restrict consumer choice and restrain competition.
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1 Complaint, ¶¶21, 41-44. Plaintiffs allege further that Apple's conduct in fact caused injury to 2 competition by deterring consumers from doing business with Apple's competitors and discouraging 3 entrance into the market for portable digital media players. Id., ¶¶72, 74-77. These allegations, if 4 proven, are adequate to show a Section 1 violation under the rule of reason and are therefore 5 sufficient to defeat Apple's 12(c) motion. 6 Apple suggests that the rule of reason analysis is reserved for those tying cases where the

7 defendant lacks market power. Def's Motion at 5-6. However, as the Supreme Court has stated "the 8 purpose of tying law has been to identify and control those tie-ins that have a demonstrable 9 exclusionary impact in the tied product market, or that abet the harmful exercise of market power 10 that the seller possesses in the tying product market."3 Jefferson Parish, 466 U.S. at 35 (O'Connor, 11 J., concurring). The rule of reason only condemns tying arrangements in these circumstances. See 12 id.; see also Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768, 104 S. Ct. 2731 13 (1984) ("[S]uch combinations are judged under a rule of reason, an inquiry into market power and 14 market structure designed to assess the combination's actual effect."); William O. Gilley Enters., Inc. 15 v. Atlantic Richfield Co., 561 F.3d 1004, 1010 (9th Cir. 2009) ("To make [a] showing [of 16 anticompetitive effect] under the rule of reason analysis, a plaintiff must generally establish market 17 power."). 18 Indeed, even where a defendant has market power in the relevant market, the court may still

19 find that analysis under the rule of reason is more appropriate given the facts of the case. For 20 example, in Microsoft, the court found that the company had market power in the tying product 21 market, operating systems. Microsoft, 253 F.3d at 54. The court still held that the rule of reason, 22 rather than per se analysis, was appropriate because the alleged technological tie represented a 23 "novel categor[y] of dealing[]." Id. at 84. Similarly, here, despite the Court's prior finding that the 24 alleged technological tie cannot be remedied through a per se action, the Court should still find, as in 25 26 27 28
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Unless otherwise noted, citations are omitted and emphasis is added.

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1 Microsoft, that Plaintiffs have alleged a set of facts that if proven would entitle them to relief under 2 the rule of reason. 3 4 Apple contends that in its order on Plaintiffs' per se claim, the Court held that Plaintiffs 5 failed to meet the "threshold requirement" that the "seller refused to sell the products at issue 6 separately." Def's Motion at 1. This is a complete misreading of the Court's prior order and an 7 incorrect statement of the law. 8 First, the Court did not find that Plaintiffs failed to allege a tie. To the contrary, the Court 9 expressly held that Plaintiffs alleged a "technological tie" like that recognized by the Ninth Circuit in 10 Foremost Pro. Dkt. No. 213 at 8 ("[T]he Court recognizes that the most relevant model for liability 11 is that of the technological tie, as recognized by the Ninth Circuit in Foremost Pro."). In Foremost 12 Pro the court considered only whether plaintiff had stated a per se tying claim. Foremost Pro, 703 13 F.2d at 541. Plaintiff alleged that defendant Kodak illegally tied the sale of film and processing 14 materials to the sale of its new camera. Because the new camera could only use the new film, which 15 could not be processed without the new processing materials, it was necessary to purchase the entire 16 package of camera, film and processing materials from Kodak. Id. at 542. The Ninth Circuit held 17 that such a "technological interrelationship among complementary products" was essentially that of 18 a "technological tie" but, standing alone, not sufficient to establish a per se tying arrangement Id. 19 Stated another way, "[t]he Ninth Circuit . . . identified the technological tie as a species of tying 20 arrangement, but expressly declined to find that allegations of technological ties, without more, 21 could provide the basis for per se Section 1 liability." Dkt. No. 213 at 8. 22 As the Court recognized, a "technological tie" exists where "a technological relationship 23 between a seller's products compels a buyer to purchase both products. Such compulsion results 24 when one product is ineffective or is less effective without concomitant purchase of the second 25 technologically interrelated product." Id. at 6. Here, Plaintiffs allege exactly this. Plaintiffs contend 26 that Apple tied purchase of its iPods to purchase of iTMS files encrypted with FairPlay technology. 27 Complaint, ¶¶42-44. Customers who purchased FairPlay-encrypted iTMS files were required to also 28
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Plaintiffs Have Alleged a Tie Between Apple's iPod and iTMS Audio and Video Files

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1 purchase an iPod from Apple for direct playback of the files on a portable digital media player 2 because Apple's proprietary encryption technology prevented direct playback of the files on 3 competing players. Id., ¶44. Plaintiffs contend that although consumers could purchase iTMS files 4 without purchasing an iPod, they were still locked into purchasing an iPod if they wished to play the 5 files directly on a portable digital media player. Id., ¶¶43, 44. Since a large part of the appeal in 6 purchasing digital downloads is that they can be easily transferred to a portable player, use of the 7 files "is ineffective or less effective" without the purchase of an iPod. Dkt. No. 213 at 6; Complaint, 8 ¶8. 9 Like the camera, film and processing materials in Foremost Pro, the "technological

10 interrelationship" created by Apple between iTMS files and iPods resulted in a tie which required 11 consumers to purchase the entire package, iTMS files and an iPod, for direct playback of the iTMS 12 files on a portable player. See id., ¶¶42-44. The Court here found Plaintiffs' allegations analogous 13 to Foremost Pro and held that while Plaintiffs alleged a technological tie, "existing antitrust doctrine 14 does not allow such conduct to be remedied through a per se tying action." Dkt. No. 213 at 9. Other 15 courts have recognized the existence of similar ties. See, e.g., Microsoft, 253 F.3d at 84-85; see also 16 10 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Laws, ¶1757c at 320-23 (2d ed. 2006). 17 Notably, plaintiff in Foremost Pro did not allege that Kodak's conduct foreclosed

18 competition in the relevant market. Instead, plaintiff merely contended that when the new Kodak 19 camera was introduced, no competing chemicals and film on the market at the time were compatible 20 with the camera. Foremost Pro, 703 F.2d at 542 n.4. By contrast, Plaintiffs here allege that Apple 21 deliberately used FairPlay to prevent competing manufacturers from creating portable digital media 22 players that are compatible with FairPlay-encrypted iTMS files. Complaint, ¶¶45, 50. Moreover, 23 Plaintiffs allege that Apple acted to maintain the tie by issuing software updates designed 24 specifically to destroy any possibility that competing manufacturers could sell a portable digital 25 media player that was interoperable with iTMS files. Id., ¶¶51-55. This type of exclusionary 26 conduct violates antitrust law. See, e.g., Xerox Corp., 511 F. Supp. 2d at 388 (finding plaintiff 27 alleged anticompetitive conduct where it was alleged that defendant's patented redesign prevented 28 competitors from selling compatible complimentary products); In re IBM Peripheral EDP Devices
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1 Antitrust Litig., 481 F. Supp. 965, 1002-03 (N.D. Cal. 1979) (explaining that a market-dominating 2 producer who kept "changing [its products] with such frequency that [competing complementary 3 products] would have been unable to attach and unable to economically adapt their [products] to the 4 ever-changing . . . designs" and used this "as a vehicle for tying" would be acting illegally). 5 Moreover, Plaintiffs are not required to allege that the purchase of the tied and tying products

6 occurred at the same time or on a "package" basis. See Def's Motion at 2. Indeed, a tying 7 arrangement exists where the seller agrees "to sell one product but only on the condition that the 8 buyer also purchases a different (or tied product), or at least agrees that he will not purchase that 9 product from any other supplier." Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 461, 10 112 S. Ct. 2072 (1992) (quoting N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6, 78 S. Ct. 514 11 (1958)). Here, Plaintiffs have alleged that Apple's use of FairPlay forced consumers who wished to 12 purchase FairPlay-encrypted iTunes files to implicitly agree not to purchase a portable digital media 13 player from "any other supplier." Id.; see Complaint, ¶¶43-45. While consumers were not required 14 to purchase both products at the same time, purchasers were forced to forgo the possibility of 15 purchasing a competing portable digital media player for use with their iTMS files. Id., ¶44. 16 Advanced Computer Services of Michigan, Inc. v. MAI Systems Corp., 845 F. Supp. 356

17 (E.D. Va. 1994), cited by Apple, is not to the contrary. See Def's Motion at 4-5. There, plaintiffs, 18 independent service organizations, alleged that defendant tied the purchase of its copyrighted 19 computer operating systems and diagnostic software to the purchase of maintenance and repair 20 services. MAI Sys. Corp., 845 F. Supp. at 360. Plaintiffs claimed that defendant's enforcement of its 21 copyrights of the operating system and diagnostic software precluded competition in the 22 maintenance and repair market because plaintiffs were unable to adequately service the computers 23 without using the copyrighted programs. Id. The court found that no tie existed because: (1) 24 independent servicers could and did develop their own diagnostic software to service the computers; 25 (2) consumers were free to and did choose to have their computers serviced by these servicers; and 26 (3) defendant's selective licensing of its diagnostic software and operating systems was within its 27 discretion. Id. at 368-69. Thus, competition in the tied product market, maintenance and repair, was 28 not foreclosed and consumers were free to choose alternative maintenance and repair services. See
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1 Areeda, supra, ¶1757a at 318 ("No tying problem arises when the defendant sufficiently prediscloses 2 its primary product design so that efficient rivals can offer a compatible complimentary product."). 3 By contrast here, Plaintiffs have alleged that competing manufacturers of the tied product,

4 portable digital media players, are unable to create and sell products that are compatible with iTMS 5 files because of the use of FairPlay and Apple's continued foreclosure of the market through 6 software updates. Complaint, ¶¶44-45, 50-55. Unlike in Advanced Computer Services of Michigan, 7 Inc. where consumers of the tying product had alternatives to the purchase of the tied product from 8 defendant, here, purchasers of iTMS files are genuinely limited in their choice of a portable digital 9 media player because no compatible products exist. See id. 10 Still, Apple claims that Plaintiffs have not alleged the level of coercion necessary to

11 demonstrate a tie. Def's Motion at 4. Apple asserts that the decision in Foremost Pro "rested on 12 the Ninth Circuit's conclusion that plaintiff had not alleged the required coercion because the 13 defendant had not conditioned the sale of the tying product on the purchase of the tied product." Id. 14 Apple contends this "analysis applies to a rule of reason claim." Id. This is simply not the law. 15 The coercion necessary to prove that a tie is unlawful per se is not the same as that required

16 to demonstrate a tie is unlawful under the rule of reason. As the court in Foremost Pro explicitly 17 stated, "Foremost's complaint failed to plead the coercion essential to a per se unlawful tying 18 arrangement." Foremost Pro, 703 F.2d at 542. The rationale of a per se claim is that competition 19 in the tied product market is necessarily restrained, not because the tied product is better, but because 20 the defendant is able to leverage its power in the tying product market into that of the tied product by 21 forcing purchasers to purchase both the tying and tied products. See Betaseed, Inc. v. U & I Inc., 681 22 F.2d 1203, 1215 (9th Cir. 1982). Thus, "`[s]ome modicum of involuntariness or coercion is . . . 23 essential to the existence of a per se illegal tie-in. When these requirements are met, tying 24 arrangements are illegal in and of themselves without any requirement that the plaintiff make a 25 showing of unreasonable competitive effect." Foremost Pro, 703 F.2d at 540 (internal citations 26 omitted). 27 Where coercion is not demonstrated in the usual way ­ the express condition that plaintiff

28 purchase the tied product with the tying product ­ it may still be appropriate to analyze the tie under
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1 the rule of reason standard with proof that the conduct had an anticompetitive effect. Id. at 542; see 2 also Webb v. Primo's Inc., 706 F. Supp. 863, 867 (N.D. Ga. 1988) (citing Jefferson Parish, 466 U.S. 3 at 15-16) ("Proof of coercion would make the tying arrangement illegal per se and eliminate the 4 necessity of establishing the actual anticompetitive effects in the tied market."). 5 6 C. "Technological Ties" Are Not Exempt From the Antitrust Laws

Apple would like the Court to find that the alleged technological tie between the iPod and

7 iTMS files is exempt from antitrust liability on purported public policy grounds. Def's Motion at 7. 8 Apple argues that antitrust law is not applicable because: (1) courts are not equipped to deal with 9 such claims; (2) Apple would not have a "safe harbor" to avoid liability since it already offers its 10 products separately; (3) Apple is not required to deal with its competitors; and (4) application of 11 antitrust law to this case would "chill . . . innovation." Id. at 7-8. 12 There is no basis in case authority or sound antitrust policy to grant Apple the immunity it

13 seeks. Although courts may give some deference to product innovation, that does not mean that 14 every technological tie is lawful. Microsoft, 253 F.3d at 65. Questions concerning technological 15 design can be complex, but they are certainly not beyond the competence of the court when applying 16 antitrust doctrine to determine what is lawful and what is not. See Richard A. Posner, Antitrust in 17 the New Economy, 68 Antitrust L.J. 925, 925 (2001) ("[A]ntitrust doctrine is supple enough . . . to 18 take in stride the competitive issues presented by the new economy."). 19 The Court is also aided by the flexibility of the rule of reason analysis to determine whether

20 Apple's conduct does in fact unreasonably restrain competition in the tied product market. See Nat'l 21 Football League, 726 F.2d at 1387 (rule of reason permits the court to consider facts peculiar to the 22 industry, the nature of the tie, and its effects); see also In re Tamoxifen Citrate Antitrust Litig., 466 23 F.3d at 201 n.3 (rule of reason permits consideration of several factors). While antitrust laws seek to 24 encourage innovation, "[j]udicial deference to product innovation . . . does not mean that a 25 monopolist's product design changes are per se lawful." See Microsoft, 253 F.3d at 65; see also 26 Xerox Corp., 511 F. Supp. 2d at 388 ("[S]everal courts have found that product redesign, when it 27 suppresses competition and is without other justification, can be violative of the antitrust laws."). 28 Accordingly, any concerns about "chilling innovation" can be addressed under a rule of reason
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1 analysis and weighed against the anticompetitive effects of Apple's conduct. See, e.g., Microsoft, 2 253 F.3d at 92 ("Rule of reason analysis, [] affords the first mover an opportunity to demonstrate that 3 an efficiency gain from its `tie' adequately offsets any distortion of consumer choice."). 4 Applying the rule of reason analysis here would, in fact, advance the public policies that

5 undergird antitrust law. The purpose of tying law is to identify and control those tie-ins that have a 6 demonstrable exclusionary impact in the tied product market by restricting consumer choice and 7 foreclosing competition on the merits. See Lafayette v. La. Power & Light Co., 435 U.S. 389, 404 8 n.26, 98 S. Ct. 1123 (1978) ("[T]he protection against injury to the buyer is only one purpose of the 9 rule against tying arrangements. Equally important is the need to protect competing sellers from 10 competition unrelated to the merits of the product involved, and, concomitantly, to protect the 11 market from distortion.").4 Where, as alleged here, purchasers are restricted in their choice of a 12 portable digital media player for direct playback of their iTMS files and competition in the market 13 for portable digital media players has been significantly stifled, application of the antitrust laws is 14 perfectly appropriate. 15 Nor is Apple entitled to the "safe harbor" it seeks. Def's Motion at 7. Cf. Ex. 15 at 7-8

16 (explaining the Department of Justice's move away from "the adoption of a number of safe harbors" 17 and "extreme hesitancy in the face of potential abuses by monopoly firms"). In support, Apple relies 18 on Pac. Bell Tel. Co. v. Linkline Commc'ns, Inc., __ U.S. __, 129 S. Ct. 1109 (2009). There, 19 plaintiffs asserted a "price-squeeze" claim that was outside "existing antitrust doctrine." Id. at 1120; 20
4 See also Times-Picayune Co. v. United States, 345 U.S. 594, 605, 73 21 (1953) ("Any intrinsic superiorityPubl'g `tied' product would convince freely choosingS. Ct. 872 of the buyers to select it over others, anyway. Thus `(i)n the usual case only the prospect of reducing competition 22 would persuade a seller to adopt such a contract and only his control of the supply of the tying

by patent monopoly or otherwise obtained, could induce a buyer to enter 23 device, whether conferred Inv. v. Equilon Enters. LLC, 532 F.3d 963, 971 (9th Cir. 2008) (The injury one.'"); Rick-Mik Enters., an unlawful tying arrangement is "reduced in the market for 24 caused by Ungar v. Dunkin' Donuts of Am., Inc., 531 F.2dcompetition (3d Cir. 1976) ("The the tied product."); 1211, 1226 purpose antitrust laws is to stimulate economic competition, the essence of which is the presence of 25 of the competing sellers."). many 26 All references to "Ex." are to the Exhibit attached to the Declaration of Thomas R. Merrick in Support of Plaintiffs' Opposition to Defendant's Motion for Judgment on the Pleadings as to 27 Plaintiffs' Rule of Reason Claims, filed concurrently. 28
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1 see also id. at 1122 ("To the extent [defendant] violates [antitrust] doctrines, the plaintiffs have a 2 remedy under existing law. We do not need to endorse a new theory of liability to prevent such 3 harm.") Here, Plaintiffs' claim is well within existing Section 1 jurisprudence. See generally 4 Microsoft, 253 F.3d at 89-94. Apple's asserted interest in promoting innovation is sufficiently 5 advanced by application of existing rule of reason analysis, which, unlike the per se rule, permits 6 consideration of the tie's purported benefits and pro-competitive justifications. See id. at 94.6 7 Moreover, application of the antitrust laws to this case would not require Apple to "deal with

8 [its] competitors." See Def's Motion at 7-8 (citing Verizon Commc'ns, Inc. v. Law Offices of Curtis 9 v. Trinko, LLP, 540 U.S. 398, 407-08, 124 S. Ct. 872 (2004)). As the Court found in its Order 10 Denying Defendant's Motion to Dismiss,7 Plaintiffs' tying claims, like their monopoly claims, are 11 not reducible to the contention that Apple should "do[] whatever was necessary to ensure that 12 competitors' products interoperate with Apple's products as well as Apple's products interoperate 13 with each other." Def's Motion at 8. See Tucker v. Apple Computer, Inc., 493 F. Supp. 2d 1099, 14 1099 (N.D. Cal. 2006). Rather, Plaintiffs have alleged that Apple took several anticompetitive steps 15 to tie iTMS files and iPods: (1) using technological restrictions for the purpose of preventing music 16 purchased from iTMS from playing on competing portable digital media players; (2) using 17 technological restrictions for the purpose of preventing video files purchased on iTMS from playing 18 on competing portable digital media players; (3) issuing software updates that prevent any attempt 19 by a competitor to enable interoperability with a competing portable digital media player; and (4) 20 refusing to license FairPlay to competitors of portable digital media players. Complaint, ¶¶22, 4121 45, 55. Of these, only the fourth can be characterized as a refusal to deal. The remaining allegations 22 are affirmative steps to exclude competitors for which there is no conceivable pro-competitive 23 24 As discussed in §IV.D., infra, technology companies do not get special treatment under Section 1. 25 The related to Apple's Motion to Dismiss plaintiff 26 21, 2006 inMTD OrderApple Co., Inc., No. c-06-4457 (N.D. Cal.).Tucker's complaint, filed July Tucker v. This was decided prior to consolidation. However, the allegations and claims in the Tucker complaint and the Consolidated 27 Complaint are essentially identical. 28
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1 justification. Moreover, the right of a firm to not deal with competitors is not "unqualified." Aspen 2 Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 601, 105 S. Ct. 2847 (1985). 3 Trinko, relied on by Apple, is inapposite. Def's Motion at 7-8. There, plaintiff alleged

4 defendant acted anticompetitively to prevent rival local telephone service carriers from competing 5 effectively. Trinko, 540 U.S. at 404-05. Important to the Court's finding that defendant's refusal to 6 cooperate with rivals was not anticompetitive was that the telephone service industry was highly 7 regulated such that "the additional benefit to competition provided by antitrust enforcement [was] 8 small." Id. at 412. By contrast here, there is no "regulatory scheme which performs the antitrust 9 function." See id. Thus, the benefits of applying antitrust law to determine whether Apple's conduct 10 as alleged by Plaintiffs is indeed anticompetitive are considerable. 11 12 D. Section 1 Applies to Plaintiffs' Tying Claim

Apple also reasserts its argument that Plaintiffs' tying claim is improper under Section 1

13 because it does not involve a "`contract combination . . . or conspiracy between separate entities." 14 Def's Motion at 3 (quoting Copperweld Corp., 467 U.S. at 768). Without any real support, Apple is 15 inviting this Court to overturn settled antitrust jurisprudence recognized by the Supreme Court, the 16 Ninth Circuit, and other courts. 17 It is well-settled that a tying claim can be based on a company's unilateral action in which a

18 customer acquiesces by purchasing the tied product. The Supreme Court's classic definition of tying 19 presupposes that it may be unilaterally imposed by a single firm: "a tying arrangement may be 20 defined as an agreement by a party to sell one product but only on the condition that the buyer also 21 purchases a different (or tied) product, or at least agrees that he will not purchase that product from 22 any other supplier." Northern Pac. Ry. Co., 356 U.S. at 5-6. "[T]he essential characteristic of an 23 invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force 24 the buyer into the purchase of a tied product that the buyer either did not want at all, or might have 25 preferred to purchase elsewhere on different terms." Jefferson Parish, 466 U.S. at 12.8 26 27 Subsequent case law is in accord. See, e.g., Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1157-58 (9th Cir. 2001) (affirming Section 1 tying claim where hospital tied the purchase of 28
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1

Plaintiffs allege that through deliberate technical impediments, Apple essentially forced

2 iTMS purchasers to agree not to purchase a portable digital media player from anyone other than 3 Apple. Complaint, ¶¶41-44, 50. Plaintiffs' tying claim is thus appropriately pleaded under settled 4 Section 1 standards. 5 Apple provides no real authority to the contrary. First, the Copperweld language that Apple

6 relies on is inapposite. Dkt. No. 229 at 7. Copperweld was not a tying case. There, the Court solely 7 addressed a separate Section 1 issue ­ whether a parent and subsidiary could conspire with each 8 other in restraint of trade. Copperweld Corp., 467 U.S. at 777. The Supreme Court specifically 9 narrowed its analysis to that issue alone: "We limit our inquiry to the narrow issue squarely 10 presented: whether a parent and its wholly owned subsidiary are capable of conspiring in violation of 11 §1 of the Sherman Act." Id. at 767.; see also Systemcare, 117 F.3d at 1145 (rejecting defendant's 12 Copperweld argument). Apple cites no case law addressing tying claims ­ under either the per se or 13 rule of reason test ­ in support of its attempt to redefine Section 1 jurisprudence. 14 Apple likewise cites no case support for its bald assertion that technological companies

15 should get special treatment under Section 1. In fact, courts and commentators agree that there is no 16 sound rationale for treating technological ties differently. See, e.g., Microsoft., 253 F.3d at 84-97 17 (analyzing how a technological tying claim may be brought under a Section 1 rule of reason 18 analysis); Antitrust Modernization Commission, Report and Recommendations (April 2007) at 38 19 (Recommendations and Findings No. 1: "There is no need to revise the antitrust laws to apply 20 different rules to industries in which innovation, intellectual property, and technological change are 21 central features."); Richard A. Posner, Antitrust Law 256 (2d ed. 2001) ("antitrust doctrine is 22 sufficiently supple, and sufficiently informed by economic theory, to cope effectively with the 23 24 C-section services and obstetrical services); Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d 1421, concerted action requirement); see 25 1427 (9th Cir. 1995) (coerced sales contract satisfied1137, 1142 (10th Cir. 1997) ("We holdalso Systemcare, Inc. v. Wang Laboratories Corp., 117 F. 3d that between buyer and seller element of section 1 26 a contractAct whereathe seller coerces satisfies the concerted actiontying arrangement."); of the Sherman a buyer's acquiescence in a Nobel Scientific Indus., Inc. v. Beckman Instruments, 670 F. Supp. 1313, 1324 (D. Md. 1986) ("There need 27 not be an explicit condition that the buyer of the tying product buy the tied product."). 28
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1 distinctive-seeming antitrust problems that the new economy presents."). In fact, as the head of 2 antitrust enforcement for the Justice Department recently pointed out, "high-tech and internet-based 3 markets" are especially crucial for antitrust enforcement. See Ex. 1 at 16 ("Increasingly, Americans 4 are relying on high-tech solutions in the home and the workplace and enjoying the fruits of 5 innovation in those markets that have been spurred on by competition between rival firms. We thus 6 plan to devote attention to understanding the unique competition-related issues posed by these 7 markets.").9 8 Plaintiffs have adequately pleaded the level of concerted action required under Section 1.

9 Apple has provided no support for this Court to reject well-settled antitrust jurisprudence. 10 11 E. Plaintiffs Have Alleged Coercion Under Applicable Ninth Circuit Law

Finally, Apple incorporates by reference its earlier argument that this Court erred in

12 following Ninth Circuit authority that Plaintiffs need not allege individual coercion in order to 13 maintain a Section 1 tying claim. See Tucker, 493 F. Supp. 2d at 1097-99.10 Apple cites no changes 14 in Ninth Circuit law on individual coercion in either its briefing on the per se claim nor in the current 15 motion. In fact, as Plaintiffs' earlier briefing points out, subsequent case law and the facts developed 16 in this case both support the Court's initial decision. See Dkt. No. 209 at 9-14. 17 Applied to a rule of reason analysis, moreover, Apple's individual coercion argument carries

18 even less weight.11 Apple argues repeatedly that its lock on consumers' iTMS purchases so that they 19 20 Apple cites the Areeda treatise purportedly in support of its argument that technological ties should be immune from Section 1 liability generally. Dkt. No. 228 at 3. The authors do not address 21 how they square this conclusion with the settled case law interpreting concerted action discussed and in fact, goes detail how technological ties should be treated 22 above,courts underthe treatiseunder on to analyze inanalysis. Areeda, supra, ¶1757 at 317-23. The by the Section 1 a rule of reason 23 quote clearly does not support Apple's argument that technological ties are immune from Section 1 liability. 24 10 Apple incorporates its earlier briefing. Def's Motion at 9 (incorporating Dkt. No. 200 at 118-12). In the event the Court believes it is appropriate to revisit its holding 25 16 and Dkt. No. 211 at coercion, Plaintiffs respectfully incorporate their opposition memorandum. regarding market level 26 Dkt. No. 209 at 9-14.
11 27 a per seSee also discussion at 9, supra, explaining that the level of coercion necessary to demonstrate claim is not that required to prove a claim under the rule of reason. 28 9

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1 can only be directly played on an iPod ­ tying iTMS purchasers into Apple's player ­ is actually an 2 "enhanced utility" to the consumer. Dkt. No. 211 at 8-10. Plaintiffs allege, in contrast, that this 3 "lock-in" is a "burdensome term" that demonstrates market level coercion and anticompetitive 4 effects. See Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1217 (9th Cir. 1977) ("the Supreme 5 Court's opinions support[] the view that coercion may be implied from a showing that an appreciable 6 number of buyers have accepted burdensome terms, such as a tie-in, and there exists sufficient 7 economic power in the tying product market.").12 While plaintiffs believe that their characterization 8 is the more reasonable one, at the very least, the issue presents a question of fact under the rule of 9 reason analysis and would therefore preclude, not support, judgment under Rule 12(c). See Newcal 10 Indus., Inc. v. IKON Office Solution, 513 F.3d 1038, 1051 (9th Cir. 2008), cert. denied, 129 S. Ct. 11 2788 (2009) (question of fact precludes Rule 12 dismissal); Tucker, 493 F. Supp. at 1101 ("existence 12 of valid business reasons in antitrust cases is generally a question of fact not appropriate for 13 resolution at the motion to dismiss stage"). 14 V. 15 For the same reasons as stated above, Plaintiffs have also adequately pleaded a tying claim 16 under the Cartwright Act and violations of the California Unfair Competition Law ("UCL") and 17 Consumer Legal Remedies Act ("CLRA") based on Apple's illegal tie. Hamro v. Shell Oil Co., 674 18 F.2d 784, 786-87 (9th Cir. 1982) (federal decisions under the Sherman act are applicable to the 19 Cartwright Act). 20 21 22 23 24
12 In its reply brief in support of its Rule 12(c) motion on the per se to 25 distinguish Moore by arguing that there is a distinction between the level claim, Apple attempts be of coercion that must claim consumer rather than at 8-10. Ninth 26 shown for a tyingis clearbrought byis no such distinction. a competitor. Dkt. No. 211v. Peacehealth, Circuit authority that there Cascade Health Solutions (9th ("Supreme Court discussions about the existence 27 515 F.3d 883, 913to theCir. 2008)the plaintiff.") (quoting Areeda, supra, ¶1752d at of a tie have not varied according status of 264. 28

FOR THE SAME REASONS, PLAINTIFFS HAVE PLEADED STATE LAW TYING CLAIMS

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1 VI. 2

CONCLUSION For the reasons set forth above, Apple's Motion for Judgment on the Pleadings as to

3 Plaintiffs Rule of Reason Tying Claims should be denied in its entirety. 4 DATED: August 27, 2009 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 s/ Thomas R. Merrick THOMAS R. MERRICK 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: [phone] (fax) THE KATRIEL LAW FIRM ROY A. KATRIEL 1101 30th Street, N.W., Suite 500 Washington, DC 20007 Telephone: [phone] (fax) Co-Lead Counsel for Plaintiffs BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. ANDREW S. FRIEDMAN FRANCIS J. BALINT, JR. ELAINE A. RYAN TODD D. CARPENTER 2901 N. Central Avenue, Suite 1000 Phoenix, AZ 85012 Telephone: [phone] (fax) BRAUN LAW GROUP, P.C. MICHAEL D. BRAUN 12304 Santa Monica Blvd., Suite 109 Los Angeles, CA 90025 Telephone: [phone] (fax) MURRAY, FRANK & SAILER LLP BRIAN P. MURRAY JACQUELINE SAILER 275 Madison Avenue, Suite 801
PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION FOR JUDGMENT ON THE PLEADINGS AS TO PLAINTIFFS' RULE OF REASON TYING CLAIM - C-05-00037-JW(RS)

Respectfully submitted, COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP JOHN J. STOIA, JR. BONNY E. SWEENEY THOMAS R. MERRICK

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1 2 3 4 5 6

New York, NY 10016 Telephone: [phone] (fax) GLANCY BINKOW & GOLDBERG LLP MICHAEL GOLDBERG 1801 Avenue of the Stars, Suite 311 Los Angeles, CA 90067 Telephone: [phone] (fax) Additional Counsel for Plaintiffs

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

S:\CasesSD\Apple Tying\BRF 00061149.doc

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1 2

CERTIFICATE OF SERVICE I hereby certify that on August 27, 2009, I electronically filed the foregoing with the Clerk of

3 the Court using the CM/ECF system which will send notification of such filing to the e-mail 4 addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have 5 mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF 6 participants indicated on the attached Manual Notice List. 7 I certify under penalty of perjury under the laws of the United States of America that the

8 foregoing is true and correct. Executed on August 27, 2009. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 s/ Thomas R. Merrick THOMAS R. MERRICK COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Telephone: [phone] (fax) E-mail: [e-mail]

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