9th Circuit Affirms Dismissal Of Antitrust Class Action Over ITunes, IPods

by Tara Arick on September 5, 2013 · 0 comments

in anti-trust

A Ninth Circuit U.S. Court of Appeals panel on Sept. 3 affirmed a lower court’s dismissal of a California woman’s antitrust claims against Apple Inc. based on purported monopolization and supracompetitive prices in the digital music market (Stacie Somers v. Apple Inc., No. 11-16896, 9th Cir.; 2013 U.S. App. LEXIS 18246).

Class Claims

California resident Stacie Somers purchased a 20-gigabyte Apple iPod portable digital media player (PDMP) from Target in November 2005. Thereafter, Somers purchased music for her iPod from Apple’s iTunes Music Stores (iTMS).

In December 2007, Stacie Somers sued Apple in the U.S. District Court for the Northern District of California for unlawful tying, monopolization and attempted monopolization under the Sherman Act and unfair business practices under California Business and Professions Code Section 17200. She sought to represent a class of indirect purchasers of Apple iPods.

DRM Encryption

Apple owns and operates iTMS, which is accessed with proprietary Apple software. Apple also designs the hardware and software of its iPod products. When Apple launched iTMS in 2003, all songs were embedded with digital rights management (DRM) encoding to prevent copying and piracy; Apple called its DRM program “FairPlay.” Consequently, any consumer who wanted to play music purchased from iTMS was required to purchase an iPod, and iPod users had to purchase their digital music through iTMS.

In 2009, Apple began offering DRM-free music that could be played on other PDMPs. However, Apple charged iTMS users 30 cents per song to have any previously purchased songs converted to DRM-free files.

Certification Denied

In July 2009, the court denied Somers’ motion to certify a class of indirect purchasers, holding that such was prohibited under federal law by Illinois Brick Co. v. Illinois (431 U.S. 720 [1977]). The court also found that under California law, Somers failed to establish a reliable measure for damages on behalf of indirect purchasers.

Somers filed a first amended complaint (FAC) that did not depend on allegations of tying, and Apple moved to dismiss. In December 2010, the District Court granted Apple’s motion to dismiss.

Somers filed a second amended class action complaint (SAC) in January 2011, asserting damage based on inflated prices for music downloads. She sought to represent a class of a class of individuals that purchased music from iTMS. Somers alleged that Apple achieved a monopoly in the PDMP and audio download markets. Apple maintained its monopoly, Somers asserted, through the use of software updates intended to prevent competitors from selling audio downloads that were compatible with iPods. This permitted Apple to charge supracompetitive prices for digital music, she said. Somers sought injunctive relief in the form of DRM-free music files, as well as damages.

Judge James Ware dismissed the SAC with prejudice in a June 2011 ruling, stating that he had previously rejected these same arguments in the December 2010 ruling. In disposing of the injunctive relief claim, the judge held that an allegation of “‘mere maintenance of DRM’ is insufficient to support [Somers'] antitrust claims.”

Somers appealed to the Ninth Circuit.

Claims Abandoned

Somers appealed the July 2009 certification denial order. Apple argued that this was not properly before the Circuit Court because Somers abandoned her underlying individual claim. The panel, which comprised Judges Dorothy W. Nelson, Stephen Reinhardt and Milan D. Smith Jr., agreed, finding that the certification motion pertained to Somers’ proposed iPod indirect purchaser class. In her FAC, the panel noted, Somers did not renew her individual damage claim based on purported overcharge for iPods. Somers also changed her damage theory in the second amended complaint, the panel said, when she focused on the supposed supracompetative prices for digital music. As such, the panel held that she voluntarily abandoned the iPod overcharge claim.

Somers also appealed the December 2010 ruling that dismissed her monopolization claim in the FAC based on purported diminution of iPod value. The panel stated that this claim was correctly dismissed in light of Illinois Brick. “The indirect purchaser rule bars suits for antitrust damages by customers who do not buy directly from a defendant,” the panel said, also citing Hanover Shoe Inc. v. United States Machinery Corp. (392 U.S. 481 [1968]).

Also, the panel stated that in a related direct purchaser action, plaintiffs are seeking damages against Apple for the same kinds of iPods but on a theory of inflated iPod prices. “[A]llowing Somers to sue as an indirect purchaser would lead to litigation on contradictory, duplicative theories of recovery necessitating ‘evidentiary complexities and uncertainties,’” per Illinois Brick, the panel held. But even if that case did not apply, the panel found that Somers lacks standing to bring her claim under the facts alleged in the FAC because “Apple’s purported anti-competitive conduct . . . began in 2004″ when it rolled out the software updates. Somers purchased her iPod in 2005, the panel said, and thus the software updates “only served to maintain the status quo” at the time of allowing iPod-only play for iTMS music.

Elements Not Pleaded

The July 2011 ruling dismissing Somers’ music overcharge claim was also appealed. She argued that the District Court applied an improper proof requirement and ignored allegations supporting her monopolization claim.

The panel held that the lower court “did not require her to prove, but rather, to plead the elements of a monopolization claim,” as required by the Sherman Act. Somers pleaded insufficient facts to state a plausible antitrust injury, the panel stated, finding that “her own allegations do not square with her overcharge theory.” If her theory was correct, the panel said, then Apple’s purported supracompetative prices would have fallen once Amazon, a key competitor, began issuing less expensive, DRM-free music. But “contradictory market facts” reveal otherwise, the panel said.

And although Somers advances some arguments that Amazon and other competitors offered lower prices when they entered the marketplace, the panel held that “without more, these allegations do not nudge Somers’ claims of antitrust injury ‘across the line from conceivable to plausible.’” Even though Somers suggested that she might eventually be able to establish some undisclosed facts supporting antitrust injury, the panel ruled that this is insufficient to allow Somers’ claims to survive dismissal. As such, the panel affirmed the District Court’s dismissal of the SAC.

Helen I. Zeldes and Alreen Haeggquist of Zeldes & Haeggquist in San Diego and Steven A. Skalet and Craig L. Briskin of Mehri & Skalet in Washington, D.C., represent Somers. Craig E. Stewart, David C. Kiernan, Michael T. Scott and Robert A. Mittelstaedt of Jones Day in San Francisco represent Apple.

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