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9th Circuit Affirms in Somers v. Apple

September 3, 2013. The U.S. Court of Appeals (9thCir) issued its opinion [26 pages in PDF] in Somers v. Apple, a putative class action alleging violation of federal and state antitrust law by Apple in connection with portable digital media players (PDMPs) such as the iPod, music download services such as the iTunes music store, and digital rights management (DRM).

The Court of Appeals affirmed the judgment of the U.S. District Court (NDCal), which denied class certification, and dismissed the complaint for failure to state a claim under Rule 12(b)(6), FRCP.

There is another iPad iTunes antitrust case pending in the same district court. See, In re Apple iPod iTunes Antitrust Litigation, U.S. District Court (NDCal), D.C. No. 05-00037. The Court of Appeals also refers to that other action as the "Direct Purchaser Action".

This is a grasping and lingering case with an ancient history. Apple introduced iTunes in 2001, and later that year began sales of the first iPod. It started the iTunes music store in 2003, with the standard price per song of 99¢, and digital rights management (DRM) named "FairPlay".

Stacie Somers bought an Apple iPod in 2005, and then bought and downloaded to her iPod music from Apple's iTunes music store, also known as iTS. (The plaintiffs class action law firm in this case is Mehri & Skalet.)

Mehri & Skalet filed a complaint in 2007, seeking to represent the class of iPod (indirect) purchasers, and the class of iTunes music (direct) purchasers. The complaint alleged that Apple violated Section 1 of the Sherman Act (15 U.S.C. § 1) in connection with unlawful tying of music sold through iTunes to its iPods, and Section 2 of the Sherman Act (15 U.S.C. § 2) in connection with monopolization of both the market for portable digital media players (PDMPs) and the market for downloaded music.

The original complaint alleged that Apple used "FairPlay" DRM that not only restricted purchasers' ability to make copies, but which also prevented purchasers from playing lawfully purchased music on PDMPs other than iPods. The Court of Appeals wrote that "music purchased from iTS could only be played on the iPod, and the iPod could only play music downloaded from iTS."

The complaint also alleged that Apple continuously issued software updates that excluded competition.

In the other above referenced action, the District Court concluded that the technological interoperability between the iPod and music sold through iTS did not constitute unlawful tying, and ordered the tying claim dismissed. Then, Somers filed an amended complaint that did not include a Section 1 tying claim, but did include Section 2 monopolization claims, and state law claims. She alleged damages based upon inflated prices for music downloads, and deflated value of the iPod.

The District Court dismissed the complaint with leave to amend. Then, Somers filed a second amended complaint that dropped the damages based upon deflated value of the iPod claim. The District Court then dismissed with prejudice, and this appeal followed.

The Court of Appeals affirmed.

As for class certification, the Court of Appeals ruled that the plaintiff had waived review of the District Court's denial of her motion for certification as to one class, and that she had abandoned her claim to represent the other class.

The Court of Appeals held that a claim by indirect purchasers of iPods for the diminution in value to their iPods fails because of the Supreme Court's 1977 opinion in Illinois Brick Co. v. Illinois, 431 U.S. 720. The Court of Appeals wrote that "The indirect purchaser rule bars suits for antitrust damages by customers who do not buy directly from a defendant".

The Court of Appeals continued that "Here, while Somers requests compensatory damages on the theory that Apple's software updates deflated the value of her iPod -- rather than causing an inflation of initial iPod prices -- the rationale under Illinois Brick applies equally to this type of damage claim. The plaintiff in the related Direct Purchaser Action case is seeking damages based on the same kinds of iPods that form the basis of Somers’ suit here, but on the theory that the software upgrades inflated iPod prices. Thus, allowing Somers to sue as an indirect purchaser would lead to litigation on contradictory, duplicative theories of recovery necessitating “evidentiary complexities and uncertainties,” which the indirect purchaser rule was intended to prevent."

The Court of Appeals also articulated a second reason for affirming. "Somers' diminution-in-value theory is also useless by any other iPod purchaser because Somers alleges that Apple used FairPlay from the beginning, when it first launched iTS in 2003, and that the iPod was incapable of playing music from any other on-line store. ... Accordingly, Apple's use of subsequent software updates only served to maintain the status quo at the time of purchase, and therefore cannot plausibly be the basis for diminishing the value of the iPod."

The Court of Appeals next held that the music overcharge claim fails. "Somers claims that the price for music downloads remained the same (99 cents) since it entered the market in 2003, before it obtained monopoly in the audio download market, and after it allegedly acquired monopoly in that market in 2004." (Parentheses in original.)

Moreover, "Somers does not allege that Apple’s music price changed -- even after Apple’s alleged monopoly ended in the beginning of 2008 -- when Amazon began selling DRM-free music, and after Apple began selling Fairplay-free music in January 2009."

Hence, "Somers' overcharge theory is thus implausible in the face of contradictory market facts alleged in her complaint. ... The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers' conclusory assertion that Apple’s software updates affected music prices."

The Court of Appeals also affirmed the District Court's dismissal of Somer's claim for injunctive relief. It wrote that "Somers' alleged inability to play her music freely is not an ``antitrust injury´´ that affects competition, and thus cannot serve as a basis for injunctive relief."

This case is Stacie Somers v. Apple, Inc., U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 11-16896, an appeal from the U.S. District Court for the Northern District of California, D.C. No. 5:07-cv-06507-JW, Judge James Ware presiding. Judge Milan Smith wrote the opinion of the Court of Appeals, in which Judge Dorothy Nelson and Stephen Reinhardt joined.

(Published in TLJ Daily E-Mail Alert No. 2,608, October 2, 2013.)