In re Actions
| Decision Date | 26 September 2014 |
| Docket Number | Case No.: 05-CV-0037 YGR |
| Court | U.S. District Court — Northern District of California |
| Parties | THE APPLE IPOD ITUNES ANTITRUST LITIGATION This Order Relates to: All Actions |
The remaining plaintiffs in this long-running antitrust case allege that defendant Apple, Inc. ("Apple"), after lawfully acquiring monopoly power in the market for portable digital music players with the introduction of the iPod, unlawfully maintained its monopoly power in violation of Section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2. These plaintiffs represent a certified class of direct purchasers, specifically, individuals and businesses who purchased certain enumerated models of iPods directly from Apple between September 12, 2006 and March 31, 2009.
Now before the Court are three substantive motions, as well as numerous administrative motions to seal the moving papers and supporting evidence. This Order resolves the substantive motions: (1) Apple's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll (Dkt. No. 740-4 ("MSJ")); (2) plaintiffs' Daubert Motion to Exclude Certain Opinion Testimony of Kevin M. Murphy and Robert H. Topel (Dkt. No. 737-4 ("Daubert Motion")); and (3)plaintiffs' Motion to Strike Supplemental Expert Report of Kevin M. Murphy and Robert H. Topel, Dated December 20, 2013 (Dkt. No. 750-3). The Court addresses the administrative motions to seal in a separate Order.1
The motions are fully briefed and the Court held hearings in connection with them on February 7, 2014 (Dkt. No. 775) and August 13, 2014 (Dkt. No. 787 ("Tr.")). For the reasons set forth below, the Court DENIES all three motions.
The lengthy procedural history of this case has been recounted in prior opinions.2 Here the Court sets forth only those background facts necessary to understand the case's present posture and the motions at bar. The facts supplied herein are undisputed unless otherwise noted.
During the class period, Apple provided to iPod owners a software program for loading and managing digital song files on their iPods, as well as for purchasing digital song downloads from Apple. That program is "iTunes" and Apple's online music store is the "iTS."3 One feature of both iTunes and iPods during the class period was their use of a digital rights management ("DRM") system unique to Apple, called "FairPlay." FairPlay made certain iPods distributed during the class period incapable of playing digital songs downloaded from an online music store unless they had been downloaded from the iTS.4
In July 2004, an Apple competitor in the online music market, third party Real Networks ("Real"), introduced a new version of its own digital-song manager, RealPlayer. RealPlayer included a feature called Harmony. Harmony made songs downloaded from Real's online music store mimic FairPlay, and thus made music purchased from Real playable on iPods.
Apple responded to Harmony by taking technological countermeasures to stop Harmony from mimicking FairPlay. First, in October 2004, Apple issued an iTunes update denominated "4.7." The 4.7 update, among other things, thwarted Harmony's ability to mimic FairPlay. The Court previously held 4.7 to be a genuine product improvement and therefore lawful, and entered summary judgment in favor of Apple to the extent plaintiff's Section 2 claim rested on Apple's introduction of 4.7. iPod III, 796 F. Supp. 2d at 1146.
It is Apple's second instance of disabling Harmony that forms the basis of plaintiff's present Section 2 claim. Following Apple's release of 4.7, Real modified Harmony such that it could again mimic FairPlay and make any new songs purchased from Real's online music store playable on iPods. Thereafter, in September 2006, Apple released another iTunes update that introduced a variety of features while also disabling Harmony—namely, "7.0." In an earlier summary judgment order, the Court found a triable issue of fact as to whether 7.0 was a genuine product improvement so as to not be anticompetitive. Id. at 1147. Apple's present motion seeks summary judgment on two different bases: (1) a lack of admissible evidence of antitrust impact, and (2) a lack of admissible evidence as to the definition of the relevant market. To understand these arguments, it is necessary to articulate plaintiff's theory of liability.
That theory is intricate, but ultimately it amounts to a charge that Apple's release of 7.0 unlawfully maintained Apple's monopoly in the market for portable digital media players by making demand for iPods less elastic. Specifically, plaintiffs claim that 7.0 resulted in an increased "lock-in" effect for iPod owners who purchased songs online. Lock-in, according to plaintiffs' principal economics expert, "is a form of foreclosure that arises from actions that increase the cost to consumers of switching to a product that has better quality and/or a lower price." (Noll MeritsReport at 4.)5 Plaintiffs offer expert opinion that Apple, by counteracting Harmony, "raised the cost of switching from iPods to competing portable digital media players by eliminating the ability of consumers to collect a library of downloads that could be played on all players." (Id.) That is, 7.0 made iPod owners unable to play songs purchased from iTS competitor Real and thus pushed them to make their online song purchases only on the iTS. As a result, it discouraged iPod owners from buying a competing, non-iPod digital portable music player when it came time to replace their iPods due to loss, breakage, or a desire to upgrade. (Id.) Such owners would have to either forego use of the songs they had purchased through Real (as well as any other online music store besides iTunes, though that is not part of the damages alleged in this case), repurchase such songs through other, iPod-compatible means (for instance, iTS or physical CDs), or convert music bought from Real into a non-DRM format, for example, by "burning" that music to a CD and then "ripping" the CD onto their computers in a file format with no DRM, from whence the songs could then be loaded on their iPods. These increased "switching costs," plaintiffs argue, locked iPod owners into continuing to purchase iPods, notwithstanding the allegedly similar or better quality of and lower prices of competing products. They also locked out owners of non-iPod portable digital media players who had downloaded songs from the Real store. The effect of both lock-in and lock-out, plaintiffs say, was to reduce competition in the market for digital portable music players and to reduce the price elasticity of iPods, which permitted Apple to charge a supracompetitive price therefor. (Noll Merits Report at 4-5; Noll Merits Rebuttal at 27.) According to plaintiffs' expert, "[t]he damages in this case are the overcharge on iPods during the class period due to the incompatibility that was created by iTunes 7.0." (Noll Merits Report at 5.) Plaintiffs' expertestimates damages to the class of $351,631,153, "consisting of $148,947,126 for resellers, $194,655,141 for direct purchasers, and $8,028,886 for additional iPod sales from the additional transactions." (Noll Merits Rebuttal at 51.)
Apple strenuously disputes the sufficiency of plaintiffs' evidence of this theory. Apple contends that it is entitled to summary judgment because plaintiffs lack admissible evidence of either antitrust impact or the relevant product market, both of which are required elements of plaintiffs' Section 2 claim. The linchpin, and Achilles' heel, of Apple's argument is the word "admissible." Apple disputes the admissibility of the opinions of plaintiffs' principal economics expert, Professor Roger G. Noll. Noll has conducted both (i) a complex statistical analysis that plaintiffs offer as proof of both the fact and the amount of antitrust damages suffered by the class, and (ii) an analysis of the relevant market. In response, Apple offers its own experts, Professors Kevin M. Murphy and Robert H. Topel, who criticize the design and execution of Noll's statistical analyses and fault his relevant market findings. Plaintiffs counter with rebuttal opinion from Noll, as well as opinion testimony from a second expert with special expertise in statistics, Professor Jeffrey M. Woodridge, whose opinions corroborate those of Noll. All of these opinions are subject to Daubert motions or procedural objections. It is to those matters that the Court now turns.
"A trial court may only consider admissible evidence in ruling on a motion for summary judgment." Ballen v. City of Redmond, 466 F.3d 736, 745 (9th Cir. 2006). Accordingly, before turning to the substance of Apple's summary judgment motion, the Court first resolves the parties' challenges to the admissibility of the proffered expert opinions.
The principal focus of Apple's Daubert motion is a set of opinions offered by Noll as to both the fact and amount of antitrust damages suffered by the class. These opinions have as their bases econometric analyses Noll performed on a dataset supplied by Apple. The dataset consists of Apple's complete sales records for the models of iPod covered by the class definition and sold during the class period, stripped of obvious outliers (e.g., sales where the price was zero ornegative, or many times the listed retail price) and incomplete records.6 Noll used this dataset to perform a hedonic multiple-regression analysis. Multiple-regression analysis is a statistical tool that "permits the comparison between an outcome (called the dependent variable) and one or more factors (called independent variables) that may be related to that outcome." Manpower, Inc. v. Ins. Co. of Pennsylvania, 732 F.3d 796, 808 (7th Cir. 2013). The term "hedonic" denotes that the...
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